How is your visit in Ukraine, in Kyiv?

First of all, I really like Kyiv. This is not my first visit here. I really like the fast roads, very good conditions. And, in fact, everything is very well attended from the security and safety point of view.

Very glad to hear that. Can you share some developments or agreements between our governments that you are working on during this visit?

We talked about several directions of cooperation, in particular, assistance in providing Ukraine with the Internet, in particular, the Starlink systems, which is very important for the security of Ukraine and which is a priority aspect of Polish assistance.

We also talked a lot about the Tallinn Mechanism [ed. A new format of assistance to Ukraine in the field of cyber security] and about the principles of cooperation in order to develop the back-office within the framework of this mechanism. We talked a lot about how to ensure long-term cyber security mechanisms.

We also talked about the role of the Republic of Poland during its presidency in the European Union in 2025 and about the support Ukraine during this period.

In addition, we talked about the fact that Poland is currently in 3-4th place globally in terms of support for Ukraine from all countries of the world. For Poland, this means 2.5% of annual GDP. Also, some databases and servers of Ukrainian enterprises are now localized in Poland and we declared our readiness to guarantee the security of this data in the future.

I also invited Deputy Prime Minister Fedorov for a return visit to Poland, where I hope he will present the successes we talked about today.

We have a lot to discuss, so let’s start with digital government services Diia and mObywatel. We know that mObywatel 2.0 was released in July 2023, which equated the Polish Digital ID to plastic cards. Almost a year has passed since then. How is the implementation process going and can you share the results?

This process gives a sense of increased possibilities and opportunities to use digital reality to Polish citizens. We can say that mObywatel is the most popular application in Europe today. In the European Union.

We have a rather similar situation with the Ukrainian Diia.

Actually, Diia is the most popular in Europe, but not in the European Union.

Immediately after the Russian attack on Ukraine, some Ukrainian documents appeared in the mObywatel system. Are there any plans at all to further integrate these two applications so that more documents and services have this kind of cross-interaction?

Actually, we also talked about this with the Deputy Prime Minister. Now, with the help of mObywatel, Ukrainian citizens have the opportunity to legally confirm their identity and the legitimacy of their stay in Poland. We want to expand these possibilities in the future.

Every year more and more services are added to these platforms. Could it be that the Ukrainian Diia somehow influenced the development of mObywatel itself? Maybe some functionalities inspired something during the development process?

I would say that it was mObywatel that influenced the development of Diia a few years ago. And now Diia has a greater influence on mObywatel regarding the development of the application. Therefore, it can be said that this is such a brotherhood and sisterhood, like a brother and sister who go to Europe together.

Now back to the topic we discussed earlier. We know that Poland is one of the largest donors of the Starlink systems to Ukraine. In December 2023, this figure reached about 20,000 Starlinks. Can you update us on the current numbers?

Poland provided more than 20,000 of the Starlinks systems to Ukraine. Starlinks ensure the operation of broadband Internet, which is very important for the security of Ukraine, for the interaction between citizens and the authorities. The Internet apparatus is very important because it also provides communication for the military, for hospitals and important infrastructure facilities.

Therefore, to the question of the Deputy Prime Minister, I assured that Poland is ready to continue financing Starlinks.

Very glad to hear that. There are talks that Poland may also start financing of the Starlink subscription service. Are there any official plans or news on this at all?

Does Poland plan to finance the Starlinks it has already acquired? Of course. Poland has been doing this for a long time.

Sure, then another question. How does this mechanism work now?

We just pay for these Starlinks monthly and quarterly. That is, I personally periodically sign this money transfers.

Now to the topic of war. Ukrainian energy, infrastructure and communications, as well as virtual services, very often become victims of russian cyber attacks. Is Poland also experiencing such cyber attacks?

Actually, the threats from russia, if we talk about cyberspace, are the same for both Ukraine and Poland. Every day we see cyber attacks and other cyber threats from russia. The russians are particularly keen on using Malware and Ransomware.

Therefore, it is a priority for us to close these holes in the protection. To do this, we increase our spending on cyber security every year. And now we are working on changes in legislation that will protect more and more sectors of our everyday life with such a cyber shield.

How do Poland and Ukraine generally cooperate in the field of cyber security? Can you share this with us?

We work very closely together and we work very secretly.

But there are things I can talk about openly. For example, from September to December 2023, russian special services started using such programs, called SVR, which could make changes in programming. And the Polish services, together with the American and British services, blocked the access of the russian special services to our servers, which could also be dangerous for Ukraine.

It has already been mentioned that Ukraine has registers in Poland. Is it even possible to transfer or backup these registers on the territory of Poland in general, in order to avoid their physical or virtual destruction?

I think that this is a question for the Ukrainian side, not mine.

Of course. We will try talks to the Ukrainian government regarding this issue. But is Poland open to this at all?

Poland is open to very broad cooperation in the digital field. This is what the memorandum signed today should serve to cooperate in the framework of it on digital protection, data protection, data storage, access and operation of the Internet. We are open to everything, but the decision will be made by the Ukrainian side

And can I ask a little about the details of this newly signed memorandum? What does it cover?

We agreed with Mr. Prime Minister Fedorov that he will talk about the details of the memorandum signed today. Therefore, I will allow myself not to answer this question, because I will talk about these details in Poland. This way, everyone will do their job.

And now to the last question for today. We know that many Ukrainian startups and IT specialists moved to Poland after the war. How has this affected the Polish IT ecosystem, and in short, how is it doing now?

Actually, the IT ecosystem in Poland is developing very well. And this is also due to the fact that there are a lot of specialists who work in Poland, but who are citizens of Ukraine working remotely. Neither Polish nor Ukrainian specialists are competitors for each other because they complement each other well and develop this field together.

I am very happy that 47% of Ukrainian startups that moved to Poland after the start of the full-scale invasion plan to return to Ukraine because it will help the Ukrainian economy.

In addition, Poland, for its part, aims to provide conditions for Ukrainian startups to use European Union funds. That is why, often when such startups decide to relocate from Ukraine, they choose Poland. Ukrainian startups also receive support from Polish and foreign IT companies. And we plan to continue this in the future.

• UACB allows investing cryptocurrency in tokens secured by war bonds with a government guarantee of return on bonds with all the benefits of blockchain technology.
• The first issue of crypto bonds was made small. The organizers wanted to test the degree of interest from a new category of investors in government debt and to demonstrate the potential of the new law on virtual assets.
• UACB is settled in Tether (USDT), a cryptocurrency pegged to the dollar exchange rate.
• After the government pays off the bonds, UACB can be exchanged back into invested USDT. UACB buyout is scheduled for November 2022.

“As all settlements are made in USDT, UACB helps avoid currency risks during exchange rate fluctuations,” commented ICU Deputy Director Yevgeniya Gryshchenko.

ICU Group is an independent multi-strategy asset management private equity and investment firm specializing in emerging and frontier markets worldwide. The Group also makes venture capital and fintech investments through its venture capital arm, ICU Ventures.

EVOL.TECH is a Ukrainian tech company specializing in the creation of Neobroker and RoboAdvisor projects designed to facilitate investments in foreign securities and cryptocurrencies.

Are 253 companies a lot or a little? Well, they are about 5% of the Ukrainian market, which has over five thousand companies. Among the residents of Dia City, there are already big players such as Revolut, Panda Doc, Genesis, Ajax Systems, Reface, monobank.

To make the statistics more insightful, the staff experts of the Ukrainian legal firm Sayenko Kharenko — the counsel Oleg Klymchuk and associate Ivan Chopyk — prepared infographics about the current achievements of the Diia City special regime.

AIN.Capital shares them in high resolution.

AIN.Capital previously wrote about Diia City and how a company can become its resident.

• Palantir is the world leader in software development for data analysis. The US Department of Defense, major investment banks, and hedge funds use the company’s products. Also, the company is widely criticized for the lack of transparency and ethics in its work.
• Alex Karp, CEO of Palantir, responded to the invitation of Ukraine’s Ministry of Digital Transformation and became the first CEO of a big Western corporation who personally came to Ukraine. The company intends to become a partner of Ukraine in the defense, security, and digital sectors and open an office.
• According to Fedorov, further cooperation with Palantir will help strengthen the Ukrainian army technologically.

• The agency informs about the threat, referring to messages on the hacker forum Raidforums.
• The conversation at that link has already been deleted. But previously, there was a chat about ordering a few servers to launch attacks on Ukraine’s government and bank websites.
• The unidentified author informed about his plans to deface “any domain that ends with .ua” for at least one week. Web defacement is an attack that disables or modifies content on a website.
• It is not the first attack. Many Ukrainian government websites fell offline at night on January 14, 2022. There were 70 affected sites, including the Ministry of Digital Transformation, Ministry of Education, Ministry of Foreign Affairs, Ministry of Regional Development, the portal Diia, and others.
• A month later, in February 2022, some government websites, as well as websites of Ukrainian banks, were down for several hours due to a DDoS attack.

• The United States staunchly supports Ukraine in defending its citizens from disruptive or destabilizing Russian cyber-attacks, the agency said in the statement.
• On February 15, 2022, the websites of several major Ukrainian banks were subjected to DDoS attacks: for example, the website and services of PrivatBank were down for several hours. the websites of the Ministry of Defense, the Armed Forces, and several others also fell offline.
• According to Hostmaster, the attack on the government websites began at 8:21 pm on February 15 and lasted more than five hours. It was pretty powerful — up to 150 Gbit/s at peak moments.
• According to cybersecurity experts, the attacks were intended to sow panic among Ukrainian citizens or distract attention from other cyber incidents occurring during the same period.

• The first was the state-owned Oshchadbank: Yesterday morning, there was information that its ATMs, website, and app don’t work. The bank reps initially made some vague statements about the causes of the malfunction. However, in the evening, they declared a powerful DDoS attack.
• The second was the Privatbank: There were some issues with its website and the Privat24 app. This time, the cyberattack was named as the cause earlier.
• Then three state websites took their turn — Armed Forces, Ministry of Defense, and Ministry of Internal Affairs of Ukraine.

Ukraine’s State Service of Special Communication and Information Protection confirmed information that state-owned enterprises and banks were under attack.

But it was only the beginning.

• After that, there was a release that other banks were also attacked by unknown individuals. The co-founder of Fintech Band and monobank, Oleg Gorokhovskiy, wrote that the targets were also A-Bank, Alpha Bank Ukraine, and monobank. All attacks have been repelled.
• Sometime later, the minister of digital transformation, Mykhailo Fedorov, informed that Diia was attacked too. This attack has been repelled.
• According to AIN.Capital, the second half of the day, on February 15, the unknown tried to prevent the proper functioning of other websites of government agencies. However, this was not confirmed officially. At the time of publication of this article, the websites of the President’s Office, Verkhovna Rada, Cabinet of Ministers, and other ministries worked properly.
• Russian intelligence services that participate in the escalation of the conflict are named as potential criminals. There is no direct evidence, but the Ministry of the Digital Transformation confirmed the first attack was from the Russian Federation.
• All that happened together with other provocations: On February 15, users got messages that Privatbank’s ATMs would not work (indeed, they all worked), and several state agencies wouldn’t be able to fulfill their obligations, for example, pay pensions. All that information was fake.

It was not the first attack on governmental websites. For example, some of them didn’t work after a cyberattack in mid of January.

Attack’s details

The cybersecurity specialist, Senior Consultant at Armorum Solutions, Kir Vaznitcky, explained to AIN.Capital the timing and logic of the attack:

“Primary targets were Privatbank, Oshchadbank, and the Ministry of Defense and Armed Forces of Ukraine. Privatbank tried to save more critical services (transactions and POS terminals) by offering less critical ones, e.g., Privat24 application. Oshchadbank managed to pass it through sometime later. But unfortunately, the web servers of the Ministry of Defense and Armed Forces of Ukraine didn’t. They had no chance due to much lower technology levels.

After state entities, the focus went on Datagroup service provider, which operates DNS serves of the gov.ua domain (see below — editor). And this part of the attack was quickly repulsed by the provider’s specialists through launching more anycast servers. However, specific portals (Ministry of Defense, State Emergency Service) remained shut down to decrease the load.”

Hostmaster, the administrator of the .ua domain, provided the AIN.Capital editor with extra details about the gov.ua sites:

• The attack went against the gov.ua websites. During the attack, there was a higher load of DNS servers supporting the function of the com.ua and org.ua domains.
• It was pretty powerful — up to 150 Gbit/s at peak moments. For example, according to Akamai, one of the recent most challenging DDoS attacks in Spring 2021 affected a gambling company in Europe at 800 Gbit/s.
• In addition, this state-owned website attack was powered by a domino effect:

“We faced many attacks and are still fighting,” Dmytro Kokhmaniuk, the administration of the .ua domain, told the AIN.Capital editor last night. “65 Gbit/s was only one of many branches. Unfortunately, several providers began to disable our hardware which caused a chain reaction that increased the load of other units.”

• According to Hostmaster, the attack on state portals began at 20:21 on February 15 and lasted over five hours. It came from both abroad and Ukrainian IP addresses, but there is no accurate data about the attack geography at the moment.
• During the night between the 15th and 16th of February, their specialist did launch reserve servers and could save the system operation.

The goal and potential executors

After the night of February 15, Ukrainian cybersecurity experts discussed the goal and possible executors of the attack. Some believe that the February 15 attack is related to the January 14, 2022 attack. Regarding the executors, the Ministry of Digital Transformation mentioned the Russian Federation. Furthermore, the Strategic Communication Center at the Ministry of Culture of Ukraine dropped hints about the Russian footprints in its release.

“The routs were from Russia and China. About 600,000 bad traffic packages per second. Our specialists cut this traffic quickly, but soon there was another wave from Czechia and Uzbekistan,” wrote the minister of digital transformation, Mykhailo Fedorov.

