Member Article

On 3 August 2014, Law of Ukraine "On Amending the Tax Code of Ukraine and Certain Other Legislative Acts of Ukraine" No. 1621-VII which was adopted on 31 July 2014 for creating conditions to increase financial inflow into the state budget (the "Law"), came into force. Implementation of the proposed regulations will provide a possibility to boost in 2014 the resources of Ukraine's unified budget for nearly UAH 10.3 bn.

The Law amends the Tax Code of Ukraine, inter alia, with respect to subsoil use payments, in particular:

• the following subsoil use payment rates are temporarily established for the period up to 1 January 2015 as regards extraction of natural gas sold for purposes other than household needs: 55% for gas extracted from deposits at depth of up to 5 km; and 28% for gas extracted from deposits at depth of more than 5 km;
• the following subsoil use payment rates are temporarily established for the period up to 1 January 2015 as regards extraction of oil and condensates: 45% for oil and condensates extracted from deposits at depth of up to 5 km; and 21% for oil and condensates extracted from deposits at depth of more than 5 km.

Please note that prior to adoption of the Law, subsoil use payment rates for natural gas used for purposes other than household needs, were as follows: 28% for gas extracted from deposits at depth of up to 5 km, and 15% for gas extracted from deposits at depth of more than 5 km, while subsoil use payment rates for oil and condensate extracted from deposits at depth of up to 5 km were respectively 39% and 42%, and 18% for deposits at depth of more than 5 km.

It should be added that the Law has abolished preferential subsoil use payment rate for oil and gas production under production sharing agreements which was 1.25% for natural gas and 2% for oil and condensate.

Besides, to stimulate production of natural gas extracted from new wells the Law provides application of a 0.55 decreasing factor to subsoil use payment rates (during two years after such wells are entered into the State Register of Oil and Gas Wells), and stipulates that the tax base is the maximum level of the price for natural gas sold to industrial consumers, which level is to be set by the NERC (rather than the average customs value of imported natural gas, as it was before).

The Law also repeals preferential taxation of profits of electric power companies that produce electricity from renewable sources. The excise tax (EUR 99 per ton) to motor-fuel produced from the alternative energy sources is temporarily established for the period up to 1 January 2015.

Thus, increase of subsoil use payment rates as an interim measure and abolition of certain privileges is caused by the current political situation in Ukraine and could adversely affect the businesses in the energy sector.