The UJBL editorial team spent the last month monitoring recently adopted legislation and new legislative initiatives. This month we asked for comments on the Orders: No.78, according to which the mandatory sale of foreign exchange earnings was cancelled, No.91 that cancelled the limitation on repatriation of dividends, Draft Law On Cashback. Other notable events included ratification of the Agreement on Free Trade between the Cabinet of Ministers of Ukraine and the Government of Israel and the launch of the new electricity market.
The Supreme Court in case No.905/691/18 decided that the claim by LLC to have a resolution of its own General Meeting rescinded is an improper method of protection. What were the main arguments issued by the Court, and what should the algorithm of actions of the company after this decision be?
Bohdan Slobodian, Senior Associate, Equity
On 22 May 2019, case No.905/691/18 heard by the Supreme Court outlined several interesting milestones in the practice of resolving corporate disputes.
The point in the case was that the director (arbitration receiver) of the limited liability company in the bankruptcy procedure filed a claim to have a resolution of the General Meeting of the Company rescinded. The claim was motivated by violation of the resolution-passing procedure as the resolution was, in fact, passed by one member holding only 1% of the authorized capital.
Courts of all three instances clarified that members of the Company were the Company itself, holding 99% of the authorized capital, and another legal entity, holding 1% of the authorized capital. The Supreme Court states that the company itself can formally own a share in its authorized capital, though such ownership, being temporary and limited, does not give rise to any corporate rights or, in other words, excludes the voting rights at the General Meeting since it is contrary to the very nature of corporate rights. In this particular case, votes of the only other member were subject to counting, with 1% of the capital constituting 100% of the votes at the General Meeting.
As far as the procedure is concerned, the court referred to the fact that the claim to have the resolution of the General Meeting rescinded cannot be filed against a company member as the company itself can be a proper defendant. In this part, the Supreme Court continued the practice established earlier by the High Commercial Court of Ukraine in cases No.8/182 and No.922/3916/13. Besides, the courts established that the defendant in the case was improper as the claim was filed by the arbitration receiver in the interest of a Company which cannot be a claimant in corporate disputes because, as mentioned earlier, the company does not acquire rights of a fully-fledged member.
Taking into account the aforementioned circumstances, the court of first instance terminated the proceedings and dismissed the rest of the claim. The decision was affirmed by courts of appeal and cassation instances.
It is worth noting that in this case the courts applied prescriptions of the Civil Code of Ukraine and the Law of Ukraine On Business Companies effective as of 2016. At the same time, the Law of Ukraine On Limited Liability and Additional Liability Companies contains an analogous legal requirement as to leaving out the share held by the company in counting votes at the General Meeting during distribution of company income.
On June 18 the Board of NBU adopted Order No.78, according to which the mandatory sale of foreign exchange earnings was cancelled. What results should we expect?
Vitaliya Karhova, Counsel, Attorney, ADER HABER
It should be noted that surrender requirements were introduced as one of the regulating measures regarding the size of the money supply.
In the last few years the regulator has, step by step, adopted amendments to legislation reducing the percentage of the surrender of foreign exchange. As of 1 March, the percentage was determined at the level of 30%.
However, until the adoption of the new legislation on currency and currency operations, not all incomings in the form of foreign currency were subject to surrender requirements. For instance, inter alia, grants from international financial organizations, to which Ukraine is a member, funds, received as foreign investments in Ukraine; funds received under commission contracts, agency contracts.
In practice clients, faced with the reality that banks did not always pay attention to the type of incoming payment and automatically proceeded with the surrender of foreign exchange, which caused negative consequences for the clients involved in foreign economic activity, commission or agency activity. Moreover, as the payments under the respective agreements should be made in foreign currency, and clients needed additional time to submit the application to purchase foreign currency on Ukraine’s inter-bank market, due to the fact that the purchase was not made within the same day, they could have lost on exchange rate differentials and borne the burden of additional banking commissions.
At the same time, according to the statistics of the regulator, regardless of the reduction in the percentage of the surrender of foreign exchange (up to 30%), 90% of Ukrainian businesses sold their foreign currency anyway.
The abolition of surrender requirements, as one of the further steps imposed by the National Bank of Ukraine on the path of liberalization of currency regulation, shall have a positive impact on the business in Ukraine conducting activities which requires payment in foreign currency, such as, for example, foreign economic activity.
In the current year, the Ukrainian business sector have been freed of more than 30 currency restrictions in force for many years. This trend is seen as one of the factors regarded as a benefit for foreigners when investors in the Ukrainian market.
NBU Order No.91 cancelled the limitation on repatriation of dividends. What might the consequences be of such action?
