Lawyer Issue

In a competitive M&A market, 

trust is your secret weapon 

The Maltese Individual 

Investor Programme 

Jurisdiction of Swiss Courts 

in International Estates

Content 

Contact 

www.lawyerissue.com 

In a competitive M&A market, trust is your secret weapon 4 

Increased Utility Requirements In Canada? How The “Promise Doctrine” Has 

Challenged Patentees And What Can Be Done To Address These Challenges 6 

Branding of Pharmaceuticals and Medical Devices: What You Need to Know 

about the Latest Developments in Canada 12 

China’s Antitrust Regulator Targets Price-related Violations 

in the Pharmaceutical Sector 18 

An Introduction to Resolving A Dispute Through an 

Expert Determination Process 23 

The upcoming Swiss Financial Market Regulations 

– Risks and Opportunities 27 

The Maltese Individual Investor Programme 31 

Real World Challenges: Practical Maritime Arrest Considerations 34 

Interpretation of Product by Process Claims in Japan 40 

Local Directors No Longer Needed in Japan: Practical Issues with the Recent 

Rule Change 46 

Sport and Free Market Rules: Should Pandora’s Box Have Stayed Closed? 52 

The“Netflix” Tax 56 

The Spanish Reits: A Valuable Instrument for Spanish and International Investors 

to Take Advantage of the Recovery of the Spanish Real Estate Market 60 

Tax Regulations in Panama: The Place to Invest In The Americas 66 

New tax exemptions for companies owned by employee ownership trusts 71 

Refunds of Excess VAT Accumulated During Mineral Exploration 74 

Recent Development of Advance Pricing Arrangement in Taiwan 79 

Jurisdiction of Swiss Courts in International Estates 83 

Doing Business in Puerto Rico 87

Mergers & Acquisitions 

IN A COMPETITIVE M&A MARKET, 

TRUST IS YOUR SECRET WEAPON 

By Mary Walsh 

Merrill DataSite provides due diligence platforms for financial transactions worldwide, 

and as such is a leading indicator of trends and future trends across global deal markets. 

However, no one needs us to tell them that M&A markets are currently bullish; there’s 

no doubt about it. There has been a flurry of activity over recent months, and dealmakers 

in private equity, corporate development teams and investment banks are poised to 

hit the ground running as soon as an opportunity presents itself. 

From the latest Mergermarket M&A Insider reports 

sponsored by Merrill DataSite, we know global deal 

value was up 27% year on year from May 2014 to 

May 2015, whereas deal volume was down 30.9% – 

proving competition for assets is growing fierce. 

One major issue related to this is that there is 

simply too much cash – both dry powder and on 

corporate balance sheets – chasing deals, which is 

raising competition to new heights, increasing some 

valuations to pre-financial crisis levels. 

Numerous new funds have closed in recent months, 

surpassing their targets, including Silverfleet, 

Inflexion, Carlyle, Equistone and Bridgepoint. Added 

to that, debt is cheap, so when an acquisition 

situation comes along individuals want and need to 

be ready to move fast. 

Law firms and M&A lawyers know better than anyone 

the demands this can place on every layer of their 

organisation – from Partner to Associate. Everyone 

understands that when serving the client, delivering 

what they want (and fast) is paramount, because 

delivery engenders trust and trust engenders repeat 

business. 

It is gaining trust, building long-term relationships, 

and establishing a successful team that really forms 

the basis of good M&A deal-making, ultimately 

making the difference in a competitive situation. 

4 | LawyerIssue

When relationships are established, 

generate success, and work for mutual 

benefit, why change them? 

This philosophy has been a long standing tenet 

of Merrill DataSite’s. We support expediting due 

diligence processes for our clients – old and new. 

Yes, we do that through technology, but largely we 

achieve this through the human element in our part 

of the transaction. Our Project Managers work 24 

hours a day, seven days a week in dedicated teams to 

ensure there is always someone available and ready 

to answer the phone, to open the project, or to load 

documentation onto the due diligence platform. This 

builds trust with our clients that we can deliver, and 

that’s the differentiator. 

You have to deliver quality, of course, but you have 

to deliver it fast. It’s a universal truth when talking to 

professionals in M&A that there are time pressures. 

Time-squeeze is a fact of life, and processes that 

clients may previously have built a six month 

contingency for are now being demanded within two 

months or less. 

Clients want to complete a transaction or make 

decisions quickly in order to capitalise on the 

opportunities they are being presented with and 

to gain the winning edge. If they can seal the deal 

quicker than anyone else, establish a relationship with 

the seller and gain their trust, then it is less likely that 

the process will drag on or go to auction. For example: 

one large, global sponsor recently completed an 

acquisition after they told the target company that 

they could finish the process in five days. 

The law firms under the pressure of these ever 

compressed timelines advise buyers that due 

diligence processes have to be done as fast as 

possible, which means using a supporting cast of 

experts who can simplify the process. This is done 

by auto-enabling every document placed in a virtual 

data room so it becomes fully searchable within 

seconds, information can be found quickly and easily, 

smoothing the process, with project managers ready 

in the wings if needed. 

If an M&A client can steer their deal towards a 

swift conclusion, saving time and money in the 

process, they will be happy. If they can keep out the 

competition and prevent their asset from going to 

auction, that is all to the good. If they can invest their 

capital and have that generating profit, rather than 

languishing, waiting to be put to good use, all the 

better. And, if trusted partners and advisors can help 

speed this process and expedite getting them what 

they want, then that means long-term relationships 

and future success. 

Company profile: 

Merrill DataSite is established as the market-leader 

for virtual data rooms (VDRs) in Europe and across 

the world. As first to market, we have many years of 

experience to bring to your transaction and have had 

time to develop and refine our technology, leading 

to a peerless Project Management and systems 

infrastructure that operates 24/7/365. This is why 

many thousands of companies trust Merrill DataSite 

to manage their online due diligence processes. 

Mary Walsh 

Regional Director at Merrill DataSite 

T: +44 (0) 20 3031 6300 

Email: mary.walsh@merrillcorp.com 

Mary Walsh is regional director at Merrill DataSite, the world’s leading provider of virtual data room solutions for due 

diligence and document management. She joined the corporation in 2013 and is responsible for International Sales in the 

United Kingdom. Now based in the European Headquarters of Merrill Corporation, Mary was previously posted in New 

York and later Paris. She brings more than 10 years executive level sales experience, working with the world’s leading fund 

managers, consultancies and corporations. 

5

Biotech & Pharmaceutical Law 

Increased Utility Requirements In Canada? How The 

“Promise Doctrine” Has Challenged Patentees And 

What Can Be Done To Address These Challenges 

By Mark D. Penner, 

Richard Y. Cheung 

Beginning in 2012, the Canadian government undertook an expansive review 

and update of many of Canada’s intellectual property (“IP”) statutes.The 

resulting changes have been well received by IP rights holders and Canada’s 

trading partners. One development, however, has been viewed by many such 

IP rights holders and trading partners as problematic. Canadian courts, 

starting in 2005, have invalidated patents on the basis that the inventions 

claimed therein do not have sufficient utility to be patentable. This increased 

utility requirement has been referred to as the “promise doctrine”. In essence 

it provides that where a patent specification is found to promise specific utility, 

that promised utility must be demonstrated or soundly predicted as of the 

Canadian filing date. 


Not surprisingly, the promise doctrine 

has raised the ire of both patentees and 

Canada’s trading partners, particularly 

the U.S. government. 1 It has been alleged 

that this aspect of Canadian patent law 

is problematic because of its perceived 

heightened utility requirements, particularly 

for pharmaceutical patents. 

U.S. based Eli Lilly and Co. (“Lilly”), whose 

Canadian patents directed to ZYPREXA® and 

STRATTERA® have been invalidated under 

this doctrine, has challenged the “promise 

doctrine” under the North American Free 

Trade Agreement (“NAFTA”) claiming that 

it discriminates against pharmaceutical 

patents and contravenes Canada’s 

international commitments thereunder 

as well as Canada’s obligations under the 

Patent Cooperation Treaty. As any ruling in 

this proceeding will likely not be made until 

after 2016, pressure from inside and outside 

Canada to address this perceived increased 

utility requirements has been mounting. 

While there has been recent retrenchment 

of some of the harsher aspects of the 

promise doctrine, those wishing to secure 

effective patent protection in Canada 

should be aware of the current boundaries 

of this doctrine and how to avoid its more 

draconian effects. 

Given that any legal impact of the decision 

coming out of Lilly’sNAFTA challenge will not 

be felt for years and given that the Canadian 

government has not to date provided a 

legislative solution, this article provides 

an update on the current boundaries of 

the promise doctrine and how Canadian 

1 For example, the Office of the United States Trade 

Representative (“USTR”) has included Canada in its Special 

301 Report (see https://ustr.gov/about-us/policy-offices/ 

press-office/press-releases/2015/april/ustr-releases-annual-special-301) 

as a country that allegedly provides 

insufficient protection of intellectual property rights. The 

promise doctrine has been specifically cited as a matter 

of serious concern (see page 66 of the 2015 Special301 

Report). 

applicants can consider how best to limit its 

impact. 

I Promised What? Utility 

Under Canadian Law & 

“Implied Promises” 

Under the Canadian Patent Act, an invention 

typically need only have a “scintilla of 

utility” as of the filing date in order to be 

considered patentable. 2 The necessary 

utility can be either directly demonstrated 

in the specification itself or be “soundly 

predicted” 3 based on the written description 

of the invention found in the specification. 4 

The one caveat to the scintilla requirement 

is where a patentee “promises” something 

more in the patent specification. 5 In that 

case, the patentee will be required to 

provide support in the patent specification 

for this promised utility; utility is to be 

measured against the promise. 6 Since 

2005, explicit and implicit promisesof utility 

haven been found in a number of cases 

to invalidate Canadian patents directed 

to pharmaceutical related inventions, 

ultimately leading to Lilly’s NAFTA challenge. 

2 Consolboard Inc. v. MacMillan Bloedel (Saskatchewan) 

Ltd., [1981] 1 S.C.R. 504 (S.C.C.). 

3 In the case of many inventions, particularly pharmaceutical 

or biotechnology related inventions, the patent 

application will have been filed before all clinical data has 

been established. In order to establish utility for those 

cases, the applicant must demonstrate that utility has 

been soundly predicted. Canadian courts have applied 

a three factor test to determine whether the invention 

meets this requirement: (a) there must be a factual basis 

for the prediction; (b) the inventor must have at the date 

of the patent application an articulable and sound line of 

reasoning from which the desired result can be inferred 

from the factual basis; and (c) there must be proper disclosure 

by full, clear and exact description of the nature of 

the invention and the manner in which it can be practiced. 

4 Apotex Inc. v. Wellcome Foundation Ltd. 2002 SCC 77, 

at para. 56. 

5 See, for example, Eli Lilly Canada Inc. v. Novopharm 

Ltd., 2010 FCA 197 (F.C.A.). 

6 See AstraZeneca Canada Inc. v. Apotex Inc. 2014 FC 

638, at para. 90; see alsoEli Lilly Canada Inc. v. Novopharm 

Ltd., at para. 76. 

7


In Eli Lilly v. Novopharm, 7 the Federal Court 

of Canadaconstrued Canadian patent No. 

2,041,113 (the “113 Patent”), relating to 

the antipsychotic agent olanzapine, as 

promising that “olanzapine is substantially 

better (‘marked superiority’) in the 

clinical treatment of schizophrenia (and 

related conditions) than other known 

antipsychotics, with a better side-effects 

profile, and a high level of activity at low 

doses.” 8 In its decision, the court stated 

that where a patented compound claims 

to be safe and effective in the treatment 

of a chronic condition, utility will be 

demonstrated if the patent discloses studies 

showing that the patented compound, when 

administered over the long-term, meets that 

promise. 

Since schizophrenia is a chronic condition, 

the court considered whether, at the time of 

filing of the ‘113 Patent, there was enough 

evidence available to show that olanzapine 

would meet its promise when administered 

over the long-term. 

As of the Canadian filing date of the 

‘113 Patent, Lilly had conducted animal 

studies, received results from healthy 

human volunteer studies, and preliminary 

clinical trials. The ‘113 Patent explicitly 

compared olanzapine favorably to two 

other compounds of the prior genus 

patent regarding a number of side-effect 

parameters. 

antipsychotics” 9 when administered over a 

long-term. 

In Eli Lilly v. Teva 10 , which involved the 

Canadian patent for atomoxetine, the 

Federal Court of Appeal confirmed a lower 

court’s decision that Lilly’s patent was invalid 

for lack of utility. There was no dispute at 

trial as to the nature of the explicit promise 

(i.e., the use of atomoxetine to “effectively 

treat humans with ADHD” 11 ). Not only 

did the Court decide that there was a lack 

of evidence demonstrating the promised 

utility at Canadian filing date, but it was also 

held that there was no sound prediction of 

the promised utility as the clinical trial data 

relied upon by Lilly, as a factual foundation 

for the prediction, was not disclosed in the 

patent. 

Pfizer Canada Inc. v. Apotex Inc. 12 involved 

the Canadian patent for latanoprost, a 

drug for the treatment of glaucoma or 

ocular hypertension. The patent in this case 

claimed to reduce intraocular pressure 

associated with glaucoma or ocular 

hypertension, without causing substantial 

ocular irritation. 

The specification included results from 

tests in both animals and healthy humans 

showing that the drug worked with minimal 

irritating side effects. However, no long-term 

studies had been performed at the time of 

the Canadian filing date. 

Despite this, the court held that utility 

had not been demonstrated, finding the 

evidence was not sufficient to show that 

olanzapine satisfied the promise that “it 

would provide markedly superior clinical 

treatment of schizophrenia with a better 

sideeffects profile than other known 

7 2011 FC 1288 

8 Ibid. at para. 124 

The Federal Court of Appeal held that 

because glaucoma is a chronic disease, the 

implied promise of the patent was “chronic 

use of the compound for a chronic medical 


10 2011 FCA 220 

11 Ibid.at para. 21 

12 2011 FCA 236 


condition” 13 , even though the patent claims 

made no mention of the chronic nature of 

the condition or ongoing use of the drug. 

According to the court, the results obtained 

from single dose human studies completed 

at the date of filing of the patent could not 

be soundly predicted to apply to chronic 

use. 14 

The Nafta Challenge& The 

Impact Of The “Plavix” 

Decision 

As a result of the invalidity proceedings for 

olanzapine (ZYPREXA®) and atomoxetine 

(STRATTERA®), Lillystarted in 2012its 

NAFTA challenge claiming that the 

promise doctrine discriminates against 

pharmaceutical patents and contravenes 

Canada’s international commitments under 

NAFTA’s Chapter 11, which protects the 

investments of companies and foreign 

investors operating commercially in NAFTA’s 

signatory countries. 15 Lilly specifically 

alleged that the application of the promise 

doctrine by Canadian courts is “arbitrary” 

in its applicationand “discriminatory” in its 

effects, 16 and is therefore not in accordance 

with Canada’s commitments under NAFTA, 

as well as Chapter 17 which requires Canada 

to provide patents for inventions, in all 

fields of technology that are “new, result 

from an inventive step, and are capable of 

industrial application”. 17 

13 Ibid.at para. 29 

14 Ibid., at para. 49 

15 See http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/ 

eli.aspx?lang=eng. On September 13, 2013, Lillyfiled its 

Notice of Arbitration (see http://www.international.gc.ca/ 

trade-agreements-accords-commerciaux/assets/pdfs/ 

disp-diff/eli-03.pdf) under NAFTA Chapter 11. Canada’s 

Statement of Defense (http://www.international.gc.ca/ 

trade-agreements-accords-commerciaux/topics-domaines/disp-diff/eli-statement-declaration.aspx?lang=eng) 

was filed on June 30, 2014. 

16 Ibid. at para. 43. 


Concurrently with Lilly’s NAFTA, in Sanofi 

v. Apotex (the “PLAVIX Decision”) 18 , the 

Federal Court of Appeal defined the 

“promise” as “the standard against which 

the utility of the invention described in 

the patent is measured” 19 . Significantly, the 

Court emphasized: (1) only if an inventor 

makes “an explicit promise of a specific 

result, then utility will be assessed by 

reference to the terms of the explicit 

promise” 20 ; (2) as there is no obligation 

to disclose utility in a patent, one cannot 

assume every patent has an explicit 

promise; and (3) where there is no explicit 

promise, a “mere scintilla” of utility will 

suffice. In construing that Sanofi’s patent did 

not provide a “promise for use in humans”, 

the court held that it was incorrect to simply 

rely on inferences from the patent to find a 

promise. 

As a result of the PLAVIX Decision, Canadian 

courts started to reconsider the nature 

and scope of the promise doctrine in 

Canada. In Pfizer v. Mylan 21 , for example, 

the court focused on statements in the 

specification to the effect that the selectivity 

of compounds “may indicate an ability to 

reduce the incidents of common NSAIDinduced 

side effects” as showing that 

reduced side-effects were only a possibility 

and that there was no promise. 22 

18 2013 FCA 186. The appeal to the Supreme Court of 

Canada was withdrawn the day before scheduled to be 

heard. 



21 2014 FC 38. This decision is notable as the subject 

patent has been the subject of Federal Court decisions 

both pre- and post-PLAVIX Decision, with differing 

constructions of the patent’s promise. In pre-PLAVIX 

decision involving Canadian patent No. 2,177,576 (the 

“‘576 Patent”) directed to celecoxib (see 2007 FC 81), the 

court found that promise of ‘576 patent included “duality 

of treatment of inflammation and reduction of unwanted 

side effects”. In post-PLAVIX decision, Court adopted a 

different construction of promise of the patent and found 

that the patent made no promise of reduced side effects. 


9


In another decision post-PLAVIX Decision, 

the court in Bayer v. Cobalt Pharmaceuticals 23 

cited a restrained approach to the promise 

of the patent and emphasized that “[c] 

ourts should not strive to defeat otherwise 

valid patents.” 24 In the court’s view, a list of 

advantages expected to be achieved is not 

promising a result to be achieved; a goal is 

not necessarily a promise. 25 

In Apotex v Pfizer 26 , the Federal Court of 

Appeal clearly enunciated the approach to 

be taken: 

Where the validity of a patent is challenged 

on the basis of an alleged unfulfilled 

promise, the patent will be construed 

in favour of the patentee where it can 

reasonably be read by the skilled person as 

excluding this promise. 27 

As part of the analysis, the court started 

with the “principle that statements outside 

of the claim should not be presumed to be 

promises”. 28 Again, the court found that 

statements as to benefits were found to be 

mere advantages. 

What Can Be Done To 

Avoid The Application Of 

The Promise Doctrine 

The Canadian court decisions post the 

PLAVIX Decision may suggest an increasing 

reluctance to find implicit promises and a 

consequently increased utility requirement. 

By focusing on claim language in order 

to find the promise, rather than any stray 

phrases in the disclosure, Canadian courts 

23 2013 FC 1061 

24 Ibid., at para 93. 

25 Ibid., at para. 152 

26 2014 FCA 250 



may be moving away from a draconian 

application of the promise doctrine rule. 

Patentees and Canada’s trading partners 

should welcome this. 

There still may be, however, cause for 

concern for patentees. Canadian courts 

may still look to inferred promises as 

a basis for invalidity in a post-PLAVIX 

world, as was the case in Alcon v. Cobalt 

Pharmaceuticals. 29 Until the Supreme Court 

of Canada or the tribunal in Lilly’s NAFTA 

challenge deals with issue, the promise 

doctrine may remain a live issue. 

As a result, the application of the promise 

doctrine may create some uncertainty for 

the Canadian patent landscape. Despite this, 

Applicants should consider the following risk 

mitigation strategies when drafting patent 

applications that may be prosecuted in 

Canada. 

• Canadian patent specification 

should avoid language that 

states or suggests any particular 

advantage with regard to the utility 

of the invention, unless specific 

support therefor is provided. 

Where such statements may be 

required (e.g. support for a sound 

prediction of utility), it should be 

made clear that such statements 

are not explicit or implicit promises 

of utility. 

• This is particularly important 

where there is evidence required 

to soundly predict utility as, in 

29 2014 FC 149. In Alcon, Canadian Patent No. 2,447,924 

claimed solutions comprising olopatadine and an amount 

of polyvinylpyrrolidone (PVP) “sufficient to enhance the 

physical stability of the solution”, wherein the composition 

does not contain five listed excipients. The Court 

construed the specification to include the promise that 

PVP will enhance the physical stability of the relevant olopatadine 

solutions “but that the five excluded excipients 

will not do so” (at para. 61). While the specification taught 

that two of excluded excipients would not enhance stability 

of olopatadine solutions, the specification was silent 

concerning remaining excipients. 


some cases, advantages described 

have been considered promises of 

utility. 

• To the extent utility is based 

on sound prediction, consider 

including as much information 

as possible in the application to 

support the factual basis and line 

of reasoning for the prediction 

(e.g., reference to the state of the 

art, hypotheses, descriptions of 

work done, tests and results). 

• Avoid overstating advantages of 

the invention in cases where there 

is insufficient data to support 

such statements. Be aware of 

how advantages or discussions 

of possible applications may be 

construed as promises of the 

patent. 

Mark D. Penner 

Partner at Fasken Martineau DuMoulin LLP 

T: +1 416 868 3501 

Email: mpenner@fasken.com 

Mark Penner is a partner in the Technology and Intellectual Property Practice Group with expertise 

in the acquisition, protection, enforcement and strategic use of a wide range of intellectual 

property assets. As a registered patent agent with the Canadian Intellectual Property Office, Mark’s 

practice focuses on the drafting and prosecuting of patent applications in the life sciences in 

Canada and throughout the world. As a registered trade-mark agent, Mark also advises local and 

international clients on how to efficiently and effectively protect, maintain and enforce trade-mark 

rights in Canada, the United States and across multiple jurisdictions. 

Richard Y. Cheung 

Associate at Fasken Martineau DuMoulin LLP 

T: +1 416 865 5490 

Email: rcheung@fasken.com 

Richard practises in all areas of intellectual property law with a focus on patents. In addition, 

he routinely counsels clients on regulatory matters involving drugs and medical devices in 

Canada, including: compliance and enforcement; pricing and reimbursement; regulatory 

exclusivity and data protection; patent listing; look-alike sound-alike drug names; establishment 

licensing; medical device licensing; problem reporting and recalls. He has experience in a 

wide range of matters involving the innovative pharmaceutical and biotechnology industry, 

including proceedings under the Patented Medicines (Notice of Compliance) Regulations and the 

preparation of research, services, development, supply, non-disclosure, and material transfer 

agreements. In addition, Richard has also provided advice on matters relevant to the Pharmacy 

industry, such as rebates, professional allowances, and scope of practice issues. 

11


Branding of Pharmaceuticals and Medical 

Devices: What You Need to Know about the 

Latest Developments in Canada 

by Sangeetha Punniyamoorthy, 

Nikolas S. Purcell 

The pharmaceutical regulatory field in Canada has seen a host of legislative 

and administrative developments in recent months. Many of the changes were 

introduced to provide Canada’s drug and health product watchdog, Health 

Canada, with greater powers to deal with public health risks associated with 

drugs and other health care products currently on the market or to be introduced 

to the market in the future. If you or your client manufactures, markets 

and/or sells pharmaceuticals (whether brand or generic), medical devices or 

other health care products in Canada, it is important to be apprised of two 

recent developments and their potential impact on your client’s business. 

The first development is Health Canada’s revised 

guidanceon the Look Alike Sound Alike policy for 

brand names for pharmaceuticals, released last 

month. Although the guidance clarifies the drug 

name approval process at Health Canada aimed 

at reducing medication errors, the revised process 

is more onerous on manufacturers and requires 

more detailed informationto be provided to Health 

Canada. The second development is the enactment 

of Vanessa’s Law, which amends the Food and 


Drugs Act to give the Minister of Health expanded 

powers to assess the post-marketing safety risks 

of pharmaceuticals and medical devices and their 

associated advertising and marketing. This article 

examines the impact of both of these developments 

in the Canadian pharmaceutical regulatory field 

and recommends how best to brand and protect 

pharmaceuticals and medical devices in view of these 

changes. 

1 

Drug Brand Guidance: Look 

Alike Sound Alike Policy 

In Canada, the importance of a pharmaceutical’s 

brand name goeswell beyond its role in a successful 

marketing campaign. It is one factor, amongst 

many, that Health Canada assesses as part of the 

comprehensive safety and efficacy review in the 

regulatory approval process. 

In order to sell a drug on the Canadian market, 

the manufacturer (or “sponsor”) must obtain a 

Drug Identification Number (“DIN”) and a Notice of 

Compliance (“NOC”) for the product.The Food and 

Drug Regulations outline the requirements to obtain 

a DIN and NOC, and also mandate submissions 

concerning the safety implications associated with the 

proposed brand name for the product 1 : 

• in the case of a new drug for human use, 

an assessment as to whether there is a 

likelihood that the new drug will be mistaken 

for any of the following products due to a 

resemblance between the brand name that 

is proposed to be used in respect of the new 

drug and the brand name, common name or 

proper name of any of those products: 

• a drug in respect of which a drug 

identification number has been assigned, 

• a radiopharmaceutical…in respect of which 

a notice of compliance has been issued 

under section C.08.004 or C.08.004.01, and 

• a kit…in respect of which a notice of 

compliance has been issued under section 

C.08.004 or C.08.004.01. 

If Health Canada determines that a proposed drug 

name has similarities and is likely to be confused for 

the brand name, common name or proper name 

of another health product, Health Canada has the 

discretion to refuse to issue a DIN or a NOC. 

Although the Food and Drug Regulations stipulate 

that an assessment of the potential causes of 

confusion must be conducted and submitted, 

nothing more is provided on the matter. To give 

direction, Health Canada introduced in 2006 an 

administrative statement of itspolicy on brand names 

for pharmaceuticals. 

