Crux (#01-02 January-February 2020)

Legal Digest

The end of the previous year was rich in legislative activities at the Ukrainian Parliament, many of which became items for discussion. A number of amendments to the Tax Code were offered and adopted, as was the significant Law No. 2261, which abolished the monopoly held by lawyers, which had existed since 2016. Another notable initiative is Draft Law No. 2635, which, if adopted, will terminate the Commercial Code of Ukraine. The UJBL editorial team asked the views of experts on these and other recent legal topics.

Draft Law No. 1067-d may simplify the procedure of licensing and providing administrative services. What will be the main amendments, and how will such procedures be carried out in the future?

Oleksiy Burchevskyy, Head of Know-How, Kinstellar Kyiv

On 4 December 2019, the Ukrainian Parliament approved in the first reading Draft Law No.1067-d, which, if approved, in its final version, would significantly expand the powers of the Cabinet of Ministers in the areas of licensing and administrative services.

Under the current set up, licensing and the provision of administrative services are strictly regulated by the relevant laws of Ukraine. Thus, only Parliament is entitled to designate the state authorities that can issue the licenses, certificates and permits required for various business activities and to outline the procedures that regulate the process. This rule serves as a safeguard against excessive and unreasonable demands of various state regulators on the market.

The proposed Draft Law would transfer the majority of the above-mentioned powers to the Cabinet of Ministers, which would then be able to unilaterally designate licensing authorities, approve licensing terms and regulate the provision of administrative services. Ukraines Commercial Code and laws of Ukraine On System of Permits in Business Activities, On Administrative Services and On Licensing of Certain Business Activities would also be amended accordingly.

These new powers would allow the government to establish or remove virtually any permit for any type of business activity in Ukraine without parliamentary approval. Government by-laws, not the parliamentary vote, would regulate which documents would be required in order to obtain a license or receive an administrative service. However, laws of Ukraine would continue to determine what types of business activities require licenses (Parliament has so far refused to transfer this right to the executive branch of power). The Draft would also remove the provision requiring entrepreneurs whose license has expired to halt business activity.

The authors of the Draft expect the Cabinet of Ministers to fast-track deregulation and improve the business climate in Ukraine using its new powers. At the same time, in the hands of a dishonest government, such unrestricted regulatory authority could kill, not heal, entire markets in Ukraine.

The Ukrainian Parliament adopted the Law On Prevention and Counteraction of Legalization (laundering) of Proceeds of Crime, Financing of Terrorism and Financing of Proliferation of Weapons of Mass Destruction. How effective can this law be in the long-term?

Inna Bondarenko, Associate, Asters

On 6 December 2019 the Verkhovna Rada of Ukraine adopted the Law On Prevention and Counteraction of Legalization (laundering) of the Proceeds of Crime, Financing of Terrorism and Financing of Proliferation of Weapons of Mass Destruction in order to harmonize financial monitoring procedures in line with international and EU standards. In particular, the law provides for the following innovations, which can be regarded as positive:

application of a risk-oriented approach by the subjects of the initial financial monitoring and proceeding to case reporting on suspicious transactions of clients;

raise the threshold of financial transactions subject to financial monitoring from UAH 150,000 to UAH 400,000, together with a reduction in the number of characteristics by which financial transactions are considered the threshold from 17 to 4 (transactions of political persons, money transfers abroad, cash transactions, transactions where a participant/bank is from a country that does not comply with FATF recommendations);

possibility to introduce remote verification mechanisms for clients.

The following changes introduced by the said Law should also be noted:

introduction of an asset freezing mechanism, as well as regulation of the actions of the Subjects with assets related to terrorism and its financing;

improvement of the procedure by which business entities disclose their ultimate beneficial owners;

a significant increase in the number of penalties that can be applied to subjects.

It should also be noted in general that the changes introduced by the Law should enable focusing on higher-risk transactions. On the one hand, the Law provides for more clear game rules for the subjects and, on the other hand, it remains to be seen how positive the effect of the new instruments and approaches introduced by the law will actually be.

On 18 December 2019 Law No. 2261, which allows legal entities and authorities to represent their interests in court by themselves, was adopted. What will be the main consequences of this law for the Ukrainian legal market?

