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Counterparties from Russia and Belarus: risks of cooperation. Patriotism or compliance with law?

15/ 04/ 2022
  Sofiia Hodovana Junior Associate at Legal Alliance Law Firm Vitalii Savchuk Associate Partner at Legal Alliance Law Firm The introduction of martial law throughout the territory of Ukraine on February 24, 2022 due to Russias armed aggression unconditionally affected the activities of Ukrainian business entities. Cooperation with the aggressor state is a certain way of sponsoring the war, so that the government legally contributes to the restriction and even termination of all interaction between Ukrainian businesses and business entities from Russia and Belarus. In view of the high-profile scandals around foreign businesses that have not left the market of Russia and Belarus, this article will discuss the restrictions and risks in the following two situations: risks for the Ukrainian business that interacts with Russian and Belarusian counterparties; risks for businesses whose parent company/head office has not ceased its activities in Russia or Belarus. Cooperation of Ukrainian business with Russian counterparties. A Decree of the Cabinet of Ministers of Ukraine “On the application of the ban on the import of goods from the Russian Federation” dated April 9, 2022,426 imposed a trade embargo against Russia and banned the import of goods from Russia into the customs territory of Ukraine. In fact, a ban was imposed on all trade transactions with Russia. It is forbidden to fulfill any obligations to creditors from Russia (including export of goods). CMU Resolution On protection of national interests in future claims of the state of Ukraine due to Russias military aggression No. 187 of March 3, 2022, prohibited the following: fulfillment of any obligations (including monetary ones), creditors (collectors) for which are: individuals – citizens of Russia, legal entities – residents of Russia, Ukrainian legal entities, ultimate beneficial owner, member or participant with a share in the charter capital of 10% or more of which is the Russian state or individuals – citizens of Russia, legal entities – residents of Russia (hereinafter referred to as persons associated with the aggressor state); assignment in each form of immovable property, securities, corporate rights, vehicles, aircraft and ships, inland navigation vessels by persons associated with the aggressor state, as well as alienation to such persons or in favor of Russia, except for free alienation in favor of the state of Ukraine. Thus, performance of any obligations (supply of goods, payment for delivered goods or services, loans and other transactions) and disposition of immovable property, securities, and others in favor of persons associated with the aggressor state or disposition of immovable properties, securities, and others by such persons are prohibited. So far, it is known that some banks do not block payments to Ukrainian companies with Russian capital, even in cases where its part is significant. It is also not yet known when customs authorities refused to clear the goods intended for such legal entities in Ukraine. However, the current violations of the moratorium do not mean the lack of verification and further accountability for such actions. All transactions breaching this resolutions requirements are null and void. Notarial actions are restricted CMU Resolution Some issues of notaries under martial law No. 164 of February 28, 2022 introduced restrictions on the performance of notarial actions related to Russian residents, namely: any pending notarial actions on the appeal of persons associated with the aggressor state are suspended until the adoption and entry into force of the Law of Ukraine on the settlement of relations involving persons associated with the aggressor state; notaries refuse to perform notarial actions at the request of the above persons during martial law. This restriction does not apply to notarial actions on the authentication of the signature on an application on renunciation of Russian citizenship. In fact, there is a moratorium on all notarial actions involving persons associated with the aggressor state, which also restricts the range of possible legal relations between Ukrainian entities and such counterparties. Payment transactions are restricted NBU Regulation On operation of banking system under martial law No. 18 of February 24, 2022 introduced the following restrictions: it is prohibited to conduct debit transactions on accounts of residents of Russia and Belarus, on accounts of legal entities (except banks), the ultimate beneficial owners of which are residents of Russia and Belarus, except for transfer of funds in the territory of Ukraine from such accounts to a special NBU account for the purpose of raising funds for support of the Armed Forces of Ukraine and/or accounts of the Cabinet of Ministers of Ukraine, ministries and other public agencies of Ukraine; social payments, payments of salary, utilities, taxes, fees and other obligatory payments; it is prohibited to transfer funds to the accounts of