Crux (#4 April 2020)

Legal Digest

Over recent weeks the UJBL team has monitored the most important legislative initiatives, from the considerable recently adopted in the first reading Draft Law On Financial Leasing to the widely discussed and necessary Law On Support of Taxpayers for the Period of Measures to Prevent the Occurrence and Spread of the Coronavirus Disease (COVID-19). Other important initiatives include several drafts in the public procurement field, drafts that may finally regulate lobbying in Ukraine. Weve invited legal experts to share their viewpoints in commentaries below.

On 4 February the Verkhovna Rada of Ukraine adopted Draft Law No. 1111 in its first reading. What exactly does this draft include, and what results should we anticipate?

Bohdan Dmukhovskyy,
Counsel, Aequo

Anna Potapova,
Associate, Aequo

Draft Law No. 1111 On Financial Leasing brings general legal and organizational principles of financial leasing in Ukraine into line with EU and international legal standards. It replaces outdated controversial regulations that are currently in effect in Ukraine and establishes a uniform approach to regulating financial leasing, its individual forms and types. This draft is aimed at creating a proper competitive environment on the financial services markets and enhancing its credibility, ensuring favorable conditions for the development of leasing services in Ukraine. It introduces several important innovations that are worth mentioning:

mandatory and clear requirements to the terms of a leasing agreement and parties thereof, which enable the avoidance of unnecessary lawsuits and legal expenses;

extending the types of property which may be leased out, to include integral property complexes, which creates alternative financing opportunities for the development of infrastructure projects;

establishes clear requirements and essential conditions of subleasing agreements, among others, includes joint and several liability of the lessee and sub-lessee to the lessor.

Such innovations contribute to more effective and frequent use by a business of such a legal instrument; introduces a clear ban on the inclusion of an object of financial leasing in the composition of the liquidation mass in the event of liquidation of the lessee. This improvement is aimed at protecting the rights of a lessor and thus encourages financial service providers to increase financing through leasing agreements; a new mechanism for the transfer of ownership to the leased property that provides for the possibility to determine conditions and procedure for the acquisition of ownership to the leased property in a lease agreement (or in a separate agreement). The current Law On Financial Leasing is outdated and needs a comprehensive overhaul, as it has not been amended for the last 15 years. The main advantage of this draft bill stems from the identity of its developers, which are participants of the leasing market united in the Association Ukrainian Union of Lessors. Therefore, this draft provides practical solutions to the problems encountered by financial services providers in their day-to-day activities. It was designed with a professional understanding of leasing instruments and is aimed at expanding the tool of financial leasing as an alternative mechanism for long-term financing.

At the beginning of 2020, Parliament registered Draft Law No.2831 On the List of Objects of State Ownership that Cannot be Privatized as the main draft, and Draft Laws Nos. 2831-1 and 2831-2 as versions. What is provided by these documents?

Nataliya Tyschenko, Senior Associate, Baker McKenzie Kyiv

On 2 October 2019 Parliament adopted Law No. 145-IX On Considering as Expired the Law of Ukraine on the List of Objects of State-Owned Property that are not Subject to Privatization, which took effect on 20 October 2019, thereby supporting the large-scale privatization campaign initiated by the Cabinet of Ministers and State Property Fund of Ukraine.

After the abolition of this law, the matter is regulated by the Law of Ukraine On the Privatization of State and Municipal Property, which provides for general regulation of the matter providing for categories of state enterprises that cannot be privatized (e.g., subsoil, roads, military equipment manufacturers, state healthcare facilities, facilities of state education institutions, etc.). Therefore, to clearly regulate the matter, the Cabinet of Ministers of Ukraine prepared Draft Law No. 2831, which provides a list of state-owned property that cannot be privatized, including:

9 joint-stock companies in which the share capital of state-owned corporate rights is 50% + 1 share;

101 joint-stock companies in which the share capital of state-owned corporate rights is 100%, state unitary enterprises and state enterprises;

109 cultural and sports facilities.

Under Draft Law No. 2831, the number of state property objects that cannot be privatized was significantly decreased in comparison with the list envisaged by the abolished law.

After the appointment of the new prime minister of Ukraine, Draft Law No. 2831 was withdrawn.

