Significant Advantage
Various Ukrainian governments have for many years demonstrated their willingness to establish a favorable investment climate in this country. Despite the setting up of investment promotion agencies and the adoption of numerous laws, the behavior of investors turns ever more in the direction of other countries. This is happening despite high rates of profitability in Ukraine compared to other jurisdictions. Pure figures no longer work as a significant advantage for our jurisdiction. We asked Maksym Lavrynovych, founding partner of Lavrynovych & Partners, who splits his time between Kiev and Vienna, to explain why it is worth going to Europe and what is the primary motivation of Ukrainian business wishing to invest overseas.
Why do your clients decide to invest abroad? What is the average return on investment in Europe?
Maksym Lavrynovych: Yesterday, one of our clients, who finally sold part of his business in Ukraine, asked me to find an investment object in Austria. As a businessman, he always argued that it was not worthwhile going to Europe, because it was impossible to earn the same profits there as in Ukraine.
So, a person who can earn and is earning in Ukraine, surprised me by a request to choose an investment object in Austria. As a rule, 95% of all requests for investment objects are for commercial real estate. Even if people wish to invest in residential real estate, we manage to persuade them of the benefits of commercial real estate. Firstly, it is the best way to get profits, and secondly, there is a variety of reasons for acting in such a way.
In terms of profitability, if we talk about commercial real estate in Vienna, the predicted profitability rate is 4-5%. The average rate is up to 7% out of Vienna and in the regions of Austria. What are the benefits of commercial real estate? The fact is that in Austria the owner bears almost no costs. The majority of all maintenance, insurance and regular repair costs are always borne by lessees. The owner receives his/her due payments, while even fees of the company carrying out maintenance are also reimbursed at the expense of lessees. Therefore, the only costs that owner basically bears are tax payments.
Why is the choice made in favor of this jurisdiction? Why not Switzerland or other European countries?
M. L: First and foremost, we can compare Austria with Eastern and Western Europe. Austria is more stable than the rest of these countries, and has rather high interest rates if compared with Switzerland, for example. Germany, Switzerland and Great Britain have lower profit rates. At the same time, the stability and reliability of safeguarding of property rights in Austria is one of the highest. There are no cataclysms when the elite political class changes. Over the past hundred years, there was no decline in commercial real estate; it just slowly became more and more expensive. And everyone likes this. Even during the economic crisis of 2008, Austrian real estate was not affected at all. Another significant advantage is the Austrian culture of payments, when everyone adheres to agreements, obligations and contracts. The legal system is one of the most reliable and trustworthy. And, of course, we have our office there.
Selling something in other countries is rather difficult. We worked with Portugal, Spain, Italy, Switzerland, Great Britain, Hungary, Poland, and France. There are a lot of factors, including bureaucracy, acting in favor of Austria. There is no such level of bureaucracy there, which, for example, may be encountered in Spain or Italy. In Austria, there is no hatred, dislike for rich people, as is sometimes the case in other countries. In Austria, the tax service and general financial services do not see anyone who pays a lot of money for whatsoever as a potential criminal. Of course, compliance procedures are quite rigorous. In order to deposit funds in a bank, a person must pass all inspections. At the same time, there are no such leaps in taxes as, for example, in more southern European countries, when taxes are used only to put the screws on payers. By the way, some of our clients move their businesses from Italy to Austria, where they register their head offices for tax reasons. Moreover, clients love Austrians for their mentality. They understand us as if they were Slavs, but at the same time they behave like Germans. In other words, it is possible to establish contacts and communicate, including informal communications.
And, of course, bankers demand explanations as to how funds were earned and why these funds might have a story, which could sometimes be related to countries like Belize, the Seychelles, sometimes to Cyprus or to the Baltic States. The most difficult part of our work is to ensure funds placement.
You have been working in Austria since 2015 on the basis of BRANDSTETTER, BAURECHT, PRITZ & PARTNER Rechtsanwälte KG (BPPA), the law firm. How can you describe your relations? Is this a best friendship agreement or exclusive cooperation?
M. L: It is exclusive cooperation, a partnership agreement. As with profits and everything else, we have detailed everything from A to Z. We are pleased, as for quite a long time we have been looking for a law firm, which could become our base in Austria. Those lawyers are not a bit like traditional Austrian lawyers who leave their office at five o’clock in the afternoon, and they cannot be reached on the phone, especially on a day off or in the evening. Here, I can call, and regardless of the time of day the call will be answered, and I will get an appropriate response. Clients also like this.
Could you tell us any public success stories of your clients who have already invested and now work in Austria? Were there any obstacles on their way that you had to deal with as legal counsels?
M. L: A few years ago we really had to learn things the hard way. Therefore, now we already know what to expect, how to enter the country, and how to make each particular case successful.
As of today, we have completed a lot of restructuring processes for Ukrainian business, creating Austrian holdings. When Ukrainian business simply wishes to keep its assets in Ukraine, the restructuring is carried out by way of creating a holding company in Austria and by transferring property to it. This is one of the simplest tasks. Furthermore, support is provided for financing such a holding and for its loan activities.
Another thing is investment itself in Austria. There are a lot of success stories here, as we closed a lot of transactions. These are funds invested in various shopping centers and commercial real estate. And a lot of our clients’ funds return to Ukraine from their Austrian holdings, mainly for the purpose of protecting foreign investment.
While working in Austria, our clients have the opportunity to borrow loans at 1.5-2.5%. Of course, for our businessmen, this is a real find.
