The Wolf Theiss Guide to: Public Debt Management in Central, Eastern & Southeastern Europe
Wolf Theiss is one of the largest and most respected law firms in Central, Eastern and Southeastern THE Europe (CEE/SEE). Since starting out in Vienna over 50 years ago, we have grown to a team of several hundred people, with offices throughout the region. WOLF THEISS During that time, we have worked on many cases that have broken new ground. GUIDE TO: We concentrate our energies on a unique part of the world: the complex, fast-moving markets of the CEE/ Public Debt Management SEE regions. This is a fascinating area, influenced by a variety of cultural, political and economic trends. in Central, Eastern & We enjoy analysing and reflecting on those changes, drawing on our experiences working on a wide range Southeastern Europe of domestic and cross-border cases. Sovereign bond issues, derivatives and www.wolftheiss.com finance transactions with public bodies Guide to: Public Debt Management
THE WOLF THEISS GUIDE TO: Public Debt Management in Central, Eastern & Southeastern Europe Sovereign bond issues, derivatives and finance transactions with public bodies
This 2013 Wolf Theiss Guide To: Public Debt Management in Central, Eastern & Southeastern Europe is intended as a practical guide to the general principles and features of the basic legislation and procedures in the countries included in the publication.
While every effort has been made to ensure that the country guides were accurate when finalized, they should be used only as a general reference guide and should not be relied upon as definitive for planning or making definitive legal decisions. In these rapidly changing legal markets, the laws and regulations are frequently revised, either by amended legislation or by administrative interpretation.
Status of information: Current as of 1 November 2013
Conception, design, and editing: WOLF THEISS Rechtsanwälte GmbH & Co KG, Attorneys-at-Law Schubertring 6, 1010 Vienna, Austria www.wolftheiss.com
© 2013 WOLF THEISS Rechtsanwälte GmbH & Co KG. All Rights Reserved.
1 Guide to: Public Debt Management
TABLE OF CONTENTS
FOREWORD 3
COUNTRY CHAPTERS 4
ALBANIA 4
AUSTRIA 9
BOSNIA AND HERZEGOVINA 17
BULGARIA 24
CROATIA 31
CZECH REPUBLIC 37
HUNGARY 44
ROMANIA 52
SERBIA 60
SLOVAKIA 68
SLOVENIA 75
UKRAINE 82
CONTACT INFORMATION 90
OUR OFFICES 91
2 Guide to: Public Debt Management
FOREWORD
In the aftermath of the Financial Crisis of 2009, the issuance of public debt has become an increasingly popular way of financing vital governmental activities. Whereas the instruments remain similar in the CEE/SEE region, procedures and regulations forming the framework of such actions can differ considerably from one country to another.
With this "Wolf Theiss Guide on Public Debt Management in Central, Eastern & Southeastern Europe" our experts intend to provide a consolidated overview of the procedures and regulations in the following countries: Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Serbia, Slovakia, Slovenia and Ukraine.
We hope that this Guide helps our clients and interested participants by providing succinct and useful information in an area of law which – at least so far – is still rather remote from harmonization and signification.
While every effort has been made to ensure that the information contained in the Guide is accurate, the Guide should be used as a general reference tool only as the legal landscape evolves constantly especially in view of EU legislation and frequent amendments of local laws. In these rapidly changing legal markets, the laws and regulations are frequently revised, either by amended legislation or by administrative interpretation.
Finally, I would like to thank each of the contributors to this Wolf Theiss Public Debt Management Guide for their valuable insights into their countries' laws and structures.
Claus Schneider Partner Wolf Theiss
3 Guide to: Public Debt Management in Albania
COUNTRY CHAPTERS
ALBANIA
By Endrit Shijaku
1. GENERAL 5 1.1 Legal Framework 5 1.2 Restrictions in public debt transactions 5 1.3 Authority 6
2. GOVERNMENT BONDS 6 2.1 Issue process 6 2.2 Restrictions on trading 6 2.4 Further requirements 7
3. FOREIGN EXCHANGE REGULATIONS 7
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 7
5. TAXATION 8
6. DOCUMENTATION 8 6.1 Choice of law 8 6.2 Language requirements 8 6.3 Legal counsel 8
7. ENFORCEMENT AND INSOLVENCY 8 7.1 Enforcement against the State and Municipalities 8 7.2 Insolvency 8
4 Guide to: Public Debt Management in Albania
1. GENERAL
1.1 Legal Framework
The management of the public debt incurred by the State is regulated under the Law "On state borrowing, state indebtness and state loan guarantees in the Republic of Albania" (Ligji per huamarrjen shteterore borxhin shteterore dhe garancite shteterore te huase ne Republiken e Sqhiperise).
The management of the public debt incurred by local authorities is governed by the law "On local government borrowing" (Ligji per huamarrjen e qeverisjes vendore).
The central government and the local government authorities are generally responsible for the management of their funds and their annual budget, including the incurrence of debt. However, various provisions on a constitutional and statutory level also have an impact on the budget planning of the State and the local government units.
1.1.1 State
On a State level, financial debts may only be incurred by the Minister of Finance (i) on the basis of the respective annual Budget Law or (ii) to finance spending incurred through force majeure or emergencies. A State guarantee of indebtedness can also only be issued on the basis of the relevant annual budged law.
1.1.2 Local government units
Local government units are responsible for autonomously deciding on and managing their budgets on the basis of, inter alia, laws governing their activities and their acts.
The law on local government borrowing contains various provisions on the taking out of loans. According to this act, the supreme body competent to decide on the taking out of long-term loans is generally the Local Government Unit Council (Këshilli i Njesise se Qeverisjes Vendore). In respect of long-term loans, an approval of the Minister of Finance is also required. In general, when deciding whether to approve the loan the Minister of Finance should only consider compliance with the procedural rules and the fiscal rules imposing limitations on the amount of local government borrowing. As an exception, however, the Minister of Finance may use its discretion when considering approval of the local government borrowing in the following circumstances: . the loan is being taken out to refinance another loan; . the loan is being taken out in international markets; or . the loan is being taken out by a local government unit which has experienced financial difficulties within the five past years.
1.2 Restrictions in public debt transactions
Albanian local government units may conclude financial transactions, e.g. issue government bonds, as a way of public debt management. Restrictions and limitations may be found in the laws governing these entities.
On a State level, the major task is to secure the financial solvency of the State at all times.
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Accordingly, debt shall only be incurred under conditions that are optimal in the long run, taking a rather risk averse approach.
1.3 Authority
Compliance with internal decision making rules under public law is important. However, although there is no case law to confirm this, it is accepted amongst academics that generally any violation of internal fiscal rules will not usually result in the invalidity of the relevant transaction. Violations of rules regarding representation may however result in the invalidity of the respective transaction.
1.3.1 State
Generally, the Minister of Finance is responsible under the law on state borrowing, state indebtedness and state guarantee for finance management, on the basis of strategies approved by the Council of Ministers.
However, where debt is to be incurred on the basis of a so called "international agreement" the transaction documents must be signed by the Minister of Finance and the Minister responsible for the use of proceeds and countersigned by the Minister of Foreign Affairs based on authority given in writing by the Prime Minister. The relevant documents must then be ratified by Parliament. Although, the term "international agreement" has not been expressly defined in Albanian law, in practice this term is invoked in relation to all agreements between Albania and foreign entities.
1.3.2 States and Municipalities
The conclusion of financial transactions by local government units is made by the chair of the relevant unit. In case of long-term debt the approval of the Local Government Unit Council is also required as well as the approval of the Minister of Finance.
2. GOVERNMENT BONDS
2.1 Issue process
Except for the issuance of Eurobonds that are typically governed by English law, the Albanian State issues government bonds which are governed by Albanian law mainly through an auction procedure. In this case, the State sells government bonds by auction to the public. The bids of those institutions or members of the public providing the lowest rate of return will win. The auction is organised and carried out by the Bank of Albania.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Albanian government bonds. The trade in government bonds generally takes place over-the-counter (OTC).
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Generally, the form and representation of securities is regulated by the agreements between the Bank of Albania and the Ministry of Finance.
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The Minister of Finance can incur debt through dematerialised notes or notes in book-entry form. In Albania, bonds are typically issued by the Republic of Albania with the Bank of Albania being the central depositary.
Government bonds are considered securities, however, certain exceptions regarding the requirement for the prospectus and information requirements are in place in relation to government bonds.
2.3.2 Clearing
There is no legal requirement to use local clearing systems, however there are agreements in place between the Bank of Albania and the Ministry of Finance according to which the clearing of Albanian leke denominated bonds is made through the Bank of Albania.
2.3.3 Public offer
No Prospectus needs to be published in Albania for such public offer.
2.3.4 Listing
Sovereign bonds are exempt from the prospectus obligation regardless of their maturity.
2.4 Further requirements
Bonds issued by local authorities, e.g. Municipalities, or Local Rural Councils are not exempt from the prospectus obligation and therefore require the prior publication of a prospectus.
Government bonds fall within the definition of "securities" pursuant to Section 1 of the Securities Law (Ligji per Titujt) and may be traded on the stock exchange. However, it is likely that a listing prospectus will be required.
Bonds issued by local authorities may also be listed on the stock exchange.
To date however both local and government bonds are traded over the counter.
3. FOREIGN EXCHANGE REGULATIONS
There are no general restrictions on payments by Albanian entities outside Albania. In cases of payments made by private entities from Albania abroad notification requirements may be imposed under which the source of income should be declared.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Albanian public sector entities are not automatically qualified as professional clients under the Securities law (Ligji per Titujt) which embraces much of the principles of the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). It is therefore recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
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5. TAXATION
In case of bonds it should be noted that payments of interest which are effected by the Bank of Albania are generally subject to a withholding tax of 10%. The term "interest" most importantly covers recurring interest, broken-period interest and redemption premiums in case of zero-coupon bonds. Depending on the circumstances, this withholding tax either serves as a prepayment or as the final payment of tax. Certain exemptions from withholding tax exist.
Albania is party to several treaties for the avoidance of double taxation and specific advice should be sought in cases of bonds purchased by non-Albanian residents for the avoidance of double taxation.
6. DOCUMENTATION
6.1 Choice of law
There are no constraints against the choice of a foreign governing law other than the general limitations set forth in the Albanian Private International Law (Ligji per te Drejten Nderkombtare Private) (which largely mirror the limitations in the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 ("Rome I Regulation").
Choices of jurisdiction are binding on Albania, subject to the Albanian Private International Law (Ligji per te Drejten Nderkombtare Private) and the Convention concluded on 1 February 1971 on jurisdiction and the enforcement of judgments in civil and commercial matters and the Albanian Civil Procedure Code.
6.2 Language requirements
Finance transactions may be documented in a language other than the official language. As a general rule, however, they are in practice always either translated into Albanian, or concluded in Albanian.
6.3 Legal counsel
Generally, in respect of transactions in international capital markets the government receives advice from law firms. Whilst in transactions relating to bonds denominated in Albanian Leke it is the legal department of the Ministry of Finance that generally provides all the legal advice.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the State and Municipalities
Generally, claims against the State and Local Government Units are enforceable in accordance with the provisions of the Civil Procedural Code (Kodi i Procedures Civile). However, enforcement against the State and Local Government Units is only possible with respect to assets which are not required for the protection of the public interest.
7.2 Insolvency
Albanian law does not contain explicit legal stipulations on whether a Local Government Unit can go bankrupt. There is nearly no case law or legal literature on the possibility of an insolvency of the State.
8 Guide to: Public Debt Management in Austria
AUSTRIA
By Claus Schneider, Alexander Haas, Kurt Retter, Ekkehard Diregger (public law), Niklas Schmidt and Eva Stadler (tax).
1. GENERAL 10 1.1 Legal Framework 10 1.2 Restrictions in public debt transactions 11 1.3 Authority 11
2. GOVERNMENT BONDS 12 2.1 Issue process 12 2.2 Restrictions on trading 13 2.3 Format of Securities, Offer, Trading 13 2.4 Further requirements 14
3. FOREIGN EXCHANGE REGULATIONS 14
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 14
5. TAXATION 14
6. DOCUMENTATION 15 6.1 Choice of law 15 6.2 Language requirements 16 6.3 Legal counsel 16
7. ENFORCEMENT AND INSOLVENCY 16 7.1 Enforcement against the Federal State, its States and Municipalities 16 7.2 Insolvency 16
9 Guide to: Public Debt Management in Austria
1. GENERAL
1.1 Legal Framework
According to Austrian constitutional law (Bundesverfassungsgesetz; "B-VG"), the federal system is constituted of the . Federal State (Bund); . nine States (Länder); and . Municipalities (Gemeinden).
These three types of territorial communities (Gebietskörperschaften) are generally responsible for the management of their funds and their annual budget, including the incurrence of debt. However, various provisions on a federal constitutional and statutory level also have an impact on the budget planning of the States and the Municipalities.
The territorial communities have the duty to safeguard macroeconomic equilibrium and to aim for sustainable, controlled budgets. Based on EU law, the Austrian Stability Pact (Stabilitätspakt; "SP") provides for a coordination of budgeting by the territorial communities including, inter alia, the surveillance of the development of budgets, public deficit and public debt.
1.1.1 Federal State
On a federal level, financial debts may only be incurred by the Minister of Finance on the basis of (i) the respective annual Federal Budget Act (Bundesfinanzgesetz; "BFG") or (ii) entitlements on the basis of a special law passed by the first House of Parliament (Nationalrat). The BFG is a special act of Parliament containing the annual budget based on the Federal Accounting Act (Bundeshaushaltsgesetz; "BHG"). Financial debts (Finanzschulden) are defined by the BHG as all monetary liabilities (Geldverbindlichkeiten) that are entered into by the Federal State in order to receive liquid funds (Geld). Financial debts may especially be incurred through the raising of loans (Darlehen) against treasury notes or other certificates of indebtedness (sonstige Schuldverschreibungen).
1.1.2 States
State legislative bodies (Landtage) are responsible for the enactment of the budgets of the nine Austrian States. In contrast to federal law, State constitutions do not provide any detailed provisions for the establishment of such budgets. It is generally held that principles of federal budget law are also applicable to budgeting by the States.
Under the Finance Constitutional Act (Finanz-Verfassungsgesetz; "F-VG"), State legislative bodies are responsible for regulating, e.g. the issuance of government bonds of (i) States; (ii) Municipalities; and (iii) associations of Municipalities (Gemeindeverbände). The Federal Government (Bundesregierung) may raise objections against general laws providing for the issuance of government bonds as well as laws specifically regulating the issuance of government bonds. In case of such an objection, the relevant State legislative body may confirm its previous decision with a higher quorum. A joint committee of the First House (Nationalrat) and the Second House (Bundesrat) of the federal Parliament has the final decision on such objections.
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1.1.3 Municipalities
Municipalities are responsible for autonomously deciding on and managing their budgets on the basis of, inter alia, the F-VG, specific regulations of the Federal State and State laws governing their activities (so-called Municipality Acts (Gemeindeordnungen) or Town Acts (Stadtrechte). In the absence of specific provisions, it is held that general principles of federal budget law are applicable to budgeting by Municipalities.
Municipality Acts and Town Acts usually contain various provisions on the taking out of loans (Darlehensaufnahme). According to these acts, the supreme body competent to decide on the taking out of loans exceeding a certain amount is generally the Municipality Council (Gemeinderat). Depending on the amount of the loan, an approval of the supervisory authority (a State body) may also be required. Under applicable laws, (i) the amount of loans needs to be limited and (ii) the interest payment as well as the interest rate must not endanger the fulfilment of legal and contractual duties of the Municipality.
The City of Vienna is subject to special rules by virtue of its qualification as both a State and a Municipality under Austrian constitutional law.
1.2 Restrictions in public debt transactions
Austrian territorial communities may conclude financial transactions, e.g. issue government bonds or conclude derivatives, as a way of public debt management. Restrictions and limitations may be found in laws governing these entities.
On a federal level, the major task is to secure the financial solvency of the Federal State at all times. Accordingly, debt shall only be incurred under conditions that are optimal in the long run, taking a rather risk averse approach. Federal debt policy is, inter alia, based on the following criteria (other territorial communities follow similar policies): . minimization of the refinancing risk; . high percentage of fixed interest rates (currently around 95%); . diversity of refinancing sources; . low foreign currency exposure (currently 98% EUR positions; all new foreign currency exposures shall be hedged); . achievement of a good standing in the market; and
. use of derivative instruments in order to reduce risks (e.g. foreign exchange rates, interest rates) in combination with a strict risk management.
1.3 Authority
Compliance with internal decision making rules under public law is particularly important in this context since – according to consistent case law – any violation of such rules or of the rules regarding representation will usually result in the invalidity of the relevant transaction.
This means that if a contract is signed by a signatory generally having the (external) power to represent the territorial community, but the required (internal) decision-making process has not been observed, the contract will be null and void and unenforceable. In the recent past, this has led to a number of disputes where public bodies have asserted that the relevant internal decision-making rules have not been complied with in connection with derivative transactions and that therefore the underlying contracts are null and void. Under certain (albeit limited) circumstances, the other party's good faith may be protected.
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1.3.1 Federal State
Generally, the Federal Minister of Finance is responsible under the BHG for finance management.
However, the Federal Financing Act (Bundesfinanzierungsgesetz; "BFinG"), inter alia, transfers responsibility for the Federal State's debt management (including the financing of the Federal State) to the Austrian Federal Financing Agency (Österreichische Bundesfinanzierungsagentur, the "ÖBFA"). Still, as stated above, each conclusion of a financial transaction, e.g. the issuance of government bonds, requires the authorisation of the federal legislator.
The ÖBFA is a limited liability company established by the Federal Minister of Finance under the BFinG that acts in the name and for the account of the Federal State. The managing board of the ÖBFA consists of at least two persons with individual power of representation appointed by the Federal Minister of Finance. Decisions on the selection of the currencies and the types of remuneration of financial instruments need to be unanimous. The supervisory board consists of five members.
It should be noted that the provisions of the Banking Act (Bankwesengesetz), the Securities Supervision Act (Wertpapier-aufsichtsgesetz, "WAG") and the Trade Act (Gewerbeordnung) are not applicable to the ÖBFA.
1.3.2 States and Municipalities
The conclusion of financial transactions is not regulated in similar detail for other territorial communities. Generally, territorial communities may decide on the financial management of their funds (including the taking out of loans and the issuance of government bonds). As stated above, the issuance of government bonds or the taking out of loans needs to be based on a law of the relevant State legislative body.
2. GOVERNMENT BONDS
2.1 Issue process
Apart from the issuance of short-term Austrian Treasury Bills through ATB-primary dealers (ATB- Primärhändler) which is governed by English law, the Austrian Federal State issues federal government bonds mainly through . an auction procedure (Auktionsverfahren); or . the so-called syndicate procedure (Syndikatsverfahren).
In the first case, the Federal State sells federal government bonds by auction to a defined circle of financial institutions. These 22 institutions have to bid for at least 1/22 of the overall volume. The bids of institutions providing the lowest rate of return will win. The auction is carried out with the Austrian Direct Auction System ("ADAS") of the Austrian Control Bank (Österreichische Kontrollbank; "OeKB"). The majority of federal government bonds are sold by auction. The ÖBFA is not in a position to influence the auction. Th"e 22 institutions also act as distributors of federal government bonds, which are based on contracts under Austrian law.
In the second case, federal government bonds may be issued with the help of a consortium of banks (syndicate) under a Debt Issuance Programme ("DIP"). Only banks that participate in the auction procedure may act as lead manager or co-lead manager. The composition of the consortium can vary between issuances. The consortium of banks has to buy the whole volume of government bonds and sells them to other investors.
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Issuances in other currencies are carried out within a European Medium Term Note Programme. The EMTN Programme is a framework agreement for international issuances under English law. For issuances in Australian Dollars, the Federal State has established an Australian Dollar Medium Term Note Programme, governed by Australian law.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Austrian government bonds. The trade in federal government bonds takes place over electronic platforms as well as over-the-counter (OTC).
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Generally, the form and representation of securities is regulated by the Depository Act (Depotgesetz, "DepG"). Section 1 para 1 DepG defines the kinds of securities to which the DepG applies. Government bonds are not explicitly included in such definition. However, because notes (Teilschuldverschreibungen), bank bonds (Bankschuldverschreibungen), other negotiable instruments, and also "other fungible securities" are covered by the scope of the DepG, government bonds are expected to fall within the scope of the DepG.
The DepG does not allow dematerialised notes or notes in book-entry form only. In Austria, bonds are typically issued in the form of global notes. The global note is deposited with the OeKB acting as central securities depositary until the obligations of the issuer have been satisfied and the noteholders receive co- ownership participations or rights in the global note which are transferable in accordance with the general business conditions of the central securities depositary.
Federal debt obligations (Bundesschuldbuchforderungen) are securities where, according to the Regulation on Federal Debt Obligations (Federal Law Gazette 162/1948), the global note is replaced by a book-entry. As the legal basis for the Regulation on Federal Debt Obligations, the Währungsschutzgesetz, was repealed in 2000, Federal Debt Obligations cannot be issued anymore.
2.3.2 Clearing
There is no legal requirement to use local clearing systems.
Typically, sovereign bonds are represented by a global note, and noteholders have no right to receive definitive notes. The notes are signed by authorised signatories of the ÖBFA and the Austrian Court of Audit (Rechnungshof) and - if governed by Austrian law - are kept in custody by OeKB in its function as a central securities depository (Wertpapiersammelbank).
No Prospectus needs to be published in Austria; neither for the public offer nor for a stock exchange listing of sovereign bonds.
2.3.3 Public offer
Sovereign bonds with a maturity of less than 12 months do not fall under the definition of securities pursuant to Section 1 para 1 No. 4 of the Capital Market Act (Kapitalmarktgesetz, "KMG") but constitute investments (Veranlagungen) in accordance with Section 1 para 1 No. 3 KMG. However, according to Section 1 para 1 No. 3 last sentence KMG, such money market instruments (instruments with a maturity of less than 12 months) are exempt from the prospectus obligation.
