Crux (#12 December 2016)

Legislative Update

Over the last month many legislative initiatives were submitted to parliamentary committees for consideration. Our traditional commentary section looks at some of the latest legislative changes and a large number of proposed draft acts that require thorough analysis, in particular, No. 5105 On Amendments to the Act on Investment Activity; No.5130 which should reform the existing system of labor remuneration; No.5368 On Amendments to the Tax Code of Ukraine for Enhancement of the Investment Climate in Ukraine; No.3665 On Mediation; No.3849 On Amendments to Some Legislative Acts of Ukraine on Facilitating the Exploration and Production of Oil and Gas in Ukraine. The UJBL editorial team has enlisted the help of experts to comment upon some of them.

Vitalii Tymchuk,

attorney, Gramatskiy & Partners

A new pilot project came into force in Ukraine on 12 October 2016 with online registration of land plots. Does the initiative eliminate corruption risks?

An announcement by the Government about the start of the pilot project with online registration of land plots is a good signal in the fight against corruption risks in the sphere of granting administrative services and introduction of e-management in Ukraine. Everything is not so simple the Government asserts. Every year legal and physical entities register more than 500,000 plots of land in Ukraine. The indicated number is conditional. In the event of the land market being opened up, we can simply talk about the ponderable increase in these statistics, which will promote corruption risks in the sphere of registration of land plots. The start of the technical project announced by the Government with online registration of land plots did not in reality create a new level of quality of service for ordinary citizens, who showed a desire to register a land plot online. Moreover, initial attempts to use a pilot project caused disappointment, because a new section called Registration of a plot of land, that was created in government portal is not available for legal and physical entities as was announced by the Government. In particular, entered electronic service of handing in an application about state registration of a land plot is accessible only for land engineers-surveyors, who have certificates on qualification and passed authentication with the use of their own electronic signature. Also, the technical project that came into effect cannot, in any case, eliminate most widespread corruption moment in Ukrainian society registration of ownership rights in the names of relatives.

Yulia Spolitak,

senior associate, Eterna Law

On 4 October Draft Act No. 5105 was adopted (currently the Draft is waiting its second reading). How will adoption of this Draft impact the countrys investment attractiveness?

The Draft Act of Ukraine On Amendments to the Act of Ukraine on Investment Activity No.5105 is directed at harmonizing investment norms and state budget legislation with respect to the selection process and monitoring of implementation of the state investment projects. Implementation of the suggested norms would simplify the mechanism of valuation, selection and provision of state support for implementation of investment projects. The Draft introduces deep involvement and support for state and municipal enterprises of the investment sphere, inter alia, by providing investments from the state or local budgets or from the borrowed costs, as well as state share participation in the companies which have received respective investments. Such deep involvement and detailed regulation of state investment activity shall be attractive for investors. It should also be noted that the Draft provides for a broadened description of an investment project, which reflects the state positions on the importance of investment for the development of a countrys economic sectors. This position is also supported by reference to development of the respective strategic documents for determining the areas of investment activity, which results in the understanding that the state nurtures the investment climate at a high strategic level. In general, detalization and simplification of the procedure for state valuation, selection, support and implementation of investment projects should ensure that potential and current investors have their rights and interests protected.

Tetyana Ivanovych,

counsel, attorney, Spenser & Kauffmann

The relevant Parliamentary Committee is cosidering Draft Act No.5130, which is meant to reform the existing system of labor remuneration. What key changes in the existing remuneration system should we expect?

