Crux (#05 May 2019)

Legal Digest

The Ukrainian Parliament, Cabinet of Ministers and National Bank of Ukraine have approved some important legislative acts that could have a great impact on business development, while others are still to be considered. The UJBL editorial team asked the views of experts on the proposed division of the State Fiscal Service of Ukraine, draft laws On Amendments to Certain Legislative Acts of Ukraine on Improvement of the Regulation of the Authorization System in the Field of Economic Activity aimed at Reducing Administrative Pressure on Business Entities, On Withdrawal of Ukraine from the Treaty of Concerted Antimonopoly Policy of Countries of the Commonwealth of Independent States and the Resolution On Introduction of Amendments to the List of Central State Executive Bodies Authorized for the Enactment of Building by the Cabinet of Ministers of Ukraine, as well as resolutions adopted by the NBU and other acts.

The Cabinet of Ministers of Ukraine recently submitted Draft Law No.0219 On Withdrawal of Ukraine from the Treaty of Concerted Antimonopoly Policy of Countries of the Commonwealth of Independent States (Treaty) to Parliament. What are the main issues regulated by this Treaty?


Galyna Zagorodniuk,

Partner, DLA Piper Ukraine


Andrii Zhupanyn,

Senior Associate, DLA Piper Ukraine

The Cabinet of Ministers of Ukraine recently submitted to Parliament Draft Law No.0219.

The Treaty, as ratified by Ukraine in 2003, is part of the legal framework surrounding cooperation between members of the Commonwealth of Independent States with a particular focus on coordination of antimonopoly policy. For more than a decade the Treaty served as a legal basis for the Antimonopoly Committee of Ukraine to exchange information, experience and legislation practice with antimonopoly authorities in other CIS countries. It is worth noting that apart from establishing principles of cooperation, the Treaty also becomes ground for creation of the Interstate Council on Antimonopoly Policy, an authority-key player in implementation of the Treaty.

Although Ukraine used to benefit from the Treaty by actively taking part in the work of the Interstate Council and cooperating in antimonopoly investigations, starting from 2014 Ukraine ceased to apply the Treaty in relation to the Russian Federation, ended its representation in the Interstate Council and halted exchange of notices on antimonopoly investigations and requests for consultations with other members of the Treaty. At the same time, the AMCU began to cooperate with several CIS countries on the basis of separate bilateral agreements. Ukraine signed such treaties with Armenia, Azerbaijan, Belarus, Georgia and Moldova. A similar bilateral treaty will soon follow with Kazakhstan, while from the Cabinet of Ministers point of view, there is currently no need for cooperation with Kyrgyzstan and Tajikistan currently on antimonopoly matters.

Considering the above and the general plan adopted by the National Security and Defense Council of Ukraine to end Ukraines participation in the CIS, development of the draft law on withdrawal of Ukraine from the Treaty seems to be a logical step that will help Ukraine to avoid any direct or indirect disclosure of any sensitive information relating to Ukrainian markets to the Russian Federation.

The NBU updated the instruction on the procedures of opening and closing the client and correspondent bank accounts of residents and non-residents, which allowed international companies to open bank accounts in Ukraine. What results should be expected from such amendments?


Kateryna Breduliak,

Senior Associate, Evris

The NBU approved the Board Resolution of 1 April 2019, No. 56, which came into force on 4 April 2019, and amended Regulation No. 492 beginning with its title. With new amendments, non-residents of Ukraine, namely legal entities, agencies of legal entities, investment funds, and asset management companies acting on behalf of such investment funds, individuals have the right to open current, deposit and escrow accounts in Ukrainian banks. The right to open accounts in Ukraine and for non-resident legal entities to make foreign currency settlements is also provided by the Laws On Currency and Foreign Exchange Transactions, On Amendments to Certain Laws of Ukraine on Promotion of Foreign Investments, as well as the Association Agreement between Ukraine and the European Union.

Certainly, such legislative changes will interest foreign companies. If a non-resident decides to buy real estate, assets or corporate rights in Ukraine, he will open an account in a Ukrainian bank without any restrictions.

The renovated document significantly streamlines the monetary movement and simplifies business conditions. In addition, the requirements for submission to a bank of the card with authorized signatures and closing of the accounts due to the change of the legal entitys name are canceled.

Also, non-resident legal entities have the opportunity to realize the pledge right on property rights to the amount of funds that remained in the deposit account. Finally, as Ukrainian banks offer quite high deposit rates, foreign companies have the opportunity to earn additional income by placing currency savings there.

