On 21 April 2022, the Ukrainian Parliament granted the President’s request to extend the martial law until 25 May 2022.

This was the second extension of the martial law since 24 February 2022.

Legally the extension of the martial law means also that numerous interrelated special laws and exemptions are deemed to be prolonged. These include for example the 2% preferential tax rate for companies, flexible employment law, suspension of contracts due to force-majeure etc.

In addition to the existing law of 15 March 2022, the Ukrainian parliament voted on 1 April 2022 another law No. 7169, significantly extending the definition of the ‘Russian residents’ and the way of its application.

In accordance with this law, the two criteria are (i) denial or support of the armed aggression by the Russian Federation against Ukraine, and (ii) carrying out economic activity on the territory of the Russian Federation during the effect of martial law in Ukraine.

Law No. 7169 has not been signed by the President of Ukraine yet.

Besides, on 21 April 2022, the Ukrainian Parliament voted to approve yet another draft law No. 7194 envisaging confiscation of assets of investors in Ukraine.

More specifically, the Parliament voted for the law extending the possibility of introducing economic sanctions against any companies and persons, even if they do  not have residency or place of business in Russia but render some obvious and explicit support or co-financing of the Russian aggression.

Importantly, the President of Ukraine refused to sign this law on expropriation dated 21 April exactly because the law does not establish clear criteria according to which such a sanction can be applied against a person;  this does not meet the requirements of the Constitution of Ukraine; the President requested the Parliament to improve it.

On April 1, the Ukrainian Parliament voted to approve several important amendments to the Tax Code of Ukraine, which came into force on 16 April 2022.

In accordance with the amendments:

• The 2% unified tax may be chosen by any company registered in Ukraine at any day starting from 1 April and until the discontinuation of martial law, irrespective of the annual income, which means that the UAH 10 billion threshold does not apply anymore.
• The 2% preferential taxation applies to any company irrespective of its place of registration in Ukraine. In other words, even companies that moved to or are newly registered Western Ukraine, which is considered to be ‘the safe harbor of Ukraine,’ may opt to pay the 2% unified tax rather than the regular 18% corporate tax.
• The new law guarantees to existing companies choosing the 2% taxation all benefits they had in the past, including the possibility to carry forward losses and VAT credits. More specifically, these benefits are deemed to be put on hold and will be resumed when martial law has been discontinued. Just the law requires to reduce the VAT if the goods or services which generated the VAT credit were sold / utilized during the 2% taxation period, which is all in all understandable.
• The new law reduced the amount of documents required for companies to confirm their costs and expenses if their normal activity was directly affected by the military actions.

Besides, the new law enables tax authorities to exercise state control over compliance by retailers with the state regulated prices, which apply to certain most critical foods and non-food products.

Last but not the least, the new tax law provides for a new exemption from the import VAT and customs duties for a number of dual-purpose goods supplied to military and law enforcement agencies of Ukraine.

4. 1. General background

On 3 May 2022, the Ukrainian Parliament prepared draft No. 7232 increasing taxes for some of foreign businesses in Ukraine for the second reading (the “Draft Law”).

The second reading is an obligatory phase before the Draft Law can be submitted to the President for signing.

In its essence, the purpose of the Draft Law is to make foreign investors in Ukraine pay more taxes compared to Ukrainian domestic businesses unless such foreign investors completely stop their activity in Russia.

When reading the justification of the Draft Law, it seems to be that the Ukrainian deputies realize that, on the one hand, the implementation of the Draft Law would seriously breach the national treatment regime which they guaranteed to foreign investors.

However, the Ukrainian deputies are of the opinion that the Draft Law serves the best interest of the Ukrainian society, given the gravity of the Russian aggression. According to the deputies, the Draft Law preserves a fair balance between the interests of foreign businesses and those of Ukraine and its economy.

4. 2. Entities at risk

Importantly, unlike the earlier version of the Draft Law, the version prepared for the second reading does not link the tax increase in Ukraine with demonstration of an active support of the Russian government.

According to the new version of the Draft Law, the mere fact of being present in Russia and receiving income in various forms or having any obligations on the Russian market is sufficient.

The Draft Law applies to any foreign businesses in Ukraine irrespective of the legal form of its presence. This means that the Draft Law applies to the Ukrainian subsidiaries of multinational groups, representative offices of foreign companies, and any physical presence (permanent establishment) of foreign businesses in Ukraine.

Further, the Draft Law is not limited specifically to corporate forms of control or UBO-based concepts. For example, a Ukrainian company without any signs of affiliation on the level of shareholders or UBOs with Russia is still at risk.

