Over the course of several months we`ve carefully monitored legislation amendments and new initiatives to select the ones which could well have the most significant impact on business and the economy. To name a few, Draft Laws No. 4167 On Prevention, Reduction and Control of Industrial Pollution; No. 3637 On Virtual Assets and the amendments to the Bankruptcy Code of Ukraine that have recently come into force. The UJBL editorial team asked our experts to share their points of view on the above-mentioned and other important issues.
In September the Ukrainian Parliament registered Draft Law No. 4119, which proposes to pay off Ukrnafta’s tax debts and compensate Naftogaz Ukraine. What are the arguments put forward by its authors, and what consequences should be expected in the event that it is adopted?
Maryna Hritsyshyna, Counsel, Sayenko Kharenko
Draft Law No. 4119 provides amendments to Ukraine’s State Budget for 2020. On 26 October 2020, the Draft was revised and a new version submitted to Parliament for consideration. Furthermore, alternative drafts were registered as well on 30 September 2020.
The draft laws were drawn up for the purpose of repaying Ukrnafta’s tax debts and compensating Naftogaz Ukraine for its performance of special obligations. However, the revised Draft Law No. 4119 also provides for additional sources of funding for the Anti-COVID-19 Fund as well as financing for the coal industry and settlement of debts in the green energy sector.
If Draft Law No. 4119 is adopted, repayment of Ukrnafta’s tax debts and compensation for the performance of special obligations by Naftogaz Ukraine is expected first of all. However, the above can only be carried out if Draft No. 4120 On Amendments to the Tax Code of Ukraine is adopted. Both drafts are interrelated and should be adopted together.
In addition to paying off tax debts, official sources mention plans by Naftogaz Ukraine’s management to divide Ukrnafta’s assets. Naftogaz Ukraine currently owns 51% of Ukrnafta’s shares and after the draft laws are adopted, Ukrnafta will be split into a private and a state-owned company.
However, Draft Laws No. 4119 and No. 4120 are not the first attempt at resolving the issue of Ukrnafta’s debts. Draft Laws No. 3004a and No. 3005a were registered in the past and duly withdrawn.
Consideration of these draft laws is included on the Verkhovna Rada’s agenda. However, Draft Law No. 4119 needs to be further revised. The Parliamentary Budget Committee recommends inclusion of Draft Law No. 4119 on the Parliamentary agenda subject to technical and legal amendments. Comments have been also provided to revised Draft Law No. 4119 by the Main Scientific and Expert Department of the Verkhovna Rada of Ukraine.
The Verkhovna Rada registered Draft Law No. 4020 On the List of State Property Objects Not Subject to Privatisation, and three alternative draft laws. What are their differences, and which draft do you think is the best option and why?
Yulia Eismont, Associate, Kinstellar
As part of ongoing efforts to reform privatisation in Ukraine, on 2 September 2020 the Draft Law On the List of State Property Objects Not Subject to Privatisation, No. 4020 and three alternative draft laws, Nos. 4020-1–4020-3, were registered at the Ukrainian Parliament.
Two of the three alternative drafts (No. 4020-2 and No. 4020-3) differ only in part and incorporate a slightly modified list of state-owned enterprises (SOEs) that are not subject to privatisation (the List) compared to those outlined in Draft Law No. 4020. However, unlike Draft Law No. 4020, these alternative drafts do not recognise that certain objects of cultural, sport and forestry sectors cannot be sold. Rather, they identify specific industries and SOEs within these industries that are strategic for Ukraine and, therefore, cannot be privatised (i.e., companies that ensure the energy independence and defence capability of the state, natural monopolies, and companies whose activities are important for society). These include, among others, Naftogaz Ukraine, Energoatom, NPC Ukrenergo, Ukrzaliznytsia, Ukrposhta, Artem, FSC Morye, Fiolent Plant and the RPÀ Kyiv Automatics Plant. We note that Odesa Port Plant is also included on the list in accordance with Draft Law No. 4020-2.
The above-mentioned alternative drafts also propose banning foreclosures of the real property of SOEs and certain key assets if such SOEs were previously covered by Law of Ukraine On the List of State Property Objects Not Subject to Privatisation, No. 847-XIV of 7 July 1999. The proposed ban is subject to limited exceptions.
Alternative Draft Law No. 4020-1 proposes reverting to previous Law No. 847-XIV, which extends the privatisation ban to a significantly larger number of companies and which is no longer in force.
There is also another, related, Draft Law No. 3747 registered with the Ukrainian Parliament on 25 June 2020, which suggests that certain profitable state and municipal assets are not allowed to be privatised.
All the above-mentioned draft laws are currently pending in Parliament’s Committee on Economic Development. However, given that it is a top priority matter for this committee, it is reasonable to expect its first comments in the near future.