The Guidance, formally called the “Guidance 

Document for Industry – Review of Drug Brand 

Names” but more commonly referred to as the “Look 

Alike Sound Alike” (“LASA”) Guidance was revised 

in July 2014 2 . On June 13, 2015, the revisedLASA 

Guidance came into effect. 

The LASA Guidance appliesto proposed brands for 

drugs for human use (whether innovator or generic), 

including biologics, pharmaceutical prescription 

drugs, radiopharmaceuticals, kits, drugs sold 

directly toprofessionals for professional use (e.g., 

anaesthetics), and drugs sold to the public with 

the intervention of a healthcare professional (e.g., 

insulin). 

The Guidance currently does not apply to 

submissions for non-prescription over-the-counter 

drug products or natural health products, but Health 

Canada expects to produce brand name assessment 

guidelines for these products in the future. 

The purpose and aim of the LASA Guidance is to 

prevent medication errors resulting from misleading 

or confusing product names. Medication errors 

related to confusing names can occur at several 

1 Food and Drug Regulations, CRC c 870, C.08.002(1)(o). 

2 http://www.hc-sc.gc.ca/dhp-mps/pubs/medeff/_guide/2014-review-examen_drug-medicament_names-marques/index-eng.php 

13


points along the path from prescriber to patient, 

including: prescribing errors, transcription errors, 

dispensing errors, administration errors and selfselection 

errors. The result of these errors is that the 

patient receives the wrong medication potentially 

depriving them of the intended therapeutic benefit, 

or resulting in serious harm from contraindications or 

adverse effects. 

The revised LASA Guidance provides sponsorswith 

direction on the processes to be followed and 

information to be submitted to Health Canada as 

part of the brand name assessment. Although the 

revised Guidance is more onerous than in the past 

and requires more detailed information, it is essential 

that the sponsorscomply with Health Canada’s 

requirements since failure to satisfy the naming 

requirements will bar regulatory approval. 

a. 

Assessment by Health Canada 

of Brand Name 

The first step of the brand name review process 

outlined in the LASA Guidance is an Initial Brand 

Name Review, which is conducted by Health Canada, 

not the manufacturer/sponsor. However, it is 

recommended that sponsors review the criteria for 

the Review prior to conducting theassessment of the 

proposed brand name to Health Canada. There are 

seven factors that are considered: 

1 

2 

3 

Does the name/modifier suggest/imply 

an unsubstantiated unique effectiveness/ 

composition, superiority claims, exaggerated 

product efficacy, broadening product indication 

or minimizing the risk of the product (e.g., 

making superiority claims such as ‘CureAll’)? 

Does the name/modifier include or imply an 

ingredient that is not included in the drug 

product? 

Is the name identical to an authorized product 

in Canada containing a different medicinal 

ingredient(s)(e.g., ‘Podium’ contains the 

medicinal ingredients ‘XY’ and a sponsor 

4 

5 

6 

7 

proposes the identical name‘Podium’ for 

medicinal ingredient ‘Z’)? 

Does the proposed name contain a letter 

sequence/stem that is in the same position 

designated by USAN(U.S. Adopted Name) or 

INN (International Nonproprietary Name) for 

the same or differentpharmacological/chemical 

trait?6,7,8 

Does the proposed brand name contain or 

suggest an exclusive composition of only one 

ingredient in amulti-ingredient product? 

Does the name suggest an unsupported route 

of administration or dosage form? 

Does the name conflict with Schedule A of the 

Food and Drugs Act 3 (e.g., DiabeticCareTM 

AcetaminophenTablets)? 

An affirmative response to any of the above questions 

will result in an automatic rejection of the proposed 

name. Additional factors are considered by Health 

Canada, however they will not result in an automatic 

rejection. These include, for example, whether the 

proposed brand name is the same or similar to a 

name for a product no longer on the market, or 

whether part of the proposed brand name represents 

or implies a medical or scientific term or acronym. 

b. 

Assessment by Sponsor of 

Brand Name 

If the proposed name passes the Initial Brand 

Name Review, the sponsor is required to conduct a 

LASA brand name assessment. This assessment is 

the responsibility of the sponsor to conduct. It is a 

comprehensive, multi-step review of the proposed 

brand name which assesses the likelihood that the 

proposed brand name will be confusing with the 

names of approved drug products. The process 

3 In Canada there are certain diseases, disorders and abnormal 

physical states for which a food, drug, cosmetic or device cannot be 

advertised and sold to the public as a treatment, preventative or cure 

for. Schedule A of the Food and Drugs Actlists the prohibiteddiseases, 

disorders and abnormal physical states. 


consists of three steps: search, simulate, and 

synthesize. 

Search 

This first step involves a search of the Drug Product 

Database 4 and the Licenced Natural Health Products 

Database. 5 The search query will compare the 

proposed name against the database according to 

orthographic and phonetic similarities. Results of 

the searches are listed according to a computed 

similarity score and results scoring 50% of higher are 

to be included in the sponsor’s submissions to Health 

Canada. 

If the proposed brand name is already marketed in 

another country, addition searches are required. For 

sponsors considering a potential brand name, it is 

important to search the Drug Submission Tracking 

System for pending submissions. 

Simulate 

The simulate step consists of simulation experiments 

to assess the confusability of the proposed name 

by using the name in a variety of prescribing, 

transcribing, dispensing and administration scenarios. 

The sponsor must consider the world in which the 

drug associated with the proposed brand name will 

exist and conduct simulations against this. 

For example, the drug may be used in the hospital 

setting, therefore the sponsor must detail every step 

of the process by which the drug gets to patient and 

conduct simulations against this. Some drugs would 

have more complicated routes than others (e.g., oral 

prescription drug vs. drug for injection by emergency 

physician) or have multiple routes (e.g., oral 

prescription drug in hospital and community). The 

sponsor must conduct at least five simulations, which 

altogether, involve at least one hundred healthcare 

professionals. 

4 Available from: http://webprod5.hc-sc.gc.ca/dpd-bdpp/index-eng.jsp 

5 Available from: http://webprod3.hc-sc.gc.ca/lnhpd-bdpsnh/ 

Synthesize 

The sponsor’s final step in the LASA assessment is to 

synthesize the results from the search and simulate 

steps by completing a failure mode and effects 

analysis (“FMEA”). As a preliminary step, the sponsor 

must consider the names generated in the search and 

simulate steps for their inclusion or exclusion from 

the FMEA. The sponsor must then provide rationale 

for the inclusion or exclusion of each name. 

The FMEAis an analysis conducted by a panel of 

various health care professionals, each representing 

an individual who would be involved in the delivery 

of the drug at issue. The panel considers the drugs 

names from the search and simulate steps that were 

included by the sponsor against the process maps 

developed in the simulate step. 

The principal consideration is determining what 

can go wrong in the case of a medication error (i.e. 

failure modes) and the effects. The FMEA panel is 

also required to answer various questions addressing 

the effects of the potential confusing drugs, the 

effects of omitting the proposed drug, the effects of 

administering the wrong drug therapy, and the effects 

of combined drug therapy. 

Once the results of the complete LASA assessment 

are submitted to Health Canada, it will review the 

submissions and decide on the acceptability of the 

proposed name. Health Canada can request further 

information or material (including raw data) or make 

its own inquiries. If a proposed drug brand name is 

rejected by Health Canada, the sponsor can submit an 

alternative name for review 6 , use the proper/common 

name alone, or seek to formally reconsider the 

decision of Health Canada if it results in a withdrawal 

notice. 

Given the more stringent and involved brand name 

approval process in Canada, it is recommended that 

innovator and generic companies consider the LASA 

Guidance well in advance, and preferably at the time 

6 A sponsor may submit two brand names for submissions of 180 

days or longer. 

15


of choosing and clearing a brand, in order to avoid 

unnecessary delays or unfavourable results. It is also 

recommended that pharmaceutical companies that 

perform global development and testing processes 

with respect to proposed brand names include 

Canadian respondents and give consideration of the 

use of the product in Canada. 

the confidential business information without notice 

to, or consent from the person to whose business or 

affairs the information relates. Although these powers 

are to be employed only where a drug or device “may 

present a serious risk of injury to human health”, the 

potentially far-reaching and invasive nature of the 

amendments are controversial. 

Otherwise Health Canada is unlikely to consider (or 

givesufficient weight) to the brand nameassessment 

completed in another jurisdiction. Alternatively, 

the sponsor may be asked to conduct an additional 

assessment to reflect the Canadian context, which 

both delays the approval process and incurs more 

expense. Sponsors should also have regard to nonname 

attributes, such as formulation, strength 

and indication, when considering the use of a 

performance study from another jurisdiction for 

the purposes of the Canadian brand name approval 

process. 

2 

Vanessa’s Law – Increased 

Oversight of Drugs and 

Medical Devices 

The second key development in Canada is 

the Protecting Canadians from Unsafe Drugs 

Act(Vanessa’s Law), which received Royal Assent in 

November 2014, but has not yet come into force. 

Through amendments to theFood and Drugs Act, 

Vanessa’s Law aims to further protect the Canadian 

public from the risk of injury from “therapeutic 

products” (defined as a drug, device, or any 

combination of drugs and devices) currently on the 

market. 

Overall, the law provides the Minister of Health with 

greater powers to assess and manage risks associated 

with drugs and medical devices. Much debate 

around Vanessa’s Law concerns the newly created 

powers of the Minister to compel any information 

from sponsors (including confidential business 

information, which is defined to include information 

that has actual or potential economic value to 

competitors, or the disclosure of which would result 

in material financial loss) and the power to disclose 

Vanessa’s Law will also impact the marketing and 

oversight of already approved pharmaceutical drugs 

and devices. First, where the Minister believes it is 

necessary to prevent injury to health, he or she may 

compel the sponsor to modify or replace the label or 

packing of a drug or device. 

Second, the Minister may order a sponsor to conduct 

an assessment of the drug or device’s effects on 

health and safety. While the latter change does not 

specifically mention the effects of the product’s brand 

name, this is well-known to be an important aspect of 

Health Canada’s safety analysis (as described in the 

LASA Guidance) and is likely encompassed by these 

new provisions. 

The Minister may also recall the drug or device at 

issue in order to respond to a serious or imminent 

health risk, or seek an injunction. Furthermore, the 

penalties for contravention of the new provisions 

can be severe,resulting in some cases in fines up 

to $5,000,000 and imprisonment for those who 

contravene the Food and Drugs Act (including 

Minister’s orders under Vanessa’s Law). 

To assist with the implementation of Vanessa’s Law, 

Health Canada recently released a draft guide titled 

“Amendments to the Food and Drugs Act: Guide 

to New Authorities (power to require and disclose 

information, power to order a label change and 

power to order a recall) seeking comments. 7 

The guide sets out principles to govern all decisions 

by Health Canada, and covers when, how, and what 

triggers the Minister’s ability to make use of the 

powers and explains to whom the powers apply. The 

7 http://www.hc-sc.gc.ca/dhp-mps/consultation/drug-medic/unsafedrugsact-guide-lesdroguesdangereuses-eng.php 


guide also contains a non-exhaustive list of elements 

that should be considered as the starting point for 

making a determination of “serious risk” of injury. 

Conclusion 

Successful branding of pharmaceutical products 

mustconsiderthetarget audiences (patients, doctors, 

pharmacists), the associated therapeutic and 

disease awareness, and the global marketin order 

to achieve greater market share and brand loyalty. 

Increasingly, the proposed brands of drugs and 

other health care products are subject to heightened 

government regulation. This is demonstrated by the 

recent regulatory changes in Canada, includingHealth 

Canada’s stringent new requirements and 

information disclosurerelating to new drug names. 

it comes to branding and have regard to both the 

regulatory approval process and the trademark 

registration process globally, especially in the key 

jurisdictions. Although the proposed drug name 

must pass Health Canada’s scrutiny to be used in 

the marketplace, the review by Health Canada does 

not grant positive rights to the pharmaceutical 

manufacturer to stop others who may be using a 

similar brand name. 

Therefore pharmaceutical branding must be 

considered strategically from all angles, includingwith 

reference to the recent changes in Canada, starting 

at an early stage of the brand selection and clearance 

process. This ensure timely and successful approval 

and entry into the market and thereafter. 

As a result, manufacturers must be strategic when 

Sangeetha Punniyamoorthy 

Partner at Dimock Stratton LLP 

T: +1 416 971 7202 

Email: sp@dimock.com 

Sangeetha is a partner at Dimock Stratton LLP and practices intellectual property law with a focus on trademark 

and copyright law. Since her call to the Ontario Bar in 2004, she has appeared as counsel before the Federal Court, 

the Ontario Court, and the Supreme Court of Canada in a variety of intellectual property matters. She is a registered 

trademark agent and has an active prosecution and opposition practice, with a focus on pharmaceutical portfolios. 

Sangeetha is an active member of the International Trademarks Association, the Canadian Bar Association, and 

the Intellectual Property Institute of Canada. She also sits on the Editorial Board of the Intellectual Property Journal 

published by Federated Press. 

Nikolas S. Purcell 

Associate at Dimock Stratton LLP 

T: +1 416 971 7202 

Email: npurcell@dimock.com 

Nik was called to the Ontario bar in 2014. His practice includes all areas of intellectual property litigation with a focus 

on patents concerning pharmaceutical, chemical, and mechanical subject-matter. Nik is a licenced pharmacist in British 

Columbia with clinical experience in both community and institutional settings. He is a member of the Canadian Bar 

Association and the Toronto Intellectual Property Group. 

17

Competition & Anti-trust 

China’s Antitrust Regulator Targets Price-related 

Violations in the Pharmaceutical Sector 

by Susan Ning, Hazel Yin, Ruohan Zhang 

In May, 2015, the National Development and Reform Commission (“NDRC”), 

the Chinese authority in charge of price-related antitrust violations published the 

Notice on Reinforcing Supervision over Drug Prices (“Notice”). The Notice includes 

a range of specific issues on the supervision over drug price, including immediately 

launching special inspections into illegal conducts under the Pricing law and the 

Anti-Monopoly Law (“AML”). 

The Notice aims to implement the Opinions on 

Promoting the Drug Pricing Reform (“Opinion”), 

which was jointly published by the NDRC, also 

the major authority in charge of the State’s 

medical price reform and other relevant 

ministries. 

In China, the medical reform has been carried 

out for decades. As a major move in this 

lengthy and continuous reforming process, the 

NDRC issued the Opinion and the Notice on 

the same day, both of which cover the issue 

of reforming the drugpricing mechanism and 

reinforcing comprehensive supervision over 

medical expenses and prices. 

This article introduces the Notice with a focus 

onthe antitrust issues that may occur in such 

special inspections, in order to provide advice 

for antitrust compliance in the pharmaceutical 

sector. 


... the 

government fixes 

the price of drugs 

relating to the 

immunization 

plans and family 

planning, while 

it sets maximum 

retail prices for the 

others 

“ 

I. Current DrugPricing 

Mechanism 

Since 2000, under the Drug Administration 

Law and its relevant rules and regulations, 

the price of the following drugs shall be fixed 

or guided by the government: (i) drugs listed 

in the directory of drugs for national basic 

medical insurance (“Directory”), and (ii) drugs 

which are not listed in the directory but are 

manufactured and distributed by a single 

supplier. More specifically,within the scope of 

the above mentioned drugs, the government 

fixes the price of drugs relating to the 

immunization plans and family planning, while 

it sets maximum retail prices for the others. 1 

By contrast, for drugs that are not listed in the 

directory, ordrugs that are not manufactured 

and distributed by a single supplier, their 

prices areset by the pharmaceutical 

companies. Besides, according to the Notice 

on Issuing the Regulationson the Centralized 

Procurement of Drugs by Medical Institutions 

(2010), all non-profit medical institutions 

shall participate in the centralized drug 

procurement plan, and medical institutions 

and pharmaceutical companies shall carry out 

drug procurement through the centralized 

drug procurement platforms established by 

local governments. 

Therefore, for drugs whose prices are guided 

by the government, their pricing shall be 

subject to the following restrictionsin order 

to be sold to non-profit medical institutions. 

First, their prices shall not exceed the 

maximal resale price, or the so-called “Ceiling 

Price” issued by the NDRC. Second,the 

NHFPC organizes the provincial centralized 

procurement process to determine the 

bidding-winning price and the hospitals then 

set the retail price of such drugs withinthe 

1 According to Article 6 of Opinions on Reforming the 

Pricing Mechanism of Drugs and Medical Service,in the scope 

of drugs whose prices are regulated by the government, the 

prices of drugs relating to immunization plans and family 

planning are fixed by the government, and the prices of 

other drugs are guided by the government. 

price increaserangein accordance with 

relevant laws and regulations 2 . 

Currently, the bid-winning price under the 

centralized drug bidding process is normally 

lower than the Ceiling Price setby the NDRC. 

It suggeststhat the NDRC’s regulation on the 

maximal resale price has very limitedimpact 

on the actual prices of drugs. Against such a 

background, it seems to be the right timing to 

repeal the regulations on the maximal resale 

price of drugs, and establish a new pricing 

mechanism for drugs. 

II. Key Points of the Drug 

Pricing Reform 

Ever since 2012, the NDRC has being working 

on reforming the drug pricing mechanism. 

After seeking public opinions, the NDRC has 

now eventually finalizedthe Opinion. The 

Opinion has provided the following measures 

for reforming the drug pricing mechanism: 

(i) cancelling the maximal resale price 

restrictions set by the government, except 

for narcotic drugs and Class I psychotropic 

drugs; (ii) forming the procedures, bases, 

methods and other rules for formulating 

the reimbursement standards for drugs 

that are covered by medical insurance, and 

enhancingmedical insurance’s functionin 

pricecontrol; (iii) establishing a public 

and transparent negotiation mechanism 

participated by multiple parties, in order to set 

prices for patent drugs and drugsproduced 

by a single supplier; (iv) setting the prices 

2 According to Article 12 of the Implementation Opinions 

on Establishing the National Basic Drugs System, in the 

county(city, or district) where the basic drugs system is 

implemented, the basic drugs used by basic-level medical 

institutions shall be sold with zero margins. All local government 

shall implement relevant governmentalsubsidypolicy. 

According to Article 14 of the Opinions on Reforming the 

Pricing Mechanism of Drugs and Medical Service, during 

the transition period of reforms, the markup percentage 

of drugs used by medical institutions shall be gradually 

reduced. The policies regarding markup percentage can be 

varied depending on the price level but shall be under the 

maximal rate of 15%. 

19


through bidding process or negotiation for 

blood products, which are not listed in the 

national drug reimbursement list, immunity 

and prevention drugs that are purchased by 

the State in a centralized manner, and AIDS 

antiviral drugs and contraceptives provided by 

the State for free; (v) for other drugs, the prices 

shall beset by the pharmaceutical companies. 

III. Supervision over Price- 

Related Conducts in the 

Pharmaceutical Sector 

In order to implement the Notice, the NDRC 

will launch a six-month campaignagainst pricerelate 

dviolations in the pharmaceutical sector. 

The inspection will focus on the prices of drugs 

for which competition is insufficient and which 

are particularly used by special patients. In 

particular, the NDRC will focus on the following 

conducts which violate the Price Law and the 

AML: 

a. Fabricating and spreading price increase 

information, pushing up the prices to an 

excessively high level, and disturbing the 

market order; 

b. Colluding with each other to manipulate 

market prices; 

c. Abusing market dominance by selling 

drugs at unfairly high price (“excessive 

pricing”); 

d. Price frauds such as making up cost 

price,marking false price, offering 

discount after increasing the price, 

misleading price marking, hiding 

additional pricing conditions; and 

e. Other illegal price-related conducts. 

Besides, the NDRC will step up efforts to 

monitordrug prices, particularly on the exfactory 

(port) prices and actual purchase prices 

of drugs over which market competition is 

insufficient. The Notice mentions that special 

inspections would be launched incases 

where the price is frequently or significantly 

changed,or cases where the price is 

significantly different from international prices, 

price of the same product, orprices from other 

regions. 

In addition, the NDRC encourages the public 

to report illegal price-related conducts via its 

national price violation report system. 

IV. Suggestions 

for Compliance of 

Pharmaceutical Companies 

Drug prices, especially the high prices 

of patent drugs have always been in 

the spotlight. Partly because of the 

implementation of mandatory Ceiling Price, 

the antitrust authorities rarely punish 

pharmaceutical companies for excessive 

pricing under the AML. After the reform, since 

the Ceiling Price for most of the drugs would 

be removed, pharmaceutical companies 

will be more susceptible toexcessive pricing 

challenges, which is exactly the focusof the 

NDRC campaign. 

(1) Relevant Market 

Under the AML, a business operator could 

be liable for excessive pricing only if it 

holds a dominant market position, the 

determinationof which depends on the 

definition of the relevant market. According to 

the Guidelines on Defining Relevant Markets, 

the relevant market refers to “the product scope 

or geographical scope within which an operator 

participates in competition during a certain 

period of time with respect to a specific product 

or service”. The relevant market can be defined 

by methods such as the functionality test by 

analyzingthe substitutability of products on 


Because of 

patent protection, 

patent drugs may, 

to some extent, 

have certain 

advantage in the 

market. 

“ 

demand/supply side, or SSNIP test. 3 In the 

human drug area, the antitrust authorities 

would take special approach to define 

the relevant market based on the specific 

characteristics of drugs. 

For example, MOFCOM, the Chinese antitrust 

merger review authority, has adopted the 

functionality test,and in particular the ATC 

3 classification (Anatomical Therapeutic 

Chemical level 3, i.e. a classification based on 

targeted symptoms) to define the relevant 

market. 4 Besides, the SSNIP test generally 

also plays an important role in defining the 

relevant market. 

However, the influence of price change on 

customers’ choice of drugs is very complicated, 

because the pricing and purchase process of 

drugs are subject to governmental regulations, 

while the customers’ choice on drugs is 

influenced by various factors such as the 

doctors’ preferencein prescriptions and the 

payment system under medical insurance. 

Therefore, various factors shall be taken into 

account if the SSNIP test is applied to define 

the market. 

(2) DominantMarket Position 

Dominant market positionrefers to the 

position with whichbusiness operators 

would be capable of controlling the prices or 

quantities of commodities or other transaction 

3 In the SSNIP test, under the circumstance that a hypothetical 

monopolist continuously raise the price at a moderate 

rate during a certain period of time, if sufficient numbers 

of buyers arelikely to switch to alternative products and 

the lost sales made such price increase unprofitable, then 

the alternative products and the hypothetical monopolist’s 

products shall be considered as in the same product market. 

Otherwise, those two products shall not be considered as in 

different product market. 

4 SeeMOFCOM Announcement [2009. No. 77] on its Decision 

on Conditionally Approve the Acquisition of Wyeth by 

Pfizer Following Anti-Monopoly Review. Nevertheless, ATC 

3 is not the only basis to define the relevant market in the 

pharmaceuticalindustry. For example, apart from the ATC 

3, the EU antitrust authorities used other methods, such as 

ATC 4 (i.e. a classification based oncurative effects or pharmacodynamics) 

to define the relevant market. 

terms in a relevant market, or preventing 

or imposing an influence on the access of 

other business operators to the market. 

According to the AML and relevant regulations, 

various factors, such as business operators’ 

market share and technical capabilities, shall 

be considered when assessing the market 

position. Among those factors, patent is a 

particularly important one. 

The pharmaceutical industry relies heavily 

on patent protection. According to industry 

study, but for patent protection, 60% of drugs 

would not have been developed in the first 

place, and 65% of drugs would not have 

been clinically applied. Because of patent 

protection, patent drugs may, to some extent, 

have certain advantage in the market. But 

in assessing the market position, it is still 

necessary to comprehensively analyze all 

relevant factors, such as the market share 

of the pharmaceutical company, its financial 

status, and its controlling power over the 

channels, etc. 

(3) Excessive Pricing 

Once concluded that the business operator 

holds the dominant market position, it is 

necessary to determine whether the drugs 

are sold at “unfairly high price”. According 

to the Provisions on Anti-price Monopoly 

promulgated by the NDRC, factors to consider 

in determining “unfairlyhigh price” include (1) 

the price offered by other business operators 

for the same kind of product, and (2) the cost 

change of such product, etc. However, the 

AML and relevant regulations do not provide 

further details on how to select the benchmark 

price for comparison.If one only compares the 

overseas price and the domestic price for the 

same drug,the resultmaynot be convincing, 

because the market situation, the regulatory 

frame workand the payment systems are 

different. Moreover, for patent drugs, the 

production cost would not be sufficient 

21


to demonstrate the actual investment of 

producers in light thatthe R&Dexpense 

is significant while the production cost is 

relatively small. 

V. Conclusion 

The pharmaceuticalsectorhas been under 

close scrutiny by antitrust enforcers globally, 

and pricing in this sector has long been one of 

themostsensitive issues. Because of the special 

regulatory provisions and the significant R&D 

investment, the pricing systemof drugs differs 

from that of other products. 

In the context of the current State medical 

and health reform, we expect that more 

reforming policies would be published in the 

future, which call for the continuous attention 

of pharmaceutical companies on antitrust 

compliance. 

Susan Ning 

Senior Partner at King & Wood Mallesons 

T: +86 10 5878 5010 

Email: susan.ning@cn.kwm.com 

Susan leads the International Trade and Antitrust & Competition Group. Her practice covers three main areas: securing 

MOFCOM merger clearance for clients, advising on antitrust compliance issues, and representing clients in antitrust 

administrative proceedings. She has undertaken more than 200 merger control filings on behalf of blue-chip clients and 

dozens of cartel cases and other antitrust investigations in various industries, such as LCD panel, infant formula, auto 

parts, high tech, and etc. Susan was consecutively listed in the International Who’s Who of Competition Lawyers and 

Economist. She was also listed in Women in Antitrust 2013 Edition published by Global Competition Review, and voted 

as Competition Lawyer of the Year 2013 by China Law & Practice. 

