Crux (#09 September 2018)

Legal Digest

Despite the hot summer season a portion of legislative novelties arrived from Parliament and posed lots of questions for consideration. The UJBL team continues to be at the forefront of news and developments. Our expert panel shares its views on the long-anticipated Draft No. 8336, which establishes responsibility for putting pressure on an expert, laws of Ukraine facilitating attraction of foreign investments and encouraging establishment and operation of family farms; Draft Law No. 8601-1 which sets rules for regulating the electronic cigarettes market and Draft No. 8616, which regulates dissemination of social advertising on television and radio; changes in the procedure for disclosure of information on applications for marks for goods and services and others.

Parliament is considering Draft Law No. 8336 of 4 May 2018, which establishes responsibility for putting pressure on an expert. How would you assess the proposed innovations?

Yulia Lukoshkina, Senior Associate, LCF Law Group

Draft Law No. 8336 submitted to Parliament has been elaborated in pursuance of strengthening guarantees of judicial independence and ensuring the appropriate implementation of forensic activities, as well as restoring the possibility of independent commissioning of expert examination in criminal proceedings by pre-trial investigation agencies.

This Draft Law provides amendments to all procedural codes of Ukraine and the Criminal Code of Ukraine. However, not all of the proposed amendments have been revised sufficiently and are consistent with other
legislative acts.

For instance, it is proposed to establish that in case special knowledge is required to identify circumstances relevant to the criminal proceedings, an expert examination shall be performed by an expert at the request of the party to a criminal proceeding or as instructed by the investigating magistrate or the court. The proviso is that the investigator or prosecutor shall apply exclusively to the specialized state agency for the expert examination to be conducted.

It should be noted that according to Part 2 of Article 242 of the Criminal Procedure Code the requirement to involve specialized state agencies to conduct an expert examination shall apply only to examinations defined in Part 2 of Article 242 of the Criminal Procedure Code. However, this contradicts the Law of Ukraine On Judicial Examination according to which the forensic experts activity in criminal proceedings shall be performed by specialized state agencies. In other cases, it may be performed by forensic experts who are not employees of the mentioned agencies. This issue has been overlooked by lawmakers.

Furthermore, the proposed regulations restrict the right either of parties of criminal proceedings and the court to select an expert for forensic examination. Thus, according to Article 7 of the Law On Judicial Examination forensic activities related to criminalistics, medical and forensic psychiatric examination shall be performed only by specialized state agencies. In all other cases, the defence, prosecution and the court could decide independently who should be instructed for expert examination. The restriction on this right is unreasonable and would not further the goal of criminal proceedings.

Taking into account numerous conflicting issues, the aforementioned Draft Law requires significant additional consideration.

On 23 May 2018 the Cabinet of Ministers of Ukraine approved Resolution No. 420, which approved the list of services of general economic interest. What does this Resolution mean for business?

Evgen Dudnyk, Head of State Aid practice, ADS Legal Group

Resolution No. 420 was adopted under the Law of Ukraine On State Aid to Undertakings, which was adopted in 2014 to fulfill the international obligations of Ukraine (in particular, before the European Union) regarding the implementation of an effective system for monitoring and controlling state aid in Ukraine.

According to the Law On State Aid to Undertakings, the support of economic activities related to the provision of services associated with satisfaction of very important public needs which cannot be met on a commercial basis unless supported by state aid (services of general economic interest, SGEI) doesnt fall within the scope of the Law. The only condition for this is that the service should be included in the list set out by the Cabinet of Ministers.

European experts, as well as Antimonopoly Committee of Ukraine representatives, have repeatedly stated that the provisions of the Law regarding SGEI in its current edition are an essential non-compliance of the Law with EU acquis. Under certain circumstances, the enforcement of these provisions may lead to competition distortions because of the provision of unreasonable and ineffective state aid. In addition, this may cause the failure of Ukraine to comply with international obligations to prohibit state aid that restricts competition.

To identify the SGEI, the European Commission uses a universal and transparent mechanism, tested by time and practice. Instead of an exhaustive list, identifying SGEI in the EU is based on using the four Altmark case criteria.

