Crux (#12 December 2017)

Legal Digest

Last month was notable for a number of legislative initiatives, like the signing of the Protocol amending the DTT between Ukraine and the UK; new anti-dumping rules adopted by the EU Parliament; the Law On Audit of Financial Statements and Auditing Activity. We also ask for hands on comments on the new Draft On Privatization of State Property; mechanism for automatic data exchange between the Register of Property Rights and the State Land Cadastre; creation of the National Bank of Ukraines Credit Registry.

The European Parliament has approved new anti-dumping rules. How will such changes in the EU anti-dumping legislation affect the foreign economic activity of domestic companies?

Anzhela Makhinova, Counsel, Sayenko Kharenko

Amendments to the EU Basic Anti-dumping Regulation (the Amendments) are the expected result of China obtaining market economy status in December 2016 and the results of the Argentina Biodiesel case.

To respond to new challenges, the EU has developed a completely new concept of adjustments. The Amendments allow the EU to construct normal value exclusively on the basis of production and sale costs reflecting undistorted prices or benchmarks in all cases when certain significant distortions are revealed. For example, distortions occurring when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces because they are affected by substantial Government intervention. Notably, the list of potential distortions as set out by the Amendments is not exhaustive and among others, cover situations involving any state authoritys impact on the market, interference by the state in prices or costs, discrimination in favor of domestic suppliers, etc.Moreover, the Amendments directly allow the EU to focus on the adequate level of social and environmental protection in the relevant countries.

The Amendments extend the possibility of applying new methodologies of normal value construction not only to non-market economy countries (like China earlier), but to all countries where certain distortions may be revealed. Ukraine is no exception, especially in view of the fact that we have a long-lasting anti-dumping history in the EU (pipes, hot-rolled products, fertilizers, ferroalloys) and there are spheres where some distortions still exist, and that is saying nothing of the social and environmental protection level. Moreover, if the EU reveals certain distortions, it will prepare a special report for the whole country or even for certain specific sectors, which will be publicly available and will be used by European producers in the course of any further anti-dumping investigations (even for products which were not initially covered by the report).

Notably, China and Russia have already strongly criticized the Amendments in the WTO and have questioned their compliance with WTO rules

On 9 October 2017 Ukraine and the UK signed the Protocol On Amendments to the Agreement on Avoiding Double Taxation between the Governments of Ukraine and the United Kingdom of Great Britain and Northern Ireland. How can this agreement affect international holding and financial structures associated with the United Kingdom?

Ihor Monastyrskyi, Associate, AVELLUM

On 9 October 2017 Ukraine and the UK signed the Protocol amending the DTT between Ukraine and the UK (the Protocol).

The Protocol increases the withholding tax rates for interest, royalty, and dividend payments up to the OECD Model Tax Conventions Standard. Ultimately, such increase will only affect the redistribution of taxes between Ukraine and the UK, resulting in more taxes being collected in Ukraine. UK taxpayers should not be significantly affected by the increase, since the taxes paid in Ukraine will be credited against UK taxes.

The Protocol, however, may affect thin profit margin businesses, particularly IP and financing conduit companies, as they will not have sufficient UK tax to utilize the tax credit. Nonetheless, considering the fact that such companies are usually structured through back-to-back structures, they should not be eligible for DTT benefits.

Additionally, the Protocol introduces provisions on a principal purpose test with the primary aim of affecting artificial structures. Thus, treaty benefits to structures without economic substance are likely to be denied in the future.

UK companies are also often used to finance Ukrainian companies through the issue of Eurobonds. Since 2017, existing national rules allow for efficient use of such structures, regardless of the applicability of the DTT. Therefore, the Protocol should not affect these structures.

To conclude, the Protocol does not significantly change the overall status of the UK as a jurisdiction for structuring international business with proper substance and economic reasons for the set-up.

The Ministry of Justice has introduced a mechanism for automatic data exchange between the Register of Property Rights and the State Land Cadastre. How can the adoption of this initiative affect the number of conflicts in the agrarian sector, as well as the registrars work?