Orest Franchuk, Associate, AVELLUM
To appreciate the complete lifting of the ban on repatriation of dividends, it is worth looking back at how it all began. The National Bank of Ukraine introduced the ban on 23 September 2014 through its Resolution No.591. The restriction remained untouched for almost two years. Then, in June 2016, the NBU started to slowly lift it. At first, dividends for 2014 and 2015 were given the green light with a monthly cap of the higher of USD 1 million or 10% of the aggregate payable dividends (but no more than USD 5 million). After another year, the NBU unlocked dividends for 2016 but retained the monthly cap. Since May 2018, investors have been able to repatriate dividends for 2017 with an increased cap of USD 7 million. In 2019, things speeded up and within the first half of the year the NBU, through several consecutive steps, finally lifted the ban completely. Overall, it took the NBU almost five years to cancel this limitation.
The NBU showed once again that it is ready to act and lift restrictions as soon as macroeconomic conditions allow this, and that its ultimate goal is the completely free flow of capital. At the same time, the NBU has reiterated on many occasions that any further liberalization of currency controls is also dependent on the Ukrainian Parliament, and particularly the adoption of draft laws on “split” and on countering BEPS. In parallel with liberalization, the NBU has been also softening its monetary policy and recently reduced its discount rate to 17%. As reported, it followed from the strengthening of the Hryvnia currency and falling inflation. In parallel with the NBU, the Ministry of Finance has also been showing good budgetary and fiscal policy, including implementation of its Mid-Term Debt Management Strategy. All of these factors, including a positive impression of a competent central bank, appeal to foreign investors. However, any delay in implementation of key reforms or unwinding of current achievements through legislative or court action could frustrate this positive trend.
In June President V. Zelensky revoked Decree No.762. What were the main norms of the Decree, and what effect can its cancellation have on a business?
Igor Reutov, LLM, Head of department, Attorney, Gramatskiy & Partners
The President of Ukraine revoked the obsolete Decree of the President of Ukraine No.762 of 10 July 1998 On Arrangements for Making Payments for Notarial Actions. The Decree set out a regulation that was not aligned with effective law and in so doing caused confusion and created ambiguity in terms of payments for notarial actions.
Thus, pursuant to the section 1 of the Decree, payment (fee) for the notarial actions performed by private notaries should not be lower than the state duty paid by the public notaries, whereas the Law of Ukraine On the Notary Service provides that the fee payable for notarial actions performed by private notaries shall be agreed between a private notary and his/her client.
Hence, the Law implies that the fee for notarial actions executed by private notaries can be lower than the state duty paid by public notaries. Businesses do not normally turn to the services of public notaries. Therefore, such regulation is beneficial to the clients of private notaries; however, many the private notaries, when applying for provisions of the obsolete Decree, demand a fee for their services at the same rate as the state duty.
It should be observed that the Decree of the Cabinet of Ministers On State Duty No. 7-93 of 21 January 1993 fixes rates for state duty payable for notarial actions performed by public notaries. In many cases, the rate of duty is a percentage of the contract price. The vital provision for business is the one that specifies that the state duty for notarial certification of contracts, which can be evaluated, shall amount to one percent of the contract price. This regulation creates additional substantial (and sometimes unreasonable) costs, especially when a transaction deals, for example, with the sale of real estate. Unreasonable costs hamper business activity and impede the effectiveness of business development.
To sum up, the Decree makes the regulation on payments for actions by a notary clear and unambiguous and puts it into line with effective law. It is hoped that the fees notary certification of contracts executed by private notaries will plummet.
On 11 July the Agreement on Free Trade between the Cabinet of Ministers of Ukraine and the Government of Israel was ratified by the Ukrainian Parliament. What sectors of Ukrainian business does it influence most?
Anzhela Makhinova, Partner, Sayenko Kharenko
On 11 July, the Ukrainian Parliament ratified the Agreement on Free Trade between the Cabinet of Ministers of Ukraine and the Government of Israel. The next stage is its ratification by Israel.
First of all, it is worth emphasizing that the conclusion of free trade agreements is very important for further trade liberalization, especially in view of the crisis in the WTO and current “trade war”. However, in order to enjoy as many benefits as possible from such agreements and avoid harming domestic industries, it is vital for the governments concerned to conclude agreements in close cooperation with domestic industries and to take their interests into full account.
