Crux (#9-10 September-October 2021)

Legal Digest

In the last few months the UJBL editorial team has been monitoring all significant legal initiatives that shouldnt go unnoticed. The most important novelties are the Law On Virtual Assets and the Draft Law On Securing Property Rights to Real Estate that will be Constructed in the Future, that has finally been adopted. Several draft laws on energy (like No. 5494) and taxation (No. 5600), also have great potential to be adopted and are definitely worth your attention. We asked prominent lawyers to share their points of view on these and other matters.

The Ministry of Energy of Ukraine brought to public discussion the Draft Law on making amendments to several laws of Ukraine on stimulating the production of electric energy from renewable energy sources on a market basis. What are its provisions about?

In August the Ministry of Energy of Ukraine published this draft, which introduces a Feed-in-Premium system, or Contracts for Difference, for producers from renewable
energy sources (RES) instead of fixed payments at the green tariff.

The Draft Law grants the right to RES producers to leave the balancing group of the state-owned Guaranteed Buyer (the offtaker), freely sell electricity on the market with the possibility of receiving a premium in the form of the difference between the established green tariff or the auction price and the market price. This instrument should help to resolve the liquidity issue connected with payments by the Guaranteed Buyer and reduce the reliance of RES producers on the Guaranteed Buyer as their only source of cash flow. As of 20 September 2021, Ukrenergos debt to the Guaranteed Buyer, which is the source for the green tariff payment, came to UAH 24.1 billion (UAH 12.5 billion in 2021,
UAH 11.6 billion in 2020).

The Draft Law also improves the auction support model in accordance with best world practice.

However, the Draft Law does require minor amendments. In particular, it should also provide the procedure for those RES producers, who started to work under the Feed-in-Premium support system and have left the balancing group of the Guaranteed Buyer, but want to return to the green tariff support system and to the balancing group of the Guaranteed Buyer.

In addition to the introduction of Contracts for Differences, the Draft Law proposes to cut off projects that are eligible for a green tariff, namely, projects of RES producers that are not obliged to participate in auctions commissioned from
1 January 2020 to 31 December 2022. Such projects include wind energy projects with a capacity of less than 5 MW and solar energy projects with a capacity of less than 1 MW.

Moreover, the Draft Law proposes the amendment of Article 15 of the Law of Ukraine On Lease of State and Communal Property with regard to the leasing of property without holding an auction. The Draft Law grants the right, without holding an auction, to the winners of RES auctions to lease state and communal property, under the terms of which roofs and/or facades of buildings and other capital structures are provided for lease for the construction of solar power plants.

On 1 September the period of voluntary declaration of assets started. How do you evaluate the previously made amendments to the Tax Code, and how does the declaration mechanism operate at the moment?

On 1 September 2021, the one-time (special) assets declaration procedure started, which should last one year till 1 September 2022.

Since it began, certain explanations have been published on the tax authoritys website. Additional legal acts were also adopted to define the procedure for the opening of special accounts and to establish the form of special tax declaration (return).

In order to be able to declare cash, it must be deposited into a special account opened with any Ukrainian bank. The bank must carry out a proper check of the declarant and the source of the declarants funds. If the bank discovers that the declarant is on a list of persons involved in terrorist activities or to whom the international sanctions, special economic or other restrictive measures apply, such a person must be denied the opening of an account. The banks shall also refuse to open an account to persons whose funds originate in the country recognized as the aggressor state (Russia) pursuant to legislation, or if there are reasons to believe that these funds are the proceeds of crime.

The person who deposited the funds on a special account must, when submitting the one-time declaration, provide a document confirming such deposition (statement/certificate). If the funds are already deposited in a current bank account, there is no need to transfer them to the special account for the purposes of declaration only.

The special declaration should be submitted to the State Tax Service through the taxpayers account online. The submitted declaration can be clarified by submitting a special new declaration. These declarations will be subject to special checks. If the controlling body detects any arithmetic or logical errors, the declarant will have to pay the underpaid amount within 10 days from the receipt of the relevant notice and submit a clarifying declaration within 20 days from the receipt of the same.

Together with the declaration, the declarant is obliged to file documents confirming the monetary value of the declared objects. In the event that the declared object is located abroad, the assessment of such object should be carried out according to the legislation of the country of its location. All funds deposited on bank accounts must also be documented.

Supposedly, those persons who own less than UAH 400,000, an apartment of less than 120 square meters, a house of less than 240 square meters, non-residential premises of less than 60 square meters, a land plot of less than 2 hectares, and a vehicle worth less than UAH 400,000 will be exempt from declaration. Those who own in excess of the aforementioned amount/space should be able to explain that such assets were acquired from income, taxes on which were paid in a timely manner and in full; otherwise, such taxes are to be paid now.

If the person that owns more than UAH 400,000 expresses the desire to exercise the right to file a declaration, legislators grant such a person the right to decide independently to declare the entire amount or only the amount that exceeds UAH 400,000.

In addition, if the assets owned by a person were received as a gift or inherited from a first or second degree relative, then such assets are not subject to declaration.