Andriy Ivaniv, Senior Associate, EQUITY Law Firm

The respective mechanisms of exchange were foreseen earlier, but they operated through acquisition of hard-copy excerpts and the use of information from them in the process of registration of rights in land. Incomplete registers and time spans made it possible to make double registration of lease agreements, with all the related consequences.

In essence, the announced changes mean arrangements for the technical ability to synchronize data in real time. The logic of the changes and their real results will actually enable a reduction, and eventually elimination, of the possibility of double registration.

However, for the time being, the introduction of the technical ability to synchronize these registries is being accompanied by technical failures and inaccuracies. Even today some registrations are suspended due to the fact that information from the SLC (State Land Cadastre) is incomplete, which in essence, in the absence of relevant legal or explanatory landmarks, blocks the registration of actions with respect to a particular land plot. This problem is being solved manually, by entering relevant information from the State Geocadastre upon personal application by the registrar, who, in the course of registration actions, discovered the incompleteness of information from the SLC.

Therefore, it is too early to talk about complete automation and synchronization of registers. At the same time, positive changes are expected in the field of registration of rights in land plots upon expiry of the conditional transition period, which will make it impossible, or will complicate, the possibility of abuse for illegal purposes.

At a plenary session of Parliament the Law On Housing and Utility Services No.1581-d was adopted. Can this innovation effectively regulate relations between administrators of multi-apartment buildings and their residents?

Mykola Voitovych, Attorney, Gramatskiy and Partners

The adopted law is just aimed at creating a framework for effective regulation of relations between administrators of multi-apartment buildings and their residents. Thus, this is just the first (but very important) step. The law specifies basic rights and obligations of residents and administrators, setting the basis for the contractual relationship and introducing qualification requirements for administrators.

At the same time, the adopted law does not solve certain major problems that have existed since the Law On the Specifics of Executing Ownership Rights in Multi-apartment Buildings (the law that introduced the concept of administrators) came into force. A significant number of residents are passive and sceptical, hence unable to organize themselves to choose an administrator. In that case, the local authorities must appoint an administrator. However, such appointment may only be provided upon the respective request of the majority of apartments owners. In such a way, we may get a dead-end situation, in which passive residents cannot select an administrator, and the local authorities cannot appoint one because of inactivity of residents who will not collect the necessary number of signatures under the request. Therefore, extensive explanatory work must be carried out to increase public awareness.

Another, still unsolved problem, is widespread sabotage of former housing offices to pass building documentation to elected (appointed) administrators. In this aspect, some legal liability for such sabotage must be stipulated.

The Supreme Council approved Draft Law No. 7066 On Privatization of State Property in the first reading. How will this Draft influence the investment attractiveness of state-owned assets?

Mykhaylo Soroka, Associate, AEQUO

In every new Privatization Program, the Ukrainian Government declares an intention to decrease and dispose of state-owned assets burdening the budget. Lists of state property contemplated for sale are only becoming longer, with the Hryvnias devaluation making those assets even cheaper. Nonetheless, year after year the privatization authorities admit their failure to adhere to stipulated schedules and financial figures. One of the explanations for this ineffectiveness in recent years might be the advances in the governments plans to sell state assets, the privatization of which is, for the time being, restricted by statute. In this regard, the necessary political decision should be reached and Parliament should reduce the relevant statutory list. However, the second major reason why we do not observe a boom in the privatization realm is outdated legislation lacking enough transparency, flexibility, competitiveness and market-oriented terms for investors to participate in the sale of public assets.

Should Draft No.7066 pass through Parliament without essential amendments, we believe the new rules put an end to the notorious era of undercover and unsuccessful privatization. The drafted framework aims to make a sale ultimately feasible, providing various types of auctions to choose the one suitable for any particular state asset. Options for negotiating arbitration clauses in privatization agreements and for applying foreign legislation to contractual relations with the state appear also to be very encouraging for both Ukrainian and foreign investors to the extent not contradicting the mandatory requirements of Ukrainian law.

