Cabinet of Ministers proposed to ease withdrawal from business. So far, only for individual entrepreneurs

Authors: Diana Rozhentsova, Galina Kalachova
Source: Capital

The Cabinet of Ministers approved amendments to the Commercial and Tax Codes relating to the termination of activities of individual entrepreneurs. It is said in the explanatory memoranda to the documents that two draft laws – one drafted by the Ministry of Justice, the other one – by the Ministry of Incomes and Fees – were prepared to implement the National Plan for the current year to ease business liquidation procedure and improve Ukraine’s positions in the world rankings.

Earlier business liquidation procedure caused a lot of criticism on the part of both business and international institutions. In particular, in the latest report Ukraine ranked 157 among 185 countries by «Resolving insolvency» criteria in the international edition «Doing Business» published by the World Bank. Recall that before changing calculation method in 2011, this criterion was called «Liquidation of companies».

To date, liquidation of business in Ukraine on average takes about six months for legal entities and between three and six – for individual entrepreneurs, says Oksana Kneychuk, partner of AstapovLawyers International Law Group.

One stage less

The Ministry of Justice proposes to cancel a two-stage business liquidation procedure. Currently, to close a business the entrepreneur must follow a number of bureaucratic procedures; firstly, make a record of his decision to liquidate a business in the Unified State Register of Legal Entities and Individual Entrepreneurs and then – a record on state registration of such liquidation. «If the draft law becomes effective, entry will be made into the register on the basis of registration card only once – about termination, without making a preliminary record on the decision to close business», says Evgen Solovyov, lawyer of Ilyashev & Partners Law Firm.

Documents on the list

The Ministry of Incomes, in turn, offers to complete the Tax Code by a list of documents necessary to close a business. In particular, it shall include an application for conducting inspection in connection with the closing of business, tax accounts for the last reporting period, ledger of income and expenditure, application for cancellation of registration of value added tax payer. Further documents confirming origin of goods and business associated costs will be required. At present, there is no such list in the Tax Code.

Documentary remote audit of business will be carried out after the official registration of the liquidation procedure. Yevgen Solovyov believes that the draft law still does not solve the underlying problem during termination of activities, which is connected with the timing of regulatory inspections. «Inspections were and will be conducted and their procedure does not ease significantly», says the expert. «If something is to be changed in the legislation, then exact and clear deadlines for inspections of the liquidated businesses shall be set. Otherwise, one can have the liquidation status for a long time against one’s will», emphasizes Volodymyr Kotenko, head of Tax and Law Department of EY in Ukraine.

«We have an example when a client non-resident cannot liquidate a subsidiary company for a year and a half. We have passed inspections of all agencies, except for the tax authorities, which are still unable to initiate the inspection», complains Kneychuk.

Responsible for obligations

The Cabinet proposes inter alia to amend the effective legislation by a rule that liquidation of the company does not terminate obligations to pay taxes and duties acquired by individuals during their activity, and obligations under the contracts. It is noteworthy that in March this year, a draft law with the same rule (No. 2410-1) was registered in the parliament by people’s deputies Ksenia Liapina («Batkivshchyna») and Irina Gorina (Party of Regions).

The document has not yet been considered in the Parliament. «After termination of entrepreneurial activity an individual shall continue to be responsible under his obligations, and the scope of such responsibility shall in no way change», say the deputies. Natalia Dotsenko-Belous, counsel of Vasil Kisil and Partners, noted in the commentary to Capital that the developed draft law is aimed at preventing schemes used by shadow companies or unscrupulous businessmen to defer payments on obligations through the liquidation procedure.
However, in her opinion, the draft law does not completely eliminate all possible loopholes for fraud. «After closing a business the founder is responsible for obligations, noted the expert. However, the draft law does not specify the order of being liable for obligations».

Attorney Evgen Solovyov explains:

In practice, the procedure for closing a business takes a few months at best. The cases, when it takes years, are not an exception. Although the effective wording of the Law of Ukraine «On state registration of legal entities and individual entrepreneurs» provides for the filing and registration of termination by tacit consent if the regulatory authorities failed to conduct timely inspection and did not provide the necessary information. This principle does not work in practice. The regulatory authorities may notify the state registrar of objections to the state registration of termination of a business entity, and in case of such notification the state registrar has the right to dismiss the documents filed by the entrepreneur. Although such notice of objection can be filed by the supervisory authority based on legal grounds, in practice such notifications are filed by the regulatory authorities with regard to almost each entrepreneur discontinuing activity.

The draft law also provides for refusal of state registration of termination of entrepreneurial activity if the Unified State Register has notification provided by the agency of incomes and fees of non-compliance by individual entrepreneur with procedures stipulated by the Tax Code and impossibility of state registration of termination of individual entrepreneur and in the absence of notification of agency of incomes and fees of compliance with the said procedures by individual entrepreneur.

Assuming that currently the regulatory authorities abuse filing such notifications and do so not only in cases provided for by law, but almost always, one can suppose that they will do the same in future.

The only entry on termination will be made in the register rather than making a preliminary entry on the decision on termination of entrepreneurial activity.

Thus, in essence the said amendments ease the liquidation procedure more formally. State registration of termination carried out by the state registrar formally even now takes one day, the said amendments only reverse its stages, as a result the documents are submitted to the state registrar not at the end of the procedure, but at its early stages, and there is no need for pre-filing of documents for recording the beginning of the terminations procedure. The main problem during termination of activity – conducting inspections by regulatory agencies – has not been solved actually, inspections have not been canceled, and the appropriate procedure has not simplified significantly. Application principle of state registration of termination is not actually introduced by the amendments, as there are still certain prerequisites for making the appropriate entry in the register by the state registrar. The procedure will be simplified only if an individual with a specific purpose has to discontinue being an entrepreneur as soon as possible (e.g. occupying certain positions in government authorities or obtaining unemployment benefit), and in cases where the regulatory authorities do not submit the relevant notifications impeding the entry in the register on termination of entrepreneurial activities.

It is advantageous that the amendments, if adopted, will make the whole procedure less complicated, even if the necessary inspections in the regulatory authorities extend in time, it will not affect registration of termination of entrepreneurial activity.

However, not so much amendment of legislation is important, but the need to change the basic approaches of the state, and, accordingly, the willingness to solve this problem by the authorities. While there are the unspoken instructions to fill the budget at all costs and that the entrepreneurial activity is impossible without violations, the inspectors (if they still failed to find violations) will have to propose, e.g. to «forget» that the financial statements were submitted in time, and to sign the documents for at least one or two thousand hryvnia fines, the courts will be forced to make decisions in almost all cases in favor of the state rather than the taxpayers, unless procedure for bringing public servants to personal and inevitable responsibility for delaying the procedures, illegal demands and other violations of legislation is developed and applied, the current situation is unlikely to change significantly.