Crux (#01-02 January-February 2018)

Legal Digest

Over the last two months the editorial team has monitored legislative initiatives and changes that may be of particular interest for our readers. We asked legal experts to give us their hands-on comments. Particularly on our radar are Resolution No.925, which introduced amendments to some regulations governing the registration of rights to land plots and maintenance of the State Land Cadaster; Draft Law On Amending Certain Legislative Acts in the Field of Road Transport with Intent to Bring them into Line with EU Legal Norms; algorithm for automatic desk-top audits of tax reporting; the strategy for reforming the state supervision (control) system.

Of course, it is important to mention draft laws regarding the restoration of development opportunities for small and medium-sized businesses using loan financing on the territory of the Anti-Terrorist Operation and On State Property Privatization, as well as the National Bank of Ukraine Resolution that introduced the procedure for banks to open escrow accounts.

The Cabinet of Ministers of Ukraine passed Resolution No. 925 by which introduced amendments to some regulations governing the registration of rights to land plots and maintenance of the State Land Cadaster. How can adoption of this initiative affect the registrars work?

Sophia Savruk, Lawyer, Salkom

On 6 December 2017 the Cabinet of Ministers of Ukraine passed Resolution No. 925 On Some Matters Related to the Improvement of the Mechanism for the Protection of Corporeal Rights to Land, and thus introduced amendments to some regulations governing the registration of rights to land plots and maintenance of the State Land Cadaster. The aim of this Resolution is to improve the mechanism that facilitates interaction between state cadastral registrars and registrars of corporeal rights to real property in the course of registration of parcels of land and rights to them. Such interaction should be aimed at preventing the violation of the rights of land owners and land users, removing impediments to the exercise of their rights, and minimizing the risks of raider takeovers. From this perspective, such an initiative by the Government can be perceived as highly positive. The other positive aspect is that the interaction will be facilitated at the level of software and in an electronic format, which will considerably reduce any undue interference in this process. However, it should be understood that efficient application of the mechanism offered by the Government is only possible in connection with parcels of land with properly defined boundaries, which have their cadastral numbers, do not overlap with other parcels of land, and are not subject to any land surveying irregularities, etc. Unfortunately, a large number of land plots in Ukraine are affected by such irregularities resulting from earlier deficiencies in the functioning of the cadastral system. As a result, the full-scale implementation of the mechanism for protecting land rights will be made possible only after all existing defects in the cadastral system and registration of land plots have been rectified.

A group of MPs registered Draft Law No. 7386 On Amending Certain Legislative Acts in the Field of Road Transport with Intent to Bringing them into Line with EU Legal Norms. How can the proposed changes affect the activities of road carriers?

Volodymyr Yaremko, Senior Associate, Sayenko Kharenko

With the EU approval of visa-free travel for Ukrainians, demand for transport services between Ukraine and Europe has inevitably increased. It is true that leading providers of both passenger bus services and road cargo transportation in Europe, which are considering expansion to the Ukrainian market, face a number of challenging regulatory requirements. Draft No.7386 suggests substantially revising Ukrainian licensing and related requirements for road carriers of both passengers and cargo. At present, there is no clear understanding of how the competent authorities would evaluate such requirements as having an excellent business reputation, appropriate financial position and professional competence. While most prominent local market players would likely be able to adopt the new rules, the proposed alterations might provide some opportunities for experienced European carriers to enter the market. However, the Draft stipulates that only local companies can obtain the necessary license. Due to this stipulation, foreign companies would need to structure their activity in Ukraine, for example, by opening an office or a kind of JV with a local carrier, in such a way that may allow them to meet Ukrainian regulatory requirements. The appearance of multiple carriers on the same international routes will help to make the Ukrainian coach travel industry more competitive.

The Ministry of Finance of Ukraine, jointly with the State Fiscal Service of Ukraine developed an algorithm for automatic desk-top audits of tax reporting. How can implementation of the automatic system affect the process of examination?

Anastasia Mosunova, Senior Associate, KPMG-Ukraine

The Ministry of Finance of Ukraine (MFU) and the State Fiscal Service of Ukraine (SFSU) announced a comprehensive tax reform whereby, inter alia, they consider implementing automatic desk-top audits of tax reports.

The MFU and SFSU claim that implementation of the automatic system should significantly decrease the time needed to carry out a desk-top tax audit, minimize the effects of human factors and make these audits transparent.

