Crux (#3-4 March-April 2021)

Legal Digest

On 3 February Draft Law No. 5009, which simplifies power grid connections for small and medium-sized business, was registered. What was the reason for this draft, and how valuable will it be for business?

Olha Horodniuk, Associate, EVERLEGAL

Draft Law No. 5009 On Amendments to Certain Legislative Acts of Ukraine Regarding Simplification of Power Grid Connection was registered by the Verkhovna Rada on 3 February 2021.

The procedures in Ukraine for connecting to the grid are complicated, bureaucratized, time-consuming and expensive. These factors cause hard times for small and medium business in Ukraine, given that simple connection of a small facility to the electricity network requires enormous efforts. This is confirmed by the fact that Ukraine ranked 128th out of 189 countries in the Doing Business rating.

The most important amendments of the Draft Law are the following:

The Draft Law eliminates the requirement of obtaining a permit from the Cabinet of Ministers of Ukraine for the purpose of changing the designated land use of forest lands for the location and operation of linear energy infrastructure facilities.

Development of land allocation design for location and operation of linear energy infrastructure facilities does not require a permit from the local executive and municipal bodies.

A distribution system operator, which is interested in obtaining the right to use a land plot (including by way of easement) may submit a notice in writing or use the software of the public cadastral map, and within three months no other person is allowed to obtain a permit to develop land allocation design for such a land plot.

If a distribution system operator acquires the building on a land plot, it automatically triggers termination of the land use right of the previous owner of the building.

Construction of cable power lines no longer requires performance of an environmental impact assessment. But construction of overhead power lines still does.

The Draft Law introduces a notification procedure for violation of elements of amenities in the course of construction or reconstruction of linear energy infrastructure facilities. Instead of obtaining a permit, the person intending to carry out such works shall notify the relevant executive body of the commencement of such works no later than within one business day.

The Draft Law is aimed at minimizing two main problems: time and costs. In this regard, it provides for the following innovative approaches:

  1. Silent consent.

If the authority does not pass a resolution to transfer the land plot into use (including by way of easement) or provide a reasonable refusal to grant an approval for the same within the period of time specified by law, it shall be deemed that approval is granted.

  1. Information web-portal Single window of customers and developers of design documentation.

The Draft Law provides for an online platform for submission of documents and cooperation in relation to design documentation. This enables digitization of the whole process, minimizing of costs and time expenses for submitting documents in several instances, and it also minimizes the impact of the human factor on the corruption risk.

Overall, the Draft Law is capable of resolving long-standing issues with the process of connection to the grid. Upon further development, the Draft Law will become a large legislative step towards efficiency.

Draft Law No. 5065 On Financial Services and Financial Companies was registered recently in Parliament. What are its main provisions and key innovations?

Taras Shtokalo, Associate, EQUITY

On 15 February 2021, the Verkhovna Rada of Ukraine registered Draft Law No 5065 On Financial Services and Financial Companies.

The need to adopt Draft Law No. 5065 is preconditioned by a rapid development of relations on the market of financial services and outdated current legal regulation (legal relations are currently governed by the Law of Ukraine On Financial Services and State Regulation of Financial Services Market adopted 20 years ago, with only insignificant changes being made thereto).

Draft Law No. 5065 is intended to enshrine new approaches to the regulation of the markets of financial services, activities of financial companies and pawnshops. In particular, provisions of Draft Law No. 5065 will entrench the principles of providing financial services and protection of clients rights in order to create a transparent and competitive market environment; to establish principles and methods of state regulation of the activities in providing financial services and their respective restrictions; to determine the list of financial services that a financial company and pawnshop may provide, with a combination of such services being likely; to enshrine the possibility for financial companies to carry out other commercial activities apart from providing financial services; to determine the licensing procedure for financial companies and pawnshops, as well as the procedure and grounds for changing the scope of a license of a financial company or pawnshop (increase or decrease in the number of types of financial services that an entity has the right to provide).