We consider that the adoption of Draft Act No. 5130 on 15 September 2016 is one of the first priority steps to be taken by the Government to raise social standards in Ukraine. The main purpose of the Draft is to improve the applicable law by raising the minimum wage and social security standards, as well as legalizing labor relations and wages. The most important amendment relates to the new rule that the minimum basic salary should be not less than the minimum living wage established as of 1 January of the relevant calendar year. The crucial point is that the enactment of the Draft will serve as the basis for the Verkhovna Rada of Ukraine to raise the minimum wage up to UAH 3,200 in 2017, while today the minimum wage is UAH 1,450. Second, the existing remuneration system will be changed. In particular, instead of the unified remuneration tariff system the Draft Act introduces a new one, which consists of tariff (including tariff scale, rate tariff, salary scale, professional standards) and other systems based on an estimation of the complexity of work and qualification. Therefore, the main novelty is that private sector companies are empowered to establish other remuneration systems in the relevant collective agreement. Last, the Draft Act introduces amendments related to the remuneration of employees, particularly, the application of the minimum wage. The new Article 3-1 dealing with the minimum wage guarantees shall be added to the applicable On Labor Remuneration Act. This Article re-phrases existing minimum wage guarantees. In particular, it provides that the amount of a wage for fully fulfilled monthly (hourly) work quotas cannot be lower than the minimum wage. According to the new rules, harmful and hazardous working conditions pay, night work and overtime work pay, assignment allowances, holiday and anniversary bonuses shall not be taken into account when calculating the sum of the minimum wage. Furthermore, the amendment ensures employees are entitled to a compulsory additional payment if an accrued wage is lower than the minimum wage.

Valeria Tarasenko,

partner,head of Tax and Financial Law, Pavlenko Legal Group

On 7 November 2016 the Government registered Draft Act No. 5368. What kinds of changes are provided by this initiative, and how will the adoption of this Draft impact business development in Ukraine?

Proposed by the Government, the Draft Act On Amendments to the Tax Code of Ukraine (TCU) for Enhancement of the Investment Climate in Ukraine addresses current issues of taxpayers than introducing tax reform.The Draft simplifies tax administration and introduces such instruments as the personal electronic office for all taxpayers. This electronic office will contain tax information, tax liabilities reconciliation, tax reporting, registration of VAT, excise duty invoices, etc., all corresponding with the tax authorities shall also be provided via an electronic office. It also provides for incorporation of public databases on all permitted installments and extension of tax liabilities; on issued general and individual tax rulings and on VAT refund claims.The calendar of all scheduled tax inspections has to be officially published on the SFSUs web page. First-level (local) tax inspections will provide the service function only without the authority to provide tax inspections. The Draft enhances transfer pricing regulation, methods of arms length prices determination and covers some issues of corporate income tax, excise duties and electronic VAT administration, inter alia, VAT invoices registered in the Unified Register cannot be cancelled by the tax authorities. The Draft also addresses some tax issues related to the temporarily occupied territories that have been questioned many times by business.In general, if all regulatory documents and software required will be implemented, the proposed amendments shall significantly simplify tax administration. However, the tax reform that was promised to the business sector 2 years ago has not yet been presented by the Government.

Olexii Stepanenko,

senior associate, FCLEX

On 3 November the Verkhovna Rada of Ukraine approved Draft Act No.3665 On Mediation (currently the document is prepared for the second reading). What do you think of this initiative? What clauses should be improved, and what changes to this Draft can you suggest?

The institute of mediation is quite new for Ukraine, which, in turn, causes certain difficulties in its implementation in Ukrainian legislation. Draft Act of Ukraine On Mediation No.3665 is, in fact, qualitatively better than the Draft Acts proposed earlier, but at the same time they are not ideal. The question of extrajudicial, peaceful settlement of disputes can occur at any stage of a trial. The parties frequently begin amicable talks after the institution of court proceedings. In this case, the parties submit a joint motion for adjournment of the proceedings in order to reach consensus. However, a court cannot repeatedly postpone consideration of a court case, since it must comply with time limits for case consideration. In this context, the Draft makes a provision for a really important novelty, namely: the power of the court to suspend proceedings in the event of initiation of the mediation procedure, and therefore it is proposed to make amendments to the respective codes of procedure. However, the order of making such amendments is quite inconsistent. Thus, the Code of Civil Procedure provides for the duty of the court to suspend proceedings upon initiation of the mediation procedure. A similar obligation of the court has already been fixed in part 2 Article 113 of the Code of Administrative Procedure. Thus, in the Code of Commercial Procedure legislators propose to set only such a right of the court rather than duty. Given the current realities, we believe that it is a duty to suspend proceedings upon initiation of the mediation procedure that is effective if fixed in law. After commencing mediation, both parties are interested in peaceful settlement of their dispute and in suspending court proceedings for the period of their negotiations. So, only having the right to suspend the proceedings, the court may avoid exercising this right and, in so doing, create a barrier to mediation and peaceful settlement of the dispute between the parties.

