Crux (#1-2 January-February 2022)

Legal Digest

The UJBL editorial team paid special attention to the main legislative initiatives at the end of 2021 and the beginning of 2022. Among the most important ones are the widely discussed Law No.1914-IX On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Ensuring Balance of Budget Revenue, previously known as Draft Law No. 5600, and Localization Law No. 1977-IX, which received very polarized feedback from experts. Other significant initiatives include Law No. 1974-IX regarding transparency in extractive industries and the initiative of the Government of Ukraine in the area of intellectual property rights (Draft Law. No. 6464).

The President of Ukraine signed Law No. 1944-IX, which lifts the moratorium on the initiation of bankruptcy proceedings. How will it influence business entities?

On 14 December 2021 the Verkhovna Rada of Ukraine adopted a law according to which, in particular, lifted the moratorium imposed on initiation by creditors of bankruptcy proceedings against their debtors under monetary claims arising during the quarantine validity period, i.e. the period starting from 12 March 2020.

In my opinion, the introduction of the said moratorium was a misstep. Any moratorium imposed by the state in the sphere of private law relations represents a kind of manifestation of manual regulation of the economy, and such actions lead, as a rule, only to negative consequences.

Via this moratorium the state has actually allowed debtors to ignore their obligations. This has probably negatively affected the investment attractiveness of our country in general and of individual entities in particular. Potential investors understood that the financial obligations undertaken by a Ukrainian company after 12 March 2020 may be left undischarged and they will be unable to protect their rights via initiation of a bankruptcy case.

The same is true with the settlement of taxes during the moratorium the tax authorities were prohibited from initiating bankruptcy proceedings which, to some extent, prompted debtors to feel irresponsible.

In addition, the moratorium on the initiation of bankruptcy proceedings by creditors, to my mind, contradicts certain provisions of the Constitution of Ukraine, in particular Article 13, according to which all property rights holders are equal before the law.

All the above circumstances necessitated the lifting of the moratorium.

I hope that the lifting of the moratorium for the initiation of bankruptcy proceedings will have a positive impact on the economy of Ukraine, improve the countrys investment attractiveness and raise its position in the Doing Business ranking.

The Verkhovna Rada of Ukraine adopted Draft Law No. 3739, which regulates localization in public procurement. What are the main points of this law, and how will it influence the business sector?

On 16 December 2021 the Ukrainian Parliament adopted the Lawof Ukraine On Amending the Law of Ukraine On Public Procurement No. 922-VIII regarding the Establishment of Conditions for Sustainable Development and Modernization of Domestic Industry No. 1977-IX. It will come into force in June 2022.

The Localization Law introduces temporary localization (or so-called Ukrainization) of industrial production for certain goods of machine-building industries (for example, public transport, certain types of trucks, locomotives and railway cars, helicopters, aircraft, etc.). There are about 100 goods in total that are subject to localization.

What is localization?

Starting from June 2022, only companies adhering to the local content of production, i.e. the rate of the Ukrainian component in the specific weight of procurement, can participate in tenders for procurement of certain goods of machine-building industries with a purchase value of over UAH 200,000. In 2022, this rate is 10%, and it will grow by 5% annually. In 2028, the degree of local content is expected to be 40%.

What countries are bound by the Localization Law?

State-parties to the WTO Government Procurement Agreement (the GPA Agreement), which are primarily the United States and European Union countries, are not bound by the Localization Law. It means that players from these countries may participate in tenders for procurement of certain goods of machine-building industries without adhering to the local content of production. However, the players from the United States and the European Union countries constitute only a small share on the Ukrainian machine-building market, unlike producers from Belarus, Turkey, China and
other countries that are not parties to the GPA.

How does the Localization Law affect the business?

The Ukrainian market is assessing the Localization Law ambiguously. The Antimonopoly Committee of Ukraine noted that this Law might put Ukrainian and foreign companies in an unequal position. Also, according to calculations by the Kyiv School of Economics, localization may be reflected in an annual decline in GDP of 0.5%. On the other hand, the adoption of the Law is an opportunity to develop relations with countries bound by localization requirements (for instance, to establish joint ventures with them, organize jobs at enterprises in Ukraine, etc.).

