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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

A Promised Simplification: Will It Really Get Any Simpler?

11.07.2013

By: Evgen Solovyov, trial attorney, Ilyashev & Partners Law Firm
Source: Companion

On February 27, 2013, Bill No.2409 was introduced amending certain legislation to simplify the liquidation of sole proprietors who don’t have employees. The Bill suggests amending the Civil Code, the Commercial Code, the State Registration (Legal Entities and Sole Proprietors) Act and Mandatory State Insurance Tax Act. It is worth noting that this Bill has to be considered together with another one introduced on the same day, Bill No.2410 amending the Internal Revenue Code as regards the simplification of liquidation procedure for sole proprietors who don’t have employees. The bill suggests a «notification-only» termination for sole proprietorships that don’t hire employees and a more friendly procedure for their liquidation.

However, a more detailed analysis shows that these two bills contain contradictory formulae. Notably, in most instances both bills use the formula «sole proprietorships that don’t have employees». When studied closer, though, it appears that to qualify for a «simplified» procedure, a sole proprietor must not have hired employees for a year before he or she decided to liquidate the business.

Some of the formulations have even caught the eye of Parliament’s Office for Research and Evaluation which said both bills need to be reviewed for these and a number of other reasons.

Simply put, the closing procedure for eligible sole proprietorships will look like as follows: a sole proprietor shall first apply to the Internal Revenue Service (IRS) for a closing audit and submit a number of supporting documents; some documents and reporting need to be filed with the Pension Fund as well.

IRS, no later that one day from the date of receipt of documents, will notify the Registrar of Companies that either (a) all documents have been received and termination is authorized; or (b) all documents have been received and termination is denied. The reason for denial can be if the IRS reasonably believes that the sole proprietor did have employees. Similar notifications shall be received from the Pension Fund.

The sole proprietor will then submit a termination form to the Registrar of Companies. In case of positive answers from the IRS and the Pension Fund the business will be closed, otherwise (the bill suggests 6 cases) stopping self-employment will be denied. However, even with the relevant record of termination made in the register, the business will continue to be registered with the IRS and the Pension Fund until the relevant audits are completed and any outstanding liabilities are paid off.

Thus, the proposed simplification is merely tokenistic and only good for non-employing sole traders. The procedure takes the same 1 day now. The whole novelty is just about switching steps: the documents will now be submitted to the registrar in the end rather than in the beginning.

The main problem associated with liquidating a sole proprietorship, namely the audits by the regulatory authorities, was not dealt with. The audits were never abolished and the entire procedure remains complicated. Equally, a «notification-only» start-up is not going to be introduced. Apparently, there still are reasons to maintain the existing company-like registration. Simplification is the word only where a sole proprietor needs to cease to be a business owner as quickly as possible (for any reason). Examples can include public service or unemployment benefits. Stopping Self-Employment

There are fears that these changes will result in a boom of short-lived businesses. I don’t believe this will happen since, in contrast to legal entities, natural persons continue to be liable all debts and damages of their business even if they no longer operate as sole proprietors. In consideration of the foregoing, it is not clear why the simplified procedure is going to be applied only to those sole proprietors who don’t have employees.

If the proposed changes will be enacted, there might be an increased number of terminations at start giving rise to a talk that small businesses are going away. In fact, I believe that most terminations will be registered by those sole traders who had stopped trading but continued to file «zero reporting» because they were unwilling to go though the hassle of all procedures. Another reason why it may seems so is that they will be struck off the register in the beginning of the procedure and not in the last stage of it.

A positive thing about these changes is that a termination will be recorded immediately irrespectively of how long tax audits may take. However, both bills need to be reviewed to a certain extent first. Further, there must be a number of bylaws developed and put in place, and the registrars will need new software and equipment to meet the new procedure.

To remind, the point here is not the changes in law but the need to change the very attitudes of the government and to build political will to solve this issue. As long as there are silent instructions to boost budget fundraising at any cost, as long as there is a «no-business-is-saint» approach, as long as tax inspectors «kindly suggest» that a business owner who is in good standing «forget» about it and pay USD 100-300 in penalties, as long as the courts will rule in favour of the government and not in favour of taxpayers, as long as there is no effective mechanism of prosecuting public officers for footdragging and misconduct, the patterns of doing business in Ukraine are unlikely to change.

 
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