Crux (#11 November 2018)

Legal Digest

Draft Law No. 9083 has been submitted to Parliament. How would you assess the proposed initiative?
Andriy Reun,
partner, head of tax, EVRIS

Draft Law No. 9083 On Changes to the Tax Code of Ukraine in Relation to Taxation of Transactions with Virtual Assets in Ukraine is undoubtedly a positive move by the state towards the transparency of transactions with cryptocurrencies and tokens and encouraging taxpayers to report the relevant transactions in their tax returns. In the absence of specific regulations and laws in respect of virtual assets, their circulation and transactions involving such assets, the Draft envisages at least a certain Ukrainian legislative framework in these areas.

Although taxpayers and the tax authorities are likely to differently interpret definitions of virtual assets, cryptocurrencies, tokens and mining suggested by the Draft, the document resolves certain tax concerns actively discussed in the crypto-community. Specifically, the Draft clearly provides for the rules for VAT treatment of transactions with cryptocurrencies and tokens, envisaging that only transactions with token assets certifying the title to VAT-able goods are subject to VAT. Furthermore, the Draft envisages that crypto-assets exchange transactions are not subject to taxation.

The Draft Law provides for a corporate income tax reduced 5% (until 31 December 2024) and 5% personal income tax rates applicable to profits generated from transactions with virtual assets (i.e. cryptocurrencies and tokens). Taxpayers will account their transactions with virtual assets separately from other transactions. Losses from such transactions will not reduce the tax base of the relevant taxes.

Despite the positive impact that the Draft may have on regulation of transactions with virtual assets, it also involves certain threats to the financial system of Ukraine, state and municipal budgets and taxpayers. These threats include the likelihood of certain businesses switching to crypto-business instead of operating in the real sector of economy, volatility of cryptocurrencies rates, potential fraud, cyber-crimes, bankruptcies, increased risks for money-laundering and potential shortage of income part of the budgets due to the reduced tax rates applicable to transactions involving virtual assets. The absence of a clear regulatory framework with respect of transactions with crypto-assets and rules/procedures for tax audits of transactions with these assets are also likely to give rise to tax disputes because of differing interpretation of such transactions by taxpayers and tax authorities. It would, therefore, be in the best interests of both the state and taxpayers if the Draft comes into effect alongside the legislative framework addressing the above-mentioned threats. Nevertheless, the Draft is a good starting point for regulation of crypto-assets related transactions and, if it becomes law, it will likely speed up the process of adoption of the relevant Ukrainian regulatory framework in relation to this technically-advanced, unstable, but fast-growing market involving billions of dollars daily.

On 18 September the Verkhovna Rada adopted the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Improving Respect for the Rights of Participants in Criminal Proceedings and of other Persons by Law-enforcement Bodies during a Pre-Trial Investigation. How would you assess this innovation?

Igor Posvystak, lawyer of criminal law department, AVER LEX

The need to adopt Law No8490 was declared, first of all, to increase the responsibility of law-enforcement officials for violating the rights of businessmen and protecting business during investigatory actions. This Law got the informal name Mask Show Stop 2.

In fact, there are positive changes to Article 307 of the CPC. They establish that the ruling of an investigating judge on the satisfaction of the complaint against a decision, action or inactivity of an investigator is sent to the head of the body which such investigator represents for conducting an official investigation and to resolve the issue of bringing those who are guilty to justice.

It is possible to bring the investigator to financial liability for damages caused, but not as easy as stipulated by law. Victims and their representatives will have to conduct substantial procedural work to get a positive result. At the same time, it cannot be ruled out that, regardless of the results of official investigations, the heads of the relevant bodies will make decisions in favor of their subordinates. Such decisions exclude the possibility of further bringing the investigator to personal liability and, in general, full implementation of the provisions of Article 130 of the CPC of Ukraine.

There are also positive changes in prevention of attempts to unjustifiably extend the terms of pre-trial investigation, which leads to harm to persons who are not suspects, but they are actually being subjected to procedural actions. In accordance with these changes, other (third) persons will be able to prevent attempts by an investigators to apply one of the measures of securing (seizure of property) within the framework of a criminal proceeding in which the pre-trial investigation is carried out beyond the established time limits and initiate the closure of proceedings.

It should be noted that it is only since 2018 that novations have come into force regarding establishing a pre-trial investigation period in proceedings where nobody has been informed of suspicion, that is, in factual cases. Now, third parties receive the full right to effectively protect their rights and interests in case of violation by their investigator. At the same time, the CCP norms clearly provide for the conducting of third-party property seizures, which are used and abused by investigators during the investigation of these facts. However, legislators have left this provision unchanged.

