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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 

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

The funds, or SIFs, are part of a wider portfolio of instruments approved by the Luxembourg parliament over the last few years. Bounded by Belgium, France and Germany, the world’s only remaining Grand Duchy is developing a niche within the EU as a modern investment capital with highly sophisticated financial services. The sector, whose contribution to the economy is growing as a percentage of GDP, is a key factor in the Luxembourg having the highest GDP per capita in the world.

Specialised investment funds, or SIFs, have proved extremely popular with investors since they were authorised in February last year.  In the end of 2007, 581 files had been authorised by the Commission for the Surveillance of the Financial Sector, Luxembourg’s regulatory authority. According to Luxembourg-based corporate and tax law firm Loyens & Loeff, the take-off in these specialised investment funds is unprecedented. As such, they have added another string to the financial sector’s bow. The wave of interest in SIFs has also thrown a broader spotlight on the Grand Duchy’s long-held but still-developing appeal as a stable, on-shore location for the increasingly sophisticated needs of international investment capital. The relatively small size of the country encourages a close dialogue between the financial sector community and the law-makers – a partnership that helps Luxembourg adjust rapidly to international investment trends. Considered a safe haven for such capital, Luxembourg has for instance proved largely immune so far to the turmoil of the international credit crisis.

An instrument for a fast-changing investment environment
SIFs are the result of a new law that creates an umbrella structure that in some ways reflects long-standing Anglo-Saxon structures in collective investment. The purpose of the legislation, which required a rewrite of legal, regulatory and fiscal provisions, was to deliver a multi-purpose product that dove-tails with the contemporary investment environment. Lightly regulated, flexible and fiscally efficient, SIFs have demonstrated over the last year they have more than met their designed purpose.

A key element of SIFs is that they are highly inclusive rather than rigidly prescriptive. The law allows any institutional, professional or “well-informed” investor, according to the definition, to access an SIF. Also, the entry threshold is relatively low.

Designed for accessibility
Based on Luxembourg’s previous experience with instruments such as the SICAV regime (an investment company with variable capital), the new definition of a well-informed investor has considerably broadened the attraction of SIFs by admitting non-institutional capital. A well-informed investor is classified as one with a minimum of 125,000 euros [£95,000] to invest, and lesser sums may qualify in certain circumstances. In this way the SIF law admits investors other than those able to prove the existence of “deep pockets”. So far, the level set for minimum capitalisation rules have proved to be about right. Under the law, at least 1.25m euros must be invested within a year of the fund being approved.

Investors also cite the relative simplicity of establishing an SIF, particularly the absence of excessive red tape, as an important factor in their appeal. For instance, an SIF does not require the prior approval of the regulatory authority before it becomes operational. Indeed many of the SIFs awaiting official registration are already in business and investing. The CSSF only requires that all the essential complying documentation be delivered to the regulatory authority within one month of the fund becoming operational. Once the authority confirms the SIF fully satisfies the law, it is admitted to the official list as a bona fide, approved investment instrument.

An additional attraction to investors has been the flexibility of SIFs. For instance, it does not prescribe rules that might inhibit investment strategy, whether in quantitative or qualitative terms. The only specific instruction is that the fund observes certain parameters in the spreading of risk. Thus the law has created a versatile fund regime that gives the initiators of SIFs the freedom to determine investment policy according to the prevailing environment and their own requirements. Thus they are able to diversify the fund according to need in terms of geography, sector and product.

Importance of high-quality management
However in a lightly-regulated environment, the regulatory authority sets considerable store on the quality of the fund’s management. The supervisory regime requires directors to establish their suitability and qualifications to guide the fund and, although the law encourages flexibility, it also requires transparency in the form of correct documentation. For instance, directors are now preparing the first generation of annual reports for the first generation of SIFs. These documents require directors to follow established templates. They must be delivered to investors and the authority within six months of the specific period.
Fiscal efficiency

The tax regime applying to SIFs builds on Luxembourg’s more than a quarter of a century’s experience with broadly similar investment funds.  It provides for a fixed one-off duty of 1,250 euros [£950] on capital contributions and, with certain exceptions, an annual subscription tax rated at 0.01 per cent on value of total net assets.

Financial sector continues to develop
Luxembourg’s financial sector is in a constant state of evolution. For instance, modifications are about to be introduced to the highly successful, four year-old SICAR regime relating to investment companies in risk capital. Reacting to feedback from investors and the financial sector, the regulations will be fine-tuned to make these funds even more flexible than at present. Under the changes, investors will be able to create compartments within existing structures — extra portfolios of investment that allow the development of a wider range of investments under the same umbrella.
Private equity short-circuits traditional banks

Similarly, Luxembourg has moved to meet the global requirement to establish holding companies in secure, on-shore locations. The grand duchy recently replaced the Netherlands as the prime location for the registration of these entities. The rapid growth of Luxembourg-based holding companies is in part a result of the development of private equity in the country, which has helped boost the entire financial sector in the last five years. Official records show that private equity companies is increasingly attracted to Luxembourg as a suitable location for a long-term base, with its fully EU-compliant tax and fiscal regime. The short lines of communication between the financial community and the government are considered to be a particular advantage, particularly compared with much larger legislatures. “Authorities here understand the real world,” as one source put it. A result is that laws and regulations can be quickly streamlined to meet prevailing conditions.

