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Andrey Mikonin on the awaited legislation amendments in 2013

5 February 2013
Despite the declarated phrases on the governmental intention to better the investment climate, the business interest to Russia is falling, say the experts. The main reason are some legislation initiatives and non-trust of the investors to the Russian court system. During the Legal Forum, organized by the ID “Commersant” on December 8, 2012, the experts were analyzing the results of 2012 and discussing the legislation amendments awaited.

Maiya Petrova, Advisor of the Mannheimer Swartling, mentioned, that last year is to be marked due to the significant decline of the foreign investments in Russia. When the Government declares the intention to provide supportive environment for the business, the investors say the Russian market is quite risky. According to Maiya Petrova, foreign investments flow decreased due to objective reasons. Thus, in 2011 there was a President Decree adopted restricting the rights of the foreign companies to own the land plots. Moreover, it is planned to give the priority to the Russian investors in the banking, insurance and purchasing spheres and to prohibit the foreign investors to take part in the purchases at all. It is also to be mentioned, that the President elections has also influenced the investment activity. “Before the elections, all investors were very careful by commenting new projects. During the political changes the investments usually stop”, - says Maiya Petrova.

According to Ms. Petrova assessments, in 2013, the investment climate is not eager to change. “The willing to attract investors should be supported by the legislation amendments. There should be novels in the registration, construction permitting, electrification, taxation and enforcement of contracts spheres. Foreign investors do not understand why is the Russian bureaucratic system as difficult”, - comments Ms. Petrova.

According to the anonymous survey hundreds of Clients of the 12 Russian largest law firms took part in, only 10% of the Russian companies register their contracts with foreign partners in Russia. 57% of the respondents register 90% of the contracts in Russia or abroad, however, they use to govern them under the foreign corporate law. Explaining the reasons, 67% of them say, Russian corporate legislation is too difficult and drafting contracts governed by the Russian law requires a lot of legal services. 62% prefer European courts and 48% mentioned they do not like the Russian tax system. Other 10% say, there are no mechanisms of investors’ protection. 14% of the survey participants mentioned they do not register contracts in Russia because of the fact they want to hide the ultimate beneficiary. “These facts are assessment of the investment attractiveness of the state”, says Maxim Sobolev, Vice-president, Partner of the Consulco. He points out, that the beneficiaries tend to hide their names not because they want to avoid liability, but because they don’t want to take part in competitive struggles and are afraid of raiding. Particularly, says Mr. Sobolev, almost all large companies form their corporate structures using foreign jurisdictions what allows among the other opportunities to move a part of litigations to the foreign courts.

“One of the negative aspects influencing the investment climate is that the state authorities do not follow the principle of legal certainty”, says Pavel Il’inyh, Senior Lawyer of the litigation practice, Rightmark Group. Mr. Il’inyh underlines, that the principle of legal certainty means that every person should always understand to which consequences his or her actions will lead. However, last year, the Committee for Urban Development and Architecture abolished its decree on the development plan of a land plot 2 years ago after its adoption due to a technical mistake therein. A building on this land plot was already construed – there were 42 floors. “Supposing the lawyers could not challenge this abolishment the developer should pull down a 140-metre building”.

Andrey Mikonin, Partner, Head of litigation of the “S&K”, Attorneys at Law notes that civil transactions protections principle should be also followed. “There is the civil transactions protections principle from the one side and the rights of the private tenant from the other. As precisely this line will be drawn by the court practice as higher will be the investment attractiveness ranking of the state”, says the expert.

Perspectives of public-private partnership

There are some positive tendencies in the development sphere underlined by the investors. Evgeny Druzhinin, Head of real estate and construction practice of the Maxima Consulting & Law LLC, thinks that the main directions of the legislation improvement in the development sphere are increasing of the investment attractiveness and ordering and liberalization of the administrative regulation. Recently, a question was raised who should finance construction of engineering and social infrastructure by complex urban development. “There were some hopes on implementation of the private-public partnership mechanisms, however, as there is still to regulation on how make such construction profitable for the developer this question cannot be analyzed”, says Mr. Druzhinin.

Il’ya Gavrilov, Senior Lawyer of the Hannes Snellman, mentions, that there are a few projects connected with the private-public partnership (PPP) due to some risks, e.g. to the legal ones. The PPP legislation is still undeveloped and non-systematized. However, there are some ideas among the experts and bills introduced on this issue.

According to Mr. Gavrilov, the most regulated type of the PPP is concession. This year, amendments to the Law on concessions were introduced. These amendments should stimulate investments in the roads construction sphere. The idea is to move from the object payment to the service payment. “Particularly, the state should not pay ones for the construction and ones for the use of the object. Instead, the state will obtain a complex service including projection, construction and exploitation of the object. This form should guarantee installment of the budgetary costs, forecasting of the expenses and motivate the partner to provide the state with the services of a high quality”.

There was a new initiative of the Ministry of economic development on adoption of a new Law on the PPP. However, there is a two-way approach to the project among the experts. From the one side, some of the federal subjects introduced legislation on the PPP and there is a positive experience of Saint Petersburg. Some experts are afraid that after the adoption of the federal the execution of the regional projects may become less effective. However, the main aim of this Law is to “sanction” the PPP-projects on the federal level by unifying the terms and procedures. “It is hard to forecast the fate of the bill as now there are many discussions in the Ministry of economic development and Ministry of transportation”, adds Mr. Gavrilov.