The applicability test under the Draft Law includes, for example, evidence that a Ukrainian company acts in compliance with the sale and purchase policies, business strategies or uses the same brand / trademarks simultaneously with another company in Russia.

In other words, the Draft Law is extremely broad in terms of its applicability. In terms of the future practice, a thorough test will be required to confirm or deny the applicability of the Law (in case it is approved) to entities and groups in each case.

4. 3. Scope of the tax increase

For businesses falling under the Draft Law, the rates will be increased by 1.5 times (the “1.5 ratio”) with relation to the following taxes:

• corporate income tax (so that the increased tax rate will reach 27%),
• environmental tax (the applicable rate depends upon the pollutant),
• subsoil rent (the applicable rate depends on the group of minerals or natural resources),
• real estate tax (the applicable rate depends on the type of the asset).

The Draft Law requires businesses to self-assess their status and notify the Ukrainian tax office in case the 1.5 ration is applicable. The failure to notify or provision of inaccurate information is in itself subject to a fine of 1.5% of revenues achieved in the tax period concerned.

4. 4. Whistle-blowing procedure

The Draft Law provides for a sort of a whistle-blowing procedure, as it offers to the management on the group level, collaborators of international organizations and NGOs and other actors to inform the Ukrainian tax office about instances of incompliance with the new law.

4. 5. Advertisement and marking requirements

The Draft Law amends the Ukrainian rules on advertisement, marking of products and consumer safety.

More specifically, it prohibits the advertisement without placing a visible warning about the support of the Russian Federation in cases covered by the Draft Law.

A similar requirement is envisaged for the marking of consumer products.

4. 6. Exemptions

The Draft Law provides for a number of exemptions and reliefs from the taxation increase granted by the Ukrainian government in the following cases:

• The particular importance of the activity of the foreign investor for the social and economic situation in Ukraine. For example, a large multi-regional retail chain supplying foods to the Ukrainian population should normally be exempted from the tax increase. At the same time, the exact number of exemptions and the applicable exemption procedure should be defined by the Cabinet of Ministers of Ukraine in a separate regulation, in accordance with the Draft Law;
• The possibility to be temporarily exempted from the tax increase if the intention of the head office is to stop activity in Russia in the nearest future – this temporary exemption applies until 1 April 2023;
• The possibility to get an individual temporary exemption from the Ukrainian government until 1 January 2024;
• The possibility to claim back the tax difference in case if the head office decides to quite the Russian market before 31 December 2022 and number of other cases.

On 21 April 2022, the Ukrainian Parliament approved the Law on State Administration of Temporary Occupied Territories.

The law was one of the priority laws proposed by the Ukrainian President.

The purpose of the law is to extend the definition of the temporary occupied territories to include potentially new territories outside of the government’s control in addition to Crimea and the Donbas region mentioned under the older 2014-2019 laws.

In accordance with the new law, the National Security Council and the President of Ukraine are authorized to specify the list of territories officially recognized as occupied.

Further, the law re-confirms key economic restrictions upon the temporary occupied territories, as they existed under the older laws with relation to Crimea and the Donbas region.

These include:

• the automatic voidance under the Ukrainian law of any types of contracts / transactions signed by companies and physical persons residing in the temporary occupied territories,
• the ban on transportation of goods through the border line,
• the ban on the Ukrainian certification of goods originating from the territories;
• automatic voidance of Ukrainian licenses issued to companies from the territories;
• and several other restrictions.

At the same time, the law encourages companies to relocate from the temporary occupied territories through re-registration in other Ukrainian regions. It guarantees the transferability of licenses in this case (the rule does not apply to all licenses, but mainly to alcohol and fuel trading / storage licenses).

The National Security Council of Ukraine is expected to define the list of territories recognized as occupied soon.

It may also not be ruled out that the Cabinet of Ministers of Ukraine may provide for a certain transitional period enabling private business to close ongoing contracts with the companies covered by the law or to relocate from the occupied territories.

6. 1. Measures taken by the Ukrainian government to the date

As of today, the measures already undertaken by the Ukrainian government are limited to the preparation for compensation of losses to Ukrainian citizens only (a reference is made to Resolution of the Cabinet of Ministers of Ukraine dated 26 March 2022 No. 380).

It is unfortunately quite clear from that resolution that the compensation procedure currently in place is not intended to apply to Ukrainian or foreign investors or commercial property.

6. 2. Potential extension of the compensation mechanism to commercial property 

Some lobbying efforts to extend the compensatory mechanism to cover the loss of assets by investors in Ukraine are well identifiable in the governmental circles.

