Month: May 2008

The only cloud on the horizon is the question of whether or not the new government can find a solution to the island’s unification problem. Yet even here there is optimism, with islanders hopeful that new president Demetris Christofias will make a fresh effort to unify the Greek- and Turkish-Cypriot parts of the island, split since 1974.

Against this background of long-running political uncertainty, Cyprus has excelled economically. There is no reason to suggest this is about to change. Mr Christofias may be a socialist, but he is a modern socialist with an appreciation of the free market. He has already declared that his policies will be liberal towards international investments and that he will continue the “mixed economy” system without making any changes to the island’s tax or social system. Such liberal policies have been supported by all major parties in the last 30 years.

According to Deloitte Cyprus, which has one of the largest teams of taxation experts on the island providing a full range of business and personal taxation services, tax incentives are the most obvious attraction. But there is more to Cyprus as a destination for FDI than its high-profile fiscal perks.

After all, Cyprus isn’t the only country in the European Union that has an attractive tax regime. Why should investors choose it over, say, Jersey or the Isle of Man?

Different philosophies
Pieris Markou, the head of tax services at Deloitte Cyprus, points out that the Channel Islands and Isle of Man have a completely different philosophy to their tax systems. They offer complete tax exemption but no double tax treaties or any other international investment agreements. Cyprus, on the other hand, offers not only the lowest corporate tax rate in Europe –along with Bulgaria – of 10 percent, but a low tax system that can be combined with double taxation agreements, other international investment agreements and, since accession to the EU, with various EU directives.

These unique combinations offer tax advisors the opportunity to use Cyprus in many international tax structures to effectively reduce a multinational’s tax burden. They also mean Cyprus has become an efficient jurisdiction for routing investments in the EU by third country multinationals, or for investing outside the EU by member state multinationals.

Hardly surprising then that since its accession to the EU Cyprus has been characterised by many as “the gateway to Europe”.

Foremost amongst the island’s tax breaks is that low tax rate, which applies to all companies irrespective of their ownership or business activity. Other tax advantages include:

Holding companies
As long as a number of straightforward conditions are met, dividends received by a Cyprus holding company from overseas participations are exempt from tax.

Financing operations
A Cyprus company acting as an intermediary between a holding and an operating foreign company can finance the foreign company through interest bearing loans using the Cyprus treaty network or EU directives. This results in a “double dip” effect with interest being deductible in the operating while also escaping taxation in the ultimate recipient’s jurisdiction. A small margin is taxable in Cyprus at the rate of 10 percent.

Royalty income
A Cyprus company acting as an intermediary between an overseas licensor and a foreign company in a treaty location or in the EU can reduce taxable profits in the operating location.  A small margin will be taxable in Cyprus at the rate of 10 percent.

Exemption from capital gains tax
No tax is imposed on any profit from the disposal of securities, irrespective of the length of ownership or percentage participation.

Treaty network
What distinguishes Cyprus from most other international business centres is its extensive network of double taxation treaties. The island has these treaties with 43 countries. Most treaties provide for reduced rates of withholding tax on dividends, interest and royalties paid out of the treaty country, or the avoidance of double taxation if a resident in one of the treaty countries derives income from another treaty country.

Withholding taxes
There are no withholding taxes on payments of dividends, interest and royalties to non-residents, irrespective of whether the recipient is a corporation or an individual.

Another new measure that has been introduced is a residency based taxation system which states that a company is considered a tax resident in Cyprus if it is managed and controlled in the island. In practical terms, management and control is usually interpreted to mean management of the company at its highest level, which is the board of directors. International investors who want to ensure compliance with this requirement can either appoint local directors or set up a fully fledged office in Cyprus, also relocating key personnel to the island.

This attractive tax regime is backed up by liberal policies on FDI that are designed to promote the island’s growing services sector. After tourism, the financial and professional services sector is the next most important source of revenue for the Cypriot economy.  According to Deloitte, having a liberal FDI policy promotes the services sector, which increases demand for services and in turn increases local employment and wealth.

The ‘spin-off’ benefits are significant, Mr Markou says. “This increased demand for services has encouraged the service providers in general to improve their product in terms of quality and efficiency. This can only be for the good of the Island as a whole.”

Because it has been able to demonstrate a stable financial and business-friendly environment since the 1970s, Cyprus has attracted significant foreign investment and capital flows for decades. But the island’s policy-makers have not sat back and happily watched FDI inflows grow. Reforms have been carried out, most notably as part of the island’s preparation for EU accession in 2004. Cyprus harmonised its financial and regulatory environment with that of the EU. A general tax reform came into effect on January 1, 2003 to align the Cypriot tax system with European principles of equality and to demonstrate a commitment to the Organisation for Economic Cooperation and Development (OECD) against harmful tax practices.

Equity participation
FDI policy has been liberalised for both EU and non-EU nationals in another significant way, says Mr Markou. Foreign investors can participate in most sectors of the economy with equity participation of up to 100 percent, without a minimum level of capital investment. This means foreign companies can invest and establish a business in Cyprus on equal terms with local investor.

The government also says administrative procedures have been simplified and measures have been taken to streamline the infrastructure regarding foreign investment, reducing the level of bureaucracy.

EU membership has given impetus to the island’s many reforms. As an EU member, Cyprus has entered what Mr Markou calls “a new era” as an economy offering a great number of advantages within a common European market. The euro was adopted by Cyprus as its unit of currency on 1 January 2008, further confirming the country’s macro-economic stability and its commitment to low inflation, low interest rates and high growth.

“I am confident that the impact of the euro can only be viewed positively by the foreign investor,” says Mr Markou. “It means an investor can put more trust in the socio-economic environment with minimum surprises as regards the kind of economic policies that can influence market conditions existing at the time the decision is taken to invest.”

“With globalisation, every piece of certainty that can be achieved is a plus for the international investor. Being part of the European economic family takes away a certain element of uncertainty in the macro-economic policies of the country and this can only be to the benefit of the international investor.”

If evidence of the success of Cyprus’s fiscal policies were needed, it comes in the form of new company registrations. More than 20,200 new companies set up shop on the island in 2006, rising to 29,016 in 2007. This is a trebling in the number of new company registrations in the last three years and the trend is continuing.

