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Senior Manager, Tax & Law, EY Ukraine.
Bogdan Malnev has over 8 years of professional experience. Bogdan specializes in M&A and financing, due diligence, business structuring and restructuring, advice on regulatory (including currency control) matters with a particular focus on IT, agricultural, e-commerce and a number of other industries
Ukrainian E-Commerce Market: The Legal Dimension
Key Market Trends: Growth and Expansion of Marketplaces
The Ukrainian e-commerce market seems to be entering the post-crisis rebound mode. The 2017/2018 winter holiday season brought record results for Ukrainian online retailers. The Black Friday phenomenon seemed to finally take root, with many stores reporting triple digit sales growth during the discount campaign.
One of the key drivers of the growth is sustained expansion of the online marketplaces. Olx, Prom.ua and bigl are some of the leading marketplaces, while Rozetka, the traditional e-commerce leader, has added and actively developed marketplace functionality within its online platform.
In line with the general market conditions, the e-commerce segment of the Ukrainian M&A market remains weak after 2014 crisis. Even before the crisis the market showed considerable level of consolidation. Together with low investor appetite for risky investments in Ukraine, this ensures that the market remains quite still.
A noteworthy transaction was Rozetka’s 2017 acquisition of a major A class warehouse in Brovary.
Marketplaces: Legal Considerations
Unlike a traditional online store, a marketplace allows the customer to purchase goods from multiple sellers via a single user interface, with the marketplace’s online platform only acting as an intermediary between vendors and customers.
Basic Legal Framework
The marketplace complicates the straightforward seller-purchaser relationship, creating a “triangle” by adding the marketplace, or “platform” into the mix. In fact, what this means is that the functions borne by the store in the traditional model are split between the marketplace and the vendor.
There are variations of the model, each creating different kinds of headaches for the participants and their lawyers who have to marry the business model with the
Ukrainian legal reality. For example, the marketplace may or may not:
— be responsible for fulfillment, including storage and delivery of the products
— act as a payment intermediary
— offer a money-back guarantee to the customer
— provide call center and product support, etc.
Considering that part of the functions (including the key matters like supplying the products and legally being the seller of the product) are borne by the vendor, it is important to draw a clear legal and practical line between the zones of responsibility of the vendor and the platform. The identity of the vendor must be clearly communicated during ordering; otherwise the customer may understandably have a claim to the marketplace as the vendor of the products. Giving this matter insufficient thought may expose the marketplace to legal risks resulting from the vendor’s misconduct, which is exactly what marketplace would want to avoid.
Crucially, in the eyes of the customers
the marketplace is usually their counterparty, the “place” where they make the purchase. This means that at least from the reputational standpoint the marketplace remains responsible for the whole customer experience. Thus, the online platform must include effective background checks and controls on the vendors to weed out unscrupulous sellers. The rules of conduct must be clearly indicated in the contract between the marketplace and the vendor and should give the platform the proper instruments to deal with any offenders.
One question that has to be answered when the marketplace is set up is how the relationship between the vendor and the platform is structured. Possible options (which are actually not altogether mutually exclusive and are sometimes creatively combined) include:
— The marketplace provides “access to IT platform” services, plus fulfillment/payment processing if this is offered by the marketplace.
— The marketplace licenses out the intellectual property (e.g., trademarks, website, etc.) to the vendor.
— The marketplace acts as an agent or commissionaire.
Each of the options has its merits and the choice must be made individually for every platform. The agency/commission model leads to the biggest legal exposure of the marketplace to the customer and is the least tax efficient.
Currently, marketplaces in Ukraine ge-
nerally elect not to get involved in handling payment for the products by the customer, leaving this to be handled by the vendor.
Many global e-commerce platforms offer the customers their services as intermediaries, e.g., to guarantee fulfillment by the vendor (basically, money is released by the marketplace to the vendor only after the product is delivered).
