Crux (#06 June 2019)

Legal Digest

Last month the UJBL editorial team monitored novelties of legislation as well as significant amendments and hot legal topics. In this section our team has enlisted the help of experts to comment on some of them. Our latest digest includesResolution On Expanding the List of Goods Originating from Russia Prohibited for Import into the Customs Territory of Ukraine, several resolutions of the National Bank of Ukraine and the court decision on nationalization of PrivatBank. Another milestone was adoption of Law On Amendments to Certain Legislative Acts of Ukraine on Ensuring Competitive Terms of Production of Electricity from Renewable Sources.

On 18 April the District Administrative Court of Kyiv announced the abolition of the nationalization of JSC PrivatBank [in 2016]. What were the arguments put forward by the Court when making this decision? Will the consequences of this decision be tangible for business, and how it will influence the future nationalization processes?

Bohdan Slobodian,

Senior Associate, Equity

It is worth noting that the decision of the District Administrative Court of Kyiv on the so-called abolition of the nationalization of JSC PrivatBank is only one of a number of legal mechanisms being used by former shareholders to regain control over the bank. According to available information, it was by this decision that the court cancelled virtually all major decisions adopted by the National Bank of Ukraine, the Cabinet of Ministers of Ukraine, the Deposit Guarantee Fund and the National Securities and Stock Market Commission, which all envisaged nationalization. Therefore, in the event that this decision comes into force, it will really have an impact on the banking and economic system, as it will, in fact, show the need to return the largest system-creating bank to former shareholders.

Simultaneously, it should not be forgotten that in many cases court decisions about the illegality of the regulators decisions on the withdrawal of banks from the market remained virtually unfulfilled.

It should be borne in mind that, in addition to the above-mentioned decision, the District Administrative Court of Kyiv has taken two other significant decisions regarding the nationalization of this bank.

Thus, through the first of those decisions the court canceled the entire list of persons affiliated with the bank, which list had been determined by the National Bank of Ukraine immediately before nationalization. It is this list that was used for the implementation of the compulsory conversion of funds into the banks capital.

This decision will be important for a large number of players, because the list includes companies and individuals who have not always directly associated themselves with the so-called Privat group. By the second court decision, the District Administrative Court of Kyiv abolished the decision to appoint an extraordinary audit, the results of which were the formal grounds for the decision on insolvency of the bank and for the institution of its temporary administration. So far, it is this court decision that has already come into force.

In fact, with those three decisions lawyers of the former shareholders of the bank succeeded in knocking out the land from under the feet of the National Bank of Ukraine, as it is not only the nationalization itself that was abolished but also the main grounds for its implementation. Moreover, the former shareholders of the bank initiated second front line lawsuits in civil and commercial proceedings to get back shares in the bank. That is, the field of court battles is quite broad and its subsequent fate will depend on the decisions of higher courts. At the same time, the question of the reasons for the nationalization is largely in the economic plain rather than jurisprudence, because the objective answer requires independent and professional findings of auditors and experts regarding the condition of the bank as of December 2016.

The National Bank of Ukraine cut the refinancing rate by 0.5% for the first time in last two years. What was the reason for this decision, and do any other changes of refinancing rate seem possible in the near future?

Oleksander Plotnikov,

Partner, Arzinger

The refinancing rate of the National Bank of Ukraine is one of the core monetary instruments used by the NBU to control the level of inflation and to stimulate economic growth.

In practice, high refinancing rate entails high loan interest rates of commercial banks for business. As a result, if borrowing becomes too expensive for business, companies have to cut their borrowing and, respectively, spend less on investment in developing their business. In its turn, a reduction in investment usually leads to a slowdown in economic growth. And vice versa, a low refinancing rate leads to low interest rates of commercial banks for business, stipulates the consumption and investments and lead to economic growth.

Taking into account that annual inflation was 10% in Ukraine in 2018, the refinancing rate of 18% was quite high for the economy and did not stimulate business investment. Due to this, in the second half of 2018 the beginning of 2019 there was reduction in corporate borrowing and in January 2019 there was a downturn of commercial production by 3.3%.

Thus, the recent 0.5% cut in the refinancing rate by the NBU for the first time in the last two years was a logical sound response to deceleration of economic growth and low inflation in 2018.

