On 14 July 2020 the Ukrainian law “On State Regulation of Organising and Conducting Gambling” (Gambling Law) finally reached the end of its six-year journey to adoption. President Volodymyr Zelenskyy is expected to sign it into law soon, at which point it will formally become the cornerstone of a new regulated European market, lifting the ban introduced in 2009.
Alina Plyushch and Dmytro Hotsyn of the gambling desk of law firm Sayenko Kharenko explain the nuances of the new Gambling Law.
The operator: general requirements
While both local and foreign investors will have access to the market, only legal entities registered in Ukraine may become gambling operators. However, certain ownership restrictions will apply.
In particular, gambling operators shall not be controlled by a Russian resident nor have a Russian person as a shareholder or Ultimate Beneficial Owner (UBO). Neither should they have shareholders registered in countries currently blacklisted by the Financial Action Task Force (FATF), in other words North Korea and Iran.
In addition, a gambling operator must have a share capital of at least USD 1.1 million (UAH 30.7 million/GBP 906,000/EUR 1.0 million). They must open a deposit account or obtain a guarantee from a Ukrainian bank for USD 1.2 million, and they must have a dot.ua domain name.
More generally, gambling operators are also obliged to follow responsible gambling standards and implement policies to prevent gambling addiction.
Casinos can be located in 5-star hotels with 150 rooms in Kyiv, 4- and 5-star hotels with 100 rooms in other cities, out-of-town resorts with a total area of at least 10,000 m2 or “special gaming zones” within territories to be defined by the Ukrainian government. Total casino areas in such zones must measure at least 10,000 m2.
In addition, the law creates investment licences. Holders of investment licences are exempt from licence fees for 10 years on condition that they construct a new 5-star hotel with 200 rooms in Kyiv or of 150 rooms in another city. Investment licences may help boost underdeveloped regions by offering an opportunity to turn them into tourist destinations.
Online casinos are covered by a separate licence.
There are no particular requirements to premises and retail presence for an online casino operator (except for being registered in Ukraine). Previous drafts provided for keeping the operator’s servers in Ukraine but this provision has been dropped.
However, additional requirements for online casino operators may be set out in the licensing conditions.
A single licence covers both land-based and online betting.
The minimum betting shop area shall be at least 50m2 and these shops may be located in 3-, 4-, and 5-stars hotels with 50+ rooms in Kyiv or 3-, 4-, and 5-stars hotels with 25+ rooms in other cities.
These strict location requirements limit materially the offline betting opportunities for the majority of potential punters. Because of this, regulated online betting is expected to skyrocket in the near future.
Slot machine halls
Slot machines are allowed in casinos (with a general casino licence) and in slot machine halls (covered by a separate licence).
Operators of slot machine halls may open the venues at 3-, 4-, and 5-stars hotels with 50+ rooms in Kyiv or 3-, 4-, and 5-stars hotels with 25+ rooms in other cities.
These halls are not allowed in cities with a population of less than 10,000 people and cannot be placed within 500 metres of educational establishments. Operators of slot machines are prohibited from using equipment manufactured before 2019.
Under the Gambling Law, specific licences are issued for online poker.
Offline poker can take place only in casinos as a casino game or in the form of competitive poker, which is not considered a game of chance.
Licence fees and taxes
The first versions of the draft Gambling Law were criticised for the exorbitant licence fees. Lowering these was deemed essential by the majority of international gambling operators interested in the market. Thanks to the multilateral dialogue with all stakeholders, the final version of the Gambling Law features more moderate fees.
Online casinos – USD 1.1 million for a five-year licence.
Betting – USD 5.1 million for a five-year licence and USD 5,100 annually per betting shop.
Slot halls – USD 1.2 million for five-year licence and USD 1,000 annually per slot machine.
Online poker – USD 850,000 for a five-year licence.
For land-based casinos, a five-year licence will cost approximately USD 10.2 million for casinos located in Kyiv and USD 5.1 million for casinos in other locations.In addition, casino operators will pay equipment fees ranging from USD 30,000 for a roulette wheel, USD 15,000 for a gaming table and USD 1,000 for a slot machine.
Ukraine’s parliament, the Rada, is yet to make a final decision on how it will tax gambling profits. Among the several taxation drafts proposed, the Rada is likely to vote for one that establishes a gross gaming revenue (GGR)-plus-corporate income tax regime.
GGR tax rates are expected to differ for each gaming vertical, ranging from 5 per cent for betting to 10 per cent for online casino and 12.5 per cent for land-based casinos and slot machine halls.
Corporate income tax is set at 18 per cent in Ukraine.
Increased licence fees for certain gaming verticals during the “transition period”
The Gambling Law provides that the licence fees for the online casino licence, betting licence and slot machine licence shall be tripled until the so-called “Online Monitoring System” is put in place.
The Online Monitoring System is a state-owned system of oversight and control allowing real-time monitoring of the national gambling industry. It is supposed to be launched within 30 months of the Gambling Law entering into force.
It is likely, though, that the launch may be delayed for technical reasons or due to financial hurdles. In this case, gambling operators may face significant increases in their licence costs for quite some period of time.
Lotteries: a market on the edge
The first draft of the Gambling Law regulated all gaming verticals including lotteries to avoid potential overlaps and lacunas.
However, the final wording was modified to exclude lotteries from the legal framework envisaged by the Gambling Law.
As a result, the lottery market remains under the umbrella of the outdated State Lotteries Law. Although separating gambling verticals is not unusual, it is questionable whether principles and restrictions of the gambling legislation can be efficiently harmonised with those of lotteries legislation.
In addition, the State Lotteries Law means that international lottery operators may be unable to access the local market. To rectify this, further changes in gambling regulations would be needed.
Last but not least, separating games of chance and lotteries (which are not legally considered as games of chance) may preserve the current market situation, where de-facto slot machines and betting services are marketed as “e-lotteries” and “sport lotteries”.
The market: what’s at stake?
It is hard to estimate the current turnover of the market in Ukraine because it is almost entirely black, though estimates put it at around the EUR 1 billion mark. A successful relaunch of the Ukrainian market might triple this figure.
The government, in turn, expects to bring in an additional USD 160 million in extra revenues by the end of 2020 alone thanks to legalisation of the gambling industry.
However, the Ukrainian consumer might also want access to more sophisticated products from other markets. This may allow international investors to introduce more complex games into the local market and in turn enjoy higher levels of spending from Ukrainian players.
Despite the intricacies of the Gambling Law, we are confident that a questionable regulation that actually exists is better than a blueprint of the perfect one.