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Attracting foreign investment and improving the investment environment in Latvia are among the key objectives in policy documents and strategic development plans as well as government declarations in Latvia.  

In the area of investment protection, Latvia ranks 68th, and it has been involved in about ten investment disputes. This may not seem like much, but three of these disputes are still in process and three of them Latvia has already lost. 

Latvia has signed investment protection agreements with 59 countries. Russia, with its investors ranking 6th on the volume of investments, is however not among them. 

Different investors emphasize different issues related to the investment environment in Latvia. Eastern European and Russian investors are primarily unhappy with the low profitability of their investments, while Scandinavian investors are not entirely satisfied with the local legislation processes. This issue has also been raised in the annual reports of the Foreign Investors’ Council in Latvia.

When making decisions about where to place their money, investors look at a wide range of different factors, including economic indicators, labor supply, and tax rates. Recently, investment protection has become one of the key factors for potential investors, who look for their property not to be expropriated, for the ability to recover their investments, and for their transactions not to be reversible by any sudden changes in local regulations.

Changes in the laws and regulations of Latvia are rapid at times, and a considered transition to a new regulatory framework is not always observed. The Constitutional Court of Latvia has provided for such transition period to be observed by setting reasonable timeframes or compensation measures. 

A key to a successful trade and investment environment lies also in the ability of the parties to rely upon the knowledge that their transactions will correspond to the regulations in effect when they were executed, and that they will not be retroactively  voided due to subsequent legislative amendments.

For instance, one of the latest amendments to the Law on Coming into Effect and Application of the Law on Obligations Part of the Restored Civil Code 1937 of Latvia provides that amendments to the Civil Code limiting the amount of contractual penalties as of January 1, 2015, will apply retrospectively to all previously signed contracts valid on January 1, 2014.

Significant legislative amendments and short transition periods indicate a negative trend regarding the predictability of the regulatory framework, which may be particularly frustrating to foreign businesses that carry out or are planning investments in Latvia and are carefully evaluating the potential investment environment. 

Another notable aspect is the use of electronic signatures. The December 13, 1999 European Parliament and Council Directive 1999/93/EC on a Community Framework for Electronic Signatures establishes and defines electronic signature certification services in the legal framework. This directive provides that EU member states may not restrict each other in certification services and the use of electronic signatures if the conditions laid down in the Directive are satisfied. However, in practice there are often problems with cross-border deal closures between companies wishing to use electronic signatures.

The government of Latvia is working on solutions to make it possible to co-sign documents across borders using secure electronic signatures issued in each member state. This year electronic identity cards were introduced in Latvia, which include individual digital signatures. This means that a contract can be signed simultaneously in Estonia and Latvia using a digital signature. This system is likely to promote and encourage cross-border cooperation. 

At the same time there is still no comprehensive regulatory framework for secure and reliable cross-border electronic agreements, which would include electronic identification and authentication. For its electronic identification to be supported in other EU member states, Latvia has yet to engage in the e-SENS project, which was launched in 2013 and for which significant expansion is in the pipeline.      

By Maris Vainovskis, Senior Partner, and Elina Vilde, Lawyer, Eversheds Bitans Law Office

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Although there has been a healthy number of mergers and acquisitions over the years in Estonia, the transactions are fairly under-regulated in the country, and there is no comprehensive court practice on the subject.  

If the shares of a private limited company have not been registered in the Estonian Central Register of Securities (Estonian CRS), which is not mandatory for private limited companies, then the share transfer deed must be notarised. In addition the application made to the commercial register after registration in the Estonian CRS would also have to be notarised. The requirements for notarial attestation are accompanied by notary fees, which depend on the value of the transaction, and are thus usually relatively high.