Hazel Yin 

Partner at King & Wood Mallesons 

T: +86 10 5878 5270 

Email: yinranran@cn.kwm.com 

Hazel is a Partner at the International Trade and Antitrust & Competition Group of King & Wood Mallesons. She has 

advised multinationals in a variety of industries, including mining, agriculture, automobile, beverages, high-tech, 

trading, telecommunications, distribution, aircraft leasing, chemical, pharmaceutical and manufacturing in both 

antitrust filings in China to the Ministry of Commerce and on compliance/investigations matters. 

Ruohan Zhang 

Associate at King & Wood Mallesons 

T: +86 10 5878 5220 

Email: zhangruohan@cn.kwm.com 

Ruohan is an associate at the International Trade and Antitrust & Competition Group of King & Wood Mallesons. He has 

assisted partners to advise multinationals in a variety of industries in both antitrust filings in China to the Ministry of 

Commerce and on compliance/investigations matters. 


An Introduction to Resolving A Dispute 

Through an Expert Determination Process 

By Adam Stronach 

Firstly, what is meant by an 

expert determination? 

It is the process where the parties agree that a 

third party (the “Expert”) is appointed to answer 

particular questions / determine particular 

disputed items identified by the parties. It 

generally works best when there is a narrow set 

of clearly defined technical questions. 

An expert determination is not the same as 

providing expert testimony to a court or a 

tribunal. Under English law, it is a process 

under contract that is intended to give the 

parties finality, save for fraud or manifest error, 

on disputed issues that are capable of being 

addressed by an expert. 

It is not a process whereby the Expert becomes 

part of the dispute between the parties, even 

if one or both parties are disappointed in the 

outcome of the determination. It is important 

to remember that the Expert engaged is not an 

arbitrator, adjudicator, or an expert witness. 

He or she is not giving opinion evidence under 

court or tribunal processes. 

What do the parties get from 

the expert determination? 

• A confidential, binding decision. 

• It allows the parties to appoint an expert 

who is familiar with the technical issues. 

• It generally results in a quicker decision 

when compared to the court / arbitration 

route. Note that even if the parties went 

to court, they may still need to engage an 

Expert, but in the capacity of an expert 

witness. 

• It can be flexible with the initial 

23

Dispute Resolution 

timetableagreed between the parties 

and the Expert. 

about independence, in which case they will 

need to research an alternative expert. 

• It is a transparent process as both 

parties see all the information / 

correspondence provided to the Expert. 

• It can be less adversarial and may 

help the parties maintain abusiness 

relationship post dispute. 

Organisations exist that can provide 

recognised experts; e.g. if the parties wish 

to appoint an expert accountant they 

can approach the Institute of Chartered 

Accountants in England and Wales (“ICAEW”) 

President’s Appointment Scheme to 

nominate one for them. 

• The Expert arrives at his / her decision, 

based upon his / her own knowledge, 

expertise and experience, taking into 

account the submissions made by the 

parties. This can bea great advantage, 

particularly when the issue is a technical 

one and the Expert has been carefully 

chosen due to their particular area of 

expertise. 

• Only in limited circumstances can the 

expert determination be challenged 

(e.g. fraud or manifest error). 

STEP 1: Identifying the 

Expert 

The identification of the Expert may already 

be set down in the commercial agreement 

between the parties that contains the 

expert determination clause, but if this is 

not the case, there are a number of options 

for selecting an appropriate Expert. 

The first option open to the parties 

may be to simply agree between them 

who might be suitably qualified. If the 

dispute is financial in nature, it may be 

that the company’s auditor can make the 

determination. 

In this situation, no further research is 

required on finding an appropriate expert. 

This may not, however, be acceptable to the 

parties if, for example, they are concerned 

Be mindful, though, that if the parties 

allow an external body to nominate the 

Expert, such as the President’s Appointment 

Scheme,they lose control over the choice of 

Expert. 

Alternatively, the parties can independently 

research and agree upon a person to act 

as the Expert, thereby retaining control 

over the selection process. There are 

organisations which maintain lists of 

experts who have had to go through an 

accreditation process. In the case of Experts 

in the accounting field these include: 

• The Academy of Experts; 

• The Expert Witness Institute; or 

• The ICAEW’s Register of Accredited 

Accountant Expert Witnesses. 

In selecting an Expert from one of these or 

similar sources it will be important for the 

parties to understand the following: 

• Whether the external body nominates 

experts, as in the case of the ICAEW’s 

President’s Appointment Scheme; and 

• The selection process under which 

these experts become members of 

these organisations. 

Once the parties have clarification on these 


issues,they can then consider whether a 

particularexternal body’s list contains a 

broad selection of highly qualified experts 

from which a suitable candidate may be 

selected. 

It is also important to establish that 

the Expert does not have any vested 

interest in the outcome of the dispute, 

and is not in any way biased towards 

or against either party. 

STEP 2: Terms of 

Appointment 

Once the Expert has been identified,the 

next step is to set the terms of the 

appointment. The main considerations 

specific to an expert determination are: 

• There should be a set of clear 

instructions, setting out the questions 

to be answered / disputed items to be 

determined. 

• Will the Expert provide an unreasoned 

or reasoned expert determination? The 

advantage of the former is that it will be 

quicker and cost less. The disadvantage 

is that the parties will not be privy to the 

reasons as to why the Expert arrived at 

his / her determination. 

• How the Expert’s fees will be split 

between the parties. Typically the 

Expert’s fees are shared equally 

between the parties. 

The terms of engagement will make it 

clear that the Expert is required to make 

the decision / determination on the basis 

of material provided to him / her by the 

parties. 

STEP 3: The Process 

There are no set rules, but the Academy 

of Experts has, for example, produced its 

“Rules for Expert Determination”, and these 

include guidelines on the timetable and 

process. 

In all cases the agreed instructions should 

be followed. This has been the subject of 

a recent England & Wales Court of Appeal 

decision in Begum –v- Hossain[2015] EWCA 

Civ 717. 

All correspondence with the Expert should 

be in writing. The process will normally 

be that each party submits their evidence 

in writing to the Expert by a prescribed 

date and the Expert then arranges for the 

evidence from one party to be exchanged 

with the other party. 

The initial set of documentation is provided 

within an agreed number of days (as set out 

in the engagement terms) after the Expert’s 

engagement letter is signed. This initial 

documentation should summarise the 

nature of the dispute, the issues involved, 

the parties’ submissions in relation to those 

issues and,in financial disputes,the effect 

on the quantum of the amount or amounts 

claimed, together with appropriate 

supporting documentation. 

• Agreeing the timetable as part of the 

engagement terms, although there 

may also be provision for both parties 

to make requests to the Expert for the 

timetable to be altered subsequently. 

The parties are then given an agreed 

number of days to provide a written 

response to the other’s submissions, 

indicating whether or not they agree with 

the other party, and if not in agreement, 

why this is the case. 

25

Dispute Resolution 

In addition to the above, the Expert 

will have discretion to request written 

clarification or ask further questions of 

the parties on any matters contained in 

the written material received from them. 

Further queries are sent in writing to both 

parties simultaneously. It may also be the 

case that issues outside the Expert’s area 

of expertise get raised; for example, legal 

issues. In such instances, the Expert’s terms 

will normally allow him to seek advice from 

appropriately qualified third parties, the 

cost of which is generally borne by the 

parties. 

STEP 4: The 

Determination 

Once the Expert has considered the 

submissions made by the parties and 

applied his / her expertise and experience, 

the determination is given. This is either 

with or without reasons. 

Conclusion 

In summary, if you consider that an expert 

determination is right for you, here are 

sometips for ensuring the process runs 

smoothly: 

• Choose the Expert carefully; 

• Ensure the instructions are clear; 

• Decide whether it is to be an 

unreasoned or reasoned determination; 

and finally 

• Ensure you comply with all the agreed 

procedures; remember the Expert 

makes a decision based upon his / her 

knowledge, expertise and experience, 

taking into account the submissions 

made by the parties. 

Expert determination clauses are often 

written into agreements between 

partieswhere there may be scope for 

disagreement over technical issues. 

Under English law, exercising such clauses 

presents a pathway to achieve finality by 

way of a private process under contract, 

rather than have the disagreement 

examined in the public arena of the courts. 

It can also be a useful way to resolve 

disputes where the parties either choose or 

need to maintain an ongoing relationship 

once the dispute resolution process is over. 

Adam Stronach 

Corporate Finance and Forensic Services director at Harwood Hutton Limited 

T: +44 (0)1494 840334 

Email: adamstronach@harwoodhutton.co.uk 

Adam Stronach is the Corporate Finance and Forensic Services director at Harwood Hutton Limited. 

He has worked in the field of forensic accountancy for over 20 years. He initially worked in Deloitte 

UK’s Forensic & Dispute Services Group and became a director in that group in 2000. Adam is also 

currently the Chair of the UK’s Network of Independent Forensic Accountants (“NIFA”). 

He is a member of the ICAEW President’s Appointment Scheme, the Academy of Experts, the Expert 

Witness Institute, and also on the ICAEW’s Register of Accredited Accountant Expert Witnesses. 


The upcoming Swiss Financial Market 

Regulations – Risks and Opportunities 

By Thomas A. Frick 

Switzerland is currently in the process of overhauling the 

existing Swiss financial market regulations in order to 

implement international standards, to create a level playing 

field for market participants and to increase the stability of 

financial market infrastructures and client protection. 

This summer, the Swiss Federal 

government took a number of key 

decisions; important changes will be 

implemented in early 2016, others in 2017. 

Generally speaking, the idea was to shift 

the regulatory structure from specific 

regulations for each sector (banks, stock 

exchanges, insurance companies, etc.) to 

regulations applying to all industry sectors 

alike under the rule of “same business, same 

rules”. 

However, in the process, it became clear 

that specific rules and laws for collective 

investment schemes, for insurance 

companies and for banks will remain in 

place. Hence, the scope of application 

of the new acts will overlap with these 

existing laws. Three new acts are planned: 

FINFRAG, FIDLEG and FINIG. 

However, in addition, most of the existing 

laws will be or have been subject to 

considerable changes, the most relevant of 

27

Financial Market Regulation 

which are summarized below: 

FINFRAG 

The new FINFRAG (Financial Market 

Infrastructure Act) is the first of the new 

acts that passed parliament; it will become 

effective on 1st January 2016. Its content is 

heavily influenced by EMIR and MiFID II. 

Under the act, new licensing requirements 

for FMIs (financial market infrastructures) 

such as trading venues (stock exchanges 

and multilateral trading facilities), 

central counterparties, central securities 

depositories, trade repositories and payment 

systems will be introduced. 

However, there will be a number of 

differences to the regulations in the EU, 

among which are the following: Selfregulation 

will continue to play an important 

role; an operator of an organized trading 

facility may trade on the platform for its own 

account; and the transfer of data to foreign 

authorities is more restricted than under the 

EU regulations. 

(compliance will be monitored by the auditors 

of the participant) and that it will not be 

necessary to disclose the beneficial owner 

under the reporting obligations. 

FIDLEG 

In June 2015, the Swiss government agreed 

on key elements of the new Swiss Financial 

Services Act (FIDLEG) and mandated the 

Federal administration to draft the so-called 

message to parliament by the end of 2015. 

Therefore, it can be expected that parliament 

will discuss the new act in 2016 and that it 

may become effective sometime in 2017. 

The new act introduces a variety of MiFID II 

standards into the Swiss Financial Market 

Regulation, in particular with respect to 

conduct and prospectus requirements. 

Conduct duties include comprehensive 

information duties, appropriateness and 

suitability obligations, rules on inducements, 

cost transparency and conflicts of interest 

and the need for client segmentation, among 

others. 

The act furthermore introduces new 

standards on derivatives trading which 

are compatible with foreign regulations, in 

particular Emir and the US Dodd-Frank Act. 

Swiss market participants, among others, 

have to clear derivatives transactions 

through central counterparties, must report 

transactions to trade repositories, and must 

take certain risk-mitigating measures. 

Again, there will be a number differences to 

the current EU regulations due to FINFRAG 

introducing local concepts such as that asset 

managers that do not manage collective 

investment schemes and investment advisors 

will qualify as non-financial counterparties, 

that group internal transactions are not 

subject to approval by the authorities 

The rules differentiate between professional 

and private clients, with possibilities to 

opt in or out. The rules may also apply to 

non-licensed market participants such as 

investment advisors. Product documentation 

requirements will be similar to those 

applicable in the EU. 

For the first time in Switzerland, FIDLEG 

intends to introduce regulations on the 

rendering of cross-border services and 

product offerings into Switzerland (up to 

today, this was only regulated and restricted 

for collective investment schemes and 

insurances) and such service or product 

providers will have to register with the 

Swiss FINMA (Financial Market Supervisory 

Authority); the same will apply to client 


Banks have 

to identify 

the beneficial 

owner of 

operative 

companies 

advisors of non-prudentially supervised 

market participants. For the offering of 

financial products, a prospectus is required 

which needs to be pre-approved by FINMA in 

case of a public offering. 

FINIG 

Timing for the introduction of the Swiss 

Financial Institutions Act is parallel to the 

introduction of FIDLEG. FINIG will govern 

the supervisory and regulatory regime for 

financial institutions, including financial 

institutions providing asset management 

services to third parties. 

As a rule, independent asset managers 

were not subject to prudential supervision 

in Switzerland (unless managing collective 

investment funds). Under the new act, 

the Federal Council decided in June 2015 

that independent asset managers should 

become prudentially supervised by a new 

supervisory organization which will in its turn 

be authorized and supervised by FINMA. 

A risk based supervision approach will be 

taken so that small asset managers will only 

be subject to a reduced supervisory burden. 

Certain small asset managers will benefit 

from a grandfathering clause. 

New AML and Due 

Diligence Convention 

Considerable changes were made in 2015 

to the existing Anti-Money Laundering 

Act. New rules regarding bearer shares 

(increased transparency) became effective 

as of 1 st July 2015. As of 1 st January 2016, 

new rules on predicate offences under the 

Anti-Money Laundering Act will become 

effective rendering the qualified tax offence 

a predicate offence under the act. A qualified 

tax offence is defined as any tax fraud (in 

Switzerland or abroad) by which the amount 

of taxes not paid per tax period exceeds the 

amount of CHF 300’000. 

Furthermore, stricter rules on the 

identification of the beneficial owner of bank 

accounts are introduced under the new Swiss 

Bankers Due Diligence Convention (VSB 16) 

which will become effective on 1 st January 

2016. 

Banks have to identify the beneficial owner 

of operative companies (defined as a person 

holding 25 % or more of the voting rights or 

of the capital or the person exercising factual 

control over the company by other means). 

If there no such controlling persons, the 

managing director of the company has to be 

determined and will be treated as the person 

controlling the company. 

Automatic Information 

Exchange and changes to 

FINMAG 

Also in June 2015, the government published 

the message to parliament for a Federal 

Act about the Automatic International 

Information Exchange in Tax Matters. The 

proposed act implements the global AEOI 

standard of the OECD. 

The introduction of the federal act is part of 

the general strategy of the Swiss government 

to implement international standards 

(including with respect to tax transparency) in 

Switzerland. 

Under the act, finance companies will collect 

finance information of their customers 

domiciled abroad and will transfer such 

information to the Swiss tax authorities which 

will forward the information to the foreign tax 

authority at the customer’s domicile. 

The already existing FINMAG (Financial 

Markets Supervision Act) will also be revised 

29

Financial Market Regulation 

and amendments include new rules for 

cross-border information flow. FINMA will 

be entitled to spontaneously exchange 

information with foreign authorities (no 

longer limited to supervisory authorities), 

provided that such information exchange 

serves the purpose of enforcing financial 

market regulations and that the foreign 

authority is bound by official or professional 

secrecy. 

As the client may be refused access to the 

formal request by the foreign authority and 

as FINMA has the option not to inform the 

client prior to the delivery of the information, 

client defense rights against transfer of the 

information will become more restricted. 

CONCLUSIONS 

Switzerland’s financial market laws are 

going through a period of dramatic change, 

which has implications not only for markets 

participants in Switzerland but also for 

foreign participants involved in cross-border 

financial services or transactions. 

Key issues to be aware of include, among 

others, the increased cross-border exchange 

of information, new licensing requirements 

for FMIs, new rules applicable to derivatives 

trading, prudential supervision of asset 

managers, new rules on retrocessions, 

new rules for clients segmentations, client 

information and suitability tests and new 

prospectus requirements. 

Any participant in the Swiss market needs 

to review its current business model and 

evaluate whether and to what extent it 

needs to be adapted to comply with the 

comprehensive changes made to the Swiss 

regulatory architecture. 

Thomas A. Frick 

Partner at Niederer Kraft & Frey AG 

T: +41 58 800 8000 

Email: thomas.a.frick@nkf.ch 

Thomas A. Frick specializes in counselling Swiss and foreign banks and other financial institutions in 

all kinds of legal and regulatory issues, with a particular focus on regulatory and compliance issues, 

customer contracts, interbank contracts and syndicated finance. Recent instructions from clients 

include the acquisition of Swiss banks, the founding and setting up of Swiss banks, negotiations with 

the Financial Market Supervisory Authority and with other authorities relevant to market participants 

in Switzerland and various internal investigation mandates. Mr. Frick is member of the board of 

directors of Swiss banks, a lector in the LL.M.-Program of Zurich University on banking and financial 

markets law and published various articles on financial law. 


The Maltese Individual Investor 

Programme 

By Kevin Deguara 

The introduction of a new route for the acquisition of Maltese citizenship through an investment 

scheme was instigated by the recognition of a significant international interest in investment 

migration. The Individual Investor Programme, currently capped at 1,800 successful 

applications, allows for foreign individuals and their families who are willing to contribute to 

the economic and social development of Malta to acquire citizenship by naturalisation. While 

this will undoubtedly continue to enhance the growth and transformation of Malta’s economy, 

the Prime Minister of Malta Joseph Muscat speaking in New York held that the scope of the 

Individual Investor Programme is talent and not money. Indeed, increasing Malta’s talent pool 

and global network would augment Malta’s competitiveness. 

Who may apply 

This scheme is available to foreigners over 

eighteen years of age and their family. Therefore 

the applicant may extend the application to his/ 

her dependents. The main applicant’s spouse or 

an equivalent to such in a relationship having the 

same or a similar status to marriage, together 

with the child of the main applicant or his/her 

spouse who is below eighteen years of age may 

be included in the main applicant’s application. 

The law also considers the unmarried child of the 

main applicant or his/her spouse between the 

age of eighteen and twenty-six years of age and 

a parent or grandparent of the main applicant 

or his/her spouse above the age of fifty-five 

years as dependents, as long as they are wholly 

dependent on the main applicant. These may 

therefore also form part of the main applicant’s 

application. 

31

Immigration 

Requirements 

Above all, it is pertinent that the Individual 

Investor Programme applicant is of reputable 

character and that inter alia he/she is not a 

threat to national security, public policy or 

public health. Unlike most of the countries that 

have adopted a similar programme, there is no 

language requirement or citizenship test in place. 

Additionally, the individual will not be asked to 

give up his or her citizenship of origin. In fact, 

multiple citizenship is allowed under the Maltese 

Citizenship Act. 

must also be held for a minimum period of five 

years. 

Application Process 

Applications for citizenship are to be submitted 

and processed exclusively by a government 

entity called Identity Malta. Applicants must 

be represented by a limited number of duly 

authorised accredited persons. These are 

professionals who are licensed by Identity Malta 

to handle the application of the individual. 

Furthermore, the applicant must have resided 

in Malta for at least one year, albeit his 

family members are not subject to the same 

requirement. When compared to similar 

programmes in various jurisdictions, Malta has 

one of the shortest residency requirements. 

It is also noteworthy to mention that the law 

doesn’t stipulate the number of days one has 

to be physically present in Malta. However it is 

mandatory that one forges genuine links to the 

island. 

The Investment 

Since this programme is investment based, 

applicants are required to make contributions 

which are used to build the National 

Development and Social Fund. A monetary 

contribution of €650,000 must be made by the 

main applicant. Additionally the spouse and 

every child aged under eighteen years must 

make a contribution of €25,000 each, while every 

unmarried financially dependent child aged 

between eighteen and twenty-six and every 

dependent adult aged over fifty-five are required 

to make a contribution of €50,000 each. 

In addition, the applicant must also rent or 

acquire immovable property in Malta for at least 

five years at an annual rate of €16,000 or a value 

of €350,000 respectively. Liquid investments at 

a minimum of €150,000 in qualifying classes of 

bonds and/or stocks are also required. These 

Identity Malta will review applications on a caseby-case 

basis. The vetting and due diligence 

process is a rigorous one. Very broadly the types 

of checks carried out include public information 

tests, background verification reports and global 

government agency checks. 

The application process is professional, nondiscriminatory 

and a fast track procedure 

wherein residence will be granted immediately 

and the passports for the main applicant and his 

family are issued within one year of taking up 

residence in Malta. 

Benefits of the IIP 

Acquisition of Maltese citizenship grants the 

naturalised citizens-by-investment all the rights 

pertaining to Maltese citizens. Thereby the 

applicant and his family will be afforded full 

legal status as a Maltese National, a passport 

within one year and in the interim Schengen 

residence status, the right to freely live and work 

in Malta and visa-free travel to one hundred 

sixty-three countries amongst which are the 

European Member States, the USA, Switzerland 

and South Africa. Furthermore, acquisition of 

Maltese citizenship confers on the individual 

acquiring such citizenship, international mobility, 

employment mobility and residential mobility. 

What sets the Maltese Individual Investment 

Programme scheme apart from others of its kind 


is the short legislative distance between investors 

and policy makers. This ensures that those who 

take decisions are accessible and makes the 

system a flexible one where the concerns of the 

investors can be dealt with individually. 

What does Malta have to offer? 

Malta’s strategic location in the center of the 

Mediterranean together with its competitive tax 

system and flight connections has turned Malta 

into an ever-growing international business hub. 

Malta’s wonderful climate and beautiful seas 

render Malta an ideal place for high net worth 

individuals who wish to form a relationship with 

a country which boasts a stable political climate, 

low crime rate and a safe living environment. Its 

industry, tourism and financial sectors are highly 

developed, while its educational system and 

health services are outstanding. Furthermore, 

its highly qualified English speaking workforce 

guarantees an added value to any investment. 

In 2014 Malta registered the highest economic 

growth in the European Union according to 

Eurostat statistics. According to the European 

Commission’s Spring 2015 economic forecast, 

Malta’s economic growth is projected to remain 

robust. It was also forecast that job creation 

and the unemployment rate are projected to 

outperform euro-area peers. 

Since, Malta has been a member of the European 

Union since 2004 and part of the Euro Zone 

since 2008, this would give the applicants the 

opportunity to also become a European Union 

citizen together with the chance to avail of the 

second largest reserve currency in the world. 

Concluding Remarks 

In conclusion, besides being the first citizenship 

programme in the European Union to be 

recognised by the European Commission, the 

Maltese Individual Investor programme has been 

very well received. From the commencement of 

this scheme in 2014 to date, a total of 573 people 

have applied to acquire Maltese citizenship, 65% 

of whom hailed from Russia and other countries 

which were part of the Soviet Union, 19% of 

whom hailed from Middle Eastern countries and 

nearly 13% of whom hailed from Asian countries, 

while applications have also been submitted 

by Africans, North and South Americans and 

Europeans. 

Kevin Deguara 

Co-Founding Partner at DF Advocates 

T: +356 2131 3930 

Email: Kevin.Deguara@dfadvocates.com 

Kevin heads the Private Clients Department within the firm. Kevin is also heavily involved in 

Corporate and Commercial Department dealing principally with major projects. Kevin, along 

with Anthony Galea leads the Sports, Media and Entertainment Department responsible mainly 

responsible for Sports related issues. Kevin is also an executive director of related companies DF 

Corporate Services Limited and DF Marine Consultancy Services Limited. DF Corporate is a company 

duly licensed to provide fiduciary and trustee services while DF Marine provided professional advice 

in the yachting industry. 

33

Maritime and Shipping Law 

Real World Challenges: Practical Maritime 

Arrest Considerations 

by G. Robert Toney, Alan Swimmer 

There are numerous practical challenges encountered during the custody 

period of arrested commercial ships — particularly when the vessel is detained 

for a considerable time period.Generally, arrest actions are intended for the 

claimant to obtain immediate payment or security, and last only a few days. 

However, with the uncertain global economy, lack of available credit,volatile 

charter rates and overall diminished ship values, the potential for long-term 

arrests has increased; ship owners are having difficulty raising the funds 

necessary to obtain a timely vessel release. 

The arrest period can also become prolonged 

if additional parties intervene in the action, 

complicating the circumstances and the 

related court proceedings. Claimants and 

their respective advisors must consider 

the risk associated with a subject vessel 

remaining under arrest for a significant 

period of time, by assessing the potential 

costs before executing against a ship and 

considering how they will react to various 


scenarios as the custody period unfolds. 

Initial Arrest and Evaluation 

Claimants can easily over-value target 

vessels or underestimate the likelihood of 

an arrest going long-term. This is particularly 

dangerous, as the arresting party is mostoften 

responsible for the costs of keeping an 

arrested ship. Arrest actions can potentially 

extend beyond a year’s time with costs 

exceeding US$1 million. It is critical that 

claimants make a proper assessment of the 

risks and likelihoods in advance of effecting 

the arrest action because some actions do 

not warrant the financial exposure. 

In relation to the ship’s value, a potential 

arresting party must consider their claim 

amount, the likelihood of additional 

intervening claims and whether those claims 

have priority over the evaluator’s claim. 

The combined value of priming claims may 

exceed the ship’s value, eliminating any 

potential recovery. Complications associated 

with multiple claimants generally reduce the 

likelihood of negotiated resolutions, and may 

also cause court delays and increasing costs. 

