Professional Documents
Culture Documents
Country Profile FINAL
Country Profile FINAL
Country Profile FINAL
2009
COUNTRY
PROFILE
1
2 Uniting Leading Companies from over 50 Nations Across the Globe
COUNTRY PROFILE (OVERVIEW BY SECTOR)
I BANKING & FINANCIAL SERVICES
The Banking Sector: The Currency Control Regime. The Anti-Money Laundering Set-Up ............................................................. 149
Financial Policy and Financial Services: Regulatory Issues .............................................................................................................155
Bankruptcy / Financing Restructuring ..............................................................................................................................................163
Leasing ............................................................................................................................................................................................168
II FMCG
Overview of the Ukrainian Retail Market Development .................................................................................................................... 171
V CUSTOMS REGULATION
Customs Audits of Business Entities in the Context of WTO Accession ......................................................................................... 183
VI INVESTMENT POLICY
Foreign Investment: Regulatory Issues............................................................................................................................................ 186
Overview of Ukrainian Market of Investment Funds ........................................................................................................................ 190
IX MEDIA
Television Broadcasting and Programming Services ....................................................................................................................... 215
XI TAXATION
Ukrainian VAT Treatment of Cross-Border Services as an Obstacle to Free Movement
of Services between Ukraine and the EU ....................................................................................................................................... 232
Tax Aspects of Mergers and Acquisitions in Ukraine ...................................................................................................................... 234
Tax Aspects of Business Administration under Various Forms of Management with Foreign Capital Participation ......................... 241
Tax Disputes in Ukraine................................................................................................................................................................... 246
Taxation of Non-resident Company Income Sources From Ukraine............................................................................................... 250
Personal Income Tax ....................................................................................................................................................................... 253
We would like to thank AstapovLawyers International Law Cash & Carry Ukraine Ltd, Microsoft Ukraine, LLC, OTP
Group, Baker & McKenzie – CIS, Limited, Baker Tilly Ukraine Capital, PricewaterhouseCoopers, Juridical Corporation
(an Independent Member of Baker Tilly International), PRINCIP, Salkom Law Firm, “Travel Centre “TRIME” – ITP
BEITEN BURKHARDT, Calyon Bank Ukraine, CMS Partner in Ukraine, UVK, WorldAPP, Inc., Yug Contract Co.,
Cameron McKenna LLC, Euro Leasing, Grant Thornton Ltd. (the companies listed alphabetically) for their generous
Ukraine, Kievapartment.com (Save Travel), Knight Frank contribution to the Country Profile section in the Membership
LLC, Law Firm “Arzinger & Partners”, Magisters, METRO Directory 2009.
www.chamber.ua
3
COUNTRYOVERVIEW
PROFILEBY SECTOR
www.calyon.kiev.ua
BANKING SECTOR • Ukraine has about 181 active banks (Russia: 1300).
Two are state-owned: the savings bank - Oschadny
• This report is based on data provided to the National Bank and UkrExImbank, previously named Vnesheconom-
of Ukraine (NBU) by the banks, as of 30 September 2008. bank (VEB) - External Economy Bank. As of 30 Sep-
tember 2008, state banks constitute only 8% of the
• Early October 2008, as a consequence of a raiders’ attack assets and the 6.6% of capital of the banking system
on Prominvestbank (PIB) and a massive run on its depos- of Ukraine.
its, the National Bank of Ukraine had to provide funding
and to takeover the management of this bank. In addition • Based on 30 September 2008 figures, western capital
the international financial crisis did hit Ukraine at the same controls more than a quarter (±30%) of the capital of
time and raised further worries about banks. Other runs the Ukrainian banking sector, and ± 33% of its assets.
took place, the interbank market dried up and, at the initia- If one adds CIS and offshore owned banks, such pro-
tive of the bankers, those events necessitated the set-up portions amount to 43% and 47%. Those banks rely
by the Regulator of harsh measures, including the ban to heavily on foreign funding, especially for the western
withdraw a deposit before its maturity, the freeze of hard banks, funded by their group. Global foreign funding
currencies’ loans outstandings, for what is lent to non-ex- of banks is in the ± 35 bn USD at the end of 2008,
porters (i.e. individuals and non-exporting corporations). with the majority of it provided to western banks.
• Such quick fixes, the measures taken by the authorities • Historically, Credit Lyonnais Bank Ukraine, now
and, as a consequence, the support provided by the IMF Calyon Bank Ukraine, came in 1993. Six other
to Ukraine, have led to a stabilization of the market early western banks came during the late 1990s: ING,
November 2008. Citibank, Raiffeisen, HVB, Unicredito and PKO.