On 3 October the Cabinet of Ministers of Ukraine approved the Technical regulations on eco-design of energy-consuming products prepared by the State Agency on Energy Efficiency and Energy Saving of Ukraine in order to implement, ensure and legitimate the 125th EU Directive 2009/125/EC of the European Parliament and the Council. What should Ukrainian manufacturers take into account when implementing the eco-design system?

Vitaliya Karhova, attorney, counsel, ADER HABER

On 3 October 2018 the Cabinet of Ministers of Ukraine approved the Technical regulations on eco-design of energy-consuming products prepared by the State Agency on Energy Efficiency and Energy Saving of Ukraine in order to implement, ensure and legitimate the 125th EU Directive 2009/125/EC of the European Parliament and the Council of 21 October 2009, according to which the basis for determining the requirements for eco-design of energy-related products is established.

It should be emphasized that pursuant to the Directive, eco-design is the integration of the environmental aspects into product design with the purpose of improving the environmental characteristics of the product throughout its period of existence.

In fact, eco-design requirements are any standards specified for a product or product design, the aim of which is to improve the environmental characteristics, or any standards for informing about the environmental aspects of a product. Each product which falls under the Technical regulations on eco-design of energy-consuming products shall be marked by the manufacturer or its authorized person with a conformity mark and shall come with a declaration of conformity.

Thus, approval of the Technical regulations on eco-design is a solid step for Ukraine within the introduction of an important European regulatory tool eco-design. The impact of its implementation can result in the next advantageous statements:

1. Improvement and increase in the quantity of energy-efficient products on the market;

2. Reductions in the use of energy resources in the design, production, use and recycling of energy consumer products;

3. Prevention of the introduction into circulation of products that irrationally consume energy and have a negative effect on the environment.

As a matter of fact, the Technical regulations on eco-design of energy-consuming products is a framework, and it provides for the adoption of about 30 special technical regulations for individual types of products.

Moreover, it stipulates requirements that energy-consuming products must conform to. These products are covered by the relevant technical regulations related to the establishment of requirements for eco-design by product types, for their introduction and/or commissioning, and also contribute to an increase in energy-efficiency and the level of protection of the natural environment, while increasing the security of energy supply. It should be noted that the Technical Regulation will not apply to vehicles for passenger or freight transportation.

In conclusion it should be said implementation of Technical regulations on eco-design of energy-consuming products is one of the steps which need to be taken for the protection of our environment, as establishment of a system for defining requirements for eco-design of energy-consuming products will not only lower the CO2 emissions in the atmosphere, but also free up the movement of such products on the Ukrainian market.

On 4 October 2018 amendments to the Customs Code and other laws of Ukraine on the procedure for carrying out various types of state control when moving goods across the border came into force. What changes should a business expect following these amendments?

Oleksandra Kondratenko-Borovska, lawyer, SDM Partners Law Firm

After more than one year of hard work by Ukrainian lawmakers, the one-stop facility at Customs points has finally been implemented. Recent amendments to the Customs Code of Ukraine which came into force on 4 October 2018 are aimed at optimizing control procedures at Customs point and improving Ukraines investment attractiveness.

The amendments simplify the customs clearance procedure. All documents required for customs clearance will be submitted in electronic form (signed with e-signature) through the one-stop system. There will no longer be a need to file documents in paper format, which is expected to save time and reduce costs for the applicants. The system will be available 24/7 (except for periodic closure due to technical maintenance).

Additionally, the general time required for customs clearance will be reduced by up to two working hours. All decisions taken by Customs authorities regarding clearance will be entered into the one-stop database.

The Cabinet of Ministers now has six months (till 4 April 2019) to ensure that the relevant software and the unified state informational web-portal One-Stop Shop for Foreign Trade are in place and fully operational.

On 7 November 2018 the Law On Electronic Trust Services enters into force. Should we expect a quick transition to electronic document management? What issues does the law address, or what issues could it create in business and state relations?

Oleksandr Dementiev, lawyer, Ilyashev & Partners

On 5 October 2018 the Verkhovna Rada of Ukraine adopted the Law On Electronic Trust Services. The adoption of this Law was among Ukraines obligations within the framework of its European integration process. It will come into effect from 7 November, 2018. So, lets try to understand what we should expect from the adoption of this unquestionably vital legal act.

First of all, it should be noted that this Law has been adopted to modernize current legislation in the field of electronic digital signature, taking into account the experience of the European Union, to build a common filed of trust based on the system of electronic trust services, to recognize the electronic trust services provided by foreign suppliers of electronic trust services in Ukraine, which will ensure the active development of cross-border cooperation and integration of Ukraine into the world electronic information space and the single digital market .

