Crux (#10 October 2019)

Legal Digest

On 7 August The United Nations Convention on International Settlement Agreements Resulting from Mediation (The SingaporeConvention on Mediation) was signed. Whats the goal behind the signing of this document? What benefits does it bring for businesses in Ukraine?

Natalia Bezkhlibna, Associate, Asters

The Convention is intended to allow and facilitate enforcement of the solutions negotiated by the parties in mediating cross-border commercial disputes. It provides for implementation of tools for recognizing and enforcing mediation arrangements, which are similar to those envisaged in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The Convention will apply to international settlement agreements resulting from mediation in commercial disputes between two companies from different member states. It provides a harmonized framework for recognizing such agreements in the territory of the member state and allows recourse to a competent government body (under which the New York Convention court is deemed) for the agreement of recognition and enforcement in a foreign jurisdiction.

The Singapore Convention has been designed to facilitate international trade and promote mediation as an alternative and effective method of resolving trade disputes. It guarantees that a settlement reached by parties through mediation becomes binding and enforceable in a foreign jurisdiction in accordance with a simplified procedure.

What are the benefits for businesses in Ukraine?

From now on, if a Ukrainian company and a company from another Party to the Convention settle a dispute through mediation, the enforcement of the relevant settlement agreement on the territory of such other Party will only require legal recourse in accordance with a streamlined procedure for formal vetting and recognition of the settlement agreement and obtaining an enforcement order.

Essentially, the Convention has enhanced mediation with guarantees of enforcement and has become the previously missing piece of the puzzle of the uniform and efficient procedure for implementation of agreements resulting from mediation.

The signing of the Convention is a major step in endorsing the recognition of mediation by the global community. It is good to see that Ukraine is keeping up with the world in this process and joined the Singapore Convention from the onset.

What are the reasons and consequences of the new Governments decision to liquidate the Ministry of Agrarian Forestry and Food of Ukraine and to merge it with the Ministry of Economic Development, Trade and Agriculture?

Prof. Dr. Anatolii Miroshnychenko,

Senior Partner, EUCON Legal Group

The Government announced the decision to liquidate the Ministry of Agrarian Forestry and Food of Ukraine on 29 August 2019. The Ministry is to be taken over by the Ministry of Economic Development, Trade and Agriculture (the former Ministry of Regional Development, Construction, Housing and Communal Services).

The new Minister of Economic Development, Trade and Agriculture, Tymofii Milovanov, has said in public comments that the new Ministry will be better equipped to give boost to key reforms like introducing the agricultural land market, privatizing state enterprises, access to agricultural markets, labor market liberalization, etc.

The response from the main stakeholders was in the main very cautious or negative. The fear was expressed that the reform was the indicator of a shift of policy priorities from agriculture to other sectors. Without the Agricultural Minister as a member of the Government, the agribusiness had lost a powerful advocate and was risking losing existing state support.

In my opinion the merger of ministries can be useful if it leads to the elimination of duplicity in functions, ensures a more comprehensive management approach, optimization of staff and removal of obsolete functions and units. If it comes to the Ministry of Agrarian Policy and Food, the very list of units within the Ministry creates an impression, that most of them are performing merely secondary tasks (accounting, document flaw support, HR, PR, internal audit, corruption prevention, legal department, planning, etc.), and not core functions (rural development, state support for agriculture, food safety control, etc.). This shows that there are good opportunities for optimization.

On the other hand, any restructuring is combined with the risk of management destabilization, decline in efficiency (at least for the transition period). This risk can be mitigated through careful preparation and planning, which, unfortunately, was not the case here.

To sum up, liquidation of the Ministry of Agrarian Policy and Food and its merger is only a tool. It is not clear yet how this tool will be used.

The Ukrainian Parliament adopted the so-called split law, different versions of which had been subject to discussion in recent years. How does the adopted version differ from the previous ones?

Maksym Hlotov, Associate, BakerMcKenzie

The initial Draft Law No. 2413a was introduced by the previous president, Petro Poroshenko, as urgent, back in July 2015. Although it was adopted in the first reading in July 2016, it was perceived as rather controversial by some of the financial services industry representatives. Opponents argued that it could lead to unexpected actions on the part of the new regulator(s), i.e., the Securities Commission and/or the National Bank of Ukraine (NBU). Opponents also argued that the Financial Services Commission (FSR) did a good job, because the sector was growing very fast. Finally, in the opinion of the main legal department of the Verkhovna Rada, the text of the Draft lacked substance so potentially it could be challenged as unconstitutional.

That said, the Draft Law enjoyed support from the IMF as one of the key instruments of reform of the financial services market: Ukraine committed itself to adopt it in the new memorandum with the IMF dated 9 November 2019 to create a sound operating environment for the development of our financial markets.

