Doing Business in Ukraine

Doing business in Ukraine is not always easy, because Ukraine is in the midst of a process of political and economic transition. This may pose challenges for companies entering Ukrainian market for the first time.
 

Foreign investments

Legal Regime of Foreign Investments. According to Foreign Investment Regime Law, foreign investors are subject to the national treatment of investment and business activity. In most instances legislation of Ukraine provides for the equal treatment of foreign and Ukrainian-owned businesses, although certain restrictions exist in some areas such as insurance, telecommunications, banking, publishing, broadcasting, manufacturing alcoholic spirits. Foreign investment in armaments, explosives, drugs and other areas of national interest are prohibited.
 
Legal Guarantees to Foreign Investors. Under current Ukrainian legislation foreign investors enjoy the following legal guarantees: - protection for a period of 10 years against adverse changes to the investment treatment contained in the law at the moment when the investment was actually made;
  • investments cannot be expropriated, except in case of national emergency (evacuation and rescue measures in connection with disasters, accidents or epidemics) and with appropriate compensation;
  • the right for compensation of damages (losses of profits and moral injury) resulting from the negligent acts or failure to perform its duties by the state bodies;
  • the right to repatriate the original investment in the event of termination of the investment without payment of customs duties upon 6 months prior notice;
  • the right to the prompt and unimpeded repatriation of profits and other funds in foreign currency derived from investments in Ukraine, after the payment of any taxes due.
In order to enjoy above mentioned guarantees and privileges provided for in the law the foreign investment should be registered by respective state authorities (municipalities), however failure to register foreign investment does not lead to invalidity thereof. The Cabinet of Ministers of Ukraine has established procedures for the registration of foreign investments, which is quite easy to comply with.
 
Vehicles for Foreign Investments. The law provides for a variety of vehicles that can be used for investment purposes, including but not limited to:
  • forming a new company with a Ukrainian partner or purchase of an interest in already existing Ukrainian company;
  • establishing a wholly-owned subsidiary, branch or any other separate structural unit of a foreign legal entity, or acquisition of an existing Ukrainian company;
  • acquisition of any kind of real or other property which is not directly prohibited by applicable Ukrainian legislation, or acquisition of shares, bonds or any other securities;
  • acquisition of land use rights or concessions for the development of natural resources;
  • acquisition of other property rights;
  • investments based on cooperation agreement with a Ukrainian partner.
 
Forms of Foreign Investments. The Ukrainian legislation does not impose any restrictions as to the form in which foreign investment can be made. In particular, the law allows investing by the following means:
  • foreign hard currency;
  • Ukrainian currency as a re-investment into the existing or a newly established company;
  • any movable or immovable property and rights related to such property;
  • shares, bonds, other securities or corporate rights;
  • monetary debts, receivables and any other claims under contracts, evaluated in hard currency and guaranteed by first class bank;
  • intellectual property rights evaluated in hard currency, including patents, copyrights, trademarks, brand-names, know-how;
  • rights to carry on separate types of business evaluated in hard currency, including rights or extraction and utilization of natural resources.
 
Mutual Investment Protection Treaties. Ukraine has concluded investment protection and promotion treaties with more than 50 countries including: Argentina, Armenia, Austria, Azerbaijan, Belarus, Bulgaria, Canada, Chile, China, Cuba, Korea, Croatia, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Georgia, Greece, Hungary, Indonesia, Iran, Italy, Kazakhstan, Kyrgyz Republic, Latvia, Lebanon, Lithuania, Macedonia, Moldova, Netherlands, Poland, Russia, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, Turkmenistan, United Kingdom, United States, Uzbekistan, Yugoslavia. Where domestic legislation is less favorable, international treaties for investment protection may be invoked by investors to secure their rights.
 

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Ownership and privatization

 
The Right to Private Ownership. The Constitution of Ukraine explicitly guarantees the right to private ownership, including the right to own land. In addition, Ukraine`s Ownership Law, which was one of the country`s first major parliamentary measures, specifically recognizes private ownership and includes Ukrainian residents, foreign individuals, and foreign legal entities among those entities able to own property in Ukraine. Moreover, the law permits owners of a property (including foreign investors and joint ventures) to use such property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. 
 
Privatization in Ukraine. Privatization in Ukraine started in 1992, when Ukraine enacted two major pieces of legislation which covered large scale privatization and the privatization of small-scale enterprises respectively. The Government began to transform state enterprises into public joint stock companies during the "corporatization" process, followed by the sale of minority stakes through auctions and competitive tenders. The majority of enterprises privatized during 1993-1996 were small and medium businesses involved in the spheres of retail trade, food service, construction and other service-related activities. A significant portion of those privatized enterprises were the result of buy-outs by worker collectives. Initially privatization of medium and large scale state-owned enterprises, being transformed into public joint stock companies, carried out through distribution of privatization certificates. However, this method of privatization is not applicable any more since 1999 due to the lack of efficiency. Instead the Government had introduce individual (case-by-case) cash based privatization mechanisms. The key objective was set as the sale of the large and, if possible, controlling stakes of strategic industrial enterprises to investors who would invest into the development of the enterprise. The State Property Fund is the Government privatization authority responsible for performance of privatization in Ukraine. In particular, the State Property Fund: develops appropriate legislation and internal privatization procedures; submits to the Parliament for approval the State privatization program: defines the list of objects subject to privatization; elaborates a marketing strategy necessary for the speedy privatization; sells state-owned property. According to the Privatization Law, the following state-owned assets can be subject to privatization:
  • assets, production facilities and structural units of enterprises that constitute an integrated property complex;
  • unfinished construction sites;
  • state-owned shares (equities) in joint stock companies.
 
Eligibility of Foreign Investors to Participate in Privatization. Foreign individuals and legal entities can participate in the privatization process along with Ukrainian citizens and legal entities. The Privatization Law establishes that foreign investors and joint ventures are no longer required to pay in hard currency for the state property they purchase. Previously, such buyers were required to pay the purchase price in hard currency, to which a discriminatory currency conversion coefficient was applied. Currently in order to make payment for the purchased object of privatization, a foreign investor must open a separate local currency bank account in Ukraine. Joint ventures and foreign investors that are legal entities must submit a declaration of origin of the funds they intend to use as consideration for the property being privatized, regardless of the value of the purchase.
 
Impact of Privatization. The impact of Ukraine’s privatization can be assessed in terms of strategic changes to Ukraine’s economy over the last ten years. The State has given up majority ownership in 90% of its industrial enterprises. Millions of Ukrainian citizens have become shareholders and more than 60% of Ukraine’s labor force work for privatized enterprises. In many cases, the new generation of investment fund managers, who have become major shareholders via the privatization program, are putting in place new enterprise directors and managers and introducing new management techniques. The shares of thousands of privatized enterprises have served as the basis for the development of Ukraine’s capital market, including the establishment of stock exchanges and an over-the-counter trading system.
 

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Land and Real Estate

 
The New Land Code of Ukraine. Starting from January 1, 2002 the new Land Code of Ukraine came in effect. The adoption of the Land Code is a significant step forward in Ukraine`s efforts to bring its legislation into compliance with best international standards in this area. The Land Code introduces a number of important concepts and principles, in particular governing land ownership and related rights, such as the private ownership of land in Ukraine, the right of foreign citizens and legal entities to own certain types of land in Ukraine, servitudes and rights of third parties. The Land Code also incorporates the existing Ukrainian land type classifications. These are based on the concept of land designation, and include agricultural land, land for residential and public construction and use, land of historic and cultural significance and others. The Land Code applies to all types of land in Ukraine, and governs the legal relations of Ukrainian and foreign individuals and legal entities, state-owned companies, state and municipal authorities of Ukraine, foreign states, and international organizations in the field of the ownership, use, and disposition of land in Ukraine.
 
