Insight

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Supreme Court of Russia Denies Enforcement of ICC Award
19 Nov 2018 The Supreme Court of Russia has recently in a judgment of 26 September 2018 surprised many international arbitration practitioners by holding that the standard ICC arbitration clause in a contract between Luxembourgish and Russian parties was not sufficiently clear evidence of the parties' agreement that the ICC Court of International Arbitration was to administer their arbitration. Similarly to the model arbitration clauses of many of the leading arbitral institutions, the standard ICC arbitration clause does not specifically state that the arbitration will be administered by the ICC Court of International Arbitration. Rather, a reference to arbitration under the ICC Rules has virtually without exception been understood to inevitably mean arbitration that is administered by the ICC Court and its Secretariat under the ICC Rules. The model ICC Arbitration clause stipulates: "[a]ll disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules." In the Russian case, the Luxembourgish claimant had obtained a favourable decision in an arbitration seated in Geneva, Switzerland. In the final arbitral award, the Russian company had been ordered to pay EUR 3.6 million in damages plus interest. The Supreme Court of Russia denied the enforcement of the ICC award on the basis that the award was against the public policy of Russia and that the ICC Tribunal lacked jurisdiction because the arbitration clause failed to specify the arbitral institution that was to administer the arbitration. A similar reasoning can be found in a judgement delivered by the Chinese Supreme People's Court previously. The Russian Supreme Court's judgment marks a distinct departure from its previous judgments, on which it has upheld ICC and other standard arbitration clauses. We understand that the judgment will not be considered as a binding precedent in Russia but will nevertheless have at least a persuasive effect on future judgments. We further understand that Mr Alexis Mourre, the President of the International Court of Arbitration of the ICC, has sent a letter to the Supreme Court of Russia requesting a clarification on the ruling of the Supreme Court of Russia deeming a standard ICC Arbitration Clause defective and unenforceable under Russian law. Effect on Finnish businesses Taking into consideration the unpredictability of the repercussions of the judgement in Russia, we would advise Finnish parties that are considering entering into an arbitration agreement with a Russian or Chinese counterparty to amend the standard arbitration clauses of any institutions, including the FAI, to state clearly that any disputes are to be referred to arbitration, administered by the named arbitration institution in accordance with the relevant institutions' rules. Whilst the recent judgment of the Russian Supreme Court concerned a standard ICC clause, the Russian courts may adopt a similar position towards any institutional standard arbitration clauses, as they also merely refer to arbitration under the given institution's rules. The FAI and SCC standard/model arbitration clauses use language that is similar to the ICC model clause and also omit the express reference to the institution itself: FAI model arbitration clause SCC model arbitration clause We advise clients to contact D&I's Dispute Powerhouse team and to seek further advice regarding tailor made arbitration clauses when dealing with Russian parties. D&I's Dispute Powerhouse is following up on the developments of the matter and will keep you updated.