Claimants should contemplate the effect of 

the arrest, both negative and positive, on 

its reputation. The action might adverselyimpact 

other relationships by causing harm to 

strategic partners or customers. Alternatively, 

the arrest may benefit cash flow, as the 

market acknowledges the claimant’s hard 

line approach to collection of delinquent 

accounts. 

Long-term vs. Short-term 

Arrest 

Generally, the minimal claims for ship 

necessaries or crew wages are resolved 

quickly. On the other hand, high-value claims, 

such as mortgage foreclosures, unpaid 

bunkers and charter disputes, represent a 

substantial percentage of ship value. Consider 

the ship owner’s likely action (or inaction). 

The following scenarios depict the ends of the 

spectrum for both short-term and long-term 

arrests: 

• The vessel is enrolled with an 

International Group P&I Club, this 

type of claim is routinely covered, and 

a letter of undertaking is presented 

immediately — resulting in a timely 

vessel release. 

• The owner (or charter) has experienced 

substantial financial difficulties, hasn’t 

funded your claim, there are other 

unpaid creditors (such as crew or fuel 

suppliers), the owner is behind on 

mortgage payments and has put off 

critical maintenance. If the ship has no 

equity, the owner may simply choose to 

walk away, forcing the arresting parties 

to pay for significant custodial expenses 

such as wharfage, maintenance, 

bunkers, crew wages and repatriation. 

Economic & Regulatory 

Climate 

Consider the effect of fluctuations in the 

global economy and volatility in cargo 

values (such as petroleum-based products). 

Significant new ship builds (in relation to 

retiring ships) has resulted in world-wide 

excess tonnage, depressed charter rates and 

declining values. 

The owner may be experiencing negative 

cash flow from operations; as revenue is 

eclipsed by operational expenses and debt 

service. The market value of a distressed ship 

may be far less than the sum of its liabilities. 

These particular owners may view the arrest 

ship as taking a problem off their hands and 

placing the burden on the claimant(s), and 

35


are unlikely to bond their ship out of arrest, 

preferring to see it sold at a court sale. 

The current financial regulatory environment 

requires banks to build capital and exit nonperforming 

relationships. Current vessel 

financings require significant cash equity; it 

is nearly-impossible for distressed owners 

to refinance their way out of trouble. Some 

mortgagees ultimately take possession of a 

defaulted ship and return it to active service, 

rather than going to immediate sale. 

The revenue generated by operating the ship 

— although generally insufficient to cover the 

debt service — will likely exceed operating 

charges, and in turn allow the lender to 

speculate that the ship’s value will increase 

in time. Due to regulatory pressure, troubled 

lenders may not have this flexibility. They are 

forced to proceed to sale, despite lackluster 

financial returns. 

Jurisdiction 

Maritime arrest rules and procedures 

vary dramatically between international 

jurisdictions, affecting such factors as the 

speed at which actions are resolved, the 

priority of various claims, and the overall 

predictability of the outcome. In legallyunsophisticated 

parts of the world, custody 

periods can linger several years as otherwiseroutine 

decisions become prolonged. 

Partiality may favor local parties and 

inexperienced jurists can cause costly delays 

or unpredictable decisions. 

Certain jurisdictions have onerous countersecurity 

requirements, which must be posted 

at time of arrest and may be difficult or timeconsuming 

to have released. Jurisdictional 

differences in “wrongful arrest” exposure 

should be considered. 

Finally, consider the availability of required 

services. Confirm that critical items such 

as inexpensive moorage, fresh water and 

reliable local security are available at the 

arrest location. 

Use of a ship custodian 

Many jurisdictions allow for the naming of 

an independent ship custodian or keeper 

during the arrest period. The custodian 

ensures crew and vessel safety, controls costs 

and preserves value. This requires them to 

possess expertise in ship operations and a 

practical understanding of the strategic and 

legal aspects of vessel arrest. Generally, the 

utilization of an independent custodian will 

ensure transparency and commonality of 

custody assignment goals, resulting in an 

efficient outcome for all parties. 

On-board licensed 

watchman 

National Maritime Services utilizes an onboard 

watchman during its crewed arrest 

assignments; a professional, licensed 

ship captain who possesses operational 

experience in the custody environment. The 

watchman serves as the custodian’s eyes and 

ears, providing frequent reports from the ship 

and communicating with master and crew; 

living amongst them and interacting on their 

level. 

Utilization of a watchman provides better 

decision making and significant cost savings 

in comparison to security guard services 

(which require routine shift changes and 

have minimal shipboard experience). While 

a watchman remains on-board the vessel 

at all times, security guards require routine 

launches or port security escorts to and from 

the vessel during each shift change. 

Crew assessment, pay, immigration, 

reduction and medical concerns 


Upon taking custody of a crewed vessel, 

several vital assessments are made. It is most 

effective to retain the existing crew during the 

custody period as they are most-familiar with 

the vessel. Immediately meet with the vessel’s 

master, describe the arrest implications and 

procedural protocol, the role of the ship 

custodian, and assess whether the captain 

will be a positive on-board influence. 

The majority of senior officers are qualified 

and committed men of the sea, possessing 

both good communication skills and a 

commitment to both vessel and crew. While 

there may eventually be potential conflicts 

with the vessel owner, operator or charterer 

of the vessel, it is important to get the point 

across that the court is ultimately in control 

of the vessel. Communicating with and taking 

instructions from an experienced watchman 

as the court/custodian representative also 

helps solidify the relationship. 

Compile payroll records and crew contracts as 

they are vital tools in determining repatriation 

strategies during the custody period. Because 

crew compensation scales are stratified into 

different categories, proper documentation 

ensures that unnecessary compensation is 

not paid. 

Immediately confirm the immigration status 

of each foreign crewmember (as applicable). 

If the arrest is executed upon arrival in port, 

the crew may not have been cleared by 

immigration authorities. If the crew has been 

cleared, confirm the physical location of their 

passports/visas with the local boarding agent. 

For potential crew leave during a long-term 

arrest, ascertain that the documentation is in 

accordance with immigration requirements. 

Since crew pay generally represents a 

significant portion of the custodial expenses, 

repatriate unnecessary, underutilized crew. 

Repatriation also reduces potential financial 

exposure to both injury and illness. Review 

safe manning and insurance documents to 

determine the appropriate number of crew 

personnel necessary to safely keep the ship. 

Identify and treat any existing medical issues 

pertaining to crew. This will avoid major 

cost and P&I coverage issues at a later date. 

Crew medical issues, including expensive 

maintenance and cure requirements which 

last throughout the term of the illness, may 

arise during the arrest period and could 

become administrative costs of the arrest. 

Insurance 

In order to minimize claimant risk and to 

preserve the value of the collateral, hull & 

machinery, port risk, P&I, crew and pollution 

coverages should be in effect during the 

pendency of the arrest. Arresting parties 

should refer to legal counsel, experienced in 

marine insurance, so as to understand the 

status of specific coverages. Immediately 

after taking possession of an arrested ship, 

it is important to evaluate which coverages 

are in place and the effect the arrest has on 

coverage. 

Unfortunately, this may prove challenging in 

that the insurer has no obligation to provide 

this information. The arrest could have 

an adverse-impact because many policies 

contain provisions that suspend coverage 

if the owner no longer controls the vessel. 

Attempting to name the vessel custodian as 

an additional insured will ultimately serve to 

confirm underwriter’s knowledge of the arrest 

and determine whether owner’s coverage is 

affected. 

In some jurisdictions, the courts or local 

authorities may require and charge for 

insurance coverages. These charges may not 

provide coverage for hull and machinery, port 

risk, P&I, crew or pollution claims. Identify 

37


the specific coverage details so as to avoid 

uninsured risks or duplicate coverage. 

Lapses in coverage often force claimants to 

scramble for last minute insurance coverage 

at less-favorable terms. National Maritime 

Services provides the parties with access to 

fixed premium, limited term policies suited 

for custodial scenarios, in comparison to 

annual policies or P&I club cover. Due to 

shorter time frame and discontinued vessel 

trading operations, rates are substantially 

discounted. 

Vessel berths & shifting, 

cargo operations, provisions 

and bunkers 

These items are all significant cost 

components of a ship custody assignment. So 

as to avoid unnecessary delay, initial arrest 

filings should contain provisions permitting 

vessel shifting, cargo discharge, and vessel 

release conditions. Court orders should 

clearly define the financially-responsibility of 

each of the parties. 

Many complications can occur when a ship is 

arrested in an active berth. Other ships may 

require its utilization for loading or discharge. 

Should the arrested ship causes delays, 

it could be subject to a cause of action or 

fines. Accordingly, it is common for the ship 

to be shifted to a lay berth or to anchorage, 

which generally requires tugs, pilots and line 

handlers. 

Cargo unloading must typically be 

accommodated when the cargo was originally 

scheduled for discharge at the port of 

arrest. Contingency plans for time-sensitive, 

perishable or volatile cargo or paying 

passengers must be made in advance. 

For obvious reasons, on-board cruise ship 

passengers tend to be uncooperative. Avoid 

arresting vessels containing a large number 

of passengers aboard. Removing passengers 

is particularly-challenging, involving return 

of luggage, providing meals, attending to 

medical issues and return transportation. 

When arresting a crewed vessel, an 

immediate count of provisions and bunkers 

is undertaken. Because of the owner’s 

potentially-ominous financial situation, it 

is common that provisions are scarce or 

the crew has not been paid or cared for. 

Immediately providing satisfactory provisions 

helps ensure the crew’s cooperation and 

reduces potential for the global media to take 

an (unreasonable and sensational) interest in 

the arrest 

In the long-term custody scenario, 

adequate planning includes consideration 

of consumption factors. Older, inefficient 

vessels consume as much as $10,000 per 

day in bunkers while dockside, significantly 

more at anchorage. Utilization of a shore side 

generator may result in reduced fuel costs 

and a reduction in crew (if the engine room 

does not require manning). Alternatively, 

shifting to anchorage reduces berthing 

charges. 

Making arrangements for most of the abovedescribed 

services requires an established 

relationship with a local port agent. Under 

normal (non-arrest) circumstances, the 

owner’s agent would have sufficient 

instructions and funds to accomplish required 

services. 

However, the arrest action has likely ended 

that relationship and a new agent must 

be utilized. The custodian should possess 

established agency relationships necessary 

to provide required services safely and 

efficiently. 

Interaction with authorities 


During the arrest period, a myriad of 

governmental authorities may become 

interested in ship activities. For example, 

customs and immigration authorities may 

perform reviews of crew entry-related 

matters, while the Coast Guard may 

require comfort pertaining to manning and 

safety, necessitating written crew security 

procedures or heavy weather plans. 

The arrest team should have experience 

dealing with the idiosyncrasies of government 

agencies and possess a track record of 

communicating on their terms. 

Conclusion 

The decision to affect an arrest requires 

careful analysis and deliberation. 

Consideration should be given to the likely 

and extraordinary outcomes and related 

costs. In the event that the custody period 

covers an extended period of time, utilization 

of a professional custodian will help to 

achieve both cost reduction and preservation 

of collateral value — resulting in a better 

financial return. 

G. Robert Toney 

Chairman at National Maritime Services 

T: +1 954-647-7194 

Email: GRToney@natliquidators.com 

G. Robert Toney created the innovative National model, offering a complete range of marine and aircraft-related 

services, such as collateral seizure, arrest and recovery, custodianship, commercial ship, aircraft and pleasure boat 

sales, vessel transportation, marine service and yacht financing. Under Toney’s leadership, National Maritime Services 

and its affiliated company, National Liquidators, have become global businesses. 

Toney shares his enthusiasm, knowledge and passion for the business at speaking engagements and educational 

workshops for bankers, attorneys and law enforcement personnel at conferences around the world. He is one of a few 

active non-lawyer members of the South East Admiralty Law Association and the Maritime Law Association of the United 

States, where he now co-chairs the association’s Yacht Finance Committee. In 2007, Toney was named “South Florida 

Business Leader of the Year.” 

Alan Swimmer 

President at National Maritime Services 

T: +1 203-988-4184 

Email: aswimmer@seizureandcustody.com 

Alan Swimmer is a finance industry veteran with over 25 years of experience. He is responsible for oversight of 

operations, long-term planning, and relationship management. Swimmer also serves as President of Maritime Capital 

Group, an affiliated company which provides vessel financing and related services. 

Prior to employment with National, Swimmer successfully operated and sold two well-known specialty finance loan 

platforms, having managed the origination of over $4 billion in aircraft, yacht, and recreational vehicle loans and the 

acquisition of several specialty loan portfolios. Originally a Certified Public Accountant, he draws on his varied business 

experience to advise law firms, lenders, and government agencies. 

39

Doing Business in Japan 

Interpretation of Product by Process 

Claims in Japan 

by Yasushi Koyama 

1Introduction 

product. 

A product by process claim (hereinafter 

referred to as “PBP claim”) relates to an 

invention of a product, of which claim 

includes a manufacturing method of the 

In Japan, the drafting practice of identifying 

aproduct by the manufacturing method 

of the product conventionally has been 

regarded as allowable when identifying 

thestructure of the product to be the subject 

matter directly fromphysical properties or the 

like without referring to the manufacturing 

method thereof is impossible, difficult, or 

inappropriate in some terms . 1 

In Japan, two issues had been pointed out 

primarily regarding the PBP claim.The first 

is the issueofinterpreting the PBP claim, and 

1 JPO Examination Guideline, Part I, Chapter 1, 2.2.2.4(2)1(i) 

second is the issue of clarity. 

The first issue relates to whether the 

product recited in the form of the product by 

process is narrowly interpreted as a product 

manufactured by the manufacturing method 

(so-called Manufacturing Process Limitation 

Theory), or would not be interpreted narrowly 

as aforementioned (so-called Product Identity 

Theory). 

Furthermore, the second issue relates to 

the scope of the invention becoming less 

clear due to product identification based 

on a process compared to a case where 

identification is based on structures and 

properties. 

In regard to these issues, the Supreme 

Court established a new standard unique to 

Japanese practice in its ruling of June 5, 2015, 


on the Second Petty Bench of Supreme Court, Furthermore, as to the interpretation of 

for the Pravastatin Na case. 

the PBP claim, it ruled that the genuine PBP 

claim is to be interpreted based on Product 

2Overview of Case 

Identity Theory and the pseudo PBP claim is 

to be interpreted based on Manufacturing 

In the present case, Teva Pharmaceutical Process Limitation Theory, in both the case 

Industries Ltd.(hereinafter,Teva), the owner of determination the technical scope of the 

of the patent right (Japanese Patent No. patented invention and the case of identifying 

3737801) related to “Pravastatin sodium the gist of the invention. 

substantially free of pravastatin lactone and 

EPI-pravastatin, and compositions containing On this premise, a determination was made 

same,” insisted that a pharmaceutical product as being a pseudo PBP claim becausethe 

manufactured and sold by Kyowa Hakko Kirin claim did not satisfy impossibility/difficulty 

Co., Ltd. (hereinafter, Kyowa Hakko Kirin) criteria in the present case, and the 

infringedthe patent right, and demanded an pharmaceutical product of Kyowa Hakko Kirin 

injunction and disposal of stock therefor. is not dependent on the process described 

in the technical scope of the patent, thus the 

In connection withdeterminationthe technical appeal by Teva was dismissed. 

scope of the PBP claim, the Tokyo District 

Court (March 31, 2010; Heisei 19(Wa)35324) 3Supreme Court Ruling 

ruled that it should be interpreted by limiting 

the scope to the product manufactured by The Supreme Court reversed the ruling of 

the manufacturing method, unless other the Grand Panel of the IP High Court. 

special circumstances apply. 

It ruled that the technical scope of the 

In addition, the demand by Teva was 

patented invention and the gist of the 

dismissed in the present case because the invention regarding the product invention 

pharmaceutical product of Kyowa Hakko described in the form of PBP claim are 

Kirin is not dependent on the process recited determined as a product having the same 

in the technical scope of the patent of the structure, property, and the like as a product 

present case. 

manufactured by the manufacturing method. 

That is, it was clarified that the interpretation 

The Grand Panel of the IP High Court, which of the PBP claim is based on Product Identity 

is the appeal court of the trial in the Tokyo Theory. 

District Court, (January 27, 2012; Heisei 22 

(ne) 10043) had set the presence or absence Furthermore, the Supreme Court ruled that 

of a situation in which it would have been “a limitation is made to cases where a situation 

either impossible or difficult to have directly is present at the time of filing, in which it is 

identified the product fromits structure or either impossible to directly identify the product 

property at the time of filing as judgment fromits structure or property, or such is not at 

criteria (hereinafter, “impossibility/difficulty all practical” for the description in the PBP 

criteria”), and made classification in which the claim format to satisfy the clarity requirement 

PBP claim is genuine when such a situation is of Article 36(6)(ii), and in the event such 

present, and is pseudo when such a situation a situation is not present, the clarity 

is not present. 

requirement would thereby be violated. 

41


That is, the Supreme Court presented 

newcriteria on “the presence of the situation at 

the time of filing, in which it is either impossible 

to directly identify the product fromits structure 

or property, or such is not at all practical” 

(hereinafter, “impossibility/impracticality 

criteria”) as criteria as towhether the PBP 

claimsatisfies the clarity requirement. 

Furthermore, the present case wasreferred 

back to the IP High Court so that athorough 

trial discussion on whether or not the 

description of the claims of the present 

case satisfies the clarity requirement could 

beconducted. 

Consideration 

4(1) 1994 Patent Law Revision and Current 

Examination Guideline 

The 1994 Patent Law Revision revised the 

requirements of Article 36(5), and moderated 

the description requirement on the claims. 

As a result, it was clarified that what is to be 

described in the claims is wholly up to the 

patent applicant’s free selection.Therefore, 

claims have been allowed to describe socalled 

functional claims and PBP claims. 

In response to this legal revision, the 

current examination guideline defines that 

descriptions identifying the product itself by 

the manufacturing method of the product 

are allowable when identification of the 

structure of the product to be the subject 

matter directly fromphysical properties or the 

like without referring to the manufacturing 

method thereof is impossible, difficult, or 

inappropriate in some terms (hereinafter 

referred to as “impossible/difficult/ 

inappropriate situation.”2 3 

2 JPO Examination Guideline, Part I, Chapter 1, 2.2.2.4(2)1(i) 

3 Tokyo High Court, ruling of June 11, 2002; Heisei 11 (gyoke) 

437 

(2) Problem of Clarity Requirement for PBP 

Claims 

The criteria of the impossible/difficult/ 

inappropriate situation as employed by 

the current examination guideline allows 

the description of the PBP format also in 

fields such as machines, in which the need 

toidentify a product by a process is generally 

not recognized. 

As a result, in the examination on the clarity 

requirement of the invention described in the 

PBP claim, the presence and absence of the 

impossible/difficult/inappropriate situation 

are not substantially determined. Accordingly, 

it can be said that the clarity requirement for 

PBP claims had been moderate then. 

However, it seems that the Supreme Court 

regards that PBP claims are admitted as 

exceptions, and consideration on whether or 

not the situation under which the PBP claims 

should be admitted should be made strictly. 

The Supreme Court had now newly set forth 

impossibility/impracticality criteria for testing 

the presence and absence of the clarity of 

PBP claims. 

It is not necessarily clear as of now what 

theseimpossibility/impracticality criteriaare, 

and we must wait for an accumulation of 

prospective rulings. 

However, according to the supplemental 

opinion ofJudge Katsumi Chiba, “impossible” 

refers to a case where analysis and 

identification of the product to be the 

subject matter according to its structure and 

property (property herein refers to a property 

that is appropriate and meaningful in terms 

of indicating that the invention is different 

from other inventions, upon adetermination 

on the novelty and inventive step of the 

invention) at the time of filing is impossible 

for a person skilled in the art primarily from 


atechnical viewpoint. 

Furthermore, “not at all practical” anticipatesa 

case where identification work cannot be 

conducted practically in terms of cost rather 

than the technical aspects thereof, at the 

time of filingfor a person skilled in the art, 

where time and cost are burdensome, and 

the requirement for such identification 

work would be excessively severe in patentobtaining 

circumstances that are under the 

rapid technological development and harsh 

international competition. 

Nonetheless, in the prospective practices, 

when the PBP claim is determined not to 

comply with impossibility/impracticality 

criteria, it would be treated as violating the 

clarity requirement.As a result, it can be said 

that the possibility of descriptions in the PBP 

claim format being rejected or invalidated has 

been increased. 

identified based on Product Identity Theory. 

This also applies similarly to a number of 

court trials against JPO Appeal Decisions. 

In the present case, the Supreme Court 

ruled that the interpretation of the PBP 

claims would be made under the Product 

Identity Theory, assuming that the product 

has structure, property, and the like that 

are identical to those of the product 

manufactured by the manufacturing method, 

either in the event of determination the 

technical scope or of identifying the gist of 

invention. 

(ii) The reason why the Supreme Court has 

unified the interpretation of the PBP claims 

in both events is as follows.That is, the 2004 

Patent Law revision has enabled the accused 

infringer to refute by insistingon the invalidity 

of patent in infringement trials (Patent Law 

Article 104ter). 

(3) Problem ofInterpreting PBP Claims 

(i)In regard to the interpretation of PBP 

claims, Manufacturing Process Limitation 

Theory, which insists that interpretation 

should be limited to aproduct manufactured 

by the process described in the claim, and 

Product Identity Theory, which insists that 

the process is described for identifying 

the product, and coverage of the claim 

encompasses products that are identical to 

the product manufactured by the method, 

had long been causing controversy. 

Furthermore, rulings by the courts had also 

been split by these theories. 

On the one hand, in the current examination 

guideline, if the invention of a product 

is identified and described in the PBP 

claim format, that description is normally 

understood as meaning the produced 

product itself that is obtained as a final 

product, and the gist of the invention is 

As a result, in an infringement trial, upon 

determining the presence and absence of 

infringement, the aspect of determinationthe 

technical scope of the patented invention 

and the aspect of identifying the gist of the 

invention in allowing refutation based on 

the invalidity of the patent are taken into 

consideration at the same time. 

Undersuch circumstances, it would 

be unreasonable to employ different 

interpretations depending on the aspects, 

based on either Product Identity Theory or 

Manufacturing Process Limitation Theory, 

in the interpretation of PBP claims.Thus, 

the court decided to integrally refer to the 

interpretation of PBP claims in both aspects, 

thus it has employed Product Identity Theory. 

Furthermore, by the present Supreme Court 

ruling, a conclusion has been presented 

that the gist of an invention should be 

identifiedbased on Product Identity Theory. 

43


This point complies with the current 

examination guideline, and it seems that its 

impact inpractice is small. 

However, as described in 3. above, the 

Supreme Court has newly employed the 

impossibility/impracticality criteria, and 

presented its judgment that any PBP claims 

that do not satisfy thesecriteria should be 

rejected underthe clarity requirement. 

As a result, in the event of identifying the 

invention of a product in aPBP claim format, 

the applicant must be even more careful. 

Especially in the fields of chemistry and 

biotechnology, identifying the invention of a 

product in the PBP claim format based merely 

on a snap judgment requires greater care. 

(iii) Furthermore, in the present Supreme 

Court ruling, it has been clarified that 

adetermination based on Product Identity 

Theory is to be made even in the aspect 

of determination the technical scope of 

apatented invention. 

According to the foregoing academic theories, 

the claims serve the function ofpublicly 

announcingthe scope of apatent right, and 

there had been some indications that an 

interpretation based on the PBP claims 

groundedon Product Identity Theory would 

make the scope of the patent right obscure 4 . 

Furthermore, because PBP claims do not have 

a broader meaning than identifyingaproduct 

by process, there havebeen some indications 

of arisk that the technical scope of apatented 

invention is interpreted too broadly 5 . 

The present Supreme Court ruling seems to 

suggest there are more advantages for the 

4 RyuichiShitara and Yugo Ishigami, “Interpretation on 

Product By Process Claims,” Top 100 Patent Rulings [Ver. 4], 

page 131 

5 Shitara, as afore-noted 

51 

patentee becauseProduct Identity Theory 

has been employed also in the aspect 

of determination the technical scope of 

the patented invention. However, at the 

same time, PBP claims need to satisfy the 

clarity requirement based on impossibility/ 

impracticality criteria. 

As a result, even ifthe invention of a product 

that had been allowed to directly identify 

itself fromits propertiesand the like is 

patented in the PBP claim format, it may be 

invalidated as above; thus, it is considered 

that, at least for such an invention, the right 

would be prevented thereby from being 

exercised under the over-broadly interpreted 

technical range. 

Tips on Filing Japanese 

Applications 

2 

In regard to the interpretation of 

PBP claims, the United States makes 

judgments based on Product Identity 

Theory for identifying the gist of an 

invention, and makes judgmentsbased 

on Manufacturing Process Limitation 

Theory for determinationthe technical 

scope of apatented invention. 

Furthermore, in the European 

Patent Convention (EPC) as well, 

a determination is made atthe 

prosecution stage based on 

Product Identity Theory6. However, 

interpretation of PBP claims upon the 

exercise of right is determined uniquely 

in each country. 

Accordingly, as to the interpretation 

of PBP claims upon identifying the gist 

of an invention, Japantakes the same 

approach as the UnitedStates and EPC. 

However, inthe present Supreme Court 

6 Guidelines for Examination in the EPO Part F, Chapter IV, 

4.12 


3 

ruling, Japan employed impossibility/ 

impracticality criteria, as a result of 

which the clarity requirement for PBP 

claims is to be judged more strictly than 

before. 

As a result, whenfiling Japanese 

applications that contain PBP claims, 

attention should be given to whether 

or not those PBP claims satisfy 

impossibility/impracticality criteria. 

Furthermore, for those that have 

already been patented, it should be 

noted that the possibility of their 

invalidation or cancellation has been 

increased. 

