Crux (#5 May 2018)

Legal Digest

The UJBL editorial team spent the last month monitoring recently adopted legislation and new initiatives. This month we asked to comment on the law of Ukraine On State Financial Guarantees for Medical Treatment of the Population; Resolution No.254 which established the rules on state support for agribusiness in 2018; Law of Ukraine On State Control over Compliance with Legislation on Food Products, Feeds, By-Products of Animal Origin, Health and Welfare of Animals. We bring together expert thoughts about proposed draft laws On Concession; On Introduction of Amendments to the Land Code of Ukraine and some other Legislative Acts on Countering Raiding; On Amendments to the Tax Code of Ukraine and some Legislative Acts Regarding Criteria for Identifying High Income Individuals.

On 30 January the Law of Ukraine On State Financial Guarantees for Medical Treatment of the Population came into force. How did this statutory instrument affect the financial situation and quality of services of public health facilities, as well as private medicine?

Olena Khytrova Partner, Head of medical and pharmacy law department, ILF

Healthcare reform in Ukraine is one of the most hotly debated reforms. Its authors aim to change the very principles of medical care and the work of medical institutions. The Law of Ukraine
On State Financial Guarantees for Medical Treatment of the Population came into force on 30 January. However, it will actually start working on 1 July.

The most important innovation will be the change of funding for the work of doctors. Medical institutions used to receive money for districts and people assigned to them, and each institution got a fixed amount. Now the principle of the money follows the patient has been introduced. That is, money will be paid to the doctor with whom a specific patient has signed a declaration. Part of this sum will go to the institution and administrative expenses, the rest will make up the doctors salary. It is expected to bring changes to the doctor-patient relationship as well as the medical staffs attitude toward their duties.

Also, within the framework of the reform, it is assumed that all medical institutions should be autonomous that is, change their status to municipal (or public) non-profit enterprise. This will open up opportunities for them to improve their financial situation (which, in turn, should improve the quality of services provided by them). Autonomous clinics will be able to:

independently manage their assets;

seek out funds from national and international investors and donors;

receive funds for the purchase of necessary equipment or equipment itself through participation in grant and international projects;

independently decide whether it is better to maintain their own laboratories or buy these services from a private laboratory or another clinic;

change the system of remuneration for medical workers, creating new incentives.

According to calculations made by the Ministry of Healthcare, if a clinic retains at least 60% of current patients, its funding will increase by 50%.

The reform is unique for Ukraine as private hospitals and independent doctors will also be able to participate.
If they sign a contract with an appropriate government institution, they will be paid for their services from the state budget on the same principle as public hospitals. This could become an additional funding source for them.

The Cabinet of Ministers issued Resolution No. 63 of 7 February 2018 approving the procedure for using the funds provided in the state budget for measures to develop domestic coal product production and further reform the state-owned sector of the coal industry. How do you assess this decision?

Evgen Dudnyk Head of State Aid practice, ADS Legal Group

The provision of new state aid to coal mining enterprises approved by the Government in early February 2018 may be found to be unlawful.

This conclusion can be reached by studying the procedure for using the funds provided in the state budget for measures to develop domestic coal products production and further reform of the state sector of the coal industry, approved by the Resolution of the Cabinet of Ministers of Ukraine of 7 Feb-
ruary 2018 No.63 On Approval of the Procedure for Using the Funds Provided in the State Budget for Measures to Develop Domestic Production of Coal Products and Further Reform of the Sate Sector of the Coal Industry. This Resolution has regulated the use of budget funds provided in the state budget under the Implementation measures to develop domestic coal products production and further reform of the state sector of the coal industry program. The budget foresees UAH 1.3 billion for this program.

It is planned to direct these funds at:

salaries (including wage arrears);

technical upgrading and modernization of coal-mining enterprises (including financing of investment projects).

According to Law No.1555-18 On State Aid to Undertakings of 1 July 2014, new state aid may be granted only after obtaining the relevant positive decision from the Antimonopoly Committee of Ukraine.

However, according to EU rules on state aid for the coal industry, which Ukraine should implement (due to joining the Treaty establishing the Energy Community and signing the Association Agreement with the EU), only state aid to facilitate the closure of uncompetitive coal mines, as well as aid for research, development and innovation, environmental protection and training activities in the coal industry are compatible.

At the same time, there are currently no criteria in Ukraine for assessing the compatibility of state aid in the coal mining sector.
In these circumstances, the Antimonopoly Committee may find state aid to the coal mining industry incompatible or unlawful, and then it will be subject to full recovery to the state budget. At the same time, the EU and the Energy Community will closely monitor the implementation of such a decision, which, unlike the antimonopoly agency, have sufficient levers of influence on the Ukrainian Government. The Ministry of Finance, Ministry of Energy and Coal Industry and the AMCU are jointly looking for a way out of the situation, but it is still difficult to predict what decision will be taken.

