Crux (#11 November 2016)

Legislative Update

Denis Maistrenko,

partner, Pavlenko Legal Group

On 6 October the Verkhovna Rada of Ukraine extended the moratorium on agricultural land transfer until 2018. The necessity to extend the moratorium lay in the reason that it does not provide for regulation of sale of agricultural land. What legal acts should be adopted for the moratoriums cancellation?

Upon entry into force of Draft Act No.5123-1 on amending of Section X Transitional Provisions of the Land Code of Ukraine regarding the extension of moratorium on agricultural land transfer, the removal of moratorium will be possible under the two following conditions: adoption of the On Transfer of Agricultural Land Act and the arrival of 2018. The previous membership of the government already drafted the On Transfer of Agricultural Land Act in 2015 which has not been registered in Parliament. This Draft provided for the possibility of execution of sale and purchase agreements of agricultural land among the other provisions. The Ministry of Agrarian Policy is currently working on a new Draft Act called On Agricultural Land Transfer. According to the statement by Minister of Agrarian Policy Mr. Kutovyi on 29 July 2016, the Draft Act prepared by the Ministry of Agrarian Policy does not provide for regulation of sale of agricultural land, and offers the possibility to entitle the leaseholders with right to sell and pledge the land leasehold. It should be noted that at the same time Ukrainian Prime Minister Volodymyr Groisman has said in the past that no decisions on the moratorium on sale of agricultural land can be adopted while all the nuances of the agricultural land transfer are not clear. The adoption of the On Agricultural Land Transfer Act and entry of 1 January 2018 cannot guarantee the removal of moratorium. For the successful removal of the moratorium it is necessary to adopt the On Transfer of Agricultural Land Act or any separate law on the sale of agricultural land which would include all possible aspects of work with agricultural land on the land market after the moratorium has been removed, including a detailed procedure of sale of agricultural land with all possible exceptions.

Volga Sheyko,

associate, Asters

On 6 October the Verkhovna Rada of Ukraine adopted the Act On Amendments to Some Legislative Acts of Ukraine Concerning Improvement of State Registration of Rights to Immovable Property and Protection of Property Rights. How will adoption of this norm impact the fight against corporate raiding in Ukraine?

Unfortunately, Parliament does not anticipate the regulation of legal relations that will appear in society in the future. On the contrary, while adopting new laws Verkhovna Rada tries to solve the problems that already exist. Draft Act No.5067 passed on 6 October 2016, is no exception. It provides for a new procedure of state registration of rights to immovable property and protection of property rights.

I would like to comment on the notification of the owner of a property on receipt of the application to carry out registration actions. In case a transaction on alienation of immovable property takes place with the direct participation of the owner, there is no need for such notification.

In the absence of the owner, the options for registration procedures are few, namely: property alienation pursuant to a power of attorney, mortgage clause, and inheritance. While in the first case the situation is more or less clear, there may be some issues when registration is carried out in execution of the mortgage contract, and even greater uncertainty may arise on registration for accepting inheritance when the owner is deceased.

The Act does not provide for a clear procedure for such notifications. For instance, via SMS, as phone numbers are not subject to registration and, as a rule, are not listed in the registry. However, I believe that in the future the Ministry of Justice of Ukraine will publish some clarification on this matter or will promulgate a subordinate normative act to regulate these issues.

Anzhela Makhinova,

counsel, Sayenko Kharenko

The Government by the Degree of 5 October 2016 No.686 annulled Resolution No.724 of the Cabinet of Ministers of Ukraine of 16 September 2015 On Application of Benchmark Indexes of Customs Value of Goods in the Risk Management System. How will this Act impact the work of business entities in the implementation of control over the correctness of determining the customs value of goods transported through the customs border of Ukraine?

In September 2015 business was taken aback by the adoption of the Resolution of the Cabinet of Ministers of Ukraine On Application of Benchmark Indexes of Customs Value of Goods in the Risk Management System No.724 dated 16 September 2015 (Resolution No.724) because all companies were sure that sadly remembered indicative prices have returned. The tax authorities declared immediately that the benchmark indexes should not be mandatory and should be used only for information purposes.

However, the business and the legal community receive it with incredulity due to the following quite justified reasons.

