Doing Business In Ukraine

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Law & Taxation

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This section of the guide was kindly supplied by one of IMA's private sector Ukrainian 'Market Experts' partners; B. C. Toms & Co

Ukraine has continued to improve the legal framework for doing business in Ukraine, improving its land laws, adopting new tax, customs and criminal procedure codes, amending oil and gas legislation and implementing other important changes aimed at protecting foreign investments in Ukraine.


Corporate and Securities Law


Over the past year, the procedure for the incorporation of limited liability companies has been significantly simplified, with the requirements for a minimum charter capital and the notarization of incorporation documents being eliminated. The Parliament of Ukraine also amended the laws on the registration of foreign investments, clarifying the timeline for registration, and explicitly providing for the legal right to register changes in the ownership of investments. Such registration of foreign investments, while not required, provides for significant benefits and protections, such as guarantees on the right to repatriate a registered investment.


The National Securities and Stock Market Commission continues to progressively develop the legal framework for the issuance and circulation of bonds in Ukraine. New regulations improve the procedure for the issuance of a prospectus and clarify the disclosure obligations of an issuer.



Since its independence in 1991, Ukraine has built an extensive collection of double tax treaties. The most recent development is the signing of a new double taxation treaty between Ukraine and Cyprus on 8 November 2012. This treaty is expected to be ratified during 2013 and to enter into force on 1 January 2014, when it will replace the old Soviet treaty between the USSR and Cyprus.

The new Ukrainian treaty with Cyprus provides for an increase in the withholding tax rate on dividends from zero per cent to (depending on certain conditions) 5 or 15 per cent, an increase in the withholding tax rate on interest from zero per cent to 2 per cent and an increase in the withholding tax rate on royalties to (depending on certain conditions) 5 or 10 per cent. As a consequence, other jurisdictions now seem more attractive as locations for investment into Ukraine, including for intermediary entities in tax efficient investment structures. Thus, the Netherlands should generally now become the preferred jurisdiction for investment into Ukraine, as under the Dutch double tax treaty with Ukraine, there is zero per cent withholding on dividends, provided only that the foreign investor holds 50 per cent of the capital and directly invests at least USD $300,000.

The Tax Code of Ukraine has recently been amended to introduce special tax incentives to encourage investment projects. The tax rate for corporate profits from qualifying investment projects has been reduced to zero per cent from 1 January 2013 through 31 December 2017, 8 percent from 1 January 2018 through 31 December 2022 and 16 per cent from 1 January 2023. To qualify for such special tax treatment, an investment project must comply with certain requirements provided for in new amendments to the Tax Code, and the actual investment must be specifically approved by the Cabinet of Ministers of Ukraine.

Other recent changes in the Tax Code include the introduction of a 5 per cent, (instead of the previous 15 to 17 per cent), personal income tax on dividends received from a foreign source, a 5 per cent tax rate on personal income received on domestic sovereign bonds and an exemption from taxes on personal income received from debt obligations issued by the National Bank of Ukraine and treasury obligations issued by the Ministry of Finance of Ukraine (effective as of 12 August 2012). In addition, advance payment of corporate profit tax is now required (except for agricultural producers and certain other categories), where the taxpayer's income for the previous financial year exceeds UAH 10 million.

A special taxation regime has also been created for IT companies, that provides for an exemption from VAT for transactions related to the supply of software and for only 5 per cent corporate profit tax during the period from 1 January 2013 until 1 January 2023 (subject to the IT company meeting certain requirements).


Exchange Control and Investment Rules

On 15 June 2012, the National Bank of Ukraine introduced a simplified procedure for the registration of loan agreements between foreign lenders and Ukrainian borrowers. A borrower is no longer required to communicate with the NBU directly. Instead, the borrower's Ukrainian servicing bank will contact the NBU to complete the registration on a more expedited basis. In addition, under new rules, funds received under a cross-border loan agreement entered into by a Ukrainian corporate borrower with a foreign lender can be directly transferred by the foreign lender to a foreign supplier, so that it should no longer necessary for the loan proceeds first to be deposited into a bank account in Ukraine.


Agricultural Land and Other Real Estate

Ukraine has about third of the world's "black earth", the richest farmland. It is estimated that Ukraine is in a position to increase its agricultural output by more than 500 per cent. where all of its land is merely farmland. This should happen as world population increases and food supplies begin to become scarce, as is expected by the end of the decade. The legal regulation of agriculture and associated buildings and other real estate in Ukraine is therefore of great importance.

