Crux (#03 March 2019)

Legal Digest

A new portion of legislative novelties were submitted by the Ukrainian Parliament and Cabinet of Ministers last month, which leave many questions to consider. We asked a handful of experts to share their views on the Draft Law On the Regime of Common Transit; the idea of mid-term or multi-annual budgetary planning; prolonging of the moratorium on the sale of agricultural land; Agreement On the General Terms and Conditions of Supply of Goods between Organizations of the CIS Member States as well as Draft Law No. 6746 providing for more certainty in a number of procedural rules of the Law of Ukraine On Protection of Economic Competition and lots of other issues.

The Cabinet of Ministers of Ukraine recently approved Draft Law No. 9532 On the Regime of Common Transit. What will be the consequences of changes to Ukrainian Customs law, and what are its benefits compared to the system in place now?

Ilona Mylostyva,
Associate, EQUITY

The Cabinet of Ministers of Ukraine has approved the Draft Law On the Regime of Common Transit developed by the Ministry of Finance of Ukraine on the basis of European legislation in the field of customs. The Draft Law provides for the simplification of customs formalities in the application of the common transit regime. In order to achieve those goals, it is planned to introduce mechanisms for the use of the electronic transit system and the electronic guarantee management system subject to the provisions of the Convention on a Common Transit Procedure of 20 May 1987.

The document provides for the simplification of customs procedures and formalities, determines the features of guaranteeing the payment of customs debt and the conditions for the application of special transit simplifications.

In general, the adoption of the law contributes to improving the quality and competitiveness of carrier services.

It should be noted that the introduction of the electronic transit system and the electronic guarantee management system opens up new opportunities for controlling risks. Thus, the electronic system provides access to information about movement of goods from European countries to a destination point in Ukraine. Such a mechanism makes it possible to determine the form of customs control in advance and accelerates the process of customs clearance. The Draft also envisages the use of special transit simplifications for those companies that comply with the requirements of law and are solvent. Such simplifications include: general financial guarantee, self-applied seals, authorized consignor/consignee, limited data customs declaration. Thus, the Draft Law provides for a system of motivation and provides additional opportunities for reliable enterprises.

In addition, the adoption of the law will help to resolve certain long-overdue issues present in the customs system. These include cases of lost cargo, dual packets of documents, failure to comply with delivery terms and to pay customs duties. Thus, the existing transit system needs to be changed. Therefore, the introduction of European mechanisms will have a positive effect on the development of customs services and movement of goods.

Thus, the adoption of the Draft On the Regime of Common Transit contributes to the development of a system of customs clearance of goods in transit. The proposed Draft envisages the introduction of mechanisms for cutting the time for clearance and simplification of customs formalities. In addition, the use of the electronic transit system and introduction of special simplifications contribute to improving of the quality of services of carriers and forwarders in general.

The Ukrainian Parliament is obliged to approve the state budget this year for the coming three years. What are the benefits of this decision, and how realistic does 3-year budget planning seem in Ukrainian conditions?


Partner, Asters

The idea of mid-term or multi-annual budgetary planning was recognized as progressive by publicists and experts quite some time ago. Now it seems to be turning into a trend among jurisdictions willing to improve current practices in public finance, fiscal policy, and budgetary expenditure planning.

Some of the most successful economies in the world have shifted from an annual to mid-term budgeting (three to five years on average). It is not the aim of this publication to dig deep into various patterns countries use to implement mid-term budget planning. Yet, one thing thats worth mentioning is that there are many varied approaches and, probably, none can be viewed as ideal-for-all. At the same time, it may prove to serve the purposes and objectives in a given country quite well. The core differences sit in at least the following aspects: (i) mid-term planning can be carried out at the central government level while local authorities continue to report and plan annually, (ii) multi-annual plans may carry varying levels of binding nature (in some jurisdictions mid-term planning serves only for high-level target measuring in fiscal policy or expenditures, and only annual figures continue to be binding on the government), (iii) horizon: three years is viewed as a reasonable term for multi-annual planning, though some jurisdictions choose longer periods, at times sticking to the life of a newly-elected government.

The recently enacted amendments to the Ukrainian Budget Code are a substantial step towards introducing multi-annual budgeting. There is no doubt this is a positive move which can hardly be overestimated, though actual implementation and efficiency will depend on continuing political commitment by the government and local authorities.

