Category: Austria

A specific form of cooperation was introduced in Austria in 2018 and will become effective on January 1, 2019: Upon the taxpayer’s request, an enterprise may opt for a “horizontal monitoring” procedure. This new law was introduced after a pilot project in which internationally renowned enterprises such as Red Bull, Shell Austria, and Infineon Technologies participated (although whether these enterprises will also participate in the new “horizontal monitoring” procedure is not yet known).

The Austrian Commercial Code defines which enterprises are eligible for and hence may apply for the horizontal monitoring procedure. Participation in the horizontal monitoring procedure is only available upon request and under certain conditions. 

On the one hand, the law requires “hard” conditions, which must be fulfilled in all cases: The participating enterprise has to have generated annual gross sales exceeding EUR 40 million in the two years before the request (exceptions exist for banks and insurance companies), and the taxpayer running the enterprise has to be credible under tax aspects (i.e., the taxpayer cannot have been sentenced for a tax crime in the five years before the request). Finally, “a tax control system” needs to be established (details are governed by a directive from the Federal Ministry of Finance).

In addition, “soft” conditions apply as well, which are only exemplified in the law. As a result, tax authorities have some discretion to decide whether a request for participation in the horizontal monitoring procedure will be rejected or not, although in practice tax authorities will reject a request if the taxpayer does not predominantly fulfill them. 

The decision-making procedure whether an applying enterprise shall be admitted to the horizontal monitoring procedure is as follows: First, the tax office decides and announces – by issuing a decree – whether the applying taxpayer fulfills the “hard” conditions mentioned above. Second, a tax audit covering the last five years before the request is required (see below for details). Third, the compliance of the taxpayer with the “soft” conditions is evaluated. If the tax office decides to admit the taxpayer to the horizontal monitoring procedure, a second decree will be issued.

The “soft” conditions described in Sec. 153c para 4 of the Federal Fiscal Code refer to the taxpayer’s “behavior” (in the tax context) in the five years before the request, including: (a) the taxpayer’s compliance with his/her obligations to comprehensively disclose facts and circumstances in his/her tax return(s); (b) the number of tax returns filed behind schedule; (c) the number of tax evaluations necessitated by incorrect/incomplete tax returns; (d) the number of defaults, and the amount of any default payments to tax authorities, as well as the period of default; (e) the number of applications to extend tax payments (or to pay in installments); (f) whether fiscal criminal proceedings are pending; (g) finally, the taxpayer’s behavior and the findings in the tax audit required prior to the initiation of the horizontal monitoring. 

As already mentioned, a tax audit is required before participating. This tax audit serves the purposes of enhancing the taxpayer’s credibility under tax aspects. Further, the tax audit prevents the existence of years being unaudited before the beginning of the horizontal monitoring procedure. The taxpayer’s behavior and the findings in the audit are, as mentioned above, “soft” conditions influencing the tax authority’s decision whether to let the taxpayer participate in the horizontal monitoring or not.

Participation in horizontal monitoring allows auditors to be present at the enterprise’s premises on a day-to-day basis in order to discuss tax issues with the taxpayer and answer his/her questions, with the auditor’s answers/statements to a certain extent legally binding. This offers the taxpayer a certain degree of protection under a “bona fide” aspect. In return, the taxpayer has an enhanced obligation to cooperate with the auditors. 

In addition, participation in the horizontal monitoring procedure precludes ordinary tax audits. In other words, the taxpayer – who is monitored anyway – is exempt from tax audits going forward (although, as mentioned above, a tax audit covering the last five years before the request is required). 

Whether taxpayers will accept the horizontal monitoring procedure is hard to predict: It has been criticized on the grounds that the procedure is open only for enterprises of a certain size and only to taxpayers who are already “model students” for tax purposes anyway.

By Christoph Urtz, Partner, Baker McKenzie Vienna

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Following some other European stock exchanges, the Vienna Stock Exchange (VSE) announced today, 22 February 2019, that it will no longer require issuers, the shares of which are admitted to trading on its regulated market, to publish quarterly reports.