At the same time, the NBU reserves the right to impose restrictions and safeguards. Under such conditions, time will show if the rights for non-residents and residents will be equal in the currency transactions sphere and requirements of the NBU.

NBU Resolution No. 58 made amendments to the Procedure for implementation of financial monitoring by banks that introduced mechanisms of identification of shell companies for banks. What results should we expect?


Oleg Krainskyi,

Associate, AVELLUM

The NBUs rules on shell companies, effective from 4April2019 are, in fact, quite straightforward. What they do is basically add to the banks financial monitoring regulations, a simple definition of a shell company, and a couple of provisions on how to identify one and what to do with it.

By definition, a shell company is a foreign company that has either or both of the following two elements. First, such a company does not carry on any actual business in the country where it is registered, meaning that it does not have sufficient assets, staff (or both) to do so. The second is that its ownership structure does not permit to see who the ultimate beneficiaries (also called controllers) are.

It follows from the drafting that both elements involve a measure of discretion for a Ukrainian account bank, which will determine whether any actual business is being done or whether the ownership is sufficiently transparent. The NBU included in the rules a few examples of what needs to be found to show this. At the same time, the regulator made it clear that banks can make their own judgment as to which evidence they would require to see that a foreign company is not a shell company.

If a bank determines that a foreign company is a shell company, or it does not receive sufficient evidence to the contrary, the bank may refuse to open an account (or close an existing account) or carry out a financial transaction for that company.

Two types of companies can qualify for an exemption from the above, including holding companies and their subordinates. To qualify for the exemption such companies must have transparent ownership that enables their ultimate beneficiaries to be seen and the nature of their business must be sufficiently clear. In practical terms this means a Ukrainian account bank will need to make itself comfortable based on the evidence supplied to it so that it sees who the people behind the structure are, and that the company has a legitimate business function in the groups ownership structure.

In general, the idea behind the shell company rules is a positive one. In this case the Central Bank has followed the approach it notably took in its recent overhaul of foreign exchange regulations, allowing banks to make their own assessment, rather than rely on if-then type of regulations. The coming months will show us how much trouble the new rules will add to foreign companies willing to open a bank account in Ukraine. However, for the time being it does not appear that those rules should lead to any significant practical challenge.

On 20 March the Cabinet of Ministers adopted Resolution No. 227, which approved the provisions on the State Tax Service and State Customs Service. What are the key consequences of reorganization?


Vyacheslav Krahvlevych,

Partner, EQUITY

When analyzing the history of how the tax authorities developed in Ukraine, it becomes obvious that history is cyclical by nature. From the period of existence of such independent bodies as the State Tax Service and the State Customs Service to the Ministry of Revenues and Taxes surpassed by the State Fiscal Service in 2019, the Government adopts Resolution No. 227 approving provisions under which the SFS is being reorganized into two independent services, the state tax and the state customs service. In terms of logic, this is a positive reform. First of all, in view of the difference between the functions of tax and customs authorities in general. The tax service is aimed at performing high-quality tax administration and providing services to such payers. The priority objective of the customs service is to protect the economic environment and development of foreign economic activity. The management of the unified SFS should have a great deal of expertise and qualifications in both structures, which is de facto not the case. Thus, the customs service is being paid less attention and so remains in the shadows. Therefore, by gaining more control over their departments, in view of the peculiar features of the activities of each service, their division will contribute to more effective performance of the mentioned functions. Neither will this reform burden the rights of taxpayers, as all the documents submitted to the SFS by them require no re-submission to any of the newly-established services; the right to appeal to the new successors against the decisions of the SFS will be reserved. The same applies to enforcement proceedings.

The controversial issue is to ensure the operation of a single database which, in its time, became perhaps the main advantage of reform to unify the SFS. Since the Government is obviously interested in the completeness of state budget revenues, there are certain options to resolve this issue. So, the Ministry of Finance proposes to create separate databases interlinked via the same identifiers. Therefore, public finance information will be available in any of the services. As a matter of interest, Regulation No. 227 establishes the authority of customs bodies to carry out law-enforcement intelligence operations related to control contraband. This provision needs to be refined, since smuggling of controlled goods belongs to the remit of the Security Service of Ukraine, while the smuggling of other goods is not a criminal offense. Another important issue of reorganization is human resourcing. The issue here is who will lead these services. The tactics adopted by the Cabinet of Ministers of Ukraine and the National Agency of Ukraine for Civil Service in the form of a series of tests, situational tasks, and interviews, should guarantee thorough selection of candidates at once. However, subjectivity cannot be excluded, and the peculiarities of the personnel transition following reorganization, as stipulated in the Law On Public Service and the Labor Code, has never been canceled. Thus, there are certain doubts about the comprehensive implementation of this reform in relation to this issue.