Mr Markou says there is a notable increased confidence in the use of Cyprus in international tax planning, especially from the European and US investors who are finding that using a company registered in the EU carries advantages that cannot be found in jurisdictions with similar tax benefits, but lack the EU identity.

And it’s not just corporations that benefit from moving their operations to the island. The benefits of an individual becoming a resident in Cyprus, either for employment or retirement purposes, are numerous. New residents are attracted by the Mediterranean lifestyle combined with a high standard of European infrastructure. There are also social benefits for residents, including low housing and education costs, and low crime rates.

Insurance contributors
From an economic viewpoint, the top marginal tax rate for employees is 30 percent and social insurance contributions are 6.3 percent. Both rates are highly competitive compared to other European countries.

For retirement purposes, Cyprus residents enjoy a low rate pension tax of 5 percent, whereas any interest or dividend income received would be subject to 10 percent and 15 percent tax respectively. Cyprus has no inheritance taxes, capital gains taxes (on property situated abroad), or transfer and exit taxes.

Yet it’s tourism that remains the primary source of revenue for the Cypriot economy, and the tourism sector has proved vulnerable during recent years. However, FDI acts as a cushion against swings in tourist arrivals, and revenue generated through the financial and professional services sector acts as “a stabiliser” on the economy.

“The government, together with the private sector, is making every effort to improve the service industry in Cyprus,” says Mr Markou. “The government recognises that this is the future of the Cyprus economy.”

Indicative of this is the recent setting up of the Cyprus Investment Promotion Agency, which combines the efforts of the private and public sector in promoting Cyprus as an international service centre. It is important to note, says Mr Markou, that all professional service providers in Cyprus employ qualified personnel educated mainly in the UK, the US and Greece. Accountants and lawyers employ qualified personnel from the UK and US professional bodies, while the professional services industry is self regulated and offers close quality control monitoring to ensure the standard of quality of services offered.

The only unanswered question about Cyprus is whether or not a solution can be found to the unification question. For the international investor community, is a solution even necessary?

“Political stability within a chosen jurisdiction is important to the international investor,” says Mr Markou. “Cyprus joined the EU without being subject to any restrictions about resolving the Cyprus problem. That said, a solution would remove any remaining uncertainties international investors may have and would act as a springboard to new challenges.”

Pieris Markou is the head of tax services at Deloitte in Cyprus. He is a fellow member of the Institute of Chartered Accountants in England and Wales, a member of the Chartered Institute of Taxation, IFA and STEP.  He is also an active member of the Institute of Certified Public Accountants of Cyprus, currently serving as Chairman of the Tax Committee, participating in a number of meetings with the Minister of Finance, the House of Representatives and the Tax Commissioners for the formulation of the Government’s policies on taxation. Pieris specialises in local and international taxation.

For further information:
Tel: +357 22 36 03 00
Email: pmarkou@deloitte.com
Website: www.deloitte.com/cy 

With a number of years of experience in providing legal services for many takeover transactions involving a wide range of multinational and domestic financial entities and businesses, M&P Bernitsas are in a unique position to comment on and analyse the takeover market in Greece and to look at the impact of the recently implemented European Takeover Directive and the repercussions of the American sub-prime crisis on Takeovers in the country.  

The firm also has experienced particular success in the growing project finance market, having been involved in almost all the recent high profile transactions to have taken place, and can offer an insight into the process and legalities of the market.

“We have been recently involved in the Maliakos-Kleidi motorway project finance transaction, where we acted as Greek law counsel to the lenders with Lovells LLP acting as English law counsel to the lenders and the Elefsina-Korinthos-Patra motorway project finance transaction, where we acted as Greek law counsels to the sponsors with Linklaters LLP acting as English law counsels to the sponsors,” said Managing Partner Panayotis Bernitsas.

As a result of their work in these projects and countless others, in which they liaised and interacted with both domestic and international partners, they can provide a comprehensive critical analysis of the growing project finance market and Greek legislation involving takeover financing in Greece.

Different projects
The demand for project financing in Greece has increased in recent years as it can provide the necessary funds to allow the financing of a variety of different projects necessary to the development of the infrastructure of the country in a manner that would also enable the Government to better monitor the State’s relevant expenditure. “Τhere is a significant call for project financing in Greece. Concession schemes as well as PPP schemes are used for projects which would otherwise need direct upfront financing by the State. Concession deals (BOT type) concern mostly motorways and operate on the basis of concession agreements ratified by law. PPP deals concern initially schools, prisons and hospitals and operate on the basis of partnership agreements. The financing structure must be firmly based on the concession or the partnership agreement respectively, must ensure a solid security package over all project assets and must also minimise mandatory costs,” said Senior Associate Yannis Kourniotis.

The growth of project financing is not the only change to be experienced in Greece, since last summer the European Takeover Directive has been in place to legislate takeover transactions and as a result there have been a number of changes to the legislation in the country and the financing arrangements that a bidder has to organise have been overhauled. “A bidder should have all necessary means to finance the offer price at completion, which means that all financing arrangements must be in place prior to launching a takeover bid and remain in place until completion. In many cases, this requirement has an impact on pricing,” said Partner Nikos Papachristopoulos.

This has made the selection of the method of raising the finance for a takeover vitally important, an issue that has not been helped by the problems with the American sub-prime market and the ensuing economic repercussions. “It appears that these problems have impacted upon all forms of financing and we do not see why they would not impact upon financing of takeover bids,” said Partner Athansia Tsene.

As a result, an alternative to direct financing that allows the creation of debt without the lender being expected to be a bank could, in the current climate, be a preferred form of financing for a takeover. As a method of financing that “is common for certain types of takeover bids, where delisting of the target company is sought upon completion of the acquisition or where mezzanine debt is considered necessary and mezzanine lenders are not expected to be banks,” according to Ms Tsene, securitisation is one such alternative.

Finance structures
But as with any form of takeover financing there are a number of considerations that must be taken into account before and during any transaction. “Any financing structure intending to finance a takeover bid needs to link advances under the facility to the actual payments for the acquisition of shares. In this regard, the rules of the Capital Market Commission and the Athens Exchange must be observed when determining the availability period and the conditions precedent to each drawdown. At the same time, the implementation of a securitisation structure may be a more complex exercise, as it requires coordination of the parties involved, including one or more banks operating in Greece and, therefore, qualifying to securitise claims under loans under Greek law on securitisation of receivables, with a view to ensuring finalisation of the documentation in a manner acceptable to all parties and meeting the requirements of Greek law on securitisation,” Ms Tsene continued.

