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Free Economic Zone of Crimea

The Verkhovna Rada of Ukraine on 19 June 2014 adopted in the first reading draft law No. 4032a of the Law of Ukraine "On Taxation and Customs Control in the Free Economic Zone of Crimea and on Peculiarities of Conducting Business on the Temporary Occupied Territory of Ukraine" (the "Law").

Pursuant to the draft law the Law establishes the Free Economic Zone in the territory of the Autonomous Republic of Crimea and Sevastopol (the "FEZ of Crimea"). The FEZ of Crimea does not extend to the territorial sea and exclusive economic zone of Ukraine, as well as to the territory of temporal location of Black Sea Fleet of the Russian Federation.

The FEZ of Crimea shall be established for 10 years as of the date of Law's entry into force (that is as of the date of Law's promulgation). The duration of the FEZ of Crimea shall not depend on the duration of temporary occupation of Crimea. The FEZ of Crimea may be prolonged by the law of Ukraine. The FEZ of Crimea may be suspended by the Law of Ukraine (at the earliest of 12 months as of the date of adoption of respective law).

Tax Matters

Under the Law, the state taxes should be cancelled in the territory of the FEZ of Crimea, however, the local taxes and duties should be paid by the taxpayers. The Management Company of FEZ (the Law designates the procedure of such Company establishment, its functions and authorities) is authorized to cancel local taxes and duties and change respective tax rates, as well as to administer local taxes and duties. Other special tax regimes could be introduced in the territory of the FEZ of Crimea. Legal entities and individuals, registered and taxed in Crimea, shall be approached as non-residents for tax purposes. The provisions of double taxation treaties are not applicable to incomes of such legal entities and individuals registered and taxed in the FEZ of Crimea. Expenses of residents paid for the goods, works and services supplied by legal entities that are registered in the FEZ of Crimea should be allowed for tax purposes in the amounts defined for the offshore companies. Transactions between entities and individuals registered in the FEZ of Crimea and in the "mainland" of Ukraine are subject to transfer pricing rules. The financial sanctions and fines should not apply for the violations related to administration and payment of local taxes and duties. Taxes and duties due on the temporary occupied territory shall not change the amount of taxes and duties due on other territory of Ukraine.

Customs Matters

The Law establishes the administrative border of the FEZ of Crimea, such administrative border equals to one of the AR of Crimea and Sevastopol. The supply of goods and provision of services through the administrative border shall be equated with import/export. Such supply/provision shall be subjected to payment of full import duties and tariff and non-tariff barriers. During temporal occupation goods/services originated from the "mainland" of Ukraine should be supplied/provisioned to the territory of the FEZ of Crimea conditioned upon prepayment of price and all charges for delivery, packing, reloading and other mandatory payments under INCOTERMS. Goods/services supplied/delivered from the FEZ of Crimea to the "mainland" of Ukraine should be subject to state sanitary-epidemiologic, veterinary-sanitary, phyto-sanitary, ecological and radiological control, аs well as to temporary customs control. During temporal occupation for the purposes of the Customs Code of Ukraine and rules of origin of WTO goods/services produced/provisioned in the territory of the FEZ of Crimea shall not be treated as goods/services with place of origin in Ukraine. Such goods/services could be supplied to the "mainland" of Ukraine subject to guarantee of customs duties payment. Supply of goods from foreign custom territories to the territory of the FEZ of Crimea and supply of goods from the FEZ of Crimea to foreign custom territories shall be excluded from Ukrainian custom regulations.

Securities

During the temporary occupation in the territory of the FEZ of Crimea rights to and under securities shall be protected and recorded in accordance with Ukrainian laws provided that:

acquisition and termination of rights to and under securities in a temporarily occupied territory, as well as their encumbrances by obligations or limitations in circulation are subject to registration in the other territory of Ukraine in accordance with procedure established by the National Commission on Securities and Stock Exchange (the "Commission"); depositary institutions, which have been registered in a temporarily occupied territory, must undergo a simplified reregistration procedure in the other territory of Ukraine within the time limits and in accordance with procedure established by the Commission, otherwise their licenses shall be considered as annulled; no transactions in securities are permitted, if a transacting party is owned or controlled by an occupying state; peculiarities of the securities depositary activity and the activity of securities issuers, which are located in the temporarily occupied territory, shall be determined by the Commission and approved by the Cabinet of Ministers of Ukraine.

Activity of State Lottery Operators

The activities of state lottery operators shall not extend to the territory of the FEZ of Crimea during the temporary occupation:

any state lottery operator, which holds a raffle in a temporarily occupied territory and/or pays (awards) prizes to gamblers residing in the temporarily occupied territory, shall be revoked of the license (permit) to carry out all kinds (types) of the state lottery in the other territory of Ukraine; within the period of a temporary occupation, a state lottery operator may not be owned or controlled by an occupying state or by a person or entity having the status of an occupying state resident or an off-shore status as defined by the Tax Code of Ukraine.

Currency and Payment Regulations

Multicurrency regime shall be established within the territory of the FEZ of Crimea. Goods and services distributed/provided in the territory of the FEZ of Crimea can be paid with UAH and freely convertible currencies. National currencies of the CIS countries are permitted to be used in cash settlements. Bank transfers from the territory of the FEZ of Crimea to the territory of Ukraine and vice versa shall be made only in UAH or in freely convertible currency. However, during the temporal occupation settlements between contractors from the "mainland" territory of Ukraine and the temporary occupied territory shall be made only in freely convertible currency. Ukrainian payment service provider shall not operate in temporary occupied territory. Legal entities of the FEZ of Crimea are discharged from the obligation to convert into UAH the part of foreign currency incomes. During temporal occupation it is prohibited to: move cash RUB across the administrative border of the FEZ of Crimea; exchange cash RUB into UAH and vice versa in the FEZ of Crimea; involve deposits/provide loans on the "mainland" of Ukraine in RUB.

Banking Operation Restrictions

During temporal occupation Banks (other financial institutions) residents of Ukraine (with tax address in the "mainland" of Ukraine) shall not perform banking activities in the "mainland" of Ukraine, if such Banks (other financial institutions):

have subdivisions, subsidiaries or affiliate banks which provide banking services on the temporary occupied territory (except for services connected with "evacuation" of business from the FEZ of Crimea); are members of banking group established under the laws of the Russian Federation or members of banking group established under the laws of Ukraine, member of which is financial institution of the Russian Federation; are members of bank holding group (irrespectively of the place of incorporation), if members of such group provide banking services on the temporary occupied territory.

For further information please contact Asters' partner Andriy Pozhidayev,
senior associates Oles Kvyat and Tetiana Gryn, and associate Anna Tkachova.

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