Emerging Europe: regulatory updates from Germany, Netherlands and Ukraine

There is often a perception that Europe as a whole is a mature gaming market but, whilst it is certainly true that there are some mature markets within the continent, it is far from a uniform picture. In fact, Germany, the largest country in the European Union and one of the most developed in every other aspect, has to be considered an emerging market when it comes to gambling. It is not alone, and this article will review newly minted gambling laws in three European emerging markets, Germany, Netherlands and Ukraine through the eyes of Dr. Joerg Hofmann, head of the gaming & betting law practice group at Melchers in Germany, Justin Franssen who leads the gaming and gambling practice group at Kalff Katz & Franssen in the Netherlands and Oleksiy Demyanenko a partner and gambling specialist at Asters in Ukraine.

Germany

It is fair to say that a regulated online gambling market in Germany has been a long time coming. In 2012 the country’s 16 states passed an Interstate Treaty on Gambling which was intended to regulate sports betting for the first time. However, intention and reality have not coincided as, almost ten years later, there has not been a single valid operating license issued. The cause has become political with states governed by Conservatives prepared to allow the market to open up, and those run by Social Democrats favouring greater restrictions.

Of course, German consumers have not simply waited patiently for regulators to get their acts together but have gravitated in large numbers to the many online offerings open to them from other jurisdictions. The last time the value of the black market was quantified was in 2015 and the figure at that time was estimated as being as high as €22 billion. If German players have followed trends seen elsewhere that number will only have grown.

In 2020, the states reached an accommodation over a new gambling treaty, with a consensus emerging that a regulated market of some kind is preferable to a large black market. New regulations are expected this month lifting the prohibition on online casino style games, online slots and online poker, as well as continuing to license an uncapped number of online sports betting providers. To emphasize the seriousness of the intent, more than 30 operator licenses have been issued with another estimated 30 or more pending applications covering sports betting and online casino.

As of July 1, 2021, a new Interstate Treaty formed the basis for a comprehensive regulation of online gambling. The mentioned licensing for casino-type games is entirely new. Sports betting licenses issued under the old treaty will initially remain valid until the end of 2022, but will be adapted to some newly implemented requirements. Also, operators who have not submitted applications by this point will not be ruled out of time but may receive a license under the new regime. For those currently operating casino-type games in the grey market, there is an opportunity to apply for a license but, in the meantime, the states have published guidelines which create a transitional regime designed to migrate grey market operators to the regulated market.

Operators who comply with these guidelines will be seen as reliable entities and will be able to obtain a license. A new central regulatory authority is currently being built up in Saxony-Anhalt. It will take over almost the entire spectrum of gambling supervision from 2023 at the latest. Until then, the state administration office in Saxony-Anhalt will handle responsibilities on a transitional basis. This also includes the licensing procedure for virtual slot machines and online poker. The Regional Council of Darmstadt will remain responsible for sports betting licenses until the end of 2022.

Licenses will be supported with new IT infrastructure which includes safe server monitoring to avoid parallel gaming on different sites and a database that controls stake, loss and deposit limits of the players. It won’t all be ready on day one, but it will come soon enough not to be a barrier to operations.

So far, so sensible but this is where the good news ends. As the details of the terms of licenses have emerged, enthusiasm has largely evaporated amid criticism that the regime will be too restrictive to function as intended. The challenge with all regulation is to accommodate legitimate market players giving them enough of a level playing field to be competitive against those in the grey market who are not subject to the same regulations. The difficulty for operators in Germany starts with the games themselves. Player stakes on slots will be limited to €1, each spin must last an average of five seconds and jackpots are prohibited. Maximum stake limits also apply to online poker games and in sports betting where in-play wagering is almost limited to final results and next goal scorer markets only. There are also limits on advertising with TV, radio and internet promotions subject to a nine o’clock watershed.

