Category: Ukraine

Ilyashev & Partners has successfully represented JS Corrugating Machinery Co. Ltd. in the Kyiv Court of Appeals, which upheld the recognition and enforcement in Ukraine of China International Economic and Trade Arbitration Commission’s USD 5 million award in favor of the company against LLC South Cardboard Ukraine, plus penalties and arbitration fees.

Ilyashev & Partners describes J.S. Corrugating Machinery as “one of the largest China-based manufacturers of packaging machines.” According to the firm, “the company has 27 sales offices, 18 branches, and 38 service stations worldwide, including its subsidiaries in Istanbul, Moscow, New Delhi and Ho Chi Minh City.”

According to Ilyashev & Partners, South Cardboard Ukraine’s indebtedness arose from a breach of a equipment supply contract.

The Ilyashev & Partners team was supervised by Senior Partner Roman Marchenko and included lawyers Andrey Bychkov, Oleksandr Denysenko, and Oleh Kulyk.

Asters has advised the EBRD on financing to the Grain Alliance Group.

The Grain Alliance Group is a Ukrainian agricultural producer that cultivates over 55,000 hectares of land in Northern Ukraine. According to Asters. “the loan will support the group’s liquidity and help it withstand the COVID-19-caused crisis. Therefore, it will help the company to preserve its capital expenditure plans, which were part of the original project between the EBRD and Grain Alliance approved in 2019.”

Asters’ team consisted of Partner Iryna Pokanay, Counsel Gabriel Aslanian, and Associates Inna Bondarenko and Viktoria Zagreba.

Aequo has advised Dragon Capital on the acquisition of a six-story building in Kyiv.

The building offers a total area of 4,441 square meters. According to Aequo, “after the reconstruction and adaptation of the premises, Dragon Capital intends to transfer the building to Kyiv School of Economics for long-term use.”

Aequo’s team included Partners Anna Babych and Sergey Denisenko, Counsel Michael Lukashenko, Senior Associate Mykhaylo Soroka, and Associates Denys Medvediev and Mariia Derechina.

Aequo did not reply to our inquiry on the matter.

Everlegal has advised the first innovation park in Ukraine, UNIT.City, on its receipt of EUR 50 million in financing from the European Investment Bank. CMS advised EIB on the deal.

According to Everlegal, “this agreement will help to create one of the largest innovation centers, which will combine specialized infrastructure with an innovative ecosystem for IT and technology companies in Central and Eastern Europe.”

“The Ukrainian Innovation Campus Project will be supported by InnovFin Science, a joint initiative from the EU Commission and the EIB that promotes research and innovation investments by public and private bodies,” CMS reports. “It will contribute to creating one of the biggest hubs merging dedicated infrastructure with an innovation ecosystem for IT and technology companies in Central and Eastern Europe.”

Everlegal’s team included Partner Andriy Olenyuk and Lawyers Olha Horodniuk, Vasylyna Belo, and Lidiia Vatutina.

CMS’s team included Partner Ihor Olekhov, Counsel Kateryna Chechulina, and Associate Khrystyna Korpan.

Doubinsky & Osharova has successfully represented Jack Daniel’s before the Ukrainian Supreme Court, which, on May 28, 2020, upheld the company’s cassation appeal to invalidate the trademark certification in Ukraine for “Black Jack” (and the certification for its Cyrillic-spelled variant).

According to Doubinsky & Osharova, “the dispute started in 2017 after Jack Daniel’s filed a statement of claim to the Commercial Court of Kyiv to invalidate the said title documents, basing on earlier registered and world-famous trademark ‘JACK DANIEL’S’. The case was considered by courts repeatedly. In 2018, the Commercial Court of Kyiv established the similarity of the disputed trademarks and that it could be misleading, and therefore satisfied the plaintiff’s claim. The Northern Commercial Court of Appeal agreed with these findings but dismissed the lawsuit [because] the statute of limitations had expired. By overturning the ruling of the court of appeal, the Supreme Court stated that the beginning of the statute of limitations for filing a lawsuit with such a claim could not automatically coincide with the date of publication of the information [about] the registration of the trademark.”

Doubinsky & Osharova’s team was supervised by Managing Partner Michael Doubinsky and included Partners Anton Koval and Victoria Sopilnyak, Attorney-at-Law Nikolai Koval, and Lawyer George Gabeliya.

 

Asters has advised the EBRD on a EUR 25 million loan to Yuria-Pharm, a Ukrainian manufacturer of intensive care medicines, medical devices, and antiseptics.