In early April the LawNo. 2042-VIII On State Control over Compliance with Legislation on Food Products, Feeds, By-Products of Animal Origin, Health and Welfare of Animals came into force. How do you assess this reform of the food control system?

Viktoriia Mykuliak Associate, Sayenko Kharenko

Law No. 2042-VIII that came into force in April 2018 creates new rules of the game for Ukrainian food and feed business operators. This document was prompted by the EU-Ukraine Association Agreement in order to align Ukrainian food safety regulations with the relevant EU standards as well as to create clearly defined rules and introduce a uniform approach to control mechanisms in food and feed safety, animal health and welfare.

The major positive developments introduced by the Law at issue include inter alia the following:

(1) a risk-based approach to inspection control (e.g. inspection frequency will depend on the level of risk associated with a particular feed, food product or live animal);

(2) transparency of inspections (exhaustive list of questions covered by inspections; right to record the inspection process using audio and video means; annual external audit of the competent body responsible for inspection control, whose results will be publicly available);

(3) inspections without prior notification of market operators (in cases of the audit of procedures based on HACCP principles alone, a business must be notified three working days in advance);

(4) a new system of penalties and different approach to sanctions imposition in case of detection of any violations germane to the quality and safety of inspected products.

As this Law is based on EU rules, it brings Ukrainian food manufacturers one step closer to European consumers, while facilitating access of Ukrainian business to the EU and other international markets. The success of this reform will, however, largely depend on the implementation and enforcement of the Law at issue. While the first element requires the adoption of dozens of by-laws implementing the Law, the second factor is heavily reliant on the effectiveness of state administration in this field.

On 11 April the Resolution of the Cabinet of Ministers No. 254 came into force, which established the rules on state support for agribusiness in 2018. What state support can companies count on in the form of interest on loans reimbursement this year?

Mykola Voitovych Attorney at law, Gramatskiy & Partners

The Cabinet of Ministers of Ukraine has changed the rules on state support for the agribusiness in2018. By its Regulation No.254 of 7 February 2018, which came into effect on 11 April 2018, theGovernment introduced amendments to the procedure of compensation of interest on loans for agribusiness.

Due to the amendments, more agricultural businesses will now have the chance to take part in the state program for the above-mentioned compensation.
The most considerable achievement of Regulation No.254 is doubling of the net income threshold. In 2018, agricultural companies and enterpreneurs with a previous year net income of no more than UAH 20million (formerly UAH 10 million) can expect state compensation for interest paid on loans. The amount of compensation for them is set at the level of the National Bank of Ukraines key policy rate.

The same level of compensation is now available for borrowers engaged in keeping and breeding farm animals specified in the Regulation (including cattle for meat and dairy production, sheep, some poultry). Nevertheless, their compensation is subject to the following condition loan funds must be used to cover such activities.

All other agribusiness borrowers may anticipate compensation at half the level of the NBUs key policy rate. In all cases, the amount of compensation may not exceed the interest on loans.

Compensation is now also dependent on loan periods. Short-term loans may be compensated if they were used to cover operating expenses. At the same time, medium-term loans are subject to compensation only if they were aimed at acquiring agricultural capital assets as well as construction or rebuilding of agricultural facilities.

The priority of allocation of compensation has remained unchanged. Borrowers with net income of no more than UAH 20 million have the advantage over those engaged in keeping and breeding farm animals.

The Cabinet of Ministers of Ukraine introduced amendments to the procedure for selecting independent members of supervisory boards of state-owned enterprises. How will these changes affect corruption risks when performing supervision over enterprises?

Andriy Lytvyn Attorney at Law, Head of Kharkiv Office, Ilyashev & Partners

With regard to the amendments introduced by the Government on 21 March 2018 to the Resolution
On Certain Matters of Appointment of Senior Officials at the Economic Entities in the Public Sector of Economy and of the Members of their Supervisory Boards it must be noted that the amendments have targeted not only the procedure of selection of senior officials at state-owned enterprises, but also the procedure of selection of independent members of supervisory boards at such enterprises, which speaks for the more systemic nature and the important influence of the said amendments into the system of administration of state-owned enterprises.
The amendments have influenced the very enterprises which are of most importance for the Ukrainian economy and are included in the corresponding list of the Cabinet of Ministers of Ukraine. This category of enterprises also includes the cost of assets which exceed UAH 2 billion or whose annual amount of net profit exceeds UAH 1.5 billion. According to the list approved by the Government there are 50 such enterprises in Ukraine.

