Author: Ben Debski

The central feature of the 2008 corporate tax reform was the reduction of the corporation tax rate, from 25 percent to 15 percent. The trade tax calculations have also been revised, leading to an effective reduction of this tax, too – from some 18-20 percent in large cities for 2007 to around 15-17 percent in 2008. The composite rate for all taxes on income for 2008 has effectively fallen to a range of 30∞33 percent, 30.2 percent in Berlin, 32 percent in Frankfurt and 33 percent in Munich. The corresponding range in 2007 was 39-41 percent, i.e. the burden has fallen by eight or nine percentage points.

A rate range of 30-33 percent, while certainly not low, is not particularly high in the international comparison. From this point of view, Germany can be said to have significantly improved her tax climate, especially as she has never sought to compete with tax havens.

The aim of the tax reforms was to send a signal that Germany welcomes foreign investment and, from now on, is not going to tax the results at rates higher than those found in many other industrialised nations. However, the reforms were also not to cost more than €5 bn in terms of lost tax revenue. In a total budget of €283 bn, €5 bn is not a large sum – hardly enough to send out a very convincing signal.

Anti-abuse measures
Another feature of the reforms is the transformation of anti∞abuse measures into revenue raisers, especially those curbing the sale of tax loss companies and restricting the deductibility of interest paid to shareholders. There is also a new provision to tax a deemed gain on the transfer of a business function abroad. Through these reforms it seems that – at least for the present – the circle has been squared, although no one knows for how long the system will hold. Moving functions around the world as needed to keep a corporate structure slender is not necessarily a tax abuse. However, for Germany it is a reason to levy exit taxes.

Since the 1980s, when the loss carry∞forward limitation of five years was abolished, the sale of tax∞loss companies – that is, of companies whose only asset is a loss carry forward – has been considered an abuse. Various attempts have been made to curb it. Up to 1997, the loss carry∞forward was forfeited upon the acquisition of three∞quarters of the share capital of a dormant company by an acquirer, followed by a restart of business operations using substantially new assets. Arguably, any construction caught by this provision was abusive, at least in the sense that the business operation making the loss was unlikely to be similar to that claiming relief on recovery.

In 1997, the rules were changed to reduce the minimum share transfer to one of more than 50 percent and to extend the harmful injection of substantially new assets to businesses continuing in operation. This tightening of the rules, even then, was mostly driven by revenue∞raising considerations. Certainly, the 1997 provision has made corporate reorganisations substantially more complex, and has rendered attempts to save failing businesses – risky in any case – substantially more costly. On the other hand, the change in shareholder was restricted to the immediate shareholders, and consequently changes in ultimate group ownership on, for example, a successful takeover of a company publicly quoted on the New York stock exchange, were not impeded by a German regulation.

For 2008 the rules have been entirely recast. If more than 50 percent of the shares are acquired by a single shareholder over a five∞year period, the entire loss carry∞forward is forfeited. If the combined acquisition is more than 25 percent, but not more than 50 percent, the loss carry∞forward will be cut in proportion to the share transfer. Injections of capital and restarts, or continuations, of business are no longer relevant and a related∞party rule now ensures that a German loss will be curtailed or forfeit on any share acquisition of more than 25 percent at any level in the corporate chain of shareholdings, and regardless of whether the transfer is temporary or permanent, or of whether it is within the group or to an outside party.

Thus we no longer have an anti∞abuse provision, but a money-maker in its own right. Unfortunately, the taxable event, the share transfer, does not of itself generate the income needed to cover the tax cost, and, equally unfortunately, it is often dependent upon occurrences far beyond the control or influence – or even the knowledge – of local management.

