Category: Ukraine

Ilyashev & Partners has persuaded the District Administrative Court of Kyiv to suspend the June 9, 2020 decision of the General Director of Ukroboronprom, Aivaras Abromavicius dismissing firm client Oleksandr Donets, the president of the Antonov State Enterprise.

Ilyashev & Partners describes Donets as “a well-known specialist in the aviation industry with extensive work experience who started his career at SE Antonov in 1988 as a ground engineer.” According to the firm, “later he held senior positions at Kyiv Aviation Plant Aviant, the State Aviation Enterprise Ukraine, and SE UkSATSE. Since May 2018, he has been occupying the position of the president of SE Antonov.”

The Antonov State Enterprise has been a client of Ilyashev & Partners since 1998.

According to Ilyashev & Partners, “the court upheld the motion of Mr. Donets filed within his claim against the unlawfulness of the Order of Aivaras Abromavicius. The court also imposed a prohibition to perform any actions directed at changing any information about the president of SE Antonov contained in the state register, as well as to delete the information from the register about Mr. Donets as the head of the State Enterprise.”

“Pursuant to the Administrative Court Procedure Code, the court’s ruling came into force immediately after the moment it was issued, [so] Mr. Donets is currently the only lawful and rightful head of SE Antonov,” commented Ilyashev & Partners Senior Partner Roman Marchenko. “Any person who is going to interfere with the activities of the president of SE Antonov will be subject to criminal liability under Article 382 of the Criminal Code, ‘failure to abide by a court decision,’ which is punishable by imprisonment for up to eight years.”

Aver Lex has persuaded Ukraine’s cassation Administrative Court, to uphold the judgments of the previous two instances that the dismissal of Ukraine’s Sergey Bochkovskiy from the Head of the Emergency Service of Ukraine was unlawful and groundless.

The Court then ordered that Bochkovskiy be reinstated as of his March 25, 2015 dismissal date.

The Aver Lex team was led by Partner Igor Fedorenko and included lawyer Vladimir Enich. According to Aver Lex, “the Cabinet of Ministers of Ukraine has not yet implemented the court’s decision and has not reinstated Sergey Bochkovskiy. Therefore, [our] lawyers [have] initiated the introduction of information on the commission of a crime in the Unified Register of Pre-trial Investigations [and have] initiated investigative and procedural actions regarding omissions of State officials by the State Bureau of Investigations. A pre-trial investigation is still continuing.”

Esquires has successfully defended Solum LLC in a dispute over real estate property rights valued at USD 8.5 million.

Solum LLC is a Ukrainian real estate company associated with Piraeus Bank Group.

According to Esquires, Solum LLC acquired commercial real estate covering 3,501.30 square meters in 2012 at public auction from a bankrupt company for USD 8.5 million. According to Esquires, “this property was in the Piraeus Bank Group mortgage, [and in 2018] after the mortgage terminated in connection with the acquisition of property by Solum, the bankrupt company, taking advantage of the imperfection of the procedural law, filed a lawsuit with a demand for the reclamation of [the] real estate and recognition of the right of ownership.”

Ultimately, the firm reports, “the trial and appeal courts upheld the arguments of Esquires’ attorneys and rejected the claims of the bankrupt company as unjustified.”

The Esquires team included Managing Partner Oleksandr Shkelebey, Partner Viktoria Kovalchuk, and Senior Associate Andrii Kravchuk.

COVID-19 has severely impacted the economy and labour migration. Many foreign citizens employed in Ukraine had to leave the country and work from their homes abroad.

In May and June 2020, Ukraine has lifted many quarantine-related restrictions. The Ukrainian government allowed public transport carriers to provide services, most businesses – to conduct regular operations and most state authorities and institutions – to carry out their activities. This contributed to the resumption of regular business activities and return of many employees, including foreigners, to their workplaces.

Given a long break and rapid changes in applicable regulations during the quarantine period, foreigners should be aware of up-to-date legal requirements regarding their employment and migration. These include the extension of work permits, residence permits and visa receipt.

1. WORK PERMIT

Most foreign nationals are employed by the local Ukrainian entities by virtue of work permits that must be extended every year. Over the quarantine, the rules for obtaining and extending work permits have not changed. Neither grace period nor suspension of work permits has been introduced. Foreigners must apply to have their work permits extended within the period stipulated by the local laws (20 days prior to the work permit expiration date). Ukrainian employers might apply to get work permits newly issued or extended during the quarantine, since competent authorities (i.e. employment centres) process applications in due course.

