Category: Ukraine

Baker McKenzie has advised the IFC on channeling EU funds up to EUR 25 million in grants across Ukrainian cities to help renovate municipal buildings for internally displaced people, create jobs, and drive economic recovery. 

According to Baker McKenzie, “the project, implemented by the IFC in partnership with the EU, will pilot in Lviv, the largest city in western Ukraine, which has offered shelter to nearly 245,000 IDPs as of September 2022. The project aims to help Ukraine provide secure and quality temporary accommodation to people who had to flee the war-affected areas in eastern and southern Ukraine.”

Baker McKenzie’s team included Managing Partner Serhiy Chorny, Associate Bogdan Dyakovych, and Junior Attorneys Polina Korotka and Maria Gorokh.

Integrites has provided pro bono advice to the urban community of Truskavets, Ukraine, regarding temporary accommodation for internally displaced persons.

According to Integrites, the firm developed “legal and financing structures for remodeling and repurposing several buildings in the city center, which would allow for the rapid revitalization of the neighborhood in the resort subregion and raise resources for it. The plan addresses such challenges as speed, functionality, adaptability, and the appropriate number of IDP families that can be accommodated in quality and safe housing. The project is part of the Rehousing Ukraine Initiative – a partnership between the Affordable Housing Institute, a non-profit consultancy registered in the USA, and Integrites, with the involvement of individual and institutional experts as needed.”

Integrites’ team included Partner Oleh Zahnitko, Counsel Olena Savchuk, and Senior Associate Tetiana Storozhuk.

What do you do if your country is invaded, your parents and kids are killed when trying to escape the occupation, your wife is gang-raped, and you are beaten to death because you speak a language the invaders hate? What do you do if the invaders have looted your house, plundered your farm, or taken your factory away from you?

The 2022 Russian war against Ukraine has already become the biggest military disaster in Europe after World War 2. This war was initiated by a nuclear super-power and a permanent UN Security Council member against a nation whose security the former had guaranteed with its own sovereign signatures under numerous international treaties. The aggressor-state has clearly manifested its primary agenda behind launching the war: it clearly aims to erode the fundamentals of post-WW2 public international law by undermining the global security framework. It has decided to start with demolishing Ukraine.

By launching and waging the war, Russia has already severely breached the most important rules of public international law as well as numerous national laws of various jurisdictions. The scope of such violations is simply overwhelming – they go across almost all branches of law, both national and international, and they cross national boundaries and continents. 

Many of them hurt the sovereign rights and interests of various states, including Ukraine. Yet many of them also hurt the rights and interests of private parties. And here comes the key question – do private parties have the right of recourse against the aggressor-state for such losses?

Regretfully, the question remains largely open. The key obstacles are three-fold: (1) under public international law, private parties are precluded from having direct recourse against the aggressor-state (however imperfect those public international law instruments may currently be); (2) in the national law dimension, private parties’ ability to act is constrained by the sovereign immunity defense principle; and (3) finally, there is a challenging 2012 decision of the International Court of Justice in Germany vs. Italy: Greece Intervening where the ICJ confirmed the jurisdictional immunities of the state in the context of private-law claims for war-inflicted damages.

Hence, the injured private parties seem to avail themselves of only the national legal means to protect their legitimate rights. Those means are still severely restrained by the sovereign immunity defense that is regretfully available also to the aggressor-state.

The above legal obstacle must be overcome one way or another to provide injured private parties with the right of full redress against the aggressor-state. Theoretically, that can be achieved either (1) by taking purely national legal measures aimed at dishonoring the aggressor-state sovereign immunity defense, or (2) by changing public international law.

There are certain indications that selected countries plan on going along the former route. By doing that, they will certainly encounter legal difficulties in (1) breaching the sacred comity of nations doctrine and (2) likely limiting the effect of any such court decision to their own territorial realms.

Given that, the latter route may seem to be more straightforward yet longer to achieve. The two known international conventions – the already effective European Convention on State Immunity (ETS no. 074) and the yet to become effective 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property – took ages to develop. Plus, they lack the degree of coercion that is needed for the aggressor-states. And, certainly, they have no universal application.

