Investment Guide Real Estate

Transcription

1 Achieving aims Profit from potential Reducing risks With the local experts: bnt Zabolis Partners: Retail and Real Estate in Central and Eastern Europe Investment Guide Real Estate

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3 Belarus: an Overview Geography Provinces and districts Population Governmental Structure The Economy GDP / Inflation Foreign Trade Currency/Fiscal policy Privatisation and Investments Interest rates Measures to attract investment to Belarus Barriers to investment in Belarus Trends and Forecasts Overview of Investment Regulation in Belarus Investment Code Other Legal Provisions Real Estate -Legal environment Introduction Real Property Rights Real Property Register and other Registers Transactions Transfer of Real Estate Leases Security for bank loans Expropriation Construction Taxation of real estate Real Estate Tax Land tax Sale of real estate...43 Appendix

4 Yet, good reasons exist for taking a deeper look at Belarus. Belarus attained independence in 1991 after seven decades as a constituent republic of the USSR. Any traveller coming to Minsk, the Belarusian capital, will be surprised by the massive ongoing construction works, in particular housing projects and business parks. Against this background, the real estate sector appears attractive for certain investors. The increasing number of shopping centres and hypermarkets evidence a demand from Belarusian citizens for consumer products similar to those available in EU Member States. Since the ordinary living standards of almost 10 million Belarusian citizens still fall way below the European average, investments in creating an infrastructure for distributing consumer products seem attractive. In terms of number of inhabitants alone, the Belarusian market dwarfs the market of the three Baltic States combined. Like the real estate sector, the energy sector appears to provide lucrative investment opportunities. While Belarus depends on Russian energy supplies, it has taken advantage of highly favourable conditions. However, the drawback of the supply of cheap energy is that necessary modernization to the energy infrastructure is lacking. The same applies to investment in energy-saving measures. Increasing energy prices are now prompting Belarus to make up for this neglect. In general, investors can draw advantage from a strongly motivated young workforce. Additionally, unlike other states from the former Warsaw Pact, most of the skilled workforce have not as yet emigrated to Western countries. 4

5 Recent decisions by the Belarusian Government also give reason to put Belarus on the radar screen of potential. The creation of Free Economic Zones (FEZ) with various incentives is only one example of measures taken to attract foreign investment. On 3 June 2008, the Belarusian Prime Minister announced that ca 15 billion USD have been earmarked for a program to reform the economy within the next three years and to establish 680 modern enterprises in different industry sectors. According to the announcement, the majority of state-owned enterprises are to be transformed into private companies by The program also aims at reducing red tape and at easing business in general, not least with an eye to attracting foreign investment. Zabolis Partners and bnt Attorneys offer substantial experience in dealing with the commercial and legal challenges arising in relation to real estate investment in emerging markets. We have created this guide with the aim of introducing Belarus to potential real estate investors who will find not only a general overview of the country but also a more detailed introduction to the commercial and legal framework for real estate investment, describing both the potential as well as the risks. 5

6 1. Belarus: an Overview. 1.1 Geography Belarus covers an overall area of 207,600 sq km, 650 km from west to east and 560 km from north to south. It is landlocked, bordering on Latvia to the north, Lithuania to the northwest, Poland to the west, Russia to the north and east, and Ukraine to the south. Final border demarcation documents with Latvia and Lithuania were ratified in February 2007, but Belarus still has to ratify a 1997 treaty establishing the Belarus-Ukraine border. The country stands in the Eastern European lowlands and accordingly is relatively flat. The average elevation is 160 m (525 feet) above sea level. According to a 1994 estimate by the United Nations Food and Agricultural Organization, 34% of the land is covered by forests, largely consisting of marsh and moor. Belarus natural resources include peat deposits, small quantities of oil and 6

7 natural gas, granite, dolomite (limestone), marl, chalk, sand, gravel, and clay. The highest and lowest points are Dzyarzhynskaya Hara (Dzyarzhynsk Hill) at 345 m (1,130 feet) and the Neman River at 90 m (300 feet). Three major rivers run through the country: the Neman, the Pripyat, and the Dnieper. The Neman and the Pripyat flow eastward to the Dnieper, while the Dnieper flows southward towards the Black Sea. Besides, many streams and some 11,000 lakes (known as the blue eyes of the country) of which many lie in the north are found in Belarus. Although vital for the transport of goods in the past, the rivers nowadays have lost their relevance. Due to lack of endeavour to preserve the river paths, some parts currently can no longer be used for shipping. Considerable effort would be needed to re-activate the paths in order to use the advantages of the nine river ports: Brest, Minsk, Mikashekichi, Mozir, Gomel, Rechitsa, Bobruisk, Mogilev, and Vitebsk. Most of these are well connected to highway or railway routes. However, Belarusian policy has not yet been inclined to raise the necessary capital. The climate fluctuates from continental to maritime. This brings Belarus moderate winters (average January temperatures at -6 C / 21.2 F) and cool, moist summers with an average temperature of 18 C (64 F). The country experiences an average rainfall of 550 to 700 millimetres (21.7 to 27.5 inches). Besides the cities of Brest, Gomel, and Vitebsk, Belarus offers a number of further places of interest to tourists. Most of the XII-XIV century castles are derelict, though a small number are reasonably well preserved, for example those in Mir, Nyasvizh, Zaslaue, Lida, and Kamianec. The national parks provide good conditions for hunting, fishing, bird-watching, and camping as well as a focus for the country s tourism development strategy. 7