First, Resolution No.724 itself was very equivocal. It did not stipulate precisely how it should correlate with the Customs Code of Ukraine setting out methods for customs valuation. Second, Resolution No.724 made no remarks as to the procedure for application of benchmark indexes in the risk management system. Third, the benchmark indexes have not been publicly available and it remains unclear for companies how they have been calculated and how they have been analyzed in each particular transaction as there are different supply terms and incurred expenses, etc. Fourth, in practice, Resolution No.724 has complicated customs clearance procedures at least at the very beginning because many companies have been required to provide additional documents for customs valuation purposes and have spent more time for customs clearance. Last, but not least, unfortunately, customs value has always been a stumbling block for conducting business in Ukraine for the vast majority of companies.

Notably, Resolution No.724has also raised WTO compliance issues. The fact is that under the WTO jurisprudence e.g. Colombia Indicative Prices and Restrictions on Ports of Entrythe panel has precisely concluded that application of mandatory indicative prices contradict the Customs Valuation Agreement.

In view of the above, it goes without saying that Resolution No.686 of Cabinet of Ministers of Ukraine of 5 October 2016, which has abolished Resolution No.724, is in the interests of the business and fully complies with WTO rules.

Volodymyr Yaremko,

counsel, Spenser & Kauffmann

The Government approved the Procedure for the initiation, preparation and implementation of Twinning projects through its resolution No.700 of 11 October 2016. How will this decision influence institutional development as well as cooperation between the EU and Ukraine?

Twinning is well-known as efficient tool to facilitate integration of the EU law and regulatory know-how into beneficiary states. It is no secret that state governance in Ukraine is very bureaucratized and it takes a lot of efforts to implement reforms in any area. The Procedure adopted by the Cabinet of Ministers is expected to ease implementation of Twinning projects in Ukraine and, thereby, open a bit wider a door for using EU standards and best practices in the country. Of course, the Procedure itself will not change anything. It is rather required precondition provided by Ukrainian local rules which make implementation of Twinning projects in Ukraine easier now. Whether and how such projects will be realized, as well as their efficiency, is much more important, and depend primarily not on EU partners, but on responsible Ukrainian state authorities and their actual will to carry out reforms. The Procedure simply provides the respective authorities with an additional instrument for doing so.

Bohdan Dmukhovskyy,

senior associate, AEQUO

The National Bank of Ukraine approved procedures of functioning of the Unified National System of Digital Identification of Individuals and Legal Entities BankID. How will this innovation affect the development of E-governance in Ukraine?

In its recent Regulation No.378 of 30 August 2016 the National Bank of Ukraine approved procedures on the functioning of the Unified National System of Digital Identification of Individuals and Legal Entities BankID. The system has been elaborated in line with the Financial Sector Development Program that sets out the step-by-step plan for reform of the Ukrainian banking sector till 2020.

BankID is an indispensable element of the e-government which is being set up by Ukrainian authorities by bringing online public services to citizens and businesses. BankID already enables services by the Ministry of Justice of Ukraine, Unified State Portal of Administrative Services of the Ministry of Trade and Economic Development of Ukraine and Lviv City Council. Regulation No.378 provided the legal framework for relations between BankID users the state authorities, banks and the public services end users tackling data confidentiality, verification and privacy issues. This will encourage more state and municipal authorities to join the BankID system and provide easy online access to their public services. In addition, more leading Ukrainian banks have become interested in joining BankID in order to enable convenient use of the public services for their clients. Thus, Regulation No.378 strongly steps up the ultimate goal of e-governance initiative to provide all public services electronically (where feasible) from a few online hubs.

Alexander Tretiakov,

senior associate of Antika Law Firm

On 4 October 2016 the Parliament adopted Draft Act No.5105 On Amendments to the Act of Financial Activity. In what way will these changes affect the evaluation, selection and monitoring of investment projects, for realization of which state support can be provided?

The most important amendment introduced by Draft Act No.5105 was cancelation of the state registration procedure of investment projects performed by the Ministry of Economic Development and Trade of Ukraine.