In reality, the most reasonable way to achieve the goal may be a combination of both mechanisms. If a critical number of states legislate that aggressor-states be denied sovereign immunity defenses within their domestic jurisdictions, they will jointly set up a new public international law custom. That would be fairly quick to achieve on the one hand, and the custom will have a universal application on the other hand. On top of that, a new international convention can eventually be adopted.

The current war, the egregious violations of both public international law and domestic law rules of various nations by Russia, and the level of atrocities committed by its troops impel the international community to weave the above coercion mechanism into the fabric of public international law. We believe that it will be the primary task of the New Allied Nations – a new coalition of democratic nations that is being formed before our very eyes.

By Olexander Martinenko, Partner and Head of Dispute Resolution, Kinstellar

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

With the war in Ukraine generating all sorts of issues for lawyers, Integrites Partner Illya Tkachuk also points to the effects of the ongoing COVID-19 pandemic as well as the implications of legislative updates as being the key drivers of the firm’s Employment practice.

“The coupling of the effects brought on by the pandemic, as well as the war, has been impacting all of our practices across the board – most so our Employment practice,” Tkachuk begins. “We’ve been facing a rising tide of client inquiries relating to remote work, the regulation of remote office work, as well as work safety requirements.”

Since February 24 and the start of the war, Ukraine has been in a state of martial law, impacting all areas of legal work. “As a consequence, our Employment practice has faced a 30-40% increase in its workload,” Tkachuk continues.” Primarily, both domestic and foreign clients have questions related to the possibilities of, and effects of, cutting down payroll costs, relocating employees, engaging in staff reductions, and questions related to mobilization of employees and reservation of conscripts,” he explains. Additionally, Tkachuk says that “some 20% of client demands are still generated by the effects of the COVID-19 pandemic.”

Illustrating the complexities that the Employment practice of the firm has been facing, Tkachuk shares a few examples. “There was one case in which our client had their production plant destroyed, and five hundred employees had to be relocated. This included a partial reduction in staff size, introduction of remote work capacities, requalification of employees, to name just a few aspects,” he explains. “Also, we’ve had a situation in which our client’s plant had been located in an occupied territory – which is not a rare case. The client needed to relocate their production facilities and, because some of the employees could flee, a special regime had to be designed to ensure a continuous workflow,” he says. 

While external factors appear to be the biggest drivers of the practice, Tkachuk does say that there were legislative updates that brought work for the firm as well. “Since the start of the pandemic, Ukraine has been hard at work to overhaul the Soviet-era employment legal framework. This process is still ongoing, and the overall situation is improving,” he reports. “The updated legislation covers numerous aspects of employment relations, including such specific regimes as the salary suspensions and employment contract suspensions, developed specifically for the martial law period.”

Looking ahead, Tkachuk feels that the levels of activity of Integrites’ Employment practice will keep up, if nothing else, on account of the “continuous improvement of the legislative framework. Of course, with the war raging in Ukraine, dealing with COVID-19 fallout is not a priority, but it is still here and is contributing to the pile of work drivers for us,” he explains. “I expect that, with all that in place, our Employment practice will keep up or even increase its level of activity,” he concludes.

Ukraine remains at the forefront of crypto industry despite overall economic hardship caused by the unprovoked Russian military aggression. According to the recent 2022 Global Crypto Adoption Index revealed by Chainalysis, Ukraine has the highest crypto adoption rate in Europe and ranks third globally.

Ukraine started to actively embrace cryptocurrencies several years ago and still maintains high positions in various charts. The country is a home for developers of a number of blockchain startups and exchanges, such as Kuna and WhiteBit.

The war which broke out in early 2022 accelerated the crypto use dramatically. Under the leadership of the Ministry of Digital Transformation, the country announced that it starts to accept donations in Bitcoin, Ethereum, and Thether. The result was fascinating – in just two days Ukraine managed to raise about $12 mln worth of crypto, and now this figure exceeds $120 mln.

