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Should the Crimea Be Deprived of the Free Economic Zone Status?


Oleksandr Denysenko, Attorney at Law at Ilyashev & Partners Law Firm
Source: Forbes

The new legislative initiative runs the risk of bringing duties and taxes on the peninsula out of the legal framework.

On November 4, the draft law No. 3402 “On the Invalidation of the Law of Ukraine “On Creation of the Free Economic Zone “Crimea” and the Peculiarities of Economic Activity in the Temporarily Occupied Territory of Ukraine” submitted by Oleksiy Goncharenko, people’s deputy from the party Petro Poroshenko’s Block, was registered in the parliament. The draft law includes only two points: the first one is to invalidate the Law on the FEZ “Crimea”, and the second one is that the law becomes effective on the day following the day of its publication.

According to the explanatory memorandum, the draft law is aimed at stopping the supply of goods, works and services on preferable terms in favor of the occupation regime, and the abuse arising from the supply of goods in the temporarily occupied territory of the Autonomous Republic of Crimea, in particular, illegal movement of such goods into the territory of the Russian Federation with the avoidance of the required payments to the state budget of Ukraine.

Based on the wording of the objective of the draft law, we can say that the Ukrainian parliament finally admitted certain “problems” with application of the Law on the FEZ “Crimea”. However, we must acknowledge that abolition of the law will not resolve the issues of economic relations with the occupied territories.

The reason is that Article 13 of the Law of Ukraine “On Ensuring the Rights and Freedoms of Citizens and Legal Framework in the Temporarily Occupied Territory of Ukraine” (hereinafter, the Law on Legal Framework) expressly provides that economic activities in the temporarily occupied territory are defined by law. That is the Law on the FEZ “Crimea”. Thus, if the law is cancelled, the sphere of economic relations with the occupied territories will remain generally unregulated. And it will not settle the supply of goods, works and services on preferable terms in favor of the occupation regime.

The effective Law on the FEZ “Crimea”, except for direct creation of a free economic zone on the peninsula and introduction of tax benefits, envisages some important provisions. Thus, subparagraph 5, paragraph 12.4 of Article 12 of the Law on the FEZ “Crimea” envisages that goods from the territory of the FEZ “Crimea” to other territory of Ukraine for the purpose of free circulation are supplied under the customs regime of import subject to the provisions of Article 6 of the Law. Supply of goods with the customs status of Ukrainian goods from the other territory of Ukraine to the territory of the FEZ “Crimea” is equivalent to the customs regime of export.

Thus, the Law on the FEZ “Crimea” set forth an important rule that the border crossings between mainland Ukraine and the Autonomous Republic of Crimea means crossing of the customs territory of Ukraine with all its consequences.

The law on legal treatment does not prohibit any economic relations with the occupied territories. Moreover, if the Law on the FEZ “Crimea” is cancelled, the transactions on import/export of goods from the Crimea will not be considered as export-import transactions, as Article 1 of the law on legal treatment clearly establishes that the temporarily occupied territory of Ukraine is an integral part of the territory of Ukraine covered by the Constitution and laws of Ukraine.

The absence of the customs border with the ARC means that import and export of goods from the occupied peninsula will be carried out without any restrictions and without paying duties and other obligatory payments stipulated by the legislation of Ukraine. At the same time Russia will surely continue to fill its budget by customs and other payments as a result of goods crossing the border with the peninsula.

Considering the purposes of the blockade of the peninsula, which have been repeatedly voiced by the Crimean Tatar activists, cancellation of the FEZ “Crimea” will not result in the cessation of supplies of goods on preferable terms in favor of the occupation regime, and, therefore, it can be argued with high probability that the blockade of the peninsula will continue.

It should be noted that cancellation of the FEZ “Crimea” is unlikely to change anything for Ukraine in the geopolitical perspective. The lack of control of Kyiv over the occupied territories does not depend on how this territory is called in the capital – a free economic zone, or otherwise. Notwithstanding that the draft law in no way restricts trade with the peninsula, questions of our Western partners to Ukraine “So, do you fight or trade with Russia?” will not disappear.

The effect of cancellation of the FEZ “Crimea” on the medium-size and large business will depend on lifting of the blockade from the peninsula. If the blockage is lifted, it will be possible to speak about trade facilitation with the Crimea, as businessmen will have to deal only with taxes to the Russian budget, and not to figure out how to get tax exemption of trade with the FEZ under the Ukrainian laws. Meanwhile, the Ukrainian will still not receive any taxes and customs duties as a result of supply of goods to the occupied territories.

Meanwhile, the Law on the FEZ “Crimea” regulates not only customs, but also tax issues in relations with the Crimea. As we know, at present there are no operating Ukrainian tax authorities in the Crimea. Cancellation of the FEZ “Crimea” will still result in the need of creation of new taxation and accounting conditions for the Crimean business entities. Earlier, during adoption of the Law on creation of the FEZ “Crimea” one of its drafters Ksenia Lyapina explained: “Our understanding of the FEZ is: a territory beyond the control of Ukraine, and Russia will collect taxes there. Therefore, we should legalize the situation when they (enterprises – Forbes) do not pay taxes temporarily”.

As we can see, the actual conditions have not changed since then, and Russia actually collects taxes in its favor from the above-mentioned enterprises. Accordingly, concerns that were attempted to be avoided by adopting the Law on creation of the FEZ “Crimea” with its further abolition can become a reality, which will result in a total re-evaluation of the economic model of doing business in the Crimea and with the Crimean counterparties. The consequence of cancellation of the FEZ “Crimea” for the enterprises in the Crimea can be, on the one hand, the possibility of doing free business, and on the other – double taxation of their activities.

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