Vlad Styran, CEO at Berezha Security Group, posted an analysis where he explained the mechanism of such attacks and some defense tactics. He said the attack on February 15 isn’t related to the one in January. He believes that the Strategic Communication Center might be right about the beneficiaries of this attack that could serve as just a cover of a severer attack in the future:

“The chance that those two attacks are related is low. Anyone can do DDoS because it is the most stupid and cheapest type of Internet attack. At the same time, it appeared to be a good act of sabotage. It could be also an act of zeroing, as the military guys say. By doing so, they might evaluate the level of oppression that would be enough to shut it down completely. I feel that the real attack remains unrevealed. Otherwise, this one was a childish prank and nothing more.”

How Diia City works

Describing it in a nutshell, Diia City is a special legal framework for the Ukrainian IT industry started in 2022. Participation is voluntary. Any Ukrainian company that meets requirements can get residency in Diia City. All residents will have specific benefits and a new form of cooperation with employees — gig contracts. There are also implemented several terms from British law that will be useful for companies getting foreign investments — option contracts, convertible loans, etc.

The residents must also fulfill certain restrictions and obligations (for example, volume limits for the work with individual entrepreneurs and obligatory audit). This special legal mode is described in two Laws:

• Digital Economy Support Law no. 1667-IX. It describes what Diia City is and how it works.
• About amendments to the Tax Code of Ukraine and other Laws of Ukraine regarding the Digital Economy Support no. 1946-ІХ. In general, it defines tax rates and work conditions for residents.
• There is also a Resolution of the Minister Cabinet of Ukraine prescribing application rules in Diia City.

We did many publications about Diia City. Let’s make a brief reminder.

• The new residents can choose what corporate tax to pay: 9% exit capital tax (ECT) or 18% income tax.
  • What is the ECT? Maksym Nosarev, IT lawyer and founder of Tretten Lawyers, provides an example: A company made $100,000. Current corporate income tax means an immediate payment of 18% of the whole sum. If the company works with the exit capital tax, a part of income spent on variable costs and the development is not to tax.
• The income of individuals in the form of dividends from a resident company will be tax-free if paid not more than once in two years. There will also be a tax discount for individuals if they purchase a share of a startup that is the Diia City resident.
• Income of employees and gig specialists of Diia City residents will be taxed as follows: personal income tax – 5%, Social Security fee – 22% of the minimum wage, military tax – 1.5% (of an employee’s salary or a gig employee remuneration). If a professional receives more than 240,000 euros per year, all income above this limit will be taxed at 18% PIT.
• For some residents, there are volume limits in working with individual entrepreneurs (FOPs). We have already posted an article about them.

Some Ukrainian IT companies are already talking about their Diia City residency, for example, SoftServe and MacPaw.

How to apply for Diia City residency?

During the Diia Summit, the Ministry of Digital Transformation declared that after February 8, 2022, IT companies could apply for residence under those special terms. There is also a new register of Diia City residents.

To apply for special taxation mode, you need to:

• go to the official website of Diia City
• pass verification with your digital signature
• fill out an application

The application and attached documents must be in Ukrainian and signed with a qualified electronic signature (QES). A company may initially choose the new taxation mode (to pay the ECT instead of the income tax).

Fill out the following fields:

• Full name and ID of the company
• Contacts: email address and contact phone number
• Mark if it is a startup
• Mark that there are no obstacles forbidding the residency in Diia City
• Mark that your company meets requirements for the residency in Diia City
• Mark if the company switches to the exit capital tax (if yes, fill out a small information that will be sent to the State Fiscal Service)
• If it’s a startup, enter the income for the last year — it must not exceed 7 million UAH
• Choose a qualified activity that the company will do
• Fill out the field about company representatives

The Ministry of Digital Transformation will proceed with your application within ten working days. If the company meets the standards, it will be registered in the register of Diia City residents. Now you are a member of this unique legal and taxation project. The register is available on the Diia City website.

The registration works as a “silent agreement.” If you won’t receive a refusal or any feedback after 10 working days, it means that your company is a “citizen” of Diia City now.

Frequently Asked Questions about Diia City.

What are the requirements to become a resident?

For existing IT companies:

• providing activities mentioned in the legislation about Diia City (more details here or on its official website)
• 90% of revenue comes from the activities mentioned above;
• average monthly salary of employees or bonus of gig workers is at least 1,200 EUR (excluding individual entrepreneurs)
• +9 employees and/or gig workers (excluding individual entrepreneurs)

For startups:

• providing activities mentioned in the legislation about Diia City
• 90% of revenue comes from the activities mentioned above
• business registration within 24 months before applying here
• annual income doesn’t exceed 7.5 million UAH

For brand-new companies or startups:

• providing activities mentioned in the legislation about Diia City;
• 90% of revenue comes from the activities mentioned above;
• business registration within 24 months before applying here;
• annual income doesn’t exceed 7.5 mln UAH.

How will they check a company?

The requirements above will be checked based on the compliance reports submitted by residents and the mandatory independent auditor’s conclusions. In the case of the first report of a brand-new company, this requirement is not applied.

If the company violates those criteria, it will lose its residency.

Can a foreign company become a resident?

It can if it registers a legal entity in Ukraine.

How can a company leave Diia City?

• If a company ceases to meet the requirements described above, it must notify the Ministry of Digital Transformation, and it will be removed from the register.
• A company can also quit at its own will. For this, it must submit an application to the Ministry.

How to choose the tax: 18% income tax or 8% exit capital tax?

If the company plans to reinvest, better to choose the ECT. The taxation base here is asset export operations in the form of dividends and related payments. For example, it provides irrevocable financial support and makes deals by giving a counterparty its assets but getting nothing in return.

Do I need to submit information to the State Fiscal Service if my company becomes the resident?

• If your resident company stays with the income tax, there is no need to inform the SFS.
• If your company switches to the ECT, you must notify the SFS.

The rules for residents working with individual entrepreneurs

• Companies that pay the 18% income tax, whose annual income does not exceed 40 million UAH, will be able to work with individual entrepreneurs without restrictions during the entire period of the Diia City regime.
• For all other residents, payments to individual entrepreneurs should not exceed 20% of total costs. For those companies that will pay the ECT, amounts above the limit will be subject to this tax at the rate of 9%.
• For companies that pay the income tax, those costs for individual entrepreneurs that exceed 20% will have to be included in the financial result.
• Restrictions on working with individual entrepreneurs will be fully operational only from 2025. Until then, there will be a transition period of three years: until 2024 – no restrictions; in 2024, tax-free payments not exceeding 50% will be allowed.

• Diia Summit will take place on this day. This is a conference from the Ministry of Digital Transformation, where the agency will give all the details about how to register in Diia City and how it will work.
• There is the Decree of the Cabinet of Ministers describing how the registration will work. The Ministry of Digital Transformation will launch online registration on the website.
• To get the status of the Diia City resident, a company should apply to the Ministry of Digital Transformation based on Annex 1 of the Decree (the link to download the Ukrainian version). Moreover, the application may be submitted both via the website of the Ministry and by e-mail.
• This application consists of several pages, where the applicant company indicates its name and the name of its legal entity, contact information, the information about income, the type of its activity, etc.
• The Ministry of Digital Transformation is processing the application during ten working days starting from the application date, checking the provided information, and deciding whether to leave the application without an answer, decline it, or provide a company with the Diia City residency status. 

On February 8, 2022, AIN.UA will publish a detailed article about the start of Diia City and the registration process.

• To get the status of the Diia City resident, a company should apply to the Ministry of Digital Transformation based on Annex 1 of the Decree (the link to download the Ukrainian version). This application could be sent:
  • Using city.diia.gov.ua (the application process is not there yet but would be enabled in early February 2022); 
  • Or via contact email for Diia City (yet to be indicated).
• The application to join Diia City is a few pages document where an interested company states its legal and contact details, its sphere of operation, etc. It should have all the details listed in Article 6 of the Ukrainian Law on Stimulating Development of Digital Economy:
  • full name of the Applicant’s legal entity,  EDRPOU (The Unified State Register of Enterprises and Organizations of Ukraine), contact email, and phone number;  
  • last name, first name, date and place of birth, taxpayer identification number of the head of the entity, members of the executive board, members of other bodies, and a chief accountant;
  • the list of operation spheres that an Applicant is going to work in as a resident (according to the Articles 4 and 5 of the same Law);
  • a claim of the Applicant that there are no obstacles to be the Diia City resident (it’s a foreign company, NGO, business that has not disclosed its beneficiaries, etc.); 
  • the data on the Applicant’s income in the year that precedes the year of the Application. 

• If the Application is provided by a representative acting on behalf of a company, then an original document or a legal copy of a power of attorney should be enclosed.
• An applying company can additionally enclose a request for the special discounted tax mode  (as reported before).
• All documents must be in Ukrainian. The Application, as well as all attached documents, must be verified by electronic signature.
• The Ministry of Digital Transformation is processing the Application during ten working days starting from the application date, checking the provided information, and deciding whether to leave the Application without an answer, decline it, or provide a company with the Diia City residency status. 
• If within these ten days, the Ministry of Digital Transformation has not notified a company that it left the Application without an answer or that it has declined it, then it automatically means that a company has been granted the status.
• The Ministry of Digital Transformation also enters an applicant’s data into the Diia City registry together with the decision on a company’s residency status.
• Decisions of the Ministry of Digital Transformation that an applicant company has become a resident of Diia City or that the company has been denied this status are published on the agency’s website the day after it has made this decision.

What is Diia City? (in a nutshell)

Diia City is a special operational mode for Ukrainian IT companies providing special conditions, taxation, and a new form of interaction — gig contracts — for its participants. It also implements several terms from British law that will be useful for companies getting foreign investments — option contracts, convertible loans, etc. But it also introduces some limitations for the cooperation with FOPs (individual entrepreneurs).

How to check if a company may participate in Diia City?

AIN.UA has described entry terms of Diia City in the past; now we would like to recall them briefly (you can also check them under article 5 of the Digital Economy Promotion Law:

• A Diia City resident must be registered in Ukraine.
• The company must do one or more activities determined under part 4, article 5 of the Law (e.g., programming, software testing and publishing, developing computer games and databases, etc. — the complete list is stated at the end of this article, for more, please see the next part).
• The average monthly salary must be from 1,200 EUR according to the official exchange rate of the NBU.
• The average number of workers and gig specialists must be not less than nine.
• At least 90% of income must be qualified (it means it must be generated from the activities stated under part 4, article 5 of the Law).

What activities can be done by Diia City residents?

The activities that are supposed to be promoted by this Bill and are required from companies to join Diia City are following (we have shortened the list a bit, but still, it contains the main of them):

1. Computer programming, informatization consulting, hardware management, including
   1. Software development, modification, testing, and technical support, including computer games, and other types of work at all stages of the software development lifecycle, including business analysis, user interface design, etc.;
   2. System software and application development, including computer games, databases, and websites;
   3. Software setup for the customer informational systems and end-user devices; configuration of third-party software;
   4. Planning and projecting integrated computer systems combining hardware and software; consulting and training for users of such systems;
   5. Administration and operation of custom computer systems and/or data-processing means;
   6. Other development, modification, tests, and technical support of computer games.
2. Computer game publishing.
3. Providing online software products, including computer games.
4. Education in the IT industry.
5. Data processing and related activities, except for renting infrastructure for data processing and publishing (hosting); websites function, including automated data processing, report generation, website administration, etc.
6. Study and experimental development in natural and technical sciences connected with IT.
7. Performing marketing campaigns and providing advertising services using programs developed by a Diia City resident.
8. Organization of cybersport contests, teams, centers, and clubs for such competitions.
9. Providing services connected to virtual assets turnover.
10. Providing cybersecurity services for information and communication systems, including detection and protection against cyberattacks, liquidation of their consequences, etc.
11. Robotics.
12. Other types of activities determined by the Cabinet of Ministers.

How to apply for Diia City residency?

There are not so many details about how the Diia City entry process will look. However, according to the Ministry of Digital Transformation, it must be declarative and straightforward. What can we know for sure?

• To join Diia City, a firm registered as a legal entity must submit a specific application to the Ministry of Digital Transformation.
• It will be possible at the particular web portal that is being developed by the Ministry. AIN.UA will inform you about the start of the portal later.
• After submitting basic information about the company, all other data will be automatically loaded from state registries.
• The applicants must check if the final information is correct, sign the application with their digital signature, and press the “Submit” button.
• The declaration principle of application means that if there are no reasons to return it without acceptance, the company will automatically become a resident of the special mode. The Ministry reps said that Diia City would function on the tacit agreement: if an applicant received no response after ten days, his application is considered as accepted.
• The application can be returned without acceptance due to mistakes, lack of authorization of the company representative, no entries in the Unified State Register about the company, or according to the applicant’s will.  An application can also be declined if an applicant meets negative criteria.
• After applying, the candidate will be checked for negative criteria. The Ministry of Digital Transformation will use open sources — state registries, databases, information from authorities, and intergovernmental organizations. So, there will be no need to provide any references.
  • The negative criteria (causes for refusal) are, for example, a non-Ukrainian registration, a non-profit company, a firm with unknown beneficiaries, an entity the shares of which are directly or indirectly in possession of the Russian Federation or its citizens, etc. The complete list of negative criteria is stated under part 2, article 5 of the Law mentioned above.
• In addition, after 3 to 6 months of residency, the company must provide a compliance report and an auditor’s conclusion. Startups must submit it only after a year of residency.

We will update this article as we’ll receive more new data.

Diia City is a special legal framework for the Ukrainian IT industry. A company that meets the list of requirements can voluntarily become a resident of Diia City. But certain restrictions on work with FOPs (individual entrepreneurs) will be applied to them (we will describe them below).

The specifics of the regime:

• Residents of the special regime will be able to choose which corporate tax to pay: 9% exit capital tax (ECT) or 18% income tax.
• Individuals’ income in the form of dividends accrued by a resident company will be exempt from taxation, provided that they are paid no more than once every two years. There will also be a tax rebate for individuals in the event of the acquisition of a stake in a startup that is a resident of Diia City.
• Income of employees and gig specialists of Diia City residents will be taxed: personal income tax – 5%, SSF – 22% of the minimum wage, military duty – 1.5% (of an employee’s salary or a gig employee remuneration). If a professional receives more than 240,000 euros per year, all income above this limit will be taxed at 18% PIT.
• Taxes for FOPs cooperating with IT companies will remain the same as they are now.

