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In November 2014, the Russian Federation ratified the Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters (hereinafter, the “Convention”).

The signatories to the Convention agree to provide each other with administrative assistance related to the exchange of tax information, conduct of simultaneous tax examinations, recovery of taxes payable abroad, and the implementation of measures of conservancy.

Today, 85 states are parties to the Convention, including some offshore jurisdictions with which Russia until now has not been able to exchange information due to the lack of relevant bilateral treaties. These jurisdictions include the Principality of Andorra, Belize, the British Virgin Islands, Gibraltar, Liechtenstein, the Principality of Monaco, and the Seychelles.

The Convention was ratified only six months ago, and therefore its provisions have not so far taken effect in Russia; however, Russian tax authorities have already begun to use new approaches to their relations with their foreign counterparts.

In the last few years, Russian tax authorities have been placing profits obtained from so-called “passive” activities (i.e., royalties, dividends, debenture interests) and profits obtained from the provision of information and marketing services paid to foreign entities under enhanced scrutiny.

On December 04, 2014, the Moscow Commercial Arbitration Court adjudged a lawsuit involving the Russian company Oriflame. The Russian tax inspectorate found, based on the information provided by tax authorities in the Netherlands and Luxemburg, that the royalties Oriflame paid to foreign companies under a sub-franchising agreement were, in fact, a means to avoid taxes. 

Also in December 2014, the Saint Petersburg and Leningrad Regional Commercial Arbitration Court adjudged a claim by the Russian company Avtotor. The tax inspectorate found that the Avtotor group of companies accumulated property in a Russian company enjoying tax preferences, and then transferred funds abroad as dividends. The tax inspectorate also found, based on the information provided by public authorities in the Netherlands, that the ultimate beneficiary of the profits paid to the Dutch company was an individual affiliated with Avtotor. 

The tax audits related to the aforementioned lawsuits were conducted before the ratification of the Convention; the necessary information was exchanged under the bilateral treaties with those states. Nevertheless, existing court practice already demonstrates that tax authorities try to expose actual relations between companies of the same group incorporated in different jurisdictions.

Profit shifting and tax-base erosion are a global problem. The OECD, together with the G20, is developing measures to implement the Base Erosion and Profit Shifting Project (BEPS). Russian tax authorities also participate in the work of the OECD task groups developing anti-BEPS measures.

The ability to exercise tax control over transactions carried out outside Russia is key to implementing the measures aimed at deoffshorizing the Russian economy.

On January 01, 2015, the laws regulating controlled foreign companies came into effect. As a party to the Convention, Russia will be able to request information from other member states, exchange information, and conduct tax audits abroad.

New tax administration possibilities will allow Russia obtain information about Russian beneficiaries using companies in offshore jurisdictions with which no bilateral treaties providing for information exchange were signed. Rules oblige such beneficiaries to include the profits made by their offshore entities in their Russian tax base.

Also, the Global Standard for the Exchange of Information on Financial Accounts developed by the OECD for the purposes of the Convention will allow tax authorities to exchange information with their counterparts from other jurisdictions. 

Therefore, a number of steps aimed at implementing the measures developed by the global community to combat illegal tax schemes have been taken in Russia over the last years. These measures are being implemented by Russian tax authorities who, as recent court practice shows, are willing to cooperate with their foreign colleagues.

Elena Bogdanova, Tax Partner, Schekin & Partners

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Russia is undergoing a full-scale civil law reform touching, among other areas, upon various aspects of corporate law. One area affected by these changes is the liability of governing bodies.

These include, in the first place, the sole executivebody – in Russia most often called “general director,” an equivalent to chief executive officer (CEO) – that has actual control over the company and is entitled to enter into transactions, represent the company before third parties, and so on. In addition to the amendments introduced in the Civil Code of Russia, the Supreme State Commercial Court of Russia has issued the Resolution “On Certain Aspects of Recovery of Damages from Persons Being Members of Governing Bodies” (the “Resolution”) on July 30, 2013, setting forth clear criteria for holding CEOs liable. 

As a result, the practice of holding CEOs liable has gained tremendous momentum. It is fair to say that there were such cases before the above-mentioned developments, but they were isolated. 