It is important to point out that in Estonia documents issued by a foreign state usually have to be legalised or authenticated by a certificate replacing legalisation (apostille). This can cause difficulties because in some countries – such as the United Kingdom – obtaining an apostille is complicated, in which case intra-firm transformations (i.e. changes in the composition of the management board or an increase of share capital) can take a long time due to the need to wait for an apostille. This problem in turn can inhibit the interest of foreign investors to do business in Estonia. In addition it seems overly encumbering that there is also an obligation to translate notarial certificates into Estonian.

Of course, certain notarisation requirements are necessary for security reasons such as ensuring a trustworthy business environment and even preventing crime, but it is also important to keep in mind that over-regulation can result in the deterioration of interest of foreign investors, and it can be argued that the current notarisation and certification requirements especially in connection to M&A transactions are no longer necessary to achieve the security-related goals. Most importantly, the reduction of notarisation requirements would make entrepreneurs’ lives much easier and would have a positive effect on the flexibility of the business environment.

Regarding public limited companies the registration of shares in the Estonian CRS is mandatory, and although registration is voluntary for private limited companies, it would be advisable to register the shares regardless, because due to current requirements registration results in lower notary fees. It should be mentioned that the registration of shares isn’t a very straight-forward process either, however, and in order to acquire shares one has to have a securities account, which can only be opened in a bank that is a member of the Estonian Central Securities Depository that maintains the Estonian CRS. A bank account has to be opened in the same bank, which in turn is a pre-requirement for opening a securities account.

It has to be stressed that banks have higher compliance requirements for rendering financial services to individuals who are located outside the European Union (EU). These requirements originate from the Money Laundering and Terrorist Financing Prevention Act, corresponding regulations of the Minister of Finance, the instructions of the Financial Supervision Authority, and directives of the EU. As a result the opening of an account is only simple for residents of the EU.     

By Merlin Salvik, Partner, and Deivid Uibo, Lawyer, Hedman Partners Attorneys-at-Law

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

After long-term unfavorable results and inefficiency in tax collection – in particular value added tax (VAT) – the Slovak government has commenced a fight against tax evasion. As a result of this initiative, the Ministry of Finance of the Slovak Republic has taken a number of measures to increase the effectiveness of tax collection and to move towards at least the average of other European Union member states.  

Prior to the amendment, the transfer of a shareholding interest in a limited company was effective between the parties at the moment of contract (unless agreed otherwise between the parties). The actual registration of a change of shareholder in the Commercial Register had only declaratory effect. These rules corresponded with  common business practice, which provided for the immediate transfer of a shareholding interest between the transferor and the transferee. Also for this reason, a limited company was the most popular legal form when starting a business in Slovakia or in any project transactions preferring a quick and informal transfer of assets in the form of a share deal. The relative informality and flexibility in the transfer of a shareholding interest in a limited company predestined it for wide use in business in Slovakia as well as abroad. However, since the amendment has come into effect, transfers of majority shareholding interests in limited companies become effective only when they are entered into the Commercial Register. 

The most important issue seems to be that without the consent of the Tax Authority or without the written declaration of the foreign entity in those transactions not involving Slovak taxpayers, the Commercial Register will not register the transfer of a majority of a shareholding interest, and thus the effects of the transfer will not occur. This needs to be borne in mind with all M&A transactions involving the transfer of a majority shareholding interest in a limited company, and, accordingly, this risk should be acknowledged in the Share Purchase Agreement and Escrow Agreement, if it is part of the deal. 

As per the amendment, the actual effect of such transactions is extended by approximately two weeks, which constitutes the time for obtaining the approval of the Tax Authority (five business days) and the term in which the Commercial Register registers the change (which is two business days from the submission of the application). However, in practice, due to the high work load of clerk it often occurs that the Commercial Register does not keep to the prescribed period, which can lead to additional delays in M&A transactions. 

Currently, the Slovak government is considering another change in legislation related to limited liability companies as part of a package of tax reforms related to the limited companies. Preliminary information suggests that in addition to changes related to the amount of share capital, the payment of profit and other capital funds to individual shareholders will be tightly regulated considering the regulated amount of equity to liabilities of a limited company.      