If ProCredit Bank Ukraine started in 2001, as
• This document, based on data as of the end of the 3rd MicroFinance bank, the recent wave started in 2005:
quarter 2008, is thus to be considered as a snapshot, at SEB purchasing Bank Aggio, Raiffeisen purchasing
that time, of such banking sector in Ukraine, after 10 years Aval, BNPP purchasing 51% of UkrSibbank, Credit
of quasi uninterrupted growth in a favourable environ- Agricole purchasing Index bank, OTP (Hungary)
ment, and /or as a basis of the further structural changes purchasing the “historical” Raiffeisen. 2008
that will be the consequence of the world crisis impact on acquisitions: Unicredito – UkrSots bank, Bank of
Ukraine, given its banking sector’s situation today. Cyprus – AvtoZAZ bank, Intesa – Pravex bank.
www.chamber.ua
5
Table 1. Western owned banks, as of 30 September 2008 (USD/UAH rate – 4.8610)
Rank by Rank by
NameEng Group Country Assets, M$ Capital, M$
Assets Capital
2 Raiffeisenbank Aval RZB Austria 10 812 2 1 178
3 Ukrsibbank BNP Paribas France 8 936 3 989
4 Ukrsotsbank UniCredit Italy 7 972 4 761
9 OTP Bank OTP Hungary 5 083 15 363
14 Forum Commerzbank Germany 3 402 14 395
20 Swedbank Swedbank Sweden 2 566 17 300
22 ING Bank Ukraine ING Netherland 1 778 30 153
23 Erste Bank Erste Austria 1 712 18 282
24 UniCredit Bank Ukraine UniCredit Italy 1683 28 168
25 Pravex Intesa Sanpaolo Italy 1 375 27 171
32 Kredobank Ukraine PKO Poland 1 018 47 80
35 Swedbank Invest Swedbank Sweden 895 33 123
39 Calyon Bank Ukraine Credit Agricole France 793 44 86
40 Citibank Ukraine Citi USA 757 35 116
41 Index-Bank Credit Agricole France 751 45 83
44 Procredit Bank ProCredit Germany 605 59 54
52 Volksbank Volksbank Austria 447 51 71
56 SEB Bank SEB Sweden 375 58 57
59 Home Credit Bank PPF Czech Republic 356 55 66
63 Faktorial SEB Sweden 300 64 44
86 International Mortgage Bank IMB USA 199 48 75
120 Plus-Bank Getting Holding Poland 105 75 34
155 Ikar-Bank Societe Generale France 44 155 13
174 Privatinvest PPF Czech Republic 19 167 11
• The past three years have been marked also by a mas- 10 banks account for 49% of these assets, and the
sive coming of regional and neighbouring countries banks top 50 account for 88%. (There is still a significant
with a business model dwelling on relatively cheap exter- number of “pocket banks”).
nal funding for further development of consumer, car and
mortgage lending. Such banks established presence via • Deposits of population, representing more than a half
2nd Tier banks like Universalbank (EFG Eurobank Er- of the bank deposits, amounted to USD 43 bn at the
gasias), Piraeus Bank (both – Greece), Credit Europe end of September 2008. A 25% growth over 9 months
Bank (Turkey), Russian Standard Bank (Russia). in 2008 to be compared to a 55% increase in 2007,
a 46% increase in 2006, a 76% increase in 2005 and
• Separate group is represented by leading Russian a 29% increase in 2004. In 1999 amount was USD
banks moving to Ukraine to follow their clients and 1bn only. Individuals in Ukraine are coming back to
touch the ground in retail business outside Russia. banks, after having experienced losses in the 1990’s.
Alfa-Bank, VTB Bank and Sberbank aim at reaching They still have for their savings no other choice but
the Top 10 list (Alfa – No.10, VTB – No.11 already) banks because of today’s quasi inexistence of other
and handle business of every kind and complexity. investment possibilities at other types of financial in-
stitutions or in other non-banks financial instruments
• Some Ukrainian banks have managed to attract capi- (quasi no mutual funds, no significant outstanding
tal from portfolio and venture investors changing also in life insurance products, very illiquid stock market,
the map of the industry (Delta – 50% Russian money) very illiquid fixed income market).
