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Tatiana Daniltseva
ADER HABER
Iryna Kalyta
EY Law
Vladimir Kotenko
EY Law
Dmytro Pavlenko
LLC “Deloitte & Touche Ukrainian Services Company”
Sergey Popov
KPMG Law in Ukraine
Yaroslav Romanchuk
EUCON Legal Group
Artem Sereda
allTax
Vladyslav Sokolovskyi
Sokolovskyi and Partners Law Firm
Olga Solovyova
Avidbiz
Illya Sverdlov
Imagine Lawyers LLC
Olga Trifonova
PwC Legal

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Anna Konovalova
Aequo
Vitalii Labadin
Integrites
Viktoriia Stavchuk-Mulundkar
CMS Ukraine
News & Developments
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Tax & Private Client

Top Changes for Financial Institutions on Restructuring and Recoveries Market in Ukraine

One of the biggest fear for a creditor in providing financing is a possible default with zero perspectives to recover damages. On the international arena until recently Ukraine has been known as a high-risk country that precludes foreign investment flows. However, the situation has changed substantially over the past few years.   One of the biggest fear for a creditor in providing financing is a possible default with zero perspectives to recover damages. On the international arena until recently Ukraine has been known as a high-risk country that precludes foreign investment flows. However, the situation has changed substantially over the past few years.   1. New Legislation on Protection of Creditor’s Rights and Interests was Adopted In February 2019 the new Law “On Recovery of Lending” (hereinafter referred to as the Law) came into force. This Law introduces amendments to a number of laws and regulations, including the Law of Ukraine “On Banks and Banking Activity”, “On the Pledge”, “On the Mortgage” and the Civil Code of Ukraine. The Law introduces  a set of changes aimed at protecting interests of lenders and mortgagees. Among all the amendments, the most important are the following:: - Reconstruction of the mortgaged property is no more the reason for mortgage termination One of the common patterns used by unfair debtors to release the real property from the mortgage is mortgaged property reconstruction. Due to the changes introduced by the Law, in case the mortgagor has reconstructed the mortgaged property, or has carried out unauthorized construction thereon (including construction of new buildings, structures etc. on the land plot owned or used by the mortgagor), all the reconstructed, newly created real property items are deemed to be the mortgaged property in accordance with the mortgage agreement. These amendments are aimed at preventing the release of real estate from the mortgage, since the unfair debtors’ attempts to “save” their property from the mortgage by means of its reconstruction are quite common, unfortunately.  In such cases, mortgagees were forced to defend their rights in court, and it should be noted that courts basically satisfy their claims. In a similar case , while representing the interests of the bank ,  GOLAW proved in the court that all reconstructed items of real estate were also mortgaged to the Bank, despite the fact that it was a rather complicated  and time-consuming process . After the amendments this procedure shall become easier and faster. At the same time, the new Law does not relieve banks of all difficulties caused by the reconstruction of the mortgage. As stated by several courts, this Law does not have a retroactive effect and does not apply to those reconstructions that were made before it’s entering into force. Whereas this statement is very disputable, we are sure that new case law shall be established. - Out-of-court foreclosure was simplified New requirements to the agreement on satisfaction of the mortgagees’ claims or respective reservation in the mortgage agreement are established. In particular, now the parties to the mortgage agreement shall decide on acceptable and adequate ways to exchange notifications between them. Such minor change may have a crucial effect on the whole foreclose case in the end. Previously, it was directly stated by law that the lender become entitled to an out-of-court foreclosure only after 30 days from the receipt by the mortgagor of the lender’s written request for debt repayment. Usually, debtors evade the receipt of such lender’s notices, which allows the debtor to subsequently appeal from the foreclosure in court. In similar cases, in order to secure the  rights of the bank, GOLAW uses a special State Post Service that ensure the receipt of the notices by the debtor under any circumstances. The above-mentioned amendments will finally put an end to that category of disputes. But many mortgage agreements currently in force do not prescribe the adequate methods for exchanging notifications between the parties. That means that the receipt by the mortgagor of the mortgagee’s written notice still must be duly confirmed. - Foreclosure on the collateral does not mean that creditor cannot recover the remainder of the debt It is clearly prescribed by the Law that upon completion of the out-of-court settlement any subsequent claims of the mortgagee regarding fulfilment of: the principal obligation by the debtor being an individual are invalid, unless otherwise provided for by the mortgage agreement or loan agreement or agreement on satisfaction of the mortgagee’s claims; the principal obligation by the debtor being a legal entity or an individual entrepreneur are valid, unless otherwise provided for by the mortgage agreement or loan agreement or agreement on satisfaction of the mortgagee’s claims. Here we see the importance of a thorough analysis of the loan and mortgage agreement before their signing. If the loan is secured by several mortgages, both court and out-of-court foreclosure of each of them is possible. These amendments were aimed at putting an end to many years of the controversial case law regarding the validity of the mortgagee’s claims upon the out-of-court foreclosure on the mortgaged property. In a similar case, GOLAW proved in the court that the bank still has the right to demand payment of the remaining part of the debt after the completed foreclosure on the major rick plant and land plot.  - Lien on the mortgaged property is not an obstacle to foreclosure  Unfortunately, there are numerous cases when unfair debtors, which do not want to return the borrowed funds, try to establish a lien or any other encumbrance on the mortgaged property (liens within criminal proceedings are especially common) in order to prevent foreclosure on the property. It is provided by newly adopted Law that any data in the State Register of Property Rights to Real Property on any encumbrances, restrictions, attachments or other bans on the mortgaged property upon the state registration of the mortgage are not a basis for denial of state registration of title to the real property in the name of the mortgagee being a bank. These amendments will finally enable lenders to foreclose on the pledged property with no hindrance and without having to waste years in courts revoking to numerous artificial attachments of the mortgaged property by the unfair debtors.  In similar cases, in our practice, GOLAW cancelled such attachments in the court. Now, such arrests are not the barrier to registration of the title on the collateral in the name of the bank. Moreover, just after the Law came into force ,GOLAW proved to the state registrar that foreign financial institution also can take advantage of this provision. - Guarantee termination rules have been changed  A guarantee used to be terminated in case when the scope of the debtor’s liability was increased without the guarantor’s consent. There were lots of cases where bank lost the guarantee because of the credit rate or credit contract term increase without the guarantor’s consent. Recently these rules have been changed. In particular, if the obligation is changed without the guarantor’s consent, which has resulted in an increase in the scope of the debtor’s liability, the guarantor remains liable for the debtor’s breach of the obligation but only to the extent existing before the change of the obligation. Furthermore, it has been established that liquidation of the debtor being a legal entity does not terminate the guarantee as well as mortgage, if the lender has filed a claim against the guarantor/mortgagor to the court in connection with breach of the obligation by the debtor before the respective entry is made in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations. 2. Positive Changes in Bankruptcy Law On 21 October 2019 the Bankruptcy Code of Ukraine (hereinafter referred to as the Code) will be enforced. The Code provides for a number of positive changes for lenders whose claims are secured by mortgage (they are called secured creditors). Secured creditors are now a party to the bankruptcy case and they can initiate bankruptcy proceedings as well. The new legislation has greatly simplified the grounds for initiating bankruptcy proceedings. Previously, it was necessary to have a court decision on debt collection that came into force. By contrast, currently, the creditor may initiate the bankruptcy of the debtor if the latter does not fulfill its monetary obligations in time.   The debtor shall file its redevelopment plan as well as the debt restructuring plan for the approval of the creditors. Those creditors who disagree with those plans are entitled to recover the mortgaged property from the mortgagee regardless of the due date in our of bankruptcy procedure. In case of sale of mortgaged property within bankruptcy proceedings, the money from such sale shall be directed to the repayment of secured creditors’ claims irrespective of the creditors’ claims satisfaction order. Another important change is that secured creditors shall approve any reduction of the price at which the mortgage property is being sold at the auction. Such novelty will help to avoid manipulation with the price at the auction when related to the debtor persons may acquire the property at the minimal price.  Also secured creditors have the right to challenge the contracts entered into by the debtor after the bankruptcy proceedings have been opened, as well as the contracts concluded during the three years preceding the opening of the bankruptcy proceedings. The reason for the challenge may be, inter alia, that these agreements led to the debtor’s insolvency. 3. Appropriate Level of Foreign Investment Protection  In Ukraine, at the state level, a special attention is paid to the issue of protection of foreign investment. For example, the Business Ombudsman Council, which deals with business interests’ representation and protection in government bodies, has been operating since 2014. Its mission is to ensure the transparent conduct of business in Ukraine and to protect foreign investors from violations by public authorities. Cooperation with the Business Ombudsman Council has many times facilitated the prompt resolution of the disputes in favour of a foreign investor in the case of unjustified criminal proceedings, the arrest of investors' accounts,  abuse by the court system, etc. In addition, there is an Investment Promotion Office (UkraineInvest) headed by the Government Investment Ombudsman. UkraineInvest was initially set up as an advisory body to the Government at the expense of donors (in particular, the Western NIS Enterprise Fund) but later it transformed into a government agency. UkraineInvest is aimed at providing investors with up-to-date information and recommendations on the peculiarities of doing business in Ukraine, as well as activities in the main sectors of the economy: agribusiness, manufacturing, energy, infrastructure, and innovative technologies. UkraineInvest also facilitates the executive authorities’ activities in solving the problematic issues which may arise when investing in the Ukrainian economy.   Iryna Kalnytska Partner, Head of Tax practice, Restructuring, Claims and Recoveries practice, Attorney at Law
GOLAW - October 28 2019
Tax & Private Client

How much does it cost to use “proprietary” TM?

