National Treatment in International Trade and Russian Law

 

August 29, 2024

BRACE Law Firm ©

 

The national treatment rule, a long-standing fixture in the legal regulation of international trade, rightfully serves as a specific principle of international trade law. The essence of the national treatment principle is a state’s international legal obligation to provide foreign citizens and legal entities with the same rights and obligations as those granted to its own legal subjects.

Legal Regulation of National Treatment in Russian Law

Modern sources of international trade regulation — international treaties in the field of trade and economic relations — utilize the national treatment principle as a fundamental basis for multilateral and bilateral cooperation between states and international organizations. This cooperation spans diverse areas of global economic relations, including trade, shipping, investment, scientific and technical cooperation, and industrial collaboration.

Rules on granting national treatment are also enshrined as legally binding provisions in the national laws of various countries. Within Russia, the principle of national treatment is established in Part 3 of Article 62 of the Constitution of the Russian Federation: foreign citizens and stateless persons in the Russian Federation enjoy rights and bear obligations equally with citizens of the Russian Federation, except as otherwise provided by federal law or an international treaty of the Russian Federation. Such federal laws include, for example, the Civil Code of the Russian Federation (the "Civil Code"). Article 2 of the Civil Code provides that rules established by civil legislation apply to relations involving foreign legal entities, unless otherwise provided by federal law. Additionally, these laws include Federal Law No. 160-FZ dated July 9, 1999, On Foreign Investments in the Russian Federation (the "Law on Foreign Investments") and Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity (the "Law on Foreign Trade Activity").

National Treatment Regarding the Activity of Foreign Investors

Pursuant to Article 4 of the Law on Foreign Investments, the legal regime governing the activity of foreign investors cannot be less favorable than the regime granted to Russian investors.

Federal laws may establish restrictive exceptions; however, these are permitted only to the extent allowed by the Constitution of the Russian Federation—i.e., if necessary to protect the foundations of the constitutional system, morality, health, rights and legitimate interests of others, or to ensure national defense and state security. Stimulating exceptions in the form of incentives for foreign investors are also permitted.

A foreign legal entity, whose purpose and/or activity is commercial in nature and which bears property liability for obligations assumed in connection with such activity in the Russian Federation, may operate in Russia through a branch or representative office from the date of their accreditation, unless federal laws provide otherwise. A foreign legal entity ceases its activity in the Russian Federation through a branch or representative office on the date the accreditation of such branch or representative office expires or is terminated.

The date of accreditation of a branch or representative office, the date of amendments to the information in the state register of accredited branches and representative offices (an information system), or the date of termination of accreditation is the day the corresponding entry is made in the register.

Subsidiaries and affiliates of a commercial organization with foreign investment do not enjoy the legal protection, guarantees, and incentives established by the Law on Foreign Investments when conducting business in the Russian Federation.

A foreign investor or a commercial organization with foreign investment established in the Russian Federation, in which a foreign investor (or investors) holds at least 10% of the charter (pooled) capital, enjoys the full range of legal protection, guarantees, and incentives established by the Law on Foreign Investments when performing reinvestment.

A Russian commercial organization acquires the status of a commercial organization with foreign investment from the date a foreign investor joins its participants. From that day, the commercial organization and the foreign investor enjoy the legal protection, guarantees, and incentives provided by the Law on Foreign Investments.

Notably, when registering relevant changes in the Unified State Register of Legal Entities, a foreign legal entity that has become a participant in a legal entity must submit information regarding any accredited representative offices or branches it maintains in the Russian Federation.

When reviewing Case No. A27-12926/2019, the courts noted that since a company is a "commercial organization whose goal is to generate profit, conducting its activities through its bodies," a foreign legal entity, by "becoming a participant in the Company, will inevitably conduct activity in the Russian Federation."[1]

A commercial organization loses its status as a commercial organization with foreign investment on the date the foreign investor exits the company (or, if there are several foreign investors, when all foreign investors have exited). From that day, the organization and the foreign investor lose the legal protection, guarantees, and incentives established by the Law on Foreign Investments.