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Other securities issued by the Federal State or States are exempt from the prospectus obligation according to Section 3 para 1 No. 1 KMG.
Securities issued by regional or local authorities, e.g. Municipalities, associations of Municipalities or public agencies have not been exempt from the prospectus obligation by the KMG and therefore require the prior publication of a prospectus.
2.3.4 Listing
According to Section 75 para 2 of the Stock Exchange Act (Börsegesetz, "BörseG") certain exemptions from the prospectus obligation pursuant to the KMG, inter alia, the exemption for securities issued by the Federal State or States apply with respect to the listing on a regulated market on the Vienna Stock Exchange. Listing of such instruments is effected by listing applications signed by a stock exchange member (listing agent).
Sovereign bonds with a maturity of less than 12 months ("money market instruments") fall within the definition of "financial instruments" pursuant to Section 1 No. 6 of the WAG and may be traded on the Vienna Stock Exchange (Section 1 para 1 BörseG). However, as money market instruments are not covered by the exemption pursuant to Section 75 para 2 BörseG, it is likely that a listing prospectus would be required.
2.4 Further requirements
Regardless of whether publicly offered or listed, and irrespective of the maturity, sovereign bonds offered in Austria are subject to the obligation to submit a notice to the OeKB in its function as notification office (Meldestelle) according to Section 13 para 1 KMG.
3. FOREIGN EXCHANGE REGULATIONS
There are no general restrictions on payments by Austrian public entities.
Austria is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are unenforceable. Accordingly, we understand that in such a case payment claims against Austria could not be enforced.
Furthermore, pursuant to the Austrian Foreign Exchange Act (Devisengesetz, "DevG") the Austrian National Bank (Österreichische Nationalbank, "OeNB") is vested with the power to issue restrictions on foreign exchange as well as on domestic currency.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Austrian public sector entities are not automatically qualified as professional clients under the WAG which implements the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). It is therefore recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
5. TAXATION
In case of bonds it should be noted that investment income (Einkünfte aus Kapitalvermögen) is generally subject to a withholding tax at a flat rate of 25% in Austria if paid by an Austrian paying agent (auszahlende
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Stelle). The term "investment income" is defined in Section 27(1) of the Austrian Income Tax Act (Einkommensteuergesetz) and comprises (i) income from the letting of capital (Einkünfte aus der Überlassung von Kapital) pursuant to Section. 27 (2) of the Austrian Income Tax Act, including interest; (ii) income from realised increases in value (Einkünfte aus realisierten Wertsteigerungen) pursuant to Section 27(3) of the Austrian Income Tax Act, including gains from the sale, redemption and other realisation of assets that lead to income from the letting of capital, zero coupon bonds and also broken-period interest; and (iii) income from derivatives (Einkünfte aus Derivaten) pursuant to Section 27(4) of the Austrian Income Tax Act.
The term "paying agent" is defined in Section 95(2)(1)(b) of the Austrian Income Tax Act and essentially means an Austrian branch of an Austrian credit institution, an Austrian branch of a non-Austrian credit institution and (in certain exceptional cases) an Austrian issuer. Depending on the circumstances, this withholding tax either serves as a prepayment or as the final payment of tax. Certain exemptions from withholding tax exist. In addition, according to Section 94 (13) of the Austrian Income Tax Act, non-residents of Austria can prevent the withholding tax from being deducted.
Payments of investment income which are not effected by an Austrian paying agent or an Austrian custodian agent are not subject to the 25% withholding tax mentioned above, but have to be contained in the investor's (corporate) income tax return.
Pursuant to the Austrian EU Withholding Tax Act (EU-Quellensteuergesetz) – implementing Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments – payments of interest which are effected by an Austrian paying agent (Zahlstelle) to a beneficial owner who is an individual resident in another Member State (or in certain dependant or associated territories) are generally subject to a withholding tax of 35% in Austria.
Interest is defined in Section 6 of the Austrian EU Withholding Tax Act as interest paid or credited to an account, relating to debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and, in particular, income from bonds or debentures as well as interest accrued or capitalised at the sale, refund or redemption of the debt claims referred to above.
The term "paying agent" is defined in Section 4 of the Austrian EU Withholding Tax Act as an economic operator which pays interest to or secures the payment of interest for the immediate benefit of the beneficial owner, whether the operator is the debtor of the debt claim which produces the interest or whether the operator is charged by the debtor or the beneficial owner with paying interest or securing the payment of interest. Certain exemptions from this withholding tax exist. Payments of interest which are not effected by an Austrian paying agent are not subject to the 35% withholding tax mentioned above.
6. DOCUMENTATION
6.1 Choice of law
There are no constraints against the choice of a foreign governing law other than those contained in the "Rome I Regulation" (Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations. The short- term Austrian Treasury Bills and the EMTN Programme are governed by English law, the Australian Dollar Medium Term Note Programme is based on Australian law (please also see question 3 above regarding issuances based on foreign law).
Choices of jurisdiction are binding on Austria, subject to Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ("Brussels I Regulation") and, to the extent outside the scope of the regulation, by the Convention of 16 September 1988 on jurisdiction and the enforcement of judgments in civil and commercial matters ("Lugano Convention") intentional treaties, and Austrian national law on civil procedure. Choices of courts
15 Guide to: Public Debt Management in Austria outside the European Union or the European Free Trade Association (except Liechtenstein) are, to the extent exclusive, likely to be unenforceable.
6.2 Language requirements
Finance transactions may be documented in a language other than the official language.
6.3 Legal counsel
Generally, the Federal State is advised by the "Attorney General Office" (Finanzprokuratur) in legal matters, save for where legal advice is rendered by other federal bodies or legal advisors (Section 3 para 2 of the Federal Act on the Attorney General, Bundesgesetz über die Finanzprokuratur, Federal Gazette 110/2008). In the context of government bond issues, the Attorney General Office regularly advises the Federal State on Austrian law.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, claims against the Federal State, the States and Municipalities are enforceable in accordance with the provisions of the Enforcement Act (Exekutionsordnung, "EO").
However, enforcement against the Federal State, the States and Municipalities is only possible with respect to assets which are not required for the protection of public interest ("Enforceable Assets"). The Enforceable Assets have to be determined by formal notification in writing by the administrative authority.
7.2 Insolvency
Austrian law does not contain explicit legal stipulations on whether a territorial community can go bankrupt. There is virtually no case law and only little legal literature on the possibility of an insolvency of the Federal State.
Predominant scholarly writing seems to hold that the Federal State cannot be subject to insolvency proceedings. In contrast, specific scholars hold the opinion that insolvency rules do apply to the States, even though such application would raise major practical and legal issues. Case law dating back to 1930 confirms that Austrian insolvency rules do apply to Municipalities.
16 Guide to: Public Debt Management in Bosnia and Herzegovina
BOSNIA AND HERZEGOVINA
By Naida Custovic and Lana Deljkic.
1. GENERAL 18 1.1 Legal Framework 18 1.2 Restrictions in public debt transactions 19 1.3 Authority 19
2. GOVERNMENT BONDS 20 2.1 Issue process 20 2.2 Restrictions on trading 21 2.3 Format of Securities, Offer, Trading 21
3. FOREIGN EXCHANGE REGULATIONS 22
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 22
5. TAXATION 22
6. DOCUMENTATION 22 6.1 Choice of law 22 6.2 Language requirements 23 6.3 Legal counsel 23
7. ENFORCEMENT AND INSOLVENCY 23 7.1 Enforcement against the Federal State and Entitites 23 7.2 Insolvency 23
17 Guide to: Public Debt Management in Bosnia and Herzegovina
1. GENERAL
Pursuant to the Dayton Peace Accord, BiH has several levels of political and administrative structuring. The country is divided into two entities: the Federation of Bosnia and Herzegovina ("FBiH") and Republika Srpska ("RS"). Furthermore, there is also a special autonomous unit – Brcko District ("BD") – which officially belongs to both entities, but is governed by neither, and functions under a decentralized system of local government. In each of the FBiH and RS entities essentially different legal regimes apply. Nevertheless, the respective legal regimes are to a large extent harmonized; some legal matters are regulated by State laws applicable in all parts of the country, while in many aspects the relevant laws regulating a particular matter in different parts of the country have no substantial differences and provide for identical legal frameworks.
FBiH is further divided into 10 cantons, each of which has its own competencies and legislation within the country's constitutional framework. Each canton consists of several municipalities and cities. In contrast to FBiH, lower governmental levels in RS include only municipalities and cities.
The State and each of the above-mentioned administrative and territorial units within the State are, in principle, responsible for the planning and execution of their respective budgets within the constitutional framework of the country, for the purposes of performing their respective constitutional competencies in line with the Dayton Peace Accord.
1.1 Legal Framework
As a general rule, public debt in BiH includes any form of financial debt incurred by public entities, either in the form of loans or issuance of bonds or other financial instruments. Public entities which can incur public debt are the State, FBiH, RS, BD, cantons, municipalities, cities and certain public funds.
1.1.1 State level
The creation and management of State debt are substantially regulated by the Law on Debt, Debt Issuance and Guarantees of BiH (Zakon o zaduživanju, dugu i garancijama Bosne i Hercegovine) (the "BiH Debt Law"). The respective law provides that State debt can be incurred either as domestic or foreign debt, depending on whether the debt is incurred within the country or outside of the country. State debt can further be classified as (i) direct domestic or foreign debt, i.e. debt incurred in the name and for the benefit of the State, and (ii) indirect domestic or foreign debt, which is debt incurred in the name of the State but for the benefit of FBiH, RS or BD. The overall amount of the domestic debt and the overall amount of the foreign debt which the State can incur in a fiscal year are determined by the law on budget execution for the respective year; the amounts of which are calculated in line with the rules set out in the BiH Debt Law.
1.1.2 Entities' level
Both FBiH and RS have their own laws regulating public debt: the Law on Debt, Debt Issuance and Guarantees of FBiH (Zakon o zaduživanju, dugu i garancijama Fedeeracije Bosne i Hercegovine) ("FBiH Debt Law") regulates the conditions for the creation and management of public debt by FBiH and by the lower administrative and territorial units within FBiH – cantons, municipalities, cities, as well as certain public funds.
Public debt in FBiH can also be classified as domestic or foreign, depending on whether the debt is incurred within the country or outside the country.
Foreign debt includes direct foreign debt of FBiH (i.e. debt incurred by FBiH in its name and for its benefit) as well as so-called "relevant foreign debt" attributable to FBIH, which is foreign debt incurred by the State for the benefit of FBiH and which is ultimately the responsibility of FBiH. Similarly, domestic debt also includes
18 Guide to: Public Debt Management in Bosnia and Herzegovina direct domestic debt of FBiH as well as the relevant domestic debt attributable to FBiH. The overall amount of the FBiH domestic debt and the overall amount of the FBiH foreign debt in a fiscal year are determined by the law on budget execution for the respective year, while the FBiH Debt Law sets out the rules for the calculation of such overall amounts. The same principle applies mutatis mutandis to cantons, municipalities and cities, each of which adopts their own respective acts on budget execution.
In RS, the Law on Debt, Debt Issuance and Guarantees of RS (Zakon o zaduživanju, dugu i garancijama Republike Srpske) ("RS Debt Law") sets out the rules for the creation and management of public debt within RS. Public debt in the sense of this law can be incurred by RS, municipalities within RS and certain social security funds, such as the Pension and Disability Insurance Fund, the Health Insurance Fund and the Public Fund for Child Protection and Employment Fund. As in the case of FBiH, in RS public debt can also be classified as domestic or foreign, whereby each such debt can be further classified as either direct debt of RS (i.e. incurred by RS in its name and for its own benefit, excluding the relevant debt), or as so-called "relevant debt" attributable to RS, which is a debt incurred by the State for the benefit of RS and which is ultimately the responsibility of RS. The total debt of RS includes the public debt of RS incurred in accordance with the RS Debt Law, as well as the total debt of public companies, the Investment and Development Bank of RS (Investiciono razvojna banka Republike Srpske) and certain other public institutions.
The overall amount of public debt of RS which can be incurred within a fiscal year, as well as the purpose of such debt, is determined by the National Assembly of RS (based on a proposal of the Government of RS) and in the acts on budget execution. However, the RS Debt Law sets out certain limitations in this respect. Thus, the overall amount of total debt of RS at the end of a fiscal year cannot exceed 60% of the gross domestic product (GDP) realized in that fiscal year. Furthermore, the public debt of RS at the end of a fiscal year cannot exceed 55% of the realized GDP realized in that fiscal year. In addition, total short-term debt of RS (i.e. debt having a maturity of up to 12 months) cannot exceed 8% of the total amount of regular income (redovni prihod) realized in the preceding fiscal year.
1.2 Restrictions in public debt transactions
The State and other administrative units within BiH may enter into financial transactions as a way of public debt management. The conditions for entry into financial transactions as well as the applicable restrictions and limitations are set out in the BiH Debt Law, FBiH Debt Law and RS Debt Law, respectively, as well as in other acts of general application regulating the activities of such units.
The BiH Debt Law provides that the Council of Ministers of BiH adopts a strategy on State debt management on the basis of a proposal prepared by the Ministry of Finance and Treasury of BiH ("State MoF") and a special committee established in line with the BiH Debt Law. The strategy must be adopted at least one month prior to the end of each fiscal year and sets out a general projection of management, planning and servicing of State debt and debt of FBiH, RS and BD, respectively, for the following five years. The terms and conditions of individual financing transactions are determined by the bodies competent for public debt management on each governmental level.
1.3 Authority
1.3.1 State level
The BiH Debt Law provides that the management of public debt on the State level is in the exclusive competency of the State Ministry of Finance and Treasury (Ministarstvo finansija i trezora Bosne i Hercegovine). The State Ministry of Finance and Treasury is thus responsible for the negotiation and conclusion of loan agreements on behalf of the State, as well as for issuing State bonds and other financial instruments. Nevertheless, each individual transaction has to be approved by the Council of Ministers of BiH (Vijeće ministara Bosne i Hercegovine), on the basis of a proposal submitted by the State Ministry of Finance and Treasury.
19 Guide to: Public Debt Management in Bosnia and Herzegovina
The Parliament of BiH ("State Parliament") is responsible for adopting the State budget and laws on budget execution which set out the overall amount of State debt that may be incurred in a fiscal year.
In principle no separate approval of the State Parliament is required for individual transactions, however, certain approvals and/or acts of ratification of the State Parliament and/or Presidency of BiH may be required when incurring foreign debt.
1.3.2 Entities' Level
In FBiH and RS, public debt management lies within the competency of the respective entities' ministries of finance – i.e. the Ministry of Finance of FBiH ("FBiH Ministry of Finance") and the Ministry of Finance of RS ("RS MoF"). The FBiH Ministry of Finance and the RS Ministry of Finance are consequently responsible for planning and carrying out all financing transactions, including the issuance of bonds and other financial instruments, on behalf of FBiH and RS, respectively. Each individual transaction, however, needs to be approved (in FBiH) or accepted (in RS) by the respective entities' government.
In order for FBiH, RS or BD to be eligible to enter into a foreign financing transaction (i.e. a financing transaction with a foreign lender and denominated in a foreign currency), the approval of the State Parliament is generally required. Transactions concluded without such approval would in principle be null and void under BiH law.
As regards lower administrative units within FBiH and RS, the conclusion of financial transactions is not regulated in similar detail. Generally, such units may decide on the financial management of their funds (including the taking out of loans and the issuance of government bonds) within the constitutional framework of the country and in line with the rules set out in the FBiH Debt Law and RS Debt Law, respectively.
2. GOVERNMENT BONDS
2.1 Issue process
2.1.1 State level
According to the BiH Debt Law, the State Ministry of Finance can issue State bonds in BiH as follows: . through an auction procedure; . at a discount; . in fixed denomination; . with fixed issuing and maturity dates; . with a limited offering amount; . with fixed coupon payments; . with stipulated redemption right; and . with regulated payment procedures when payment obligation falls during holidays.
The BiH Debt Law stipulates that the Central Bank of BiH ("Central Bank") shall act as a fiscal agent for the State in connection with the issuing of State bonds and that the Central Bank and the State Ministry of Finance will regulate the rights and obligations of the Central Bank in this context by a special agreement between the Central Bank and the State Ministry of Finance.
20 Guide to: Public Debt Management in Bosnia and Herzegovina
2.1.2 Entities Level
As a general rule, issuances of bonds by FBiH are carried out in line with the Law on Securities Markets of FBiH, while the individual terms and conditions are defined on a case-by-case basis and set out in the decisions of the FBiH Government approving the issue.
Cantons, municipalities, cities and public funds in FBiH issue bonds through public or private placements, in accordance with the rules set out for such procedures in the Law on Securities Markets of FBiH and on the basis of prospectuses which must be approved by the Securities Commission of FBiH.
In RS, on the other hand, the RS Government regulates the primary market for securities of RS and sets out the terms and conditions of the primary issue and trade of RS bonds on the primary market. The Ministry of Finance of RS is responsible for the actual realization of the issue and registration of RS bonds and, in this context, it is authorized to, inter alia, engage an agent for the issuing, and to conclude all relevant agreements with the stock exchange and the Central Securities Register of RS (Centralni Registar hartija od vrijednosti Republike Srpske) in relation to the issuing. The secondary trade of RS bonds is carried out on the stock exchange and other regulated markets.
Municipalities in RS issue bonds through public or private placements pursuant to the Law on Securities Markets of RS and on the basis of prospectuses which must be approved by the Securities Commission of RS.
Moreover, in the case of issuing bonds for certain specific purposes (e.g. compensation for war damages, etc) special laws apply.
2.2 Restrictions on trading
There are no specific statutory restrictions regarding the trading and/or listing of government bonds in BiH.
2.3 Format of Securities, Offer, Trading
2.3.1 Form
BiH Debt Law stipulates that State bonds in general may be issued as tangible securities, in dematerialized form as well as by way of a global note. On the other hand, bonds of FBIH and RS, as well as bonds of lower administrative units within these entities (i.e. cantons, municipalities and cities in FBiH and municipalities in RS) may be issued as dematerialized securities only.
2.3.2 Clearing
In principle there is no legal requirement to use local clearing systems. However, if the issuing of bonds is carried out in BiH, the local clearing system would apply.
According to BiH Debt Law clearing in respect of State bonds is envisaged to be carried out by the Central Bank on the basis of a special agreement between the Central Bank and the State MoF. Clearing with respect to bonds issued on other governmental levels (i.e. entities, cantons, municipalities and cities) is carried out by the competent entities' securities registries – the Securities Registry of FBiH and Securities Registry of RS – depending on the place of issue.
21 Guide to: Public Debt Management in Bosnia and Herzegovina
2.3.3 Public offer
No prospectus is required when issuing State bonds, FBiH bonds or RS bonds; the issuing of such bonds is carried out on the basis of the respective decisions of the Council of Ministers of BiH/entities' governments and is not subject to any further approvals or scrutiny of other bodies. On the other hand, the issuing of bonds by cantons, municipalities and cities in FBiH and municipalities in RS is generally subject to prospectus requirements, whereby the prospectus must also be approved by the competent securities commission.
3. FOREIGN EXCHANGE REGULATIONS
In principle, there are no specific statutory restrictions preventing the payment in or transfer of foreign currencies by public entities in BiH. However, all payment activities within the country must be made in the local currency (BAM) and accordingly payment obligations relating to the issuing of bonds in BiH (regardless of the currency in which they are denominated) would need to be settled in local currency.
BiH is also a party to the Agreement of the International Monetary Fund ("IMF Agreement") according to which (as set out in Article VIII Section 2 (b)) exchange contracts involving the currency of an IMF member state that are contrary to the exchange control regulation of such member state are unenforceable in the territory of any IMF member state, provided that such regulations are in line with the IMF Agreement.
Therefore, payment obligations on the basis of such exchange contracts in BiH would in principle not be enforceable before the local courts.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Laws and regulations regulating securities markets and securities trading in BiH do not classify public sector entities as professional investors.
5. TAXATION
In BiH, indirect taxes (i.e. VAT, customs, and excise duties, etc.) are regulated by State laws, while direct taxes (corporate income tax, personal income tax, etc.) are regulated by the entities' laws – namely, Corporate Income Tax Law of FBiH and Corporate Income Tax Law of RS.
According to the Corporate Income Tax Law of FBiH and Corporate Income Tax Law of RS, interest paid to owners of, inter alia, government bonds are exempt from payment of withholding tax. Also, under the Law on VAT of BiH, government bonds are exempted from VAT.
6. DOCUMENTATION
6.1 Choice of law
As a general rule, there are no statutory constraints preventing BiH public sector entities from agreeing on a foreign governing law and/or agreeing on a foreign forum for dispute resolution to the extent that the underlying public debt has an international element within the sense of the BiH international private law rules (e.g. foreign lender, issuing of bonds outside of BiH, etc.). On the other hand, loan or bond documentation relating to a purely internal public debt must be governed by local law and subject to the jurisdiction of the local courts.
22 Guide to: Public Debt Management in Bosnia and Herzegovina
6.2 Language requirements
In principle finance transactions may be documented in a language other than the official languages, however, offering documentation for government bonds or other financial instruments issued in the country needs to be done in the official languages of BiH (i.e. Bosnian, Croatian, or Serbian).
6.3 Legal counsel
The State Ministry of Finance and Treasury, FBiH Ministry of Finance and RS Ministry of Finance each have special departments which are responsible for, inter alia, the creation and management of public debt. Specialized consultants and lawyers can be engaged on a case-by-case basis, in accordance with the applicable public procurement rules for such services.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State and Entitites
As a general rule, claims against the State, FBiH and RS and lower administrative units are enforceable in accordance with the general rules on enforcement of claims set out in the Law on Enforcement Proceedings before the Court of BiH, Law on Enforcement Proceedings of FBiH and Law on Enforcement Proceedings of RS, respectively. Enforcement of such claims is, however, limited to those assets of the public sector bodies which are not exempt from enforcement in accordance with the law.