5 

Notably, in response to the current 

Supreme Court ruling, JPO announced 

that it would employ impossibility/ 

impracticality criteria in examinations 

from July 6, 2015.Furthermore, 

adaptation of impossibility/ 

impracticality criteria will not be limited 

to those filed hereafter, but will also be 

applied to those already filed.Moreover, 

it also plans to revise the examination 

guideline sometime around October 

2015. 

4 

Furthermore, similar to the case of 

identifying the gist of an invention, 

the Supreme Court ruling employed 

Product Identity Theory likewise for 

determinationthe technical scope 

of the patented invention at the 

right-exercising stage.As a result, 

attention should be paid hereto as well 

becauseJapan has now come to employ 

an interpretation method that differs at 

least from that of the United States. 

Yasushi Koyama 

Partner at OMNI International Patent Law Office 

T: +81 6 6484 6157 

Email: info@omni-pat.com 

Koyama is a partner at OMNI International Patent Law Office and practices intellectual property law with 

a focus on patent law. He retains the Specific Infringement Litigation Qualified. Koyama is a member of the 

Examination Committee of the State Examination for Patent Attorneys in Japan. Furthermore, he is an active 

member of the Japan Patent Attorneys Association, the Japan Intellectual Property Arbitration Center, and the 

Asian Patent Attorneys Association. 

45


Local Directors No Longer Needed in Japan: 

Practical Issues with the Recent Rule Change 

by Henry Tan, 

Matthew Kyle 

Over the past decade Henry Tan, Representative Director of Tricor K.K., 

has helped companies of all industries enter the Japanese market. Each 

time a company planned to set up an entity in Japan, without fail, there 

was a discussion about why there was a requirement to appoint a local 

Japanese resident, member or officer (details are explained below) (“local 

representative”). With the 16 March 2015 official statement by the Japanese 

Ministry of Justice (“MoJ”) abolishing this requirement, the details of the 

discussion have changed considerably. In the following article he will explore 

the history of the issue, how it was before the recent statement by the MoJ and 

provide personal insights into the reality of the situation. 


The Companies Act of Japan, which came 

into effect on 1 May 2006 and before it, the 

Commercial Code of Japan put into place 

in 1899 states that there are four types of 

companies that can be incorporated under 

Japanese Law. 

Before the Companies Act, it was the 

Kabushiki Kaisha (“KK”, stock company), 

Yugen Kaisha (“YK”, limited company) and 

two other less frequently used types of 

companies (Gomei Kaisha, Goshi Kaisha). 

Now, after the establishment of the 

Companies Act, the YK has been removed 

and the Godo Kaisha (“GK”, limited liability 

company) has been added. 

Neither the Commercial Code nor the 

Companies Act states anywhere that the 

above respective four types of entities are 

required to appoint a local representative. 

However, in 1984 and 1985 the MoJ 

provided a set of official statements which 

in summary required that at least one 

representative director named at the time of 

registration be a local resident. 

The policy adopted by the 1984 and 1985 

official statements was followed in company 

registration practice by all Legal Affairs 

Bureaus (“LAB”s) in the Japan, surviving the 

change from the Commercial Code to the 

Companies Act. 

The MoJ and the LAB also, in company 

registration practice, applied the concept 

of this policy to the other three types of 

companies that were incorporated under 

Japanese Law. 

In such types of companies each member 

(i.e., equity holder) (or a part of members 

if otherwise provided by the AoI) has 

representative power; and if a member 

with representative power is a corporate 

body it must appoint an individual as a 

representative officer (shokumu-shikkosha). 

Under the policy at least one member with 

representative power who is an individual, 

or one representative officer appointed, was 

required to be a local resident. 

However, since the Japanese business 

environment has become much more 

international and technology allows the 

people of the world to be in many places at 

one time it has led to an increased pressure 

and demand for Japanese companies to 

be able to incorporate under Japanese Law 

without a local representative. 

In response, a Working Group for Fostering 

Inbound Investments organised by the 

Cabinet Office in December 2014 (the 

“Inbound Investment WG”) led governmentinternal 

discussion towards changing the 

policy and under “Abenomics” the MoJ 

accepted abolition of the requirement based 

on two factors: 

• Adoption of a new requirement that 

all directors (not just representative 

directors) register their addresses 

for the benefit of creditors. 

• Confirmation by the Japanese 

Supreme Court that directors of a 

Japanese company residing abroad 

would be subject to jurisdiction in 

Japanese courts. 

From the discussion held by the Inbound 

Investment WG, the officers of the MoJ 

announced on 16 March 2015 that the 

company registration practice announced 

in 1984 and 1985 would be rescinded, 

and the LAB would accept applications 

for the establishment of KKs with no local 

representatives. 

This new announcement is also applied 

for local representatives of the other three 

47


types of companies incorporated under 

Japanese law. 

The abolition of the local representative 

requirement does not apply to Japanese 

branches of non- Japanese entities. The 

Companies Act clearly states in Article 817 

that a branch of a foreign company needs to 

have at least one representative who lives in 

Japan. 

Since this is an explicit statutory 

requirement it cannot be overridden by 

administrative action by the MoJ. The 

Inbound Investment WG has announced 

that it will consider further deregulation for 

branches of foreign companies in Japan. 

After the New Official Statement made 

by the Ministry of Justice: Now that the 

policy has changed, practically speaking, 

it has become relatively easier to set up a 

subsidiary in Japan. 

Without the requirement of a local 

representative, simply collecting the 

information for preparing the necessary 

documents is enough for submission to the 

LAB (evidence of capital and a registered 

address in Japan are still required to be 

provided during registration). 

Even with this perceived simplification 

of the establishment process, there are 

some issues that may be of interest to 

foreign based executives of multi-national 

companies. 

by the MoJ it was normal practice that the 

evidence of capital would be simply a copy 

of the bank book of the local representative 

showing the applicable capital amount. Now 

that the guidelines have changed it is not 

clear exactly how evidence of capital will be 

established. There are some options that 

can be entertained: 

• Still appoint a local representative 

during the establishment phase 

to use his or her personal bank 

account. 

• Appoint a promoter locally to 

set up the company who will 

initially own the shares of the KK. 

Once established the promoter 

would then transfer the shares 

to the appropriate shareholder 

immediately. 

• Set up an Escrow bank account ( 別 

段預金 “betsudan yokin” in Japanese) 

for deposit of initial capital for 

evidence to show the LAB. Setting 

up an Escrow account may take 

considerable time depending on the 

bank. 

Setting up a Bank Account: 

Most banks in Japan require a local 

representative to set up a bank account. As 

of the writing of this article, Mizuho Bank is 

the only bank I have identified that accepts 

bank account applications without having a 

local representative in Japan. 

How to show Evidence of Capital: 

When you set up a KK [1] evidence of the 

initial capital has to be shown in a Japanese 

bank account before the LAB will process 

the registration of establishment of the 

company. 

Before the official statements were changed 

Dealing with Landlords: 

If you have ever dealt with a Japanese 

Landlord you know how different the 

requirements can be amongst owners. My 

general assumption and experience is that 

foreign multinational friendly office space 

providers that offer “turnkey” solutions 

will be willing to rent space to companies 


without a local representative. It is yet to 

be seen how more conservative landlords 

will act towards companies without a local 

representative. 

Business Licenses: 

Even though the policy regarding company 

registration practice has been changed, 

many business licenses in Japan still require 

a local representative to be named in order 

to apply. 

Directors of Japanese Entities residing 

Abroad subject to Japanese Jurisdiction: 

During legal matters directors of Japanese 

companies residing abroad may be subject 

to jurisdiction in Japanese courts and thus 

be asked to appear in court. 

Corporate Seals: 

Even if there isn’t a local director, every 

company must have at least one Corporate 

Seal (basically a portable power of attorney 

of the company which can bind the 

company to any agreement). Given that it 

is most practical to keep the seal in Japan 

for execution of Japanese documents, 

transactions, etc, it isn’t clear where the seal 

will be held. 

The seal is linked to the listed representative 

on the Corporate Registry (each 

representative can have their own seal, but 

only one seal is required). Without someone 

local to wield that power responsibly, how 

will the seal be maintained safely for clients 

that set up with the representative residing 

abroad? 

What would I do? 

So what do you do when setting up an entity 

in Japan? Honestly, with the ripple-effects 

from the announcement still visible it is 

hard to say. I am learning each day what the 

effects may be but it is still very exciting to 

see things changing in Japan; however small 

or large of a step it may be. 

One thing is for sure though; if you do not 

want to run into delays during your set 

up phase, it may be best to either hire a 

representative director from the pool of 

talent in Japan or to appoint a nominee local 

representative from a reputable service 

provider. Removing the local representative 

(hired internally or a nominee) later on once 

things are set up properly may be OK but it 

remains to be seen for all cases. 

It should be noted that removing a local 

representative working at the company can 

become a burdensome task as this person 

may not be the most cooperative during 

a forced removal. I will cover this issue in 

more detail in a later article coming out 

soon. 

Further, if a company sets up without 

someone local to hold the Corporate Seal 

responsibly, a corporate governance risk 

exists since the seal is a portable power of 

attorney of the company. 

If not held safely issues may arise. At the 

end of the day I know that companies 

entering Japan do not want to take their 

first step backwards or in the wrong 

direction, so for now, I would still use a local 

representative during set up stages at the 

very least. 

Key Points Summary: 

1. There is a difference between 

companies incorporated under 

Japanese Law and those that are 

not. Companies incorporated under 

Japanese law include the KK and GK 

among less commonly used company 

types. A Branch Office is always 

incorporated under the laws of the 

country the branch extends from and 

not under Japanese law. 

49


2. As of 16 March 2015 the KK and GK no 

longer require a local representative 

for establishment, Branch Offices do. 

9. Obtaining business licenses may be 

difficult or impossible without a local 


3. The Japanese Companies Act, 

established on 1 May 2006 has 

not changed – this is a common 

misconception. Simply, the Ministry of 

Justice has announced a new official 

statement for Legal Affairs Bureaus 

to adhere to in order to accept an 

application for setting up a company 

incorporated under Japanese law. 

4. Issues may arise from this official 

statement change. The extent of the 

issues remains to be seen but as of 

writing this I have noticed that: 

5. The way of showing evidence of 

capital for a KK has shifted toward 

other, arguably, less commonly used 

methods before the official statement 

change. 

Most commonly a nominee promoter 

option has become the most used 

method of set up where a local 

shareholder will exist at the time 

of establishment and shares to 

the ultimate shareholder will be 

transferred after establishment is 

complete. 

6. Opening a bank account at certain 

Japanese banks may still require a 

local representative. 

7. Mizuho Bank, however, has 

been identified as a bank that 

accepts companies without a local 


8. Dealing with Landlords without a local 

representative may become more 

difficult. 

10. Representatives appointed abroad 

may be subject to jurisdiction in 

Japanese courts. 

11. Where will the Corporate Seal be held 

if there is no local representative? The 

seal is a portable power of attorney 

which can bind the company to any 

agreement, so it should be held 

somewhere responsibly. Holding it 

outside of Japan is impractical, so how 

can companies ensure its safety? 

12. Using a local representative still is the 

most understood way for setting up 

smoothly in Japan. It remains to be 

seen what sort of delays may occur 

without one. 

Tricor K.K. (Tricor Japan), the Japan arm 

of Tricor Group, supplies comprehensive 

business and corporate services including 

entity establishment, accounting, 

payroll/benefits, HR Advisory, banking & 

administration, tax, corporate secretarial, 

serviced office space, and IT set up and 

support services. 

Tricor K.K. provides a bilingual and bi-cultural 

approach dedicated solely to foreign managed 

multi-national enterprises which value a native 

English point of contact and an understanding 

of the business culture, both locally as well as 

internationally. 

As a group we strive to be Asia’s one-stop shop 

for international expansion back office needs. 

For more information please contact matthew. 

kyle@jp.tricorglobal.com. 

The views and opinions expressed herein 

are solely the views and opinions of the 


author and are not in any way a guarantee 

or definitive conclusion on the subject. 

Any actions taken by the reader based 

on the information presented in this 

document are solely the responsibility of the 

reader and not the responsibility of Tricor 

Group, Tricor K.K. or any other affiliated 

companies. 

is Article 47(2)(v) of the Rules of Commercial 

Registration. For GK, this is Article 117 of 

the Rules.] For a Gomei Kaisha and Goshi 

Kaisha, actual evidence of capital is not 

needed. 

1Evidence of equity contribution is required 

for a KK and GK establishment. [For KK, this 

Henry Tan 

Representative Director at Tricor Japan 

T: +81 3 4580 2700 

Email: info@jp.tricorglobal.com 

Henry Tan is current the Representative Director of Tricor Japan. Prior to this role, Henry was a founder of 

Ascendant Business Solutions and served as CEO for 4 years prior to acquisition by Tricor Group. Throughout 

his tenure, Henry, along term resident of Japan, has assisted in bringing more than 200 multi-national 

companies into Japan, of which he is the resident director for over 100 companies. Henry is originally from 

Ventura, California and is a graduate of the California State University, Northridge with a degree in business 

and finance. He is a US CPA licensed in the state of California. 

Matthew Kyle 

Head of Business Development at Tricor Japan 

T: +81 3 4580 2700 

Email: info@jp.tricorglobal.com 

Matthew Kyle spent his first three years out of college playing professional basketball in the NBA, Europe, 

Africa and Japan. Since basketball he has spent time with Ernst & Young on the Tokyo Transfer Pricing 

team. From here he moved to Tricor K.K. working his way up to Head of BD, Marketing and Engagement 

Management for the Japan Operation. He actively manages over 100 clients, maintains key strategic 

relationships all while developing new marketing initiatives for the firm. 

51

Sports Law 

Sport and Free Market Rules: Should 

Pandora’s Box Have Stayed Closed? 

by Stephen Hornsby 

In 1984, one of the very first complaints was made to a competition 

authority about the organisation of a sporting event. Its novelty caused 

some stirrings of interest in the EU Commission competition department. 

Swift action was required as it related to ticketing arrangements; after 

some deliberation no action was taken at all. 

The head of the department took this 

decision at a time when other departments 

of the Commission were engaged in slow 

moving negotiations with UEFA over the “3 

plus 2” restriction on player movement. This 

restriction was to remain in force for over 

10 years despite manifestly breaking EU law 

until Bosman blew it away. The time was 

clearly not ripe for fresh interventions in the 

area. But more than that, the decision was 

taken on the basis that it was not a good idea 

to open Pandora’s box for fear of all sorts of 

unpleasantness being revealed which could 

not be resolved to everyone’s satisfaction. 

Since that time, competition and other 

regulators and courts in Europe have been 

unable to duck a number of issues applying 

free market rules to a variety of sporting 

markets. As we shall see, the outcome of 


some of the major interventions tends to 

provide some support (albeit sentimental) for 

the initial “hands off” approach. 

Nothing comes close to the ECJ’s Bosman 

judgment for its impact on sport. The 

consequence of the judgment – basically the 

mushrooming of player wages and the free 

movement of players to earn those wages – is 

very far reaching indeed in Europe’s biggest 

sport. 

For example, Ajax are unlikely to ever win 

a European cup as the best players leave 

Holland to work abroad in major leagues 

where greater populations generates more 

commercial revenues that find their way 

through to the players. At a national level, 

the likes of Blackburn Rovers are unlikely to 

ever win the Premiership again since players 

gravitate to the richest clubs. 

In the price war for talent between clubs 

that Bosman helped unleash, there were a 

number of casualties. In response so called 

Financial Fair Play rules were introduced 

a few years ago which included a limited 

‘break even’ rule. At the time, this initiative 

was rather foolishly applauded by the EU 

Commission for Competition. 

Abolition of these rules or substantial 

watering down of them) is a distinct 

possibility now they have been referred to 

the European Court of Justice (though UEFA 

has appealed). However, Bosman’s impact 

was not really lessened by Financial Fair Play 

but was simply harnessed for the benefit of 

established clubs by restricting challenger 

clubs ability to speculate to accumulate. 

Is this process of applying free market rules 

started by Bosman a good result for sport? At 

one level much depends on who you support. 

But wider than the question of which club 

that might be, any sort of answer depends on 

whether evenly balanced and evenly spread 

competitions are considered desirable. In US 

sport, which has developed a special legal 

regime, balance is perceived as good – hence 

the draft and other equalising measures. In 

Europe however there is no such consensus. 

Uneven competitions seem very popular in 

England and Spain and elsewhere too; indeed 

such competitions have garnered increased 

commercial returns. 

If the players are getting more of what they 

are really worth because of their freedom to 

follow the money (and because there is more 

competition in the broadcasting market) 

maybe the undermining of sport’s selfregulation 

that Bosman brought about has 

been beneficial. If this is so, it is fortunate: the 

chances of revenue sharing ever happening 

between clubs (which was mooted in the 

Bosman case as a less restrictive way of 

achieving competitive balance between clubs 

than restrictions on player movement), are 

remote in the extreme. 

Consideration of Bosman’s impact reveals 

that defining what is good for sport is very 

difficult. One of the difficulties in analysing 

a regulatory outcome in sport is that the 

industry has many real (and imagined) 

consumers. Whereas in other industries such 

as energy or transport, the identity of the 

consumer is clear, in sport there are a variety 

of consumer interests. 

For example, final consumers may wish to 

watch sport on TV in a manner that is free 

at the point of delivery. The difficulty with 

that preference is that it not only means less 

revenue for the producers (the sport) but also 

that it freezes out commercial TV operators 

who are other potential consumers. 

Some sort of compromise in this case has 

been attempted between producers and 

consumers by “listing” rules which restricts 

market forces; but the list of protected events 

has shut out commercial TV operators who 

53

Sports Law 

have allied with the sports themselves to 

narrow the list of protected events. Listing 

regulations cannot be judged as a success; 

they leave everyone dissatisfied but a free 

market solution would also be unpopular. 

mobile and broadband). Whether this works 

long term or not in the media markets, the 

intervention will leave many consumers 

of sports unhappy here and now as their 

interests take second place. 

Unfortunately, some of the interventions 

involving sport treat sport as a means 

to achieve other policy goals. Sport here 

is a pawn in a bigger regulatory game. 

Throughout Europe over the last decade, 

legal interventions – mostly but not entirely 

– under the competition rules, have been 

designed to share out prime sporting content 

as prime “content is king” (i.e, determine 

technological success). 

As a result of regulators’ attachment to this 

shibboleth, whilst collective selling has been 

permitted (because it supports solidarity 

between weak and strong clubs), resulting TV 

agreements have been limited in both time 

and scope. 

The imposition of separate rights packages 

has been controversial. After a few market 

failures in the UK (e.g. Setanta) this attempt 

to promote competition in TV markets by 

dividing content into packages has smoothed 

the entry of the former telecoms monopoly 

(British Telecom) into the sports rights 

broadcasting market. 

Difficulties in keeping all those who are 

interested happy is brought into very sharp 

focus by the EC Commission’s major case on 

the internal organisation of the sport (FIA). 

The FIA case essentially rose because in order 

to maintain Formula 1 ’s pre-eminent position, 

Ecclestone tied up all the racing circuits 

where race meetings could take place that 

might be competitive to Formula 1. 

His effective control of the regulatory body 

which fixed the racing calendar then meant 

that he became the gateway to the sport. As 

a result, he could control the sometimes very 

powerful teams and this assisted his ability 

to divide and rule. This probably had the 

beneficial outcome of increasing his ability 

to prevent a financial arms race which would 

have sent the weakest to the wall. 

What eventually happened after the 

Commission cancelled the contracts of the 

circuits and separated the commercial and 

regulatory functions on legally orthodox 

lines? The speed with which the weakest went 

to wall simply increased. 

This has been beneficial for some (e.g. 

English rugby clubs whose former broadcast 

partner was really more interested in 

international matches) but the outcome for 

some consumers will be that they will have 

to purchase new subscriptions. In future, 

all consumers will be faced with increase in 

prices. 

The strongest teams were able to resist cost 

control measures that helped the smaller 

teams by threatening a ‘breakaway’ credibly 

(having failed to threaten it credibly for many 

years as a result of Ecclestone’s control). 

It is well arguable that as a result of this 

intervention the “sport” is under threat as 

interest is declining. 

Sport has become part of competition 

regulators’ determination to make it a key 

ingredient in new head to head competition 

between “quad play” offerers (that is 

companies who offer telecoms, television, 

Sports can certainly damage themselves 

and others by clearly anti-competitive rules 

but regulators and courts need to consider 

whether their intervention actually might 

make matters worse in some cases. A good 


starting point would be recognising the 

limitations of remedies. 

The basic problem here is that regulators 

cannot force unwilling partners to do 

business with each other. This stems from 

sports origins in voluntary associations which 

are inherently unstable. If you can join, you 

can also leave if you give notice and pay your 

dues. 

A few years ago, at about the same time as 

the governing bodies’ self-serving attempt 

to lobby for a sporting exception for their 

benefit ran into the sand, a serious attempt 

was made by the French government to 

make sport fully regulated at EU level on a 

top down basis under public law with clubs 

subject to licensing controls, etc, etc. 

This initiative would have brought about 

a fundamental change by preventing 

‘breakaway’ and would have eradicated 

sports’ voluntary association roots. The 

initiative was scotched by the UK, amongst 

other member states, on the grounds that 

sport should be left to them. 

Governing bodies’ response once the 

‘sporting exception’ failed was to hope that 

binding arbitration behind closed doors 

would keep legal challenges safely bottled up 

in Switzerland. It is unlikely that this will work 

as the German courts want all parties to be 

able to choose the arbitrators which lessens 

the attractions for the governing bodies. 

So Pandora’s box will stay open in Europe 

and transparency is set to increase. To 

suggest it should have stayed closed, ignores 

the inevitability of legal intrusions where 

money is increasingly involved and conflicting 

interests are at stake. 

Stephen Hornsby 

Partner at Goodman Derrick LLP 

T: +44 (0)20 7421 7931 

Email: SHornsby@gdlaw.co.uk 

Stephen Hornsby has been an EU and competition law specialist since the early 1980s when he worked in 

the EC Commission Competition department. He first became involved in the application of law to sport 

in the early 90s on behalf of Newcastle United who were generally supportive of Bosman’s challenge to 

UEFA’s “3 plus 2” player restrictions. 

On behalf of English rugby clubs, in 1998 he brought the first formal EU competition complaint against a 

sport’s requirement that players be released free of charge for national team duty. Last year a German 

Court condemned such a rule in handball. 

He has acted usually for clubs and their associations in England, Wales and Scotland in disputes with 

governing bodies and regulatory enquiries in a number of sports including cricket, basketball and ice 

hockey. The most well known of these was the ‘Bloodgate’ enquiry where he acted for the club and later an 

employee whose subsequent worldwide ban by his professional body was overturned by the High Court. 

He has written and lectured extensively on the application of EU law to sport and broadcasting. 

55

Tax Law 

The “Netflix” Tax 

by Geoffrey Mann 

One of the most technically interesting tax changes announced in the Federal 

Budget in May 2015 was the proposed imposition of goods and services (GST) 

at 10% on offshore intangible supplies to Australian consumers, termed 

the “Netflix tax”, so called after the announcement by Netflix in November 

2014 that it proposed to enter the Australian market with its online movie 

streaming service by March 2015. 

The Government announced the 

implementation of “integrity measures” 

(which included the Netflix tax) in April 

2015. 

The integrity measures proposed by the 

Government were in relation to what was 

emerging as an OECD (Organisation for 

Economic Co-Ordination and Development) 

consensus, that GST should be charged at 

the source of the revenue, so a supplier 

providing intangible services into Australia, 

wherever the supplier is located should be 

subject to Australian GST on those services. 

The Tax Laws Amendment (Tax Integrity: 

GST and Digital Products) Exposure Draft 

Bill 2015 (Exposure Draft Bill) proposes 

to extend the scope of GST to supplies of 

things other than goods or real property (ie 

intangibles) from offshore which are made 

to Australian consumers. It is intended that 

the legislation will take effect from 1 July 

2017. 

The amendments are consistent with the 

reforms in a number of other countries 

(including Norway, Japan and the member 

states of the European Union) to extend 


the scope of their value added taxes to the 

growing area of offshore intangible supplies 

to consumers in those countries. 

Summary of current law 

Under the current GST law, GST is 

payable on taxable supplies and taxable 

importations. 

A taxable importation is an importation 

of goods that are entered to Australia for 

consumption within Australia, provided the 

importation is not specified to be a nontaxable 

importation. 

does not steadily erode over time through 

the increasing use of foreign digital supplies 

by Australian consumers and that local 

suppliers are not at a tax disadvantage 

relative to overseas suppliers 

The Netflix tax 

The effect of the Exposure Draft Bill is that 

all supplies of “inbound intangible consumer 

supplies” made to “Australian consumers” 

will be considered to be “connected” with 

Australia, and subject to GST, regardless 

of whether the supplier is an Australian 

resident or non-resident. 

Generally, for a supply to be a taxable 

supply it must, among other things, be 

connected with the Australian “indirect tax 

zone” (ie, supplies made or done in Australia 

or good delivered within Australia). 

The current GST law also ensures that 

entities that are registered or required 

to be registered for GST are in the same 

net GST position in respect of intangibles 

acquired for their Australian activities from 

overseas as they are for things acquired 

locally. This is known as the “reverse charge” 

rule. However, this rule does not extend to 

entities that are not registered or required 

to be registered for GST (ie consumers). 

This change will result in supplies of 

digital products, such as streaming or 

downloading of movies, music, apps, 

games, e-books as well as other services 

such as consultancy and advisory services 

(such as brokering), receiving equivalent 

GST treatment whether they are supplied 

by a local supplier or a foreign supplier. 

A supply is an “inbound intangible consumer 

supply” if it is a supply of anything other 

than goods or real property that is not done 

wholly in the Australian indirect tax zone or 

made through an enterprise the supplier 

carries on in the Australian indirect tax 

zone. 