8 Especially worth visiting are the Belavezhskaya Berezinsky Biosphere Nature Reserve (130 km north of Minsk), the Braslau Lakes National Park (250 km northeast of Minsk), and Pushcha - the National Park near Brest. Location: Eastern Europe Population: 9.7 million Capital city: Minsk (pop ) Largest cities: Gomel (pop ) Mogilev (pop ) Vitebsk (pop ) Grodno (pop ) Brest (pop ) Territory: thousand sq. km km from west to east 560 km from north to south In neighbouring Ukraine, the Chernobyl nuclear disaster occurred in About 70% of the radiation entered Belarus. As of 2005, about a fifth of Belarusian land (principally farmland and forests in the south-eastern provinces) continues to be affected by radiation fallout. 1.2 Provinces and districts Belarus is divided into oblasts, or provinces. These are named after the cities that serve as their administrative centres. Each oblast is jointly administered. The administration consists of a provincial authority elected by oblast residents, with a provincial executive authority, whose leader is appointed by the president. Oblasts are further subdivided into raions (commonly translated as districts or regions). As with oblasts, each raion has an executive authority (raion executive committee) appointed by higher executive powers. As of 2008, Belarus contains six Oblasts (Brest,

9 Gomel, Grodno, Mogilev, Minsk, Vitebsk), 118 raions, and 102 towns. Minsk (1,798,000 inhabitants) enjoys special status, since the city serves as the national capital. Minsk City is run by an executive committee Minsk (capital) 2. Brest Oblast 3. Gomel Oblast 4. Grodno Oblast 5. Mogilev Oblast 6. Minsk Oblast 7. Vitebsk Oblast Minsk Oblast forms the heart of the country, surrounding the capital. Here are located both main airports for cargo and passengers. Its importance as a rural leisure and recreation area for the inhabitants of Minsk city is set to grow sharply with development of the necessary infrastructure. Gomel Oblast, situated in the south-east, hosts a railway line of both local and international importance. The long-distance highway connecting Minsk with the Baltic Seaports (Klaipeda, Ventspils, and Kaliningrad) runs through the region. In addition, Eastern European metropolises such as St. Petersburg, Kiev, and Odessa are linked by this highway. Gomel, the oblast capital, forms the focus of culture and education, with numerous specialised universities and institutes. The oblast is also home to deposits of oil, diamonds, miner- 9

10 als, hard coal, and clay. On the territory of the Vitebsk Oblast lie two trans- European corridors. One connects Paris, Berlin, and Warsaw with Moscow. The other connects Helsinki with Kiev. Vitebsk boasts eleven of the nineteen major lakes in the country. The large variety of growing lumber (timber) is an important economic factor in the region. The Brest Oblast provides industry with granite, clay for bricks, chalk and quark-sand for producing ferro-concrete and silicon-concrete. About 80% of the overland transport from the CIS states to Western European countries passes through the region. Even today, foreign capital already supports over 500 businesses. The area of the Mogilev Oblast is situated in the lowlands of the river Dnieper and its various feeding rivers. Resident businesses belong to the chemical, engineering, and wood-working sectors. The existing road and railway network provides good connections to most Belarusian cities, as well as to Russia, the Ukraine, and the Baltic States. A characteristic feature of the Grodno Oblast is its flat relief. Besides, its natural resources include iron ore (ilmenite), turf, chalk, clay, and raw silicon sand. 1.3 Population According to the 1999 census, the population of 9.7 million inhabitants is composed of Belarusians (81.2%), Russians (11.4%), Poles (3.9%), Ukrainians (2.4%), and others (1.1%). Most of these (80%) belong to the Eastern Orthodox Church. The official languages are Belarusian and Russian. Although both languages belong to the East Slavonic group of languages, quite profound differences exist in grammar, wording, and pronun- 10