Ownership and Other Rights in Land. The Land Code expressly states that there are three types of ownership of land in Ukraine: private, municipal and state. Ukrainian individuals and legal entities are no longer restricted in their ownership, use or disposition of land subject to a few restrictions primarily applicable to agricultural lands. In particular, agricultural land may not be re-sold, alienated, or otherwise disposed of (unless such alienation occurs as a result of an exchange agreement, inheritance, or the withdrawal of land for a public purpose) by individuals or legal entities until January 1, 2005. The Land Code does not contain any similar restrictions with respect to non-agricultural lands. The Land Code provides for the following types of rights to land in Ukraine:
  • ownership right;
  • perpetual/indefinite use for state owned enterprises;
  • short-term and long-term leases;
  • servitudes.
The Land Code contains a number of guarantees for landowners and land users, and significantly limits the powers of the state authorities to terminate the right of ownership of land, by stipulating that the state authorities may restrict or limit the ownership of land only pursuant to a court decision. The Land Code expressly provides a restrictive list of cases, in which the right of ownership of a land plot may be terminated, such as alienation of a land plot at the owner`s decision or alienation of land for public needs. Land lease is considered to be a contractual, limited-in-time possession and use of a land plot, which is granted for compensation and which is necessary for the lessee`s commercial and other activities. All Ukrainian and foreign individuals and legal entities may lease land in Ukraine. The Land Code establishes two types of land leases: short-term (up to 5 years) and long-term (up to 50 years). Lessee is entitled to sublease the land plot, subject to the lessor`s consent. Lessors of land plots are defined only as the owners of such land plots or their authorized representatives. The Land Code also recognizes new types of rights of third parties and establishes the concepts of "servitudes" and "good-neighborliness".
 
Transactions with Land. Land plot could be an object of purchase and sale through civil law agreements (contracts). This method of land alienation applies to any type of land in Ukraine and may be utilized by any Ukrainian or foreign individual or legal entity. As a rule, state and municipal land may be sold only at land auctions. Every agreement on the sale and purchase of a land plot is subject to notarization and further state registration in the Land Cadastre. Land plot can also be mortgaged by its owner. However, only banks may act as mortgagees in respect of such a mortgaged land plot.
 
Eligibility of Foreign Investors to Own Land. Foreign individuals and legal entities are also allowed to own, use, and dispose of certain non-agricultural land in Ukraine, but are explicitly prohibited from owning agricultural land. In particular, foreign individuals and legal entities may own only non-agricultural land if they purchase buildings or construction or land plots for construction purposes. State or municipal land may, however, be sold to a foreign legal entity if it establishes and registers its permanent establishment in the form of a representative office in Ukraine. Although, in principle, a Ukrainian-registered company, which is owned by a foreign company or individual, may own non-agricultural land without above restrictions. Foreign investors are not limited in rights to lease the land or transact with the land that they own.
 
Real Estate (Buildings and Constructions). Real estate can be owned in Ukraine either by Ukrainian residents or by foreign individuals and legal entities. Ukrainian legislation imposes no restrictions on eligibility of foreign individuals or legal entities to purchase or lease buildings and flats from the state or private companies and individuals. However, the process is often complicated by confusion about legal title. The law specifically permits owners of property, including foreign investors and joint ventures, to use such property for commercial purposes, to lease property and to keep the revenues, profits and production derived from its use.
 

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Types of Businesses

 
Joint Ventures and Other Forms of Businesses. Joint ventures as a form of business, including those between Ukrainian and foreign partners, were popular in Ukraine immediately after the start of the transformation to a market economy. They were viewed as a compromise between the customary form of business oriented towards national ownership and the necessity to attract foreign investors and learn foreign business practices. Joint ventures are based on the common capital of Ukrainian and foreign business activity entities, as well as on joint management and common distribution of results and risks. A joint venture acquires all the rights of a legal entity since the moment of its state registration. Joint ventures may perform business activities of any kinds, except for those explicitly prohibited by law. As far as legal forms of joint ventures are concerned, the legislation of Ukraine stipulates no limitations - they are free to be established in any corporate forms of partnerships usually applicable in Ukraine. The Ukrainian legislation provides for variety of types of partnerships. However, as a practical matter, most business entities in Ukraine are established as joint stock companies (JSC) or limited liability companies (LLC). Such types as additional or full liability companies are being never used. Shares or stocks in Ukrainian companies can generally be issued or sold to non-Ukrainian residents without restrictions. There is no limitation on the percentage of ownership of a foreign investor in most types of Ukrainian companies.
 
Joint Stock and Limited Liability Company. JSC is a company whose capital is divided into a specified number of shares. In JSC shareholders are only liable for the obligations of the entity to the extent of their capital contributions evidenced by shares. At least two founding shareholders are necessary to create JSC. There are two types of JSCs: public and closed. A public JSC is established via a public offering and subscription of shares; a closed JSC shares are distributed privately among the founding shareholders. Shareholders are free to determine among themselves the share distribution that each will have in JSC. Shares issued by both closed and public JSC must be registered with the State Commission on Securities and Stock Exchange (Securities Commission). Closed JSC differs from public JSC by rather narrow number of its co-owners (shareholders) and by the fact that its shares are not eligible to free trade at stock exchanges. Neither public nor closed JSC enjoys any privileges as to the business that they are entitled to conduct in comparison to any other types of legal entities. Besides, JSC have rather big disadvantages connected to rigid state regulation related to issuance of shares, holding shareholders registers and submitting regular financial reporting. From this perspective utilization of LLC as a vehicle for foreign investments seems to be much easier and practical. In many aspects LLC is very similar to JSC with a major difference coming from the fact that LLC does not have shares in a traditional sense. Participants in LLC own an interest in the company’s capital pursuant to a written agreement between themselves. LLC should have at least two founding participants (stakeholders), who are liable for LLC obligations only to the extent of their capital contributions. Ownership interests in LLC are expressed in terms of contractual rights that arise out of the founding documents. A transfer of ownership rights is accomplished through an assignment of these contractual rights. Since interests in LLC are not qualified as securities, they are not subject to registration with the Securities Commission. 
 
Wholly Owned Subsidiary. As an alternative to partnerships (JSC and LLC) wholly owned subsidiary (also known as a daughter enterprise) can be considered for investment purposes. Subsidiary is a legal entity established exclusively by another entity that is its sole owner. Subsidiary does not issue shares and has no capital distributed for any shares or portions. There is no minimum capital requirement for a wholly owned subsidiary as well. Subsidiaries are not specifically regulated, as are other forms of business entities such as LLC or JSC. The advantage of a subsidiary is that it offers more flexibility upon formation. Consequently, the disadvantage is that it affords state authorities more flexibility in interpreting the regulations they wish to apply to subsidiaries. Moreover, in many cases, state authorities are reluctant to register subsidiaries established by foreign entities.
 
Licensing. Licensing is mandatory for certain types of activity. In particular, the following areas are subject to licensing by respective government agencies: exploration and extraction of natural recourses; manufacturing of weapons, explosives, chemicals, cosmetics, pharmaceuticals and veterinary products, space objects, holograms and laser discs; transactions with precious metals and stones; supply of oil and gas: medical, veterinary, mailing, utilization, transportation and carrier services; gambling; construction business; broadcasting; tourism; industrial fishing; professional trade in securities etc. Licensing of products, technology, technical data, and services is being widely introduced in Ukraine. Due to the long list of activities subject to licensing, the large number of government agencies involved in the licensing process, and obscure and contradictory licensing regulations, licensing was viewed as one barrier in the way of foreign investments. However, over the last couple of years the tendency has been noticed to cutting down drastically the list of licensed activities being limited only to those that represents public policy or national security concerns.
 
Representative Office. Foreign legal entities are permitted to establish representative offices in Ukraine, which are similar to an un-incorporated branch. A representative office does not constitute a legal entity and operates in Ukraine on behalf of a foreign company it represents. A non-resident company operating a representative office is deemed to be conducting business activity in Ukraine through a permanent establishment and may be subject to corporate profits tax unless protected by a double taxation treaty. A representative office is permitted to carry out marketing, promotional and other auxiliary functions on behalf of foreign legal entity. It is less clear whether a foreign company can also carry out trade or business through a representative office, although in practice many have been permitted to engage in activities that go well beyond the scope of traditional representative offices. However, for manufacturing purposes representative office is definitely not suitable. For regulatory and taxation purposes, with some exceptions, representative offices are treated similarly to independent legal entities. Some industries, including banking and insurance, are more heavily regulated, and must be established in compliance with specific requirements. The registration of representative offices is carried out by the Ministry of Economy and European Integration of Ukraine.
 