individuals on transfers initiated using electronic means issued by participants of international payment systems operating on the territory of Russia and Belarus; accept in Ukraine electronic means of payment (including transfers, execution of payments and cash withdrawals) issued by participants of international payment systems operating on the territory of Russia and Belarus. all currency transactions using Russian rubles and Belarusian rubles are prohibited; all foreign exchange transactions conducted by legal entity or individual located (registered/permanently residing) in Russia or Belarus are prohibited; all currency transactions to fulfill obligations to legal entities or individuals located (registered/permanently residing) in Russia or Belarus are prohibited. There are some exceptions to these prohibitions, most of which relate to social benefits, transfers to the Armed Forces of Ukraine, and so on. Thus, all transfers from/to Russia and Belarus in dollars, euros, Belarusian and Russian rubles are prohibited. Both Swift and Western Union transfers, as well as debit transactions on accounts of residents of Russia and Belarus are prohibited. Risk to Ukrainian companys image In addition to the foregoing legislative restrictions on cooperation with Russian business, which almost do not allow it, Ukrainian companies that still intend to continue cooperation with Russian counterparties should think about their own reputation. After all, it is obvious that reputational risks for those cooperating with the aggressor states residents may cause more losses than the termination of such cooperation. This applies not least to Ukrainian companies and representative offices that are part of international (the U.S. or European) groups of companies. The issue of cooperation with Russian and Belarusian counterparties is focused by the media, since obtaining information about such ties does not yet cause difficulties. Lists of companies that have not ceased cooperation with Russian and Belarusian companies are available in open sources, which will also work against the companys image. However, legislators are actively working on the development of a comprehensive law to regulate relations involving persons associated with the aggressor state, which is likely to contain more restrictions on such cooperation. It is also needed to remember the sanctions imposed by other states against Russian residents, as information on cooperation with Russian companies can adversely affect further cooperation with foreign counterparties. Business activities in Ukraine, the parent company of which has not left Russias market. Seizure of property items is possible Law of Ukraine On basic principles of forcible seizure in Ukraine of objects of the property rights of Russia and its residents No. 2116-IX of March 3, 2022 stipulates the procedure for seizure of property of Russian residents. On April 1, 2022, this law has been amended. According to the version of the law that was signed by the head of the Verkhovna Rada of Ukraine, by the decision of court or the National Security and Defense Council (NSDC), individuals or legal entities (regardless of their citizenship) who are permanently outside Ukraine or in the temporarily occupied territory of Ukraine and and publicly deny or support the armed aggression of the Russian Federation against Ukraine, the establishment and approval of the temporary occupation of part of Ukraine and that have not ceased their business activities on the Russian territory during the period of martial law may be equated with residents of Russia. Currently, there are no clarifications to whether the seizure of property can be applied only to the entities which deny or support armed aggression of the Russian Federation in Ukraine and have not ceased their activities in Russia or such a seizure can be applied to foreign entities which just have not stopped their economic activities in Russia. It is necessary to expect clarification or by-laws that detail this issue, because it is obvious that there are few foreign companies that support the armed aggression of the Russian Federation, and the number of those who have not left the Russian market is much bigger. Higher taxes are possible On April 1, 2022, Bill of Ukraine On amendments to the Tax Code of Ukraine on taxation of business entities associated with economic ties with the aggressor state No. 7232 of March 30, 2022 was adopted as a basis. This bill provides for the following changes: creation of the Register of business entities associated with economic ties with the aggressor state, which will be publicly available. Both Ukrainian and foreign companies whose activities form a permanent establishment in Ukraine will be included in this register if: as of February 23, 2022, their participants (directly or indirectly) were Russia or Russias citizens/residents or a legal entity, a member of which is Russia or Russias residents/citizens; they receive income in any form with a source of origin from Russia; they have a share in the charter capital of a legal entity receiving incomewith a source of origin from Russia; they