Crux (#04 April 2019)

Legal Digest

Last month was quite rich in legislature-changing activity and some of these actions caused strong waves of discussion, particularly the Draft Law On Introduction of Amendments to Several Legislative Acts of Ukraine on Strengthening the Protection of Employees Rights and Preventing the Use of Undeclared Labor and the Decision of the Constitutional Court of Ukraine on decriminalization of illicit enrichment. Other significant points were ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, adoption of the Law On the Authorized Economic Operatorand some promising draft laws. The UJBL editorial team asked experts to provide some comments on these legal issues.

The Draft Law On Introduction of Amendments to Several Legislative Acts of Ukraine on Strengthening the Protection of Employees Rights and Preventing the Use of Undeclared Labor is now the topic of a major discussion. How will it change the status of employers and individual entrepreneurs?


Valeriia Gudiy,

Attorney at Law,
Ilyashev & Partners

Its no secret that state bodies resort to their supervisory functions as to the compliance of companies with legislation, not with the aim of preventing violation of law, but to punish them and to impose a fine.

The countrys business circles are actively discussing the Draft Law On Introduction of Amendments to Several Legislative Acts of Ukraine on Strengthening the Protection of Employees Rights and Preventing the Use of Undeclared Labor, as submitted by the Ministry of Social Policy of Ukraine.

The Drafts main provisions are meant to supplement the Labor Code with the criteria of labor relations and the right of employment inspectors, who are, actually, officials of the State Employment Service of Ukraine, to establish the fact of employment.

Explaining the need for amendments on this question, the Ministry raises no doubt that stepping up the powers of the State Employment Service and determining the criteria of labor relations will help to beef up the State Budget.

The question raised here is the provision of services by individuals based on civil contracts, which, in view of the Ministry, reduces the amount of taxes that the state can collect in the event of official employment of such persons. The Ministry and the State Employment Service are sure that legal entities and individual persons who use the services of individuals on the basis of civil contracts are trying to cover up labor relations.

If the proposed Draft Law is passed, employment inspectors can pay a visit to every company or every individual who use the services of individuals based on civil contracts, and may decide that instead of civil legislation, their relations should be governed by labor laws. Such decisions will be binding and be the basis of the decision to impose a fine in the amount of UAH 125,190 regarding every such person.

In fact, the Draft compromises the main principle of contractual law the freedom of contract and consolidates the possibility of bypassing consideration of disputes in courts.

At present, employment inspectors may also pass their decisions regarding the existence of signs of labor relations in certain specific cases. But such decisions are made by relying on the personal view of an inspector, and not on legislation. Today, only a court may decide whether the person was admitted to factual work without a labor contract and annul a civil contract. In the near future it could well be the labor inspector who gets the right to decide, which, in my opinion, will increase the risk of corruption.

On 26 February the Committee on Financial Policy and Banking recommended adoption of the Draft Law On Preventing and Countering Legalization (Laundry) of Criminally Obtained Proceeds, Financing Terrorism and Financing Proliferation of Weapons of Mass Destruction. What are the main changes that it can bring?


Maksym Saliy,

Lawyer, EQUITY

The Draft Law On Preventing and Countering Legalization (Laundry) of Criminally Obtained Proceeds, Financing Terrorism and Financing Proliferation of Weapons of Mass Destruction has been submitted with the aim of harmonizing the legal system of Ukraine in the sphere of combating the laundering of proceeds, financing terrorism and proliferation of weapons of mass destruction with due regard to the criteria elaborated by the European Union (EU) for states intending to join it.

The Draft Law envisages diversification of reporting entities, in particular by including persons who provide expertise on taxation.

It is proposed to improve the procedure for disclosure by business entities of their final beneficiary owners (controllers), and to strengthen the requirements for reporting entities to disclose beneficiary owners of their clients.

The Draft introduces a requirement for payment service providers to pass on complete information on the payer and payee throughout the payment chain in transfers of funds.

