Crux (#1-2 January-February 2021)

Legal Digest

On 26 November Law No. 995-IX, which foresaw the withdrawal of the Treaty on Implementation of Coordinated Antimonopoly Policy in CIS countries came into force. What will be the consequences for Ukrainian business?

Olga Samoilenko, Lawyer, Ilyashev & Partners

In fact, Ukraines withdrawal from yet another CIS agreement the Treaty on Implementation of the Coordinated Antimonopoly Policy (the Treaty) is a completely logical step for a number of reasons.

Firstly, the adoption of the corresponding Law No. 995-IX of 5 November 2020 on withdrawal from the Treaty is due to the national policy of withdrawing from the CIS, which is why Ukraine has ceased its participation in many multilateral agreements within the CIS, as well as in different sectoral cooperation bodies.

Secondly, as was officially announced, because the Treaty contained certain mechanisms for the exchange of information, there was a risk that CIS member states would be able to continue getting information, which could be used to exert trade and economic pressure on Ukraine in the future.

Therefore, Ukraines withdrawal from the Treaty must, in principle, protect Ukraines national economic interests by eliminating the mechanism that stipulates the interstate exchange of information on economic issues.

And thirdly, over the past 10 years, this format of multilateral cooperation at interstate level has not been as effective as was predicted during its formation.

Looking back, it must be noted that the main objective of the Treaty was to create a legal and organizational basis for cooperation in pursuing a coordinated antimonopoly policy and the promotion of competition, to eliminate factors harmful for trade and economic development, as well as to prevent actions damaging the economic interests of member states as a result of monopolistic activities or unfair competition.

This was the reason why the Interstate Council on Antimonopoly Policy of CIS member states was established, where each of them had two representatives. However, representatives of Ukraine have not taken part in the meetings of the Council for a long time, just as Ukraine does not apply the provisions of the Agreement. Apparently for this reason, it is difficult to bring to mind any high-profile precedents from the practice of the Antimonopoly Committee of Ukraine based on decisions/recommendations made by the Council or information received from the competition authorities of the participating countries. That is, over the past decade, Ukraines membership in the Council has not particularly affected its internal antimonopoly policy or the work of the AMCU in general. In total, Ukraines withdrawal from the Treaty will, in my opinion, be painless and imperceptible for business. Subsequently, after the termination of the Treaty, cooperation with the competition authorities of CIS countries will be carried out on the basis of bilateral agreements, which will definitely be much more effective.

On 16 December the Ukrainian Parliament ratified the Strategic Partnership Agreement between Ukraine and Great Britain (Draft Law No. 0083). What are the provisions of the Agreement, and how do you evaluate them?

Anzhela Makhinova, Partner, Sayenko Kharenko

On 1 January 2021 the Political, Free Trade and Strategic Partnership Agreement between Ukraine and the United Kingdom of Great Britain and the Northern Ireland came into force.

This Agreement is very important for Ukrainian business because after BREXIT the provisions of the DCFTA are no longer applied in relations between Ukraine and Great Britain. In the absence of the Agreement, Ukrainian business, while exporting to Great Britain, must pay all import duties as set out in the WTO schedule of Great Britain. Therefore, conclusion of the Agreement was very important to extend the current free trade regime available between Ukraine and the EU to Great Britain.

The Agreement is quite similar to the DCFTA. It also covers trade in goods, services, IP rights issues, public procurement, etc.

If one looks at the import tariff rates, almost all of them have been eliminated. Specifically, Great Britain has not liberalized 163 tariff lines only (these duties will be eliminated by 2023). Moreover, Great Britain will apply an entry price to 27 tariff lines. Ukraine has not liberalized 603 tariff lines (these duties will be liberalized by 2026).

As for tariff quotas, they are established in addition to ones set out by the DCFTA. Great Britain will apply 364 tariff quotas on the following products: pork, beef, poultry, milk, sugar, butter, eggs, etc. Notably, the quotas are not very high. For instance, for poultry 9,534 tons per year + 2,724 tons per year for customs codes 020712 (10-90), for honey 1,000 tons per year. Ukraine will apply 73 tariff quotas to pork, poultry and sugar.