This may be the case, for example, with respect to certain property which is essential for the performance of activities of public sector bodies, or which are otherwise of public interest, etc.
7.2 Insolvency
According to the BiH insolvency law rules, the State, FBiH, RS, as well as lower administrative units, may not be subject to insolvency proceedings.
23 Guide to: Public Debt Management in Bulgaria
BULGARIA
By Jasmina Uzova, Rebeka Kleytman and Atanas Mihaylov.
BULGARIA 24
1. GENERAL 25 1.1 Legal Framework 25 1.2 Restrictions in public debt transactions 26 1.3 Authority 27
2. GOVERNMENT BONDS 27 2.1 Issue process 27 2.2 Restrictions on trading 28 2.3 Format of Securities, Offer, Trading 28
3. FOREIGN EXCHANGE REGULATIONS 28
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 29
5. TAXATION 29
6. DOCUMENTATION 29 6.1 Choice of law 29 6.2 Language requirements 30 6.3 Legal counsel 30
7. ENFORCEMENT AND INSOLVENCY 30 7.1 Enforcement against the Federal State, its States and Municipalities 30 7.2 Insolvency 30
24 Guide to: Public Debt Management in Bulgaria
1. GENERAL
1.1 Legal Framework
Bulgarian law currently regulates the State budget (in the Constitution of the Republic of Bulgaria, Конституция на Република България and the Bulgarian State Budget Structure Act, Закон за устройството на държавния бюджет1) and the municipal budget (in the Bulgarian Municipalities’ Budget Act, Закон за общинските бюджети) as the two main categories related to the public budget in separate acts. As of 1 January 2014 the new Public Finance Act, (Закон за публичните финанси) will replace the two separate acts which will be repealed as of the same date and introduce the regulation of the State and the municipal budget in a single act.
The State and the municipalities are generally responsible for the management of their funds and their annual budget, including the incurrence of debt. However, various provisions also have an impact on the budget planning of the State and the municipalities. There are special acts regulating in particular the assumption of debt by the State and the municipalities, i.e. the State Debt Act (Закон за държавния дълг) and the Municipal Debt Act (Закон за общинския дълг) and providing for a number of limitations to be taken into account.
1.1.1 State
According to the State Debt Act all financial obligations assumed on behalf and on account of the State in accordance with the Constitution of the Republic of Bulgaria form part of the State debt. Pursuant to the State Debt Act State debt may be assumed by the issuance of government bonds or through government loan agreements.
According to the Constitution of the Republic of Bulgaria one of the main powers of the Bulgarian parliament (i.e. the National Assembly, Народно събрание) is the granting of its consent for the State to enter into any loan agreements and the ratification of all international agreements which provide, inter alia, for financial obligations of the State. Additionally, the parliament approves the State budget which also sets out the maximum amount of debt which may be assumed by the State.
The maximum amount of State debt which may be assumed for the current financial year by the State by way of issuance of government bonds and State guarantees is set out in the State Budget Act (Закон за държавния бюджет) for the relevant year. The new Public Finance Act further provides that the State Budget Act for the relevant year shall set out in detail the maximum amounts of debt which may be assumed for the current year (i) pursuant to the State Debt Act, and (ii) by financial lease agreements and any other form of debt pursuant to Regulation 479/2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community. The State Budget Act for the relevant year shall, as of 1 January 2014, further set out the maximum amount of new government bonds pursuant to the State Budget Act which may be assumed during the relevant financial year, the State debt as of the end of the year and other guarantees which shall be included in the State Budget Act as provided in other acts.
The Minister of Finance is authorized to sign government loan agreements based on the relevant resolution of the government pursuant to the International Agreements Act (Закон за международните договори). The Minister of Finance is also responsible for the issuance of government bonds.
1 Repealed by the new Public Finance Act, Закон за публичните финанси, promulgated in State Gazette issue 15 dated 15.02.2013 with effect as of 1 January 2014.
25 Guide to: Public Debt Management in Bulgaria
1.1.2 Municipalities
The definition for municipal debt set out in the Municipal Debt Act is similar to the definition for State debt; all financial obligations assumed on behalf and on account of the municipality in accordance with the Municipal Debt Act form part of the municipal debt.
Municipal debt may be assumed in any of the ways listed in the Municipal Debt Act and includes municipal bonds issues, municipal loan agreements, debt assumed by certain municipal companies financed by the municipal budget or by accounts and funds different from the municipal budget for the performance of certain municipal activities and services, municipal guarantees which have become due, interest free loans disbursed to the municipalities from the State budget for financing certain shortages in the municipal budget, interest free loans disbursed to the municipalities from the State budget for financing expenses subject to compensation under programmes which are co-financed by the European Union, certain forms of financial lease and other permitted forms of debt etc. The maximum amount of municipal debt which may be assumed in the current year is set in the resolution of the municipal council approving the annual budget for the relevant year. The Municipal Debt Act (and as of 1 January 2014 the Public Finance Act) also provides for further limitations concerning the municipal debt including limitation of the amount of annual payments and the nominal value of municipal guarantees making them dependent on the respective municipality's own revenues.
The Municipal Debt Act further limits the purposes for which the municipality may assume long-term debt to the following: financing of investment projects in favour of the local community, refinancing of existing debt, prevention or mitigation of the effects of any force majeure, securing payment under municipal guarantees which have become due, and municipal projects for public- private partnerships.
Short-term debt may be assumed by the municipalities for the provision of public services, in the event of temporary budget deficiencies, capital expenditures subject to compensation by means other than the municipal budget, urgent expenditures for the prevention and mitigation of the effects of force majeure and payments under municipal guarantees that have become due.
The mayor of the municipality is responsible for the submission of proposals for the assumption of municipal debt to the municipal council. The municipal council reviews and approves the proposals.
1.2 Restrictions in public debt transactions
The State may enter into financial transactions, e.g. issue government bonds or conclude derivatives, as a way of public debt management. Restrictions and limitations may be found in the laws governing these entities.
The restrictions concern both the purposes for which State or respectively municipal debt may be assumed as set out above as well as certain other terms concerning the debt itself (e.g. amount, maturity, repayment etc.).
The main purposes of the State debt management policy set out in the Strategy for State Debt Management 2012-2014 (Стратегия за управление на държавния дълг 2012-2014г) are the provision of the necessary resources for budget financing and refinancing of the debt at the best possible terms. The Strategy for State Debt Management sets out further non-binding limitations concerning the State debt such as maintaining reasonable State debt levels, facilitation of the expenses for the servicing of the debt, etc.
26 Guide to: Public Debt Management in Bulgaria
1.3 Authority
1.3.1 State
The Minister of Finance signs the State loan agreements in accordance with the relevant resolution of the government pursuant to the International Agreements Act (Закон за международните договори). The government may also appoint further government bodies to participate in the negotiations concerning State loan agreements.
The Minister of Finance is responsible for the issuance of government bonds. However, the Minister of Finance is limited in his or her actions by the provisions of the State Budget Act for the relevant year as approved by the parliament which sets the maximum amount of State debt to be assumed for the relevant year (for details see above).
1.3.2 States and Municipalities
The mayor of the municipality is responsible for the submission of the proposal for assumption of debt for approval by the municipal council. In additional to other formal requirements the law explicitly states that any proposal concerning the assumption of long-term debt by the municipality shall be to the benefit of the local community. The local community shall be given the possibility to participate in public discussions concerning the proposed long-term debt. The position of the local community shall be attached to the proposal submitted by the mayor to the municipal council for approval.
2. GOVERNMENT BONDS
2.1 Issue process
The issue of government bonds takes place pursuant to a resolution of the Minister of Finance. The Bulgarian National Bank acts as an agent based on an agency agreement signed with the Ministry of Finance. The Bulgarian National Bank is responsible for the creation and the maintenance of an electronic system for the registration and trading with government bonds as well as a system for the settlement of transactions with government bonds.
The procedure for acquisition, registration, payment and trading with government bonds is regulated by Regulation No. 5 dated 4 October 2007 for the terms and conditions for acquisition, registration, payment and trading with government bonds (Наредба №5 от 4.10.2007г. за реда и условията за придобиване, регистриране, изплащане и търговия с държавни ценни книжа) ("Regulation No.5").
Regulation No. 5 does not apply to trading procedures with government bonds on regulated markets and / or multilateral trading systems.
On the primary market government bonds may be acquired through auction procedures (“аукциони”) which are organized by the Bulgarian National Bank. Only primary dealers are entitled to participate in an auction procedure. Primary dealers are banks and investment intermediaries which have been licensed for this activity in accordance with the applicable laws, i.e. the Credit Institutions Act (Закон за кредитните институции) for banks and the Markets in Financial Instruments Act (Закон за пазарите на финансовите инструменти) for investment intermediaries, and which have been approved by the Ministry of Finance as primary dealers of government bonds in accordance with Regulation No. 15 dated 4 October 2007 on the control over transactions with government bonds (Наредба №15 от 4.10.2007г. за контрол върху сделките с държавни ценни книжа). Additionally the primary dealers shall be approved for participation in the system for auctions and subscriptions for the sale of government bonds by competent commission within the Bulgarian National Bank.
27 Guide to: Public Debt Management in Bulgaria
Regulation No. 5 provides for the possibility for the participants to submit both competitive and non- competitive bids in auctions. The maximum amount of government bonds traded through non-competitive bids in an auction may not exceed 20% of the total amount of offered government bonds. Any participant in an auction may not acquire more than 15% of the short-term bonds, 35% of the mid-term bonds and 50% of the long-term bonds offered for trading through competitive bids irrespective of whether the participant is acting on its own behalf and account or not.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Bulgarian government bonds.
According to the Public Offering of Securities Act (Закон за публичното предлагане на ценни книжа) there are additional requirements for multilateral trading systems, regulated financial markets and investment intermediaries trading with government bonds to be approved, inter alia, also by the Bulgarian National Bank.
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Bulgarian law acknowledges both materialized and non-materialized securities. The law does not limit the forms for the issuance of government bonds; the available legislation only regulates in detail the issuance, subscription and dealing with non-materialized government bonds which is the standard form for issuance of government bonds.
2.3.2 Clearing
As mentioned above, government bonds are typically issued as non-materialized securities registered in the systems maintained by the Bulgarian National Bank as a depository.
Depending on the type of transaction the clearing is performed by the Bulgarian National Bank and the participants in the electronic government bonds trading systems.
No prospectus needs to be published in Bulgaria for a public offer or for a stock exchange listing of government bonds.
2.3.3 Public offer
Securities issued by the State are exempt from the prospectus requirement according to the Public Offering of Securities Act.
2.3.4 Listing
According to the Public Offering of Securities Act securities other than shares issued by the Republic of Bulgaria or another Member State of the European Union or their regional or local authorities, international organisations where the Republic of Bulgaria or another Member State is a member, or the European Central Bank are exempted from the prospectus obligation.
3. FOREIGN EXCHANGE REGULATIONS
There are no general restrictions on payments by Bulgarian entities. The Currency Act (Валутен закон) only sets out certain reporting obligations for statistical purposes.
28 Guide to: Public Debt Management in Bulgaria
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
National and local governments, central banks, international and supranational organizations such as the International Monetary Fund, the European Central Bank, the European Investment Bank and other similar organisations qualify as qualified investors (i.e. professional clients) under the Public Offering of Securities Act. However, the remaining public sector entities are not automatically qualified as professional clients under the Public Offering of Securities Act which, inter alia, implements the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). It is therefore recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
5. TAXATION
The Corporate Income Tax Act (Закон за корпоративното подоходно облагане) regulates the taxation of companies in Bulgaria.
Profit of local entities from transactions with government bonds should be included in the income statement of the entity and may be subject to 10% corporate income tax unless such profits are partially or fully offset against current year losses from other operations, tax losses carried forward from previous years and any interest expenses deductible in the current year whose deductibility has been disallowed in the year of their accrual due to the application of capitalization rules.
Bonds payments of interest from government bonds which are effected by a local payer to a local entity are generally subject to corporate income tax currently amounting to 10% subject to the above assumptions.
In case the payee of the interest is a foreign company without a permanent establishment within the territory of the Republic of Bulgaria the payment of interest is subject to 10% withholding tax.
Income of local individuals from transactions with government bonds is generally subject to 10% capital gains tax as set out in the Personal Income Tax Act (Закон за данъка върху доходите на физическите лица). Interest paid by local entities to local individuals is subject to 10% personal income tax.
Income of foreign individuals from transactions with financial assets and from interest payable on financial assets is generally subject to 10% final tax (i.e. withholding tax).
Any taxes due by a foreign legal or natural person are not due in case there is relief under a double taxation treaty. In case the revenues of the foreign payee exceed BGN 500,000 it shall obtain clearance from the National Revenue Agency for the application of the relevant double taxation treaty. Otherwise the payee shall present the relevant documents for the application of the double taxation treaty to the payer.
6. DOCUMENTATION
6.1 Choice of law
There are no constraints against the choice of a foreign governing law other than those contained in the "Rome I Regulation" (Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations).
Choices of jurisdiction are binding on Bulgaria, subject to Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial
29 Guide to: Public Debt Management in Bulgaria matters ("Brussels I Regulation"). Choices of courts outside the European Union or the European Free Trade Association (except Liechtenstein) are, to the extent exclusive, likely to be unenforceable.
For relations involving participants from non-EU- Member States the Bulgarian International Private Law Code (Кодекс на международното частно право) applies. However, the provisions in the International Private Law Code do not deviate substantially from those in the Rome I Regulation and Brussels I Regulation.
6.2 Language requirements
Finance transactions may be documented in a language other than the official language. There аrе only special language requirements for the primary accounting documents which shall be drafted only, or also, in Bulgarian. A primary accounting document under the Bulgarian Accountancy Act (Закон за счетоводството) is a document which evidences certain commercial transaction for the first time.
6.3 Legal counsel
There are no specialised legal teams. The State is free to choose whether to involve its in-house advisors or independent lawyers and/or law firms.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, civil law claims are enforceable in accordance with the provisions of the Civil Procedure Code (Граждански процесуален кодекс). According to the Civil Procedure Code the enforcement of payment obligations of the public authorities is not permitted.
Such obligations shall be discharged with funds from the relevant budget of the respective authority. The writ of execution shall be presented to the financial body of the relevant authority. In case the budget of the relevant authority has not provided sufficient funds in the current budget, the authority which is superior to the one in default shall take the necessary measures to include sufficient funds in the budget for the next financial period.
Enforcement over bank accounts of the municipalities and other entities subsidized by the State with regard to funds which have been paid to such accounts as a subsidy by the State budget is also not permitted.
7.2 Insolvency
Bulgarian law (unlike other laws) does not contain legal stipulations on whether a municipality may go bankrupt. There is no case law.
30 Guide to: Public Debt Management in Croatia
CROATIA
By Vedrana Ivekovic.
CROATIA 31
1. GENERAL 32 1.1 Legal Framework 32 1.2 Restrictions in public debt transactions 32 1.3 Authority 33
2. GOVERNMENT BONDS 33 2.2 Restrictions on trading 34 2.3 Format of Securities, Offer, Trading 34
3. FOREIGN EXCHANGE REGULATIONS 34
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 35
5. TAXATION 35
6. DOCUMENTATION 35 6.1 Choice of law 35 6.2 Language requirements 35 6.3 Legal counsel 35
7. ENFORCEMENT AND INSOLVENCY 36 7.1 Enforcement against the Federal State, its States and Municipalities 36 7.2 Insolvency 36
31 Guide to: Public Debt Management in Croatia
1. GENERAL
1.1 Legal Framework
According to Croatian constitutional law (Zakon o područjima županija, gradova i općina u Republici Hrvatskoj; "ZPŽGO"), the Republic of Croatia is divided into: . counties (županije); . municipalities (općine); . cities (gradovi); and . the City of Zagreb (Grad Zagreb)
Counties, municipalities and cities are generally responsible for the management of their funds and their annual budget, including the incurrence of debt. However, various statutory provisions at the State level also have an impact on the budget planning of the counties, municipalities and cities. The territorial communities have the duty to safeguard macroeconomic equilibrium and to aim for sustainable, controlled budgets.
1.1.1 Federal State
On a State level, financial debts may only be incurred by the Minister of Finance on the basis of (i) the Budget Act (Zakon o proračunu; "ZDP") and respective annual Budget Implementation Act (Zakon o izvršavanju državnog proračuna Republike Hrvatske za[2013] godinu; "ZIDP") or (ii) entitlements on the basis of a special law passed by the Parliament (Sabor). Financial debts (zaduživanje) are defined by the ZDP as the raising of credits (kredita), loans (zajmova) or the issuance of securities (izdavanje vrijednosnih papira).
1.1.2 Territorial communities
Legislative bodies of the territorial communities (predstavničko tijelo) are responsible for the enactment of the budgets of Croatian counties, municipalities and cities. Territorial communities are responsible for autonomously deciding on and managing their budgets on the basis of, inter alia, the ZDP, ZIDP, and specific instructions of the Ministry of Finance. The principles of State budget law are also applicable to budgeting by the territorial communities.
Territorial communities may incur long term financial debts only for investments that are financed from their budgets, and which are approved by their assemblies or councils (predstavničko tijelo) with the Government’s consent, and upon the proposal of the Minister of Finance. The total annual financial debt of the territorial communities may not exceed 20% of their realized income in the preceding year.
1.2 Restrictions in public debt transactions
Croatian territorial communities may conclude financial transactions, e.g., issue government bonds or conclude derivatives, as a way of public debt management. Restrictions and limitations may be found in laws governing these entities.
According to the ZDP, the primary goal of incurring financial debts and public debt management is securing the financial needs of the budget by realizing the lowest medium-term and long-term financing costs and by taking a prudent level of risk. Financial debts may be incurred in Croatia or abroad within the limits provided by the ZIDP.
32 Guide to: Public Debt Management in Croatia
Financial debts may be incurred for the purpose of . financing of the State budget deficit; . financing of investment projects and specific programmes, approved by the Parliament (Sabor);
. payment of due instalments of State debt; . settlement of due payments in connection with State guarantees; . budget liquidity management; and . satisfying the needs of the Croatian National Bank for foreign currency reserves.
In 2013 public debt may not exceed 58% of the aggregate gross domestic product for 2013.
1.3 Authority
1.3.1 Federal State
Under the ZDP, the Government and the Minister of Finance are responsible for finance management in accordance with the amounts and purposes determined in the annual budget and ZIDP. The Government passes the relevant decisions on debt management, and the Minister of Finance signs the finance contracts and State guarantees and keeps the relevant registries of public debt.
1.3.2 Territorial communities
As stated above, territorial communities may incur long-term financial debts only for investments that are financed from their budgets, and which are approved by their assemblies or councils (predstavničko tijelo) with Government consent, and upon the proposal of the Minister of Finance.
The contracts must be signed by a signatory having the (external) power to represent the territorial community (načelnik; gradonačelnik; župan) on the basis of the budget, with the Government’s consent, and upon the proposal of the Minister of Finance.
The Government is obliged to decide whether to provide its consent or not within 40 days upon submittal of the complete request.
A contract that is signed without observing the above-mentioned consent and proposal requirements is null and void and unenforceable.
2. GOVERNMENT BONDS
2.1 Issue process
Apart from the issuance of short-term Croatian treasury bills through the Bloomberg auction system ("BAS"), the Croatian Government issues government bonds mainly through the so-called syndicate procedure with the help of a consortium of banks syndicate (sindikat banaka), upon the proposal of the Ministry of Finance and under an annual issuance plan. The composition of the bank consortium can vary between issuances. The consortium of banks buys the whole volume of government bonds and sells them to other investors.
33 Guide to: Public Debt Management in Croatia
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Croatian government bonds. All issued bonds are listed in the first quotation of the Zagreb Stock Exchange.
Trading in government bonds takes place via electronic platforms as well as over-the-counter (OTC).
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Generally, the form and representation of securities is regulated by the Capital Market Act (Zakon o tržištu kapitala; "ZTK"). Section 3 para 1 of the ZTK defines the financial instruments, money market instruments and securities, including bonds, to which the ZTK applies.
The ZTK does not regulate explicitly the form of government bonds. Rather it provides that securities (whereby the definition of securities includes bonds) issued by an issuer with the seat in the Republic of Croatia must be issued as dematerialised securities, government bonds are expected to be issued in a dematerialised form as well. The current practice confirms this.
2.3.2 Clearing
Government bonds are registered with the central register of dematerialised securities maintained by the Central Depository & Clearing Company Inc. (Središnje klirinško depozitarno društvo d.o.o.; “SKDD”). The register includes data on rights from securities, holders of such rights and any third party rights over securities. The SKDD also maintains securities accounts in which entries are made in case of securities transfers.
2.3.3 Public offer
No prospectus needs to be published in Croatia for a public offer or for a stock exchange listing of government bonds.
Generally, under Section 349 of the ZTK, the prospectus obligation applies to public offerings of securities and listing of securities on a stock exchange in Croatia, while money market instruments are exempt from this obligation. In particular, the ZTK explicitly provides, under Section 343 para 1, that sovereign bonds with a maturity of less than 12 months do not fall under the definition of securities to which the prospectus obligation applies, and are therefore exempt from the prospectus obligation. Other debt securities issued by the Republic of Croatia or territorial communities are exempt from the prospectus obligation according to Section 342 para 1 No. 2a of the ZTK.
3. FOREIGN EXCHANGE REGULATIONS
There are no general restrictions on payments by Croatian public entities.
Croatia is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are unenforceable. Accordingly, we understand that in such a case payment claims against Croatia could not be enforced.