By Jana Togelova, Junior Partner and Michal Hulena, Senior Associate, Ruzicka Csekes in association with members of CMS

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Despite the country’s deep political crisis, particularly in the Crimea and the eastern regions of the country, Ukraine still offers tremendous investment potential. Recently Ukraine has signed the Deep and Comprehensive Free Trade Agreement, as well as the broader EU Association Agreement with the European Union. Both agreements could move Ukraine towards a more open and transparent trade regime and improve the country’s investment climate. Currently the global investment community is closely scrutinising the steps that the new Ukrainian President and Government are taking, evaluating the risks perceived by industry leaders, bankers and investors.  

As a result, for a number of reasons, compliance issues are currently high on the list of priorities for all multinational companies doing business in Ukraine. First, there is the perception that the problem of corruption in Ukraine is significant, underpinned by the 2013 Transparency International Corruption Perceptions Index, which ranks Ukraine 144th (out of 177 countries). Second, new anti-corruption legislation was introduced in Ukraine in July 2011 (the “Anti-Corruption Law”), making it necessary for multinational companies to take another look at their compliance policies and procedures. Finally, these developments have been occurring against the backdrop of the introduction of the United Kingdom’s Bribery Act, the enhanced enforcement in the U.S. of the Foreign Corrupt Practices Act, and the increasing level of cooperation between enforcement authorities across the U.S. and Western Europe in terms of the oversight and regulation of the business conduct of their companies overseas, particularly in high-risk emerging markets.

The Anti-Corruption Law sets forth the main principles for combating corruption. In addition, four laws were adopted between April and May of 2013 in order to enhance the government’s ability to combat corruption and address Ukraine’s commitments to the European Union and the Group of States Against Corruption. The new legislation includes, among other provisions, corporate criminal liability for certain corruption offences, asset forfeiture as a penalty for certain corruption offences, and whistleblower protection laws. 

The Anti-Corruption Law defines corruption misconduct as an intentional act that has the features of corruption, and is performed by a covered person (as defined below) who is subject to criminal, administrative, civil and/or disciplinary liability. The following persons, among others, are now subject to liability for corruption: (i) Ukrainian civil servants; (ii) foreign civil servants; (iii) officers of international organisations; (iv) officers of legal entities; and (iv) “public service providers,” i.e., persons who provide public service even though they are not civil servants, such as auditors, notaries, experts, evaluators and arbitrators. The law introducing criminal corporate liability for certain corruption offences will take effect in September 2014.

The Anti-Corruption Law prohibits a covered person from receiving any gifts other than in accordance with the generally recognised acceptance of hospitalities and within the expressly allowed limits. At any one time, the value of a gift may not exceed half of the statutory minimum monthly salary (approximately USD 60). Within a calendar year, a covered person is not allowed to receive gifts from one source with a value of more than one statutory minimum monthly salary established as of the first of January of the current year. In 2014 the total value of gifts received from one source may not exceed approximately USD 120. 

The Anti-Corruption Law expressly requires that a state official take active measures to prevent any conflict of interests. In addition, information about a state official’s property, income, expenses, and financial obligations must be declared and is subject to public disclosure. State officials are not allowed to have any income in addition to their salaries, apart from income received from medical or sports judging practice or artistic or scientific activity. Also, for one year after the resignation, former state officials are prohibited from occupying certain positions and roles within the companies that they have monitored prior to their resignations.

Any losses and/or damages caused by corruption misconduct must be duly compensated to the state and/or to the other injured party. Moreover, decisions of a state body related to alleged corruption offences may be challenged in court. The Anti-Corruption Law does not indicate any mandatory or recommended actions that could reduce the risk of violations or would mitigate sanctions or other negative consequences. However, the precautions that would protect a company from being penalized under US or European anti-corruption legislation (e.g., adoption of policies, monitoring, and investigation) can also be implemented in Ukraine. 