The pace of development in private equity is so marked that many practitioners in Luxembourg believe that it may threaten the long-term future of established banking channels. Investors are increasingly by-passing the major banks, traditionally the first port of call for investment-hungry funds, and placing them with private equity. In this way they are able to access new ventures more directly, eliminating one stage in the investment process.

Luxembourg has not however proved to be entirely immune from the credit crunch. As elsewhere, there has been a slowing of activity in the more highly-leveraged M&A transactions but little change in the appetite for deals at more normal ratios of debt to equity.
A good citizen of the EU

Article 41 of the Luxembourg law on the financial sector – the law that preserves Luxembourg’s bank secrecy laws – has given the state an historic reputation for confidentiality in banking arrangements. That is unlikely to change, given that Luxembourg, a founding member of the EU, fully complies with its financial regime and is in constant dialogue over savings directives and other developments in investment law. The purpose is to widen its appeal as a reputable home for a wide range of investment purposes. For instance, the nation has become a fully compliant channel for investment in the wider EU real estate market. Investors typically use Luxembourg-based funds and financing vehicles, in particular special-purpose vehicles such as tax-efficient real estate investment funds known as REIFs, to purchase properties in one or more jurisdictions. Others may prefer to set up their own portfolio.

In tandem with its widening portfolio of instruments, over the last few years Luxembourg has moved decisively to develop its reputation as a location of integrity for long-term investment funds. In the process it has deliberately distanced itself from regimes that are chosen primarily for their confidentiality. As one practitioner put it, “people don’t come to Luxembourg to hide.” One result is that Luxembourg has become the preferred on-shore location for the registration of investment funds. More than 10 percent of UCITS in the world are located in Luxembourg, which makes of it the second haven for investment funds after the USA.

The strategy of full compliance has proved highly effective, helping the financial sector grow rapidly as it develops a broader array of investment instruments and opportunities. Established practitioners such as Loyens & Loeff report that clients increasingly demand matched solutions that employ a full package of fiscal and legal services that meet best practice in every area.

A result of the demand for the financial sector’s service is the rapid recruitment of highly qualified staff. Indeed the sector’s biggest current problem is attracting professionals of a suitable calibre in law, tax and other areas of expertise. However, compared with other financial-sector hubs around the world that are shedding staff in the wake of the credit turmoil, that can safely be regarded as a desirable state of affairs.

For further information:
Tel: +352 466 230 222 or +352 466 230 233
Email: dirk.leermakers@loyensloeff.com or Thibaut.partsch@loyensloeff.com  
Website: www.loyensloeff.lu
 

The survey said Flanders was attractive for foreign direct investment based on seven key areas: economic potential, business friendliness, quality of life, human resources, costs, infrastructure and foreign direct investment.

The magazine pointed to Flanders’ central location in Europe, its world-class seaports, its rapid connections to neighbouring countries and its multilingual and productive workforce.

It success in attracting investment has led to Flanders sometimes being referred to as SME country, a region where enterprises with fewer than 50 employees make up about 96 percent of the total number of companies. This doesn’t mean large enterprises are hard to find. In fact, the number is growing quickly. And in 2006, about two thirds of the largest enterprises in the region were controlled by foreign shareholders.

One of the reasons for the increase in FDI in Flanders is that it offers some of the most carefully structured tax incentives in Europe: the kind of incentives designed to bring inn companies in key growth areas such as services, logistics, nanotechnology, pharmaceuticals and communications.

Tax treatment
Swiss food giant Nestlé was one of the latest multinationals to make the most of the incentives offered by Flanders. Nestlé is transferring its pension funds to Flanders because of the region’s favorable tax treatment of pan-European funds. The company has said it intends to centralise all its pension funds from the different EU countries in Belgium because it is more economical and efficient.

In practical terms, what Nestlé is doing is establishing an Organisation for Financing Pensions, or OFP, a special purpose vehicle specifically designed for pension institutions. An OFP gives companies beneficial tax rates including the ability to credit interest and dividend withholding tax against corporate tax still to be paid.

The OFP is just one area of growth. Flanders’ fast-growing knowledge-based economy has resulted from far-sighted government policies that place emphasis on research and development in growing areas. One of the specific policies that has proved hugely successful is to form business clusters – geographic concentrations of companies that are active in the same value chain or that use the same technologies.

Spending on R&D in Belgium as a whole is growing as a percentage of GDP, reaching 2.33 percent last year. In specific areas such as the information and communications technology (ICT) cluster close to Leuven University about 30 kilometres east of Brussels, R&D spending is among the highest in Europe at US$7,011 per employee. Pharmaceutical companies are well-represented in Flanders, as are medical device and medical imaging companies.

Other clusters have been established. The Flanders Graphics Valley has a concentration of leaders in digital graphical communication and a wide application base in printing and editing. Flanders Multi Media Valley is a regional cluster that began with the strong R&D department of Philips. The cluster is steadily growing and now services more than 100 companies.

Major sectors such as the automotive industry also have strong research bases in the region. Much of the automotive industry’s R&D is in-house, but universities and specialist research institutes all play a role, ensuring a continuous stream of high-level research and a regular crop of skilled workers to carry it out. The Scientist magazine ranked Leuven and Ghent universities in the 10 best research centres in the world, while the independent research centre IMEC, also at Leuven, is Europe’s leading independent research centre in micro- and nanoelectronics, nanotechnology.