An alternative draft law, No. 2831-1, was initiated by a group of Members of Parliament and contains the same three lists of state property items which cannot be privatized. However, it also provides for the specific regulation of the privatization of JSC Ukrainian Railways in view of the intended restructuring of the Ukrainian rail transport system. With regard to Draft Law No. 2831-2, this was also initiated by Members of Parliament and provides for renewing the effect of the abolished law as the Members of Parliament in question believe that it is better to manage state-owned property effectively than to sell it.

We believe it is important for Ukraine to have a list of state property that cannot be privatized, the adoption of which will provide greater clarity to investors regarding the privatization program.

On February 19 Draft Law No. 3087 On the Bureau of Economic Security was registered. What are its main provisions?

Yulian Durda, Junior Associate, EQUITY

The European integration path that Ukraine has embarked on presupposes establishing and ensuring the operation of institutions that would guarantee supremacy of law, respect for rights and interests of individuals and legal entities and their effective protection.

Thus, on 10 October 2019, the Verkhovna Rada of Ukraine approved the program of the Cabinet of Ministers of Ukraine. One of the paragraphs in this program specifies the formation of an agency that would investigate crimes in the field of public finances.

Besides, the approved Law of Ukraine On the 2020 State Budget of Ukraine envisages 1.288 billion UAH worth of expenditure on forming a body that would carry out investigations in the field of public finances.

Since the time the aforementioned program was approved, several draft laws providing for formation of a body that would investigate crimes in the sphere of public finances, including Draft No. 1208-2 On the Bureau of Financial Investigations of 18 September 2019, have been registered with the Verkhovna Rada of Ukraine. However, the document in question was rejected by Parliament.

On 19 February 2020 Draft Law No. 3087 On the Bureau of Economic Security, drawn up on the basis of the aforementioned Draft No 1208-2, accounting for comments made by the main legal department of the Verkhovna Rada, was registered with the Verkhovna Rada.

According to its explanatory note, the Draft is aimed at differentiating the service and law-enforcement functions of the State Tax Service, liquidating the tax police, downsizing the structure and personnel numbers of the bodies combating crimes in the sphere of finance, discovering overlapping functions and the actual formation of the Bureau of Economic Security. The main objectives of the BES include preventing, detecting, stopping, investigating and solving criminal offences referred to its jurisdiction by legislation.

The activities of BES are to be directed and coordinated by the Cabinet of Ministers of Ukraine through the Minister of Finance of Ukraine, though the latter does not have significant influence over the BES.

In accordance with the proposed changes to the Criminal Procedure Code of Ukraine, 29 articles of the Criminal Code of Ukraine outline the jurisdiction of detectives of the BES, with 20 of them describing the direct functions of the agency in connection with economic crimes. In this way an attempt was made to protect businesses from control over the economy by other security, defense and law-enforcement agencies.

The draft specifies that the maximum number of personnel must not exceed 3,000 officers, with officers who handled economic crimes while working for other law-enforcement bodies or prosecution bodies from 2010 to 2015 being banned from working for the BES.

The draft sets out the procedure for competitive selection of the BES director and deputy directors, involving donors who have provided international technical assistance to Ukraine with a view to preventing and combating corruption and economic crimes in the last two years.

In general terms, the proposed formulae to establish a new central body of executive power specializing in investigation of crimes in the area of public finances will positively influence the existing business environment in the country, enhance the effectiveness of investigation of crimes in the economy and finance, reduce corruption risks in the system of law-enforcement bodies. At the same time, Draft Law No. 3087 needs further reworking.

A number of draft laws on lobbying regulations (No. 3059, 3059-1, 3059-2, 3059-3) have been registered in Parliament. How would you evaluate them, and which of the mentioned do you regard to be the most suitable?

Marta Barandiy, Head of Asters office in Brussels, Ph.D., LL.M. Eur.

Although Ukrainian society is highly politicized, citizens do not feel responsible for the states policies, since they do not directly participate in their creation. Lobbying could be a good tool for such participation. Lawmakers seem to understand this. As of today, four drafts have been submitted to the Verkhovna Rada of Ukraine, all of which attempt to regulate the lobbying process. All of these drafts have common features, namely the establishing of a lobbying register, requirements to disclose the nature of contracts between a lobbyist and his client, penalties and criminal liability for the violation of lobbying standards.

