This chapter seeks to measure administrative costs related to selected procedures prescribed under the Commercial Law. It identifies and analyses possible simplification measures that may support the starting-up or re-organisation of business operations and translate into cost savings. The main focus of this chapter is put on reducing administrative burden generated from selected business registration procedures administered by the Latvian Enterprise Registry, i.e. registrations of an individual merchant and a limited liability company with decreased capital, and reorganisation of a limited liability company through merger by acquisition. The chapter presents evidence that may be considered to substantiate legal amendments and changes in procedural practice and make the relationship with businesses more efficient, as presented in Chapter 1.
Access to Justice for Business and Inclusive Growth in Latvia
Chapter 4. Measuring the administrative costs of starting a business in Latvia
Abstract
Identifying and managing the costs that regulations impose on businesses is at the core of many initiatives by OECD countries to improve regulatory quality, particularly when governments seek to make the domestic business environment more competitive and attractive for economic activity, ensuring a fair level playing field for all companies. As the previous chapter highlighted, Latvia is no exception to this trend and over the last few years efforts have been made to introduce simplification measures to help business operations. The diffusion of information and communication technology (ICT) and e‑government solutions contributed to greater clarity, transparency and efficiency of the relationship with state institutions, but challenges remain. Because it is the main legal instrument for doing business in Latvia, this chapter focuses on the Commercial Law.
In particular, this chapter seeks to measure the administrative costs related to selected procedures provided for by the Commercial Law and to identify possible simplification measures that may translate into cost savings for businesses. By doing so, evidence is presented that may be considered to substantiate legal amendments and make the relationship with businesses more efficient (for the methodology, see Annex 3.A).
In order to continue the pattern of reforms and with a view to meet the government target of placing Latvia among the leading countries in both the World Bank Doing Business Index and the World Economic Forum Global Competitiveness Index, the Latvian Ministry of Justice identified three formalities regulated by the Commercial Law for which there might be margin for improvement, and for designing possible simplification measures on the basis of a quantification of the related administrative costs (Box 4.1).
Box 4.1. Selected formalities in the OECD cost assessment
The OECD measurement covers three procedures performed by businesses when interacting with the Enterprise Registry of Latvia. They are:
the registration of an individual merchant (individuā lais komersants, IK)
the registration of a limited liability company with decreased equity capital of EUR 2 800 or below (sabiedrība ar ierobež otu atbildību, SIA)
the reorganisation of a limited liability company, through merger by acquisition.
All three procedures are managed by the Latvian Enterprise Registry, which is also responsible for implementing the legal amendments and the simplification measures affecting them.
Starting a business in Latvia is not confined to the sheer registration procedure that entrepreneurs have to follow at the Latvian Enterprise Registry. The main task of the Registry is to ensure the company has a valid legal name and legal address, while the rest of the authorisations needed to operate are managed by other authorities, such as the State Revenue Service and the various institutions responsible for licenses to operate. Besides intervening at the very outset of the procedure, nonetheless, the Enterprise Registry plays a pivotal role since it is the institution where all modifications to the statute and organisation of companies have to be notified by businesses.
Focus: Reducing administrative burden for business registration
Registration of an individual merchant
The definition and registration of an individual merchant are regulated in Part B, Division VIII of the Commercial Law of Latvia. According to Section 74 therein, “an individual merchant is a natural person who is registered as a merchant with the Enterprise Registry.”
The application to the Enterprise Registry to register as an individual merchant entails a series of administrative activities, of which some are out of the scope of the registration process at the Registry itself, but they are necessary to complete the registration. In particular, applicants have to provide the name they selected for their firm. Even if the Registry offers the possibility to check if that name is available and may be used (a procedure that can take up to three days if done by a state notary at the Registry), the applicants can do their own search on various websites – including the website of the Enterprise Registry where this information is available free of charge ‑ to make sure the name is available.
Applicants must then fill in some forms that the Enterprise Registry has tried to simplify (making them short and user-friendly). In some cases, the Registry has also published guidelines to facilitate this process, guiding the user on what type of information has to be inserted in the required fields.
The information to be included in the application dossier is rather minimal. It consists of the personal data (name, surname), the chosen name of the legal entity and a legal address. As to the latter, the applicant has to include a written consent by the owner of the property, if he or she does not personally own the physical place where the business will be registered.
Online registration is possible. Nonetheless, registrations of individual merchants continue to be a process mainly carried out in person. This holds also for the step of notarising signatures, which may take place at the Registry’s venue by scheduling an appointment with a state notary, if the applicant prefers to do so instead of recurring to a sworn notary. The comparatively limited use of e-signatures in Latvia has reduced the possibility of making the procedure completely online-only (see Chapter 2 for further information on access to the Enterprise Registry).
