Gambling has become legal in Ukraine (photo: UNIAN)
So far, only four companies have received state licenses to conduct gambling. The rest have either adopted a wait-and-see approach or are completely unwilling to emerge from the shadows. What's happening to the gambling industry since the legalization law was passed, and what taxes they plan to impose, is discussed below. in the RBC-Ukraine material.
Legalizing the gambling industry was one of the first items on Volodymyr Zelenskyy's team's agenda after coming to power. The raids carried out by law enforcement in December 2019 at the president's initiative had a short-lived effect. This helped lawmakers find the votes needed to pass the law in its first reading. However, many gambling establishments that closed their doors then soon returned to underground operations.
Last July, the ruling party succeeded in passing a law regulating gambling. According to the document, those wishing to operate legally must obtain licenses and pay taxes to the budget. But the market, which has remained in the shadows for a decade, is reluctant to accept the government's terms. Because the terms themselves, on the one hand, are not favorable to everyone. On the other, they are not entirely clear.
The Verkhovna Rada is planning to pass an additional law on taxation of gambling and lotteries. Deputies have included some "indulgences" for the industry in the document, which could encourage companies to operate legally. However, this is far from the only reason forcing the gambling business to remain underground.
White spots
The legalization of gambling in Ukraine is progressing at a slow pace. The reasons include bureaucratic red tape, business inertia, and government oversights.
At the end of September, the Cabinet of Ministers began forming the Commission for the Regulation of Gambling and Lotteries (KRAIL). Due to the ban on recruiting staff for the new bodies, the Commission is operating with a reduced staff, says its head, Ivan Rudy.
The KRAIL is responsible for monitoring market participants and issuing them licenses. The government only approved the conditions for obtaining them at the end of the year. Licenses are expensive. The cheapest permit is for online poker, at 23,6 million hryvnias. The largest fee is for opening a casino in the capital, at over 283 million hryvnias. In addition, an annual fee for equipment must be paid.
Rudy estimates the market's potential at 6-7 billion hryvnias in budget revenues for the year. "For February, we set a target of 70,2 million hryvnias in license revenues. As of February 25, this target was met, meaning we've transferred this amount of money to the state budget. For next month, I have a target of 150 million hryvnias, which, given the current situation, is realistic. It's difficult to provide more detailed forecasts at this point," the head of the KRAIL told RBC-Ukraine.
According to the official, business interest in legalization is very high. Since February, KRAIL has issued licenses to four companies: SpaceX (owner of the Cosmolot brand), Gamedev, First Element, and Parimatch. The first three received permission to operate online casinos. Parimatch will receive two licenses – one for online casinos and one for bookmaking. The commission also had to return several other applications from companies due to improperly completed documentation.
"Market representatives who have received licenses to operate online are already announcing: we will be legal, we are better than those who operate illegally, because we pay taxes, we have become subjects of the law, and we are ready to bear responsibility in case of violations. And for potential consumers, this is a good choice factor," Rudy explained.
Government and law enforcement agencies don't particularly crack down on those who continue to operate "under the table." That's why they feel comfortable, having adapted to these conditions over many years, says Maryan Zablotsky (Servant of the People), a member of the Committee on Finance, Tax, and Customs Policy.
"In fact, not everyone is rushing to legalize their operations. No one is taking measures to restrict the activities of 'shadow businesses.' If our authorities were to actively block online casino websites and advertising, businesses would certainly rush to obtain licenses. But that's not happening," the MP noted in a conversation with RBC-Ukraine.
Another issue is the lack of an online monitoring module. By law, authorities have two years to launch it. But until the system is up and running, monitoring the industry, especially online gaming, will be problematic.
Even if companies want to operate legally, the current law doesn't fully allow them to do so, according to Elena Mochalova, head of the NGO "Support for the Legalization of Gambling in Ukraine." It doesn't meet the needs of land-based businesses, the expert says.
"There will be a couple thousand illegal establishments in Ukraine now. I'm sure we'll hardly be able to eradicate this shadow economy right now. It will be cheaper for businesses to pay protection to the law enforcement agencies that are already accustomed to this than to go through all the hoops of hell to obtain a license," she explained to RBC-Ukraine.
One of the obstacles for companies operating offline is finding the right premises, says Mochalova. The Gambling Commission also points to this problem.
The law already passed stipulates that gambling halls and casinos can only be established in hotels. Slot machines require a minimum rating of three stars, while casinos require a minimum rating of four stars. Hotels must be classified by a special commission from the State Agency for Tourism Development (SAD). Some hotels cannot confirm their star rating because this commission is not fully operational, Rudy explained.
The launch of the market is a major plus, according to Parimatch. "Licenses are already being issued, and the Commission can move on to creating other regulations, developing rules for socially responsible gaming, rules for problem gambling, and a description of the player identification card," Mikhail Koval, head of the company's legal department, told the publication.
In addition to these issues, several key ones remain unresolved, in particular, changes to tax legislation and certification of gaming equipment, Koval noted.