An anticipated increase in commercial lending is aimed at stabilizing the economy and creating a more favorable financial situation and investment climate in order to attract investment into the Ukrainian economy. As reported by the NBU, it may consider further reduction of the refinancing rate if current economic trends are preserved.

The National Bank of Ukraine absolved securities market participants from the need to receive the currency transaction license by its Resolution No. 65. What effect will this have on the Ukrainian securities market, and what results are expected from these amendments?

Ihor Olekhov,

Partner, Baker McKenzie Kyiv

In the absence of credibility in the local securities market, Ukrainian asset management companies and securities brokers have not experienced huge popularity among investors. So far local government bonds in UAH and USD remain almost the only viable option for reliable investment in Ukraine. With the coming into effect of the Law of Ukraine On Currency and Currency Operations the situation is likely to change and local investment houses and brokerages may start to provide direct access to the wealth and breadth of instruments available to any qualified investor globally.

An important milestone for Ukrainian asset management companies and securities brokers was reached in May 2019.The National Bank of Ukraine cancelled foreign currency licenses for stock market participants in pursuance of FX market liberalization efforts. As a result of these changes, stock exchange participants were allowed to conduct all currency operations related to professional activity on the securities market without any licenses. Starting from 9 May 2019, stock market participants have the right to both pay for securities abroad without the need to receive any permits from state authorities and to receive payments from foreign entities or individuals within the scope of securities-based transaction. Such currency operations as transfer of money, sale of currency values in cash and others are still not permissible for stock exchange participants without any license.

Draft Law No. 10287 On Amendments to Certain Legislative Acts of Ukraine on Improvement of the System Guarantee of Individuals Deposits and Withdrawal of Bankrupt Banks from the Market was registered on 14 May. How can this draft influence the position of depositors who are individuals, as well as banks?

Kateryna Breduliak,

Senior Associate, Evris

Draft Law No. 10287 was developed with the aim of stepping up protection of the rights of depositors who are individuals by preventing an unreasonable reduction in the value of assets of insolvent banks. Also, the procedure for the disposal of bank assets is improving, as is the prevention of improper use of procedural rights. Therefore, a number of laws are being reshaped, some of which are listed below.

Thus, the proposed changes to the Law On Enforcement Proceedings is that during the execution of enforcement proceeding by which the bank acts as an execution creditor, classified as insolvent, and the bank is being liquidated, the executor is obliged to involve the Estimator defined by the Deposit Guarantee Fund (Fund). The procedure for selling the property is also determined by the Fund.

Also, according to the Draft On Restoring the Debtors Solvency or Recognizing it as Bankrupt, the valuation of property, the creditor of which is one of the above-mentioned banks, is carried out with the Estimators involvement, who is determined by the Fund. The sale of the property is carried out in accordance with the Law On the System Guarantee of Individuals Deposits and the Funds acts.

In addition, the Law On the System Guarantee of Individuals Deposits is expected to include funds received from the Funds property management (including on alienation, lease, etc.) and from the management of bad debts of state banks and banks in which the state has a shareholding. Moreover, the procedure for the management of such a bad debt is also specified.

Thus, these changes should increase the amount of proceeds raised from the sale of assets of insolvent banks and, as a consequence, increase the amount of payments to a depositor. Lastly, the level of confidence of depositors in the banking system will grow.

The Government made amendments to the procedure for stopping registration of a tax invoice in the Unified Register of Tax Invoices by issuing Resolution No. 391. What is the main reason for the need to make such changes?

Olena Sulyma,

Associate, GOLAW

On 11 May 2019 the Cabinet of Ministers of Ukraine Resolution No. 391 came into force. It was via this Resolution that procedures for stopping registration of a tax invoice in the Unified Register of Tax Invoices were amended. It was adopted in order to prevent groundless avoidance of stopping registration of tax invoices and artificial formation of a tax credit by dishonest taxpayers. In the CMUs opinion it will increase the effectiveness of the work of controlling bodies without causing additional pressure on honest business.

In fact, the adopted changes must be taken into account by all VAT payers. It is worth paying attention to the following.

1. In order to avoid the blocking of a tax invoice the scope of goods supply of the taxpayer shall be less than UAH 500,000 subject to certain conditions (as was the case previously) and the amount of paid VAT in the previous month shall be more than UAH 20,000 (new requirement).