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The Government Proposal on Changes in Taxation of Electricity Storage
8 Nov 2018 The Government Proposal regarding amendments to energy taxation has been submitted to the Parliament on 18 October. The most significant changes relate to electricity storages. Pursuant to the Proposal, electricity would be transferred to electricity storages without any excise duty on electricity. The excise duty would be paid when electricity is transferred to be consumed. The need for electricity storages has arisen since more and more electricity has been produced by using renewable energy sources such as wind and solar which are not flexible. The electricity storages can be used to even out the variation in supply and demand of electricity and prices. However, current legislation does not recognize electricity storages at all. Therefore, the excise duty on electricity has been paid twice, for example, in circumstances where the storage has been first charged from the grid and later supplied back to the grid to be consumed. The purpose of the Proposal is that transmission of electricity to the electricity storage would be duty free. The excise duty would be paid when electricity is transferred to be consumed from the duty free electricity storage. The condition would be the electricity storage is deemed to be a part of the grid or a power plant; or an owner of the electricity storage has a permission from the Tax Administration to uphold the duty free energy storage. In order to meet the purpose of the Proposal the definition of the grid would be broadened. The electricity storage would be deemed to be a part of the grid if the electricity storage is connected to the grid and no electricity can be transferred to be consumed from the electricity storage. In addition, the definition of a power plant would be changed. In the future, the power plant would mean a fixed functional unit which acts in a certain area and its purpose is to produce electricity (and heating) and store electricity in the electricity storage. Owners of electricity storages which are not a part of a grid or a power plant in accordance with the law should apply permission of the Tax Administration in order to be owners of a duty free electricity storage. Consequently, the Proposal allows duty free electricity storage for different operators as power plants, grid companies or end consumers or storage service providers. The recast electricity market directive, currently under legislative process in the EU, seeks to promote market based energy storage. It would limit the distribution and transmission systems operators (DSO and TSO) involvement with energy storage facilities. Among others, DSOs and TSOs would be prohibited from owning and operating storage facilities, except in cases where no other parties have expressed interest, or where the storage facility is necessary for fulfilling the DSO's or TSO's obligations. Exceptions are subject to approval of the regulator. Member States would have to re-assess whether third parties would be able to own, develop and manage or operate the storage facilities, in which case the operations of DSOs and TSOs would be phased out. We welcome the removal of double taxation. However, according to the Proposal, the electricity storage means only a unit of equipment, machines and buildings which are required in order to temporary store electricity electrochemically. Our view is that the definition of an electricity storage should not be limited only to storages based on electrochemical technology. The limitation might delay development of new technology and its adoption to use. Taxation should be neutral for all technology solutions. With the current wording, storage solutions based on for example power-to-gas or kinetic technology would not be duty free. The purpose of other, more technical, changes to energy taxation is to promote the use of natural gas instead of coal, which is part of the Government's plan to encourage the early phase-out of combined heat and power plants using coal by 2029. The proposed changes would enter into force in the beginning of 2019. Due to developments in technology and promotion of the transfer towards more sustainable energy system, changes in energy taxation as well as energy storages in general can be expected also on the EU level. We are happy to discuss in more detail the proposed legislation in concrete situations.
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New CFC Rules Require Review of Corporate Structures
6 Nov 2018 The Finnish Government issued a government proposal on controlled foreign company ("CFC") rules on 1 November.  The proposed rules would enter into force at the beginning of 2019 and would apply already for tax year 2019. Through these rules, the Anti-Tax Avoidance Directive (2016/1164, the "Directive") adopted by the EU is further implemented in Finland. The proposed rules are stricter than the currently applicable CFC rules in particular for Finnish companies with subsidiaries outside of the European Economic Area ("EEA"). In principle, the government proposal follows the main features of the draft proposal published earlier this year with the exception of widening the exempted activities to certain services. Overview of Proposed Rules General In brief, foreign entity's income is subject to CFC taxation in Finland if a Finnish tax resident, together with its related parties, has sufficient control in the foreign entity, the foreign entity's level of taxation is significantly lower than in Finland, and the genuine economic activities exemption is not applicable. If an entity qualifies as a CFC, the proportion of the income of the