Crux (#10 October 2017)

Legal Digest

Over the course of the last month our team monitored legislative initiatives and changes that may be of particular interest. We asked legal experts to give us their hands-on comments. Particularly on our radar are amendments to the Tax Code of Ukraine regarding the taxation of incomes of non-residents who have invested in securities; draft laws regulating the activities of pawnshops as well as credit unions; amendments to the Land Code of Ukraine. Of course, it is important to mention the novelties of the National Bank of Ukraine as well as touch upon such a tremendous current topic as cryptocurrencies.

NBU Resolution No.84 of 31 August 2017 amended the Regulation On the Application of Enforcement Measures by the National Bank of Ukraine. How will this Resolution affect the activities of banks?

Nickolas Likhachov,

Counsel, Spenser & Kauffmann

NBU Resolution No.84 of 31 August 2017 amended the Regulation On the Application of Enforcement Measures by the National Bank of Ukraine. The proposed amendments came into effect on 6 September 2017. The National Bank of Ukraine has specified the conditions regarding the introduction of a special regime for monitoring a banks activities and the appointment of a curator for a bank.

In particular, the fact of obtaining a loan from the NBU, which is provided to maintain the liquidity of the banking system or the existence of a loan, the repayment period of which has not occurred yet, is not the basis for the introduction of a special regime for monitoring a banks activities and appointment of a curator for a bank. Thus, the degree of supervision by the NBU over banks is decreasing.

The main purpose of the institution of supervision in the banking system is to strengthen control over proper use of refunding. However, this institution is not very efficient in Ukraine. Thus, the Ukrainian mass media is drawing attention to the shortcomings of the supervisory institution in connection with the emergence of situations when the supervisor assists the management of the bank and its owners with the withdrawal of funds from insolvent banks.

While way back in September 2014, NBU chair Valeria Gontareva highlighted the plans of the NBU to introduce the supervisory institution for banks on a permanent basis, regardless of the provision of resource support by the NBU, we can now mention particular changes in NBU policy.

In addition, Resolution No.84 has introduced new conditions for charging fines for violations of the requirements of AML/CFT compliance laws and regulations by banks. Thus, if the previous version indicated that such penalties shall be calculated as a percentage of the banks registered authorized capital, from now on, penalties shall be capped at the maximum amount applicable for a certain type of violation of AML/CFT compliance requirements.

Establishment of capped penalties contributes to the introduction of equal conditions for the imposition of fines, regardless of the amount of a banks authorized capital. Thus, banks with a large amount of authorized capital will not receive multimillion-dollar fines for violating legislation on financial monitoring.

It should be noted that the maximum penalty for significant violations of AML/CFT compliance laws and regulations, and the unsatisfactory level of risk management associated with financial monitoring and identified during the on-site inspection, can amount up to
UAH 8 million.

The NBU believes that Bitcoin does not fall under the definition of currency, but at the same time, mining (cryptocurrency manufacturing) is not violation of legislation. The State Fiscal Service insists that the Bitcoin cryptocurrency cannot serve as a payment instrument. At the same time, the Financial Stability Board is in favor of resolving the status of cryptocurrencies in Ukraine. Does the mining and cryptocurrencies market require regulation and oversight from the state?

Oleksandr Vygovskyy ,

Attorney, Ilyashev & Partners

The mining and cryptocurrencies market definitely need regulation and control, or at least intense attention on the part of the national financial regulator. Today, people in Ukraine involved in Bitcoin transactions cannot enforce their rights and protect their interests in a judicial proceeding, since the Ukrainian courts tend to refer, inter alia, to a lack of legal regulation of this field of the financial market and negative position of the National Bank of Ukraine reflected in its Letter of 8 December 2014 in which it labeled Bitcoin as quasi-money and warned that Bitcoin transactions may signify potential involvement of their parties in shady transactions related to money laundering and financing of terrorism.

There are global concerns about Bitcoins potential negative impact on the national currency system, considerable room for its criminal misuse, fraud and tax evasion. Therefore, these issues must prima facie be addressed when drafting cryptocurrency legislation and regulatory measures. In my opinion, Bitcoin should be officially recognized as an alternative legal tender which could be accepted as a means of payment by any legal entity or individual. Provision of financial services on exchange of virtual currencies into real currencies should be licensed and subject to strict supervision and control by a financial regulator in order to diminish the risks for customers. Above all, such operations should be subject to existing regulations on combating money laundering and financing of terrorism.