Myroslav Horoshko, Associate, EQUITY

Amendments which introduced the lawyers monopoly shook the Ukrainian market in 2016. Pursuant to the Constitution of Ukraine, only a trial lawyer is allowed to represent another person in court.

The commented law of 18 December 2019, introduced changes to Ukrainian procedural codes, having made it possible for both government bodies and legal entities of public and private law to represent their interests through persons with the right to act on their behalf as specified by a law, articles of association, provision or labour contract under the procedure of self-representation.

The changes made to procedural codes have expanded the notion of self-representation for legal entities and enabled its application by government bodies and institutions, which was unknown before. In particular, the law of 18 December 2019, abolished the lawyers monopoly regarding presentation of interests of legal entities and government bodies in court. Today, as it was in 2016, legal entities may yet again be represented in court by in-house lawyers and legal counsels. At the same time, such content of the procedural codes in respect of self-presentation of government bodies is not in line with the existing version of the temporary provisions of the Constitution of Ukraine, which states that from 1 January, 2020, government and local self-government bodies are represented in courts solely by a prosecutor or trial lawyer.

We predict that the rights protection practice will side with the lawmaker in implementation of amendments to the Law of 12 December 2019, though such changes yet again refer to the lack of consistency in the reform of legislation.

What about the implications of such changes?

The aforementioned changes have resolved one of the most acute problems, namely labour dependence of the in-house lawyer (former legal counsel) on his employer, which contradicted certain provisions of the Lawyers Code of Ethics and excluded even a chance of independent actions by such a lawyer. In addition to this, such changes will help to cut budgets expenditures of both government bodies and legal entities to engage trial lawyers into court representation. In turn, such changes may bring about certain unpleasantness for the Bar in general caused by a loss of clients in less complicated disputes which, in its turn, is going to intensify the ongoing battle for clients. Apart from this, the aforementioned changes may be felt by the judiciary as new/old legal counsels or representatives are not burdened by the rules of the lawyers professional conduct in their professional activities, and may not be aware of procedure subtleties of litigation and the need to respectfully treat the judiciary.

What is the concept of Draft Law No. 2419 On Amendments to the Tax Code of Ukraine with Respect to Improvement of State Tax and Customs Policy Governance?

Vadim Medvedev, Partner, AVELLUM

On 18 December 2019 the Verkhovna Rada of Ukraine supported Draft Law No. 2419 in its first reading. The Law is designed to simplify governance of the recently established State Tax Service and State Customs Service, and to improve the quality of services provided by the authorities to taxpayers.

The major change is introduction of a "single legal entity" principle. Territorial tax inspections and customs units will lose their status of separate legal entities and will function as branches under the roof of STS or SCS. This will increase the level of responsibility borne by top officials of the STS and SCS for efficient operation of respective authorities, as they will concentrate more management powers in their hands. If done properly, this will lead to optimization of internal working processes, unification of approaches to resolving common administrative issues and facilitation of data and document exchange between structural units and central departments.

In addition, the Law nominates the Ministry of Finance of Ukraine as the responsible authority for purposes of the Mutual Agreement Procedure, a tool for resolution of international tax disputes on a state-to-state level. Double tax treaties concluded by Ukraine provide for use of MAP, and the Ministry of Finance of Ukraine is the Competent Authority of Ukraine for purposes of MAP in the majority of such treaties. However, this tool has seldom been tested in practice. Clear indication of MAP authority of the Ministry of Finance of Ukraine in the Law, in addition to a more detailed MAP mechanism in recently voted Draft Law 1210 remove a number of obstacles in the use of this remedy. We hope that such changes will give life to a new effective tool for the protection of taxpayers rights.

The Law also introduces new criteria for calculation of remuneration of STS and SCS officials, including key point indicators and personal qualifications. Such an incentive scheme may help the authorities attract and keep more qualified employees.

As a bonus, the Law gives taxpayers an option to request and to receive individual tax rulings in electronic form. This will make communication with the authorities more convenient and time-efficient for taxpayers.

Draft Law No. 2635, which may terminate the Commercial Code of Ukraine, was registered in Parliament. What are the chances of such a law being adopted?