Moreover, Ukraine is allowed to apply export duties on the following products: live cattle, hides, seeds, scrap metal. All such export duties shall be eliminated by 2026. However, the Agreement sets out a safeguard measures mechanism for cases when after termination of export duties Ukraine will suffer certain injuries.

As for technical regulations, the parties have confirmed that they will comply with the Agreement on Technical Barriers to Trade, but the Agreement does not set out any preferences for Ukraine in this field. According to experts, only if Ukraine complies with DCFTA provisions in the part on technical requirements will the market of Great Britain be opened up for Ukrainian industrial products. However, the Agreement sets out the possibility to conclude ACAA for certain industries.

The situation is the same with sanitary and phytosanitary measures. Ukraine must comply with many requirements, obtain permits and confirm equivalence of the SPS system. Only after this will the market of Great Britain be open for Ukrainian agrarian products. Moreover, Ukraine and Great Britain are now negotiating to extend currently applied permits under the DCFTA to Great Britain. If successful, the relevant Ukrainian agrarian products will be available on the market of Great Britain. Moreover, both Ukraine and Great Britain have fully opened up their public procurement sphere.

On 16 December Parliament adopted the Law of Ukraine On Electronic Communications. What are its main provisions, and what is your opinion on this law?

Yelyzaveta Shram, Associate, AEQUO

On 12 January 2021, the President of Ukraine signed the Law of Ukraine On Electronic Communications. It will come into force on 1 January 2022 and replaces currently effective laws on telecommunications and radio frequency resource.

The Law was adopted to fulfil Ukrainian obligations under the Association Agreement signed with the EU and to harmonize electronic communications regulations. So, it reproduces the basic principles of EU regulatory acts, in particular the approach of the European Electronic Communications Code, and significantly updates the market.

It brings a lot of changes for business. The most important and positive are technological neutrality, shared access to infrastructure, the possibility to share radio frequency spectrum and a procedure for out-of-court settlement of disputes. One more crucial point is changes in the liability of operators. The new Law introduces larger fines, incl. in the percentage of profit, and new types of violations.

Furthermore, the regulator will be more independent both financially and in the scope of decisions. However, it also means that a great deal will depend on the regulators practice. Even now we are still waiting for by-laws which will detail a bunch of the Laws provisions.

At the same time, the Law does contain some flaws. Radio frequency monitoring still remains unreformed. The state enterprise continues to conduct it at the expense of the users on a paid contractual basis. In addition, the wording of some provisions is not accurate or clear. For example, the networks shall be divided into 3 types, and the separation of both broadband access network and high-speed network simultaneously seems, at least to us, to be not entirely appropriate and does not correspond to European practice.

Still, while it is not perfect, the Law of Ukraine On Electronic Communications is a significant step. It gives a start to reforms and will make the Ukrainian market more attractive to European investors.

On 17 December Draft Law No. 3670, more famous as the investment nannies law, was adopted. What is provided under the final version of the Draft?

Bogdan Dyakovych, Associate, Baker McKenzie - Kyiv

Draft Law No. 3760 On State Support for Investment Projects with Significant Investments provides a number of incentives for local and foreign investors making investments in certain areas to the amount of EUR 20 million or more, where at least 80 new jobs are created. State support can be provided in the forms of temporary tax benefits, preferential rights and special land use fees for using state-owned and municipally-owned land plots, or provision of related infrastructure facilities necessary for the implementation of the project. The maximum amount of such state support is capped at 30% of the expected sum of investment.

Each participating investor will have a direct agreement with the government (a special investment contract), which will set out the terms of implementation of the investment project and the terms and form of state support, and will include a stabilization clause to address any change in legislation adopted after the date of such agreement. The governing law of the agreement and the procedure for dispute resolution will be determined by the agreement signed between the parties.

To support participating investors at all stages of their projects, a dedicated state institution (a so-called investment nanny) will be appointed. This institution will be responsible for assisting investors in applying for state support, facilitating the approval of their projects by relevant government authorities, and helping with the successful implementation of approved projects.