Joint Cooperation Agreement. Ukrainian legislation provides a foreign investor with the right to invest in Ukraine without creating a legal entity by entering into a joint production or joint cooperation agreement with Ukrainian partners. Joint activity agreements with participation of a foreign investor are subject to state registration in the Ministry of Economy and European Integration of Ukraine on almost similar terms with registration of representative offices. Contributions of the parties in joint activity as well as outcomes of such activities are considered to be a joint property of the parties. Therefore, one of the parties may not dispose of his share in joint property without consent of the other party, which brings a lot of similarity in legal treatment as in the case with partnerships registered as legal entities. Management of joint activity and conducting joint business must be assigned to one of the parties by their mutual agreement based on the power of attorney. Separate bookkeeping and tax reporting under the contracts on joint investment activities are required. Besides, for settlement of accounts it is necessary to open a separate bank account for joint activity. Accounting, tax reporting and managing segregated bank accounts must be assigned to the party, which is responsible for management of joint activity. Contract-based investments are subject to taxation almost on the same grounds as taxation of business entities.
 

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Mergers, acquisitions, liquidation and bankruptcy

Reorganization or Liquidation of a Company. In accordance with Ukrainian legislation termination of a company’s activity takes place by means of its reorganization (e.g. merging, acquisition, split, separation, or conversion) or liquidation. A decision on reorganization must be taken by the highest body of a company – general meeting of stockholders. Current legislation also provides for a compulsory split of a company, which is abusing its monopoly position in the market. As a result of reorganization all rights and liabilities of a company transfer to its successors. A company may be terminated by a decision of its highest governing body or upon expiration of the term for which it was established (if any) or by a court decision if the company has become insolvent. Liquidation of a company is conducted by liquidation committee, established by the company`s owners or by authorized body (e.g. the Commercial Court). Liquidation committee estimates the asset value of a company, it pays creditors, prepares the liquidation balance sheet and submits it to the owners or other body, which had appointed liquidation committee.
 
Anti-Monopoly Requirements. Since acquisitions are considered to be one of the vehicles for foreign investments, for large-scale investment projects the requirements of Ukrainian anti-monopoly and competition legislation must be taken in account. This legislation provides the principal features of:
  • anticompetitive concerted actions between business entities;
  • monopoly position of business entities and abusing that monopoly position;
  • anti-competitive actions of state authorities;
  • restrictive and discriminatory activities by business entities and their associations.
In order to follow the above mentioned features, certain transactions are subject to prior approval of the Anti-Monopoly Committee of Ukraine if they meet thresholds defined in the law. In particular, such approval is required for the following transactions:
  • mergers of business entities;
  • acquisition of direct or indirect control over a business entity by appointing the management of this entity;
  • direct or indirect acquisition or obtaining management control of shares (interests) of a business entity, if such acquisition results in obtaining or exceeding 25% or 50% of voting rights of the target business entity;
  • direct or indirect acquisition of assets or rights to manage the assets treated as “a whole property complex” of an enterprise.
Above transactions are subject to prior approval if the aggregate value of the assets or sales turnover of all participants of the appropriate transaction exceed twelve million Euro for the last fiscal year provided that: the assets or sales turnover, including those abroad, of at least two participants of the transaction, exceeds one million Euro for the last fiscal year andor the assets or sales turnover in Ukraine of at least one of the participants exceeds one million Euro for the last fiscal year, including assets and turnover of their affiliated entities. For calculation of the foregoing thresholds, it is necessary to consider the assets and sale turnover of entities associated with direct participants of a transaction.
 
Bankruptcy. A company may be terminated as a result of bankruptcy. Bankruptcy cases are initiated exclusively against legal entices and not against separate structural units such as representative offices, departments or branches. An individual is not entitled to be a debtor under Ukrainian insolvency law. Under current Ukrainian insolvency legislation, bankruptcy is defined as the failure of any legal entity or individual entrepreneur to meet timely tax liabilities andor creditors’ claims, due to its lack of assets. Another requirement for bankruptcy proceedings is that the debtor owes debts of no less than 300 minimum monthly wages in UAH. Creditors have the right to initiate insolvency procedures only in the Ukrainian State Commercial Court. Bankruptcy proceedings can be initiated by submitting a written demand to the Commercial Court. Any creditor may initiate bankruptcy proceedings when a legal entity or individual entrepreneur fails to meet the time deadlines. A debtor may apply to the Commercial Court on its own initiative if it is financially insolvent.
 

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Employment 

Employment and Labor. Ukraine has a well-educated and skilled labor force, with a nearly 100 percent literacy rate. Wages in Ukraine remain very low by western standards. Ukrainian labor legislation is inherited from Soviet times and therefore the emphasis is made on protecting rights of employees rather than of employers. In particular, provisions of individual labor agreements which worsen employees working conditions of compared to those which are stipulated by the Ukrainian labor legislation are considered ineffective in Ukraine. The main body of laws covering the Ukrainian labor rules is the Labor Code. Ukrainian labor legislation requires employers to follow statutory requirements as to the working time, overtime and time-off from work. In Ukraine, working time is limited to 40 hours per week. An employer may introduce a six-day working week, in which case the working day may not exceed seven hours. Shorter working time is ensured for some categories of employees. Overtime may not exceed two hours per day or 120 hours per year. An employee`s minimum annual holiday entitlement is 24 calendar days. However, it may be longer depending on the number of years worked, working conditions and the employee`s position. Normal retirement age is 55 years for women and 60 years for men. Women are entitled to paid maternity leave for the 70 days prior to and 56 (sometimes 70) days after childbirth. A woman will be entitled to partially paid leave until the child reaches the age of three. Salaries of employees are determined in accordance with the employment agreement.The Labor Code provides for additional compensation for overtime, holidays, as well as night-time work. Wages and all other payments due to employees shall be in UAH only. Salary must be paid at least once every two weeks. There is a criminal liability for groundless salary underpayment. Employees are generally entitled to sick leave benefits. Such benefits are based on the employee’s wages and vary between 60% and 100%. An employment relationship is subject to labor legislation in Ukraine, internal employer regulations, collective agreement of an employer. An employee is entitled, as a minimum, to rights and benefits afforded under the Labor Code. Ukrainian labor legislation provides certain guarantees for employees, including: the right to reinstatement in a prior job upon the expiration of the term of an elected office; being paid wages while being hospitalized or spent time away from work for performing the functions of a trade union officer, appearing in court, going to vote and fulfilling other state or social responsibilities; the right to keep one’s job when on a training program; certain social benefits like maternity leave, paid holidays and vacation time. An employer is not permitted to demand work from an employee beyond that included in the labor agreement, without the consent of the employee except in certain circumstances. These include temporary transfers of one month in the event of an industrial emergency and transfers ensuring from disciplinary proceedings.
 