The adopted Draft Law No. 1069-2broadly replicates Draft No. 2413a, but contains some new important features. Thus, it adds substantial enhancements to the key idea of the previous Draft to distribute the powers of the FSR between the remaining regulators. In particular, it substantially develops exactly how the NBU would regulate the new sector: e.g., the NBU Management Board may set up a designated committee authorized to manage the industry. It also states explicitly that the NBU will exercise its new powers within the confines of applicable legislation (thus addressing one of the criticisms made by opponents of the initial draft law). Another curious aspect is that it removes from the list of the recognized financial service some additional types of activities, such as the issue of payment cards, clearing and provision of suretyships. This is apparently due to the fact that the status of some of these activities as financial services has been questioned in the past.

The explanatory note to the Draft provides for numerous and very broad objectives. The Draft addresses some of them, like reduction of (i) the financial services regulators and (ii) the regulatory cost imposed on market participants. It remains to be seen whether these will be implemented in practice.

On 30 August the Draft Law On the Bureau of Financial Investigations was registered in Parliament. What will the Bureau be authorized to deal with?

Bohdan Slobodian, Senior Associate, EQUITY

The main objectives of the Bureau of Financial Investigations (the Bureau) will include the prevention, detection, termination, investigation and clearance of criminal economic offences which, directly or indirectly, cause harm to public interest in the field of finances.

Organizationally, the Bureau will be subordinated to the Ukrainian Finance Ministry, consisting of the central office and no more than seven territorial departments. The head of the Bureau will be appointed by the Cabinet of Ministers of Ukraine at the recommendation of the Ukrainian Finance Minister.

Functionally, the Bureau is delegated a wide range of measures, among them initiating and conducting pre-trial investigations, taking active search measures, carrying out covert investigative activities, direct access to state-automated information and reference systems, registers, information exchange with other law-enforcement and government bodies, international cooperation, etc.

Conceptually, the Bureau is set up to replace the investigative units of the tax authorities or, in other words, with the aim of liquidating the tax police and eliminating duplicated functions carried out by various investigative and law-enforcement bodies in respect of economic crimes.

Thus, the following crimes will be referred to jurisdiction of the Bureau: Art.204; Art.205 (fictitious entrepreneurship); Art.205-1; Art.206 (countering lawful commercial activities); Art.212 (tax evasion); Art.212-1; Art.2018-1 (making a bank insolvent); Art.219 (driving to bankruptcy); Art.220-1; Art.220-2; Art.220-2; Art.222-1; Art.223-1; Art.223-2 (breaking procedure to maintain the Register of Holders of Registered Securities); Art.224; Art.229; Art.231; Art.232 (disclosure of commercial or banking secrets); Art.232-1 (unlawful use of insider information); Art.232-2, Art.233 of the Criminal Code of Ukraine.

Under certain conditions, detectives of the Bureau can also investigate crimes specified in Art.206-2; Art.210; Art.211; Art.222; Art.192; Art.200; Art.209 (legalization (laundry) of proceeds obtained in a criminal manner); Art.216; Art.358; Art.366 of the Criminal Code of Ukraine.

As we can see, the list of crimes will be significantly expanded in comparison with the powers of the tax police. Apart from solely taxation crimes, the Bureau will be authorized to deal with crimes such as making a bank insolvent or countering lawful economic activities.

It is worthwhile noting that Draft Law No.1208 partially contradicts the Law of Ukraine
On Introduction of Amendments to the Criminal Code of Ukraine and Criminal Procedure Code of Ukraine on Reducing Pressure on Business approved by Parliament on 18 September 2019, which decriminalized fictitious entrepreneurship (Art.205). At the same time, Draft Law No.1208 includes a reference to fictitious entrepreneurship referring this crime to the Bureaus jurisdiction.

The other part of the Draft may be positively evaluated as it rather systematically outlines the place and functions of the Bureau. It is obvious that this is a step forward in comparison with the legal status of the tax police. At the same time, one has to note that real effect and results of the Bureau will, to a greater extent, depend on the staff, qualifications and competence of people that will join the newly-established body.

What is the concept of the Draft Law on so-called tax amnesty and what are the prospects for its successful realization?

Larysa Antoshchuk, Attorney, Head of Tax Dispute Resolution Practice, KPMG Law Ukraine

The Draft Law on the so-called tax amnesty is already registered in the Ukrainian Parliament under No.1232 and its official name is On Amendments to the Tax Code of Ukraine on Specifics of Applying Special Reporting for Breaches Committed by Individuals of Tax and other Laws Controlling those Laws on Control Authorities up till
31 December 2018

This initiative is justified as the tool for reducing the size of the shadow economy, which reached 32% of the countrys official GDP in JanuarySeptember 2018 and by combating informal employment (the number of people employed unofficially in 2018 was 21.6%). Thus, the Draft Law has to influence this situation by providing a special reporting mechanism.

Under the term of special reporting the authors of the Draft have in mind exemption for individuals from legal liability (Article 205 and 212 of the Criminal Code) for breaches of tax law that were committed up till 1 January 2020 (inclusive) providing that tax liabilities are paid to the state budget. In order to pay liabilities, the taxpayer shall submit, between 1 January and 31 March 2020, the PIT report (declaration).