With regard to the Agreement with Israel, there are a number of different viewpoints from the perspective of Ukrainian business. Firstly, the Agreement covers only trade in goods. However, according to various experts, in view of the fact that export-import trade volumes between the two countries are quite small, it is more important to have special arrangements covering trade in services and investments. Secondly, the Agreement stipulates the elimination of tariffs as follows: Israel eliminates 80% of tariffs for Ukrainian industrial products and 9% of tariffs for Ukrainian agricultural products, while Ukraine eliminates 70% of import tariffs for industrial products originating in Israel and 6% for agricultural products from Israel. Meanwhile, according to official export-import statistics, agricultural products constitute more than 56% of Ukrainian exports, while industrial products from Israel constitute more than 95%. This means that Israel will enjoy more trade liberalization advantages from the very beginning. Besides, in view of the fact that the parties have not accepted technical regulations of each other as such (they have agreed to certain cooperation and facilitation in this field), it is hardly reasonable to expect that exports of Ukrainian industrial products will increase shortly. Thirdly, unfortunately, tariff quotas are set out for many Ukrainian products that enjoy leading export positions. For instance, for poultry, tariff quotas are equal to between 50 and 135 tons as per the relevant customs code. At the same time, Myronivskyy Khlibproduct alone produced 617,000 tons of poultry in 2018. For sunflower oil, quotas are equal to 2600 tons per customs code. At the same time, 6,360,000 tons were produced in Ukraine in 2018.
On 15 July the Constitutional Court of Ukraine received an appeal with a petition on verification compliance with the Constitution of Ukraine of the squeeze-out procedure, as regulated by the Law On JSCs. What does this procedure involve, and how does it comply with the norms of the Constitution of Ukraine?
Oksana Krasnokutskaya, Of Counsel, AEQUO
Pursuant to Article 65-2 of the Law On JSCs any entity that owns a dominant (95% or more) controlling stake has the right to initiate a squeeze out procedure by sending a demand to buy out shares from all other minority shareholders of the JSC in question.
All JSC minority shareholders and the joint-stock company itself (if it owns its own shares) are obliged to unconditionally sell their shares to such an entity.
On 15 July 2019, 47 MPs of Ukraine appealed to the Constitutional Court of Ukraine with a constitutional petition requesting verification of compliance with the Constitution of Ukraine and to recognize unconstitutional provisions of the Law On JSCs, Law No.1983-VIII and Law No.2210, which regulate the squeeze-out procedure.
It is stated in the petition that the squeeze-out procedure is aimed, first of all, at satisfying the interests of owners of the majority stake in the JSC and the forcible deprivation of minority shareholders’ ownership to the shares in question and, consequently, violates the ownership rights of individuals and legal entities, which is prohibited by the Constitution of Ukraine.
It is worth noting that minority shareholders have so far received over UAH 660 million for shares purchased as a result of completion of squeeze-out procedures, and the aggregate amount to be paid to minority shareholders under all initiated squeeze-out procedures exceeds UAH 1 billion.
Part 5 of Article 41 of the Constitution of Ukraine states that expropriation of private property objects may be applied only as an exception for the reasons of social necessity, on the grounds of, and in the order established by law, and on terms of advance and complete compensation of the value of such objects.
All of these three conditions were met when the squeeze-out procedure was introduced.
First of all, the squeeze-out procedure is the only solution for hundreds of minority shareholders to quickly and effectively benefit from their private property, which was obtained as a result of the privatization processes of the JSCs which took place in the 1990s. Secondly, the squeeze-out procedure is regulated in detail in the Law On JSCs. Thirdly, the shares of minority shareholders are credited to the securities account of the majority shareholder only upon crediting of the consideration for such shares to the escrow account of the majority shareholder, from which consideration is paid to minority shareholders.
The Ministry of Finance of Ukraine published the Draft Law On Cashback. What will be the consequences for business be this Draft is adopted?
Kateryna Breduliak, Senior Associate, EVRIS
The majority of individual entrepreneurs who use the simplified taxation system (STS) do not use payment transactions recorders (PTRs). It is no surprise that large and medium companies are trying to do the same, but in another way, thereby lowering declared earnings. So, the Draft Law On Amendments to the Tax Code of Ukraine and the Law on the Application of Payment Transactions Recorders in the Sphere of Trade, Catering and Services is aimed specifically at removing from the grey economy turnover in high-value segment goods and cash from retail trade.
According to the Draft the main consequences for business should be:
— Losing the opportunity to conceal the real amount of proceeds from the sale of goods and services;
— Reducing the volume of counterfeit and contraband goods;
— Tax optimization and raising the level of tax discipline;
— Reducing the number of verifiers for honest sellers;
— Leveling economic competition conditions between sellers who do not apply STS;
— Gradual reduction in unfair competition;
— Monitoring by state authorities for PTRs and ensuring trust in public institutions.
