Crux (#01-02 January-February 2019)

Legal Digest

On 20 December 2018 the Draft Law No. 8449-d On Amendments to Certain Legislative Acts of Ukraine on Ensuring Competitive Conditions for Electric Power Production of Alternative Energy Sources was adopted in its first reading. How would you assess the proposed new procedure of 20-year-long state support for electric power facilities that produce electricity from renewable sources?

Taras Lytovchenko,

Senior Associate, Attorney at Law, GOLAW

The new procedure for supporting electricity producers from alternative sources was definitely the hottest topic in the energy sector at the end of 2018 and still remains a topical issue at the beginning of 2019, as the final version of Draft Law No. 8449-d in the second reading is not available yet. Based on the version of the Draft approved in the first hearing by the Ukrainian Parliament, the new support system stipulates that the winner of the auction will be awarded a 20-year power purchase agreement (PPA) with a guaranteed buyer.

Such a state guarantee for 20 years of buy-out of the full amount of electricity is definitely a very attractive feature of the proposed Draft. Compared with the current state guarantee till 2030, such a term is much more convenient for renewable energy projects which have a long payback period. Besides, such a 20-year term will make it much easier for projects to get financing from financial institutions. As an aside, just two months into 2019 and certain large scale biomass-to-energy projects have faced difficulties in relation to obtaining financing due to the fact that the payback period exceeds the term of the green tariff.

Another important fact is that this 20-year term will start from the moment when a Power Purchase Agreement is signed. The auction system is preliminarily proposed until 2030 when the last auction will be held, so a state guarantee for the winners of this auction will last until 2050.

On the other hand, the auction system establishes quotas for different types of alternative energy sources, namely: sun, wind and others. This raises a lot of questions regarding how the competitive environment for such other kinds of alternative energy will be organized.

For example, technology and the price of production of hydro and biomass energy differs a great deal, which complicates the possibility of corresponding producers to compete for the same quote.

Although several key points of the Draft still have to be reconsidered, the attitude of certain politicians to this question gives confidence that the new support system will be well balanced and adopted in early 2019.

On 29 December the Ministry of Economic Development published the Draft Law On Self-Regulatory Organizations for discussion. How would you comment on such an initiative? In what areas is the existence of such organizations extremely important, and why?

Oleksandr Biryukov,

Ph.D., Counsel, LCF Law Group

Development of a separate law on self-regulation in certain areas of professional activity is an extremely timely and useful initiative. The urgency of such a proposal is explained by the fact that self-regulation is an important element of an appropriate legal basis for realization of the potential of professional communities regarding development of professional standards to comply with, as well as to establish the rules of ethical conduct. Such regulations exist in the main in those spheres of professional activity in which the state can grant part of its regulatory powers to professionals through their self-governing associations. This so-called non-state regulation exists practically in all developed countries. In Ukraine, there is quite comprehensive experience of the activity of self-regulating organizations activity in certain professions, including negative experience. The existence of self-regulation organizations is envisaged in different laws dedicated to the professional activity of judges, attorneys, notaries, bailiffs, insolvency practitioners, brokers and other professionals dealing with securities, etc. The need for unification of the normative regulations in this specific sphere of activity is a long overdue issue. We are certain that this initiative will give a good chance to establish a unified legal environment for the activities of such organizations, establish partner relations between the state and professional communities, and create common high-level standards for professional activities and ethical rules on behavior for persons providing public services. Certainly, the Draft is too far from that which can be submitted for approval to the Verkhovna Rada (it is unclear, based on the wrong concept, uses surprising terminology, contains puzzling regulation and strange norms), but the idea is crucial and requires whole-hearted support.

From 1 January 2019 rules to determine the origin of goods in accordance with the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin are applicable for the purpose of the free trade regime between Ukraine and EU countries. What should Ukrainian manufacturers prepare for?

Oleksiy Gorbatyuk,

Lawyer, Ilyashev & Partners

As we know, on 1 February 2018 Ukraine became a fully-fledged member of the Regional Convention on the Pan-Euro-Mediterranean Preferential Rules of Origin of Goods (hereinafter the PEM Convention).

On 21 November the EU-Ukraine Customs Sub-Committee approved Decision No. 1/2018 (hereinafter the Decision), according to which the provisions of the PEM Convention are applied in trade between Ukraine and EU countries.