are members of the international group of companies if any of its members receive income fromsource of origin from Russia/performs business operations, which, based on their legal content, may generate such income/which arises or may arisefinancial obligations to Russian residents/to which Russian residents have or may have financial obligations/which ensures Russias economic support. a ratio of 1.5 to the rate of enterprise income tax, environmental tax, rent and property tax will be established for the entities from this register; if the business entity was on a simplified taxation system as of June 30, 2022, such an entity loses the right to stay on such a taxation system and from July 1, 2022 is automatically considered as payer of income tax; entities have to notify the tax authorities of acquiring the business entity status associated with economic ties with the aggressor state within 60 days from the date of acquiring such status. Failure to report will entail the imposition of a fine of 1.5 percent of the income (revenue) of the taxpayer for each tax (reporting) period for which tax liabilities are to be determined according to the rules established by the relevant sections of the Tax Code of Ukraine, but with multiplying ratio. The new tax rules will apply from the tax period starting from March 1, 2022. The bill stipulates the possibility of exemption from the debt to pay higher taxes upon termination of economic ties with Russia. The bill also contains exceptions for entities exempted from the application of multiplying ratio, if their business activity is of social, humanitarian or economic significance for Ukraine. The list of such entities is not defined by law, which can lead to discrimination, since there is no criteria or procedure for classifying entities whose activities are of social significance. In the absence of detailing the issue of classifying entities whose business activity has social, humanitarian or economic significance for Ukraine, the number of litigation with tax authorities may increase substantially, since the bills provision is subjective. Image risks To date, it is known about high-profile names of foreign retail chains that have decided not to leave the Russian market, putting their Ukrainian subsidiaries/representative offices in an extremely uncomfortable position. After all, even if such chains continue their operation in Ukraine, it is obvious that they are boycotted by conscious Ukrainians who do not intend to sponsor companies paying taxes in the aggressor state, by which the Russian army is further funded. It is, therefore, natural to expect that the income of such companies in Ukraine will decrease even without legislative restrictions. Interaction with Belarusian counterparties. Since this country is not recognized de jure as an aggressor state, therefore, interaction with counterparties is less legally restricted. Such relations are subject only to the payment restrictions listed above. Conclusion. Therefore, considering both options for interaction with Russian and Belarusian counterparties, one core conclusion can be made – now such interaction can be carried out within the legal framework, but subject to all restrictions. However, given the trade embargo with Russia, the moratorium on the implementation of obligations and possible reputational risks, such cooperation may have more negative consequences for Ukrainian business than the cessation of such cooperation. As for foreign businesses operating in parallel both in Russia and in Ukraine, there is a possibility of seizure of property in favor of Ukraine or for future reparations. In case of the adoption of amendments to the Tax Code of Ukraine, entities having economic ties with Russia need to be prepared to pay 1.5-fold higher taxes. The issue of criminalizing business activities with the aggressor state also remains open. According to part 4 of Article 111-1 of the Criminal Code of Ukraine, one of the types of cooperation activities is business activities in cooperation with the aggressor state. Such actions shall be punishable by a fine up to ten thousand tax-exempt minimum incomes of citizens or imprisonment for a term of three to five years, with disqualification to hold certain positions or engage in certain activities for a period of ten to fifteen years, including seizure of property. It is not clearly defined whether the aggressor state falls directly into the category of Russia as a state (its public agencies, enterprises, and others) or whether the list of persons is broader, as for example, in the Law of Ukraine On basic principles of forcible seizure in Ukraine of objects of the property rights of Russia and its residents, referred to above. Ukrainian business should also be aware of reputational risks that may affect further cooperation with both Ukrainian and foreign counterparties. Consequently, Ukrainian business entities are encouraged to minimize any interaction with Russian and Belarusian counterparties as far as possible.
Sofiia Hodovana
Junior Associate at Legal Alliance Law Firm
Vitalii Savchuk
Associate Partner at Legal Alliance Law Firm