The Verkhovna Rada registered Draft Law No. 4219 On Amendments to Legislative Acts of Ukraine Concerning the Licensing System in the Sphere of Economic Activity and Simplification of Access to Markets. How much will the provisions of the draft be able to affect the situation of business?
Alexander Tretiakov, Senior Associate, Antika Law Firm
New Draft Law No. 4219 On Amendments to Legislative Acts of Ukraine Concerning the Licensing System in the Sphere of Economic Activity and Simplification of Access to Markets is just another simplification law with regard to the licensing system.
The Law cancels 5 existing permits and introduces some minor changes and modifications to procedures for obtaining other permits.
Among cancelled permits the most important one, in our opinion, is the permit for works and equipment of increased danger. Now the “permit” system is replaced by the notification system – the company conducting such works or using such equipment should just submit a declaration confirming its compliance with the relevant legislative requirements for safety at work.
It should be noted that while the permit was not difficult to obtain due to the recent changes in regulations which established a quite clear and simple procedure, it was still a significant issue and expense for small companies and individual entrepreneurs. Taking into consideration the fact that, for example, boilers, elevators are considered to be dangerous equipment the number of affected persons is actually quite high.
Among other significant changes is cancelling the license for medical activity in the field of ethnoscience – and this change is more twofold. From one point of view the procedure for obtaining this license did, indeed, require changes. From the other – no other procedure was established in its place. It should be noted that while the license was a clear administrative barrier for this type of activity it also acted as a screen against all types of frauds.
Among changes connected with cancellation of permits, there are a number of clarifications and simplifications introduced into existing procedures.
For example, for a permit for special water use the explicit list of cases when a short-term permit can be issued is stipulated – for all other cases a long-term permit is issued by default.
Thus, in general the Draft may have a significant impact on business in Ukraine. While none of the issues it deals with are critical, it does remove or simplify several big “complications” and additional expenses for a big number of companies in Ukraine.
Draft Law No. 4098 On Amending the Ukrainian Tax Code On Balancing Excise Tax Rates was registered in Parliament, as well as four alternative versions to it. What are the differences between the registered drafts, and how can they influence the market?
Daria Kuznietsovà, Senior Consultant, KPMG in Ukraine
This fall Ukrainian parliamentarians submitted Draft Law No. 4098 On Amending the Ukrainian Tax Code on Balancing the Excise Tax Rates.
The aim of Draft No. 4098 is to make excise tax rates on petrol and liquid gas equal. Parliamentarians propose to reduce petrol excise tax rates (from EUR 213.50 to EUR 139.50) and increase liquid gas excise tax rates (from EUR 52 to EUR 139.50). The authors of the Draft expect that such an equation should lead to an increase in demand for petrol and a reduction in consumption of liquid gas (that, ultimately, reduces the necessity to import liquid gas).
At the same time, four competing draft laws were submitted to the Ukrainian Parliament. The main purpose of these laws, similarly to Draft Law No. 4098, is to reduce the necessity to import liquid gas.
The main difference of mentioned competing draft laws lies in the mechanisms by which parliamentarians propose to reach this goal. One of the competing draft laws provides to merely decrease petrol excise tax rates (from EUR 213.50 to EUR 139.50) but leave liquid gas rates at the same level (EUR 52).
The authors of the second competing draft law propose to provide the 25% ratio (liquid gas excise tax rates to petrol excise tax rates) by arguing that such an approach corresponds to EU directives.
The third competing draft law does not propose to make excise tax rates equal, but instead suggests changing the rates as follows: cut petrol excise tax rates from EUR 213.50 to EUR 169.50 and raise liquid gas rates from EUR 52 to EUR 124.50.
The last, fourth, competing draft law provides the 25% ratio (liquid gas excise tax rates to petrol excise tax rates) and proposes to gradually increase excise tax rates from 2024 till 2031.
Overall, Draft Law No. 4098 and the mentioned competing draft laws should have a positive impact on the Ukrainian oil market and its producers.
Draft Law No. 3637 On Virtual Assets is on the parliamentary agenda. What are its main provisions?
Vasylyna Belo, Associate, EVERLEGAL
Virtual assets are not a new concept around the world. The active emergence of new concepts like cryptocurrency, tokens, mining and others began at least 5 years ago. Today, virtual assets have become our new and widespread reality. A lot of countries have already, in one way or another, tried to legalize virtual assets.
In Ukraine there have been a few attempts to provide certain limited regulation, though, unsuccessful. The new modified Draft Law No. 3637 On Virtual Assets was submitted to the relevant parliamentary committee for consideration on 30 October 2020. The Draft contains certain input from the Ministry of Digital Transformation and inter- factional deputy association Blockchain4Ukraine and is very likely to be adopted soon.
