Category: Ukraine

On December 6, 2019, the draft Law No. 2179 “On Prevention and Counteraction the Legalization (Laundering) of Proceeds from Crime, Financing Terrorism and Financing the Proliferation of Weapons of Mass Destruction” has been adopted by Ukrainian Parliament (the “Law”). The Law will enter into force on April 28, 2020, to implement the FATF Recommendations, the Fourth Directive (EU) 2015/849 and Regulation (EU) 2015/847 (which is a part of Ukraine’s commitment pursuant to the Association Agreement between Ukraine and the EU) and the Memorandum of Understanding between Ukraine and the IMF ratified on November 8, 2018.

The Law is anticipated to substantially enhance the existent financial monitoring system in Ukraine in order to bring it in line with the European AML standards. Due to the newly introduced risk-oriented approach, the Law allows banks and other financial institutions to focus predominately on checking high-risk clients, which is expected to improve the efficiency of financial monitoring. However, despite, reduction of scope and increase of thresholds of operations subject to monitoring, financial institutions will have to more scrutinize documents and information in order to reveal suspicious transactions.

The Law introduces the following changes:

>> The list of SIFMs has been expanded

The list of SIFMs has been supplemented with entities providing services related to turnover of virtual assets, tax advisors (in addition to audit companies) and business entities providing advisory services related to the sale and purchase of real estate

>> Application of mandatory risk-oriented approach

The Law introduced a mandatory risk-oriented approach to be applied by the subjects of initial financial monitoring (the “SIFM”), that is SIFMs should identify, assess, understand and appropriately manage risks of legalization (laundering) of criminal proceeds.

>> Establishment of case-by-case report system on suspicious transactions and activities

The SIFM is now obliged to notify the competent authority of suspicious financial transactions and activities regardless of the amount of transaction carried out.

>> Regulation of virtual assets transactions

The Law introduces a definition of virtual assets –  “a digital expression of value that can be traded in digital format or transferred and that can be used for payment or investment purposes”) and sets out the requirements to information that should accompany the transfer of virtual assets. Transactions involving virtual assets for the amount exceeding UAH 30,000 that we believe includes cryptocurrencies and electronic money are subject to mandatory financial monitoring.

>> A threshold for mandatory financial monitoring is increased while the list of the monitored financial transactions is reduced

The Law has raised from UAH 150 000 to UAH 400 000 the threshold for financial transactions subject to mandatory financial monitoring, and the former list of 17 types of financial transactions has been reduced to 4, namely:

• any participant of the transaction is registered/located in a country that fails to comply with FATF and other international anti-money laundering rules (the “AML”);
• financial transaction is carried out by a politically exposed person(s) (the “PEP”), PEP’s family members and affiliates;
• cross-border transfer of funds;
• all financial operations with cash.

>> Differentiated KYC checks have been introduced

The Law introduced a simplified procedure for the know-your-client checks with reduced frequency and scope of monitoring business relationship and data collection. However, the risks criteria, which SIFM shall take under consideration (connected to the client, country of its location, type of goods and services, etc.), as well as specific measures within such a simplified approach are not expressly stipulated in the Law and can be expected to be adopted separately by authorities.

According to the Law, SIFM within an enhanced procedure for the know-your-client checks should verify grounds and purposes of all financial transactions, which complies with at least one of the following conditions:

• are complex;
• are unusually large;
• are conducted in an unusual way;
• have no obvious economic or legitimate purpose.

Moreover, money transfers amounting to or exceeding UAH 30 000 (previously – UAH 15 000) and carried out without opening of an account will now be subject to the appropriate know-your-client check.

>> Identification and risk-management of PEPs transactions to become more thorough

SIFMs are now obliged to (1) use several reliable sources in order to identify PEPs, their family members and affiliates, (2) take sufficient measures to identify PEPs` sources of wealth and funds, (3) carry out permanently an enhanced monitoring of business relations, namely, increase frequency and scope of monitoring business relationship and data collection; and (4) obtain their management permission to establish or continue business relations with PEPs (we expect that the form and the term for issuance of such a permission will be clarified by the regulator). In addition, the continuing risks with respect to PEPs should be considered by SIFMs during 12 months after PEP ceased to perform public functions.

The Law explicitly prohibits to rely solely on the information contained in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Entities in order to establish the UBOs.