Being a crypto-friendly country, it is unsurprising that Ukraine made a move to formally legalise cryptocurrencies and set the rules for their commercial use. In March 2022 the President of Ukraine signed the Act “On Virtual Assets” (“Act”), which was passed by the Parliament of Ukraine back in 2020. The Act is not yet in force though. It will become effective once the Parliament adopts the set of amendments to the Tax Code, which are already in a pipeline.

Here comes a brief overview of what the Act effectively means for crypto industry:

Cryptocurrencies are recognised as intangible assets that may be freely kept or disposed of. Nonetheless, you still cannot use cryptocurrencies to pay for goods and services in Ukraine.

Since the legal status of cryptocurrencies is now clear, the ownership right to them may be protected by the courts and law enforcement.

The Act lays the foundations of cryptocurrency market infrastructure and distinguishes the following cryptocurrency services:

• Cryptocurrency wallets (custodians or administrators of cryptocurrencies or private keys);
• Exchanges; 
• Services for transfer of cryptocurrency; and
• Brokerage (intermediary services).

Cryptocurrency services providers will have to obtain a special permit for carrying out each of the above activities. The SEC of Ukraine is designated to be the industry regulator – the authority will grant permits and oversee the market.

No connection to Russia whatsoever – cryptocurrency services providers may not have russian beneficiaries, management, and russian entities in the corporate structure.

The Act introduces massive amendments to the existing AML legislation in terms of handling cryptocurrency transactions.

It is clear that these developments may give rise to rapid growth of crypto industry in Ukraine. As distinct from many other countries, Ukraine is about to have a clear set of game rules approved by the state. This would enable major industry players to consider the launch of local presence in Ukraine avoiding the risks of running a business in the grey area.

Ukrainian authorities are already exploring how to better cope with numerous legal issues related to cryptocurrency fraud and tracing dissipated crypto assets. To this end, the local Asset Tracing and Management Agency in cooperation with the Cyber Police Department developed the Guidelines for Tracing Cryptocurrencies in Criminal Investigations. Such efforts are overall very helpful for the lawyers and other industry specialists because of the gradually increasing number of criminal cases involving various types of crypto fraud. Moreover, the Asset Tracing and Management Agency has already set up cooperation with Binance in order to facilitate information exchange regarding the wallets mixed up in illicit activities and their further freeze. Without any doubt, we will see further developments in this sphere soon.

By Andriy Fortunenko, Counsel, Avellum

Ukrainian lawyer Oleksandr Pankiv has joined Bank of America in London as a Director.

Prior to his move, Pankiv was a Senior Associate with Latham & Watkins in London between 2017 and 2022. Before that, he was a Supervising Associate with Simmons & Simmons in 2017 and an Associate with King & Wood Mallesons between 2014 and 2017. Earlier still, he was an Associate with the EBRD between 2012 and 2014.

Before relocating to London, he was an Associate in the Kyiv office of Clifford Chance between 2010 and 2012.

Originally reported by CEE In-House Matters.

Before February 24, 2022, Redcliffe Partners’ busiest practice was corporate and M&A, however, the war changed it all, according to Founder and Partner Dmytro Fedoruk.

“For the first several months, almost all of our existing projects were put on hold and there were no new requests from clients,” Fedoruk explains. “However, it was a time of complete chaos so we were not very concerned with the absence of work. On the first day of the war, we advanced 3-months’ salary to all our employees and advised them to treat their personal safety as a priority.”

“It is only several months later when international businesses realized that Russia was unlikely to occupy the entire Ukrainian territory, and some projects were restarted and clients started coming back,” Fedoruk adds.

Among the resumed projects, Fedoruk highlights a few, noting that some of the work is a result of the war. “IT projects stand out,” he says, adding that “many clients relocated their offices from Kyiv to Lviv, as it was apparent that the war was unlikely to affect the Western part of the country.” Additionally, he says, “the firm also did some pro bono work for volunteer organizations.”