So, what is the issue of recovery of damages from CEOs about and in what cases do grounds for such recovery arise? The general rule is that grounds for recovery actions arise where a company suffers damages from fraudulent (willful) or unreasonable (negligent) acts by its CEO. These may include entering into a transaction that is obviously disadvantageous (e.g., the sale of an important asset for a price much below its market value), or stripping assets from the company to the benefit of the CEO’s affiliates. But apart from such obvious and easily-understandable situations, grounds for recovery of damages from a CEO may also arise where the company is made publicly liable (e.g., in tax or administrative matters). Such actions may be brought by the company itself (e.g., represented by its new CEO) or by a company shareholder.

The first notable case in which damages were awarded against a former CEO on the basis of the criteria introduced by the Resolution involved damages resulting from a money transfer to a fly-by-night company for services that were never actually rendered (Case No 40-56721/13). The case was handled by Schekin & Partners. After that, successful actions against former CEOs followed one after another. Thus, in one case (Case No A41-2271/13) a company recovered more than USD 7 million from its former CEO (at the exchange rate as of the award date). Paying such a debt was not easy even for a successful and highly-paid top manager. 

That is why the first judicial precedents shocked the business community, particularly top managers who often hold the position of sole executive in companies. During the first six months of the Resolution (from late November 2013 through late April 2014), more than 30 claims were satisfied while only 15 were dismissed.

I remember speaking to business persons at a seminar and seeing their frightened faces and eyes full of despair. At that time, top managers felt extremely vulnerable to employers and shareholders. Many feared becoming pawns in a conflict between various shareholder groups. As experts, we also realized that any such claim against a CEO allowed by a state commercial court might later become a basis for commencing a criminal action for embezzlement or abuse of power, because the circumstances established by the state commercial court would not need to be proven in a criminal case.

We had different expectations, however, believing that there would be no mass persecution of CEOs and that the high percentage of claims satisfied against them was due to the fact that cases taken to court were the most flagrant ones, where abuses by CEOs were plain to see.

Everything worked out as we expected. Over the period from early May 2014 to the present, the numbers of claims satisfied and dismissed against CEOs have become almost equal, the latter even outweighing slightly (78 claims satisfied and 83 dismissed), while the practice of converting civil liability into criminal liability has not spread. 

I would conclude by noting that there are many cases when CEOs begin to play their own games that do not always meet the interests of their companies. In this light, the launching of directors’ liability seems to be a useful instrument of control for businesses.

Roman Serb-Serbin, Partner, Schekin & Partners

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Evaluated at EUR 21 billion several years ago, the Russian pharmaceutical market is among the ten largest pharmaceutical markets in the world. With 500% growth in 20 years, it is also one of the fastest growing. An ambitious state policy of innovation and the current economic crisis are reshuffling the cards on this import-oriented market.

Foreign drugs account for half of the market, yet this share is bound to decrease due to the recent devaluation of the ruble and reduced spending power of Russians. Under these circumstances, Russian-owned companies and foreign companies with local manufacturing capacities (such as Novartis, Sanofi, AstraZeneca, and Laboratoires Servier) are in a better situation than importers. But Russian companies with a strong exposure on low cost products and generics or dependent upon national and regional budgets are suffering from reduced sales and shrinking margins.

The Russian pharmaceutical market is now beginning to witness the positive results of the 2020 Development Program of the National Pharmaceutical Industry that was launched in 2009. Focused on innovative drugs and biotech projects, this ambitious state policy brought necessary funding to support local drug R&D, while at the same time imposing heavier compliance requirements upon healthcare professionals.

Foreign companies have always been welcome to participate in the Russian pharmaceutical sector. Technology clusters established across Russia and local partnerships with universities offer a good basis for collaboration. Through these partnerships, foreign companies seek opportunities for fast drug development and commercial launch in Russia. Since 2006, the Russian government has helped build a business infrastructure-facilitating technology transfer. Public Venture funds are investing in start-ups incubated in Skolkovo – which is known as “the Russian Silicon Valley.” Innovative projects can receive direct grants up to EUR 5 million. Public-Private partnerships in R&D may also benefit from direct financial support by the government. Thanks to this modern infrastructure, foreign companies with a good understanding of the market have an opportunity to launch their products in Russia faster than in the US or in Europe and to dramatically reduce the costs of product development.