Through Draft Law No. 6723 MPs intend to eliminate the duality in regulation of certain types of concerted acts. What changes to the Draft will influence market competition most of all?

Oleksandr Fefelov, Attorney, Head of Antitrust and Competition Practice, Ilyashev & Partners

The basic idea of the draft Law “On Introduction of Amendments to certain Laws of Ukraine on Protection of Economic Competition”, which was laid on the table of the Parliament this October, is to approximate the requirements on general exemption from the prohibition of anticompetitive concerted actions to the EU norms regulating this matter. For this purpose it is proposed to delete articles 7-9 of Ukrainian Law “On Protection of Economic Competition” (the Law) providing such general exemptions from statutory prohibition of the vertical arrangements as not corresponding to EU requirements of articles 1-8 of the Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices and the Commission Regulation (EU) No 316/2014 of 21 March 2014 on application of Article 101(3) of the Treaty to categories of technology transfer agreements in the national legislation. Obligations of approximation of certain national legal rules of competition and enforcement practices to the part of the EU acquis as required by article 256 of Association Agreement between EU and Ukraine.  

Currently the general exemptions from the prohibitions of the concerted practices are provided simultaneously by both the Law and the regulation of the Antimonopoly Committee of Ukraine (the AMCU), which in practice often confuses the business and not always insures the clear and understandable model of the competition behavior for undertakings, specifically in respect of their vertical arrangements. As a result the AMCU initiates proceedings regarding violations which in some cases turn in the considerable sanctions.

Excluding articles 7-9 would fix the exclusive authority of the AMCU to determine the general exemptions from the prohibited concerted practices and stipulate such exemptions in the detailed AMCU document instead of discussing them in general format in the Law. This will help business, especially small and mid-sized undertakings, to better understand the rules of competition law when planning and conducting their business activity and to avoid violations. It also eliminates a number of “elastic” notions such as “considerable restriction of competition” or “economically not justified prices increase”, interpretation of which is not standardized.  

Further, the AMCU recently amended the typical requirements to the concerted practices for the general exemption from obtaining prior AMCU permit to make them in compliance with the above EU documents. Actually the AMCU elaborated the new block exemption regulation for vertical agreements, which determines new requirements consistent with the EU norms, for instance, allowance and release from obtaining the AMCU prior permit on arrangements where the shares of the supplier and the purchaser do not exceed 30 per cent in the relevant market each. As well new exemptions allow (subject to certain criteria) the vertical concerted actions providing rendering or using the IP rights, or agreements between contractor and sub-contractor. Like the EU documents the new AMCU regulation provides that exemptions will not apply to the vertical arrangements containing the hard-core restrains like fixing by the supplier the minimal prices of re-sale of goods. At the same time, as was mentioned by many practitioners the document still needs further improvements and detailing the procedures.

Excluding doubling the block exemptions may have a positive effect on the legal certainty in the matter enabling regulation of the competition behavior of the market players in strict compliance with the legal requirements. In addition, empowering the AMCU to restate and amend the block exemptions by its own will help to react on the economic and market challenges and developments much easier and faster as in comparison with the lengthy procedure of amending the statutes there would be no need to involve the Parliament.

 

The Verkhovna Rada has adopted the Law On Amendments to the Law on Protection of Economic Competition regarding the procedures of improvement for monitoring the concentration of economic entities (Draft No. 4287). How do you evaluate this initiative?