National Treatment Regarding Goods Originating from Foreign States

The leading multilateral treaty regulating modern trade relations, which serves as the foundation for the World Trade Organization—the General Agreement on Tariffs and Trade (the "GATT") — also establishes the principle of national treatment. Pursuant to Article III of the GATT, internal taxes and other internal charges, as well as laws, regulations, and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of products, and internal quantitative regulations requiring the mixture, processing, or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. Imported products shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Furthermore, internal taxes or other internal charges cannot be applied to imported or domestic products in a manner inconsistent with the principles mentioned above.

If a state applies regulatory measures while differentiating between domestic and foreign goods (e.g., by exempting a portion of domestic goods from regulatory impact), this constitutes a violation of national treatment, as the measures applied are not neutral regarding the state of origin of the goods.[2]

Article 29 of the Law on Foreign Trade Activity establishes the principle of national treatment regarding foreign trade in goods and services, the content of which is as follows:

• Pursuant to Article 3 of the Tax Code of the Russian Federation, the establishment of differentiated tax rates and charges (except for import customs duties) based on the country of origin of goods is prohibited.
• Goods originating from a foreign state or groups of foreign states are granted treatment no less favorable than the treatment granted to like goods of Russian origin or directly competitive goods of Russian origin regarding their sale, offering for sale, purchase, transportation, distribution, or use on the internal market of the Russian Federation. However, this provision does not prevent the application of differentiated payments related to transportation based exclusively on the cost of operating the vehicles rather than the origin of the goods.
• Goods originating from a foreign state or groups of foreign states that do not have international treaties with the Russian Federation on granting treatment to goods of Russian origin in accordance with the legislation of the Russian Federation may be subject to a different regulatory regime.
• Technical, pharmacological, sanitary, veterinary, phytosanitary, and environmental requirements, as well as mandatory conformity assessment requirements, apply to goods originating from a foreign state in the same manner they apply to like goods of Russian origin.

The application of technical, pharmacological, sanitary, veterinary, phytosanitary, and environmental requirements, alongside mandatory conformity assessment requirements, is currently addressed at the level of universal and regional international agreements. Universal agreements include the World Trade Organization's Agreement on Technical Barriers to Trade (1994) and the Agreement on the Application of Sanitary and Phytosanitary Measures (1994), as well as documents from international organizations, including the Codex Alimentarius (Food Code). This code was adopted by the International Commission of the Food and Agriculture Organization of the United Nations and the World Health Organization for the implementation of standard codes and rules for food products (the "Codex Alimentarius Commission"). [3] Within the Eurasian Economic Union (the "EAEU"), these issues are regulated by the Treaty on the Eurasian Economic Union (the "EAEU Treaty").

National Treatment Regarding Technical Regulation

Technical regulation within the EAEU territory includes:

• Developing and adopting mandatory technical regulations for all member states;
• Developing and adopting unified rules for conducting technical regulation work;
• Harmonizing standards and applying unified forms and rules for conformity assessment;
• Harmonizing conformity assessment procedures and developing and applying comparable testing methods (control and measurements).

Technical regulations are developed for products included in the Unified List of Products for which mandatory requirements are established within the EAEU.[4] These are developed and adopted to ensure the protection of human life and/or health, property, the environment, animal and plant life and/or health, to prevent actions that mislead consumers, and to ensure energy efficiency and resource conservation. The regulations establish requirements for products or for products and their related processes of production, installation, setup, operation (use), storage, transportation, sale, and disposal, as well as rules for identification and the forms, schemes, and procedures for conformity assessment (confirmation). They may also contain requirements for terminology, packaging, labeling, and marking, as well as sanitary, veterinary-sanitary, and phytosanitary requirements and procedures. Such regulations include the Technical Regulation of the Customs Union On the Safety of Railway Rolling Stock (TR CU 001/2011), On the Safety of Packaging (TR CU 005/2011), On the Safety of Machinery and Equipment (TR CU 010/2011), and others.

