Crux (#7-8 July-August 2021)

Legal Digest

Despite the relative calm in law-making activities before the start of the new political season, there are still some attention-worthy highlights from the previous months related to the countrys banking and taxation sectors. These include Draft Law No. 5542-1, which increases the guaranteed sum in the event of a banks insolvency; Draft Law No. 4546, which improves mechanisms for the withdrawal of banks from the market; Draft No. 2713-d, which reduces taxes for gambling businesses; Draft No. 5376, which establishes a special tax regime called Diia.City. The UJBL editorial team asked our experts to provide comments on the issues mentioned.

The Verkhovna Rada of Ukraine adopted Draft Law No. 5542-1, which increases the guaranteed sum in the event of a banks insolvency. What do you think of this Draft?

Adoption of Draft Law No. 5542-1 in the first reading has brought closer to reality one of the most sensitive issues regarding the work of the state-run Deposit Guarantee Fund increase of the guaranteed sum in the event of a banks insolvency to at least UAH 600k. This increase was long awaited by the vast numbers of clients of insolvent banks whose deposits exceeded the now effective cap of UAH 200k. If Draft Law No. 5542-1 comes into law it will only apply to guaranteed payouts to clients of banks that will be declared insolvent by the NBU after this law has come into force.

The case for increasing the guaranteed sum in the event of a banks insolvency grew even stronger after public hearings were held by the Constitutional Court of Ukraine on the merits of the constitutional challenge against the Law of Ukraine On the Deposit Guarantee System, whereby, amendments proposed in Draft Law No. 5542-1 are aimed at elimination of the most crucial arguments against the deposits guarantee system implemented by the DGF stated in the respective constitutional challenge.

Moreover, Draft Law No. 5542-1 introduces amendments to the Law of Ukraine On the Deposit Guarantee System clarifying the means and procedure of financing the DGFs activities and also sets out a detailed procedure for cooperation between the NBU and the DGF within the process of liquidation of insolvent banks.

It is noteworthy that if Draft Law No. 5542-1 is adopted and the guaranteed sum is actually increased, the corresponding fees from banks participating in the deposit guarantee system will most likely be increased by the DGF.

Nevertheless, the relevant amendments proposed by Draft Law No. 5542-1 should have a positive influence on the banking sector overall, providing more certainty and protection to both clients and banks that keep their liquidity and other applicable regulations in check.

Parliament adopted Draft Law No. 4546, which improves the mechanisms for withdrawing banks from the market and granting claims by the creditors of such banks. How much do the adopted amendments differ from the previous version?

Despite a number of positive novelties recommended in Draft Law No.4546 On Amendments to Some Legislative Acts of Ukraine to Improve Mechanisms of Withdrawing Banks from the Market and Granting Claims of Creditors of These Banks, some of them are rather debatable.

In particular, the Draft Law recommends alteration of Article 52 of the Law of Ukraine On the System of Insurance of Individuals Deposits (hereinafter the Law), which authorizes the Fund to file a claim on damages inflicted upon creditors against persons who are liable for such damages even after termination of an insolvent bank as a legal entity.

Respective amendments will also be made to procedural codes which enshrine that proceedings in a case of reimbursement of damages initiated by the DGF, acting in the interests of the non-solvent bank or creditors of such a bank, even in the event of its termination as a legal entity, may not be ceased.

First and foremost, it should be remembered that the powers of the DGF with regard to a problem bank arise solely on the grounds of a respective decision adopted by the regulator and within the current procedure of withdrawing the bank from the market. At the same time, the Law does not spell out that the DGF is delegated powers to act in the interest of the bank beyond the procedure of withdrawing the bank from the market, and neither does it envisage the possibility to introduce such procedures with regard to the terminated bank.

Moreover, of rather debatable nature is the Draft vesting the DGF with the right to address persons who, in accordance with legislation, are held liable for damages (losses) inflicted on creditors. To reimburse damages inflicted upon the creditor by unlawful acts carried by persons related to the bank is an exclusive right of such a creditor, which may not be assigned without a respective juristic act with the creditor.

In my opinion, in order to avoid legal collisions, it would be more appropriate to introduce a regulation which would enable the DGF to continue liquidating the bank until all processes related to this procedure, including recovery of losses inflicted upon creditors or banks due to the acts of third persons, are complete.

The Ukrainian Parliament adopted Draft Law No. 2713-d in its first reading, which can reduce taxes paid by gambling businesses. What are the main ideas behind the Draft?

Draft Law No. 2713-d On Amendments to the Tax Code of Ukraine on Taxation of Income from the Organization and Conduct of Gambling and Lotteries has been adopted in its first reading by the Verkhovna Rada. Its key provisions focus on the impact for business and the economy.

Following the resolution on lifting the ban on gambling, Draft Law No. 2713-d has been developed to regulate taxation and stimulate the development of legal gambling to finally withdraw its funds from the shadow market.