2. In addition to complying with respective indices D and P (an additional criterion) the total amount of VAT paid during the last 12 calendar months by a taxpayer shall be more than UAH 400,000.

3. From now on, only decisions by regional commissions may be appealed under an administrative procedure to the State Fiscal Service (SFS).

4. The form of a claim was established, and such claims will be considered by the central level commission with the participation of a representative of the Ministry of Finance and not by a commission on the consideration of claims.

Appeals can be brought against decisions of the central level commission only in a court of law. Such changes are quite logical because the central level commission and commission on consideration of claims were both created under the State Fiscal Service, which in fact meant that the same body could make a decision and consider an appeal against it.

The Cabinet of Ministers of Ukraine submitted for ratification the protocol amending the UkraineSwitzerland double taxation treaty. What are the main principles of this protocol, and what will be the consequences of the ratification?

Alisa Yepanchyntseva,

Tax Consultant, KPMG in Ukraine

In 2019, Switzerland not only negotiated the protocol amending UkraineSwitzerland DTT, but also initiated long-awaited tax reform. Both the tax reform and the protocol to the DD are expected to have a significant impact on Ukrainian businesses operating in Switzerland.

On 19 May 2019 the Swiss population voted in favour of the Swiss tax reform, under which the federal and cantonal tax regimes for holding, domicile and mixed companies as well as the principal company taxation and the financial branch regime will be abolished as of 1 January 2020. Such measures are expected to result in an increase in the tax burden on businesses structured through Switzerland.

In turn, the protocol to the DTT reduces maximum rates of WHT and provides for the following new conditions for the application of reduced WHT rates:

Dividends:

5% WHT will apply if the beneficial owner of the dividends is a company (other than a partnership) which directly holds at least 10% (currently 20%) of the capital of the company paying the dividends;

0% WHT rate will apply if the beneficial owner is a pension fund, the central bank or the government;

Interest: 5% WHT (currently 10% WHT), subject to exceptions;

Royalties: 5% WHT for royalties for the use of, or right to use any copyright of literary or artistic work (currently 10% WHT) and any copyright of scientific work, any patent, trade mark, design, model, plan, secret formula or process, know-how (currently 0% WHT).

As an additional measure to ensure the tax attractiveness of Switzerland, the most favourable national clause will apply in relation to dividends, interest and royalty payments sourced in Ukraine. It means that, if in any DTT between Ukraine and third state that is a member of the OECD, Ukraine agrees to exempt from tax dividends, interests, royalties arising in Ukraine, or to limit the rate of WHT applicable to such payments to a rates lower than rates provided for under UkraineSwitzerland DTT, such exemption or lower rate shall automatically apply to the UkraineSwitzerland DTT. Therefore, after the Ukraine-Switzerland DTT has taken effect, it will provide one of the lowest WHT rates amongst other DDTs of Ukraine and it will also retain the possibility to lower WHT rates further.

Also, the amending protocol implements a number of anti-BEPS related measures, primarily aimed at preventing claiming treaty benefits in inappropriate circumstances. The MLI is a common way in which jurisdictions implementing the treaty-shopping minimum standard. However, the MLI will not apply to UkraineSwitzerland DTT. In turn, the amending protocol will ensure such a minimum level of protection against treaty-shopping. The most important anti-BEPS related provision is the Principal Purpose Test.

Pursuant to PPT, a double taxation treaty benefit shall not be granted if it is reasonable to conclude, having regard to all the relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the objective and purpose of the relevant provisions of DTT.

Also, the amending protocol implements an arbitration procedure provided for under BEPS Action 14, which will allow taxpayers to submit issues, that were not resolved through a mutual agreement procedure within a period of 3 (three) years, to arbitration to be conducted by both contracting states and (if necessary) with the assistance of the OECDs highest ranking official.

Given ongoing Swiss tax reform and contemplated amendments to UkraineSwitzerland DTT, business structured through Switzerland should analyze the possible impact on taxation of passive income payments with due consideration of the Principal Purpose Test.

On 15 May the Cabinet of Ministers of Ukraine approved the decision on expanding the list of goods originating from Russia prohibited for import into the customs territory of Ukraine. What are the main points of this decision?