The introduction of martial law throughout the territory of Ukraine on February 24, 2022 due to Russia’s armed aggression unconditionally affected the activities of Ukrainian business entities.

Cooperation with the aggressor state is a certain way of sponsoring the war, so that the government legally contributes to the restriction and even termination of all interaction between Ukrainian businesses and business entities from Russia and Belarus.

In view of the high-profile scandals around foreign businesses that have not left the market of Russia and Belarus, this article will discuss the restrictions and risks in the following two situations:

  • risks for the Ukrainian business that interacts with Russian and Belarusian counterparties;
  • risks for businesses whose parent company/head office has not ceased its activities in Russia or Belarus.

Cooperation of Ukrainian business with Russian counterparties

  • A Decree of the Cabinet of Ministers of Ukraine “On the application of the ban on the import of goods from the Russian Federation” dated April 9, 2022,426 imposed a trade embargo against Russia and banned the import of goods from Russia into the customs territory of Ukraine.

In fact, a ban was imposed on all trade transactions with Russia.

  • It is forbidden to fulfill any obligations to creditors from Russia (including export of goods).

CMU Resolution “On protection of national interests in future claims of the state of Ukraine due to Russia’s military aggression” No. 187 of March 3, 2022, prohibited the following:

  • fulfillment of any obligations (including monetary ones), creditors (collectors) for which are:
  • individuals – citizens of Russia,
  • legal entities – residents of Russia,
  • Ukrainian legal entities, ultimate beneficial owner, member or participant with a share in the charter capital of 10% or more of which is the Russian state or individuals – citizens of Russia, legal entities – residents of Russia (hereinafter referred to as persons associated with the aggressor state);
  • assignment in each form of immovable property, securities, corporate rights, vehicles, aircraft and ships, inland navigation vessels by persons associated with the aggressor state, as well as alienation to such persons or in favor of Russia, except for free alienation in favor of the state of Ukraine.

Thus, performance of any obligations (supply of goods, payment for delivered goods or services, loans and other transactions) and disposition of immovable property, securities, and others in favor of persons associated with the aggressor state or disposition of immovable properties, securities, and others by such persons are prohibited.

So far, it is known that some banks do not block payments to Ukrainian companies with Russian capital, even in cases where its part is significant. It is also not yet known when customs authorities refused to clear the goods intended for such legal entities in Ukraine. However, the current violations of the moratorium do not mean the lack of verification and further accountability for such actions.

All transactions breaching this resolution’s requirements are null and void.

  • Notarial actions are restricted

CMU Resolution “Some issues of notaries under martial law” No. 164 of February 28, 2022 introduced restrictions on the performance of notarial actions related to Russian residents, namely:

  • any pending notarial actions on the appeal of persons associated with the aggressor state are suspended until the adoption and entry into force of the Law of Ukraine on the settlement of relations involving persons associated with the aggressor state;
  • notaries refuse to perform notarial actions at the request of the above persons during martial law. This restriction does not apply to notarial actions on the authentication of the signature on an application on renunciation of Russian citizenship.

In fact, there is a moratorium on all notarial actions involving persons associated with the aggressor state, which also restricts the range of possible legal relations between Ukrainian entities and such counterparties.

  • Payment transactions are restricted

NBU Regulation “On operation of banking system under martial law” No. 18 of February 24, 2022 introduced the following restrictions:

  • it is prohibited to conduct debit transactions on accounts of residents of Russia and Belarus, on accounts of legal entities (except banks), the ultimate beneficial owners of which are residents of Russia and Belarus, except for transfer of funds in the territory of Ukraine from such accounts to a special NBU account for the purpose of raising funds for support of the Armed Forces of Ukraine and/or accounts of the Cabinet of Ministers of Ukraine, ministries and other public agencies of Ukraine; social payments, payments of salary, utilities, taxes, fees and other obligatory payments;
  • it is prohibited to transfer funds to the accounts of individuals on transfers initiated using electronic means issued by participants of international payment systems operating on the territory of Russia and Belarus;
  • accept in Ukraine electronic means of payment (including transfers, execution of payments and cash withdrawals) issued by participants of international payment systems operating on the territory of Russia and Belarus.
  • all currency transactions using Russian rubles and Belarusian rubles are prohibited;
  • all foreign exchange transactions conducted by legal entity or individual located (registered/permanently residing) in Russia or Belarus are prohibited;
  • all currency transactions to fulfill obligations to legal entities or individuals located (registered/permanently residing) in Russia or Belarus are prohibited.