The visit to the Enterprise Registry is relatively short, and if all data and additional requirements are complete and correct, then the file is admitted. Before leaving, the future individual merchant has to make the necessary payments, unless payments were made beforehand, directly at a bank, in which case the applicant must show the corresponding receipts. The costs amount to EUR 30 for the firm registration and EUR 18.50 for the future publication of the registration in the Official Gazette.
The Enterprise Registry then performs a series of checks in order to verify the information provided by the user is correct. In particular, the issue of the legal address is relevant and is cross-checked with other registries (such as the Land Registry and cadastre) to ensure the address is valid and that there is no risk of irregularities. The checks can last from one to three days, when the Enterprise Registry informs the individual merchant either by email, post or in person. In the case of a refusal, the Enterprise Registry sends a priority letter or email to the legal address explaining the reasons for the negative response.
Table 4.1sums up the activities required to register an individual merchant, indicating the associated time and costs.
Table 4.1. Activities, time required and associated fees to register an individual merchant in the Enterprise Registry
Source: Author.
The administrative costs for an individual merchant to conduct this procedure amount to EUR 369 and it takes 4.6 days to complete the whole procedure to register an individual merchant. In 2016, 603 individual merchants were registered in the Enterprise Registry of Latvia, and the total administrative costs of those people to comply with the process amounted to EUR 222 508.65. The main administrative costs and administrative activities are shown in Figure 4.1.
Figure 4.1. Administrative activities and costs of the registration of an individual merchant
Source: Author.
In this procedure, the estimated waiting time related to the notification of the decision by the Enterprise Registry accounts for 52.65% of the total administrative cost, while the visit to the notary (17.55% of the total administrative cost) and the visit to the Enterprise Registry to hand in the application dossier and make the payments (6% of the total administrative costs), also increase the time that businesses have to invest when dealing with institutions and waiting for their reactions.
Registration of a limited liability company with decreased capital
Division IX on “Capital Companies” in Chapter 1 of the Commercial Law defines a limited liability company (LLC) and Chapter 2 describes its registration procedure in the Enterprise Registry.
Provisions pertaining to a so-called “LLC with decreased capital” are specified in Section 185(1) of the law, which spells out “Special Provisions in Relation the Amount of the Equity Capital”. The section establishes that upon compliance with certain conditions, a minimum equity capital of less than EUR 2 800 can be accepted for such a type of company. The conditions include:
The founders and the shareholders of the company are natural persons and there can only be up to five of them.
Each shareholder of the company is a shareholder of only one such LLC.
The board of directors of the company consists of one or several members, and they all are shareholders of the company.
Other conditions related to the equity capital of the company.
At present, LLCs with decreased capital are quite common in Latvia, to the point that many individual entrepreneurs prefer to register as a limited liability company with decreased capital instead of as an individual merchant.
The procedure to register an LLC with decreased capital is quite similar to the one pertaining to the individual merchant, the main difference being the larger number of documents that have to be presented. Also in this case, written consent from the owner has to be attached to the application file if the legal address, understood as the address where the management of the company (headquarters of the company) is located, is not owned by the company. The cadastre number of the immovable property, the given name, surname and personal identification number or name (firm name) and registration number of the owner shall be indicated in the consent.
In addition, a number of documents related to the company have to be presented, including: the application form, the decision to found an LLC, the statute of the company, the shareholder distribution, the board announcement of the legal address, and the consent of the real estate owner.
In some cases, these documents can be easily produced by the applicants – the Enterprise Registry does not mandate using any particular format, merely requiring that the correct information is properly submitted. Guidelines and examples are published on the website of the Enterprise Registry, which can help applicants prepare such documents, in case they do not have the professional support of a lawyer or accountant.
The following payments are related to this procedure: EUR 20 state tax for registration; EUR 14.23 for the publication in the Official Gazette; and EUR 9 for each notarised signature. If the procedure is done on line, a 10% discount on the price of the state tax applies. This requires the use of the e-signature by all shareholders of the company.
Once the application dossier is submitted to the Enterprise Registry, the latter proceeds to several checks. The task normally lasts up to three working days. If the applicant wants the check to be performed under a fast-track procedure, an additional payment of EUR 60 is charged by the Registry.
Table 4.2 lists the activities that the procedure entails, as well as the time and costs related to them.
Table 4.2. Activities, time required and associated fees to register a limited liability company with decreased capital in the Enterprise Registry
Source: Author.
The administrative costs associated with the registration of an LLC with decreased capital amount to the equivalent of EUR 478.49. It takes around 5.6 days for applicants to complete the whole process with the Enterprise Registry.
In 2016, a total of 10 316 companies of this type received a positive notification from the Enterprise Registry, meaning that the total administrative costs associated with this procedure were EUR 4 936 117.35, an equivalent of 0.019% of Latvia’s GDP. The main costs related to this procedure are presented in Figure 4.1, in relation to the various activities that have to be undertaken to complete the registration with the Enterprise Registry.
