In Spring 2022, following the onset of Russia’s full-scale invasion, the Ukrainian government implemented a series of extraordinary measures to keep the national economy afloat. These initiatives had a direct impact on Ukraine’s nascent legalised gambling sector, which had only been operational since late 2020. Significant policy adjustments included deferred licence fee payments during martial law and a shift to a simplified tax framework that required a single 2% income tax.
These unparalleled policy relaxations enabled the gambling industry to not only weather the storm but also to grow. The market had long been in a state of limbo, awaiting promised reforms.
Initially, the tax landscape was ambiguous. Post-legalization, the industry had been anticipating swift tax reforms, envisioned as the second phase of the relaunch of Ukraine’s gambling market. Unfortunately, this did not come to fruition, thereby impacting the market’s allure and potential.
Secondly, the lack of a government-run online monitoring system led to a threefold increase in the cost of specific licences. As it stands, Ukrainian licences are among the most expensive in Europe. For instance, the annual fee for a betting licence in Ukraine is UAH 120.6 million (USD 3.2 million), whereas in Romania, a key player in Eastern Europe’s gambling scene, the cost is ten times lower.
While these relaxations didn’t solve the longstanding issues, they served as a crucial catalyst for growth. However, as of early 2023, the tide has turned again, this time against the industry.
To better understand the rollercoaster of policy changes, let’s examine the timeline of key events over the past 18 months that led to the industry falling out of government favour.
In March of 2022, TBC LLC, a company owning the rights to the 1xbet brand in Ukraine, secured online casino and sport betting licences. This marked their first foray into the market amidst wartime conditions.
A significant public information campaign kicks off, advocating for the revocation of 1xbet’s licence due to its allegedly Russian beneficiaries, which is something that the Ukrainian society doesn’t tolerate.
Yielding to public pressure, the Commission for the Regulation of Gambling and Lotteries (CRGL) revokes 1xbet’s licence, sparking one of the most significant controversies in the 2022 gambling market. Simultaneously, the National Bank of Ukraine (NBU) and law enforcement agencies started investigations and initiated actions against deceptive payment practices. These practices include “miscoding,” where gambling operators collaborate with banks and payment companies to evade taxes.
Mykhailo Fedorov, the Minister of Digital Transformation, announces sweeping regulatory changes aimed at bolstering the Ukrainian economy.
Political circles in Ukraine actively debate the initial findings of the investigation into payment misdirection. Preliminary estimates suggest that the legally taxable market is a fraction of the actual market size.
CRGL takes action by cancelling multiple gambling licences due to the operators’ ties to Russia. Among the impacted are Joker.UA LLC (casino brand: Joker), Alfagame LLC (brand: Gold Cup), and Play Fan Investment LLC (brand: Fan Sport). These moves by CRGL prompted a moderate level of concern in the industry.
The Ukrainian Parliament revoked the simplified taxation system for gambling businesses. This shift forced the industry back into the old deficient taxation framework.
The government nullified the option for deferred licence fee payments. Consequently, operators were required to pre-pay annual licence fees and settle any outstanding licence fees debts for the financial year of 2022. Coupled with tax changes, many legal operators found it difficult to project profitable operations.
Around the same time, the NBU intensified scrutiny of banks and payment systems. This significantly hampered operators’ ability to manage player funds and pay out winnings, revealing a global weak spot in the gambling industry’s business processes.
At least 9 banks are rumoured to be actively engaged in the payment misconduct, with the biggest state-owned banks among them. The industry feels an unprecedented rise in transactional issues. Players are complaining that the payouts are taking weeks.
Alternative payments solution providers are trying to keep up with the flurry of demand. Operators with the most diversified partnerships are in the best position.
The market was left reeling when the President of Ukraine imposed sanctions against major local operators such as Parimatch, Pointloto, and PokerMatch. This sudden turn of events significantly reshaped the competitive dynamics among legal operators.
In a parallel development, iBox Bank, a key player in gambling payment processing, lost its licence due to actions by the National Bank of Ukraine (NBU). Concord Bank met the same fate four months later.
The upheaval extended to the crypto market, as leading crypto exchanges were hindered from processing deposits and withdrawals for Ukrainian clients.
The Ministry of Digital Transformation presented a draft law calling for the dissolution of CRGL and the establishment of a new regulatory authority, along with the digitalization of the licensing process to reduce corruption risks.
The State Tax Service of Ukraine issued new guidelines on the taxation of player winnings. According to these guidelines, the entire amount of winnings paid to players is subject to taxation, without considering the cost of the game. This policy renders legal operators less appealing compared to unlicensed ones that impose no tax on the players’ winnings.
On August 8, CRGL took a decisive step by revoking the highest number of licences since its inception. Among others:
- Parimatch LLC (brand: Parimatch) lost its online casino and online betting licences.
- Pointloto LLC (brand: Pointloto1) lost its online casino licence.
- Pokermatch.ua LLC (brand: Pokermatch) lost its online poker licence.
- Victoria-Soft LLC and iBOX Bank lost their B2B licences.
Lots of land-based operators lost their licences as well.
Viewed chronologically, these developments reveal a significant trend. While initially considered just another economic sector, the gambling industry has increasingly come under the state’s scrutiny during the second year of the full-scale invasion. The reasons for this shift are multifaceted. The state’s inconsistent policies, particularly concerning taxes and monitoring systems, have clashed with manipulative tactics employed by some legal gambling operators. Consequently, the industry has faced stringent regulations, leading to the exit of a third of legal operators.
This presents challenges not just for the remaining operators but also for the state. Balancing the need for regulatory efficiency with the industry’s business viability is a long-term yet crucial endeavour.
Failure to strike the right balance encourages illegal business activities, a phenomenon corroborated by global practices.
In 2009, the Ukrainian government formally banned gambling but unwittingly paved the way for its continuation under the facade of lotteries. This aggressive regulatory stance set the industry back by a decade, giving rise to so-called “lottery clubs,” which were, in essence, slot machine halls. Despite the official proclamation of a gambling-free environment, these venues thrived. With today’s widespread internet access, illegal operators face few barriers to operating within Ukraine. For the country to safeguard and grow its budgetary revenue, it’s imperative to establish a coherent strategy that encourages legal business practices in the gambling sector.
Surprisingly, despite these regulatory hurdles and economic challenges, the Ukrainian market remains attractive. The key task for Ukraine is to direct operators’ interests toward legal avenues.
This article was made by Dmitry Hotsyn.
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