Adoption of the Law of Ukraine On Electronic Trust Services will assist in ensuring operation of such important areas as creating conditions for the development and functioning of the field of electronic trust services; free circulation of electronic trust services in Ukraine; raising peoples trust in electronic (including cross-border) services; equal opportunities regarding the access to electronic trust services, including for people with disabilities; protection of rights and legitimate interests of users of electronic trust services; protection of personal data processed during the provision of electronic telecommunication services, etc.

This Law will allow people to register a company, sign a contract, send any request using only a smartphone, tablet or other electronic device. It also relates to the legalization of such business administration tools as electronic identification, electronic signature, electronic seal, time stamp, electronic registered mail delivery, fake control of electronic sources, etc.

In particular, this Law will be of interest to small and medium-sized businesses, since all their active written communications as to administrative services is going to be performed electronically, using only a mobile phone, which will undoubtedly affect the simplification of the general system, particularly the circulation of paperwork, its acceleration, reducing the level of corruption and bureaucracy in this area.

Therefore, the adoption of the Law of Ukraine On Electronic Trust Services will make it possible to introduce a model and principles for the provision of the EUs electronic trust services through harmonization of legislation with the provisions of the Council Regulation, taking into consideration for national particularities, not ruining the system of interaction that exists between the parties in the field of electronic digital signature use which has shaped itself in Ukraine. On the one hand, the Law will stimulate the markets development and, on the other hand, it will satisfy the needs of the state in the information resources without limiting the rights of consumers.

As for the impact of the Law on state-wide processes, one may draw the conclusion that joining the single digital market should give Ukraine an opportunity to enter into cooperation with leading countries in the fields of e-commerce, e-health, e-customs, and more. Ukraine will get the chance to contribute to issues of information and network security, cyber security and electronic identification and trust services. Furthermore, resolving this issue in Ukraine at the legislative level will predictably bring a significant rise in foreign investment, improve the quality of information and digital services, and possibly reduce their cost.

The VR Committee on Financial Policy and Banking Operations recommends Parliament adopt Draft Law No.9035 On Capital Markets in the first reading. How would you comment on the proposed innovations?

Roman Stepanenko, partner, Asters



The recently announced Draft Law No.9035 on capital markets is intended to offer long-overdue reform of Ukrainian capital markets in the broad reading of the term. Needless to say, the reform is crucial for the full reconstruction of the non-existent stock market, or rather building it from scratch. The proposed law has great potential for handling the task. Lets take a look at least at some major novelties on the table:

Structure. The law focuses heavily on the new structure covering securities, derivatives, money and commodities markets (governed by the NSSMC). Naturally, given the sponsors and developers of the draft, it is in line with international experience, and generally resembles the approach of mature financial markets (USA, UK) tailored to the specifics of Ukrainian financial environment.

Derivatives. A transparent regulatory mechanism is offered for the derivatives market to replace current outdated regulations and healing numerous discrepancies which impede healthy development of the market. Although the law does not directly address FX issues, it is expected that derivatives linked to FX will be available once the new FX Law comes into force in February 2019.

Yuliia Prikhodko, junior associate, Asters

Netting. Introduction of the netting option for OTC derivatives subjected to the ISDA Master Agreement allows Ukrainian derivatives market participants to employ an efficient and time-effective settlement instrument (i.e. making single payment transaction instead of numerous payments). There have so far been several attempts to document derivatives transactions under the Master Agreement (including netting provisions), which have bumped into the adverse Ukrainian capital markets ecosystem.

Settlement finality. The law introduces the concept of settlement finality, which guarantees that transfer orders are considered as finally settled after a certain point in time, regardless of whether the sending participant has become insolvent or the transfer orders have been revoked in the meantime. The instrument serves as a means of minimising risks associated with the transfer of financial instruments and payments.

Clearing. The law allows for foreign institutions (additionally to Ukrainian entities) to render clearing services as a central counterparty subject to certain licensing requirements.

Administrator. There are several instruments intended to protect the interests of bondholders. Introduction of an administrator (bond trustee) who carries out numerous functions related to bonds on behalf of bondholders and also facilitates dealings with bonds.

The version of the law available for our review at the moment is far from final and may yet undergo substantial changes. If, however, no drastic amendments are introduced, the new regulatory framework seems able to respond adequately to the needs and demands of the financial market.

Law No.2545-VIII On Ensuring Transparency in the Extraction Industries comes into force on 16 November 2018. Therefore, related companies will have to disclose information on payments and production volumes. What difficulties might the sectors representatives face?