Furthermore, the novelties of Draft Law No. 5065 are definitions enshrined in law such as a financial company and a pawnshop; introduction of the notion of secrecy of a financial service as the analogy of banking secrecy; introduction of outsourcing as performance by third parties of functions or some processes of a financial service provider, and change of approach to licensing with a view to simplifying the process of entry to the market and enhancing the efficiency of regulation.

The Verkhovna Rada of Ukraine recently adopted Draft Law No. 4184, the so-called tax on Google. What is reason for this draft and what are its provisions?

Andrii Buznytskyi, Manager, International Tax, KPMG in Ukraine

On 17 February the Ukrainian Parliament adopted Draft Law No. 4184 in the first reading. The main purpose of the Draft Law is to introduce VAT on supplies of electronic services by non-residents to Ukrainian individuals. Legislators substantiated this by it referring to the principles of equality and neutrality of taxation, since for non-residents supplies to Ukrainian businesses there is a reverse-charge mechanism in place, but there is no effective mechanism to tax respective supplies by non-residents to Ukrainian individuals.

The Draft Law introduces the notion of electronic services. Non-residents suppling electronic services in the amount exceeding
UAH 1 million to Ukrainian individuals will have to register as VAT payers by filing an application through their personal electronic cabinet. In the event of non-registration, the Draft Law provides for severe penalties in the amount of 100% of the cost of electronic services supplied. When registered, non-resident VAT payers will have to calculate the number of supplies to individuals in Ukraine (under the Draft Law the place of supply can be determined based on the country code on the SIM card, location of the device according to IP address, etc.) and on the last day of the reporting period (quarter) assess VAT liabilities. Non-residents will have to submit a simplified tax return and can pay VAT liabilities in foreign currency.

Notably, it also repeals the advertisement tax that Ukrainian residents paying to non-residents for the advertising services are required to withhold at their own expense.

In general terms, adoption of the Draft Law does correspond to international practice. Still, from the view point of tax administration several issues arise that require clarity: how will the Ukrainian tax authorities track the supply of electronic services to individuals in Ukraine, and how are non-resident VAT payers expected to do that since it may probably involve a great deal of expense on their part. Also, the Draft Law includes, under the notion of electronic services, the supply of gambling games. This contradicts the Law of Ukraine On Gambling
No. 768-IX
, which provides that only residents can supply gambling games in Ukraine as well as to the provisions of the Tax Code that provide VAT exemption for making a bet/buying the right to participate in a game, thus the reconciliation of these provisions may also be welcomed.

Draft Law No. 4684 On the National Securities and Exchange Commission was registered in the Ukrainian Parliament. What are its main provisions?

Natalia Selyakova, Partner, Dentons

The Draft Law On the National Securities and Exchange Commission was developed, inter alia, in order to bring the activities of the National Securities and Exchange Commission into compliance with the standards of the International Organization of Securities Commissions(IOSCO). Below are the principal changes:

The Draft Law is a voluminous and very detailed normative act. It provides for detailed regulation of matters that have usually been regulated by subordinate legislation. On the one hand, it is good to have detailed rules while, on the other hand, the rules should be sufficiently flexible so they can be made to respond quickly to market changes, new trends and needs.

The Draft Law provides for a special procedure for funding the activities of the Commission. It envisages, among other things, the following funding sources: regulatory contributions paid by participants of capital markets and organized commodity markets; fees for administrative services provided by the Commission; funds received by the Commission under European Union assistance programs, foreign governments, international organizations, and donor institutions

The Draft Law proposes to introduce so-called regulatory contributions to be paid by professional participants of capital markets and organized commodity markets. The maximum amount of such contributions, depending on the type of licensed activity, varies from 1% to 5.5% of the average net profit from operating activities for three years.

It is likely to be an additional financial burden for major market players (such as banks).

At the same time, the fees for administrative services are set at a quite low rate.

