Crux (#05 May 2016)

Legislative Update

Activity over the last month has brought in new legislative changes as well as developments in various aspects of business regulation. In this section the UJBL editorial team has enlisted the help of experts to comment on the latest changes and a large number of proposed draft acts. Our latest digest includes, to a large extent, initiatives that touch upon the intellectual property, energy, arbitration, taxation, customs spheres, and not only.

 

Oleksiy Stolyarenko,

Senior associate, Baker & McKenzie

The Ministry of Economic Development and Trade of Ukraine has approved the Draft Concept on reform of the state system of intellectual property protection in Ukraine. The priority measures of intellectual property reform are establishment of the National Intellectual Property Authority, which will based on Ukrpatent and the State Intellectual Property Service of Ukraine with subordination to the Ministry of Economic Development. How will the introduction of this institution affect the regulation of IP rights?

Reform proposed by the Draft Concept on reforming of the state system of intellectual property protection in Ukraine is long overdue. Structural problems with three level subordination in the state IP system are quite evident, where all of the levels do align, duplicate and conflict with each other at the same time in terms of the scope of authority, funding and official duties.

Of course, it remains to be seen how the proposed reform will be implemented, but the Concept enables an increase in efficiency and transparency of the overall state IP system, and to deal with issues such as underpaid government employees, underfunded projects in developing areas of IP.

Through the years we`ve seen numerous configurations of distribution of functions between the State Intellectual Property Service of Ukraine (SIPS) and State Enterprise Ukrainian Intellectual Property Institute (Ukrpatent) caused by the lack of government funding and other considerations. In many cases, both organizations had and still have structural departments responsible for performance of the same functions overseeing one another. The new proposed structure would help to avoid unnecessary duplication, and establish grounds for a better financial flexibility and transparency.

Another important issue is chronical lack of motivated, educated and bright employees, which is of paramount importance for the State IP system. Because of the self-funded nature of the new agency proposed by the Concept it would be possible to bring to the State IP system new blood and not to forget motivating existing employees.

 

Oksana Krasnokutskaya,

Senior associate, AEQUO

What mechanisms for protecting the rights of LLC participants are offered by the Draft Act On Limited Liability Companies and Additional Liability Companies?

The Draft Act On Limited Liability Companies and Additional Liability Companies prepared by the Ministry of Economic Development and Trade of Ukraine in collaboration with representatives of the legal community and Commercial Law Centre took into account the current needs of business and filled the gaps of current regulation on LLCs.

The long-awaited novelty provided by the Draft is the possibility to execute legally binding corporate agreements by a company’s participants and at their own discretion to set up participants’ rights in a company (lock up provision, pre-emption rights and rights of first refusal in relation to any shares, tag along and drag along rights), establish specific controlling and management functions, dispute resolution provisions (deadlock, etc).

Another positive novelty of the Draft is setting up some specifics of the foreclosure procedure with regard to participatory interest. Thus, the participants of the company have a pre-emptive right to purchase the pledged participatory interest at its market value pro rata to their shares in the company share capital prior to announcement of an auction and selling of pledged participatory interest to any third party.

The Draft also provides for exclusion of information about the participants and their shares in the share capital from a company’s articles of association. Practically, such an amendment resolves the vital problem of minority participant sabotage, when someone refuses to sign the articles of association of a company and so blocks the process of registering participants with the Unified State Register.

The Draft abolishes the prohibition on offsetting a participant’s property claims against a company through debt-into-equity conversion. In practical terms, such an approach will help to avoid additional monetary transactions between participants and the company.

By analogy with the On Joint-Stock Companies Act, the Draft also provides for regulation of related-party transactions and material transactions, which promotes the protection of both minority and majority participants.

To conclude, the Draft contains numerous progressive provisions and takes into account the experience of foreign jurisdictions. There is no doubt that adoption of the Draft will enhance the investment attractiveness of Ukraine and corporate governance culture in general.

 

Anna Bukvych,

Associate, Lavrynovych and Partners

What reformatory innovations do the authors of the Draft No.4310-1 On Amendments to Certain Legislative Acts of Ukraine on Improvement of Connecting to Electric Networks propose to include, and how will adoption of this Draft affect Ukraine’s rating in the World’s Bank Doing Business?

