19 December 2014
KyivPost Legal Quarterly publishes a commentary by Oleg Boichuk on disclosure and transparency requirements for beneficiaries of local companies

New law on corporate ownership gives hope to state tax collectors

True beneficiaries often hidden by companies

The Verkhovna Rada, the nation’s par­liament, on Oct. 14 adopted a law that requires Ukrainian companies to disclose their true owners. The move is aimed at fighting corruption as many elected officials and others hide their ownership of companies and fail to disclose conflicts of interest.

The government also hopes greater trans­parency will curb tax evasion schemes that are usually based on pouring revenues into fic­titious entities registered in offshore juris­dictions with lower taxes, like Cyprus or the British Virgin Islands.

However, lawyers say bypassing the law shouldn’t be too much of a problem, despite Prime Minister Arseniy Yatsenyuk’s bold proc­lamation on Oct. 14 that the “offshore era in Ukraine has ended.”

Those Ukrainian companies that were reg­istered prior to adopting the law will have six months to disclose their beneficiaries from Nov. 25, when the law came into effect. Ukrainian companies sold as much as $334

million worth of goods through offshores in   January-September, 10 times less than last year, according to Igor Bilous, head of the Fiscal Service. Analysts suggested this could be either a side effect of the transfer pricing leg­islation or a failure to track the full amount of cash flows. 

Oleksiy Feliv, partner at Gide Loyrette Nouel law firm, says companies are now obliged to disclose the ultimate owner’s full name, cit­izenship and ID information. All the data should be submitted to the State Registry of Legal Entities and be made publicly available through the regularly updated website. Making information on real estate owners public is also part of the document.

The law assigns the term “ultimate bene­ficial owner” to a person exercising ultimate effective control over a company, whether di­rectly or through a chain of ownership. Such “ultimate effective control” particularly ap­plies to situations where an individual owns 25 percent or more shares. Moreover, those who hold a 10 percent slake should also be disclosed.

However, by creating a network of ficti­tiously distributed shares an owner ineligi­ble may be able to avoid the disclosure rules. Beneficiaries may register smaller percentag­es of their businesses through trusts, invest­ments funds or purely nominal owners.

“In practice the situation won’t change rad­ically,” said Sergiy Aleksandrov, a lawyer at Alekseev, Boyarchukov & Partners. “People will simply start registering their companies to authorized persons like friends, colleagues. In fact, this method has been practiced for a long time. We should not expect that the real own­ers will be brought out of the shadows.” 

The obligation to disclose the true struc­ture of the business is not new - dating back to 2010, when the law obliged companies to sub­mit information on persons exercising effec­tive control to the State Registry. However, the   new law significantly expands on this obligation by setting more criteria for identifying the ultimate owners and in­troducing responsibility for a failure to submit data to the State Registry.

“The new law on disclosing ultimate beneficiaries is a breakthrough in terms of transparency,” Feliv said. “At the same time, the parliamentarians clearly left themselves room for maneuver.”

According to the lawyer, the original draft of the law en­visaged criminal responsibility for a failure to reveal the in­formation, while the final version included a tiny fine of up to $530 that does not pose a serious threat for those who might have to pay much bigger taxes after disclos­ing the structure of their business. Moreover, the law does not include the mechanism how to verify the submitted information.

“This is hardly a scary amount for big businessmen who hide big money behind these companies,” comments Oleg Boichuk, counsel at EPAM. “Whether there will be other sanctions or pressure for those who do not disclose this information, the law does not say at the moment.”

Still, for the companies that operate only in Ukraine it will be more difficult to hide the owners now, Boichuk em­phasizes. Companies registered offshore will continue to hide them in the same way.

Some experts think the new legislation may scare off investors as some of them prefer to use  the offshore schemes to reduce the tax expenses.

“Ukrainian lawmakers are notorious for passing am­biguous laws that appear to have good intentions, but ul­timately cause negative consequences for the economy,” says Scott Brown, partner at Frishberg & Partners law firm.

“Does Ukraine really need to impose additional bureau­cratic hurdles for foreign companies, who are already re­thinking their Ukraine strategy for 2015?”

But Roman Blazhko, senior lawyer at Lavrynovych & Partners, said that foreign investors should have no rea­son to be afraid. “In some countries if you are the ultimate beneficiary - you may be asked to pay taxes from your com­pany’s income,” he told the Legal Quarterly. “This is not the case for Ukraine. Therefore foreigners have no grounds to be afraid that they will be disclosed as beneficiary own­ers unless they are corrupted and received all their income from some unknown sources.”

Oksana Lyachynska