In line with EU legislation, the Austrian Stock Exchange Act (Börsegesetz – BörseG) requires issuers of equity and debt instruments listed on the regulated market to publish semi-annual reports. Whether or not issuers in the highest market segment also have to publish quarterly reports (Q1 and Q3) is left to the discretion of the relevant stock exchange (to be regulated in the terms and conditions of the relevant market). 

The VSE has now decided to change its rules to the effect that quarterly reports (Q1 and Q3) will no longer be mandatory and has amended its prime market rules accordingly with immediate effect. Going forward, issuers may decide individually, if and in what format they will continue publishing quarterly financial information, also considering investor expectations. If an issuer continues to publish quarterly financial information, such information will have to follow a consistent format and will need to be published to investors generally to ensure non-discriminatory and equal treatment of investors. The annual report and the semi-annual report (Q2) will have to be prepared in the same manner as in the past.

This change does not affect an issuer’s obligation to disclose events which qualify as inside information in accordance with Art 17 of the Market Abuse Regulation if and when they arise (MAR; unless disclosure is delayed in accordance with Art 17 para 4 MAR). 

This change is certainly welcome to Austrian and non-Austrian (potential) issuers when selecting listing venues and is part of the VSE’s strategic positioning as an attractive listing venue. Only recently the VSE has introduced direct market, its fast, inexpensive and easy access entry-level segment to attract SMEs, start-ups and growth companies. 

By Peter Feyl, Partner and Ursula Rath, Partner Schoenherr

On October 29, 2018, leading Austrian law firms Dorda, Eisenberger & Herzog, Herbst Kinsky, PHH, Schoenherr, SCWP Schindhelm, and Wolf Theiss announced their joint launch of the “Legal Tech Hub Vienna”: a non-profit forum for LegalTech companies, start-ups, and other legal market participants to identify innovation potential and work together to implement technological tools appearing ever-more-rapidly on the legal market.

The LTHV represents a unique cooperation by seven prominent law firms in the market to encourage and promote the development and implementation of technology for the legal industry, often referred to as “LegalTech.” The organization’s website – lthv.eu – has already announced an open call for the first LTHV accelerator programs for startups and small and medium enterprises to kick off on January 28, 2019. Founders of the LTHV also plan to establish a physical office soon.

We spoke to the founding members of the LTHV to find out more about this unique project. 

Inspiration and Conception 

The LTHV was the brainchild of Karin Artner, the wife of Dorda Partner Stefan Artner. “Last December we were on a taxi ride from Linz,” Stefan Artner recalls, “where we visited a start-up accelerator.” In that northern Austrian city Artner and his wife had seen a variety of specialized hubs for FinTech, PropTech, and IndustryTech. “We were abuzz from the energy of the accelerator and greatly inspired with new ideas, and we thought, if there was no hub for the legal industry, we would have to make it happen. The rest is history.” Within a year, Artner had managed to develop the concept of the hub, pitch it to other major Austrian law firms, and get the budget approved. 

One of the very first to join the team was Sophie Martinetz, Managing Partner at Future-Law, an accelerator program open to early stage and growth start-ups who create products or services applicable to the legal and professional industry. Future-Law quickly signed up as “Implementing Partner.”

The Founding Partners came from both large and multi-service law firms and smaller firms experienced in working with start-ups. Herbst Kinsky, which works regularly with start-ups and advises established companies on innovation, falls into both categories. “We advise both sides and speak both languages,” says Phillip Kinsky, “therefore it was clear that this initiative – which focuses on bringing startups and corporates together – is something we had to join and support.” 

Many participants point to their firms’ institutional commitments to innovation and technology. Eisenberger & Herzog Partner Alric Ofenheimer points with pride to a “sort of think tank” in his firm, dedicated to reviewing and staying abreast of Legal Tech developments, and Schoenherr’s COO Gudrun Stangl mentions the Innovation Hub initiative Schoenherr launched in 2017 in explaining that “LTHV made sense to us because we all stand to benefit from the ideas that will emerge from the platform.”