These four universal criteria can be applied to any type of economic activity. If all four criteria are met, then such state support does not constitute state aid and may be provided without potential harm to competition. Otherwise, we are dealing with state aid, which can be granted only after the prior approval of a positive decision by the authorized body, because of its potential competition distortion.

In the case of Ukraine, we have an exhaustive list of activities, which were removed from the scope of the Law according to the Government decision. At the same time, the Cabinet of Ministers has no limits in the list extensions on its own desire. The grounds, or any criteria for including any another economic activity in the List (if any exist), will remain unknown to the public.

For example, experts are already raising questions about the grounds for including in the List such services as services to ensure the development of generating capacity; "last hope" provider services; gas transportation and storage services.

It is clear that Cabinet of Ministers Resolution No. 420 (in conjunction with the provisions of Article 3 of the Law), can be used as a tool for the withdrawal of virtually any type of economic activity from the scope of the Law.

All that is needed to do this is to make amendments to the Regulation by including the desired type of activity into the existing SGEI list. Such amendments may be made even without the approval of the AMCU, which, according to the Law, is the authorized body on state aid to undertakings.

Therefore, the provisions of the Law of Ukraine On State Aid to Undertakings regarding the SGEI regulation issue, requires urgent amendments. Will the Antimonopoly Committee be able to convince the Government and Parliament of the need for such amendments to the Law? Will Resolution No 420 be used to avoid the requirements of the Law?

The legislative procedure in Ukraine can be long and complicated. However, we should not waste time. There is the opportunity to attract the Government's attention to issues regarding legislation on state aid by combining the efforts of the public, business, and expert environment and their possible consequences.

Resolution No. 333 of the Cabinet Ministers of Ukraine dated 25 April 2018 has amended the rules governing the granting of subsoil usage rights and holding of auctions for the sale of such rights. How would you assess changes regarding sub-surface management?

Viktoriia Pysmenna, Associate, Kinstellar

Little by little, Ukraine is reforming the procedures for granting of subsoil usage rights on its territory. Resolution No. 333 of the Cabinet Ministers of Ukraine (25 April 2018) has amended the rules governing the granting of subsoil usage rights and the holding of auctions for the sale of such rights.

Among its changes, the Resolution clarifies outdated or vague provisions and changes some deadlines. For example, the deadline for regional councils to grant approvals has been cut in half and is now 45 days. The Resolution also details certain sensitive procedures, e.g., the procedure for submitting a proposal (previously approval) from the Ministry of Ecology and Natural Resources of Ukraine was streamlined.
Although considered by many to be small, changes of this kind contribute to better predictability of doing business in the sector.

The Resolution also addresses major concerns by market players in Ukraine that had previously fallen on deaf ears. A notable change that comes into effect on 1 January 2019 relates to use of the approbation of geological information as grounds to obtain rights over mineral resources without the holding of an auction. For oil and gas fields, approbation can be carried out only in relation to geological information gathered as a result of activities covered by a special permit for subsoil use. Previously there was no such condition for obtaining the permit, and approbation of geological information was used for skipping auctions.

Another notable innovation introduced by the Resolution is the possibility to obtain rights over offshore fields (located on the Continental Shelf or within an exclusive economic zone) without the need to obtain approvals from local authorities.

The Resolution also addresses problems relating to a recent environmental impact assessment (EIA) law, specifically by introducing the concept of purchase and sale agreements that take effect upon completion of the EIA.

Many have welcomed the Resolution, but whether it will bear fruit in terms of increased volumes of mineral resource extraction will depend on the further improvement of regulations and the economic attractiveness of available deposits. The intention is that, by adopting legislation on the transparency of the extractive industries and a new subsoil code, and by liberalising the use of geological information, Ukraine will continue to develop a more investment-friendly environment.

Recently, the President of Ukraine signed the Law On Amendments to the Tax Code of Ukraine and Certain Laws of Ukraine on Encouraging Establishment and Operation of Family Farms. How would you assess the impact of this initiative on the related industry development?

