In answering the question “does my DAO need legal structuring?”, Nestor Dubnevych, co-founder & COO of Legal Nodes, has addressed eight of the most commonly asked questions that web3 founders have about the legal aspects of launching and operating a DAO.

1. When should I set up a DAO for my web3 project?

Usually, once an idea has been created, investors have been found, tokenomics has been decided and the tokens have been issued, a final step for a web3 founder might be to turn it into a DAO. Alternatively, there are some cases where you could proceed to setting up a DAO when you only have an established community and are simply looking for a way to decentralize the decision-making process and have the ability to manage the community’s Treasury.

It’s important to note that there is no obligation for web3 projects to set up a DAO. A DAO is also not obligatory for any legal structuring of the project. There are a lot of Web3 projects with no plans to decentralize their governance & ownership and as a result don’t plan to launch DAO. Whether you wish to set up a DAO is a business decision, not a legal question.

2. Are DAO members at risk if there is no DAO Legal Wrapper in place?

Yes. DAO members can be at risk of all kinds of unlimited liability. Most DAOs are called ownership-free entities or ownership-free organizations, which means that all assets that are inside the DAO are owned by the whole community. As a consequence, some web3 founders mistake the ownership-free aspect to mean that DAOs do not have any legal requirements that help or permit the DAO’s operation. Many web3 founders would argue that the smart contract rules are implemented into the protocol of the project and that it is enough to build trust, create transparency within the project, and satisfy any “legal” requirements. Unfortunately, having a smart contract and transparent governance practices is simply not enough to exempt DAOs from legal obligations. An unregistered DAO, which some web3 founders may consider as a truly ownership-free entity, can have legal implications that are quite dangerous for DAO members, founders, and investors.

The most important consequences to address–and that all web3 founders should be wary of–is the unlimited liability that arises in cases of unregistered–or incorrectly registered–DAOs. This unlimited liability can be split into different types; unlimited judicial liability, unlimited tax liability, and unlimited financial liability. Additionally, an unregistered DAO might be recognized by some regulators as a General Partnership. In general partnerships, each member (each general partner) has unlimited legal liability for all activities conducted by the organization.

3. What happens when DAO members face unlimited judicial liability in a DAO?

This type of liability might arise in situations where a DAO is involved in some kind of lawsuit. There are two main types of lawsuits against DAOs:

1. lawsuits initiated by regulators (if there is a non-compliant DAO). A lawsuit of this kind may result in fines and even criminal liability for DAO members;
2. lawsuits initiated by investors (in cases of investment-related misconduct and violation of investor’s rights). A lawsuit of this kind might result in DAO members being obligated to return all collected funds and pay additional compensation to the investors.

The court may search for the people who are involved in, or are behind the creation of, the DAO. An unregistered DAO that does not have the proper legal rules in place limiting liability for DAO members puts the DAO members at great risk. Each DAO member may be required to respond to the court and may become involved in the lawsuit, with serious repercussions. 

4. What happens when DAO members face unlimited tax liability in a DAO?

The same applies in a situation where tax liabilities arise. For example, if a DAO collects some money or earns some income and then doesn’t pay the correct taxes for these earnings, any DAO member could be liable for these tax violations if the DAO is not registered. In other words, without a correctly registered DAO, any unpaid taxes and penalties may have to be paid for by the DAO members.

5. What happens when DAO members face unlimited financial liability in a DAO?

In situations where verification procedures have not been correctly followed, for example the KYC requirements set out by a jurisdiction have not been met, certain fines for violations of AML regulations may be issued by the regulator. If the DAO itself does not have the correct legal structure, it may fall to the DAO members to pay for the fines. The DAO members may have unlimited liability for such penalties, and consequently are at risk of having to pay an unlimited amount out of their personal pocket. 

6. What is a DAO legal entity?

A DAO legal wrapper is a legal entity that is much the same as all other legal entities but with some very important characteristics. The first is the entity ownership. Regular companies have their shareholders centralized and they also have directors, and generally a centralized form of governance and ownership. In the case of a DAO, governance is decentralized. Decentralized organizations still need some form of decentralized government and decentralized ownership of the treasury, and so a DAO legal entity can be described as a kind of ownership-free type of legal entity. There are–currently–no ideal legal solutions for such types of entities. The closest example to an ownership-free type of entity includes different forms of trusts, such as foundations.

7. What are the different types of a DAO legal entity?

There are DAO LLC, DAO foundations, and DAO associations, all of which could also be for-profit and not-for-profit organizations. 

There are several countries where these types of legal entities can be registered. For example, it might be that your DAO can be registered as an association or a foundation in Switzerland. Recently, Wyoming has passed specific regulations for DAOs, making it possible for a DAO LLC to be set up in that specific US state. There is also the option of a foundation entity in the Cayman Islands and an LLC in the Marshall Islands, the latter of which has seen new specific regulation for non-profit LLCs passed quite recently.

Web3 founders who wish to turn their web3 project into a DAO, can choose between creating a DAO LLC, DAO foundation or DAO association and with a growing number of options for creating a DAO legal wrapper, founders should not overlook the necessity of limiting liability of the DAO members and creating a proper legal structure for their DAO.

8. How can decentralized governance work from a legal perspective?

After you have designed your decentralized governance system, you should list all the details of it in your DAO constitution. This is a document, like a state constitution, to which all the DAO members should agree to, and which outlines the rules for their decentralized governance system. 