11 ciation. Therefore, even Russian-speaking foreigners find Belarusian hard to understand. As to the number of people speaking Belarusian, statistics vary depending on the criteria applied. While 85% of Belarusians declare the Belarusian language as their mother tongue, only 37% admit to speaking it at home, while only 5% use it in their daily lives. Yet, for example, a number of periodicals are published in Belarusian, which is regularly used for metro announcements, as well as on official occasions. 1.4 Governmental Structure Article 1 of the Constitution of Belarus proclaims the country to be a unitary, democratic, social state based on the rule of law. Article 6 establishes the separation of legislative, executive, and judicial powers and the checks and balances among them. Head of state since July 1994 is President Aleksandr Lukashenko, while Prime Minister Sergey Sidorskiy currently serves as head of government over a Council of 43 members, of which 24 are Ministers and 19 are individuals with equivalent powers. The president is elected by popular vote for a five-year term. By a referendum in 1996, the President extended his first period in office for two years. A second referendum held in 2004 allowed him to run in a third election, which was not originally foreseen. On 19 March 2006 the President was re-elected with a majority of 82.6% The legislative branch is formed by the bicameral National Assembly (Natsionalnoye Sobranie), consisting of the Council of the Republic (Soviet Respubliki; 64 seats; 56 members elected by regional councils, and eight members appointed by the president, to serve for four years) and the Chamber of Representatives (Palata Predstaviteley; 110 seats; members elected by popular vote to serve four-year terms). 11

12 Judicial power in Belarus is exercised by the Constitutional Court, regular courts, commercial courts, and other courts. The Constitutional Court is meant to ensure that state regulations adhere to the constitution. The Court consists of 12 judges, half appointed by the president and half by the Council of Representatives, for an 11-year period. Regular courts of the Republic of Belarus include the Supreme Court (judges appointed by the president), Oblast and Minsk courts, regional and town courts, and military courts. Commercial courts include the Supreme Commercial Court of the Republic of Belarus, the commercial courts of the six Oblasts, and the commercial court of Minsk. An international arbitration tribunal has been established in Minsk. Far-reaching presidential powers and the actual involvement of the president in all aspects of social and economic life in Belarus increase the likelihood of arbitrary decisions. A constitutional amendment of 1996 states (Article 137) that parliamentary legislation of the National Assembly can be superseded by presidential edicts and certain decrees. 1.5 The Economy In spite of an unreformed and extensively bureaucratic system, the Belarusian economy has recently shown a significant upturn. By far the largest number of companies consist of small and medium enterprises, with only about 4% employing more than 500 people. Since 1995, when the President drove the country towards a form of market socialism, Belarus has seen little structural reform. The President adheres to his policy of administrative control over prices and currency exchange rates. On the other hand, the golden stock rule, allowing the state to intervene in the management of private enterprises even when it owned only one share, 12

13 was abolished at the beginning of Moreover, since 2005 cases have arisen where shares of private companies have been transferred to public ownership in order to protect them from insolvency. Along with these actions, the President recently (2006) amended the Investment Code of Belarus, weakening the position of foreign investments in the country. In this context, it is of particular interest that according to official figures 50.5% of employees are working for the state and 48.0% in the private sector (Belstat for 2007). But a study of independent statistics (e.g. EBRD for 2007), suggests that only 25% of GDP is generated in the private sector. This discrepancy can only be explained by the fact that the official statistics simply diversify by the legal form of the company not by the real owner, which in most cases is the state GDP / Inflation GDP growth has been strong in recent years, reaching nearly 8% in For 2008 more than 9% is forecast, while for 2009 more than 8% is forecast. 13

14 And although inflation still stands at a high level, the rate has been decreasing over recent years. In the opinion of economists, the positive data are due to close economic relations between Belarus and the Russian Federation. Belarus receives heavily discounted oil and natural gas from Russia. Nevertheless, the turn of the year 2006/2007, when Russia threatened to cut off gas supplies, shows that the Belarusian economy heavily depends on relations with Russia and can therefore be considered fragile. This in the eyes of economists also accounts for the re-increase of inflation in It is expected that the prices for natural gas supply will reach the world market price in 2011 at the latest. 14

15 1.5.2 Foreign Trade Russia is by far the largest single trading partner of Belarus, although its proportion in 2006 fell for the first time, largely as a result of a change in the way the Value Added Tax (VAT) on trade was collected. Table shows Russia s proportion amounting to approximately 50%, pointing to Belarus dependence on its large neighbour. Future developments, especially in the energy sector, may therefore influence the country s prosperity Currency/Fiscal policy The official currency of Belarus is the Belarusian Ruble (BYR). This was pegged to the Russian Ruble until In August 2007, the National Bank of Belarus terminated the peg and oriented to the U.S. dollar. From 2 January 2009, the Belarusian Ruble is pegged to a currency basket composed of the U.S. dollar, the Euro, and the Russian Ruble, resulting in a sharp devaluation of some 20%. The main objective of fiscal policy has been to increase financial and social stability. This objective can be expected to continue in the near future. Fiscal policy is meant to establish a macroeconomic environment to stimulate economic growth on a qualitatively new, innovative basis, to set up economic restrictions and to improve the population s living standards. According to Belarus Fiscal 15