Unsuccessful foreign takeover bids, involving the assembly of a significant holding on a foreign stock exchange, followed by its disposal shortly afterwards when the bid fails, can easily leave the German subsidiary with its loss∞recovery plan in ruins. Corporate reorganisations are now only feasible where German losses are insignificant. Transferring ownership in a family business to the next generation can be a nightmare despite plans for inheritance tax incentives to keep family businesses within the family. Outside attempts to save troubled businesses will benefit the government sooner than the new owners. On the other hand, there is a growing realisation that not all loss relief claims under new ownership are abusive, and the Bundesrat has requested an amendment to the Annual Tax Bill 2009 to preserve the loss carry∞forwards for offset against future profits earned from an existing potential.       

Loan interest
Until 2007 a thin capital rule disallowed the interest paid on a shareholder loan, to the extent that the loan exceeded one∞and∞a∞half times the shareholder’s portion of the equity in the company. This rule has now been changed to disallow the entire net interest expense in excess of 30 percent of EBITDA. Small businesses are exempt by the condition that this ‘interest limitation’ rule does not apply to taxpayers with a net interest expenditure of up to €1m. Further exemptions also exist in favour of borrowings by non∞group companies or by group companies with a debt/equity ratio of no more than one percentage point higher than that of the group as a whole. However, these exceptions are generally only applicable to outside finance. Loans from shareholders of more than 25 percent of the equity only qualify, where the interest paid to the shareholder in question is not more than 10 percent of the total net interest expense. Interest in excess of the limitation can be carried forward, thus offering the prospect of ultimate relief when a company’s profitability rises to a level beyond which outside finance is no longer needed. In this day and age, that level of profitability is unattainable for most companies.
The government’s intention was to hinder attempts to convert profits to interest, thereby moving the place of taxation from Germany to the home of the foreign creditor, by financing a German venture with a loan, rather than with equity. What it has also achieved is to disrupt the smooth operation of cash∞pooling systems and centralised corporate treasury functions, to seriously impede group reorganisations, to penalise businesses with fluctuating capital requirements and to hinder attempts to match the profits from an acquisition with the costs of financing it.

Transfers of business functions
The transfer of business functions does not fall into quite the same category. Here the revenue∞raising aspect comes to the fore. The government sees a business organisation as something semi∞permanent, that is, subject to change on the basis of a conscious management decision. The idea of flexible reaction to the needs of the moment without regard to national borders is at the heart of EU thinking, but disturbing to the concept of ‘unharmonised’ local taxation by member states. In principle, the idea is that developing a business function takes time and money that is mostly written off to current expense. Once developed, the function has value as a viable business unit that cannot easily be reproduced. Is it moved abroad, a third party acquirer would be prepared to pay an arm’s length price for it – i.e. its market value. This leads to a gain, corresponding to the value of the intangible, built up with costs already deducted as expenses. Consequently, this gain should be taxed.

Whilst this taxation does not seem unreasonable at first sight, one has to consider that the value of the intangible at the time of transfer has (like most other investments in projects of uncertain outcome) little to do with the cost of establishing it. Perhaps more significant, though, is the objection that the transfer of functions within a group does not involve outside parties. Taxing a deemed gain means demanding a tax payment before the income has been earned. Leaving the function where it is will avoid the payment, but may not be efficient, and can therefore be detrimental to the long-term benefit of the company.

An illegal ‘exit tax’?
One view of the tax on the transfer of functions is that it is an ‘exit tax’, and potentially in contravention of Community Law. However, it is difficult to state with certainty that something is contrary to EC Law until the ECJ has passed judgment on the issue. There has not yet been a directly relevant case – taxing transfers of functions is not a new concept, but is new to the statute books of most countries – although it is difficult to see how taxing a transfer of a function to another EU country can be anything but a restriction on the company’s freedom of establishment.

One argument for the tax would seem to lie in the national interest in securing the right to tax on ultimate disposal of the asset. However, this argument is weak in EU Law as it is dependent upon there being no other, less onerous way of achieving the same legitimate object. Even assuming the object to be legitimate, a less onerous way would seem to be available in establishing the deemed gain upon transfer, but deferring taxation until the asset is sold to a third party or leaves the EU.