The Law is expected to help stimulate the coming of investment into Ukraine. And while the proposed mechanisms of state support and dedicated investment managers might factor into a positive decision to invest in Ukraine, the successful implementation of any investment project will remain reliant on Ukraine strengthening the rule of law, tackling corruption and making its government institutions and law-enforcement agencies more transparent.

On 17 December the Draft Law On Energy Efficiency was registered in Parliament. What are the key ideas behind the Draft?

Alexander Tretiakov, Senior Associate, Antika Law Firm

The Draft Law On Energy Efficiency was widely discussed for several years. It should be noted that adoption of this Law is one of the major obligations undertaken by Ukraine under the Association Agreement signed between the EU and Ukraine.

The Draft should create a basis for further adoption of energy efficiency regulations as it is prescribed by the Association Agreement. While the regulations set out by the Law itself are general and it refers to the number of legal acts to be adopted and approved by various ministries, several key features set by the Law will significantly impact not only the energy sector but a lot of others.

First and foremost, the Law establishes the obligation on annual energy savings which should not be lower than 0.7% per annum. Failure to meet the required parameter will result in implementation of special measures by the Cabinet of Ministers with specific obligations set for stakeholders with severe liability for those who fail to fulfill them.

Another significant innovation is the special requirement for large state procurement to purchase goods with a specific minimum energy efficiency parameter or use only energy efficient materials/equipment to conduct works/provide services. The actual requirements shall be set by the Ministry of Economy later, but this provision of the Law may provide another means for abuse if not used carefully.

The requirement of an obligatory energy efficiency audit for big companies and for companies working in the energy sector is also established by the Draft. Most importantly, failure by energy sector companies to conduct an audit will result in a fine.

Overall, the Law also introduces a number of other innovations which were long due for implementation and previously lacked any kind of legal regulation. While some of the provisions may be debatable, it is important to note that without adoption of the new Law we cannot proceed with any significant reform in energy saving policy.

At the same time, it should be noted that, just like any basic Law, the draft establishes only key principles of corresponding regulations which are to be detailed further by the acts of the respective Ministry.

The Grand Chamber handed down its decision in squeeze-out case No. 908/137/18. There is also the dissenting opinion of 5 judges who disagree with the courts decision. What is your opinion on the decision?

Daria Tkachenko, Senior Associate, LCF Law Group

Ukrainian corporate legislation has been significantly improved over the last three years. On 4 June 2017, legislative amendments on improving the corporate governance in joint-stock companies came into force.

A number of important and promising amendments were introduced, including mandatory sale of minority shareholders shares to the majority shareholder owning at least 95% of shares in a joint-stock company (squeeze-out).

Being a long-awaited instrument for the Ukrainian business and legal community, the squeeze-out is still the subject of discussions and the disputes are too.

The decision of the Supreme Court in case No. 908/137/18 of 24 November 2020 drew the attention of lawyers and the business community. The decision demonstrated that the squeeze-out procedure should be amended, particularly in terms of determining a fair share price.

In the course of review of the case the plaintiffs (minority shareholders) required invalidation of the deed demanding them to sell their shares within a squeeze-out procedure. The Supreme Court sent the case for reconsideration by the court of first instance and noticed that the courts of lower instance failed to explore the existence of a legitimate purpose and to determine whether the share price was fair during the squeeze-out.

On the one hand, the Supreme Court has not denied or cancelled the squeeze-out, but it put emphasis on the criterion of proportionality of rights and factoring in of the public interest when conducting the squeeze-out.

On the other hand, the Supreme Court noted that the squeeze-out, just like any other method of compulsory alienation of a persons property, should be used in exceptional cases for achieving a legitimate aim and ensuring a balance between the interests of all the parties involved. Specific focus was put on fair compensation to minority shareholders.

Given the above, we believe that the existing procedure of squeeze-out should be amended by implementing additional guarantees and mechanisms to ensure that the share price paid to minority shareholders is fair and appropriate.