The Draft Act On Amendments to Certain Legislative Acts of Ukraine on Improvement of Connecting to Electric Networks was developed according to the Government’s plan approved in order to upgrade Ukraine’s rating in the World’s Bank Doing Business. In the last few years recent achievements in the Rating were gained mostly by improving Ukraine’s position in certain topics of the Rating. For example, starting a business, registration of ownership rights and international trade. However, the ranking in the topic “Getting Electricity”, which is one of the most important criteria, is still on a very low level. Therefore, the development of the relevant Draft is a necessary step in improving Ukraine’s rating. Ukraine is now 137th in the ranking in the topic “Getting Electricity”. The relevant Draft introduces a lot of amendments aimed to approving the procedure of connecting to electric networks, i.e., among other, on-line application, decrease the list of documents as well as shortening the time required for connection to electricity grids. In addition, the Draft provides for detailed classification of connection categories as well as types of connections. The most important amendment is introducing the possibility for the customer to access the public contract. These amendments will definitely simplify the existing connection procedure. However, the Draft also envisages the amendments to be made to the Land Code of Ukraine and On Electric Power Industry Act of Ukraine. It is worth mentioning that there is also the Draft On the Electricity Market of Ukraine which provides for another procedure for connection to electric networks. Therefore, these Drafts shall be amended and updated in order to envisage unified and consistent provisions.

 

Dmytro Shemelin,

Lawyer, Ilyashev & Partners

On 31 March 2016 the Ukrainian Parliament registered Draft Act No.4351 On Amending to Certain Legislative Acts of Ukraine with Regard to Judicial Control and Assistance to the International Commercial Arbitration. What are the key innovations provided by the Draft? In what way will adoption of this norm affect the investors’ confidence to Ukrainian jurisdiction?

Draft Act No.4351 is in general terms a positive step towards the pro-arbitration stance of Ukrainian courts. The key positive feature of the Draft is that arbitration-related cases are now in the jurisdiction of the Kiev Court of Appeal. The removal of these cases from the jurisdiction of courts of first instance drastically reduces the reaction time of the courts and stimulates the unification of arbitration-related practice.

The Draft also provides a number of procedural solutions in the spheres, which heretofore remained obscure. The Draft expressly authorizes the joiner of the enforcement and the challenge proceedings; for the first time a law specifically deals with interim awards on jurisdiction. There are also several issues, where the Draft intends to make significant breakthroughs (although the practical application is yet to be established). First, the Draft enables the parties to expressly waive the possibility of challenge of the award, which may be seen as a fundamental challenge to the sanctity of the right to court. Second, the Draft establishes the possibility for the parties to an international arbitration to obtain interim relief from a Ukrainian court in support of arbitral proceedings, without opening a case on merits. In general, the Draft provides a number of improvements of arbitration-related procedures in the Ukrainian courts, designed to make life easier for practitioners.

 

Sergiy Gryshko,

Partner, Redcliffe Partners

The purpose of Draft Act No.4351 lay in increasing the effectiveness of arbitration, as well as the attractiveness of Ukraine as a place of arbitration. How do you assess the proposed methods of arbitration effectiveness? What measures can you put forward for achieving this goal?

Despite its less than appealing name, Draft Act No.4351 On Amending Certain Legislative Acts of Ukraine with Regard to Judicial Control and Assistance to the International Commercial Arbitration is a revolutionary piece of legislation which, if adopted, will completely change the regulatory framework for international commercial arbitration in Ukraine.

First and foremost, it introduces the exclusive jurisdiction of the Kiev City Commercial Court of Appeal with regard to any international commercial arbitration matters, from enforcement of foreign awards to attachment of debtor’s assets to annulment of arbitral awards rendered in Ukraine.

By contrast to the legislation in force, Draft Act No.4351 suggests that there will be one specialized court, namely, the Kiev City Court of Appeal, considering all applications for leave to enforce foreign arbitral awards regardless of where the debtor is seated or where its assets are located. The only appeal will be to the Higher Civil and Criminal Matters Court and, in limited cases, to the Supreme Court.

The Draft introduces new procedures for annulment of Ukrainian arbitral awards, attachment of a respondent’s assets while arbitration is under way and providing judicial assistance to arbitral tribunals in collecting evidence. Furthermore, a new rule that any disputes which can be settled by parties can be arbitrable is introduced. Parties will also be able to waive their rights to seek annulment of the arbitral award.

In summary, Draft Act No.4351 constitutes the most comprehensive reformist piece of legislation which Ukraine has seen since the adoption of the UNCITRAL Model Law on International Commercial Arbitration in 1994. One can only hope that the Draft will pass successfully through Parliament and receive the President’s approval.

 

Serhiy Yaroshenko,

Junior associate, KINSTELLAR

Draft Act No.4413 On Amendments to the Tax Code of Ukraine on the Introduction of the Tax for Transactions with Offshore Jurisdictions is proposed to introduce a new tax — on transactions with offshore jurisdictions. How does this Draft affect the ease of doing business in the country? Can the Draft reduce the outflow of capital overseas?