This, for example, is currently the practice in respect of significant shareholdings in German companies held by individuals who choose to move to another country within the EU, following an ECJ ruling against a French obligation to provide a bank guarantee to secure payment of the ‘exit tax’ potentially due later when the shares were sold (ECJ judgment C-9/02 de Lasteyrie du Saillant of March 11th, 2004). In many cases, there will be no real opportunity to offset the German ‘exit tax’ in the new location. Apart from the fact that the German calculation of the deemed gain – laid down in some detail in a Transfer of Functions Order – might not be accepted in the other country, one would normally expect the acquiring entity to capitalise the intangible and to write it off over its expected useful life. Tax relief would generally follow the amortisation period under the new country’s rules, and in this regard some countries are more generous than others.

Germany, for example would, in most cases, insist on an amortisation period of 15 years, and some countries do not give relief for the amortisation of intangibles at all. At best, a company is faced with an immediate payment with the corresponding relief spread over a period stretching into the distant future, which is not an appealing prospect!

Deemed gain
Since the German calculation of the deemed gain seems to follow normal commercial logic, one might be forgiven for assuming that it should, at least in principle, be acceptable abroad. However, the calculation does not in fact follow normal commercial logic, but rather the interests of the tax authorities in ensuring that all the uncertainty falls on the taxpayer. The calculation is based on the average between the value to the buyer and that to the seller, both values to be subject to a review clause in the light of actual developments following the transfer. Calculated this way, the transfer price includes the benefits of synergies and location of the buyer – something which a third party buyer would not normally accept. After all, the buyer’s motives are nothing to do with the seller.

The review and adjustment clause is understandable in the interests of fiscal control, but problematic in practice. The statement in the Order to the effect that third parties would agree on such a provision simply is not true. Applied to the presumption in the Order of a ten∞year adjustment period unless the taxpayer can show a shorter period to be appropriate in the circumstances, it becomes extreme. The commercial reality is that the buyer investigates the nature of the asset before he buys it and then assumes the risk of being unable to deploy it in the manner he intends.

Price adjustment clauses are sometimes found in contracts for the acquisition of entire businesses but even then are restricted to defined factors warranted by the buyer that the seller cannot immediately influence. These can include minimum sales levels for the next eighteen months, or that named major customers remain loyal to the company. The period is, naturally, limited to the time needed by the acquirer to get to know the company well enough to make his influence on business strategies felt. Ten years to achieve this is unrealistic. Given that the nature of an intangible changes with use – technological development is constant, and customers or their buying patterns change – one might expect the calculation to make assumptions in respect to the period before the intangible can be regarded as an acquirer’s own development. However, this is not the case. Instead, the calculation assumes an infinite period of future usefulness to the acquirer of the unchanged intangible, unless the German taxpayer can produce evidence showing otherwise.

OECD involvement
On September 19th 2008 the OECD released a discussion draft of a paper on “The Transfer Pricing Aspects of Business Restructurings” for public debate.  The paper aims to provide guidance to governments and business alike on the transfer pricing implications of international business restructurings involving the transfer of assets, risks, functions and opportunities around a group, i.e. between related parties. It is devoted to four aspects in particular, risk allocation between related parties, arm’s length compensation for the restructuring itself, application of the arm’s length principle to the post∞restructuring arrangements, and the “exceptional circumstance” of the refusal by a tax administration to accept a transaction or structure adopted by the taxpayer. Much of the OECD report covers the same subjects as the German Transfer of Functions Order, so one might be justified in hoping for a lively response from Germany to the OECD’s call for comments from the public by February 19th 2009.

A disincentive to inward investment?
If these deficiencies can be seen as a disincentive to inward investment, then largely it is for fear of not being able to withdraw afterwards if business circumstances warrant. As Mark Twain said, “It is easier not to get on the train, than to jump off.” Taxation is, of course, not the primary factor influencing an investment decision, but it is certainly one of the more important secondary considerations, particularly if geographical aspects are not predominant.

