Disclosure of Information on Beneficiaries of Companies in Ukraine
Ernest GRAMATSKIY
President of Gramatskiy & Partners Attorneys at Law
PROfile
Gramatskiy & Partners
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Gramatskiy & Partners is known as a trustworthy law firm, which has been successful in provision of legal assistance to its clients in various areas of law since its foundation. Gramatskiy & Partners is recognized as one of the leading law firms in Ukraine introducing high standards of legal services and performing exceptional proficiency.
From the moment of its foundation in 1998, Gramatskiy & Partners has acknowledged business legal practice as its own professional vocation and a mission of its serving to the public. The unique experience of a vast legal practice allows the firm to advise today more than a hundred of Ukrainian and foreign companies providing complex aid and assistance in legal matters, combining classic legal practice traditions with modern international standards of the legal services market.
Being a universal law firm, Gramatskiy & Partners has made its name in a capacity of a qualified provider of comprehensive legal service. Combination of scrupulous approach and customer-centered orientation in terms of rendering legal assistance enables the firm to individualize a wide range of its services for business of every certain client.
For more than 17 years Gramatskiy & Partners has been successfully developing its practice in the field of business (commercial) law, foreign economic activity, and the practice of international private law.
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The firm’s experts provide tailor-made advice on many different practice areas, including commercial, corporate, tax, foreign economic activity and foreign investments, copyright, mass media, labor, securities and stock market, disputes resolution, mediation, insolvency. Furthermore, many of the firm's clients have been successfully represented before public authorities and courts in civil, commercial, administrative and criminal cases.
Pragmatism and practical orientation are among distinctive features evinced by Gramatskiy & Partners in all the projects it was involved in; the firm bears responsibility for every memorandum and for every legal opinion, presented to the client. Gramatskiy & Partners structures and describes every legal procedure, as if the firm itself were to implement it in practice.
In addition Gramatskiy & Partners pays special attention to the issues of confidentiality of the proj-ects in which it assists because the law firm realizes the importance of information secrecy for the clients.
Effective business conduct and commercial activity management of the company in general implies appropriate organization of corporate structure and corresponding information policy as a necessary prerequisite. In this regard, besides the making up of internal corporate regulation of the legal entity (by means of formation of the Articles of Association on the basis of provisions of the Civil Code of Ukraine, the Economic Code of Ukraine, the On Business Associations Act of Ukraine, On Joint-Stock Companies Act of Ukraine; introduction of internal administrative regulations and rules of corporate ethics), it is necessary to pay special attention to issues of public disclosure of information on governing bodies, founders of the company and persons who have influence on decision-making and distribution of the incomes of the legal entity.
In Ukraine it has become a matter of topical interest in view of dramatic change of legal regulation in the sphere of disclosure of information on “owners” of companies registered in accordance with the law of Ukraine. If formerly, when submitting constituent documents for registration or for modification to the state registrar only the founders were indicated — formal owners of shares, now in Ukraine there is a need to open additional, more detailed data on persons who control direct founders or significantly influence activity of the company. What new data is at issue?
Innovations in procedure of information disclosure: what should business expect?
On 14 October 2014, the Ukrainian Parliament enacted the On Amending to Certain Legislative Acts Related to Identification of Ultimate Beneficiaries of Legal Entities and Public Officials Act of Ukraine No. 1701-VII (hereinafter — the Act), which came into effect on 25 November 2014. According to the Act, companies registered in Ukraine (not only existing but also newly established) are obliged to disclose information on their final beneficiary (hereinafter — the Beneficiary), including information on the Beneficiary of their founder if the founder is a legal entity. In other words, the question is about emergence in Ukraine of a lawful duty of the management of the company to report the government bodies when conducting any (!) registration actions on full chain of legal entities — holders of the corporate rights of the company and all subsequent legal entities (irrespective of their jurisdiction) up to a private person.
It is defined by the Act that Beneficiaries are private persons who, irrespective of formal possession(!) have the opportunity directly or through other persons, to carry out decisive influence on management or economic activity of the company directly or through other persons, in particular by realization of the right of possession or use of all assets or their considerable part, the right of decisive influence on formation of structure, the results of voting, effecting transactions defining conditions of economic activity, opportunity to give obligatory instructions or perform functions of governing body, or have an opportunity to have influence by direct or indirect (through other private or legal entity) possession independently or together with related private and/or legal entities of shares in the legal entity at the rate of 25% and more of the authorized capital/shares/votes (Paragraph 20 Clause 1 of Section 1 the On Preventing and Countering Illegal Money Laundering, Funding of Terrorism and Distribution of Mass Destruction Weapons Act of Ukraine of 14 October 2014 No. 1702-VII).