Yet, positive changes should be expected as part of the professional improvement of public officials. During the existence of the SFS, tax officers had to regularly study the Customs Code, and customs officers had to study the Tax Code, having absolutely no justified need to do so. After all, a customs inspector practically does not encounter issues regarding the Tax Code while performing his/her job duties, but should know it to confirm the qualification of an SFS inspector. Proposed division of the SFS is intended to eliminate the said flaw. Another positive point related to the services decentralization is that from now on the heads of territorial bodies are appointed to the office without the consent of the respective head of the regional state administration. This will reduce corruption risks and unjustified obstacles for candidates when they take up office. And it will also be a general guarantee of the relative independence of financial services.

Furthermore, one of the key mechanisms, whose development will be promoted by the division of the customs service, is a customs post-audit. Both the supplier of goods and the regulatory authorities are interested in reforming this area. A post-audit allows simplification of the procedure of customs clearance to the maximum extent and to trace the movement of goods right up to the final consumer while reducing corruption risks at various stages. After unification into the SFS, functions of the so-called customs post-audit were undertaken by the corresponding Main Directorate of the SFS. However, due to the lack of professional qualifications of its employees and improper exchange of information at international and national levels, the effectiveness of this procedure was brought to naught. The concentration of relevant powers in the hands of the newly established customs service will enable the customs post-audit mechanism to be restarted. Therefore, the splitting of the State Tax and Customs Services, subject to necessary funding and rational organization by the reforms initiators, can be confidently called a progressive step within the regulatory mechanism of the state financial field.

Taking into account the global tendency to strengthen anti-offshore legislation and corresponding actions of Ukraine in this direction (Agreement with Qatar and ratification of MLI Convention), what might the consequences be?


Anton Kerimov-Varanytskyi,

Manager, KPMG in Ukraine

In recent years, the Ukrainian legislative agenda has been overwhelmed with tax-related issues. In tackling tax avoidance and evasion practices, Ukraine has committed itself to observe the OECD footstep, which resulted in implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (MLI) and a draft law to address basic BEPS issues that are not covered by the MLI. Needless to say, it is expected that such initiatives will prove their high efficiency and will not only enhance Ukraines international standing, but result in considerable tax revenues collected to the state treasury.

In addition to cooperation on the international plane, Ukraine recently extended its list of low tax jurisdictions, which now includes Trinidad and Tobago, Namibia, Guam, Palau and American Samoa. This, in itself, should not have significant impact on combating harmful tax practices in Ukraine as these jurisdictions have always been beyond the radar of Ukrainian companies and their tax advisors in terms of streaming Ukraine-sourced income/margins to low tax or no-tax jurisdictions.

Meanwhile, Ukrainian decision-makers might go even further in their attempt to combat tax abuse. Given the current political climate, a capital exit tax has never been as likely to be introduced as today. If and when it is implemented, a new capital exit tax will substitute corporate income tax and withholding tax. It is arguably expected to stimulate business activities in Ukraine by encouraging re-investment of income rather than its repatriation. Introduction of this tax appears to be a highly convenient option to kill two birds with one stone: ensure proper collection of taxes to the State Treasury and, at the same time, significantly cut spending on administering the collection of taxes.

That said, the number of capital exit tax supporters is about as high as its opponents, arguing that the introduction of the tax would bring nothing but an unaffordable State Treasury shortfall to the developing Ukrainian economy. It goes without saying that there is always space for creativity, which would obviously come up with viable substitutes for obsolete tax abuse techniques.

Nevertheless, the tangible impact of a new taxation system can be neither judged nor measured, as even in countries that have already followed this route (e.g., Latvia, Estonia, Georgia) the ultimate effect from introducing a capital exit tax is different. Moreover, in certain jurisdictions (e.g., Macedonia) the capital exit tax proved negative in terms of influence on tax revenues in the State Treasury and was later abolished.

The Draft Law On Amendments to Certain Legislative Acts of Ukraine on Improvement of the Regulation of the Authorization System in the Field of Economic Activity Aimed at Reducing Administrative Pressure on Business Entities, No. 10207 was submitted to Parliament. How necessary are these amendments?