To stimulate economic growth, both the Belgian and Flemish Government have implemented other incentives for businesses with operations in Flanders. These range from investment incentives through tax-related schemes to employment, training and R&D advantages.

Participation
Cash grants are available to incoming companies that meet certain criteria, with the government limiting its participation to 25 percent. Companies applying for cash grants are evaluated on business-economic criteria, and also on their level of relevance to Flemish government policy priorities. The level of financial support is dependent on the size of the company and the location of the investment.

Tax incentives include notional interest deduction, which allows a company to reduce its taxable base when making investments from its own resources.

Flanders is also an attractive holding company location because it allows exemption from domestic dividend withholding tax. This means companies using Flanders as a holding location for investments in Europe can repatriate European profits without paying dividend withholding tax and without a limitation on benefits.

An incentive known as VAT grouping is another tax break that has made multinationals choose Flanders as a base, especially those that handle invoicing, accounting and credit management.

VAT grouping allows all taxpaying entities that are part of a larger corporation to be regarded by the Belgian VAT administration as a single fiscal entity. Consequently, different companies within the same group will not have to invoice one another VAT, resulting in cost savings (because companies belonging to the same group can save the 21 percent VAT when they invoice one another) and flexibility, because foreign companies can choose which parts of their group will fall under the system.

Technology transfer
The Flemish government institution, IWT-Flanders (Institute for the Promotion of Innovation by Science and Technology) is behind many of the incentives on offer to companies involved in industrial research and technology transfer. Any company with activities in Flanders can ask IWT-Flanders for financial support with technological projects. Three types of projects qualify for support:

·         Basic industrial research such as scientific-technological research focused on the generation of new knowledge;

·         Prototype or development activities;

·         Mixed research – essential research that combines basic industrial research as well as prototype or development activities.

In addition to financial support, IWT-Flanders offers technological advice, provides partner search services and provides information concerning international programmes for technological innovation.

Flanders even offers tax allowances for R&D personnel, with a one-time tax exemption for companies hiring additional research or quality assurance personnel. In practice this works by Flanders granting a deduction from taxable income for scientific researchers, staff in charge of developing a company’s technological potential, and the heads of quality assurance departments and export departments. Higher exemptions are on offer for what the Flemish government defines as “highly qualified researchers employed in the company in Belgium for scientific research”.

But tax breaks and incentives amount to very little if the infrastructure isn’t there to back them up. Flanders’ infrastructure is second to none, with freight channelled through four major ports (Antwerp, Ghent, Ostend and Zeebrugge) and two airports: Brussels and Ostend. All these ports and airports are close to the region’s motorway system, which links Flanders directly with France, Germany, the Netherlands and, across the Channel through the Channel Tunnel, the UK. Geopolitically, Flanders is also in a prime location, at the centre of the wealthiest and most populated areas of Europe.

Language skills
The workforce is another of the region’s assets. It’s among the world’s most educated and productive, as well as having a high level of language skills. In GDP per hour worked, the region scores 113 with the US at a base rate of 100 and the G7 average at 92. Per capita GDP has consistently been more than 20% above the EU average. The workforce, says the Flemish government, is a byword for the economy as a whole: dynamic, flexible and internationally orientated.

Vincent Vanden Bossche, a consultant and specialist based in Belgium, believes that Flanders holds a whole range of trump cards when it comes to hosting multinational organisations.

“You have a level of multilingualism that you don’t find in many other regions in Europe,” he says. “And there’s a tradition of all these European institutions being based here that creates a pool of multilingual personnel. The people are also well educated and well trained, they’re productive, and they’re ready to work and work hard. On top of this, Belgium has a central location at the heart of Europe.”

The number of M & A deals for the year 2007, according to one deal count, soared from an average for 2006 below 300 deals to almost 400 deals. It is interesting to note that the aggregate value of deals is however at similar levels compared to previous years. This may be explained by the fact that strategic as well as private equity buyers have proceeded to numerous smaller acquisitions by purchasing Swiss high added value entities in order to optimise their portfolio of investments. Moreover, a certain number of deals can be accounted for as secondary buy-outs with private equity funds selling their stakes to other private equity funds, in most cases keeping the management in place. A notable transaction of that nature was the sale of the cable machinery group Maillefer by Argos Soditic (advised by Lenz&Staehelin) to Groupe Alpha. If these secondary buy-outs were made with the firm intention of going public on short or mid-term, it remains to be seen whether such plans can still be implemented in the current economic context.

Most recently, the US subprime crisis and its consequences on the international capital markets have certainly made it more difficult to obtain reasonable financing for contemplated deals. This situation is particularly felt by private equity investors, although small and medium size transactions, which form the bulk of the M & A work, will not be greatly affected in all likelihood. Conversely, this situation could benefit strategic investors with a full war chest who now can contemplate acquisitions of Swiss companies at prices that are not so highly driven by competing private equity investors.

One of the biggest private acquisitions of the year 2007 was Medi-Clinic’s acquisition of the hospital group Hirslanden from the private equity fund BC Partners Ltd for an amount of almost $3bn. Lenz&Staehelin advised the purchaser.