To make your decentralized governance system legally binding and provide more legal protection to DAO members, you should include the most important details of your DAO Constitution in the statutory document of your DAO legal entity (i.e., your DAO foundation or DAO LLC).

If you have found this useful and have any further questions regarding this topic, we suggest you schedule a 1-hour discovery session with our Head of Web3 Legal. During the call, we can take a deep dive into your project to discuss your business model, your tokenomics, Token Cap Table, plans for token distribution and fundraising, and help you build a proper legal roadmap for creating an effective legal structure to protect your project and your DAO community. Schedule a call here.

Written by Nestor Dubnevych, co-founder & COO of Legal Nodes

More articles about Web3 legal issues you can read in Legal Nodes blog.

What are Decentralized Apps (DeFi, GameFi, SocialFi and other FI+ projects)?

Today, the number of Web3 projects running as DApps (Decentralized Applications) is multiplying. These include:

• DeFi (staking, yielding, crypto lending applications);
• GameFi (play-to-earn games); and 
• SocialFi (move-to-earn, social platforms for creators, such as NFT platforms, etc.).

Many analysts predict that these applications will become an indispensable element of the metaverse, to which the world is moving towards everyday.

Most DApps are a set of smart contracts developed by a group of enthusiasts. Each DApp smart contract is responsible for the autonomous operation of a specific part of the DApp, including:

• various transaction algorithms (token issuance, token mining/minting, token swap);
• the formation and storage of Treasury, reserve funds and liquidity pools, which are automatically filled with virtual assets following the rules programmed in smart contracts;
• the participation of key contributors and stakeholders of the DApp ecosystem (validators, oracles, supervisors, guardians) in a DAO (DAO members can vote with private keys to change the rules of operation of specific smart contracts and manage the Treasury).

The legal status of DApps

These smart contracts are usually uploaded (deployed) once to the blockchain network (e.g., Ethereum, NEAR, Solana, etc.) and operate entirely autonomously. These decentralized applications (smart contracts) do not require administrators, servers, domain providers, etc. They “live” in a blockchain network and operate autonomously, without the need for human intervention and centralized services for their storage and operation. That’s why DApps are also called “on-chain entities”.

Since DApps do not have owners, administrators or other final beneficiaries and are entirely autonomous applications, they require a particular approach to their legal structuring to create an effective Legal Wrapper for them to operate in real-world business.

Why do DApps need Legal Wrappers?

When Web3 founders begin working on their DApps, many don’t see the need to create any legal structures for their DApps–these applications are decentralized after all, so what legal structuring could they need?  Well, most Web3 founders will need their fully decentralized Web3 projects to interact with the outside world, and this is where a proper Legal Wrapper is essential.

“Real-world” or “off-chain world” interactions could include:

• creation of centralized interfaces for DApps (even though smart contracts make DApps “live” autonomously in the blockchain network, for users to interact with them, these DApps need user-friendly interfaces; usually in the form of websites, mobile applications with their subsequent listing in application stores, browser plug-ins, etc.);
• connection of payment gateways for the conversion of virtual assets, which can be obtained (mined, minted, swapped, staked) in the process of using DApps, into fiat currencies or other virtual assets;
• fundraising with the use of tokens (when attracting investments in a Web3 project involves not only the allocation of shares but also the allocation of tokens, and investors ask which company will sign SAFT or other investment agreement on the part of a Web3 project); and
• distribution of tokens by listing them on crypto exchanges or launchpads (exchanges ask a Web3 company to undergo KYC for token listing) and using tokens in Token Incentive Schemes for team members and advisors.

In all of the mentioned cases, founders will need to build “legal bridges” between an entirely virtual autonomous DApp and centralized market players such as application stores, payment systems, centralized exchanges, venture funds and others.

The legal structure of a Legal Wrapper for DApps

As mentioned above, DApps do not have centralized administrators or beneficiaries. Thus, all DApps are ownerless (ownership-free) and permissionless (moderators-free) applications. This fact, in turn, creates the need to build an ownerless (ownership-free) legal structure for DApps.

Building these “legal bridges” for a DApp to interact with the outside world usually implies registering a group of companies around a DApp that will function as a “legal wrapper”. Each of these companies has its own purpose and “area of responsibility” to ensure the interaction of a DApp with the outside world. Here’s a common example of a structure for these companies:

Development Laboratory Company

Generally speaking, there are three types of companies required to build a Legal Wrapper for DApps: 

1. a Dev Lab Company;
2. a Token & Product Distribution Company; and 
3. a DAO Company.

Each of these companies acts as a service provider for a DApp, creating the legal conditions for a DApp to interact with the outside (off-chain) world.

For Web3 founders to start developing a Web3 project, they need to hire a team of software engineers who will develop smart contracts for a DApp, create the interfaces and provide the technical support. Founders will need to set up the salary payments for developers. For this purpose, the Development Laboratory (Dev Lab) Company is usually registered, which, in addition, also performs other operational tasks like renting an office, paying for software subscriptions, accumulating IP rights, etc.

Product & Token Distribution Company

When Web3 founders open a new round of investments and offer Web3 funds not only company shares but also tokens–they will need to create a Token Distribution Company. This is because the Web3 funds will want to know which company will be specified in the investment documents.