Vitaliya Karhova,

Attorney, Counsel, ADER HABER

Many foreign investors consider Ukraine as a possible jurisdiction for investments and conducting business because of the educated workforce and cost efficiency in a number of sectors. Another important criterion is current legislation and the clearness of all licensing procedures, as certain businesses require receipt of the relevant licenses and permits.

Receipt of such approval for businesses in Ukraine is determined by the Law of Ukraine On Administrative Services and list of the authorizations and approvals is defined in the Law of Ukraine On the List of Authorizations and Approvals in the Field of Economic Activity.

However, not all sectoral laws governing receipt of permits have been brought into line with the Law of Ukraine On Administrative Services and Law of Ukraine On Authorization System in the Field of Economic Activity, and this can make the process of obtaining them more complicated.

Ease of receipt of licences and permits is one of the indicators used in the calculation of Ukraines ranking pursuant to Doing Business. Therefore, reforms aimed at its unification and simplification can have a positive impact on Ukraines business environment.

On 8 April 2019, Draft Law No. 10207 was registered with the Verkhovna Rada of Ukraine. It proposes amendments to about 25% of licensing procedures in the spheres of environmental protection, agro-industrial production, food industry, land use, commercial shipping and water consumption, which shall implement a more simplified and clear provision of receipt and renewal, and determine the grounds for denial of issue of a permit.

Taking into account the fact that some legislative acts regulating the procedure of obtaining licenses and permits were adopted more than 10 years ago (for example, legislation on phytosanitary control) and were not precise in setting out the requirements for obtaining them, many companies faced problems obtaining the necessary permits, which definitely had a negative impact on business processes.

One of the amendments proposed by Draft Law No. 10207 is to stipulate information on the decision of the licensing authority on the issue of licenses and permits in the Uniform State Register of Legal Entities, which shall save time when searching for the counterpartys licenses in different registers.

If this Draft is adopted, then the applicants will have the possibility to submit and obtain the results of administrative services both in paper and electronic forms, depending on which option is more convenient for them.

Adoption of regulations proposing business friendly reform in Ukraine can improve Ukraines ranking, as determined by the international business community.

The Draft Law On Amendments to Certain Legislative Acts Regarding the Improvement of Territories of Priority Development, No. 10200, which proposes making amendments to the Economic Code of Ukraine, Law of Ukraine On State Aid to Business Entities and Law of Ukraine On Stimulating the Development of Regions. How efficient is the existence of such a regime?


Ievgeniia Makarenko,

Lawyer, Ilyashev & Partners

Draft Law No. 10200 proposes to amend Article 415 of the Economic Code of Ukraine and the provisions contained in a number of other laws. In particular, it is proposed to introduce the definition of territory of priority development as a part of the territory of Ukraine within a city or district with unfavorable social and economic conditions, where, on the grounds and under the procedure provided for by the law, a special legal regime of economic activity is introduced in order to create new jobs and stimulate development in such a territory. The same definition is introduced into the Law of Ukraine On Stimulating the Development of Regions.

Another provision of this Draft envisages amendments to Article 6 of the Law of Ukraine On State Aid to Business Entities regarding the provision of state support to priority development territories. It is also proposed to amend Article 7 of the Law of Ukraine On Stimulating the Development of Regions so that priority development can be introduced in a city or region located within depressed territories via a special legal regime of economic activity for such territory.

It appears that this Draft does not introduce any global changes in the number of regulatory acts, but only defines in greater detail the concept of priority development territory. An important point is how the mechanism of this special legal regime will actually work in practice. A special investment regime in priority development territories can be introduced with the aim of attracting investment into priority sectors of production, preserve existing jobs and create new ones, introduce new technologies, develop foreign economic relations, increase the volume of high-quality goods and services, and establish an up-to-date production, transport and market infrastructure, use natural resources efficiently, regenerate radiation-polluted land, and introduce advanced agricultural technologies, etc.

It is quite difficult to assess the chances of approval of the Draft Law, since it was submitted to the Verkhovna Rada for consideration not long ago. The only thing that can be said is that the adoption of this Draft Law is capable of ensuring more efficient exercise by responsible persons of their powers and prompting gradual growth of the economy in regions and in Ukraine as a whole.

The Cabinet of Ministers of Ukraine approved the Resolution On Introduction of Amendments to the List of Central State Executive Bodies Authorized for the Enactment of Building Regulations. How exactly will this Resolution influence the renewal of regulations in this sector, and what will be the results for the countrys construction industry?


