Category: Ukraine

In 2021 the renewable energy market in Ukraine has been in a crisis mode compared to the booming years of 2018 and 2019. Following the legislative changes in 2020, which decreased the feed-in tariff (FiT), the market for solar projects has been very low, except for small solar projects for households and solar projects implemented by industrial consumers to produce electricity for their own use. Primarily, such industrial consumers are aiming to reduce costs for electricity and improve their market position before the introduction of the Carbon Border Adjustment Mechanism. Notwithstanding the weakening of the market for solar projects, we have observed a steady growth of wind projects. The 2020 FiT changes have decreased the wind tariff moderately and provided a cut-off day for wind projects under the FiT on December 31, 2022. This has boosted the construction of several large wind projects in 2021 and 2022. In 2022 we anticipate commissioning of almost 1 gigawatt of wind capacity, which is much higher than in 2021.

The payment discipline of the state’s off-taker for FiT has been an issue in 2021. In addition to the debts for 2020, in 2021 there were no months where the payments were done in full, except for December, which has been 100% paid in 2022. For 2021, the state-owned off-taker guaranteed buyer has paid the lowest 62% for October, 80% for May-July and September, 86% for August, 93% for January to April, and 94% for November.

The total debt for 2021 is UAH 9,6 billion (approximately EUR 296 million). The main reason for this deficit is that Ukraine’s state budget for 2021 did not include 20% to be allocated for payments under the FiT under Law 810-IX, which reduced the FiT in 2020 and included a provision saying that a state budget may include funds necessary to cover 20% of FiT payments to RES producers.

The situation with the 2020 debts to RES producers has been resolved in November 2021 after the Ukrainian TSO – NEC Ukrenergo – has placed its debut green and sustainability-linked Eurobonds with a total value of USD 825 million. The TSO’s transmission tariff is the main source of income for the guaranteed buyer to pay the FiT, therefore, the Government’s secured bonds have been issued specifically to compensate debts to RES producers for 2020. Although there were some delays in payment of the debt to DTEK Renewables, this was resolved in January 2022.

Importantly, the decrease of the FiT and problems with payments for the produced electricity in 2020 has triggered the initiation of two investment arbitration cases by foreign investors, and around ten companies submitted Trigger Letters to the Ministry of Justice of Ukraine.

Despite promises of the Government since 2019, the market is waiting for the first renewable energy auction. The regulatory framework is ready, but the decision to hold the auctions and approve quotas for auctions has not been approved yet.

In 2021, we have seen several positive signals from the Government and the market: a) the market is ready for corporate PPAs, and there are several developers who are developing such projects under this scheme. The Parliament has received draft changes necessary to launch corporate PPAs’ projects; b) the Government is planning to launch a new support scheme – feed-in-premium, which is aiming to approve payment discipline to the RES producers enjoying state subsidies. We anticipate the draft law in 2022; c) the Parliament has adopted in the first reading a draft law on energy storage. Implementation of this law will help to improve the balancing and stability of the energy system; d) the Parliament has adopted a law on biomethane aiming to launch a mechanism for the biomethane certificates of origin; and e) the Ukrainian Wind Energy Association, Ukrainian Hydrogen Council, and Asters carried out a joint study on the implementation of offshore wind projects in Ukraine.

In summary, taking into consideration a difficult situation with the FiT payments discipline, we see a trend towards shifting from state subsidy-based support schemes to marke-driven projects, which is a positive signal. Moreover, the current rise in electricity prices may allow investors to develop RES projects without state support.

By Yaroslav Petrov, Partner, Asters

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

Relatively high inflation and lowering deposit interest rates became characteristic for Ukraine in recent years, thus heating investors’ demand for yields. Savings have been growing continuously, boosting the segments with a higher risk appetite and propelling the development of new investment opportunities. At the same time, the domestic financial sector is undercapitalized and has few financial instruments to offer. The market, therefore, attracts the attention of various non-resident providers of financial services – from the most diversified investment banking groups to single product enthusiasts, who are asked by Ukrainian corporations and high-net-worth individuals to offer a service or specifically target potential customers.

The cross-border financial services regime, however, is a work in progress: Ukraine is not a member of the EU, while the domestic securities markets authority – the National Securities and Stock Market Commission (NSSMC) – is not certifiable as an independent body under IOSCO standards. If a law is passed to ensure the NSSMC’s political and financial autonomy (following six years of public debate, the relevant bill awaits its second reading in the legislature, in 2022), the commission will join the club of reputable regulators and start the mutual recognition of proper supervision with other IOSCO members.

Thus, offshore investment banks lawfully providing their services directly to local Ukrainian investors, on a reach-in or fly-in basis, is still a matter of the future. Meanwhile, the recommended course of action would be working through an onshore licensed entity, as an intermediary, or establishing a permanent presence in Ukraine. The NSSMC has been actively supporting the coupling of the capital market with EU and North American infrastructure.

