Everything You Need To Know About Legalization Of Crypto Assets In Ukraine - Fin Tech

ABSTRACT

In this article you will find the relevant data on the current virtual assets' regulatory status in Ukraine, legislative proposals for legal recognition and taxation of cryptocurrencies transactions, prospects for the development of the Ukrainian virtual assets market regulation, maintenance of its transparency and efficiency and enhancement of economic climate.

Key words: Ukraine, Virtual Assets, Cryptocurrencies, Taxation, Permit, Regulation.

INTRODUCTION

On 8 September 2021, Ukrainian Parliament adopted the draft Law No. 3637 "On Virtual Assets" (the "Draft Law"), which introduces a basic regulation regarding all virtual assets in Ukraine¹. The Draft Law allows both Ukrainian and non-resident companies to provide its crypto-related services under the Ukrainian law. The Draft Law is to be signed by the President of Ukraine and will enter into force once the respective amendments to the Tax Code of Ukraine regarding taxation of transactions with virtual assets take effect.

The Draft Law establishes only general provisions regarding virtual assets' ownership, conduct of business activity related to virtual assets, their circulation, and liabilities.

The Draft Law does not contain a term "crypto asset" but introduces the term "virtual asset" (the "VA") which shall cover any type of crypto asset. Under the Draft Law, a virtual asset means a set of electronic data which has certain value and exists in the system of virtual assets circulation².

GENERAL LEGAL FRAMEWORK

The crucial thing is that the Draft Law defines a VA as just an asset and stipulates that it cannot be used as an instrument of payment or be exchanged for other assets, goods or services³. The Draft Law introduces two types of VA - secured and unsecured virtual assets⁴.

A secured VA means an asset which is secured by fiat currency, securities or any type of offline asset and certifies property or non-property rights, inter alia, right of claim on other objects⁵. This type of assets may include stable coins (namely USDT, BUSD etc.), liquidity provider tokens and securities.

The Draft Law also sets forth the following special terms in respect of secured VAs:⁶

In case the Ukrainian legislation prescribes special terms in respect of the form or essential terms of transaction regarding VA's security, such special terms shall be met during transaction towards secured VAs;
Limitations in respect of circulation of certain assets shall extend to the respective VAs secured by such assets.

Unsecured VAs include all other types of cryptocurrencies and crypto-based assets, namely non-stable coins (Bitcoin, Ethereum etc.), non-fungible tokens etc.

In accordance with the Draft Law, ownership of VA means a right of free possession, management, and usage of VA and the respective key to such VA.

A person is an owner of a certain VA if he/ she possesses a key to the VA. In terms of crypto assets, it means that the right of ownership is substantiated by possession of a certain online or hardware wallet. Exception to this rule applies where (1) key to VA or certain VA is transferred to a third party for storage purposes; (2) VA is transferred to a third party pursuant to the law or under the court order and (3) VA has been obtained by a third party by illegal means⁷.

The Draft Law guarantees participants of VA market certain basic rights: freedom of transaction, the right to receive full information from providers of VA-related services, proper quality of services related to VA circulation, personal data protection and court protection of VA rights.

Apart from the basic rights, the Draft Law also grants participants the right to freely determine VA prices and to open and use bank accounts for VA-related transactions⁸.

It is worth noting that the Draft Law shall enter into force on the date of introduction of amendments to the Tax Code of Ukraine on taxation peculiarities of transactions with virtual assets.

RULES FOR PROVIDERS OF VA-RELATED SERVICES

The Draft Law introduces regulation for commercial services related to secured and unsecured virtual assets. Companies will be entitled to provide the following types of VA-related services⁹:

storage and management of VAs;
exchange of VAs (for another VAs or fiat funds);
transfer of VAs;
intermediary services related to VAs (including initial cryptocurrency offering or sale of Vas).

Any company intending to provide the aforesaid services shall obtain permit in the State Register of Providers of VA-Related Services (the "Register"). Should the company intend to provide several types of the mentioned services, it shall obtain a specific permit for each type of services rendered.

Detailed requirements for the respective permitted procedures will be introduced by the new state body which shall be created within 6 months from the date of the entry into force of the Draft Law (the "State Body")¹⁰.

The Draft Law sets major criteria for companies intending to be providers of VA-related services (the "Provider")¹¹:

executives and founders of an applicant shall have an impeccable reputation as required by AML compliance rules and anti-terrorism laws;
an applicant shall disclose its ownership structure and ultimate beneficiary owners;
an applicant shall develop and implement internal procedures of financial monitoring and other rules regarding AML and anti-terrorism procedures;
an applicant shall develop and implement rules of personal data processing.

The State Body shall decide on the received applications within 30 calendar days¹².

In case of successful registration, the applicant receives a permit to conduct the respective VA-related service for 1 year¹³.

The Provider shall notify the State Body of any changes to the data contained in the Register within 10 business days from the date of such changes¹⁴.

The important thing to remember is that the permit obtained by the Provider may be cancelled in case the Provider committed two violations within one calendar year. Although the Draft Law shall not specify the nature of said violations, it is fair to assume that it implies violations related to VA, AML and anti-terrorism regulations as well as regulations regarding personal data processing.