On the other hand, mobility is not everything. Stability has value, too. Not every company has long∞term losses, is under∞financed, or has its next location in mind when planning a move now. The reduction of the tax rates to an average level for Europe is certainly a clear message to business that the tax bill will not be exorbitant and that this attitude is an accurate reflection of the general tax climate  would seem clear from the other recent or planned tax changes. Investment income of private individuals is to be taxed at a flat rate of 25 percent in 2009, the double tax treaty with the USA has recently been amended – particularly noteworthy is the abolition of dividend withholding tax on dividends on 80 percent shareholdings – inheritance tax is to be reformed, especially with concessions to ease the succession of family businesses within the family. The tax scene is, though, as complicated as ever and there are still plenty of traps to be avoided. As ever, the only answer is careful planning.

Slovenia’s business makeover has not been a bumpy ride experienced by other economies in transition at the beginning of the 1990s. Slovenian companies were a target for foreign interest as early as in the late 1970s thanks to Slovenia’s manufacturers of household appliances, cars and commercial vehicles, furniture and garments. Conveniently nestled between Austria and Italy, Slovenia has traditionally served as a gateway for exports to the discerning markets of West Europe even in former Yugoslavia.

Much has been done to boost the country’s attractiveness as a place to do business between Slovenia’s independence and today. The call for political action was backed within the framework of effort to become a full EU Member State and awareness that the Slovenian internal market was not fully integrated, which in turn meant a lack of competition in some sectors and increased operating costs for foreign investors.

Following the political consensus, liberalisation of the internal market has been built continuously since 2000 as the Slovenian economy become fully integrated with the EU economies, joined the EU in 2004, qualified for Eurozone and adopted the euro on January 1, 2007, and entered the EU Schengen in December 2007.

Adding value
Despite the country’s good economic performance, the government is committed to continuing efforts to improve micro-economic conditions to enhance GDP growth. This includes measures to increase competition by liberalising previously sheltered industries such as electricity, energy, telecommunications, and to dismantle administrative hurdles. In response to the critics quoting Slovenia’s excessive red tape and the shortage of land for industrial use, the Slovenian authorities got down to the business of changing the country’s business landscape attractive to foreign investors. Since 2000, registering a company in Slovenia has been greatly facilitated in many ways including electronic access to practically all public administration services, and the number of locations for property development and redevelopment to technological parks and economic zones has jumped.

When foreign investors consider locations to relocate or expand operations, the attractive tax regime of the eastern Alpine country bordering the Adriatic Sea is a reason to shortlist it. The present government deserves much of the credit for Slovenia’s tax reforms: a gradual corporate tax rate reduction aimed at promoting a pro-growth economy, phasing out of pay-roll tax, a relief on personal income tax. Tax allowances are in place for investment in research, technology and development, while greenfield foreign investment projects in manufacturing and sectors with high value added are eligible for financial incentives when they create new jobs. With tax revenue accounting for some 40 percent of GDP in 2005, Slovenia’s tax rates are lower than in many other European countries and converge with the EU27 average.

While traditionally taxes have been one of the key reasons for locating and investing away from home, transparent and stable political, legislative and administrative environment, the ease of getting about: good transport to airports, good rail links, availability of schools and good quality accommodation, as well as quality of life in general, should tip the scale in favour of Slovenia. The government’s ambition is to make Slovenia the leading European choice of international companies for locating international/European headquarters, an R&D centre, or a centre for administration and/or accounting functions. The government reforms have helped Slovenia’s economy increase its competitive edge and appeal to foreign investors without overheating the economy. Thanks to a wide-spread use of the first common financial reporting standard – IFRS – investors can compare statements produced in one country with those produced in another and exploit the advantages of mobile technology and broadband penetration where Slovenians themselves are early adopters both for business and private purposes. Today investors can benefit also from lower transaction costs arising from the single currency and the implementation of the Single Euro Payments Area (SEPA) where the current differentiation between national and cross-border payments no longer exists. This means that customers within the SEPA are able to make payments throughout the whole euro area as efficiently and safely, and above all at the same price, as in the national context today.