So far, these efforts have not materialized into any draft law.

Still, the situation might change soon with the voting for an additional clause of draft law No. 7198 specifically regulating the compensation procedure.

In its present form, draft law No. 7198 is limited in its scope to compensation  for the damaged or destroyed personal property only. However, new amendments covering commercial property might be introduced soon in preparation of the Draft Law for the second reading in the Ukrainian Parliament.

In anticipation of establishment of compensation procedures, we would recommend collecting evidence of the amount of damages with all available means: photo and video recording, witness statements, calling local police, internal investigations etc.

6. 3. If assets are on occupied territories

The situation with assets located on the occupied territories is quite different.

It is quite clear that compensation mechanism, if any is proposed by the Ukrainian government, would not extend to the property located on the territories recognized as occupied by Russia, as territories beyond the government’s control.

In this regard, the Ukrainian Parliament said already in 2014 a clear ‘no’ to claims against Ukraine for compensation of property in Crimea.

The law forced large Ukrainian investors to resort to protection options available to them as ‘foreign investors’ under the Russian-Ukrainian BIT.  This strategy appeared to be quite successful in several arbitrations initiated back in 2014-2019.

In the more recent law (No. 7270) that was voted for on 21 April 2022, regulating the newly occupied territories, the Ukrainian Parliament has reconfirmed its 2014 position, in clause 9 of Article 5 stating that ‘Compensation for material and moral damage caused by the temporary occupation of Ukraine to legal entities, non-governmental associations, citizens of Ukraine, foreigners and stateless persons is fully borne by the Russian Federation as the occupying power’.

Therefore, the recognition by Ukraine of the Russian Federation as the occupying power with relation to its territories, which has not occurred yet but is expected soon, may indeed open the door for additional options of protection available under the bilateral investment treaties with Russia.

7. 1. Energy Storage Law

On April 18, the President of Ukraine signed the Law on the Use of Energy Storage Systems in Ukraine, which will balance the operation of the electric power system and increase the stability of electricity supply to consumers.

The law provides for:

• the regulation of a new type of activity on the electricity market – electricity storage activities.
• the licensing of energy storage activities.

The law is designed to encourage the electricity market players to introduce and develop energy storage technologies, which is especially relevant given the growing capacity of “green” energy, which has led to the significant imbalances in the energy system.

Energy storage facilities can optimize electricity production and provide additional capacity to balance the energy system, guaranteeing its flexibility, as well as balance the load on generating and other electric power infrastructure.

7. 2. 90 days’ rule for foreign currency payments

On 4 April 2022 the National Bank of Ukraine decided to shorten the maximum permitted period under the Ukrainian law for import / export between the payment is made and the date of goods’ customs clearance to 90 days from previous 365 days.  The restriction applies to operations starting from 5 April.

Besides, the National Bank of Ukraine obliged Ukrainian banks to re-start the standard business purpose test for foreign currency transactions of clients, including checking the underlying documentation (contracts, invoices etc.).

7. 3. Registration services resumed by Ukrainian notaries, albeit with certain restrictions

On 28 April 2022, the Ukrainian government enacted Resolution no. 480 reinstating access by notaries to the state real estate and other registries.  Also, the Resolution enables some Ukrainian notaries to resume their services relating to the registration of corporate share and real estate transactions and other services.

Previously, the registration services by notaries were largely blocked by the government due to the introduction of martial law in Ukraine. Such an extraordinary measure was undertaken by the government to prevent the risk of fraudulent actions.

Now, according to the Resolution, the Ministry of Justice created a list of trusted notaries who will be allowed to register corporate and real estate transactions despite martial law in Ukraine.

Such a list of trusted notaries is region-based.  This means that in order to sell a real estate asset located in Kyiv, the parties have to choose among trusted notaries registered in Kyiv.

At the same time, the Resolution further restricts the possibility to sell corporate shares and real estate in case if the seller is an individual represented through a power of attorney. In other words, in order to notarize a transaction, an individual must personally appear before the notary.

Besides, the Resolution provides for a number of other important changes in the regulatory landscape under martial law, including:

• possibility to notarize contracts of Russian citizens in Ukraine, if he/she proves the legality of his/her stay on the territory of Ukraine;
• possibility to check with the notary the validity of PoAs notarized on plain (unprotected) paper;
• possibility for the Ministry of Justice of Ukraine to restrict access to the state and notaries’ registries in certain regions of Ukraine.

All in all, Resolution No. 480 should allow some Ukrainian notaries to resume their business-important services with a number of restrictions, despite the existence of martial law in Ukraine.