Legal Pitfalls in Crimea
Considering the current situation in Crimea, in particular circumstances influenced on doing business there, it is clear that there are more questions than answers despite legislative settlements undertaken from both the Ukrainian and Russian sides. At present only the optimists retain confidence in doing business in the territory of the Crimean peninsula in line with the usual civilized rules. Perhaps, for the Ukrainian side the incurring of damages and reservation of right of ownership and other rights of property are the most pressing issues. And the range of pitfalls grows all the time…
Have you had clients who were seeking damages associated with the occupation of the Crimea peninsula? From what sectors of economy? What models of protecting clients’ interests do you use in your practice?
Losses associated with occupation of Crimea by the Russian Federation include:
1. Loss of income resulting from impossibility to carry out entrepreneurial activity in the previous volumes (including due to the application by civilized nations of sanctions in respect of goods originating from the occupied territories). These losses are mostly export-oriented enterprises, whose counterparties are customers from different countries of the world. The option of attempts to obtain any compensation for losses from Russia is unlikely to have any future, and entrepreneurs can be recommended either to refocus on the Russian market, or to use a rather cumbersome scheme, implementation of which will allow, on the one hand, to identify the final product as one produced in Crimea and, on the other hand, allow Ukrainian entrepreneurs to avoid sanctions on the part of the Ukrainian state for carrying out economic activities in the occupied territories.
2. Companies also risk to suffer direct damages as a result of nationalization of certain assets of the companies, including by reason of the impossibility of their being in the place of their private property under the laws of the Russian Federation, which are imposed by the occupants in the Autonomous Republic of Crimea (e.g. it concerns docks and other waterworks). Among our clients are a number of companies who really do face this threat but are not yet experiencing the problem. Much will depend on the manner of conducting this nationalization, the size of the compensation to be paid, on the further fate of the nationalized objects (e.g. lease by the previous owner), etc.
3. Quite significant losses are incurred by entrepreneurs of all levels because enterprises need to adapt their activities to occupation law, without which they are unable to actually work with the enterprises from the Russian Federation and are also at risk of reprisals from the occupying authorities. At the same time, the overall situation with the protection of the rights and interests of individuals and legal entities on the territory of the occupied Crimea is deplorable. This is due to the fact that the occupation authorities say, on the one hand, that legislation of the Russian Federation extends to the territory of ARC and, on the other hand, that since March 2014 sufficient legal acts have not been created to regulate enforcement procedures in this so-called “transition period”.
The On Rights and Freedoms of Citizens and Legal Regime in the Temporary Occupied Territory of Ukraine Act provides for the duty of the prosecutor’s office and judges to take measures to change the jurisdiction of unfinished cases and investigations in occupied Crimea. How is the Act implemented? What should parties of proceedings do?
Although the Verkhovna Rada did its best to provide the relevant legislative framework for the transfer of cases from Crimean courts to courts on the “mainland”, in practice, the consideration of the transferred court cases is difficult.
First, for a Crimean resident it is very difficult to have his or her case record transferred to the receiving Ukrainian court. Crimean courts, which are now under the control of the Russian state, are naturally reluctant to cooperate. Ukrainian courts try to deal with this problem by asking the parties to resubmit their pleadings with the relevant documents, but clearly, this may not always be done. As a result, Ukrainian courts have a hard time considering incoming cases.
Second, it is both expensive and technically difficult for Crimean residents to appear in Ukrainian courts. While large companies may bear the cost of sending their representatives “abroad”, for the majority of civil litigation parties, which expected to litigate within several kilometers of their residence, the road to Kiev is an insurmountable obstacle. Naturally, the parties have to abandon oral hearings and suffer from a substantial disadvantage.
Finally, it is unclear whether the decisions of the Ukrainian courts in “Crimean cases” will be enforced in Crimea. Despite Russia and Ukraine undertaking to recognize the court decisions of one another, in most cases Ukrainian court decisions must still be enforced by Russian courts.
How is the operation of Ukrainian companies legally regulated in Crimea?
Legal regulation of Ukrainian companies in Crimea raises a number of questions.
Commercial activity in Crimea includes various spheres, each of them regulated using various methods. For instance, real estate transactions in Crimea were de-facto paralyzed, any alienation of such real estate outside of the peninsula is risky.
According to Article 13 of the On Ensuring the Rights and Freedoms of Citizens and on Legal Regime on the Temporarily Occupied Territory of Ukraine Act of Ukraine, economic activities in Crimea are regulated by the law. But to date there’s no such law. There are only plans to create a free economic zone and to grant companies remission of taxation for the period of occupation. It’s the optimal resolution because, on the one hand, it allows to introduce a customs regime in relations with Crimea, and, on the other — to consider Crimea a part of Ukraine.
However, to date Crimea comes under the jurisdiction of the authorities of the Russian Federation. At the same time, in accordance with the above-stated law, such authorities and their instructions are illegal. Under these circumstances, the law does not provide for any model of behavior for the Ukrainian companies in Crimea, in particular with regard to taxes.
As a result, before special laws are passed, Ukrainian companies in Crimea are, in fact, subject to regulation of both the Ukrainian and the Russian laws, while business operations in Crimea are unregulated and plagued by various risks. This is why such activity in each separate case should be planned ad hoc with the invitation of the relevant specialists.
What tax changes have taken place in Crimea?
After the annexation of Crimea, many taxpayers faced numerous challenges: how to work, how to make payments and where to pay taxes?