16 Policy 2008, the central state budget deficit will amount to 1.9% of GDP, meaning an increase of 0.4% in comparison with the previous year Privatisation and Investments The government intends to privatise state-owned businesses, partially through IPOs of minority stakes on international stock markets. This will require the involvement of legal and financial service providers. Generally, privatisation can be achieved in three ways: tender, sale by auction, and targeted sale. Each might be performed in Belarus. While stateowned enterprises may only be sold (privatised) by a decision of the president, enterprises under the ownership of municipalities are sold (privatised) by a local authority decision which has to be approved by the president. Where several competitors are involved in acquisition of a state enterprise, Belarusian investors are often preferred. Most public enterprises that have recently been sold were heavily leveraged with state loans to ensure continuation of business, while little capital has been invested to modernise the relevant technology. Privatisation is thus used primarily to find skilled management for challenging industries and recoup financing rather than to attract foreign investment and know-how crucial for the wider economy Interest rates Belarusian banks offer loans for, e.g., construction, acquisition of vehicles and equipment, wage payments, as well as revolving and non-revolving credit lines, and overdrafts. Conditions for obtaining loans depend on various factors, such as type, term, loan currency, company size, and financial situation. Some Belarusian banks offer micro-credits for specific projects under lending programs to Belarusian 16

17 banks from the European Bank of Reconstruction and Development (EBRD). The main condition required by Belarusian banks for granting a loan is credit security. In most cases, this consists of a mortgage or pledge. However, investors (foreign and domestic) find it hard to obtain loans for commercial projects. This is mainly due to high interest rates, so that investment based on bank financing becomes unprofitable. Interest rates for loans in BYR / /2008 long term (for the term over 1 year) loans to legal persons 6.7 % 9.3 % 8.1 % short term for the term under 1 year) loans to legal persons 12.9 % 12.7 % 12.0 % Interest rates for loans in foreign exchange long term loans to legal persons 11.1 % 10.9 % 11.4 % short term loans to legal persons 11.2 % 11.0 % 10.8 % 17

18 1.5.6 Measures to attract investment to Belarus In order specifically to attract foreign investment, various measures have been taken during recent years. These include, e.g.: Creation of a database to provide potential investors with information on premises and circumstances of business investments ( Establishment of particular Free Economic Zones. Legislation, in the shape of a number of presidential decrees and edicts in 2008 granting several advantages, simplifying the registration procedure and thereby improving the economic climate. Free Economic Zones The law of 7 December 1998 established Free Economic Zones (FEZ). A free economic zone is defined as a precisely outlined part of the territory of Belarus with a special regime setting up more favourable terms for carrying on business and other commercial activities as compared with usual standards. Examples of activities permitted in FEZ include: production, science and technology, export, trade, tourism and recreation, insurance and banking. Usually, FEZ concentrate on specific types of business. Presently, the following FEZ have been established: FEZ business sector restrictions Brest pharmaceutical, automotive, food, electronic, furniture, machinery construction, woodworking priority: organisation of export and importreplacing manufactures gambling business 18

19 Vitebsk Gomel-Raton Grodnoinvest Minsk Mogilev production of building materials, food, oil and petroleum, electronics, veterinary medicines and chemicals for the agricultural sector, fiberoptic cables, sewage disposal plant and water treatment equipment, liquid-crystal monitors, fur items, lighting equipment, sewing industry, wood processing export production and high-tech development transport, food, medicine, building materials, chemicals and petrochemicals, wood working, machine building, lighting production of building, food, polygraphic industry and production of mechanical engineering machine building, civil and woodworking industry enterprises trade, trade-purchase, public catering trade, trade-purchase, public catering production and realization of exported goods and services and of replaceable import goods trade, trade-purchase, public catering production and realization of exported goods and services and of replaceable import goods Legislation for the FEZ mentioned in table offers incentives such as tax reliefs or exemptions from profit tax, VAT, income tax, land tax, state and social insurance fees, and state duties. Furthermore, when importing foreign and domestic commodities to the territory of a FEZ, customs fees are not imposed and economic policy measures are not applied, except for customs clearing duties. The same applies when commodities originating from a FEZ are exported to a destination outside Belarus. Residents of FEZ face no limitations in engaging foreign engineering, technical, and management staff. Finally, a system of state guarantees assures protection of foreign investors by giving the right to return their share in the enterprise s property at its depreciation value. 19

20 Recent Legislative Activity Recently, attempts have been made to improve the economic climate in the country. The Senior Counsellor of the International Finance Corporation (IFC) in Belarus has stated that Belarus will reform the business environment by pursuing a long-term strategy. Reportedly, the Belarusian Government has drafted 63 laws and regulations in order to achieve this goal. In January 2008, the President enacted new measures to stimulate production and realisation of goods in order to attract foreign investment and to increase Belarus export potential. Presidential Decree No. 1 provides that commercial organisations, including those with foreign investment, created and located in settlements with less than fifty thousand inhabitants, will receive a number of tax benefits and privileges for five years after their establishment. On 1 January 2008, the Decree of the President On Registration of Legal Persons came into force. The regulations aim to simplify the procedure for registering legal persons. The Decree regulates: Decrease of the required minimum capital for companies (e.g. limited liability company: previously 1,600 Euros, now 800 Euros). Abolition of the requirement to indicate all company activities (objects) in the company charter. This requirement had significantly obstructed company activity. Companies were obliged to perform all activities indicated in their charter and were prohibited from performing activities that were not specified. Thus, if a company wanted to stop an activity or to start a new one it had to change its charter. 20