Igor Svechkar, Partner, Asters

It is a little early to comment on this law without seeing the as-passed version several tweaks proposed by MPs while in session are still to make it into the final text. As the transcript states, these tweaks relate to alignment with the Sanctions Law and the AMCUs ability to revisit clearances granted to sanctioned parties in the past. Leaving aside these further enhancements, there is already one major concern in the law: it is unclear which particular merger notifications the AMCU should reject only those made by the filing parties that appear on Ukraines sanctions list or also filings made by any persons/entities belonging to the relevant groups of those sanctioned parties. While restrictions imposed by the Sanctions Law are generally believed to apply personally, i.e., target only the immediately blacklisted parties, the notion of an undertaking under the Competition Law is much broader in scope and catches all persons/entities controlled, controlling, or coming under common control with the sanctioned parties. In other words, by looking in terms of merger control rules, we may float away from the individualized concept of sanctions and find ourselves in a situation where a blacklisted company automatically infects the whole corporate group it belongs to. This may not be exactly the goal that legislators meant to pursue here while the idea of catching a wholly-owned subsidiary of a sanctioned Russian company may perhaps be warranted, it may look quite odd for a US or a German parent of a sanctioned JV to be prohibited from getting merger clearances in Ukraine, blankly and on a group-wide basis. Having said that, I still believe that the AMCU will apply this new rule reasonably and no unjustified rejections will occur. Though we need to see the final wording of the law to say how it rhymes with the Sanctions Law in the broader context and also how the retroactivity part is implemented and interpreted by the AMCU.

The Verkhovna Rada adopted the Law On Amendments to Certain Legislative Acts of Ukraine (regarding the simplification of business and investments by issuers of securities), No. 5592-d. What are the main changes envisaged by the Law, and how will these changes influence the work of banks?

Iryna Shalinska, PhD, Associate, GOLAW

Amendments to legislation regarding enticing the issuers of the securities are very important for banks and, in most cases, require adapting their functioning to such amendments.

The following novelties of Law No. 5592-d can be highlighted:

Farewell to quasi-public companies. Starting from next year all JSC that have not undergone the listing procedure will be recognized as never having made a public offering of shares. Therefore, such companies will become subject to the regulations of the private JSC and will be obliged to amend their by-laws in accordance with the law. For the time being, only 6 companies can satisfy the new listing requirements and are recognized as public JSC.

Ukrainian banks in the form of public companies. The respective amendments have removed a limitation on the banks to be incorporated only in the form of a public JSC. As a result, all banks that cannot issue an initial public offering will be also recognized as private companies. One should note that the requirements for the bank to disclose information established by the NBU and NSSMC remain valid.

A new prospectus regime. The law establishes a new approach and requirements for a prospectus of a shares offer for the purpose of providing a potential investor with full information on the issuer and the subject of investment.

As we can see, such changes will have influence on the banks, first and foremost, in the part of their legal form and may require additional actions on bringing the banks statutory documents into line with the actual changes as well as undergoing the listing procedure if required.

Parliament adopted Law No. 7114-d regarding the creation of the NBU Credit Registry and improving the management of bank credit registries. How will the creation of this register affect the activities of banks?

Kateryna Breduliak, Associate, EVRIS Law Firm

The adoption of the Law regarding the creation of the NBU Credit Registry assumes responsibility for banks to transfer information on credit operations to it.

The proclaimed reason for creating the NBU Credit Registry is the necessity to reduce risks for commercial banks when making a decision to disburse a loan to borrowers and estimate their ability to pay. The Credit Registry is aimed at reducing a banks risks on credit operations and to increase the stability of the banking system through the implementation of banking supervision.

In most countries of the world the credit registers are regarded as developing the banking system.

Now, within lending, a bank will have an opportunity to investigate the ability of a potential borrower to pay and to sustain the new loan. The bank will see the borrower in the Credit Registry in the event of existence of a borrowers obligation to another bank and the amount of which exceeds 100 minimum wages (UAH 320,000).

Currently, information from this kind of public register is given to users on receipt of the borrowers consent. With the implementation of the NBU Credit Registry, banks will transfer information without the borrowers agreement.

Banks will be responsible for: transferring information to the Credit Register; notifying the client that information will be provided to the Credit Register and correcting information following a reasoned application from the borrower.