There is still a heavy involvement of private equity firms in Greece however M&P Bernitsas believe that the current financial climate has made the financing of a takeover via private equity a more costly exercise. “Due to the volatility of and uncertainty in money markets, it is expected that it would be more expensive for private equities to finance a takeover. Usually, they commit a relatively low percentage of their own available cash and seek to obtain bank financing against security over the assets of the target,” said Mr Papachristopoulos.

While the current financial climate may make private equity more expensive it doesn’t mean that the takeover of Greek companies by foreign investors is about to stop. One of the largest areas of change following the European Takeover Directive has been in the regulation of cross border transactions which have, in theory, been made easier.

However, as with the enactment of any sweeping European-wide legislation there have been some problems integrating it into each country’s existing legal structure and Greece has been no exception. “It is easier, although we have faced certain problems with the way that the Greek legislator has implemented this Directive in Greece,” Mr Papachristopoulos continued.

Primary concerns
The problems with the implementation of the Directive in Greece could be because of the legislator’s interpretation of how to regulate the most important part of a cross-border takeover. The primary concern is “to ensure that the underlying financing arrangements are such that the requisite funds will be available at completion, notwithstanding the occurrence of events or circumstances which would otherwise entitle the financiers to cancel their commitments. In other words, certainty of funds between signing the transaction documents, launching and completing a takeover bid is of a paramount importance,” Mr Papachristopoulos said. If the legislator is unsure how stringent to be in order to ensure that this issue is addressed, a number of problems could arise.

The complications following the implementation of the European Takeover Directive will need to be resolved because the involvement of foreign investors and financial intuitions in takeover transactions involving Greek companies is only going to increase. The country has a number of attributes, “fairly healthy balance sheets, high margins and well positioned to expand in the neighboring emerging markets of the Balkans,” continued Mr Papachristopoulos, which make it an attractive proposition for international banks and investors. As a result there has been a shift in the attitudes of Greek companies to foreign investment and ownership, a shift that is backed by the government. “The trend is that numerous Greek companies would like to have strong international investors to also take advantage of the synergies and the local investment community and the Government favour this type of co-operations,” said Mr Papachristopoulos.

However, the involvement of international entities in takeovers in Greece brings with it a number of additional considerations and issues for firms like M&P Bernitsas to consider for their clients. The problems or issues that must be dealt with are determined by what role an international bank will be taking in the transaction. “If they act as lenders, a structure must be implemented to ensure that the borrower will have sufficient funds to repay its acquisition debt and to shorten the time period that will be required to complete the takeover to minimise their exposure to adverse market conditions. If they act as financial advisers of the bidder, the offer document and any other document relating to the takeover must be true and accurate. If they act as financial advisers of the target, the target must be assisted in forming a view as to whether the offer is fair and reasonable both for the shareholders and the target itself,” concluded Mr Papachristopoulos.

The origin of the financing or entities involved in takeover transactions is not the only factor that must be considered, the form of financing is, and always has been, the most important consideration.

For further information
Tel: +30 210 361 5395 or +30 210 339 2950
Email: bernitsas@bernitsaslawoffices.gr 

With the election of a new government and renewed focus on employment and productivity, Finland is hoping to continue the economic growth that has characterised the country over the past few years. The new transfer pricing legislation will place Finland directly in line with its European neighbours, whilst the passing of the Companies Act in 2006 enabled greater flexibility in financing and cross border transactions. Despite the credit crunch, the number of transactions in Finland was at a record high in 2007, with the number of deals exceeding the previous record set in 2000. With forecasts of slowing economic growth and employment concerns due to ageing populations, the new government is streamlining bureaucracy and focussing on innovation to spur Finland’s economic growth.

Continued foreign direct investment activity
The transaction market was active in 2007 with industrial buyers reentering the market and private equity continuing to sell to private equity. The number of transactions was at a record high, with 768 deals exceeding the previous record set in 2000, and a 17 percent increase in deals over 2006. Finnish companies purchased 105 companies abroad, whilst non-Finnish buyers purchased 101 companies from Finnish sellers. Finnish entities sold businesses covering turnover of €5bln both in Finland and abroad. In total, Finnish companies purchased turnover worth €2.8bn, a decrease from €3.2bn in 2006.

In 2007 majority stake transactions, 110 000 employees were transferred under new shareholder control. As the Finns made the largest transactions abroad, about 38 percent of the group, some 41 000 persons, work outside of Finland. Standout deals include Nokia purchasing Navteq for €5.7bn: the purchase price exceeding 14 times the target’s 2006 turnover; Atria, Finnish food product corporation acquiring Swedish Sardus and Finnish Pouttu and Cargotec did 13 acquisitions in 2007.

The State of Finland sold a 30 percent stake of Kemira Growhow, fertilising business, to the Norwegian Yara. M-real, pulp and paper company, divested Map Merchant in the Netherlands, Zanders plant in Germany,

Petöfi plant in Hungary, Tako in Finland and Meulemans in Belgium.

There were two new listings in the OMX Nordic Exchange: SRV Group in June 2007 and Suomen Terveystalo in April 2007. A rather new phenomenon in 2007 was an IPO through a merger: Tiimari merged with listed Leo Longlife, John Nurminen with listed Kasola, and Trainers’ House with listed Satama Interactive. OMX also organised a new market place, First North, for small growth companies.

Impact of the credit crunch
The credit crunch meant that there was a period in the autumn of 2007 in which transactions were delayed and negotiations between parties took longer. It is likely that some transactions did not take place but overall, the effect was not dramatic. Market value of companies listed in the local Stock Exchange decreased some €24bn within a month according to Talouselämä in February 2008. When comparing the October 2007 peak with the current situation, the market values have decreased some €45bn of which Nokia counts only for €10bn. According to the same source, exits by non-Finnish institutional investors and large private investors have played a big role in this development.

