ICLG The International Comparative Legal Guide to: Project 2017 6th Edition

A practical cross-border insight into project finance

Published by Global Legal Group, with contributions from:

Advokatfirma Ræder DA Milbank, Tweed, Hadley & McCloy LLP Ali Budiardjo, Nugroho, Reksodiputro Oraro & Company Advocates Anderson Mōri & Tomotsune Patton, Moreno & Asvat ASC Law Firm Petrikić & Partneri AOD in cooperation with Axioma Estudio Legal CMS Reich-Rohrwig Hainz Brigard & Urrutia Abogados Ploum Lodder Princen Cases & Lacambra PrimePartners Wirtschaftskanzlei Cuatrecasas Severgnini, Robiola, Grinberg & Tombeur Dhaval Vussonji & Associates Templars Henriques, Rocha & Associados, The Legal Circle Sociedade de Advogados, Lda VdA Vieira de Almeida Kyriakides Georgopoulos Law Firm Lee and Li, Attorneys-at-Law Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados The International Comparative Legal Guide to: Project Finance 2017

General Chapters:

1 Why the World Needs Project Finance (and Project Finance Lawyers…) – John Dewar & Oliver Irwin, Milbank, Tweed, Hadley & McCloy LLP 1

2 Public-Private Partnership, Project Finance and Concession Contracts in the Italian Legal System – Sergio Massimiliano Sambri & Matteo Trabacchin, International Project Finance Association (IPFA) 8 Contributing Editor John Dewar, Milbank, Tweed, Country Question and Answer Chapters: Hadley & McCloy LLP 3 Andorra Cases & Lacambra: Miguel Cases & Marc Ambrós 12 Sales Director Florjan Osmani 4 Argentina Severgnini, Robiola, Grinberg & Tombeur: Carlos María Tombeur & Account Director Matías Grinberg 20 Oliver Smith

Sales Support Manager 5 Bangladesh The Legal Circle: Karishma Jahan & Anita Ghazi Rahman 28 Paul Mochalski

Sub Editor 6 Brazil Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados: Pablo Sorj & Nicholas Catlin Filipe de Aguiar Vasconcelos Carneiro 37

Senior Editors Suzie Levy, Rachel Williams 7 Colombia Brigard & Urrutia Abogados: Manuel Fernando Quinche & César Felipe Rodríguez 48 Chief Operating Officer Dror Levy 8 Costa Rica Axioma Estudio Legal: José Pablo Sánchez Vega 58 Group Consulting Editor Alan Falach 9 England & Wales Milbank, Tweed, Hadley & McCloy LLP: Clive Ransome & Munib Hussain 64

Publisher Rory Smith 10 Germany PrimePartners Wirtschaftskanzlei: Adi Seffer 80

Published by 11 Greece Kyriakides Georgopoulos Law Firm: Elisabeth V. Eleftheriades & Global Legal Group Ltd. Ioanna I. Antonopoulou 88 59 Tanner Street London SE1 3PL, UK 12 India Dhaval Vussonji & Associates: R.S. Loona & Prachi Dave 102 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 13 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Emir Nurmansyah & Freddy Karyadi 111 Email: [email protected] URL: www.glgroup.co.uk 14 Japan Anderson Mōri & Tomotsune: Kunihiro Yokoi & Wataru Higuchi 126 GLG Cover Design F&F Studio Design 15 Kenya Oraro & Company Advocates: Pamella Ager & Juliet C. Mazera 134 GLG Cover Image Source iStockphoto 16 Mozambique Henriques, Rocha & Associados, Sociedade de Advogados, Lda: Paula Duarte Rocha & Ana Berta Mazuze 143 Printed by Ashford Colour Press Ltd 17 Netherlands Ploum Lodder Princen: Tom Ensink & Alette Brehm 152 April 2017 18 Nigeria Templars: Oyeyemi Oke & Mayowa Olugunwa 160 Copyright © 2017 Global Legal Group Ltd. All rights reserved 19 Norway Advokatfirma Ræder DA: Kyrre W. Kielland & Anne Christine Wettre 167 No photocopying 20 Panama Patton, Moreno & Asvat: Nadya Price & Ivette Martínez 177 ISBN 978-1-911367-43-7 ISSN 2048-688X 21 Portugal VdA Vieira de Almeida: Teresa Empis Falcão & Ana Luís de Sousa 185

Strategic Partners 22 Serbia Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz: Milica Popović & Ksenija Boreta 195

23 Spain Cuatrecasas: Héctor Bros & Jaume Ribó 205

24 Taiwan Lee and Li, Attorneys-at-Law: Hsin-Lan Hsu & Pauline Wang 216

25 Turkey ASC Law Firm: Okan Beygo & Levent Yetkil 225

26 USA Milbank, Tweed, Hadley & McCloy LLP: Eric F. Silverman & Simone M. King 236

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

WWW.ICLG.COM EDITORIAL

Welcome to the sixth edition of The International Comparative Legal Guide to: Project Finance. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of project finance. It is divided into two main sections: Two general chapters. These are designed to provide readers with an overview of key issues affecting project finance, both from a multi-jurisdictional perspective and with a particular insight into the Italian legal system. Country question and answer chapters. These provide a broad overview of common issues in project finance laws and regulations in 24 jurisdictions. All chapters are written by leading project finance lawyers and industry specialists, and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor John Dewar of Milbank, Tweed, Hadley & McCloy LLP for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

Why the World Needs Project Finance (and Project John Dewar Finance Lawyers…)

Milbank, Tweed, Hadley & McCloy LLP Oliver Irwin

“Any fool can make something complicated. It takes a genius to including commercial and conventional capital markets make it simple.” instruments, domestic government-funded loans, export credit and – Woody Guthrie multilateral agency loans and guarantees and Islamic Shari’ah- compliant financing structures. The 2008 financial crisis exposed weaknesses in a number of structured finance products (such as collateralised debt obligations, Whilst providing desperately needed sources of liquidity, this structured investment vehicles and certain derivatives) and business diversity of finance and financing structures (combined with models that were, in essence, arbitrage plays, heavily dependent on the expansion of project finance into new industry sectors and short-term debt funding to finance portfolios of long-dated, illiquid jurisdictions) has meant that the accompanying legal issues have investments. By way of contrast, project finance proved itself to become progressively more complex. Notwithstanding this be an asset class that demonstrated the intrinsic value of productive complexity, a combination of proper legal frameworks, sound tangible assets, extensive due diligence, strong collateral packages commercial structures and robust collateral packages have helped and transparent financial structures that have become increasingly ensure that these new structures have been welcomed and effectively relevant post financial crisis. integrated into the project finance market. Notwithstanding the after-effects of the financial crisis and the The financial crisis demonstrated that the key to a successful project recent downturn in global commodity prices, there remains a financing (or indeed, financing of any nature) is due diligence. A pressing need throughout the world for large-scale investment in full awareness of the risks inherent in a particular project and its across a broad spectrum of industries (in particular, host country (and who bears which of the many costs involved in in emerging markets such as Africa). Large-scale project finance financing a project) is the first step in identifying mitigants to those typically focuses on “greenfield” projects in sectors ranging from risks. A project finance lawyer must be fully conversant with ever- power generation (conventional, nuclear and renewables) to shifting market trends as well as the project company’s business transmission, oil and gas, petrochemicals, infrastructure, because, in order to advise their clients on the risks associated and telecoms. Global economic growth and demand for energy and with a project, they will need to have first considered all aspects commodities are major drivers for capital investment in these sectors of the underlying project. Only once a comprehensive analysis of and, although the financial crisis has dramatically reduced demand the underlying project has been undertaken, from the of its for energy and commodities in the developed world, the economies feedstock and fuel supply right through to any potential political, of fast-growing countries such as India and China have underpinned regulatory, legal and environmental issues, will it be possible to the upward trend in energy and commodity prices. Some of the identify the material risks to that project’s future success. largest projects in the world are currently being developed in Having considered the technical, political and legal risks of the emerging markets: projects involving capital expenditures of $10– project, a lawyer will then use this expertise to help the parties 30 billion are moving forward in countries such as Saudi Arabia, the structure the project and its financing, secure consensus as to how United Arab Emirates (Abu Dhabi) and Mongolia. those risks should be mitigated and, finally, accurately reflect The increase in global competition for resources has led to a the parties’ agreement in the underlying project agreements and corresponding increase in the size and complexity of infrastructure financing documentation. projects. Today’s governments, institutional investors and the private Before we consider further the all-important question of why the sector are unable to shoulder the burden of financing projects of this world needs project finance lawyers, we have set out below some scale alone. This means that large-scale infrastructure projects are key issues that any participant in a project financing should consider. now financed using ever more sophisticated and complex financial instruments which are, in turn, provided by an increasingly diverse pool of public and private finance institutions. In recent years, A Brief History of Project Finance project financiers and sponsors have become adept at mobilising these diverse sources of finance and developing innovative Although project finance techniques are applied throughout the structures combining commercial , capital markets investors, world today in a wide range of industries, project finance can trace Export Credit Agencies (“ECAs”), Multilateral Development its roots back to ancient Greece and Rome where it was used to Finance Institutions (“DFIs”), Islamic banks and loans sourced finance maritime operations and infrastructure development from government-affiliated lending institutions. As a result of this (shipping merchants utilised project financing techniques to dilute seismic shift in the financial landscape, project finance lawyers the risks inherent in maritime trading as loans would be advanced to require a degree of familiarity with a range of financial instruments, a merchant on the basis that the loans would be repaid through the

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sale of shipped cargo; in other words, the financing would be repaid ensuring the economic viability of these projects (allowing them by the internally generated cashflows of the project). Project finance to compete effectively against conventional fossil fuel projects). in the Civil Law jurisdictions of continental Europe (in the form of However, the sovereign debt crisis has had a significant impact on “public-private partnerships”) can find their origins in the Roman government support; for example, the withdrawal or reduction of concession system. Project finance in the Anglo-American world solar power feed-in tariffs by the Spanish and the UK governments. came to prominence in the mid-20th century in the United States, Nonetheless, the overall commitment of the EU and European where it was used to finance mining and rail companies and evolved governments to the reduction of greenhouse gas emissions will into its modern incarnation in the 1980s, when it was principally continue to help facilitate a significant number of projects in the used by commercial banks to finance the construction of natural gas renewables sector. Recent evidence of this can be seen in the UK, projects and power plants in Europe and in North America following with the introduction of the “contracts for difference” mechanism the 1978 Public Utility Regulatory Policy Act. Project finance and guarantee programme by the UK government, in an effort techniques developed in the 1980s were subsequently honed in the to facilitate private investment in large-scale infrastructure projects 1990s in emerging markets such as the Middle East, Latin America such as new build nuclear power plants. and Asia. In the 1980s and 1990s, project financiers and sponsors (the term used to describe the ultimate owner of a project company) were predominantly based in London, New York and Tokyo. What is Project Finance?

In recent years, European banks had dominated the project finance Defining “modern” project finance is an increasingly difficult task; lending market; however, fears regarding the economic stability there is no universally adopted definition. As project financing has of the eurozone and the Russian economy resulted in a dearth evolved, it has imported techniques and market evolutions from of liquidity from traditional sources of project finance such as other banking disciplines. One example of this can be seen in the European banks (an issue that many commentators predict will be increase in the use (particularly in natural resource based projects) further amplified by the application of the Basel III framework, of completion guarantees and other forms of sponsor support, which which means that banks now have to assign a higher percentage of historically has not been a feature of limited or non-recourse lending. their liquidity to back long-tenor commercial debt financing). As a Notwithstanding this difficulty, definitions of project finance will result, many sponsors have had to look elsewhere to find sources of generally focus on the basic premise that: finance, and in recent years we have seen many new entrants to the ■ a newly formed, often thinly capitalised, special purpose project finance market, including commercial banks from Asia, the vehicle (the project company) will own an asset (which Middle East and Latin America, as well as larger roles for ECAs and may at that time amount to little more than a collection of DFIs. Due to the funding pressures facing commercial banks, ECA licences and contracts granting the project company the right direct financing has become an increasingly important feature for to develop and construct the project); and greenfield infrastructure finance in emerging markets. Finance has ■ that project company’s lenders will finance (in part) the also been forthcoming from the Islamic finance market and (for the development and construction of the project on the basis largest projects) the markets. of their evaluation of the projected revenue-generating A number of the institutions that have stepped in to fill the funding capability of the project. gap left by European banks (such as Japanese commercial banks) There are a number of key characteristics that are common to most appear to have access to relatively deep pools of lower-cost dollar project financings, namely: funding and low exposure to European sovereign debt, and are ■ the project is developed through a separate, and usually aggressively seeking to expand their project finance loan portfolios. single-purpose, financial and legal entity; In addition, until recently, regional financial institutions in the ■ the debt of the project company is often completely separate Middle East had significant petrodollar-driven liquidity and had (at least for balance sheet purposes) from the sponsors’ direct proved their ability to fund deals even when the European banks obligations; were finding it challenging to do so. ■ the sponsors seek to maximise the debt-to-equity The involvement of an ECA in a project financing can be invaluable, of the project, and the amount of debt is linked directly to not least due to their provision of either direct loans or credit the cash flow potential, and to a lesser extent the liquidation protection (or both) for the development of projects, but also value, of the project and its assets; because ECAs act as important anchors and facilitators to attract ■ the sponsors’ guarantees (if any) to lenders generally do not commercial banks to club deals or syndications where banks cover all the risks involved in the project; would otherwise be hesitant to participate due to risk allocation or ■ project assets (including contracts with third parties) and credit concerns. Similarly, the involvement of a DFI (such as the revenues are generally pledged as security for the lenders; African Development Bank, the Asian Development Bank or the and International Finance Corporation) can also be critical in providing ■ firm contractual commitments of various third parties a so-called “halo effect” for a project. (such as construction contractors, fuel and other feedstock suppliers, purchasers of the project’s output and government Although project finance is often seen as a tool for investment in authorities) represent significant components of the credit emerging markets and a means of facilitating the construction of support for the project. infrastructure in developing countries, global concerns relating to climate change have led to increased activity in mature project finance markets such as Europe and North America. Government Risk: Assessment and Allocation stimulus programmes, in particular targeted efforts to promote investment in renewable energy and other forms of low-carbon At the outset of any project financing, the project’s lenders will power, have resulted in an increase in project finance activity in require a lawyer to produce a comprehensive legal due diligence jurisdictions such as Europe, where the European Union has set an report identifying the key risks to the future success of the project. ambitious target to have 20% of energy sourced from renewable This is a vital stage of the financing process as an unidentified, and energy by 2020. It should be noted that the attractive incentives therefore unmitigated, risk has the potential to jeopardise the stability on offer from the host European governments have been crucial in of a project. In order to produce such a report, the lawyer will

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need to work closely with a series of specialist advisers (typically will withstand legal challenge) through the project company’s including advisers, technical advisers and environmental contractual arrangements with its sponsors, lenders, suppliers and consultants) and local lawyers in the relevant jurisdiction. purchasers, so that the party best able to bear a risk will do so. Once As the project’s sponsors (who are providing the equity) and the the project’s material project risks have been identified, the key role project’s lenders (who are providing the debt) may have differing of a lawyer is to advise as to the optimal allocation of those risks perspectives as to the likelihood of future adverse events and and, as far as possible, mitigate them through the documentation which party should bear the risk of those events occurring, during process. In a perfect world, a lawyer would hope to see: the financing process the due diligence of a project is of great ■ the project’s construction risk allocated to a contractor with an importance because a project’s risk profile will directly influence the acceptable credit standing though a “turn-key” EPC contract; structuring of its overall debt and equity arrangements. An example ■ the project’s supply risk allocated through “firm” supply of how this works in practice can be seen in Middle Eastern power contracts that guarantee a steady supply of feedstock, fuel or projects. Middle Eastern host governments deliberately structure other necessary resources; and their tendering processes for the right to build the power plant so as ■ the project’s off-take risk allocated through a “firm” long- to ensure that they will have to pay the lowest possible electricity term sales contract with an off-taker with an acceptable credit tariff. Typically, this is achieved by the host government’s utility standing that contains firm pricing and minimum purchasing company guaranteeing to purchase both the project’s power obligations (commonly known as “take or pay” commitments). capacity and its actual generation. This arrangement significantly Naturally, the actual outcome will be driven by a host of commercial, decreases the project’s risk profile as the lenders can take comfort legal and other factors affecting the relevant project. from the utility’s strength as the off-taker and can accurately predict the revenues that the project company will receive once the project has been constructed and is generating power. A lower risk profile Security allows lenders to offer longer tenors and lower margins. This Project financings are in essence complex secured lending decreases the sponsors’ cost of funding, which enables the project transactions. The willingness of lenders to extend long-term credit company to offer a more competitive electricity tariff whilst still to a project may depend on the degree of comfort they take in preserving the sponsors’ equity returns. the viability of the underlying security package. The structuring By way of contrast, in industry sectors such as mining and of security packages across jurisdictions and diverse assets can petrochemicals, a project company’s off-take arrangements will present numerous and unique challenges. The strength of the typically be calculated by volume and the (variable) market price security package on offer will also impact the “bankability” of a for its output (the project takes market risk). Because market risk project. The security package is key as lenders’ only collateral is means that the project’s revenues are less predictable, lenders will the project’s assets. Typically, lenders will seek to take security over typically require sponsors to invest a greater proportion of equity all of a project company’s assets. However, in a project located into the project. In a project where market risk is an issue, a market in an emerging market with an undeveloped collateral framework, analyst’s report, which will predict future off-take and feedstock the practical reality of creating and/or enforcing security is that it supply prices, will be of paramount importance to lenders and may be expensive, time-consuming and uncertain in outcome. In sponsors alike. practice therefore, enforcement of security over a project company’s In order to be able to raise finance for a project, the sponsors assets is generally seen by lenders as a last resort. For many will need to demonstrate to potential lenders that the contractual lenders, the main driver in taking security over a project company’s arrangements are “bankable”. The less comfortable the lenders are assets is, should the project company face financial difficulties, to with provisions involving the contractor’s ability to claim extensions maximise the strength of their bargaining position against (i) the of time or additional costs, the greater the amount of equity support project company’s other creditors, (ii) the host government, and (iii) the sponsors will have to provide. When asked to advise as to the the project company’s sponsors. Should a project face financial “bankability” of a project, a project finance lawyer will need to pay difficulties, the lenders’ ability to enforce their security (with, subject particular attention to the supply and off-take arrangements and the to local law requirements, no obligation to share the benefits of the risk allocation arrangements in a project’s construction contract. A enforcement proceeds with anyone else) puts them in the strongest large-scale infrastructure project will typically have a construction possible position in the context of any restructuring negotiations. contract with an established (and creditworthy) engineering and As noted throughout this guide: supply contractor under a market-tested “bankable” contractual ■ regimes for creation or perfection of security vary greatly form known as an Engineering, Procurement and Construction (or between different jurisdictions. Whether a “EPC”) contract, which will typically include provisions for testing has been validly created and whether it has priority over and the payment of liquidated damages in the event that the project competing security interests is a question of local law; is not constructed by a certain date. Failure to comply with any ■ the strength of a lender’s security package will be influenced requirements of an EPC contract will usually result in a contractor by the relevant jurisdiction’s applicable insolvency law; and incurring monetary liabilities. ■ restrictions on foreign ownership of assets will impact the The “bankability” of a project will of course differ depending on efficacy of a lender’s security package. that project’s industry sector or jurisdiction. By way of example, the Project financiers will want to establish at the outset of a project technology risk and regulatory risk associated with a satellite project whether the law of the jurisdiction where the project is located will be greater than the technology risk and regulatory risk of a will recognise their rights as secured creditors and, if the project power project. Similarly, the key bankability concerns for investors company becomes insolvent, whether their claims will be dealt with in a mining project situated in a developing country are likely to be equitably. Any relevant issues would typically be described in a influenced by factors such as political, environmental and social risk, legal due diligence report in which, amongst other things, a lawyer, which are not likely to be key concerns in a satellite project. working closely with local counsel, will (at a minimum) need to Broadly speaking, in a successful project financing, the material establish (i) whether the relevant jurisdiction has a registration project risks will have been allocated (under contracts that system for the filing of security interests, and (ii) whether the

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relevant jurisdiction’s courts, liquidator or equivalent officer will and regulations. The host government may also opt to enter into respect the security interests granted by a project company. direct contractual undertakings with the project company and/or its It should also be noted that in many jurisdictions (particularly those sponsors. These vary from legally binding undertakings, the breach with little or no track record of complex financings) the cost of filing of which will entitle the claimant to sue for damages or other pre- or registering security can be significant (sometimes a percentage agreed levels of compensation (such as termination payments which of the total amount being borrowed) and sponsors may therefore cover the project company’s outstanding indebtedness), to “comfort argue that the creation of security is unduly burdensome and that letters” which offer little, if any, certainty of remedy. the practical value of the security to the lenders does not the related expense. Lenders will often seek to mitigate this by Government Approvals (if permitted by local law) requiring that certain of the project company’s assets, such as its bank accounts, are held offshore in a In addition to the above-described regulatory restrictions, a host jurisdiction with a favourable security regime (such as England and government will usually require any large-scale infrastructure Wales or New York). project to obtain a broad range of permits and consents in relation to matters such as site use, environmental impact, health and Foreign Investment and Ownership safety and industrial regulation. In order to determine the permits and consents that will be required by a project company, a project Restrictions finance lawyer will need to work closely with local lawyers and specialists in the relevant jurisdiction. These specialists will also Where large sums of money are at stake, sponsors and project advise as to the existence of any restrictions on the provision of financiers should assume that host governments will be insistent on insurance by foreign insurers, the hiring of foreign workers and the ensuring that they receive what they view as their rightful share of importation of equipment into the country. At a minimum, any legal the profits of a successful (i.e. revenue-generating) infrastructure due diligence report should identify: project. As host governments will often require project companies to be incorporated under local law, it will need to be established at ■ what permits and consents the project company will require the outset of a project how the law of that jurisdiction may affect in order to carry out its business; the governance of the project company. The sponsors will look ■ whether enforcement of any security interests over a project’s to satisfy themselves that the project company has the ability to assets could lead to a permit being revoked; and distribute surplus funds to its shareholders. Foreign sponsors (who ■ whether, following the enforcement of a security interest, the are shareholders alongside domestic sponsors) will wish to satisfy entity to whom the lenders sell the project would be entitled themselves that whatever rights they have over the project company to the benefit of that project’s permits and consents. will be both respected and enforceable. Lenders will also take an Risk relating to regulatory restrictions and approvals may be interest in how the legal regime of the relevant jurisdiction treats mitigated by obtaining legal opinions confirming compliance with foreign sponsors, because, should they need to enforce their security applicable laws and ensuring that any necessary approvals are and sell the project company assets, they may eventually need to a condition precedent to the drawdown of funds under the loan replace the original sponsors. agreement.

Regulatory Restrictions Environmental & Social Issues

Typically a host government will impose certain regulatory Large-scale infrastructure projects will inevitably have an restrictions on how its public utilities, natural resources and environmental and social impact and sponsors seeking access infrastructure are owned and operated. It will therefore need to to the financial markets will usually need to demonstrate ahigh be established at the outset of the project what impact, if any, that level of environmental and social compliance. Most industrial country’s regulatory regime will have on the project’s construction facilities emit at least some waste and pollutants into the air, water and operation. and soil and require permits and other authorisations to operate. For most projects, the legal analysis of the regulatory environment Environmental concerns have become more prominent as a result of increased public awareness, more stringent environmental, will involve two basic areas of investigation: (i) a determination of the health and safety laws and permitting requirements, and heightened rights granted to, and the obligations imposed on, the project company; liability for the identification and clean-up of hazardous materials and (ii) an assessment of the risks associated with a change in a and wastes. Traditionally, lenders have required, at a minimum, country’s regulatory regime. In order to minimise the risk involved in that the project company undertakes to comply with all applicable infrastructure development, a host country will demand that a project environmental and social laws and regulations; however, in recent be completed to the government’s specifications as quickly as possible, years, lenders (especially ECAs and DFIs) have typically required and will seek adequate safeguards and assurances that the project will the project company to adhere to a set of guidelines known as the be operated properly and in line with the public’s interests. “Equator Principles”, which are a financial industry benchmark for The second of these two areas of investigation is particularly determining, assessing and managing social and environmental important because, although initial certainty as to the scope of a risk in project financing. The “Equator Principles” incorporate jurisdiction’s regulatory regime may be achievable, there will the IFC and World Bank environmental performance standards always remain the risk that the regulatory regime will change. and guidelines. Thus, the “Equator Principles” extended these In circumstances where there is significant uncertainty as to the international project-based environmental and social standards into stability of a jurisdiction’s regulatory regime, in order to encourage the realm of private financings. Amongst other things, adherence to foreign investment in their infrastructure, host governments may be the Equator Principles requires the project company to develop and willing to enshrine specific contractual commitments into national comply with an agreed environmental and social management plan law, thereby allowing greater certainty that those commitments focusing on areas such as: will have precedence over competing, and often inconsistent, laws ■ labour and working conditions;

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■ pollution prevention and abatement; ■ Will judgments or arbitral awards be enforced in the home ■ community health, safety and security; jurisdictions of the parties to the dispute? ■ biodiversity, conservation and sustainable natural resource As a result of the increasing popularity of arbitration as a means of management; and settling disputes, the parties will also need to consider at the outset ■ protection of indigenous peoples and cultural heritage. whether any dispute should be the subject of judicial or arbitration proceedings. The advantages in opting for judicial proceedings will While such requirements are principally for the protection of the depend on the country in question; however, key considerations will project’s host country, they are also very important for lenders, be: as high-profile international lending institutions do not want to be associated with projects that have an adverse environmental or ■ Do the country’s courts have a tradition of reported case law or judicial precedent (in order that a party might be able to social impact (and the reputational damage potentially caused by predict the likely outcome of a dispute)? any resulting negative publicity). ■ Are there established procedural laws? ■ How independent is that country’s judiciary from the Governing Law Issues legislature and executive? In recent years, the election of arbitration as a means of settling Sponsors and lenders to large-scale cross-border infrastructure disputes has become increasingly common due to the relative speed projects will typically seek to have the finance documentation and privacy that an arbitral process affords. Another significant governed by either English or New York law. Although the law advantage of arbitration, given the often complex nature of disputes of each of these jurisdictions in relation to the enforceability of that arise from project financings, is the ability to designate an customary finance documents is broadly similar, lenders may still arbitrator better equipped to address complex technical issues have strong preferences based on familiarity with customary forms than a judge with more general skills. It is also the case that, in and terminology. However, sponsors and lenders will not usually some instances, an arbitral award may be more likely than a court have the ability to choose the governing law of the project’s other judgment to be enforced in the home jurisdiction of the party against agreements as conflict of law principles, such as the doctrine of lex whom it is made, as international treaty arrangements, such as the situs (the rule that the law applicable to proprietary aspects of an New York Convention, call for Member States to give effect to asset is the law of the jurisdiction where the asset is situated) may arbitral awards made in other Member States. dictate which law is to be applied for specific purposes (notably the creation of security interests). Although there is no equivalent legal Judicial proceedings, in some circumstances, may still be preferable doctrine that stipulates that project agreements should be governed to arbitration, particularly if that jurisdiction’s courts have the by the law of the jurisdiction in which the project is located, it is ability to compel parties to refrain from certain actions, disclose often a requirement of the host government that its own domestic documents and order interim relief (which can be very useful when law be specified as the governing law of certain agreements. This is one party is seeking to prevent another party from moving assets particularly true of any agreements to be signed by the government out of a jurisdiction). Further, there is a perceived tendency of or a governmental entity. arbitrators to arrive at compromise positions – so-called “rough justice”. For these reasons, lenders will typically insist that the Since the manner in which a project’s agreements will be interpreted finance documents include an arbitration clause which applies only or enforced will differ, sometimes significantly, according to for their benefit, thus preserving the possibility of recourse to the the governing law of the contract, the following will need to be relevant jurisdiction’s courts. In addition, as arbitration is a product established at the outset: of contract, only parties that have specifically consented to the ■ the effectiveness of the choice of the law clause to govern the arbitration of a dispute can be compelled to proceed in that forum. various project agreements; and ■ the extent to which agreements governed by local law are legal, valid, binding and enforceable (i.e. whether there are Sovereign Immunity mandatory provisions of local law that will override the terms of the contract). Another potential issue that a project finance lawyer must consider It is, of course, of fundamental importance that the parties are aware is the possibility that host governments or state-owned stakeholders at the outset of the project if a country’s domestic law prohibits in the project (and their assets) may well be immune from fundamental aspects of the transaction (for example, a project proceedings before the courts of the host state, with the result that company’s obligation to pay interest on a loan is unenforceable a successful judicial or arbitration proceeding may prove to be a in some jurisdictions by virtue of general principles of Islamic wholly unsatisfactory means of recourse. Sovereign immunity is Shari’ah law). widely acknowledged to be a matter of international law. However, there may be exceptions to its application, which means that, if required, sovereign immunity can usually be mitigated at the outset Disputes of a project, either because as a matter of local law a state entity acting in a commercial capacity may not benefit from immunity in A project finance lawyer will also be concerned with establishing all (or any) circumstances, or because it is usually possible for a the impact of the choice of the forum for the determination of state entity to waive its right to immunity. disputes arising from the transaction (including the extent to which judgments or arbitral awards that emanate from that forum will be enforced in other relevant jurisdictions). Of particular interest to Change of Law/Political Risk lenders and sponsors will be the following issues: As project finance loans are generally repaid over a relatively long ■ Is the forum likely to be neutral in its decision-making? timeframe, the host country’s laws are liable to change during the ■ Will the chosen forum apply the law specified by the parties tenor of the project’s debt. Political risk arises from actions by host in the contract? governments that have a negative impact on the financial performance ■ Which evidential or procedural rules will apply in the forum? or commercial viability of a project. In an unstable country where

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regime change is frequent and competing policy objectives vary determine if relief from the effects of withholding requirements can widely, it follows that the risk of a change in law adversely impacting be found under an applicable double taxation treaty or the domestic a project will be greater. At the more extreme end of the scale, actions tax laws of the jurisdiction in which the investors or lenders are by a host government such as expropriation of the project or the situated. imposition of restrictions on the repatriation of a project’s foreign Whenever goods or individuals cross a border, they become subject currency earnings, can have an extremely negative impact on the to the laws of both the country they are leaving and the country commercial viability of a project. Economic cycles will shift the they are entering. It will be necessary to ensure that the project relative negotiating balances between investors and host governments company has the ability to import into the host country the goods, and, as a country’s economy develops, its host government may seek equipment and raw materials required for the project, as well as to re-negotiate contracts in order to exact more favourable terms. the ability to employ expatriate managers, engineers and labour. As practitioners of energy law in Europe will attest, this is not just an Typically, customs restrictions will take the form of simple import issue in emerging markets. In 2011, in response to the Fukushima duties; however, certain jurisdictions impose absolute prohibitions nuclear disaster, host governments in Germany and Italy took on the import of certain goods. The immigration laws of many significant decisions with regard to their nuclear programmes that countries will permit the employment of qualified expatriates on a will have long-term impacts on the price of energy and the direction limited basis, but prohibit the employment of expatriates without of energy infrastructure investment in Europe. The premature particular skills or qualifications. Some host countries may shutdown of nuclear power plants in countries such as Germany permit a large influx of foreign workers during the early stages of makes the long-term revenue streams of nuclear power projects less a project (particularly during the construction phase), after which certain for sponsors, especially in countries where policy decisions indigenisation laws may require that an increasing number of local are greatly influenced by public opinion. citizens be trained and employed by the project company. Notwithstanding this uncertainty, at the outset of a project, sponsors and lenders will still seek to satisfy themselves that they Why Does the World Need Project Finance are comfortable with the political, judicial, economic and social stability of the country in which a project is situated. In cases Lawyers? where there are concerns as to the stability of the host state, such As well as the ability to negotiate a deal that works for all parties concerns may be capable of being addressed through the use of throughout the life of the project, project finance lawyers need political risk insurance (for many commercial lenders, political risk to be able to assess the bigger picture, understand which points insurance is often a prerequisite to their internal credit approvals) really matter in the overall commercial context, and, as the quote or the involvement of multilateral and other public sector lending at the beginning of this article alludes to, try to ensure that what is institutions (such as ECAs and DFIs) whose participation may act already a complex and challenging undertaking does not become as a deterrent to adverse interference by the host government. Other unnecessarily complicated. potential mitigants to political risk include: Given the long-term nature of a project financing, the documentation ■ requiring the host government to “freeze” the laws that apply to the project company (through, for example, the execution must be sufficiently robust to withstand long-term volatility. It is of investment agreements); also important that the parties realise from the outset that, even after the relevant financing and project documentation has been executed, ■ requiring the project’s off-takers to compensate the project company through tariff adjustments to cover increased costs they must make an effort to sustain the relationships that underpin arising from changes in law or regulation; and/or the project. This is because, no matter how extensive or well- ■ reliance on bilateral investment treaties which afford nationals drafted the legal documentation, virtually every project encounters of a contracting state treaty protection from specified actions technical or commercial problems over its life, and will face some by the government of another contracting state. kind of economic, political or legal change. Despite the mountain of documents governing the project participants’ relationships, issues that had not been contemplated at the time of signing (and which Tax and Customs are therefore not addressed in the documentation) can, and often do, arise. A key role for the project finance lawyer is to attempt to Virtually all projects are subject to some form of taxation, and the minimise the frequency with which any project encounters problems tax regime will generally have a significant impact on the project’s by undertaking a careful initial assessment of the project risks and economics. Typically, a project company will be required to pay encouraging a consensual approach between the parties to resolving corporate tax which will be determined on the basis of the profits risk allocation issues which arise. that it generates. In some jurisdictions it may also be obliged to Given the complexity of the process and the large sums of money pay royalties to the host government calculated on the gross value at stake, project financing is a document-intensive process and of its sales. Stamp taxes, registration taxes and notarial fees may project finance lawyers play a crucial role in managing that process. be significant and may also impact on a project’s economics. In In many ways the legal skills required to close a project finance addition to establishing the level of such fees and taxes at the outset, transaction are often as much to do with process management as a project’s sponsors and lenders will want to know whether the legal analysis and drafting. As it is not unusual for a project’s laws of the host country will require the project company to make sponsors’ lenders and advisers to be based in different jurisdictions withholdings on account of tax on interest and dividend payments it across differing time-zones, keeping on top of the complex set of makes to overseas lenders and shareholders. documents required for the closing of a project financing can be If interest payments made by a project company to its lenders attract a significant undertaking and it is important that the lawyers work withholding tax, then those lenders will require the project company together to ensure that signing arrangements do not become overly to “gross up” interest payments so that they receive the same complex or contingent. amount of interest that they would have received in the absence of Today’s project finance market sees sponsors and lenders from the withholding tax. The role of a lawyer in this scenario will be to increasingly diverse backgrounds working together on larger

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and more complex projects in ever more remote and challenging management of risk in order to enable them to continue to push jurisdictions. In this exciting and evolving market place, project the frontiers of project financing and ensure the development and finance lawyers have the unique and crucial role of being able to construction of much-needed large-scale infrastructure projects advise their clients, whether sponsors or lenders, on the effective around the world.

John Dewar Oliver Irwin Milbank, Tweed, Hadley & McCloy LLP Milbank, Tweed, Hadley & McCloy LLP 10 Gresham Street 10 Gresham Street London London EC2V 7JD EC2V 7JD United Kingdom United Kingdom

Tel: +44 20 7615 3004 Tel: +44 20 7615 3006 Fax: +44 20 7615 3100 Fax: +44 20 7615 3100 Email: [email protected] Email: [email protected] URL: www.milbank.com URL: www.milbank.com

John Dewar is a partner in the Global Project, Energy and Infrastructure Oliver Irwin is a senior associate in the Global Project, Energy and Finance Group and is based in Milbank, Tweed, Hadley & McCloy Infrastructure Finance Group and is based in Milbank, Tweed, Hadley LLP’s London office. John’s practice centres on project and structured & McCloy LLP’s London office. Oliver acts for both lenders and finance transactions in Europe, Africa, the Middle East and Asia. He sponsors in the development and financing of cross-border projects, has acted for commercial banks, export credit agencies, Islamic banks specialising in multi-sourced financings involving export credit and sponsors in a wide range of industries, including power, oil and gas, agencies, multi-laterals and development finance institutions. petrochemicals, satellites, telecommunications, water, infrastructure Oliver has a wide range of experience in a variety of industry sectors, (including PPPs) and mining. He has advised on a number of projects including telecommunications, satellites, oil and gas, power and water which have issued both conventional and Islamic project bonds. John and renewables, and has worked on a number of major transactions in also leads the firm’s Islamic Finance Business Unit. the Middle East, Africa, Europe, Latin America and Asia. John has been recognised as a leading project finance lawyer by a Oliver is featured and listed as a “Rising Star” in Euromoney’s LMG number of journals, among them: the International Who’s Who of Project Rising Stars 2016 guide and was awarded the “Rising Star” award for Finance Lawyers, The Legal 500, PLC, Chambers UK, Chambers Global Project Finance at the 2014 IFLR European Awards. (which designated him among the 1st tier of projects lawyers in London and as 1st tier in the Middle East projects market), Chambers Asia Pacific Oliver has been recognised by IFLR 1000 as a “Rising Star” in their (which designated him as 1st tier in the Indian projects market) and Project Finance rankings each year since 2013, and named as an Euromoney’s Experts Guide (which ranks him among the top 30 lawyers “Associate to Watch” among leading project finance practitioners in in the world in its Best of the Best guide for Project Finance). Chambers & Partners each year since 2012, where clients report that “he is calm under pressure, delivers high quality work quickly and John has also been recognised as a leading Islamic finance lawyer efficiently, grasps commercial points where often lawyers would not do by a number of journals, including Chambers UK, Chambers Global, so, and helps to translate them quickly into legal drafting”. Who’s Who Legal and Euromoney’s Experts Guide (which ranks him among the top 30 lawyers in the world in its Best of the Best guide for Oliver has co-authored a chapter on “Project Risks” and a chapter Islamic Finance). on “Insurance” in International Project Finance – Law and Practice published by Oxford University Press. He is the Editor of International Project Finance Law and Practice, Second Edition, which was recently published by Oxford University Oliver is a regular speaker at the School of ECA Finance, run by TXF Press, and is the Contributing Editor to The International Comparative and CC Solutions. Legal Guide to: Project Finance 2017.

Milbank, Tweed, Hadley & McCloy LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, individuals and governments, achieve their strategic objectives. Project Finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than100 dedicated Project, Energy and Infrastructure Finance attorneys, including 20 partners, in our offices worldwide. We operate on an integrated basis with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong andTokyo. From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia to the largest wind and solar farms in the world, clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. Over the past three years, Milbank has closed more than 140 project financings, which raised more than US$125 billion for infrastructure projects worldwide.

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Public-Private Partnership, Project

Finance and Concession Contracts Sergio Massimiliano Sambri in the Italian Legal System

International Project Finance Association (IPFA) Matteo Trabacchin

When implementing projects in Italy involving public 163/2006, together with the regulation implementing it under administrations and funded by means of a project finance scheme, it Presidential Decree No. 207/2010). The New Code applies only is necessary to take into account the applicable Italian and EU law to the procedures and contracts for which the call for tenders is on public-private partnerships (PPPs). published after the date of its entry into force. The aim of this article is to provide an overview of the PPP sector With specific reference to the concession contracts, the New Code in the Italian legal system, focusing on recent developments in takes as its basis Directive 2014/23/EU, which is a novelty in EU domestic legislation (which includes the implementation of EU legislation since this, replacing Directive 2004/18/EU, provides legislation), the crucial connected issue of operating risk, the comprehensive regulation on the award of both “public works award procedure, as well as the applicable instruments for funding concessions” and “public services concessions”. In the previous projects. For the purposes of this chapter, by “project finance” we Union regime, the regulations of the latter were subject to the general refer to a non-recourse or limited recourse financing in which debt, principles of the Treaty on the Functioning of the European Union equity and credit enhancement are combined for the construction (TFEU). The relevant consequence has been legal uncertainty due and operation of a specific facility.1 to the divergent interpretations of the aforementioned principles by The new Italian public procurement code, Legislative Decree No. the Member States, as confirmed by the broad case law of the EU Court of Justice in this respect. 50/2016 (New Code), under Art. 3, Par. 1 (eee) provides for a definition of the “public-private partnership contract”2 and, at the In particular, the purpose of this Directive is to provide for an same time, under art. 180, for an illustrative and non-exhaustive organic application of the TFEU’s principles, avoiding the risk of list of the agreements covered by this definition, including the discrepancies in the interpretation of such principles in the various concession of works, the concession of services, the financing lease Member States and the consequent distortions in the internal market, of public facilities, availability contracts, the award of concession favouring the efficiency of public spending, as well equal access for of works through finanza di progetto, joint enterprises, and even – small and medium-sized enterprises in the award of concessions at under certain conditions – the procurement of a general contractor. local and Union level, thus not jeopardising the equal treatment of the contracting entities (operating in the private or public sector). By way of contrast, at Community level PPP is not defined, and there is no unanimously accepted definition even if, according to The fundamental characteristic of the new Directive is the application the Green Paper, the term refers to “forms of cooperation between to both “works concessions” and “service concessions” of the principle public authorities and the world of business which aim to ensure of the transfer to the concessionaire of the operating risk in exploiting the funding, construction, renovation, management or maintenance the relevant works or services, in this way developing a principle of an infrastructure or the provision of a service”. The relevant already expressed by Eurostat in its decision dated 11 February 2004, as further implemented,4 according to which an asset pertaining to a key features are the long duration of the relationship, the funding PPP project should be classified for the public entity as “off balance structure in part from the private sector, the prominent role of the sheet” if both of the following requirements are met: (i) the construction private partner and the distribution of risks between the parties.3 risk is transferred to the private partner; and (ii) at least one of the Broadly speaking, two major models are applied in the Member availability or demand risk is transferred to the private partner. States in order to implement a PPP project: (i) a contractual PPP, based only on contractual links between the public and private Therefore the New Code, in implementing the above Directive, sets sector; or (ii) an institutional PPP, based on the cooperation of the out the definitions of concessions (works and services) partially public and private sectors by means of a distinct entity. in a different manner to those provided in the previous public procurement code, stressing the concept of the requirement of the transfer of the operating risk to the concessionaire,5 which is met The New Italian Public Procurement Code when: (i) it is not guaranteed to the concessionaire, under normal operating conditions, to recoup the investments made or the costs In order to implement Directives 2014/23/EU, 2014/24/EU and incurred in performing the works or the services which are the 2014/25/EU, pursuant to Law No. 11/2016, the Italian Government subject of the concession; and (ii) the part of the risk allocated to adopted the New Code on the award of concession contracts, on the concessionaire entails a real exposure to the fluctuations of public procurement and procurement by entities operating in the the market, such that any potential estimated loss suffered by the water, energy, transport and postal services, as well reorganising concessionaire is not merely nominal or negligible. the current rules on public contract works, services and supplies. To supplement the requirements of European law, the New Code The New Code entered into force on 19 April 2016, replacing the also sets out the concepts of construction risk, demand risk and previous public procurement code (i.e. Legislative Decree No. availability risk, whose proper allocation among the parties in a PPP

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transaction is crucial for the purposes of accounting of works not The first type of tender is provided for under Art. 183, Par. 1–14: included in the public budget of the contracting authority, as already the public authority publishes the call for tender on the basis of the mentioned above, in accordance with Eurostat’s decision. feasibility project already prepared by the said public authority. Under Art. 180 of the New Code, fundamental principles in Bids shall include a final design, a draft of a concession contract, relation to risk allocation and economic-financial equilibrium of the and a business plan (piano economico finanziario) certified by a project, which are an expression of the aforementioned Directive, credit institution, and shall specify the characteristics of the service are provided. In brief, it sets forth that the transfer of risk to the and of the management and report the prior involvement of one or economic operator entails a real and substantial allocation to the more financial institutions in the project. latter, in addition to the construction risk, the availability risk or the After tenders have been examined, the public authority shall draft a demand risk of the services supplied, while it manages the works. ranking, appoint as a sponsor (promotore) the entity which submitted Typically, such risks shall derive from factors which are outside the the best bid and start the approval process for the final design. control of the operator since, for instance, a contractual default or During this stage, the sponsor shall carry out the amendments to mismanagement, and even force majeure, are elements inherent in the design necessary to obtain the approval without entailing extra 6 every contract, and not characteristic of a PPP/concession agreement. burdens. If the sponsor does not agree to change the final design, the Indeed, first of all, the above provision lays down that the operating public authority may subsequently request that the next competitors income of the economic operator may derive not only from the accept the amendments to the final design under the same conditions public contribution paid by the contracting authority (e.g. public proposed to the sponsor. grants, fees or any other financial advantage), but also from any The second type of tender is provided for under Par. 15-20 of the other kind of consideration such as, for example, the direct income said Art. 183 of the New Code, and concerns concessions for works of the management of the service for external users. Such fee shall not originally included in the public authority’s planning. be proportionally reduced or equal to zero when the availability of Economic operators may submit proposals to the public authority the work (i.e. the facility) and of the provision of related services is concerning public works (not already covered by the plans) reduced or equal to zero. including, inter alia, a feasibility project, a draft concession contract Since a PPP contract typically involves a complex and long-term and a certified business plan. relationship, the New Code also sets out the regulation of the “economic Within the next three months, the public authority shall assess the and financial equilibrium” (equilibrio economico finanziario), which feasibility of the proposal and may invite the bidder to carry out is defined as the combination of cost-effectiveness (i.e. the project’s the amendments necessary for its approval. The feasibility project, ability to create value over the duration of the contract and to which might be changed, is included in the planning and approved. generate an appropriate level of profitability for the capital invested) Once approved, the project will be at the basis of the tender for the and financial sustainability conditions (i.e. the project’s ability to award of the concession to which the bidder is invited and the latter generate a cash flow sufficient to ensure the repayment of the loan).7 may exercise the right of first refusal. This equilibrium is the assumption made for a correct risk allocation between the economic operator and the contracting authority; it Within this framework, three possibilities may arise: (i) tenders shall be fixed between the parties from the outset of the project (in which are more economically advantageous than the sponsor’s one particular, in the tender documents) and shall last for its entire lifespan. are submitted and the sponsor does not exercise the right of first The New Code further and specifically focuses on the performance refusal (in such a case, the concession will be awarded to the best of the contract following the signing of the concession documents, bidder, who will refund the sponsor the amount of the costs for the i.e. the contracting authority supervises the work of the economic drafting of the bid); (ii) no tenders more economically advantageous operator through monitoring systems verifying, in particular, whether are submitted (the concession is therefore awarded to the sponsor); the economic operator is really responsible for the risks transferred. or (iii) tenders more economically advantageous than the sponsor’s one are submitted – in that event the sponsor may, within 15 It is exclusively for the purpose of reaching the aforementioned days, exercise the right of first refusal, undertaking to match the equilibrium that a public grant, by means of a government contribution contractual obligations under the same conditions offered by the or the transfer of a real estate property, may be provided by the successful tenderer. contracting authority in addition to the right to exploit, for instance, the management of the services. In any case, the right of the economic operator to receive the payment of a price, added to the value of any Financing a PPP in Italy government guarantees or of other financing mechanisms borne by the government, shall not be higher than 30% of the total investment cost, From a financing perspective, it should be pointed out how the including any financial cost. In this regard, the draft of the corrective New Code envisages and implements the provisions already in decree (decreto correttivo) of the New Code (under discussion as force under the former public procurement code aimed at ensuring of February 2017) provides, inter alia, for an amendment to this funding for the works/services under concessions and, in general, threshold, which is increased to 49% (applicable to concessions and, in under PPP projects. For this purpose the New Code includes that, general, to PPPs). The goal of this amendment is clearly to encourage for setting out appropriate “bankability” conditions of the projects, the awarding of concessions with an increased economic attractiveness the signing of the concession contract (or PPP contract) shall take for the operators, while ensuring that the New Code conforms with place after the submission of appropriate documentation regarding PPP market practice in force in Italy until its adoption. the financing of the works. In addition, in order for the transaction to successfully develop and, therefore, in order to avoid a project being started without financial support, the concession contract shall The Award Procedure be automatically terminated if the loan agreement is not finalised within 12 months from the date of the signing of the contract itself.8 In relation to the procedure to award a concession under the so- called finanza di progetto scheme, which is one of the agreements Additionally, in order to ease the project’s access to the project to the provided in the list covered by the Italian definition of PPP, the New credit market (starting from the launch of the tendering process), the Code provides for two different types of tender under Art. 183. tender documents, including the draft contract and the business plan

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(piano economico finanziario) attached thereto, shall be defined in insurance companies, Cassa Depositi e Prestiti S.p.A., SACE such a way as to ensure an appropriate level of bankability, meaning S.p.A. and the European Investment Bank); the commercial availability of the needed sources in the financial ■ the security package could also be established in favour of the markets, sustainability of these sources and adequate return on the bondholders’ agent, which will be entitled to act and enforce invested capital. In certain tender procedures, in the call for tender the security package on behalf of the bondholders; (bando), it may be also provided that the contracting authority may ■ similarly to the security package assisting a project financing propose a consultation of the economic operators before the deadline loan, any security issued in relation to a project bond, including for submission of their bids, in order to verify the absence of critical the relevant replacements, postponements, cancellations and issues in the project in terms of financeability, and consequently transfers (even if consequential to the transfer of the relevant such call for tender may provide for amendments to the tender bond), is subject to a registration tax for a fixed amount equal documents, including a change to the deadline for submission of to EUR 200 each; and the offers. Of course, the amount of public funding available for the ■ project bonds can benefit from the same tax regime provided project cannot be subject to consultation. for bonds issued by the Italian Treasury. It is noteworthy that, since the aforementioned provision of the New Code makes express reference only to a “loan agreement” (as the Security Package funding agreement to be finalised within 12 months from the signing of the concession contract), the draft of the corrective decree (decreto The structuring of a security package assisting a project finance loan correttivo) of the New Code (under discussion as of February (or a project bond) in Italy is one of the central issues, exactly like in 2017) provides, inter alia, for an amendment to Art. 165, Par. 3, most asset-based transactions. in order to include the possibility that also financing alternatives Generally, the securities created under Italian law over the assets can be finalised within the same term, in particular with respect (tangible or intangible) of the project company are the following: to funding granted by the institutional intermediaries (investitori istituzionali qualificati) referred to in Art. 107 of Legislative Decree ■ pledge on shares/quotas of the project company; No. 385/1993 (e.g. project bonds). The proposed correction also ■ pledge on bank accounts; provides that in the event of partial funding of the project, and in ■ mortgage, if there is any real property interest; any case for a portion of the project technically and economically ■ assignment of company receivables by way of security; feasible and self-standing, the concession contract remains effective ■ general lien (privilegio generale); only for the part that regulates the construction and operation of the same functional portion. Clearly, by means of this correction, the ■ special lien (privilegio generale); and legislator wishes to promote the credit enhancement of a PPP project ■ security over the insurance policies (appendice di vincolo). by extending the instruments available for the financing. Unlike in the UK and US legal systems, an all-asset security (like a In particular, the possibility to use a project financing scheme in blanket lien) and floating charges are not recognised under Italian law. order to fund a PPP/concession is expressly provided under Art. 182 Specifically, separate instruments are required over different types of of the New Code. The concession contract shall set forth the risks assets, and often each one is subject to particular statutory provisions transferred, the monitoring mechanisms and the consequences that in relation to its creation, perfection and registration. Save for limited may arise from the early termination of the contract. Should events exceptions, security under Italian law generally covers only existing for which the economic operator is not responsible arise, and affecting and well-identified assets. Broadly speaking, (i) a security over real the equilibrium of the business plan (piano economico finanziario), a property interests and registered moveable assets is usually granted revision thereof is required. The revision, aimed at re-establishing the by way of a mortgage, (ii) a security over moveable assets (e.g. “economic and financial equilibrium” of the project, shall: (i) maintain personal property, shares, bank accounts and receivables) is usually the economic operator as the entity responsible for the risks already taken by way of a pledge, and (iii) a security over receivables can transferred to it in the original contract; and (ii) set forth the same also be created by an assignment by way of security. A security over conditions of economic financial equilibrium relating to the contract. future assets is not generally recognised and often is re-classified as In order to determine the nature of the events which may trigger a an undertaking to assign the asset by way of security. revision of the contract, it is possible to refer to the notion provided Under Italian law, only two instruments may be drawn to a so- by Directive 2014/23/EU (point 76) in relation to external and called “floating charge”, as such instruments cover certain assets unforeseeable circumstances that “could not have been predicted owned from time to time by the project company: the special lien despite reasonably diligent preparation of the initial award by (privilegio speciale) under Legislative Decree No. 385/1993; and the contracting authority, taking into account its available means, the general lien (privilegio sui crediti) under Art. 186 of the New the nature and characteristics of the specific project, [and] good Code. However, both are available only in specific circumstances. practices in the field in question”. The special lien is possible only if (i) the grantor is also the borrower, Additionally, in order to incentivise long-term investors to direct (ii) the lenders are banks or financial institutions authorised under their resources towards long-term infrastructure projects (e.g. Italian law (or the bondholders are qualified investors), and (iii) financial institutions, pension funds, etc.) – developing the path the financing has a duration of more than 18 months; while the already taken by the European Commission with the “Europe general lien is possible only if (i) the borrower is a concessionaire 2020 Strategy”9 – the New Code (together with other recent Italian or an entity awarding a PPP project, and (ii) certain registration legislative measures)10 provides for a regulation of project bonds formalities have been fulfilled. with the following main features: ■ project bonds may have a different duration, depending on whether the relevant issuance is aimed at financing Endnotes (or refinancing) infrastructure during its construction 1. Hoffman, L.S., The Law and Business of International Project phase (“greenfield projects”) or interventions related to Finance, (Cambridge, 2008). infrastructure already in operation (“brownfield projects”), and may also benefit from specific guarantees issued by 2. A public-private partnership contract means a contract for financial institutions (such as banks, financial intermediaries, pecuniary interest concluded in writing by means of which

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one or more contracting authorities or contracting entities by the private partner must have a significant impact on its entrusts to one or more economic operators, for a period profitability, and possibly in some cases on its solvency, under determined on the basis of the time required to recoup the normal circumstances where there is a clear link between investment or the conditions of the financing, the execution the realization of these risks and the actions (or absence of of a set of activities consisting in construction works or the actions) taken by the partner. Therefore, this analysis of risks transformation, operation and maintenance services of a borne by the contractual parties is the core element as regards facility, the consideration of which consists in the availability classification of the assets involved in the contract, to ensure of the facility, or in the right to exploit it, or consisting in the the correct accounting of the impact on the government net provision of a service connected to the use by the operator of lending/borrowing (B.9) and debt of this type of partnerships”. the facility itself, together with a transfer to the latter of an 5. The definition of “works concession” and “services operating risk as provided in the relevant contract. concession” is set forth under Art. 3, Par. 1, of the New Code, 3. Green paper on public-private partnerships and community respectively, point (uu) and (vv). law on public contracts and concessions of the European 6. See also the judgment of the Italian Council of State Commission dated 30 April 2004. (Consiglio di Stato) No. 3653 of 19 August 2016. 4. In this regard, please note further that the Manual on 7. The definition of “economic and financial equilibrium” is set Government Deficit and Debt – Implementation of ESA forth under under Art. 3, Par. 1, point (fff). 2010 (2014 edition) specifies that “ESA 2010 20.283 states 8. Art. 165, Par. 3, of the New Code. that a majority of the risks and rewards must be transferred. It is not required to transfer “all” of them. In reality, it is 9. As also in A New Strategy for the Single Market at the Service usually observed in partnerships a share of risks between of Europe’s Economy and Society, report to the President of the government and the partner. As mentioned further, it European Commission by Mario Monti, dated 9 May 2010. may be seen as normal that some risks might be taken by 10. Art. 185 of the New Code, Decree No. 83/2012 (converted by government (for instance in the case of very exceptional Law No. 134/2012), Decree No. 179/2012 (converted by the events or for government action that changes the conditions Law No. 221/2012) and Decree No. 133/2014 (converted by of activity that were agreed previously) but the risks incurred Law No. 164/2014).

Sergio Massimiliano Sambri Matteo Trabacchin Grimaldi Studio Legale Grimaldi Studio Legale Via Fratelli Gabba 4 Via Fratelli Gabba 4 Milan, 20121 Milan, 20121 Italy Italy

Tel: +39 02 3030 9330 Tel: +39 02 3030 9330 Email: [email protected] Email: [email protected] URL: www.grimaldilex.com URL: www.grimaldilex.com

Sergio is the Chair of the Italian Branch Council for the International Matteo is a senior associate in the Project Finance and in the Banking Project Finance Assocaiation (IPFA). He is a partner in the Project Finance and Insurance departments of Grimaldi Studio Legale and Finance and in the Administrative, Infrastructure and Energy Law is based in the firm’s Milan office. Matteo specialises in project departments of Grimaldi Studio Legale and is based in the firm’s financing, infrastructure and energy. He regularly assists lenders and Milan office. He has significant experience in the public procurement sponsors – in Italy and overseas – in the financing of the construction sector (e.g. work, supplies and services), in activities connected with and operation of infrastructure (among others, rail, underground rail, privatisations and structured finance, energy law and public evidentiary hospitals and ports) and renewable and conventional energy projects procedures, as well in environmental and urban planning law. Sergio (wind, solar, hydro, gas storage and liquefied natural gas). His advises lenders, sponsors, contractors and sector operators on private experience also includes trade finance, acquisition finance, real estate finance initiatives (PFI) and public-private partnerships (PPP), in both finance, company law, commercial law and contracts (engineering, the energy and public works sectors, at all project stages. In these procurement and construction; operations and maintenance, etc.) and sectors he advises his clients in litigation matters before the Regional physical and financial energy trading. He is co-author of the chapter Administrative Court (TAR) and Consiglio di Stato. Sergio lectures La Borsa Elettrica ed i Mercati in Il Diritto dell’Energia – Trattato, on the public procurement sector, PFI and PPP and is co-author of curated by E. Picozza e S.M. Sambri, published by CEDAM, 2015. Il Diritto dell’Energia – Trattato, published by CEDAM, 2015, and the author of Project financing. La finanza di progetto per la realizzazione di opere pubbliche, second edition, published by CEDAM, 2013.

The International Project Finance Association (IPFA) is an independent, not-for-profit, professional members’ association dedicated to providing up-to-date information on best practice, industry trends and new developments in infrastructure and energy. IPFA operates globally across Africa, the Americas, Asia, Australia, Europe, the Middle East, Russia, the CIS and Turkey, giving members access to an international network of over 600 public and private sector organisations. IPFA hosts a continuous programme of over 100 industry events, webinars and working groups, which are free for members to attend and offer a unique opportunity to network with senior decision-making professionals across the industry. Membership also includes access to the Future Leaders Network (FLN), a forum that is specifically targeted at members in junior positions. Other benefits include access to discounted project finance training courses, facilitated introductions, post-event and webinar content, plus a wide range of industry documents and publications. For further information on IPFA and its activities around the world, please visit its website: www.ipfa.org.

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Andorra Miguel Cases

Cases & Lacambra Marc Ambrós

1 Overview 2 Security

1.1 What are the main trends/significant developments in 2.1 Is it possible to give asset security by means of the project finance market in your jurisdiction? a general security agreement or is an agreement required in relation to each type of asset? Briefly, In the coming years, we anticipate a potential increase in the what is the procedure? Andorran project finance market, in both the public and private sectors, and also under public and private schemes of collaboration; In general, each security must be granted by means of its relevant in particular, in respect of unique projects related to infrastructure agreement related to each type of asset. for the tourism industry. The most common structure of guarantees in a project finance In the public sector, the main focus would be in infrastructure and transaction in Andorra is the pledge over the shares of the project energy projects; in particular, through the development of road company (normally a Special Purpose Vehicle (SPV)), one or several infrastructure and cogeneration plants. pledges over the bank accounts of the project company, and receivables deriving from the project (e.g. operation and maintenance (O&M) In the private sector, the major trends relate to direct and indirect agreements or insurance policies), normally with cash-sweep clauses. acquisitions of projects already under operation, in terms of both the financing of such acquisitions and the refinancing of the existing Moreover, security over the essential project assets, especially over project debt. The foreseen enactment of the Andorran Tax Regime assets which are essential to the project (e.g. certain types of specific in Business Restructuring Operations Act (Llei de règim fiscal de machinery), is eventually used, normally by means of a pledge or les operacions de reorganització empresarial) is also expected mortgage, depending on the characteristics of the specific type of to increase the number of intra-group M&A deals, since certain asset. corporate restructuring transactions would benefit from a neutral tax Under Andorran law, the creation of security interest does not require regime. notarisation or any formal requirement, except in the case of real estate mortgages, where it is mandatory to constitute these before an Andorran Public Notary. However, we recommend, as a matter of 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? best practice, the granting of the security by means of a public deed, in order to increase the effectiveness of its enforceability against third parties. In the last decade, the Andorran Government has opened the Andorran economy to foreign investors and has also updated the However, it has to be noted that under Andorran law, security does principal regulations of the old-fashioned Andorran legal framework. not provide equal rights to other common jurisdictions. Security in This situation has helped to build up some infrastructure projects, Andorra only grants the creditor a preferential position to receive such as the €159m tunnel dels Dos Valires and the €42m tunnel de his credit from a specific debtor’s asset, in respect of other ordinary la Tapia, both under operation since 2012. creditors, in case of insolvency of the debtor. In 2015, Fomento de Construcciones y Contratas, S.A. (FCC) and Bankia, S.A. sold their 50% of the share capital in the Spanish 2.2 Can security be taken over real property (land), plant, concessionaire company Globalvía Infraestructuras, S.A. at €420m machinery and equipment (e.g. pipeline, whether to the Universities Superannuation Scheme (USS), OPTrust underground or overground)? Briefly, what is the and PGGM funds. The deal included the stake of Globalvía in procedure? the Andorran company Túnel d’Envalira, S.A., which holds the concession of the Andorran tunnel d’Envalira which connects Security over real property may be taken through a real estate Andorra with France. mortgage (hipoteca immobiliària), and security over plants, machinery and equipment may be granted by means of a chattel Most recently, in February 2017, the Andorran electricity company, mortgage (hipoteca mobiliària) or non-possessory pledge (penyora FEDA, built the first gas cogeneration plant in Andorra, which is sense desplaçament). currently in operation. The election of the type of guarantee will depend on the characteristics of the specific asset, as well as the legal requirements to be fulfilled.

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In general terms, under Andorran law, real estate mortgages cover: the Decree of 3 May 2000 and vary in accordance with the nature (i) the plot of land and construction on it; (ii) natural accretions; (iii) and economic interest of the transaction. improvement works carried out on the property; and (iv) the amount of any compensation related to the asset owed to the owner of the 2.7 Do the filing, notification or registration requirements asset. in relation to security over different types of assets involve a significant amount of time or expense? 2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the The notification or consent required in relation to security may take absence of a default and the debtors are not notified a significant amount of time, although the granting of such consent of the security? Briefly, what is the procedure? may vary depending of the recipient. Andorra

Yes; under Andorran law, it is possible for security to be taken over 2.8 Are any regulatory or similar consents required with receivables by means of a non-possessory pledge (penyora sense respect to the creation of security over real property desplaçament), as long as the receivables cannot be possessed. (land), plant, machinery and equipment (e.g. pipeline, However, notification would prevent set-off risks. whether underground or overground), etc.?

2.4 Can security be taken over cash deposited in bank Generally, Andorran law does not foresee a specific requirement accounts? Briefly, what is the procedure? for the granting of security over real property, plant, machinery and equipment. However, special consents may be mandatory in very Yes, security can be taken over cash deposited in bank accounts. specific cases, depending on certain criteria (e.g. the location of the Such security will normally be taken over non-possessory pledge asset, its legal nature or connection to the performance of a public of receivables (penyora sense desplaçament), the possessory activity). displacement being performed by means of notification to the bank However, please note that it could be necessary to obtain foreign in case of enforcement of the pledge. Usually, in addition to the investment authorisation in order to acquire the secured assets after granting of security over cash deposited in bank accounts, cash an enforcement proceeding, as detailed in question 4.2 below. sweeps are established. When security is taken over financial instruments, the use of a 3 Security Trustee financial collateral arrangement is recommended, since this type of guarantee is expressly regulated in Act 8/2013 of 9 May 2013 on the organisational requirements and operating conditions of entities 3.1 Regardless of whether your jurisdiction recognises operating in the Andorran financial system, investor protection, the concept of a “trust”, will it recognise the role of market abuse and financial securities agreements (Llei 8/2013, a security trustee or agent and allow the security del 9 de maig sobre els requisits organitzatius i les condicions de trustee or agent (rather than each lender acting funcionament de les entitats operatives del sistema financer, la separately) to enforce the security and to apply the proceeds from the security to the claims of all the protecció de l’inversor, l’abús de mercat i els acords de garantia lenders? financera), which is aligned with Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial Under Andorran law, there is no recognition of the concept of collateral arrangements. “trust”. Lenders usually appoint an agent for the Andorran security, which holds the security in its own name and acts on behalf of the 2.5 Can security be taken over shares in companies rest of the lenders. incorporated in your jurisdiction? Are the shares in Frequently, the agent is granted with powers of attorney in order to certificated form? Briefly, what is the procedure? enforce claims and issue enforcement proceedings on behalf of the lenders and the rest of the secured intervening parties. Yes, it is possible to take security over the shares of company incorporated in Andorra. In fact, it is a customary measure of guarantee in project finance transactions performed in Andorra. However, the 3.2 If a security trust is not recognised in your restriction set out in question 4.2 below should be taken into account. jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor The procedure to create security over shares requires two status) to achieve the effect referred to above which consecutives steps: (i) the granting of a deed of pledge before a would allow one party (either the security trustee or Public Notary; and (ii) the registration of the pledge in the Registry the facility agent) to enforce claims on behalf of all Book of Shareholders (Llibre Registre de Socis) of the company. the lenders so that individual lenders do not need to enforce their security separately?

2.6 What are the notarisation, registration, stamp duty The structures of joint and several creditor status, “parallel debt” and other fees (whether related to property value or between lenders and a special purpose vehicle (SPV) or a security otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables agent are not known under Andorran law and there are no judicial and chattels)? precedents.

There is no registration or stamp duty in Andorra related to security. Only notarisation fees apply. Those fees are published by means of

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The clawback regime under the Insolvency Decree of 4 October 4 Enforcement of Security 1969 determines that the insolvency judge will be able to declare the following acts unenforceable against the insolvent estate: (i) all acts 4.1 Are there any significant restrictions which may of disposal made on a gratuitous basis and all agreements on which impact the timing and value of enforcement, such the debtor’s obligations (project finance company) are notably as (a) a requirement for a public auction or the superior to the obligations of the other party; (ii) all payments due availability of court blocking procedures to other for reason of outstanding debts on the cessation-of-payments day; creditors/the company (or its trustee in / and (iii) any mortgage of pledge granted after the cessation-of- liquidator), or (b) (in respect of regulated assets) payments day, over the debtor assets, for reason of outstanding debts regulatory consents? prior to the cessation of payments. Andorra In addition to these, the insolvency judge is entitled to declare as Yes. The characteristics of the enforcement may vary significantly, unenforceable against the insolvent estate, the gratuitous acts stated depending on the nature of the enforced security and the enforcement above which occurred during the six months prior to the date of proceedings carried out at the discretion of the lenders. cessation of payments. In essence, there are two main procedures to enforce securities in the Furthermore, the judge can set the cessation-of-payments date up to context of project finance: (i) judicial; or (ii) notarial proceedings. 18 months preceding this declaration. Overall, the former is carried out by a declaratory civil proceeding in order to reach a judgment, and afterwards such judgment has to be enforced, the latter being less costly and time-consuming, although 5.3 Are there any entities that are excluded from both parties have to agree to carry out the notarial enforcement bankruptcy proceedings and, if so, what is the proceeding. applicable legislation?

Banking entities are subject to special administrative measures 4.2 Do restrictions apply to foreign investors or creditors which apply before the opening of an ordinary bankruptcy in the event of foreclosure on the project and related companies? proceeding, established by Act 8/2015 On Urgent Measures to Implement Banking Restructuring and Resolution Mechanisms (Llei 8/2015 de mesures urgents per implantar mecanismes de In the event of foreclosure, the Foreign Investment Act 10/2012 (Llei reestructuració i resolució d’entitats bancàries), which sets a 10/2012 d’inversió estrangera al Principat d’Andorra) establishes similar regime to Directive 2014/59/EU of the European Parliament a restriction, as foreign investors or creditors would need to obtain and of the Council of 15 May 2014 establishing a framework for the a prior foreign investment authorisation granted by the Andorran recovery and resolution of credit institutions and investment firms. Government in order to acquire the ownership of real estate in Andorra or more than a 10% stake in the relevant Andorran company. However, please note that the Foreign Investment Act specifically 5.4 Are there any processes other than court proceedings prohibits foreign legal persons from investing in real estate properties that are available to a creditor to seize the assets of the project company in an enforcement? in Andorra with the sole purpose of commercialising them.

Yes, it is possible to carry out-of-court foreclosure proceedings 5 Bankruptcy and Restructuring before a Public Notary if such enforcement proceeding and its terms Proceedings and conditions have previously been agreed between the parties.

5.5 Are there any processes other than formal insolvency 5.1 How does a bankruptcy proceeding in respect of the proceedings that are available to a project company to project company affect the ability of a project lender to achieve a restructuring of its debts and/or cramdown enforce its rights as a secured party over the security? of dissenting creditors?

In general, bankruptcy proceedings in respect of the project The Insolvency Decree establishes a judicial proceeding company do not affect the ability of a project lender to enforce its (Arranjament) prior to the declaration of bankruptcy, allowing the rights as a secured party over the security, as long as the security is project company to negotiate with its creditors in order to achieve sufficient to cover the project loan. a restructuring of its debts or cramdown of dissenting creditors that In respect of preferential treatment of creditors, the claims of secured permits it to comply again with its payment obligations. creditors will be considered “privileged claims” inasmuch as they are guaranteed by means of a security, up to the value of such guarantee or security. Any amount exceeding the value of the guarantee or 5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in security in this way will be considered an “ordinary claim”. financial difficulties in your jurisdiction.

5.2 Are there any preference periods, clawback rights Under the Insolvency Decree, directors may incur personal liability or other preferential creditors’ rights (e.g. tax debts, if they continue to trade whilst the company is facing financial employees’ claims) with respect to the security? difficulties. The bankruptcy effects will be extended to the directors of the entity in consideration of the continuation of a financially There are no other preferential creditors’ rights with respect to deficient activity such as an act of bad faith, inexcusable negligence the security that could affect the secured lender rights, as such or serious breach of commercial uses and practices. preferential creditors will only have preference over the rest of the ordinary claims on the insolvency estate but not in respect of the secured assets.

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Andorra is divided. According to the Andorran Constitution and 6 Foreign Investment and Ownership the Qualified Act On Demarcation of Competences of the Comuns, Restrictions dated 4 November 1993, these entities have competence over the management and governance, in general terms, of goods in both the public and private domains, as well as patrimonial goods that may 6.1 Are there any restrictions, controls, fees and/or taxes have been acquired. In addition, this competence is projected over on foreign ownership of a project company? the use and exploitation of natural resources. The Andorran Foreign Investment Act sets out the restrictions, controls This general formula includes energy projects, inasmuch as they and limits related to the foreign ownership of a project company. Thus, use natural resources which are located or generated in the territory prior to investing in a real estate asset or in a stake higher than 10% in under the jurisdiction of a specificComú . Andorra a share capital or voting right of a company located in Andorra, foreign Additionally, the Andorran Government may play a significant investors have to obtain the relevant foreign investment authorisation role depending on the location and size of the project, especially if before the Andorran Government. The amount, destination and sort of the project determines a financing need from the Comuns, as these investment (e.g. investment in real estate assets) must be notified as a entities are financed from the central Government by means of the mandatory requirement to obtain the authorisation. Qualified Act of Transfers to the Comuns, dated 4 November 1993. Nevertheless, the obligation to obtain the foreign investment authorisation does not impose any restriction on the remittance of 7.2 Must any of the financing or project documents be income coming from an investment outside Andorra. In addition, registered or filed with any government authority or exchange control rules are widely liberalised and thus, there are no otherwise comply with legal formalities to be valid or restrictions on the transferral of currencies from a registered bank enforceable? account located in Andorra to any country, and vice versa. Certain regulated sectors (e.g. telecommunications or energy) may Under the anti-money laundering regulation, an Andorran or foreign be subject to the fulfilment of certain specialities and requirements entity which formalises a transaction before a Public Notary by imposed by the Andorran Government, the territorial entities granting a public deed shall identify its ultimate beneficial owner (Comuns) or specific regulatory authorities. (veritable drethavent), which is any individual (either a natural or legal person) owning 25% or more of the social capital of the entity. The guarantees normally granted as a security package in an project finance operation (i.e. mortgages and pledges) are notarised. Please note that Andorra does not have a property register, such functions 6.2 Are there any bilateral investment treaties (or other being equivalently performed by the Chamber of Notaries (Cambra international treaties) that would provide protection de Notaris). from such restrictions? In addition, please bear in mind the requirements of foreign There are no bilateral investment treaties entered into by Andorra investment authorisation referred to in question 6.1. that would provide protection from the Andorran foreign investment restrictions. However, by means of a most-favoured-nation clause 7.3 Does ownership of land, natural resources or a Andorra has Access to the treaties entered into by its neighbouring pipeline, or undertaking the business of ownership or countries. operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?

6.3 What laws exist regarding the nationalisation or Ownership of land or natural resources itself does not require a licence; expropriation of project companies and assets? Are any forms of investment specially protected? however, performing a project or exploitation over such land or natural resources may require the prior obtainment of certain authorisations or licences granted by national or local public administrations, depending The regime governing the nationalisation or expropriation of project in particular on the size and relevance of the project. finance companies and/or assets is set by the Act of Expropriation, dated 3 September 1993, making no distinction between Andorran and The treatment between foreign and Andorran entities does not foreign companies or assets, as long as the expropriation of private differ and, overall, foreign entities can hold licences and be granted property responds to the satisfaction of a public utility or social interest. authorisations on the same terms as Andorran entities. The requirements, procedure and guarantees to the expropriated entity are thoroughly and strictly regulated, due to the fact that the 7.4 Are there any royalties, restrictions, fees and/or expropriation procedure is deemed an aggression against private taxes payable on the extraction or export of natural property, which is only justified on the basis of serving the general resources? and public interest. There are certain taxes related to the processing of hydrocarbons (oil and natural gas) in order to use them as fuel, and the exploitation 7 Government Approvals/Restrictions of electricity generation projects is subject to a burden tax. Thus, the obtainment, importation and refining of hydrocarbons and the production of electricity within Andorra are respectively subject to 7.1 What are the relevant government agencies or a special tax on hydrocarbons and the general indirect tax of 4.5%. departments with authority over projects in the typical project sectors? These special taxes would not be paid by the project company, as the payment would rely on the final consumer of the electricity or the Overall, the public administration/agencies with authority over hydrocarbon. Please note that importation of both electricity and projects are determined by the specific sort of project. The main certain types of hydrocarbons is exempt from taxation, due to the authorities involved are the different town halls (Comuns) of limited capacity of the Andorran public infrastructure to cover the the administrative units (“Parishes” – Parròquies) into which energetic demand (electricity is imported from Spain and France).

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The income obtained by a project company incorporated in and needs to be performed prior to the granting of the specific under the laws of Andorra from the sales of the extraction or authorisation by the competent administration. exploitation are subject to company income tax at the rate of 10%.

7.10 Is there any specific legal/statutory framework for 7.5 Are there any restrictions, controls, fees and/or taxes procurement by project companies? on foreign currency exchange? There is no a specific framework for procurement by project There are no currency, exchange control or other regulatory companies. However, in public projects, the administration could restrictions that limit the availability or transfer of funds for the establish specific requirements. project company. Please refer to question 6.1. Andorra 8 Foreign Insurance 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other 8.1 Are there any restrictions, controls, fees and/or taxes jurisdictions? on insurance policies over project assets provided or guaranteed by foreign insurance companies? There are no restrictions on the repatriation of investment returns. Insurance activity is a reserved activity. Thus, only Andorran- licensed insurance companies may provide insurance over project 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore assets located in Andorra. accounts in other jurisdictions? 8.2 Are insurance policies over project assets payable to Yes. foreign (secured) creditors?

7.8 Is there any restriction (under corporate law, Yes, although a case-by-case analysis is highly recommended. exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent 9 Foreign Employee Restrictions company where the parent is incorporated in your jurisdiction or abroad? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed According to the Andorran Corporate Act 10/2007, there are certain by a project company? limitations on the payment of dividends to a parent company, as follows: (i) there is a requirement to offset losses from previous Yes, there are restrictions on foreign workers being employed by a years in order to build up 10% of the profits to the statutory reserve project company. In particular, prior to the hiring of such foreign until it reaches an amount equal or higher than 20% of the share workers, the project company has to confirm before the Andorran capital; (ii) dividends may only be distributed if the mandatory employment department that there are no qualified Andorran workers. reserves foreseen legally or in the by-laws are covered, as well as the research and development costs being covered; and (iii) a In order to validly work and reside in Andorra for a short period, restricted reserve equivalent to must be funded, at least in foreign workers must obtain permission for stays of over 30 days in the amount of 10% of the profits. cases where they are working for a foreign company, during the time that the work for the foreign company in Andorra lasts and without In terms of the contractual covenants normally imposed on the project limitation regarding the nationality or the professional level of the company in project financing agreements, the distribution of dividends applicant (e.g. worker, technician, engineer or executive). is normally restricted. Additionally, there are other typical financial and corporate restrictions imposed to the project company, such as: (i) If foreign workers intend to stay for a longer period in Andorra, they prohibition of performing structural modifications; (ii) the fulfilment will need to obtain a residence and working authorisation in advance, of certain financial ratios (e.g. debt service coverage ratio); and (iii) which is granted for one year by the Andorran Government. This operation of the specific facility during a stipulated period of years. type of permit is normally used for workers that come to Andorra to carry out professional activities in the country.

7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a 10 Equipment Import Restrictions project financing and which governmental authorities administer those laws or regulations? 10.1 Are there any restrictions, controls, fees and/or taxes Yes. There are material environmental, health and safety laws whose on importing project equipment or equipment used by application and content will essentially depend on the location, construction contractors? nature and characteristics of the specific project. Moreover, the authorisations to initiate a project (especially in projects which are The Customs Agreement between the Principality of Andorra and notable for their size and capacity of affecting the environment) will the European Economic Community establishes a preferential have to be granted by the relevant authority (normally the specific regime for goods imported from or originating in the EU in Comú), taking into account the environmental impact on the territory. comparison with third countries. Specifically, the objective scope of the Customs Agreement covers: (i) goods produced in the EU or In addition, before the execution of any private or public project that in Andorra, including those obtained wholly or in part from products may impact the environment, an environmental impact assessment which come from third countries and which are in free circulation in

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the EU or Andorra; and (ii) goods which come from third countries the diverse ways in which this crime may be performed, bribery of a and are in free circulation in the EU or in Andorra. Hence, customs public authority determines the imposition of a qualified sanction. duties will be applicable to imported project equipment coming In respect of the crime of corruption, this is defined by the Andorran from non-EU countries, in the terms established by EU agreements Criminal Code as a demand by or an offer made to a public authority with these countries or applicable regulations that may be in place. or civil servant, for its own benefit or for the benefit of a third Please note that, currently, Andorra is an observer member of the person, for a handout or remuneration of any sort, in order to dictate World Trade Organization (WTO) and there are no regulations in or perform an act contrary to the duties and obligations inherent to place which confer on the Government any powers to impose anti- its condition as a public official (active side), as well as the offering dumping measures in line with WTO principles. or demanding of the aforementioned remunerations to delay the performance of an act (passive side). The penalties imposed for the perpetration or omission of these conducts include: (i) a prison Andorra 10.2 If so, what import duties are payable and are sentence (from one to four or two to five years, depending on the exceptions available? nature and gravity of the felony); (ii) criminal penalties (e.g. from two to five times the profit obtained); and (iii) ineligibility for public The import duties depend on the characteristics of the goods, with office for a period of between three and six years. exceptions available in each case; for example, for products coming With regard to influence-peddling, the Andorran Criminal Code from non-EU countries, such as imported equipment or machinery, establishes that any person which, through its personal relationship, depending in the nature and characteristics of the products. Thus, exerts influence over a public authority or civil servant with the aim we recommend that a case-by-case analysis is performed. of achieving a resolution dictated by the latter which benefits him or a third person either directly or indirectly, shall be punished with 11 Force Majeure imprisonment and a fine of one to two times the benefit intended or obtained. Additionally, the public authority or civil servant may be punished with ineligibility for public office for three years and the 11.1 Are force majeure exclusions available and person who influences this authority may be punished, at the court’s enforceable? initiative, with prohibition from contracting with a public authority for a three-year period. Under Andorran law, the verification of a force majeure situation exonerates any party from liability with respect to a legal relationship, although parties to a specific contract may, as in the 13 Applicable Law vast majority of neighbouring jurisdictions, waive the application of this regime and accept liability arising from it. 13.1 What law typically governs project agreements? The normal scenario is that most project financing agreements, and ancillary contracts to these (e.g. O&M contracts), establish the Generally, project agreements are few and governed by Andorran verification of force majeure as an event of default. In the case that law unless the relevant parties impose the application of a foreign a force majeure is discussed before a court, an Andorran judge will law. According to Andorran law, the choice of foreign law is recognise its validity. valid and legally binding. An Andorran court would apply such From the point of view of the lenders, a liability exclusion is law provided that the contents of the relevant provisions of the normally established in project finance agreements if this affects chosen laws may be duly proved before the Andorran court without their ability to provide the financing for the project facility under a contravening the Andorran Constitution or the Andorran principles force majeure scenario. of public policy. However, please see question 18.1 below. In the case of concession contracts with public authorities, and similarly to the situation in Spain, the verification of a force majeure 13.2 What law typically governs financing agreements? normally entails compensation from the specific public administration to the concessionaire, which may take the form of an improvement of Financing agreements are typically governed by Andorran law. either the economic or temporal terms of the public concession. In addition to the mechanics of a force majeure event (which will be 13.3 What matters are typically governed by domestic law? regulated in the terms established by the project finance agreement – normally a turnkey contract), in the case that the project company All security documents related to assets located in Andorra (i.e. suffers a prejudicial effect due to unforeseen circumstances, it would mortgages or pledges) and personal guarantees granted by Andorran also be possible to invoke the rebus sic stantibus clause if foreseen entities (e.g. bonds or first demand guarantees) are typically governed, in the relevant contract (lenders may also benefit from this clause). and we would recommend that they be governed, by Andorran law. As in most of the neighbouring jurisdictions, the contractual 12 Corrupt Practices relationship between the public authorities and the concessionaire is mandatorily regulated by Andorran law.

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting 14 Jurisdiction and Waiver of Immunity the projects sector)? What are the applicable civil or criminal penalties? 14.1 Is a party’s submission to a foreign jurisdiction and Qualified Act 9/2005 of 21 February of the Criminal Code (Llei 9/2005 waiver of immunity legally binding and enforceable? qualificada del codi penal) punishes corruption and traffic-of-influence bribery performed by a public authority or by a private subject. Among Under Andorran case law and the applicable Andorran law (dret

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comú), submission to a foreign jurisdiction by the parties to a In the current climate of serious concern about the political situation project finance agreement would be valid, binding and enforceable (with potential future changes in the Government or in governmental in Andorra. There are many judicial precedents that support this policies which could substantially affect projected investment), the view. Moreover, in the case that a claim is presented before the main options would be either to obtain a specific governmental Andorran courts, they should decline their competence in favour of resolution from the competent administration providing support to the elected jurisdiction if an express submission clause had been the project, or to wait for clarification of the political framework. agreed by the parties. 17 Tax 15 International Arbitration Andorra 17.1 Are there any requirements to deduct or withhold tax 15.1 Are contractual provisions requiring submission from (a) interest payable on loans made to domestic or of disputes to international arbitration and arbitral foreign lenders, or (b) the proceeds of a claim under a awards recognised by local courts? guarantee or the proceeds of enforcing security?

Yes; the Andorran courts will recognise submission by the parties in Under Andorran law, there is no deduction or withholding tax upon a project finance agreement to international arbitration and arbitral payment of interests on loans made to either domestic or foreign awards, as the Convention on the Recognition and Enforcement lenders. of Foreign Arbitral Awards of 1958 (the “New York Arbitration On the other hand, under Andorran law, the proceeds of a claim Convention”), which applies to the recognition and enforcement of under a guarantee and the proceeds of enforcing security are not foreign arbitral awards and the referral to arbitration by a court, has subject to withholding tax if they are made to a domestic lender. been in force in Andorra since September 2015. However, they are subject to withholding tax at 10% if they are made to a foreign lender, unless a lower rate applies under a tax Furthermore, Andorra currently has an arbitration regime for treaty (with treaty rates ranging between 5% and 10%). commercial disputes, and a local Arbitration Court should be operating in the next few years. 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What 15.2 Is your jurisdiction a contracting state to the New York taxes apply to foreign investments, loans, mortgages Convention or other prominent dispute resolution or other security documents, either for the purposes conventions? of effectiveness or registration?

Yes. The New York Arbitration Convention entered into force in The main incentive for foreign investors or creditors are the lower Andorra in September 2015. level of taxation and the possibility to benefit from certain tax exemptions (e.g. corporate tax at 10%), in addition to a solid legal 15.3 Are any types of disputes not arbitrable under local framework. In particular, there are substantial advantages for those law? countries with which Andorra has signed a tax treaty (Spain, France, Luxembourg and Liechtenstein). The Andorran Arbitration Act 47/2014 (Llei 47/2014 d’arbitratge In essence, under Andorran law, there are no relevant additional del Principat d’Andorra) excludes labour and consumer arbitration taxes on foreign investments, other than those that would apply to proceedings. Furthermore, the Arbitration Act states that all free an Andorran investor. disposal subjects can be arbitrable. Although Andorra is not part of the EU, a customs agreement with the EU is currently in force, allowing the free transit of industrial 15.4 Are any types of disputes subject to mandatory products without customs duties being imposed. domestic arbitration proceedings? 18 Other Matters Taking into account that which is stated under the previous question, submission to arbitration as a conflict resolution process is only possible if the parties involved in a controversy expressly agree to it, 18.1 Are there any other material considerations which either in the agreement or in a separate document. The submission should be taken into account by either equity of the parties to an arbitration proceeding must be made in writing investors or lenders when participating in project and signed by them, in order to verify their unequivocal will to financings in your jurisdiction? submit their controversy to arbitration. Yes, since lending is a reserved activity that can only be performed by Andorran-licensed entities, as long as there is no passport to 16 Change of Law / Political Risk provide lending services on a cross-border basis into Andorra. Therefore, in practice, there is no secondary market for foreign financial entities to buy tickets for local project finance. However, 16.1 Has there been any call for political risk protections international project finance transactions with an Andorran leg, such as direct agreements with central government or political risk guarantees? where security has been granted but the disbursement of the loan had been made abroad, are common. To the best of our knowledge, political risk provisions are not common in Andorra, given the lower political risk of project finance, in line with the adjacent jurisdictions, as these are direct agreements with public administrations.

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18.2 Are there any legal impositions to project companies 19.2 In what circumstances may Shari’ah law become issuing bonds or similar capital market instruments? the governing law of a contract or a dispute? Have Please briefly describe the local legal and regulatory there been any recent notable cases on jurisdictional requirements for the issuance of capital market issues, the applicability of Shari’ah or the conflict of instruments. Shari’ah and local law relevant to the finance sector?

Please note that there is no regulation regarding the issuance of There is no case law in Andorra which has pronounced in regard capital market instruments, but there is some limitation on their to the application of Shari’ah law, nor in relation to the governing issuance. However, due to this lack of local regulation, it is law of a contract or a dispute. In our view, it is not probable that necessary to use foreign vehicles as issuers in order to benefit from Andorran courts will accept the application of Shari’ah, except Andorra international standards in this matter. where the law generally governing a contract is the law of a country whose legislation recognises and is based on Shari’ah. 19 Islamic Finance 19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha enforceability in your jurisdiction? If so, what steps instruments might be used in the structuring of an could be taken to mitigate this risk? Islamic project financing in your jurisdiction. Yes, there is a risk that the inclusion of interest payment obligations The Islamic finance instruments Istina’a, Ijarah, Wakala and in a loan agreement construed in accordance with Shari’ah can be Murabaha are not recognised under the laws of Andorra. enforceable.

Miguel Cases Marc Ambrós Cases & Lacambra Cases & Lacambra Manuel Cerqueda i Escaler 3–5 Manuel Cerqueda i Escaler 3–5 Escaldes-Engordany (AD700) Escaldes-Engordany (AD700) Andorra Andorra

Tel: +376 728 001 Tel: +376 728 001 Email: [email protected] Email: [email protected] URL: www.caseslacambra.com URL: www.caseslacambra.com

Miguel Cases is the Managing Partner of Cases & Lacambra and leads Marc Ambrós is a Partner at Cases & Lacambra. He has broad the Corporate and Banking & Finance Practices. He has extensive experience in advising foreign clients in general investment in Andorra, experience in advising credit institutions and investment services although he is specialised in the financial services sector and in firms, being the legal counsel of several national and international project and matters. He regularly advises in M&A, financial institutions, public administrations and investment funds. joint ventures, , corporate restructuring and refinancing, His practice includes regulation of the financial sector, where he is an representing both Andorran regulated and non-regulated entities. expert in the legal framework and regulatory environment applicable He is a key advisor in many cross-border transactions that have an to entities subject to prudential supervision, especially those rendering Andorran component. financial and investment services.

Cases & Lacambra is a client-focused boutique law firm with a top-tier specialisation in banking, finance and tax law. We offer bespoke advice and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms, group companies and high-net-worth individuals. The Firm and the Banking and Finance department lawyers are qualified in Andorra but also in other EU jurisdictions, and so are well-prepared to advise their clients in EU legislation that is progressively being adopted in the jurisdiction. The Firm has broad experience in acquisition finance, project finance and refinancing Andorra.in The Banking and Finance department has a broad range of clients, including local and foreign banks, the Andorran Government and the Andorran authorities, and regularly advises institutions on their inbound financial transactions towards that jurisdiction.

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Argentina Carlos María Tombeur

Severgnini, Robiola, Grinberg & Tombeur Matías Grinberg

1 Overview 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?

1.1 What are the main trends/significant developments in the project finance market in your jurisdiction? The most significant project financing has been in the mining and oil and gas industries and in power generation, especially from renewable sources (wind parks and hydroelectric dams) but also by means of Since the 2001 political and economic crisis, which led to the fossil fuels (combined cycle plants), as well as some infrastructure sovereign default, Argentina has lacked or had very limited access (airports, ports, trains, subway construction, and others). to international financial markets and thus to project financing, although it required significant new infrastructure. On December 10, 2015, a new elected National Government took 2 Security office, and many measures have been adopted since then in order to incentivise the development of new infrastructure and investments, with a more pro-market approach to economic, financial and 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement regulatory issues. Thus project financing may become stronger required in relation to each type of asset? Briefly, again. what is the procedure? ■ The most significant foreign exchange restrictions for the entry and repatriation of capital and remittance of dividends It is possible to have a general security agreement but certain asset and royalties abroad, through the Foreign Exchange Market, security needs to be executed in specific local documents and be have been removed. Please refer to question 7.5 for further detail. registered. Often creditors appoint a local collateral agent, who will represent and follow the instructions of the lenders or another agent ■ The Sovereign debt in default has been restructured and the appointed in accordance with the security agreement and enforce the long legal dispute with the holdouts was finally settled in April 2016. Thereafter, Argentina has issued bonds for more specific local documents. than USD 20 billion. Private companies and banks have also A project of law prepared by the Executive Branch to amend Capital been more active in the international capital markets. Market Law No. 26,831 (which is expected to be discussed in ■ With Law No. 27,191 the Government has launched a new Congress during 2017) will regulate the role of the collateral agent programme for the development of the use of energy from for syndicated loans – it is already in use in practice. renewable sources for the production of electricity (Plan Renovar). The first round of public bidding has already closed, and several Power Purchase Agreements (PPP) have 2.2 Can security be taken over real property (land), plant, been granted. The programme aims to reach 8% of electricity machinery and equipment (e.g. pipeline, whether consumption from these sources by the end of 2017, and 20% underground or overground)? Briefly, what is the by the end of 2025. procedure? ■ Public-Private Participation Contracts (PPP) Law No. 27,328 was enacted, which establishes a new regime of contracts Security can be taken over real property by means of a mortgage between the Federal Government and the private sector to executed by a notary public in a public deed and must be registered develop projects of infrastructure, housing, public services, in the pertinent registry, depending on the location of the property. and others. The mortgage includes the land and the accessories (like plant) ■ Law No. 27,260 was enacted, which aims, among others, and improvements. The new Civil and Commercial Code, recently to promote the development of local mutual funds (Fondos enacted and effective as of August 1, 2015, excludes from the Comunes de Inversión) for investment in infrastructure mortgage the assets pledged before the date of the mortgage deed, projects. among others. As a whole, the current regulatory framework and economic Notwithstanding the foregoing, generally in project finance all environment in Argentina is more favourable for project finance important parts of a plant are secured under a registered pledge. developments than in previous years. The registered pledge, which is used for machinery, equipment, vehicles and other movable assets, is executed in a form provided by

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the registry, with the signatures and the capacity of the signatories certified by a notary public, and it has to be registered in the registry 2.6 What are the notarisation, registration, stamp duty corresponding to the location of the assets. and other fees (whether related to property value or otherwise) in relation to security over different types Finally, a security over real property, machinery and equipment, of assets (in particular, shares, real estate, receivables and receivables may be granted by means of a trust, in which case, and chattels)? the property of those assets will be transferred to the trust and be administered by a trustee. There are notarisation fees related to the value of the guarantee in the case of a mortgage deed. In case of notarisation of the signatures 2.3 Can security be taken over receivables where the of other agreements (e.g. pledge, trust, etc.), the fees are not related chargor is free to collect the receivables in the to the value of the agreement. Registration fees are usually related absence of a default and the debtors are not notified to the value of the security. Stamp tax is related to the value of each Argentina of the security? Briefly, what is the procedure? security, although sometimes the tax authorities grant exemptions. In some jurisdictions (e.g. the City of Buenos Aires), there is a The assignment of receivables is effective and enforceable against general exemption from stamp tax for multilateral credit institutions third parties only after the debtors have been notified. Notice to to which the Republic is a party. the debtors should be given at the beginning. With such notice, the assignment of the receivables is perfected but the debtors will not have to pay the chargee until, following a default by the chargor, 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets they receive an instruction in that respect from the chargee. involve a significant amount of time or expense? Sometimes, the assignment of the receivables is made from the beginning, and a trust is created to that effect. While the chargor The registration of a mortgage or a registered pledge over machinery is not in default, it will instruct the trustee in connection to the or vehicles may involve a few weeks, depending on the registry, payments to be made on its behalf. The trust, under current foreign which in turn will depend upon the location of the assets, although it exchange regulations, will not be able to make principal and interest will be enforceable against third parties since the filing or, in the case payments abroad on behalf of the chargor/debtor and, therefore, a of a registered pledge agreement, since it has been executed if filed pass-through account in the name of the chargor can be opened to within 24 hours of the execution. With respect to expenses, please make such payments abroad. see question 2.6 above. Notifications made by a notary public to The Civil and Commercial Code provides the credit pledge, by debtors for assignments of rights, credits or contracts, do not involve which any credit that is documented may be pledged. The credit much time, and fees do not depend on the value of the security. pledge is enforceable against third parties when the debtor is notified of the pledge, thus being similar to an assignment. 2.8 Are any regulatory or similar consents required with respect to the creation of security over real property 2.4 Can security be taken over cash deposited in bank (land), plant, machinery and equipment (e.g. pipeline, accounts? Briefly, what is the procedure? whether underground or overground), etc.?

Cash deposited in bank accounts can be secured by means of a Other than as mentioned in question 2.7 above, in principle there are trust or a pledge. In the first case, the bank account and the funds no regulatory consents required for the creation of a security. deposited in it will be in the name of the trust and administered by a trustee. In connection with payments under a loan to be made 3 Security Trustee abroad, please see question 2.3 above. In the case of the pledge of an account and funds, they will remain in the name of the debtor. 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a 2.5 Can security be taken over shares in companies security trustee or agent and allow the security trustee incorporated in your jurisdiction? Are the shares in or agent (rather than each lender acting separately) to certificated form? Briefly, what is the procedure? enforce the security and to apply the proceeds from the security to the claims of all the lenders? Shares can be secured by means of a pledge or a trust. The parties to a share pledge agreement will notify the company of the pledge Yes, it will. so that the latter registers it in the company’s shareholders’ ledger. In case the shares are in certificates, the pledge will be recorded on those certificates also. Public corporations’ registries are generally 3.2 If a security trust is not recognised in your managed by a third party electronically, and such third party will be jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor notified of the pledge and will issue the pledge certificate. status) to achieve the effect referred to above which The conveyance of shares into a trust administered by a trustee would allow one party (either the security trustee or would grant better control of the exercise of the voting rights of the facility agent) to enforce claims on behalf of all the shares. the lenders so that individual lenders do not need to enforce their security separately?

Security trusts are recognised in Argentina. In addition, lenders may enter into an agreement and grant a power of attorney to an agent in order to enforce any claim on behalf of them all.

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4 Enforcement of Security 5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation? 4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the Insurance companies are subject to specific liquidation proceedings availability of court blocking procedures to other with the intervention of the relevant regulatory authority. Trusts are creditors/the company (or its trustee in bankruptcy/ liquidated in accordance with the trust agreement provisions. liquidator), or (b) (in respect of regulated assets) regulatory consents? 5.4 Are there any processes other than court proceedings

Argentina that are available to a creditor to seize the assets of A mortgage or a pledge has to be enforced in a public auction the project company in an enforcement? through the courts unless the parties have agreed in the mortgage deed or pledge agreement that the creditor may opt for an out-of- Please see question 4.1 above. court public sale. However, under the Registered Pledge Decree-Law in the case of the enforcement of a fixed or floating registered pledge over 5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to movable assets, only local financial institutions or multilateral achieve a restructuring of its debts and/or cramdown organisations can seize the assets (with a court order) and sell them of dissenting creditors? in out-of-court proceedings, while foreign lenders may obtain the seizure and later foreclosure of the assets only in court proceedings. Yes. There is a privately negotiated agreement This inconvenience is usually overcome by the appointment by the (APE – Acuerdo Preventivo Extrajudical) supported by consents from foreign lender of an Argentine to act as its agent. holders of a majority in number and two-thirds in total outstanding Regarding a trust, the assets conveyed to the trust may be sold in amount of the affected unsecured debt obligations that, upon court out-of-court proceedings if agreed in the trust agreement. approval, becomes binding on all creditors affected thereby. In addition, upon filing of the APE together with a disclosure statement and the consents from the requisite majorities, all existing and future 4.2 Do restrictions apply to foreign investors or creditors actions against the company are stayed. in the event of foreclosure on the project and related companies? 5.6 Please briefly describe the liabilities of directors (if Please see question 4.1 above. In addition, in an ordinary proceeding any) for continuing to trade whilst a company is in (as opposed to an executive proceeding) the defendant may demand financial difficulties in your jurisdiction. that the foreign lender with no assets in Argentina post a performance bond or guarantee. Generally, the financing documents provide a The directors’ legal responsibilities include both civil (i.e. damages waiver by the borrower. and losses) and criminal liability (for instance, given a case of fraud or misappropriation). They are not allowed to transfer substantial assets of the company or make operations that are not related to 5 Bankruptcy and Restructuring the ordinary course of the debtor’s business without the previous Proceedings approval of the insolvency judge, or they shall be liable for the damages caused. In addition, the bankruptcy court may extend the bankruptcy of the debtor to: (i) any person who has used the debtor’s 5.1 How does a bankruptcy proceeding in respect of the assets as their own; (ii) a related or controlling person of the debtor project company affect the ability of a project lender who has improperly manipulated the assets of the debtor for their to enforce its rights as a secured party over the own benefit or of the group of which they are a part; or (iii) a person security? whose assets were inseparably mixed with the assets of the debtor.

The Bankruptcy and Reorganization Law No. 24,552 provides that in the event of a declaration of bankruptcy, all creditors of the debtor 6 Foreign Investment and Ownership must verify their credits with the bankruptcy court. Creditors with a Restrictions special preference given by the nature of their security (i.e. mortgages and pledges) may foreclose those assets before the liquidation proceeding, but after the bankruptcy court has verified their credits. 6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?

5.2 Are there any preference periods, clawback rights In general, there are no restrictions on foreign ownership of a project or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security? company. Foreign Investments Law No. 21,382 provides that foreign investors have the same rights and obligations that the law grants to local investors, subject to the provisions of any special regime. Yes. The following credits, among others, have a special preference A foreign company, in order to act as a shareholder of a project over the security, in decreasing order of priority: (i) construction, company, must register before the Public Registry of Commerce, and improvement or maintenance expenses; (ii) workers’ salaries; and comply with certain initial and periodical reporting requirements. (iii) certain taxes; with the exception of mortgages and pledges that have a special priority. However, certain industries may have limitations on foreign ownership, like media businesses in which foreign ownership is restricted to 30%, unless there is a reciprocal treaty which allows a higher percentage. For foreign exchange controls, please see question 7.5.

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6.2 Are there any bilateral investment treaties (or other 7.2 Must any of the financing or project documents be international treaties) that would provide protection registered or filed with any government authority or from such restrictions? otherwise comply with legal formalities to be valid or enforceable? Please see question 6.1 above. In addition, in the 1990s Argentina signed various bilateral treaties for the reciprocal promotion and In general, the validity or enforceability of the financing or project protection of investments. documents does not require a registration or filing with any Government authority. However, depending on the type of industry, certain documents 6.3 What laws exist regarding the nationalisation or must be filed before the agencies mentioned in question 7.1. In

expropriation of project companies and assets? Are Argentina any forms of investment specially protected? certain industries there are tax benefits or exclusions (e.g. mining), in which case the documents must be filed in order to obtain them. Expropriation Law No. 21,499 sets forth that any goods that satisfy Additionally, the documents may have to be filed before the Central the “public utility” purpose may be subject to expropriation by the Bank for foreign exchange purposes; see question 7.6. Federal Government. Bilateral treaties subscribed by Argentina The financing documents can be executed through private for the reciprocal promotion and protection of investments usually instruments. Nevertheless, in case the documents are executed establish conditions of nationalisation or expropriation. In general, abroad, to be enforceable it would be advisable that the signatures at the Provincial level, there are also expropriation laws. of the parties be certified by a public notary and the signature of the notary duly legalised. Also, if the documents are not in Spanish, a translation by a public translator is required. 7 Government Approvals/Restrictions

7.3 Does ownership of land, natural resources or a 7.1 What are the relevant government agencies or pipeline, or undertaking the business of ownership or departments with authority over projects in the typical operation of such assets, require a licence (and if so, project sectors? can such a licence be held by a foreign entity)?

The relevant Government agencies depend on each project and the It is not necessary to obtain a licence to own land in Argentina. areas they will cover. On a Federal level, the main authorities would However, Law No. 26,737 establishes that foreign residents cannot be the following: own more than 1,000 hectares (approx. 2,471 acres) of rural land. (A) The Ministry of Production, which is responsible for agencies Also, developing a project related to such land may require certain (among others) such as: permits or authorisations, which may be related to the nature of the (i) The Secretary of Industry and Services. industry or its environmental impact. Furthermore, local licences (i.e. construction permits) may be required. (ii) The Secretary of Commerce. (iii) The Secretary of Entrepreneurs and Small and Midsize With regard to natural resources, there are exploration permits Companies. and exploitation concessions which must be obtained, as well as authorisations from the applicable provincial authority. (B) The Ministry of Internal Affairs, Public works and Housing, which is responsible for agencies (among others) such as: (i) The Secretary of Public Works, which includes: 7.4 Are there any royalties, restrictions, fees and/or ■ The Undersecretary of Water Resources. taxes payable on the extraction or export of natural resources? (ii) Autonomous entities, such as: ■ The Regulatory Authority for Water and Sanitation Yes. For hydrocarbons, Law No. 17,319 as amended by Law (ERAS). No. 27,007 sets the regulation on a Federal level. The holder of (C) The Ministry of Energy and Mining, which is responsible for an exploration permit or an exploitation concession shall pay an the following agencies: annual canon to the province on which the field is located – or to (i) The Secretary of Electric Energy. the Federal Government in case of off-shore permits or concessions (ii) The Secretary of Fuel (oil and gas). – in advance in proportion to the extension of the granted area. In (iii) The Secretary of Mining. addition, for the exploitation concession the concessionaire shall pay a monthly royalty equal to a percentage of the oil production. (iv) The Secretary of Strategic Planning for Energy. Regarding the export of hydrocarbons, Decree 929/13, which (v) Autonomous entities, such as: created a promotional regime, establishes incentives for oil and gas a. The National Regulatory Authority for Electricity producers that bring hard currency equivalent to US$ 1 billion into (ENRE). the country during the first five years of the project. b. The National Regulatory Authority for Gas For mining, the provinces are entitled to collect as royalties a (ENARGAS). percentage of the pithead value of the extracted minerals. Companies (D) There may be others depending on the industry related to operating under Mining Investment Law No. 24,196 get tax stability the project, such as the Ministry of Communication or the for 30 years. Ministry of Transport. Additionally, each Province has its own relevant agencies. 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?

Since 2001, foreign exchange transactions, as well as the entry

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into Argentina (such as capital contributions or loan proceeds) and the remittance abroad (such as dividend, interest, royalty, fees or 7.7 Can project companies establish and maintain other services payments) of foreign currency, were subject to a onshore foreign currency accounts and/or offshore accounts in other jurisdictions? foreign exchange control regime. During 2016 the most significant restrictions were removed. Yes, they can. Foreign exchange transactions may only be conducted in the Foreign Exchange Market. The remittance of dividend payments abroad is allowed (so long as 7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental they conform to a closed and audited balance sheet), as well as the practice or binding contract) on the payment of remittance abroad of royalties, fees or other services payments. In dividends from a project company to its parent Argentina all cases, the payments and remittances abroad are subject to the company where the parent is incorporated in your prior filing of the affidavits set forth in Communications “A” 3602 jurisdiction or abroad? (“Information regime of securities issuances and external financial debts) and “A” 4237 (“Information Regime of Direct Investments”) No, other than as mentioned in questions 7.5 and 7.6. of the Central Bank.

Borrowers are no longer obliged to enter the borrowed funds into 7.9 Are there any material environmental, health and Argentina, and are also allowed to keep funds as collateral in safety laws or regulations that would impact upon a accounts abroad. project financing and which governmental authorities administer those laws or regulations?

7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment In principle, the Federal Government sets minimum standards for the returns or loan payments to parties in other protection of the environment and the provinces and municipalities jurisdictions? establish specific standards and implementing regulations. At the Federal level, the main environmental legislation is the Regarding foreign exchange controls, please refer to question 7.5. Environmental Law No. 25,675 and the Integrated Management of Industrial Waste and Services Activities Law No. 25,612. There Different tax rates of withholding may be applicable to dividends, are other specific environmental protection regulations that address interest, royalties, fees or other services payments abroad, depending the kinds of waste whose generation, treatment and disposal are on the jurisdiction in which the relevant party is located. regulated by law; or natural resources protected by law; or specific Dividend payments: if the amount of dividends paid does not exceed waste-generating industries, such as mining and hydrocarbons. the tax net income of the project company there is no withholding, The Environmental Law provides guidelines for environmental but any excess is subject to a 35% rate. Similar treatment applies impact assessment procedures to be used prior to undertaking any in case of reduction of legal capital of the company. Corporate tax kind of work or activity that may harm the environment or the is 35%. population’s quality of life. The sale of of a local non-listed company by a resident is The Law of Integrated Management on Industrial Waste and Services subject to income tax of up to 31.5%. It is also applicable to a sale Activities establishes the minimum thresholds of environmental by a foreign resident. protection in regard to the integrated management of waste Interest payments to foreign residents are subject to: (A) withholding generated throughout the country, as well as waste derived from tax at a rate of (i) 15.05% if the country where the lending institution industrial processes or from service-related activities. Authorities is located is considered by the Tax Authorities to be “cooperative for from the provinces and the city of Buenos Aires must keep a record fiscal transparency”, or (ii) 35% if the condition indicated in (i) above of all those responsible for generating, handling, transporting, is not met; and (B) VAT at a rate of (i) 10.5% if the Central Bank of storing, treating and disposing of industrial waste. the country where the lending institution is located has adopted the Basel Banking Committee Rules, or (ii) 21% if the Central Bank 7.10 Is there any specific legal/statutory framework for of the lending institution does not follow such standards, in each procurement by project companies? case provided that the borrower engages in VAT-taxable activities. Loan fees and expenses payable to foreign residents incurred by the Between private parties, procurement is governed by civil and borrower to obtain the foreign loan, are subject to: (A) withholding commercial law without a specific framework. tax at a rate of 31.5%; and (B) VAT at a rate of 21%. A Public Procurement Regime was created and regulated by Regarding royalties, if the transfer of technology is registered with Executive Decrees 1023/2001 and 893/2012, which governs the the National Institute of Industrial Technology (INTI), the following selection process of parties contracting with the Federal Government withholding rates are applicable: (i) technical assistance – 21%; and and entities depending thereon, public bidding procedures being (ii) patents – 28%. In the absence of INTI registration, the rate is the general principle. It does not apply, among others, to public 35%. works, public works concessions, public services concessions The above treatment is subject to any applicable tax treaty between and permits, and public-private participation contracts that have a Argentina and the country of the investor, lender, service provider specific regulation such as the Public Works Law No. 13,064 and the or other. Public Concessions Law No. 17,520, including the Public-Private In addition, in general there is an exemption from income tax and Participation Contracts (PPP) Law No. 27,328. VAT in the case of interest and dividend payments to multilateral In addition, the Laws of Argentine Purchase No. 18,875 and No. credit institutions to which the Republic is a party. 25,551 establish a preference for the acquisition of goods and services of Argentine origin, when the acquirer or buyer of the goods or services is the Federal Government, any related entity or a public concessionaire.

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In 2014, the Federal Government signed an agreement for economic and investment cooperation with the Government of China, which 10.2 If so, what import duties are payable and are established that acquisitions and concessions for projects from the exceptions available? public sector may be awarded directly – without a bidding procedure – provided they are subject to concessionaire financing from China Import duties will vary depending on the tariff position given to and made in favourable quality and price conditions. In 2015, this each imported good. The provinces of Tierra del Fuego, San Luis agreement was approved by the National Congress, thus it came into and La Pampa, among other jurisdictions, have special regimes – force. with tax benefits – for the import of certain goods, provided that those goods are assembled and finalised therein.

8 Foreign Insurance 11 Force Majeure Argentina

8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or 11.1 Are force majeure exclusions available and guaranteed by foreign insurance companies? enforceable?

Law No. 12,988 provides that it is forbidden to acquire insurance Yes. The law defines force majeure as an event that cannot be coverage with foreign companies when the covered risks occur prevented or, if prevented, cannot be avoided. In addition, the event in Argentine territory. For large infrastructure projects, local should be unrelated to the debtor’s control, must exist at the time insurers tend to reinsure the policies with international reinsurance of the fulfilment of the obligation and should make the fulfilment companies, which must comply with the supervision and economic impossible. requirements established by the National Superintendence of Insurance, in order to be an acceptable reinsurance transaction. 12 Corrupt Practices

8.2 Are insurance policies over project assets payable to foreign (secured) creditors? 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or Yes. Although, in the event of paying, local insurance companies criminal penalties? will pay in local currency at the official exchange rate. Once paid, project lenders will have to purchase US dollars and send them The Criminal Code criminalises the bribery of public officers abroad. with imprisonment. It punishes the person who offers any undue advantage to a public officer with the intent of influencing him to 9 Foreign Employee Restrictions act or refrain from taking a given action in the performance of his duties. In addition, it punishes the public officer who accepts or asks for those ‘advantages’. 9.1 Are there any restrictions on foreign workers, Moreover, it punishes the employees and officers of financial technicians, engineers or executives being employed institutions and those who operate in the exchange stock market that by a project company? unduly receive any financial benefit as a condition to celebrate a given operation. No, provided they are holders of the appropriate work visa. Not only individuals but also entities may be subject to criminal Nevertheless, Laws No. 18,875 and No. 25,551 establish that the sanctions. Federal Government will grant preference to local companies in the procurement of works and services, which require that at least 80% In 2016, Law No. 27,304 was enacted as an amendment to the of its employees are Argentine residents. Criminal Code, which allows the courts to reduce sanctions of those who, within a criminal action, provide precise and true information to the court regarding the crimes under investigation. 10 Equipment Import Restrictions Finally, Argentina is a party to the UN Convention Against Corruption and is a member of the OECD, under which Argentina signed the “Convention Against Bribery of Foreign Public Officials 10.1 Are there any restrictions, controls, fees and/or taxes in International Business Transactions”. on importing project equipment or equipment used by construction contractors? 13 Applicable Law Regarding the import of project equipment or equipment used by construction contractors, there are two main options under the Customs Law No. 22,415. A first alternative is the permanent 13.1 What law typically governs project agreements? import of such goods paying the pertinent import rights and taxes, which requires a previous filing of a form before the Customs. Domestic or foreign law can govern the project agreements. New A second option is a temporary import for capital equipment, York law is used in several cases. provided such equipment is used within an “economic process”. The procedure would include a previous filing before the Customs. 13.2 What law typically governs financing agreements?

The applicable law of the lender or a law which is acceptable to it. New York law is used in many cases.

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13.3 What matters are typically governed by domestic law? 17 Tax

In addition to securities agreements, promissory notes are sometimes 17.1 Are there any requirements to deduct or withhold tax governed by domestic law. Projects which involve the use of, or are from (a) interest payable on loans made to domestic related to, public property, works and/or concessions, are in general or foreign lenders or (b) the proceeds of a claim under governed by domestic law. a guarantee or the proceeds of enforcing security?

Regarding domestic lenders, the interest paid to them is subject to: 14 Jurisdiction and Waiver of Immunity (A) withholding tax at a rate of (i) 3% in case of loans granted by

Argentina Argentine financial entities, and (ii) 6% in case of other lenders; 14.1 Is a party’s submission to a foreign jurisdiction and and (B) VAT at a rate of (i) 10.5% in the case of loans granted by waiver of immunity legally binding and enforceable? Argentine financial entities to borrowers registered for such tax with the tax authority, and (ii) 21% in the case of loans granted by Yes, if the subject matter is international, and if there is a reasonable other lenders or in the case of borrowers that are not registered for point of connection with such jurisdiction. such tax or that are final consumers. In the case of loans granted by Argentine financial entities, such entities are considered self- withholders. In addition, at provincial level, operations by Argentine 15 International Arbitration financial entities and other entities are subject to gross income tax, which rate depends on the applicable jurisdiction (e.g. in the City of Buenos Aires, the rate is 6% for Argentine financial entities and 15.1 Are contractual provisions requiring submission 6.5% for other entities). of disputes to international arbitration and arbitral awards recognised by local courts? Regarding foreign lenders, please see question 7.6.

Yes, provided that they are patrimonial and international matters. 17.2 What tax incentives or other incentives are provided International awards are recognised by local courts if they fulfil such preferentially to foreign investors or creditors? What requirements as are issued in cases where submission to arbitration taxes apply to foreign investments, loans, mortgages was permitted, and where the award does not affect the public order or other security documents, either for the purposes of Argentine law, among others. of effectiveness or registration?

There are no tax incentives or other incentives provided 15.2 Is your jurisdiction a contracting state to the New York preferentially to foreign investors or creditors. However, depending Convention or other prominent dispute resolution on the activities performed (such as oil, mining or gas) a legal right conventions? to tax stability may be applicable.

Yes, Argentina is a contracting state to such conventions. Regarding taxes for the purpose of effectiveness or registration of transaction documents, please see question 2.6.

15.3 Are any types of disputes not arbitrable under local law? 18 Other Matters

Yes, for example, labour matters, antitrust, criminal law, tax, administrative, bankruptcy and industrial property law, and family 18.1 Are there any other material considerations which should be taken into account by either equity matters. Disputes which do not involve patrimonial matters, or investors or lenders when participating in project which may not be settled by the parties, are not arbitrable. financings in your jurisdiction?

15.4 Are any types of disputes subject to mandatory The most relevant issues have been covered previously. domestic arbitration proceedings?

18.2 Are there any legal impositions to project companies No, they are not. issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 16 Change of Law / Political Risk instruments.

Pursuant to Capital Markets Law No. 26,831 an issuer has to obtain 16.1 Has there been any call for political risk protections such as direct agreements with central government or authorisation for from the National Securities political risk guarantees? Commission (CNV) to make public offerings of securities like project bonds. The law requires the issuer’s compliance with It is common for project companies or their lenders to contract the CNV’s initial and periodic reporting obligations, including a political risk insurance with multilateral institutions or export prospectus with the terms of the offer. agencies. Such insurance usually provides guarantees against the risks of currency convertibility or transferability.

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19 Islamic Finance 19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha could be taken to mitigate this risk? instruments might be used in the structuring of an Islamic project financing in your jurisdiction. No, it could not. This is not applicable.

19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have Argentina there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?

This is not applicable.

Carlos María Tombeur Matías Grinberg Severgnini, Robiola, Grinberg & Tombeur Severgnini, Robiola, Grinberg & Tombeur Reconquista 336, 2nd floor Reconquista 336, 2nd floor C1003ABH, Buenos Aires C1003ABH, Buenos Aires Argentina Argentina

Tel: +54 11 5550 9970 Tel: +54 11 5550 9970 Email: [email protected] Email: [email protected] URL: www.severgnini.com.ar URL: www.severgnini.com.ar

Education: University of Buenos Aires, School of Law and Social Education: Fordham University, School of Law, New York, LL.M. in Sciences, qualifying as a lawyer in 1976. Banking, Corporate and Finance Law, 1998; and Argentine Catholic University, School of Law and Social Sciences, qualifying as a lawyer Experience: Member of the Board of Directors of the Central Bank of in 1995. the Republic of Argentina (1991–1992); Legal Undersecretary of the Ministry of Economy and Public Works and Services (1992–1996); and Teaching Experience: Argentine Catholic University, School of Law, Comptroller of Seguro de Depósitos S.A. (SEDESA – Federal Deposit professor of “Commercial Law and Business Companies Law”; Insurance Company) (1997–2001), as appointed by the Central Bank Argentine Catholic University, School of Law, professor in “Banking of the Republic of Argentina. and Monetary Law” on the Masters in Economic and Enterprise Law Programme; and Universidad Argentina de la Empresa, School of Law Teaching Experience: Di Tella University, School of Law, professor of and Social Sciences, professor in “Mergers & Acquisitions” on the Economics and Regulatory Activities. Masters in Enterprise Law Programme. Member of: The Bar Association of the City of Buenos Aires; and the Experience: Foreign Associate, White & Case LLP, New York, 1998– International Bar Association. 1999. Member of: The Bar Association of the City of Buenos Aires; and the Lawyers’ Committee of Banks of the Republic of Argentina.

Severgnini, Robiola, Grinberg & Tombeur is one of the leading law firms in Argentina and was founded in 1925. Almost 90 years later, it remains a firm guided by the principles and values on which it was founded: experience; expertise; initiative; professionalism; and excellence. The firm offers its clients a full range of legal and consulting services in both international and local matters, with a particular emphasis on: Corporate Law; ; Finance Law and Capital Markets; Banking; Civil Law; Litigation, Arbitration and Conflict Resolution; Labour and Social Security; Administrative Law; Criminal and Criminal Tax Law; Consumer and Antitrust; Tax; Intellectual Property; Telecommunications and Radio Broadcasting; and Natural Resources. Throughout its history and with the development of new areas of expertise, Severgnini, Robiola, Grinberg & Tombeur has built relationships with law firms both throughout Argentina and abroad, which has ensured that the firm can offer its clients access to the fullest range of legal assistance.

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Bangladesh Karishma Jahan

The Legal Circle Anita Ghazi Rahman

In the telecommunication sector, Robi received a USD 99 million 1 Overview loan from the International Finance Corporation to expand its 3G network in Bangladesh. The loan has been received at LIBOR plus 1.1 What are the main trends/significant developments in 2% with a tenure of seven years. the project finance market in your jurisdiction? In the port sector, Summit Alliance Port Limited received USD 30.51 million from Nederlandse Financierings-Maatschappij voor Capital is a major constraint for domestic Bangladeshi project Ontwikkelingslanden N.V. and Infrastructure Development Company financings. The local equity capital market is very small, with Limited for the development of an inland container depot on the almost no liquidity above USD 20 million. There is no institutional project land, including the construction, operation and maintenance pool to secure long-term equity investment. Both retail and of a quay/container berth, acquisition and installation of necessary institutional investors have very short exit timelines and limited cargo handling equipment, and acquisition of vessels. quantum. Structured investments are difficult to do as there is little familiarity both for investors and regulators. The local debt market is liquid but the tenure offered is for the very 2 Security short term (a maximum of eight years for a Taka-denominated loan and five years for a Dollar-denominated loan), which does not meet 2.1 Is it possible to give asset security by means of the need of capital-intensive large infrastructure projects. Projects a general security agreement or is an agreement get financed through very simple, organically available equity required in relation to each type of asset? Briefly, and plain debt. The documentation involved for domestic project what is the procedure? financing is a hybrid between project finance and commercial debt transactions, and ranges from taking security on the project assets It is not possible to give asset security by means of a general security to obtaining personal guarantees from the sponsors or corporate agreement. Due to the requirement of perfection of security, which guarantees from the parent company. involves registration, notification or recordation with separate Those managing infrastructure projects, especially in the power, regulators or parties, an agreement is required in relation to each telecommunications and garments industries, have recently opted to type of asset. avail themselves of project financing from multilateral institutions The different forms of security available are mortgage over and development finance institutions (DFIs). Foreign loans in the immoveable property, hypothecation over present and future book country’s private sector have seen a steady increase over the years, debts, moveable properties and plant and machinery, pledge over with USD 1.88 billion in 2015, USD 1.834 billion in 2014, USD shares, letters of credit, and corporate or personal guarantees. 1.173 billion in 2013, USD 1.466 billion in 2012, USD 909.30 Sponsor support is sought to cover identified project risk and may million in 2011, USD 302.77 million in 2010 and USD 478.09 relate to project completion, project cost over-run or share retention million in 2009. The textile, ready-made garment (RMG), power by lead sponsors. Debt service shortfalls are also sought from plant, power transmission and distribution, and telecommunication sponsors by way of sponsor deficiency undertakings. sectors received a major share of the foreign loans. The foreign loans mentioned above are usually in the form of project financing – however, they are not purely limited or non-recourse lending – 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether the sponsors usually have to extend completion guarantees or other underground or overground)? Briefly, what is the forms of sponsor support. procedure?

1.2 What are the most significant project financings that Security can be taken over real property (land), plant, machinery have taken place in your jurisdiction in recent years? and equipment. Security over land is created by way of a mortgage in accordance Notable project finance deals in recent years have included the USD with the mechanism set out in the Transfer of Property Act, 1882. 210 million loan for setting up a 341 megawatt (MW) combined- The Act allows both freehold as well as leasehold properties to be cycle gas-fired power plant project near Bibiyana, Bangladesh. The mortgaged in order to secure a debt. loan was extended by the Asian Development Bank, the International Finance Corporation and the Islamic Development Bank.

