Crux (#05 May 2014)

Strict and Unpopular Stabilizers

A series of rapidly changing events in Ukraine, the most dramatic the country has observed since it declared independence, has undermined stability in all walks of life. The economic consequences could be hardly underestimated. The new government has taken a range of strict and quite unpopular measures to stabilize the situation. To be fair, so many legislative changes in such a short period of time are hardly reminded for late. No wonder, our expert panel is focused on proper analysis of the latest legislative news.

Svitlana Chepurna, partner, Asters

Svitlana Chepurna, partner, Asters

The Ukrainian Parliament adopted the On Amendments to Certain Legislative Acts of Ukraine as to Reduction of the Number of Permitting Documents Act of Ukraine of 9 April 2014. Will this Act reduce the cost of setting up business in Ukraine and help to attract investments?

The On Amendments to Certain Legislative Acts of Ukraine as to Reduction of the Number of Permitting Documents Act of Ukraine approved by the Ukrainian Parliament on 9 April 2014 (the Act) is a positive and long-awaited step towards easing the regulatory regime in Ukraine. The Act should open new opportunities in spheres that are currently subject to excessive and/or non-transparent administrative barriers.

While the Act will hardly make the government control over business less efficient, its net effect on a particular activity requires careful analysis. It further appears that some of the praiseworthy novelties of the Act may be difficult to implement in practice without further regulatory reform. For example, the Act requires a permitting authority to obtain approvals and other documents needed to issue a permit without involving the applicant. To see this rule work in practice with regard to permits that now call for an applicant to get, for instance, an expert opinion (such as permits for extra-hazardous work or equipment), the government would need to change the list of documents to be filed by an applicant and payable fees. Until this is done, a conflict between novelties of the Act and current procedures might even block the issuance of relevant permits if the permitting authorities have no sufficient documents or resources to obtain an approval or opinion that has been required from an applicant before the Act.

Note should also be taken that if a business has failed to cure any non-compliance with an Act or Regulation applicable to the activity, for which it has a permit, within the period set by the permitting authority, the latter will be in a position to bring a court claim seeking cancellation of the permit.

Gabriel Aslanian, counsel, Asters

Gabriel Aslanian, counsel, Asters

The National Bank of Ukraine recently issued a number of resolutions that have changed the system of currency regulation in Ukraine. In what way have these changes influenced the projects in banking and finance area?

Over the past few months, the National Bank of Ukraine (the NBU) has introduced certain measures intended to reduce the uncontrolled outflow of hard currency abroad. By its Resolution No.49 of 6 February 2014 the NBU prohibited the purchase of foreign currency for early repayment of loans. Resolution No.49 was substituted with Resolution No.172 of the NBU, according to which a Ukrainian borrower can repay a loan under an agreement with a foreign lender, including in case of introduction of an amendment to the loan agreement, not earlier than on the date established by such loan agreement. In fact, this means introduction of a general early repayment prohibition including inter aliathe prepayment of loans with borrowers’ own hard funds (the Prepayment Prohibition). The Prepayment Prohibition applies both to prepayment of the loan principal and early payment of other charges contemplated by the respective loan agreement.

It can be argued that the Prepayment Prohibition applies solely to the borrower and should not prevent the lender from declaring the loan principal and all charges there under immediately due and payable upon the occurrence of certain events contemplated by the loan agreement (e.g., change of control provisions, event of default provisions and similar). However, one may not exclude that a local bank servicing payments under a loan agreement can interpret the Prepayment Prohibition restrictively by treating it as ground to refuse to purchase and transfer foreign currency for the purposes of the loan prepayment made both voluntarily and upon acceleration by the lender.

The Prepayment Prohibition is not welcomed by foreign lenders usually treating it as an adverse effect resulting in suspension of disbursement of funds under ongoing transactions. The good news is that the Prepayment Prohibition constitutes the temporary measure to be in effect until 1 May 2014.

Andriy Lytvyn, lawyer, Ilyashev & Partners

Andriy Lytvyn, lawyer, Ilyashev & Partners

On 25 March 2014 the Act of Ukraine On Introduction of Changes to the on Executing Public Procurements Act as to Strengthening of Transparency of Purchases of Enterprises, No.1156-VI was adopted. Is this Act efficient from the standpoint of reform of the public purchases sector?

On 20 April 2014 the new On Public Procurements Act of Ukraine No.1197-VII came into effect. It is necessary to notice that the following positive and helpful changes came about due to this Act:

— The list of cases which are not under the action of the On Public Procurements Act was cut down. Such change should make the environment of public procurements in Ukraine more competitive and should also help to use governmental resources more efficiently.

— The Article “Public control in the area of public procurements” was added to the Act. The article fixed provisions under which representatives of mass media and public associations have the right to be present during procedures of disclosure of competitive procurement offers. This will help to make the procedure of public procurements more transparent the Act made some changes to the other acts that regulate relationships in the area of public procurements in Ukraine.

Yuriy Gomza, associate, Antika Law Firm

Yuriy Gomza, associate, Antika Law Firm

27 March 2014 the On Prevention of Financial Disaster and Creation of Favorable Conditions for Economic Growth in Ukraine Act of Ukraine, No.1166-VII came into force. What are the main risks for this Act becoming an additional burden for business owners? Is it possible for business to go underground?

