Crux (#11 November 2019)

Legal Digest

The Draft Law On the Agricultural Land Market was registered in Parliament. What are its key provisions and what aspects caused the most discussion?

Vitalii Panchyk, Junior Lawyer, Legal Group EUCON

Recently, a group of MPs of the dominant Servant of the People Party, including the Chairman of the Committee on Agrarian and Land Policy, Mykola Solsky, submitted the Draft Law On Amendments to Some Legislative Acts of Ukraine on the Circulation of Agricultural Lands No.2178-10 (hereinafter Law), which is an alternative to the relevant government draft. The prospect of adopting the Law is obvious from the fact of public approval of its ideas by the President of Ukraine during his recent press marathon.

Key provisions:

(1) Cancellation of the so-called land moratorium (paras 14 and 15 of the Land Codes Transitional Provisions).

Owners of agricultural land will have the right to dispose of it freely: to sell, transfer to the share capital of legal entities, otherwise alienate. In general, cancelation of the moratorium is a significant (albeit delayed) breakthrough in the development of the economys agricultural sector.

(2) Foreign investment, but only from 2024.

The Law allows (among others) legal entities incorporated under the laws of Ukraine to buy agricultural land. This formulation makes it possible to foreigners and foreign-owned companies (FOCs) to purchase farmland indirectly through the registration of a (subsidiary) legal entity in Ukraine.

However, the Law stipulates that FOCs will be able to purchase agricultural land only after 1 January 2024 (the restriction does not apply in certain circumstances).

Such a clause does not appear to have a rational economic basis but is rather a compromise between the proposals put forward by the authorities and the illusory phobias of a certain part of society about the mass purchase of Ukrainian lands by Arab sheikhs or Chinese.

(3) Limit of the land per customer.

The Law suggests a cap on the amount of land that can be purchased by one person or legal entities that have a joint beneficial owner:

35% of farmland within an amalgamated territorial community;

8% of farmland in one region /AR of Crimea;

0.5% of all agricultural lands of Ukraine.

The obligation to ensure compliance with these limits will be vested in notaries certifying purchase contracts. I believe that such restrictions are not productive both from the economic point of view and given the simplicity of circumventing these restrictions, e.g. through indirect acquisition of land via transfer of corporate rights.

On 4 October the Ukrainian Parliament supported Draft Laws No. 1049 and No. 1051, which implement a unified account for payments of tax, duties and unified social tax (UST). What is the reason for such changes, what lies behind it and how will they affect the tax system?

Liliia Taran, Senior Tax Consultant, KPMG in Ukraine

According to current legislation, taxes and duties are paid to different accounts in the Treasury Service of Ukraine (TSU). The system of such accounts is widely differentiated, depending on the type of tax, type of taxable transaction, tax authority body, etc. Such accounts are changed every year. A mistake in the payment order (number of account or other date) causes underpayments to the budget and a tax debt for the taxpayers.

The Drafts introduce a unified account for payments of taxes and duties except for VAT, excise tax on supply of petrol and ethanol, and transfer of the net profit of state entities to the State Budget. Taxpayers are not required to use the unified account mandatory, the relevant choice should be made in the Electronic Cabinet of Taxpayer (ECT). The taxpayers might manage the unified account through the ECT, including initiation of the payments of the taxes and duties. The Drafts state the priority of the charges from the unified accounts to the budgets. Unpaid UST has the highest priority, the debts on the other taxes and duties follow it.

Any overpayments to the unified account might be returned to the current bank account of the taxpayer if there are no tax debts. In addition, the Drafts prohibit the collection and seizure of funds on the unified account.

The Drafts provide the simplification to the process of tax administration. The time investment for tax administration is expected to be reduced. However, at this stage the Drafts have certain shortcomings. This novelty in the tax administration process might require significant improvement of the technical resources and special software of the tax and treasury authorities, as well as involvement of extra human resources.

Considering that the servicing banks are authorized to control the UST and personal income tax payments to the State Budget during salary payment, additional administrative burden might be required to prove the fact that the tax payments have been made. The Drafts (if enacted) will come into force from 1 January 2021.