We should note that the newly-adopted approach is one of the requirements set Ukraine by the IMF back in 2017. Therefore, there is a good chance that the Ukrainian authorities will have no option other than to stick and get used to it given the long-term nature of Ukraine-IMF cooperation. If we consider the positive outcome of the approach for Ukraine, I would be looking at least at the following aspects (the list is far from exhaustive): (a) the intention is for three-year planning to be fully public, which will make some major moves by the government in terms of fiscal policy and budget expenditure more predictable in the medium term; (b) a longer planning horizon requires a more responsible approach to goal setting and regular monitoring of results, which gives a better chance of actually achieving the goal set; (c) many business initiatives in infrastructure, healthcare and other important fields will benefit from extended budget planning, with extra comfort provided to private parties (investors in social, healthcare, transport infrastructure).

The Government of Ukraine approved Order No. 50 on 30 January 2019. What are the most significant changes that have happened and are about to happen as a result of this suspension?

Oleksiy Gorbatyuk,
Ilyashev & Partners

On 2 February 2019 the Cabinet of Ministers of Ukraines Order No.50 On Suspension for Ukraine of the Agreement on General Terms and Conditions of Supply of Goods between Organizations of the CIS Member States came into force.

The Agreement On General Terms and Conditions of Supply of Goods between Organizations of the CIS Member States was concluded on 20 March 1992 in Kyiv and provided for general conditions for the conclusion, amendment and termination of agreements between legal entities of CIS countries in accordance with inter-government economic trade agreements.

The peculiarity of the Agreements was that its provisions had to be applied only during the transition period from a planned to a market economy of CIS member countries. For Ukraine this period ended more than 15 years ago and, therefore, the Agreement now has no significance.

Prior to the date of its suspension, Ukraine applied the provisions of the Agreement within the Agreement between the Government of Ukraine and the Government of Russian Federation On the Principles of Cooperation in the Field of Production and Supply of Aviation Equipment of 1993 (hereinafter the 1993 Agreement), which are not actually applied and the agreement is valid only de jure.

Thus, in the near future the 1993 Agreement will be revised and its predicted that it will be suspended along with other outdated agreements.

What are the consequences of extending the moratorium on the sale of agricultural land in the light of the ECtHR decision in Zelenchuk and Tsytsyura v. Ukraine, and the need to improve Ukraines investment climate?

Dmitriy Nikolov,

The decision in the Zelenchuk and Tsytsyura v. Ukraine case prompted a broad response in both the legal and political senses. In many cases the analysis of this decision was very radical (complete lifting of Moratorium).

Nevertheless, despite the fact that the ECtHR discovered violations of the convention regarding the right to the peaceful enjoyment of possessions, as guaranteed by Article 1 of Protocol No.1, there was no question of lifting the moratorium, since it is the prerogative of the state.

In this respect, the most significant part of the decision is Paragraph 50: The Court stresses that the problem underlying the violation of Article 1 of Protocol No.1 concerns the legislative situation itself, and that its findings extend beyond the sole interests of the applicants in the instant case. The Court believes that the respondent State should take appropriate legislative and/or other general measures so as to ensure a fair balance between the interests of agricultural land owners on the one hand and the general interests of the community, on the other hand, in line with the principles of protection of property rights under the Convention. It is not for the Court to specify how those interests should be balanced. Under Article 46 the State remains free to choose the means by which it will discharge its obligations arising from the execution of the Courts judgment... The Courts judgment should not be understood to mean that an unrestricted market in agricultural land has to be introduced in Ukraine immediately

In fact, the court avoided answering the question as to when the moratorium should be lifted, limiting itself only to the general phrase that it should not be understood to mean that an unrestricted market has to be introduced in Ukraine immediately.

Besides, neither the Convention nor its protocols provide for real and effective state responsibility for non-compliance with the decisions of the ECtHR. Forcing the State to execute a decision by adopting legislation seems unreal due to the inability of the ECtHR to intervene in the internal affairs of the state in the part of the legislative process.

Thus, the extension of the moratorium on the sale of agricultural land, in the light of the above-mentioned, decision does not imply any consequences. According to the decision, Ukraine is bound indefinitely to bring its legislation into conformity with the Convention without the risk of real responsibility. Thats all.

In our opinion, the prospects of using the legal position of the ECtHR in court practice are more interesting. First, achievements in this direction have already appeared. For example, in the decision of the Donetsk Appellate Court in case No.227/1505/18 of 10 October 2018, the court noted that a moratorium on the sale of agricultural land provided for in Paragraphs 14, 15 of Section X Transitional provisions of the Land Code of Ukraine restricts the constitutional rights of citizens of Ukraine regarding the possibility of alienating land owned by them on the right of private ownership of land plots guaranteed by the Constitution of Ukraine and the norms of the Land Code of Ukraine and contravenes Article 1 of Protocol No.1 to the Convention, and referred to the Zelenchuk and Tsytsyura v. Ukraine case.