It should be noted that the size of fines for businesses is quite high. Such additional responsibility may affect small and medium-size businesses, and for individual entrepreneurs, it may be “non-performing” amounts in general. Of course, there may be abuses from the buyers side during the course of submission of complaints to controlling bodies. In any case it is important for buyers to realize their rights and the ability to get compensation from the state. Business will, in turn, try to sell only high-quality goods and set higher prices, covering the risks of abuse and payment of higher amounts in tax and, sometimes, fines. In such situations, the buyers should receive compensation for such expenses, so not only will the buyers’ requirements increase, but so will the cost of goods.
The Ministry of Economic Development and Trade of Ukraine published a Draft Law that proposes to increase the minimum amount of security tour operators held by ten times and to introduce penalties for illegal usage of categories by hotels. How can it influence the tourism industry?
Andriy Guck, Partner, Ante law firm
Tour operators in Ukraine, despite regulations that they obliged to follow, are not controlled sufficiently.
One can take a look at the official list of licenses on the official site of the Ministry of Economic Development and Trade of Ukraine website and see that more than a half the licenses are marked red due to violations, particularly due to the absence of financial security. And yet most of them keep their licenses.
And this happens when the amount of financial security for tour operators is EUR 20,000 in the case of outcoming tourism activities and EUR 10,000 for domestic and incoming tourism. For tickets sales agents the sum is just EUR 2,000 and the situation here is not good either, as the majority of agents operate in violation of this rule.
Besides changing the rules of financial security, state officials should rid the market of severe violators.
The proposed Draft changes not only raise the minimum-security amount from EUR 20,000 to EUR 200,000 (international and outcoming tourism), EUR 10,000 to EUR 100,000 (domestic and incoming tourism) and links the amount to turnover, also adding reputation criteria for the CEO of tour operators and regulates relations with tourists in terms of agreements and responsibility in a deeper way. They are no surprise. The market was involved and discussed those matters for a long time and licensing rules were amended recently to make tour operators more responsible.
If properly executed and enforced this draft law can improve the situation for tourists in Ukraine.
By comparison, for an agent to become an IATA accredited agent the financial security should be at least USD 75,000 and the value of security should also be tied to turnover.
The price for the security is around 3-4% of the secured amount and it is quite affordable for those willing to enter the market or for active tour operators.
One of the signs that a tour operator or agent is risky and tends towards committing fraud is changes in the management and shareholders. For this reason, reputational criteria proposed by the Ministry are good and should be applied.
Financial security in the event of insolvency of a tour operator may be used by a tourist directly not only in the event of the need to return money paid for a tour that did not actually happen or that was partially not provided, but to also bring people back home.
The new electricity market in Ukraine was launched on 1 July. What is the concept behind it, and how does current legislation comply with the real market situation and new working conditions, including the reduction of the regulatory impact?
Olena Sichkovska, Associate, Asters
On 1 July the Law of Ukraine On the Electricity Market fully came into force and the new electricity market of Ukraine was launched despite lots of talk about possible delays. The free electricity market substituted the energy pool model. The new electricity market is consumer-aimed and it provides the opportunity for every consumer to choose his or her electricity supplier independently.
Under the old electricity trading module, electricity was traded in the majority of cases through the Wholesale Market of Ukraine, and under strictly regulated prices. Currently, the Wholesale Market of Ukraine is liquidated. Market participants can trade on six markets or trading platforms. As part of the introduction of the new electricity model, the retail market was launched on 1 January 2019; bilateral contract, balancing, day-ahead and intra-day markets were launched on 1 July and due to technical problems, ancillary services have not been launched yet.
The State Enterprise Ukrenergo i.e. Transmission System Operator (TSO), is the market administrator possessing the functions of registration of market participants, imbalances and trade calculations, conduct commercial accounting, etc.
Regardless of the launch of the new electricity market, the legislative amendments are still in process. From the technical perspective of view, the market is functioning. However, problems arise from gaps in legislation. For example, due to restructuring of the payment model, the RES producers have not obtained payments for the electricity produced in June 2019 and there is no chance that RES producers will obtain these payments in the event that additional costs are not allocated.
In addition to legislative gaps, some obstacles are created by the other market participants. Recently, decisions issued by the Kyiv District Administrative Court abolished two resolutions of the NEURC by which tariffs for Ukrenergo were set for electricity transmission and dispatch control services for the second half of 2019.
The launch of the electricity market coincided with scorching heat in Ukraine, which provoked a list of technical issues in the system’s work. Nevertheless, the first results are evidence the success of the process. The Rotterdam+ formula has now ceased to exist, electricity prices for final consumers remain the same as before the launch of the new electricity market launch, and the required legislative developments are in the process of being elaborated.