The Draft Law expands and specifies in detail the
powers of the Commission, also including those as under the Law of Ukraine On Capital Markets and Organized Commodity Markets. The Draft Law vests the Commission with a range of different powers, including the following:

setting the requirements, development and approval of corporate management standards with professional participants of capital markets and organized commodity markets, as well as monitoring the compliance thereof;

making decisions on whether particular assets\objects of civil rights should be classified as financial instruments;

taking measures to protect the rights of consumers of financial services;

conducting inspections, investigations, reviews of respective cases;

sending binding requests for information and documents to market players, relevant officials;

dismissal/suspension of the officials of market participants;

taking part in relevant court proceedings as a third party;

setting requirements for the specification of derivative contracts;

determining transactions where clearing services must be provided by a central counterparty under derivative contracts;

in established cases, filing a claim (application) with a court seeking termination of a joint-stock company.

The Draft Law empowers the Commission to appoint a temporary director of a professional participant in the capital markets (except for banks) for a period of up to 12 months. This may raise a number of questions about corporate governance during the period of activity of such a temporary director.

The Draft Law envisages to establish a competition commission for the selection of candidates. Representatives of the European Commission, the International Organization of Securities Commissions (IOSCO), the International Organization of Pension Supervisors (IOPS), and donor institutions may take part in the activities of the Commission in an advisory capacity.

The maximum sum of salary and possible fringe benefits and bonuses are also set.

The Draft Law envisages that market players shall be released from liability if they have acted in accordance with an explanation or recommendation issued by the Commission.

The Draft Law provides for very detailed procedures for conducting inspections and investigations.

It also enables the Commission to impose provisional attachments on property, including financial instruments and funds, followed by filing an application with an administrative court seeking seizure of such property.

The Draft Law provides for significant financial sanctions for committing an offense. For example, a number of violations entail sanctions to a sum of up to UAH 81 million or up to 10% of total annual turnover. At the same time, according to transitional provisions, in place temporarily, for the period until 31 December 2030, the sums of financial sanctions shall be applied on an increasing scale, not in full. In this regard an interesting change is the opportunity for market players to conclude settlement agreements with the Commission for addressing the consequences of an offense.

The provision on informers is among the changes described in detail in the Draft Law.

Summarizing our review of the Draft Law, it would be expedient, based on the established rule-making practice in Ukraine and the needs of the rapidly changing market, to provide detailed, procedural issues at the level of subordinate legislation.

The financial capabilities of the regulator, to be able to provide proper effective supervision and attract professionals is an important element of successful market development. However, it is questionable as to what extent the proposed provisions will resolve the situation.

The introduction of the concept of regulatory contributions is debatable in terms of economic feasibility, and correlate with established practices in taxation and accounting. An alternative approach could be to set a fee for administrative services at a sufficiently high level, both for the purpose of financing the activities of the Commission and as a fee for the entry of players onto the market. After all, it is likely that one of the important tasks of the Commission is to remove junk securities and insolvent players from the market.

On 2 March Parliament adopted the law that provides tax benefits for businesses that implement investment projects with significant investments (Draft Law No. 3761). What were the amendments to the Tax Code of Ukraine and how significant are they for investors?

Nina Bets, Head of Tax Practice, Ilyashev & Partners

On 13 February 2021, the Law of Ukraine On State Support for Investment Projects with Significant Investments came into force, and on 2 March 2021 the Verkhovna Rada of Ukraine adopted in the first and second readings two Draft Laws, No. 3761 and No. 3762, on tax and customs benefits whose provision the said law stipulates. This is the new program for investors announced by Ukrainian President Zelensky in January 2020 at the World Economic Forum in Davos and which became widely known as the investment nanny program.

In order for investors to take advantage of state guarantees the sum of the investment must exceed EUR 20 million and the implementation period must be no more than five years. The potential investment project must create at least 80 jobs with the average salary being at least 15% higher than last years average salary paid for a similar activity in the particular territory.

Investors are welcomed in the processing, mining and waste management industries, transportation and warehousing spheres, postal and courier activities, logistics, education, R&D, healthcare, art, culture, sports, and tourism and recreation fields.

It is of importance that such state guarantees can be used not only by the investors planning to enter the Ukrainian market, but also by those who have been operating here for some time and meet the above criteria.

For the implementation of an investment project the eligible investors will be exempt until 1 January 2035 from:

VAT applied to operations on imports of goods into the territory of Ukraine;

corporate income tax within five years from the date of commissioning of the facility;

taxation of import duties on equipment.