The Parliamentary Committee on Financial Policy and Banking recommended the adoption in the first reading of Draft Law No. 6405 On Credit Unions. How can this initiative affect the activities of credit unions?

Dariya Pisna,

Associate, Trusted Advisors

In our opinion, this Draft is premature for its adoption, as a number of its provisions are not elaborated.
In particular, the Draft Law On Credit Unions No. 6405 provides for involving the contributions of participants to deposit accounts. However, the law does not define a clear mechanism for attracting these funds, for example, as for banks, via a separate legislative act.

However, this Draft nevertheless provides special conditions for such attraction of deposits on deposit accounts, namely, to be a participant of the Deposit Guarantee Fund of individuals and to pay contributions in accordance with the Law On the System of Guaranteeing Deposits of Individuals. Although the reliability of the credit union with the attraction of such deposits does not actually increase, this innovation does provide certain guarantees regarding the return of deposits involved in deposit accounts in the event of the liquidation of a credit union.

There is also an interesting innovation in terms of mandatory credit union participation in national self-regulatory associations; according to legislators, it will monitor the activities of credit unions. That is quite a progressive and is consistent with a number of European directives in the area of regulation of credit unions.

Regarding liability for violating the Law On Credit Unions, as in the old and new versions of the Law On Credit Unions, no changes are envisaged. Generally, reference is made to liability is foreseen by law, but this responsibility is virtually never specified.

In addition, the main disadvantage of this Draft is that it does not actually solve the issue of the liquidity of credit unions. As in the current version of the Law, this standard does not apply European standards for compliance with the rules of liquidity of the credit union, which actually leaves a credit union vulnerable when the economic situation in the country changes.

The Parliamentary Committee on Financial Policy and Banking recommended adoption in the first reading of Draft Act No. 6569. How will this initiative affect the activities of pawnshops?

Kateryna Breduliak,

Associate, EVRIS Law Firm

A pawnshop is one of the most conservative and stable financial institutions for individuals focused on allocation of small and short-term loans. The volume of financial loans that secured precious metal and stones (up to 8.5%), and household appliances (up to 16.9%) increased in 1Q 2017 compared to the same period in 2016. Currently, the activities of pawnshops are subject to the regulation on provision financial services by pawnshops approved by the Order of the State Commission for Regulation of Financial Services Markets of Ukraine No. 3981 of 26 April 2005 (hereinafter the Regulation).

However, the need to adopt a Law regulating the activities of pawnshops has been discussed for a long time.

In contrast to the current Regulation, the Draft Law of Ukraine On Regulation the Activity of Disbursement of Private Loans for the Pledge of Movable Property No.6569 contains demands for pawnshops as to: i) regulatory capital; ii) involvement in subordinated debt; iii) exceptions for items which are registered in the temporarily occupied territory of Ukraine as a pledge; iv) insuring items for storage to the benefit of the depositor for free; v) protecting and supplying confidential information.

The Draft expands the list of activities carried out by pawnshops: pre-sale preparation, repair, redesign and storage of property, renting of premises. Pawnshop services can be provided not only on terms on disbursement of financial loans.

The Draft has no retroactive effect and extends to relations which arise after it has been adopted.

Thus, the Draft legitimizes some additional services of pawnshops, which were provided by them, but are not fixed at legislative level, and do not protect the rights of individuals. This can lead to an increase in the number of pawnshops (the current number is 458) and disbursement of small loans.

Verkhovna Rada of Ukraine on 7 September 2017 adopted the Law of Ukraine No. 2146-VIII. How would you evaluate this initiative? Will the adoption of this Law have a positive reflection on investors demand for Government securities?

Pavlo Shovak,

Associate, Asters

We consider adoption of the Law of Ukraine On Amendments to the Tax Code of Ukraine regarding Taxation of Incomes of Non-residents investing in Securities, No. 2146-VIII of 7 September 2017 as a positive step towards fostering investment attractiveness in sovereign bonds (both internal and external) and treasury notes for strategic investors.