Olena Omelchenko,

Partner, Ilyashev & Partners

On May 15 the Cabinet of Ministers of Ukraine approved initiated by the Ministry of Economic Development and Trade (MEDT) decision to expand the list of goods originating from Russia prohibited for import into the customs territory of Ukraine. This list is set out in Resolution No.1147 of the Government On Prohibition of Import of Goods Originating from the Russian Federation into the Customs Territory of Ukraine of 30 December 2015. The new Resolution has not yet been published but, according to the Minister of Economy and to the information posted on the website of the MEDT, the Government has decided to expand the embargo list with such goods as cement and plywood on the grounds of Article 29 of the Law of Ukraine On Foreign Economic Activity in the context of discriminatory and unfriendly actions by the Russian Federation.

From that point onwards, Portland cement, alumina cement, slag cement, cement and similar hydraulic cements, colored or uncolored, finished or in the form of clinkers, as well as plywood, lamwood panels and similar laminated wood materials are prohibited for import into Ukraine. According to estimates by the MEDT, in 2018 imports of cement from Russia into the territory of Ukraine amounted to almost USD 17 million and imports of plywood amounted to about USD 19.7 million.

The Government of Ukraine has for the first time applied a special duty on all products originating from the Russian Federation. Nevertheless, sensitive imports, such as coal, coke, gasoline, liquefied gas and pharmaceutical products are not to be subject to this duty.

Thus, from 1 August 2019 a special duty calculated as a percentage of the customs value of goods at certain rates will apply to all imports into the customs territory of Ukraine of goods originating from the Russian Federation.

The special duty payments will be accumulated in a special state budget fund and will be used to finance import substitution activities.

It is worth mentioning that the special duty is for the first time applied by Ukraine to a WTO member state. This is a unique case, since, according to the WTO rules, the safeguard measures may be applied only following an investigation. In addition, the General Agreement on Tariffs and Trade (GATT) clearly defines that no prohibitions or restrictions should be imposed on the import of any product of a WTO member state. During its accession to the WTO Ukraine undertook not to apply the measures provided for in Article 29 of the Law of Ukraine On Foreign Economic Activity, save for the exceptions envisaged by the General Agreement on Tariffs and Trade, in particular, Article XIX of GATT for national security reasons.

It is unlikely that this decision of the Government of Ukraine will be appealed against by Russia to the WTO, since Ukraine may refer to Article 21 of GATT Security Exceptions. The decision of the WTO Dispute Settlement Body in the case DS512: Russia Measures Concerning Traffic in Transit paved the way for the countries to actively apply trade restrictions for security reasons and created a situation in which Ukraine and Russia can freely exchange trade restrictions. Consequently, we should expect new restrictive trade measures from Moscow.

On 25 April Parliament adopted the Law On Amendments to Certain Legislative Acts of Ukraine on Ensuring Competitive Terms of Production of Electricity from Renewable Sources. What are these amendments, and what are the results of their coming into force?

Viktoriia Pysmenna,

Associate, Kinstellar

On 22 May 2019, Law of Ukraine On Ensuring Competitive Terms of Production of Electricity from Renewable Sources came into effect. Designed to lower prices for green energy by enhancing competition among future investors, the Law reshapes the entire system of incentives for renewable energy producers, and goes even further.

Previously, Ukraine relied on a feed-in tariff (FIT) support scheme to attract investors to its renewable energy sector. Under this scheme, a RE producer has the right to sell energy at a fixed price per kWh, denominated in EUR (but payable in UAH) and multiplied by FIT indices. FIT indices vary depending on the technology used, capacity and commissioning date. Investors were attracted by the high price for green energy as well as by the stateguarantee to off-take and pay for all power dispatched to the grid until 1 January 2030. However, in light of the falling costs for wind and solar energy technology, it was decided that the market should determine a fair price for green energy.

The Law retains the FIT support scheme but makes it unavailable from 2020 for solar or wind plants (their construction stage) with capacity equalling or exceeding 1 MW (solar) and 5 MW (wind, except for three-turbineplants), unless exceptions apply. If no exception is applicable, a potential investor undergoes a bidding process to win state support a 20-year obligation to off-take all power dispatched under the auction price denominated in EUR. The off-take price is determined by an e-auction and shall not be higher than the price under the FIT support scheme.

