On 16 September 2014, the Parliament of Ukraine ratified the Association Agreement between the EU and Ukraine.

As we described in our recent publication, the Association Agreement was signed by the European Union and Ukraine on 27 June 2014.

To date the Association Agreement has been ratified by five EU member states and it is expected that the process of ratification among the rest of the member states may take some time.

After the ratification process has been over, the Association Agreement will come into effect on the first day of the second month following the date of deposit of the last instrument of ratification or approval (the “Effective Date”).

As of the Effective Date of the agreement, Ukraine will start harmonising its legislation with the EU laws in various business sectors.

In addition to our previous article, below we provide a brief overview of the key issues arising out of the Association Agreement.

1. CUSTOMS AND TAX MATTERS

The Association Agreement sets forth the gradual reduction and, in most of the cases, abolition of import and export duties on goods originating from both EU countries and Ukraine.

Currently, Ukraine temporarily enjoys a preferentiale trade status approved by the Regulation of the European Parliament No. 374/2014, 16 April 2014, which allows Ukrainian companies to import their goods to the EU free of customs duties or at reduced customs duties rates. It was initially agreed that those measures would be in force until 1 November 2014. However, the EU and Ukraine have announced that this arrangement will be likely extended by agreement of the Parties to 31 December 2015. Therefore, until 31 December 2015 EU goods imported into Ukraine will likely continue to be subject to Ukrainian customs duties, while Ukrainian goods may be exported to the EU under the favourable regime set out in the Association Agreement.

Ukraine also undertakes that within three (3) years from the Effective Date it will implement certain provisions of the EU customs rules and within one (1) year ratify two international conventions (i.e.: the Convention on the Simplification of Formalities in Trade in Goods dated 20 May 1987 and the Convention on a Common Transit Procedure dated 20 May 1987, as revised). The Prime Minister has stated, however, that the government shall begin implementing these reforms immediately.

Ukraine is also obligated to enhance its tax collection and control system with specific focus on Value Added Tax (“VAT”) refund procedures to avoid accumulation of VAT refund arrears and to reinforce the fight against tax fraud and tax evasion.

To that end, Ukraine undertook to implement certain provisions of the EU tax regulations relating to VAT and excise tax to a range of products, including spirit, alcohol beverages and tobacco products. At the same time, provisions of the Association Agreement do not affect existing treaties between Ukraine and other EU member states regarding avoidance of double taxation.

2. FINANCIAL MATTERS

Under the Association Agreement, Ukraine undertakes to implement international standards and a number of EU Directives relating to banking, insurance and other financial services. This should improve legislation regarding accounting, capital requirements for banks and other financial institutions, deposit guarantees, electronic money, pension funds, anti-money laundering, etc.

Upon entry into force of the Association Agreement, the Parties shall ensure free movement of capital in certain areas, such as direct and portfolio investments and cross-border loans from the EU. Free movement of capital should be followed by liberalisation of the foreign currency control restrictions currently in force, thereby simplifying foreign financing of Ukrainian companies.

Further, Ukraine commits to implement a prudent regulatory framework for financial market supervision equivalent to that existing in the EU. This should ensure a more transparent and predictable business environment and will make the Ukrainian market more attractive to foreign investors.

The Association Agreement also provides for mutual covenants regarding free access of financial institutions to payment and clearing systems, which should substantially ease cross-border transactions. 

Finally, the Parties permit each other to provide new financial services on their territories, which should stimulate the development of the financial market in Ukraine, boost competition and provide major opportunities for financial market growth.

3. IP MATTERS

The Association Agreement also has a substantial impact on intellectual property rights protection in Ukraine. It is expected to resolve a number of problematic issues plaguing sector for some time, including the collection of copyright royalty fees, protection of EU geographical indications, liability for infringements on the Internet, improvement of trademark registration procedures, etc.

In general, the provisions of the Association Agreement provide for adequate commitments regardingharmonisation of Ukrainian legislation with the EU legal framework with respect to whole range of IP objects.

The implementation of the IP-related provisions by Ukraine will enhance the process of production and commercialisation of innovative products and inventions. It is anticipated that the IT and telecommunications sectors, as well as pharmaceutical and agrochemicals businesses, will be most favourably affected by the legislative changes.

4. TELECOMMUNICATIONS MATTERS

On the regulatory side, the Association Agreement provides that mere notification and/or registration will be sufficient grounds for provision of telecommunication services.

It further provides that the licences may be required to attribute the numbering capacity as well as frequency resource.

This substantially differs from what Ukraine has now, given that currently the license is needed not only for use of the radio frequency resource, but also for conducting of a business activity in the telecommunication area (i.e.: for provision of both mobile and fix-line (wireless and wireline) communications services). Therefore substantial changes to the current legal framework will be required.

