Law of Belarus No. 312-Z dated November 13, 2023 “On Amendments to Codes” adopted comprehensive changes to civil legislation. Below we are discussing some novations for business.
1.Branches of foreign companies with option to carry out business activities on the territory of Belarus
The possibility of carrying out entrepreneurial activities through opening a branch in Belarus as structural unit of a foreign company (without right of legal entity) is introduced.
Today, foreign companies can only open representative offices in Belarus (without right to carry out business activity and perform only auxiliary, representative functions) and establish legal entities which does not always suit the business needs.
It shall be noted that there was a demand from foreign businesses not only having option of opening separate entities with right of legal entities but to open branches.
According to the new rule, foreign companies operating in Belarus through a permanent establishment for tax purposes (for example, construction and other companies performing works/services in Belarus for more than 180 days in a 12-month period) and without having corporate structures, for continuation of their business activities in Belarus will be required to open either a branch, or establish a company, or enter a shareholder’s composition of a local partner.
2. Escrow accounts as a guarantee mechanism for settlements
Escrow accounts are special accounts for crediting funds from a depositor (e.g., a buyer in a sale and purchase transaction) for the purpose of transferring them to a third party (e.g., a seller) upon the occurrence of grounds provided for in the escrow account agreement (e.g., elimination of some financial risks for the buyer).
The escrow account agreement is executed between bank as an escrow agent and depositor (the escrow account owner).
Escrow account agreement is an independent obligation in relation to sale and purchase agreement or other principal obligation under which the parties agreed to use an escrow account.
Escrow accounts are widely used in international practice in real estate transactions, transactions for the sale and purchase of shares and other M&A transactions, when funds payable to one of the parties is transferred to a third independent party, which subsequently (only if agreed conditions are met) credits them to the account of the seller or buyer.
In Belarus, only a bank can act as an escrow agent, which, when conditions are met, transfers funds from the escrow account to the beneficiary.
Escrow account performs a guarantee (security) function and allows seller and buyer to find a balance of interests.
3. Expansion of factoring (financing against assignment of a monetary claim)
Factoring operations are excluded as exceptionally banking ones and any commercial company can provide factoring services.
However, it is expected to set certain requirements for commercial companies by separate legislative act.
Factoring is a financial instrument under which a creditor (e.g., a seller under a deferred purchase and sale agreement) cedes to a factor for a fee his monetary claim against the debtor (buyer under a purchase and sale agreement), and the factor transfers money to the creditor with the right to collect it from debtor.
We believe that these legislative changes can contribute to the development of alternative financial instruments and appearance of a new business industry focusing in factoring transactions.
4. Representations in circumstances as additional contractual measure for the parties
Such circumstances include the subject of agreement, corporate authority, licenses, financial condition, including presence or absence of debt to the budget and counterparties, existence of rights to tangible or intangible assets, etc.
If the representations are invalid, a party may claim from the other party recovery of real damages, contractual penalties and even withdraw from the contract.
The concept of “representations in circumstances” is borrowed from the Anglo-Saxon system of law, where it is called Representations & Warranties.
Typically, buyer who risks money is primarily interested in assurances about the circumstances. Representations & Warranties use is widespread in transactions on purchase and sale of businesses, shares (M&A), transactions on purchase of real estate and other major assets.
The point is that before purchasing an asset or shares, it is not always realistic or even possible to check all aspects of the business through the Due Diligence process. Therefore, the seller’s provision of representations in circumstances with possibility of liability and other consequences to some extent “hedges” the buyer’s risks.
In our practice of legal support to foreign and international businesses, there have been cases when conducting a comprehensive legal, financial and tax audit (Due Diligence) was impractical for the buyer.
Therefore, the possibility of using Representations & Warranties in contract can be an additional guarantee for buyer in order to enter the project and conclude a deal on purchasing the asset.
5. Widespreading of legal institutions previously available to the Hi-Tech Park residents only
The institutions of irrevocable power of attorney, indemnities, option agreements, and a convertible loan agreement are established and regulated by general civil legislation now for all business entities.
Widespreading these institutions should help attract investment in business and start-ups using alternative financing mechanisms.
We will talk about these mechanisms in more details in our next publications.
Other changes
The regulation of procedure for registration, reorganization and liquidation of legal entities is amended in certain aspects: option to use model charters for LLCs, unitary enterprises and some other types of commercial organizations is established; joint liability to creditors of managers, shareholders of reorganized company and new companies created within reorganization is established, etc.
Institutions such as an agreement between creditors on procedure for satisfying their claims against debtor (intercreditor agreement), a legally significant notice, and meeting decision are defined.
Legislation on intellectual property is being improved.
Conclusion
We would like to note the most of changes are long overdue and de-facto were in great demand in business practice, especially in transactions involving foreign and international companies.
Most of the changes come into force one year from the date of law publishing – November 19, 2024.
If you need detailed advice on changes to civil legislation and how these changes may affect your business, please contact us by phone (+37517 3886824) or email to us (info@artlegal.by).