However, some employers face practical challenges during the quarantine. The law says that an employer shall submit a copy of the employment agreement within 90 days upon the work permit issue date (art. 42-7 (4) Law of Ukraine “On employment”). Failure to comply with this requirement results in revoking a work permit. If an employee is unable to start working due to the entry restrictions (e.g. presence in person is required), the parties should agree to postpone the employment start date and file the copy of a respective employment agreement. In practice, this enables an employer to keep a permit “alive” since the law does not clearly require that employment must start within the aforesaid period.

In practice, employers often get the work permits extended upon the lapse of the filing period or even upon expiry of the permit. Although this rule is not prescribed by the law, employers should apply for extension by providing reasonable clarifications.

2. SERVICE CARD

Many foreigners are employed through the representative offices of foreign businesses registered in Ukraine. No changes as to rules for obtaining and extending service cards have been made. During the quarantine, the competent authority (the Ministry for Development of Economy, Trade and Agriculture of Ukraine) keeps operating during normal business hours and processing applications for issuance or extension of service cards.

As a matter of practice, the Ministry accepts documents required to extend a service card even if it has already expired. Thus, the employers should apply to have the service cards extended.

3. VISA

Ukrainian embassies have not issued visas during the quarantine. Due to the limitation in operations, they processed emergency requests only. Earlier, the entry of foreigners (except for those who had temporary residence permits) was generally restricted and required prior approval from the Ministry of Foreign Affairs of Ukraine.

Regulation No. 480 of the Cabinet of Ministers of Ukraine dated June 12, 2020 (effective as of June 15,2020) reads that the entry into Ukraine is generally forbidden unless foreigners have insurance certificates for the medical treatment of COVID-19 or medical support during the mandatory medical observation period, or have permanent residence permits, or are declared refugees. The prior approval from the Ministry of Foreign Affairs of Ukraine for the entry of foreigners into Ukraine is no longer required.

The aforesaid regulation provides for the mandatory medical observation of those foreigners who come from the countries with a significant number of the infected with COVID-19. Countries with a significant number of the infected with COVID-19 are those with 40 infected persons per 100,000 population. The list of those countries has been published on the website of the Ministry of Health.

The aforesaid mandatory medical observation requirement does not apply to foreigners who agree to self-isolate at home using mobile application Diya Vdoma of the Unified State E-Services Web Portal, as well as to the following categories of travellers:

• citizens of countries with a significant number of the infected with COVID-19 who have not been on the territory of such countries for the last 14 days;
• employees of diplomatic missions and consular posts of foreign states, official international missions, organizations accredited in Ukraine, and members of their families;
• drivers and crew members of trucks, crew members of aircraft and ships, river vessels, members of train and locomotive crews;
• people who take exams of the Ukrainian Centre for Educational Quality Assessment with one person accompanying each of them.

The above exceptions do not apply if there is a reason to believe that travellers were in contact with people infected with COVID-19. As for now, it is not clear how the officers of the State Border Guard Service of Ukraine will check this. The state officials might request filling in questionnaires in this regard.

4. TEMPORARY RESIDENCE PERMIT

From the beginning of the quarantine and till May 12, 2020, the State Migration Service of Ukraine neither processed nor accepted documents required to issue or extend the temporary residence permits. The period for temporary residence permit extension was actually suspended. According to the currently applicable rules, foreigners may apply to have their temporary residence permits extended within 30 days upon the end of the quarantine (currently June 22).

Since May 12, the State Migration Service of Ukraine has started working, however its operations are limited. While the authority now accepts documents required to extend temporary residence permits, most of its regional offices still do not accept documents to issue new temporary residence permits.

Since Ukraine is gradually lifting the quarantine restrictions, it is getting easier for foreign citizens to come to Ukraine. For those who stay in Ukraine, it is highly recommended to keep control over deadlines for extension of their permission documents.

By Vasyl Yurmanovych, Counsel, and Yuriy Osiv, Junior Associate, Integrites

On 23 May 2020, Law of Ukraine “On Amendments to the Tax Code of Ukraine Aimed to Improve Tax Administration, Eliminate Technical and Logical Inconsistencies in Tax Legislation” No. 466-IX, dated 16 January 2020 (“Law”), came into force. The Law implements changes to tax legislation, including recommendations under the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) and changes to tax administration procedures. Certain changes will come into force on 1 July 2020 and 1 January 2021.