Sergey Nedelko,

Attorney at Law, Ilyashev & Partners

On 19 December 2019, a group of parliamentary MPs registered Draft Law No. 2635 On Amending and Expanding Some Laws of Ukraine aiming to Improve Civil Legislation. The key provision of the Draft is termination of the Commercial Code of Ukraine (the Code). The initiation of Draft No.2635 is one of the steps towards the recodification (updating) of Ukrainian civil legislation in order to bring it into line with global trends in the development of private law.

Abolition of the Code would enable the provision of conditions for implementation of commercial activity in Ukraine in accordance with the legislative practice of EU countries, strengthen the investment attractiveness of economy, improve corporate management in the state and municipal owned legal entities and remove collisions between the Civil Code and special legislation acts. Legislators propose to refuse business entity types established in the Code, which do not meet conditions on the current market. So, for example, the draft law provides for transformations of state and municipal owned enterprises, private enterprises, collective property companies, mixed ownership companies and joint venture municipal companies into the business entity types as established by the Civil Code meeting world practice. These include entrepreneurial companies (full company, commandite company, limited or additional liability company, joint-stock company, production cooperative) and non-profit companies (for example, commodity markets, chambers of commerce, political parties, religious organizations, trade unions, attorney associations, etc.).

The authors propose to completely reject property-law titles of state and municipal companies, which are not known to world practice and to replace them with traditional and generally used private-law concepts of possession and management of anothers property.

Parliament adopted Law No. 2432 related to SJSC Chornomornaftogaz. What is the main goal of this law, and what are its key provisions?

Alexander Tretiakov,

Senior Associate, Antika Law Firm

On 19 December 2019 the Verkhovna Rada adopted the Law of Ukraine On Amendments to Some Legislative Acts of Ukraine on Continuation of Measures Related to the Resumption of Activities of the SJSC Chornomornaftogaz. The Law was signed by the President of Ukraine on 27 December 2019.

This Law introduces two changes connected with Chornomornaftogaz: one is a change to the Law On Enforcement Proceedings which extend to 2021 the moratorium on arresting of the Chornomornaftogaz property due to enforcement proceedings.

Another change is a new article to the Law of Ukraine On Bankruptcy which sets the prohibition on opening the bankruptcy case against Chornomornaftogaz till 31 December 2021.

This Law is generally the continuation of the same measures taken due to the situation with Russia, which nationalized Chornomornaftogazs property in Crimea after it seized the peninsula. Chornomornafotgaz, having lost its main production base, obviously has numerous debts, including several of them based on rulings to be made by international arbitration courts.

Nevertheless, all these actions are mainly stop-gap measures. Without returning this nationalized property or obtaining equitable compensation it will be impossible to resolve Chornomornaftogaz problems.

At the same time, another matter should be considered altogether. The state did not accept Chornomornaftogazs debts nor provide any other compensation but, at the same time, it introduced legislative restrictions which would not allow to enforce any debt collection. Chornomornaftogazs problems were de facto shifted to its creditors which is actually not the main problem of the whole situation.

The main problem is that the state still does not understand what it plans to do with the company in future, and has no views on possible company reorganization or development. Which means that the said moratorium may be prolonged for a few more years in 2021.

What are the main provisions of Draft Law No. 2327, which provides amendments to the Tax Code on excise tax administration?

Taras Koval, Senior Manager, KPMG in Ukraine

On 29 December 2019, the Law of Ukraine No.391-IX of 18 December 2019 On Introducing Changes and Amendments to the Tax Code of Ukraine and Some other Legislative Acts of Ukraine for the Improvement of Excise Tax Administration came into force. Law-391 is also known as Draft Law No.2317 of 25 October 2019.

Regardless of violation of the tax fundamentals the principle of tax legislation of Ukraine, stipulated in Article 4.1.9 of the Tax Code of Ukraine, establishing the principle of stability of the tax legislation of Ukraine, which in particular was addressed twice by the Main Legal Department of Verkhovna Rada providing conclusions to Draft Law-2317 prepared for adoption in the first and second readings. It should be acknowledged that in general terms Law-391 is aimed at improving and developing administration of the excise tax regarding the supply of fuel and ethanol, the operation of the electronic administration system for the sale of fuel and ethanol (hereinafter SEA SF&E), simplifying licensing conditions for businesses.

