Draft Law of Ukraine

"On Amendment of the Law of Ukraine "On Production-Sharing Agreements"

The draft suggests adding the list of criteria according to which a certain subsoil area is to be included into the List of Subsoil Areas (mineral deposits), that may be allocated into use on conditions stipulated by production-sharing agreements (hereinafter referred to as "the List"). The present criterion is the necessity to attract non-governmental investment into deposits, which are being explored, for support or expansion of the existing volumes of minerals extraction.

The draft envisages establishing that quarterly share of the compensation production in extraction of oil and natural gas can not exceed 70% of the general volumes of production in the settlement period until full recovery of the investor's expenditures. The current wording of the Law of Ukraine "On Production-Sharing Agreements" applies this norm to any production.

The draft also suggests canceling the norm, according to which recovery of expenditures is performed through transfer to the investor of ownership rights to the compensation production.

In case the investor's object of taxation upon results of a tax period has a negative balance (taking into account amortization deductions) the amount of such negative balance is to be included into gross expenditures of the first calendar quarter of the next tax year.

Transactions on transfer of property by the parties to a production-sharing agreement into use to the operator within such agreement, as well as transactions on distributing compensation and/or profit production between investors is exempted from taxation by the value added tax.

In case of an authorized state body selling production, transferred by the investor as payment of taxes at a price, which is lower, than the price mentioned in tax return and the deed on acceptance and conveyance, that is the funds obtained from such sale do not cover the amount of tax liabilities of the investor, the investor does not gain any tax liabilities and tax debt.

The draft, if approved, will permit increasing the share of foreign investment attracted to Ukraine. Apart from that, the draft will regulate the procedure, terms and mechanism for replacing calculation and payment of taxes by production sharing in favor of the state, remittance of mandatory payments in kind.