On the investor’s side, the retail segment has now obtained a premium category of “qualified investor,” with simplified access to the market and looser protection. The initial threshold is a UAH 20 million balance sheet and UAH 2 million in cash equivalents (approximately EUR 625,000 and EUR 62,500, respectively) or even as low as UAH 0.5 million (EUR 16,500) – if the investor has at least one year’s experience in capital market transactions. The threshold, however, is set to increase progressively every year, e.g., multiplied by a factor of six in 2022 – with that factor going up as high as 30, in 2030.

The 2020 restatement of the Capital Markets Law (effective as of mid-2021) consolidated the state’s practice of participating in capital markets and, separately, the roles of the National Bank of Ukraine as an independent investor as well as the administrator of securities with a sovereign rating. In short, both the National Bank and the state (acting through the Cabinet of Ministers and the Minister of Finance) are mostly exempt from the statutory law and can determine their issuer and investment strategies, enjoying more freedom in contract bargaining. Thus, targeting the government of Ukraine and/or the NBU as a prospective issuer (borrower) or investor has become a simpler task, from a regulatory compliance standpoint.

As to the potential instruments of investment, the new rules embraced many more possibilities, to which the issuers have yet to adjust: the most developed to date have been treasury notes and sovereign bonds, with very few shares, mortgage-backed securities, and corporate bonds on top. To remedy the situation, the money market contracts have been officially recognized in support of FX transactions. Further, the notion of derivatives has been set in detail, as part of the financial instruments market and their separation from spot contracts. Most types of betting contracts are now expressly allowed, after decades of consensus that a “contingency contract” (i.e., a derivative) ran a high risk of being confused with a “game of chance” (i.e., gambling).

Notably, “wholesale energy products” can be used as alternatives for investment, since they are exempt from the financial instruments framework – OTC and OTF-traded derivatives contracts for natural gas and power with mandatory physical delivery already conform to the so-called “REMIT carve-out”, even though Ukraine is late on the implementation on the rest of the body of transparent energy markets rules. Finally, the legislation in Ukraine has caught up with trendy securities such as green bonds, infrastructure bonds, bonds of the international financial organizations and removed some redundancies in mortgage-backed securities.

By Oleh Zahnitko, Partner, Integrites

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

With the ambitious plan to create in Ukraine the most powerful IT hub in Central and Eastern Europe, the Government of Ukraine has established Diia City – a special legal framework for the IT industry, in summer 2021. Currently, the legal and organizational basis for the operation of Diia City is being developed and improved. It is expected that the project will be fully launched already in the first quarter of 2022.

In addition to special tax benefits, efficient employment set-ups, and IP rights protection mechanisms, the Diia City Law introduced a number of important corporate novelties.

Professional Management Companies

For the first time in Ukrainian corporate laws history, it is allowed to appoint a legal entity as an executive body of a company. Diia City residents (i.e. companies that meet certain criteria and are included in the Diia City registry), which are organized in the form of limited or additional liability companies (LLCs and ALCs), may hire a legal entity to perform functions of an executive body (i.e. a professional management company). Such a management company must be incorporated in Ukraine and perform management functions as its primary activity. The management company will be hired based on an agreement, the terms of which require pre-approval of the supreme governing body of the Diia City resident. The representative(s) of the management company will act on behalf of the Diia City resident without proxies. The management company will bear full liability towards the Diia City resident for damages caused by its wrongful acts or omissions. It is expected that the novelty will allow the Diia City residents to benefit from the services of professional management companies securing effective operational management.

Shareholders’ Agreements

Ukrainian law-governed shareholders’ agreements (SHAs) have recently become a popular instrument in M&As involving Ukrainian targets. The innovations suggested by the Diia City Law will make this instrument even more practical and useful for structuring M&A transactions with foreign investors. In particular, it has been allowed to subject SHAs to foreign law in relation to Ukrainian companies with at least one foreign shareholder. Such a novelty contributes to the discretion of investors to choose the most preferable jurisdiction for governing their relations.

In addition, the Ukrainian company itself or third parties (i.e. creditors or contemplated investors) may join SHAs for LLCs or ALCs. Indeed, such a possibility creates additional leverages for third parties to control the company’s activities and safeguard their investments or assets.

Option Agreements

Another important corporate instrument, which has been often used in practice recently, is the option agreement. Such an agreement provides the option holder with the possibility to purchase company shares at a pre-agreed price in the future. The requirements introduced by the Diia City Law relate to the option agreements for LLCs and ALCs and concern the form of option agreements (only in writing) and the mandatory clauses for the option agreements to be valid (i.e. the option shares, their price, option trigger events, and term of option agreements). It is now also possible for LLCs and ALCs to become parties to option agreements in relation to the company shares held by them. Such a novelty opens the possibility to introduce stock option plans for the top management of LLCs and ALCs, which would be beneficial not only for Diia City residents but for many other businesses operating in Ukraine.

