Ukraine: E-shops in Ukraine: Legal Framework

Last Updated: 20 August 2010

Electronic commerce, as one of the new forms of conducting business, is currently experi-Inyurpolis encing substantial growth worldwide and in Ukraine. On-line shopping is one of the most widespread types of e-commerce. An E-shop is a website with a catalog of products and a shopping cart. When browsing through the catalog a web surfer can order a product and place it in his/her shopping cart. A system of on-line payments can be used to pay for the order, as well as, bank/post remittance or cash on delivery payments.

On-Line Shopping In Ukraine: A Brief Overview

The development of e-shopping in Ukraine is directly related to the rise in the number of Internet users in the country. That number increases every year. According to the data from BIGMIR report in October of 2008, the number of Internet users in Ukraine per month reached 10, 164, 517. The leader in this at index is the Kiev Region (58, 96%). Today Ukraine is included in the list of the top-15 countries with the fastest development in the area of communication technologies (Global Information Technology Report 2007–2008).

There is no reliable statisticals data about the quantity of existing Internet-shops in Ukraine. According to the data from BIGMIR in January 2008, there were 3168 Internet-shops in Ukraine, the majority of which were located in Kiev. Some Internet-shops are established by private entrepreneurs (individuals registered as entrepreneurs by the State Registrar) or small companies; however, almost all big retailers have a presence on the Internet. An interesting fact: the most popular Internet-shops abroad are branches of regular retailers, meanwhile in Ukraine strict online shops are more successful.

According to the GEMIUS Report Ukraine conducted in 20071, nearly one third of Internet users from Ukraine use online stores or auction portals as place for purchasing various goods. Despite the high dynamics in the retail sales structure of Ukraine, Internet shopping makes up less than 0.4% of all retail sales. In the United States, for instance, this figure is more than 2%.

Legal Framework

1. General Legislation on Trading

Unlike in the countries that have separate regulations on e-commerce, in Ukraine it is regulated by the same legislation ure as traditional trade. That is why many issues are left unregulated and unresolved.

Sale of goods via e-shops is a form of business activity and it must be legalized in the established order. Thus, the owner of an e-shop must be registered as a business entity with a number of state agencies and funds, and obtain all the required permits and licenses - depending on the types of its commercial activity. In order to evade the rigid rules of the Ukrainian legislation some businessmen prefer to register their companies abroad. But according to s. 2.3.3 of the On the Value Added Tax Act of Ukraine of 3 April 1997, No.168/97-BP, an entity is obliged to register as a Value Added Tax Payer if it delivers products (renders services) within the customs territory of Ukraine via global or local computer networks, whereas a non-resident may implement such an activity only via his/her permanent representative office registered in Ukraine.

According to the Order of the Ministry of Economy and European Integration of Ukraine on the Rules on Sales of Ordered Goods and Sales of Goods Outside of Retail or Office Facilities of 19 April 2007, No.103 an agreement concluded via the Internet is defined as a distant agreement. The above Rules stipulate that the business entity that concludes distant agreements must comply with the requirements of the On Safety and Quality of Food Products Act of Ukraine of 23 December 1997, No.771/97-BP, On Sanitary and Epidemiological Welfare of Population Act of Ukraine of 24 February 1994, No.4004-XII, On Consumers Rights Protection Act of Ukraine of 12 May 1991, No.1023-XII, On Use of Registers of Accounting Operations in Retail, Public Catering and Services Act of Ukraine of 6 July 1995, No.265/95-BP, the Order of Retail Trade Execution and Rules of Retail Servicing, approved by the Decree of the Cabinet of Ministers of Ukraine of 15 June 2006, No.833, and other legal acts of legislation that regulate the retail sector.

2. Form of Purchase Agreement

The process of product sales via the Internet becomes more complicated because of the statutory legislative requirements to conclude almost every purchase agreement in writing (s.208 of the Civil Code of Ukraine of 16 January 2003, No.435-IV (hereinafter - the Civil Code).

The On Electronic Documents and Documentary Exchange Act of Ukraine of 22 May 2003 No.85-IV stipulates that an electronic document must be granted the same legal effect as its paper equivalent, as long as certain requirements set out in the statute are met. In particular, an electronic digital signature must be affixed to an electronic document by its signatory. According to the On Electronic Digital Signature Act of Ukraine of 22 May 2003, No.852-IV, an electronic digital signature is based on cryptographic algorithms that utilize a set of keys (private and public). In fact, the complicated procedure of certification of electronic signatures serves as an obstacle for its wide use in e-shopping (especially in sector B2C). Non-compliance with the requirements on written forms makes all e-agreements voidable.