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The mortgage is effected by a registered instrument signed by the deposited in bank accounts by way of either a floating or a fixed mortgagor and attested by at least two witnesses. Mortgages are charge, or by way of assignment of the relevant debt or account, established through a two-step procedure: depending on the type of bank account. 1. The deed of mortgage is prepared and executed before the Sub-Registrar of Land with jurisdiction over the land 2.5 Can security be taken over shares in companies mortgaged, and registration with the Land Registration Office incorporated in your jurisdiction? Are the shares in after payment of the requisite stamp duty and registration certificated form? Briefly, what is the procedure? fees. 2. In the event that the mortgagor is a company, the mortgage Security over shares is taken by way of pledge of shares, by is registered with the Registrar of Joint Stock Companies and executing a share pledge agreement. For the purpose of creating Firms.

a security interest by way of pledge in favour of the lenders, the Bangladesh It is usual to execute a power of attorney in respect of the mortgage chargors are required, in respect of all of their certificated shares, to that allows the mortgagee/secured lender to sell the mortgaged deposit with a third party the following: property in a default scenario. 1. Original certificates in respect of the shares. The creation of security over plant, machinery or equipment is 2. Blank share transfer forms executed by each of the chargors, by way of hypothecation. A deed of hypothecation is executed along with verification of the same by the borrower. between the borrower and the secured lenders, under which the The lenders, or the third party, on the instruction of the lenders may, latter acquires security interest in identifiable assets, e.g. all present in a default scenario, complete such transfers and present them for and future book debts, actionable claims, debts, moneys receivable, registration in the company. investments, account proceeds, deposits, moveable property and all documents constituting title to or control over the property and all In respect of uncertificated/dematted shares held in the Central insurance proceeds relating thereto, all plant, machinery, equipment, Depository Bangladesh Limited (CDBL), the pledgor may either spares and accessories. The deed of hypothecation is executed opt to rematerialise the shares and pledge in accordance with the simultaneously with a power of attorney, allowing the secured procedure set out above or may pledge the shares in uncertificated lenders to sell the hypothecated properties in a default scenario. form if the pledgee of the shares is a participant or a depository account holder of CDBL. The process of creating pledge of dematted In the event that the chargor is a company, the deed of hypothecation shares is by the pledgor giving instructions to the participant to pledge is registered with the Registrar of Joint Stock Companies and Firms. its shares to the pledgee. After the pledgee confirms acceptance of the pledge, the shares are “frozen” in the account of the pledgor and 2.3 Can security be taken over receivables where the cannot be moved until instructions are received from the pledgee. chargor is free to collect the receivables in the The instruction from the pledgee may be to “release” the pledge absence of a default and the debtors are not notified (for example, if the loan has been repaid) or to move the shares to of the security? Briefly, what is the procedure? its own (or a third-party) account (for example, if the pledgor has defaulted on his repayments). As the shares remain in the account Security can be taken over receivables through the execution of an of the pledgor (although frozen), the pledgor will receive all benefits assignment of rights from the borrower/debtor in favour of creditors/ (e.g. dividends and bonus issues) and will still be able to vote. lenders. The manner in which such receivables would be collected depends on the agreement between the chargor and the chargee. To ensure the enforceability of the assignment agreement, the person 2.6 What are the notarisation, registration, stamp duty from whom receivables are obtained is notified of the assignment. and other fees (whether related to property value or otherwise) in relation to security over different types Fixed charges over receivables or bank accounts require the secured of assets (in particular, shares, real estate, receivables lender to control both the receivables and the account into which and chattels)? they are paid when collected; this is achieved by the borrower being required under the accounts agreement to receive all its receivables Pledge of shares attracts stamp duty at the rate of 0.5% on the loan in an identified account. Security over receivables can also be taken amount. by way of a floating charge. Registration of a deed of mortgage attracts fees of Taka 5,500 for a deed value above Taka 10 million. Stamp duty payable is Taka 2.4 Can security be taken over cash deposited in bank 5,500 for a up to Taka 10 million and Taka 100 for every accounts? Briefly, what is the procedure? Taka 100,000 above. Registration of a charge document with the Registrar of Joint Stock Project financings in Bangladesh are accompanied by a strict regime Companies and Firms attracts fees of Taka 150 for the first Taka in relation to the project’s cash flows. The borrowers and lenders 500,000 secured amount, Taka 120 for every Taka 500,000 for the enter into an accounts agreement with an identified accounts bank, next Taka 5,000,000, and Taka 60 for every Taka 500,000 for the and establish dedicated accounts for the receipt and withdrawal of rest of the secured amount. cash earned by the project or required to be expended by the project in accordance with the rules on priority of application of available cash. The agreement also sets out the rules as to withdrawals from 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets the accounts bank. Withdrawals will cease to be permitted upon involve a significant amount of time or expense? the occurrence of an actual or potential event of default. Any withdrawal which is not permitted under the relevant account or Apart from payment of the requisite stamp duties and taxes, the accounts bank agreement will trigger default; default will permit the filing, notification or registration requirements in relation to security lenders to enforce security. In the context of receivables and bank over the different types of assets do not involve a significant amount accounts, this will include transferring to the lenders full control of time or expense. over receivables and accounts. Security can be taken over cash

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2.8 Are any regulatory or similar consents required with 5 Bankruptcy and Restructuring respect to the creation of security over real property Proceedings (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.? 5.1 How does a bankruptcy proceeding in respect of the Please see question 2.2 above. project company affect the ability of a project lender to enforce its rights as a secured party over the security? 3 Security Trustee Secured creditors have priority over all other creditors and claimants except floating charge holders as per the Companies Act, 1994 and Bangladesh 3.1 Regardless of whether your jurisdiction recognises the Bankruptcy Act, 1997. The debts are payable to the fullest the concept of a “trust”, will it recognise the role of extent unless the assets are insufficient to meet them, in which case a security trustee or agent and allow the security they are abated in equal proportions. trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the 5.2 Are there any preference periods, clawback rights lenders? or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security? Bangladesh recognises the concept of trust, and will recognise the role of a security trustee or agent and allow the security trustee Bankruptcy or insolvency proceedings may limit and restrict the or agent (rather than each lender acting separately) to enforce the extent of the security package available to creditors, inter alia, security and to apply the proceeds from the security to the claims on account of laws relating to fraudulent preference. The secured of all the lenders. creditors are subordinated to claims of the Government in respect of statutory dues. Further, other amounts identified by statute, such 3.2 If a security trust is not recognised in your as workmen’s dues, may have a priority or right over the jurisdiction, is an alternative mechanism available claims of the secured creditors. (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or 5.3 Are there any entities that are excluded from the facility agent) to enforce claims on behalf of all bankruptcy proceedings and, if so, what is the the lenders so that individual lenders do not need to applicable legislation? enforce their security separately? Government organisations or judicial bodies, charitable or religious Please see question 3.1 above. bodies, statutory bodies whose principal object is not financial gain, and autonomous bodies, cannot be included in bankruptcy proceedings. 4 Enforcement of Security

5.4 Are there any processes other than court proceedings 4.1 Are there any significant restrictions which may that are available to a creditor to seize the assets of impact the timing and value of enforcement, such the project company in an enforcement? as (a) a requirement for a public auction or the availability of court blocking procedures to other Typical project security arrangements will include detailed creditors/the company (or its trustee in bankruptcy/ contractual controls over project receivables, cash and bank accounts, liquidator), or (b) (in respect of regulated assets) and “step-in” and related rights and contractual arrangements with regulatory consents? counterparties to key project documents providing protection against borrower non-performance, insolvency and other matters. Generally no, unless there are private actions seeking injunctive reliefs. Further, the Money Loan Courts Act, 2003 also requires lenders to recover their borrowing by sale of the secured assets prior to initiation of court action for recovery of the loan. 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies? 5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown In principle, no. However, Artha Rin Adalat Ain, 2003 (the Money of dissenting creditors? Loan Court Act, 2003), a law enforced to provide fast-track remedies to financial institutions providing money to borrowers, will not Section 228 of the Companies Act, 1994 provides a procedure for be applicable to foreign creditors or investors (excluding limited financial institutions named in the Act, e.g. the Islamic Development companies to make a compromise or arrangement with its creditors Bank, the International Development Association, the World Bank, or any class of them which will be binding on all creditors in the the International Finance Corporation, and the CDC Group (formerly relevant classes if the requisite majorities vote to approve the the Commonwealth Development Corporation)), and therefore scheme. A scheme requires the approval of a majority in number foreign creditors or investors will not be able to take advantage of of creditors holding 75% in value of each affected class, and the the various fast-track procedures for recovery of the secured amount sanction of the High Court Division of the Supreme Court of or the remedies available under the Act, e.g. sale of security prior to Bangladesh. the commencement of a suit for recovery of the loan.

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expropriated or nationalised, immediately before the expropriation 5.6 Please briefly describe the liabilities of directors (if or nationalisation) which shall be paid expeditiously and be freely any) for continuing to trade whilst a company is in transferable. Transfer of capital, returns from foreign private financial difficulties in your jurisdiction. investment and proceeds from liquidation is guaranteed.

There are no specific provisions under the Companies Act, 1994 dealing with the liabilities of directors for continuing to trade when 7 Government Approvals/Restrictions a company is in financial difficulties.

7.1 What are the relevant government agencies or 6 Foreign Investment and Ownership departments with authority over projects in the typical project sectors? Restrictions Bangladesh

The exact nature of the project will determine which regulatory 6.1 Are there any restrictions, controls, fees and/or taxes bodies and/or Government agencies will have authority over the on foreign ownership of a project company? project. However, there are a number of bodies which have an overarching function in respect of development related to the typical Other than the four controlled sectors named in the Industrial Policy project sectors. (these being military, nuclear power, security printing and minting, Board of Investment: If the project finance involves foreign lending and forestation and mechanised extraction within reserved forests), or use of instrument (for example guarantees to non-residents, hedge project companies may be wholly owned by foreign shareholders, instruments or letters of credit), the project company is required to excluding those in the insurance, logistics and telecommunication seek approval of the foreign lending or instrument from the Board industries, where foreign participation has been capped at between of Investment. 49–60%, as applicable to the particular sector. Foreign ownership Department of Environment: The Department of Environment is does not attract specific restrictions, controls, fees or taxes. A the main environment regulator responsible for the environmental company wholly or partially owned by a foreign shareholder(s) will permitting regime covering most areas of environmental regulation, experience the same restrictions, controls, fees and/or taxes as a including water pollution control, air quality management, site company wholly owned by resident shareholders. clearance and waste management. Insurance Development Regulatory Authority: If the project financing 6.2 Are there any bilateral investment treaties (or other requires insurance to be sought from insurers outside of Bangladesh, it international treaties) that would provide protection would be required to seek permission from the Insurance Development from such restrictions? Regulatory Authority. Bangladesh has signed bilateral investment treaties, protecting Furthermore, each industry sector is regulated by its regulators; for investor rights, with 30 countries. instance, the energy industry is regulated by the Bangladesh Energy Regulatory Commission, whilst the telecommunication industry is regulated by the Bangladesh Telecommunication Regulatory 6.3 What laws exist regarding the nationalisation or Commission. expropriation of project companies and assets? Are any forms of investment specially protected? 7.2 Must any of the financing or project documents be Bangladesh has not yet experienced any nationalisation or registered or filed with any government authority or expropriation of project companies and assets involving foreign otherwise comply with legal formalities to be valid or enforceable? investment. Moreover, protection has been accorded to foreign investment under the Foreign Private Investment (Promotion and Protection) Act, 1980 which ensures fair and equitable treatment In respect of financing that requires permission of the Board to foreign private investment by the Government. The Act states, of Investment, the financing documents are required to be filed amongst other provisions, that the terms of sanction, permission with the Board of Investment within 15 days of execution of the or licence granted by the Government to an industrial undertaking documents. There are sectoral requirements for the submission of having foreign private investment, shall not be unilaterally changed project documents as well. For instance, in respect of Independent so as to adversely alter the conditions under which the establishment Power Projects, the project agreements include an obligation to of such undertaking was sanctioned. It ensures that the foreign submit the financing documents to the Government, represented by private investment is not accorded less favourable treatment the Ministry of Power, Energy and Mineral Resources. than that which is accorded to similar private investments by the citizens of Bangladesh in the application of all relevant rules 7.3 Does ownership of land, natural resources or a and regulations. Under the Act, the Government further ensures pipeline, or undertaking the business of ownership or indemnification of losses of foreign investment suffered owing to operation of such assets, require a licence (and if so, civil commotion, insurrection, or riot. The Act states that these can such a licence be held by a foreign entity)? investments shall be accorded the same treatment with regard to indemnification, compensation, restitution, or other settlement as is Land accorded to investments by the citizens of Bangladesh. The Act There is no requirement for a licence to own land in Bangladesh, further provides protection from expropriation and nationalisation, nor is there a general bar on foreign ownership of private-sector stating that foreign private investment shall not be expropriated land. However: (a) in practice, there is a general understanding or nationalised or be subject to any measures having the effect of that foreign “individuals” cannot own land (based on the land expropriation or nationalisation, except for a public purpose against office refusing to allow registration to any person not holding a adequate compensation (at the market value of the investment Bangladeshi identification) and, as such, land has to be owned by

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foreigners through incorporating a company in Bangladesh; and (b) price for such investments, the Bangladesh Bank, while determining land owned by municipal corporations is leased out to interested the remittable amount, works out the net asset value, market value parties for long tenures and the lease agreement usually contains or of the shares on the basis of the typeof a restriction in respect of the transfer of a lease to a foreign entity. company and audited financial statements as on the date of sale. Prior Oil and gas permission of the Bangladesh Bank is not required for the sale/transfer, by one non-resident to another non-resident, of shares in public limited The Republic owns all mineral resources, including petroleum, companies not listed with the stock exchange companies. within the territory, continental shelf and economic zone of the country and has the exclusive right and authority to explore, develop, exploit, process, refine and market petroleum resources. On behalf 7.7 Can project companies establish and maintain of the Republic, the Bangladesh Oil Gas and Mineral Corporation onshore foreign currency accounts and/or offshore accounts in other jurisdictions? Bangladesh (Petrobangla) exercises the right and power to explore, develop, process and market petroleum and also to enter into petroleum agreements with any person/company for these purposes. Project companies can establish and maintain onshore foreign currency accounts and offshore accounts in other jurisdictions with Coal special approval from the Bangladesh Bank. Whilst permission from The ownership of coal vests in the Republic, which grants the the Bangladesh Bank is generally easily obtainable for maintaining licence for coal exploration and the lease for coal extraction. onshore foreign currency accounts in project financings involving foreign lending, permission for maintaining offshore accounts in 7.4 Are there any royalties, restrictions, fees and/or another jurisdiction is not easily granted by the Bangladesh Bank. taxes payable on the extraction or export of natural However, standard project agreements in the independent power resources? producer (IPP) industry provides that the Government shall ensure that relevant authorities grant permission for project companies Royalties, fees and land rents as set out in the Mines and Minerals to maintain offshore accounts for the purposes of achieving the Rules, 1968 are payable for the exploration and extraction of financial closing of the project. minerals. 7.8 Is there any restriction (under corporate law, 7.5 Are there any restrictions, controls, fees and/or taxes exchange control, other law or binding governmental on foreign currency exchange? practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your The Foreign Exchange Regulations Act, 1947 (FERA, 1947) jurisdiction or abroad? controls the exchange of foreign currency in Bangladesh. Whilst in principle there is no restriction on the inward remittance of foreign There is no restriction on payment of dividends from a project currency, the FERA, 1947 requires general or special permission of company to its parent company where the parent is incorporated in the Bangladesh Bank (the central bank of Bangladesh) for outward Bangladesh or abroad. Dividends are repatriable after payment of remittance of foreign exchange or creation of any obligation that the relevant dividend tax as imposed under the Bangladesh Income gives rise to a right in favour of a non-resident to receive foreign Tax Ordinance. exchange from a resident. All such permissions are required to be sought through authorised dealers, i.e. banks authorised by the Bangladesh Bank to deal with foreign exchange. 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a The requirement to obtain permission for foreign lending or usage project financing and which governmental authorities of foreign instruments, for instance, hedging instruments or opening administer those laws or regulations? letters of credit as well as providing guarantees to non-residents, is set out in the FERA, 1947. The Bangladesh Bank, under the FERA, Depending on the nature of the project and the industry in which it 1947, also controls the transfer of securities from residents to non- functions, various Government functionaries are involved to oversee residents, as well as the repatriation of sale proceeds of non-resident the material environmental, health and safety laws or regulations. equity investments. The primary regulator is the Department of Environment, which grants permission to commence civil works on the basis of the 7.6 Are there any restrictions, controls, fees and/or taxes Initial Environmental Examination Report. The Department of on the remittance and repatriation of investment Environment further approves the project for environmental and returns or loan payments to parties in other social impact on the basis of the Environmental Impact Assessment jurisdictions? Report of the project. A “no objection” certificate for the project, consent for site clearance, and an environmental clearance As stated earlier, prior permission of the Bangladesh Bank is required certificate, are provided by various relevant local governments in order to make loan payments in other jurisdictions. Application is and corporations. Various other organisations like the Inland Water made to, and permission granted by, the Board of Investment. Transport Authority and the Civil Aviation Authority are responsible Prior approval of the Bangladesh Bank is not necessary for remitting for granting permission for, amongst others, the use of river water, sales proceeds of listed securities held by non-residents. In such the dredging of rivers, and the building of a bypass or exhaust stack cases, the repatriable amount must not exceed the market price of at the site. securities prevailing in the stock exchange on the date of sale. Project financiers usually require the obtaining of all relevant However, prior approval of the Bangladesh Bank is required for the authorisations for implementation of the project as a condition repatriation of sale proceeds of non-residents’ equity investments in: precedent to disbursement of funds. Therefore, depending on the (1) public limited companies that are not listed on the stock exchange; nature of the industry and project, various authorities would have to and (2) private limited companies. There being no established market provide their consent in order for the project to be set up.

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2. Employment of expatriate personnel will be considered 7.10 Is there any specific legal/statutory framework for only in industrial/commercial establishments which are procurement by project companies? sanctioned/registered by the appropriate authority. 3. Employment of foreign nationals is normally considered for There is no legal/statutory framework for procurement by project jobs for which local experts/technicians are not available. companies. The Public Procurement Act, 2006 and the Public 4. Initially, employment of any foreign national is considered Procurement Rules framed under the Act, are applicable to contracts for a term of up to two years, which may be extended on the awarded by governments, local authorities or other public-sector basis of the merits of the case. bodies. 5. The Ministry of Home Affairs will be required to issue the necessary security clearance certificate.

8 Foreign Insurance Bangladesh 10 Equipment Import Restrictions 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or 10.1 Are there any restrictions, controls, fees and/or taxes guaranteed by foreign insurance companies? on importing project equipment or equipment used by construction contractors? The Insurance Act, 2010 of Bangladesh restricts persons to insure outside Bangladesh any risk or any part thereof in respect The importation of goods is regulated by the Import Policy Order. of any property or interests in Bangladesh unless a certificate has Excluding items on the restricted or prohibited list as set out in the been obtained from the Insurance Development and Regulatory Order, project equipment is freely importable by project companies Authority to the effect that the risk in question cannot be insured or contractors after payment of the relevant taxes. in Bangladesh. An exemption from the above requirement may be obtained. However, such exemptions are rarely granted. 10.2 If so, what import duties are payable and are Further, the Insurance Corporations Act, 1973 of Bangladesh requires exceptions available? 50% of all insurance business relating to any public property or to any risk or liability appertaining to any public property to be placed Import duties are payable in accordance with the rates imposed with the State-owned Shadharan Bima Corporation (a corporation by law. Few industries enjoy exemption from payment of duties. set up to conduct general insurance business). The remaining 50% For example, the IPP projects enjoy exemption from payment of of such business may be placed with the Corporation or any other customs duties in respect of equipment used for construction of the insurer in Bangladesh. Public property has been defined to mean any facilities, while in the RMG sector raw materials imported to make moveable or immoveable property belonging to the Government or the final export product are tax-free, subject to obtaining a customs a local authority, by direct ownership or through another entity (e.g. bonded licence from the Customs Bond Commissionerate. a company, firm, etc.), and a project financed out of an external loan or with external aid until commercial production. The Insurance Corporations Act further requires every insurer 11 Force Majeure registered in Bangladesh to re-insure at least 50% of the reinsurance amount with the Shadharan Bima Corporation. 11.1 Are force majeure exclusions available and enforceable? 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? Force majeure provisions are usually set out in all project documents and are enforceable under Bangladeshi law. There are no restrictions in this regard contained in any law or regulation. Secured creditors usually obtain an assignment of all insurance policies in respect of the project. 12 Corrupt Practices

9 Foreign Employee Restrictions 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company? Bribery and corrupt practices are offences under the Penal Code, along with the Prevention of Corruption Act, 1947. Bribery and A work permit is mandatory for every foreign national seeking corrupt business practices are punishable with imprisonment for a employment in Bangladesh. In principle, the authorities providing maximum period of seven years, or a fine, or both. the work permit will ensure that, out of the total number of employees, including top management personnel, the number of foreign employees does not exceed 5% in the industrial sector and 13 Applicable Law 20% in commercial sector. The following guidelines apply for the issuance of a work permit: 13.1 What law typically governs project agreements? 1. Only nationals of countries recognised by Bangladesh are considered for employment. Typically concessions, exploration licences, extraction leases or production-sharing contracts are governed by the laws of Bangladesh.

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The standard project agreements in IPP projects use English law as in the early stages of IPP projects. Calls for these guarantees are the governing law of agreements, except in the case of land lease not common, although the Government regularly assigns project agreements, which are governed by the laws of Bangladesh. agreements in favour of long-term lenders. Presently the power industry has an implementation agreement under which the Government guarantees the payment obligations of the various 13.2 What law typically governs financing agreements? authorities executing the project agreements.

Financing agreements for projects using domestic project finance are usually governed by the laws of Bangladesh. In respect of 17 Tax project financing obtained from foreign lenders, the parties may choose the governing law and generally choose English law.

Bangladesh 17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic 13.3 What matters are typically governed by domestic law? or foreign lenders or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? Land-related agreements, concessions, licences and leases for the exploration and extraction of minerals are typically governed by Investment returns and payments of loans are taxable under law. domestic law. Withholding tax is imposed in certain forms over the investment returns. Dividend tax is in force in Bangladesh. Tax on interest remittances with respect to lending in certain sectors may be 14 Jurisdiction and Waiver of Immunity exempted. All other interest is to non-residents, subject to withholding of the stipulated corporate tax rate currently subsisting. 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What Yes, it is. taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration? 15 International Arbitration There are no preferential tax reliefs provided to foreign investors or creditors. Certain industries, e.g. the electricity generation 15.1 Are contractual provisions requiring submission industry, the hi-tech park industry and the export processing zones, of disputes to international arbitration and arbitral are provided tax incentives and foreign investors or creditors may awards recognised by local courts? enjoy certain exemptions. IPP projects benefit from exemption of tax on interest from loans, as well as capital gains tax arising out of Yes, they are. the transfer of shares. However, these exemptions are not specific to foreign investment. 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions? 18 Other Matters

Yes, it is. 18.1 Are there any other material considerations which should be taken into account by either equity 15.3 Are any types of disputes not arbitrable under local investors or lenders when participating in project law? financings in your jurisdiction?

Criminal and regulatory matters, insolvency, dissolution or winding There is a requirement of mandatory listing with the stock exchanges up of a company and claims invoking statutory relief are some of the of Bangladesh once a company goes beyond a certain paid-up capital matters that are not arbitrable. limit or reaches a certain number of years of commercial operation. However, there is an exemption from this mandatory listing for foreign-owned companies and companies with foreign investment. 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? 18.2 Are there any legal impositions to project companies No, not in relation to commercial transactions. issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 16 Change of Law / Political Risk instruments.

The issuance of bonds and other capital market instruments requires 16.1 Has there been any call for political risk protections the prior approval of the Bangladesh Securities and Exchange such as direct agreements with central government or Commission, and may require other sector-specific regulatory political risk guarantees? permissions as applicable.

Political risk protections such as direct agreements with central government and political risk guarantees were extended to lenders

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Islamic banking has become a part of mainstream banking in 19 Islamic Finance Bangladesh. In view of some basic differences in Shari’ah-based Islamic banking and interest-based banking, the Bangladesh Bank 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha has issued guidelines for governance of Islamic banking. The instruments might be used in the structuring of an guidelines are issued under Section 45 of the Bank Companies Islamic project financing in your jurisdiction. Act, 1991 and are supplementary, and not substitute, to the existing banking laws, rules and regulations. Any points not covered under The Istina’a arrangement has been used in Bangladesh for foreign the guidelines and any contradiction or conflict situations are dealt lending, mainly by the Islamic Development Bank and its affiliates, with under the rules formulated pursuant to the Bank Companies for the purposes of financing the construction of assets during the Act, 1991 and Companies Act, 1994, as applicable. pre-completion period. Such assets have been funded by financiers Bangladesh to be purchased and leased back to project companies pursuant to 19.3 Could the inclusion of an interest payment obligation the Ijarah, by which the principal and the profit margin are returned in a loan agreement affect its validity and/or to the financier during the post-construction period of project enforceability in your jurisdiction? If so, what steps financing as rental consideration comprising the purchase price of could be taken to mitigate this risk? the asset as well as a fixed and/or floating profit margin calculated by reference to LIBOR. Based on guidelines issued by the Bangladesh Bank requiring Domestic project financings by Islamic Banks incorporated in Boards of Directors of Islamic Banks to conduct the business of Bangladesh use the mechanism of Bai-Murabaha for project banks in accordance with the principles of Shari’ah law, banks financing, which is a contractual buying and selling arrangement at operating on Islamic financing principles cannot charge interest. a profit mark-up calledMurabaha . The scenario as set out in the question has therefore not been tested in Bangladesh, making it difficult to predict an outcome or advise on mitigation options in such a scenario. However, using a governing 19.2 In what circumstances may Shari’ah law become law other than Bangladesh law may be a consideration. the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?

Shari’ah law is applicable to Muslims in respect of matters of inheritance, child custody and guardianship, marriage, maintenance or divorce laws, as well as management of wakf property.

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Karishma Jahan Anita Ghazi Rahman The Legal Circle The Legal Circle High Tower (9th Floor) High Tower (9th Floor) 9 Mohakhali C/A 9 Mohakhali C/A 1212 Dhaka 1212 Dhaka Bangladesh Bangladesh

Tel: +880 17 3071 3833 Tel: +880 17 1303 6917 Email: [email protected] Email: [email protected] URL: www.legalcirclebd.com URL: www.legalcirclebd.com

Ms. Karishma Jahan focuses on the energy sector and advises clients Ms. Anita Ghazi Rahman obtained her LL.B. (Hons) degree from Bangladesh on strategy and development as well as acquisition and financing of University College London (UCL), UK in 2002 and was called to the assets in the energy and infrastructure sector. Her key skills are in the Bar of England and Wales from the Honourable Society of Lincoln’s negotiation of project agreements with the Government, the drafting Inn, London in July 2003. and negotiation of engineering, procurement and construction (EPC) Anita has extensive experience in and knowledge of the energy and contracts and operation and maintenance (O&M) contracts, as well power sector. She has represented and acted as counsel in major as the financing of energy companies. To any large-scale energy energy and power projects in Bangladesh. She has previously transaction, Karishma brings experience of having worked with a acted as counsel for Orion Group and has advised them on an significant variety of industry participants, from the Government which engineering, procurement and supervision contract in connection with awards the energy contracts, to contractors undertaking EPCs and the construction of a 30,000 metric ton per annum capacity liquefied O&Ms, original equipment manufacturers, as well as multilateral petroleum gas terminal/filling plant. She has also acted as counsel for agencies, DFIs and commercial banks providing long-term financing to an Indian conglomerate for a project involving the implementation of projects. In recent years, she has represented the sponsors in respect a 750 MW dual-fuel combined-cycle power plant. Besides her long- of all their legal needs for implementation of the two largest power standing expertise in the energy sector, Anita also advises clients plants in Bangladesh constructed in the last 10 years, i.e. a 341 MW on business formation and transnational matters in other corporate combined-cycle power plant (CCPP) in Bibiyana, Sylhet and a 337 sectors. Anita has considerable experience litigating complex business MW CCPP in Meghnaghat, Narayanganj. She is presently advising disputes in the Supreme Court of Bangladesh in public procurement, sponsors on the implementation of a 750 MW CCPP in Meghnaghat, company and securities matters. Narayanganj. She sits in the Board of Khulna Power Company Limited as an independent director. She also regularly represents the Anti-Corruption Commission in the Supreme Court. Karishma was called to the Bar of England and Wales in the year 2002 by the Honourable Society of Lincoln’s Inn, London. She has been working as an Advocate of the Supreme Court of Bangladesh since 2004.

The Legal Circle is a firm of Barristers, Advocates and Legal Consultants specialising in representing clients in Bangladesh on both domestic and international legal matters. The Legal Circle is committed to providing the highest level of legal services and achieving cost-effective legal results for its clients by being flexible and highly responsive in its approach. The Legal Circle’s team comprises of lawyers with extensive experience in matters relating to power transmission, electricity generation and energy regulations. Our team also has vast experience in drafting and negotiating energy and electricity related commercial contracts as well as Project Agreements with governments for the implementation of major Projects. The Legal Circle has been regularly engaged across the full spectrum of the electricity generation industry as well as the oil and gas supply chain in Bangladesh.

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Brazil Pablo Sorj

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados Filipe de Aguiar Vasconcelos Carneiro

with Korea’s Export-Import Bank and Korea Trade Insurance Corp 1 Overview in a project financing. Another important ongoing project financing is Logum Logística’s 1.1 What are the main trends/significant developments in ethanol pipeline, 1,330 km in length, which will be capable of the project finance market in your jurisdiction? transporting ethanol from the country’s central-west region to consumption centres in the south-east. BNDES has provided a R$1.8 The Brazilian Development Bank (BNDES) continues to play billion bridge loan backed by guarantees issued by commercial banks. a dominant role in long-term financing in Brazil, although it has reduced disbursement prospects for the next few years. During 2016, only R$88 billion (approximately US$28 billion in February 2017) 2 Security was disbursed – a decrease of 35% compared to 2015. BNDES has announced that the main sectors that will receive financing 2.1 Is it possible to give asset security by means of are healthcare, education, exportation, innovation, environment, a general security agreement or is an agreement small and medium-sized enterprises, and infrastructure projects required in relation to each type of asset? Briefly, (especially water, waste and transport). The other two relevant what is the procedure? state-owned banks, Caixa Econômica Federal and Banco do Brasil, have increased their market share in recent years. Commercial There is no equivalent to a “blanket lien” in Brazil; specific banks have reduced their presence in the market, but continue to agreements are required to cover different categories of assets. provide bank guarantees (to BNDES and debentures) and BNDES Additionally, Brazilian law requires, among other formalities, that on-lending facilities. (i) the security agreements clearly identify the assets put forth as BNDES is requiring project companies to come up with multiple collateral, and (ii) the obligations being secured are described in sources of financing, including commercial banks, export credit the security agreements (i.e., principal amount, additional secured agencies and project bonds (debentures). The challenge has been obligations, schedule of amortisation, form of amortisation, place of to find commercial banks willing to provide such long-term loans, amortisation, interest payment, interest rate, etc.). and investors with the appetite to buy project bonds (debentures). Most project financings in Brazil rely on the following security package: There have been some discussions in recent years on reducing the amount of recourse against sponsors during the construction ■ pledge or fiduciary sale of shares; phase, which has led to an interesting debate about the optimal ■ pledge or fiduciary sale of assets; risk allocation among the parties involved in a project. In the ■ pledge or fiduciary assignment of rights and receivables; current market conditions, however, we expect banks to take a ■ mortgage of land and buildings; and more conservative approach and to require full recourse against the ■ personal, corporate or bank guarantee. sponsors during the construction phase. In most cases, perfection of the lenders’ security interest in personal property is achieved by registering the security agreement with the 1.2 What are the most significant project financings that relevant public registry, which depends upon the type of the asset and have taken place in your jurisdiction in recent years? its location, although specific requirements must be also observed when applicable (for instance, the notification of the counterparties One of the most significant projects of 2016 was the US$350 million of the rights fiduciarily assigned). financing provided by the Overseas Private Investment Corporation (OPIC) for the development, construction and operation of infrastructure (including dredging) related to ship-to-ship oil trans- 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether shipment operations at Terminal 1 of Açu Port. underground or overground)? Briefly, what is the In 2015, the US$2 billion financing of the steel plant located in procedure? São Gonçalo do Amarante, in the State of Ceará, by Companhia Siderúrgica do Pecém (CSP), a steel manufacturer sponsored by Mortgages and fiduciary sales given as collateral are the most Vale S.A., POSCO and Dongkuk Steel Mill Co., Ltd, was the most common forms of security granted over real estate properties to significant transaction. It was the first time BNDES had teamed up raise finance in Brazil.

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A mortgage is a type of in rem security which is created by the appropriate Registry of Deeds and Documents, the security must be registry of the public deed on the real estate record file with the registered in the relevant company’s share register book or, in the relevant Real Estate Registry Office. It is important to note that case of shares whose share registers are held by financial institutions Brazilian law forbids the automatic appropriation of the real estate in book entry form, by a register made by the financial institution given as a guarantee by the creditor as a result of default, hence a in its electronic registration system. The security document usually court proceeding with judicial auction is required to foreclose the governs the voting rights regarding the security granted over the property. shares. A fiduciary sale of land and buildings is created by means ofa contract between the original owner and the creditor (a deed is not 2.6 What are the notarisation, registration, stamp duty

Brazil mandatory in this case) and shall be registered in the real estate and other fees (whether related to property value or record file with the relevant Real Estate Registry Office inorder otherwise) in relation to security over different types to create the lien over the real estate and be valid against third of assets (in particular, shares, real estate, receivables parties. In the event of a default scenario, the creditor consolidates and chattels)? the ownership title of the real estate and subsequently conducts an auction for the sale of the real estate through the relevant Real Estate Any document in a foreign language to be introduced into a Brazilian Registry Office. No court proceedings are required. court proceeding or any other Brazilian public authority must be translated into Portuguese by a sworn public translator. Also, if Pledges and fiduciary sales given as collateral are also common documents executed outside Brazil have the signatures notarised by forms of security granted over non-real estate assets, such as a notary public, the documents must be consularised at a Brazilian machinery and equipment. The agreement between the original consulate in that country (except when such public notary is from a owner and the creditor shall describe in detail the asset subject to the country that is a signatory of the Hague Convention Abolishing the fiduciary sale and pledge and shall be registered with the Registry of Requirement of Legalisation for Foreign Public Documents dated Titles and Deeds of the debtor’s domicile in order to create the lien of 5 October 1961, in which case the consularisation by a Brazilian over the real estate assets and/or be valid against third parties. In the consulate is not required as such documents will be apostilled) event of a default scenario, extrajudicial foreclosure is allowed for and then registered with the applicable Registry of Deeds and pledges/fiduciary sales. For pledge/fiduciary sale of movable assets, Documents in Brazil. however, a court proceeding is required. Costs associated with notarisation and registration of a collateral security depend upon the type of security granted and the state 2.3 Can security be taken over receivables where the where the collateral is registered. Usually, filing fees vary according chargor is free to collect the receivables in the to the value of the secured obligations and the number of pages and absence of a default and the debtors are not notified of the security? Briefly, what is the procedure? parties to the document. There are no stamp duties.

Security granted over receivables requires, amongst other 2.7 Do the filing, notification or registration requirements formalities, the notification of the debtor of the receivables assigned, in relation to security over different types of assets informing him of the creation of the security, in order for the security involve a significant amount of time or expense? interest to be perfected and valid against him. The receivables may be deposited in checking accounts and the monies deposited can be Time and fees associated with filing, notification or registration will freely transacted; however, such structure may be considered fragile depend on the type of security granted and the state in which the as no assurance can be given as to whether the funds deposited in collateral is registered. In some states, the filing and registration such checking accounts will remain therein for purposes of security proceedings are time-consuming. interest upon the occurrence of an event of default. Therefore, commonly in Brazil the receivables are deposited in escrow 2.8 Are any regulatory or similar consents required with accounts which are regulated by account control agreements and respect to the creation of security over real property enable the lender to manage/block the account in case a default (land), plant, machinery and equipment (e.g. pipeline, occurs, preventing the chargor from collecting the receivables. whether underground or overground), etc.?

2.4 Can security be taken over cash deposited in bank Brazilian law prohibits public assets, and assets deemed essential accounts? Briefly, what is the procedure? for the rendering of public services, from being subject to any liens or attachments. A security interest can be created over the cash deposited in a bank In the case of security over (i) shares issued by a concessionaire account, as well as over all proceeds contained, from time to time, of public services in Brazil, or (ii) assets related to certain public therein. Therefore, security is usually granted over the bank account services, authorisation for the creation of the collateral or its to encompass all monies deposited therein. The bank in which the foreclosure may be required from the governmental authority/ account is held must be notified of the creation of the security for the agency that granted the relevant concession. security interest to be valid against him. However, in the case of grants of public-private partnerships, the governmental authority is able to provide a guarantee through to a 2.5 Can security be taken over shares in companies wider range of options, including constituting collateral as , incorporated in your jurisdiction? Are the shares in pledge, mortgage and trust receipt. certificated form? Briefly, what is the procedure?

Security interests may be created over shares issued by Brazilian companies. In addition to the registration of the collateral with the

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3 Security Trustee 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies? 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security Brazilian law provides that in order to institute a court proceeding trustee or agent (rather than each lender acting in Brazil against the borrower, lenders domiciled abroad and with separately) to enforce the security and to apply the no real estate property in Brazil must provide collateral (cash or an proceeds from the security to the claims of all the asset) to guarantee the payment of legal fees and court expenses. lenders? Most security agreements constitute enforceable non-judicial titles, Brazil which do not require collateral in order to be enforced. As a general rule, Brazil will recognise the legitimacy of a security agent to act on behalf of the lenders as an attorney-in-fact to foreclose on a security granted in their favour. Therefore, the power 5 Bankruptcy and Restructuring of attorney must clearly state the matters entrusted and the scope of Proceedings the powers granted thereby.

5.1 How does a bankruptcy proceeding in respect of the 3.2 If a security trust is not recognised in your project company affect the ability of a project lender jurisdiction, is an alternative mechanism available to enforce its rights as a secured party over the (such as a parallel debt or joint and several creditor security? status) to achieve the effect referred to above which would allow one party (either the security trustee or In the event of liquidation, any enforcement proceedings filed the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to before the issuance of the bankruptcy decree must be stayed – and enforce their security separately? any claims will be submitted to the bankruptcy court, which has jurisdiction over the debtor’s assets. Please see question 3.1 above. Pursuant to the Brazilian Bankruptcy Law (Law no. 11.101), creditors are classified in accordance with the nature of their credits. In this regard, amounts raised at a liquidation proceeding must be 4 Enforcement of Security used to pay the debts of the estate in bankruptcy in a particular order prescribed by Articles 83 and 84 of the Brazilian Bankruptcy Law and Article 186 of the Brazilian National Tax Code, as follows: 4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such (i) fees of the judicial administrator and labour claims in general, as (a) a requirement for a public auction or the as well as those related to indemnification for labour accidents, availability of court blocking procedures to other provided that such claims are related to services rendered after creditors/the company (or its trustee in bankruptcy/ the bankruptcy decisions; liquidator), or (b) (in respect of regulated assets) (ii) funds provided to the estate in bankruptcy by creditors; regulatory consents? (iii) expenses for the collection, administration and sale of the assets of the estate in bankruptcy, as well as for the The steps a lender must take to foreclose on a collateral security distribution of the sales proceeds, and costs incurred in interest in Brazil depend upon a number of factors. First, it is connection with the liquidation proceeding (administrative important to determine whether the lender has an executory non- costs and expenses); judicial title that enables it to initiate an expedited foreclosure (iv) court costs relating to lawsuits and enforcement proceedings proceeding. Second, the nature of the asset – movable or immovable decided unfavourably to the estate in bankruptcy (court – will require particular steps and formalities. Third, the type of costs); collateral and the provisions laid out in the agreement may also play (v) obligations assumed during the judicial reorganisation a role when foreclosing on a collateral security interest. It is worth (debtor-in-possession (DIP) finance, for example) or after the noting that, in specific circumstances, the courts may grant freezing bankruptcy decision, and taxes relating to periods after the or restraining orders, as well as injunctive relief. The entire process bankruptcy decision; may take months or even years. (vi) labour claims, (limited to a maximum amount of 150 minimum Self-help remedies are not available in Brazil and, except in wages per creditor), including indemnification for labour very limited circumstances, the lender may not keep collateral accidents; in satisfaction of the debt. In certain cases, depending on the (vii) secured claims up to the value of the collateral; nature of the asset, a private sale is permissible and the mechanics (viii) taxes, except for tax penalties; of such a sale are usually set forth in the security agreement. A (ix) personal claims enjoying special privileges; court-supervised sale is conducted through a public auction and the (x) personal claims enjoying general privileges; bids are presented in Brazilian currency (the Real). Lenders may (xi) unsecured claims; participate as buyers in any such sale. (xii) contractual penalties and fines for breach of criminal or Additionally, for the enforcement of security over assets of a administrative laws, including tax-related penalties; and regulated company, the prior approval of the relevant regulatory (xiii) subordinated debts. body may be necessary. Secured credits shall be paid up to the value of the pledged asset, which shall be the amount effectively raised after the liquidation of the asset, even if it was already sold as part of a block of assets – in this case, the value of the asset should be individually appraised. In

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the event that the credit is higher than the value of the pledged asset, performed with the purpose of harming creditors will be considered the remaining portion shall be classified as an unsecured credit (as null and void if proven to have been taken by the contracting parties per item xi, above). with the intent to defraud creditors and proven to have effectively With regard to judicial reorganisation proceedings, once the harmed the bankruptcy estate. debtor files for judicial reorganisation, and provided that all legal In a judicial reorganisation scenario, there is no clawblack provision, requirements are met, the court will authorise the processing of i.e., there is no legal term. For purposes of the creditors’ meeting, the the judicial restructuring and such order will also trigger a non- creditors are classified in four classes, as follows: (i) Class I – labour extendable 180-day protection period, during which the majority claims; (ii) Class II – secured creditors (i.e., credits with guarantees of the lawsuits filed against the debtor (including all foreclosure in rem, such as a mortgage or pledge); (iii) Class III – unsecured

Brazil proceedings) will be suspended. creditors; and (iv) Class IV – creditors classified as “small sized NB Although the Brazilian Bankruptcy Law provides for a non- enterprises”. The plan must set forth the conditions of payment or extendable period, there are a number of court precedents extending each class, but there are no preferential rights, except that creditors such period, to the extent that any delays that caused such term to in Class I shall receive their payments within 12 months after the expire prior to the approval of a reorganisation plan were not caused ratification of the reorganisation plan by the court. by the debtor. NB The class of “small sized enterprises” was created by Law (Lei In addition, as secured credits are subject to judicial reorganisation Complementar) no. 147/15, enacted after the Brazilian Bankruptcy proceedings, they should follow the rules that would be set forth in Law. A company may be considered a “micro-company” or a “small the reorganisation plan when and if duly approved by the creditors’ sized company” depending on its annual gross revenues, which general meeting. must not be higher than R$360,000 or R$3,600,000 respectively. The reorganisation plan results in the replacement and renewal of all credits existing prior to the filing of the reorganisation, and 5.3 Are there any entities that are excluded from is binding on the debtor and all creditors subject to it, although it bankruptcy proceedings and, if so, what is the cannot affect guarantees provided by third parties. applicable legislation? The judicial reorganisation binds all pre-filing credits, even those In accordance with Section 2 of the Brazilian Bankruptcy Law, state- not yet due, except credits arising from financial leases, fiduciary owned companies, government-controlled companies, and public or ownership or transfer of property, contracts for the sale of real estate private financial institutions, pension funds, consortium, insurance where the contract includes an irrevocability and or irreversibility companies and equivalent entities, are not subject to its provisions. clause, and purchase agreements with title retention are not subject to judicial reorganisation or bankruptcy proceedings under Brazilian Some entities, such as insurance companies and financial institutions, law and may be enforced by the creditors thereof. are subject to specific insolvency procedures, including intervention by the relevant regulatory authority (e.g. the Central Bank of Brazil (BACEN) in the case of financial institutions, and the National 5.2 Are there any preference periods, clawback rights Agency of Health (Agência Nacional de Saúde) for health insurance or other preferential creditors’ rights (e.g. tax debts, companies). employees’ claims) with respect to the security?

The Brazilian Bankruptcy Law provides that certain transactions 5.4 Are there any processes other than court proceedings can be set aside if they occur within a prescribed period before that are available to a creditor to seize the assets of the court’s decision to liquidate the insolvent company (“Legal the project company in an enforcement? Term”). During the Legal Term, the transactions carried out by the company are either ineffective vis-à-vis the bankruptcy estate or There are some processes, in very limited circumstances, as can be revoked based on the assumption that during such period described in question 4.1 above. the insolvent company may have carried out fraudulent acts with a view to protecting its shareholders or benefiting certain creditors. 5.5 Are there any processes other than formal insolvency Such period is fixed by the court and must not retroact to more proceedings that are available to a project company to than 90 days before: (i) the filing for bankruptcy; (ii) the filing for achieve a restructuring of its debts and/or cramdown judicial reorganisation (if the judicial reorganisation is converted of dissenting creditors? into a bankruptcy); or (iii) the first protest for non-payment of a credit instrument or security issued by the company, that has not No. The insolvency proceedings available in Brazil for a company been cancelled. to achieve a restructuring of its debts and/or cramdown of dissenting Article 129 sets forth a list of actions that shall be considered per se creditors are those set forth in the Brazilian Bankruptcy Law (Law void if performed by the insolvent company during the Legal Term, no. 11.101), as follows: (i) judicial reorganisation proceedings; (ii) irrespective of whether such actions were performed with fraud and extrajudicial (out of court) reorganisation; and (iii) liquidation. further irrespective of whether the contracting party had knowledge In a judicial reorganisation, the company can cramdown the plan or not of the economic-financial crisis then faced by the insolvent in the event that the requirements described above are not met. party, such as payments: (i) of a non-matured debt by the debtor; The cramdown is only possible if: (i) at least 50% of the creditors and (ii) of a matured and outstanding debt in a manner that is not (overall), by amount of claims, attending the meeting voted provided for in the relevant agreement, are void per se and may be favourably for the approval of the plan; (ii) the plan is approved clawed back. by two classes of creditors or, in the event that there are only two Article 130, in turn, determines that certain acts performed by the classes of creditors, at least one class approved the plan; and (iii) insolvent company may be annulled, provided that (i) they have 1/3 of the creditors attending the meeting in the rejecting class voted been carried out with fraud (to prejudice bona fide third parties), and favourably for the approval of the plan (such 1/3 can be either based (ii) there is proof of such “harmful intent” and of the effective losses on the amount of claims and/or number of creditors, depending on the bankruptcy estate as a result thereof. In this sense, any action the class).

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In a extrajudicial reorganisation, the company can cramdown the Brazil, require the prior consent of the National Defence Council. plan provided that at least 3/5 of its creditors agreed with the plan. This restriction does not apply to rural properties located in the In such a situation, the company may ask the court to ratify the plan Border Zone which are given as security for loans granted by to extend its effects for the other 2/5 of the creditors. foreign financial institutions. Regarding rural land not located in In a liquidation scenario, the company cannot submit a restructuring the border zone, some restrictions apply to foreign companies and plan. The judicial administrator appointed by the court will appraise individuals in relation to ownership and occupation of rural land. the company’s assets and sell them in order to pay the creditors. However, there is an ongoing discussion both in the courts and in the executive branch as to whether Brazilian companies in which In addition, there are formal insolvency proceedings specific to the majority of the capital is held by foreign entities or controlled entities that were excluded from the Brazilian Bankruptcy Law’s

by foreigners, may be subject to such restrictions. From a practical Brazil provision, as described in question 5.3 above. standpoint, such uncertainty may cause problems in the achievement of business transactions involving the acquisition of rural properties 5.6 Please briefly describe the liabilities of directors (if by Brazilian companies in which the majority of the capital is held any) for continuing to trade whilst a company is in by foreign entities or controlled by foreigners, therefore this should financial difficulties in your jurisdiction. be considered an issue to be properly addressed. No restrictions apply to the creation of other in rem rights over rural land. Under Brazilian law, directors shall not be held liable for continuing Foreign companies and individuals, on the other hand, are free to to trade whilst a company is undergoing to the purchase, lease, possess or create in rem rights over commercial, extent that they continue to act within their regular managing industrial and residential buildings, and no restrictions apply powers. Directors may only be held liable for damages wilfully whatsoever. caused to third parties with the aim of harming creditors or obtaining undue personal gain. Directors should be aware that certain actions, when performed within 6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection a certain timeframe – usually ninety (90) days before a bankruptcy from such restrictions? or judicial reorganisation filing (see question 5.2) – may be voided towards creditors if harmful to them or to the insolvent estate. There is no international investment treaty in force in Brazil. However, with a view towards the avoidance of double taxation, 6 Foreign Investment and Ownership Brazil has entered into tax treaties with the countries listed below. Restrictions These treaties follow the model of the Organisation for Economic Cooperation and Development. Brazil’s treaty partners currently are: Argentina; Austria; Belgium; Canada; Chile; China; the 6.1 Are there any restrictions, controls, fees and/or taxes Czech Republic; Denmark; Ecuador; Finland; France; Hungary; on foreign ownership of a project company? India; Israel; Italy; Japan; Luxembourg; Mexico; the Netherlands; Norway; Peru; the Philippines; Portugal; the Slovak Republic; Brazilian regulation permits remittances to and from abroad at any South Africa; South Korea; Spain; Sweden; Trinidad and Tobago; value and of any nature, provided that the payments are legal and Turkey; Ukraine; and Venezuela. have economic grounds, as well as the appropriate documentation. Registration of the foreign investment is mandatory to ensure access 6.3 What laws exist regarding the nationalisation or to the foreign exchange markets for any remittances in connection expropriation of project companies and assets? Are with such investments. The main purpose of such registration is to any forms of investment specially protected? provide local authorities with control over currency entering and leaving the country. The registration is made by means of a self- The government is entitled to expropriate an asset upon due process declaratory electronic system created by BACEN named Registro of law and prior indemnification. Expropriation may occur in case Declaratório Eletrônico (RDE System). of: (i) public need, which is justified by means of urgency and There are no restrictions on the repatriation of funds or remittance of emergency situations; (ii) public interest, which is the basis for most profits in terms of the amount of capital and the length of time funds of the expropriations of land to serve project companies to build the have to remain in Brazil. In addition, remittances to and from Brazil project facilities; or (iii) social interest, which is justified by the non- do not depend on any authorisation of local authorities, except in fulfilment of the social function of the property in accordance with some specific sectors and cases, as detailed below. the provisions of Brazil’s Federal Constitution. The transfer of control of certain regulated companies or companies There is no form of investment that is specially protected. However, that hold public concessions or authorisations may require the prior it is worth noting that project companies commonly benefit from notification or consent of the applicable governmental authority. government expropriation, using expropriated areas for the Sectors where foreign ownership are restricted include finance, construction of project facilities. nuclear energy, oil, mining and exploration of minerals, domestic airlines, health services, media companies, telecommunication and 7 Government Approvals/Restrictions pay-TV companies, security/surveillance services, security transport companies and fishing. Also, all transactions which, directly or indirectly, involve the acquisition of rural real estate possession, 7.1 What are the relevant government agencies or domain or any other in rem right located in the Border Zone (the departments with authority over projects in the typical area comprising 150 km from the border parallel to the division line project sectors? of the Brazilian territory) by a foreign entity or individual, or by a Brazilian company which has the majority of its corporate capital In Brazil, the relevant regulatory agencies for the typical project held by a foreign company or foreign individual non-resident in sectors are:

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(a) ANA – water resources. risks at a given field. There is also the special participation, which (b) ANAC – civil aviation. is an extraordinary financial compensation payable in the event (c) ANATEL – telecommunications. that high volumes of hydrocarbons are produced or a certain field enjoys high profitability. With regard to the Production Sharing (d) ANEEL – electric power generation, transmission and sale. Regime, the Pre-Salt Law (Law no. 13,351/10) establishes that a (e) ANP – oil, gas natural and biofuels. royalty rate of 15% over the monthly volume of oil produced – no (f) ANTAQ – waterway transportation services and public ports special participation is due. Royalties and special participation are and waterways. distributed to federal, state and local governments and agencies, (g) ANTT – railway and road services. in accordance with the provisions of the Pre-Salt Law and the

Brazil (h) DNPM (to be replaced by ANM) – mining. Petroleum Law (Law no. 9,478/97). States have also formed their own regulatory agencies, but made With respect to mineral activity, any revenue is subject to “Financial through a single regulator covering different areas, such as Compensation on Revenue from Exploitation of Mineral Resources” Amazonas, Goias, Mato Grosso, Minas Gerais, Pernambuco, Rio (CFEM), which is due and payable upon sale of the mineral or its Grande do Norte, Rio Grande do Sul and Santa Catarina. beneficiation or consumption by the mining company. CFEM’s tax On the other hand, other states have chosen to set up specialised rate ranges from 0.2% to 3% and varies according to the type of agencies in given sectors, such as Bahia, Distrito Federal, Rio de mineral. Compensation equal to half of the CFEM is also due to Janeiro and São Paulo, replicating the structure used at the federal the landowners where the mine is located. Additionally, during the level. In São Paulo we can highlight the institution of ARTESP exploration phase, an annual occupation fee per hectare (TAH) is (Agência de Transporte do Estado de São Paulo). collected by the National Department of Mineral Production. Likewise, municipalities have opted to establish regulators for Regarding the development of hydropower resources, the specific services. concessionaire shall pay: (i) a fee to the federal government for the use of public assets; (ii) a fee regarding the use of water (CFURH) of 6.75% of the value of the energy produced; and (iii) an annual 7.2 Must any of the financing or project documents be inspection fee of 0.4% to ANEEL. registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable? 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange? In general terms, except for documents creating a security interest, there is no requirement that project or financing agreements be Subject to the requirements and limitations provided in question 6.1 registered with any governmental authority in order to be valid and above, Brazilian regulation permits remittances from and to abroad enforceable in Brazil. It is not unusual, however, for lenders such at any value and of whatsoever nature, provided that payments as BNDES to require that a credit agreement be registered with the are legal and count with economic grounds, as well as appropriate Registry of Deeds and Documents in Brazil in order to give notice documentation. For that purpose, foreign exchange transactions to third parties. must be performed by and between a financial institution authorised to operate in FX markets and the person interested in receiving a remittance from abroad or performing a remittance to another country. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or The “IOF-Exchange” tax is levied upon sums converted from foreign operation of such assets, require a licence (and if so, currency into Brazilian Reais (inflow of funds) and from Brazilian can such a licence be held by a foreign entity)? Reais into foreign currency (outflow of funds). The currently applicable rates for investments made by non-residents in Brazilian According to the Brazilian Federal Constitution, natural resources companies are generally: (i) 0.38% for the corresponding inflow are owned by the federal government. The use of resources (such of funds for the acquisition of the equity interest (if investment is as oil and gas, minerals and hydro-electric power, including the made on stock market, the IOF rate is 0%); (ii) 0.38% for the return transportation of natural gas through pipelines) therefore requires of the capital invested; and (iii) 0% for remittances of dividends government authorisation, licensing, or the grant of a concession. and interest on net equity. The currently applicable IOF-Exchange In those cases, natural resource development may only be performed rates related to foreign loan transactions are the following: (i) for by a company incorporated under Brazilian law and having its head the inflow of funds, the rate is 0% if the minimum average maturity office in Brazil. Such companies may be controlled by foreign term of the loan transaction is longer than one hundred and eighty entities; provided, however, that certain sectors and industries are (180) days, or 6% for transactions with shorter periods; and (ii) for controlled by Brazilians, as described in the response to question 6.1. the outflow of funds (payment of interest or repayment of principal) In addition, the operation of certain specific assets of infrastructure the applicable rate is 0%, regardless of the term of the transaction. sectors, such as ports and highways, are subject to concession, Please note that the federal government may increase the current subject to prior bidding and with the power to implement eventually IOF-Exchange rates at any time, up to a maximum rate of 25%. being granted. Any such new rate would only apply to future foreign exchange transactions.

7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural 7.6 Are there any restrictions, controls, fees and/or taxes resources? on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions? For the extraction of oil and natural gas, royalties are due for both onshore and offshore production. With regard to the Concession Regime, the royalty rate varies from 10% to 5% of the total amount of Subject to the requirements provided in question 6.1 above, there are the monthly volume of oil produced, depending upon the geological no restrictions on the repatriation of funds or remittance of profits

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in terms of the amount of capital and the length of time funds have to remain in Brazil. In addition, remittances to and from Brazil do 7.10 Is there any specific legal/statutory framework for not depend on any authorisation of local authorities, except in some procurement by project companies? specific sectors and cases. No, provided that the parties of the project are not state-controlled Some remittances, however, may be subject to withholding taxes. companies. Gains on the sale or redemption of shares are generally subject to 15% capital gains tax (or 25% if the transaction originates in a favourable tax jurisdiction). As of January 2017, new tax rates 8 Foreign Insurance on capital gains are in force, ranging from 15% to 22.5% on gains above R$30 million. Brazil Cross-border payments of Interest on Net Equity (Juros sobre o 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or Capital Próprio) are also subject to 15% withholding income tax (or guaranteed by foreign insurance companies? 25% if the transaction originates in a favourable tax jurisdiction). Tax treaties may function to reduce withholding. Yes. As a general rule, individuals or legal entities domiciled in Brazil are not allowed to purchase insurance coverage overseas. 7.7 Can project companies establish and maintain However, there are some exceptions to this prohibition, allowing onshore foreign currency accounts and/or offshore certain individuals/entities to obtain insurance coverage abroad in accounts in other jurisdictions? specific circumstances, as follows: In projects, only companies engaged in transportation headquartered (i) if the insurance coverage is not offered in Brazil, provided it is not a coverage prohibited according to local laws and abroad and companies in the energy sector can establish and regulations; maintain onshore foreign-currency accounts. (ii) coverage for risk located abroad, provided that the insured is On the other hand, any company located in Brazil can establish and an individual resident in Brazil and the policy’s duration is maintain offshore accounts in another jurisdiction, provided that limited to the period the insured is abroad; their use is limited to the interests of the own company (and not of (iii) insurance which is the object of international treaties ratified any third party). by the Brazilian National Congress; (iv) for hull, machinery, and civil liability risks of ships or vessels 7.8 Is there any restriction (under corporate law, duly registered under the Brazilian Special Registry (REB) exchange control, other law or binding governmental in case (a) such insurance coverage is not available in Brazil, practice or binding contract) on the payment of or (b) local rates are not compatible with the international dividends from a project company to its parent market; and company where the parent is incorporated in your (v) if the insurance was purchased abroad, according to jurisdiction or abroad? regulations applicable before Complementary Law no. 126, dated January 2015, was enacted. Generally, there are no restrictions with respect to the payment of Finally, please note that the law also imposes restrictions on the dividends to residents in Brazil or to non-residents in Brazil, subject activities of foreign reinsurers. As a general rule, only a reinsurer to the requirements and limitations detailed in question 6.1 above. licensed with Brazil’s private insurance regulatory body, SUSEP, as a local, admitted, or occasional reinsurer, will be permitted to 7.9 Are there any material environmental, health and operate in Brazil. safety laws or regulations that would impact upon a Insurance transactions between a Brazilian entity and a foreign project financing and which governmental authorities insurer located abroad typically generate the following taxes: (i) administer those laws or regulations? Withholding Income Tax (WHT); (ii) PIS/COFINS-Import Tax; and (iii) IOF-Exchange. Rates vary depending upon the line of business Under Brazilian law, projects potentially harmful to the environment covered. are subject to environmental licensing. Most infrastructure projects require an environmental impact assessment (EIA) and an environmental impact report (RIMA), which may be time- 8.2 Are insurance policies over project assets payable to consuming to produce. Additional licences may be required, foreign (secured) creditors? depending on the activity. Yes. Foreign (secured) creditors may be indemnified in connection Moreover, to undertake activities with significant environmental with insurance retained in Brazil, as long as they are specified in the impact, it is necessary to provide financial resources to create or insurance policy as third-party beneficiaries or co-insured parties. maintain a specially protected environmental area. Such obligation is determined during the environmental licensing proceedings and the specific compensation to be paid must be calculated based 9 Foreign Employee Restrictions on the environmental impact that cannot be avoided or reduced through pollution control systems. Nevertheless, the applied rate tends to be up to 0.5% of the total amount for implementation of the 9.1 Are there any restrictions on foreign workers, endeavour, not including costs related to developing environmental technicians, engineers or executives being employed programmes and plans. by a project company? Health and safety laws and regulations may be applicable depending The Brazilian labour laws limit the number of foreigners hired as upon the type of activity that the project involves. employees in a company to 1/3 of the total number of employees. Furthermore, the total amount paid to foreigners cannot exceed 1/3

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of the cost of the payroll. This mandatory quota, however, is not precedents on the matter. As there is no strict definition of force applicable to technicians without employment agreements in Brazil majeure or fortuitous events in the law, we note that in certain who come to Brazil on short-term assignments and thus are entitled contracts, such as construction agreements, it is common to list to a technician visa, or to executives who perform management events that will not be deemed force majeure or fortuitous events. activities (legal representatives) and are thus are entitled to a permanent visa. 12 Corrupt Practices The type of visa and relevant restrictions will be determined according to the position that the individual will hold in Brazil and the duration of the assignment. 12.1 Are there any rules prohibiting corrupt business Brazil It is important to stress that the project company shall engage the practices and bribery (particularly any rules targeting foreign workers, technicians, engineers or executives and request the projects sector)? What are the applicable civil or criminal penalties? the respective visas prior to the individuals’ entry into Brazil. Additionally, if the project company’s activity is regulated, it may The main legislation relating to anti-bribery and anti-corruption in be necessary to obtain the approval of the applicable regulatory Brazil is as follows: Decree-Law no. 2,848 of 7 December 1940 authority. (“Penal Code”), Law no. 8,429 of 2 June 1992 (“Law against Improbity in the Government”) and Law no. 12,846 of 1 August 10 Equipment Import Restrictions 2013 (“Anti-Corruption Law”). Such laws cover not only anti- bribery and anti-corruption, but also a number of other crimes and infractions. These laws apply to all sectors and there are no specific 10.1 Are there any restrictions, controls, fees and/or taxes rules targeting the projects sector. on importing project equipment or equipment used by The Penal Code imposes criminal penalties on: (i) individuals who construction contractors? directly or indirectly promise, offer or give any unlawful advantage to a public official in order to influence him/her to do, omit or delay All the restrictions, exemptions, controls and taxes are defined any official act; and (ii) public agents who directly or indirectly according to: (i) the specific product code in the “Harmonised request, demand, charge or accept, to the benefit of him/herself or of System Tariff Schedule”; (ii) the state where the equipment is a third party, any undue advantage or promise of advantage. There cleared; and (iii) usage in Brazil/purpose of the project. Brazil is no legal definition of undue advantage. Brazilian law does not has a restriction on importation of second-hand equipment on a impose criminal liability on companies for corruption. Penalties permanent basis, unless it is proven that no equivalent equipment applicable in such cases include imprisonment from two (2) to is produced locally. twelve (12) years, and fines. The penalties may be increased by 1/3 if, as a result of the advantage or promise, the public officials 10.2 If so, what import duties are payable and are delayed or omitted an official act or infringed their duties. exceptions available? Although targeted at public officials, the sanctions provided in the Law against Improbity in the Government may also be Taxes regularly levied upon imports that must be collected upon imposed on private parties should they participate in any of the clearance of goods are the Import Tax, Excise Tax, PIS Tax and illegal conduct provided therein. Among other types of improbity COFINS Tax, as well as the ICMS (state value-added) Tax. Rates infraction, the Law against Improbity in the Government provides vary according to the product. Foreign exchange transactions related that an infraction occurs if a public official “receives, for oneself to such import transactions are exempt from the IOF-Exchange. or to a third party, money, a movable or unmovable asset, or any Tax incentives may be available in relation to the importation of other economic advantage, directly or indirectly, on a basis of equipment and materials that depend upon the specifics of each commission, percentage, gratification or gift, from one that has an project and which are granted on a case-by-case basis. It is not interest, directly or indirectly, that may be attained or supported by possible to list all of the exceptions available, but in general, an action or omission as a result of the actions or inactions from the responsibilities of the public official”. Penalties and sanctions for permanent assets, information technology and products that do this type of infraction include fines of up to two times the amount not have similar equivalents in Brazil tend to be subject to tax of damages suffered by the government and/or three times the value reductions. of the illegally afforded benefit, confiscation of illegally obtained assets, and prohibition to enter into contracts with the government 11 Force Majeure or to receive tax or financial incentives, which may extended to companies in which the implicated entity owns a majority stake. Brazil’s Anti-Corruption Law, issued on 1 August 2013 and in force 11.1 Are force majeure exclusions available and since 29 January 2014, is targeted at legal entities, foundations, enforceable? associations or foreign companies with headquarters, a branch or representation in Brazil (with or without registered corporate rules Exemptions from liability due to force majeure events are available of organisation). The Anti-Corruption Law provides that liability and enforceable in Brazil. Brazilian court precedent differentiates for acts covered therein shall be applied in accordance with the strict between force majeure and “fortuitous” events, although both are liability doctrine; that is, irrespective of an assessment or proof of treated in the same manned under the Brazilian Civil Code. Force the legal entity’s fault or intent. The list of prohibited conduct majeure is an event whose effects were impossible to avoid or includes: (i) to promise, offer or give, directly or indirectly, an undue prevent, such as acts of God (floods, hurricanes, earthquakes, etc.). advantage to a public official or to a third person related to him/her; Fortuitous events are events which are beyond the control of the (ii) to manipulate or defraud public bids or public contracts; (iii) to affected party, such as wars, strikes, etc. In both circumstances, finance, fund, sponsor or in any other way subsidise the practice of the affected party is exempt from liability and from performing harmful acts pursuant to the Anti-Corruption Law; (iv) to use third its obligations. However, those definitions are based on court parties, individuals or corporate entities, and to hide or disguise

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real interests or the identity of the beneficiaries for the acts; (v) to agreements with foreign and domestic investors, and this practice hinder investigations or oversight by agencies, entities or regulatory has become generally used in construction agreements. bodies, or interfere in their acts. As per the Penal Code, Brazil’s Anti-Corruption Law does not define undue advantage. 15 International Arbitration If a company is found liable for any of the prohibited conduct provided in the Anti-Corruption Law, it can be subject to administrative and court-enforced sanctions. At the administrative level, the following 15.1 Are contractual provisions requiring submission sanctions may be applied, jointly or independently: (i) fines ranging of disputes to international arbitration and arbitral from 0.1% to 20% of the gross revenue, which should never be awards recognised by local courts? less than the advantage amount obtained through the unlawful act; Brazil and (ii) extraordinary publication of the condemnatory decision, Yes. The parties can validly submit their disputes to international at the implicated entity’s own expenses. In the event that it is not arbitration (provided that it refers to disputes related to freely possible to estimate the gross revenue, such fine shall be assessed transferable patrimonial rights), and may freely choose the seat of the in an amount between R$6,000 and R$60,000,000. Court-enforced proceedings (however, limitations on the possibility of choosing a seat sanctions may include: (i) the confiscation of assets, rights, or value may apply to disputes involving governmental entities). Domestic obtained from the illegal act; (ii) partial suspension or prohibition arbitral awards are enforceable by Brazilian courts like any other of activities; (iii) compulsory dissolution of the implicated legal court judgment, and, therefore, without re-examination of the merits. entity; and (iv) prohibition against the receipt of donations, grants, If the award was rendered outside Brazil, it must first be confirmed subsidies or funding from public entities and financial institutions, by the Brazilian Superior Court of Justice (STJ) prior to enforcement. from one (1) to five (5) years. The STJ will confirm the award without re-examination of the merits if it complies with the requirements set forth under the New York Facilitation payments to public agents are not allowed under Convention and the Brazilian Code of Civil Procedure. Brazilian law and may be considered a violation according to the laws described. 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution 13 Applicable Law conventions?

Yes. Brazil became a contracting party to the 1958 New York 13.1 What law typically governs project agreements? Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2002. Brazil is also a signatory to: (i) the Geneva Protocol Under Brazilian law, there is no restriction as to the governing law on the Arbitration Clause; (ii) the Brasília Protocol on Dispute of project agreements. Brazilian law is widely used for project Resolution; (iii) the Ouro Preto Protocol on the MERCOSUR documents, such as construction contracts, supply agreements, and institutional structure; (iv) the Las Leñas Protocol on Cooperation offtake agreements. and Jurisdictional Assistance in Civil, Commercial, Labour, and Administrative Law Matters; (v) the Inter-American Convention 13.2 What law typically governs financing agreements? on Territorial Validity of Foreign Awards; and (vi) the Inter- American Convention on International Commercial Arbitration Foreign lenders typically request New York law as the governing (Panama Convention). Brazil is not a signatory of the Washington law for financing agreements and for any collateral located outside Convention of 1965 (ICSID). Brazil, such as offshore accounts. 15.3 Are any types of disputes not arbitrable under local law? 13.3 What matters are typically governed by domestic law?

Agreements providing for the creation of security interests over Yes. The Brazilian Arbitration Act states that arbitration can be property located in Brazil must be governed by Brazilian law, while used only to settle disputes involving freely transferable patrimonial agreements executed by governmental authorities usually need to rights between persons capable of entering into contracts. However, be governed by such law, which is also commonly used for personal there are court precedents that limit the use of arbitration to certain guarantees given by Brazilian residents. disputes, such as employment-related matters and consumer rights.

15.4 Are any types of disputes subject to mandatory 14 Jurisdiction and Waiver of Immunity domestic arbitration proceedings?

14.1 Is a party’s submission to a foreign jurisdiction and No, there are no types of dispute which are subject to such waiver of immunity legally binding and enforceable? proceedings.

Except with respect to certain matters for which a Brazilian court 16 Change of Law / Political Risk would have concurrent or exclusive jurisdiction (e.g. disputes regarding real estate located in Brazil), a Brazilian party can validly submit to the jurisdiction of a foreign court or to an international 16.1 Has there been any call for political risk protections arbitral tribunal based outside Brazil in international contracts. such as direct agreements with central government or Waiver of sovereign immunity is possible, but please note that it has political risk guarantees? not been well tested in court due to the limited number of practical cases. Governmental entities may, however, enter into arbitration No, there has not.

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project financings. This practice poses additional challenges in 17 Tax multi-source financing involving foreign lenders, as such lenders are used to dealing with loan and project documentation that conforms 17.1 Are there any requirements to deduct or withhold tax to international standards. from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a 18.2 Are there any legal impositions to project companies guarantee or the proceeds of enforcing security? issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory Interest payments made by foreign borrowers to domestic lenders requirements for the issuance of capital market

Brazil are treated as general income and shall be subject to the tax regime instruments. applicable to the specific domestic lender, and foreign tax credits may be deducted on certain conditions; however, transfer pricing No, as long the project company satisfies the requirements set forth rules might come into play. in the Brazilian Corporate Law (Law no. 6.404/76), the relevant As a general rule, interest payments made to foreign lenders are offering rules issued by Brazil’s securities and exchange regulatory subject to 15% withholding income tax. If the lender is resident in body, the Comissão de Valores Mobiliários (CVM), which may a favourable tax jurisdiction, as defined by applicable legislation, require, in certain cases, a feasibility study. As a general rule, project the applicable rate is 25%. A lower tax rate may be available in bonds are offered in Brazil to the general public, pursuant to CVM the event that there is a tax treaty in effect between Brazil and the Instruction no. 400/03, or to professional investors (e.g. financial country where the lender is domiciled. Financing agreements in institutions and pension funds), pursuant to CVM Instruction no. Brazil usually contain gross-up provisions whereby the borrower 476. Debentures issued under Law no. 12,431/11 must comply undertakes to make payments net of tax deductions and withholdings with certain requirements related to the project in which funds will of any nature, including any other taxes that may be applicable in be invested (e.g., detailed information on the current status and the future, or any increases in the rates of existing taxes. Moreover, expected date for conclusion of the project, and, in some cases, the please note that transfer pricing and thin capitalisation rules might approval of the competent Brazilian Ministry) and with the terms come into play on such foreign loan transactions. and conditions of the debentures (e.g. a minimum weighted average The proceeds arising out of the enforcement of guarantees or term of four (4) years, remuneration based on certain pre-fixed rates security interests are generally subject to the same rules applicable to be paid within a minimum period of time, restrictions on the pre- to the original amounts guaranteed under such instruments as if the payment and/or redemption of the debentures, among others). borrower itself had made the payments. 19 Islamic Finance 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha or other security documents, either for the purposes instruments might be used in the structuring of an of effectiveness or registration? Islamic project financing in your jurisdiction.

There are several tax incentives given by the federal government This is not applicable. to non-resident investors (NRIs) that vary depending on the project itself, the borrower or even the financing structure. As a general rule, there is no difference between domestic and foreign investments for 19.2 In what circumstances may Shari’ah law become the purposes of effectiveness or registration. the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional By way of an example, it is worth noting that, in an attempt to boost issues, the applicability of Shari’ah or the conflict of investments in infrastructure, legislators enacted Law no. 12,431/11, Shari’ah and local law relevant to the finance sector? which established that earnings by NRIs resulting from investments in publicly traded bonds and securities issued by non-financial This is not applicable. Brazilian corporations for the purpose of financing projects, will benefit from 0% withholding tax. NRIs may also enjoy more 19.3 Could the inclusion of an interest payment obligation favourable tax treatment when investing in the local capital markets. in a loan agreement affect its validity and/or In addition, there are incentives offered by states and municipalities enforceability in your jurisdiction? If so, what steps in order to foster local production and exports. These incentives are could be taken to mitigate this risk? usually available to attract new projects to the respective states and municipalities, providing exemptions and/or reductions in taxes, This is not applicable. fees, utilities and other expenses.

18 Other Matters

18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?

The main source of financing in Brazil is Brazil’s development bank, BNDES, which usually relies upon its own loan documentation for

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Pablo Sorj Filipe de Aguiar Vasconcelos Mattos Filho, Veiga Filho, Marrey Jr. e Carneiro Quiroga Advogados Mattos Filho, Veiga Filho, Marrey Jr. e Praia do Flamengo, 200 – 11º andar Quiroga Advogados Rio de Janeiro – RJ, 22210-901 Praia do Flamengo, 200 – 11º andar Brazil Rio de Janeiro – RJ, 22210-901 Brazil Tel: +55 21 3231 8200 / +55 11 3147 7811 Email: [email protected] Tel: +55 21 3231 8205 URL: www.mattosfilho.com.br Email: [email protected] URL: www.mattosfilho.com.br Brazil

Pablo Sorj’s practice focuses primarily on the representation of Filipe Carneiro concentrates his practice in project development, companies, sponsors, investment funds and financial institutions in a finance, and infrastructure transactions. He has spent significant wide range of power, logistics (roads, railroads, ports and airports), oil time working on project finance and development transactions and gas, water and sewage, mining and other infrastructure-related across several sectors, including the natural resources, energy, projects. Sorj has particular expertise in domestic and cross-border power, aviation and infrastructure sectors. He advises Brazilian and multi-source project financing. He worked for two years at Gibson, foreign corporations/financial institutions as sponsors, borrowers and Dunn & Crutcher LLP in New York. He currently serves as a member lenders in project development and finance matters, general finance of the Board of Visitors of Stanford Law School. transactions and joint venture transactions and M&A related to Brazil. He worked at Shearman & Sterling LLP in their New York Office in Mr. Sorj is currently ranked as one of Brazil’s leading project finance 2013/2014, as an international associate, and was also seconded to lawyers by Chambers and Partners Global, IFLR 1000, Chambers and BP (British Petroleum) and to a major Brazilian airline in Brazil. Mr. Partners Latin America, Latin Lawyer 250, Who’s Who Legal (Project Carneiro has a Bachelor of Laws from the Universidade Federal do Finance), the Latin American Corporate Counsel Association and The Estado de Minas Gerais (UFMG), and an One Year Extension Course Legal 500. He has a Bachelor of Laws from the Pontifícia Universidade in Management of Enterprises in the Oil & Gas Industry from the Católica do Rio de Janeiro and an Executive M.B.A. from the Instituto Brazilian Institute of Oil, Gas & Biofuels (IBP). He holds an LL.M. from Brasileiro de Mercado de Capitais (IBMEC). He holds an LL.M. from the University of Virginia School of Law and is admitted to practise law Stanford Law School. in Brazil and New York (USA).

As a leading firm in project development and finance in Brazil, Mattos Filho advises clients in structuring, developing and financing infrastructure projects, representing companies, sponsors, lenders and suppliers. We are active in a broad range of industries, including energy, telecommunications, mining, sanitation, highways, ports, aviation and airports. Our services include preparation of the full array of agreements required for a project, including engineering, procurement and construction (EPC) agreements, operations and maintenance agreements, and other operating agreements, as well as arrangements to secure project funding, such as financing agreements, shareholder support agreements, account management agreements, and security documents.

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Colombia Manuel Fernando Quinche

Brigard & Urrutia Abogados César Felipe Rodríguez

energy market. This regulatory framework is complemented by 1 Overview resolutions issued by the Commission for the Regulation of Energy and Gas (Comisión de Regulación de Energía y Gas) that establishes, 1.1 What are the main trends/significant developments in among others: (a) the rules on supply contracts for agricultural-origin the project finance market in your jurisdiction? fuel for a reliability charge; (b) the methodology to determine the firm energy of geothermal plants; (c) the methodology to determine During the last couple of years, Colombia has been experiencing an the firm energy of wind farms; and (d) the methodology to determine infrastructure and project finance boom. The fourth generation of the firm energy of photovoltaic solar plants. toll road projects (the 4G Program), which comprises 42 projects aimed at building roads totalling approximately 7,000 km in length 1.2 What are the most significant project financings that and requires an investment of around US$20 billion, is underway. have taken place in your jurisdiction in recent years? Given the strategic importance of the 4G Program, the Colombian government has implemented several actions to provide support The most significant project financings that have taken place in and enhance the risk profile of investments in the 4G Program. A Colombia in recent years are as follows: decisive action was the enactment of Law 1508 of 2012 governing ■ Cartagena Refinery: US$3.5 billion financing for the expansion the legal framework for public-private partnership (PPP) contracts and modernisation of the Cartagena refinery. in Colombia, and Law 1682 of 2013 (the Infrastructure Law), which ■ El Dorado Airport: US$500 million refinancing for the aims to offer quick solutions to the most common bottlenecks in construction, expansion and modernisation of the El Dorado road construction related to land acquisitions, environmental Airport in Bogotá, Colombia. licences and relocation of public utility networks. The Colombian ■ Puerto Bahía: US$370 million financing for the construction government expects the 4G Program to have a solid legal framework of a multi-purpose port located in Cartagena, Colombia. to overcome the challenges and complexities that this ambitious ■ Pacífico 1 (4G Toll Road Project): COP2.1 trillion plan entails. (approximately US$724.1 million) financing for the The National Infrastructure Agency (ANI), which is the government construction of the Pacífico 1 49 km toll road project. entity in charge of structuring, tendering and supervising the ■ Pacífico 2 (4G Toll Road Project): US$250 million and performance of the 4G projects, is seeking to attract foreign lenders COP510,000 million (approximately US$59.7 million) (including capital markets financing), infrastructure funds and financing for the construction of the Pacífico 2 98 kmtoll first-level domestic and international contractors with sufficient road project. experience, financial strength and technical standards. ■ Conexión Norte (4G Toll Road Project): US$250 million and COP540,000 million (approximately US$186.2 million) Other than the 4G Program, Colombia has a healthy stream of financing for the construction of the Conexión Norte 145 km infrastructure projects in diverse sectors. The most important public toll road project. procurement projects for the next couple of years include: (i) the ■ Perimetral de Cundinamarca (4G Toll Road Project): US$173 first line of the Bogotá metro project (27 km), which is currently in million and COP864,000 million (approximately US$59.7 the structuring phase and entails investments in the region of US$6 million) financing of the Perimetral de Cundinamarca 153.8 billion; (ii) an additional airport for Bogotá, called El Dorado II, km toll road project. which ANI is currently structuring and which entails investments ■ Transversal del Sisga (4G Toll Road Project): US$225 in the region of US$800 million; and (iii) the construction and million financing of the Transversal del Sisga 137 km toll operation of a liquefaction, regasification and storage unit for the road project which will be financed in COP. processing of natural gas which will be located on the Colombian ■ Autovía Neiva Girardot (4G Toll Road Project): US$276 Pacific Coast. million financing of the Autovía Neiva Girardot 196.85 km In addition, Law 1715 of 2014, “through which the integration of toll road project which will be financed in COP. This is the non-conventional renewable energy to the National Energy System is first private initiative to have achieved financial closing in Colombia. regulated”, and Decree 2143, published by the Colombian government in November 2015, aim to promote research, development and ■ Aeropuerto Ernesto Cortissoz (4G Airport Project): COP173,000 million (approximately US$59.7 million) and investment in the generation and use of non-conventional renewable US$50 million financing of the modernisation of the Ernesto power, which translates into business opportunities in the renewable Cortissoz Airport in Barranquilla, Colombia.

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■ Sociedad Portuaria el Cayao: US$110 million financing of the a bank account. Security over funds deposited in a bank account development and operation of the first regasification terminal is perfected: (i) when the relevant bank is the secured party, by the in Colombia, located on the Colombian Atlantic Coast. execution of a security agreement in respect of the account (in which case the secured party shall be deemed to hold possession of the secured assets); or (ii) when the bank is not a secured party, by the 2 Security execution of a control agreement between the bank, the guarantor and the secured party. 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement 2.5 Can security be taken over shares in companies required in relation to each type of asset? Briefly, incorporated in your jurisdiction? Are the shares in what is the procedure? certificated form? Briefly, what is the procedure? Colombia

In principle, it is possible to create a blanket lien or ongoing Yes. In Colombia, if the company’s shares are materialised in concern pledge over a group of assets. In this case, security may be certificates, securities may be taken over the shares through a share granted by means of a commercial establishment pledge agreement pledge agreement (garantía mobiliaria sobre acciones) or trust (garantía mobiliaria sobre establecimiento de comercio) and shall agreements, whereby property of the shares is transferred to the be registered before the national registry for security interests over trust. In both cases, registration of the security in the stock ledger of movable assets (Registro Nacional de Garantías Mobiliarias), the company is required. In this scenario, notwithstanding the fact which provides priority and enforceability against third parties. that the shares are represented by certificates, it is not necessary for Furthermore, it is also possible to grant security over assets by the guarantor to deliver the share certificates to the creditor. transferring these to a security trust. For this purpose, parties should It is also possible to issue shares in uncertificated form (or execute a trust agreement with a trustee company and register such dematerialised shares); however, Law 1676 is not applicable for agreement before the said national registry. security over that kind of shares. However, security over certain assets such as real estate, aircraft and ships must be created by mortgage agreements and cannot be part of 2.6 What are the notarisation, registration, stamp duty a general security agreement. and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables 2.2 Can security be taken over real property (land), plant, and chattels)? machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure? The cost of a mortgage, notarial expenses, registration tax and registration rights are required as follows: Yes. For real property a mortgage agreement must be executed (i) Notarisation fees may range between 0.471% and 0.571% of and such agreement should be registered before the relevant public the value of the mortgage. instrument registry office (Oficina de Registro de Instrumentos (ii) For the registration tax, tariffs range between 0.3% and 1.5% Públicos). On the other hand, security over movables (i.e. machinery of the value of the mortgage, depending on the municipality and equipment) can be created through a security trust agreement or in which the mortgage is registered. a pledge agreement. However, if the relevant movable assets are (iii) Registration rights tariffs are 0.3% of the value of the attached to real estate and cannot be separated without deteriorating, mortgage, which corresponds to the value determined for the those assets can be covered by the mortgage. calculation of notarial expenses. In case the mortgage does not specify an amount, the registration rights will be US$20. Registry costs to complete the registry of security interests over 2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the movable assets are approximately US$15. absence of a default and the debtors are not notified of the security? Briefly, what is the procedure? 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets Yes, it is possible to provide security over receivables where the involve a significant amount of time or expense? chargor is free to collect the receivables in the absence of an event of default. To this effect, the receivables must be described in the text Filing, notifications and registration requirements in respect of of the security agreement. On the other hand, it is not necessary to security over movable assets can be undertaken online at https:// notify the debtor of the receivable unless the parties to the underlying www.garantiasmobiliarias.com.co/ and therefore the amount of time agreement have explicitly agreed to this. Nevertheless, if the parties and expenses is marginal. have agreed to issue the above-mentioned notice and the debtor is On the other hand, mortgage filings, notifications and/or registration not notified, the chargor is required to indemnify the debtor for all requirements may vary depending on the region. In general, the the costs, damages or prejudices stemming from such breach of procedure may take two to three weeks. the agreement, and the debtor will be released of its obligation by paying the receivable to the chargor. 2.8 Are any regulatory or similar consents required with respect to the creation of security over real property 2.4 Can security be taken over cash deposited in bank (land), plant, machinery and equipment (e.g. pipeline, accounts? Briefly, what is the procedure? whether underground or overground), etc.?

Yes. Law 1676 of 2013 (“Law 1676”) states the possibility of No. In general, there are no regulatory or similar consents required entering into a control agreement to secure the cash deposited in with respect to the creation of securities over real estate property,

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plant, machinery and equipment. Depending on the particular case, the event of foreclosure) must be completed through the foreign regulatory approvals may be required. exchange market and must be registered before the Central Bank. If the project assets are built over public land granted by the government by means of a concession agreement, such project 5 Bankruptcy and Restructuring assets incorporated into the concession cannot be taken as security. Proceedings

3 Security Trustee 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the 3.1 Regardless of whether your jurisdiction recognises Colombia security? the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting Upon the commencement of a reorganisation proceeding in Colombia, separately) to enforce the security and to apply the secured creditors are granted priority over unsecured creditors for proceeds from the security to the claims of all the payment (including that of employees’ salaries and taxes). Therefore, lenders? secured creditors are allowed to enforce their security interests during the reorganisation proceeding under certain circumstances; Yes. Colombian law recognises the concept of trust and it does for instance, if the secured assets are not deemed necessary for the recognise the role of security trustees or agents and allows them to continuation of the operations of the debtor’s business. In general, act on behalf of different lenders. The role of the security trustee from the date of commencement of the reorganisation proceeding, and the scope of its powers will depend on the particular trust any demand for execution or any other collection proceeding against agreement. the debtor regarding movable assets or real property necessary for the operation of the debtor’s business will be stayed. Please note that 3.2 If a security trust is not recognised in your a claim filed by a creditor under an insolvency proceeding will be jurisdiction, is an alternative mechanism available deemed to be secured up to the value of the encumbered asset. (such as a parallel debt or joint and several creditor Upon the commencement of judicial liquidation proceedings, the status) to achieve the effect referred to above which debtor’s encumbered property may be excluded from the liquidation would allow one party (either the security trustee or estate for the benefit of the secured creditors or beneficiaries of the the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to security interest, subject to certain rules. Therefore, if there is no enforce their security separately? reorganisation agreement and the company enters into liquidation, creditors will be paid in their respective order of priority, with This is not applicable in Colombia. preference to the specific assets over which said creditors hada security interest (provided that there are still available funds and assets after paying creditors with a higher ranking). 4 Enforcement of Security 5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, 4.1 Are there any significant restrictions which may employees’ claims) with respect to the security? impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other In the course of insolvency proceedings, any creditor, the promotor creditors/the company (or its trustee in bankruptcy/ or the liquidator may request reversal or declaration of fraudulent liquidator), or (b) (in respect of regulated assets) transfer of some acts executed by the debtor when such acts regulatory consents? adversely affect any creditor or the priority order among creditors. Pursuant to Article 74 of Law 1116 of 2006 (“Law 1116”), the acts The general restriction regarding mortgages is that the seizure that may be revoked by the insolvency court are the following: of any mortgaged collateral requires a judicial proceeding and a (i) Any act that results in the transfer or conveyance of property, judicial auction whereby the proceeds of the auction are delivered including: transfer to a trust with collateralisation purposes; to the creditor. If the auction is unsuccessful, the collateral will be payment of a pre-petition claim; granting or cancellation delivered to the creditor. Any provision in a mortgage agreement of a lien; and execution of a lease agreement that obstructs whereby the creditor will be entitled to claim or acquire property the insolvency proceeding, if such act took place within over the asset directly is not expressly permitted by law. For 18 months prior to the commencement of the insolvency pledges over movable assets, pursuant to Law 1676 the creditor will proceeding. be entitled to directly claim or acquire property over the pledged (ii) Any gratuitous act executed within 24 months prior to asset through a direct payment mechanism, special foreclosure of the commencement of the insolvency proceeding. The the security, or judicial proceedings. Superintendence of Companies has held that the act shall be presumed to be gratuitous if: (a) the act was verbally concluded; (b) the parties did not agree on compensation for the debtor; or 4.2 Do restrictions apply to foreign investors or creditors (c) although the parties agreed on compensation for the debtor, in the event of foreclosure on the project and related there is no evidence that it has actually been paid. companies? (iii) Any amendment to the by-laws executed within six months prior to the commencement of the insolvency proceeding in No, there are no restrictions that exclusively apply to foreign either of the following cases: (a) if the equity of the debtor investors or creditors in foreclosure events. The granting of loans was reduced; or (b) if the liability regime of the shareholders as well as the entry and exit of foreign currency performed as a was altered. consequence of the disbursement and repayment of loans (including

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Additionally, under Colombian law, claims are classified as follows: ordinary course of the debtor’s business, without previous approval (i) first-class claims (judicial costs, salaries and other payments by the insolvency court. Otherwise, the directors will be jointly derived from employment contracts, and liabilities in favour of liable for the damages caused to the company, the shareholders or the tax authorities); (ii) second-class claims (claims secured with partners, and to creditors. The directors may be removed from their a pledge); (iii) third-class claims (claims secured with a mortgage); office, and may be sentenced to pay successive fines of up to 200 (iv) fourth-class claims (obligations with suppliers of raw materials legal minimum monthly wages (approximately US$50,900) until or services related to the core business); and (v) fifth-class claims (all the operation is reversed. other creditors). In principle, the claims of each of the five categories According to Article 82 of Law 1116, if the debtor’s equity is must be paid in full before any claim in the next category receives reduced due to willful or negligent conduct attributable to the any distribution. However, pursuant to Law 1676, secured creditors shareholders, directors, auditors or employees, these shall be liable now have privileges within insolvency proceedings. Moreover, for the payment of the liabilities of the entity. Said Article expressly Colombia under certain circumstances the priorities may be modified in the provides that the shareholders who did not have knowledge about reorganisation plan with the approval of the creditors representing at the action or omission, or who voted against it and did not take part least 60% of the votes recognised by the insolvency court. in its implementation, will not be subject to this kind of liability. In cases of breach of duties or ultra vires acts, or breach of 5.3 Are there any entities that are excluded from laws or bylaws, the negligence of the persons involved will be bankruptcy proceedings and, if so, what is the presumed. Furthermore, any contractual provision that exonerates applicable legislation? the shareholders, administrators, auditors or employees of the aforementioned liabilities or that limits such liabilities to the The general bankruptcy regulation is Law 1116, which applies to amount of the bond given in order to exercise their duties, will not all entities unless a specific exception applies. In general, State- be enforceable. The liability will arise only to the extent that the owned entities at the regional level (nivel territorial), State-owned assets of the company are insufficient to pay off creditors. universities, health promotion agencies (entidades promotoras de salud), stock exchanges, entities under surveillance of the Superintendence of Finance (Superintendencia Financiera – SFC) 6 Foreign Investment and Ownership or the Superintendence of Solidary Economy (Superintendencia Restrictions de la Economía Solidaria – SES), companies with public capital, companies that provide public services and non-trader individuals, 6.1 Are there any restrictions, controls, fees and/or taxes have a different regulation in connection with bankruptcy on foreign ownership of a project company? proceedings than all other individuals or entities. Foreign investments are granted equal treatment vis-à-vis those 5.4 Are there any processes other than court proceedings of Colombian investors, with certain exceptions; namely for that are available to a creditor to seize the assets of investments in the following industries: (i) national defence and the project company in an enforcement? national security activities; (ii) disposal and processing of toxic, dangerous or radioactive waste; and (iii) TV broadcasting (foreign Yes. By means of the proceedings set forth in Law 1676, a creditor investors can hold up to 40% of the shares in such companies). may fulfil its credit directly with the secured asset. In addition, Since capital contributions are considered direct foreign investment, during the special foreclosure proceeding of a security over movable these must be registered before the Colombian Central Bank. Any assets, the creditor may foreclose the secured assets before chambers other foreign exchange operation must be completed through the of commerce or notaries. foreign exchange market.

5.5 Are there any processes other than formal insolvency 6.2 Are there any bilateral investment treaties (or other proceedings that are available to a project company to international treaties) that would provide protection achieve a restructuring of its debts and/or cramdown from such restrictions? of dissenting creditors? No. There are no bilateral treaties that prevent an investor from No. Only judicial reorganisation proceedings under Law 1116 are having to complete its operations through the foreign exchange binding on dissenting creditors. However, according to Law 1116, market. However, Colombia has several bilateral investment treaties business reorganisation may be carried out not only by means of pursuant to which investors are granted: (i) national treatment and a judicial proceeding, but also by means of a private agreement most-favoured-nation provisions; (ii) no expropriation without between the debtor and its creditors with the further approval of compensation; and (iii) general promotion and protection of the insolvency court. Once the insolvency court has approved investments. the agreement, such agreement will be binding on all creditors recognised within the proceeding, including absent and dissenting creditors. 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected? 5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in Expropriation or nationalisation of assets may only take place for financial difficulties in your jurisdiction. previously defined reasons of public utility or social interest. The Colombian National Constitution states that any expropriation Pursuant to Law 1116, since the filing of the application to a by the government must be undertaken with due process and reorganisation proceeding, directors are not allowed to transfer be fairly compensated. Except in case of war, the government a company’s assets or make operations that are not related to the cannot expropriate without prior payment of compensation to the

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person from whom assets are expropriated. Expropriation may be entities must be previously authorised by the corresponding undertaken only if a judge orders so, or, exceptionally, through an governmental authority of the national, regional or local order, and administrative act which, nonetheless, may be subject to further must be published in an official database. judicial review. In addition, indebtedness of public entities must fulfil certain requirements. Specifically, foreign indebtedness must be authorised 7 Government Approvals/Restrictions in advance by the Ministry of Finance and Public Credit. Also, local indebtedness of public entities must be authorised in advance by the Ministry of Finance and Public Credit and requires the previous 7.1 What are the relevant government agencies or issuance of a favourable opinion of the Colombian National departments with authority over projects in the typical Planning Department (Departamento Nacional de Planeación).

Colombia project sectors?

7.3 Does ownership of land, natural resources or a (i) Finance pipeline, or undertaking the business of ownership or (a) Ministry of Finance and Public Credit. operation of such assets, require a licence (and if so, (b) National Treasury Department of the Ministry of Finance can such a licence be held by a foreign entity)? (Dirección del Tesoro Nacional del Ministerio de Hacienda y Crédito Público). In general, licences to hold land, natural resources or a pipeline (ii) Environment depend on the particular case and project. Foreign entities are (a) Ministry of Environment and Sustainable Development. allowed to hold such licences. However, the exploitation of certain (b) National Agency of Environmental Licences (ANLA). assets, including oil fields, mines and water sources, requires a concession granted by the competent public authority. Foreign (c) Regional Environmental Authorities (Corporaciones entities may obtain any such concessions. A foreign entity that is Autónomas Regionales). a party to a concession agreement must establish a subsidiary or a (iii) Infrastructure branch in Colombia. (a) National Infrastructure Agency (Agencia Nacional de Infraestructura). (b) Law 1682 (Infrastructure Law) gave special powers to the 7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural President of Colombia to create the Unit of Transportation resources? Infrastructure Planning (Unidad de Planeación del Sector de Infraestructura de Transporte) and the Commission for the Regulation of Infrastructure and Transportation Yes. Under the Colombian Constitution, the Colombian government (Comisión de Regulación de Infraestructura y Transporte). must be compensated, through the payment of royalties, for the (iv) Oil & Gas exploitation of non-renewable natural resources. The amount payable depends on the type of non-renewable natural resource. (a) Ministry of Mining and Energy (Ministerio de Minas y Energía). The general taxation regime would be applicable. (b) National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos). 7.5 Are there any restrictions, controls, fees and/or taxes (c) National Agency of Environmental Licences (ANLA). on foreign currency exchange? (d) Mining and Energy Planning Unit (UPME). Other than the obligation to complete foreign exchange operations (v) Mining through the foreign exchange market, there are no restrictions, fees (a) Ministry of Mining and Energy (Ministerio de Minas y or taxes applicable to foreign currency exchange. Energía). (b) National Mining Agency (Agencia Nacional de Minería). (c) Mining and Energy Planning Unit (UPME). 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment (vi) Energy returns or loan payments to parties in other (a) Ministry of Mines and Energy (Ministerio de Minas y jurisdictions? Energía). (b) Commission for the Regulation of Energy and Gas There are no currency exchange restrictions or controls. However, (Comisión de Regulación de Energía y Gas). it is necessary to complete the repatriation of investments or loan (c) Mining and Energy Planning Unit (UPME). payments to parties in other jurisdictions through the foreign (d) Superintendence of Public Utilities (Superintendencia de exchange market. Additionally, withholding tax will apply to the Servicios Públicos). payment of any revenue arising from a Colombian source or to the payment of interests in the case of loan agreements. Regarding taxes, and in accordance with the recently enacted 7.2 Must any of the financing or project documents be registered or filed with any government authority or Law 1819 of 2016 (the Tax Reform), if dividends from the project otherwise comply with legal formalities to be valid or company were taxed at the project company level, from 2017 enforceable? onwards such dividends will be taxed at the level of shareholders (foreign entities or individuals) with a dividends tax at a 5% rate. In general, the enforceability of financing documents and project No additional taxes would accrue. However, please bear in mind documents does not require any filing or registration (with the that if such dividends where not taxed at the company level, the exception of the above-mentioned registrations before the national company would have to withhold taxes before the remittance of registry for security interests over movable assets and before the dividends abroad at a consolidated tax rate of 38.25% (general tax Central Bank). Nevertheless, agreements with governmental rate of 35% + dividends tax rate of 5%), absent any applicable tax

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treaty. Finally, it is important to consider that no dividends tax would be applicable for the distribution of dividends by the project 8 Foreign Insurance company to another national legal entity, as long as the dividends were taxed at company level. 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies? 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions? Colombian residents may enter into insurance agreements with foreign insurance companies, except for the following cases: (i) Project companies incorporated in Colombia are not entitled to social security related ; (ii) mandatory insurance policies; maintain onshore accounts in foreign currency. (iii) insurances in which the insured party is required to provide Colombia evidence of a mandatory insurance policy or that it is up to date Project companies incorporated in Colombia are entitled to maintain with its obligations regarding a social security requirement; or (iv) offshore foreign currency accounts. Said accounts are subject to insurances in which the insured party is a State-owned entity. special registration and reporting obligations before the Colombian Central Bank, when used for certain foreign exchange operations (i.e. investment or indebtedness). 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? Onshore foreign currency accounts maintained by non-Colombian residents are subject to numerous restrictions and are permitted only Yes. Insurance policies over project assets may be payable to for specific purposes. foreign secured parties (unless this is specifically restricted by any project document). However, the payment of any amounts resulting 7.8 Is there any restriction (under corporate law, from insurance policies to foreign creditors shall be reported to the exchange control, other law or binding governmental Central Bank for statistical purposes. practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your 9 Foreign Employee Restrictions jurisdiction or abroad?

In the case that the parent company of a project company is 9.1 Are there any restrictions on foreign workers, incorporated abroad, the corresponding foreign investment shall technicians, engineers or executives being employed be registered before the Central Bank. Foreign investment duly by a project company? registered with the Central Bank confers on the investor the right to: (i) transfer abroad the dividends resulting from the investment; In general, there are no restrictions on foreign workers in Colombia. (ii) reinvest dividends and income derived from the disposal of such However, certain professions and activities (e.g. engineering investment; and (iii) transfer abroad any income derived from the activities) have special regulations which require authorisations/ sale of the investment, the liquidation of the company or portfolio permits granted by certain professional councils (e.g. the Engineering or the reduction of the company’s capital. If the parent company is Professional Council). In such cases, foreign workers would need incorporated in Colombia, there is no restriction on the payment of to apply for a temporary professional permit before the relevant professional council or validate their professional degree or diploma. dividends from the project company. From an immigration law standpoint, foreigners entering Colombia for the performance of business or working activities require a proper 7.9 Are there any material environmental, health and visa or an entry permit, depending on the case. The appropriate safety laws or regulations that would impact upon a type of visa or entry permit would depend on the nationality of the project financing and which governmental authorities administer those laws or regulations? applicant, the activities to be performed, the length of stay and/or the existence of a local employment relationship. It is likely that the requirement for licences in relation to environmental or construction matters will impact a project 10 Equipment Import Restrictions financing materially. However, depending on the particular project there may be additional environmental, health and/or safety laws or regulations that impact the project financing. 10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors? 7.10 Is there any specific legal/statutory framework for procurement by project companies? In general, there are no restrictions on importing project equipment or equipment used by construction contractors. However, there may Project companies deemed to be private entities are not subject be import fees applicable depending on the particular asset being to specific procurement rules or regulations. In the case that the imported, and the customs regime imposes two types of restriction, project company is a State-owned entity, public procurement laws namely: (i) the importation of certain goods is subject to the obtainment may be applicable, with the exception of special cases regarding of a licence; and (ii) the importation of some other goods is prohibited. certain industries with special regulations.

10.2 If so, what import duties are payable and are exceptions available?

As a general rule, the importation of goods triggers the payment of tariffs and VAT. The specific amount of these duties, and particular

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exceptions, will vary depending on: (i) the tariff classification of the goods; (ii) the origin of the goods (applicable, for example, to 13.3 What matters are typically governed by domestic law? goods imported from free trade agreement countries); and (iii) the import regime. Agreements to be performed in Colombia are governed by Colombian Import duties vary depending on whether there is a valid and law (e.g. concession agreements, onshore trust agreements and enforceable free trade agreement with the corresponding country. engineering, procurement and construction (EPC) agreements). Agreements pertaining to in rem rights over assets located in Colombia (including agreements for the transfer of property and 11 Force Majeure mortgage agreements) must be governed by Colombian law. Colombia 11.1 Are force majeure exclusions available and 14 Jurisdiction and Waiver of Immunity enforceable?

Yes. Colombian law sets forth force majeure exclusions which are 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? available and enforceable even if the parties do not include them in the project or financing documents. In events of force majeure, the parties will not be forced to comply with their obligations under the Parties may submit to foreign jurisdiction. Nevertheless, if a affected agreement and will not be liable for any default thereunder. Colombian judge has jurisdiction over a matter, the said judge may assume jurisdiction if the specific criteria for assumption of jurisdiction listed in the Colombian General Procedural Code applies. 12 Corrupt Practices In such an event, the parties to the litigation should request from the Colombian judge a dismissal or stay of the Colombian proceedings. Waiver of immunity will be valid and enforceable, provided that 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting only the individual rights of the waiving party are affected. the projects sector)? What are the applicable civil or criminal penalties? 15 International Arbitration Yes. Colombia has developed several mechanisms to control and prevent corrupt business practices and bribery. Penalties for 15.1 Are contractual provisions requiring submission bribery range from imprisonment to a fine of up to 200,000 times of disputes to international arbitration and arbitral the legal monthly minimum wage (approximately US$50,877,034). awards recognised by local courts? Additionally, there may be the annulment of ownership over the involved assets and civil liability for any damages caused by the There are contractual provisions requiring submission of disputes criminal conduct. According to Law 1778 of 2016, individuals to international arbitration. If the following criteria are met, parties condemned for corrupt practices cannot enter into contracts with may agree to submit their disputes to international arbitration. the government, nor the companies in which they are majority According to the Colombian Arbitration Statute, parties may shareholders, officers or directors, for up to 20 years. agree on international arbitration if at least one of the following requirements is met: 13 Applicable Law (i) the parties have their domiciles in different countries; (ii) a substantial part of the obligations will be performed outside of the country in which the parties have their principal 13.1 What law typically governs project agreements? domicile; or (iii) the dispute relates to international commercial interests. According to the Colombian Code of Commerce, agreements to be For the enforcement of an international or foreign award by the performed in the Colombian territory are subject to Colombian law. Colombian authorities, a recognition proceeding must be fulfilled If substantial parts of the agreement are to be performed outside unless the seat of the tribunal is in Colombia. Colombia, agreements may be governed by foreign law, depending on applicable conflict-of-law rules. 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution 13.2 What law typically governs financing agreements? conventions?

Financing agreements, in the context of cross-border financing Colombia is a party to the 1958 New York Convention on the transactions involving Colombian residents and foreign lenders, are Recognition and Enforcement of Foreign Arbitral Awards, as well as typically governed by New York State law or English law. However, to the 1975 Inter-American Convention on International Commercial financing documents between Colombian residents and local banks Arbitration, and the 1965 Washington Convention for the Settlement should be governed by Colombian law. Therefore, cross-border of Disputes between States and Nationals of Other States. multi-currency loans involving foreign and local banks would require certain financing agreements (e.g. local loan agreements) in 15.3 Are any types of disputes not arbitrable under local order to be governed under Colombian law. law?

Every dispute is subject to arbitration unless said conflict is not susceptible to being transacted (a “transaction” is a specific form

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of private agreement whereby the parties terminate their present or result of multiplying by three the taxpayer’s net worth determined potential conflicts). As a general principle, it is possible to transact at December 31 of the preceding fiscal year. These Colombian thin over economic rights subject to any waiver (certain private economic capitalisation rules are aimed at limiting the deductibility of interest rights are not subject to waiver, including certain labour and social payments/accruals derived from debts that exceed the taxpayer’s net security rights) that does not affect the rights of third parties. equity (patrimonio liquido) by more than three times (a 3:1 ratio). Note that Colombian thin capitalisation rules apply to both local and foreign loans as well as debts with related and unrelated parties. 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? 17.2 What tax incentives or other incentives are provided No. The Colombian Constitutional Court has generally rejected any preferentially to foreign investors or creditors? What law or regulation that has attempted to include arbitration or other taxes apply to foreign investments, loans, mortgages Colombia non-judicial venues as mandatory conflict resolution proceedings. or other security documents, either for the purposes of effectiveness or registration?

16 Change of Law / Political Risk Currently, there are no specific incentives for foreign investors or creditors. Nonetheless, please note that some incentives may apply depending on the type of project that is being financed in Colombia. 16.1 Has there been any call for political risk protections For example, interests on loans granted to special-purpose companies such as direct agreements with central government or engaged in public-private partnerships for infrastructure projects may political risk guarantees? be subject to a preferential 5% withholding if the term of the loan is at least eight years. Also, certain relief or reduced withholdings may No. Nevertheless, the Colombian government has established a fund apply if the investor or creditor is a resident of a country with which to cover contingent obligations of governmental entities derived Colombia has a treaty to avoid double taxation (e.g. Canada, Chile, from contracts. The fund is called the Fondo de Contingencias and is Mexico, Portugal, Spain and Switzerland, among others). administered by the Ministry of Finance. In addition, in the context of Foreign investment and loans are typically subject to income tax 4G project financings, the government has entered into memoranda to the extent that they produce Colombian-sourced income (e.g. of understanding with concessionaires to clarify certain aspects of dividends, interests, royalties, etc.). As from 2015, a net wealth 4G concession agreements, such as: (i) availability payments; (ii) tax was created that also applies to foreign persons who hold lenders’ step-in rights; and (iii) a termination payment formula. Colombian assets in excess of a specific amount (i.e. COP1 billion or approximately US$294,117). Certain assets can be excluded from 17 Tax the tax base amount (e.g. shares in Colombian companies), while others must be included and taxed (e.g. loans to Colombian debtors). Finally, it is noteworthy that registration tax may apply on any 17.1 Are there any requirements to deduct or withhold tax document that requires registration with the Chamber of Commerce from (a) interest payable on loans made to domestic or or the Office of Public Records (e.g. public deeds or mortgages). foreign lenders, or (b) the proceeds of a claim under a A case-by-case analysis is required to determine if registration tax guarantee or the proceeds of enforcing security? applies, and the tax base amount.

Due to the Tax Reform, all interest rate payments will be subject to a withholding tax at a 15% tax rate. This rule may vary depending 18 Other Matters on any double taxation treaties in place and any special rules for a specific project finance (e.g. long-term infrastructure projects, as explained in question 17.2 below). 18.1 Are there any other material considerations which should be taken into account by either equity Since withholding tax must be applied by the payer, gross-up clauses investors or lenders when participating in project are used whenever parties have agreed on a specific net amount. financings in your jurisdiction? Loans granted abroad to Colombian credit establishments and loans granted to Colombian public entities are not subject to any Since the enactment of Law 1676, security structures have been withholding. Multilateral agencies in which Colombia is a Member modified for projects in Colombia. However, since the implementation State are generally exempt from all Colombian taxes. of such regulation is fairly recent, the real scope of the regulation is There is no specific tax applicable to the proceeds in connection only now being established. with enforcement of a security interest, to the extent that any such payment is not sourced as Colombian income. Note, however, that 18.2 Are there any legal impositions to project companies if a guarantee is granted by a Colombian party to a foreign related issuing bonds or similar capital market instruments? party (principal debtor), transfer pricing rules may apply and require Please briefly describe the local legal and regulatory for the Colombian guarantor to charge an arm’s length consideration requirements for the issuance of capital market for the guarantee. instruments. Regarding the requirements to deduct the interest paid, it is important The public offering of securities in Colombia is strictly regulated, to mention that if no withholding applies, such payment of interest with regard not only to the issuance of shares, but also to the made by the project company will not be deductible. Conversely, processes for the offering of bonds, notes and securitisations. Project if the interest payments made are subject to the corresponding companies must comply with certain requirements to register before withholdings, they will be fully deductible. the National Registry of Securities and Issuers (Registro Nacional According to Colombian thin capitalisation rules, interest payments de Valores y Emisores), managed by the SFC, and before the will not be allowed as a deduction if they originate on loans whose Colombian Stock Exchange (Bolsa de Valores de Colombia), for average amount throughout the corresponding fiscal year exceeds the the purposes of issuing bonds or similar capital market instruments.

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Any offering of securities addressed to the public at large or to 100 or more determined investors must be authorised by the local 19.2 In what circumstances may Shari’ah law become regulator. For such purposes, project companies must file before the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional the SFC the prospectus of the offering, along with the financial issues, the applicability of Shari’ah or the conflict of statements of the last three years. If the company does not have Shari’ah and local law relevant to the finance sector? such financial information, it is advisable to present to the SFC feasibility evaluations of the underlying project. Usually, project That will depend on the conflict of law rules; please refer to question finance is structured through a securitisation process. Hence, the 13.1 above. There are no known precedents of Shari’ah applicable securities derived from a securitisation have an underlying asset to the financial sector. including cash flows, economic rights, real estate property, etc. It

Colombia is also necessary to subscribe a trust agreement with a trustee entity that would become the administrator of the securitisation, as well as 19.3 Could the inclusion of an interest payment obligation the relationship between the issuer and the investors. in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk? 19 Islamic Finance No. It is common to include interest payment obligations in loan agreements and such obligations do not affect the validity of 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha enforceability of these types of agreement. Such obligations must instruments might be used in the structuring of an comply with legal maximum interest rate regulations and other Islamic project financing in your jurisdiction. financial consumer regulations.

Please refer to question 13.1 regarding conflict of laws. There is no known precedent in Colombia regarding Islamic project financing. Acknowledgment The authors would like to acknowledge the assistance of their colleague Ana María Rodríguez Polanía in the preparation of this chapter.

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Manuel Fernando Quinche César Felipe Rodríguez Brigard & Urrutia Abogados Brigard & Urrutia Abogados Calle 70A #4–41 Calle 70A #4–41 Bogotá Bogotá Colombia Colombia

Tel: +57 1 346 2011 Tel: +57 1 346 2011 Email: [email protected] Email: [email protected] URL: www.bu.com.co URL: www.bu.com.co

Manuel Fernando Quinche has been a partner at Brigard & Urrutia César Felipe Rodríguez is a law graduate from Universidad de Los Colombia Abogados since 2011. Mr. Quinche has more than 15 years of Andes in Colombia; he is a specialist in Financial Law and in Civil experience practising in the areas of Structured Finance, Project Procedural Law. Mr. Rodríguez holds a Masters (LL.M.) in International Finance and Mergers & Acquisitions. For five years Mr. Quinche Business Law from the University of Liverpool, United Kingdom. worked in Corporate Finance at a prestigious law firm in New York. He has more than 15 years of experience working at multinational He has acted as legal counsel in various national and international companies, law firms and consulting firms. He joined the firm in 2012 corporate and project finance transactions, including, among others, and is currently the Director of the Banking and Financial Services syndicated loans, financings with multilateral institutions and export Practice Area. During his career, he has provided legal advice in credit agencies, and financings through capital markets. several PPPs, project finance transactions and leveraged acquisitions. Mr. Quinche’s project finance experience includes advising either He has participated in infrastructure projects and financings in the U.S. financiers or project developers in toll road projects, ports, oil & gas and in Latin America. transportation infrastructure, liquefied natural gas facilities, airports, Mr. Rodríguez advised IFC, KEXIM and HSBC as local counsel power generation facilities, public transportation infrastructure, for the financing of the fare collection, fleet management and real- telecommunications infrastructure, downstream, midstream and time information technology system within the Integrated Public upstream oil & gas infrastructure and, in general, public infrastructure Transportation System (SITP) of Bogotá’s bus network. Mr. Rodríguez developed under PPP programmes. Highlights from Mr. Quinche’s advised Banco CorpBanca Colombia S.A. and Banco Davivienda recent work include the US$3.5 billion Ecopetrol Cartagena Refinery S.A in the financing of Sociedad Portuaria el Cayao S.A. E.S.P., Project, the US$370 million Puerto Bahía Port Project, the US$250 a concessionaire for the development and operation of the first million and COP510,000 million financing for the construction of the regasification terminal in Colombia, located in the department of Bolívar. Pacífico 2 toll road project, and the US$173 million and COP864,000 Furthermore, Mr. Rodríguez advised Concesión del Sisga S.A.S. in the million financing of the Perimetral de Cundinamarca toll road project. US$225 million toll road project.

The Banking and Project Finance Team in Brigard & Urrutia Abogados is very well recognised in the Latin American market in the context of high- profile, cutting-edge financial transactions, project finance and syndicated lending. Additionally, since B&U provides legal advice and assistance in all relevant areas of business, B&U lawyers are highly trained in management and international financial dynamics in all industries, which enables them to understand the needs of a diverse client base. B&U encourages a strong commitment to providing innovative legal solutions to clients and has consistently been a pioneer in the design of legal structures enabling clients to achieve their goals. B&U has been present in ground-breaking, landmark transactions and has played a central role in developing the practice of law relating to infrastructure in Colombia. B&U has a unique Projects practice distributed among two highly specialised teams: Infrastructure; and Project Finance. Over the years, B&U has been a pioneer and leader in providing legal advice in the development of the most complex and breakthrough infrastructure projects completed in Colombia.

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Costa Rica

Axioma Estudio Legal José Pablo Sánchez Vega

accounts receivable, inventory and cash flows, among other assets. 1 Overview It is also possible to use separate security agreements over each type of asset, such as mortgages, pledges, or the assignment of beneficial 1.1 What are the main trends/significant developments in rights under certain contracts, and, depending on the type of project, the project finance market in your jurisdiction? assets and rights can be taken as security.

During the last five years, Costa Rica has been experiencing a 2.2 Can security be taken over real property (land), plant, major infrastructure and project finance increase. The amendment machinery and equipment (e.g. pipeline, whether to the General Regulation on Managing Companies and Corporate underground or overground)? Briefly, what is the Investment Funds was adopted in 2016. This regulatory change procedure? allows any investment project, from hotel construction to energy projects, to be financed and developed using a special investment As mentioned above, security can be taken over real estate property fund which is known as an Infrastructure Project Investment Fund. based on the Costa Rican Civil Code, Commerce Code and Law on Secured Transactions. The following are some collaterals available to secure lending obligations in the country: mortgage; mortgage 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? certificate; trust agreement; and moveable guarantee (garantía mobiliaria). Recent projects include the San José-Caldera road concession, the A mortgage agreement requires execution by both secured parties investment management contract for airport services at Juan Santa and the owner of the property as a guarantor and must include all María International Airport, the concession for a new international mandatory details required by the Civil Code, and shall be notarised airport design in Orotina and a seaport concession won by APM and registered in the Costa Rican National Public Register. In Terminals to design, build, finance and operate for 33 years a new addition, a non-possessory pledge can be registered in the national container terminal in Limón, Costa Rica. This public-private public register with all formalities such as mortgages. In the association is valued at $1 billion. In addition, in 2016 a project case of equipment and any assets (tangible or intangible), as well debt financing and syndication was completed for a total of $149 as receivables, crops, inventories, contracts, brands, intellectual million in loans for Alisios Holdings for four wind projects owned property, livestock, machinery and equipment, and other moveable and sponsored by Globelec Mesoamerica Energy. The Export- property, these may now be presented as collateral based on the Import Bank of the United States has recently provided financing Law on Secured Transactions. The agreement embodying the for a wind energy project in Guanacaste Province. Congress passed pledge must be signed in the presence of a Notary Public and then a bill to allow the Executive Power to acquire a loan of $465 registered. The notarisation, registration and stamp duty, among million from the Chinese government to finance the construction other fees, will apply in all cases and will be based on the asset of 107km of highway in Limón Province, known as Ruta 32. The value. entity responsible for executing the work is the Chinese state-owned China Harbour Engineering Company. Finally, a new international 2.3 Can security be taken over receivables where the airport in Orotina moved forward, with the signing of a $1.5 million chargor is free to collect the receivables in the contract with a British firm to conduct feasibility studies. absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?

2 Security According to Costa Rican law, a pledge of collateral security can be taken over receivables and it is required for the debtor to assign the receivable to the lender through a formal assignment and be 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement appointed as a legal depositary. The lender is not allowed to use required in relation to each type of asset? Briefly, or take control of the collateral without the express consent of the what is the procedure? debtor.

Generally, lenders collateralise loans by means of a general security agreement (a guaranty trust) covering real and personal property,

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2.4 Can security be taken over cash deposited in bank 3.2 If a security trust is not recognised in your accounts? Briefly, what is the procedure? jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor In this case, only if the lender is a bank and it grants the loan can status) to achieve the effect referred to above which would allow one party (either the security trustee or such collateral be taken over cash deposited. the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to 2.5 Can security be taken over shares in companies enforce their security separately? incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? This is not applicable in Costa Rica. Costa Rica Security over shares can be taken through pledge whether the company is an Anonymous Corporation or a Limited Liability Company. In 4 Enforcement of Security order to establish the pledge over the company, share certificates have to be delivered to the lender who is designated as legal depositary 4.1 Are there any significant restrictions which may of the shares. In Costa Rica, the Commerce Code establishes a dual impact the timing and value of enforcement, such mechanism which is the registration of this security in the shareholders’ as (a) a requirement for a public auction or the company register. In addition, shares can be taken or transferred in a availability of court blocking procedures to other trust agreement where the trustee shall be responsible for the shares but creditors/the company (or its trustee in bankruptcy/ shall also follow due process in case of foreclosure. liquidator), or (b) (in respect of regulated assets) regulatory consents?

2.6 What are the notarisation, registration, stamp duty Civil procedural law contains procedures regarding collaterals and and other fees (whether related to property value or provisions in collaterals whereby the creditor is entitled to claim or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables acquire an asset directly considered null. In the case of mortgages, and chattels)? a judicial proceeding and a judicial auction are required, whereby the proceedings of the auction are delivered to the creditor. If the The cost of a mortgage is granted over real estate assets, notarial auction is unsuccessful then the collateral is delivered to the creditor. expenses, registration tax and registration rights. Notarisation fees may range between 1% and 2% according to 4.2 Do restrictions apply to foreign investors or creditors the value declared, and registration fees may depend on the asset, in the event of foreclosure on the project and related whether it be a mortgage, mortgage certificate, trust agreement or companies? moveable guarantee (garantía mobiliaria). There are no restrictions applicable to foreign investors or creditors in foreclosure events. 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense? 5 Bankruptcy and Restructuring Proceedings Filing registration requirements in respect of security over moveable assets can be undertaken online and can be completed in five business days if all the information provided is correct. On the other hand, 5.1 How does a bankruptcy proceeding in respect of the notification may depend on the asset and the jurisdictional court. project company affect the ability of a project lender to enforce its rights as a secured party over the security? 2.8 Are any regulatory or similar consents required with respect to the creation of security over real property In a bankruptcy proceeding, secured creditors (lenders who have (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.? collateral security) are granted priority for payment and they can enforce their security through proceedings. Any demand for execution or any collection proceeding against the debtor will Specific consents are required in cases where real estate or moveable appear at the asset number in the public registry. A claim filed assests are under usufruct. against the debtor in the judicial process will be in order, following the principle of “first come, first served”. 3 Security Trustee 5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, 3.1 Regardless of whether your jurisdiction recognises employees’ claims) with respect to the security? the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to Certain limited debts and obligations have preference with respect enforce the security and to apply the proceeds from to security. These have to be declared by a judge and declared as the security to the claims of all the lenders? legal mortgages such as unpaid taxes and employers’ claims, and these types have priority over the collateral security. Costa Rican law recognises the concept of a trust and the role of a security trustee and/or agent, and recognises agents acting on behalf of lenders in accordance with the trust agreement.

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5.3 Are there any entities that are excluded from 6.3 What laws exist regarding the nationalisation or bankruptcy proceedings and, if so, what is the expropriation of project companies and assets? Are applicable legislation? any forms of investment specially protected?

The only entities which are excluded are national banks, the The Costa Rican legal system provides a special legal regime for central state government, as well as decentralised institutions and expropriation, whereby governmental bodies may proceed with the municipalities. property’s rights in order to convert it to public use; for example, real estate for connecting or extending roads.

5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of Costa Rica 7 Government Approvals/Restrictions the project company in an enforcement?

Costa Rican law prohibits the seizure of assets of a company if non- 7.1 What are the relevant government agencies or fulfilment of the terms and conditions is based on lack of payment. departments with authority over projects in the typical Several processes exist to seize the assets of the project company in project sectors? an enforcement; for example, trust agreements in which assets are transferred to the trustee to hold them in order to secure them in the The main institution in connection with projects is the Ministry of event of default by the debtor or trustor. Public Works and Transportation; other specific agencies are the Ministry of Environment and Energy and the Ministry of Industry and Commerce. 5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown 7.2 Must any of the financing or project documents be of dissenting creditors? registered or filed with any government authority or otherwise comply with legal formalities to be valid or Private restructuring of debts is allowed; however, this has to be enforceable? carried out with the creditors based upon agreements in respect of insolvency law. A concession for public works requires foreign entities to declare and register legal documentation concerning the bidding entity during the bidding process, in order to comply with legal formalities; in 5.6 Please briefly describe the liabilities of directors (if special cases such as concessions for mining, these documents need any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction. to be registered with the Department of Mines.

Liabilities of directors apply only if the company has initiated 7.3 Does ownership of land, natural resources or a insolvency/bankrupcy proceedings or if directors violate the pipeline, or undertaking the business of ownership or liquidation plan. operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?

6 Foreign Investment and Ownership A foreign entity is not restricted from holding any rights or licences. Restrictions Costa Rica requires all entities to establish a permanent address or, in certain cases, to open a national corporation in which a resident agent can be notified by the government. 6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company? 7.4 Are there any royalties, restrictions, fees and/or Costa’s Rica Political Constitution provides foreigners with the taxes payable on the extraction or export of natural resources? same individual and social rights and duties as Costa Ricans, with the exception of political rights. It also guarantees a market Exports of natural resources are subject to tariffs and taxes, but economy by safeguarding economic freedom. There is no need certain resources such as minerals require special tariffs for export. for prior authorisation for investments or mandatory or optional registrations for investments, nor are there limits to the contributions. Concessions for public works or services require foreign parties to 7.5 Are there any restrictions, controls, fees and/or taxes hold at least a 50% stake in the project. on foreign currency exchange?

In accordance with article 81 of the Income Tax Law, where the 6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection local company carries out operations in a foreign currency that from such restrictions? affects its taxable income, the company is obliged to record the transaction for tax purposes in the national currency by using the The Dominican Republic-Central America Free Trade Agreement reference exchange established by the Central Bank of Costa Rica (“CAFTA-DR”) includes exceptions to the restrictions in connection at the moment the operation took place or the income was received, with concessions for public works. In addition, the country is a recording any exchange rate differential gain or loss as a taxable signatory of the European Union-Central America Association or deductible expense, respectively. Assets and liabilities kept in a Agreement. These are the most important treaties that have been foreign currency at the end of the fiscal year shall be converted into signed to protect foreign investors in the country. Costa Rican colones for taxable income purposes.

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7.6 Are there any restrictions, controls, fees and/or taxes 8.2 Are insurance policies over project assets payable to on the remittance and repatriation of investment foreign (secured) creditors? returns or loan payments to parties in other jurisdictions? Any proceeds from local insurance policies may be assigned in guarantees to any lenders, including foreign secured creditors, When foreign companies are creditors of a local subsidiary, interest following notice to the local insurer. payments abroad are subject to a 15% withholding tax since all remittances abroad are subject to taxation according to the territoriality principle. 9 Foreign Employee Restrictions Costa Rica 7.7 Can project companies establish and maintain 9.1 Are there any restrictions on foreign workers, onshore foreign currency accounts and/or offshore technicians, engineers or executives being employed accounts in other jurisdictions? by a project company?

The Central Bank manages, in principle, three types of foreign There are visa and residence permit requirements for any person currency accounts for companies: euros; dollars; and Costa Rican travelling or moving to Costa Rica to be employed by a project colones. Project companies can establish and maintain offshore company. accounts in other jurisdictions, but foreign accounts are limited to savings and checking accounts in the aforementioned currencies. 10 Equipment Import Restrictions

7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental 10.1 Are there any restrictions, controls, fees and/or taxes practice or binding contract) on the payment of on importing project equipment or equipment used by dividends from a project company to its parent construction contractors? company where the parent is incorporated in your jurisdiction or abroad? Unless projects are executing works for a governmental concession, the tax import exemption is applicable; otherwise, taxes and controls A foreign parent company can receive dividends from a local apply to all equipment under import. entity but is subject to a 15% withholding tax. Moreover, where the foreign parent company is a creditor of the local subsidiary, interest payments abroad are subject to taxation according to the 10.2 If so, what import duties are payable and are territoriality principle. exceptions available?

An exception for imports exists if the equipment is brought under 7.9 Are there any material environmental, health and temporary use. The main taxes for nationalisation have to be paid. safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations? 11 Force Majeure All projects in the country require an environmental licence and permit, and must comply with health and safety laws. 11.1 Are force majeure exclusions available and enforceable?

7.10 Is there any specific legal/statutory framework for procurement by project companies? The Costa Rican Civil Code contains the general principles of force majeure exclusions and all are applicable in the country. Procurement of public works and services will be subject to the General Admistrative Contracting Law. Certain activities or types 12 Corrupt Practices of concession will require compliance with additional laws.

12.1 Are there any rules prohibiting corrupt business 8 Foreign Insurance practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties? 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies? Corrupt businesses are generally prohibited by the Costa Rican Criminal Code and, in addition, the Law Against Corruption and Illicit Enrichment in Public Function. A fine of between 20 and The insurance market was opened in 2008 in accordance with 1,000 times the monthly minimum wage will be imposed on the CAFTA-DR. The law regulating the insurance market provides the legal entity, without prejudice and independently of criminal and framework for authorisation, regulation, supervision and development civil liabilities and the liability of the official, in accordance with of all activities related to insurance as well as supervision of consumer this and other applicable laws. If the remuneration, gift or improper rights. In order for a foreign entity to be able to sell insurance products, advantage is related to administrative contracting, the responsible it must be duly authorised by the Superintendence of Insurance to that legal person will be subject to the fine or up to 10% of the amount of effect; the law also provides that assets in the country may only be its offer or the award, whichever is greater. It shall also be subject insured by locally authorised insurers.

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to the disqualification referred to in Subsection c) of article 100 of Law No. 7494 on Administrative Contracting. 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?

13 Applicable Law Contracts with an arbitration pre-clause are subject to mandatory domestic arbitration proceedings.

13.1 What law typically governs project agreements? 16 Change of Law / Political Risk Concessions for public works are governed by the Law on Administrative Contracting. Special laws for energy and

Costa Rica telecommunications are also specifically regulated. 16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees? 13.2 What law typically governs financing agreements? Only projects contracted with development banks require political Costa Rican external financing agreements are governed specifically risk insurance. In other cases, insurance or reinsurance is not by Law No. 7010 on Contracts with External Financing (the “Private required, as the country is politically stable. Banks Law”). 17 Tax 13.3 What matters are typically governed by domestic law?