Importantly, when assessing the lawfulness of establishing specific requirements, relevant international standards (rules, directives, recommendations, and other documents adopted by international standardization organizations) serve as the basis for developing regulations. This applies unless such documents are absent or do not correspond to the objectives of adopting EAEU technical regulations due to climatic and geographical factors, technological or other features. In their absence, regional documents (regulations, directives, decisions, standards, rules, and other documents), national (state) standards, national technical regulations, or their drafts are used.[5]

No country should be prevented from taking measures necessary to ensure the quality of its exports, or for the protection of human, animal, or plant life or health, of the environment, or for the prevention of deceptive practices, at the levels it considers appropriate, provided that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade.[6]

When applying technical regulations, states must ensure that products imported from the territory of another state are granted treatment no less favorable than that granted to like products of national origin and like products originating from any other country. This means technical regulations must not be developed, adopted, or applied with a view to or with the effect of creating unnecessary obstacles to international trade. They should not have a more trade-restrictive effect than necessary to fulfill a legitimate objective, taking account of the risks non-fulfillment would create. Legitimate objectives include national security requirements, prevention of deceptive practices, and protection of human health or safety, animal or plant life or health, or the environment. In assessing risks, relevant factors to be considered include available scientific and technical information, related processing technology, or intended end-uses of products. Technical regulations shall not be maintained if the circumstances or objectives giving rise to their adoption no longer exist or if the changed circumstances or objectives can be addressed in a less trade-restrictive manner.[7]

Sanitary, veterinary-sanitary, and phytosanitary measures may include checking compliance with requirements for products, methods of processing and production, procedures for testing, inspection, and conformity assessment (confirmation), as well as quarantine rules. This also includes requirements related to the transport of animals and plants, materials necessary for ensuring the life and health of animals and plants during transport, and sampling, research, and risk assessment methods and procedures.

States are entitled to introduce sanitary, veterinary-sanitary, and phytosanitary measures subject to several conditions. Primarily, any sanitary or phytosanitary measure can be applied and maintained only if there is sufficient scientific justification and to the extent necessary to protect human, animal, or plant life or health.

Pursuant to Article 56 of the EAEU Treaty, sanitary, veterinary-sanitary, and quarantine phytosanitary measures applied within the EAEU are based on international and regional standards, guidelines, and/or recommendations. Exceptions apply when, based on appropriate scientific justification, measures are introduced that provide a higher level of protection than measures based on corresponding international and regional standards, guidelines, and/or recommendations.

Given that states may establish a higher level of sanitary or phytosanitary protection, their obligation to ensure that the measures applied do not serve as a means of arbitrary or unjustifiable discrimination between members where identical or similar conditions prevail — including their own territory and that of other members — is of particular importance. Furthermore, these measures must not be applied in a manner that would constitute a disguised restriction on international trade.

Assessing the risks to human, animal, or plant life or health, performed in accordance with risk assessment techniques developed by relevant international organizations, is critical in determining the lawfulness of introducing such measures. States must consider available scientific justification, relevant processes and production methods, inspection, sampling, and testing methods, the prevalence of specific diseases or pests, the existence of disease-free or pest-free areas, relevant ecological conditions, and quarantine or other treatments.

States recognize the sanitary, veterinary, or phytosanitary measures of other members as equivalent, even if they differ from their own or from those used by other members trading in the same product, if the exporting member objectively demonstrates to the importing member that its measures achieve the importing member's appropriate level of sanitary or phytosanitary protection. For this purpose, reasonable access shall be given, upon request, to the importing member for inspection, testing, and other relevant procedures.[8]

The establishment of environmental requirements is also of interest. The most resonant example is the recycling fee, which was introduced for every wheeled vehicle (chassis), self-propelled machine, and trailer imported into Russia. This fee aims to ensure environmental safety, including the protection of human health and the environment from the harmful effects of vehicle operation, considering their technical characteristics and wear.[9]

Goods originating from a foreign state or groups of foreign states are granted treatment no less favorable than that granted to like goods of Russian origin or directly competitive goods of Russian origin regarding sale, offering for sale, purchase, transportation, distribution, or use on the internal market of the Russian Federation. This provision does not prevent the application of differentiated payments related to transportation and based exclusively on the cost of operating vehicles rather than the origin of the goods. Establishing and applying such payments is not recognized as a violation of national treatment.