Labor Agreement. Ukrainian legislation allows individuals to choose their place of work and enter into direct labor agreements with employers. The law also provides a typical form of a labor agreement and provisions to be included in such an agreement. According to Ukrainian legislation, any enterprise may be required to honor its employees` request to conclude a collective agreement, even if there is no trade union presence at the enterprise. Ukrainian labor legislation requires that a labor book be kept for each employee working for an enterprise longer than five days. This is the basic document concerning activities of an employee, reasons for dismissal, etc. As the labor book is a legal requirement, all enterprises are generally required to sign, stamp and hold such labor books for their employees. In order to hire a Ukrainian citizen, an employer should receive employee`s labor book and passport. A labor agreement may be concluded for an indefinite period of time, a specific term which is settled through mutual consent of the parties, or for the amount of time necessary to perform the work. The probation period of an employee may not exceed three months but depending on the qualification of such a worker the time may be reduced to one month. If an employee continues to work after such period has expired, he is considered to have `passed the test` and is entitled to all rights and protection under Ukrainian law. Employees may at any time terminate employment relationship (e.g. labor agreement). Notice period is at least two weeks. In contrast, employers may terminate the employment relationship only in cases that are expressly envisaged by the Labor Code and provided that all applicable formalities are met. The statutory termination notice is two months. Grounds for termination of employment by an employer under the Labor Code in particular include:
  • dissolution of an enterprise or reduction of personnel;
  • reinstatement of a worker who previously performed the job;
  • systematic non-fulfillment of working duties without good cause;
  • absence without good reason;
  • absence from work for more than four months as a result of a temporary disablement (not including maternity leave).
An employee must be warned of essential changes in work terms no less than two months in advance. If the former terms cannot be maintained and the employee disagrees with the new terms, a labor agreement can be discontinued. In this case, an employee shall receive severance pay. Upon being dismissed from a job as a result of redundancy ensuing from changes in the organization of the work, an employer shall continue to pay a salary to the dismissed employee until the latter finds new employment, but for a maximum period not exceeding three months.
 
Expatriate Personnel. Ukrainian employers must obtain work permits for foreign nationals, who are either directly employed or seconded to Ukraine by foreign companies. A work permit may be issued for up to one year with subsequent renewal. The overall time of employment in Ukraine is not limited. Non-compliance with the work permit requirements is subject to penalties, as well as potential summary deportation of a foreign national from Ukraine at the cost of an employer.
 

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Taxation and Fiscal System

Tax system. Ukraine tax system is undergoing reforms, which are expected to be completed when a new tax code is introduced. Reforms are aimed at increasing Government revenues by reducing the number of special tax exemptions and simplifying and streamlining compliance procedures. Number of taxes and tax rates gradually are being reduced significantly. Principal taxes and compulsory payments in Ukraine include the following: corporate profits tax, personal income tax, value added tax (VAT), payroll payments, excise tax, land tax, tax on owners of motor vehicles, import duties. Other taxes and charges include stamp duty, royalties on oil and gas extraction, charges for exploitation of natural resources, charges on environmental pollution and charges for retail trade patents. In addition, there are 16 different local taxes that may be levied at discretion of local authorities. Brief description of the most essential taxes is indicated below.
 
Corporate Profits Tax. Ukrainian Corporate Profits Tax Law distinguishes between domestic companies and foreign companies based on their place of incorporation. Domestic companies, those incorporated in Ukraine, are taxed on their world-wide income whilst foreign companies are subject to corporate profits tax on profits from business activities performed via a permanent establishment in Ukraine. Permanent establishment is considered to be a fixed place of business through which the business activity of a non-resident entity is wholly or partly carried on in Ukraine. In particular, a permanent establishment includes:
  • a place of management, a branch, an office, a plant, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
  • a Ukrainian resident business entity which has the authority to act in the name of a nonresident entity generating civil rights and obligations for the non-resident entity.
Taxable profits are defined as adjusted gross income less allowable gross expenses and depreciation (amortization) charges. Gross income includes any sales or non-sales incomes received or accrued within a reporting period (quarterly). Gross income is deemed to be received either on the date the goods/services are shipped/rendered, or the date the payment is received from a customer, whichever happens first. Gross expenses include any expense actually incurred or accrued in respect of the taxpayer`s business excluding non-allowable expenses specified by the law. Gross expenses are recognized either at the date of payment to a supplier (contractor) or at the date when the goods, works or services were received, whichever occurs first. Transactions between related entities are subject to transfer pricing regulations. In particular, income received by a taxpayer from transactions with a related entity is determined based on contractual prices which cannot be less than usual market prices on the date of a transaction. The same rule refers to a taxpayer`s expenses in connection with the purchase of goods or services from a related entity. The existing law generally allows reasonable business expenses as tax deductible, with the exception of expenses explicitly disallowed or restricted by the law in a detailed list. Disallowed or restricted expenses in particular include: fuel, repairs of company cars; contractual penalties; expenses associated with warranty repairs; expenses incurred in connection with receptions, celebrations and similar events. The following are not included in taxable profit:
  • capital contributions in return for a share in the equity;
  • contributions in cash or in kind under joint activity agreements in Ukraine without creation of a legal entity;
  • share premium received by a share issuer;
  • dividends received provided they were taxed upon distribution.
Resident companies and non-resident entities that have a permanent establishment in Ukraine are obliged to keep accounts in accordance with Ukrainian accounting standards. Tax returns must be filed both by resident and non-resident taxpayers on a quarterly basis within 40 calendar days following the last day of the reporting quarter. Tax should be paid within 10 calendar days following the date when the tax return has to be filed.
 
Withholding Tax. Income earned by non-residents from Ukrainian sources is subject to withholding tax on the following:
  • interest on loans;
  • dividends on corporate rights and securities;
  • royalties;
  • payments for engineering services;
  • rental (leasing) income from property;
  • income from disposal of a real estate located in Ukraine;
  • gains from securities trading or sale of other corporate rights;
  • income earned by an un-incorporated joint venture in Ukraine;
  • income from long-term contracts;
  • fees from cultural, educational, religious, sporting and entertainment activities;
  • broker`s or agent`s fees in respect of services performed in Ukraine;
  • income from lotteries and gambling business other than the state lottery;
  • charitable donations payable to non-residents;
  • other income from business activity in Ukraine except for sums payable to non-residents for goods, works or services supplied to Ukrainian residents.
A share of withholding tax is applicable to income from freight. Ukrainian withholding tax can be reduced or avoided under the relevant double taxation treaty. The procedure for the application of double tax treaties is rather liberal and transparent. It allows advance withholding tax clearance for any kind of income, provided the Ukrainian payer of income obtains from the income recipient its residence certificate issued by the authorities of the treaty country. For payment of interest between Ukrainian and foreign banks, the residence in the treaty country is evidenced by the excerpt from the International Bank Identifier Code. The tax on dividends should be paid prior to or simultaneously with the payment of dividends. However, the tax can be offset against corporate income tax liabilities of the entity distributing the dividends.
 
Transactions with Tax Haven Jurisdictions. Expenses in respect of direct or indirect purchases of goods, works or services by Ukrainian entities from suppliers registered in tax haven jurisdictions are deductible for taxation purposes. The list of tax haven jurisdictions includes: Andorra, Anguilla, Antigua and Barbuda, Aruba, Alderney, Bahrain, Bahamas, Barbados, Bermuda, Belize, Cayman Islands, Commonwealth of Dominica, Cook Islands, Gibraltar, Guernsey, Grenada, Isle of Man, Jersey, Liberia, Marshall Islands, Monaco, Montserrat, Netherlands Antilles, Nauru, Republic of Maldives, Panama, Puerto Rico, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and Grenadines, Samoa, Seashell Islands, Turks and Caicos, British and US Virgin Islands, Vanuatu.
 
Tax Conventions. A tax credit system is effective to avoid double taxation of income derived from abroad. A credit is allowed for foreign taxes paid up to the amount of Ukrainian tax due on such income, provided there is a tax treaty with the state in which the tax was paid and proof of taxes paid can be obtained. Tax conventions of Ukraine (overwhelmingly based on the OECD model convention), providing for certain tax privileges and exemptions, with: Armenia, Austria, Belarus, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Denmark, Estonia, Finland, France, Georgia, Germany, Czech Republic, Hungary, India, Indonesia, Iran Italy, Japan, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Malaysia, Moldova, Mongolia, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, Turkmenistan, United Kingdom, United States, Uzbekistan, Vietnam.
 