It should be remembered that for each Swiss company acquired by a foreign purchaser, a Swiss company bought two foreign companies. In 2007, this would include transactions such as Swisscom’s purchase of the Italian broadband telecommunications company Fastweb SpA for an amount of $6.35bn or Hoffmann-La Roche’s acquisition of the US manufacturer of medical diagnostic instruments Ventana Medical for an amount of $3.4bn.

New draft bill regarding the law of corporations
In the very last few weeks of 2007 the Department of Justice published a new draft bill regarding amendments to the law of corporations (Aktiengesellschaft, société anonyme). However, it does not include any spectacular changes and it appears that doing business in Switzerland will benefit from the usual stable legal environment for more years to come. Yet, there are some intersting features of the draft legislation, particulraly those which will enhance counsels’ tool box when it comes to structuring private equity deals. First and foremost the new concept of the ‘capital band’ must be mentioned. This concept will replace the well-known concept of the authorised capital and will be completed by its corrollary, an authorized capital reduction which up until now has not been possible under Swiss law. Once this becomes law, the board of directors will have the power, for a period of a maximum of three years, to increase or decrease the corporation’s capital (within some global limits provided by the law) depending on the corporation’s needs. This concept has been widely welcomed by the legal community.

There has been, from the outset, more criticism in respect of some surprising proposals, such as the possibility for the shareholders to impose a duty on the board of directors to submit certain business decisions to the approval of the general assembly. This mechanism is at odds with the basic structure of the corporation. The design of the corporation aims at a clear separation of ownership and control and the shareholders are supposed to have no duties other than making their capital contribution to the corporation and should not have any management or monitoring duties. Put in a broader context, by borrowing heavily from the regime actually applicable to the LLC (GmbH in German / Sarl in French) the Bill blurrs the distinction between the two company forms.

Another proposal which appears to violate basic principles of the capitalistic corporation is the possibility of creating non-voting stock without limitation (the law currently provides for a limitation of a maximum of twice the company capital). This would imply that a corporation could be controlled by a shareholder holding just one voting share whereas all the other capital providers would have no saying in the governance of the corporation (but still bear same risks of a shareholder with respect to their investment).

Further amendments deal with issues such as the flexibility of the general assembly (electronic general assembly), proxy voting and the election of the board members. As at today, it is too early to predict how the parliamentary debates will impact the bill and when it could enter into force.

Amendments to law of LLCs
The long awaited amendments to the law concerning LLCs (GmbH ? Sarl) eventually came  into force on January 1, 2008. At the same time, various amendments to the laws relating to corporations, the commercial registry and corporate names have come into force.

The main features of the amendments to the law concerning LLCs is that (i) LLCs of a certain importance must appoint auditors to carry out either an ordinary audit or a restricted review, (ii)  transfer of LLC shares has become easier as a written form is now sufficient (as opposed to the notarized form which was required under the old law), and (iii) the LLCs’ share capital is no longer capped at CHF 2 million.

The LLC has hence become an appopriate legal form for firms having significant need for equity and it may well become the predominant legal form for companies in Switzerland belonging to a group. Opting for the LLC has the advantage of allowing multinational groups to draft the subsidary’s articles of incorporation to maximize the power of the parent company to take the management decisions for the LLC.

Certain amendments to the law concerning corporations are of interest from an international view point, in particular the amendment to the provision relating to the composition of the board of directors. Previously, the majority of the members of the board of directors of a Swiss corporation had to be domiciled in Switzerland and be Swiss, EU or EFTA nationals. The new provision now provides that only one person authorised to represent the corporation must be domiciled in Switzerland such authorised representative being a board member or an officer of the corporation.

The amendment to the law concerning LLCs did not include any changes to Swiss tax laws. As in the past, LLCs will be taxed as a corporation as regards direct taxes, withholding taxes, stamp duty and VAT. From an American law perspective, one can speculate as to whether the amendments to the law concerning LLCs may have consequences for the American tax classification of Swiss LLCs held by American groups as a partnership of persons or as companies with capital (check-the-box regulations). The choice offered by American tax laws between a partnership of persons and a company with its own capital is excluded only for companies known as “per se corporations”. Only Swiss corporations are considered to be such per se corporations. We anticipate that with respect to the choice of American companies to classify a Swiss subsidiary that is an LLC as a transparent partnership of persons or a non transparent company with its own capital, nothing will change as a result of the new law on LLCs.

For further information:
Tel: +41 22 318 7000
Email: Andreas.Roetheli@LenzStaehelin.com  
www.lensstaehelin.com

The global credit crunch could prove a long-term blessing for Switzerland’s investment environment. The currency of choice for many years, the Swiss franc lost favour between 2003 and mid-2007 after an uncharacteristic period of instability. But as liquidity dried up and currencies became more volatile, the franc has rapidly strengthened after its four-year decline. Since mid-2007 it has gained against the euro and the dollar among other currencies, and many economists see the franc regaining its former role as an international haven in times of volatility. The consensus forecast is for the franc to find a ‘fair value’ against the euro of around SFr1.40-1.45 and SFr1.10 against the dollar.