3. Consumer Protection

S. 13 of the On Consumers Rights Protection Act of Ukraine of 1 December 2005 No.1023-XII stipulates that prior to conclusion of a distant agreement a seller must provide a consumer with the following information: name of the seller; its location; basic product characteristics; cost of the product including any delivery fees and conditions for payment; warranties and maintenance terms; proposal acceptance period; procedure for termination of the agreement; other essential information in the agreement; rights and obligations of the parties to the agreement, etc. Receipt of the above information must be confirmed by the consumer in a written or electronic form.

The consumer has the right to terminate a distant agreement within 14 days from the date of the confirmation of the information or from the date of the receipt of a good or the first delivery of the good. If the disclosure of the information does not comply with the above-mentioned requirements the term for the termination of the agreement is 90 days. The section also provides for some cases when a consumer has no right to terminate a distant agreement.

If otherwise is not provided by the distant agreement, the seller must deliver the product to the consumer within the stipulated term, but no later than 30 days from the date of obtaining the consumer's consent on the conclusion of the agreement.

4. Payments

Many small shops often refuse to accept credit/debit cards because this is a complicated and expensive service (use of credit/debit cards in the electronic trade system is regulated by the Regulation on the Procedure of Credit/Debit Card Issue and Operation, approved by the Resolution of the Administration of the National Bank of Ukraine of 19 April 2005 No.137).

Yet, credit/debit card payments are not profitable for sellers. E-shop owners risk more than card holders in the course of online payments. When paying for a purchase in a traditional store a consumer places his/her signature on the receipt, the document that serves as proof of purchase. There is no signature on the paper receipt when a consumer pays via the Internet, thus, the main proof of purchase is not available. Therefore, any consumer can change his/her mind about the purchase and by filling out a special bank form can return the payment. It is practically impossible for the seller to get the product back (the procedure is very long and complicated). In such cases the risks are borne not by the credit/debit card issuers (banks), but by the shops that under a bank's request cannot provide the document confirming the purchase operation by a consumer.

The level of trust in "electronic money" is also low. In spite of the fact that there are several systems in Ukraine that offer services on e-payments (the most well-known are WebMoney and iMoney), neither e-shops nor e-shoppers actively use these options. All the more, great changes are coming forth onto this market. The Administration of the National Bank of Ukraine, via its Resolution of 26 June 2008 No.178, has passed the Regulation on Electronic Money in Ukraine. According to this Resolution, electronic money may be issued only by banks, and legal entities that issue electronic money in Ukraine and are not banking institutions and must accord their activity with the requirements of this Resolution within one year from the date of this Resolution coming into effect.

At the same time, shoppers are not in a hurry to use cards or e-money to pay for goods in e-shops. Taking into account the instability and the absence of proper state control over the Internet-shops, 55% of Ukrainians prefer to pay for the goods on delivery: after making sure of the about the quality of the ordered goods. In addition, Ukrainians traditionally fear card fraud, especially when personal data is used in the Internet.

Inyurpolis is one of the leading Ukrainian law firms based in Kharkov. The firm was founded in 1994 by scholars of the National Law Academy of Ukraine and by a group of practicing lawyers. Having been established as a regional firm, Inyurpolis has gradually acquired the status of an all-Ukrainian one, extending its services to other cities and regions. Indeed, the firm has a branch office in Kiev.

Today, Inyurpolis is a prominent law firm providing compre- hensive legal support to corporate and individual clients. The main areas of our practice include corporate law, banking law, M&A, securities, commercial law, privatization and investments, taxes, construction, land law, land development and real estate, oil & gas, mining, pharmaceutical, unfair competition and antitrust law, labor law, intellectual property law, private international law, litigation and arbitration, constitutional law and elections, bankruptcy law and debt collection. The firm's team consists of over twenty highly qualified lawyers and paralegals.

Inyurpolis, as a legal advisor for the Kharkov Regional state Administration, has been involved in legal support of many important regional projects, including the reconstruction of Kharkov Airport, issue of municipal bonds, privatization (leas- ing, concession) of property of public companies and numerous development projects. The firm was recently chosen by the Kharkov Region Governor's Office to provide legal support for the construction of the new organ for the Kharkiv Regional Philharmonic new organ hall.

Inyurpolis and its lawyers are members of many professional associations, such as the Ukrainian Bar Association, European Business Association, Ukrainian Association of Patent Attorneys, International Bar Association etc.

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.

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