Crux (#04 April 2015)

Deregulation in Practice

Ukraines statements on deregulation are finally being translated into legislation. The Acts of Ukraine On Licensing of Certain Types of Business Activity of 2 March 2015, No.222-VIII and On Changes to Some Acts of Ukraine on Facilitating Business (Deregulation) of 12 February 2015, No.191-VIII have already been signed by the President of Ukraine. The UJBL initiated discussion on significant provisions of these comprehensive documents, which are not widely commented on in the media. We suggest dwelling specifically on the proposed initiatives.

What impact would termination of licenses have for certain types of business activities? Can the proposed list of such types of business activities be viewed as exhaustive? Is it necessary to make appropriate changes to the legislation to ensure the adequate control over the conditions of license revocation?

Nataliya Gaidai, associate, Antika Law Firm

The note to the Act of Ukraine On Licensing of Certain Types of Business Activity signed on 25 March 2015 by the President of Ukraine and that comes into force on 28 June 2015 explains the main objective of its adoption, namely the necessity to introduce systematic improvements and to update the order, all stages and procedures on licensing of business activities by making them simpler and to shorten the list of certain types of business activities.

Licensing is one of the ways for the government to have a regulatory control over the economy. The licensing itself is not a negative notion, because it is an important part of the administrative system of business activity and is considered as a rate of flexibility to conduct business in Ukraine. But the procedure for obtaining a license has, due to its non-transparency, created a number of conditions for corruption that, in its turn, caused certain problems for running a business and created an unattractive investment climate in Ukraine.

The Act cancelled licenses in 20 fields of business activities. For instance, security guard activities, creating forms for securities, conducting land evaluation works and land tenders, collecting and using information that includes credit history, sales of liquid fuel made from biomass and biogas, sales of pesticide and agricultural chemicals, etc.

In addition, by cancelling such a way for the government to regulate business activity, the Act determined other ways to perform it. For instance, customs broker activity shall not require a license but getting a permit is a must to conduct it. The license to conduct land evaluation works shall be cancelled but the necessity to register in the State Register of Certified Engineers and Land Surveyors remains. The construction of objects of I-III categories of complexity does not need to be licensed. The objects of IV-V complexity still need to be licensed.

License cancelation does not mean the total deregulation of business activity (because the activity related to pyrotechnic devices, producing and selling weapons and military equipment, service ammunition, etc. shall be under appropriate control). It shall be aimed at making the procedures for running business simpler and removing deliberately created barriers.

In order for such licenses cancellation to be considered as a step to bring the Ukrainian legislation into conformity with EU legislation it is necessary to make further amendments to the current legislation in order, first of all, to avoid conflict of law taking place due to the technical mistakes of the law maker, secondly, to create regulative influence on economy that shall control business, creating favorable conditions but not the barriers.

The list of types of business activities, where the licenses shall be cancelled is rather extensive but, in our opinion, it is supposed to be sufficient for the beginning. The influence of the Act on regulation business activity shall be visible when it works in practice. We hope that the Act shall simplify the beginning of business activity as well as its running, increase the level of protection of investors rights and simplify licensing and agreement procedures.

Act No.191-VIII provides for elimination of permit centers as a separate component of administrative services, and provision of administrative services related to the issuance of permits for business activities through the administrative services centers (along with the growing number of such centers), and strengthening responsibility of administrators for failing to perform official duties. Are these changes efficient for those who would use the services? Would the new system still have room for corruption abuse, manipulations, and the collection of unjustified payments from citizens?

Svitlana Chepurna, partner, Asters

Taken alone, the liquidation of permit centers, with administrative service centers stepping into their shoes, appears to fall short of bringing the long-awaited relief to business from the administrative burden associated with obtaining permitting documents. After all, permit centers have already been a part of administrative service centers for some time. At first sight, this step may look as mere administrative reshuffling.

Nevertheless, after the Act takes effect, administrative services and permits effectively will be provided through administrative service centers as a single window. A larger number of administrative service centers should make it easier for businesses to seek and get permits.

Furthermore, elimination of permit centers should facilitate deployment of e-government technologies for government-to-citizens and government-to-businesses interaction relating to permits and administrative services under a single institutional umbrella. Subsequent government deregulation efforts should be aimed,inter alia, at enabling companies and individuals to apply and pay for, as well as obtain the results of, administrative services electronically to the extent possible. Genuine reforms should also be accompanied by a further reduction in the number of activities requiring a permit, as well as the number of documents required to obtain a permit, thereby opening access to Ukrainian market to new entrants and investors.

The Act No.191-VIII provides a number of measures to decentralize the governments functions in the regulation of urban development. How would it impact developers?

Lina Nemchenko, partner, Kiev office of Baker & McKenzie

The Act is aimed at, among other things, simplifying permit procedures in town planning and making the relevant services client-friendly.