More ingredients for a recipe to attract FDI
Many Slovenians speak English, German and Italian and the Slovenian economy has all the attributes of an open and dynamic system without high leverage. Its budget revenues and expenditures are balanced, services generated 64.4 percent of GDP (2007 estimate) leaving industry behind (33.5 percent), gross fixed investment accounted for over 27 percent of GDP (2007 estimate), value added grew most in construction (well over 18 percent) followed by manufacturing (slightly more than 8 percent). Financial intermediation, trade and transport enjoyed high growth rates, and the only figure to spoil the picture of prosperity was the fact that in 2007 consumer prices increased by 5.6 percent.

In other words, the level of external debt is sustainable leaving room for more private equity and M&A activity. The Resolution on National Development Projects for the Period 2007-2023 lists several national projects worth some €24bn of which some €15m in private equity through public-private partnership.

In conclusion, although foreign direct investment (FDI) is generally perceived a source of economic development and modernisation, income growth and employment, it should truly be a ‘win-win’ situation for both the investor and the recipient country. Over the past seven years, Slovenia has established a transparent and effective enabling policy environment for investment and has built the human and institutional capacities to attract foreign investors. If its FDI stock appears modest in comparison with other CEE countries, it has something to do with the proverbial prudency of its people and their system of values where diligence and loyalty go hand-in-hand with creativity and innovation that are often key to the success of a business. A good pole position seems to make people more prudent and more environment-concerned. In the long run, it should be good for the investor and the host country.

Why invest in Slovenia?
A strategic location as a bridge between Western Europe and the Balkan States boasting strong levels of efficiency and productivity.

A well developed transport infrastructure both on dry land and through the sea port at Koper to serve some of Europe’s major transit routes.

A proficient and skilled labour force boasting a high degree of IT and technological prowess, from electronics to financial services.

All attributes to become a location of choice of international companies for international or European headquarters, an R&D centre, or a centre for administration/accounting functions

Slovenian Ministry of the Economy identifies development priorities
The priorities of the Slovenian EU Presidency in the field of energy, telecommunications and industrial policy – sustainability, competitiveness and security of energy supply with focus on the internal gas and electricity markets, renewable energy sources, energy technology and external energy policy. Energy and waste management offer a host of opportunities for foreign investors (PPP).

The Resolution on National Development Projects for the Period 2007-2023 lists several national projects worth some €24bn of which some €15m in private equity through public-private partnership.

The areas of wholesale and retail trading such as in electronics and garments, as well as consultancy services remain investors’ favourites, but further opportunities exist in sectors such as IT, pharmaceuticals, banking, insurance and telecommunications. Niche sectors and boutique companies may not be high-profile but thanks to specialisation stand to fare better than large household names that often lack flexibility in meeting customers’ needs. From electronic components to sailing boats, from racing skis to roulettes, from ultra-light aircraft to motor exhaust systems – these are some of the products ‘Made in Slovenia’ that do not fear competitors.

Efforts to improve macro-economic conditions to boost GDP growth and attract FDI have delivered the following preliminary figures for 2007:

GDP growth                    6.1 percent
GDP (at current prices)      €33,542m
GDP per capita                     €16,616
Exports growth                 13 percent
Imports growth              14.1 percent
Employment growth         2.7 percent

A thriving commercial and administrative centre, Exeter is also an exciting and inspiring place in which to live and work. It has been and continues to be one of the most important leaders and drivers of economic growth. It is no surprise that world-class organisations like the Met Office have moved to enjoy the city’s excellent opportunities for state-of-the-art accommodation, high standard of recruits, transport links and first-class lifestyle. Operational and accommodation costs are very competitive. Recent significant investments include the £225m city centre Princesshay development, transforming the city’s retail and evening economies. The city is home to a diverse range of regional or national headquarters, including amongst others EDF Energy, Pennon Group, Friends Provident, Flybe and BT.