The President of Ukraine signed Law No. 1974-IX, which provides transparency in extractive industries. What will be its influence on the industry?

Law No. 1974-XI of 16 December will further improve regulation of the extractive industries transparency initiative (EITI) already implemented in Ukraine on the basis of the relevant law adopted in 2018. The main idea behind the EITI is to make the revenues generated from the extraction of natural resources available to the public. The government must disclose how much it receives from extractive companies operating in Ukraine, and extractive companies must disclose how much they pay to the government.

As often happens, the new act also addresses other areas, including the writing off of bad and doubtful debts of household consumers for natural gas, special settlement mechanisms to compensate for the writing off and clarification of the rules regarding the time frames for subsoil use and special permits.

I will, however, focus on the changes requiring Ukrainian companies to disclose their agreements for extractive projects to state authorities and state-owned/state-controlled entities. Specifically, extractive companies (or, using the term from the law, extractive industries business entities) must now disclose their subsoil use agreements. These include production sharing agreements (PSAs), joint activity agreements (JAAs) and other agreements for the exploration and production of mineral resources, including pilot production, sales of produced minerals and transportation of natural gas, oil and gas condensate. This disclosure requirement applies to agreements concluded with the state represented by the CMU or another state property management entity.

(Notably, subsoil use agreements should not be confused with agreements on subsoil use terms and conditions forming an integral part of special permits.)

Extractive companies must now send copies of their subsoil use agreements, or amendments to them, to the Ministry of Energy. This is also true for all agreements or amendments made after the law came into force. However, regarding those agreements or amendments that were executed before the laws effective date, extractive companies must disclose only their essential terms. The Ministry of Energy must publish these terms on its website.

Notably, the disclosure requirements also apply to those JAA parties that do not hold a special permit. In addition, PSAs are also subject to disclosure. Whether this will work for those PSAs that were concluded before 2022 is yet to be established, because of the stabilisation clause contained in such agreements.

Admittedly, the EITI disclosure requirements now go beyond payments to the state and cover the full text of subsoil use agreements. It is debatable as to whether this is technically correct in terms of the EITI framework, but greater transparency should benefit both the Ukrainian state and the public. Ukrainian extractive businesses should now carefully address the new disclosure requirements in light of their confidentiality policies and obligations.

Finally, the new amendments introduce the subsoil use stability rule. This rule ensures preventing the controlling authorities from taking over the functions of other regulatory authorities and prohibiting the stripping of subsoil use rights on grounds which are not based on the law effective as of the date of issuing the special permit or outside a court. These rules may, however, seem rather declarative, and lack a proper mechanism for their implementation.

On 16 December Parliament adopted Draft Law No. 6055 about the new telecommunications regulator in its second reading. Why was this necessary and what amendments does it include?

A new telecommunications regulator, the National Commission for State Regulation of Electronic Communications, Radio Spectrum and Postal Services, is to be established In Ukraine. The respective law was adopted by the Ukrainian Parliament on 16 December 2021. Upon the President of Ukraine signing the law and its official publication, the National Commission for the State Regulation of Communications and Informatization of Ukraine (NCCIR, the former regulatory authority) will assume the status of a new regulator and all its powers as provided under the respective new law.

The establishment of the new telecom regulator has been dictated by the new regulatory framework provided by the Law of Ukraine On Electronic Communications enacted on 1 January 2022. The implementation of the said law requires a new regulator with stronger powers and independency. For example, in line with the current EU approaches as reflected in the European Electronic Communication Code, the new regulator is supposed to control and ensure broadband coverage through respective geographical surveys among network and/or service providers and be more efficient in monitoring and ensuring the quality of services which shall be done as per the parameters established by the Law of Ukraine On Electronic Communications. In terms of the independency of the new regulator, among other things, its regulations will no longer require an approval by the State Regulatory Service (earlier, mandatory review by the State Regulatory Service has blocked on numerous occasions draft regulations of the NCCIR).

Due to delayed adoption by Parliament of the law on the new telecom regulator, formally, in Ukraine, there is no state authority exercising control over telecommunications sector since 1 January 2022 and up until the new law comes into force.

It is also worth noting that proper functioning of the new regulator requires adopting and updating secondary legislation and most likely expanding the existing staff of the NCCIR, so that the new regulator is able to efficiently exercise its increased powers.