There are some exceptions to these prohibitions, most of which relate to social benefits, transfers to the Armed Forces of Ukraine, and so on.

Thus, all transfers from/to Russia and Belarus in dollars, euros, Belarusian and Russian rubles are prohibited. Both Swift and Western Union transfers, as well as debit transactions on accounts of residents of Russia and Belarus are prohibited.

  • Risk to Ukrainian company’s image

In addition to the foregoing legislative restrictions on cooperation with Russian business, which almost do not allow it, Ukrainian companies that still intend to continue cooperation with Russian counterparties should think about their own reputation.

After all, it is obvious that reputational risks for those cooperating with the aggressor state’s residents may cause more losses than the termination of such cooperation. This applies not least to Ukrainian companies and representative offices that are part of international (the U.S. or European) groups of companies.

The issue of cooperation with Russian and Belarusian counterparties is focused by the media, since obtaining information about such ties does not yet cause difficulties.

Lists of companies that have not ceased cooperation with Russian and Belarusian companies are available in open sources, which will also work against the company’s image.

However, legislators are actively working on the development of a comprehensive law to regulate relations involving persons associated with the aggressor state, which is likely to contain more restrictions on such cooperation.

It is also needed to remember the sanctions imposed by other states against Russian residents, as information on cooperation with Russian companies can adversely affect further cooperation with foreign counterparties.

Business activities in Ukraine, the parent company of which has not left Russia’s market

  • Seizure of property items is possible

Law of Ukraine “On basic principles of forcible seizure in Ukraine of objects of the property rights of Russia and its residents” No. 2116-IX of March 3, 2022 stipulates the procedure for seizure of property of Russian residents.

On April 1, 2022, this law has been amended. According to the version of the law that was signed by the head of the Verkhovna Rada of Ukraine, by the decision of court or the National Security and Defense Council (NSDC), individuals or legal entities (regardless of their citizenship) who are permanently outside Ukraine or in the temporarily occupied territory of Ukraine and and publicly deny or support the armed aggression of the Russian Federation against Ukraine, the establishment and approval of the temporary occupation of part of Ukraine and that have not ceased their business activities on the Russian territory during the period of martial law may be equated with residents of Russia.

Currently, there are no clarifications to whether the seizure of property can be applied only to the entities which deny or support armed aggression of the Russian Federation in Ukraine and have not ceased their activities in Russia or such a seizure can be applied to foreign entities which just have not stopped their economic activities in Russia.

It is necessary to expect clarification or by-laws that detail this issue, because it is obvious that there are few foreign companies that support the armed aggression of the Russian Federation, and the number of those who have not left the Russian market is much bigger.

  • Higher taxes are possible

On April 1, 2022, Bill of Ukraine “On amendments to the Tax Code of Ukraine on taxation of business entities associated with economic ties with the aggressor state” No. 7232 of March 30, 2022 was adopted as a basis.

This bill provides for the following changes:

  • creation of the Register of business entities associated with economic ties with the aggressor state, which will be publicly available.