The core idea of the Law is to extend exemption from 15% income tax to income from securities other than interest and discount provided that such income is repaid by the Ministry of Finance of Ukraine. The latter is authorized to place the securities and may potentially buy back or convert them.
In particular, income from the buying back of the securities and/or their conversion should be exempt from withholding tax.
On the other hand, income (capital gains) earned from the sale of securities and/or their exchange for other securities or derivatives remains taxable under general rules. Therefore, the Law does not provide tax benefits for those investors who plan to earn income by trading these securities immediately.

The above rule also applies only to non-resident legal entities. The Law does not change the tax regime available for non-resident individuals. Unlike legal entities individual non-residents are explicitly exempt from personal income tax (18%) relative to interest and capital gains from the securities, although the military duty (1.5%) should apply in general.

Draft Law No.7060 proposes amendments to the Land Code of Ukraine. How will the adoption of this Draft be reflected on simplifying access to state and municipally-owned agricultural land which have the legal status of reserve land? In what way do changes in the existing free land plots privatization system impact the family farming business?

Roman Pozhodzhuk,

Ph.D., Attorney, Gramatskiy and Partners

Draft Law No.7060 is aimed at promoting the family farming business in Ukraine by simplifying access to state and municipally-owned agricultural land which have the legal status of reserve land. The adoption of the Draft certainly will be a huge step on the path of promoting agricultural development. One of the Drafts key features is the right to lease a land plot with an option to buy out the land plot despite the Ukrainian moratorium on the sale of agricultural land.

Another positive step, which may be implemented by the Draft, is that the process of obtaining the land plot for farming by citizens will be liberalized and clearly regulated. The Draft also provides a special procedure for obtaining a land plot through a land auction, which may be described as rigid but transparent. On the one hand, the Draft should have a positive impact on the family farming, since will facilitate the citizens access to the agricultural lands. On the other hand, entrepreneurs will be obliged to meet the new requirements and perform new obligations with respect to agricultural production.

The following outcomes may be reached if the Draft is adopted by the Verkhovna Rada of Ukraine and signed into law by the President: 1) increase in the number of family farms and promoting the family farming business as a whole; 2) employment generation in the countryside; 3) increasing tax revenues; 4) development of economic indicators in agricultural production; 5) rational use of land plots.

Through Resolution No. 88 of the NBU of 7 September 2017 the procedure for obtaining loans from international financial organizations by residents was changed. How will these changes affect legal support for such transactions?

Bogdan Dyakovych,

Associate, Baker McKenzie

The importance for the Ukrainian market of these long-anticipated changes cannot be overestimated. With the amended regulations in place, IFIs, which are among the major creditors of Ukrainian businesses, will have more flexibility in structuring their transactions with Ukrainian borrowers.

This flexibility will likely have a significant impact on the scope and type of legal advice required by IFIs in connection with such transactions. We expect that a local legal counsel will not need to say it is impossible or it is difficult to achieve to their clients in connection with such deals as often as they had to in the past.

Firstly, many instruments, including convertible loans and convertible interest rates as well as fees payable before registration of a cross-border loan with the NBU, can now be included in loan agreements with IFIs. Until recently, such instruments, although widely used in lending transactions across the globe, were difficult (if almost impossible) to implement in Ukraine due to the very restrictive registration regime and NBU practices.

Furthermore, any advice relating to compliance with the NBU registration procedure and the unpredictability of the regulators approach will become redundant. This, however, should not significantly affect the profitability of Ukrainian law firms, as clients often receive such advice from their local lawyers at the preliminary stages of a lending transaction and do not pay for it in any event.

Finally, the lifting of prior restrictions will allow Ukrainian lawyers to concentrate on better reflecting the commercial agreement of the parties to a transaction rather than on finding ways to work around outdated NBU registration requirements and other unjustifiable administrative restrictions. As well as this, there is the very positive message that the continuous liberalisation of Ukrainian currency control regulations sends to prospective foreign lenders and investors.

On 10 August 2017 the Verkhovna Rada registered Draft Act No. 7022 On Amending the Criminal Procedure Code of Ukraine on Improving the Procedure for Considering Criminal Proceedings Collegially by a Court and a Jury. How do you assess this initiative? How can the adoption of this rule appear at a trial?