The agreement further provides that the  telecommunications regulatory body must possess the power to carry out an analysis of the relevant product and service markets, including at the retail and wholesale levels.  This essentially bestows upon the telecommunications regulator certain competition law functions.

It further expands the definition of the operators with significant market powers (compared to what currently exists under Ukrainian law) and provides that the regulatory authority may impose specific regulatory obligations on those operators if a relevant market is determined to be insufficiently competitive.

Within a determined period (in most cases four (4) years following the Effective Date), Ukraine shall implement a range of EU Directives, including regarding authorisation of electronic communication networks, access and interconnection, electronic commerce, electronic signature, etc.

5. CONSUMER PRODUCTS SECTOR

According to the Association Agreement, Ukraine will align its consumer protection laws with EU standards in the fields of the food safety, marketing, contract law, unfair trade, doorstep selling, financial services, consumer credits, redress, injunctions regarding the protection of consumers’ interests, and consumer protection cooperation.

In total, there are 18 European directives and other acts regarding consumer protection that will be implemented by Ukraine. Most of them should become part of the national legislative framework within three years after the Effective Date.

Incorporation of these EU regulations into Ukrainian legislation should enhance the protection of consumers’ rights, improve marketing practices and prevent unfair trade.

6. ENERGY SECTOR

The ratification of the Association Agreement is supposed to stimulate implementation of Ukraine’s commitments under the Treaty establishing the Energy Community 2005 (Energy Community Treaty), ratified by Ukraine on 15 December 2010, and relevant EU acquis communautaire, in particular the Second and Third Energy Packages. The timelines for implementation of the EU acquis in the energy sector are consistent with the Protocol Concerning the Accession of Ukraine to the Energy Community Treaty.

In fact, Ukraine’s accession to the Energy Community Treaty in 2010 has actually granted Ukraine a so-called “associated membership” in the EU’s energy sector. For this reason, the Association Agreement states that the Energy Community Treaty, or the EU acquis shall take precedence over provisions of the Association Agreement.

The Association Agreement summarises the main principles and rules of the Energy Community, focusing on: transparency of price-setting procedures for energy resources, such as electricity, oil and gas; elimination of any import/export restrictions from/to EU markets; transparency and fairness of access to transportation capacities, in particular to the Ukrainian gas transportation system; development and access to infrastructure; prevention of disruption in supplies; independence of the regulator, etc.

The Association Agreement also promotes cooperation with international financial institutions, such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). Investments into the energy sector should increase energy efficiency and further develop renewable energy sector. In addition, the parties should take full advantage of joint implementation mechanisms under the Kyoto Protocol to the UN Framework Convention on Climate Change (1997) to reduce greenhouse gas emissions.

Close attention is paid to safety in the energy sector, including the mining and nuclear sectors. The EU and Ukraine shall implement the “Early Warning Mechanism” to immediately react to any emergencies or emergency threats. Further measures shall also be taken to reduce the impact of the Chernobyl catastrophe and to ensure a high level of nuclear security based on EU practice and the standards of the International Atomic Energy Agency (IAEA).

7. DISPUTES RESOLUTION AND MEDIATION

The Association Agreement provides for a complex system of resolving inter-state trade disputes between the EU and Ukraine.  It provides for:

  1. Consultations and determinations by a group of experts regarding trade and sustainable development measures;
  2. A two-tier system of resolving trade disputes through negotiation and arbitration; and
  3. Mediation of disputes regarding market access for goods.

If consultations prove to be unsuccessful within the time-limits provided for by the Association Agreement, any party can bring a dispute to an arbitration panel consisting of three arbitrators appointed in accordance with the procedure stipulated by the Association Agreement.  The arbitral tribunal will have to render its ruling within 120 days (or 40 days for energy-related disputes) of the constitution of the panel, which will be subject to further comments by the parties.

The dispute settlement provisions of the Association Agreement are generally without prejudice to the WTO dispute settlement procedure.  However, it prohibits challenging the same measure under the WTO agreements and the Association Agreement at the same time.

The jurisdiction of the arbitral tribunal (based on a two-tier system) extends to disputes arising under the economic part of the Association Agreement, but certain types of measures will not be reviewable by the arbitral tribunal.  These include global safeguard measures, anti-dumping measures and others. 

The Association Agreement does not contain any provisions regarding investor-state dispute settlement.  Thus, the EU investors in Ukraine will have to rely on the pre-existing network of investment protection agreements to protect their investments in Ukraine.

8. IMPLEMENTATION

On 17 September 2014, the Ukrainian Government adopted a plan of implementation of the Association Agreement. The plan is not yet publicly available, but the government expects that the Association Agreement will be fully implemented by 2017.