Merger of the Financial Supervision and Insurance Supervisory Authority
The merger of the Financial Supervision and Insurance Authority will essentially cover the same duties as the two existing supervisory authorities. The objective would be to enable companies and organisations in financial markets to operate in a balanced business environment, maintain public confidence in financial markets, foster compliance with good practice and disseminate general knowledge about the financial markets. The centralisation will make it possible to supervise more effectively and take into consideration special characteristics of different industries in the financial sector.

Activities within the financial market, including: Icelandic Glittnir acquiring FIM, investment bank, Danish Danske Bank acquiring Sampo Bank, and offers on the OMX Stock Exchange, will have an effect on the roles and responsibilities of the new authority.

Implications of new government
The new government’s approach to taxation has been a movement toward trying to attract business angels to the country, with the Ministry of Employment and Economy and the Ministry of Finance currently drafting a proposal to offer direct tax incentives. This would take the form of exemption on capital gains after a holding period of three years. The incentive would not be targeted to institutional private equity, and although the details have yet to be released, the purpose is to prepare the package by the end of the year.

Despite this, there is also a draft proposal, prepared by the Ministry of Finance, on a new asset classification, which would limit the scope of participation exemption on capital gains. The government recently terminated plans to design a new tax depreciation regime for investments to maintain productive investment activity in Finland. There is also a Real Estate Investment Trust (REIT) discussion pending, as there is currently no tax element included in the REIT legislation.

The Ministry of Employment and the Economy was established on 1st January and its mandate prescribe duties assigned to the current Ministry of Trade and Industry (excluding matters related to immigration and integration), and functions of the Interior Department for Development of Regions and Public Administration (excluding the Regional and Local Administration Unit). The Ministry’s focus will be on innovation, the employment of labour, reforms to meet the challenges of climate change through energy policies and a focus on developing regional co-operation.

2007 transfer pricing legislation
According to Finnish tax law, associated companies are required to comply with the arm’s length principle in their intra-group transactions. The principle may be applied to adjust the profits of a Finnish company in relation to both domestic and cross-border transactions. An adjustment is possible if the taxpayer has agreed to the transaction on conditions differing from those that would have been agreed to between independent parties. Any profits that would have accrued to the company but for the non-arm’s length terms have not, may be included in the company’s profits.

All companies are obligated to comply with the arm’s length principle in their intra-group tradings, even though the transactions would be exempted from documentation requirements. Documentation must be provided separately for each tax year. Satisfactory documentation is to be prepared in accordance with the model set forth in the EU Code of Conduct (COM (2005) 543 Final), taking into account the OECD Transfer Pricing Guidelines.

Under the new regulations, a taxpayer is obliged to provide the documentation within 60 days from the date of request by the tax authorities. The revenue may not request documentation before six months from the end of the company’s accounting period under scrutiny. The tax authorities are also entitled to require additional information regarding the documentation, which is to be provided within 90 days from the date of the request. It should be noted that companies are not obliged to file transfer pricing documentation in connection with the corporate income tax return.

An exemption from documentation requirements applies to small and medium-sized enterprises. However, as the independency criteria set by the EU Commission 2003/361 EC Recommendation apply; Finnish companies that are small and medium-sized on stand-alone basis are required to fulfill the documentation requirements if they are controlled by large non-Finnish corporations. A company is not regarded as an SME if, in accordance with the Commissions Recommendation, the company employs more than 250 persons and has an annual turnover exceeding €50m and/or an annual balance sheet total exceeding €43m.

Transfer pricing has been a subject of increasing interest of the Finnish tax administration during the past decade. In the lack of specific documentation requirements and resources, the Finnish revenue has, in terms of numbers, mostly targeted simple issues, e.g. management fees. During the last ten years or so, especially after the establishment of the Tax Office for Major Corporations in late 90’s, the revenue has placed a certain amount of effort in more complex transfer pricing issues on Finnish based large multinational companies.

Legal issues arising from cross border transactions
Cross-border transactions are subject to documentation requirements and the expectation is that the Finnish revenue will actively monitor the Finnish tax base and there will be more inquiries and disputes in this area of practice. Recent discussions in Finnish tax journals and published case law indicate the revenue’s growing interest in business model conversions as well as issues on intellectual property. Finland actively follows the international tax discussion and it may well be that some of the international developments will be adopted in some form in Finland.

With regard to other legal issues arising from cross border transactions, the amendment of The Companies Act in 2006 allowed greater flexibility in financing and these measures are available for transactions where there is a Finnish acquisition vehicle. There are still some pending tax debates on tax treatment, especially in the area of repatriation.

The documentation should include items listed below:

There is less documentation required if the total amount of the intra-group transactions entered into by the taxpayer does not exceed 500,000 euros. According to the section on penalties, a maximum penalty of 25,000 euros may be imposed if the taxpayer has not prepared sufficient documentation in accordance with the regulations. Standard tax penalties may be levied if income is adjusted

For further information:
Tel: +358 20 755 5314
Email: outi.ukkola@deloitte.fi
Website: www.deloitte.fi

This plethora of deals in Russia represent a rise of 11 percent in the volume and 57 percent in the value of deals from the previous year, which saw $75bn transacted across some 759 deals.

Looking at these deals in a little more detail, it is clear that just as Russian businesses are becoming increasingly acquisitive on the international stage, so too are foreign companies taking more of an interest in Russian assets. Of the deals in 2007, 300 were domestic transactions, 56 saw Russian companies embarking upon international expansion and 489 were deals led by non-Russian firms.

Driving factors
In terms of outbound investment, Russia is home to a number of large corporations that have developed as a result of the abundance of Russia’s large reserves of natural resources, principally gas and mining. In recent years Gazprom has made some significant international acquisitions, including including Natural Gas Shipping Services Ltd in the UK and WINGAS GmbH in Germany.

So far in 2008 Gazprom has concluded two deals outside Russia, acquiring Serbian investment company Naftna Industrija Srbije for $730m and Austria-based Central European Gas Hub GmbH for a undisclosed figure.

But it is not just these traditional sectors that are enjoying popularity. Russia as a nation is rapidly coming up to speed with its Western counterparts, and as such there is considerable investment in sectors that contribute to this development.