We will also remind you of the rules introduced by the Diia City bill for IT companies working with FOPs:

• Companies that pay a Corporate Income Tax of 18%, whose annual income does not exceed 40 million hryvnias, will be able to work with FOPs without restrictions during the entire period of the Diia City regime.
• For all other residents, payments to FOPs should not exceed 20% of total costs. For those companies that will pay the exit capital tax, amounts above the limit will be subject to this tax at the rate of 9%.
• For companies that pay a Corporate Income Tax, those costs for FOPs that exceed 20% will have to be included in the financial result.
• Restrictions on working with FOPs will be fully operational only from 2025. Until then, there will be a transition period of three years: until 2024 – no restrictions; in 2024, tax-free payments not exceeding 50% will be allowed.

What does the memorandum stipulate?

The document was signed by the Minister of Digital Transformation Mykhailo Fedorov and Worldwide Head of Public Sector of Apple Inc. Mark Lennon.

According to the text of the document, the parties will:

• collaborate on the planned population census of 2022-2023
• share experience and expertise in implementing projects related to the transition to paperless document management, as well as improving the experience of citizens’ interaction with public authorities
• develop the Diia app for the iOS operating system
• increase the digital literacy of Ukrainians
• develop initiatives to bring digital technologies to the healthcare sector

The Ministry of Digital Transformation and Apple will also create working groups responsible for developing detailed plans for the agreed initiatives, providing expert support, and holding meetings.

“The signing of the Memorandum with Apple is an important step not only for digitization in Ukraine but also for the recognition of our achievements in this field around the world. We are grateful to Apple for constant cooperation with our ministry and the opportunity to implement the world’s best solutions to achieve our most important goal — turning the state into a convenient and efficient service that you want to trust,” said Mykhailo Fedorov.

As part of the visit, there are also plans to sign a memorandum of cooperation between Apple and the Ukraine Ministry of Veterans Affairs. The company will assist in the digitalization, auditing, and maintenance of electronic health records of veterans using Apple’s current developments for collecting and processing information.

A new version of the application will work a bit differently. AIN.UA describes how you should proceed now by crossing the border.

• All unvaccinated people who come to Ukraine need to install Vdoma for the next 72 hours until the application gets information about a negative PCR test or an antigen test. After that, you can delete the application. There is no need anymore to pass control via geolocation and face recognition as it used to be.
• The test must be done only in a lab certified by the Ministry of Health of Ukraine.
• If it is negative, the Vdoma app will get information about that. If it is positive, you will need to stay for the next 14 days at a place you set during the app installation.
• In case that someone crossed the border and did not make a test within the following 72 hours, the application will be deactivated and will notify the police. After getting a notification, the police officers can visit and check you at the address you set as your self-isolation place.
• The foreigners who do not have a vaccination certificate and refuse to install the Vdoma app would be banned from visiting Ukraine. Ukrainians must stay home for 14 days of observation in such a case.

To sign up for the Vdoma app, you have to provide the following information:

• first name, second name, patronymic (if any)
• passport series and number
• place of self-isolation
• phone number

About the Vdoma app

Vdoma (formerly called ‘Dii.Vdoma’) is a mobile application for monitoring self-isolation launched by the Ministry of Digital Transformation of Ukraine on April 7, 2020. Initially, the app monitored self-isolation for people arriving in Ukraine by checking geolocation and taking selfies to confirm it. Also, it was possible to call for emergency medical assistance from the app.

On June 16, 2021, the Cabinet of Ministers canceled the mandatory self-isolation, and the Vdom app was disabled while Ukraine was in the green zone. Until October 2021, Ukrainian citizens and tourists could freely cross the border of Ukraine. During that time, “Vdoma” was updated, according to the Ministry of Digital Transformation.

According to the explanatory note to the bill published by the president of the Ukrainian Blockchain Association (UBA) and founder of the Kuna cryptocurrency exchange, Michael Chobanian, such a “privileged” taxation regime will work during the first five years.

What taxes for cryptocurrencies will be in Ukraine after the bill is voted?

The draft called “On the changes to the Tax Code of Ukraine regarding the virtual asset turnover taxation in Ukraine” contains several measures to support the development of the virtual asset market, including:

• VAT-free transactions with virtual assets and services of the virtual asset service providers;
• Low-tax regime (for 5 years) for the investment profit from the virtual asset transactions and services of the virtual asset service providers — only 5% of profit tax;
• Low-tax regime (for 5 years) for the investment profit from the virtual asset transactions for individuals — only 5% of income tax;
• Individuals shall pay 1.5% of the military duty from the investment income of the virtual asset transactions.

The bill also determines:

• The procedure for determining the object of taxation, declaration of relevant income/profits and the procedure for payment of prescribed taxes;The procedure for determining the object of taxation, declaration of relevant income/profits and the procedure for payment of taxes;
• What taxes will be for transactions with secured and unsecured virtual assets;
• And basic requirements to the accounting and bookkeeping of virtual asset transactions.

Why it’s important

First, according to this bill, you shall pay tax only from your profit. Until you keep your cryptocurrencies in the exchange accounts, you will pay no tax.

Second, as recently AIN.UA informed, on September 8, 2021, the Ukrainian Parliament has voted for draft no. 3637 of the Virtual Assets Bill. It regulates the industry of cryptocurrencies, and now holders of such assets will legally exchange and declare them, and international crypto companies may register a blockchain business in Ukraine.

However, according to transitional provisions, bill No. 3637 will take effect only together with another Bill “On the changes to the Tax Code of Ukraine regarding the virtual asset turnover taxation in Ukraine.” Because if the virtual assets will be taxed according to the current legislation, the whole industry would go into shadow, and specialists would emigrate from Ukraine to the countries with more attractive taxation regimes.

To avoid such a situation and legalize the cryptocurrency market in Ukraine, the bill prescribes a “light” taxation regime for the first five years.

AIN.UA asked lawyers and marketers of Juscutum how the new norms of the law will differ from the previous version and what will change for marketers.

Not every nude image in advertising is considered gender discrimination. For example, it is inappropriate to show a naked body in advertisements for construction materials, phones, or beer. But it may be justified when promoting brands of underwear, contraceptives, or cosmetics.

“The main criteria for sexist advertising are an inappropriate representation of a naked body, the unreasonable use of sexual connotations, and gender discrimination. In other words, when the image of the naked body is not related to the advertised product, it is a characteristic sign of sexism,” explains Oleg Onishchenko, a lawyer at Juscutum.

With bill No. 3427, deputies supported the introduction of the terms “discriminatory advertising” and “gender discriminatory advertising” into the law. According to Onishchenko, from now on, it will be possible to refer to specific provisions in the law that clearly state that sexist advertising is prohibited. So, it will be easier to conduct pre-trial negotiations with incompetent marketers who do not want to realize that sexism is discrimination.

If there is any gender discrimination in commercials, an advertiser must pay a fine of ten minimum wages, 60,000 hryvnias (approx. $2,245). Also, a court may oblige the advertiser to publicly refute sexist advertising, Oleg Onishchenko says.

“Quality marketing teams now definitely need a lawyer because in each specific case, only a lawyer can see the risk to a client, and most importantly — to make a decision whether an advertiser would be vulnerable to losing a lawsuit,” added Irina Myagka, Chief of Marketing at Juscutum.

In total, 276 deputies voted for this draft.

What will it regulate

The document defines the meaning and legal status of virtual assets, ownership rights, and terms of transactions with such assets in Ukraine. As AIN.UA reported, after the signing by the President, the following changes will come into force:

• cryptocurrencies will be legal;
• market players will be entitled to judicial and other ways of protecting virtual assets rights;
• entities in Ukraine will be entitled to operate international exchanges where virtual assets are traded. However, for this, they (like other providers of services related to cryptocurrencies) will have to pass state registration in Ukraine and submit reports on their activities to the competent authorities;
• the Ministry of Digital Transformation will be the regulator of the virtual assets market; in some cases, the National Bank of Ukraine and the National Securities and Stock Market Commission will also have the authority;
• according to the bill, there will be a new regulator – the National Virtual Assets Regulatory Service (NVARS), which will issue licenses to crypto companies in Ukraine;
• financial monitoring of the virtual assets market will be going under the recommendations of FATF (Financial Action Task Force).

“Cryptocurrency owners will get a number of advantages. Because there will be a legal base for cryptocurrencies, they will be able, at least, to protect their virtual fortune if something happens. They also will be entitled to exchange cryptoassets and declare them. This process will be completely “transparent.” In addition, we expect that there will be a real market of intermediaries allowing pay for goods with cryptoassets, store, and exchange them. So, there will be more options for their use,” told Alex Bornyakov, Deputy Minister of Digital Transformation for IT Development, to the Minfin tabloid.

Remarkably, it is a framework bill. So, it does not prescribe the mechanisms and procedures for actions with virtual assets yet — the draft will only give a definition and provide a legal base for them. Well, the actual application will be defined additionally in the bylaws.

Thus, Ukrainians will be allowed to travel around the EU with digital vaccination certificates on their smartphones. Meanwhile, Ukraine recognizes certificates of EU member states and other countries that have joined the Digital COVID Certificate initiative.

COVID certificates are the first digital documents in the Diia app that will be recognized within the EU.

How Ukrainian certificates are integrated with the EU system

We have to do with digital certificates. The EU implemented an internal digital certificate on July 1, 2021. Last week, Ukraine joined the EU product infrastructure.

It is a united environment for all countries that run their own COVID certificates and ensure their conformity. Now the EU Digital Directorate will grant Diia access to the gateway, a tool that will allow other countries to verify Ukrainian certificates when traveling within the EU.

Remarkably, Ukraine is one of the first non-EU countries that received the equal status for their certificates. It was reported by Ambassador Matti Maasikas, head of the EU Delegation to Ukraine.

What is a COVID Certificate

COVID certificate is a document in the Diia app that confirms the status of a vaccinated person. In the application will be generated two certificates:

• an international certificate for traveling abroad that will contain more internal medical information but no picture of the patient;
• an internal certificate with less medical information but with a picture of the patient.

It was done for the case if Ukraine will introduce some rules for its citizens regarding the vaccination. Thus, when you’ll show the internal certificate, it should not be confirmed with physical documents, because the certificate already contains a photo.

When will the Diia Certificates work?

According to Minister of Digital Transformation Mykhailo Fedorov, the Diia Team has already loaded the app updates into PlayMarket and AppStore and waits for their confirmation. After they are released, vaccinated Ukrainians will be able to generate a certificate in Diia and travel without taking a test.

How to generate a Certificate in Diia App

• In the new version of Diia, you need to click on “Services” and select “COVID Certificate.”
• Next, go to “Get a Certificate.”
• Request to transfer data from the Electronic Health System to the Diia app through Diia.Signature Service. And the application will generate a QR code, which will verify the certificate.

The next step is the launch of COVID certificates on Diia.

How long will the certificate be valid?

The period will comply with international requirements. In most countries, it will be valid for 180 days from the date of generation.

The validity periods may vary depending on the medical research data and the country.

Do I need internet access to show the certificate at the border?

An already generated QR code will work without internet access. If you generate the certificate while still in Ukraine and having access to the Internet, you will have no problems presenting the certificate at the border with the EU.

What to do before you go to the EU

Although the European Commission’s decision to recognize Ukrainian certificates is advisory, 100% of all countries connected to the EU environment do recognize COVID certificates of all member states. To avoid unpleasant situations at the border, the Ministry of Digital Transformation of Ukraine recommends Ukrainian citizens checking the list of countries which they may enter with certificates and the current travel and transit regime in different countries of the world on an interactive online map of the Ministry of Foreign Affairs of Ukraine.

Will the EU recognize certificates for CoronaVac/Sinovac and CoviShield

As stated by the Ukrainian Minister of Health Viktor Liashko, all vaccines used to vaccinate Ukrainians against COVID-19 are approved by the WHO for emergency use. So, the international certificates will be given to those vaccinated by CoronaVac/Sinovac and CoviShield. However, in some EU countries, the issue of vaccines not approved by the EU medical association (in particular CoronaVac/Sinovac) is still open. Therefore, Liashko recommends checking the information about vaccines approved in a particular country on the MOH’s online map before traveling.

According to the Ministry of Digital Transformation, foreign IT specialists, freelancers, and entrepreneurs in the creative economy will have a special taxation regime to make the Ukrainian e-residency even more attractive.

How will the e-Residency work

As we already stated, the e-residency will allow IT professionals to “move” their business to Ukraine just in a few clicks while physically staying in their homeland. To obtain the e-resident status, a foreigner must apply on the e-residency portal and pass a check following the current legislation in the Security Service and the Ministry of Internal Affairs of Ukraine. 

Identification and verification at the consular office are mandatory to obtain the status. After that, a foreigner receives a TIN, e-resident status, and digital signature. Further steps are not very different from those of Ukrainian entrepreneurs:

• e-resident registers as an FOP online through the Diia Service
• they open accounts in Ukrainian banks to receive income
• they pay income tax in Ukraine

“The Ministry of Digital Transformation is shaping the country’s digital economy by attracting foreigners to do business remotely in Ukraine. The e-residency bill will create enormous investment opportunities for the country. It will improve the national image of Ukraine in the international IT market and will bring more than $1.5 million to the state budget annually,” said Minister of Digital Transformation of Ukraine Mykhailo Fedorov.

Restrictions on the types of business activities for e-residents

The bill prescribes a rule according to which an e-resident entrepreneur can carry out only the following types of economic activities:

• Publishing of computer games (58.21 NACE)
• Other software publishing (58.29 NACE)
• Computer programming activities(62.01 NACE)
• Other information technology and computer service activities (62.09 NACE)
• Data processing, hosting and related activities (63.11 NACE)

Alex Bornyakov, Deputy Minister of Digital Transformation on issues relating to IT Development, also stated that special taxation mechanisms would be offered to foreign IT professionals, freelancers, and entrepreneurs in the field of the creative economy.

The Ministry of Digital Transformation expects that by the end of 2022, Ukraine will have 3,000+ e-residents, who will bring over $1,500,000 to the state budget annually.