Value Added Tax. VAT Law provides for uniform treatment of both production and merchandising entities. VAT due to the State is assessed as the difference between VAT collected from customers and VAT paid to suppliers. All turnovers from the sale of goods, works and services in Ukraine are within the scope of VAT, including imports of goods and services. VAT liability arises either at the date of the goods shipment or at the date of receiving the payment from the customer depending on which event occurs first. For VAT purposes the law distinguishes between four types of transactions:
  • subject to VAT and taxed at the standard rate of 20%. This applies to sales of all goods and services apart from the exceptions set out below;
  • subject to zero-rate VAT. The list of these transactions primarily includes export of goods and services;
  • non-VAT transactions. Some of these transactions are: fixed assets contributed in exchange for shares in a company; leasing; rent payments; insurance; most banking services; trade in securities etc.
  • VAT exempt transactions. These in particular include: education services; artistic and cultural services; healthcare services; certain mass media services; privatization services.
In general, VAT is payable by:
  • an entity with a volume of VAT taxable transactions in excess of 3,600 non-taxable allowances for any preceding 12 months of operation;
  • an importer of goods, services or works;
  • an entity that is engaged in trade for cash regardless of the volume of sales.
Any entity qualified as a VAT payer is required to register for VAT purposes in local tax office. VAT registration is compulsory for all Ukrainian companies which are qualified as VAT payers. Foreign legal entities engaged in production or other commercial activity in the territory of Ukraine are considered to be VAT payers and required to register for VAT purpose. Foreign companies terminating their activities in Ukraine are obliged to file a final tax declaration with the relevant tax authorities. VAT is recoverable provided that the goods (works, services) are deductible for corporate profits tax purposes or, in the case of fixed assets, are subject to depreciation. VAT incurred on business expenses may normally be recovered as a credit against output VAT or as a refund, with the following exceptions: VAT on inputs corresponding to exempt supplies; VAT on certain expenses, which by virtue of the corporate tax legislation, are not deductible for corporate profits tax purposes. Generally, an input tax credit can only be claimed if the VAT has been paid to the supplier although there are some exceptions. VAT paid (accrued) by a taxpayer during the reporting period in relation to acquisition (construction) of fixed assets subject to tax depreciation are included as a tax credit for that reporting period regardless of the time the fixed assets are put into operation. There are no specific partial exemption rules. Companies making wholly taxable supplies can recover the VAT element of their expenses whilst those making wholly exempt supplies do not enjoy recovery. Partly exempt companies which make both taxable and exempt supplies are required to make a calculation as to what proportion of the input tax they should recover. Any exempt supplies will trigger a partial disallowance of input tax. The transfer of goods into the customs territory of Ukraine is chargeable to VAT at 20 % rate as well as any sales of services in the customs territory of Ukraine and import of services from a non-resident. The provision of services by non-residents to Ukrainian resident entities is subject to VAT. VAT is to be self-assessed by Ukrainian taxpayer and is due on the service fee payable to a non-resident. If service provider is regarded as being related to Ukrainian entity, VAT is collected based on the contract price but not less than the so-called `usual price`. The usual price is defined as a price that can be obtained by a seller from selling of services to non-related entities in the normal course of the seller`s business. To qualify as export and consequently to be zero-rated, goods should be physically exported outside the customs territory of Ukraine. Documentary evidence of export is important. In order for a zero VAT rate to be applicable for the export of services from Ukraine two conditions should be satisfied: services should be consumed by a non-resident entity and these services should be used or consumed outside Ukraine. The zero-rated exported services inter-alia include:
  • services provided in relation to lease, charter and freight of aircraft, ships, shuttles;
  • export of patents, trademarks, licenses;
  • advertising services to be used outside the territory of Ukraine;
  • international communication services;
  • sales of goods in duty free shops.
VAT refund for zero-rated operations is available to an exporter within 30 calendar days following the date of submission to tax authorities of respective application and supporting documents (e.g. customs declaration, copies of payment orders). An exporter can claim VAT refund based on the amounts of creditable VAT provided full payments are made to suppliers. VAT credit subject to refund is calculated as the percentage of export sales from total volume of taxable transactions during reporting period. Reporting period for VAT taxpayers can be either a monthly or quarterly. VAT return must be submitted to tax authorities within 20 calendar days following reporting month or within 40 calendar days following the last day of reporting quarter. VAT is payable to the State within 10 calendar days following the date when the tax return has to be filed.
 
Personal Income Tax. Ukrainian and foreign individuals are residents in Ukraine for personal income tax purposes if they are physically present in Ukraine for not less than 183 days in a calendar year. Residents are subject to personal income tax on their worldwide income. Non-residents are taxed only on their Ukrainian-source income i.e. income actually paid by a Ukrainian registered entity or income derived from a property located in Ukraine. Such income of non-residents in the form of interest payments, dividends or royalties is taxed. Any other forms of non-residents incomes, including rent, winning in lotteries etc, are taxed. Employers are required to withhold personal income tax and state pension and social insurance contributions from compensation paid to their employees and remit them to the appropriate authorities.
 
Payroll Taxes. Employers, whether a Ukrainian business entity or a permanent establishment of a foreign entity, are required to pay the following payroll taxes in respect of their employees based on gross salary:
  • to the Pension Fund;
  • to the Social Security Fund;
  • to the Employment Insurance Fund;
  • to the Fund for Social Insurance against Accidents at Work.
The tax rate depends on the level of risk of accident for enterprises belonging to certain sectors of economy. Employee’s personal contributions (withholding requirement applies) to the above funds are as follows:
  • to the State Pension Fund;
  • to the Social Security Fund;
  • to the Employment Insurance Fund (for Ukrainian national employees only).
 
Excise Tax. Excise tax is an indirect tax levied on certain profitable and monopolized goods (products), which is included in the price of these goods (products). All business entities producing or importing excisable goods (products) are the payers of excise duty. The list of excisable goods currently includes the following items: alcoholic beverages, tobacco and tobacco products, imported cars, fuel, tires, jewelry etc. Rates of excise tax are uniform for the whole territory of Ukraine. 
 
Import Taxes (Customs Duties). Generally, the following import taxes are payable by an importer upon importation of goods into Ukraine (customs duties and fees etc.). Customs value is defined as the invoice value increased by the following items:
  • actual costs of transportation, loading, unloading and insurance incurred up to the moment of crossing the Ukrainian border;
  • amounts of commissions and broker`s fees paid;
  • fees for intellectual property rights relating to goods which must be paid as a condition of their importation.
There are relieved and full rates of customs duty applied depending on the country of manufacture or origin. The relieved customs duty rates apply to goods manufactured in countries that signed trade agreements with Ukraine for the most-favored-nation status. Countries which qualify for this favorable trade regime include Austria, Belgium, Canada, China, Denmark, Egypt, Estonia, Finland, France, Germany, the United Kingdom, Greece, Hungary, Italy, Japan, the Netherlands, Switzerland, Sweden, Turkey, and the USA. Relieved import duty rates may also apply to goods manufactured in countries which have entered into free trade agreements with Ukraine (e.g. Belarus, Russia). Full rates are applied to goods from a limited list of countries with whom trading is not specifically encouraged or when the origin of goods cannot be defined. Import duty is payable in local currency and may be deferred for the period of one month by way of a bank guarantee. Exemptions from import duty are applicable for a very limited number of items (Ukrainian and foreign currency, securities, goods exempt from import duty under international agreement concluding by Ukraine, etc.). The Unified Customs Tariff is based on the Ukrainian Nomenclature of Foreign Trade compiled in accordance with the Harmonized Commodity Description and Coding System accepted in the EU.
 
Accounting and Financial Reporting. Since 2001 Ukraine has been implementing National Accounting Standards, which are based on International Accounting Standards. Ukrainian accounting remains primarily a means for computing tax liabilities. The principal features of the present Ukrainian accounting system are the following:
  • financial statements, with itemized schedules, are prepared on state approved forms; chief accountant manages the accounting and preparation of financial statements;
  • foreign-owned Ukrainian entities must adopt and follow the Ukrainian chart of accounts and accounting principles (but simultaneously may use their own system);
  • the accounts must be prepared in compliance with the chart of accounts and directions for making entries according to National Accounting Standards promulgated by the Government as law;
  • all accounting material must be in Ukrainian;
  • UAH is the basic accounting currency unit. Transactions denominated in foreign currency must also be recorded separately in UAH for accounting purposes;
  • financial year of a Ukrainian enterprise is the calendar year.
Manual accounting is still in widespread use and the system is built around prepared forms. These printed forms are journalizing sheets on which individual business transactions are recorded. In addition, there are memorandum sheets to combine one or more forms and for subsequent entries into the ledger. With its numerous forms and summaries, Ukrainian accounting is administratively burdensome and time consuming from an external observer`s viewpoint. Companies must file on a quarterly basis their commercial financial statements with the Ministry of Statistics and with the Securities Commission (if it is a JSC). Quarterly taxation reports should be filed before the 25th of the month following the reporting quarter. Taxation reports for the whole financial year must be filed with the tax inspectorate by February 15 of the next year. With the exception of financial institutions and public JSC, statutory audit reports are generally not required by Ukrainian companies. Qualified statutory auditors can be either an individual with the appropriate qualification or a firm employing licensed auditors.
 