Introduction of a special 15% tax for transactions with corporates established in offshore jurisdictions through Draft Act No.4413 will likely affect the ease of doing business in the country. The need for its adoption is unclear, as a year ago similar provisions known as thin capitalisation rules were re-incorporated in Article 140 of the Ukrainian Tax Code. Article 140 governs borrowing-related payments made to non-residents, and sets calculation of interest deductible from taxable corporate income on a debt-to-equity basis. In its Letter of 5 October 2015 No.21052/6/99-99-19-02-02-15, the State Fiscal Service of Ukraine defined these as interest payments under debt obligations upon transactions with non-resident related parties. Normally, where the debt exceeds the equity by 3.5:1, and 10:1 in case of financial institutions and leasing companies, deduction on interest expense is limited to 50% of profits before tax, the amount of financing expenses and depreciation. The offshore tax is designed to apply to transactions effected with offshore entities, and through their bank accounts. Conceptually, Draft Act No.4413 does not seem to meet the declared objective by failing to establish the actual purpose of payments, the relationship between the parties, and lacks clarity on offshore tax administration. The purpose of this regulation is to minimise anti-money laundering practices. In practice however, such stringent policies prove ineffective in attracting foreign capital, instead hindering the activity of honest taxpayers.

 

Igor Reutov,

Head of department, attorney, Gramatskiy & Partners

The Cabinet of Ministers of Ukraine has, through its Resolution No.247 of 30 March 2016, reorganized the specialized state tax administrations dealing with compliance of large taxpayers. How will this reform affect tax administration?

The Cabinet of Ministers of Ukraine has approved reorganization of tax administrations dealing with compliance of large taxpayers (Resolution No.247 of 30 March 2016). All such tax administrations will merge with the State Tax Service Office for large taxpayers. There are 1725 large taxpayers (in 2016) in Ukraine and they anticipate that the said reorganization will have more effect than just change of name.

It is expected that tax administration of large taxpayers will be similar to the European model. In EU tax administrations structure the compliance operations of their large taxpayers division or unit on an industry segment. Application of such an approach would enable Ukrainian companies in the same industry to receive unified services from the office.

Moreover, non-traditional approaches to compliance activity are contemplated for exercise. According to the OECD the current European trend is to move from post-filing of tax return examination to “real-time” evaluation of risk and compliance issue resolution. A number of countries have instituted various programs to provide certainty to large taxpayers and early identification and resolution of compliance issues. A focus on building a better relationship between the tax administration and the large taxpayers is a common approach across European states and the Ukrainian Office direct its efforts to the same practices. In addition, it is recognized that the complexity of tax legislation, business structures and transactions in the large business segment have created a need for specialist knowledge and expertise in certain areas. Thus, the office should concentrate on accumulating such specialist knowledge and expertise and increase the efficiency of services provided to large taxpayers.

 

Sergiy Kyrych,

Counsel, FCLEX Law Firm

The Ukrainian Finance Ministry, together with experts and public organizations developed the Draft Act On Amendments to the Customs Code of Ukraine (concerning the authorized economic operator and simplified customs procedures). How will adoption of this Act improve the economic and administrative conditions for the customs clearance of goods by Ukrainian exporters and importers? What additional measures for reforming customs procedures can you put forward?

The Ukrainian Finance Ministry presented the Draft Act On Amendments to the Customs Code of Ukraine (on the authorized economic operator and simplified customs procedures).

Under the Draft there are plans to introduce in Ukraine the Institute of authorized economic operators (UEO) similar to that which functions in the European Union and throughout the civilized world.

In our view, this will help to significantly improve conditions for customs clearance of goods by Ukrainian exporters and importers.

The Draft provides that the State will issue two types of UEO certificates, depending on the nature of the requirements and simplifications, in particular, a reliability and safety certificate (to minimize customs control and reduce the time of entry) and a customs procedure simplification certificate (to simplify and accelerate customs formalities for release of goods, etc.)

The introduction of the said institution in Ukraine will be one of the instruments to fight corruption and administrative pressure and will, consequently, improve the work of customs authorities in general. The UEO concept has been accepted into world practice and is widely used in international trade.

Adoption of the proposed Draft will make it possible to bring Ukrainian legislation into compliance with EU standards and international practice. As a result, by means of reducing artificial barriers to international trade the state will reduce the cost of imports and make Ukrainian exporters more competitive. However, the Draft has not yet been submitted to the Verkhovna Rada of Ukraine.

