Hot Issue (#05 May 2014)

Uncertainty of Jurisdiction in Question

by Anton A. Molchanov

Having adopted the On Ensuring the Rights and Freedoms of Citizens and on Legal Regime on the Temporarily Occupied Territory of Ukraine Act of Ukraine (which is often being called the On Occupied Territories Act), the Ukrainian Parliament has created another controversial precedent in modern Ukrainian history. As hot discussions on the necessity and consequences of the Act continue, ordinary people and business entities are preparing to live in a new Crimean world — whether it would be an Orwellian anti-utopia or a new Eden. 

In these new realities the main issue is uncertainty of jurisdiction in question. The official position of Ukrainian authorities embodied in the Act is to consider the Crimean peninsula as temporarily occupied territories of Ukraine. On the other hand, by adopting the On Admitting to the Russian Federation the Republic of Crimea and Establishing New Constituent Entities of the Republic of Crimea and Sevastopol City of Federal importance within the Russian Federation Federal Constitutional Act, Russia declared Crimea to be under its direct jurisdiction.

Such dualism will possibly create no practical difficulties for Ukrainian nationals residing on a permanent basis in Crimea or for legal entities registered under Ukrainian law, whose activities primarily take place within Crimean territory. Nonetheless, those wishing to continue visiting the continental part of Ukraine or to proceed with further business activities with Ukraine should be aware of the following.

Firstly, Article 2 of the Act emphatically declares Crimea a territory temporarily occupied as a result of military aggression on the part of the Russian Federation. Hence, in all further provisions the Act considers all natural or legal entities in Crimea, including those of Ukrainian nationals, either as victims of aggression or as Russian collaborators. From this point of view the Act:

— establishes a special entry and departure regime (which require special permissions from the Ministry of Interior Affairs and the Security Service of Ukraine) for entry into the peninsula, and provides administrative or criminal responsibility for those who breached this special regime;

— stipulates that activities of any public body, authority or an official which did not obtain its powers in accordance with Ukrainian legislation are illegal, and that any exclusion from the above rule may be sanctioned only for protecting the national interests of Ukraine, for protecting the rights and interests of Ukrainian citizens or for the fulfillment of international treaties.

The above-mentioned prohibitions de facto almost completely freeze all infrastructure connections between Crimea and continental Ukraine, and since Russia’s infrastructure projects in Crimea are long–term and seemingly intractable, turning the peninsula into an economic desert.

Secondly, adoption of the Act will rather complicate than facilitate certain customs issues related to Crimea. Following the Treaty on admitting Crimea to the Russian Federation and a Decree of Crimea State Council of 17 March 2014, prior to 1 January 2015 pieces of Ukrainian legislation which entered into force before 21 February 2014 and including the Customs Code of Ukraine, are applicable on the territory of the Republic of Crimea, if such legislation does not conflict that of the Russian Federation. However, since Russia executes de facto control over Crimea, this will undoubtedly cause application of the Customs Code of the Customs Union for all customs-related matters on the peninsula. There are currently Crimean and Sevastopol customs and three checkpoints (Turetskyy Val, Perekop and Sivash) acting on behalf of the Federal Customs Service. Nonetheless, on 8 April 2014 the Federal Customs Service of Russia informed that it was still not carrying out customs clearance of goods in Crimea, being limited by consignment control only.

Having in mind the categorical position of the Ukrainian authorities, it can be assumed that in the near future any trade operations (if such will take place) with Ukraine will be considered as import-export. Such consequences in conjunction with high logistics costs related to possible supplies from Russia, would scarcely stimulate the Crimean market.

Similar difficulties, caused mostly by the above-mentioned uncertainty, can be traced in tax issues.

In particular, Ukraine provides Crimean residents with the possibility to change their commercial registration address to that of continental Ukraine, and thereby to continue to act as a Ukrainian tax resident. Moreover, there is also a Draft Act related to full exemption from taxes for Crimean residents for the period of occupation, which has not yet been considered and adopted.

On the other hand, in accordance with the On Admitting to the Russian Federation the Republic of Crimea and Establishing New Constituent Entities of the Republic of Crimea and Sevastopol City of Federal Importance within the Russian Federation Federal Constitutional Act prior to 1 January 2015 all tax issues related to Crimea should be governed by local acts (and, because of the above-mentioned provisions of the Decree On Independence of Crimea, by the Tax Code of Ukraine). In relevant written explanations the Crimean tax service insists that during the transitional period Ukrainian tax legislation is applicable in Crimea, but only in those parts which do not contradict Crimean tax legislation. At the same time, the Crimean government has raised the implication of Russian import VAT rates of 18% (excluding goods which are subject to 10% VAT) instead of the 20% rate of Ukraine.

Therefore, by paying taxes either to the Ukrainian or Russian state budget, those Crimean entrepreneurs who will retain their commercial activities within Crimean borders should face a symbolic Rubicon with apprehension to be fined by the authorities of the other state.

There are definitely many other disputed and complicated issues related to life and business activities in Crimea after its annexation by Russia, but experts are gravely concerned by the humanitarian side of Crimea’s annexation. There is no need to explain in detail the imperfections of the Russian judicial system and totally inability (which sometimes creates an impression of unwillingness) to protect human rights and freedoms within the whole state. Meanwhile, Article 5 of the On Occupied Territories Act places all responsibility for pecuniary and non-pecuniary loss caused by the annexation on the Russian Federation. Obviously, unpromising statistics regularly provided by the Council of Europe clearly show that in many cases of determined breaches of fundamental human rights either in Ukraine or Russia the one and only remedy that appeared to be effective was to lodge an application with a claim for just satisfaction with the European Court of Human Rights in Strasbourg. However, history knows numerous examples when even final judgments by the Court containing rulings on just satisfaction (which generally mean compensation for pecuniary and non-pecuniary loss paid by the breached state) were not executed by Russia for ages.

Keeping the war of words quite fierce, Russian officials are not hesitating to use stinging words about the situation in Ukraine like “coup d’état”, “junta” and “fascists” at every possible occasion, while Ukraine’s rhetoric seem to be more restrained. In the meantime, ordinary people in Crimea are preparing to face their numerous problems by themselves — some with a certain kind of optimism, other recalling Byron’s words: “What want these outlaws conquerors should have, but history’s purchased page to call them great?”

Subscribe
The Ukrainian Journal of Business Law

Subscribe to The Ukrainian Journal of Business Law right now and enjoy the most relevant issues on doing business in Ukraine on your device or in print.

All this for just USD 9.99 a month.

 

Subscribe now

Яндекс.Метрика