LegalLab: A Fair Justice System is Key to Business

14.08.2018 | 09:20 Home / News / Articles /
#LegalLab #Stepan Khzrtian #Narek Ashughatoyan
The interview of Banks.am with the Founding Partners of LegalLab, Stepan Khzrtian and Narek Ashughatoyan.

-Some time ago LegalLab founded a company in the United States. What were the main goals of having a US office?

Stepan Khzrtian: One of the main goals of LegalLab's founding mission is taking Armenian business global (we call this “from Armenia to the World”) and making Armenia more accessible to foreign business (we call this "From the World to Armenia"). We viewed establishing an office in California as the natural next step for accomplishing this mission.

From Armenia to the World: We acknowledged the need for a California office back in 2015 when we noticed certain obstacles for Armenia-based companies and particularly for high tech companies: several Armenia-based companies make globally competitive products, but it is often difficult for them to offer and sell these products to the foreign client, engage foreign investments for business expansion, and also benefit from the skills of experienced foreign professionals in the field of management and marketing for the company's development.

We sought to help fill these gaps by assisting Armenian companies in entering foreign markets – especially the United States – smoothly and establish contacts with key persons. It is one thing to offer legal consulting mainly from Armenia, and it is another thing to be physically present in both countries. This allows us to contribute to the geographical expansion of our customers from A to Z. The client feels more confident and gets legal services of consistent quality.

From the World to Armenia: The reverse process is also important: making Armenia more accessible and “comprehensible” for a foreign investor and entrepreneur. In this respect, since our founding, we have worked toward reforming Armenian legislation and presenting our laws and local practice to foreign businesses in their “native” language and style.  Again in 2015, we realized that we can make this process more effective and support the flow of investments to Armenia by being physically present at the investor’s and entrepreneur’s side, having private and open conversations on the advantages and disadvantages of the Armenian economy and its legal and tax scenes, and also seeking to dispel – and sometimes confirm – any myths about the country.

Our goal has been to deliver a real image of Armenia through comprehensive consulting. As a result, the investor and entrepreneur feel more confident and protected while investing or starting a business in Armenia.

- What are the first results of the U.S. company’s work, what is the scale of transactions that you have serviced?

Stepan Khzrtian: Just like our mission, the results of our work are also aligned along these two vectors: from Armenia to the World and from the World to Armenia.

I am happy to inform that, within one year, our California practice has helped a number of Armenian companies, particularly high tech companies, establish a presence in the United States, present their products to customers in accordance with local practice and laws, protect their intellectual property, and incentivize their employees through stock options.  We have also negotiated and serviced several-million-dollar investment deals that should substantially, directly and indirectly, flow into the Armenian economy.

I am also glad to inform that in this year our California practice has met with many Armenian and foreign investors and entrepreneurs, presenting the legal and tax scenes, work environments, and geographical advantages of Armenia. Based on this information, at least one Californian company has already established a subsidiary in Armenia, creating new jobs, another company has expanded its presence in Armenia, and three other major ventures are already in the pipeline. In case all these projects succeed, we anticipate investments amounting to several million dollars and creation of new jobs in Armenia in the coming years.

Of course, such activities are not a novelty for LegalLab, and we have been performing these services together with our foreign partners well before establishing our presence in the United States. Now, when we have a physical presence in both countries, this allows us to serve our founding mission on a whole other level.

Just to note in conclusion, alongside these dual-vector services, we continue to serve clients whose legal and business interests are focused solely on one country, on the Armenian or US market, without any international component.

-Are there legislative restrictions that hinder US investment nowadays? If so, what steps are needed to eliminate them, and what kind of role does LegalLab play?

Stepan Khzrtian - One of the biggest challenges is the absence of a modern double tax treaty between the US and Armenia. Such a treaty will eliminate the burden of double taxation, when a tax resident of one country receives income from the other country. For example, a person living in the United States who has shares in an Armenian corporation and receives dividends from that corporation ends up paying tax to both Armenia and the United States, and tax paid in Armenia is not credited against the US tax liability. Simultaneously, this dividend is taxed in the United States as ordinary income at a higher tax rate (highest tax bracket being 39.6%) instead of as qualified dividends at a tax rate that is nearly half less (highest tax bracket being 23.8%).