Law-391 is a positive signal for market players, as it introduces certainty about a number of legislative provisions, improves the conditions of the tax regulation of relations in the market of fuel and ethanol alcohol. Thus, in particular: the terms and procedure for applying penalties for violation of the rules of accounting, production, and circulation of fuel or ethanol in excise warehouses were revised; the requirement to equip tank meters for the production of fuel during the purification of coke oven gas was abolished; the period was increased from a total of 90 days to 270 days of repayment of a promissory note for aviation gasoline; the deadline for introduction of the system of comparison between flowmeters and SEA SF&E was postponed from 1 January to 1 July 2019, etc.

Law-391 introduced relevant changes and amendments not only to the Tax Code, but also to other laws of Ukraine that regulate these relations. That is, Law of Ukraine No.2628-VIII of 23 November 2018 On Amendments to the Tax Code of Ukraine and Some other Legislative Acts of Ukraine concerning Improvement of Administration and Revision of the Rates for some Taxes and Duties and Law of Ukraine No.481/95-VR of 19 December 1995 On the State Regulation of Production and Circulation of Ethyl Alcohol, Cognac and Fruit Spirits, Alcoholic Beverages, Tobacco, and Fuel.

What are the main statements of Draft Law No. 2358, which could simplify the process of financial restructuring of enterprises?

Bogdan Dyakovych, Associate, Baker McKenzie

On 29 December 2019, amendments to the Tax Code of Ukraine introduced by the Law of Ukraine No. 425-IX came into effect. The changes relate to taxation of certain transactions within the financial restructuring procedure, which is a special procedure allowing Ukrainian debtors to voluntarily restructure their debt obligations in an out-of-court manner.

The New Law has extended until 1 January 2023 the temporary VAT exemption for transactions on the supply of goods by a debtor for the purpose of repayment of its obligations to its creditors within the financial restructuring procedure. Such temporary exemption will now also apply to the supply of goods by sureties, guarantors and pledgors. In addition, the new law provides for a temporary exemption from VAT of the further disposal or sale of such goods by receiving creditors, namely Ukrainian financial institutions. We expect these tax incentives to encourage Ukrainian debtors and their creditors to more actively seek voluntary settlement of debt obligations. Overall, the adoption of the new Law signals continuing progress in reforming the financial sector of Ukraine and addressing its pressing issues, among which the extremely high non-performing loan ratio (currently set at over 50%) remains one of the most notable.

What are the key provisions of Draft Law No. 2543 on renewable energy, and why did it cause such resonance among experts?

Max Lebedev, Partner, Attorney at Law, GOLAW

In 2019 the SE Guaranteed Buyer had several delays in settlements with the RES producers operating under the green tariff, which caused significant concern among market participants. Further on, the Ministry of Energy and Environmental Protection of Ukraine announced an expected strong deficit of the budget of the SE Guaranteed Buyer for settlements with RES producers beginning as early as the end of 2019.

As a result of several months of negotiations the Draft Law No. 2543 appeared, being deemed as a compromise to resolve key issues in the renewable energy sector.

Draft Law No. 2543 establishes voluntary restructuring of green tariffs. In particular it prescribes a reduction in the green tariff both for commissioned projects and for projects that were not commissioned but had concluded prePPA by 1 January 2020, with simultaneous extension of the term of PPA to 15 years.

In general terms, the business community agreed with Draft Law No. 2543, considering that the proposed green tariff restructuring framework has a voluntary nature and the parameters of restructuring of the green tariff are generally in line with the proposals expressed by business.

At the same time, Ministry of Energy and Environmental Protection of Ukraine said it strongly opposes the restructuring scenario proposed by Members of Parliament.

According to the Ministrys viewpoint, the Draft Law does not provide for a possibility either to stabilize the financial standing of the Guaranteed Buyer or to solve other problems in the sector. Calculations provided by the Ministry as well as other expert organizations show that proposed restructuring will not enable the Guaranteed Buyers deficit to be covered in 2020 and it will come to approximately UAH 17 billion.

It should be noted that the European-Ukrainian Energy Agency initiated a mediation procedure with the Government of Ukraine within the Energy Community Secretariats Dispute Resolution and Negotiation Centre. As a result of mediation it is expected that a comprehensive solution will be developed that will not worsen conditions for current investors and which will, at the same time, provide for a correct model of the electricity energy market to stabilize the financial standing of the Guaranteed Buyer.

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