During 2012, a number of statutes were enacted in order to improve and simplify the procedure for the state registration of rights to real estate, and to reduce the time required to conduct real estate transactions.

To begin with, 4 July 2012, the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine with Regards to the Improvement and Simplification of the Procedure for the State Registration of Land Plots and Property Rights to Immovable Property" (the "Amendments") was enacted. According to the Amendments, from 1 January 2013 notaries can handle the state registration of rights to real estate, as well as other rights and liabilities for registered real estate, by entering the relevant information in the State Registry of Proprietary Rights to Immovable Property and its Encumbrances (the "State Registry").

Previously, the registration of rights to real estate was the prerogative of the Bureau of Technical Inventory (the "BTI"), a quasi-private entity that functioned like a registrar. Based on the changes by the Amendments, notaries have become a kind of a "single window" for real estate transactions. Now, the long queues and bureaucratic rules at the BTI in order to get an extract from the State Register and to register the rights to real estate of a new owner can be avoided. These recent changes greatly simplify the procedure and should reduce the time required for the registration of property rights by half or more. Another improvement is the requirement for professional liability insurance of of notaries for such acts. Though the expense for this insurance may end up being passed onto customers, it is certainly needed protection. In the past, too many purchasers have unfairly lost their titles and had no such protection, as professional liability insurance was not required and therefore was rarely carried by Ukrainian lawyers and notaries.

Another positive achievement from the Amendments is that encumbrances to real estate can now be registered regardless of the location of the real estate, which should greatly simplify the work of lawyers and banks. In addition, the required extract from the State Registry on the state registration of mortgage and encumbrances can also now be obtained by any individual or legal entity on the basis of an application, which simplifies the due diligence process. However, an extract with respect to other information on real estate, including on the state registration of the most recent and previous transfers of title, will not be public and may be provided only to the owners, their heirs and other persons having rights to the property and their authorized persons.

Another important statutory development is the amendment, on 6 September 2012, of the Law of Ukraine "On the State Registration of Property Rights to Immovable Property and Encumbrances Thereon" (the "State Registration Law"). According to these changes, where a person or entity that acquires title to a house, building or other structure, and obtains property rights to the land underneath, the state registration of rights to both the real estate and the land can be accomplished with one application. Previously, the state registration of property rights to land plots and real estate thereon was performed by two separate authorities, being the land resources authorities and the BTIs. Under the State Registration Law, the functions of the land resources authorities and the BTIs are now performed by state registrars under the supervision of the Ministry of Justice of Ukraine. The ability to register rights to land and the real property thereon with this single authority by filing one application should greatly simplify the procedures for the registration of the rights of real property owners and facilitate their protection thereafter.

Presently, there is a moratorium on the sale of Ukrainian agricultural land, which has been in effect since 2001, but it remains possible for foreign persons and entities to continue to lease land plots for up to 50 years in unlimited amounts. Currently, there are hundreds of major foreign-owned farming businesses in Ukraine created on the basis of such land leases, typically for terms of 5 to 15 years with the leases being periodically extended or renewed. A number of these farms exceed 300,000 hectares, making them among the largest in the world. It is expected that there will be more such mega-farms created in the future, in particular in response to the many Asian and Middle Eastern investors that are presently expressing interest.

Based on the new land and land lease registration system in Ukraine, the new procedure for the registration of land and land lease rights introduces two new registries: (1) the State Land Cadastre, which collects data on the formation of land plots and (2) the State Registry on Proprietary Rights to Immovable Property and its Encumbrances, the registrars of which record title and other proprietary rights including any encumbrances on land and other immovable property.




Over the past year, the government of Ukraine has held tenders for production sharing agreements ("PSA"s) for the development of Skifska and Foroska offshore oil and gas areas on the Black Sea shelf, one of which was won by a consortium led by Exxon and Shell. Likewise, Chevron and Shell have won PSA tenders for the exploration and development of oil and gas in large areas of western and eastern Ukraine where significant shale gas production is expected.

In anticipation of the expected rapid development of the oil and gas industry in Ukraine based on such foreign investment, the Ukrainian government has significantly improved oil and gas legislation during the past year. To begin with, the Law of Ukraine "On Production Sharing Agreements" (the "PSA Law"), was modified to expressly exempt investors under a PSA from rather strict exchange control regulations and to facilitate the effective use of PSAs, including by permitting holders of licenses (called special permits) to be able to back into PSAs without the need for a tender.