Operators’ license fees will be calculated based on projected amounts wagered. For operators generating turnover of up to €40m, they will be required to pay a fee of at least 0.2 percent of stakes, at least €100. For those with stakes of between €40m and €65m, this fee rises to €80,000, plus 0.16% of stakes above €40m. This increases again to €120,000 plus 0.1 percent after €65m and again to €185,000 plus 0.06 percent for operators taking over €130m in wagers.

It is the rate of tax where the real problems start, however, as a single rate tax of 5.3 percent on stakes is envisaged across all verticals. Although the effective rate is slightly lower as the tax is deductible (5.03 percent), it still puts legitimate operators at a significant disadvantage to those in the grey market and makes achieving the goal of channelizing the market and protecting players less likely. Some have gone as far as to say that Germany may end up having the best protective legislation, but it will be completely ineffective as the combined effects of restricted gameplay and a punitive tax burden will destroy the market and drive everything offshore.

One big anomaly in the tax rules concerns the difference between the level at which land-based casinos and retail arcades are taxed. Research by Goldmedia has found that online operators will face a tax burden four- or five-times greater than brick and mortar casinos and 15-times higher than landbased amusement arcades.1 So great is the advantage that there is almost certain to be a legal challenge under EU state aid rules. The Bundestag, the German parliament, has hinted that it will review the operation of the market within the next year but there are no guarantees that anything will change.

Meanwhile, it seems the situation for the regulated market in Germany will get worse rather than better under the new rules. The only hope for the industry is to demonstrate that it is a reliable partner and can be trusted with a more liberal regime as it aims to meet the same goals of player protection. The question remains as to how that is possible when all the players and certainly all the problem gamblers have gone elsewhere.

Netherlands

Netherlanders cultivate a relaxed, fun-loving and free-spirited image so it may surprise some to learn that they too are an emerging European country when it comes to gambling legalization. Now, however, in a big step forward for a process which started back in 2014, the first license applications have been submitted. To date, there have been 29 applications in total with some operators applying for more than one license. This first group have comprised mainly the incumbent – lottery etc. – and squeaky clean new-to-the market operators, but at this point the bigger players from the grey market have yet to get on board. The first licenses will go live in October and there is likely to be a pickup of applications from then running through until April next year. The Netherlands Gambling Authority (KSA) has put no cap on the number of licenses and interest is high among operators who have perhaps been put off by their experience next door in Germany.

From the point of application, license applications take six months to process by the KSA who are being unashamedly tough. They have said they will be very strict at the entry level with the intention of being more lenient once an operator has met the bar. Those acting for operators have seen the kinds of questions that come back and they are very demanding. The best advice for those planning to apply is to be meticulous in the application. Licenses are being awarded for four product verticals – including sports betting, casino, horse race betting.

The application fee for a license is €48,000 and there are some parallels with the German situation and some characteristics that are uniquely Dutch. There is a distinction between prioritization criteria which relates to the enforcement strategy of the regulator. If an operator does not have a Dutch language website and does not market their products in the country they are deprioritized from enforcement proceedings. The original intention was to ban operators trading in the country without a license, but the regulator quickly realized that this would not be effective. To get around the issue, they have come up with the concept of a cooling off period, a compromise whereby operators may demonstrate they are suitable applicants if they have not traded in the Netherlands for 33 months, they don’t use local affiliate marketing, they verify players and specifically carry out age verification. Those operators who pass this test are considered as if they have not previously traded in the country and are not restricted from applying.

Those who have not already started their cooling off period are going to face a problem, however: applications have to be made no later than April 1, 2022 and following completion of the 32 months cooling off period. Those operators that are ruled out will be considered unreliable, but it remains unclear how the regulator will consider their applications. In theory the KSA could reject them but that would mean some larger operators will be prevented from applying. Also uncertain is the status of those operators who have not been trading in the country. Theoretically they too could fall foul of this provision as they have not completed a cooling off period. In reality, the regulator is still asking technical questions and no application has yet been rejected, so the situation remains unclear.

One misunderstanding that has arisen in the market is that those who have been fined by the regulator in the past couple of years will be at a disadvantage, but this is not the case. The fact that an operator has received a fine is completely irrelevant in terms of cooling off and, in principle at least, there is no material difference between the positions of those that have or have not faced a fine.