Of interest is also the proposal to increase the threshold sum for transactions to be reported to the State Service of Financial Monitoring. The sum of the transaction is increased from UAH 150,000 to UAH 300,000.

The duty to report also remains regarding remittances abroad, politically significant persons and clients from states that do not abide by recommendations of international, intergovernmental organizations which carry out their activities in the anti-legalization sphere.

One should note changes to the Criminal Code of Ukraine and the Code of Administrative Offences which step up liability for violating the laws on financial monitoring.

The Draft Law predicts certain simplification for ordinary citizens, whereas the procedure of registration actions for legal entities will become somewhat complicated.

The Verkhovna Rada of Ukraine adopted Law No.7473 On Authorized Economic Operator, which was one of the conditions set by the receive macro-finance assistance. What consequences should we expect after the passing of this law?


Bielitskyi Ihor,

Associate, Evris

This is a law that Ukrainian business has waited a long time for. The Draft Law introduces the institution of authorized economic operator. This will significantly simplify customs formalities for businesses that qualify and increase their market competitiveness. Specifically, Ukrainian companies that qualify as authorized economic operators would be eligible to apply a simplified customs declaration procedure, use the shortened import declaration and receive notices from inspections of physical cargoes. Besides simplification of customs formalities, such Ukrainian companies could eventuallybenefit from mutual recognition of authorized economic operators in the EU and other countries.

The Draft Law also provides for certain barriers that could hamper successful implementation. Notably, the majority of Ukrainian businesses will not be able to qualify as authorized economic operators, so only a small number of businesses would be able to benefit from simplification of customs procedures. During the initial three years, the regulatory bodies will consider applications for obtaining the status of authorized economic operator exclusively from companies that are both producers and exporters (importers). In this period there would also be restrictions on the number of authorized economic certificates issued: 10 in the first year, 20 in the second, 50 in the third year from the effective date of the law. Furthermore, businesses that obtained authorized economic operator certificates will have to apply for separate permits for each type of special simplifications and each object. Obviously, such bureaucratic procedures would slow and complicate the laws implementation.

The Parliament ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting on 28 February. What are the main advantages of Ukraine joining this Convention, and what changes to our taxation system does it involve?


Anastasiya Mosunova,

Manager, KPMG in Ukraine

On 19 March 2019 Ukrainian President Petro Poroshenko signed the Law of Ukraine On Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI is an agreement aimed at implementing the provisions of the BEPS Action Plan into the Ukrainian double tax treaty (DTT) network through simultaneous amendments to all of Ukraines DTTs covered by the MLI.

Given that the MLI applies only when both contracting states opted to amend the respective DTT, MLI will apply to 43 Ukraines DTTs (DTTs with Cyprus, Malta, Luxembourg, Estonia, UK, etc.).

MLI is expected to have a significant impact on the taxation of passive income (dividends, interest and royalties) remitted from Ukraine to foreign companies, of income from alienation of shares deriving their value principally from immovable property, as well as on taxation of permanent establishments (PE).

The minimum standard of the MLI is a set of provisions that shall be mandatorily included in the DDTs for all jurisdictions that signed the MLI. It includes BEPS measures aimed at preventing the granting of treaty benefits in inappropriate circumstances. The major amendment to DTTs provided for under the MLI is the Principal Purpose Test (PPT), under which a benefit under the DDT shall not be granted in respect of an item of income or capital, if obtaining that benefit was one of the principal purposes of any arrangement or transaction.

The PPT will apply to all Ukraines DTTs covered by MLI. Therefore, MLI will have a significant impact on IP/holding/financial structures that are commonly used by Ukrainian business. For example, the back-to-back structures with the use of foreign intermediary companies (IP holding and/or financing companies) that have no or limited economic substance in their country of residence, and one of the principal aims of establishing the is to apply reduced or nil WHT under the DDTs, will not pass the PPT.