The Law has also clarified the definition of PEP affiliates, who are the individuals subject to at least one of the following criteria: (1) they own a legal entity, trust or other legal formation jointly with such PEP, or they have other strong business connections with PEP; (2) they are the UBOs of the legal entity, trust or other legal formation, which de facto were established for the benefit of PEP.

>> New UBO criteria, UBO of trusts

According to the Law, the UBO is an individual exercising a decisive influence not only on a legal entity but also on other individual on whose behalf the financial transaction is being conducted (the existing version of law recognizes the UBO as an individual exercising a decisive influence only on a legal entity carried out directly or indirectly).

In addition, the Law has defined a beneficiary of a trust – a person entitled to receive benefits and/or income from such trust or other similar legal entity, namely a settlor, a trustee, a protector (if any), a beneficiary or group of beneficiaries, as well as any person exercising a decisive influence on the activity of trust (including through the chain of control/ownership).

While conducting the verification and identification procedures with respect to trust or another legal formation, the SIFM should determine:

• its name;
• purpose of establishment and activities;
• objects (property, funds, etc.) managed by such trust or another legal formation;
• country of establishment;
• place of business;
• banking details;
• registration number (if any).

SIFM should also request a notarized copy of extract certifying the establishment of such trust or legal formation.

>> Exchange of financial monitoring information

SIFM is now allowed to exchange data for the purpose of initial financial monitoring with the members of its group, provided that the unified procedure for such exchange is developed and approved by the parent company.

In addition, SIFM has been allowed to exchange data with entities outside its group about persons who have been refused to establish (maintain) business relations, to open an account or to perform a financial transaction. The law is silent to which extend SIFM should rely on such information.

>> Asset freezing procedure has been introduced

In case the client is connected with the terrorist activity or is a person under international sanctions, SIFMs are obliged not only to notify the authorized controlling authority, but also to freeze the client`s assets immediately without prior notification to the client. After the assets have been frozen, SIFM is entitled to notify the client about asset freezing based on the written client`s request.

The Law explicitly envisages that once the assets have been frozen debit operations should be suspended, however, crediting of funds should remain possible.

>> Introduction of new interference measures

The Law supplemented the list of interference measures, which can be applied with respect to the SIFMs for non-performance or improper performance of the AML requirements.

In particular, the Law entitled financial monitoring authorities to execute a settlement agreement with the SIFMs, under which the SIFMs will have an obligation to pay a defined monetary obligation (which is, however, not a fine) and to take all reasonable measures to eliminate continuing and prevent new violations of the AML requirements.

The list of 7 authorities empowered to supervise and regulate the activities of SIFM has been reduced to 5 authorities, namely the NBU, the State Financial Monitoring Service, the Ministry of Justice of Ukraine, the National Securities and Stock Market Commission (the “Commission”) and a recently established Ministry of Digital Transformation of Ukraine (instead of Ministry of Infrastructure of Ukraine). The National Commission for State Regulation of Financial Services Markets was removed from the list due to its liquidation prescribed by the “Split” Law and its functions were split between the NBU and the Commission. Ministry for Development of Economy, Trade and Agriculture of Ukraine was also removed from the list.

>> The fines for violation of AML rules have been increased

 

 

By Igor Krasovskiy, Partner, and Olena Savchuk, Senior Associate, Integrites

On February 1, 2020, the new Law on Lease of State-Owned and Municipal Property (the “Law”) came into force. The Law substitutes the old one that has been in use since 1992 and launches a fundamentally new mechanism for the lease of state/municipal property which aim to:

• simplify the leasing procedure
• minimize the potential corruption risks

In particular, the Law introduces the following basic novelties in the leasing procedure:

• The list of all premises which potentially may be leased, as well as information about the already leased property, relevant prices, main terms and conditions of lease agreements, are now public and will also be available online on the “Prozorro” online platform.
• The Law establishes 2 different procedures for the lease execution:

The general (main) procedure: all premises must be leased based on an auction, except for the premises that are directly covered by the out-of-tender procedure
Out-of tender procedure: lease of premises by state/municipal authorities and entities, educational and scientific institutions, diplomatic offices, museums, religious organizations (and other similar entities) may be done without an auction; sub-lease of such premises is prohibited

• All auctions, as well as all communications and document circulation during tender or out-of tender procedures (i.e. applications, resolutions, etc.), will be conducted online through the “Prozorro” online platform;
• Subject to certain exceptions (i.e. out-of tender procedure, etc.), the lease extension will also be made through an auction;
• The starting rental price for an auction in most cases will be calculated based on a balance value (as opposed to an independent evaluation);
• Due to the simplification of the leasing procedure, the total time for the lease execution is expected to reduce by half.