There are many other interesting developments suggested by the Diia City Law, which would positively impact the conduct of business in Ukraine, including non-compete, non-solicitation and non-disclosure agreements, convertible loan agreements, etc.

It is expected that Ukrainian, foreign entrepreneurs, and investors from all over the world will highly benefit from the Diia City project and will avail themselves of the opportunities to implement quickly and effectively the most ambitious and innovative business ideas in Ukraine.

Maria Orlyk, Managing Partner, and Oleksandra Prysiazhniuk, Senior Associate, CMS RRH

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

This year marks the start of a new era for all Ukrainian taxpayers – both corporate and individuals. Ukraine lawmakers up to – and especially in – 2021 made unprecedented efforts to implement into local law and the network of double tax treaties major recommendations and principles which went far beyond the minimum base erosion and profit shifting (BEPS) action plan Ukraine committed to in 2017.

The following are the five major trends and expectations for 2022 and onwards.

New Tools for the Tax Office to Administer Taxes and Prevent Malpractices

As a part of anti-BEPS efforts, as well as the recent broadening of the tax base for certain industries, the Ukrainian tax office becomes more powerful.

Further to the continually increasing trend of thorough oversight of any cross-border transaction, the business purpose test is now a controversial topic, in addition to beneficial ownership arguments which taxpayers have, to some extent, become used to. Tax residence can now be assigned to businesses having their place of effective management in Ukraine. Many business groups have been reviewing their corporate structures to meet the new requirements. The controlled foreign companies’ taxation has also enlivened the stances for discussion.

Another important development is the revision of the permanent establishment definition and granting the tax service at least a possibility of examining the activities of foreign companies without the latter having a formal legal presence in Ukraine.

Transfer pricing rules have also been further developed, with a particular focus on commodities. In addition to the above-mentioned business purpose test, taxpayers can also be taxed on so-called constructive dividends – those profits distributed in a controlled transaction in excess of market levels.

Tax Rates Increase and Broadening the Tax Base

Although corporate profit tax and VAT rates have for a long time remained unchanged, the overall tax burden has tended to increase. This includes the limitation on losses carried forward, strengthening thin capitalization rules, and reducing the terms for crediting input VAT. Environmental tax, the excise tax on a few groups of goods as well as certain royalties, have been increased and further increases might be expected.

Controlled Foreign Companies’ Taxation

Following a grace period for foreign companies’ tax-free liquidation, 2022 is the first reporting year for individuals and companies exercising control over foreign entities and formations such as trusts or funds. With quite demanding conditions for exemption, a business need for a foreign company will now require additional tax or administrative costs, and new forms of international tax planning. Sufficiency of economic substance for the foreign entities that receive primarily passive income would be another argument between taxpayers and tax officials. Nevertheless, the new rules also caused the participation exemption and look-through concept to be implemented, in some cases making taxpayers’ lives easier.

Another landmark is the tax amnesty available by September this year, with a soon-to-arrive automatic exchange of information between Ukrainian and foreign fiscal authorities.

Launch of the Special Tax and Legal Framework for the IT Industry

In recent years, the Ukrainian government has counted on IT as one of the leaders in GDP and export dynamics. Of the factors for this success, many name the simplified tax regime which allowed the industry to benefit from significant tax savings, but which was criticized from time to time. To end this uncertainty and dismiss the hidden employment risks, the lawmakers offered an attractive alternative. Almost the same level of salary taxes and a possibility to pay 9% of exit capital tax (similar to the Estonian model) are definitely worth considering. As a bonus, capital gains and dividends for individuals, if distributed not more often than once every two years, are exempt from personal income tax. If it will make Ukraine a new Silicon Valley is of course an open question, but this is already a major step forward for the industry.

Foreign Suppliers Will Begin To Pay Ukrainian VAT on E-Services in 2022

Non-residents’ supplies of electronic services to Ukrainian customers (individuals who are not VAT payers) are now VAT-able in Ukraine. Reaching the threshold of UAH 1 million triggers the obligation for a foreign supplier to register as a VAT payer and to assess and pay VAT in Ukraine on e-services supplies. The e-VAT registration and reporting procedures are significantly simplified as compared with regular VAT reporting. Registration and tax return filings can be undertaken remotely. Payments would not require a bank account to be opened in Ukraine.

By Oleksandr Markov, Partner and Head of Tax and Tax Litigation, Redcliffe Partners

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

In 2021, the President of Ukraine had signed two laws establishing a special legal and tax regime for the digital economy called Diia City. It has become effective from January 1, 2022, after the law shaping the taxation regime of Diia City has become effective.