For many international companies, it is a common practice to allow the use of their trademarks (TM) to all group companies on a free of charge basis. Some parent companies do not even have a right to charge the royalty payments from their subsidiaries, as this contradicts the company’s policy. In the case of subsidiaries located in the territory of Ukraine, such a situation suits everyone, at first glance, because royalties do not have to be paid at all.  For many international companies, it is a common practice to allow the use of their trademarks (TM) to all group companies on a free of charge basis. Some parent companies do not even have a right to charge the royalty payments from their subsidiaries, as this contradicts the company’s policy. In the case of subsidiaries located in the territory of Ukraine, such a situation suits everyone, at first glance, because royalties do not have to be paid at all.  However, the aforementioned practice has recently attracted the attention of the State Fiscal Service of Ukraine (the national tax authority) that do not share such an optimistic view towards Ukrainian companies of this sort and consider it as a method of tax evasion. Why is it considered as tax evasion? The Tax Law is based on the principles that everything must be paid. If the company receives services, then they must be paid; if the company orders the execution of the work – such work must also be paid. A very similar approach is applied to the use of TM because, in essence, the use of TM is a service for which a royalty payment shall be charged. If royalty is not paid, the TM can be de facto used for free, because this is not prohibited by the law, including the Tax Code. But there is an issue: the cost of freely provided services proportionally increases the company's revenue. In other words, the company, which used the TM for on a free basis, should calculate its entire amount of unpaid royalties and, accordingly, increase the tax base of income tax. Hereupon, the national tax authority has an obstacle – how to correctly determine the number of royalties that were not paid by the Ukrainian company. Usually, when concluding license agreements, the parties determine the number of royalties at their own discretion. If there is no such agreement, the tax authority must, in a certain way, calculate the number of royalties that the subsidiary could otherwise pay to the TM owner. In this situation, the representatives of the State Fiscal Service of Ukraine showed a very creative approach and calculated the number of royalties as 4% of the total income of the company for the previous year. In justification of such type of calculation, the national tax authority refers to Article 140 of the Tax Code of Ukraine, which deals with the application of financial differences in the payment of royalties in particular cases, and which has nothing to do with the order of taking into account the value of services received on a free of charge basis.   In spite of the fact that those calculations, in our opinion, are completely unreasonable and incomprehensible, far too often the tax audit result require the taxpayer to pay a very large sums, since it is about 4% of the company's total revenue for the year (even a couple of years) preceding the audit. Does a company actually break the law?  Ukrainian legislation, in particular the Civil Code of Ukraine, the Law of Ukraine “On the Protection of Rights to Marks for Goods and Services” (hereafter referred to as the Law) state that only the owner of the rights to the TM is entitled to use and allow or prohibit the use of its TM. It is implied that the TM owner is entitled to receive a certain fee for granting permission to use its TM, the amount of which is agreed by the parties. Further, Article 16 of the Law defines the use of a mark as follows:  - applying the mark on any goods for which the mark is registered, the package containing the goods, the signboard connected with the goods, a label, tab, tag or another item attached to the goods; storing such a goods with the mentioned application of the mark for the following offering for selling; offering the goods for selling, selling, import (coming-in) and export (coming-out);  - using the mark while offering or rendering any service for which the mark is registered;  - using the mark in business documentation or in advertising, and in the Internet network. Based on the above, we can conclude that if a subsidiary uses the TM in its business activities rather than import a product marked with the TM, such use shall be subject to royalties. Moreover, we recommend charging  at least the minimum amount of such royalties to avoid disputes with the tax authorities. The situation is somewhat different if the subsidiary imports a trademarked product purchased from the manufacturer, rather than from a company that is the owner of the TM, without paying a royalty for using the TM. We believe that from this perspective, the affiliate has no obligation to pay royalty, and thus such use does not violate tax laws. This position is justified by the so-called principle of exhaustion of rights. Part 6 of Article 16 of the Law states that the exclusive right of a proprietor of a certificate to prohibit the use of the registered mark by other persons without his permission does not extend to: …the use of the mark for the goods introduced into the commercial turnover under this mark by the proprietor of the certificate or by his permission, provided that the proprietor of the certificate has no essential reasons to prohibit such a use in connection with the following selling of the goods, in particular in case when the condition of goods changed or the quality of the goods lowered after its introducing into the commercial turnover. Introduction to commercial turnover means introducing a product to the market under a certain TM. In other words, if a company buys a trademarked product from a company other than the TM owner, such TM is considered as already introduced to the stream of commerce, and the TM owner is not entitled to prohibit the buyer of the product from using such product in its business activities or from using the TM. Accordingly, if the TM owner is not entitled to prohibit the buyer from using TM, then it is not entitled to seek payment of royalty for using such TM.  