New anti-avoidance rules

• Taxpayers may not apply benefits of double tax treaties if the main purpose of the transaction is to obtain such benefits (a General Anti-avoidance Rule).
• Tax authorities may disregard expenses incurred in transactions with non-residents if there is no business purpose in these transactions.
• The Law introduces controlled foreign companies (“CFC”) rules. CFCs are foreign legal entities and entities without legal personality including trusts and foundations. CFC’s income will be subject to corporate income tax or personal income tax in Ukraine as part of the income of the controlling person. The CFC rules will come into force on 1 January 2021.
• The Law changed the “thin capitalisation” rule. The new rule will test debt-to-equity ratio considering debt towards unrelated non-residents, will restrict deductibility of interest paid to resident lenders and will decrease the deductible interest threshold to 30% EBITDA.
• Some payments to non-residents would be treated as dividends that are subject to 15% withholding tax (“WHT”) (i.e. payments for redemption of shares or payments for goods/services in controlled transactions that are not at “arm’s length”).
• Resident entities should increase their taxable income for corporate income tax purposes by 30% of the value of the goods/services sold to the residents registered in low tax jurisdictions or fiscally transparent non-resident entities unless the prices in these transactions are at “arm’s length”.

Transfer pricing

• Taxpayers must substantiate in their transfer pricing (“TP”) documentation the economic and business purposes in controlled transactions such as purchase of works (services), intangible assets, and other types of business transactions other than purchaser goods.
• Entities will be deemed related parties if one entity owns a 25% share in another entity (as opposed to 20%). Under the Law, a joint venture and related parties of its participant that has a 25% share in the joint venture are treated as related parties.
• Taxpayers must report their participation in an international group of companies, including the aggregated consolidated income of the group for the previous financial year.
• Taxpayers must submit global TP documentation (the master file) at tax authorities’ request if the aggregated consolidated income of the international group of companies for the previous financial year is EUR50 million or more.
• Taxpayers must submit a TP report on a country-by-country basis if the aggregated consolidated income of the international group of companies for the previous financial year exceeds EUR750 million.

Withholding tax

• Income from disposal of shares in real estate rich companies is subject to WHT in Ukraine. Starting from 1 July 2020, if a non-resident pays such income to another non-resident that has no permanent establishment in Ukraine, the non-resident paying this income must register and pay WHT prior to such payment. The failure to pay WHT leads to a fine in the amount of 10-75% of the unpaid WHT.
• A person who transfers all income to a third party and does not have the resources (qualified personnel, fixed assets, sufficient equity etc.) to perform functions, use assets, and manage risks related to the received income may not be considered as the beneficial owner of such income for the purposes of double tax treaties.
• The Law establishes a mutual agreement procedure (“MAP”). A taxpayer may apply for MAP if the taxpayer considers that actions of the tax authorities of Ukraine or another country may result in taxation that contradicts the double tax treaty.

Permanent Establishment

• The Law expands the definition of a permanent establishment of a non-resident according to the BEPS Action Plan. For example, under the previous version of the Tax Code, a Ukrainian resident might have been recognised as a permanent establishment if it negotiated contracts only in favour of one non-resident. This definition allowed to avoid recognition of a permanent establishment if a Ukrainian resident negotiated contracts in favour of more than one non-resident. Under the Law, a Ukrainian resident may be recognised as a permanent establishment if it acts in favour of several related non-residents.
• Tax authorities can register permanent establishments operating without prior registration in the course of tax audits, as well as can seize the property of such permanent establishments.

Rent tax

• The Law repeals some adjustments of a rent tax for mining of off-balance mineral resources, including oil and condensate.
• Tax rates on iron, non-ferrous metals, and ironstone were increased.
• The price of realisation of mined mineral resources in controlled transactions may not be lower than the price under the “arm’s length” principle.

We expect that the Law may result in new tax risks for Ukrainian and international business. In this regard, we recommend you to review your corporate and operational structures to identify, analyse, and mitigate possible risks. We will be happy to assist you with these matters.

By Anton Zaderyholova, Senior Associate, Yelyzaveta Kravtsova, Associate, and Taisiia Duda, Associate, Avellum

Sayenko Kharenko has advised JSC Novokramatorsky Machine Building Plant in a sunset review of anti-dumping measures against the import of casting rollers originating from Ukraine into the Eurasian Economic Union. The review was initiated at the request of Russian manufacturers.

According to Sayenko Kharenko, following the review the anti-dumping measures were extended for only two years, although five years is standard for the Department for Internal Market Defense of the Eurasian Economic Commission.

Sayenko Kharenko’s team consisted of Lawyers Ivan Baranenko and Tetyana Tanchyn, working under the supervision of the Partner Anzhela Makhinova.

Sayenko Kharenko has successfully represented the interests of PJSC Manufacturing Association Stalkanat-Silur in a sunset review of antidumping measures against the import of wire ropes originating from China into Ukraine.

According to Sayenko Kharenko, the firm “successfully proved that the position of the exporters and the economic conditions do not preclude new types of dumping causing injury, as well as the fact that termination of the antidumping duty would arguably entail recommencement of dumping and would cause injury to PJSC Manufacturing Association Stalkanat-Silur.”

Following the review the 123% antidumping duty was extended for an additional five years.