As mentioned above, local law will apply as a matter of public 17.1 Are there any requirements to deduct or withhold tax policy with respect to the creation, function and enforcement of from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a securities affecting local assets and interests. guarantee or the proceeds of enforcing security?

14 Jurisdiction and Waiver of Immunity In cases of loans payable to foreign lenders, this is not applicable; nor are payments of interest or principal. In extreme cases, 10% could be deducted, but this is not a common occurrence. 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What In general terms, for commercial purposes a waiver is binding and taxes apply to foreign investments, loans, mortgages enforceable, except where the matter has public or criminal aspects. or other security documents, either for the purposes of effectiveness or registration? 15 International Arbitration Foreign investors or creditors will generally be subject to the tax obligations applicable to domestic companies. Free trade zones 15.1 Are contractual provisions requiring submission have special tax regimes and other tourism companies in the of disputes to international arbitration and arbitral Papagayo Peninsula are an exception. awards recognised by local courts?

Yes, contractual provisions are recognised by local laws, and 18 Other Matters arbitral agreements and international commercial arbitration proceedings are governed and regulated by the law on international 18.1 Are there any other material considerations which commercial arbitration, based on the United Nations Commission should be taken into account by either equity on International Trade Law (“UNCITRAL”) Model Law. investors or lenders when participating in project financings in your jurisdiction?

15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution Equity investors and lenders should be advised of new laws conventions? concerning new tax regimes which are under discussion in Congress.

Yes, the New York Convention was recognised as Law No. 6157 on 18.2 Are there any legal impositions to project companies 26 October 1987. issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 15.3 Are any types of disputes not arbitrable under local instruments. law? The capital markets of Costa Rica are still in development, in Labour, family and criminal matters are not subject to arbitral contrast to its banking system. The National Securities Commission awards. of Costa Rica has made efforts to develop capital markets at the local and regional levels. As part of these efforts, the stock market opened up a capital market, called MAPA, for national companies of minor size, similar to the Alternative Investment Market of the London

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Stock Exchange, and a derivatives market for exchange rates. On the other hand, the stock exchange of Costa Rica is negotiating an José Pablo Sánchez Vega agreement between the other stock exchanges of Central America, Axioma Estudio Legal to group the infrastructure of the market, negotiation platforms and Edificio Tenerife Calle 25, Barrio González Lahman technology for the purpose of developing a capital market at the San José regional level. Costa Rica

Tel: +506 2221 8557 Email: [email protected] 19 Islamic Finance URL: www.axiomalegal.com

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha José Pablo Sánchez Vega is a partner in the Environment & Energy Costa Rica instruments might be used in the structuring of an Department. He focuses on energy, environmental and infrastructure Islamic project financing in your jurisdiction. projects. He has particular experience advising regulators, contractors, off-takers, export credit agencies and lenders on a number of projects in public and social infrastructure sectors, including energy, This is not applicable in Costa Rica. the electronics industry, retail, chemicals, water and other industrial and services sectors, with an emphasis on transactions, counselling and litigation. In addition, he helps businesses comply with local 19.2 In what circumstances may Shari’ah law become environmental regulations prior to, during and following transactions the governing law of a contract or a dispute? Have and development projects, from permitting and reporting obligations, there been any recent notable cases on jurisdictional to other environmental-financial disclosures, as well as supply chain issues, the applicability of Shari’ah or the conflict of due diligence. Shari’ah and local law relevant to the finance sector?

This is not applicable in Costa Rica.

19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

This is not applicable in Costa Rica.

Axioma is a premier boutique law firm which places priority on providing personalised services to customers, identifying their needs and proposing creative and efficient solutions to their particular business, within a pleasant atmosphere in which clients as well as members of the firm can achieve their professional and personal goals. The firm’s objective is to add value to its clients’ projects and cases. Our purpose is to lead the operations we are involved in, with a view to bringing them to completion efficiently in the shortest possible time and minimising contingencies. The firm’s practice has a broad national complex litigation practice in aviation litigation, environmental litigation and business crime, including a presence in various international tribunals. The firm is renowned for its ability to handle the most difficult legal situations with targeted and steadfast intensity.

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England & Wales Clive Ransome

Milbank, Tweed, Hadley & McCloy LLP Munib Hussain

■ the UK Green Investment Bank (GIB) was formed, with a 1 Overview mandate to finance “green” projects; and ■ the UK’s Export Credits Guarantee Department (ECGD) 1.1 What are the main trends/significant developments in launched Direct Lending and Export Refinancing Facilities. the project finance market in your jurisdiction? The GIB was launched in October 2012 and has since committed £2.3 billion of financing to 58 new and existing projects and has 2016 has been an interesting year for project finance in and from the mobilised an additional £7.8 billion of private capital. It is the first UK, not least given the increased uncertainty following the UK’s investment bank worldwide to invest solely in green infrastructure. referendum vote to exit the European Union. The UK market breaks The funds have been used to leverage private-sector capital to fund (broadly speaking) into two quite distinct halves – a UK-oriented projects in priority sectors from offshore wind to waste and non- market where local (as in UK-sited) deals are structured and financed, domestic energy efficiency. In November 2015, the UK Government and a much larger and more geographically diverse finance market announced its intention to change legislation surrounding its where (for one reason or another) international finance is structured, ownership of the GIB, allowing it to be sold to the private sector. negotiated and documented in the UK (in practice, London), but the 2014 and 2015 saw a significant shift in approach and appetite underlying project is located elsewhere. The two markets are both for international project finance risk from the former ECGD (now relatively large in terms of capital and debt requirements and flows, UK Export Finance or UKEF). UKEF introduced two additional but the international English-law finance market far outstrips the funding-related facilities; the Direct Lending Scheme and the domestic UK market in both volume and size of deals. Export Refinancing Facility. Under the Direct Lending Scheme, Continuing the trend from 2014, 2015 saw an increased amount of UKEF now provides export credit loans up to £3 billion in aggregate liquidity in the project finance market. As the to overseas buyers to finance the purchase of capital goods and/or UK emerges from the economic slowdown and moves into a period services, from exporters carrying on business in the UK. Loans of economic growth, there is considerable demand for upgrading can be made in sterling, US dollars, euro or Japanese yen. The existing infrastructure or investing in new, greenfield projects. The Export Refinancing Facility is available to banks funding non- value of the UK Government’s infrastructure pipeline is £411 billion sterling buyer credit loans, typically with values above £50 million (as at July 2015), consisting of projects and programmes from within that are intended to be refinanced through the debt capital markets the energy, transport, waste, flood defence, communications, water or other commercial loans. The Export Refinancing Facility aims and science and research sectors, in order to ensure that the UK to boost trade by ensuring that long-term funding is available to has the infrastructure to support and reinvigorate economic growth. overseas buyers of British exports supported by UKEF. UKEF Public and private infrastructure investment has gradually increased has also recently introduced a Local Currency Finance Scheme. over the past three decades. The two largest sectors, energy (£245 Under this scheme, UKEF can guarantee a credit loan given to an billion, 60%) and transport (£127.4 billion, 31%), account for 91% overseas borrower in a local currency, provided the loan is used to of the infrastructure pipeline’s total value. In the UK, the divide purchase capital goods/services from an exporter operating in the between conventional project finance and the bond and leveraged UK. Local Currency Financing is particularly useful for reducing finance markets continues to narrow. The market saw a continuation foreign currency risk and variable debt costs where a project does of diversification of both sources and types of project-related debt. not generate revenues in a foreign currency. As with the project bonds market, the trend comes in part from The energy markets the US; 2014 and 2015 saw a number of infrastructure and energy The UK’s energy sector continues to undergo significant change. sponsors experimenting with Term Loan B structures – sometimes The 2009 Renewable Energy Directive set a target for the UK to as refinancing tools, sometimes to sit alongside conventional achieve 15% of its energy consumption from renewable sources by financings and/or less conventional financings – for example, 2020. The Energy Act 2013 (Energy Act) received Royal Assent inventory and receivables financings. on 18 December 2013; the Energy Act implements key aspects of Multilateral and bilateral institutions have continued to participate Electricity Market Reform (EMR) – a policy initiative pioneered in the market, and existing institutions have re-branded themselves by the UK Government to mobilise £110 billion (approximately and introduced additional products to help fill the debt financing US$175 billion) of capital investment required by 2020 to ensure a gaps. By way of example: reliable and diverse supply of low-carbon electricity. The reforms ■ the European Investment Bank introduced the Europe 2020 are vital, as the UK has seen significant power plant closures in Project Bond Initiative; recent years. Around a fifth of capacity that was available in 2011

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will close by the end of this decade, and demand for electricity is set Transformation of the UK electricity market to increase as major sectors such as transport and heat are electrified. From a policy perspective, the Energy Act was aimed at bringing The UK’s current electricity mix is dominated by gas- and coal-fired about a “once-in-a-generation transformation” of the UK electricity plants; however, there has been an increase in renewable-generated market, and has had significant implications for the economics electricity. Between 2014 and 2015, electricity supplied from of investing in low-carbon generating technologies. EMR is the nuclear power increased from 21.6% to 22.2% (an increase from UK Government’s key policy mechanism for ensuring security of 18% in 2010). Coal’s share of electricity supplied dropped from energy supply through the development of low-carbon technology. 34% to 26.7% and the share from gas rose from 25.6% to 29.7%. The key policy measure to incentivise new low-carbon electricity Overall electricity supplied from renewables increased from 16.7% generation is the provision of the contract for difference (CfD) in 2014 to 19.3% in 2015. instrument. In addition, through the Infrastructure Act, the UK The UK Government’s energy and climate change goals are to Government introduced the UK Guarantee Scheme, which is a deliver secure energy and a sustainable low-carbon future. This liquidity enhancement mechanism that aims to enhance liquidity is driven by the need, by 2050, for an 80% reduction in carbon to ensure that investment in nationally significant and financially England & Wales emissions (across the economy) as against 1990 levels and, by 2020, credible infrastructure projects does not stall due to adverse credit to achieve the legally binding EU target of sourcing 15% of the UK’s conditions. In the Autumn Statement (2016), it was confirmed that energy from renewable sources (not including nuclear power). This the UK Guarantee Scheme would be extended to at least 2026. is coupled with the need, in the UK as a whole, for approximately The provision of CfDs is intended to stabilise revenues for investors 59GW of net new capacity by 2025, with as much as 33GW of in low-carbon electricity generation projects such as nuclear (and this coming from renewables and the remaining 26GW to come renewables) by helping developers secure the large upfront capital costs from conventional thermal power. In an effort to promote private for low-carbon infrastructure. However, the long planning horizon investment in the development of large-scale infrastructure projects for nuclear new-build projects and massive capital requirements pose (and in particular, the development of low-carbon technology) in substantial financial risks to nuclear power sponsors and investors. the UK, the UK Government has instituted a series of programmes In the US, it was determined that US Government guarantees were that are specifically designed to stabilise the economics of financing necessary in order for new-build nuclear projects to be commercially for such projects. viable. It seems that the UK Government has undertaken to provide Following the election of the Conservative Party-led UK Government guarantees to EDF in order to secure the development of the UK’s at the May 2015 General Election, however, there have been a number first new nuclear plant since 1995 (Hinkley Point C). of revisions to the UK Government’s energy policy that could, in the The CfD is a quasi-power purchase agreement; generators with a medium to long term, have a profound effect on future investment CfD will sell their electricity into the market in the normal way, in low-carbon energy generation projects in the UK. These policy and remain active participants in the wholesale electricity market. changes have partly arisen as a result of the UK Government’s The CfD then pays the difference between an estimate of the market attempts to reduce public spending (in May 2015 the cost of the price for electricity and an estimate of the long-term price needed Renewables Obligation was three times that predicted in 2008). It to bring forward investment in a given technology (the strike price). is also a reflection of the UK Government’s energy stance, which has This means that when a generator sells its power, if the market seen a shift in emphasis from being “pro-renewables” to what has price is lower than needed to reward investment, the CfD pays a been described by some commentators as being more “pro-business” “top-up”. However, if the market price is higher than needed to – a consequence of this is that support for more established renewable reward investment, the contract obliges the generator to pay back technologies, such as onshore wind, biomass and solar, has been cut. the difference. In this way, CfDs stabilise returns for generators The Conservative Government has, however, continued the at a fixed level, over the duration of the contract. This removes Coalition’s policy towards new nuclear, with a firm commitment to the generator’s long-term exposure to electricity price volatility, the role it should play in the UK’s future energy mix. This is based substantially reducing the commercial risks faced by these on nuclear power being low-carbon, affordable, dependable, safe projects. The Energy Act includes a provision whereby a new UK and capable of increasing the diversity of energy supply. This echoes Government-owned company (the Low Carbon Contracts Company similar pro-nuclear political decisions in other jurisdictions, notably or LCCC) will act as the counterparty to eligible generators under the UAE and Turkey. The events at Fukushima, Japan (March 2011) the CfD. This mechanism was in direct response to concerns about did not result in a reversal of this policy, unlike the nuclear phase-out the “credit” behind the CfD economics. Although a CfD is a private announced by Germany and the cancellation of a new-build nuclear law contract between a low-carbon electricity generator and the programme in Italy. Although the UK Government emphasises LCCC, the cost of CfDs will ultimately be met by consumers via a that it will be for energy companies to fund, develop and build levy on electricity suppliers. new nuclear power stations in the UK, including meeting the full The first CfD auction in January 2015 was a success, witha costs of decommissioning and their full share of waste management competitive allocation process, and the cost was £105 million less and disposal costs, the Office for Nuclear Development (within than the original strike prices published for the same technologies. the Department for Business, Energy and Industrial Strategy) is It was a similar story for the Capacity Market auction, where the first taking active steps to establish and cement the right framework and auction procured capacity at almost half the expected clearing price. conditions in the UK for investment in new nuclear power stations, However, following the May 2015 General Election, there has been with the aim of having new nuclear projects generating electricity a decrease in pace in implementing the CfD and Capacity Market from around 2020. measures, which, in turn, has created uncertainty for EMR. In July The UK Government’s strong support for nuclear power was shown 2015, the Department of Energy and Climate Change confirmed the in November 2015 when it was announced that the UK Government postponement of the next CfD auction round, and, subsequently, in November 2015, the Secretary of State for Energy and Climate intended to phase out coal-fired generation without CO2 abatement in 2025, build new gas-fired plants, and place greater reliance on Change confirmed that the delayed October 2015 CfD auction nuclear power and offshore wind. See the response to question 1.2 would now not take place until the end of 2016. This postponement below for a summary of the nuclear power market in the UK. was partly caused by the UK Government’s attempts to rein in the costs of supporting low-carbon electricity generation.

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The delay of the October 2015 CfD auction could also be viewed investors. A planning regime has been proposed to aid the installation as evidence of the UK Government’s attempts to reduce levels of of nuclear reactors, including – following public consultation – support to certain categories of low-carbon energy generation, such identifying sites for new nuclear power stations to be built by the as onshore wind and solar. This reduction in support is unlikely end of 2025. The UK Government legislated in the Energy Act to affect offshore wind, which the UK Government continues to 2008 to ensure that operators of new nuclear power stations will support (in part because it believes the offshore wind technology have secure financing arrangements in place to meet the full costs developed in the UK could be exported to other markets around the of decommissioning and their full share of waste management and world). Offshore wind projects secured CfDs for between £114 and disposal. The Energy Act 2013 also introduced measures to create £120 per megawatt hour (MWh) in the March 2015 CfD auction, a new independent statutory body, the Office of Nuclear Regulation compared with around £80/MWh for onshore wind projects. (ONR), to regulate the nuclear power industry. The ONR and the In a draft budget notice issued on 9 November 2016, the Department Environment Agency are undertaking a process of Generic Design for Business, Energy and Industrial Strategy confirmed that the next Assessment (GDA) of the new nuclear designs, which allows the England & Wales allocation process for CfDs for renewable generators will begin generic safety, security and environmental implications of new in April 2017, aiming to provide support for projects that will be nuclear reactor designs to be assessed before an application is made delivered between 2021 and 2023. There will be no allocation of CfD for a licence and permissions are granted to a particular design of budget for onshore wind or solar, consistent with the Government’s reactor on a particular site. Currently, the EPR developed by Areva view that these are mature and/or politically undesirable technologies (and to be used by EDF in the UK) and the AP1000 developed by which should no longer receive subsidies. The only technologies Westinghouse Electric Company are being assessed in the GDA supported will be offshore wind, certain forms of biomass or process. However, following the completion of the sale of Horizon, waste-fuelled plant (advanced conversion technologies, anaerobic Hitachi is currently at step 4 (detailed design, safety case and digestion, biomass with CHP), wave, tidal stream and geothermal. security evidence assessment) for its ABWR technology. Amongst the EMR policies was the establishment of a carbon price In March 2015, the ONR published revised resolution plans in floor introduced on 1 April 2013, with the aim of encouraging response to 51 outstanding GDA Issues for the AP1000 reactor additional investment in low-carbon power generation by providing design. Westinghouse is aiming to complete GDA in early 2017 greater support and certainty to the carbon price. Supplies of fossil but this will be dependent on the timely delivery of high quality fuels used in most forms of electricity generation will become documentation for regulatory assessment. In August 2015, the subject to either the climate change levy (CCL) or fuel duty from that ONR published a new research strategy to support its independent date. Such supplies would be charged at the relevant carbon price regulatory decision making. The strategic approach is intended to support rate, depending on the type of fossil fuel used, which will be ensure that the ONR has continued access to the latest independent determined by the average carbon content of each fossil fuel. The scientific and technical expertise; the ONR has also published carbon price support rates would reflect the differential between the an annual research update to confirm and summarise the work future market price of carbon and the floor price determined by the completed. This is to ensure that research generates useful outputs UK Government. In April 2015, it was announced that the carbon and is disseminated to maximise the potential benefits.

floor price would rise from £9.54 to £18.08 per tonne of CO2, raising Shale gas the cost of a tonne of carbon for British power plants to £23, when Shale gas fracking remains an area of great interest and potential allowances on the EU’s emission trading system (ETS) are factored in. within the UK – the British Geological Survey estimates that there The effect of the hiking of the carbon floor price was seen as positive could be up to 1,300 billion cubic feet of shale gas in the north by the nuclear industry and resulted in coal’s share of electricity of England (primarily in the Bowland shale beneath Manchester, supplied being noticeably reduced for the remainder of 2015. Liverpool and Blackpool) – equivalent to approximately 50 years of In the July 2015 budget, the UK Government announced the removal UK gas consumption. Further reserves are likely to exist in central of CCL exemption for electricity generated from renewable sources and southern England. In December 2013 the UK Government’s from 1 August 2015. The CCL was introduced in 2001 and is a tax Department of Energy and Climate Change reported that up to half on UK business, collected by energy suppliers, that is designed to of the UK’s land area might be suitable for fracking, including as encourage energy efficiency, reduce carbon emissions and promote yet unexplored deposits throughout much of eastern and southern energy from renewable sources. Businesses were previously able to England. US energy costs (partly as a result of significant claim an exemption if they could show a levy exemption certificate, investment by oil and gas buyers in US shale gas development) are showing that they bought energy from qualifying renewable energy currently one-third of those of Western Europe – a major issue for sources. European exporters. Total announced the acquisition of interests in In September 2015, Drax, along with one of the UK’s leading two exploration licences in January 2014; other shale gas developers generators of renewable power, Infinis, announced that they were include Cuadrilla, D’Arcy Oil Exploration, IGas and Dart Energy. to apply for judicial review of the UK Government’s decision to While UK shale oil is still in the early stages of exploration in remove the CCL exemption. Drax and Infinis’ challenge is also the UK, a PwC report published on 14 February 2013 stated that based on the fact that when the CCL exemption was removed from shale oil production could boost UK GDP by up to £50 billion by electricity generated from combined heat and power plants, there 2035, whilst also resulting in significantly lower oil prices. In 2013 was a two-year notice period, whereas in this case the notice period the BGS released an estimate of the total resources of the entire was only 24 days. Judgment was entered against Drax and Infinis Bowland shale layer of 23,000–65,000 billion cubic metres (bcm). on 10 February 2016. The High Court recognised the merits of The approach involved mapping the layer to provide information bringing the case; the ruling noted that the Government had not on its thickness. Assuming a North American recovery factor of made any specific and clear assurances that the exemptions would around 8–20% would indicate potentially recoverable resources continue to apply. of 1,800–13,000 bcm. To put these estimates in context, the UK’s Regulatory framework remaining potentially recoverable conventional gas resources are 1,466 bcm (of which 493 bcm are reserves) and annual UK gas The Office of Nuclear Development has focused on taking actions consumption is 77 bcm. which are aimed at reducing regulatory and planning risks for

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On 1 April 2015, certain functions passed from the Department of accused the European Commission of legal and procedural error. Energy and Climate Change to the Oil and Gas Authority (OGA), They fear that a comprehensive subsidies package could create a newly created executive agency within the Department of Energy distortions in the European energy market and create competitive and Climate Change. On 1 October 2016, the Energy Act 2016 came advantages for nuclear power. Final contracts for Hinkley Point C into force, establishing the OGA as a government company limited were signed in September 2016. by shares and as an independent regulator for the industry. In turn, The three main investors who have announced plans to build up to the process of obtaining consent to drill a well is the same whether an aggregate of 16GW of new nuclear power generation in the UK the well targets conventional or unconventional gas. Operators by 2025 are: bid for exclusive rights to an area in competitive licence rounds. EDF Energy (NNB GenCo) The operator then needs the landowner’s and planning permission, which may require an environmental impact assessment. In January 2009, EDF purchased British Energy and all of its assets for £12.5 billion, including 10 sites in the UK. In addition On 16 July 2015, the UK Government laid draft regulations that to running the existing fleet of ex-British Energy nuclear power defined the protected areas in which hydraulic fracturing willbe England & Wales stations, EDF has publicly made clear its intention to build four new prohibited. The draft regulations ensure that the process of hydraulic European Pressurized Reactors (EPRs) (amounting to 6.4 GW) at fracturing can only take place below 1,200 metres in specified Hinkley Point C and Sizewell. Centrica’s withdrawal from British groundwater areas outside National Parks, Areas of Outstanding Energy will mean that there is no British involvement left in the Natural Beauty and World Heritage Sites. three consortiums established to build new nuclear plants in the UK. In October 2015, EDF announced that it expected to begin 1.2 What are the most significant project financings that construction at Hinkley Point C “within weeks” after signing a deal have taken place in your jurisdiction in recent years? with China General Nuclear Power Corporation (CGN), which will provide one-third of the cost, now estimated at £18 billion. First Notable project finance deals in 2015 and 2016 included the Hinkley power was scheduled for 2025. As part of the deal, CGN will also Point C Project in Somerset (currently in pre-development stage), the take a 20% stake in developing Sizewell, and will try to develop its £2.2 million Thames Tideway Tunnel project, the Galloper Offshore own reactor with EDF’s backing at Bradwell in Essex. Wind Farm, the Thameslink Rolling Stock Project refinancing, the Meanwhile, Sellafield announced the winning consortia for a £500m Drax Coal-Fired Power Plant refinancing and the Intercity Express 10-year agreement to support the organisation’s own staff on the Programme Phase 1 public-private partnership (PPP) refinancing. decommissioning of Europe’s most complex nuclear site. New Project bonds activity increased and included, in the infrastructure deals were framed to bring big benefits to the community, with area, the $300 million CPI linked bond as part of the London all firms committed to training and spending at least 20% of their Underground Northern Line Extension 2015, and the £254 million subcontracting budget with small to medium-sized firms. senior secured bonds issued for the acquisition of the 389MW West Horizon Nuclear Power of Duddon Sands wind farm offshore transmission assets. Horizon Nuclear Power is a UK energy company which was As mentioned in the response to question 1.1, nuclear power has established with the objective of developing a new generation of become central to the UK Government’s thinking on energy policy nuclear power stations. Horizon Nuclear Power was a joint venture in the UK. In October 2013, the UK Government announced that between E.ON UK and RWE npower; however, in March 2012, initial agreement had been reached with EDF to develop the first E.ON UK and RWE npower announced that they were withdrawing new nuclear power station in the UK since the start of generation at from the joint venture to build new nuclear plants in the UK due to, Sizewell B in 1995 – Hinkley Point C in Somerset. The 430-acre among other factors, pressure from Germany’s decision to phase out site, reducing to 165 acres once operational, will generate enough all nuclear power. The sale of Horizon Nuclear Power to Hitachi electricity to power nearly 6 million homes, bring 900 permanent Limited of Japan was announced in November 2012. The Hitachi jobs to the area and create around 25,000 jobs during construction. Horizon programme involves building two to three 1,300 MW In October 2013, the UK Government agreed EDF should receive plants at each of Horizon’s sites at Wylfa, Anglesey, and Oldbury, a guaranteed strike price of £92.50 per megawatt per hour from Gloucestershire, with the first unit becoming operational in the Hinkley Point C, twice the market price of electricity over a 35- first half of the 2020s and employing its Advanced Boiling Water year period. With construction costs estimated at £18 billion, the Reactor (ABWR) technology. key commercial terms include the provision of an IUK Guarantee In November 2015, it was announced that Wylfa and Oldbury for the debt element of the financing (which could include a bond had moved a step closer to going ahead after the ONR said it issuance). had completed three of the generic design assessments (GDAs) In June 2013, the UK Government announced that it would guarantee for ultimate client Hitachi-GE’s advanced boiling water reactor up to £10 billion in loans for Hinkley Point C under the IUK (ABWR), which will be used in both plants. The ONR said it has Guarantee Scheme. The UK Government’s support for the project concluded that sufficient progress has been made by Hitachi-GE to was deemed compatible with the Common Market in a formal report move into the final assessment stage, which Hitachi-GE expects to by the European Commission, published in October 2014, which complete in December 2017. Hitachi and Horizon expect to have found that there was no State aid in this case. An appeal against the full range of licences and permissions in place by 2018 for a new this decision was lodged by Austria on 6 July 2015; however, the nuclear power plant at Wylfa. External finance will be required to European Commission insisted that EU Member States are free to fund construction, from both debt and equity sources. choose their mix of energy sources. The Department of Energy NuGeneration Ltd (NuGen) and Climate Change has said that it is confident that the European NuGen is a joint venture between GDF Suez and Iberdrola, created Commission’s State aid decision on Hinkley Point C is legally robust to develop new-build nuclear opportunities in the UK. Scottish and and it has no reason to believe that Austria would submit a challenge Southern Energy plc had been part of the original joint venture but of any merit. On 15 July 2015, a second challenge was lodged with sold its 25% stake to the existing parties in 2011. Further to this, the European Court of Justice by Greenpeace Energy and nine NuGen has acquired option rights over 100 hectares of land adjacent German and Austrian green energy suppliers. The claimants have to the existing nuclear facilities at Sellafield in West Cumbria. It was

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announced in December 2014 that NuGen had signed a cooperation English law differentiates between legal and equitable interests in agreement with HM Treasury to promote financing for a new nuclear assets (including security interests) and in particular as regards land power station at Moorside. In December 2015, NuGen was awarded and shares. a £20 million contract to assess the site of the potential new nuclear It is possible, in theory, to create security orally (unless it relates reactors. The contract is the Moorside project’s largest so far and to land) but, in practice, security is always documented. There is will support licensing, planning application and other consents no prescribed procedure or form of document required to create required to build the new nuclear power station near Sellafield. security (but see question 2.2 below regarding registration). It was also announced in December 2015 that Toshiba was looking A legal assignment of an asset must comply with section 136 of for outside help to fund its £8 billion nuclear programme after a the Law of Property Act 1925. If the secured lender wishes to collapse in its share price. The Japanese group is in talks with implement a legal assignment of rights by way of security, then local financial institutions to support the construction of an atomic section 136 sets out the procedure. A legal assignment must be plant near the Sellafield facility in Cumbria, after running up losses in writing and signed by the assignor, be absolute (meaning that England & Wales following an accounting scandal. The Japanese financial regulator the assignee has the entire right to the benefit in the action) and recommended that Toshiba be fined 7.37 billion yen (£40 million) not be set out to be by way of charge only, and any third parties for overstating profits and the share price of the company is down against whom the assignor could enforce the assigned rights need 40% since the start of the year. to be notified in writing. If the assignment has been perfected, the assignee has the right to sue the third party in its own name. It is often not possible in project financing to comply with section 2 Security 136; the vast majority of assignments of receivables, accounts and contracts used for the purposes of project financing are equitable assignments. If the requirements under section 136 are not met, 2.1 Is it possible to give asset security by means of the assignee has an equitable assignment, which does not grant the a general security agreement or is an agreement right to sue the third party in its own name. Assignments of future required in relation to each type of asset? Briefly, what is the procedure? contracts can only be by way of equitable assignment. Other securities, such as a charge and a mortgage, require evidence in In domestic UK project financings the intention of the parties (and writing, which can be effected by means of a debenture. Debentures the usual requirement of all types of lenders) is to create security can create legal mortgages and fixed and floating charges over all over all, or substantially all, a project company’s assets. Project the borrower’s assets, if agreed, and as set out in the debenture. The finance borrowing vehicles are normally special purpose vehicles or debenture is executed as a deed. “SPVs” with no pre-existing businesses, rights or liabilities beyond those associated with the project. 2.2 Can security be taken over real property (land), plant, Security is normally granted by way of a general security agreement, machinery and equipment (e.g. pipeline, whether such as a debenture, which covers all the SPV’s rights and assets underground or overground)? Briefly, what is the procedure? (both pre-existing and after-acquired) or (less commonly) by way of separate security agreements for each type of asset. Security is usually taken over real estate by way of a legal mortgage More often than not, lenders will look to achieve “going concern” over (ideally) a freehold title, or by the creation (or assignment) of security on a UK-based project or asset. This is aimed at putting a leasehold interest. Security over moveables is normally effected them in a position of default, stepping in if necessary and operating by way of a fixed charge over plant, machinery and equipment. (or selling) the relevant asset as a going concern. Basic legal Plant and machinery which is fixed to land is normally deemed to security is normally insufficient to achieve this type of outcome; be part of that land; pipes and cables can in certain circumstances conventional legal security is often supplemented by bespoke also constitute fixtures. The depreciation position differs between contractual arrangements providing lenders with specific notice, “fixtures” (which effectively become part of the land or property “cure” and “step-in” rights. to which they are affixed) and moveables or “chattels” – so fully Where (as is very often the case) the viability of a project as a going analysing the legal standing of an asset is important. Complications concern is dependent upon the continuing availability to an operator arise over the creation of security over assets located on the or owner of permits and licences, special attention will need to be foreshore or in international waters. paid to the consequences of default in the wider sense – by way of The following are the main types of security which require example, breach of licence conditions or change of control can result registration: in permits and licences being breached and/or becoming terminable. ■ company charges; Certain types of licences and permits are, in effect, personal to the initial licence-holder; contractual rights can be expressed to be non- ■ mortgages and charges over interests in land; assignable in the absence of consents. A careful analysis of the ■ security over certain IP rights; and regulatory and practical conditions applicable to the application for, ■ security over ships and aircraft. and maintenance of, permits, licences and key contracts is necessary Registration is important for the chargee to secure its priority rights and will differ on a case-by-case basis. and ranking in case of the chargor’s insolvency. The main types of securities under English law are mortgages The procedure is the same as set out above, namely by agreeing the (equitable and legal), charges (fixed and floating), assignments terms and conditions and setting these out in a debenture. In order to (broadly equivalent to charges), pledges and liens. Mortgages, perfect a legal mortgage and a fixed charge following the execution charges and assignments are the most frequently used forms of of the debenture, the security has to be registered. security. Assignments may be legal or equitable; the process for Under the Companies Act 2006, a company must register details enforcement of the two types of security differs. A debenture will of any security it grants (subject to some exceptions) at Companies include a range of mortgages, charges and assignments depending House within 21 days of the date of creation of the security. on the nature of the security assets. Failure to register results in the security becoming void against an

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insolvency officer appointed in respect of the chargor and against any creditor. Separate registrations regarding security over land 2.5 Can security be taken over shares in companies and real estate interests will be required at the Land Registry or at incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? the Land Charges Department. Note that security over intellectual property may also be subject to separate registration procedures (for example, at the Trade Marks Registry). Security over shares in companies incorporated in England and Wales can either be taken by way of legal mortgage or by way of charge over the shares (an equitable mortgage or charge). The 2.3 Can security be taken over receivables where the governing law of the mortgage should always be English law. The chargor is free to collect the receivables in the convention in English law financings for security over shares in the absence of a default and the debtors are not notified context of projects, is for security to be effected by way of equitable of the security? Briefly, what is the procedure? charge; lenders will always (subject to very limited exceptions) resist becoming shareholders of record in an SPV or project vehicle for a Security over receivables is normally taken by way of assignment. England & Wales wide range of reasons, including incurring shareholder liabilities and Fixed charges over receivables or bank accounts require the secured reputational risk. Equitable share charges are normally protected by lender to control both the receivables and the account into which means of a power of attorney in favour of an agent or trustee for they are paid when collected; this is almost always impossible as the lenders, enabling the lenders to take a legal transfer of shares if a practical matter in the context of a typical project. Security over default occurs, where absolutely necessary. receivables can also be taken by way of a floating charge, but the practical value of a floating charge (which “fixes” on the assets In the ordinary course of events, secured lenders will normally it covers only on the occurrence of a crystallisation event) to a be happy for the sponsors/relevant chargors to retain legal title to lender in terms of asset security may be limited. If the benefit of shares until an Event of Default and/or enforcement event occurs. the receivables is assigned to the lender, then, in order to achieve A legal mortgage of shares involves the transfer of the relevant a legal assignment under section 136 of the Law of Property Act shares in the company to the lender from the outset, subject to an 1925, notice in writing of the assignment must be served on the agreement for their re-transfer once the secured debt is repaid. The account debtors – often impracticable where there are a wide range lender will be registered in the company’s register of members of debtors. as a fully entitled shareholder of the company, and not just as a As it may be impractical to serve notice or to impose a high degree mortgagee. As a result, the transfer will operate so as to give the of control on this asset class, an equitable assignment or floating lender all the rights of a shareholder. While the lender is registered charge is often used as an alternative form of security. This form as a shareholder, it will receive all dividends and any other money of security enables the chargee to take security without unduly or assets paid in relation to the shares, and will be entitled to vote restricting or affecting the chargor’s ability to carry on its business as a shareholder. by dealing pre-default with its receivables as if no security had been With an equitable mortgage or charge of shares, the chargor remains created. The formalities for this form of security are fewer but as a registered shareholder and retains legal title to the shares, floating charges rank behind fixed charges in terms of priority, and transferring only its beneficial interest to the lender. The chargor will the proceeds of floating charge enforcement are subject to certain normally be required to lodge its share certificates and stock transfer other prior ranking claims. forms with the lender, on the basis that the stock transfer forms can be completed by the lender (in favour of itself or a nominee) if an 2.4 Can security be taken over cash deposited in bank Event of Default or enforcement event occurs. Voting rights and accounts? Briefly, what is the procedure? the right to receive dividends will normally remain with the chargor until an Event of Default occurs. Project financings will invariably establish a strict regime in relation to the project’s cashflows – this will require revenues to be paid into dedicated accounts held by pre-agreed account banks and will 2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or set out clear rules on the priority of application of available cash otherwise) in relation to security over different types (the Cashflow Waterfall). A typical project account or account bank of assets (in particular, shares, real estate, receivables agreement will establish strict rules as to permitted withdrawals and chattels)? from those accounts. Withdrawals will cease to be permitted upon the occurrence of an A nominal fee is payable to Companies House on registration of actual or potential Event of Default. Any withdrawal which is not security by a company. The fee does not vary according to the class permitted under the relevant accounts or account bank agreement of asset or type of security. Separate registration is required for each will trigger default; default will permit the lenders to enforce security document. security. In the context of receivables and bank accounts, this will Additional fees are also payable for registration to the Land Registry include transferring to the lenders full control over receivables and or Land Charges Department as regards security over land. These accounts. fees are registration fees and will not usually be significant in the As it may be impractical to serve notice or to impose a high degree context of the overall transaction. No stamp duty is payable on the of control on this asset class, an equitable assignment or floating registration of security. charge is often used as an alternative form of security. This form of security enables the chargee to take security without unduly 2.7 Do the filing, notification or registration requirements restricting or affecting the chargor’s ability to carry on its business in relation to security over different types of assets by dealing pre-default with its receivables as if no security had been involve a significant amount of time or expense? created. The formalities for this form of security are fewer but floating charges rank behind fixed charges in terms of priority, and Registration with Companies House requires the completion of a the proceeds of floating charge enforcement are subject to certain specified form and must be undertaken within 21 days of the creation other prior ranking claims. of the security. Companies House is not responsible for inaccuracies

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in the registered particulars (acceptance of the particulars does not guarantee their accuracy). Inaccuracies in the registered particulars 3 Security Trustee can have serious consequences as regards priority and effective registration. Responsibility for ensuring the accuracy of the registered 3.1 Regardless of whether your jurisdiction recognises particulars lies with the presenter (in practice, the chargee or its the concept of a “trust”, will it recognise the role of a advisors). The 21-day period includes bank holidays and weekends security trustee or agent and allow the security trustee and does not stop running if the Companies House registrar identifies or agent (rather than each lender acting separately) to a defect and returns the registration form for correction. As a result, in enforce the security and to apply the proceeds from the security to the claims of all the lenders? the context of complicated security documents, it is essential to draft and agree the registration particulars in advance of financial close. If necessary, these particulars can be pre-agreed with Companies House England and Wales fully recognise the concept of trusts. Trusts to reduce the risk of rejection and the loss of time (and priority). are normally used to create beneficial interests in assets which may differ from the strict legal ownership of those assets. Trust deeds are England & Wales Charges over certain assets, such as land, intellectual property rights, often used alongside debentures in England and Wales to create and ships and aircraft, need to be registered at other specialist registries regulate the holding of security over assets. related to the asset in question, as well as at Companies House. The creation of a trust by a borrower will normally involve the On 6 April 2013, a new regime for the registration of security conveyance by the borrower to a trustee (usually a trust corporation came into force via the Companies Act (Amendment of Part 25) – either an eligible financial institution or a specialist trust company Regulations 2013. This regime is intended to streamline existing such as any Law Debenture or Banker’s Trust) who may hold procedures and to reduce uncertainty over registration. the security for the benefit of itself, the other secured lenders in Principal features of the new registration regime include: the transaction and (on a residual basis) for the borrower itself. ■ Scope of charges covered: All charges created by a company English law trusts are normally long-term arrangements; beneficial are registrable except for a narrow range of excluded items. ownership remains with the secured party so the trust assets do not The company and any person “with an interest in the charge” fall within the trustee’s estate if the trustee becomes insolvent. is entitled to register the charge. ■ “Voluntary” registration: Failure to register security is no longer a criminal offence. However, commercial sanctions for 3.2 If a security trust is not recognised in your non-registration (whereby non-registered security becomes jurisdiction, is an alternative mechanism available void against a liquidator, administrator or creditor and any (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which secured debt becomes immediately re-payable) continue to would allow one party (either the security trustee or apply. Security should still be registered within the 21-day the facility agent) to enforce claims on behalf of all window. the lenders so that individual lenders do not need to ■ Filing, e-filing and statements of particulars: Persons enforce their security separately? wishing to register security have the option of registering via an electronic filing system. Under this system, a statement of This is not applicable. Please see question 3.1. particulars must be filed online together with a certified copy of the charging document. The entire charging document is available to view online, although certain personal 4 Enforcement of Security information (such as bank account details) can be redacted. There is no longer any need to send an original charging document to Companies House. 4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the 2.8 Are any regulatory or similar consents required with availability of court blocking procedures to other respect to the creation of security over real property creditors/the company (or its trustee in bankruptcy/ (land), plant, machinery and equipment (e.g. pipeline, liquidator), or (b) (in respect of regulated assets) whether underground or overground), etc.? regulatory consents?

Subject to limited exceptions in relation to certain types of UK In general, no. In relation to unregulated assets, there is no Government-owned, strategic and regulated assets, no regulatory or requirement for a public auction following enforcement of security. similar consents are required in relation to most land and real estate It is impossible to exclude the possibility of third parties seeking rights or in relation to most types of privately held assets. Specific injunctive relief to prevent enforcement of security or the sale of legal regimes apply, however, to different types of regulated assets secured assets following enforcement, but generally English courts – for example, certain types of governmental assets (in particular will oppose any such proceedings where security was validly given those associated with defence), nuclear generation, nuclear fuel and (where required) properly registered. production and reprocessing plants and related sites and certain assets vested in specific types of privatised businesses (for example, The Financial Collateral Arrangements (No. 2) Regulations (FCA) water and transmission businesses). In addition, licences granted came into force in England and Wales in December 2003 in order by Ofgem (the gas and electricity regulator in England and Wales), to implement the Financial Collateral Directive (2002/47/EC), regulatory authorities in relation to exploration for and development of with the aim of simplifying the enforcement of security over cash, hydrocarbon assets or the Financial Conduct Authority, may affect the financial instruments (including shares, bonds and warrants) and granting of any mortgage, charge or other form of security over an asset. credit claims. The consent of Ofwat (the regulator of the water and sewage industry Following the FCA, paragraph 43(2) of Schedule B1 to the IA 1986 in England and Wales) may also be required under the instruments of will not apply to any security interest created or otherwise arising appointment by the Secretary of State for the Environment for water under a financial collateral arrangement. This means that neither and sewerage, undertaken under the Water Act 1989. the consent of the administrator, nor the permission of the court, is

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required to enforce such a security interest, which would otherwise the whole or substantially the whole of the company’s assets, and be applicable when a company is in administration or the subject of the company has triggered an Event of Default under the financing a company voluntary arrangement. documentation. A company need not be insolvent in order for administration to occur. Once appointed, the administrator owes his duties to all creditors, not only to the project lenders. His primary 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related objective is to rescue the company as a going concern. If a lender companies? has the right to appoint an administrative receiver (as described above), that lender may veto the appointment of the administrator. “Foreclosure” has a narrower meaning under English law than it does in, for example, English usage in the US. Foreclosure involves 5.2 Are there any preference periods, clawback rights a mortgagee obtaining a court order under which it becomes the or other preferential creditors’ rights (e.g. tax debts, owner of the property. Even in these circumstances a mortgagee employees’ claims) with respect to the security? normally has certain obligations to the mortgagor – including an England & Wales obligation to obtain a reasonable price on sale of a mortgaged asset, Following the formal insolvency of a company, an administrator or and (pursuant to the “equity of redemption”) to return any excess liquidator may challenge transactions entered into by the company proceeds over the secured debt finalised by it to the mortgagor. In before the start of the relevant insolvency procedure. The period general, under English law, foreign investors are treated differently when such transactions are vulnerable to being challenged is known from businesses established in England and Wales in relation to the as a “hardening period”. Such transactions include transactions enforcement of security. at an undervalue, preferences, extortionate credit transactions, avoidance of floating charges and transactions defrauding creditors. The hardening period ranges from two years (transactions at an 5 Bankruptcy and Restructuring undervalue) to six months (preferences). Proceedings Employees are usually the only preferential creditors following the introduction of the Enterprise Act 2002. In order of priority, a 5.1 How does a bankruptcy proceeding in respect of the party secured by way of mortgage or fixed charge will rank ahead project company affect the ability of a project lender to of any preferential creditors. Preferential creditors are paid from enforce its rights as a secured party over the security? the proceeds of floating charges, which are ranked below the fixed- charge creditors but above all other unsecured creditors. There are different types of insolvency proceedings under English law: 5.3 Are there any entities that are excluded from ■ administration; bankruptcy proceedings and, if so, what is the ■ receivership/administrative receivership; applicable legislation? ■ liquidation; ■ company voluntary arrangements (CVAs); and Private-sector entities incorporated in England and Wales are generally not excluded from bankruptcy proceedings in England ■ schemes of arrangement. and Wales. From a lender’s perspective, administration and administrative receivership are the most important regimes. 5.4 Are there any processes other than court proceedings Lenders to a project normally insist on taking security over all, that are available to a creditor to seize the assets of or substantially all, the Project SPV’s rights and assets. Special the project company in an enforcement? rules apply to security created by “Project Companies” (prior to the Enterprise Act 2002 these rules were capable of applying to all Injunctive relief may be available from the English courts in unusual businesses). An administrative receiver is generally appointed over and/or extreme circumstances. As described in the responses to the whole of the company’s assets by, or on behalf of, the holders questions 2.1 to 2.5 above, typical project security arrangements of any of the company’s charges which, as created, were floating will include: charges. Since the coming into force of the Enterprise Act 2002, only lenders holding security created before 15 September 2003 ■ detailed contractual controls over project receivables, cash are able to appoint an administrative receiver, subject to certain and bank accounts; and exceptions. The key exception in the case of project finance is ■ “step-in” and related contractual arrangements with that set out under section 72E of the Insolvency Act 1986. Section counterparties to key project documents providing protection 72E states that the appointment of an administrative receiver by against borrower non-performance, insolvency and other a project company is not prevented if the project is a “financed” matters. project and is subject to step-in rights. A project is “financed” There are specific insolvency regimes relating to the insolvency of if, under an agreement relating to the project, a project company PPP and public finance initiative (PFI) projects and in relation to the incurs (or, when the agreement is entered into, is expected to incur) preservation of certain types of strategically important assets (for a debt of at least £50 million for the purposes of carrying out the example, certain pipelines and transmission assets). project. The administrative receiver’s primary duty is to the secured lender who appointed him, but he is also an agent of the company. 5.5 Are there any processes other than formal insolvency If the secured lender has the highest-priority fixed charge over the proceedings that are available to a project company to company’s assets, the lender may appoint one or more fixed-charge achieve a restructuring of its debts and/or cramdown receivers over the secured assets. Appointing its own receiver offers of dissenting creditors? the lender more control over the realisation of the assets. Out of court, an administrator can be appointed by the holder of Part 26 of the Companies Act 2006 provides a procedure for a “qualifying” floating charge, provided that the charge relates to companies to make a compromise or arrangement with its creditors

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(or any class of them) which will be binding on all creditors in the Compliance with EU directives may impact an entity’s ability to relevant class(es) if the requisite majorities vote to approve the invest in or own certain assets. scheme. A scheme requires the approval of a majority in number of creditors holding 75% in value of each affected class, and the 6.2 Are there any bilateral investment treaties (or other sanction of the High Court of England and Wales. The court will international treaties) that would provide protection consider any objections from creditors, which commonly relate to from such restrictions? the provision of insufficient information or notice of the scheme and/or the fairness of class composition. There is no statutory The UK has signed bilateral investment treaties, protecting investor moratorium attached to the scheme, although lock-up agreements, rights, with around 120 countries. whereby creditors commit in advance to vote in favour of the scheme and agree not to take enforcement action, are common in practice. Since the legislation does not prescribe the subject matter 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are England & Wales of a scheme, it is a highly flexible device and is available to any any forms of investment specially protected? company which can be wound up under the Insolvency Act 1986. This includes UK-registered companies, unregistered companies and foreign companies, provided a sufficient connection with Expropriation of assets or companies is generally rare in the UK England is established. This is a determination on the facts, but the in the absence of hostilities, breach of international sanctions or presence of English law governed debt, often together with English financial market turmoil. Certain public-private assets are subject to creditors or bank accounts, will typically be considered sufficient. compulsory purchase powers; compulsory purchase is also possible (subject to public processes and appeal rights, and to the payment of “market value” compensation) for the development of infrastructure 5.6 Please briefly describe the liabilities of directors (if and other assets (such as new railway lines). Subject to limited any) for continuing to trade whilst a company is in exceptions (for example, the State’s ability to acquire shareholdings financial difficulties in your jurisdiction. in financial institutions in certain circumstances), the State has no special legal right to expropriate private-sector assets. Under English law, a director will potentially be liable for wrongful trading if “at some time before the commencement of the winding up of the company, that [director] knew or ought to have concluded 7 Government Approvals/Restrictions that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent liquidation” (section 214(2), Insolvency Act 1986). A director will have a defence 7.1 What are the relevant government agencies or if, after that director knew or should have concluded that there was no departments with authority over projects in the typical project sectors? reasonable prospect of avoiding an insolvent winding-up or entering insolvent administration, the director took every step with a view to minimising the potential loss to the company’s creditors which he The exact nature of the project will determine which regulatory ought to have taken (section 214(3), Insolvency Act 1986). This will bodies and/or UK Government agencies will have authority over generally give conscientious directors facing financial difficulties the project. However, there are a number of bodies which have an sufficient time to organise a restructuring while continuing to trade, overarching function in respect of development related to the typical provided there continues to be a reasonable prospect that restructuring project sectors. negotiations will successfully conclude (even if in fact they do not). Local Authorities Liability for fraudulent trading (that is, knowingly carrying on the The majority of onshore projects will require planning permission, business of the company with the intent to defraud creditors) can and the identity of the body granting planning permission depends on also extend to directors, who may be personally liable in an action the nature of the project. Planning permissions are usually granted brought by a liquidator. Directors could also face criminal liability by the local authority of the relevant area. Local authorities are also for fraud, misconduct, falsification of the company’s books, material responsible for granting consent for the storage of large quantities omissions from statements and false representations under sections of hazardous substances, such as natural gas and chemicals. Local 206 to 211, Insolvency Act 1986 and are liable to disqualification authorities, and the London Mayor, may also charge the Community from being a director of any company for up to 15 years under the Infrastructure Levy, which is a charge attached to development once Company Directors Disqualification Act 1986. it has been granted planning permission, to fund and pay for the maintenance of local infrastructure. 6 Foreign Investment and Ownership National Infrastructure Planning Restrictions Where a proposed development in England is classed as a Nationally Significant Infrastructure Project (e.g. power plants, airports, and major road schemes), planning permission/development consent for 6.1 Are there any restrictions, controls, fees and/or taxes these will be dealt with by the Planning Inspectorate (specifically on foreign ownership of a project company? the Major Infrastructure Planning Unit). The ultimate decision- maker for such projects will be the relevant Secretary of State, e.g. There are no restrictions on foreign investors investing in UK the Secretary of State for Energy and Climate Change in the case of companies as a general rule under English law, but there are specific energy projects. statutory regimes in place for certain industries. Authorisation is Welsh Assembly Government required for investment in specific regulated areas including the nuclear industry, banking, media, financial services and defence. Planning decisions which would be taken by the relevant Secretary of State in England will be made by the Welsh Ministers when these UK and EU competition rules may impact ownership by companies projects are in Wales. with UK, EU or global business turnovers exceeding specific thresholds.

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Environment Agency (EA) petroleum within Great Britain. The rights granted by onshore The EA is the main environmental regulator in England and is licences do not include any rights of access, which must be obtained responsible for the environmental permitting regime, which covers from the relevant landowner, and the licensees must also obtain a variety of areas including waste management, water pollution any consents required under other legislation, such as planning and air pollution. There is a separate Welsh Environment Agency permissions and environmental permits. Licensees wishing to enter which, on 1 April 2013, was merged into a new environmental body or drill through coal seams for coal-bed methane and coal mine gas for Wales alongside the Countryside Council for Wales and Forestry must also seek the permission of the Coal Authority (see below). Commission Wales. Within UK territorial waters, consent for placing installations and laying pipelines on the seabed must be obtained from the Crown Health and Safety Executive (HSE) Estate. The HSE is the principal regulator for all health and safety issues Coal in Great Britain. Following the privatisation of the coal industry in 1994, the Marine Management Organisation (MMO) England & Wales ownership of almost all coal now resides with the Coal Authority, The MMO implements and regulates the UK’s marine planning and which grants licences for coal exploration and extraction. licensing system in respect of all offshore construction works. Gold and silver A number of other public, private or semi-public regulators may also Rights to gold and silver in most of England and Wales are owned have authority over projects, depending on their exact nature. These by the Crown, and a licence for the exploration and development of may include Natural England, the Crown Estate, the Office of Gas these metals must be obtained from the Crown Estate. and Electricity Markets (Ofgem), the Water Services Regulation Authority (Ofwat) and the Office of Communications (Ofcom). 7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural 7.2 Must any of the financing or project documents be resources? registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable? Owners of minerals may receive royalties in relation to the extraction of minerals. Such royalties would be subject to UK tax. There may In general, no. Registration of prescribed particulars at Companies be restrictions in place in relation to the extraction and exploitation House and/or other applicable registrars must, however, comply of natural resources. For example, the Environment Agency has with the relevant registration requirements. discretion to refuse to grant water abstraction licences if it believes there will be a detrimental environmental effect. Customs procedures and/or duties may apply on certain exports. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, 7.5 Are there any restrictions, controls, fees and/or taxes can such a licence be held by a foreign entity)? on foreign currency exchange?

Land There are no general restrictions on foreign currency exchange. To own land in England and Wales there is no requirement for a The Money Laundering Regulations apply to various categories of licence, nor is there any general bar on foreign ownership of private- businesses, including those active in the UK financial sector. sector land. Fees may be imposed by banks in the UK when dealing in foreign Water currencies. Corporation taxes may arise on exchange gains and In order to impound or abstract groundwater and surface water, a losses, depending on the asset or liability in question. licence must be obtained from the Environment Agency. Wind, wave, tidal and solar energy 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment No licences are required to use any renewable energy resources, returns or loan payments to parties in other although the usual planning permissions and consents required to jurisdictions? carry out construction and engineering works will be required. A licence to generate electricity (or an exemption from obtaining such There are no general restrictions on foreign currency exchange. a licence) must also be obtained from the Department for Business, The Money Laundering Regulations apply to various categories of Energy and Industrial Strategy. businesses, including those active in the UK financial sector. Minerals (other than oil and gas, coal, gold and silver) Fees may be imposed by banks in the UK when dealing in foreign Ownership rights of minerals located in privately owned land currencies. Corporation taxes may arise on exchange gains and (except oil and gas, coal, gold and silver) will generally reside in the losses, depending on the asset or liability in question. owner of the surface land, although these rights may be retained by a previous landowner. 7.7 Can project companies establish and maintain The Crown Estate generally holds the right to exploit all minerals onshore foreign currency accounts and/or offshore on the UK foreshore and continental shelf, with the exception of accounts in other jurisdictions? gas, oil and coal. Oil and gas Subject to UK and EU sanctions and the Money Laundering Regulations, project companies in England and Wales can establish Ownership of all onshore and offshore oil and gas in Great Britain and maintain onshore foreign currency accounts and/or offshore (to the limits of the continental shelf) is vested in the Crown. The accounts in other jurisdictions. OGA grants exclusive rights to “search and bore for and get”

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Climate change 7.8 Is there any restriction (under corporate law, The Climate Change Act 2008 established a framework to develop exchange control, other law or binding governmental practice or binding contract) on the payment of an economically credible emissions reduction path. The Department dividends from a project company to its parent for Business, Energy and Industrial Strategy focuses on climate company where the parent is incorporated in your change and energy supply. jurisdiction or abroad? Environmental Damage (Prevention and Remediation) (England) Regulations 2015 No; only as agreed contractually amongst the shareholders of a These Regulations implement the EU Environmental Liability project company, its lenders and the parent. Directive (2004/35/EC) in England. There are equivalent regulations in Wales. They apply to damages to species, habitats or water, or 7.9 Are there any material environmental, health and risks to human health from contamination of land, and require those safety laws or regulations that would impact upon a

England & Wales responsible to take immediate action to prevent damage occurring or project financing and which governmental authorities remediate damage where it does occur. administer those laws or regulations? Nature conservation legislation Legislation and regulations, in addition to the permits and licences The Environment Agency and Natural England are responsible already mentioned above, that may affect a project include: for enforcing laws implementing the EU Wild Birds Directive (2009/147/EC) and the EU Habitats Directive (92/43/EC), which Environmental impact assessment protect certain species and habitats. Where a development may have adverse impacts on the environment, Health and safety legislation the developer will be required to submit an environmental impact assessment to the relevant planning authority when applying for The Health and Safety at Work etc. Act 1974 provides the framework planning permission/development consent. for health and safety regulation in England and Wales. The Act is enforced by the Health and Safety Executive and local authorities, Contaminated land regime although in general the HSE will be the regulator for major projects. The contaminated land regime contained in Part 2A of the Other legislation such as the Control of Major Accident Hazards Environmental Protection Act 1990 may apply to any project Regulations 1999 may also apply to major projects. that either pollutes land and/or water or is located on previously contaminated land. Under the regime, liability for the clean-up of contaminated land falls on any person who causes or knowingly 7.10 Is there any specific legal/statutory framework for permits contamination in, on or under land. If such people cannot be procurement by project companies? found, then liability passes to the current owners and/or occupiers, regardless of their awareness of the contamination. However, if a The EU procurement laws (as implemented in England and Wales) project involves redevelopment of a site, then it is likely that the are applicable to project companies developing public-sector planning regime will govern clean-up rather than the contaminated projects, if the public contracts fall within the scope of the rules land regime. and exceed certain financial values. The rules ensure that the award process is transparent, non-discriminatory and respects the Common law principles of equal treatment. A person (including a company) who has suffered loss as a result EU procurement laws apply to contracts awarded by central of environmental or health and safety issues such as noise, odour or governments, local authorities or other public-sector bodies. other pollution, may in some cases be entitled to bring a civil claim under the common law of nuisance, negligence, trespass and/or the rule in Rylands v Fletcher against those who have caused the loss. 8 Foreign Insurance Statutory nuisance

Certain nuisances such as noise and dust are regulated by local 8.1 Are there any restrictions, controls, fees and/or taxes authorities as “statutory nuisances”. on insurance policies over project assets provided or EU Industrial Emissions Directive (2010/75/EU) guaranteed by foreign insurance companies? The Industrial Emissions Directive aims to prevent or reduce emissions to air, land and water from industrial installations. The There are no restrictions on insurance policies over project assets Directive requires installations within its scope to operate under provided by foreign insurance companies, unless the foreign a permit and streamlines permitting, reporting and monitoring insurance company is carrying out and effecting the insurance in requirements to simplify and reduce the administrative burden on the UK. operators. If the foreign insurance company is carrying out and effecting the Most installations will have to comply with the Industrial Emissions insurance in the UK, it may require authorisation by the Prudential Directive from 7 January 2014, but this depends on the type of Regulation Authority (PRA), and may therefore have to comply with installation. the PRA rules, unless it can rely on European Economic Area (EEA) “passporting” rights or other exclusions. The PRA was created by Environmental Permitting regime the Financial Services Act 2012 and is part of the Bank of England. The Environmental Permitting regime is an integrated permitting regime which regulates a range of activities which may give rise to pollution, including those covered by the EU Industrial Emissions 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? Directive, such as waste management, air pollution and water pollution. Foreign banks, and other foreign creditors, can be co-insured by the insurance company over the project assets.

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9 Foreign Employee Restrictions 12 Corrupt Practices

9.1 Are there any restrictions on foreign workers, 12.1 Are there any rules prohibiting corrupt business technicians, engineers or executives being employed practices and bribery (particularly any rules targeting by a project company? the projects sector)? What are the applicable civil or criminal penalties? The general position is that EEA nationals have the automatic right to work in the UK by virtue of being an EU citizen. In The Bribery Act 2010 received Royal Assent in April 2010 and came addition, Swiss citizens and Commonwealth nationals who have a into force on 1 July 2011. It repeals previous statutes in relation to grandparent born in the UK or the British Islands have been granted bribery, including the Public Bodies Corrupt Practices Act 1889, the permission to work in the UK. Unless an individual falls into one Prevention of Corruption Act 1906 and the Prevention of Corruption of these categories, they must obtain immigration permission to Act 1916 (the “Bribery Act” or the “Act”). The legislation arms England & Wales work in the UK under the Points-Based System (PBS) by falling prosecutors with a range of criminal offences which will cover a wide into one of the new tiers (employers must be aware there are five range of conduct that they may employ to prosecute any potentially distinct tiers) of the PBS or be a dependant of a migrant coming to corrupt activity. The Bribery Act’s arrival coincides with a significant the UK under one of the tiers. With the exception of Tier 1, migrants shift in the UK’s approach to fighting corruption which has seen must be “sponsored” before they can apply to enter or remain in the prosecutors bring companies into the criminal courts for corruption UK. UK employers need to obtain a sponsor licence from UK Visas on numerous occasions in recent years. The Act reflects a general and Immigration (UKVI) before they can employ migrants under tightening of anti-bribery laws globally in line with the OECD Tiers 2–5. Tier 1 categories require migrants to make their own Convention on the Combating of Bribery, as well as an increased level applications to enter and stay in the UK to work. of international cooperation to enforce such legislation; however, the Act raises the bar even higher than equivalent legislation in other jurisdictions, such as the US Foreign Corrupt Practices Act. 10 Equipment Import Restrictions The Act affects all UK businesses and those incorporated abroad who do business in the UK, and creates four new offences related to 10.1 Are there any restrictions, controls, fees and/or taxes bribery (the offering or receipt of financial or other advantages) of on importing project equipment or equipment used by a person with the intent of bringing about improper performance of construction contractors? that person’s duties. These are: (1) Offering (or promising or giving) a bribe, intending that As the European Union (EU) is a customs union, UK companies can another person perform their duties improperly (or rewarding buy most goods from other member countries without restrictions them for having done so). – although VAT and excise duty will normally still apply. If a UK (2) Accepting (or requesting or agreeing to accept) a bribe, company imports from outside the EU, it may have to comply intending that duties will be performed improperly. with import licensing requirements and with common customs (3) Bribing a foreign public official in order to retain business or tariffs that apply across the EU. Apart from the general restrictions to gain an advantage in the conduct of business. concerning materials that are deleterious to health and safety and the (4) Failure of commercial organisations to prevent bribery on environment, there are no legal restrictions or controls which apply behalf of the organisation. If any person associated with an exclusively to importing construction equipment. organisation is found guilty of bribery then the organisation is deemed guilty of an offence, unless it can show it had adequate procedures in place to prevent those people from 10.2 If so, what import duties are payable and are committing bribery. exceptions available? Individuals found guilty of certain of these offences can be imprisoned for up to 10 years and/or receive an uncapped fine. This is not applicable. Please see the response to question 10.1. Commercial organisations found guilty of any of the above offences can receive an uncapped fine. Directors and senior officers of 11 Force Majeure commercial organisations may also be convicted if they are deemed to have given their consent or connivance to the offence. For natural resources companies operating in countries where 11.1 Are force majeure exclusions available and government offices are seen by some in positions of influence as enforceable? an opportunity to accumulate personal wealth and as involving tasks which justify small additional financial incentives, the Bribery Force majeure provisions and exclusions are set out in virtually all Act presents a significant compliance challenge, not least because project documents, and although the term “force majeure” is derived the list of those who can expose the company and risk a criminal from French law with no recognised meaning under English law, conviction extends well beyond its employees. such provisions and exclusions are enforceable under English law provided that they are properly defined in the agreement. Normally The corporate offence of failing to prevent bribery means that senior force majeure exclusions do not apply to payment obligations. management may be held accountable for the actions of persons associated with the organisation. A company’s only defence is to show that it had adequate bribery prevention procedures in place. These would include establishing policies which define acceptable behavioural limits, procedures to record all related events with a means of seeking approval in uncertain cases, and training and briefing for all staff likely to be affected by the provisions of the Act.

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The Act has forced natural resources companies which do business Sovereign immunity is governed by the State Immunity Act 1978. in the UK, and UK companies which do business overseas, to re- The starting point is that a State or State entity will enjoy sovereign examine their approach to assessing and managing bribery risk immunity from both suit and attachment. However, the Act contains throughout their operations in the UK and abroad to ensure that several ways in which a court can disregard this immunity, such as adequate anti-corruption procedures are in place internally. Such a consensual waiver. If the usual conditions for recognition and procedures also need to address the risk that third-party service enforcement of a judgment are fulfilled, a State will not benefit from providers will expose the company to criminal liability by bribing in immunity if it would not have been able to claim immunity had the connection with the company’s business. proceedings been brought in the UK. Ordinarily, where a sovereign entity is acting in a private or commercial capacity, it will not be entitled to claim sovereign immunity from suit or attachment. 13 Applicable Law

England & Wales 15 International Arbitration 13.1 What law typically governs project agreements?

Project agreements relating to projects located in England and 15.1 Are contractual provisions requiring submission Wales are generally governed by the laws of England and Wales. of disputes to international arbitration and arbitral Scottish law is substantially different to English law and normally awards recognised by local courts? applies to some or all project documents relating to projects located in Scotland. Northern Irish law is broadly similar to English law, Contractual provisions in project documents governed by the subject to a number of qualifications. laws of England and Wales requiring submission of disputes to international arbitration are generally recognised, and supported by the courts of England and Wales. Provided the arbitration agreement 13.2 What law typically governs financing agreements? is in writing, the English courts will stay any proceedings brought in breach of that agreement unless the court is satisfied that the Financing agreements for English projects are generally governed arbitration agreement itself is null and void (Arbitration Act 1996). by English law. Financing agreements for a broad range of projects The UK is a signatory to the New York Convention, under which located throughout the world are often subject to English law. arbitral awards may be recognised and enforced.

13.3 What matters are typically governed by domestic law? 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution Land-related agreements, concessions and the like, and permits and conventions? consents, are normally governed by the law of the location of the project. The UK has been a contracting State to the New York Convention since December 1975. 14 Jurisdiction and Waiver of Immunity 15.3 Are any types of disputes not arbitrable under local law? 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? Whether or not a matter is arbitrable is determined on a case-by-case basis, although arbitration is, in general, limited to civil proceedings. Judgments obtained through a party’s submission to a foreign Criminal or family law matters, or matters relating to status, are not jurisdiction may be legally binding and enforceable, provided the capable of being submitted to arbitration. Disputes in which the conditions for recognition and enforcement of those judgments are UK Government has a direct interest, such as criminality, cannot be fulfilled. Judgments, relating to civil and commercial matters, of submitted to arbitration. However, a claim for compensation arising EU Member State courts (except Denmark), dated from 10 January out of a criminal act may well be arbitrated (for example, in respect 2015 onwards, will be enforceable in England and Wales pursuant to of a claim for trespass to the person or property, as these would be the Recast Brussels Regulation (EU 1215/2012). Similar rules apply civil actions). Divorce also cannot be arbitrated and can only be to Iceland, Norway and Switzerland pursuant to the 2007 Lugano granted by the courts in England and Wales, though the division of Convention. Judgments of courts of some non-EU States (mainly property might be subject to arbitration proceedings, provided that Commonwealth members) with which reciprocal conventions the arbitrator was not involved in the initial divorce proceedings. exist will be enforced by a different process of registration under Similarly, succession issues do not lend themselves to arbitration the Administration of Justice Act 1920 or the Foreign Judgments and wills are usually only contested in court, though certain matters (Reciprocal Enforcement) Act 1933. involving trusts might well be arbitrated. Again, the beneficiaries Judgments of courts of all other States will usually be enforced of a will can agree to a different method of sharing out the estate through new English proceedings and the English courts must and could enlist the help of an arbitrator in reaching a settlement. recognise the basis on which jurisdiction was accepted by the ruling Arbitration of issues involving minors and the insane is sometimes court; namely, territorial or submission. Typical exceptions to possible, but enforcement will be subject to the same constraints these regimes include: judgments obtained following fundamental as apply to the courts in respect of enforcement of claims against procedural irregularities; proceedings brought in breach of statutory minors and the insane for public policy reasons. or international convention obligations; or where the judgment is In some disputes, parts of claims may be arbitrable and other based upon fraud, is contrary to English public policy or natural parts not. For example, in a dispute over patent infringement, a justice, or is contrary to the Protection of Trading Interests Act 1980 determination of whether a patent has been infringed could be (e.g. for multiple damages). adjudicated upon by an arbitration tribunal. However, the validity

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of a patent would not ordinarily be arbitrated, as patents are subject to a system of public registration. Therefore, an arbitral 17.2 What tax incentives or other incentives are provided panel would have no power to order the relevant body to rectify preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages any patent registration based upon its determination. It is relevant or other security documents, either for the purposes to note that, although the English courts at one point suggested of effectiveness or registration? that an arbitration agreement would be considered “null, void and inoperative” insofar as it purports to require the submission to There are no UK tax incentives provided preferentially or specifically arbitration of issues relating to mandatory EU law (see Accentuate to foreign investors or creditors. Specific incentives are afforded Ltd v ASIGRA Inc. [2009] EWHC 2655), this approach has not been to foreign investors in relation to the construction and operation of followed in subsequent cases (see Fern Computer Consultancy projects and businesses in specified locations. Ltd v Intergraph Cadworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch)). However, there has not yet been any ruling by an appellate court in relation to this issue and, therefore, some 18 Other Matters England & Wales ambiguity remains.

18.1 Are there any other material considerations which 15.4 Are any types of disputes subject to mandatory should be taken into account by either equity domestic arbitration proceedings? investors or lenders when participating in project financings in your jurisdiction? As a general principle, arbitration is consensual rather than mandatory. If a matter is arbitrable pursuant to agreement by the Currency exchange risk will always be a consideration for foreign parties, then it is subject to the relevant dispute resolution and investors in UK-based projects, where revenues are almost always jurisdiction clause in a contract. sterling-based. Change of law remains (as in all other jurisdictions) a risk for 16 Change of Law / Political Risk investors in the UK (albeit a risk of very low magnitude, but examples include the early closure of the Renewable Obligation regime in the UK), given the inability of any administration to tie 16.1 Has there been any call for political risk protections the legislative hands of its successors. such as direct agreements with central government or EU, US, UK and UN sanctions can be an issue if a project or business political risk guarantees? might involve dealing with sanctioned persons, entities or assets.

There have not been any calls for political risk guarantees in England and Wales in recent years. Lenders will typically require direct 18.2 Are there any legal impositions to project companies agreements with governmental authorities if the project is a PPP issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory or PFI project. Direct agreements are commonly entered into by requirements for the issuance of capital market lenders with key project contract counterparties in all types of UK- instruments. based projects. Following retroactive changes to regulatory support regimes for renewable energy projects in countries such as Spain, There are no legal requirements that apply exclusively to project Greece, Bulgaria and the Czech Republic, investors in renewable companies seeking to issue bonds or similar capital markets energy are understandably wary of “change in law” risk in the instruments. renewables sector and the damaging effect that such retroactive changes can have on a project’s economics. For this reason, both Any project company seeking to issue debt instruments (securities) the CfD and IUK Guarantee contain provisions safeguarding the on the London Stock Exchange (LSE) must comply with the UK generator/guaranteed beneficiary against UK “change in law” risk. Listing Authority (UKLA)’s Listing Rules (the “Listing Rules”). The UKLA, a division of the Financial Conduct Authority, is the body responsible for regulating all securities listed on the LSE. The 17 Tax Listing Rules contain (i) the rules and regulations for listing debt securities, and (ii) the continuing obligations that apply to issuers and bondholders for the duration of the listing. The Listing Rules 17.1 Are there any requirements to deduct or withhold tax cover principles ranging from corporate governance and executive from (a) interest payable on loans made to domestic remuneration to accounting standards and full disclosure of or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing information to prospective investors. security? Debt securities admitted to the Main Market of the LSE must be listed in accordance with Chapters 2 and 17 of the Listing Rules. The UK imposes a withholding tax at the basic rate of income tax Debt securities admitted to the Professional Securities Market must (currently 20%) on any payment of yearly interest arising in the be listed in accordance with Chapter 4. All debt securities admitted UK. Consequently, a UK company paying yearly interest on a debt to trading must comply with the LSE’s Admission and Disclosure security will generally have an obligation to deduct 20% of such Standards and the relevant Disclosure and Transparency Rules. interest payment and account for this withheld amount to the UK tax Rules may differ according to the issuer’s market sector. For example, authorities. Double tax treaties exist with many other jurisdictions, mineral, oil and natural gas companies are subject to the additional which in many cases will reduce withholding tax. disclosure requirements set out in Chapter 6 of the Listing Rules. Rules may also differ according to the issuer’s investor base. For example, an issuer will be subject to more stringent obligations if marketing its securities to retail investors as opposed to solely professional investors.

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ordinary principles of English law, and an English court will avoid 19 Islamic Finance ruling or commenting on the compliance of the agreement with Shari’ah (see Shamil Bank of Bahrain v Beximco Pharmaceuticals 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha Ltd [2003] 2 All ER (Comm) 84). instruments might be used in the structuring of an Parties may still elect to have a dispute in relation to a contract Islamic project financing in your jurisdiction. determined and resolved in accordance with Shari’ah principles by submitting to arbitration. Under Section 46 of the Arbitration Act Although these instruments have been used in other financing 1996, arbitral tribunals are obliged to decide disputes with reference contexts in England and Wales (such as acquisition finance, to either the national law chosen by the parties or any other agreed corporate finance and capital markets), they have not yet been used considerations (including Shari’ah considerations). in the project financing context in England and Wales. Were they to be employed, then it would be likely that an Istina’a or Wakala 19.3 Could the inclusion of an interest payment obligation England & Wales arrangement would be used for the purposes of financing the in a loan agreement affect its validity and/or construction of the assets during the pre-completion period and such enforceability in your jurisdiction? If so, what steps assets would then be leased by the financier (as direct or indirect could be taken to mitigate this risk? owner of the assets) to the project company, pursuant to the Ijarah. The Ijarah is the mechanism by which the principal and the profit Generally, the inclusion of an interest payment obligation in a margin are returned to the financier during the post-construction loan agreement would not affect its validity and/or enforceability period of a project financing as rental consideration comprising the in England and Wales, unless that interest payment obligation purchase price of the asset as well as a fixed and/or floating profit is deemed a penalty offending the rules laid down in Dunlop margin calculated by reference to LIBOR. A Murabaha instrument Pneumatic Tyre Co Ltd v New Garages & Motor Co Ltd [1915] could be used to make available either a working capital facility to AC 79 and Cavendish Square Holding BV v El Makdessi and the project company or equity bridge loans to the project company, ParkingEye Ltd v Beavis [2015] UKSC 67 (Cavendish). Note that a with full recourse to the sponsors. contractual provision for payment of a higher rate of interest after a default in payment by a borrower could be deemed to be a penalty; 19.2 In what circumstances may Shari’ah law become however, this will be difficult to establish in view of the new test set the governing law of a contract or a dispute? Have out in Cavendish which requires that the clause in question impose there been any recent notable cases on jurisdictional a detriment on the contract breaker “out of all proportion to any issues, the applicability of Shari’ah or the conflict of legitimate interest of the innocent party”. In determining this, an Shari’ah and local law relevant to the finance sector? English court will now consider the wider commercial context of a transaction and, where the parties have negotiated a contract, on a Shari’ah is not applied in the UK, and English law does not recognise level playing field and with the assistance of professional advisors, Shari’ah as a system of law capable of governing a contract, on the it will now be much harder for the party paying the higher rate of basis that English law does not provide for the choice or application interest to challenge the validity of such a provision on the basis that of a system of law other than a system of national law. This is based it is a penalty. Furthermore, a provision that provides for interest to on the Convention on the Law Applicable to Contractual Obligations increase on default is not likely to be held to give rise to a penalty 1980 (the Rome Convention), which requires that a governing law if: (i) the increase is levied only from the date of default (and not of an agreement must belong to a country, and Shari’ah does not before); (ii) the main purpose of the clause is not to deter default; belong to a particular country (albeit that Shari’ah has been adopted, and (iii) the increase is modest and commercially justifiable by through legislation, by countries such as Saudi Arabia). reason of the increased credit risk represented by a debtor in default. The approach of the English courts, in the main, has been to distinguish between the Shari’ah and the contractual governing law of an Islamic finance agreement by ruling that Shari’ah issues Acknowledgment are not justiciable in the English courts. That element of the The authors would like to thank Christopher Puttock for his agreement is deemed as forming part of the commercial agreement assistance in preparing this chapter (Tel: +44 20 7616 3193 / Email: (which English courts will rarely interfere with) and not the legal [email protected]). agreement. Instead the dispute will be dealt with by applying the

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Clive Ransome Munib Hussain Milbank, Tweed, Hadley & McCloy LLP Milbank, Tweed, Hadley & McCloy LLP 10 Gresham Street 10 Gresham Street London EC2V 7JD London EC2V 7JD United Kingdom United Kingdom

Tel: +44 207 615 3144 Tel: +44 207 615 3013 Email: [email protected] Email: [email protected] URL: www.milbank.com URL: www.milbank.com

Clive Ransome is a partner in the Global Project, Energy and Munib Hussain is a senior associate in the Global Project, Energy and Infrastructure Finance Group and is based in Milbank, Tweed, Hadley Infrastructure Finance Group and is based in Milbank, Tweed, Hadley

& McCloy LLP’s London office. He has also worked extensively in the & McCloy LLP’s London office. He is also a member of the firm’s England & Wales Far East, having been based in Hong Kong for six years. Islamic Finance Business Unit. Clive focuses on energy financing, projects, project finance, export Munib has advised lenders and sponsors on a number of international credit and banking law. Clive has extensive experience of major projects, energy and infrastructure financings specialising in multi- power, infrastructure, and oil & gas financings; advising export credit sourced financings involving export credit agencies, multilaterals, and agencies, banks and borrowers on major international cross-border both commercial and Islamic banks. financings; and advising key multilaterals (and borrowers from key Munib authored a chapter on Islamic project finance in International multilaterals) – including the European Bank for Reconstruction and Project Finance – Law and Practice, published by Oxford University Development, the International Finance Corporation, the European Press, the UK chapter in Getting the Deal Through – Islamic Finance Investment Bank and the Multilateral Investment Guarantee Agency & Markets 2017 and the England & Wales chapter in The International – on major international cross-border financings. Clive has excellent Comparative Legal Guide to: Project Finance – 2014, 2015, 2016 and and extensive on-the-ground experience of developing, negotiating 2017 editions. and documenting major project financings in Europe, the Middle East and Africa. Munib is recognised as an expert on Capital Markets – Islamic Finance in the 2015 edition of Who’s Who Legal 100. Clive has experience of advising power developers including International Power, RWE, GdF Suez, EDF, AES and others on hydropower projects and on conventional coal- and gas-fired power projects, as well as wind and solar power projects. Clive has long been recognised as a top-ranked and leading project finance and energy expert by industry journals, including the International Who’s Who of Project Finance Lawyers, Who’s Who Legal, Legal Experts, The Legal 500, Chambers Global and Chambers UK.

Milbank, Tweed, Hadley & McCloy LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, individuals and governments, achieve their strategic objectives. Project finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than 100 dedicated project, energy and infrastructure finance attorneys, including 20 partners, in our offices worldwide. We operate on an integrated basis, with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong andTokyo. From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia, to the largest wind and solar farms in the world, clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. Over the past three years, Milbank has closed more than 140 project financings, which raised more than US$125 billion for infrastructure projects worldwide.

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Germany

PrimePartners Wirtschaftskanzlei Adi Seffer

1 Overview 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the 1.1 What are the main trends/significant developments in procedure? the project finance market in your jurisdiction? German law differentiates between security over real estate and The Eurozone is still suffering uncertainties and geopolitical security over movables and other equipment. Security over real problems. Great Britain’s vote on leaving the European Union, the estate can be established by land charge (sec. 1191 German Civil recent terrorist attacks in Belgium and Nice and the massive number Code (BGB)) or mortgage (sec. 1113 BGB). Land charges and of refugees arriving in Germany are clear evidence of this situation. mortgages extend to accessories which are to be considered an However, the German economy is still in a very good condition and economic unity with the real property according to secs. 97 and mergers and acquisitions (M&A) and private equity (PE) activities 98 BGB. Security over other equipment can be established by a are close to the peak of 2007. The trend for 2017 remains quite security transfer or a pledge agreement. strong and mainly optimistic. The German Mittelstand is one Land charge main acquisition target of foreign investors, although we also see a significant number of secondaries (PE selling to PE). Restructuring The creation of a land charge requires a notarised agreement by a transactions of all kinds are strong as well as the alternative energy German notary public between the owner of the land and the secured market (wind parks and solar). party about the encumbrance on the real estate and registration with the land registry. Perfection of a land charge is effected by registration with the land registry or, if a land charge certificate 1.2 What are the most significant project financings that has been issued, by transfer of the land charge certificate. Under have taken place in your jurisdiction in recent years? German law, the first-to-file rule applies, thus the chronological order of land charges – pursuant to the filing date – over the same In Germany, numerous alternative energy projects also represent real property determines their priority; namely, if an earlier land significant project financing: charge is already registered with the land registry, such land charge ■ the financing of the offshore wind parks “Nordsee One”, takes precedence over subsequent land charges. With regard to the “Nordergründe” and “Butendiek”; security agreement by which the owner of the real estate and the ■ the redevelopment of the campus of the Schleswig-Holstein creditor agree that the land charge shall secure a certain claim of university hospital; the creditor, no formal requirements apply; however, for verification ■ development of the autobahn A7; and purposes, written agreements are recommended. ■ purchase of the natural gas supply company, Thüringen- Mortgage Sachsen, including the respective gas distribution systems. Like a land charge, a mortgage is perfected by notarised agreement by a German notary public between the owner of the real estate and 2 Security the creditor, stipulating the encumbrance of the land and registration of all essential circumstances (e.g., underlying claim, interest and creditor) with the land registry. Its priority is established according 2.1 Is it possible to give asset security by means of to the first-to-file rule. a general security agreement or is an agreement required in relation to each type of asset? Briefly, Security transfer what is the procedure? It is characteristic of a security transfer that the party granting security usually remains in possession of the transferred assets and The establishment of securities and their priority depend on the type is therefore still in a position to use the assets economically, even of asset and the type of the security requested. A general security though it is no longer the legal owner of the asset because of the agreement is achievable for assets of the same type and/or securities transfer of ownership. Because of the tax on the transfer of real of the same type. estate, in practice this security is executed in relation to movable assets only.

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A security transfer of movables requires an agreement on the must be signed in front of a German notary public after having been transfer of ownership of the asset for a certain period of time, read aloud and in its entirety to the parties. Priority is established usually until the secured claim is completely satisfied. With respect according to the date of the pledge; namely, a pledge of an earlier to such transfers, the principle of certainty has to be observed; date has prior ranking. namely, a third party must be able to determine which specific assets are transferred as security. Transfer of ownership usually 2.6 What are the notarisation, registration, stamp duty requires transfer of possession; to make it possible for the debtor to and other fees (whether related to property value or keep using the assets, however, this transfer of possession is often otherwise) in relation to security over different types replaced by a separate agreement by which the debtor is entitled to of assets (in particular, shares, real estate, receivables hold possession on behalf of the secured party. Further, the debtor and chattels)?

and the creditor have to agree on what claims of the creditor shall Germany be secured and the process of foreclosure, if the creditor’s claim is The fees of the notary public depend on the value of the land or not satisfied. There are no formal requirements for security transfer shares and vary from 1 per cent to less than 0.3 per cent. agreements, but for certainty and verification reasons a written agreement is highly recommended. 2.7 Do the filing, notification or registration requirements Regarding priority, the security right that was perfected first – i.e., at in relation to security over different types of assets an earlier date – has prior ranking. A security transfer of movables involve a significant amount of time or expense? requires no registration; therefore no fees or taxes are incurred. Real estate may also be transferred as security; however, the transfer of In case of land charges, mortgages and pledging shares in a GmbH, real estate incurs real estate transfer taxes of approximately three the respective agreements need to be notarised by a German notary per cent of the land’s value, and is therefore very seldom used as public. This leads to notary fees, consisting of fees for registration security. and issuance of a land charge certificate, if applied for, as mentioned Pledge under questions 2.2 and 2.6 above. The creation of land charges and In order to perfect a pledge on movable assets, transfer of possession mortgages needs to be registered with the land registry. is required. The pledge of rights requires the notification of the relevant third party (e.g., bank, customer) of such pledge. Priority 2.8 Are any regulatory or similar consents required with is established according to the date of the pledge; namely, a pledge respect to the creation of security over real property of an earlier date has prior ranking. (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?

2.3 Can security be taken over receivables where the Usually, under German law, government approvals are not chargor is free to collect the receivables in the required for project finance transactions. However, for project absence of a default and the debtors are not notified of the security? Briefly, what is the procedure? implementation, different types of approval exist (e.g., building permits, permissions under the Water Resources Act, Water Waste Rights, for example receivables, are usually assigned by global Act, Federal Mining Act, etc.). As the requirements for each assignment agreements pursuant to which the debtor assigns all permission vary, before the implementation of the project there existing and future claims in connection with customer relations or should be a careful review of whether all necessary permissions other claims to the creditor for security purposes. With regard to already exist or may be obtained. A foreign investor would not the assigned claims, the principle of certainty applies; namely, if the be treated more strictly in obtaining a required permission, but the claims assigned are not determinable, the assignment is invalid and German Federal Ministry of Economics and Technology (BMWi) unenforceable. Further, claims already assigned to third parties are may restrict a foreign investment if public security is threatened. not assignable, as the priority principle on the date of assignment applies. 3 Security Trustee In general, no formal requirements exist to perfect such global assignments, but to avoid any uncertainty about which claims are assigned and for verification reasons, written agreements are 3.1 Regardless of whether your jurisdiction recognises common. the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting 2.4 Can security be taken over cash deposited in bank separately) to enforce the security and to apply the accounts? Briefly, what is the procedure? proceeds from the security to the claims of all the lenders? The pledge of rights requires a notification of the relevant third party (e.g., bank, customer) of such pledge. Priority is established Under German law a corporate entity, in the capacity of an agent according to the date of the pledge; namely, a pledge of an earlier or trustee, may hold collateral on behalf of the project lenders as date has prior ranking. the secured party. To perfect such an arrangement, it needs to be established whether the security is non-accessory or accessory. In the case of non-accessory securities, the security may be granted 2.5 Can security be taken over shares in companies directly to the agent or trustee. In the case of accessory securities, incorporated in your jurisdiction? Are the shares in the security is granted to all project lenders and the security trustee certificated form? Briefly, what is the procedure? or agent as their representative.

In the case of pledging shares in a German limited liability company (GmbH), a notarised pledge agreement is required by law; namely, it

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3.2 If a security trust is not recognised in your 5 Bankruptcy and Restructuring jurisdiction, is an alternative mechanism available Proceedings (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or 5.1 How does a bankruptcy proceeding in respect of the the facility agent) to enforce claims on behalf of all project company affect the ability of a project lender to the lenders so that individual lenders do not need to enforce its rights as a secured party over the security? enforce their security separately? Pursuant to the German Insolvency Code, insolvency proceedings The security agent is a common position in project finance may be opened over the assets of individuals and legal entities.

Germany agreements in Germany. Insolvency proceedings over the assets of a company are opened in the case of over-indebtedness or illiquidity, if insolvency proceedings are initiated either by the company itself or one of its 4 Enforcement of Security debtors. Insolvency proceedings are opened by court order and an insolvency administrator is appointed, who then is the only one 4.1 Are there any significant restrictions which may who has the power of disposal over the company’s assets. Often impact the timing and value of enforcement, such a preliminary administrator is appointed who has limited power as (a) a requirement for a public auction or the and operates the company and its assets jointly with the company’s availability of court blocking procedures to other management. The insolvency administrator is in charge of seizing creditors/the company (or its trustee in bankruptcy/ the business assets and has to enforce clawback rights. After liquidator), or (b) (in respect of regulated assets) insolvency proceedings are opened, the creditors have to file their regulatory consents? claims with the insolvency court. The enforcement of security interests depends on the type of collateral granted. The following list briefly outlines the enforcement of the 5.2 Are there any preference periods, clawback rights different securities: or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security? Land charge, mortgage A security enforcement of land charges and mortgages is usually Under German law, different clawback rights exist if the debtor has realised through public auction or sequestration. The process of transferred assets within three months preceding the opening of public auction and sequestration is governed by the German Act on insolvency proceedings, provided that such transfer was intended Enforcement. Any foreclosure action has to be ordered by the court. to harm its creditors. In the case of fraudulent transfer (transfer Security transfer with the intention to harm the creditors), all transfers in the 10 In the case of a security transfer, the process of realisation is usually years preceding the opening of insolvency proceedings may be agreed by the parties within the security agreement. As the debtor challenged. usually remains in possession of the transferred assets, the creditor often empowers the debtor to sell the assets and in return the debtor 5.3 Are there any entities that are excluded from assigns the proceeds to the creditor. bankruptcy proceedings and, if so, what is the Assignment of rights applicable legislation? The realisation of an assignment of rights is usually conducted Public agencies may not be the subject of insolvency proceedings. through forfeiture of the assigned claim. The creditor may also decide to sell the assigned claim or rights if such sale is not disadvantageous. However, a sale of claims is usually inappropriate 5.4 Are there any processes other than court proceedings as the purchaser will probably not pay the nominal value of such that are available to a creditor to seize the assets of claims. the project company in an enforcement? Pledge German law provides fast-track procedures and injunctions to seize A pledge is realised through the sale of the assets or public auction, assets in cases of urgency. whichever is more profitable. As the cost of a sale is usually lower than the cost of a public auction, a sale is more common. If the proceeds of such sale exceed the security, the debtor is entitled to 5.5 Are there any processes other than formal insolvency claim the excess amount. proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown Guarantee, surety of dissenting creditors? If the debtor is in default, the creditor is entitled to demand payment from the guarantor. German law provides the possibility for insolvency protection proceedings under a company’s own administration (slightly similar to the “chapter 11 proceedings” used in the US) if it is threatened 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related with insolvency or over-indebtedness. The court appoints a trustee companies? for the company’s assets while the company and its board of creditors are granted three months to implement an insolvency plan. Under German law, no restrictions apply to foreign investors The court may only deviate from unanimous decisions of the board or creditors in the event of foreclosure on the project and related of creditors if the insolvency plan is obviously futile. Dissenting companies. creditors trying to fight the implementation of the insolvency plan, have to show credibly that they are subject to worse conditions under

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the plan. The insolvency plan may contain a debt-for-equity swap of a purchase agreement, the BMWi may initiate the examination of by way of remedial action. Such debt-for-equity swap provides foreign investments. In this case the investor would be obliged to certain advantages for the acquirer, in the form of limited liabilities submit all necessary information in connection with the acquisition. compared to the regular acquisition of shares. After the receipt of the information, the BMWi has to decide within two months whether the examined acquisition should be subject to certain conditions or prohibited. If the BMWi takes no action within 5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in this period, the acquisition may no longer be prohibited or made financial difficulties in your jurisdiction. subject to any conditions.

In the case of insolvency or over-indebtedness, directors are obligated 6.3 What laws exist regarding the nationalisation or to apply for insolvency proceedings instantly, or in any case, no later expropriation of project companies and assets? Are Germany than within three weeks. Failure to do so is a criminal offence, and any forms of investment specially protected? directors are personally liable for any damages caused by the delayed application. In cases of obvious infringement of such obligation, e.g., Article 14 of the German Constitution guarantees property rights. obvious over indebtedness or manoeuvres intended to cause damage However, it also obliges the use of such property for the public to certain creditors or to benefit other creditors, such action may not good. Otherwise expropriation is permitted, constitutional and be insured by directors’ and officers’ liability (D&O) insurance. lawful provided that reasonable compensation is paid. Specific German laws allowing expropriation are: ■ the Federal Building Code; 6 Foreign Investment and Ownership ■ the Federal Highway Act; Restrictions ■ the Regional Highway Act; ■ the Air Traffic Act; 6.1 Are there any restrictions, controls, fees and/or taxes ■ the Energy Act; on foreign ownership of a project company? ■ the General Railway Act; and Under German law, there are no general restrictions on foreign ■ the Regional Water Act; investment in, or ownership of, project and related companies. However, expropriation under the above-mentioned laws is only However, it should be noted that in 2009, the German Foreign permitted if it is necessary for the public good. Trade and Payments Act and the Foreign Trade and Payments Regulations were amended. The law enables the German Federal Ministry of Economics and Technology (BMWi) to examine and 7 Government Approvals/Restrictions possibly prohibit acquisitions by foreign investors (from outside the European Union), who wish to acquire directly or indirectly 25 7.1 What are the relevant government agencies or per cent or more of the voting rights in a German company, if this departments with authority over projects in the typical is essential to safeguard the public policy or public security of the project sectors? Federal Republic of Germany. The law is not limited to specific sectors and enterprises; its aim is not to abandon the country’s open Generally, regional authorities are in charge of approvals and investment strategy but to ensure that, in individual cases, the BMWi supervision, although in a few cases federal agencies are the has measures at its own disposal to examine foreign investments. responsible authorities. The law does not provide for the registration of foreign investments. Transport Thus, a foreign investor would not be obliged to register the Air traffic that is regulated by the Federal Air Traffic Actis envisaged investment. However, in order to verify if an acquisition supervised by the Federal Air Traffic Agency. Railways are mainly would be deemed to be against public policy or public security, the governed by the Federal Railway Act and supervised by the Federal investor may request a legally binding certificate of non-objection Railway Authority. Public transport is regulated by the Federal prior to the envisaged acquisition. Such application needs only to Public Transportation Act and supervised by regional authorities. outline the basic elements of the acquisition, the investor and its Shipping transport and ports are supervised by the Federal Water field of business. If the BMWi does not start an investigation of and Shipping Act. the acquisition within one month of receipt of the investor’s written request for a certificate of non-objection, it will be deemed to have Water treatment been issued. For tax reasons, there are no disadvantages in foreign The commercial use of water is mainly governed by the Water investments, as they trigger the same taxes as domestic investments. Resources Act, Waste Water Levy Act and the State Water Acts. Chemicals 6.2 Are there any bilateral investment treaties (or other Pursuant to the Federal Chemicals Act, the registration of chemicals international treaties) that would provide protection is handled by the Federal Environment Agency. from such restrictions? Energy

The prohibition or restriction is only possible in exceptional cases, The energy market is regulated by the Federal Energy Act and because it may only be restricted or prohibited if it is a threat to supervised by the Federal Network Agency for electricity, gas, public policy or public security, as established by articles 52 and telecommunications, postal services and railways. 65 of the Treaty on the Functioning of the European Union and Minerals, oil and gas according to case law of the European Court of Justice. Therefore, The extraction of minerals is mainly governed by the Federal the existence of a concrete and serious threat to the fundamental Mining Act, pursuant to which regional authorities are usually in interests of society is required. Within three months of the signature charge of the administrative procedures thereunder.

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Finance or payments of principal, interest or premiums on loan payments to To conduct business in the banking sector, permission under the parties from foreign jurisdictions. There are no restrictions on the Federal Banking Act is required. The supervision of the banking and distribution of profits of a German project company to shareholders finance sector is carried out by the Federal Financial Supervisory in other jurisdictions. There are no legal obligations for German Authority (BaFin). project companies to repatriate foreign earnings. Nor is there any restriction on their use. However, there might be contractual obligations on the project companies to do so. 7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or 7.7 Can project companies establish and maintain enforceable? onshore foreign currency accounts and/or offshore Germany accounts in other jurisdictions? Under German law, no substantial documentation formalities exist regarding finance or project agreements. In some cases formal Yes, foreign currency accounts may be established by German requirements, such as a written form (e.g., surety, lease agreements), project companies abroad and in Germany as well. There are no need to be observed in order to execute legally binding and enforceable legal restrictions. However, such accounts have to comply with agreements. For verification reasons, written agreements are highly German tax and money laundering rules. recommended even if a written form is not required by law. If foreign investors are party to the agreement, bilingual documentation is 7.8 Is there any restriction (under corporate law, recommended; namely, German and English. If the project company exchange control, other law or binding governmental is a GmbH, please note that its incorporation, any transfer of shares, practice or binding contract) on the payment of and any share pledge, need to be notarised, as mentioned above. dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad? 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or Except for double taxation agreements, no specific regulations exist operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)? regarding remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loan payments to parties from foreign jurisdictions. There are no restrictions on the In general, under German law the owner of land is also the owner distribution of profits of a German project company to shareholders of the natural resources therein. However, according to the Federal in other jurisdictions. Mining Act, the resources listed therein do not belong to the landowner. Therefore the right to extract these natural resources, for example, oil and gas, is assigned by the state. With respect to the 7.9 Are there any material environmental, health and commercial use of water, a permit pursuant to the Water Resources safety laws or regulations that would impact upon a Act is required. project financing and which governmental authorities administer those laws or regulations?

7.4 Are there any royalties, restrictions, fees and/or Different laws apply depending on the relevant project sector. There taxes payable on the extraction or export of natural are various laws that govern the environmental aspects of a project; resources? for example, the Water Resources Act, the Waste Act, the Federal Pollution Act, and so on. As regards health and safety, there exist The royalties to be paid for the extraction of natural resources are numerous sector-specific laws. Basically, the employer is obliged governed by the Federal Mining Act and are assessed by the regional to safeguard its employees from injury and to take all reasonable authorities. In general, no restrictions with respect to the export of measures, taking into account the nature of the business. natural resources exist. Export permissions are required only for goods listed in the Foreign Trade Act: specifically, dual-use goods; namely, goods that may be used for civil and military purposes. 7.10 Is there any specific legal/statutory framework for procurement by project companies?

7.5 Are there any restrictions, controls, fees and/or taxes A GmbH is the most favoured structure for project companies in on foreign currency exchange? Germany. To set up a GmbH, a notarised deed of incorporation is required. Further, under German law, the purchase of a shelf In Germany no significant controls, taxes or other charges exist company is possible, which also needs to be notarised. The with respect to foreign currency exchange. However, the rules principal financing sources for German project companies are the regarding the prevention of money laundering need to be observed facilities provided by banks. Other possible legal structures for with respect to currency exchange transactions. Concerning fees in project companies are limited partnerships and stock corporations. relation to foreign currency exchange, it should be noted that banks usually charge exchange or transaction fees. 8 Foreign Insurance

7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment 8.1 Are there any restrictions, controls, fees and/or taxes returns or loan payments to parties in other on insurance policies over project assets provided or jurisdictions? guaranteed by foreign insurance companies?

Except for double taxation agreements, no specific regulations exist Foreign insurers not registered in an EU or EEA Member State may regarding remittances of investment returns (dividends and capital) also carry out insurance business in Germany. However, they have

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to be admitted in Germany. The authority for the issuance of such admission is the Federal Financial Supervisory Authority (BaFin). 12 Corrupt Practices Insurers registered in an EU or EEA Member State and having a valid licence within an EU or EEA Member State, in contrast, may conduct 12.1 Are there any rules prohibiting corrupt business their insurance business in Germany without further permission. practices and bribery (particularly any rules targeting This is known as the European passport or single-licence principle. the projects sector)? What are the applicable civil or criminal penalties? In order to be able to operate in Germany, however, the insurer has to go through a notification procedure with theBaFin . Corrupt business practices and bribery are criminal offences according to sec. 299 ff. of the German Criminal Code (StGB), and 8.2 Are insurance policies over project assets payable to are punishable by penalty, or imprisonment for up to five years in Germany foreign (secured) creditors? particularly serious cases. Corrupt business practices are prohibited under sec. 3 of the German Act Against Unfair Practices (UWG) and Insurance policies over project assets can be payable to foreign subject to damages according to sec. 9 UWG. (secured) creditors.

13 Applicable Law 9 Foreign Employee Restrictions

13.1 What law typically governs project agreements? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed Typically, German law applies; see question 13.3 below for details. by a project company?

There is a distinction between EU citizens and citizens of other 13.2 What law typically governs financing agreements? countries. As EU citizens have the right of free movement and labour, they may establish themselves independently in Germany Typically, German law applies; see question 13.3 below for details. and work without a visa or permit. Non-EU citizens need to obtain a residence permit for work in order to start working in Germany. 13.3 What matters are typically governed by domestic law? Specific transition rules may apply to certain countries which joined the European Union recently. The parties may freely choose the applicable law, provided that such choice is not intended to circumvent public order and is not 10 Equipment Import Restrictions in conflict with mandatory law. A choice of law will usually be accepted by a German court. In practice, usually the jurisdiction of the main centre of interest of the project will be agreed on; e.g., if 10.1 Are there any restrictions, controls, fees and/or taxes the financing is provided by German banks, the facility agreements on importing project equipment or equipment used by will be governed by German law. In the case of international construction contractors? projects, the facility agreements are often governed by English law. However, it needs to be pointed out that the security documentation Under German law, no specific restrictions regarding the importation regarding assets located in Germany has to be governed by German of project equipment exist. An import permit is required only for law. products in specific categories, from certain countries or certain goods listed in the import list of the Foreign Trade and Payments Act. Under the law against terrorism, further arrangements with 14 Jurisdiction and Waiver of Immunity certain individuals, groups and organisations are prohibited.

14.1 Is a party’s submission to a foreign jurisdiction and 10.2 If so, what import duties are payable and are waiver of immunity legally binding and enforceable? exceptions available? Yes, submission to a foreign jurisdiction would be effective under Customs duties (especially importation VAT, currently at 19 per German law. With regard to enforceability, a distinction needs to be cent) are only payable for goods imported from outside the European made between orders from courts within the European Union and Union which are not just temporarily imported and re-exported after those from courts in other foreign countries. Orders from EU courts a few months. are directly enforceable in Germany. In other cases, enforceability depends on bilateral treaties. 11 Force Majeure 15 International Arbitration 11.1 Are force majeure exclusions available and enforceable? 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral Force majeure exclusions are generally available according to awards recognised by local courts? law. In some cases (e.g., the German Liability Act (HaftPflG)), liability for force majeure is already explicitly excluded by law. Germany is a signatory to the New York Convention on the Thus, it should be checked in each case whether such force majeure Recognition and Enforcement of Foreign Arbitral Awards. exclusion is applicable for the intended project.

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Therefore foreign arbitration agreements and arbitration awards are recognised by German courts. However, the vast majority of 17.2 What tax incentives or other incentives are provided commercial disputes are dealt with by national courts. preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages For the enforcement of such arbitration awards, a declaration of or other security documents, either for the purposes enforceability by a regional court is required. of effectiveness or registration?

15.2 Is your jurisdiction a contracting state to the New York Foreign investors are treated like domestic investors, so that from Convention or other prominent dispute resolution a tax point of view, no disadvantages result from investment. conventions? Depending on the type of investment, certain tax advantages may be applicable, as double taxation agreements exist with certain Germany Germany is a signatory to the New York Convention on the countries. Thus, it should be checked whether such agreements are Recognition and Enforcement of Foreign Arbitral Awards. applicable for the intended project.

15.3 Are any types of disputes not arbitrable under local 18 Other Matters law?

Matters of public interest, such as the granting of permits by public 18.1 Are there any other material considerations which authorities or criminal law matters, are not arbitrable. should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction? 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? There are no specific public bodies that regulate the project finance industry in Germany, and mandatory law is very limited in this regard. Any type of arbitrable disputes may also be subject to foreign All relevant public law aspects of the project (permits, concessions, arbitration. However, certain types of disputes, in particular where approvals, supervision, etc.) are handled by the public authorities public parties are involved, are not subject to arbitration but to competent for the applicable subject matter (e.g., renewable energy ordinary court jurisdiction only. sector). Accordingly, a variety of laws and authorities may have to be considered/dealt with, and any kind of collateral can be limited by mandatory law (for instance, subsidiaries are limited in granting 16 Change of Law / Political Risk collateral for their parent companies).

16.1 Has there been any call for political risk protections 18.2 Are there any legal impositions to project companies such as direct agreements with central government or issuing bonds or similar capital market instruments? political risk guarantees? Please briefly describe the local legal and regulatory requirements for the issuance of capital market Germany remains one of the most stable economies in the world. instruments. Because of its convenient statute-based system and the convenient enforceability of German law-based judgments worldwide, German A public placement of capital market instruments and/or admission law is therefore often chosen by parties to avoid uncertainties due to to trading in a regulated marked requires a prospectus based on the political risks and/or corruption in other jurisdictions. EU prospectus regime. There are a couple of market segments for bonds, and not all of them accept project companies. Further, if the parent company provides any kind of guarantee, it needs to fulfil 17 Tax certain disclosure requirements as well. If the bond comprises an equity kicker or similar instrument, it may require a resolution by the issuer’s shareholders and, if there is a broad shareholder basis, 17.1 Are there any requirements to deduct or withhold tax shareholders’ subscription rights are to be granted. from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? 19 Islamic Finance

In general, there are no obligations to deduct or withhold tax from: 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha (i) interest payments under a fixed interest-bearing loan, which instruments might be used in the structuring of an is not secured by German real estate or by ships entered into the Islamic project financing in your jurisdiction. ship register; (ii) proceeds of a claim under a guarantee; or (iii) the proceeds of enforcing security. Istina’a, Ijarah, Wakala and Murabaha each have similar or However, if there is a profit from a loan, there is an obligation corresponding legal institutions available under German law. to withhold 26.375 per cent tax on these payments, provided the Details of structuring may be different depending on the asset(s) borrower does not qualify for benefits under an applicable tax treaty. involved:

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Istina’a 19.3 Could the inclusion of an interest payment obligation Istina’a may be used for any manufacturing or processing projects, in a loan agreement affect its validity and/or where the asset or project structure is manufactured/implemented enforceability in your jurisdiction? If so, what steps over different stages/milestones. For each stage/milestone, a down- could be taken to mitigate this risk? payment is agreed in advance. This provides ongoing liquidity to the manufacturer paid for the actual work finalised. It is similar to a The inclusion of an interest payment in a loan agreement is not service contract with down payments. permitted by Islamic law (Shari’ah). Under German law, such Ijarah provision does not cause any issues. No case has been reported Ijarah is a leasing concept that can be used for assets and equipment, to date in which such provision has resulted in a validity issue or hindered its enforceability if Islamic law applies to the contract and

similar to regular leasing contracts. The bank/lease provider Germany purchases the asset/piece of equipment and leases it to the user. The the intention is to execute such provision in Germany. leasing fee/rent is usually paid for management and maintenance over a fixed period of time. Adi Seffer Wakala PrimePartners Wirtschaftskanzlei Powers of attorney may be given according to German law. Some Bleichstraße 52 60313 Frankfurt am Main powers may require a specific form under German law; for example, Germany a notarial deed. Tel: +49 69 87 00 208 0 Murabaha Email: [email protected] Murabaha is a fixed-income loan for the purchase of goods (real URL: www.primepartners.de assets). The creditor purchases the goods and then sells them to the beneficiary for the purchase price plus an additional profit margin. Payment for the loan is not provided by interest (over time). The At PrimePartners, Adi Seffer brings more than 20 years of experience in corporate & IT transactions and financings with national and creditor is compensated by the profit margin paid by the beneficiary. international reach. He has advised his clients as lead counsel in more than 70 buy-outs, private, public or restructuring transactions and outsourcings. Trained in international law at the universities of 19.2 In what circumstances may Shari’ah law become Frankfurt, Munich, the London School of Economics and Barcelona, the governing law of a contract or a dispute? Have he started his career as a lawyer in 1990, becoming a partner in 1993 there been any recent notable cases on jurisdictional at a major national firm. From 2001 to 2005 he served as Head of issues, the applicability of Shari’ah or the conflict of Business & Finance and Technology at an international US firm. Since Shari’ah and local law relevant to the finance sector? then he has continued his legal transactional advisory services with his entrepreneurial spirit and enthusiasm. Adi is one of the foremost Shari’ah may be agreed by the parties as the governing law in an certified specialists in International Business Law in Germany, a lecturer for acquisition finance at the Frankfurt School of Banking & arbitration clause or arbitration agreement. We doubt that ordinary Finance, and is currently an author and speaker on M&A, Finance and courts may acknowledge Shari’ah as governing law. No precedents Restructuring topics. have been seen so far. Adi Seffer is ranked nationally and internationally; in particular, he was As only very few cases of Islamic law-based financial products selected as one of the Best Lawyers in Germany by Handelsblatt, have been issued in Germany, we may not state any notable case of for his IT expertise (Juve), Outsourcing (Euromoney) and in the field of Corporate/Mid-Cap Markets (Chambers Europe) as “the leading dispute or jurisdiction so far. Also, currently we do not see a trend transaction manager” (Best of the Best – Europe). in favour of Islamic financing in Germany.

PrimePartners Wirtschaftskanzlei combines top-quality, internationally experienced legal specialists along with individual consultancy focusing on the needs of the client, at reasonable costs within a lean structure. For PrimePartners, the client is at the core of our focus and efforts. We provide efficient solutions for complex and challenging situations, such as purchase and sale (M&A) of strategic or financial investments, restructurings and outsourcings. We also provide legal assistance in public financing, including IPOs and bond issuance. As a personal advisor (partner), we legally guide foreign investors and, as well as German entities and entrepreneurs, service providers and financers such as banks and financial institutions, project financers or general financial investors, with pragmatism and excellence. Our service shall ensure our clients’ success. We at PrimePartners commit to an excellent professional performance, closeness to the client, and professional integrity.

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Greece Elisabeth V. Eleftheriades

Kyriakides Georgopoulos Law Firm Ioanna I. Antonopoulou

HCAP is established in order to, among others, contribute to the 1 Overview investment plan implemented by the Greek State and reinforce the economic development of the latter. 1.1 What are the main trends/significant developments in the project finance market in your jurisdiction? 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? The Greek project finance market focuses on infrastructure projects mainly in the areas of environment, energy, transport, ports, The major projects that have been concluded recently are the telecommunications, real estate, urban development, water, sewage, following: a long-term concession for the implementation of a waste management, health, education, airports, public sector model urban development project regarding the upgrading of the accommodation and leisure. Hellinikon area, i.e. the creation, financing and maintenance of the One of the main developments in the project finance market in largest Greek metropolitan park and the financing and construction 2016 was the issuance of a new legislative framework in the fields of all related infrastructure (transport, public utilities, port works, of public projects and incentives schemes, which, in both cases, is sport and hotel facilities, etc.); and a public-private partnership expected to encourage the consummation of project finance deals. (“PPP”) for the design, construction and operation of a waste treatment plant in Western Macedonia (financed by the European More particularly, law 4412/2016 on public contracts, supplies Investment Bank (“EIB”), JESSICA UDF and the National Bank and services, transposing Directives 2014/24/EC and 2014/25/EC, of Greece S.A.). A significant large-scale infrastructure project adopts an integrated system on the award and execution of public in relation to maintaining, operating, managing, upgrading and contracts, while law 4413/2016 on public concessions, transposing developing 14 Greek regional airports was expected to have been Directive 2014/23/EC, introduces for the first time into the Greek completed by the end of 2016, the concessionaire being financed legal system a regime on public concessions. In addition, law in the long term by, amongst others, the EIB, the European Bank 4399/2016 (“Development Law”) makes available to private sector for Reconstruction and Development and the International Finance investors a new state aid scheme affording to eligible entities, as per Corporation. Furthermore, other project financing deals which the conditions of the Development Law, the right to benefit from reached closing during 2016 are in the energy sector and in the field state aid incentives in the form of subsidies (cash grant), beneficial of wind energy. Unlike the trend of the previous years, very few tax treatment (tax exemptions or a stable tax rate), leasing subsidies infrastructure projects via PPPs were implemented in Greece during and a subsidy of costs incurred, to create employment and financing the last part of 2015 and 2016 (those which took place consisted, of business risk. for the most part, in the limited restructuring of existing financings). The Bond Law, entailing the possibility for a group of bondholders to be represented by a bondholder agent who takes securities on their behalf, continues to play a vital role in the project finance 2 Security market as the main financing instrument for the structure of project finance deals. 2.1 Is it possible to give asset security by means of Furthermore, the project finance market may be approached in a general security agreement or is an agreement the light of the concession processes undertaken by the Hellenic required in relation to each type of asset? Briefly, Republic Asset Development Fund (“HRADF”); established in what is the procedure? July 2011, HRADF is governed by law 3986/2011, as amended and in force, and has taken the form of a public limited company, Under Greek law, an asset/claim security may be granted only over operating according to the rules of the private economy and acting a specific asset/claim (even a future claim), which needs to be well for the benefit of the public interest. It is noted that within 2017 defined; thus, no security can be granted by means of a general the total amount of HDRAF shares is expected to be transferred security agreement on assets or claims which are not well defined. by the Greek State to the Hellenic Corporation of Assets and It is legally possible, however, to group all assigned claims under Participations (“HCAP”), as provided by law 4389/2016. The one general security agreement, as long as each type of assigned claim is well defined.

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group of movable assets or rights, ensures that the pledgor 2.2 Can security be taken over real property (land), plant, not only remains in possession of the assets (or rights), but machinery and equipment (e.g. pipeline, whether may also dispose of the pledged assets, so long as it duly underground or overground)? Briefly, what is the replaces them with similar assets or rights of the same value. procedure? The aforementioned securities are executed in writing and need to be registered with the Pledge Registry to achieve Security can be taken over real property, plant, machinery and perfection and determination of ranking. Upon registration equipment. The Greek Civil Code (“GCC”) makes a distinction and unless renewed, the security is effective for 10 years from between movable (tangible and/or intangible) and immovable registration, and the duration of the pledge may be extended property. Immovable property is the soil and its constituents, in accordance with the provisions of law 2844/2000. whereas movable property is all property not qualifying as ■ Legislative decree 17.07-13.08.1923 provides for security Greece immovable (article 948 GCC). Constituents, according to the GCC, interests granted in favour of credit institutions operating are, among others, things firmly attached to the ground. lawfully in Greece securing existing or future claims. A pledge granted in favour of banking institutions under the With regard to immovable (real) property, the GCC provides for two provisions of the aforementioned decree on the borrower’s standard in rem securities; mortgage and pre-notation of mortgage claims against a third-party obligor is established by a written (articles 1257 et seq. GCC). More specifically: agreement (no notarial deed is required). Upon perfection of ■ A mortgage is granted only over real estate property and the security, the pledge agreement is binding upon both the usufruct rights, and may be established by virtue of a borrower and the third party. This agreement is perfected notarial deed, a final court ruling or by virtue of law. Upon by the service of the agreement to such third-party obligor registration of the mortgage with the competent Mortgage by a court bailiff. A pledge constituted by virtue of the Registry kept with the Land or Cadastral Registry where the aforementioned legislative decree is equal to a fiduciary real estate is located, the security and the order of priority are assignment of the pledged claims in favour of the pledgee. established. Any assignment, pledge or change in the terms ■ A pledge over cash, financial instruments (such as shares and of the mortgaged claim is also noted in the mortgages book other instruments equivalent to shares and bonds, provided they held with the Mortgage Registry. are negotiable on regulated markets) or credit receivables may ■ A pre-notation of mortgage is established only by virtue of a be established under law 3301/2004, as amended and in force. court ruling (including a payment order) under the procedure The establishment, validity and conclusive effect of the financial of interim measures (articles 682 et seq. of the Greek Code collateral agreement is not subject to any formal act. However, of Civil Procedure – “GCCP”) and is also registered with in relation to in rem financial collateral granted on titles in the competent Mortgage Registry where the real estate is a dematerialised form and listed on the Athens Exchange, located. The main difference between a mortgage and a such deviation does not affect the obligation to evidence the pre-notation is that the former allows immediate satisfaction establishment of the security by means of a registration with of the claim, whereas a pre-notation requires conversion to the electronic system run by the Athens Exchange. In such mortgage upon a court ruling, not being subject to an appeal, case the security agreement should be certified in writing or by adjudicating finally (telesidika) the underlying claim. Upon any equivalent means. Regarding enforcement, law 3301/2004 issuance and registration of this final decision, the beneficiary deviates from the standard process and does not require obtains a mortgage valid retroactively as from the date of the liquidation of the pledged asset being made via a public auction. registration of the pre-notation.

Movable assets may be secured via: (1) pledge under the GCC 2.3 Can security be taken over receivables where the provisions; (2) notional pledge and floating charge under law chargor is free to collect the receivables in the 2844/2000; (3) pledge established in favour of banking institutions absence of a default and the debtors are not notified under legislative decree 17.07/13.08.1923; and (4) pledge under law of the security? Briefly, what is the procedure? 3301/2004 on financial collateral arrangements, which transposed EC Directive 2002/47/EC. More particularly: The security may be perfected following notification to the debtors, ■ A pledge may be established on movable assets on which served by court bailiff (such service being legally required in case the borrower has full, bare or conditional ownership, as well of a security established by virtue of the legislative decree 17.7- as on transferable rights and claims. In accordance with the 13.8.1923). The chargor, following relevant agreement with GCC, the secured claim should be monetary or assessable the creditor and the inclusion of a specific clause in the security in money and identifiable. The pledge is established by a agreement, may, in the absence of a default, collect and make use of notarial deed or document having a certain date, provided the the pledged receivables. pledged asset is delivered to the pledgee or a third party, if the latter has been agreed. In case of a pledge on claims, the security is perfected by notification of the pledge to the third- 2.4 Can security be taken over cash deposited in bank party obligor (article 1248 GCC). The perfection entitles the accounts? Briefly, what is the procedure? pledgee to receive any benefits of the asset (e.g. dividends of shares, exercise of voting rights in relation to the pledged A pledge over bank accounts and an assignment of claims that the shares, unless otherwise agreed), as well as its priority right account-holder has against the account bank under the account in auction proceedings. relationship can be established in favour of the creditor: ■ Under the provisions of law 2844/2000, a notional pledge, ■ Under legislative decree 17.07/13.08.1923, the account bank i.e. a pledge under which the pledgor reserves the possession is usually the bank which provides financing and thus benefits of the pledged assets, may be established on types of from the pledge; this does not preclude the establishment of movable professional equipment (cars, machinery, etc.), as a pledge in favour of a party other than the bank where the well as products in the form of raw material, semi-processed account is held. The pledge agreement must be served by a or completed products ready for sale. Both contracting court bailiff upon the account bank. parties should be businesses or professionals, while the security should be granted for the purpose of covering the ■ Under the provisions of law 3301/2004, financial collateral needs of the borrower’s business or profession. On the arrangements may also be established on cash, including other hand, a floating charge that may be established ona bank account deposits.

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It is noted that, despite the existing capital controls in Greece or court procedures, should also be taken into consideration. Stamp imposing restrictions on opening a new bank account, the opening duty (when applicable) may currently reach 3.6%. of a bank account with a credit institution operating in Greece as Pre-notation of mortgage: In this case the fees and costs do not cash collateral for a loan or a documentary letter of credit issued include the notarisation, since the pre-notation can be registered by such bank is permitted (for further details regarding capital only by virtue of a court decision. Therefore the fees payable are restrictions, please refer to question 18.1). the following: Regarding the perfection of such agreements, please refer to question a) the Registrar’s, Cadastre’s and Real Estate Registry’s fees 2.2 with respect to movable assets. mentioned in the mortgage. The payable fee is the same for both mortgage and pre-notation of mortgage; and

Greece 2.5 Can security be taken over shares in companies b) the Lawyer’s fee for the representation of the debtor before incorporated in your jurisdiction? Are the shares in the competent court, which ranges between EUR 300.00 and certificated form? Briefly, what is the procedure? 400.00 (proeispraxi dikigorikis amoivis). However, this is the minimum lawyer’s fee provided for by the lawyer’s code (statutory fee) and the lawyer’s fee can be agreed to be higher. Pursuant to articles 1244 and 1245 of the GCC, the provisions of the GCC applicable to the common pledge apply to the pledge of bearer A prerequisite of the conversion of the pre-notation to mortgage shares of sociétés anonymes mutatis mutandis. The provisions of is the issuance of a final court judgment, the judicial costs of legislative decree 17.07/13.08.1923 are applicable as well. Therefore, which vary depending on the nature of the case. The costs for as far as the perfection of the pledge is concerned, in case of a pledge the registration of the conversion of the pre-notation to mortgage amount to approximately EUR 15.00 plus approximately EUR 5.00 established under the provisions of the GCC, the pledge should be per summary sheet issued. established by a notarial deed or a private agreement with a certain date (for instance, documents served by a court bailiff). On the other Notional pledge and floating charge: this amounts to approximately hand, in case of a pledge to be established under the provisions of 0.8% of the secured amount, plus EUR 4.50 per summary sheet legislative decree 17.07/13.08.1923, a private agreement should issued by the competent Pledge Registry. Again, the flat fee of EUR be served by a court bailiff and the shares have to be delivered to 100.00 is also applicable, as per the above in case of notional pledge the pledgee. The same applies to the pledge of registered shares of and/or floating charge securing a bond loan. sociétés anonymes, although there is no express provision in the law. Finally, unless otherwise agreed, the aforementioned registration A notation of the pledge agreement should be endorsed in the body fees are borne by the borrower. of the shares and signed by both contracting parties, and possession of the pledged share certificates should be delivered to the pledgee 2.7 Do the filing, notification or registration requirements and, in addition, the issuing company of the pledged shares by in relation to security over different types of assets analogy of article 8(b) of the codified law on sociétés anonymes involve a significant amount of time or expense? 2190/1920, as actually in force, and the shares’ and shareholders’ registry of the issuing company of the pledged shares. Although The filing, notification and registration of security do not require not compulsory for the perfection of the security, this is necessary in a significant amount of time; however, there could be bureaucratic order to legalise the pledgee towards the company. delays, taking into consideration that some securities require a court Regarding the pledge under law 3301/2004 please refer to question decision. Regarding expenses for registration of the different types 2.2 above. of securities, please refer to question 2.6 above.