CFC controlled by Finnish tax residents is taxed as their income in Finland. According to the proposed new rules, the type of income received by the foreign entity or the artificial nature of the transactions would not be relevant in the assessment. Thus, Finland would not implement either of the alternative models laid out in the Directive as such but instead the new rules follow similar approach as the current rules. Control The new proposal imposes a participation threshold of 25% for the CFC rules to apply. The participation by the Finnish resident's related parties (based on also the 25% threshold) in the foreign entity is included in the assessment. This presented participation threshold is significantly stricter than the 50% threshold adopted by the Directive and the 50% threshold of the current CFC rules. In practice, the low CFC threshold significantly expands the scope of the rules. It may also prove to be challenging to obtain necessary information to assess potential CFC taxation when the participation in the CFC is e.g. only 25%. Level of Taxation According to the proposal, a CFC is an entity with an actual level of taxation of less than 60% of the actual level of taxation the entity would be subject to in Finland. Finland’s current corporate income tax rate is 20%, which leads to an effective tax rate threshold of 12%, when the foreign entity's taxable income is calculated in accordance with the Finnish rules. The level of taxation is assessed separately for each year. The proposed new rules do not take into account the timing differences, e.g. different depreciation rules. More accelerated depreciation rules than the Finnish depreciation rules may trigger CFC taxation for the years when larger depreciations are deducted even though the level of taxation over the years would not be lower than the above mentioned threshold. Exempted Activities The main exemption in the proposed rules is the genuine economic activities exemption. The concept of genuine economic activities is assessed differently depending whether the foreign entity is a EEA resident company or not. The proposal follows the Directive’s, as well as the current CFC rules', framework of excluding EEA resident companies with genuine economic activities from CFC taxation. This requires sufficient level of personnel, premises and assets. Outside the EEA, the concept of genuine economic activities also requires that the entity carries out certain type of business activity. The new rules exempt only companies the income of which mainly arises from industrial or other comparable production activities, shipping activities, as well as sales or marketing activities related to such exempt activities. The government proposal widens the current concept of activities comparable to production activities to include marketable services. However, the proposal lists service activities which are not comparable to production activities, such as certain investment management services, holding and transferring of intangibles, as well as intra-group financing, insurance and management services.In addition, adequate exchange of information procedures need to be in place between Finland and other state, and the other state cannot be listed as non-cooperative tax jurisdiction by the EU, for the exemption to apply.Contrary to the currently applicable CFC rules, which have required that the sales and marketing activities could only be performed in the company’s state of residence in order for the exemption to apply, the new CFC rules would also exempt regional sales and marketing hubs from the applicability of the rules, provided that the operations relate to industrial production or comparable activities. This change will provide more flexibility for companies with regional activities. The current exemption applicable to tax treaty resident companies would be abolished. Consequently, the effective level of taxation of such non-EEA resident companies, which do not fall under the genuine economic activities exemption, needs to be monitored. Implications As discussed above, the scope of the application of the CFC rules is significantly widened due to the newly proposed amendments. The different approaches compared to the Directive, as well as compared to the current rules, will likely cause issues to numerous taxpayers. Pursuant to the new rules, genuine business operations subject to low taxation in non-EEA countries may classify as CFCs. In particular, intra-group and other service activities as well as holding company structures may trigger CFC taxation in situations that have so far not been subject to the current CFC rules. Inclusion of service activities to the scope of exempted activities is a welcomed feature but the definition in the proposal leaves room for interpretation. An advance ruling on the interpretation in specific cases may be recommendable in order to achieve certainty on the treatment. Due to the Directive, all EU countries need to implement CFC rules. Also many other jurisdictions have already implemented or will implement CFC rules. This may lead to the taxation of the same company's income as CFC income in several jurisdictions. The proposed Finnish CFC rules do not take this type of double taxation into account at all. Group structures with multiple layers of companies should therefore be reviewed from this perspective. On the other hand, the new rules introduce new options to enhance the group structure for many operators with regional activities due to the extension of the scope of sales and marketing exemption. Do not hesitate to contact us with respect to the proposed changes, we are happy to discuss the matter and its implications to your circumstances.