• Total bank assets: +/- USD 155 bn (9/2008), +/- USD • The loans to GDP ratio in Ukraine should be in the
119 bn (12/2007), +/- USD 67.4 bn (12/2006), +/- USD +/- 80% range at the end of 2008. Even if not yet at
49 bn (06/2006), +/- USD 42 bn (12/2005), +/- USD western European levels, such ratio did increase sig-
25 bn (12/04), +/- USD 19 bn (12/2003). Overall 6 nificantly over the last years. At the end of Septem-
times growth (USD) over the last four years. The top ber of 2008 loans to corporations in Ukraine reached
USD 75 bn, after a 33% growth for the first 9 months no bullet proof possibility to hedge UAH interest rates
of 2008, after a 65% growth in 2007, and a 52% via UAH short-term interest rates derivatives). This
growth in 2006. Loans to individuals progressed even limits therefore the capacity of the banking sector to
faster: outstandings at the end of September of 2008 borrow/lend UAH at a fixed rate for one year and over
amounted to USD 42 bn, an amount multiplied by 6 tenors.
when and if compared to outstandings of December
2005 (USD 7 bn). • The banks’ funding in foreign currencies, i.e. USD
and EUR mostly, has, over time, developed signifi-
• The share of UAH loans and deposits which had been cantly. Historically, a few trade finance lines for up
in the +/- 60% for a few years declined today to 55%. to one year transactions where in place. Second,
Banks in Ukraine are prevented to have significant some Export Credit Agencies as Hermes, Sace,
foreign exchange positions against the domestic cur- Coface… accepted to open credit lines and later
rency, but individuals and corporations are not. The increased their potential exposures by taking up
very rapid pace of the development of the lending ac- to 7 years (now) equipment financing related hard
tivity having exceeded the pace of the development currency risks on some banks, (UkrEximBank, Raif-
of the availabilities in the domestic currency… banks’ feisenbank Aval, Prominvestbank, UkrSotsbank…)
hard currencies lending and borrowings increased From 2003 on, but for increasing amounts over
even faster - a situation that endangers the borrow- time, some top ten “big banks”, first, and, second,
ers, the lenders (banks) and thus Ukraine. 2nd tier banks succeeded to be funded for up to
one year tenors via the European syndicated loans
• Lending rates were at +/- 12 to 13% on average in market (USD 1.9 bn for 9 months of 2008, USD 4.0
foreign currencies (up), and at +/- 16% on average bn raised in 2007, USD 1.5 bn in 2006,). Exception:
in UAH (up), but below inflation, expected to be over early 2007 Raiffeisen Bank Aval raised USD 300 m
20% in 2008. The money market in UAH is not devel- (maximum amount) via a two years syndicated loan
oped (no UAH relevant T-bills issuance and activity, (the longest tenor). In addition, starting in 2003 also,
www.chamber.ua
7
Ukrainian Banking System - Assets Growth
180,000
160,000
140,000 22,895 4. Venture and CIS
Assets, Mio USD
120,000
100,000 50,774 3. Western Capital
80,000
60,000 2. Ukr. Private
40,000 69,393
20,000
12,380 1. Ukr. State
0
2006 EO 2007 EO 2008 3Q
and so far only some banks from the top ten ones, • Cards: 62 m as of the end of September 2008 ver-
were able to tap the Eurobond market for up to USD sus 50m a year before. Visa and Master debit cards
350 m transactions and up to 10 years tenors (USD mostly, but 21 m of credit cards.
1.2 bn for 9 month of 2008, USD 6.4 bn in 2007,
USD 3.5 bn in 2006). • UAH “bonds”: for corporations, even if the “investors’”
market in Ukraine is quasi inexistent, there has been
• Depending on the tenor and on the counterparty, the a UAH corporate “bonds” development over the last
cost of such hard currencies funding in 2008 was years. Notes in UAH for up to 2 years are being pro-
from +/- 1% all in to +/- 5% all in (over LIBOR). The posed to investors, i.e. mostly local banks and non-
2008 worldwide credit crunch is impacting Ukraine, residents, notes issued by locally owned corpora-
including its banks, especially its non-western owned tions, including some banks.
portion. But for banks, because also of the tight regu-
latory environment, such consequences were so far • The consumer loans market “exploded” over the last
much less severe than for other CIS countries (Rus- years. For instance +/- 300 000 cars have been fi-
sia and Kazakhstan especially). nanced by banks in 2007 (60% of new cars’ sales).