Yevgen Levitskyi,

senior associate, AEQUO

The Council on Judicial Reform approved the Draft Act On the Constitutional Court of Ukraine at its regular meeting. How will such amendments impact the work of this body?

The Draft Act On the Constitutional Court of Ukraine provides not only for another mechanism of appointment of judges, but also introduces a completely new procedural instrument for the protection of rights. What it involves is the so-termed constitutional complaint, which can be filed by any person who believes that an Act applied by a court to his particular case is unconstitutional. In fact, if such complaint is successful (i.e. the law or its certain provision applied to the particular court case is declared unconstitutional), the complainer will be deemed to have provided legal rationale for reconsidering the case based upon newly found circumstances. Legislators suggest a number of criteria which must be met to make such a complaint admissible. Although the Draft Act establishes a kind of procedural threshold, allowing a judge to decline an apparently groundless complaint at a very early stage, it does not eliminate the risk that the Constitutional Court of Ukraine might be attacked by complaints once it receives such new powers. Evidently, the parties may treat the above Constitutional body as yet another possibility for having their case reevaluated. Nevertheless, the suggested concept of a constitutional complaint seems to be well-judged and reasonable for the purposes of the Ukrainian legal systems further development. Hopefully, this new legal instrument will help to improve the legislature in general and jurisprudence in particular.

Mykyta Polatayko,

associate, Sayenko Kharenko

Draft Act No. 5361 On Amendments to Some Legislative Acts of Ukraine regarding Regulation of the Transfer of Funds has been registered in Parliament. How will adoption of this norm affect the development of e-money payment services?

Draft Act No. 5361 is too complicated to be commented on in just a few words. However, its authors still have not submitted a separate Draft on amendments to the Tax Code of Ukraine, which is needed to allow payers of the single tax to receive e-money and to clarify that e-money is not a VAT base. Talking about Draft Act No. 5361, it looks ambivalent. On the one hand, it allows not only banks, but also other financial institutions to issue e-money; it permits e-money to be exchanged in UAH to e-money in foreign currencies. On the other hand, it still prohibits merchants from spending e-money received they will need to convert the funds into non-cash money. Besides, the Draft extends the influence of the National Bank of Ukraine (NBU) over the market. International payment systems will be obliged to obtain the NBUs consent on the order of its operations in Ukraine and the NBU will be authorized to consider financial activities as an e-money emission and to suspend such financial activities in order to bring them into line with the NBUs requirements. By way of summary, Draft Act No. 5361 is not perfect and even needs comprehensive elaboration after the first reading, but it should be adopted in order to increase competition and make the e-money market great for the first time.

Olexy Kharitonov,

partner, ILF

Draft Act No.5390 has been signed into law by the President. How will this initiative affect the protection of the rights of bank depositors?

The Deposit Guarantee Fund can only return money deposited in bank accounts. For this reason, the clients of Bank Mykhailivskyi that worked with financial companies instead of a bank account are having trouble getting their money back. To rectify the situation, on 15 November 2016 Parliament adopted Draft Act No.5390 On Changes to Several Acts of Ukraine regarding the Compensation for Individuals through the Deposit Guarantee System for Damages Incurred as a Result of Abuse in the Field of Banking and other Financial Services. The Act allows the Fund to work with assets used by banks for financial companies. However, this exception only relates to those banks placed under provisional administration prior to the Acts adoption. Therefore, these changes will not apply to similar cases in the future, and the Fund will not be able to help with money used by financial companies through banks later on. Currently, within 20 days of the Drafts signing, the Fund must inspect existing contracts and begin payments to the Mykhailivskyi Banks clients on guaranteed sums that dont exceed UAH 200,000. The Draft forbids financial companies to take loans from individuals. In addition, steps will be taken to allow authorized representatives of the Fund to demand compensation from persons connected with a bank whose action or inaction led to damages for the said bank. The money collected will be used to settle accounts with the banks creditors. So, the Act not only helps thousands of Mykhailivskyi Banks clients, it also seeks to prevent similar problems in the future.

Andriana Fozekosh,

attorney assistant, AVER LEX

On 3 October 2016 the Verkhovna Rada registred the Draft Act On Amendments to Article 469 of the Criminal Procedure Code of Ukraine regarding Some issues of Improvement of the Institute of Plea-bargaining Arrangement between Prosecutor and Suspect or Accused. How do you assess this initiative?