Draft Law No. 2713-d aims to bring the following changes to the Tax Code of Ukraine:

to tax the income from the organization and conduct of gambling, activities for the issuance and conduct of lotteries at a rate of 10% (by comparison, current legislation provides for taxation at 18% income tax on bookmaking, gambling (including casinos), 10% income tax on gambling using slot machines, 30% income tax on issuing and conducting lotteries). Thus, accrued income tax reduces the financial result that is subject to profit tax.

to abolish personal income tax on prizes in gambling or lottery, the amount of which do not exceed 8 minimum wages set for January 1 of the relevant calendar year (UAH 48,000 as of 1 January 2021).

Draft Law No. 2713-d also aims to abolish the triple fee for licenses to organize and conduct bookmaking activities, online casino gambling, as well as to cancel the annual triple fee payable for slot machines.

Taking into consideration the explanatory note, the reduction in the tax burden on the gambling business is explained by comparison with EU practice, where a balanced system of taxation of activities related to the organization and conduct of gambling has been formed. Yet, gross gaming revenue (GGR) at the rate of 10% in Ukraine would be one of the lowest in Europe.

Reducing taxes on the creation and conducting of gambling definitely makes it more accessible as a business. Adoption of Draft Law No. 2713-d may lead to an increase in budget revenues in the long run together with the growth of casino chains around the country. Thus, Draft No. 2713-d raises profound questions, ones that are undoubtedly in the public interest to be answered, as to how it would bring such a high degree of benefit to national business or the economy, when the evidence of the social damage of addiction to gambling being inflicted on the public is so obvious and should be of concern to us all.

Parliament adopted Draft Law No. 5376, which establishes a special tax regime called Diia.City. What is this about and what results are expected?

On 2 June 2021 the Ukrainian Parliament adopted Draft Law No. 5376 On Amendments to the Tax Code of Ukraine regarding Stimulation of Development of Digital Economy in Ukraine in the first reading. The Draft Law provides for the taxation regime for companies that are registered with Diia City (resident of Diia City), their investors, employees, and engaged gig-specialists.

Under the Draft Law, a resident of Diia City pays 18% CIT on the pre-tax financial result subject to tax adjustments, or may opt to pay (1) 9% CIT on profit distributions and (2) 18% CIT on the value of transfer pricing adjustments arising from controlled transactions and CFC income. Dividend or interest payment, investment abroad, settlement of payables, shares/participatory interest, buy-back and certain other transactions may qualify, for tax purposes, as profit distribution.

According to the Draft Law, the personal income tax rate (PIT) for employees and gig-specialists engaged by a resident of Diia City is less than for employees of a regular Ukrainian company, being 5% as opposed to 18%. A resident of Diia City pays the unified social contribution (USC) based on the statutory minimum wage of an employee, whereas a regular Ukrainian company pays USC based on the actual salary. Wages of employees and gig-specialists engaged by a resident of Diia City are subject to the 1.5% military duty, just like wages of regular employees.

The Draft Law exempts from PIT capital gain realized by an individual on the sale of shares/participatory interests in a resident of Diia City, provided that the individual holds respective shares/participatory interests for more than a year. Dividends received from a resident of Diia City are exempt from PIT if a resident of Diia City does not distribute dividends for two years in a row.

The Draft Law is silent on the tax implications for a company if its employees or gig-specialists were engaged as private entrepreneurs before the company applied for Diia City residency. The current version of the Draft Law provides that a resident of Diia City pays the Unified Social Contribution based on the actual consideration payable to a gig-specialist rather than the statutory minimum monthly wage, as the Ministry of Digital Transformation claimed during public discussions.

In overall terms, while the Draft Law provides a lower tax burden on residents of Diia City, the conditions of certain tax incentives and historical risks for prospective Diia City residents should be addressed in the Draft Law before the second reading stage.

In June 2021 Parliament adopted the Law of Ukraine On Payment Services. What new opportunities does this law create?

In June 2021 the Ukrainian Parliament adopted the long-awaited Law of Ukraine On Payment Services. This law is supposed to modernise and further develop the Ukrainian payment services market and bring Ukrainian legislation in the payment services area into line with EU legislation, in particular, the Payment Services Directive 2 (PSD2) and the Electronic Money Directive (EMD), which are the key regulatory acts of the EU.