As far as tax goes, the initial plan was to tax GGR at 29 percent whilst land-based businesses remained at 20 percent. This led to howls of protest from potential licensees to which the response was to set the tax at 29 percent for both online and land-based operators. Obviously, this was a body blow to brick and mortar casinos who have been forced to close during the pandemic. There are rumours that the 29 percent rate will be ditched in favour of a flat 20 percent across the board, and there is a commitment to review how the system is operating after three years. Whether this yields the desired result is uncertain as gambling revenues are an easy target especially when Covid has placed heavy burdens on state coffers.

Requirements for testing and certification are currently being finalized and the first group of licensees have put themselves in a beneficial position as they have until July 1 to supply testing and certification reports. After that, these will have to be supplied with the applications which is unusual and poses quite a barrier to new entrants. That said, it seems regulated gaming in the Netherlands is at least likely to get up and running before the end of 2021.

Ukraine

Having been banned for the past ten years, gambling was legalized in Ukraine last year. License requirements were announced in December and the first license was awarded in January. The regulations have been framed to attract foreign direct investment in Ukraine, specifically into the hotel sector with its associated jobs, but they also cover illegal advertising and the protection of minors.

One of the possibilities available under the regime is an investment license whereby an operator agreeing to build a hotel in which to house a casino can obtain a free license for ten years. As it stands, dozens of B2C licenses have now been issued along with B2B licenses for manufacturers and software suppliers. Licenses vary in cost with operators required to have one for each vertical.

In general, licenses are for five years with a payment in instalments each year. There is no limit on the number of licenses so any number of applications is possible, although operators from outside the country must show they have a local subsidiary with share capital of around €1 million in their submission to the Gambling Commission which regulates the market.

Their approach is quite strict requiring details of source of funds and beneficial owners which are monitored closely. Setting up a Ukrainian subsidiary can be completed in a week and some international operators have already gone down this route, but there are some other issues to consider. For example, there are questions as to whether servers need to be located in Ukraine. Russian citizens and Russian-backed companies are not allowed to invest and neither are those from FATF special list countries.

The Commission is now focused on certification requirements: equipment must be certified but there is currently no approved way to recognize international certificates and domestic Ukrainian certificates are being issued. Some preliminary options are being discussed to allow recognition of international certificates and the expectation is that this will be relaxed.

There has been talk of a bad actor concept which would prevent those previously trading into Ukraine from outside the country from obtaining a Ukrainian license, although there is no such explicit clause in regulations. The operators may face a different danger, however, as a recent court ruling has effectively forced internet service providers to block access to many international operators’ gambling websites leading observers to wonder whether there is a criminal investigation underway with authorities considering possible prosecutions.

Apart from the threat of penalties, there is a possibility that the Gambling Commission may view such operators and their officials as disreputable with the effect that applications will be viewed differently when it comes to gambling licenses. It is not currently clear whether this position will be taken but those operators mentioned in the criminal investigation would be wise to be proactive in defense and apply to be excluded from the criminal actions if they intend to enter this market in future.

Tax is another bugbear which currently presents a significant hurdle. There is a gambling tax set at 18 percent and a corporate tax, also 18 percent, as well as triple fees for a license pending introduction of an online gambling monitoring system. Together these combine to put significant financial pressure on operators. Discussions are ongoing around the introduction of a GGR tax set at 10 percent and of the triple license fee being removed. Whilst it seems there is a clear understanding that this needs to be reviewed, it has not happened yet.

Another ongoing issue concerns the protection of intellectual property. To apply for a license an operator needs to have registered a .ua domain name in Ukraine. As the law currently stands these can be obtained without a trademark and there have been spurious domain name applications for the Ukrainian version of several well-known international brands. Whilst this would be considered piracy in most jurisdictions it is a problem for the brands involved. Some have taken action against the pirates but this is ongoing and it is unclear how the situation will be resolved.