Since January 1, 2017, Ukraine has joined the extended cooperation program within the framework of the OECD and has committed to implement the minimum BEPS standard. Having signed the integration agreement with the European Union in 2014, Ukraine also committed itself to implementing EU legislation. After a while, these obligations were reflected in the wording of draft laws No. 2179 and 1210 adopted by the Parliament of Ukraine.
New financial monitoring rules and amendments to the Tax Code of Ukraine that have recently come into force have already significantly affected the Ukrainian real estate market, transferring more verification and notification functions to private businesses. Now they have to decide which customers to provide services to and who to refuse due to non-compliance with the control rules.
It is important to keep in mind that the real estate market is not limited to developers, investors and sellers. In addition to them, realtors are also involved in this sector, providing property owners with stable leasing of their properties. So are notaries, who execute and register transactions. Banks that provide financial transactions, development companies, architectural firms, companies that sell building materials, and many others are also involved. And for most of them, the rules of doing business have already changed.
And first, it is necessary to understand the essence of the new rules for private business.
First of all, the amount, after exceeding which mandatory financial monitoring is carried out, has been increased from UAH 150,000 to UAH 400,000
The law has expanded the range of persons who are required to conduct primary financial monitoring, in particular, these functions are now assigned to:
- Notaries;
- Business entities that provide intermediary services during the purchase and sale of real estate, as well as business entities that provide consulting services for remuneration that are related to the purchase and sale of real estate;
- Accountants, business entities providing accounting services;
- Business entities providing tax advice;
- Business entities providing legal services.
Special attention should be paid to the inclusion of lawyers and solicitors in this list.
The law defines the cases in which lawyers and solicitors are required to conduct primary financial monitoring, and this list includes participation for or on behalf of the client in any financial transaction, and/or assistance to clients in planning or performing transactions for:
- the purchase and sale of real estate or property management in housing finance;
- the purchase and sale of business entities and corporate rights;
- managing clients’ money, securities, or other assets;
- opening and/or managing a bank or securities account.
Therefore, this list includes almost the entire range of legal services in real estate transactions. This means that now most buyers and sellers of real estate who involve lawyers to support their real estate sale and purchase agreements will first have to provide a full set of documents confirming the origin of the funds necessary for the purchase of a particular object.
Amendments affected also the real estate agents and notaries. In Ukraine, there is already a resolution of the NBU, according to which any settlements between individuals exceeding 50,000 UAH for purchase and sale transactions subject to notarization, should be made only by bank transfer. At the same time, notaries did not have the authority to check the settlement between the parties, it was enough to confirm that the settlement took place. Now, as with law firms, clients will need to confirm to notaries the origin of the required amount of funds.
Moreover, legislative amendments have obliged many businessmen not only to check their clients. From now on, realtors and notaries are required to notify the tax authorities of each concluded lease agreement. Thus, according to the law: “Violation by a business entity that performs intermediary activities related to the provision of real estate rental services (realtor), of the order and/or terms of submission of information about the conclusion of a civil law agreement (contract) on the rental of real estate through its mediation – shall entail a fine of UAH 680 for each such violation.” But it should also be taken into account that the real estate rental market will be affected not so much by fines in the amount of 680 UAH, as by the growth of notification of tax authorities about concluded rental agreements, which will lead to an increase in prices for the cost of rented property, due to the need to cover the costs of paying taxes. However, this growth may be offset by the global crisis that has already begun.
These are not all the amendments that came into force together with the new laws, and against the background of the global crisis it is still difficult to say whether they entail higher prices for services in the real estate market. But we can say for sure that such amendments will be more costly for performers.
At the same time, it should also be recognized that the law is progressive in some aspects and implements the European standards of service provision in Ukraine. Working in the EU real estate market, I can say for sure that mandatory compliance is a necessary procedure to start working. It should also be understood that verification of the origin of funds has always been a mandatory procedure for banks. But now these control functions are available to individual companies, work with which begins before the payment is made in the bank, and thus they have the opportunity to better prepare customers for this procedure, and to screen out those who do not comply with these rules from the beginning.
The adopted versions of these laws raise many questions, but one thing is certain — they are only an intermediate step in a large-scale change in the tax architecture and standards of service provision. And instead of rejecting and not accepting new rules, business in general, and the real estate sector in particular, should focus on ensuring that the new requirements are consistently met.