The issue that was identified by the 

Australian Government with the operation 

of these rules was that the importation 

of services or intangible property by 

consumers would never be a taxable 

importation (as importations must be of 

goods) and will often also not be a taxable 

supply under the current “connected” rules 

and would not be subject to the “reverse 

charge” rule. 

The implementation of a “Netflix tax” is 

intended to ensure the GST revenue base 

An “Australian consumer” is an Australian 

resident (other than an entity that is an 

Australian resident solely because the 

definition of Australia in the Income Tax 

Assessment Act 1997 includes the external 

Territories) that: 

• is not registered or required to be 

registered; or 

• if the entity is registered or required 

to be registered – the entity does 

not acquire the thing supplied solely 

57

Tax Law 

or partly for the purpose of an 

enterprise that the entity carries on. 

Importantly, no GST liability arises under 

the amendments if the recipient acquires 

the supply as a business rather than as a 

final consumer. 

The amendments also make changes to 

the rules for determining an enterprise’s 

GST turnover, which determines whether 

registration for GST is required. Usually, an 

entity’s GST turnover includes, among other 

things, the value of the GST-free supplies 

the entity makes that are connected with 

the Australian indirect tax zone. 

However, this would mean that the making 

of a significant number of supplies by 

overseas suppliers to Australian residents 

which would now be connected with the 

indirect tax zone, used and enjoyed outside 

the indirect tax zone and therefore GSTfree, 

would require GST registration of the 

suppliers. 

Electronic distribution service 

In some circumstances, the GST liability is 

shifted from the supplier to the operator of 

an “electronic distribution service” through 

which the supplies of inbound intangible 

consumer supplies are made. This will 

occur if the operator of the electronic 

distribution service controls any of the key 

elements of the supply. 

A service is an “electronic distribution 

service” if the service allows entities to 

make supplies available to end-users 

and the service is delivered by means of 

electronic communication and the supplies 

are to be made by means of electronic 

communication. 

The responsibility for the GST liability 

shifts from a supplier to the operator of an 

electronic distribution service for supplies 

that are inbound intangible consumer 

supplies made through the electronic 

distribution service they operate unless all 

of the following are met: 

The Explanatory Memorandum uses the 

example of hairdressing services that an 

Australian resident might obtain while 

travelling overseas. 

• an invoice issued in relation to the 

supply identifies the supply and 

identifies the supplier as the supplier 

of the supply; 

The suppliers may have no involvement 

with the Australian GST system, and 

in some, if not most instances, will be 

unaware they are making a supply to an 

Australian resident. 

Therefore, requiring these entities to 

register for GST purely on the basis that the 

supply falls within the new law would create 

significant compliance costs for no benefit. 

As a result, the amendments exclude GSTfree 

supplies from GST turnover if they are 

connected with the Australian indirect tax 

zone only as a result of these amendments. 

• the supplier is identified as the 

supplier of the supply, and as the 

entity responsible for paying GST, in 

contractual arrangements for making 

the supply and the provision of 

access to the electronic distribution 

service; 

• the operator of the electronic 

distribution service does not 

authorise the charge to the recipient 

for the supply and does not 

authorise delivery of the supply and 

does not set terms and conditions 

under which the supply is made. 


The shift in GST liability to the operator 

of an electronic distribution service is 

proposed given that, generally, the operator 

of an electronic distribution service will 

be a much larger and better resourced 

entity than most of the entities making the 

supplies. 

The operator of the electronic distribution 

service will also have significant influence 

over the terms of sale made using the 

electronic distribution service and either 

manage or closely regulate the payment 

process. 

Modification of regulations 

The Exposure Draft Bill also proposes the 

making of regulations to modify particular 

GST rules (for example, registration 

turnover, tax periods and GST returns) in 

order to accommodate the new rules for 

intangibles and to minimise compliance 

costs of non-resident suppliers. 

The Explanatory Memorandum to the 

Exposure Draft Bill states that the form of 

regulations will need to be determined in 

consultation with members of the industry. 

Further, often the operator of the electronic 

distribution service will have more 

information about the recipient of the 

supply, compared with the suppliers. 

Geoffrey Mann 

Partner at Ashurst Australia 

T: +61 3 9679 3366 

Email: Geoffrey.mann@ashurst.com 

Geoff advises on indirect tax with particular emphasis on goods and services tax, stamp duty, land tax and 

human resources taxes (for example, fringe benefit tax, payroll tax, workers’ compensation premiums, 

superannuation guarantee charge and PAYG). 

Geoff’s tax experience spans over twenty years. He has advised on a wide range of transactions and issues. 

59

Tax Law 

The Spanish Reits: A Valuable Instrument for Spanish and 

International Investors to Take Advantage of the Recovery of 

the Spanish Real Estate Market 

by Diego Montoya Esteban 

1. The Socimi Regime 

SOCIMIs (Sociedad Anónima Cotizada de 

Inversión en el Mercado Inmobiliario) are 

Spanish collective real estate investment 

vehicles that enjoy a privileged tax 

regime, provided that certain legislative 

requirements are met. The law governing 

SOCIMIs (the “SOCIMI Law”) was passed in 

2009 but created a more restrictive and 

unattractive legal and tax regime that failed 

to satisfy investors’ expectations. 

The Spanish regime departed too far 

from the standard European model when 

implemented in 2009 (19% Corporate 

Income Tax rate and the requirement of 

a minimum of €15m in share capital) and 

combined with the significant economic 

downturn’s impact on real estate 

transaction activity, no SOCIMIs were 

actually incorporated before 2014. 

From 2008 to 2013, the Spanish commercial 

real estate market contracted in terms 

of volume to the point that deal activity 

consisted of a limited number of relatively 

small-scale transactions each year and 

there was no longer a fully functioning 

investment market. 


This negative trend has reverted since 

2014, with that year marking the inflection 

point for the Spanish real estate market’s 

turnaround. Since the end of 2013, the 

improvement in macroeconomic indicators 

has boosted confidence in Spain, resulting 

in greater interest and investment flows 

from international investors, which judged 

it a good moment to enter the Spanish 

market by taking advantage of the bottom 

of the cycle. 

The SOCIMI Law was amended in December 

2012 to make the regime more attractive. 

The reforms successfully converted the 

SOCIMI into a flexible and attractive 

instrument to invest in Spanish real estate 

assets. 

The new SOCIMI regime provides for a 0% 

Corporate Income Tax rate and removes 

the asset diversification and leverage 

limitations, allowing SOCIMIs to trade on 

Spain’s alternative investment market 

(Mercado Alternativo Bursátil). Combined 

with the recovery and improvement of 

the real estate sector, investment through 

SOCIMIs has been boosted significantly. 

Listed SOCIMIs have accounted for almost 

33% of the total investment volume in Spain 

and close to 75% of domestic investment 

(Source: Savills Market Report – Spain 

Investment, February 2015). SOCIMIs 

also accounted for over 20% of the total 

investment volume in the first quarter 

of 2015, maintaining the high levels of 

investment seen in 2014. 

The SOCIMI structure has become one 

of the preferred routes for international 

investors seeking to benefit from the 

Spanish real estate market’s recovery. 

Foreign investors have their eyes on “blind 

pool listings” and others look for tailored 

structures, including the conversion of 

former standard real estate companies 

into SOCIMIs. For foreign REITs interested 

in Spanish real estate, the use nonlisted 

SOCIMIs may also be an option, 

benefiting from 0% taxation under certain 

circumstances. 

Naturally, local investors such as Spanish 

family offices or certain family-run business 

can also benefit from this advantageous 

regime solving specific issues (limitations 

on the deductibility of interest expenses, 

benefiting from a more favorable 

divestment regime, etc), including a 

reduction of its tax invoice. It is therefore 

worth revisiting their structures. 

2. Requirements of the 

Socimi Regime 

A) Corporate form and listing 

The SOCIMI must take the form of a joint 

stock corporation (Sociedad Anónima) 

with a single class of registered share 

capital (minimum of EUR 5 million fully 

subscribed). The SOCIMI’s shares must be 

in registered form and nominative, being 

this requirement met if the shares are 

represented in nominative book entry form. 

This trading requirement must be met 

within 24 months of the election to become 

a SOCIMI. 

In addition, the SOCIMI must be listed on a 

regulated market (for example, one of the 

four Spanish Stock Exchanges) or multilateral 

trading systems (such as the Spanish 

Mercado Alternativo Bursátil or MAB) 

either in Spain, in the European Union, 

in the European Economic Area or in any 

jurisdiction with which there is an effective 

exchange of tax information agreement 

with Spain. 

As a general rule, the minimum free float 

61

Tax Law 

for listing on the Spanish Stock Exchanges 

is 25%. In the case of MAB listing, shares 

representing either (i) 25% of the total 

share capital of the SOCIMI, or (ii) an 

aggregate estimated market value of €2 

million, are distributed among investors 

holding individually less than 5% of the total 

share capital of the SOCIMI. 

Such calculation will include the shares 

made available to the liquidity provider to 

carry out its liquidity duties. No minimum 

number of shareholders is required by 

the MAB regulations and, in practice, their 

shares are not widely distributed among 

shareholders. However, as a listed entity, 

an actual free float requirement must be 

appropriately met. 

B) Purpose and activities 

The SOCIMI can only invest in one tier Sub- 

Socimis (i.e. only one level of Sub-Socimis 

is available); Sub-Socimis cannot hold 

shares in other companies. Any foreign 

subsidiaries must be tax resident in a 

jurisdiction which effectively exchanges tax 

information with Spain. 

SOCIMIs are allowed to carry out other 

ancillary activities that do not fall under 

the scope of their main corporate purpose. 

However, such ancillary activities must not 

exceed 20% of the assets or 20% of the 

revenues of the SOCIMI in each tax year. 

C) Investment and income requirements: 

80%-20% rules 

At least 80% of the SOCIMI’s assets must be 

invested in: 

The SOCIMI must have the following as its 

main corporate purposes: 

• Acquisition, development and 

refurbishment of urban properties to 

be leased; 

• Urban properties for lease; 

• Land for development into 

urban properties for lease (if the 

development activities start within 

the 3 years following the acquisition); 

• The holding of shares of other 

SOCIMIs, collective real estate 

investment funds or foreign listed 

REITs that meet similar requirements 

to those applicable to SOCIMIs; 

• The holding of shares in non-listed 

Spanish or foreign companies whose 

corporate purpose is the acquisition, 

development and refurbishment 

of urban properties to be leased, 

provided that they have the same 

compulsory dividend distribution 

obligation as that which applies to 

SOCIMIs and the same investment 

requirements and wholly owned 

by SOCIMIs or foreign REITs (“Sub- 

Socimi“). 

• Shares in SOCIMIs, foreign REITs, 

Sub-Socimis or real estate collective 

investment funds. 

There are no asset diversification 

requirements: the SOCIMI is entitled to 

hold one single asset. These qualifying 

assets must be held for a minimum three 

year-period from its acquisition date (or 

from the first day of the financial year when 

the company became a SOCIMI if the asset 

was held by the company before becoming 

a SOCIMI). 

This 80% threshold should be calculated on 

a consolidated basis, taking into account 

the SOCIMI and its qualifying subsidiaries 

and the gross value of the assets (without 


taking into account depreciation or 

impairments). 

At least 80% of the SOCIMI’s net income, 

excluding income arising from the sale of 

qualifying assets after the minimum threeyear 

holding period has expired, must 

derive from: 

• Leasing of qualifying real estate to 

non-related parties; or 

• dividends from SOCIMIs, Sub- 

Socimis, foreign REITs, or real estate 

collective investment funds. 

The Spanish tax authorities consider that 

the annual income should be measured on 

a net basis, taking into consideration direct 

income expenses and a pro rata portion of 

general expenses. These concepts should 

be calculated in accordance with Spanish 

GAAP. 

All income obtained by the SOCIMI 

(including 20% income deriving from 

other non-qualified assets) is taxed a 0% 

Corporate Income Tax Rate provided the 

80%-20% rules on assets and income are 

met. 

Capital gains derived from the sale of 

qualifying assets are in principle excluded 

from the 80%/20% net income test. 

Conversely, the sale of qualifying assets 

before the end of the three year period 

implies that (i) such capital gain would 

compute as non-qualifying revenue; and (ii) 

such gain (and the rental income generated 

by the asset, if any) would be taxed at the 

standard Corporate Income Tax rate (28% 

for 2015 and 25% for 2016 onwards). 

D) Dividend distribution 

The SOCIMI is required to adopt resolutions 

for the distribution of dividends within the 

six months following the closing of the fiscal 

year of: (i) at least 50% of the profits derived 

from the transfer of real estate properties 

and shares in qualifying subsidiaries and 

real estate collective investment funds ( 

provided that the remaining profits must be 

reinvested in other real estate properties 

or participations within a maximum period 

of three years from the date of the transfer 

or, if not, 100% of the profits must be 

distributed as dividends once such period 

has elapsed); (ii) 100% of the profits derived 

from dividends paid by Sub-Socimis, foreign 

REITs and real estate collective investment 

funds; and (iii) at least 80% of all other 

profits obtained (e.g., profits derived from 

ancillary activities). If the relevant dividend 

distribution resolution was not adopted 

in a timely manner, a SOCIMI would lose 

its SOCIMI status in respect of the year to 

which the dividends relate. 

In our view, the investment model for the 

SOCIMI should ensure that the dividend 

distribution requirement is met. However, 

in circumstances where SOCIMI’s leasing 

business does not generate enough cash to 

service debt and pay compulsory dividends 

in cash, the Spanish tax authorities have 

previously accepted that this requirement 

is met if the dividends are declared, but 

the resulting credit against the SOCIMI, 

net of withholding taxes, is immediately 

capitalised by the shareholders. 

3. SOCIMI Tax Regime 

A) Opting into the SOCIMI regime 

The decision to apply the SOCIMI regime 

has to be agreed by the shareholders in 

a general meeting and communicated to 

the Spanish tax authorities before the last 

three months of the fiscal year (i.e. before 1 

October if the fiscal year coincides with the 

63

Tax Law 

calendar year). The tax regime is applicable 

from the beginning of the fiscal year in 

which the communication is duly filed with 

the Spanish tax authorities. 

It is possible to opt for the SOCIMI 

regime even if its requirements are not 

met, subject to the SOCIMI meeting the 

requirements in the two years after the 

date on which the option was made. 

However, certain requirements of the 

SOCIMI regime are essential and must be 

met on the date on which the option is 

elected: (a) the dividend distribution policy; 

(b) main corporate purpose; and 

(c) the registered nature of the shares. 

The SOCIMI will lose the benefits of the 

tax regime if certain circumstances take 

place or if certain failures are not cured 

the following year. In such a case, certain 

taxation may be triggered and the entity 

will not be eligible for the SOCIMI regime 

for three years. 

B) Corporate Income Tax 

Nevertheless, the SOCIMI will be subject 

to a special 19% levy on the amount of the 

gross dividend paid to shareholders which 

do not qualify for the SOCIMI regime and 

which own 5% or more in the capital of the 

SOCIMI and are exempt from any tax on the 

dividends or not subject to tax at, at least, 

a 10% rate on dividends received from the 

SOCIMI. 

The Spanish Tax Authorities have issued 

certain rulings stating that the 10% test 

to be carried out in order to identify 

substantial shareholders shall be focused 

on the tax liability arising from the dividend 

income considered individually, taking into 

account (a) exemptions and tax credits 

affecting the dividends received by the 

shareholder, and (b) those expenses 

incurred by the shareholder which are 

directly linked to the dividend income (e.g., 

fees paid in relation to the management 

of the shareholding in the relevant SOCIMI 

distributing the dividends, or financial 

expenses (interest) deriving from the 

financing obtained to fund the acquisition 

of the shares of the relevant SOCIMI). 

Generally, all income received by a SOCIMI 

or a Sub-Socimi (including capital gains) is 

taxed under CIT at a 0% rate. Nevertheless, 

rental income and capital gains stemming 

from qualifying assets being sold prior to 

the end of the minimum holding period 

(three years) would be subject to the 

standard CIT rate (28% in 2015 and 25% for 

2016 onwards). 

The SOCIMI will not be entitled to tax losses 

carried forward and tax credits, although if 

the company had any of such tax assets in 

its balance sheet before its application for 

the SOCIMI tax regime, those assets could 

be used if the SOCIMI obtains income or 

gains subject to the general CIT rate. 

In addition, the Spanish Tax Authorities 

have confirmed that the withholding tax 

levied on a dividend payment (including any 

Non-Resident tax liability) should also be 

taken into consideration by the shareholder 

for assessing this 10% threshold. 

Hence, if these dividends are subject to 

withholding tax in Spain at a rate equal to, 

or higher than, 10%, said 19% levy should 

not be triggered. Otherwise, a careful 

review will need to be carried out of the 

substantial taxation of the shareholders’ 

dividend. 

C) Taxation of non- resident Shareholders 

Dividends distributed to non-resident 


Shareholders not acting through a 

permanent establishment in Spain are 

subject to Non-Resident Income Tax 

(“NRIT”), at the standard withholding tax 

rate at 20% (19% for 2016 onwards). No 

exemptions are allowed on dividends 

distributed by a SOCIMI. 

This standard rate can be reduced upon 

the application of a convention for the 

avoidance of double taxation (“DTC”), or 

eliminated as per the application of the EU 

Parent-Subsidiary Directive as the SOCIMI 

may qualify for its application according to 

the Spanish Tax Authorities criterion (the 

application of the EU Parent-Subsidiary 

withholding tax exemption requires the 

fulfillment of certain requirements and 

includes an anti-abuse provision when the 

majority of the voting rights of the parent 

company are held directly or indirectly by 

individuals or entities who are not resident 

in a EU Member State or in a European 

Economic Area). 

in Spain at a general tax rate of 20% in 2015 

(19% in 2016 onwards), unless the relevant 

DTC prohibits Spain from taxing such 

capital gains. 

Nevertheless, capital gains obtained by 

non-Spanish Shareholders holding a 

percentage lower than 5% in a listed SOCIMI 

will be exempt from taxation in Spain 

provides the shareholder is tax resident in a 

country which has entered into a DTC with 

Spain which provides for exchange clause 

information (most of the DTC entered into 

by Spain). 

This exemption is not applicable to 

capital gains obtained by a non-Spanish 

shareholder acting through a country or 

territory that is defined as a tax haven by 

Spanish regulations 

Capital gains derived from the transfer 

or sale of the shares are deemed income 

arising in Spain, and, therefore, are taxable 

Diego Montoya Esteban 

Senior associate at Uría Menéndez 

T: +34 91 586 05 82 

Email: diego.montoya@uria.com 

Diego advises on corporate tax law, tax aspects of real estate investments, indirect and local 

taxation, and regularly advises on corporate restructuring transactions. He has extensive 

experience in advising on inbound and outbound investments, tax audits and all types of appeals 

before the tax tribunals and courts, including the Supreme Court. 

65

Tax Law 

Tax Regulations in Panama: The Place to 

Invest In The Americas 

by Elias Solis Gonzalez 

Panama is a country located in the center of the Americas, with a 

republican, democratic and participatory political system, based on 

principles of rule of law and free enterprise. It has an extraordinary hotel 

and tourism infrastructure, as well as an international financial center, 

which together allow the satisfaction of anyone visiting our country. 

Its tax system is based on the principle of 

territoriality. Only the income generated 

within the country will be subject to income 

tax, and the income of foreign source is 

exempt. Panama meets all international 

standards in taxation. 

It is the most favorable place to invest 

in the Americas. It is the hub to develop 

multiple business in the region. Here are 

some of its tax advantages: 

Income Tax 

It is determined by applying to the annual 

income declaration of taxpayers, the 

traditional method or the alternative 

income tax method (minimum tax). The 

method used is the one that results in the 

highest amount. 

Under the traditional method, the net 

taxable income is taxed at a rate of 25%. 

This income will be the result of deducting 

from the gross income, exempt or nontaxable 

income and the costs, expenses 

and deductible expenses (traditional 

method). 

The alternative income tax method will 

apply only to entities whose taxable income 

exceeds USD$1,500,000.00. Therefore, the 

4.67% of the net taxable income will be paid 

according to the 25% tariff. The taxpayer 

may request not to apply this method in 


case it incurs in losses or the effective tax 

rate exceeds 25%. 

of USD$60,000.00 payable as notice of 

operation tax. 

Individuals will pay tax at a rate of 15% 

after the tax allowance of USD$11,000.00 to 

50,000.00 and the surplus at a rate of 25%. 

Dividends tax 

When a corporation distributes profits 

generated in Panama to its shareholders, it 

must retain the tax at a 10% rate. Income 

generated from sources outside Panama 

are subject to a 5% withholding. 

There will be no withholding when the 

entity distributes profits that are generated 

from profits, as long as the juridical person 

that distributed such profits made the 

withholding and paid the corresponding 

tax. 

The withholding will not apply over the 

portion of income generated from profits, 

as long as the juridical persons that made 

the distribution is exempt of withholding 

or has paid the corresponding tax in other 

jurisdiction. 

The taxation regime provided in treaties 

to avoid double taxation entered into by 

Panama with other countries will always 

prevail. 

However, due to the inexistence of a legal 

obligation to distribute profits periodically, 

in the event profits are not distributed or 

less than the 40% is distributed, likewise 

a tax rate of 10% will be applied over the 

income of the taxpayer after the payment 

of the income tax (complementary tax). 

Notice of operation tax 

To do business in Panama companies 

require a Notice of Operation, except those 

exempt by law. Annually there is a 2% tax 

tariff of the net assets of the company, with 

a minimum of USD$100.00 and a maximum 

Companies located at free international 

commerce (such as the Colon Free Zone 

or any other free zone established or 

created in the future), will not be subject 

to the notice of operation tax, unless 

special law provides otherwise, but will 

pay 1% over their annual income, with a 

minimum of USD$100.00 and a maximum 

of USD$50,000.00. 

Capital gains tax 

The transfer of shares or real property, that 

do not constitute the ordinary business 

of the taxpayer, will be subject to a capital 

gains tax at a rate of 10%. 

For a sale of shares, bonds or other 

securities issued by legal entities, the 

buyer will retain 5% of the transfer value as 

advanced payment of the tax and will pay 

such tax to the Tax Authorities. The seller 

may consider the advanced payment as a 

definitive tax or request a reimbursement 

of the surplus, if he considers that the 

amount retained exceeds the tax applied 

over the capital gain at a rate of 10% or 

the recognition of a tax credit to pay other 

taxes. 

In the sale of the real property, the 

withholding by the buyer will be of 3% 

over the selling price and the seller also 

can claim back the reimbursement of the 

surplus or the recognition of a tax credit. 

Remittances to foreign entities 

Payments sent to a person domiciled 

abroad for services received in Panama 

or from abroad, will be subject to income 

tax at a 12.5% rate over the total amount 

remitted, as long as the services: (1) 

have an incidence in the generation or 

the conservation of Panamanian source 

of income; and (2) its value has been 

67

Tax Law 

considered as deductible expense by the 

taxpayer that received such services. 

Public entities of the Central Government, 

autonomous, local governments, stateowned 

enterprises or joint stock companies 

in which the State is owner of at least 51% 

of the shares, as well as non-taxpayer 

entities and taxpayers that present losses 

will be subject to the withholding. 

Foreign source income 

It will not be considered produced 

within the Panamanian territory, income 

originated from the following activities, 

among others: 

• Invoicing, from an office established 

in Panama, the sale of goods or 

products for a greater sum than the 

one invoiced for the same goods or 

products for the office in Panama, 

as long as the goods or products 

are transported exclusively abroad, 

as well as the invoicing of those in 

transit at national ports or airports. 

• Managing from an office established 

in Panama, transactions that are 

consummated, perfected or take 

effect abroad. 

• Wages and other labor related 

remunerations of the individuals that 

hold a permit as special temporary 

resident, that receive income directly 

from their headquarters located 

abroad, even if they reside in the 

country to perform those activities. 

Tax Exempt Income 

Several revenues are tax-exempt, for 

example: in regards to financing, interests 

paid over: (i) securities issued by the State 

and the profits derived from its sale: (ii) 

deposits in saving accounts, time deposits 

or of any other nature that are maintained 

at Panamanian banking institutions, 

whether local or foreign deposits; (iii) loans, 

acceptances and other funding instruments 

to obtain financial resources to banks or 

financial institutions abroad, through the 

Panamanian banking institutions, even 

though the product of such resources is 

used by the borrower bank in the making of 

productive assets. 

For individuals, we must point out the sums 

that beneficiaries receive from retirement 

fund, pensions and other benefits are also 

tax-exempt. 

Movable Assets and Services 

Transfer Tax (value added tax) 

This tax (known as ITBMS in Spanish) is 

levied on the sale of movable assets and 

the rendering of services at a 7% rate, 

as long as the taxable events take place 

within the country. The law provides for 

a variety of products (food, medicine, 

school supplies) and some services that 

are exempt from this tax, such as the 

payments, including the interest rates, paid 

on banking and financial services, except 

for the fees charged for the services. 

Double Taxation Agreements 

Panama has endorsed the OECD 

recommendations to avoid international 

tax evasion and has subscribed 16 treaties 

to avoid double taxation with the following 

countries: Singapore, United Kingdom, 

Qatar, Portugal, Mexico, Luxembourg, 

Italy, Israel, Ireland, Netherlands, France, 

Spain, United Arab Emirates, Republic of 

Korea (south Korea), Czech Republic and 

Barbados. 

Panama also has 9 agreements signed 

for the exchange of tax information with 

Canada, Denmark, United States, Finland, 

Greenland, Island, Faroe Islands, Norway 

and Switzerland. 


Our domestic legislation has been modified 

to allow the application of the agreements, 

contemplating concepts such as the 

free market principle, related parties, 

comparison analysis, study and report of 

transfer pricing, permanent establishment 

and tax residency, among others. 