To participate in an auction, a potential bidder submits an application, a bank warranty in the amount of EUR 5 per 1 kW, information on its ultimate beneficiary owner (UBO), and a set of mandatory documents, including copies of the grid connection agreement for the requested capacity and land title document, etc. During the auction, the bidder submits a closed offer with the price per 1kWh in eurocents. The successful bidder will enter into a power purchase agreement with the off-taker within 15 business days from the auction, if the former secures a new bank warranty (EUR 15 per 1kW). The construction terms are capped at two years (solar) and three years (wind and other RE technologies), although the time period may be prolonged for one year if an additional bank warranty is provided (EUR 30 per 1kW).

The auction support scheme entitles the government to set the annual quotas to be distributed at the auction, although the minimum quota limits are established by the Law: 15% (30% in 20202021) are reserved for wind, the same amount is set aside for solar energy, and at least 15% is allocated for other alternative energy sources. Within one technology, the capacity that can be awarded to an auction winner cannot exceed 80% of the total capacity requested by all bidders. A bidder and related bidders with the same UBO may win a maximum of 25% of the annual quota.

In addition to establishing the rules for the auction procedure, the Law also changes the FIT indices for RE plants commissioned after 2020, introduces the new concept of small generation (up to 150 kW) by customers and energy cooperatives, and revises the FIT support schemes for households. The Law also amends construction legislation in Ukraine by limiting the validity term of the technical conditions for RE power plants. All of the above measures are aimed at promoting renewable energy generation by smaller players, and to make available the technical capacity that has been reserved but for which projects have not yet been implemented.

The Law also obliges the government to develop another support scheme for the promotion of storage technologies at power plants. Ukraine needs investment in power storage technologies, given the technical issues associated with the fast-developing renewable energy sector and the limits of its national grid. While the six-month term to prepare the bill is rather optimistic given the current political situation, by raising the issue, Ukraine is indicating its readiness to create more investment opportunities in its energy sector.

On 16 May the Cabinet of Ministers submitted Draft Law No. 0227. How will such amendments influence the oil and gas market in Ukraine?

Elizaveta Beley,

Associate, Antika Law Firm

The Draft Law approves the Decision of the Association Council between Ukraine and the EU on amending Annex XXVII to the Association Agreement between Ukraine, on the one hand, and the European Union, the European Atomic Energy Community and their Member States, on the other.

The main strategic task in the part of the European integration vector in the energy sector of Ukraine is creation of fully-fledged natural gas and electricity markets in accordance with EU legislation on energy. In order to ensure further implementation of Ukrainian legislation in accordance with EU norms and standards, as well as to provide the legal basis for deepening cooperation aimed at the integration of markets, initiation of amendments and additions to Annex XXVII to the Association Agreement between Ukraine, on the one hand, and The European Union, the European Atomic Energy Community and their Member States, on the other.

The very joined work with the EUs work on the development of energy infrastructure and the full implementation of Ukrainian legislation in accordance with European norms and EU standards is important for the integration of energy markets.

According to the document, Ukraine undertakes to consult with the European Commission on compatibility with the provisions of the EU acquis (EU law Ed.) of any legislative proposal in the field of energy. In addition, Ukraine refrains from enacting acts before the European Commission completes assessment of the compatibility of the draft law with EU law and whether the EC concludes that the draft does not meet European requirements.

The application covers all energy markets. In the field of electricity, the introduction of EU Directives and Regulations on the conditions for access to the network for transboundary electricity flows, integrity and transparency in the wholesale electricity market and the reliability of electricity supply and investment in infrastructure.

For the gas market, inter alia, the introduction of EU requirements for common rules for the internal market of natural gas, conditions for access to transportation networks, reliability of supply, as well as requirements for transportation tariffs, are envisaged.

In the part on energy infrastructure, the introduction of the EU Regulation on guidelines for the trans-European energy infrastructure is important.

In the field of energy efficiency, Ukraine undertakes commitments on energy performance of buildings, as well as energy labeling of household appliances and equipment. There are separate requirements for eco-design for energy-related products. These measures will improve the environment and reduce energy consumption.

Introductation of EU network codes in the gas and electricity networks, in particular, the Network Code on Gas Balancing of Transmission Networks.

In the long run, for Ukraine to combine energy systems through the creation of a single European energy space within the EU, it will have to ensure reliable and stable functioning of the energy sector in general.

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