Characteristics of Exeter’s workforce are loyalty, flexibility and educational attainment above the national average. Salary levels are competitive and being here provides employers with the proven advantage of attracting high-calibre staff drawn locally and from further afield. This is also an effective place to recruit bright, young graduates, with over 20,000 people in further education and post-graduate education in the city. Employment numbers are up nearly 40 percent since 1998.

The University of Exeter and the Peninsula Medical School have gained awards for their pioneering work with national and international partners. New developments further building the progressive nature of the city include a Science Park prominently located on the M5/A30 interchange, the rapidly expanding Exeter International Airport, Skypark, the area’s newest strategic employment site and Cranbrook – a new well-planned urban community. The recently opened University Innovation Centre provides accommodation and support for up to 50 knowledge-based organisations.

MAJOR DEVELOPMENTS
Joint working between Exeter and East Devon Councils, the County Council and the South West of England Regional Development Agency has strengthened the pace of change on the eastern side of the city. Major developments being progressed include:

EXETER SCIENCE PARK
A partnership between the University, Met Office, South West of England Regional Development Agency, Exeter City Council, East Devon District Council and Devon County Council are progressing plans to deliver the 25 hectare Science Park, near junction 29 of the M5 Exeter. When complete, this will position the local economy at the forefront of technological and scientific research and demonstrate the quality of life, scientific and innovative capacity and ambitions of the city of Exeter and the wider region.

BUSINESS PARK – SKYPARK
Complementing the role of the Science Park, the 37 hectare Skypark will provide extensive modern office and industrial space facilitating some 7,000 additional jobs near Exeter International Airport, close to the motorway and the planned inter-modal rail freight terminal.

PRINCESSHAY
Princesshay opened just before Christmas 2007, adding to the diversity of the city’s 300 independent retailers and many national names. Land Securities invested £225m and created 530,000 sq ft of retail space and residential apartments, including sixty new shops and restaurants providing more choice, visitors and jobs. Princesshay is pivotal in reinforcing the city’s position as a prosperous vibrant city and prominent regional centre.

BUSINESS COMMUNITY
Exeter and its sub-region is a great place to do business. Every organisation can be part of a close and supportive public and private community which continues to be instrumental in the city being amongst the most economically successful in the country. You’ll join a significant number of regional and national employers located here. There are also many other businesses offering professional services to the region, nationally and internationally.

COMMUNICATIONS
A first-class telecommunications network serves the area, capable of meeting the needs of any organisation. There are also good reliable road and rail links. Exeter International Airport serves a wide range of UK and European destinations as well as a number of international hub airports.

UNIVERSITY OF THE YEAR
As a top-20 university, Exeter University caters for some 11,000 students and gained acclaim as the Times Higher Education University of the Year 2007. Particular specialisms are IT, multimedia, healthcare, engineering – including engineering of ‘smart materials’ – electronics, biotechnology including systems biology, the environment including climate change impact, business, leadership management and international finance. Research at the Peninsula Medical School focuses on several specialised areas including cancer, heart disease, diabetes, environmental influences on health and innovations in clinical education.

LOCATION MATTERS
Exeter and its sub region does provide a better business climate. Meeting your location and operational needs matters to us. You can search our on-line commercial property register for an insight into the array of sites and buildings available at www.exeterandtheheartofdevon.org.uk.

Do bear in mind that there is a wide choice of citywide locations including prestigious city centre settings, modern out-of-town business parks and the potential of new sites. Conversely, if it’s important to your organisation, within the city’s wider area you can find accessible sites and buildings in attractive market town and rural settings. Information on typical rents and rates paid for prime offices in comparable cities is available to demonstrate this among other cost advantages.