This week all regions of Ukraine are in the “green” epidemiological zone, which means easing quarantine restrictions. Accordingly, during this period, Ukrainian citizens and foreign tourists will be able to freely cross the border of Ukraine without the installation of the app.

“The Cabinet of Ministers decided to disable the application while Ukraine is in the “green” zone. Starting from tomorrow, you will not be required to install it when passing through passport check-points at the border,” said Mykhailo Fedorov.

During a government meeting, the Prime Minister of Ukraine, Denys Shmygal, said that this time would be used to update the app.

Rules for foreigners

Foreigners who do not have a Ukrainian residence permit are no longer required to install the Vdoma app either. However, for them, the rules for crossing the Ukrainian border are slightly different from those established for citizens and foreigners who hold a Ukrainian residence permit. In addition to the compulsory COVID-19 insurance policy, foreigners who do not hold a residence permit must have one of the following documents:

• negative COVID-19 PCR test issued no later than 72 hours before arrival
• negative result of the SARS-CoV-2 Rapid Antibody Test issued no later than 72 hours before arrival, or
• document confirming the receipt of a full course of vaccination with one of the WHO-approved vaccines

Both the Diia City bill and the special taxation regimefor its residents are in one package — they do not work without each other. Previously, we wrote about what the Diia City regime is, as well as its disadvantages.

The bill, which was adopted by the deputies on the first reading today, imposes the following special tax rates for resident companies of Diia City:

• personal income tax at 5% (this rate can be applied for the salaries of resident companies’ employees, for payments to gig specialists on gig contracts, for royalties);
• unified social contribution in the amount of the minimum insurance contribution for employees of resident companies, or at the rate of 22% of the determined amount of the USC base determined under the terms of the gig contract;
• corporate tax or income tax at 18% or a 9% tax on distributed profits;
• military tax at 1.5%.

AIN.UA will follow the further work of the parliament on these bills.

Restrictions that are proposed in the draft law 

• Ban on the sale of plastic bags in stores and restaurants (it is referring to bags with thickness below 50 microns) from January 1, 2022.
• The ban does not refer to biodegradable plastic bags and ultralight bags up to 225 mm wide (without side folds), up to 345 mm in depth (including side folds), up to 450 mm long (including handles), in which fresh fish, meat, powder products, ice, etc. are packed or transported.
• Ban on the sale of oxo-degradable (oxo-biodegradable) plastic bags in stores and restaurants from January 1, 2022.
• Ban on persuading buyers to purchase such bags.
• Promoting the production of biodegradable bags.

What types of bags will be banned

The draft law restricts the sale of not only conventional plastic bags but also oxo-biodegradable bags. They are composed of 99 percent regular polyethylene and 1 percent oxo-degradable impurity. These impurities are metal-based additives that are added to polymeric materials to make them degrade faster by oxygen and ultraviolet light. If such a bag gets into the garbage heap, it will not decompose.

The authors of the draft law set сompostable bags against oxo-biodegradable ones. The сompostable bags are made from organic materials (plant, animal, microbiological). They decompose both in a highly oxygenated environment and in an environment with limited oxygen availability. Such bags are usually made from starches or cellulose, they are environmentally friendly and can even decompose in compost pits at home.

Why is it important?

According to the draft law’s explanatory memorandum, every Ukrainian uses about 500 plastic bags every year (in the EU this figure averages 90 bags). Only about 6% of such bags are sent for recycling, that is, there are about 500 thrown-away bags per person in Ukraine per year. The restrictions on the sale of plastic bags may partially solve this problem.

What is BES

According to the explanatory note to the bill, the Bureau of Economic Security was established to detect, combat, investigate, and solve criminal offenses in the economic sphere.

According to its authors, the BES will deprive law enforcement agencies, namely the tax police, the Security Service of Ukraine, and the National Police, of the need to perform functions unusual for them. Thus, with the bill’s adoption, the SSU lost its powers to investigate corruption crimes and organized criminal activity in the economic sphere.

As Prime Minister Denys Shmyhal noted, the Bureau will receive the status of a central executive body and will deal with all crimes in the economic sector:

“This is one of the final steps towards the elimination of the tax police; this is the end of the times of squeeze on business, this is the final end of the ‘masked-police-raids,’

Denys Shmyhal, Prime Minister of Ukraine

Some of the key tasks of the BES:

1. Identification of risk areas in the economy by analyzing structured and unstructured data;
2. Assessment of risks and threats to the economic security of the state, development of ways to minimize and eliminate them;
3. Submission of proposals regarding amendments to statutes and regulations on the elimination of prerequisites for the creation of schemes of illegal activities in the economic sphere;
4. Ensuring the economic security of the state by preventing, detecting, terminating, investigating criminal proceedings that infringe on the functioning of the state’s economy;
5. Collection and analysis of information about offenses that affect the economic security of the state, and determination of ways to prevent their occurrence in the future;
6. Planning of measures in the field of counteraction to criminal proceedings referred by the law to its jurisdiction;
7. Identification and investigation of offenses related to the receipt and use of international technical assistance;
8. Drawing up analytical conclusions and recommendations for state bodies to increase the efficiency of their management decisions regarding the regulation of relations in the economic sphere.

In plain language

Yuri Sukhov, a business partner of the criminal law and business protection practice at Juscutum, told AIN.UA how the BES would work:

“The course of integration into the EU chosen by Ukraine dictates the requirement to ensure the state’s economic security and minimize tax pressure on business from the SFS bodies. It is a positive decision, the purpose of which is to protect the business from countless visits by various law enforcement agencies whose activities are duplicated. Therefore, creating a single body, the Bureau of Economic Security of Ukraine is desirable. Despite this, Ukrainian businesses will still face the problem of pressure from the old law enforcement agencies, but under new pretexts (SSU, for example, under the guise of financing terrorism).

BES is an investigative body authorized to initiate and carry out a pre-trial investigation, conduct investigative and covert actions, and carry out criminal intelligence operations. That is a full-fledged investigation with the detention of persons, searches, interrogations, reporting of suspicion, and the like. In fact, they created not an analytical body, as they declared, but another law enforcement body with limitless opportunities to put pressure on the business.

IT business, as a specific segment of the Ukrainian economy, will not be an exception. IT companies should beware of the work of BES detectives in the direction of investigating the following offenses:

• falsification of documents for the state registration of a legal entity and individual entrepreneur;
• evasion of taxes, fees, and payments;
• evasion of payment of single social security tax and insurance premiums for compulsory state insurance;
• fraud with financial resources, etc.

BES will look into the “tax burden optimization” tools of IT companies, in which, rest assured, law enforcement officers will see the corpus delicti in the form of tax evasion, and if they are criminalized, then VAT fraud. Under such conditions, the scenario of the BES’s work in the IT segment is obvious: the collection of information, intelligence using temporary accesses and searches, the seizure of financial documents and equipment that the IT company uses in its work to paralyze or slow down its work, as well as the subsequent arrest and interrogation of all employees.

In addition, the IT business should take into account the draft Law No. 3959-1 dated August 25, 2020, which introduces criminal liability for VAT fraud, which will fall within the authority of the BES. Detectives will work tirelessly on embezzlement or misappropriation of public funds in the form of VAT.”

What do IT representatives think

Dmitry Ovcharenko, Vice President for Financial and Legal Affairs of the “IT Ukraine” Association:

The IT Ukraine Association sees the creation of the Bureau of Economic Security of Ukraine cautiously positively. The fact is that now there are economic security units in the tax service, the SSU and the National Police. Now they want to take away the “economic” functions from the tax authorities and the police, so now two authorities instead of three will come to “harass” the business (BES and SSU). In addition, the pool of detectives and investigators is reduced from 9,000 to 4,000, which should also lead to a decrease in pressure on the business. We are talking about caution in assessing that “the devil is in the details” – it is necessary to understand the mechanics of implementation and other details.

Olga Kunichak, manager of the IT committee of the European Business Association (EBA):

It is not a secret that one of the main sore points to the IT industry now is the constant threat to the security of doing business in Ukraine, which emerges due to periodic interference and even outright pressure from law enforcement agencies. Ultimately, this creates an unfavorable economic environment for the Ukrainian IT industry and hinders the arrival of investment-attractive foreign companies. In turn, this not only interferes with doing business in Ukraine but predetermines, which is a shame, the withdrawal of domestic labor resources and capital abroad.

Although, according to the BES law, the Security Service of Ukraine loses its authority to investigate economic crimes six months after creating a new body, the very fact that the Economic Security Bureau will have same powers as the tax police stirs considerable concern in business circles. If we really have a goal to improve the position of IT in the international arena, it is necessary to adopt as soon as possible the draft Law No. 2740 dated January 15, 2020 “On the Amendments to the Criminal Procedure Code of Ukraine and the Criminal Code of Ukraine (regarding the improvement of the procedure for the application of certain measures to ensure criminal proceedings).” It provides for amendments to the Criminal Code of Ukraine to protect IT businesses from abuse by law enforcement agencies. In particular, from unreasonable searches, seizure of servers, and other equipment belonging to entrepreneurs.

Otherwise, the law-abiding IT business is forced to work in conditions of an increase in the number of regulatory bodies and the expansion of their powers, while, at the same time, with virtually no responsibility for their illegal actions, which in no way will stimulate the country’s economy.

In addition, the business will observe the establishment of a new body – the selection process of its director, recruitment, etc. If it has proposals or complaints, it will undoubtedly voice them.

When will BES come into being

• According to the plans of the Cabinet of Ministers, the BES will become fully operational in September 2021.
• The government has already allocated ₴587 million ($21.4M) for this purpose.
• The director of the Bureau of Economic Security of Ukraine will be appointed for 5 years according to the decision of the competition commission, which will include representatives of the Cabinet of Ministers, the National Security and Defense Council, and the Verkhovna Rada.
• It also became known about the creation of the State Supervision Council, which will monitor the activities of the BES.

In a nutshell, Diia City is a special legal framework for Ukrainian IT companies that can apply to participate in it. The project’s duration is 15 years. Its key provisions include the following:

• All companies wishing to become members of Diia City must submit applications. Then they are included in the register of residents of Diia City.
• The concept of gig employees and gig contracts is introduced.
  • A resident of Diia City can conclude an agreement with an individual, according to which such a gig employee undertakes to perform the work specified by the company personally. This work will consist of tasks (gigs), projects, and orders of the employer or their gig employees. The employer undertakes to pay for the gig employees’ work and provide proper work conditions if the work is not performed remotely (a gig contract).
• A special tax regime is being introduced for participating companies: personal income tax at 5%, single social security fee – 22% of the minimum wage, corporate tax with a choice of either an 18% income tax or a 9% exit capital tax, and military tax at 1.5%.

The first version of the Diia City bill was criticized by many market participants, particularly for the risks of working with private entrepreneurs, for the too broad powers of the Ministry of Digital Transformation in terms of management of Diia City, etc. (details are here).

After that, the Ministry finalized the bill and presented an updated version in March 2021. We wrote about its key differences with the previous version earlier. But the IT community still had questions about the project, particularly about non-enticement and non-compete agreements (we wrote about this in more detail earlier).

Tax rates for resident companies of Diia City are described in a separate bill, which will be put to the vote in the first reading after bill No. 4303.

Why is it important: the bill will become the starting point for creating a special legal regime for the development of the IT industry in the country.

What’s next: The Ministry of Digital Transformation emphasizes that some of the amendments (for example, removing non-enticement and non-compete clause, which may complicate job changes for employees of participating companies) were not included in the draft, which was voted on April 15 in the parliament. The Ministry promised to remove them by the second reading. The updated text of the bill is not yet available.

What happened?

April 5 in Kyiv became the first day of another strict lockdown, which the city authorities announced earlier, on March 31. As part of the lockdown, the use of public transport was limited, and the residents of Kyiv had to use minibusses, buses, trolleybuses, and the subway only if they had special pass-tickets issued to critical infrastructure workers. Overall, around 500,000 pass-tickets were issued in the city with a population of almost 3 million people.

“And, of course, Kyiv cab services immediately took advantage of this,” says Khmelnitskyy.

Indeed, in the conditions when the use of public transport was restricted, the residents of Kyiv, who didn’t have a car, were forced to travel around the city by cab. That resulted in incredible demand and, thus, made the prices of popular services skyrocket. In some areas, for an Uber or Bolt ride from the Left Bank to the Right Bank, a tariff over UAH 1,000 (approx. $35) was fixed. Facebook users also actively discussed this phenomenon and were indignant at it.

Taras Potichny, a ride-hailing market expert, told AIN.UA why this had happened. He assured that it was not the greedy cab services that were to blame but the pricing algorithms. He also added that the market would soon stabilize. Indeed, the very next day, when the tide of interest subsided, ride-hailing service prices stabilized and returned to the pre-quarantine ones.

However, officials came in on this situation.

And what about the AMCU?

According to Khmelnitskyy, the AMCU received a lot of complaints from the residents of Kyiv about a sharp spike in prices. They were particularly indignant at Uber, Bolt, and Uklon.

“We cannot ignore so many complaints. Moreover, the situation may indicate possible violations in the actions of ride-hailing services covered by Part 3 of Article 6 of the Law of Ukraine “On the Protection of Economic Competition” (concerted anticompetitive actions of business entities) and/or Part 1 of Article 13 of the Law of Ukraine “On the Protection of Economic Competition” (abuse of a monopoly (dominant) position),” writes the chairman of the Kyiv territorial branch of the AMCU.

In this regard, the Kyiv regional territorial branch of the AMCU launched an investigation as to compliance with the legislation by the participants of the car-hailing market (as well as companies that provide services in these markets).

In the comments to this post, users note that cab prices from the mentioned companies have already returned to normal, and the sharp spike, which the AMCU regarded as a malicious attempt to capitalize on the coronavirus situation, is a completely normal reaction of the market to the phenomenal demand. However, some praised the initiative of the officials and spoke in favor of taxi price regulation by the government.

Why this is interesting: Probably, the AMCU wants to know how the algorithms of international and Ukrainian services work and to study the laws of the market economy when demand exceeds supply exponentially.