According to Asters, “A six-year loan of up to EUR 25 million from the EBRD will help Yuria-Pharm expand its existing production facilities and introduce an innovative solution for the Ukrainian market, which will help customize cancer treatment practices. Healthcare establishments and patients across Ukraine will be able to buy smaller and cheaper doses of specialized medicines.”

Asters’ team consisted of Partner Iryna Pokanay, Counsel Gabriel Aslanian, and Associates Inna Bondarenko and Viktoria Zagreba.

Maksym Sysoiev has been promoted to Partner at Dentons in Kyiv, where, the firm reports, “he will focus on further developing and enhancing Dentons’ energy capabilities and offering in Ukraine.”

Sysoiev has over ten years of experience in the Ukrainian energy sector. According to Dentons, “he regularly advises foreign and local companies with respect to various legal issues, including local and cross-border transactions, and represents clients’ interests before Ukrainian State authorities. He has deep industry experience in both conventional and renewable energy sectors.”

‘‘I am honored to be a partner in the world’s largest law firm,” commented Sysoiev. “I look forward to working with my colleagues here in Ukraine and around the globe to further develop our Energy practice and provide top quality service to our clients.’’

Sysoiev has an LL.B. from the Jaroslav the Wise National Law Academy in Kharkiv and an LL.M. from the University of Pittsburgh. Prior to joining Dentons in 2015, he spent almost half a year with Gide Loyrette Nouel, three and a half years with the Paritet law firm, and two and a half years with the Marchenko Danevych law firm.

“Maksym’s admission to the Dentons partnership reflects his devotion to clients, deep knowledge of complex regulations, thorough understanding of the pulse of the Ukrainian energy market, as well as his commitment to the legal community,” stated Dentons Kyiv Managing Partner Oleg Batyuk. “I am delighted to congratulate him on achieving this important career milestone.”

Sayenko Kharenko has advised the EBRD on its input into Ukraine’s new law On Amendments to Certain Legal Acts to Facilitate Attraction of Investments and to Introduce New Financial Instruments.

The new law was adopted on June 19, 2020, and will enter into force on July 1, 2020, pending the President’s signature.

“The Capital Markets Law marks a significant breakthrough towards enforceability of derivative transactions by establishing a detailed framework for operations on the derivatives market, introducing a concept of close-out netting and improving the rules on the enforceability of financial collateral,” according to Sayenko Kharenko. “This should allow Ukrainian market players and their foreign counter-parties more certainty and flexibility in using derivatives as an instrument for their hedging and investment activities, which, in turn, would make Ukrainian capital markets more attractive and competitive globally. The Capital Markets Law also provides for an improved regulation of other types of financial instruments, in particular, sets out more flexible and investor-oriented rules on bond issuances by creating a framework for collective action by the bondholders through bondholder meetings and bonds trustees.”

Sayenko Kharenko’s team was led by Partners Nazar Chernyavsky, Anton Korobeynikov, and Olexander Droug and included Senior Associate Dmytro Vasylyna and Junior Associate Sofiia-Mariia Kuzminska.

The widely discussed draft law 1210 has finally been signed by the President of Ukraine and come into effect on May 23 (Law No. 466). This is why business will have to adjust to new rules of the game. The Law mostly aims to implement the main measures under the BEPS Project, which our state undertook to do as early as in December 2019 by ratifying the MLI Convention.

The new rules concern mainly medium-sized and large businesses whose ownership structure includes foreign companies, or those business entities which mostly work with non-residents.

What will change in the international aspects of taxation?

It will be more difficult to obtain benefits under Double Tax Treaties, the concept of “beneficial owner” has been specified in detail and the “principal purpose test” of the business transaction and “sound economic reason” criteria have been introduced.

Starting from May 23, any transaction with a non-resident must meet the “sound economic reason” principle. Otherwise, a resident must increase its income by the amount of expenses under such a transaction. In this case, it shall be deemed that there is no business purpose if the principal purpose of a transaction is non-payment of tax, or if a resident would not enter into such an agreement with a non-related non-resident on the same conditions.

Almost the same rule has been introduced for the possibility to enjoy benefits on withholding tax under Double Tax Treaties (the “principal purpose” test). From now on, a taxpayer will have to prove that the principal purpose of a transaction is not tax evasion, otherwise, he/she will have to pay the 15% tax.