21 The procedure for registering a change to a charter in those cases was similar to the procedure for registering a new company. Under the new regulations, only activities subject to licensing need be indicated in a company charter. Abolition of some official grounds for declining registration of a company. Reduction of the term for registration from 30 to 15 days. Furthermore, on 1 April 2008, Edict No. 42 introduced amendments to legislation dealing with FEZ activity. In addition to special taxation procedures, guaranteed for at least seven years, the Edict secures the right to tax relief and the right to import facilitation for specific products. Moreover, FEZ residents enjoy privileged rental conditions and are exempt from real estate tax and tax on vehicle acquisitions. Finally, infrastructure development for large investment projects is facilitated and FEZ administrations have obtained additional powers. To conclude, the Presidential Edict on Measures for Roadside Service Development was adopted on 15 May This aims to create favourable conditions for roadside service development and to attract foreign investment. Roadside service objects are defined as buildings located at the roadside of state highways and aiming to serve road users (e.g. motels, hotels, camping sites, service stations, retail and public catering objects). The Edict provides a range of tax and other benefits for the owners of roadside service objects Barriers to investment in Belarus Although Belarus is attempting to create an atmosphere open to foreign investment, businesses still have to face some barriers. Especially noteworthy is the highly complex tax legislation. Added to the 21

22 way this is implemented by the public authorities, the result is that day-to-day business is hampered. Belarus has one of the most complicated tax systems in the world. Indeed, not only is it complex but in addition it frequently changes. This excessive regulation is often hard to understand and therefore hard to follow. On the other hand, frequent inspections force investors to observe all changes carefully and to act accordingly in order to avoid fines or the threat of closure. Furthermore, government powers to set prices for transport, telecommunication, housing, and public utilities need to be observed. Many administrative barriers and complex tax legislation: One of the most complicated tax systems in the world (complex and frequently changing). Excessive regulations, orders and bans (often hard to follow and understand as a whole). Frequent inspections (entrepreneurs often viewed as potential criminals rather than one of the pillars of the country s development). Belarus ranked 151st in the world in the corruption perception index by Transparency International (36th in 2002). One of the worst Indexes of economic freedom: regional rank: 41 of 41 transforming countries. The Government sets prices for transport, telecommunications, housing, and public utilities. 22

23 Protectionist legislation in support of Belarusian enterprises introduced in recent years is to some extent limiting government efforts to attract foreign investors. For example, the Import Substitution Program for foresees essential cutting of import of goods and input materials hand in hand with enhancement of Belarusian production. However, it is worth noting that Belarusian enterprises are those registered in Belarus. This means that the Import Substitution Program does not target enterprises with foreign capital, since the program s limitations and incentives apply irrespective of whether foreign capital is involved in a Belarusian enterprise. Local non-governmental organizations point out that the level of corruption has not noticeably declined in recent years. The broad legal regulations, especially tax rules and compulsory licences or permissions, provide opportunity aplenty for local abuse of power. The Corruption Perception Index by Transparency International ranks Belarus as number 150 out of 179 in the world. 23

24 Examples of recent investments Major foreign investors in Belarus Year 2007: Russia petrochemical industry, motor-car construction, light industry, telecommunications Cyprus banking sector Switzerland automobile motor-car construction, banking sector, petrochemical industry European Union construction materials, light industry Plans for the years : Russia construction, pharmaceuticals China automobile motor-car construction, white goods Iran, Lebanon, United Arab Emirates construction, hotel and trade center business Germany, Switzerland Electric-power industry Shere Enterprise Project Foreign Investments, min $ Petrochemical Industry Naftan Mozyr Oil Refining Factory Reconstruction Reconstruction Gas and Oil Industry Gomel Transneft Beltransgas Re-equipment Gas pipe line building Chemical Industry Grodno-Azot Gomel Chemical Factory Reconstruction Reconstruction 14,3 5 Mogilev Chem Volokno Production 5 Telecommunications BeST (mobile service provider) Infrastructure Beltelecom Construction 10 24

25 1.5.8 Trends and Forecasts The cheap supply of energy from Russia to Belarus has prevented investment and progress in energy-saving technology in the country. Relative to other economies in the region, Belarus consumes more than twice as much energy. Even now, oil processing, which used to be the principal generator of profits, taxes, and foreign exchange for the economy as a whole, needs support from the state budget. To offset recent and future price increases for gas and oil, Belarusian enterprises will have to invest considerably in modern technology, which presents opportunities for specialised producers from abroad. Belarusian goods are expected to suffer from deteriorating competitiveness, causing a decrease in exports. Consequently, an increasing current account deficit is forecast, while opportunities for financing will be rather limited due to decreasing currency inflows from exports. This will most likely result in an overall decrease of investment by domestic businesses. In total, this will presumably lead to a larger demand for subsidies from government, slower growth rates of the economy, and accelerated inflation. 2. Overview of Investment Regulation in Belarus The legal basis of all investment activity in Belarus is the country s Investment Code. This contains basic legal conditions for performing investment activity. Besides, Belarus has signed bilateral agreements on co-operation and mutual protection of investments with more than 35 states, including Germany, France, Poland, Finland, China, Switzerland, the USA, Italy, Turkey, and others. 25

