Efforts for Sale
The reform-minded sentiments of lawyers are extended not only to the specific legal spheres of law-enforcement and the judicial sector. Experts are tak-ing an active part in developing legislative proposals and new regulations in the most rapidly developing sectors of the Ukrainian economy: agriculture, IT, energy, and pharmaceuticals. Apart from the benefits expected for business, implementation of the reforms requires substantial legal support. This means even greater demand for field-specific lawyers.
This Is It
Over the past year, specific features of the legal market in the IT sector were chiefly determined by active hostilities in the ATO area. Anton Zinchuk, Head of IT-practice, Associate Partner at ILF Law Firm, explains that it means the risk of losing key specialists in view of their being called up for military service in the ATO area or moving to a permanent place of residence abroad to avoid military conscription. In addition, due to the current situation in the country, significantly reduced interest on the part of foreign customers in executing their orders for software development or other IT services by Ukrainian companies has been observed.
Thus, in the second half of 2014 and in 2015, the portfolio of ILF IT-practice was formed mainly due to the restructuring of the IT-business in Ukraine and abroad in order to organize the work of Ukrainian back-offices with foreign customers. Besides, some IT-companies carried out full relocation of their businesses to other countries or started establishing overseas offices in preparation for relocation. As a result, stable demand was observed for services to develop business models assisted by companies belonging to foreign jurisdictions (UK, USA, Hong Kong, Cyprus, Poland, Bulgaria, Slovakia, Spain, etc.), establishment of such companies, legal support for transfer of the contracts with customers following the results of restructuring and in some cases with personnel.
In view of frequent inspections of IT-companies (Plarium, Luxoft, NIX Solutions, Lucky Labs, etc.) by the law-enforcement authorities, Anton Zinchuk points to a significant increase in demand for the services of criminal lawyers. In addition to this, many companies have taken a decision to conduct business restructuring within the country in order to minimize the risk of contact with the law-enforcement authorities.
Based on Anton Zinchuk’s experience, the volume of the legal services market for IT is unlikely to decrease next year, while restructuring services will continue to enjoy stable demand: “While in 2015 business owners were ready to change their business structure mainly to protect themselves against possible risks related to the external environment, next year this service is expected to be relevant for project development. This is because the legal market is gradually rebalancing. This is true at least for the companies specializing in IT-outsourcing. In this respect, a tendency is being observed both for opening offices of foreign IT-companies (e.g. Israel) in Ukraine and relocation to Ukraine of a business from less stable regions (e.g. the Russian Federation)”.
When speaking about the IT-sphere, one must keep in mind the ecosystem of startups creating demand for services of registration and protection of intellectual property rights, as well as legal support for attracting investment. In this regard, Mr. Zinchuk points out the largest transaction of 2015 – the acquisition of the Ukrainian Odessa-based project Looksery by Snapchat (USA). The transaction value is estimated at 150 million USD.
In terms of expectations for the sphere of legal regulation, then the first thing that the Ukrainian IT-business is preparing for is a change in the rules of the game in the taxation area. “It is no secret that the Ukrainian IT-system is mainly built on the model involving an individual entrepreneur, a single tax payer of group III. And it is a necessity for this business, providing that Ukraine wants to remain an attractive location for software development orders from foreign customers. Any radical change in the rules of a single tax system may entail not only increased tax burden for businesses with an average profitability of 10-15 %, but their falling into the shadow economy or complete business withdrawal from Ukraine”, Anton Zinchuk says. According to him, owners of Ukrainian IT-companies are ready for increased tax sums, unless it is going to happen immediately.
Cubic meters of deregulation
In the energy sector, the year 2015 was marked by liberalization of the gas market. Although the relevant law was adopted in April, its provisions came into force only last October. By that time, public authorities had to prepare the necessary regulations and discuss them with companies. Vitaliy Radchenko, a Partner at CMS Cameron McKenna International Law Firm, points out that in such conditions, the efforts of market players were focused mainly on adaptation to new rules of the game and participation in legislative development. This direction turned out to be the most profitable for the energy practice.
When it comes to legislative innovations in the energy sector, Vitaly Radchenko draws attention to the law on the natural gas market, which has become one of the most radical reforms of the previous year. The law creates an effective competitive environment. Thus, on October 1, 2015, the principles of free pricing and freedom to choose a gas supplier were introduced in the natural gas market.
The expert considers a rise in rates of oil and gas rent payments to be one of the disadvantages of the legislative regulation. The decision on the increased rental rates was taken in summer 2014. The government promised that new “draconian” rates for subsoil use with the purpose of gas extraction sold not for the public’s needs (55% and 28% depending on the depth of deposits) would be of a temporary nature, staying in force until the end of 2014. These promises, however, were never fulfilled. In early October 2015, Parliament agreed with the arguments put forward by the gas business and adopted in the first reading a bill on reduction of rental rates to 29% and 14%, respectively.
In view of the expectations for 2016, Vitaliy Radchenko recalls the reform of the NJSC Naftogaz of Ukraine — by June 1, 2016 the monopolist’s
business should be divided into separate independent segments: production and supply, transportation and storage.
Mr. Radchenko also predicts changes in the electricity sector: on July 1, 2017, the country is going to have an open and competitive electricity market based on direct bilateral contracts. However, the Law of Ukraine “On the Principles of Functioning of the Electricity Market of Ukraine” has a number of shortcomings and inconsistencies with EU legislation. That’s why it will undergo the necessary changes in the near future.