34 Guide to: Public Debt Management in Croatia
Furthermore, pursuant to the Croatian Foreign Exchange Act (Zakon o deviznom poslovanju; "ZDP"), the Croatian National Bank (Hrvatska narodna banka, "HNB") is vested with the power to issue restrictions on foreign exchange as well as on domestic currency.
According to a decision of the HNB, payments made between residents may be made in a foreign currency if they (i) trade in treasury notes issued by the HNB or securities issued by the Croatian Government and such securities are expressed in a foreign currency, or (ii) they trade in securities listed or issued abroad. However, if the securities are issued abroad but listed in Croatia such payments must be made in Croatian Kuna. In addition, payments made between residents and non-residents for the trade of securities listed or issued in Croatia (with the exception of securities issued in Croatia but listed abroad) must be made in Croatian Kuna. This does not apply to trade on the principal securities market of securities issued by the Croatian Government if such securities are expressed in a foreign currency.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
The ZTK, which implements the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"), qualifies national governments, public authorities competent for public debt management and central banks as professional clients. Other Croatian public sector entities, in particular territorial communities, are not automatically qualified as professional clients. It is therefore recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
5. TAXATION
According to the Personal Income Tax Act (Zakon o porezu na dohodak; "ZPD"), receipts from interest on securities issued pursuant to a special act (e.g. ZTK) are not deemed as personal income and therefore not taxable as personal income tax.
Pursuant to the Corporate Profit Tax Act (Zakon o porezu na dobit; "ZOPD"), the withholding tax (generally applicable on interest paid to non-resident legal entities at the rate of 15%) shall not be paid on interest paid to holders of government or corporate bonds.
6. DOCUMENTATION
6.1 Choice of law
There are no constraints against the choice of a foreign governing law other than those contained in the Croatian national law on the law applicable to contractual obligations.
Choices of jurisdiction are binding on Croatia, subject to Croatian national law on civil procedure.
6.2 Language requirements
Finance transactions may be documented in a language other than the official language.
6.3 Legal counsel
Generally, the Attorney General (državni odvjetnik) represents Croatia in all legal matters unless a specific law, or a decision of the competent State body based on a specific law, provide otherwise (Section 30 para 4 of the Attorney General Act (Zakon o državnom odvjetništvu; "ZDO"). In the context of government bond
35 Guide to: Public Debt Management in Croatia issues, the Attorney General regularly advises the State on Croatian law, however, if bonds are issued abroad, foreign legal counsels are engaged.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, claims against the State and territorial communities are enforceable in accordance with the provisions of the Enforcement Act (Ovršni zakon; "OZ"). However, resources, equipment and objects intended for the work of State bodies and territorial communities as well as tax claims and other duties claims are exempted from enforcement.
7.2 Insolvency
The Croatian Bankruptcy Act (Stečajni zakon; “SZ”) explicitly excludes the possibility that the State and territorial communities can go bankrupt. Section 3 para 2 of the SZ stipulates that the Republic of Croatia and territorial communities may not be subject to bankruptcy procedures.
36 Guide to: Public Debt Management in Czech Republic
CZECH REPUBLIC
By Kateřina Pechanová Babická.
CZECH REPUBLIC 37
1. GENERAL 38 1.1 Legal framework 38 1.2 Restrictions in public debt transactions 39 1.3 Authority 39
2. GOVERNMENT BONDS 40 2.1 Issue process 40 2.2 Restrictions on trading 40 2.3 Format of securities, offer, trading 40
3. FOREIGN EXCHANGE REGULATIONS 41
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 41
5. TAXATION 42
6. DOCUMENTATION 42 6.1 Choice of law 42 6.2 Language requirements 43 6.3 Legal counsel 43
7. ENFORCEMENT AND INSOLVENCY 43 7.1 Enforcement against the State and municipalities 43 7.2 Insolvency 43
37 Guide to: Public Debt Management in Czech Republic
1. GENERAL
1.1 Legal framework
Under Act No. 1/1993 Coll., constitution of the Czech Republic, as amended ("Czech Constitution"), the Czech Republic is divided into the following self-governing communities (územně samosprávné celky): . municipalities (obce); . regions (kraje); and . the Capital City of Prague (Hlavní město Praha).
The Czech Republic and these self-governing communities may own property and manage their own budgets. Public debt may be incurred on the level of (i) the Czech State, (ii) the municipalities, (iii) the regions, and (iv) the Capital City of Prague.
Every year the Government of the Czech Republic proposes a bill on the State budget (návrh zákona o státním rozpočtu) for the upcoming year. Such a bill must be approved by the Parliament of the Czech Republic to become law. The State budget for the relevant year adopted in the form of an act ("State Budget") regulates, among other things, the financing of the State budget deficit by government bonds (státní dluhopisy) and the financial relations among the State budget and the budgets of the self-governing communities.
The management of public debt is generally regulated by Act No. 250/2000 Coll., on budgetary rules of self- governing communities, as amended ("Act on Budgets of Self-governing Communities") and Act No. 218/2000 Coll., on budgetary rules, as amended ("Act on State Budgets"). Although the Czech State does not have a statutory obligation to secure macroeconomic equilibrium under the Act on State Budgets, the budgets of the self-governing communities are generally prepared as balanced under the Act on Budgets of Self-governing Communities.
1.1.1 The State
The Government of the Czech Republic, through the Czech Ministry of Finance ("Ministry of Finance"), is responsible for the fulfilment of the State Budget.
1.1.2 Regions
Although the regions' authorization to manage their budgets is generally given by Act No. 129/2000 Coll., on regions, as amended ("Act on Regions"), a region composes and administers its budget in line with specific rules given by the Act on Budgets of Self-governing Communities. Under the Act on Budgets of Self-governing Communities, a budget of a region is generally compiled as a balanced or even as a surplus budget. A deficit budget may only be approved if the deficit is repayable from the funds from previous years or financed by contractually secured loans, returnable financial assistance or by municipal bonds (komunální dluhopisy) issued by the regions on the basis of the Act on Regions.
The Capital City of Prague and, to a certain extent, its individual districts are authorized to manage their budgets under the Act on Capital City of Prague (Act No. 131/2000 Coll., on Capital City of Prague, as amended). The rules governing the budgets of the Capital City of Prague and its districts are generally similar to the rules applicable to the regions under the Act on Regions.
38 Guide to: Public Debt Management in Czech Republic
1.1.3 Municipalities
Although the municipalities' authorization to manage their budgets is generally given by Act No. 128/2000 Coll., on municipalities, as amended ("Act on Municipalities"), a municipality composes and administers its budget in line with specific rules given by the Act on Budgets of Self-governing Communities. Under the Act on Budgets of Self-governing Communities, a budget of a municipality is generally compiled as a balanced or even as a surplus budget. A deficit budget may only be approved if the deficit is repayable from the funds from previous years or financed by contractually secured loans, returnable financial assistance or by municipal bonds issued by the municipalities on the basis of the Act on Municipalities.
1.2 Restrictions in public debt transactions
On the State level, the Czech State through the Ministry of Finance or, as the case may be, a legal entity established on the basis of a special act, is entitled to conclude financial transactions (e.g., trading in government bonds or other investment securities) as a way of managing public debt. However, the Czech State may only conclude such financial transactions to the extent covered by the State Budget for the relevant year in which such financial transactions should occur or by a special law.
On the self-governing communities' level, the self-governing communities' authorization to engage in financial transactions as a way of managing public debt is limited. Thus, the self-governing communities may issue municipal bonds with the prior written consent of the Ministry of Finance. The Ministry of Finance grants its consent upon request provided, among other things, that the self-governing community meets the following requirements: the economic situation of the self-governing community enables it to fulfil its obligations arising from the municipal bonds, the funds gained will be used for one of the reasons set down in the Act on Bonds and the maturity date of the municipal bonds does not exceed 15 years from their issue.
1.3 Authority
The authorisation to act (e.g. to sign relevant documents) on behalf of the Czech State or its self-governing communities in connection with the management of public debt is given, in particular, by the Czech Constitution, the Act on Ministries (Act No. 2/1969 Coll., on the establishment of ministries and other institutions of central government of the Czech Republic), the Act on Regions and the Act on Municipalities. Thus, based on the respective acts, e.g. the Minister of Finance and/or a mayor of a municipality is entitled to act in connection with the management of public debt. Also, if provided for by the respective acts, the internal regulations or decisions of the relevant State authorities or the self-governing communities may further regulate the authority to act in specific cases. Acts in breach of statutory authorizations and/or authorizations under relevant internal regulations or decisions are considered null and void and hence unenforceable.
1.3.1 The State
Generally, the Ministry of Finance has the authority to manage the government debt on behalf of the Czech Republic. In this respect, no specific authorizations are necessary. However, should the conclusion of specific documents fall outside the scope of its direct authorization under the Act on State Budgets, the adoption of a specific act may be required.
As to government bonds, their issuance is regulated by Act No. 190/2004 Coll., on bonds, as amended ("Act on Bonds"). Each specific issue of government bonds is further regulated in detail either by a specific act on a State bond programme or by a specific act which empowers the Ministry of Finance to issue government bonds.
The issue is executed by the Ministry of Finance under the terms of issue (emisní podmínky) which must be published in the Collection of Laws (Sbírka zákonů).
39 Guide to: Public Debt Management in Czech Republic
1.3.2 Regions and municipalities
When entering into financial transactions in connection with public debt the self-governing communities must generally adhere to the regulations given by the Act on Municipalities and Act on Regions. To the extent municipal bonds are concerned, the self-governing communities must also seek the written consent of the Ministry of Finance prior to their issue. There is no special institution empowered to deal with financial transactions entered into in connection with public debt. Importantly, the Czech State is not liable for and does not guarantee obligations incurred by the regions and municipalities, unless agreed otherwise in the relevant contractual documentation.
2. GOVERNMENT BONDS
2.1 Issue process
Under the Act on Bonds, the Czech State may issue government bonds on the basis of either a specific act adopted by the Parliament of the Czech Republic which empowers the Ministry of Finance to issue government bonds, or a specific act adopted by the Parliament of the Czech Republic on a State bond programme.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of government bonds.
Government bonds may be traded in OTC transactions as well as through exchanges. Importantly, however, specific regulations of trading and/or listing of government bonds may be imposed by specific acts. In the Czech Republic, government bonds are sold through the Czech National Bank. Some bonds may also be sold through the Ministry of Finance or a special type of entity.
2.3 Format of securities, offer, trading
2.3.1 Form
Generally under the Act on Bonds, government bonds, may be issued as both materialised (v listinné podobě) or dematerialised securities (v zaknihované podobě).
2.3.2 Clearing
Government bonds issued in the Czech Republic, i.e. bonds that have been registered on the account of their first holder in the Central Securities Depository Prague (Centrální depozitář cenných papírů Praha), are usually traded and cleared on the Prague Stock Exchange.
The Central Securities Depository Prague is a central register of dematerialized securities issued in the Czech Republic, which operates a settlement system for the settlement of exchanges (e.g. the Prague Stock Exchange) and OTC transactions involving investment instruments (e.g., government bonds), the lending of securities, administration and management of guarantee instruments, and the custody and administration of investment instruments maintained in a separate register. Foreign clearing systems will typically be used when government bonds are issued outside the Czech Republic (e.g. government bonds that have not been registered on the account of their first holder in the Central Securities Depository Prague).
No prospectus needs to be published in the Czech Republic for the public offer of government or municipal bonds.
40 Guide to: Public Debt Management in Czech Republic
2.3.3 Public offer
Government and municipal bonds do not fall under the regulation for public offerings as set out in Act No. 256/2004 Coll., the capital markets act, as amended ("Capital Markets Act"), which implements Directive (EC) No. 2003/71 on the prospectus, and hence no prospectus needs to be published in the Czech Republic for the public offer of government or municipal bonds.
2.3.4 Listing
In general, listings of securities on the markets of the Prague Stock Exchange are subject to the "conditions for the admission of the security for trading on the relevant market of the Prague Stock Exchange" (Podmínky přijetí cenného papíru k obchodování na příslušném trhu Burzy cenných papírů Praha).
Under the "Conditions for the Admission of Bonds for Trading on the Official Market and the Regulated Market of the Prague Stock Exchange", the issues of government bonds and issues for which generally binding legislation or an international treaty so stipulate, are admitted without an application and without a prospectus.
In general, the conditions for listing and trading stipulated by the Capital Markets Act do not apply to government bonds. However, under the Act on Bonds, terms of issue of government bonds (emisní podmínky statních dluhopisů), which stipulate the rights and obligations of the issuer and the holder of government bonds, must generally be announced in the Collection of Laws.
Some of the terms of issue of government bonds with maturity of less than 12 months do not have to be announced in the Collection of Laws, but they must be made public in a manner allowing remote access.
3. FOREIGN EXCHANGE REGULATIONS
The Foreign Exchange Act (Act No. 219/1995 Coll., as amended) provides for a state of emergency in the foreign exchange economy ("State of Emergency"). During the State of Emergency, i.e. when the ability to make payments to other countries is directly and seriously jeopardized, it is forbidden, inter alia, to make any payments and transfers from the Czech Republic abroad. However, the Government of the Czech Republic may declare a State of Emergency only if (i) there is an unfavourable trend in the balance of payments, and (ii) this trend directly and seriously jeopardizes the ability to make payments to other countries or the internal monetary balance of the Czech Republic. The State of Emergency elapses no later than three months after the day on which it was announced in the media. As far as we are aware, a State of Emergency has never been declared in the Czech Republic.
The Czech Republic is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are unenforceable in the territory of any IMF member state. Accordingly, we understand that in such a case payment claims against the Czech Republic could not be enforced.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Under the Capital Markets Act, which implements Directive (EC) No. 2004/39 on markets in financial instruments, the Czech State and the Czech National Bank are considered professional clients (profesionální zákazník).
41 Guide to: Public Debt Management in Czech Republic
The self-governing communities of the Czech Republic, i.e. municipalities, regions and the Capital City of Prague, and various public sector entities do not automatically qualify as professional clients under the Capital Markets Act. The question whether public sector entities or self-governing communities may be considered as professional clients in a specific transaction, is a factual one and will be considered on a case by case basis.
5. TAXATION
As a matter of Czech law, it is necessary to distinguish between capital income (kapitálový výnos) and coupon income (kupónový výnos).
With respect to taxation of private individuals (nepodnikající fyzická osoba): . if the period between the acquisition of ownership of a bond by an individual and its sale exceeds 6 months, no income tax is applicable to the income obtained by the sale of the bond; . if the period between the acquisition of ownership of a bond by an individual and its sale does not exceed 6 months, the income obtained by the sale of the bond is subject to income tax (15%) and has to be included in the annual tax return of the individual; and . interest payments are subject to a withholding tax of 15% which is deducted from the amount of interest payments prior to their payment to the bond holder. Thus, interest payments are not included in the annual tax return of the bond holder.
With respect to taxation of individual entrepreneurs (podnikající fyzická osoba), the income obtained by the sale of a bond is subject to 15% income tax and has to be included in the annual tax return of the individual entrepreneur (i.e., the 6 month ownership period does not apply). Interest payments are subject to a withholding tax of 15% which is deducted from the amount of interest payments prior to their payment to the bond holder. Thus, interest payments are not included in the annual tax return of the bond holder.
With respect to taxation of legal entities (právnické osoby), the income obtained by the sale of a bond as well as the interest payments are subject to 19% income tax and have to be included in the annual tax return of the entity (i.e., the 6 month test ownership period does not apply).
6. DOCUMENTATION
6.1 Choice of law
Opting for foreign law as the law governing a contract or, as the case may be, an issue of government bonds is generally possible under Czech law and the Czech courts would give effect to the choice of foreign law as the governing law and recognize the choice of foreign law subject to the provision of Regulation (EC) No. 593/2008 on the law applicable to contractual obligations ("Rome I Regulation").
The choice of jurisdiction is binding on the Czech Republic, subject to Regulation (EC) No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ("Brussels I Regulation") and, to the extent outside the scope of the regulation, by the Convention of 30 October 2007 on jurisdiction and the enforcement of judgments in civil and commercial matters ("New Lugano Convention").
Under the Brussels I Regulation, judgments against the Czech Republic rendered by a court of an EU Member State (including Denmark with certain restrictions under the agreement concluded between the European Community and Denmark on 19 October 2005), are to be recognized and enforceable by courts of the Czech Republic.
42 Guide to: Public Debt Management in Czech Republic
Under the New Lugano Convention, judgments against the Czech Republic rendered by a court of Switzerland, Norway or Iceland are to be recognized and enforceable by courts of the Czech Republic.
Judgments against the Czech Republic given by a court of a non-EU Member State may be recognized and enforced by courts of the Czech Republic in accordance with the Act on International Private and Procedural Law (Act No. 97/1963 Coll., as amended).
6.2 Language requirements
Finance transactions may be documented in a language other than the Czech language. However, a translation of the relevant documents into the Czech language prepared by an official judicial translator may be required if the relevant documents become subject to judicial or administrative review in the Czech Republic.
6.3 Legal counsel
In practice, legal matters related to the management of public debt and issuance of government bonds are handled by legal teams of the respective authorities, in particular the Ministry of Finance, the Czech National Bank and the self-governing communities.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the State and municipalities
Any receivables arising from government bonds or other means of financing of public debt may be enforced against the Czech Republic, regions and municipalities as part of execution proceedings based on an execution title issued by a competent court.
The relevant provisions of the Civil Procedure Code (Act No. 99/1963 Coll., as amended) and the Act on Judicial Executors and Execution Activities (Act No. 120/2001 Coll., as amended) will apply.
7.2 Insolvency
The Czech Insolvency Act (Act No. 182/2006 Coll., the Insolvency Act, as amended) explicitly stipulates that the Czech State and its regions and municipalities are exempted from its application.
43 Guide to: Public Debt Management in Hungary
HUNGARY
By Gábor Erdős, Eszter Járja, Erzsébet Varga and Eszter Bihari-Nagy.
HUNGARY 44
1. GENERAL 45 1.1 Legal Framework 45 1.2 Restrictions in public debt transactions 46 1.3 Authority 46
2. GOVERNMENT BONDS 47 2.1 Issue process 47 2.2 Restrictions on trading 48 2.3 Format of Securities, Offer, Trading 48
3. FOREIGN EXCHANGE REGULATIONS 49
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 49
5. TAXATION 49
6. DOCUMENTATION 50 6.1 Choice of law 50 6.2 Choice of jurisdiction 50 6.3 Language requirements 50 6.4 Legal counsel 50
7. ENFORCEMENT AND INSOLVENCY 51 7.1 Enforcement against the Federal State, its States and Municipalities 51 7.2 Insolvency 51
44 Guide to: Public Debt Management in Hungary
1. GENERAL
1.1 Legal Framework
Pursuant to Act CXCIV of 2011 on Hungary's economic stability (the "Stability Act"), the public debt of Hungary consists of the consolidated debt of the (i) central organisations of the Stage budget (államháztartás központi alrendszere) ("State"); (ii) the system of the local municipalities of the State budget ("államháztartás önkormányzati alrendszere", including the municipality of the capital, any cities, villages, counties, districts of the capital, etc.) ("Municipalities"); and (iii) other organisations included in the governmental sector (kormányzati szektorba sorolt egyéb szervezetek) as set out by Council Regulation (EC) No. 479/2009 of 25 May 2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community ("Governmental Organisations"). A list of Governmental Organisations is published on the website of the government.
The Minister of Finance (currently referred to as the Minister of National Economics) is responsible for the satisfaction of the State's financing needs and the management of the State’s public debt. The Municipalities are generally responsible for the management and fulfilment of any obligations arising from their own public debt and the registration of such debt.
1.1.1 Federal State
On the State level, public debt management is regulated in different levels of regulations.
1.1.1.1 Constitution of Hungary
The Constitution of Hungary (25 April 2011) ("Constitution") which entered into full force and effect on 1 January 2012 contains general provisions on incurring and managing public debt. According to the Constitution, the Parliament of Hungary ("Parliament") is responsible for the enactment of the act on the annual budget and the implementation of it.
The Constitution itself, inter alia, sets a limit for public debt and prohibits the approval of an annual budget which would result in a level of public debt that exceeds 50% of the Hungarian GDP.
1.1.1.2 Stability Act
The Stability Act defines public debt and the obligations and the persons responsible for the management of the public debt.
According to the Stability Act, the Minister of Finance, within its competence for managing public debt, inter alia, (i) maintains the solvency of the central budget; (ii) ensures the management of the public debt and the temporary liquid funds of the central budget; (iii) arranges the issuances of government securities; (iv) prepares the financing plan of the central budget and the strategy of the public debt financing; and (v) arranges the secondary market of the government securities.
The above tasks are carried out by the Minister of Finance through the Government Debt Management Agency Private Company Limited by Shares ("ÁKK", Államadósság Kezelő Központ Zártkörűen Működő Részvénytársaság).
45 Guide to: Public Debt Management in Hungary
1.1.2 Municipalities
Municipalities are responsible for autonomously deciding on and managing their own budgets on the basis of, inter alia, the Stability Act, Act LXV of 1990 on the municipalities ("Municipality Act") and their own annual budgets.
The enactment of the local budgets and their financial management and the decisions relating to obtaining a loan and issuing of bonds is vested with the supreme body of the Municipality (képviselőtestület; "Council"). The financial management of the Municipalities is monitored by the State Audit Office (Állami Számvevőszék) and also by local auditors.
1.2 Restrictions in public debt transactions
Subject to the limitations set out by the Constitution, the Stability Act and the Municipality Act, the State and the Municipalities may conclude financial transactions, e.g. issue bonds or enter into derivatives transactions as a way of public debt management.
The Budget Act determines certain types of institutions which are prevented from (i) entering into any transaction which increases the public debt; (ii) issuing of bonds; (iii) entering into any agreement in relation to financial leases or factoring; and (iv) undertaking any guarantee or suretyship such as any budgetary organisation (költségvetési szerv), the social insurance fund or special State funds.