However, implementing this in Ukraine would be problematic. Under Ukrainian law acting as a payment intermediary is considered a financial service, which means it can only be done by a financial institution. This makes offering this service unpractical for many marketplaces. Implementation of this offering requires complex legal structuring.
Legal Issues Affecting Ukrainian E-commerce Market in General
E-commerce is generally governed by the Civil Code of Ukraine, as well as a number of regulatory acts (notably, the Law On Protection of the Rights of Consumers). In 2015 a dedicated Law On Electronic Commerce was also adopted, which was intended to lay down the legal framework for e-commerce, particularly, by regulating execution of online agreements between vendors and customers.
Still, there are a number of problems in the applicable regulatory framework.
Use of Fiscal Cash Registers and Cash Collection
2017 saw several changes to the laws and regulations that made the use of fiscal cash registers mandatory for most sales. Exemptions are limited. Individual entrepreneurs who are unified tax payers of the second and third groups are exempted as long as their annual revenues do not exceed UAH 1 million but the exemptions do not
apply to sales of technically complex household products.
The regulations on the use of fiscal cash registers are still poorly tailored to e-commerce. Particularly, it is unclear at which moment the fiscal receipt must be printed and how it should be provided to the customer in the context of the e-commerce online order and delivery process. The law still does not provide for a possibility of an online fiscal receipt or a digital copy — it must be physically printed and delivered to the customer. This is an issue for online vendors as 1) if there is prepayment via a banking card, there is a disruption between payment and delivery, 2) vendors mostly use third-party service providers for delivery, who may have nothing to do with collecting payments and issuing fiscal receipts.
If the customer pays in cash, there is also an issue of how the cash is collected.
As already noted, most vendors use third party providers for delivery. In case of a cash payment the provider also effectively undertakes the function of collecting the cash and transferring it to the seller. This creates the risk that the logistics services provided may be deemed to act as a financial intermediary (subject to financial services compliance) or a trade intermediary (subject to customer protection and tax issues). Careful legal structuring is required to minimize this risk.
Ukrainian online retailers are facing increasingly stiff competition from global online stores and marketplaces like Amazon, eBay and Aliexpress. On the other hand, a number of online vendors (particularly, small ones operating through marketplaces) have started selling products to Ukrainians directly from warehouses abroad.
This situation is, particularly, the result of a rather high threshold for the value of goods which must be exceeded for a delivery from abroad to be subject to taxation on import to Ukraine (EUR 150 per delivery). Note that starting in 2019 only up to three postal deliveries with aggregate value of EUR 150 per one customer should be tax free (subject to customs controls that are yet to be implemented).
Compliance with Personal Data Protection Regulations
E-commerce necessarily involves processing of personal data of the customer. This means that Ukrainian personal data protection laws apply.
Under the general rule, Ukrainian personal data protection laws require the individual data subject to give consent to the processing of their personal data. The law does contain some important exceptions, inclu-
ding processing in the context of a transaction to which the data subject is a party or a beneficiary. However, this legal ground may not be sufficient, especially in the context of complex data structuring arrangements, often involving multiple processors/third parties and cross-border data transfers, that are typical of e-commerce. Thus, it is a good practice to take data processing consents from the data subjects. Changes to the law made several years ago made the requirements to the form of such consents less strict — now they can be made in any form that allows the conclusion that the consent has been given (previously written form was strictly required).
Please also note that in May 2018 the new EU General Data Protection Regulation (GDPR) came into effect. GDPR takes protection of individuals’ personal data to a new level, granting the data subjects a broad set of rights. GDPR generally applies where activities of a controller or a processor are in the EU or the processing is related to offering of goods/services or monitoring of behavior that takes place in the EU. So far GDPR has not been transposed into Ukrainian laws, and thus should generally not apply in Ukraine. Still, GDPR may need to be taken into consideration in certain cases, particularly where Ukrainian online retailers expand to European markets or where the business structure involves elements (companies, warehouses, IT resources) that take place in the EU.