The main goal of the Act is to increase state budget in the shortest possible time.

In order to reach this goal the Act provides increasing taxes and fees rates, extending the tax base, as well as carrying out a number of actions to reduce budget expenditures.

We suppose that such innovations may be effective only on a short-term prospect. The Act may serve to reach the stated goal and to increase budget revenues but in the long-term prospect its effect is more likely to be negative. Thus, the majority of actions will lead to rising of prices for a number of goods. This will lead to a fall in demand and sales of such goods, which in their turn will lead to reduction of budget revenues in form of taxes, job cuts, etc. Increasing tax rates as well as introducing new fees will force manufacturers, importers, employers go into “the shadow sector” due to the fact that in conditions of financial and economic crisis increasing means a reduction in sales volume. So, the risk of “shadowing” is rather high.

Nevertheless, it should be noted that the Act is more likely to be an urgent measure and despite of negative attitude to it, the Act contains a number of essential changes. For instance, reducing budget expenditures at the expense of reduction of privileges for public officials as well as reducing their number in the respective authorities. But, it is necessary to understand that reducing the number of public officials and the functions that they used to perform should be reduced as well. Otherwise, it may lead to a workload increase and staff outflow, which may lead to poor quality performance of tasks.

Reducing VAT-free of custom value of good that is imported to Ukraine through international postal services will enable the imposition of VAT on a number of goods that in fact are being sold by non-residents in Ukraine.

Igor Reutov, head of department, attorney, Gramatskiy & Partners

Igor Reutov, head of department, attorney, Gramatskiy & Partners

On 29 March 2014 the Act of Ukraine on Introduction of Changes to Certain Legislative Acts of Ukraine on Improvement of Legal Regulation of Activity of Legal Entities and Individuals-Entrepreneurs from 10 October 2013, No.642-VII came into force. How do the norms of the Act help to stamp out raiders schemes in Ukraine?

The Act as of 10 October 2013, No.642-VII is aimed at eliminating unlawful schemes used for fraudulent acquisition of shares and supervening illegal appropriation of property thereafter. Giving a general outline of the new regulation, several aspects thereof could be distinguished.

Firstly, the Act introduces criminal liability for submission of forged documents to the State Registrar within the procedure of state registration of a legal entity (including state registration of changes of information related to existing legal entity).

Therefore, producing untruthful documents and statements regarding shares and shareholding constitutes a crime; and the persons involved in such activity will be criminally prosecuted. Moreover, fraudulent appropriation of assets (including shares) by means of use of forged documents shall be treated as a criminal offence. A person who is found guilty in committing such a crime could be sentenced to imprisonment up to 10 years.

Secondly, it is noteworthy that the Act provides an effective mechanism to prevent illegal dilution of shares. In this regard the court may impose temporary restrictions on amendments to Articles of Associations dealing with the change of the size of the authorized capital; thereby freezing the ratio of shares until the corporate dispute is settled.

Thirdly, the Act provides precise and clear instructions for the state registrars elucidating the procedure of changing information in the state registry based on a court decision. Thus, if the state registry is amended unlawfully the legitimate status quo could be easily reinstated by means of a court decision. To sum up, the new regulation should have a positive impact on shareholders rights protection.

Nazar Chernyavsky, partner, Sayenko Kharenko

Nazar Chernyavsky, partner, Sayenko Kharenko

Tax authorities have declared the intention to pardon capital through legislation. Is it efficient for Ukraine at the present moment? Could you name relevant examples in world practice?

The idea of “tax” or “capital amnesty” is not new for Ukraine. A number of politicians have been playing with it for many years hoping to return some mythical capital to Ukraine. At the same time, we should consider a number of factors, which are unique for Ukraine, when deciding on the feasibility and efficiency of such amnesty. There are many positive examples of tax amnesty in foreign countries. Belgium, France, Ireland, Italy, USA and many others managed to significantly increase tax revenues by introducing “voluntary compliance programs” or “tax amnesties” at some point in time. Furthermore, in 2010 the OECD published a comparative country survey which reiterated that voluntary disclosure programs (tax amnesty) succeeded when implemented as a part of a wider tax compliance strategy (e.g. in Italy, Ireland, USA). This means that a tax amnesty should in no time pursue full waiver of evaded taxes but should rather reassure the compliant taxpayers that the tax authority expects compliance from everyone, and will effectively prosecute those who fail to comply. If they see the tax authority tolerating evasion by large businesses through an amnesty or otherwise, the overall level of compliance could fall. In Ukraine the major perceived obstacle for the success of the tax amnesty is overall instability and uncertainty of the legal system. People cannot be sure that by declaring their hidden assets they would not expose themselves to the potential prosecution or even extortion in the future. Furthermore, the suggested means for carrying out a tax amnesty in Ukraine were exactly what the OECD warned against. Allowing richest people to legalize their offshore capitals without paying taxes and any penalties would discourage ordinary citizens from paying taxes and will not prevent others from accumulating further funds offshore. 

Accordingly, until the Ukrainian tax system starts operating efficiently and independently, thus inspiring universal trust and respect, any tax amnesty is unlikely to pay off.

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