The Act authorizes the executive bodies of village, settlement and city councils to (i) grant, receive and register the documents required for conducting preparatory and construction works; (ii) perform architectural and building inspections and (iii) commission the objects. Prior to the Act, the State Architectural and Construction Inspectorate and its regional departments performed these functions.

Overall, the decentralization of permit procedures in town planning should be welcomed. However, most of the provisions on town planning were removed from the initial version of the Act when it was submitted for the second reading due to the existence of another Draft Act governing the above procedures in more detail.

Both documents should be considered and it remains to be seen what will be the final arrangement as the regulation of the town planning issues will mainly be provided in the Draft Act which is yet to pass the second reading in the Parliament. Currently, uncertainty remains as to how exactly the Act and the Draft Act will affect the developers.

How would Act No.191-VIII affect land owners in terms of their agricultural business?

Anatoliy Miroshnychenko, attorney at law, scientific counsel, head of agrarian and land law practice, ILC EUCON

The Act addresses several issues arising in agricultural land use. Its impact will be mostly positive, though limited.

In particular, the Act significantly reduces the number of essential clauses in land lease agreements (Article 15 of the Act On Land Lease). This amendment is clearly positive.

The Act directly authorizes the owners of land plots designated for subsistent farming to lease these land parcels to legal entities for commercial farming (amendments to Article 33 of the Land Code) without any permitting procedures. It must be noted that the practice of such lease existed in the past, but its legality was sometimes challenged. This amendment should be welcomed, although its effect is minor.

The special requirements governing crops use and rotation are lifted or loosened (the Acts On Lands Protection, On State Expertise of Land Survey Documentation).

Another amendment (Article 93 of the Land Code, Article 19 of the On Land Lease Act) is establishing a minimum 7-year term of agricultural land lease (this provision also covers subsistent farming). In my opinion this amendment is harmful. Although there is the problem of stability of land lease relationships, the solution is not proper. In most cases the parties will find a way to conclude an agreement with a shorter period (if this is their intention), but they will have to incur higher transaction costs and additional risks.

How can Act No.191-VIII influence development of food production in Ukraine? What strategic issues important for the industry need additional legislative regulation?

Anna Zorya, partner, head of agribusiness, Arzinger Law Office

The Act introduces several novelties concerning agricultural land. The minimum duration of a lease of agricultural land, designated for commercial agriculture, private farming or farming, cannot be less than 7 years. Previously, there was no minimum duration for land leases (while the maximum duration remains 50 years). The Act further expressly allowed the leasing out of agricultural land designated for private farming to companies for commercial agriculture without changing the designation. The novelty is favorable for many agricultural holdings, which lease land plots from numerous individuals without changing their designation.

According to the provisions in the Act obligatory documents on crop rotation and relevant state control is eliminated. Therefore, no fines can be imposed for the absence of crop rotation documents. This novelty will reduce the corruption component in doing business.

Important changes are to be introduced in respect of products that are already certified in the European Union such products will receive a Ukrainian certificate without any additional procedure. Such an approach is aimed at simplifying EU/Ukraine trade.

Other significant improvements in the agricultural sector that should be taken into account among others are creating a new type of entity family farm, simplifying land lease contract registration, adopting the Act on animal feed, etc.

The above changes should have a positive impact on the business environment and so create favorable conditions for attracting foreign and domestic investments and improve the position in the Doing Business Ranking.

How does Act No.191-VIII regulate businesses with scrap metal? What changes can be expected in this area?

Victoria Buzhor, senior associate, AstapovLawyers

The said Act is declared to be aimed at business activities deregulation, which will improve the business environment in Ukraine. Suggested changes by the Act, inter alia, concern regulations in the sphere of metal scrap in Ukraine. It is worth admitting that during the process of consideration of the Act in the Ukrainian Parliament, it was significantly amended, and, at the end, with respect to the sphere of metal scrap regulation only changes concerning administrative and criminal responsibility survive. Still, such changes to the administrative and criminal liability require further clarifications in order to eliminate potential collisions due to upcoming changes in the licensing of activity in the sphere of metal scrap.

Thus, it is hard to say that the Act in any manner facilitates declared deregulation in the sphere of metal scrap. At the same time, the scrap metal market in Ukraine, which significantly suffers from current economic and political turmoil, requires to be re-launched by means of creating a competitive environment, reducing bureaucratic burden (read: elimination of corrupt practices) and, in particular, abolition of: licensing, allocation of quotas for export of scrap and registration of contracts for export of metal scrap. The said initiatives are generally supported by the Ukrainian government and Parliament, in particular, abolishment of licensing in the area of scrap metal is foreseen in the Act of Ukraine On Licensing of Certain Types of Business Activity. The respective Draft Acts on abolishment of allocation of quotas for export of metal scrap and abolishment of registration of contracts for export of metal scrap are also registered in the Verkhovna Rada, and hopefully will be passed in the near term.