National Treatment in Procurement for State and Municipal Needs

In accordance with GATT requirements, goods originating from a foreign state or groups of foreign states are granted equal opportunities for their sale, offering for sale, purchase, transportation, distribution, or use on the internal market. The question of competitive advantages arises regarding like Russian goods. A similar approach is implemented within regional agreements. For example, the provisions of Article 11 of the Agreement on Partnership and Cooperation establishing a partnership between the Russian Federation, of one part, and the European Communities and their Member States, of the other part.[10] It establishes a unified legal regime for goods released into civil circulation in the participating countries. Consequently, a product released into circulation by the right holder or with their consent in any participating country of the agreement has a unified legal regime regarding its further circulation.

Goods originating from a foreign state or groups of foreign states that do not have international treaties with the Russian Federation regarding goods of Russian origin may be granted a different regulatory regime.

The provisions of the article under consideration do not apply to the procurement of goods for state or municipal needs. These needs are defined as the requirements of the Russian Federation, its constituent entities, municipal formations, and state and municipal customers for goods, works, and services necessary for exercising their functions and powers, for performing the international obligations of the Russian Federation, and for implementing interstate target programs with Russian participation, funded by budget and extra-budgetary sources.

As follows from Article 14 of Federal Law No. 44-FZ dated April 5, 2013, On the Contract System in the Field of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs, the application of national treatment in procurement to goods originating from a foreign state or group of foreign states is carried out only in cases and on conditions provided for by international treaties of the Russian Federation. The Ministry of Economic Development of Russia publishes the list of foreign states with which such treaties have been concluded in the Unified Information System (the "EIS").

Simultaneously, to protect the foundations of the constitutional system, ensure national defense and state security, protect the internal market, develop the national economy, and support Russian manufacturers, the Russian Government establishes a prohibition on the admission of goods originating from foreign states and restrictions on their admission for procurement purposes. Exceptions include cases where production of such goods in Russia is absent or does not meet the requirements of state customers. This is confirmed by the List of technological equipment (including components and spare parts) for which no analogues are produced in Russia and whose import into Russia is not subject to VAT. This list was approved by Russian Government Decree No. 372 dated April 30, 2009 (concerning casting machines, machine tools, and measuring and control instruments) or by a corresponding conclusion based on the results of an expert review conducted by the Ministry of Industry and Trade of Russia in the established manner.

Such an approach to government procurement is not entirely consistent with the 1994 World Trade Organization's Agreement on Government Procurement. Regarding all laws, regulations, procedures, and practices regarding government procurement covered by this Agreement, each Party shall provide immediately and unconditionally to the products and suppliers of other Parties treatment no less favorable than that accorded to domestic products and suppliers, and products and suppliers of any other Party. Furthermore, each Party shall ensure that its entities shall not treat a locally-established supplier less favorably than another locally-established supplier on the basis of degree of foreign affiliation or ownership.

At the same time, Article V of the Agreement allows for the possibility of reaching an agreement on mutually acceptable exclusions from the national treatment rules regarding specific entities, goods, or services included in relevant lists, specifying the particular circumstances for each case. However, laws, regulations, procedures, and practices regarding government procurement should not be prepared, adopted, or applied to foreign or domestic products and suppliers so as to afford protection to domestic products or suppliers.[11]

Pursuant to Clause 31 of Annex No. 25 to the EAEU Treaty, a member state is entitled, in exceptional cases and in the unilateral manner established by its procurement legislation, to establish exceptions to national treatment for a period not exceeding 2 years. However, the possibility of repeatedly establishing exceptions to national treatment or establishing specific procurement features for the same types of goods, works, and services is not provided. Within the regulation of the mechanism for adopting restrictive measures, states must proceed from the "possibility of only a one-time establishment" thereof. [12]