Angelika Sitsko,

Partner, Attorney at law, GOLAW

Draft Law No.7022 significantly expands the opportunities for the defense of persons accused of criminal offences. It is a case of expansion of the scope of application of trial by jury. I would remind that trials by jury are currently organized only to hear cases where punishment envisages life imprisonment. The Draft proposes also apply the trial by jury process to serious and especially grave crimes.

The Draft proposes that the prosecutor is obliged to inform the accused about his/her right to declare his will to enlist members of a jury to the hearing, following which the court should finally acknowledge the will of the jury through its resolution. There is no doubt that the proposed changes would, to a certain extent, expand the right to defense. However, in practice, an ordinary person may not always take a correct decision with regard to the choice of the trial format. You should agree that in the absence of a clear-cut defense strategy a trial by jury may produce a somewhat worse result than one could expect.

It is quite different though if the choice of the judicial procedure format is taken within the scope of a well-defined position with participation of the attorney in his/her capacity of an experienced player on the judicial ring. Therefore, do not waive your legal right to apply for an attorneys services.

Ukrainian President Petro Poroshenko has submitted to Parliament Draft Law No.159 On Ratification of Protocol No.15 and Protocol No.16 to the Convention for the Protection of Human Rights and Fundamental Freedoms. How will this initiative affect the quality of judicial proceedings and the judiciary as a whole?


Counsel,Attorney, LCFLawGroup

Since the President of Ukraine submitted to the Verkhovna Rada of Ukraine the Draft Law On Ratification of Protocol No. 15 and Protocol No. 16 to the Convention for the Protection of Human Rights and Fundamental Freedoms, we expect Parliament to ratify them in the near future.

Notably, year by year within case proceedings national courts are increasingly applying the provisions of the Convention and case law of the European Court of Human Rights as a source of law. I believe that the ratification of Protocol No.16 will have a positive effect on the judicial system as a whole. So in accordance with the provisions of Protocol No.16, the Supreme Court will, when considering a case, be able to apply to the ECHR for an advisory opinion on the key issues relating to either interpretation or application of the Conventions provisions as well asits Protocols.

In my opinion, it will have a positive impact on the development of judicial practice for the application of the provisions of the Convention.

It should be, however, noted that the advisory opinion of the European Court of Human Rights will not be binding for the Supreme Court. But this will have a positive impact in the event of ones applying to the ECHR in this case after the Supreme Court has considered it without paying due regard to the advisory opinion.

As to Protocol No.15 to the Convention, there is a reduction in the time limits for applying to the European Court of Human Rights. Both individuals and legal entities will be able to apply to Strasbourg within 4 months from the date of the final decision in a case, rather than 6 months, as provided for at present. The number of applications made to the ECHR will most likely fall. Since 1997 (when the Convention was ratified by Ukraine) Ukrainians have been aware that they have 6 months to apply to the ECHR. In the event of ratification of Protocol No. 15, there really is a need for wide publicity, including that in the media, in terms of changing deadlines.

Draft Law No. 6553 On Amending Certain Legislative Acts of Ukraine to Ensure the Operation of the General Inspectorate proposes the creation of the General Inspectorate, an independent body within the Prosecutor-Generals Office which will protect the prosecutors office against internal corruption. How do you assess this initiative? Will the General Inspectorate work effectively?

Opanas Karlin,


I am impressed with the idea of creating the General Inspectorate, which will be aimed at protecting the prosecutors office against internal corruption by conducting official investigations against prosecutors, carrying out inspection of the integrity of prosecutors, etc. But the main question is: will the work of the General Inspectorate be effective?

In my opinion, it is reasonable to establish the new institution of the General Inspectorate once the Anticorruption Court of Ukraine has been created. In this regard, the NABU is a good example. The courts intentionally drag out the cases against corrupt officials and, therefore, it is quite difficult to bring such individuals to justice (despite the efficient work of NABU). I think that the General Inspectorate will face the same problem. So, the existence of the General Inspectorate may become just a formality.

Moreover, the creation of a new structural unit within the Prosecutor-Generals Office of Ukraine and its material support will require additional expenditure from the state budget. Considering such an illusory result of the General Inspectorates activity, we should ask ourselves if those expenses make sense.

It is also necessary to consider the opinion of the Main Office for Research and Evaluation, which states that it is reasonable to return the Draft Law for further revision because of some reasons (e.g., some provisions of the Draft Law are inconsistent with the Constitution of Ukraine).