The President of Ukraine signed the Law of Ukraine which ratified amendments to the Convention on the Avoidance of Double Taxation between Ukraine and Switzerland. What are these amendments, and how can they influence the mechanism of double taxation between the two states?

Iryna Kalnytska, Partner, GOLAW

On 23 September 2019 the President of Ukraine signed the Law of Ukraine On Ratification of the Protocol on Amendments to the Convention on the Avoidance of Double Taxation between Ukraine and Switzerland (hereinafter the Protocol). In particular, the Protocol provides for the following:

the increase of rates of interest and royalty from 0% to 5%;

the addition of a new article on improving mutual settlement (tax disputes) through arbitration;

the revision of the article on exchange of information, which envisages a significant expansion of the possibilities of the Contracting States to exchange tax information without reservations about the requirements of national tax interest or banking secrecy;

the rule on the application of the right to receive benefits: benefits will not be granted in respect of the type of income or property if one of the principal purposes of any arrangement or agreement between the business entities was the direct or indirect receipt of such advantage.

The above-mentioned changes will in the main affect Ukrainian business in order to review its existing or planned corporate, financial and transactional structures involving Switzerland. Therefore, companies will need to consider in advance whether any transaction or tax benefit might be affected or any feature of the transaction might indicate its artificial nature. Among other things, companies will need to comply with the substantive requirements for any future transaction and make some improvements if necessary.

A reminder that ratification of the Protocol is aimed at bringing the Convention into line with the standards of the Organization for Economic Co-operation and Development (OECD) and the BEPS Action Plan (rules for counteracting the base erosion and profit shifting), in particular to enhance information sharing, improve dispute resolution (tax disputes) through arbitration, and exercise the right to receive benefits.

Parliament adopted Draft Law No. 1060. What business industries will most notice these amendments?

Oleksandr Kamsha, Attorney at Law, Ilyashev & Partners

The Draft Law No. 1060 On Amendments to Certain Legislative Acts of Ukraine on Improving the Procedure of Licensing of Business Activities was signed by Ukrainian President Volodymyr Zelensky on 16 October 2019 in order to improve licensing legislation.

To this end, the project proposes to amend the Law of Ukraine On Licensing of Business Activities, Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations, and a list of other laws of Ukraine.

The Law simplifies the conditions for carrying out business activities subject to licensing; clarifies the list of information on licensing contained in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations, information on the availability of places of economic activity for people with restricted mobility, and improves the procedures for appealing against the actions of licensing bodies to the Expert Council of Appeal.

The Law also provides for the procedure for appeal by a licensee against a decision of a licensing authority to suspend a license; resolving issues regarding the re-submission of an application for a license; elimination of the grounds for canceling a license in case of non-payment by the licensee for the issuance of a license; mandatory inclusion in the licensing conditions of provisions on the accessibility of places of business for people with restricted mobility; unification of the amount of fines for violation of the legislation in the field of licensing. In accordance with the final provisions of Law No. 1060, this law comes into force two months after the date of its official publication.

How exactly will the cancellation of the licensing for telecommunication operations, according to Law No. 1050, influence the industry?

Yuriy Kotliarov, Partner, Asters

The Ukraine-European Union Association Agreement in its part relating to the implementation of Directive 2002/20/EC (Framework Directive) prescribes the abolition of licensing for telecommunication operations. The mentioned goal is to remove additional barriers for entering the telecommunications market.

In 2015 a new version of the Law of Ukraine On Licensing the Types of Economic Activities had cancelled licensing in the telecommunication sphere from 1 January 2018. However, the licensing requirement continued to exist in the provisions of the Law of Ukraine On Telecommunications, causing a number of contradictions within the telecommunication business community.

The National Commission for the State Regulation of Communications and Informatization insisted on the ongoing licensing process in the telecommunication sphere justifying the priority of the specific Law of Ukraine On Telecommunications over the general provisions of the Law On Licensing Types of Economic Activities.