This Decision provides the possibility to use a diagonal cumulation in bilateral trade between Ukraine and EU. Namely, it allows the use of raw materials originating in third counties that are members of the PEM Convention, in the production of goods, and export of finished product to EU countries at a reduced customs duty or without duty.

However, Ukrainian exporters will be able to take advantage of this opportunity only after similar changes are made to free trade agreements that have been already signed with the other counties participating in the PEM Convention (Ukraine has so far signed FTA with 9 of the 25 members of the PEM Convention). For this purpose, on 16 January the Cabinet of Ministers of Ukraine authorized the First Vice Prime Minister of Ukraine to sign the Protocol on introduction of relevant amendments to the FTA between Ukraine and Georgia. It is also predicted that in 2019, as soon as Ukraine ratifies the FT with Israel, Ukrainian enterprises will also be able to use the principle of diagonal cumulation in trade with it.

Consequently, Ukrainian producers will in the near future be able, for example, to purchase raw material in Georgia, process it in Ukraine and export end products to EU countries with a Ukrainian certificate of origin, while retaining preferential rules of trade.

A growing number of Ukrainian exporters will be able, through this process, to join regional and global value chains in 2019, as a result of which Ukraine will increase competitiveness in the modern economic system.

On 1 January 2019 the Law of Ukraine On Amending Provisions of the Tax Code of Ukraine, as well as other Legislative Acts of Ukraine on Improvement of the Tax Administration and Increase of the Tax and Charges Rates came into force. Which industries could benefit from the proposed changes?

Kateryna Hamretska,

Manager, KPMG in Ukraine

Amendments envisaged by the Law of Ukraine On Amending Provisions of the Tax Code of Ukraine, as well as other Legislative Acts of Ukraine on Improvement of the Tax Administration and Increase of the Tax and Charges Rates could well be grouped as follows:

Improvement of tax administration;

Clarifications on adjustments for corporate income tax purposes, including transfer pricing regulation;

Amendment of the VAT treatment of certain transactions and format of VAT returns;

Increase of rates of excise duty and improvement in administration of the excise duty system;

Increase in ecological tax and rental charges;

Improvement of the tax administration system, as well as clarification of certain procedural issues, will definitely influence all Ukrainian taxpayers registered in the form of legal entities in Ukraine, since legislative terms for appeal of tax audit reports were increased, and assessment of the penalties and fines as well as terms primary documents storage were clarified.

Clarifications on adjustments for corporate income tax purposes related to transactions with lease assets that will, accordingly, trigger taxpayers that have lease transactions, have been made. In addition, certain amendments were introduced with regard to the depreciation of equipment (4th group), computers and other IT techniques that will trigger taxpayers that have respective equipment on their balance sheets.

From the Ukrainian VAT perspective, certain VAT
exemptions were granted to taxpayers performing the following transactions:

Supply of services related to the lease/sublease of land plots;

Import of the certain metals, paper and hard paper for recycling on the customs territory of Ukraine (up to 1 January 2022);

Import and supply of certain pharmaceuticals on the customs territory of Ukraine (up to 31 December 2020);

Supply of certain types of coal to the customs territory of Ukraine (up to 1 January 2022);

Import and supply of electric vehicles to the customs territory of Ukraine (up to 31 December 2022).

Accordingly, respective VAT exemption should lead to a fall in price of the respective items on the Ukrainian market. However, please note that transactions that are still VAT-exempted influence the limit on mandatory registration as a VAT payer in Ukraine.

In 2019 excise duty rates on tobacco products were raised. This will, accordingly, lead to an increase in the market price on tobacco products in Ukraine.

In addition, the excise duty administration systems of fuel and ethanol spirit were amended, which will lead to an administrative burden on taxpayers performing transactions with such liquids and, accordingly, will increase the operational costs of such taxpayers. This may, in turn, result in an increase of the price paid by the final customers for the respective substances or products containing respective substances.

The rate of the ecological tax was increased to UAH 10 per 1 ton of emissions. This will, accordingly, raise the operational costs of such taxpayers and this may well result in an increase in the price paid by end customers for the respective substances or products containing these substances. Any rise in rental charges will have the same impact.

Other minor changes include increases in local tourist charges and the land tax.