Infrastructure-related industries such as real estate, telecommunications, technology and public services have received a boost from private investors, and in the near future government initiatives look set to spur further development.

Western countries have launched a number of Public Private Partnerships (PPPs), designed to revitalise weary public services. And although in Russia, investment in infrastructure is hotly debated, as in other fields, Russia is likely to develop its own unique approach and solution.

Interest in infrastructure development is expected to be big. Investment bank Merrill Lynch estimates that investment in the infrastructure sector could reach as much as £90bn over the next three years. Add to this the downward pressure on the $US, and Russian assets are looking increasingly attractive price-wise.

The fact that international private equity firms are taking a keen interest confirms this. Big names including Texas Pacific, Lion Capital, Mid-Europa, Morgan Stanley, Barclays and Deutsche Bank have all taken significant shareholdings in Russian companies. In 2007 alone there were 60 private equity-backed transactions in Russia, totalling more than £11.3bn in value.

Business framework
With investors queuing at the door, it is just as well that Russia’s business framework is conducive to doing deals. Russian businesses are served by a strong network of advisors, well-equipped to handle the needs of the acquisitive business.

PwC has 2400 professionals on the ground in Russia, offering a range of services including pre and post transaction services.

With 450 employees, one of the largest departments – reflective of the size and importance of the task – is the tax and legal practice. PwC’s tax and legal services provide assistance to businesses involved n M & A, helping them structure the transaction to ensure it is built in the most efficient way, put together as quickly as possible, is focused on value creation and the strategic priorities of the business.

Tax planning at an early stage can add significant value to a transaction, and is essential to reduce both the actual transaction tax costs and the long-term sustainable effective tax rate following the transaction.

Common issues faced on M & A deals in Russia include the tax philosophy or tax culture of the target, which by western standards may be considered either overly aggressive or overly conservative. Tax savings opportunities and strategies employed by the target may not be acceptable to a western buyer. Other tax issues include the complexity of the group structure, underlying transaction flow, related party transactions, transfer pricing practices, unrecorded transactions, and transparency of the target including ownership and control.

Overcoming issues
Russia is a vast country with many different tax jurisdictions, and as such the way certain aspects of tax is handled by one tax authority may differ from that of a neighbouring tax authority.

Bill Henry is a partner and tax specialist, based at PwC’s Moscow office. ‘The authorities are still developing and they are having to adapt quickly to a rapidly-growing business environment. Tax authority risk includes resource constraints, lack of experience and sophistication relative to market developments, harsh and indiscriminate actions of some tax authorities. In some cases, authorities have been viewed as biased against taxpayers and have said to serve as an instrument of pressure.

But it is heading in the right direction. ‘The tax legislation is actually in pretty good shape, and it is possible to get some good letters of clarity. However, the problem is one of scale – the ministry of finance is working hard to bring about better organisation and consistency, but this can’t happen overnight. It is a huge logistical challenge.’

Since the judicial system does not have the expertise to handle the modern business climate, with particular reference to M & A transactions, more time is spent by the advisors in managing tax risks. This provides lots of work for the advisors, but it is such great news if you want to get your deal done quickly and efficiently.

Aside from administration, there are other issues facing a high-growth business community.

Indigenous talent
The main issue is that there is a shortage of people with the correct level of experience and expertise to manage within the business community. This is a result of the speed at which the country has developed – there is just not enough indigenous talent to cope with the amount of work.

Furthermore, the businesses that do employ good Russian staff are finding it increasingly hard to retain them. It is all too common for internationally-trained professionals to quickly change employers for increasing opportunity and reward afforded by the booming economy.

But these problems are just teething troubles – the sign and the stigma of a developing market – and there is no doubt that they will soon be addressed. On balance, the pros of investing in Russia easily outweigh the cons.

One of the biggest attractions of doing business in the Russian market is the way it has fared in the wake of the credit crisis. At a time when billions of dollars has been wiped off the balance sheets of some of the world largest businesses and large corporate acquisitions due to the lack of availability of debt to fund the transactions, Russia has remained relatively unscathed by the turmoil that has hit the West.

Bill Henry comments, ‘The credit crunch has not yet had an impact on Russian transactions – in fact I can only think of one enterprise that has collapsed, and that was more down to the quality of the balance sheet, not the availability of funding.’

One reason for Russia’s near unique position amidst all the credit issues is simple: until recently the country was isolated from the trends of Western banking. As such there is no great levels of consumer debt as is found in the US and the UK, for instance. So when the crisis came, there was much less of a credit crunch in Russia. However, Russian companies will have to refinance short term borrowings. While the expect volume of refinancing is not expected to bring about a crisis, defaults are possible among those who lack credit worthiness in the tighter credit environment.

On the public markets, too, the issues in the credit market are not as pronounced as in some Western markets. Whereas, as expected, there has been a slight slowdown in IPO activity, it does not mirror the near total shutdown in institutional interest for listings.

In 2007, 55 Russian companies achieved a listing, just four fewer than the previous year. Putting this into perspective, in the UK the total number of IPOs fell from 433 to 339 over the same period. What is most interesting is the amounts of money achieved by such listings. The total value of listings by UK companies in 2007 was $16.3bn, as compared with $15bn by Russian companies.

Business landscape
From the huge difference in the number of listings it is clear that many more large cap Russian businesses made it to market that year. Indeed the Russian business landscape is largely characterised by a small number of very large companies.

And there are other plusses that Russia has on its side. There is an affluent middle class in Russia with strong spending power, and this is likely to appeal to retail investors.

Furthermore, although some catching-up is needed, especially in terms of the tax administration, certain aspects of Russia’s business legislation has been more flexible than in many Western nations. One of the most significant is connected with anti-avoidance laws.

Most countries have in place legislation that dictates that if a company enters into a domestic or cross border arrangement primarily for the purpose of reducing their tax burden, the resulting tax advantage can be removed. Therefore, any arrangement that confers a tax advantage should also have a commercial purpose, and should be set up, at least in part, for reasons other than tax planning.

The historical absence of any real anti-avoidance restrictions has been a real advantage for Russian businesses. However, recently there has been an emergence of anti-avoidance practices on a substantive approach including guidance issued by the Supreme Arbitration Court and proposed tax policy instruments including controlled foreign corporation legislation, tax residency based upon the place of management and control, and proposed amendment to transfer pricing rules.