 Tax Incentives for Foreign Investors. Tax Exemptions. Under the current corporate profit tax legislation, with one exception, no tax holidays or exemptions are provided to foreign investments. 5-year tax holidays used to be provided to foreign investors in previous years but these have been cancelled and are no longer applicable. Since Ukrainian tax legislation does not grant to foreign investors substantial tax exemptions, foreign investments are subject to taxation on the same terms as any Ukrainian businesses. Ukrainian legislation also does not provide for the creation of legal entities or partnerships which act as "flow through" entities for tax purposes. However some fiscal benefits for foreign investors exist. For example, foreign investor may import property into Ukraine as a contribution to the constitutional capital of a local company without paying custom duties. When importing such property, a company must issue a promissory note in the amount equivalent to the duty owed and with a maximum maturity term of 15 days. Such promissory note shall be extinguished once the property is transferred to the company’s account or balance. A company shall be required to pay respective import duty on the declared value of foreign investment if, within three years of importation, the foreign investment is alienated. In addition, exemption from import VAT is available for fixed assets imported into Ukraine as an in-kind contribution to constitutional capital of a Ukrainian legal entity. However, if the goods contributed are subject to excise duties, the exemption from VAT and import duties does not apply. If the investment is disposed of within 3 years from the moment of registering a foreign investment in the books of the Ukrainian entity, all the relevant import duties shall be due.
 
 

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 Exchange Controls and Currency Regulations 

Currencies in Ukraine. In 1992 Ukraine introduced the karbovanets as its temporary currency. Consequently, Ukraine was effectively no longer a member of the rouble zone of the former Soviet Union. In 1996 the UAH replaced the karbovanets as the official currency. According to the law UAH is a single legal form of payment between residents in the territory of Ukraine, which may be accepted without limitation for the settlement of any debts and obligations. Normally, foreign currencies cannot be used in Ukraine for settlement of any monetary obligations with major exception made for international transactions, foreign investments and international trade. Payments in foreign currencies between residents in the territory of Ukraine are prohibited, including payment of salaries by Ukrainian companies. However, this rule is not applicable to granting bank loans in foreign currencies and repayment of such loans.
 
Use of Foreign Currencies. Ukrainian legislation establishes no limitation on individuals to buy and sell foreign currencies. At the same time Ukrainian business entities are restricted in doing that. Foreign currency can be purchased by Ukrainian businesses free of any licensing procedures for the following main purposes:
  • payments in foreign currencies to overseas suppliers as a compensation for delivery of goods, works or services;
  • payments in foreign currencies of dividends, interest, royalty to non-residents;
  • repayment of a hard currency loan both to a resident and non-resident.
Purchase of foreign currencies is performed via Ukrainian banks or Ukrainian Inter-bank Currency Exchange. Submission to a bank of documents proving grounds for purchase and further transfer abroad of foreign currency is required and should be made prior to purchase of foreign currency subject to assessment by bank officers. Banks are considered to be so-called “agents of currency control responsible for inspecting clients’ compliance with currency exchange regulations. Investors are advised to deal with well-established banks that are experienced in handling such transactions. Payments under foreign trade contracts between a resident and a non-resident entity should be made only in foreign currency, unless Ukraine`s agreement with the relevant country allows for the use of national currency of Ukraine in such transactions. Currently, national currency of Ukraine can be used in international transactions only with residents of Russia and some other CIS countries.
 
 

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Banking System and Financial Sector 

Banking System. The evolution of the national banking system in Ukraine started in 1991, after the adoption of the Banking Law. In 2001, when the new Banking Law was put in effect, the Ukrainian banking system was modernized essentially based on progressive international standards. The Ukrainian banking system is a two-tier structure consisting of the National Bank of Ukraine and commercial banks of various types and forms of ownership. The National Bank of Ukraine serves as the country`s central bank which pursues a uniform state monetary policy to ensure the national currency stability. The National Bank of Ukraine has gained a reputation as a staunch enforcer of tight monetary policy and sound financial practice. Due to that Ukraine has stable national currency and law inflation. The National Bank is also the main regulatory and supervisory body for Ukrainian commercial banks. Banking services in Ukraine may be rendered only by those entities which were registered as banks in Ukraine. Registration of banks is performed by the National Bank of Ukraine. Representative offices of foreign banks must be registered with the National Bank of Ukraine as well, but they are not entitled to carry on banking operations in Ukraine. A bank can carry out banking activities only after obtaining the National Bank of Ukraine license where specific operations, that a bank is eligible to perform, are mentioned. The range of commercial banks activities includes traditional banking services such as:
  • receiving deposits of companies, institutions and households;
  • crediting of businesses and households;
  • keeping accounts, performing cash transfers and settlements of accounts;
  • foreign exchange transactions.
Banking is the first sector in Ukraine that transferred to International Accounting Standards (IAS). Starting from 1998, the banking system of Ukraine operates according to the international accounting and statistics standards, which are mandatory for all commercial banks.
 
Commercial Banks. In general, Ukrainian banks are rather universal than specialized. Therefore, they are willing to provide to their customers a broad range of services not being limited to purely banking but also covering other financial transactions such as investments, securities trade, custodian, depositary, management and trust services, factoring, leasing, issuance of guarantees and payment cards etc. Commercial banks are formed primarily as joint-stock companies on an equal footing with both legal and natural persons involved. Another option is a cooperative bank being set up at least by 50 founders. The National Bank of Ukraine has the authority to establish different minimum capital requirements than those indicated above for certain banks depending on their specialization if any. Bank’s capital must be paid up in cash only. In general, Basel capital adequacy principles are applicable in Ukrainian banking system. Direct or indirect acquisition of more than 10% of the bank’s voting shares or capital requires prior permission of the National Bank of Ukraine. Establishment of banks with foreign capital or transfer of shares in existing banks to foreign entities or individuals also requires prior permission from the National Bank of Ukraine. A bank with foreign capital is defined as a bank where foreign holding exceeds 10%.
Among private Ukrainian retail banks the following operate countrywide and play substantial role in the financial sector: Privatbank, Nadra, Pravexbank etc. The National Bank of Ukraine eased restrictions on foreign banks and has one of the more liberal policies towards foreign banks in the region. Therefore, several have entered Ukraine, including Creditanstalt Austria, ING Barings, Rafeissenbank, Citibank, Credit Lyonnais. All of them are represented by wholly-owned subsidiaries. The European Bank for Reconstruction and Development (EBRD) has made several investments in the banking industry including the First Ukrainian International Bank.
 