“Since our clients suffered as a result of the Russian invasion, there is a drive to bring claims in arbitration and get compensation from Russia for the damages it caused,” Fedoruk points out. “In terms of damages, considering what has been destroyed, getting awards will be relatively easy, but it may be harder to enforce them. At the moment, we are working to see ways to make these claims enforceable, as well as looking to litigation funding providers to invest in the proceedings,” Fedoruk adds. “We are also looking at asset tracing companies to assist us at the enforcement stage.”

“As a result of the war, we stopped working with clients who were connected with the Russian government, including Western businesses with Russian ownership,” Fedoruk notes. “In general, we stopped working with all Russian and Belorussian unless they publicly condemn the Russian aggression.”

“We started relocating some of our lawyers abroad for secondments since we did not have enough work to keep our entire team busy,” Fedoruk notes, adding that some of them moved to Warsaw, Paris, Frankfurt, and London. “Finally, some of our people are in the army, on the frontlines, including one of our Partners and one Associate,” he says. “We are trying to help them as much as possible.”

As for the future, Fedoruk believes that there is going to be a lot of work in terms of rebuilding the country once the war stops. “However, right now it’s hard to predict any increase in client activity,” he notes. “We should hope that Ukraine’s quicker victory is better for everyone, including Russia.”

The number one priority for Ukrainian firms is to ensure the safety of their employees while dealing with dire economic conditions and making collective efforts to help those in need, according to Sayenko Kharenko Co-Founding Partner Vladimir Sayenko.

“Obviously, life has changed dramatically in Ukraine since February 24, 2022, and the legal sector faces many challenges,” Sayenko says. “Despite that, many law firms continue to operate in Kyiv in more or less an ordinary manner. Thus, since the war began, we had to put many measures in place to reorganize our operations and remain prepared for what’s to come.” 

“Among those challenges, of course, our number one priority has been ensuring the security of our employees,” he notes. “For example, our law firm had to spread our team apart for security reasons, since our main office is too near the government buildings, primary targets for missile attacks and terrorist groups, and does not have a bomb shelter,” Sayenko points out. He adds that, “even after Kyiv was considered safer, we also encourage our people to work from home or in other secure locations so that large groups of employees would not be caught in one place.”

“Moreover, a number of our employees are scattered all over Europe,” Sayenko notes. “Most of them are on secondments at major international law firms, who have offered their support and invited our lawyers since the beginning of the war. It turned out to be quite easy to collaborate, as expertise in the fields such as competition, M&A, or arbitration is very relevant for our colleagues abroad,” he notes. “As our workload increased during the last months, some Ukrainian lawyers are already coming back home.”

Sayenko highlights that many Ukrainian law firms struggle to stay on the market. “The economy is not what it used to be, and most law firms barely make ends meet, especially if they rely solely on the local clients that face financial difficulties these days. It’s hard to have any profits and preserve teams to continue operations. It is relatively easier for bigger firms with rather diversified practices and an international client base.” 

As for transactional matters, Sayenko notes that the market is quite unstable. “There is enough work in corporate and M&A – some businesses want to leave the market, some want to restructure, while others don’t want to be subsidiary companies of Russian holdings. There are a lot of internal restructuring issues as well. Still, obviously, these are not classic M&A deals,” he points out. Additionally, he says that “the banking and finance practice is also busy, as international banks and IFIs continue to provide financings to Ukrainian borrowers, leading to many sovereign deals and restructurings of existing debts.”

According to Sayenko, businesses are also adapting to the new reality. “For instance, allocating human resources is a challenge,” he says. “If half of the employees have to go to the army simultaneously, the company needs to manage it and find a replacement. To avoid such business interruption risks, companies try to find contracts to supply the military or satisfy other state needs, which helps reserve the necessary employees from mobilization.”

“Currently, the economy struggles and the legal market is just a reflection of overall economic conditions,” Sayenko notes. “But, eventually, there will be a reconstruction phase – and there will be a need for a lot of capital to rebuild the country and for lawyers to support the process. The government is already thinking about ways to attract foreign investors to reconstruct the country. So, hopefully, we will soon see the light at the end of the tunnel,” he concludes.