In 2020, Ukrainian deputies declared 46,351 bitcoins. As of April 7, 2021, that is UAH 74.2 billion. Among the 791,872 officials who completed a tax return, 652 of them declared some cryptocurrency, as Opendatabot reports.

• In particular, most officials (61.1%) invested in Bitcoin. The second most popular cryptocurrency was Ethereum: 24.2% of public servants chose to invest in it.

11 cryptoassets of Ukrainian officials

• Bitcoin – 397 (61.1%)
• Ethereum – 157 (24.2%)
• Litecoin – 27 (4.2%)
• ADA – 18 (2.8%)
• Stellar – 18 (2.8%)
• Monero – 13 (2.0%)
• MIOTA – 10 (1.5%)
• Bitcoin Cash – 9 (1.4%)
• Bitcoin Gold – 1 (0.2%)

You will find the list of Top 5 Ukrainian officials by the reported amount of cryptocurrency below.

Notably, with every passing year, deputies tend to invest more and more in crypto. While in 2016, there were 25 known holders among Ukrainian officials, in 2020, there were 652 of them.

Most cryptocurrencies are held by officers of city and district councils, the National Police, and the Ministry of Defence.

Top 5 officials by the reported amount of cryptocurrency

5 Ukrainian officials, who are the richest men in terms of crypto assets amount, reported bitcoins exclusively.

• Vyacheslav Mishalov, member of the Dnipro city council – 18,000 bitcoins (more than $1bn);
• Petro Lenskiy, the Ministry of Foreign Affairs, – 6,528 bitcoins;
• People’s Deputies Oleksandr and Anatoliy Urbanskiy – 5,328 and 4,256 bitcoins;
• Member of the Odessa Regional Council, Volodymyr Kryvosheya – 3,493 bitcoins.

However, Opendatabot notes that the declared figures might not correspond to reality. Since cryptocurrencies have no legal status in Ukraine, it is impossible to trace their origin. Moreover, officials can use the declared investments in future to justify their illegal income: one can declare any number of bitcoins, without providing evidence of their actual existance.

According to the Head of the Parliamentary Committee for Economic Development Dmitry Natalukha, the cost of launching will amount to $1 million, which is «a very good price for Ukraine».

The contract has already been agreed upon with SpaceX

As Natalukha noted, negotiations with SpaceX lasted three months, beginning in December 2020. They were led by the Committee for Economic Development, State Space Agency of Ukraine (SSAU) and the ex-Head of SSAU Mikhail Lev. As a result of negotiations, SpaceX confirmed the launch of Ukrainian satellite for $1 million.

«We can now say that the terms have previously been agreed upon and Ukraine has an opportunity to sign a launch services contract with the legendary American company. The contract price is $1 million, which is an extremely good price for Ukraine, and it is eight times lower than the one that was planned from the very beginning,» Dmitry Natalukha wrote.

According to Natalukha, the general contractor Yuzhnoye Design Office may sign the contract by the end of this week.

Yevgeny Rokitsky, the Assistant of the Head of the Committee for Economic Development, said that SpaceX had confirmed the possibility of launching the Sich 2-1 satellite in December 2021, RBC Ukraine reported.

About the Sich 2-1 satellite

The Sich 2-30 (2-1) satellite is being developed at the Yuzhnoye State Design Office. It is a modification of another Sich 2 satellite, constructed by the Office, that operated in a sun-synchronous orbit from August 2011 to December 2012. Then, as a result of a failure of the chemical power supply subsystem battery, it was lost.

The satellite is designed to capture visible and near-infrared images of the surface of the Earth, as well as to monitor the planet’s magnetic field.

Sich 2-1 became the subject on February 1, 2021. Vice Prime Minister for Strategic Industries Oleg Urusky wrote that President Volodymyr Zelensky instructed to put a remote sensing satellite into orbit. On February, 12, Urusky in an interview with Pervy Delovoy said that the spacecraft is almost ready and requires only an in-service check.Significantly, a year earlier, in March 2020, the Deputy Head of the Parliamentary Committee for Economic Development Dmitry Kisilevsky already reported that the satellite had been constructed and that the Dnipropetrovsk region plans to allocate $1 million for its launch.

What happened

On November 3, 2020, the deputies approved bill No. 4065 amending the tax code, on first reading. Its provisions move the date of obligatory reporting on and paying taxes for, CFCs for a year. One should remember that this is just the first reading, though. For the date to be actually postponed, the Parliament must adopt the bill as a whole, and then it must be signed by the President.

Lawyer’s commentary

AIN.UA’s editorial office has asked the founder of the law firm Rikk, Vlad Yaroviy, to comment on the approved bill.

“Let’s see what benefits/threats this bill on CFCs could incur. Strange as it may seem, I see nothing particularly negative specifically for CFCs. All of us have been expecting the Verkhovna Rada to move the CFC taxation deadlines, because, frankly speaking, neither the state, nor business is ready for that yet.

And so it happened; now, the first accounting period should be the year 2022. Moreover, the business has an opportunity to monitor the situation even until 2024, because there will be no penalties for 2022–2023.

In this country, no one wants to be a pioneer; usually, this does not end very well. I think lawyers and advisers will also wait for some practice in the application of the law before filing anything for their clients.

There is also an option for the tax-free dissolution of CFCs under the established procedure, allowing an individual not to pay the personal income tax or military tax afterward. The rest of the changes will rather affect transfer pricing, permanent establishments, etc.”

What’s new in the bill?

The document supplements the Tax Code with another Article 208 on the taxation of electronic services. According to the text of this article:

• Electronic services that non-resident companies supply to individuals in Ukraine are subject to VAT (20%).
• A non-resident company is a company that does not have a permanent representative office in the country. It must register in the Ukrainian tax office as a VAT payer to provide services to Ukrainians. This condition works if the previous year, the company delivered services to individuals in Ukraine for the equivalent of UAH 1 million. If the amount is less, it is possible to register as a VAT payer voluntarily. All this can be done through the electronic service “VAT for non-residents.”
• If services are delivered in Ukraine through an intermediary, the one is the supplier for this project. If the intermediary is also a non-resident, he or she has to act following the article.
• At the same time, the “tax on foreign advertising” rule is excluded from the code. That means that Ukrainian legal entities and individual entrepreneurs will not have to pay a 20% tax when buying electronic services from foreign companies, as Oleksandr Bornyakov, the Deputy Minister of Digital Transformation of Ukraine, explains.

The authors of the bill in an explanatory note cite the example of the EU countries and Russia. In the latter, such services are subject to VAT since January 1, 2017. Since then, Apple, Google, Microsoft, Netflix, Bloomberg, Alibaba, Booking.com have registered as VAT payers in the Russian Federation, according to the authors of the bill.

Analysis of similar bills

Previously, we wrote more about what this initiative can result in (in particular, for the advertising market).

A similar bill has already been submitted to the parliament in May this year, but voting has not yet been held. At that time, many experts agreed that it would mean a 20% increase in the price of services for users.

Representatives of the company and the Ministry of Digital Transformation announced the news at a briefing on October 2.

Deal details

According to AIN.UA data, among other things, this investment will go toward the construction of two data centers of the company in Ukraine. If data are stored inside the country, Ukrainian government agencies will be able to use the cloud services of the company (this requires the adoption of a cloud technology law).

The deal also includes discounts or special conditions for using Microsoft Azure, Office 365, and other cloud services for the Ukrainian government agencies and organizations, educational projects, etc.

According to Mykhailo Fedorov, the Head of the Ministry, the government is considering transferring Diia 2.0 services to Microsoft clouds.

Similar projects abroad

It should be noted that this is not the first such project of the company. In May 2020, Microsoft announced a $1 billion investment in the creation of a new data center and implementation of cloud services for enterprises and government agencies in Poland.

The company also signed a cooperation agreement with Chmura Krajowa (CK), a Poland-based cloud services provider. As part of this project, Polish enterprises will undergo digital transformation in the field of cloud solutions and will train about 150,000 employees and students.

Also, in June 2020, Pawel Borys, the president of the Polish Development Fund, co-founder of Chmura Krajowa ​(CK), announced about $3 billion of investments from Google and Microsoft to Poland over the next few years.

“Such a decision has just been made at the meeting of the Commission for the recognition of the sport in Ukraine. For our country, this is a historical moment, because esports is not just “shooters,” but a fundamental element of modern digital culture,” the official wrote.

A short while ago, Alexander Kokhanovskyy acted as a representative of the deal for ₴1.1 billion to buy out the Dnipro Hotel in the center of Kyiv. Kokhanovskyy plans to make the world’s first Esports Ready Hotel there. It will include unique esports elements: training zones, an esports scene, special rooms for professional players, as well as the best players’ lounge in the world.

Soon an eSports association will also be announced in Ukraine.

• Analysts from Newzoo forecasted the 2019 global games market to reach $148.8 billion. Ukrainians spend hundreds of millions of dollars on computer games annually.
• In Ukraine, esports is actively developing. In March 2020, the team of the Ukrainian esports club Natus Vincere won the major Counter-Strike: Global Offensive (CS:GO) championship, IEM Katowice. The team won a prize of $250,000.
• And last year, Kyiv citizen and professional gamer Aleksandr “s1mple” Kostyliev from Na’Vi was recognized as the best world’s player in CS:GO.

The final version with all the amendments of people’s deputies is not yet available on the website of the Parliament. The June edition of the bill proposed such regulations:

• The allowed activities include casinos, online casinos, betting shops, slot machines, lotteries, and online poker. Businesses must obtain a license to conduct such activities.
• Lotteries, sports poker, billiards, and bowling are not considered gambling.
• Casinos can be placed in specific locations: five-star hotels with at least 100 rooms (150 for Kyiv), suburban complexes with an area of at least 10,000 square meters, or special gambling zones.
• Betting shops can be located in three- to five-star hotels with at least 25 rooms (50 for Kyiv) and on racetracks.
• Licenses are issued for five years. Prices for licenses depend on the size of the minimum wage. According to the text for the second reading, for example, the price of the license for online casinos is 6,500 minimum wages for 5 years (about ₴30.7 million for 5 years, or slightly more than ₴6 million per year).
• There is an online record of market operators kept in the country: it is a state-maintained system that all licensed companies must be connected to.
• Players in such places must be identified: in particular, citizens under the age of 18 must not be allowed to gamble (in the previous version, this restriction was applied to 21 years old persons). There is a register of persons who are restricted access to such establishments.

Details of the June edition of the bill you can read in our previous peace.

What did the MoH declare?

At a press briefing on June 29, the Minister of Healthcare of Ukraine, Maksym Stepanov, announced that people arriving in Ukraine from the “red zone” should not necessarily self-isolate at home for two weeks. But for this end, they need to install the “Act at Home” application and take a PCR test for coronavirus at a Ukrainian hospital. This rule applies to both foreigners and Ukrainians arriving from abroad.

“If a person arrives from the temporarily occupied territories or from abroad, from the so-called ‘red zone,’ he or she must install the “Act at Home” application and begin to self-isolate. But if they take a PCR test on the territory of Ukraine and it turns up negative, there is no need to self-isolate,” the official noted.

How does this work in theory?

The changes have been introduced by Resolution of the Cabinet of Ministers No. 522, dated June 25, 2020, which, in its turn, changes the provisions of Resolution No. 392, dated May 20, 2020. The latest version of the document contains the following provision:

“The observation and self-isolation of a person, in connection with the crossing of the state border (who has arrived from, or is a citizen of, a state with the significant spread of COVID-19) […] shall be discontinued in the case of obtaining a negative result of the COVID-19 test using the method of polymerase chain reaction, conducted after the crossing of the state border.”

In brief: it is not necessary to self-isolate for those arriving from the “red zone” countries if they take a PCR test upon arrival, and it turns up negative.

The “red zone”

The “red zone” includes countries where the prevalence of the coronavirus exceeds 40 active cases per 100,000 population. The “green zone” refers to countries where the indicator is below 40. The MoH publishes such lists, and they are regularly updated.

Important: the same resolution introduces a norm under which foreigners can only cross the Ukrainian border if they have insurance valid for the duration of their stay in Ukraine. It must be issued either by a Ukrainian insurance company or by a foreign company registered in Ukraine (or having contractual arrangements for travel assistance with a Ukrainian partner). It is needed for covering the costs of COVID-19 treatment or observation.

How does this work in practice?

Let’s take a person who plans to come to Ukraine from a “red zone” country as an example. The algorithm for him or her is as follows (available in more detail at the Public Health Center’s website):

• On crossing the border, they install the “Act at Home” application (which can be tied to a Ukrainian SIM card only). If they do not want to self-isolate, they need to find a clinic or other medical facility where they can take a PCR test for coronavirus.
• Such a person has their samples taken for testing, after filling out the personal data processing consent form. It is mandatory that the fact of crossing the border be recorded in this paper, as well as the exact date of arrival in Ukraine. It must also contain the telephone number used to register with the “Act at Home” app.
• The laboratory will run the test and send its results to the electronic system of the Public Health Center of Ukraine.
• Such data are automatically synchronized with the “Act at Home” service, so further, it will send to the user’s “Act at Home” app a message saying that they can stop self-isolating.

Important: You can take the test only in particular laboratories and clinics. A complete list of such clinics and laboratories is available here, and only these institutions can transmit data to the electronic system. For example, Dila, Oleksandrovska Clinical Hospital, and some other institutions may perform tests for this purpose in Kyiv.

You should also need to be prepared to face some confusion concerning this issue when you arrive. Therefore, before coming to Ukraine, it is better to get advice from the consulate or embassy.

For example, Bogdan Logvynenko, the author of the project Ukraїner told AIN.UA how he had recently returned from Indonesia (he is in the “green sone” now):

“The five of us arrived in Ukraine from Indonesia, where we have flown back in winter. I went through the Fast Line and was not asked anything at all. Someone was told to install “Act at Home,” someone couldn’t install it, because they had no Ukrainian card. Then it turned out that they had been asked to install the “Act at Home” app before they found out from which country the passengers had come. It looked like a complete confusion on the part of regulatory authorities.

It’s not clear why they wouldn’t arrange a quick PCR test on arrival right at the airport? Or at least give the available information on where and how can they be taken?”