Conducting an “anti-corruption due diligence investigation” of potential business partners and intermediaries before engaging in business activity with them is certainly recommended. Despite the difficult operating environment, some investors are finding opportunities in Ukraine. For their part, officials at regional and local levels are increasingly looking to attract investment and create jobs in their regions who become willing partners for investors in need of land or permits, which frequently are controlled below the national levels.      

By Serhiy Piontkovsky, Partner, Baker & McKenzie

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Throughout the last couple of years, the Romanian government has initiated various tax measures meant to attract foreign investors and encourage their long term operations in Romania. Although this has always been the ultimate goal, none of the recent Romanian governments have had a coherent strategy to insure conditions for economic development while achieving budgetary balance at the same time. Moreover, a large majority of the tax measures initiated during this period have led to an increase of the tax and bureaucratic burden on all Romanian taxpayers.  

Among these, perhaps the biggest challenges which foreign investors face in Romania is the overall instability and unpredictability of Romanian tax legislation. In fact, recent analysis I conducted revealed that in the past 10 years alone the Romanian Tax Code and Tax Procedure Code have been modified in more than 220 significant ways, while budgetary revenues remained at approximately 28 – 29% GDP. Therefore, we can say that with an average of over 20 changes per year to its two most important pieces of tax legislation, Romania cannot secure the legislative stability and predictability which any investor would seek. This is one of the main aspects which the Romanian government needs to improve in the future.

Another important aspect which needs improvement pertains to the regulation of the tax consolidation in the Tax Code, which has not yet been drafted, despite all the requests pouring in from the Romanian business environment. Essentially, a mother company cannot act in a unitary manner from a taxation point of view at the level of the entire holding, so that it can use the profits obtained by some of the companies within the group to offset them against tax losses obtained by other companies within the group.

Yet another significant issue affecting taxation in Romania regards the poor efficiency of its tax administration system. The best indicator is the huge delay in receiving advance tax rulings or advance pricing agreements taxpayers request from the Romanian Tax Authorities.    

In addition to the overall lack of stability and predictability of Romania’s tax legislation, it is quite often inconsistent with Romania’s macroeconomic objectives. In this regard, it is worth mentioning two  substantial inconsistent legislative changes: 

First, the VAT rate increased from 19% to 24%, starting July 1, 2010, which deepened the economic crisis, and led both to a decrease in consumption (Romania being the only EU Member State where consumption has decreased within the past 6 years) and to an increase in tax evasion.

Second, the tax on constructions, introduced on January 1, 2014, quantified as 1.5% from the net book value of the constructions for which no building tax is due. Its strongest impact will be in agriculture, telecom, and energy, domains where the infrastructure used in operational activity has the largest costs incurred and registered. Overall, the impact of this measure on the macro-economy will be the decrease of investments. This measure was intended to be later balanced by a new profit tax exemption for the profit reinvested for the acquisition or production of new equipment. 

On the other hand, recent amendments regarding the taxation of dividends and capital gains have put Romania on the map of the European countries with the most favorable holding legislation, along with the Netherlands, Cyprus, and Luxembourg.

These positive changes are also backed up by the 16% corporate income tax rate, one the most competitive in EU, and by the very large number of DTTs concluded with countries throughout the globe. It is also worth mentioning that at this moment there are also intense discussions regarding a potential decrease of the social security contribution by 5%.

To conclude, even if the latest changes to the holding tax legislation do not entirely compensate for the  shortcomings of the Romanian tax regime, investors may want to keep their eyes on Romania. The country shows high potential to become an important regional hub for foreign investments, considering latest amendments, its importance within Eastern Europe, and expected future legislative changes which will propel Romania towards full compliance with reasonable investor expectations for a European Union member.      