This Product & Token Distribution company is also responsible for listing tokens on exchanges and launchpads. Most token listing platforms require a Token Legal Opinion, which, in most cases, cannot be prepared without a registered legal entity (such a legal entity is usually responsible for token distribution through the exchange).

DAO Legal Wrapper as a part of the legal framework for DApps

Suppose founders of the Web3 project decide to create a DAO around their DApps. In this  case, they will probably want to provide DAO members (usually key contributors to the DApps ecosystem) with the right to participate in decentralized governance and Treasury management. DAO members exercise this right with the help of private keys following the algorithms of the DApp smart contracts.

Creating a DAO company addresses two main legal needs:

1. It helps to create a Legal Wrapper for DAO members, which aims to limit (protect) DAO members from judicial, tax, financial and other liability for the activities of such DAO. Otherwise, DAO may be recognized as a general partnership, which will result in the unlimited liability of each DAO member for the activities of the DAO.
2. It ensures compliance with the procedures in cases of Treasury management, for example, ensuring AML & KYC procedures for the issuance of grants from DAO Treasury, etc.

DApps need legal structures

A well-established legal structure for DApps will allow Web3 founders to solve the following key tasks:

1. Create “legal bridges” for the interaction of virtual autonomous (on-chain) DApps with participants in the outside (off-chain) world such as crypto exchanges, payment systems, application stores, etc.;
2. Distribute the responsibility for different components of a DApp between separate legal entities. To date, DApps regulation is at a very early stage, so to reduce the risks associated with regulatory uncertainty, responsibility for different DApp activities is shared between separate companies;
3. Protect (limit) members of the DApps ecosystem (developers, contributors, DAO members, etc.) from liability, similar to how traditional shareholding companies limit the liability of their shareholders and directors; and
4. Save the concept of the ownerless / permissionless structure of a DApp.

If you’d like to learn more about the process of legal structuring of DApps, we’re planning to run a webinar on this topic soon. Click here to leave your email and we’ll send you a link to register for the webinar once the registration is open.

Written by Nestor Dubnevych, co-founder & COO of Legal Nodes

More articles about Web3 legal issues you can read in Legal Nodes blog.

The need for legal structuring of Web3 projects

In most venture projects, the need for legal structuring arises when such projects begin to attract the first investments. At this point, founders of such projects begin to receive questions from investors about whether the project company is registered, whether intellectual property is protected, whether team members have contracts with the company, etc.

Unlike traditional venture-backed startups that solve such tasks by registering a classic shareholding company, Web3 startups have more tasks to solve by creating a proper legal structure. Such tasks include:

1. issuing not only shares for investors but also tokens (or only tokens);
2. the possibility of further transformation of the project into DAO with the capitalization of tokens, not shares;
3. creating a reliable legal wrapper around the Web3 project to protect the participants of such a project (developers, investors, DAO members, etc.) from unlimited liability for DAO activities.

Legal Roadmap for legal structuring of Web3 projects

Since the legal structure has to solve more business tasks for Web3 startups compared to Web2 startups, it implies much more legal work in the Legal Roadmap. Such legal tasks include registering a group of companies, conducting legal analysis and obtaining Token Legal Opinions, solving the issue of financial compliance, etc.

Implementing such a Legal Roadmap will help Web3 founders create the proper legal wrapper for a decentralized app (DApp) operations that underlie every Web3 project and provide an opportunity to attract venture capital. Therefore, Legal Roadmap for the Web3 project should be divided into several stages, each of which helps solve the project’s relevant business tasks.

Stage 2: Start of early-stage fundraising and registration of a Token company

Once the Web3 project team has reached the proof-of-concept of the DApp, they begin to fundraise. At this stage, the Web3 project usually does not issue tokens, but investors who plan to invest in it are interested in receiving tokens for their investments in the future. At the same time, given the early stage of the project, investors understand that token issuance plans and the tokenomics model of the project may change in the future. Hence, as an additional guarantee for their investments, they count on receiving shares in the project.

This approach of investors in the early stages of fundraising requires founders to register a separate company that will sign investment documents and issue tokens in the future (let’s call it a “Token company”). Most projects need a separate company at this stage because:

• this company must be registered in a jurisdiction that is acceptable for investments (where venture instruments operate and where investors can protect their rights); and
• this jurisdiction must also have special regulations for the token issuance to avoid regulatory barriers to future liquidity of tokens.

Stage 3: Launching the product and preparing the necessary legal documents 

After attracting investments and bringing the DApp to a new stage of development, Web3 founders face the question of how to correctly launch their product on the market and begin to attract users legally. The complexity of this process is that DApps are a set of smart contracts that virtually and completely autonomously “live” and operate in a blockchain network. At the same time, to create the ability for users of such DApps to interact with them, Web3 founders develop interfaces to such DApps in the form of websites, mobile applications, and browser plug-ins.

To host websites or list mobile applications in application stores, Web3 founders need to analyze the business model of their DApp carefully to: 

• obtain necessary authorizations/licenses for the DApp operation;
• ensure that all details of the DApp are properly reflected in the Terms & Conditions and Policies posted on the website/mobile application of the DApps.

Stage 4: Token launch and preparation of legal documents for token distribution

After launching a DApp on the market, Web3 founders begin to issue their tokens. In most DApps, the purpose of such a token is to increase users’ engagement, namely to create additional motivation for users to use the DApp more actively, recommend the product to friends, spend more time using it, etc. Also, Web3 founders can significantly expand their user base by airdrops or by launching tokens on launchpads. Attracting additional investments can also be done via selling tokens to investors in new rounds of investments.