2.6 What are the notarisation, registration, stamp duty 2.8 Are any regulatory or similar consents required with and other fees (whether related to property value or respect to the creation of security over real property otherwise) in relation to security over different types (land), plant, machinery and equipment (e.g. pipeline, of assets (in particular, shares, real estate, receivables whether underground or overground) etc.? and chattels)? In principle, and as a general rule, there are no regulatory or similar An average estimate per type of security would be the following: consents required regarding the creation of security over real property, plant machinery and equipment. There could, however, Mortgage: Pursuant to article 1 of ministerial decision 111376/2012 be exceptions to such rule in cases of concessions or publicly owned (as amended by law 4336/2015 and ministerial decree 72386/2015), land/infrastructure or PPPs, where the consent of the competent notary fees for execution of the mortgage deed amount to a authority might be required. Besides, the GCC (articles 1257 et proportional fee ranging from 0.1% to 0.8% depending on the seq.) provides for the ability of the parties to agree on a consensual secured amount plus value-added tax (“VAT”) (currently amounting pre-notation of mortgage. to 24%) plus a standard fee of EUR 20.00. The Registrar’s fee for registration of the mortgage amounts to approximately 0.8% of the value of the secured claim plus around EUR 60.00 for issuance of 3 Security Trustee the relevant certificates and summary sheets by the competent Real Estate Registry. On the other hand, the fee for the registration of the deed with the Cadastre is approximately 0.9% of the value of the 3.1 Regardless of whether your jurisdiction recognises secured claim. In case of bond loans secured in rem, a fixed amount the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee of EUR 100.00 applies for registration of their securities in rem. or agent (rather than each lender acting separately) to Also, according to article 14 of the Bond Law, the notary fees for enforce the security and to apply the proceeds from the execution of a mortgage deed securing a bond loan equal 1/20 the security to the claims of all the lenders? of the secured amount and cannot in any case exceed EUR 2,500.00 plus VAT (currently amounting to 24%). Other costs, such as the The concept of a trust is not, in principle, recognised under Greek lawyer’s fee for the representation of the client during the notarial law. Also, Greek law does not recognise the right of one entity to

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receive security on behalf of another, meaning that, in principle, the to collect the assigned claims and apply them in discharge creditor enjoying such security shall itself execute, in its own name of the secured debt without complying with any further and on its own behalf, the relevant security agreement. formality, since as aforesaid the creation of a pledge by virtue of the aforementioned legislative decree is equal to a fiduciary Α deviation from such principle is the capacity of the bondholders’ assignment of the pledged claims in favour of the pledgee. agent, under the Bond Law, to represent the bondholders and ■ Credit and financial institutions which operate in Greece take and hold securities in their name and on their behalf. The according to law 4261/2014, including branches of foreign bondholders’ agent is entitled to proceed with any step necessary credit institutions, as well as Companies under article 1 for the enforcement of securities and allocation of the relevant of law 4354/2015 as amended and in force, are subject to proceeds amongst the bondholders. A similar provision is that of the Code of Conduct, issued by the Bank of Greece (Act

law 3389/2005, in accordance with which, in case of a PPP, where 195/2016), pursuant to which they must seek, in cooperation Greece the Private Partnership Operator (“PPO”) has more than one lender, with the debtor, a suitable, effective and mutually beneficiary any in rem securities granted may be established in favour of the solution for the settlement of the latter’s loan agreement. This lenders’ agent, appointed in accordance with the relevant credit procedure, known as the “Arrear Resolution Process’’, must agreement concluded between the PPO and its lenders. be completed within six months. Only after the failure of such procedure or in case of lack of cooperation on the part of the debtor, may the credit/financial institution proceed with 3.2 If a security trust is not recognised in your the termination of the loan agreement and the declaration of jurisdiction, is an alternative mechanism available the loan as due and payable (kataggelia). (such as a parallel debt or joint and several creditor ■ For bankruptcy and debt-restructuring proceedings, status) to achieve the effect referred to above which please refer to question 5.1. would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all II. Requirements and constraints in accordance with the the lenders so that individual lenders do not need to GCCP: enforce their security separately? ■ Enforceable title vested with a writ of execution issued by the courts or by a notary public (the latter is not frequently used The parallel debt structure is sometimes used to establish the due to elevated fees); and service upon the debtor by a court bailiff of a copy of the enforceable title together with a notice borrower’s obligation to pay to the security trustee any monies due for payment. Foreclosure of the debtor’s assets begins three to any of the secured parties, as if the security trustee were the sole business days after the service upon the debtor as mentioned lender or had a joint and several claim along with the rest of the above. The auction date is set to seven months or no later than creditors for the full amount of the secured liabilities vis-à-vis the eight months after the completion of the foreclosure. Subject borrower. If such structure was to be brought before the courts, the to the expression of bidding interest, the liquidation of the validity of the parallel debt would primarily be assessed, based on debtor’s assets is expected to be completed within one year after the arrangements between the creditors, as to the underlying cause the initiation of the enforcement process. Parallel enforcement for the security trustee’s “joint creditor” capacity. proceedings initiated by different creditors on the same asset are permissible under Greek law. The assets are liquidated through public sale or other methods prescribed by law. With regard to 4 Enforcement of Security real estate property, the minimum auction price shall be set at the commercial value of the auctioned property, as estimated by the court bailiff and the property appraiser, pursuant to the 4.1 Are there any significant restrictions which may provisions of the Presidential decree 59/2016. The amount of impact the timing and value of enforcement, such as guarantee to be submitted by anyone who wishes to participate (a) a requirement for a public auction or the availability in the auction is set at 30% of the minimum auction price. of court blocking procedures to other creditors/the ■ Other creditors wishing to have an entitlement to the company (or its trustee in bankruptcy/liquidator), or (b) liquidation proceeds have to announce their claims against the (in respect of regulated assets) regulatory consents? debtor and file the respective evidence before the enforcement agent (i.e. notary public) five days prior to the auction. The I. Generally, the enforcement of security is implemented as liquidation proceeds are distributed by the enforcement agent follows: between the executing creditor and the announced ones, on ■ According to the provisions of the GCCP, enforcement of in the basis of a ranking of claims set by the GCCP (article rem security must be implemented through judicial procedure, GCCP 974 ff.). In particular, creditors holding a general with the exception of certain limited instances provided by privilege (i.e. social security organisations, the public sector, law. This procedure may be initiated by both secured and lawyers and employees), shall be satisfied from one third of unsecured creditors in order to proceed with the liquidation the auction proceeds, whereas the remaining two thirds will be of the debtor’s assets (whether subject to security or not), allocated to the secured creditors. In the case that unsecured through a public auction. creditors have lodged their claims before the enforcement agent, secured creditors shall be satisfied from 65% of the ■ The aforementioned does not apply to secured creditors under auction proceeds, creditors holding a general privilege from law 3301/2004, where the creditor is entitled to realise its 25% of the auction proceeds and unsecured creditors from collateral without any prior judicial or enforcement procedure. the remaining 10%. If again there are no claims of creditors ■ Simpler judicial proceedings are required for liquidation of holding a general privilege, then secured creditors shall be mortgages or pledges in accordance with the provisions of satisfied from 90% of the auction proceeds and unsecured legislative decree 17.07/13.08.1923; however, enforcement creditors from the remaining 10%. Finally, if there are no in the process provided under such decree is not followed in claims from secured creditors, then creditors holding a general practice by the banks, due to the fact that the most common privilege shall be satisfied from 70% of the auction proceeds security provided by debtors is pre-notation of mortgage, and unsecured creditors from the remaining 30%. to which enforcement procedure under such decree is not ■ Such ranking may be contested by any party having a applicable. legitimate interest. ■ Pledge on monetary claims in accordance with the provisions ■ In the case that the enforceable title is a payment order, the of legislative decree 17.07/13.08.1923 permits the pledgee debtor has the right to challenge its validity within 15 business

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days after its service upon the debtor as above. Moreover, the latter has the right to raise objections against the subsequent 5 Bankruptcy and Restructuring acts of enforcement within specific deadlines set by the GCCP. Proceedings In particular, the debtor may challenge: a) all single acts of the preliminary stage of the enforcement process, as well as the creditor’s claim within 45 days from the foreclosure date; 5.1 How does a bankruptcy proceeding in respect of the b) the validity of the final act of enforcement (i.e. auction), project company affect the ability of a project lender to within 30 days from the auction in case of movable property enforce its rights as a secured party over the security? and within 60 days from the date of the transfer deed’s registration to the Real Estate Registry in case of immovable After the filing of the application of a debtor’s bankruptcy property. In case of more than one annulment petition

Greece declaration, the court may order a stay of creditors’ individual concerning enforcement actions of the same stage, the same actions in order to protect the debtor’s estate from any change hearing date shall be scheduled for all of them. Moreover, the or reduction of its value until the decision on the application is debtor is deprived of the right to appeal before the Supreme published. Upon the issuance of the decision, the individual Court against the judgment of the Court of Appeal, ruling over actions of creditors against the bankrupt company and its assets its petition for the annulment of the enforcement acts or for the annulment of the auction, unless the enforceable title is an are suspended, excluding claims secured by a special lien or in rem arbitral award or a notarial deed, in which case a petition for security over assets of the bankruptcy estate. cassation before the Supreme Court shall be allowed. Security over assets, which are deemed to be operatively and ■ After the filing of the petition for the annulment of the directly connected with the business activities, or with a production enforceable title, the debtor may file a petition for provisional unit or establishment of the debtor, cannot be enforced until a measures requesting the suspension of the enforcement relevant resolution is reached by a meeting of the creditors or, in the process until the issuance by the court of a final decision on the case of a reorganisation plan, by its approval by the court. The stay annulment petition (article 632 of the GCCP). Such decision of execution cannot be extended to more than 10 months from the is expected to be issued within three months after the hearing declaration of bankruptcy, after which the stay is lifted. of the case and, in any event, not later than the auction date. ■ If the enforceable title is a court judgment or a payment order, In bankruptcy proceedings, creditors whose claims are secured by a initial court fees are approximately 1.2% over the amount of special lien or in rem security over assets of the bankruptcy estate the claim. State fees for the issuance of a writ of execution are satisfied exclusively from the liquidation of the same. Secured vary from 0% to 3% over the claimed amount and/or the creditors are satisfied from the total bankruptcy estate only if they accrued interest. waive their privilege or their security, or when their security does ■ Fees payable to the enforcement agent and the court bailiff not suffice for their full satisfaction. are set by the respective ministerial decisions (i.e. ministerial decision 11.1376/2012 as amended by ministerial decision 5.2 Are there any preference periods, clawback rights 72.386/2015 with regard to the enforcement agent and or other preferential creditors’ rights (e.g. tax debts, ministerial decision 21798/2016 with regard to the court employees’ claims) with respect to the security? bailiff) and depend on the nature of the enforcement act and the number of auctions. Additional costs are also likely to arise, such as payments for legal counsels, property appraiser, In order to prevent the reduction of the debtor’s property, the etc., which cannot be quantified up-front. Greek Bankruptcy Code (“GBC”) provides for the possibility of III. Requirements and constraints in accordance with the the subsequent recall of any detrimental transactions carried out other legal instruments: within the stage running from the cessation of payments up to the ■ In the case of legislative decree 17.07/13.08.1923, if a debtor declaration in bankruptcy, for a maximum period of two years prior is in default of meeting its financial obligations, the pledgee or to the issuance of the decision declaring bankruptcy (the “hardening mortgagee serves upon him, by means of a court bailiff, a notice period” or “suspect period”). Among the acts that are mandatorily for payment. If the debtor fails to pay the amounts due, then revoked is the establishment of in rem security, including the the creditor may initiate, through a notary public, an auction pre-notation of a mortgage or the granting of other securities of a for the sale of the pledged or the mortgaged asset. The debtor contractual nature for pre-existing unsecured obligations for which may challenge in court the notice of payment and the auction the debtor has not assumed a corresponding obligation, or for itself. The exercise of such right of the debtor does not result in securing new obligations that were assumed by the debtor with a suspension of the auction proceedings. The general ranking of view to replacing previously existing obligations. claims is applicable. This process, as aforesaid, does not apply in case of pledge on monetary claims constituted by virtue of Other acts concluded during the suspect period are subject to an the legislation, which allows the pledgee to collect the assigned optional revocation provided that they are detrimental to the group claims without any further formality (see section I above). of creditors. Such actions include every bilateral act of the debtor, ■ In the case of law 3301/2004, in the event of default, either: or payment of its mature debts, which was concluded after the (1) the collateral-taker is entitled to realise or appropriate the cessation of payments and before the declaration of bankruptcy. A financial collateral, without any prior judicial or enforcement prerequisite in such cases is knowledge by the counterparty that the proceedings; or (2) a close-out netting provision comes into debtor had ceased its payments. effect. Also, the debtor’s acts concluded within the last five years prior to the issuance of the bankruptcy decision with intent to harm the creditors 4.2 Do restrictions apply to foreign investors or creditors or to benefit others, are revoked if the third party with whom the in the event of foreclosure on the project and related debtor contracted had knowledge of the debtor’s malicious intention companies? at the time of performing the act. In bankruptcy liquidation, claims of creditors are classified into the In general, there are no restrictions applying to foreign investors following categories: or creditors in the event of foreclosure on project and related (i) Costs pre-deducted from the liquidation proceeds before companies. the satisfaction of any other class of creditors, which include

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judicial fees relating to the administration of the bankruptcy organisations are not declared bankrupt. Special insolvency estate and claims of the “group creditors” (i.e. claims which provisions exist for various legal entities, e.g. insurance companies, arise in the course of the bankruptcy process and as a result credit institutions, municipal companies, joint ventures, investment thereof). firms, the Hellenic Exchange S.A., etc. The GBC provisions also (ii) Creditors with special privileges (secured creditors), which apply to joint ventures as de facto partnerships, and thus they have include: bankruptcy capacity. a. Claims for expenses incurred for maintaining the property.

b. Claims for the capital with interest of the two last years, 5.4 Are there any processes other than court proceedings which are secured through a pledge, a mortgage or a pre- that are available to a creditor to seize the assets of notice of mortgage.

the project company in an enforcement? Greece c. Claims for expenses incurred for the production and harvesting of crops in the last six months before the Following the issuance of a final or enforceable decision, declaration of bankruptcy. enforcement against the secured assets is conducted through court (iii) Creditors holding a general privilege which are ranked as proceedings. Enforcement of security granted on movables and follows (reference is made only to categories pertaining to securities leads to public auction. However, voluntary auction may debtors/legal entities): be made through a specific provision of law (e.g. law 3301/2004) or a. Claims for new money injected or goods or services court decision or agreement of the parties. provided to ensure the continuation of the company’s activities and of the payments under a rehabilitation agreement, a reorganisation plan or a special administration 5.5 Are there any processes other than formal insolvency procedure according to law 4307/2014. proceedings that are available to a project company to b. Certain claims of dependent employees and lawyers, achieve a restructuring of its debts and/or cramdown claims of the State for VAT and withholding and imposed of dissenting creditors? taxes with surcharges of any nature and claims of the Social Security Organisations, providing that they arose Other than the ordinary bankruptcy proceedings, the following until the declaration of bankruptcy. insolvency options are available to debtors/creditors following the c. Claims of farmers or agricultural cooperatives from the latest amendments of the GBC by law 4446/2016 (applicable as of sale of agricultural products. 22 December 2016): d. Claims of the State and local government bodies for all Pre-pack rehabilitation procedure: this may be initiated by debtors causes. who are facing financial difficulties or who have already reached e. Claims of the Guarantee Fund (Sineggiitiko) for debtor- the state of the cessation of payments following conclusion of a investment firms arising in the last two years before the rehabilitation agreement with its creditors. The procedure may also declaration of bankruptcy. be initiated on creditors’ initiative (without the debtor having to be (iv) Unsecured creditors and secured creditors whose security party to the agreement) in case the debtor is in a stage of cessation of does not suffice for the full satisfaction of their claims. payments. The relevant rehabilitation agreement is submitted before Claims of the same class are satisfied in the order provided above, the bankruptcy court for ratification. Upon submission, the individual while claims of the same ranking are satisfiedpari passu. enforcement acts against the debtor’s assets are automatically suspended, while additional preventive measures may be ordered According to the revised GBC (applicable as of 22 December 2016), by the court, following a relevant application. The rehabilitation in the case that more classes of creditors concur, after payment of agreement must be concluded between creditors representing 60% of pre-deducted claims (and in the case that claims under (iii) a above the totality of claims including 40% of secured claims. In the event concur with unsecured claims, following full repayment of such that the court proceeds to the ratification of the agreement, then the claims), creditors are satisfied as shown in the following table: latter shall have a binding effect even on dissenting creditors. Percentages of liquidation Reorganisation plan: the rescue of the business (or alternatively, Concurrent Creditors proceeds for the satisfaction of the distribution of the insolvency estate) can be regulated by a claims reorganisation plan. The debtor is entitled to submit a reorganisation Secured 65% plan within a period spanning from the time of the initial application General Privileged 25% for the declaration of bankruptcy or within three months from the Unsecured 10% date of declaration of bankruptcy. The court determines a time Secured (excluding specific period, not exceeding three months, for the plan to be accepted secured claims) 2/3 by the creditors. Such acceptance requires a creditors’ majority General Privileged 1/3 representing 60% of the overall claims, including at least 40% of the Secured 90% secured claims. Creditors representing the above majorities may also Unsecured 10% submit, along with the bankruptcy application, a reorganisation plan General Privileged 70% proposal. The plan, following the creditors’ acceptance, is submitted Unsecured 30% for judicial ratification. Upon ratification, which constitutes a writ of execution and is binding upon all creditors of any category, whether they have announced their claims or not, the bankruptcy 5.3 Are there any entities that are excluded from proceedings are terminated and the debtor assumes the operation of bankruptcy proceedings and, if so, what is the the business aiming at the fulfilment of the terms of the plan, whereas applicable legislation? the creditors assume their claims against the debtor within the terms of the plan. The rights of in rem secured creditors are not affected Merchants and undertakings with legal personality, which unless otherwise specified in the plan. In any event, these rights are pursue an economic purpose, are eligible for bankruptcy. Legal maintained in favour of the new claim as this is formulated by the persons governed by public law, municipal authorities and public plan, unless the creditor secured by these agrees otherwise.

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Law 4307/2014 has, inter alia, made available the extraordinary procedure of special administration which may be initiated by the 6 Foreign Investment and Ownership creditors. The creditors should include at least one credit institution Restrictions and represent at least 40% of the total debts of the debtor according to its last published financial statements. The duration of the 6.1 Are there any restrictions, controls, fees and/or taxes special administration is 12 months starting from the issuance of on foreign ownership of a project company? the decision of the court, and the administrator appointed conducts a public tender for the sale of the totality of the debtor’s assets or of As a member of the European Union (“EU”), the Organisation for separate business units. Upon acceptance of the relevant petition, Economic Co-operation and Development and other multilateral all enforcement proceedings against the debtor are automatically Greece organisations, Greece generally treats foreign investment and suspended throughout the procedure. Furthermore, the court may, ownership as equal to those held domestically. upon a relevant petition, order any other preventive measure as in rehabilitation. 6.2 Are there any bilateral investment treaties (or other Particularly with regard to loans, the repayment of which has been international treaties) that would provide protection overdue for at least 90 days (“NPLs”), law 4354/2015, as recently from such restrictions? amended, introduced a specified legal framework for handling (sale and management of) NPLs. According to the latest amendment, this Greece has concluded about 45 Bilateral Investment Treaties (“BITs”) may also be utilised for performing loans. The management of NPLs with other countries for the protection of foreign investments in its may be assigned to sociétés anonymes with their registered seat in territory. On an EU and EEA level, the provisions of the Treaty on Greece or the European Economic Area (“EEA”) upon the grant European Union and the Treaty on the Functioning of the European of a permit by the Bank of Greece. These companies are entitled, Union, as well as the secondary EU legislation, are applicable for among others, to initiate, attend and/or participate in pre-bankruptcy the protection of investments and foreign undertakings. rehabilitation or bankruptcy procedures or procedures regarding the settlement of debt and the abovementioned extraordinary insolvency procedure of law 4307/2014. In such cases, decisions issued shall 6.3 What laws exist regarding the nationalisation or have a direct binding effect on the beneficiaries of the relevant expropriation of project companies and assets? Are claims from non-performing loans. any forms of investment specially protected? The revised insolvency framework is expected to prove more Protection of property enjoys constitutional protection and therefore efficient and expedient in practice than the set of rules previously Greece has not adopted any special laws for the nationalisation or applicable. expropriation of project companies and assets. Foreign investments are protected via the various BITs concluded by Greece aiming at 5.6 Please briefly describe the liabilities of directors (if the prohibition of nationalisation or expropriation or other measures any) for continuing to trade whilst a company is in of equivalent effect. These prohibitions may only be lifted for financial difficulties in your jurisdiction. reasons of public interest; in this case, however, the principles of prior hearing, proportionality, equal treatment, transparency, etc. Directors can be liable, together with the company, for any tortious have to be respected, and the damages paid to the undertaking that is act or omission that took place during their management or nationalised/expropriated have to be direct, adequate and effective. representation of the company (article 71 GCC). Increased supra-legislative protection (and privileges) is afforded to Civil liability in the GBC is based on the culpable delay in filing the import of foreign capital destined for productive investments for bankruptcy (article 98 of the GBC). The Board of Directors by virtue of legislative decree 2687/1953. The protected capital is obliged to file for bankruptcy within 30 days from the moment may be imported in various forms, such as, indicatively: exchange, when the company reached the state of the “cessation of payments”. machinery, materials, inventions, technical methods, trade and Such liability normally covers the damages of creditors which were industrial marks. The legislative decree offers a wide range of created from the date when the application for bankruptcy should protective measures (such as a fixed tax regime, reduction, waiver of have been filed, as above, up to the declaration in bankruptcy. import duties and/or levies). Special administrative and legislative Liability for an unlawful act can also be established according to procedures must be followed in order to include a foreign investment article 914 GCC, provided that other provisions of law, such as in the protective ambit of the legislative decree. insolvency law provisions, have been violated. The GBC also extends penal liability for various acts to 7 Government Approvals/Restrictions administrators, members of the Board of Directors and to the directors of legal entities, who have committed crimes specified therein. An extensive enumeration of crimes punished with up to 7.1 What are the relevant government agencies or two years’ imprisonment as well as pecuniary fines, is provided in departments with authority over projects in the typical the relevant provisions of the GBC (e.g. liability for hiding assets, project sectors? entering into speculative or high-risk contracts, omitting to keep regular books, hiding the commercial books, illegally omitting the Typically, for a number of business sectors and activities there will drawing up of balance sheets, diminishing the assets of the company, be competence at Ministerial level (e.g. Transport and Infrastructure, or treating a creditor favourably to the detriment of other creditors). Energy, Shipping, Development, etc.), Regulatory Authority level (e.g. for Energy, for Telecommunications, for Railways, etc.), as well as general competence of the Ministry of Finance if state funding is involved (e.g. subsidies, state guarantees, special tax exemptions, etc.). The PPP Special Secretariat (within the Ministry of Finance) acts as the general supervisor throughout all phases of the execution

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of a PPP project; the HRADF, wholly owned from 2017 by HCAP relation to the undistributed income (i.e. dividends, interest, etc.) (as per question 1.1 above), is a private entity managing the of foreign legal entities, provided that certain requirements are met commercial exploitation of state assets (privatisation projects). The (including participation by 50% or more in the share capital of the Agency “Enterprise Greece” (formerly “Invest in Greece”) aims at foreign entity, and tax residence in a non-cooperative jurisdiction the creation of a one-stop shop service for their handling. Finally, the or a jurisdiction with a beneficial tax regime outside the EU). Court of Auditors has to approve state-funded projects. There are no particular restrictions on returns other than a 15% withholding tax on dividends (as of 1 January 2017, as opposed to 10% which applied until 31 December 2016) paid out to non-Greek 7.2 Must any of the financing or project documents be registered or filed with any government authority or parent companies of Greek subsidiaries (unless a double taxation treaty provides for a more favourable withholding tax rate or the

otherwise comply with legal formalities to be valid or Greece enforceable? EU Parent-Subsidiary Directive applies). Regarding loan payments, interest payments by a Greek legal person are, in principle, subject Documents creating in rem security (equipment liens and mortgages) to a 15% withholding tax (unless a double taxation treaty provides must be registered with the competent Registry and/or Cadastre in for a more favourable withholding tax rate or the EU Interest and order to become valid and enforceable. Collaterals constituted in Royalties Directive applies). As to the transfer of funds abroad, favour of banking institutions become valid only after service to these are subject to the capital control restrictions which currently the debtor by a court bailiff. Otherwise, private agreements require apply (see question 18.1). no registration formalities. In the case of PPPs, project and finance documents should be approved by the awarding authority, while in 7.7 Can project companies establish and maintain the case of concessions, the awarding authority approves the sub- onshore foreign currency accounts and/or offshore contractors and confirms the project company’s creditworthiness. accounts in other jurisdictions?

7.3 Does ownership of land, natural resources or a Project companies can open offshore accounts in other jurisdictions pipeline, or undertaking the business of ownership or or maintain onshore foreign currency accounts. As far as onshore operation of such assets, require a licence (and if so, accounts are concerned, their opening is currently subject to capital can such a licence be held by a foreign entity)? control restrictions, which are gradually de-escalating.

Acquisition of property rights in Greece is generally free and 7.8 Is there any restriction (under corporate law, non-discriminatory, except in relation to acquisition of rights exchange control, other law or binding governmental over land in “Border Regions” providing for special permits for practice or binding contract) on the payment of non-EU/European Free Trade Area nationals. The ownership and dividends from a project company to its parent concession of natural resources and pipelines are regulated by company where the parent is incorporated in your special legislation, as per constitutional provisions; only long-term jurisdiction or abroad? concession is allowed to non-state entities. Furthermore, the sale or concession of publicly owned land or infrastructure to private There are no restrictions on the payment of dividends to non- investors is made through a tender process launched in accordance Greek-resident parent companies other than the general company with the legislation on public procurement. and accounting rules on dividend distributions. As noted, however, under question 7.5 above, the transfer of funds abroad is currently subject to certain capital control restrictions, which are gradually 7.4 Are there any royalties, restrictions, fees and/or de-escalating. taxes payable on the extraction or export of natural resources? 7.9 Are there any material environmental, health and Concessions are against royalty. Other issues should be addressed safety laws or regulations that would impact upon a on a case-by-case basis. project financing and which governmental authorities administer those laws or regulations?

7.5 Are there any restrictions, controls, fees and/or taxes Greece has transposed most EU environmental laws into domestic on foreign currency exchange? legislation. As a matter of fact, on 9 November 2015 the Greek Parliament enacted law 4342/2015 transposing EU Directive In principle, no. Generally, all monetary transfers abroad must be 2012/27 on Energy Efficiency. This way, all large enterprises are effected through commercial banks in Greece, which are obliged to obliged to conduct frequent and effective energy audits. A factor check the authenticity of the transaction (for avoidance of money to be considered, depending on the nature of the project and its laundering or prevention of terrorism funding) and ensure that the environmental impact, is annulment proceedings brought before payment has been subject to, or is exempt from, withholding tax. the High Administrative Court (Council of State), which may stall However, currently and due to the extraordinary fiscal situation construction works. of Greece, provisional restrictions (capital controls) have been introduced limiting the free outflow of money and foreign exchange 7.10 Is there any specific legal/statutory framework for transactions. The level of restrictions is gradually de-escalating. procurement by project companies?

7.6 Are there any restrictions, controls, fees and/or taxes There is no specific legal framework for procurement by private on the remittance and repatriation of investment returns project companies. State, state-owned or controlled companies or or loan payments to parties in other jurisdictions? companies funded over 50% from the state budget comply with public procurement rules transposing EU legislation. The newly Greece has introduced a set of controlled foreign company rules in established Hellenic Single Public Procurement Authority monitors

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public procurement procedures and ensures compliance with nationals who wish to work in Greece must receive, before travelling the relevant EU legislation. Within the framework of its vested to Greece, a visa from the Greek Embassy or Greek Consulate of the authorities, it regularly issues circulars which include guidelines country of their residence. regarding the legislative developments at EU level that are to be Once they enter Greece, they should apply for a permit during applied and/or complied with by the awarding authorities. the time period for which said visa is still valid, depending on the category they fall under, according to the law on immigration. 8 Foreign Insurance Residence permits for work purposes include the following categories: ■ salaried employment or rendering of services or a project;

Greece 8.1 Are there any restrictions, controls, fees and/or taxes ■ employment for specific purposes (e.g. in the capacity of an on insurance policies over project assets provided or executive, member of a Board of Directors, etc.); guaranteed by foreign insurance companies? ■ investment activity; and ■ highly qualified employees (Blue Card). There are no special restrictions or fees/taxes over project assets provided or guaranteed by foreign insurance companies in contrast to Third-country nationals receive only one permit, which is valid as a project assets provided or guaranteed by local insurance companies. residence permit for work reasons. Applications for the granting of The only obligation of the foreign insurer is to operate legally work permits are submitted before the competent one-stop shop of in Greece. Insurance companies with a registered seat in an EU the Directorate for foreigners and immigration of the Decentralised Member State may exercise their activities in Greece either through Administration based on the applicant’s place of residence, or before an establishment (branch) or on a “freedom of services” basis. A the competent Directorate for immigration policy of the Ministry of notification to the supervisory body of the Member State of origin is Interior. If individuals do not have the required permit, then any required in such a case. Insurance companies with a registered seat employment contract is invalid. in a non-EU Member State may exercise their activities in Greece through a branch or agency located in Greece. In this case, a licence from the Bank of Greece is required. 10 Equipment Import Restrictions Currently, the transfer of payments to the foreign insurance companies is subject to capital control restrictions. 10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors? 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? There are no restrictions or controls on the import of project equipment other than the ones applying at EU level (Common According to the GCC, in the case that a project asset is mortgaged Customs Tariff) and, potentially, those applying to military material. or pledged, the security rights are also extended on the insurance Special rules apply when goods are placed in customs-controlled monies due on the basis of the insurance policy covering risks of free zones and free warehouses, thus avoiding payment of any duties loss or damage to such asset. Nonetheless, if the insured property or taxes, or VAT. Special rules also apply for temporary importation is a building, the owner may, within six months from the date of or for processing. The transfer of funds abroad for payment of the occurrence of the risk, request that the money is allocated for the imported goods is subject to the capital control restrictions currently repair of such building. imposed. In practice, however, the claim from the insurance policy is contractually assigned from the debtor/policyholder, owner of 10.2 If so, what import duties are payable and are the mortgaged property or pledged asset, to the secured creditor exceptions available? (domestic or foreign). In such cases, a “loss payable” clause may be added in the policy. The average EU customs tariff is around 4%, and around 60% of goods are subject to the EU duty. VAT also generally applies to 9 Foreign Employee Restrictions imports from non-EU countries. Further, special Excise Duties are imposed on certain goods (e.g. alcohol-petroleum products) in accordance with the Greek Customs Code (law 2960/2001) and 9.1 Are there any restrictions on foreign workers, other national legal instruments, and are payable when those goods technicians, engineers or executives being employed are released for consumption in the Greek market. by a project company?

EU/EEA citizens may freely reside in Greece. The only requirement 11 Force Majeure for a lawful residence in Greece is the possession of a valid EU citizen passport. EU/EEA nationals who wish to stay and work in Greece for more than three months are provided with an EU national 11.1 Are force majeure exclusions available and enforceable? registration certificate of an indefinite period of time from the police authorities. According to jurisprudence, an event of force majeure is an event The statute regulating the conditions under which a foreigner (third- which is beyond the control and without the fault or negligence country national) may work in Greece is law 4251/2014. It entered of the party affected, and which, by the exercise of reasonable into force on 1 June 2014 and contains provisions on the entry diligence, the party affected was unable to prevent. It depends on the of foreigners into Greece, their residence in the country, various circumstances as to whether an event may or may not be considered purposes for residence (e.g. residence for educational purposes, by a court as force majeure so that a party can rely upon this as a residence for the purpose of economic activity, etc.). Third-country

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defence for failing to fulfil its obligations under a contract. Clauses IV. The penalty for active bribery towards public officials is explicitly defining which events are considered asforce majeure can imprisonment of at least one (1) year (up to five (5) years) be agreed upon by contractual parties. Such definition renders the plus a monetary fine from EUR 5,000.00 to EUR 50,000.00 administration of a contract and, more particularly, the mechanism within the context of the public official’s lawful duties. for dealing with force majeure events, simpler and more effective. However, should the public official be asked to execute an act which is not permitted by the law and exceeds his duties, Force majeure clauses exist in all project finance transactions and a sentence of incarceration for up to ten (10) years plus a are included in the project documents implementing the project. monetary fine from EUR 15,000.00 to EUR 150,000.00 may be imposed on the offender of active bribery. 12 Corrupt Practices V. It is further provided that a sentence of imprisonment may

be imposed on the business manager(s) or any person having Greece authority over the decision-making, or the supervisory 12.1 Are there any rules prohibiting corrupt business authority, in the event that, through negligence, he/they did practices and bribery (particularly any rules targeting not prevent any employee(s) of the business from committing the projects sector)? What are the applicable civil or active bribery towards public officials in favour of the criminal penalties? business. VI. Passive and active bribery of political officials (i.e. members Relatively recently, the Greek Government passed through the of legislative and governmental bodies as well as members of Parliament law 4254/2014, which seeks − inter alia − to reform local and regional authorities) are introduced as distinct types basic anti-corruption provisions of the Greek Criminal Code of corruption and are treated as felony acts under the GCrC. (“GCrC”) in an effort to intensify the country’s compliance with Bribery in the Private Sector: private commercial bribery applies its international treaty obligations and update the local legal (penal) to commercial and business activities without any involvement system against corruption. of political and/or public officials, and consists of benefits or Bribery in the Public Sector: promises to deliver benefits or advantages to individuals working in any capacity for companies in the private sector (including, but I. According to the GCrC, the term “public official” (i) refers not limited to, employees, external partners, associates and legal to a person who is appointed, permanently or temporarily, to render public services (including regional and municipal counsels) in order for the latter to violate the rules and obligations services as well as services provided by legal entities of of their work. the public sector), and (ii) encompasses any and all other Confiscation: the proceeds of bribery, as well as the property/assets categories of foreign public officials as determined by a acquired by such proceeds, are subject to confiscation. number of international instruments already ratified and integrated into the domestic legislation. Corporate Liability: in Greek penal law, there is no general rule for criminal liability of legal entities; the structure and prerequisites II. An individual soliciting or receiving, directly or indirectly via of most legal provisions in terms of knowledge and intent apply to intermediaries, in favour of himself or any third party, any undue advantage/benefit of any nature as well as any promise individuals. However, Greece has ratified a series of treaties and for such advantage/benefit in order to act or refrain from conventions which called for measures against entities in cases acting in the exercise of his duties or in breach thereof, must where they benefit from the criminal actions of their employees. be a public official (passive bribery). The offender of active We indicatively refer to law 3691/2008 (re money laundering bribery may be any individual offering or promising, directly and prevention of terrorism funding) and law 4042/2012 (re or indirectly via intermediaries, any undue advantage/benefit environmental offences). It should be noted that: (i) an entity’s of any nature to a public official, in favour of the latter or any liability is not stricto sensu criminal but actually includes a series third party, in order for the public official to act or refrain of administrative measures; and (ii) liability of the legal entity is from acting in the exercise of his duties or in breach thereof. dependent on liability of the entity’s employee(s). The GCC also provides for the act of bribing judges and/or arbitrators (both active and passive bribery). Civil Penalties: Greece has ratified the Civil Law Convention on III. The penalty for passive bribery in the public sector depends Corruption by law 2957/2001. Provisions therein are part of Greek on whether the public official would be obliged to act or civil law, and mainly acknowledge rights of compensation, of refrain from acting, regardless of the undue advantage/benefit annulment of agreements that were the result of bribery act(s), and received or offered. In particular: there are also specific provisions for the protection of civil servants ■ Should the public official receive or be offered any undue against disciplinary punishment for reporting corruption practices advantage/benefit so as to execute a lawful duty of his, a to higher officials. sentence of imprisonment of at least one (1) year (up to five (5) years) plus a monetary fine from EUR 5,000.00 to EUR 50,000.00 may be imposed; in case, however, 13 Applicable Law of a recidivist public official or when the bribe is ofa particularly high value, bribery is treated as a felony and is punishable with incarceration for up to ten (10) years plus 13.1 What law typically governs project agreements? a monetary fine from EUR 10,000.00 to EUR 100,000.00. ■ Should the public official receive or be offered any undue Greek projects are typically governed by the laws of Greece, given advantage/benefit so as to execute an unlawful act, which that the projects are located within the Greek jurisdiction and is not permitted by the law and exceeds his duties, a several construction operation and environmental provisions of sentence of incarceration for up to ten (10) years plus a a mandatory nature apply. Further, Greek law also applies in the monetary fine from EUR 15,000.00 to EUR 150,000.00 majority of cases where the project counterparties are Greek entities. may be imposed; in case, however, of a recidivist public However, according to the provision of Regulation 593/2008 of the official or when the bribe is of a particularly high value, European Parliament and of the Council (Rome I) regarding the law bribery is punishable with incarceration for up to fifteen applicable to contractual obligations, the contracting parties are free (15) years plus a monetary fine from EUR 15,000.00 to EUR 150,000.00. to choose the governing law, which may be applied to only a part

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of or to the whole contract. Greek courts are obliged to apply the applies to enforcement proceedings initiated on or after 10 January agreed law, unless it contradicts the provisions set for the protection 2015), if a decision issued in a Member State is enforceable in that of public order. Member State, then it shall also be enforceable in Greece without any declaration of enforceability being required. The conditions for the enforceability of decisions issued by non-EU Member States’ courts 13.2 What law typically governs financing agreements? depend on bilateral treaties. In the absence of any bilateral treaty, for an enforceable decision of a non-EU Member State court to be Financing agreements are typically governed by Greek law. Notably, recognised and declared enforceable in Greece, the court will also certain of the financing agreements which are structured as bond examine whether such decision meets certain procedural and factual loans in accordance with the provisions of law, as amended and standards in accordance with articles 323 and 905 of the GCCP. Greece in force, and mainly those that relate to the issuance, transfer and discharge of bonds, the formation of the bondholders into a group and their decision-making and the role and duties of the bondholder 15 International Arbitration agent, should be mandatorily governed by the aforementioned Bond Law in order to benefit from the tax provisions afforded by such law. 15.1 Are contractual provisions requiring submission However, it is common for the contracting parties to be subject of disputes to international arbitration and arbitral to the law on which they agree, especially English law, when the awards recognised by local courts? group of creditors is dominated by foreign banks or international institutions. In any case, the contracting parties can make use of As a general rule, before Greek courts enter into the substance of a the aforementioned provisions of the Rome I Regulation regarding dispute, they are obliged to review whether they have jurisdiction the applicable law. It is customary practice in project finance deals over the specific case. Therefore, given that the parties tothe where the group of creditors consists of foreign banks, to apply the dispute have agreed to an arbitration clause, Greek courts should concept of “dépeçage” in order to benefit from the tax privileges of decline their competence in favour of an arbitration court. However, the Bond Law, in which case those terms relating to bonds issuance, in order for the court to proceed in such an action, it firstly has to bondholder group and bondholder agent are governed by Greek law, examine the validity of the arbitration clause and rule on whether and in particular the Bond Law, while the remaining terms of the the contracting parties have the right to freely subject the dispute financing agreement are governed by the law chosen by the parties. at stake to arbitration, as there are specific disputes that cannot be Particularly with regard to security agreements, these are typically subject to arbitration procedures under Greek law. It should be also governed by Greek law (insofar as they relate to Greek law governed noted that, even if the parties have agreed to refer their dispute to assets). arbitration, the Greek courts have a concurrent competence with the competent arbitration court to seize on a request for interim relief 13.3 What matters are typically governed by domestic law? (interim measure process) which is instigated against assets located in Greece and which relates to the disputes which are subject to the arbitration clause. As mentioned above, there is no limitation regarding matters which can be governed by Greek law (subject to the notation made in relation to the financing terms that should be governed by the Bond 15.2 Is your jurisdiction a contracting state to the New York Law). Also, as per question 13.1 above, security agreements are Convention or other prominent dispute resolution typically governed by Greek law. Nevertheless, the contracting conventions? parties should bear in mind that the application of Greek law is mandatory for dispute resolution regarding the interpretation, Greece is a contracting state to the New York Convention. application or validity of a Partnership Agreement in a PPP project Furthermore, Greece is a contracting member of the International (see article 31 para. 3 of law 3389/2005). Centre for the Settlement of Investment Disputes.

14 Jurisdiction and Waiver of Immunity 15.3 Are any types of disputes not arbitrable under local law?

14.1 Is a party’s submission to a foreign jurisdiction and Pursuant to article 867 of the GCCP, labour law disputes are clearly waiver of immunity legally binding and enforceable? exempted from arbitration procedures.

Generally, submission to a foreign jurisdiction may be validly 15.4 Are any types of disputes subject to mandatory agreed between the parties under Greek law. However, a foreign domestic arbitration proceedings? jurisdiction clause could be denied by a Greek court, especially if same refers to the jurisdiction of a non-EU Member State country, According to article 31 para. 1 of law 3389/2005 on PPPs, every in a case where there is no close connection of such country with dispute arising from the execution, interpretation or validity of a the case and a hearing in such country appears impossible or Partnership Agreement or its auxiliary agreements (parepomena unreasonable. Furthermore, submission to a foreign jurisdiction symfona), is mandatorily subject to arbitration proceedings. may be limited mainly: (a) by the rules on exclusive jurisdiction The Partnership Agreement must provide for the application of set out in article 24 of Council Regulation 1215/2012; and (b) for arbitration rules of the GCCP and should also include the rules disputes arising out of consumer contracts, employment contracts or regarding the selection of arbitrators, the location of the arbitration insurance contracts. tribunal and the language of the procedure. The arbitration award With regard to enforceability, a distinction needs to be made is not subject to legal remedies and can be executed without any between decisions issued by EU and non-EU Member States’ courts. previous ruling from the regular courts. According to Council Regulation 1215/2012, as in force (which

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favour of third parties, always in compliance with EU Regulation 16 Change of Law / Political Risk 800/2008 on State Aid. Moreover, in the context of the “ordinary” incentive legislation, subsidies may be available or alternatively the 16.1 Has there been any call for political risk protections formation of tax-free reserves may be granted. Finally, research and such as direct agreements with central government or development expenditure (augmented at 30%) is accepted for tax political risk guarantees? deduction from the enterprise’s gross profits. Loans and credits provided by domestic or foreign banks and credit There have been calls for political risk protections on some occasions institutions are subject to the contribution set out in law 128/1975 (at and depending on any state guarantees which may have been granted a rate of 0.60%). Loans granted by banks operating in Greece and any for the projects. Direct agreements are the typical method used for

supplementary agreement (e.g. securities, etc.) are exempt from stamp Greece the provision of such guarantees. duty. The same exemptions apply to loans (including interest and supplementary agreements) granted by foreign banks, irrespective of the location of conclusion and payment of the respective agreements. 17 Tax Ordinary loans concluded and/or executed in Greece are subject to the respective stamp duty, whereas bond loans of the Bond Law are 17.1 Are there any requirements to deduct or withhold tax exempted from the contribution of law 128/1975. from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? 18 Other Matters

Pursuant to the provisions of the new Greek Income Tax Code 18.1 Are there any other material considerations which (applicable on tax years commencing as of 1 January 2014), any should be taken into account by either equity legal entity which has its tax residence or maintains a permanent investors or lenders when participating in project establishment in Greece is obliged to withhold tax at a rate of financings in your jurisdiction? 15% on interest payments to domestic or foreign lenders, without prejudice to the provisions of the applicable double tax treaty. No The matters outlined above address the most important withholding is effected on interest payments paid to affiliated legal considerations to be taken into account. However, please note entities which meet the preconditions set in Directive 2003/49/ that all the above are subject to restrictions on the transfer of funds EU. In particular, interest payments deriving from bank loans, late imposed on all credit institutions duly operating in Greece as of 28 interests included, are exempted from withholding tax. With respect June 2015, pursuant to which the transfer of funds abroad is severely to interest from bond loans, the laws granting exemption for foreign restricted and is subject to a special pre-approval (see below). Such investors have been abolished; therefore such income is subject to capital control restrictions apply to orders for transfers of capital withholding tax. The term “interest”, as it is determined in the new from Greek bank accounts to accounts held with credit institutions Greek Income Tax Code, consists of any income accruing from any abroad, but are subject to a number of specific exemptions. As the kind of claims, whether they are secured through a mortgage or not. capital restrictions currently stand, pursuant to the provisions of the In that respect, it may be argued that the proceeds of a claim under legislative act (Official Government Gazette issue A’ 84/18.07.2015) a guarantee or the proceeds of enforcing security, to the extent that as amended so far and ratified by law 4350/2015, as currently in they constitute interest income, are subject to tax as above. force (the said restrictions have been relaxed since June 2016 and are expected to be further relaxed within the coming months), any 17.2 What tax incentives or other incentives are provided contemplated transfer of funds from Greece abroad, which does preferentially to foreign investors or creditors? What not fall under the scope of any particular exemption stipulated by taxes apply to foreign investments, loans, mortgages law, can only be performed upon specific request and subsequent or other security documents, either for the purposes permission thereto. Nonetheless, inbound cross-border transfer of effectiveness or registration? transactions, namely from a bank account outside Greece to a Greek bank account, are permitted. As regards amounts having been There are no particular tax incentives applying to foreign transferred that way, the said legislative act, as currently in force, investments, other than the legislative framework of legislative explicitly states that they can be re-transferred to a bank account decree 2687/1953, mentioned under question 6.3 above, affording outside Greece without prior permission. protection to the import of foreign capital destined for productive Depending on the amount of the intended outbound transfer, special investments and offering, in this respect, a wide range of protective approval is provided: measures (such as a fixed tax regime or a reduction or waiver of a) either centrally by the “Committee for the Approval of import duties and/or levies). Banking Transactions”, which has been established within There are a number of other tax incentives/exemptions introduced the Greek Treasury; or by a range of legislation which applies to all types of investors, both b) locally, by the specially formed sub-committees within each domestic (i.e. Greek law entities) and foreign. credit institution, for transfers that do not exceed a certain A “fast track” procedure is applicable for strategic investments in value. Greece which have a considerable impact on the condition of the Among the various requests for outbound transfers of capital, Greek economy. Specifically, tax incentives are determined with priority is given to those regarded as necessary for the preservation a special law ratifying submission to the fast track procedure. of public and/or social interests, for example payment of hospital Such incentives, indicatively, may include the stabilisation of the expenses and/or purchase of medicines, but as the Greek banking tax regime, the forming of non-taxable reserves, or the reduction system gradually stabilises over time, more room for latitude is of, or exemption from, duties, special taxes, levies or fees in offered and more transactions are permitted.

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18.2 Are there any legal impositions to project companies 19 Islamic Finance issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments. instruments might be used in the structuring of an Islamic project financing in your jurisdiction. Shares and corporate bonds are the main capital market instruments in Greece. A project company may issue shares (capital financing) This is not applicable in Greece. or corporate bonds (debt financing) for raising capital. In order for

Greece them to be regulated by the Greek legislation, tangible shares may 19.2 In what circumstances may Shari’ah law become only be issued by sociétés anonymes domiciled in Greece, while the governing law of a contract or a dispute? Have intangible ones (company parts) may be issued by other company there been any recent notable cases on jurisdictional forms. Bonds are also issued only by sociétés anonymes domiciled issues, the applicability of Shari’ah or the conflict of in Greece. Shares or bonds may be offered either through a private Shari’ah and local law relevant to the finance sector? placement or through an offer to the public (usually through a listing on the Athens Exchange). If a public offer takes place, then the This is not applicable in Greece. issuer should comply with the applicable legislation concerning mainly the publication and approval of a prospectus (the Prospectus 19.3 Could the inclusion of an interest payment obligation Directive and the relevant Greek legislation). If such shares or in a loan agreement affect its validity and/or bonds are to be listed on the Athens Exchange, then additional legal enforceability in your jurisdiction? If so, what steps requirements and procedures need to be met and followed for listing could be taken to mitigate this risk? and admission to trading. Issuers with shares or bonds listed on the Athens Exchange have increased reporting, publication and This is not applicable in Greece. notification obligations. Acknowledgment The authors would like to thank Souzana Aivalioti, Dimitris Dimitriadis, Evi Dimitropoulou, Angeliki Chalikia, Niki Ignatidi, Charalambos Karampelis, Anastasia Kelveridou, Tania Nedelkopoulou, Zaphirenia Theodoraki and Loukas Panetsos for their invaluable contribution to this chapter.

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Elisabeth V. Eleftheriades Ioanna I. Antonopoulou Kyriakides Georgopoulos Law Firm Kyriakides Georgopoulos Law Firm 28 Dimitriou Soutsou Str. 28 Dimitriou Soutsou Str. 115 21 Athens 115 21 Athens Greece Greece

Tel: +30 210 817 1500 Tel: +30 210 817 1500 Email: [email protected] Email: [email protected] URL: www.kglawfirm.gr URL: www.kglawfirm.gr Greece Elisabeth heads the Project Finance team of the firm. Her main area Ioanna joined the firm in March 2010 and specialises in banking and of practice is PPPs and energy projects, both on the financing and the project finance. project documentation (from construction through to operation) and Her main area of practice is PPPs and infrastructure, real estate and project due diligence side, mostly acting for senior lenders. energy projects on the financing and security side, mostly acting for She was instrumental in setting up the firm’s tax department, which banks as senior lenders. she also headed from January 2011 to June 2013. Prior to joining the firm, Ioanna held senior positions in the legal Elisabeth is active in infrastructure privatisations as well as energy department of Emporiki Bank of Greece S.A. (absorbed by Alpha Bank and infrastructure M&As, regularly acting for international investors S.A.) and has been involved in corporate finance contracts, international (greenfield and brownfield investments, business investors and funds). finance transactions, intragroup transactions, project finance transactions in Greece and abroad, international and domestic syndicated loan Her expertise includes real estate acquisition and incentives legislation. transactions, bond loans, international trade transactions, corporate debt restructuring, securitisation, and investments of Emporiki Bank (through the establishment of subsidiaries or branches) abroad, especially in Eastern Europe.

Kyriakides Georgopoulos Law Firm is Greece’s largest multidisciplinary law firm and covers the needs of its clients in all fields of legal practice. Our multi-disciplinary teams of lawyers also have experience in practice areas consisting of Capital Markets, Corporate & Commercial, Banking, Tax, Project Finance, Dispute Resolution, Insurance, Energy, Labour & Employment, M&A, Intellectual Property, Data Protection, Competition, E-Commerce, Restructuring & Insolvency, Natural Resources & Utilities, Real Estate Development and Tax, providing a client-focused service with a constructive approach to legal practices. Kyriakides Georgopoulos Law Firm has offices inAthens and Thessaloniki. Kyriakides Georgopoulos Law Firm is also a member of South East Europe Legal Group (SEE LEGAL), a regional group of 10 leading independent law firms covering 12 jurisdictions of south east Europe, established in 2003 (visit www.seelegal.org). Email: [email protected] URL: www.kglawfirm.gr

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India R.S. Loona

Dhaval Vussonji & Associates Prachi Dave

billion of fresh equity capital to Vodafone India, making it the 1 Overview largest foreign direct investment in the country. New telecom operator Reliance Jio Infocomm is planning to invest 1.1 What are the main trends/significant developments in INR 300 billion more to expand coverage and increase network the project finance market in your jurisdiction? capacity. With this, its total investment in the network will reach close to INR 1.9 trillion. Overseas investment in India is likely to surge to a record high in Mytrah Energy Limited, an independent power producer in India, the year ending in March 2017. Foreign Direct Investment (“FDI”) has announced that it will invest INR 130 billion (USD 1.9 billion) inflows into India during the period of April to December 2016 to set up wind and solar power projects in the south Indian state of jumped 22% to a record USD 35.8 billion from the year earlier. The Andhra Pradesh and for that purpose it has signed a Memorandum main factor which contributed to such an exponential increase in of Understanding with the state government. foreign investment in India, even as the global flows of FDI fell, Between April 2000 and March 2016, the power sector has attracted was the Indian government’s (“GOI”) conscious liberalisation of USD 10.48 billion in FDI. Around 293 global and domestic the country’s FDI policy in the last two years, making India the 10th companies have committed to generate 266 GW of solar, wind, most attractive destination in the world for FDI. mini-hydel and biomass-based power in India over the next 5 to 10 In the recent past, the GOI has taken several policy decisions to push years, which is estimated to represent an investment of about USD investment in the infrastructure sector. Major reforms have been 310 to 350 billion. carried out in FDI policy pertaining to some sectors. 100% FDI In recent past, the GOI has signed contracts worth INR 5 trillion has been allowed in railway infrastructure, excluding operations. for investment in infrastructure, roads, ports, etc. There has been a Although the initiative does not allow foreign firms to operate trains, good response from investors to PPP, Build-Operate-Transfer and it allows them to invest in areas such as creating the network and Hybrid Annuity models. NHAI proposes to raise INR 7 trillion supplying, inter alia, wagons and coaches. The GOI has permitted through infrastructure bonds. 100% FDI under the automatic route in greenfield projects and 74% FDI in brownfield projects under the automatic route. Silver Spring Capital Management, a Hong Kong-based equity hedge fund, plans to invest over INR 20 billion (USD 291 million) To encourage investment in start-ups, the Reserve Bank of India (the in Hyderabad-based infrastructure developer Transstroy India central bank of India – “RBI”) has permitted them to raise external Limited, for construction of highways in the country. commercial borrowings (“ECBs”) of up to USD 3 million per financial year for a three-year tenure. Apple Inc, the technology giant, has opened its first development centre outside the United States in Hyderabad, which will employ The National Highways Authority of India (“NHAI”) plans to over 4,000 people, making the centre the largest outside its offer a risk cover to foreign investors who are willing to invest in headquarters, and will focus on the development of Maps for Apple government-owned operational national highways, which would products. cover risk associated with the possibility of structural design fault, sub-standard quality of construction, and loss of traffic. The Export-Import Bank of the US is looking to provide loans to India for procuring American equipment and technology for its An amendment to the Airport Authority of India Act, 1994 has been booming airport sector that has investments worth at least USD 5 proposed to facilitate monetisation of assets and the development billion lined up for the next four years. of airports under the Private-Public Partnership (“PPP”) model. Further, legislation has been proposed which will provide for dispute resolution in PPP infrastructure projects so as to encourage 2 Security private sector involvement in urban infrastructure creation. A Metro Rail Bill, 2016 has also been proposed, along with a metro policy to push for privatisation of urban infrastructure. 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, 1.2 What are the most significant project financings that what is the procedure? have taken place in your jurisdiction in recent years? While it is possible to club together security on movables and Vodafone Group, the British telecom giant, has given INR 477 immovables under the registered deed of mortgage, normal

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banking practice is to procure security by way of hypothecation on the bank accounts of the borrower, including escrow accounts, on movables and security by way of mortgage by deposit of title particularly when there are numerous debtors or the intention is to deeds on immovables. Registered mortgage deed, however, is cover even the future debtors. Security on such receivables can preferred in large projects, particularly infrastructure projects. be created under the registered mortgage deed, assignment deed Security on equity shares is procured by way of pledge. In case or hypothecation deed. Any person from whom any money is due of dematerialised (“demat”) shares, there is a procedure specified or may become due by the secured creditor to the borrower, can by law for creation of pledge. Any pledge of demat shares without be called upon under Section 13(4)(d) of the Securitisation and compliance with the prescribed procedure is not enforceable in law. Reconstructing of Financial Assets and Enforcement of Security Pledge of physical shares can be created by delivery of shares to the Interest Act, 2002 (“SARFAESI Act”) to pay so much money as pledgee and by execution of the pledge agreement. In the case of is sufficient to pay the secured debt, and any payment made to the India consortium financing, the security may be created in favour of the secured creditor by such person shall give him a valid discharge security trustee who, in the event of default, also takes necessary as if he has made payment to the borrower. A Debts Recovery enforcement action and distributes the proceeds of enforcement in Tribunal (“DRT”)/Civil Court can also recover money belonging accordance with the Inter-Creditor Agreement (“ICA”) executed to a judgment debtor from a third party (garnishee) by issuing a amongst lenders. All documents of security – namely, mortgage, garnishee order/notice. hypothecation and pledge – attract stamp duty as per the rate applicable in the state where such agreements are executed. While 2.4 Can security be taken over cash deposited in bank the hypothecation deed and pledge agreement are not required to accounts? Briefly, what is the procedure? be registered, the mortgage deed is required to be registered with the concerned sub-registrar of assurances. In case the immovable Security can be taken over cash deposited in bank accounts, being properties happen to be located in different districts/states, the movable assets as detailed above in question 2.3. In large projects, mortgage deed can be registered with any of the concerned sub- the security on cash and receivables of the borrower is created by registrars of assurances. Since the stamp duty rates substantially execution of a trust and retention account agreement, where the vary from one state to the next, the execution of security documents account bank also becomes a party to the agreement to ensure that can be decided considering the location of the lender’s office and all monies are utilised in accordance with the “waterfall” mechanism the ease of enforcement of security at the agreed place of execution. specified therein.

2.2 Can security be taken over real property (land), plant, 2.5 Can security be taken over shares in companies machinery and equipment (e.g. pipeline, whether incorporated in your jurisdiction? Are the shares in underground or overground)? Briefly, what is the certificated form? Briefly, what is the procedure? procedure?

Shares of a company in India can be held in physical (certificated) As stated in the response to question 2.1, security can be taken form or demat form. Security over physical shares in companies over both movables and immovables, including real property (land, is generally created by execution of an agreement for pledge. It is plant, machinery, etc). Security can also be taken over equipment usually coupled with a power of attorney authorising the pledgee to, including pipeline, cables, etc., whether underground or overground. inter alia, transfer the pledged shares and/or exercise voting rights Procedural formalities may vary with the nature of the security in respect thereof in the event of default. If shares are in physical document to be procured, e.g., in the case of a registered mortgage form, the execution of the agreement is followed by delivery of the on immovable properties, it would be necessary that such executed share certificates by the pledger to the pledgee. If the pledge is over document is registered with the concerned sub-registrar of demat shares, the process as prescribed by the Depositories Act, assurances. The document is also required to be stamped as per 1996, read with the rules and regulations framed thereunder, is to the applicable rate of stamp duty. In case of a company, all security be followed. Broadly speaking, the pledger is required to notify the documents are required to be executed by an authorised signatory or creation of pledge in the prescribed format on demat shares to the under common seal, and the creation of security has to be notified depository through the depository participant who, in turn, blocks to the Registrar of Companies (“ROC”) as per the provisions of the pledged shares and does not permit any transfer thereof until the the Companies Act, 2013 (“Companies Act”). Banks and Financial release of the pledge on receipt of the notice in this regard from the Institutions are also obligated to notify such charges to the Central pledgee. The pledgee can also transfer the pledged shares to himself Registry of Securitisation Asset Reconstruction and Security or to any other person in the event of invocation of the pledge. Interest of India (“CERSAI”). Before the creation of mortgage/ hypothecation, the company may also be required to obtain the prior approval of the shareholders under the Companies Act, consent/ 2.6 What are the notarisation, registration, stamp duty non-objection from the Income Tax authorities under the Income and other fees (whether related to property value or otherwise) in relation to security over different types Tax Act and permission from the lessor for mortgage on leasehold of assets (in particular, shares, real estate, receivables lands (if the lease deed so stipulates). and chattels)?

2.3 Can security be taken over receivables where the While a registered mortgage deed is required to be registered in all chargor is free to collect the receivables in the states, mortgage by deposit of title deeds is required to be registered absence of a default and the debtors are not notified only in some states. Hypothecation and pledge agreements are not of the security? Briefly, what is the procedure? required to be registered. There is no requirement of notarisation of any of the said documents; however, some related documents A borrower can create a charge over its receivables and, in the such as power of attorney, declaration-cum-undertaking (in the event of default, such charge can be enforced even if the debtors form of affidavit) and other related documents when not executed of the borrower have not consented to the creation of such charge. in the presence of any official of the lender, may be notarised for Generally, a security over receivables is procured by taking a charge the sake of evidentiary value. The stamping of such documents and

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notification thereof to the authorities, such as ROC and CERSAI, are discussed comprehensively in questions 2.1 and 2.2. 4 Enforcement of Security

2.7 Do the filing, notification or registration requirements 4.1 Are there any significant restrictions which may in relation to security over different types of assets impact the timing and value of enforcement, such involve a significant amount of time or expense? as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/ No; the filing, notification or registration requirements in relation liquidator), or (b) (in respect of regulated assets) to security of different types of assets do not involve a significant regulatory consents? India amount of time or expense. As per Section 446 of the Companies Act, 1956 (since repealed), 2.8 Are any regulatory or similar consents required with a secured creditor could not file or continue with the suit/legal respect to the creation of security over real property proceeding for recovery of its dues without the approval of the (land), plant, machinery and equipment (e.g. pipeline, winding-up court, and the receipt of such approval could take whether underground or overground), etc.? a substantial period of time. To some extent, this obstacle was addressed by the Companies Act, 2013 which provided that Creation of security over immovable property may sometimes application for such leave of the Court/Tribunal shall be disposed require the approval or a no-objection certificate of the owner/lessor, of within 60 days. The Insolvency & Bankruptcy Code, 2016 particularly when the subject property has been leased/assigned (“Bankruptcy Code”) has taken a step further to provide that the by a government authority. The creation of a charge on plant, bankruptcy order shall not affect the right of any secured creditor to machinery and equipment including pipelines, whether underground realise or otherwise deal with his security interest, provided that he or overground, will not require any regulatory approvals, though initiates an enforcement action within 30 days from the bankruptcy the installation thereof may require certain approvals including commencement date. There was another restrictive provision in environmental clearance. Section 22 of Sick Industrial Companies Act, 1985 (“SICA”) in terms of which no proceeding for winding-up or for execution, distress or the like against any of the properties of the industrial company 3 Security Trustee shall lie or be proceeded with further, except with the consent of the Board for Industrial & Financial Reconstruction (“BIFR”). Relief 3.1 Regardless of whether your jurisdiction recognises from this provision was provided to secured creditors taking action the concept of a “trust”, will it recognise the role of under the SARFAESI Act. However, now with the enactment of the a security trustee or agent and allow the security Bankruptcy Code, the SICA has been repealed, paving the way for trustee or agent (rather than each lender acting unhindered enforcement actions against secured assets. Under the separately) to enforce the security and to apply the Bankruptcy Code, secured creditors have been given the option to proceeds from the security to the claims of all the join winding-up proceedings and, where they exercise such option, lenders? their dues have been given priority over government dues. Despite all these legislative measures, delays in enforcement of security The concept of “trust” is recognised in India and the lender(s) in are still observed in the recovery proceedings pending before the project finance transactions may either take security in their favour DRTs due to delaying tactics adopted by the borrower concerns. directly or appoint a security trustee or lenders’ agent. With respect Very often, actions of the lenders under the SARFAESI Act are to secured debentures, it is mandatory to appoint a debenture trustee challenged before the DRTs, which delays the process of realisation under the Companies Act. The security trustee is empowered to of security. enforce the security on behalf of the lender(s) and apply the proceeds from the security towards the respective claims of all the lender(s) in accordance with the security trustee appointment agreement and 4.2 Do restrictions apply to foreign investors or creditors the ICA. in the event of foreclosure on the project and related companies?

3.2 If a security trust is not recognised in your Upon the foreclosure on a project and related companies, foreign jurisdiction, is an alternative mechanism available investors and creditors can enjoy security rights over assets that (such as a parallel debt or joint and several creditor were encumbered for their benefit and the enforcement thereof, status) to achieve the effect referred to above which would allow one party (either the security trustee or subject to the guidelines prescribed by the RBI. Unlike domestic the facility agent) to enforce claims on behalf of all secured creditors, which can directly enforce security under the the lenders so that individual lenders do not need to SARFAESI Act without the intervention of the court, foreign enforce their security separately? creditors do not have the same benefit. However, foreign creditors may enter into an ICA with the domestic lenders, whereunder they As stated in question 3.1 above, the security trust mechanism is may become entitled to pro rata distribution of sale proceeds in recognised in India. However, there are cases where the banks and the event of enforcement of security by all the lenders collectively financial institutions, while lending for a project, have appointed pursuant to the arrangement agreed under the ICA. Except for one of the lenders as the lead bank/lender’s agent/facility agent to the Asian Development Bank and the International Finance procure and hold security on behalf of all the lenders, to enforce the Corporation, no other bank, financial institution or secured creditor same in the event of default and to distribute the sale proceeds of the has recourse to the SARFAESI Act, for recovery of their dues. On security in accordance with the ICA. any enforcement/invocation of the charge over an immovable asset, and its subsequent sale, the immovable asset can only be sold to a person resident in India. The sale proceeds can be repatriated to liquidate the outstanding ECB, subject to tax deducted at source.

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In case of invocation of pledged shares, any transfer shall be in laid down therein. The Bankruptcy Code has expanded the scope accordance with the extant RBI regulations governing issuance to beyond companies, to cover other entities; namely, limited liability and transfer of securities by foreign entities. partnership firms, partnership firms and individuals. Bankruptcy proceedings against insurance companies, banking companies, companies engaged in the supply of electricity and any other 5 Bankruptcy and Restructuring company incorporated under any special law are subject to additional Proceedings restrictions/conditions imposed by the respective laws/regulators and there is no entity that would be excluded from bankruptcy proceedings. 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender India to enforce its rights as a secured party over the 5.4 Are there any processes other than court proceedings security? that are available to a creditor to seize the assets of the project company in an enforcement? The law governing winding-up proceedings of a company has undergone substantial change with the enactment of the Bankruptcy Banks and financial institutions including asset reconstruction Code. While pending winding-up proceedings shall continue to be companies are empowered to take possession of the secured assets governed by the provisions of the Companies Act, fresh winding- by following the procedure laid down under the SARFAESI Act, up proceedings shall be governed by the Bankruptcy Code. Under and to realise the security without the intervention of the court. the Companies Act, a secured creditor has a right to stand outside Secured creditors having an English mortgage as a security on the winding-up proceedings and enforce the security, subject to the the borrower’s assets also have the right to enforce such security condition that the sale proceeds shall be distributed in accordance without the intervention of the court, pursuant to Section 69 of the with the provisions of Section 529-A of the Companies Act. When Transfer of Property Act, 1882. a secured creditor enforces his security under the SARFAESI Act in respect of a company in liquidation, he is entitled to retain the 5.5 Are there any processes other than formal insolvency sale proceeds of the secured assets after depositing the workmen’s proceedings that are available to a project company to dues with the liquidator, in accordance with the provisions of achieve a restructuring of its debts and/or cramdown Section 529-A of the Companies Act. Under the Bankruptcy Code, of dissenting creditors? the secured creditor can realise his security by standing outside the winding-up proceedings and he can appropriate all sale proceeds There are certain legislative and regulatory provisions pursuant towards his dues provided; however, if the enforcement of security to which the lenders have been trying to achieve restructuring of yields an amount which is in excess to the debts due to him, then the borrowers’ debts. SICA was one such piece of legislation which secured creditor shall account to the liquidator for such surplus. The provided the legal framework for the restructuring of sick and Bankruptcy Code significantly changes the priority waterfall for potentially sick companies. Prior to the enactment of SICA, distribution of liquidation proceeds. After the costs of insolvency the lenders were attempting to restructure the borrower’s debts resolution (including any interim finance), secured debt, together individually or collectively by having joint lenders meetings. In case with workmen’s dues for the preceding 24 months, has been given of joint financing, the lenders also tried to restructure borrowers’ highest priority in ranking. Central and state government dues stand debts through the mechanism of corporate debt restructuring below the claims of secured creditors, workmen’s dues, employees’ (“CDR”) and/or through the Joint Lenders Forum. To deal firmly dues and other unsecured financial creditors. with wilful defaulters, the RBI recently introduced the Strategic Debt Restructuring Scheme (“SDR”), which allows banks and 5.2 Are there any preference periods, clawback rights financial institutions to convert their loans into equity andto or other preferential creditors’ rights (e.g. tax debts, change management of the borrower concern. With a view to (i) employees’ claims) with respect to the security? strengthening lenders’ ability to deal with stressed assets, and (ii) putting real assets of entities facing genuine difficulties back on track, As stated in question 5.1 above, the new Bankruptcy Code has the RBI has issued guidelines called the Scheme for Sustainable brought in substantial change in the priority of preferential payments Structuring of Stressed Assets (“S4A”). to workers, employees, government dues, etc. Under the Bankruptcy Code, workmen’s dues for the period of 24 months preceding the 5.6 Please briefly describe the liabilities of directors (if liquidation commencement date, employees’ dues (other than any) for continuing to trade whilst a company is in workmen) for the period of 12 months preceding the liquidation financial difficulties in your jurisdiction. commencement date and government dues including taxes, etc. for a period of two years preceding the liquidation commencement date When a company is in financial difficulties and the lenders are fall within the category of preferential payment and are entitled to considering restructuring and/or winding-up proceedings are priority as per the waterfall mechanism provided under Section 53 pending before the court, a director is obligated not to make any of the Bankruptcy Code. change in his shareholding in the company without permission of the lenders or the winding-up court. In the case of a listed company, 5.3 Are there any entities that are excluded from if a director trades in the securities of the company based on bankruptcy proceedings and, if so, what is the unpublished, price-sensitive information relating to the company’s applicable legislation? financials, he may be held liable for insider trading in violation of Securities and Exchange Board of India (“SEBI”) regulations. Any company registered under the Companies Act, 1956 / 2013 can be liquidated pursuant to the provisions of winding-up proceedings

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and airports are jointly regulated by the Ministry of Civil Aviation and 6 Foreign Investment and Ownership the Airports Authority of India; national highways are governed by the Restrictions Ministry of Surface Transport and the NHAI; the telecommunications sector is regulated by the Telecom Regulatory Authority of India and the Department of Telecommunications; and the power sector is 6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company? regulated by the Ministry of Power and the Central and State Electricity Regulatory Commissions. Investments by foreigners in India are governed by the Foreign Exchange Management Act 1999 (“FEMA”). Under the FDI Policy 7.2 Must any of the financing or project documents be India and FEMA, an Indian company can receive FDI in two ways: (i) registered or filed with any government authority or Automatic Route: under this route, FDI is allowed without prior otherwise comply with legal formalities to be valid or approval (from either the Foreign Investment Promotion Board enforceable? (“FIPB”) or the government) in relation to all activities/sectors up to thresholds specified in the FDI Policy, issued by the GOI every Relevant security documents executed by companies have to be filed year; and (ii) Government Route: under this route, FDI in activities with the ROC, and certain security documents executed in favour of not eligible for investment under the Automatic Route or beyond banks and financial institutions are also required to be notified to the threshold specified the Automatic Route require prior approval CERSAI. This aspect is discussed extensively under questions 2.1, from the FIPB. In the Union Budget for 2017–2018, the GOI has 2.2 and 2.6. announced its decision to wind up the FIPB, which in turn is likely to further liberalise foreign ownership of Indian entities. Foreign ownership of a project company per se does not attract any payment 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or of fees or taxes, as against taxation of income from such ownership. operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)? 6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection The right to exploit natural resources is a sovereign right which from such restrictions? vests in the state. Title to natural resources vests with the state and natural resources are not privately held unless the state has Foreign investment in project companies is subject to compliance actually given such natural resource for private ownership. The within the limits, sectoral caps and other conditions of the prevailing GOI periodically licenses specifically identified natural resources foreign investment policy of the GOI for the relevant sector. India has for private exploitation in a prescribed manner and upon payment of signed bilateral investment protection agreements with 83 countries. royalty. A foreign entity is not allowed to own immovable property India has also signed around 85 agreements for the avoidance of double directly, except for the establishment in India of a branch office or taxation (“DTAAs”) with various countries. These DTAAs, inter other place of business, as permitted under relevant RBI regulations. alia, provide tax relief for certain kinds of income, either in totality While a pipeline laid under the land may be owned by an enterprise, or partially (by reducing the tax rates) in India. Under the provision the right to use the land must be procured from the government. of DTAAs, foreign companies can also offset the credit (or benefit) of the tax paid in India from the tax payable in their home country. India also continues to sign tax information exchange agreements 7.4 Are there any royalties, restrictions, fees and/or (“TIEAs”) with countries for maintaining transparency and exchange taxes payable on the extraction or export of natural resources? of information for enforcement of domestic laws in respect of tax matters. India has signed TIEAs with around 10–12 countries so far. The rates of royalties/fees depends on government policy, and the same may be fixed based on revenue or profit, as prescribed by 6.3 What laws exist regarding the nationalisation or the government. For instance, rates of royalty payable in respect expropriation of project companies and assets? Are of extraction of various minerals are determined and governed any forms of investment specially protected? in accordance with the Mines and Minerals (Development and Regulation) Act, 1957. The export of natural resources is subject to Nationalisation and expropriation have been resorted to in the past governmental control. by the GOI in the public interest, to achieve the social welfare and equitable distribution of the ownership of certain assets and resources, particularly in the coal mining industry, banking sector and textiles 7.5 Are there any restrictions, controls, fees and/or taxes sector. The respective legislation in the aforementioned sectors was on foreign currency exchange? brought in under particular circumstances related to the national outlook at the relevant time. While the GOI possesses this sovereign Foreign currency exchange is subject to FEMA and the rules and power, it has used it very rarely for the purposes of the public interest. regulations framed under FEMA and prescribed by the RBI from time to time. The Indian economy is exchange-controlled, due to which full convertibility of capital is not permitted and capital 7 Government Approvals/Restrictions account transactions can be undertaken only pursuant to general or specific permission from the RBI. There are no taxes, fees or charges that need to be paid to any governmental authority or the 7.1 What are the relevant government agencies or RBI for availing of foreign exchange currency loans. departments with authority over projects in the typical project sectors?

Some typical project sectors are governed/regulated by government departments, regulatory authorities/commissions, etc. Civil aviation

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7.6 Are there any restrictions, controls, fees and/or taxes 8 Foreign Insurance on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions? 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies? Repatriation and realisation of investment returns and loan payments is a capital account transaction and is subject to specific To insure assets in India, the foreign insurer (the existing insurer conditions imposed by the RBI. Repayments and interest payments under the law of any country outside India) needs permission from under ECBs currently do not require further approval. Investment returns, whether as capital gains, business income or repatriation the central government of India under Section 25 of the General India of the principal investment amount, normally do not require any Insurance Business (Nationalisation) Act, 1972. specific approval. Taxes on foreign exchange earnings are as per Indian insurers can get reinsurance from foreign insurers with the the applicable Indian tax laws, subject to any DTAA. prior permission of the Insurance Regulatory and Development Body (“IRDA”), subject to a certain percentage to be reinsured with an Indian insurer, which is determined by the IRDA. 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions? 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? A project company or body corporate having Indian nationality can establish and maintain onshore and/or offshore foreign currency A foreign secured creditor can become a beneficiary of an insurance accounts, in its name or that of its branch office, or in the name of its policy, subject to a ‘loss payee clause’ having been inserted in the representative in such foreign jurisdiction, by making remittances insurance policy. The RBI from time to time can prescribe regulations from India for the purpose of normal business operations of the with respect to how claims can be effected by foreign secured creditors. branch or representative, in accordance with FEMA and RBI guidelines and regulations. 9 Foreign Employee Restrictions

7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental 9.1 Are there any restrictions on foreign workers, practice or binding contract) on the payment of technicians, engineers or executives being employed dividends from a project company to its parent by a project company? company where the parent is incorporated in your jurisdiction or abroad? As per the Bureau of Immigration, within the Ministry of Home Affairs, foreigners wishing to come to India for the purpose of Companies in India are required to pay Dividend Distribution Tax employment must hold a valid Employment Visa and also fulfil, and the dividend amount is free from tax in the hands of shareholder, inter alia, the following conditions: whether it is an Indian or foreign parent company. (i) the applicant should be a highly skilled and/or qualified professional being engaged or appointed by a company/ 7.9 Are there any material environmental, health and organisation/industry/undertaking in India on a contract or safety laws or regulations that would impact upon a an employment basis at a senior level, in a skilled position project financing and which governmental authorities such as technical expert, senior executive, or in a managerial administer those laws or regulations? position, etc.; and (ii) the employee’s salary must be in excess of USD 25,000 per India has a comprehensive legal framework in place for dealing with annum, subject to certain exceptions. environmental, health and safety issues and a number of national Such foreigners will have to comply with any such other conditions policies governing environmental management; consequently, a that the Immigration Bureau may prescribe from time to time. host of comprehensive environmental legislations have evolved. Further, the Indian Constitution itself enunciates the national commitment to protect the environment and provides for specific 10 Equipment Import Restrictions directive principles of state policy in that regard. The competent authorities, e.g. the environmental authorities, coastal authorities, etc., for procurement of the relevant permissions/licences and the 10.1 Are there any restrictions, controls, fees and/or taxes monitoring of each project, would vary depending upon the kind of on importing project equipment or equipment used by business being undertaken by the project company. construction contractors?

Import trade in India is regulated by the Directorate General of 7.10 Is there any specific legal/statutory framework for Foreign Trade, within the Ministry of Commerce and Industry. The procurement by project companies? Foreign Trade Policy (2015–2020) identifies the restricted goods and items and also the countries from which the imports are restricted. There is no specific legal/statutory framework for procurement in respect of a project company in private sector. The General Financial Rules (“GFR”), developed by the Ministry of Finance, establish the 10.2 If so, what import duties are payable and are principles for general financial management and procedures to be exceptions available? followed for government procurement of goods and services. State governments and Central Public Sector Units have their own general The import of goods and items in India is subject to existing duties financial rules, broadly based on the GFR. announced by the GOI from time to time, i.e. the import duty, value-

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added duty, customs duty, and other applicable cesses. Depending on the market conditions, the GOI can impose restrictions on import 14 Jurisdiction and Waiver of Immunity and, in applicable cases, exemptions are granted on customs duties chargeable on goods, depending on the product. 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 11 Force Majeure A party’s submission to a foreign jurisdiction is enforceable; however, if the cause of action of a dispute arose in India or 11.1 Are force majeure exclusions available and the foreign jurisdiction is chosen by the parties with a mala fide India enforceable? intention, the Indian courts would have jurisdiction. Parties’ right to waive their immunity is recognised by the Indian courts if the Force majeure exclusions are enforceable in India under the Indian subject matter is commercial in nature. Contract Act, 1872. 15 International Arbitration 12 Corrupt Practices 15.1 Are contractual provisions requiring submission 12.1 Are there any rules prohibiting corrupt business of disputes to international arbitration and arbitral practices and bribery (particularly any rules targeting awards recognised by local courts? the projects sector)? What are the applicable civil or criminal penalties? Under a contract, where one contracting party is Indian and other party is foreign national, and there is an arbitration agreement/ There is no direct law that targets the project sector; however, there clause between both the parties which requires submission of have been various laws enacted by the government to curb corrupt disputes arising from the contract to international arbitration, practice in the relevant industry. To bring about transparency in such contractual provision requiring submission of disputes to the functioning of public authorities, i.e. broadly the government international arbitration will be recognised by local courts of department and organisations owned and/or controlled by the India; provided, however, that the foreign national falls under the central government or state government, the Right to Information territory to which the New York Convention/Geneva Convention Act, 2005 was enacted. The various other laws that prohibit corrupt applies and as notified by the GOI in the Official Gazette from time practices are the Companies Act, Prevention of Corruption Act to time. The law relating to domestic and international arbitration 1988, the Prevention of Money Laundering Act 2002, the Whistle and all matters connected therewith and incidental thereto is set Blowers Protection Act 2014, the Black Money (Undisclosed out in the Arbitration and Conciliation Act, 1996 (“Arbitration Foreign Income and Assets) and Imposition of Tax Act 2015, the Act”). Enforcement of foreign arbitral awards in India is subject Foreign Contribution (Regulation) Act 2010 and the Indian Penal to certain conditions precedent as set out in Sections 46 to 48 of the Code 1860. The penalties for violation of these Acts are in the form Arbitration Act, and one of the primary conditions is that the matter of imprisonment and/or a fine/monetary penalty. decided in such arbitration should be one capable of being decided by arbitration according to the laws of India. 13 Applicable Law 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution 13.1 What law typically governs project agreements? conventions?

The Indian laws would apply in the case of the granting of licences Yes, India is a contracting state to Convention on Enforcement or concessions of a project in India, but the parties are free to choose and Recognition of Foreign Arbitral Awards, 1958 (the New York a foreign law as the governing law to settle a dispute if the project Convention), as well as the Geneva Convention on the Execution of agreement is between a foreign entity and an Indian entity. Foreign Arbitral Awards, 1927 (the Geneva Convention).

13.2 What law typically governs financing agreements? 15.3 Are any types of disputes not arbitrable under local law? Financial agreements between Indian banks and project companies are typically governed by Indian law. The parties are free to decide The Arbitration Act does not specify any kinds of disputes which if they want to be governed by the foreign law or Indian laws in case are not arbitrable in India. However, in 2011, the Hon’ble Supreme of financing agreements with a foreign lender, subject to the rules Court of India has in Booz & Hamilton Inc. vs. SBI Home Finance set by the RBI. Ltd. & Ors (2011) 5 SCC 532 and recently in Shri Vimal Kishor Shah and Ors vs. Mr. Jayesh Dinesh Shah and Ors. Civil Appeal no 8164 (2016) carved out seven categories of cases which are not capable of 13.3 What matters are typically governed by domestic law? being decided by private arbitration under the aforesaid Act, being: (i) disputes which give rise to or arise out of criminal offences; Interest in immovable property located in India is governed by Indian (ii) matrimonial disputes relating to divorce, judicial separation, law. Security documents of such assets are typically governed by restitution of conjugal rights and child custody; (iii) guardianship Indian law, as the security would be enforced by the Indian courts. matters; (iv) insolvency and winding-up matters; (v) testamentary

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matters (grant of probate, letters of administration and succession be availed of under DTAAs and bilateral investment treaties. With certificates); (vi) eviction or tenancy matters governed by special respect to tax implications on foreign creditors, the same is more statutes where the tenant enjoys statutory protection against eviction; particularly dealt with in question 17.1. and (vii) disputes relating to a trust, trustees and beneficiaries, arising out of the Trust Deed and the Indian Trust Act, 1882. 18 Other Matters

15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? 18.1 Are there any other material considerations which should be taken into account by either equity Under certain enactments, instead of voluntary arbitration, the investors or lenders when participating in project India financings in your jurisdiction? arbitration is imposed by the statute itself; for instance, the Electricity Act, 2003 provides for arbitration for disputes arising from the said Act. Foreign investment in Indian projects is possible either through the FDI route or through ECB. Hence it is essential for a foreign investor/lender to carefully examine and understand the provisions 16 Change of Law / Political Risk of FDI Policy and ECB, with particular reference to conditions pertaining to acquisition and transfer of shares of an Indian company, royalty payments, technical know-how fees, eligibility of borrowers 16.1 Has there been any call for political risk protections as well as the lenders under the ECB. Foreign exchange fluctuation such as direct agreements with central government or is also another important risk factor, against which necessary steps political risk guarantees? including hedging are advised.

Political risk insurance is being availed of by Indian multinational companies from private insurance companies. However, the 18.2 Are there any legal impositions to project companies concept of direct agreements with central government does not exist issuing bonds or similar capital market instruments? in India. Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments. 17 Tax Bonds and similar capital market instruments which are listed/to be listed on Indian Stock Exchanges are regulated by SEBI, which 17.1 Are there any requirements to deduct or withhold tax has framed various regulations including the SEBI (Issue and from (a) interest payable on loans made to domestic or Listing of Debt Securities) Regulations, 2008 and the SEBI (Listing foreign lenders, or (b) the proceeds of a claim under a Obligations and Disclosure Requirements) Regulations, 2015. guarantee or the proceeds of enforcing security? There are various provisions under the Companies Act and rules made Withholding tax, currently at the rate of 10%, is applicable in case thereunder; in particular, the Share Capital and Debenture Rules, of any payment of interest in respect of loans made by domestic 2014, the Companies (Issue of Global Depositary Receipts) Rules, lenders. Such withholding tax, however, is not applicable in the 2014 and the Companies (Prospectus & Allotment of Securities) case of domestic banks and certain other specified entities which are Rules, 2014 which may also apply in certain circumstances. exempt from withholding tax. Interest payable to a foreign lender on a foreign currency debt generally ranges between 5% and 20% 19 Islamic Finance withholding tax plus applicable surcharge and cess depending on the category of the borrower, the purpose of borrowing and the guidelines prescribed by the central government. Such tax rate 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha may be reduced under a tax treaty between India and the foreign instruments might be used in the structuring of an country. If any DTAA has been executed between the countries, Islamic project financing in your jurisdiction. and any benefit by way of a lower tax rate is available thereunder, the same may be availed of by the parties. As regards the proceeds The concept of Islamic finance has yet not been incorporated of a claim under a guarantee or other security, withholding tax as in India but RBI has proposed the introduction of interest-free above is applicable. banking products and the GOI, along with the RBI, is exploring the possibility of introducing Islamic banking to ensure financial inclusion for all sections of society. 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages 19.2 In what circumstances may Shari’ah law become or other security documents, either for the purposes the governing law of a contract or a dispute? Have of effectiveness or registration? there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Tax and other incentives available to foreign investors will depend Shari’ah and local law relevant to the finance sector? upon the type of investment and income, the type of investor, country of origin of the investor, as well as the type of entity in If the governing law is not specified in a contract, the local law of which the investment is made. Such incentives and benefits may India will be applicable.

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19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

No, the inclusion of an interest payment obligation in a loan agreement will not affect its validity and/or enforceability in India. A loan without interest is rather rare and exceptional, arising in circumstances such as a loan by the promoter to the project company India in distress.

R.S. Loona Prachi Dave Dhaval Vussonji & Associates Dhaval Vussonji & Associates 113–114, Free Press House 113–114, Free Press House Free Press Journal Marg Free Press Journal Marg Nariman Point Nariman Point Mumbai 400021 Mumbai 400021 India India

Tel: +91 22 666 235 35 / 617 490 00 Tel: +91 22 666 235 35 / 617 490 00 Mob: +91 98 202 256 65 Mob: +91 98 192 289 36 Email: [email protected] Email: [email protected] URL: www.dvassociates.co.in URL: www.dvassociates.co.in Mr. R.S. Loona, a Partner at Dhaval Vussonji & Associates (also known Ms. Prachi Dave, Managing Partner of Dhaval Vussonji & Associates, as Dhaval Vussonji Alliance) is a leading corporate lawyer specialised is a qualified Advocate and Solicitor practising in the Bombay High in the securities market, banking and finance, infrastructure projects, Court. She has experience of close to a decade in assisting domestic real estate and regulatory advice. He represents his clients before the and international clients in matters relating to project finance, mergers, Securities Appellate Tribunal, the Securities and Exchange Board of acquisitions, joint ventures, foreign collaboration, private equity India (“SEBI”) and arbitration tribunals. He has served as Executive investments, banking and finance, capital markets, corporate debt Director (Law) of SEBI for approximately four years. He has held restructuring, labour and employment and real estate laws. the post of Chief General Manager Legal at IDBI, a premier financial Ms. Dave has vast experience in banking and finance matters, which institution. includes advising on finance documentation connected with corporate Mr. Loona has been a member of several Expert Groups/Committees banking, retail banking, trade credits, external commercial borrowings constituted from time to time by the Government of India or SEBI. and enforcement of security. She has acted as Indian counsel He was the Vice-Chairman of the Draft Convention on Harmonized to offshore lenders and institutions in various ECBs to corporate Substantive Rules for Intermediated Securities, prepared under the borrowers within India. auspices of the International Institute for the Unification of Private Ms. Dave has, over the years, advised multinationals in private banking, Law (“UNIDROIT”) in Rome, Italy and has also served as Chairman wealth management, investment advisory, cross-border banking, of the Expert Group constituted to evolve enforcement policy for SEBI. syndicated lending and structured finance transactions, both within India He was a member of the SEBI Panel from October 2007 to as well as overseas. June 2015. Recognised for his expertise in the securities market, his views are often covered by business newspapers and significant news Ms. Dave is also known for her customised advisory on inbound and channels such as CNBC, ET Now, NDTV Profit, CNBC Awaaz, NDTV outbound investments in companies, has advised multinationals on 24/7, Bloomberg and Zee Business. their entry strategy into India across various project finance sectors, and is known to give all-round advice on applicable foreign investment laws, evaluating other corporate, taxation and sectoral regulations which regulate investment within India.

Dhaval Vussonji & Associates, a law firm of Mumbai, is an integrated entity which has emerged after a merger with Alliance Corporate Lawyers (“ACL”). Core areas of practice of the combined entity, Dhaval Vussonji & Associates (also known as Dhaval Vussonji Alliance) are Banking and Project Finance, Capital Market and Securities Laws, Infrastructure, Securitisation and Structured Finance, Investments and , Corporate Advisory, Maritime Law, Dispute Resolution and Real Estate. The primary aim of the Firm is to provide the highest quality of service to its clients by recognising their needs and responding promptly through very knowledgeable, partner-driven teams. The Firm has gained rich experience in advising banks as well as borrowers in concluding transactions involving term lending, consortia working in capital finance, pre-shipment and post-shipment facilities, etc. The Firm regularly advises domestic and cross-border financing transactions in the real estate, aviation, education and shipping sectors in India, China, Singapore and Africa. The Firm has also acted as the Indian counsel in international transactions, advising on the structuring, validity and enforceability of such transactions in relation to Indian law. Further, the Firm has acted as Lenders Legal Counsel (“LLC”) in large infrastructure projects in sectors like power, road, metro-rail, telecoms and oil.

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Indonesia Emir Nurmansyah

Ali Budiardjo, Nugroho, Reksodiputro Freddy Karyadi

have their own unique characteristics, therefore it is better if each 1 Overview type of asset has its own agreement. Such security agreements represent accessory rights upon the loan agreement. A corporate 1.1 What are the main trends/significant developments in guarantee would be another type of security, but it does not give the project finance market in your jurisdiction? preference rights to the lender as it constitutes merely a contractual obligation of the guarantor against certain underlying liabilities. All Project finance is one of the main financing schemes used in of the assets of the guarantor would be the objects when the lenders Indonesia. This system has been used for several years in many enforce the corporate guarantee through a civil lawsuit. transactions such as infrastructure development, power plant In relation to general security agreements, there are several security projects and others. documents (which will be explained below) that it is advisable to On 20 March 2015, the Indonesian Government issued Presidential have executed in the form of a notarial deed. According to Law Regulation No. 38 of 2015 regarding Public-Private Partnerships No. 30 of 2004 on Notaries as amended by Law No. 2 of 2014 (“PPP”), which revokes and replaces Presidential Regulation No. 67 (“Notary Law”), any deed made before a Notary must be made of 2005 regarding Public-Private Partnerships as amended several in an Indonesian language. If agreed by the parties, a notarial times. Presidential Regulation No. 38 of 2015 strengthens the role deed may be made in a foreign language, with a translation into of the Government Infrastructure Guarantee Fund in increasing the Indonesian language. If there is a difference of interpretation the creditworthiness of the PPP infrastructure, and develops sound between the foreign language deed and its translation, then the procedures for granting security over project finance. Therefore, Indonesian language must be used as the prevailing language. to date, project finance has made good progress and has often been used in Indonesia. 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the 1.2 What are the most significant project financings that procedure? have taken place in your jurisdiction in recent years?

Yes, it can. Some of the most significant project financings in Indonesia in recent years have been financing projects on the development of For security over the land, the security is in the form of: mining/processing plants and power plants. Recently, offshore a. Mortgage lenders arranged by JBIC entered into the financing of USD 4.3 Under Law No. 4 of 1996 on Mortgage (Hak Tanggungan) billion to PT Bhimasena Power Indonesia for the construction of (“Mortgage Law”), a security interest known as a real property 2x1000MW Central Java IPP. It is regarded as the largest project mortgage may be encumbered on land rights. financing to date in terms of the capacity of the power plant, and is Procedure the first IPP project developed under a PPP scheme to have reached financial close. This is the first project in which the obligations Mortgages are established through a two-step procedure − namely: of PLN (the State electricity company) under the Power Purchase (i) The signing of the mortgage deed before the Land Officer Agreement have been guaranteed by the Government of Indonesia (“PPAT”) with jurisdiction over the land to be mortgaged. and Government Infrastructure Guarantee Fund. This deed must be in Indonesian and in the prescribed PPAT form. (ii) The registration of the mortgage deed at the relevant Land 2 Security Registration Office (“BPN”). The mortgage is established at the moment it is entered in the land book located at the BPN. The PPAT must submit the executed 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement mortgage deed to the BPN at the latest seven (7) days after the required in relation to each type of asset? Briefly, execution date of the mortgage deed, and the actual date of the what is the procedure? registration is deemed as the seventh (7th) day after the complete application of the mortgage received by BPN. No, it is not possible to give asset security by means of a general For plant and machinery, the security may be in the form of a security agreement, since there are several types of security which mortgage, as explained above, or:

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b. Fiduciary transfer itself should be officially served on the debtor by a court bailiff. Fiduciary transfers are governed by Law No. 42 Year 1999 The acknowledgment by the debtor can be in the form of a deed of concerning Fiduciary Security (“Fiduciary Law”). transfer. The legal effect of the notification is that the debtor can no longer validly settle with the fiduciary transferor and is required to A fiduciary transfer can be effected with respect to movable assets make payments directly to the fiduciary transferee. (whether tangible or intangible) and certain immovable assets (including buildings which cannot be the subject of a mortgage under the Mortgage Law). The only specific exceptions are that a 2.4 Can security be taken over cash deposited in bank fiduciary transfer cannot be effected in respect of: accounts? Briefly, what is the procedure? a. land, buildings and all things appertaining thereto (including machinery affixed thereto) which are subject to the Mortgage Yes, a bank account is an intangible movable property, so that Indonesia Law; pledges over it are now being used instead. In general, the process b. registered vessels with a gross weight of 20 cubic metres to encumber cash deposited in bank accounts shall refer to the or more which are subject to the Mortgage Law and its general procedure of creating a pledge for other tangible and regulations; intangible movable properties (please refer to question 2.2 c). c. aircraft which are subject to the Mortgage Law and its However, the perfection of the pledge shall be subject to the service regulations; and of each notice to and acknowledgment from the banks holding the d. assets which are subject to the pledge laws and regulations. relevant accounts. This notification acceptance shall be deemed as the transfer of control over the pledged accounts from the pledgor Therefore, machinery may be subject to mortgage or fiduciary. If to the pledgee. the machinery is affixed to the land, it is considered as immovable property and can then fall as an object of mortgage. However, if the machinery is not affixed to the land but placed on the land instead, 2.5 Can security be taken over shares in companies such machinery is categorised as movable property and accordingly incorporated in Indonesia? Are the shares in falls under the fiduciary security. certificated form? Briefly, what is the procedure? Procedure Yes, pledge of shares is one of the mechanisms. The procedures that ■ Making the fiduciary transfer agreement in Bahasa Indonesia have to be followed are: making the Pledge of Shares Agreement, in a notarial form. together with a Power of Attorney to Vote Shares (“POA to Vote”) ■ The fiduciary transfer must be registered in the fiduciary and a Power of Attorney to Sell Shares (“POA to Sell”). Under transferee at the Fiduciary Registration Office by attaching a Indonesian law, a pledge of shares does not include voting rights, as Statement of Fiduciary Transfer Registration. the voting rights are not assigned through a pledge. This principle ■ The fiduciary transfer comes into effect on the date of is explicitly stated in Article 60 of the Indonesian Company Law. registration in the Fiduciary Registration Book kept by the Fiduciary Registration Office. Upon acceptance of the The POA to Vote attempts to authorise the pledgee to exercise the registration application, the applicant will obtain a Fiduciary voting rights of the pledgor without assigning them voting rights and, Security Certificate. Based on Letter of Directorate General of therefore, without violating Article 60 of the Indonesian Company General Law Administration No. AHU-06.OT.03.01 TAHUN Law. It must be noted that although the granting of an (irrevocable) 2013 dated 5 March 2013 regarding the Implementation of power of attorney to vote shares is customary in Indonesia, there Online System of Registration Administration System of is no certainty that an Indonesian court will uphold such a power Fiduciary, the registration of a fiduciary conducted by the of attorney since it may circumvent the general rule under Article relevant Notary is done through an online system and the 60 of the Indonesian Company Law that such voting rights must original supporting documents are submitted to the Fiduciary remain with the pledgor/shareholder, notwithstanding the grant of Registration Office in the hard-copy version. any security interests. c. Pledge A pledge under Indonesian law can only be encumbered on tangible movable properties (such as machinery, vehicles and equipment) 2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or and intangible movable property (such as shares, bonds, Indonesian otherwise) in relation to security over different types Government bonds, receivables, debentures and patents) which are of assets (in particular, shares, real estate, receivables regulated in Articles 1150 to 1160 of the Indonesian Civil Code and chattels)? (“ICC”). Procedure There will be several fees in relation to such security which consist There is no formal legal requirement to have a pledge agreement in of the following (inter alia): writing. However, it is standard practice in Indonesia for pledges to ■ Notary’s fee in making a fiduciary transfer deed/pledge of be embodied in a deed of pledge (notarised or executed privately), shares agreement/power of attorney; setting forth the particulars of the pledge. ■ Land Officer Deed/PPAT fee for making a mortgage deed; ■ stamp duties; and 2.3 Can security be taken over receivables where the ■ registration fee in the Fiduciary Registration Office/BPN. chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure? 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense? Yes, it can. Receivables are one type of intangible asset that may be secured by fiduciary transfer as regulated in Article 19 of the Yes, each of asset security filing, notification and registration Fiduciary Law; the procedure to secure the receivables by fiduciary requires a certain period of time. transfer is described in question 2.2 (b) above. The notification

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a. Mortgage 4 Enforcement of Security The registration of the mortgage deed and the issuance of the mortgage certificate as evidence of registration can take between two (2) weeks and six (6) months, although it most commonly takes 4.1 Are there any significant restrictions which may two (2) to four (4) weeks. impact the timing and value of enforcement, such as (a) a requirement for a public auction or the b. Pledge availability of court blocking procedures to other There is no requirement for registration or notification with the creditors/the company (or its trustee in bankruptcy/ Pledge Registration Office. liquidator), or (b) (in respect of regulated assets) c. Fiduciary transfer regulatory consents?

The issuance of the Fiduciary Security Certificate may take one (1) Indonesia Yes, there are requirements for a public auction or private sale as the week to one (1) month. enforcement of security, which must be complied with. a. Mortgage 2.8 Are any regulatory or similar consents required with Public auction respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, In the event of the debtor’s default, the mortgagee will have the right whether underground or overground) etc.? to enforce the mortgage based on: (i) the mortgagee’s right of instant or direct execution (parate If land and machinery are secured by mortgage, then they will have eksekutie) (Article 6 of the Mortgage Law); or the requirements as stipulated in question 2.2 (a) above. However, if (ii) the executory title in the mortgage certificate (Article 14, land is covered by mortgage, while plant, machinery and equipment paragraphs (2) and (3) of the Mortgage Law). are covered by fiduciary, then the stipulation under question 2.2 (c) The right of instant or direct execution is a right conferred by above shall apply. operation of the law by which the mortgagee is entitled to sell the mortgaged property based directly on its own authority through a 3 Security Trustee public auction without consent from the mortgagor. Private sale Based on the Mortgage Law, the procedures to effect a private sale 3.1 Regardless of whether your jurisdiction recognises of the mortgaged land and buildings are as follows: the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security (i) the mortgagee and the mortgagor agree to foreclose on the trustee or agent (rather than each lender acting mortgaged land and buildings by means of a private sale; separately) to enforce the security and to apply the (ii) the mortgagee and/or mortgagor serve at least one month’s proceeds from the security to the claims of all the prior written notice to the concerned parties of the mortgaged lenders? land and buildings. Within this period, the mortgagor and/or mortgagee must announce the intended private sale in at least Trust is regulated under the Financial Service Authority (Otoritas two (2) newspapers and/or local radio stations circulating Jasa Keuangan – “OJK”) Regulation Number 27/POJK.03/2015 in the area where the mortgage land and building/s is/are as lastly amended by OJK Regulation Number 25/POJK.03/2016 located; and concerning Business Activity of Bank in form of Trust. This (iii) the private sale may only be conducted if there is no objection regulation recognises the Trustee as the receiver and the manager from third parties. of the assets to enforce the Trust in accordance to the prevailing law b. Pledge and regulation. The Trustee may represent the lenders under the Public auction Trust agreement to conduct the following: Pursuant to Article 1155 of the Indonesian Civil Code, pledged ■ act as a paying agent; property is required to be sold by public auction in accordance with ■ act as conventional investment fund agent and/or based on the rules of local custom. Shari’ah principles; and/or Private sale ■ act as conventional borrowing agent and/or funding agent based on Shari’ah principles. The sale of pledged property through a private sale is only possible if: These actions may be carried out by the Trustee based on written instruction from the lenders under the Trust agreement. ■ it is consented to by the pledgor after the debt is due and the debtor is in default; or ■ the pledgor agrees to the sale of such pledged property by 3.2 If a security trust is not recognised in Indonesia, is an being a party to any sale agreement and the proceeds of such alternative mechanism available (such as a parallel sale are used to satisfy the creditor’s claim. debt or joint and several creditor status) to achieve the effect referred to above which would allow one c. Fiduciary transfer party (either the security trustee or the facility agent) Public auction to enforce claims on behalf of all the lenders so In the event of the debtor’s default, the fiduciary transferee will that individual lenders do not need to enforce their security separately? have the right to enforce fiduciary transfer over the goods which are subject to this, by: Please refer to question 3.1 above. (i) exercising the executorial title as provided under the Fiduciary Certificate (Article 29, paragraph (a), and Article 15, paragraphs (1) and (2), of Law No. 42); or

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(ii) exercising the right of direct execution (Article 29, paragraph (b), and Article 15, paragraph 3, of Law No. 42). 5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, Private sale employees’ claims) with respect to the security? Foreclosure by private sale can only be conducted after the expiry of one (1) month as of the date of written notification of the intended Yes, there are several kinds of creditors which are generally sale to interested parties, and publication thereof in at least two (2) regulated in the ICC, IBL and Law No. 6 of 1983 which was latterly daily newspapers having circulation at the place concerned, so long Law No. 16 of 2009 regarding General Provision of Taxation (“Tax as no third party has voiced an objection against the private sale. Law”) which have preferential right, as follows: In addition, with regard to the enforcement of fiduciary assignment ■ Creditor who holds any tax debts. Such creditor has a higher of tangible goods, Regulation of Head of Police Department of position than the creditor who is the holder of the security; Indonesia Republic of Indonesia No. 8 of 2011 regarding Fiduciary Execution this is regulated under Article 21 of the Tax Law and Article Protection (“Regulation No. 8/2011”) provides that the holder of 1137 of the ICC. fiduciary rights may ask the police department to secure and protect ■ Separatist/concurrent creditor. Such creditor is the holder of the repossession and execution of its fiduciary objects by submitting the security as regulated under Article 1134 of the ICC. the application. The fiduciary objects themselves should have been ■ Preference creditors. Such creditors are categorised as registered with the Fiduciary Registration Office. In the event general preference creditors under Article 1149 of the ICC the application is approved, the Operational Head of the Police and special preference creditors as stipulated under Article Department will prepare, plan and perform the protection procedure 1139 of the ICC. whose purpose is to make the execution process of fiduciary objects When a bankruptcy estate is declared to be in a state of insolvency run in a smooth and orderly way. and the receiver decides to liquidate the bankruptcy estate to be distributed to the creditors of the bankrupt debtor, a certain ranking 4.2 Do restrictions apply to foreign investors or creditors order will need to be applied. in the event of foreclosure on the project and related The general rule on distributing the proceeds of a bankruptcy estate companies? to unsecured creditors is one of equality, subject to the statutory priority rights of certain categories of creditors. Shareholders No, there are no restrictions on foreign investors or creditors to rank behind all creditors in the distribution of the proceeds of the foreclose the security. Such foreclosure is generally regulated under bankruptcy estate. Based on various Indonesian laws and pieces Article 227 HIR. of legislation, the ranking order of creditors under the bankruptcy is as follows: ■ Specific expenses stipulated by the Tax Law consisting of: 5 Bankruptcy and Restructuring ■ legal expenses arising solely from a court order to auction Proceedings movable and/or immovable goods; ■ expenses incurred for securing the goods; and 5.1 How does a bankruptcy proceeding in respect of the ■ legal expenses arising solely from the auction and project company affect the ability of a project lender settlement of inheritance. to enforce its rights as a secured party over the ■ Preferred creditors having ranks above the secured creditors security? as provided by the Indonesian Civil Code, for example: tax claims; court charges which specifically result from the The mortgage, the pledge and the fiduciary transfer are “in rem disposal of a movable or immovable asset (these must be rights” which are “absolute” and “exclusive” and create preferential paid from the proceeds of the sale of the assets over all other rights to the holder of the security, even in bankruptcy. Bankruptcy priority debts, and even over a pledge or mortgage); and legal of the mortgagor, the pledgor and the fiduciary transferor does not, charges exclusively caused by sale and saving of the estate in principle, affect the security right of the mortgagee, pledgee and (these will have priority over pledges and mortgages). transferee, in that the assets in question are not regarded as being ■ Bankruptcy estate creditors/post-bankruptcy creditors (i.e. part of the bankruptcy assets. claims against the bankruptcy estate), for example: (i) the fee of the receiver; (ii) the costs of liquidating the bankruptcy The bankruptcy declaration, however, triggers an automatic stay of estate (fees of an appraiser, an accountant, etc.); (iii) new the bankruptcy estate upon the issuance of the Commercial Court financing; (iv) the lease costs for the bankrupt’s house or decision declaring the bankruptcy of the debtor. The secured offices as of the date of the declaration of bankruptcy; and (v) creditors’ rights to enforce security are subject to automatic stay for the wages of the employees of the bankrupt debtor as of the a maximum of 90 days (Article 56 section (1) of the Law No. 37 of date of the declaration of bankruptcy (Article 39, paragraph 2 2004 regarding Bankruptcy and Insolvency (Indonesian Bankruptcy IBL). Law “IBL”)). Under the bankruptcy proceedings, the automatic stay ■ Secured creditors, which under Indonesian law consist of: period may be less than 90 days if the bankruptcy proceedings are (i) mortgage (for land); (ii) pledge (over movable intangible terminated earlier or if the state of insolvency is commenced. Once assets); (iii) fiduciary transfer (over movable and intangible the state of insolvency is declared, the secured creditors must start assets); and (iv) hypothec (for aircraft and ships having a size exercising their privileged right over the collateral within 2 (two) of more than 20 cubic metres). months as of the insolvency. Otherwise, the appointed receiver is ■ Specific statutorily preferred creditors, whose preference required to request the delivery of the collateral to be sold by the relates only to specific assets. receiver. If the receiver enforces the collateral, the proceeds that ■ General statutorily preferred creditors (for example, revenue will be distributed to the secured creditors need first to be deducted authorities, etc.). by not only the mandatory preferred claims (which will also apply if Other unsecured creditors receive their pro rata share of any of the the secured creditors enforce the collateral by themselves), but also remaining proceeds. The cost of the bankruptcy is shared pro rata the bankruptcy cost (including the receiver’s fee). among the statutorily preferred creditors and the unsecured creditors.

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Law”) and can only be made through the establishment of, or 5.3 Are there any entities that are excluded from investment in, a limited liability (“PT”) company, which must be bankruptcy proceedings and, if so, what is the registered with the Investment Coordinating Board (“BKPM”). applicable legislation? For certain lines of business (e.g., mining, oil and gas, plantations, education, etc.) the recommendation of the relevant supervising Any entities can be declared bankrupt. However, there is a specific Government institution must be obtained before registration with provision for entities that are restricted from the general bankruptcy BKPM will be granted. In 2015, BKPM issued Regulation of Head proceedings: of BKPM No. 14 of 2015 regarding the Procedures for Principle a. The petition for a declaration of bankruptcy for a Bank may Licences (“Regulation 14”) and Regulation of Head of BKPM No. only be filed by Bank Indonesia. 15 of 2015 regarding the Procedures for Licensing/Non-Licensing

b. The petition for a declaration of bankruptcy for a Security of Investment. Under such regulations, BKPM determines that: Indonesia Company, Stock Exchange, Clearing and Custodian (i) a minimum investment shall be more than Rp 10,000,000,000 Institution, Settlement and Depository Institution may only (ten billion rupiah) or the equivalent value in US dollars, outside be filed by the Capital Market Supervisory Board. the land and building investment, for each type or classification c. The petition for a declaration of bankruptcy for an Insurance of business activity; (ii) a minimum issued and paid-up capital of Company, Reassurance Company, Pension Funds, or State- approximately Rp 2,500,000,000 (two billion five hundred million Owned Enterprise may only be filed by the Minister of rupiah) or the equivalent value in US dollars; and (iii) each of the Finance. shareholders of the company shall hold at least Rp 10,000,000 (ten million rupiah) or the equivalent value in US dollars and the 5.4 Are there any processes other than court proceedings percentage of share ownership is calculated based on the shares’ that are available to a creditor to seize the assets of nominal value. However, depending on the particular business the project company in an enforcement? sector, such as mining exploration or power plant, the BKPM may require an investment value exceeding the minimum investment No, there is no process other than court proceedings that is available value as provided under Regulation 14, based on its discretion, by to a creditor to seize the assets of the project company in an considering the size and necessity of the project. enforcement. Foreign investors who wish to invest in Indonesia must comply with a specific regulation which lists specific lines of business 5.5 Are there any processes other than formal insolvency in Indonesia that are open for foreign investment with certain proceedings that are available to a project company to requirements (usually a local party must hold a minimum percentage achieve a restructuring of its debts and/or cramdown interest in the foreign investment company) and those business lines of dissenting creditors? closed to investment (Negative List). Any business lines not on the Negative List can be opened for foreign investment (100% foreign- Currently, the only formal insolvency proceedings available in owned). The current Negative List of Investment shall be referring Indonesia are regulated under the IBL. However, in relation to debt to the President Regulation Number 44 of 2016 concerning the Lists restructuring and/or cramdown of dissenting creditors, as long as the of Business Fields that are Closed to Investment and Business Fields company has not been declared bankrupt by the court, the parties that Conditionally are Open for Investment. can still conduct private negotiation regarding their outstanding Under the Negative List, the Government has opened foreign obligations/debt. investment in geothermal projects to a maximum foreign shareholding of 95%. Foreign investment in certain construction contractor 5.6 Please briefly describe the liabilities of directors (if services has also increased by a maximum of 67%, including any) for continuing to trade whilst a company is in construction work for roads, railways, airport runways, bridges, financial difficulties in your jurisdiction. flyovers, tunnels, subways, water pipelines, telecommunications networks and electricity cables. The directors shall conduct activities which are (i) legally determined under the scope of the Articles of Association of a 6.2 Are there any bilateral investment treaties (or other company, and (ii) based on common business practice since the international treaties) that would provide protection directors have fiduciary duty to the shareholders. If the directors from such restrictions? conduct themselves in violation of (i) the Articles of Association of the company, or (ii) business practice, and such conduct is not The Indonesian Government has entered into the Protocol to approved by the shareholders of the company and reflected in the Implement the Eighth Package of Commitments under the ASEAN Financial Statement of the company, the directors may be personally Framework Agreement on Services with other members of ASEAN. liable for the loss. Furthermore, this protocol was implemented into the current Negative List, as it provides an exemption for maximum foreign shareholding applicable for investors having their origin in an 6 Foreign Investment and Ownership ASEAN member country. Restrictions The Indonesian Government has also entered into treaties with various countries which give special tax treatment for entities having 6.1 Are there any restrictions, controls, fees and/or taxes their origin in such countries. Such treatment may be in the form on foreign ownership of a project company? of a reduction in net income of up to 30% of the amount invested, accelerated depreciation deductions, extension of tax losses carried Foreign investment in Indonesia in project companies is governed forward for up to 10 years, and reduction of the withholding tax rate under Law No. 25 of 2007 on Capital Investment (“Investment on dividends paid to non-residents to 10% (or lower if applicable).

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directly to the President of Indonesia. The general task of the PKLN 6.3 What laws exist regarding the nationalisation or Team is to manage the utilisation of offshore commercial loans as expropriation of project companies and assets? Are one of the sources for financing national development. any forms of investment specially protected? PD 39/1991 requires companies which intend to obtain offshore commercial loans to seek approval from the PKLN Team for the Pursuant to Article 7 paragraph 1 of Law No. 25 of 2007 regarding plan to borrow said loan, and must report the implementation of Investment, the Indonesian Government advised that it would not the loan and the repayment. The offshore loans that are under the conduct any nationalisation or expropriation against the proprietary coordination of the PKLN Team are: (i) offshore commercial loans rights of investors, unless provided by law. If the Government relating to construction projects whose financing has the following takes measures in such nationalisation or expropriation, then the nature/characteristics: “non-recourse”, “limited-recourse”, “advance Government shall pay compensation, the amount of which shall be Indonesia payments”, “trustee borrowings”, “leasing”, etc.; and (ii) offshore determined by market value. commercial loans relating to development projects whose financing is based on the scheme of “BOT” (build, operate and transfer), 7 Government Approvals/Restrictions “B&T” (build and transfer), etc. PD 39/1991 also provides that the following types of loans are not considered offshore loans under the management of the PKLN 7.1 What are the relevant government agencies or Team and thus do not require approval: departments with authority over projects in the typical project sectors? a. offshore commercial loans for short-term trade purposes; b. offshore commercial loans obtained by private companies for The relevant Government agencies or departments with authority financing projects which are not related to the Government over projects are, among others: of Indonesia (“GOI”) or State-Owned Companies (including GOI institutions and PT Pertamina (Persero)) in the form of a. the Ministry of Energy and Mineral Resources, for projects in GOI capital participation, assurance on the supply of raw the energy sector, such as mining, geothermal and electricity; material, assurance of the purchase of the products or any b. SKKMigas, for projects in the oil and gas upstream sectors; other relation; or c. BPHMigas, for projects in the oil and gas downstream c. other offshore commercial loans as determined by the PKLN sectors; Team. d. the Ministry of Public Works and Ministry of Transportation, Under Article 12 of PD 39/1991, the borrower of an offshore loan for the infrastructure sectors; shall submit a regular report to the PKLN team regarding the e. the Ministry of Telecommunication and Information implementation of the offshore loan obtained. In addition, there are Technology, for the telecommunications sectors; reporting requirements for an individual, legal entity or other entity f. the Ministry of Environment and Forestry, for any projects domiciled and/or planning to be domiciled in Indonesia having requiring environmental licences; offshore loan obligations to non-residents, to Bank Indonesia, and/ g. the National Land Agency, for any projects requiring use of or to the Minister of Finance. land; and h. Bappenas, as the coordinator and facilitator for general 7.3 Does ownership of land, natural resources or a development planning activities. pipeline, or undertaking the business of ownership or There may be other agencies or departments with authority operation of such assets, require a licence (and if so, depending on the project sector. As an example, electricity projects can such a licence be held by a foreign entity)? will also involve a role for the Development and Finance Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan or Foreign entities may not directly own land or natural resources or “BPKP”) in determining the price of electricity. Furthermore, undertake the business of ownership or operation. Law No. 25 of regional governments may have authority as well on project finance 2007 on Investment requires a foreigner or foreign entity wishing arising in their regions, especially in relation to licences issued by to do business in Indonesia to establish a limited liability company. the regional government, such as environmental impact analysis Such foreign-owned company will be able to obtain rights of land, (Analisis Mengenai Dampak Lingkungan or “AMDAL”), and such as rights to build (Hak Guna Bangunan or “HGB”), and spatial plans of the region. licences, and/or undertake business of ownership or operation, Previously, BPMigas was the authorised Government agency that such as leasing of land or buildings, so long as it complies with the entered into contracts on behalf of the Government for projects in Negative List of Indonesia. oil and gas upstream. However, BPMigas was dissolved and its authority transferred to SKKMigas which is structurally under the 7.4 Are there any royalties, restrictions, fees and/or organisation of MEMR as an impact of the ruling of the Constitution taxes payable on the extraction or export of natural Court of Indonesia under its Decision Number 36/PUU-X/2012 resources? dated 13 November 2013. With regard to extraction, there is an obligation imposed on certain mining and oil and gas companies to fulfil national needs of such 7.2 Must any of the financing or project documents be registered or filed with any government authority or mining and oil and gas products. Further, there are also non-tax otherwise comply with legal formalities to be valid or revenue impositions including: (i) dead rent; (ii) exploration royalties; enforceable? (iii) production royalties; and (iv) compensation for data information, toward companies holding mining business licences. Presidential Decree No. 39 of 1991 regarding the Coordination The Government of Indonesia, through several Ministries, enacted of Management of Offshore Commercial Loans (“PD 39/1991”) four (4) key regulations related to the obligation of mining established the PKLN Team, a Government institution which reports companies to conduct processing and refining activities domestically

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as embodied in Article 103 of Law No. 4 of 2009 on Mineral and The cooperation may be in: Coal Mining (“Mining Law”). Those four (4) key regulations are ■ the sale and purchase of ore or mineral concentrates; or as follows: ■ the processing and/or refining process activities. ■ Government Regulation No. 23 of 2010 on the Implementation MOF Regulation 6/2014 regulates that Export Tariffs on exported of Mineral and Coal Mining Business Activities as amended processed mineral products, as intended, shall be those provided lastly by Government Regulation No. 77 of 2014 (“GR 23/2010”); in the Attachment to MOF Regulation 6/2014. Mining companies that export processed mineral products are subject to progressive ■ Minister of Energy and Mineral Resources Regulation No. 1 export duty tariffs. The export duty tariff will gradually increase per of 2014 on the Increase of Added Value of Minerals Through semester, starting from 20% (or 25% for copper) in the first half of Activities of Processing and Refining/Smelting Domestically as amended by Minister of Energy and Mineral Resources 2014 until 60% in the second half of 2016. In particular, for copper, Indonesia Regulation No. 8 of 2015 (“MEMR Regulation 1/2014”); such export tariffs are applicable from 12 January 2014 up to 31 December 2016. ■ Minister of Finance Regulation No. 75/PMK.011/2012 on the Stipulation of Export Goods that are Subject to Export This MOT Regulation 119/2015 generally stipulates the limitation Duty and its Tariff as amended lastly by Minister of Finance for several metal mining products as well as restriction to export Regulation No. 6/PMK/011/2014 (“MOF Regulation several products including raw material or ore. The regulation 6/2014”); and further stipulates the requirement for a mining company which ■ Minister of Trade Regulation No. 119/M-DAG/PER/12/2015 will export metal mining products as a result of processing and/or on the Provision for Exporting Mining Products Resulting refining/smelting. from Processing and Refining (“MOT Regulation Export of metal mining products may be conducted by companies 119/2015”). which hold Operation Production Mining Business Licence (IUP GR 23/2010 requires the holder of the Contract of Work (“COW”) Operasi Produksi and Special Operation Production Mining and IUP for the Operation Production (locally known as Izin Usaha Business Licence (IUPK Operasi Produksi) registered as clean and Pertambangan Operasi Produksi or “IUPOP”) to refine their clear, Operation Production Mining Business Licence specifically mined products domestically. Further, COW and IUPOP holders for processing and refining, Industrial Business Licence (Izin Usaha performing metal mineral mining and refining activities can conduct Industri) or Industrial Certificate of RegistrationTanda ( Daftar exports in a certain quantity. Industri). Export of metal mining products as a result of processing, Pursuant to MEMR Regulation No. 1/2014, each type of metal e.g. copper concentrate ≥15% Cu, anode slime, which have not mineral mining commodity must be processed and/or refined passed a certain purified standard or as stated in Attachment II of by fulfilling at least the minimum requirements stipulated inthe MOT Regulation 119/2015, may only be conducted up to 12 January Attachment to MEMR Regulation No. 1/2014. Metal mineral 2017. Until such deadline, an Export Approval from the Director mining commodities, including its by-products/waste products/ General of International Trade is required for the export of those associated mineral, non-metal mineral and certain rocks which mineral products. On the other hand, the exports of minerals which will be sold abroad, must meet the said minimum requirements. have passed a certain purified standard or as listed in Attachment I IUPOP and COW holders may export raw material or ore once they can be conducted after the verification and technical study have been obtain recommendation from the MEMR. Such recommendation conducted and without a requirement to obtain Export Approval. can be obtained if the IUPOP and COW holders have fulfilled the One of the requirements to obtain an Export Approval is a requirements of: (i) having adequate reserves to carry out processing recommendation from the Director General of Mineral and Coal and refining/smelting domestically on their own or in cooperation which must at least stipulate type, quantity and loading port for with another party, with due regard to the age of processing and mining products resulting from processing. The Export Approval refining/smelting facilities; (ii) having a commitment to build is valid for 6 (six) months and can be extended. Mining products refining/smelting facilities directly or in cooperation with another resulting from processing and/or refining that will be exported must party, by submission of a refining/smelting facility construction be verified and technically scrutinised by the surveyor appointed plan; and (iii) complying with good environmental management by the Minister of Trade. There are also provisions on reporting performance. An application to acquire recommendation shall requirements and sanctions for Exporters and Surveyors. be deemed compliant if accompanied by, inter alia: (i) the Furthermore, on 14 October 2014, the Government issued approved feasibility study documentation; (ii) the environmental Government Regulation No. 77 of 2014 on the Third Amendment documentation approved by the competent agency; (iii) the proof of Government Regulation No. 23 of 2010 on the Implementation of payment to the State; (iv) a clear and clean certificate for a of Mineral and Coal Mining Business Activities (“Regulation 77”). holder of a Production Operation Mining Permit; (v) the approved Regulation 77 stipulates a new provision which states that every domestic refining/smelting facility construction schedule under holder of a Mining Business Licence (locally known as Izin Usaha the laws and regulations; (vi) the approved current year’s working Pertambangan or “IUP”) and a Special Mining Business Licence plans and budget; and/or (vii) the processing product sales planning (locally known as Izin Usaha Pertambangan Khusus or “IUPK”) that contains, inter alia, the product types and qualities, quantities, who would like to change the investment status of the company prices, and the port of loading. may only change its investment status from a domestic investment company to a foreign investment company provided that the foreign Holders of IUPOP and COW of metal minerals, including nickel, are ownership is not more than: obligated to conduct the processing and/or refining of their minerals domestically, and this processing and/or refining process may be ■ 75% (seventy-five percent) for a company in the exploration stage; conducted directly by themselves. If the direct/self-processing and/ or refining is viewed as unfeasible for economic reasons, the IUPOP ■ 49% (forty-nine percent) for a company in the production and COW holder may do the processing and refining in cooperation operation stage, in the event the processing and/or refining activities are conducted by third parties; with another IUPOP and COW holder. A cooperation between IUPOP and COW holders requires the approval of the Director ■ 60% (sixty percent) for a company in production operation General of Mineral Mining. stage, in the event the processing and/or refining activities are conducted by the mining company itself; and

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■ 70% (seventy percent) for a company in production required under the underlying transaction. The term “Underlying operation stage, in the event the mining company conducts Transaction” is not defined in such regulation, but according to the an underground mining method. amendment, the Finance Agreements would satisfy the requirement Another major provision under Regulation 77/2014 is regarding the for an underlying transaction for the purpose of any conversion extension of Contract of Work COW (“COW”) and Coal Contract required for the project. In addition, the party purchasing the of Work (“CCOW”). Based on Article 112 paragraph (2) of above-stated foreign currencies is required to submit the following Regulation 77/2014, COW and CCOW will be converted into a first documents to the bank making the conversion: extension or second extension of IUPK depending on whether the (i) a copy of the underlying agreement; COW or CCOW has previously been extended. The application for (ii) a Tax Registration Number for Indonesian parties (known as the extension may be submitted at the soonest two years prior to the “NPWP”); and

Indonesia expiration and at the latest six months prior to the expiration of the (iii) a statement from the party purchasing the foreign currencies COW and CCOW. that the underlying agreement is a valid document and that the foreign currency will only be used to settle the payment obligations under the underlying agreement. 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange? Pursuant to Bank Indonesia Regulation No. 15/8/PBI/2013 dated 7 October 2013 as amended by Bank Indonesia Regulation No. Concerning currency exchange, the Government of Indonesia has 16/18/PBI/2014 dated 17 September 2014 concerning Hedging passed Law No. 7 of 2011 on Currency (“Currency Law”) which Transactions (“PBI 15/8”), the limitation for the underlying provides that each and every transaction conducted in Indonesia economic activities of hedging transactions is anything to be decided must use the currency of rupiah, with exceptions for: (i) certain by Bank Indonesia, and any kind of hedging transactions shall be transactions in implementing State revenues and expenditure carried out in accordance with PBI No. 18/18 and Bank Indonesia budgets; (ii) receipt or distribution of grants from or to an overseas Regulation No. 7/31/PBI/2005 as amended by Bank Indonesia country; (iii) international trade transactions; (iv) bank savings in Regulation No. 10/38/PBI/2008 concerning Derivative Transactions foreign currency; or (v) international financing transactions. (“PBI 7/31”), as well as risk management regulations issued by the Financial Services Authority. Such hedging transaction shall be Furthermore, Bank Indonesia has issued Bank Indonesia Regulation supported by a valid supporting document. Further, the settlement No. 17/3/PBI/2015 (“PBI 17/2015”) on the Obligation to Use procedures will be carried out in accordance with PBI 18/18. Rupiah. PBI 17/2015 imposes the obligation to use rupiah for every transaction (cash or non-cash) within Indonesian territory, In the event that the local bank intends to conduct a hedging swap including any payment transaction, fulfilment of other obligation transaction with Bank Indonesia, the local bank shall also present which is satisfied by monies, and/or another financial transaction. the underlying transaction documents which are possessed by Furthermore, PBI 17/2015 also implements such obligation for the local bank itself or its customers as stipulated under Bank every contract executed in the Indonesian territory and/or involving Indonesia Regulation Number 15/17/PBI/2013 as amended by an Indonesian party. Bank Indonesia Regulation Number 18/13/PBI/2016 dated 10 August 2016 concerning Hedging Swap Transaction with Bank Law No. 24/1999 provides that a person may freely hold, use and Indonesia (“PBI 15/17”). PBI 15/17 only covers any hedging swap transfer foreign exchange. The foreign exchange transfer to and transaction above US$10,000,000. The hedging contract made by from an overseas country is, however, subject to the reporting the local bank and Bank Indonesia shall be valid for a maximum of requirement to Bank Indonesia as regulated under Bank Indonesia 3 (three) years but hedging swap transactions shall be valid for a 3 Regulation Number 16/22/PBI/2014 on the Reporting of Foreign (three)-month period, 6 (six)-month period, or 12 (twelve)-month Exchange Activity and Implementation of Prudential Principle in period and may be extended for a minimum of 3 (three)-month the Management of Foreign Debt of Non-Bank Corporation dated period to a maximum of 12 (twelve)-month period. Further, for this 31 December 2014 (“PBI 16/22”). According to PBI No. 16/22, hedging swap transaction with Bank Indonesia, such transaction is non-bank institutions owned either by state-owned, region-owned, considered as a pass-on to the derivative transaction position of the privately owned or individually owned enterprises, are required to related party to the local bank. deliver monthly foreign exchange reports to Bank Indonesia no later than 15 months after the foreign exchange activity is conducted. Any Non-Bank Corporation that has foreign loans must implement prudential principles, by satisfying certain obligations to meet Certain transactions in rupiah have been restricted by Bank prescribed hedging ratios, liquidity ratios, and credit ratings Indonesia Regulation Number 18/18/PBI/2016 dated 5 September as stipulated under Bank Indonesia Regulation Number 16/20/ 2016 and Circular Letter number 16/14/DPM dated 17 September PBI/2014 dated 28 October 2014 on the Implementation of 2014 as lastly amended by Circular Letter number 17/23/ Prudential Principles on the Management of Foreign Loans of Non- DPM dated 30 September 2015, concerning Foreign Currency Bank Corporations (“PBI 16/20”). The obligation to implement Transaction Between Bank and Domestic Party (“PBI 18/18”) and these prudential principles does not apply to foreign loans in foreign Bank Indonesia Regulation No. 18/19/PBI/2014 dated 5 September currency in the form of trade credits. Furthermore, the obligation 2016 and Circular Letter No. 17/50/DPM dated 21 December 2015, to meet a certain credit rating does not apply to foreign loans in concerning Foreign Exchange Transactions Against Rupiah between foreign currency for the following purposes: (i) refinancing; and Banks and Foreign Parties (“PBI 18/19”). (ii) financing obtained from international organisation(s) for There are no restrictions or requirements which limit the availability infrastructure projects. Companies must report their implementation or transfer of foreign currency, except that, pursuant to PBI 18/18 of these prudential principles for the management of their foreign and PBI 18/19, the conversion of Indonesian rupiah to foreign loans, along with supporting documents that outline the following: currencies or the purchase of foreign currency in the amount of more a. hedging ratio, liquidity ratio and credit rating; and than US$25,000 per month (or its equivalent) per customer for Spot Transactions or in the amount of more than US$1,000,000 either per b. any applicable exemptions (as mentioned above). month per customer, or per outstanding derivative transaction, must The report must be delivered in accordance with PBI 16/22. be based on an underlying transaction, with a maximum amount

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7.6 Are there any restrictions, controls, fees and/or taxes 7.10 Is there any specific legal/statutory framework for on the remittance and repatriation of investment procurement by project companies? returns or loan payments to parties in other jurisdictions? The Indonesian regulations of procurement would only apply to procurement of works which are financed (either entirely or Other than the above and the requirement of withholding tax upon partially) by the State Budget (Anggaran Pendapatan Belanja certain types of passive income (e.g. interests, dividends, royalties, Negara or APBN or Anggaran Pendapatan Belanja Daerah or leases, etc.), we are not aware of any such restrictions, controls, APBD) as set forth in Presidential Regulation No. 54 of 2010 on fees on the remittance and repatriation returns or loan payments Procurement of Government Goods/Services as amended lastly by to parties in other jurisdictions. However, the currency of such Presidential Regulation No. 4 of 2015. remittance shall be foreign currency instead of rupiah. Indonesia In general, the appointment of construction companies in Indonesia is subject to tender requirements. Direct appointment is only permitted 7.7 Can project companies establish and maintain for very limited reasons. This tender requirement is stated in onshore foreign currency accounts and/or offshore Government Regulation No. 29 of 2000 regarding the Implementation accounts in other jurisdictions? of Construction Services as amended by Government Regulation 59 of 2010 and Government Regulation 79 of 2015 (“GR No. 29/2000”). We are not aware of any regulation restricting a company from One notable amendment of GR No. 29/2000 is that a State-owned maintaining foreign currency accounts in Indonesia and/or offshore company may perform direct appointment only to another State- accounts outside Indonesia. Thus, project companies should be owned company or the subsidiary of the State-owned company. allowed to maintain such types of account. Additionally, Bank Indonesia has enacted Bank Indonesia Regulation No. 16/10/ PBI/2014 dated 14 May 2014 as lastly amended by Regulation 8 Foreign Insurance 17/23/PBI/2015 dated 23 December 2015 on the Receipt of Export Foreign Exchange and Withdrawal of Offshore Loan Foreign 8.1 Are there any restrictions, controls, fees and/or taxes Exchange (“PBI 16/10”). Such regulation specifically stipulates that on insurance policies over project assets provided or the receipt of export foreign exchange and withdrawal of offshore guaranteed by foreign insurance companies? loans have to be conducted at foreign exchange banks which have been appointed by Bank Indonesia. Failure to do so will cause the Generally, the object of insurance in Indonesia must be insured in exporter or withdrawer to be subject to a monetary sanction. Indonesia. Article 2 of Government Regulation No. 73 of 1992 on the Implementation of Insurance Business, as last amended 7.8 Is there any restriction (under corporate law, by Government Regulation No. 81 of 2008 (“GR No. 73/1992”), exchange control, other law or binding governmental stipulates that the insurance object in Indonesia may only be insured practice or binding contract) on the payment of by an insurance company holding a business licence from the dividends from a project company to its parent Ministry of Finance, unless: company where the parent is incorporated in Indonesia or abroad? a. there is no insurance company in Indonesia, either severally or jointly, which has the capability to hold insurance risk of such object; Essentially, every shareholder is entitled to receive a dividend. However, Article 48 (3) of Law No. 40 of 2007 on Limited Liability b. there is no insurance company willing to cover insurance of such object; or Companies stipulates that a shareholder who does not fulfil the requirements of share ownership will not be able to exercise his/ c. the owner of such insurance object is not a citizen or legal her/its rights as a shareholder, including receiving a distributed entity of Indonesia. dividend. In the event of exceptions, insurance coverage can be granted by an Law No. 24 Year 1999 dated 17 May 1999 on the Flow of Foreign insurance company abroad. Exchange and Exchange Rate Systems provides that a person may freely hold, use and transfer foreign exchange. Any transfer of 8.2 Are insurance policies over project assets payable to foreign exchange to and from abroad by such person is, however, foreign (secured) creditors? subject to a reporting obligation to Bank Indonesia. Yes. They can be payable to foreign secured creditors when there is an arrangement between the related parties, such as a banker’s 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a clause. project financing and which governmental authorities administer those laws or regulations? 9 Foreign Employee Restrictions The answer depends on what field a project financing is for. If the objective is to finance a project involving environmental 9.1 Are there any restrictions on foreign workers, affairs or other fields requiring health and safety protections, then technicians, engineers or executives being employed specific environmental and or safety licences will be required. by a project company? The authorities are, among others, the Ministry of Environmental and Forestry and Ministry of Manpower and Transmigration and The Minister of Manpower has issued Regulation No. 16 of 2015 Regional Governments, including representatives such as regents regarding Procedure for the Utilization of Foreign Manpower as and mayors. amended by Regulation No. 35 of 2015 (“Regulation 16/2015”). Under Regulation 16/2015, a company may hire a foreign worker

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for a specific position only for a specific time. Regulation 16/2015 does not clearly provide restrictions on foreign works. However, 11 Force Majeure there is an unwritten policy of the Ministry of Manpower, which requires the company to employ 3 (three) Indonesian employees for 11.1 Are force majeure exclusions available and every employment of 1 (one) foreign employee. The Indonesian enforceable? employee hired shall include at least 1 (one) assisting employee to the foreign employee for the purpose of transfer of knowledge. Yes. Force majeure is regulated under Articles 1244 and 1245 of Failing to comply with this requirement may cause the application the Indonesian Civil Code. As the Articles fall under Book III of by the relevant company for the Foreign Manpower Utilisation Plan the Contracts of the Indonesian Civil Code, the binding power of (Rencana Penggunaan Tenaga Kerja Asing or “RPTKA”) to be such Articles may be waived by the parties. Consequently, the force

Indonesia rejected, or the revocation of the Work Permit (Izin Mempekerjakan majeure exclusions clause may be available and enforceable so long Tenaga Kerja Asing or “IMTA”) of the relevant foreign employee. as the parties agree.