In fact, Ukrainian taxpayers that pay passive income to their IP/holding/financial companies will need to pass the PPT along with the beneficial ownership test, which in practice could be difficult or even impossible.

Ukraine opted to apply the following optional provisions of MLI:

MLI will amend the rules on taxation of capital gains from alienation of shares (or comparable interests, such as interests in a partnership or trust) deriving their value principally from immovable property:

MLI provides for a stricter property rich test, as compared to the current edition provided for by the DTTs which Ukraine is a party to: capital gains may now be taxed in the contracting state, if at any time during 365 days preceding the alienation of shares, they derived more than 50% of their value directly or indirectly from immovable property (real property) situated in that contracting state. MLI is aimed at preventing cases of artificial reduction in the immovable property component of the value of shares on a balance sheet through the disposal of such immovable property before the alienation of shares.

This rule should be considered by multinationals planning to dispose of their Ukrainian business (e.g. retail property management business) indirectly via the disposal of shares in Ukrainian companies.

MLI will implement the following anti-abuse rules to counter artificial avoidance of PE status:

the treaty benefits will not be granted to a taxpayer if the income is allocated to a low taxed passive PE in a third jurisdiction;

an enterprise shall be deemed to have a PE if a person acts on behalf of an enterprise and in doing so habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise;

the independent agent status will be no longer available if the agent acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related (the agent and his principals that are connected by more than 50%, directly or through a common beneficiary);

rules that will not enable a taxpayer to avoid a PE status by means of splitting contracts (e.g. construction);

all specific exemptions (having an office only for the purposes of purchasing or collecting information, having a warehouse for storing goods, etc.) will be applied only if each respective activity is of a preparatory or auxiliary nature.

Therefore, certain international sales and purchase structures could be exposed to PE risks. For example, under the current edition of DTTs, which Ukraine is a party to, if an on-line retailer establishes warehouses in foreign jurisdictions in order to deliver goods to local customers, such activity will not constitute a PE as this activity is directly exempt under Article 5 of the respective DTT. Under MLI, such activity will be exempt, only provided that such activity is of a preparatory or auxiliary nature. This means that if a warehouse of goods constitutes a part of the core business of an online retailer that allows the delivery of goods to fulfill purchase orders made by local customers, it is likely that such activity may not be considered as activity of a preparatory or auxiliary character. Therefore, such activity will constitute a PE of such an online retailer.

Given the above, certain Ukrainian business models will be exposed to significant tax risks as discussed above, and may require review in order to address the impact of MLI.

After cancellation of Article 368-2 of Criminal Code of Ukraine draft laws were registered on amending provisions to the Code because of Draft Law No.10110 and its alternative versions, and Draft Law No.10103. Which is the most suitable and best fit for achieving its aim?

Oleh Shkondin,

Attorney Assistant
of Criminal Law Department,
AVER LEX

After the Constitutional Court ruled on non-compliance of the provisions of Article 368-2 of the Criminal Code of Ukraine with the Constitution of Ukraine, a number of draft laws on the Codes amendment by revision of the article description were registered with the Ukrainian Parliament.

Some of the draft laws describing a punishable act are expressly in violation of the position of the Constitutional Court, and so they risk sharing the fate of Article 368-2 of the Criminal Code when adopted.

This act is given quite an interesting definition in Draft Law No. 10103 of 28 February 2019:

Acquisition of a significant amount of assets by a person authorized to perform the functions of state or local self-government, the illegality of whose acquisition is declared in a judicial proceeding, as well as the transfer of such assets to any other person by him/her. Such a description meets both the Constitution of Ukraine and international treaties, and the position of the Constitutional Court, but it is not applicable in practice since it is almost impossible to prove the illegality of grounds for assets acquisition through legal proceedings.

Another definition is proposed in Draft Law No. 10110 of 28 February 2019: Acquisition of a significant amount of assets by a person ... in a manner which is unlawful without signs of abuse of power or office, or signs of acceptance of a proposal, promise or receipt of improper advantage by an official, as well as the transfer of such assets to any other person by him/her.

