Ukraine Law Alert

    January 2010

    The end of 2009 marked another step in the Ukraine government’s efforts to support businesses during difficult times. Effective December 30, 2009, a law amending and revising existing laws to facilitate entrepreneurship (the "Business Support Law") went into effect.

    The Business Support Law was created to remove the bureaucratic obstacles businesses face, stimulate economic activity and minimize governmental control over entrepreneurship. The law addresses establishing a business, licensing procedures and obtaining state or municipal approvals for activities, as well as specific matters such as the leasing of state or municipal property, or the licensing of seed sales.

    Some of the more important changes introduced by the Business Support Law are described below.

    1. Requirements for Limited Liability Companies in Ukraine

    The Business Support Law reduces the required minimum charter capital for limited liability companies (LLCs). To establish LLCs, the charter capital required must now at least equal the amount of one minimal salary (869 UAH[1], or about US$108).

    Such a small threshold will not only facilitate incorporation of LLCs. Under certain circumstances, the lower minimum may help prevent an LLC’s forced liquidation. Under Ukrainian law, a company is subject to liquidation if its net assets at the end of the second and each following fiscal year are less than the required minimum charter capital.

    2. Licensing Procedures and Rules for Obtaining State or Municipal Approvals

    The Business Support Law introduces certain "business-friendly" regulatory changes including

    (i) Allowing an unlimited term for licenses;

    (ii) Making it more difficult to have a license annulled; and

    (iii) Introducing the concept of "silent consent" for obtaining state or municipal approvals or permits.

    According to the previous version of the Law of Ukraine "On Licensing of Certain Activities," the validity terms of most licenses had to be established by the Cabinet of Ministers of Ukraine. Pursuant to the "Regulation of the Terms of Licenses for Certain Activities and Amounts of Licenses Fees," approved by Decree of the Cabinet of Ministers of Ukraine No. 1755, dated November 29, 2000 (Licensing Decree), such terms were limited to five years. The Business Support Law now dictates that licenses must be issued for an unlimited period of time. The terms of certain licenses may be limited by the Cabinet of Ministers of Ukraine, but those terms may not be less than five years.

    In order to implement the Business Support Law, the Cabinet of Ministers of Ukraine has already amended the Licensing Decree. As of January 19, 2010 a five-year term was established for licenses for:

    (i) Extraction of natural resources from deposits of state importance;

    (ii) Transportation of oil and gas via pipelines;

    (iii) Supply of natural gas and gas from coal deposits;

    (iv) Storing natural gas and gas from coal deposits in amounts that exceed levels established by the licensing conditions;

    (v) Development, production, testing, export and import of holographic safety elements; and

    (vi) Other activities.

    The terms of licenses issued under the old rules will not be extended; therefore, after a license expires, companies must renew their licenses according to the new rules.

    The Business Support Law also changes the rules for annulment of licenses and further limits valid reasons for their annulment. For example, a licensing authority may not annul a license due to a company’s failure to notify the licensing authority about changes to documents that had been attached to a license application, such as the company’s address. In addition, any decision on license annulment will take effect after 30 days, instead of the previous 10 days. That gives a license holder more time to appeal a decision on license annulment.

    Other regulatory changes include:

    (i) The establishment of a 10-day term for obtaining the permits necessary for business activities (unless a different term is specified by law); and

    (ii) The introduction to the Law "On Regulatory Approval System in the Sphere of Commercial Activity" (Approval System Law) of a principle of "silent consent" that under certain circumstances allows companies that had failed to obtain certain municipal or state approvals or permits to operate without such approvals or permits. A company has the right to invoke silent consent once it has filed the required documents for obtaining or extending an approval or permit with an authorized state body and that body has not informed the applicant by the end of the required term that the approval or permit has been approved or denied. Effective 10 working days after the end of the time allowed for either issuing the approval or deciding to refuse the request, silent consent goes into effect and the applicant has the right to conduct the actions that would normally be contingent upon an approval or permit.

    3. Change of Municipal and State Property Lease Rules

    The Business Support Law makes it easier to lease municipal or state property by establishing a minimum lease term of five years, unless the lessee wants to lease for a shorter term.

    4. Elimination of Licensing Requirements for Certain Types of Activities

    The Business Support Law eliminates the need for licenses pertaining to certain types of activities, including those for certain "social services" including medical, legal, psychological and other services for people who find themselves in difficult situations (e.g. the disabled, disaster victims or the homeless); those involved in the sale of art, collectables and antiques or who organize auctions); and the design, construction and reconstruction, or reclamation of objects of cultural heritage. The new law also eliminates the requirement to conduct archeological or geological research prior to the design, construction, reconstruction or repair of objects of cultural heritage.

    The Business Support Law also abolishes the licensing requirement for seed sales. This change may be quite important for agricultural traders who previously had had to obtain such licenses.

    5. Support to Small Enterprises

    The Business Support Law establishes certain benefits for so called "small enterprises," which Ukrainian law defines as entrepreneurs/individuals or entities with up to 50 employees and an annual income of not more than 70 million UAH (about US$8 million). Most of these benefits relate to the lease of state or municipal property. In particular, the Business Support Law:

    (i) Prohibits, until January 1, 2011, the State Property Fund from increasing lease payments from small enterprises for state property under lease;

    (ii) Recommends that the Supreme Council of Autonomous Republic of Crimea and municipal authorities not increase lease payments from small enterprises for municipal property and property of the autonomous Republic of Crimea until January 1, 2011; and

    (iii) Establishes that lease agreements for municipal or state property entered into with small enterprises before December 30, 2009 will be extended for up to five years from the effective date of the agreements.

    The Business Support Law also places a moratorium, until January 1, 2011, on inspections and other reviews of small enterprises by municipal or state authorities, except for:

    (i) Inspections of high-risk enterprises, for example, heat or power generating companies. (The risk level of an enterprise is determined according to criteria approved by the Ukrainian Cabinet of ministers);

    (ii) Scheduled and unscheduled field inspections by the State Tax Service of Ukraine (with certain exceptions);

    (iii) Scheduled or unscheduled inspections of high-or-middle risk enterprises by the Pension Fund of Ukraine; and

    (iv) Unscheduled inspections by consumers’ rights agencies which were initiated pursuant to consumer complaints.

    If you have any questions regarding the Business Support Law, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this Alert.

    [1] As of January 1, 2010.