The revised Tax Code contains a clarified definition of a beneficial owner of income and states that this shall be the person who has the actual benefit from the income. Furthermore, it contains examples when a person may not be deemed a beneficiary: a company with no sufficient resources and personnel, an intermediary company, which transfers the obtained income to third parties bears no significant risks and has no rights to use and dispose of such income.

Positive changes in international taxation

Law 466 also contains positive innovations. For instance: the introduction of a “look-through approach” to determine a beneficial owner of income and a mutual agreement procedure.

In particular, it is now possible to use the Double Tax Treaty not with the direct owner of income, but with its beneficial owner (“look through” approach). If a taxpayer understands that he/she pays income to an intermediary company, which then transfers it to a real beneficiary, the real beneficiary may apply to the tax authorities for confirmation of its status of beneficial owner of the income. In this case, the resident will be able to enjoy the benefit under the international convention with the real beneficiary of income and reduce the withholding tax rate.

Furthermore, the Tax Code introduces an additional chain of the administrative procedures for challenging the decisions of tax authorities concerning the application of international conventions. This procedure is called the mutual agreement procedure (it will presumably come into effect in six months). Under such a procedure, a taxpayer may challenge a decision of the tax authorities to a competent body (the Ministry of Finance), and, after consultations with a foreign company, the taxpayer’s complaint may be granted. In any case, the taxpayer reserves the right to further challenge a decision of the tax authorities in court.

Permanent establishments of non-residents

However, not all novelties of Law 466 are positive. The new rules of taxation for non-residents, which have been in effect since May 23, make the presence of the latter in Ukraine much more difficult without a permanent establishment. For instance, residents using the corporate mail of a non-resident, who enter into agreements on behalf on a non-resident, or residents holding negotiations on concluding agreements by non-residents shall be equal to a permanent establishment. In addition, persons providing services in Ukraine on behalf of a non-resident for more than 183 days a year may be recognized as permanent establishments. Such persons will have to register with tax authorities as a permanent establishment and to pay tax on non-residents’ income at the general rate of 18%. Moreover, the tax authorities now have the right to register a non-resident’ establishment following the results of inspecting its activity in Ukraine and to charge the non-resident a penalty of UAH 100,000 for failure to register the permanent establishment.

Indirect sale of real estate

The Tax Code invalidates the possibility to sell Ukrainian real estate without paying taxes in Ukraine through the sale of corporate rights of foreign legal entities. From now on, a non-resident buyer must register with the Ukrainian tax authorities and withhold a 15% tax from the non-resident buyer’s income obtained from the sale of an investment asset.

It is important to understand that only corporate rights of foreign legal entities (the Ukrainian companies were left aside) are recognised as an investment asset and only subject to certain conditions. In particular, a foreign company must hold at least 50% of shares of a Ukrainian company, the authorised capital of which is more than by 50% formed at the expense of real estate throughout a year preceding the transaction. The Code contains very interesting and ambiguous provisions on determining the value of real estate, which are likely to be clarified soon.

CFC Rules

The new rules of taxation of income of controlled foreign companies, which may come into effect from January 1, 2021, are likely the most widely discussed. The new rules will de facto allow Ukraine to charge taxes on incomes of foreign companies (including partnerships and trusts) controlled by residents of our state. The rules for determining the control are quite universal and will be rather hard to avoid. For instance, a foreign company may be recognised as controlled by a Ukrainian resident if the latter conducts transactions with banking accounts of a foreign company, holds negotiations on the CFC entering into agreements or has the power of attorney to hold such negotiations and sign agreements for more than 1 year.

At the same time, rules on CFC taxation contain a lot of exceptions from which one may benefit. For instance, a CFC will not be charged taxes for its income in Ukraine unless the company’s income is 50% or more passive income, or if the company pays corporate income tax at the effective tax rate of 13% or more. Moreover, even passive income may be recognized as active for taxation purposes should it be possible to prove that the company is actually present and that it has staff and fixed assets.

And, finally, provisions of the Tax Code on CFCs will be further clarified and amended and are likely to come into effect by January 1, 2021.

What to think about right now

Considering the large number of new introductions, we recommend that businesses take measures that will help them avoid penalties and potential disputes with the tax authorities. In particular, we suggest conducting an audit of all agreements with non-residents and determining and confirming that such agreements contain a business purpose. As a result of such an audit, it will be possible either to change the structure of a transaction or to determine the correct withholding tax rate.

Concerning cooperation with non-residents, we suggest determining the risks of the emergence of a permanent establishment in Ukraine, taking measures on minimising them or registering a permanent establishment.