 
Financial Sector. Banks remain to be key financial intermediaries in the Ukrainian financial sector market. Partially it happens due to underdevelopment of other financial intermediaries such as credit unions, trusts etc. However, for the last few years new financial sector legislation was adopted in Ukraine aiming to foster development of financial sector on a comprehensive basis. This legislation is intended to create a class of financial institutions capable of serving as vehicles between investors and potential recipients of such investments as well as to establish appropriate infrastructure and instruments for their operation. In particular, mutual funds legislation has been introduced recently, which corresponds to modern international standards in this area. Mutual funds registered in Ukraine may attract investments by issuance of investment certificates. Such investments, depending upon a type of a mutual fund, may be invested in both diversified and non-diversified assets. New legislation also gave a ground for credit unions to grow as mushrooms – at the moment their number is counted by thousands. However, this sector remains extremely undercapitalized and restricted in operations, since credit unions may grant loans only to its members for limited number of primarily consumer purposes. Insurance business is growing as well despite certain infancy state of insurance industry. At present insurance policies available are medical insurance, mortgage insurance, real estate insurance, property insurance, medical insurance for travel abroad, insurance for transportation of goods, financial risks insurance. Life insurance just started to be implemented by a few insurance companies. According to the law, insurance activities may be conducted only by resident entities, where participation of foreign insurance companies is severely limited. Foreign insurance companies business in Ukraine is limited to re-insurance only. In 2003 new pension legislation was adopted that, first time in the history of Ukraine, stipulates operation of private pension system in line with operation of existing State Pension Fund of Ukraine. Appearance of new private pension funds is expected in 2005 and many hopes are pin to this event, since they are considered to become one of the major accumulators of long-term financial resources in the Ukrainian financial market. Currently, availability of only short and medium term resources is viewed by the Government of Ukraine as a most important problem for fast development of Ukrainian financial sector in a long term perspective.
 

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Securities Market 

Securities Regulation. The establishment of modern securities market is viewed in Ukraine as important stimulus for economic growth as it allocates substantial capital to most productive companies and leads to the formation of a capital market thus providing sources of finance for enterprises. The regulation of the securities market in Ukraine largely relies on the law on securities and stock exchanges, which defines different kinds of securities existing in Ukraine: shares, bonds, treasury obligations, saving certificates, investment certificates, privatization certificates. Traditional negotiable documents, such as promissory notes, bills of exchange and warehouse receipts, are also treated in Ukraine as securities, which create a lot of confusion since conditions and procedures, governing issuance of securities and intermediary activities as far as their placement and trade is concerned, are highly regulated. According to the law, securities can be issued either in documentary (paper) or non-documentary (electronic) form; they can be namely designated or issued to the holder thereof. Documentary securities may be transferred by endorsement, while securities issued in non-documentary form can be transferred only upon filing appropriate data with the specialized registrar. However, data on transfer of documentary securities by endorsement should also be registered in due course. Therefore, the securities market in Ukraine could be described as a “quasidematerialised” market where the legal evidence of ownership is restricted exclusively to the records of the registrar. In general, securities can be freely transferred; they can be used for settlement of accounts and may also be pledged as collateral for securing payments and credits.
 
Supervision on Securities Market. Supervision and regulation of securities market is executed by the Securities Commission. Ukrainian legislation regulates all types of professional activities that could be carried out on the securities market, including:
  • securities trading (brokerage and dealing);
  • depository activities;
  • clearing as to payment of securities;
  • securities management;
  • securities ownership registration and custody.
All these activities must be licensed by the Securities Commission subject to compliance with mandatory requirements, standard procedures and rules, established by the Securities Commission in respect to each securities market participant. Besides, the Securities Commission set up the rules of securities issuances. According to these rules any issuance of emissive securities (shares, bonds, investment certificates etc.) must be registered with the Securities Commission based on prospectus. Placement of such securities may happen only upon registration of the respective issue and prior publication of prospectus in local media. Issuers must regularly submit financial reports to the Securities Commission, which supervises their financial standing and compliance with obligations assumed as the result of respective issue.
 
Securities Market Infrastructure. National depository system, which was established in 1996, is a key element of securities market structure in Ukraine. National depository is an open joint stock company, whose shareholders may only consist of legal entities that are participants in the National depository system, e.g. depositories, custodians and registrars. All transactions with emissive securities are accounted in the National depository system. The primary purpose of the National depository system is to provide liquidity and secure operation of securities by setting up rules for transactions with them. Securities market in Ukraine is split up onto organized and non-organized (private). Organized market is considered to consist of transactions with securities performed via stock exchange, while non-organized market covers all securities traded privately out of the scope of stock exchange. Currently only approximately 20% of transactions with securities are performed via organized market. A first decentralized OTC trading system (similar to the US NASDAQ system), the PFTS, was established and began operations in 1996, increasing the transparency and liquidity of the market. PFTS is considered to be key element of organized securities market in Ukraine. Generally, securities market in Ukraine undergoes constant developments both in sense of improving its infrastructure and broadening the range of instruments used. At the moment Government bonds are considered to be the most secure instrument on the market being 0% risk rated. However, shares and corporate bonds market is growing gradually. In the nearest future appearance of new instruments is anticipated – investment certificates of mutual funds and mortgage securities (mortgage bonds and pass-through mortgage obligations).
 

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International Trade 

Foreign Trade.  The liberalization of foreign trade was a condition given to Ukraine in order for the country to participate in the World Trade Organization (WTO) and obtain financial assistance from the World Bank and International Monetary Fund. New Customs Code.
 
Imports. Import licenses are required for plant protection chemicals; postage, excise duty and similar stamps; officially stamped paper; ozone damaging substances and products that can contain ozone damaging substances; other limited number of goods presenting certain danger for nature, human health or national security. The Government strictly controls and restricts the import of weapons, narcotics, chemical and hazardous substances, certain pharmaceutical and communications related products. Foreign companies wishing to import these goods should contact the relevant Ukrainian Government ministry responsible for issuing licenses (for example the Ministry of Internal Affairs license is required for the import of hunting rifles).
 
Certification: For imported goods compulsory certification procedure was introduced with the purpose of ensuring their compliance with national standards. Certificates may be one of two types:
  • Certificate of Acceptance of a foreign certification issued by a Ukrainian certifying agency (DerzhStandard);
  • Conformance Certificate issued by a Ukrainian agency upon certification of goods.
Certificates issued by foreign certification authorities are to be recognized in Ukraine only to the extent provided in international treaties to which Ukraine is party. DerzhStandard adopted as national standards the ISO-9000 series for production systems certification. Based on these standards, Ukrainian certification bodies can evaluate the quality of a production system rather than the quality of a single product. The procedure for issuing ISO certificates requires a visit from Ukrainian standards specialists to the importer`s production facilities to inspect the system`s quality. Adoption of the ISO-9000 series should facilitate the process of certifying goods as system quality certificates are issued for a three year period. The ISO-900 standard certificate doesn`t prevent the importer from certifying individual products. However, with this certificate, only selective goods will be certified according to the procedures described above.
 
Labeling. Ukrainian commercial legislation does not impose general labeling requirements on imported goods, except food items. All imported food products should carry labels in the Ukrainian language. The labels should include information about the manufacturer, product ingredients, and expiry dates for quality control purposes. In addition, some labels/markings which should be adhered on specific products, including labels for hazardous materials, labels indicating the contents and expiration date of foodstuffs, and markings indicating the voltage and frequency of electric appliances.
 
Exports. Export contracts for certain categories of products, such as those falling under antidumping regulations, are subject to registration by the Ministry of Economics and European Integration. The main exports from Ukraine subject to licensing (and/or quotas where applicable) include: amber; precious metals and stones; certain metal and textile products exported to EU and USA; ferrous scrap metal; ferrous silicon manganese; ozone damaging substances and products that can contain ozone damaging substances. Special export control requirements are also applicable to military and other special commodities of dual-use. This control is administered by authorities of the National Export Control Committee implementing national control over protection of national security interests in compliance with Ukraine`s international commitments regarding non proliferation of weapons of mass destruction and delivery vehicles, restricted transfer of conventional armaments, and other measures aimed at protecting national interests. There is a general requirement that export prices should not be lower than world prices for similar goods. The Ministry of Economics and European Integration is empowered to establish mandatory indicative export prices for certain categories of goods (e.g. metal products, ferrous silicon manganese, livestock and raw hides, sunflower seeds, etc).
 