 

Katerina Lysechko,

Associate, AstapovLawyers

National Bank of Ukraine Resolution No.225, which amended the procedure on opening and using the funds on current accounts of international financial organizations, which are opened in authorized banks, as well as in the Instruction on the order for opening, using and closing accounts in national and foreign currencies, came into force on 6 April. Will these changes expand access to lending in the national currency? And what companies can expect to receive a loan?

The changes made by the Cabinet of Ministers of Ukraine as of 6 April 2016 through Resolution No.277 to the Procedure on issuing special permits for subsoil use and Procedure of conducting auctions for the sale of special permits for subsoil use, in general, can be considered as a positive step towards attracting investment in developing mining operations.

The changes, such as the exclusion of preferences to receive special permits for companies in which the state owns a share reducing the number of approving bodies and strengthening of “tacit consent” principle, public lighting of the procedures for issuing special permits and decision-making are definitely aimed at establishing transparent procedures for issuing special permits.

At the same time, to attract investment in such a regulated sector of the economy, as mining, and to create transparent conditions for issuing special permits is not enough. This requires an integrated approach, which includes the creation of conditions for the normal functioning of the extraction sector and reducing state pressure on such companies through the use of supervisory functions. Another important factor is the general improvement of the investment climate in the country and the creation of favourable conditions for business.

 

Sergii Korniienko,

Counsel, Antika Law Firm

Resolution No. 277 of the Cabinet of Ministers of Ukraine amended the procedure for issuing special permits and procedure on conducting auctions. How will these amendments affect the attraction of investment in the development of mining operations?

The changes made by the Cabinet of Ministers of Ukraine as of 6 April 2016 through Resolution No.277 to the Procedure on issuing special permits for subsoil use and Procedure of conducting auctions for the sale of special permits for subsoil use, in general, can be considered as a positive step towards attracting investment in developing mining operations.

The changes, such as the exclusion of preferences to receive special permits for companies in which the state owns a share reducing the number of approving bodies and strengthening of “tacit consent” principle, public lighting of the procedures for issuing special permits and decision-making are definitely aimed at establishing transparent procedures for issuing special permits.

At the same time, to attract investment in such a regulated sector of the economy, as mining, and to create transparent conditions for issuing special permits is not enough. This requires an integrated approach, which includes the creation of conditions for the normal functioning of the extraction sector and reducing state pressure on such companies through the use of supervisory functions. Another important factor is the general improvement of the investment climate in the country and the creation of favourable conditions for business.

 

Sergey Protasov,

Senior associate, attorney-at-law, Trusted Advisors

Draft Act No. 3448 was submitted to the Verkhovna Rada of Ukraine. How can this Draft affect taxpayers and the tax authorities?

On 10 November 2015 Draft Act No. 3448 On Amendments to the Tax Code of Ukraine as to the Peculiarities of Criminal Proceedings in Tax Relations and Administration of Taxes and Duties» was submitted to the Verkhovna Rada of Ukraine. Draft Act No.3448 proposes several amendments to some legislative acts of Ukraine, in particular:

1. To clarify the procedure for calculating the timing for the provision of objections to the tax audit report and copies of documents to it, that will eliminate violations by the State Fiscal Service of Ukraine under Articles 2, 3 of the European Convention on the Calculation of Time-Limits, 16 May 1972.

2. To determine the timing of finished crime components provided under Articles 212, 212-1 of the Criminal Code of Ukraine stating that such is the actual non-payment of exactly agreed tax liabilities within the legal limits.

3. To double the rate of actual non-receipt by the budget of taxes, duties from which the act is considered a criminal offense under Articles 212, 212-1 of the Criminal Code of Ukraine.

4. Comprehensively solve the problems of prejudice in criminal proceedings for administrative proceedings.

5. To set additional grounds for termination of criminal proceedings:

— Cancellation of the decision of the tax authority that the tax liability is established;

— Debt payment in full by any person within 10 days from the date of the agreed upon monetary obligation.

In my opinion, corresponding amendments will, in case of adoption, fill the gaps in legislation and eliminate ambiguous interpretation of tax and criminal laws with regard to terms of qualification of actions under Articles 212, 212-1 of the Criminal Code of Ukraine. They also will determine actions on the part of the tax authorities in the case of cancellation of tax assessment notice, payment of tax obligations within the prescribed period of 10 days after its approval, etc. Thus, the proposed Draft will reduce the number of entries regarding investigations provided under Articles 212, 212-1 of the Criminal Code of Ukraine, which are put on the Unified register of pre-trial investigations, which will decrease the influence and undue pressure by the tax authorities on business.

 

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