Mykola Voitovych,

Attorney, Gramatskiy & Partners

The main principles of state policy in building regulations include the principles of harmony of building regulations with current achievements in science and technology and with requirements set out in domestic legislation and international rules. Unfortunately, neither of them has been realized completely. Plenty of regulations are not even close to the requirements demanded at the present time. We still have 72 or so effective Soviet-era (adopted in 1970-80s) building regulations, including, for example, Construction Safety Standards. Obviously, technological progress has not passed by the building sector; therefore, modern rules to regulate this field are required as soon as possible.

The impulse for revising the regulations was expected after the adoption of Law 1704-VI of 5 November 2009 On Building Regulations, which initiated the launch of the appropriate state program. However, there was little progress and some steps are still being taken even now. One example of such steps is recent amendments made to the List of central state executive bodies authorized for the enactment of building regulations (the List) introduced by Cabinet of Ministers Resolution 290 of 3 April 2019. The aim of Resolution 290 is to resolve two major problems in the enactment process of industry-specific regulations: a clash between legislation and the vague jurisdiction of state institutions.

Law 1704-VI provides that only ministries are entitled to enact industry-specific regulations. However, the List had contained several state enterprises as the makers of these regulations (e.g. state highways builder Ukravtodor). This clash led to an inability to renew some rules. If state enterprises issued new rules this would contradict Law 1704-VI; at the same time, competent ministries which are absent from the List, could not pass specific rules either. Once these amendments are passed, the List will include only ministries, which means the legal collision is eliminated and ministries are given the green light.

The amendments also specify each ministrys jurisdiction according to their industrial competence and remove non-existent ministries from the List, with the delegation of their past powers being passed to the appropriate current ministries.

Altogether, the proposed amendments, if adopted, are expected to update now obsolete regulations.

The Cabinet of Ministers of Ukraine registered the Draft Law On State Regulation in the Sphere of Satellite Navigation, No. 10198. How will this influence the business sector, and how necessary is state intervention in the sector?


Roman Kostenko,

Partner, Asters

On 29 March 2019 the Cabinet of Ministers of Ukraine submitted the Draft Law On State Regulation in the Sphere of Satellite Navigation, No. 10198 for consideration by Parliament.

Background.GNSSis the acronym for Global Navigation Satellite System. There are currently several of them, including GPS (U.S.), GALILEO (EU) and others. GNSS is, basically, an array of MEO satellites transmitting navigation signals to Earth. Yet, for enhanced accuracy of positioning, separateaugmentation systemsneed to be used. These can be ground-based, GEO satellites-based, or combined. An augmentation system compares thereceived GNSS signals with the reference signals from the systems own stations or satellites, and generates thedifferential information. The latter is used in geodesic surveying, machined farming, network planning and other specialized applications that require increased precision of positioning. There are various national satellite augmentation systems and Ukraine is on the way to making its system interoperable with EGNOS, the EUs system.

The key novelties, which the Draft purports to introduce, are:

1. The operators of the augmentation systems in Ukraine will be subject to registration. There will be two new official registers created, for two types of systems, distinguished by the draft: (1) state register for registration of augmentationunits; (2) discipline-specific register for registration of augmentation informationplatforms.

2. Only registered systems will be allowed for use in the military, national security, medical emergency or transportation areas, or if provided on a paid basis then regardless of the area.

3. The augmentation systems will be subject to compliance certificates, with the rules of certification yet to be prepared. Certificates will be required in order to register the system in either of the official registers mentioned above.

4. There will be GNSS services-specific Regulations that are to be approved by the Cabinet of Ministers of Ukraine. The Regulations will be binding on providers and users, and will provide a set of requirements to, the services provided with the use of the augmentation systems in Ukraine.

5. Before the Regulations are enacted, a temporary simplified procedure for registration will be prepared by the State Space Agency (SSA) and certificates will not be required.

6. The SSA shall, upon approval of the Ministry of Defense, be authorized to effect the temporary limitation of the positioning accuracy in the event of a military or terrorist situation, on the affected territories. If limitation is enacted, the providers of augmentation systems services will be required to disclose the fact and the details of such limitations to their clients.

The Draft Law is not substantially detailed, yet the vector of state regulation appears to focus on the aspects of registration and certification, with separate emphasis on the states ability to controllably downgrade the positioning services in the event of need. However, the effectiveness of the law will apparently depend on further definitive legislation that has not yet been adopted by the Government.

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