Customs. Any business entity that is engaged in export/import operations is required to obtain accreditation at the customs office, which serves the area in which the company is located. Goods crossing Ukrainian border should be declared to the customs authorities, either by the importer or a licensed customs broker on behalf of the importer. For customs classification of goods, Ukraine uses Ukrainian Classification of Foreign Economic Activities (UC FEA), which is based on the Harmonized Commodity Description and Coding System and Combined Nomenclature. UC FEA serves the basis for Ukraine’s Customs Tariff. Ukraine joined the International Convention on Harmonized Commodity Description and Coding System. All imported goods are subject to customs duty levied in accordance with the Unified Customs Tariffs. Customs value is defined as the price of the goods that has been actually paid or will be payable at the moment of crossing the customs border of Ukraine based on invoice value of the goods. Where it is not possible to determine the customs value of the goods based on the documents submitted, the customs office has the authority to determine the customs value based on prices for identical or similar goods in leading countries-exporters of such goods. Imported goods can be stored in the customs bonded warehouse (CBW) under customs control without payment of import duty and taxes during storage for three years and exported goods can be stored there under customs control after customs clearance for three months till actual exportation outside Ukraine. Certain goods can be stored in the CBW for a limited period of time or prohibited for placing into the CBW. There are two types of CBW:
  • public CBW, which is available to any users on a contractual basis;
  • private CBW, which can be used only by its owner.
CBW operator must obtain a license from the State Customs Service of Ukraine.
 
Toll Manufacturing Arrangements. Raw materials imported into Ukraine for processing under a toll manufacturing arrangements enjoy exemption from import taxes and duties provided finished products are re-exported from Ukraine during 90-day period. Finished goods can be sold in Ukraine after tolling. However, a non-resident owner of finished goods must register a permanent establishment in Ukraine and pay applicable import taxes and duties.
 

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Intellectual Property

Intellectual Property Regulation. Ukraine has already established a comprehensive legislative system for the protection of intellectual property rights. As a successor state to the former Soviet Union, Ukraine is a member of the Universal Copyright Convention (May 1973), and the Convention establishing the World Intellectual Property Organization - WIPO (April 1970). After independence, Ukraine became a signatory to a number of key international conventions. In addition, Ukraine has adopted laws regarding protection of rights in inventions, utility models, industrial designs, brand names and marks for goods and services etc. The protection of intellectual property in Ukraine has developed quickly along the lines of that in other European countries, based on the same principles and general rules of the major international treaties. Ukraine is a member state of the European system of protection of intellectual property rights created by the Paris Convention on Protection of Industrial Property and the Bern Convention on Protection of Copyright and Neighbouring Rights. To the extent these international treaties are contradictive to Ukrainian legislation, the provisions of the international treaties shall prevail. The Constitution of Ukraine adopted in 1996 protects the results of intellectual activity of people as their exclusive property. There are two basic types of intellectual property rights protected in Ukraine – industrial property and copyright. Under Ukraine laws the following types of industrial property are protected: inventions; utility models; industrial designs; trademarks. Currently legislation related to know-how and trade secrets protection is being under adoption in the Parliament; however these types of intellectual property are not yet legally protected in Ukraine.
 
Industrial Commercial Property. Preconditions, established by Ukrainian legislation, for registration of a patent in Ukraine for any type of industrial intellectual property are similar to those in other European countries. In particular, Ukrainian legislation establishes the priority right of the applicant who was the first to apply for a patent or trademark in any member state to the Paris Convention on Protection of Industrial Property. This right is valid only for six months of the date of the original registration, and it is therefore essential that a patent to be registered in Ukraine as well. Applications for registration of a patent should be submitted to the State Intellectual Property Department. Applicants are advised to enlist the help of professional patent agent. The period of validity of a patent depends on the type of an object patented. A patent on an invention is valid for a period of 20 years of the date of submission respective application the State Intellectual Property Department. Patents on utility models (models that offer technical improvements to an existing invention) are valid for a period of five years. Patents on industrial designs are valid for a period of ten years, and may be extended for a period not exceeding five years. In view of the rapid technical developments making some inventions obsolete in just a few years, some applicants prefer to protect their inventions in Ukraine with a simplified utility model registration to avoid the lengthy application process for inventions. Trademark ownership in Ukraine is evidenced by a certificate issued by the State Intellectual Property Department, effective for ten years of the date of submission respective application. It is possible to extend the effective duration of a certificate at the end of each ten year period. The holder of a patent or certificate may transfer the right of ownership or use of respective industrial intellectual property to any other person by execution of a license agreement, which should be registered at the State Intellectual Property Department. Any actions violating terms of a patent or certificate are considered to be infringements of holder’s rights. At request of a holder such violation must be ceases and a violator should pay compensation for any losses caused. In addition, a person whose rights have been violated by unfair competitive actions may also apply to the Antimonopoly Committee with a claim to stop such violation. In any case, the owner or legitimate user of industrial intellectual property rights is entitled to protect its infringed interests in the court. Violations of intellectual property rights can be punished by the courts with both civil and criminal liability. Sanctions usually include forced withdrawal from the market of products which infringe respective rights, as well as cessation of unlawful business activity by the offending party and payment of damages and legal fees.
 
Copyrights. In addition to industrial property, Ukrainian legislation protects copyrights including published and unpublished works dealing with science, literature and arts, irrespective of their designation, genre, volume, purpose (whether for education, information, advertising etc) and method of reproduction, and whether rendered in oral, written or any other form. As a member state of the Bern Convention on Copyright, Ukraine ensures protection of copyright through the Convention`s legal and institutional framework. Protection of rights in software is performed under existing Ukrainian copyright law. An infringement of copyright resulted from any reproduction or distribution of copies of works, sound recordings, radio or TV program without permission of a person holding a copyright, leads to civil or criminal liability. In the event of a copyright infringement the author or owner of copyright can apply to the State Agency on Copyright as well as to the courts for recovery.
 

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Dispute Settlement

Ukrainian Juridical System. Ukrainian court system in existing shape had been formed in 2001, when a number of laws related to judicial reform were adopted. Ukrainian court system is wholly state owned and is considered to be a separate and independent branch of power in Ukraine. A uniform system of courts of general jurisdiction exists in Ukraine where specialized courts forming subordinate parts of the general court system were established. As one of parts of general court system, 4 level specialized commercial court system exists. The first level of the commercial court system consists of local commercial courts, which exist in every region of Ukraine and in city of Kiev and Simferopil. Any commercial claims must be filed for resolution by local commercial courts according to the location of the party, who is a defendant in the case. There are procedural terms fixed by legislation, which must be followed by the court. However procedural legislation also contains a number of provisions enabling parties for different types of delays. Therefore, the length of the hearing always depends on circumstances and may vary from 2 month up to 1 year. According to the Law, parties to a dispute, after the case is heard in the local commercial court, may file an appeal to the respective commercial court of appeals, which constitute the second level of the commercial court system. Commercial courts of appeal exist in every region of Ukraine. After appeal hearing the parties may file cassation petition to the High Commercial Court of Ukraine and then to the Supreme Court of Ukraine, both located in Kiev. High Commercial Court of Ukraine and the Supreme Court of Ukraine constitute the third and the fourth level of the commercial court system in Ukraine respectively. The decision of the last instance shall be final and subject to enforcement. Enforcement of court decisions in Ukraine is performed by specialized State Execution Office attached to the Ministry of Justice of Ukraine.
 
Arbitration. All contracts between Ukrainian nationals or residents are subordinated to the Ukrainian legislation. Currently all commercial disputes between residents of Ukraine must be resolved within the scope of state commercial court system, which create significant delays in final resolution of the dispute and enforcement thereof. The law on private arbitration is being under adoption in the Parliament. Enactment of this law is anticipated this year; it will enable companies to resolve disputes more quickly using the advantages of private domestic arbitration system in Ukraine. According to the draft law, selection of private arbitration must be effected using respective arbitration clause in the contract. Different situation exists with requirements to dispute settlement in international transactions. In this context Ukraine adhered to the United Nations Commission on International Trade Law dispute settlement principles. Therefore, Ukrainian legislation allows the parties of the international contract to select on their own discretion the place of arbitration, arbitration rules and law governing the contract. Ukraine is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards. Therefore, enforcement of foreign arbitral awards in Ukraine is performed according to the rules set up in this Convention. However, Ukraine does not grant such enforcement to residents of those states, which did not join the Convention.
 

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Source: Doing Business in Ukraine. A Guide for Foreign Investors. Stusio Legale. Olivieri, Ciapetti & Partners. Attorneys and Counselors at Law 

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