On 18 September 2019 a long-waited law was adopted abolishing a long-standing conflict in Ukrainian legislation. The Law of Ukraine On Amendments of Certain Legislative Acts of Ukraine Aimed at Reducing Business Activities which require licensing cancels the licensing regime in the telecommunication sphere. The law has not come into force yet.

Instead of licensing, telecom operators and providers must notify the national regulator about the commencement of activities in the telecommunication sphere.

The notification principle slightly facilitates the process of launching a telecommunication business in Ukraine; however, it does not significantly affect either the simplification of access to the market in certain segments or engaging the activities in the telecommunications sector without changing the legislative system in general. The permissive principle (licensing and permissions) will continue to apply to limited resources radio frequencies and numbering resource. Given that, the abolishing of the licensing regime will have little impact on the telecom market in Ukraine.

It is unlikely that licensing cancellation will benefit subscribers greatly either. Some proponents of the licensing regime claim that it will be much more difficult to regulate the telecommunication operators, providers effectively without such licenses. But this claim is not grounded on facts. In its history the national regulator has rarely, if ever, revoked the licenses of telecommunication operator, provider for violation of subscriber`s rights. So, abolition of the licensing regime might be regarded rather as a formal implementation of the requirements of the Framework Directive, which is not a bad thing in itself.

President Volodymyr Zelensky signed the Law of Ukraine No. 124-IX. What caused the necessity for its adoption and why is it important for the industrial visa free regime with the EU?

Ivan Baranenko, Lawyer, Sayenko Kharenko

The Law of Ukraine No. 124-IX On Making Amendments to Certain Legal Acts of Ukraine due to Adoption of the Law of Ukraine On Standardization, which will come into force from 16 October 2020, amends more than 100 laws in various spheres of regulation. The majority of these amendments concentrate on the development of a single legislative approach to the notion of standards and technical specifications.

The system of technical regulation in force before 2014 envisaged a large variety of mandatory rules, commonly referred to as standards, in different spheres ranging from construction to cargo carriage. This approach significantly differed from the modern European approach, which establishes mandatory technical regulations in key spheres only, while standards are applied on a voluntary basis.

The adoption of a DCFTA with the EU entailed revision of the Ukrainian system of technical regulation and adoption of several laws (e.g. the Law On Standardization). This brought Ukrainian legislation broadly into line with the European approach and established the voluntary application of standards.

Law No. 124-IX removes reference to standards from a variety of laws across different spheres and, where applicable, emphasizes that the application of standards and technical specifications is voluntary. The mandatory nature of specific standards can be established by government in exceptional cases only. The Law also abolishes the right of certain government agencies to develop and establish standards or technical specifications. This contributes to legal certainty and establishes a single judicial understanding of standards as voluntary rules applied only in the sphere of technical regulation.

Law No. 124-IX is another step on the way towards execution of the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) between Ukraine and the EU, which is sometimes referred to as an industrial visa free regime. ACAA will allow mutual acknowledgement of conformity assessment procedures in Ukraine and the EU, which will cut the costs of businesses and facilitate mutual trade.

In October Parliament adopted Law No. 1046 On Concession. What are its main provisions and why is it significant?

Rostyslav Myshka, Associate, AVELLUM

On 20 October 2019 the new Law On Concession came into force. Provisions of the Law are based on best international practices and are more detailed compared to the previous concession law.

The circle of parties to the concession agreements has been substantially expanded, as the Law recognises participation of international financial organisations, creditors, advisors and independent experts in concession projects. A consortia of legal entities (which may include both residents and non-residents) are also allowed to participate in concession tenders. In case such consortium wins the tender it is obliged to establish a legal entity in Ukraine to carry out the concession.

At the same time, the Law establishes a number of restrictions on concession tenders participants. For example, legal entities registered in offshore zones or owned by residents of country recognised as an aggressor state by the Ukrainian Parliament are prohibited from taking part in concession tenders.

The concessionaire may be selected through the: (i) concession tender, (ii) competitive dialog or (iii) direct negotiations. While the first two procedures are competitive, the direct negotiations procedure is applied only to tenants of state property. Essentially, direct negotiations is a way to convert the existing lease of state property into the concession with all its benefits.