The Draft Act of Ukraine On Amendments to the Article 469 of the Criminal Procedure Code of Ukraine regarding to Certain Issues of improvement of Institute of the Plea-bargaining Arrangement between Prosecutor and Suspect or Accused was registered on 3 October 2016 in the Verkhovna Rada of Ukraine. It is proposed to expand the cases where a plea bargaining arrangement can be concluded in criminal proceedings with respect to special, serious offenses. Firstly, pursuant to current edition of the Criminal Procedure Code of Ukraine a plea bargaining arrangement may be concluded only in criminal proceedings regarding to crimes in the investigative jurisdiction of the National Anti-Corruption Bureau of Ukraine. The Draft proposes to apply such agreement in respect of special grave offenses, irrespective of investigative jurisdiction. Secondly, the condition for conclusion of the plea bargaining agreement is disclosure by suspect or accused of other person in committing a crime with investigative jurisdiction of the National Anti-Corruption Bureau of Ukraine. This Draft proposes to include in Subparagraph 2 of Part 4 of Article 469 of the Criminal Procedure Code of Ukraine 1) crimes with the investigative jurisdiction of State Bureau of Investigation; 2) special grave offenses with the investigative jurisdiction of other law-enforcement agencies in exceptional cases and with the agreement of a higher level prosecutor. On the one hand, such amendments may help to improve the detection of crimes, but on the other hand, it raises doubts in its expediency. The ambiguousness of the definition in exceptional cases, which can be differently interpreted, may cause problems with application of the plea bargaining arrangement. Also, these amendments will not rectify a situation in which a person has committed an especially grave offense can conclude plea bargaining agreement disclosing the identity of other persons who committed any crime, including lesser gravity crime, with the investigative jurisdiction of the National Anti-Corruption Bureau of Ukraine and State Bureau of Investigation.

Sergii Korniienko,

counsel, Antika Law Firm

Parliament registered Draft Act No. 3849 On Amendments to Some Legislative Acts of Ukraine on Facilitating the Exploration and Production of Oil and Gas in Ukraine. How will this initiative impact the attracting of investment to the petroleum sector?

Attracting private investment, including foreign investment, into oil and gas exploration and extraction, which is historically considered in Ukraine as overregulated and quite corrupt, with complicated and non-transparent rules without its substantial reform and liberalization, seems to be mission impossible. Thus, the intention of the Ukrainian Parliament to consider Draft No. 3849 within the current fifth session is, indeed, a positive step towards potential investors interested in investing in developing Ukraines oil and gas sector. The main precondition for increasing the attractiveness of using the subsoil sector to a potential private investor is simplifying the conditions for conducting business activity in this sector. Therefore, the changes proposed by the Draft to the procedure for approval and conclusion of the production sharing agreement (PSA), particularly in the part of dividing up powers between the Cabinet of Ministers of Ukraine and Interdepartmental Commission for conclusion and implementation of PSAs as well as eliminating the double approval of mentioned agreements by the Cabinet of Ministers of Ukraine, from my perspective, shall help to attract potential investors and encourage them to conclude PSAs instead of complicated and opaque joint activity agreements. So, the legislative initiative submitted by Draft Act No.3849 could be estimated generally as positive. Meanwhile, it makes sense to note that changes to Ukrainian legislative acts in the oil and gas exploration and extraction sphere are necessary, but are not a sufficient step towards real liberalization of this economic sector. The changes in business rules and procedures shall be accompanied by specific steps of state and local authorities directed at actual simplification of access to the oil and gas exploration and extraction in Ukraine. Only such synergy of laws and actions by the state and local authorities can enable the creation of favorable conditions for attracting private investment in the oil and gas sector of Ukraine.

Oleksandr Biryukov,

Doctor of Law, professor, counsel, LCF Law Group

On 21 October 2016 the Verkhovna Rada registered Draft Act No. 3132-. What novels are introduced by the Draft? How do you evaluate these innovations?