Each token distribution method requires certain legal works: 

• listing tokens on an exchange requires obtaining a Token Legal Opinion; 
• selling tokens to investors requires a Token Sale Agreement;
• distributing tokens through airdrops or as the token incentives requires appropriate policies;
• the project might need token approval from regulatory authorities to issue tokens in some cases.

Stage 5: DAO launch and structuring a legal wrapper for it

After launching a DApp, attracting customers and issuing tokens, the project enters a stage of active growth. The nature of DApps suggests that this type of project is completely decentralized and autonomous, meaning it has no centralized administrators or final beneficiaries. Therefore, at some stage in the development of a DApp, many Web3 founders think about “transferring” the project to the full disposal and management of the project community.

This transition involves the organization of decentralized governance and decentralized treasury management. Such rules of decentralized project management are programmed in a smart contract and allow DAO members to participate in voting for changes to the rules of smart contracts operation, as well as for ways to manage the DAO Treasury. The main legal works in this process are to create a proper Legal Wrapper for such a community of people. In other words, founders need to register a DAO company which will protect DAO members from unlimited liability for DAO activities, allow for a legally binding voting process and ensure compliance with the procedures in the process of DAO Treasury management.

Getting started with a Legal Roadmap

Each business task of the Web3 project, which involves the interaction of virtual and autonomous DApp with the real centralized world of application stores, payment systems and venture funds, requires Web3 founders to do legal work to build “bridges” between the two worlds (centralized and virtual decentralized). Each stage of Web3 project development has such tasks, so for Web3 founders to plan their business activities and project budgets, it is essential to prepare a detailed Legal Roadmap in advance.

And given that Web3 regulation is at an early stage of development and there is a high level of regulatory uncertainty in the industry, a well-thought-out Legal Roadmap becomes even more relevant as it will allow Web3 funders to avoid many troubles and risks in the future.

Usually, founders think about creating a Legal Roadmap when the need to interact with a centralised world appears or when they plan to raise funds for the project. It is best to start with a consultation with a crypto expert who understands the crypto market and recent regulations and also has information on the most crypto-friendly countries and best practices of Web3 project structuring. 

At Legal Nodes, we provide such Legal Discovery Sessions, where Web3 founders can discuss the best way to structure their project with our Web3 legal expert and get: 

• an intro to crypto-friendly countries – specifically which ones may be the best jurisdictions for your project;
• an intro to token legal design to better understand all the implications of issuing a token; and 
• a checklist of all the tasks to structure your Web3 startup legally.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Written by Nestor Dubnevych, co-founder & COO of Legal Nodes

From now on, companies engaged in the following activities can become a resident of Diia.City:

• development, implementation, and support of solutions for international card payment systems
• manufacturing of technological products for use in the defense, industrial, and domestic areas
• hosting, in particular, cloud data centers

“We continue to create the conditions for Ukraine’s economic development. We expanded the list of qualified activities for Diia.City and now even more companies will be able to take advantage of the unique space,” Mykhailo Fedorov, Minister of Digital Transformation of Ukraine, explained in a comment for AIN.Capital.

In March, the Ministry of Digital Transformation for the first time simplified the criteria for the residency due to martial law.

So far, more than 150 international and Ukrainian IT companies have already joined Diia.City. Among them are Luxoft, PandaDoc, MEGOGO, Revolut, SoftServe, EPAM, MacPaw.

What does the law provide?

The document defines the concept and legal status of a virtual asset, ownership rights, and terms of transactions with such assets in Ukraine. As reported by AIN.UA, after the President’s signature, the following changes will take effect:

• Cryptocurrencies will receive legal status.
• Market participants will have the right to legal and other ways to protect the rights to virtual assets.
• International exchanges where virtual assets are traded will be able to operate legally in Ukraine. However, to do so, they (as well as other providers of services related to the circulation of critical currencies) will have to register in Ukraine and submit reports on their activities to the competent authorities.
• Financial monitoring of the virtual assets market will be carried out in accordance with the recommendations of the FATF (Financial Action Task Force on Money Laundering).

“The new law is an additional opportunity for business development in our country. Foreign and Ukrainian crypto companies will be able to operate legally, and Ukrainians will have convenient and secure access to the global virtual asset market. Market participants will receive legal protection and the opportunity to make decisions based on open consultations with government agencies. There will be a transparent mechanism for investing in a new asset class,” says Mykhailo Fedorov, Minister of Digital Transformation.

It should, however, be noted that it is a framework law. That is, it does not provide for specific mechanisms and procedures for dealing with virtual assets but only defines them. And practical application thereof will be detailed in by-laws.

What changes has the President made?

The initial version of the law, adopted by the Verkhovna Rada in the second reading in September 2021, provided for the creation of a new institution, the National Virtual Assets Regulatory Service (NVARS), which will issue permits to crypto companies to operate in Ukraine and regulate the virtual asset market.

Now, according to the changes, the National Securities Commission will regulate the market of virtual assets. Among other things, the commission will:

• Formulate and implement a policy in the field of virtual assets.
• Determine the order of turnover of virtual assets.
• Issue permits to virtual asset service providers.
• Carry out supervision and financial monitoring in this area.

