Crux (#07-08 July-August 2017)

Legal Digest

The summer of the outgoing year was notable for a number of legislative initiatives such as amendments to the Customs Code in terms of the duty-free limit for cross-border goods movement, changes in accounting and financial reporting, introduction of a new model of healthcare financing. In addition, the President has signed the disputable Law On the Constitutional Court of Ukraine, which was approved by Parliament at the third attempt. We also ask for hands on comments on the new rules for the development of oil and gas fields in Ukraine and NBU and NSSMC Memorandum of Understanding on development of the capital markets infrastructure.

The Ministry of Ecology and Natural Resources of Ukraine by Order No. 118 of 15 March 2017 approved Rules for the development of oil and gas fields in Ukraine and regulating relations between economic entities and central executive authorities during the usage of oil-and-gas bearing deposits. What consequences for business should be expected with the introduction of these rules?

Marta Halabala,

Senior Associate, Asters

The energy security of Ukraine is one of the major priorities of the state, which includes the refusal to depend on Russia in the supply of energy resources, particularly natural gas, by increasing hydrocarbon production in Ukraine. Up till 30 June, 2017, hydrocarbon production was performed in line with the obsolete 1987 Rules for the Development of Oil and Gas Oil Fields and the 1971 Rules for the Development of Gas and Gas-Condensate Fields. These Soviet-era rules were often inapplicable in modern field development, as technologies have improved and changed significantly. With the entry into force of the Order of the Ministry of Ecology and Natural Resources of Ukraine No. 118 of 15 March 2017, which approved the Rules for the development of oil and gas fields in Ukraine (The Rules), uniform rules for the development of oil and gas fields are set for all the subjects of the oil and gas industry in Ukraine. The Rules take into account the current realities of the oil and gas production industry of Ukraine and contain general norms and requirements for the subsoil use of oil and gas. The Rules also establish the stages of development of open hydrocarbon fields, their classification both in terms of resource base and types of minerals. The Rules regulate all stages, such as design, drilling, development, exploration, additional exploration, field facilities of gas, gas-condensate and oil fields, hydrocarbon production, production accounting, including the main provisions of labor protection and safety in the performance of all types of work.

The National Bank of Ukraine and the National Securities and Stock Market Commission signed a Memorandum of understanding on development of capital markets infrastructure in Ukraine. What goals did regulators set? How does the signing of this memorandum contribute to the development of the capital market infrastructure in general?

Dmytro Vasylyna,

Lawyer, Sayenko Kharenko

The Memorandum of understanding on development of capital markets infrastructure recently signed between the National Bank of Ukraine and the Securities Commission in general terms sets out an ambitious framework for future cooperation between regulators. If properly implemented, the goals set in the Memorandum should indeed upgrade the market infrastructure, bringing it closer to those that exist in developed jurisdictions.

According to the Memorandum, the regulators intend to modify the core of the capital markets settlement system by, in particular, upgrading the technology of the National Depository of Ukraine (NDU) and inviting a strategic investor into the NDU and the Settlement Center. This should increase basic trust in Ukrainian capital markets, which, in turn, should attract new money. Technology upgrading has become especially important in the context of the recent cyber attack resulting in trading being suspended for two days.

Other important goals set out in the Memorandum include: (i) consolidation of the Depository of the National Bank of Ukraine with the NDU, (ii) establishment of a light central counterparty in Ukraine, and (iii) establishment of fully functional relations with foreign capital market institutions (e.g., international central securities depositories, international central counterparties and global custodians).

Parliament approved a new version of the Draft Law of Ukraine On the Constitutional Court of Ukraine No. 6427- at the third attempt. Please comment on this law. Does it contain controversial provisions, and what, in your opinion, was left without attention?

Dmytro Bondarchuk,

Associate, EQUITY

On 22 June, 2017, the Verkhovna Rada of Ukraine adopted in the first reading the Draft Law On the Constitutional Court of Ukraine (hereinafter the Law on U).

Among the novelties of the draft law, in comparison with the current law, are provisions about a constitutional complaint. The constitutional complaint is a new instituttion for Ukrainian constitutional law, which appeared with the introduction of amendments to the Constitution of Ukraine in 2016 and which provides a person with the possibility to file a complaint with the Constitutional Court of Ukraine (hereinafter the Court) if he/she believes that the law of Ukraine applied in the final court decision in his/her case is contrary to the Constitution of Ukraine.

According to the draft law, it is also proposed to create a new organizational structure of the Court (the Grand Chamber, two Senates and six colleges). The structure is intended to facilitate consideration of constitutional complaints by the Court, since it is the two senates that will consider complaints. Thus, one of the possible problems may be the Courts inability to ensure timely consideration of all the complaints filed, since a large influx thereof is expected to appear before the Court. Although the draft law proposes to increase the number of scientific advisers of every single one of the Courts 18 judges from 1 to 2, this may not be sufficient.

Another thing which is also drawing attention is the possibility for the Court to take interim measures to ensure a constitutional complaint through a restraining order.

The draft does not provide for appeals against decisions approved by the two Senates, though alternative laws have the possibility of such an appeal to the Court itself, but to the equivalent of the Grand Chamber (the entire composite of the Court).