The procedure of state registration of investment projects changed from obligatory registration to notification. Currently, the state registration is a prior procedure the project cannot receive state support without registration, which in addition includes the evaluation of its economic effect. According to the proposed amendments, the body responsible for the project only notifies the Ministry of Economic Development and Trade of Ukraine about it and the said Ministry includes the respective information to the registry by itself. The Ministry does not carry out any additional evaluation. This should simplify the procedure of project initiation because the current procedure of state registration and evaluation is unnecessarily burdensome.

Another important amendment concerned state expertise at the stage of project selection. State expertise is an obligatory procedure for any investment project which receives state support. At the same time, the project selection in reality may be done based on economic effect evaluation performed by the Ministry of Economy of Ukraine. The offered amendment removed this inconsistency, and state expertise will be the only one evaluation procedure required for the investment project.

At the same time, certain weird amendments were offered. In particular, the amendment to the term investment project made the term apply only to projects determined on the basis of national values and objectives of innovation development of economy. Such an amendment will limit the actual use of the law to state projects and projects with state support exclusively, which is incorrect. There are no reasons for private investment projects to correspond with national plans and objectives and such projects are still considered as investment ones.

Mykola Voitovych,

attorney, Gramatskiy & Partners

The Verkhovna Rada of Ukraine adopted in the first reading the Act that provides an extension term on commissioning illegally built residential buildings and objects of the first-second grade until 31 December 2016. Why do we need a construction amnesty in Ukraine? What is the difference between the new building amnesty and previous ones?

If Draft Act No.3696 becomes law its provisions will resume so-called construction amnesty. The construction amnesty will allow individuals to legalize their dwelling houses and other individual constructions that were built before 2011 without construction permits.

As we can see, the amendments do not affect business but are very important for individuals. The thing is that before 2011 the procedure of obtaining of constructions permits was very complicated, cumbersome, and expensive for individuals. It resulted in the appearance of a huge amount of illegal constructions all over the territory of Ukraine and so it was decided to introduce a construction amnesty in order to deal with this scandalous problem. There were several amnesties. Some allowed legalizations with no liability, but there was one that involved penalties in the form of a fine.

Todays construction amnesty is not a new procedure. It is supposed to be the final act of the previous one from mid-2015 until 31 December 2015. This half year period was too short for plenty of citizens to legalize their property. So the problem was solved just partially. Hence Draft Act No.3696 was introduced to the Parliament at the end of 2015 where it gathered dust till now. As a result, another problem arises this new construction amnesty is supposed to expire at the end of 2016, but only two months remain till we reach that date, and the Draft is far from becoming an existing law. The hope is that MPs will eliminate the problem during the second vote by extending the date of expiration.

Evgeniy Vazhynskiy,

associate of Redcliffe Partners

On 19 October Act No.1414-VIII On Financial Restructuring of 14 June 2016 came into force. How will this Act influence the stability of the financial system and the economic activity of debtors?

On 19 October 2016 a new On Financial Restructuring Act came into effect with the aim of creating an effective procedure for consensual restructuring of debt obligations of Ukrainian companies.

The Act regulates the process of initiating a financial restructuring and spells out the conditions of participation in the restructuring, negotiating and approval of a restructuring plan. It also introduces a number of new concepts, such as a statutory moratorium outside insolvency and standstill agreements, so as to allow debtors temporary relief in the course of restructuring negotiations, special tax treatment of certain operations related to restructuring and other benefits for those parties opting for restructuring.

The new restructuring procedures can apply to assets of a debtor located inside or outside Ukraine and to obligations arising under an agreement governed by a foreign law.

Special administrative bodies are to be established under the Act, such as the Supervisory Council, the Secretariat and the Arbitration Committee, which will be in charge of coordinating the restructuring process and dispute resolution.

In our opinion, the implementation of this Act should have a positive impact on the commercial activity of debtors, will ensure access to financial resources for recovery, and will generally strengthen the financial system by cleaning it from non-performing loans and restarting lending in the country.

At the same time, the Act introduces unnecessary formalistic procedures which may complicate the process of consensual debt restructuring. Involvement by administrative bodies adds unnecessary formalities to the process of restructuring, and may result in additional administrative burden and time delays. It remains to be seen how this will be implemented.