The tax amnesty provides for the possibility to pay a one-time tax to the state budget in the amount of 5% of the cost of assets located in Ukraine. This payment can be made in installments over a period of three years, but the rate will be 6% (first payment within 30 days from the date of filing of declaration; second by 1 November 2023; third by 1 November 2024).

If the assets are located overseas, the tax rate will be 9%, and in the event of payment of the tax in installments it will be 11.5%. The first declarants of foreign assets will receive a discount: rates of 7% and 9.5%, respectively, will apply to those who file their declaration before 1 March 2022. When buying sovereign bonds with a maturity period of longer than one year, the preferential tax rate will be 2.5%, and if paid in installments it will be 3%.

Today, global trends demonstrate the worldwide desire to achieve maximum transparency in the payment of taxes and completely narrow down any mechanisms of tax evasion. Ukraine is also moving towards this, but it is not yet clear whether Ukraine is truly ready for such transparency. Will the Ukrainian tax amnesty be as successful as in Italy or Argentina, or maybe as disastrous as in Georgia? September 2022 will show us.

Draft Law No 4416-1 about industrial parks was adopted in the second reading. In what ways will it influence the development and activities of business?

On 7 September 2021 the Ukrainian Parliament approved in its second reading Draft No.4416-1, which is intended to implement incentives in industrial parks (IPs) and to increase their investment attractiveness.

To this end, the document:

expands the concept of IPs (i.e., allows the performance of business activity in industrial and/or domestic waste processing (except for waste dumping) within IPs);

defines the activities that are prohibited within IPs (namely, production of certain excisable goods and certain activities subject to licensing); and

outlines the facilities that can operate and/or be located within IPs (e.g., logistical infrastructure, office premises of IP stakeholders, science parks, accelerators, laboratories to develop innovative technologies, etc.).

Perhaps the most significant change introduced by the bill is a specification of statutory incentives for IP stakeholders. According to the document, the initiators of establishing the IPs, management companies and members of IPs will be entitled to the following incentives:

full or partial reimbursement of interest payments on loans for the development of IPs and/or for business activities within IPs;

donation of funds on a non-refundable basis for the development of IPs and/or construction of infrastructure facilities necessary for the operation of industrial parks (e.g., roads, facilities for supplying heat, gas, water, electricity, etc.); and

reimbursement of expenses for connection to engineering and transport networks.

It is expected that in the period from 2022 to 2026, the Government will allocate at least UAH 2 billion annually from the State Budget of Ukraine to finance the above-mentioned incentives.

The Draft Law was positively perceived by major industrial players as the legislator specified that the Government would allocate specific funds to support IPs.

The document also stipulates that the state and municipal bodies may grant tax and customs exemptions. However, there is no specification of such exemptions. At the same time, there are currently two draft bills registered in Parliament (No.5688and No.5689) specifying tax and customs exemptions for members of industrial parks, which include, for example, exemptions from CPT, VAT and state duties, lower rates of land tax and incentives for the payment of real estate tax subject to a respective decision of the municipal body. Alongside the Draft, these two bills can establish a regulatory framework that will provide IP stakeholders with enforceable legal mechanisms to obtain statutory incentives for developing IPs in Ukraine. Consequently, this can boost the activity of industrial parks in Ukraine and help to increase the investment attractiveness of Ukraine.

On 8 September the Ukrainian Parliament adopted in the second reading Draft Law No. 3637, which enables the legalization of virtual assets and business in this field in Ukraine. How do you evaluate the provisions contained in this document?

The Ukrainian Parliament adopted the Law On Virtual Assets on 8 September 2021.

The market of virtual assets was indefinite and unregulated, and participants of this market went unprotected under Ukrainian legislation. The main aim of this piece of legislation on virtual assets was to define a virtual asset, its legal status and to regulate issues of property rights and transactions with such assets in Ukraine.

As a result, cryptocurrencies have received legal status in Ukraine and the markets participants have received the right for judicial protection of their assets. Moreover, the Law empowers international stock exchanges, which trade virtual assets, to enter the Ukrainian market legally and officially.

The Ministry of Digital Transformation of Ukraine will become the national regulatory body. Furthermore, this Law determines the list of professional service providers of virtual assets and defines their registration. Thus, a new regulatory body called the National Service for Regulating the Circulation of Virtual Assets will be created. It will issue permits to crypto companies for operating in Ukraine. This piece of legislation will also adapt the FATF recommendation on financial monitoring of the market of virtual assets into Ukrainian legislation.

However, there are some shortcomings. First, being a framework law, it only establishes a legal status of virtual assets in Ukraine and does not create any practical mechanism and instruments for its implementation. Second, the Law will come into force only after Parliament has adopted amendments to the Tax Code regarding taxation of transactions involving virtual assets.

This Law should have a positive effect overall on the development of the virtual assets industry in Ukraine. It should help to increase revenues to the State Budget through taxes from transactions with virtual assets. Nevertheless, in order to be effective, the Law requires additional laws to be adopted.

On 8 September the Verkhovna Rada of Ukraine adopted Draft Law No. 5091 On Securing Property Rights to Real Estate that will be Constructed in the Future in its first reading. How will it influence investors, and what is your view on this draft?

