Ukraine Enters 2016 with Decreased Royalty Rates for Production of Natural Gas

Starting 1 January 2016 Ukraine changes royalty rates for production of natural gas, which have been significantly increased in summer 2014 as a temporary measure and in 2015 converted into a permanent increase. For 1.5 years Ukrainian production companies have been under significant tax burden. The royalty rates were changed by the Law of Ukraine No. 909-VIII dated 24 December 2015 (the "Law"), which amended the Tax Code of Ukraine and other laws aiming at balancing budget contributions in 2016. The Law entered into effect on 1 January 2016.

According to the Law royalty rate for natural gas, including solution gas (associated petroleum gas), coalbed methane, shale gas, basin centered gas and tight gas:

extracted from deposits located entirely or partly at depths of up to 5,000 meters was reduced from 55% to 29%; extracted from deposits located entirely at depths of more than 5,000 meters was reduced from 28% to 14%; and extracted from deposits located at depths of up to 5,000 meters (to be used for the needs of the population) was reduced from 70% to 29%. However, as a provisional measure from 1 January 2016 to 1 April 2016 the royalty rate remains 70% and from 1 April 2016 to 31 December 2016 the royalty rate will decrease to 50%.

Noteworthy that the Law does not change 70% royalty rate for joint activity agreements (the "JAA"). Under such circumstances it is likely that JAAs will be converted to production sharing agreements, which would allow decreasing the tax burden. Relevant legislative initiatives are still pending.

The Law introduces some novelties to administration of this tax. In particular, basic tax (reporting) period will be on a monthly basis instead of quarterly basis in the past. Moreover, the Law abolishes a requirement to pay royalties on an advance basis.

Adoption of this Law is a positive step and Ukrainian production companies welcome its adoption.

For further information please contact Asters' senior partner Armen Khachaturyan
and counsel Yaroslav Petrov.

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