By Gennadii Roschepii, Counsel, and Oleksiy Feliv, Managing Partner, Integrites

Sayenko Kharenko has advised Promprylad.Renovation, a project within the premises of Promprylad, a revitalized Soviet-era plant in Ivano-Frankivsk, on its buying-out of plant facilities.

According to Sayenko Kharenko, Promprylad.Renovation will “create an ecosystem of collaboration between businesses, social initiatives, artists, and educators,” and the purchase of the facilities “[opens] up the next page of the project development strategy, which is the creation of more than 37,000 square meters for lease, including office and co-working spaces, hotels, R&D center, exhibition center, etc.”

Yuriy Fylyuk, CEO of Promprylad Renovation, commented that: “At the beginning of the project, we knew that we were about to face a challenging exercise to design a corporate set up that was entirely new for the Ukrainian market. Yet, we didn’t initially realize the task would be that difficult. The whole development stage took two years.”

Sayenko Kharenko’s team was led by Partner Oleksandr Nikolaichyk and included Associates Oksana Daskaliuk, Yurii Dmytrenko and Sviatoslav Kozak.

On 16 January 2020, the Ukrainian Parliament adopted law No 1210 “On amendments to the Tax Code related to the improvement of tax administration and elimination of technical and logical inconsistencies in the tax legislation” (the “Law”).

It is likely that the President will sign the law in early to mid-February.

The most significant changes in the Law include:

I. Introduction of a mechanism to collect capital gains tax from a non-resident-seller

Capital gains on foreign to foreign sales of shares or corporate rights in a Ukrainian company will be subject to 15% withholding tax (“WHT”), unless provided otherwise in an effective double tax treaty (“DTT”) between Ukraine and the jurisdiction of the foreign seller.

Although theoretically this was previously the case, Ukrainian domestic law had no provisions and effective mechanism for collection of this tax. Now, the Law obliges a foreign buyer to register with the Ukrainian tax authorities and pay WHT from the seller’s capital gain to the Ukrainian budget.

Moreover, the Law provides for certain circumstances when even indirect capital gains (i.e., gains from the transfer of a Ukrainian company by sale of its foreign parent’s shares) will be subject to 15% WHT (mainly if there is no relevant or standard DTT and/or the Ukrainian subsidiary derives most of its value from real estate).

The above provisions become effective from 1 July 2020.

II. Taxation of controlled foreign companies (“CFC”)

Becomes effective from 1 January 2021 and should have no retrospective effect.

A CFC is a foreign company under control of a Ukrainian entity or individual.

Unless eligible for certain exceptions, the controlling person must pay corporate income tax or personal income tax on the income earned by the CFC, even if it has not yet been distributed.

Failure to comply with CFC reporting and taxation may result in significant penalties, although effective from the 2023 reporting year.

III. Concept of constructive dividends

The relevant provision becomes effective from 1 January 2021.

For corporate income tax purposes, the difference between fair market price and the actual price in any transaction with a related non-resident or a non-resident registered in a “low tax” jurisdiction which leads to underpayment of corporate income tax will be treated as a distribution of constructive dividends. As a result, the company should pay WHT at a 15% rate (or a lower rate if provided by an effective DTT) from such constructive dividends.

IV. New thin capitalisation rules

Becomes effective from 1 January 2021.

For corporate income tax taxpayers having a debt-to-equity ratio of more than 3.5, certain additional limitations on deductibility of interest will apply.

According to the unofficial text of the Law, thin capitalisation rules will no longer apply to lease companies and financial institutions.

V. Introduction of a participation exemption

A Ukrainian company owning at least 10% in a foreign company may exclude from its taxable income the accrued dividends from such foreign company, or increase such foreign company’s book value (if accounted for based on the equity method) in the Ukrainian company’s balance sheet.

If the 10% ownership rule is met for 3 consecutive years, the Ukrainian company may adjust its taxable income for previous years, as relevant.

VI. Foreign companies deemed Ukrainian tax residents for corporate income tax purposes

A foreign company may be deemed as a Ukrainian corporate income taxpayer if the company is actually managed from Ukraine.

If the place of management is another jurisdiction, one of the following conditions would still be sufficient to cause the company to be deemed a Ukrainian taxpayer:

• bank accounts are managed from Ukraine; or
• financial or management accounts are prepared in Ukraine; or
• the foreign company’s employees are managed from Ukraine.

