Russian forest sector: annual survey report

2024

B1 Group and the ASPPI conducted an annual survey among companies in Russia’s forest sector.

KEY FINDINGS

Russia’s economic growth slows amid high interest rates. However, demand for goods and services continues to outstrip supply, pushing up industrial product prices
Industrial production and wood processing are on the rise. Industrial production is outpacing growth in other sectors. Wood processing output has rebounded this year, showing positive momentum after periods of minimal or negative growth
Forest industry grapples with cross-border payments. Cross-border payments remain a key challenge for Russian businesses working with international partners. Companies in the forest sector concede that tackling this issue is proving to be exceptionally tough
Industry players turn to self-reliance. Russian timber companies are taking a more cautious stance on government support, with many feeling their expectations have not been fully met. Increasingly, they rely on their own resources and self-financing strategies to drive business expansion
Timber companies pin hopes on sanctions relief. Surveyed businesses see lifting or easing sectoral sanctions as one of the few external sources of hope, with the greatest potential to boost Russia’s forest sector
Tax reform is expected to reshape business. The upcoming tax reform, effective from 2025, is seen as a dual move to strengthen fiscal policy while enhancing the efficiency of tax administration

In 2024, wood processing emerged as one of the top three industrial sectors for growth, alongside machine building and metals. Following a peak in early 2024, production growth began to decline as tight monetary policy and the exhaustion of previous growth drivers took their toll.

Drivers of business activity

Machine building has gained momentum, bolstered by government defense orders and the push for import substitution
Metals output has grown, fueled by demand from both the machine building and construction sectors, though the construction boom is beginning to cool
Wood processing has expanded, primarily due to rising activity in the printing sector
Chemical producers are ramping up output, supported by import substitution efforts and the adoption of specialized technologies to produce niche chemicals.

New challenges for the forest sector

0 %

report a decline in available credit

0 %

believe current government support measures are having little impact on their operations

0 %

cite issues with cross-border payments

New solutions

0 %

see diversification of their product offerings as a notable achievement

0 %

have attracted new suppliers of technological equipment

0 %

view self-financing as the key source for business expansion

CHANGES THAT COULD SIMPLIFY DOING BUSINESS

0 %

emphasize the need to expand the domestic market and boost demand for higher value-added products

0 %

are confident that relaxing or removing sectoral sanctions would give a major boost to Russia’s forest sector

0 %

see the development of local production of equipment and components for the forest industry as a key factor that could substantially benefit their business

TURNING HOPE INTO RESULTS

0 %

have successfully restructured their logistics, with some companies having altered the origin of their products to reach new markets

0 %

managed to hold onto their geographical markets this year

Tax and legal outlook for the forest sector

What’s new

Expanded qualification criteria for related party relationships
Expanded list of non-controlled transactions
Adjustments made by the tax authority are treated as dividends

What’s new

Penalty for failure to pay tax on controlled transactions increased from 40% and a minimum of RUB 30,000 to 100% and a minimum of RUB 500,000
Penalty for failure to report controlled transactions increased from RUB 5,000 to
RUB 100,000

What’s new

Tax rate increased from 20% to 25%
15% rate of tax for foreign companies that do not have a permanent establishment but render services to or perform work for related parties in Russia

What’s new. Tax charged on capital investment expenditure is capped at 50% of the historical cost of the underlying fixed asset and/or intangible asset.

The amount of tax after FITC must not fall below the 2% tax threshold, however, any excess credit amounts may be carried forward to the subsequent 5-year period.

What’s new. The rate is now capped at 2.5% on property carried at cadastral value exceeding RUB 300 million.

In ruling that financial transactions lack a valid business purpose, courts invoke Article 54.1 of the Russian Tax Code, specifically:

Transactions lack economic substance
Financial transactions are part of a conduit arrangement to pass through cash flows
host employees, i.e., those formally on payroll but providing no service
Artificial profit allocation to disguise payments to a single beneficiary
Transactions are not supported by documentary evidence
No record is kept of expenses incurred in transactions that lack economic rationale, including those recognized as artificial or fictitious.

Stance taken by the Russian Supreme Court. In determining the corporate property tax base, an entity must classify each individual item within a pool asset as either movable or immovable. For example, transformer substations should be classified as movable property and treated as non-assessable.