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Ukraine Improves Tax Regime for Oil & Gas Production

Recently Ukrainian Parliament took several steps to improve tax regime for production of oil and gas:

Reduction of Royalty Rates for Oil

On 20 December 2016 the Parliament adopted Draft Law No. 5132 "On Amendments to the Tax Code of Ukraine with Respect to Ensuring the Balance of Budget Revenues in 2017" as part of the 2017 Budget Laws package. The Law entered into force on 1 January 2017.

This Law introduces reduction of royalty rates for oil production. In particular, the royalty rate for production of oil extracted from deposits that lie entirely or partly at depths of up to 5,000 metres constitutes 29%(earlier 45%) and of oil extracted from deposits that lie entirely at depths of more than 5,000 metres constitutes 14% (earlier 21%) of the value of extracted hydrocarbons.

Municipal Budgets Will Get Part of Royalties

Another legislative act adopted as a part of the 2017 Budget Laws package is the Draft Law No. 3038 "On Amendments to the Budget Code of Ukraine (on organizing incomes and use of funds from royalty payments for the subsoil use to produce oil, natural gas, and gas condensate)". This Draft Law is pending the signature of the President of Ukraine. In case of signing the new Law will enter into force on 1 January 2018.

The Draft Law provides for assigning 5% of royalty, approx. USD 2 billion according to the law makers, as an additional income to municipal budgets. Under the effective legislation, 100% of obtained royalty payments are passed directly to the state budget. In accordance with the Draft Law No. 3038 the state budget will receive 95% of the revenues and the remaining 5% will be distributed among the territories where the subsoil is used.

This development could lead to the increase of investments in this sphere. In Ukraine local authorities have powers to issue approvals for exploration and production of oil and gas. The additional income from royalty payments for the subsoil use to produce oil, natural gas, and gas condensate may serve as an incentive to such authorities when providing the necessary approvals.

Liberalization of Royalty Mechanism under Production Sharing Agreements

On 21 December 2016 the Parliament adopted the Law of Ukraine "On Amendments to the Tax Code of Ukraine (on development of investment climate of Ukraine)" No. 1797-VIII, which came into force on 1 January 2017.

The previous revision of the Tax Code of Ukraine has foreseen that parties of the Production sharing agreement ("PSA") could agree on the royalty rate in the PSA, provided it is not lower than royalty rate envisaged in the Tax Code, applicable under a general regime. The current revision of the Tax Code does not include the requirement of the minimum amount of royalty payment in the PSA, consequently parties of the PSA are free to agree the amount of royalty payment by themselves without any restrictions.

For further information please contact Asters' counsel Yaroslav Petrov.

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