March 28, 2018

Special taxes and contracts: what concessions Ukrainian business is going to get

The government proposes to amend legislation on public-private partnerships.

The Cabinet of Ministers offers tax incentives and promises clear procedures for joint investment in projects important for the country. This includes, for instance, a guarantee that all working conditions (including taxation) will stay the same for the entire duration of the project, which could last from 3 to 50 years.

To do this, it is proposed to almost completely rewrite the existing law on concessions (draft No. 8125) and to amend the Budget Code (No. 8126) and Tax Code (No. 8127). In addition, some 30 laws will be amended in order to make uniform the procedures for regulating public-private partnerships (PPP).

The lawyers interviewed by UBR.ua generally speak well about the innovations that bring Ukraine closer to international rules on public-private partnerships (Directive 2014/EU of 26 February 2014). However, they feel that a number of important points still need to be addressed. For instance, it is necessary to eliminate contradictions between the laws on PPP and concessions.

Why it needs to be done

Firstly, the PPP law contains an overly complex and bureaucratic procedure for concluding such contracts. And secondly, before 2016, it had been unclear which of the laws should be used for concession contracts – the law on concessions or the relevant provisions of the law on PPP.

"However, even after it has been decided to consider the law on concessions the primary one, the issue of disparity between the procedures for different PPP contracts still remains," ILF counselor and Candidate of Law Irina Selivanova tells UBR.ua.

Concession is a type of public-private partnership used to implement large-scale projects in the areas that lack government funds and where full transfer of the project to private ownership is either impossible or inadvisable.

Since 1999, when the current law on concessions was adopted, Ukrainian sea ports, airports, roads and other infrastructure objects have found no private investors. The laws related to roads, energy industry and municipal services did not help here either. Most of the 189 PPP projects concern public services (waste management; water collection, purification and distribution; production, transportation and supply of heat).

No large-scale concession projects have been implemented in Ukraine so far, since everything usually strongly favors just one of the partners.

"The principle of any partnership is that both partners win. Ukraine lacks this parity - the private partner has more responsibilities and fewer rights than the public one. The draft laws are aimed at eliminating this imbalance," says Ms. Selivanova.

For instance, investors will be able to initiate a project they are interested in themselves (unlike now, when only the public partner can do this), as well as defend their rights in international arbitration bodies.

Financial guarantees

Draft law No. 8126 introduces a new type of state guarantees – commitments in the framework of public-private partnership, and regulates the terms and peculiarities of long-term obligations within PPP, including concessions. In addition, the draft law regulates the payment procedure for concession fees, making it more understandable for investors.

As for draft law No. 8125, it offers a number of guarantees for lenders and provides for a procedure for replacing the concessionaire, which, according to lawyers, is an important condition for attracting international lenders to a project.

"For instance, a lender may ask to replace the concessionaire if he or she fails to fulfill financial obligations under the contract, making further fulfillment of the terms of the concession contract by the concessionaire impossible," EternaLaw associate Philip Taranenko tells UBR.ua.

The decision to replace a private partner is taken by the authority, that is, the state.

"Also, the authority or the lender can temporarily assume the concessionaire's obligations," explains DLA Piper Ukraine partner Galina Zagorodnyuk.

According to her, the bill also details payment types under the concession agreement. In particular, the concessionaire can get revenue by receiving payments directly from the general public (for example, collecting fare for using roads or fees for accessing and operating road service facilities, roadside infrastructure, advertising, logistics centers or communication lines along the roads). The concessionaire can also be paid by the state for a facility’s readiness (availability), or receive other payments provided for by the concession agreement.

Tax benefits serve as an additional incentive.

Tax benefits

In particular, the document suggests not to tax the concessionaire's receipt of real rights to the land plots required to execute the concession project.

According to Galina Zagorodnyuk, it is also proposed to significantly simplify the procedure for registering rights for land. Ownership of the site where the concession object will be built must be transferred to the concessionaire for the duration of the contract. At the same time, all issues concerning the development and approval of the land management project and other documentation must be dealt with by the public partner, not the concessionaire. And if the public partner fails to address these issues within 9 months after the conclusion of the concession agreement, the concessionaire has the right to withdraw.

According to Roman Stepanenko, EPAP Ukraine partner and head of banking, financial law and capital markets department, the innovations make a number of transactions related to concession projects exempt from taxes.

They are:

  1. payment of concession fees;
  2. provision and withdrawal of assets under the under contract; return of assets created by the concessionaire in the course of the project to the public partner;
  3. compensation of the concessionaire’s expenses, to which he is entitled under the contract or the law, etc.

"It is important to remember that we are talking about tax benefits for the concessionaire, these do not apply to any contractors involved in the project," says Mr. Stepanenko.

To receive the tax benefits, the concessionaire and the concession contract must be registered with fiscal authorities.

For this, the Tax Code will be supplemented with a new section XV, which elaborates keeping separate tax accounting for all transactions related to the fulfillment of the concession contract. That is, the concessionaire will be required to keep separate tax records.

Finally, the state guarantees that the legislation that was in effect at the time the contract’s signing will remain in effect for the entire duration of the concession contract. New regulations will be applied immediately only if they reduce or cancel taxes.

The bill also regulates a number of other issues, in particular, the possibility of attracting consultants and independent experts and introduction of a transparent procedure for selecting a concessionaire, in accordance with best practices, specifically the standard recommendations of Uncitral (main legal body of the UN).