The idea of Diia City is that any Ukrainian legal entity may become a participant in this regulatory regime if certain criteria are met, in particular: (1) the entity is engaged in certain digital-related activities (e.g., software development, video game production, educational activities in the sphere of IT, etc.); (2) the average amount of the monthly salary for employees and gig-contractors (will be described further) is not less than the EUR 1,200 equivalent; (3) the legal entity’s average amount of employees and gig-contractors is no less than nine; (4) the amount of the entity’s qualified income is not less than 90%, with qualified income defined as income from activities described in point (1) above; (5) the entity does not face one of the restrictions on the approved list. For example, the list contains the following restrictions: (i) the entity is not a foreign one; (ii) the entity has not violated UBO disclosure legislation; (iii) the entity is not recognized as bankrupt, etc.

Residents should submit a compliance report confirming compliance with the criteria above. If the entity cannot comply with the requirements, it will lose the status of a Diia City resident.

Residents of Diia City may engage their workforce as employees and as gig contractors. Gig contracts provide for more flexibility of mutual arrangement between entity and individual.

Diia City was introduced as an alternative to the popular (in Ukraine) structure for engaging software developers, the so-called co-working structure. Within this structure, software developers are engaged as independent private entrepreneurs, paying a 3% or 5% single tax on their income and, usually, united under the umbrella of one co-working office. Such co-working structures have some tax and employment risks. One of the major reasons for introducing Diia City was the mitigation of these risks while keeping a beneficial tax regime.

Residents of Diia City may choose the following taxation regimes: (1) the general corporate income tax at 18%, applied to the entity’s profits; (2) a special corporate income tax at 9%, applied to distributed profit and other payments.

Apart from dividends, the special corporate income tax also covers other payments that may be abusive and aimed at artificial profit shifting. For example, some cases of share buy-backs in an amount exceeding the initial contribution or purchase price are taxable; interest payments to a related resident entity or non-resident, in case of thin capitalization, are taxable; some cases of free-of-charge supply of goods and services are taxable, etc.

Diia City also provides for a beneficial salary taxation regime. The salary of Diia City residents’ employees and gig-contractors is taxed at a decreased 5% personal income tax rate if the annual income does not exceed EUR 240,000. The income on top of EUR 240,000 is taxed at a standard 18% personal income tax rate. The salary of Diia City residents’ employees and gig-contractors is, in addition, taxed at a standard 1.5% military duty rate and is subject to the minimum unified social contribution of approximately EUR 37 per month.

Dividends paid by those Diia City residents who have opted for a special corporate income tax regime are exempt from Ukrainian taxation if the dividends are not distributed for two years in a row.

Diia City is a game-changer for the Ukrainian IT industry. Some big players on the Ukrainian market have publicly supported Diia City and are likely to become its residents.

It is still unclear how the co-working structure will coexist with Diia City. Therefore, some companies may be skeptical about the regime. The argument here is the Ukrainian IT industry was already growing very fast, and it may be dangerous to alter that which is already working. Extra attention from the government may also lead to some unexpected black swans.

Diia City does not apply to non-profit organizations. Thus, it is questionable how IT-focused non-profit universities may benefit from the regime and salary taxation incentives. However, such an issue may be fixed in the future.

By Vadim Medvedev, Partner and Head of Tax, and Anton Zaderyholova, Senior Associate, Avellum

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

On April 5, 2022, the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine on Improving Legislation for the Period of Martial Law” No. 2142-IX dated March 24, 2022 (“Law No. 2142”) came into force.​

The Law No. 2142 aims at decreasing of tax and administrative burden for businesses, entrepreneurs and individuals. Major changes include the following:

Unified tax

The list of persons (natural and legal entitles) eligible to be Unified Tax payers on special conditions (the 3-d group, 2 % rate) was broadened. As of now Unified Tax payers on special conditions can also be enterprises that import cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 or more people, vehicles for the transportation of goods.

The date starting from which a taxpayer is considered a taxpayer of the 3rd group on special conditions (2% rate) was clarified. The following rules apply to identify the date:

• from April 1, if the taxpayer submitted an application for special tax conditions before April 1;

• from the day following the day of submission of the application for special tax conditions, if such application is submitted after April 1; or

• from the date of state registration, if the taxpayer has submitted an application for special tax conditions within 10 days from the date of its state registration.

Upon termination or cancellation of martial law, all taxpayers will be automatically reverted back to paying taxes they used to pay before their transition to payment of the Unified Tax under special conditions.

VAT​

The Law No. 2142 clarified the VAT rules regarding payers of the Unified Tax of the 3-d group with tax rate of 2 %. Such tax payers for the period until the termination or cancellation of the martial law are exempt from obligation to charge and pay VAT on supply of goods, works and services within the customs territory of Ukraine. The same exemption applies to importation of goods to the customs territory of Ukraine, as well as VAT tax reporting. Their registration as a VAT payer is suspended during the period of the martial law in Ukraine. Transactions performed by a Unified Tax payer of the 3-d group under special conditions are not subject to VAT.