National Treatment Regarding Foreign Trade in Services

Unless otherwise provided by international treaties of the Russian Federation, federal laws, and other regulatory legal acts regarding measures affecting foreign trade in services, foreign service providers and their services are granted treatment no less favorable than the treatment granted to like Russian service providers and the services they provide within the Russian Federation. Treatment is considered less favorable if it modifies the conditions of competition in favor of Russian service providers or services provided by them within the Russian Federation compared to like foreign service providers.

Article 34 of the Law on Foreign Trade Activity is dedicated specifically to granting national treatment for foreign trade in services. This is because their intangible nature and the inability to identify them by place of origin prevent the full extension of rules established for trade in goods to services. The subject of regulation in this case is the methods of providing services and performing works.

The possibility of granting national treatment in foreign trade in services is established in several international documents. This issue is detailed most extensively in Article XVII of the General Agreement on Trade in Services (the "GATS"). According to this article, each World Trade Organization member, in the sectors inscribed in its Schedule and subject to any conditions and qualifications set out therein, shall accord to services and service suppliers of any other member, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers. Regarding sectors where such commitments are undertaken, each schedule defines limits, restrictions, and conditions regarding market access, conditions and qualifications regarding national treatment, the undertaking of additional commitments, and, where possible, time frames for performing relevant commitments and the date of their entry into force.

Corresponding individual national lists were determined for each EAEU member state. [13] Meanwhile, the Russian Federation made reservations regarding:

• Activities requiring a license may only be performed by legal entities of the Russian Federation or individual entrepreneurs registered in the established manner in the Russian Federation. The types of activities requiring a license and the procedure for determining the licensee's organizational-legal form are established by the legislation of the Russian Federation;
• Regarding printing and publishing services, establishment is permitted only in the form of a Russian Federation legal entity;
• A lottery operator can only be a Russian Federation legal entity;
• Space activity can only be performed by legal entities of the Russian Federation. The commander of a Russian Federation manned space object must be a cosmonaut who is a citizen of the Russian Federation;
• A commercial organization in the field of auditing activity may be established in any organizational-legal form, except for a public joint-stock company or a state or municipal unitary enterprise;
• Attorneys may only provide services through law bureaus, law offices, bar associations, and legal consultations;
• Cadastral activity on the territory of the Russian Federation may be performed exclusively by Russian Federation persons;
• Activity related to providing employment services for Russian Federation citizens outside the Russian Federation cannot be performed by an individual entrepreneur;
• A bankruptcy trustee can only be a citizen of the Russian Federation, and others.

Except for these specified exceptions to the national treatment principle, no EAEU member state applies or introduces restrictions on the number of service providers (in the form of a quota, monopoly, economic needs test, or any other quantitative form) or on the operations of any service provider (in the form of a quota, economic needs test, or any other quantitative form) regarding services and service providers from another EAEU member state in connection with trade in services.

GATS specifically stipulates the conditions for the activity of a monopoly service provider and exclusive service suppliers, if a state formally or in effect authorizes or establishes a small number of service suppliers and substantially prevents competition among them in its territory. It is assumed that in such a situation, the state must ensure that any monopoly supplier in its territory does not act in a manner inconsistent with its obligations undertaken in the context of ensuring national treatment. If a monopoly supplier competes, either directly or through an affiliated company, in the supply of a service outside the scope of its monopoly rights and which is subject to specific state commitments, the state ensures that such a supplier does not abuse its monopoly position to act in its territory in a manner inconsistent with such commitments.

While recognizing a state's right to stipulate individual exceptions to the national treatment principle, GATS provides for the further liberalization of regulation in this field of foreign trade. This should be carried out considering national policy objectives and the level of development of individual members, both overall and for specific sectors. For these purposes, the Parties enter into successive negotiations directed at reducing or eliminating measures adversely affecting trade in services to provide effective market access. This process is carried out to promote the interests of all participants on a basis of mutual advantage and to ensure an overall balance of rights and obligations. Guidelines and procedures for negotiations are established for each round based on an assessment of trade in services overall and by sector conducted by the Council for Trade in Services.