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Non-compliance with Merger Commitments Escapes Fines
6 Nov 2018 On 24 October 2018, the Finnish Competition and Consumer Authority (the "FCCA") ended a 6-year long investigation concerning a breach of merger commitments relating to the acquisition of C More Group AB ("C More") by TV4 AB ("TV4") in 2008, without seeking any sanctions. The FCCA investigated whether the launch of the MTV Total pay-TV channel package in 2012 by MTV, a subsidiary of TV4, was contrary to the conditions to which TV4 had committed in order to obtain the FCCA's approval for the acquisition.  The FCCA's decision closing the investigation reveals that the FCCA considered that the merger commitments had been breached with the launch of the MTV Total channel package. The FCCA's reasoning for not taking any further action despite this is questionable, and the outcome is unfortunate for the credibility of the FCCA's merger control enforcement. The Law Merger commitments, also known as merger remedies, are conditions and obligations the parties to a concentration may propose to competition authorities in order for an otherwise problematic concentration to be permitted. The object of the commitments is to eliminate the competition concerns identified by a competition authority during the review of a notified concentration. The commitments are attached to the decision clearing the concentration and their compliance is monitored. Non-compliance with commitments may lead to an administrative fine of up to 10 per cent of the annual worldwide turnover of the group of companies in question. The fine is imposed by the Market Court on the FCCA's proposal. Background and Facts In July 2008, TV4, a Swedish company, notified the acquisition of C More to the Finnish Competition Authority (currently the Finnish Competition and Consumer Authority). TV4 belongs to the Swedish Bonnier Group, which is active on the Finnish free-to-air and pay-TV market through MTV. The FCCA's main competition concerns at the time of the merger decision related to the fact that TV4 and C More were the two largest providers of pay-TV services in Finland and they had the broadcasting rights for the main sports events. Following an in-depth investigation – which included extending the Phase II review period twice with the permission of the Market Court – the FCCA finally decided to clear the acquisition in November 2008, subject to several commitments. One of the main purposes of the conditions imposed by the FCCA was that MTV and C More pay-TV services had to be kept separate. In November 2012, MTV launched the MTV Total channel package which combined the MTV and C More pay-TV services. Interestingly, the channel package was launched despite the fact that the FCCA had rejected – in a decision in 2010 – MTV's application to have certain merger commitments lifted. In 2014, two years after launching the MTV Total channel package, MTV applied, again, for the lifting of the commitments. This time the application was accepted in 2015. In 2015, the FCCA also prepared a draft Statement of Objections with a view to asking the Market Court to impose fines for the non-compliance of the commitments. The Outcome The FCCA closed the case on 24 October 2018 without seeking any sanctions. The FCCA's decision (in the form of a memorandum) closing the investigation makes it clear that the FCCA considered that the merger commitments had been breached with the launch of the MTV Total channel package. Despite this, the FCCA did not take the case to the Market Court as it did not consider it reasonable. According to the decision, the reasons of the FCCA for not considering it reasonable to make a proposal to the Market Court for the imposition of fines were as follows: (i) inaccuracy of the commitments, (ii) contradictions between the wording and the objectives of the commitments, (iii) ambiguity of the interpretation of the FCCA's earlier advice, (iv) the length of the FCCA's investigation, and (v) the fact that the conditions had eventually been lifted in 2015 due to significant changes in the market conditions as applied by MTV in its second application to this effect. As can be seen, the reasons for not finding it reasonable to seek any sanctions depend largely on the FCCA itself. Key Observations Despite having merger control rules in place for 20 years, there has not yet been a decision in Finland imposing fines on non-compliance with merger commitments. For a long time, the case at hand seemed to become the first one. The FCCA's withdrawal in this case – and the reasons leading to the withdrawal – are unfortunate for the credibility of the FCCA's merger control enforcement, and also somewhat at odds with its call for tougher sanctions in competition law that has been witnessed in the media and public speeches lately. Also, customers, suppliers and competitors of the parties to a concentration should be able to rely on the fact that commitments cannot be and are not unilaterally lifted, even due to significant changes in market conditions, as in law the power to remove or mitigate the commitments lies solely with the FCCA. Even though the case calls into question the binding nature of merger commitments, one should be careful to draw a hasty conclusion that commitments need no longer be complied with. On the contrary, due to the potentially very severe consequences of non-compliance, it is naturally still important to comply with the commitments. Even though in this particular case the consequences did not materialize, we trust that the case will contribute to improving the development of the practical application of commitments. We represented a competitor of the notifying party in the case at hand.

Dittmar & Indrenius