At the same time, if goods / services (i) were purchased or manufactured with VAT before the start of the application of 2 % rate by a Unified Tax payer and (ii) were used or sold during the period of application of 2% rate in transactions that are not subject to VAT taxation, then the VAT payer is obliged not later than the last day of the reporting period during which its VAT registration is renewed to increase its VAT liabilities. At the same time, the tax base for increasing VAT liabilities on non-current assets is determined on the basis of their book value as of the beginning of the reporting (tax) period during which such operations are executed. In case no accounting for non-current assets was done – based on the market prices. In terms of the tax base for goods / services, such VAT liabilities shall be increased on the basis of the cost of their acquisition.​

Additionally, for the period of martial law, the following operations are exempt from VAT:

• importation of goods into the customs territory of Ukraine under the customs import regime by business entities registered as Unified Tax payers of the 1-st, 2-d and 3-d groups, except for tax payers of the 3rd with the tax rate of 3 %;

• importation by natural persons to the customs territory of Ukraine of cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 people or more, vehicles for goods transportation. Such transactions by natural persons are also exempt from excise tax.

These exemptions do not apply to goods originating from the aggressor state in respect of Ukraine, or imported from the temporarily occupied territories of Ukraine or from the territory of the aggressor state in respect of Ukraine.

Personal Income Tax

The Law No. 2142 amended some peculiarities related to Personal Income Tax charged on agricultural products grown by natural persons.

Income received from the sale of agricultural products grown directly by a natural person to a business entity, shall be finally taxed by such business entity as a tax agent of the natural person during income payment.

Tax agents reflect in tax calculations (i) the total amount of income accrued (paid) in the reporting tax period, received by natural persons from the sale of their self-own agricultural products to a business entity with the status of a tax agent, as well as (ii) the total amount of tax withheld. At the same time, the tax calculation shall not include information on the amounts of specific payments, the amount of tax accrued on them, as well as information regarding Personal Income Tax payer who received income from the sale of self-grown agricultural products to a tax agent.

Import / export of goods and transport

From the date of entry into force of Law No. 2142 and during the period of martial law, the following are exempt from import duty:​

• goods imported (shipped) to the customs territory of Ukraine by enterprises for free circulation, except for alcohol, alcoholic beverages, beer, tobacco products and industrial tobacco substitutes;

• cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 people or more, vehicles for the goods transportation imported by citizens to the customs territory of Ukraine for free circulation

These exemptions do not apply to goods originating from the aggressor state in respect of Ukraine, or imported from the temporarily occupied territories of Ukraine or from the territory of the aggressor state in respect of Ukraine.

Law No. 2142 also simplifies customs formalities to facilitate and speed up importation of goods to the customs territory of Ukraine, in particular, the Cabinet of Ministers of Ukraine can determine the goods for which exemption from the customs clearance documents necessary for importation will be provided.

Unified Tax payers (except for payers of the 3-d group with tax rate of 3 %) can declare goods for customs clearance on the basis of a preliminary customs declaration containing all the necessary information for importation of goods. At the same time, customs clearance of such goods must be executed as soon as possible, but not longer than one working hour from the moment the goods and vehicles for commercial purposes are presented.

Also, Law No. 2142 gives the Cabinet of Ministers of Ukraine the right to make the following decisions:

• to establish the transfer of goods on the basis of not expanding export control in accordance with the Law of Ukraine “On the State Control over International Transfers of Military and Dual-Use Commodities”;

• to establish a list of goods not subject to prohibitions and restrictions on their movement across the customs border of Ukraine as per the Customs Code of Ukraine; and

• establish the list of goods in respect of which the customs authorities do not take measures to promote the protection of intellectual property rights as per the Customs Code of Ukraine. 

Aside from the mentioned, for the period of the martial law / state of emergency, non-residents are exempt from the obligation to be registered within the customs authorities, as required by Art. 455 of the Customs Code of Ukraine.

Environmental Tax and Property Tax

Law No. 2142 stipulates that taxpayers are exempt from the Environmental Tax if the source of pollution or the location of the waste is within the territory of active combat operations or in the temporarily occupied territory.

Law No. 2142 also provides for exemption from Property Tax (other than land) on residential real estate if is (i) located within the territory of active combat operations, temporarily occupied territories or (ii) is unsuitable for habitation in connection with the military aggression of the Russian Federation according to the following rules:​

• If such residential real estate was owned by natural persons, the tax is not accrued and is not paid for 2021-2022 reporting years;

• If such residential real estate was owned by legal entities, the tax is not accrued and is not paid for the period from March 1, 2022 to December 31, 2022.

Owners of non-residential real estate (natural persons and legal entities) are also exempt from the obligation to pay Property Tax: from March 1, 2022 to December 31 of the year in which martial law will be terminated.​

The list of territories with active combat operations, temporarily occupied territories, as well as the procedure for declaring residential real estate uninhabitable will be established by the Cabinet of Ministers of Ukraine.

