• Bate C. Toms

    Managing Partner, B.C.Toms & Co. Legal education: Yale Law School (J.D., 1975); Magdalene College, Cambridge University (Law Tripos I; 1972-1973). Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in France.Chairman, British Ukrainian Chamber of Commerce

  • Natalia Vietoshkina

    Associate, B.C.Toms & Co. Legal education: Kyiv National Economic University (Commercial and International Law, Master’s Degree, 2008), Ukrainian Bar Association (Certificate of advocate, 2010)

B.C. Toms & Co

Address: 18/1 Prorizna Street, Suite 1,
Kyiv, 01001, Ukraine
Tel.: +380 44 490 6000, 278 1000
E-mail: kyiv@bctoms.net
Web-site: www.bctoms.net

B.C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kyiv office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine.

The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.

The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective.

B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts.

Legal Developments in Energy Laws

The Ukrainian natural gas and oil market became subject to European style regulation in 2016 and 2017, and thus more transparent, due to the adoption of new legislation in the energy sector.

New Legislation on NEURC

The Law of Ukraine On the National Commission for the State Regulation of Energy and Utilities, No. 1540-VІІІ, of 22 September 2016 (the New Law), that came into force on 26 November 2016, greatly reduces the virtually unlimited control over the National Commission for the State Regulation of Energy and Utilities (the NEURC) that the President previously exercised under the President’s Decree On Approval of the Statute of the National Commission for the State Regulation of Energy and Utilities, No.715, of 10 September 2014 (Decree No.715), that is still valid. The New Law introduces an amended appointment procedure of NEURC members, and a number of new requirements that such members need to comply with as well as guarantees of NEURC members’ independence.

Under Decree No.715, the members of NEURC are appointed and dismissed by Presidential decree. The New Law modifies this by introducing a two-stage procedure for such appointments, whereby the NEURC members are selected on a competitive basis by a Selection Committee consisting of five members, each appointed for a three year term, as follows:

— two members are appointed by the President,

— two members are appointed by the Parliament (with one recommended by the Committee on the Fuel and Energy Sector and one recommended by the Committee on Housing and Public Utilities), and

— one member is appointed by the Government (based on the recommendation of the Ministry of Energy).

Under the New Law, NEURC members are appointed for six year terms and shall not serve for more than two terms.

The New Law introduces administrative and criminal liability for improper interference with the work of NEURC members and staff. It is stipulated that NEURC members and staff shall act independently from any private business interests and shall not own any equity interests in any entities involved in the energy business. It is also required that potential candidates for a position with NEURC must have at least five years of professional experience in the energy sector or with utilities, including at least two years of experience in managerial positions.

Further, the New Law obligates the Cabinet of Ministers of Ukraine to submit to Parliament a Draft Law On the Energy Ombudsman by 1 July 2017. The main need for the Energy Ombudsman is the absence of any reliable mechanism protecting the rights of energy consumers’.

Licensing Conflict

Presently, under Ukrainian law, a license is required to supply natural gas to an ultimate consumer in Ukraine, whether residential or non-residential, and whether the sale is from abroad or within Ukraine, based principally on the Law of Ukraine On the Natural Gas Market No. 329-VIII, of 9 April 2015 (the “Gas Market Law”). However, this was not always clear, since the Law of Ukraine On the Licensing of Commercial Activities, No. 222-VIII, of 2 March 2015 (the “Licensing Law”, adopted earlier than the Gas Market Law) (described further below), previously permitted the unlicensed supply of natural gas by foreign and domestic sellers to ultimate consumers that could purchase under unregulated tariffs, generally meaning to commercial businesses as customers. Based on this (and despite the conflicting provisions of the later adopted Gas Market Law), NEURC in practice continued to permit such unlicensed supply to consumers under unregulated tariffs until the New Law was enacted.

The adoption of the New Law resolved the conflict between the Licensing Law and the Gas Market Law, by amending the former so that all gas supply activities became clearly subject to the prior receipt of a license, as provided by the Gas Market Law. Under the Gas Market Law, a license is obligatory for all types of gas supply activities for ultimate consumers in Ukraine, whether residential or non-residential and irrespective of the applicable tariff.