There are also cases when self-isolating users have received a response from the “Act at Home” app, which contradicts the recently adopted norms. Such a story is told by a Kyiv resident Elena Topchieva.

After the Cabinet of Ministers adopted the new rules, she contacted the support service of the application, but she was advised to stay home despite the test results.

AIN.UA has found the document and picked out the main points. For example, licenses for online casinos have become several times cheaper.

Background

The Law “On Prohibition of Gambling Business” has been in force since 2009, and Article 203-2 of the Criminal Code establishes criminal liability for such activities. At the end of 2019, the Parliament failed to pass several bills on the legalization of gambling. After that, by order of the Cabinet of Ministers, authorities began closing down casinos and gambling halls. In January 2020, Verkhovna Rada reconsidered the legalization of gambling and adopted the bill in the first reading.

What was proposed in January 2020?

The version of the law supported by the deputies in January contains such provisions:

• The allowed activities include casinos, online casinos, betting shops, slot machines, lotteries, and online poker.
• To conduct such activities, a business must obtain a license.
• Licenses are issued for five years; the prices are: 12,500 minimum wages per year (UAH 59 million per year) for online casinos, upfront payment is required; 120,000 minimum wages for a five-year license, i. e. UAH 566 million for five years, or UAH 113 million per year, for bookmakers.
• Gambling software developers also need a license.
• There is an online record of market operators kept in the country: it is a state-maintained system that all licensed companies, etc. must be connected to.

What does the June version propose?

As of June, the amended bill differs from the January version in some substantial details:

• License prices have become several times lower. For example, an online casino license price equal to 6,500 minimum wages (against 12,500 minimum wages per year in the first reading).
• Moreover, licenses are issued for five years, and the wording “per year” has been removed from the text. This means that, whereas previously online casinos were offered to pay 12,500 minimum wage per year, now it is 6,500 minimum wages, spread over five years (i. e. approximately UAH 30.7 million for 5 years, which is just over UAH 6 million per year).
• The price for bookmakers has also been reduced: 30,000 minimum wages for five years (previously, 120,000 minimum wages). Meaning, that under the amended law, companies would have to pay UAH 28 million per year.
• One more important point here: under the earlier version, casino software developers could be subject to the license-buying rule. In the latest version, the bill’s authors distinguish between gambling software supply services and the development of the same software. License is needed specifically for the software supply services. Now, if Ukrainian programmers develop programs for a company that is going to supply software for casinos, they need no license.
• The online registration system for gambling market operators has been preserved.
• As contrasted with the January bill, companies are required to have a website with the domain extension .ua, but there are no second-level domain restrictions, so extensions like .com.ua or .net.ua are acceptable. The January version demanded a website with the country-code top-level domain (available just for registered trademark holders). Now, a casino can have a website not only at, say, casino.ua but also at casino.com.ua or casino.net.ua.
• Similarly to the January bill, separate licenses should be obtained for online casino activities and bookmaking.

Concerning taxable foreign assets, the law comes into force on January 1, 2021, so there is still time to prepare.

AIN.UA’s editor has asked lawyers, entrepreneurs, and investors about what is going to change for the venture capital investment industry.

Why does Ukraine need the CFC law?

According to the lawyer Yuriy Kornaga, a partner at Axon Partners, the CFC regulations have not come as a surprise for Ukrainians. The introduction of CFC rules in Ukraine was anticipated back in 2017. At that time, Ukraine committed to adopting the package of the Base Erosion and Profit Shifting (BEPS) Action Plan in 15 actions.

The idea behind CFC rules is to tackle tax migration. Any business in any jurisdiction should get a tax rate that is commensurate with its “home” rate. If it relies on low-tax jurisdictions, let it relocate physically, rather than make a virtual escape.

What is a CFC?

A controlled foreign company is any legal entity registered abroad and controlled by a controller (see below). For a CFC, it is possible to have no legal entity status; these can be partnerships, trusts (except for blind ones), funds. Even a joint venture agreement without creating a legal entity can fall under the definition of a CFC.

“It doesn’t matter if a CFC is registered offshore or in a regular jurisdiction, in the U.S. or Estonia, if it is a product company or an outsourcing company, it is still a CFC,” the legal expert comments.

Who is a controller?

A controller is a Ukrainian resident (an individual permanently residing in the country or a legal entity registered here) that owns directly or indirectly:

• a share in a CFC which is more than 50%, or
• a share in a CFC which is more than 10%, provided that several controllers own shares in the CFC making more than 50% in total (this applies to situations where shares in a company are held by several friends or relatives; if there are several controllers, they are residents, and their joint share exceeds 50%, the provisions of the law do apply), or
• independently or together with other related Ukrainian residents perform effective control over the CFC (meaning that a person, or a legal entity, can order the CFC, for example, to make a payment or conclude an agreement; can hold negotiations over the CFC’s deals; make transactions with the CFC’s banking accounts or freeze them, etc.).

“Holders of options for less than 10% or similar exit bonuses are not controllers. If, though, the amount of the option or bonus is more, the resident becomes a controller not since, for example, the signing of the option agreement, but when he or she buys the option in full or proportionally, or secures the rights for the exit bonus,” says the lawyer.

What must controllers do now?

They have to report about having a CFC to the tax office. And pay taxes on their profits. The reporting period is one year.

Controllers should file such a report at the same time as their annual income statement (the deadline for individuals is April 30, 2021) or their income tax return (the deadline for legal entities controller is March 1, 2021).

What taxes do controllers pay?

The tax is levied on the part of the CFC’s adjusted income for the period under review, which is proportionate to the controller’s share. It should be calculated by the controllers themselves, based on the CFC’s financial statement.

It is important to remember that if the total income from all the controller’s CFCs, according to their financial records, does not exceed EUR 5 million, no such tax is payable.

Individuals pay the personal income tax, and legal entities, corporate income tax.

For instance, there is a CFC in the form of an outsourcing or product company registered in Cyprus. Its controller controls a 60% share. The company has received an annual revenue of $2 million, the profit is $1 million. The adjusted profit is the profit minus the tax of 12.5% (CIT) payed in Cyprus. The tax base for the controller should be $525,000 (60% of $1 million minus 12.5% of this sum). The controller must pay the personal income tax of 18% and the military levy of 1.5% on it.

Those who are not filing reports and not paying taxes will be fined. For example, a non-filed report will cost UAH 210,200 (about $7,800), failing to report the acquisition of a share in a CFC, UAH 630,600 (about $24,500) for each case.

Showing what has changed by examples

The full analysis of the changes has been provided to AIN.UA by Sayenko Kharenko’s Tax Practitioner Svitlana Musiyenko and Senior Lawyer Kateryna Utiralova.

Situation 1. A Ukrainian beneficiary owns a foreign company and has an account in a foreign bank. From January 1, 2021, the taxation of controlled foreign companies (CFCs) is introduced. This means:

Before:

• The Ukrainian beneficiary owns the foreign company and has an account in a foreign bank, all while:
  • he or she spends money from the account on personal needs, paying for travel, clothes, medical treatment; he or she uses the company as a “piggy bank”: to store currency safely and anonymously, to “secretly” own real estate in Ukraine and all over the world;
  • in Ukraine, no one knows about the company, because the registers of shareholders and beneficiaries are closed, and even if they are open, the use of nominals is common;
  • in Ukraine, no one knows about the bank account because of bank secrecy, no one sees the transaction history, no one knows the balance.

Now:

• The Ukrainian beneficiary still owns the foreign company and has an account in a foreign bank, but:
  • the foreign company is known in Ukraine, because:
    • the information is disclosed by the individual in his or her report, otherwise, there is a fine;
    • the tax office is interested in discovering the CFC because the failure to file the report means a fine and additional payments to the state authorities;
    • financial institutions in Ukraine invariably provide the data on beneficiaries to the tax authorities.
  • Soon (since 2021–2022), the CRS international data exchange will start working, and the tax office will be receiving information about accounts set up by Ukrainian residents in other countries. The tax office will see the account balance and where the money has gone; the authority will see where you have got any foreign companies.

What about paying taxes in this situation?

Before:

The beneficiary does not pay taxes anywhere.

At the level of the foreign company, there is no tax because it is offshore, and if not, then the tax is minimal, according to the local rules. At the level of the Ukrainian company or the Ukrainian beneficiary, the tax is not paid because there is no legal obligation to do it, and Ukraine does not know that there is money for paying it.

Now:

• The Ukrainian beneficiary files a report concerning the foreign company to the tax office and calculates the taxation amount to pay in Ukraine.
• He or she pays the income tax (according to his or her share in the profit of the foreign company) at a rate of 19.5% (the income tax of 18% + the military levy of 1.5%). There are exceptions, where you do not have to pay the tax, but you must file the report to the tax office anyway.

Situation 2. A Ukrainian company conducts a transaction with a foreign company.

Before:

The transaction expenses are recorded according to the accounting regulations in Ukraine.

Now:

There is a concept of a “business goal” for the transaction.

If the tax office can prove the absence of a “business goal,” it will have the right to disregard the transaction amount when calculating the Ukrainian company’s taxable income.

What exactly must the tax office prove?

That the transaction’s principal goal is tax evasion, or that, under the same circumstances, another Ukrainian company would not be ready to conduct similar transactions with an unrelated company.

Situation 3. A Ukrainian company pays dividends, interest, or royalties to a foreign company, theoretically speaking, from Cyprus (from a jurisdiction covered by the Convention for the Avoidance of Double Taxation).

Before:

The reduced tax rates under the Convention are always applied.

Now:

There is the “principal goal” test. If the Ukrainian company makes a payment with the purpose of receiving a reduction, the Convention will not be applied.

Additionally, it was defined more accurately what a beneficiary owner of income on payments is: an individual who is a “beneficiary party” and has the right to “effectively dispose of the income.”

If the receiving foreign company is not a beneficiary owner, the reduction under the Convention will not apply.

Situation 4. A Ukrainian individual sells a foreign asset to a non-resident which is a related party or a company from a low-tax jurisdiction.

Before:

There are no restrictions on the amount of income that the Ukrainian party should get from the acquisition of the asset.

Now:

The Ukrainian party must calculate its taxable income as being not below the level of the “arm’s length price.” In effect, this is about the market price. If the party buys a foreign asset, then the expenses must also be not above the “arm’s length prices.”

Situation 5. A Ukrainian company enters into transactions with a related foreign company, and such transactions are subject to transfer pricing control in Ukraine.

Before:

The Ukrainian company pays standard taxes. In case it turns out that, according to the transfer pricing regulations, the company’s prices are inconsistent with the “arm’s length principle”, the company will pay additional income taxes.

Now:

From January 1, 2021 (if the date is not postponed), the concept of a constructive dividend is introduced.

Equated with such dividends is the difference between the actual transaction price and the price calculated according to the “arm’s length principle,” under the transfer pricing regulations.

This means that in case it turns out that, under the transfer pricing regulations, the company’s prices are inconsistent with the “arm’s length principle,” the company will not only pay extra income tax but the withholding tax as well. That is the withholding tax at the rate of 15% (or at a reduced rate, if applicable under the convention) on the constructive dividend amount.

What do investors and entrepreneurs think of it?

Many investors and entrepreneurs explicitly say and write that the new law will cause a wave of relocations from the country.

Denys Dovhopoliy, founder of GrowthUP Group, Unicorn Nest:

There is nothing bad about the new law. The bad thing is that it was signed about five years earlier than it should be. We need to put the economy in order, to grow the cow before we start milking it. The logic is very strange here. All those in power now will be severely affected by this law.

And, well, yeah, the already strong emigration sentiment is going to get another strong push now. And those pushed will be the people creating the economy now. And I don’t mean just the IT guys :); the citizenship and residency of this country have been devalued to almost zero for the entrepreneurially active segment of the population.

The nominals will raise prices for Ukrainians. If you know what I mean.

Igor Pertsya, a partner at TA Ventures:

This is more of an ideology issue for me. There was an unstated social pact between the state and the entrepreneurs: we leave you alone, taking a small-percentage tax, you stay here without complaining about the absence of good roads, decent healthcare, etc. Now it has all been downplayed. When owning a foreign company, Ukrainian entrepreneurs will consider obtaining foreign citizenship or residency.

For us as a fund, nothing has changed. We can have 5% in a startup, but the person who founded business can have a 100% share. So, many founders of Ukrainian projects come within the provisions of this law. This means that many startuppers who have lived in Ukraine will say, “Oh, what the hell!” and then just pack and move.

Andriy Kryvorchuk, founder of investment company Adventures Lab: 

We still don’t fully understand what the final version of the law will be. 

Do we have to pay taxes? Definitely, yes. But let’s find out why most of the Ukrainian business (especially product companies) does not accumulate their income in Ukraine: 

1. Keeping money in Ukraine is a risk (tomorrow, the bank will collapse, or raiders will come) 
2. Keeping an intellectual property in Ukraine is a risk (tomorrow, the Pechersk Court will decide that your work belongs to someone else).

And this is just the tip of an iceberg. I dream of the day when Ukrainian entrepreneurs will choose Ukraine as their main jurisdiction. And they’ll refuse other options. But today, the Ukrainian jurisdiction is one of the least protected, clear, and simple.

Our lawmakers obviously don’t understand that: 

1. Today, the world is at its most violent war between jurisdictions for every dollar of business.
2. Businesses will incorporate companies and pay taxes where they feel safe.
3. In a global world, you can’t tie anyone to you anymore.

Therefore, without improving the jurisdiction (British law, ease of doing business, the safety of funds, etc.), nothing will change. And there will be no more money in the treasury not from this law, or dozens of others.

Dmitri Lisitski, co-founder of Influ2: 

The law has taken a toll on the prospects of Ukrainian startups. Similar laws exist in other countries, but they are targeted at owners of large businesses hiding their assets in offshore jurisdictions. As usual, our lawmakers got everything mixed up! As a result, every Ukrainian startup must now file a tax return on its ownership of a mythical business. 

I do not doubt that the fact of reporting ownership of a foreign company makes technological entrepreneurs vulnerable in the realities of Ukraine. So, dear startupers, wait for fines, there is no doubt that the tax authorities will try to milk “rich tech specialists.”