The recovery of the franc is considered likely to cement Switzerland’s growing popularity with foreign business and with wealthy investors attracted by its stable political and social climate, low corporation tax and high standard of living. Although the credit crisis has inevitably slowed activity in the financial sector, all the signs are that it will quickly rebound on the back of the economy’s gold-plated official rating of AAA Stable.

M&A business expected to rebound
The financial sector expects the M&A market, which was extremely active over 2006 and the early part of 2007, to recover as soon as the credit crisis settles and the price of debt reverts to more normal levels. Like all cross-border financial sectors, the industry has been affected by the drying-up of acquisition finance as banks hoard capital to strengthen balance sheets. Although the caution is mainly down to the crisis, the introduction of Basle II with its higher standards for regulatory capital has also affected the availability of credit.

At the same time domestic institutions have responded to the global tightening of standards by requiring more demanding loan covenants. As elsewhere, lenders seek lower-risk debt: equity ratios in a general reversion to more sustainable standards.

However there appears to be no shortage of appetite among acquirers when conditions improve in the capital markets. Several of Switzerland’s biggest companies in the pharmaceutical, food and tourism industries are reportedly waiting in the wings with substantial investment war chests. Cash-rich with robust profits and strong balance sheets, they have only temporarily frozen acquisition strategies as they wait for a more favourable investment climate to emerge.

Meantime analysts point out that the fundamentals of Switzerland’s corporate sector, which is dominated by SMEs, are extremely healthy with excellent forward order books, assured markets and stable cashflows.
Fiscal reform drives M&A markets

A host of reforms including laws on limited liability, mergers and corporate tax has continued to stimulate activity in the last two years. One of these is the clarification of tax law in what is known as the indirect partial liquidation regime involved in the sale of shares. Under the previous regime, the issue of the taxation of capital gains on the sale of shares in a business was typically argued case by case in the absence of clear rules. By making the regime more transparent, the clarification has made it easier for private investors and family-owned businesses to cash out their assets.
Real estate

In spite of the credit crisis, there is no shortage of funds for more normally leveraged investments in both residential real estate and smaller-scale commercial property transactions. There is a marked trend for wealthy investors to develop portfolios of prime properties through investment funds under recent changes to the law that have enabled more flexible participation in CBD, industrial and other property opportunities. There has been a healthy diversification of the M&A transactions market into retail, hotels and hospitals and other sectors in the last few years.

Although non-Swiss residents cannot in general own residential real estate, there are exceptions. For example, certain cantons apply a kind of quota for foreigners that has proved attractive to the new wave of wealthy private investors. Typically, these exceptions apply in the most desirable locations such as ski resorts like Verbiers and Gstaad. However there is no law preventing high net worth individuals from renting prime properties and the growing attraction of Switzerland has driven up rentals and helped fuel the residential market.

Meantime the large-scale, headline deals that typified early 2007 are temporarily off the agenda, mainly  because banks face difficulty in syndicating loans. A repeat of the headline deals of the last two years are considered unlikely for 2008.

Swiss-style private equity continues to thrive
The domestic private-equity industry has generally defied the turmoil in financial markets. As before, it continues to concentrate on SME buy-outs in the Sf10m-Sf30m [£4.8m-£14.4m] range often overlooked by the biggest private-equity operators. Debt is readily available for these mid-market transactions, but at levels of leverage several notches lower than those available at the peak of the boom during 2004-mid-2007 as lenders return to more normal debt ratios. Mid-market private-equity firms continue to target family-owned SMEs with robust profits and largely unencumbered assets.

The family-run investment offices that are an integral part of private equity sector remain focused on the long term, as they have always done. They continue to seek long-term deals characterised by low volatility rather than ones featuring quick exits and high returns. The biggest deals, most of which were headed by foreign firms, are however off the agenda for the present.

Equities market matures
Despite the introduction of rules that have made the equities market more transparent, its relatively small size has long proved a deterrent to public listings by foreign companies. However observers hope that the influx of foreign-owned companies and wealthy individual investors to Switzerland will in time boost the equities market.
Integration with the EU

Switzerland’s participation with the EU continues to deepen through bilateral agreements that facilitate the financial sector’s growth outside its own borders. It continues to work towards a profitable integration with the single market that absorbs 62 per cent of all Swiss exports. These agreements include the rule on the free movement of persons, which among other things helps Swiss banks locate staff in EU-based branches.

It is also considered important that the sector does not miss out on the advantages of access to the EU’s single market in financial services. “We need innovative Swiss banks to enhance EU competitiveness,” as Brussels’ commissioner Charlie McCreevy told the association recently. For instance, although Switzerland is outside the Single Euro Payments Area [SIPA], Swiss banks have pledged to fully uphold all their obligations under it. Officially, the Swiss Bankers Association “wholeheartedly supports” these and similar arrangements that help bind the domestic and EU financial sectors.  “Good relations between the EU and Switzerland matter a good deal to Swiss banks,” remains the official view.

For further information:
Tel: +41 44 498 98 98
Email: ldefferrard@wwp.ch

It would be wrong to say that other countries outside the Anglo-Saxon circle are feeling smug at the credit-crunch crisis, fuelled in large part by what may seem, in hindsight, an unwise rush into sub-prime home loans, that has already claimed banking victims in the UK and the United States. But there is certainly a sense of relief in places such as Italy that local bankers have been considerably more cautious than those in New York or Newcastle upon Tyne.