Herewith agents, nominal holders (nominal owners) or intermediaries in exercising rights of the owner or manager are not considered Beneficiaries.
Besides, information on the structure of property of founders — legal entities which give a chance to identify private persons — owners of essential participation in the company is subject to obligatory disclosure. Essential participation is direct or indirect possession of shares at the rate of 10% or more of the authorized capital/shares/votes in a legal entity through either direct or indirect influence on it.
The heads of Ukrainian companies, irrespective of their organizational and legal form, are obliged to identify their final Beneficiaries, regularly update and store information on them, and also to provide the state registrar with it (at primary registration, and also at any changes submitted earlier information on their Beneficiaries).
Requirements on disclosure of information on final Beneficiaries are already acting in full when registering new legal entities. As for the companies registered before the Act came into effect (before 25 November 2014), they have to submit to the state registrar information on the Beneficiaries and on the Beneficiaries of their participants/shareholders, within 6 months from the effective date, that is, not later than 25 May 2015. Previously, the necessity to name beneficiaries (or rather only participants of the company with essential participation in the form of a share not less than 10%) existed only at primary registration of Ukrainian companies.
What Data will the Ukrainian Register Include?
The Unified State Register of Legal Entities and Private Persons-Entrepreneurs in Ukraine should contain information on Beneficiaries and owners of essential participation in a legal entity as follows:
— surname, name, patronymic (if any);
— country of citizenship;
— passport data (series and number of the passport of the citizen of Ukraine or foreign passport document);
— residence;
— tax ID number (if any).
Hitherto a separate subordinate procedure of information submission on Beneficiaries was not approved, however, amendments are already made to the standard forms which are to be filled in and filed to the state registrar when establishing a company or making amendments to its constituent documents. In the near future additional subordinate acts should be adopted, the same as detailed explanations from Ukrainian government bodies — regulators concerning provisions of the Law and compliance procedure.
It is worth paying attention to the fact that at the moment the Law does not require any confirmation of the submitted data on Beneficiaries and persons with essential participation. That is, at the time of submission they are not verified by the state registrar, and are entered at once in the state register.
It is unlikely that the registrars will check the submitted data in future. However, their further check by law-enforcement authorities is possible with the use of: international multilateral agreements on exchange of information (for example, Conventions of Council of Europe and OECD on mutual administrative aid in tax issues); agreements on avoidance of double taxation; — intergovernmental and interdepartmental agreements; information available from open sources.
The question remains open on whether the information on beneficiaries will be available to the public at large (first of all, on the site www.irc.gov.ua where key data on legal entities are placed), whether excerpt/extract from the state registrar on the company will contain data on beneficiaries, or access to this information for the use of government bodies remain closed nevertheless. If it is not then one of the main risks the law-abiding companies face is leakage of the information provided to the government body.
Serious Difficulties, or Simple Change of the “Rules of the Game”?
On the one hand, such radical changes of the rules of disclosure of corporate structure cannot but have an essential impact on Ukrainian business and on foreign investors. According to Article 166-11 of the Code of Ukraine On Administrative Offenses for not submitting information on the beneficiary by a legal entity to the state registrar — the administrative penalty in the amount of from UAH 5,100 up to 8,500 can be imposed on the head of the company (registered in Ukraine). At the same time, so far such responsibility extends to the facts of failure to submit data. However, there are cases when a director does not physically know the final real Beneficiary–the private person in another jurisdiction (especially when such information is not disclosed under the legislation of such jurisdiction).
It is possible to say that no drastic changes in Ukrainian legislation have occurred and the practice of implementation of requirements of the Law in 2015 will allow legal consultants of companies to answer all their challenges. There is no doubt that benefits of creation and use of flexible corporate structure significantly outweigh possible inconveniences from any kind of disclosure of information on founders and beneficiaries.
Considering frequent changes to the legal framework of activity of legal entities in Ukraine, the coordinated use of all existing instruments of local corporate regulation and creation of optimum in time corporate structure will enable provision of accurate interaction between governing bodies of the legal entity with reasonable disclosure of data and protection of the rights of founders, shareholders as well as investors in the company.