Taxes administration

Local authorities may establish local taxes and fees without following all procedures of state regulatory policy. In particular, local authorities do not have to hold public hearings on the issues of establishing taxes, publish a draft act for discussion, etc.

The moratorium on desk audits of tax declarations of Unified Tax payers of 4-th group has been lifted.

Until the termination or cancellation of martial law, a moratorium has been introduced on customs audits: new audits shall not start, and the started audits are to be stopped; customs audit acts, statements and tax notices shall not be sent. At the same time, the state of limitations for customs audits was stopped.

Taxpayers are allowed to file tax returns in paper form during the martial law.

The deadline for tax obligations fulfilling due to its impossibility in timely manner was extended. As of now all taxpayers can file reports and pay taxes and fees within 6 months after the termination or cancellation of martial law (previously the deadline was 3 months).

Other planned changes in the taxation of business entities associated with economic ties with the aggressor state

On April 1, 2022, the Draft Law No. 7232 “On Amendments to the Tax Code of Ukraine on the Taxation of Business Entities Connected with Economic Relations with the Aggressor State” (hereinafter – the Draft) was preliminary approved. In accordance with the Draft a business entity that has economic ties with the aggressor state shall pay taxes at the tax rate with a multiplier of 1.5.

The multiplier will be applied to the following taxes:

Corporate Profit Tax (except for withholding tax);

Environmental Tax;

Rent on Subsoil Use; and

Property Tax.

The following business entities will be recognized connected with economic ties with the aggressor state:

• a legal entity resident of Ukraine, the founder or ultimate beneficial owner (controller) of which, directly or indirectly as of February 23, 2022 is a resident of the aggressor state;

• a legal entity resident of Ukraine, which receives income in any form originating from the aggressor state, or which directly or indirectly has a share or other corporate rights in a legal entity – resident of Ukraine or a foreign legal entity – non-resident of Ukraine, that receives income originating from the aggressor state;

• a legal entity resident in Ukraine that is a member of an international group of companies, if the parent company or any other member of such international group of companies receives income from a source originating from the aggressor state; and

• a legal entity resident in Ukraine that is a member of an international group of companies, if the parent company or any other member of such international group of companies provides economic support to the aggressor state.

Certain economic entities with economic ties to the aggressor state may be exempted from the application of the multiplier if their activities are of social, humanitarian or economic significance for Ukraine. The list of criteria for granting exeption shall be established by the Cabinet of Ministers of Ukraine.

By Viktoriya Fomenko, Partner, Integrites

An effective judiciary forms a cornerstone of a successful state that upholds the rule of law.

However, during the past few years, the state of the judiciary has become critical in Ukraine, despite a number of reforms that have been announced and implemented.

A significant problem has arisen concerning the time needed for a court to consider a case. In many instances, it takes more than a year to obtain a court decision. For example, many cases that were filed to the Kyiv District Administrative Court in 2019 are still pending review.

In 2021, the Civil Cassation Court within the Supreme Court mainly considered cases that had been filed in 2020 or earlier, and the cases filed in 2021 that it did consider were the exception. Several courts in some regions do not even have a judge with sufficient authority to hear cases. In fact, commercial courts are the only branch that functions properly in this regard.

What led to this judicial crisis in Ukraine? First, criteria regarding a judge’s qualifications were introduced as part of the reform of the judiciary and, surprisingly, not all judges were able to meet them. Second, and this is the main reason, in November 2019 the Highest Qualification Commission of Judges (HQCJ) was dismissed. The HQCJ was an authority that evaluates existing judges and candidates for judge and recommends whether they should be appointed.

Since it has been dismissed, no state body has been available to evaluate judges and it is thus impossible to appoint new judges, while in the meantime the powers of old judges are expiring.

The law dismissing the HQCJ also details the procedure for forming the new HQCJ. The main idea was that the Highest Council of Justice (HCJ) would appoint the members of the new HQCJ from among a pool of candidates recommended by a special committee acting within the HCJ. This committee, in its turn, would consist of three local judges, proposed by the Council of Judges of Ukraine, and international experts, proposed by international organizations.

The necessity of appointing international experts became a real stumbling block. And eventually, the entire chain of appointments was interrupted and put on hold, resulting in Ukrainian courts being short of judges.

In November 2021, at last, a law unblocking the work of the special committee was adopted and the committee finally gathered for a preparatory meeting. On January 21, 2021, the committee gathered for its first meeting, where it elected its leadership and adopted a number of procedural documents related to its work.

Further, following an open and public competition, the committee will elect 32 candidates for the new HQCJ, recommend them to the HCJ, and the latter will choose and appoint 16 members. According to representations from the head of the committee, their aim is to complete their part of the process by early summer 2021. Thus, there is a chance that by the end of the year Ukraine will have a newly operating HQCJ that will be able to approve new judges and thereby resolve the judicial crisis.