26 The regulations are complemented by numerous other legal acts. Investment activity is defined as investments in manufacturing, works or services, or any other use of these investments aiming at generating profit (Article 2 of the Investment Code). 2.1 Investment Code The Investment Code was first adopted on 22 June 2001 and has been amended several times. It determines the general conditions for investment activity in Belarus and is aimed at facilitation and state support of activities as well as at protection of investors rights. Under the Code, all forms of regulation may be made in order to stimulate investor activity, to attract foreign investment, and to protect investors rights. The Investment Code states in what forms and under what circumstances different types of regulation may become relevant. Among other things, a system of expert examination of investment projects is set up, as well as the possibility to conclude an investment agreement between the Republic of Belarus and investors with the objective of providing state support subject to realization of certain projects. The Investment Code envisages direct participation of the state by means of: adopting state investment programs and their financing from state funds; providing investment resources from state funds; providing state guarantees for credits; preparing comprehensive state expert examinations of investment projects; 26

27 granting concessions to national and foreign investors. These possibilities and further regulations in the Act on Privatization denote government attempts to prevent unregulated privatisation and to establish socially-oriented economic principles. In 2006, the President approved amendments to the Investment Code, weakening the position of foreign investors but leading to equalization of business conditions for foreign and national companies. The amendments provide for the following: an article stipulating five-year invariability of applicable laws after registration of an enterprise was excluded for foreign investors; a new compensation procedure was established for cases of re-nationalization or confiscation; now compensation is based on market value instead of real value ; however, market value may be determined by the government; foreign investors no longer have the right to set prices of the commodities and services they produce; price-formation is now regulated by the government as for all national companies; an article that had allowed foreign investors to keep all export proceeds from the sale of their commodities and services (after taxes and other obligatory payments) was abolished; similarly, a regulation providing preferences for companies of certain branches of foreign investors was abolished. 2.2 Other Legal Provisions The number of additional legal provisions concerning commercial activity in Belarus is considerable. Numerous legal acts are in force, along 27

28 with presidential decrees and edicts, decisions of the government, and regulations. The volume of statutes and their interdependence make it nearly impossible to successfully start and run a business without professional legal advice. The complexity may be shown by a sample list of provisions applicable to any investment in Belarus: Investment Code of the Republic of Belarus, 22 June 2001 with amendments. Civil Code of the Republic of Belarus with amendments. Law On Entrepreneurship in the Republic of Belarus with amendments. Law On State Regulation of Foreign Trade Activity of 29 December 1998 with amendments. Decision of the Council of Ministers No. 929 of 22 July 1997, On procedure for Opening and Activity in the Republic of Belarus of Representations of Foreign Organizations with amendments. Presidential Decree No. 11 of 16 March 1999, On Putting Order to State Registration and Liquidation (Termination of Activity) of Economic Entities. Presidential Edict No. 460 of 17 July 2006, Regulations On the Procedure for Licensing Import and Export of Specific Goods (Works, Services) in the Republic of Belarus; Regulations on the Procedure for Registration of Obligations for Using Imported Specific Goods (Works, Services); Regulations on the Procedure for Organizing Control over Commitment of Obligations on the Use of Specific Imported (Exported) Goods (Works, Services) for Declared Purposes. 28

29 Presidential Edict No. 443 of 13 July 2006, On Customs Duties. Law On Counteracting Monopolistic Activity and Development of Competition. Law On Economic Insolvency (Bankruptcy). Law On Denationalization and Privatization of State Property in the Republic of Belarus. 3. Real Estate Legal environment 3.1. Introduction The basic legal acts regulating real estate in Belarus are: the Civil Code, the Land Code, the Presidential Edict on Land Acquisition, the Mortgage Act, the Privatisation Act, the Condominiums Act, and the Act on Real Property Registration Real Property Rights Proprietary Interests in Land A list of persons and corresponding rights to land has been provided by the Presidential Edict on Land Acquisition. They are: ownership, right of heritable possession, permanent right of use, temporary right of use, and lease. Most Belarusian land is owned by the state. Ownership may be granted to Belarusian citizens, Belarusian legal persons, or foreign states. Belarusian citizens may acquire ownership to land under certain conditions, namely, (i) the citizen is permanently resident in Belarus; (ii) the land is intended for individual housing, a 29