It should be noted that the grounds for acquisition of title are stipulated in civil legislation of Ukraine (for example, sale and purchase agreements), and it is, therefore, impossible to prove the absence of legal grounds for assets acquisition to prosecute a person.

Currently, the most appropriate definition, which meets the objectives of the registered draft laws, is the one specified in Draft Law No. 10110-11 of 14 March 2019:

Acquisition of a significant amount of assets or ownership of such assets or income from assets by a person authorized to perform the functions of state or local self-government, whose value exceeds the declared income of such person and his/her connected persons, as well as the transfer of such assets to any other person by him/her

In addition to the absence of shortcomings present in previous draft laws, this definition is also in line with the one given by the Constitutional Court in its ruling No. 21-rp/2010 of 6 October 2010: Unlawful enrichment is a significant increase in income exceeding the legal incomes of a person that cannot be reasonably substantiated by him/her.

Draft Law No. 10126 suggests amendment of provisions to the Economic Code of Procedure of Ukraine on the pre-trial settlement of a dispute. How relevant is this topic for business, and what will be the result of such amendments?


Mykhailo Voitsekhovskyi,

Associate, Antika Law Firm

Before 2005 Article 5 of the Economic Code of Procedure of Ukraine defined the measures of the pre-trial settlement of a dispute as the mandatory stage of a trial and, in the absence of proof of the application of such measures, the courts returned the claims. This provision was the subject of lengthy discussions and led to the existence of different court practice. However, by the resolution of the Constitutional Court of Ukraine as of 9 July 2002 with regard to case No. 1-2/2002 on the pre-trial settlement of dispute and by the Resolution of Plenum of the Supreme Court of Ukraine No. 9 as of 1 November 1996 On the Application of the Constitution of Ukraine in the Administration of Justice an approach was formed, whereby a person cannot be refused in the acceptance of a statement of claim or a complaint only on the grounds that such claims can be considered as prescribed by the law pre-trial procedure, since it restricts the right to judicial protection.

For the purpose of legislative consolidation of such an approach, the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Pre-trial Dispute Settlement as of 23 June 2005 introduced amendments to the Economic Code of Procedure of Ukraine, which resulted in the obligation of pre-trial settlement of disputes to become the right of the participants in such a dispute.

As part of judicial reform carried out in 2016, Article 124 of the Constitution of Ukraine was supplemented with a paragraph according to which the law could establish a mandatory pre-trial procedure for settling a dispute.

In this regard, the rules on the necessity of taking mandatory measures for pre-trial settlement of a dispute were included in the new codes of procedure. Actually, not only to the Economic Code of Procedure of Ukraine, but civil procedural legislation and the Code of Administrative Proceedings of our state. As a consequence, the relevant provisions of the codes of procedure are, in essence, a reflection of the provisions of the Constitution of Ukraine.

In view of the above the exclusion of the relevant provisions from the Economic Procedural Code of Ukraine is unlikely to be regarded as relevant. Therefore, in our opinion, it will be difficult to find sufficient support in Parliament to approve Draft Law No. 10126 of 5 March 2019.

However, even if were adopted, it will not significantly affect business, since there are quite a few cases of compulsory pre-trial settlement of commercial disputes in Ukrainian legislation.

The Cabinet of Ministers of Ukraine submitted Draft Law No. 10135 On Introduction of Amendments to Several Legislative Acts of Ukraine on Shortening the List of Types of Economic Activities which are Subject to Licensing. How can such amendments influence the activity of such entities?


Mariia Bokach,

Associate, Asters

Initiation of this Draft is not a surprise for players of the Ukrainian telecommunication market. Theres been a heated debate related to de-licensing in the field of telecommunications since the start of 2018. However, in the same year, the NCCIR issued an official statementwhere it explained why the licensing regime remains unchanged notwithstanding the removal of the requirement for telecom licenses in law on licensing of commercial activities. Therefore, the clarity in this respect will be the first and substantial change for the telecommunication sector.

