On 21 May 2009 the Parliament of Ukraine passed the law "On amending certain laws for incentivizing production and utilization of biological fuel", stimulating the production of bio-fuel ("Law 1"). Law 1 was signed by the President and came into force on 19 June 2009 with its official publication.

On 19 June 2009 another piece of legislation – the law of Ukraine "On Coal Gas (Methane)" ("Law 2"), also came into force. Law 2 establishes a general framework for the exploration and utilization of natural gas from coal deposits and coal mine waste sites in Ukraine and facilitates the development of related business activities.

Bio-fuel

Generally, Law 1 has introduced a number of definitions (biomass, bio-fuel, biogas, etc.) which are reasonably required to further develop alternative energy market regulation. Law 1 also provides vast financial incentives for bio-fuel production.

The new law puts an end to the monopoly of state enterprises on bio-fuel, particularly, bio-ethanol production. Bio-ethanol can be manufactured by any business entity with a respective license. Motor gasoline with bioethanol and/or an ethyl-tert-butyl ether (ETBE) component may be produced by the enterprises that are on the list approved by the Cabinet of Ministers.

Manufacturing, storage and trade of biogas and bio-fuel shall be subject to licensing; moreover bio-fuel manufacturers must be registered with the competent authorities and properly account for bio-mass and bio-fuel components.

Law 1 exempts from the customs duty imports of equipment used for reconstruction of currently available and construction of new bio-fuel production facilities as well as for construction or reconstruction of equipment and transport vehicles powered by bio-fuel. The same applies to equipment and transport vehicles (including agricultural) powered by bio-fuel. Such equipment and vehicles may be exempt from customs duty, if similar equipment is not produced in Ukraine and as long as the respective equipment is used by the importer for the declared purposes. This exemption will be effective as of 01 January 2010 and will run until 01 January 2019.

Starting from 01 January 2010 until 01 January 2019 import of the aforesaid equipment and vehicles will also be exempt from value added tax ("VAT") at 20%. VAT exemption will be also applicable to domestic transfers of the abovementioned equipment and vehicles.

No less significantly, within 10 years starting from 01 January 2010, the profits gained by business entities from the following business activities shall not be subject to corporate profits tax ("CPT") at 25%:

  • profits of bioethanol manufacturers gained from sales of bioethanol;
  • profits gained from co-generation under condition of bio-fuel utilization;
  • profits gained by manufacturers of the equipment and vehicles operating on bio-fuel from their sales in Ukraine.

Furthermore, Law 1 allows "bonus" amortization of the newly commissioned fixed assets. The costs for acquisition of the equipment operating on alternative energy sources or facilities for production of alternative fuels may be deducted by up to 50% of the book value in the reporting period in which they were put into operation.

Law 1 further establishes that for the period from 01 January 2010 till 01 January 2014 excise tax shall apply at a 0 % rate to:

  • ethyl spirit acquired by a licensed manufacturer for production of bioethanol; and
  • bioethanol acquired by manufacturers for production of biofuel.

According to Law 1 statutory obligation to pay excise duty can be postponed by a 90 day promissory note and discharged upon confirmation of proper disposal of the acquired raw materials.

A zero rate on excise tax shall also apply to gasoline pro rata to their bio-fuel component.

Coal mine gas

Law 2 declares "on the spot" coal mine gas utilization and its pipeline transportation as main development trends. Law 2 does not address gas conversion into electricity or heat – this is subject to the laws on energy.

According to Law 2 coal mine gas exploration within currently valid mining allotments may be carried out by an authorized user of subsurface resources under special permit or by other business entities under written consent of an authorized user of subsurface resources.

A special permit for coal mine gas exploration and utilization on free land plots of coal mines is granted under the tender with UAH 0 as a starting price. The businesses that explored subsurface resources at their own costs are entitled to get a special permit for industrial extraction without tender.

Law 2 introduces an obligation of the user of subsurface resources to insure to possible damages from the gas exploration and utilization process.

Furthermore Law 2 obliges the authorized user of subsurface resources upon completion of gas exploration and utilization to carry out destruction or conservation of methane drainage boreholes and technical boreholes, or their transfer to other business entities for their further exploitation.

Law 2 exempts profits gained from coal mine gas exploration and utilization from CTP starting from 01 January 2010 till 01 January 2020. However, the monetary funds released due to the above exemption shall be used for production volume increases, renovation of the material and technical base, and implementation of modern technologies related to coal mine gas exploration and utilization.

It is noteworthy that some of the abovementioned tax exemptions shall also apply to equipment and transport vehicles operating on alternative energy sources other than bio-fuel.

Law 2 also establishes administrative fines from 100 to 2000 non-taxable individual incomes (current equivalent of EUR 150 to EUR 3000) for violations in the field of coal mine gas exploration and utilization.

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.