Asters, working with Quinn Emanuel Urquhart & Sullivan, has successfully represented the interests of PrivatBank in two parallel arbitration proceedings before the London Court of International Arbitration regarding the enforcement of eurobonds issued in 2010 and 2013.

PrivatBank is the largest bank in Ukraine in terms of the number of clients, assets value, loan portfolio, and taxes paid to the national budget, according to the firm.

Asters announced the proceedings were “brought in 2017 by UK SPV Credit Finance, the issuer, and Madison Pacific Trust Limited, the trustee, concerning the enforcement of eurobonds issued in 2010 for USD 200 million and 2013 for USD 175 million. The Eurobonds’ proceeds were used to finance the relevant Loan Agreements advanced by the Issuer to the Bank that were subsequently bailed-in in the course of the Bank’s nationalization in December 2016.”

According to the firm, “following the Bank of England’s decision to recognize the Ukrainian bail-in and thus discharge as a matter of English law, all of PrivatBank’s obligations under the relevant loan agreements as of the date of the bail-in in December 2016, on September 3, 2021, the tribunal issued final awards dismissing all claims against PrivatBank and declaring that it has no liability under the loan agreements. The total sum of principal and interest under the four loan agreements, the bail-in of which has been recognized in England, is in excess of USD 1 billion.”

Earlier this year, Asters represented PrivatBank before the Supreme Court of Ukraine in a case relating to the bank’s nationalization (as reported by CEE Legal Matters on August 3, 2022), as well as in a UAH 152 million office building ownership dispute (as reported by CEE Legal Matters on May 5, 2022).

Asters’ team included Co-Managing Partner Oleksiy Didkovskiy, Counsel Anna Tkachova, and Associate Maksym Zeltser.

Under many tax treaties mirrored after the OECD Model Treaty, the 183-day period implicates a significant threshold: individuals temporarily present in the treaty-party country (the Host Country) may be taxed by that country on income for personal services performed there if the individual resides in the Host Country for over 183 days in a given tax year. This is called the 183-Day Rule.

Few European countries have issued guidance on how they intend to apply the 183-Day Rule to Ukrainian refugees. Although one can hope that European governments will not aggressively pursue refugees as tax residents– at least for tax year 2022 – the absence of guidance in many countries leaves uncertainty for employee-refugees and their employers.

State-specific guidance in response to Ukraine war

Below we highlight the material guidance that has been issued to date.

Ireland announced concessionary treatment solely for tax year 2022. Ireland will waive the requirement for Ukrainian employers to levy Irish payroll taxes on Ukrainian refugees who would otherwise meet the 183-Day Rule and who have relocated to Ireland because of the war. Importantly, this treatment will apply only in relation to Ukrainian employment income for the tax year 2022 if the employee remains subject to Ukrainian income tax on his or her employment income for that year. Ireland has similarly relaxed its rules for permanent establishments for Ukrainian companies that have employees in Ireland.

Lithuania has also announced that it will not treat refugees as tax-resident in Lithuania. Further, Lithuania will not tax wages earned by Ukraine refugees who are working remotely for Ukrainian employers.

In Poland, a new regulation allows Ukrainian refugees to claim Polish tax residence. Invoking tax residence under this regulation would make a narrow category of refugees eligible to take advantage of certain favorable tax positions available only to Polish tax residents. The majority of Ukrainian refugees may not see any practical advantage from invoking Polish tax residence.  For refugees who do not claim Polish tax residence, the Polish Ministry of Finance has committed to employ a flexible approach for determining tax residence.

Estonia will also allow Ukraine refugees to claim tax residence in Estonia. Doing so would make Ukraine refugees eligible for tax exemptions available only to Estonia tax residents.

Considerations for employer/employee liability and double taxation under existing law

In other European countries, no significant guidance has been issued. This means that the ordinary residence and treaty rules should apply to Ukrainian refugees who have been forced to relocate.