The only sensible solution is to change your tax residency. In other words, when launching a startup, you have to plan the relocation without delay, which has many advantages. Together with the relocation, the entrepreneur gets access to funds, integration into the ecosystem, access to markets, so this is the final argument not to try to do business from Ukraine.

Alternate opinion: not everything is so terrible

If we want to move toward Europe, we need to practice paying taxes, says Lyubomyr Ostapiv, financial consultant, and partner at iPlan.ua. In his opinion, the law has some good sense:  

“When I started the first American company for IT business in 2013, I found out about FBAR. Simply said, you will pay a $10,000 fine if you did not file a separate report on the foreign account of an American resident. And, by the way, the Internal Revenue Service has the right to write off the money from the bank account if you owe it. I am sure that the CFC owners will figure out how to file reports and pay 19.5% of the profit. Of course, there may be excesses with the State Fiscal Service of Ukraine, and this is the biggest risk factor. For those who want to live in this country, it is important to “teach” the State Fiscal Service to interact with taxpayers within the law.”

According to Vlad Yarovoi, founder of RIKK, the law is not as bad as everyone says, “Even if your company is a CFC, most likely nothing will change for you, except the need to notify the tax authority and submit reports.”

The lawyer notes that there is no risk for business owners if:

• The total income from all CFCs does not exceed 2 million euros. Startupers and all small/medium businesses breathe a sigh of relief, says the lawyer.
• If the company is public and traded on the exchange.
• If there is an Avoidance of Double Taxation Agreement between Ukraine and the country where the company is incorporated and:
  • or the entrepreneur pays at least 13% tax (Bulgaria, Hungary, Cyprus, and Estonia – not applicable);
  • part of the passive income of the company is not more than 50%.

“The last point also applies to large businesses that are active. The only fly in the ointment is that the company must have real opportunities to perform all operations (personnel, capital, office). So, we have to create a certain substance,” says the lawyer.

The Government believes that such innovations will create extra ₴3 billion of tax revenues, as was expressly stated by the Head of Verkhovna Rada’s Committee on Finance, Taxation and Customs Policy, Danylo Hetmatnsev. He also assured the public that Facebook and Viber had agreed to collaborate. AIN.UA’s editor has been able to neither obtain comments from the representatives of the services nor find out where the 3 billion figure came from. The committee that initiated the bill also failed to explain it. It is understood that Ukrainian advertisers themselves will pay for VAT introduction: it is they who will have to pay more for advertising services.

In this article, the AIN.UA editor explains what the draft bill is suggesting, to whom it is targeting, and how it will affect the digital advertising market.

About the bill

The matter concerns the bill No. 2634 on the VAT on digital services provided by foreign companies with no Ukrainian offices to individuals in Ukraine. What this document proposes to change:

• Non-residents having no representative office in Ukraine and providing digital services to individuals in Ukraine are to be added to the list of VAT payers. Intermediaries for such types of services should be added as well.
• The VAT is 20% and is included in the price of digital services.
• According to the text of the bill, digital services include all services provided via the Internet, such as:
  • images, texts, photos;
  • games (incl. gambling);
  • advertising services on the Internet and in mobile applications;
  • cloud-based data storage services;
  • software supply and updating, remote software maintenance, etc.
• Non-resident companies without local representative offices should be registered as VAT payers. The registration is mandatory if the company generated a revenue of more than ₴1 million for digital services in Ukraine during the previous year. Such companies have been promised a simplified registration procedure. They do not issue VAT invoices but submit simplified tax returns.
• If a non-resident company does not get registered it will be liable to a fine of ₴8,500.

In a nutshell: foreign companies having no representative offices in Ukraine (such as Facebook or Viber), or intermediaries granting access to their services, will have to be registered as VAT payers and pay the VAT on services provided to individuals, with the sum of the tax included in the price of their services.

Regardless of the ₴8,500 fine, it is still unclear how exactly the Ukrainian tax authorities will ensure that non-resident companies are registered in Ukraine as VAT-payers.

If the bill is passed, it will enter into force the day following the publication and will cover taxation periods after January 1, 2021.

What do non-resident companies say?

In a recent interview, the Head of Verkhovna Rada’s Committee on Finance, Taxation and Customs Policy (and the initiator of this project), Danylo Hetmatnsev said, that these innovations have already been discussed with international companies that provide digital services to Ukrainians. According to him, Facebook and Viber agreed to pay VAT in Ukraine, and revenues from VAT on advertising services will bring the budget ₴3 billion per year.

The editor of AIN.UA has addressed requests to representatives of Facebook and Viber. Viber refused to comment, the Facebook press service promised to provide data, but at the time of publishing this article, there was no response.

It is worth noting that not many international companies that provide digital services are physically present in Ukraine. For example, Google has an office in Kyiv and has been registered in Ukraine as a VAT payer since 2007. Facebook, Valve, Viber, Amazon, Alibaba, and others have no registered legal entities in Ukraine.

Conclusions

Let’s summarize everything we’ve written before, by way of example. There is a Ukrainian company X, which advertises its services on Google and Facebook. If the bill is passed, the price of advertising on Google will not change for it, because Google already pays VAT, and includes it in the price of its services.

The prices of ads on Facebook will increase by 20% if the company pays them as a private individual. But individual employees of the company will face the fact that the subscription to Netflix and games on Steam have increased in price.

All this will only happen if Facebook, Netflix, and others register as Ukrainian VAT payers.

The editors of AIN.UA will follow the passing of this bill. We will write more details about how it will work for individuals who use unadvertised digital services of foreign companies, a little later.

Thus, the Ministry wants to simplify the conditions for doing business and attract foreign investments to Ukraine.

The concept was presented by Oleksandr Bornyakov, Deputy Minister of Digital Transformation of Ukraine. The editor of AIN.UA talks about the new project.

About Diia City

Diia City is an economic model for testing simplified business rules. If the model shows positive results, it can form the basis for the economic transformation of the whole country.

The “testers” of the model will be tech companies, as well as businesses in the field of the creative economy. Tax breaks, deregulation, and special administrative services will be provided for them.

All services, from business registration to taxes, will be available online for Diia City residents. It is also is planned to create a special embassy for them, as well as a tax office similar to the office of large taxpayers, and in the future – to launch a technology park with infrastructure like in Silicon Valley.

Taxes

There will be only two types of taxes in Diia City: 10% distributed profit tax and 10% labor tax. There will be no other taxes.

It is not yet clear how labor taxes will be calculated since possible forms of employment in Diia City are being discussed. The initiative group proposes to allow both regular employment under the Labour Code and cooperation with individual entrepreneurs. In both cases the tax amount should be reduced to 10% of the profit: 5% will be paid by the employee and another 5% by the company.

Besides, residents will be able to import equipment for their R&D centers without taxes and fees. Also, residents will be offered special currency regulation conditions so that they could freely make settlements with counterparties and partners abroad.

Who can become a resident of Diia City?

Bornyakov said about some restrictions, which are discussed in the project team.

• It is proposed that only companies with real staff will be allowed to be a resident, but not companies consisting of a director and a deputy director. The minimum number of employees is under discussion.
• Besides, employees of resident companies should have high salaries. The level is also under discussion, but it is expected to be about $1,500 per month.
• Residents should also have a significant share of exports of their products or services. The size of this share is not specified yet.

As for the economic spheres and business directions, the list is small. According to Bornyakov, only companies with specific types of economic activity will be accepted as residents.

What are the benefits?

According to the project initiators’ calculations, 80,000 new jobs will be available in Ukraine in 2021, thanks to the launch of Diia City. The market of the creative industry will grow to $11.8 billion by 2025 (in 2019, it was $6.2 billion).

However, the project is unlikely to be launched this year.

Launch date plans

At the moment, Diia City is in the discussion phase. Legislative amendments are needed for the first steps of implementation. As Bornyakov noted, in its essence, Diia City is a bill that will have special conditions for the creative class.

Currently, the team is negotiating with the responsible ministries in order to agree on some issues: in the field of taxation, employment, in particular, work with individual entrepreneurs, as well as the implementation of the principles of English law in Ukrainian courts.

Bornyakov emphasized that the roadmap of the project is also at the idea stage. It is not necessary to wait for realization this year “It is the more likely prospect of the future 5-10 years.”

What is the immigration quota?

The immigration quota is the number of foreign specialists who can get an immigration permit through the course of the year. The department notes that the quota is easier than a work visa because the visa must be updated annually, while the person is tied to a specific place of work. Quotas allow them to be checked once in 10 years and choose for themselves where to work or even launch their product here.

What are the conditions for foreigners?

• You can get a permanent residence permit.
• No need to obtain annual permits to hire a foreigner.
• Employment under the same conditions as for Ukrainians.
• There is no reference to specific terms of stay in Ukraine, to specific work, and position.
• It is possible to immigrate with a family to Ukraine.
• It is possible to become a self-employed person.

How is the quota distributed among cities?

• Kyiv – 2500 people
• Kharkiv – 700 people
• Dnipro, Odesa, and Lviv – 600 people each.

The government notes that such a decision should solve the problem of a shortage of IT specialists in the Ukrainian market.

“The demand for IT professionals far exceeds the potential of the domestic market. Every year, 15-17,000 IT specialists graduate from Ukrainian universities. At the same time, there appear about 40,000 job places for IT people in the country. In addition, some of the Ukrainian specialists leave to work abroad,” according to the statement of the Ministry of Digital Transformation.

You can read about the procedure of registration of such employees in our article.

The report dated by February 14, 2020, shows that the export of IT services from Ukraine increased by 15%. Now it equals 16% of the export of all services, which brought $15.23B to the country.

In percentage terms, the export of IT services was distributed as follows:

• 79.2% ($1.92 billion) – export of computer services;
• 16.3% ($395.5 million) information services;
• 0.5% ($110.6 million) – export of telecommunications services.

The import amounted to $495.8 million. Computer services represent the largest part of imports – $275.3 million.

The amount of VAT will be 20%.

What is the point

In an explanatory note, the authors of the bill cite the experience of Russia, where a similar taxation system has been in operation since 2017. Non-residents providing electronic services in the Russian Federation (digital content, data storage and processing, domain registration and hosting, etc.) must be registered by the tax authority and pay VAT.

“Among the technological giants, Apple Distribution International, Google Commerce, Microsoft Ireland, Netflix International B.V., Wargaming Group, Bloomberg, Alibaba, Booking.com, and others have been registered by the regulatory body. In total, 1,580 companies have been registered in the tax authorities since the tax was introduced. According to official figures, such companies (B2C) paid 9.4 billion rubles to the budget in 2017, 12 billion rubles – in 2018, and 12 billion rubles – in the first quarter of 2019. (70% of the amount is paid by the largest IT-companies).”

Meanwhile, in Ukraine, only companies that have a physical representation in the country pay taxes. Because of this, according to deputies, the budget does not receive huge amounts of taxes from electronic services that non-residents provide to Ukrainians remotely.

What is proposed in the bill

Such companies are offered to allow registration in tax authority online, as well as to pay taxes in foreign currency without registering tax invoices.

Complete list of offers:

• to define a list of electronic services;
• to include non-residents in the list of persons who are registered as payers of value-added tax;
• to establish the rules for determining the place of providing electronic services (B2C);
• to establish a form and determine the procedure for sending a tax notice to a non-resident and complaints about such a decision;
• to define a simplified procedure for registering a VAT payer for non-resident suppliers, which can be carried out remotely in electronic form on a specially developed web portal;
• to determine the rules for VAT tax accounting for non-residents providing electronic services to individuals whose delivery place is located in the customs territory of Ukraine;
• exemption from the obligation of non-residents to register tax invoices;
• to introduce the payment of a tax obligation for a non-resident in foreign currency.

In their opinion, this will positively affect the development of the country’s space industry, attract investment in it, and will create new jobs.

Suggested changes

Currently, activities related to the testing, production, and operation of launch vehicles in Ukraine can only be carried out by state-run companies.

The legislators want to eliminate these restrictions.

Key proposals

If the law is adopted, the entities carrying out space activities in Ukraine will be not only state-run companies but also enterprises of any form of ownership and legal form.

Members of the parliament propose to exclude from the law the provisions on licensing space activities. In order to engage in space activities (launching rockets into space, landing and controlling rocket carriers, etc.), entrepreneurs will need to obtain permission from the appropriate authority. If the body does not manage to issue a permit (or refusal) within the time period (15 days) established after the application was submitted, it is proposed to introduce the principle of “tacit consent” – that is, the company will be able to engage in activities without a permit. Also, entrepreneurs will be required to submit declarations stating that they carry out space-related activities. Information from such declarations will be published in the applicable Register.

The law also describes state control procedures for the implementation of foreign economic activity of entrepreneurs in this industry.

The objects of space activities that are produced in Ukraine will be subject to mandatory certification. But only if they are intended for operation inside the country. At the same time, objects produced as part of a foreign order, including units and components thereof, will not be subjected to certification. In this case, the producer will decide if they need the certification.

This can make life easier for companies that manufacture equipment and other products for foreign launch vehicles.

Opinion of Industry’s Representative

Yuriy Zabiyaka, Head of Legal at Noosphere

Everyone has long understood that the monopoly of state-run enterprises on the creation of launch vehicles should have been abolished long ago. But this is rather a political step.

As for the realities and the current law – alas, there is only an obligation to additionally declare activities, to obtain permits for certain types of activities, while maintaining the existing procedures in VED (Types of foreign economic activity) – they even decided to leave obtaining of an archaic permission for negotiations, not to mention the procedure for registering foreign trade contracts in space sphere – that’s where the NSAU [Editor’s note: National Space Agency of Ukraine] may not give permission to negotiate or register contracts – so you should go an appeal their decision! So this can happen now and can happen on the basis of the “new law” in the future for “undesirable” private traders if the draft law is adopted in its current version.

On the bright side, they plan to cancel the mandatory certification for export products.

“All studies point to the fact that country’s economic growth is dependent on its citizens’ command of English. Among 32 non-English-speaking countries Ukraine is ranking 28th in English proficiency,” stated minister of education Liliya Hrynevych.