What is the position of the courts in this regard?   To date, there are several final court decisions concerning the disputes of the above category. Case 1. The Claimant's position was that the policy of the group of companies does not provide for royalties for the use of their own trademarks, and, accordingly, a Ukrainian company, which is 100% owned by a foreign founding company, did not make any royalty payments favour of the latter. As a result, in order to estimate the value of the revenue from unpaid use of TM, the regular price determined by the parties of the transaction should be applied. Since the parties agreed on the absence of any payments, including royalties for the right to use TM, then the standard price for this transaction is zero. The Court of the First Instance supported this position. However, the appellate body annulled the decision and stood up for national tax authority, and noted that, taking into account the fact that the owner of the trademarks in granting oral permission (according to the company policy) for the use of TM by the Ukrainian company did not determine the amount of compensation for its use, the Ukrainian company used TM in its own business for free and did not count other income (royalty) for such free use of TM. In turn, this led to a reduction in the number of tax liabilities. In this case, the Court of Appeal, without any justification, agreed with such unclear calculations of the tax authority. Case 2. In this case, the Claimant referred to the principle of ‘exhaustion of rights’ for TM. It was the first time when an international company (the TM owner) benefited from that particular canon of law. The Court of the First Instance and the Court of Appeal upheld the claimant’s position and invalidated the decision notice. As stated by the courts, "in order to make a conclusion about the claimant’s free use of TM with the subsequent receipt of income, it is necessary to deliberate the issue of the statutory regulation of the TM using, the scope of the TM owner’s rights, the circumstances of the introduction of the product to the market, the fact of the TM using in specific circumstances, and the amount of benefits that may be regarded as income. Part 6 of Article 16 of the Law states that the exclusive right of a proprietor of a certificate to prohibit the use of the registered mark by other persons without his permission does not extend to: …the use of the mark for the goods introduced into the commercial turnover under this mark by the proprietor of the certificate or by his permission, provided that the proprietor of the certificate has no essential reasons to prohibit such a use in connection with the following selling of the goods, in particular in case when the condition of goods changed or the quality of the goods lowered after its introducing into the commercial turnover; […].   That is, [...] the principle of ‘exhaustion of rights’  shall be applied. Therefore, the using of TM on a particular product is not a commercial per se after the product has been introduced to the market. The presence of TM on the product packaging does not benefit the buyer from the TM using, the cost of which is already an integral part of the product price. The introduction of the product to the market does not cause the TM owner’s right to demand the payment for the use of TM, which collectively indicates the lack of both grounds for the conclusion of license agreements, and the emergence of payment obligations related to the use of TM.  The panel of judges agrees with the conclusion of the Court of the First Instance that the promotion of already trademarked products acquired by the claimant on the market is a standard marketing service that is provided for the purpose of increasing the volume of sales of products, and is a common business practice which, however, does not mean the actual commercial and royalty-free use of TM”.   We believe, the second opinion of the court is more justified and complies with the provisions of the law and the essence of the legal relationship, since it is impossible to use something for free because the payment for this ‘something’ cannot be charged at all. Currently, both cases are subject to a cassation appeal, and only time will tell the opinion of the Supreme Court of Ukraine. At this point, we recommend taxpayers to avoid free of charge use of TM, owned by the parent company. In the case of purchasing goods that are already trademarked, ensure appropriate reservations and warranties in the supply contract in order to avoid contradictions with the State Fiscal Service. Iryna Kalnytska GOLAW Partner, Attorney at law 
GOLAW - October 28 2019
Tax & Private Client

Svitlana Musienko joins Sayenko Kharenko as a partner

Svitlana Musienko joins Sayenko Kharenko as a partner Sayenko Kharenko has strengthened its tax practice with a new partner hire. Svitlana Musienko brings 20 years of professional experience advising major international companies and the largest Ukrainian business groups on domestic and international tax planning, transfer pricing, tax issues, corporate law, and investment structuring. Prior to joining Sayenko Kharenko, Svitlana worked as a partner heading the tax practice at an international law firm and as a senior manager at one of the Big Four accounting firms. She has been involved in some of the most significant corporate restructuring and high-profile tax due diligence projects in Ukrainian history. In addition, Svitlana is actively involved in policy and legislative initiatives in the areas of tax and transfer pricing. Partner Vladimir Sayenko welcomes new partners team member: “We are proud to welcome Svitlana on board. She is a recognised expert in Ukrainian tax law with many years of experience leading the tax practice at a multinational law firm. We have no doubt that under Svitlana’s supervision our tax practice will continue to develop into a true market leader.” See here: sk_new_partner_svitlana_musienko 
Sayenko Kharenko - October 28 2019