Thus, amendments to Ukrainian tax legislation effective as of 1 January 2019 are not so significant compared with previous periods. Moreover, the respective amendments in the main affect taxpayers performing certain transactions, as specified above.

On 4 January 2019 the National Bank published a package of regulatory acts, which are a prerequisite for the full functioning of the new Law of Ukraine On Currency and Currency Operations. What changes should be accepted in connection with the liberalization of Ukrainian currency legislation?

Sergii Papernyk,

Partner, Head of Banking & Finance practice and FinTech, Evris

Ukrainian currency legislation has long needed change. Based on the outdated Decree of 1993 and the uncounted regulatory acts of the National Bank of Ukraine, it reminded one of a slow-moving monster, which only prevented business from developing. In addition, the situation was aggravated by interim NBU regulations designed to resolve the financial crisis of 2014. These regulations significantly limited the rights of subjects when carrying out currency operations.

However, 2018 saw a change in the paradigm and adoption of a completely new regulation on currency relations. Continuing the ideas of the new Law of Ukraine On Currency and Currency Operations, the NBU presented the draft of new regulatory acts which will come into force on 7 February 2019.

Expected changes include:

an increase in the period for calculating export-import contracts from 180 to 365 days

abolition of currency supervision over export-import operations to UAH 150,000;

free use of accounts of legal entities abroad is permitted;

cancellation of individual licenses for currency transactions they will be replaced by a system of electronic limits (EUR 2 million per year for legal entities, EUR 50,000 per year for individuals);

cancellation of sanctions in the form of termination of foreign economic activity for breach of the terms of payments;

cancellation of restrictions on early repayment of external obligations;

free realization of operations on accounts of legal entities which are non-residents in Ukrainian banks;

cancellation of registration of external borrowing;

online purchase of foreign currency by individuals;

an increase in the limit for foreign currency transfers abroad for individuals without opening an account from UAH 15,000 to 150,000 per year;

permission to invest in Ukraine not only in currencies of the first group but also the second group of classifiers of currencies.

Unfortunately, other currency restrictions are still in force. This is explained by the National Bank of Ukraine as the necessity to stabilize the Ukrainian financial market.

Of course, in order to set a full restart of the investment landscape in Ukraine it is desirable to abolish all existing currency restrictions and cease to restrain the free movement of capital. However, its hoped that due to the liberalization of NBU policy this will be achieved by the end of 2019.

The register of the top level domain .UA, HostMaster, and the World Intellectual Property Organization (WIPO) have concluded an agreement, by which an alternative dispute resolution procedure within the domain .UA is implemented. How would you assess this novelty and its impact on the standards of resolution of domain disputes?

Taras Kyslyy,

Counsel, Asters

Cybersquatting was a headache in Ukraine until recently. Indeed, to get back a squatted Ukrainian domain name you had to undergo fully-fledged litigation, which is quite a challenge here. But everything will change this January: Ukraine and the World Intellectual Property Organization (WIPO) signed an agreement allowing a review of domain disputes via arbitration procedure fast, cheap and predictable.

Review of domain disputes via arbitration is not something new though. Its been available for generic top level domains like .com, .net, .biz and alike for decades now, and have already proved to be a very effective alternative to traditional court review. So why is it so good?

First of all, it is incredibly fast compared to any court procedure. It takes up to 3 months from the filing of a complaint to getting the domain from the squatter to your account. It is possible thanks to a procedure reasonably limiting the quantity and volume of filings, which is combined with deadlines for each procedural step.

The dispute review is also quite cheap. It will cost USD 1,500 for the whole case in terms of arbitration costs if the case is reviewed by one arbitrator.

The outcome of the dispute review is rather predictable. This is achieved by clear rules for resolving the dispute, skilled arbitrators involved by WIPO and case law formed by previous arbitration decisions. Over 39,000 domain disputes were resolved within WIPO in the last 18 years. So youll always be able to find a case similar to yours to get an idea of the expected arbitration award.

And last, but not least, WIPO arbitral awards are instantly enforced by domain name registrars without any involvement of state enforcement authorities.

So the average domain name dispute resolved within WIPO arbitration basically looks like the filing of a 10-page complaint, getting a response from a respondent, getting an arbitral decision and, if granted, getting the disputed domain. Just like that. It takes up to 3 months and costs USD 1,500 for everything. Sounds like a dream, but it will become reality in a few months from now in 2019 for .UA domain names. Enjoy.