Taking the above-mentioned into account, I am convinced that the creation of the General Inspectorate is anticipated.

Via Draft Law No.7094 On Amendments to the Law of Ukraine On Renewal of the Debtors Solvency or Declaring him a Bankrupt Regarding Enforcement of the Right to a Fair Trial by Bankruptcy Participants it was proposed to regulate the issue of determining court jurisdiction over the subject matter of all categories of cases within a bankruptcy procedure. How can this initiative influence the process of legal support in bankruptcy proceedings?

Orest Tsimerman,

Associate, Integrites

The proposed Draft may become necessary for some particular cases, but such exceptions should not become a subject for individual changes in the basic law. This Draft does not take into account the current regulation of the jurisdiction of disputes at the level of the plenum of the Supreme Economic Court of Ukraine, and also gives an erroneous interpretation of the difference between general and special regulations as a lack of procedure.

At the moment, the necessary disputes are already combined under one case number, and consideration of the current claims by another composition of a court is not critical to legislators settling the problem. Unfortunately, in Draft No. 7094 there is excessive scaling up of the ability to renew the debtors solvency in the context of the insignificant role of deductions to the Pension Fund in the General Register of Creditors Claims.

Draft Law No. 7091 proposes to change the current budgetary donation mechanism for development of agriculture manufacturers. How can these changes affect the support of agricultural manufacturers?

Dmytro Savchuk,

Associate Partner, Lavrynovych & Partners

Draft Law No.7091 On Amending the Tax Code of Ukraine of 8 September 2017 is aimed entirely at improving the current budgetary donation mechanism for development of agriculture manufacturers and stimulating the production of agricultural output.

The essential principle of the current donation mechanism presupposes that a company obtains a subsidy from the Government in the amount equal to the amount of value added tax (VAT) paid into the state budget. However, the inefficiency of such a mechanism is stipulated by its method of calculation. Specifically, the sum of the subsidy is calculated on the basis of the ratio of the VAT paid for subsidized products to the VAT paid for all other products.
In such case, if the company has predominantly non-profitable activities, including those that are not subsidy-based, it will be subsidized less than the one that has only one type of activity. However, it is will be almost impossible to find a Ukrainian company which has only one type of activity. Therefore, the reform suggests calculating donations on the basis of VAT liabilities, occurring exclusively as a result of operations involving subsidized products.

Moreover, it is recognized that the existing financing scheme is the most favorable for enterprises, having a higher profitability, thus not needing additional financing, which seems illogical in terms of the allocation of fair funds. In order to improve the current mechanism, the Draft Law envisages a reduction in the donation amount from UAH 150 million to UAH 50 million per agriculture manufacturer, including its affiliated persons, which will help to balance such financing.

The concept of reforming public procurement mechanisms for medicines and medical products was approved by the Cabinet of Ministers of 23 August 2017 No. 582-. How will the adoption of this concept affect the competitive environment as well as the transparency of the public procurement system for medicines?

Olena Khytrova,

Associate Partner, ILF

Creating a unified agency responsible for procurement will enhance competition on the market, since decentralized procurement will be gone.

The unified procurement agency will buy medicines and medical supplies at the countrywide, local and international levels.

One of the reasons for establishing a single procurement agency is to save money through bulk buying and ensuring high quality drugs. Manufacturers or their immediate distributors will be able to support competitive pricing. Procurement may involve a long-term contract with one of the suppliers. Not all distributors will stay competitive as there is a risk that such companies will be excluded from the pool of prospective suppliers. By creating a unified procurer and making it responsible for all acquisitions we can trigger serious market changes.

However, the main purpose of a unified procurement agency is to fight corruption in public procurement. Despite the use of the Prozorro system, stories of clinics buying medicines at higher than usual prices keep appearing in the media.

Of course, even a unified procurer is not impervious to corruption. In order to minimize this risk, the Government is proposing to appoint the agencys head after a contest and create a regulatory body, the Supervisory Board. The agencys activities will be evaluated based on WHO standards.

It is still unclear when going through the agency will be mandatory and when just up to you, and how applications for centralized procurement will be processed taking into account the needs and specifics of each medical institution.

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