And even if a businessowner has some spare money and wishes to invest in his business in Ukraine, we present him an elementary scheme of investing in commercial real estate, again. For example, if an investment amounts to EUR 10 million, then against these EUR 10 million a loan of EUR 6-7 million can be granted. Thus, the client has a stable investment that generates stable profits. I would like to draw your attention to the fact that our clients really love rental agreements in Austria. Lessees conclude a rental agreement for an average term of 10-15 years, which can later be renewed (usually +5, +5, +5). The lessee cannot withdraw from a rental agreement without paying its full value. That is, a person can withdraw from a rental agreement either tomorrow or in six months, but he/she should pay the full value of that rental agreement. Therefore, the client is happy, of course, he loves such conditions, and he can get loans from local banks against such a guarantee. In other words, a person can take a loan of 7 million against this facility after paying 10 million, and later such a loan, say, at 2%, although against good objects the rate is less than 2%, can be used for any business that is common for a client, for example, in Ukraine. And then he can place these funds in Ukraine as European ones, thus protecting them via an international convention and bilateral agreement.
Within the framework of currency legislation liberalization, the NBU simplified the procedure of cross-border investing by legal entities. Now they can invest the equivalent of USD 2 million a year based on a single currency license. Do you think an increase in outflow of capital abroad can be expected?
M. L: Indeed, recent changes related to the fact that residents can now invest quite large amounts abroad became a rather revolutionary decision on the part of the National Bank. After all, earlier there were quite strict requirements, and nobody expected that the limit would be increased that much.
Currently, many companies contact us on the issue of acquisition of securities, corporate rights, and other instruments for cross-border investment. Nevertheless, the requirements put forward for such investments by the NBU are quite strict and high. Before carrying out cross-border investing, the company should provide a number of documents that do not allow the withdrawal of money without proper justification. Thus, it is necessary to provide documents regarding a business plan and investment expediency, disclose all the beneficial owners and provide economic justification for the investment. Therefore, I do not think that it is possible to expect an increase in outflow of capital abroad, as, despite some relief, the NBU has tightened requirements for these documents and for their verification.
We all understand that the NBU cannot let off the situation being what it is. At the same time, business must develop. Large business with diversified assets is interested in business development in other jurisdictions. And it is unlikely that companies that simply want to withdraw funds will comply with the requirements put forward by the NBU.
There has recently been increasingly frequent news that European banks are tightening requirements for non-resident investors. How does this affect legal support of investments?
M. L: Of course, the requirements have become different. A few years ago the banks of Latvia and Cyprus simply opened accounts. Nowadays, due to international cooperation and on the basis of documents that exist currently, it is quite difficult to open an account even in a simple jurisdiction. We get more refusals, and we have to deal with a fairly long procedure for the opening of an account and with verification of a multitude of documents by a bank. What is more, the list of such documents is not exhaustive. A bank has the right to request any documents, and in case of the slightest doubt, to refuse. Of course, this delays the transaction structuring, the transaction itself. Nevertheless, if the company can confirm its beneficial owner, the legal origin of funds, that it is opening an account not for optimization but for the purpose of business operations, then problems usually do not arise. Of course, it is the work of a lawyer to request a package of documents, to prepare it properly, to negotiate with the bank, and thus to facilitate this procedure. But, at the moment, it is really very long and involves the company itself, owners and management.
Which jurisdictions are the most liberal, and which have stricter regulations?
M. L: Previously, Latvia was absolutely liberal; the same was true for Czech Republic and Cyprus. Today, we cannot say that any kind of jurisdiction is liberal, as subject to international cooperation and measures taken to avoid money laundering, we see that banks have in general terms unified their requirements. As all countries will accede to the Convention on Exchange of Information, the process for opening an account is likely to become even more complicated.
Regarding Austria, with which you mostly work, how would you comment on the situation?
M. L: Austria is not a simple jurisdiction. Still, it is interesting for a real business that is planning to open its subsidiaries, representative offices or conduct business in Europe and abroad. Austria is quite an interesting jurisdiction in terms of taxation, social security, both for business and owners. However, we cannot say that it is liberal. Clients that own a real business and invest in Austria opened their accounts fairly easy by simply providing a complete package of documents.
Did you encounter situations where clients were refused in opening an account?
M. L: Yes, that does happen. A bank carefully examines the entire package of documents, which includes a request for financial statements, confirmation of tax payments, and confirmation of the source of funds. Therefore, the preparation of these documents should be taken very seriously.
How is the compliance procedure carried out? How much time does it take?
M. L: The compliance procedure is quite complicated and starts with the opening of an account. The first compliance is compliance of a law firm when information about the owner, management, business structure and the company to be established is provided. After that, a certain package of documents is prepared and is provided to the bank. The bank also performs its compliance check, which is considered to be longer and more complicated, as the bank is entitled to request additional information from any authorities it deems appropriate. The bank compliance procedure takes more than two weeks.
Is this information prepared by the law firm in Austria?
M. L: It is a joint effort involving two firms, because we prepare one part of the documents, and the other part is prepared by the Austrian company. For example, constituent documents are the responsibility of the Austrian company, of course, since they are counsels practicing Austrian law. We prepare documents regarding structuring, choose companies that will be involved in the structure, prepare other preliminary documents before submitting them directly to the Austrian company and the bank. We also prepare documents for the bank. And basically, we support the client throughout the entire process.
Lavrynovych & Partners Key facts
Year of establishment:
2004
Number of lawyers/partners:
34/4
Core practice areas
Litigation
Bankruptcy
Corporate Law/M&A
Investment
Business Protection
Construction and Real Estate