Ultimately, Martinetz believes that the LTHV will serve as a useful conduit between the law firm industry in Austria and those tech start-ups developing products that may be useful to it. “We want to get the right mix of big companies together for the law firms, and give these startups access to law firms,” she says. This, she believes, should help those lawyers and law firms that are traditionally conservative and famously technology-averse. “Law firms are not start-up savvy. Although many companies are already digitalizing and collaborating with start-ups, the concept is new for lawyers.”

Kinsky echoes Martinetz’s analysis. “Usually law firms are quite conservative when it comes to innovation, due to internal reasons, administration, IT systems, data protection, and other issues,” he says. “We see law firms being reluctant to innovate, and we are trying to change that. I think it will be a great opportunity for start-ups.”

Artner, who is also a private investor in start-ups, knows that it can take a long time to get an idea to the market. “It takes the right team and values, spirit, and endless energy to be successful,” he says. “And of course, it is equally important to have a product which is at the right time in the right place.” The LTHV can play a major role in facilitating that process, both inside and even outside the country, he believes, noting that “Austria has historically been a hub for Central and Eastern Europe and Vienna is a great location for start-ups from the region, offering access to investors, funds, know-how, infrastructure, and a jumping-off point to the rest of Europe.”

How It Works

The LTHV’s three main activities are Acceleration, Research & Development, and Partnerships. The hub’s specific goal, Artner says, is to discover and develop new solutions and methods to improve the legal industry. And the LTHV’s large law firm membership provides a unique opportunity to potential start-ups, he says.  “With the LTHV we offer a market view on the product before start-ups enter the market. This can be done at a very early stage – even just evaluating ideas and visions.” 

The hub itself is divided into two groups: the democratically-elected Board, which is tasked with ensuring public awareness and interest and developing strategy and goals, and which consists of Philipp Kinsky, Gudrun Stangl, and Stefan Artner; and the Jury, which is charged with implementing ideas and developing criteria for startups and SMEs and for the scope of work and target technologies, and which consists of representatives of all seven founding partners. 

Martinetz herself is tasked with running the day-to-day operations of the LTHV. She explains that the accelerator program will be “the first big thing” the LTHV will work on, with applications being accepted as of the first day of 2019. According to her, the LTHV members plan to work closely with LegalTech companies on innovation and helping them move forward, as well as seeking other start-ups that focus on raising the efficiency of internal legal management and those that focus on AI and blockchain products. 

Artner describes the hub as facilitating a process, rather than merely providing a simple conduit for existing technology. “I think we are only at the beginning of the advancement of technology,” he says, “and we have yet to understand how this will change our profession. The capabilities of technology and process innovation will fundamentally change the way lawyers work and how they deliver legal services.” He notes that “less complex work or standardized procedures will be solved by technology one day,” so those lawyers who are most comfortable embracing modern technological tools will “always be in the game for solving complex legal issues and helping clients make decisions.”

Among the hub’s three core foci are Transaction Management – facilitating more intelligent reviews, better documentation, and processes automation – and Data Management. “Innovation has changed the entire way of handling these processes,” Martinetz claims. “What we can see is that the vast amount of data simply exceeds people’s time, because no human can look through three terabytes of data,” she says. “It really is about helping lawyers to review data more effectively and efficiently and therefore deliver better results.” The final core focus is Law Firm Management, involving improving both communication with clients and client-service-related processes, work, and cost management, and optimizing internal and external processes.

The hub is also open to working with interest groups and universities and plans on developing standards for the legal industry through academic partnerships, research, and other projects. Wolf Theiss Chief Business Development & Marketing Officer Andrea Miskolczi, an LTHV jury member, explains that involving universities is a critical component of the hub’s mission. “We invite universities to help us to understand how developed different technologies are, what can be expected from different machine learning or natural language processing tools. They are kind of our consultants, but they also can channel in.”