The decision was followed by the dissenting opinion of five judges. However, procedural aspects were raised and discussed in it rather than substantive ones. The judges stated that resolution of the case (i.e., dismissing a cassation claim and sending the case for reconsideration) was correct in general terms, as it could not have been resolved otherwise. However, the motivational part of the decision caused disagreement, as the dissenting judges believe that the claimants method of protection of their rights (challenging deeds requiring sale of shares) was selected incorrectly and, therefore, the case should have been dismissed on this ground.

Overall, new consideration of this case would hardly cure existing drawbacks in a squeeze-out procedure, but its results promise to be interesting in terms of defining a new approach in determining a fair share price during a squeeze-out.

Draft Law No. 4537, which aims to regulate the mechanism and allocation of royalties, was registered. How is this field regulated, and what are the new provisions proposed in this draft?

Oleksandr Mamunya, Partner, Mamunya IP

Proposed Draft Law No. 4537 is aimed at solving a fundamental problem issue in the sphere of copyright in Ukraine, namely the issue of copyright levies collected from producers and importers of consumer electronics who may have never used copyrighted works but their products are allegedly capable of reproducing such works. The list of potential payers of the levy was recently supplemented with producers of copying and printing devices which can, using reprographic means, potentially reproduce copyrighted works.

As a result of the development of streaming services, as well as direct ways to deliver content from the copyright holder to the end user, Ukrainian copyright levies regulation has become completely outdated and, therefore, inefficient and harmful. It seems that only collective management organizations (CMOs) themselves are satisfied therewith. However, the level of trust of market players, namely copyright holders and potential levy payers, in the current copyright levies system is dramatically low.

Manufacturers and importers disagree with the principles for determining the products to be levied. And the amount of levies proposed by CMOs can potentially harm white businesses, offering additional benefits to gray importers who systematically fail to pay the levies. In turn, authors and copyright holders are much concerned by the non-transparent mechanism for distribution of the levies.

The Draft proposes to solve extremely critical issues: transparent levy accounting and distribution methodology, CMOs cost control, public reports by them, etc. Besides, it is aimed at removing unfair fiscal pressure from white importers and the consumers of electronics.

The Verkhovna Rada adopted Draft Law No. 3656 to reduce VAT on the agricultural sector to 14%. What are these ideas based, on and what is your attitude towards such amendments?

Svitlana Teteria, Head of Agricultural and Land Law Practice, EVERLEGAL

In December 2020 the Ukrainian Parliament adopted Law No. 3656, which establishes a reduced VAT rate of 14% for transactions for the supply and import of certain agricultural products. This caused a huge public response because disputes over the expediency of its adoption have been arising since its Draft was registered by Parliament. We have analyzed what to expect for particular market players and whether the adoption of this Law will facilitate reducing the shadow market of the agricultural sector.

First of all, the purpose of Law No. 3656 is to reduce the tax burden on agricultural producers, reduce the cost of agricultural raw materials for its processers and to stop the use of schemes by taxpayers for minimization of tax liabilities.

It should be noted that the VAT rate of 14% is not established for all agricultural products, but only for its list, which is specified in Law No.3656, and is applied at the stage of intermediate consumption. Thus, the final consumer will buy agricultural goods at the price in which, as now, VAT at the rate of 20% will be included. Obviously, in this way the government tries, on the one hand, to support agricultural producers, and on the other - not to lose the previous level of revenue coming into the budget in the form of VAT.

At the same time, agricultural producers fear that the adoption of Law No.3656 could result in a situation where the amount of tax credit will exceed the amount of tax liabilities and, therefore, they will be forced to credit the difference to the tax credit of the next tax period, i.e. lend to the state, or apply for a refund from the budget, which is difficult to obtain. However, even in this case, these fears are unfounded. Despite the fact that the budget refund is preceded by an inspection of the taxpayer by the tax control body, which often either reduces the sum of the refund or refuses to reimburse it at all, for example, due to formal errors in filling out the VAT declaration, courts still side with taxpayers and force the state to pay the sum claimed for VAT refund.

Finally, it should be noted that the adoption of Law No.3656 will also have a positive impact on traders in agricultural products, as it will reduce the purchase price of raw materials, as well as facilitate saving of their working capital and cut the waiting time for VAT refunds from the stage budget.

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