A similar agreement was reached by EAEU participants, who committed to taking measures to achieve a higher level of liberalization aimed at gradually reducing the number of the aforementioned restrictions.

It is considered that the national treatment requirement can be met either by granting services and service suppliers formally the same treatment as that accorded to domestic like services or service suppliers, or formally different treatment. The primary condition remains that the conditions of competition must not be modified. It is specifically noted that national treatment conditions cannot be interpreted as a right to demand compensation from any member for the loss of competitive advantages arising from the foreign character of the relevant services or service suppliers.

Article 34 of the Law on Foreign Trade Activity establishes two criteria for recognizing treatment as less favorable:

• Modifying conditions of competition in favor of Russian service providers or services provided by them within Russia compared to like foreign service providers. This may be determined based on expert assessments or results from observations of commodity markets and economic-statistical calculations;
• Providing services in one of the following ways: from the territory of a foreign state to the territory of the Russian Federation; on the territory of a foreign state to a Russian customer; by a foreign service provider without a commercial presence in the Russian Federation through their presence or the presence of foreign persons authorized to act on their behalf within the Russian Federation; and by a foreign service provider through a commercial presence in the Russian Federation.

General national treatment rules do not extend to the provision of services and performance of works for state or municipal needs or to providers of such services.

Virtually any trade restriction (and generally regulatory measures) can be presented as discrimination. For example, import duties discriminate against foreign goods relative to local ones, as they are subject to an additional tax. Goods requiring a license for import are in a less advantageous position compared to goods imported freely and are therefore also subject to discrimination (the same can be said for their suppliers). Therefore, it is impossible to create fair and equal conditions of competition without addressing the issue of discrimination.

The goal of using the national treatment principle is to prevent the use of discrimination against foreign goods (services, capital) as a protectionist measure through internal regulatory measures — internal taxes, sales rules, etc. — which are not directly related to import regulation but can create unfavorable conditions for the circulation of foreign goods in the internal market.

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References

1. Resolution of the Arbitration Court of the West Siberian District dated March 19, 2020, in Case No. A27-12926/2019.
2. Smbatyan A.S. National Trade Regulation Regime in the Interpretations of the WTO Dispute Settlement Body. International Justice Journal, 2014, No. 3.
3. Batrova T.A. Commentary on Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity, 2014.
4. Decision of the Customs Union Commission No. 526 dated January 28, 2011, On the Unified List of Products for which mandatory requirements are established within the Customs Union.
5. Batrova T.A. Commentary on Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity, 2014.
6. World Trade Organization Agreement on Technical Barriers to Trade, contained in Annex 1A to the Agreement Establishing the World Trade Organization dated April 15, 1994.
7. Batrova T.A. Commentary on Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity, 2014.
8. Decision of the Customs Union Commission No. 835 dated October 18, 2011, On the Equivalence of Sanitary, Veterinary-Sanitary, and Phytosanitary Measures and on Conducting Risk Assessment.
9. Federal Law No. 89-FZ dated June 24, 1998, On Production and Consumption Waste.
10. The Agreement was ratified by Federal Law No. 135-FZ dated November 25, 1996.
11. Batrova T.A. Commentary on Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity, 2014.
12. Advisory Opinion of the Court of the Eurasian Economic Union No. CE-2-2/7-20-BK dated January 11, 2021, Upon the application of the Eurasian Economic Commission for clarification of the provisions of the Treaty on the Eurasian Economic Union dated May 29, 2014.
13. Decision of the Supreme Eurasian Economic Council No. 112 dated December 23, 2014, On approval of individual national lists of restrictions, exceptions, additional requirements, and conditions within the framework of the Eurasian Economic Union for the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, and the Russian Federation.