All drugs manufactured, imported, or sold in Russia must be registered with Roszdravnadzor, the Russian Health Regulatory Body. The procedure of registration of drugs in Russia has been considerably modified recently, and it is now more efficient and closer to the process of application to the European Medicines Agency. It also includes a special procedure for orphan drugs, biosimilars, and generics. Despite being more transparent than in the past, administrative procedures with Roszdravnazor leading up to successful application remain complicated, especially for newcomers operating without a trusted local partner. New products can be registered in 12-24 months depending on the product specificities and clinical trials already conducted in Russia. For new entrants, it is advisable to develop close relationships with key local opinion leaders and to participate in government-funded national strategic programs such as “Seven Nosologies” for access to the most expensive drugs.

All imported products must comply with Russian standards, which often differ from European or international standards. In addition, the quality of drugs must obtain the Russian GOST R Certificate of Conformity. For each importation, drugs have to be certified for customs clearance. This certification is conducted by authorized Russian laboratories which establish documents evidencing conformity of each delivery with the specifications approved by Roszdravnadzor. 

Most drugs are distributed by wholesalers, and there are currently two main distribution channels for patients, hospitals, and drugstores. Meanwhile, the six largest distributors cover about 80% of retail sales in Russia. 

Certainly, the Russian pharmaceutical market is very promising. However, it requires serious preparation, reflection and prudence, especially in connection with the protection of intellectual property rights, as counterfeited drugs are still trading at high volume. 

Foreign companies are still welcome but should be ready for tough talks on technology transfer with local partners and venture funds which are often better equipped to navigate through the revised business infrastructure and regulatory framework.

Marc Solovei, Partner, Member of Brandi Partners International, and Irina Raskina, Strategy Consultant, AANORA

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The foreign political situation, introduction of sanctions, “economic war,” and public criticism of legal advisers who found themselves entangled in the YUKOS proceedings has fired up a new round of debates about the level of transparency, maturity, and regulation of the Russian legal services market.

These debates mostly address the presence of foreign lawyers and law firms on the market, but also consider the issue of how stringent and regimented the requirements for all lawyers practicing in Russia should be. This context makes the necessity of consolidating the legal profession under the auspices of a bar association and exploring new forms of business for professional “freelance” lawyers increasingly relevant. Today’s primary goal is to make fundamental improvements to the country’s system for providing legal aid to develop and safeguard private commerce, ensure the protection of human and civil rights, and maintain Russia’s interests and image on the international scene.

The domestic market for legal services is only generally accessible, rather than open in its essence. Accordingly, the challenge of “purging” the market of amateurs and bringing competent specialists together in a professional association gains social importance. This is the challenge for the state, society, and each of us.

Thus, the election of Yuri Pilipenko as the new president of Russian Federal Chamber of Lawyers is a significant development for the Russian legal market. Pilipenko – a Senior Partner at the YUST law firm – is considered not only to be one of the top Russian lawyers, but also a professional “top-manager.” 

The first warnings of market changes appeared in late March of this year. PricewaterhouseCoopers, which had been auditing Gazprom for over 15 years, lost its contract with the company. According to media reports, the tender committee meeting held to select an auditor for the 2015 mandatory annual audit of JSC Gazprom opted for FBK Legal. The tender also involved Ernst & Young and KPMG. Reportedly, the tender price was limited to 381 million rubles. FBK offered 204 million rubles.

At the same time, domestic lawyers continue to win the world, as one prominent international publication recently named Dimitry Afansiev, Chairman and Co-Founding Partner of Egorov Puginsky Afanasiev & Partners, its European Managing Partner of the Year for 2015.

It is worth mentioning the new draft law on capital amnesty, which represents an important event for the legal sector. With this law the state has almost completed its creation of a mechanism to bring to life the idea of deoffshorization of Russia’s business. The point of the capital amnesty law is to bring back into the country’s economy those assets which previously remained in the shadows because they were earned in violation of law and tax obligations. The law will provide both a lawful and safe way for the owners of assets to bring them back to Russia and a good way for the state to increase its budget. 