At the same time, the team of the Ministry of Finance continues to work on appropriate amendments to the Tax and Civil Codes of Ukraine to kick off the market of virtual assets fully.

“Today, the potential of the global crypto industry is determined by billions of investments. Its growth rate is ahead of traditional sectors of the economy. In Ukraine, the virtual asset market can become a powerful digital economy sector. Thanks to the adopted Law, we have every chance to become a leading country for business development in this innovative field,” says Oleksandr Borniakov, Deputy Minister of Digital Transformation for IT Development.

What market players say

The world’s largest cryptocurrency exchange Binance is optimistic about the legislative changes.

“Binance congratulates the entire cryptocurrency industry on the adoption of the law on virtual assets. It is a massive step for the whole market. Currently, there is a global transformation in the field of cryptocurrency regulation, and it is nice to see that Ukraine is taking such a progressive position on the issue.

Ukraine has become a country where virtual assets have acquired legal status. This step creates a vast market, which will now operate legally, and the country will become even more attractive to investors, crypto companies, and users,” comments Kiril Khomiakov, General Manager of Binance in Ukraine.

The law will allow cryptocurrency owners in Ukraine to legally exchange assets, file income earned from cryptocurrency transactions with tax returns, start blockchain businesses, and use cryptocurrencies in their daily lives.

“At Binance, we particularly welcome the fact that Ukrainian cryptocurrency users are now protected from cryptocurrency fraud and crime by law.”

He also noted that the law is based on the world’s best practices and will contribute to the de-shadowing of the cryptocurrency market.

How it came about

In Ukraine, the rule about gender, race, skin color, political, or religious discrimination in job openings has been in place since 1996. This is stated in the Law on Advertising, Art. 24:

“It is prohibited to indicate in job openings (job advertisements) the age of applicants, to offer jobs to women only or men only, except for specialized jobs that can be performed by persons of a particular gender only.”

January 8, 2022, is the date when the amendments to this law come into effect. According to these amendments, an employer may be fined a sum of ten times the minimum wage for breaking this rule. The minimum wage in Ukraine is now UAH 6,500, which means that the fines will be 65,000 until the minimum wage is raised.

How it will work

AIN.UA has reached out to Work.ua for comment on this legislative change. The company has explained that under the Ukrainian legislation any job ad falls within the scope of this rule.

In accordance with the Law on Employment, Art. 11, Par. 3:

“It is prohibited to indicate in job openings (job advertisements) the age of applicants, to offer jobs to women only or men only, except for specialized jobs that can be performed by persons of a particular gender only; set requirements favoring one of the genders, as well as demand from persons being hired to provide information about their private lives.

Restrictions on the content of job announcements (advertisements) and liability for the violation of the established procedure of distribution thereof shall be defined by the Law of Ukraine “On Advertising.”

Whereas, the Law on Advertising defines advertisement as follows: ‘An advertisement is a piece of information about persons or goods, distributed in any form or way and aimed at creating or maintaining awareness of advertisement consumers about and their interest in such persons or goods.’

So, it turns out that a job opening is the same as a job advertisement. And a job opening description should not contain any information or requirements on gender, age, etc. So, if employers, treated as advertisers by the law, indicate the desired gender in their job openings, they may be sanctioned, that is, fined an amount of ten times the minimum wage.

How violators will be fined

As explained by Work.ua, the sanctions for breaking this rule will work as follows:

1. The State Labor Service (SLS) prepares an administrative document on the imposition of a fine based on an inspection certificate – following the consideration of the case, examination of materials, and identification of grounds for the imposition of a fine.
2. The employer pays the fine to the state budget at the place of state registration of the legal body or individual entrepreneur.
3. The payment will be due within 15 days after receiving the SLS administrative document.
4. If not paid or appealed against, the fine will be collected through legal action.

Detailed advice as to how this rule will work can be sought from labor lawyers. Meanwhile, employers should better refrain from indicating sex in their job announcements, including those published online.

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 has happened

On November 24, Ukraine received a $700 million tranche from the IMF and signed the Memorandum on Economic and Financial Policies. The document states that Ukraine will not substitute its corporate income tax with the exit capital tax.

“After a careful technical assessment, we will not move forward with substituting the current income tax for a exit capital tax (DPT),” the document says.

The problem is that DPT is one of the key benefits of the Diia City legal regime. It is offered to Diia City residents among the taxes they can choose from. The corresponding amendments are set out in bill No5376. By the time of signature of the Memorandum, it has not been adopted on second reading. Deputies will vote on the bill on December 2.

This has raised allegations that the provision on DPT can be removed from the document on short notice. But the Ministry of Economic Development says this will not happen, because the agreement with IMF does not apply to the Diia City regulations.

“Because we do not substitute the corporate profit tax for the exit capital tax, we offer residents of the special regime different taxation models to choose from. That is why the taxation part of Diia City remains unchanged,” the Ministry of Digital Transformation has replied.

How taxation will work in Diia City

Diia City is a legal regime that will apply to the Ukrainian IT industry. A company that meets the list of requirements can opt to become a Diia City resident. The specifics of the regime:

• Special regime residents can choose at their discretion which corporate tax to pay – a 9% exit capital tax (ECT) or an 18% income tax.
• Personal income in the form of dividends distributed by a resident company will be exempt from taxation on the condition of being paid out not more often than once every two years. There is a tax reduction envisaged for natural persons in case of buying a stake in a startup which is a Diia City resident.
• The income of employees and gig-workers of Diia City residents will be taxable: personal income tax – 5%, Social Security fee – 22% of minimum national wage, military tax – 1.5% (of an employee’s salary or a gig-worker’s remuneration). If a professional receives more than €240,000 per year, then all their income exceeding this limit will be taxed at the rate of 18% of the PIT.