"There's currently no list of this equipment. There are also no technical regulations; the Cabinet of Ministers must develop them. This means changes to tax legislation and the adoption of certification standards are needed," Parimatch asserts.
To achieve such certification, the random number generator must at least be tested. This takes between three months and a year and a half, Mochalova explained.
If the equipment fails this check, the player is completely unprotected. There's a risk that they'll continually lose, and the desire to win will only further entice them into the game. This trap will result in lost tax revenue for the government. Moreover, such certification is necessary for both land-based establishments and websites, such as online casinos, says Mochalova.
"A user who plays an uncertified slot machine will likely never win. There's a selector on the last reel, and spinning the last reel will never reveal a full line combination, meaning the user won't hit the jackpot or any combinations. This is a common scheme that black haters have been using for over a decade, and I'm sure they'll continue to do so," the expert explained.
Money question
Last summer, the Verkhovna Rada's Finance Committee approved a draft bill on gambling taxation, which it recommended for a floor vote. The document proposed a zero-tax rate for gambling businesses until 2024 and a reduced 5% rate for bookmaking. All winnings would be exempt from taxation.
The deputies wanted to compensate for all this by tripling the cost of licenses, which businesses must pay until online monitoring is implemented.
But ultimately, the relevant committee decided to rewrite the entire bill and draft a new tax bill (2713-d). In it, the deputies, firstly, proposed excluding taxation of winnings if the prize is greater than eight minimum wages (currently 48,000 hryvnias).
Secondly, the document eliminates the requirement to triple the license fee for companies. Thirdly, in addition to corporate profit tax, they must also pay income tax (on gross gambling revenue). This refers to the GGR—the difference between bets and winnings.
It is proposed to make this tax rate uniform for all types of gambling businesses – 10% of gross gambling revenue. However, this would reduce the tax rate for bookmakers and casinos from 18% to 10% of gross revenue, and for lottery operators from 30% to 10%. There is no unanimity on this issue within the committee.
"Personally, I did not support this decision and voted against it. I believe it's wrong that we're reducing taxes on the gambling industry so much, particularly on lotteries. Essentially, the tax will be 3-5% of a lottery ticket. This is too low and unfair, in my opinion," explained Finance Committee member Marian Zablotsky.
Some committee members accused its chairman, Daniil Getmantsev (SN), of allegedly lobbying for a decision favoring certain market participants. Getmantsev owned shares in one of the lottery operators, MSL. He acknowledged a conflict of interest in the gambling business and therefore did not participate in the development of the gambling bill.
Getmantsev denies the accusations of his committee colleagues. He says the flat-rate tax mechanism is, on the contrary, simple and transparent. Ivan Rudy, head of the Krai Regional Investment and Development Agency, shares this position. Hetmantsev explained that excessively high rates could simply "strangle" the gambling industry and discourage any desire to operate legally.
"We're not reinventing the wheel—we're doing it the way other countries do. They have such a tax there, too. We've made it simple—a single rate for all types of gambling businesses. Although there were lobbyists who, even at the committee level, demanded higher rates for some types of games and exemptions for others. But we didn't agree to that," the head of the finance committee told the publication.
According to him, the rate in the bill can still be discussed and revised before the second reading. But he insists that it should be the same for all types of gambling businesses.
"It should be uniform, not like the current law: 30% for lotteries, 10% for slot machines, but based on revenue, which made this type of activity impossible, and 18% for others. Why such a difference in percentages? Is it because some lobbyists are more influential and others are not? If the Rada decides that this rate should be 30% for everyone, I will agree," Getmantsev said.
A Small Game. How the Gambling Business Works in Ukraine After Legalization. Getmantsev assures that the gambling rules are intended to be simpler (photo: Vitaly Nosach / RBC-Ukraine)
However, such "concessions" may not satisfy many majoritarian candidates, Zablotsky believes. The fact is that the "social economy" subvention payments to the districts are tied to gambling revenues.
"At least from what I've seen in our faction chat, many of our deputies have spoken out against tax cuts. I think it will be difficult to convince the Verkhovna Rada that this is the right thing to do in the current situation," the MP suggested.
The Rada was supposed to consider this document during its final plenary week. However, it never reached the floor either on Thursday or Friday last week. The relevant committee is currently unsure when parliament will take it up.
***
The lack of clear regulations and accountability are two key issues hindering the legalization of the gambling market. The government has left numerous "miscalculations" and shortcomings in this regard that need to be addressed. On the other hand, gambling companies are unlikely to line up for licenses, no matter how attractive the terms legislators may prescribe. Therefore, until the authorities begin to clamp down on illegal operators, market legalization is unlikely to accelerate.
Another factor that could revive this process is competition. Licensed companies will have a vested interest in eliminating the gray market. Those who choose to remain underground may be unable to withstand the pressure from licensed competitors. And this isn't just a matter of better conditions or equipment, but also of responsibility to the client.
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