Figure 4.2. Administrative activities and costs of the registration of a limited liability company with decreased capital
Source: Author.
As it can be observed, the main source of cost (41% of the total administrative costs) is associated with the final stage of the process, when the applicant needs to wait for three days to receive the positive notification. Activities such as compiling the necessary information (24% of the total administrative cost) and scheduling an appointment with the state notary at the Registry (14% of the total administrative cost) also imply some waiting time.
In total, businesses spend around 57% of the whole process waiting for responses from third parties, being the Enterprise Registry or other experts required to provide the requested information.
Reorganisation of a limited liability company through merger by acquisition
Part C of the Commercial Law describes the different forms in which a commercial company can be reorganised, either by merging, division or by restructuring. Section 335 establishes the different forms of merging. The procedure that was mapped and measured by the OECD is an acquisition, which is defined as “a process in which a company (the acquired company) transfers all of its property to another company (the acquiring company).” The Enterprise Registry must be notified of the decision to merge companies.
The procedure consists of two stages. The first is a pre-notification stage, in which the company makes the announcement and presents a reorganisation draft to the Company Register. In the second stage, the announcement must be published in the Latvian Official Gazette about the reorganisation project of a company through the acquisition by another one.
In the first stage, the acquiring company announces the reorganisation. Neither the declaration of intent nor the accompanying reorganisation project draft must be made using standardised or binding templates. A state tax of EUR 18 is charged for each company involved, while the cost of publishing the declaration of intent in the Official Gazette amounts to a one-off fee of EUR 9.25.
The board can subsequently call a shareholder’s meeting, which however cannot take place sooner than one month after the publication in the Official Gazette. At the meeting, shareholders formally decide whether to reorganise. In the case of a positive deliberation, it must be published in the same Official Gazette. Three months after that second publication, both the acquiring and the acquired companies must officially report the decision to reorganise to the Enterprise Registry. The three-month period allows for shareholders or third parties that object to the reorganisation to express their concerns and contest the decision.
The documents that have to be submitted in this second stage of the process are the application to reorganise, the decision to reorganise, the agreement on reorganisation and the final financial review of the company that was acquired.
The cost of the reorganisation consists of a state tax of EUR 30 to be paid by each company involved and a fee of EUR 9.25 for the publication of the final reorganisation process in the Official Gazette.
The Enterprise Registry evaluates the procedure of acquisition and provides a response within three working days. The various activities required to complete the procedure are presented in Table 4.3.
Table 4.3. Activities, time required and associated fees to reorganise companies through merger by acquisition1
1. For the purpose of this measurement, it was assumed that the reorganisation is made internally (no payment to any law firm to help through the process), there is a normal amount of creditors (which does not impose any difficulty in making the financial statements of the merging companies and do the closure of accounts) and a lawyer and an accountant are at hand within the companies to follow up the process. It is also assumed that the procedure is conducted in person, not electronically with the use of e-signatures.
Source: Author.
Results without opportunity costs
The sheer administrative cost borne by businesses when they reorganise two companies through the acquisition of one by the other is EUR 1 726.76. Since 342 mergers of this type took place in 2016 in Latvia, the total administrative costs for businesses carrying out this procedure amounted to EUR 590 533.31 in that year. The total time required to complete the process is almost 24 days. In addition, there is also the waiting time of more than four months between some of the administrative activities that have to be conducted (Figure 4.3).
Figure 4.3. Administrative activities and costs of reorganising companies through merger by acquisition (without opportunity costs)
Source: Author.
The main sources of costs are associated with the preparation of the set of documents that has to be delivered to the Enterprise Registry: initial preparation of the draft reorganisation plan (14% of administrative costs), after a month, the preparation of the final agreement on reorganisation (25% of the administrative costs), which should inform creditors about the merger so they can prepare their claims, if any, and after another three months, the final preparation of all documents that have to be presented to the Enterprise Registry (46% of the administrative costs). According to businesses, documents do not change drastically from the initial intention to merge, as this decision is made at the beginning of the process, so the various steps are seen as repetitive by most businesses.
Results with opportunity costs
In this procedure, there are two instances where the companies are affected by significant “waiting time” – the initial one month related to the pre-notification stage and the subsequent three months, during which the companies cannot complete the merging and hence cannot operate as a new entity, until final positive notification from the Enterprise Registry. The assumption here is that the waiting time creates a significant delay in the set-up of a new company, which will not be able to operate as such until a positive decision is granted by the Enterprise Registry.