Eugene Blinov,

partner, Eterna Law

A Parliamentary Committee recommended the adoption of Draft Act No.4496 in the second reading as well as its final reading. Its aim is to eliminate administrative barriers for the export of services. How will adoption of this Draft affect exporters?

The Draft Act will certainly simplify the regulatory field for export of services but carries a number of flaws in its wording and may be said to discriminate against other areas of business.

First of all, the Draft Act introduces an electronic form of an agreement and appears to distinguish it from the traditional written form. This may raise certain ambiguity as the Ukrainian Civil Code does not recognize electronic form of an agreement and in essence defines it as a written agreement concluded by way of exchange through modern means of electronic communications. On a practical note, this may be remedied by improving the wording in the Draft Act by referring to an agreement concluded by means of e-communications.

Furthermore, the Draft Act regulates the procedure for concluding an electronic contract for export of services but does not explain whether it may be applied for contracts on the export of goods. Obviously, it would have had a greater deregulatory effect if the operation of the Draft Act was extended to export of goods, which suffers from the same bureaucratic delays and unnecessary costs.

Finally, the Draft Act aims to liberalize the export of services and intellectual property rights by revoking the duty of Ukrainian residents to ensure deposition of proceeds therefrom on their foreign currency bank accounts. However, this would discriminate other businesses as opposed to exporters of services. Given the purpose of the Draft Act (i.e. to simplify the business climate for freelance professionals) it would have been prudent to establish a monetary limit (one-time or as an annual total), below which this privilege could be used.

Maxim Salii,

associate, FCLEX

The Ukrainian Parliament adopted Draft Act No.4901 On Commercial Accounting of Utilities. How will this norm affect the consumption of energy, heat and water. What changes should consumers expect?

The Draft Act On Commercial Accounting of Utilities is another legal act aimed at compliance with the requirements set by the European Union needed to get the next tranche of macro-financial aid. As the legal system of the European Union is more progressive, almost all borrowings are useful for Ukraine.

The idea enshrined in the Draft is interesting and rational; it implies introduction of greater control over the supply of water and heating. The idea implies mandatory introduction of accounting/metering means for 100% of consumers.

Legislators intend to increase energy efficiency through optimization of consumption of service by consumers and, consequently, a decrease in the value of the resources by reducing the consumption of energy necessary to the producers to meet the needs of the population. Also, it is expected to arrange for more detailed information to consumers about the quantity, quality and cost of the resources used, which is in any case a positive innovation. From a theoretical point of view, this mechanism is effective for both the government and consumers.

However, it is necessary to introduce a more transparent pricing mechanism for utilities. As Ukraine is known for effective functioning of a range of schemes to artificially inflate prices to help a few enrich themselves at the expense of the population, the reforms in the industry regarding consumers will be useful to such persons only.

Oleksander Plotnikov,

partner, Arzinger

Draft Act No.5068 proposed to enhance the protection of rights and interests of bondholders in Ukraine. How will this document affect the development of the corporate bond market, domestic local bonds, bonds issued by international financial organizations?

The Draft Act On Implementation of Amendments to Some Legislative Acts of Ukraine Regarding Certain Types of Bonds was registered with Parliament on 5 September 2016 (No.5068). The main purpose of the suggested amendments is to enhance the protection of rights and interests of bondholders in Ukraine in order to stimulate further development of the Ukrainian capital market.

The core novelties which are suggested for implementation are the concepts of joint representative and bondholders meeting which are well known and successfully used in countries with developed capital markets. The Draft Act vests a joint representative with comprehensive powers in relation to a bonds issuer, which will facilitate consolidation of the bondholders interests and will provide bondholders with efficient instruments of protection of their rights. Inter alia, it is suggested that a joint representative shall have the right to solely represent the bondholders in courts and arbitration courts.

The Draft also provides an option of restructuring of a debt under bonds which is subject to approval by the bondholders meeting. A decision on restructuring shall be adopted by at least 3/4 of bondholders votes taking part in voting on this matter and shall be binding on all bondholders of respective issue of bonds, including those who voted against such a decision or did not take part in voting.

I believe that amendments introduced by this Draft are long overdue and will have a positive impact on the Ukrainian capital market.

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