Three weeks ago in the Austrian city of Salzburg, the first instance court proceedings were completed, in which one segment is very interesting to the Croatian public, as some of the until now unknown circumstances of the strategic merger between Europapress Holding, Croatia’s largest publishing company, and the German media giant WAZ were revealed. The case was initiated by Karl Heinz Fellhofer, one of the mediators in the talks on the strategic merger, after his partner refused to pay him his half of the provision. The case was open to the public in Austria, and Ninoslav Pavić appeared as a witness to explain, along with other protagonists in the EPH and WAZ merger, just how that process unfolded. Based on his testimony, as well as on a large amount of documents, the Salzburg court ruled on 21 June 2004 that Fellhofer was right and that his former partner was due to pay him half of the commission for mediating WAZ’s entry into the EPH ownership structure.

The Salzburg court ruling, which gave cheated Austrian mediator Fellhofer the right to half of the mediation commission, states clearly that the amount of the total transaction was 40 million DEM, with 32 million DEM paid to EPH and 8 million DEM to Pavić's private accountIn addition to winning this lawsuit against his former partner, Fellhofer directly brought Pavić into an uncomfortable position, as some of the documents presented in the case seriously suggest that in 1998, he evaded paying 8 million DEM in tax. However, Pavić should not be angry with Fellhofer for any possible troubles with the tax authority, but instead, he should be angry with Erich Schumann, one of the WAZ directors. The case came to court in Salzburg in the first place because of Schumann, who whilst purchasing a share of EPH, decided to financially take care of his then mistress, Hedwiga Wenzl. Schumann took advantage of his influence in WAZ, and as such he hired her company Real Finanz from Salzburg to mediate in the talks. She took on this task together with her associated Fellhofer, who did most of the mediation work in the WAZ-EPH merger. The company Real Finanz and the two of them were to have received a 1.5% commission of the total value of the price paid to EPH and Pavić. Pavić’s mediator in the deal, Matan Sentić, was to have received the same percentage. He received his 1.5% commission in Bosnia Herzegovina.

The commission rate was agreed to at a meeting held between WAZ director Schumann, his mistress and Fellhofer on a Sunday in the fall of 1997. Immediately after this meeting, the mediators concluded that this commission would be too small, as that meant only 0.75% for each of them for the job. For that reason, they agreed that they would try to get another 1.5% from the Croatian side, EPH. Not long after that meeting, Fellhofer began looking for contacts abroad, as at the meeting Schumann told his lover and him that WAZ wanted to invest money in foreign media. Fellhofer was given the task of finding an appropriate newspaper for WAZ to invest in.

He succeeded at one dinner, where Fellhofer and the director of a paper factory were introduced to Sentić and the Franciscan Ivan Tolj. Fellhofer later established a good business relationship with Sentić, and the fact that Tolj is Pavić’s cousin only helped. At that time, EPH had just begun with Jutarnji List, today the most profitable newspaper in the country. As the market was not stable in the beginning, Pavić feared for the stability of his entire company and he began looking for possible business partners. Thanks to that dinner, WAZ and Pavić made a strategic partnership. Fellhofer conducted most of the mediation meetings for WAZ, while Pavić and EPH were represented by Sentić. Considering that Pavić and Schumann conducted professional negotiations on behalf of their respective companies, Fellhofer and Schumann’s mistress did not succeed in receiving another 1.5% commission from Pavić, as he paid that commission to Sentić.

The strategic partnership of WAZ and EPH was realized in December 1998, while in January 1999, WAZ paid out the commission to its mediators. However, after the deal was completed, Schumann’s mistress Hedwiga Wenzl refused to pay Fellhofer his half, and he sued her. The court ruled in his favour and ordered her to pay him close to 200,000 euro. In order to prove his claims, Fellhofer provided documentation on the communications between WAZ and EPH before the deal was completed. Based on that documentation, the judge succeeded in reconstructing what Fellhofer’s role was in the deal, as well as the exact amount that WAZ paid for the share in EPH. That part of the documentation suggests that Pavić evaded paying taxes. The first document that proves this was a letter sent by Pavić to Schumann on 16 June 1998, when WAZ and EPH were in the midst of negotiations. In that letter, Pavić states, “Based on today’s conversation with Mr. Sentić, I hereby list the points that are acceptable to EPH:
1) It is confirmed that WAZ must pay 40 million DEM for entry into EPH, of which 30 million DEM must be paid to EPH and distributed according to the set plan, and 10 million DEM must be paid to the current owner of EPH in the manner he sets.
2) The current owner of EPH shall receive the position of CEO and have all rights concerning decision-making in the editorial policy in EPH.
3) WAZ agrees to pay 80 million DEM to EPH in the form of a loan, with a 12% annual interest rate, one year grace period, over 10 years, which EPH will return to WAZ. These resources will be used to finance new projects in Croatia and BiH.”

Pavić personally signed this document, and following this, both sides continued to negotiate and WAZ succeeded in obtaining better terms than those set by Pavić. That is best seen by the internal memo which Schumann wrote one day after Pavić’s letter, on 17 June 1998. This memo was sent to his associates Grotkamp, Fondermann, Nacke, Heyer and Holscher. This memo stated, “Mr. Pavić has fallen to his knees. Now he agrees to the following: payment in the total of 40 million DEM, with 32 million going to recapitalization, paid to the company. 8 million DEM is to go to him personally. With that the total amount that we have to pay, 1.75 million DEM less than what was set by the pre-contract.” These two letters prove that Pavić sought that WAZ pay one quarter of the total transaction into his personal account, and that WAZ did not object to this proposal. It was clear that this was an unusual request by Pavić. Takeovers are usually conducted by paying the complete sum into the company, as that is good for the company that receives fresh capital, and that income can be spent in various ways, and according to the size of the expenditures, the level of tax paid on the transaction can be reduced.