1.3 Authority
1.3.1 Federal State
The State is represented by the Minister of Finance acting through ÁKK in relation to the management of government debt (i.e. the public debt of the State).
ÁKK is a company limited by shares and its sole shareholder is the State. The ownership rights are exercised by the Minister of Finance. The company is controlled by the board of directors and its operation is supervised by the supervisory board and the company's auditor. In addition to these internal management and control mechanisms, the process of debt management is regularly audited by the State Audit Office. The activities of ÁKK are closely interrelated with the operations of the Hungarian State Treasury. The operations of these organisations are coordinated and controlled by the Minister of Finance.
According to the Stability Act, an authorisation provided by a law is required for ÁKK to enter into any transaction increasing the amount of public debt.
1.3.2 States and Municipalities
The conclusion of financial transactions is not regulated in similar detail for the Municipalities and no uniform authority exists for debt management which is mainly the responsibility of the Council. However, the financial activities of the Municipalities are also monitored on a State and local level and, save for certain exceptions, Municipalities may only enter into any transactions increasing the amount of public debt with the prior approval of the government. The procedure to be followed for the issuance of the approval is regulated in Government Decree No. 353/2011 (XII. 30) on the detailed rules of the approval on transactions constituting public debt.
46 Guide to: Public Debt Management in Hungary
1.3.3 Governmental Organisations
Save for certain exceptions, Governmental Organisations may only enter into transactions increasing the amount of public debt with the prior approval of the Minister of Finance.
The procedure to be followed for the issuance of the approval is regulated in Government Decree No. 353/2011 (XII. 30) on the detailed rules of the approval on transactions constituting public debt.
2. GOVERNMENT BONDS
The Hungarian government issues the following types of government securities for resident or non-resident private or corporate investors (the "Institutional Government Securities"): . Government Bonds that are registered, dematerialised and fixed rate securities issued with maturities of 3, 5, 10 or 15 years (i.e. a maturity of more than one year), under Government Decree No. 285/2001 (XII.26.) on bonds ("Government Bond Decree") and having a denomination of HUF 1,000 and EUR 1. . Discount Treasury Bills that are registered, dematerialised and non-interest-bearing securities issued below par value with maturities of 3 or 12 months (i.e. a maturity less than one year), under Government Decree No. 286/2001 (XII.26.) on treasury bills ("Treasury Bills Decree") and having a denomination of HUF 10,000.
The Hungarian government issues the following types of government securities solely for resident (devizabelföldi) investors ("Retail Securities"): . Interest Bearing Treasury Bills that are registered, dematerialised, fixed rate government securities with a maturity of one year, having a denomination of at least HUF 10,000 and issued also under the Treasury Bills Decree for resident private and corporate investors; . Treasury Savings Bills that are registered fixed, step-up rate securities with maturities of one year or two years and having a denomination of HUF 10,000, HUF 50,000, HUF 100,000, HUF 500,000 or HUF 1,000,000 and issued under Government Decree No. 98/1995. (VIII. 24) in printed form solely for resident private individuals; and . Premium Government Bonds that are registered, dematerialised, fixed rate securities with maturities of 3, 5, 10 or 15 years and having a denomination of HUF 1,000, and issued under the Government Bond Decree solely for resident private individuals.
The Hungarian government also issues Eurobonds according to the rules as set out in the documentation of the relevant series of government securities.
2.1 Issue process
2.1.1 Institutional Government Securities
The government issues the Institutional Government Securities through auctions (aukció). The issuances are arranged by ÁKK.
Pursuant to the effective regulations, only investment firms who have entered into agency contracts with ÁKK to trade government securities ("Primary Dealers") may place bids at the auction of government securities. Investors need to give orders to the Primary Dealers to purchase government securities at the auctions on their behalf. The result of the auction is published by ÁKK in press releases and on its website.
47 Guide to: Public Debt Management in Hungary
2.1.2 Retail Securities
The Hungarian State issues Retail Securities in the following ways: . Interest Bearing Treasury Bills are issued either through the Primary Dealers or the branch offices of ÁKK; . Treasury Savings Bills are sold continuously in the post offices; and
. Premium Government Bonds are issued in the course of progressive issuance.1
2.1.3 Eurobonds
Eurobonds are issued by subscription procedure as set out by the relevant documentation.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Institutional Government Securities. Except for Discount Treasury Bills having a maturity of or less than 3 months, the Institutional Government Securities are admitted to trading on the Budapest Stock Exchange ("BSE") upon their issuance.
Institutional Government Securities may be acquired by and traded between natural or legal persons or entities without legal personality. However, ÁKK reserves the right to limit the acquisition or transfer of certain series of government securities. In this case, ÁKK has to publish a new guidance for the issuance of such series of the Institutional Government Securities.
Retail Securities can only be sold to and traded between Hungarian resident investors.
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Under the Capital Markets Act, it is possible to issue even Institutional Government Securities in printed form; however, in practice, government securities (except for Treasury Savings Bills) are issued as dematerialised securities.
2.3.2 Clearing
Except for Treasury Saving Bills and Eurobonds, government securities are registered on the securities account of the Primary Dealers held by Central Clearing House and Depository (Budapest) Ltd. (Központi Elszámolóház és Értéktár (Budapest) Zrt.).
Upon the registration of the issued government securities, the Primary Dealers may transfer them to the securities account of the investors held by any investment firm.
1 Under section 5(1)(1) of Act CXX of 2001 on the capital markets (the “Capital Markets Act”), progressive issuance means the offer of debt securities to the public by selling the securities having the same maturity within a period determined by the issuer.
48 Guide to: Public Debt Management in Hungary
2.3.3 Public offer
Regarding government securities, there is no need to publish a Prospectus provided that the government securities (except for those issued by any non-EEA member state) or the securities guaranteed by any member state of the EEA are offered to the public or admitted to trading only in Hungary and ÁKK provides certain information to the investors Securities issued by Municipalities.
If debt securities (i) issued by any Hungarian local government or (ii) issued by or guaranteed by any local or regional government of any EEA member state are offered to the public or admitted to trading only in Hungary, the issuer may publish a prospectus with an amended content as set out in Schedule 4 of the Capital Markets Act. The prospectus with the amended content must also be approved by the Hungarian Financial Supervisory Authority ("HFSA").
Local governments may issue or admit to trading its securities without publishing a prospectus if the offer complies with any of the general exemptions from the obligation to publish a prospectus as set out by the Capital Markets Act (e.g. issuance of money market instruments).
3. FOREIGN EXCHANGE REGULATIONS
There are no statutory restrictions on payments made by Hungarian public entities.
Hungary is a party to the Agreement of the International Monetary Fund ("IMF Agreement").
According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state being in line with the IMF Agreement are unenforceable. Accordingly, we understand that in such a case payment claims against Hungary could not be enforced.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Under the Investment Firms Act implementing Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments ("MiFID"), the government, the municipalities and ÁKK qualify as eligible counterparties. However, with respect to the rules in relation to the client qualification upon the clients’ request and in the case of other State entities, it is recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
5. TAXATION
The taxation of holders of government securities in Hungary depends primarily on their tax status and tax residence (adóügyi illetőség). The fact that the securities are government securities does not affect the rules applicable to taxation. Private individuals are subject to personal income tax, while corporations are subject to corporate income tax on income derived in connection with government securities. Hungarian tax residents (magyar adóügyi illetőségű) are taxed in Hungary on their worldwide income. Under certain conditions, non- residents (külföldi illetőségű) could also incur Hungarian tax liability.
In the event that the interest income of a private individual is received from a Hungarian paying agent as defined by Hungarian law, the paying agent should withhold and pay to the Tax Authority the relevant Hungarian personal income tax. If certain conditions are met, non-resident private individuals may request the paying agent not to withhold Hungarian personal income tax. In the event that the interest income is not
49 Guide to: Public Debt Management in Hungary received from a paying agent, the tax should be assessed, declared and paid to the Tax Authority by the private individual directly.
Corporate taxpayers are obliged to assess, declare and pay the relevant corporate income tax by themselves, in the form of a ‘self-assessment’.
6. DOCUMENTATION
6.1 Choice of law
In general, there are no constraints against the choice of a foreign governing law other than those contained in the Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations ("Rome I Regulation") and, out of the scope of the Rome I Regulation, the relevant conflict of laws regulations. The general principle of freedom of choice of the governing law is applicable to the issuance of government securities. However, except for Eurobonds, Hungarian government securities are usually governed by Hungarian law.
6.2 Choice of jurisdiction
Choices of jurisdiction are regulated by the Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters on the level of the European Community ("Brussels I Regulation") and, to the extent outside the scope of the Brussels I Regulation, Hungarian conflict of laws regulations.
According to the current conflict of laws regulation, as a general principle Hungarian courts have exclusive competence in cases filed against the Hungarian State or a Hungarian government agency save for some exceptional cases such as if the Hungarian State has expressly waived the right to immunity, or if the subject matter of the case in question pertains to a legal relationship to which the Hungarian State or a Hungarian government agency is a party and which does not grant foreign countries immunity from Hungarian jurisdiction. However, the above rules are not applicable with regard to the European Community.
6.3 Language requirements
As there are no special rules which would require that documentation must be in the Hungarian language, finance transactions may be documented in accordance with the general rules applicable to finance transactions under the relevant laws (e.g. in the case of a public offering of government securities, depending on in which member states of the EEA the government securities are to be offered, in a language accepted by the HFSA (which is English or Hungarian) or the competent authorities of the relevant member states or in a language which is customary in the international financial markets (which is English).
6.4 Legal counsel
ÁKK and other government institutions have specialised legal teams within their organisation.
However, on the basis of publicly available information in relation to ÁKK, it mandates external law firms for certain tasks relating to the issuance of government securities.
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7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, claims against the State and Municipalities are enforceable in accordance with the provisions of Act LIII of 1994 on enforcement. However, enforcement against the State and the Municipalities is only possible with respect to assets which are not excluded from the scope of assets that might secure financial indebtedness or in the scope of not negotiable State assets.
7.2 Insolvency
Hungarian law does not contain explicit legal stipulations in relation to the State’s bankruptcy.
In relation to the insolvency of Municipalities, Act XXV of 1996 on the reorganization procedure of the Municipalities contains specific rules. According to this act, any Municipality or their creditors may initiate this procedure in order to achieve a financial reorganization of the relevant Municipality and satisfy creditors' claims.
51 Guide to: Public Debt Management in Romania
ROMANIA
By Claudia Chiper and Diana Stetiu.
ROMANIA 52
8. GENERAL 53 8.1 Legal Framework 53 8.2 Restrictions in public debt transactions 54 8.3 Authority 54
9. GOVERNMENT BONDS 54 9.1 Issue process 54 9.2 Restrictions on trading 55 9.3 Format of Securities, Offer, Trading 55
10. FOREIGN EXCHANGE REGULATIONS 56
11. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 56
12. TAXATION 57
13. DOCUMENTATION 57 13.1 Choice of law 57 13.2 Language requirements 57 13.3 Legal counsel 58
14. ENFORCEMENT AND INSOLVENCY 58 14.1 Enforcement against the Federal State, its States and Municipalities 58 14.2 Insolvency 58
52 Guide to: Public Debt Management in Romania
1. GENERAL
1.1 Legal Framework
Public debt management is regulated at governmental level and municipal level.
1.1.1 Governmental Level
The management of Governmental public debt ("GPD") is regulated under Government Emergency Ordinance No. 64/2007 on public debt, as amended from time to time ("GPD Ordinance").
The Ministry of Finance is appointed by law as the sole manager of GPD. In such capacity the Ministry of Finance is acting in the name and on behalf of the Romanian State and is generally in charge of contracting and managing GPD together with all risks associated with GPD (i.e. risks related to foreign currency or interest rate variations).
GPD comprises both direct governmental debt (i.e. the debt contracted by way of loans, bonds or other similar debt instruments) and indirect debt (i.e. the debt arising from guarantees that the Ministry of Finance has granted to various borrowers).
GPD may be contracted either internally or externally, in foreign currencies and/or the Romanian lawful currency (leu; "RON").
In order to contract GPD, the Ministry of Finance may use loans contracted from local or international banks, temporary transfers from the State Treasury, loans from the European Union, loans from foreign governments, domestic or international bond issues or other instruments.
1.1.2 Municipality levels
Law 215/2001 on local public administration grants municipalities (i.e. counties, cities, communes) self- government rights. Municipalities have thus full authority and responsibility in all matters related to the management of the local public affairs within their territory.
As a consequence, under Law 273/2006 on municipal finance ("MPD Law"), municipalities are vested with powers to collect revenues and to contract municipal public debt ("MPD"). MPD may be contracted either in the form of direct debt (i.e. debt contracted by loans or bonds) or in the form of guarantees.
The municipal councils (i.e. the deliberative decisional bodies within Romanian municipalities) are in charge of deciding on contracting and managing MPD. In deciding on these matters the municipal councils usually take into account (among others) the municipal investment programmes and the associated financing requirements or the need to refinance the existing MPD.
Importantly, loans contracted by municipalities are subject to the prior approval of the Ministry of Finance, through its special committee for the authorization of MPD. In the absence of such an approval, municipalities cannot validly contract indebtedness. In addition, under the MPD Law, municipalities cannot contract indebtedness exceeding more than 30% of their average own revenues for the last 3 years (calculated as per specific formulae).
Furthermore, additional nominal ceiling levels are imposed on municipalities regarding annually contracted loans and reimbursement expenditures with respect to tranches already contracted or to be contracted by
53 Guide to: Public Debt Management in Romania local public authorities. As per the current regulations, the maximum level is RON 800 million (approximately EUR 180 million) for each year in the period 2013 – 2015.
As of January 2013, the above-mentioned RON 800 million ceiling was further broken down based on the type of administrative units as follows: . for villages (sate) the ceiling of RON 300 million (approximately EUR 67 million); . for towns (orase) the ceiling of RON 100 million (approximately EUR 23 million); . for municipalities (municipalitati) the ceiling of RON 150 million (approximately EUR 34 million); and . for counties (judete) the ceiling of RON 250 million (approximately EUR 56 million).
1.2 Restrictions in public debt transactions
The GPD Ordinance allows the Ministry of Finance to enter into a series of transactions in order to manage GPD.
Specifically, the Ministry of Finance may resort to foreign currency swaps, interest rate swaps, future contracts, option agreements and other similar operations for the management of risks relating to foreign currency and interest rate risks.
In addition, the Ministry of Finance may, in the course of managing GPD, refinance the existing debt and/or make anticipated repayments of loan commitments or anticipated redemptions of government bonds.
1.3 Authority
The institution which manages government debt is the Ministry of Finance as sole manager of GPD (please refer to point 1.1.1, above).
Previously there have been annual limits for contracting GDP, approved by way of Government Decision. For the time being, though, no such limits are currently imposed.
The authorization process for the contracting of GPD is conducted by the Ministry of Finance through its various committees. There are multiple approval procedures with respect to the instruments through which GPD is contracted and the timeframes for approval vary on a case by case basis.
In administering GPD, the Ministry of Finance also consults the National Bank of Romania ("NBR"). NBR may also act as the Romanian State’s agent in repaying the GPD contracted in a foreign currency, based on conventions made with the Ministry of Finance.
2. GOVERNMENT BONDS
2.1 Issue process
The Ministry of Finance may approve the issue of bonds either (i) on the international markets or (ii) on the domestic market.
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2.1.1 International government bond issues
The Ministry of Finance (acting on behalf of the Romanian State) may issue bonds on international markets either in the form of standalone issues or in the form of Medium Term Notes Programmes. Standalone issues are approved by ministerial order whereas MTN Programmes are approved by Government Decision.
2.1.2 Domestic government bond issues
The Ministry of Finance approves the issue of government bonds on the domestic market based on a provisional yearly programme issued in December for the following year. Based on this programme, prospectuses are prepared for the issuance of governmental bonds. Depending on the existing deficit and/or the refinancing of the existing governmental debt, government bonds may be issued monthly, quarterly or half yearly.
Domestic government bond issues are launched on a special primary market administered by NBR, acting as the agent of the Ministry of Finance. NBR operates this market based on principles of transparency and equal access for investors.
Any operations on this market are conducted by qualified primary dealers which are: (i) credit institutions and (ii) entities providing financial services, either authorised in Romania or in the CE/EEA member states. Individuals or corporate entities (whether resident or non-resident) can access the primary market only through a primary dealer.
On the primary market, government bonds may be offered for subscription by way of: . auction, where the allocation of bonds is made following the selection of purchase offers depending on criteria concerning the price and interest rate tendered by participants; and . public subscription, where no selection criteria apply in respect of the offer for government bonds.
Once issued, government bonds may be traded on the secondary market. This secondary market is a regulated market, functioning under the supervision of NBR and the Financial Supervisory Authority (incorporating the former Romanian National Securities Commission ("RNSC")) ("FSA"), according to principles of transparency and equal access for investors.
2.2 Restrictions on trading
Government bonds are issued and traded on special domestic markets. As stated above, these domestic markets operate on principles of transparency and equal access opportunities for all investors and, apart from specific regulatory requirements, there are no restrictions for investors. These markets are also accessible to foreign investors.
2.3 Format of Securities, Offer, Trading
Romanian government bonds can be issued in a material form or in a dematerialised form. Government bonds may also be in a registered or bearer’s form. They can be negotiable or non-negotiable instruments.
In practice, most government bonds issued on the domestic market are issued in the form of dematerialised securities.
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The local markets for dematerialised bonds are special trading markets. The registration and trading of government bonds, as well as the settlement of transactions with such bonds on these markets is made electronically via the systems supervised by NBR and FSA in accordance with specific norms.
2.3.1 Public offer
Issues of government bonds on the primary market in Romania or in other countries are based on prospectuses approved by the Ministry of Finance. Even though the applicable rules concerning the issue of government bonds use the term "prospectus", such a concept does not fall within the meaning of the Prospectus Directive (Directive 2003/71/EC as amended and implemented by the secondary legislation). In particular, Romanian capital markets law and regulations, in line with the EU framework, provide for an exemption from the requirement to prepare a prospectus (within the meaning of the Prospectus Directive) in case of bonds issued by State authorities. Further, in light of such an exemption, prospectuses regarding government bonds are approved by the Romanian Ministry of Finance and not by the FSA.
2.3.2 Listing
Government bonds can be subscribed either directly (public subscription) or following an auction procedure.
2.3.3 Further requirements
The issue of government bonds on an international market is governed, aside from the specific Romanian law procedural rules, by the specific legislation applicable to such market. When issuing bonds on an international market, the Romanian Government (acting through the Romanian Ministry of Public Finance) publishes an information memorandum containing all the necessary details regarding the respective programme.
3. FOREIGN EXCHANGE REGULATIONS
The Romanian FX regime has been liberalised. Accordingly, foreign currency can be introduced into Romania or transferred outside Romania freely, without any approvals being necessary.
Depending on specific circumstances (e.g. pressures on the domestic FX market), NBR may resort to safeguarding measures and consequently impose restrictions on foreign currency operations in Romania. These measures cannot be taken for more than 6 months and must be notified to the EU Commission which may ask the Romanian Government to modify, replace or cease them.
Romania is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are unenforceable. Accordingly, we understand that in such a case payment claims against Romania could not be enforced.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Entities in charge of the management of public debt (i.e. the Ministry of Finance and municipalities) qualify as eligible counterparties under RNSC Regulations transposing MiFID in Romania.
These standards consequently apply to the Ministry of Finance (as the manager of GPD) and to municipalities (as managers of MPD). However, these standards do not apply to all other public sector entities.
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5. TAXATION
Under the Romanian Tax Code, income resulting from government bonds is tax free in the case of individuals, whether resident or non-resident in Romania.
Corporate entities (whether resident or non-resident in Romania) usually incur 16% tax with respect to the interest accrued on government bonds. The same rate applies with respect to the capital gains resulting from the transfer of government bonds.
6. DOCUMENTATION
6.1 Choice of law
The choice of a foreign law as the governing law of a transaction is recognized in Romania in accordance with Regulation (EC) No. 593/2008 of the European Parliament and of the Council on the law applicable to contractual obligations ("Rome I Regulation") and the internal norms on conflict of laws. Generally, the choice of such a foreign law as the governing law of a transaction may be set aside on grounds of public policy requirements in Romania or if it is contrary to internal mandatory norms.
We should also note that Romanian courts have a broad discretion in considering public policy issues in specific cases.
These issues are not defined specifically, but are determined by courts on a case by case basis. As a result, it may be possible that in a particular case a Romanian court sets aside the choice of foreign law as the governing law of a transaction on the grounds of public policy. In such circumstances the Romanian court will apply Romanian law.
Choices of governing laws outside the EU/EEA may be upheld in Romania, if: (i) they are not made by fraud, and (ii) they are not irreconcilable with Romanian mandatory norms.
A judgment passed in an EU Member State court may be recognized and enforced in Romania in accordance with Council Regulation (EC) 44/2001 ("Brussels I Regulation"), subject to the limitations set out therein.
Notably, when presented with a request for the recognition and/or enforcement of a judgment passed in an EU Member State court, Romanian courts will only verify if the relevant conditions set out under the Brussels I Regulation are met, without reviewing the merits of the case in question. Enforcement proceedings will be conducted in accordance with Romanian law.
Generally, judgments passed in non-EU/EEA Member States may be recognized in Romania if: (i) they are conclusive under the laws of the state where they have been passed; (ii) they have been passed by competent courts; and (iii) there is reciprocity between Romanian and the state where such a judgement has been passed.
6.2 Language requirements
Finance transactions may be documented in a language other than the official language. However if used as evidence in a Romanian court documents drafted in a foreign language must be accompanied by a certified translation into Romanian.