At Simmons&Simmons Italy, one of the country’s leading legal firms, which has 120 to 130 lawyers in Rome, Milan and Padua and which specialises in work for clients in the financial sector, senior partner Filippo Pingue says: “We do not have doubts that the Italian banking system is really solid. The sub-prime issue has not involved Italian banks.”

The Italian banking sector has seen a fair degree of consolidation in the past three or four years, leaving two giants, Intesa Sanpaolo, and Unicredito, and a good handful of smaller operators, including Banca Monte dei Paschi di Siena, the oldest bank in the world, dating back to the 15th century, which recently acquired Banca Antonveneta in the north-east of Italy. “None of these banks had sub-prime loans among their assets,” Mr Pingue says. “But although the situation for Italian banks is very good, now, after what’s been happening, they are very cautious about where they invest their money. However, if we did not have a situation like Northern Rock, or Bear Stearns, I’m sure the Italian government would persuade another bank to take over the bank in difficulties.”

Simmons&Simmons Italy is certainly in a position to comment on the state of the Italian financial sector: its client list is a blue-chip line-up of names both domestic and international, including Intesa Sanpaolo, the biggest domestic banking group in Italy, with approximately 5,500 branches serving 12 million customers, UniCredit, now the second-largest bank in Europe after HSBC, and Cassa di Risparmio di Firenze, all from Italy, as well as JP Morgan, Nomura, West LB, Morgan Stanley and Deutsche Bank.

Substantial deals
The company has been involved in some substantial deals over the past couple of years, including advising Mediobanca, another Italian investment bank, and Nomura on the €1.8bn securitisation of healthcare receivables in the Lazio region and advising Capitalia, the former Banca di Roma, which merged with UniCredit last year, on updating its €20bn medium-term note (EMTN) programme.

In the past year, Mr Pingue says, the Italian bond market has been comparatively quiet, and “we have been more involved in restructuring of bond issues than the issuing of corporate bonds.” Among the operations Simmons&Simmons has been involved in are the continuing saga of the Italian food group Cirio, which collapsed in 2002 with more than €1bn of debt – the firm represent Law Debenture, trustee of the group’s bond issues, and Pingue sits on the creditors’ committee of Cirio, having been appointed by the Minister of Production Activities to supervise the activities of the group’s receivers. Other rescue missions of Simmons&Simmons and the distressed debt team lead by partner Nino Lombardo include restructuring the bond issues of a couple of middle-cap companies, one a port equipment manufacturer, Fantuzzi Reggiane, and the other being Italtractor. “They had bond issues of respectively €125 and €100m and we organised under a legal point of view a postponement in payments agreed by a bondholders’ meeting,” Mr Pingue says. As a result, “essentially Italtractor didn’t go bust and they have been able to reimburse the bondholders entirely. The same is going on for Fantuzzi Reggiane.”

Overall, Pingue says, “corporate bonds have not been historically a large market in Italy”. After the Cirio and Parmalat scandals earlier this decade, “Italian corporations have been a bit reluctant to issue corporate bonds.” The average issue size is around €50m – small stuff, Filippo Pingue says. The bonds are issued for specific reasons, such as acquisitions, refurbishment of production processes, or to support investments, and generally what happens, he says, is that a bank itself, looking to have a bit more of its portfolio in bonds rather than loans, “goes to the company and says. ‘Would you like to issue a bond, I will subscribe to the bonds’ – it’s not a public placement, more a relationship between the bank and its client. They are institutional deals.” Bond issues are also used by unlisted companies “just to put a toe into the international capital markets before an IPO.” Mr Pingue says.

For Simmons&Simmons, banking and corporate bond issues “are not really a profitable segment of the market, but since we want our top financial institutions clients to consider us as a one stop shop, we have decided to invest in the segment,” Filippo Pingue says.

Raising cash
Once the credit crunch is over, Mr Pingue expects the bonds market to expand in Italy, across companies of all sizes looking for ways to raise cash: “The big companies have always suffered from a lack of capitalisation. In terms of medium companies, there’s a lot to do in terms of acquisition financing, leverage finance, which will continue to be a solid and substantial market. And in relation to premium small-cap companies, they are very active, and the financial markets can support their growth.”

On the securitisation side, “the main assets in Italy for securitisation have been residential mortgages,” Mr Pingue says. “The law regarding securitisations was enacted in 1999, and as soon as it was passed the banks securitised their non-performing loans. After that they started securitising the residential performing loans and eventually it came the time of personal loans.”

The notorious slowness of Italian bureaucracy, particularly its slowness in paying money due, has also meant that VAT credits are another area where securitisation has been taking place, where “a bank buys the VAT receivables and put them on its own balance sheet, or using a credit default swap to reallocate risk,” Filippo Pingue says.

But the dominant area for securitisation, at least from 2003 to 2007, has been the securitisation of health care receivables. These are the receivables due to the suppliers of medical goods from the Italian regional health care system. Up to 60 or 70 percent of an Italian region’s budget is made of health care expenses, and the global health care expenses market in Italy is around €100bn. “But Health Care Units in Italy do not pay on time, and so suppliers sell on these debts to specialist vehicles,” Mr Pingue says. “You can understand that it is a big market. We at Simmons&Simmons as a firm have been the most active in this sector – we were the first, we opened up the market with our banking partners, both Italian and foreign banks,– Intesa San Paolo, UBS, Nomura, Mediobanca, JP Morgan, The deals were as big as €1.8bn, €600m, etc.”