We have seen Ukrainian employers address relocation of their Ukrainian employees in three ways:

• Keep the Ukrainian employee-refugee on Ukrainian payroll (Option A);
• “Localize” the Ukrainian employee-refugee by formally transferring him or her to a group affiliate in the Host Country and putting the employee-refugee on local payroll (Option B); or
• Adopt a hybrid approach whereby the Ukrainian employee-refugee remains employed by the Ukrainian employer but is temporarily seconded to a group affiliate in the Host Country (Option C).

Each of the above options has its own benefits and shortcomings, meaning that it will be up to the employer and employee-refugee to decide which option to pursue.

Option A: Maintain the status quo

Under Option A, and assuming that the employee-refugee’s wages would be taxable in the Host Country, the employee-refugee may be personally responsible for periodically remitting taxes to the Host Country throughout the year and for filing and settling with the Host Country tax authorities at year-end.

Meanwhile, existing Ukrainian rules will require the Ukrainian employer to continue withholding for Ukrainian 18 percent personal income tax and a Ukrainian 1.5 percent military levy. The Ukrainian employer will also continue to make social security contributions on behalf of the employee.

This has the potential to result in significant double taxation for the refugee-employee. According to the existing position of Ukrainian tax authorities, the Ukrainian tax authorities will treat salaries paid by a Ukrainian employer as Ukrainian source, and, therefore, the Ukraine will not provide a refund or tax credit for foreign income taxes paid on that income. If the employee-refugee claims tax residence in the Host Country, some Host Countries may allow the employee-refugee to credit Ukrainian taxes in the Host Country; however, the mechanism for doing so will vary by country and may not be feasible in some cases. As such, under Option A, resolving double taxation could be difficult in practice. Although the parties could, in theory, initiate a mutual agreement procedure (MAP) (ie, a dispute resolution process between competent authorities from the Ukraine and the Host Country), doing so may be prohibitively time consuming and costly.

From the Ukrainian employer’s perspective, Option A raises the risks of permanent establishment or even tax residence in the Host Country. There is a corresponding risk that the Host Country will assert penalties for not withholding on employee-refugee wages. In our experience, some companies are willing to bear this risk and hope that Host Countries will not strictly enforce existing rules given wartime circumstances.

Option B: Localize the employee-refugee

Under Option B, the refugee-employee is put on the local employer’s payroll, and the local employer is responsible for withholding income taxes due the Host Country. The employee-refugee’s wages would also be subject to compulsory social security contributions in the Host Country.

The Ukraine is also likely to assert taxing rights on the employee’s income as the Ukraine will probably treat the refugee as Ukraine tax resident unless and until the refugee proves otherwise. Importantly, the Ukraine will allow a tax credit against foreign tax if there is double tax treaty between the Ukraine and the Host Country. To credit taxes paid outside of the Ukraine, the taxpayer must receive from the Host Country a certificate stating the foreign tax base and taxes paid. This certificate must be legalized and translated into Ukrainian. Thus, as compared to Option A, Option B should reduce to the risk of double taxation for employee-refugees.

Option B does not raise the complications that the Ukrainian employer would face under Option A.

Option B may not be viable in many instances especially if the Ukrainian employer does not have a group affiliate in a given Host Country. Also, some Ukrainian refugees might resist Option B if they want to retain flexibility to easily return to their original Ukrainian employment.

Option C: Second the employee-refugee to a group affiliate in the Host Country

The considerations under Option C will generally align with those described under Option A. That said, in a formal secondment, there is usually a Host Country payroll (so-called shadow payroll) set up to ensure proper withholding of income tax and social charges in the Host Country.

Ukraine also has social security treaties with various EU member states. Under these agreements, it may be possible to obtain a certificate of coverage from the Ukraine social security authorities to ensure ongoing coverage in the Ukrainian social security system while avoiding Host Country social coverage.

As none of the above options offers a perfect solution, employers and their employees should weigh the potential risks and advantages of each to best manage their positions through Europe.

By Lyudmyla Dzhurylyuk, Senior Associate, Kinstellar