Such foreign companies may register in Ukraine voluntarily and, if registered, cannot be deemed a CFC.

Notably, any entity qualifying as a non-resident according to an effective DTT cannot be considered as a Ukrainian tax taxpayer.

VII. Other notable changes

• For corporate income tax purposes, the taxable revenue is increased by 30% for certain goods/services sold to non-residents in “low tax” jurisdictions, or having a special form of incorporation (according to lists approved by the Cabinet of Ministers of Ukraine). The increase does not apply if the sale is at fair market value, as proved by transfer pricing documentation.
• Expenses without business purpose incurred on transactions with non-residents are not deductible.
• Permanent establishments of non-residents will not be allowed to use a currently available notional profitability of 70%. The Law obliges them to calculate their taxable income based on the arm’s length principle.
• Quoted prices should be used to prove the arm’s length level of transactions with commodities.
• The requirements for transfer pricing reporting and documentation for multinational entities will be broadened.

By Rob Shantz, Partner, Oleksandr Markov, Counsel, and Kateryna Kuzmenko, Tax Consultant, Redcliffe Partners 

Avellum has advised arrangers J.P. Morgan Securities Plc and Raiffeisen Bank International AG on a USD 464 million bridge loan financing for Bakcell’s acquisition of PSJC Vodafone Ukraine. DLA Piper advised Bakcell on the deal.

Avellum also advised JP Morgan Securities Plc, Raiffeisen Bank International, Dragon Capital, and ICBC Standard Bank as joint lead managers on Vodafone Ukraine’s Eurobond offering of USD 500 million 5-year 6.2% loan participation notes, proceeds of which were intended for the bridge loan prepayment, among other things. DLA Piper advised Vodafone Ukraine on the issuance.

Avellum describes Bakcell, which is part of the NEQSOL Holding group of companies, as “a mobile operator and the leading mobile internet provider in Azerbaijan.” 

According to DLA Piper, “the proceeds of the issued notes will be advanced to Ukrainian telecom business of NEQSOL to refinance a syndicated bridge facility and for general corporate purposes of telecom businesses. This is an important transaction for the Ukrainian market as the interest rate marks the lowest USD coupon achieved by a corporate issue from Ukraine and is the first takeout loan with a two-year call option.”

Avellum’s team was led by Senior Partner Glib Bondar with support from Partner Vadim Medvedev, Senior Associates Anton Zaderyholova, Tetiana Mykhailenko and Anastasiya Voronova, and Associates Yelyzaveta Kravtsova, Oleg Krainskyi, Anna Mykhalova, and Mariana Veremchuk.

DLA Piper’s Kyiv-based team included Partners Illya Sverdlov, Galyna Zagorrodniuk, and Oleksandr Kurdydyk, Senior Associate Dmytro Rylovnikov, Legal Directors Natalia Kirichenko and Dmytro Pshenychniuk, Associates Olena Stanishevska, Ivan Shatov, and Viktoriia Luganska, and Junior Associates Kateryna Tyshchenko and Andrii Falendysh. The firm’s London-based team consisted of Partners Mark Dwyer, Ben Brown and Tony Lopez, Senior Associate Mei Mei Wong, and Associates Elvis Dangol, Michael Graham, and Elizabeth Baek.

Cai & Lenard is advising Ukrainian teenage dance troupe Light Balance Kids, on the next phase of what the firm calls its “creative development.”

According to Cai & Lenard, “Light Balance Kids is a Hi-Tech neon and LED show with elements of acrobatic and dance choreography. The group was formed in Kyiv in late 2018 and consists of 13 dancers between the ages of 11 and 14.” Light Balance Kids recently performed on America’s Got Talent 2019, where they reached the top ten.

According to the firm, its advice included the “development of corporate structure (choosing proper forms of legal entities, advising on corporate governance and protection of shareholders matters), elaboration of legal framework for involving minors into the project (drafting respective agreements, advising on specifics and current practice of involving minors under Ukrainian and international laws), and tax consulting (review of the possible transactions within the project in order to implement more reasonable and legal instruments to decrease tax burden).”

Cai & Lenard’s team included Managing Partner Anton Lukovin and Counsel Dmytro Symanov.

Eterna Law has advised the Ukrainian subsidiary of AIG on its restructuring.

According to Eterna Law, the firm’s advice “included drafting related documents and overall transaction support.”

The firm’s team included Partner Maksym Uslystyi and Junior Associate Margarita Tatarova.