However, there are some major differences. For example, Draft Laws Nos. 3059-1 and 3059-2 contain rules on self-organisation of lobbyists. According to Draft No. 3059-1, lobbyists automatically become members of a nonprofit professional organization and they are required to pay membership fees.

Draft No. 3059-3 provides for a distinction between lobbying and advocacy, although in practice advocacy is lobbying of a humanitarian nature. At the same time, advocacy and legal advocacy are put together and forbids lawyers from being lobbyists. This provision completely ignores the EUs experience, where law firms have the greatest lobbying potential. Drafts Nos. 3059-1 and 3059-2 prohibit foreigners from lobbying in Ukraine.

All these drafts, except for Draft No. 3059, impose restrictions on lobbying the interests of the state that has been recognized by Ukraine as an aggressor.

A common feature of all the documents, with the exception of Draft Law No. 3059, is the format of lobbying relationships: it restricts the range of individuals who can influence law-making to intermediaries for whom lobbying is their exclusive entrepreneurial activity or a professional activity. However, NGOs or associations cannot participate in lobbying without intermediaries. Although the explanatory notes to the drafts, which usually explain the intentions of their initiators, recognize this need. Thus, the explanatory note to Draft Law No. 3059-2 states that small non-government organizations that do not have significant resources and other opportunities to influence the government, join the process of government decision-making and public policy-making. In fact, Draft No. 3059-2 implies that only those who have resources can influence state policies. The intention of the initiators of Draft Law No. 3059-3 is to legalize existing lobbying, which may seem correct given the need to eliminate the corruption component from the lawmaking process. However, in a vacuum situation it is crucial not to legalize existing, chaotic historically-established links between lawmakers and lobbyists, but to focus on creating new actors in this field and establishing the same rules for all of society.

In general, all draft bills submitted to the Ukrainian Parliament attempt to regulate lobbying relations in terms of control over lobbyists, and none is able to meet societys demand for participation in policy-making.

Draft Law No. 3132 offers an overview of the mechanics of the AMCU as a body of appeal in the public procurement sphere. What mechanics are suggested instead, and what is your opinion on such an initiative?

Oleksandr Fefelov, Partner, Ilyashev & Partners

We would like to begin our commentary by reminding readers of what Ukraine undertook in the sphere of public procurement under the Association Agreement with the EU. Specifically, Ukraine was obliged to ensure progressive approximation of public procurement legislation in Ukraine with EU public procurement acquis, accompanied with institutional reform and the creation of an efficient public procurement system based on the principles governing public procurement in the EU. Within the framework of institutional reform, Ukraine undertook to designate an impartial and independent body tasked with the review of decisions taken by contracting authorities or entities during the awarding of contracts.

As stipulated by the Law On Public Procurement, the AMCU was designated as the appeal authority which has to ensure impartial and coherent policy in the area of contesting procurement procedures. The Law also provides procedures for the functioning of the Permanent Administrative Board for Handling Compliance against Violations of Public Procurement Legislation within the AMCU.

As you well know, the Board currently consists of three state commissioners of the AMCU, whose work is getting harder and harder with every passing year. For instance, in 2019 11,147 claims were submitted to the Board for consideration, demonstrating a 43% rise on 2018. This absolutely enormous number of claims forced the Board to hear the claims from morning to night, frequently even at 23:59, in order to comply with the procedural deadlines provided by the Law. The Board quite often hears 50 or more claims per day. Apart from the fact that three commissioners are unable to carry out their duty in the Board to fulfil their direct functions as members of the Committee, such an abnormal overload may raise concerns of the parties to the proceedings on the correctness and legal perfection of its decisions. In fact, the appeal system in the field of public procurement provided by the current Law cannot be considered effective and responsive to business needs, its functioning definitely requires enhancements. In such circumstances, proposed amendments would obviously be helpful.

