A question often asked lately by the community involved in clinical trials for medicines is whether individuals entering into clinical trial services agreements with non-resident sponsors may enter into such relations without becoming entrepreneurs?
Doubts as to whether individuals (non-entrepreneurs) Considering the above arguments, if a civil contract is concluded between an investigator that is not registered as an entrepreneur and a sponsor/contract research organisation, their contractual relationship will not fall under the definition of foreign economic activity and, therefore, the restrictions imposed by the Law on Foreign Economic Activity will not apply thereto. In addition to the above, the principle of general permissibility applying in civil relations allows doing anything that is not prohibited by law. As no law prohibits entering into civil contracts between Ukrainian individuals and non-residents, such actions are permitted. The consequences of recognising an individual's activity as entrepreneurial should also be taken into account. It is well known that one of the key criteria for entrepreneurial activity is its regularity. The concept of regularity has been construed by the Supreme Court of Ukraine as execution of works or services at least three times in a calendar year. The question is what action shall be considered as one time in a calendar year? In our opinion, such action is an investigator's signing a contract and performing the full scope of work under that contract within one clinical trial. That is, if an investigator signs more than two contracts a year and performs certain work followed by respective payment there under, such activity can be considered as entrepreneurial. Such activity without proper registration constitutes an administrative offence, and can entail the imposition of fines on the investigator (up to 500 tax-free minimum incomes of individuals – 8500 UAH) and confiscation of money obtained through that offence. Another negative consequence may be tax liabilities, if tax on income derived from such activities has not been paid in full. Therefore, if service activities related to the conduct of clinical trials are regular, investigators shall acquire the entrepreneur status in order to avoid the undesirable consequences described above may enter into agreements with non-residents arise from the ambiguous interpretation of the Law of Ukraine "On Foreign Economic Activity" (hereinafter the Law on Foreign Economic Activity). In accordance with the provisions of Paragraph 2, Article 5 of the above Law, individuals having permanent residency in Ukraine may engage in foreign economic activity if they are registered as entrepreneurs according to the Law of Ukraine "On Entrepreneurship".
In other words, an individual may engage in foreign economic activity (hereinafter FEA) only on being given the status of a entrepreneur. Armed with this legal provision, some lawyers argue that individuals may not enter into agreements with non-residents until they are registered as entrepreneurs. However, this conclusion causes reasonable doubts due to the following reasons. Based on the analysis of legislation, we can conclude that entering into agreements with non-residents will not always be deemed FEA, thus the above restriction will not be applicable.
In accordance with Paragraph 12, Article 5 of the Law on Foreign Economic Activity, no provision of Article 5 may be interpreted as prohibiting individuals, legal entities or other FEA subjects from entering into any relationships that do not fall within the definition of foreign economic activity. Thus, the Law on Foreign Economic Activity confirms the existence of activities that do not fall under the definition of FEA.
It should also be noted that, based on the definition, FEA shall mean activity of business entities. In other words, the activity carried out by a person that is not a business entity may not be deemed FEA in the meaning of the above Law. Below, we will try to find out in which cases an individual shall be considered a business entity.
In accordance with Paragraph 2, Article 55 of the Commercial Code of Ukraine, business entities are, inter alia, citizens of Ukraine doing economic activity and registered as entrepreneurs under the law. In accordance with Article 128 of the Commercial Code, a citizen shall be deemed a business entity, if he/ she has been doing economic activity and has been registered as an entrepreneur without being given a legal entity's status. Due to that, a person that is not registered as an entrepreneur shall not be considered a business entity in formal terms, and thus cannot be a FEA subject. Therefore, based on the provisions of the above Article 5 of the Law on Foreign Economic Activity, such a person performs activities that do not fall under the definition of FEA. Namely, it is involved in property and personal non-property relations governed by the Civil Code of Ukraine (Article 4 of the Civil Code). However, it should be remembered that if a person's activity acquires signs of entrepreneurship, that person will be required to register in accordance with the law in order to avoid the negative consequences described below.
Additionally, the Tax Code of Ukraine confirms the possibility of earning income from non-entrepreneurial activity. Thus, in accordance with Article 1.14.54 of the Tax Code, income from sources in Ukraine is any income earned by residents from any type of activities in Ukraine, including, but not limited to, income in the form of: i) salary, other benefits and remunerations paid under the terms of a labour or civil contract ii) income from entrepreneurial or independent professional activity.
Given this, we can conclude that Ukrainian legislation provides for a type of economic activity exercised by an individual to generate income (in particular, through the conclusion of civil contracts or due to professional activity such as research), which is not FEA.
Considering the above arguments, if a civil contract is concluded between an investigator that is not registered as an entrepreneur and a sponsor/contract research organisation, their contractual relationship will not fall under the definition of foreign economic activity and, therefore, the restrictions imposed by the Law on Foreign Economic Activity will not apply thereto.
In addition to the above, the principle of general permissibility applying in civil relations allows doing anything that is not prohibited by law. As no law prohibits entering into civil contracts between Ukrainian individuals and non-residents, such actions are permitted.
The consequences of recognising an individual's activity as entrepreneurial should also be taken into account. It is well known that one of the key criteria for entrepreneurial activity is its regularity. The concept of regularity has been construed by the Supreme Court of Ukraine as execution of works or services at least three times in a calendar year. The question is what action shall be considered as one time in a calendar year? In our opinion, such action is an investigator's signing a contract and performing the full scope of work under that contract within one clinical trial. That is, if an investigator signs more than two contracts a year and performs certain work followed by respective payment there under, such activity can be considered as entrepreneurial. Such activity without proper registration constitutes an administrative offence, and can entail the imposition of fines on the investigator (up to 500 tax-free minimum incomes of individuals – 8500 UAH) and confiscation of money obtained through that offence. Another negative consequence may be tax liabilities, if tax on income derived from such activities has not been paid in full.
Therefore, if service activities related to the conduct of clinical trials are regular, investigators shall acquire the entrepreneur status in order to avoid the undesirable consequences described above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
