New law on cor­po­rate own­er­ship gives hope to tax col­lec­tors

True ben­e­fi­cia­ries of­ten hid­den by com­pa­nies

Kyiv Post Legal Quarterly - - Contents - By Ok­sana Lyachynska ok­[email protected]

The Verkhovna Rada, the na­tion’s par­lia­ment, on Oct. 14 adopted a law that re­quires Ukrainian com­pa­nies to dis­close their true own­ers. The move is aimed at fight­ing cor­rup­tion as many elected of­fi­cials and oth­ers hide their own­er­ship of com­pa­nies and fail to dis­close con­flicts of in­ter­est.

The gov­ern­ment also hopes greater trans­parency will curb tax eva­sion schemes that are usu­ally based on pour­ing rev­enues into fic­ti­tious en­ti­ties reg­is­tered in off­shore ju­ris­dic­tions with lower taxes, like Cyprus or the Bri­tish Vir­gin Is­lands.

How­ever, lawyers say by­pass­ing the law shouldn’t be too much of a prob­lem, de­spite Prime Min­is­ter Arseniy Yat­senyuk’s bold procla­ma­tion on Oct. 14 that the “off­shore era in Ukraine has ended.”

Those Ukrainian com­pa­nies that were reg­is­tered prior to adopt­ing the law will have six months to dis­close their ben­e­fi­cia­ries from Nov. 25, when the law came into ef­fect.

Ukrainian com­pa­nies sold as much as $334 mil­lion worth of goods through off­shores in Jan­uary-septem­ber, 10 times less than last year, ac­cord­ing to Igor Bilous, head of the Fis­cal Ser­vice. An­a­lysts sug­gested this could be ei­ther a side ef­fect of the trans­fer pric­ing leg­is­la­tion or a fail­ure to track the full amount of cash flows.

Olek­siy Fe­liv, part­ner at Gide Loyrette Nouel law firm, says com­pa­nies are now obliged to dis­close the ul­ti­mate owner’s full name, cit­i­zen­ship and ID in­for­ma­tion. All the data should be sub­mit­ted to the State Reg­istry of Legal En­ti­ties and be made pub­licly avail­able through the reg­u­larly up­dated web­site. Mak­ing in­for­ma­tion on real es­tate own­ers public is also part of the doc­u­ment.

The law as­signs the term “ul­ti­mate ben­e­fi­cial owner” to a per­son ex­er­cis­ing ul­ti­mate ef­fec­tive con­trol over a com­pany, whether di­rectly or through a chain of own­er­ship. Such “ul­ti­mate ef­fec­tive con­trol” par­tic­u­larly ap­plies to sit­u­a­tions where an in­di­vid­ual owns 25 per­cent or more shares. More­over, those who hold a 10 per­cent stake should also be dis­closed.

How­ever, by cre­at­ing a net­work of fic­ti­tiously dis­trib­uted shares an owner in­el­i­gi­ble may be able to avoid the dis­clo­sure rules. Ben­e­fi­cia­ries may reg­is­ter smaller per­cent­ages of their busi­nesses through trusts, in­vest­ments funds or purely nom­i­nal own­ers.

“In prac­tice the sit­u­a­tion won’t change rad­i­cally,” said Sergiy Alek­san­drov, a lawyer at Alek­seev, Bo­yarchukov & Part­ners. “Peo­ple will sim­ply start reg­is­ter­ing their com­pa­nies to au­tho­rized per­sons like friends, col­leagues. In fact, this method has been prac­ticed for a long time. We should not ex­pect that the real own­ers will be brought out of the shad­ows.”

The obli­ga­tion to dis­close the true struc­ture of the busi­ness is not new - dat­ing back to 2010, when the law obliged com­pa­nies to sub­mit in­for­ma­tion on per­sons ex­er­cis­ing ef­fec­tive con­trol to the State Reg­istry. How­ever, the

new law sig­nif­i­cantly ex­pands on this obli­ga­tion by set­ting more cri­te­ria for iden­ti­fy­ing the ul­ti­mate own­ers and in­tro­duc­ing re­spon­si­bil­ity for a fail­ure to sub­mit data to the State Reg­istry.

“The new law on dis­clos­ing ul­ti­mate ben­e­fi­cia­ries is a break­through in terms of trans­parency,” Fe­liv said. “At the same time, the par­lia­men­tar­i­ans clearly left them­selves room for ma­neu­ver.”

Ac­cord­ing to the lawyer, the orig­i­nal draft of the law en­vis­aged crim­i­nal re­spon­si­bil­ity for a fail­ure to re­veal the in­for­ma­tion, while the fi­nal ver­sion in­cluded a tiny fine of up to $530 that does not pose a se­ri­ous threat for those who might have to pay much big­ger taxes af­ter dis­clos­ing the struc­ture of their busi­ness. More­over, the law does not in­clude the mech­a­nism how to ver­ify the sub­mit­ted in­for­ma­tion.

“This is hardly a scary amount for big busi­ness­men who hide big money be­hind th­ese com­pa­nies,” com­ments Oleg Boichuk, coun­sel at Egorov Pu­g­in­sky Afanasiev & Part­ners. “Whether there will be other sanc­tions or pres­sure for those who do not dis­close this in­for­ma­tion, the law does not say at the mo­ment.”

Still, for the com­pa­nies that op­er­ate only in Ukraine it will be more dif­fi­cult to hide the own­ers now, Boichuk em­pha­sizes. Com­pa­nies reg­is­tered off­shore will con­tinue to hide them in the same way.

Some ex­perts think the new leg­is­la­tion may scare off in­vestors as some of them pre­fer to use the off­shore schemes to re­duce the tax ex­penses.

“Ukrainian law­mak­ers are no­to­ri­ous for pass­ing am­bigu­ous laws that ap­pear to have good in­ten­tions, but ul­ti­mately cause neg­a­tive con­se­quences for the econ­omy,” says Scott Brown, part­ner at Fr­ish­berg & Part­ners law firm. “Does Ukraine re­ally need to im­pose ad­di­tional bu­reau­cratic hur­dles for for­eign com­pa­nies, who are al­ready re­think­ing their Ukraine strat­egy for 2015?”

But Ro­man Blazhko, se­nior lawyer at Lavrynovych & Part­ners, said that for­eign in­vestors should have no rea­son to be afraid. “In some coun­tries if you are the ul­ti­mate ben­e­fi­ciary - you may be asked to pay taxes from your com­pany’s in­come,” he told the Legal Quar­terly. “This is not the case for Ukraine. There­fore for­eign­ers have no grounds to be afraid that they will be dis­closed as ben­e­fi­ciary own­ers un­less they are cor­rupted and re­ceived all their in­come from some un­known sources.”

“We should not ex­pect that the real own­ers would be brought out of the shad­ows,” says Sergiy Alek­san­drov, a lawyer at Alek­seev, Bo­yarchukov & Part­ners.

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