Looking to 2008, it seems that the Russian market is in for another prosperous year. In the first two months alone the total value of M & A deals involving Russian companies tipped 100, with a combined deal value of just over $8bn.

But figures only tell half the tale. It is those on the ground involved in business that count. What does Bill Henry think the future will hold for Russian business? ‘Simply put, the opportunities are unlimited.’

For further information:
Tel: +7 (495) 967 6023
Email: bill.henry@ru.pwc.com
Website: www.ru.pwc.com

As the effects of the sub-prime crisis in the US continue to reverberate around the world, investors are understandably adopting a more cautious approach. Yet some regions and countries are weathering the current financial storm better than others. Sweden for example, in the Nordic countries, is still relatively unaffected by the credit squeeze, says Gunnar Thuresson, a senior tax partner at Ernst & Young Sweden, and although the government’s current privatisations may be scaled back slightly,  some recent tax court decisions have only served to reinforce the country’s continued attractiveness for investors.

Despite its relatively small size –it has a population of about nine million – Sweden has an impressive roster of economic and business related achievements. In a recent OECD ranking of prosperous nations, for example, Sweden placed no.9, above the UK, Germany and Japan. The country also placed no.1 in the European Union’s European Innovation Scoreboard (EIS) 2007 and no.4 in the World Economic Forum’s Global Competitiveness Report 2007-2008 (from over 130 countries), up from no.9 previously.

Overall other economic fundamentals are relatively sound.  Growth expectations have been cut back in recent months, with growth forecasts of 2.3 percent in 2008 and 2.2 percent in 2009. However, in 2007 Sweden enjoyed considerable success on the employment front with 111,000 Swedes entering the labour force in 2007, reducing full-year unemployment by one percent from 2006 figures, to 6.1 percent, and the number of hours worked increased by 3.1 percent, up to 138.6 million hours per week.

In addition, consumer confidence remains buoyant with January 2008 retail figures up 4.8 percent on the previous year. Plus the Swedish government is sitting on a record budget surplus.

Real estate
One area that should be of interest to investors is the real estate sector.  Sweden has one of the most liquid real estate markets in Europe; so even a very large property investment will remain a liquid investment.

Sweden is the fourth largest real estate investment market in Europe with more than SEK 140 billion (€15.6bn) in total real estate transactions in 2007. By the end of 2007, foreign investors owned real estate assets amounting to more than SEK 210 billion (€23.1bn) by acquisition value, a 300 percent increase over five years. Office and retail property remained the most popular targets for foreign investment.

The outlook for 2008 in the commercial property market remains favourable, says Thuresson. “Real estate rentals are expected to increase, and vacancies are expected to fall further, and while the trend in transaction volume is down slightly over the last three years, the volume is still large relative to the size of Sweden, and we are not expecting volumes to fall dramatically,” he says.  “For the immediate future at least, the story is likely to be rents rising, lower vacancies, coupled with a more selective approach by investors on what to buy, when to buy, and at what price.”

Sweden does not yet offer the equivalent of the Real Estate Investment Trust (which has a special tax status), found in the US and some other EU jurisdictions. Entry into the real estate market is likely to be via a holding company – a limited liability company (AB), or non-resident company – and the taxation regime is a favourable one in this regard.

“From a tax perspective the benefits are that a property sale is very easy to structure as a tax exempt sale,” says Antoine van Horen, Transaction Tax partner at Ernst & Young Sweden. “That is because most property deals done here are in the form of corporate deals –you don’t buy the property, but the shares in the company that owns the property,” says Mr van Horen. “That means it is a tax exempt transaction for the seller, and also, when it comes to the sale, an exempt exit for the buyer. Plus there is a very generous approach to interest deductions. It all adds up to an extremely low effective rate of tax.”

At the moment the rate of return for commercial property investors is somewhere between five and seven percent depending on the type of property (that reflects the yield in the form of rent, rather than any increase in the capital value). Yield expectation in the surrounding countries appear to be 100 basis points or so lower at present.

Privatisation
Another note of interest for real estate investors is the Swedish government’s forthcoming privatisation programme, a key pledge of the government upon its election in 2006.

As part of the programme the government is hoping to sell its 100 percent stake in the property company Vasakronan.  But the sale of Vasakronan is only part of a wider privatisation, where the government has approved or indicated that it will privatise a number of wholly or partly owned government companies. There are six on the list at present which should attract interest from a wide range of potential investors.

The government is still evaluating the timings involved, especially in the wake of current financial market turmoil.  Mats Odell, the minister for financial markets, who is overseeing the privatisation process, recently acknowledged that some reshaping of the original plans may have to take place, including some of the prospective sales being delayed.

So far $2.97bn has been raised from the sale of eight percent of the government’s 45 percent stake in TeliaSonera, the telecommunications company, as well as $363m, from the sale of its 6.6 percent stake in OMX, the Swedish stock market company, to Borse Dubai and Nasdaq.

Forthcoming deals include the sale of Vin & Sprit, the makers of Absolut vodka, as well as banking group Nordea, and mortgage lender SBAB. Although, when referring to SBAB recently, Odell did note, “mortgage lenders are not exactly the top of everyone’s list,” – and the same could be said of banks. Whether or not there are delays in the short term, the intention is for the government to complete the sale of the six organisations by 2010.

Impact of the credit crunch
While the financial markets are going through a period of upheaval, and it is difficult to predict the future with a high degree of certainty, to date there is not much credit crunch related suffering in Sweden.

The credit crunch has had an impact worldwide. All the major international banks have become very careful about counterparty risk and lending, and at the time of writing one major bank, Bear Stearns, had had to be rescued. The effect of this change in attitude towards risk in Sweden and the Nordic countries is that it has reduced activity on very large deals. So deals above $1bn are more difficult to manage because the large foreign banks are more cautious.

“What we have seen both in real estate and in the commercial sector is that where a lot of those deals in the past would have been funded by large foreign banks – Swiss, German, UK and US – we now see less of that,” says Mr van Horen.

“At the same time, however, a more important development at the local level is that local banks do not seem to have suffered from any balance sheet impact, and do not appear to have invested in the problematic US led derivative products. Consequently these banks are less risk averse and are stepping in and grabbing market share. So we are seeing more deals funded by local banks and by equity.”