If the opportunity costs arising from the process were included in the measurement, the administrative cost borne by businesses when they reorganise two companies through acquisition of one by the other would amount to EUR 6 228.31, since it takes more than four months of waiting time to complete the procedure (considered as an opportunity cost). In 2016, 342 mergers of this type took place in Latvia, which brings the overall administrative costs for businesses carrying out this procedure to a total of EUR 2 130 080.63. The overall time to complete the process is 144 days. Figure 4.4 shows the costs and activities of the whole process.
Figure 4.4. Administrative activities and costs reorganising companies through merger by acquisition (including opportunity costs)
Source: Author.
In this process, 75.39% of the administrative cost is associated with the waiting time that businesses have to spend in order to meet deadlines and get answers from the Enterprise Registry. In this case, that waiting time was calculated as an opportunity cost, since the companies cannot merge until the whole procedure is completed, missing commercial and economic opportunities as a single company. Waiting for an initial month to prepare the reorganisation and then for additional three months to formally submit the reorganisation request to the Enterprise Registry amounts to EUR 4 695.83.
Results of quantification: Possible costs savings for businesses
The three selected procedures mapped and measured by the OECD are relatively straightforward and have already undergone substantial simplification over the years. This notwithstanding, a number of possible costs savings can be identified through the application of the Standard Cost Model (SCM), making these processes less burdensome for businesses. These areas of further improvement can be summarised as follows:
In terms of the actual registration and licensing to operate granted to both an individual merchant and an LLC with a decreased capital, the process is long and costly. What the OECD mapped and measured above only covers the registration procedure managed by the Enterprise Registry, which is but the initial check of the company’s name and legal address. Obtaining a positive notification from the Registry does not lead directly to an authorisation to the applicant to start trading. The latter must comply with further administrative steps, which might trigger quite significant delays, particularly in case VAT fiscal regimes need to be opened and specific licenses are required. The costs associated with this initial procedure amount to the equivalent of EUR 369 for an individual merchant and EUR 478.49 for an LLC with a decreased capital. Considering that further, additional requirements and procedures are foreseen before being authorised to actually start operating, these amounts may be substantial.
In light of this, the time required for the initial part of the registration procedure appears considerable – slightly more than four and five days (depending on the type of business), from the moment the business starts looking for information on how to apply to when it receives positive notification. Only waiting for three days for a final positive notification is equivalent to EUR 194.29, and the business cannot start operating. Reducing that amount of time might help decrease the administrative costs related to the registration. This would imply having shared databases among registries in order to make the checks performed by the Enterprise Registry quicker.
Several stakeholders interviewed by the OECD referred to the fact that information is still not very clear on the Enterprise Registry website. Enhancing communication and further facilitating the use of guidelines, templates and examples on the type of information that the Registry requires and checks can have a positive impact on the administrative cost of the procedures, since it would reduce the cases in which applicants feel the need to visit the Registry in person to get clarifications. The administrative costs to businesses could also be cut by reducing the time devoted to becoming familiarised with the procedure (estimated at three hours and equivalent to EUR 24.30) and by streamlining the type of information that has to be presented to the Enterprise Registry.
The lack of generalised use of e-signatures implies that most applicants visit the Enterprise Registry and they make an appointment with a state notary in order to have their signatures notarised. This means an associated cost to both registration activities, which account for around 25% of the total administrative cost of each procedure. Broader use of e-signatures and the online system could have a positive impact on reducing the cost of the procedure for businesses. For instance, the Enterprise Registry offers a discount of 10% on the state tax charged for the submission of documents to those applicants that use the online system. Combined with the elimination of the EUR 4 fee charged to the applicant for paying at the Registry, as well as with the elimination of the notarisation requirement thanks to the e-signature certification and of the need to visit the Registry in person, this would reduce the administrative cost for an individual merchant registering on line to EUR 278.47, compared to EUR 369 (or 24.64% less) in the case he/she decides to register at the Enterprise Registry. The administrative cost related to the online registration of an LLC with a decreased capital would be EUR 391.66, instead of EUR 478.49 (or 18.15% less) in the case of an in-person registration.
With regard to the merger by acquisition procedure, mandating two stages for the process appears to be cumbersome and it increases the administrative costs for businesses. The first pre-notification stage, in which the companies have to prepare a reorganisation draft and present it to the Enterprise Registry could be eliminated, since the companies have made an initial decision to merge and the publication of such intention occurs as a part of the subsequent stage anyway. That would reduce more than one month of waiting time and several payments related to state taxes and publications in the Official Gazette. If the opportunity costs are considered, the elimination of the pre-notification stage would generate savings in the order of EUR 1 581.78 (or 24.40% – i.e. cutting from EUR 6 228.31 to EUR 4 653.46) per business. Including flexibility on the three months for creditors’ claims would reduce even more the administrative cost of the procedure, since not all companies require such an amount of time for this activity.