By Gabriel Biris, Partner, and Ioana Cartite, Senior Tax Consultant, Biris Goran

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

There can be no doubt that the economic crisis in Europe has been felt especially acutely in Greece. With estimates of EUR 100 billion having been erased from its economy, record youth unemployment and a relentless roll-out of austerity policies, the country has had a particularly rough ride in recent years. Unsurprisingly, foreign direct investment (“FDI”) has suffered badly, with total FDI falling from approximately EUR 3 billion in 2008 to approximately EUR 250 million in 2010. And the country’s economy continued to contract in the first quarter of 2014. Nevertheless, after six continuous years of painful recession, there may be signs that Greece is on its way to a (slow) recovery – export performance is rising, Greece is back in the debt markets, and foreign investors are starting to reconsider FDI in Greece.  

Traditionally, investors in Greece have been keen to take advantage of the opportunities afforded by turquoise seas and sunny skies, and while investor confidence has no doubt been battered by the financial crunch, tourists have been amongst the quickest to return, with revenues from the tourist industry expected to rise by 13% (to a record EUR 13 billion) in 2014. European investors are still treading with caution, while others have been quick to seize the new opportunities that have presented themselves on the back of the downturn. A recent example from October 2013 is the acquisition of the Astir Hotel complex in Southern Athens which commanded a price in excess of EUR 440 million from backers of Jermyn Real Estate originating in Abu Dhabi, Kuwait and Turkey.

Potential for FDI has also been noticed by investors further afield with The Fosun Group of China reportedly investing alongside Lamda Development of Greece and Al Maabar Real Estate Group of Abu Dhabi for the EUR 915 million acquisition of the Hellinikon area in Southern Athens. The project, which is set to turn the former Athens airport into a thriving tourist complex, is predicted to contribute 1.2% of the Greek GDP in years to come. However, aside from the return of FDI to tourism and real estate markets, new roles for foreign investors in Greece are also envisaged in the energy sector. The EU has arguably set its sights on Athens to relieve dependence on Russian gas (which is currently transported through the Ukraine and amounts to roughly 15% of total EU demand). The Trans Adriatic Pipeline, expected to be functional in 2019, is intended to transport natural gas from the Caspian Sea to the Greek border, through Albania and the Adriatic Sea to Italy and further into Western Europe, is one of a number of initiatives stirring the industry. New legal frameworks relating to the exploitation of hydrocarbons have also been put in place, demonstrating the Greek government’s commitment to developing the sector and further increasing investor confidence. 

The push in the energy sector has further been backed by recent interest in the Greek shipping market and, while merchant shipping has always been a major part of the Greek economy, levels of foreign interest have soared in recent months. In May, the shipping world welcomed the “Athens Declaration”, under which marine policy for the EU was outlined for the coming years. The Declaration, conducted under Greek chairmanship, was also applauded by representatives of the European Community Shipowners’ Association. In addition, recent Greek legal developments have expedited the port and terminal development in Piraeus. Relations with China have proven to be of paramount importance to the Greek State’s privatization program, and COSCO, already possessing a 35-year concession to run Piraeus’ container piers II and III, is beginning to transform the capital’s port into a distribution centre for Chinese goods into Europe. Plans have also been mooted for a further twelve ports around the country.

During the Chinese Premier’s visit to Athens in June, financing deals reportedly worth EUR 6.5 billion were concluded and a funding arrangement between the China Development Bank and Greek container shipping company Costamare (reportedly worth USD 1.5 billion) took center stage. 

Cooperation between China and Greece is expected to strengthen over the coming years with further Chinese plans for investment revealed in relation to the Greek rail network with linkage between Thessaloniki’s port (the second largest in Greece) and the national network expected to be functional in 2015. Through the eyes of post-recession optimism, the opportunities seem rife with a planned integrated distribution hub, comprising of cargo handling facilities and inter-rail networks, having the possibility to shorten Chinese export time to Europe by up to eleven days.

What remains to be seen is whether further foreign investors will be buoyed by Chinese confidence to stray outside the traditional tourism opportunities in a country only just emerging from crisis. While the road to recovery will be long, there certainly seems to be cause for optimism, and Greece may have finally turned a corner.      