LIABILITY

The Draft Law shall establish financial liability of Provides for certain violations of the Ukrainian laws, namely¹⁵:

Provision of VA-related services without respective permit – entails a penalty of UAH 34,000 – 85,000 (circa USD 1,300 – 3,300);
Provision of VA-related services other than those for which the permit is obtained – entails a penalty of UAH 17,000 – 85,000 (circa USD 650 – 3,300);
Submission of an information known to be inaccurate or unreliable attached to the application for a permit – entails a penalty of UAH 17,000 – 34,000 (circa USD 650 – 3,300);
Late notification of the State Body of changes to the data contained in the Register – entails a penalty up to UAH 17,000 (circa USD 1,300);
Failure to submit the comprehensive report on VA-related services – entails a penalty up to UAH 34,000 (circa USD 1,300);
Late compliance or failure to comply with decision of the State Body – entails a penalty of UAH 17,000 – 85,000 (circa USD 650 – 3,300);
Failure to comply with requirements for initial VA offering – entails a penalty of UAH 17,000 – 85,000 (circa USD 650 – 3,300).

The said penalties shall apply to violations committed after the expiration of three months from the date of introduction of the Register¹⁶.

TAXATION OF CRYPTOCURRENCIES TRANSACTIONS

In recent years, the Ukrainian tax authorities in their individual clarification letters took the unequivocal position in this regard – cryptocurrencies transactions are treated as the business activity and any income from such transactions must therefore be taxed with 18% personal income tax and 1,5% military levy.

Notwithstanding the above, such straightforward approach is not reflected in the relevant court practice; the total amount of court decisions with reference to the word "cryptocurrency" in their texts are a little over 100¹⁷, whereas most of them relate to criminal or commercial litigation and only a few are tax disputes with regulatory authorities. Such insignificant number of court proceedings shows that the position of the tax authorities is rather idle in this respect and cryptocurrencies transactions may in fact be treated as part of shadow economy in Ukraine.

In terms of legislative initiatives, the latest draft law¹⁸ submitted to the Ukrainian Parliament for consideration on amendments to the Tax Code of Ukraine regarding taxation of transactions with crypto assets sets forth the following taxation rules:

income from cryptocurrency transactions, defined as the positive difference between the income received by the taxpayer from the sale of cryptocurrencies and the costs associated with their acquisition and/or creation, shall be imposed with 18% corporate income tax (for enterprises);
for individuals, investment income from the sale of cryptocurrencies shall be imposed with 5% personal income tax (for a period of 5 years);
sale of cryptocurrencies as well as intermediary services related to the creation and circulation of VAs shall be considered as non-taxable with the Ukrainian VAT.

FURTHER LEGISLATIVE WORK

Considering that the Draft Law shall establish only general provisions regarding transactions with VAs, detailed regulations as well as oversight of the VA market shall be exercised by the State Body, the National Bank of Ukraine and the National Securities and Stock Market Commission of Ukraine.

The State Body will be responsible for future policymaking, normative work, control over VA circulation, rulemaking for providers of VA-related services, defense of rights of VA market participants, imposition of penalties and oversight of participants' compliance with AML and anti-terrorism rules, and consider cases of violation of VA-related legislation and also issue penal notices and charge penalties if necessary.

CONCLUSION

In the face of the worldwide emerging virtual assets market, Ukraine is becoming one of the first states to adopt clear and precise legislation. Transparent regulation of virtual assets would allow potential players to compete in the Ukrainian market without prejudice to the judicial remedy for offences against their ownership rights on virtual assets. The entry into force of the Draft Law and introduction of the corresponding amendments to the Tax Code of Ukraine are also expected to enhance the investment climate by strengthening confidence of domestic and foreign investors due to the introduction of unified rules for the circulation of virtual assets in Ukraine, reduce the share of the shadow economy associated with investments in virtual assets, and help create the necessary and yet quite sufficient prerequisites for attraction of additional revenues to the State Budget of Ukraine.

Footnotes

1. Online card of the draft Law "On Virtual Assets", https://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=69110

2. Article 1 paragraph 1 of the draft Law of Ukraine "On Virtual Assets".

3. Article 4 paragraph 7 of the draft Law of Ukraine "On Virtual Assets".

4. Article 4 paragraph 1 of the draft Law of Ukraine "On Virtual Assets".

5. Article 1 paragraph 4 of the draft Law of Ukraine "On Virtual Assets".

6. Article 8 of the draft Law of Ukraine "On Virtual Assets".

7. Article 6 paragraph 3 of the draft Law of Ukraine "On Virtual Assets".

8. Article 9 paragraphs 4 and 7 of the draft Law of Ukraine "On Virtual Assets".

9. Articles 10, 11, 12 and 13 of the draft Law of Ukraine "On Virtual Assets".

10. Article 16 of the draft Law of Ukraine "On Virtual Assets".

11. Article 17 paragraph 6 of the draft Law of Ukraine "On Virtual Assets".

12. Article 20 paragraph 8 of the draft Law of Ukraine "On Virtual Assets".

13. Article 20 paragraph 8 of the draft Law of Ukraine "On Virtual Assets".

14. Article 20 paragraph 15 of the draft Law of Ukraine "On Virtual Assets".

15. Article 24 paragraph 1 of the draft Law of Ukraine "On Virtual Assets".

16. Paragraph 2 of the Chapter 6 of the draft Law of Ukraine "On Virtual Assets".

17. According to the Ukrainian Unified State Register of Court Decisions: https://reyestr.court.gov.ua/.

18. Online card of the draft Law "On Amendments to the Tax Code of Ukraine and other laws of Ukraine on taxation of transactions with crypto assets", http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=67423

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ukraine: Everything You Need To Know About Legalization Of Crypto Assets In Ukraine