Concerning controlled foreign companies, firstly, we suggest determining whether or not your company can be recognised as a CFC and, secondly, checking if benefits on non-payment of CFC income tax in Ukraine are applicable to you. Following the results of the analysis it should be decided what will be the most feasible option for you: to administer a CFC or to enjoy a benefit and liquidate a CFC while paying no taxes.

By Iryna Kalnytska, Partner, GOLAW

The global financial crisis and the COVID-19 pandemic are impacting businesses all over the world so badly that many operations have stopped, exports have fallen and imports are being replaced by domestic consumption, and international corporations had to put on hold any expansion plans and their forays into other markets.

In such an unprecedented situation, businesses have to either shut down or use their accumulated  financial resources and find ways to stay afloat.

Companies are rapidly pushed to operate in new ways. One of the recent good examples, luckily not related to the coronavirus, was Unilever’s decision to reorganize its corporate structure and move toward a single HQ in Rotterdam in order to increase control and make faster decisions about its global product portfolio.

It is obvious that experienced top-managers clearly understand weak spots of their businesses and know how to cope with such issues, including when corporate reorganization may be applied. In any case, one should think of corporate reorganization in terms of:

•  financial recovery of the business (e.g. tax optimization, reduction of costs, etc.);
• the need to establish correct and transparent corporate structure in project finance transactions or when attracting investors;
• acquisition of competing companies;
• business expansion or reduction;
• allocation and liquidation of non-core or non-profitable business lines;
• concentration of assets or property rights in one hand, etc.

Apart from the reasons for reorganization, caused mostly by the financial crisis, some of them are also driven by the developments in Ukrainian legislation, requiring business owners and top managers to rethink their corporate structures.

Let’s recall that draft law No. 1210 as of 08/30/2019 on changes to tax legislation was adopted early in 2020 and is now waiting to be signed by the President of Ukraine. After entering into force, the law will introduce so called “controlled foreign corporation” rules. Generally, beneficiaries will be liable for paying personal income tax in Ukraine on the amounts of the non-distributed company’s profit.

Another recent legislative novelty was introduced by the new version of AML Law as of 12/06/2019, which established new rules for the disclosure of beneficial owners of a company, requiring all legal entities to annually update the information about their corporate structure and beneficial owners, including filing a notarized copy of the beneficial owner’s passport and legalized (apostilled) certificates about foreign companies registration (if foreign companies are in the corporate structure of the reporting Ukrainian company).

Generally, forms of corporate reorganisation in Ukraine are divisions, separations, mergers, consolidations, transformations and liquidations. From our point of view, two quite efficient forms of corporate reorganization in the current realities of Ukraine are consolidations and liquidations.

Consolidation

Consolidation means the termination of one company and the transfer of its assets and liabilities to another company (successor).

Consolidations are mainly used if there is a necessity to enlarge business. For example, valuable assets, trademarks, licenses, etc. belong to different companies of the group and when there is no commercial point to maintain all the companies, they may be consolidated in one main company which will gain all these assets and property rights as well as liabilities to counterparties of companies participating in the consolidation.

Another example is when one of the group companies is profitable and the other one is unprofitable. Having one owner, it basically means that taxes are paid from one pocket and it may make commercial sense to cover the revenues by the losses to optimize the general group income.

Entering into consolidation, one should be aware of dozens of legal peculiarities that may arise in case of non-proper preparation for the process. Among the issues requiring special attention are correctly transferring assets and liabilities, tax implications, compliance with corporate and antitrust legislation, issues related to dismissals and transfers of employees, etc.

Liquidations

Liquidation of the joining company is an integral part of the consolidation procedure, and may also be considered as a separate measure for the financial recovery of the business.

Voluntary liquidation as an independent form of business reorganization is a way of terminating a company without succession, that is, without transferring its rights and obligations to other entities.

Obviously, liquidation is aimed at winding up those companies of the group that have only loss-making units or production that is not financially viable and has no prospects for recovery.

One must take into account that a voluntary liquidation process includes undergoing a tax inspection as well as settlements with the creditors. This stage of the liquidation procedure is definitely the most time- and resource-consuming. A preliminary internal tax audit is the prerequisite for a smooth tax inspection.

Now more than ever before, restructuring may become a magic bullet for international and domestic businesses seeking how to improve operations.

By Max Lebedev, Partner, and Taras Lytovchenko, Counsel, GOLAW