Administrative Tax Court 

This court was established under Law 

No.8 of 2010 as an autonomous agency, 

specialized and independent. It has 

competence to settle appeals against 

the decisions of the Tax Administration, 

representing a guaranty for the taxpayers. 

The World Bank has reviewed its creation as 

an important institutional advance. 

Special Regimes 

The Panamanian legislation includes 

special regimes created to promote foreign 

investment, to facilitate the flux of free 

trade and to promote the economic growth 

of the region. 

- Multinational Headquarters 

Regime (Law 41 of 2007/Law 45 of 

2012). 

These are entities domiciled in Panama 

constituted to provide services to other 

entities located abroad, particularly to its 

headquarters, subsidiaries, affiliates and 

associated corporations. 

They enjoy income tax exemption in respect 

of profits obtained on the services provided 

to any person domiciled abroad that does 

not generate taxable income in Panama. 

There is also an exemption on dividend and 

complementary tax. 

The services provided by these entities 

are ITBMS exempt, as long as these are 

provided to persons that do not produce 

taxable income in Panama. 

The wages and other type of labor 

remuneration that the workers with 

immigration permit for permanent staff in 

Multinational Headquarters receive from 

abroad will be considered foreign source 

income. This permit is granted for a period 

of 5 years renewable and with the right to 

opt out for a definitive residence. 

Multinational Headquarter entities can 

carry out the following activities: 

• Conduct and/or administer 

geographic operations in an specific 

or global location (strategy planning, 

business development, staff 

management and training, operation 

control and/logistic); 

• logistics and/or component storage 

or product parts for manufacturing; 

• technical assistance to corporations 

of the corporate group and to clients 

for their products or services; 

• finance management, including 

treasury and accounting from the 

corporate group; and 

• advise, coordination and follow up for 

the market and publicity of goods or 

services produced by the corporate 

group, among others. 

– The Panama Pacific Special 

Economic Area 

The corporations located in this area may 

carry out any kind of activities that are not 

forbidden by Law. Since the moment of its 

incorporation corporations shall enjoy the 

benefits of Law 54 of 1998 on legal stability 

of investments, which provides that any 

amendments to the taxation regime will not 

be applicable for a 10 year term. 

It is a tax-free area for the corporations 

located here, except some exceptions 

69

Tax Law 

established by Law. 

For foreign personal hiring, there are 

several immigration alternatives that 

facilitates the permanency in Panama. 

Under this regime, the income tax 

exemption to foreign staff is not granted, 

regardless of the place of remuneration. 

– Colon Free Zone (Decree Law No. 

8 of 1948) 

Among the operations that can be 

developed in this tax free area, we 

have introduction of goods and assets 

abroad; general handling (transformation, 

assembling, packaging and repackaging) 

any other goods stored in the zone; selling 

abroad goods stored or handled in the 

zone (import taxes will only be paid when 

the goods are sold within the national fiscal 

territory); and making transfers within the 

corporations located in the Zone. 

the exemption of the income tax if the 

wages come directly from the headquarters 

located abroad. 

Conclusions 

Panama´s tax system has been 

consolidated under the principle of 

territoriality, although in the present times 

it has been overshadowed by the foreign 

income taxation, without compromising 

the advantages that represent investing in 

Panama due to its geographical location 

and the connectivity that offers to the 

Americas. 

Beyond the criteria that we are a capital 

importer country, with a territorial 

taxation system we have adhered to the 

subscription of treaties to avoid double 

international taxation and the exchange 

of tax information, cooperating with the 

policies aimed to prevent the tax evasion. 

In respect of foreign workers, there are also 

several immigration options. The special 

temporary worker permit would involve 

Elias Solis Gonzalez 

Associate at Patton, Moreno & Asvat 

T: +507 306 9600 

Email: esolis@pmalawyers.com 

Elías obtained a Degree in Law and Political Science and Master Studies in Criminal Law at the University 

of Panama and a Postgraduate Degree in Public Law and a Master’s Degree in Commercial Law from 

Universidad Latinoamericana de Ciencias y Tecnologías – ULACIT and a Postgraduate Degree in Taxation 

Law from Universidad de las Américas. Elías experience in the public sector includes the office of Deputy 

Magistrate - Administrative Tax Court (2011 - 2015) and Secretary General - Administrative Tax Court (2011 - 

May 2015). Previously, in the private sector, Mr. Solis had a legal practice in tax advice and tax litigation. He 

is also National Deputy Secretary of the Panamanian Red Cross. 


New tax exemptions for companies 

owned by employee ownership trusts 

By Jennifer Martin 

A strong economy requires, amongst other things, the use of a diverse 

range of business models. Once an under-used business model, the 

employee trust model of ownership has received a boost in recent years 

with support from the UK Government, including the introduction of 

new tax exemptions. 

The growth of employee ownership 

Employee benefit trusts or “EBTs” have 

commonly been used in the UK to act as a 

warehouse for shares in a company operating 

a share or share option plan and, in the case 

of private companies, for creating an internal 

market enabling employees to buy and sell 

shares in their employer company. 

EBTs were also used in tax avoidance 

structures during the 1990s and early 2000s 

– it is because of these structures that the 

UK tax authority, HM Revenue & Customs, 

can view employee trust arrangements with 

some suspicion. But another use is now 

proving popular, with support from the UK 

Government. This is where a business is 

owned collectively for the benefit of all those 

working in it through an employee ownership 

trust. In this article, “employee ownership” 

means: 

“a significant and meaningful stake in a business 

for all its employees. If this is achieved then 

a company has employee ownership: it has 

employee owners” (The Nuttall Review of 

Employee Ownership, Business of Innovation 

and Skills, 2012). 

For decades, direct share ownership by 

employees has been promoted in the UK 

through a variety of tax-advantaged share 

and share option plans. Employee trust 

ownership is also a tried and tested method 

71

Tax Law 

of running and sustaining a successful 

business. John Lewis Partnership, one of the 

UK’s biggest retailers, is a great example. 

of the disposal and for the remainder of the 

tax year (from 6 April to 5 April the following 

year) in which the disposal falls; 

It is wholly owned by an employee trust 

and all of its 93,800 permanent staff are 

beneficiaries of the trust. Notwithstanding 

such success stories there has been a distinct 

lack of awareness of the employee trust 

ownership model until recently. 

Hard work and perseverance by interested 

stakeholders has succeeded in raising 

awareness of employee trust ownership. 

In particular, in 2014, the UK Government 

confirmed its commitment to support 

employee ownership trusts in a tangible way 

with the introduction of new tax exemptions. 

Capital gains tax exemption 

As in many other jurisdictions, any capital 

gains made in respect of the sale of shares in 

a company by individuals are subject to tax 

(“CGT“). In the UK, the rate of CGT can be up 

to 28% depending on the facts. 

All-employee benefit requirement: the EOT 

must not permit: 

• any property in the trust (at any time) 

to be applied otherwise than for the 

benefit of all employees of C and any 

group companies (subject to some 

limited exceptions) on the same terms; 

• the trustees of the EOT to apply any 

trust property: 

• by creating a trust; or 

• by transferring property to the 

trustees of any settlement other 

than, broadly, another EOT; 

• the trustees to make loans to any 

beneficiaries; or 

• permit the terms of the EOT to be 

amended in such a way as to permit 

any of (a) to (c) above, 

and this requirement must be met at the 

time of the disposal and for the remainder of 

the tax year in which the disposal falls; and 

The UK Finance Act 2014 introduced a 

complete exemption from CGT arising in 

connection with the sale of shares to a new 

type of trust, an “employee ownership trust” 

or “EOT”. An EOT is essentially a particular 

type of EBT which has less discretion as 

to, for example, how trust property can be 

applied in favour of the beneficiaries. 

There are a number of conditions that need 

to be satisfied in order for the exemption 

from CGT to apply. The exemption does not 

apply to disposals of shares by a company. 

The other main conditions are as follows: 

Trading company: the company whose 

shares are being disposed of (“C“) must be 

trading or the parent company of a trading 

group (i.e. the exemption does not apply to 

the sale of shares in investment companies). 

This requirement must be met at the time 

Controlling interest requirement: as a 

result of the disposal (or an earlier disposal 

in the same tax year), the EOT gained a 

controlling interest in C. “Control” for this 

purpose means (broadly) the EOT owns more 

than 50% of the ordinary shares of C, has the 

majority in voting rights in C, has the right to 

more than 50% of profits of C available for 

distribution and is entitled to more than 50% 

of C’s assets available for distribution on a 

winding up. 

Income tax exemption 

Bonus payments made in the UK from 

employers to their employees are generally 

subject to income tax (at rates of up to 45%) 

and national insurance (social security) 

contributions. 

The second tax exemption introduced 

by the Finance Act 2014 is an exemption 


from income tax (but not national insurance 

contributions) on qualifying bonus payments 

of up to £3,600 per employee per tax year. 

This business model provides a tax benefit to 

the business and its employees. As with the 

CGT exemption, certain conditions must be 

met in order for the income tax exemption to 

apply. 

The main conditions for making a qualifying 

bonus payment by employer (“E“) are as 

follows: 

1. Discretionary bonus: it must not consist 

of regular salary or wages; 

2. Participation requirement: all 

individuals employed by E or another 

group company when a payment is made 

must be eligible to participate in the 

scheme pursuant to which the payment 

is made; 

3. Equality requirement: every employee 

must participate in the scheme on the 

same terms; 

4. Trading: E must be trading; 

5. Controlling interest requirement: an 

EOT must “control” E (see above); and 

6. All employee benefit requirement: 

such EOT must meet the all-employee 

benefit requirement described above. 

The conditions in 5. and 6. above are together 

known as the “indirect employee-ownership 

requirement” which must be met throughout 

the period of 12 months prior to a qualifying 

bonus payment being made or, if less, the 

period of time since conditions 5. and 6. were 

first met in respect of E. 

The future of employee ownership in 

the UK and around the world 

Whilst the two new tax exemptions are 

welcome and go some way to putting 

employee trust ownership on a par with the 

tax advantages for direct employee share 

ownership, tax, of itself, should not drive 

business structuring. 

Employee ownership is a tried and tested 

business model in the UK. Businesses such 

as the John Lewis Partnership are proof of 

this. This is what should attract attention to 

this ownership model. Of course, the new tax 

exemptions certainly serve to raise the profile 

of this under-used business model. 

Although these new tax exemptions are only 

relevant to UK tax payers, there is scope 

for promoting the employee trust model of 

ownership in other jurisdictions. One of the 

benefits of employee trust ownership is its 

flexibility. It can work at every stage of the 

business life cycle, not just as a business 

succession solution, and across companies of 

all sizes and in all sectors. 

Jennifer Martin 

Senior Associate at Tax and Structuring group at Fieldfisher 

T: +44 (0) 20 7861 4730 

Email: jennifer.martin@fieldfisher.com 

Jennifer advises companies and business owners on the full range of corporate tax and since 

qualifying as a solicitor, she has developed expertise in advising clients and intermediaries on 

business transformations and tax structuring, both in the public and private sectors often with an 

employee ownership element. 

73

Tax Law 

Refunds of Excess VAT Accumulated 

During Mineral Exploration 

by Assel Ilyassova 

Refunds of value added tax (VAT) incurred 

in connection with the export of goods 1 

has lately become a pressing issue. Despite 

the fact that tax legislation clearly sets out 

the procedure for refunding excess VAT, 

in reality taxpayers encounter a number 

of obstacles. This article focuses on excess 

VAT accumulated during exploration prior 

to the export of minerals. 

The Rationale for Applying VAT to 

Exported Goods 

Two opposing principles underpin indirect 

taxation 2 of cross-border trade: country of 

origin and country of destination. The vast 

majority of countries, including Kazakhstan, 

1 Refund of excess VAT to be offset against 

the amount of assessed VAT resulting from 

the acquisition of goods, works and services 

used for export turnovers will hereafter be 

referred to as “excess VAT”; 

2 VAT is an indirect tax; 

the CIS countries, and the European 

Union, charge VAT on the basis of country 

of destination. This system has wellrecognised 

benefits in terms of customs 

control and customs valuation. 

According to the country of destination 

method, exporting goods and the capital 

expenditure incurred during production 

of these goods are not subject to VAT in 

the country of origin. These goods are only 

subject to VAT in the country into which 

they are imported and where they are used. 

When trade occurs between two 

countries, it gives rise to a potential 

double taxation scenario. The country of 

destination method is intended to avoid 

this. Furthermore, it places domestic 

producers on a level playing field with 

foreign producers, thus ensuring the 

competitiveness of exporting goods in the 


international market. 

The Country of Destination 

Principle in the Tax Code 3 

The country of destination principle is 

formalised in Articles 242 and 272 of the 

Tax Code and implemented in the following 

way. 

as tax privileges or exemptions from 

the government to taxpayers. In fact, it 

is a means of enshrining the ‘country of 

destination’ principle for applying VAT. The 

tax authorities, in essence, are returning tax 

previously paid by the exporter. 

Article 272 of the Tax Code: 

During production of exported goods 

Materials, equipment, work and services 

used in producing exported goods, 

including construction of facilities for 

production of exported goods, once they 

are purchased by the exporter, become 

subject to VAT at the current rate (12%). 

In other word, when materials, equipment, 

work and services are acquired, the 

exporter has to pay suppliers the price 

together with VAT, according to tax invoices. 

VAT is then offset and accumulated by the 

exporter prior to export. These obligations 

are contained in Articles 229, 231, 268 and 

256 of the Tax Code. 

For the export of produced goods 

Export sales are subject to VAT at the rate 

of “0”%, i.e. export goods are not subject 

to VAT, as stated in Article 242 of the Tax 

Code. This gives rise to excess VAT that can 

be offset against the assessed VAT. 

The application of Article 272 is disputes 

between the tax authorities and taxpayers. 

A detailed analysis of this Article is provided 

below. 

Paragraph 2 of Article 272 states: 

“Excess value-added tax specified in the first 

part of subparagraph 1) of paragraph 1 of this 

Article, relating to goods, work and services 

purchased prior to January1, 2009, except for 

excess related to the purchase of goods, work 

and services that are or will be used for the 

purposes of turnovers taxable at a zero 

rate, shall not be refunded ….” 

This rule gives taxpayers the right to claim 

a refund of excess VAT related to turnover 

from export goods, including excess 

amounts incurred before 1 January 2009. 

The phrase “… will be used …” indicates 

that the exporter has the right to claim a 

VAT refund paid by the exporter during 

production of goods for export from 

Kazakhstan. 

Paragraph 2 of Article 272 states that the 

exporter has the right, at the start of the 

export process, to claim a VAT refund from 

the tax authorities of the amount paid 

during preparation for production and the 

actual production of the exported goods. 

Thus, it is a mistake to regard the zero 

rate VAT on exports and the VAT refund 

3 The Code of the Republic of Kazakhstan “On taxes and 

other obligatory payments to the budget” of 10 December 

2008; 

For example, during mineral exploration the 

VAT paid by a subsoil user at the moment 

of purchasing materials, equipment, goods, 

work and services, can be refunded when 

the export of mineral resources begins. 

Thus, according to Paragraph 2, the 

exporter may exercise his/her right to 

a refund of excess VAT if the following 

conditions are met: 

• once the sale of export goods has 

75

Tax Law 

occurred i.e. once the process has 

begun, the exporter has the right 

to submit a declaration to the tax 

authorities claiming a refund of excess 

VAT accumulated during production of 

the exported goods; 

• if the excess VAT for refund is related 

to export turnovers – in other 

words, goods, materials, equipment, 

work and services used to produce 

exported goods and for which the 

exporter paid VAT (thereby giving rise 

to the excess VAT payment). 

Paragraph 3 of Article 272 states: 

“With regard to turnovers taxable at a zero 

rate, excess amounts of value-added tax to be 

offset against the assessed tax as stated in a 

declaration as a progressive total at the end 

of the reporting tax period shall be subject to 

refund, provided the following conditions are 

simultaneously met: 

the entire amount of the excess VAT is 

refundable. If, on the date when the refund 

claim is made, the exporter does not meet 

the criteria in paragraph 3 of Article 272, 

then only part of the excess VAT will be 

refunded. In this case, the amount of excess 

VAT is determined according to Paragraph 4 

of Article 272. 

Paragraph 4 of Article 272: 

“The Government of Kazakhstan shall 

establish criteria for classifying the sale of 

goods, work, and services taxed at a zero 

rate as permanent sales as specified in 

sub-paragraph 1) of paragraph 3 of this 

Article, and the procedure for calculating 

excess value-added tax to be refunded in the 

following circumstances: 

1. in relation to turnovers taxable at a 

zero rate, in the case of non-observance 

of provisions established by paragraph 

3 of this Article; 

1. a payer of value-added tax permanently 

carries out sales of goods, work, services 

taxable at a zero rate; 

2. in relation to VAT specified in the second 

part of subparagraph 1) of paragraph 1 

of this Article”. 

2. if turnover from sales taxable at a zero 

rate, for a tax period in which turnovers 

taxable at a zero rate were received and 

in relation to which a claim for refund 

of excess value-added tax is made, 

was not less than 70 per cent of total 

taxable sales turnover”. 

The provisions of Article 272 cited above 

set out the extent to which excess VAT is 

refundable to the exporter, namely whether 

it may be refunded in its entirety or only in 

part. The amount of excess VAT for refund 

depends on whether export of goods is a 

consistent activity for the exporter. If the 

exporter constantly exports goods and 

the export turnover share exceeds 70% of 

the exporter’s total sales turnover, then 

Paragraph 4 of Article 272 is a reference 

rule that applies when the exporter 

does not meet the criteria specified in 

Paragraph 3 on the date a VAT declaration 

is submitted. 

If the exporter does not meet at least one 

of the conditions, the amount (share) of 

the refundable excess VAT is determined 

according to the “Rules for Determining 

Refundable Excess Value Added Tax, and 

Criteria for Classifying the Sale of Goods, 

Work, and Services Subject to Zero Rate 

VAT as Permanent Sales’’, approved by the 

Government of Kazakhstan, No.373 of 20 

March 2009. 

Thus, if we apply Article 272 to a situation 


when a subsoil user has begun production 

and export of mineral resources from 

Kazakhstan, this Article allows the subsoil 

user to claim a refund of excess VAT 

accumulated during exploration, that 

is, before mineral export sales. Goods, 

materials, work, and services, as capital 

costs incurred during exploration, are used 

for field development in preparation for 

production and export. 

Once the subsoil user starts exporting 

minerals, he is entitled to claim a refund 

of VAT incurred during exploration (in 

preparation for producing exports). Hence, 

in confirming the refundable excess VAT, 

it does not matter whether the excess VAT 

was amassed before or after the mineral 

exports began. 

An important condition, as noted above, 

is that the excess VAT claimed for refund 

relates to export turnovers. In other words, 

goods, materials, equipment, work, and 

services in connection with which VAT was 

paid by the subsoil user (leading to excess 

VAT) should be used for field development 

and extraction of raw minerals for export. 

The Tax Authorities’ Perspective 

The tax authorities believe that only 

excess VAT accumulated once goods have 

been exported is subject to refund. In 

other words, the tax authorities deny the 

exporter’s right to a refund of VAT paid 

during the production of goods (during 

exploration) that were subsequently 

exported. 

Thus the tax authorities, referring to 

Paragraph 3 of Article 272, mistakenly 

believe that only this rule establishes 

the exporter’s right to a refund of excess 

VAT, not taking into account the other 

paragraphs in Article 272 that classify VAT 

paid during production as refundable, 

We believe this view is misguided since it 

fails to take into account Article 272. 

It should be noted that this reflects recent 

practice. Under the previous Tax Code, VAT 

refunds were made for VAT accumulated 

during exploration. Thus Article 251 of the 

previous Tax Code 4 and Article 272 of the 

current Tax Code, which both contain the 

exporter’s right to VAT refunds, do not 

significantly differ in their content. 

We therefore believe VAT refund problems 

relate more to enforcement practices than 

to the legislation itself. 

Opinion of the Advisory Council 

The Advisory Council on Taxation works 

under the Government of Kazakhstan and 

its primary goal is to resolve ambiguities 

and inaccuracies in Kazakhstan tax law. 

During 2013 the Advisory Council issued 

two decisions regarding the interpretation 

of Article 272 of the Tax Code, which, in our 

opinion, are contradictory. 

According to the decision of 31 January 

2013, the Advisory Council confirmed 

the taxpayer’s right to refund excess VAT 

accumulated prior to zero turnovers. This 

decision was addressed to companies 

engaged in international shipping. 

Let us recall that under the Tax Code, 

international shipping, as well as the export 

of goods, is subject to zero rate VAT. The 

procedure for refunding the excess VAT 

for shipping companies and exporters is 

single, i.e. the shipping companies refund 

the excess VAT from the budget also under 

a procedure prescribed in Article 272 of the 

Tax code. 

Later on 17 October 2013 the Advisory 

Council issued another decision on the 

4 Code of the Republic of Kazakhstan “On taxes and other 

obligatory payments to the budget” of 12 June 2001. 

77

Tax Law 

refund of excess VAT, where they explained 

that the procedure for refunding excess 

VAT accumulated in connection with field 

development prior to the export of goods, 

that is, prior to the zero turnovers, is not 

regulated in the tax law. 

The Advisory Council confirmed that 

companies engaged in international 

shipping have the right to a refund of the 

excess VAT accumulated prior to the zero 

rate turnovers; however, they did not 

confirm this right in respect of subsoil users 

exporting minerals. 

The conditions and procedure for exercising 

the right to the refund of the excess VAT are 

regulated by Article 272 of the Tax Code, 

which stipulates the same conditions for 

all taxpayers, regardless of the nature of 

business. 

Thus it seems the provisions of Article 

272 of the Tax Code are unequally applied 

to entities, which contradicts principles 

enshrined in the Kazakhstan tax law and 

the Constitution. 

The Courts’ Stance 

The Supreme Court of Kazakhstan supports 

the tax authorities’ position. Reasons on 

which the judgements are based do not 

differ per se from the explanations of the 

tax authorities, i.e. the courts believe that 

only excess VAT accumulated once goods 

have been exported is subject to refund. 

To summarize, the practice of the state 

bodies is not only illegal, but also results in 

double taxation of Kazakh domestic goods. 

Double taxation, in turn, leads to goods 

becoming uncompetitive on the world 

market. 

The obstacles to VAT refunds created by the 

tax authorities have an ultimately negative 

impact on Kazakhstan’s investment 

image. We firmly believe that one of the 

most important conditions to create an 

attractive economic climate in Kazakhstan 

is predictability and certainty in the field of 

taxation. 

Assel Ilyassova 

Partner at GRATA Law Firm 

T: +7 (727) 2445-777 

Email: tax@gratanet.com 

In 2003, Assel graduated from the Kazakh Humanitarian and Law Institute (Almaty, Kazakhstan) 

with a Bachelor’s degree. In 2009, she received a Master’s Degree in Law from City University 

(London, UK). 

In September 2009, Assel underwent training with the Tax Department of Eversheds International 

Law Firm (London, UK). 


Recent Development of Advance 

Pricing Arrangement in Taiwan 

By George Chou 

Since the implementation of the transfer pricing guidelines in 2004, the tax authorities 

have entered into approximately ten Advance Pricing Arrangements (APA). The total 

number of APAs is low in the last ten years in comparison with that of other countries. 

To promote APAs, Taiwan’s Ministry of Finance (MOF) amended the transfer pricing 

guidelines on 6 March 2015 to reduce the threshold of APA application and include 

the provision of pre-filing meeting. This article analyzes the criteria of application, 

documentation requirements, pre-filing meeting, exemption of transfer pricing audits as 

well as the pros and cons of APA. 

Criteria of APA Application 

Prior to the amendment of transfer pricing 

guidelines on 6 March 2015, the criteria of 

APA application is as follow: 

• The total amount of the transactions, 

being applied for APA, is not less than 

NT$1 billion or the annual amount 

of such transactions is not less than 

NT$500 million; 

• No significant tax evasions were 

committed in the past three years; 

• Have prepared the documents required 

under Article 24 of the transfer pricing 

guidelines and completed the transfer 

pricing reports; and 

• Other criteria prescribed by the MOF. 

In the amendment, the threshold of APA 

application is reduced as follows: 

The total amount of the transactions, being 

applied for APA, is not less than NT$500 

million or the annual amount of such 

79

Transfer Pricing 

transactions is not less than NT$200 million; 

Documentation Requirements 

To apply for an APA, the following 

documents and reports shall be provided: 

• A comprehensive business overview, 

including history, main business 

activities, and an analysis of economic, 

legal and other factors that affect 

transfer pricing. 

• Global organizational structure of the 

group. 

• Relevant information of the related 

parties involved in the transactions, 

including an analysis report covering 

the following six aspects: operation, 

legal, tax, finance, accounting, and 

economy, as well as the income tax 

returns and financial statements for 

the three years prior to the application. 

• Relevant information concerning the 

transaction applying for an APA: 

• Name of the related parties involved in 

the transaction and their relationship 

with the Applicant; 

• Type, flow, date, object, amount, 

price, and contractual terms of the 

transaction as well as the use of the 

property or services transferred. The 

use shall include the descriptions 

regarding whether the property is 

transferred for sale or use and its 

benefits; and 

• The time period covered by the related 

transaction. 

• The Transfer Pricing reports shall, 

in addition to the documentation 

required under Article 22 of the 

transfer pricing guidelines, specify the 

following information: 

• Assumptions affecting the pricing; 

• In case of adopting a transfer pricing 

method not provided under the 

transfer pricing guidelines, a special 

analysis along with supporting 

evidentiary documents explaining the 

reasons why such method is more 

suitable than the other methods as 

provided and why it can achieve an 

arm’s length result. 

• Important financial accounting policies 

that have a direct impact on the pricing 

methods. 