Maxym Nosarev, an IT lawyer and the founder of Tretten Lawyers, says that the introduction of the exit capital tax is attractive for business. It allows companies to use more funds for their development and refinancing.

The legal expert explains how this works. A company has earned $100,000, and corporate income tax means that the percentage applies to the entire amount. In case the exit capital tax is introduced, the portion of the income which covers operating and development costs is not taxable. “Such taxation regime has been successfully applied, for example, in Estonia. And quite a few IT companies, including Ukrainian ones, now choose this country to register their offices there,” Nosarev says.

Why IMF is opposed to the exit capital tax

According to Anton Zaderyholova from the law firm AVELLUM, the main reason is a quest for stability. Corporate income tax guarantees regular budget revenues, and DPT is less predictable. Thus, this can affect Ukraine’s ability to settle its debt on time.

“In essence, DPT is the taxation of dividends. Not all companies plan to apply their undistributed income towards dividend payouts. Corporate income tax is a guaranteed budget revenue that directly correlates with GDP growth.

Ukraine has grave problems with access to fair justice and other macroeconomic problems, such as limited access to low-cost funds. The introduction of DPT is unlikely to attract new investors. The main objective, in my opinion, is not to lose the tax revenues which already exist,” the lawyer says.

• In June 2021, the President signed law No. 1525-IX, which introduces 20% VAT on online services provided to Ukrainian users by non-resident companies. According to new rules imposed by this law, such electronic services are subject to VAT (20%).
• To comply with these rules, Google starts to charge 20% VAT on its services in Ukraine. This increase applies only to services provided to individuals. Nothing changes for companies and entrepreneurs with business accounts:

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.

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

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.

The amendment made by the Ministry on September 21, 2020, are the following:

• Expanded the list of professions. The previous list included 10 IT professions, and the updated one has 23. The new ones are managers of quality systems, information security systems, application and system programmers, etc. The complete list of the professions that are now available for this procedure, you can see in the ministerial decree.
• Reduced the work experience requirement. Previously, for many professions, confirmed work experience should have been seven years. In Ukrainian companies, there is a great demand for professionals with experience of 3 years. Therefore, in the current classifier for the professions, the work experience has been reduced to 3 years.
• Established mandatory and additional requirements for the qualification. According to the previous version of the decree of the Ministry of Economy, foreigners who wanted to come under the quota had to have higher vocational education and confirmed work experience. In this wording, work experience is a mandatory requirement, while education is an additional one.
• Specified a list of documents that confirm work experience. Previously, a foreigner was required to provide proof of work experience in the industry but did not have requirements for the execution of such documents. Now they have been established. The following documents can prove work experience:

• employment record book or equivalent document;
• reference letters;
• services supply agreements and certificates of services rendered (relevant for self-employed specialists);
• other documents confirming the work experience.

BRDO also says that the next step is to reduce the time required to check the documents of foreigners by the State Migration Service. Such term should not exceed ten calendar weeks, and now this process may take up to a year.

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.

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.

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 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.

This will allow countries to share information about taxpayers and look for hidden assets.

What is it about

FATCA is the U.S. Foreign Account Tax Compliance Act that took effect in July 2014. It describes the mechanism of interaction between the IRS (the U.S. tax office) and foreign financial organizations.

Parties can automatically exchange data, provided that the countries have concluded an intergovernmental agreement on oversight. The main goal is to find Americans who evade taxation abroad. If there are no contracts, fines may be imposed on transfers on suspicion of tax evasion.

Ukraine has signed an agreement with the United States to improve the implementation of the FATCA in 2017. A new law completes this process. Now the IRS will be able to automatically receive data on the administration of income and taxes of the U.S. taxpayers.

What’s in it for Ukrainians

The head of the parliamentary committee on finance, tax, and customs policy Danylo Hetmantsev is confident that the bill applies to Ukrainians who hide assets in the United States. He is quoted in The Page.:

This mechanism will allow us not only to disclose information about the U.S. taxpayers, about their income in Ukraine, but also it will also provide an opportunity to open mechanisms for our government and tax service to receive information about the assets of Ukrainian citizens that they are hiding abroad so far. These are simple steps to deoffshorization.

The document, developed by the Ministry of Justice of Ukraine, simplifies the registration of representative offices for foreign companies in Ukraine.

What changed:

• The cost of registering a representative office in Ukraine was reduced from $2,500 to 1 subsistence income for able-bodied people. In 2019, it is UAH 1,921.
• The registration period reduced from 60 to 20 working days.
• For companies that are residents of the aggressor state, registration of a representative office in Ukraine will cost 30 living wages (UAH 57,630) and the procedure will take up to 60 business days from the date of submission of documents.

Will it affect the IT industry

At the request of AIN.UA, representatives of the association IT Ukraine commented on the changes.

According to Kostiantyn Vasiuk, Executive Director of IT Ukraine, this is a positive change, but it needs to be supported by other solutions:

Reducing the registration period for foreign representative offices along with an improvement in Ukraine’s position in the Doing business ranking by 7 positions is certainly a positive signal for foreign investors.