At the discretion of local authorities investors may, in certain cases, be partially or fully exempt from land use fees and charges.

It should be mentioned that the current version of the Tax Code of Ukraine does not stipulate the existence of the bodies involved in the regulation of the particularities of collecting VAT, corporate income tax, and land fees and there is no clause in the Customs Code as to the exemption from import duty charged on equipment.

By introducing the mentioned tax benefits, legislators are expecting to attract funds for the development of those industries that currently require investment the most and, at the same time, avoid significant losses for the Ukrainian state budget.

One of the major sources of beefing up the state budget today is VAT, and investors are not exempt from this, except for operations on the import of goods into the territory of Ukraine related to the implementation of an investment project. Replenishment of the budget is also expected at the expense of settlement of personal income tax and a unified social tax charged for hired employees.

The legislation provides for the establishment of a special official government authorized body responsible for rendering support to investors and assisting them in cooperation with other government agencies and institutions during the projects implementation. The main task of this body is to protect investors against possible unfair and sometimes repressive actions on the part of law-enforcement and other public authorities on the territories of implementation of projects.

There are cases when foreign investors in Ukraine suffered from hostile takeover attempts or bribe solicitation on the part of local bodies and authorities and, unfortunately, being unable to receive adequate support and protection from law-enforcement agencies, were forced to close their investment projects and leave our market. The above-mentioned government body will be in charge of preventing such cases in the future.

According to the law, the special government body will be responsible for the provision of information and advisory assistance to investors, interaction with public authorities and local self-government authorities, etc. In other words, it will be a so-called single window for investors to which they will be able to turn to should they need to resolve certain issues in the process of implementation of their projects.

Such investors will be provided with the preemptive right to use state or communal lands for the implementation of their large-scale investment projects with the preferential right to acquire the title to such lands after the expiry of the term of the special investment agreement (except in the case of its early termination).

An investor wishing to implement its large-scale investment project and receive state support provided by legislation will need to prepare and submit an application, documents confirming the applicants compliance with the requirements as to the amount of the investments, term of their implementation, number of corresponding salaried employees, technical and economic feasibility study of a large-scale investment project (subject to the mandatory indication of the social effect of its implementation) and a draft of the special investment agreement to the official state authorized body. A special investment agreement should be concluded between the investor and the Cabinet of Ministers of Ukraine, and the local self-government authority. This agreement will define the form and the scale of state support provided to a major investor making large-scale investments throughout the term of validity of the special investment agreement. The agreement is to be concluded for a period agreed between the parties, but for no more than 15 years.

It is important that the parties to a special investment agreement are free to choose the method of dispute resolution, including the possibility of lodging claims to Ukrainian courts, resorting to mediation procedures, ordering non-binding expert examinations, using national or international commercial or investment arbitration procedures, including in foreign jurisdictions.

Draft Law No. 4364 On Payment Services was adopted in the first reading. What does the concept of open banking mean, and what consequences should we expect after its adoption?

Maksym Hlotov, Senior Associate, Baker McKenzie Kyiv

On 19 February 2021 the Ukrainian Parliament adopted in the first reading a draft payment services law implementing a regulatory framework for open banking similar to EU Directive 2015/2366 (PSD2). PSD2 requires banks to share data from their clients payment accounts free of charge with third party providers (TPPs) without any underlying commercial agreement thereby allowing TPPs to offer new payment services to consumers. To comply with PSD2, banks must build and publish an Application Programming Interface (API), which permits a piece of software to read data from the system of the API publisher (in this case, a bank).

Publication of APIs was not invented by the authors of PSD2; they were in use before the adoption of PSD2. Many Ukrainian banks publish their own APIs to enable collaboration with the API developers community. Some publish a partner API where a specific authorization is required for access, which is available between different companies to facilitate commercial projects.

But the key difference between then and now is that before PSD2 the sharing of account data (i.e., publishing APIs) was not mandatory. In Ukraine, this particular aspect of PSD2 was the subject of much debate and controversy between the NBU and market participants.