Draft Act No.3132- is a renewed Draft submitted to Verkhovna Rada of Ukraine last year. This legislative initiative has been extended and now contains a number of novelties, which are aimed at streamlining the process of administering bankruptcy cases in the courts. The efficiency of the Ukrainian Bankruptcy Act is criticized in the professional community. Not only international organizations but also local practitioners have pointed out that application of the Act does not prove implementation of the main goal declared in the Preamble to ensure rehabilitation of an insolvent business and then, when it turns out unfeasible, to liquidate the company as a last resort to resolve debts problems in an effective way. Among the biggest changes that the Draft suggests is abolishment of one of the bankruptcy procedures that are currently provided for in the Bankruptcy Act an amicable agreement. We fully support this novelty for several reasons. First, technically this is not a procedure. This is simply an act of approval by the judge of a contract agreed by the participants of the case in court proceedings. Second, an agreement in bankruptcy proceeding on settling the debts is called sanation reorganization or rehabilitation, which normally includes debts restructuring. Therefore, there is no need to have another similar tool that is not an instrument of bankruptcy legislation. This is a purely procedural law remedy, which the parties can employ when after holding negotiations they come to an agreement to settle the dispute and to terminate a case. Notwithstanding the critics of the innovations included in the Draft, particularly expressed at the II Bankruptcy Forum held in November 2016, expectations on the part of insolvency practitioners for success of the amended Act after its adoption are quite high.

Oleksandr Vygovskyy,

attorney at law, Ilyashev & Partners

On 15 November 2016 the Verkhovna Rada of Ukraine adopted Act No. 2455 On Consumer Lending. How will adoption of the Act impact the level of protection for the consumers, as well as the competitive environment in the financial sector?

The On Consumer Lending Act of Ukraine adopted on 15 November 2016 represents a considerable milestone in the development of Ukrainian banking legislation and its harmonization with European standards. It unifies legal rules on consumer lending within a single legislative act and implements certain provisions of EU Directive 2008/48/EC of 23 April 2008 on Credit Agreements for Consumers. More importantly, the said Act strengthens the level of protection for consumers. Under the Act, consumers shall be strongly protected against unfair or misleading practices, in particular, by means of comprehensive disclosure of information by the creditor. Standard information to be provided to consumers shall include, inter alia, the amount of the actual annual percentage rate of charge applicable to the credit. This rate shall be calculated on the basis of the total cost of the credit to the consumer comprising of payments for any additional and related services which are mandatory for concluding a credit agreement (including the fees of a credit intermediary (if any). Such provisions shall allegedly eliminate the current practice of misleading advertising of consumer credits declaring the nominal interest rate, say at 0.01% per annum, when the consumer may be unaware of its real debt burden which may easily exceed 100% (due to the presence of hidden charges and costs). The Act prohibits advertising of interest-free consumer credits as well as credits without an assessment of a potential borrowers creditworthiness. The terms and conditions of a consumer credit agreement can be amended only subject to the consent of the parties. No creditors option of unilateral alteration of the percentage rate (regardless of its type) can be envisaged in such an agreement.

Yuriy Zaremba,

associate, AVELLUM

On 9 November 2016 the Government adopted Resolution No.806. How will these amendments impact the protection of business against corporate raiding in Ukraine?

Regulation by the Cabinet of Ministers of Ukraines Resolution No.806 of 9 November 2016 has been adopted to implement some of the provisions of Act No. 1666 VIII of 6October 2016 (the Anti-raiding Act). Among other things, the Regulation has established the procedure for notifying the owner of real estate about the registration actions in respect of his/her real estate. In practice, this should allow owners to interfere and prevent illegal actions in respect of their real estate. At present very few owners can actually benefit from this, since the state registrar must send the notification to the email address indicated in the owners file in the State Register of Proprietary Rights to Immovable Property and not all owners have indicated this information in the Register. Furthermore, there is still a problem that not all real estate objects are registered in the Register. Therefore, to benefit from the anti-raiding protections introduced by the Regulation and the Anti-raiding Act, we recommend the registration of the real estate in the Register and adding an email address to the contact details of the owner, as recorded in the Register. Obviously, notification of the owner is only a small piece of the puzzle to protect the assets from raiding. Many raider attacks in respect of real estate have been performed not due to the lack of regulations, but due to illegal actions on the part of registrars. Therefore, the key to reducing the number of raider attacks is to improve monitoring of illegal registrations and immediate enforcement against those registrars who violate the law. The Anti-raiding Act and the Regulation have introduced certain important preconditions. However, the outcome of this initiative depends on successful enforcement.

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