However, this is a trend that needs to be supported by a number of further steps. Thus, the insufficient level of protection of private investment, compared to, say, Israel, is still not in favor of Ukraine.

And possible hasty changes in the simplified tax system are perceived by potential investors as a factor of destabilization. Choosing a recipient for their capital, investors are likely to pay attention to a country with a stable predictable economy and transparent rules of the game. At the same time, the fee for the registration of representative offices is not decisive.

According to Dmytro Ovcharenko, CEO of Alcor and Vice President of Legal Affairs IT Ukraine, few companies choose this method of doing business:

Indeed, the government has simplified the procedure for registering foreign representative offices. But you should not expect an instant and tangible result since this is not the most common form of IT companies entering the Ukrainian market. It is used only in 10-15% of cases.

Representative offices are registered predominantly by large companies, such as Google.

Whereas working with small and medium-sized foreign companies brings the country the remaining 90% of exports in the form of more than $ 5 billion of export revenue (last year statistics).

Given the industry’s annual growth at the rate of 20–25%, it is important to maintain the current tax environment for SPDs (self-employed persons) without turbulence. This will help maintain the growth of Budget revenues in 2020. 

As soon as the document is published in the official media, online businesses, online media, and software developers will have a year and a half to comply with the requirements of the new law.

Сьогодні я мав високу честь і унікальну можливість підписати закон про забезпечення функціонування української мови як державної. Дякую всім, хто працював над тим, щоб цей закон став можливим.

Закон про мову – підписано! ?? pic.twitter.com/Ryz5RwXTqS

— Петро Порошенко (@poroshenko) May 15, 2019

Essentially, all regulations concerning the Ukrainian language online are laid out in article 27 of the draft law named “A state language in the sphere of user interfaces of computer programs and websites.” Regulations pertaining to online businesses are also contained in article 30 “A state language in the sphere of consumer services.”

These regulations include:

• Websites and pages in social networks of companies selling goods in Ukraine and registered in Ukraine must be in Ukrainian.
• Mobile applications of companies selling goods and services in Ukraine must have a Ukrainian version.
• Companies of all forms of ownership and PEs [Private entrepreneurs] providing services to consumers shall have such services and information about their products available in the Ukrainian language.
• A computer program sold in Ukraine must have an interface in Ukrainian and/or in English and other official languages of the EU.

Essentially, all regulations concerning the Ukrainian language online are laid out in article 27 of the draft law named “A state language in the sphere of user interfaces of computer programs and websites.” Regulations pertaining to online business are also contained in article 30 “A state language in the sphere of consumer services.”

Regulations contained in the draft law prescribe the following for software developers:

For website owners:

• Websites and pages in social networks of companies selling goods in Ukraine and registered in Ukraine must be in Ukrainian (Article 27, Part 6). There may be other versions, but the Ukrainian version should contain no less content and be loaded by default for Ukrainian citizens. The same applies to websites of state and municipal enterprises, as well as media registered in Ukraine.
• Websites of foreign companies selling goods in Ukraine shall have the Ukrainian version by default.
• Mobile applications of companies selling goods and services in Ukraine must have a Ukrainian version.
• Dedicated equipment (not common goods, but, for example, a medical device) does not have to have a Ukrainian version of the interface if there is an English version.
• According to the article 30, part 2, companies of all forms of ownership and PEs [Private entrepreneurs] providing services to consumers shall have such services and information about their products available in the Ukrainian language. This also applies to online stores, online directories. Information in Ukrainian may be duplicated in other languages. But, at the request of the client, they may receive the services in the language of their preference.
• E-commerce companies, registered in Ukraine (online stores) during the “distribution of electronic commercial communication” must provide all information in Ukrainian. According to the Law “On e-commerce” (Section III, Art. 10), “electronic commercial communication” means advertising messages with respect to goods, works, services. This can be an advertisement for a product in an SMS or mailing list, or information about discounts and gifts, about the cost of goods, etc.
• A computer program sold in Ukraine must have an interface in Ukrainian and/or in English and other official languages of the EU, according to the article 27, part 1 (it means 23 languages: Bulgarian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Italian, Latvian, Lithuanian, Maltese, Irish, Polish, Portuguese, Romanian, Slovak, Slovenian, Spanish and Swedish).
• Software products with user interface installed on products that are sold in Ukraine must have a Ukrainian version that is not inferior in terms of its volume to versions in other languages.

Important: the regulation about the translation of sites and pages in social networks of companies comes into force one and a half year (18 months) after the entry into force of the draft law. Part 1 of the article 27, which prescribes the translation of software into Ukrainian (but also leaves the English version) is not indicated among those articles that have a long term of entry into force, and most likely will commence 2 months after the entry into force of the draft law. However, part 2, which describes the use of Ukrainian in applications installed on products (for example, on consoles, smartphones, etc.), also comes into force after 18 months. In order for the draft law to take effect, it must be signed by the president and promulgated.

It should be reminded that the draft law was passed in the first reading in October of the last year.