Second, the debated draft declares the permit nature of doing business in the telecommunications industry. Therefore, in order for a provider to start providing telecommunication services it would only need to notify the NCCIR of the planned activity. Such notification will prompt the inclusion of such a provider in the State Register of Telecom Providers and Operators.

Yet, if such a provider needs limited resources (radio-frequency and/or number) for provision of its services, it must receive individual licenses and permits.

The changes that the draft introduces will make life much easier for those who intend to enter the market, and for those who already provide services. Obviously, a notification regime would cut the direct costs connected with the acquisition and renewal of licenses and, to some extent, the indirect cost connected with compliance activities.

However, the draft also contains a bitter pill.

For example, it imposes sanctions on operators and providers for the provision of misleading, inaccurate or incomplete information in the notification. Moreover, the bill significantly increases penalties, particularly for violation of conditions or procedures in the field of telecommunications and usage of radio frequency resource.

Thats no surprise. Withdrawal of the individual licensing regime deprives the NCCIR of its habitual regulatory tools associated with this regime the threat to annul or refuse to renew a license.

Thus, this seems a logical step towards strengthening the ability of the NCCIR to regulate the market efficiently. One of the main requirements of EU telecom regulations is to provide telecom regulators with all the powers necessary to ensure compliance with the provisions of the electronic communications regulatory framework.

Another goal of the draft seems to be to fight shadow business. To some extent, the bill may achieve this if such businesses exist. Yet, as practice shows, and given how many grades of shadow are out there, high fines may fail to force businesses to come out of the shadows and, eventually, the draft may miss its target.

The new Draft Law On Copyright and Related Rights No. 10143 of 12 March 2019 is now available. What is new in the proposed Draft, and what else needs to be perfected to improve regulation of the sphere?


Ganna Prokhorova,

Senior Associate, AEQUO

It is no secret that todaythe sphere of copyright and related rights needs to be improved by taking into account the provisions of European legislation. Clear obligations on the implementation of certain provisions of EU law were also undertakenby Ukraine when it signed the EU-UA Association Agreement. Draft Law No. 10143 On Copyright and Related Rights, in particular, assumes the mission of bringing provisions on the protection of copyright and related rights into line with legislation of the European Union and removing the relevantinsufficienciesthat arise in practice and require legislative settlement. In comparison with the current law the new law would, among other things, more precisely regulate the issues related tocreation of copyright; determine the peculiarities of copyright in works made for hire and works createdtoorder, which have caused many difficulties in practice due to imperfect regulation, specify cases and peculiarities of the free use of objects of copyright and related rights, the transfer (alienation) of property rights to such objects. It also contains proposals to solve a number of issues on increasing responsibility for violation of copyright and related rights, etc. The law will introduce a new concept of orphan works and the peculiarities of their use, determine the possibilities for the free use of works for print-disabled persons. This draft also propose to restore compensation for a violation in the amount from 10 to 50,000subsistence minimumsthat can be recovered instead of damages.Other interesting new provisions include introducing a register of subjects of the art market.

At the same time, there is no doubt that the economic terms and models offered by the draft bill need to be clarified.For example, it is obvious that copyright and ownership of the material object in which the product is embodied do not depend on each other. Alienation of a material object in which the product is embodied does not mean the alienation of property rights to a work and vice versa.In this respect, it should have been envisaged that in the event that the exclusive right to a work of art (original works of painting, sculptures, etc.), did not pass to the acquirer of the original work, the acquirer has the right to exhibit the original of the work, whose ownership has been acquired, and reproduce it in catalogs of exhibitions and in publications dedicated to his/her collection, as well as to deliver the original of the work for display at exhibitions organized by other persons. Since interest in the art market has grown significantly in Ukraine over recent years, this would make the life ofcurrentmarket participants much easier.

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