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Cancellation of Free Economic Zone in Crimea: Implications for Business

Date of publication: 29 October 2015

Oleksandr Denysenko, Attorney at Law

Source: Ekonomichna Pravda

Recently there was news in the press that the law on creation of a free economic zone in the Crimea will be canceled.

It was reported by the President Petro Poroshenko during a meeting with leaders of the Crimean Tatar people Mustafa Dzhemilev and Refat Chubarov.

One possible reason for this decision of the President was beginning of blocking by the activists of all three checkpoints to the Crimea from mainland Ukraine to prevent the supply of Ukrainian goods to the peninsula.

Dzhemilev says that the action of blocking will be discontinued in case of cancellation of the law on FEZ.

Blockade of the peninsula causes significant damage to sellers and carriers of goods, but the chances of getting compensation through the courts are negligible, because the decision on blockade is an initiative of the Crimean Tatar activists rather than state authorities.

What will be the implications of cancellation of this law for business? To answer this question, we should analyze what import and export rules were set forth by the law on FEZ.

The law on FEZ was adopted pursuant to Article 13 of the Law “On securing the rights and freedoms of citizens and the legal regime in the temporarily occupied territory of Ukraine”. It provides that the peculiarities of economic activities in the temporarily occupied territory are regulated by law.

The law of FEZ establishes the legal regime of import and export of goods from the temporarily occupied territory and peculiarities of taxation of such transactions.

The law envisages a number of tax benefits in connection with the introduction of a free economic zone. In particular, income earned by legal entities and their separate subdivisions in the temporarily occupied territory, as well as transactions with other objects of taxation in the territory are exempt from taxation.

Goods are supplied from the territory of FEZ Crimea into other territory of Ukraine for their free circulation according to import customs regime. Supply of goods with customs status of Ukrainian goods from other territory of Ukraine to the territory of FEZ Crimea is equivalent to the export customs regime.

According to paragraph 6.6 of Article 6 of the Law, goods released for free circulation in the temporarily occupied territory of Ukraine are considered as goods originating from Ukraine and move freely to other territory of Ukraine without any duties upon presentation of a certificate of origin from Ukraine issued by Chambers of Commerce in other territory of Ukraine.

Thus, if the law is cancelled, allowances associated with a free economic zone will be cancelled too. However, cancellation of the law will not result in tacit prohibition of import and export of goods. This is due to the fact that the law on the legal regime does not contain prohibitions on economic relations with such territories.

Moreover, if the law on FEZ is cancelled, transactions on import and export of goods will not be considered as export and import transactions. Article 1 of the law on the legal regime 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.

Thus, transportation of goods to the Crimea will not differ from the carriage of the same goods, e.g. from Kyiv to Cherkasy.

Whereas the peculiarities of economic activities in the temporarily occupied territory shall be determined by law, it is expected that after cancellation of the law on FEZ and until approval of a new law the government will introduce a temporary procedure of economic relations with the Crimea.

What remains to be seen are the rules of taxation, import and export of goods from the Crimea envisaged by this procedure and how it will affect business.