One reason that the Nordic and Swedish banks may be holding up well is that they learnt some tough lessons at the beginning of the 1990s. In the early 1990s there was a financial crisis in Sweden largely as a result of extensive bank lending to speculative investments. Real estate prices slumped and the Swedish banks suffered very badly. It would be fair to say that without government assistance (a general guarantee of bank obligations) many would have gone under. So the Swedish banks may have been a bit more risk averse this time around.

Taxation
While a general perception exists that Sweden is a country with a high tax regime, on the commercial side nothing could be further from the truth. In fact Sweden has a very favourable tax regime for investors.

At 28 percent, the corporate tax rate is competitive with corporate tax rates across Europe. Factor in the ability to defer – companies can defer a quarter of their taxes every year, for a maximum period of six years – and you end up with an effective annual corporate tax rate of about 21 or 22 percent.

“From a corporate tax perspective, any gains from buying and subsequent sale, for almost all of the parties involved, are tax-free,” says Mr van Horen.  “Capital gains on sale for corporations are almost always exempt, as are capital gains for institutional investors. Transaction costs from the tax point of view are virtually zero. There is no stamp duty on the transfer of shares, for example, as in some jurisdictions, such as the UK.”

The so-called participation exemption for both capital gains and dividends received also means that Sweden is an attractive location as an intermediate holding company, particularly for wider investment into Europe.

Historically, the rules relating to deductibility of interest have also been fairly liberal compared to many other countries in Europe, or elsewhere in the world.

Whereas in many jurisdictions the total debts of the acquisition vehicle, or the consolidated group, can only be a certain percentage of the total balance sheet, (so-called ‘thin capitalisation’ rules), in Sweden there is no limitation at present. This means it is possible to use more debt to fund a transaction, and to obtain greater interest deductions than under most tax regimes.

There have, however, been strong signals from the tax authorities that changes are likely on interest deduction regulations. This stems from a recent tax case in the Supreme Administrative Court, which related to interest deductions.

“The case at hand concerned interest deductions on inter-company loans in connection with a tax driven internal reorganisation. The result of the planning measures was that the tax cost for the group was substantially reduced.  Consequently, the tax authorities challenged that transaction,” says Mr Thuresson.

Initially, the tax authorities obtained a favourable decision from the courts and, as a result, developed a policy to challenge a number of taxpayers on what the authorities perceived as aggressive interest deductions. This caused a lot of concern on the part of tax advisers and big corporations.

“At the end of 2007, the Supreme Court gave its judgment in that case and, in line with the expectations of most tax professionals, gave judgment against the tax authorities, and in favour of the taxpayer,” says Mr van Horen. “The tax authorities then changed their approach, dropped all cases against the taxpayers, and instead have entered into a lobbying process to persuade the government to think about adopting anti-abuse rules around these types of structures.”

Understandably, the tax community is somewhat concerned about the outcome of the lobbying process and how far the government will pursue the interest deduction issue. Will they, for example, look for broader restrictions such as thin capitalisation rules? Mr Thuresson remains optimistic.

“It is not easy to see how the current Swedish government would be persuaded to introduce more general limitations on interest deductions, as we have seen in a lot of other countries, as that would not fit with the government’s liberal thinking with respect to the business climate in Sweden. Based on the current standing of the law, there are very few limits to obtaining interest deductions in connection with investments in Sweden.”

Specialist advice needed
It is clear from developments like the recent decisions on interest deductions by the Swedish courts that it is essential for prospective and existing investors in Sweden to obtain specialist advice. Such as that provided by EY Sweden.

“Our goal is to ensure, whatever the type of activity we are engaged in, that we support clients throughout the whole process – planning, implementation, financing, and finalising the activity,” says Helena Norén, Business Tax Services leader at EY Sweden.

“We try to offer clients a service that goes through the entire lifecycle of the process, which starts with thinking about the investment, supporting them in the financial modelling and tax structuring, supporting them in the due diligence and completion of the transaction, in the integration of the business with the rest of their business, and in the compliance and reporting aspects.”

Because, as Helena Norén notes, a good service for the investor is about more than just the transactional aspects. “We are there for our clients whenever they need us. We take an interest in our clients and invest time with them to understand their business and be able to service them better and in a practical and pragmatic way; to do the right things in the right way.”

For further information
Tel: +46 8 520 590 00
Email: gunnar.thuresson@se.ey.com
www.ey.com/se

The development of Polish capital markets, demonstrated by the capitalisation of the Warsaw Stock Exchange in March 2007, for 700 billion PLN, and corporate restructuring, deregulation and further privatisation has made the country an increasingly attractive location for FDI. With the country being the beneficiary of €90bn in EU funds for development, infrastructure and human capital it would seem that the country’s transformation is set to continue. Poland is offering beneficial tax rates to foreign investors and offers an environment with low inflation and an excellent strategic geographical location for both Western and Eastern Europe.

According to Ernst & Young’s attractiveness survey, Poland holds 7th position worldwide among countries with the greatest potential of attracting new FDI. The country’s growth has been driven by export growth, industrial production, and investments. It also has a highly skilled and educated workforce with strong language skills, as well as a large consumer market.

However, with the liberalisation of the economy and rapid growth, have come difficulties, namely a need for the regulatory environment to keep up with economic progress. Essential to Poland’s continued growth will also be the presence of a strong tax advisory market, with the expertise and actionable insights to help potential investors best capitalise on this developing business environment. Jacek Kedzior, Managing Partner at leading tax advisory firm Ernst & Young spoke to World Finance about his company and its capabilities, the innovative training schemes his company offers, and the tax environment in Poland.

Ernst & Young’s roots in Poland go back to 1933-1939 when Whinney Murray & Co, Ernst & Young’s predecessor, provided advisory services in Warsaw. The company has operated in Poland under the name of Ernst & Young since 1990. Thanks to the combination with Andersen, Ernst & Young in Poland has become the biggest auditing and advisory firm in the Polish market. The company’s total workforce now tops 1,000 professional advisors and auditors, and the company has recently launched the Ernst & Young University.