30 summer house, gardening, and smallholdings. Belarusian legal persons may own land only in two cases: privatisation of real estate, and implementation of investment projects. The list of objects for privatisation may only be adopted by the president. However, so far no legal person has actually acquired ownership of a plot of land. Foreign states may own land in Belarus on the basis of reciprocity. Foreign citizens and foreign legal persons are not allowed to own land in Belarus. The right of heritable possession is a right that may be granted only to a Belarusian citizen for purposes specified by the Land Code, namely, (i) individual housing, (ii) summer house, (iii) smallholding, (iv) farming, and (v) similar purposes. The right of heritable possession is permanent, i.e. it may not be granted for a specified term. The holder of a right of heritable possession may transfer it only together with a building located on the land plot. Permanent right of use may only be granted to a Belarusian legal person. As well as the right of heritable possession, a permanent right of use is transferred only together with a building located on it. The person entitled may not sell the right or otherwise transfer it without a building. A temporary right of use may be granted to Belarusian citizens or Belarusian legal persons for a maximum of 10 years. However, the term of use may be prolonged by a local authority upon application by a right-holder. A lease may be granted to any natural or legal person, including foreigners. The maximum term of a lease is 99 years. The differences between types of rights to land appear in the table on page

31 Ownership Heritable possession Permanent right of use Temporary right of use Lease Who may acquire? Belarusian citizens and legal persons (Belarusian residents) Belarusian citizens Belarusian legal persons Belarusian legal persons and Belarusian citizens Legal and natural persons (Belarus residents and nonresidents) Maximum term None None None 10 years. May be prolonged 99 years Price (when acquiring from state) Cadastral value Without payment Without payment Without payment Payment for the right to conclude a lease contract Current payments (tax, rental payments) Land tax Land tax Land tax Land tax Rental payment (from 0.1% to 12% of cadastral value annually depending on use of land) Expropriation Court decision Local authority Local authority Local authority Local authority (if empowered to cancel the contract unilaterally) or court decision Transfer of right No approval of local authority needed No approval of local authority No approval of local authority No approval of local authority No approval of local authority Land acquisition Only local authorities are empowered to expropriate lands owned by the state. Acquisition of land by auction is now possible (with some exceptions) under the new regulations. At auctions, land plots (ownership right) or lease rights may be acquired. In a few cases, land parcels can be obtained directly from the local authority and not by auction. These cases are enumerated in the Presidential Edict on Land Acquisition. The price of land sold at auction must be not less than its 31

32 cadastral value. The cadastral value is approved by the State Committee on Property and is usually close to the market value. The value of a lease (as well as rental payments) is defined on the basis of the cadastral value. Buildings Under the Civil Code, a building is referred to as real property along with a land plot. Moreover, under Belarusian legislation a land plot and a building constructed on it may be owned by different persons. In most cases, a land plot is owned by the state, whereas the owner of a building (i.e. a natural or legal person) only has a proprietary interest, e.g. lease right. However, it is not possible to transfer a building without simultaneously transferring the corresponding proprietary interest. Whenever a building is transferred the proprietary interest follows the building. Self-contained premises Self-contained premises are parts of a building that are isolated from other adjacent parts of the same building and have an independent entrance. Self-contained premises may be owned individually in contrast to common areas, which are jointly owned by the owners of self-contained premises. Common property is directly managed by the premises owners or through the owners association (if a building has more than five owners of self-contained premises). Depending on the form of management, the process of taking decisions differs. Relations between owners of self-contained premises generally are regulated by the Condominium Act Real Property Register and other Registers The real property registration system was established in 2003 under the Act on Real Property Registration. Real estate, rights to it and real estate transactions are to be registered in the Real 32

33 Property Register; otherwise they are considered invalid. Real estate transactions only take effect from the moment of registration. For instance, ownership of a real property is acquired upon entry of the title into the Real Property Register. After entry in the Register, rights to real estate may be revoked or a transaction invalidated only by a court decision. As the Real Property Register is a public register, information is available to all on simple application. The following data may be provided: i) descriptions of real properties (cadastral index map; plans of buildings and apartments are available still only on paper); ii) records of rights (ownership, lease, mortgage and other proprietary interests) and encum brances; iii) records of transactions (sales contracts, exchanges, gifts, leases, mortgages, and other transactions involving real estate); Apart from the Real Property Register, two more public registers contain information about real estate. These are: The Register of Real Estate Prices, which contains information about the prices of real estate according to registered contracts. The Register of Land Values, which contains information about cadastral values of land. The cadastral value is the basis for determining rental payments and the selling price for land. Usually, no significant difference exists between cadastral value and market value. The National Cadastral Agency is responsible for maintaining the Real Property Register, the Register of Real Estate Prices, and the Register of Land Values. 33