Both Ukrainian and foreign companies whose activities form a permanent establishment in Ukraine will be included in this register if:

  • as of February 23, 2022, their participants (directly or indirectly) were Russia or Russia’s citizens/residents or a legal entity, a member of which is Russia or Russia’s residents/citizens;
  • they receive income in any form with a source of origin from Russia;
  • they have a share in the charter capital of a legal entity receiving incomewith a source of origin from Russia;
  • they are members of the international group of companies if any of its members receive income fromsource of origin from Russia/performs business operations, which, based on their legal content, may generate such income/which arises or may arisefinancial obligations to Russian residents/to which Russian residents have or may have financial obligations/which ensures Russia’s economic support.
  • a ratio of 1.5 to the rate of enterprise income tax, environmental tax, rent and property tax will be established for the entities from this register;
  • if the business entity was on a simplified taxation system as of June 30, 2022, such an entity loses the right to stay on such a taxation system and from July 1, 2022 is automatically considered as payer of income tax;
  • entities have to notify the tax authorities of acquiring the business entity status associated with economic ties with the aggressor state within 60 days from the date of acquiring such status. Failure to report will entail the imposition of a fine of 1.5 percent of the income (revenue) of the taxpayer for each tax (reporting) period for which tax liabilities are to be determined according to the rules established by the relevant sections of the Tax Code of Ukraine, but with multiplying ratio.

The new tax rules will apply from the tax period starting from March 1, 2022.

The bill stipulates the possibility of exemption from the debt to pay higher taxes upon termination of economic ties with Russia.

The bill also contains exceptions for entities exempted from the application of multiplying ratio, if their business activity is of social, humanitarian or economic significance for Ukraine.

The list of such entities is not defined by law, which can lead to discrimination, since there is no criteria or procedure for classifying entities whose activities are of social significance.

In the absence of detailing the issue of classifying entities whose business activity has social, humanitarian or economic significance for Ukraine, the number of litigation with tax authorities may increase substantially, since the bill’s provision is subjective.

  • Image risks

To date, it is known about high-profile names of foreign retail chains that have decided not to leave the Russian market, putting their Ukrainian subsidiaries/representative offices in an extremely uncomfortable position.

After all, even if such chains continue their operation in Ukraine, it is obvious that they are boycotted by conscious Ukrainians who do not intend to sponsor companies paying taxes in the aggressor state, by which the Russian army is further funded.

It is, therefore, natural to expect that the income of such companies in Ukraine will decrease even without legislative restrictions.

Interaction with Belarusian counterparties

Since this country is not recognized de jure as an aggressor state, therefore, interaction with counterparties is less legally restricted.

Such relations are subject only to the payment restrictions listed above.

Conclusion

Therefore, considering both options for interaction with Russian and Belarusian counterparties, one core conclusion can be made – now such interaction can be carried out within the legal framework, but subject to all restrictions.

However, given the trade embargo with Russia, the moratorium on the implementation of obligations and possible reputational risks, such cooperation may have more negative consequences for Ukrainian business than the cessation of such cooperation.

As for foreign businesses operating in parallel both in Russia and in Ukraine, there is a possibility of seizure of property in favor of Ukraine or for future reparations.

In case of the adoption of amendments to the Tax Code of Ukraine, entities having economic ties with Russia need to be prepared to pay 1.5-fold higher taxes.

The issue of criminalizing business activities with the aggressor state also remains open.

According to part 4 of Article 111-1 of the Criminal Code of Ukraine, one of the types of cooperation activities is business activities in cooperation with the aggressor state.

Such actions shall be punishable by a fine up to ten thousand tax-exempt minimum incomes of citizens or imprisonment for a term of three to five years, with disqualification to hold certain positions or engage in certain activities for a period of ten to fifteen years, including seizure of property.

It is not clearly defined whether the aggressor state falls directly into the category of Russia as a state (its public agencies, enterprises, and others) or whether the list of persons is broader, as for example, in the Law of Ukraine “On basic principles of forcible seizure in Ukraine of objects of the property rights of Russia and its residents,” referred to above.

Ukrainian business should also be aware of reputational risks that may affect further cooperation with both Ukrainian and foreign counterparties.

Consequently, Ukrainian business entities are encouraged to minimize any interaction with Russian and Belarusian counterparties as far as possible.

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