On February 18, 2021, following a five-year preparation period, the Saeima – the parliament of the Republic of Latvia – adopted amendments to the country’s Advocacy Law, addressing, inter alia, the proper corporate form for law firms. Going forward, in Latvia, a law firm must either be a partnership (either general or limited) or a limited liability company. CEE Legal Matters spoke with several Latvian lawyers about the newly amended law.
A ‘Vague’ and ‘Outdated’ Law
The relevant portions of Latvia’s Advocacy Law, according to BDO Latvia Managing Partner Vita Liberte, stipulated that “sworn advocates may establish offices of sworn advocates who are registered in the Council of Sworn Advocates of Latvia” and were well over 17 years old. “Since 2004, Article 116(2) of the Advocacy Law remained unchanged,” says Liberte, noting that, in the absence of any elaboration or detail, civil law provisions had to be applied by analogy to resolve the problems that arose.
Liga Merwin, the Managing Partner of Ellex Klavins, highlights the challenges law firms faced under that original law. According to her, “technically, law firms, including the large ones, were formed not as legal entities, but as civil law partnerships.” Back then, she says, “each individual attorney was registered as a taxpayer, and annual accounts were not publicly accessible. In addition, the old model led to several unresolved issues, including how to liquidate a law firm and its consequences on employees and technical staff.”
In addition, Fort Legal Partner Sandis Bertaitis says, under the previous law, even though law firms were registered as taxpayers, they were not recognized as full legal entities. “However, in everyday life, law firms acted like such, e.g., they used to open and operate bank accounts, own registered property (such as vehicles), conclude a variety of agreements (for office supplies, etc.), and even conclude employment agreements.” As a result, he says, law firms were de facto legal entities. Still, Bertaitis explains, it was necessary “to unify and give legal shape to existing practices by explicitly defining the legal status of law firms.”
The Latvian Ministry of Justice started preparing to amend the Advocacy Law about five years ago, reports Janis Esenvalds, Partner at RER Lextal in Riga, with the country’s bar association and representatives from various government and judicial bodies also involved in the process. Law firms were consulted during the drafting of the amendments as well, he says, providing them with “the opportunity to express their views on the current situation as well as their vision for its improvement.”
Feedback from other countries, including Estonia, Lithuania, Poland, Germany, Switzerland, France, and the Czech Republic, was also taken into account, says Head of PwC Legal Janis Lagzdins. “It was concluded that in similar legal systems there is a clear regulation regarding the legal status of law firms, [allowing them to] be established as capital companies or other forms of legal persons.”
The declared purpose of the amendments’ authors, Liberte says, was simple: it was to prevent “contradictory interpretations of the law on the alignment of law offices with a legal person, as well as [to provide] recognition as a rights-holder.”
The amendments to the Advocacy Law were adopted by the Saeima on February 18, 2021, and entered into force on March 16, 2021. According to Bertaitis, “the amendments specify some qualification and education requirements for advocates, introduce conditions for compulsory professional insurance, and finally, stipulate the most essential changes – the legal status of law firms.” The amendments set a transitional period of six months, he says, during which existing law firms were required to register in the Commercial Register to continue their practice.
Clearing Transitional Hurdles
Lagzdins says that the “re-registration process was [treated] as a reorganization, as a result of which all rights and liabilities of the old law firm were automatically transferred to the new law firm.”
In general, Esenvalds explains, “given that the newly established law firm is the successor of the rights and obligations of the law firm established before the effective date of the amendments, the transfer of assets and liabilities to the law firm was not considered a disposal of assets and liabilities.” As a result, according to him, “this transfer of assets and liabilities to a new legal entity did not have any tax consequences.” In fact, he reports, adapting to the requirements was relatively easy, “as the transition period for re-registering the law firm was quite long, and the upcoming changes were announced in advance.”
For Merwin, one of the most challenging elements of the transition involved accounting. “It was a fairly complex exercise,” she says. “We had to register a new company, resolve issues related to the tax regime, decide how much money partners could take out as dividends, etc. We are still in the process of adapting to the new reality and the coming years will show how it develops.”
The re-registration process necessitated several (often slow) administrative and bureaucratic steps, such as the opening of a new bank account and acquiring a new status as a VAT payer, says Lagzdins. “Banks in Latvia did not fully understand the legal view of this process, and accordingly, the banks were not always forthcoming in allowing the use of old bank accounts for new law firms.”
“The banks, at least initially, treated re-registered law firms as new legal entities, and thus required them to open completely new bank accounts and fulfill other formalities,” agreed Bertaitis, adding that “the resulting changes to registration codes and other banking details caused practical problems in the invoicing process and other management situations.”
Another set of issues was related to tax administration, Lagzdins says – in particular, registering as a VAT payer. “Although our law firm was registered as VAT payer before, we had to prove all over again that the new entity could be considered a VAT payer and indeed would have active business activities, by submitting a lot of explanations, documents, and so on.”
The rules, it appears, were not always clear. Bertaitis reports that “there were no clear instructions and understanding of how the migration of accounting records should be done.” According to him, “law firms can only hope that the State Revenue Service will not view the unavoidable change of bank accounts and other formalities as a deviation from the accountancy rules.”
The changes in name and status generated additional requirements in some unexpected areas as well. According to Esenvalds, for instance, “all law firms in whose names vehicles were registered with the Road Traffic Safety Directorate were required to register changes of owner/holder with the directorate within five days after the change of status.”
And the amended law requires that names of firms be changed to reflect the new status as well. “According to the provisions of the Advocacy Law, a law firm’s name must include the term ‘zverinatu advokatu birojs’ (‘sworn attorney’s office’) or the ‘ZAB’ abbreviation,” Esenvalds explains. “Failure to comply with this requirement is one of the grounds for the council to refuse to consent to the establishment of a law firm.”
It appears that the re-registration requirement did not have a significant impact on clients, at least. “Clients pay no attention to the legal status of the firm,” says Merwin. “We only had to notify [them] about changes in information about the law firm (such as the name, registration number, and bank account details),” adds Lagzdins. Esenvalds agrees: “clients were only affected to the extent that all invoices had to be paid with different company details after the law firm was re-registered.” Thus, he says, “if the law firm did not register in the Commercial Register by September 16, 2021, and continued to issue invoices for legal services, the client could not recognize such invoices in their accounts, as this law firm is considered liquidated.”
All Things Considered
While overcoming bureaucratic hurdles might be a challenge, the long-term effects of the amendments are difficult to gauge. “For now, it is difficult to say how the amendments will affect other fundamental aspects of advocates’ daily obligations,” Liberte says, “and there are still a lot of technical issues with the ‘reorganization’ process.” Opinions remain divided, she explains: “some believe that it is a big step in providing more transparency on law firms’ financial data, while others believe that it could hinder the very essence of the advocate’s role in our judicial system, and that these amendments could suggest that advocates only provide services, like any other company, thereby weakening their role in protecting the fundamental freedoms of their clients.”
Merwin is more confident that the law will have a positive effect. “Definitely, the amendments reflect progress in the Latvian legal system,” and allow firms “to move towards a modern setup.” According to her, the procedures relating to banks and corporate partners will be simplified, and, ultimately, “the law enables more transparency and a clear structure for clients and corporate partners.”
Esenvalds agrees. “In the long run, the legal status of law firms, the tax regime, and the administrative process are expected to be regulated in a more transparent and comprehensible manner, which is a positive step.”
This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.