In order to continue their operations, the Ministry of Revenue and Taxes suggested that all companies that have decided to stay within the jurisdiction of Ukrainian legislation should re-register and replace their current location with any other region of Ukraine. All Crimean branches of Ukrainian companies will be re-registered at the location of their parent companies. In this case, there will be no problem with the reporting and payment of taxes. Everything can be done at the new place of registration. If a company decides to stay and carry on its business in Crimea, it should be understood that the tax agency of Crimea considers the Ukrainian companies staying on the peninsula to be foreign entities and demands that they submit documentation for registration with the tax authorities of the Russian Federation in the territory of the Republic of Crimea by 1 July 2014. If the companies fail to do so, the tax authorities will impose charges under the legislation of the Russian Federation for violation of registration requirements, which implies a fine of RUB 10,000 and a penalty for operating without registration in the amount of 10% of income received during the period of such operation, but no less than RUB 40,000. Accordingly, taxes will have to be paid into Russian accounts. Thus, given the fact that our country has not yet adopted legislation governing business operations on the occupied territory, taxpayers do not have many options. Either they register a new location in Ukraine, or they register in Crimea as a resident of Ukraine with the risk of double taxation or total termination of operation.
How are intellectual property rights being protected in Crimea?
The Federal Intellectual Property Service states that according to the provision of the On Admission of the Republic of Crimea to the Russian Federation Act any natural or legal entity that resides or locates in Crimea and is an owner of the intellectual property rights that have been registered before 18 March 2014 in Ukraine has the right to appeal to the Federal Intellectual Property Service in order to declare one’s exclusive rights on the territory of the Russian Federation.
However, it provokes solid troubles as lots of trademarks that have been registered by Crimean enterprises or individuals are similar to the trademarks registered in the Russian Federation prior to Ukrainian registrations. The possibility to implement the right of prior use to the said cases is very doubtful. The Russian Federation claims an initiative to prioritize businesses that started use of the mark in its commerce activity earlier; however I do not think that this rule would be applied to the marks that were used earlier but on the territory out of Russia, particularly in Crimea. An increasing number of court hearings on these matters is foreseen.
As for patents I see the situation as follows. The unified requirement to the invention, utility model and industrial design is to suit to the features of novelty, and what is more to worldwide ones. Consequently, superiority belongs to the party who can prove that the opponent’s patent lacks novelty. Before the Russian Federation occupied Ukraine’s Crimea there was zero possibility to have a dispute between the market participants of the Russian Federation and Crimea as the title of protection operates on the territorial principle; but now such disputes may take place.
Crimean business will, unfortunately, face a lot of serious legal problems and the sphere of intellectual property is no exception.
What is the situation with registration/re-registration/alienation of real estate in Crimea?
Despite the fact that Ukraine has adopted a number of legislative initiatives aimed at creating a possibility to move business from Crimea, it is clear that immovable property is inseparable from its location. Considering this local regulations and Russian legislation are important to the owners of real estate in Crimea.
First of all, Russia recognizes the private property of Ukrainian citizens, foreign companies and legal entities established under the Acts of Ukraine. This is witnessed by Russian legislative provisions according to which the legal documents proving ownership and right of use in Crimea issued by Ukrainian authorities remain effective without limitation to their validity and unless otherwise provided therein.
Secondly, for the purposes of ownership transfer, the real estate object shall be registered within the Russian real estate register. In accordance with the information of our colleagues in Crimea, a test version of the system of registration of immovable property started working few weeks ago.
It is worth mentioning that Ukraine does not recognise documents issued by the local authorities in Crimea. Moreover, according to the On Securing Citizens’ Rights and Freedoms and a Legal Regime on the Temporary Occupied Territory of Ukraine Act of Ukraine transfer of ownership to real estate located in Crimea will be recognized and deemed to have legal effect in Ukraine and the other jurisdictions that did not recognize Crimea’s secession from Ukraine only if the requirements of Ukrainian law are complied with.
How are banks depositors and clients being protected in Crimea?
The current situation in Crimea raised a number of issues in the banking area, including protection of depositors’ rights. This is a well known fact that currently the governmental bodies and state institutions of Ukraine are notable to fully perform their duties in Crimea. Since the banking system cannot operate currently without effective government control, on 6 May 2014 the National Bank of Ukraine (the NBU) adopted its Regulation No.260 which expressly obliged all Ukrainian banks to close their existing branches and divisions in Crimea within one month, prohibited opening new branches and divisions there, and prohibited Ukrainian banks from providing any financial services in Crime through their commercial agents. Notably, the NBU has not prohibited Ukrainian banks to provide financial services to individuals and legal entities residing /located in Crimea through their branches, divisions and commercial agents located in other regions of Ukraine. Therefore, inhabitants of Crimea may fully exercise their rights outside of Crimea on the “mainland” of Ukraine. Moreover, the deposit guarantee system protects not only individuals who are Ukrainian citizens, but also foreign individuals. Therefore, those residents of Crimea who became Russian citizens are covered by the deposit guarantee system as well.
From the Ukrainian side, the most unprotected depositors are those who have contractual relations with PJSC Chernomorskiy Bank of Development and Reconstruction and PJSC Bank Morskiy headquartered in Crimea. On 6 May 2014 the NBU cancelled banking licenses of these institutions and on 27 May 2014 the Deposit Guarantee Fund terminated their participation in the deposit guarantee system without any payments to depositors.