The issue is that according to the US Government, the double tax treaty of 1973 between the U.S. and U.S.S.R. is still valid, a position that the Armenian government does not share. Even if we assume that the treaty is valid, that treaty is long overdue since it neither properly regulates the taxation of dividends and other types of income that are common in a globalized world, nor does it include robust provisions on the exchange of information between tax authorities. I have penned an op-ed on this subject that is available here.  

For more than a decade, the Armenian National Committee of America has been working systemically and closely with the U.S. Congress and high-level officials and with government officials in Armenia to adopt a new double tax treaty. Last year, I had the privilege of involving LegalLab in this work, taking into account our expertise of US and Armenian laws and practice. Currently, the Treasurer of the United States has publicly committed to negotiating a new tax treaty with Armenia, and the Government of Armenia has expressed its readiness to negotiate a tax treaty based on the U.S. Model Income Tax Convention. The next step will be holding the meeting of the authorized representatives of these two governments and the launch of negotiations, to which end we are working closely with the Armenian National Committee of America within the framework of its strategy.

- The issues of ensuring a level playing field and fighting against economic patronage have come to the forefront after the transition of power in Armenia. Do you notice that nowadays businessmen are more willing to fight for their once violated rights in the legal field?

Narek Ashughatoyan - Changes in the environment after the transition of power are evident.  However, at the moment, expectations are still higher than the present changes. This is natural; time should pass before one can give a proper assessment. However, one of the positive changes is that people are ready and willing to fight for their rights. This is a very important message. I think that in a year, it will be possible to give more wholistic feedback on the state of judicial and legal reform.

- Today, there is much talk about the key role of the judiciary in economic development and attracting investments. There are also unexpected suggestions, such as transferring commercial disputes to a judicial tribunal which is governed by British legal principles. This experience has been used in Singapore, Hong Kong, and some Arab countries. Recently, such a court was set up in the capital of Kazakhstan, Astana, where independent British lawyers were engaged. Do you consider it possible to apply this practice in Armenia?

Narek Ashughatoyan - On all possible occasions, I have said that a fair justice system is key for the development of our country's economy. If our courts work more efficiently in terms of time management and implementing justice, the business environment will undergo tremendous positive changes. Finally, the court is that foundation of the state on which an entrepreneur or investor should rely when other mechanisms of business or investment protection fail.  In this regard, the most important priority is guaranteeing the independence of courts in Armenia.

In order to create specialized courts for commercial disputes, first of all we need to take into consideration the Constitution of our country which directly establishes the courts of the Republic of Armenia. The Mother Law also states that “specialized courts may be established in the cases provided by law.” As for arbitration, this is not new for our country as several local businesses agree to submit the resolution of their disputes through arbitration.  It is also important to know that Armenian businesses can apply foreign legal norms in their contracts, taking into account the peculiarities of Armenian legislation.

At one point I had a chance to study Dubai’s example, where English law is used in some courts. Such courts are of great importance especially in free economic zones, with jurisdiction over commercial disputes arising in such zones.

In Armenia, first of all, it is necessary to institutionalize the independence of the courts, to support the system with skilled professionals specialized in commercial and corporate matters, and to find possible solutions to alleviate the burdens of the courts. These steps will allow us to have such an environment in our country that should lead to significant growth in business investments without following Astana and other examples.

Stepan Khzrtian - I am not very excited with the concept of establishing a court governed by foreign law. The latter may gloriously fail if it does not take into consideration the peculiarities of our country, society and economy, and this is natural: after all, law and legal thinking stem from the specific environment of a country and it culture, and not independent of these.

Foreign experience can educate and inform our law and thought, but not replace them. I’m more inclined toward the concept of creating a specialized commercial court whose judges will have the proper knowledge and experience of trying commercial cases. The objective is to increase the professionalism of the courts so that, regardless of the law applied, the courts can provide investors and entrepreneurs with a “quality trial.”

Ara Tadevosyan talked to Stepan Khzrtian and Narek Ashughatoyan

The above should not be viewed as legal advice and the publication of this interview does not create a lawyer-client relationship between you and LegalLab. Since every situation can be unique, LegalLab encourages you to contact a competent lawyer on your matter.
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