Andrii Moskalyk, senior associate, Baker McKenzie

New Law No. 2545-VIII of 18 September 2018 is obviously a sign that regulations in the Ukrainian extraction industry are developing in the direction of building up the trust of civil society. It also creates the basis for productive dialog as to whether losses from extraction of resources are adequately paid off by the relevant payments for the benefit of society. The law gives a good start but its actual effect remains to be seen no sooner than when the first EITI local report is available. Obviously, reporting will be possible after approval of the relevant subordinate regulations defining the precise forms and scope of disclosure. It will be crucial to ensure that before 1 September 2019 industry players and payment recipients have sufficient guidance for consistent reporting so that the same payments are classified in the same manner by both sides. For example, to avoid duplicative reporting or misleading information, industry players will be keen to see the rules on how reporting should be carried out for those business groups and companies which combine extraction, sub-holding and/or holding activities. On 18 October Draft Code No. 8060 was adopted. Would the proposed innovations address the issue of the recovery of the debtors financial solvency? How could the Code affect bankruptcy practices?

Dmytro Tylipskyy,
senior associate, EQUITY

In compliance with DoingBusiness 2018, Ukraine is 149th of 168 countries in insolvency settlement issues and it is an open secret of long-standing needs in transformations in this field. On 18 October 2018 the Verkhovna Rada of Ukraine adopted as it stands the Code of Ukraine on Bankruptcy Proceedings (No.8060), which currently awaits the signature of the President of Ukraine.

In our opinion the Code, in terms of corporate bankruptcy, contains a number of innovations and new mechanisms of which special attention shall be given to disposal of assets at electronic auctions, ensuring transparency of such sales and increasing the number of potential buyers, possibility for loss of effect of pledge property moratorium, increase in the level of protection of secured creditors as well as combining voluntary settlement and external management institutions.

It is worth noting the introduction of individually joint and several liability for the head of the debtor under commitments to creditors in the event of failure to take legal action in a timely manner with the petition for commencement of bankruptcy proceedings.

Moreover, lawmakers have reconciled in detail financial support and the salary for the court-appointed administrator which will enable greater motivation of such administrators for proper execution of their responsibilities and facilitate the discharge of creditors claims or re-establishing of debtor solvency.

The introduction of the institution of individual bankruptcy is an undeniable step forward, which is the first attempt at settling these complex legal relations. Applying the practice of individual bankruptcy will, with time, enable estimations to be made of the effectiveness of the mechanisms being used and their necessity.

Certain questions cause cancellation of the minimum amount of indebtedness required to commence bankruptcy proceedings which are likely to cause abusive practices by participants in proceedings.

Novelties proposed by the Code of Ukraine on bankruptcy proceedings provide for more options to protect creditors and discharge their claims, which in turn will cause an upward trend and changes in the percentage of discharged claims of creditors.

The National Bank has introduced changes to the procedure for the disclosure of information on the ownership structure of banks. How will the procedure change, and what does the status non-transparent structure entail?

Daryna Dashkevych, associate, Sayenko Kharenko

On 17 October 2018 the National Bank of Ukraine introduced amendments to the Regulation On Procedure for the Disclosure of Information Regarding a Banks Ownership Structure (the Regulation) with the intention of making the respective disclosure procedures more clear and predictable to market participants.

As one of the key amendments, the Regulation provides for an enhanced interaction procedure between the National Bank and banks whose ownership structure may be treated by the regulator as non-transparent. Once the NBU detects a potentially non-transparent ownership structure, it serves the bank with a written notification. The regulator should set out a timeframe for the bank to bring its ownership structure into line with disclosure requirements. In addition, while issuing the notification, the regulator may, but is not obliged to, indicate a specific list of actions/guidelines the bank or its key shareholders should follow to deal with the issue.

Failure by a bank and/or its key shareholders to ensure the disclosure of information on the proper ownership structure within the timeframe set out in the notification results in the regulator adopting a decision designating the bank as having a non-transparent ownership structure. Although the Regulation amendments specify that the decisions in question fall within the remit of the Committee on Banking Supervision and Regulation and Oversight of Payment Systems, in practice this unit was historically responsible for adopting similar decisions. Once adopted, the decision should be notified to the bank within three business days.

The consequences of classifying a banks ownership structure as non-transparent remained the same: refusal to grant a refinancing loan to the bank and restrictions on certain banking operations, including the purchase of foreign currency. In the worst-case scenario, the NBU may classify such banks as problem ones. As a reminder, this was one of the most common paths in 2014-16 for the NBU to remove banks from the market.

The latest amendments to the Regulation enable banks to clean up their non-transparent ownership structures. This may serve as an indication of the regulators willingness to cooperate with the market. On the other hand, the NBU also received the right to reassess the ownership structures of banks even for banks previously classified as transparent.

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