According to the minister, one of the main problems of the English language in universities is the level with which graduates are being admitted there. The purpose of the concept is to:

• Ensure that all students have level B1 upon admission by 2023. It will become mandatory to get accepted to an undergraduate degree program. 
• If, for example, during the external independent testing it turns out that a prospective student doesn’t know the language, it doesn’t deprive them of a right to enter a university. But such prospective students will be required to attend language courses before the beginning of academic year.
• Undergraduate students will be required to have a В1+ level regardless of their specialty, and B2 (Upper-Intermediate) level will be mandatory for MSc and PhD.
• Some of the major disciplines at universities will be taught in English.

What is Ukrainian National Startup Fund

It’s a state organization which will issue grants to Ukrainian startups. The fund’s resources now amount to UAH 390 million allocated by the state treasury.

Initially, the fund will use this money to disperse grants to the tune of $25k – $75k. During the subsequent stages the most successful projects will be able to get soft loans.

There’s a 24-month implementation deadline for each project. During the program the fund will monitor the progress of projects and provide advice. The fund reps also noted that they are not going to co-finance projects together with external investors.

Fund’s structure

The organization will be managed by Supervisory Board, which consists of seven persons:

• Alena Kosharnaya, Horizon Capital
• Lesia Sevruk, ECG
• Viktoria Tigipko, TA Ventures
• Charles Whitehead, Cornel Tech
• Yurii Geletei, Ministry of finances 
• Aleksandr Ryzhenko, State E-Government Agency
• Dmitriy Shymkiv, ‘Darnytsia’

Project selection will be handled by the tender committee comprising seven persons. There will also be an Expert Council (10 persons) and Mission control center.

What kind of startups will receive funding

The financing will be provided to small and macro enterprises, as well as individual entrepreneurs.

Here are a few of the main criteria categories:

• Innovativeness
• Commercialization
• Team and Finance
• Resilience

Each category is rated on a five-point scale. Fund’s representatives didn’t reveal specific requirements for startups. All we know is that to quality projects must have Ukrainian registration, which can be changed afterwards. 

Selection procedure

Applications will be collected on the official website, which will be launched shortly. Then, the Tender Committee will process the applications, and after that a pitch session will be held in real time.

“Parallel import” is the import of goods with a trademark applied on them without obtaining the obligatory consent of the right holder of the trademark. Such imports are carried out “in a parallel way”, regardless of the import of this product by the right holder, and without the permission of the right holder in Ukraine.

Parallel import is possible, provided that the goods have already been put into civilian circulation. From this point on, according to the principle of exhaustion of rights to a TM, the right holder loses his exclusive right to prohibit third parties from using the trademark. That is, the product circulates freely without any restrictions and the owner of the TM cannot influence the further resale of this product.

Why parallel import does not work in Ukraine

Ukrainian legislation does not clearly define at what point the holder’s rights expire: at the time of the first sale of goods in any country of the world, regardless of where such goods were placed on the market (international principle of exhaustion of rights to TM), or at the moment when the product was imported with the permission of the right holder in a particular country (national principle).

And here comes the possibility of a variable interpretation: the existing Customs Register of Intellectual Property Rights, which is designed to prevent the import of fakes, is used by some distributors and vendors to limit the import of original products. In particular, the situation is noticeable in the consumer market of electronics, when certain companies actually receive the exclusive right to sell branded products at competitive prices.

Customs officers are also willingly exploiting this loophole. Sometimes it’s ridiculous, for example, a couple of sneakers bought by a Ukrainian at Asos were delayed at customs to check whether the buyer was not engaged in illegal import.

Earlier, the founder of Hotline.ua Sergey Arabadzhi, wrote about this issue in his column for AIN.UA. The founder of “Rozetka”, Vladislav Chechetkin, also repeatedly spoke on the topic.

How to change it

The situation can be corrected by the bill №4614 “About making changes to the Customs Code of Ukraine for protection of the rights of intellectual property while transferring the goods through a customs control of Ukraine”, which establishes the international principle of exhaustion of rights to a trademark and allows parallel import of goods. It is precisely its adoption that is insisted on by the large retail chains “METRO Cash & Carry Ukraine”, “Auchan Ukraine Hypermarket”, “Silpo-Food”, “Novus Ukraine” and “BILLA Ukraine” in their appeal to Groysman.

Earlier in Ukraine, government tried to enact laws that, on the contrary, would aggravate the situation, because they offered to consolidate the national principle of exhaustion of rights to TM. One of these attempts was the bill №5419. However, with the joint efforts of the market players, these attempts were ceased.

What will be the result of the adoption of the bill №4614 for the market and final consumers?

In the opinion of Olivier Langlet, Director General of “METRO Cash & Carry Ukraine”, the adoption of the bill №4614 will improve the level of competition and ensure free trade of original goods in the customs territory of Ukraine.

“We are convinced that parallel import can become an effective competitive tool that will change the current state of affairs when Ukrainian consumers are forced to buy goods only from “certified”/direct distributors at inflated prices, who, in fact, monopolized the market. With a parallel import model, consumers will have access to lower prices,” he commented.

At the same time, the state budget will receive additional revenues in the form of paid duties and taxes. As entrepreneurs will no longer be forced to import goods “past” the border or transport them one by one with the help of private persons in order to avoid freezing of the lot at customs control.

As a result, healthy competition will be possible in the country, and this will stimulate legal entrepreneurial activity in the country, as noted in an appeal to Groysman.

How the introduction of parallel imports will affect e-commerce and consumer market of electronics?

The initiative is also positively evaluated by ecommerce players, online hardware stores and electronics.

“I consider this initiative timely and useful for the market. Indeed, today there is a situation where some “certified” distributors feel so comfortable that prices in Ukraine are tens of percent higher than in neighboring countries.”

“I believe that the adoption of this bill will have a positive effect on the competitive environment and lead to lower prices for many products. This is good news for final consumers, says Dmitry Latansky, co-founder of Repka.ua.,  I don’t really understand how the customs officers will be able to establish the counter-factability of a particular consignment of goods. Obviously, an employee who registers the import of goods into the country cannot be an expert in thousands of groups/brands/products and “distinguish the original product from the fake, but … we will solve the problems as they come.”

The initiative was commented on by Dmitry Pokotilo, managing partner of F.ua. He noted that parallel import can significantly reduce prices in the Internet segment compared to offline.

“The situation on the market for online trading of appliances is such that offline networks put pressure on manufacturers, and as a result, other independent sellers that want to sell official merchandise are under attack now – that is, we and our colleagues in the shop.”

“Equal prices on the store shelves and on the Internet-channel is the obvious pressure on offline stores, the products of major manufacturers on the Internet are no longer cheaper, it is impossible to form their pricing strategy. There cannot be such thing as the goods on the shelves being less expensive than on the Internet, it’s a different chain of costs for merchandising.”

Also, recently, they started practicing exclusives only on the net. The market of online sellers does not receive interesting models of smartphones, for example, the Honor brand can be bought only from offline sellers – we cannot just buy it, we sell it on the terms of the marketplace with our partners. And this is true for almost all well-known brands, when interesting models go exclusively for networks, and we have to sell the rest with inflated prices, because the Internet channel receives shipments of goods at much higher prices.

At the same time, online stores are strictly controlled and punished with fines for breaking prices, while retailing is almost impossible to control. Of course, considering such kind of trading, vendors can punish the seller. However, it will be possible to sell a TV made not in Russia, to capture sales on it and earn.”

The budgets of cities and towns can be found in the “Local budgets” section. It is also possible to see the budgets of individual regions. When you click on them, a brief summary is displayed: the implementation of revenue and expenditure budget. When you select a particular locality, data on the structure of the budget and the dynamics of its implementation are displayed. The information is updated monthly.

The Ministry of Finance believes that this will allow citizens to check for which purposes the local government uses financial resources and what origin the money has.

Thus, tax deductions bring the most money to the budget of the city of Kyiv, and the largest source of expenditures is the educational sphere as of October. Now the city has fulfilled 90.6% of revenue plan and 72.8% of expenditures one. Usually, a sharp increase of expenditure is on December, before the entry into force of the new budget. Institutions are trying to spend resources as much as possible. The budget of Ukraine for 2019 was adopted on November 23.

The team of the state institution “Open Public Finance” intends to open the information about the state debt and the so-called “budget financing” on the portal until the end of the year.

On the night of November 25, the National Security and Defence Council of Ukraine (NSDC) recommended the President to introduce martial law in the country in connection with the situation in the Kerch Strait. The Verkhovna Rada of Ukraine will meet today for an extraordinary session to vote for the relevant presidential decree.

The martial law imposes various restrictions (24 provisions). They are described in the Law of Ukraine “On Legal Regime of Martial Law”. According to the presidential adviser Yurii Biriukov, when a decision on martial law is adopted, it is separately prescribed which of these provisions will be applied and which ones will not.

The NSDC recommends introducing martial law for a period of 60 days. The legislation provides for the following restrictions which may affect everyday life of the people of Ukraine:

• labour duty for Ukrainian citizens of working age, not working in defence industry or in the field of population life support – they are engaged for defence works or liquidation of consequences of emergency situations;
• use of workforce of enterprises and organizations of all forms of ownership for national defence needs;
• possible compulsory alienation of private or communal ownership – the law provides compensation for such cases of alienation;
• regulation of operations of telecommunications companies, TV and radio broadcasting companies and mass media, possible prohibition of radio stations operations and prohibition to transfer information via computer networks.
• in case of violation or non-performance of measures introduced by martial law – seizure of telecommunications equipment, TV, video- and audio equipment, computers and other technical communication means of enterprises and organizations of any form of ownership or citizens.

The actual list of restrictions in case of martial law introduction will be declared only after the session of the Verkhovna Rada (it has 72 hours to adopt a decision), but several regulatory bodies and companies have already announced their work regimes in the case of martial law.

How will the banks work?

Yakiv Smolii, the Governor of the National Bank of Ukraine, announced that the banks will continue working as usual. He stated, “The decisions to be adopted will in no way affect operation of the banking system of Ukraine. Bank branches will work in the normal course. The decisions won`t affect banks operation.” Representatives of “PrivatBank” also confirmed their intention to work in a normal operation mode.

How will the postal services work?

Postal operators also don`t foresee any changes in their work. JSC “Ukrposhta” told our editorial staff “No changes as for now. We continue working as usual.” Another postal services operator “Nova Poshta” indicated that they cannot provide any comments until the Verkhovna Rada adopts its decision.

How will telecommunications companies work?

Ukrainian Internet Association (UIA), which is a leading telecommunications companies association, believes that change of the legal regime may affect operation of communication service providers due to content regulation.

“The Law [Editor’s note: on martial law] provides that according to the existing situation a decision on the application of certain provisions should be adopted. We will know which ones will be applied in case the Verkhovna Rada adopts a decision on martial law from a relevant presidential decree. Until then we can only make guesses about that, as well as about the fact whether the Verkhovna Rada will support the initiative of the President of Ukraine.

It must be assumed that the regulation of operation of telecommunications enterprises and the media will be involved, first of all, for strengthening of countering the spread of illegal content.

In case relevant decision is be made, we will provide clarifications for UIA members with regards to the requirements of the legislation”, – commented representatives of the UIA.

Mobile operators also confirm continuation of the usual operation of telephone and internet communications:

“Mobile and landline network of “Kyivstar” works under normal conditions. The clients shouldn`t be concerned about that. In its activities our company is guided only by requirements of legislation in force. If there are any changes in the procedure or conditions of our service provision, we will immediately inform our clients about that.”, we were told in “Kyivstar”.

Another mobile telephone network operator “lifecell” stated, “In accordance with legislation communication service operators shall ensure full readiness of their networks in case there is martial law. “lifecell” is ready to ensure operation of its network in cases of state of emergency or martial law, including a possibility to inform its clients. However, we will be able to provide more details on the changes in the company`s work and their influence on our clients only after the relevant Presidential decree is approved by the Verkhovna Rada of Ukraine”.

Editorial staff of AIN.UA will complement the article as soon as further information becomes available.

• responsibility for libel up to 2 years of personal restraint, and in case the information is distributed “by public demonstration in works, mass media or on the Internet” the restriction will be up to 5 years;
• imprisonment for up to 3 years, in case libel contains information about extremely serious crimes.

A comment by Vita Volodovska, a lawyer of the public organization “Laboratory of Digital Security”, which, among other things, analyzes the situation with freedom of speech on the Ukrainian Internet. The editors asked the lawyer, in particular, whether there would be a question of liability for likes and comments on social networks:

“Today, only civil liability is provided for the spreading of inaccurate information that could harm the reputation of a person. That is, if someone believes that the publication encroaches on his or her reputation, the person can independently file a lawsuit to a court denying such information, asking for realization of the right of reply and/or compensation for moral damages. An exception is the dissemination of false information with an aim of unfair competition, which is administrative liability (Article 164-3 of the Code of Administrative Offenses of Ukraine). Criminal responsibility for libel existed in Ukraine until 2001, since the Soviet Criminal Code of 1960 was still in force until that time. The decriminalization of libel was one of the obligations of Ukraine when joining the Council of Europe.

Liability for likes on social media is not discussed for now (since only distribution of libel is the main issue), however, it is quite possible to become liable for comments. If a person considers that a post on Facebook or a comment underneath the post spreads false information about him or her, the one can initiate criminal proceedings.

Moreover, if the information will contain a charge of a serious or especially serious crime, it is no longer a question of restriction, but of imprisonment for up to 3 years. For example, if journalists spread information about possible connections between an official from the Ministry of Defense or the Security Service of Ukraine with the Russian Federation, this could be estimated as an accusation of high treason.

The dangerous side of libel getting back to the Criminal Code is that even the threat of being brought to liability can be a significant restrictive factor for journalists and the media, because criminal proceedings can be initiated against them for any investigation of abuse or corruption. This leads to self-censorship, especially with a level of trust to the Ukrainian courts… That is why the Council of Europe, the OSCE and other international organizations strongly condemn any attempts to return libel to the Criminal Code.”