Adoption of the Payment Services Law will lead to full-scale transformation of the Ukrainian payment services market. In particular:

The law defines nine categories of payment services providers, including postal operators and state authorities in some cases, as well as new market participants electronic money institutions, branches of foreign payment institutions, services providers, ensuring access to the account data, and payment institutions;

The law defines nine types of payment services seven financial services and two non-financial services (i.e. initiation of a payment service and ensuring access to account data). The payment services providers will be allowed to select one payment service and develop the most efficient way of rendering the services;

Non-banking payment services providers (i.e. payment institutions, electronic money institutions, postal operators, etc.) will be entitled to open payment accounts, issue payment cards and electronic money (previously only banks were entitled to do so);

The NBU is now entitled to issue its own digital currency (i.e. e-hryvnia) and create a regulatory sandbox, which is supposed to test innovations in the financial services market and ensure close collaboration between the NBU and FinTech start-ups;

The Open banking concept will be implemented in Ukraine in 2023. In particular, payment services providers, including banks, will be obliged to open up their API for other payment services providers and create the possibility for them to connect with the interface of banking services and exchange data with a market participant that renders payment services.

The new Payment Services Law creates outstanding opportunities for further development of the financial market and new innovative payment products in Ukraine. It allows new participants to enter the market, which should facilitate fair competition and permit customers to receive modern payment services, rendered to a high standard and at an affordable price.

On 15 July the Ukrainian Parliament adopted Draft Law No. 3790 On Improving the Transparency Mechanism in Extractive Industries in its first reading. What is this Draft about?

On 15 July 2021, the Ukrainian Parliament approved Draft Law No. 3790 in the first reading. Its primary goal is to improve the transparency mechanism in the extractive industries by introducing amendments to the Law of Ukraine No. 2545-VIII On Ensuring Transparency in the Extractive Industries of 18 September 2018. The Draft aims to bring the said law into line with global standards, namely the Extractive Industries Transparency Initiative (EITI).

In general, all the amendments introduced by the Draft can be summarised as follows:

Clarification of the procedure and conditions for disclosure of information on any activity related to the extraction of natural resources. For instance, the document clarifies the scope of information subject to disclosure, the procedure for approval of reporting forms and the deadline for submitting reports.

The Draft Law requires disclosure of all contracts on subsoil use executed between companies in the extractive industry and the government (including, among others, production-sharing agreements). The obligation to publish the terms of such contracts is imposed on the Ministry of Energy.

Establishment of specific supervisory bodies that will monitor the compliance of companies with reporting conditions on the extraction of natural resources. The Ministry of Energy will manage the activity of such bodies.

Identification of measures to accelerate the start of an electronic system for submission and analysis of reports in the extractive industries (i.e., an online platform for disclosing data from the extractive industries) and the transition to electronic reporting.

Having analysed the Draft, as well as the position of key stakeholders in the extractive industry, we can outline the following advantages:

increasing the level of transparency regarding transactions and activity in the extractive sector;

public control over the activities of companies operating in the extractive industry and the government;

ensuring competitive access to natural resources;

reducing manipulations by the companies in the extractive industry and respective authorities during negotiation of contracts on subsoil use given that the terms of such contracts will become public; and

applying sanctions to companies that fail to comply with transparent reporting and disclosure procedures.

The Draft Law was well received in the market overall, and it is expected to increase transparency in the extractive industry.

The current Draft Law No. 5431 passed the first reading stage in Parliament. What are its main key topics?

The current competition legislation of Ukraine, although fundamentally in conformity with EU standards, has not seen substantial development since 2001. The intensification of competition enforcement since 2015 has revealed that there are significant flaws in legislation which negatively affect the effectiveness of the AMCUs work.

The key topics of Draft Law No. 5431 include the possibility for the AMCU to prioritize cases; determining the procedure for conducting inspections, including authorization to conduct searches in private premises; changes to merger control thresholds and the application of simplified merger control procedure; reduction in the amount of damages as compensation in the course of private enforcement from double the amount to single; introduction of the institution of settlement and a leniency-detailed procedure. Despite the seemingly good intentions of the AMCU to bring Ukrainian competition law into line with the standards set forth in the ECN+ EU Directive of 2018, some of the proposed changes triggered criticism and heated debate in professional circles. The most argued subjects (among others) were the fear that the AMCU will abuse its right to reject the review of complaints based on inconformity with its priorities and the right to search private premises of individuals. It is, therefore, likely that in view of such criticism the provisions about the search of private premises will be removed from the existing Draft and be incorporated into a subsequent one with more detailed wording.

Regarding priorities the AMCU should, indeed, be capable of focusing on high-profile topics and not on reacting to every complaint it receives. This is the standard in EU. However, in EU countries an injured party may seek compensation of its competition-related damages in a national court as an alternative to address the competition authority. In Ukraine private-enforcement cases are only possible as follow-on cases after the respective decision has been adopted by the AMCU. The AMCU should definitely have the right to allocate its resources in accordance with its strategic priorities, but the law should, at the same time, provide for other possible ways to defend the rights of injured parties directly in courts, something which is absent in Draft No.5431.

The current Draft No. 5431 which successfully passed its first reading in Parliament, is aimed at bringing the first part of changes of so-called gap analysis, while the more conceptual topics like definitions of dominance and concerted actions are still left for the short-term future.

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