Virtual assets currently remain largely unregulated in Ukraine. The existing legal, albeit partial, regulation is provided in the Law of Ukraine On the Prevention of and Counteraction to Legalization (Laundering) of Criminal Proceeds, Financing of Terrorism and Proliferation of Weapons of Mass Destruction which came into effect on 28 April 2020. The Law sets out a definition of virtual assets, provider of services related to the circulation of virtual assets and certain other provisions related to financial monitoring, which obviously cannot sufficiently regulate the complex and multifaceted sphere of virtual assets.
The Draft Law establishes a new general framework regulation for circulation of virtual assets in the legal field of Ukraine.
The Draft Law defines “virtual asset” in a different way than the AML Law. Under the Draft Law a “virtual asset” is a set of data in electronic form, which has value and exists in the circulation of virtual asset. As it is seen, the definition is prescribed in general terms and does not limit application of the Draft Law to a specific kind of virtual assets.
It is noteworthy that with the adoption of the Draft, a virtual asset will be considered as one of the types of property. Due to this, the respective change is to be introduced to the Civil Code of Ukraine. The status of property will result in application of general legal provisions, which regulate relations with respect to property, to virtual asset.
The Draft also prescribes that a virtual asset can be either secured or unsecured. The secured virtual asset will be the one, which certifies property or non-property rights, in particular the right of claim on other objects of civil rights. Importantly, securing of virtual assets will not constitute securing the fulfillment of certain obligations.
The Law mainly focuses on matters of circulation of virtual assets and does not cover aspects of their creation. The Draft Law and the AML Law enumerate the following possible services related to the circulation of virtual assets: storage or administration of virtual assets and keys to virtual assets; exchange of virtual assets; transfer of virtual assets; participation and provision of financial services related to the issuer’s offer and/or sale of virtual assets.
Either a legal entity or a private entrepreneur can become such a service provider.
It is noteworthy that participation and provision of services related to the issuer’s offer and/or sale of investment virtual assets will be qualified as financial services under Ukrainian legislation.
In order to provide services related to the circulation of virtual assets, a person will be required to carry out state registration. The service provider will have an opportunity to be engaged in several types of services, but it will need to obtain respective state registration for each type.
The registration will be effectuated with the Ministry. If successful, the Ministry will provide the applicant with the decision on registration. For consideration of granting or rejecting registration approval the Ministry will have either 21 or 30 days (as provisions of the Draft Law create confusion with respect to the specific term).
Once state registration has been obtained, the service provider will not be restricted with certain time limits, as the state registration will be open-ended. However, if more than two offenses are committed during the calendar year, the Ministry will be authorised to cancel state registration.
Although the Draft Law foresees list of documents which should be provided together with an application, the details of registration, registration fees and application forms should be envisaged in separate legal acts of the Cabinet of Ministers of Ukraine.
The Draft Law prescribes the following requirements for service providers: managers and founders must have an impeccable business reputation under anti-money laundering and related legislation. It is worth noting that although it is not a qualifying requirement, the information on professional experience of managers and founders should also be provided to the Ministry within the application; disclose information about the ownership structure of the applicant, which allows the establishment of the ultimate beneficial owners of the applicant or their absence; develop and implement documented internal financial monitoring procedures and other procedures aimed at preventing money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction in accordance with legislation; and develop and introduce documented rules for personal data processing, taking into account the requirements of the Law of Ukraine On Personal Data Protection.
The Ministry will be the central executive body that formulates and implements the state policy in the field of virtual assets circulation. The Ministry will have a lot of powers and responsibilities with respect to the sphere of virtual assets, including: creation, administration, maintaining the State Register of service providers related to the circulation of virtual assets; monitoring and supervising observance by the participants of the virtual assets of respective legislation and hold such participants liable; and conducting inspections independently, or with other state bodies, on compliance by participants with the respective legislative requirements.
On 29 September the Cabinet of Ministers of Ukraine registered Draft Law No. 4167 On Prevention, Reduction and Control of Industrial Pollution. How can this Draft influence business, and how do you evaluate its provisions?
Anzhelika Livitska, Counsel, Asters
Bohdan Shmorhun, Senior Associate, Asters
Ukraine has a long list of reform priorities in the area of sustainable energy and the environment (SEE). SEE covers a wide range of issues in the SEE area, including:
— climate change mitigation and adaption;
— energy efficiency;
— waste management;
— natural resources management;
— environmental pollution;
— mitigation of the negative environmental consequences of the ongoing armed conflict in east Ukraine;
— the “green” development of Donetsk and Luhansk Regions.