 

Draft Law No. 4646-d On Accounting and Financial Reporting in Ukraine (on improvement of certain provisions) was adopted in its first reading by Parliament. How can these amendments change the order of filing and publication of financial statements?

Inna Shershun,

Senior Consultant, KPMG-Ukraine

On 22 June the Verkhovna Rada adopted Draft Law of Ukraine No. 4646-d On Accounting and Financial Reporting in Ukraine (on improvement of certain provisions) in its first reading. The implications of the proposed amendments for financial reporting procedure are outlined below.

It should be noted that the Draft Law envisages significant amendments to administration of accounting procedures at nationwide level. In particular, businesses will be classified as micro, small, medium and large depending on the carrying value of their assets, net revenue, and headcount. Large businesses, unless publicly traded, as well as medium-size businesses, are required to publish annual financial statements with independent auditors reports on their websites by 1 July of next year. Furthermore, the Draft Law distinguishes companies of public interest as a separate group to publish their financial statements by 30 April of the year following the reporting year. In addition to publicly traded entities, banks, insurers, non-government pension funds and other financial institution, companies of public interest belong to the category of so-called large businesses.

In accordance with the Draft Law, in addition to public joint stock companies that already reporting in accordance with international standards, companies of public interest and mining businesses of national importance will also have to adopt the said standards.

It should be stressed that the norms of the Draft Law are much needed by Ukrainian business today. First, insignificant flaws in the document will no longer provide a basis to challenge a transaction unless they hinder identification of the parties to the transaction. Furthermore, in accordance with the Draft Law, the rights and responsibilities of the parties arising from the transaction do not depend on whether the transaction was recorded on the entitys registers and accounts.

Second, the Draft Law envisages the possibility of adjusted financial statements to be submitted by businesses. As corporate income tax calculation is based on accounting profit or loss before tax, this provision will help taxpayers to correct errors made in previous periods. At present, there is no formal mechanism for such correction, as the effective accounting standards contain no provisions that enable the submission of adjusted financial statements.

Members of Parliament proposed amendments to the Customs Code in terms of the duty free limit value for cross-border movement of goods. How should this initiative and particularly the rise in the duty free value, affect the conditions of doing business in Ukraine?

Mykola Voitovych,

Attorney, Gramatskiy and Partners

The discussion about altering the duty free limit for cross-border movement of goods is not new for Ukrainian society. At the end of 2016, the association that represented producers, importers, and distributors of electronic products initiated a big fall in the limit from EUR 150 to EUR 22. Considering that members of the association covered nearly 90% of the domestic electronic market, the initiative, which became a draft law, sparked huge debate and public outrage. As we may see now, the legislative pendulum has reversed, and MPs suggest the opposite move to double the limit. Therefore, opinions from previous discussions are still topical and applicable.

Consumers who will get more options in the international market hail the initiative. If it becomes law, individuals will have access to a broader range of products that are of better quality and for a lower price; a number of orders from Ukraine in worldwide systems of on-line shops will blow up; fulfilment of such orders will cause a sufficient rise in the revenues of logistics companies. Amid the influx of imported goods, local retailers will feel tougher competition and will be forced to cut prices, clearly benefit consumers. Since more products will be legally available from abroad, the level of traffic in illegal goods will go down.

The new limit will definitely cut the amount of income the state budget receives from VAT and customs duty as the import of more items will be exempted from these charges. However, some analysts consider those losses may be compensated by payments from the increased turnover of imported goods on the domestic market.

The Governments Draft Law No. 6604 intends to introduce a new model of healthcare financing. How would you assess this initiative? What are the main differences of this healthcare reform from those that were suggested earlier?

Olena Khytrova,

Head of Medical and Pharmacy Law Department, ILF

Parliament adopted in the first reading Draft Law No. 6327 On State Financial Guarantees for the Provision of Medical Care and Medicines on 8 June. In addition, MPs reviewed Draft Law No. 6349 On Amendments to the Budget Code meant to establish a mechanism for implementing changes in healthcare funding provided for in Draft Law No. 6327. However, MPs rejected Draft Law No. 6349 and sent it for reworking.

Draft Law No. 6604 is that revised version.

The Draft Law envisions changes in the process of allocating funds on healthcare. Today, the state allocates money through medical subventions, which are then directed to local budgets. It is being proposed that healthcare money is allocated by adopting state healthcare programs. Under the budget program, a relevant executive authority will be responsible for handling the funds.

The Draft Law proposes to keep the existing target allocation of public funds, which prevents medical subventions to be spent on energy and utilities.

In accordance with the Draft Law, the cost of hospital maintenance will be covered with additional funds allocated by the state. Local councils will still provide funds and pay for energy and utilities, as well as finance the overhaul of hospital buildings.

A number of MPs disagreed with these proposals. This led to an alternative Draft Law No. 6604-1, which suggests that local councils should co-finance payments for medical services within the cost of utilities and energy.

The idea of the alternative Draft Law is that it should motivate local authorities (as owners of hospitals) and heads of those hospitals to jointly seek ways of optimizing energy and utilities costs.

As for which of the proposed Draft Laws the Verkhovna Rada of Ukraine will actually adopt, well find out in autumn.

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