But in terms of new transactions in the energy sector, the year 2015 was not the best. Large investors suspended or closed their projects on the Ukrainian market (in particular, Shell and Chеvron quit deals on gas-field development and extraction of shale gas).
Since in the current situation the agribusiness is the main sector of the economy able to provide high foreign exchange earnings, legal firms are getting more interested in it. Those law firms inexperienced in dealing with the agribusiness are now expanding their focus area. Anna Dragomiretska, Counselor for Agrarian Issues at Pavlenko Legal Group, notes a noticeable increase in this trend: “Competition in the legal market, in particular in the agricultural sector, is getting even fiercer, which makes law firms reconsider their approaches and either develop new legal practices or significantly enhance existing ones. Last year, the most popular practice in agribusiness was judicial practice (particularly land disputes), tax practice, as well as corporate law practice/mergers and acquisitions, restructuring”.
At the same time, Ms. Dragomiretska draws attention to the fact (often found in agribusiness) that customers are changing their approaches to work with law firms. That couldn’t be ignored last year: small, some medium and even large companies in the agribusiness sector prefer working with family lawyers, whom they can contact for complex legal issues and solve all main or related issues at the same law firm.
Legislative changes, relating to the agricultural activity carried out by farmers, primarily include tax liabilities. Fixed Agricultural Tax (FAT), for many years paid by farmers, in 2015 was included in the single tax, while agricultural producers were automatically transferred to the fourth group of the single tax system. And although the taxation procedure has not changed, a single tax rate has tripled as compared to FAT, says Anna Dragomiretska. Another important change made in 2015 was a new indexation procedure. The land-usage coefficient has become 4-7 times as high as a result which, along with the tripled tax rates, resulted in a 12-20-fold increase in the tax burden. There was one more unpleasant surprise for corn traders — cancellation of the VAT refund on grain exports.
In the years ahead, the agricultural sector is bound to undergo further changes relating to taxation. Last April, in the course of preparations of the Main Directions of Budgetary Policy for 2016, the Cabinet of Ministers of Ukraine proposed to transfer the Ukrainian agriculture to the common tax system starting from 2016. “And if the single tax rate for the fourth group of taxpayers is the same in 2016, there is a risk of cancellation of the special VAT regime”, Anna Dragomiretska points out. In terms of positive expectations, Ms. Dragomiretska mentions improvement in the legislative and regulatory aspects of mechanisms for alternative (including non-bank) financing, in particular, agrarian receipts. The Pavlenko Legal Group Law Firm actively participated in improving the legislative regulation of this institution.
In view of the most notable transactions, which were concluded last year in the sphere of the agro-industrial complex, Anna Dragomiretska, bearing in mind legal complexity and scale, emphasizes the transaction on grain growing assets exchange between the agricultural holding MHP – PJSC Myronivsky Hliboproduct (the assets of LLC Voronezh Agro Holding located in Voronezh region of the Russian Federation) and LLC Agrokultura (assets located in the Lviv, Ternopil, Ivano-Frankivsk regions of Ukraine). The transaction was structured as a share exchange. Besides, according to Ms. Dragomiretska, the transaction also included exchange of intra-group debts of the parties and was a pure swap agreement with no monetary correction but based on equal circulating assets.
The pharmaceutical industry, as well as the healthcare system on the whole, is in a state of permanent reform. Last year, lawyers took part in work on implementing the idea of drug purchase assisted by international organizations. Oleksiy Bezhevets, a Partner at Legal Alliance Law Firm, points to the first positive results have been already achieved — almost all regulations, providing an opportunity to implement this idea, have been approved, giving hope for overcoming corruption in procurement.
Besides, Mr. Bezhevets draws attention to work on deregulation and simplification of licensing procedures in the pharmaceutical industry: “First of all I should mention introduction of unlimited drug re-registration and its use prior to the expiry date, even if the term of the registration certificate has ended. Although at the legislative level such options were granted to the market about a year ago, the opportunity to implement them appeared quite recently due to the changes at the sub-legislative level”. Oleksiy Bezhevets considers a return to the model of declaring wholesale prices for medicinal products to be a manifestation of deregulation. It was one of the necessary steps for unlocking the tenders in conditions of violent currency fluctuation.
In the end, with general economic contraction in the background, the pharmaceutical industry is doing relatively well. However, says Oleksiy Bezhevets, last year was distinguished by the significant reduction in staff at pharmaceutical companies (which resulted in labor disputes and the need for the appropriate legal services). The increased workload of lawyers was partially facilitated by the Antimonopoly Committee of Ukraine actively participating in investigations of anticompetitive actions on the pharmaceutical market.
One of the most anticipated acts, according to Oleksiy Bezhevets, is the new law in the field of medicines. The lawyers of Legal Alliance Law Firm have been engaged in preparing its draft for more than a year. Mr. Bezhevets is firmly convinced that adoption of the law is going to have a positive impact on the conditions of carrying out pharmaceutical business in Ukraine, since the need for systematized legislation and bringing it into conformity with European laws appeared a long time ago.
Medicine & Healthcare
|2||Legal Alliance Company|
|3||BAKER & MCKENZIE|
|5||Law Offices of OMP|