License Conditions

New Licensing Conditions

NEURC has initially adopted the Resolution On Approval of the License Conditions for Economic Activity in the Natural Gas Market, No. 201, of 16 February 2017 (the License Conditions Resolution), as required by the New Law. The License Conditions Resolution obligates entities that carry out or intend to carry out economic commercial activity related to the transportation, storage, distribution and supply of natural gas, irrespective of the legal form and ownership, to obtain a license within three months of the date of the official adoption of the License Conditions Resolution.

The License Conditions Resolution was published on 5 May 2017, so entities are able to continue to carry out activities for gas supply, transportation, storage and distribution for another three months , but must apply for and receive a license for such activities after three months, i.e. by 5 August 2017, to continue activities without interruption.

No License Required for Gas Exports

The Government of Ukraine adopted the Resolution On Approval of the List of Goods that are Subject to Licensing for Export and Import and Quotas for 2017, No. 1009, of 28 December 2016 (“Resolution No. 1009”), that came into effect on 1 January 2017. The list of the products subject to licensing for export from Ukraine was revised by Resolution No. 1009 to eliminate natural gas (as well as coal) effective 1 January 2017. Thus, licenses for the export of natural gas (and coal) are no longer required.

However, persons and entities are still required to obtain permission from the Ministry of Economy for the re-export of natural gas that was previously imported into Ukraine.

The Gas Security Reserve Stock

On 22 September 2016, the Law On Amending the Natural Gas Market Law, No.1541-VIII (the Amendment Law) was adopted (on the same date as the New Law, described above). The Amendment Law entered into force and amended the Natural Gas Market Law on 1 November 2016. It reduces the size of the gas security reserve stock required to be kept in Ukraine by natural gas suppliers from a maximum of 50% down to a maximum of 10%.

The previous gas security reserve stock requirement of 50% of the planned monthly volume of deliveries for each supplier of natural gas to consumers for the next month, was introduced by the Cabinet of Ministers’ Resolution On Approval of the Establishment of the Security Reserve Stocks of Natural Gas, No. 795, of 30 September 2015. To implement the reduction in the gas security reserve stock permitted by the Amendment Law, the Cabinet of Ministers adopted the Resolution On Establishing the Size of the Gas Security Reserve Stock, No. 860, of 16 November 2016, which entered into force on 30 November 2016, that generally provides for a 0% gas security reserve stock requirement. However, gas suppliers may still be obliged to provide for a 10% security reserve stock in exceptional circumstances, such as the occurrence of an emergency situation in the natural gas market in Ukraine. The criteria for such an emergency situation is defined by the Ministry of Energy’s Decree No. 687, of 2 November 2015, that states that it can be declared where the forecast demand for natural gas in Ukraine is higher than the potential maximum supply, and pressure in the gas transportation system is at a critical level, so as to justify temporary special safeguard measures.

The More Favorable Tax Regime for Oil and Gas Production

The Parliament of Ukraine adopted the Law On Amendments to the Tax Code of Ukraine for Balanced Budget Revenue in 2017, No.5132, on 20 December 2016, which came into force on 1 January 2017. This Law reduces the rate of royalty fees for oil. Notably, the royalty rate for oil extracted from fields fully or partially lying at a depth beyond 5,000 meters is 29% (previously 45%).

Presently the Tax Code of Ukraine stipulates the following royalty rates for production of hydrocarbons:

(i) for extraction of natural gas (of any origin):

— 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters;
— 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters;

(ii) for extraction of oil:

— 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters;

— 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters.

Foreign Natural Gas can be Stored under the “Customs Storage” Regime

The Ministry of Finance of Ukraine adopted a Resolution that gives non-resident suppliers of natural gas an opportunity to store gas under the ‘customs storage’ regime. The Resolution On Approval of Amendments to Several Regulations of the Ministry of Ukraine, No. 292, of 27 February 2017 (which came into force on 4 April 2017) allows the storage of natural gas in Ukraine for up to three years without the need of pay the 20% import VAT that would otherwise apply. Previously, foreign suppliers could store natural gas only under the transit customs regime and only for 31 days.