Sayenko Kharenko’s team was supervised by Partner Anzhela Makhinova and consisted of Lawyers Ivan Baranenko and Tetyana Tanchyn.

The so-called BEPS Law (No. 466-IX) changed corporate profit taxation rules in Ukraine. The majority of its provisions entered into force on May 23, 2020. Others will become effective later on.

What major changes are there to know?

Increase of financial criteria

The income threshold of UAH 40 million (previously UAH 20 million) now applies in order:

• To determine the possibility of applying 1-year reporting period
• Not to apply tax adjustments

Fixed assets

• Tangible assets are qualified as fixed assets if their value exceeds UAH 20 thousand (previously – UAH 6 thousand)

“Thin capitalization” rules have been updated (effective from January 01, 2021)

• “Thin capitalization” rules are applicable to interest payments under loans, credits and other debt obligations from unrelated non-residents (previously – only from related non-residents)
• The financial result before tax shall be increased by the amount of excess of accrued interest over 30 % (previously – 50 %) of the amount of the taxation object (previously – the amount of financial result before tax), increased by the amount of financial expenses and depreciation deductions;
• If the amount of the excess is negative, the financial result shall be increased by full amount of the accrued interest
• Separate accounting of capitalized interest which increased the prime cost of non-current assets is required
• “Thin capitalization” adjustments shall not apply in respect of interest which does not comply with the arm’s length principle

Some other rules for adjusting the financial result have been changed

The financial result shall be decreased, inter alia, by the amount of:

• Dividends accrued from the controlled foreign company and income derived from the ownership of equity in non-residents and accrued dividends from such non-residents (subject to some conditions) (effective from January 01, 2021)
• Negative value of taxation object of a taxpayer in the process of reorganization – by the successor (subject to some conditions)

The financial result shall be increased, inter alia, by the amount of:

• 30% of the value of goods, works, and services which were supplied to non-residents from the list of territories and organizational forms adopted for transfer pricing purposes (exceptions – controlled transactions, or if sale prices are determined under the arm`s length principle) (previously 30 % tax adjustment applied only to purchase of goods / works / services from such non-residents)
• Fines, late fee accrued by controlling or other state authorities
• Expenses under transactions with non-residents in case such transactions had no business purpose

Accrual of depreciation

• The Production Method may apply (subject to some exceptions)
• Depreciation shall not be accrued for the period of non-use of fixed assets in economic activities in connection with their modernization, reconstruction, further construction, further equipping and conservation
• The following minimum allowable depreciation periods may apply in respect of fixed assets put into the operation from 01 January 2020 until 31 December 2030:

4th group (machinery and equipment) and 5th group – two years;

3d group (transmitting devices) and 9th group – five years.

Reporting requirements 

Taxpayers who are required to publish financial statements along with the auditor’s report shall submit to the tax authority (in year 2021 for year 2020):

• Annual financial statements alongside with the auditor’s report for the preceding year– until 10 June of each year
• A report on financial position (balance sheet) and a report on profit, loss and other gross income (report on financial results) – along with the tax returns.

By Viktoriya Fomenko, Partner, Integrites

Asters has successfully defended PrivatBank CB JSC, the largest bank in Ukraine by assets, in a defamation dispute with O. Dubilet, the former chairman of the bank’s board, before the Civil Court of Cassation of the Supreme Court in Ukraine.

According to Asters, ”on May 27, 2020, the panel of judges of the Supreme Court passed a resolution allowing PrivatBank’s cassation appeal in its entirety and setting aside the lower court decisions made in favor of O. Dubilet. This is the first time that the nationalized PrivatBank has won a defamation case before the Supreme Court.”

Asters’ team included Partner Andriy Pozhidayev, Counsel Oleh Lazovskyi, and Associate Nataliia Mysnyk.

Sayenko Kharenko has advised the EBRD on its up-to-USD 60 million secured loan to the Fozzy Group.

According to Sayenko Kharenko, “the funds will facilitate the opening or renovation of 41 Silpo supermarkets and stores as well as 29 Fora convenience stores. Fozzy Group will also launch the first ‘green’ supermarket in Ukraine. The loan will be available for disbursement in USD, EUR, or UAH, which will allow the Fozzy Group to control its currency exchange-related risks. The Fozzy Group is a Ukraine-based industrial group and a multi-format retailer (brands such as Silpo, Fora, Fozzy C&C, and Thrash), with over 560 outlets around the country. The group’s businesses also include food production, banking, and restaurants, as well as logistics, including a postal delivery operator.”

Sayenko Kharenko’s team was led by Partner Igor Lozenko and included Associates Denis Nakonechnyi, Vladyslava Mitsai, and Vira Pankiv, and Junior Associates Sofiia-Mariia Kuzminska and Olexander Motin.