On 8 September 2021, the Draft Law On Securing Property Rights to Real Estate that will be Constructed in the Future was adopted at the first reading stage by the Verkhovna Rada of Ukraine. It now awaits the second reading. The Draft Law aims to offer more protection to investors in construction by introducing the following changes, which can be regarded as positive from the perspective of investors:

The Draft treats apartment buildings that are being constructed as buildings that consist of future real estate items (i.e., apartments, parking places, storage rooms, etc.) Following the commissioning of apartment buildings, such items will become independent real estate items and ownership to them will be automatically registered in the name of investors.

A developer will only be allowed to sell future real estate items if the developers property rights to future real estate items and apartment buildings are registered in the State Register of Property Rights to Real Estate, which will be possible as soon as the construction permit for the construction of the apartment building(s) has been obtained. According to the bill, a developer is allowed to seek funding (either directly or indirectly) from individuals and corporates, which will receive constructed real estate items in ownership, exclusively by way of execution of agreements on the sale and purchase of future real estate items.

The Draft Law aims to protect the interests of investors by introducing the concept of guaranteed portion of construction. The guaranteed portion is the number of future real estate items to which the property right of the developer is registered. A developer will be prohibited from alienating future real estate items that represent the guaranteed portion until the date of commissioning of the apartment building. Developers are expected to be incentivized to achieve commissioning in order to be able to sell real estate items that were included in the guaranteed portion.

The developer will define the amount of the guaranteed portion at the time the property rights to future real estate items are registered in the developers name. The proportion of the amount of the guaranteed portion to the total area of future real estate items will be set by the Government.

To further secure the interests of investors, this Draft Law also requires that the developer disclose certain information about the construction on its website, including information on the progress of construction (photographs of the object and the state of performance of the construction schedule), information on future real estate items that have already been sold, and the draft agreement on the sale and purchase of the future real estate item. Compliance with these requirements is expected to contribute to the transparency of construction.

On the other hand, this bill does contain certain deficiencies, which need to be worked out further, such as inconsistencies in terminology, non-compliance with the current procedure for the state registration of property rights in the State Register of Property Rights to Real Estate and poor development of the concepts of future real estate item and special property right to it. The bills provisions must also be made more coherent with the Law of Ukraine On Financial and Credit Mechanisms and Management of Property in the Course of Residential Construction and Operations with Real Estate.

On 9 September 2021, the Ukrainian Parliament adopted Draft Law No. 5494 on the development of biomethane production. What is this draft about?

On 9 September 2021 the Ukrainian Parliament adopted the Draft Law On Amendments to the Law of Ukraine On Alternative Fuels for the Development of Biomethane Production in the first reading. According to the explanatory note to the draft, biomethane can be injected into gas pipelines in the event of compliance with technical norms and safety standards. However, in current Ukrainian legislation there is no mechanism for biomethane verification to ensure its further supply to the gas transmission system. Nor is there a clear definition of biomethane.

The Draft Law defines biomethane as biogas which, in terms of its physical and technical characteristics, meets the requirements of natural gas regulations for supply to the gas transmission and distribution system or for use as motor fuel. In other words, biomethane is a biogas brought to the quality of natural gas, which usually contains 95-98% methane.

Biomethane plays a key role in EU carbon neutrality targets. Meanwhile, Ukraine has significant potential for biomethane production based on agricultural materials. According to assessments by the Bioenergy Association of Ukraine, the countrys biomethane production potential is 7.8 bn cubic metres per annum. However, the possibilities for developing biomethane production are restricted in Ukraine due to a lack of regulation.

Taking into consideration the fact that biomethane has the same characteristics as natural gas, biomethane cannot be supplied without confirmation of its origin. For this reason, the Draft Law provides for a biomethane register and the procedure for forming guarantees on the origin of biomethane. In other words, the adoption of the Draft Law will provide an opportunity to verify biomethane by providing guarantees of origin for biomethane supplied to the gas transmission system and for export with the help of the biomethane register.

It should also be noted that the adoption of this Draft Law could improve the attractiveness of biomethane projects in Ukraine for potential investors. Taking into consideration the large potential of agricultural raw materials for biomethane production and the countrys developed gas distribution network, biomethane production could enable Ukraine to gain energy independence.

Draft Law No. 5600 on taxation is being prepared for its second reading in the Ukrainian Parliament. What is this draft about and how will it influence the business sector?

First of all, it should be noted that the revision of this Draft Law for the second reading takes into account several amendments that were previously proposed by business and the professional environment: provisions on tax pledge for the period of challenging tax notifications were excluded, rules on taxation of VAT on the second and subsequent deliveries of property were excluded, and some errors were corrected.

In general terms the document remained very fiscal, as it gives even more powers to the fiscal authorities and does not increase the investment attractiveness of business in Ukraine and does not shift the tax burden onto the oligarchs, as stated by the Government. The draft remains one that tries to close the budget deficit primarily at the expense of small and medium-sized businesses and citizens, which will distort the real estate market, lead to an increase in prices for electricity, Internet services and much more.

It remains to be seen what version of the draft will be adopted but, as practice shows, it will be adopted.

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