E Pluribus Unum 

Beyond keeping up with consistent technological leaps forward, the idea of law firm competitors working together in this manner is, if not unprecedented, at least decidedly rare. Stefan Artner explains that his decision to work with other law firms was based on his vision of reconstructing the whole legal industry. “LegalTech is taking up an important role in the legal consulting industry worldwide and will, to some extent, revolutionize legal advice. Hence, I deemed it important that this initiative not be driven by one single law firm, but that we find a platform for the whole legal consulting industry so that the LTHV can grow on a large basis.” A rising tide lifts all boats, he believes. “This is our common denominator – as different and as competitive as we are – we all know that pulling on the same rope is a major advantage for each of us. In the end it is very simple: Joining forces in this field enables better resources in time, money, and people, for more projects.” He smiles. “It’s a win-win for all parties.” 

Still, other LegalTech hubs in Europe are usually established and run by single law firms – one of the reasons ILFs like Allen & Overy, Baker McKenzie, and Freshfields opted out of the LTHV, according to its founding members. “In the UK, for example, you will see law firms such as Allen & Overy doing this individually,” Miskolczi concedes. “But of course A&O is large.” In any event, she insists, such collaboration is hardly unprecedented. “We also see banks cooperating on Fintech, and thus the idea of working together in regard to technology and digitalization is not completely new.” 

“It simply does not make sense to compete against each other in this changing area,” Steger adds, “where all of us will be affected.” For example, he notes, the compliance work each law firm does provides no real competitive advantage, yet requires a lot of time, human resources, effort, and cost. “If that could be optimized it would help us get our feet to the ground much faster.”

Stangl agrees. “There is a lot of buzz around artificial intelligence, LegalTech, and data management,” she says, “but few can see the forest for the trees or determine which LegalTech solution makes the most sense to them. In essence, we’re all in the same boat in terms of the challenges that digitalization poses, so it makes sense to join forces with our peers.” Besides, she notes, the LTHV does not affect individual law firm strategies and the development of competitive advantages in other areas. 

Instead, it contributes to the ability of strong local and regional law firms which otherwise would fall behind their international counterparts. As Eisenberger & Herzog’s Alric Ofenheimer explains, “in comparison to international law firms like Allen & Overy or Linklaters we are simply too small. We do not have sufficient funds to keep up with these international law firms, and therefore for us the only way not to stay behind is to cooperate with other law firms which have the same problems.”

As a result, Ofenheimer insists, there is a friendly atmosphere within the team. “I am happy to see that our ideas and needs can be shared with other law firms without having a barrier to prevent or hold something back to hide that maybe in some fields one firm is more developed and matured than the other. We should try to keep this good spirit.”

Prochaska agrees that the sharing of knowledge to provide faster and more efficient development is important, but he concedes with a smile that that the make-up of the group surprised him. “For me personally it is a little astonishing that Wolf Theiss and Schoenherr are willing to work together within the project, because they are really tough competitors and two of the tops of the market.” He laughs, joking that “we will see how it will work out.”  

Shaping the Future

There is little contesting the inevitable effects of technology on the legal market. Indeed, it is already resulting in significant competitive pressure in the industry, and Stangl points to its effects on fees. “As the technology boom progresses, our clients’ expectations have also changed,” she says. “In addition to obtaining the best possible legal service, clients are now also interested in how exactly we create and offer them.”

Miskolcz agrees that the legal industry will inevitably change and diversify, with new technologies reshaping the traditional law firm business model and non-lawyers coming into law firms. “We will see legal project managers, IT people, and legal engineers working alongside lawyers on transactions,” she says, “not only in the back office, but in client-facing roles. Of course clients will see that, and they will not tolerate paying an extra fee for the old-fashioned form of service delivery.”

Ultimately, Miskolcz believes that the result will be similar to other sectors, with technological tools taking over repetitive, easy, and automated tasks. She draws a parallel with the transformation of the automotive industry, where 50 years ago cars were built by a human workforce that today has to a large extent been replaced with robots. But in her telling this is a positive prediction, not a bleak one. “You still need people for creative and high level tasks in the car industry,” she says, “and the legal industry now faces something similar – simple repetitive and basic tasks will be taken over by software and software will support lawyers to an extent which is unimaginable today.”

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

No individual, no business, and no country is immune from the threat of cybercrime. The increasingly successful and complex economies of CEE countries are no exception to this rule. In fact, for both historical and political reasons, CEE is at particular peril.