Of course, the courts’ ability to effectively protect rights and interests that have been violated is only viable if the time for considering cases is reasonable, while the situation in which courts consider cases for years cannot be treated as something acceptable or normal.

We may only hope that the sacrificed time and continuously invested efforts will result in building an independent and reliable judiciary that will serve as the basis for a state and society beholden to the rule of law.

By Maria Orlyk, Managing Partner, and Oleksandr Protsiuk, Counsel, CMS RRH

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

2021 was indeed an active year for the Antimonopoly Committee of Ukraine (AMCU). It seems that antitrust enforcement did not slow down during another pandemic year but even, in fact, accelerated. The agency closed a number of investigations, having imposed million-dollar fines on players from a variety of markets. Below you may find the top trends in Ukrainian antitrust enforcement. They are worth keeping an eye on, especially for companies having or planning a business presence in Ukraine.

Antitrust Fines Are Reaching a Record High

Continuing the trend of the last several years, fines for antitrust infringements are increasing drastically. In recent years, the AMCU has imposed a number of record fines for such antitrust infringements as abuse of dominance practices (the 2016 case against Gazprom, USD 3.5 billion fine), anticompetitive practices (the 2019 case against tobacco market players, USD 235 million fine), and gun-jumping (the 2021 case against sugar manufacturer, USD 2.4 million fine), to name a few. Apart from imposing fines on companies, the AMCU has also returned to the application of structural remedies as a sanction in abuse of dominance cases. It is worth noting that it has not applied this type of sanction since 1995. The practice restarted in 2019 when the AMCU not only fined a company belonging to the Ostchem group for abuse of a dominant market position but also ordered the group’s split.

The AMCU Is Expanding and Deepening Its Market Expertise

Such traditional markets as energy & oil, pharmaceuticals, retail, and transport & infrastructure have always been under the spotlight of the AMCU. However, in the last several years, the agency has expanded its expertise by investigating a lot of new markets such as tobacco, mineral fertilizers, molasses of starch corn and glucose syrups, liquid chlorine, and many others. Apart from studying new markets, since the start of the pandemic, the AMCU has also delved into socially sensitive markets, e.g., pharmaceutical and healthcare, food, fuel, telecommunications, transport, to name a few.

It should be noted that, in contrast to world-leading competition agencies, the AMCU has not yet advanced into digital antitrust. In fact, there has been no investigation or scrutiny into the digital market commenced by the agency so far. At the same time, in 2021, the agency announced its intention to initiate a study of the market for advertisements in social media.

Foreign-to-Foreign Transactions Primarily Trigger a Ukrainian Notification

Due to the very low notification thresholds for merger filings in Ukraine, the number of merger clearances for foreign-to-foreign transactions issued by the AMCU is increasing – and so is the number of filing rejections issued because notifications are found incomplete. Significant changes to the current merger control thresholds are expected in 2022. Among other things, a newly announced draft law, which envisages Ukrainian antitrust law reform, proposes the exclusion of the selling group’s figures if the transaction leads to its loss of control over the target. If the parliament adopts the draft law, the number of foreign-to-foreign mergers filed in Ukraine is expected to decrease.

Bid Rigging Is Increasingly Investigated and Punished

In recent years, investigating bid-rigging (in other words, conspiracies in public procurements) has been the main focus of AMCU’s activities. According to the AMCU, such cases constitute about 50% of all anticompetitive concerted practices investigated. Fines imposed for this category of infringements are increasing. To date, the record fine for bid-rigging (USD 31 million) was imposed in 2019 on the participants of food service procurements. It should be noted that the fine is not the most unpleasant outcome for those caught bid-rigging when compared to a three-year ban by the AMCU from participation in public procurements.

The Forecast for 2022

The agency has several major market investigations and studies pending: poultry, sugar, cement, sodium hydrochloride, sulfuric acid, to name a few. We anticipate it will finish some of the mentioned investigations and studies, in 2022, and will present its results to the public. In early February 2022, the AMCU announced its market priorities for the year. These are energy & oil, banking & finance services, seaports and rail freight, and construction materials, among others.

Besides, in 2022, businesses should be prepared for the anticipated Ukrainian antitrust law reform, which includes numerous amendments to the investigation’s procedure, leniency, and settlement, as well as the merger control regime.

By Timur Bondaryev, Managing Partner and Co-Head of Antitrust & Competition, and Anastasiia Panchak, Associate, Arzinger

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

Sayenko Kharenko has advised the French Development Agency on a EUR 300 million credit facility agreement to service Ukraine’s financial, economic, and humanitarian needs.

According to Sayenko Kharenko, the agreement provides “a loan for the account of the French state and at the demand of the French Ministry of Economy, Finance, and Recovery. This credit facility aims at supporting Ukraine in addressing its essential public services needs and restoring key macroeconomic balances in the context of major humanitarian and economic crises.”