By Jasel Chauhan, Partner, Holman Fenwick Willan

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Investing in Bosnia and Herzegovina (BH) may be summarized in a simple but contemplative Latin proverb:fortis fortuna adiuvat – i.e. fortune favors the bold. We suppose Cicero did not have BH in mind when leaving this written treasure in the legacy of Humanity. However, given the country’s current investment climate, there is no better way to describe it in fewer words.   

On one side, BH is placed at an ideal geo-strategic position that made it popular among conquerors in past centuries (i.e., the Austro-Hungarian Empire and the Ottoman Empire), with outstanding natural resources (i.e. water, timber, energy), qualified and hard-working human potential, outstanding agriculture, and much more. Its industrial and tourism opportunities are therefore developing fast, with an economy evidently crying out for investments. On the other side, BH still has a number of issues to resolve when it comes to foreign investment. One of the most prominent ones, besides obviously the relatively small nature of the country and market (51,209 square kilometers of territory, 3.8 million inhabitants, and a per capita GDP of approximately EUR 3,500.00), is the complex and heavily-divided administrative and legislative environment. The nation properly consists of two entities: the Federation of BH (“F BH”) and the Republic of Srpska), one district (Brcko District), and ten cantons within the F BH. The total number of legislative authorities, on different issues, eventually amounts to fourteen. There are over 135 ministries, which create an almost-intolerable bureaucracy causing slow movement in obtaining any kind of license, from Corporate, Immigration, to Real Estate, or Environment. The significant political tension is an additional issue, used for masking the corruption and theft of the country’s resources (e.g. the country imports water while at the same time it is one of the main export potentials). 

However, the fact is that the negatives (i.e., the burdensome administration) can be changed, while the positives (i.e. the geo-strategic positioning, the unexploited natural resources, etc.) are quite constant. The best showcase of how prudent investors see BH is the UK energy company EFT Group, which initiated a tremendous investment project of EUR 600 million related to the Thermal Plant Stanari mine and power plant project in the RS (which is financed through the credit line of the China Development Bank). While advising the EFT Group we witnessed the willingness of the government administration to even change the legislative environment so it would fit the needs of the transaction. There are also number of foreign investors (predominantly coming from Austria, Serbia, Croatia, Slovenia, Russia, Germany, Switzerland, the Netherlands, and Turkey, among others) who, following our advice, looked beyond the challenges and proved that the hardships are worth enduring to get to the benefits. 

Ultimately, even though the prolonged process of incorporating a company or the requirement to obtain residence and work permits for key personnel can make one want to leave before even truly entering the market, and through litigation can take several years – and enforcement of judgments over a year or more – can make one tempted to take the first plane out; still, business goes on and a predominant number of investors make a profit. The legislative framework is in fact becoming more harmonized with EU principles and practices, the implementation of it is improving each day, and bold investors are most generously rewarded for their endurance and prudence. 

The most prominent investment opportunity in BH at the moment relates to the incomplete privatization process. Unlike most of the surrounding countries and Europe in general, BH still has a number of state-owned companies to be privatized, as well as other smaller state-owned companies in the energy, postal services, and telecommunication sectors, among others. There are no highways or other significant roads or railway infrastructure; energy potential is mostly unexploited, especially when it comes to renewable energy sources, and well as tourism, agricultural, and timber potential all remain high. BH has also shown significant potential when it comes to semi-finished products and partial industrial production (automotive industry, energy, wood, etc.), however, there are also examples of imports of unfinished goods for production process completion in BH, with final products exported without triggering any tax or customs issues.    

Finally, given that most of the foreign investors are still here and reinvesting, the question that emerges would be: If they are able to generate profit in this unfavorable investment climate, can you imagine the growth of their businesses once the inevitable and ongoing transitioning processes are finally completed, and most of the hardships resolved? 

Therefore, to all bold investors, all we can say is: “Welcome aboard!”      

By Emina Saracevic and Adis Gazibegovic, Managing Partners, SGL Saracevic & Gazibegovic Lawyers

This Article was originally published in Issue 4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.