The Government has approved a liberal variant of capital amnesty, which will be free for owners and synchronized with deoffshorization. Yet, businesses were expecting longer and more complicated procedures for deoffshorization. Not many business people understand the ins and outs of the project and the conditions of amnesty. Many of them are even afraid of malfeasance from law enforcement bodies. Lawyers from the domestic legal services market are fully engaged in the project and offer their own ideas. Senator Konstantin Dobrynin, who made the most resonant proposals to combine amnesty and deoffshorization, has been quoted as saying: “The main idea of our proposal is simply to bring together two legal concepts: deoffshorization and amnesty. If the state really needs a financial result rather than just a declaration, it makes sense to reshape the legislated deoffshorization procedure. In this case the budget will win much more and businesses will become aware that the state offers clear rules.”

The Committee for Legal Support to Business at the Association of Managers together with the Public Chamber of the Russian Federation (a committee headed by Vyacheslav Leontyev, the Managing Partner of the Leontyev & Partners law firm) are also working to prepare proposals on the subject from the business community and lawyers.

By Olga Binda, Counselor to the President of Federal Chamber of Advocates of the Russian Federation

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Legal Actors of Changes

Thoughts of “occupation” first came to me during my business trip to the US in 2007. I met a lawyer from Lithuania who used that word to describe the period of her “Motherland” becoming a part of the USSR. Many times I return to this conversation in my memory, since occupation and annexation have become a part of the Ukrainian reality. The tumultuous past year turned into a period of frustration and civilization-shock, but certainly also incredible national cohesion.

The legal market always reflects the economy and indicates its developments – both growth and recession. From an economic perspective, the high risks in the country resulted in a drop in investments and subsequent exits from Ukraine. No wonder, then, that the volume of transactional practices has dropped. M&A activity is rather slow, and many parties pursuing deals prefer to keep those deals undisclosed. Indeed, Ukrainian assets have dropped in value and are currently assessed as 2-3 times lower than their normal market price. It is, however, the best time to consider high yield investments. But all market actors agree that two factors are pivotal to renewing investor confidence: termination of the military conflict in the East and comprehensive reforms. 

In light of the current turmoil, there is a demand for business reorganization, asset restructuring by high-net individuals (beneficiaries of business groups), and complete liquidation and exits. Some lawyers have received lucrative pieces of work due to trends related to the deteriorating economy, like the new wave of bankruptcies and debt restructurings, redundancies, and personnel transfer from the occupied territories. The vague legal status of Crimea has created an unprecedented situation with assets and business operations in the peninsula. Investment arbitration and sanctions advice are increasingly in demand. Moreover, the major law firms established Crimean desks, multidisciplinary practice groups, and even offices to support relevant clients.

Business Not as Usual 

Despite the dramatic drop in the legal market’s growth rate (down an estimated 40-50%), this turbulent period serves as a stress test for law firms in the country. It has resulted in a review of business strategies to ensure pragmatic management, flexibility, business process optimization, and finally, more effective cost management. Turning to the positive, the tough competition in the challenging environment had forced firms to become innovative and handle clients with greater care. Some market players are refocusing to attract clients from outside the country – those not sensitive to currency depreciation and the volatile exchange rate. Others have developed non-conventional offerings. At the end of the day, rainmakers and good sellers are evidently the most valuable assets for professional services providers.

There is no definite answer as to which market players are in a more favorable position – the international powerhouses that still receive referrals from their networks, or the domestic firms that are traditionally more flexible and responsive in decision-making. However, the tier of European firms appears to be more sensitive. Following the capital of their clients, the German Noerr and Beiten Burkhardt law firms, and recently Austria’s Schoenherr, have left the Ukrainian market. 

The past year changed the legal marketplace not only from a monetary perspective. The positive outcome of the crisis is that it fuels changes in many senses. It has compelled lawyers to be actors of change in both policies and politics.

The legal market quickly responded to the Government’s request for assistance, and a record number of Ukrainian lawyers have entered Parliament, the Presidential Administration, Ministries, the National Bank, and other authorities. For example, two friends of mine entered the Parliament – a development I could have hardly imagined just a year ago! Many practitioners are significantly involved in developing such long-anticipated reforms in various spheres. 

