25 March 2014
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Legal issues pertaining to conducting business in the Crimea

Over the past several weeks there have been a number of dramatic political changes affecting the business operations in the Crimea and the city of Sevastopol (collectively, the Crimea). A brief description of the main areas of concern for businesses, which may require legal solutions, is set forth below.

Prohibition of business operations

  • Draft Law of Ukraine No. 4473-1 "On Securing Rights and Freedoms of Citizens on the Temporarily Occupied Territories of Ukraine" (the Draft Law) to prohibit all business operations, which are subject to state regulation (including inter alia money transfers and financing), in the Crimea.
  • The Draft Law introduces criminal liability for conducting prohibited business operations.
  • The prohibition applies to the related parties, which notion may cover any foreign company having its presence in the Crimea.
  • Parliament's decisive voting for adopting the Draft Law has been postponed due to the vigorous opposition of the business community.

Title to immovable property

  • According to the applicable Russia's federal constitutional law (the Federal Law), title documents issued by the public authorities of Ukraine shall be valid in the territory of the Crimea.
  • The registration of title to immovable assets located in the Crimea and all respective transactions with Ukraine's State Registry of Proprietary Rights to Immovable Property should be sought at the registration service offices based in the Kherson and Zaporizhzhia regions.

Currency regulations

  • The Crimean Parliament's Resolution "On the independence of the Crimea" (the Independence Resolution) can be interpreted as preserving in force the Ukrainian legislation adopted as of 21 February 2014. The Ukrainian currency regulations may be modified in the Crimea since the local legislation shall apply to the extent it is not contrary to the laws of the Russian Federation. 
  • The Ukrainian Hryvnia shall serve as payment currency in the Crimea till 1 January 2016 together with the Russian Rouble.

Security interests

  • Ukraine has denied the Crimea access to its public registries, which precludes registration, modification or deregistration of security records related to the immovable and movable assets from the territory of the Crimea. However, all the security registries remain accessible from the territory of Ukraine.
  • To date, there have been no clarifications as to whether any additional registrations of Ukrainian law security are required in accordance with the laws of the Russian Federation for the assets located in the Crimea.

Financial institutions

  • Official documents (including licenses, certificates and permits) issued by Ukrainian authorities shall remain in force.
  • Non-credit financial institutions, registered in the Crimea, may continue business activity based on valid Ukrainian permits. Till the end of transitional period such institutions shall obtain permits of the Russian Federation.
  • The Federal Law foresees the establishment of the Bank of Crimea and probably the Bank of Sevastopol, also it provides for special regulation of operation of banks during the transitional period.

Tax matters

  • According to the Federal Law, the Russian tax regime and tax regulations will be effective in Crimea starting from 1 January 2015. Until then the so-called "tax legislation of Crimea and Sevastopol" will apply.
  • This should mean that the tax provisions of the Ukrainian Tax Code are likely to be applied before 1 January 2015 on the occupied land.
  • The prohibition of business activity in Crimea, established by the Draft Law, may have negative implications for the "mainland" businesses.
  • There is a risk that the formal prohibition of business activities in Crimea would mean that transactions of "mainland" entities involving Crimea's entities/assets may be treated as ineligible for tax benefits (VAT credit, corporate tax deduction, etc.) since they fail to meet "business related" test.

Mobilization and labor matters

  • As of 17 March 2014 Ukraine has started partial military mobilization. The employers are obliged to assist in and procure the mobilization of the employees called up to the arms. In case of mobilization, the employees (irrespective of their rank) will have very few grounds for the deferral.
  • Military mobilization serves as a ground for employee's dismissal. After completion of military service, dismissed employee can seek renewal in the position.
  • Ukrainian authorities intended to adopt a law that would prohibit dismissal of called up Ukrainians and would require employers to repay the average wage to mobilized Ukrainians. If passed such law requires private business to partially bear cost of army.

Judiciary

  • Existing courts in the Crimea will continue acting on behalf of the Russian Federation. The Supreme Court of the Russian Federation shall perform the functions of cassation appeal court.
  • Pending cases are subject to further consideration in appropriate courts (trial and appellate) in accordance with procedural laws of the Russian Federation.

Enforcement services

  • At the moment, state enforcement authorities de facto do not perform their functions. 
  • Subject to the above, commenced enforcement proceedings are expected to be pursued in due course.
  • Court decisions that have entered into force in the Crimea are enforceable there without recognition.

* * *

We continue monitoring the legislative and regulatory developments and will follow-up upon occurrence of any significant changes. In particular we will address shortly the issues of debt instruments (i.e., municipal loans, bonds, etc.).


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