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7 October 2014

Free Economic Zone Crimea”: Cooperation or Embargo?

On 27 September 2014, the Law of Ukraine “On Establishing Free Economic Zone "Crimea" and Specifics of Economic Activity in the Temporarily Occupied Territory of Ukraine” (the “Law”) came into force. Although the initial draft was intended to become a tool of peninsula’s economic blockade, the final version of the Law proved to be much softer in its approaches. In a nutshell, it simply acknowledges the status quo. Businesses across administrative border between mainland Ukraine and Crimea are allowed to trade with each other subject to a number of reasonable limitations analysed in more detail below.

Legitimisation of a Status Quo

Effective on 27 September 2014, the territory of Crimea (Autonomous Republic of Crimea and Sevastopol) is declared a “free economic zone” where all businesses, including those regulated by the state, may be freely conducted. The lawmakers abandoned the initial proposal to outlaw the businesses subject to state regulation.

Companies having a tax residence in Crimea become non-residents for the taxation purposes. Settlements with such companies must be made in freely convertible currency. Yet penalties for late payment for goods and services supplied (or late supply of pre-paid goods and services) do not apply to dealings with the Crimean tax residents.

Moving of goods and services across administrative border becomes export and import of goods and services and is subject to customs clearance. Customs checkpoints are established at the administrative border.  

Crimean residents are released from their obligations towards Ukrainian authorities, including obligations to file tax declarations, to pay taxes, to seek permits for employment of foreign nationals, etc.

Effective 1 June 2014, tax registration of the Crimean residents is cancelled.

Restrictions on Dealings with Crimean Residents

Where Crimean residents become Russian tax residents, Ukraine will not extend a preferential tax treatment to such residents under the Treaty between Ukraine and the Russian Federation on Avoidance of Double Taxation. However, all eligible operations with the Crimean residents are fully tax deductible. A limited deductibility of expenses of a type applicable to dealings with offshore residents does not apply for the entire period of the temporary occupation of the peninsula by the Russian Federation.

The government of Ukraine may impose temporary restrictions on supply of certain goods (works, services) to and from mainland Ukraine. These restrictions may only be implemented subject to a 30 day prior notice for the reasons of national security, maintenance of public order, and protection of public health. One of the first measures which is likely to be implemented by the government under this entitlement will be Ukraine’s accession to the EU sectoral sanctions. The blacklisted sectors include transport, telecommunications, energy, and exploitation of natural resources in the spheres of oil, gas and minerals.

The NBU’s electronic payment system and national payment systems do not operate in Crimea.

Securities

Transactions with securities issued by the Crimean residents must be governed by Ukrainian law.

Securities may only be supplied subject to prepayment. 

Violations of these and other Ukrainian law requirements are penalised by the denied access to the system of registration of title to securities in Ukraine.

Real Property and Land

Transactions with these objects must be governed by Ukrainian law and registered in Ukraine.

Transactions are void if a party to a transaction is an entity under control of the occupying state. This restriction creates a risk of a mortgage agreement with a Russian state bank being recognized void in Ukraine if the mortgaged property is the real property located in Crimea.

Restrictions on Regulated Operations

Licences of depositary institutions issued by the National Securities and Stock Market Commission will be cancelled if the licensee does not move its registered office to mainland Ukraine before the expiration of the deadline set by the regulator.

Other licences remain valid until their expiration but can not be re-issued or extended by Ukrainian regulating bodies.

Certification of Place of Origin of Goods

Goods manufactured in Crimea may receive a Ukrainian certificate of origin subject to compliance with the relevant Ukrainian rules.

Movement of individuals

Crossing of the administrative border with Crimea by individuals:

  • is prohibited if an individual holds a passport of citizen of the Russian Federation issued by the Russian authorities in Crimea;
  • is permitted for foreign nationals, including Russian citizens, with a special permit issued by the Ukrainian migration authorities.

It is prohibited to carry through the board the cash in RUR exceeding the equivalent of UAH 10,000.

State Guarantees and Obligations

The state guarantees and obligations do not extend to persons having both Russian and Ukrainian citizenships.

***

The business community welcomes the efforts of the Ukrainian Parliament towards the protection of Ukrainian business in Crimea and considers restrictive measures reasonably necessary.

Lawyers, however, draw attention to the conflict of the Law and the Law “On Securing the Rights and Freedoms of Citizens and the Legal Regime in the Temporarily Occupied Territory of Ukraine”. The latter states that any acts issued by occupying authorities in Crimea have no legal force in Ukraine. The same applies to state registration of the Crimean companies in the Russian corporate register.

Will Ukraine recognise, for the purposes of the Law, as ‘non-residents having tax residence in Crimea’ those Crimean companies that will be registered in the Russian corporate register? The tax residence of such companies will be evidenced by the documents issued by the “occupying authorities”, and hence the conflict of laws. To resolve the conflict, Ukrainian government will have to be prepared to make a painful carve-out from the general rule, a bold move that many fear is not going to happen soon.

Until this conflict is resolved, the future of cooperation of Ukrainian businesses across the new administrative border will remain uncertain.

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On any queries relating to the situation in the Crimea, please contact Tatyana Slipachuk, or e-mail us at CrimeanDesk@sk.ua.

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