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6.3 Legal counsel
Public institutions have, in most of the cases, a legal department. However, significant public institutions (such as ministries or city halls of large municipalities) instruct local and international law firms as their advisors in the case of complex finance transactions.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
GPD is by law an irrevocable and binding commitment on the Romanian State. However the enforceability of claims against the Romanian State in relation to GPD commitments may be limited by the following aspects: . Only those assets which are in the private property of the Romanian State may be enforced upon. Other assets held by the Romanian State under a public property regime cannot be subject to any enforcement measures; and . If the Ministry of Finance does not have sufficient available funds for the repayment of GPD, it is possible that enforcement is delayed. In such circumstances the Ministry of Finance is under an obligation to make available such funds within 6 months from receipt of a demand for payment.
7.2 Insolvency
There are no express provisions on the insolvency of the Romanian State.
However the newly enacted modifications to the MPD Law provide that municipalities can be either: (i) in a state of financial crisis, or (ii) in a state of insolvency. . A municipality is in a state of financial crisis if it is not capable of paying: . its obligations that have been due for payment for more than 90 days and exceed more than 15% of the general budget of the respective territorial-administrative unit (except for obligations which are in a commercial dispute); or . the salaries provided for in its budget or in the budget of the public institutions for more than 90 days since they became due for payment.
A municipality in such a state will be subject to a financial rehabilitation plan (plan de redresare financiară) which may provide for: (i) the means to increase municipal revenues, (ii) a decrease in local expenditure, or (iii) for the collection of new types of revenues. This plan is approved in the council of the relevant municipality and afterwards implemented under the supervision of the committee for situations of financial crisis (comitetul pentru situatii de criză financiară). . A municipality is in a state of insolvency if it is not capable of paying:
. its obligations that have been due for payment for more than 120 days and exceed more than 50% of the general budget of the respective territorial-administrative unit (except for obligations which are in dispute); or . the salaries provided for in its budget for more than 120 days since they became due for payment.
The state of insolvency of a municipality will be announced in court and registered in the special local registry held by the Territorial General Directorate of Public Finance (Direcția Generală a Finanțelor Publice) and the special national registry held by the Ministry of Finance. The court will appoint a judicial receiver to draft a rehabilitation plan (plan de redresare) with the assistance of the main credit release authority (ordonatorul principal de credite) and the approval of the General Directorate of Public Finance and of the local territorial
58 Guide to: Public Debt Management in Romania chamber of accounts (camerei teritoriale de conturi). The rehabilitation plan is subject to approval by the local council.
Such an insolvency rehabilitation plan shall include:
. measures to re-establish the financial viability of the administrative-territorial unit; . measures to preserve the essential services rendered by the administrative-territorial unit during the insolvency period; and . a payment schedule for the creditors' debts.
If the local plan is not approved or if it is not observed during implementation, the judicial receiver will take over the management of the plan’s implementation.
When the municipality is restored to its sound financial status, the court will pass a judgment closing the procedure. A registration with the special registry of the Ministry of Finance as to the closing of the procedure will follow
59 Guide to: Public Debt Management in Serbia
SERBIA
By Bojana Bregovic, Katarina Minic, Tomislav Popovic, Marijana Zejakovic and Vladimir Milosevic.
SERBIA 60
1. GENERAL 61 1.1 Legal Framework 61 1.2 Restrictions in public debt transactions 62 1.3 Authority 62
2. GOVERNMENT BONDS 63 2.1 Issue process 63 2.2 Restrictions on trading 64 2.3 Format of Securities, Offer, Trading 64
3. FOREIGN EXCHANGE REGULATIONS 65
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 65
5. TAXATION 65 5.1 Interest 65 5.2 Capital gains 66
6. DOCUMENTATION 66 6.1 Choice of law 66 6.2 Language requirements 66 6.3 Legal counsel 66
7. ENFORCEMENT AND INSOLVENCY 66 7.1 Enforcement against the Republic of Serbia 66 7.2 Insolvency of the Republic of Serbia 67
60 Guide to: Public Debt Management in Serbia
1. GENERAL
1.1 Legal Framework
The administrative divisions within Serbia are determined by the Serbian Constitution and the Law on the Territorial Organization of the Republic of Serbia, according to which there are two Autonomous Provinces within the Republic of Serbia: the Autonomous Province of Vojvodina and the Autonomous Province of Kosovo and Metohija (of course, this is a well-known subject of international dispute and, therefore, will not be analyzed herein). The Constitution further defines the City of Belgrade and other Serbian municipalities and towns as local self-governing units ("Local Self-Governing Units").
According to the Constitution, the Republic of Serbia, its Autonomous Provinces as well as the Local Self- Governing Units may all incur debt. In this context, the Republic of Serbia, its Autonomous Provinces as well as the Local Self-Governing Units are responsible for the management of their own funds, indebtedness and their annual budgets.
1.1.1 Federal State/Republic of Serbia
Pursuant to the Law on Public Debt, Serbia may borrow in order to: (i) finance its budget, (ii) finance liquidity deficits, (iii) refinance existing debt, (iv) finance investment projects and acquisition of financial asset, and (v) make payments under guarantees issued by it.
Decisions on borrowing by the Republic of Serbia are issued by the following: . The Serbian National Assembly decides on the following types of borrowing by the Republic of Serbia: long-term loans, for the financing of investment projects and the issuance of guarantees. . The Serbian Government decides on the issuance of long-term debt securities (unless otherwise specified by law in a particular case). . The Minister of Finance decides on the taking of short-term loans for budget and liquidity deficit financing, public debt refinancing, as well as on the issuance of short-term debt securities.
Serbia may borrow in both domestic and foreign markets and in Serbian Dinars and foreign currency; provided, however, that borrowing incurred by the issuance of short-term debt securities within Serbia can only be carried out in domestic currency.
The Law on Public Debt defines long-term loans and long-term debt securities as those for which the repayment term extends into the next budgetary year(s). Furthermore, all borrowing by the Republic of Serbia must not exceed the limits set by the Serbian budget-related legislation.
1.1.2 Autonomous Provinces and Local Self-Governing Units
The Autonomous Province of Vojvodina and the Local Self-Governing Units may borrow in both domestic and foreign markets, in Serbian Dinars as well as in foreign currency.
The Autonomous Province of Vojvodina and the Local Self-Governing Units may borrow to finance a liquidity deficit; however such borrowed amounts must be repaid before the end of the given budgetary year and cannot be refinanced or transferred into the next budgetary year. In any event, the borrowing for liquidity deficit financing during any given budgetary year may not exceed an amount equal to 5% of the total revenues realized in the budget of the Autonomous Province or Local Self-Governing Unit during the preceding budgetary year.
61 Guide to: Public Debt Management in Serbia
Neither the Autonomous Province of Vojvodina nor any Local Self-Governing Units may provide guarantees, nor may they borrow on the long term, except for long-term borrowing for the financing or refinancing of capital investment expenditures envisaged in the relevant budget. However, the Autonomous Province of Vojvodina may borrow by the issuance of long-term securities for the financing of investment, development and priority programmes and projects, e.g. the investment in capital investments and acquisition of finance assets.
The amount of outstanding long-term borrowing for such capital investment expenditures (except if the Autonomous Province of Vojvodina borrows by the issuance of long-term securities for the financing of investment, development and priority programmes and projects, e.g. the investment in capital investments and acquisition of finance assets) may not exceed an amount equal to 50% of the total budget revenues of the relevant Autonomous Province or Local Self-Governing Unit during the preceding budgetary year, except for long-term borrowing if the repayment period (excluding any grace period) is at least 5 years. In addition, the amount of principal and interest due in any future budgetary year on all outstanding long-term borrowing for capital investments may not exceed an amount equal to 15% of the total local government budget revenues amount achieved during the previous budgetary year.
If the Autonomous Province of Vojvodina does not repay debt as planned or if it informs the Ministry of Finance that it cannot perform its obligations arising from borrowing, the Minister of Finance shall stop the allocation of the transfer resources from the Republic of Serbia's budget up to the amount of the outstanding liabilities.
Furthermore, the Law on Public Debt provides that the Autonomous Province of Vojvodina and the Local Self- Governing Units may borrow by taking loans and issuing long-debt securities (municipal bonds) that may be purchased by domestic and foreign legal entities and natural persons under the terms and conditions prescribed by the Serbian Law on Securities Market.
1.2 Restrictions in public debt transactions
Serbia is generally permitted to conclude financial transactions as a way of public debt management.
The Minister of Finance manages the public debt and prepares a public debt management strategy, which is submitted for Government adoption once a year.
The Foreign Exchange Law as well as the Decree on the General Conditions for the Issuance and Sale of Short-Term Government Securities on the Primary Market provides that only Serbian residents may purchase short-term government bonds; therefore, foreign entities and persons may not purchase short-term Serbian government bonds.
Non-residents may purchase long-term government bonds and must report on such transactions as prescribed by the National Bank of Serbia (such reporting is customarily carried out by custody banks and broker-dealer companies).
1.3 Authority
1.3.1 Federal State / Republic of Serbia
As explained above, the Serbian National Assembly decides on the taking of long-term loans, borrowing for the financing of investment projects, issuance of guarantees, as well as on the assumption of liabilities arising from issued guarantees.
62 Guide to: Public Debt Management in Serbia
The Minister of Finance has the sole authority to conclude loan agreements and to issue government debt securities on behalf of the Republic of Serbia; however, the Minister may also authorize (by way of a decision) another person within the Ministry of Finance to conclude such arrangements.
The Law on Public Debt envisages the establishment of a Public Debt Agency (Uprava za javni dug); an administrative body within the Ministry of Finance. The aim of this Agency is to conduct operations in connection with public debt, which, inter alia, refers to: (i) government issued debt securities, (ii) monitoring borrowing negotiations, (iii) managing public debt proceeds, (iv) risk reduction, (v) monitoring and analysing conditions and changes in domestic and foreign financial markets, (vi) preparing a debt management strategy, and (vii) monitoring local government borrowing.
1.3.2 Autonomous Provinces and Local Self-Governing Units
As a general matter, the Autonomous Province of Vojvodina and Local Self-Governing Units may incur debt following a decision of the competent administrative body of the Autonomous Province of Vojvodina or the Local Self-Governing Unit, respectively, but upon having previously obtained an opinion from the Ministry of Finance.
According to the Charter of the Autonomous Province of Vojvodina, the Assembly of Vojvodina has the authority to decide on borrowing by the Autonomous Province of Vojvodina, whereas a municipal assembly is the competent body for adoption of decisions on borrowing at the municipal level (provided that the opinion of the Ministry of Finance has been obtained). This procedure also applies to any city in Serbia, including the City of Belgrade.
2. GOVERNMENT BONDS
2.1 Issue process
According to the Law on Public Debt, the Serbian Government regulates the general terms for the issuance and sale of government securities on the primary market. The Minister of Finance may conclude an agreement with the National Bank of Serbia or the Central Registry, Depository and Clearing of Securities ("Central Securities Registry") for the execution of certain operations relating to government debt securities (bonds).
The Decree on the General Conditions for the Issuance and Sale of Government Bonds on the Primary Market regulates how the sale of government bonds is carried out on the OTC market, i.e.:
. by direct negotiation with "professional investors" (qualified investors); or . by auction.
According to the Decree on the General Conditions for the Issuance and Sale of Long-Term Government Bonds on International Financial Markets, the sale of government bonds on international financial markets may be carried out on a stock exchange or OTC.
The procedure for the issuance of government bonds is assisted by a selected legal advisor, while the procedure for the sale of government bonds is conducted by a selected bank (who also provides any other financial service related to the issuance of governmental bonds). The process of settlement of the sale of the bonds is performed by a foreign clearing house appointed by the Government after the proposal of the Ministry of Finance.
Government bonds issued for trade on international financial markets may be purchased by domestic and foreign legal entities and natural persons, and the maturity of such bonds must be at least two years from the
63 Guide to: Public Debt Management in Serbia date of issuance. The Government, upon the proposal of the Ministry of Finance, decides on the purchase of such bonds before their maturity, if such possibility is provided for in the decision on the issuance of such bonds.
2.2 Restrictions on trading
Foreign legal entities and natural persons may not purchase short-term government bonds. Namely, the Decree on the General Conditions for the Issuance and Sale of Short-Term Government Securities on the Primary Market provides that only Serbian residents may purchase Serbian government bonds. In addition, according to the Foreign Exchange Law, non-residents may not perform financial transactions to purchase short-term government bonds.
Non-residents may purchase long-term government bonds and must report on such transactions as prescribed by the National Bank of Serbia (such reporting is customarily carried out by custody banks and broker-dealer companies).
There are no any statutory restrictions on the listing of government issued bonds.
2.3 Format of Securities, Offer, Trading
2.3.1 Form
All government securities (including government bonds) must be issued in a dematerialized form.
2.3.2 Clearing
The Minister of Finance (or the appointed person authorized by the Ministry of Finance) decides on the clearing and settlement of the primary issue of government bonds available for trading on international financial markets. The Minister of Finance also issues a decision on the selection of a foreign clearing house.
On the other hand, clearing and settlement of government bonds that are traded on the domestic market is performed by the Central Securities Registry.
2.3.3 Public offer
According to the applicable regulation, there does not seem to be a requirement for the publication of a prospectus for the issuance of Serbian government bonds for sale on the domestic market. On the other hand, for government bonds intended for sale on foreign markets, the Decree on the General Conditions for the Issuance and Sale of Long-Term Government Bonds on International Financial Markets, requires a prospectus to be prepared by the Ministry of Finance (it should include, i.e. Serbia’s historical background, economy, the political system, the executive and legislative bodies, gross domestic product, foreign trade balance, monetary policy and foreign reserves, public finance, public debt and fiscal policies, etc.).
2.3.4 Listing
According to the Rules on Listing and Quotation of the Belgrade Stock Exchange, there is no need for the issuance of a prospectus if government bonds are listed on this stock exchange (the Belgrade Stock Exchange is the only stock exchange in Serbia).
So far, the only government bonds that have been listed on the Belgrade Stock Exchange are the government bonds based on the so called "old foreign currency savings deposits."
64 Guide to: Public Debt Management in Serbia
3. FOREIGN EXCHANGE REGULATIONS
Serbia is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2 (b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are not enforceable. Pursuant to the Foreign Exchange Law, a non-resident is authorised to make payments for the purpose of buying long-term debt securities and equity securities. Accordingly, we understand that in such a case payment claims against Serbia could not be enforced.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Serbia is not a member of the EU, and, therefore, the MiFID is not applicable. We are not aware of any other similar classification applicable in Serbia.
5. TAXATION
Interest income earned by a non-resident legal entity from resident legal entity is subject to withholding tax at the rate of 20%, and by a non-resident individual from a resident legal entity at the rate of 15%, and in both cases unless otherwise provided for in a double taxation agreement between the Republic of Serbia and the country of the non-resident income earner.
Capital gains realized by non-residents upon disposal of certain Serbian assets (including Serbian securities) are in principle subject to taxation by assessment of the tax authorities, but the relevant double taxation agreements may provide protection from the taxation of capital gains in Serbia.
5.1 Interest
With respect to withholding tax on interest payments, these are taxable if earned or realized by a non-resident taxpayer (entity or individual) or a resident individual from a resident entity. An example would be when a foreign legal person or individual (non-resident) or a resident individual is holding debt securities and the resident issuer of such debt securities is paying interest to the non-resident or resident holder.
However, interest income earned by non-resident legal persons, non-resident individuals, and resident individuals from debt securities issued by the Republic of Serbia, the Autonomous Province of Vojvodina, Local Self-Governing Units, and the National Bank of Serbia are exempt from taxation.
Interest income earned by non-resident legal persons from other types of debt securities (which are not exempt from taxation) is subject to taxation at the rate of 20%, which should be withheld and paid on behalf of non-residents by a paying entity (resident legal person). Double taxation treaties in most cases provide for a relief in the form of a reduced withholding rate of 10%.
The Serbian Law on Personal Income Tax provides a tax exemption from taxation of interest income gained by both resident and non-resident individuals from the securities issued by Serbia, an Autonomous Province, a Local Self-Governing Unit or the National Bank of Serbia. Interest income from other debt securities earned by both resident and non-resident individuals is in principle subject to taxation in Serbia at the rate of 15%. The tax should be withheld and paid by a resident legal person who pays the interest (on behalf of a non- resident individual who earns the interest).
65 Guide to: Public Debt Management in Serbia
5.2 Capital gains
The Corporate Income Tax Law excludes gains earned from the sale of government bonds, and from debt securities issued by autonomous provinces, local self-governments and the National Bank of Serbia from capital gains treatment, so that a resident and non-resident legal entity do not realize any taxable capital gains from the sale of Serbian government bonds. However, gains from the disposal of other debt securities are not exempt and are in principle subject to taxation. If non-resident entities realize such gains, the taxdue is 20%, unless the applicable double taxation treaty provides for protection from taxation (by giving the right to tax to the residence state only). However, a double taxation treaty cannot be applied by a non-resident legal person directly, but rather non-resident legal persons should file a tax return and claim the double taxation treaty protection before the tax authorities. The tax authorities will confirm the tax treaty protection (provided that all formal conditions are fulfilled) and issue the assessment that no tax is due.
The Personal Income Tax Law excludes gains earned by both resident and non-resident individuals from the sale of debt securities issued by Serbia, an Autonomous Province, local municipalities and the National Bank of Serbia from capital gains treatment.
6. DOCUMENTATION
6.1 Choice of law
There are no general restrictions on the Republic of Serbia agreeing to a choice of foreign law and jurisdiction with respect to government issued bonds.
6.2 Language requirements
Based on the applicable regulation, financial transactions of a purely local nature (with no foreign element involved) must be made in the Serbian language.
However, this restriction does not apply to transactions that are not of a purely local nature. In case of doubt, the best solution would be to create a bi-lingual document to cover both eventualities.
6.3 Legal counsel
Serbia does not have a designated institution to act as legal counsel with respect to financial transactions. However, there are explicit provisions in the Decree on the General Conditions for the Issuance and Sale of Long-Term Government Bonds on International Financial Markets that envisage that the Government chooses external legal counsel and the bank, as the financial advisors to assist it in the process of issuing and selling government bonds.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Republic of Serbia
As a general matter, in Serbia the rules for the enforcement of judgments equally apply to legal entities and natural persons, and also to the Republic of Serbia itself. Thus, if Serbia does not have sufficient funds on its bank accounts to satisfy any final and enforceable court judgment against it, then the seizure of its immovable and movable assets may be made in order to satisfy the judgment.
The enforcement of a judgment against the Republic of Serbia would generally begin with a legal claim against the Treasury Department of the Ministry of Finance, which is responsible for the management of a
66 Guide to: Public Debt Management in Serbia consolidated treasury account into which all income of the Republic of Serbia is deposited and from which all budgetary payments are made.
The Enforcement Law explicitly states that enforcement cannot be made against immovable and movable property that serves for the defence and protection of the country.
Furthermore, according to the Serbian Public Ownership Law, natural resources, goods in general use, publicly owned networks, land and water facilities, protected natural resources and cultural assets are not subject to enforcement. This draft law also stipulates that enforcement cannot be made against publicly owned real property which is, in whole or in part, used by the Republic of Serbia, an Autonomous Province or a Local Self-Governing Unit to exercise any of its rights and obligations, nor against any strategic or defence- related property.
7.2 Insolvency of the Republic of Serbia
The Bankruptcy Law explicitly states that bankruptcy proceedings cannot be carried out with respect to the Republic of Serbia, an Autonomous Province, or any Local Self-Governing Unit.
67 Guide to: Public Debt Management in Slovak Republic
SLOVAKIA
By Jana Palčiková and Zuzana Sláviková.
SLOVAKIA 68
1. GENERAL 69 1.1 Legal Framework 69 1.2 Restrictions in public debt transactions 70 1.3 Authority 70
2. GOVERNMENT BONDS 71 2.1 Issue process 71 2.2 Restrictions on trading 71 2.3 Format of Securities, Offer, Trading 72
3. FOREIGN EXCHANGE REGULATIONS 72
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 72
5. TAXATION 73
6. DOCUMENTATION 73 6.1 Choice of law 73 6.2 Language requirements 73 6.3 Legal counsel 73
7. ENFORCEMENT AND INSOLVENCY 74 7.1 Enforcement against the Federal State, its States and Municipalities 74 7.2 Insolvency 74
68 Guide to: Public Debt Management in Slovak Republic
1. GENERAL
1.1 Legal Framework
Pursuant to Act No. 460/1992 Coll. Constitution of the Slovak Republic, the territorial self-governing administration units are: . regions (vyššie územné celky); and . municipalities (obce).
Following the EU regulation, the new Constitutional Act No. 493/2011 Coll. on Fiscal Responsibility ("Constitutional Act") came into force on 1 March 2012 (except for the sanction mechanism against self- governing administration effective as of 1 January 2015), and is known as a "debt brake" aiming to promote a sustainable economic development. The Constitutional Act applies to: . subjects of the State administration including the National Bank of Slovakia; . subjects of the self-governing administration – i.e. regions and municipalities; and
. entities in which the subjects under lit. (i) or (ii) hold at least a 20% share (in case of the State, it applies to any entities in which the State holds directly or indirectly a 20% share of the registered capital or voting rights or the possibility to exercise a similar influence on the management of such entity).
The Constitutional Act introduces the rules for fiscal responsibility, limits of debt and measures triggering further actions if the respective limit is reached. The maximum limit is generally set to 50% of the GDP, whereby the maximum limit of 60% of the GDP within the transitory period until the end of 2017 is allowed. The State does not ensure and is not liable for the payment balance of the self-governing administration units; however, if the total debt of these units exceed 60% of their ordinary revenues from the previous fiscal year, the Ministry of Finance shall impose a fine on such unit – as stated above, the sanction mechanism is effective only as of 1 January 2015, whereby certain transitional provisions concerning the upper limit of debt apply, too.
Apart from the Constitutional Act, the State debt management is regulated by Act No. 386/2002 Coll. on the State Debt and on the State Guarantees as amended pursuant to which, the State debt is "the sum of the liabilities of the Slovak Republic from the previous years."
