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Lexwell & Partners
Lexwell & Partners
Legal Regulation of Investments: Changes and Prospects
Compared to the previous year, the investment climate in Ukraine remains more or less stable. The legal field is being gradually reformed towards simplification of the conditions of doing business, even though not as fast as desired.
Exchange regulation and corporate law acts are among that legislation that has had the most perceptible influence on the investment process and the status of business in general in recent years. Sectoral government institutions have also been rather actively discussed, albeit only as legislative initiatives, the adoption of possible amendments to tax legislation as specific steps to be taken by Ukraine to implement the Action Plan on Base Erosion and Profit Shifting (BEPS) which are supposed to limit the possibilities for tax evasion abuses.
In particular, the most noticeable changes in the legal field include the enactment of the Laws of Ukraine On Currency and Currency Transactions and On Limited and Additional Liability Companies. Another important development that is long-expected by investors and business, which should have a positive impact on the investment climate, is adoption of the Law of Ukraine On the Higher Anti-Corruption Court to Ukraine (No. 2447-VIII of 7 June 2018).
Below, we will look in detail at some of the most important changes to legal regulations introduced by the above laws.
On 7 February 2019, the Law of Ukraine On Currency and Currency Transactions was enacted. It was passed to systematise currency legislation and with the aim of further promoting currency liberalisation, reducing currency restrictions and currency control. In addition, the National Bank of Ukraine (NBU) approved a number of resolutions which, coupled with the above law, create an intrinsically new system of currency regulation, while the previous, essentially obsolete acts were cancelled.
In particular, so as to replace in excess of 50 regulations in this area, the NBU developed 8 resolutions which came into force on 7 February to govern issues like the foreign current trade procedure, currency values transactions, trans-border movement of currency values, etc. They also list so-called “defence” measures. For example, restrictive measures that can be taken by the NBU temporarily to support stability of the national banking system and establish the procedure and criteria for introducing such measures.
Prior to the above changes, currency regulation restrictions were set out both by laws and by NBU resolutions. But now only the National Bank is entitled to do that within the limits defined by law. This, to some extent, requires business to be more vigilant when tracing any such changes.
Thus, having removed a range of restrictions, at the same time, the Law of Ukraine On Currency and Currency Transactions did not deprive the NBU of the right to introduce such restrictive measures on a temporary basis. The latter may be done for a limited period of time, 6 months, and under certain conditions: the cumulative duration of such measures cannot exceed 18 months over 2 years in cases of (1) the banking system’s instability, (2) deterioration of Ukraine’s balance of payments, or (3) emergence of circumstances threatening the stability of the banking and/or financial system.
The new currency regulation also cancelled or weakened a number of previous restrictions for currency transactions. All types of individual licenses issued by the NBU, including for investments abroad, have been repealed. However, limits have now been established on the purchase and transfer of foreign currency abroad by residents and non-residents, foreign investors — EUR 50,000 for individuals and EUR 2 million for legal entities over a calendar year. At the same time, a number of transactions are not covered by such limits (including those for the return of profits, revenues, and dividends from investment activities in Ukraine to a foreign investor).
Among the cancelled measures, there are also special sanctions in the form of an individual licensing regime and temporary suspension of foreign economic operations which used to be applied to Ukrainian residents and non-residents for violation of export and import rules. The settlement period for export and import transactions were increased from 180 to 365 days. The requirements on the mandatory sale of proceeds received in foreign currency from abroad currently remain unchanged — as before, they still make up 50% of foreign currency proceeds. This requirement, however, no longer extends to the funds received for making foreign investments.
The NBU intends to continue with liberalisation of currency regulation, and so investment conditions are expected to be further simplified with the weakening of existing restrictions. At the same time, as introduction of new restrictive measures depends directly on the political and economic situation in the country, other, less beneficial for investors, prospects of legal regulation in this area are also possible.
Even though, like before, tax legislation is amended annually, no particular changes have been made to have any essential influence on investment activities and the business environment.
However, possible measures for implementation of the BEPS plan in Ukraine continue to be discussed. Even though this discussion has been going on for a rather long time, at the end of 2018 the authorities began acting more decisively in this direction. For this purpose, the NBU and Ministry of Finance developed and presented a bill aimed at improving existing tax evasion agreements and norms on transfer pricing documentation, as well as introducing measures for the future exchange of information between countries. It is quite likely that this legislation will be considered and adopted by the Ukrainian Parliament in 2019.
A prominent innovation of 2018 was the Law of Ukraine On Limited and Additional Liability Companies (No. 2275-VIII), which came into effect on 17 June 2018. It’s an important act due to limited liability companies being one of the most widespread forms of commercial societies in Ukraine. As a key novelty of the Law, the number of LLC shareholders is no longer limited (previously, only up to 100). Besides, a new instrument for Ukraine that is known in international practice as “a shareholder agreement”, was also introduced. In the first six months after the enactment of the Law, i.e. until 17 June 2019, limited and additional liability companies are expected to bring their charters into compliance with it, otherwise they will be considered invalid.
Investor protection tools remain the same in general. Courts are still among the most efficient national remedies to defend the rights of an investor (even though, in many cases, it is more advisable and quicker to use other methods to resolve legal issues).
Judicial reform continues in Ukraine. The first year after introduction of new procedural legislation has, however, shown that even though certain individual justice administration rules have been somewhat simplified, the system requires further improvement (both in organisational and procedural ways). There are also hopes that adoption of the long-expected Law of Ukraine On the Higher Anticorruption Court of Ukraine, and subsequent establishment of this body, will decrease the level of corruption in the country, providing further encouragement for investments. In addition, as in the past, investors also have the possibility of defending their rights at international (arbitration) institutions.
To summarise, the legal field for investments is gradually improving and, at the same time, remains relatively stable. Nevertheless, when preparing and structuring agreements involving Ukrainian businesses or planning foreign economic operations in Ukraine, it’s important to keep in mind that professional legal assessment of all aspects of such operations is a crucial precondition of their success.