34 3.4. Transactions Possible transactions with real estate are governed by different legal provisions. While transfer (see 3.4.1) is basically regulated under the Civil Code, for lease contracts (see 3.4.2) the provisions of the Act on Lease, the Housing Code, and the Land Code also apply. A mortgage is the most common form of security for bank loans (see 3.4.3). A new Act on Mortgages is expected to come into force on 27 December Transfer of Real Estate Real estate may be transferred by purchase, gift, or exchange contracts. Buildings have to be transferred together with the respective land plot or together with the respective proprietary interest. Moreover, some restrictions exist on the transfer of land. For instance, if a land plot is disposed of for construction purposes, it may only be transferred when the building has been erected or suspension of construction is approved by the responsible authority. Form of contract A real estate purchase agreement must be in writing and signed by both parties. The transfer certificate confirming transfer of real estate must also be signed. This transfer certificate may be included in a purchase contract if ownership is transferred simultaneously with the signing of the purchase contract. But the transfer certificate may also be signed as a separate document after the contract is signed. As a rule, a purchase, gift, or exchange contract does not have to be notarized. However, some exceptions exist. In particular, transactions relating to land plots owned by natural persons have to be notarized. To take effect, a contract transferring real estate must be registered (see also 3.3 above). The parties to the contract 34

35 have to apply to the local registration authority (Registration and Land Cadaster Agency). Fees For transfer of real estate, the following fees apply: Fees for transfer of real estate notarial fee registration fee approx 80 USD - approx 20 USD for natural persons - approx 75 USD for legal persons Leases Generally, lease agreements are governed by the Civil Code and the Act on Leases. Furthermore, some special regulations exist on leases of residential premises (the Housing Code) and lease of state lands (the Land Code and Presidential Edict on Land Acquisition). General rules (mostly applying to commercial leases) The parties are free to define the content of the contract, such as the term and the rent. Lease agreements must be concluded in writing and signed by all parties. In certain cases, lease agreements must be registered. For instance, land lease agreements take effect only after registration in the Real Property Register. The obligation to register lease agreements concerning buildings or self-contained premises depends on the term of the contract. Registration is necessary if the parties agree on a term of more than one year. Agreements of unspecified duration and with terms not exceeding one year only have to be registered if the parties have agreed to do so. The regulations for unilateral termination of a contract also depend on its duration. Either party may terminate a lease agreement with an unspecified term by three months advance notice. Fixed term 35

36 agreements may be terminated by decision of a competent court at the request of one of the parties, on proof of breach of contract by the other party, or of another cause for termination laid down in the contract. Lease of residential premises These rules do not apply to a lease of residential premises. Leases of residential premises are regulated by the Housing Code. The parties in this case are not free to define the content of the contract. They are bound to the standard agreement established by the government. Lessors are not allowed to change the contract by changing its conditions to the disadvantage of the lessee. Lessees may terminate the contract at any time. No specific form is required for termination of a contract by the lessee. The contract is considered terminated from the day the lessee leaves the apartment. However, a lessee must notify the lessor of the intention to terminate a contract three months in advance. On the other hand, the lessor is only allowed to terminate a contract unilaterally in case of a gross violation of the contract by the lessee or in cases when apartments have to be reconstructed or demolished. In the former case, the contract is terminated by court decision and in the latter case the lessor has to offer the lessee a different apartment and may be forced to conclude a new contract. Information about lease contracts is not contained in the Real Property Register. Instead, the contract is subject to registration by the local authorities. They are responsible for enrolling lease contracts in a registration book. Lease of state land The Land Code and the Presidential Edict on Land Acquisition contain detailed regulations on agreements for the lease of state land. In most cases, state land is acquired at auction. 36

37 The winner of an auction must sign a lease agreement and pay for the right to conclude the lease agreement. A government regulation of 26 March 2008 defines the prices to be paid. These depend on the cadastral value of the land plot and the term of lease. Term of lease Coefficient for calculating the agreement fee (to be multiplied by the cadastral value) 1 year years years years years A standard agreement, which cannot be modified, has been drafted by the government. Additionally, the parties are not free to define the rent. This is fixed by Presidential Edict and depends on the cadastral value and the use of the land (for examples see table on next page). Unlike general lease contracts, the duration of land leases cannot be unlimited. The maximum term is 99 years. The legislation on state land provides additional grounds for terminating lease contracts. For example, local authorities may terminate a lease agreement if the lessee does not start to develop the land plot during a specified period (currently half a year for legal persons and one year for natural persons). Use of land (examples) Coefficient for calculating the rent (to be multiplied by the cadastral value) Apartment building parking place, garage (in private or cooperative use) all kinds of farms,

38 public health, social services, education, sciences, religion, graveyards, sports, cultural activities, industry, communications, energy, transport, administration finance (banks, insurance companies), theatres, tourist services, parking places and garages (except those of individuals or cooperatives) public car parks, petrol stations, Security for bank loans Belarusian banks provide loans for different types of investment project, including real estate acquisition and construction. Loans are usually granted for five to six years, but the period may also be defined in accordance with the project payback period, e.g. equal to or not exceeding 20% of the payback period. Banks usually finance from 70% to 100% of project value. Most commonly, loans are secured by real estate security. Therefore, real estate may serve as collateral under a mortgage agreement or by a title transfer agreement. Besides, other forms of security exist, such as security deposits pledge suretyship guarantee. Mortgages Under a mortgage agreement, the mortgagee (i.e. lender) is given preference over other creditors in recovering a debt from the value of a mortgaged 38