While reducing the time required to perform a desk-top tax audit is a clear benefit for the tax authorities, it is a matter of fact whether the remaining two objectives will be scored. At this stage it is difficult to predict whether taxpayers will indeed benefit from implementing the automatic desk-top tax audits due to the following considerations:

1. The algorithm for the automatic desk-top tax audits is still polished and is not available in the public domain (i.e., mechanism and criteria for the automatic tax audits remain unclear);

2. Neither is it clear how the associated software will operate and which capabilities it will grant to the tax authorities (e.g., following implementation of the electronic system for blocking VAT invoices, certain taxpayers complained that selected VAT invoices which should not be blocked based on the prescribed criteria were still automatically blocked).

Implementation of the automatic desk-top tax audits is per se a step forward. Whether this step is a success will largely depend on how this system is actually implemented.

Via the strategy of reforming the state supervision (control) system, adopted by the Goverment, it is planned to create a national List of dangerous businesses. How can reform of the inspection system affect corruption risks during supervision? What kind of changes should entrepreneurs expect?

Viktoria Kovalchuk, Attorney-at-law, Partner, ESQUIRES

The strategy of reforming the state supervision (control) system that was adopted by the Government had not been published as of the date of preparation of this comment.

According to the Draft Strategy it appears that this is a declarative document, which only indicates the Governments intention to change state supervision (control) approaches and does not provide an understanding of the quality of future changes.
The Strategy involves changing the state supervision vector from punishment for detected violations to their prevention. A two-year term for implementing the Strategy has been set, so the state and business will be able to communicate about future initiatives. It is envisaged to implement criteria for risk assessment from the conduct of business activity in specific sectors of the economy. For example, advertising, cinema, publishing, control of the technical facilities status, etc. In addition, the Governments intention to reduce the number of state supervisory bodies has been declared. We take a critical stance at such initiatives, because in order to achieve a high level of business freedom and ease of doing business in Ukraine, the state should change its approach: business is not a potential perpetrator; business is an equal partner.
The Strategy in no way eliminates the corruption risks that exist during state cooperation with citizens and companies. Also, reducing the number of state supervisory (control) bodies through their association, just like before, does not solve the problem of excessive state interference in business activity.

It is rather hard to predict the changes that business will face. It will be possible to analyze and discuss ways of reforming once the Draft Program for the reform of the supervisory (control) system has been prepared by the Ministry of Economic Development and Trade.

In 2017 Draft Law No. 6264 On Forensic and Expert Activities was registered with the Verkhovna Rada of Ukraine. How do you assess the initiatives proposed by the Draft?

Serhiy Oleksin, Attorney at law, Pavlenko Legal Group

Judicial reform is actively turning into reality in Ukraine. New procedural codes are now in effect. Such participants, as experts, play a significant role in legal proceedings, and their conclusions are integral part of the evidence. Thus, change of legal proceedings requires approval of the examination procedure.

Currently, Draft Law No. 6264 has been submitted to the Verkhovna Rada of Ukraine, by which adoption of the new Law of Ukraine On Forensic and Expert Activities in Ukraine is proposed.
In general, the Daft Law is quite good and complies with the idea of judicial reform embodied in the new procedural codes.

Questions arise regarding the transitional provisions of the Draft. So, upon the Draft Law entry into force, the Law On Forensic Examination loses its effect. At the same time, the next paragraph of the Draft introduces amendments to the Law On Forensic Examination, although the latter should lose its effect as is stated above!

Also, the Draft Law introduces amendments to the Civil Procedural Code of Ukraine, the Code of Administrative Procedure and the Economic Procedure Code of Ukraine, however, as in force until 15 December 2017.

Consequently, Draft Law No.6264 contains provisions that bring the procedure for conducting forensic examinations into line with the current procedural law. Thus, the Draft naturally complements judicial reform. However, the author of the document worked independently from the authors of the procedural codes, since he proposes to amend old versions of these procedural codes.

On 18 December 2017 the Government approved a concept for the abolition of nearly 340 obsolete regulatory acts which were irrelevant and created excessive pressure on business. How can cancellation of these acts influence business in Ukraine?

Artur Kiyan, Associate Partner, Lavrynovych & Partners

It is no secret that for the growth of the states economy, improvement of its investment climate and facilitating business, it is necessary to minimize all regulatory processes of the state and exclude those that are not related to the provision of services to the private sector.

Thus, on 18 December 2017 the Government approved a concept for the abolition of nearly 340 obsolete regulatory acts. On the same day, Decrees No. 984 and
No. 987 were adopted. In particular, amendments were made to Decree No. 1336 of 23 August 2000 on increasing the sum of the annual volume of settlement operations to UAH 500,000 in excess of which it is obligatory to use registrars of settlement transactions.