• The material differences in financial 

accounting and tax laws between the 

countries involved in the transaction 

and Taiwan provided that such 

differences would have an impact on 

the adoption of arm’s length m 

• The pricing information of the same or 

similar transactions conducted by the 

applicant and other related parties. 

• The annual forecast of the operation 

results and business plans within the 

effective period of the APA. 

• Upon filing the application, the 

explanations or conclusions on issues 

related to the adoption of the transfer 

pricing method that have occurred or 

are currently under discussion with 

local or foreign competent authorities 

or APA that have been approved. 

• Whether there are issues related to 

potential double taxation and whether 

bilateral or multilateral APAs of tax 

treaty countries are involved. 

• Other information as requested by the 

tax authorities. 

The applicant or its agent shall attach a 

table of contents and index when filing the 

documents and reports in accordance with 

the preceding paragraph. If the information 

to be produced is in a foreign language, a 

Chinese translation shall also be attached, 

unless otherwise approved by the tax 

authorities to provide an English version. 

Pre-Filing Meeting 

Prior to the filing of an APA, an enterprise 

is entitled to apply for a pre-filing meeting 

with the tax authority three months 

before the fiscal year end by providing the 

following information for determination of 

APA application: 


• Period to be covered by the 

arrangement 

• Global organizational structure of the 

group 

• Main business activities of the 

enterprise 

• Related parties involved, the controlled 

transactions, and the descriptions of 

functions and risks 

• Reason for the application 

• Other relevant information 

Exemption of Transfer Pricing 

Audits 

In accordance with Tax Letter Ruling No. 

9404540920, under an APA, a tax return 

is not subject to a transfer pricing audit 

except when: 

• The enterprise fails to provide the 

tax authority with the annual report 

regarding the implementation of the 

APA. 

• The enterprise fails to keep the 

relevant documents in accordance with 

transfer pricing guidelines. 

• The enterprise fails to follow the 

provisions of the APA. 

• The enterprise conceals material facts, 

provides false information or conducts 

wrongful acts. 

Pros and Cons of APA 

The pros and cons of APA are as follow: 

Pros: 

• No need to prepare transfer 

pricing reports but the annual APA 

implementation reports within the 

valid period (three to five years). Costs 

for tax compliance can therefore be 

reduced significantly. 

• Avoid tremendous time cost on 

transfer pricing disputes. 

• Mitigate or avoid the risk of double 

taxation and ensure maximization of 

corporate profits. 

• Enhance certainty on taxpayers’ future 

tax liabilities within the valid period of 

APA. 

• Build up a decent relationship with 

the tax authority and enhance the 

corporate image. 

Cons: 

• Considerable time costs for first time 

application. 

• More detailed and specific information 

about industry and taxpayer will be 

requested during the APA review 

process. 

Implication 

APA is the best tool for the risk 

management of transfer pricing for 

multinational companies (“MNCs”). An arm’s 

length result agreed in advance can not 

only enhance the certainty of tax liability, 

but mitigate the risk of TP audit and avoid 

the time cost when a dispute arises. 

MNCs are suggested to apply for the APA 

where applicable and suitable. In addition, 

MNCs are recommended to discuss 

significant TP issues as well as expectations 

with the tax authorities in the pre-filing 

meetings to ensure that the APA application 

can be completed with efficiency and 

effectiveness. 

EY | Assurance | Tax | Transactions | 

Advisory 

About EY 

EY is a global leader in assurance, tax, 

transaction and advisory services. The 

insights and quality services we deliver help 

build trust and confidence in the capital 

markets and in economies the world over. 

We develop outstanding leaders who team 

to deliver on our promises to all of our 

stakeholders. In so doing, we play a critical 

role in building a better working world 

for our people, for our clients and for our 

communities. 

81

Transfer Pricing 

EY refers to the global organization, and 

may refer to one or more, of the member 

firms of Ernst & Young Global Limited, each 

of which is a separate legal entity. 

Ernst & Young Global Limited, a UK 

company limited by guarantee, does 

not provide services to clients. For more 

information about our organization, please 

visit ey.com. 

© 2015 EYGM Limited. 

document has been printed on paper with 

a high recycled content. 

This material has been prepared for 

general informational purposes only 

and is not intended to be relied upon as 

accounting, tax, or other professional 

advice. Please refer to your advisors for 

specific advice. 

ey.com 

All Rights Reserved. 

APAC no. 14001975 

ED MMYY 

In line with EY’s commitment to minimize 

its impact on the environment, this 

George Chou 

Partner at Ernst & Young 

T: +886 2 2757 8888 ext 2735 

Email: george.chou@tw.ey.com 

George Chou is a member of the transfer pricing practice of the Ernst & Young global member 

firm in Taiwan. He joined Ernst & Young in April 1994. He has extensive experience in both 

preparing transfer pricing documentation and assisting with transfer pricing audit defence cases. 

He is also experienced in tax compliance, tax advisory and transaction tax, as well as customs and 

international trade. 


Jurisdiction of Swiss Courts in 

International Estates 

By Catherine Grun Meyer 

Daniel R. Antognini 

A. Introduction 

• In today’s globalized world, estates 

increasingly encompass assets located 

in different jurisdictions. This gives 

rise to complex legal questions as e.g. 

which authorities have jurisdiction over 

assets and which law is applicable to the 

respective assets. 

Due to Switzerland’s position as a 

leading international financial center 

Swiss lawyers and courts are often 

confronted with cases regarding assets 

belonging to international estates. 

• Hence, the authors will give hereinafter 

an overview on the jurisdiction of Swiss 

courts and authorities in international 

estate matters. They also highlight some 

important conflicts of jurisdiction with 

foreign jurisdictions respectively the 

mutual competences in relation to prime 

jurisdictions. 

B. International Jurisdiction 

of Swiss Courts and 

authorities 

I. Legal Basis 

• The international jurisdiction of Swiss 

courts and authorities over estates 

linked to foreign countries is governed 

by the Federal Law on International 

Private Law (FLIPL). This statute basically 

applies if the Swiss decedent was 

residing abroad at the time of his/her 

death or if he/she was a foreign national 

and lastly resided in Switzerland. 

• However, treaties generally precede 

the FLIPL. Hence, if a treaty containing 

jurisdiction rules exists between 

Switzerland and the foreign state of 

residence or country of origin of the 

decedent , these rules apply. Such 

treaties exist inter alia with the United 

States of America and Italy. 

• The Convention on Jurisdiction and 

the Recognition and Enforcement of 

83

Wills Trusts & Estates 

Judgments in Civil and Commercial 

Matters (the “Lugano Convention”) 

is by way of contrast not applicable 

since the Convention shall not apply to 

wills and succession pursuant to the 

Convention’s art. 1 para. 2 (a). 

• Since Switzerland is not a member of 

the European Union, the Regulation 

(EU) No. 650/2012 on jurisdiction, 

applicable law, recognition and 

enforcement of decisions and 

acceptance and enforcement of 

authentic instruments in matters of 

succession and on the creation of a 

European Certificate of Succession 

is also not applied by Swiss courts 

and authorities. Nevertheless, this 

regulation will have a remarkable 

impact on the handling of international 

estates in Switzerland following its full 

entry into force since the application of 

these rules by EU member states may 

lead to conflicts of jurisdiction with 

Switzerland. 

II. Principle of Residence 

• Pursuant to the general rule of 

art. 86 FLIPL, Swiss authorities are 

competent to handle the whole estate 

irrespectively of whether the estate 

assets are located in Switzerland or 

abroad if the decedent had his/her last 

residence in Switzerland. This even 

applies for foreign decedents having 

resided in Switzerland. However, 

if a foreign state claims exclusive 

jurisdiction over realties located in 

its territory, Swiss courts are not 

competent for these realties. 

• The decedent’s country of residence 

is defined as the state where the 

decedent resided with the intent of 

continual stay. 

• Hence, if a Swiss or foreign national 

dies with last residence in Switzerland, 

Swiss courts and authorities are 

basically competent for all estate 

assets even if no estate assets are 

located in Switzerland. This principle 

often creates conflicts of jurisdiction 

with countries assuming jurisdiction 

over estates of their citizens or for 

moveable estate assets located in their 

territory. 

III. Jurisdiction of Place of 

Origin 

• In the event that a Swiss national 

dies with last residence in a foreign 

country (and the Swiss authorities are 

therefore not competent pursuant 

to art. 86 FLIPL), Swiss courts and 

authorities may be competent based 

on the place of origin jurisdiction 

according to art. 87 FLIPL. 

• 1 of this article provides for jurisdiction 

of the Swiss courts and authorities of 

the decedent’s Swiss place of origin 

insofar as no foreign authorities 

handle the decedent’s estate assets. 

So, this is a subsidiary jurisdiction 

coming into play if foreign countries 

only assume jurisdiction over assets 

located in their territory. 

• Further, para. 2 of art. 87 FLIPL 

stipulates the decedent’s option to 

choose jurisdiction of his Swiss place 

of origin by way of dispositions of 

will. The decedent may opt for this 

Swiss jurisdiction regarding his assets 

located in Switzerland or his whole 

estate. In the latter case an exclusive 

jurisdiction of a foreign country for 

realties is however reserved. 

• Consequently, art. 87 FLIPL may lead to 

conflicts of jurisdiction with countries 

assuming jurisdiction based on a 

Swiss national’s last residence in their 

territory. 


IV. Forum Rei Sitae 

• Swiss courts and authorities are 

generally not competent to handle 

estate assets of foreign nationals with 

last residence abroad. Nevertheless, 

as an exception, they have jurisdiction 

over assets located in Switzerland 

if no foreign authority assumes 

jurisdiction over these assets. This 

rule shall prevent that these assets 

remain unsettled in cases where the 

other involved countries’ jurisdiction 

is limited to assets located in their 

territories. 

• The Swiss forum rei sitae is further 

competent to issue any protective 

measures with regard to estate assets 

located in Switzerland of a decedent 

with last residence abroad. 

C. Conflicts of jurisdiction 

/ Mutual Competences 

in relation to prime 

jurisdictions 

I. Germany 

• The Federal Republic of Germany 

assumes jurisdiction for the whole 

estate of German nationals, regardless 

whether they lastly resided in Germany 

or abroad. So, if a German decedent 

dies with residence in Switzerland, 

Germany as well as Switzerland 

are competent. Since only realties 

are excluded from Switzerland’s 

jurisdiction, there are conflicting 

competences for all other assets 

wherever located. This is in particular 

problematic since German authorities 

apply German inheritance laws 

whereas the Swiss authorities basically 

implement Swiss laws and decisions of 

German courts are not recognized and 

enforced by Swiss authorities under 

these circumstances. 

• However, upon the EU Regulation No. 

650/2012 entirely entering into force 

(the Regulation is applicable to estates 

of decedents dying on or after 17 

August 2015), Germany’s jurisdiction 

over estates is defined pursuant to the 

criterion of the last habitual residence 

of the decedent. Since it is not clarified 

whether the term “habitual residence” 

is identical to the “residence” according 

to Swiss laws, there might still result 

conflicting competences. Furthermore, 

the Regulation stipulates subsidiary 

competences based on the location 

of estate assets and the decedent’s 

nationality which can lead to conflicts 

of jurisdiction with Swiss courts and 

authorities. 

II. United Kingdom 

• All estate assets being located in the 

United Kingdom (UK) are part of an 

UK estate, regardless whether the 

decedent’s last residence was in UK 

or abroad. If the decedent had last 

residence in Switzerland, but moveable 

assets in UK, a conflict of jurisdiction 

between UK and Switzerland results 

since Switzerland assumes jurisdiction 

for moveable assets wherever they 

are located. Consequently, under 

these circumstances UK as well as 

Switzerland have jurisdiction for 

moveable assets in UK. Again, UK 

decisions with regard to these assets 

are basically not recognized and 

enforced in Switzerland unless the 

decedent was a British citizen (and not 

a Swiss dual citizen) and has chosen 

UK laws to be applied to his/her estate. 

III. United States 

• As mentioned above, there is a 

treaty in place between Switzerland 

and the United States of America 

regulating the mutual competences 

of Switzerland and USA. Swiss courts 

generally interpret this treaty as 

follows: Inheritance disputes regarding 

85

Wills Trusts & Estates 

moveable assets are to be handled 

by the courts of the decedent’s last 

residence whereas disputes with 

respect to realties are submitted to 

the jurisdiction of the realties’ location. 

Furthermore, the competent court 

shall apply the laws of its jurisdiction 

(lex fori). 

• Hence, if, for example, the decedent 

had his/her last residence in the 

US, any of his/her Swiss realties are 

basically to be handled by Swiss 

courts and authorities applying 

Swiss inheritance laws. In contrast, 

moveable assets located in Switzerland 

have to be settled by US courts resp. 

executors. 

D. Conclusion 

• The administration and handling of 

estates involving assets in several 

jurisdictions often require advice by 

local counsels. This is specifically true 

if the estate resp. the decedent has 

any relevant connection to Switzerland 

which may trigger jurisdiction of Swiss 

courts and authorities. 

Ideally, the decedent tackles such 

potential jurisdiction issues in the 

course of his/her estate planning 

since respective dispositions by will 

can prevent some of the conflicts 

of jurisdiction complicating the 

administration of the future estate. 

Catherine Grun Meyer 

Partner at Niederer Kraft & Frey AG 

T: +41 58 800 8000 

Email: catherine.grun@nkf.ch 

2 Catherine Grun Meyer studied at the Law School of the University of Zurich (licentiata iuris) and at the 

University of Miami, School of Law (LL.M.). She was admitted to the bar in 2003 and joined Niederer Kraft 

& Frey in the same year. Since January 1, 2015 she is a partner and the head of the private clients’ team 

of Niederer Kraft & Frey. She mainly focuses on inheritance, estate and family law (including marital and 

marital property law), foundation law as well as employment, corporate and contract law. Her work also 

includes dispute resolution in these areas. 

Daniel R. Antognini 

Associate at Niederer Kraft & Frey AG 

T: +41 58 800 8000 

Email: daniel.antognini@nkf.ch 

4 Daniel R. Antognini studied at the university of St. Gallen (HSG), reached a Master of Arts in Law and 

Economics and was admitted to the bar in 2013. He is an associate at Niederer Kraft & Frey since 2013 and 

member of the firm’s private clients and litigation team. His practice is mainly focused on administration of 

estates and dispute resolution in complex international estates. 


Doing Business in Puerto Rico 

By Jose Julian Alvarez-Maldonado 

The Commonwealth of Puerto Rico (“PR”) is a self-governing territory of the United 

States of America (“US”) with approximately 3,750,000 inhabitants. Located between 

the Atlantic Ocean and the Caribbean Sea, PR governs its internal affairs in a manner 

similar to that of the other 50 states of the US. The US has jurisdiction over foreign 

relations and commerce, customs, immigration, nationality and citizenship, postal 

service, currency and military matters, among others. Generally, US federal trade and 

economic treaties, laws and regulations apply in PR. The US is PR’s main trading 

partner. The official languages of PR are Spanish and English. 

Business Entities 

Domestic Corporations. The PR General 

Corporations Act is modeled after the 

Delaware General Corporations Law. Any 

natural or juridical person, acting singly 

or jointly with others, can incorporate or 

organize a corporation by filing a certificate 

of incorporation at the PR State Department. 

Generally, this certificate grants the 

corporation legal existence as soon as it is 

filed with the PR Secretary of State. 

87


Foreign Corporations. Foreign corporations 

(including US corporations) desiring to 

operate in PR must request a certificate of 

authorization to do business in PR by filing 

an application at the PR State Department. 

The application to conduct business in PR 

must be accompanied by a certificate of 

corporate existence (or any other similar 

document) issued by the Secretary of State 

or other official having custody of the 

corporate register in the jurisdiction where 

the foreign corporation was incorporated. 

If such certificate of corporate existence is 

in a foreign language, a translation must be 

attached, together with a sworn certificate 

of the translator. 

Limited Liability Companies. Limited liability 

companies or LLCs are fast becoming 

the preferred method of doing business 

in PR. LLCs offer their owners the same 

limited liability protection granted by law to 

corporations and the flexibility to manage 

their internal affairs as a partnership, a 

corporation or a combination of both 

in accordance with their Operating 

Agreement. LLCs are organized by filing 

a certificate of formation at the PR State 

Department. 

Foreign Limited Liability Companies. 

Foreign limited liability companies desiring 

to operate in PR must request a certificate 

of authorization to do business by filing an 

application at the PR State Department. 

The application to conduct business in PR 

must be accompanied by a certificate of 

existence (or any other similar document) 

issued by the Secretary of State or other 

official having custody of the company 

register in the jurisdiction where the foreign 

corporation was incorporated. 

Other Entities. Both the PR Civil Code 

and the PR Commercial Code allow for 

the creation and/or authorization to do 

business of other types of business entities 

such as civil and commercial partnerships 

and limited partnerships. A commercial 

partnership must be registered in the 

Mercantile Registry of the Registry of 

Property where its property is located. In 

order to have access to the PR Registry of 

Property, the partnership agreement must 

be constituted in Public Deed. 

Taxes 

For tax purposes, PR is a separate tax 

jurisdiction from the US. 

Income Taxes. PR’s Internal Revenue Code 

of 2011, as amended, is modeled generally 

after the US Internal Revenue Code. All 

corporations, whether domestic or foreign 

which are engaged in trade or business in 

PR are taxed on their net income. 

Domestic corporations are taxed on their 

net income from all sources and foreign 

corporations are taxed on the income that 

is effectively connected with the conduct 

of a trade or business in PR. The maximum 

tax rate is 39%. Foreign corporations not 

engaged in trade or business in PR are 

subject to a flat withholding income tax rate 

of 29% on certain items of gross income 

received from sources within PR. 

Municipal License Taxes. The Municipal 

License Tax Act imposes a license tax on the 

volume of business (gross income) on every 

person engaged in any business, including 

the sale of goods, the performance of 

services and any financial business, in any 

municipality in PR. The municipal license 

tax rate applicable to non-financial business 

businesses ranges from .27% to .5%. For 

financial businesses, the rate is usually 

1.5%. Each municipality establishes its own 

rates. 


Personal Property Taxes. Unless specifically 

exempted, every natural or juridical 

person engaged in a trade or business in 

PR is subject to the imposition of personal 

property taxes ranging from 4.33% to 

6.58%, of the net book value of the taxable 

property. Taxable property includes cash on 

hand, inventories, materials and supplies, 

furniture and fixtures, and machinery and 

equipment used in a trade or business. 

Real Property Taxes. Real property tax rates 

vary for each municipality and generally are 

2% higher than the personal property tax 

rate. For tax purposes, real property means 

the land, the subsoil, the structures, objects, 

machinery, or implements attached to the 

building or fixed on the ground in a manner 

showing permanence. 

Sales and Use Taxes. Every merchant 

engaged in the sale of taxable items, or 

which provides a service not specifically 

exempted, has the obligation to collect a 

sales and use tax (“SUT”) as a withholding 

agent. The SUT rate on the sales and use 

of goods is generally 11.5%. Although 

originally exempted, services provided to 

businesses generally will be taxed at a rate 

of 4% commencing on October 1, 2015 and 

10.5% commencing on April 1, 2016. There 

is a possibility that the SUT will be replaced 

by a VAT in 2016. 

Tax Incentives. PR is focused in 

promoting foreign investment primarily 

on manufacture, biotechnology, 

communications, information technology, 

tourism and export services. To achieve 

this goal, PR offers tax incentives and 

exemptions for qualifying companies and 

individuals. Some of the tax incentive 

programs available in PR are: 

1. Economic Incentives for the 

Development of PR Act, as amended 

(“Act 73”). Act 73 provides a fixed 

income tax rate of 4% with a 

withholding tax on royalty payments of 

12%. There is an optional fixed income 

rate of 8% with a withholding tax on 

royalty payments of 2%. There is a fixed 

income tax rate of 1%, or of 0% for 

pioneer products (as such term is define 

in Act 73). 

Distributions of earnings or profits and 

liquidations are tax free. The taxable 

gain realized on sales of stock and/ 

or of substantially all of the assets 

of the exempt business are subject 

to an income tax rate of 4%. Act 

73 also provides a 90% exemption 

from property taxes and a 60% tax 

exemption from municipal license 

taxes. Act 73 provides tax credits for 

purchases of products manufactured 

in PR, job creation, investments 

in research and development and 

technology transfers, among others. 

Some credits are transferrable. 

2. The PR Export Services Act, as amended 

(“Act 20”). Act 20 provides a 4% fixed 

income tax rate on the net income 

generated from the operation of an 

eligible export service activity which 

may be reduced to 3% if more than 90% 

of the income generated by the entity 

is generated from qualified export 

services activities and the services are 

considered strategic services. 

Accumulated earnings and profits 

derived from the export service activity 

are 100% exempted from income tax 

upon distribution. Act 20 also provides a 

90% exemption from real and personal 

property taxes if the qualified eligible 

business is engaged in management 

headquarters services, call centers, and 

shared services center. The businesses 

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engaged in any of these three services 

will enjoy a 100% exemption from all 

property taxes during the first five (5) 

years. The Act also provides a 60% 

exemption from municipal license 

taxes. These benefits would be provided 

for a 20 year period, and may be 

extended for 10 additional years. 

3. Act to Promote the Transfer of 

Individual Investors, as amended (“Act 

22”). Act 22 provides a 100% income tax 

exemption on interest income, dividend 

income, and short and long term capital 

gain, derived from any source, which is 

generated by an individual investor that 

becomes a resident of PR or transfers 

his residency to PR. 

4. The income must be generated 

between the date in which the foreign 

individual is considered a resident in PR 

(i.e. 183 days test) and before January 

1, 2036. In general, a special tax rate of 

5% applies to capital gains accrued prior 

to the individual becoming a resident of 

PR which are recognized within 10 years 

after the residency in PR is established. 

5. The Tourism Incentives Act of 1993. 

The Tourism Incentives Act provides 

eligible tourism activities with partial 

exemptions from income, property, and 

municipal license taxes for a period of 

up to ten years. Qualifying investments 

in tourism activities may receive tax 

credits. 

Labor Legislation 

Both federal and local laws apply to 

employers in PR. The Fair Labor Standards 

Act (FLSA) applies to employers in 

PR engaged in interstate commerce. 

The federal minimum wage applies 

automatically in PR to employees who 

work in companies covered by the FLSA. 

Companies not covered by the FLSA must 

pay a minimum wage equivalent to 70% of 

the prevailing minimum wage. 

In PR, a regular work day consists of 8 hours 

of work and a regular work week consists 

of 40 hours. Employers covered by the FSLA 

must pay overtime at a rate of not less than 

1 ½ times their regular rates of pay, after 8 

hour of work per day and after 40 hours of 

work in a workweek. 

The meal period must be no less than 1 

hour, unless a shorter period is agreed to 

by the employer and the employee. The 

meal period may be reduced for certain 

types of employees. Work performed 

during the meal period, or any part thereof, 

must be compensated at twice the regular 

hourly rate. 

An employer is also required to pay a 

Christmas Bonus to each employee who 

has worked 700 hours or more between 

October 1 of the previous year and 

September 30 of the current year. 

In PR, employees are entitled to 

compensation and medical treatment for 

work-related accidents or illnesses. The 

employer is not liable to the employee for 

damages arising out of an occupational 

accident in those cases where the employer 

is fully insured through the State Insurance 

Fund. There is also a short term disability 

insurance to cover non-occupational 

disabilities. 

This plan covers the risks of sickness, total 

and permanent physical disability, or death. 

Both, the employers and employees, are 

required to make payments to this plan. PR 

and US unemployment acts provide for a 

coordinated US/PR Plan designed to provide 

economic security for employees during 


temporary periods of unemployment. 

There are several statutes, both local and 

federal, that prohibit discrimination in 

hiring, promotions, discipline or otherwise 

treating differently in employment persons 

on account of age, race, color, national 

origin, religious or political beliefs or sex, 

among others. 

There is also legislation protecting 

qualified individuals who are disabled 

veterans, veterans of the Vietnam era, 

or individuals with disabilities. Sexual 

harassment is forbidden in the workplace. 

The law provides for strict liability for the 

employer for the actions of its agents and 

supervisors. 

Employees employed for an indefinite 

period and discharged from employment 

without just cause, as defined in PR Act 80, 

are entitled to a severance payment based 

on years of service and the highest salary 

earned in the last 3 years of employment. 

Other US laws such as COBRA, WARN, 

OSHA, Title VII, ADEA, ADA and IRCA apply 

to PR. 

Intellectual (Industrial) 

Property 

US federal protection, laws and regulations 

regarding Trademarks, Patents and 

Copyrights apply to PR. The PR Trademarks 

Act provides ample protection for the 

rights of the owners of locally registered 

trademarks, such as granting the prevailing 

registrant the right to always recover the 

costs, fees and expenses of an infringement 

lawsuit. 

It also allows the issuance of an ex-parte 

temporary restraining order to cease 

and desist of the use of the mark and the 

seizure of the articles on which the mark 

was affixed. 

Jose Julian Alvarez-Maldonado 

Shareholder at Fiddler, Gonzalez & Rodriguez, PSC. 

T: +1 (787) 759 3183 

Email: jjalvare@fgrlaw.com 

José Julián Álvarez-Maldonado is a Shareholder at Fiddler, González & Rodríguez, P.S.C. A graduate 

from Marquette University, at Milwaukee, Wisconsin, he earned both his JD and LLM degrees from 

Tulane University at New Orleans, Louisiana. His practice concentrates in the areas of merger and 

acquisitions, securities, tax and general corporate matters. Mr. Alvarez participated in the drafting 

of the 1995 and 2009 Puerto Rico General Corporations Law and serves as an Associate Professor 

at the Interamerican University of Puerto Rico School of Law. He recently collaborated in the text 

book on Puerto Rico Corporation Law, Analysis and Commentaries (2015). 

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