Additionally, the Law introduces direct agreements, which will secure creditors interests by providing them with, inter alia, step-in rights.

The Law entitles the parties to the concession agreement to (i) govern it by using foreign law, and (ii) choose dispute resolution venue and procedure.

The new Law envisages a lot of benefits for investors, since it: (i) introduces transparent concessionaire selection procedures, (ii) reduces the bureaucracy impact, and (iii) provides for the new tools that are based on best international practices. Based on the principles of equality, non-discrimination, and transparency, the Law will certainly contribute to attracting investment into the Ukrainian infrastructure sector.

The Ukrainian Parliament adopted Law No. 1052. What is its goal and when will its provisions be used in practice?

Aleksandra Fedotova, PhD, Partner, ADER HABER

Draft Law No. 1052 On Amending the Law of Ukraine On Construction Regulations Regarding the Improvement of the Construction Regulations was adopted by the Verkhovna Rada of Ukraine and signed by the President of Ukraine recently (hereinafter Law No. 1052).

The main goal of the Law No. 1052 is to introduce new innovative technologies to the construction field.

As of today, there are many state construction regulations strictly prescribing all stages of construction as well as elements, materials, etc. So, nowadays, a developer has a strict instruction on how to build without opportunity to change any elements or technology of construction for something more modern and innovative. Having an instruction, a developer sometimes doesnt understand the goal of the regulations (for example a stair width is Y meters, without any explanation why). It is one of the reasons why an architect may not be able to offer the best way to solve the task in a specific situation.

The situation is supposed to be changed with Law No. 1052, as it envisages the following changes.

There shall be three methods of construction regulation, in particular: the administrative, the parametric and the target method. Current law stipulates the administrative method only.

The goal of the parametric method is to prescribe parameters to provide security, functionality and quality of regulated construction. Functional issues and criteria for the object shall be used as the goals of parameters.

The target method is the method in between the administrative and the parametric, which prescribes goals and respective criteria of the object.

The developer will have the option on whether to use all technical norms prescribed by the Construction Regulation (administrative method) or to introduce the alternative decision to reach the goal (parametric method) as well as combine them (target method).

The list of the organization to draft the Construction Regulations shall be widened.

The way to publish the Construction Regulations shall be changed in a way that all government bodies which adopted construction regulations shall publish it on their web sites.

Law No.1052 shall come into force the day following the day of its publication. Nevertheless, for Law No. 1052 to start working, respective construction regulations introducing the parametric and target methods must be adopted. We hope this will happen as soon as possible.

On 20 September the Verkhovna Rada passed Law No. 1085-1. What are its main provisions and how can it affect the market situation?

Tetiana Romanchenko, Senior Associate, EVRIS

This Law will come into force on the day following its publication (for reference published on 18 October 2019) and shall be made effective 3 months later, namely on 19 January 2020, except for some of its provisions specified in the final provisions of this Law, which shall come into force and shall be made effective on the day following the day of its publication.

Note: provisions of the Law will be applied to financial services agreements concluded after it has come into force.

The major changes that are introduced, along with the adoption of the abovementioned Law, are as follows:

relevant legislative acts were supplemented with rules that gave powers regulators of the financial services market have a clear definition of their powers, necessary for the implementation of the protection of the rights of financial services consumers;

the Code of Ukraine on Administrative Offenses was amended by rules that clearly define the concept of offenses in the specified area, their composition and responsibility for their commission;

Unification and clear definition of requirements for advertising of financial services by banks and non-banking institutions and providing the consumer with full information about such services, including specifying what unfair advertising in the specified area is;

it was finally clearly defined exactly what can refer to total expenses under a consumer loan, which already includes all consumer expenses, including related and ancillary services provided by third parties;

a consumer credit agreement can be concluded in the form of an electronic document, using an electronic signature.

I believe that the adoption of the aforementioned Law will help to revitalize the Ukrainian financial market, increase the confidence of Ukrainians in the financial system as a whole, which in recent years has fallen significantly and, as a result, the number of outstanding consumer loans has rapidly increased, and will improve the financial literacy of citizens consumers of financial services, which is, unfortunately, quite low.

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