With regard to the development of computer programs:

• Programs that are sold in Ukraine will have to have a full-fledged user interface in the Ukrainian language and/or the official languages ​​of the EU (that is, in this case, if the program has an English-language interface, the Ukrainian version is optional).
• Programs with a user interface installed on products that are sold in Ukraine must have a version in Ukrainian. That is, for example, the sale of iPhones, for which the Ukrainian version is set by default, will not violate the law if it is passed. And, for example, the sale of PlayStation consoles without Ukrainian localization will be violating the law.
• Developers who write and sell programs for state authorities in Ukraine and for public utilities will also need to localize their product by adding the Ukrainian version. Authorities and public utilities will be prohibited from using programs without the Ukrainian version. Accordingly, they can only buy such software. However, it is allowed to use software without the Ukrainian version with an interface in one of the EU languages, “at the time of the creation of the Ukrainian interface.”

As for the work of online stores and other sites:

• Internet representations of legal entities and individual entrepreneurs who sell goods and services in Ukraine “are performed in the state language”, this applies to both websites and official pages on social networks. In addition to the version in Ukrainian, there may be other versions. However, the Ukrainian version should be loaded by default, and it should not have less content than versions in other languages.
• The same rule applies to sites and pages in social media, registered as media in Ukraine.
• Article 24 states that information for general awareness (such as ads or signs) should be submitted in Ukrainian, however, the provisions of this article do not apply to the Internet.
• Part of the new requirements for owners of online stores is also contained in Article 26 “State language in the sphere of customer service.” In particular, it says that companies of all forms of ownership (including online stores and online catalogs) serve customers and provide information in the Ukrainian language. However, at the request of the client it can be served in another language.
• Owners, operators and online stores’ sellers “in the case of distribution of a commercial electronic message” should provide information in Ukrainian, including the information on the subject matter of the contract. Translating it from the clerk to an understandable language, we are talking about advertising messages, newsletters, letters confirming the purchase, product cards, etc.

What could be the sanctions for violation of such rules?

The Ombudsman for the Protection of the State Language will monitor the implementation of the norms of the law, and the State Service for the Protection of Consumer Rights will apply sanctions against service companies that violate its norms. In the text of the draft law, there is section 8, Article 2.7, with a rule amending the Law “On Protection of Consumer Rights”, which requires the Central Administration to give instructions, including “On the temporary cessation of activities in the field of electronic commerce and the placement of electronic commercial messages.” That is, if, for example, the user complained about the lack of information about the product in the Ukrainian language, the State Service of Customers could hypothetically suspend the operation of such an online store. However, it is still unclear what will be the mechanism for the implementation of this norm.

Violation of the requirements of the draft law in terms of providing information about goods and services will result in a fine of shop officials in the amount of 300-400 non-taxable minimum incomes of citizens (this is UAH 5,100 – 6,800).

The Liga.net media asked lawyers how the rules on sanctions will be implemented. De-jure lawyer Volodymyr Danilin described several ways of circumventing the norms in the existing wording:

• The prescription will be issued to a specific business entity. On the Internet, sites with marketplaces for third parties are registeredquite often. A business entity will shift the responsibility to a third party, to whom, in fact, the state body must claim the termination of the violation.
• Large marketplaces can add a separate tab with a mirror site in the Ukrainian language. Or in accordance with Part 2 of Article 26 of the draft law there will be a format button added “Would you like all materials to be provided to you in another language? (language choices).” Thus, the marketplace will actually shift the responsibility for the content to the end user. And there is a rule about the choice of the user service language in the draft law.
• Until a provision on how a government agency will verify that the marketplace complies with the requirements of the language law will be elaborated, the rule will not actually work. It is impossible to demand to stop the violation if there is no procedure for fixing this violation.

“In simple terms, starting from today, the liable persons will bear personal responsibility for the illegal prosecution of business, including material liability,” – said Poroshenko.

The full title of the law is: “On Amendments to Certain Legislative Acts of Ukraine on Improving Ensuring the Observance of the Rights of Participants in Criminal Proceedings and Other Persons by Law Enforcement Agencies in the Pre-Trial Investigation”. However, among the governmental officials, the Law was simply called “Raiders Stop2”. The Law was registered in the Rada in the summer of 2018 on the initiative of the Cabinet of Ministers and it was adopted on September 18th.

The law allows an entrepreneur or a citizen to appeal to the investigating judge with a motion to close the case if the deadlines for conducting a pre-trial investigation have expired (more than one year or 18 months), as well as to claim damages personally from the investigator and prosecutor who committed violations during the investigative actions.

However, it is believed that the law is not as “victorious” as it is served in the government. So, according to the lawyer Yury Radzievsky, the injured party always had and still has the right to file a civil suit in a criminal proceeding against a particular “violator” – therefore, one cannot speak about radical changes for the better.

One more important issue concerns third parties who are involved in the case, but they have not been charged or suspected. If, within the framework of pre-trial proceedings, the investigator arrests the property of such companies “for the purpose of securing physical evidence”, the law allows them to initiate the closure of the criminal case, if the terms of the pre-trial investigation are overdue. Previously, such terms were not established, and arrests of property could last for years, so this innovation is positive.

At the same time, the possibility of arresting the third parties’ property was added only in 2015 –since then such arrests have become commonplace with the potential to put pressure on business.

“The 2015 initiative has radically increased the number of abuses by law enforcement officers. However, instead of prohibiting arresting the property of “third parties”, that is, generally solving the problem, such officials simply “sugar-covered a bitter truth”, partially eliminating the result of the problem”, – the lawyer notes.