Therefore, of what significance are the amendments adopted by the Government on 21 March 2018? First and foremost, one must underline the systemic concentration of all administrative levers over the enterprises, which are most important for the economy, in the hands of the senior officials of the current Government. This is due to the fact that appointment and selection of independent members of the supervisory board is carried out by the same appointment committee and the selection commission which appoints and selects the senior officials of state enterprises. The composition of the selection commission is approved by the Cabinet of Ministers.
The appointment committee, on the other hand, includes the Minister himself. Secondly, the corruption risks have not gone anywhere because the same system of selection and appointment of senior officials, as well as of independent members of the supervisory board, has been built to be concentrated in the hands of the highest-ranking officials in the Cabinet of Ministers of Ukraine, but not in the hands of certain ministries. Thus, everything will depend on the persons who make up the appointment committee and the selection commission, as well as directly or indirectly influence their formation.

The Verkhovna Rada of Ukraine adopted in the first reading Draft Law of Ukraine No. 8125 On Concession. What is your assessment of this draft? How will this initiative influence the development of infrastructure projects?

Oleg Matiusha Counsel, Head of local real estate practice, Kinstellar

Ukraine has very few examples of concession projects successfully implemented since 1999, when the existing Law On Concessions was adopted. Poor and ambiguous legislative regulation is the main reason for this.
The Government did impressive work to improve this situation via the new Draft Law On Concessions prepared in close cooperation with the business environment, lawyers and international institutions.

Adoption of the new Law On Concessions is very much welcomed by the state, Ukrainian and international business and by international financial institutions, which are ready to invest in developing the Ukrainian infrastructure. It should resolve legal issues preventing structuring projects via concessions and will simplify funding of Ukrainian infrastructure such as roads, railways airports, sea ports and terminals.

The Draft Law recently adopted by Parliament in the first reading removes conflicts with Ukrainian laws on public procurement and lease of state property. It improves land allocation, land withdrawal and land buy-out procedure for concession projects and establishes instruments, simplifying receipt of construction permits by concessioners.

We note a number of positive novels aimed at procuring funding for the concessions, i.e. possibility of replacing a concessioner in default without holding a new auction, possibility to assign and pledge rights of claims under a concession agreement. Significant liberalization of the currency control regime for concessioners is also greatly welcomed.

The Law contains real instruments, not illusory ones, for the division of risk between a concessioner and the concessor. Still, the Draft needs further improvement during the second reading stage in Parliament, first of all, in the area of land relations, as one of the most essential and painful issues in infrastructure concession projects.

In mid-March Draft Law No.8121 was registered with Parliament. How do you assess the proposed anti-raiding initiatives? To what extent can they be implemented in practice?

Yuliya Lukoshkina Attorney at Law, Senior Associate, LCF Law Group

The Ukrainian Parliament submitted and registered Draft Law No.8121 On Introduction of Amendments to the Land Code of Ukraine and Some Other Legislative Acts on Counteraction to Raidership. The Draft is supposed to introduce a number of anti-raiding actions and establish effective mechanisms for protecting the property rights of owners and users of land plots with the aim of preventing the illegal acquisition or seizure of enterprises in the countrys agrarian sector.

The innovations concern the following points:

The owner of real estate with a one-way transaction may establish a requirement for an agreement (e.g. agreement of rent) to be certified by a notary public. Such a requirement is subject to mandatory registration and is a kind of encumbrance fixed in the State Register of real rights to real estate.

State cadastral registrars will have online access to the information contained in the register, and the state registrars of rights to the information of the State Geo Cadaster, which will help to prevent cases of double registration of land lease agreements. In addition, the owners and users of land plots will no longer need to receive hard copies of extracts on land plots from the State Geo Cadaster. State registrars will have to make such extracts in electronic form when carrying out registration actions.

It is the duty of state registrars to check whether the person who applied for registration has the right to do so. The state registrar will also check the presence of information on real estate in other state registries. The application for registration of the right to real estate will be left without consideration if the cadastral number of the plot is absent in the cadaster.

The Draft provides for the automatic extension of the validity of a land lease agreement for the same period and on the same conditions if
automatic renewal is foreseen in the agreement and if the leased land does not belong to the lands of the state or a municipality.

Additionally, administrative liability has been made harsher for violation of the law by state registrars when performing registration actions.

Such changes will have an efficient impact on the protection of land ownership rights, but not all of them can be realized. This is especially true for the proposals which change the essence of legal relations in key legislative acts, which hinders the systematic harmonization of current legislation. Therefore, the Draft Law considered will require substantial improvement.