The most important other changes introduced by these amendments to the PSA Law are as follows:

1)      The relationships which are allowed to be governed by a PSA have been extended to include those in connection with the construction and use of PSA related industrial facilities, pipelines and other objects.

2)      The state is now also required to facilitate not only investors, but also the investors' contractors, subcontractors and other persons and entities (including their representative offices) in obtaining the necessary licenses and permit documentation related to the subsoil use, performance of works and construction of facilities provided for by a PSA.

3)      The state's right to expropriate all land within a PSA area that is owned or leased by individuals or privately owned entities created a great risk for PSA investors, as well as a great problem for many farming enterprises and others privately owning or using land within PSA areas, as they could have their business and property taken away. The new amendments provide (though they should still be improved) that a PSA can limit the state's right to expropriate private land within the PSA area, such as by providing in the PSA that such expropriation should only occur to the extent and on such terms as the PSA investor requests. Ordinarily, it would be expected that a PSA investor would receive good terms for land usage from the farmers who lease, and from the owners of, agricultural land, so the state would not ordinarily need to be involved.

4)      The ban on the amendments to the geographical coordinates of subsoil areas (mineral deposits) after a PSA has been entered into has been lifted. Such amendments are now allowed to be introduced at the request of the PSA investor according to the procedures to be provided for in the PSA, if so provided.

5)      A number of issues have been clarified for cases where a number of investors participate in a PSA. For example, the PSA may now provide for a procedure for changing the rights and obligations of investors in the PSA, including their respective shares in the production produced from certain deposits (subsoil areas) and/or during the performance of certain stages or types of works.

6)      A PSA may now provide for its English text to prevail in case there are discrepancies between its English and Ukrainian versions or any dispute exists regarding the interpretation of any of its provisions.

7)       The special permit under a PSA should now be issued to each investor participating in such PSA for its duration. Most importantly, the PSA Law expressly provides that this special permit may only be suspended, terminated or annulled by  the CMU when imminent danger to the life and health of people or the environment exists and only under the procedure provided for in the PSA, which can limit possible abuses on the part of state authorities.

8)      The definition of what are "unconventional hydrocarbons" is provided for to expressly include shale gas, coal bed methane and gas of the "central basin type" as well as oil, condensate and other hydrocarbons lying in "unconventional collectors". For such unconventional hydrocarbons, the PSA may provide for certain stages, rules and procedures for the use of the subsoil and for carrying out works during the development of the deposits, which are allowed to differ from the legally mandated stages, rules and procedures for ordinary hydrocarbon development.

9)      It used to be that only expenses born by investors for the performance of works provided for by the PSA after it became effective were allowed to be compensated with the cost compensation production. By contrast, under the amendments to the PSA Law, all of the investor's expenses related to the performance of works and other activity under the PSA and other PSA obligations incurred after the publication of the notice on its success in the tender (or in the case of backing into a PSA, the issuance of the respective CMU decision) can now be compensated, unless otherwise provided by the PSA.

10)  The PSA Law expressly provides that the PSA shall exclusively define the investor's right to, and conditions for, the use of the property the cost for which was compensated under the PSA and which, as a result, the state obtained title to.

11)  The requirement for the CMU to approve a PSA investor's assignment of its rights under a PSA was abolished.

12)  It used to be that the CMU was entitled to unilaterally terminate a PSA if, during the regular inspection of the performance of the PSA's terms, material violations were identified. Presently, in such a case, the CMU is only entitled to apply to a court (or other dispute settlement body if provided for by the PSA) with the request for premature termination of the PSA.

13)  At the request of a foreign investor, the state now has the right to waive its sovereign immunity in the PSA, with such waiver extending to all court decisions, decisions of international commercial arbitral tribunals and decisions in interim relief proceedings as well as to the enforcement of all court and arbitral decisions.

The Tax Code was also amended to increase the fees for subsoil use and to introduce differentiated fee rates for mineral extraction, depending on the mineral types and the production conditions. In particular, the amount of these fees is now to be determined as a percentage of the value of the extracted minerals, with set minimum thresholds.

Such significant changes in energy legislation are expected to facilitate rapid development of oil and gas industry in Ukraine and create conditions for effective use of PSA's by foreign investors.

© B.C. Toms & Co 2013


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