The Government has developed the Draft Law On the Distribution of Copies of Audiovisual Works, Phonograms, Videograms, Computer Programs, Databases and introduction of amendments to certain legislative acts of Ukraine. How would you comment on this initiative?

Oleksiy Stolyarenko,

Head of IT/TMT Practice, Baker McKenzie

The Law of Ukraine On the Distribution of Copies of Audiovisual Works, Phonograms, Videograms, Computer Programs, Databases was adopted in Ukraine under pressure from the international community back in the year 2000 to combat the illegal distribution of copyrighted materials on laser disks. It required optical disc producing factories to obtain licenses and comply with a number of requirements to ensure that they produce only legitimate products. It also required the distributors of optical discs to obtain hologram protected control stamps to mark all legitimate disks approved for distribution in Ukraine.

Over the years, the proposed framework of this law proved to be ineffective in combating optical disk piracy because of the lack of enforcement and the formalistic approach in the drafting of the law. In particular, it appeared to be possible for counterfeit distributors to provide government authorities with a full set of documents and obtain control stamps for their counterfeit products in compliance with the formal requirements of this law. Furthermore, the widespread introduction of high-speed broadband Internet in Ukraine from 2008-2010 pushed most illegal music and video distribution online, and this was followed by legitimate music and video distribution services as well. The rapid decline in the popularity of optical disks as a medium for distribution of both illegal and legal content in Ukraine and worldwide practically rendered this law as outdated and unnecessary, and therefore, I fully support its abolition.

Another set of amendments proposed by the Draft is related to the recently adopted law on collective management organizations where the authors propose a number of technical corrections. The authors also propose to return to the previous iteration of the copyright law of Ukraine, particularly in relation to the mechanism for calculating damages for copyright infringement, which I believe would simplify things a little for judges and copyright owners. The bottom line, after the adoption of this Draft and in case the copyright enforcement online becomes much more efficient, is that users in Ukraine would have a back-up plan to return to good old optical disks and Kyivs Petrivka market will once again become great.

The Cabinet of Ministers registered Draft Law No. 9385, which is aimed at harmonization of legislation related to protection of rights to inventions, utility models,industrial designs and trademarks with EU right and implementation of the respective provisions of the Association Agreement that Ukraine signed with the EU. How would you comment on this initiative?

Antonina Pakharenko-Anderson,

General Director of Pakharenko and Partners, President of AIPPI, President of Ukraine Alliance Against Counterfeiting and Piracy

Legislative developments stipulated in Draft Law No. 9385 include norms related to exclusion from patent protection of new forms of a number of chemical compounds, despite the fact that the previous Draft proposed by the government was not adopted by the Verkhovna Rada in view of the presence of these norms. The main argument put forward by the authors of these norms is the intention to eliminate the possibility of obtaining evergreen patents in Ukraine.

Lets make things clear: after expiry of a patent no one can prohibit the free use of an earlier patented active substance by anyone; companies are absolutely free to manufacture pharmaceutical products on the basis of such substance without infringing anybodys IP rights. Study of the patented active substance for scientific purposes is allowed even before the expiry of a patent.

However, science does not stand still and, as a result, improved medicines appear based on known active substances which are the result of other scientific research involving significant material and intellectual resources, and an improved product becomes the subject matter of a new invention. Such inventive subject matters may include new compounds created based on a known active substance, new combinations with other active substances, or even a new dose of an active substance that ensures a different administration method and effect of a product. All these inventive subject matters are patentable in European countries since they involve novelty and provide a different technical result.

Unfortunately, local manufacturers who disclaim the patentability of improved products instead of using in their medicines an original active substance whose patent protection has expired, choose to produce a new modification of it, which is the subject matter of a new invention.

Consequently, we as consumers may be deprived of the possibility to choose between an innovative medicine and a Ukrainian equivalent, while domestic scientists will not be able to protect the results of their scientific research in the field of organic chemistry based on patents, and so become unable to gain leading positions in the global expert community. Such a shortsighted legislative initiative can seriously worsen the countrys investment climate.

The Ukrainian Journal of Business Law

Subscribe to The Ukrainian Journal of Business Law right now and enjoy the most relevant issues on doing business in Ukraine on your device or in print.

All this for just USD 9.99 a month.


Subscribe now