10 Equipment Import Restrictions 12 Corrupt Practices

10.1 Are there any restrictions, controls, fees and/or taxes 12.1 Are there any rules prohibiting corrupt business on importing project equipment or equipment used by practices and bribery (particularly any rules targeting construction contractors? the projects sector)? What are the applicable civil or criminal penalties? Pursuant to Law No. 10 of 1995 as amended by Law No. 17 of 2006 on Custom (“Law 10/1995”), goods imported into a customs area Corruption and bribery practices are specifically regulated under Law are classified as imported goods and are therefore subject to import No. 31 of 1999 on Eradication of the Criminal Act of Corruption as duties. The tariff of import duties is determined and classified by the amended by Law No. 20 of 2001 (“Anti-Corruption Law”). The Anti- goods classification system. Corruption Law identifies a wide scope of persons who can be charged with criminal acts of corruption, in that the law does not only apply to civil servants but also to people who work in private enterprises. In the 10.2 If so, what import duties are payable and are exceptions available? event that the criminal act of corruption is committed by or on behalf of a corporation, a criminal prosecution can be undertaken against such corporation and/or its management board. The management board Article 26 of Law 10/1995 provides that the exemption or must represent the corporation in a lawsuit relating to a criminal act dispensation of import duties may be granted for particular of corruption. The basic criminal sentence against a corporation shall imported goods. Among others, the import of goods and materials only be a fine, with the imposition of an additional 1/3 (one-third) of for industrial construction and expansion of the framework of the maximum fines mentioned above. investment are exempt. These goods and materials are defined as all goods or materials, for all types and composition that will be used Civil and criminal penalties are applicable under the Anti- as materials or components to produce finished goods. Machinery Corruption Law. Criminal penalties are in the form of imprisonment for industrial construction and expansion means all machines, tools, and/or a fine, while civil penalties can be granted through civil claims before a court. Civil penalties may be claimed based on equipment and factory installations that shall be needed for industrial illegal actions causing losses to State . It is regulated in construction and expansion. Exemption from import duties will be the Anti-Corruption Law that in the event the investigator finds granted as long as the imported machines and/or goods and materials: and assumes that there is insufficient evidence against one or more a. have not been produced domestically; elements in the criminal act of corruption while State finances are b. have been produced domestically, but do not fulfil the suffering losses, the investigator shall submit the docket to the State specification; or attorney in order to process a civil suit, or deliver such docket to the c. have been produced domestically, but the volume of institution harmed in order to file suit. production has not yet fuled the industrial demand. Indonesia established a Court of Criminal Act of Corruption through A foreign-owned company (Penanaman Modal Asing or “PMA”) Law No. 46 of 1999. The Court is authorised to examine, hear and or a domestic-owned company (Perusahaan Milik Dalam Negeri decide in cases of: or “PMDN”) may apply for a fiscal facility to reduce, defer, or a. criminal acts of corruption; discharge the tariff imposed on machineries and goods/materials. A b. criminal acts of money laundering originating from company that has already had a Principal Licence (Izin Prinsip) and corruption; and/or is already a legal entity or has a valid Business Licence (Izin Usaha) c. criminal acts stipulated as corruption under the law. can apply to BKPM to obtain a fiscal facility as stipulated in Head of BKPM Regulation No. 16 of 2015. Fiscal facilities consist of: (i) The Court is also authorised to examine, hear and decide on an import duty facility for imported machinery (excludes any spare corruption cases conducted by an Indonesian citizen outside the parts); (ii) an import duty facility for imported materials and goods; territory of Indonesia. (iii) the possibility to obtain a facility on Value Added Tax (Pajak Pertambahan Nilai) for the imported goods; and (iv) the possibility to obtain a facility on Income Tax (Pajak Penghasilan) for the entity. 13 Applicable Law The approval of the application for import duty facilities shall be in the form of an approval letter on import duty facilities issued by 13.1 What law typically governs project agreements? the Head of BKPM (and the Minister of Finance). Pursuant to this regulation, import duty facilities are granted for a certain period and Normally, these would fall under English law. can be extended.

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can be provided to infrastructure projects that are implemented 13.2 What law typically governs financing agreements? under PPP schemes as regulated under Presidential Regulation No. 67/2005 on Public-Private Partnership, as lastly amended by Normally, these would fall under English law. Presidential Regulation No. 66/2013 (“Perpres 67/2005”). Perpres 67/2005 stipulates the provision of infrastructure guarantees 13.3 What matters are typically governed by domestic law? by the Minister of Finance (“MoF”), which can be implemented through a State-Owned Enterprise (“SOE”) mandated to process Typically, the transfer of assets or security over assets located in and provide infrastructure guarantee (Infrastructure Guarantee Indonesian territory is governed by domestic law. Entity or Badan Usaha Penjaminan Infrastruktur – “BUPI”). The process for infrastructure guarantee through a BUPI is further regulated through Presidential Regulation No.78/2010 Indonesia 14 Jurisdiction and Waiver of Immunity on Infrastructure Guarantees in Public-Private Partnership Projects provided through the Infrastructure Guarantee Entity (BUPI) (“Perpres 78/2010”), as well as through Minister of 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? Finance Regulation No. 260/PMK.011/2010 on Guidelines for Implementation of Infrastructure Guarantee in Public-Private Yes, submission to a foreign jurisdiction (subject to the proper nexus Partnership Projects (“PMK 260/2010”). to such jurisdiction) and waiver of immunity should be binding and The Establishment of the Indonesia Infrastructure Guarantee enforceable. Fund (“IIGF”) The IIGF was established in 2009 through Government Regulation No. 35/2009 (“PP 35/2009”) on the Republic of Indonesia State 15 International Arbitration Equity Participation for the Establishment of a State Owned Enterprise in the Field of Infrastructure Guarantees. With the 15.1 Are contractual provisions requiring submission subsequent amendments to Perpres 67/2005, IIGF’s role as BUPI is of disputes to international arbitration and arbitral further defined within the framework for infrastructure PPPs. awards recognised by local courts? Objectives of the IIGF The primary objectives of the IIGF’s establishment are: Yes, international arbitration clauses are recognised by local courts. ■ Providing guarantees for PPP projects in infrastructure. ■ Improving creditworthiness, particularly bankability of PPP 15.2 Is your jurisdiction a contracting state to the New York projects from the perspective of investors/lenders. Convention or other prominent dispute resolution conventions? ■ Improving governance and transparent processes in the provision of guarantees. ■ Minimising the possibility of sudden shocks to the APBN and Yes. Indonesia ratified the New York Convention through ring-fencing the exposure of the Government’s contingent Presidential Decree No. 34 of 1981. However, Indonesia is not liabilities. a contracting state to any other prominent dispute resolution conventions. As IIGF guarantees are aimed at improving the creditworthiness of Indonesia’s infrastructure PPP projects, this will in turn reduce the risk of projects for private investors and lenders, thereby attracting 15.3 Are any types of disputes not arbitrable under local more private investment and increasing competition among potential law? bidders in the tender process. The lower degree of risk would also enhance the potential projects’ Pursuant to Law No. 30 of 1999, the disputes that can be settled credit ratings, and may reduce the cost of project debt and lengthen the through arbitration are those of a commercial nature. As far as other maturity of available financing. Lower cost of debt would ultimately types of dispute are concerned, this is not possible. translate into lower tariffs for consumers. The higher ratings of project debt may allow some PPP project companies (“PCs”) to 15.4 Are any types of disputes subject to mandatory issue bonds on the capital markets, including local markets, thereby domestic arbitration proceedings? contributing to the development of Indonesia’s capital markets. The IIGF operates as a “single window” for the management of No. The parties may choose to settle the dispute through domestic the provision of all guarantees provided to infrastructure projects or international arbitration. proposed by the Government’s CA. As the single-window administrator of infrastructure guarantees in Indonesia, the IIGF will: 16 Change of Law / Political Risk 1. provide consultation and guidance to CAs interested in obtaining IIGF guarantees for their projects; 16.1 Has there been any call for political risk protections 2. screen infrastructure projects for the eligibility to receive such as direct agreements with central government or IIGF guarantees; political risk guarantees? 3. evaluate guarantee proposals for infrastructure projects in accordance with the IIGF project appraisal guidelines and, in The GOI has enabled the provision of infrastructure guarantees with turn, accept or reject guarantee proposals; the purpose of improving infrastructure projects’ creditworthiness, 4. customise the guarantee structure and, if needed, propose as part of an effort to encourage private sector participation in and coordinate other guarantee programmes with other co- Indonesia’s infrastructure development. Infrastructure guarantees guarantors or GOI institutions; and

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5. establish a monitoring framework and closely monitor ■ Depositing capital in Indonesian banks in the amount of at projects supported by the IIGF. least 10% of the total new capital investment plan. The fund Infrastructure Guarantee Arrangements cannot be withdrawn before the implementation of capital investment. An infrastructure guarantee is a form of MoF fiscal support ■ Having Indonesian legal entity status issued since/after/ to privately financed infrastructure projects. It guarantees the at least 12 months before the issuance of the Minister of commitment of a CA to fulfilling its financial obligations under a Financial Regulation (15 August 2011). PPP agreement. Under the current regulations, such guarantee can be provided by a BUPI. As a BUPI, the IIGF shall enter into a Guarantee Agreement with the 18 Other Matters investor or PC, guaranteeing the performance of the CA under the PPP Indonesia Agreement, specifically for those risks allocated to the CA in the PPP 18.1 Are there any other material considerations which agreement, and which have been agreed by the IIGF to be included should be taken into account by either equity under the guarantee structure. In providing such guarantee, the IIGF investors or lenders when participating in project will require the CA to enter into a Recourse Agreement with the IIGF. financings in your jurisdiction? Other than the above, and the explanation under question 6.3, we are not aware of any political risk protections. The Investment Coordination Board of Indonesia recently issued a regulation stating that minimum foreign investment shall be: (i) more than Rp 10,000,000,000 (ten billion rupiah) or the equivalent 17 Tax value in US dollars, beyond the land and building investment with an equity debt ratio of 1:3; (ii) a minimum of approximately Rp 2,500,000,000 (two billion five hundred million rupiah) or the 17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or equivalent value in US dollars of issued and paid-up capital; and foreign lenders, or (b) the proceeds of a claim under a (iii) each of the shareholders of the company shall hold at least guarantee or the proceeds of enforcing security? Rp 10,000,000 (ten million rupiah) or the equivalent value in US dollars, and the percentage of share ownership is calculated based Yes, there are requirements to deduct or withhold tax from interest on the shares’ nominal value. payable on loans made to domestic or foreign lenders, as stipulated Furthermore, there is a recent development regarding the language in the Income Tax Law. Other than the interest and fees for various of the contract. The language of the contract may be one of the agents’ portions of such proceeds, the proceeds of a claim under key issues since the stipulation of Law No. 24 of 2009 on Flag, a guarantee or the proceeds of enforcing security should not be Language, National Coat of Arms and National Anthem (“Law subject to the withholding. 24/2009”). Under Law 24/2009, Indonesian language is required in any MOU or agreement involving Indonesian parties. On 20 June 2013 the District Court of Jakarta Barat nullified a Loan Agreement 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What executed only in English. The District Court interpreted that taxes apply to foreign investments, loans, mortgages provision to mean that an agreement not using Bahasa Indonesia is or other security documents, either for the purposes void as a matter of law. The District Court decision was affirmed of effectiveness or registration? on 7 May 2014 by the Jakarta High Court, and the Indonesian Supreme Court announced that it had rejected the appeal filed by No tax incentives would be given to foreign creditors. The tax the petitioner on 31 August 2015, thus re-affirming the High Court’s incentives which are provided preferentially to foreign investors are decision. Therefore, any party contracting with an Indonesian in the form of the following: counter party, be it in a cross-border or domestic transaction, shall 1. Investment Allowance enter into an agreement in the Indonesian language or bilingually so as to comply with Law 24/2009. For any English-only agreement The investment allowance has several types, including, among involving Indonesian parties concluded after the enactment of Law others: 24/2009 (July 9 2009), it is advised to re-execute the agreement ■ 30% of the invested capital; in the Indonesian language (or bilingually) so as not to leave it ■ accelerated depreciation and amortisation; vulnerable to challenge. ■ reduction of the Dividend Income Tax Rate; and

■ extended loss carried forward. 18.2 Are there any legal impositions to project companies 2. Tax Holiday issuing bonds or similar capital market instruments? This type of facility consists of the following: Please briefly describe the local legal and regulatory requirements for the issuance of capital market ■ Corporate income tax relief for 5 (five) to 10 (ten) years after instruments. commencing commercial production. ■ An additional reduction of 50% on the corporate income tax In order to obtain project financing, a company can issue bonds payable for a period of 2 (two) years. or , the procedure for which is regulated by the Indonesian ■ Taking into account the competitiveness of national industry Stock Exchange and Capital Market Supervisory Board Financial and the strategic value of certain business activities, the Institution (Badan Pengawas Pasar Modal Lembaga Keuangan – Minister of Finance may extend the period of the tax holiday. “Bapepam-LK”) which is currently known as the Financial Service The criteria for obtaining the tax holiday facility are as follows: Authority (Otoritas Jasa Keuangan – “OJK”). ■ The activity is in a “pioneer industry”. In the event that the company would like to issue stocks in the stock ■ Having a plan for new capital investment of Rp 1 trillion, exchange through an (“IPO”), Decree of which has been approved by the competent authority. Chairman of Bapepam-LK No. Kep-122/BL/2009 concerning the

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Procedure of Public Offering Registration (“Regulation IX.A.2”) After the completion of the building, at the first level of Istisna’a states that the company, as the issuer, shall submit the registration the right of ownership of the building will be owned by the Shari’ah statement and any supporting documents to the OJK, as well as bank, and subsequently the Shari’ah bank will transfer the right of announcing the short prospectus in local newspaper. After the ownership to the customer at the second level of Istisna’a. applications have been completed, the company will obtain the b) Ijarah effectiveness of registration so that it can begin to offer its stocks In practice, financing under Ijarah akad is essentially similar to to the public. a leasing agreement. Pursuant to the Instruction (Fatwa) of the With regard to the bond issuance, Law No. 24 of 2002 regarding National Shari’ah Board (Dewan Syariah Nasional) No. 09/DSN- Government Bonds (“Law No. 24/2002”) and Decree of Chairman MUI/IV/2000 regarding Ijarah payment, Ijarah payment can be of Bapepam − LK No. KEP-07/BL/2006 regarding Bond Transaction conducted by parties that have entered into a lease agreement either Reporting (“Regulation No. X.M.3”) states that bond transactions verbally or in writing. Indonesia may be conducted on the stock exchange or over the counter, but Generally, in practice there are two forms of Ijarah, as follows: the issuer shall report any of its bond transactions (i.e. issuance or ■ Al-Ijarah is an agreement for the transfer of rights to utilise transfer) to the OJK. goods and services for a period of time as stipulated in the Further, it is advisable to issue bonds or conduct an IPO after a lease agreement without being followed by the transfer of project company has been established for a certain period. Basically, ownership of the lease object after the lease term has expired. in the IPO or bond issuance process, the OJK will check the ■ Al-Ijarah Al-Muntahia Tamlik Bit-Ijarah is an agreement accountability and capability of the company in conducting business for the transfer of rights to utilise goods and services for a activity. Those are the important aspects which will be assessed by period of time as stipulated in the lease agreement, which is the people who would like to purchase the stocks or bonds issued by followed by the transfer of ownership of the lease object after that company. In the newly established company, however, business the lease term has expired. activity has not been firmly conducted so the financial capability or In practice, financing of projects by Shari’ah banks in Indonesia assets of that company cannot be assessed or offered to the public. is preferable to using Al-Ijarah Al-Muntahia Tamlik Bit-Ijarah In the event that the newly established project company still intends schemes for providing financial assistance for customers, since the to obtain funding from an IPO or bond issuance, accordingly its Shari’ah bank does not need to maintain and hold the lease object sponsor may conduct such IPO/bond issuance, then inject the funds after the lease term has expired. to the newly established project company. c) Wakala Wakala is essentially an agreement to act on behalf of another person, 19 Islamic Finance commonly known as power of attorney. In commercial practice, Wakala akad is used by many sectors, for instance, to perform Letter of Credit transactions, enter into insurance agreements or finance 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha via Shari’ah banking. instruments might be used in the structuring of an Islamic project financing in your jurisdiction. In the insurance sector, pursuant to Instruction (Fatwa) of the National Shari’ah Board (Dewan Syariah Nasional) No. 52/ DSN-MUI/III/2006 regarding Wakala Bil Ujrah Akad on Shari’ah Indonesia has applied and regulated the common structure of the Insurance and Re-insurance, Wakala Bil Ujrah Akad is used by an application of the Shari’ah law akad in Islamic project financing, insurance company to act on behalf of its customer to manage their as described below: fund for insurance purposes and also to obtain a compensation fee a) Istisna’a (ujrah). In the banking sector, pursuant to Law No. 21/2008, a Istisna’a is an Islamic project financing conducted in schemes of Shari’ah bank may act as a trust agent (wali amanat) for the holder sale and purchase. Pursuant to Instruction (Fatwa) of the National of a warrant (surat berharga) under Wakala akad. Shari’ah Board (Dewan Syariah Nasional) No. 06/DSN-MUI/ d) Murabaha IV/2000 regarding Istisna’a Sale and Purchase, Istisna’a akad is The structure of Murabaha generally is a financing method under defined as a request/reservation of certain goods with specific terms the structure of a sale and purchase agreement. A Shari’ah bank and requirements that have been agreed by the purchaser and the will purchase goods from the seller and then sell the goods to its seller in which the payment will be conducted via the instalment customer. Payment under the Murabaha structure can be conducted method. in cash or instalments depending on the agreement between the Pursuant to Law No. 21 of 2008 regarding Shari’ah Banking (“Law parties without interest (riba), pursuant to Instruction (Fatwa) of the No. 21/2008”), a Shari’ah bank is allowed to conduct project National Shari’ah Board (Dewan Syariah Nasional) No. 04/DSN- financing under Istisna’a akad. In practice, Istisna’a akad is MUI/IV/2000 regarding Murabaha. commonly used for construction projects such as buildings or roads. After the purchase of goods, the right of ownership of goods In corporate financing, commonly Istisna’a is conducted at two will be owned by the Shari’ah bank, thus in order to transfer the levels. At the first level, the Shari’ah bank will provide payment to right of ownership to its customer, such goods will be re-sold by the builder to construct the building in accordance with the Shari’ah the Shari’ah bank to its customer either by the instalment or cash bank’s request (the specification of the Shari’ah bank’s request has method. If the method of payment under the Murabaha akad is been agreed by its customer). Payment from the Shari’ah bank will based on instalments, the object of the akad shall be transferred be delivered to the builder depending on the term of completion that to the customer at the beginning of the instalments. The purchase has been agreed by the parties; for instance, the first term payment is price is based on the price that has been agreed by the bank and its delivered after the completion of 30% of the requested building, and customer. will be settled after the building has been fully constructed. At the Both Murabaha and Istisna’a are akad under sale and purchase second level, the Shari’ah bank will enter into Istisna’a akad with schemes, but there are differences between Murabaha and Istisna’a its customer for the same object. This method is advisable as long in Islamic financing, as described below: as the Istisna’a akad is conducted separately for each transaction.

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(i) under Murabaha akad, the object of the akad will be directly DSN-MUI/IV/2000 regarding Istisna’a Sale and Purchase. This transferred from the Shari’ah bank to its customer in the stipulation is required in order to prevent disputes between parties beginning of akad, while under Istisna’a akad the object of caused by a difference of interpretation of the governing law for the akad will be transferred after the end period of akad; and such contract. (ii) under Istisna’a akad, the object of the akad shall be based One of the notable cases is one regarding disputes in relation to on the specification as requested by the buyer, while in Murabaha akad between PT Atriumasta Sakti and Bank Syariah Murabaha such object may be based on specific request, or has been provided by the Shari’ah bank and/or seller. Mandiri before the Supreme Court of Indonesia in 2010 regarding the annulment of award of National Shari’ah Arbitration Tribunal The above is the common understanding of each akad in Indonesia, (Badan Arbitrase Syariah Nasional) by the judgment of Religious particularly Indonesian project financing practice. Court of Jakarta. The Supreme Court of Indonesia judged and

Indonesia declared that the annulment was invalid. 19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have 19.3 Could the inclusion of an interest payment obligation there been any recent notable cases on jurisdictional in a loan agreement affect its validity and/or issues, the applicability of Shari’ah or the conflict of enforceability in your jurisdiction? If so, what steps Shari’ah and local law relevant to the finance sector? could be taken to mitigate this risk?

Not all principles of Shari’ah law can be chosen as governing laws of Generally, the inclusion of an interest payment obligation in a loan a contract. Only principles of Shari’ah law that have been regulated agreement is allowed under Indonesian law. However, if the parties in the form of Indonesian law and regulations can be chosen as the of the agreement agree to choose the principle of Shari’ah law, as governing law of a contract; for instance, the Murabaha principle regulated under Indonesia law, as their governing law, then it will be may be a governing law for a sale and purchase agreement, since the conflicted if the agreement contains clauses which state an interest principle of Murabaha has been regulated under Instruction (Fatwa) payment. of the National Shari’ah Board (Dewan Syariah Nasional) No. 06/

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Emir Nurmansyah Freddy Karyadi Ali Budiardjo, Nugroho, Reksodiputro Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga Graha CIMB Niaga Jl. Jendral Sudirman Kav. 58 Jl. Jendral Sudirman Kav. 58 Jakarta 12190 Jakarta 12190 Indonesia Indonesia

Tel: +62 21 250 5125/36 Tel: +62 21 250 5125/36 Fax: +62 21 250 5001 Fax: +62 21 250 5001 Email: [email protected] Email: [email protected] URL: www.abnrlaw.com URL: www.abnrlaw.com

Mr. Emir Nurmansyah has worked with ABNR since 1989 and has Mr. Freddy Karyadi joined ABNR as a senior associate in July 2007 Indonesia been a partner since 1 January 1997. He graduated from the Faculty and became a partner on 1 January 2012. He read law at the of Law, University of Indonesia in 1989, majoring in Economic Law. University of Indonesia (1998) and earned an LL.M. in International In 1993, he earned an LL.M. degree from the Faculty of Law at Bond Tax at Leiden University (2002). He also graduated cum laude in 1997 University in Australia, majoring in International Transactions. from the Faculty of Economics of Trisakti University in Jakarta and obtained an M.B.A. degree from Peking University (2015). Mr. Karyadi Since 1993, Emir has dealt with a large number of transactions has participated in various training events and seminars in Indonesia involving privatisation, corporate restructuring, and project and debt and abroad. Prior to joining ABNR, he worked for a number of years financing. He has been involved in most of the restructuring projects in other prominent law firms in Jakarta. In 2010, he was seconded in which ABNR is involved; both as a member, and as the leader, of to a leading Dutch law and tax firm. His special practice areas are the ABNR team. He has also acted as an advisor to the Indonesian capital markets, M&A, investment, bankruptcy, corporate and debt Bank Restructuring Agency (“IBRA”) in several restructuring and asset restructurings, litigation, property, natural resources, tax, banking and disposal projects. project finance matters. He has represented international financial institutions, banks, private equity, venture capital, tech/digital, mining, and publicly listed companies. Mr. Karyadi is a member of the editorial board of the Derivatives and Financial Instrument Journal, International Bureau of Fiscal Documentation, the Netherlands and is the regional correspondent for the Indonesia jurisdiction for Tax Notes International of Virginia, USA. Freddy also contributes articles to the International Financial Law Review (IFLR), International Tax Review, International Comparative Legal Guides (ICLG) and Getting The Deal Through, and is a regular speaker at the International Bar Association, Inter-Pacific Bar Association and various forums hosted by IFLR. He is also a tax attorney, chartered accountant and licensed tax consultant. He has received awards from the IFLR1000, Asialaw Profiles and The Legal 500 Asia Pacific.

Ali Budiardjo, Nugroho, Reksodiputro, usually abbreviated to ABNR, was established in Jakarta in 1967 as a partnership of legal consultants in Indonesian business law. The firm is one of Indonesia’s largest independent full-service law firms. The commitment we make to clients is to provide broad-based, personalised service from top-quality teams of lawyers with international experience that includes groundbreaking deals and projects. ABNR’s reputation has been recognised around the world by independent industry surveys and law firm guides. ABNR was selected, based on its high level of integrity and professionalism, to be the sole Indonesian member of the world’s largest law firm association Lex Mundi, and of the prestigious Pacific Rim Advisory Council (“PRAC”).

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Japan Kunihiro Yokoi

Anderson Mōri & Tomotsune Wataru Higuchi

security agreement, as long as each asset is clearly specified therein. 1 Overview However, the security interest in each type of asset must be perfected separately. 1.1 What are the main trends/significant developments in the project finance market in your jurisdiction? 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether After the introduction of a feed-in tariff for renewable energy in underground or overground)? Briefly, what is the July 2012, photovoltaic (PV) power projects have been the main procedure? target for project finance in Japan. Since around the second half of 2014, however, the momentum for such projects has subsided, (1) Real property (land) mainly due to the over-supply of PV power that led to decreased Under Japanese law, the typical security interest in real property is sales prices since 2012 and a newly enacted uncompensated and a mortgage (teito-ken). For a revolving facility with a maximum unlimited restriction on power supply. Recently, projects investing claim amount (kyokudo-gaku), a revolving mortgage (ne-teito-ken) in renewable energy other than PV power, such as wind power and is applicable. biomass power, have started to attract attention. A mortgage in respect of land or a building is created by an Since its introduction in 2011, the “concession right” scheme, in the agreement between a mortgagor and a mortgagee. In order to perfect field of public-private partnership (PPP) and private finance initiative the mortgage against a third party, the mortgage must be registered (PFI) projects, has undergone further development. The concession with the Legal Affairs Bureau (LAB) having jurisdiction over the right scheme is a scheme that enables a public entity to confer upon property. There are approximately 500 LABs throughout Japan. a private entity concession rights to operate and maintain existing facilities by financially relying on users’ fees. The leading examples It should be noted that the land and any building on the land are of where concession rights have been granted are Sendai Airport and treated independently of each other. It is, therefore, important to Kansai and Osaka International Airports, further detail of which is separately create and perfect the mortgage as a first lien upon both set out in question 1.2 below. Expectations are that in the coming the land and the building. years water supply services, sewage services, highways and other (2) Plant airports will also become subject to the concession right scheme. A typical “plant” consists of land, a building, machinery and equipment. As mentioned above, land and a building can be 1.2 What are the most significant project financings that collateralised by a mortgage (teito-ken or ne-teito-ken). Machinery have taken place in your jurisdiction in recent years? and equipment are classified as movables, and can be collateralised by assignment as security (joto-tanpo) (discussed below). As mentioned above in question 1.1, Kansai and Osaka International In addition, Japanese law provides for two comprehensive security Airports were monumental transactions in terms of their scale. The interests for property located in a factory. One is a factory mortgage concession right to operate Kansai and Osaka International Airports, (kojo-teito-ken), and the other is a factory estate mortgage (kojo- for a term of approximately 44 years, was conferred on a special zaidan-teito-ken). A factory mortgage over land covers all machinery purpose company (SPC) established by a consortium consisting of and equipment located in the factory. A factory estate mortgage ORIX Corporation and VINCI Airports S.A.S. in December 2015 for is a particularly strong security interest that can actually eliminate a consideration of approximately JPY 2,200 billion in total, paid over pre-existing security interests over movables in the factory estate. the 44-year term. The SPC commenced operation in April 2016. Notice regarding the factory estate mortgage is published in the Japanese official gazette and if an existing security interest holder 2 Security fails to object within a certain period (specified as being from one to three months), that party’s existing security interest is extinguished. Both a factory mortgage and a factory estate mortgage require each 2.1 Is it possible to give asset security by means of piece of machinery and equipment to be identified, and therefore a general security agreement or is an agreement require more burdensome procedures and costs than normal required in relation to each type of asset? Briefly, mortgages. The factory mortgage and factory estate mortgage are what is the procedure? not very common and are used mostly for large factories.

It is possible to create security interests by means of a general

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(3) Machinery and equipment special LAB located in Nakano Ward of Tokyo. The registration Machinery and equipment are movables. Movables can be can be made with the LAB upon creation of the security interest collateralised by way of assignment as security (joto-tanpo). This without notice to the obligor. In such a case, practically, the notice security interest can be created by a security agreement between to the obligor of the target receivable will be sent upon the event of an assignor and an assignee. In order to perfect this security default of the pledgor/assignor, and the notice must be accompanied interest, the target movable must be “delivered” from the assignor by a registration certificate (this notice can be sent by the pledgee/ to the assignee. Delivery can be made by (i) physical delivery, (ii) assignee). constructive delivery, or (iii) (where the assignor is a legal entity (including a company)) if a movable assignment registration (dosan- 2.4 Can security be taken over cash deposited in bank joto-toki) is filed with the LAB, the registration itself is deemed to accounts? Briefly, what is the procedure? Japan be delivery from the assignor to the assignee. The LAB located in the Nakano Ward of Tokyo is the exclusive designated LAB for any Yes, a pledge over cash deposits is commonly used. A pledge over movable assignment registration. deposits is created by a pledge agreement between a depository bank In creating a joto-tanpo, it is necessary to identify the target movable and a depositor and perfected by a notice to, or acknowledgment by, by whatever means is sufficient to specify it, such as the kind of a depository bank with a stamp of fixed date. The validity ofa movable, its location, number and so forth. This identification pledge over an ordinary deposit (futsu-yokin) has been debated but rule is also applicable to perfect the joto-tanpo by way of physical no Supreme Court decision addressing this issue exists. Despite or constructive delivery. In perfection by movable assignment this, such pledges are often used for project financing. registration, there are two statutory ways to identify the target movable: (i) specification by both the kind of movable and bya 2.5 Can security be taken over shares in companies definitive way to specify the target (such as a serial number); and incorporated in your jurisdiction? Are the shares in (ii) specification by kind of movable and its location. The former certificated form? Briefly, what is the procedure? is usually used for a fixed asset, and the latter is usually used for inventory (aggregate movables). Shares of stock companies (kabushiki-kaisha) incorporated in Japan can be pledged or assigned as security (joto-tanpo), and 2.3 Can security be taken over receivables where the pledges are relatively common. The articles of incorporation of chargor is free to collect the receivables in the the company will specify whether the shares are represented by absence of a default and the debtors are not notified physical certificates. If the shares are “certificated” (i.e., if physical of the security? Briefly, what is the procedure? certificates representing the shares are issued or will be issued), then a pledge can be created by physical delivery of the certificates to the A security interest in receivables (claim) may be taken by a pledge pledgee, and perfected by continuous possession of the certificates (shichi-ken) or assignment as security (joto-tanpo). These security by the pledgee. interests can be created by a security agreement between the On the other hand, if the shares are not and will not be certificated, a pledgor/assignor and pledgee/assignee. pledge may be created by a security agreement between the pledgor In creating the security interest, it is necessary to sufficiently and pledgee, and perfected by registration of the pledge on the identify the target receivable to specify it (such as kind of movable, issuer’s shareholders’ list. date of origination and other items to the extent applicable). If It is not expected that a project company conducting project finance the target is a claim to be generated in the future (shorai-saiken, transactions would be a listed company. If it is listed, however, “future claim”), the period (the beginning and end dates of the the shares of a listed stock company are managed in a book-entry period during which the claim will be generated) must be specified system electronically and the pledge over the shares are created and in the security agreement and in connection with perfection. If there perfected in the system. is an agreement made between the debtor and the obligor of the In each case, the stock company’s approval is not necessarily target receivable which prohibits a pledge/assignment of the target required upon creation of the pledge, but will be needed when receivable, the pledge/assignment is basically invalid, with two the pledge is to be enforced. For security assignments, the issuer exceptions: (i) if the pledgee/assignee is unaware of the prohibition company’s approval will be necessary at the time of its creation as agreement without gross negligence on the part of the pledgee/ well as its enforcement. assginee, the pledge/assignment shall be valid; and (ii) the pledge/ assignment will become valid retroactively from the time of the pledge/assignment (to the extent not harmful to a third party) if the 2.6 What are the notarisation, registration, stamp duty obligor of the target receivable consents to the pledge/assignment, and other fees (whether related to property value or even if there has been a prohibition agreement. otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables The pledgee/assignee can assert the security interest against the and chattels)? obligor of the target receivable upon (i) notice to the obligor from the pledgor/assignor, or (ii) the acknowledgment of the obligor. Registration taxes are imposed on (i) mortgage registrations (0.4% The pledgee/assignee can assert the security interest against a of the claim amount (or, for a revolving mortgage, 0.4% of the third party (such as a double pledgee/assignee or bankruptcy maximum claim amount)), (ii) movable assignment registrations trustee of the pledgor/assignor) upon (i) notice to the obligor of the (JPY 7,500 per filing (up to 1,000 movables)), and (iii) claim target receivable from the pledgor/assignor by a certificate with (a assignment registrations (JPY 7,500 per filing (up to 5,000 claims) stamp of) a fixed date, (ii) the acknowledgment of the obligor of and JPY 15,000 per filing (exceeding 5,000 claims)). Creation of the target receivable by a certificate with (a stamp of) a fixed date, assignment as security (joto-tanpo) over claims may be subject to a or (iii) (only where the pledger/assignor is a legal entity (including fixed stamp duty of JPY 200. a company)) a claim pledge/assignment being registered with the

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2.7 Do the filing, notification or registration requirements 5 Bankruptcy and Restructuring in relation to security over different types of assets Proceedings involve a significant amount of time or expense?

No, except for the factory estate mortgage, which requires the 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender procedures discussed in question 2.3 above. to enforce its rights as a secured party over the security? 2.8 Are any regulatory or similar consents required with

Japan respect to the creation of security over real property There are three types of bankruptcy proceedings: bankruptcy (land), plant, machinery and equipment (e.g. pipeline, (hasan); civil rehabilitation (minji saisei); and corporate whether underground or overground), etc.? reorganisation (kaisha kosei). Under both bankruptcy (hasan) and civil rehabilitation proceedings (minji saisei), secured creditors can No regulatory consents are required to grant security, except for enforce their own security interests outside the proceedings (betsujo- general consents for transfers required by the terms of the asset itself ken) unless the court orders the deletion of the security interest in (such as licences). response to the petition by a bankruptcy trustee under certain limited requirements. On the other hand, under corporate reorganisation 3 Security Trustee proceedings (kaisha kosei), the enforcement of security interests is prohibited or suspended (kosei-tanpo-ken).

3.1 Regardless of whether your jurisdiction recognises 5.2 Are there any preference periods, clawback rights the concept of a “trust”, will it recognise the role of or other preferential creditors’ rights (e.g. tax debts, a security trustee or agent and allow the security employees’ claims) with respect to the security? trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the A bankruptcy trustee may exercise clawback rights (hinin-ken). lenders? With respect to the security, if a debtor repays its debts, or grants security to a specific creditor after becoming “unable to pay its A security trustee is recognised under the Trust Law of Japan. In debts” and being aware of such situation, or after a bankruptcy filing practice, however, a security trust scheme is not commonly used, (or grants security without obligation or repays debts before maturity mainly due to a lack of precedents. within 30 days prior thereto), then such act may be avoided by the bankruptcy trustees. Administrative expenses, pre-bankruptcy adjudication taxes, certain labour costs, etc. are treated as claims 3.2 If a security trust is not recognised in your that have priority over general claims, but secured creditors have jurisdiction, is an alternative mechanism available priority over the collateral irrespective of the existence of these (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which claims. would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all 5.3 Are there any entities that are excluded from the lenders so that individual lenders do not need to bankruptcy proceedings and, if so, what is the enforce their security separately? applicable legislation?

See question 3.1 above. No, there are no such exclusions.

4 Enforcement of Security 5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement? 4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the As set out in question 5.1 above, secured creditors can enforce availability of court blocking procedures to other their own security interests outside bankruptcy (hasan) or civil creditors/the company (or its trustee in bankruptcy/ rehabilitation proceedings (minji saisei). liquidator), or (b) (in respect of regulated assets) regulatory consents? 5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to In principle, security shall be enforced through a court-supervised achieve a restructuring of its debts and/or cramdown auction (keibai). However, it is possible and common to agree to of dissenting creditors? enforce security without a court-supervised auction, such as by way of a private sale. Turnaround alternative dispute resolution (ADR) proceedings (or business turnaround ADR) are a method overseen by the Japanese 4.2 Do restrictions apply to foreign investors or creditors Association of Turnaround Professionals that can be used to in the event of foreclosure on the project and related restructure an insolvent business without involving courts. The companies? process works by forming an agreement between the insolvent business and its creditors that includes debt write-offs and the No, there are no such restrictions. rescheduling of debt payments.

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(METI) is the responsible authority in relation to matters such as 5.6 Please briefly describe the liabilities of directors (if energy, natural resources and other industries, and the Ministry of any) for continuing to trade whilst a company is in Land, Infrastructure, Transportation and Tourism (MLIT) is the financial difficulties in your jurisdiction. responsible authority in relation to matters such as construction, transportation and ports. Directors are liable against the company if they breach their duty of care as a good manager; however, this can be tempered by the application of the business judgment rule to directors’ decisions. 7.2 Must any of the financing or project documents be Also, directors are liable against third parties for any loss or damages registered or filed with any government authority or otherwise comply with legal formalities to be valid or incurred by a third party due to a director’s wilful misconduct or enforceable? Japan gross negligence. Criminal liability would arise in certain limited cases where directors intentionally breach their duty and cause Financing or project documents do not generally require registration damages to the company. or filing with any governmental authority. However, a guarantee agreement must be executed in writing, and perfection of security 6 Foreign Investment and Ownership rights may require registration with the relevant authority. Stamp Restrictions duty may be imposed depending on the type of financing or project documents if they are executed in Japan.

6.1 Are there any restrictions, controls, fees and/or taxes 7.3 Does ownership of land, natural resources or a on foreign ownership of a project company? pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, A foreign investor is required to lodge a filing if it obtains shares in can such a licence be held by a foreign entity)? a non-listed company, obtains more than 10% of shares in a listed company, or conducts certain other activities under the Foreign Ownership of land or a pipeline does not require a licence. However, Exchange and Foreign Trade Act. Investment in certain types of development or, in some situations, the acquisition of land, as well businesses (such as electricity, mining, oil, gas, water supply, as the instalment or operation of pipelines, are subject to various transportation, telecommunication and shipbuilding) requires regulations such as agricultural land regulations and pipeline prior filing with the Japanese government. Investment in certain business regulations. While these matters are regulated by various industries (such as telecommunications, airlines and broadcasting) acts, a licence is generally required for the extraction of natural is subject to maximum shareholding restrictions. resources and the operation of pipelines. A licence under the Mining Act is given only to Japanese nationals. On the other hand, activities for quarrying and/or gravel gathering, subject to local regulations, 6.2 Are there any bilateral investment treaties (or other can be performed by a registered foreign entity. Acquisition of an international treaties) that would provide protection from such restrictions? oil pipeline or gas pipeline business is subject to a pre-notice filing requirement under the general restrictions of the Foreign Exchange and Foreign Trade Act and may also be subject to a suspension order While Japan has executed bilateral investment treaties with in case it disturbs public order. certain countries, these treaties do not provide protection from the restrictions noted above. 7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural 6.3 What laws exist regarding the nationalisation or resources? expropriation of project companies and assets? Are any forms of investment specially protected? Fees apply depending on the mining activities. Certain prefectural and municipal mining taxes are payable on the extraction of Expropriation may be permitted for a limited public interest (such natural resources, as applicable. The rates for these taxes may as transportation, electricity facilities and airlines) under the vary depending on the location and the resource, but in general, a Compulsory Purchase of Land Act, with compensation provided. prefectural tax is imposed on the area of the allotted mining area, No form of investment is specially protected. and a municipal tax, the standard rate of which is 1% of the relevant mineral price, is also imposed. 7 Government Approvals/Restrictions There are no general export restrictions relating to natural resources, provided that they do not fall into the exceptional categories regulated under the Export Trade Control Ordinance. No tax is 7.1 What are the relevant government agencies or imposed on the export of natural resources. departments with authority over projects in the typical project sectors? 7.5 Are there any restrictions, controls, fees and/or taxes The relevant government agencies or departments will vary on foreign currency exchange? depending on the types of projects over which regulatory bodies in the state or local government have authority. Among the agencies No, other than a post facto filing under the Foreign Exchange and and departments, the Ministry of Economy, Trade and Industry Foreign Trade Act.

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7.6 Are there any restrictions, controls, fees and/or taxes 8.2 Are insurance policies over project assets payable to on the remittance and repatriation of investment foreign (secured) creditors? returns or loan payments to parties in other jurisdictions? Insurance policies over project assets can be generally payable to foreign creditors. Generally no, but a post facto filing is required under the Foreign Exchange and Foreign Trade Act if the remittance exceeds JPY 30 million. Withholding of Japanese income tax at the rate of 20.42% 9 Foreign Employee Restrictions (including special reconstruction income tax) will be taxed for Japan dividends and interest paid to foreign lenders, unless a double tax treaty applies. 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company? 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore Foreign workers, technicians, engineers or executives may be accounts in other jurisdictions? employed by a project company as long as it obtains an appropriate visa (certificate of eligibility). The visa requirements vary depending Yes, they can, but a report is required to be filed with the tax on the type of visa. authority if the offshore assets exceed JPY 50 million.

10 Equipment Import Restrictions 7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of 10.1 Are there any restrictions, controls, fees and/or taxes dividends from a project company to its parent on importing project equipment or equipment used by company where the parent is incorporated in your construction contractors? jurisdiction or abroad?

Construction contractors may generally import project equipment, No, there is no such restriction. except for limited restrictions such as goods that are deleterious to health and safety under the Foreign Exchange and Foreign 7.9 Are there any material environmental, health and Trade Act. A licence is not generally required in order to import safety laws or regulations that would impact upon a equipment. Contractors may be subject to customs duties and VAT project financing and which governmental authorities (consumption tax). administer those laws or regulations?

There are various regulations including local prefectural or 10.2 If so, what import duties are payable and are municipal regulations that handle environment, health and safety exceptions available? issues. The necessity of an environmental impact assessment under state or local regulations would have a big impact on the costs and Import duties may differ depending on product type, origin and schedule of a project financing. Regulations on certain areas (such other relevant conditions. as forest areas and agricultural land) would also affect the project financing. Environmental matters are generally handled by the 11 Force Majeure Ministry of the Environment (MOE) and/or similar environmental division at the local government level, and health and safety matters are generally handled by the Ministry of Health, Labour and Welfare 11.1 Are force majeure exclusions available and and similar divisions at the local government level. enforceable?

7.10 Is there any specific legal/statutory framework for Force majeure provisions are set out in many project agreements. procurement by project companies? Generally, exclusions based on such provisions are enforceable as long as they are clearly defined in such agreements. Normally,force No, privately owned project companies are not subject to such majeure exclusions do not apply to payment obligations. procurement regulations. 12 Corrupt Practices 8 Foreign Insurance 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting 8.1 Are there any restrictions, controls, fees and/or taxes the projects sector)? What are the applicable civil or on insurance policies over project assets provided or criminal penalties? guaranteed by foreign insurance companies?

Bribery is a criminal offence under the Criminal Code, with a Except for certain exceptions, foreign insurers are in principle penalty of imprisonment for up to three years or a fine of up to JPY required to obtain insurance business licences as a condition to 2.5 million. Conducting corrupt business practices with foreign insurance relating to project assets located in Japan. government officials is a criminal offence under the anti-bribery provisions of the Unfair Competition Prevention Act, with a penalty

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of imprisonment for up to five years and/or a fine of up to JPY 5 of divorce or separation) are arbitrable (Art. 13.1 of the Arbitration million (for the offender) and fine up to JPY 300 million (for the Act). Examples of matters which are generally considered to not corporate body). be “arbitrable” include: (i) the validity of intellectual property rights granted by the government; (ii) shareholders’ actions seeking revocation of a resolution of the shareholders’ meeting; 13 Applicable Law (iii) administrative decisions of government agencies; and (iv) insolvency and civil enforcement procedural decisions. 13.1 What law typically governs project agreements? 15.4 Are any types of disputes subject to mandatory Project agreements are typically governed by the laws of Japan. domestic arbitration proceedings? Japan

No, they are not. 13.2 What law typically governs financing agreements?

Financing agreements are typically governed by the laws of Japan. 16 Change of Law / Political Risk However, securities documents may be legally required to be governed by the laws of the state in which the collateral is located. 16.1 Has there been any call for political risk protections such as direct agreements with central government or 13.3 What matters are typically governed by domestic law? political risk guarantees?

The parties may generally choose the governing law. However, There has been no call for political risk guarantees. Lenders will securities documents for collateral located in Japan are typically typically require direct agreements with governmental authorities governed by the laws of Japan. In addition, enforcement, insolvency, if the project is a PPP or PFI project. Lenders usually seek criteria consumer protection and employment matters will be subject to to approve the potential transferee of shares in the project company mandatory provisions of Japanese law. or concession right since a transfer thereof requires a consent of the relevant governmental authority under the PFI Act and its relevant regulations. 14 Jurisdiction and Waiver of Immunity

17 Tax 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 17.1 Are there any requirements to deduct or withhold tax A waiver of sovereign immunity is legally valid and enforceable from (a) interest payable on loans made to domestic subject to the conditions in the Immunity Act. The Immunity or foreign lenders, or (b) the proceeds of a claim Act is based on the United Nations Convention on Jurisdictional under a guarantee or the proceeds of enforcing security? Immunities of States and Their Property (2004) and became effective from April 1, 2010. Withholding of Japanese income tax is required on interest paid to foreign lenders at the rate of 20.42% (including special 15 International Arbitration reconstruction income tax). This is subject to a double tax treaty between Japan and the country where the foreign lender resides, which in many cases will reduce withholding of such tax. 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral The proceeds of enforcing security may be subject to income tax if awards recognised by local courts? it is categorised as Japanese-sourced income.

Generally, yes. Japan is a signatory to the New York Convention on 17.2 What tax incentives or other incentives are provided the Recognition and Enforcement of Foreign Arbitral Awards. preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes 15.2 Is your jurisdiction a contracting state to the New York of effectiveness or registration? Convention or other prominent dispute resolution conventions? Various tax or other incentives are available to foreign investors to attract more foreign investment; however, such incentives are not Yes, the Convention became effective from 1961 with a reservation intended specifically for project financing. of reciprocity. Japan is also a party to the Washington Convention on the Settlement of Investment Disputes Between States and Registration tax is imposed on the registration of certain rights and Nationals of Other States (1965) (otherwise known as ICSID). securities. Rates vary depending on the type of rights and securities (e.g., 0.4% of the claim for mortgage). Stamp duty is imposed on the execution of certain documents. The amount of stamp duty for a 15.3 Are any types of disputes not arbitrable under local loan agreement ranges from JPY 200 to JPY 600,000. law?

Unless otherwise provided by law, civil and commercial disputes that may be resolved by settlement between the parties (excluding that

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framework corresponding to the Islamic finance concept. While 18 Other Matters compliance with Shari’ah is required to be reviewed separately, Japanese law would likely recognise Istina’a as a procurement and 18.1 Are there any other material considerations which construction agreement (seizou itaku); Ijarah as a lease agreement should be taken into account by either equity (chintaishaku); Wakala as an agency agreement (dairi or toiya); and investors or lenders when participating in project Murabaha as a sales agreement with an instalment payment (kappu financings in your jurisdiction? hanbai). Therefore, in a possible structure for a project financing, (i) an Istina’a arrangement may be used in order to provide funds Foreign investors should take into account currency exchange risk, for the construction of the plant during the construction period, and

Japan since revenues generated by a project are generally paid in Japanese (ii) an Ijarah arrangement may be used in such a manner that the yen. financier leases the plant to a project company and receives the rent A wide variety of regulations will generally need to be considered during the operation period. In addition, (iii) a Wakala arrangement for the development of a project. Generally, applicable permits and/ may be used for syndication fund providers to provide funds to the or licences may differ depending on the site or facilities, and they project company through a financing special purpose vehicle. Also, are handled by the competent government and/or local government (iv) Murabaha financing would in theory be permissible to make having regulatory oversight of the subject matter. Administrative a working capital facility or equity bridge finance available to the officers sometimes have broad discretion on permits and/or licence project company. Note that in such cases, project participants may application procedures, and this may result in a certain degree of also be subject to their applicable regulatory restrictions (e.g., the unpredictability. Banking Act of Japan). If lenders to a project are not banks, loans for project financings will generally be subject to the Money Lending Business Act, which 19.2 In what circumstances may Shari’ah law become requires registration with the authority and compliance with other the governing law of a contract or a dispute? Have obligations. there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector? 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? We doubt that a Japanese court would recognise Shari’ah law as the Please briefly describe the local legal and regulatory governing law of a contract or dispute. No notable cases have been requirements for the issuance of capital market instruments. determined in this area.

Project bonds are considered securities and are therefore subject to 19.3 Could the inclusion of an interest payment obligation the Financial Instruments and Exchange Act. Offering securities to in a loan agreement affect its validity and/or the public will require filing securities registration statements and enforceability in your jurisdiction? If so, what steps following certain continuous disclosure obligations, unless exempt could be taken to mitigate this risk? under certain exceptions. In general, inclusion of an interest payment obligation does not affect the validity or enforceability of a loan agreement, although 19 Islamic Finance usury laws will apply.

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.

To the extent of our knowledge, Islamic project finance has not been used in Japan. However, Japanese law has a similar legal

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Kunihiro Yokoi Wataru Higuchi Anderson Mōri & Tomotsune Anderson Mōri & Tomotsune Akasaka K-Tower, 2–7 Akasaka K-Tower, 2–7 Motoakasaka 1-chome, Minato-ku Motoakasaka 1-chome, Minato-ku Tokyo 107-0051 Tokyo 107-0051 Japan Japan

Tel: +81 3 6888 1160 Tel: +81 3 6888 5830 Email: [email protected] Email: [email protected] URL: www.amt-law.com URL: www.amt-law.com Japan

Kunihiro Yokoi is a special counsel at Anderson Mōri & Tomotsune. Wataru Higuchi is a partner at Anderson Mōri & Tomotsune. Wataru He regularly advises on various project financings and engages in an Higuchi has been involved in a wide range of finance transactions, extensive range of legal matters for both domestic and international from structured finance to capital markets. Mr. Higuchi has particular clients, including energy and infrastructure projects, M&A, general expertise in various equity and bond offerings and structured finance corporate matters, PFI/PPP, various financial transactions, and transactions, including real estate securitisation and project finance employment. He also has experience from secondments to both transactions. In addition to his professional experience at Anderson domestic and overseas firms in handling contract negotiation and Mōri & Tomotsune, Mr. Higuchi has also worked for the Tokyo Stock project management. He lectures on domestic and international Exchange (from October 2012 to September 2013) as a secondee, project development and project financing, and his recent publications where he was in charge of listings of both Japanese and non-Japanese include The Energy Regulation and Markets Review (Fifth Edition), companies, exchange-traded funds, and Japanese real estate (Law Business Research Ltd, 2016) (co-author). investment trusts (J-REITs). He studied at Hitotsubashi University (LL.B.) and Columbia Law School (LL.M.) and is admitted to the Bar Mr. Yokoi is a graduate of the University of Tokyo (LL.B., 2002) and the in Japan and New York. He has particular expertise in asset-based University of California, Los Angeles, School of Law (LL.M., 2010). He finance, syndicated loan, securitisation and other structured finance is admitted in Japan (2003) and New York (2011). transactions.

The Project Finance practice at Anderson Mōri & Tomotsune frequently advises all parties involved in projects, including sponsors, project companies, domestic and international commercial lenders, export credit agencies, suppliers, contractors and governments. We provide comprehensive and practical legal advice on the successful structuring and implementation of major infrastructure projects in all sectors, including electricity, oil and gas, transport, water and telecommunications. We are able to draw on our firm’s expertise in complementary areas, such as Japanese corporate law and regulation, tax-effective structured financing and capital markets. In addition to our commitment throughout the entire duration of a project, we are able to exploit our international experience to recognise specific cultural, political or environmental issues, enabling the successful implementation of major cross-border and transnational projects. Our support also extends to energy and resources projects and PFIs, which are a relatively recent, but increasingly important, development in Japan. Anderson Mōri & Tomotsune is a pioneer in these transactions and we have been involved in many of the major projects in this field in Japan.

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Kenya Pamella Ager

Oraro & Company Advocates Juliet C. Mazera

a company include movable assets such as machinery and motor 1 Overview vehicles, then the financier would have a charge by way of debenture registrable in the Companies Registry. On the other hand, where the 1.1 What are the main trends/significant developments in security was to be over immovable property, for example land and/ the project finance market in your jurisdiction? or buildings, then Kenyan law requires that a charge be created over these particular immovable assets and be registered in the Lands Kenya has seen a lot of development in the project finance market, Registry. Third-party securities in the form of guarantees would particularly in the real estate, infrastructure and energy sectors. The entail the preparation of a separate security document. real estate market continues to experience tremendous growth, with the constant development of large-scale housing developments, 2.2 Can security be taken over real property (land), plant, malls and other commercial buildings. machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure? 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? Yes. In the case of a company, requisite board resolutions would need to be obtained from the company borrower authorising the A private limited liability company engaged in the business of creation of the security. A charge document would be prepared, advanced medical care, which was undertaking the construction of securing the financial obligations of the borrower to the financier. a hospital on land in Kiambu, recently entered into talks with a This charge would then be executed by all the parties in the presence development bank for the purposes of obtaining financing for the of an Advocate. Thereafter, the stamp duty, based on the amount aforementioned construction project for facilities amounting to secured, would be paid to the Commissioner of Domestic Taxes. In USD 30.5m. cases where the charge involves agricultural land, the consent of the Other notable project financings include: the financing of Kenya relevant land control board would have to be sought and obtained. Electricity Generating Company Limited (Kengen) by the European Further, where the charge involves leasehold property, the consent Investment Bank on a EUR 32.5m (USD 35.28m) project for the of the lessor would need to be obtained. Where the charge is over a expansion of Olkaria II Geothermal Power Station; the syndicated property belonging to a married individual, then the consent of the financing and development of the USD 160m 90 MW independent spouse would be obtained. The charge would thereafter be submitted power plant at Rabai in Kenya by the Emerging Africa Infrastructure for registration at the relevant Lands Registry, accompanied by a Fund, DEG and Proparco; the financing of the construction of rates clearance certificate from the relevant county government Radisson Blu Hotel, located in Nairobi’s Upper Hill, by Swedfund, (confirming that all land rates applicable have been paid in full) and, IFU, Finnfund (a Danish investment fund) and Norfund; and the in the case that the property is leasehold, a rents clearance certificate financing of Base Titanium Limited to the tune of USD 190m in (confirming that the applicable land rent has been paid on full). respect of its Kwale mineral sands project. Where the charge is created by a company, the charge would also have to be registered in the Companies Registry. 2 Security 2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the 2.1 Is it possible to give asset security by means of absence of a default and the debtors are not notified a general security agreement or is an agreement of the security? Briefly, what is the procedure? required in relation to each type of asset? Briefly, what is the procedure? Security can be taken over receivables. It is the practice in Kenya to either have a charge over the receivables or have a deed of In Kenya, a general financing agreement would be used, either assignment created over such receivables. Financiers are usually in the form of a loan agreement or facility agreement. Security advised to place an obligation on the borrower to notify the debtors documentation would differ depending on the type of security of such security. a financier has opted to obtain. For example, where the assets of

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of a provincial land control appeals board for every meeting 2.4 Can security be taken over cash deposited in bank which he attends; and a mileage allowance at prevailing accounts? Briefly, what is the procedure? Government rates shall be paid to unofficial members of a land control board. It will be appreciated that when a customer places a deposit with ■ Registration fees at the Lands Registry (if security is over a bank, that deposit represents a loan made to the bank. The bank immovable property) – KES 500. is the debtor and the customer the creditor. It had generally been ■ Filing fees at the Companies Registry (if the chargor is a recognised by legal practitioners that there was no difficulty in a company) – KES 600. bank taking a charge over a cash deposit held by it.

However, the legality of a charge over a cash deposit was not 2.7 Do the filing, notification or registration requirements Kenya accepted in the English case of Re Charge Card Services. This in relation to security over different types of assets judgment caused a major controversy in legal and banking circles in involve a significant amount of time or expense? England. The judge in this case argued that as the deposit represented a debt owed by the bank and grants the right for the depositor to sue Provided that the security documents have been duly executed the bank for its recovery, the debt cannot be assigned or taken as and consented to (where applicable) and the requisite stamp duty security, as a debtor – the bank – cannot sue for a debt it owes. The paid and rates and rents clearance certificates obtained, registration judge stated that it was “conceptually impossible” for a debtor to of securities at a Lands Registry may take a day, or even much take a charge over his own debt. longer. There have, however, been instances where a file relating to a particular property cannot be located, and this usually causes 2.5 Can security be taken over shares in companies significant delays in the registration process. It should benoted incorporated in your jurisdiction? Are the shares in that time varies from registry to registry depending on how busy certificated form? Briefly, what is the procedure? that particular registry usually is. It has been our experience that registration at the Companies Registry would take approximately Yes. Shareholders (especially those in private companies) are one week. usually granted share certificates in respect of the shares they own. If a company holds shares in another company and it wishes to offer 2.8 Are any regulatory or similar consents required with these shares to a financier as security, then a charge may be prepared respect to the creation of security over real property over these shares and registered in the Companies Registry. It (land), plant, machinery and equipment (e.g. pipeline, should, however, be noted that a company cannot create security whether underground or overground) etc.? over its own shares. In the case of shares owned by a natural person, it has been the practice in Kenya by most financial institutions to The Land Control Act requires that the consent of the relevant Land require the borrower to surrender the relevant share certificate to Control Board be obtained in cases where the land is agricultural. the financial institution. In addition, the borrower is required to The Land Registration Act requires that spousal consent be obtained execute a blank share transfer form and give the financial institution in cases where a spouse who holds land or a dwelling house in his authorisation to transfer the shares to any person in case of default. or her name individually undertakes a disposition of that land or dwelling house. 2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types 3 Security Trustee of assets (in particular, shares, real estate, receivables and chattels)? 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of The following are the charges payable in respect of a charge: a security trustee or agent and allow the security ■ Security documents are required to be prepared by an trustee or agent (rather than each lender acting Advocate and legal fees at the rate set out in the Advocates separately) to enforce the security and to apply the Remuneration Order are applicable. Attestation fees would proceeds from the security to the claims of all the also be payable to any Advocate witnessing the execution of lenders? the security documents. ■ The stamp duty payable is based on the amount secured by Yes, it will recognise such a role. the charge or debenture at the rate of 0.1%. In the case of a guarantee, the stamp duty payable is the nominal amount of KES 200. 3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available ■ Bank charges – KES 100. (such as a parallel debt or joint and several creditor ■ Lessor’s consent (if the relevant property is leasehold) – this status) to achieve the effect referred to above which varies from lessor to lessor. would allow one party (either the security trustee or ■ Land Control Board Consent (if the property is agricultural) the facility agent) to enforce claims on behalf of all – KES 1,000. In addition, the Land Control Act provides the lenders so that individual lenders do not need to enforce their security separately? that: an allowance of KES 500 inclusive of lunch shall be paid to each unofficial member of a land control board for every meeting which he attends; an allowance of KES 1,300 See question 3.1 above. inclusive of lunch shall be paid to each unofficial member

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advertised in such a manner and form as to bring it to the attention 4 Enforcement of Security of persons likely to be interested in bidding for the charged land and that the provisions relating to auctions and tenders for land are, as 4.1 Are there any significant restrictions which may near as may be, followed in respect of that sale. impact the timing and value of enforcement, such A chargee exercising the power of sale may, with leave of the as (a) a requirement for a public auction or the Court, purchase the property. A court shall not grant leave unless availability of court blocking procedures to other the chargee satisfies the Court that a sale of the charged land to the creditors/the company (or its trustee in bankruptcy/ liquidator), or (b) (in respect of regulated assets) chargee is the most advantageous way of selling the land. regulatory consents? The purchase money received by a chargee who has exercised the Kenya power of sale shall be applied in the following order of priority: Charges rank according to the order in which they are registered (a) first, in payment of any rates, rents, taxes, charges or other unless so provided in the charge instrument. sums owing and required to be paid on the charged land. The Land Act sets out the remedies available to a charge in the event The Rating Act provides that any land rates due in respect of land shall be a charge against the land on which the rate was of default. If a chargor fails to pay interest or any other periodic levied; and the charge shall take priority; payment due under any charge, and continues to be in default for one month, the chargee may serve on the chargor a notice, in writing, to (b) second, in discharge of any prior charge or other encumbrance subject to which the sale was made; pay the money owing. If the chargor does not comply within two months after the date of service of the notice, the chargee may: (c) third, in payment of all costs and reasonable expenses properly incurred and incidental to the sale or any attempted (a) sue the chargor for any money due and owing under the sale; charge; (d) fourth, in discharge of the sum advanced under the charge (b) appoint a receiver of the income of the charged land; or so much of it as remains outstanding, interests, costs and (c) lease the charged land, or if the charge is of a lease, sublease all other money due under the charge, including any money the land; advanced to a receiver in respect of the charged land; and (d) enter into possession of the charged land; or (e) fifth, in payment of any subsequent charges in order of their (e) sell the charged land. priority, and the residue, if any, of the money so received shall be paid to the person who, immediately before the sale, In the event that a charge opts to appoint a receiver, the chargee was entitled to discharge the charge. shall serve a notice in the prescribed form on the chargor and shall not proceed with the appointment until a period of 30 days, from the date of the service of that notice, has elapsed. 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related In the event that a chargee opts to exercise the power to sell the companies? charged land, the chargee shall serve on the chargor a notice to sell in the prescribed form and shall not proceed to complete any See question 4.1 above. contract for the sale of the charged land until at least 40 days have elapsed, from the date of the service of that notice to sell. The notice is required to be served on several people, including: 5 Bankruptcy and Restructuring (a) the Commission, if the charged land is public land; Proceedings (b) the holder of the land over which the lease has been granted, if the charged land is a lease; (c) a spouse of the chargor who had given the consent; 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender (d) any lessee and sub-lessee of the charged land or of any to enforce its rights as a secured party over the buildings on the charged land; security? (e) any person who is a co-owner with the chargor; (f) any other chargee of money secured by a charge on the The recently enacted Insolvency Act provides that if the property of charged land of whom the chargee proposing to exercise the a bankrupt is subject to a charge, the creditor who holds the charge power of sale has actual notice; may choose either of the following options: (g) any guarantor of the money advanced under the charge; (a) to realise the property by having it sold (but only if the (h) any other person known to have a right to enter on and use the creditor is entitled to do so under the terms of the charge); land or the natural resources in, on, or under the charged land (b) to have the property valued and prove in the bankruptcy as an by affixing a notice at the property; and unsecured creditor for the balance due (if any) after deducting (i) any other persons as may be prescribed by regulations, and the amount of the valuation; or shall be posted in a prominent place at, or as near as possible (c) to surrender the charge to the bankruptcy trustee for the to, the charged land. general benefit of the creditors and prove in the bankruptcy A chargee shall, before exercising the right of sale, ensure that a as an unsecured creditor for the whole debt. forced sale valuation is undertaken by a valuer. The price at which The bankruptcy trustee may at any time, by notice, require a creditor the charged land is sold should not be 25% or below the market who holds a charge over a bankrupt’s property: value at which comparable interests in land of the same character (i) within 30 days after receipt of the notice, to choose one of the and quality are being sold in the open market. options above; and If a chargee or a receiver becomes entitled to exercise the power of (ii) if the creditor chooses option (b) or (c), to exercise the chosen sale, that sale may be by private contract at market value or public option within that period. auction with reserve price. If a sale is to proceed by public auction, A creditor who fails to comply with the notice is taken to have it shall be the duty of the chargee to ensure that the sale is publicly surrendered the charge to the bankruptcy trustee under option (c) for

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the general benefit of the creditors, in which case the creditor may prove as an unsecured creditor for the whole debt. 5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of Further, the Insolvency Act provides that if property of a bankrupt is the project company in an enforcement? subject to a security, the bankruptcy trustee may make an application to the Court for an order enabling the bankruptcy trustee to dispose The Land Act sets out the remedies available to a chargee in the event of the property as if it were not subject to the security, but only if it is of default. If a chargor fails to pay interest or any other periodic satisfied that the disposal of the property would be likely to provide payment due under any charge and continues to be in default for one a better overall outcome for the creditors of the bankrupt. month, the chargee may serve on the chargor a notice, in writing, to pay the money owing. If the chargor does not comply within two 5.2 Are there any preference periods, clawback rights months after the date of service of the notice, the chargee may: Kenya or other preferential creditors’ rights (e.g. tax debts, (a) sue the chargor for any money due and owing under the employees’ claims) with respect to the security? charge; (b) appoint a receiver of the income of the charged land; The Insolvency Act provides that debts of a person who is adjudged (c) lease the charged land, or if the charge is of a lease, sublease bankrupt or of a company that is in liquidation are payable in the the land; following order of priority: (d) enter into possession of the charged land; or (a) The expenses of the bankruptcy or liquidation will have first priority. (e) sell the charged land. (b) The following debts will have second priority: ■ all wages or salaries payable to employees in respect of 5.5 Are there any processes other than formal insolvency services provided to the bankrupt or company during the proceedings that are available to a project company to four months before the commencement of the bankruptcy achieve a restructuring of its debts and/or cramdown or liquidation; of dissenting creditors? ■ any holiday pay payable to employees on the termination of their employment before, or because of, the No, there are no other processes of this nature available. commencement of the bankruptcy or liquidation; ■ any compensation for redundancy owed to employees that 5.6 Please briefly describe the liabilities of directors (if accrues before, or because of, the commencement of the any) for continuing to trade whilst a company is in bankruptcy or liquidation; financial difficulties in your jurisdiction. ■ amounts deducted by the bankrupt or company from the wages or salaries of employees in order to satisfy their Such directors are liable to imprisonment if convicted. obligations to other persons (including amounts payable to the Kenya Revenue Authority in accordance with the Income Tax Act); 6 Foreign Investment and Ownership ■ any reimbursement or payment provided for, or ordered Restrictions by the Industrial Court under the Labour Institutions Act, 2007 to the extent that the reimbursement or payment does not relate to any matter specified in the Labour 6.1 Are there any restrictions, controls, fees and/or taxes Relations Act, 2007 in respect of wages or other money on foreign ownership of a project company? or remuneration lost during the four months before the commencement of the bankruptcy or liquidation; No. However, a company whose shareholders are not Kenyan cannot ■ amounts that are preferential claims under section 175(2) own agricultural land, freehold land or leasehold property whose and (3); and term exceeds 99 years. There are also restrictions as to foreign ■ all amounts that are, by any other written law, required shareholding in the banking, insurance and telecommunications to be paid, in accordance with the priority established by industries. this subparagraph, by a buyer to a seller on account of the purchase price of goods. 6.2 Are there any bilateral investment treaties (or other (c) The following debts will have third priority: international treaties) that would provide protection ■ tax deductions made by the bankrupt or company under from such restrictions? the “pay as you earn” rules of the Income Tax Act; ■ non-resident withholding tax deducted by the company No, there are no such treaties. under the Income Tax Act; ■ resident withholding tax deducted by the company under the Income Tax Act; and 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are ■ duty payable within the meaning of section 2(l) of the any forms of investment specially protected? Customs and Excise Act. There are no laws regarding the nationalisation and expropriation of 5.3 Are there any entities that are excluded from project companies or assets. The Constitution protects the right to bankruptcy proceedings and, if so, what is the private property, save in the case where such property needs to be applicable legislation? compulsorily acquired for the public benefit. The aggrieved party is entitled to compensation at the prevailing market rates. No entities are excluded from such proceedings.

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currency. Therefore, the exchange rate between the Kenyan Shilling 7 Government Approvals/Restrictions and any other currency is determined by market forces, subject of course to interventions from time to time by the Central Bank of 7.1 What are the relevant government agencies or Kenya. The Central Bank of Kenya and the commercial banks departments with authority over projects in the typical usually publish the exchange rates applicable on a day-to-day basis. project sectors?

7.6 Are there any restrictions, controls, fees and/or taxes The relevant agency is the Kenya Investment Authority, whose role on the remittance and repatriation of investment is to assist and facilitate investments in Kenya. Its main functions returns or loan payments to parties in other

Kenya are to promote investments in Kenya by local and foreign business jurisdictions? enterprises, to liaise with the relevant Ministries responsible for approving all new private sector projects and expansion of existing Kenya does not have exchange control laws in force since the repeal projects, to assist business enterprises in implementing the projects of the Exchange Control Act in December 1995. However, the approved by the relevant Ministries and, generally, to assist all Central Bank of Kenya Act (the “CBK Act”) establishes the Central business enterprises in overcoming managerial, institutional and Bank of Kenya (the “CBK”). Under the CBK Act, the CBK is bureaucratic problems. empowered to formulate and implement foreign exchange policy in Kenya and it is provided under Section 33I of the CBK Act that: 7.2 Must any of the financing or project documents be “The Bank may, in consultation with the Minister, impose registered or filed with any government authority or restrictions on payment for the purposes of enabling the otherwise comply with legal formalities to be valid or Government of Kenya meet its obligations under any enforceable? international treaty.” According to Central Bank Circular No. 12 of 1996 – “Revised Financing and project documents would need to be stamped in Foreign Currency Transaction Guidelines to Authorised Banks”, respect of the applicable stamp duty payable. commercial banks were assigned a monitoring role by the CBK and each commercial bank is required to submit returns to CBK 7.3 Does ownership of land, natural resources or a on a regular basis. Foreign currency is freely repatriable from pipeline, or undertaking the business of ownership or Kenya, provided there is written evidence of an underlying business operation of such assets, require a licence (and if so, transaction and the respective bank handling the repatriation is can such a licence be held by a foreign entity)? satisfied as to the genuineness of the transaction. However, for any amount equivalent to USD 500,000 or more, the CBK has requested In the case of land and/or immovable property, an owner is usually that a commercial bank first consult with them as to the amount provided with a document of title, and this could either be a Grant, and purpose of the remittance. This is stated to be for statistical a Certificate of Title, a Title Deed or a Lease. There is a restriction purposes. For any amount below the equivalent of USD 10,000, on foreign ownership of freehold land, leases exceeding 99 years commercial banks are not required to obtain any documentary and agricultural land. evidence to back the transaction, although in certain cases banks The Constitution, the Mining Act and the Petroleum (Exploration will nonetheless seek an explanation. and Production) Act all provide that natural resources in the form The Foreign Investments Protection Act provides that a foreign of minerals and petroleum belong to the Government of Kenya. national who proposes to invest foreign assets in Kenya may apply An interested party may obtain a prospecting right or licence to the Cabinet Secretary in charge of finance, for a certificate that from the Government in respect of such natural resources. There the enterprise in which the assets are proposed to be invested is an are currently no restrictions on foreign ownership of companies approved enterprise. The Cabinet Secretary shall consider every intending to undertake such businesses. application made and, in any case in which he is satisfied that the To undertake a business in Kenya, the business entity would need enterprise would further the economic development of, or would to apply for a single business permit in addition to the licences that be of benefit to Kenya, he may in his discretion issue a certificate may be required in the particular economic sector. to the applicant. The holder of a certificate may, in respect of the approved enterprise to which such certificate relates, transfer out of 7.4 Are there any royalties, restrictions, fees and/or Kenya in the approved foreign currency and at the prevailing rate taxes payable on the extraction or export of natural of exchange: resources? (a) the profits, including retained profits which have not been capitalised, after taxation, arising from or out of his Yes. There are applicable fees which one must pay to obtain a mining investment in foreign assets, provided that any increase in licence or a petroleum exploration licence. One must obtain a licence the capital value of the investment arising out of the sale of from the relevant authorities in order to be allowed to export extracted the whole or any part of the capital assets of the enterprise or minerals or petroleum out of Kenya. There are also royalties that revaluation of capital assets shall not be deemed to be profit arising from or out of the investment for the purposes of the are payable in respect of extracted natural resources. For example, Foreign Investments Protection Act; the Mining Regulations provide that “there shall be payable on all diamonds originating in Kenya an ad valorem royalty of fifteen per (b) the capital specified in the certificate as representing and centum of the gross value thereof as assessed by an approved valuer being deemed to be the fixed amount of the equity of the holder of the certificate in the enterprise for the purpose of appointed under the Diamond Industry Protection Regulations”. this Act, provided that: ■ where any amendment or variation is made in the amount 7.5 Are there any restrictions, controls, fees and/or taxes of the said capital, the amended or varied amount shall be on foreign currency exchange? substituted for the original amount; and ■ no additional amount or sum shall be added to the Kenya does not operate a fixed exchange rate against any foreign capital specified in the certificate (as amended or varied)

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to represent any increase in the capital value of the investment since the issue of the certificate or since the 8 Foreign Insurance last amendment or variation of the certificate; and (c) the principal and interest of any loan specified in the 8.1 Are there any restrictions, controls, fees and/or taxes certificate. on insurance policies over project assets provided or guaranteed by foreign insurance companies? 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore There are no restrictions against insurance policies over project accounts in other jurisdictions? assets provided or guaranteed by foreign insurance companies.

There may be VAT implications as the provision of insurance by a Kenya Yes, they can. foreign company may be deemed to be an imported service.

7.8 Is there any restriction (under corporate law, 8.2 Are insurance policies over project assets payable to exchange control, other law or binding governmental foreign (secured) creditors? practice or binding contract) on the payment of dividends from a project company to its parent Yes, they are. company where the parent is incorporated in your jurisdiction or abroad? 9 Foreign Employee Restrictions No, there is no such restriction.

9.1 Are there any restrictions on foreign workers, 7.9 Are there any material environmental, health and technicians, engineers or executives being employed safety laws or regulations that would impact upon a by a project company? project financing and which governmental authorities administer those laws or regulations? Such workers would need to apply for and obtain visas (where applicable) and any requisite work permits. Yes. The Environmental Management and Co-ordination Act (the “EMCA”) requires a project proponent to carry out an environmental impact assessment study and submit a project report 10 Equipment Import Restrictions “before financing, commencing, proceeding with, carrying out...or causing to be financed, commenced, proceeded with, carried out...” any undertaking of certain projects, including mining, activities out 10.1 Are there any restrictions, controls, fees and/or taxes of character with their surroundings, and major changes in land use. on importing project equipment or equipment used by construction contractors? The EMCA requires the owner of premises or the operator of a project to take all reasonable measures to mitigate any undesirable There are no restrictions on importing project equipment. Applicable effects not contemplated in the environmental impact assessment customs duty would, however, be payable. study report, and shall prepare and submit an environmental audit report on those measures to the National Environment Management The Import Declaration Fee was recently lowered to 2% from 2.25% Authority (“NEMA”) annually or as NEMA may in writing require. of Cost Insurance and Freight. The EMCA provides that no owner or operator of any trade or Goods and services for the construction of infrastructure works in industrial undertaking shall discharge any effluents or other industrial and recreational parks of 100 acres or more in Nairobi, pollutants into the environment without an effluent discharge licence Nakuru, Kisumu, Mombasa and Eldoret are VAT-exempt. issued by NEMA. The EMCA defines “effluent” to mean “gaseous waste, water or liquid or other fluid of domestic, agricultural, trade 10.2 If so, what import duties are payable and are or industrial origin treated or untreated and discharged directly or exceptions available? indirectly into the aquatic environment”. The Customs and Excise Act contains an extensive list of the items 7.10 Is there any specific legal/statutory framework for attracting import duty. In terms of exceptions, the Customs and procurement by project companies? Excise Act also contains quite an extensive list of the institutions and persons that enjoy exemptions in respect of various items as This is governed by the Public Procurement and Disposal Act indicated in the Act. (which establishes procedures for efficient public procurement and for the disposal of unserviceable, obsolete or surplus stores, assets 11 Force Majeure and equipment by public entities) and the Public Private Partnership Act (which provides for: the participation of the private sector in the financing, construction, development, operation, or maintenance 11.1 Are force majeure exclusions available and of infrastructure or development projects of the Government enforceable? through concession or other contractual arrangements; and the establishment of the institutions to regulate, monitor and supervise Yes. These would have to be set out in the applicable contracts. the implementation of project agreements on infrastructure or development projects).

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12 Corrupt Practices 15.3 Are any types of disputes not arbitrable under local law?

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting Disputes involving matters that are criminal in nature are not the projects sector)? What are the applicable civil or arbitrable under local law. criminal penalties? 15.4 Are any types of disputes subject to mandatory The Anti-Corruption and Economic Crimes Act provides for the domestic arbitration proceedings? prevention, investigation and punishment of corruption, economic Kenya crime and related offences. There are several offences under this No, they are not. Act and each offence attracts a penalty. Penalties range from fines of KES 300,000 to KES 2M, to maximum prison sentences ranging from three years to 10 years. 16 Change of Law / Political Risk

13 Applicable Law 16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees? 13.1 What law typically governs project agreements? Generally, letters of undertaking and guarantees are the two most Project agreements are typically governed by contract, save in the common commitments that the Government formally issues to case where one of the parties is the Government, a state corporation guarantee payments. The Public Finance Management Act and the or a county government, in which case provisions of statutes Public Private Partnerships Act, read together with the Constitution of such as the Constitution, the Government Contract Act, the State Kenya, recognise guarantees by the Government subject to specified Corporations Act, the County Governments Act, Public Private conditions prescribed thereunder. The choice as to which one it Partnerships Act and the Public Procurement and Disposal Act, issues will depend on the circumstances of each case. Although both would need to be considered. can be binding in law, there is some doubt over the enforceability of letters of undertaking, especially considering that the Public Finance Management Act is silent on the same, though the Public 13.2 What law typically governs financing agreements? Private Partnerships Act provides for their issuance, albeit vaguely. A guarantee may, in the context of the present legal framework, Financing agreements are typically governed by contract law. be preferable and recommended. Once issued, the Public Finance Management Act provides that no further parliamentary authorisation 13.3 What matters are typically governed by domestic law? shall be necessary for payment under a guarantee, and that the same shall be a charge on the consolidated fund. Under the Public Finance Contracting parties have the freedom to choose the governing law in Management Act, issuance of a guarantee is the prerogative of the respect of their contract. Parties would, however, still have to adhere Cabinet Secretary responsible for Finance. Once the guarantee is to the laws of the land in respect of various aspects of their project, issued, parliament is required to approve it. including but not limited to land, employment and companies. 17 Tax 14 Jurisdiction and Waiver of Immunity

17.1 Are there any requirements to deduct or withhold tax 14.1 Is a party’s submission to a foreign jurisdiction and from (a) interest payable on loans made to domestic or waiver of immunity legally binding and enforceable? foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? Yes, it is. Interest to be paid on loans from foreign lenders for the purposes of investing in the energy or water sectors, or in roads, ports, railways 15 International Arbitration or aerodromes, are exempt from tax. Further, instruments (including charges, debentures and guarantees) executed with respect to the transactions relating to loans from 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral foreign sources received by investors in the infrastructure (energy, awards recognised by local courts? roads, ports, water, railways and aerodromes) development sector, shall be exempted from the provisions of the Stamp Duty Act. Yes, they are. 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What 15.2 Is your jurisdiction a contracting state to the New York taxes apply to foreign investments, loans, mortgages Convention or other prominent dispute resolution or other security documents, either for the purposes conventions? of effectiveness or registration?

Yes, it is. See question 17.1 above.

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18 Other Matters 19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional 18.1 Are there any other material considerations which issues, the applicability of Shari’ah or the conflict of should be taken into account by either equity Shari’ah and local law relevant to the finance sector? investors or lenders when participating in project financings in your jurisdiction? The Constitution is the supreme law of Kenya. Islamic finance products, on the other hand, are to be governed by Shari’ah. Equity investors and/or lenders should undertake due diligence investigations on a particular project and/or project company before In Kenya, the Judiciary is the arm of the Government that interprets Kenya advancing any funds. The due diligence exercise should cover the the law. legal and financial status of the companies that the investors or Article 170(5) of the Constitution states that the jurisdiction of a lenders would be contracting with. Kadhis’ court shall be limited to the determination of questions of Muslim law relating to personal status, marriage, divorce or inheritance in proceedings in which all the parties profess the 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Muslim religion and submit to the jurisdiction of the Kadhis’ courts. Please briefly describe the local legal and regulatory As such, the jurisdiction of the Kadhis’ court does not extend to requirements for the issuance of capital market contractual relations. The Kadhis’ Courts Act further reiterates instruments. this point by providing that a Kadhis’ court shall have and exercise jurisdiction over the determination of questions of Muslim law There are legal impositions on project companies issuing bonds or relating to personal status, marriage, divorce or inheritance in capital market instruments in Kenya. The local legal and regulatory proceedings in which all the parties profess the Muslim religion. requirements for the issuance of capital markets instruments are set The Judicature Act provides the sources of law in Kenya which out in the Capital Markets Act. The Capital Markets Act prohibits include the Constitution, written laws, the substance of the common any person from carrying on business as a stockbroker, derivatives law, the doctrines of equity and the statutes of general application in broker, real estate investment trust (“REIT”) manager, trustee, force in England on 12 August 1897, and African customary law. It dealer, investment adviser, fund manager, investment bank, central should be noted that Shari’ah, Islamic or Muslim law is not referred depository, authorised securities dealer, authorised depository, or to in the Judicature Act. Therefore, although a contract may be from holding himself out as carrying on such a business unless he prepared in accordance with Shari’ah, the governing law will be holds a valid licence issued under the Capital Markets Act or under Kenyan, as Kenya does not recognise Shari’ah law as governing the authority of the Capital Markets Act. contracts in Kenya. To our knowledge, there have not been any notable cases to date 19 Islamic Finance over jurisdictional matters pertaining to Shari’ah law.

19.3 Could the inclusion of an interest payment obligation 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha in a loan agreement affect its validity and/or instruments might be used in the structuring of an enforceability in your jurisdiction? If so, what steps Islamic project financing in your jurisdiction. could be taken to mitigate this risk?

Istina’a – This instrument may be used in the manufacturing Islamic finance prohibits the charging or payment of interest. industry and also in infrastructure projects. Consequently, Kenya, in an attempt to regulate Islamic banking Ijarah – An Ijarah may be used in a construction project where the operations and products, made slight changes to its Banking Act. financier would be involved in the construction of the development, Initially, the Banking Act only made reference to “interest”. The then subsequently lease out the property to the end consumer, Banking Act was subsequently amended in 2008 by adding the with the end consumer’s last instalment being used as the amount phrase “or a return in the case of an institution carrying out business required to purchase the property. in accordance with Islamic law” when referring to interest chargeable Wakala – This can be used where a company acts as the agent for on a savings account. It would be interesting to see what the courts a financier or lender by investing the funds from that financier or would determine in cases where an interest payment obligation was lender. The company may choose to invest the funds in different included in a loan agreement that is meant to be Shari’ah-compliant. projects, and profits and losses would be shared equally by both parties. Murabaha – This could be used to finance the movable assets that may be used in a project; for example, motor vehicles.

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Pamella Ager Juliet C. Mazera Oraro & Company Advocates Oraro & Company Advocates ACK Garden Annex ACK Garden Annex 6th Floor, 1st Ngong Avenue 6th Floor, 1st Ngong Avenue Nairobi Nairobi Kenya Kenya

Tel: +254 20 271 3636 Tel: +254 20 271 3636 Email: [email protected] Email: [email protected] URL: www.oraro.co.ke URL: www.oraro.co.ke Kenya As head of the Corporate & Commercial, Real Estate, Conveyancing Juliet’s legal career spans around 10 years. She has a wealth and Securities teams, Pamella has been part of various Kenyan of expertise in banking & finance, employment law, energy, ground-breaking commercial transactions; for instance, the environmental, intellectual property, mergers & acquisitions and real privatisation of Mumias Sugar. She also acted in a flotation exercise estate. One of her career highlights is that she has advised Kenya’s by KCB (Kenya’s biggest bank, in network terms), two successful leading fully-fledged Islamic bank on several matters and has spoken rights issues for KCB, the IPO of KenGen and the development of at various events on Islamic finance topics. Other than her niche Kenya’s Central Depository and Settlement Corporation. Pamella in Islamic finance, she has also advised on several infrastructure specialises in the following areas: banking & finance; capital markets; projects. In addition, she has worked with a number of Savings and conveyancing; mergers & acquisitions; and regulatory work. Pamella Credit Cooperative Organisations (“SACCOs”), oil and gas clients and is recognised for her breadth of expertise, and has served as a foreign investors, on a variety of issues. Lecturer at the University of Nairobi’s renowned Faculty of Law. In addition, she holds an LL.M. degree from Auckland University.

Established 38 years ago by George Oraro SC (one of Kenya’s top litigators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm. The firm’s areas of strength include Corporate & Commercial, Dispute Resolution, Intellectual Property, Real Estate, Conveyancing & Securities and Tax. Its partnership includes some of Kenya’s best legal minds and its lawyers are recognised by several international leading legal directories. The firm is also well-recognised for its contribution to Kenyan jurisprudence (through its formidable dispute resolution team), work on some of Kenya’s largest deals and its significant contributions to Kenya’s legal profession. The firm’s corporate and commercial team specialises in all aspects of transactional work such as banking and finance, capital markets, corporate finance, corporate regulatory work, energy law, mergers & acquisitions and project finance. It also has Islamic finance capabilities and has advised Islamic finance clients on a variety of matters, including Shari’ah compliance.

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Mozambique Paula Duarte Rocha

Henriques, Rocha & Associados, Sociedade de Advogados, Lda Ana Berta Mazuze

It is also notable that Italian oil company ENI approved the 1 Overview investment related to the first phase of its LNG production plant, whose development plan had already been approved by the 1.1 What are the main trends/significant developments in government in February 2016. the project finance market in your jurisdiction? Approval of this investment by ENI is a fundamental step for the final investment decision of the project, which will be effective after Mozambique has been experiencing a reduction in foreign approval of the project and its financing by the remaining partners investment inflows since late 2015. Low commodity prices, plus the of Area 4, a process currently under way. withdrawal of funding by international donors due to “hidden” debts With the beginning of the operation of this project, it is believed that contracted by the Government, have slowed the country’s economy several investments will emerge. and growth trend. In 2016 the country’s economy grew a mere 3.3%, half the growth registered in 2015. 2 Security Reserves of foreign currency dropped considerably and high interest rates are discouraging local borrowing. At the same time, the Bank 2.1 Is it possible to give asset security by means of of Mozambique’s measures to control inflation have put a strain on a general security agreement or is an agreement the economy and increased the cost of local funding. required in relation to each type of asset? Briefly, what is the procedure? The Standing Lending Facility was raised 200 base points, from 10.75% to 12.75%. The Standing Deposit Facility rose by 150 base points from 4.25% to 5.75%. The Compulsory Reserves Coefficient As a general rule, the creditor right in rem determines the type of for reserves in foreign currency rose to 15%. security being created. The majority of the securities available are created and perfected through a written agreement between the With the inflation rate decelerating (since January 2017) and the debtor and creditor, with the respective signatures certified by a stability of the metical vis-à-vis the other currencies, the Bank of notary public. Mozambique has been implementing measures aiming to prevent a further rise in inflation and restore the country’s economic stability. Immovable and real estate property and movable assets subject to registration (vehicles, vessels and aircrafts) are mortgaged, whilst The annual limit on payments abroad using international debit and movable assets that cannot be mortgaged and rights (such as credits credit cards, set last year at 700,000 meticais (about US$10,000 or shareholdings) are pledged. at current exchange rates) per person is now revoked. Limits for payments abroad will now be established by commercial banks. For mortgages, the debtor and creditor are required to sign a deed in the presence of a notary public, which deed must be subsequently A new interest rate to the interbank money market, called the registered with the applicable registrar, depending on the asset monetary policy rate, has now been introduced. being mortgaged (real estate property, vehicles, vessels or aircraft Mozambique’s ability to attract large investment projects in natural registrars). resources is still expected to sustain high growth rates in coming Pledges are not subject to special formalities (other than a written years. The 2017 forecast for growth is still conservative at 5.5%, document); neither are they subject to any type of public registry, with inflation expected to stabilise at 14%. except in the case of pledges of securities.

1.2 What are the most significant project financings that 2.2 Can security be taken over real property (land), plant, have taken place in your jurisdiction in recent years? machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the The main relevant projects remain the same as last year and include: procedure? the Moatize coal mines; Palma’s LNG production plant; the gas fields/ pipeline of Pande and Temane; Moma and Chibuto’s heavy mineral There is no private ownership of land in Mozambique as the sands projects; Ressano Garcia’s thermal power plant; Nacala’s deep- Mozambican Constitution contains the fundamental principle that water port; the Maputo–Catembe Bridge; the Ressano Garcia–Matola the land belongs to the State. gas distribution network; and the Mozal aluminium plant.

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Private persons – either Mozambican or foreign – may, however, be notary public and applicable registrar charges, plus Stamp Duty, granted the right to exploit and use the land (a “DUAT”) and become which is assessed on all documents, contracts, books, papers and owners of any buildings, premises or other immovable assets built deeds designated in a Schedule that is attached to, and forms an on the land to which the DUAT relates, and may create mortgages integrated part of, the “Stamp Duty Code”. over such assets. Calculation of notarisation and registration fees are based on variable Machinery and equipment in an immovable asset, such as in a plant, percentages, depending on the loan amount/secured amount and the may be granted as security together with the immovable asset and number of pages of the deed (where applicable). under a “general mortgage” deed – without the need to enter into a For short-term securities (created for a period of less than a year) a separate pledge agreement – which must include a list allowing for fixed rate of 0.02% is charged, plus a fixed fee charged by the notary clear identification of the plant, machinery and equipment included upon certification of the signatures in the document creating the in and subject to the mortgage. security. For securities created for a period equal to or exceeding Mozambique one year, a rate of 0.2% is charged, plus the notary fixed fee for 2.3 Can security be taken over receivables where the certification of the signatures in the document. For securities chargor is free to collect the receivables in the without a term or for a term exceeding five years, a rate of 0.3% is absence of a default and the debtors are not notified charged plus the notary fee already referenced. of the security? Briefly, what is the procedure? Stamp Duty on mortgages and pledges is charged at 0.3% of the total amount secured, plus a fixed fee charged by the notary (per The most common form of security over claims and receivables page of the mortgage, as this security is created through signature of is a pledge. In general, securities over claims and receivables can a public deed, as referenced in question 2.1 above), plus a variable only be constituted over existing (present) claims and by an entity fee on each thousand of the amount secured. which is the owner of the same and is duly entitled to transfer them, meaning that the creation of said securities over future claims and receivables is not permitted. 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets Pledges over claims and receivables are created by a written involve a significant amount of time or expense? agreement between the parties like any other pledge, with the particularity that the debtor must be notified or accept the pledge of Filing, notification and registration procedures before the relevant the credit or receivables in order for the security to become effective. authorities (notary public and registrars) are straightforward and do not involve a significant amount of time. 2.4 Can security be taken over cash deposited in bank Stamp Duty costs, however, are often assessed as a “deal-breaker”. accounts? Briefly, what is the procedure?

A pledge over cash deposited in bank accounts is deemed a pledge 2.8 Are any regulatory or similar consents required with of credits or receivables. Please see question 2.3 above. respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.? 2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in The creation of security over assets which are in the private domain certificated form? Briefly, what is the procedure? does not, in general, require any regulatory or similar consents. Securities over public domain assets are generally not allowed or Pledging shareholding rights in a joint-stock company (“sociedade restricted. These restrictions include governmental consent and/or anónima”), wherein the shareholding is represented by nominative approval, imposed through sector-specific regulations, the relevant shares and the creation and perfection of the security, requires the concession contracts or general public administration laws. endorsement of the share certificates by the pledger (debtor), the registration of the pledge in the company’s share register book and the delivery of the share certificates to the pledgee (creditor); should 3 Security Trustee the shares be warrant-to-bearer, the delivery of the shares to the pledgee is sufficient for the creation and perfection of the security. Pledging rights in a private limited liability company (“sociedade 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of por quotas”) in which the shareholding is represented by quotas a security trustee or agent and allow the security (corresponding to percentages of the company share capital and trustee or agent (rather than each lender acting not materialised in share certificates) requires and is subject to the separately) to enforce the security and to apply the execution of a pledge agreement between the debtor and the creditor, proceeds from the security to the claims of all the the notification of the company of the creation of the pledge (if prior lenders? consent is not required by the company and/or by the shareholders for creation of the pledge) and the registration of the pledge with the Securities may be held and enforced on behalf of third parties Commercial Registry Office. acting via an acting agent (or security trustee), and intercreditor arrangements to accommodate recognition of this role are common in Mozambique. 2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?

Costs and taxes to create and perfect any type of securities include

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3.2 If a security trust is not recognised in your 5.2 Are there any preference periods, clawback rights jurisdiction, is an alternative mechanism available or other preferential creditors’ rights (e.g. tax debts, (such as a parallel debt or joint and several creditor employees’ claims) with respect to the security? status) to achieve the effect referred to above which would allow one party (either the security trustee or Creditors are generally paid from the proceeds of the sale and in the the facility agent) to enforce claims on behalf of all following order: (i) employment credits; (ii) secured credits; (iii) tax the lenders so that individual lenders do not need to enforce their security separately? credits; (iv) ordinary credits; (v) contractual and tax penalties; and (vi) subordinated credits. Please see question 3.1 above. In case of different securities granted over the same asset, the prior in tempore, potior in iure principle applies, and the first (older) creditor

shall be paid first, except in the case of the right of retention. Where Mozambique 4 Enforcement of Security the security is subject to registration, the prior in tempore, potior in iure principle is assessed by reference to the date of registration.

4.1 Are there any significant restrictions which may Moreover, certain creditors are entitled. The right of retention impact the timing and value of enforcement, such (“direito de retenção”) or lien entitles creditors to retain certain assets as (a) a requirement for a public auction or the in their possession until their credit is paid, prevailing over common availability of court blocking procedures to other credits and credits secured by pledges/mortgages even if the latter creditors/the company (or its trustee in bankruptcy/ were already created at the time the right of retention/lien arises. liquidator), or (b) (in respect of regulated assets) regulatory consents? Whenever different unsecured creditors concur, and if there are no legitimate preferential rights or a security-sharing agreement Where a mortgage is in place, the enforcement of the security either providing otherwise, creditors have the right to be paid on a pro rata by the creditor or its agent (or security trustee) must be effected by basis when the debtor’s assets are not enough to satisfy the credit. means of proper judicial proceedings. In the case of pledges, the sale (the usual means to retrieve the 5.3 Are there any entities that are excluded from amount equivalent to the debt) may be performed – either by the bankruptcy proceedings and, if so, what is the creditor or its agent (or security trustee) – either judicially or, when applicable legislation? previously agreed by the parties, by means of a private sale. Bankruptcy proceedings are generally applicable to all persons or Usually, an irrevocable power of attorney is granted to the creditor, legal entities, except to the State and public entities and companies. under which the creditor is entitled to sell the secured asset on behalf Furthermore, insurance companies, credit institutions as well as of the debtor and be paid from the proceeds of such sale. financial corporations are subject to specific insolvency rules and proceedings. 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies? 5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement? In essence, transactions with and/or between entities of foreign nationality must be approved by, and registered with, the Bank of Please refer to question 5.2 above, regarding the “right of retention” Mozambique. Provided that this requirement has been met, the (“direito de retenção”). remittance of proceeds in the event of foreclosure is permitted.

5.5 Are there any processes other than formal insolvency 5 Bankruptcy and Restructuring proceedings that are available to a project company to Proceedings achieve a restructuring of its debts and/or cramdown of dissenting creditors?

5.1 How does a bankruptcy proceeding in respect of the The Mozambique bankruptcy and recovery regime provides for project company affect the ability of a project lender extra-judicial recovery proceedings, which serve the purpose to enforce its rights as a secured party over the of securing an agreement between the company which may be security? insolvent or becoming insolvent, and its creditors. In practice, this involves an arrangement between the company and all or part of its A debtor’s declaration of insolvency triggers the automatic maturity creditors. Note that the company must meet some requirements in of all the debts of the debtor and involves: an automatic stay on order to be eligible for this type of procedure. assets (i.e., secured creditors cannot gain possession of a secured asset or “sell” such asset separately in order to be paid); the inability of the debtor to carry out any business activities and to administer or 5.6 Please briefly describe the liabilities of directors (if dispose of its assets; and the unenforceability of certain transactions any) for continuing to trade whilst a company is in related to the debtor carried out immediately prior to the declaration financial difficulties in your jurisdiction. of insolvency. According to the bankruptcy and recovery regime, directors may Pursuant to the bankruptcy and recovery regime, all security continue trading and remain in their positions, provided that they over the debtor’s assets must be enforced within the bankruptcy act within the special duty of care and do not violate general legal proceedings (judicial recovery proceedings or extra-judicial duties and principles applicable to the management of companies. recovery proceedings). Directors may however be subject to penalties, in case they have

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contributed to the worsening of the economic situation of the and Finance, the Ministry of Land, Environment and Rural company, or due to felonious or gross fault during the period before Development, the Investment Promotion Centre (which is in the commencement of the insolvency proceedings. process of extinction and its attributions will pass to a new agency designated Agency for Promotion of Investment and Exports, “APIEX”) and the Bank of Mozambique are the most relevant 6 Foreign Investment and Ownership Government authorities with a cross-sector role in investment Restrictions projects.

6.1 Are there any restrictions, controls, fees and/or taxes 7.2 Must any of the financing or project documents be on foreign ownership of a project company? registered or filed with any government authority or otherwise comply with legal formalities to be valid or

Mozambique enforceable? Mozambican commercial law enables foreign entities to do business in the country with limited liability, either by incorporating a company or registering a representative office. Except for designated sectors Private agreements that set out an obligation – notably a payment – (e.g., media, public works, private security companies), there are no shall only be enforceable before the courts after being authenticated limitations for foreigners (individuals or corporate) to hold shares or or certified by a notary or by any competent authority. quotas in the capital of Mozambican companies. Financing documents involving non-resident entities are subject to Note that all foreign direct investment transactions are qualified as prior authorisation by, and registration with, the exchange control capital transactions, and are subject to authorisation by the Bank of authority – the Bank of Mozambique. Mozambique, and to subsequent registration with the same entity. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or 6.2 Are there any bilateral investment treaties (or other operation of such assets, require a licence (and if so, international treaties) that would provide protection can such a licence be held by a foreign entity)? from such restrictions?

The exercise of economic activities in Mozambique is subject to Mozambique is a party to several bilateral investment treaties with licensing. key nations, generally to promote and strengthen investment relations between Mozambique and other countries (South Africa, Germany, Please note that there is no private ownership of land in Mozambique. Algeria, Belgium, China, Cuba, Denmark, Egypt, USA, USA Overseas Private Investment Corporation (“OPIC”), Finland, France, 7.4 Are there any royalties, restrictions, fees and/or Indonesia, Italy, Mauritius, the Netherlands, Portugal, Sweden, the taxes payable on the extraction or export of natural United Kingdom, Vietnam, India, Switzerland, Spain and Zimbabwe). resources? As a common characteristic, all these bilateral investment treaties aim at fostering foreign direct investment into Mozambique, providing Taxpayers under mining and petroleum activities are subject to the investors with guarantees and protection measures (security and application of the general taxation rules in Mozambique, namely protection of property rights, access to foreign loans and loan corporate income tax, valued-added tax and, cumulatively, the fiscal repayment, remittance of dividends, arbitration by the International regimes applicable to mining and oil and gas activities. Chamber of Commerce (“ICC”) or the International Centre for the Petroleum Production Tax is levied on oil and gas produced in Settlement of Investment Disputes between States and Nationals of each concession area and is due by corporate entities performing Other States (“ICSID”) for dispute resolution, and liberalised banking petroleum operations under a concession agreement. The tax rate is rates), but do not overcome or provide protection from foreign 10% for oil and 6% for gas, and is levied on the value of the oil and ownership restrictions imposed under sector-specific legislation. gas produced, and may be paid in cash or in kind. The following rules and taxes apply to mining activities: (i) Tax on 6.3 What laws exist regarding the nationalisation or Mining Production (“IPM”); (ii) Surface Tax (“ISS”); (iii) Tax on expropriation of project companies and assets? Are Income Deriving from Mineral Sources (“IRRM”); and (iv) special any forms of investment specially protected? rules to determine the taxable income under Personal Income Tax and Corporate Income Tax. There are laws and regulations expressly allowing the State or IPM tax rates vary between 8% for diamonds; 6% for precious governmental authorities to expropriate companies and nationalise metals, precious and semiprecious stones and heavy sands; 3% for assets and/or compulsorily acquire assets in the private sector for basic metals, charcoal, ornamental rocks, etc.; and 1.5% for sand strategic, national security or other reasons (pertaining to situations and stone, and are levied on the value of the extracted mineral in which public interest must prevail over private interest). product after treatment. Note that such laws and regulations also expressly establish the right ISS is due annually and is levied on the mining area of exploration. to compensation. The rates vary between MZN 17.50/ha (meticals per hectare) and MZN 25,000.00/ha, depending on whether they relate to the first 7 Government Approvals/Restrictions year of prospecting and research or the sixth year onwards of the mining concession, respectively, and are levied on the number of hectares of the area subject to a mining title (prospecting licence, 7.1 What are the relevant government agencies or research, mining concession or mining certificate). departments with authority over projects in the typical project sectors? The IRRM tax rate is 20% on the cash earnings accumulated during the year, determined according to specific rules. Where foreign investments are concerned, the Ministry of Economy

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Occupational health and safety in Mozambique is governed in 7.5 Are there any restrictions, controls, fees and/or taxes the first instance by the Constitution, in the second instance by on foreign currency exchange? the “Labour Act”, and finally by an ample body of subordinate legislation, much of it of colonial origin. The undertaking of any arrangement, transaction or operation The governmental authorities which administer those laws and between resident and non-resident entities in Mozambique, which regulations are the Ministry for Land, Environment and Rural results or may result in payments or receipts from abroad, is Development and the Ministry of Labour. subject to the exchange control legislation; thus requiring the prior authorisation of the Bank of Mozambique (the central bank). 7.10 Is there any specific legal/statutory framework for procurement by project companies? 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment Mozambique returns or loan payments to parties in other Mozambique’s general procurement terms stem from the jurisdictions? “Regulation on Contracting Public Works, and Procurement of Goods and Services by the State” (Decree no. 5/2016 of March In general, remittance of profits and repatriation of proceeds from 8), applicable to all State bodies and institutions, including local government and State-owned companies. The Regulation includes the sale or liquidation of an investment in Mozambique is permitted a general mechanism (public tender) and an exceptional contracting for duly approved foreign investment projects. mechanism (limited call for tenders by prior qualification, limited Any such remittances may only be effected through the local call for tenders, two-stage tender, tender by auction, small tender, banking system and upon presentation of tax clearance from the tenders by means of quotes and direct award). Ministry of Finance. Sector-specific legislation (mainly in the area of natural resources) Except as otherwise provided by a double taxation treaty existing and the mega-projects legislation also include procurement rules between Mozambique and the lender’s home country, a 20% and principles of mandatory application, generally accommodating withholding tax is levied on both interest and fees paid to foreign similar procurement rules or contracting methods (public tender, lenders. Where applicable, VAT is also due and levied at the rate of restricted tender, two-stage tender and direct award). 17% upon the total income in connection with services rendered for consideration in Mozambique. 8 Foreign Insurance

7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore 8.1 Are there any restrictions, controls, fees and/or taxes accounts in other jurisdictions? on insurance policies over project assets provided or guaranteed by foreign insurance companies? The opening and operation of onshore foreign currency and offshore bank accounts is subject to prior authorisation by the Bank of Mozambican law usually requires insurance to be placed with local Mozambique. insurers. Given the limited size of the Mozambican insurance market, entities are allowed to obtain insurance with foreign insurers to the extent it is not possible to insure with local insurance 7.8 Is there any restriction (under corporate law, companies and pursuant to notification of the regulator. exchange control, other law or binding governmental practice or binding contract) on the payment of Transfers in execution of insurance contracts between residents and dividends from a project company to its parent non-resident entities exceeding one year in duration, or which are company where the parent is incorporated in your related to a capital transaction, are classified as capital operations, jurisdiction or abroad? thus being subject to prior authorisation and registration with the Bank of Mozambique. Dividend payments are subject to a 20% withholding tax, except for dividends paid in connection with shares listed on the Mozambique Stock Exchange, which are subject to a 10% withholding tax. These 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? tax rates may be reduced by the application of a tax treaty and are not applied in the case of dividends paid to a Mozambican company Forex operations undertaken with a view to the payment of insurance that has held 25% or more of the shares in an associated company in contracted offshore by the insured himself, or by the person taking Mozambique for at least two years. out such insurance, shall require presentation, by the interested Mozambique has concluded tax treaties with Portugal, Italy, parties, of proof that the necessary approval has been obtained from Mauritius, the United Arab Emirates, the Special Administrative the competent entity in the country for the taking out of insurance Region of Macau, South Africa, India, Vietnam and Botswana. offshore, in terms of applicable legislation.

7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a 9 Foreign Employee Restrictions project financing and which governmental authorities administer those laws or regulations? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed As a rule, any activity which may affect the environment is subject by a project company? to evaluation of the potential impact (“environmental impact assessment”) to determine its environmental feasibility, which Under the terms of the Mozambican “Labour Act”, there are concludes with the issuance of an Environmental Licence. basically two means of employing foreigners in Mozambique:

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(i) Authorisation of the Minister of Labour, granted on a case- ad valorem charges, service charges, Specific Consumption Tax by-case basis if the following prerequisites are met: and Value-Added Tax. Specific preferential rules apply for imports ■ there are no Mozambican employees qualified to do the within SADC countries. particular job; or Authorised investment projects and activities under certain sector- ■ the number of qualified Mozambican employees is specific legislation may benefit from exemption from import duties insufficient to meet the demand. on the importation of capital assets (equipment and machinery). Authorisation is also the required approach in cases of “specialised technical assistance”, among others. (ii) Communication to the Minister of Labour in the following 11 Force Majeure circumstances: ■ the number of foreign workers meant to be contracted is 11.1 Are force majeure exclusions available and Mozambique within established quotas; enforceable? ■ there is specific provision in the prospective employer’s investment contract with the Government of Mozambique Mozambican law does not provide a specific provision regarding for an explicit percentage of foreign workers greater or exclusion of liability in cases of force majeure; the principle is lesser than the percentages set forth above; or generally accepted and enforceable in Mozambique. ■ the prospective worker is to be hired for a short-term assignment, i.e., for a period of up to 90 days (consecutive General liability principles are found under the Mozambican “Civil or interspersed). Foreigners may work in Mozambique for Code”. Clauses that totally limit or completely exclude liability up to 90 days (consecutive or interspersed) per calendar are prohibited. In fact, liability can only be limited under certain year by means of communication from the Mozambican circumstances and by establishing a compensation ceiling or overall employer (understood here to mean a Mozambican limit of liability, or liquidated damages. In principle, this type of company or the foreign parent of a Mozambican company) clause will be valid, provided it is not simply a way to exclude to the Ministry of Labour. parties’ liability, and shall not apply to situations of gross negligence The following quotas are currently established for the employment and intentional or wilful misconduct. of foreigners: ■ 5% of the total number of employees in large enterprises (i.e., more than 100 workers); 12 Corrupt Practices ■ 8% of the total number of employees in medium-sized enterprises (between 11 and 100 workers); and 12.1 Are there any rules prohibiting corrupt business ■ 10% of the total number of employees in small enterprises practices and bribery (particularly any rules targeting (10 or fewer workers). the projects sector)? What are the applicable civil or criminal penalties?

10 Equipment Import Restrictions Besides the provisions established under the “Criminal Code”, Mozambique has anti-corruption legislation (Act no. 6/2004), criminalising extortion, attempted corruption, as well as active and 10.1 Are there any restrictions, controls, fees and/or taxes passive bribery. on importing project equipment or equipment used by construction contractors? Civil and criminal penalties for bribery and corruption practices include imprisonment (up to a maximum of eight years) and Mozambique’s customs regimes include (i) temporary importation, monetary fines. (ii) temporary exportation, (iii) re-importation, (iv) re-exportation, (v) customs transit, (vi) storage, (vii) industrial free zones, and (viii) 13 Applicable Law customs warehousing. Certain products are excluded from entry under some of these regimes. The importation of left-hand drive vehicles used for commercial 13.1 What law typically governs project agreements? purposes in Mozambique is prohibited. Other prohibitions and import restrictions apply based on health and moral grounds and in Pursuant to the Mozambican “Civil Code”, contracts are governed compliance with international conventions to which Mozambique is by the law chosen by the parties, provided that such election has a party, including prohibitions under the multilateral environmental a connection (nexus) with a relevant element of the contract or is agreements to which Mozambique is a party. otherwise supported by an interest in good faith (a bona fide interest) Goods imported into Mozambique are subject to duties and taxes of the parties. However, a foreign law elected in accordance with applied at the border. those rules will not be acceptable if it involves the violation of a fundamental principle of Mozambican public policy, and there are Some imported goods are subject to a pre-shipment inspection certain Mozambican principles and rules that are mandatory even if procedure. Goods imported from within the Southern African a foreign law is validly chosen. Development Community (“SADC”) region, subject to complying with SADC rules of origin, are subject to zero- or reduced-duty tariffs. Concession contracts and other project agreements entered into with public entities are governed by Mozambican law.

10.2 If so, what import duties are payable and are exceptions available? 13.2 What law typically governs financing agreements?

Imports into the national territory are subject to payment of import Please see question 13.1 above. duties as consigned in the “Customs Tariffs Book”, which include

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(v) no concurrent proceedings are pending in a Mozambican 13.3 What matters are typically governed by domestic law? court; (vi) the foreign judgment does not conflict with a prior The capacity, powers and authority to enter into an agreement Mozambican or foreign judgment in the same matter; and and bind Mozambican parties, as well as any related mandatory (vii) the foreign judgment is not contrary to public policy of approvals, authorisations and permits, are subject to Mozambican Mozambique or to the Mozambican conflict-of-laws rules. law.

The Mozambican conflict-of-laws rules also determine that the 15.2 Is your jurisdiction a contracting state to the New York creation, assignment and cancellation of rights of possession, Convention or other prominent dispute resolution ownership and other related rights – including guarantees – over conventions? movable or immovable property, are governed by the lex rei sitae. Mozambique is a signatory to the Washington Convention of 15 Mozambique March 1965 on the Settlement of Investment Disputes between 14 Jurisdiction and Waiver of Immunity States and Nationals of Other States and the International Centre for the Settlement of Investment Disputes between States and Nationals 14.1 Is a party’s submission to a foreign jurisdiction and of Other States (“ICSID”), and is also a signatory to the Additional waiver of immunity legally binding and enforceable? Facility Rules of ICSID approved on 27 September 1978 and a member of the International Chamber of Commerce. Submission to a foreign jurisdiction and a waiver of immunity are Mozambique has been a signatory to the New York Convention effective and enforceable contract provisions in Mozambique, to the on the Recognition and Enforcement of Foreign Arbitral Awards extent permitted by law. Under the Mozambican “Civil Procedural since 10 June 1998, which is fully applicable in national territory. Code”, as a rule, the Mozambican courts cannot be deprived of However, as permitted by Article I(3) of the New York Convention, their jurisdiction (irrespective of contractual provisions providing when it acceded thereto Mozambique declared that it would apply otherwise) if, in accordance with the Mozambican mandatory the Convention to the recognition and enforcement of awards made procedural rules, the Mozambican courts are deemed to have only in the territory of another contracting State, on the basis of jurisdiction to decide on any matter arising from an agreement. reciprocity.

15 International Arbitration 15.3 Are any types of disputes not arbitrable under local law?

15.1 Are contractual provisions requiring submission The Mozambican “Arbitration Act” expressly recognises the general of disputes to international arbitration and arbitral principle that all disputes may be referred to arbitration, with the awards recognised by local courts? exception of disputes relating to non-disposable rights (typically, of a personal nature), or disputes which by special law are exclusively Mozambican law recognises arbitration as a valid method of dispute subject to the jurisdiction of a judicial court or a necessary arbitral resolution in Mozambique. tribunal. The definition of international arbitration set out in the Mozambican “Arbitration Act” follows the one adopted in the 1985 Model Law 15.4 Are any types of disputes subject to mandatory on International Commercial Arbitration of the United Nations domestic arbitration proceedings? Commission on International Trade Law (“UNCITRAL”). The “Arbitration Act” contains express provisions on its territorial Disputes concerning labour rights regulation are subject to domestic scope of application, to the effect that the Act shall apply to all the arbitration. arbitrations taking place in Mozambique. Also, if the parties do not expressly agree to exclude its application, the provisions of the Matters of an economic nature arising from administrative “Arbitration Act”, adapted as necessary, will apply to international agreements, contractual liability and torts of the public administration arbitrations having their seat in Mozambique. may be submitted to voluntary administrative arbitration in, and under the ruling of, the administrative court. Any foreign judgment can be recognised and enforced by a Mozambican court without re-litigation and re-examination of the merits of such judgment, provided that the following requirements 16 Change of Law / Political Risk are previously met: (i) the foreign judgment must be legible and genuine; 16.1 Has there been any call for political risk protections (ii) the foreign judgment must be final, non-appealable and such as direct agreements with central government or conclusive in accordance with relevant laws; political risk guarantees? (iii) Mozambican courts must have no jurisdiction to hear the dispute, and the foreign court which rendered the judgment The “Mega-Projects Act” accommodates provisions allowing for must have such jurisdiction; access to guarantees from multilateral or governmental institutions (iv) the foreign proceedings were conducted in accordance with against non-commercial risks, which may originate from governmental the applicable procedures and the parties to the dispute had institutions’ actions, particularly in matters concerning the scope of been duly notified and were properly represented in the coverage, terms, and conditions of each guarantee. proceedings;

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17 Tax 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory 17.1 Are there any requirements to deduct or withhold tax requirements for the issuance of capital market from (a) interest payable on loans made to domestic instruments. or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? The capital market in Mozambique comprises a primary market (market for new issues of securities) and a secondary market (trading market for previously-issued securities between third Except as otherwise provided by a double taxation treaty existing parties). Additional concepts within this framework include the between Mozambique and the lender’s home country, a 20% stock market and over-the-counter market, the latter being a market

Mozambique withholding tax is levied on both interest and fees paid to foreign in which supply and demand are dealt with outside the stock market, lenders. with the involvement of authorised financial intermediaries. The enforcement of securities would not, in general terms, trigger All public offerings for subscription and public offerings for sale any taxes. However, this must be analysed on a case-by-case basis of securities, as well as the form and content of advertising these (e.g., the enforcement of a mortgage, with the subsequent transfer offerings, are subject to approval and registration with the Bank of of ownership of real estate, could trigger a 2% Property Transfer Mozambique. Tax – “SISA”).

17.2 What tax incentives or other incentives are provided 19 Islamic Finance preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha of effectiveness or registration? instruments might be used in the structuring of an Islamic project financing in your jurisdiction. Besides a favourable exchange control regime, foreign investors may be eligible for tax incentives in Mozambique – such as As of the time of writing, there have been no reports of the use of deductions from taxable income, deductions from the amount of Islamic instruments in project finance in Mozambique. tax assessed, accelerated depreciation, tax credits, exemption from tax and the reduction of the rate of taxes and other fiscal payments, 19.2 In what circumstances may Shari’ah law become deferment of the payment of taxes and other special fiscal measures the governing law of a contract or a dispute? Have – as provided for under the “Investment Act”, the “Investment Act there been any recent notable cases on jurisdictional Regulation” and the “Tax Incentives Code”, a set of rules designed issues, the applicability of Shari’ah or the conflict of mainly to attract foreign investment into the country. Shari’ah and local law relevant to the finance sector? For the costs and taxes to create and perfect any type of securities, Please see question 19.1 above. please see question 2.6 above.

19.3 Could the inclusion of an interest payment obligation 18 Other Matters in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk? 18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project It is common practice in Mozambique to include interest payment financings in your jurisdiction? obligations in a loan agreement subject to Mozambican law, which is fully valid and enforceable. The law foresees maximum rates of There are no other material considerations. interest. In the event such interest rates are higher, the interest rate shall be reduced to the maximum interest rate allowed.

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Paula Duarte Rocha Ana Berta Mazuze Henriques, Rocha & Associados, Henriques, Rocha & Associados, Sociedade de Advogados, Lda Sociedade de Advogados, Lda Edifício JAT V-1, Rua dos Desportistas Edifício JAT V-1, Rua dos Desportistas N.º 833, 6.º andar, fracção NN5 Nº 833, 6º andar, fracção NN5 Maputo Maputo Mozambique Mozambique

Tel: +258 21 344 000 Tel: +258 21 344 000 Email: [email protected] Email: [email protected] URL: www.hrlegalcircle.com URL: www.hrlegalcircle.com

Paula Duarte Rocha is a Partner with Henriques, Rocha & Associados, Ana Berta Mazuze joined the firm in 2013. She began her career as a

Sociedade de Advogados, Lda (HRA Advogados). Even before she Legal Assistant at Abreu Advogados in Lisbon, and Vasconcelos Porto Mozambique had finished her degree in law, Paula started her career as a Legal & Associados in Maputo. Assistant in the financial development institution GAPI, and then as a She is also a Professor at the Law Faculty of Eduardo Mondlane Legal Assistant to Mrs. Maria João Dionísio Santos, formerly a partner University, teaching an Introduction to the Study of Law. Ana Berta at Pimenta, Dionísio & Associados. Later she provided multidisciplinary has been a member of the Mozambique Bar Association as a Trainee legal consultancy at the Tax and Legal Services Department of Lawyer since 2014. PricewaterhouseCoopers, cooperating with national and foreign investors. She was also an Associate Lawyer and Senior Legal Advisor at MGA – Advogados & Consultores. More recently, Paula was Managing Partner and Lawyer at Ferreira Rocha & Associados, Sociedade de Advogados. During this professional experience she was involved in all areas of practice: advising national and foreign private companies with respect to public sector laws, public tenders and contracts; as well as advising foreign entities on compliance with all Mozambican tax, labour and commercial obligations.

Henriques, Rocha & Associados, Sociedade de Advogados, Lda (HRA Advogados) was founded by a group of lawyers of Mozambican nationality, and is a leading law firm in Mozambique due to its dynamism, innovative capacity and the quality of service it provides. Building a legal practice capable of meeting our clients’ needs in the Mozambican market and contributing to the growth and development of the legal market in Mozambique are the main goals of the HRA Advogados team. Our firm was created in the context of an association with Morais Leitão, Galvão Teles, Soares da Silva & Associados (MLGTS), a top-ranking Portuguese law firm. We work in close connection with the firm’s Africa Team; always with respect for, and in strict compliance with, the cultural norms applicable in Mozambique. We are also members of the MLGTS Legal Circle, an international network created by MLGTS for a select set of jurisdictions, including Angola, Mozambique and Macau (China). The firm works very closely with the other member firms of MLGTS Legal Circle, which enables us to maximise inherent synergies. HRA Advogados also benefits from the privileged relationship established by MLGTS with the distinguished Brazilian law firm Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados (São Paulo).

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Netherlands Tom Ensink

Ploum Lodder Princen Alette Brehm

1 Overview 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the 1.1 What are the main trends/significant developments in procedure? the project finance market in your jurisdiction? Security over real property located in the Netherlands is created The project finance market remains very liquid with recent pursuant to a notarial deed of mortgage (hypotheek) executed before transactions in infrastructure public-private partnerships (PPPs), a Dutch civil law notary. The notarial deed must be registered with renewables as well as refinancings. The multi-year trend of the Dutch Land Registry Office Kadaster( ). tightening margins over decreasing EURIBOR rates seems to have The ownership of cables and pipelines can be established by paused and even slightly reversed in the course of 2016. way of a right of superficies (underground or overground) or as the registration of a network/grid (underground), followed by 1.2 What are the most significant project financings that registration with the Dutch Land Registry Office (Kadaster). Both have taken place in your jurisdiction in recent years? the right of superficies and the ownership of a registered network/ grid are real rights and can be encumbered with a mortgage. Since 2015, we have seen various significant closings, for example: Security over moveable assets (such as plant, machinery and ■ A1/A6 refinancing; equipment) located in the Netherlands can be created as (i) a ■ Delfland Wastewater PPP refinancing; possessory pledge (vuistpand), or (ii) a non-possessory pledge ■ IJmuiden Sealock PPP; (bezitloos pandrecht). ■ Beatrix Lock PPP; Possessory pledges are rarely created, as they require the pledgee to ■ Luchterduinen offshore wind (primary); take possession of the pledged moveable asset. A non-possessory ■ Kreekraksluis onshore wind (secondary); pledge is created pursuant to private deed of pledge. A non- possessory pledge can be created in two different ways: (i) by a ■ A6 Almere PPP; and notarial deed; or (ii) by a private deed of pledge which must be ■ Hart van Zuid Rotterdam Real Estate PPP. registered with the Dutch Tax Authorities (for date stamping purposes only). It is common practice to create a non-possessory 2 Security pledge pursuant to a private deed of pledge.

