OASIS

                        ORGANIZATION OF ADVOCATES SPECIALISING IN INTERNATIONAL SERVICES

UKRAINIAN DEVELOPMENTS 2009/2010

 Dmitri Grischenko and Nickolai Atanosov, Grischenko & Partners

1. Overcoming the Negative Consequences of the Financial Crisis

-         Foreign Currency Control Regulation

-         Foreign Investment Procedures

-         Tax Novelties

-         Loans in Foreign Currency

-         Mortgaged Property Foreclosure Moratorium

-         Debt Acceleration Prohibition

 2. Simplification of the Conditions of the Pursuit of Business in Ukraine

-         Lease of Property

-         Permit Issue Procedures

-         Licencing

-         Regulation of Small Businesses

-         Corporate 

3. Alterations to authorities of the Constitutional Court of Ukraine  

4. Prohibition of gambling

1. On 19 November 2009, the President signed the Law "On Amendment of Certain Laws of Ukraine with the Purpose of Overcoming the Negative Consequences of the Financial Crisis" No. 1533-VI (the "Law"), whereby important amendments were made to the effective laws. The Law enters into force on the day of its official publication, which is yet to take place.

Foreign Currency Control Regulation 

The maximum term for the return to Ukrainian of foreign currency under export and import transactions  (agreements) has been reduced from 180 days to 90 days, unless an extension thereof is approved by the Ministry of Economy of Ukraine. 

The failure to comply with the maximum terms results in a fine of 0.3% of the amount of the delayed payment or delivery imposed on the Ukrainian party for each day of delay. 

The reduced terms are likely to be applied not only to agreements concluded after the Law enters into force but also to the effective agreement which are currently under performance. 

Foreign Investment Procedures 

The Law establishes that foreign investment in monetary form should be carried out only through investment accounts opened with the authorized Ukrainian banks and is subject to conversion in the Ukrainian hryvnya. As a result, foreign investments in Ukraine contemplated without opening of intermediary investment accounts will not be possible, and where a local subsidiary needs funds in foreign currency, such funds would need to be advanced in ways other than via capital contribution, or else the investor would face the burden of double conversion of the currency. 

Also, the Law introduces a temporary requirement of mandatory state registration of foreign investments, both monetary and nonmonetary. Before enactment of the Law, state registration of foreign investments was not mandatory, although many foreign investors opted to register their investments. Registration of property investments involves the submission of a prescribed set of registration documents to the regional state administration. Registration of monetary investment shall be performed by the National Bank of Ukraine.  

However, the existing procedure of registration of foreign investment by local state administrations is as of now applicable only to nonmonetary investment, while the monetary investment is subject to registration procedures to be introduced by the National Bank of Ukraine.

Tax Novelties 

The Law temporarily establishes a cash method of tax accounting for income received by the banks from credit operations. Certain amendments are introduced with respect to formation of reserves by banks and nonfinancial institutions with respect to all credit obligations: guarantees, surety ship, aval, consolidated mortgage debts, etc, as determined for tax purposes. Certain amendments are made to the Law “On Taxation of Individuals” affecting taxation of interests. 

Loans in Foreign Currency 

The Law temporarily limits the possibility to render foreign currency loans to natural persons only to those advanced for the payment for medical treatment and education, by way of direct transfer of funds to the medical or educational institutions (no cash payments). Foreign currency loans to private entrepreneurs are allowed only by way of bank transfers. 

Repayment of the loans in foreign currency granted after the new law enters into force and payment of interest on them may take place only via bank transfers. 

Mortgaged Property Foreclosure Moratorium 

The Law introduces a moratorium for 2009-2010 with respect to eviction of natural persons from mortgaged residential property, provided that such property is the only place of residence for an individual debtor, the delay on payment of the interest under the mortgaged loan does not exceed two months, and that the debtor has signed a debt restructuring agreement with the bank. 

Debt Acceleration Prohibition 

The Law temporarily prevents acceleration of payments under foreign currency loan agreements with non-resident lenders. It has been prohibited for the residents of Ukraine to reduce terms of execution of its obligations under foreign loans.  