Ihor Bielitskyi, Associate, Evris

Adoption of Law No.2497-VIII, of 10 July 2018, provides more opportunities for farmers in terms of choosing a taxation system for their activities.

This law has expanded the concept of agricultural producers by referring them to individual entrepreneurs, which allows the heads of family farms to become payers of the single tax (ST), Group 4. From now on, the heads of farms will face a choice on whether to pay tax on income as before, or on a normative-monetary valuation of the land plot. In this case, each farmer will be able to choose a more favorable taxation system specifically for him or her.

An additional advantage of Group 4 is the absence of a limitation on annual income for the purpose of remainig an ST payer. At the same time, if the farm's income for the last 12 months exceeds the sum of UAH 1 million, the head of the farm is obliged to register as a VAT payer, which will increase the administrative and tax burden on him.

Farmers can also be motivated by the lawmaker's decision to pay within 10 years at the expense of the state up to 90% of the single social contribution for the head and members of the farm.

Persons who decide to establish a farm for the purpose of transition to Group 4 of the ST will, by the end of the month in which the state registration is carried out, submit an application to the controlling body about the election of the respective group of ST payers. Within 20 days of submission of the application, the heads of farms will need to submit a package of documents provided for in clause 298.8.1. of Article 298 of the Tax Code of Ukraine.

Existing farms will have to wait until 20 February to make the transition to Group 4. It is necessary to submit a package of documents provided for in paragraph 298.8.1. of Article 298 of the Tax Code by that date.

On 20 July President Poroshenko signed the Law On Amendments to Certain Laws of Ukraine to Facilitate Attraction of Foreign Investments,according to which the procedure for foreign investment in Ukraine was simplified by introducing a legal regime for recording title to securities of clients of global custodians or other financial intermediaries. How attractive are these innovations for foreign investors?

Oleksandr Onufrienko, Partner, Asters, PhD in Law

The Ukrainian stock market is not very attractive for foreign investors due to many economic and legal reasons. A limited choice of investment tools and insensitive laws regulating transactions on this market are some of the key reasons behind that. The new Law of Ukraine On Amendments to Certain Laws of Ukraine to Facilitate Attraction of Foreign Investments No. 2418-VIII of 15 May 2018 is aimed at providing new tools to foreign investors. The main novelty of the Law is that foreign investors can now invest in securities of Ukrainian issuers (open securities accounts and perform transactions in securities) with minimum personal attendance in Ukraine. The concept of the nominal holder is now formalized: it is a person acting in transactions in securities for the benefit of a client that is not a Ukrainian resident. A foreign custodian institution shall be a nominal holder.

It is worth noting that this investment tool is very important because it allows foreign investors to skip the compulsory personal identification procedure when opening securities accounts and not to disclose their personal data to a very wide range of unauthorized persons. Nominal holders are permitted to perform most transactions for the benefit of foreign investors on their own.

Of course, foreign investors will be subject to financial monitoring and to the identification procedure, but information about such investors can be disclosed only at the request of a competent authority and only in a special manner prescribed by the Law. The nominal holder will be required to disclose information about foreign investors in a minimum number of cases.

In view of the above, the Law can be regarded as a legislative instrument that will facilitate the attraction of foreign investors to the national stock market, especially in the environment where the demand for government securities is sufficiently high.

Draft Law No. 8601-1, which sets out rules for regulating electronic cigarettes market, is registered with Parliament. How will it affect the industry?