CMS, together with Legal Week and The American Lawyer, recently published a report, “The Cybersecurity Challenge in Central and Eastern Europe,” which reveals and discusses how corporates and smaller businesses in the region are dealing with the cyber threats that assail them. The report asked one hundred respondents and general counsels about their cyber-strategies and levels of risk awareness and preparedness, and if there was a specific responsibility for cyber-protection within the leadership structure. 

Unsurprisingly, the majority of respondents were worried about cyber-attacks in the future. The report revealed that, although in 2017 there were 113 cyber-attacks in the 18 CEE countries covered, and despite the widespread concern, only a minority of respondents had confidence that their companies were adequately prepared to detect and deal with cyber-attacks.

Training and Attack Readiness 

Prevention of attacks is, of course, the first line of defense, but fewer than two-thirds of respondents (60%) said there was mandatory cybersecurity training for their workforce. The problem of a lack of cybersecurity awareness is most acute in small or medium firms, the report reveals, but respondents said that even in larger enterprises awareness does not always extend to the highest level. The weakness in corporate readiness for cyber-attacks is typically human error. Respondents said that even where training is fully in place and supported by senior executives, the enduring difficulty is in getting employees to prioritize cybersecurity and to be routinely aware of its requirements. The report showed that it was only in the wake of a cyber-attack that levels of awareness and preparation rose. Respondents said that in those circumstances systems were updated and counter measures implemented.

In the event of a cyber-attack, it is essential that damage limitation incident response plans (IRPs) are fit for purpose. The report revealed that fewer than half of respondents regularly update their IRPs.

Who Takes Responsibility?

The extent and seriousness of the cyber-threat throughout CEE has, the survey revealed, had the positive effect of increasing the time and resources invested in cyber-risk management: more than half of respondents report an increase in the past year.  On the crucial questions of who in CEE businesses takes “ownership” of cyber-strategy, and who or which department reports to the Board, the findings are mixed: IT dominates with 39%, while Compliance is at 27% — but only 11% of General Counsels have that responsibility. There is a two-thirds consensus among respondents in every CEE country that regulators need to up their game when it comes to cybersecurity processes.

Regulations

Despite the GDPR having only a limited relevance to cybersecurity, respondents were concerned about compliance. No doubt it is the extent of the maximum fines for failing to comply with data security that caught their attention: EUR 20 million, or four percent of annual global turnover, whichever is higher, for non-compliance.

National laws based on the Directive on Security of Network and Information Systems are becoming increasingly relevant to cybersecurity, although respondents were far less aware of its provisions for prevention and mitigation than they were of those in the GDPR.

Insurance? 

The report shows a general awareness of the increasing risk to cybersecurity in CEE countries. Cyber-attacks can be prohibitively expensive; McKinsey has estimated that the average financial cost of a breach is EUR 4 million. It is strange, then, that the apparent take-up of cyber-attack insurance is at very modest levels: only 37% of respondents have cyber-attack coverage. Interviews have identified a probable cause – that for many CEE countries and companies, cyber-attack insurance is a novel concept that is yet to be fully embraced.

In Conclusion

Cyber-threats are difficult and elusive enemies, as they can be neither seen nor physically defeated. Security against data breaches is both a defensive strategy and intangible; there is no immediate – or at least no apparent – value added to the business. Safety, let alone immunity, can never be absolute, however sophisticated the cyber strategy may be. But as the experience of the report’s respondents confirms, in a world of uncertainty little is as certain as that cyber-risks and costly attacks will continue and amplify.

Interviewee statements together with analysis of the report’s findings demonstrate that CEE board directors and general counsels fully comprehend the cyber-threats their companies face. In many cases they also accept that adequate measures to mitigate cyber-risk have yet to be taken. 

Business success in CEE countries, as elsewhere, is complex and rarely secure. As this report makes clear (sometimes uncomfortably so) an integrated and continually renewed strategy for cybersecurity is as essential to success as a skilled workforce or a first-rate IT system. Cyber is the future – its security cannot be ignored.

By Dora Petranyi, Partner and Johannes Juranek, Partner CMS

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.