Asset protection is essential for reducing a firm’s tax burden, but these days it is also considered vital protection against government involvement in the market.
Any company involved in foreign direct investment (FDI) activity would also like the ability to directly pull its investment out of the host country if needed. Of course, repatriating profits can be complicated: Countries arrange tax and ownership laws in ways that make it harder to take earnings and equity across borders.
Ensuring the ability to recoup investments has always been important here in Hungary, an economy heavily dependent on FDI. These days, as the government more actively engages in efforts to shape markets, sometimes making it harder for foreign firms to stay here, investors want stronger guarantees of the ability to bring money out of the country. Local legal experts say the business of asset protection is more popular, and has grown more complex, requiring protections that transcend the classic solution of the cross-border merger (CBM).
CBM has long been part of the toolkit of law firms serving multinational clientele. Now it seems that demand for such legal services is up in Hungary. As Dr. András Posztl, country managing partner at DLA Piper says there are various reasons behind this but clearly one of these is tax optimization.
“Now that there is a stronger market, profits are up in many areas. More investors get into a position where it is worth considering making their profit distribution more tax efficient, especially when they suffered interim losses on their investments. Many do so and are willing to go the extra mile,” Posztl says. Such mobility has been made easier since 2005 when a relevant EU directive was adopted.
Dr. Csilla Andrékó, managing partner at Kinstellar, believes the matter is mostly about structuring. “Client needs may differ, but the key ultimately is where the liabilities end up. Our task is to find the proper structure that allows you to separate assets and move them under a jurisdiction that offers more favorable conditions.” At Kinstellar, therefore, tax advisors are charged with drawing up the pros and cons of moving assets around in a company with cross-border operations, but before anything gets decided, due diligence must be performed to assess the situation.
If tax optimization is the only thing you need to worry about, the above provides an excellent solution. However, if you are in a fight for your life and your main goal is to minimize losses, this is far from enough.
According to a leading attorney at a top international law firm in Budapest who wished to remain anonymous, many players are considering leaving Hungarian jurisdiction as the government has created intolerable market conditions in certain industries. “Apart from cross-border mergers, placing the entire operation of companies abroad is a solution that is often used,” our source says.
As practice shows, in many cases, the government has openly sought to make unwanted players give up and leave the market. Different methods have been applied to force competitors by decree to exit or quit. In the energy and retail sectors heavy administrative burdens did the trick; on the casino market existing licenses were withdrawn; and in the schoolbook market, a monopoly was introduced overnight by legislation.
Therefore, investors worried about their assets are used to thinking about preventive measures early on that provide sufficient protection.
The fact is that Parliament can enact laws that have a negative impact on certain economic players. Furthermore, the national courts may be of little help for a business seeking compensation for damages caused by legislation. The Constitutional Court is not an effective remedy, either, since it is not empowered to award compensation. Sources note it is also full of government-friendly judges who very rarely rule against the government in important economic cases.
Dr. Péter Peremiczki, lead M&A lawyer at MOL Group argues that the only forum where an investor may seek effective remedy for the losses it suffers as a result of state intervention is the International Center for Settlement of Investment Disputes (ICSID), a permanent arbitration forum attached to the Word Bank. Under a framework treaty the signatory states may conclude bilateral agreements with one another where the nature and scope of investment protection are detailed. Key is that the country of establishment of the parent company must have a treaty with the state where the damage was suffered. If this is not the case, and you want to prepare for a potential ICSID scenario, the parent company or an entity of substance holding the local assets must be relocated to a country that does have such an agreement.
“And this is when legal competence kicks in. For instance, you need to know which treaties provide you the most comprehensive protection and choose the place of relocation accordingly. Forward thinking is badly needed here, though, as relocation must happen before legislation causing damage could enter into force,” Peremiczki says. He believes this is the best way to protect investor assets, as this is the only forum where you can sue for damages with a fair chance of success and be awarded real compensation.
“Yes, you can file a claim with the European Court for Human Rights (ECHR) in Strasbourg too, but it is simply not prepared to form an opinion in sophisticated investment protection matters. The ECHR was just not made for this purpose, though, it is doing its best in recent years to catch up in property protection cases as well.”
Since the Hungarian state has altered the legal environment for various markets by distorting competition in the past few years, investors are taking this threat into consideration more often. “When selecting a lawyer, clients do value the expertise that provides them with structures that offer the best possible investment protection for them,” Peremiczki says.