On 16 May this year, our real estate & construction sector group held a business breakfast, where Sorainen specialists spoke about sector highlights from diverse legal viewpoints. In this newsflash, we report on the most significant findings expressed during the event.

Raivo Raudzeps explained how sanction regulation applies to public procurement and PPP

Raivo indicated that since last summer, Latvia’s Law on International and National Sanctions has been supplemented by specific regulations. These determine that public procurement (including procurement for providers of public services, defence and security, and PPPs) requires a check on whether sanctions ‒ international, national or by an EU or NATO member state ‒ have been imposed that affect significant financial and capital market interests and contract performance concerning:

  • – a candidate or applicant who would have to obtain rights to enter into the contract;
  • – their officials and representatives and
  • – their subcontractors whose construction works or services amount to at least 10 per cent of the total contract value, or
  • – a person whose abilities the candidate or applicant relies on to confirm their qualification(s).

Raivo stressed that if such sanctions have been imposed and they delay performance of a contract, the candidate and the applicant must both be excluded from further participation in the procurement procedure, although a subcontractor and a person on whose abilities the candidate or applicant relies can be replaced. In turn, the contract should allow unilateral withdrawal from a contract that cannot be performed due to the application of sanctions.

Likewise, Raivo noted that new amendments to this law are being promoted to introduce significant changes. On 14 May 2019, the draft law was reviewed at a meeting of the Cabinet of Ministers. The Parliament is expected to amend the law by the summer break. Further changes could affect the range of persons to be checked. In addition, foreign funding or payments might be prohibited for parties who ‒ or whose officials, authorised representatives and beneficial owners ‒ face sanctions affecting performance of the contract. The contract will have to provide rights to unilaterally withdraw from a contract that cannot be performed due to sanctions applied.

Finally, Raivo summarised that companies need to carefully assess sanction risk of partners as well as subcontractors and persons on whose abilities companies rely. It is advisable for companies and contracting entities to include solutions in contracts for a situation where a cooperation partner is sanctioned during contract performance.

Dace Everte on tax novelties in the real estate and construction sector

Dace reported that during the last six months most of the tax issues in real estate and construction were related to correct application of value added tax (VAT) to construction of immovable property. She drew attention to the following highlights:

  • Reverse VAT payment for construction products

Dace confirmed that the Ministry of Finance is still corresponding with the European Commission to maintain the present VAT regulation whereunder a recipient of construction materials calculates VAT for construction materials purchased. The plan is to file another request to allow application of reverse VAT to the same construction products as before. However, the Ministry of Finance suggests that taxpayers should prepare for changes to the regulation starting from 1 January 2020, as presently there are no grounds to believe that the EC would satisfy Latvia’s request.

  • Application of reverse VAT if the project company issues invoices for construction of an object to the owner

Dace made the point that in this situation the project company has not been registered in the construction information system as a construction company, but itself receives construction services from the construction company and then re-invoices the construction costs of the object to the object owner. The SRS has agreed that the project company can issue invoices with reverse VAT unless the percentage of other services in the transaction is insignificant. Of course, this SRS confirmation is very individual and always depends on the actual circumstances of the transaction. Nevertheless, Dace stressed that the SRS explanation in the particular situation complies with the case law of the Court of Justice of the European Union – that is, in applying VAT equal transactions should be taxed equally irrespective of the legal status and licences of the operators.

Zane Akermane analyses the latest highlights involving penalties imposed on disposal of waste water that fails to comply with legal requirements

Zane emphasised that administrative liability is imposed for failure of this kind, and the person responsible may be required to compensate damage to the environment caused by waste water pollution, plus the costs of eliminating the damage, in the sum of up to ten times the amount of natural resources tax, as well as ‒ in certain situations ‒ facing criminal liability.

Likewise, Zane stressed that in relation to environmental pollution special attention should be paid to persons who have received a permit for A or B category pollution activities, who use hazardous chemical substances in their operations, or who are not connected to the centralised sewage system. Zane invited everyone who meets these criteria to pay special attention to waste water quality and in case of problems to take the required action to improve waste water quality.

Jorens Jaunozols outlined the most frequent forms of FIDIC contracts in practice, i.e., the White, Silver, Red and Yellow book

Jorens noted that ‒ contrary to practice ‒ the FIDIC White book should not be used for design works, while the White book is actually the only FIDIC contract where the liability clauses favour the contractor. In Latvia, the White book is best for construction supervision works but it requires amendments to balance the parties’ responsibilities.

Although many clients want to use the Silver book, in practice it is rarely applied. The reason is the high risk imposed on the contractor by the Silver book, thus increasing the price for the client as a consequence.

The Yellow and Red books ‒ which have been used most frequently in practice ‒ regulate issues of construction work and so-called “design & build” construction contracts; although both contracts are suitable for our market, they still require significant changes to decrease the possibility of later disputes, for example over the procedure for calculating variations in price, underground surveys and other issues.

Finally, Lelde Laviņa reviewed mandatory insurance in construction, indicating that the present regulation fails to achieve its aim of providing an efficient protection mechanism for third parties whose health or property is harmed due to mistakes made during construction.

The reason for this is simple ‒ regulatory enactments do not lay down mandatory terms for insurance policies. This means that inspections carried out by the construction board to verify the presence of the policies are a mere formality because institutions are not allowed to inspect the contents of policies, including exemptions.

For example, regulatory enactments do not require a policy not to exclude “gross negligence”; however, practice shows that this exception allows insurers to justify almost every refusal to pay the insurance indemnity, including mistakes by construction specialists.

Lelde thus concluded that present regulation turns mandatory construction insurance into stage props and real cover can be obtained only by buying a policy with much wider cover than the scope specified in regulatory enactments.