2.3 Can security be taken over receivables where the 2.1 Is it possible to give asset security by means of chargor is free to collect the receivables in the a general security agreement or is an agreement absence of a default and the debtors are not notified required in relation to each type of asset? Briefly, of the security? Briefly, what is the procedure? what is the procedure? Security over receivables can be created as (i) a disclosed pledge We do not have a general security agreement in the Netherlands. (openbaar pandrecht), or (ii) an undisclosed pledge (stil pandrecht). This means that each (type of) asset has to be pledged (in case of moveable property or rights) or mortgaged (in case of real estate or A disclosed pledge of receivables is created by a private deed of registered property) individually. Under Dutch law, the formalities pledge and notice of the right of pledge to the debtor of the pledged to be taken into account by creating a security right differ according receivables. An undisclosed pledge of receivables can be created in to the type of asset. two different ways: (i) by a notarial deed; or (ii) by a private deed of pledge which must be registered with the Dutch Tax Authorities. It is, however, common to combine various types of pledged assets It is common practice to create an undisclosed pledge pursuant to a in one deed which is then referred to as an ‘omnibus pledge deed’. private deed of pledge. An important limitation of an undisclosed pledge is that, unlike a disclosed pledge, an undisclosed pledge can only be created over existing receivables and future receivables which directly derive from a legal relationship existing at the time of the execution of the pledge

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deed. In order to ensure that these future receivables are also covered is possible to make an individual agreement with a Dutch civil under an undisclosed pledge, it is necessary to periodically execute law notary. The notarial fees in the Netherlands are regarded as supplemental deeds to be registered with the Dutch Tax Authorities. In reasonable, especially in comparison with other jurisdictions in practice, many Dutch banks have now introduced the concept that only which the fee amount is based on the deal value. a ‘master pledge document’ is created, in which the pledgor empowers The mortgage of real estate must also be laid down in a notarial the bank to register supplemental deeds. The bank subsequently deed for which a notarial fee is charged. Furthermore, the Dutch registers one supplemental deed on behalf of all of its customers. Land Registry Office (Kadaster) will charge a (nominal) fee for the mandatory registration of the mortgage with the Dutch Land 2.4 Can security be taken over cash deposited in bank Registry Office (Kadaster). accounts? Briefly, what is the procedure? There are no stamp duties on security rights over assets. For the

sake of completeness, the only stamp-duty-type taxes are real estate Netherlands It is possible to take security over cash deposited in a bank account transfer tax (not for mortgages or transfer of grids) and insurance with a Dutch bank. The procedure set out under question 2.3 above premium tax. applies mutatis mutandis to security over such cash; however, the claim will be against the account bank (instead of the debtor of the 2.7 Do the filing, notification or registration requirements receivable). in relation to security over different types of assets It is common practice to create a disclosed pledge over bank involve a significant amount of time or expense? accounts. Pursuant to the Dutch general banking conditions, a Dutch account bank has certain security interests in the bank account, such No, they do not. as a right of pledge and a right of set-off. It would therefore only make sense to pledge the cash if the account bank would co-operate 2.8 Are any regulatory or similar consents required with with the creation of such a disclosed pledge. respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, 2.5 Can security be taken over shares in companies whether underground or overground), etc.? incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? There might be consents required for the mortgage over real property, especially when it concerns real rights that are to be A distinction should be made between registered shares in a Dutch encumbered with a mortgage. Depending on the specific conditions private company with limited liability (besloten vennootschap met under which the real rights are established, it is possible that the beperkte aansprakelijkheid or BV) and a Dutch public company landowner will have to give its consent. Furthermore, should the with limited liability (naamloze vennootschap or NV) that can have real property already be encumbered with another right of mortgage, registered or bearer shares (aandelen aan toonder). this mortgage-holder shall have to consent as well. A pledge of registered shares in a Dutch BV or NV is created by a notarial deed executed before a Dutch civil law notary. However, the 3 Security Trustee articles of association may prohibit or restrict the creation of a right of pledge over shares and/or the transfer of voting rights attached to the shares, in which case the articles of association have to be amended. 3.1 Regardless of whether your jurisdiction recognises In general, the notarial deed of shares will provide that the the concept of a “trust”, will it recognise the role of a shareholder remains entitled to collect dividends and to exercise its security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to voting rights until the occurrence of an event of default and notice enforce the security and to apply the proceeds from given thereof by the pledgee. the security to the claims of all the lenders? The (registered) shares are not in certificated form, but registered in the shareholders’ register of the BV or NV. Dutch law does not recognise the concept of a ‘trust’, but it will The procedure set out under question 2.2 above with respect to recognise the role of a security trustee/agent if duly established and moveable assets applies mutatis mutandis to a pledge of bearer existing under the laws of another jurisdiction. However, pursuant shares held or deposited in the Netherlands. to Dutch law, security can only be created in favour of the creditor of the claim (see question 3.2 below). Shares can also be deposited in a securities account and pledged in this form. A right of pledge over securities which are transferable through book entries under the Dutch Securities (Bank Giro 3.2 If a security trust is not recognised in your Transactions) Act (Wet giraal effectenverkeer) is created by a book jurisdiction, is an alternative mechanism available entry in the name of the pledgee by the custodian bank. (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or 2.6 What are the notarisation, registration, stamp duty the facility agent) to enforce claims on behalf of all and other fees (whether related to property value or the lenders so that individual lenders do not need to otherwise) in relation to security over different types enforce their security separately? of assets (in particular, shares, real estate, receivables and chattels)? To allow a trustee or agent to hold and enforce security rights on behalf of the lenders, it is common use to insert a ‘parallel debt’ Notarial fees are involved in relation to a mortgage or a pledge of in the finance documentation (preferably the loan agreement or registered shares, which must be laid down in a notarial deed that intercreditor agreement). A parallel debt constitutes a separate (but will be executed before a Dutch civil law notary. Notarial fees not double) claim from the borrower and/or guarantor to the security are not regulated and not dependent upon e.g. the deal value. It trustee or agent for an amount equal to the amount owed to the

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syndicated lenders. Any payment by the borrower to the security trustee or agent (or proceed recovered from security) in respect of the 5.2 Are there any preference periods, clawback rights parallel debt equally discharges the borrower’s debt to the lenders. or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security?

4 Enforcement of Security Yes. The most important is that the Dutch Tax Authorities have a preferential right on all assets (rights and goods) of a taxpayer. With respect to certain moveable goods (most notably inventory, but not 4.1 Are there any significant restrictions which may e.g. stored supplies) that are present in the premises of the taxpayer, impact the timing and value of enforcement, such the preferential right of the Dutch Tax Authorities even supersedes as (a) a requirement for a public auction or the availability of court blocking procedures to other the rights of the holders of a non-possessory pledge (bezitloos

Netherlands creditors/the company (or its trustee in bankruptcy/ pandrecht) for the collection of wage tax, VAT, custom duties and liquidator), or (b) (in respect of regulated assets) certain duties and taxes. regulatory consents? The enforcement of secured rights on such assets requires pre- notification of the Dutch Tax Authorities. After notification, the Tax There are no significant restrictions which may impact the timing or Authorities have four weeks to announce whether they will enforce value of enforcement in the Netherlands. their rights to the abovementioned moveable goods. If they do The general rule under Dutch law is that a Dutch security right is not enforce their rights, the secured creditor may proceed with the enforced by way of public sale. Enforcement by way of private sale enforcement without the risk of having to hand over the proceeds to requires prior authorisation from the competent Dutch court. A right the Dutch Tax Authorities. of pledge may also be enforced by way of private sale if agreed upon between the pledgor (or trustee in bankruptcy) and the pledgee, after 5.3 Are there any entities that are excluded from the payment default has occurred. bankruptcy proceedings and, if so, what is the In general, there are no regulatory consents required for the applicable legislation? enforcement of security, except for the sale of shares in a Dutch entity, which may require the prior approval of the Netherlands No private entities are excluded from bankruptcy proceedings. Authority for Consumers and Markets (ACM).

For the enforcement of inventory, see the rights of the Dutch Tax 5.4 Are there any processes other than court proceedings Authorities in question 5.2. that are available to a creditor to seize the assets of the project company in an enforcement?

4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related Secured creditors have the right of immediate execution without companies? proceedings on the merits, or a court decision, being necessary.

No particular restrictions apply to foreign investors or creditors in 5.5 Are there any processes other than formal insolvency the event of foreclosure on the project or related companies. proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors? 5 Bankruptcy and Restructuring Proceedings Some courts have co-operated with requests to appoint a ‘silent administrator’ to prepare for a ‘pre-pack’ style bankruptcy, but without any legal basis being present. A legislative proposal has 5.1 How does a bankruptcy proceeding in respect of the been made, but has not been accepted yet. project company affect the ability of a project lender to enforce its rights as a secured party over the security? 5.6 Please briefly describe the liabilities of directors (if The Dutch Bankruptcy Act provides that, as a general rule, secured any) for continuing to trade whilst a company is in creditors can enforce their rights as if there were no bankruptcy. They financial difficulties in your jurisdiction. have so-called ‘separatist’ status. Nevertheless, the enforcement of moveable and immoveable assets may be affected by the standstill A director may be personally liable on the basis of tort towards a period, which the administrator may request the court to render creditor if, at the time of entering into the transaction, this director applicable for two months, and which can be prolonged for another knew or should have known that the company was not able to two months. Furthermore, the administrator may subject the pledgee comply with its obligations arising out of this transaction, and the or mortgagee to a term within which it must enforce its security director knew or should have known that the company did not have rights. If it fails to do so, the administrator can enforce the secured sufficient assets for recovery by the creditor for such obligations assets. The proceeds will then fall into the bankruptcy estate. The (Beklamel). On various occasions, (lower) courts have held that a secured creditor must file its claim with the bankruptcy estate. It director may continue running a company in financial trouble for as will have a preference right on the proceeds, but has to share in the long as there is still a realistic likelihood of survival. The director general bankruptcy costs, just as other ordinary creditors, and will may, in such circumstances, selectively pay its creditors who are only receive the proceeds upon distribution of all the proceeds to the necessary for the continuation of the company (i.e. no payment of creditors of the estate. affiliates). However, after a certain transition point, where there is The administrator is obliged to co-operate by providing necessary no realistic prospect of survival, a director risks being personally data to enforce (collect) the pledged receivables, but is entitled to liable if he continues to trade. reasonable remuneration.

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6 Foreign Investment and Ownership 7.2 Must any of the financing or project documents be Restrictions registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable? 6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company? See question 2.2 on security over assets.

No general restriction on foreign ownership of a project company applies. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or No extra taxes apply on foreign ownership of a project company operation of such assets, require a licence (and if so,

compared to domestic owners. A 15% withholding tax applies can such a licence be held by a foreign entity)? Netherlands on dividends. Furthermore, a foreign party holding a substantial interest in a Dutch company may be subject to non-resident income Ownership of land or a pipeline by itself does not require a tax on dividend, interest and capital gains derived from investment government licence. For the undertaking of the business or in shares and shareholder loans. operation of such assets, a licence may be required. This depends on the sort of activities undertaken. 6.2 Are there any bilateral investment treaties (or other In general, all natural resources are owned by the state, and international treaties) that would provide protection exploration thereof will require a concession granted by the state. from such restrictions? As mentioned under question 7.1, in accordance with the Mining Act (Mijnbouwwet), a permit from the Minister of Economic Affairs Bilateral investment treaties do not deal with tax as such. The is required for the tracing, extracting and storage of minerals and Netherlands has concluded tax treaties or similar arrangements with terrestrial heat. Furthermore, an integrated environmental permit around 90 countries and territories, which tax treaties limit the power (omgevingsvergunning) is required for various activities with regard of the Netherlands to apply the withholding tax and non-resident tax to, e.g., construction work or building in certain nature areas. The as mentioned in question 6.1 above. operation of a pipeline may also trigger safety regulations. The application for an integrated environmental permit can be done at the local municipality and the regulation with regard to this permit 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are is set out in the Environmental Permitting General Provisions Act any forms of investment specially protected? (WABO). In general, such a licence is held by the company that develops the project and the licence can therefore also be held by No laws exist specifically in respect of nationalisation or a foreign entity. expropriation of project companies or assets. The Intervention The Dutch Gas Act (Gaswet) and the Dutch Electricity Act Act (Interventiewet) provides for far-reaching possibilities for the (Elektriciteitswet) contain (more specific) regulation for owners government to secure (and expropriate) assets or shares, but this only of a gas transmission grid or an electricity transmission grid. For applies to financial companies in distress. Investment protection on example, in accordance with the aforementioned Dutch Gas Act a retail level is dealt with in general securities laws. and the Dutch Electricity Act, owners of a gas or an electricity transmission grid are (apart from exceptions) obliged to appoint a public limited company or private limited company as grid operator 7 Government Approvals/Restrictions to run the grid. Please note that the Dutch Gas Act and the Dutch Electricity Act are currently in the process of being amended. The legislative proposal on the progress of the energy transition 7.1 What are the relevant government agencies or departments with authority over projects in the typical (Voortgang Energietransitie) provides for the amendment and project sectors? modernisation of the Dutch Gas Act and the Dutch Electricity Act.

This depends on the sort of project. The government at various 7.4 Are there any royalties, restrictions, fees and/or levels may be active in project finance. For example, the taxes payable on the extraction or export of natural Minister of Economic Affairs has authority over concessions resources? for natural resources and handles the issuance of permits for the tracing, extracting and storage of minerals or terrestrial heat. The Yes, it is called ‘Staatswinstaandeel’ and it is levied instead of Minister of Infrastructure and Environment deals with permits corporate income tax on the profit of companies exploring and for offshore windmill parks, and is also the main ‘driver’ for extracting natural resources such as oil and gas. Regulations national infrastructural projects, through its government agency on concerning the Staatswinstaandeel are set out in the Mining waterways and public works (Rijkswaterstaat). The provinces or Act. The main difference with corporate income tax is the rate: local municipalities may also be very active in realising projects, Staatswinstaandeel at 50%; and corporate income tax at 20–25%. e.g. projects for distribution of heat, and also deal with the issuance of certain permits. Furthermore, the Netherlands Authority for 7.5 Are there any restrictions, controls, fees and/or taxes Consumers and Markets (ACM) is an autonomous administrative on foreign currency exchange? authority under Dutch law, which keeps track of developments for consumers and businesses. The ACM supervises the energy, There are no specific taxes in relation to foreign currency exchange. telecommunication, transport and postal services industries, and, more generally, oversees competition and consumer protection law. The ACM can also provide certain permits and has the authority to impose fines for certain violations.

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7.6 Are there any restrictions, controls, fees and/or taxes 7.10 Is there any specific legal/statutory framework for on the remittance and repatriation of investment procurement by project companies? returns or loan payments to parties in other jurisdictions? Under Dutch law, the European rules for procurement under three different Directives apply. These are: Directive 2014/23 (on the There are no specific taxes in relation to the remittance and award of concession contracts); Directive 2014/24 (on public repatriation of investment returns or loan payments to parties in procurement); and Directive 2014/25 (on procurement by entities other jurisdictions. However, interest on long-term subordinated operating in the water, energy, transport and postal services sectors). profit-sharing loans may be treated as a dividend. If so, a15% These Directives are implemented by the Dutch Procurement Act withholding tax may apply. Furthermore, a foreign party holding (Aanbestedingswet).

Netherlands a substantial interest in a Dutch company may be subject to non- This means that if a project company can be qualified as a ‘contracting resident income tax on dividend, interest and capital gains derived authority’ or as a ‘body governed by public law’, the contracts from investment in shares and shareholder loans. qualify as a concession or a supply, works or service contract and the contracts concerned exceed the applicable thresholds, this entity 7.7 Can project companies establish and maintain is obliged to tender the contract in question. Depending on the facts onshore foreign currency accounts and/or offshore and the circumstances, there are certain entities and contracts which accounts in other jurisdictions? do not fall within the scope of the Dutch Procurement Act. If a project company decides to voluntarily tender contracts, such Yes, they can. company needs to realise that if it does not exclude the applicability of the Dutch Procurement Act, it can be bound to these rules as well. 7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of 8 Foreign Insurance dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad? 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or In relation to the distribution of dividends by a Dutch public limited guaranteed by foreign insurance companies? liability company to its shareholder(s), such company may make distributions to the shareholders and other persons entitled to There are no special taxes on insurance policies over project assets distributable profits, only to the extent that its net assets exceed provided or guaranteed by foreign insurance companies. However, the sum of the amount of the paid and called up part of the capital premiums for damage insurance are generally subject to a 21% and the reserves which have to be maintained by virtue of law or stamp duty (instead of VAT). pursuant to the articles of association. In relation to the distribution (of dividends or other distributions) by 8.2 Are insurance policies over project assets payable to a Dutch private limited liability company to its shareholder(s), the foreign (secured) creditors? amount thereof is limited to the extent that the equity (total assets minus liability) exceeds the reserves which have to be maintained by Yes, this possibility exists. virtue of law or pursuant to the articles of association. In addition, the management board of the private limited company must declare that the company will be able to continue the payment of its due and 9 Foreign Employee Restrictions collectable debts after the distribution. 9.1 Are there any restrictions on foreign workers, 7.9 Are there any material environmental, health and technicians, engineers or executives being employed safety laws or regulations that would impact upon a by a project company? project financing and which governmental authorities administer those laws or regulations? There are no restrictions apart from the fact that foreign workers, technicians, etc. should have a valid residence status. The Netherlands has various acts and regulations in place that deal with health and safety, environment, hazardous substances, best available techniques, etc. Project documentation will have detailed 10 Equipment Import Restrictions provisions, warranties, covenants and CPs ensuring that the broad spectrum of rules and regulations is complied with. The main 10.1 Are there any restrictions, controls, fees and/or taxes governmental authorities to administer these laws and regulations on importing project equipment or equipment used by are: the Municipal Executive (college van burgemeester en construction contractors? wethouders) (municipality); the Provincial Executive (college van Gedeputeerde Staten) (province); the Minister of Infrastructure and In principle, no. Exceptions may apply to imports from certain the Environment (Minister van Infrastructuur en Milieu); and the countries on whom the Netherlands has levied sanctions, or certain Minister of Social Affairs and Employment (Minister van Sociale types of equipment (e.g. dual-use goods or technologies). Zaken en Werkgelegenheid) (central government). The Netherlands is a Member State of the European Union. As a result, imports from other EU Member States into the Netherlands are free of taxes (import duties). Imported goods from outside the EU are subject to the Integrated Tariff of the European Communities.

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10.2 If so, what import duties are payable and are 14 Jurisdiction and Waiver of Immunity exceptions available?

14.1 Is a party’s submission to a foreign jurisdiction and The goods to which import duties apply, as well as the rate, may waiver of immunity legally binding and enforceable? be found online via http://ec.europa.eu/taxation_customs/general- information-customs_en. A submission to a foreign jurisdiction is valid and legally binding upon a Dutch entity under the laws of the Netherlands, as long as 11 Force Majeure there is an international element to the transaction. Notwithstanding a valid submission to a foreign jurisdiction, Dutch courts may assume jurisdiction if a plaintiff seeks provisional measures Netherlands 11.1 Are force majeure exclusions available and in preliminary relief proceedings, a preliminary decision or if a plaintiff enforceable? files a request for the levy of a pre-trial attachment. Furthermore, it should be noted that a valid submission to a foreign jurisdiction will Parties are free to determine by contract when force majeure is not restrict the application of certain overriding provisions of the laws applicable. Article 6:75 of the Dutch Civil Code provides that a party of the Netherlands, designed for safeguarding its public interests. is not responsible for a failure (tekortkoming) if this follows from the Finally, it should be noted that certain proceedings, such as law, contract or generally accepted principles (verkeersopvattingen). proceedings related to real estate or the governance of companies, have exclusive jurisdiction. 12 Corrupt Practices 15 International Arbitration 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or 15.1 Are contractual provisions requiring submission criminal penalties? of disputes to international arbitration and arbitral awards recognised by local courts? Corruption and bribery are both criminal offences under the Dutch Penal Code. The courts have seen various cases where companies and A Dutch company may submit disputes to international arbitration people have been prosecuted for bribery of government employees and such submission is generally recognised in the Netherlands. The (article 177 of the Penal Code and/or article 363 of the Penal Code) recognition and enforcement in the Netherlands of arbitration awards and/or for bribery of non-government employees (article 328ter of rendered in countries that are a party to the New York Convention the Penal Code). The Dutch Criminal Code makes a distinction are subject to the provisions of the New York Convention. between active and passive bribery, as well as a distinction between bribery in public industry and bribery in private industry. 15.2 Is your jurisdiction a contracting state to the New York Also, in these cases, subjects have been indicted for money laundering Convention or other prominent dispute resolution (article 420bis/420ter of the Penal Code), as well as for forgery (article conventions? 225 of the Penal Code), theft (310/311 of the Penal Code), other malversation (321/322 of the Penal Code) and even for membership The Netherlands has been a contracting state to the New York of a criminal organisation (article 140 of the Penal Code). Convention since April 1964. Maximum penalties vary from four to 12 years of imprisonment or even, in a combination of sentences, 16 years of imprisonment. 15.3 Are any types of disputes not arbitrable under local Also, fines with a maximum of €82,000 or €820,000 (for legal law? entities), or even up to 10% of the annual turnover (for legal entities) can be imposed. Arbitral proceedings in the Netherlands may not lead to the determination of legal consequences that are not at the free disposal 13 Applicable Law of the parties, such as certain intellectual property disputes, the granting of a liquidation order, certain family law disputes and the annulment of a decision of a legal person. 13.1 What law typically governs project agreements? 15.4 Are any types of disputes subject to mandatory In national projects, the governing law is usually Dutch law. domestic arbitration proceedings?

13.2 What law typically governs financing agreements? No, there are not.

Idem. In international projects, the governing law is sometimes 16 Change of Law / Political Risk English law.

13.3 What matters are typically governed by domestic law? 16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees? Domestic law governs security arrangements, equity subscription agreements, subordination agreements, intercreditor agreements No, there has not. (under certain circumstances) and direct agreements.

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There are several exemptions available, e.g. (i) offerings to <150 17 Tax persons, (ii) offerings to qualified investors only, (iii) nominal value of security/total counter value per investor >EUR 100,000, (iv) 17.1 Are there any requirements to deduct or withhold tax total amount issued in European Economic Area per calendar year from (a) interest payable on loans made to domestic or

Netherlands interest on long-term subordinated profit-sharing loans may be treated as a dividend. If so, a 15% withholding tax may apply. 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an 17.2 What tax incentives or other incentives are provided Islamic project financing in your jurisdiction. preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages Each of the Istina’a, Ijarah, Wakala and Murabaha instruments can or other security documents, either for the purposes be applied under Dutch law. For Wakala, it should be noted that each of effectiveness or registration? power of attorney (volmacht) or mandate (lastgeving), whether or not irrevocable, granted by the company will terminate by force of There are no formal incentives that apply specifically to foreign law, without notice, upon bankruptcy (faillissement) of the grantor investors or creditors. However, it is important to know that and will cease to be effective in case of suspension of payments foreign investors can discuss their Dutch tax position in advance (surseance van betaling). with the Dutch Tax Authorities and obtain a binding tax ruling. A There are no specific tax rules applicable to these instruments. government agency, the Netherlands Foreign Investment Agency Generally speaking, the remuneration of such instrument will (http://www.nfia.nl), can provide information on this subject. be treated as interest. If an instrument, even labelled as debt for Foreign investors are subject to Dutch (corporate) income tax on civil law purposes, is perpetual or with a maturity of over 50 years, income from Dutch sources. Except for wage withholding tax subordinated and profit-sharing, the remuneration is considered a (on wages, salaries and certain other remunerations for labour of non-deductible dividend that is subject to a 15% withholding tax. individuals) and dividend withholding tax, no withholding taxes apply on payments to non-residents. 19.2 In what circumstances may Shari’ah law become Dutch investors are subject to Dutch income tax on their worldwide the governing law of a contract or a dispute? Have income. However, foreign source income generally may benefit there been any recent notable cases on jurisdictional from an exemption or credit to avoid international double taxation. issues, the applicability of Shari’ah or the conflict of The most important exemptions are income and gains from Shari’ah and local law relevant to the finance sector? qualifying subsidiaries (participation exemption), foreign enterprises (permanent establishment exemption) and foreign real properties. Shari’ah law will be regarded by the (ordinary) Dutch courts as a non-national system of law. Also, the Rome I EC Regulation that is applicable in the Netherlands will most probably not recognise 18 Other Matters Shari’ah law for this reason. The parties to an international Islamic finance contract with the jurisdiction of the ordinary Dutch courts, 18.1 Are there any other material considerations which may choose Shari’ah as the governing law but preferably combined should be taken into account by either equity with any other national law (which can be a country that applies investors or lenders when participating in project Shari’ah law). We are not aware of any Dutch cases involving financings in your jurisdiction? Shari’ah law as governing law (such as the Shamil Bank case in the UK). Investors and lenders should take into account the possibility that If, however, parties opt for arbitration, it is possible to give the companies employing more than 50 persons have to institute a instruction to the arbitrators to apply Shari’ah law. Article 1054 of works council with advisory powers on matters such as important the Code of Civil Procedure provides that the arbitrators must apply finance transactions, the granting of security for debts of third ‘applicable law’ (regelen des rechts). According to the legislative parties, important co-operations, transfer of control, etc. history of said article 1054, ‘applicable law’ also includes non- national systems of law, such as the lex mercantoria. It is also 18.2 Are there any legal impositions to project companies possible to instruct the arbitrators to act as ‘amiable compositeurs’ issuing bonds or similar capital market instruments? (goede mannen naar billijkheid) and apply the equitable principles Please briefly describe the local legal and regulatory under Shari’ah law. requirements for the issuance of capital market instruments. 19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or Subject to (national implementation of) the EU Prospectus Directive enforceability in your jurisdiction? If so, what steps and the EU Prospectus Regulation, issuance to the public or could be taken to mitigate this risk? admission to trade on a regulated market of securities (including transferable bonds) requires a prospectus, which shall be approved This is not applicable in the Netherlands. by the Dutch supervisory authorities (AFM) or other EU supervisory authorities.

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Acknowledgment The authors would like to acknowledge the assistance of Freek Snel, Arno Panis, Jouko Barensen, Stephan Sluijters, René van de Klift, Karen Haanstra, Leyla Bozkurt, Paul Verloop, Brigitte Ebben, Parwana Teymoeri and Marieke Groenendijk in writing this chapter.

Tom Ensink Alette Brehm Ploum Lodder Princen Ploum Lodder Princen Blaak 28 (3011 TA) Blaak 28 (3011 TA) Netherlands Rotterdam Rotterdam The Netherlands The Netherlands

Tel: +31 10 440 6458 Tel: +31 10 440 6468 Fax: +31 10 436 4400 Fax: +31 10 436 4400 Email: [email protected] Email: [email protected] URL: www.ploum.nl URL: www.ploum.nl

Tom Ensink LL.M. (1967), attorney at law, graduated from Maastricht Alette Brehm (1983), attorney at law, graduated from Leiden University University in 1989 and gained his LL.M. Master of Laws degree at in 2007. She joined Ploum Lodder Princen in January 2008. Alette Tulane Law School in New Orleans in 1991. Before joining Ploum specialises in financing and corporate law. She acts as a counsel for Lodder Princen, Tom trained and was an associate at an international lenders and borrowers alike on domestic and international financing Dutch firm. In 1997 he joined Ploum Lodder Princen, where he became transactions and general lending or borrowing issues. She also partner in 1999. As head of the banking and finance department of advises Dutch and foreign companies on corporate transactions (M&A Ploum Lodder Princen, Tom specialises in corporate and banking and joint ventures) and general corporate law issues. transactions, preferably with a multijurisdictional element, in which he acts on both the lender’s and the borrower’s side.

Founded in 1995 as one of the first break-away firms in the Netherlands, Ploum Lodder Princen is not an average full-service law firm. Its clients will confirm that it is significantly different. The firm strives to support businesses in achieving their objectives. Combining know-how and practical experience to its clients’ advantage is its talent. The 70-plus lawyers and civil law notaries at Ploum Lodder Princen understand what business is about and know what is important. The firm focuses on what matters to businesses and helping clients achieve their goals swiftly and smoothly. Its competitive fee arrangements, in addition to this pragmatic way of working, mean that clients (including both banks and borrowers) find Ploum Lodder Princen a perfect alternative to bigger firms.

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Nigeria Oyeyemi Oke

Templars Mayowa Olugunwa

1 Overview 2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the 1.1 What are the main trends/significant developments in procedure? the project finance market in your jurisdiction? Security may be taken over real property, plant, machinery and There has been marked progress in the provision of partial risk equipment, subject to regulatory approvals in certain instances. guarantees by the Federal Government of Nigeria to support The applicable procedure for taking security over physical assets greenfield independent power producers. This includes credit is dependent on the security subject. For example, security over enhancement for Nigerian bulk electricity trading and private debt land may be granted by a legal or equitable mortgage. Subject to mobilisation support. the location of the land in the different states of Nigeria, a legal mortgage may be created by: 1.2 What are the most significant project financings that a. a sub-demise; have taken place in your jurisdiction in recent years? b. a charge by deed expressed by way of legal mortgage; or In recent years, there have been significant project financings in the c. an assignment with a covenant for re-assignment, amongst others. power sector. A good example is the financing of the development of 500MW Azura Power Project in Edo State for the supply of power A legal mortgage over real property in any state in Nigeria may to the national grid. The project finance is in respect of a greenfield only be created with the prior written consent of the governor of the independent power plant in Edo State, Nigeria. This pioneering relevant state. project has paved the way for other power projects in Nigeria which With regard to taking security over plant, machinery and equipment utilise credit enhancement products. (“Equipment”), security is usually created by a fixed charge over the Equipment, and any agreement or document which relates to the Equipment or further to which a benefit from the Equipment 2 Security accrued.

2.1 Is it possible to give asset security by means of 2.3 Can security be taken over receivables where the a general security agreement or is an agreement chargor is free to collect the receivables in the required in relation to each type of asset? Briefly, absence of a default and the debtors are not notified what is the procedure? of the security? Briefly, what is the procedure?

Security may be granted on all types of assets under Nigerian law and Security can be taken over receivables, with the chargor free to this may be done via a general security document creating charges, collect the receivables by way of a security assignment. If a notice liens, mortgages and/or security assignments on the relevant types of of assignment is not provided, the assignment would take effect assets. under Nigerian law as an equitable assignment and the consequence The formalities required to perfect a general or other security would be that (a) the debtors would earn a full discharge if it paid document is the payment of stamp duties on the relevant document(s) the receivables to the chargor, and (b) the chargee would have to join at the Federal Inland Revenue Service (“FIRS”) and registration the chargor as co-claimant or co-defendant in any action to enforce of same at the central companies registry – the Corporate Affairs the assignment. Commission (“CAC”) – within 30 (thirty) days and 90 (ninety) days of its creation, respectively. 2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?

Security can be taken over cash deposited in a bank account by a charge or lien over the account. Typically, a floating charge is created through an account security agreement or similar arrangement

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where a charge will be created over all present and future rights, interests, benefits, etc. of the bank account. The chargor is usually 3.2 If a security trust is not recognised in your restricted from withdrawing monies from the charged bank account, jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor save in accordance with the account administration agreement or as status) to achieve the effect referred to above which otherwise agreed by the parties. would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to 2.5 Can security be taken over shares in companies enforce their security separately? incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? The concept of a security trust is recognised in Nigeria. Nigeria Security may be taken over shares in Nigerian companies. Also, shares are in certificated form in Nigeria. Security may be created over shares 4 Enforcement of Security in a Nigerian company by way of a charge, a security assignment or an equitable mortgage. It is the usual practice for the creditor or security trustee to take physical possession of the share certificates, along with 4.1 Are there any significant restrictions which may other necessary documents as may be applicable. impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other 2.6 What are the notarisation, registration, stamp duty creditors/the company (or its trustee in bankruptcy/ and other fees (whether related to property value or liquidator), or (b) (in respect of regulated assets) otherwise) in relation to security over different types regulatory consents? of assets (in particular, shares, real estate, receivables and chattels)? Generally, there are no significant restrictions which impact the timing and value of enforcement. It is important to note, however, Stamp duties are payable on all security documents and may be that in certain enforcement scenarios (such as enforcement of nominal or ad valorem. security over oil and gas assets), regulatory consents may be CAC registration fees are also payable for security interests created required in order to complete any such enforcement. against the assets of a company at a rate of 1% of the value of the secured assets for private companies and 2% in the case of a public 4.2 Do restrictions apply to foreign investors or creditors company. in the event of foreclosure on the project and related With respect to real estate, registration fees are payable at the companies? relevant state land registries where the land is located. Fees are not payable in respect of notarisation, as notarisation is not There are no special restrictions imposed on foreign investors required to validate the security instruments. or creditors in the event of foreclosure on the project and related companies.

2.7 Do the filing, notification or registration requirements in relation to security over different types of assets 5 Bankruptcy and Restructuring involve a significant amount of time or expense? Proceedings

Subject to any bureaucratic delays, perfection formalities for security taken over different types of assets may be completed 5.1 How does a bankruptcy proceeding in respect of the within 5 (five) to 15 (fifteen) days. project company affect the ability of a project lender to enforce its rights as a secured party over the security? 2.8 Are any regulatory or similar consents required with respect to the creation of security over real property Insolvency or insolvency proceedings would ordinarily constitute (land), plant, machinery and equipment (e.g. pipeline, whether underground or over-ground), etc.? an event of default under the loan and security documentation. As such, the pendency of insolvency proceedings will not generally affect the right of a project lender to enforce its security. In the event Please see question 2.2 above. Also, regulatory consents are that a winding-up order has been made or a provisional liquidator sometimes required for the creation of a security interest over appointed by the court, the project lender will require the leave of physical assets in certain industries. the court to enforce its security.

3 Security Trustee 5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security? 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee Nigerian law guarantees preferential payments in the event of the or agent (rather than each lender acting separately) to winding up of a company; these are: enforce the security and to apply the proceeds from a. charges and taxes due and payable by the company; the security to the claims of all the lenders? b. deductions made under the Nigerian Social Insurance Trust Fund Act; The role of a security trustee or agent is recognised and they would c. wages or salary of any clerk or servant for services to the be permitted to enforce the security on behalf of the secured parties. company;

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d. wages of any workman or labourer for services to the (as amended) (“Constitution”), the Nigerian government may company; and compulsorily take possession of an immovable property or e. all accrued holiday remuneration becoming payable to compulsorily acquire interests in any such property, provided that any clerk, servant, workman or labourer on termination of compensation is promptly paid. This notwithstanding, the Nigerian employment before or by effect of the winding-up order. Investment Promotion Commission Act (“NIPC Act”) guarantees It should also be noted that holders of perfected security interests are that project companies or assets will not be expropriated by any entitled to payment ahead of all other unsecured creditors. government of the federation unless it is in the national interest, for a public purpose and carried out according to a law that makes provisions for fair compensation to be given and also allows the 5.3 Are there any entities that are excluded from aggrieved previous owner access to the courts to determine his

Nigeria bankruptcy proceedings and, if so, what is the applicable legislation? interests or the level of compensation to which he is entitled.

There are no private entities excluded from insolvency proceedings. 7 Government Approvals/Restrictions

5.4 Are there any processes other than court proceedings 7.1 What are the relevant government agencies or that are available to a creditor to seize the assets of departments with authority over projects in the typical the project company in an enforcement? project sectors?

Subject to the nature of the security interest, a creditor with a perfected The relevant agencies are as follows: security interest may seize/take possession of the assets or sell such ■ Electric power sector: Nigerian Electricity Regulatory assets by a power of sale, without the need for court proceedings. Commission. ■ Oil and gas: Department of Petroleum Resources. 5.5 Are there any processes other than formal insolvency ■ Telecommunications: Nigerian Communications Commission. proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown ■ Infrastructure: Federal Ministry of Works, Housing and of dissenting creditors? Power.

A project company may engage in a scheme of arrangement, or a 7.2 Must any of the financing or project documents be compromise with its creditors, to restructure its debts. registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable? 5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction. The instrument that creates a charge is required to be registered at the CAC within 90 days of creation. Stamp duties are also to be paid on all other financing and project documents, to be admissible as Directors who continue to trade whilst a company is in financial evidence in any legal action for the enforcement of rights. difficulty may become personally liable for a refund of money or property received by the company and misapplied. Such director shall be required to refund any monies improperly paid away. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, 6 Foreign Investment and Ownership can such a licence be held by a foreign entity)? Restrictions Title to land is vested in the governor of the state in which the land is located and leasehold interests are granted to private individuals 6.1 Are there any restrictions, controls, fees and/or taxes or corporate entities. Each individual state in Nigeria has an on foreign ownership of a project company? “acquisition of lands by aliens” law which prohibits non-Nigerians from acquiring land except with the approval of the governor of the Generally, there are no restrictions, controls, fees and/or taxes relevant state. on foreign ownership of a project company. However, in certain The Constitution, Mineral and Mining Act 2007 and the Petroleum Act industries such as oil and gas, certain preferences are attributable to 1990 vest the entire property in, and control of, mineral resources and a company with at least 51% ownership by Nigerians. petroleum under or upon any land in Nigeria, its contiguous continental shelf, and rivers, streams and water courses throughout Nigeria in the 6.2 Are there any bilateral investment treaties (or other federal government of Nigeria. Different licences are required to international treaties) that would provide protection search for and exploit these resources or to operate pipelines for their from such restrictions? distribution. The licences required for mining natural resources may only be granted to a company incorporated in Nigeria. See question 6.1 above.

7.4 Are there any royalties, restrictions, fees and/or 6.3 What laws exist regarding the nationalisation or taxes payable on the extraction or export of natural expropriation of project companies and assets? Are resources? any forms of investment specially protected? Taxes, duties or royalties payable in respect of extraction of minerals Under the Constitution of the Federal Republic of Nigeria 1999 or other natural resources in Nigeria include the following:

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■ Petroleum Profits Tax. ■ Company Income Tax. 7.10 Is there any specific legal/statutory framework for procurement by project companies? ■ Royalties for the sale of mineral resources under an Exploration Licence, under the Minerals and Mining Act. There is no specific legal framework for procurement by private ■ Royalties payable under the Petroleum Act. project companies. Where the project company is government- owned, the Public Procurement Act applies. 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange? 8 Foreign Insurance

Generally, there are no restrictions on foreign exchange. That Nigeria said, under the applicable exchange control laws and regulations 8.1 Are there any restrictions, controls, fees and/or taxes in Nigeria, an inward remittance of foreign exchange for equity on insurance policies over project assets provided or investments or in the form of a loan is required to be evidenced guaranteed by foreign insurance companies? by a certificate of capital importation (“CCI”). The CCI serves as proof of the receipt of the relevant funds and their conversion The Nigerian Insurance Act (“Insurance Act”) prohibits the to Naira. It allows access to the official foreign exchange market transacting of insurance and reinsurance business with a foreign for the purpose of payment of dividends or capital repatriation (in insurer or reinsurer in respect of the following: the case of equity) or interests and principal (in the case of loans) a. Fire insurance and reinsurance. intended to be remitted outside Nigeria by the investee company or b. Motor insurance and reinsurance. the relevant investor. c. Liability insurance and reinsurance. d. Life insurance and reinsurance. 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment e. Accident insurance and reinsurance. returns or loan payments to parties in other However, where the National Insurance Commission is satisfied that jurisdictions? a risk is of an exceptional nature, it may, in writing, permit insurance or reinsurance with a foreign insurer. There are generally no restrictions on repatriation of funds, returns on investment or loan payments to other jurisdictions. Nigerian laws 8.2 Are insurance policies over project assets payable to guarantee unconditional transferability of funds including dividends foreign (secured) creditors? and loan repayments (net of all taxes). To repatriate funds through the proper channels, capital must have been imported into Nigeria Insurance policies over project assets are payable to foreign through an authorised dealer and a CCI issued. Interest repayments (secured) creditors. However, there are regulatory restrictions in and dividends are subject to withholding taxes at the rate of 10%. A respect of Nigerian residents (including companies) assigning their lower rate of 7.5% is applicable to interest and dividend payments to insurance policies to non-residents. countries with double taxation agreements with Nigeria.

7.7 Can project companies establish and maintain 9 Foreign Employee Restrictions onshore foreign currency accounts and/or offshore accounts in other jurisdictions? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed Yes, they can. by a project company?

7.8 Is there any restriction (under corporate law, Yes. Project companies seeking to employ foreign workers are exchange control, other law or binding governmental required to apply to the Federal Ministry of Interior for expatriate practice or binding contract) on the payment of quota positions for the number of foreign workers, technicians, dividends from a project company to its parent engineers or executives they seek to employ. company where the parent is incorporated in your jurisdiction or abroad? In addition to the above, a Temporary Work Permit is required for short-term employees and a Combined Expatriate Residence Permit See questions 7.5 and 7.6 above. and Aliens Card (“CERPAC”) must be obtained from the Nigeria Immigration Service for permanent employees. For the grant of an expatriate quota or CERPAC, the company must 7.9 Are there any material environmental, health and show that the foreign employee possesses a skill which is not readily safety laws or regulations that would impact upon a project financing and which governmental authorities available in Nigeria. administer those laws or regulations? 10 Equipment Import Restrictions The National Environmental Standards and Regulations Enforcement Agency (Establishment) Act 2007 and the Environmental Impact Assessment Act 1992 (“EIA Act”) are material environmental laws 10.1 Are there any restrictions, controls, fees and/or taxes that would impact upon a project financing. They are administered by on importing project equipment or equipment used by the National Environmental Standards and Regulations Enforcement construction contractors? Agency. The EIA Act prohibits companies from undertaking projects without prior consideration of their environmental effects. Contracts for the importation of equipment and any other form of

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technology must be approved by the National Office of Technology Acquisition and Promotion. Import duties are also payable on 14 Jurisdiction and Waiver of Immunity importation of the equipment. 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 10.2 If so, what import duties are payable and are exceptions available? Yes, it is. Import duties are payable based on the Common External Tariff. An exception which is available on the import of equipment, is on 15 International Arbitration

Nigeria goods which are imported for the purpose of export.

15.1 Are contractual provisions requiring submission 11 Force Majeure of disputes to international arbitration and arbitral awards recognised by local courts?

11.1 Are force majeure exclusions available and enforceable? Yes. The Arbitration and Conciliation Act provides for the recognition and enforcement in Nigeria of foreign arbitral awards irrespective of Yes, they are. where they were made.

15.2 Is your jurisdiction a contracting state to the New York 12 Corrupt Practices Convention or other prominent dispute resolution conventions?

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting Yes. Nigeria has also ratified the International Centre for Settlement the projects sector)? What are the applicable civil or of Investment Dispute Convention. criminal penalties? 15.3 Are any types of disputes not arbitrable under local There are general non-project-specific rules which prohibit corrupt law? business practices under Nigerian law. Penalties are dependent on the offence and the legislation under which they are brought. Tax disputes, election matters, criminal cases, divorce matters An example is that under the Corrupt Practices and Other Related (dissolution of marriage, etc.) and disputes involving the Offences Act, the penalty for the individuals who engage in the interpretation of statutes are not arbitrable under Nigerian law. bribery or corrupt practice is imprisonment of between 5 (five) and 7 (seven) years. 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? 13 Applicable Law No types of disputes are subject to mandatory domestic arbitration proceedings. 13.1 What law typically governs project agreements?

Project agreements may be governed by any law chosen by the 16 Change of Law / Political Risk parties. Typically, parties choose Nigerian or English law to govern project agreements. 16.1 Has there been any call for political risk protections such as direct agreements with central government or 13.2 What law typically governs financing agreements? political risk guarantees?

The governing law for financing agreements is dependent on It is not unusual to have political risk protection such as direct whether the lenders are domestic or foreign. Foreign lenders are agreements or political risk guarantees with the federal or state more comfortable with English law. Generally, Nigerian or English government through the relevant ministry, department or agency in law governs project agreements. a project involving a conferment of rights on the project company by the government or a project involving public interests. In the power sector, there has been a trend of “Put and Call Option Agreements” 13.3 What matters are typically governed by domestic law? between the project sponsors and the Nigerian government, as well as “Partial Risk Guarantees”, which seek to afford some level of Project agreement and security documents over immovable property protection with respect to political risks. or rights over immovable property are usually governed by domestic law.

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17 Tax 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory 17.1 Are there any requirements to deduct or withhold tax requirements for the issuance of capital market from (a) interest payable on loans made to domestic or instruments. foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? A company issuing bonds or other similar capital market instruments is required to be a public limited liability company and the capital Yes, there is a requirement to withhold tax on interest payable market instruments are required to be registered with the Securities on both domestic and foreign loans. There is no requirement

and Exchange Commission (“SEC”) before they can be issued. In Nigeria to withhold tax on proceeds of a claim under a guarantee or the addition, the SEC Rules require the capital market instruments to proceeds of enforcing security. be rated by a ratings agency registered with the SEC or by an SEC- approved, internationally recognised rating agency. Bonds issued 17.2 What tax incentives or other incentives are provided through a public offering must be rated at investment grade BBB preferentially to foreign investors or creditors? What or above. taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration? 19 Islamic Finance

There are no tax incentives or other incentives provided preferentially to foreign investors or creditors. However, a project company may 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha apply for the grant of pioneer status, which confers a tax holiday instruments might be used in the structuring of an Islamic project financing in your jurisdiction. for a period of up to five years subject to the fulfilment of certain conditions and depending on the applicable sector in which the project company intends to operate. Istina’a, Ijarah, Wakala and Murabaha, amongst others, are acceptable principles under the SEC Rules which may be applied in Save for payment of stamp duties and CAC registration fees as an Islamic Fund. The SEC requires that the fund manager offering highlighted under question 2.6 above, there are no taxes that apply Shari’ah-compliant portfolio management must ensure that its to foreign investments, loans or other security documents for the investment activities are limited to Shari’ah-compliant investments purposes of effectiveness or registration. and that part of the fund’s assets are invested in unquoted securities. The fund manager is required to prepare or forward annually, a 18 Other Matters written disclosure, certificate of compliance and declaration to the board of directors of the fund manager and the trustees that the fund is carried out in accordance with Shari’ah principles. 18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project 19.2 In what circumstances may Shari’ah law become financings in your jurisdiction? the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of The Companies Income Tax Act provides for certain tax exemptions Shari’ah and local law relevant to the finance sector? in respect of interest payable on foreign loans, depending on the tenor of the loan and the moratorium as follows: There have been a few transactions where Islamic finance has been Repayment Period used. Governing law clauses under such contracts are governed in Grace Period Exemption Allowed including Moratorium accordance with English law to the extent that it does not contradict Islamic rules and principles of Shari’ah. In the event of a conflict, Above 7 years Not less than 2 years 100% Shari’ah law prevails. Due to the fact that Islamic finance is an Not less than 18 5–7 years 70% emerging mode of project finance, there is a dearth of cases on months jurisdictional issues concerning the applicability of Shari’ah. Not less than 12 2–4 years 40% months 19.3 Could the inclusion of an interest payment obligation Less than 2 years Nil Nil in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

Interest payment obligations are excluded in Islamic finance.

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Oyeyemi Oke Mayowa Olugunwa Templars Templars 5th Floor, The Octagon 5th Floor, The Octagon 13A, AJ Marinho Drive 13A, AJ Marinho Drive Victoria Island Victoria Island Lagos Lagos Nigeria Nigeria

Tel: +234 1 4611 294 Tel: +234 1 4611 294 Email: [email protected] Email: [email protected] URL: www.templars-law.com URL: www.templars-law.com Nigeria Oyeyemi Oke is a Senior Associate in the Energy & Project Finance Mayowa Olugunwa is a key Associate in the Energy and Finance and Tax practice groups. Oyeyemi is also a Chartered Accountant and practice groups. Prior to joining the firm, Mayowa garnered experience a member of the Chartered Institute of Taxation of Nigeria, and has working at two top-tier Lagos-based law firms. She frequently advises considerable experience of advising leading local and multinational lenders, project sponsors and third-party contractors on major social corporations on the structuring of various projects in the areas of Oil, infrastructure projects in Nigeria and is known for prudently achieving Gas, Power and Infrastructure Development. her clients’ objectives within given timelines.

Templars is one of the foremost integrated, full-service law firms in Nigeria. With offices in Lagos and Abuja, we are strategically placed to offer legal services to clients across the country. We currently have 10 partners and approximately 70 lawyers. Our strengths lie in diverse legal fields and in major sectors of the Nigerian economy. Our practice areas are broadly divided into: Energy & Projects; Banking & Finance; Corporate & Commercial; Dispute Resolution; and Tax. We have several years of experience in analysing business problems from a commercial perspective and proffering shrewd legal solutions. On principle, we work as a team with our clients to achieve tangible results, keeping their objectives in sight and focusing on key aspects of their business that are material to their success. Our services have been recognised repeatedly over the past 20 years. We are proud of our heritage and continue to serve our clients distinctively.

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Norway Kyrre W. Kielland

Advokatfirma Ræder DA Anne Christine Wettre

The vessel was financed through a loan syndicate consisting of 1 Overview DNB, NIBC, GIEK and Eksportkreditt Norge. Later the same year, in September 2016, the Norwegian ship owner Solstad Offshore 1.1 What are the main trends/significant developments in ASA took delivery of the gigantic pipeline laying vessel “Normand the project finance market in your jurisdiction? Maximus” from Norwegian yard Vard Brattvaag. VLS “Normand Maximus” is the largest and most expensive offshore vessel ever Traditionally, in Norway, project financing has been viewed in built in Norway with an estimated total cost of approximately USD connection with the construction of ships, rigs and other offshore 390 million. The vessel financing was syndicated by DNB, NIBC, units. The number of new project financings in the shipping and Swedbank, GIEK and Eksportkreditt Norge. offshore sectors has, however, been significantly reduced over the In the public sector we have seen three road projects which have last few years. During 2016 there were very few new financings in been accomplished as public-private partnerships – two on the these sectors. “E-39” and one on the new “E-18”. Also in the public sector, the The dramatic fall in oil prices, the cost-cutting projects of the oil European Investment Bank (EIB) announced in October 2015 a companies and the oversupply of offshore service vessels have EUR 200 million long-term loan to Norwegian airport operator rendered financing of new projects very difficult. A huge number of Avinor AS for the expansion and upgrading of Bergen airport. vessels within these sectors are currently laid up and most of the ship- owning companies on the western coast of Norway are undergoing 2 Security financial restructuring. The few projects in these sectors which have been able to obtain financing during 2016 are characterised by long and solid contracts with reliable counterparties and financially 2.1 Is it possible to give asset security by means of robust owners. a general security agreement or is an agreement Project financing is now more often seen in energy projects, such required in relation to each type of asset? Briefly, what is the procedure? as solar energy and wind power projects. However, the assumption last year that investments in Norwegian wind power projects would be more attractive has not yet materialised, which is most likely There is no concept under Norwegian law to give security by means due to energy prices currently being very low. Over the last two of a floating mortgage over all the assets of a person or entity. The years, an increase in project financing has been seen in real property main rule under Norwegian law is that only individualised assets or projects in Norway. assets which can be individualised may constitute collateral security. Some important exceptions to this rule are, however, recognised, as In recent years, project financing has often been raised in public the Norwegian Mortgages and Pledges Act (the “MPA”) opens up debate as an alternative means of financing public projects to that the possibility to mortgage groups of certain specified assets, such of using the governmental budget, including proposals for the as receivables (factoring), machinery and plant, inventory, farming financing of projects such as railways, roads and schools through products and fishery tools, and to thereby create a floating mortgage so-called public private partnership projects (“PPP-projects” or in over such groups of assets. Norwegian (No): “OPS”), and it is likely that such financing will be more commonly used in these sectors in the future. Inter alia, the Norwegian government has established an infrastructure fund and a 2.2 Can security be taken over real property (land), plant, publicly-owned financing entity for road projects. machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure? 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? Section 2-1 of the MPA provides that collateral security can be taken over real property, registered rights in real property and undivided In April 2016, Norwegian ship owner Østensjø Rederi took interests in real property. Leasing and owner-occupied units fall within delivery of the offshore vessel “Edda Freya” from Norwegian yard this category. Unless otherwise agreed, the security encompasses Kleven Verft. OCV “Edda Freya” is among the world’s largest the land (ground) and houses, buildings, plants, etc. on the ground. offshore construction vessels with an estimated new build cost of The mortgage is perfected by the registration of standard mortgage approximately NOK 1.4bn, i.e. approximately USD 170 million. documents with the Norwegian Land Registry (No: Statens Kartverk).

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Motor vehicles used in or determined for use in business activity, movable production machinery which is used in or determined 2.4 Can security be taken over cash deposited in bank for use in construction business, and railway material used in or accounts? Briefly, what is the procedure? determined for use in railway traffic, can be pledged as separate categories. The pledge can cover each vehicle or machine separately Cash deposited in bank accounts is considered receivables and can or be a fleet mortgage. The pledge is perfected by registration in the be pledged the same way as receivables on named debtors. Legal Register of Mortgaged Movable Property (No: Løsøreregisteret). protection is established by way of notification to the debtor, in this Furthermore, there are some special provisions in the MPA (sections case the bank. 3-9 and 3-10) stating that certain assets related to farming and There is a special regulation in the MPA section 4-4, paragraph 2, fishing equipment used in fishing industries may serve as collateral that cash on accounts in a credit institution can be pledged in favour Norway security. Perfection is obtained by registration in the Register of of the credit institution itself. As regards consumers, such a pledge Mortgaged Movable Property (No: Løsøreregisteret). must be established through written agreement and the pledge can A floating charge can also be established over an entity’s operating only comprise cash in a specified bank account which has been set assets, cf. the MPA section 3-4 (No: driftstilbehørspant) (e.g. up in connection with the agreement. machinery, plant and other equipment, certain intellectual property rights, such as rights in trademarks, patents and designs, acquired 2.5 Can security be taken over shares in companies copyrights, plant breeders’ rights and certain mineral exploitation incorporated in your jurisdiction? Are the shares in rights, etc.). Perfection is obtained by registration in the Register of certificated form? Briefly, what is the procedure? Mortgaged Movable Property (No: Løsøreregisteret). The Ministry of Petroleum and Energy, which is the governing Shares in limited liability companies, which are not registered in a body with regard to the issuance of licences for exploration and securities register, can be pledged/mortgaged unless otherwise set exploitation activities of oil and gas on the Norwegian Continental out in the articles of association of the company, cf. the MPA section Shelf, may give permission for a licence-holder to pledge the entire 4-2a. Perfection is created by notification to the company that the licence or its share of a licence; cf. section 6-1 of the Petroleum share(s) is/are pledged. Act. Perfection is obtained by registration in the Petroleum Registry If the company’s shares are registered in a securities register, (No: Petroleumsregisteret). The pledge comprises the rights that perfection is created by registration of the pledge in the securities follow from the licence from time to time and other rights of the register, cf. the MPA section 4-1, paragraph 3. pledgor related to the activity carried out pursuant to the licence; cf. Partnership shares in Norwegian limited liability partnerships can § 6-2. Thus, ownership to pipelines and rights related to the use of also be pledged. Perfection is obtained by a transfer of the possession pipelines would be included in the pledge. of the partnership shares to the pledgee, and thus it is required that Ownership to and security in high-voltage power lines is the partnership agreement allows for physical partnership shares to perfected by way of registration in the Power Line Registry (No: be issued. Kraftledningsregistret). The pledge must comprise the entire Share certificates are no longer issued. Security over shares in pipeline which is subject to the pledge. Norwegian companies can validly be agreed regardless of whether the agreement is governed by the laws of another country, as long as the 2.3 Can security be taken over receivables where the Norwegian law requirements for legal perfection are complied with. chargor is free to collect the receivables in the When the company is notified that a share is pledged, this absence of a default and the debtors are not notified information shall, without undue delay, be recorded in the register of the security? Briefly, what is the procedure? of shareholders with a note of the day the information was added to the shareholders’ register, and the name, address and organisation Receivables which the mortgagor (i) has on a named debtor, or (ii) number (if applicable) of the pledgee. The registration of the pledge will obtain against a named debtor in a specified legal relationship in the shareholders’ register does not in itself create legal protection (cf. section 4-4, paragraph 1) can be mortgaged. Legal protection for the pledge, as this is created already by notification of the pledge is obtained through notification of the debtor that the receivable is to the company. If the company’s shares are registered in a securities pledged. Thus, such security cannot be enforced unless the debtor register, the shareholders’ register is replaced by the registration in is notified of the security. It is not a requirement under Norwegian the securities register. law for the debtor to have acknowledged the notice, but in practice banks often require such acknowledgment from the debtor, to obtain evidence that the notification has been sent and that legal protection 2.6 What are the notarisation, registration, stamp duty is obtained. and other fees (whether related to property value or otherwise) in relation to security over different types Pursuant to the MPA section 4-10, a business person or entity can of assets (in particular, shares, real estate, receivables pledge receivables which it has or will obtain in the future from and chattels)? the sale of goods or services in its business or in a separate part of its business (“factoring”). This is done in a standard mortgage Except for nominal fees for registration in applicable registries, no document. Legal protection is created by registration in the stamp duty or similar fees or taxes are or will become payable in Registry of Mortgaged Movable Properties. No express notification connection with execution of the pledge. of the debtors is required in order to create such security, but the information about the pledge is publicly available through registration in the Registry of Mortgaged Movable Properties. 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets Security can be taken over receivables even if the chargor is free to involve a significant amount of time or expense? collect the receivables in the absence of a default. No, the time or expense required for the filing, notification or registration required to create legal protection of security is limited.

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The Enforcement and Execution Commissioner (No: Namsfogden) 2.8 Are any regulatory or similar consents required with will then administrate the sale. Moreover, depending on the nature respect to the creation of security over real property of the real estate, licensing requirements may impact the timing and (land), plant, machinery and equipment (e.g. pipeline, value of enforcements. For other assets, the Commissioner may whether underground or overground), etc.? in many instances initiate a forced sale without a judgment of a Norwegian court. No, the security has legal authority in law and regulations and no regulatory consent is required in addition to this. The Financial Collateral Act section 7 provides an exemption from the rules in the Enforcement Act and enables the parties to enter into an agreement that entitles the mortgagee to redeem the pledge 3 Security Trustee immediately at market value. Norway According to the Enforcement Act, the forced sale of an asset is to be carried through in the way that provides the best possible 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of economic outcome. It is generally up to the Commissioner to decide a security trustee or agent and allow the security how the asset should be realised. Public auctions are an alternative trustee or agent (rather than each lender acting if the asset is suitable for this. However, the Act also has provisions separately) to enforce the security and to apply the regarding the handing over of the asset to the secured creditor, which proceeds from the security to the claims of all the may be a good option if the market demand is lower than usual, and lenders? it is assumed that a sale will not achieve a reasonable price. In general, a forced sale will not result in a selling price in accordance Although Norwegian law does not recognise the concept of a with market value due to the circumstance that it is a forced sale. security trustee as such, the role of a security agent and/or facility agent acting on behalf of the lenders will be recognised. As long as enforcement does not involve legal proceedings, the agent will 4.2 Do restrictions apply to foreign investors or creditors be able to act on behalf of the secured parties (from time to time) in the event of foreclosure on the project and related companies? in relation to enforcement of security and application of proceeds against the claims of the secured parties. There are no particular restrictions on foreign investors or creditors A facility agent or security agent will normally not be entitled to in the event of foreclosure. See question 6.1 for further details with initiate legal proceedings on behalf of the lenders. In relation to respect to ownership restrictions. bond trustees acting on behalf of the bond-holders, the Norwegian Supreme Court recently confirmed that the bond trustee was entitled to initiate legal proceedings in its own name. Whether this, in 5 Bankruptcy and Restructuring certain circumstances, might also be the case for agents acting on Proceedings behalf of a large syndicate of lenders, remains unprecedented. To avoid risk of dismissal we regularly advise that agents formally include the secured parties as claimants in any legal proceedings, to 5.1 How does a bankruptcy proceeding in respect of the the extent this is feasible. project company affect the ability of a project lender to enforce its rights as a secured party over the security?

3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available When insolvency proceedings have been initiated, secured creditors (such as a parallel debt or joint and several creditor generally have a right to preferential treatment, i.e. the right to get status) to achieve the effect referred to above which coverage from the realisation of the asset in which the creditor has would allow one party (either the security trustee or collateral, which leaves only a possible surplus of the realisation to the facility agent) to enforce claims on behalf of all be divided among other creditors. In general, only the appointed the lenders so that individual lenders do not need to administrator may realise the company’s assets and, pursuant to enforce their security separately? the MPA section 6-4, the bankrupt estate also has a first-priority statutory lien of 5% of the proceeds to cover necessary costs for See question 3.1 above. Alternative mechanisms such as joint handling of the bankrupt estate. and several creditor status are theoretically available, but such alternatives are less practical than the appointment of a facility agent The Bankruptcy Act section 117 states that the realisation of assets or a security agent to act on behalf of the lenders. shall be carried out in the manner that is expected to provide the best price for the asset. However, according to the Bankruptcy Act section 117 a, the administrator may sell the asset even if the value of 4 Enforcement of Security the asset is less than the secured claim, if the asset is sold along with other assets, and the combined sale is expected to provide a better price than by selling each asset separately, or if the sale is part of a 4.1 Are there any significant restrictions which may transfer of the entire business. Further, the Bankruptcy Act section impact the timing and value of enforcement, such 117 b states that the administrator may decide to abandon the estate’s as (a) a requirement for a public auction or the availability of court blocking procedures to other seizure of a particular asset of the company if the estate has no creditors/the company (or its trustee in bankruptcy/ economic interest in that asset, e.g. if the asset is placed as collateral liquidator), or (b) (in respect of regulated assets) and the secured claim exceeds the value of the asset. The asset is regulatory consents? then placed at the debtor’s disposal. However, the administrator may also revoke the seizure and, by agreement, transfer the asset to Depending on the collateral, different assets have different time the mortgagee according to the Bankruptcy Act section 117 c. Such frames with regard to realisation. Forced sale of real estate has to be agreement shall be entered into based on the market value of the approved by the district court and this might take up to six months. asset, and the mortgagee may then realise the asset.

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5.2 Are there any preference periods, clawback rights 5.4 Are there any processes other than court proceedings or other preferential creditors’ rights (e.g. tax debts, that are available to a creditor to seize the assets of employees’ claims) with respect to the security? the project company in an enforcement?

The Creditors Recovery Act of 1984 includes provisions regarding No. A creditor has to resort to legal proceedings in order to seize an the priority of claims and clawback rights. In general, claims asset of the project company in an enforcement. against the bankruptcy estate itself will be covered first according to section 9-2. Subsequently, preferential debts of first and second 5.5 Are there any processes other than formal insolvency priority will rank, according to sections 9-3 and 9-4. Thus, most proceedings that are available to a project company to Norway employees’ claims and tax debts will be covered first, in that order. achieve a restructuring of its debts and/or cramdown However, some parts of the employees’ claims and tax debts may of dissenting creditors? be considered without priority, according to sections 9-6 and 9-7. As a main rule, the priority provisions will not affect a claim that is The Bankruptcy Act of 1984 has provisions regarding voluntary secured, in which case the mortgagee’s claim has the best priority debt settlement and compulsory composition through which a in the collateral. However, security can under certain circumstances project company could achieve a restructuring of its debts. A be set aside. The administrator may challenge a company act that voluntary debt settlement requires acceptance from all creditors and has granted a creditor payment or security within a defined time thus a cramdown of dissenting creditors cannot be obtained through period prior to the bankruptcy. The provisions are objective, in the such a process. In order to commence a compulsory composition, sense that a creditor’s good faith is irrelevant, and the time frame the debtor must file a petition to the court for debt settlement is then three months prior to the filing of the bankruptcy, unless proceedings. The court will appoint a debt negotiations committee, the beneficiaries’ creditor is considered closely related to the which will prepare a composition proposal. If the proposal entails company, in which case transactions made up to two years prior to that the creditors will receive more than 50% of their claims, such the bankruptcy can be set aside. According to section 5-7, security proposal requires acceptance from more than 3/5 of the creditors. granted in order to secure existing debt and security for existing debt If less than 50% of the creditors’ claims will be covered, 3/4 of the which has not received legal protection without undue delay and creditors’ votes are required. which took place later than three months prior to the filing of the If the company has been taken under bankruptcy proceedings, claims demand for bankruptcy, may be set aside. can no longer be enforced by creditors unless the proceedings were Furthermore, gifts that have been made later than one year before initiated before the bankruptcy. Furthermore, pursuant to section the filing of the demand for bankruptcy, and two years if the receiver 5-8 of the Creditors’ Security Act, security obtained through an is a related party, may be set aside pursuant to section 5-2. Section attachment in the debtor’s assets within three months before the 5-6 provides that set-offs with receivables on the debtor which were demand for bankruptcy was received by the courts is not legally acquired later than three months from the filing of the demand for binding on the bankruptcy estate. If the security is obtained by bankruptcy can be set aside. There are also certain other clawback a related party, the time period extends to two years prior to the provisions available, e.g. in relation to extraordinary payments, receipt of the demand for bankruptcy by the court. extraordinary salary payments and security which is obtained by If the company has filed a petition for debt settlement proceedings, way of an attachment of assets shortly before the bankruptcy is a petition for bankruptcy filed by a creditor will not be processed by opened. the court until the debt settlement proceedings have become legally In addition, there is a subjective provision in section 5-9 that applies binding or closed, or the petition has been cancelled or declined. This to dispositions which are considered improper if the creditor knew rule also applies if the petition for bankruptcy has been filed, but is not or should have known that the debtor was in a difficult financial yet processed when the company files a petition for debt settlement situation, and the circumstances that made the disposition improper. proceedings; cf. the Bankruptcy Act section 16. Furthermore, This provision is applicable to dispositions which took place up to pursuant to the Bankruptcy Act section 17, a creditor may not file for 10 years prior to the bankruptcy. an attachment in company assets, unless the creditor’s claim arose after the initiation of the debt settlement proceedings. A petition for attachment will be processed when the petition for debt settlement has 5.3 Are there any entities that are excluded from been processed, and will be declined if the petition is granted. During bankruptcy proceedings and, if so, what is the applicable legislation? the first six months of the debt settlement proceedings, enforcement cannot be sought according to chapters 8 to 12 of the Enforcement Act without approval from the debt negotiations committee. A municipal entity (No: kommunalt foretak) cannot be taken under bankruptcy proceedings, as such enterprise is not considered to be an independent legal entity. Further, a Norwegian Foreign 5.6 Please briefly describe the liabilities of directors (if Enterprise (No: NUF) is not considered an independent legal any) for continuing to trade whilst a company is in entity, but rather a branch of a foreign limited company, and does financial difficulties in your jurisdiction. not normally have legal venue in Norway. A court may, however, commence bankruptcy proceedings against a company that has its Pursuant to the Companies Act section 17-1, the company, shareholders principal place of business in Norway. Thus, if the foreign limited and others may claim compensation from, inter alia, a member of the company is declared bankrupt based on the fact that its place of board of directors of the company for any loss caused by the board business is in Norway, the NUF will be processed as part of the member in this capacity due to negligence or wilful misconduct. bankruptcy proceedings. There are certain provisions in the Act providing that the board of The Guarantee Schemes Act chapter 4 has provisions entailing that directors has a duty to act if the company is in a difficult financial financial institution and insurance companies cannot be declared situation. Section 3-4 states that the company shall at all times have bankrupt. Such enterprises will instead be subject to administration an equity and a liquidity which are sufficient considering the risk by the authorities. of its business. The board of directors has to monitor the equity

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and liquidity of the company and assess the situation frequently, and Energy. In order to be pre-qualified, it has to demonstrate that it has, more often if the company faces financial difficulties. Section 3-5 inter alia, an organisation in Norway which has relevant competence. states that if the equity is less than sufficient according to section 3-4 Foreign ownership is in general subject to the same tax regime as or the equity is less than half of the share capital of the company, Norwegian ownership. In fact, the tax regime on asset taxation is the board has to assess the matter and convene a general meeting favourable to foreign shareholders, as only Norwegian shareholders with a proposal for appropriate measures. If the board cannot find would be liable to pay tax on the net worth of their shareholdings in a basis for proposing any measures, or such measures cannot be a Norwegian project company. On the other hand, dividends paid to accomplished, it shall propose to liquidate the company. certain foreign shareholders might be subject to a withholding tax at It is generally assumed that the board has a relatively wide leeway a rate of up to 25%; see question 7.6 below. before it will be considered to have acted negligently. If the board members made a careful consideration of the situation when a Norway 6.2 Are there any bilateral investment treaties (or other decision was made they will not be considered to have acted international treaties) that would provide protection negligently if it later appears that their judgment was wrong. The from such restrictions? court cases where board members have been held liable have often been where one or several creditors have received preferential Yes, Norway is a party to the European Economic Area (EEA) treatment in the time period when the company was in financial Agreement which, to some extent, provides protection against the distress or shortly before the company was declared bankrupt, or above restrictions for foreign owners domiciled within the European where the company enters into a contract without informing the Union (EU) or EEA. other party about its financial difficulties. As of February 2015, Norway is party to 14 bilateral investment According to the Norwegian Penal Code section 284, the board has treaties (BITs) that serve to protect foreign investments in Norway an obligation to file for bankruptcy if the company is insolvent. If a and vice versa. The current Norwegian government has proclaimed failure to file for bankruptcy is considered grossly negligent or due its intention to increase the use of BITs in the future. The BITs protect to wilful misconduct, this is a criminal offence, which may result foreign investors in many respects, but do not, however, expressly in fines or imprisonment of up to two years. A failure to file for provide protection against the above-mentioned restrictions. bankruptcy is, however, not punishable if the debtor has acted in concert with creditors representing a majority of the claims with The protection provided for in bilateral tax treaties varies, but regard to both numbers of claims and amounts. certain tax treaties impose less withholding tax than 25%. Similar obligations rest on the board of directors of general liability companies and limited liability partnerships. 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected? 6 Foreign Investment and Ownership Restrictions The Norwegian constitution provides for protection against the nationalisation or expropriation of any asset. Further, the European Convention on Human Rights Protocol 1 Art. 1 on the protection 6.1 Are there any restrictions, controls, fees and/or taxes of property is made statutory law in Norway and gives additional on foreign ownership of a project company? protection from nationalisation or expropriation.

Norwegian law does not impose any general restrictions, controls, Expropriation would only be allowed when in accordance with law, against monetary compensation in full and if deemed necessary in fees and/or taxes on foreign ownership of project companies as such. accordance with public interest. Currently, there are no laws allowing In relation to project companies organised as private or public/listed nationalisation or expropriation of project companies as such. There limited liability companies (No: aksjeselskap/allmennaksjeselskap or are, however, a few asset types that may be subject to expropriation, AS/ASA) there are, however, certain requirements as to Norwegian such as real property. According to the Expropriation Act (No: representation in the company’s management and/or board of directors. Oreigningslova), expropriation of real property is only allowed when Further, in certain industries there might be industry-specific needed for the development of specifically listed social infrastructure restrictions or controls relevant to foreign ownership. For instance, such as roads, railroads, hospitals, schools, power production, power in relation to shipping partnerships (No: partrederi), there is still distribution, etc. Expropriation is only allowed when the benefits of a requirement that the managing owner (No: bestyrende reder) the expropriation initiative outweigh the harm caused to the owner of is Norwegian or a Norwegian general partnership. Shipping the property, and only against full monetary compensation. partnerships are rarely used these days, and within the shipping industry limited liability partnerships (No: kommandittselskap or KS), with no foreign ownership restrictions, are more common. 7 Government Approvals/Restrictions There are also certain restrictions on foreign ownership within the renewable energy industry. Foreign investors are not allowed to 7.1 What are the relevant government agencies or acquire more than one-third (33.3%) of the shares in large-scale departments with authority over projects in the typical hydro power project companies, i.e. projects exceeding 5 MW. For project sectors? smaller projects there are no ownership restrictions, but foreign ownership might be an issue when seeking governmental licences. For petroleum-related projects, the relevant governmental authority As further described in question 7.3, a project company may only is the Norwegian Petroleum Directorate (No: Oljedirektoratet) acquire a licence to exploit water resources and certain other (http://www.npd.no/en/). resources; it may not acquire ownership of the resources as such. For projects related to hydro power or wind power, the relevant As a third example, from the petroleum sector, a foreign operator or governmental agency is the Norwegian Water Resources and Energy licence-holder investing in a Norwegian petroleum project company Directorate (No: Norges vassdrags- og energidirektorat) (http:// will have to be pre-qualified by the Ministry of Petroleum and www.nve.no/en/).

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Other relevant governmental agencies in different industries might be Jernbaneverket in relation to railroad projects, the Norwegian 7.6 Are there any restrictions, controls, fees and/or taxes Coastal Administration in relation to harbour projects, the Civil on the remittance and repatriation of investment returns or loan payments to parties in other Aviation Authority in relation to aviation projects and the Norwegian jurisdictions? Directorate for Public Roads in relation to road projects.

For all projects involving real property, one would also have to Yes, certain taxes apply to the remittance and repatriation of contact municipal agencies. investment returns and payment of loan interest to investors outside of Norway. 7.2 Must any of the financing or project documents be Remittance of investment returns in the form of dividends from a

Norway registered or filed with any government authority or Norwegian project company is generally subject to a withholding otherwise comply with legal formalities to be valid or tax of 25%. The payment of principal or interest on loans is not enforceable? subject to withholding tax. Repatriation of the principal amount of a loan is not subject to any Filing or registration of financing or project documents are generally taxes at all, but interest payments might be subject to income tax at not necessary to ensure validity or enforceability. However, in order a flat rate of 24% if the foreign lender is considered to be “resident” to achieve legal perfection of most mortgages and pledges, filing in Norway, i.e. if it is incorporated in Norway or its principal place or registration with governmental agencies would be necessary. In of business is Norway. certain circumstances there might be a condition for enforceability that the project documents are filed with and/or approved by the To avoid tax incentives leading foreign investors to prefer receiving relevant authorities. income via loan interest instead of dividends, recent changes in the Tax Act establish strict limitations on a Norwegian debtor’s right to claim tax deductions of 24% for interest paid to related parties. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, 7.7 Can project companies establish and maintain can such a licence be held by a foreign entity)? onshore foreign currency accounts and/or offshore accounts in other jurisdictions? Yes. Ownership of land is in general subject to licence pursuant to the Norwegian Concession Act (No: Konsesjonsloven); however, Yes, a Norwegian project company can establish and maintain due to the number of exemptions from this general rule, a licence foreign currency accounts in any jurisdiction. The company has would not be required for most acquisitions of land and property in to disclose the net worth of all its accounts to the Norwegian tax Norway. Foreign entities can hold a licence to acquire land directly authorities. or indirectly through ownership of a project company. Under Norwegian law, most natural resources such as petroleum 7.8 Is there any restriction (under corporate law, resources, water resources and mineral resources are in principle exchange control, other law or binding governmental owned by the state or the general public. The undertaking of business practice or binding contract) on the payment of related to, or operation of, such natural resources therefore requires dividends from a project company to its parent a governmental licence, including for operations on the Norwegian company where the parent is incorporated in your jurisdiction or abroad? continental shelf and for the development and operation of: hydro power or wind power; mining facilities; power plants; and power lines. Project companies organised as limited liability companies are subject to detailed restrictions on dividends for the protection of 7.4 Are there any royalties, restrictions, fees and/or the company’s equity, pursuant to the Public Limited Liability taxes payable on the extraction or export of natural Companies Act and Private Limited Liability Companies Act resources? chapters 3 and 8. Firstly, the amount of distributable dividend is limited to the company’s total equity less an amount equal to the As most natural resources are in principle government-owned, aggregate of: (i) the company’s share capital; (ii) certain limited special tax regimes apply to income from activities related to natural accounting-based deductions; (iii) loans and guarantee obligations resources. Typically, high marginal tax is based on considerable to shareholders or related parties; and (iv) the nominal value of own excess return (resource rent) associated with the extraction of that shares held by the company. particular natural resource. Secondly, dividends may only be distributed based on the company’s For instance, the marginal tax rate on net income from petroleum last audited balance sheet. Such balance sheet may be based on activities is 78%, consisting of a regular 24% income tax and a 54% the annual or interim statements of the company and consequently petroleum tax. By way of comparison, the marginal tax rate on net several distributions are allowed throughout a fiscal year. income from (larger) hydro power activities is 58.3%. For wind power activities there is no resource rent and the marginal tax rate on net income is 24%. 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities 7.5 Are there any restrictions, controls, fees and/or taxes administer those laws or regulations? on foreign currency exchange? EHS has long been an important focus for Norwegian authorities, There are no restrictions on foreign currency exchange if provided and there are many general and industry-specific regulations in by a licensed bank or financial institution. Norwegian law. The Working Environment Act with regulations serves for the benefit of all employees in all industries, and the relevant authority is the Norwegian Labour Inspection Authority

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(No: Arbeidstilsynet). The Pollution Act with regulations, which of the debtor, which would be the insurance company. Often, is also relevant for most project companies, is administered by the the mortgagee would be noted as the co-assured or loss payee in Norwegian Environment Agency (No: Miljødirektoratet). Within the applicable loss-payable clauses. Such security arrangements, as energy sector, the Petroleum Directorate (No: Oljedirektoratet) and well as payments to foreign creditors pursuant to such arrangements, the separate Petroleum Safety Authority (No: Petroleumstilsynet) are generally enforceable in Norway. administer the Petroleum Act with regulations. Further, the Water Resources and Energy Directorate (No: NVE) administer the Water Resources Act with regulations. 9 Foreign Employee Restrictions

9.1 Are there any restrictions on foreign workers,

7.10 Is there any specific legal/statutory framework for Norway procurement by project companies? technicians, engineers or executives being employed by a project company? Yes; in relation to public procurement, Norway has implemented the 2004/18/EC Directive on procurement in the public sector and the A complex set of rules applies to the employment of foreign workers 2004/17/EC Utilities Directive. Thus, there is a statutory framework in Norway including, but not limited to, technicians, engineers or governing the coordination of procedures for the awards of public executives. This includes requirements for residence and work work contracts, public supply contracts, as well as procurement permits, tax rules, etc. However, if the foreign worker is a citizen of procedures for entities operating in the water, energy, transport and an EU, EEA or European Free Trade Association (EFTA) country, postal sectors. Private project companies doing business within the worker will not have to apply for a residence or work permit but regulated areas will also be subject to the statutory framework. will have to register with the police. The rules and regulations which will apply to foreign workers apply generally and not specifically to project companies. 8 Foreign Insurance 10 Equipment Import Restrictions 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies? 10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by According to the Insurance Business Act, insurance activity in construction contractors? Norway can only be carried out by insurance companies which have a licence to carry out such activity in accordance with the The import of certain equipment and goods is subject to restrictions, Act. Permissions pursuant to this Act are granted by the Financial meaning that you have to obtain permission to import the equipment Supervisory Authority in Norway. It is set out in section 3-1 of the and that conditions may be attached to the permission. Such Act that an insurance company shall have a business office and main restrictions apply, inter alia, to agricultural machines and equipment office in Norway, and that permission can only be granted ifthe and to timber. authority is convinced that the company is sufficiently qualified and Customs are also payable on the import of certain goods into complies with certain capital requirements. Norway, and the applicable levels for the customs are given by the According to the Insurance Business Act (chapter 14), a foreign Parliament. Project equipment and equipment used by construction insurance company may be licensed to carry out insurance activity contractors would generally also be subject to VAT on importation in Norway if the company is licensed to carry out such activities in into Norway. its home state and is subject to adequate supervision there. Before a branch office can be opened by the foreign insurance company in Norway, a satisfactory cooperation arrangement regarding 10.2 If so, what import duties are payable and are exceptions available? supervision must have been set up between the supervising authorities in the company’s home state and the Financial Supervisory Authority in Norway. The general VAT rate in Norway is 25%. The basis for the calculation of VAT and whether certain items are exempt from VAT depends on In order to fall under the Insurance Business Act, one would have the type and nature of the item. If customs duties are payable the to carry out insurance activities in Norway. If a project company levels will vary according to the type of goods, and are given by the contacted a foreign insurance company and requested an offer Parliament. The customs tariff would, as a starting point, be based for insurance once, we assume that this would not be considered on the value of the goods. insurance activity pursuant to the Act. However, we assume that the threshold as to when a company would be considered to carry out insurance activity in Norway is low, and thus that a foreign 11 Force Majeure insurance company would need a licence if it provided insurance to a Norwegian company more than once or twice. 11.1 Are force majeure exclusions available and enforceable? 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? Yes, force majeure exclusions in contracts are available and enforceable and are often seen in Norwegian contracts. Even if a Proceeds from insurance claims can generally serve as collateral force majeure clause is not included in a contract, such exclusions security by way of an assignment of insurances in Norway. Such may be applied by the Norwegian courts pursuant to the background security would be perfected the same way as security in other rules of law. receivables and thus receive legal protection through notification

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12 Corrupt Practices 14 Jurisdiction and Waiver of Immunity

12.1 Are there any rules prohibiting corrupt business 14.1 Is a party’s submission to a foreign jurisdiction and practices and bribery (particularly any rules targeting waiver of immunity legally binding and enforceable? the projects sector)? What are the applicable civil or criminal penalties? As long as such submission to a foreign jurisdiction has been made in writing and for a specific legal relationship, the party’s submission New legislation regarding corruption was adopted in 2003 in the Penal to jurisdiction will normally be legally binding and enforceable. Code, section 276 a to c. The prohibition applies both to the receiving Please note, however, that certain statutory limitations to the parties’ Norway and offering of briberies and kickbacks (active and passive corruption) choice of jurisdiction might apply to, inter alia, consumer contracts. and participation in such actions. The question of whether corruption Further, unbalanced jurisdiction clauses, e.g. jurisdiction clauses has occurred and if it is a basis for criminal liability will depend on which are exclusive for one party (typically the borrower) and non- whether an act or omission must be considered “improper” (No: exclusive for the other party (typically the lender(s)), run the risk of “utilbørlig”). This is a legal term the content of which is developed being held unenforceable under Norwegian law. in court practice. The rules apply to corruption both in the public and private sectors and regardless of whether the corruption was undertaken If and to the extent that proceedings have already been instituted or in Norway or abroad. The sentence in case of violation may either are pending in a foreign jurisdiction at the time a matter is brought be large fines, imprisonment for up to three years for corruption, or before a court in Norway, the courts of Norway shall stay or dismiss imprisonment for up to 10 years for serious corruption. In addition, a the Norwegian proceedings in accordance with the rules of the company which is subject to corporate penalty for corruption will be Lugano Convention and the Dispute Act section 18-1. excluded from all public procurement for an indefinite period, cf. the In relation to waiver of immunity, Norwegian courts are bound by regulations on public procurement, sections 11-12 and 20-12. international law regarding sovereign immunity, and a party’s waiver The law on tort, section 1-6, contains a special provision applicable of sovereign immunity will be legally binding and enforceable to the to claims on damages for loss caused by corruption. Thus, Norway extent permissible under applicable international law. now has a strict and far-reaching set of rules against corruption. A general waiver of sovereign immunity might be held contrary to international law, for instance in respect of diplomatic immunity. Enforcement of assets protected by diplomatic immunity, for 13 Applicable Law instance, might require an express waiver of immunity.

13.1 What law typically governs project agreements? 15 International Arbitration

Project agreements relating to Norwegian projects are normally governed by Norwegian law. For certain parts of the project 15.1 Are contractual provisions requiring submission agreements, e.g. security documents, it might even be necessary or of disputes to international arbitration and arbitral advisable to accept Norwegian law and jurisdiction. If one or more awards recognised by local courts? parties are foreign, one might also typically see English or even Swedish law-governed documents on the more commercial parts Norway has ratified the New York Convention on Recognition and of the project agreements, even if the parties or the project do not Enforcement of Foreign Arbitral Awards of 1958 (the “New York necessarily have a connection to England or Sweden. Convention”). Thus, arbitral awards and awards from international arbitration obtained in any jurisdiction, whether party to the New York Convention or not, will be recognised and enforced without 13.2 What law typically governs financing agreements? re-examination of the merits of the case. However, recognition and enforcement of arbitral awards will be subject to, inter alia, Finance documents are typically governed by Norwegian law, arbitrability, Norwegian public policy rules (ordre public), unless one or more foreign lenders insist on another governing internationally mandatory provisions and certain circumstances law such as English law, laws of the State of New York or Swedish where the judgment is given in default of appearance. law. For instance, the European Investment Bank policy has been to only accept governing law within the EU, which excludes EEA/ Norwegian law as governing law. As mentioned under question 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution 13.3 below, security documents are nonetheless typically governed conventions? by Norwegian law. Yes, see question 15.1 above. 13.3 What matters are typically governed by domestic law?

15.3 Are any types of disputes not arbitrable under local Norwegian courts will recognise and give effect to the parties’ law? choice of foreign law, subject only to public policy (ordre public) and internationally mandatory rules of Norwegian law. In relation Pursuant to the Arbitration Act section 9, only disputes over which to enforcement of security over assets located in Norway or granted the parties are free to dispose are arbitrable under Norwegian law. by a Norwegian borrower, for instance, relevant Norwegian law Disputes involving public considerations, such as childcare and might apply notwithstanding the parties’ choice of law to the divorce cases, are therefore not arbitrable under Norwegian law. contrary. Therefore, security documents governing security granted by Norwegian parties or granting security over assets located in Disputes in relation to project financing are regularly arbitrable. Norway will typically be governed by Norwegian law.

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Where an offer to subscribe for or purchase transferable securities 15.4 Are any types of disputes subject to mandatory is addressed to 150 or more persons in the Norwegian securities domestic arbitration proceedings? market, and involves an amount of at least EUR 1,000,000 calculated over a 12-month period, a prospectus shall be prepared in No, arbitration has to be agreed upon by the parties. accordance with the rules of the Securities Trading Act. Bond issues in Norway are generally carried out through the Nordic 16 Change of Law / Political Risk Trustee, which acts on behalf of all the bond-holders in connection with the issuance of a bond and during the term of a bond issue. An increasing number of investors will only invest in bonds where the 16.1 Has there been any call for political risk protections issuer is subject to a regulated duty of disclosure. This trend is even Norway such as direct agreements with central government or more apparent for high-yield bonds, where investors are exposed political risk guarantees? to a higher level of risk. Where bonds are issued by a company that does not have a stock exchange listing, investors seek the No. Such arrangements are not common in Norway. reassurance that a listing of the bonds will ensure that the company provides a satisfactory level of information to investors. Bonds may be registered both on the Nordic ABM and on the Oslo Stock 17 Tax Exchange. In the case of listings of bonds, the rules and regulations of the ABM Nordic, the Oslo Stock Exchange and the Securities 17.1 Are there any requirements to deduct or withhold tax Trading Act applicable to listings will apply. from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing 19 Islamic Finance security?

No taxes apply to foreign lenders with respect to loans, mortgages 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an or other security documents for the purposes of effectiveness or Islamic project financing in your jurisdiction. registration. There are no regulations specifically designed to facilitate the 17.2 What tax incentives or other incentives are provided structuring of Islamic financing in Norway. Within existing principles preferentially to foreign investors or creditors? What of Norwegian law, including the principle of freedom of contract, taxes apply to foreign investments, loans, mortgages Istina’a, Ijarah, Wakala and Murabaha instruments might generally or other security documents, either for the purposes be used in the structuring of an Islamic project financing in Norway. of effectiveness or registration? Providers of Islamic finance should, however, observe general There are no tax incentives for foreign investors or creditors. No licensing requirements in relation to financial services. Further, taxes apply to foreign lenders with respect to loans, mortgages when structuring Islamic project financings that involve ownership or other security documents for the purpose of effectiveness or of the project or the assets, one should carefully consider licensing registration. requirements, ownership restrictions and possible tax implications on a case-by-case basis. Although there seems to be an increasing interest in Islamic 18 Other Matters financing, we have yet to see the establishment of providers of Islamic financing in the Norwegian lending market.

18.1 Are there any other material considerations which should be taken into account by either equity 19.2 In what circumstances may Shari’ah law become investors or lenders when participating in project the governing law of a contract or a dispute? Have financings in your jurisdiction? there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of No, there are no other such considerations. Shari’ah and local law relevant to the finance sector?

Shari’ah law may not become the governing law of a contract or a 18.2 Are there any legal impositions to project companies dispute in Norway. issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 19.3 Could the inclusion of an interest payment obligation instruments. in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps A bond issue would be considered issuance of a transferable security, could be taken to mitigate this risk? pursuant to the Securities Trading Act, section 2-2, meaning shares and other securities which are negotiable on the capital market. No, interest payment obligations are generally enforceable in Norway.

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Kyrre W. Kielland Anne Christine Wettre Advokatfirma Ræder DA Advokatfirma Ræder DA P.O. Box 2944 Solli P.O. Box 2944 Solli N-0230 Oslo N-0230 Oslo Norway Norway

Tel: +47 23 27 51 57 / +47 45 02 20 56 Tel: +47 23 27 27 59 / +47 90 04 16 25 Email: [email protected] Email: [email protected] URL: https://en.raeder.no URL: https://en.raeder.no Norway Kyrre W. Kielland has broad experience in financing and other Anne Christine Wettre has long and extensive experience within transactions within shipping, aviation and real estate. He advises insolvency, bankruptcy and restructuring. Her specialist fields are banking institutions/lenders, companies and others with negotiations monetary claims, law of mortgages and pledges, enforcement, property and the closing of financial transactions and complex loan and leasing law and value-added tax. In addition, she is regularly appointed trustee structures. of bankruptcy estates by the City Court of Oslo. In addition to traditional bank financing, Kyrre advises clients on leasing Through her work with bankruptcy proceedings, Anne Christine has transactions and bond deals in the Norwegian and European market built up the unique ability to not only provide answers to purely legal (Euro Medium Term Notes). Kyrre holds valuable experience in export issues, but also to find practical solutions that are specifically adapted financing, to the benefit of our many clients, from his secondment with to the client’s business activities and the legal problems the client is Eksportkreditt Norge AS, the Norwegian export financing scheme. facing. Furthermore, she has a significant ability to study and assess financial statements and other company documentation and also Further, Kyrre is regularly appointed as an external examiner at the assist our clients with audits from the tax authorities. Faculty of Law, University of Oslo and Lillehammer University College, within fields such as private international law, international commercial Before she came to Ræder in 2007, Anne Christine held a position as law and law of contracts. a lawyer at the Norwegian division of Euler Hermes Credit Insurance. Through her vital role within compliance and contract law, she built The Legal 500 recommends Kyrre within Banking and Finance up important skills within all aspects concerning the management of (including Shipping Finance). debt recovery.

Advokatfirma Ræder is a leading Norwegian law firm with more than 65 experienced lawyers, of which eight are dedicated to our department for Shipping, Offshore and Financing. We provide advice within most areas of commercial law and are centrally located at Solli Plass in Oslo. The majority of our clients are national and international companies, organisations and government authorities. We focus on offering tailor-made, cross-disciplinary advice that suits the needs of each client. We have an international focus and have built an extensive network of cooperative partners across national borders. Ræder is represented in the board and as members of several chambers of commerce. Our international network and experience mean that we can provide prompt assistance to all our clients, including those situated outside of Norway. We focus on each client and concentrate on building trust by providing good advice based on solid, specialist legal knowledge and commercial understanding. Our organisation is built on a foundation that is characterised by orderliness, commitment, quality and respect.

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Panama Nadya Price

Patton, Moreno & Asvat Ivette Martínez

■ the parties to a pledge agreement must agree the method that 1 Overview will be used to determine the value of goods given in pledge for purposes of a private sale or appropriation thereof, to ensure a fair valuation, upon application, of the amount owed. 1.1 What are the main trends/significant developments in If no such valuation is agreed upon in the corresponding the project finance market in your jurisdiction? contract, the parties must appoint appraisers and ultimately it will be decided by a court in the event of disagreement. There is a significant and growing interest in the project finance Panamanian law also contemplates the possibility of execution of market on the part of both the Panamanian government and private a general pledge of assets located outside of Panama. This general companies. Such interest is sustained by an increase in foreign pledge of assets may be granted via a public instrument issued in investment in Panama for major infrastructure projects led by the Panama or by a private document authenticated by a Notary Public government, which has resulted in Panama being one of the fastest- in the jurisdiction where it is executed and thereafter legalised by a growing economies in Latin America in recent years. Panamanian consul or by apostille. The general pledge of assets may be governed by a foreign law and must be registered at the Public 1.2 What are the most significant project financings that Registry Office in Panama to be valid against third parties. This have taken place in your jurisdiction in recent years? type of pledge would only affect assets situated outside Panama and will not enjoy preference over charges made against specific assets. The most significant project financings that have taken place in Panama in recent years have been in relation to major infrastructure 2.2 Can security be taken over real property (land), plant, projects, such as the expansion of the Panama Canal, as well as the machinery and equipment (e.g. pipeline, whether expansion of Tocumen International Airport, with the construction underground or overground)? Briefly, what is the of a new terminal. Other projects include the further development procedure? of ports in the Canal area, the construction of additional lines for the metro system, as well as major projects in the power and renewable Mortgages can be taken over real property (land) provided that (i) energy sector, including wind generation parks, solar projects and they are constituted to secure a principal obligation, (ii) the real hydroelectric plants. property is legally owned by the mortgagor, and (iii) the mortgagor persons have free disposal of the property. Mortgages over real 2 Security property must be agreed in writing, protocolised by a Panamanian Notary Public and submitted for registration at the Public Registry Office in Panama. 2.1 Is it possible to give asset security by means of Security can be taken over plant, machinery and equipment under a general security agreement or is an agreement the provisions of Law 129 of 31 December 2013, which sets the required in relation to each type of asset? Briefly, requirements and procedure to grant mortgages over movable what is the procedure? assets (“chattel mortgage”) provided that no restrictions have been established in the concession agreement or contract entered into The Code of Commerce allows a Panamanian company to grant with the government. a pledge agreement over movable property. Some of the general characteristics of a pledge agreement governed by the laws of A chattel mortgage may be granted over the totality of the assets Panama are as follows: of a person or corporation but the assets must be specified in the mortgage agreement. ■ it extends to payment of principal, interests, and conservation and collection expenses; Chattel mortgages must be agreed in writing and must be entered ■ the pledge agreement may contain a clause authorising into as a notarial deed if the lien exceeds US$20,000. Registration the pledgee to appropriate or take over the property given of the chattel mortgage is required to be valid against third parties. in pledge in the event of a default, namely private sale, but The parties may determine the scope or extension of the chattel subject to appraisal by two brokers selected by each of the mortgage. In the absence of such agreement, the mortgage shall parties, or by a third broker designated by these two in case extend to the parts and accessories of the asset that exist at the time of disagreement, or by the corresponding judicial authority in of enforcement, as well as to the expenses incurred in the transfer the absence of designation thereof; and and the insurance indemnification that was contracted.

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2.3 Can security be taken over receivables where the 2.6 What are the notarisation, registration, stamp duty chargor is free to collect the receivables in the and other fees (whether related to property value or absence of a default and the debtors are not notified otherwise) in relation to security over different types of the security? Briefly, what is the procedure? of assets (in particular, shares, real estate, receivables and chattels)? Security over receivables by way of an assignment is possible under Panamanian law to the extent that no restrictions have been The registration of mortgages over real property, as well as chattel established in the concession agreement or contract entered into mortgages, entails the payment of registration fees, which will be with the government. calculated based on the principal amount secured by the mortgage.

Panama Assignments must be notified to the debtor before two witnesses or For mortgages over real property, fees will be calculated at the rate by any other authentic manner. Although a definition of the concept of US$3 for each US$1,000 or fraction thereof, and for chattel of ‘authentic manner’ is not provided for in Panamanian law, this mortgages these will be calculated at US$42 for the first US$20,000 may be accomplished by means of a notarial authentication of the and US$$30 for each US$10,000 or fraction thereof. notice, in which the notice is delivered in the presence of a Notary For registration purposes, mortgage agreements must be elevated Public, who will attest such act. to a Public Deed, which entails notarisation fees calculated at US$8 per page.

2.4 Can security be taken over cash deposited in bank Stamp duty is payable at the rate of US$0.10 per US$100 of the value accounts? Briefly, what is the procedure? expressed in the corresponding document, and would be due on any act, contract or obligation subject to the jurisdiction of Panama. Yes, it is quite common for securities to be taken over cash deposited in bank accounts by means of a pledge of bank accounts. The bank 2.7 Do the filing, notification or registration requirements holding the account must be a party to the pledge of bank account in relation to security over different types of assets agreement. Such agreement must be governed by Panamanian law involve a significant amount of time or expense? if the bank account is held by a bank located in Panama. Registration of a pledge of bank account is not necessary. However, The registration of mortgages over real property or over movable it is essential that the pledgee or an agreed third party takes control assets may take between six and eight weeks to be completed. of the account for the pledge to be valid. It is also possible for a bank account to be transferred to a trustee 2.8 Are any regulatory or similar consents required with established to act on behalf of lender under the terms of a trust respect to the creation of security over real property agreement. (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?

2.5 Can security be taken over shares in companies Consent from government authorities for the assignment of incorporated in your jurisdiction? Are the shares in certain assets, and for the granting of mortgages over machinery certificated form? Briefly, what is the procedure? and equipment and other movable assets, may be required if so established in the concession agreement. Under Panamanian law, any individual or legal entity, whether national or foreign, can own and pledge shares held in Panamanian corporate vehicles. A pledge of shares of a Panamanian company 3 Security Trustee may be governed by laws other than those of Panama, and a court in Panama would enforce terms in accordance with the laws of the corresponding jurisdiction, unless these are in contravention of 3.1 Regardless of whether your jurisdiction recognises Panamanian public policy. the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee A pledge of shares must be agreed in writing. Minimum requirements or agent (rather than each lender acting separately) to for its validity include: enforce the security and to apply the proceeds from ■ Delivery of the corresponding share certificate(s) to the the security to the claims of all the lenders? pledgee or to an agreed third party. ■ The parties must agree the method to be used to determine the The role of a security trustee or agent, and the enforcement of value of shares to ensure fair value against the debt. In the securities by a security trustee or agent, are recognised by Panama absence of such an agreement, the shares would be appraised under ‘freedom of contract’ principles. The security trustee or by two experts named by each of the parties, or a third one agent, on behalf of lenders, will be able to foreclose on securities appointed by these two in the case of disagreement, or by and apply the proceeds to the claims of all lenders. judicial authority in the absence of experts. Registration of the share pledge is not necessary but annotation in 3.2 If a security trust is not recognised in your the Stock Registry of the company is advisable. jurisdiction, is an alternative mechanism available Shares of Panamanian companies may be issued in nominative (such as a parallel debt or joint and several creditor and bearer form. Law 47 of 6 August 2013 adopted a regime for status) to achieve the effect referred to above which the custody of bearer share certificates, which provides that if the would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all company issues bearer shares, these must be placed in the custody the lenders so that individual lenders do not need to of an authorised custodian. enforce their security separately? Any legal entity that has obtained a concession or has been awarded a public bid by the government must have 100% of its shares issued The concept of security trustee is recognised in Panama under in registered form. ‘freedom of contract’ principles.

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of qualification to determine the situations in which a transaction 4 Enforcement of Security may be capable of setting aside acts undertaken by a debtor or ‘clawback’, but some guidance may be obtained from certain 4.1 Are there any significant restrictions which may provisions which we will explain below. impact the timing and value of enforcement, such as In general, Panamanian law would allow for acts undertaken by the (a) a requirement for a public auction or the availability debtor to be set aside in any of the following cases: of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) ■ Payments, acts and contracts effected after a state of (in respect of regulated assets) regulatory consents? bankruptcy has been declared. ■ Acts and contracts made in a fraudulent or simulated manner, on the understanding that this has been the case when the Enforcement procedures vary depending on the type of security Panama granted. These proceedings, in the majority of cases, are time- parties affirm or declare things or facts which are not true. consuming. ■ Judgments obtained in mock proceedings; judicial resolutions against a debtor that have been pronounced under malicious For the enforcement of mortgages in Panama, the creditor must circumstances with the intent of prejudicing creditors. file ‘executive mortgage proceedings’ before the corresponding ■ Transfers, be it gratuitous or onerous, where the transferee circuit court. The creditor must file the complaint together with knew that the transferor was executing the act or contract to the original public deed containing the mortgage, a public registry withdraw assets from the creditors’ reach. certificate certifying that the mortgage is in force, whether or not there are any other encumbrances over the same asset and who is the ■ The following acts or contracts, but only if they were undertaken 30 days or earlier since the state of bankruptcy current owner, and an accounting certificate issued by the creditor commenced: expressing the total amount owed and interests. After reviewing the complaint and the required documents, the judge will issue i. Gratuitous acts or contracts. an executive order containing a payment order stating the capital, ii. Onerous acts or contracts which are deemed to be interest and legal costs owed, and ordering the embargo of the gratuitous on account of the excess value given in mortgaged property. The embargo is achieved solely by putting consideration for the equivalent received in return. notice of this in the Public Registry, unless the creditor requests that iii. Mortgages, pledges and other similar securities, or those the mortgaged asset be deposited with the court through a custodian. establishing terms that result in giving security to previous credits or to prefer certain credits over other credits. Enforcement of a pledge may proceed through judicial sale or, if so agreed in the pledge agreement, via private sale following provisions iv. Payment of unmatured obligations (debts which are not due). of the Code of Commerce, as indicated in question 2.1 above. v. Granting of security, or undertaking acts or establishing terms, that result in giving security to previous credits or 4.2 Do restrictions apply to foreign investors or creditors to prefer certain credits over other credits, as well as the in the event of foreclosure on the project and related payment of debts which are not due. companies? In conclusion, merits for the setting aside of acts of the debtor or ‘clawback’ will depend on several factors and will require the There are no restrictions for foreign investors or creditors in the creditors’ request for the setting aside of acts or contracts, the event of foreclosure. creditors’ ability and means to prove the acts’ damage, the agreement of the liquidator, and the agreement of the court. 5 Bankruptcy and Restructuring Proceedings 5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation? 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to The following entities are subject to a special regime for their enforce its rights as a secured party over the security? intervention, reorganisation, dissolution and liquidation and are excluded from bankruptcy proceedings pursuant to their special Approved credits in a bankruptcy will be paid from the assets of the regulations: debtor with the order and ranking established in the Civil Code of ■ Banks – Executive Decree No. 52 of 30 April 2008, as Panama, except for credits guaranteed by pledge or mortgage, which amended. will not enter into the bankruptcy and may be enforced in a separate ■ Licensed entities, such as investment managers, investment proceeding, notwithstanding the commencement of bankruptcy advisors and broker dealers – Law Decree No. 1 of 8 July proceedings. 1999, as amended. Mortgages and pledges would rank ahead of all other debts and ■ Insurance and re-insurance companies – Law 12 of 3 April obligations, but only in relation to the specific asset secured thereby. 2012, as amended and Law 63 of 1996, respectively. If the sale price of the specific asset does not cover the outstanding obligations in full, such obligations would rank at least pari passu with all other present or future unsecured and unsubordinated 5.4 Are there any processes other than court proceedings obligations of the debtor. that are available to a creditor to seize the assets of the project company in an enforcement?

5.2 Are there any preference periods, clawback rights Pledges may contain a clause authorising out-of-court foreclosure or other preferential creditors’ rights (e.g. tax debts, proceedings but subject to appraisal by two brokers selected by each employees’ claims) with respect to the security? of the parties, or by a third broker designated by these two in case of disagreement, or by the corresponding judicial authority in the The provisions of our Code of Commerce do not provide standards absence of the designation thereof.

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5.5 Are there any processes other than formal insolvency 6.2 Are there any bilateral investment treaties (or other proceedings that are available to a project company to international treaties) that would provide protection achieve a restructuring of its debts and/or cramdown from such restrictions? of dissenting creditors? Panama has signed bilateral investment treaties (BITs) with Insolvency proceedings are not regulated under Panamanian law. more than 20 countries, providing certain protections to foreign The only reorganisation channel contemplated in the Code of investors, including fair and equitable treatment, protection against Commerce is the negotiation of an agreement between the debtor expropriation without compensation, as well as access to neutral and its creditors to set out how the creditors will be repaid over a dispute settlement.

Panama period of time. In the course of formal bankruptcy court proceedings, but only after credits have been evaluated and recognised by 6.3 What laws exist regarding the nationalisation or every creditor, a debtor who has not been charged with fraudulent expropriation of project companies and assets? Are bankruptcy may propose a debt workout agreement to the general any forms of investment specially protected? meeting of creditors. In order to be accepted, the agreement must be approved for the vast majority of the creditors and not less The National Constitution provides that private property may be than two-thirds of the total debt. An agreement accepted by the expropriated only in cases of public utility or social interest, by general meeting of creditors will not be valid until it is published special judgment and compensation. and endorsed by the relevant judge. Once the agreement is valid and accepted, it will be compulsory for each of the creditors, except In case of war, the Executive may decree the expropriation or for those having a privileged right, unless they have taken part in occupation of private property. If feasible, the occupation will only it. Therefore, the debtor will be reinstated in its rights and actions, be for the duration of the circumstances that have arisen. The State must pay for the damages incurred by the occupation and pay their without prejudice to the restrictions agreed within the agreement. value when the cause of the expropriation or occupation has ceased. In this context, the court-appointed administrator shall immediately deliver all the assets to the debtor, but it will still remain responsible The bilateral investment treaties signed by Panama include for supervising the execution of the agreement. confirmation that the measures of expropriation, subject tothe provisions of the Constitution, shall be accompanied by the prompt payment of adequate and effective compensation. The amount 5.6 Please briefly describe the liabilities of directors (if of such compensation shall correspond to the market value of the any) for continuing to trade whilst a company is in expropriated investment immediately before the expropriation or financial difficulties in your jurisdiction. before the impending expropriation became public knowledge, and shall include interest from the date of expropriation at a normal As a general principle, officers and directors are not liable or made commercial rate. The compensation should be paid without delay to pay for obligations owed by their corporations unless they have and be freely transferable. incurred such obligations in bad faith or by fraudulent action. Directors who have given their consent for acts such as the preparation of false statements or reports, may be jointly and severally liable 7 Government Approvals/Restrictions to creditors of the company for any resulting damage or harm. In addition, they might be deemed to be accomplices to a fraudulent 7.1 What are the relevant government agencies or bankruptcy if they maliciously assisted the withdrawal of property departments with authority over projects in the typical of the debtor, either before or after a state of bankruptcy is declared. project sectors? Criminal sanctions for a bankruptcy arising from guilt or fraud shall be applied to managers, directors, administrators or liquidators who The government entity with authority over projects would depend personally took steps that the law establishes as grounds for the on the type of project. For example, concessions related to corresponding charge. hydroelectric and thermoelectric generation are awarded through the National Public Services Authority. Port concessions will be processed through the Panama Maritime Authority and projects 6 Foreign Investment and Ownership related to mining activities will involve the Ministry of Commerce. Restrictions Permits from other authorities such as the Environment Ministry and the Health Ministry may also be required for each project.

6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company? 7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or In general terms, there are no fees or taxes on foreign ownership of enforceable? a project company. Certain activities designated as retail trade are restricted to nationals. If a mortgage is granted as collateral, registration of such mortgage The Constitution states that most of the capital of private utility at the Public Registry in Panama will be necessary to ensure its companies operating in the country must be Panamanian, with validity and enforceability. exceptions provided by law. In the event of enforcement of any of the financing documents in It is also worth mentioning that the Constitution provides that Panama: (i) submission in evidence may be facilitated if documents foreign nationals or foreign legal entities may not acquire ownership are authenticated by a diplomatic or consular officers of Panama in of land located less than 10 kilometres from the border. the jurisdiction of execution or pursuant to the Hague Convention on the legalisation of documents (Apostille); and (ii) if the corresponding document is in a language other than Spanish, it must be translated into Spanish by a licensed translator in Panama.

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income comes from foreign sources or export, or other specific laws 7.3 Does ownership of land, natural resources or a exempting the income. Companies located in the free trade zones pipeline, or undertaking the business of ownership or pay a 5% dividend tax for all income. The tax rate will increase to operation of such assets, require a licence (and if so, 20% to dividends paid to holders of bearer shares. can such a licence be held by a foreign entity)? Companies, irrespectively whether they have Panamanian- or The Constitution of the Republic of Panama states that mining and foreign-source income, must pay a 4% complementary tax on hydrocarbon deposits shall not be subject to private ownership but a yearly basis on behalf of their shareholders if no dividends are can be objects of concession for exploitation by private national or declared or if the dividend or participation is below 40% of the net foreign companies. profit of the corresponding fiscal year, less the taxes paid bythe legal entity. The obtainment of a particular licence would depend on the type Panama of project. 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a 7.4 Are there any royalties, restrictions, fees and/or project financing and which governmental authorities taxes payable on the extraction or export of natural administer those laws or regulations? resources? Depending on the type of project, there may be material The Code of Mineral Resources of Panama was amended by Law environmental, health and/or safety laws or regulations that will 13 of 2012, which includes a new regime regarding duties and impact on the project financing. royalties applicable to mining concessions and contracts. It is very likely that an environmental impact study will be required Extraction concessions of minerals will entail the payment of a to be submitted to the Ministry of Environment for approval before surface tax which will vary between $1.50 and $8 per hectare, with the beginning of the project. production royalties ranging from 5% to 8%. The Ministry of Environment, the Ministry of Health and the Contractors will pay royalties between 2% and 4% over the value of Ministry of Labour and Workforce Development are among the the extracted minerals. government institutions regulating environmental, health and safety Royalties applicable to the extraction of sand, clay, limestone, matters. quarried stone, coral, coarse ground and gravel will be between US$0.50 and US$3.00 per cubic metre and will also be subject to 7.10 Is there any specific legal/statutory framework for the payment of municipal taxes. procurement by project companies?

7.5 Are there any restrictions, controls, fees and/or taxes Private project companies are not subject to procurement rules. on foreign currency exchange?

There are no exchange controls of any kind in Panama, since the 8 Foreign Insurance U.S. dollar has been legal tender since 1904. 8.1 Are there any restrictions, controls, fees and/or taxes 7.6 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or on the remittance and repatriation of investment guaranteed by foreign insurance companies? returns or loan payments to parties in other jurisdictions? Insurance policies of assets situated in Panama must be provided by local insurance companies. If the insurance policy is issued by For services and acts in benefit of natural or juridical persons a company not authorised to engage in the insurance business in established in the national territory and for financing or loan interest Panama, an annual tax of 50% of the amount of the premium shall or fees to creditors abroad, a 12.5% withholding tax shall apply. be paid by the insured.

7.7 Can project companies establish and maintain 8.2 Are insurance policies over project assets payable to onshore foreign currency accounts and/or offshore foreign (secured) creditors? accounts in other jurisdictions? Yes, they are. Yes, project companies are allowed to establish and maintain onshore foreign currency accounts as well as offshore accounts in other jurisdictions. 9 Foreign Employee Restrictions

7.8 Is there any restriction (under corporate law, 9.1 Are there any restrictions on foreign workers, exchange control, other law or binding governmental technicians, engineers or executives being employed practice or binding contract) on the payment of by a project company? dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad? Panamanian law allows the contracting of foreign workers in a proportion of not more than 10% of the workforce, except for foreign technicians, whose percentage may increase up to 15%. There is a 10% Panamanian dividends tax imposed upon companies carrying out commercial activities in Panama and Liberal professions, such as lawyers, engineers, architects or doctors having Panamanian-source income. The dividends tax is 5% if the can only be practised by Panamanian citizens.

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Other than the above, there are no other restrictions on foreigners being employed by a project company, provided that work permits 13 Applicable Law issued by the Ministry of Labour and Labour Development are obtained first. 13.1 What law typically governs project agreements?

10 Equipment Import Restrictions Project agreements and concession contracts entered into with governmental entities are governed by Panamanian law.

10.1 Are there any restrictions, controls, fees and/or taxes 13.2 What law typically governs financing agreements? on importing project equipment or equipment used by Panama construction contractors? In respect of the governing law for financing agreements, please All imports are subject to import duties unless specifically excluded note that there is no requirement for these to be governed by by law. Imports will be also subject to payment of ITBMS (Impuesto Panamanian law. Parties to a contract are generally at liberty to de Transferencias de Bienes, Muebles y Servicios) (VAT equivalent) choose the governing law that will apply in respect thereof. Most of at a 7% rate. the matters that come through our office are generally governed by either English law or the laws of New York.

10.2 If so, what import duties are payable and are exceptions available? 13.3 What matters are typically governed by domestic law?

Concession agreements may provide exemptions from payment Mortgages over real estate properties and movable assets located in of import duties on machinery, equipment, spare parts and other Panama must be governed by Panamanian law. The same applies to necessary items that are used for the execution of the activities pledges over onshore bank accounts held by local banks. under the contract. 14 Jurisdiction and Waiver of Immunity 11 Force Majeure 14.1 Is a party’s submission to a foreign jurisdiction and 11.1 Are force majeure exclusions available and waiver of immunity legally binding and enforceable? enforceable? The submission by a party to the jurisdiction of a foreign jurisdiction Yes. Force majeure exclusions are available and enforceable. is valid and binding upon the party. Under Panamanian law, force majeure and acts of God are two separate concepts but having the same legal effect. 15 International Arbitration Neither party shall be liable for the total or partial breach of its obligations under a concession agreement to the extent that such failure results from force majeure or an act of God. 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts? 12 Corrupt Practices Yes. Moreover, the arbitration jurisdiction is recognised by our National Constitution. 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or 15.2 Is your jurisdiction a contracting state to the New York criminal penalties? Convention or other prominent dispute resolution conventions? Corruption of public servants is penalised under provisions of the Penal Code which state that anyone who offers, promises or submits Yes. Panama is a contracting state to the New York Arbitration to a public servant a donation, promise, money or any benefit or Convention on the Recognition and Enforcement of Foreign Arbitral advantage to perform, delay or omit any act corresponding to his/ Awards. It is also a signatory of the Convention on the Settlement her post or in violation of his/her duties shall be punished with of Investment Disputes between States and Nationals of Other States imprisonment of three to six years. (also known as the Washington Convention) and to the 1975 Panama Other rules include Executive Decree No. 7 of 22 January 2002 Convention. which establishes the Presidential Commission to Fight Corruption, and Executive Decree No. 179 of 27 October 2004 which creates the 15.3 Are any types of disputes not arbitrable under local National Council of Transparency against Corruption. law? In addition, Panama is a signatory of the Inter-American Convention against Corruption, of the Organization of American States, and the Disputes relating to matters considered by law to be within the United Nations Convention Against Corruption. free disposition of the parties may be submitted to arbitration proceedings.

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security package may vary from concession agreement to concession 15.4 Are any types of disputes subject to mandatory agreement. Approval from the government may be required under domestic arbitration proceedings? certain concession agreements for the assignment of the contract, its rights and obligations, pledge of assets as well as the change of No, they are not. administrative control and shareholding. In addition, it is worth mentioning that the State may provide for 16 Change of Law / Political Risk the early termination of a concession agreement for reasons of public interest duly proven, in which case the investor shall be compensated for the damage caused by the unilateral termination. 16.1 Has there been any call for political risk protections such as direct agreements with central government or Panama political risk guarantees? 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory No, there has been no such call. requirements for the issuance of capital market instruments. 17 Tax The issuing of bonds or similar capital market instruments is regulated under Law Decree No. 1 of 1999, as amended by Law 67 17.1 Are there any requirements to deduct or withhold tax of 2011 (the Securities Law), and entails the obtainment of a licence from (a) interest payable on loans made to domestic or from the Superintendency of the Securities Market. foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? 19 Islamic Finance Interest paid on loans made or credited to the account of a foreign lender is subject to a 25% withholding tax over 50% of all interest 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha remittances if the borrower is using the proceeds of the loan in the instruments might be used in the structuring of an Republic of Panama. In practice, the withholding tax is calculated Islamic project financing in your jurisdiction. at 12.5% over the total payment of interests. An exemption would be possible if the recipient of payments Following the principle of ‘freedom of contract’, Istina’a, Ijarah, submits an opinion issued by an independent tax expert in its home Wakala and Murabaha instruments may be used in a project country confirming that withholding tax paid in Panama could not financing in Panama to the extent that their terms are not contrary to be credited against the tax due in the recipient’s country under the Panamanian public policy. domestic law of the country.

19.2 In what circumstances may Shari’ah law become 17.2 What tax incentives or other incentives are provided the governing law of a contract or a dispute? Have preferentially to foreign investors or creditors? What there been any recent notable cases on jurisdictional taxes apply to foreign investments, loans, mortgages issues, the applicability of Shari’ah or the conflict of or other security documents, either for the purposes Shari’ah and local law relevant to the finance sector? of effectiveness or registration? As previously mentioned, the laws of Panama contemplate that There are no tax incentives or other incentives granted solely on parties to a contract may agree to a choice of law to govern the nationality grounds. Foreign investors have the same obligations corresponding contract, save that a Panamanian court may refuse to and rights as local investors and have no other limitations than those enforce terms that are against public policy. There are no relevant established in the Constitution. cases on jurisdictional issues, the applicability of Shari’ah or A certain level of protection is granted to nationals of those countries conflict betweenShari’ah and local law. which are signatories to BITs with Panama, as listed in question 6.2 above. 19.3 Could the inclusion of an interest payment obligation Foreign companies investing in Panama may take advantage of the in a loan agreement affect its validity and/or special economic zones and regimes that provide certain tax incentives enforceability in your jurisdiction? If so, what steps to companies as the Colon Free Zone, the City of Knowledge, the could be taken to mitigate this risk? Multinational Enterprises Headquarters (SEM, as per its acronym in Spanish) and the Panama-Pacifico Special Economic Area, as well If an interest payment obligation has been agreed on, the parties may as the legal and tax stability regime established under Law 54 of 22 include it in the loan agreement and such inclusion will be valid and July 1998. enforceable. Interest rates for loans granted by local banks or financial institutions 18 Other Matters are not subject to legal provisions restricting these. Nevertheless, regulations of the Superintendent of Banks in this respect may be applicable. 18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?

Project finance is not specifically regulated in Panama. Therefore, the

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Nadya Price Ivette Martínez Patton, Moreno & Asvat Patton, Moreno & Asvat 8th floor, Capital Plaza Building 8th floor, Capital Plaza Building Roberto Motta Ave. Roberto Motta Ave. Costa del Este Costa del Este Panama City Panama City Panama Panama

Tel: +507 306 9600 Tel: +507 306 9600 Email: [email protected] Email: [email protected] URL: www.pmalawyers.com URL: www.pmalawyers.com Panama NADYA KARINA PRICE SALAZAR obtained her Law degree in IVETTE ELISA MARTINEZ SAENZ (LL.B. – J.D. equivalent – Magna 2003 from the University of Panama. Since then she has worked Cum Laude, University of Panama, 1993) is the author of several actively in the shipping sector. Nadya was a resident lawyer at the international publications on Finance and Corporate Law, and has London branch of Patton, Moreno & Asvat from 2006 to 2015, where been a lecturer at international conferences on Merger and Acquisition she advised major banking and financial institutions in shipping and Transactions and Banking Rights, Banking Credits and Consumer corporate matters. Nadya returned to Panama in 2015 to join the Protection, among other topics. She is a member of the Panama Bar Corporate and Finance Department, where she assists in matters Association, the Association of Fulbright Scholars of Panama, the of corporate law and is involved in the negotiation and drafting of American Chamber of Commerce and Industry of Panama (AmCham). contracts, including financing agreements. Ivette is also an Arbitrator appointed by the Centre of Conciliation and Arbitration of the Chamber of Commerce and Industries of Panama (since 2002), and is the Director-Secretary of the National Concerts Association. Ivette’s main practice areas are Corporate, Commercial and Administrative Law (including Banking, Insurance, Securities, Mergers and Acquisitions, Government Contracting, Telecommunications and Energy).

Patton, Moreno & Asvat has more than 35 years’ experience in the legal sector. The firm was founded in 1981 as an efficient and modern international practice in Panama, establishing the successful reputation that the firm maintains today both nationally and in other countries where it has a presence. The firm’s areas of practice include Corporate, Maritime Financing, Registration and Litigation, Contracts and Commercial Transactions, Real Estate, Public Procurement, Telecommunications, Energy, M&A, Intellectual Property, Banking Law, Aeronautical Law, among others. Our affiliates include: ACE Funds Services Inc, based in the British Virgin Islands, engaged in investment funds advisory services; Assets Trust & Corporate Services, which provides local and offshore fiduciary services, tax planning and structuring and back-office services; Xperta Corporate Services, our incorporation services company for the European market; and Siglo BPO, which provides outsourcing of book-keeping and payroll services.

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Portugal Teresa Empis Falcão

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the infrastructure of one the biggest hospitals in the Lisbon 1 Overview area. This company also laterally operates the concession for the provision of medical services at the facility which was granted to another Portuguese company. 1.1 What are the main trends/significant developments in the project finance market in your jurisdiction? ■ The financing (arranged under Portuguese law and secured by Portuguese law and Luxemburg law collateral) regarding the acquisition of the share capital of a significant Portuguese 2016 saw a shy resurgence of greenfield activity in project finance in road concessionaire by a Portuguese subsidiary of a dominant Portugal. There were a few new projects, mainly in the renewable company incorporated under the laws of Luxembourg. energy sector, including biomass plants and pioneer renewable ■ The financing of the construction of a new university technologies. campus in Lisbon under a project finance regime. This is However, as in previous years, the trend in secondary market sales an innovative project as far as project finance structures of participations in project companies in the road, ports and energy in Portugal are concerned, since the Borrower is a private sectors continued, with construction companies and other original law foundation and part of the financial flows financing the shareholders in those companies seeking to free up capital to invest project arises from donations to be made to the Borrower. in other geographies or to focus on their core businesses. ■ The financing of an innovative biomass energy production project, including all relevant phases, from construction to Moreover, there have been certain refinancings of project debt operation and maintenance, comprising two biomass power transactions, some of which were within the context of merger plants in the north of Portugal with a combined installed and acquisition deals, with recourse to bond issues by Portuguese capacity of 30 MW, under a project finance regime. issuers and registered with Interbolsa, the Portuguese clearing ■ The acquisition and refinancing of a windfarm portfolio to be and settlement house. This structure has been favoured by both implemented through the issuance of bonds in the amount of sponsors and lenders, as it has proven very efficient, not only from €210,000,000. a contractual perspective but also from a tax point of view. It is ■ The acquisition of part of the former ENEOP portfolio (which worth noting that, although the participation of Portuguese banks had resulted from the ENEOP Split of Assets in 2015) and in these transactions has been rather constrained, Portuguese law as the subsequent refinancing, under a project finance structure, the governing law of finance documents has been the rule to date. of the current 322 MW windfarm portfolio owned by the Lastly, we are seeing the role of traditional banking groups and purchaser – one of the most significant international groups other players increasingly being replaced by investment funds of operating in the energy sector. different nationalities – European and otherwise – with investment ■ The project finance by issuance of two sets of bonds in an policies which vary substantially from one to another. Whilst aggregate amount of €340,000,000 for the acquisition and some only invest in equity, others, additionally or alternatively, refinancing of major companies operating in the gas sector. provide debt. Some funds only look at majority stakes, require big tickets and wish to take a very active role in the management of the companies acquired and/or financed, while others take the approach 2 Security of a financial investor and, therefore, are passive with regard to operational issues. 2.1 Is it possible to give asset security by means of a general security agreement or is an agreement 1.2 What are the most significant project financings that required in relation to each type of asset? Briefly, have taken place in your jurisdiction in recent years? what is the procedure?

The most relevant deals which have been entered into in recent years The concept of a fixed charge is the only form of security interest include several transactions regarding, notably, the greenfield and generally admissible in Portugal and the terms and formalities secondary markets, among which we would highlight the following: required for security creation vary depending on the type of assets at stake. ■ The sale of the shareholding stakes of the concessionaires of road shadow toll concessions in Madeira, financed under a Despite the non-recognition of the “floating charge” concept under project finance regime. Portuguese law, there is the possibility of creating security over ■ The acquisition of the share capital of a Portuguese company, different assets through a single security agreement. granted with a concession of 30 years for the management of

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As an exception to the above principles, Portuguese law does provide for the existence of financial collateral – on shares, debentures and 2.5 Can security be taken over shares in companies bank accounts – in line with the terms of the Directive on Financial incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? Collateral Arrangements. This type of security generally takes the form of a pledge but permits limited foreclosure remedies as well as a floating charge on assets (money, securities) in bank accounts. In companies the capital of which is represented by immaterial nominative participations (“quotas”), creation of security requires a written agreement and registration of the same with the relevant 2.2 Can security be taken over real property (land), plant, Commercial Registry Office. machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the On the other hand, in companies the capital of which is represented Portugal procedure? by shares, security is created by means of a pledge in accordance with the following formalities: Security on immovable assets or rights relating thereto, or on (i) bearer shares represented by certificates: delivery of the share movable assets subject to registration (such as automobiles, ships, certificates; planes), is created by means of mortgages, executed through notarial (ii) nominative shares represented by certificates: a pledge deeds and subject to registration as a condition for the validity declaration written by the chargor on the certificates and a thereof. request for registration of the pledge in the issuer’s share ledger book; and The creation of security interests over plant and machinery may (iii) dematerialised shares: by means of an entry as to the creation be made by means of a specific type of mortgage which is called of the pledge in the chargor’s bank account. a “factory mortgage”, which covers the factory’s land, as well as the equipment and movable assets used in the factory’s activity It is common practice to have a written contract governing the terms identified in an inventory attached to the mortgage deed. of the relevant pledge. Pledges may be created over movable (non-registered) assets or credits and shall be effected by written agreement, and require the 2.6 What are the notarisation, registration, stamp duty transfer of possession over such assets to the pledgee or to a third and other fees (whether related to property value or party. Exceptions to this transfer of possession requirement are: otherwise) in relation to security over different types the creation of a pledge having as its beneficiary a credit institution of assets (in particular, shares, real estate, receivables and chattels)? authorised to carry out business in Portugal, in which case specific rules apply; and the creation of financial pledges under the legislation The creation of security interests over assets located in Portugal for financial collateral arrangements. (including share pledges) attracts Stamp Duty, levied on the secured amount. Stamp Duty shall not be payable in the case of security 2.3 Can security be taken over receivables where the interests that are ancillary and created simultaneously with a loan, chargor is free to collect the receivables in the provided that the loan has already been subject to a similar taxation absence of a default and the debtors are not notified (no duplication of tax applies). of the security? Briefly, what is the procedure?

A pledge over receivables qualifies as a pledge of credits. The 2.7 Do the filing, notification or registration requirements validity of a pledge of credits is subject to (i) the pledgor’s in relation to security over different types of assets counterparty being served notice thereof, and (ii) the pledgee involve a significant amount of time or expense? coming into possession of the documents required in order to enforce the rights arising from the relevant contract directly against The registration before the local Registry Offices of the creation of the pledgor’s counterparty. pledges over quotas will involve a cost of €100 per quota, and for the creation of mortgages there will be a cost of €500 per item of real A pledge of credits covers all payments to be made in connection estate (regardless of the number of mortgages). with the contractual relationship underlying such credits. After the debtor is notified, such payments must nevertheless be made As for the time involved, the registration of pledges over quotas jointly to the pledgor and the pledgee. As a means of circumventing generally takes one business day to be completed, and that of practical difficulties arising from the joint payment requirement, mortgages up to 10 days (or, if an urgency fee is paid, one business it is common for the pledgee to authorise the third-party debtor day). to continue to carry out the relevant payments to the pledgor until notice to the contrary, and/or to construe the relevant pledge 2.8 Are any regulatory or similar consents required with agreement as a financial collateral arrangement, in accordance with respect to the creation of security over real property the Directive on Financial Collateral Arrangements. (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?

2.4 Can security be taken over cash deposited in bank The creation of security over assets which are in the private domain accounts? Briefly, what is the procedure? does not, in general, require any regulatory or similar consents. A pledge over cash deposited in bank accounts is deemed a pledge However, the creation of security over public domain assets is of credits (see above). prohibited and some restrictions in respect of the creation of security over concession/regulated assets may be imposed, notably through Generally, the taking of security over bank accounts by financial specific regulations or the relevant concession contracts. institutions is made through financial pledges allowing the beneficiary to use and dispose of the deposited funds.