The travel to work area genuinely can boast high levels of attainment in its state primary and secondary schools, including some national leaders. Additionally, the area is well served by a range of prestigious private schools. Within Exeter, all of the High Schools moved into new buildings in 2006 following an extensive building programme. Exeter, East Devon, South Devon and Bicton further
education colleges help many people of all ages to achieve outstanding results and progress towards their aspirations.

LIVING HERE
We know from experience that it is easier to attract and retain staff if their other interests are well catered for. Exeter is close to many areas of outstanding natural beauty with Dartmoor, Exmoor, many river valleys, market towns, villages and superb coastlines and seascapes within easy reach. Exmouth marks the start of the World Heritage site of the Jurassic Coast and is just one of many local beaches.

With an extensive range of leisure facilities, a year-long programme of festivals, and many live entertainment/music venues, there’s always something to satisfy a very wide range of interests. As far as shopping is concerned, Exeter has an excellent mix of small interesting shops and quality national names. Exeter is recognised as one of the top 20 cities in the UK to eat out, and in the wider area you’ll find award winning restaurants, food festivals, markets and vineyards.

A move can provide real opportunities for your organisation to become more effective in many different ways. If you are considering a move we will work with you throughout the whole process. We also do not walk away once your decision is made and our support can be intensive but bespoke. We can organise early site visits and introductions, data provision, supporting board reports, introductions to the business community and work closely with you on staff consultation, communication or relocation.

We’ll support you by providing advice on everything from housing issues to getting children into schools, and help communicate the advantages of the area to your staff. In other words, we will work with you where it is important to realising your objectives and plans.

FURTHER INFORMATION:
tel +44 (0)1392 265134
invest@exeter.gov.uk
www.exeter.gov.uk
fax +44 (0)1392 265625

Ukraine might be a country with a number of perceived problems, but its size – at least in a European context – means it is also a country which few can afford to ignore. Most important perhaps, it’s a young country. This is the main reason why savvy investors are being attracted to it, with foreign direct investment (FDI) reaching about $4.3bn in 2007, bringing the total since independence in 1991 to $21.2bn.

Figures show that the largest receiving end for FDI in 2007 was Ukraine’s financial sector. Much of the inflow activity in this sector came from a handful of merger and acquisition deals through which Ukrainian tycoons sold their banking operations to European financial groups for top dollar.

Increased FDI has also been seen in engineering, manufacturing, consumer goods, telecommunications, pharmaceuticals, and mining and processing.

Remarkably, FDI began to increase at the time of political upheaval. Ukraine’s turbulent politics notwithstanding, international investors remain highly confident in the market’s opportunities and seem to be willing to continue investing. In fact, political uncertainty in Ukraine has not had the impact on FDI that many might have expected. This is because FDI was at a low level to begin with and therefore has plenty of room for growth.

Anatole Klepatsky, chief executive officer and partner of Golden Gate Business, a Kiev-based firm which specialises in mergers and acquisitions (M&A) in Ukraine, says now is the time to consider getting a foot on the ladder in Ukraine. “It’s a big country with a population of 46 million. That means it’s a country of opportunities.” Until 2000 Ukraine underperformed, but is now in a position to play catch-up. “It’s the right time,” said Mr Klepatsky. “There’s no doubt that the growth potential is there.”

Mr Klepatsky is in an ideal position to judge. Golden Gate Business is a premier Ukrainian M&A advisory firm with proven execution capabilities. It provides objective and independent advice to help clients achieve their goals and increase the value of their businesses. In 2007, Golden Gate Business executed transactions with the total deal value over $800m.

“We try to provide a service in areas that we know such as telecommunications, consumer products and building materials. It’s only by handling the areas we are very familiar with that we can offer such a high level of service. We do not touch oil or gas, for instance. These areas are very difficult because so much of what happens is politically motivated.”

FDI is vital because the more Ukraine has, the better the country, said Mr Klepatsky. “Foreign investors bring their methods and their ideas and for a young country like Ukraine that can only be a positive development. The multinationals are active in Ukraine because they realise it’s a developing market. But there’s more to it than just making money. FDI also gives Ukraine a direct link to the way these companies operate.”