Given the above circumstances, market players are currently prevented from receiving administrative services which may be necessary to continue their respective telecom operations, e.g., receiving or renewing the spectrum licenses, permits on usage of numbering resource, etc. Hopefully, the transition period for the new regulator will not be long, and soon both market players and consumers of telecommunications will benefit from the newly established telecom regulator.

The Cabinet of Ministers of Ukraine registered Draft Law No. 6464 regarding stepping up the protection of international property rights. What is this Draft about?

According to the authors of Draft Law No. 6464, it is aimed at implementing a number of provisions of the EU-Ukraine Association Agreement into Ukrainian legislation, namely: Article 235 Right to Information (regarding possibility for a court to request information on the origin and network for distribution of goods and/or services infringing intellectual property rights); Article 236 Provisional and Precautionary Measures (regarding application of preliminary injunctions with respect to intermediaries whose services are used by a defendant to infringe intellectual property rights); Article 239 Alternative Measures (regarding the possibility to apply one-time compensation instead of other remedies); Article 240 Damages (regarding principles for compensation of damages, including lost profit, or collecting the infringers income, or compensation, and/or moral damages); Article 242 Publication of judicial decisions (regarding the possibility to make public information on intellectual property rights infringement and the content of a court verdict), and respective provisions of Directive 2004/48/ of the EU Parliament and Council of 29 April 2004 on protection of intellectual property rights.

Though Ukraine should fully implement the EU-Ukraine Association Agreement, enforcement of the above right to information raises a lot of questions as it would be too easy to avoid providing the information on the origin and network for distribution of goods and/or services infringing intellectual property rights requested by a court.

An alternative draft law has already been registered with the Ukrainian Parliament since, according to the authors thereof, Draft Law No. 6464 incompletely implements the Association Agreement into Ukrainian legislation.

On 1 January 2022 Law of Ukraine No. 1914-IX, which makes amendments to the Tax Code of Ukraine came into force. What are the main amendments that the law brings, and what are the possible consequences?

In December 2021, the Ukrainian Parliament adopted Law No. 1914-IX On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Ensuring Balance of Budget Revenues that introduces a wide range of amendments to the Tax Code of Ukraine coming into force on 1 January 2022. The Top-8 important amendments to corporate taxation can be summarized as follows:

The tax authorities and taxpayers are entitled to openly film and record tax audits;

Tax loss carry-forwards for large taxpayers are limited to 50% of accumulated tax losses;

Tax deductibility of financial aid provided to loss-making related parties is restricted;

Minimum corporate tax liability of 4% of the normative monetary value of the land plot (5% starting from 2023) is introduced for owners of agricultural land plots;

The period for reporting input VAT credits is limited to 365 calendar days following the date of registration of relevant VAT invoices;

Taxpayers should apply the general procedure for proportional allocation of input VAT credits when supplying VAT exempt waste, ferrous scrap and non-ferrous metals.

Amendments in calculation of rent tax for iron stone extraction. The rent tax should now be calculated based on average iron stone value for IODEX 62% FE CFR China provided by price reporting agency Platts. At the same time, rental rates for iron stone extraction have been reduced.

Increase in tax rates for rent for the use of radio frequencies and environmental tax for emissions of pollutants into the atmosphere.

The provisions of Law No. 1914, previously known as Draft Law No. 5600, were generally aimed at creating a legal framework for combating tax evasion practices and developing a competitive business environment.

However, the positive effect of this law is not straightforward. For example, Ukrainian business has concerns over widening the rights of the tax authorities (e.g., granting the ability to film during tax audits). There are also some concerns that the increase in resource taxes could affect Ukraines competitiveness on the international market. Having said that, based on the new formulae for calculating these taxes, it is unclear whether the increase in tax rates will necessarily result in an increase in associated tax revenues. Also, an increase in the tax rates on rent for the use of radio frequencies could increase the cost of providing telecommunication services, which would be immediately passed onto users of mobile devices.

Additionally, the above tax amendments introduced significant changes in corporate taxation that could lead to an increase in the tax burden borne by taxpayers (including for non-operational agri-businesses) and additional VAT (mainly for the production sector).

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