Vyacheslav Krahlevych, Partner, Equity

On 26 July Draft Law No.8601-1, which proposes to establish an excise duty on liquid for electronic cigarettes, was registered in Parliament. It should be noted that this Draft is an alternative one to Draft No. 8601, and, unlike the main Draft Law, which provides for the possibility of extending the excise duty on liquids without nicotine, Draft No. 8601-1 is exclusively about electronic cigarettes as products used for consumption of vapors containing nicotine. Currently, within the meaning of the Law of Ukraine On Measures for Prevention and Reduction of the Use of Tobacco Products and Their Harmful Impact on Public Health, electronic cigarettes are not classified as tobacco products, and so are not currently subject to excise duty. However, Draft No. 8601-1 may fundamentally change this situation. It proposes to add ready mixed liquids used in electronic cigarettes to the list of excisable goods. Since excise duty is an indirect tax, its imposition will directly affect the price of the specified products. Thus, the price for a standard 60 ml bottle of liquid for electronic cigarettes may increase by about UAH 120 (at excise duty rate of UAH 2 per 1 ml of liquid). Moreover, a large number of business entities engaged in economic activities of sales and distribution of liquids used in electronic cigarettes are single tax payers. However, the introduction of excise duty on these products will make it impossible for them to continue activities under the simplified tax system. Unfortunately, it should be noted that a significant increase in prices of accompanying goods for electronic cigarettes may become the real reason for the movement of business entities engaged in sales and distribution of the relevant goods to the shadow sector. However, the introduction of changes set in Draft Law No. 8601-1 will make the market of electronic cigarettes regulated, and after adoption of the law their sale to minors will be prohibited, similar to bans on the sale of alcoholic drinks.

Ukrpatent, the state patent office, informs about changes in the procedure for disclosure of information on applications for marks for goods and services. What opportunities do these provide for trademark owners?

Yuliya Kolchenko, Senior Associate, Baker McKenzie

Indeed, the Ukrainian Institute of Intellectual Property (Ukrpatent) informed on 1 August 2018 that the order of publication of information about trademark applications had been changed.

In fact, according to the information published on its website, the change refers to the following. Starting from 1 August 2018 Ukrpatent will publish information on trademark applications after establishing that a trademark application complies with the requirements of Article 8 of the Ukrainian Law On Protection of Rights to Trademarks for Goods and Services (basic formal requirements to a trademark application), and provided that a document confirming payment of the official fee for filing the respective trademark application is filed. That is, publication of information on pending trademark applications will be carried out by Ukrpatent on its website soon after sending to the trademark applicant of a notification on establishing the date of filing of the respective trademark application.

This may be regarded as a positive development for trademark owners and third parties, as Ukrpatent will now publish information on pending trademark applications on its website very soon after the filing of respective trademark applications (after sending notifications on establishing the date of filing of respective trademark applications). This is an improvement of the previous practice of Ukrpatent with respect to publishing information on pending trademark applications.

Third parties that are interested may now receive information as to filed trademark applications sooner (from the official Ukrpatent website) and, respectively, react to possible infringement of their rights (by filing grounded opposition to pending trademark applications, which may infringe on their prior rights, to Ukrpatent). Accordingly, review of the database of pending trademark applications on Ukrpatents official website for interested trademark owners and third parties/their representatives on a regular basis may be recommended, as this provides them with necessary information as to pending trademark applications, filed under the national procedure in Ukraine.

MP Viktoria Siumar submitted Draft Law No. 8616 to regulate dissemination of social advertising on television and radio. The Drafts objective is to eliminate situations when pre-election campaigning is conducted disguised as social advertising. To what extent does this document regulate such campaigning process?

Volodymyr Khomenko, Lawyer, Gramatskiy & Partners

The Draft Law of Ukraine On the Amendments to the Laws of Ukraine Regarding the Distribution of Social Advertisement on TV and Radio proposes to change the definition of social advertisement in the Law of Ukraine On Advertisement. In particular, social advertisement shall be limited socially useful information thatis directed at the development of individuals and society,popularization ofhuman values,healthy lifestyle, education, etc.

At the same time, it is proposed to exclude any political events from social advertisement since its valid wording is too general and covers information of any kind, including which has a political colouring.

In addition, in the event that the Draft Law will be adopted by Parliament, the Law of Ukraine On Advertisement will be supplemented with new demands of social advertisement. Also, TV and radioprograms should be separated byaudio and video tools or titles.

TV and radio companies will be encouraged to broadcast more social adverts with a proportional increase in the permitted volume of commercial advertisements and TV sales.

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