Standing apart from competitors
Ernst & Young is the biggest tax advisory and a market leader in Poland. We provide our clients with comprehensive services, including tax advice supporting international tax planning needs, mergers and acquisitions, transfer pricing support and defense, indirect tax services including both VAT and excise related to supply chain and new investment planning.

Our Corporate tax services are accompanied by a very strong Human Capital advisory practice. In Poland we are leaders in tax litigation and regulatory advice services. We help our clients to receive public support through our grants and incentives service offering.

Despite the wide range of services that we offer, the main strength of our practice is built around client-centricity. Our client’s needs are at the top of our agenda and drive our service offering. Rather than sell and idea or a scheme, we listen to our clients, understand their business imperatives and wrap our planning advice into this process.

This combination of high technical expertise and ability to help compliment our clients in order for them to achieve their business goals makes Ernst & Young the most reputable firm in the Polish market.

Global footprint and strong personnel key drivers to leadership
The firm’s reputation comes on the back of the high esteem in which its tax advisors are held in professional circles in Poland. For me, in order to be the best tax advisory firm, we need to recruit and develop the best people, provide the best quality of services and serve the best clients.

We have and continue to be successful in attracting and retaining the highest caliber of professionals with long-term aspirations to succeed. Our advisors combine sound expertise with the skills and abilities to deliver value to clients aligned with their business objectives. Quality in a developing environment like Poland means for us not only technical knowledge and accumulated experience, but the on-going development of knowledge, as Poland is still a country going through significant changes. What’s more, quality is also access to the world’s thought leadership of the Ernst & Young organisation. We are proud when looking at our client list. We share clients with EY Global and win new business from inbound investors. Thanks to our local reputation we work for the biggest Polish enterprises. Our Clients Satisfaction Surveys prove that in all categories our services are highly regarded by clients.

Ernst & Young University: Developing tax advisors of the future
The wide range of services we offer gives our employees an opportunity to gain experience in all areas of tax advisory services. For many years we have been investing in the training and development of our people, both locally and internationally.

At the same time we are constantly challenging ourselves and asking, ‘What is our value proposition for newcomers?’ The most recent response to employees’ needs is the just launched Ernst & Young University. It is also a response to our clients’ current needs. Nowadays clients expect their advisors to be experts in the given field, but with a broad understanding of other areas. Ernst & Young University is the first such comprehensive program for professional development in Poland. It has already been introduced by Ernst & Young in countries like the USA, Switzerland or the Czech Republic. It is a unique structured approach that was designed to help participants gain diversified technical and non-technical experience. Getting experience is combined with a counseling structure and learning curriculum. Those three pillars: experience, learning and counseling will give young people an opportunity to acquire a set of skills necessary to operate as genuine business advisors.

Our approach to professional development is a response to the expectations of the young generation (generation Y), which is very demanding, has clear and ambitious professional plans, and a variety of opportunities to make their dreams come true. The program will ensure that talented people are not pigeon-holed early in their careers and will provide the opportunity to “find the right home” in the firm. In this context EYU is also important from the perspective of our firm’s values – it promotes an atmosphere of appreciation of achievements of people from different competency groups rather than internal competition.

Tax environment increasingly compatible with the EU
The foundations of the current tax system in Poland were laid in the early 90’s. At that time, tax authority decisions were viewed by many as arbitrary. The regulations were changing constantly. The unpredictability of both the regulations and the tax authorities were a serious problem for most organizations, especially when one looked at the relatively harsh penalties that could be imposed on companies or criminal sanctions on those responsible for the filing of the returns.

In time the Polish tax system began to settle down and the regulatory agencies introduced programs to further stabilize it by providing binding tax rulings and advanced pricing arrangements for related party transactions.

Polish courts also have played an important role in stabilizing the practice of tax law. Prior to Poland’s EU accession Poland introduced a number of changes into its tax system in line with the EU regulations. However, the European regulations and the jurisprudence of the European Court of Justice remain an important point of reference for tax law practitioners in Poland.

Growing tax advisory market
As Polish businesses have grown and new investors have invested in Poland the demand for tax advice has grown. So too have the advisors of such services.

Companies growing and expanding or needing access to larger sources of capital, including from public capital markets have fueled the growth of the larger accounting firms that include Ernst & Young, KPMG, Deloitte & Touche and PricewaterhouseCoopers.

Serving smaller companies are a number of advisory firms, many times consisting of former advisors from the Big 4. These firms provide advice to companies not needing the resource and broader service offering of the larger firms.

We see also law firms that have established in house tax capabilities to support their corporate practices focusing tax matters that might be applicable on transactions they represent their clients on.

Smaller advisors in our marketplace face a similar challenge in making sure that continue to develop and improve our ability to attract the best graduates from Polish universities and offer appealing career opportunities.

As the Polish economy continues to become more global, Polish investors and their businesses will require advisors which offer comprehensive tax advisory services and the support of an international network that is there to greet them where they go.

Evolving tax advisory market
Historically, due to the developing framework around tax policy and rules, there was a lack of a clear understanding of the law, regulations and in some instances the decisions of the Polish Courts.

This combination led to a lack of clarity around the application of the tax rules to actions of companies that tax advice was sought from lawyers to provide opinions that their treatment was correct.

These services have been and will continue to be needed even as the laws, regulations and judicial decisions become clearer. The Polish economy is becoming more integrated with the global economy, this brings an element of constant change which fuels the need for advice.

What we are seeing today is a growing need for tax professionals focused on the operational aspects of tax departments. Tax compliance and reporting has become more complex. This is taking corporate resources away from integrated and timely tax planning in their organisation.

The skills now needed in tax practices today are quickly broadening. Clients need and expect not only tax advice and opinions addressing their risks but also demand value driven solutions having a positive impact on their financial statements.

Tax advisors should be capable of providing services throughout the tax lifecycle including the planning stages, compliance, reporting and defending such positions in front of the regulators.

Regulatory and tax processes improvement advice, including gaining the support from corporate IT departments is increasingly more important. I also believe that reputable tax advisory firms will become more and more important partners working with the tax administration to develop proper tax practices.

For further information:
Tel: +48 (0) 22 557 7263
Email: Jacek.Kedzior@pl.ey.com
Website: www.ey.com.pl