Now everyone is waiting for the Supreme Courts decision on this issue, which could unlock the agricultural land market without the help of legislators. Nevertheless, this case has a strong political background and there are doubts that the Supreme Court will approach it in a meaningful way, and not just make a formal reference to the fact that this issue falls within the competence of the Verkhovna Rada of Ukraine.

Discussions continued recently about Draft Law No. 2413 On Amending Particular Legislation of Ukraine to Consolidate the Functions of State Regulation of a Financial Services Market, known as the Split Law. How well is the Draft version within the scope? What might be the main problems that arise during the implementation process?

Sergiy Kazmirchuk,

Sayenko Kharenko

Apart from redistribution of the regulatory and supervisory functions, the Draft Law on split (the Split Law) does not provide for any immediate significant changes to the current activities of financial institutions in Ukraine. All effective regulatory acts of the National Commission for State Regulation of Financial Services Markets (NFP)will remain effective until replaced. Therefore, regarding the availability and sufficiency of the relevant regulatory framework, there should be no global problems with the implementation of the Split Law. On the other hand, the practical implications of its implementation for market participants raise significantly more questions. At first glance, the transfer of functions from one regulator to another appears to be a mere formality. However, to be more accurate, any assessment of the practical consequences of the Split Law should be made based on analysis of already well-established approaches by the National Bank of Ukraine, which is supposed to become the key regulator for the greater part of the financial services market.

Starting in 2015, the NBU implemented a number of measures aimed at clearing the banking services market. Initially this involved tightening control over the transparency of bank ownership structures followed by tightening the requirements to bank equity and confirmation of sufficiency and quality of the funds of the actual beneficial owners of banks. The effectiveness of these measures is evidenced by simple statistics: the number of banks has halved. It is safe to assume that after adoption of the Split Law, a similar transformation will also begin on the non-banking financial services market and the NBUs approach in all key areas of supervision will differ little from the previously adopted principles of working with banks.

The transparency of the ownership structure, business reputation of beneficiaries and origin of their funds will be among the top priorities. Moreover, in practice, the NBU tends not to limit itself to a formal review of provided information but prefers thorough independent investigation.

The NBU has announced particular emphasis on prudential supervision, which should now be based on a risk-oriented approach as opposed to the more formal approach of the NFP. In practice this means that the NBU will focus not on formal implementation by financial institutions of the established procedures but on the essence and effectiveness of these procedure. Accordingly, mere formal compliance by a financial institution with legislative requirements will not guarantee protection against possible claims or influence measures from the new regulator.

The same risk-based approach has been promised by the NBU with respect to corporate governance in financial institutions though, evidently, the business reputation of officers of an institution and their compliance with professional requirements will be carefully verified.

Thus, despite the declared intention of the NBU to perform a painless transfer of functions, most likely market participants will face significant changes in the approaches taken by former and new regulators to supervision and risk assessment. Accordingly, financial institutions and their owners should immediately seek to critically evaluate their business in terms of compliance with the declared principles, thereby preventing problems in the future.

How will amending the Convention adopted between the Government of Ukraine and the Government of Switzerland On Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and on Property affect the structuring of international holdings where Switzerland is involved?

Daria Kozhuhovska,
KPMG in Ukraine

On 24 January 2019 the Minister of Finance of Ukraineand the President of Switzerland signed the Protocol for Amending the Convention between the Government of Ukraine and the Government of Switzerland On Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and on Property (the Protocol).

The Protocol provides for increased withholding tax rates both for interest and royalties. In particular, 0% WHT rates are raised to 5%.

The dividend payments are subject to the WHT applying the rates as follows:

5% if the beneficial owner of the dividends is a company (other than a partnership), which directly holds at least 10% of the capital of the company paying the dividends;

0% if the beneficial owner is a pension fund, the Central Bank or the government, or any political subdivision or local authority thereof of the other contracting state;

15% in other cases.

Furthermore, the Protocol amends provisions relating to resolution of tax disputes by means of the mutual agreement procedure (MAP). Such amendment implies introduction of a new article providing for a MAP arbitration procedure.

The Protocol also amends provisions of article with regard to the exchange of tax information between the tax authorities of Ukraine and Switzerland, aligning it with the one prescribed in the OECD Model Convention (2017).

Besides, the Convention will be modified by introduction of the principle purpose test (PPT) as an anti-treaty abuse measure. PPT provides for the benefits not to be granted to a taxpayer if:

it is reasonable to conclude, having regard to all relevant facts and circumstances, obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit (subjective element);

the benefit in these circumstances is not in accordance with the object and purpose of the relevant provisions of the Convention (objective element).