An important step to stimulate the development of the chemical industry was the adoption of Resolution No. 985 on expanding the list of companies that receive quotas for the receipt and import of chemical raw materials without payment of excise tax.

Changes will affect and simplify the procedure for customs clearance of goods in sea and river ports. From now on, foreign vessels are allowed to enter Ukrainian ports and carry out unloading of goods 24 hours after the provision of electronic information about the cargo on board the ship. Accordingly, it will speed up the customs procedures as earlier a foreign vessel did not have the right to even enter port waters without the prior sending of such information.

Also, the Government approved the amendment of its Resolution No. 146 of 27 February 1995 regarding the simplification of the procedure for opening and operating representative offices of foreign companies and financial institutions in Ukraine. Thus, the above-mentioned representative offices will no longer be required to coordinate issues related to the acquisition, reorganization or lease of premises with a government agency.

In addition, the duty of subsoil users to reassess reserves of mineral deposits every five years, which was set out in Decree No. 865 of 22 December 1994, has been canceled.

It is expected that regulatory pressure on business in Ukraine will decrease, as well as the risks of corruption abuses, and that released funds will contribute to the modernization of existing production.

The Ukrainian Parliament supported Draft Law No.7338 regarding the restoration of development opportunities for small and medium-sized businesses using loan financing on the territory of the Anti-Terrorist Operation. How can these changes affect banking activities?

Oleksandr Vygovskyy, Attorney at Law, LL.M., PhD in Law, Ilyashev & Partners

Draft Law No. 7338 introduces a highly anticipated liberalization of two moratoriums established by the Law of Ukraine On Temporary Measures for the Period of Conducting of Anti-Terrorist Operation of 2 September 2014, namely the moratorium on accrual of penalties and fines on the principal amount of debt under loan agreements and other contractual obligations and moratorium on enforcement in respect of mortgaged real property located on the territory of the Anti-Terrorist Operation. These restrictions on enforcement of mortgages created impediments for obtaining new loans under mortgage contracts, since the banks could not enforce their collateral located in particular districts of Donetsk and Lugansk Regions. Furthermore, it was highly doubtful whether banks could take into account the value of such collateral when calculating the amount of credit risk associated with the relevant loan transactions which might result in deterioration of the banks performance under regulatory requirements.

Draft Law No. 7338 stipulates that such restrictions shall not apply to the real property of individuals-entrepreneurs and legal entities that are small and medium enterprises which have been mortgaged to secure obligations under agreements that came into force after 1 January 2018 or were amended by the parties after that date in respect of duration and applicable interest or fines. These amendments shall contribute to restoring the lending for such borrowers, eliminate their further discrimination and shall provide impetus to an overall revival of banking activities in the above-mentioned regions.

Resolution No. 133 of the National Bank of Ukraine introduced the procedure for the opening of escrow accounts by banks. What opportunities will business receive with the adoption of this document?

Gabriel Aslanian, Counsel, Asters

Resolution No. 133 of the National Bank of Ukraine is aimed at the implementation of the amendments to the Civil Code of Ukraine adopted back in 23 March 2017 introducing escrow accounts as a new type of accounts available for the clients of Ukrainian banks. The fact that only banks are allowed to act as escrow agents in Ukraine makes us stand out among many other countries, where law firms, business advisors, trustees can also render escrow services.

Resolution No. 133 specifies the know-your-customer checks to be performed by a local bank opening an escrow account and limits the types of operations for which an escrow account can be used. In particular, the know-your-customer checks are similar to the checks performed by banks prior to opening a customary account (current or deposit) for a client. Although the rules established by Resolution No. 133 are technical, their absence has proved to be one of the obstacles preventing Ukrainian banks from rendering escrow services.

In overall terms, the aforementioned changes represent a good example of the legislative and regulatory reforms in Ukraine. However, these rules are yet to be tested in practice. On the one hand, their implementation may simplify structuring transactions involving escrow services. On the other hand, the instability in the domestic banking sector is frequently mentioned as the main factor that discourages Ukrainian companies from dealing with local banks as escrow agents.

The Verkhovna Rada of Ukraine has registered two alternative Draft Laws, namely No.7440-1, 7440-2, to the presidential Draft No.7440. What are the main differences between these Drafts?