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Appropriation or foreclosure of the asset is generally not available to 3 Security Trustee mortgagees or to pledgees other than in the case of financial pledges. Court procedures usually take several months or even more than a 3.1 Regardless of whether your jurisdiction recognises year if the complexity of the legal arguments at stake leads to court the concept of a “trust”, will it recognise the role of appeals. a security trustee or agent and allow the security trustee or agent (rather than each lender acting Please refer to section 5 below for restrictions concerning separately) to enforce the security and to apply the insolvency/bankruptcy and restructuring proceedings. proceeds from the security to the claims of all the lenders? 4.2 Do restrictions apply to foreign investors or creditors

in the event of foreclosure on the project and related Portugal Trusteeship is generally not recognised by Portuguese law. Thus, companies? even if the relevant agreements indicate that the security agent holds security for the benefit of a given lending syndicate, unless No different rules apply to domestic or foreign investors in this all lenders are disclosed as holders thereof, the security agent shall respect. appear as the sole beneficiary of the security entitlements and shall be the sole entity with authority to file enforcement procedures in respect thereof. 5 Bankruptcy and Restructuring Hence, in the context of the enforcement procedures, the security Proceedings agent may be required to prove before a court that it holds title to the secured obligations. 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender 3.2 If a security trust is not recognised in your to enforce its rights as a secured party over the jurisdiction, is an alternative mechanism available security? (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which Upon the opening of bankruptcy proceedings, all security other would allow one party (either the security trustee or than financial collateral over the insolvent’s assets must be enforced the facility agent) to enforce claims on behalf of all within the bankruptcy proceedings and payment of creditors’ claims the lenders so that individual lenders do not need to enforce their security separately? shall be made in accordance with the Portuguese Insolvency and Company Recovery Code (“CIRE”) rules. The only prima facie way to have all the lenders recognised as Furthermore, the insolvency order delivered by the court suspends beneficiaries of a given security is to name them as holders of the any outstanding executory proceedings having as an object the secured obligations and corresponding security. However, this attachment or seizure of the insolvent’s assets, and prevents the entails the need to amend the relevant agreement (or execute a new bringing of any new executory proceedings or the enforcement of notarial deed) each time the lenders assign, buy or sell part of the any security against the insolvent entity. Any lawsuits related to loans, which is not a practical solution. For this reason, attempts such assets are attached to the bankruptcy proceedings. have been made to set up alternatives and to put in place more In addition, all claims from creditors of the insolvent entity must lender-friendly solutions, as is the case where the security agent is be lodged within the insolvency proceedings. Therein the creditor made the registered beneficiary of the security and either benefits shall mention the amount of its claim as well as any security from from a parallel debt or is made contractually bound to assign which it may benefit over the assets of the insolvent entity. the secured obligations to all of the lenders prior to enforcement of the security. Other alternatives include having the entire 5.2 Are there any preference periods, clawback rights lending syndicate registered as secured creditors but with proper or other preferential creditors’ rights (e.g. tax debts, intercreditor arrangements in place (setting up the rules for action employees’ claims) with respect to the security? by individual creditors and for allocation of the proceeds of security enforcement). The insolvency administrator is entitled to terminate agreements which may be qualified as detrimental to the insolvent estate by 4 Enforcement of Security notice to the relevant counterparty. The counterparty may either accept termination of the contract and return to the insolvency estate the consideration received or, alternatively, challenge the 4.1 Are there any significant restrictions which may termination of the contract in court. impact the timing and value of enforcement, such There are certain acts and transactions which are legally deemed to as (a) a requirement for a public auction or the availability of court blocking procedures to other be detrimental to the insolvent company’s estate. Other than these, creditors/the company (or its trustee in bankruptcy/ acts performed within two years prior to the opening of the corporate liquidator), or (b) (in respect of regulated assets) bankruptcy proceedings that generally diminish, jeopardise or delay regulatory consents? the rights of the debtor’s creditors may be qualified as detrimental to the insolvent estate, provided that challenge of these acts requires The enforcement of mortgages consists of a sale of the relevant proof of bad faith of the relevant parties. Bad faith is presumed by assets through court proceedings. The sale of pledged assets may law in the case that the counterparty or the beneficiary of the act is be made through court or out-of-court proceedings. Alternatively, related to the insolvent entity. financial pledges may also be enforced by appropriation ofthe Upon payment of the insolvency procedure costs (which must be relevant assets. settled prior to all other claims), claims shall be paid in the following order:

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(a) secured claims (those with security over assets which are part While this procedure is pending, creditors of the company being of the insolvent estate up to the value of those assets); subject to the same cannot file any enforcement proceedings for the (b) preferential claims, including: payment of a fixed amount or other lawsuits to demand fulfilment (i) general creditors’ preferential claims over the assets in of monetary obligations, while any ongoing executive actions the insolvent estate up to the value of the assets over for payment of a fixed amount or any other lawsuits to demand which such preferential claims exist and where the fulfilment of monetary obligations are suspended. claims are not extinguished as a consequence of the declaration of insolvency; 5.6 Please briefly describe the liabilities of directors (if (ii) certain debts to the tax and social security authorities; any) for continuing to trade whilst a company is in (iii) claims by creditors which have provided capital to financial difficulties in your jurisdiction. Portugal finance the insolvent’s activity during the SIREVE procedure (see question 5.5) over all movable assets of Directors may continue to trade even if a company is facing financial the insolvent; difficulties, provided that they act with a special duty of care and do (iv) employees’ claims over the specific company premises not violate their legal duties and legal principles applicable to the where they carry out their activity; and management of companies. (v) claims by the party that applied for the opening of the Within insolvency proceedings, the insolvent entity’s directors insolvency proceedings); and may be found liable if they fail to meet their legal obligation to file (c) unsecured claims and subordinated claims. for corporate insolvency proceedings within 30 days of the debtor becoming insolvent or if the insolvency situation has been created or 5.3 Are there any entities that are excluded from aggravated as a consequence of a felonious or gross fault during the bankruptcy proceedings and, if so, what is the period of three years before the opening of the corporate insolvency applicable legislation? proceedings. Directors may be subject to ancillary penalties – prohibition Bankruptcy proceedings are generally applicable to all persons or from performing commercial activities – and/or ordered to pay legal entities, with the exception of the Republic of Portugal and amounts unduly received from the insolvent company, and may public/administrative entities and companies. In addition, insurance be deemed jointly and severally liable with the company in certain companies, credit institutions and other financial corporations are circumstances. subject to specific insolvency rules (and not to the CIRE). Where the debtor is declared insolvent by the court, directors may also be held criminally liable for fraudulent insolvency, negligent 5.4 Are there any processes other than court proceedings insolvency and the unlawful favouring of creditors. that are available to a creditor to seize the assets of the project company in an enforcement? 6 Foreign Investment and Ownership A creditor may, without filing a judicial proceeding, retain possession Restrictions of the assets pertaining to a certain entity if it is in the possession of such assets and if the claim arises from expenses or damages caused by such assets. 6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company? Creditors may also enforce security over assets of the project company outside the court, provided such security was granted Under general Portuguese law, there are no restrictions on foreign under the Directive on Financial Collateral Arrangements. direct investment or foreign ownership of a project company. However, the exercise of an economic activity within the regulated 5.5 Are there any processes other than formal insolvency sectors (such as energy, water and waste management, telecoms, proceedings that are available to a project company to postal services, railways, commercial aviation and financial services) achieve a restructuring of its debts and/or cramdown may require authorisation from the regulator to both Portuguese and of dissenting creditors? foreign investors. Restrictions may apply under the Law on Money Laundering The Portuguese insolvency law provides for a special recovery and the Financing of Terrorism, which transposed the EU Money proceeding which aims to promote the rehabilitation of debtors Laundering regulations into Portuguese law. There may also facing financial difficulties (Processo Especial de Revitalização – be temporary embargo situations applying to persons or entities “PER”). These proceedings are available to a debtor which finds residing in non-EU states. itself in a distressed financial situation but whose insolvency has not been declared by a court. Special recovery proceedings are designed There are no currency controls under Portuguese law and money to provide a moratorium on creditor action while a recovery plan is can be freely transferred into or out of Portugal. Also, there are no agreed. restrictions on the remittance of profits or investments abroad. Portuguese law further provides for an out-of-court recovery system (Sistema de Recuperação de Empresas por Via Extrajudicial – 6.2 Are there any bilateral investment treaties (or other “SIREVE”) which is a non-judicial procedure that aims to obtain international treaties) that would provide protection a settlement between a company which may be insolvent or facing from such restrictions? imminent insolvency, and its creditors. It involves an arrangement between the company and all or part of its creditors (representing No particular restrictions in relation to foreign direct investment at least 50% of the company’s total debts) which will enable the apply. company to overcome its financial difficulties.

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by private entities, the ownership of land or other assets does not 6.3 What laws exist regarding the nationalisation or require a licence. expropriation of project companies and assets? Are any forms of investment specially protected? However, the exercise of a specific economic activity by use or operation of such assets may require a licence and, in the case of an asset in the public domain, the attribution of a right of use (of the The protection of private property is upheld by the Constitution. relevant asset, normally through a concession regime). Accordingly, the nationalisation, expropriation or requisition of private property can only take place on the grounds of public interest There is no distinction between national and foreign entities in this and provided that private entities are duly compensated. respect. While there is a legal framework setting out the terms for the expropriation process and calculation of indemnification payable 7.4 Are there any royalties, restrictions, fees and/or Portugal in relation to immovable assets, there is no general framework for taxes payable on the extraction or export of natural nationalisation processes. resources? There is, nevertheless, a specific legal regime setting out the framework for the public appropriation of share capital, in whole or There is no specific tax regime applicable to the extraction or export in part, from private legal persons for public interest reasons. of natural resources, other than in respect of the extraction of oil (but not applicable to natural gas). There are no distinctions between domestic and foreign investors in this respect. Additionally, Portuguese oil legislation, currently under review, foresees that the agreements for the prospection, research and production of oil shall include an annual fee (“renda de superfície”) 7 Government Approvals/Restrictions calculated by reference to the area of the concession. Other fees and royalties may be agreed in the relevant concession agreements or licences. 7.1 What are the relevant government agencies or departments with authority over projects in the typical Portugal has implemented excise duties on petroleum and energy project sectors? products, in line with EU legislation, which are triggered on the supply of such products to the final consumer. The governmental agencies or departments with authority over The extraction and/or export of natural resources may also be projects depend mainly on the relevant sector of activity of a project. subject to the general taxes applicable within the Portuguese tax In general terms, the respective Ministries (energy, infrastructure, system; namely, Corporate Income Tax (“CIT”) and Value-Added transport, health, etc., and – when applicable – environment) are Tax (“VAT”). responsible for the launch, licensing and major regulation of the projects, either directly or through their governmental departments, 7.5 Are there any restrictions, controls, fees and/or taxes e.g.: Direção Geral de Energia e Geologia (energy); Instituto da on foreign currency exchange? Mobilidade e dos Transportes, I.P. (roads); Administração Regional de Saúde (health), etc. Income derived from foreign currency exchange may be subject to The approval of the Ministry of Finance may also be required where CIT. Commission fees payable to a financial/credit institution for a project involves public investment or, more generally, where the foreign currency exchange may trigger Stamp Duty. public-private partnership (“PPP”) legal framework applies. In general terms, Portugal does not apply controls on foreign In this respect, reference should be made to the Unidade Técnica de currency exchange, without prejudice to money laundering Acompanhamento de Projetos (“UTAP”), an administrative entity controls in line with those applicable in other EU Member States. under the supervision of the Ministry of Finance, recently created Furthermore, reporting obligations to the Bank of Portugal may also for the follow-up of PPP projects. apply to certain transactions.

7.2 Must any of the financing or project documents be 7.6 Are there any restrictions, controls, fees and/or taxes registered or filed with any government authority or on the remittance and repatriation of investment otherwise comply with legal formalities to be valid or returns or loan payments to parties in other enforceable? jurisdictions?

Project documents are valid and enforceable without any need Interest or dividends paid by Portuguese-resident companies to non- for registration, authentication or filing with any governmental resident entities are, as a general rule, subject to withholding tax at a authority, save for certain pledge arrangements which need to be rate of 25% (this rate may, under certain circumstances, be increased authenticated by a Notary or by any competent authority. to 35%). Private agreements with acknowledgment of a payment obligation With respect to interest or dividend payments, the withholding shall also only be directly enforceable before the courts if tax can be waived or reduced under the EU Interest and Royalties authenticated by a Notary or by any competent authority. Directive, the EU Parent-Subsidiary Directive or under bilateral double tax treaties signed by Portugal, as long as certain conditions are met. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or Note that the CIT legislative reform implemented a participation operation of such assets, require a licence (and if so, exemption regime for dividends (and capital gains), which can such a licence be held by a foreign entity)? considerably extended the cases in which dividends paid to other jurisdictions (e.g. with whom Portugal has signed a double tax Other than assets in the public domain (e.g. the hydro domain, treaty and there is administrative cooperation in tax matters) are not mineral resources, roads, railways) which may not be appropriated subject to withholding tax.

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Moreover, public procurement rules shall also apply to construction 7.7 Can project companies establish and maintain contracts and services agreements entered into by a project company onshore foreign currency accounts and/or offshore (i) which is in more than 50% directly financed by a public entity, accounts in other jurisdictions? and (ii) whose contractual price equals or exceeds €5,000,000 and €200,000 respectively. There are no restrictions or limitations regarding the establishment and maintenance of onshore foreign currency accounts or offshore accounts in other jurisdictions. 8 Foreign Insurance

7.8 Is there any restriction (under corporate law, 8.1 Are there any restrictions, controls, fees and/or taxes Portugal exchange control, other law or binding governmental on insurance policies over project assets provided or practice or binding contract) on the payment of guaranteed by foreign insurance companies? dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad? Portuguese law does not foresee any restrictions, controls, fees or taxes on the granting of insurance policies by a foreign insurance Please see question 7.6 concerning withholding taxes related to company. the payment of dividends to a foreign parent company. Regarding dividends paid to a resident parent company, exclusion from 8.2 Are insurance policies over project assets payable to taxation is also available provided some requirements are met foreign (secured) creditors? (namely, a certain level of shareholding – currently 5% held for at least 24 months). Yes. No limitation applies under Portuguese law regarding payment of insurance to foreign secured creditors. 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities 9 Foreign Employee Restrictions administer those laws or regulations? 9.1 Are there any restrictions on foreign workers, Environmental impact assessments are generally required for technicians, engineers or executives being employed infrastructure projects. The PPP law establishes that PPP procurement by a project company? procedures shall only be launched after approval of the relevant environmental impact declaration. Financing documents also normally In general, no restrictions apply to the employment of foreign include this environmental impact declaration as a condition precedent workers. However, citizens of non-EU countries must obtain a (“CP”) to the disbursement of funds. work, visa residence or equivalent permit to live in Portugal. Depending on the sector in question, a project may also be subject to the European Integrated Pollution Prevention and Control (“IPPC”) rules. The environmental licence (which is required, in 10 Equipment Import Restrictions particular, for industrial projects) must be obtained before operation commences, and must be successively renewed during the entire 10.1 Are there any restrictions, controls, fees and/or taxes period of operation of the relevant plant. on importing project equipment or equipment used by Furthermore, in the context of the EU emissions trading system, for construction contractors? projects in certain industrial sectors and meeting certain conditions and/or thresholds, operators must hold a permit to emit greenhouse In general, the import of goods is a taxable event for the purposes gases, and be the holder of emission allowances. of VAT and customs duties. VAT and customs duties are payable by Depending on the sector of activity, health and safety laws may the importers (whether or not a taxable person) at the time the goods apply in terms consistent with European directives in this respect. pass the customs control.

7.10 Is there any specific legal/statutory framework for 10.2 If so, what import duties are payable and are procurement by project companies? exceptions available?

In general terms, project companies are not subject to specific VAT is charged on importation of goods at the rate that applies procurement rules. There are, however, some specific cases where a to a supply of similar goods within the Portuguese territory. The project company may be subject to the regime set forth in Portuguese taxable value of imports is determined in accordance with customs public procurement law, namely: (i) if the project company has been legislation, excluding VAT itself but including customs duties and established for the specific purpose of meeting general interest any other taxes or charges levied on imports, as well as incidental needs and is controlled by public entities or financed mainly from expenses such as commissions, packaging, transport and insurance the public budget; (ii) if the project company has been created for expenses incurred up to the first destination within Portugal. the specific purpose of meeting general interest needs, operates in Customs duties are calculated, on an ad valorem basis, as a the energy, water, transport or postal services, and a public entity percentage of the value of the goods being declared for importation. exercises a dominant influence over it; and (iii) if a project company The level of that percentage depends on the kind of product imported has been granted, without an international public procurement and the country of origin. process, special or exclusive rights in the public energy, water, transport or postal services sectors, affecting the ability of third parties to exercise activities on those sectors.

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11 Force Majeure 14 Jurisdiction and Waiver of Immunity

11.1 Are force majeure exclusions available and 14.1 Is a party’s submission to a foreign jurisdiction and enforceable? waiver of immunity legally binding and enforceable?

Although Portuguese law does not provide for a specific provision Portuguese courts recognise the parties’ autonomy to select the regarding exclusion of liability in case of force majeure, the principle forum of their disputes, even when the selected forum has no is generally accepted and enforceable in Portugal. particular connection with the dispute, and have consistently In general, project contracts provide for detailed provisions in recognised the provisions of the Brussels Regulation as prevailing Portugal relation to force majeure events and the terms under which the over the Portuguese Code of Civil Procedure, under which the parties parties have agreed to mitigate the effects of force majeure, and are required to establish a significant interest in the designated exclude liability for breach of contract resulting from a force jurisdiction to select it as the appropriate forum for their disputes. majeure event. The terms agreed between the parties in this respect Notwithstanding, Portuguese courts may ignore foreign jurisdiction are generally accepted and enforceable in Portugal. clauses and assume jurisdiction in special cases where they may claim to hold exclusive jurisdiction, e.g. actions relating to local land, in proceedings related to the validity of the incorporation or 12 Corrupt Practices the dissolution of companies domiciled in Portugal, in proceedings relating to the validity of entries in public registers, or in proceedings related to the registration or validity of patents. 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting In addition, a waiver of immunity is recognised and enforceable in the projects sector)? What are the applicable civil or Portugal. Although there is no specific national act or international criminal penalties? convention entered into by Portugal in this regard, Portuguese law gives immunity from jurisdiction of the Portuguese courts to No specific rules apply on corruption and bribery activities in sovereign states (and to other public entities) by virtue of a general the projects sector. Nevertheless, entities are subject to general principle of customary international law. State immunity is, criminal law, which sets forth corruption and bribery as criminal however, given a strict extent and is limited to acts involving the offences which may be punished with fines or imprisonment up to exercise of sovereign authority. a maximum of eight years (without prejudice to the possibility of aggravated penalties in specific cases). We also refer to the provisions of the Law on Money Laundering 15 International Arbitration and the Financing of Terrorism, which transposed the EU Money Laundering regulations into Portuguese law. 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts? 13 Applicable Law Major project contracts typically provide that the parties shall resort 13.1 What law typically governs project agreements? to arbitration for the resolution of disputes. Where international contractors are involved, the parties often choose to apply the Project agreements are typically governed by Portuguese law. A rules of international centres such as the International Chamber of different applicable law may be chosen (provided that the choice Commerce (“ICC”), the London Court of International Arbitration of law observes the requirements set out in Portuguese law or in (“LCIA”) and the Rules of Arbitration of the United Nations the applicable international conventions). We note, however, that Commission on International Trade Law (“UNCITRAL”). concession contracts and other project agreements entered into with International arbitration clauses are widely recognised by Portuguese public entities are mandatorily governed by Portuguese law. courts irrespective of the choice of the parties to locate the seat of the arbitration in Portugal or abroad. At the enforcement stage, the decree of enforceability of an arbitral award is likely to vary 13.2 What law typically governs financing agreements? greatly depending on the applicable legal regime. An international arbitral award rendered in Portugal is immediately enforceable in The parties may freely choose the law which will govern the Portuguese territory under the rules of the Portuguese Arbitration financing agreements with observation of the requirements set out Act and of the Portuguese Code of Civil Procedure. Foreign arbitral in Portuguese law or in the applicable international conventions. awards are recognised and enforced in Portugal under the applicable Although financing agreements in project finance deals in Portugal international treaty or bilateral agreement (see question 15.2 are commonly subject to Portuguese law, it is also quite common for below), generally under the 1958 Convention on the Recognition international lending syndicates to require finance agreements to be and Enforcement of Foreign Arbitral Awards (“the New York submitted to English law. Convention”). Foreign arbitral awards that are not covered by any of these 13.3 What matters are typically governed by domestic law? international treaties may still be recognised and enforced in Portugal under the general provisions of the Portuguese Arbitration In the context of project finance deals, the creation of security Act, which were greatly influenced by the UNCITRAL Model Law interests over assets which are located in Portugal is, according and by the New York Convention. to the applicable conflict of laws rules, mandatorily governed by Portuguese law.

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15.2 Is your jurisdiction a contracting state to the New York 17 Tax Convention or other prominent dispute resolution conventions? 17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or In the context of international arbitration, Portugal is a party to the foreign lenders, or (b) the proceeds of a claim under a following international conventions: guarantee or the proceeds of enforcing security? (a) the Geneva Protocol on Arbitration Clauses of 1923; (b) the Geneva Convention on the Execution of Foreign Arbitral Under certain circumstances (e.g. interest paid to financial Awards of 1927; institutions), withholding tax on interest payments may be waived.

Portugal (c) the New York Convention, which entered into force in Under the EU Interest and Royalties Directive and since 1 July 2013, Portugal on 16 January 1995; no withholding tax is due on interest payments made by resident (d) the Inter-American Convention on International Commercial companies, provided the following conditions are met: (i) the Arbitration, adopted in Panama on 30 January 1975; and paying and beneficiary entities are subject to (and not exempt from) (e) the Washington Convention on the Settlement of Investment corporate tax and take one of the legal forms listed in the annex of Disputes between States and Nationals of Other States, which this directive; (ii) both entities are considered EU residents for the entered into force in Portugal on 1 August 1984. purposes of double tax treaties; (iii) a direct 25% shareholding is held by one of the companies in the other’s capital, or both are sister On a bilateral level, Portugal has signed Judiciary Cooperation companies (i.e. are both held, in at least 25%, by the same direct Agreements with Guinea-Bissau, Mozambique, Angola, São Tomé shareholder and in either case the shareholding must be held for at e Príncipe, the Special Administrative Region of Macao (People’s least a two-year period); and (iv) the entity receiving the interest Republic of China) and Cape Verde. These bilateral agreements payment should be its effective beneficiary. Under the provisions of entered into between Portugal and other Portuguese-speaking the double tax treaties signed by Portugal, the domestic withholding countries equate arbitral awards to national courts’ judgments and tax rates foreseen for interest payments can be reduced to rates subject both decisions to the same legal regime. ranging from 5% to 15% (no withholding applies in the case of long- term loans extended by US banking or financial institutions). 15.3 Are any types of disputes not arbitrable under local Withholding tax may apply depending on the taxable construction law? of the claim under the guarantee.

Unless the matter is subject to the exclusive jurisdiction of national 17.2 What tax incentives or other incentives are provided courts or to compulsory arbitration, any dispute involving an economic preferentially to foreign investors or creditors? What interest is arbitrable. Portuguese law also extends arbitrability to non- taxes apply to foreign investments, loans, mortgages pecuniary rights under which the parties can enter into agreements. or other security documents, either for the purposes Only a few types of disputes, namely some disputes related to of effectiveness or registration? insolvency proceedings, are subject to the exclusive jurisdiction of national courts and thus considered non-arbitrable. Portugal has tax regimes applicable until 2020 aimed at fostering investment, particularly foreign investment. These comprise tax incentives to investment made in Portugal in specific business 15.4 Are any types of disputes subject to mandatory sectors (e.g. the mining and manufacturing industry), such as (i) CIT domestic arbitration proceedings? deductions or tax credits, and (ii) exemptions or reductions in Real Estate Tax, Real Estate Transfer Tax and Stamp Duty. Disputes concerning intellectual property rights related to The tax exposure of a foreign investment in Portugal will depend medicines, collective labour rights and sports regulation are subject on how such investment is structured (e.g. if it involves a direct to mandatory domestic arbitration. presence in Portugal or not). For instance, if such foreign investment is made through a local subsidiary, this affiliate will be subject to the 16 Change of Law / Political Risk taxes which are typically applicable to national companies; namely (among others), CIT, VAT, Stamp Duty and property taxes. Loans, mortgages and other security documents may be subject 16.1 Has there been any call for political risk protections to Stamp Duty in Portugal, at rates that vary between 0.04% per such as direct agreements with central government or month or fractions thereof up to 0.6% (one-off), depending on the political risk guarantees? maturity of the loan or the term of the guarantee, as applicable. The current Stamp Duty Code provides for exemptions applicable Although it is common in project finance deals to have direct to certain loans (e.g. shareholders’ loans, under certain conditions) agreements with the government (in particular in its capacity as and guarantees (e.g. those granted to financial or credit institutions, grantor in a concession contract), those agreements are normally under certain conditions). designed to address step-in rights of financial institutions and do not provide any particular political risk protections. Change-in-law risk is normally addressed by contract in the standard 18 Other Matters terms for international project finance deals. 18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?

In general, the most relevant issues have been addressed.

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18.2 Are there any legal impositions to project companies 19 Islamic Finance issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments. instruments might be used in the structuring of an Islamic project financing in your jurisdiction. In general terms, bonds may only be issued by limited liability companies incorporated in Portugal whose share capital is paid up To the best of our knowledge, there is no experience of Islamic project in full and which have been registered with the relevant Commercial finance in Portugal, nor are there any finance instruments structured in Registry Office for at least one year. This requirement shall be waived accordance with Islamic law in the Portuguese financial sector. Portugal if the issuer makes available to investors financial information on the company, with reference to a date not later than three months 19.2 In what circumstances may Shari’ah law become prior to the issue date, audited by an independent auditor, registered the governing law of a contract or a dispute? Have with the Portuguese Securities Market Commission, and prepared in there been any recent notable cases on jurisdictional accordance with the applicable accounting rules. issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector? In accordance with new legislation published in February 2015, a company may only issue bonds if, after the issuance, it has a ratio See question 19.1 above. of financial autonomy equal to or higher than 35%, to be calculated in accordance with a certain legally set formula. This limit does not apply to (i) companies listed on a regulated market, (ii) companies 19.3 Could the inclusion of an interest payment obligation enjoying a credit rating or bond issues enjoying a credit ratio in a loan agreement affect its validity and/or attributed by a rating agency registered with the European Securities enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk? and Markets Authority (“ESMA”) or with the Portuguese central bank (Banco de Portugal), (iii) issuances the repayment of which is specially secured in favour of the bondholders, (iv) bond issues with The inclusion of interest payment obligations in a loan agreement is a nominal or subscription amount equal to or higher than €100,000, common practice and fully valid and enforceable in Portugal. or (v) issuances subscribed by qualified investors (and without Although civil law foresees maximum rates of interest, those subsequent placement to non-qualified investors). provisions are not applicable to loans provided by financial institutions in relation to which only very specific limitations (e.g. for consumer credit or a surplus interest rate for overdue amounts) may apply.

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Teresa Empis Falcão Ana Luís de Sousa VdA Vieira de Almeida VdA Vieira de Almeida Av. Eng. Duarte Pacheco, 26 Av. Eng. Duarte Pacheco, 26 1070-110 Lisbon 1070-110 Lisbon Portugal Portugal

Tel: +351 21 311 3584 Tel: +351 21 311 3422 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Portugal Before joining VdA in 2008, Teresa Empis Falcão was an Associate Ana Luís de Sousa is a Managing Associate in the Projects – with the project department at Allen & Overy (London) where she Infrastructure, Energy & Natural Resources practice group. acquired expertise in the financing of projects in various jurisdictions. She has been involved in several transactions in Portugal, mainly Teresa, a partner in the Projects – Infrastructure, Energy & Natural focused on the energy sector (including renewable energies), oil & gas, Resources practice, acquired her reputation as a deputy in the infrastructure, water & waste, as well as public-private partnerships Cabinet of the Secretary of State for Infrastructure, Transports and in the health sector – acting as legal adviser to the administrative Communications, from August 2011 to April 2014, which included authorities, sponsors and financial institutions (in particular, those in responsibility for drafting and reviewing legislation concerning these and the European Investment Bank). sectors, as well as leading negotiation teams in the context of the Ana has also advised several clients in international transactions in infrastructure PPP review requested by the bail-out arrangements Cape Verde, Angola (in energy and financing matters) and Mozambique applying in Portugal between 2011 and 2014. (in oil & gas-related matters). She is frequently sought for leading-edge national and international transactions on project finance transactions, mainly focused on the infrastructure and energy sectors, due to her high level of expertise. Teresa is admitted to the Portuguese Bar Association, the Law Society of England and Wales, as a solicitor, and the Brazilian Bar Association.

VdA Vieira de Almeida is an independent Portuguese law firm with 350-plus staff and strong experience in various industries. Over the past 40 years, VdA has participated in a significant number of pioneering transactions in both Portugal and abroad, in some instances alongside some of the most relevant international law firms, with whom we have a strong working relationship. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as the “Financial Times 2015 Game Changing Law Firm in Continental Europe”, the “Financial Times Innovative Lawyers in Continental Europe 2013 and 2016”, the “Portuguese Law Firm of the Year 2014, 2015 and 2016” awarded by IFLR, the “Portuguese Law Firm of the Year 2016” awarded by Chambers & Partners, and the “Most Active Law Firm” awarded to VdA by Euronext for five consecutive years. VdA is the most international Portuguese law firm and, through VdA Legal Partners (which encompasses all lawyers and independent law firms and associated with VdA for the provision of integrated legal services), is actively present in 11 jurisdictions, including all African members of the Community of Portuguese-Speaking Countries (“CPLP”), as well as Timor-Leste and some of the Francophone African countries. Portugal – Angola – Cape Verde – Congo – Democratic Republic of Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique São Tomé and Príncipe – Timor-Leste www.vda.pt

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Serbia Milica Popović

Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz Ksenija Boreta

■ Advising Alpha Bank on the EUR 50 million refinancing of 1 Overview Blue Center, one of the largest office projects in Belgrade. ■ Advising UniCredit on a EUR 35 million loan facility for the 1.1 What are the main trends/significant developments in development and acquisition of Sava City, one of the largest the project finance market in your jurisdiction? office projects in Belgrade. ■ Advising Erste Group Bank in relation to a EUR 30 million The major trend we are witnessing is an increased number of refinancing loan facility provided to the leading Israeli real project financings in the area of real estate housing/condominiums, estate developer. commercial real estate and infrastructure projects. More precisely, ■ Advising IFC on a EUR 24 million loan facility granted to the largest project financings are the ones related to renewable Kronospan for the purpose of constructing the factory for the energy projects as on 13 June 2016, the Government of Serbia production of raw and melamine-faced chipboard in Lapovo. adopted the set of regulations governing the renewables sector and ■ Advising Hypo Alpe-Adria, Piraeus Bank and Eurobank fostering further development of the entire energy market, which on a EUR 13 million syndicated loan facility granted for the has led to huge investments in this industry – especially investments development of a regional shopping mall in Niš. in large-scale wind farms in Serbia. ■ Advising OTP Bank Hungary in relation to a change in the borrower shareholding structure for a EUR 42.5 milion loan granted for the construction, development and operation of 1.2 What are the most significant project financings that a shopping and entertainment centre called Belgrade Plaza, have taken place in your jurisdiction in recent years? and the drafting and negotiation of the relevant security documents. The most significant project financings have been the following: ■ Advising Erste Group Bank in relation to a EUR 19 million ■ Advising UniCredit, Intesa, Raiffeisen, Erste, Hypo facility for refinancing the existing for the Alpe-Adria, Société Générale, Crédit Agricole Serbia, Belgrade Business Center, and for drafting and negotiating Eurobank, National Bank of Greece, Piraeus, OTP Bank the relevant security documents. and Komercijalna Banka on a EUR 470 million syndicated loan to Serbian state-owned telecoms provider Telekom Srbija, which is one of the largest corporate financings in 2 Security South Eastern Europe. ■ Advising BNP Paribas, Erste Bank, ING, UniCredit, 2.1 Is it possible to give asset security by means of Banca IMI, Crédit Agricole, Raiffeisen and Société a general security agreement or is an agreement Générale on a EUR 330 million financing granted to required in relation to each type of asset? Briefly, SBB Serbia, Telemach Slovenia and Telemach Bosnia and what is the procedure? Herzegovina, the leading cable TV and broadband internet providers in the territory of the former Yugoslavia – one of the landmark financings in South Eastern Europe. A separate agreement is generally needed for each security instrument, even though some of them may be combined in the same ■ Advising Eurobank, National Bank of Greece, Piraeus document if the registration authority is the same (e.g. in case of Bank and UniCredit on the restructuring of a EUR 122 million syndicated loan facility granted for the purpose of pledge over receivables and movable assets which are registered in constructing the largest shopping mall in Belgrade – Ušće the Pledge Registry kept by the Serbian Business Registers Agency). Shopping Mall. The following security instruments are usually provided in Serbia: ■ Advising UniCredit on a EUR 90+ million loan facility for mortgages over real estate; pledges over movable property; pledges the development of Airport City Belgrade, the largest office over the funds available in bank accounts; receivables pledges; park in Serbia. share pledges; promissory notes; and direct debit authorisations ■ Advising Alpha Bank on the EUR 65 million refinancing over bank accounts. In general, security instruments are deemed to of one of the largest mixed-use development projects be perfected only once duly registered with the relevant authorities. in Belgrade, including the remodelling of the former The authentication of security documents is not mandatory, save for InterContinental Hotel into the Crowne Plaza. mortgages and share pledges, which need to be authenticated before ■ Advising Piraeus Bank, Alpha Bank and Eurobank on a a notary public. EUR 50+ million syndicated loan for real estate development.

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2.2 Can security be taken over real property (land), plant, 2.8 Are any regulatory or similar consents required with machinery and equipment (e.g. pipeline, whether respect to the creation of security over real property underground or overground)? Briefly, what is the (land), plant, machinery and equipment (e.g. pipeline, procedure? whether underground or overground), etc.?

Yes, security can be taken over real property, plant, machinery and No, such consents are not required. However, in the case that the equipment in general. Please note, however, that the pledge over assets are owned by a public company or are covered by certain pipelines is within the competence of the cadastre of lines which is negative pledge clauses, certain consent(s) might be required. not fully operative, i.e. in practice the pledge of pipelines cannot be Serbia established. Please refer to our answer under question 2.1 above for more details on the procedure for taking securities. 3 Security Trustee

2.3 Can security be taken over receivables where the 3.1 Regardless of whether your jurisdiction recognises chargor is free to collect the receivables in the the concept of a “trust”, will it recognise the role of a absence of a default and the debtors are not notified security trustee or agent and allow the security trustee of the security? Briefly, what is the procedure? or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders? No, it cannot.

Serbia recognises the concept of a security agent for the purpose of 2.4 Can security be taken over cash deposited in bank registration of securities. accounts? Briefly, what is the procedure?

Yes. Please refer to our answer under question 2.1 above for more 3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available details as to the procedure for establishing the pledge. In addition, (such as a parallel debt or joint and several creditor please note that the pledge registry refuses to register the pledge status) to achieve the effect referred to above which over future accounts/funds, i.e. only the funds available in the would allow one party (either the security trustee or existing accounts at the moment of establishing the security may the facility agent) to enforce claims on behalf of all be pledged. the lenders so that individual lenders do not need to enforce their security separately?

2.5 Can security be taken over shares in companies Serbian law recognises the joint and several creditors mechanism. incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? On the other hand, the parallel debt mechanism is not envisaged by Serbian law and, although not explicitly forbidden, is untested in practice. Yes, security can be taken over shares/stocks in a joint stock company and over shares in a limited liability company. The security is deemed to be perfected only once it is registered with the 4 Enforcement of Security competent registries.

4.1 Are there any significant restrictions which may 2.6 What are the notarisation, registration, stamp duty impact the timing and value of enforcement, such and other fees (whether related to property value or as (a) a requirement for a public auction or the otherwise) in relation to security over different types availability of court blocking procedures to other of assets (in particular, shares, real estate, receivables creditors/the company (or its trustee in bankruptcy/ and chattels)? liquidator), or (b) (in respect of regulated assets) regulatory consents? The fees include court, notarial and registration fees and their amounts vary depending on the type and value of the security Yes, enforcement requires certain procedures to be followed; in question. In general, they do not exceed a maximum of the however, they cannot be viewed as significant restrictions. Serbian dinar (“RSD”) equivalent of approximately EUR 7,000 Mortgages may under Serbian law principally be established either for a mortgage and a few hundred euros for pledges over shares, as (i) court mortgages, i.e. judicial mortgages, or (ii) out-of-court receivables and chattels. mortgages. Consequently, mortgages may be enforced in two different ways, i.e. by way of (i) court, i.e. judiciary, enforcement, 2.7 Do the filing, notification or registration requirements or (ii) out-of-court enforcement. As a matter of principle, please in relation to security over different types of assets note that the creditor may enforce claims out-of-court only if such involve a significant amount of time or expense? manner is envisaged in the relevant security documents, while court enforcement is generally an option that is available to the creditor Normally they do not. However, if it happens that there already in either case (be it specifically envisaged in the documents or not). exists a certain encumbrance over the property then that requires Court enforcement certain steps to be taken in advance which may entail additional time and expense. In case of enforcement of the court mortgage, the relevant property could be sold via a direct deal or public auction. In case of a public auction, at the first auction the minimum opening price would have to be at least 70% of the estimated value of the property (with such value determined by a reputable entity typically engaged in

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property appraisals). However, parties to the enforcement may jointly propose or the enforcement creditor alone may propose to the 5.2 Are there any preference periods, clawback rights public bailiff that he/she determine the minimum opening price at or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security? the first auction to be higher than 70% of the estimated value of the property, in which case the public bailiff is obliged to accept their proposal and set the minimum opening price at the proposed value. Under the Serbian Law on Contracts and Torts, any legal transaction If the first auction is unsuccessful, the minimum opening price at the (action or omission) of the debtor may be challenged by creditors second auction would have to be at least 50% of the estimated value. with claims due by the debtor in case that transaction has been If the second auction is unsuccessful as well, the relevant creditor/ performed to their detriment, i.e. the debtor does not have sufficient assets to fulfil its outstanding liabilities toward creditors. Itis

mortgagee would be allowed to opt for the ownership over the real Serbia estate to be transferred to it (in that case, it would be deemed that the presumed that the transaction is detrimental to creditors if – as a creditor has been compensated in the amount equalling 30% of the result of the transaction – the debtor does not have sufficient assets appraised value of the property). for the satisfaction of the creditors’ claims. Out-of-court enforcement An onerous contract (contract with counter-payment) may be challenged if the debtor, at the time the contract was signed, knew The out-of-court procedure could also be performed by way of or ought to have known that the contract was detrimental to its a direct deal or a public auction. Unless otherwise agreed, the creditors and the third party with whom the contract was concluded minimum opening price in the auction would have to be at least 75% was, or ought to have been, aware thereof. If the transaction was of the appraised value of the property (or 60% in the second auction non-onerous, there is a legal presumption that the debtor knew that attempt – if the first attempt to auction the property has failed). The the transaction was detrimental to its creditors. creditor would be allowed to participate in the public auction. Challenge is made through a clawback lawsuit against the third party benefiting from the debtor’s transaction within one year from the 4.2 Do restrictions apply to foreign investors or creditors date on which the challenged transaction was performed (i.e. three in the event of foreclosure on the project and related years in the case of a non-onerous transaction). The consequence companies? of a successful challenge is that the challenged transaction has no effect toward the claimant (the challenger) to the extent necessary Yes, restrictions apply. for fulfilment of his/her claim. Pursuant to the Bankruptcy Law, certain pre-bankruptcy actions of a 5 Bankruptcy and Restructuring bankrupt entity may be challenged by the bankruptcy administrator Proceedings or by creditors of the bankrupt company, if these actions interfere with a pari passu settlement of bankruptcy creditors, if they damage the creditors, or if they fairly improve the position of some 5.1 How does a bankruptcy proceeding in respect of the creditors over all other creditors. The Bankruptcy Law provides project company affect the ability of a project lender for various grounds on which pre-bankruptcy transactions could, to enforce its rights as a secured party over the if they occurred within certain time periods before the initiation security? of bankruptcy proceedings, be challenged by the bankruptcy administrator or creditors of the bankrupt company. The following Claims of unsecured bankruptcy creditors have different orders of may be contested: priority in bankruptcy proceedings. Claims of the lower priority (a) Congruent settlement: Legal transactions and actions taken order creditors can only be satisfied after the claims of the higher within six months before filing for commencement of priority order creditors. The claims of the creditors with the same bankruptcy proceedings (or even after the commencement of order of priority are satisfied pro rata in bankruptcy proceedings. bankruptcy proceedings if the creditor knew or should have Article 17 of the Law on Bankruptcy and Liquidation provides the known that the debtor was insolvent or that the bankruptcy following order of priority (payout lines) in respect of the payout proceedings had been initiated), providing security or of unsecured claims towards the bank in bankruptcy proceedings: settlement to a creditor, may be contested if the debtor was (a) following claims related to insured deposits, (i) claims of insolvent at the time of taking this action and the creditor knew creditors related to the deposits insured in conformity with the or should have known of the debtor’s insolvency. It shall be Law on the Insured Deposits, which decrease by the amount deemed that the creditor knew or should have known of the of insured deposit, and (ii) claims of the Deposit Insurance debtor’s insolvency or of the petition for initiating bankruptcy Agency related to loans granted to the bank in the process of proceedings, if he was aware of the circumstances undoubtedly liquidation which precedes a bankruptcy procedure, to enable leading to the conclusion that insolvency occurred or that the payment of insured deposits; petition was submitted to initiate bankruptcy proceedings. If the preferred creditor is a related party to the debtor, there is (b) claims related to public revenues becoming due for payment a presumption that he knew about the debtor’s insolvency or for the last three months prior to instituting bankruptcy about the commencement of the bankruptcy proceedings. proceedings, except for contributions for the pension and disability insurance of employees; (b) Incongruent settlement: Legal transactions and actions providing security or settlement for one creditor which it (c) claims of the National Bank of Serbia (“NBS”), including was not entitled to request, or was entitled to request but claims arising from loans which are not fully settled due to a not in the manner and at the time when it was provided, difference in value of collaterals; may be contested if it was provided up to 12 months before (d) claims of creditors related to deposits of large legal entities submitting the petition or initiating bankruptcy proceedings. in line with the accounting and auditing rules, with the (c) Directly detrimental legal transactions: Legal transactions of exception of deposits of parties related to the bank; a debtor, entered into up to six months before commencement (e) claims of other creditors; of the bankruptcy proceedings and directly damaging the (f) claims of subordinated creditors; and creditors, may be contested (i) if the debtor was insolvent at that time and the counterparty knew of debtor insolvency, (g) claims of banks’ shareholders.

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(ii) if the transaction has been entered into after the petition does not necessarily mean that the director is liable in any manner for bankruptcy proceedings has been submitted and the unless he abused his powers and undertook actions clearly counterparty knew or should have known about the debtor’s detrimental to the company. Under the specific circumstances insolvency or about a petition for initiation of the bankruptcy provided by the law, and if his acts could be qualified as criminal proceeding, or (iii) if the legal action was taken or omitted acts, the director may even be held liable for the crimes of causing a from being taken within six months prior to filing a petition for bankruptcy or causing a fault bankruptcy. initiation of the bankruptcy proceedings, and, due to that legal action being taken or omitted, the debtor will lose certain rights. (d) Intentionally detrimental legal transactions: Legal transactions 6 Foreign Investment and Ownership or actions entered into or taken with the intent of incurring Restrictions Serbia damage to one or more creditors up to five years before submitting the petition for initiating bankruptcy proceedings may be contested, if the debtor’s counterparty knew of 6.1 Are there any restrictions, controls, fees and/or taxes the debtor’s intent. Knowing about intent is presumed if on foreign ownership of a project company? the debtor’s counterparty knew that there was a threat of insolvency against the debtor and that the action would damage the bankruptcy creditors. Firstly, please note that under the Law on Investments, a foreign investor is: 1) a legal entity established in compliance with a foreign (e) Transactions and actions without, or for negligible, compensation: Legal transactions and actions of the bankruptcy law whose principal place of business is abroad, including its debtor without compensation, or for negligible compensation, branch office registered in Serbia; 2) a foreign natural person; or may be contested or taken up to five years before submitting 3) a Serbian citizen having permanent residence abroad for longer the petition for initiating bankruptcy proceedings. than one year. In response to the above question – no, except the prohibition on 5.3 Are there any entities that are excluded from a foreign investor from acquiring more than 49% of shares in a bankruptcy proceedings and, if so, what is the company engaged in weapon production or in a company operating applicable legislation? in an area designated as a prohibited zone under special laws. Also, there are no special taxes payable by a non-resident just on The Republic of Serbia, autonomous provinces and units of ownership of a company in Serbia. local self-government, funds or compulsory insurance bodies for pensioners, disabled persons, social security or health services, 6.2 Are there any bilateral investment treaties (or other legal entities established by the Republic of Serbia, an autonomous international treaties) that would provide protection province or a unit of local self-government that are exclusively or from such restrictions? primarily funded from the allocated public revenues or the budget of the Republic of Serbia or budgets of the autonomous provinces No, there are no such treaties. or units of local self-government; the National Bank of Serbia; the Central Securities Depository and Clearing House; and public agencies are excluded from bankruptcy proceedings. Founders or 6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are owners having the status of members or shareholders of the above- any forms of investment specially protected? listed legal entities exempted from bankruptcy proceedings are jointly and severally liable for the liabilities of these legal entities. In general, the state is allowed to expropriate privately owned real estate under the conditions of the Law on Expropriation. The Law 5.4 Are there any processes other than court proceedings envisages that real estate may be expropriated (or the ownership that are available to a creditor to seize the assets of restricted) only in public interest determined on the basis of the Law, the project company in an enforcement? against compensation which may not be lower than the market price of the expropriated real estate. The public interest for expropriation Out-of-court enforcement is available if explicitly agreed in the of real estate can be determined by law or by decision of the agreement. Government. Expropriation of assets of foreign companies is further regulated 5.5 Are there any processes other than formal insolvency by the Law on Investments, which specifies that the investment proceedings that are available to a project company to of a foreign investor and the assets of companies with a foreign achieve a restructuring of its debts and/or cramdown investment cannot be expropriated, nationalised, or subject to of dissenting creditors? other acts of state of equal effect, unless the public interest is established by the law or based on the law, and against the payment The reorganisation procedure is set forth under the Serbian of compensation. Compensation must correspond to the market Bankruptcy Law. The reorganisation plan is deemed to be accepted value that the investment has on the day of the act of expropriation, once the majority of all classes of creditors have voted for the nationalisation or other measure taken and it has to include the adoption of the reorganisation plan, in which case even the dissenting compensation for decrease of value of business. Compensation creditors are obliged to abide by the adopted reorganisation plan. must be paid without delay, in convertible currency and the foreign investor may freely transfer it abroad. In the case of a delay of the 5.6 Please briefly describe the liabilities of directors (if payment of this compensation, the foreign investor has the right to any) for continuing to trade whilst a company is in the statutory interest. financial difficulties in your jurisdiction.

The director is liable for all acts he undertakes in the company’s name. However, the fact that the company is in financial difficulty

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7 Government Approvals/Restrictions 7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources? 7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors? Rent fees, taxes, administrative fees and stamp duty may be payable for certain permits or for the exploitation of certain natural resources. Also, excise duties are payable on oil derivatives, biofuels and The relevant agencies in terms of security are the Cadastral Registry, bioliquids. the Pledge Registry and the National Bank of Serbia. With regard

to regulatory departments, these depend on the area of investment, Serbia e.g. the Regulatory Agency for Telecommunications is in charge 7.5 Are there any restrictions, controls, fees and/or taxes of investment in telecommunications, the Agency for Medicines on foreign currency exchange? is in charge of investment in the production and distribution of medicines, etc. There are no taxes payable on foreign currency exchange.

7.2 Must any of the financing or project documents be 7.6 Are there any restrictions, controls, fees and/or taxes registered or filed with any government authority or on the remittance and repatriation of investment otherwise comply with legal formalities to be valid or returns or loan payments to parties in other enforceable? jurisdictions?

Only if the financing is taking place in an area that requires certain Remittances, investment returns or loan payments to parties in regulatory approvals, for example in the cases outlined in question other jurisdictions are generally subject to withholding tax. Still, 7.1 above. depending on the form of an investment (e.g. contractual joint venture), returns on such investments may be instead subject to corporate income tax at a rate of 15%. The general withholding 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or tax rate is 20%. Still, as Serbia has a wide network of double tax operation of such assets, require a licence (and if so, treaties in place, in specific cases income may be taxed at a lower can such a licence be held by a foreign entity)? rate or exempt from taxation in Serbia. If the interest is paid to a party from a jurisdiction with a preferential Ownership over land does not require a licence, but it requires tax regime (“tax haven”), such interest is taxed at a special 25% registration in the land registry. However, Serbian legislation withholding tax rate. prescribes that some resources in general use, as well as forests and If the lender and the debtor are related parties, loan payments are forestland, may be subject to ownership rights under limitations subject to transfer pricing rules and thin capitalisation restrictions defined by law. (4:1 debt-to-equity ratio, 10:1 ratio for banks and financial leasing Foreign natural persons and legal entities are allowed to acquire companies). title to real estate, but under additional requirements – foreign natural persons and legal entities that perform business activities 7.7 Can project companies establish and maintain in the territory of the Republic of Serbia may, under the condition onshore foreign currency accounts and/or offshore of reciprocity, acquire real estate necessary for the performance of accounts in other jurisdictions? their business activities. The existence of reciprocity between the Republic of Serbia and the country of origin of the foreign natural Pursuant to the NBS Decision on Terms and Conditions under person or legal entity has to be confirmed by the Ministry of Justice. which Residents May Hold Foreign Exchange in Bank Accounts However, even if all the above-mentioned conditions are met, the Abroad (“Decision”), a legal entity may hold foreign exchange in a state may still forbid the acquisition of real estate in certain areas bank account abroad exclusively subject to the NBS’s approval, for (e.g. due to the vicinity of military facilities, etc.). Also, agricultural the following purposes: land cannot be owned by a foreign natural person or legal entity. 1) to finance construction works abroad – based on a contract Ownership of a pipeline falls under a special regime as pipelines with an investor or foreign creditor and estimate of planned are, principally, objects of national interest and thus the operation monthly costs, up to the amount of: of a pipeline requires an Energy Licence which can, as a rule, be a) advance payment received from the foreign investor; issued only to a Serbian entity (the exception being wholesale b) foreign credit received for financing construction works, electricity). Also, in addition to a construction permit, an investor if a foreign creditor makes credit approval conditional in the construction of a pipeline has to obtain an energy permit upon holding credit funds in an account with a foreign (except where this construction is subject to a public-private ban; and partnership (“PPP”) arrangement or a concession). An energy c) planned average monthly costs of performing construction permit can be issued to both domestic and foreign legal entities works, supplying and maintaining the construction site and natural persons. However, as the energy permit relates only to abroad; the construction of the energy facility, the possibility for a foreign 2) to pay in the profits earned in the local currency from the company to actually engage in the energy activity on the Serbian performance of construction works abroad, up to the market, principally requiring an Energy Licence, will be limited countervalue in a currency tradable in the foreign exchange only to situations where the Energy Licence may be issued to a market of the Republic of Serbia, for the purpose of foreign entity (wholesale electricity). repatriation of profits following the completion of these works; 3) to finance research works abroad – based on a copy ofa concession agreement on such works:

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a) to pay the tax and other public revenue obligations A legal entity holding foreign exchange on a bank account abroad towards the foreign country – the concession grantor contrary to the NBS regulation will be fined for the offence being based on the turnover from the subject of the in an amount ranging from RSD 100,000 to RSD 2,000,000 concession (if necessary under the foreign country laws) (approximately EUR 870 to EUR 17,390), while the legal entity’s – based on the abovementioned laws and the resolutions responsible person will be fined an amount ranging from RSD 5,000 of the competent authority; and to RSD 150,000 (approximately EUR 45 to EUR 1,300). b) to collect the tax refund in a foreign state (if necessary due to a foreign country laws) – based on evidence on foreign country laws and the document proving the entitlement to 7.8 Is there any restriction (under corporate law, tax refund; exchange control, other law or binding governmental Serbia 4) to cover the current operating costs of representative offices practice or binding contract) on the payment of dividends from a project company to its parent or branches of legal entities abroad and to pay for services company where the parent is incorporated in your in international freight and passenger transport – up to the jurisdiction or abroad? amount of planned monthly costs, based on the specification of such costs and a document issued by a competent foreign authority evidencing the registration of the legal entity’s A Serbian project company may not make any payments to representative office or branch abroad; shareholders, including by way of dividends, the repayment of 5) to place a guarantee deposit for the purpose of participating in voluntary contributions or loans or any other payments, if the an auction or a tender, and/or for the purpose of placing bids net assets of the company are lower than – or, as a result of such for the acquisition of shares if the foreign co-contractor so payments, would fall below – the sum total of (i) the amount of the requests or the regulations of the given country so prescribe company’s paid-up share capital, and (ii) the company’s statutory – based on the copy of an agreement, an excerpt from the reserves. auction or tender documentation, or an excerpt from the In addition, the aggregate amount of payments a company may regulations of the said country; make to its shareholders in any given financial year may not exceed 6) to make a guarantee deposit under a guarantee issued by a (1) the sum of (a) the company’s profit for such financial year, (b) foreign bank to a resident who performs construction works retained earnings from prior financial years, or (c) the amount of any abroad, up to the amount specified in the bank’s request for a guarantee deposit and/or guarantee agreement – based on reserves intended for distribution to shareholders, minus (2) the sum a copy of such request and/or such agreement, as well as the of (a) any uncovered losses from prior financial years, and (b) the contract for construction works abroad; amount of the company’s statutory reserves. 7) to use a foreign financial credit intended for making payments Read literally, the restrictions referred to above apply only to abroad, if the disbursement of such credit is conditional upon payments to a company’s direct shareholders, but not to any indirect holding funds with a foreign bank – based on a copy of the shareholders that are located further up the ownership chain. credit agreement and the registration of a borrowing with the NBS: 7.9 Are there any material environmental, health and ■ to collections in respect of the sale of securities abroad safety laws or regulations that would impact upon a and revenue from securities purchased abroad – based project financing and which governmental authorities on foreign country regulations stipulating that holding administer those laws or regulations? foreign exchange in a bank account abroad is the condition for such collection; Yes, as described above. If project financing is in the area of 8) to purchase securities abroad in accordance with the law telecommunications, approval from the Regulatory Agency for regulating foreign exchange operations – based on a copy of the agreement entered into with an authorised participant of telecommunications may be required. If the financing is taking an organised market of securities abroad and an excerpt from place in the medical field, the Agency for Medicines may have to the regulations of the given country pursuant to which it is approve the project. If the energy area is being financed, a project necessary to hold foreign exchange in an account with a bank company needs to obtain approval from the regulatory authority in abroad for the payment of such securities; charge of energy. In addition, if a project facility exceeds a certain 9) to deposit and to invest funds of insurance companies abroad size, various environmental impact assessment studies need to be – subject to the NBS’s approval being issued pursuant to the performed. law regulating insurance;

10) to collect donations and monetary contributions from abroad 7.10 Is there any specific legal/statutory framework for for scientific, cultural and humanitarian purposes – based on procurement by project companies? a copy of the donation agreement or other documentation specifying that holding foreign exchange in a bank account abroad is a precondition for receiving such donations, up to No, there is no such framework. the amount specified in such agreement or documentation; 11) to collect compensation under the court’s ruling abroad, if 8 Foreign Insurance such ruling sets out that collection is to be effected via a foreign bank account – against presentation of a copy of the court ruling; or 8.1 Are there any restrictions, controls, fees and/or taxes 12) to cover the costs of medical treatment abroad, as well as the on insurance policies over project assets provided or costs of residing abroad for the purposes of such treatment – guaranteed by foreign insurance companies? based on appropriate documentation issued by the competent medical institution in the Republic of Serbia or abroad and Even though there is no tax on insurance policies over project assets based on other evidence submitted. provided or guaranteed by foreign insurance companies, please note A legal entity cannot hold foreign exchange on a bank account that insurance premiums are subject to a 5% tax, payable by the abroad for general purposes of conducting its business. insurance company.

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8.2 Are insurance policies over project assets payable to 13 Applicable Law foreign (secured) creditors?

13.1 What law typically governs project agreements? Yes, they are. The law of England and Wales typically governs project agreements. 9 Foreign Employee Restrictions 13.2 What law typically governs financing agreements?

9.1 Are there any restrictions on foreign workers, Serbia technicians, engineers or executives being employed The law of England and Wales typically governs financing by a project company? agreements.

In general, there are only restrictions on the number of people who 13.3 What matters are typically governed by domestic law? can obtain a working licence on an annual basis (although some additional requirements may exist depending on the particular case). Security instruments/collaterals are typically governed by domestic law. 10 Equipment Import Restrictions 14 Jurisdiction and Waiver of Immunity 10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors? 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?

The importation of equipment into Serbia is generally subject Yes, it is. to customs duties and VAT. The general VAT rate is 20%. Some restrictions are imposed on import of certain types of used equipment. 15 International Arbitration

10.2 If so, what import duties are payable and are 15.1 Are contractual provisions requiring submission exceptions available? of disputes to international arbitration and arbitral awards recognised by local courts? Customs import duties are generally payable on imports. Certain customs duty exemptions or reduced rates may apply for certain Yes, they are subject to certain conditions. goods or on the basis of bilateral or multilateral international treaties (Central European Free Trade Agreement – “CEFTA”, European The enforcement of foreign arbitral awards is subject to prior Free Trade Association – “EFTA”, European Union – “EU”, Russia, recognition by the courts of the Republic of Serbia and such Turkey and Belarus). recognition may be denied in accordance with the provisions of the Law on Arbitration in any of the following cases: (a) the arbitration matter according to the laws of the Republic 11 Force Majeure of Serbia may not be arbitrated, i.e. it may not be referred to arbitration; (b) the matter in which an arbitral award has been rendered is 11.1 Are force majeure exclusions available and within the exclusive jurisdiction of the court or other state enforceable? authority of the Republic of Serbia; (c) the matter in which the arbitral award has been rendered Yes, they are. had already been settled by the final and binding decision rendered by a court or other state authority of the Republic of Serbia or another foreign arbitral award/court decision had 12 Corrupt Practices been recognised for that matter; (d) the recognition or enforcement of an arbitral award is in 12.1 Are there any rules prohibiting corrupt business contravention of the public order of the Republic of Serbia; practices and bribery (particularly any rules targeting (e) the arbitration agreement has been signed under duress, threat the projects sector)? What are the applicable civil or or as consequence of misunderstanding on the side of one criminal penalties? party of the arbitration agreement; (f) the arbitration agreement has not been concluded in writing, Yes, they are. Penalties range from monetary fines to imprisonment or through exchange of business correspondence letters, in more severe cases for criminal liability, while damages are cables or telex messages; available in civil proceedings for aggrieved parties. As for criminal (g) the arbitration agreement is null and void before the law which liability, the bribe related to imprisonment for individuals may last the parties choose as the governing law of the arbitration up to 15 years (aggregated, together with different modalities of the proceeding or before the law of the place of arbitration; offence), whereas companies may be fined in an amount generally (h) the party against whom a recognition is sought has not not higher than RSD 500,000,000 (approx. EUR 4,167,000) and been properly served with the summons and process and punished with the cessation thereof. notification on appointment of arbiters, or was otherwise impeded from exercising its procedural rights;

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(i) the composition of the arbitration panel or arbitration at a general rate of 20%. Still, as Serbia has a wide network proceedings was not in conformity with the arbitration of double tax treaties in place, in specific cases income may agreement or with the law of the place of arbitration; be taxed at a lower rate or exempt from taxation in Serbia. (j) the arbitration panel has transgressed its authority conferred Interest paid by a domestic company to a domestic lender is not on it by the arbitration agreement; if possible, part of the taxed separately, as it becomes the income of a domestic lender decision which is covered by the arbitration agreement will which is subsequently taxed trough corporate income tax. be divided from the part in which the panel exceeded its Interest paid to a party from a jurisdiction with a preferential powers; or tax regime (“tax haven”) is taxed at a special 25% withholding tax rate. (k) the arbitral award is not final and enforceable between the parties, or if such award was annulled or suspended by the If the lender and the debtor are related parties, loan payments Serbia competent authority of the state in which it had been rendered. are subject to transfer pricing rules and thin capitalisation restrictions. The arbitration award may be enforced in Serbia by initiating the separate arbitration award recognition procedure or as an incidental For the purpose of transfer pricing rules, a party related to the taxpayer is any entity (foreign or Serbian) which (in)directly question in the regular enforcement procedure. The competent court is holds at least a 25% share in the taxpayer’s capital or at least the court in whose territory the enforcement will take place. The party 25% of the total number of votes in the taxpayer’s governing seeking the recognition/enforcement submits to the court, along with bodies. In addition, any non-resident from the jurisdiction with the request for recognition/enforcement, the following documents: a preferential tax regime is, without any further conditions, (a) the original arbitral award or its verified copy; automatically considered a related party and thus subject to (b) the arbitration agreement or its verified copy; and transfer pricing rules. (c) a verified translation of the foreign arbitration award and the Serbian thin capitalisation rules allow for recognition of arbitration agreement in the Serbian language. interest and loan-related costs only up to a 4:1 debt-to-equity ratio (10:1 for banks and financial leasing companies). An arbitral award will be final and enforceable once it is recognised (b) The proceeds of a claim under a guarantee or the proceeds of either in a separate arbitration award recognition procedure or as an enforcing security may be taxed at a rate of 20%, depending incidental question in the regular enforcement procedure. on the source of the debt (e.g. interest, royalties, etc.). Also, if a creditor acquires real estate through enforcement, such 15.2 Is your jurisdiction a contracting state to the New York acquisition may be subject to real estate transfer tax at a rate Convention or other prominent dispute resolution of 2.5%, or to VAT if it is a newly-built building (at a 20% conventions? rate, or 10% if it is a residential building). VAT would also apply if the goods subject to enforcement are VAT-taxable. Yes, subject to the reciprocity principle, although the New York Convention is applicable only for commercial business disputes 17.2 What tax incentives or other incentives are provided (excluding any disputes where there is exclusive jurisdiction of the preferentially to foreign investors or creditors? What Serbian court, e.g. disputes related to real estate located in Serbia). taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration? 15.3 Are any types of disputes not arbitrable under local law? Under certain conditions, foreign investors may apply for non- refundable state aid in connection with investments in greenfield Please see question 15.1 above. and brownfield projects related to investments in material and non-material assets of a company, which are directed at initiating 15.4 Are any types of disputes subject to mandatory a new business activity or expanding the existing capacities and domestic arbitration proceedings? scope of production to include new products, resulting in job creation. Domestic and foreign investors alike are eligible to apply Yes – those where there is no foreign element are subject to such for subsidies based on these incentives in order to support their proceedings. investment projects. However, state aid may only be sought for investment projects in specific industry sectors. Certain industry sectors are clearly deemed as not eligible for state aid, such as the 16 Change of Law / Political Risk traffic sector, software development, the hospitability industry, gambling, trade, synthetic fibre production, production of coal and steel, tobacco and tobacco products, weapons and ammunition, 16.1 Has there been any call for political risk protections shipbuilding, airports, the utility sector, the energy sector, and such as direct agreements with central government or political risk guarantees? broadband networks. The minimum size of the investments required to qualify for the direct investment state aid is EUR 100,000 for investments into manufacturing and subject to hiring at least 10 No, there has not been a call for this. new employees, EUR 150,000 for investments into export-related services and subject to hiring at least 15 new employees and, last 17 Tax but not least, EUR 2,000,000 for investments into agriculture and fisheries sectors and subject to hiring at least 15 new employees. The amount of state aid granted to such qualified project depends on 17.1 Are there any requirements to deduct or withhold tax the development coefficient of the specific municipality where the from (a) interest payable on loans made to domestic or investment is made, and ranges from: foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? ■ 20%–40% of the employee’s gross salary (maximum of EUR 7,000) per new workplace; (a) Withholding tax is payable on interest paid to foreign lenders ■ 10%–30% of the investment costs; to

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■ an additional 10%/15%/20% for capital investments creating 200/500/1,000 new jobs. 18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? A double tax treaty and social security network may provide relief Please briefly describe the local legal and regulatory for foreign creditors from certain countries, in the form of reduced requirements for the issuance of capital market rates and exemption for taxes and mandatory social security instruments. contributions. Customs incentives and duty-free imports into Serbia may apply A joint stock company may issue shares, and only public joint stock to foreign investors from certain countries or to certain equipment. companies may publicly issue shares and trade with them at the The network of bilateral and multilateral treaties may also provide stock exchange in accordance with the procedures and requirements for an opportunity for zero-rated customs duty exports from Serbia strictly defined by the Capital Markets Act and sublegal regulations. Serbia to several other countries (CEFTA and EFTA countries, EU Member Similarly, the joint stock company may issue convertible bonds States, Russia, Turkey and Belarus). or warrants entitling their holders to convert them to shares or to A 10-year corporate income tax holiday, proportional to the size of acquire the appropriate portion of shares in a company. the investment, applies in the case of a taxpayer who invests more than RSD 1,000,000,000 (approx. EUR 8,200,000) in fixed assets 19 Islamic Finance used for performing its registered business activities and additionally employs 100 people. The same applies if the investment is made by a foreign investor. 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha Until 31 December 2017, an employer is entitled to a 60–75% instruments might be used in the structuring of an refund for taxes and mandatory social security contributions paid Islamic project financing in your jurisdiction. in connection with employees’ salaries, depending on the number of newly employed persons who were previously unemployed. There have not been any cases of Islamic finance in Serbia. A special incentive has been introduced for small and micro-sized companies. If these companies hire at least two new employees, 19.2 In what circumstances may Shari’ah law become they are entitled to a 75% refund for taxes and mandatory social the governing law of a contract or a dispute? Have security contributions paid in connection with the employees’ there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of salaries. This incentive is also available until 31 December 2017. Shari’ah and local law relevant to the finance sector? A company employing a person with a disability is exempt from paying taxes and mandatory social security contributions which There have not been any cases where Shari’ah law was the governing would be charged to such employee’s salary for a period of three law, but we do not see a problem in having it as a governing law as years. long as the mandatory requirements of Serbian law are observed. Depending on the municipality, certain regional and municipal incentives may be applicable as well (exemptions for local 19.3 Could the inclusion of an interest payment obligation communal taxes, construction and administrative fees, etc.). in a loan agreement affect its validity and/or Administrative fees and stamp duties are payable on registration of enforceability in your jurisdiction? If so, what steps foreign investments, loans, mortgages or other security documents. could be taken to mitigate this risk?

Interest payment is a regular clause in loan agreements in Serbia, 18 Other Matters thus its inclusion would not affect the validity of such an agreement.

18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project Acknowledgment financings in your jurisdiction? The authors would like to thank Mihajlo Matković for his assistance in preparing this chapter. Mihajlo joined the CMS Belgrade team No, there are not. in June 2015 and focuses primarily on banking and finance, dispute resolution and real estate law (Tel: +381 11 3208 900 / Email: [email protected]).

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Milica Popović Ksenija Boreta Petrikić & Partneri AOD in cooperation with Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz CMS Reich-Rohrwig Hainz Cincar Jankova 3 Cincar Jankova 3 11000 Belgrade 11000 Belgrade Serbia Serbia

Tel: +381 11 3208 900 Tel: +381 11 3208 900 Email: [email protected] Email: [email protected] URL: cms.law URL: cms.law Serbia Milica Popović is an experienced attorney who joined CMS Belgrade Ksenija Boreta joined CMS Belgrade in 2007, after graduating from the in 2008 as a specialist in corporate as well as banking and finance Faculty of Law at the University of Belgrade and completing several law. Before joining CMS, she worked for the United States Agency internships at the EU Integration Office of Serbia and the Vienna for International Development (“USAID”), as an attorney and project Business Agency. Ksenija mainly focuses on matters of commercial manager of its Montenegro office, on a project dealing with Serbia’s law, banking and finance law, and project finance, and is experienced and Montenegro’s accession to the World Trade Organization in advising international financial institutions, commercial banks and (“WTO”). She completed her LL.M. in International Commercial regulatory authorities in respect of both domestic and international Law at the Columbia University in New York in 2008. Milica Popović transactions. She also advises clients on all legal aspects of real has extensive experience in legal work in the Balkan region and estate leasing. Ksenija is fluent in Serbian and English. specialises in corporate, commercial, as well as banking and finance law, including project finance and capital markets. She has been the local partner for CMS Reich-Rohrwig Hainz in Montenegro since 2013. Milica is fluent in Serbian and English.

CMS Reich-Rohrwig Hainz is one of the leading law firms in Austria and South Eastern Europe. Because we are specialists, our lawyers and tax advisors are able to provide you with advice of the highest calibre and sophistication, both from a legal perspective as well as through our industry- specific know-how. Highly specialised teams consisting of internationally experienced lawyers primarily provide services in the following fields of law: mergers and acquisitions; banking and finance; real estate; construction; tax; labour; intellectual property; information technology; and public procurement. We operate offices in Vienna, Belgrade, Bratislava, Brussels, Istanbul, Kiev, Ljubljana, Podgorica, Sarajevo, Sofia and Zagreb. Taken together, the CMS offices offer clients a team of more than 600 experienced specialists in 15 offices across the Central and Eastern Europe and South Eastern Europe regions. For further information, please visit: cms.law.

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Spain Héctor Bros

Cuatrecasas Jaume Ribó

deals have been implemented for underground, tram and other 1 Overview railway-based infrastructure, such as the three concessions for the huge underground Line 9 of Barcelona (totalling more than €3bn in 1.1 What are the main trends/significant developments in public-private partnership (PPP) schemes), the light rail systems of the project finance market in your jurisdiction? Malaga and Bilbao and the financing of some of the civil engineering works behind the impressive high-speed rail network. Some of The Spanish economy grew at a healthy rate – just above 3% – in these projects have now been the object of major by the 2016. This, together with the expansionary monetary policy of the original sponsors. European Central Bank and the balance sheet clean-up exercise Other significant deals have been closed in the context ofthe (which is almost in its final stage for most banks), has boosted acquisition of various portfolios of car parking facilities (most the appetite of lenders for new projects. However, partly due to notably, Parkia in 2016), in some cases as a result of joint ventures budgetary constraints and also related to the fact that the country with publicly controlled companies (e.g. the €200m financing now boasts – notably in its highway and high-speed train networks – of Bamsa) or in the context of tender processes sponsored by one of the most extensive and modern infrastructure systems, there governmental entities, such as the railway management company continues to be a stark contrast between the limited number of new Adif. projects available and the greater appetite for funding among lenders In the waste treatment business, the country has also seen interesting (driven also by the abundant cash sitting on their balance sheets). investments in recycling plants (e.g. the Ecoparks of Zabalgarbi Notwithstanding the general scarcity of new projects, a number of or Amorebieta), which in some cases have been at the mercy of major infrastructure funds have acquired relevant interests in many unexpected political changes. concession-driven projects, a good part of them prompted by the Separately, there has been significant involvement by some need of cash-strapped sponsors to reduce their corporate debt. In Spanish sponsors in international project finance deals, such as: most cases, lenders have welcomed the newcomers, partly because the construction of a 223 MW dual thermal power plant in Peru, they were the main beneficiaries of the de-leveraging process of the financed through bonds, or the participation of Técnicas Reunidas relevant sponsor, and partly because of the incentive to gain access as an engineering, procurement and construction (EPC) contractor to new clients. As in previous years, most new financings have been in Sadara, the mega petrochemical plant in Saudi Arabia. In some offshore, mainly in Latin America and Europe. other cases, outbound investments have been financed by less 2016 marked the completion of the Abengoa restructuring – the largest conventional techniques, such as the discounting facility provided ever debt reshuffle in the country – whose actual implementation to Abertis by a group of international lenders in connection with the remains as complex as it is uncertain. Together with this, the year 2016 acquisition of the Italian A-19 “Serenissima” highway. has witnessed a wave of investment from alternative lenders, which have mainly concentrated on brownfield distressed transportation (the Madrid toll roads being the most relevant example) and, to a 2 Security lesser extent, energy projects. 2.1 Is it possible to give asset security by means of 1.2 What are the most significant project financings that a general security agreement or is an agreement have taken place in your jurisdiction in recent years? required in relation to each type of asset? Briefly, what is the procedure? In the area of transport, most of the new projects have been located in the northern regions, such as the €320m project financing of the Spanish law does not provide for a so-called “universal security” N-636 Gerediaga–Elorrio road, in Vizcaya, or the €900m project over the entire debtor’s assets. Nor does it generally admit the financing of the hard-toll highways AP-1/AP-8 and GI-632, in creation of a “floating” or “adjustable” lien or encumbrance (except Gipuzcoa, which included the €500m refinancing of the European for certain mortgages and pledges over cash-like instruments). Investment Bank tranche. Project finance structures have also been Therefore, a security agreement is usually required in relation to used to permit the acquisition of hard-toll highways, such as the each type of asset. privatised tunnels of Vallvidrera and Cadí, acquired by Abertis Typically, the security package in a project finance transaction in and BTG in 2012 and recently reshuffled to accommodate a new Spain comprises a pledge over the shares of the project company, investor. Equally, a number of interesting and fairly innovative one or more pledges over bank accounts and receivables arising from

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project agreements (EPCs, operation and maintenance agreements, The formal requirements are identical to those that apply in the hedging agreements, insurance policies, etc.) and, eventually, actual case of any other possessory pledge of receivables. Possession is or contingent security over the project’s physical assets (whether by transferred by notification to the depository bank. The creation of means of a pledge or a mortgage, depending on the type of asset). the pledge does not imply, unless otherwise agreed by the parties, the freezing of the account.

2.2 Can security be taken over real property (land), plant, In the event of pledges over bank accounts securing cash machinery and equipment (e.g. pipeline, whether settlements of financial instruments (such as netting-based financial underground or overground)? Briefly, what is the agreements), it may be possible to subject the pledge to a specific procedure? regime regulated under Royal Decree 5/2005. The pledge created

Spain under this regime would not require notarisation. Real property is taken as security by means of a real estate mortgage (hipoteca inmobiliaria). Under Spanish law, real estate mortgages 2.5 Can security be taken over shares in companies cover: (i) the plot of land and the buildings built on it; (ii) the incorporated in your jurisdiction? Are the shares in proceeds from the insurance policies insuring such property; and certificated form? Briefly, what is the procedure? (iii) the improvement works carried out on the property and natural accretions. Should the parties agree to it, such mortgage may also Yes, it is certainly possible, and is one of the most common types of include movable items located permanently in the mortgaged property. security in Spanish project finance transactions. Security over machinery and equipment may be created by means If the shares to be pledged belong to a private limited company of a chattel mortgage (hipoteca de maquinaria industrial) or a (sociedad limitada), as the quota units are not represented by issued non-possessory pledge (prenda sin desplazamiento de maquinaria certificates, possession is transferred by their entry into the notarial industrial). The choice will depend on whether the specific asset deed of pledge and, eventually, registration of the pledge in the meets certain legal requirements. Registry Book of Shareholders (Libro Registro de Socios) of the relevant pledged company. 2.3 Can security be taken over receivables where the When the shares belong to a public limited company (sociedad chargor is free to collect the receivables in the anónima), transfer of possession is achieved as follows: (i) if the absence of a default and the debtors are not notified share certificates (títulos múltiples or resguardos provisionales) of the security? Briefly, what is the procedure? have been issued, by endorsing the title guaranty and entering the pledge in the Registry Book of Shares (Libro Registro de Acciones); In Spain, security over receivables can be taken in two different and (ii) if no share certificates have been issued, by registration of ways: the pledge in the Registry Book of Shares. (i) By creating a possessory pledge. Although the use of this form of security for receivables is not expressly contemplated In both cases, it is also advisable for the pledgee to request and under the applicable law (the Spanish Civil Code), it has obtain certification from the company’s secretary that the pledge has traditionally been admitted by case law and widely applied been entered in the Registry Book of Shareholders or the Registry in practice. Under this pledge, the pledgor would be entitled Book of Shares, as applicable, which will also comply with the to collect the receivables in the absence of a default, unless requirement of notification of the pledge to the company whose agreed otherwise. However, the obligation to notify the shares are pledged. debtor about the creation of the pledge is, in the opinion of When the pledged company has its shares represented by book the majority of scholars and certain case law, a requisite for the effective transfer of possession under the relevant pledge entries (anotaciones en cuenta), the pledge must be entered in (although some hold the opinion that such notification is not a the relevant account, and is enforceable against third parties once perfection requirement but a precautionary measure to avoid entered in the book entry register; in the case of shares traded on a the relevant debtor of the receivables being released from its Spanish secondary market, the book entry register will be held by payment obligation by paying the original creditor, i.e. the the central clearing house. On request, the entity responsible for the pledgor). As a matter of practice, it is sometimes agreed book entry register will issue a certificate stating that the pledge has that notice to the relevant debtors shall only be given upon been entered. potential or effective default, or if certain covenants (e.g. financial ratios) are not met. (ii) By creating a non-possessory pledge (prenda sin 2.6 What are the notarisation, registration, stamp duty desplazamiento de la posesión), except if they are represented and other fees (whether related to property value or otherwise) in relation to security over different types by securities or considered financial instruments. Under this of assets (in particular, shares, real estate, receivables form of pledge, no notification to the relevant debtor would and chattels)? be required (unless such debtor is a public authority), on the basis that the filing of such pledge with the relevant Chattel Registry would give it the necessary publicity vis-à-vis third For possessory pledges to be opposable to third parties, a notarised parties. As with the possessory pledge, unless otherwise agreement (póliza notarial) or, as the case may be, a deed (escritura agreed, this form of security would not prevent the pledgor pública), must be created, as these public documents verify the date from collecting the receivables in the absence of enforcement. and terms and conditions of the pledge (other than pledges under Royal Decree 5/2005; see question 2.4 above). 2.4 Can security be taken over cash deposited in bank Some other types of security are subject to compulsory notarisation accounts? Briefly, what is the procedure? and entry on public registries (particularly mortgages and non- possessory pledges), which has certain implications in terms of The pledge of bank accounts is simply a pledge of the credit rights of cost, due to: (i) registry fees; and (ii) stamp duty of 0.5% to 1.5% the holder of the account vis-à-vis the bank, which should typically of the secured liability (principal, interest and any related costs), correspond to the account balance. depending on the region where the collateral is located.

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Notary fees are fixed amounts that vary according to the secured structure be adopted in a transaction where the secured obligations liability (approximately 0.03% of the secured liability), although in are governed by Spanish law, there is a risk that it is considered transactions with an aggregate value higher than €6m they can be to be a fiduciary relationship unsupported by a real credit of the reduced if negotiated with the notary. agent against the project company. If the secured obligation is Registry fees will be approximately 0.02% of the secured liability. governed by foreign law, there should be no problem for the Spanish security to secure such parallel debt, to the extent this is valid and enforceable under the applicable law. Notwithstanding this, there 2.7 Do the filing, notification or registration requirements are clearly insufficient judicial precedents to assure that this will in relation to security over different types of assets always be validated by the courts. involve a significant amount of time or expense? Spain

For security documents that need to be filed within a public registry, 4 Enforcement of Security the expected elapsed time from the date the documents are notarised to the actual filing by the public registry is usually from twoto six weeks, assuming the relevant security document was correctly 4.1 Are there any significant restrictions which may drafted and no errors were found by the registry that needed to be impact the timing and value of enforcement, such as (a) a requirement for a public auction or the amended by the parties. As to registry fees, see question 2.6. availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/ 2.8 Are any regulatory or similar consents required with liquidator), or (b) (in respect of regulated assets) respect to the creation of security over real property regulatory consents? (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.? The timing and value of enforcement will depend very much on the type of security enforced and the enforcement proceedings chosen Regulatory or other consents with respect to the creation of security by lenders. over real property or machinery would apply only in very limited Enforcement of collateral security is typically carried out through cases, depending on the exact location of the asset, its nature and a public auction, in the context of judicial or notarial proceedings. the parties involved. For notarial enforcements, see question 5.4. The rights derived from the relevant security can be judicially 3 Security Trustee enforced either through declaratory civil proceedings or through summary proceedings. The latter action is faster and more effective, while the former is costly and time-consuming. However, to start 3.1 Regardless of whether your jurisdiction recognises summary proceedings, certain requirements must be met. In the concept of a “trust”, will it recognise the role of a particular, the lender shall: specify the agreement giving rise to security trustee or agent and allow the security trustee the claim and the final due amount, with a full break-down of each or agent (rather than each lender acting separately) to concept; provide a notarial deed where a Notary Public affirms enforce the security and to apply the proceeds from the security to the claims of all the lenders? that calculations have been made in accordance with the terms and conditions of the facility agreement; and present a copy of the notarial request for payment addressed to the debtor. Spanish law does not recognise trusts as a legal concept. Therefore security trustees, although used in transactions where foreign lenders For the enforcement of a pledge, the court will request the deposit of are involved, are seldom used for a Spanish security package. Instead, the pledged assets; and for the enforcement of a mortgage, the court lenders tend to appoint an agent for the Spanish security, which would will give notice of the foreclosure to any other mortgage creditor. hold the security in its own name and on behalf of the other lenders. Once the above actions have been taken, the court will publish a date for auction. The debtor will only be able to oppose foreclosure It is possible for the security agent to enforce claims on behalf under limited circumstances, such as prior extinction of the pledge, of the lenders and the other secured parties, as long as each party full payment of the secured obligation or existence of a material grants a notarised power of attorney to the security agent, expressly error on the calculation of the due amounts. authorising it to carry out the enforcement proceedings. This system nevertheless has two problems: from a practical perspective, The time schedule for the actual recovery of amounts through Spanish banks are reluctant to grant powers of attorney to other enforcement will depend on each case, since there is no time limit banks, and prefer to appear themselves throughout the enforcement for the court to complete the proceedings. proceedings; and from a legal perspective, authors and case law The enforcement of pledges over receivables may also be achieved are inconsistent regarding the role of an agent acting on behalf of a through set-off. syndicate of lenders upon enforcement. Restrictions on enforcement of security regarding regulatory consents are very specific, usually related to energy transactions, 3.2 If a security trust is not recognised in your and will ultimately depend on the kind of project and the assets on jurisdiction, is an alternative mechanism available which security is enforced. (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or 4.2 Do restrictions apply to foreign investors or creditors the facility agent) to enforce claims on behalf of all in the event of foreclosure on the project and related the lenders so that individual lenders do not need to companies? enforce their security separately? Generally, there is no distinction between domestic and foreign The structure of “parallel debt” between lenders and a special entities when it comes to foreclosing Spanish security granted by a purpose vehicle (SPV) is not known under Spanish law. Should this project company or in relation to a project.

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nor the percentage of the existing debt covered by security prior to 5 Bankruptcy and Restructuring the refinancing agreement; (iv) the applicable interest rate has not Proceedings increased by more than 33% over the prior applicable interest rate; and (v) the refinancing agreement is formalised as a notarial deed. 5.1 How does a bankruptcy proceeding in respect of the If the refinancing agreement: (i) has been ratified by at least 51% project company affect the ability of a project lender of the debtor’s financial liabilities; and (ii) substantially increases to enforce its rights as a secured party over the the available credit, extends the maturity date, or enhances the security? financing obligations of the relevant debtor, such agreement may be sanctioned by the insolvency judge, in which case it may also

Spain As a general rule, as from the declaration of insolvency of the project bind dissident lenders (subject to such refinancing agreement having company, secured lenders will be prevented from enforcing their been entered into by certain reinforced majorities, ranging from a security until the earlier of the following: a composition of creditors minimum threshold of 60% to 80%, depending on whether or not is approved; or at least one year has elapsed since the declaration the particular dissident lenders are secured and the scope of the of insolvency, provided that during this period no liquidation cramdown). proceedings have been commenced.

Exceptionally, the above standstill period will not apply if the 5.3 Are there any entities that are excluded from insolvency judge determines that the assets which constitute the object bankruptcy proceedings and, if so, what is the of security are not devoted to the business activity of the insolvent applicable legislation? company, do not constitute a productive unit of such company or, eventually, such asset is not necessary for the continuation of the Governmental entities of any type (whether territorially based – business operations. such as national, regional or municipal authorities – or those of a At any time during the standstill period, the insolvency administrator functional nature) will not be subject to the Insolvency Act. However, may decide to satisfy immediately any due amounts to the secured companies directly or indirectly controlled by governmental entities lenders, in order to avoid the relevant security being enforced. will also be subject to general bankruptcy laws. Additionally, certain types of companies (such as banks and other credit 5.2 Are there any preference periods, clawback rights entities, financial services companies or insurance companies) are or other preferential creditors’ rights (e.g. tax debts, subject to specific insolvency regulations, although the composition, employees’ claims) with respect to the security? appointment and operation of the insolvency administration will still be regulated by the Insolvency Act. Any claims of secured creditors will be qualified as “privileged claims” up to the value of the collateral on which they fall; any 5.4 Are there any processes other than court proceedings excess being qualified as an “ordinary claim” or, in the caseof that are available to a creditor to seize the assets of interest claims, a “subordinated claim”. As a general rule, no third the project company in an enforcement? parties may benefit from the value of the secured assets insofar as the secured creditor has not been paid (whether by enforcement of Yes; out-of-court foreclosure, available for certain types of security, the relevant security or at the request of the insolvency administrator is typically carried out by a Notary Public and takes the form of a – see question 5.1 above). In connection with this, secured creditors public auction. The terms and conditions of such auction are loosely will not be affected by the contents of the creditors’ composition regulated in the law and hence they usually follow the provisions agreement unless they agree otherwise. agreed by the parties in the relevant security document. For any It may be possible to challenge security created “to the detriment of unregulated aspects, the Notary Public tends to follow equivalent the insolvency estate” within the two years preceding the declaration provisions applicable to judicial enforcements. Should the auctioned of insolvency, even in the absence of fraudulent intent. In particular, assets not be acquired by any bidder, after the two first auctions, there is a presumption of prejudice to the insolvency estate in the lenders are given the option to acquire ownership over such assets, event: (i) that the security was granted for pre-existing debts or for but in that case lenders shall not be able to sue the grantor of security new debt incurred to cancel pre-existing, unsecured debt; or (ii) for any outstanding amounts. of any prepayments or other acts of early cancellation of secured In the case of security over bank accounts or listed securities, payment obligations. particularly when the secured obligation consists of cash settlement Refinancing agreements achieved before the date of insolvency agreements or derivative contracts, secured lenders may appropriate which meet certain requirements (substantial increase in the directly and immediately the secured assets, without conducting a available credit, extension of the maturity date, general enhancement public auction. Equally, certain regional laws (such as Catalan law) of the financing obligations of the relevant debtor) and which result expressly permit private sales of the secured assets or, in the case of in a general improvement of the prospects of the debtor in the short highly liquid security, appropriation by set-off. and medium term shall not be challengeable during the two-year clawback period, provided that: (i) the refinancing agreement is 5.5 Are there any processes other than formal insolvency entered into with creditors representing at least 60% of debtor’s proceedings that are available to a project company to liabilities as of the date of the agreement; (ii) the terms of the achieve a restructuring of its debts and/or cramdown agreement allow the future viability of the company; and (iii) the of dissenting creditors? refinancing agreement is formalised as a notarial deed. Irrespective of the above, if a refinancing agreement meets all the following Section 5bis of the Spanish Insolvency Act provides companies requirements it shall also not be challengeable during the two-year with a way to achieve restructuring of their debts without having to clawback period if: (i) it increases the ratio of assets over liabilities; request a formal declaration of insolvency. (ii) the current assets exceed the current liabilities; (iii) the value of The directors of a company may submit to the relevant court a security does not exceed 90% of the existing debt for such creditors, notification that the company has initiated negotiations in order to

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achieve the restructuring of its debt, for which the company has three months. If negotiations fail after such time, the company has a 6.2 Are there any bilateral investment treaties (or other month to request a formal declaration of insolvency. international treaties) that would provide protection from such restrictions?

5.6 Please briefly describe the liabilities of directors (if This is not applicable. See question 6.1 above. any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction. 6.3 What laws exist regarding the nationalisation or In accordance with the Spanish Insolvency Act, the insolvency expropriation of project companies and assets? Are

any forms of investment specially protected? Spain situation of a company may be considered by the court to be “fortuitous” or “guilty”. The insolvency will necessarily be considered “guilty” in certain scenarios specifically described by Expropriation of private property must be based on public utility or the Spanish Insolvency Act, which mainly consist of situations social interest. These concepts and the procedure for expropriation where the directors of the insolvent company failed to carry are strictly regulated, with very limited, if any, room for governmental out their obligations with the necessary diligence (i.e., amongst discretion. No distinction is made between national and foreign others, keeping separate accounting books, embezzling assets of ownership. the company, fraudulently detracting assets from the company or Generally, governmental authorities shall have no pre-emption rights failing to request the declaration of insolvency within two months for the sale of property, other than in the case of protected natural after the directors knew or should have known that the company areas and certain regulated businesses. was insolvent). If the insolvency is considered to be “guilty”, the consequences for 7 Government Approvals/Restrictions the directors may include: (i) prohibition from managing assets from third parties and from acting on behalf of third parties, for a period ranging from 7.1 What are the relevant government agencies or two to 15 years; departments with authority over projects in the typical (ii) the loss of any rights they may have as creditors of the project sectors? insolvent company; (iii) the obligation to return any funds or assets they may have The agencies and departments with authority over a project greatly unduly obtained; and depend on the kind of project. In energy projects, the main authority (iv) eventually, the liability to refund all or part of the unpaid would be the state’s government, which has to authorise any debts of the insolvent company. construction, transfer or modification of premises for the production, transport or distribution of energy when the project affects more than one region or the energy is transported or distributed outside 6 Foreign Investment and Ownership the region where it is produced. Regional governments have certain Restrictions competences regarding electricity generation inside their respective region and therefore, depending on the size and location of the project, they may also have a role. 6.1 Are there any restrictions, controls, fees and/or taxes Another relevant agency in the energy sector is the National Markets on foreign ownership of a project company? and Competition Commission (CNMC), operating since 7 October 2013, which included within the same entity the different commissions With the exception of certain special sectors, such as air transport, for each sector (energy, postal, transportation, competition, etc.). broadcasting, telecoms or national defence, foreign investment is Therefore, nowadays the CNMC is in charge of all energy sectors widely liberalised. However, non-resident investors must notify the (wind, solar, fuel, gas, etc.) and also acts as a consultant for the Spanish Foreign Investment Registry of the amount, destination and form of and regional governments in all matters regarding the energy sector and investment, mainly for statistical purposes. The obligation to notify is strongly involved in the applicable regulation. It has the authority to does not restrict the ability of the foreign investor to remit income ensure that all legal requirements in an energy project are met. coming from investment outside Spain. Exchange controls are also liberalised, so that, as a general rule, currency is freely transferable through a registered bank account 7.2 Must any of the financing or project documents be registered or filed with any government authority or from Spain to any country and vice versa, although certain otherwise comply with legal formalities to be valid or information must be provided periodically (monthly, quarterly or enforceable? annually) depending on the amounts of foreign transactions carried out over a calendar year. Generally, security instruments are notarised and, in the case of Recently enacted anti-money laundering regulations now provide mortgages and certain forms of pledges over chattel property, filed that any company shall have a Spanish Tax Identification Number at the relevant public registry; such registry typically being the land when entering into potentially taxable transactions (e.g. execution registry in the case of real estate and the chattel property registry in of notarial deeds with tax implications). The aforementioned the case of machinery, industrial property rights, receivables and identification does not have any impact on the residence fortax other forms of chattel property. See section 2 above. purposes of non-resident entities. Please refer to question 6.1 above with regard to notification In addition, a Spanish or foreign entity entering into a notarial deed requirements to the Foreign Investment Registry or to the Bank of or other equivalent agreement shall identify its “real owner” (titular Spain, as the case may be. real), i.e. whether there is any individual ultimately owning 25% or Specially regulated sectors, such as energy or telecommunications, more of the share capital of the foreign entity, and if there is not, the may require specific supervision from regulatory bodies. Equally, identities of the members of the board of directors.

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administrative concessions must be subject to certain registration resident parties, except for the obligation to notify the Foreign and filing requirements, and mortgages upon such concessions Investments Registry or, in the case of loans and other forms of debt need to be approved by the relevant concession-granting entity and financing, the Bank of Spain, as described in question 6.1. subsequently filed with the land registry. Section 18 of the Spanish Corporate Income Tax Act provides for a general limitation on the tax deductibility of financial expenses. 7.3 Does ownership of land, natural resources or a Net financial expenses exceeding 30% of the operating profits of a pipeline, or undertaking the business of ownership or company – as defined by the Spanish tax legislation – are not tax- operation of such assets, require a licence (and if so, deductible. can such a licence be held by a foreign entity)? For that purpose, net financial expenses are defined as the difference Spain between the financial expenses (except those not deductible under Although the actual ownership of land or natural resources (other article 15 g), h) and j) of the Spanish Corporate Income Tax Act) and than oil and fuel) does not require a licence, developing a business or the interest obtained. project related to such land or resources may require certain permits In all cases, net financial expenses up to €1m are tax-deductible. The or authorisations granted by authorities at national or regional level net financial expenses which were not tax-deductible in a particular tax depending on the size and location of the project, which may be year can be carried forward with no time limitation. In the event that related to the nature of the industry or its environmental impact. the financial expenses do not exceed the 30% threshold, the difference Local licences (e.g. for construction) may also be required. between such 30% and the percentage of the operating profit of a tax year can be added up to the limit of the subsequent five tax years. 7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources? 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions? Under Spanish law, there are several state taxes payable on the exploitation of electricity generation projects and on the processing of energy products (oil, gas, etc.) when those are used as fuel. These Yes. However, bank accounts held by Spanish companies outside taxes are harmonised with European Union (EU) Directives and are Spain and operations carried out through such accounts are subject called special taxes on electricity and on hydrocarbons. to regular declarations to the Bank of Spain. Generally speaking, these special taxes are not actually paid by the project company; their payment (if all legal requirements are met) 7.8 Is there any restriction (under corporate law, is suspended until the electricity or energy product reaches the final exchange control, other law or binding governmental consumer, who will be the actual payer. practice or binding contract) on the payment of dividends from a project company to its parent There is also a state tax on oil and gas extraction and exploitation company where the parent is incorporated in your based on the extension of land used for such purposes and the jurisdiction or abroad? amount of years the project company will be authorised to operate on such land. In addition to the withholding taxes described in section 17 below, Moreover, as of 1 January 2013, there is another state tax on the following restrictions may apply: electricity generation based on the production of electricity either on (i) under Spanish corporate law, there are certain requirements renewable or conventional electricity production installations which regarding the payment of dividends, which are common to will be subject to a tax rate of 7%. many other jurisdictions, such as the need to set off losses Additionally, there are other regional and local royalties payable on from previous years or to assign 10% of the profits to a the extraction of natural resources based on the environmental impact statutory reserve until the reserve reaches 20% of the share the project may cause. Those royalties vary depending on the kind capital, as well as other requirements intended to avoid the of natural resource and the region where the extraction takes place. payment of dividends by a company that is not financially viable; and Finally, any income obtained by a project company from the sales of (ii) from a contractual perspective, project financing agreements such extraction or exploitation will be subject to company income tax will typically restrict the distribution of dividends. Standard at a special rate of 40% (instead of the general tax rate which is 30%). restrictions would include: (i) meeting certain financial covenants; (ii) reaching a certain percentage of repayment of 7.5 Are there any restrictions, controls, fees and/or taxes ; (iii) ensuring that the project has been operating on foreign currency exchange? for a number of years; and (iv) cash sweep provisions. Additionally, minority shareholders may be entitled to have their There are no currency, exchange control or other regulatory restrictions shares purchased by the project company if the shareholders decide that limit the availability or transfer of funds for the project company not to distribute any dividends notwithstanding the fact that the to make any payments due, subject to the notification requirements company has operational profits. provided in question 6.1. Finally, under certain concessions or other administrative contracts, public authorities establish minimum percentages of equity 7.6 Are there any restrictions, controls, fees and/or taxes throughout the project, which could also act as a restriction on the on the remittance and repatriation of investment payment of dividends. returns or loan payments to parties in other jurisdictions?

Other than withholding taxes (see section 17), there are no restrictions on the repatriation of investment returns or loan payments to non-

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Switzerland) generally need to obtain a work permit for stays of 7.9 Are there any material environmental, health and over 90 days in Spain, irrespective of their professional level safety laws or regulations that would impact upon a (worker, technician, engineer or executive). project financing and which governmental authorities administer those laws or regulations? The two main kinds of work permit are: (i) a work permit for transnational rendering of services, which is used by companies There are certainly environmental, health and safety regulations which transfer an employee who remains hired by a foreign potentially applicable to a project financing, which may vary company, is hence subject to the social security and tax regulations substantially depending on the type of project and the region where of the foreign company, and generally lasts for a maximum period the project is developed, since parts of the legal competences in this of one year, which can be extended to an additional year; and (ii) a respect correspond to regional governments. regular work permit, which allows working in Spain for a period Spain of time between 90 days and five years, if the person in question is From an environmental point of view, before commencing any large- scale construction work potentially affecting the environment, it hired by a Spanish company. will likely be necessary to obtain the prior approval of the relevant Despite all the above, depending on the country of origin of the regional environmental authority, by means of an environmental foreigner coming to Spain, the application for a visa might also be impact assessment issued by the project company, which the relevant required for stays shorter than 90 days, so as to allow entrance into authority would review and approve, usually subject to the fulfilling of the country and the possibility of rendering services. certain regulations and measures aimed at assessing and subsequently In terms of social security, employees in the EU and Switzerland mitigating the environmental risks associated with the project. benefit from an EU regulation enabling employees to work In conclusion, the federal nature of the Spanish administration and throughout the different countries while maintaining their social the complexity and dispersion of regulations make it necessary to security benefits in their country of origin. Similar regimes are carry out a case-by-case analysis. foreseen for other countries through bilateral treaties. In addition, under settled case law, if certain requirements are met, bilateral 7.10 Is there any specific legal/statutory framework for treaties between EU Member States improving the current EU procurement by project companies? regulations will apply. Finally, case law has also stated that EU regulations will apply to There is no specific legal framework for procurement by privately- non-EU Member State nationals who render services in the EU and held project companies, except in the case of entities operating in transfer within the geographical scope of such regulations. regulated sectors such as energy or water. However, as a matter of practice, it is relatively common for project 10 Equipment Import Restrictions companies wishing to subcontract large works (mainly construction and civil engineering) to set out a procurement system resembling that applied by governmental entities, particularly with regard to the hiring 10.1 Are there any restrictions, controls, fees and/or taxes principles (transparency, non-discrimination, concurrence and equal on importing project equipment or equipment used by treatment). In some cases, notably infrastructure concession contracts, construction contractors? this contracting framework may be imposed by the concession- granting authorities in order to ensure that part of the concession Customs duties may apply on imported project equipment from works is subcontracted to competitors of the concessionaire. outside the EU, as established by EU regulations and trade treaties between the EU and third countries. In addition, the European Commission has powers to impose anti-dumping measures in line 8 Foreign Insurance with World Trade Organization (WTO) principles.

8.1 Are there any restrictions, controls, fees and/or taxes 10.2 If so, what import duties are payable and are on insurance policies over project assets provided or exceptions available? guaranteed by foreign insurance companies? This will be determined by the common customs tariff uniformly Generally not, although in the case of concessions and other applied by the EU Member States for imports which originate administrative contracts it might be necessary to complete a case- in third countries, and will depend on the nature of the imported by-case analysis of the relevant concession terms. equipment and its country of origin. As with anti-dumping measures, the duty, product and producers affected are established 8.2 Are insurance policies over project assets payable to by a Council Regulation. foreign (secured) creditors?

Generally yes, although for the avoidance of any doubt it would be 11 Force Majeure advisable to review the relevant insurance policy. 11.1 Are force majeure exclusions available and enforceable? 9 Foreign Employee Restrictions Article 1.105 of the Spanish Civil Code sets out as a general rule the 9.1 Are there any restrictions on foreign workers, absence of liability of any party for damages caused by a situation technicians, engineers or executives being employed of force majeure. However, the parties can waive contractually the by a project company? application of this general liability exclusion regime. Accordingly, most project financing agreements and other project contracts Foreign workers (nationals from outside the European Union and include as a specific event of default the occurrence ofa force

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majeure event, which is usually defined in detail in the relevant contract. It is nevertheless unclear that Spanish courts would 13 Applicable Law recognise acceleration of a project facility on the grounds of force majeure, unless there is a substantial impact on the ability of the 13.1 What law typically governs project agreements? project company to meet its payment obligation under the relevant facility, or the viability of the construction or operation of the project Typically, project documents are governed by Spanish law is seriously in danger as a result of force majeure. (particularly when project counterparties consist of Spanish Lenders are typically excluded from any contractual liability if they entities), although the relevant parties can choose to apply a foreign fail to provide the required funds due to force majeure. In the current law, in accordance with the provisions of Regulation (EC) No. Spain economic turmoil, market disruption clauses are widely used. 593/2008 of the Parliament and the Council on the Law Applicable In administrative contracts, such as concessions with public to Contractual Obligations (Rome I). The selection of a foreign law authorities, force majeure is a regulated term related to natural will be valid and legally binding in Spain, and a Spanish court would disasters or major alteration of public order, and is one of the apply such law provided that the contents of the relevant provisions circumstances which would entitle the concessionaire to benefit of the chosen laws may be duly proved before the Spanish court from an indemnity from the public authorities, in the event that the without contravening the principles of Spanish public policy. situation of force majeure renders the performance of the contract uneconomical for the concessionaire. Such indemnity may take 13.2 What law typically governs financing agreements? different forms; typically, higher tariffs or longer concession terms. If the force majeure event impairs the continuation of the project, Financing agreements are also typically governed by Spanish public authorities may choose to terminate the concession and law, although as a matter of practice, when the group of lenders indemnify the relevant concessionaire. is dominated by foreign banks or international institutions, English or New York law may be the preferred option. Again, a foreign 12 Corrupt Practices law may be chosen by the parties to govern financing agreements in accordance with the provisions of the Rome I Regulation (see question 13.1 above). 12.1 Are there any rules prohibiting corrupt business Security documents must, however, comply with the “lex rei practices and bribery (particularly any rules targeting sitae” principle existing under Spanish law, which determines that the projects sector)? What are the applicable civil or criminal penalties? the governing law of a security document must be the law of the jurisdiction where the asset is located. Specific fiction location rules may apply to non-tangible assets (for example, in the case of The Spanish Criminal Code prohibits the bribery of national and receivables, location will be determined by the place of payment foreign government officials. This is defined as the conduct of a or the nationality of the debtor) and, for registrable assets, the private individual who offers or delivers a handout or remuneration governing law will be that of the place of the public registry where of any kind to an authority, civil servant or person who participates the asset is filed. in the exercise of public duties in order for the latter to perpetrate an act that is against the duties inherent to his or her office, or in order for him or her not to carry out such act, or to delay what he 13.3 What matters are typically governed by domestic law? or she should carry out. The same prison sentences and fines are foreseen for the corrupt authority, officer or person. This is without Generally, security documents relating to assets located in Spain, prejudice to the additional punishment for the act perpetrated, and personal guarantees granted by Spanish entities (particularly omitted or delayed due to the remuneration or promise, if such act when the assets of the relevant Spanish guarantor are mainly located also constitutes a felony (which may imply criminal penalties of up in Spain), are governed by domestic law. to €9m or of two to five times the profit obtained). In concession agreements and other PPP agreements, the contractual These penalties shall also be applicable when charges are brought relationship between the concessionaire and the public authorities against, or the acts concerned affect, officers of the European Union will always be subject to the Spanish administrative laws. or civil servants who are nationals of another Member State of the Union. The Criminal Code also prohibits influence-peddling, described 14 Jurisdiction and Waiver of Immunity as influencing a civil servant or authority by taking advantage of any situation arising from his personal relation with him/her or 14.1 Is a party’s submission to a foreign jurisdiction and with another public officer or authority, to obtain a result that may waiver of immunity legally binding and enforceable? directly or indirectly generate a financial benefit for him/her or for a third party, which shall be punished with imprisonment for Under Spanish law, waiver of immunity is legally valid and six months to two years and a fine of one to two times the benefit enforceable unless it relates to certain entities which are affected intended or obtained. by special immunities, such as: (i) persons or entities under Spanish jurisdiction would also apply to crimes committed abroad public law, and assets owned by such entities; (ii) autonomous against the Spanish public administration. Perpetration of an act organisations, semi-public entities or agencies; (iii) diplomatic and defined by law as a felony or misdemeanour shall entitle the victim consular entities; and (iv) certain cooperatives. Further, the assets to reparation for the damages and losses caused thereby. connected to a public service (such as the assets of an administrative concession) may also be subject to immunity even if they are operated by private entities. Submission by the parties to a foreign jurisdiction is valid, binding and enforceable in Spain: (i) in the case of foreign courts covered

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by conventions, in accordance with the provisions of Council In those cases where there are serious concerns regarding future Regulation (EC) No. 593/2008 of 17 June 2008 on Jurisdiction changes in government policy which could affect the existing and the Recognition and Enforcement of Judgments in Civil and agreements between a project company and a public authority, the Commercial Matters or the applicable bilateral convention; and (ii) project company (or its lenders) would typically seek that the project in the case of foreign courts not covered by Brussels/Lugano or be backed by a specific government resolution. Direct agreements bilateral conventions, in accordance with the domestic conflict of with public authorities are very unusual. law regulations, which would reject the selection of foreign courts in cases where the exclusive jurisdiction of the Spanish courts under the Spanish Law of the Judiciary is violated. 17 Tax Spain

15 International Arbitration 17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security? 15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts? Generally speaking, interest paid by a Spanish borrower under a loan to a domestic lender (other than a financial institution) is Yes, the express submission by the parties to international arbitration subject to withholding tax at 19%. Likewise, interest income paid and arbitral awards contained in an agreement will be recognised to a non-EU tax resident is subject to withholding tax at 19%, unless by Spanish courts in accordance with the provisions of the 1958 a lower rate applies under a tax treaty (treaty rates ranging between United Nations Convention on Recognition and Enforcement of 5% and 15%). Interest payments to EU residents or EU permanent Foreign Arbitral Awards (the “New York Convention”), of the 1961 establishments (other than those residing in tax-haven jurisdictions) European Convention on International Commercial Arbitration are not subject to withholding tax (irrespective of whether payments (the “Geneva Convention”) and of Spanish Law 60/2003 of 23 are made to a financial institution or a regular company). December 2003 on Arbitration (the “Spanish Arbitration Law”). On the other hand, proceeds of a claim under a guarantee or the proceeds of enforcing security are generally subject to withholding tax as if such payments were made by the borrower. 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions? 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What Spain ratified the New York Convention in 1977. Also, Spain taxes apply to foreign investments, loans, mortgages ratified the Geneva Convention in 1975. or other security documents, either for the purposes of effectiveness or registration?

15.3 Are any types of disputes not arbitrable under local As a member of the European Union, Spain benefits from the free law? transit of goods within the EU, including exchange rate fluctuations and transaction costs. Therefore, Spain’s EU membership represents The Spanish Arbitration Law does not list the matters which cannot an important part of its foreign policy. be subject to arbitration. Instead, such law establishes that a dispute Additionally, Spain has more than 75 income tax treaties currently may be arbitrable “if the parties may dispose of” the subject matter in force, as well as a remarkable treaty network with Latin American of obligation. Examples of disputes which are not arbitrable will countries which reduces or eliminates the Spanish taxes payable to mainly be related to family law (e.g. parental authority, marital residents of treaty countries. status, filiation) and matters in which the Public Prosecutor’s Office has to intervene (e.g. criminal procedures). The main tax incentive is the Spanish international holding company (ETVE) regime, which nowadays is a well-established legal framework that has turned Spain into one of the most favourable 15.4 Are any types of disputes subject to mandatory jurisdictions within the EU to channel and manage international domestic arbitration proceedings? investments. ETVEs can benefit from an exemption on inbound and outbound dividends and capital gains, as long as certain requirements Arbitration is only possible if the parties involved have expressly are met. Since ETVEs are Spanish regular entities, they are treated agreed to it in the relevant agreement or in a separate document. To like regular limited liability companies, and can therefore benefit solve a dispute through arbitration, the express will of the parties from tax treaties signed by Spain, as well as EU Directives. to submit their disputes to arbitration is legally required. Such will Under Spanish law, there are no relevant taxes on foreign investments shall be verifiable in writing, contained in a document signed by in addition to those that would apply to a Spanish investor. the parties or in an exchange of communications (letter, fax, telex, telegram, or other means) evidencing such express agreement. 18 Other Matters 16 Change of Law / Political Risk 18.1 Are there any other material considerations which should be taken into account by either equity 16.1 Has there been any call for political risk protections investors or lenders when participating in project such as direct agreements with central government or financings in your jurisdiction? political risk guarantees? Most of the relevant issues have already been covered in the Political risk clauses are very unusual in Spanish project finance. previous sections.

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18.2 Are there any legal impositions to project companies 19 Islamic Finance issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments. instruments might be used in the structuring of an Islamic project financing in your jurisdiction. Companies bearing the legal form of a private limited company (sociedad limitada) may not be legally entitled to issue, guarantee Istina’a, Ijarah, Wakala and Murabaha are not instruments or secure bonds and other debt securities. In addition, public limited expressly recognised under Spanish law. However, it is sometimes Spain companies (sociedades anónimas) are subject to certain quantitative possible to structure project finance transactions in compliance with limitations in the amount of unsecured bonds outstanding at any Shari’ah law using other instruments recognised under Spanish one time, as compared to their level of equity and reserves. These law which, although they do not have the same characteristics as limitations should not apply to banks and other credit entities or the original Islamic instruments, are similar in nature; such as an listed and insurance companies, and there are other more minor EPC agreement for the Istina’a, an operating lease for the Ijarah, exceptions. In the context of certain PPP projects, the issue of a mandate for the Wakala or the purchase of chattel property with bonds may be subject to prior consent by the relevant governmental deferred payment for the Murabaha. authority, although the general regulations on concessions are permissive on the issue of bonds. 19.2 In what circumstances may Shari’ah law become Capital market instruments may be structured as private or public the governing law of a contract or a dispute? Have placements (depending on the type of investors addressed, number there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of of retail investors addressed, total issue amount, minimum amount Shari’ah and local law relevant to the finance sector? of securities to be acquired per investor, and minimum unit par value of the securities). Private placements have no disclosure or There is no relevant case law in Spain regarding the application of supervision requirements with the Spanish Securities and Exchange Shari’ah law as the governing law of a contract or dispute. However, Commission (to the extent that the relevant instruments are not it is unlikely that Spanish courts will accept its application, unless the intended to be listed in an official market). Nevertheless, except governing law of the relevant agreement is set as the law of a country for private placements exclusively addressed to qualified investors, with legislation based on Shari’ah law (see also question 13.1). private placements require the intervention of an authorised financial entity in order promote the allocation of securities. 19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

Under Spanish law, the inclusion of an interest payment obligation in a loan agreement is fully valid and therefore there is no risk of it affecting its validity and/or enforceability.

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Héctor Bros Jaume Ribó Cuatrecasas Cuatrecasas Avenida Diagonal 191 Avenida Diagonal 191 08018 Barcelona 08018 Barcelona Spain Spain

Tel: +34 932 905 447 Tel: +34 933 129 639 Email: [email protected] Email: [email protected] URL: www.cuatrecasas.com URL: www.cuatrecasas.com Spain

Héctor Bros is a partner at Cuatrecasas, with broad experience in Jaume Ribó is a senior associate in the Finance Department and is banking and finance. He has provided advice on multiple corporate based in the Barcelona office. Jaume has extensive experience in and project financing transactions, asset financing, complex and project finance transactions, particularly in PPP and infrastructure innovative public-private partnership (PPP) and private finance financing in both domestic and cross-border transactions. He also initiative (PFI) structures for transportation and social infrastructure has experience in representing both lenders and sponsors in a variety (prisons, hospitals, public buildings), other forms of structured finance of energy transactions and leveraged , as well as negotiating and cross-border acquisition finance. He regularly assists a number derivatives transactions. In addition, Jaume has gained substantial of national and international banks and is a leading reference for top US and Latin American project finance experience as a result of sponsors operating in the Iberian market. prolonged exposure to such markets. Amongst other transactions, Héctor Bros advised lenders in the €2.5bn financing of Tranches I, II and IV of the Barcelona Metro Line 9, the €900m financing of the AP-1, AP-8 GI-632 hard-toll highways in the Basque Country, the €400m project debt restructuring of the Vallvidrera and Cadí tunnels and the €1.4bn regional infrastructure debt restructuring of the Generalitat de Catalunya. He has also participated in high-profile international project finance transactions, such as the $19bn Sadara petrochemical project in Saudi Arabia, where he advised the Spanish Corporate Internationalisation Fund (FIEM), and the €600m non-recourse financing to Abertis in connection with the acquisition of the Italian A-19 “Serenissima” toll road. Héctor Bros has been recommended by several directories, including Chambers Europe, Who’s Who Legal, Best Lawyers and The Legal 500, in Banking & Finance, Project Finance and Public Law.

With over 950 lawyers, Cuatrecasas is a leading law firm in Spain, Portugal and Latin America. We advise on all areas of business law, through 19 legal specialties and 15 industry groups. We have 13 offices in Spain, two in Portugal, and 12 international offices in cities in Europe, the Americas, Asia and Africa. We represent some of the largest companies in Spain and Portugal and advise foreign investors interested in the Iberian market. Year after year, we are listed by international directories such as Chambers and The Legal 500 as number 1 in the main legal practice areas. In 2015, Financial Times Innovative Lawyers also recognised our firm as the “Most Innovative Firm in Corporate Europe”. The firm’s Finance Practice consists of over 50 lawyers based in Madrid, Barcelona, Lisbon, London, Mexico City and Bogotá, with expert knowledge and extensive experience in complex national and international financial transactions. The lawyers work seamlessly from different locations, ensuring a wide coverage for their clients, wherever they are based. The team has extensive expertise advising sponsors and banks in all types of domestic and foreign, corporate and structured, financial and debt capital markets transactions. Among other aspects, such transactions consist of: structured and project finance facilities; refinancing, acquisition finance and other sorts of repackaging; synthetic and mortgage-backed securitisation; credit assignments; issuance of fixed-interest securities and other financial instruments; and consumer credits. We also deal with bankruptcy issues in order to efficiently ensure bankruptcy remoteness and an adequate security package structure, extending the scope of our advice to the restructuring of debt. In addition, we advise on matters and relevant issues related to equity requirements for credit institutions, as well as for other entities.

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Taiwan Hsin-Lan Hsu

Lee and Li, Attorneys-at-Law Pauline Wang

and cultural activities (construction commenced in 2012 but was 1 Overview suspended in 2016) and shopping malls, cinemas and hotels nearby (construction of the nearby buildings has not yet commenced). 1.1 What are the main trends/significant developments in the project finance market in your jurisdiction? 2 Security In Taiwan, project finance primarily applies to infrastructure projects developed by the private sector or through a public-private 2.1 Is it possible to give asset security by means of partnership. The major legislation that governs private participation a general security agreement or is an agreement in infrastructure projects is the Act for Promotion of Private required in relation to each type of asset? Briefly, Participation in Infrastructure Projects (the “PPP Act”), last amended what is the procedure? in 2015. The PPP Act provides 14 categories of public works for private sector participation, including, among others: transportation As a general rule, the security provider and the security interest facilities; sewerage treatment facilities; water supply, flood control holder should enter into an agreement to identify the specific asset and drainage facilities; hygienic and medical facilities; recreation/ subject to the security interest. A general security agreement where tourism facilities; power supply facilities; sports facilities; industrial, such specific asset, such as a floating charge, is not identified, is not commercial, technical and agricultural facilities; and government enforceable under Taiwanese law. In addition, different types of office buildings. assets may be subject to different requirements, such as registration A project company under the PPP Act may apply for mid- and or filing with the competent authorities, on the perfection ofthe long-term loans from domestic banks at preferential interest rates. security. Such requirements are discussed briefly in our answers to Also, foreign banks may participate in the syndication of loans. questions 2.2 to 2.5. In addition, there is further deregulation regarding the issuing of new shares and corporate bonds to facilitate the project company’s 2.2 Can security be taken over real property (land), plant, financing. machinery and equipment (e.g. pipeline, whether Among the 14 categories, transportation facilities have the lion’s underground or overground)? Briefly, what is the share of the project finance projects. However, green energy has procedure? been the industry in focus for the government. In recent years, we have seen some small project financings for independent power Yes. In order to create a valid mortgage over the land, buildings plants and wind farms. In 2016, the Equator Principles were and plants, the mortgagor and the mortgagee should enter into a adopted for the first time in Taiwan by a bank in their project finance written agreement, and a registration with the competent authority for a wind farm. is required. As for machinery and equipment, the security to be created may be a pledge or a chattel mortgage. The machinery and equipment 1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years? on which a chattel mortgage can be created are subject to the list promulgated by the authority. Both security interests (pledge and chattel mortgage) give the security interest holder first priority over The most significant project financing transaction in Taiwan in the machinery and equipment. To create a pledge, the pledgor and recent years is the Taiwan High Speed Rail project (a NT$323.3 the pledgee have to enter into a written agreement and the pledgor billion (US$10.5 billion) multi-tranche syndicated loan) in 2000 should deliver the possession of the machinery and equipment to the which was restructured to NT$381.06 billion (US$12.7 billion) pledgee, but registration with the competent authority is not required. in 2009. Project financing was also adopted for other large-scale To create a chattel mortgage, the mortgagor need not deliver the projects, such as: Taipei 101 Tower (NT$35.3 billion (US$1.2 possession thereof to the mortgagee; however, registration with the billion)), which opened in 2004; Taipei Port Container Terminal competent authority would be necessary in order for the mortgagee (NT$16 billion (US$533 million)), which began operation in to claim the chattel mortgage against a bona fide third party. 2009; Kaohsiung Kuo Ming Container Terminal (NT$16.2 billion (US$540 million)), which began operation in 2011; and Taipei Dome For projects subject to the PPP Act, approval of the authority Complex (NT$15.4 billion (US$513 million)), which consists of a in charge of the PPP project is required before project assets are main dome building used as a baseball ground and for other sporting encumbered for the purpose of project finance.

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2.3 Can security be taken over receivables where the 2.6 What are the notarisation, registration, stamp duty chargor is free to collect the receivables in the and other fees (whether related to property value or absence of a default and the debtors are not notified otherwise) in relation to security over different types of the security? Briefly, what is the procedure? of assets (in particular, shares, real estate, receivables and chattels)? Yes. To create a pledge over receivables, the pledgee and the pledgor must enter into a written agreement and, with the pledgee’s No notarisation or stamp duty is required for the creation of security consent, the pledgor (or charger) is free to collect the receivables over different types of assets. Whether registration is required in the absence of a default. In addition, the receivables must be depends on the type of assets provided as security (please see the identifiable according to the content of the pledge agreement. answers to questions 2.2–2.5). Taiwan Further, the debtor should be notified of the creation of the pledge The registration fee for creating a chattel mortgage over a movable in order for the pledgee to be able to claim the pledge against the asset is NT$900. The registration fee for creating a mortgage over debtor. The pledgor should provide the pledgee with documentary real property is equivalent to 1/1,000 of the total amount secured by evidence of the receivables. Usually, the pledgor and the pledgee the mortgage. will, in the pledge agreement, require the debtor to remit the outstanding receivables to a bank account designated by the pledgee 2.7 Do the filing, notification or registration requirements in the event that the debtor is informed of the pledgor’s default. in relation to security over different types of assets involve a significant amount of time or expense? 2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure? Regarding the registration fee, please refer to the answer to question 2.6. The authority in charge of the registration will only conduct a Yes. To create a pledge over cash deposits, the pledgee and the formality review and it is not expected that the registration will take pledgor must enter into a written agreement. The pledge shall not a significant amount of time. become effective against the account bank taking the cash deposits unless the account bank is notified of the creation of the pledge. 2.8 Are any regulatory or similar consents required with Nevertheless, please note that the concept of a floating charge is not respect to the creation of security over real property recognised under Taiwanese law. In other words, the pledge covers (land), plant, machinery and equipment (e.g. pipeline, only the cash in the bank account when such pledge is created and whether underground or overground), etc.? notified to the account bank. The pledge will not cover the cash deposited in the bank account after the account bank is notified of In addition to the requirement of registration for certain types of the pledge. To deal with this issue, the pledgor, in practice, will be security interests as mentioned above, generally the creation of the required to periodically confirm with the account bank the amount security interests does not require a regulatory or similar consent, of cash in the bank account to ensure that the pledge also covers the unless the individual or private entity has made any contractual cash deposited after the creation of the pledge. commitment with the government agencies. In Taiwan, facilities of public utilities such as pipelines are usually owned by the state or 2.5 Can security be taken over shares in companies state-owned enterprises, and thus the chance of them being provided incorporated in your jurisdiction? Are the shares in as security are remote. certificated form? Briefly, what is the procedure? A project company under the PPP Act shall not transfer, lease out, or create any encumbrance on, the concession rights obtained Yes. According to the Company Act, a company should issue shares under the concession agreement, nor shall it make such concession in certificated form if its issued capital reaches a certain amount rights an object for enforcement in a civil action, unless otherwise specified by the competent authority. Currently, the threshold declared by the authority in charge of the PPP project that such an amount is NT$500 million. In addition, a public company may act is necessary in accordance with relevant provisions under the issue shares in scripless form. To create a pledge over shares in PPP Act. According to a ruling issued by the competent authority certificated forms, a written agreement is required. The certificates in charge of the PPP Act, the concession rights refer to the rights to of the pledged shares shall be duly endorsed and delivered by the build and operate the infrastructure. pledgor to the pledgee. Furthermore, the company issuing the shares However, a project company may, with the prior consent of the shall be notified of the creation of a pledge in order to register such authority in charge of the PPP project, transfer, lease out, or create pledge on the shareholders’ roster. The creation of a pledge is valid any encumbrance on, any operating asset and/or equipment obtained between the pledgee and the pledgor when the certificates of the from the building and/or the operation of infrastructure. shares have been endorsed and delivered to the pledgee. However, the creation of the pledge cannot be claimed against the company Any transfer, lease, or creation of any encumbrance in violation of unless the company is notified of the creation of the pledge. any of the preceding two paragraphs shall be null and void. To create a pledge over listed shares which are traded and transferred It is worth noting that, according to the interpretation of the Ministry through the book-entry system of Taiwan Depository and Clearing of Economic Affairs, a foreign company having no branch office in Corporation (“TDCC”), the pledgor and the pledgee have to sign a Taiwan is not allowed to be registered as a security interest holder. form prescribed by the TDCC and have the pledge registered with In local practice, the competent authorities will not permit such a the TDCC. foreign company to be registered as a mortgagee of real property or a chattel mortgagee of a movable asset.

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3 Security Trustee 4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies? 3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security The restrictions explained in question 4.1 above also apply to foreign trustee or agent (rather than each lender acting investors and creditors in the event of foreclosure on the project separately) to enforce the security and to apply the company’s operating assets or machinery or Concession Right. proceeds from the security to the claims of all the lenders?

Taiwan 5 Bankruptcy and Restructuring As general practice for a syndicated loan, syndicated banks will Proceedings appoint an agent bank to act for and on behalf of the syndicated banks, including registering the agent bank as, for instance, a mortgagee and foreclosing the mortgaged property. In addition, 5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender there will be a clause in the syndicated loan agreement to the effect to enforce its rights as a secured party over the that the syndicated banks’ claims against the borrower under the security? syndicated loan agreement are joint and several. Given this, the agent bank may claim the whole amount of the loan from the If the project company enters a bankruptcy proceeding, the security borrower and enforce the security and apply the proceeds from the owned by the project company will become a part of the bankruptcy security to the claims of all the lenders. estate and all enforcement actions against the project company will Nevertheless, under Taiwanese law, it is questionable whether or be stayed and all unsecured creditors must follow the bankruptcy not a third party, who is not a creditor/lender, could validly hold the proceeding. A secured project lender has a preferential right to collateral as a trustee or a security agent for other creditors/lenders. claim proceeds from the sale of the underlying security through Pursuant to the Civil Code, a mortgage/pledge would not be validly the bankruptcy proceeding while it still retains the right to initiate a created in favour of the creditor/mortgagee/pledgee if there is no compulsory enforcement action during the bankruptcy proceeding. underlying credit owned by the mortgagee/pledgee against the In addition, if the sale proceeds (from court auction through debtor. compulsory enforcement proceedings) are insufficient to repay the claims in full, it may participate in the bankruptcy proceeding to 3.2 If a security trust is not recognised in your get additional distribution pari passu with the unsecured creditors. jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor 5.2 Are there any preference periods, clawback rights status) to achieve the effect referred to above which or other preferential creditors’ rights (e.g. tax debts, would allow one party (either the security trustee or employees’ claims) with respect to the security? the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately? There are no preference periods with respect to the security. The bankruptcy administrator may, within six months of the bankruptcy As advised in question 3.1 above, in practice, if the lenders’ claims adjudication, apply to the court for the invalidation of the following against the borrowers are joint and several, one of the lenders may acts of the debtor: (1) provision of security for outstanding debts be appointed as the agent bank by syndicated banks to act for and within six months prior to the bankruptcy adjudication; and (2) on behalf of all the syndicated banks, including registering the agent repay the debts not yet due. In addition, the bankruptcy shall, within bank as, for instance, a mortgagee and foreclosing the mortgaged two years after declaration of the bankruptcy proceeding, file with property. the court to rescind the transaction which the bankrupt conducted with or without consideration before the bankruptcy proceeding if such transaction is deemed detrimental to the rights of the bankrupt’s 4 Enforcement of Security creditor and is revocable under the Civil Code. As for preferential creditors’ rights, below are certain examples: 4.1 Are there any significant restrictions which may (i) land value increment tax, land value tax and house tax levied impact the timing and value of enforcement, such on the sale of the real property which will rank prior to the as (a) a requirement for a public auction or the mortgagee and the unsecured creditors; availability of court blocking procedures to other (ii) labour wages due and payable by the employer but overdue creditors/the company (or its trustee in bankruptcy/ for a period of up to six months which will rank prior to liquidator), or (b) (in respect of regulated assets) unsecured creditors; and regulatory consents? (iii) fees and debts incurred for the benefit of the bankruptcy estate which will rank prior to unsecured creditors. A secured creditor may exercise its rights over security through compulsory enforcement despite the ongoing bankruptcy proceeding or liquidation. The standard steps for initiating compulsory 5.3 Are there any entities that are excluded from enforcement are: (1) filing a petition with the court for a writ of bankruptcy proceedings and, if so, what is the applicable legislation? execution; (2) court officials seizing the security; and (3) the court holding an auction for the sale of the security and distributing the proceeds to the secured creditor. Unless other creditors have priority The following may apply for bankruptcy adjudication: (1) natural over the underlying security, the proceeds should be paid to the persons; (2) juristic persons; and (3) partnerships and any other secured creditor first. incorporated association with a representative or an administrator. An

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unincorporated association without a representative or administrator PRC investments. PRC investors are prohibited from investing in is excluded from a bankruptcy proceeding, and there is no special the industries which are not in the Positive List. legislation applicable to such entity.