Pavić’s request that 25% of the total transaction be paid into his private account is unusual, as that money must also be reported to the tax authority as income and tax is paid. In Croatia, the tax level is 35%, which is a whopping 2.8 million DEM on 8 million DEM. Pavić would not have had to pay that much had that money gone directly into his company. At that time, however, that was not in Pavić’s interests, as he was not the only owner of EPH. With him were Miroslav Kutle, Ivić Pašalić and Vinko Grubišić, his secret partners from the Grupo gang, which took control over 90% of the media in Croatia in the late 1990s. Pavić would have had to split that money with his partners, and in this way, 8 million DEM was clear and free in his account. Upon revealing the Grupo affair, Nacional learned that WAZ paid 32 million DEM for EPH, and paid another 8 million DEM into Pavić’s private account. He told his partners from Grupo that he received only 4 million DEM aside from the investment, to which Miroslav Kutle personally told Ivo Pukanić in summer 2003, “Only by reading Nacional in jail did I learn that my secret partner had cheated me for 4 million DEM. Of course I lost it when I found it.”

Requests such as this one by Pavić – that part of the money paid for a strategic merger be paid into his private account as the company owner – in the normal business world suggest that the person is intending to evade paying taxes. WAZ also interpreted Pavić’s request in that way, which is seen in the internal memo dated 3 July 1997, which described the steps to be taken before WAZ entered into the EPH ownership structure. The fourth item of the document states, “Mr. Kostrenčić will compose a draft contract concerning the 8 million DEM to be paid to Mr. Pavić. The problems with the German and Austrian financial systems in this case were obviously familiar to him. He will take that into consideration: that this is a mediation commission, that it is evident that he is the ultimate recipient of that payment and that the payment was recorded in our books”. This internal WAZ memo was signed by Holscher and sent to his associates Fendermann, Hezer, Nacke, Ribbert and the attorneys Grotkamp and Schumann. It clearly shows that WAZ intended to avoid problems with the German and Austrian tax administrations if it were ever revealed that 8 million DEM were paid into Pavić’s private account. That is likely why they left this paper trail, indicating that they had warned Pavić of the problems with the financial systems abroad and that they would have to record the payment, showing that this money was paid directly to Pavić.

Of course, this does not mean that Pavić did not reconsider at the last minute and that the 40 million DEM was paid in full into the EPH accounts. However, last year’s statement by Kutle that his partner cheated him out of 4 million DEM suggests that Pavić did receive that 8 million DEM in his private account. That is also suggested by the minutes of the Zagreb meeting between WAZ and EPH on 10 July 1998, attended by Pavić, Kostrenčić and the public notary Šaškor, and Heyer, Holscher and their attorney Pačarević, as well as the interpreter Rogošić. They discussed the remaining activities for both sides in order for the negotiations to be finalized. Item f) states, “Mr. Pavić is to begin immediately preparing the reorganization of the company (d.d.) into a company with limited liability (d.o.o.) such that upon arrival of the lawyer, the reorganization into a d.o.o. can take place in September. Within the framework of that reorganization, the recapitalization in the amount of 32 million DEM will also take place.”

That item states the WAZ recapitalized EPH with 32 million DEM. The Salzburg court ruling, which gave cheated Austrian mediator Fellhofer the right to half of the mediation commission, states clearly that the amount of the total transaction was 40 million DEM. Based on that amount, the judge ruled Fellhofer be paid 0.75% as commission. All of the documents suggest that 6 years ago, Pavić received 8 million DEM in his private account. If he received that money an account in Austria or Germany, then he is required to pay tax in those countries. Croatia has a signed agreement on avoiding double taxation with both Austria and Germany, and as such, Pavić would then not be required to pay tax in Croatia. The documents that suggest that Pavić evaded paying tax are also in the possession of the Agency for Tax Evasion in the headquarters of the Tax Administration in Zagreb, and its officers are to launch a complete investigation to verify the claims within those documents.

Thanks to these documents, it will not be difficult to establish exactly what happened. In order to learn in which account Pavić received this money, they will ask their colleagues abroad to obtain the payment documents from WAZ which will show where and how Pavić was paid the 8 million DEM. Then they will look into whether Pavić reported 8 or more million DEM in income in 1998 to the Croatian tax administration. If the response is negative, they will ask the Austrian and German officials the same question. If the response is still negative, then it will be clear that Pavić evaded paying tax. This investigation will be conducted with the cooperation of the State Prosecutor, as Pavić will likely be prosecuted as a physical person for tax evasion, which is a criminal act according to Article 286 of the Criminal Code, and a jail term of 10 years is prescribed. The Statute of Limitations on this criminal act is 10 years. Which gives the tax investigators a full four years to thoroughly investigate whether Pavić evaded paying tax, even though the internal memos of EPH and WAZ will significantly help them out. Pavić and Kostrenčić, who drafted the contract on the payment of that 8 million DEM into Pavić’s private account, could also be of great assistance. They can simply provide the tax authorities with all the necessary information on that payment, as well as on the tax that Pavić may or may not have paid. The internal WAZ memos, showing that they clearly did not want anything to do with Pavić’s actions, and their paper trails stating that they warned him of the problems with the Austrian and German authorities show that he likely did not pay any tax on that transaction.