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You're reading: Ukraine: a special legal regime is established in Crimea

On 12 August 2014 the Parliament of Ukraine adopted the long-awaited Law of Ukraine No. 1636-VII "On Establishment of the Free Economic Zone "Crimea" and Special Aspects of Economic Activities on Temporarily Occupied Territory of Ukraine" (the "Business in Crimea Act").

 The Business in Crimea Act became effective on 26 September 2014. It sets forth a specific legal regime and introduces a special procedure for application of the Ukrainian regulatory, tax, customs and currency legislation in the (currently occupied) territory of the Autonomous Republic of Crimea and the city of Sevastopol (“Crimea”). It contains a number of transitional rules and provisions that are only applicable whilst the Crimean territory is under occupation, so as to ensure that clearer rules for conducting commercial activity and financial operations are in place pending the end of the occupation.

The most important provisions as set out by the Law are as follows: 

• The free economic zone in Crimea (hereinafter – “FEZ”) shall be established for a period of 10 calendar years and its legal regime shall not be terminated even if the temporary occupation ends; 

• The FEZ legal regime shall not be applicable to the territorial sea and exclusive economic zone of Ukraine;

• The FEZ shall extend to the territory of Crimea, with the administrative border of the FEZ being the one between AR Crimea and Kherson oblast;

• The FEZ Management Company shall be established by the Government for the purpose of conducting the day-to-day operations of the FEZ (its functions and authority shall be developed in detail by the Cabinet of Ministers of Ukraine at a later date);

• The state taxes shall be cancelled in the territory of the FEZ, however, the local taxes and duties must still be paid by the taxpayers;

• Legal entities and individuals registered in Crimea shall be treated as non-residents for tax purposes;

• Any supply of goods and/or provision of services from the mainland through the administrative borders of the FEZ (or vice versa) shall be treated as import/export operations and shall be subject to the applicable duties and measures;

• The multicurrency regime shall be established within the borders of the FEZ, in particular – payments for goods and/or services can be made in UAH and/or any freely convertible currencies (i.e. groups 1 and 2 of the NBU Classifier of the Foreign Currencies and Banking Metals);

• Cashless payments (i.e. bank transfers) from the mainland through the administrative borders of the FEZ (or vice versa) shall be made only in UAH and/or any freely convertible currencies (i.e. groups 1 and 2 of the NBU Classifier of the Foreign Currencies and Banking Metals) and are not subject to the regular restrictions of the National Bank of Ukraine;

• Disputes arising out of activities in Crimea shall fall within the exclusive jurisdiction of Ukrainian courts or, subject to parties agreement, the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry in Ukraine;

• Although Ukraine guarantees protection of the proprietary and non-proprietary rights of individuals and legal entities in the territory of the FEZ (including the investment protection mechanisms), the state guarantees shall not cover any internal and external local loans as taken by AR Crimea, the city of Sevastopol or any legal entities/individuals registered in Crimea; 

• The period of occupation of the territory of Crimea is deemed to commence on the date when the Resolution of the 68th Session of the United Nations General Assembly “Territorial integrity of Ukraine” became effective (i.e. 27 March 2014). The period of occupation is deemed to be terminated on the date when the aforementioned Resolution is cancelled;

• Properties in private, municipal and state ownership that are located in the temporarily occupied territory, shall remain properties of the respective owners (as of the date of commencement of the occupation). However, during the period of the occupation any transactions/deeds with respect to such properties involving parties which are a legal entity/individual controlled and/or owned by the occupying country shall be prohibited; and 

• Any legal entities which are tax residents of Ukraine and choose to change their legal address from the temporarily occupied territory to any other region of Ukraine shall enjoy a number of tax privileges (including writing off the taxes that were payable from the start date of the occupation).

Despite the detailed and thorough wording of the Business in Crimea Act, it still leaves too many questions open. In particular, it contains no regulations on the use of natural resources or the effect of licences (including bank or mobile communications licences) issued by Ukraine in Crimea before the occupation. It provides very little guidance as to how its well-meaning provisions are to be put into practical effect inasmuch as Ukraine recognises neither the self-proclaimed government of Crimea nor the annexation of Crimea by Russia. 

Thus, the real life effects of the Business in Crimea Act remain to be seen.

Law: Law of Ukraine No 1636-VII “On Establishment of the Free Economic Zone “Crimea” and Special Aspects of Economic Activities on Temporarily Occupied Territory of Ukraine” dated 12 August 2014

Authors:

Olexander Martinenko, Senior Partner, Olexander.Martinenko@cms-cmck.com

Sergiy Gryshko, Senior Associate, Sergiy.Gryshko@cms-cmck.com

Inna Antipova, Lawyer, Inna.Antipova@cms-cmck.com 

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