Moreover, there are also other budgetary rules which partially regulate other subjects (self-governing administration units) and their debt management, in particular: . Act No. 291/2002 Coll. on the State Treasury as amended; . Act No. 523/2004 Coll. on Budgetary Rules of Public Administration as amended;
. Act No. 583/2004 Coll. on Budgetary Rules for the Self-governing Territorial Units as amended ("Act on Municipal Budgets"); and . the measure of the Ministry of Finance of the Slovak Republic No. MF/010175/2004-42 Stating the Generic Classification, Organization Classification and Economic Classification of the Budgetary Classification as amended.
The budget of the Slovak Republic as well as of the self-governing units is adopted on an annual basis. In case of the State, the Slovak Parliament decides on the draft budget prepared by the Slovak Government and
69 Guide to: Public Debt Management in Slovak Republic approves it in the form of an act on the State budget for the upcoming year. The State budget also deals with the form of public debt financing (e.g through State bonds).
Similarly, the budgets of the self-governing units are to be approved by the respective body (meeting of appointed representatives). The basic principles which have to be followed when preparing the budget of the region/municipality are to secure the coverage of all regions/municipalities obligations under Slovak law. Pursuant to the Act on Municipal Budgets, it is possible for regions/municipalities to issue municipal bonds (komunálne obligácie).
1.2 Restrictions in public debt transactions
The self-governing units may conclude financial transactions, e.g. issue municipal bonds. Restrictions and limitations may be found in the laws governing these entities. According to Act No. 530/1990 Coll. on Bonds as amended ("Act on Bonds"), municipal bonds may be issued: . by a bank that from financial resources acquired through the sale of municipal bonds is to provide a loan to the respective self-governing unit requesting the issuance of such municipal bonds and guaranteeing their issuance with its real estate assets; . by the respective self-governing unit itself that guarantees the issuance of municipal bonds with its assets; the bank may also take over the guarantee for such bonds.
On the State administration level, the Slovak Republic is permitted to conclude financial transactions, e.g. issue governmental (treasury bonds) – again in line with the Act on Bonds.
1.3 Authority
The Constitutional Act created the Council for Budget Responsibility (Rada pre rozpočtovú zodpovednosť; "Council") as an independent body set up to monitor and evaluate the fiscal performance of the Slovak Republic. It consists of 3 members, appointed and recalled by the Slovak Parliament, whereby the Slovak Government, the Slovak President and the Governor of the National Bank of Slovakia each propose one member. Moreover, it is supported by a panel of 5 international experts. Through its expertise and the use of state-of-the-art analytical tools, the Council acts as a mirror to the Slovak Government, to improve public awareness in the area of public finance, facilitate better decision-making in the Slovak Parliament as well as perform other activities stipulated by law.
Apart from the Council, which rather fulfils the function of an independent observer and controller only, the Ministry of Finance of the Slovak Republic, together with the Debt and Liquidity Management Agency (Agentúra pre riadenie dlhu a likvidity, "ARDAL") and the State Treasury are key institutions of the State debt management whereas the Ministry of Finance of the Slovak Republic is responsible for managing State debt and for the preparation of the strategy and main goals of the debt management. The strategy for managing State debt includes these main goals: transparency, preference for middle-time and long-time goals, and risk optimization.
With regard to the self-governing territorial units, there is no such central body managing the public debt, however, to some extent, they are also subject to the supervision of the Ministry of Finance of the Slovak Republic (as they are e.g. to some extent connected to the State budget).
As to the powers of representation, the substantive rules dealing with the issue may be found in the statutory act by which the respective institution is established, or in the deed on the establishment of the respective entity. Moreover, the internal rules of the respective entity may also contain the rules on the powers of representation. It should be noted that such internal rules may include certain limitations above which the
70 Guide to: Public Debt Management in Slovak Republic transaction requires the prior approval of another body (e.g. meeting of appointed representatives) which should be diligently checked. A failure to observe such rules could invalidate the transaction.
2. GOVERNMENT BONDS
2.1 Issue process
According to the Act on Bonds, State bonds are issued on behalf of the Slovak Republic by the Ministry of Finance of the Slovak Republic.
State bonds may be issued: . pursuant to a decision of the Slovak Government in line with an Act on the State Budget for the relevant year; . for covering a deficit of the State budget in line with a decision of the Slovak parliament on a plan for covering a deficit of the state budget; and
. in line with Act No. 566/2001 Coll. on Securities and Investment Services as amended ("Act on Securities").
ARDAL manages issuances of governmental bonds.
The Ministry of Finance of the Slovak Republic may also authorize the National Bank of Slovakia or a foreign entity to perform activities concerning the issuance of governmental bonds.
Governmental bonds may be issued (besides the issuance of governmental bonds into the own portfolio of the Slovak Republic) through: . auctions (on the basis of offered competitive prices or on the basis of non-competitive bids); . subscriptions; . syndicates; . direct sale to investors; or . exchange for other State securities.
In order to prevent economic crises, any government bonds with a maturity exceeding one year issued after 31 December 2012 have to include Collective Action Clauses (CAC) in accordance with the Treaty establishing the European Stability Mechanism; this obligation does not apply to government bonds issued as part of the government bonds issue, the conditions of which specify a commencement date of the issued bonds that falls before 1 January 2013.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Slovak governmental bonds. They are traded as other bonds.
71 Guide to: Public Debt Management in Slovak Republic
2.3 Format of Securities, Offer, Trading
2.3.1 Form
2.3.2 Clearing
Pursuant to the Act on Securities and the Act on Bonds, bonds may be issued in both forms, i.e. as paper bonds (v listinnej podobe), and as book-entry bonds (i.e. dematerialised securities; v zaknihovanej podobe).
However, in general, governmental bonds are issued as bearer bonds for which it is explicitly required by Slovak law that these are issued only in a dematerialized form. Therefore, governmental bonds are mostly issued as dematerialized securities. In general, such dematerialised governmental bonds are kept within the Central Securities Depository of the Slovak Republic to which also the foreign clearing systems have access.
2.3.3 Public offer
Under Slovak law, in case of a public offer of governmental bonds, there is no obligation to publish a prospectus. The issue conditions are not subject to the prior approval of the National Bank of Slovakia.
2.3.4 Listing
In general, governmental bonds may be listed on the Bratislava Stock Exchange (Burza cenných papierov v Bratislave, a.s.) on the basis of an application of an issuer which shall meet the requirements pursuant to Slovak law. Also in this case, no prospectus is required.
3. FOREIGN EXCHANGE REGULATIONS
There are no specific foreign exchange restrictions apart from the exceptional case of a so called "foreign exchange administration emergency",1 when it is forbidden to make any payments from Slovakia to foreign countries or in fact to sell any Slovak securities to non-residents.
As Slovakia is one of the parties to the Agreement on the International Monetary Fund ("IMF"), exchange contracts which involve the currency of any member state of the IMF and which are contrary to the exchange control regulations of that member state maintained or imposed consistently with the Agreement on IMF shall be unenforceable in the territories of any member state.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Section 8a of the Act on Securities expressly states that State, regional or municipal authorities, the state or regional authorities of other countries, ARDAL, and public authorities of other countries that are charged with or intervene in the management of public debt, as well as the National Bank of Slovakia, other central banks, the International Monetary Fund, the European Central Bank, the European Investment Bank and other similar international organizations are considered to be professional clients.
1 According to Act No. 202/1995 Coll., the Foreign Exchange Act as amended, in case of an adverse development of the balance of payments which represents a substantial danger to the ability of the Slovak Republic to pay its foreign obligations or for the internal monetary stability of the Slovak Republic, the Government of the Slovak Republic may, on the National Bank of Slovakia's motion, declare a state of foreign exchange administration emergency. The emergency cannot last longer than three months as of the declaration date.
72 Guide to: Public Debt Management in Slovak Republic
The respective statutory provision implements Directive (EC) No. 2004/39 on Markets in Financial Instruments ("MiFID").
5. TAXATION
In Slovakia, a 19% income tax rate applies for natural persons (or 25% for an amount exceeding 176,8 times the living minimum, i.e. in 2013 exceeding EUR 34.401,74) and a 23% income tax rate for legal persons (entities). In general, the proceeds from the transfer of the securities are subject to income tax.
With regard to the proceeds on the bonds, such proceeds are also subject to a 19%, respectively 23% or 25% income tax. It should be noted that such proceeds are subject to a withholding obligation only in case of, inter alia, natural persons, entities the purpose of which is not a business activity or in case of a taxable party with limited tax liability (i.e. in general a non-resident) which does not have a permanent establishment in Slovakia. Other entities are obliged to declare the tax in a tax return.
However, even though the proceeds from governmental bonds are generally subject to 19% (respectively 23% or 25%) income tax, proceeds from governmental bonds issued and registered abroad until 28 February, 2009 are not subject to income tax. Furthermore, effective as of 1 January, 2011, in general, the proceeds from governmental bonds (as well as from treasury bills) are no longer deemed as a source of income in case of a taxable party with a limited tax liability.
6. DOCUMENTATION
6.1 Choice of law
In general, it possible under Slovak law to agree upon a contractual choice of law.
A Slovak court would be bound to recognize such contractual choice of law provided that such choice of law is in line with the "Rome I Regulation" (Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations) or with a respective bilateral treaty, or with the Act No. 97/1963 Coll. on International Private Law and Procedure as amended ("Act on International Private Law") as the case may be.
Choices of jurisdiction are binding on the Slovak Republic, subject to Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ("Brussels I Regulation") and, to the extent outside of the scope of the regulation, by the Convention of 16 September 1988 on jurisdiction and the enforcement of judgments in civil and commercial matters ("Lugano Convention"), intentional treaties, and the Act on International Private Law and Procedure, as the case may be.
6.2 Language requirements
Slovakia may conclude financial transactions documented in other languages than Slovak. However, it should be noted that in general, a translation into the Slovak language prepared by a certified translator (i.e. a translator included in the list maintained by the Slovak Ministry of Justice) may be required by the respective judicial or administrative authority in Slovakia.
6.3 Legal counsel
We are not aware of any specialized legal team used for legal counselling for financial transactions. In general, Slovak institutions which deal with financial transactions are highly specialized and use their own
73 Guide to: Public Debt Management in Slovak Republic employees trained in the respective area. Ad hoc, law firms may be also employed. However, in such case, the rules on public procurement shall be followed.
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Any claim arising from governmental bonds or any other form of financing of public debt may be enforced against the Slovak Republic within the execution proceedings pursuant to Act No. 233/1995 Coll. on Court Executors and Executive Activity (the Execution Order) as amended ("Execution Order"), provided that there is a valid execution title (e.g. a valid decision of the competent court).
However, State property may be exempt from the enforcement proceeding on an absolute or relative basis. The absolute immunity concerns State property listed in the Execution Order such as revenues to the State budget, securities or participations in legal entities owned by the State, funds aimed at covering the State debt, etc. If the State property is not subject to absolute immunity, the enforcement is possible only with respect to the assets in the management of such manager/entity which has generated such enforced claim. Still, on an ad-hoc basis, following a motion, the court may suspend the enforcement proceeding due to the fact that the respective assets are necessary for the fulfilment of State tasks or for the public benefit.
7.2 Insolvency
In general, the Slovak insolvency proceedings are regulated by Act No. 7/2005 Coll. on Bankruptcy and Restructuring Proceedings as amended ("Bankruptcy Act"). However, Section 2 of the Bankruptcy Act expressly states that, inter alia, the State, regions and municipalities are not subject to the Bankruptcy Act.
74 Guide to: Public Debt Management in Slovenia
SLOVENIA
By Klemen Radosavljević, Uroš Notar and Branko Čevriz.
SLOVENIA 75
1. GENERAL 76 1.1 Legal Framework 76 1.2 Restrictions in public debt transactions 76 1.3 Authority 77
2. GOVERNMENT BONDS 77 2.1 Issue process 77 2.2 Restrictions on trading 78 2.3 Format of Securities, Offer, Trading 78
3. FOREIGN EXCHANGE REGULATIONS 79
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 79
5. TAXATION 79
6. DOCUMENTATION 80 6.1 Choice of law 80 6.2 Language requirements 80 6.3 Legal counsel 80
7. ENFORCEMENT AND INSOLVENCY 81 7.1 Enforcement against the Federal State, its States and Municipalities 81 7.2 Insolvency 81
75 Guide to: Public Debt Management in Slovenia
1. GENERAL
1.1 Legal Framework
Public debt management in Slovenia is regulated on two different levels, i.e. on the State and on the local level. Public debt management on the State level is regulated by, inter alia, the Public Finance Act (Zakon o javnih financah, "ZJF"), whereas debt management on the local level is regulated by, inter alia, the Municipality Financing Act (Zakon o financiranju občin, "ZFO"), the Rules on Procedure of the Indebtedness of Municipalities (Pravilnik o postopkih zadolževanja občin, "PIM") and ZJF. The level of borrowing for public debt management is determined by a special law which determines the implementation of the State budget for an individual year passed by the Parliament or a local body.
1.2 Restrictions in public debt transactions
1.2.1 Federal State
The State may incur debts in Slovenia and abroad up to the level stipulated by law. The debt in a current year shall not exceed the deficit in balance between income and expenditure, financial assets and liability account and repayments of principal on loans which are due in a current fiscal year and only to the amount necessary for the repayment of budget loans which are due in the following two fiscal years.
The State may manage its national debt by drawing loans and issuing securities in order to raise the funds necessary either to repay the public debt before it falls due or to purchase its own securities, provided that:
(i) measures to establish economic stability are supported, (ii) expenses involving the public debt are reduced, or (iii) the quality of borrowing is improved and no increase in the public debt is recorded. The State may also conclude financial transactions to reduce or exclude currency and interest rate risks on the market (derivative financial instruments). The State may for purposes of public debt management also intervene on a secondary market by purchasing and reselling its own securities either within or outside the organized securities market.
1.2.2 Municipality
For the implementation of its budget, a municipality may only incur debts, for investments provided for in such municipality's annual budget. ZFO determines a maximum limit of borrowing by a municipality, which is when all outstanding liabilities from debts (including principal and interest), financial leases and other debts, including public guarantees, reach 8% of the realized budget revenue from the balance of revenues and expenditures of the local budget from the year prior to the year in which the municipality wants to incur debt.
A municipality may also borrow funds in order to manage the debt of its budget. In this way, municipalities may borrow resources required for re-payment of debt before this falls due if this: . reduces costs of the debt; or
. improves the structure of debt so that the risk from market and macroeconomic fluctuations is effectively reduced.
Such debt managing must be approved by the Ministry of Finance. As a general rule, a municipality is obliged to obtain at least three offers from three different creditors (although it is not clearly defined whether such
76 Guide to: Public Debt Management in Slovenia three creditors may be part of the same banking group) with regard to the terms of the new anticipated debt (loan).
Furthermore, should the municipality incur debt in the total annual amount of EUR 400,000 or more, the municipality must appoint an independent financial and legal counsel with the appropriate professional qualifications and relevant experience in financial advisory business for the purposes of (i) selection of the creditor, (ii) negotiations prior to conclusion of the contract on indebtedness, and (iii) any other necessary activities in the process of debt incurring.
1.3 Authority
1.3.1 Federal State
Decisions regarding transactions in relation to public borrowing, public debt management, and securities market interventions shall be adopted by the Minister of Finance on the basis of the annual budget financing programme to be adopted by the government. These transactions shall be concluded by the Minister of Finance or another person authorized by the Minister in writing.
The decisions regarding liquidity borrowings shall be passed by the Minister of Finance or person authorized by the Minister in writing.
1.3.2 Municipalities
Transactions regarding debt management on a local level are concluded by the mayor of a municipality or a person whom the mayor authorizes. The decision has to be approved by the Ministry of Finance, whereby the consent from the Ministry forms an integral part of the contract. Such approval is also required in case of borrowing, when the debt incurred and its repayments do not take place in the same fiscal year.
Other borrowing, including liquidity borrowing may be concluded by the mayor and is not subject to approval by the Ministry of Finance.
2. GOVERNMENT BONDS
2.1 Issue process
The Ministry of Finance issues bonds, as well as treasury bills by way of auction or syndicated issuing.
2.1.1 Auction
Only primary dealers who are selected by the Ministry of Finance for an agreed period and contracted may participate in auctions directly (currently about 15 financial institutions). Other investors can participate in the auctions in an indirect manner, by submitting their order(s) for subscription and payment of bonds for their own account to the primary dealers. Primary dealers may therefore submit bids in their own name either for their own account or for the account of the investors. The auction is carried out through an electronic system provided by Bloomberg ("BAS").
2.1.2 Syndicated issuance
After entering the European Monetary Union in 2007 the government turned to a syndicated way of issuing bonds. The applied procedure is standard and based on the practice in other EU Member States. Contrary to the auction procedure, there are no special rules prescribed. The government selects 4 to 5 financial
77 Guide to: Public Debt Management in Slovenia institutions out of the primary dealers and drafts a Memorandum of Understanding indicating the key obligations of the syndicate. The syndicate of financial institutions is then required to prepare a Joint Proposal which should include a term plan, prospectus, division of work with regards to distribution and marketing inside the syndicate, etc. Other primary dealers (outside the syndicate) may also place their orders for issued bonds; however the government usually provides these dealers with a maximum of 10% of the bonds of the whole issued series.
2.2 Restrictions on trading
There are no statutory restrictions on the trading and/or listing of Slovenian government bonds. In accordance with the agreement between the Ministry of Finance and the Ljubljana Stock Exchange all government bonds (and treasury bills) issued for budget financing are listed on the Ljubljana Stock exchange's official market. Government bonds may also be traded over-the-counter (OTC).
2.3 Format of Securities, Offer, Trading
2.3.1 Form
Bonds in Slovenia are issued as dematerialized securities in a book-entry form registered on the holders’ accounts in the central securities registry maintained by the local central securities depository, the KDD – Central Clearing and Depository Corporation Inc., Ljubljana.
The government bonds are freely transferable by the securities holder's transfer order which is executed in the central registry by the holder's registry member.
Slovenia has also issued three USD denominated Eurobond 144A / Reg S bonds listed in the Luxembourg Stock Exchange, one in the year 2012 and two (dual-tranche) in the year 2013.
2.3.2 Clearing
There is no legal requirement to use the local clearing system. In 2008 KDD established a connection with Euroclear and Clearstream Banking Luxembourg. By establishing the said connections, KDD enabled domestic issues of Slovenian government bonds, including bond trading and settlement in KDD’s central registry as well as in pan-European trading and settlement systems.
No prospectus needs to be published in Slovenia either for the public offer or for a stock exchange listing of sovereign bonds.
2.3.3 Public offer
As mentioned above, any debt securities (including sovereign bonds) issued by any Member State of the EU or any regional or local authority of an EU Member State (e.g. municipalities) are, under Art. 41 of the Market in Financial Instruments Act (Zakon o trgu finančnih instrumentov, "ZTFI") exempt from the prospectus obligation.
2.3.4 Listing
Similarly to the above, according to Art. 41 ZTFI any debt securities (including sovereign bonds) issued by any Member State of the EU or any regional or local authority of an EU Member State (e.g. municipalities) are exempt from the prospectus obligation.
78 Guide to: Public Debt Management in Slovenia
2.3.5 Further requirements
According to ZTFI, any new issuance of debt securities by an entity whose securities are listed on an organised market in Slovenia or other EU Member State must be published (customarily on SEONET – the electronic dissemination information system of the Ljubljana Stock Exchange).
3. FOREIGN EXCHANGE REGULATIONS
There are no general restrictions on payments by Slovenian public entities. Slovenia is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). According to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state and which are contrary to the exchange control regulations of such member state which are in line with the IMF Agreement are unenforceable. Accordingly, we understand that in such a case payment claims against Slovenia could not be enforced.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
Slovenian public sector entities (excluding the Republic of Slovenia, regional or local authorities, Bank of Slovenia) are not automatically qualified as professional clients under ZTFI which implements the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). It is therefore recommendable to seek guidance as to the extent and quality of the disclosure and advice required to be rendered before concluding a financial transaction.
5. TAXATION
According to Art. 70 of the Slovenian Corporate Income Tax Act (Zakon o davku od dohodkov pravnih oseb, "ZDDPO-2") income with its source in Slovenia of resident and non-resident corporate entities shall be subject to withholding tax (the general rate is 15%). Nevertheless, taxation of income from securities issued by the Republic of Slovenia is not subject to withholding tax.
Interest on the Notes (bonds) received by a legal person resident for taxation purposes in the Republic of Slovenia or a permanent establishment (poslovna enota) in the Republic of Slovenia of a legal person not resident for taxation purposes in the Republic of Slovenia will be subject to Slovenian Corporate Income Tax (davek od dohodkov pravnih oseb) as a part of its overall income tax levied at the rate of 17%. (for 2014 the income tax rate will be 16% and for 2015 and the following years the income tax rate will be 15%).
According to Art. 132 of the Slovenian Personal Income Tax Act (Zakon o dohodnini, "ZDoh-2"), taxation of interest income for individual persons (personal income) is subject to withholding tax (in the amount of 25%). However, any payment of interest from securities issued by the Republic of Slovenia on the basis of ZJF is free from withholding tax.
Any individual who is liable for Slovenian Personal Income Tax on interest income under the Notes as non- business income and receives an amount of interest under the Notes free of any deduction for accounting of this tax shall (i) declare each amount so received in a tax return filed by the 15th day of the calendar month for the period of the previous three calendar months; and (ii) pay the amount of tax in accordance with the relevant decision of the tax authorities.
ZDPPO-2 and ZDoh-2 (and the Slovenian Tax Procedure Act (Zakon o davčnem postopku, "ZDavP-2") provide for additional exemptions from withholding tax, in case the issuer is not the Republic of Slovenia.
