“With the High-priced “Entry Point”, Subsequent Taxation Has to Be Commensurate,” Managing Partner at Stron Legal Services Oleh Derlyuk
What is the specifics of gambling business taxation envisaged by the draft law 2285-d? What foreign tax rules are the most beneficial for business development? What experience is useful to adopt for Ukraine? Managing Partner at Stron Legal Services Oleh Derlyuk told about all of it in the interview for Ukrainian Gaming Week.
Oleh has seven years of experience in tax structuring and consulting. He has been holding the position of managing partner at the international law firm Stron Legal Services for two years. He has successfully realized over 70 fintech, e-commerce, and IT projects.
Interviewer: Ukrainian Gaming Week (UGW)
Respondent: Oleh Derlyuk (О. D.)
UGW: What types of tax will gambling business have to pay according the draft law 2285-d? Is this approach constructive in your opinion?
О. D.: This draft law envisages the introduction of a compulsory license, which has to be renewed every five years. It costs 60,000 minimum salaries for casinos in Kyiv, 30,000 minimum salaries for bookmakers, and 28,000 for lotteries. It divided many people into two camps: those who believe that the sum is unsubstantial for casino owners in the light of their revenues, and those who state that the sum will cause many casinos to go in the shadow again.
In fact, one should not consider license fee as the only and independent investment of gambling business in its operation. Therefore, to answer the question of how tough this requirement is, one should also consider the proposed taxation of gambling business overall.
In other words, with the high-priced “entry point”, subsequent taxation has to be commensurate. For now, what one can expect of this draft law is a high cost of licensing and high taxes on gross gaming revenue (GGR), allegedly 18%, as well as income tax according to suggestions of some deputies of the Ukrainian parliament.
Many European countries with developed legislation and taxation were reaching the current level for long years, but not straight away. For this reason, I do not think that one can expect a positive response of the Ukrainian gambling business to the changes offered in the draft law.
UGW: What EU countries offer the most beneficial tax rules for the development of gambling business?
О. D.: Looking at the general picture, I can safely mention the UK as the country with the most favorable taxation for both gambling operators and their customers. Despite the number of regulators, rules, and requirements to gambling business, the British government is rather liberal in this question as compared to other EU countries.
In the UK, gambling business owners have to pay 15% tax on GGR, and winnings of players are exempt from taxes. The tax rate of 15% can seem not so small, but it is very beneficial compared to other EU countries. In the Netherlands for example, gambling business operators pay 29% tax on GGR, and they have to contribute 1.5% to the Gaming Authority and 0.25% to the addiction fund. Besides, taxes on winnings depend on the sum.
In Sweden, the GGR tax rate is 18%, but winnings are exempt from tax. The situation is worse in Greece with 35% tax rate; and Italy offers 22%. In countries that require gambling businesses to acquire licenses and at the same time, to pay taxes, the cost of license does not exceed several tens of thousands of euros.
The situation with online casinos in Europe is somewhat different, as many operators prefer the jurisdiction of Malta due to its beneficial terms such as 5% GGR tax rate, the cost of license from €10,000 to €25,000 and low administrative expenditures.
UGW: How can Ukraine use the foreign experience of gambling industry taxation?
О. D.: As I have already mentioned, foreign experience shows that it is important not to make the cost of license too high and not to impose different taxes on the income of gambling facilities straight away, making conditions unbearable for most of gambling business owners. Again, this can lead to the situation when most facilities return in the shadow and continue to avoid taxes and licensing.
UGW: Is it reasonable to introduce a tax on winnings in our country? Why?
О. D.: Cancellation of the tax on player winnings is an important aspect of this draft law. Amendments to the law offer to reduce the tax on winnings to 0% as compared to 18% we have now. The lower the tax on winnings is, the more people are interested in it. In other words, it will allow attracting tourists to gamble in Ukraine instead of going to jurisdictions that impose tax on winnings. Nobody likes to share winnings compulsorily, which is the main factor that can scare away potential investors.
UGW: What legal issues can companies face when they enter our gambling market?
О. D.: License acquisition will be the main challenge for all companies that plan to enter the Ukrainian gambling market (under the condition they will comply with all the requirements specified in this draft law). As a rule, it is a long process, causing many difficulties for people that want to obtain a gambling license in most of the world’s jurisdictions. The most complicated legal issues are usually connected with the company’s documentation, as this kind of activity implies a detailed compliance procedure.
In the process of license acquisition, financial aspect will be the first difficulty: the last revision of this draft law envisages a minimal registered capital of 30,000,000 UAH. Besides, it is necessary to provide documentation that confirms the source of funds, which will be problematic for most gambling companies that existed before changes in the legislation.
Moreover, all gambling equipment has to be certified according to international standards, and servers of online gambling services will have to be integrated with the online monitoring system in order to allow the fiscal service to control money turnover of businesses and to monitor the timeliness of payouts.
UGW: Will it be beneficial for foreign companies, investors to work in the Ukrainian gambling market and why?
О. D.: What can interest a foreign investor to enter the Ukrainian market? Beneficial economic conditions in the form of low taxes, affordable license, and small administrative expenditures on business management. Foreign companies will find it much more beneficial to stay outside Ukraine, even in the neighboring EU countries. For example, in Poland where license costs almost 70 times cheaper.
Unfortunately, the draft law 2285-d does not offer favorable conditions for gambling business operation for Ukrainian and foreign companies today.
UGW: In your opinion, what legislative norms are the most efficient to fight against money laundering and underhanded turnover?
О. D.: For many years, Europe and USA have been using different directives, acts, standards, and regulation intended to fight against money laundering and underhanded income, which have proven to be effective instructions for the indication of illegally obtained money. It is worth mentioning several anti-money laundering tools commonly used in the world now.
For example, Financial Action Task Force on Money Laundering (FATF) developed documents, especially 40 recommendations, which make a compilation of organizational and legal measures on the establishment of efficient regime in every country intended to counter the legalization of illegally obtained income and financing of terrorism. These recommendations have significantly toughened the verification of every foreign legal and physical entity that wants to run business on the territory of another country.
The EU has a whole range of norms on this topic, including the European Union Anti-Money Laundering Directive, which has already six editions by 2020. One of the most distinguished peculiarities of this directive was the obligation to introduce a central register of beneficiaries, which reveals real business owners, in every EU country. Besides, almost every EU jurisdiction has its own laws that establish criminal responsibility for money laundering.
The question concerning which legislative norms can be the most efficient for the prevention of money laundering through gambling business in Ukraine can be answered referring to the abovementioned international standards. Firstly, the introduction of the register of beneficiary business owners; secondly, verification of the source of funds and capital of companies; thirdly, engagement of international monitoring and establishment of the European standards of compliance procedures.
UGW: How do you think how much time will it take for the law about legalization to start working and for the market to start developing?
О. D.: As a rule, over 10 years may be needed in order to introduce enough amendments in such legislation to the extent that will satisfy both market players (business and customers) and the government. Ten years is the time that other countries needed to normalize requirements to gambling business operators.
Amendments to the taxation of the gambling business in Ukraine are most likely inevitable, as excessive taxes are unattractive, not to mention that they can scare away market participants from official operation, causing them to go in the shadow.
Oleh will take part in the panel discussion “Intricacies of gambling business regulation in Ukraine” at Ukrainian Gaming Week 2020.