After a change in the law in 2007, however, “this kind of securitisation has been made more difficult to structure,” Mr Pingue says. “But, of course, the market finds other ways, alternative ways and we continue to work in the health care field.”

More cautious
Even though Italian banks do not have the sub-prime loans problems hitting the financial markets in the United States, the current situation has still made securitising property assets a little more difficult, Mr Pingue says, as institutions become even more cautious: “We have been involved in three residential mortgage-backed securities (RMBS) transactions in the past four months, which is quite a good result, but the RMBS market now is going rather slowly.”

Commercial mortgage-backed securities, on the other hand, have never taken off in Italy, largely because the Bank of Italy, as regulator for the banking sector, has remained sceptical about the safety of such deals, Mr Pingue says. “You have a bank or a number of banks that make loans to a property company to buy something, then the banks would like to securitise their loans. But usually the commercial rent fees do not ensure the same stability for the repayment of the bonds.”

All the same, he says: “I believe that securitisation will continue to be a very good funding source for banks. From time to time the securitisation market is able to find new eligible assets – healthcare has been one, from 2003 to 2007, then it disappeared, but I believe we can have other assets that will be discovered by the market.  We advise a number of banks on the investment side – they call us, they ask our opinions, we work closely to find new assets out in the market. We are considered a point of reference for banks, especially foreign banks.”

One brand new vehicle for financial institutions in Italy is covered bonds, bonds backed by mortgage loans, or receivables from the public sector, which were made legal in Italy only last year, despite being popular in countries such as Germany. Covered bonds, which are issued by eligible banks, come with a double guarantee that is likely to make them more attractive to both institutional and retail investors, Mr Pingue says. As yet, however, despite comments from big banks such as UniCredit that they are likely to move into the covered bonds market this year, no Italian financial institution has yet issued such a bond. The banks, Mr Pingue says, “are studying the situation. I don’t expect covered bonds on the market before the end of the year.” When they do start to come on to the market, however, Mr Pingue expects that they will eventually be “quite a plain vanilla transaction, as they are in Germany for instance, or in other countries. People will come to see them as just another investment they ought to have in their portfolios.”

Sharing risk
Overall there is no one fund-raising structure that is most popular in Italy, Mr Pingue says, although the mezzanine structure for corporations is an increasing way of raising funds, mixing debt and shares. The reason for this is simple, he says: “The banks must accept the fact that they must share the risk with the entrepreneurs. We are involved in a number of mezzanine structure deals.”

Meanwhile, despite the turmoil across the Atlantic, Filippo Pingue remains optimistic about the future for the Italian financial markets, although he says: “We still don’t know if we are in a baby fall or a big-sized one. I felt at the end of last year we were in for a crash. Now I am a bit more optimistic. But in my opinion we have not touched the floor yet and we need to wait for this to happen overseas – and overseas means the US.”

For further information
Tel: +39 06 809 551
Filippo.Pingue@simmons-simmons.com
www.simmons-simmons.com 

The regime introduces a whole new method of measuring the amount of interest that can be deducted in the case of leveraged acquisitions. The new benchmark for deductions and related expenses is now firmly tied to pre-tax income. The high ground is fixed at 30 percent of adjusted EBITDAR in any given year. Inspired by similar legislation introduced as part of Germany’s crackdown on the claims based on carrying costs, the main objective is to simplify the tax system by establishing an easily understood and recognisable yardstick from which all parties can work.

However practitioners in general agree that the overall effect of the new regime is considered to significantly limit the options of Italian corporates in the deduction of interest expenses, especially when involved in large-scale acquisitions.

A carry-forward mechanism has been introduced, but it is likely to prove ineffective for businesses with a relatively steady turnover and financing structure. Thus the new rules will impact significantly on the way businesses finance themselves in the future.

Not all taxpayers come under the regime’s umbrella. For instance, the banking and insurance sectors are excluded. And at least temporarily, so is in part the real estate market which is still free to claim for interest incurred through mortgage loans on rentable property.

Comparisons with the previous regime
The old regime relied on an entirely different method of assessing liabilities in acquisition finance. In this, the main constraint in the design of financing structures was the rules applying to thin capitalisation. The main principle was that they limited the deduction of interest on related party debt in cases where it exceeded adjusted equity by four times.

Importantly however, the regime applied only to related party debt. In turn, this had a direct effect on the way shareholders structured their financing in order to comply with the rules, as well as on the design of guaranteed third-party debt. For example, if such debt was guaranteed by a related party, it was treated for tax purposes as debt held by the latter.

However relatively generous debt to equity ratios softened the blow. Under the rules of thin capitalisation, the maximum permissible debt-to-equity ratio was 4:1. Additionally, the rules had applied for four years and were well understood by all practitioners involved in designing tax-efficient acquisition financing. The result was that, provided deals were underpinned by soundly leveraged structures, arrangements were generally green-lighted by the authorities.

Similarly, the rules limiting deductions in the case of eligible participations could generally be overcoming by opting into tax consolidation. Thus overall, the limitations did not really constitute an insurmountable hurdle.