According to Act No.191-VIII, some changes were made in the Code of Criminal Procedure of Ukraine on the procedure for seizing telecommunication equipment. How could this affect the practices of seizing computer servers by law-enforcers? Is there any risk that they might return to the practices of previous years?

Dmytro Gadomsky, attorney-at-law, partner, the Juscutum Attorneys Association, head of the IT Law Committee of theLviv IT Cluster

On 24 March 2015 the Act was sent for signature by the President. It will finally allow the Ukrainian IT business to get rid of risk of equipment seizures within criminal proceedings.

For a long period of time now Ukrainian authorities have practiced seizures of computer equipment (servers) during searches in offices of IT companies under investigation of copyright infringement, distribution of pornography, etc. Despite the need for onlya fewgigabytes the authoritiesseizedall servers, which literally paralyzed the business of the company. The explanation for such actions refers to the purpose ofinvestigation, which turns out to be more about pressure on an ITcompany than about the investigation of a particular crime.

The above-mentioned bill replaces seizure of servers with copying of information. The temporary seizure of the computer equipment is still possible only provided that: (1) it is necessary for the investigation of physical properties, which are relevant for criminal proceeding, and (2) there is a court order.

However, the notion of physical properties relevant for criminal proceedings can hardly be named as definite and still leaves much reservation on the part of state authorities. This may potentially lead to different interpretations and continuous abusive practices. The first text of the bill was clearer, and sanctioned equipment seizures only when there are physical traces of the crime on them (finger prints, traces of blood, etc.).

What changes are made by Act No.191-VIII in the Commercial Code of Ukraine and the On Companies Act of Ukraine? How would this affect businesses?

Vyacheslav Krahlevych, partner, FCLEX Law Firm

The Ukrainian Parliament adopted the Act in entirety on 12 February 2015. Also, on 18 March 2015, MPs voted for editorial clarifications to the Act.

The Act actually reflects deregulation changes to the existing law that are long awaited by society and the current situation.

Specifically, in the Act, the legislators made changes to the Housing Code, whereby they allowed to perform the re-equipment and redevelopment of the residential fund without any permits, if such changes do not involve interference with the supporting structures and/or engineering systems for general use.

And so now everyone will be able to convert their apartments to their taste and for their needs, without any additional financial costs or wasting time in the government offices.

Also, the provisions of the Act exclude from the Commercial and Civil Codes of Ukraine rules on compulsory state registration of commercial concession agreements.

Thus, domestic and foreign investors enjoy a simplified procedure for performance of concession agreements and are free of burdensome administrative obstacles in the way of doing business.

The confines of this commentary do not allow us to analyze all the positive deregulation rules that have been adopted by Ukrainian MPs. However, the analysis of the entire Act gives a positive impression.

Finally, the necessary legislative changes that eliminate unnecessary government regulation of social relations that almost involve ordinary citizens and business on a daily basis have been adopted.

Act No.191-VIII eliminates state registration of agreements on commercial concession. How would this affect development of the franchising business in Ukraine?

Nataliya Mykolska, head of international trade, Sayenko Kharenko, national expert on Franchising for Ukraine, International Distribution Institute

The Act abolishes mandatory state registration of franchise agreements in Ukraine required by the Civil Code of Ukraine and the Commercial Code. The removal of mandatory state registration shall be deemed as a simplifier for franchising business in Ukraine.

The approaches to franchise agreements mandatory registration differ from jurisdiction to jurisdiction. In the jurisdictions which apply mandatory registration this is done for the purpose of protecting the weaker party i.e. franchisee, by ensuring that the latter received true and complete information on the franchise prior to entering into the franchise agreements.

The major stumbling block in Ukraine was a lack of a legislative framework describing the registration procedure itself. As a result, the competent Ukrainian authorities either refused to register franchise agreements or merely stamped the agreement registered, while the legal status of such stamping remained vague. Thus, the standard practice in Ukraine was not to register franchise agreements, which negatively affected the parties to such agreements. For instance, we are aware of cases when the tax authorities refused to assign royalties paid by Ukrainian franchisees to deductible expenses without due registration of franchise agreements. Foreign franchisors, in their turn, considered the registration requirement with no transparent registration procedure in place to be a burdensome ambiguity.

The Ministry of Justice of Ukraine made an attempt to address the above issue by adopting the Order On Approval of the Order for State Registration of Agreements on Commercial Concession (Sub-Concession), No.1601/5 on 29 Septem- ber 2014. The Order, however, included some vague wording, which required additional interpretation. Consequently, the Order has not resolved the registration issue.

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