However, to make this concept work the market may need to come up with a standard for APIs, because it is not so straightforward to pull data from a third party system (i.e., from a banks numerous information systems). A standard API can make the operation of a TPP easier in the sense that it need not worry about how to access data, but rather focus on building the service it offers to the consumer.

The Draft Law envisages that the NBU will adopt data security and communication requirements regarding end users, banks and TPPs when accessing consumers accounts. Moreover, the NBU has indicated that it would set up a market stakeholders working group shortly to consult on the issue of API standardization. It seems that one of the options to move this initiative forward (once the draft law has been adopted) might be to leverage the existing market experience of tech savvy banks in developing an API economy.

The Ukrainian Parliament adopted Draft Law No. 4507 On Energy Efficiency in the first reading. What new regulations does this Draft provide, and what results can be expected if it comes into force?

Alexander Burtovoy, Partner, Antika Law Firm

On 4 March the long-awaited Draft Law of Ukraine On Energy Efficiency (registered by Members of Parliament under No. 4507 of 17 December 2020) was passed in the first reading by 270 votes in favor of the Law. The latter underscores the need for this issue, and everyone understands that it is time to define precisely what energy efficiency and energy saving are, as well as to introduce current new principles in European law and the world community. For example, in the form of European Union directives 2012/27/EU and 2010/31/EU.

The main reason, as has become traditional, is to fulfill the commitments undertaken by Ukraine under the Association Agreement between Ukraine and the European Union. It is envisaged that the legal basis for the transposition of most articles of EU legislation should be the Law On Energy Efficiency. Together with the number of votes for the Law it gives grounds to perceive the Law positively. Despite that, our lawmakers confuse, for some reason, these tasks in their implementation. On the one hand, the Law is a partial codification of the rules governing the energy efficiency industry. On the other hand, the Law is perceived heavily since it contains amendments to a range of laws, which are not directly related to the current law, and are based on the said Directives.

The authors emphasize that the Law is developed within the framework of the implementation of Directive 2012/27/EU. But it should take into account not only the said Directive, but also the EU Directive on RES, the 4th energy package, climate goals and the National Plan to increase the number of buildings close to zero. Almost 10 years have passed since the adoption of the 27th EU directive implemented by this Law. We have an obligation to adopt this framework directive and, in accordance with current legislation, to consult with the EU on the final version. Interestingly, in the EU itself, this Directive was updated a couple of years ago, and that is why even this adopted Law can be regarded as outdated. Such a situation demonstrates that we are late with implementation and it already requires consideration of improvements to take into account the new practice of the EU.

In addition, this Law should replace the current Law On Energy Saving, the first version of which was adopted in 1994 and which currently does not meet the requirements of these times. The aim of the Law is to cover a whole range of questions of energy efficiency regulation, which had to be adopted several years ago and form a backbone for further laws and regulatory acts. Instead, more specialized legal instruments were adopted over the last few years without even having a framework skeleton.

Nevertheless, there is hope that refinements will be made to the Law and we will have a law on energy efficiency, which will be fundamental in the implementation of the energy efficiency policy of Ukraine.

On 5 March Draft Law No. 5203, which proposes amendments to the Law of Ukraine On the State Regulations of the Activities on Organizing and Conducting of Gambling was registered, as were some alternative drafts. What are the proposed amendments, and which version of the draft law do you regard to be the most suitable?

Oleksandr Ilkov, Partner, Hillmont Partners

Olena Stepanova, Associate, Hillmont Partners

While Draft Law No. 5207 and the ones that are alternatives to it are allegedly aimed at preventing the addiction of gambling, most of them contain provisions regarding other elements of gambling regulations. Even more three of the draft laws in question do not relate at all to the problem of gambling addiction: Draft Law No. 5207-1 concerns only procedure of appointment of members of Gambling Commission, Draft Law No. 5207-3 provides solutions for issues, hindering development of the market, while Draft Law No. 5207-4 is aimed at totally restoring the ban on gambling.

Draft Laws Nos. 5207 and 5207-2 suggest introduction of different combinations of various restrictions for gambling, including introduction of additional requirements to the advertising of gambling and new restrictions regarding the places where gambling facilities may be opened. While countering the addiction of gambling is necessary, it is worth noticing that most additional restrictions (in particular, in terms of locations where the opening of slot machine halls is banned) are impracticable and therefore, may have an effect contrary to the expected one.