Moreover, the new document regulates the issue of continual updating of information under loan agreements in case of cessions of rights. The bank, as the alienee under a loan transaction, has an obligation to at least once a month update information on the debt owed to the Bureau where the credit history was formed until the loan is recovered.

In the event of transfer of the banks management to the Deposit Guarantee Fund, it is obliged to update information on loan transactions and transfer it to the Bureau where such information is a credit history and there is an agreement between the bureau and the bank.

Certainly, such legislative amendments will improve the quality of a banks loan portfolios and have a positive effect on the banking sector.

On 16 November the tender commission for the selection of the leadership of the State Bureau of Investigation (hereinafter SBI) selected the winners. What challenges will the bureau employees face? What problems can arise during the transfer of current affairs to the SBI?

Opanas Karlin, Partner, ESQUIRES

According to the final provisions of the Criminal Procedure Code of Ukraine, the SBI was supposed to begin its work on 19 November 2017. The competence of the SBI shall include pre-trial investigation of crimes committed by the President, MPs, ministers, judges, law-enforcement officers, etc. Anticipating a heavy workload for the SBI, in May 2016 Parliament adopted Law No.1355-VIII, which established that criminal proceedings already opened shall be carried out by investigators of the prosecutors office until the end of the pre-trial investigation (no longer than two years and then criminal proceedings should be transferred to the SBI). Consequently, new crimes committed by high-ranking officials have to be investigated by the SBI from 19 November 2017. SBI staff have not yet been recruited. The head of the SBI was only appointed in November 2017. Therefore, nobody will investigate new crimes committed by officials. This problem requires an early fix.

We believe that besides the high level of skills necessary to investigate complex crimes, it is important for SBI employees to not use the negative experience of other pre-trial investigation bodies and not use the post of SBI employee for the attainment of personal goals.

It is also extremely important to preserve the independence of the SBI so as to make it impossible for the SBI to become a regular tool for eliminating political competitors.

On 16 November Parliament approved in the first reading a new Law, No.6016-d. How can the initiatives contained in the Draft affect audit activity?

Yulia Tereshchenko, Audit Director, KPMG in Ukraine

Parliament approved in the first reading new Law No.6016-d On the Auditing of Financial Statements and Audit Activity (the Law) intended to reform the audit market in Ukraine. The Law will come into effect from May 2018 and, consequently, all stakeholders need to start preparing for the new rules.

Among others, the Law will significantly affect the statutory audits of public interest entities (PIEs), supervised by a new regulatory body. The Law contains expanded auditor reporting requirements for PIEs aimed at enhancing stakeholders understanding of the audit, explaining how significant identified risks have been addressed. The Law also requires the auditor of the PIEs to prepare a written report addressed to the Audit Committee.

The Law contains a list of non-audit services (NASs), which the auditor of a PIE and all members of the auditors network are prohibited from providing to the PIE itself, its subsidiaries or its parent. There is also a cap of 70% of audit fees for permissible NAS. Additionally, PIEs are required to rotate their auditors after a ten year period with the option to extend the rotation period if a public tender takes place.

The new Law in general and changes for PIEs and their auditors in particular, are aimed at enhancing audit quality and strengthening corporate governance for all stakeholders. Expanded reporting and strengthening of auditor oversight and communication with regulators will promote greater transparency around the audit process and consistency in the audit market in Ukraine. Additionally, structured audits of PIEs may identify broader systemic issues.

However, in many areas the legislation might, on the contrary, increase costs for the business. Mandatory audit firm rotation will reduce choice by placing restrictions on the period for the current auditor while other firms might also be unable to participate in a tender due to provision of NASs. The new independence rules prohibit many NASs that are permitted under other internationally recognised frameworks such as the IESBA Code of Ethics and even the EU Audit Directive itself. Also, the absence of transition rules might create difficulties in the short run while even the EU Audit Directive allowed for a certain transition period. The inconsistencies might increase the cost and complexity of doing business in Ukraine.

Respectively, auditors, regulators, government authorities and the business community need to work together to ensure that the new legislation is implemented as effectively as possible.

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