In such a case if the transaction/structure meets one of the above criteria, the benefit under such transaction/structure will be denied by the relevant tax authorities.

Therefore, the Ukrainian and Swiss companies are, as part of a group of companies, to evaluate any possible tax risks which may arise for their holding structures/transactions due to the ratification of the aforementioned changes introduced by the Protocol. Such risks include possible denial of a tax benefit for Swiss companies in respect of earned income derived from Ukraine/reassessment of withholding tax liabilities to be paid in Ukraine. To avoid such implications and meet the PPT, Swiss companies are recommended to strengthen their economic substance in Switzerland and re-consider the terms of the transactions conducted inside the group.

How would you comment on Draft Law No. 10046 On Amending Particular Legislation of Ukraine to Create Conditions for External Trade Development and Increase in Exports of Ukrainian Enterprises, and how might it influence business development?

Andrii Trembich
Gramatskiy & Partners

Legislation on foreign trade is in strong need of codification and unification with the norms of international instruments (the General Agreement on Tariffs and Trade (GATT) within the framework of membership in the WTO, the WTO Agreement On Trade Facilitation, the Association Agreement with the EU and this can be seen as the only reason for the Law On Foreign Economic Activity (FEA) to exist.

The Draft Law eliminates many weaknesses of the Law on FEA: cancels general licenses and the automatic licensing regime, introduces competition for receiving quotas using the electronic public procurement system (this is likely the projects main novelty), introduces a single database of goods to license and quote in the area of foreign economic activity, shortens the terms of license issuance and reduces the list of documents required for obtaining licenses; improves the classification of goods according to UKTVED.

But, on the other hand, Draft Law No. 10046, despite its promising name, does not create a revolution in the field of regulation of FEA, and certainly does not increase the export of Ukrainian enterprises.

The fact is that our legislation is only a small part of the export infrastructure; a much greater impact on its performance and condition is provided by multilateral and bilateral agreements, quotas and limits set by the main trading partners, ease of obtaining export credits and related services. And we experience many problems with all these things. In conditions of negligibly small quotas for high value-added goods, and a non-operational Export Credit Agency, it is hard to expect one being able to seriously stimulate exports.

On 7 February 2019Ukrainian Parliament voted in favor of the Draft Law No. 6746 which implements the mechanism of resolution and partial exemption from responsibility for a violation in the way of concerted actions. What is the practical sense of such changes and who gets the main advantage?

Sergey Denisenko,

On 7 February 2019 the Ukrainian Parliament voted in favor of Draft Law No. 6746, which provides for more certainty in a number of procedural rules of the Law of Ukraine On Protection of Economic Competition. The respective Draft Law is a long-awaited step in reform of competition law in terms of improving procedural rules.

The most expected developments of the Draft Law include the following:

Fixing of terms, established for review and completion of the AMCU cases on violation of competition legislation;

Development of clearer procedural rights of the parties involved in a probe by the AMCU, including the right to access case files and make copies. Establishing limits for the regulator to cite facts and evidence, unless they were disclosed to the participants of a case;

Introduction of recusal procedure of AMCU members in case of conflict of interest or lack of impartiality;

Introduction of a new institute of settlement in cases on anti-competitive concerted actions. The procedure enables a party who admits violation and cooperates with the regulator during the investigation process to receive a reduction of 20% of their fine.

Improvement of the current leniency regime. The updated regime will offer the possibility of 50%, 30% and 20% reductions in fines for those applicants, who submitted their applications (along with significant information, relevant for investigating the case) even after the initial leniency applicant (who enjoys full immunity in a case).

Despite the fact that respective developments in legislation will definitely contribute to more efficient and predictable investigation procedures, practical implementation of certain provisions of the Draft Law may face difficulties. As an example, the task to ensure that the client will have a sufficient level of comfort when discussing the sum of the fine in a settlement process appears to be quite a tricky issue. Specifically, the amount of the fine to which a reduction of 20% will be finally applied is hardly predictable, since all the relevant circumstances of a case are yet to be analyzed by the regulator and the aggravating and mitigating factors in a case have not yet been established. Thus, the amount of a fine, calculated at the initial stage without knowing the preliminary results of an investigation, may differ from the final amount, determined by the regulator based on the results of investigation.

However, we all hope that fresh waves of reforms and constructive upgrades of legislation will not curb the regulators formalistic approach to their interpretation and the old school bureaucracy of enforcers.

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