The Parliament of Ukraine has recently adopted the Law "On Amendments to Certain Legislative Acts of Ukraine with Respect to the Performance of Production Sharing Agreements" (hereinafter – the "Law"). The Law is now awaiting the President's signature.
The Law regulates relations between the State and an investor with respect to exploration and extraction of mineral resources (including hydrocarbons) based on a Production Sharing Agreement ("PSA") - a contract pursuant to which the State (owner of the subsoil) allows the investor to conduct exploration and production activities at a specific subsoil plot. The extracted minerals are later shared between the State and the investor based on the provisions of the PSA.
The Law provides for the liberalisation of the PSA regime and includes the following amendments:

  • relations of subsoil use in the performance of a PSA shall be governed by the Law "On PSA" (the "PSA Law"), which will prevail over the Subsoil Code of Ukraine. In turn, the PSA Law distinguishes that the following important aspects of a PSA investor's relations with the State will be determined by the PSA itself: (i) amount and procedure for the payment of royalties (subsoil rental payments); and (ii) dispute resolution procedure;
  • the State shall now ensure the issuance of the consents, licences and permits necessary for construction activities under the PSA;
  • profits received by the investor from subsoil use activities under the PSA are exempt from Corporate Profit Tax in Ukraine;
  • production sharing transactions performed by the investor under the PSA are exempt from Value Added Tax in Ukraine;
  • various preferential treatment (i.e. exemption from customs duties, VAT and other taxes) is established for: (i) transactions with goods, services and/or works imported/exported for the purposes of the PSA; (ii) import of hydrocarbons produced under the PSA in the exclusive economic zone of Ukraine; and (iii) export operations with hydrocarbons;
  • any subsoil users which have already obtained the respective special permit for subsoil use and commenced subsoil use activities may switch to the PSA regime (i.e. sign a PSA with the State) without following the mandatory tender procedure, subject to the State's approval;
  • it is expressly provided that the investor's subsoil use rights may be terminated only in the event that: (i) the PSA is terminated; (ii) individuals' lives, health or environment are under threat as a result of activities under the PSA; and/or (iii) the investor has failed to commence subsoil use activities within the time periods established by the PSA;
  • subsoil plots shall be granted to the investor together with the land plot out of state or communal property;
  • a foreign investor (which is a party to the PSA) must establish a representative office in Ukraine within 3 months following execution of the PSA (or within 1 month if the respective investor was appointed as the operator under the PSA);
  • any draft PSAs are now subject to mandatory financial, legal, and environmental review (state expert review) (previously, only capital intensive PSA projects were subject to such extensive review); and
  • previously, the provision of the Law provided for a so-called "stability" clause, i.e. a guarantee that the legislation that was effective at the time the PSA was executed will be applicable to the investor's rights and obligations under the PSA as long as the aforementioned PSA is effective. This provision has now been removed from the Law, however, there is hope that an identical clause, currently contained in the Law "On Regime of Foreign Investment", will still offer the same degree of protection to investors.

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The original publication date for this article was 08.10.2010.