6.2 Are there any bilateral investment treaties (or other 5.4 Are there any processes other than court proceedings international treaties) that would provide protection that are available to a creditor to seize the assets of from such restrictions? the project company in an enforcement? None of the bilateral or multinational investment treaties signed A creditor and the project company may sign an agreement by Taiwan provides any exemption from the restrictions stated in

whereby the ownership of the mortgaged or pledged security will question 6.1 above. Taiwan be transferred to the mortgagee or pledgee automatically when the project company defaults. However, in the case of a mortgaged 6.3 What laws exist regarding the nationalisation or security, such agreement to transfer cannot be enforced against a expropriation of project companies and assets? Are bona fide third party, unless the mortgage is registered with the any forms of investment specially protected? competent authorities. Generally speaking, the Taiwanese government may expropriate 5.5 Are there any processes other than formal insolvency land in accordance with the Land Expropriation Act, under which proceedings that are available to a project company to the owners of the expropriated land are entitled to reasonable achieve a restructuring of its debts and/or cramdown compensation. Pursuant to the Statute for Investment by Foreign of dissenting creditors? Nationals, the government may expropriate or acquire an invested company for national security and defence reasons by paying a Taiwanese law provides for a reorganisation proceeding which is reasonable compensation, provided that the total foreign investment slightly similar to the “chapter 11 proceedings” used in the US if a in such invested company is less than 45% of the total capital company is in financial difficulties, ceases its business or is likely to amount of the invested company. If the total foreign investment in cease operations but is able to be re-established. The company or an invested company has never accounted for less than 45% of its its shareholder(s) or creditors meeting the qualification requirements total capital amount, the invested company will be immune from provided under the Company Act may apply to the court for a expropriation for 20 years from its establishment. reorganisation proceeding. A reorganisation plan, which normally contains a restructuring of the company’s debts, will be prepared by the reorganisation administrators and should be agreed by the secured 7 Government Approvals/Restrictions creditors’ meeting, unsecured creditors’ meeting and shareholders’ meeting and then approved by the court. The shareholders’ meeting 7.1 What are the relevant government agencies or will not have a voting right if the company does not have any net departments with authority over projects in the typical assets. The reorganisation plan approved by the court is binding on project sectors? the company and all its creditors and shareholders. Various central and local government authorities are authorised 5.6 Please briefly describe the liabilities of directors (if to implement projects under the PPA Act. The Department of any) for continuing to trade whilst a company is in Promotion of Private Participation under the Ministry of Finance is financial difficulties in your jurisdiction. responsible for administering the PPA Act and overseeing projects in the typical project sectors. If a company is in financial difficulties and its assets are insufficient to repay its debts, directors are obligated to apply for reorganisation 7.2 Must any of the financing or project documents be proceedings (if the company is still able to re-established) or registered or filed with any government authority or bankruptcy proceedings instantly. Failure to do so would make otherwise comply with legal formalities to be valid or directors subject to an administrative fine of NT$20,000 to enforceable? NT$100,000 and would possibly entail personal liability for failure to perform their fiduciary duty. In general, Taiwanese laws do not require that specific financing or project documents be registered or filed with government authorities 6 Foreign Investment and Ownership for validity (or enforceability); nor do the laws require that such documents be in conformity with specific formalities. Restrictions

7.3 Does ownership of land, natural resources or a 6.1 Are there any restrictions, controls, fees and/or taxes pipeline, or undertaking the business of ownership or on foreign ownership of a project company? operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)? Foreign investors who wish to make direct investments in a Taiwanese private company, regardless of the industry, are required to obtain Foreign entities may not own forest land, land with mineral deposits, prior approval from the Investment Commission of the Ministry of water sources or other pieces of land with similar resources. Other Economic Affairs (“IC”). In addition, Taiwan maintains a list of than the above, a foreign entity with a branch in Taiwan may acquire industries in which foreign investment is prohibited or restricted up pieces of land in Taiwan, provided that its home country grants to certain percentage (the “Negative List”). For investors from the reciprocity to Taiwanese nationals and entities. People’s Republic of China (“PRC”), only those industries that are The extraction of natural resources requires a licence under the announced in the “Positive List” by the government are opened for Mining Act and the operation of pipelines (for water, electricity,

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gas, and so on) also requires a licence under the Act of Regulating Private Utilities. A project company incorporated in Taiwan and 7.8 Is there any restriction (under corporate law, awarded the Concession Right pursuant to the PPP Act should exchange control, other law or binding governmental practice or binding contract) on the payment of generally be eligible for such licence. dividends from a project company to its parent company where the parent is incorporated in your 7.4 Are there any royalties, restrictions, fees and/or jurisdiction or abroad? taxes payable on the extraction or export of natural resources? Under the Company Act, a company should not pay dividends unless and until its losses have been covered, a legal reserve has

Taiwan Under the Mining Act, only Taiwanese nationals, whether natural or been set aside, and there are surplus earnings left. If a company judicial persons, can own mineral rights to extract natural resources. pays dividends in violation of the above requirements, creditors A mineral rights holder needs to pay the government mineral of the company request nullification of the dividend distribution royalties and mineral rights fees twice a year. Mineral royalties are and demand compensation for losses incurred, and the statutory calculated at 2% to 50% of the price for petroleum and natural gas, representative of the company will be sentenced to up to one 2% to 20% for metallic minerals, and 2% to 10% for other minerals, year’s imprisonment. If the dividends are paid to a foreign parent while the amount of mineral rights fees depends on the kind of company, they will be subject to withholding tax as explained in minerals and the terms of the concession. Tariffs may be imposed question 7.6 above. on the export of natural gas and petroleum, but there is no tariff for exporting natural gas and petroleum to a WTO member or a country 7.9 Are there any material environmental, health and which has a free trade agreement with Taiwan. safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations? 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange? Taiwan has various environmental, health and safety laws and Taiwan has foreign exchange restrictions and controls. Generally related administrative regulations. The impact that they may have speaking, a Taiwanese corporate entity or individual has an annual on a project financing depends on the nature and the contractual foreign exchange quota of US$50 million (or its equivalent) or US$5 terms of the project. If a project involves substantial environmental million (or its equivalent), respectively, and may therefore remit issues or may create hazardous worksites or substances with a risk of sums of foreign currency within the quota into or out of Taiwan significant liabilities (e.g., soil and groundwater pollution and clean- without prior approval from the Central Bank of the Republic of up), the lenders may be cautious about providing project finance China (Taiwan) (“CBC”). The CBC has the sole discretion to grant or may demand the inclusion of repayment acceleration clauses in or withhold its approval on a case-by-case basis if the Taiwanese the loan agreement. The Environmental Protection Administration corporate entity’s or individual’s quota would be exceeded for such under the Executive Yuan is currently the highest governmental conversion. No government fee or tax is payable purely on foreign authority supervising all environment-related matters, and the local currency exchange transactions. environmental protection bureau would oversee projects located within its jurisdiction.

7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment 7.10 Is there any specific legal/statutory framework for returns or loan payments to parties in other procurement by project companies? jurisdictions? As long as over 50% of a company is owned by the private sector and Any remittance and repatriation of funds to a party in another not characterised as a state-owned enterprise, its procurement should jurisdiction will be subject to foreign exchange control in Taiwan if not be subject to any special legal/statutory framework such as the it involves exchange settlements against New Taiwan dollars. For Government Procurement Act. According to the PPP Act, where example, any remittance of over US$1 million (or its equivalent) the government or any government-owned enterprise makes any into or out of Taiwan by a company should be declared by the equity investment in, or makes any donation to, a project company, remitting company to the bank handling foreign exchange, with the total equity investment or donation from the government and supporting documents. such government-owned enterprise shall not exceed 20% of the As to tax treatment, the remittance of dividends is subject to total capital or the total assets of the project company. If a project withholding tax at 20% or lower if there is a tax treaty between company enters into an investment contract with the competent Taiwan and that jurisdiction, while the remittance of loan payments government authorities under the PPP Act, its procurement may be is not taxable except for interest, which is subject to a 20% subject to the special requirements under the investment contract. withholding tax or a lower tax treaty rate. 8 Foreign Insurance 7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions? 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies? A project company may open and maintain a foreign currency account as long as it provides all the documents required by the bank for opening an account. Taiwanese law does not prohibit a Foreign insurance companies may not sell insurance policies in Taiwanese company from opening an offshore account in another Taiwan unless they obtain a licence to do so from the Financial jurisdiction. Supervisory Commission (“FSC”). In addition, insurance companies

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must submit the terms and conditions of their insurance policies to the FSC for approval before selling them in the market. Once licensed 11 Force Majeure and approved, they will not be subject to any special restrictions or controls on their sale of insurance policies over project assets. If 11.1 Are force majeure exclusions available and the insurance premium on the project assets is paid by a Taiwanese enforceable? company or the Taiwan branches of a foreign company, such Taiwanese entity may have to bear the tax withholding obligation. Force majeure exclusions are common in project contracts. Taiwanese law generally respects party autonomy, thus a force majeure clause 8.2 Are insurance policies over project assets payable to is usually enforceable. Under the Taiwan Civil Code, an obligor is generally not held liable for non-performance if the non-performance

foreign (secured) creditors? Taiwan is through no fault of the obligor. A foreign company may be named as a payee or receive an insurance payment through a pledge of the insurance policy in Taiwan only 12 Corrupt Practices after it has been recognised and has set up a branch in Taiwan in accordance with the Company Act. 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting 9 Foreign Employee Restrictions the projects sector)? What are the applicable civil or criminal penalties?

9.1 Are there any restrictions on foreign workers, Bribing a public official in exchange for certain favours constitutes a technicians, engineers or executives being employed by a project company? criminal offence in Taiwan. According to the Statute of Punishment for Corruption, a person may be sentenced to one to seven years’ The hiring of foreign workers is subject to certain restrictions under imprisonment and fined up to NT$3 million if he offers a bribe the Employment Services Act. A permit from the competent labour or other unjust enrichment to a government official in return for authorities is required in order to hire technicians, engineers or his breach of duty; or up to three years’ imprisonment and/or a executives. Application procedures and government administrative NT$500,000 fine for bribing a government official in return for a measures are provided under the Employment Services Act and the favour which does not entail a breach of the government official’s regulations promulgated by the Council of Labour Affairs. duty. In a government procurement project, if the bidder (or supplier or contractor) gives public officials a commission, kickbacks, a 10 Equipment Import Restrictions brokerage fee, or any other unjust benefits to win a procurement contract, the bid bond may be confiscated, and the contract may be terminated or rescinded. Furthermore, the bidder may be barred 10.1 Are there any restrictions, controls, fees and/or taxes from bidding for government procurement projects for one year. on importing project equipment or equipment used by construction contractors? 13 Applicable Law Certain equipment and components used by construction contractors such as cranes, cables and wires are subject to inspection during import clearance procedures for public safety reasons. The 13.1 What law typically governs project agreements? government authorities in charge of inspecting such imports and labour safety are the Bureau of Standards, Metrology and Inspection With regard to PPP projects, the PPP Act shall prevail. Unless and the Council of Labour Affairs. In general, importation of goods otherwise specified in the PPP Act, the rights and obligations for sale or other commercial use is subject to import duties and a between the authority in charge and the project company shall be 5% sale tax; the importation of certain commodities such as tyres, governed by the concession agreement, and for matters not specified vehicles, gasoline and machineries is subject to commodity tax. The in the concession agreement, the relevant provisions under the Civil PPP Act provides: (i) an import duty exemption for certain qualified Code shall apply. equipment used by construction contractors; and (ii) a deferred (until In Taiwan, parties to a contract are generally free to choose the one year after commercial operations) instalment payment of import governing law of the contract. In practice, it is common for the duty on operating equipment to be used by a project company. parties to choose Taiwanese law as the governing law for projects in Taiwan; in particular, the government counterpart to an investment 10.2 If so, what import duties are payable and are agreement under the PPP Act is not likely to accept a foreign law exceptions available? as the governing law. However, for EPC contracts involving international contractors, we have seen contracts governed by New Products are classified in accordance with the Customs’ Classification York law or English law. of Commodities of the R.O.C. Code (“CCC Codes”) with corresponding import duty rates. The CCC Codes are published on 13.2 What law typically governs financing agreements? the website of the Directorate General of Customs. To encourage the development of certain industries, the importation of some equipment Most infrastructure projects in Taiwan are locally financed. Thus, and key parts required by such industries may enjoy zero import duty. Taiwanese law typically governs financing agreements. Exemptions from import duties are generally provided under Article 49 of the Customs Act. See also the import duty exemption explained in question 10.1 above.

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13.3 What matters are typically governed by domestic law? 15.3 Are any types of disputes not arbitrable under local law? Investment agreements, off-take agreements, financing agreements, project insurance policies and land acquisition agreements are Under the Arbitration Act, disputes that can be resolved through typically governed by domestic law. arbitration are limited to “those which may be settled in accordance with the law”. A good example of a matter that may not be settled or arbitrated is a dispute over the validity of intellectual property rights 14 Jurisdiction and Waiver of Immunity because it can only be decided by the Intellectual Property Office or the Intellectual Property Court. Taiwan 14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable? 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? Under Taiwanese law, parties may agree to submit their disputes to a foreign court or an arbitral tribunal located outside of Taiwan, Some types of disputes are subject to mandatory arbitration even if one of the parties is a government agency. Taiwanese courts under Taiwanese law, e.g., a dispute between the Stock Exchange generally honour such an agreement on the basis of party autonomy Corporation and a securities firm, no matter whether there is an in the absence of any of the following circumstances: arbitration agreement between them. In addition, in a dispute (a) it will be unfair for the subject matter to be adjudicated by the over a government procurement contract for construction works chosen jurisdiction; or technical services, if the government agency refuses to accept (b) the consent of a party to submit to the chosen jurisdiction is mediation suggestions or resolutions proposed by the Public obtained by fraud, duress or other unlawful means; Construction Commission under the Executive Yuan, and the (c) the parties are not on an equal footing when they enter into contractor files for arbitration, the dispute must be resolved by the submission to jurisdiction agreement; arbitration. (d) it will be inappropriate or inconvenient for the chosen jurisdiction to adjudicate the subject matter; and 16 Change of Law / Political Risk (e) the country of the chosen jurisdiction does not recognise and enforce judgments of the Taiwanese courts on a reciprocal basis. 16.1 Has there been any call for political risk protections The principle of sovereign immunity does not apply to projects in such as direct agreements with central government or political risk guarantees? Taiwan.

Political risk protections such as direct agreements with the central 15 International Arbitration government or political risk guarantees are rare in Taiwan because the legal framework and political regime are relatively stable, and the government generally does not feel the need to offer such 15.1 Are contractual provisions requiring submission protections. In some exceptional cases, the government has agreed of disputes to international arbitration and arbitral to buy back the project assets to facilitate project finance. awards recognised by local courts?

Taiwanese courts recognise arbitration agreements requiring 17 Tax submission of disputes to arbitration institutions or ad hoc arbitration outside of Taiwan. The arbitral awards rendered under such arbitration agreements are generally recognised and enforceable unless any of 17.1 Are there any requirements to deduct or withhold tax the grounds for denial of recognition or enforcement prescribed under from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim the Arbitration Act applies. under a guarantee or the proceeds of enforcing security? 15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution Interest paid to foreign lenders is subject to withholding tax as conventions? explained in question 7.6 above. However, exemption may be available for interest derived from: (1) loans given by a foreign Taiwan is not a party to the New York Convention. However, government or financial institution for economic development; (2) provisions similar to Article 5 of the New York Convention are financing facilities offered to its own branch or other Taiwanese provided under the Arbitration Act. For example, Taiwanese financial institutions by a foreign financial institution; (3) loans courts may dismiss a petition for the recognition and enforcement extended for important economic construction projects approved by of a foreign arbitral award on certain grounds, including that the the Ministry of Finance; or (4) favourable-interest export loans or recognition or enforcement of the arbitral award is contrary to the guarantees from foreign government institutions or foreign financial public order or good morals of Taiwan, or the dispute is not arbitrable institutions specialising in export lands. under Taiwanese law, or there is no reciprocity of recognition of Proceeds from exercising a claim under a guarantee or proceeds arbitral awards. from enforcing security will not be subject to withholding tax.

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However, the criteria of the financial conditions and the limitation 17.2 What tax incentives or other incentives are provided amount applicable to the issuance of corporate bonds by a Taiwan preferentially to foreign investors or creditors? What project company can be exempted to certain extent if the Taiwan taxes apply to foreign investments, loans, mortgages project company involved in an infrastructure project is a public or other security documents, either for the purposes of effectiveness or registration? company and the proceeds resulting from such bonds issuance will only be used for the infrastructure project concerned. While tax incentives were offered to foreign investors in the past, the current tax regime generally does not treat foreign and local 19 Islamic Finance investors and creditors differently, except that no withholding

tax applies to the profits repatriated to a foreign company by its Taiwan branch office in Taiwan and that certain interest income of a foreign 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha company is exempt from withholding tax, as explained in question instruments might be used in the structuring of an 17.1 above. Islamic project financing in your jurisdiction. A foreign investor subscribing for shares issued by a qualified project The development of Islamic finance in Taiwan is still in its embryonic company under the PPP Act may enjoy tax credits of up to 20% stage. To date, there are no known examples of Islamic projects that of its investment amount. Such tax credits, which are also offered have been financed in the jurisdiction of Taiwan. However, under to domestic investors, may be applied against the withholding tax Taiwanese law, Istina’a, Ijarah, Wakala and Murabaha instruments on the dividends expatriated by a project company to its foreign may be used in the structuring of an Islamic project financing in shareholders. Taiwan. Under Taiwanese law, no tax is required to be paid in order for foreign investments, loans, mortgages or other security documents to take effect or to be successfully registered. 19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional 18 Other Matters issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?

18.1 Are there any other material considerations which Under the Law Governing the Application of Laws to Civil Matters should be taken into account by either equity Involving Foreign Elements, parties to a contract are free to select investors or lenders when participating in project the governing law of their contract. We doubt that ordinary courts financings in your jurisdiction? would acknowledge Shari’ah as governing law. No precedents have been seen so far. The risk allocation under many project agreements with a government To our knowledge, there has not been any notable case of dispute or counterpart may not necessarily be in line with international practice jurisdiction so far. Furthermore, currently we do not see a trend in and may be more protective of the government party. Thus, risk favour of Islamic financing in Taiwan. control or mitigation measures would be especially important. Legal entities in which the PRC investors hold 30% or more shares in total or which are controlled directly or indirectly by PRC natural 19.3 Could the inclusion of an interest payment obligation or juristic persons are considered PRC investors. Their investments in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps in Taiwan are limited to certain businesses and are subject to special could be taken to mitigate this risk? approval from the IC. The inclusion of an interest payment obligation in a loan agreement 18.2 Are there any legal impositions to project companies will not affect its validity or enforceability in Taiwan. No case issuing bonds or similar capital market instruments? has been reported to date in which such provision has resulted in a Please briefly describe the local legal and regulatory validity issue or hindered its enforceability if Islamic law applies to requirements for the issuance of capital market the contract and the intention is to execute such provision in Taiwan. instruments.

The issuance of corporate bonds by a project company in Taiwan is subject to the regulatory requirements and restrictions under the Company Act and the Securities and Exchange Act, including the financial conditions, the limitation on the total issuance amount and the reporting to the competent authorities for effective registration of the issuance.

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Hsin-Lan Hsu Pauline Wang Lee and Li, Attorneys-at-Law Lee and Li, Attorneys-at-Law 7F, 201 Tun Hua N. Road 7F, 201 Tun Hua N. Road Taipei, 10508 Taipei, 10508 Taiwan Taiwan

Tel: +886 2 2715 3300 ext. 2551 Tel: +886 2 2715 3300 ext. 2137 Email: [email protected] Email: [email protected] URL: www.leeandli.com URL: www.leeandli.com Taiwan Hsin-Lan Hsu graduated from National Taiwan University (LL.B.). She Pauline Wang graduated from National Taiwan University and obtained served as a notary public at Keelung and Taipei District Courts for an LL.M. from Columbia University. She also passed the New York nearly two years. She then won a scholarship from the Ministry of Bar Examination. Education to study International Economic Law in France, where she Pauline is a partner in the Corporate Investment Department. Pauline obtained a DEA at Paris I University. specialises in government procurement and private participation in Hsin-Lan is a partner in the Banking and Capital Market Department. infrastructure projects, and has vast experience in assisting clients Hsin-Lan’s major practice areas are banking, capital markets, finance, in handling project planning, bidding processes, contract negotiation, M&A and general corporate law. contract management and dispute resolution. She assisted the Promotion of Private Participation at the Ministry of Finance in drafting Hsin-Lan has advised on many offshore and onshore fund raising and modifying the model contracts for various private participation projects, finance projects, mergers and acquisitions, and asset sale modes (such as BOT, BOO, OT, ROT, BTO, etc.). She also acted as and purchases. In addition to transactions, Hsin-Lan has provided counsel to the Taipei City Government for negotiating the concession general advice in the field of financial, investment, data protection and agreement with the President Group for the Taipei Bus Terminal BOT corporate-related inquiries. Project; her efforts were recognised with an Eminent Contribution Education Award for Consulting Firms in 2007. ■■ University of Paris I Pantheon-Sorbonne (Diplôme d’études approfondies, 1998). ■■ University of Paris II Pantheon-Assas (Diplôme supérieur d’université, 1996). ■■ National Taiwan University (LL.B., 1992).

Lee and Li, Attorneys-at-Law is the largest law firm in Taiwan, and its services are performed by over 100 lawyers admitted in Taiwan, patent agents, patent attorneys, trademark attorneys, more than 100 technology experts, and specialists in other fields. With expertise covering all professional areas and building on the foundations laid down over decades, the firm has been steadfast in its commitment to the quality of services to clients and to the country, and is highly sought-after by clients and consistently recognised as the preeminent law firm in Taiwan. Lee and Li is often named as one of the best law firms in evaluations of international law firms and intellectual property right firms. For instance, it was selected as the best pro bono law firm in Asia and the best law firm in Taiwan many years in a row by the International Financial Law Review (IFLR); it was also consistently named the National Deal Firm of the Year for Taiwan and awarded Super Deal of the Year by Asian Legal Business.

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Turkey Okan Beygo

ASC Law Firm Levent Yetkil

market transactions, issuing debt securities both in domestic and 1 Overview global markets, raising external funding from any source including banks, international financial institutions, countries and official 1.1 What are the main trends/significant developments in funds and participating in domestic and international investments the project finance market in your jurisdiction? together with other countries and international companies.

The recent trend in our project finance market is the achievement of 1.2 What are the most significant project financings that financial close and completion of giant infrastructure projects such have taken place in your jurisdiction in recent years? as nuclear power projects, Istanbul’s third airport and the Istanbul- İzmir highway. In August 2016, Garanti Bankası, Finansbank, İş Bankası, Industrial Another recent trend in our project finance market is the refinancing/ Development Bank of Turkey (“TSKB”), Yapı Kredi and Ziraat restructuring and/or amendment and reinstatement of the existing Bankası provided a project financing loan in an amount of EUR debts due to recent developments in Turkey and the volatility of the 1,020,000,000 relating to the construction of various facilities in Turkish currency against foreign currencies. relation to, and the operation of, the Istanbul Salıpazarı Port Area The most recent significant development is the introduction of for 30 years. the Turkey Wealth Fund Management Joint-Stock Company In February 2016, the Black Sea Trade and Development Bank, the (“TWFM”), with the objective of launching and managing the Turkey European Bank for Reconstruction and Development (“EBRD”), Wealth Fund (“Fund”). The Republic of Turkey Undersecretariat the Islamic Development Bank, Siemens Bank and UNICREDIT of the Treasury’s (“Undersecretariat of the Treasury”) shares in provided a project financing loan in the amount of EUR the following strategically significant companies are transferred to 265,000,000 for a hospital infrastructure public-private partnership the Fund: project concerning the design, construction and maintenance of an (i) licence for Turkish Horse Races and National Lottery; integrated health campus in Konya. (ii) all the Undersecretariat of the Treasury’s shares in Ziraat Bank, In November 2015, Ziraat Bank, Vakıfbank, Halkbank, Denizbank, BOTAS, Turkish Petroleum Corporation (“TPAO”), Turkish Garanti and Finansbank provided a project finance loan in the Post (“PTT”), Borsa Istanbul, Turksat, Turk Telekom (6.68% of amount of EUR 4,480,000,000 concerning Istanbul’s third airport shares were help by Undersecretariat of Treasury), Eti Mining project. Enterprises, Tea Enterprises (“CAYKUR”), and Izmir Port; In relation to structured finance deals which have taken place in our (iii) all shares of Halkbank (51.11%) and Turkish Airlines jurisdiction: in September 2016, EBRD, the International Finance (49.12%) held by the Privatisation Authority; Corporation and UNICREDIT Bank Austria provided a refinancing (iv) certain immovable properties; and and capex loan for the refinancing and capital requirements of (v) TL 3 billion of funds under the control of the Defence Industry Sakarya Elektrik Dağıtım Anonim Şirketi and Sakarya Elektrik Support Fund (with the condition that they must be transferred Perakende Satış A.Ş., and in September 2015, Yapı Kredi provided a back in three months). refinancing loan in the amount of USD 1,100,000 for the refinancing The Fund is aimed at managing the public assets more efficiently of existing loans of the entire Akenerji Group. and generating long-term and low-cost external funding for strategic infrastructure investments. The main objectives of the Fund involve raising external funding and participating in large-scale, strategic 2 Security investments. Therefore, the introduction of the Fund is expected to facilitate the 2.1 Is it possible to give asset security by means of funding of mega infrastructure projects such as highways, Channel a general security agreement or is an agreement Istanbul (an artificial sea-level waterway) (Kanal Istanbul) and required in relation to each type of asset? Briefly, nuclear projects. what is the procedure? TWFM will also be buying and selling financial assets in primary and secondary markets including foreign exchange, debt General security agreements are not regulated under Turkish law, instruments issued by domestic and foreign issuers both in Turkey hence each type of asset shall be collateralised separately. The and abroad, and in addition to these, it will be executing money Turkish Civil Code numbered 4721 is the main source of law

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governing the specific types of securities. A standard security package in the Turkish project financing market is comprised of: (i) 2.5 Can security be taken over shares in companies share pledge; (ii) account pledge; (iii) mortgages; (iv) assignment incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure? of receivables; (v) asset pledge of a commercial enterprise; and (vi) shareholder loan assignment and subordination. These securities may be established by way of different procedures, as briefly Shares in companies may be pledged in favour of the creditors and, explained below: moreover, a usufruct right may also be established over such shares. The share pledge procedure depends on the type of company. In ■ Share pledge: in order to establish pledge over shares of a respect of joint-stock companies, the Turkish Commercial Code project company, the share certificates should be annotated and possession of the same must be transferred to the pledgee. numbered 6102 regulates the shares as (i) registered shares, and (ii) Turkey bearer shares. In order to establish pledge over registered shares, ■ Mortgage: mortgages over real properties are established by the share certificates should be annotated and possession of the way of registering the mortgage agreement in the form of an official deed before the deed registrar. same must be transferred to the pledgee. In respect of bearer shares, transfer of the possession of the shares is sufficient. ■ Assignment and account pledge: Turkish law requires written agreement for (i) the assignment of receivables and If shares are not in certificated form, a pledge over the shares of a shareholder loans, and (ii) pledge of receivables. joint-stock company could only be established by entering into a ■ Asset pledge of commercial enterprise: plant, machinery, written share pledge agreement. equipment, and other movable assets that constitute the In limited liability companies, however, a share pledge agreement relevant project can be pledged in favour of the lenders must be executed in writing and the signatures must be authenticated pursuant to the Law on Pledge over Movable Assets in by a notary public; approval by the General Assembly may be Commercial Transactions numbered 6750 (“Movable Pledge required if stipulated under the articles of association of the Law”) by way of executing a pledge agreement either in writing before a notary public or in electronic form (signed company. with an electronic secure signature) through the online system and registering this pledge agreement in the movable 2.6 What are the notarisation, registration, stamp duty asset registry. and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables 2.2 Can security be taken over real property (land), plant, and chattels)? machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure? Pursuant to the Stamp Duty Law numbered 488, documents executed for the purpose of (i) providing loans by banks, foreign banks and Please see our explanations set out in question 2.1 above for further qualified financial institutions, (ii) securing the obligations related information. to loans, and (iii) repaying or transferring of the loans are exempted from stamp duty and charges. Furthermore, construction agreements executed for the purpose of manufacturing and constructing capex 2.3 Can security be taken over receivables where the investments within the scope of investment incentive certificates chargor is free to collect the receivables in the shall also be exempt from stamp duty. absence of a default and the debtors are not notified of the security? Briefly, what is the procedure? Therefore, security agreements which are not required to be notarised or registered before a public authority, such as pledge over The receivables are taken over by way of an assignment mechanism. shares of joint-stock companies and assignment of receivables, are Given that the assignment is made for the purpose of securing loans free from any fees. and not as a payment method, the ownership of the receivables In respect of security agreements: (i) for those which should is deemed to be transferred to the lenders for security purposes be notarised, such as pledge over the shares in limited liability and, provided that there is no default, the receivables are left to companies and/or pledge over machinery or equipment, the the disposal of the chargor in accordance with the provisions of notarisation fees, based on the content and number of pages of the financing agreements. document, should be paid; or (ii) for those which are registered Notification and/or consent to the assignment by the original before the deed registrar, a standard fee of an insignificant amount debtors is not obligatory for the perfection of the assignment to the should be paid. extent that the underlying contractual relationship does not prohibit If a security is established to secure obligations which are not assignment of receivables. However, in the event that the debtors related to loans provided by a bank or credit institution, stamp duty are not notified of the assignment, they can be discharged from their at the rate of 9.48‰ of the amount of the security of the obligation obligations by way of making a payment to the original creditor. and other significant fees shall accrue, as long as there is a written security agreement. 2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure? 2.7 Do the filing, notification or registration requirements in relation to security over different types of assets A written agreement must be executed in order to establish involve a significant amount of time or expense? security over cash deposited in bank accounts. In practice, it is recommended to notify the relevant account bank and to obtain an Depending on the type of security, filing or registration of security acknowledgment letter from such account bank in order to prevent before the relevant authorities may be completed on the date of unpermitted withdrawals and to ensure that there are no prior application or within a couple of days following the application pledges or assignments over the same bank account. date, provided that the documents of the parties are complete and in order.

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Please see our explanations set out in question 2.6 above for further these mechanisms, given that the relevant courts and/or execution information. offices, to the best of our knowledge, are not yet familiar with these concepts.

2.8 Are any regulatory or similar consents required with respect to the creation of security over real property 4 Enforcement of Security (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.? 4.1 Are there any significant restrictions which may Except for regulated markets where the security may be established impact the timing and value of enforcement, such subject to the consent of the regulatory authority, there are no as (a) a requirement for a public auction or the Turkey regulatory or similar consents. availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/ The establishment of securities over real properties and/or plant, liquidator), or (b) (in respect of regulated assets) machinery and equipment are subject to the satisfaction of certain regulatory consents? legal procedures. Please see question 2.1 above for further information. a) Pursuant to Article 45 of the Enforcement and Bankruptcy Law numbered 2004, if the receivables of the lenders are secured by pledge, then the lenders are obliged to liquidate 3 Security Trustee the pledge primarily by way of a special enforcement procedure. If the proceeds received as a result of liquidating the pledges are not sufficient to cover the receivables of the 3.1 Regardless of whether your jurisdiction recognises lenders, the lenders may apply a general liquidation process the concept of a “trust”, will it recognise the role of a where the lenders will have a right to liquidate all assets of security trustee or agent and allow the security trustee the borrowers. or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from The lenders whose receivables are secured by pledge are the security to the claims of all the lenders? entitled to determine the method for the sale of pledged movable assets. Accordingly, pursuant to Article 309/g of the Enforcement and Bankruptcy Law, the lenders may liquidate The roles of security trustee and security agent are not separately the movable assets by way of liquidating the pledge through regulated under Turkish law. In practice, the security agent enforcement offices or by way of a bargaining method or sale mechanism is applied to ensure that the security is established in on the capital markets. the name of a security agent acting on behalf of group of lenders. Debtors, creditors and, in certain cases, third parties In addition, Turkish law allows that the security trustee can be may object to enforcement proceedings, as set out in the structured in accordance with the relevant law. The mechanisms Enforcement and Bankruptcy Law. A debtor may object to stated under question 3.2 below are utilised in order to have the the order of payment within seven days following its receipt, security agent (rather than each lender acting separately) enforce and a creditor may bring an action for the annulment of the the security. objection, which may significantly lengthen the whole legal process. The debtor and/or creditor who demands the sale of seized assets and/or participants in an auction may object 3.2 If a security trust is not recognised in your to that auction based on the grounds set out in the law. In jurisdiction, is an alternative mechanism available addition, all creditors and relevant persons noted on the land (such as a parallel debt or joint and several creditor registry document may object to auctions of immovable status) to achieve the effect referred to above which properties. Moreover, there are other grounds for objection would allow one party (either the security trustee or that may significantly increase the time, including but not the facility agent) to enforce claims on behalf of all limited to objection to an order table and valuation. the lenders so that individual lenders do not need to b) If secured assets are subject to regulated areas such as energy, enforce their security separately? telecommunications, etc. or belong to a public company, regulatory consents may be needed. For instance, if the In our jurisdiction, the following legal mechanisms may be utilised secured asset is a share of a public company, share pledge to structure the role of security agent: (i) parallel debt; and (ii) joint transactions shall be recorded by the Central Registry and several creditorship. Agency. In respect of a parallel debt structure, the debtor acknowledges an additional and separate debt vis-à-vis the security agent and “in 4.2 Do restrictions apply to foreign investors or creditors parallel” with the amount of debt owed by the debtor to the lenders, in the event of foreclosure on the project and related so that the security agent becomes entitled to enforce claims of all companies? lenders against the debtor. Joint and several creditorship is a system where each lender has a Foreign investors or creditors acting as claimants have an obligation right to claim all receivables of all lenders from the debtor and the to provide security in order to (i) file a lawsuit, (ii) intervene to a receivables collected by the security agent shall be distributed to lawsuit, or (iii) initiate enforcement proceedings pursuant to the other lenders pro rata for their receivables pursuant to the financing Turkish International Private and Civil Procedure Law numbered agreements. 5718. However, if Turkey and the foreign claimant’s country have reciprocal relations in relation to the above, the court would hold the Furthermore, please note that the lender acting on behalf of other claimant exempt from the obligation to provide security. lenders may encounter some practical problems when enforcing the securities established on behalf of other lenders through any of

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request the transfer of the ownership of the pledged movable as per 5 Bankruptcy and Restructuring Article 24 of the Enforcement and Bankruptcy Law, pursuant to Proceedings Article 14 of the Movable Pledge Law.

5.1 How does a bankruptcy proceeding in respect of the 5.5 Are there any processes other than formal insolvency project company affect the ability of a project lender proceedings that are available to a project company to to enforce its rights as a secured party over the achieve a restructuring of its debts and/or cramdown security? of dissenting creditors?

In the event of bankruptcy, all receivables of creditors, including Postponement of bankruptcy (concordatum) – a process similar to Turkey secured creditors, become due and payable without any application moratorium – and consensus-based reorganisation are other formal being made to enforcement/bankruptcy offices. The creditors are insolvency proceedings that are available to a project company to satisfied from the liquidation of the bankrupt’s assets by bankruptcy achieve a restructuring of its debts and/or cramdown of dissenting offices, in accordance with the order table to be prepared pursuant to creditors. the Enforcement and Bankruptcy Law. After the deduction of selling With the application of these proceedings, project companies expenses (e.g. auction expenses) and taxes arising from the use or may request that authorised courts reach a decision by which all mere existence of the secured assets, such as real estate taxes and enforcement proceedings can be suspended and no new enforcement motor vehicle taxes, secured receivables will be paid first; following proceedings can be initiated. the payment of secured receivables, unsecured receivables will be paid. Therefore, a secured project lender has a privileged right to enforce its rights on the secured assets in case of bankruptcy of the 5.6 Please briefly describe the liabilities of directors (if project company. any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.

5.2 Are there any preference periods, clawback rights Pursuant to Article 376 of Turkish Commercial Code governing the or other preferential creditors’ rights (e.g. tax debts, loss of capital and over-indebtedness (technical bankruptcy): (i) if employees’ claims) with respect to the security? the latest annual balance sheet affirms that ½ of the sum of share capital and legal reserves remains uncovered due to loss, the board In case of bankruptcy of a project company, the pledges established of directors should immediately invite the shareholders to convene to secure an existing debt within one year prior to the bankruptcy, a general assembly meeting and apply to the general assembly for excluding cases where the pledgor previously undertook to provide any remedial measures it sees fit to take; (ii) if the latest annual the pledge, are deemed null and void unless the third party proves balance sheet affirms that ⅔ of the sum of share capital and legal that it did not know the financial condition of the bankrupt legal reserves remain uncovered due to loss, the board of directors should entity. immediately invite the shareholders to convene a general assembly Bankruptcy offices organise an order table to list creditors following meeting, and inform the shareholders in the relevant meeting of the opening of a bankruptcy. After the payment of selling expenses, the current financial distress the company is in; and (iii) if there related taxes and secured receivables, unsecured receivables will be are significant signs that the company is over-indebted, the board paid in the following order: of directors should prepare an interim balance, and if the interim (i) certain receivables related to employment and family law; balance sheet indicates that the company’s assets are not sufficient (ii) receivables of third parties whose assets are managed by the to cover its debts, the board of directors should notify the competent debtor under tutorship or guardianship; commercial court and file for bankruptcy. (iii) privileged receivables (e.g. public receivables) pursuant to Additionally, under Article 377 of the Turkish Commercial Code certain laws; and and Article 179 of the Turkish Enforcement and Bankruptcy Law, (iv) unprivileged receivables. the board of directors can demand a postponement of bankruptcy by proposing a recovery plan to the relevant court. 5.3 Are there any entities that are excluded from If the board of directors does not fulfil its duties in case of the bankruptcy proceedings and, if so, what is the company’s loss of the capital and over-indebtedness, the board of applicable legislation? directors shall be responsible against the company, shareholder and creditors of the company due to the breach of their special duty of care. Public institutions are excluded from bankruptcy proceedings. On the other hand, under Article 345/a of the Turkish Enforcement However, companies that are incorporated by public institutions for and Bankruptcy Law, if the board of directors does not notify the commercial purposes are subject to bankruptcy proceedings. competent commercial court and file for bankruptcy in the case that the company’s assets are not sufficient to cover its debts, the directors shall be punished with 10 days to three months of imprisonment. 5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement? 6 Foreign Investment and Ownership Restrictions In case of non-payment of the debt, creditors may apply directly to enforcement offices to seize the debtor’s assets. If the debtor does not object to the order of payment, the aforementioned proceedings 6.1 Are there any restrictions, controls, fees and/or taxes would be completed without filing a lawsuit before the courts. on foreign ownership of a project company? In case of default of project companies where the loans provided by the lenders are secured by the pledges established on movable Pursuant to Article 36 of the Land Register Law, there are certain properties in the context of the Movable Pledge Law, creditors may restrictions imposed on project companies with foreign ownership

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on acquiring real property in Turkey. Foreign real persons or foreign For instance, typical energy projects such as hydroelectric power legal entities having 50% or more of the shares or the right to assign plants, solar power plants, wind power plants, oil & gas storage and or remove the majority of the persons having the management rights distribution facilities require certain kinds of licences which are in a company that is incorporated in Turkey, are allowed to acquire issued by the Energy Market Regulatory Authority. and use real property or rights in rem within the scope of activities Local municipalities also play a very active role in governing stated under their Articles of Association. In case the real property projects where certain permits, such as those for construction or is located in a strategic location as set out in the Land Register Law, workplace opening and operation, are required to be obtained for the prior consent of relevant authority should also be obtained. the completion of the project.

6.2 Are there any bilateral investment treaties (or other 7.2 Must any of the financing or project documents be Turkey international treaties) that would provide protection registered or filed with any government authority or from such restrictions? otherwise comply with legal formalities to be valid or enforceable? There is no bilateral investment treaty that would provide protection from the restrictions imposed on project companies with foreign There are no legislative formalities under Turkish law for execution ownership, as set out in question 6.1 above. However, Bilateral and/or validity of facility agreements. However, certain security Agreements for the Promotion and Protection of Investments have documents are subject to registration and/or notarisation as a been signed in order to increase the flow of capital between Turkey matter of Turkish law for purposes of perfection, validity and/ and 94 contracting parties, whilst ensuring a stable investment or enforceability under the relevant legislation, or for evidencing environment; 75 of these agreements are in force. Double Taxation purposes. Prevention Treaties, signed between Turkey and 80 other countries, Sometimes internal bank policies require further formalities in aim to prevent double taxation by offsetting the tax paid in one of respect of security agreements, such as having the aforementioned the countries against the tax payable in the other. assignment of receivables agreement notarised to avoid practical risks. 6.3 What laws exist regarding the nationalisation or Please also note that any type of personal guarantee subject to expropriation of project companies and assets? Are Turkish law, including suretyship and guarantorship, requires a any forms of investment specially protected? written agreement and the completion of several formalities in order to be valid, such as a guarantee cap and the handwriting of In general, expropriation and nationalisation matters are regulated the guarantor. under the Constitution of Turkey. Expropriation Law numbered 2942 and corresponding secondary legislation regulate detailed terms and conditions governing expropriation matters. 7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or Under Turkish law, foreign direct investments, in accordance operation of such assets, require a licence (and if so, with current legislation, may not be expropriated or nationalised can such a licence be held by a foreign entity)? unless there is public welfare and prompt, adequate and effective compensation is paid in return. There is no regulatory restriction and/or requirement on Turkish On the other hand, Bilateral Agreements for the Promotion and citizens in terms of land ownership. However, pursuant to Article Protection of Investments mostly include provisions that protect 35 of the Land Register Law, land acquisition by foreign persons or investors against nationalisation, where nationalisation can only be entities is somewhat restricted in terms of which country the said realised upon the satisfaction of certain conditions determined under foreign person or entity hails from. Citizens of the countries which such bilateral agreement. are determined by the Council of Ministers may acquire land within the borders of the Republic of Turkey, depending on the bilateral international relations and benefits of each state. 7 Government Approvals/Restrictions The construction and operation of certain projects, such as those in the field of energy and/or natural gas, require the obtainment of 7.1 What are the relevant government agencies or certain licences. These licences are also required in order to have departments with authority over projects in the typical usage rights over land in the ownership of the Undersecretariat of project sectors? the Treasury, the state, a public entity, or a private entity, where the projects shall be realised. The authorised governmental agencies and/or regulatory bodies over the projects are dependent on the nature of the project. There 7.4 Are there any royalties, restrictions, fees and/or is no single governmental agency and/or regulatory body describing taxes payable on the extraction or export of natural the legal environment applicable to projects. resources? In some cases, the authority over the project shall be at a ministerial level, where various ministries can retain sole and/or joint authority The extraction or export of natural resources requires the obtainment over project areas, whereas in some cases governmental authorities of a licence under the applicable law. The holders of relevant such as the Energy Market Regulatory Authority (Enerji Piyasaları licences may be required to pay an amount of royalties/fees over the Denetleme Kurumu), Energy Exchange Istanbul (Enerji Piyasaları extracted and exported natural resources to the relevant authorities. İşletme Anonim Şirketi), the State Hydraulics Authority (Devlet However, the exportation of natural resources may be subject to Su İşleri) and the Banking Regulation and Supervision Agency certain customs duties unless there is a specific exemption. (Bankacılık Düzenleme ve Denetleme Kurulu) may govern the issuance of licences and other relevant permits.

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licence, transmission licence, wholesale licence, export- 7.5 Are there any restrictions, controls, fees and/or taxes import licence, natural gas import licence, natural gas export on foreign currency exchange? licence, natural gas storage licence, natural gas distribution licence, natural gas import licence, and oil market related In general, there are currently no restrictions or taxes on foreign licences are obtained from the Energy Market Regulatory currency exchange. The Financial Crimes Investigation Board is Authority. the responsible body for investigating the laundering of income from ■ Municipalities: the workplace opening and operation permit, crime and/or the financing of terrorism. non-sanitary enterprise certificate, health protection strip, operation permit and zoning permits are obtained from In addition, banks in Turkey may impose fees when dealing in municipalities. foreign currencies. Corporate and/or income taxes may also accrue Turkey ■ Relevant Ministries: the environmental impact assessment on profits gained by the relevant legal or private persons. certificate, tourism investment certificate, investment incentive certificate, tourism operation licence, environmental permit 7.6 Are there any restrictions, controls, fees and/or taxes and environmental licence, industrial registry certificate and on the remittance and repatriation of investment forestry permission are obtained from the relevant ministries. returns or loan payments to parties in other jurisdictions? 7.10 Is there any specific legal/statutory framework for procurement by project companies? There are no restrictions under Turkish law on remittance and repatriation of investment returns or loan payments to foreign persons. Procurement transactions should be conducted in a manner complying As a general principle, a withholding tax at the rate of 15% shall be with the Law on Prevention of Unfair Competition on Importation. applicable over dividends paid out to a foreign shareholder by a project The general procedures for procurement of foreign equipment are company. This rate may differ depending on the jurisdiction in which generally governed by the Custom Laws and related secondary the shareholder is incorporated, due to double-taxation agreements. If legislation. the relevant double-taxation agreement stipulates a lower rate than that On a side note, if more than 50% of the shares of the project company stipulated in Turkish law, then this lower rate shall apply accordingly. is owned by public entities stipulated under the Public Procurement The Resource Utilisation Support Fund shall be imposed on Law numbered 4734 or the State Procurement Law numbered 2886, foreign loans provided by foreign banks and/or qualified financial transactions of the project company relating to certain procurement institutions, based on their average maturities, from a minimum rate and/or provision of goods and services shall be governed by the of 0% to a maximum rate of 3%. aforementioned legislation and the project company shall be obliged to abide by and meet specific tender obligations.

7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore 8 Foreign Insurance accounts in other jurisdictions?

The Law Regarding the Protection of the Value of Turkish Currency 8.1 Are there any restrictions, controls, fees and/or taxes states that persons (entities or real persons) are allowed to keep on insurance policies over project assets provided or foreign currencies by opening foreign currency accounts and to guaranteed by foreign insurance companies? make onshore or offshore transactions via banks. Hence, there are no legal restrictions to establish onshore foreign currency accounts Pursuant to Article 15 of the Insurance Law numbered 5684, legal or offshore accounts. or private persons located in Turkey have to insure their insurable interests in Turkey through insurance companies operating in Turkey. 7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental However, the following insurances can be concluded abroad: practice or binding contract) on the payment of (i) transportation insurance for goods which are subject to export dividends from a project company to its parent and import; company where the parent is incorporated in your (ii) hull insurance for aircraft, ships and helicopters which are jurisdiction or abroad? purchased with foreign loans, exclusively limited to the loan amount and applicable for the term until the foreign debt is Please see question 7.6. paid, or limited to the period of financial leasing if the same are brought home by financial leasing obtained abroad; 7.9 Are there any material environmental, health and (iii) liability insurances arising from the operation of ships; safety laws or regulations that would impact upon a (iv) life assurances; and project financing and which governmental authorities (v) personal accident, sickness, health and motor vehicle administer those laws or regulations? insurances, limited to the time people will be abroad or their temporary stay abroad. There are numerous laws and regulations that would impact upon Save for the foregoing exceptions, foreign insurance companies are a project financing. The applicable laws and regulations can be not entitled to insure the insurable interests of persons located in determined based on the nature of the project. The material licences Turkey. and permits are also dependent on the type of project. Examples of these material permits and the authorities issuing the same are as follows: 8.2 Are insurance policies over project assets payable to foreign (secured) creditors? ■ Energy Market Regulatory Authority: the electricity generation licence, electricity distribution licence, retail Insurance proceeds are payable to foreign (secured) creditors.

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9 Foreign Employee Restrictions 11 Force Majeure

9.1 Are there any restrictions on foreign workers, 11.1 Are force majeure exclusions available and technicians, engineers or executives being employed enforceable? by a project company? Force majeure is a known concept under Turkish law and force In general, there are no restrictions under Turkish law, apart from the majeure exclusions are available and enforceable. In general, fact that foreign workers, technicians, engineers or executives being pursuant to the principle of freedom of contract, parties may agree employed by a project company should have a work permit and a and determine the force majeure event and its consequences under Turkey residency permit in order to be employed in Turkey. It should also the same; if such determination is made explicitly, the parties will be noted that there are few professions in which the various pieces be relieved of their contractual obligations. However, there is no of legislation do not allow foreign employees to be employed, such uniform force majeure definition and force majeure exclusions are as dentistry, nursing, pharmacy, attorneyship, public notary services not explicitly stated under any legislation. The events and results and customs brokerage. arising from a force majeure event are regulated under: (i) various laws, such as the Public Procurement Contracts Law numbered 4735 and the Tax Procedure Law numbered 213; and (ii) court decisions. 10 Equipment Import Restrictions

12 Corrupt Practices 10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors? 12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting Procurement transactions should be conducted in a manner the projects sector)? What are the applicable civil or complying with the Law on Prevention of Unfair Competition on criminal penalties? Importation. The procedure for procurement of foreign equipment is generally governed by the Customs Law and related secondary According to the Turkish Criminal Code numbered 5237 (“Criminal legislation. Code”), the person who provides a benefit to public officials or Customs duties, value-added tax (“VAT”) and fees determined for other persons in respect of the works to be done or not to be done customs transactions shall be applied to goods imported into Turkey. in relation to the fulfilment of his/her duties will be punished for a However, there is no fee or tax which is specifically determined for minimum period of four years and a maximum period of 12 years of imprisonment for bribery. These provisions shall be applicable imported construction equipment. The customs duty is calculated for publicly held joint-stock companies. In addition to bribery, over the customs value of the imported good during the import bid rigging is also regulated as a crime under the Criminal Code. procedures, and value-added tax is calculated over the customs According to Article 235 of the Criminal Code, any person who value of the imported good. is involved in actions and behaviours which are strictly prohibited Certain goods listed in the annexes of the relevant communiqués are during the preparation, execution and conclusion phases of tender required to be controlled, and a permit is required to be submitted contracts and hinder competitive and fair tender conditions will be in respect of the same, which can be obtained from the respective punished with imprisonment for a period of five to 12 years. governmental authority in Turkey. Control procedures for the goods Pursuant to the Law on Prevention of Laundering Proceeds of Crime may differ from each other based on their qualification. The related and Article 282 of the Criminal Code, (i) transferring abroad the communiqués also indicate that the importation of certain goods, proceeds from crime is sanctioned by imprisonment of six months or such as: waste products which have hazardous effects with respect more, and (ii) if these proceeds are subjected to various transactions to environmental protection; certain chemicals (ozone-depleting in order to give the impression that they were acquired lawfully, chemical substances); and scrap metals, is prohibited. this shall constitute a crime, punishable by imprisonment for three to seven years. 10.2 If so, what import duties are payable and are Additionally, there are several examples of corrupt business exceptions available? practices regulated for different business areas. Pursuant to the Tax Procedure Law numbered 213 (“Law No. 213”) and the General The generally applicable VAT rates are 1%, 8% and 18%. Pursuant Communiqué on Tax Procedure Law numbered 229, fraudulently to the State Aid for Investments Decision (12/3305), there are four conducting financial records is also designated as accounting fraud different incentive implementations granting different incentives, and is subject to penalties. which include certain tax and duty exemptions and/or reductions. Insider trading and market manipulation are also regulated as These incentive implementations consist of general incentive business crime under the Capital Markets Law numbered 6362. In implementations, regional incentive implementations, large-scale cases where the persons designated under the Capital Markets Law, investments and strategic investments. The incentives provided provide a benefit from securities transactions for themselves or third under the different incentive implementations may include: (i) a parties based on information which has not been declared to the VAT exemption; (ii) customs duty; (iii) an exemption tax reduction; public and directly or indirectly concerns capital market instruments (iv) social security premium support (employer’s share); (v) income or issuers, these persons shall be sentenced to imprisonment for tax withholding support; (vi) social security premium support a period of between two and five years or be punished with an (employee’s share); (vii) interest support; and (viii) land allocation. administrative fine for insider trading. Additionally, pursuant

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to Article 107 of the Capital Markets Law, persons who (i) make purchases and sales, give and/or cancel orders with the purpose of 15 International Arbitration creating a misleading impression on the prices of capital market instruments, or (ii) give false, wrong or deceptive information, 15.1 Are contractual provisions requiring submission spread rumours, make comments or prepare or distribute reports with of disputes to international arbitration and arbitral the purpose of affecting the prices of capital market instruments, awards recognised by local courts? shall be sentenced to imprisonment or handed an administrative fine for market manipulation. An arbitration agreement may be in the form of an arbitration clause within an agreement, or in the form of a separate agreement. In order for an arbitration agreement or arbitration clause to be recognised Turkey 13 Applicable Law before Turkish courts, such agreement or clause should be executed relating to an arbitrable matter and concluded in written form. 13.1 What law typically governs project agreements? Arbitral awards shall also be recognised before Turkish courts unless: (i) there is an absence of an arbitration agreement or an arbitration Project agreements/licences related to projects in the Republic of clause; (ii) the subject matter of the dispute is capable of settlement Turkey and entered into with, or issued by, government entities by arbitration under the laws of Turkey; (iii) the recognition or including but not limited to the transfer of operating rights agreements, enforcement of the award is contrary to public policy; (iv) the concession agreements, build-operate-transfer agreements and judgment given on the matter falls within the exclusive jurisdiction licences are generally governed by Turkish law. of the Turkish courts; and (v) the award is final. However, the recognition and enforcement of an arbitral award may also be The parties are free to determine the governing law of other project agreements – such as turbine supply and maintenance agreements, rejected at the request of the party against whom it is invoked, only if construction agreements and engineering, procurement and that party furnishes to the competent authority where the recognition construction contracts – by mutual agreement. and enforcement is sought, proof that: (a) the party was not properly represented before the arbitral tribunal in accordance with due process and said party does not accept the tribunal’s award; (b) the 13.2 What law typically governs financing agreements? party against whom the award is invoked was not given proper notice as to the appointment of the arbitrator or the arbitration proceedings Project finance documents are generally governed by Turkish law. or was otherwise unable to present his case; (c) the arbitration However, if one or more parties or the arranger of the financing are agreement (or clause) is invalid under the law to which it is subject foreign, the finance documents may also be governed by foreign or, where there is no agreement, the arbitral award is invalid under law – commonly, English law. the law of the state in which it was made; (d) the appointment of the arbitrators, or procedural rules applied by the arbitrators, is contrary to the parties’ agreement or, if there is no agreement, is contrary to 13.3 What matters are typically governed by domestic law? the law of the country in which the award was made; (e) the arbitral award relates to a matter that was not in the arbitration agreement Security documents including share pledge, account pledge, (or clause), or it exceeds the scope of the arbitration agreement (in movable and/or immovable pledge granting security over assets which case, the court only refuses to enforce the part which exceeds located in Turkey are typically governed by Turkish law to ensure the scope of the arbitral agreement); and (f) the arbitral award has not their validity and enforceability under Turkish law. become final or enforceable or binding under the law under which it was issued or the law of the state where it was made or the procedural 14 Jurisdiction and Waiver of Immunity rules to which it was subject, or the arbitral award was annulled by the competent body of the place where it was made.

14.1 Is a party’s submission to a foreign jurisdiction and 15.2 Is your jurisdiction a contracting state to the New York waiver of immunity legally binding and enforceable? Convention or other prominent dispute resolution conventions? Parties to an agreement containing a foreign element can choose the courts of a foreign jurisdiction to settle the disputes arising from Turkey ratified the New York Convention on the Recognition and the agreement, unless the subject matter of the dispute falls in the Enforcement of Foreign Arbitration Awards on July 2, 1992 which exclusive jurisdiction of Turkish courts. However, recent rulings entered into force on September 30, 1992. In addition to this, the of the Turkish Supreme Court stated that, when choosing foreign European Convention on International Commercial Arbitration courts to have jurisdiction to hear and settle the disputes arising out (ratified by Turkey in 1991) and the Washington Convention on the of an agreement, the specific foreign court in the relevant jurisdiction Settlement of Investment Disputes (ratified by Turkey in 1987) are must be precisely referred (rather than receiving a general reference) other prominent dispute resolution conventions to which Turkey is to the courts of such jurisdiction. a party. As a principle, a state or state entity will enjoy sovereign immunity from both lawsuit and seizure. However, a state or state entity, when acting in a private or commercial capacity, will not benefit from 15.3 Are any types of disputes not arbitrable under local sovereign immunity from lawsuits. The waiver of immunity of the law? state and state representatives is valid provided that such waiver of immunity of state and state representatives is made in an explicit There are two types of disputes in Turkey that cannot be made fashion. Nonetheless, in order for the waiver of immunity of state subject to arbitration under the International Arbitration Law representatives to be valid and legally binding, the waiver must numbered 4686: (i) disputes arising out of the rights in rem on the be made by the relevant state itself, as regulated under the Vienna immoveable properties in Turkey; and (ii) disputes which cannot be Convention on Diplomatic Relations. made subject to the parties’ will (e.g. those arising from family law

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or employment law (except for disputes arising from the termination of an employment contract), administrative law, criminal law and 18 Other Matters bankruptcy law). 18.1 Are there any other material considerations which should be taken into account by either equity 15.4 Are any types of disputes subject to mandatory investors or lenders when participating in project domestic arbitration proceedings? financings in your jurisdiction?

Several specific kinds of disputes are subject to mandatory The material considerations may differ depending on the type of the arbitration in Turkey, such as collective bargaining agreement project financing. In general terms, subordination mechanisms and disputes, consumer law disputes and disputes relating to the Turkey clawback provisions should be taken into consideration in project private legal relationships between state-owned institutions such as financing under Turkish law. institutions, agencies and municipalities. Subordination Rules Contractual subordination is allowed between parties, pursuant 16 Change of Law / Political Risk to general principles under Turkish law, despite the fact that subordination is not specifically regulated under any legislation. 16.1 Has there been any call for political risk protections In practice, there may be a risk that subordination would not be such as direct agreements with central government or recognised or upheld by the liquidation officers, given that they political risk guarantees? are not familiar with the concept of subordination and, therefore, the creditors of the debtor would be ranked as set out under the Not to our knowledge. Execution and Bankruptcy Law (pari passu), notwithstanding any contract and/or agreement by and between the parties. The lenders typically request that the receivables arising under shareholder loans 17 Tax are also assigned to them in order to avoid the risk of application of rankings under the Execution and Bankruptcy Law. 17.1 Are there any requirements to deduct or withhold tax Clawback Risks from (a) interest payable on loans made to domestic Specific transactions that have been conducted within a certain or foreign lenders, or (b) the proceeds of a claim period of time by the insolvent debtor could be challenged by other under a guarantee or the proceeds of enforcing security? creditors if certain conditions are met. Pursuant to Article 278, Article 279 and Article 280 of the Turkish The deduction and/or withholding of taxes from interest payable Bankruptcy and Enforcement Law, such transactions (including on loans are, in general, regulated under the Corporate Tax Law. securities) may become voidable under the following circumstances: Pursuant to the Corporate Tax Law, the interest payments to be (i) Transactions without consideration, including donations and paid to foreign lenders over specified facilities may be subject any kind of undervalued transfers, executed within a period to corporate tax. Borrowers shall withhold these taxes and pay of two years prior to the insolvency or bankruptcy of a debtor. them to the relevant authorities. The rate of this corporate tax in (ii) Transactions listed below that are executed within a period of relation to foreign entities that are not qualified as foreign states, one year prior to the insolvency or bankruptcy: qualified financial institutions and/or foreign banks is 10%. If the (a) any pledge granted to secure a debt, excluding cases where loans are provided by foreign states, qualified financial institutions the pledgor previously undertook to provide the pledge; and/or foreign banks, then this tax shall be 0% and paid by way of (b) any payment not made by cash or made by unusual withholding. payment methods; In addition to the foregoing, qualified financial institutions and/ (c) payments made for undue debts; and or foreign banks are also subject to Resource Utilisation Support (d) annotations registered to the title deed. Fund regulations. There will be a certain amount of deduction (iii) Transactions executed by the debtor acting with intent to over the interest payments accruing on loans. The amount of these harm the creditors within a period of five years prior to the deductions shall be determined based on the average maturities of opening of bankruptcy or enforcement proceedings. the relevant loans, from a minimum rate of 0% to a maximum rate Appointment of an Administrator and Confiscation of Immovables, of 3%. Rights and Receivables In respect of the loans provided by domestic banks and financial According to the Criminal Procedural Law, the judge or the court institutions in Turkey, Banking and Insurance Transaction Tax at the may appoint an administrator (kayyım) for the management of a rate of 5% shall be payable by way of withholding. company in case: (i) there is strong proof that crimes listed in Article There is no specific legal requirement to deduct or withhold tax 133 (The Appointment of an Administrator for the Management of from the proceeds of a claim under a guarantee, save for cases where Companies) of the Criminal Procedural Law were committed by the guarantee agreement requires otherwise. such company within its activities; and (ii) such measure is deemed necessary to reveal the material fact. 17.2 What tax incentives or other incentives are provided In addition, (i) the immovable, (ii) transportation vehicles of land, preferentially to foreign investors or creditors? What sea or air, (iii) all kinds of accounts in banks or other financial taxes apply to foreign investments, loans, mortgages institutions, (iv) all kinds of rights and receivables in real persons or other security documents, either for the purposes or legal entities, (v) negotiable instruments, (vi) contents of a safe- of effectiveness or registration? deposit box, (vii) other assets belonging to the suspect or accused, and (viii) the shares of any company which belongs to the suspect Please see questions 2.6 and 10.2 above. or the accused as a shareholder, may be confiscated as a temporary

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measure in relation to the crimes, which include, for example, certain management, purchase and sale, partnership (sukuk al-musharaka) crimes against state security, crimes against the constitutional order and construction agreement (sukuk al-istisna) basis. and the functioning of order, etc. The application of Istina’a, Ijarah, Wakala and Murabaha instruments Turkey has recently experienced the application of these foregoing is set out as follows: measurements. Therefore, in order to mitigate the risk associated (i) Ijarah is based on a transfer of the use of an asset and with the application of these measurements, we recommend that receiving of rentals, while ownership remains with the lessor lenders introduce provisions in the loan agreements to identify with all its liabilities involved, and is commonly used when the early indications of the borrower’s situation and/or require a company needs an asset but can neither afford it nor is additional securities. willing to purchase it in cash. Ijarah is similar to financial leasing and is a common transaction in Turkey for a project Turkey financing. 18.2 Are there any legal impositions to project companies (ii) Istina’a is a contract where one party is under an obligation issuing bonds or similar capital market instruments? to produce a specific item with a specific quality and size Please briefly describe the local legal and regulatory such as a facility or a product/object within the given period requirements for the issuance of capital market of time for the determined amount, where the other party is instruments. obliged to pay the total amount of money at the end of such period. Istina’a sukuk (manufacturing certificates) enables Under Turkish law, companies may issue debt instruments for financial payment at a future date and includes the sukuk costs (fund purposes. Those capital market instruments are regulated by: costs) which are equal to the total of the complete sale price (i) Turkish Commercial Code numbered 6102; and fund costs during a set period of time. (ii) Capital Markets Law numbered 6362; (iii) Murabaha is an instrument based on a sale contract between the seller and client for the sale of eligible goods, whereby the (iii) Communiqué No II-31.1 on Debt Instruments of Capital selling of goods includes a profit margin agreed by the parties Markets Board; and and repayment is mostly made in instalments. This method is (iv) Listing Directive of Borsa Istanbul (“BIST”). commonly used in Turkey for project financings as follows: The Capital Markets Board, the sole authority on capital markets, (a) A bank may purchase the asset and request that the assets manages and oversees the market in Turkey. Instruments may be are delivered to its client by the seller, and the bank makes issued by companies through a public offering or . the payment for the assets when the assets are delivered The total amount of the debt instruments to be issued shall not to the client. With this method, the client pays back the exceed the limit to be determined by the Capital Markets Board. In value of the assets plus a margin in instalments. either scenario, certain legal obligations for issuers must be satisfied (b) A bank may issue a power of attorney empowering its as listed below: client for the purchase of the specific asset. The client takes delivery of the assets and pays back the value of the (i) registration in BIST; and assets plus a margin in instalments. (ii) obtainment of an approval certificate from the Capital Markets (iv) Wakala is an agreement where the client appoints an agent to Board by fulfilment of the requirements regulated under capital invest funds and such agent manages those investments on markets legislation. behalf of the client for a particular period of time in order to It is compulsory to satisfy the conditions regulated under capital generate an agreed profit in return. It is often known for its markets legislation for companies willing to issue such instruments. similarity with agency agreements, whereby the client and In case of a breach of the continuing obligations determined by agent share in the profit and risk of loss of investment. law, the Capital Markets Board and BIST are authorised to impose pecuniary and administrative fines on such companies. 19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional 19 Islamic Finance issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?

19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Parties may freely determine the governing law of a contract or a Islamic project financing in your jurisdiction. commercial relationship, pursuant to Article 24 of the International Private and Procedure Law numbered 5718 and within the context Islamic finance has been developing in Turkey in recent years of freedom of contract. Nonetheless, determination of governing through the use of financing instruments by participation banks law shall be valid in contracts/disputes containing a foreign element. which apply an interest-free banking system, and by banks which As long as the contracts/disputes contain a foreign element, then charge interest on banking transactions. the parties may determine Shari’ah law as the governing law of a dispute or a contract under Turkish legislation. However, the Islamic finance instruments for project financing have been enforcement of contracts and/or disputes governed by Shari’ah law introduced in the Turkish market by sukuk, which can be categorised under Turkish legislation will be primarily dependent on the fact as Islamic bonds providing their owner with a right to share the that, among others, the dispute resolved according to Shari’ah law income arising from the relevant financed assets. In 2010, the and brought before the Turkish courts for enforcement is not against Capital Markets Board of Turkey issued a Communiqué on Lease Turkish public policy. Public policy can be defined simply as all Certificates and Assets Lease Companies, which was replaced in the rules protecting the fundamental social structure and the benefits 2013 by a Lease Certificates Communiqué. These communiqués of the public. If a dispute resolved according to the Shari’ah law introduced the concept of lease certificates, which are an investment and brought before the Turkish courts for enforcement is against tool similar to Islamic bonds. Pursuant to these communiqués, Turkish public policy, then this decision will not be enforced by the lease certificates can be structured on an asset (sukuk al ijarah), Turkish courts.

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On the basis of freedom of contract, the relevant Turkish Code of 19.3 Could the inclusion of an interest payment obligation Obligations and Turkish Commercial Code provisions enable parties in a loan agreement affect its validity and/or to freely determine the interest rate, within the frame of legislative enforceability in your jurisdiction? If so, what steps restrictions. Nonetheless, the determination of an interest clause could be taken to mitigate this risk? falling under legal restrictions might face the risk of enforceability of the relevant provision of the loan agreement. The inclusion of an interest payment obligation in a loan agreement is common practice in our jurisdiction. The provisions governing The Turkish Commercial Code, as a general principle, prohibits the interest payments are regulated under the Turkish Code of accrual of interest on accrued interest. There are exceptions to this Obligations, the Turkish Commercial Code and the Code on Legal general principle, where compound interest of not less than three

Interests and Default Interests numbered 3095. (3) months shall be applicable, such as that of current accounts and Turkey borrowing agreements between the parties.

Okan Beygo Levent Yetkil ASC Law Firm ASC Law Firm Harmancı Giz Plaza, Kat: 8-15-16 Harmancı Giz Plaza, Kat: 8-15-16 Levent Levent Istanbul TR 34410 Istanbul TR 34410 Turkey Turkey

Tel: +90 212 284 98 82 Tel: +90 212 284 98 82 Email: [email protected] Email: [email protected] URL: www.aschukuk.com URL: www.aschukuk.com

Okan Beygo’s years of work in Turkish and international banks have Levent Yetkil is currently a partner of ASC Law Firm, with more than given him a deep expertise in banking and finance law. Mr. Beygo has eight years’ experience at the firm and leading ASC’s consultancy provided legal counselling services to many major financial institutions team of 15 attorneys and paralegals with Okan Beygo, who is one of and has valuable practical experience in banking law, capital markets the founding partners of ASC. law, derivative transactions, project finance, mergers & acquisitions Mr. Yetkil has been involved in many major domestic and cross- and securities and private equity issues. Mr. Beygo leads ASC’s young border transactions, especially banking and finance transactions and dynamic team in the swift resolution of the issues facing our clients. governed by Turkish and English law, and specialises in project finance, banking and finance, corporate, M&A and real estate. Additionally, Mr. Yetkil has extensive construction transaction experience, with a particular focus on engineering, procurement and construction contracts based on the International Federation of Consulting Engineers (“FIDIC”) model, in relation to various types of energy project. He also regularly advises energy companies on a retainer basis.

ASC Law Firm is an innovative and growing law firm that provides world-class legal services to a range of Turkish and international clients. ASC’s 35 attorneys are a source of in-depth transactional expertise and have extensive litigation experience in the Turkish courts. ASC’s head offices are located in Levent, the financial centre of Turkey. Building on the rich potential of a dynamic team of partners, lawyers and consultants, alongside numerous respected outside counsels, ASC maintains a strong practice in various legal sectors. ASC has taken its place among Turkey’s elite law firms. Each of our lawyers in ASC’s Corporate Team has taken part in numerous international and local deals, in areas as diverse as project finance, banking finance and mergers & acquisitions. ASC’s Corporate Team provides services at every stage of a deal’s life cycle, from term sheet to closing and beyond. These services include the drafting of facility and security documents, due diligence, the registration of security agreements and the structuring of funding transactions for corporate borrowers, banks and financial institutions. ASC’s Corporate Team represents local and international banks in their day-to-day transactions, as well as in complex derivative and custody-related transactions. ASC serves a diverse client portfolio, including large multinational corporations and some of the largest banks in the world. We strive for excellence, whether we are advising on day-to-day work or complex international deals.

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USA Eric F. Silverman

Milbank, Tweed, Hadley & McCloy LLP Simone M. King

coal-fired market share. Wind energy contributed 5.5% of total U.S. 1 Overview electric energy, at 223.9 TWh (rolling 12 months, ending in October, 2016) and is expected to continue growing. Solar electric production 1.1 What are the main trends/significant developments in from utility-scale facilities (1 MW and larger) is approaching 1% of the project finance market in your jurisdiction? total U.S. output, and exceeds that level, at 53.4 TWh (if estimated generation from distributed solar facilities are included). As with any transition to a new administration, there will be President Trump has stated his desire to encourage domestic uncertainty as to priorities and policy direction. Transitions production of fossil fuels and reduce the regulatory burdens on the involving a change in political party bring an extra degree of energy sector. Skeptics have noted that removing barriers for shale uncertainty, and a transition to an administration headed by a gas production will only contribute to the decline of the domestic coal President with no previous government experience brings a quantum industry, as these two fuels compete directly for power generation. The jump in uncertainty. It is still too early to discern the full impact of ability of the new administration to increase gas and coal production the new administration’s policies on the energy, electric power and simultaneously would appear to require either an increase in export infrastructure sector; however, some general outlines have emerged. markets, an increase in total domestic demand, or both. Export President Donald Trump is expected to prioritise the scaling back markets for U.S. coal are currently under pressure from such diverse of environmental regulations that particularly affect the energy and factors as slow global economic growth, environmental concerns and electric power sectors. Notably, most industry observers predict the regulations in host nations, competition with other energy sources and demise of the far-reaching Clean Power Plan, the Environmental the strength of the U.S. dollar. On balance, it appears doubtful that Protection Agency rule announced during the Obama administration, U.S. production of both gas and coal can be increased, absent a large designed to reduce carbon pollution from power plants. There is boost in domestic economic growth. Most experts are expecting some also substantial uncertainty as to whether the United States under increase in U.S. GDP, but not in the range of what has been proposed President Trump will withdraw from the Paris Climate Agreement. by the President. The outlook for gas appears to be for continued Beyond reducing environmental regulation, the new administration growth in supplies and exports as newly constructed liquefied natural is widely expected to actively promote traditional fossil fuels by gas (“LNG”) export terminals are completed and (perhaps) a modest opening more government-controlled land to exploration and increase in prices. The outlook for coal appears to be, at best, a degree production and expediting government approvals for energy exports of stabilisation of market share. and energy projects that require Federal approvals. Along with coal-fired electric plants, nuclear power has also been Such new policies may be capable of increasing energy supplies; stressed by flat demand and competition from inexpensive gas and however, many experts believe that the limiting factors are more renewable energy. The U.S. currently has 100 operating nuclear closely associated with the demand side. Energy Information power plants, down from 104 a few years ago. Four nuclear units are Administration (“EIA”) data show the total generation of electric currently under construction at two sites in southern states, but several power in the U.S. reached a peak in 2007 at around 4,156.7 Terawatt- others have been scheduled for shut-down. Nuclear operating costs hours (“TWh”) and never again approached this level. Given the have been increasing, partly as a function of the aging of the nuclear stagnation of electric demand (partially due to the proliferation of fleet and also from increased safety regulations implemented after distributed generation (e.g. rooftop solar)), the competition among the Fukushima Daiichi accident. In both California and New York, primary energy sources for market share has become intense. where large nuclear plants have been proposed for shut-down (e.g. I. Declining Market Share for Coal and Nuclear the Indian Point Nuclear Power Plant in New York), the thinking The year 2007 also marked the highest amount of U.S. electricity on replacement energy (still unofficial as of this time) seems to be derived from coal, at 2,015 TWh. The most recent figures (still focusing on more renewables (solar in California and offshore wind incomplete for 2016) show total U.S. generation of electricity from in New York), strengthening the transmission grid (for imports of coal at 1,211 TWh (rolling 12 months, ending in October, 2016); wind power into California and imports of Canadian hydroelectric a decline of 40%. Competition from inexpensive natural gas, power into New York), demand-side management and innovations increasingly sourced from shale, is responsible for most of coal’s such as battery energy-storage facilities. Expanded reliance on gas lost market share. In the year that coal reached its peak, electricity does not seem to be favoured. New York and Illinois have attempted generated from natural gas totalled 896.6 TWh. The most recent to bolster nuclear generation by instituting zero-emissions credits figure is 1,401.9 TWh, representing an increase of 56%. Electric to nuclear assets. In response, non-utility generators are pressing power derived from renewables is also a factor in the decline of the Federal Energy Regulatory Commission (“FERC”) to overturn

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these state subsidies that the generators claim distort FERC’s from production centres to consuming markets or export terminals. wholesale electricity markets. Overall, we expect nuclear power to U.S. pipeline exports to Mexico continued to grow throughout decline slightly, as the limited number of new plants will not quite 2016, comprising 87% of all U.S. natural gas exports. A number compensate for planned closures. The “nuclear renaissance” of the of new gas pipeline projects to Mexico reached financial close last prior decade today seems like science fiction. year, including the Fermaca La Laguna–Aguascalientes, Fermaca II. Prospects for the Oil and Gas Industry Villa de Reyes–Aguascalientes–Guadalajara Gas, Nueva Era and Samalayuca–Sasabe pipelines. However, the outlook for expanded While global oil prices rebounded sharply last year (to approximately gas exports to Mexico could be jeopardised by the recent sharp $53 per barrel in December 2016), prices remain low in comparison to drop of the Mexican peso and also by political friction between the historical levels (and the levels necessary to support the oil-dependent Trump administration and the Mexican Federal government. USA economies of many petroleum-exporting nations (e.g. Russia, Venezuela and Nigeria). In the U.S., excess supplies of crude oil Given that the new administration has indicated a decidedly different persist due to U.S. shale oil production remaining at near record levels. view from the Obama administration regarding pipeline infrastructure U.S. producers have cut costs and improved production efficiencies development, including over the Dakota Access Pipeline and the with advanced drilling and hydraulic fracturing technologies. New Keystone XL Pipeline, some suggest that the new administration, with policies of the Trump administration, including expanded leasing of Republican control over Congress, has the potential to change course Federal land for exploration and production, will likely have the effect radically to unclog projects and accelerate energy and infrastructure of increasing domestic production and further depressing prices in the development (e.g. the Executive Order issued on January 24, 2017 and absence of significant growth in demand. While oil prices may be the Presidential Memoranda issued on January 24, 2017). We should boosted by OPEC’s proposed production cuts, U.S. shale producers note, however, that oil pipelines are largely under state jurisdiction, and other non-OPEC producers may not follow OPEC’s lead. and while interstate gas pipelines are under FERC jurisdiction, FERC Notably, the U.S. demand for gasoline has not responded significantly is an independent Federal regulatory commission that follows existing to the substantial price declines of the past few years. precedents established by the courts in performing its environmental reviews of proposed gas pipeline projects. The impact of the price decline and falling demand continued to ripple through the entire energy value chain and highly-leveraged IV. Regional Electricity Markets exploration and production companies were hit hardest as they faced The combination of depressed demand, particularly due to warmer- difficulty satisfying their debt payment obligations. Hedges became than-normal winter temperatures, large amounts of natural gas in expensive to renew. U.S. banks heavily exposed to the oil and gas storage and low natural gas prices has driven down regional spot industry (e.g. Wells Fargo in 2015 derived 15% of its investment electric energy prices and placed stress on capacity prices, as banking fee revenue from the oil and gas industry and Citigroup in generation project developers have come to rely more on capacity 2015 derived 12% from the same according to industry statistics) revenues needed to support project financing. While, typically, and finding that the value of their collateral had sunk, nevertheless, summer weather drives electric power demand, which should seem poised to weather the downturn. U.S. banks reacted quickly translate into higher power prices, this was generally not the case by increasing loan loss reserves, renegotiating borrowing base for regional energy markets in 2016. Platts reported that peak determinations and consenting to extensions and amendments of demand in the Electric Reliability Council of Texas (“ERCOT”) existing credit facilities. It should also be noted that banks with a hit record levels several times during August 2016. ERCOT North large consumer banking business should benefit from falling prices Hub day-ahead on-peak power prices in August 2016 averaged as consumers find themselves with more disposable cash to obtain roughly $50.25 per megawatt hour (“MWh”), 15% below where mortgages and open credit cards. day-ahead prices averaged in August 2015. On August 11, 2016, III. The U.S. as a Net Natural Gas Exporter the ERCOT electric load peaked above 71 gigawatts (“GW”), a new record. However, on August 11, 2016, peak power prices only According to the EIA, as of November 2016, the U.S. became a net averaged near mid-$40s/MWh. According to Platts, ERCOT had exporter of natural gas on a monthly basis for the first time since not issued any conservation notices or warnings about low physical 1957. Natural gas storage inventories were at or near record levels responsive capability. Similarly, on July 21, 2016, the Midcontinent throughout most of the year due to continued strong production and Independent System Operator (“MISO”) experienced a generation reduced demand arising in part from mild winter weather at the start shortage event. However, MISO power prices that day peaked of 2016. We expect to see increasing exports of U.S. crude, natural lower than anticipated (approximately mid-$30s/MWh). In respect gas/LNG, ethane, propane and refined products as the U.S. markets of ERCOT, some industry observers attribute strong wind output remain largely oversupplied. on the system as helping to reduce price spikes which typically While U.S. LNG exports increased from almost zero in 2015 to an coincided with periods of peak demand. average of 0.5 billion cubic feet per day (“Bcf/d”) in 2016 – largely V. Continuing Shift in Project Finance Activity Towards due to the commercial operation of Cheniere’s Sabine Pass LNG Renewables, Transport and Gas-fired Power Projects liquefaction plant in Louisiana – export markets for U.S. LNG face competition from other LNG sources (notably Australia), As part of this cycle, we are witnessing a greater shift in project the strength of the U.S. dollar and economic pressure from low finance activity towards renewables, transport and gas-fired power oil prices, which form the basis of LNG prices in Asian markets. projects – a trend that we expect to persist throughout 2017. However, EIA forecasts LNG exports to average 2.6 Bcf/d in 2018, Especially notable in 2016 was the growing significance of hybrid driven by the Cove Point LNG export terminal in Maryland, which structures in financing large-scale energy and infrastructure projects. is expected to come online in December 2017, and the Cameron Partially as a result of the financial crisis in 2008, which led to U.S. LNG and Freeport LNG terminals on the Gulf Coast, which are each banks facing stiffer banking regulations, project finance sponsors expected to come online in the second half of 2018. have increasingly turned to the institutional private placement market for their financing needs and, since then, we have seena Pipeline exports of gas to Mexico have been booming, as a number growing appetite from institutional investors (particularly insurance of new gas pipelines have come online. With domestic natural gas companies and pension funds) in infrastructure and project production at an all-time high and oil prices remaining low, 2016 financings. Notable bank/bond hybrid financings in 2016 include saw much activity around pipeline infrastructure to move natural gas the approximately $1 billion financing of the gas-fired Lackawanna

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Energy Center in Jessup, Pennsylvania, the approximately $230 component of many renewable energy financings and may require million financing for the 150 MW nameplate capacity Alta Wind that these transactions increase reliance on debt financing rather than VIII power project in the Tehachapi/Mojave area of Kern County, tax equity. In certain instances, where deals have been structured California and the approximately $250 million financing for the under assumptions agreed prior to the implementation of the said Argo Black Hills Energy Project in Pueblo, Colorado. tax reforms, there may be adverse economic impacts on project a. Continued Growth for the Renewables Sector developers and/or certain construction lenders that expected to be repaid from the proceeds of tax equity investments that may now be According to recent EIA statistics (relying on planned capacity downsized. Reducing corporate tax rates may lead to fewer active additions for the last two months of 2016), approximately 63% of tax equity investors in renewables financings, as corporations will utility-scale capacity additions in 2016 were renewables technologies USA have significantly lower effective tax rates and many may conclude – almost exclusively wind and solar – and a continuation of the trend that further efforts to reduce taxes may not be worth the effort. over the prior two years in which renewables accounted for more than Nevertheless, we anticipate that the renewables sector will adapt half of added electrical capacity. Despite the new administration’s quickly to such tax proposals and develop new financing structures professed focus on conventional power generation technologies and that will support the industry’s substantial capital requirements. fossil fuels, renewable energy has garnered economic momentum and bipartisan support. A number of states, including California, b. Prospects for Infrastructure Investment and Privatisation New York, Oregon and Washington, DC, have expanded mandates Many analysts suggest that the Trump administration’s stated for renewable electric generation to reach 50% of each state’s total goals of undertaking infrastructure investment, coercing American electricity generation. After years of technological improvements manufacturing jobs back to the United States and attempting to leading to the dramatic decline in capital costs and favourable jumpstart U.S. manufacturing will lead to increased domestic GDP regulatory policy, the renewables sector has demonstrated that it has growth, although the scope for such growth will be limited by passed its adolescence to the point that it can sufficiently sustain structural factors, including an aging population and low growth in itself. We expect this trend to continue despite predictions that the productivity. To the extent that domestic GDP can be increased, new administration might seek to accelerate the scheduled phase- the correlation (weakened of late, but not eliminated) between out of tax incentives for renewable energy development. aggregate energy demand and GDP may be expected to stimulate The first offshore wind project in the U.S. (Deepwater Block Island) domestic energy demand. The magnitude of this demand-side reached commercial operation by the end of 2016. Although this stimulus is subject to great uncertainty. project is only 30 MW, it represents a breakthrough in project The new administration released plans to embark on a massive development. Additional offshore wind projects are planned, infrastructure building and revitalisation programme. To the extent especially off the coast of Massachusetts and New York. In a these plans can be realised, we expect a greater role for state and related development, Statoil was declared the provisional winner of private sector participation, public-private partnerships and related the Bureau of Ocean Energy Management (“BOEM”) offshore wind arrangements. Discussions to date have proposed approximately energy area lease sale auction for a site off the coast of Long Island, $137 billion in tax credits to private investors for projects that New York. While offshore wind is still significantly more expensive generate revenue, such as toll roads, toll bridges and airports. Under than other U.S. electricity sources, it is still seen as economically this preliminary plan, investors would receive a substantial tax credit viable in places like Block Island (in the state of Rhode Island), as an inducement for equity investment in infrastructure projects. where residents were previously reliant on diesel generators or near The new administration has suggested that conventional municipal markets where electricity prices are high. financing would be available for projects that lack a revenue stream, In 2016, we witnessed a wide-scale restructuring of the solar industry but the details are less clear. As with any tax proposal, the Trump as the industry faced headwinds from declining oil and gas prices, administration’s plans will have to withstand the Congressional coupled with weak demand. Abengoa, SunEdison, First Solar and budget process. Deficit hawks from the President’s own political SunPower each either announced or restructuring party may be expected to oppose any large increase in spending (tax plans in 2016. These companies were typically highly-leveraged credits are viewed as spending), and members of the opposition party in order to undertake ambitious expansion programmes to acquire may oppose programmes that appear to offer the prospect of corporate companies and develop large project portfolios. As a result, we profits and Wall Street financial engineering. Additionally, tax credit anticipate that there could be distressed sales of these companies’ proposals may become tied up in a larger debate about reform of the solar and wind farm assets over the next year. One example is U.S. tax code – another stated goal of the new administration. On the the acquisition last year by J.P. Morgan Asset Management from whole, we reasonably expect a significant increase in infrastructure SunEdison and its affiliates of interests in 29 utility-scale wind and investment. That said, we expect the majority of such investment to solar projects totalling approximately 1.2 GW. be targeted at the transportation sector rather than the energy sector, which in the U.S. is largely privately owned. Some have also expressed Nevertheless, 2016 remained a strong year for wind and solar, with concerns that decisions on transportation sector spending are too often a number of projects reaching financial close last year, including the driven by political considerations rather than solid economic analysis. 276 MW Bethel Wind Farm in Castro County, Texas, the Broadview The effect of transportation infrastructure spending on GDP growth is Wind Project in Curry County, New Mexico and Deaf Smith County, subject to considerable uncertainty. Even so, an increase in domestic Texas, the 230 MW Electra Wind Project in Haskel County, Texas, steel and cement consumption, with a related boost in metallurgical the 230 MW Mariah North Wind Project in northern Texas and the coal production, is possible. 45 MW Sandstone Solar Plant in Arizona. The new administration’s plans for streamlining regulations and for The renewables industry could face headwinds from the President’s privatisation of government-owned infrastructure assets are certain proposed tax reforms. Even if the wind energy production tax credits to face opposition from Congressional Democrats. But the President and the solar energy investment tax credits are left untouched, one may find opposition within his own party for some proposals. The potential consequence of the new administration’s tax reform proposals electricity transmission system in the U.S. is an excellent example. is that corporate tax rates are expected to decline significantly from The U.S. transmission network is fragmented, consisting of three 35% to perhaps a range of 15% to 20%. This reduction in corporate largely separate power grids, with key parts of the system owned by tax rates will have the effect of reducing the size of the tax equity private companies, but other parts owned by Federal, state and local

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governmental authorities, and some parts owned by diverse entities sectors is particularly opaque. We note that President Trump such as state irrigation districts and cooperative utilities. Parts of recently appointed Rudy Giuliani as cybersecurity advisor. The the system are overseen by seven independent system operators/ President has also been vocally critical of the U.S. intelligence regional transmission organisations, but these do not encompass community in general, and its cybersecurity abilities in particular, the entire country. FERC has authority over economic regulation both during the election campaign and afterwards. How this may of the power grid (with certain notable exceptions) and state-level translate into possible changes in policy or practice is unclear at the regulatory commissions have authority over siting and construction present time. But we do not see this subject being ignored under of transmission lines. The respective authority of FERC and the this administration; we – along with many in the American business state commissions has been the subject of many court decisions over community – are taking a “wait and see” approach with respect to the years and new areas of dispute continue to emerge. Any proposal the new administration’s security programmes. USA to change the existing system is certain to threaten vested interests. Past proposals for increased Federal authority over the siting and 1.2 What are the most significant project financings that construction of high-voltage transmission lines have encountered have taken place in your jurisdiction in recent years? stiff resistance from state authorities. Given that the Republican Party generally favours less Federal authority, any plans for building See question 1.1 above. a revamped, “modern” national transmission system will likely face questions over Federal versus state jurisdiction. Privatisation of existing Federal entities (such as the Federal power marketing 2 Security administrations, currently part of the Department of Energy; or the Tennessee Valley Authority, a corporate agency of the U.S. Federal government) would be even more controversial and would almost 2.1 Is it possible to give asset security by means of certainly face opposition from the Congressional delegations in the a general security agreement or is an agreement required in relation to each type of asset? Briefly, affected regions. To date, President Trump has not announced any what is the procedure? specific plans for the reform of electric transmission system. c. Continued Activity for Gas-fired Power Generation Several different tools are typically used to provide lenders security In 2016, we saw continued project finance activity around gas-fired in the project assets, including a security agreement covering power generation. Notable projects include the approximately $755 personal property of the project company. million project financing of the 785MW gas-fired CPV Towantic The Uniform Commercial Code (“UCC”) provides a well-developed Energy Center in Oxford, Connecticut, the approximately $1 and predictable framework for lenders to take a security interest billion financing of the gas-fired Lackawanna Energy Center in in the borrower’s personal property assets. Each U.S. state has Jessup, Pennsylvania, the $725 million refinancing of the 705 MW adopted article 9 of the UCC, which governs secured transactions, Newark Energy Center gas-fired merchant power plant in New with some non-uniform amendments. Under the UCC, a security Jersey, the $948 million sale by Entegra of a 2,000 MW gas-fired agreement must, among other elements, describe the collateral combined cycle power plant in Arkansas and the $500 million sale and the obligations being secured in order for the lender’s security of the Granite Ridge 745 MW combined-cycle natural gas-fired interest in the collateral to attach to a borrower’s personal property power plant in New Hampshire to Calpine. We expect this trend assets. Filing a UCC-1 describing the collateral in the appropriate to continue, particularly in the Midwest and Great Plains regions. filing office perfects the lender’s security interest. VI. Physical Security and Cybersecurity of the Electric Grid Perfection of rights in deposit accounts, money and letters of credit and Energy Infrastructure is achieved by control rather than by the filing of a UCC-1. Control Concerns with both physical security and cybersecurity of critical in accounts is achieved by the lender (or its collateral agent) taking energy infrastructure have been growing in recent years and this control of the deposit account under control and funding provisions trend is expected to continue. In the U.S., both physical security and in the security agreement or entering into an account control cybersecurity of the bulk power system are overseen by the North agreement. American Electric Reliability Corporation (“NERC”), which has Lenders usually also require a pledge of the ownership interests been designated as the Electric Reliability Organization (“ERO”) in the project company to give them the ability to own the project by FERC pursuant to authority under the Federal Power Act, as company (and all of its assets) in the event that they choose to amended by the Energy Policy Act of 2005. Under FERC rules foreclose. concerning Critical Infrastructure Protection, NERC has taken an educational and supporting approach under which entities that are registered as owners or operators of bulk power system components 2.2 Can security be taken over real property (land), plant, can choose to participate in a confidential review by NERC staff of machinery and equipment (e.g. pipeline, whether their physical security and cybersecurity procedures as compared underground or overground)? Briefly, what is the to industry best practices. The results are not disclosed and are not procedure? used in subsequent NERC reliability audits, unless an imminent threat is found. FERC itself maintains confidential treatment of Security may be taken over real property, subject to the real property Critical Energy Infrastructure Information (“CEII”) and has in the laws of the state in which the real property is located, through a last year adopted new rules imposing penalties for release of such mortgage, deed of trust, leasehold mortgage or leasehold deed of information. Although the particulars of security initiatives are, trust. If under a certain state’s law these instruments do not cover by nature, not public, we understand that efforts have focused on fixtures, a UCC-1 fixture filing may also be required. both software security issues (such as firewalls, patches and internal To create a security interest in real property by mortgage or deed of monitoring), and also on human-factor vulnerabilities, such as trust, such instrument will: (i) identify the legal names of the lender contractor and supply chain cybersecurity measures. and the borrower; (ii) state the amount of the debt owed by the Looking forward, the outlook for physical and cybersecurity borrower to the lender and identify the promissory note evidencing initiatives for the U.S. generally as well as the energy and power the indebtedness; (iii) contain a granting clause conveying the

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mortgage to the lender; (iv) describe the secured property; and (v) be signed and notarised. In most states, a security interest is 3.2 If a security trust is not recognised in your perfected when the instrument is recorded in the recorder’s office of jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor the county where the real property is located. status) to achieve the effect referred to above which would allow one party (either the security trustee or 2.3 Can security be taken over receivables where the the facility agent) to enforce claims on behalf of all chargor is free to collect the receivables in the the lenders so that individual lenders do not need to absence of a default and the debtors are not notified enforce their security separately? of the security? Briefly, what is the procedure?

USA New York law recognises the concept of a security trust, although it Yes, a consent to collateral assignment by the project company to is not typically used. the lenders provides the lenders with the right to collect receivables under an underlying assigned agreement. 4 Enforcement of Security

2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure? 4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the Please see question 2.1 above. availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/ 2.5 Can security be taken over shares in companies liquidator), or (b) (in respect of regulated assets) incorporated in your jurisdiction? Are the shares in regulatory consents? certificated form? Briefly, what is the procedure? Regulatory approval varies greatly, as such elements are dependent Please see question 2.1 above. on the type of collateral involved. For example, a direct or indirect change in control over electric power assets subject to the jurisdiction of FERC must be approved by FERC. FERC has jurisdiction over 2.6 What are the notarisation, registration, stamp duty most sellers into wholesale electric markets and electric power and other fees (whether related to property value or transmission facilities in the contiguous U.S. states other than in the otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables ERCOT region, which is subject to state jurisdiction. Certain small and chattels)? power generators known as “qualifying facilities” may qualify for exemption from FERC approval of changes in control. Moreover, Depending on the relevant state, city and county laws, recording if the remedies to be exercised involve direct taking of assets fees and taxes for perfecting a security interest in real property will subject to FERC hydro-electric licensing rules, or an interstate typically comprise a significant percentage of the debt obligations natural gas pipeline or underground gas storage facility that holds secured. a FERC certificate of public convenience and necessity, transfer of the licence or certificate may be required. Certain state laws and regulations may also require approvals, such as New York State, 2.7 Do the filing, notification or registration requirements which generally parallels FERC regulations. Most states, however, in relation to security over different types of assets require approval only if the assets are in the nature of a “traditional” involve a significant amount of time or expense? public utility serving captive customers under cost-based rates or are subject to a certificate of public convenience and necessity Please see question 2.6 above. issued under state law. Similar considerations arise with nuclear facilities, for which 2.8 Are any regulatory or similar consents required with the operator will hold a licence from the Nuclear Regulatory respect to the creation of security over real property Commission (“NRC”), and any transfer of such licence that might (land), plant, machinery and equipment (e.g. pipeline, need to accompany an enforcement action would require separate whether underground or overground), etc.? NRC approval, recognising that only the licensed operator may operate a nuclear power plant. It should be noted that foreign Requirements for regulatory consents are specific to the location entities are not allowed to hold an NRC nuclear power plant and nature of the project and the identity of the project parties. operating licence or to exercise control over the licensee. Many energy facilities include a radio communication system 3 Security Trustee licensed by the Federal Communications Commission (“FCC”), and a transfer of ownership of the FCC licence related thereto will require prior approval from the FCC. In addition, there are 3.1 Regardless of whether your jurisdiction recognises restrictions on the grant of a security interest in an FCC licence; the concept of a “trust”, will it recognise the role of a generally, such security interests are limited to an interest in the security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to proceeds thereof rather than the licence itself. enforce the security and to apply the proceeds from Any foreclosure or enforcement action is also subject to the possible the security to the claims of all the lenders? imposition of: (i) the automatic stay under the Federal bankruptcy code, title 11 of the United States Code (“Bankruptcy Code”), if the In New York law-governed security documents where there are at title-holder commences a case under the Bankruptcy Code; and (ii) least two lenders, a collateral agent is nearly always appointed to act more generally, for any non-judicial foreclosure, the obtaining of a on behalf of the lenders with respect to the collateral. specified injunction halting the auction or other proceeding.

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grant of a security interest to a lender may be “avoided”, or set 4.2 Do restrictions apply to foreign investors or creditors aside, if the security interest is unperfected. In addition, a lender’s in the event of foreclosure on the project and related perfected security interest may be avoided as either a “preference” companies? or a “fraudulent transfer”. It is important to note that there is no requirement for there to be actual fraud or wrongdoing for a See section 6 below. transfer to be avoided under either of these theories. A lender’s security interest in a project company’s property may be avoided 5 Bankruptcy and Restructuring as a preference if (i) the lender perfects the security interest during the 90 days (or one year, if the lender is an “insider” of the project

Proceedings USA company) preceding the commencement of the project company’s bankruptcy case, (ii) that transfer is made for or on account of an 5.1 How does a bankruptcy proceeding in respect of the antecedent debt owed by the project company to the lender, (iii) the project company affect the ability of a project lender to transfer enables the lender to receive more than it otherwise would enforce its rights as a secured party over the security? have received in a liquidation of the project company, and (iv) the lender has no affirmative defence (which include that the transfer Once a bankruptcy case is commenced under the Bankruptcy Code was a contemporaneous exchange for new value, that the lender in respect of a project company, the Bankruptcy Code imposes an gave subsequent new value, or that the transfer was in the ordinary “automatic stay”, or statutory injunction, which immediately stops course of business) to such preference. Under the Bankruptcy Code all enforcement actions outside of the Bankruptcy Court against the and applicable state laws, a constructive fraudulent transfer claim debtor project company or its property. The automatic stay applies can be asserted to avoid a transfer that the project company made to secured creditors, although it is possible for a secured creditor to the lender if both (i) the project company made the transfer in to obtain relief from the automatic stay in certain circumstances, exchange for less than reasonably equivalent value, and (ii) the but only through an order of the Bankruptcy Court. In addition, in project company at the time of the transfer was, or was thereby certain limited circumstances, the Bankruptcy Court may extend the rendered, insolvent, inadequately capitalised, or unable to pay its automatic stay to protect entities that are not debtors in a bankruptcy debts as they matured. For this purpose, the securing or satisfaction case, or assets of such non-debtor entities. of a present or antecedent debt of the project company will generally A secured creditor is not, however, without protection in a case constitute reasonably equivalent value (although it may be an under the Bankruptcy Code. For instance, a secured creditor avoidable preference). Under the Bankruptcy Code, the look-back is generally entitled to “adequate protection” of its interest in a period for constructive fraudulent transfer claims is two years before debtor’s collateral, and there are limits on the ability of the project the commencement of the bankruptcy case. Under state laws, the company to use some types of collateral, or to dispose of collateral, look-back period can vary, depending on the state, and can be up without the secured creditor’s consent. In particular, the project to six years. If a transfer is avoidable as either a preference or a company will not be permitted to use cash collateral (cash and fraudulent transfer, the project company may be able to cancel the cash equivalents) without the agreement of the secured party or security interest and force a return of the property, which may be an order of the Bankruptcy Court. In any sale of collateral (other used to pay all creditors. It should be noted that not all transfers than ordinary-course-of-business sales, such as sales of inventory in made during the applicable look-back period are avoidable, and normal business operations) during a bankruptcy case, the secured these inquiries are generally fact-intensive. creditor generally has the right to “credit-bid” its claim against the debtor, although that right can be limited by the Bankruptcy Court for 5.3 Are there any entities that are excluded from cause. The determination of cause is fact-intensive, and in several bankruptcy proceedings and, if so, what is the recent cases Bankruptcy Courts have found that such cause existed, applicable legislation? in order to facilitate an auction with active, competitive bidding. It should also be noted that in the context of a plan of reorganisation, The Bankruptcy Code excludes from the category of entities that a secured creditor cannot be compelled to accept a plan through a are eligible to be debtors in a bankruptcy case: governmental “cramdown” when the plan provides for the auction of the secured entities (other than municipalities); domestic insurance companies; creditor’s collateral without giving the secured creditor the right to domestic banks; foreign insurance companies engaged in such credit-bid. But it is still possible to cramdown a secured creditor business in the U.S.; and foreign banks with a branch or agency in by providing it with the indubitable equivalent of its secured claim, the U.S. In addition, the Bankruptcy Code has special provisions for which can include substitution of collateral. particular types of eligible entities, such as railroads, municipalities, stockbrokers and commodity brokers. 5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, 5.4 Are there any processes other than court proceedings employees’ claims) with respect to the security? that are available to a creditor to seize the assets of the project company in an enforcement? Generally speaking, the holder of a perfected security interest is entitled to payment from its collateral ahead of all other creditors Outside of court proceedings, creditors may be permitted to exercise (other than the holder of a security interest that is prior in right self-help remedies depending upon the nature of the collateral, to it). Although particular creditors, such as taxing authorities or provisions of the applicable security agreements, and the governing employees, may be entitled to priority claims under the Bankruptcy law. For example, the UCC generally authorises a secured creditor, Code, such claims do not come ahead of a secured claim with regard after default, to take possession of, to collect on, and to dispose to the collateral. Under certain circumstances, a debtor (or trustee) of (such as by public or private sale), personal-property collateral may surcharge collateral for the costs of preserving or disposing of it. without first commencing a court proceeding, provided that the Under the Bankruptcy Code, the term “transfer” is broadly defined, secured creditor complies with particular formalities and proceeds and includes the grant or perfection of a security interest. The without breach of the peace.

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from performance requirements, freedom to hire senior management 5.5 Are there any processes other than formal insolvency without regard to nationality, rights to unrestricted transfer in proceedings that are available to a project company to convertible currency of all funds related to an investment, and, in achieve a restructuring of its debts and/or cramdown the event of expropriation, the right to compensation in accordance of dissenting creditors? with international law.

One possibility is a consensual, out-of-court debt restructuring, which can be used to recapitalise or reorganise the 6.3 What laws exist regarding the nationalisation or (debt and/or equity) of an entity and its subsidiaries outside of a expropriation of project companies and assets? Are bankruptcy case. Under such a debt restructuring, cramdown of any forms of investment specially protected? USA dissenting creditors is not available. Under the doctrine of eminent domain, the U.S. Federal government or any of the U.S. state governments may take private property 5.6 Please briefly describe the liabilities of directors (if without the property owner’s consent, so long as just compensation any) for continuing to trade whilst a company is in is paid to the property owner. financial difficulties in your jurisdiction.

The United States does not impose personal liability on directors for 7 Government Approvals/Restrictions insolvent trading. Under the law of some states, however, directors of an insolvent company may be found to have fiduciary duties not only to the company’s shareholders, but also to its creditors, and a 7.1 What are the relevant government agencies or director’s breach of those fiduciary duties may give rise to personal departments with authority over projects in the typical project sectors? liability.

Regulatory jurisdiction over the electric power sector in the United 6 Foreign Investment and Ownership States is bifurcated between Federal and state authorities. State Restrictions regulatory authorities retain jurisdiction over the siting of electric power generation, transmission and distribution facilities. In most of the United States, FERC has authority over wholesale sales of 6.1 Are there any restrictions, controls, fees and/or taxes electric power, and power may not be sold at wholesale until FERC on foreign ownership of a project company? has granted authority to sell at negotiated, “market-based rates” (“MBR Authority”). The owners of certain small (not larger than While the United States generally has a liberal policy toward foreign 20 MW) qualifying facilities are exempted from the need to obtain direct investment, there are certain restrictions with respect to MBR Authority, although owners of facilities larger than 1 MW ownership of land with energy resources, as well as energy production must file a form with FERC in order to qualify. As noted in question facilities, assets and transmission infrastructure, under both state and 4.1, FERC lacks jurisdiction in the non-contiguous states (Alaska Federal laws. For instance, mining of coal, oil, oil shale and natural and Hawaii) and in the intrastate-only ERCOT region. gas on land sold by the Federal government is permitted by U.S. Dams and hydroelectric facilities on navigable waters are also citizens, corporations and other U.S. entities only. Ownership and subject to licensing by FERC, subject to exemption for very small control of nuclear power facilities and leasing of geothermal steam projects. Interstate natural gas pipelines and underground natural and similar leases of Federal land, or licences to own or operate gas storage projects are subject to FERC certificate authority. hydroelectric power facilities, are also generally restricted to U.S. persons only. However, a U.S.-registered corporation that is foreign- Nuclear energy projects and the operators of such projects are owned or -controlled may own hydroelectric power facilities. subject to licensing by the NRC. Under the Exon-Florio Act of 1988, as amended (“Exon-Florio”), The Environmental Protection Agency (“EPA”) governs the issuance which is administered by the Committee on Foreign Investment in of most Federal environmental permits. Environmental permits can the United States (an inter-agency committee coordinated by the also be required by state, local and other Federal governmental Department of Treasury), the President may block an investment or authorities. acquisition (or order that such investment or acquisition be unwound) after conducting an investigation that establishes that a foreign 7.2 Must any of the financing or project documents be interest exercising control or influence on relevant U.S. resources, registered or filed with any government authority or assets, infrastructure or technology “might take action that impairs otherwise comply with legal formalities to be valid or the national security” that cannot be adequately addressed by any enforceable? other provision of law. As noted above in question 4.1, a foreign entity cannot hold a U.S. There are a number of registration and filing requirements for nuclear plant operating licence issued by the NRC or otherwise financing or project documents that depend on the nature ofthe control the licensee. A foreign entity cannot directly hold a FERC project and identity of the parties. For example, FERC requires hydro-electric licence, but may own or control a U.S. company that approval of issuances of securities or assumptions of liabilities (e.g. holds such a licence. incurrence of debt), subject to certain exceptions, for companies subject to its electric power jurisdiction. FERC customarily grants 6.2 Are there any bilateral investment treaties (or other electric power generators with MBR Authority blanket approval for international treaties) that would provide protection jurisdictional financings, and the owners of qualifying facilities that from such restrictions? are exempt from FERC rate regulation are also exempt from FERC regulation of financings. The United States has concluded a number of bilateral treaties that Please refer to question 18.2 for SEC-related requirements. protect investor rights to establish and acquire businesses, freedom

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7.3 Does ownership of land, natural resources or a 7.8 Is there any restriction (under corporate law, pipeline, or undertaking the business of ownership or exchange control, other law or binding governmental operation of such assets, require a licence (and if so, practice or binding contract) on the payment of can such a licence be held by a foreign entity)? dividends from a project company to its parent company where the parent is incorporated in your Please see questions 6.1 and 7.1 above. In addition, the operation jurisdiction or abroad? of certain U.S. telecommunications infrastructure that is licensed by the FCC may be subject to direct or indirect foreign ownership Apart from the withholding taxes discussed under question 17.1, restrictions, and, with the exception of broadcast radio and New York law financing documents, which often impose restricted USA television assets, in many cases waivers of such foreign ownership payment conditions on the issuance of dividends, and shareholders’ restrictions are available for investors that are domiciled in countries agreements, typically contain restrictions. In addition, project that provide reciprocal market access for U.S. investors to own or companies subject to FERC regulation of issuances of securities and assumption of liabilities under Section 204 of the Federal Power invest in similar telecommunications infrastructure. Act, other than blanket authority under MBR Authority (discussed at 7(a) above), are subject to certain restrictions, such as restrictions 7.4 Are there any royalties, restrictions, fees and/or requiring parent debt obligations to follow up to the parent company taxes payable on the extraction or export of natural if a project company borrows at the public utility level and resources? “dividends up” the proceeds to its non-public utility parent.

Federal, state and private royalties are payable on the extraction of natural resources, as applicable. 7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a In general, no specific Federal taxes are imposed on the extraction project financing and which governmental authorities of natural resources, although income taxes are imposed on profits administer those laws or regulations? from sales. Domestic crude oil used in or exported from the United States is also subject to Federal tax. Income taxes may apply to The Clean Air Act and the Clean Water Act are generally the most sales outside of the United States to the extent such sales are related material Federal statutes that would impact power projects. Permits to business conducted in the United States. related to air emissions and water discharges under these statutes and similar state laws may be required prior to the start of construction by the EPA or by state or local governmental authorities. 7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange? Any major Federal action or decision, including the granting of certain permits by the U.S. Fish and Wildlife Service and the U.S. The United States does not generally impose controls or fees on Army Corps of Engineers, or the approval of a loan guarantee by foreign currency exchange. However, U.S. persons, which include the DOE, is subject to comprehensive environmental review under U.S. companies and their foreign branches, are prohibited from the National Environmental Policy Act. Some states, notably engaging in transactions with individuals or entities that the Office California, require similar state-level comprehensive environmental of Foreign Assets Control of the U.S. Department of Treasury review of discretionary governmental actions relating to power project permitting and siting. designates as individuals or entities owned or controlled by countries against which the United States has imposed sanctions, or that the In terms of international frameworks, the Equator Principles United States has designated as terrorists, narcotics traffickers, are voluntary and would only be used with respect to a project if cybercriminals, transnational criminal organisations or proliferators required by the applicable financial institution. Since the U.S. has of weapons of mass destruction. In addition, U.S. persons and comprehensive environmental laws and is a designated country, foreign persons engaged in business in the United States are subject covenants to comply with environmental law in conjunction to U.S. Federal and state income taxes on foreign currency exchange with the performance of standard due diligence are often deemed gains. sufficient. As a result, representations and warranties and covenants expressly related to the Equator Principles are often not included in the applicable project agreement. 7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other 7.10 Is there any specific legal/statutory framework for jurisdictions? procurement by project companies?

Other than the withholding taxes discussed in question 17.1, there Outside of the nuclear industry, privately owned and financed are no such generally applicable restrictions. project companies are not subject to governmental oversight for procurement.

7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore 8 Foreign Insurance accounts in other jurisdictions?

Yes, they can. 8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?

Such restrictions are applicable on a case-by-case basis depending on the location and nature of the project, the type of project and the identity of the project parties.

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natural force majeure, such as acts of God, and political force 8.2 Are insurance policies over project assets payable to majeure, such as war or terrorism, as well as the effect on the foreign (secured) creditors? parties’ rights and obligations if a force majeure event occurs.

Such restrictions are applicable on a case-by-case basis depending on the location and nature of the project, the type of project and the 12 Corrupt Practices identity of the project parties.

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting

USA 9 Foreign Employee Restrictions the projects sector)? What are the applicable civil or criminal penalties? 9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed The Foreign Corrupt Practices Act of 1977 (“FCPA”) prohibits by a project company? the bribery of foreign government officials. The law contains two sets of provisions: (i) it prohibits corrupt payments to officials and Foreign workers employed by a project company within the United agents of foreign governments by U.S. persons; and (ii) it requires States are required to have work authorisation in accordance with accounting practices to accurately reflect payments to foreign U.S. immigration laws. This can be achieved via various “non- officials and agents. immigrant” or temporary visa categories which are typically based Among other penalties, (i) for violations of the FCPA’s anti-bribery on employer sponsorship. In addition, work authorisation might be provisions, the U.S. Department of Justice (“DOJ”) may impose obtained via permanent resident status (also known as green card criminal penalties of up to $2 million against offending firms and or immigrant status), often through sponsorship from an employer fines of up to $250,000 and imprisonment for up to five years for (which can be a difficult and lengthy process) or from sponsorship offending officers, directors, stockholders, employees and agents, by an immediate family member who is a U.S. citizen (which may and (ii) for violations of the FCPA’s accounting provisions, the be less difficult than employer sponsorship but is generally a lengthy DOJ and the Securities and Exchange Commission may bring process). civil and criminal actions, which include criminal penalties of up to $25,000,000 against offending firms and of up to $5,000,000 10 Equipment Import Restrictions and imprisonment for up to twenty years for offending directors, officers, employees or agents of such firm.

10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by 13 Applicable Law construction contractors?

13.1 What law typically governs project agreements? There may be customs duties on imported project equipment, which are determined based upon the country of origin of the equipment Project agreements may be governed by the law of any state but unless a relevant trade agreement eliminates or reduces certain of may be subject to the doctrine of lex situs (i.e. the rule that the these tariffs. law applicable to proprietary aspects of an asset is the law of the jurisdiction where the asset is located). 10.2 If so, what import duties are payable and are exceptions available? 13.2 What law typically governs financing agreements? The Harmonized Tariff System provides duty rates based on the classification of the imported equipment. New York law typically governs financing documents since the commercial laws and legal precedents in the state of New York tend to be more settled than in other states, making lenders more 11 Force Majeure comfortable. Security documents, such as the mortgage, may be legally required to be governed by the law of the state in which the collateral is located. 11.1 Are force majeure exclusions available and enforceable? 13.3 What matters are typically governed by domestic law? Yes, force majeure exclusions are available and enforceable and are applied such that one or both parties are excused from performance Please see questions 13.1 and 13.2 above. of the project agreement, in whole or in part, or are entitled to suspend performance or claim an extension of time for performance. Invocation of a force majeure clause can trigger force majeure across 14 Jurisdiction and Waiver of Immunity other related project agreements, and thus it is important to ensure that the force majeure provisions “mesh” with those found in related 14.1 Is a party’s submission to a foreign jurisdiction and project agreements. Some force majeure provisions, however, waiver of immunity legally binding and enforceable? typically will not excuse parties from any monetary payments that mature prior to the occurrence of the force majeure event. Yes, foreign law may govern a contract. However, the Foreign A typical force majeure provision will set forth a non-exhaustive Sovereign Immunities Act provides an exception to immunity list of events that constitute force majeure, which often include through waiver, which may be explicit or implicit.

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15 International Arbitration 17 Tax

15.1 Are contractual provisions requiring submission 17.1 Are there any requirements to deduct or withhold tax of disputes to international arbitration and arbitral from (a) interest payable on loans made to domestic awards recognised by local courts? or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing Yes, they are typically recognised by local courts. security?

Withholding of U.S. Federal income tax at a rate of 30% is generally USA 15.2 Is your jurisdiction a contracting state to the New York required on payments of interest, dividends, royalties and other Convention or other prominent dispute resolution amounts (not including principal on loans or distributions by conventions? corporations that are treated as returns of capital) to foreign persons unless attributable to a branch office maintained by the recipient Yes, the United States is a contracting state to the New York within the United States. The United States maintains treaties with Convention, which requires courts of contracting states to give numerous jurisdictions that reduce or eliminate these withholding effect to arbitration agreements and recognise and enforce awards taxes on amounts paid to qualified residents of the counterparty made in other states, subject to reciprocity and commercial treaty country. In addition, interest paid to foreign persons, other reservations. The United States made a reservation that it will apply than banks on loans made in the ordinary course of business, the New York Convention only to awards made in the territory of is exempt from this withholding tax if certain requirements are another contracting state and only to disputes arising out of legal satisfied, including that the loan is not in bearer form and the lender relationships (whether contractual or not) that are considered is unrelated to the borrower. commercial under the relevant national law. Even where an exemption may be available, under the Foreign The United States is also party to: (i) the Inter-American Convention Account Tax Compliance Act (“FATCA”), interest paid and, on International Commercial Arbitration (“Panama Convention”), beginning after December 31, 2018, the gross proceeds of a sale or which governs international arbitral awards where expressly agreed other disposition of any loan that can produce U.S.-source interest by the parties or where “a majority of the parties to the arbitration paid to a foreign financial institution (whether such foreign financial agreement are citizens of a state or states that have ratified or institution is a beneficial owner or an intermediary) may be subject acceded to the Panama Convention and are member States of the to U.S. Federal withholding tax at a rate of 30% unless: (x) (1) the Organization of American States” only; and (ii) the International foreign financial institution enters into an agreement with the U.S. Convention on the Settlement of Investment Disputes (“Washington Internal Revenue Service to withhold U.S. tax on certain payments Convention”), which is applicable to disputes between a government and to collect and provide to the U.S. Internal Revenue Service entity and a national of another signatory state. substantial information regarding U.S. account holders of the institution (which includes, for this purpose, among others, certain 15.3 Are any types of disputes not arbitrable under local account holders that are foreign entities that are directly or indirectly law? owned by U.S. persons), or (2) the institution resides in a jurisdiction with which the United States has entered into an intergovernmental Yes, certain disputes involving family law and criminal law are agreement (“IGA”) to implement FATCA, and complies with the not arbitrable. Claims under securities laws, Federal antitrust laws legislation implementing that IGA; and (y) the foreign financial and the civil provisions of the Racketeer Influenced and Corrupt institution provides a certification to the payor for such amounts that it Organizations Act have been found by the U.S. Supreme Court to is eligible to receive those payments free of FATCA withholding tax. be arbitrable. The legislation also generally imposes a U.S. Federal withholding tax of 30% on interest paid and, beginning after December 31, 2018, the gross proceeds of a sale or other disposition of loans that can 15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings? produce U.S.-source interest paid, to a non-financial foreign entity (whether such non-financial foreign entity is a beneficial owner or an intermediary) unless such entity (i) provides a certification that With few exceptions, such as small disputes at the local court level, such entity does not have any “substantial United States owners”, or there are no broad categories of commercial disputes that must be (ii) provides certain information regarding the entity’s “substantial resolved by arbitration, absent an agreement of the parties to that United States owners”, which will in turn be provided to the U.S. effect. Internal Revenue Service. From a U.S. tax perspective, amounts received from a guarantor or 16 Change of Law / Political Risk from the proceeds of property pledged as collateral are characterised and taxed in the same manner as amounts paid on the underlying claim would have been taxed. 16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees? 17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What Generally, no. taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

There are very few Federal incentives targeted at foreign investors or lenders.

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No Federal taxes are required for the effectiveness or registration advances). During the operations phase, the lenders lease project of an agreement. Various documentary recording and transfer taxes assets to the borrower. The borrower, in turn, makes lease payments apply at the state level. (equivalent to debt service). Unlike in traditional project financing, the lender, as the owner of the underlying assets, can be exposed to a number of potentially significant third-party liabilities, including 18 Other Matters environmental risk. The Wakala-Ijarah structure differs from the Istisna’a-Ijarah structure 18.1 Are there any other material considerations which as the borrower is employed as the lender’s agent per an agency should be taken into account by either equity (Wakala) agreement. The borrower/lender relationship is different USA investors or lenders when participating in project from the Istisna’a-Ijarah structure in that the borrower procures the financings in your jurisdiction? construction as the lender’s agent. A less commonly used structure is the Sharikat Mahassa-Murabaha The above questions and answers address most of the main material structure. Under this structure, the borrower and the lenders enter considerations for project financings governed by New York law in into a joint venture (Sharikat Mahassa) agreement which is not the United States. disclosed to third parties. A Murabaha transaction is one in which a bank finances the purchase of an asset by itself purchasing that 18.2 Are there any legal impositions to project companies asset from a third party and then reselling that asset at a profit to issuing bonds or similar capital market instruments? the borrower pursuant to a cost-plus-profit agreement, akin to a Please briefly describe the local legal and regulatory loan. Each member of the joint venture holds Hissas (shares) in requirements for the issuance of capital market the joint venture purchased by capitalising the Sharikat Mahassa. instruments. The Murabaha portion of the transaction involves sales of Hissas from time to time by the lenders to the borrower in compliance with Project bonds are securities and therefore are subject to the various Shari’ah law. U.S. securities offering and fraud laws (principally the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 19.2 In what circumstances may Shari’ah law become 1934). Under the Securities Act, securities in the United States must the governing law of a contract or a dispute? Have be sold pursuant to an effective registration statement filed with there been any recent notable cases on jurisdictional the U.S. Securities Exchange Commission (“SEC”) or pursuant issues, the applicability of Shari’ah or the conflict of to an exemption from filing. Very few, if any, project bonds are Shari’ah and local law relevant to the finance sector? sold in SEC-registered offerings. The most common exemptions are offerings pursuant to Section 4(a)(2) of the Securities Act Generally, under U.S. state and Federal law, contracting parties and Rule 144A and Regulation S thereunder. Rule 144A project may select any law as the governing law of the contract so long bond offerings require a comprehensive offering document that as it is sufficiently defined and capable of enforcement. However, describes in detail the project, the project and finance documents, there is limited case law and no conclusive rulings by U.S. courts the risks associated with the project along with a summary of the on whether Shari’ah law would be recognised as a system of law bond terms, a description of project modelling, limited information capable of governing a contract. about the sponsors and offtakers and various other disclosures. The In the U.S. bankruptcy court case of In re Arcapita Bank, B.S.C.(c), underwriters and their legal counsel perform due diligence (in order et al., Case No. 12-11076 (SHL) (Bankr. S.D.N.Y.), an investor of for counsel to provide 10b-5 statements) to mitigate securities law the debtors objected to the debtors’ motion to approve debtor-in- fraud liability. Offerings solely under Regulation S and Section possession and exit financing, asserting, among other things, that 4(a)(2) typically have much less disclosure and diligence and the the financing was not Shari’ah-compliant. In statements made disclosure is more similar to that used in a typical bank deal. on the record, the court noted that the financing agreement was governed by English law and expressly provided that no obligor was permitted to bring a claim based on Shari’ah compliance of the 19 Islamic Finance finance documents. The court then appeared to adopt the English courts’ approach of avoiding ruling or commenting on compliance of an agreement with Shari’ah law, citing a recent English court 19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha case that found that, irrespective of Shari’ah compliance, Shari’ah instruments might be used in the structuring of an law was not relevant in determining enforceability of a financing Islamic project financing in your jurisdiction. agreement governed by English law, and that Shari’ah principles are far from settled and subject to considerable disagreement among While Islamic project financing is relatively new to the U.S. market, clerics and scholars. However, the precedential value of the Arcapita there are generally three types of financing structures used in bankruptcy court’s refusal to consider whether the financing was Islamic project financing globally: (i) Istisna’a (or Istina’a)-Ijarah Shari’ah-compliant may be limited, given that the district court (construction contract-lease); (ii) Wakala-Ijarah (agency-lease); and dismissed the objector’s appeal of the bankruptcy court’s approval (iii) Sharikat Mahassa-Murabaha (joint venture-bank purchase and of the financing (along with an appeal asserted by the objector of sale) structures. confirmation of the debtors’ chapter 11 plan of reorganisation) as Under the Istisna’a-Ijarah structure, which is believed to be the more equitably moot. popular structure in Islamic project financing, anIstisna’a instrument (similar to a sales contract) is usually applied to the construction 19.3 Could the inclusion of an interest payment obligation phase and an Ijarah instrument (similar to a lease-to-own agreement) in a loan agreement affect its validity and/or is usually applied to the operations phase. During the construction enforceability in your jurisdiction? If so, what steps phase, the borrower procures construction of project assets and could be taken to mitigate this risk? then transfers title to assets to the lenders. As consideration, a lender makes phased payments to the borrower (equivalent to loan Generally, no.

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Acknowledgment The authors would like to thank James C. Liles (jliles@milbank. com) and Michael E. Kaufmann ([email protected]) for their substantial assistance in preparing this chapter. James is a regulatory advisor and Michael is special counsel; both are based in the Washington, DC office of Milbank, Tweed, Hadley & McCloy LLP and are members of the firm’s Global Project, Energy and Infrastructure Finance Group. USA

Eric F. Silverman Simone M. King Milbank, Tweed, Hadley & McCloy LLP Milbank, Tweed, Hadley & McCloy LLP 28 Liberty Street 28 Liberty Street New York, NY 10005 New York, NY 10005 USA USA

Tel: +1 212 530 5648 Tel: +1 212 530 5145 Email: [email protected] Email: [email protected] URL: www.milbank.com URL: www.milbank.com

Eric Silverman is a partner in the Global Project, Energy and Simone King is an associate in the New York office of Milbank, Tweed, Infrastructure Finance Group. He was a founder and former chairman Hadley & McCloy and a member of the firm’s Global Project, Energy of the International Private Energy Association. and Infrastructure Finance Group. He has extensive experience in project development and financing of Ms. King’s primary focus is on domestic and cross-border energy major energy, power and infrastructure projects in the U.S. and overseas. and infrastructure project and structured financings, acquisitions and His experience includes representing multinational corporations, private investment transactions. equity funds and other project participants in greenfield projects and Her recent experience includes the representation of: the international acquisitions/restructuring/recapitalisation transactions. He has also lenders, comprising commercial banks, institutional lenders and Korean advised hedge funds, bondholders and other investors in connection funds in an approximately $1 billion financing for the development and with acquisitions and divestitures of infrastructure assets and distressed construction of Lackawanna Energy Center in Pennsylvania; the lenders companies in the energy, telecoms and natural resources sectors. in an approximately $1.6 billion refinancing of a U.S.-based global ports Mr. Silverman has represented international energy companies, project operator; the sponsor in an approximately $1.6 billion acquisition (and sponsors and financial investors (including banks, official credit agencies subsequent financing) of six natural gas-fired, combined-cycle power and underwriters) in connection with: the development, acquisition and plants; a tax-equity investor in connection with the financing of a wind financing of independent power producer (“IPP”) projects, upstream oil project in Western Texas; the lenders and purchasers in connection and gas, LNG, petrochemical, refinery, pipeline and other major energy with the refinancing of a diverse portfolio of eight power plants; the projects; telecommunications projects including global satellite telecom, purchasers and issuing banks in an approximately $443 million private fibre optic networks and other telecom systems; natural resources, placement and $47 million credit facility for the construction of the environmental facilities and transportation infrastructure projects; and 313 MW EIF Pio Pico Project in San Diego County, California; and a others. His financing experience includes Rule 144A project bonds, sponsor consortium in a bid for the development and financing of a securitisations, private equity funds, project leasing and other financing floating LNG regasification and storage unit to be located in Uruguay. structures. Ms. King received her B.A. from Macalester College and her M.A., with Distinction, from the University of London: School of Oriental and African Studies. She earned her J.D. from the University of Virginia. Prior to law school, she worked in international trade policy with the U.S. Department of Commerce.

Milbank, Tweed, Hadley & McCloy LLP is a leading international law firm that provides innovative legal services to clients around the world. Founded in New York 150 years ago, Milbank has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, São Paulo, Seoul, Singapore, Tokyo and Washington, DC. Milbank’s lawyers collaborate across practices and offices to help the world’s leading commercial, financial and industrial enterprises, as well as institutions, individuals and governments, achieve their strategic objectives. Project Finance is among our firm’s core practice areas and our Project, Energy and Infrastructure Finance Group comprises more than100 dedicated Project, Energy and Infrastructure Finance attorneys, including 20 partners, in our offices worldwide. We operate on an integrated basis with project finance teams in each of our offices in the US, São Paulo, London, Frankfurt, Seoul, Singapore, Hong Kong andTokyo. From a first-of-its-kind toll road in Latin America, to a wireless telecom build-out in Southeast Asia to the largest wind and solar farms in the world, clients recognise our Project, Energy and Infrastructure Finance Group as the leading choice for the financing and development of the most critical and pioneering infrastructure projects across the globe. Over the past three years, Milbank has closed more than 140 project financings, which raised more than US$125 billion for infrastructure projects worldwide.

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