Ongoing deregulation and a diverse reform agenda anchored by the EU-Ukraine Association Agreement may bring new opportunities to lawyers as well as clients. The initiated judicial reform may replenish the dispute resolution practice landscape, as international law firms have traditionally chosen to limit their presence in domestic litigation due to the element of brazen bribery. Recent anti-corruption initiatives continue to entail demand for anti-corruption programs and compliance. Finally, improvement in the investment climate may reload inbound capital flows. And so high- profile transactional work and new market players are just around the corner.

As the legal community is destined to be a driving force of these changes, I believe that Ukraine is just gaining momentum.

By Olga Usenko, Chief Editor and Head of Research Programs, The Ukrainian Journal of Business Law

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Ranked 35 out of 175 countries in Transparency International’s Corruption Perceptions Index for 2014, Poland is neither the most nor the least corrupt country in the region. Although a dedicated agency was founded specifically for the purposes of fighting corruption, it is sometimes ineffective due to procedural infringements during investigations.

The most common form of corruption is bribery, which is defined by the Polish Criminal Code as a personal or financial gain (e.g. money) that is promised to or accepted by an official in relation to this person’s official duties. However, as history shows, simply defining the elements of a crime in a penal code does not get rid of it. To fight corruption, governments must ensure that it is investigated and prosecuted in a diligent and thorough manner. To this end the Polish government founded the Central Anti-Corruption Bureau (CBA), a government agency responsible for dealing with bribery schemes.

The founding of a special agency to fight corruption should generally be considered a good idea if standard authorities such as the police are insufficient. However, the founding of the CBA in Poland has led to concerns as to whether this agency would serve its role as an impartial agency responsible for fighting corruption, or whether it would be used as an instrument for witch-hunting.

Beata Sawicka’s case broke out in 2007. Sawicka, a member of the parliamentary opposition, was placed under secret surveillance by the CBA, which resulted in a conviction for arranging a bribery type of deal between a randomly-met businessman (who turned out to be an undercover CBA agent) and the mayor of a municipality who was a friend of hers. This case, announced as the CBA’s first great success, soon turned into the Bureau’s most spectacular failure. Sawicka was acquitted, and the Supreme Court found that the CBA had no reason to suspect her of being involved in bribery before putting her under surveillance, therefore the investigation violated Article 6 of the European Convention on Human Rights (the right to a fair trial). As the investigation of Sawicka by the CBA was unlawful, no evidence from that investigation could be allowed in a court of law (as “fruit of the poisonous tree”). It is also worth noting that in relation to a different investigation, the former head of the CBA lost his job in relation to allegations that he abused his authority in the course of this investigation.

Nonetheless, the CBA should not be underestimated. The recent activity of the CBA has greatly increased awareness about corruption by public authorities, regarding not only simple bribery but also major bid-rigging schemes. A major CBA investigation is aimed at alleged illegal schemes involving the implementation of IT solutions in public administration. The CBA alleges that the biggest public IT projects were secured for certain companies at far more than regular market prices. Other sectors are under scrutiny of the authorities, in particular construction (in relation to bid rigging) and the pharmaceutical sector (in relation to payments made to healthcare professionals). The media’s interest in the investigations, provoked by the CBA itself, has encouraged companies to revise their compliance policies.

The CBA’s current strategy may also result in the broader use of the so-called “collective liability” of companies. Pawel Wojtunik, the head of the CBA, in one of his many TV appearances, has encouraged public prosecutors to pursue companies for the wrongdoings of their employees or agents under the Act on the Liability of Collective Entities for Acts Prohibited Under Pain of Punishment of 2002. In Poland, a company may bear liability for certain offenses, including bribery, committed by its representatives, employees, or even informal associates, if it has benefited from the crime. If found liable, it may face serious financial consequences, as penalties ranging from approximately EUR 250 to EUR 1,250,000 can be imposed on top of forfeiture of the fruits of the crime. However, the most severe sanction may be debarment from participating in public procurement for up to 5 years. As a consequence of the CBA’s activity, the Act of 2002, which so far has been applied very rarely, may serve as another weapon to fight organized corruption.

The message from the CBA is clear: the bitter consequences of bribery should be borne not only by the individuals involved, but also by the companies that stand behind and benefit from the crimes. If the CBA is able to apply this principle effectively, it will be a great step forward in the war against corruption.

By Arkadiusz Korzeniewski, Partner, Maciej Kopczynski, Senior Associate, CMS

This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.