Maskym Saliy, Lawyer, EQUITY

Ukrainian President Petro Poroshenko has initiated the procedure for elaboration of the Draft Law On the Supreme Anti-Corruption Court, which was intended to finalize and supplement state policy on combating corruption by creating a specialized court that would more quickly and efficiently consider cases investigated by another ,newly-maden body, the National Anti-Corruption Bureau of Ukraine (NABU).

The Draft Law was registered with the Verkhovna Rada under No.7440 on 22 December 2017. The Draft wording caused heavy criticism, including that on the part of the International Monetary Fund, which expressed its opinion that the Draft was imperfect and failed to comply with recommendations of the Venice Commission.

Over some time, two Draft Laws, No.7440-1 of 27 December 2017 and No.7440-2 of 5 January 2018, which are claimed to be alternatives to the Opresidentialp one, were registered with the Parliament.

At the same time, Draft Law No.7440-2 is simply a duplicate of Draft Law
No. 7440-1 and does not contain any new information content, which raises doubts as to the reasonability of its submission.

Regarding Draft Law No.7440-1, so, generally speaking, its almost no different from the Rpresidentialp one. The MP submitting it has introduced some amendments only in respect of comments made by the IMF; at the same time these amendments are imperfect and require further revision. In particular, the Draft Law grants a certain specials status to judges of the Supreme Anti-Corruption Court, which contradicts the objective and content of the relevant Draft Law.

So far, the lack of a worthy legislative initiative that would satisfy the high demands placed on the creation of the Supreme Anti-Corruption Court can be noted.

The Cabinet of Ministers of Ukraine allowed the placing of temporarily free budget funds of a single treasury account on deposit accounts in foreign currency. How can this initiative affect the efficiency of use of budget funds?

Kateryna Breduliak, Associate, EVRIS Law Firm

The Cabinet of Ministers of Ukraine has permitted the placing of temporarily free budget funds of a single treasury account on deposit accounts in foreign currency. The Government adopted this decision on 11 January 2018. Previously, the placing of budget funds was allowed only in Hryvnias.

Certainly, the decision makes it possible to use budgetary funds more efficiently, the balance of payments, the budget deficit, the situation with servicing the external debt and minimizing the risks of exchange rate fluctuations, forecast needs in foreign currency, and, moreover, connected to the expected rise in the dollars exchange rate in 2018.

The National Bank of Ukraine argues that the weakening of the Hryvnia is related to a seasonal decline in the supply of foreign currency. There could be a fall in the Hryvnia, but it is unlikely to become much stronger before then.

The experts of investment companies add, spending the state budget in Decem-
ber 2016 caused the growth of the dollar exchange rate in Ukraine, as, traditionally, at the end of the year all underfinanced programs and needs are funded.

The custody of budgetary resources in currency minimizes the currency risks, but the effectiveness of their use depends on their budget management, set tasks in the process of using budgetary funds. Considering the changing circumstances, requirements, technologies for using budgetary funds efficiency will be calculated as the proportion between the use of resources and the results achieved.

The Verkhovna Rada has adopted Draft Law No.7066 On State Property Privatization. What are the main innovations contained in this law? How does this law affect the privatization procedure?

Oleksandr Kez, Associate, Baker McKenzie

Needless to say that the Law is not just a shuffling of the old provisions: it provides, among other things, for a new approach towards determination of the starting price for the sale of privatization assets, allows English law to govern privatization agreements, and contains a set of protections that would bring a certain degree of comfort to buyers and add value to the entire deal.

As for large assets, the Law introduces a default rule pursuant to which an advisor engaged by the Fund should determine the starting price based, in particular, on the results of the market sounding. For small assets, the Law prescribes different sale methods, e.g, 50% price decrease, direct buy-out and Dutch auction, to be implemented using transparent
e-platform mechanisms. Such an approach would help to understand what the market can now offer and to avoid multiple auctions for the sale of one asset, the cost of maintenance of which for the period between the failed auctions may even exceed the estimated value of the sale.

Another novelty that cannot go unnoticed is that no bankruptcy proceedings shall be brought, within one year following the privatization completion date, against the privatized company on the basis of any event that occurred before completion. This should positively impact the buyers risk assessment.

The possibility to govern privatization agreements by English law, available until 2021, would definitely become one of the top incentives for buyers. Given that a large amount of mandatory provisions of Ukrainian law still cannot be replaced by the mere application of foreign law, even the sole option to incorporate a set of enforceable warranties and indemnities into the deal will add value to the asset.

However, a number of implementing regulations are still to be adopted by the CMU and the Fund. Whether this Law becomes the beginning of a privatization success story would depend on how the state authorities now use the tools given to them.

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