Recently Ukrainian Parliament took several steps to improve tax
regime for production of oil and gas:
Reduction of Royalty Rates for Oil
On 20 December 2016 the Parliament adopted Draft Law No. 5132
"On Amendments to the Tax Code of Ukraine with Respect to
Ensuring the Balance of Budget Revenues in 2017" as part of
the 2017 Budget Laws package. The Law entered into force on 1
This Law introduces reduction of royalty rates for oil
production. In particular, the royalty rate for production of oil
extracted from deposits that lie entirely or partly at depths of up
to 5,000 metres constitutes 29%(earlier 45%) and of oil
extracted from deposits that lie entirely at depths of more than
5,000 metres constitutes 14% (earlier 21%) of the value of
Municipal Budgets Will Get Part of
Another legislative act adopted as a part of the 2017 Budget
Laws package is the Draft Law No. 3038 "On Amendments to
the Budget Code of Ukraine (on organizing incomes and use of funds
from royalty payments for the subsoil use to produce oil, natural
gas, and gas condensate)". This Draft Law is pending the
signature of the President of Ukraine. In case of signing the new
Law will enter into force on 1 January 2018.
The Draft Law provides for assigning 5% of royalty, approx. USD
2 billion according to the law makers, as an additional income to
municipal budgets. Under the effective legislation, 100% of
obtained royalty payments are passed directly to the state budget.
In accordance with the Draft Law No. 3038 the state budget will
receive 95% of the revenues and the remaining 5% will be
distributed among the territories where the subsoil is used.
This development could lead to the increase of investments in
this sphere. In Ukraine local authorities have powers to issue
approvals for exploration and production of oil and gas. The
additional income from royalty payments for the subsoil use to
produce oil, natural gas, and gas condensate may serve as an
incentive to such authorities when providing the necessary
Liberalization of Royalty Mechanism under Production
On 21 December 2016 the Parliament adopted the Law of Ukraine
"On Amendments to the Tax Code of Ukraine (on development of
investment climate of Ukraine)" No. 1797-VIII, which came into
force on 1 January 2017.
The previous revision of the Tax Code of Ukraine has foreseen
that parties of the Production sharing agreement ("PSA")
could agree on the royalty rate in the PSA, provided it is not
lower than royalty rate envisaged in the Tax Code, applicable under
a general regime. The current revision of the Tax Code does not
include the requirement of the minimum amount of royalty payment in
the PSA, consequently parties of the PSA are free to agree the
amount of royalty payment by themselves without any
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