The tax rates will defer depending on the reported hidden income as follows:
1)5% of PITwill apply to the currency reported, movable and immovable property, securities, shares, property rights on objects of intellectual property or financial instruments; 2)10% of PITwill apply to other property rights; and 3) the preferential rate equal to2.5% of PITwill apply to assets used for further purchase of Ukrainian government bonds issued by the National Bank of Ukraine.

The special reporting regime will not apply to tax agents or to income obtained as a result of crime, corruption or related to the latter offenses as well as to income found as a result of a tax audit carried out by 1 January 2020.

According to the Draft, after the deadline for reporting has expired, the tax authorities will have 90 days (expiring early June) to evaluate the assets reported and determine the amount of tax to be paid. The Draft envisages a guarantee that information obtained as a result of special reporting will be treated as confidential and will not be disclosed without the writtenconsent of the declarant.

A special threshold is also envisaged that would automatically be treated as the amnestied one the equivalent of UAH 100,000 (about USD 4,000). These amounts may be not reported, taxed and are free from sources of income analysis. The Draft does not specify whether this amount shall be deposited to financial institutions as well as the reported one. Actually, prior to reporting, taxpayers shall deposit their currency values and precious metals into accounts of national financial institutions. Such assets will remain deposited for at least a year after the reporting deadline, which is
31 March 2020.

Taking into consideration the fact that the attempt at a tax amnesty process in 2015 was not successful, according to evaluations by experts, there is the actual question as to whether initiative will have a positive impact on the State Budget, individuals and legal entities.

Parliament adopted Draft Law No.1076, which brings some changes to the ProZorro system. What are the main arguments for such changes?

Oleksandr Aleksyeyenko, Partner, Marchenko Partners

The recently adopted Law No.1076considerably upgrades the Ukrainian procurement system and targets long-expected improvement of procurement procedures.

The revolutionary and long-expected approach of the Law provides for new non-price criteria for the assessment of offers. The previous system was heavily criticized for being focused merely on the price, but not the quality. The procuring entity will now have an option to deal with a life cost estimate of the tender allowing, for example, to purchase currently more expensive but energy-efficient equipment or technology instead of currently cheaper ones, but much more expensive in terms of its future service and maintenance.

It will become mandatory for procurements equal or above UAH 50,000 but lower than the standard threshold for procurement procedures to be conducted via ProZorro under a new simplified procedure. This will enable the bringing of a major portion of all public procurements out of the shadow and significantly increase the level of transparency.

The Law introduces a system aimed at protection against dumping, and the procuring entity will be able to request from the supplier the justification behind the anomalously low price. This change looks promising for reducing the number of previously abusive practices by procurement participants.

Now authorized procurement officials, and not tender committees, will be responsible for procurement. This, together with other changes, is expected to increase the efficiency of tender procedures both by raising the competence of officials and having a clearer individual responsibility algorithm for them.

Its an absolutely new opportunity for procurement participants to fix some technical errors in the documentation within 24 hours after disclosure of the tender proposal.

The amount of the challenging fee is expected to increase and will be established by the Cabinet of Ministers of Ukraine. Instead of the current set fee, the Law introduces a differentiated approach depending on the cost of procurement. It is also important that tender participants will be able to recover the fee for challenging a tender if the AMCU confirms an infringement or leaves the complaint without review.

We expect the Law to further cultivate a competitive ecosystem in procurement, reduce the number of abusive practices and facilitate fair competition.

On 11 September Parliament supported Draft No.1059, which makes amendments to some legislative acts of Ukraine On Improving the Investment Climate. What is the idea behind such changes, and what results of such changes can be anticipated?

Oleksandr Kamsha, Attorney at Law, Insolvency Receiver, Ilyashev & Partners

The Draft Law On Improving the Investment Climate was submitted to the Verkhovna Rada under updated number No.1059 in order to improve the position of Ukraine in the global Doing Business ranking.

To this end, the project proposes to amend the Code of Ukraine on Administrative Offenses, the Civil Code of Ukraine, the Land Code of Ukraine, the Economic Procedure Code of Ukraine, the Code of Ukraine on Bankruptcy Procedures and the Laws of Ukraine On Notaries, On Securing the Creditors Claims and Registration of Encumbrances, On State Registration of Legal Entities, Individual Entrepreneurs and Public Associations, On State Registration of Property Rights to Real Estate and Encumbrances Thereon, and others.

In terms of improving the situation with securing contractual obligations between a lender and borrower, the Draft Law proposes to introduce a new trust property right into Ukrainian legislation. If the proposed changes are made to current legislation, borrowers may have a lower chance of preventing foreclosure of pledged property, but this does not guarantee absolute security for banks. There are frequent cases in judicial practice when the most verified and properly executed pledge agreements (mortgages) were declared null and void by judges. That is, the judgments do not always follow legislation. The borrowers also will have the right not to enter into such pledge agreements, since nobody can force a borrower to transfer his property into trust.

Draft Law No. 1059 also proposes the abolition of payments for infrastructure development. This innovation may have a negative social and economic effect due to the fact that construction projects will not be provided with the appropriate infrastructure. Therefore, it would be more appropriate not to abolish payments for the development of infrastructure, as proposed in the draft, but to optimize the size of it, depending on the level of development of such infrastructure.

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