CMU Law No. 4167 was prepared with the purpose of complying with the terms of the Association Agreement between Ukraine and the EU and also to improve the quality of air in Ukraine, which, currently is really poor. According to the Central Geophysical Observatory review (2015), and other public resources out of 47 cities in Ukraine where regular monitoring was carried out in 2014-2020, 22 cities were characterized by very high and high combined air pollution levels. The air of Ukrainian cities included key pollutants, namely formaldehyde, nitrogen dioxide, phenol, hydrogen fluoride, carbon monoxide, and suspended solids.
The general idea of the Draft is to replace all the permits for the environment pollution by a unified one. This should be considered as a positive shift towards the simplification of the permit system in Ukraine. It should further spare the business of collecting the separate packages of documents for the receipt of each permit.
This Draft should, upon its adoption, have an impact on large production businesses that will have an opportunity to receive a sole permit and proceed with their business activities. What is more, there could be a joint operation of the emissive entity and both operators could now become a part of the unified permit. The permit is permanent and, therefore, the business has no need to re-apply for its extension. This should be credited in favor of the bill as well.
There’s another positive concept that is introduced by the Draft. A public hearing on consideration of public interests prior to the issuing of the unified permit. This procedure will also require submission and publication of all the information on the Internet to let the public acknowledge the potential source of emission and provide their comments. Regardless of the fact that the procedure of public hearings should bring more transparency into matters of permit issuance, there is a flipside too. In certain, exceptional, cases a business could face potential public or rival pressure during the procedure of public hearings.
The Draft also contains a clear provision on the monitoring of emissions, which is carried out by the State Ecology Inspection of Ukraine. The monitoring frequency shall be determined for each entity. Any separate entity, depending on the type of the equipment, might be required to have automatic emission monitoring systems, which means that the said entity would face additional costs in order to fulfill such requirements of the law. A positive impact of this on emissions should also consider the potentially excessive requirement of the authorities.
Nevertheless, this Draft should be considered as a positive shift towards the implementation of best practices. What is more, the bill should be passed by Parliament, and today we see that new drafts were registered after this. Therefore, the final text may be drastically changed.
Amendments to the Bankruptcy Code of Ukraine related to arbitration practitioners have come into force. What are these changes about, and how would you describe them?
Olena Volianska, Partner, LCF
It’s not possible just to up and stop improving bankruptcy legislation.
Amendments to the Bankruptcy Code of Ukraine came into force on 17 October 2020. Thus, the President signed Law of Ukraine On Amendments to the Bankruptcy Code of Ukraine No. 686-IX, which was adopted by Parliament on 5 June, 2020.
The most interesting point for business is the temporary change in the procedure of appointing an insolvency practitioner in a bankruptcy case.
Now the candidacy of the insolvency practitioner to manage the bankruptcy process of a legal entity can be submitted by the creditor initiating the bankruptcy procedure.
Similarly, such a candidacy is submitted by an individual who initiates his own bankruptcy. It is this person who must be appointed in the case without any alternative. Exceptions are cases of impossibility to appoint a certain person, as defined by law. For example: the initiator of the bankruptcy procedure is the debtor-legal entity itself, the person who previously managed the legal entity-debtor, or is a relative of the private person-debtor, etc.
How was it before? Since 2013 there has been a system of automated selection of an insolvency practitioner to be appointed in the case. The practitioner was selected automatically from among all the insolvency practitioners and appointed by the court. This procedure was not perfect, and if a system-selected specialist were to refuse, any other insolvency practitioner could be appointed who had submitted the respective application to the court.
The Bankruptcy Code, which came into force in October 2019, maintained the automated system for the selection of practitioners. During the development of the draft code, this option was considered the most appropriate to ensure the independence of the insolvency practitioner. The court would have to make a request to a system that would select three candidates, and one of the selected specialists would be appointed to the case.
There is one “but”. Automated selection should be provided by the Unified Judicial Information and Telecommunication System (the UJITS). However, this has not been created yet, and since the introduction of the Code, the “lottery” for the selection of arbitrators has been taking place in a way not actually provided by law. The old system was used, refined in the past so that it could provide three candidates to the court. It is obvious that new defects have been added to previous problems.
The mechanism proposed by legislators is a quite advantageous, albeit pro-creditor, solution to the problem for the transition period to the establishment of the UJITS.
Thus, giving creditors the right to initiate the appointment of an insolvency practitioner should encourage debtors to perform their duties in a more conscientious way. Creditors also get some guarantees of an efficient and fast procedure in the event of addressing a professional and experienced practitioner.
Of course, so-called “friendly” bankruptcy, at the initiative of the debtor’s creditors with the participation of a loyal insolvency practitioner, cannot be ruled out. However, on the other hand, the Code contains sufficient mechanisms for other creditors to exercise control over the insolvency practitioner, as well as to review disputed transactions of the debtor and to refute the claims of other creditors.