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Payments of interest from debt securities issued by a company established under Slovenian law (i) which do not contain an exchange option for ownership securities, and (ii) are, at the time when the issuer will make payments of interests under the bonds, admitted to trading on a regulated market or a multilateral trading facility ("MTF") within an EU Member State or an OECD member state, are free of withholding tax.
If, however, at the time when the issuer (who is a company) will make a payment of interests under such securities, the securities are not admitted to trading on a regulated market or an MTF within an EU Member State or an OECD member state then: . such payment will be subject to withholding tax payable by the issuer at the maximum rate applicable under Slovenian taxation law (currently 25%); and . if the income derived from such interest payment would, if received directly by its beneficial owner, be exempted from Slovenian tax or subject to tax at a rate lower than applied for the purpose of such withholding tax, the beneficial owner will be entitled to claim a refund from the Slovenian tax administration of the amount of tax so withheld in excess of that which would have otherwise been payable.
6. DOCUMENTATION
6.1 Choice of law
There are no constraints against the choice of a foreign governing law other than those contained in the "Rome I Regulation" (Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.
Choices of jurisdiction are binding on Slovenia, subject to Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ("Brussels I Regulation") and, to the extent outside of the scope of the regulation, by the Convention of 16 September 1988 on jurisdiction and the enforcement of judgments in civil and commercial matters ("Lugano Convention") and Slovenian law on civil procedure. Choices of courts outside the European Union or the European Free Trade Association (except Liechtenstein) are, to the extent exclusive, likely to be unenforceable.
6.2 Language requirements
According to the Public Use of the Slovene Language Act (Zakon o javni rabi slovenščine, "ZJRS") the representatives of government bodies and public authorities draft and conclude each agreement in both Slovenian and a foreign language.
6.3 Legal counsel
Generally, the Republic of Slovenia is represented by the "State Attoney's Office" (Državno pravobranilstvo) in legal matters. The Ministry of Finance is responsible for the issuance of government bonds on behalf of the Republic of Slovenia and thus for the associated legal issues. The Republic of Slovenia also uses external legal advisors – i.e. law firms, for example with regard to the issuance of government bonds.
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7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, claims against the Republic of Slovenia and Municipalities are enforceable in accordance with the provisions of the Enforcement Act (Zakon o izvršbi in zavarovanju, "ZIZ"). However, according to ZIZ, enforcement against the Republic of Slovenia is not possible with respect to assets which are necessary for the conduct of its principal duties and activities. With regard to municipalities, enforcement is not possible with respect to (i) assets provided by the Republic of Slovenia for the performance of tasks which have been delegated to the municipalities, (ii) assets as determined by the law on financing of municipalities, (iii) assets designated for natural disaster recovery, and (iv) assets designated for co-financing of tasks and programmes with regard to structural and cohesion policy of the European Union.
7.2 Insolvency
There are no legal stipulations on whether the Republic of Slovenia can become bankrupt and there is no case law with regard to the respective matter.
Similarly, there are no legal stipulations and no case law on bankruptcy of municipalities. According to legal theory municipalities may be subject to bankruptcy. However, according to the Slovenian Constitution, a municipality, which is unable to completely provide for the performance of its duties due to insufficient economic development, shall be assured additional funding by the Republic of Slovenia in accordance with the principles and criteria provided by law. The latter may imply that in case of a municipality's financial difficulties, the Republic of Slovenia may/should step in with additional funding and in effect prevent its bankruptcy.
81 Guide to: Public Debt Management in Ukraine
UKRAINE
By Oksana Volynets and Anna Kvederis.
UKRAINE 82
1. GENERAL 83 1.1 Legal Framework 83 1.2 Restrictions in public debt transactions 85 1.3 Authority 85
2. GOVERNMENT BONDS 85 2.1 Issue process 85 2.2 Restrictions on trading 86 2.3 Format of Securities, Offer, Trading 87
3. FOREIGN EXCHANGE REGULATIONS 87
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION 87
5. TAXATION 88
6. DOCUMENTATION 88 6.1 Choice of law 88 6.2 Language requirements 88 6.3 Legal counsel 89
7. ENFORCEMENT AND INSOLVENCY 89 7.1 Enforcement against the Federal State, its States and Municipalities 89 7.2 Insolvency 89
CONTACT INFORMATION 90
OUR OFFICES 91
82 Guide to: Public Debt Management in Ukraine
1. GENERAL
1.1 Legal Framework
The legal framework of the budgetary system of Ukraine and the main principles of the sovereign debt issuance and management are laid down in the Budget Code of Ukraine of 8 July 2010 ("Budget Code"). As a two level system, it is represented by the State Budget and local budgets.
At the national level, the Parliament of Ukraine (Verkhovna Rada) by adopting legislative acts, inter alia, introduces the State Budget of Ukraine, adopted annually ("State Budget Law"), the budget system, the procedures for the State and municipal debt accumulation and discharge; rules for issuance and circulation of State securities, their types and categories (which are detailed in the Law of Ukraine "On Securities and Stock Market", dated 23 February 2006, as amended ("Securities Law)). As provided by the Constitution of Ukraine, the Cabinet of Ministers of Ukraine ("CMU"), as the executive authority at the national level, elaborates the draft of the State Budget Law, ensures, and accounts for, its fulfillment. The CMU is also authorized to service the State debt and take decisions on the issuance of governmental bonds for internal and external borrowings.
At the regional level, the respective budgets are approved by the local self-governance bodies (local municipal authorities) which are represented by territorial communities (hromady), i.e. the Autonomous Republic of Crimea ("ARC"), 24 main regions (oblast), districts (rayon), cities, city districts, settlements and villages.
Although Ukraine is a unitary state, the ARC adopts its own Constitution; it is vested with self-governance authorities, has its own Parliament (the "ARC Parliament"), and the Cabinet of Ministers. The cities Kyiv and Sevastopol, enjoy a special status.
The amendments introduced by the Budget Code were aimed at decentralizing budget funds administration at the national level and providing a more efficient system of inter-budget relationships and funds allocation. Under the applicable law the local budgets are independent. At the same time, the State financially supports local budgets and ensures minimum per capita local budgets by inter-budgetary transfers. Also, the State (Government) bears all local expenditures imposed on the national level. The Ministry of Finance of Ukraine ("MFU"), as the executive authority principally responsible for the development, management and fulfilment of the State Budget, is vested with oversight functions over the local budgets; for instance it participates in the development of local budgets, and approves borrowing by the local authorities.
The Budget Code differentiates between the public (State) debt and local (municipal) debt. The first one would generally include the amount of all borrowings incurred by the State of Ukraine. The total amount of borrowings received by the ARC and territorial communities of cities make up municipal debt. The overall volume of the public (municipal) debt as well as the total amount of State (municipal) guarantees are defined for each budget period by the State Budget Law (decision on approving the local budget).To monitor compliance with the State budget policy, the MFU keeps the Register of State debt and state-guaranteed debt, the Register of State guarantees and the Register of municipal borrowings and guarantees.
1.1.1 State debt
As provided by the Budget Code the total amount of public debt (and state-guaranteed debt) is limited to 60% of the GDP. The member of the CMU responsible for the formation and implementation of the State budgetary policy is authorized by the Budget Code to incur internal and external debt on behalf of the State of Ukraine.
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The CMU defines the terms and conditions of the borrowing, including the type, currency, terms and interest rate.
The internal public debt consists of: (i) securities issued by the State of Ukraine (bonds, T-bills, other debt instruments); and (ii) state-guaranteed debt, i.e. the guarantees issued by the State to secure borrowing obligations of Ukrainian business entities under loan (credit) agreements.
The external public debt may be incurred by way of: (i) securities issued by the State and placed on the external market (i.e. issuance of Eurobonds and USD-denominated bonds), (ii) loans (credits) received from foreign lenders, and (iii) state-guaranteed debt, i.e. guarantees issued under external borrowings by Ukrainian business entities.
For the issuance of State bonds please refer to section 2 below. As for loans (credits) raised by the State, the Budget Code requires that such loans (credits) are received from foreign states, banks and international financial institutions based on the international treaties which Ukraine is a party to. Notably, such borrowing can be carried out exclusively for the implementation of definitive investment programmes (projects). The funds required for the repayment of principal as well as amounts for the debt servicing shall be allocated in the State Budget Law for the tenure of the loan (credit) agreement.
As provided by the Budget Code, contingent liabilities may be incurred by the State to secure borrowing obligations (for the full amount or partially) of a commercial entity resident in Ukraine.
The State Budget Law usually allows for the guaranteeing of debt obligations of the enterprises of the State sector related to strategic investment projects. The decision on the issuance of guarantees is generally within the authority of the CMU or it can be issued on the basis of an international treaty and within the amount permitted by the State Budget Law.
1.1.2 Local debt
The local authorities are permitted under the Budget Code to issue debt exclusively to finance the deficit of so-called development budget (i.e. cannot be used to finance current expenditures). The maximum permitted amounts of the local debt and municipal guarantees are approved for each budgetary year and indicated in the local budget.
Internal debt may be incurred by the ARC Parliament and city councils through (i) issuance of municipal bonds, (ii) receiving loans, and (iii) issuance of municipal guarantees.
As for external borrowings, only cities with a population over 300,000 people (i.e. around 25 cities in Ukraine) are permitted to borrow on external financial markets via municipal bond issuances without any restrictions. All city councils are allowed to receive borrowed funds in the form of a loan (credit) from international financial institutions, such as the World Bank, EBRD and other international financial institutions.
The local authorities are also authorized to issue guarantees securing the borrowing obligations of the local municipal entities undertaking investment programmes for the development of infrastructure or resource- saving technologies. The municipal guarantees are basically subject to the same requirements as the State guarantees.
In addition, the amounts and terms of borrowings as well as guarantees by local authorities are subject to prior approval by the MFU.
The head of the local financial department is authorized to represent the ARC and city councils in various borrowing arrangements (but only within the amounts set forth by the respective local budget).
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1.2 Restrictions in public debt transactions
At a national level the major risks associated with public debts are the increase of the State budget expenditures due to the increase of amounts of principal and amounts for debt servicing as well as a reduction of the sources of the State budget financing out of borrowed funds. The MFU, as principal public debt risk manager, shall within one month after the enactment of the State Budget Law adopt and publish the programme for the public debt management envisaging measures for risk reduction and, inter alia, instruments to be issued to ensure the financing of the State budget.
Generally, the Budget Code provides for a list (non-exhaustive) of transactions for public debt management which includes swap, issuance, acquisition, redemption and alienation of State/local debt obligations. Except that such transactions shall be executed (i) to ensure the efficiency of the State (local) debt management, and (ii) within the overall amount of public debt for the respective budget period, no other requirements are provided. The MFU, the ARC Parliament and city councils (or the head of the relevant financial department) are authorized to enter into transactions for the State (local) debt management.
1.3 Authority
As provided by the Securities Law, sovereign bonds may be of the following types:
(i) State bonds of domestic borrowings (obligatsii vnutrishnih derzhavnyh pozyk), (ii) State bonds of international borrowings (obligatsii zovnishnih derzhavnyh pozyk), and (iii) special-purpose bonds of domestic borrowings (tsil’yovi obligatsii vnutrishnih derzhavnyh posyzk).
As a source of State Budget financing, the issuance and placement of sovereign bonds are governed by the budget legislation. The securities regulations are not applicable and no registration with the National Commission on Securities and Stock Market of Ukraine ("Securities Commission") for their issuance is required (unlike the placement of bonds by other Ukrainian issuers, including municipalities).
2. GOVERNMENT BONDS
2.1 Issue process
As provided by the Securities Law, sovereign bonds may be of the following types: (i) State bonds of domestic borrowings (obligatsii vnutrishnih derzhavnyh pozyk), (ii) State bonds of international borrowings (obligatsii zovnishnih derzhavnyh pozyk), and (iii) special-purpose bonds of domestic borrowings (tsil’yovi obligatsii vnutrishnih derzhavnyh posyzk). As a source of the State Budget financing, the issuance and placement of sovereign bonds are governed by the budget legislation. The securities regulations are not applicable and no registration with the National Commission on Securities and Stock Market of Ukraine ("Securities Commission") for their issuance is required (unlike the placement of bonds by other Ukrainian issuers, including municipalities).
2.1.1 State bonds
As a source of financing of budget expenditures, the terms and volumes of State bonds issuance are defined based on the Budget Code rules and provisions of the State Budget Law for a respective budget year. Specific terms of issuance are determined by the CMU (such as currency, term, interest etc.).
Domestic and international bonds may be issued as (i) short term bonds maturing within one year, (ii) middle term bonds (with a maturity from one to five years), and (iii) long term bonds (with a maturity exceeding five years).
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There is no regulatory framework for external bonds placements. The law only provides that the placement, servicing and redemption are organized and managed by the MFU which may also involve banks, investment companies and other institutions in this process by entering into respective agreements with these institutions. As a practical matter, Ukraine has already raised funds a number of times by way of sovereign bonds external issuances (Eurobonds and USD-denominated bonds).
Bonds placed domestically are governed by a resolution of the CMU specifying the type of bonds and the general terms of their issuance and allocating functions among the State authorities involved. Such bonds may be denominated in the Ukrainian currency ("UAH") or in a foreign currency. As additional instruments, a middle term and long term indexed bonds (redemption value is based on UAH/USD exchange rate) were introduced.
The domestic bonds’ issuer functions are assigned to the MFU, represented by the Minister of Finance. The National Bank of Ukraine ("NBU"), which is the central bank of the country, performs the function of the general agent. Also by operation of law, the NBU (its structural subdivision) operates as the central depository institution for the securities issued by the State.
As provided by the CMU regulation, all initial placements of State domestic bonds are carried out by the NBU through the primary dealers system. The primary dealers are the top Ukrainian commercial banks selected by the MFU on a competitive basis, who have entered into an agreement with the MFU.
Simultaneously, the primary dealers are also licensed securities custodians having contractual relationships with the NBU, acting as a depository institution.
No restrictions or limitations are provided on the State bonds circulation on the secondary market. General securities law requirements would come into play, in particular the requirement of trading in securities through a licensed securities trader subject to very narrow exceptions.
2.1.2 Municipal bonds
Under the Securities Law, municipal bonds may be in the form of bonds of internal borrowings (obligatsii vnutrishnih mistsevyh pozyk) and bonds of external borrowings (obligatsii zovnishnih mistsevyh pozyk). Domestic bonds may be issued by the ARC Parliament and by city councils.
As mentioned above, the issuers of external municipal bonds are limited to cities with a population over 300,000. However, there are practical difficulties. Firstly, the Securities Commission has failed to introduce a regulation for external municipal bonds issuances. Secondly, there is an archaic requirement of the Securities Commission to receive a permit for a placement abroad. As a result, all municipal bonds of international borrowing have been placed indirectly through non-resident issuers.
An issuance of municipal bonds of domestic borrowings requires prior registration by the Securities Commission. Both public and private placements are available. The Securities Commission regulations allow issuances of municipal bonds both in UAH and a foreign currency; the latter is subject to Ukrainian currency exchange requirements.
2.2 Restrictions on trading
There are no statutory restrictions or requirements on the trading and/or listing of Ukrainian State or municipal bonds. Trading can take place both on organized market (i.e. stock exchanges) as well as over-the-counter (OTC).
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2.3 Format of Securities, Offer, Trading
2.3.1 Form
State and municipal bonds are issued in non-documentary form. The depositary accounting of the State and municipal securities is carried out by the NBU.
2.3.2 Clearing
No statutory requirements on the clearing of transactions with State or municipal bonds are provided. The NBU, as the central depository institution for state-issued securities, together with the Securities Commission elaborates and introduces requirements for the circulation of such securities, including rules for their clearing and settlements.
In October 2013, the new Law of Ukraine "On the Depositary System of Ukraine" will become effective. The Securities Commission has already introduced the requirements and procedures for clearing activities with securities. However, the specifics of the State securities clearing and accounting are yet to be elaborated by the NBU.
2.3.3 Public offer
As already mentioned, Ukrainian securities regulations are not applicable to State bonds.
Currently, there is no requirement for a State bonds’ prospectus to be published either in the initial offering or for a stock exchange listing. For the public offering of municipal bonds, a prospectus shall be published after its registration with the Securities Commission.
3. FOREIGN EXCHANGE REGULATIONS
There are no currency control restrictions on the initial placement of sovereign bonds at external markets including on money transfers to foreign paying agents.
Generally, Ukrainian currency control restrictions apply to cross-border transfers by Ukrainian residents of consideration for the bonds, such as e.g. an individual license of the NBU to be obtained by a resident payer prior to a money transfer.
Ukraine is a party to the Agreement of the International Monetary Fund ("IMF Agreement"). Pursuant to Article VIII Section 2(b) of the IMF Agreement, exchange contracts involving the currency of any IMF member state shall be unenforceable if such contracts are contrary to the exchange control regulations of such member state maintained or imposed consistently with the IMF Agreement. Although we are not aware of any application of this provision in Ukraine, its use as a defence for non-performance of contractual obligations may not be fully excluded.
4. CLASSIFICATION OF PUBLIC SECTOR ENTITIES IN TERMS OF INVESTMENT REGULATION
As a part of the EU integration process, Ukraine declared an approximation of its regulatory acts in selected areas to EU Acquis Communautaire. However, neither the Markets in Financial Instruments Directive 2004/39/EC ("MiFID") nor any its provisions have been implemented into the national legislation.
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Ukrainian law does not contain a definition of "professional client" in the meaning used by MiFID or a similar term which may apply for the classification of the public sector entities.
5. TAXATION
Generally, the Tax Code of Ukraine of 2 December 2010 ("Tax Code") provides for a 15% withholding tax on interest payments abroad (for tax purposes, interest is broadly defined to include interest payable on bonds). This rate may be reduced up to 10% under the majority of effective double taxation treaties to which Ukraine is a party. Furthermore, the old USSR tax treaties with Spain (which is still effective) and the tax treaties with the UK and the USA, provide for a zero withholding tax rate for any interest. There are also a number of treaties (e.g. with Algeria, Canada, Egypt, Greece, or Japan) providing specifically for a zero withholding tax rate on interest paid under State or municipal bonds. However, there is no special tax treatment of coupon interest payments, so general rules on interest taxation apply.
The 15% withholding tax does not apply to the income derived by a non-resident in the form of interest or income (discount) on State securities or municipal bonds which are secured by the State or municipal guarantees and which are sold or placed to non-residents outside Ukraine through authorized non-resident agents.
6. DOCUMENTATION
6.1 Choice of law
As a matter of Ukrainian law, no specific requirements are set forth regarding the governing law for bond placements by the State. So, the general choice of law rules apply.
Under the Law of Ukraine "On International Private Law" ("International Private Law"), a foreign law may be chosen to govern the private-law relations involving a so-called "foreign element".
There are a number of exceptions when Ukrainian law may be applied by a Ukrainian court. In particular, when a foreign law may be deemed as (i) restricting the application of imperative (mandatory) Ukrainian law rules, or (ii) inconsistent with basic Ukrainian legal order (public order).
Based on the Private International Law (i.e. foreign element rule) the choice of foreign jurisdiction as a dispute resolution forum should be generally valid unless the law provides for the exclusive jurisdiction of Ukrainian courts. The International Private Law, inter alia, provides for the exclusive jurisdiction of Ukrainian courts over disputes related to the issuance or destruction of securities executed in Ukraine. However, the application of this rule has not been clarified by court practice in the context of State bonds issuance. The reference of the disputes to a foreign court may also be limited by the complexity of the recognition and enforcement of foreign court judgments in Ukraine. Specifically, such judgments would be recognized and enforced in Ukraine based on the international treaties which Ukraine is a party to (such treaties exist with certain CIS countries and a few Eastern European countries, Cyprus, China, Turkey, etc.); otherwise, the principle of reciprocity is applicable unless provided otherwise.
6.2 Language requirements
The Ukrainian law on languages may be interpreted as requiring the obligatory use of the Ukrainian language (in addition to a foreign language version) for agreements executed by Ukraine.
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6.3 Legal counsel
The MFU (local financial departments) is the only authority for State (municipal) financial transactions. However, the MFU (local financial departments) is allowed to involve business entities to receive agency, consultancy and other services (the fee due to such entities should be provided in the respective budget).
7. ENFORCEMENT AND INSOLVENCY
7.1 Enforcement against the Federal State, its States and Municipalities
Generally, subject to the waiver of sovereign immunity, claims against the State and municipalities should be enforceable. However, due to the procedural rules applicable to the enforcement of claims against the State or municipalities, official clarification and judicial practice, an actual enforcement may be complicated if at all possible. In particular, due to legal uncertainty in this respect, it is not fully clear where the funds of the State (local) budget other than those specifically allocated for the debt repayment (servicing) may be collected. Also, there may be issues with foreclosure on certain state-owned and municipal assets.
7.2 Insolvency
Based on Ukrainian insolvency rules, which define a debtor as a business undertaking (either a legal entity or individual), initiation of insolvency proceedings against the State or municipal authorities (e.g. city council as a borrower under local borrowing) would not be possible.
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CONTACT INFORMATION
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91 Guide to: Public Debt Management
92 The Wolf Theiss Guide to: Public Debt Management in Central, Eastern & Southeastern Europe
Wolf Theiss is one of the largest and most respected law firms in Central, Eastern and Southeastern THE Europe (CEE/SEE). Since starting out in Vienna over 50 years ago, we have grown to a team of several hundred people, with offices throughout the region. WOLF THEISS During that time, we have worked on many cases that have broken new ground. GUIDE TO: We concentrate our energies on a unique part of the world: the complex, fast-moving markets of the CEE/ Public Debt Management SEE regions. This is a fascinating area, influenced by a variety of cultural, political and economic trends. in Central, Eastern & We enjoy analysing and reflecting on those changes, drawing on our experiences working on a wide range Southeastern Europe of domestic and cross-border cases. Sovereign bond issues, derivatives and www.wolftheiss.com finance transactions with public bodies