According to the Law it is prohibited for natural persons and legal entities to amend loan agreements in foreign currency from non-residents, due to which the terms of execution of obligations by residents-borrowers to non-residents-lenders reduce under such agreements, or which foresee its prior execution. The National Bank of Ukraine temporary suspends the registration of amendments to the agreements on raising funds from non-residents in foreign currency, which deal with reducing terms of execution of obligations under such agreements by residents-borrowers or its prior execution.

As well, it is prohibited the prior execution by residents natural persons and legal entities of payment obligations under foreign raising fund agreements.  

It is specifically set forth that the provisions of the Law remain effective until 1 January 2011.

2. On 30 December 2009 the Law of Ukraine "On Amendment of Certain Laws of Ukraine Concerning Simplification of the Conditions of the Pursuit of Business in Ukraine" No. 1759-VI (the "Law") entered into force. The Law introduced important amendments to the effective laws, most notably, on licensing, permits issuance procedures, lease of property, company formation, as well as regulation of small businesses. 

Lease of Property 

The Law introduced important amendments to the Law "On Lease of State and Municipal Property". Even though the name of the law suggests that it regulates the lease of state and municipal property only, it may also be applied to lease of privately owned assets as well, which makes legislative changes relevant for non-state sector as well. 

Preemptive rights of current lessees to renewal of lease. Under the new rules, current lessees who duly fulfilled their duties under the lease agreement are granted a pre-emptive right. Property may be leased to a third person only if the current lessee does not notify the lessor of its intent to renew the lease. However, it is unclear whether the pre-emptive rights extend to any property subject to lease or to integral property complex only, or how this rule would correlate with the tender procedure prescribed where there are more than one prospective lessee. 

The Law establishes a minimal 5 year term of lease, unless the lessee requests a shorter period (prior to the amendment, the lease term was not regulated but rather was left open for the agreement of the parties). 

To the leases of state and municipal property entered into by small business (i.e. entrepreneurs and entities with up to 50 employees and up to UAH 70 million annual income), this provision applies retroactively, so the lease agreements which were concluded before the Law entered into force are deemed to have automatically been extended to 5 years unless the lessee requests a shorter lease term. 

Permit Issues Procedures 

Starting from December 30, 2009 the procedure for obtaining authorization documents (excluding licences for commercial activity)   has been simplified. 

A "silent consent" principle is established for obtaining most but not all permits. If an application for a permit and the respective supporting documents have been properly submitted, and the authorities fail to respond within the term established by law (either to issue the permit or reject the application), the applicant is  allowed to pursue the activities as if the permit had been issued on the basis of the list of submitted documents bearing the date of their submission (the "Acquiescence Principle"). 

The Law introduced the maximum 10 days period for the issue of business related permits, unless a longer term is expressly established by the laws. This rule appears to apply to issuance of various types of documentation, including as might relate to land, construction, etc. 

Licensing 

The Law revoked the requirement of licensing with respect to the following business activities: 

–        wholesale trade in seeds; 

–        professional activities in the field of social services; 

–        development of projects and performance of works regarding preservation, restoration, renewal, repair, or adjustment of cultural heritage monuments; 

–        breeding of pets (dogs, cats, exotic and decorative animals) at the breeding facilities, dog training as well as preparation of specialists in those fields; 

–        activities related to the re-sale of artworks, collectables and antiques, organization of trade (auctions) in artworks, collectables and antiques. 

Under the Law, licenses for business activities should be issued for an indefinite term. The Cabinet of Ministers of Ukraine, acting upon the submission of a state licensing authority may limit the term of the license; however, the minimal term of a license should not be less then 5 years. This provision, however, does not apply retroactively to licenses issued before the Law entered into force. 