The Sayenko Kharenko team was led by Partner Anton Korobeynikov and included Associates Oles Trachuk, Vladyslava Mitsai, and Oleksandr Motin.

Editor’s Note: After this article was published, Avellum announced it had advised the Ministry of Finance of Ukraine on the loan. The Avellum team was led by Senior Partner Glib Bondar and included Senior Associate Oleg Krainskyi and Associates Anastasiia Zhebel, Oleksandra Mohylna, and Yaroslav Pavliuk.

On 07 March 2022 two vital laws regulating tax and reporting obligations during martial law in Ukraine became effective: 

The Law of Ukraine No. 2118-IX On Amendment of the Tax Code of Ukraine (the Law 1) 

In accordance with the Law 1 the following key changes were implemented in the Tax Code of Ukraine (the TCU): 

Taxpayers are released from any liabilities indicated in the TCU, in particular resulting from failure to pay taxes, submit tax declarations / other tax reports, register VAT and Excise tax invoices / adjustments to VAT / Excise tax invoices in timely manner. Such unfulfilled tax obligations must be completed within 3 months following the end of martial law in Ukraine.

No tax audits must be initiated. All on-going tax audits must be suspended. 

Taxpayers that directly participate in war actions are released from any liabilities as per the TCU concerning their failure to fulfill tax obligations indicated in point (a) above in timely manner due to the consequences of their participation in war actions. Such tax obligations must be completed within 1 month following the end of the mentioned consequences. 

Fuel or ethanol can be transported without registration of Excise tax invoice on condition that a way bill of lading contains all information that must be indicated in the relevant Excise tax invoice. The Excise tax invoice must be registered either within 3 months as per point (a), or within 1 month as per point (c) indicated above.  

Free of charge transfer of monies, commodities, as well as provision of services for the benefit of the Ukrainian Armed Forces or territorial defense units is not considered supply of goods / services. Consequently, such transactions should not be subject to VAT.

Monies, soldiers’ protection gear, medicine, medical gear, food as well as other commodities, works, services as per the list to be approved by the Cabinet of Ministers of Ukraine that are free of charge transferred to the Ukrainian Armed Forces, as well as other law enforcement agencies, shall not increase financial result subject to Corporate Profit Tax of taxpayers that transfer / provide / perform such goods / services / works.  

Compensation for the fuel used for transportation services provided by natural persons for the benefit of the Ukrainian Armed Forces or territorial defense units must be exempt from Income Tax of such natural persons 

Production and importing of electronic cigarettes under classification code 2402 20 90 20 can be done using excise stamps for foreign or domestic electronic cigarettes interchangeably on condition that the rate of the Excise Tax is the same.

All terms indicated in tax and other legislation for taxpayers, as well as for tax authorities are suspended.  

All expired or unpaid during martial law licenses for (1) production / turnover of ethanol, alcohol, tobacco products and liquids for electronic cigarettes, (2) production, storage, retail and wholesale of fuel, as well as places of production, storage, retail and wholesale of fuel are considered valid during martial law period. Prolongation of the licenses, as well as payment for them must be done within 30 days following the end of martial law.  

Office / field tax audits related to VAT refund are canceled during martial law.

Socially significant food, medicine and medical gear which prices are to be fixed by the Cabinet of Ministers of Ukraine must be exempt from import duties during martial law 

Taxpayers are released from any liabilities indicated in the Law of Ukraine On the use of cash registers in the sphere of trade, public catering and services during martial law  

The Law of Ukraine No. 2115-IX On Protection of Interests of Persons Submitting Reporting and Other Documents during Martial Law (the Law 2)

In accordance with the Law 2 the following key provisions were adopted: 

• All natural persons, private entrepreneurs, legal entities may submit reporting, financial, accounting documents, auditors` reports or any other documents as per the valid legislation (if such documents were not submitted during martial law) within 3 months following the end of martial law in Ukraine.
• During martial law or within 3 months following the end of martial law in Ukraine no administrative or criminal liability can be imposed on natural persons / legal entities indicated in point (a) above.
• If natural persons do not have physical possibilities to submit documents indicated in point (a) above due to the consequences of their direct participation in war actions, then such persons shall be free from administrative / criminal liability and must submit the reporting or other required documents within 1 month following the end of the mentioned consequences. 
• No audits regarding timeliness and completeness of submission of any reporting document must be initiated during martial law.

Furthermore, on 07 March 2022 the Government of Ukraine announced additional measures to release during martial law and during 1 year period following the end of the martial law: 

 

• Private entrepreneurs subject to Unified Tax (Groups 1, 2) from payment of the Unified Social Security Tax (the USST) in full
• Private entrepreneurs and legal entities subject to Unified Tax (Group 3) from payment of the USST for their employees drafted to the Ukrainian Armed Forces and other defense units 
• Taxpayers from payment of land tax and land rent on all Ukrainian territories where war actions are ongoing 

By Viktoriya Fomenko, Partner, Integrites