All in all, the old regime required careful attention to the structure of the financing architecture. But provided that was the case, the authorities could hardly ever disallow claims for substantial portions of interest expenses. In short, expert practitioners could generally manage the regime in ways that delivered highly efficient solutions for clients.
Implications for leveraged acquisitions

Although all parties are still feeling their way through the new arrangements, it is clear there has been an important sea change. It is more difficult than before to obtain tax advantages, even in structures that employ levels of leverage that were once perfectly acceptable. This is because the regime now applies to all kinds of interest costs including that anchored on third parties. Thus the umbrella extends across the whole spectrum of leverage, not just intra-group financing established for tax-planning purposes.

Also, since EBITDAR has become the starting point for the measurement of what is deductible and what is not rather than the overall financing structure of the relevant company, the previous yardstick of capitalisation no longer applies. Thus it is no longer possible to secure or even predict the amount of deductible amounts by capitalising the company.

At this stage practitioners are still learning how to navigate the regime. Uncertainty about the exact scope may induce creativity in the use of alternative forms of finance as practitioners work their way towards what is or is not an acceptable form of financing. As yet, no firm conclusion can be reached and in the long run uncertainty may prove detrimental rather than not.

Temporary reprieve for commercial property
Rationally, interest expenses incurred in mortgages incurred on rental property are temporarily exempt. This is probably for the obvious reason that otherwise the regime would have blocked the legitimate deduction of expenses on purely business-driven financial structures as distinct from tax-driven ones. While the property sector is still waiting for clarification on these details, its is likely the new regime will prove to be of benefit to it.
Tighter interpretations

All parties are in the middle of a steep learning curve as they learn how to work within the new boundaries. However it is already clear that the concept of what is deemed “legitimate” tax planning in financial structures has shrunk considerably, especially in the light of rulings by the tax authorities. The nub of these rulings is how the tax authorities determine what constitutes an abusive structure.

So far, any structure has been deemed abusive if it produces a tax advantage without generating an overwhelming non-tax advantage that could not be achieved through an alternative structure. In practice that means the reason behind the option adopted for the financial structure must reflect a significant — and fully corroborated — business motivation. Also, they make no distinction between onshore and offshore financing, applying equally all kinds of debt including bank borrowings.

Cross-border structures
In the meantime cross-border structures have come in for special attention. As we have seen, on the one hand foreign-based structures are challenged if they cannot show a specific, non-tax advantage that could not otherwise be achieved in a domestically-based structure. This is why the use of foreign holding companies often faces objections on the grounds that the structure could just as easily take the form of a domestic entity.

Normally, the line of challenge is based on the place of effective management of the relevant foreign company. Thus the final decision comes down to where the executive team is located. If the entity is an offshore structure but the management is clearly based locally, the structure can be expected to come under scrutiny.

Applying similar principles, tax authorities are also challenging foreign tax structures if in their view they reveal a lack of substance and are thus designed for tax-planning purposes rather than for commercial gain. In fairness however, several of the entities that have come under scrutiny so far have most of the executive team centred within Italy. It could therefore be argued that so far it has been the less legitimate structures have been affected by these stricter interpretations.
Anti-abuse principles invoked

The marked and growing tendency by the authorities to dispute previously acceptable structures has been growing over recent years. It suggests a concerted strategy by the tax authorities. However the position taken by the tax authorities in the growing volume of challenged structures seems motivated by a desire to boost tax revenue rather than by an interest in making impartial judgements on the different circumstances that may lie behind a particular structure.

Although this may be understandable in the case of the tax authorities, many practitioners believe the weight of judicial decisions has been less helpful. The Supreme Court in particular has consistently issued judgements on tax matters that appear to rely on a blanket, anti-abuse principle embedded in the code. This provides the courts with a reason to challenge transactions even in cases where there is no obvious anti-avoidance element.

However practitioners believe the reference to a vague principle rather than more or less specific provisions only serves to increase uncertainty in the interpretation of what is considered abusive and what is not.

However in principle, the new emphasis on genuinely commercially-based structures is seen as helpful and more balanced than in the past. It is clear that the prime inspiration behind the architecture of acquisition finance must be business-driven rather than tax-driven.

Verdict still out on IAS accounting
As part of the general reform, new legislation allows IAS adopters to use the international system for computing taxable income. The laws are not yet complete and follow-up work still has to be done. However it looks as though IAS-adopters will benefit from greater simplicity and clarity because there are likely to be fewer deviations from existing law under the code.

Similarly, it is probably too soon to make a decision about the effect that IAS will have on the assessment of levels of taxable profits. Secondary legislation will also complete the picture in this case.

Under present Italian standards, not all companies are permitted to adopt the international accounting standards. The exceptions are banks, insurance companies and listed companies. However, the authorities may decide to widen the scope of IAS accounting and bring more companies into the net. We believe IAS will become more widespread and eventually provide the foundation for assessing taxable income in an increasing number of companies.

Meantime the government has promised to introduce laws that harmonise local accounting principles more closely with international standards. This move will lead to an important simplification of the relationship between tax and accounting.

For further information:
Tel: +39 02 776 931
Email: P.Ludovici@maisto.it
www.maisto.it