Regulation of small businesses  

Specifically with respect to the small businesses (i.e. individual entrepreneurs and entities with up to 50 employees and up to UAH 70 million annual revenue), the Law introduced a one year moratorium temporarily banning: 

1) the increase of the rent payments under state property lease agreements concluded between the State Property Fund or its territorial branches with the small businesses. Additionally, the Law recommends the municipal authorities to introduce the same moratorium with respect to the rent payments under municipal property lease agreements with small businesses; 

2) any measures of state or municipal supervision or control with respect to small businesses, except for the inspections of high-risk businesses, ordinary and extraordinary audits by tax authorities, audits by the Pension Fund authorities of the high- and medium risk businesses, as well as extraordinary inspections by the consumer protection authorities acting upon consumers’ complaints. 

Corporate 

The amendments to the Law of Ukraine “On business entities” by the Law considerably reduced the amount of the minimal authorized capital required for the formation of a limited liability company (LLC) from 100 minimal wages to 1 minimal wage, as applicable at the date of the registration of LLC. Currently, 1 minimal wage is UAH 884 (approx. USD 109, or EUR 75) and shall increase every month. This amendment does not affect LLCs registered before the Law entered into force. 

It is likely that a new law on limited liability companies may be adopted with various distinctions according to the present provisions, as for now it is still under consideration of the Parliament of Ukraine.  

It is specifically set forth that the provisions of the Law remain effective until 1 January 2011. 

3. According to the decision of the Constitutional Court of Ukraine (hereinafter – the CCU) as of March 11, 2010 at the submission of 48 members of Parliament regarding official interpretation of expressions “the highest judicial body”, ”supreme judicial body”, “cassational appeal” (articles 125, 129 of the Constitution of Ukraine), it was determined that the CCU is not entitled to reverse decisions of the Supreme Administrative Court of Ukraine and the Supreme Commercial Court of Ukraine in the cassation order and under exceptional circumstances – decisions of commercial and administrative courts. The CCU rendered this decision relying on its constitutional status, and that it is not empowered by the legislator to perform cassation functions regarding decisions of specialized supreme or highest courts, implementing the competence of the cassation instance.  

4. According to the Law of Ukraine “On prohibition of gambling (business) in Ukraine” registration No. 4268 as of March 26, 2009 (hereinafter – the Law), activity on organizing and conducting gambling in casinos, play on gambling machines, in bookmaker’s offices and in electronic (virtual) casinos by the organizers of gambling (entrepreneurs and business entities), with the view of drawing income, will be prohibited as well as participation in gambling. Further, from the effective day of the Law, issuing of licenses for implementation of the activity on organizing and conducting gambling in Ukraine shall be ceased, and the licenses, issued to the entrepreneurs, shall be cancelled. The Law came into effect on June 23, 2009.  

Moreover, the Law does not provide any mechanism for further restoration of the cancelled licenses, which may mean that the business entities have to obtain the licenses over again. 

Contradictions. As to the legitimacy and lawfulness of the Law, we are of the opinion, first of all, that in compliance with Article 8 of the Constitution of Ukraine, laws and other regulatory legal acts shall be adopted on the basis of and not contradicting with the provisions of the Constitution of Ukraine, which provisions are of the direct effect. Article 58 of the Constitution of Ukraine provides that laws and other regulatory legal acts have no retroactive effect in time, except cases when it is a reduction or cancellation of the person’s responsibility. We believe that the provisions of the Law may be interpreted as bearing the retroactive effect since they cease the previously undertaken obligations by the State for the determined period (e.g. by cancelling the licenses post factum). 

Secondly, Article 21 of the Law of Ukraine “On licensing of certain types of commercial activity” provides the particular grounds for annulment of gambling licenses for maintenance of totalizators, gambling establishments, issuance and conducting of lotteries, organizing the gambling entrepreneurship.  

Thirdly, the relevant provision of the Law violates one of the fundamental rights of the owners of gambling establishments, since it does not provide for a procedure of reimbursement of direct losses and lost income (including, inter alia, costs for obtaining licenses, charges for patents, which in case of their termination have to be returned to the appropriate state tax authority, and, besides, the losses caused by impossibility to conduct further commercial gambling activity – by reason of absence of the profit, as the owners of gambling establishments have to pay salary to the gambling establishments’ staff, pay rent for premises and machines, repay loans attracted for the development of gambling business and to pay interest, etc.).

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