Three Draft Laws (5207, 5207-1 and 5207-3) contain provisions aimed at resolving the collision regarding procedure for selection of members of the Gambling Commission. The main difference between the procedure suggested in Draft Law No. 5207 and two other ones is that it involves a Parliamentary Committee in the selection process. While some MPs strongly support this model, it raises an issue of constitutionality, given the Ruling of the Constitutional Court of Ukraine No. 1-11/2009 of 27 May 2009.

In terms of development of the gambling market, Draft Law No. 5207-3 may be the best of the alternatives, as it tackles some of the issues that prevent many international operators from entering Ukrainian market, such as server localization requirement and equipment certification issues. However, suggested solutions are still rather partial.

As of now, we see the lack of support for gambling-related initiatives in Parliament, so it is unlikely that Draft Law No. 5207 or any of the alternatives will be adopted in the near future. In any case, the gambling market is now much more interested in adopting Draft Law No. 2713-d, which introduces gambling-related amendments to the Tax Code of Ukraine.

On 17 March Draft Law No. 4303 was registered in Parliament. What does it include?

Igor Reutov, Head of Department, Lawyer, LL.M Gramatskiy & Partners

Draft Law No. 4303
On Incentives for the Development of the Digital Economy in Ukraine, developed by the Ukrainian government provides a new legal framework for the IT industry in Ukraine. The Draft will create a new IT cluster called Diia City with favorable and flexible regulation, making it clearer and more understandable for big companies when they enter the Ukrainian market. The document consists of specific features such as gig-contracts and gig-specialists that align Ukrainian business practice in the IT sector (including individual (private) entrepreneurs) with the expectations of big players who often lack understanding of such practices and have high-risk expectations.

Under the proposed legislation, businesses that meet the legal requirements can be registered as residents of Diia City and benefit from the preferences of that residence. Diia City residents will be entitled to hire gig-specialists who will be officially entitled to such similar benefits as employees. For example, annual leave, social insurance, maternity leave, sick leave, a 40-hour week, etc. At the same time, gig-specialists are not considered employees. The residents of Diia City will have the right to terminate the gig-contract with a 30-day notice period, control and monitor the performance of the contract, bind the gig-specialist via corporate policies, etc. Copyright, an important issue in IT, has also received its specific regulation consistent with the existing legal framework economic rights belong to the companys moral rights and remain with the gig-specialists. In order to strengthen the position of companies, the Bill recognizes such agreements as non-disclosure agreements (NDA), non-competition agreements (NCA), and non-solicitation agreements (NSA), which are widely used by parties but currently lack regulatory support and recognition. The bill can make these agreements efficient tools for protecting businesses.

The general requirements for Diia City Residency are as follows: 1) conducting IT business (or others listed in the Bill) and receive at least 90% of income fromsuch activity; 2) average monthly remuneration of employees and gig-specialists should not be less than EUR 1,200; 3) the average number of employees and gig-specialists should not be less than nine a month. There are also certain limitations, such as Ukrainian registration of the company, beneficial owners should be disclosed; shares owned in the company by the Ukrainian government (or local authorities) should not exceed 25%; likewise, shareholders holding 25% or more should not be registered on the territory included in the FATF-list; direct or indirect shareholders cannot be residents of the aggressor state (Russia) and others.

Another major feature of the Diia City system is taxation, which, however, is outside the scope of the bill. The promoters of Diia City insist that a separate bill on taxation will set out low tax rates compared to a regular regulation and provide the following tax rates: 5% personal income tax; 1.5% military levy and 22% social tax on the minimum salary only.

To sum up, the aim of the document is to get a compromise between the state and IT-business the model, which, on the one hand, includes protection of gig-specialists, and provides them almost the same benefits as regular employees have and, on the other hand, the companies receive flexibility in engaging gig-specialists and control over their performance without onerous employment regulations. In addition, reasonable taxes are promised to be an integral part of the Diia City regimen.

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