One cloud on the horizon is the effect that inflation, which topped 26 percent in March, might have on the economy and FDI. Ukrainian officials put much of the blame for the current spike in inflation on global food price rises, and also energy price rises caused by sharp hikes in charges for imported gas.

It’s a problem, said Mr Klepatsky, but while the risk of recession is there it’s very unlikely. There are reasons for this bullish view. The government has, in reality, done a solid fiscal job. State finances are generally in good shape, with public debt at just 11 percent of GDP. According to the National Bank of Ukraine, international reserves have grown steadily and now stand at $33bn. Gross domestic product (GDP) has been growing strongly at seven percent, while the exchange rate against the US dollar has remained almost unchanged. The average wage in the country has grown by more than 30 percent since October 2006 and grew by 5.2 percent in one month, September 2007.

New champions
The easing of restrictions on Ukraine’s economy and the resulting economic growth has been partly responsible for the rise of successful domestic companies, the so called “new champions.” These companies are changing the business landscape because they are innovative, they make the domestic market more competitive and are socially responsible in ways that communist-era behemoths were not. “It’s the same at Golden Gate,” said Mr Klepatsky. “We are privately owned, which means we are fast and quick, and not afraid to innovate.”

In previous years M&A market value was driven mainly by a small number of large deals over $1bn and a large number of small domestic deals under $5m. In 2008 there has been considerable growth in mid-market deals of between $50m and $500m.

As with any cross-border deal, investors need to weigh political and business risks. Political risks are always a concern for any cross-border transaction because regulatory issues can make or break the deal. However, given Ukraine’s growth potential, the question is not “should we enter the market?” – but rather “how can we manage the risks?”

For mid-sized and large deals, concerns over political risk highlight the need for a local partner. For more straightforward deals, a company still needs a local advisor, who knows how the government makes decisions and handles approvals and who can expedite the deal. Even multi-million-dollar investments can be delayed simply because a foreign investor does not know how to find his way through the maze of Ukrainian bureaucracy.

“A high standard of due diligence is absolutely vital, which is where Golden Gate can help,” Mr. Klepatsky said. “Our experience shows that several M&A deals in former Soviet countries delivers disappointing results due to poor due diligence. Good due diligence needs to look into strategic, operational, financial, legal and tax issues. It is critical to have a team of specialists who can carry through the whole process from pre∞deal negotiation to deal execution.”

Confident about the future
Golden Gate handles about 10 such M&A deals a year, concentrating on the business areas it knows and working with clients through the whole process from origination to closing. The company’s advantages include its in-depth understanding of local industries, markets and the regulatory environment, as well as its high level of access to key industry players.

“Clearly there are a number of economic areas where improvement would be welcome, but things are definitely changing and we feel very confident about the future,” Mr Klepatsky said. “Government stability is needed and new fiscal laws are needed to end some of the confusion that exists. But for a young country we have come a long way in a short time.”

The legal framework for FDI has improved and Ukrainian law now protects foreign direct investments in a variety of ways. Some allow for the full repatriation of profits, invested capital and the wages of expatriate employees in hard currency, once taxes and other debts have been paid. If nationalisation or expropriation takes place, Ukrainian law guarantees quick hard currency compensation of the full amount that was invested. It also provides a 10-year guarantee against changes in legislation that could damage foreign investors in any way.

Overall, Ukraine has taken significant steps, focusing on five main points to help in attracting FDI; admission and establishment, ownership and control, operational conditions, foreign exchange controls, and incentives. If the government succeeds in creating a lasting stable environment, and continues its policy of seeking closer integration with western Europe, Ukraine will see growth levels that will exceed anything that has gone before.

Further information: www.goldengate.com.ua

The jury is still out on the question of whether steps to create a single European market for investment regulation and financial services will be a revolutionary Big Bang, or just a damp squid. But one thing is clear: when it all becomes a reality later this year, many banks simply will not be ready.