Higher Arbitrazh Court promotes influence

Sergey Sosnovskii, head of the tax practice of “Pepelyaev Group” in Saint Petersburg notes, that the Higher Arbitrazh Court (HAC) has a significant influence in the taxation sphere. Going forward, it will only grow, is sure the expert.

Mr. Sosnovsky reminds that the year began from the landmark Decision of the HAC on the Leroy Merlin Vostok (LMV) case. LMV has been receiving two types of retrospective bonuses from its suppliers (“stimulating progressive bonuses” and “bonuses for the presence of goods in stores”), provided for by supply agreements and calculated on the basis of the volume and price of goods supplied. LMV did not charge VAT on the bonuses, considering that they were not connected to the payment for services. However, the competent tax authorities challenged this approach and charged VAT on the entire amount of the bonuses received by LMV. The taxpayer had to refer the case to the arbitration court. Before the Leroy Merlin case reached the HAC, decisions of lower instances were in favor of LMV. However, in November 2011, the HAC did not agree with the conclusions of the courts and transferred the matter to the Presidium for further examination. Indeed, the arguments stated in the Decision of the HAC on transferring the case to the Presidium are quite remarkable. According to the opinion expressed in the Decision, the bonuses received by LMV should be treated as payment for services consisting of “the provision of the possibility of the suppliers’ selling the goods in LMV stores” and should, therefore, be VATable.

The other important Decree was issued by the HAC in the end of the last year on the “Sinterra” (Megafon’s subsidiary) vs Tax inspection N 7 case. The company amortized communication lines and equipment with double speed, being sure that their use increased shift mode. However, the tax authorities have decided that "Synterra" enjoyed the benefits illegally, because it is prohibited to use rapidly depreciate equipment specially designed for round the clock work. On this issue, there are dozens of decisions of lower courts, and they are all made in favor of the taxpayers. So, there was a risk that the Presidium of the HAC will "break" the practice. This could cause a problem for business, as well as purely legal issues: in particular, from what moment will be the HAC decision effective and whether it may have the opposite effect? Much to the relief of the business community the HAC supported the taxpayers. This Decision is of importance not only for "Synterra", but also for other companies.

The Decision of HAC on the Kama prefabricate plant also became a landmark one. The HAC formulated a new conclusion, that has changed the old algorithm of proof in cases of unjustified tax benefit. It looks as follows: if the transactions are real, but the documents were signed by an unidentified person from the supplier and there is a suspicion of his involvement or willful negligence of the taxpayer, the taxpayer is not deprived of the opportunity to prove that he incurred costs and has the right to cut income taxes. "Thus, a taxpayer who loses in all positions, has a last chance," - says Sergey Sosnowski. There is no doubt that the HAC will continue to build the law enforcement practice.

Translucent scheme

Senior partner of the Pen & Paper Valery Zinchenko indicates negligence of the Russian business and transactional lawyers in M&A. This folly is becoming more dangerous, given the rising economic and legal literacy of the state agencies, he said. Transactions that seem at first glance impeccable may be finally treated as criminal. The expert gave an example: the purchase of liquid assets in the bankruptcy proceedings. "As is often the case, the company under bankruptcy is looking for an investor, shareholders have the ability to control the procedure, and there are no signs of deliberate bankruptcy. Former investors plan to stay in business. A scheme is created under which the assets are put up for auction and the shareholders vote and set the value of property. Under it will be a new company created, which includes investors and shareholders and wins the auction. However, under one of the creditors application the police may treated this scheme as a criminal one under the Art. 165 of the Criminal Code (causing damage to property by deception or abuse of trust) and 201 (abuse of authority). A lawyer who assisted the transaction may be qualified by the law enforcement agencies the head of crime "- says Mr. Zinchenko. The expert points out: no private agreement does not preclude the intervention of law enforcement agencies. In the near future, according to Mr. Zinchenko, the analysis of criminal legal risks in implementing M&A-projects must enter into the business custom.

Ekaterina Mikhalskaya, "Prime Advice Saint-Petersburg", Attorneys at Law advocate noted that one of the important stages of the bankruptcy of the company is the step of enabling the creditors to the registry. Often there is a situation where it is obvious that some lenders include their demands for absolute grounds, based, for example, on the bills receivable, on enforceable judgments, on arrears arising from loan agreements, surety, etc., leaving no chance other creditors to challenge the inclusion of such creditors. However, the expert cited the example of several successful cases in the portfolio of the company, when it was possible to prove the invalidity of the claims submitted by such creditors and to failure of their inclusion to the registry.

The winner takes it all
Resolving corporate disputes the companies usually seek the help of external consultants and lawyers. Costs for their services may be recovered from the losing party in the court, said Kirill Sasko, partner and head of corporate and arbitration practice law firm "Kachkin and partners." In August, the Swiss company collected in Moscow more than 20 million rubles. To recover the costs, the plaintiff must prove the fact of the costs and the amount of them. As evidences may serve contracts on provision of services, receipt of services acts, reports of the consultant, money orders for payment of services rendered. Benchmark for assessing the reasonableness of costs may serve the information on prices of similar legal services of the same level law firms. The same price will be in companies that are on similar positions in prestigious Russian and international rankings.

Kristina Naumova

"Year’s results. Society". Attachment, №16 (5048), 30.01.2013


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