A number of draft laws currently exist on establishing the National Bureau of Financial Security of Ukraine No. 8157, introduced by a group of MPs headed by Nina Yuzhanina; No. 8157-1, introduced by MP Andriy Zhurzhii, and No. 8157-2, introduced by MP Tatyana Ostrikova and others. Which of these initiatives meet the needs of both business and the state in the most balanced way?

Sergii Papernyk Head of Banking & Finance, and FinTech, EVRIS

As in most cases of drafts on the formation of the state apparatus, the main deal breaker for a number of draft laws on the National Bureau of Financial Security (Financial Police) is the issue of the subordination of the new body and the procedure for appointment of its officials.

At the same time, in most cases Ukrainian business does not care who and how will form this
authority. The main demand made by society is that the National Bureau or the Financial Police work efficiently and do not violate the principles of freedom of business activity.

From this point of view, it is important as to whether the new state agency should be part of law-enforcement and have the right to weapons and use of special tools during an investigation.
So, the Draft Law submitted by Tatyana Ostrikova No. 8152-2 prescribes that the financial police will not be a law-enforcement body and its powers will be limited to paper and analytical work. Nevertheless, in this case, the financial police will be able to conduct criminal investigations, which are related to their responsibility. Draft Laws No. 8152 and
No. 8152-1 provide, on the contrary, the National Bureau of Financial Security with powers to apply force.

There is currently strong resistance in Ukrainian society to the setting up of yet another law-enforcement authority. However, world practice generally follows the path of broader powers for the tax police. For example, in the UK (HMRC), United States (IRS) and France (DGFiP), special agents have powers, similar to those of the police.

As for the rest, these draft laws are quite similar to each other, differing only in some details. Therefore, the best solution would be to create a single draft that would unite the best sides of all the proposals mentioned above and enable a truly effective authority of financial and tax investigations to be established in Ukraine.

The Ministry of Finance of Ukraine submitted the Draft Law On Amendments to the Tax Code of Ukraine and some Legislative Acts Regarding Criteria for Identifying High Income Individuals for public discussion. How do you assess this initiative? To what extent will the provisions of the draft law help to eliminate tax evasion schemes?

Nataliia Musiienko Associate, Tax Dispute Resolution practice, KPMG Law Ukraine

The Draft Law introduces criteria for the identification of high income individuals, their inclusion in the register and annual submission of a tax report.

It also follows from the text of the Draft Law that it is aimed at the State Fiscal Services authorities getting access to information about the bank accounts of such high income individuals.

Analysis of this Draft shows that the implementation of such criteria as mentioned in the Draft Law is not grounded. At the same time, attention is paid to providing access to the banking information of high income individuals, which is serious interference in the private information of these individuals.

Meanwhile, the Draft does not impose additional obligations on tax payments, but merely establishes control over those who have a high income. As can be seen from Ukrainian experience, declarations are almost an ineffective instrument for preventing concealment of income and tax avoidance. Considering Ukraines previous experience with electronic declarations from public servants, we can assume that this Draft Law will not increase tax funds received by the state budget.

Obviously, the resources currently available to the tax authorities will not be sufficient to carry out tax audits and, as a result, it is unlikely that someone will be held liable for tax avoidance. Rather, the tax authorities will try to catch someone who did not file a declaration or filed it late, which is what the tax authorities do in transfer pricing disputes. Many points relate to formal procedural issues rather than the nature of a transaction (i.e. audit on compliance of transaction to arms length principle).

It is too early to assume the Draft Law will be an effective mechanism for preventing concealment of income and tax avoidance. The effectiveness of this legislative initiative will be visible only after its high-quality implementation as a result of adoption by the Verkhovna Rada of Ukraine.

For the first time in Ukraine, a national court awarded a plaintiff in a civil case compensation of USD 5 million for moral damages caused by inaction on the part of the Prosecutor's Office for 12 years. How can this decision actually affect the collection of a penalty for moral damages by Ukrainian courts?

Oleksandra Pavlenko Managing Partner, Pavlenko Legal Group

At the moment, the case looks rather suspicious in terms of information about the legal position. The very circumstances that are known indicate that the plot of the case does indeed indicate negligence on the part of the state body in the performance of its duties. Unfortunately, this is not surprising for our country.
It is worth noting that the judicial authorities are beginning to react to such illegal inactivity, which may lead to the creation of good precedents. However, from the point of view of the practice of proof and procedural norms, the plaintiff must prove not only the existence of moral harm, but also its size. The subject of a claim in such a case is usually the subject of a probe. It is not known whether it was conducted in this case. And if it was conducted it is necessary to evaluate the expert's conclusions, what options were used and also on what formula they were evaluated. Then we can really talk about creating a precedent in Ukraine.

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