The main idea of the proposed amendments is to establish a new body within the AMCU called the Commission on Reviewing the Claims on Breach of Legislation in Sphere of Public Procurement and to transfer to it the functions currently carried out by the Board. It is proposed that the Commission would include at least three authorized officers (not state commissioners of the AMCU). If seven persons were to be appointed authorized persons this could enable consideration of claims by two commissions at the same time, which would ensure an appropriate workload on those officers. Hopefully, the proposed institutional reform inside the appeal system will ensure its stabilization and facilitate effective protection of the rights and interests of participants of public procurements.

On 5 March Draft Law No. 3176 was registered in Parliament. What does this draft propose, and is it topical for these times?

Alexander Tretiakov, Senior Associate, Antika Law Firm

The Draft Law On Making Changes to the Law of Ukraine On Public Procurement Regarding the Procurement of Natural Gas that was registered in Verhovna Rada on March 2020 should resolve a substantial issue in regulations created once the energy exchange market begins its work.

Currently, the natural gas which is purchased by state-owned enterprises should be purchased through the procurement procedure on ProZorro. This also includes the situation when the gas is purchased for the technological purposes by the operators of the gas transport system. At the same time, the Code of Gas Transport System adopted in 2015 allowed the purchase of gas through exchanges which was not in line with the provisions of the Law of Ukraine On Public Procurement.

The Draft should resolve this situation and allow the operator to easily purchase gas on the exchange markets without a lengthy and complex procurement procedure.

At the same time, we do not expect the changes to have an impact on the gas market in general as the draft is aimed at a particular piece of regulation which affected the work of the gas transport systems operators.

How would you evaluate Draft Law No. 3220 (Law No. 533-IX), adopted by Parliament and directed at setting temporary tax rules for the period of measures to prevent the occurrence and spread of COVID-19?

Liliia Taran, Senior Consultant, KPMG in Ukraine

On 18 March 2020 Law No. 533-IX (Draft Law No.3220) On Amendments to the Tax Code of Ukraine and other Laws of Ukraine on Support of Taxpayers for the Period of Measures to Prevent the Occurrence and Spread of the Coronavirus Disease (COVID-19) came into force. This Law is aimed at supporting businesses during the quarantine period and introducing certain tax exemptions. However, the taxation and tax administration system continue to operate, so each amendment should be carefully analyzed.

One of the most supportive actions introduced by the Law is postponing tax audits. Namely, the Law introduced a moratorium on documental and actual tax inspections for the period from 18 March to 31 May 2020 except for audits on VAT refunds (Art. 78.1.8 of the Tax Code of Ukraine ) and a moratorium on audits regarding the unified social tax for the period from 18 March to 18 May 2020. Taxpayers should take into account that the period of limitation (prescribed by Art. 102 of the TCU) is suspended for the same period.

According to the updated schedule of tax audits published by the tax authorities on 24 March the number of scheduled audits for 2020 is not reduced, which may mean an increase of pressure on the tax authorities. In addition, the tax authorities may conduct desk audits and send requests to taxpayers during this period. The Law does not establish special exemption on providing information to a request made by the tax authorities, which may cause violation of the TCU requirements on providing information because of constrained delay. The land tax and real estate tax are not charged for March and April 2020. The current edition of the Law does not determine any limitation on this exemption for entities which did not suspend their business activity. To realize the right to this exemption taxpayers should submit an adjusting tax return for 2020 before the deadline of the relevant tax payments. Cancellation of UST charges was introduced for individual entrepreneurs only, for March and April 2020, so legal entities are obliged to pay the UST under the general rules.

In addition, special medical goods for anti-Covid-19 measures determined by the Cabinet of Ministers are temporarily exempted from import VAT and customs duties.

Taxpayers are temporarily exempted from penalties and late payment interest for violation of tax legislation for the period from March to May 2020 as well as for late submission of UST reports, late payment of the UST or underpayment of the UST for the period from March to April. However, tax penalties are still in force for violations of accrual, declaration and payment of VAT, excise tax, rent, regulations on ethanol and fuel. The tax authorities have issued clarifications that penalties for late registration of VAT invoices are temporarily cancelled, just like other penalties, but the right to VAT credit exists only on the basis of a registered VAT invoice.

The Law really has provided some simplifications for entities. However, certain under-law regulations should be amended to ensure that the simplifications provided operate in reality.

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