Top players: Privatbank, DeltaBank, UkrSotsbank,
• Total equity of Ukrainian banks as end of September Prostofinance (a consumer finance company owned
2008 amounted to USD 18.9 bn, a 32% increase over by SocGen). Mortgage loans developed also at a fast
the first 9 months of 2008, after an increase of 63% pace, and 2 securitization deals have been conduct-
in 2007, and an increase of 70% in 2006. All banks’ ed so far (Ukrgasbank, UAH 50 m; Privatbank, USD
capital adequacy ratio slipped from 17% at end of 134 m). In both cases, consumer and mortgages, the
2002 to +/- 12% today, but has been stable over the majority of the financing is in hard currencies (USD
last 3 years. mostly). In the USD 42 bn loans to individuals out-
standings at end of 09/08, consumer finance repre-
• The banking sector is a +/- USD 10 bn per year busi- sents the biggest share. Cars were, so far, for a still
ness today: the turnover / net banking income (NBI) at to grow middle class, much more “affordable” than
banks in Ukraine, i.e. the addition of interest margins housing related borrowings.
on loans and deposits, of fees, of foreign exchange
and securities related gains amounted to USD 8 bn • The domestic clearing system is excellent. Ukraine is
as of 30 September 2008 (+ 2/3 over same period in a country where cheques do not exist and … trans-
2007). Total NBI 2007: USD 7 bn. Banks’ NBI versus fers are the rule.
GDP is in the 5% plus range. It is a high figure that re-
sults from intermediation costs that are still in the 6 to • If banks involvement in financing in the economy
7% range versus a 2-4% range in the western world. remains relatively low, expensive and should be im-
Such cost for the economy in Ukraine results from proved, the daily service provided by banks and es-
some deficiencies: weak, even if improving, legal en- pecially the long time established in Ukraine Western
vironment and enforcement capabilities, small size banks is good, cash management systems provided
of banks (i.e. economies of scale would help), high by such banks being up to date also.
structural costs… But the development of the banking
sector and of its NBI has been significant over the last • The National Bank of Ukraine regulates the banking
years. In addition, today banks in Ukraine are much activity, banks being subject to very significant con-
more profitable: as to the end of September 2008 the straints in their day to day activities, even if the NBU
banks’ net profit was USD 1.37 bn (2007 banks’ net enforcement capacity is not perfect. As highlighted
profit: USD 1.32 bn). by the NBU, the Banking sector is faced, mostly
Funds @ disposal (possibility to withdraw cash wired • Non-resident UAH investments and divestments (divi-
from abroad without account opening): dends, sale of shares…) must be channelled via such
non-resident investment account at a bank in Ukraine
Disposable funds are limited per transaction and per and via a broker (banks usually have the latter capacity).
day to the equivalent of UAH 50 000 (applicable for
residents and non-residents). • Cross-border loans (loans granted by non-resident
lenders).
Non-commercial transactions:
• Currency purchases.
Wire transfers in foreign currency are limited to equiv-
alent of UAH 15 000 per month without account open- Main documents used to perform Currency Control:
ing as well as without supporting documents (before
29.10.2008 UAH 15 000 per day was allowed). For sales/purchases of goods – trade contracts, cus-
toms declarations, invoices.
Wire transfers in foreign currency are limited to the
equivalent of UAH 75 000 per month if made from For services (including royalties) – Contracts and doc-
current account and relevant supporting documents uments proving that services were provided. When
www.chamber.ua
9
such services provided by same foreign supplier ex-
ceed equivalent of EUR100 000 it is required to obtain Following entities are involved in the state level of fi-
in addition from a designated state entity a certificate nancial monitoring:
on price relevance.
• central executive authorities and the National Bank
For capital market divestments incl. dividend pay- of Ukraine which, pursuant to the law, regulate and
ments – investment agreement and a document proving supervise the activity of legal entities engaged in fi-
that investment was made and registered in Ukraine. nancial transactions,
• State Committee of Financial Monitoring or Finan-
If shares are sold by a non-resident, or if a divestment cial Monitoring Unit (FMU): a more than 300 persons
originally was made in kind and the proceeds are to staffed central organ of the executive branch whose
be repatriated, an “estimation certificate” issued by a head is nominated by the President of Ukraine.
licensed Ukrainian appraiser is required. In addition,
cash divestments of investments made in kind must Financial transactions subject to compulsory fi-
have been made possible by a treaty between Ukraine nancial monitoring:
and divestor’s country.
A financial transaction shall be subject to compulsory fi-
For cross-border loans – loan agreement, NBU regis- nancial monitoring if its amount equals or exceeds UAH
tration notice, and local bank’s consent to service such 80 000 or its equivalent in foreign currencies and if such
a loan. financial transaction also has one or more of the specific
features stipulated in the Article 11 of the Law, i.e. if certain
For currency purchases – contracts, invoices and cus- objective criteria are being met, reporting is compulsory.
tom declarations as mentioned above. Purchased For-
eign Currencies must be transferred within five banking Financial transactions subject to internal financial
days. monitoring:
The Law specifically excludes tax crimes from the list 3. Repeated financial transactions, the nature of which
of crimes subject to it. Laundering in Ukraine is related gives to believe that their aim is to evade the proce-
to prostitution, drugs, arms, terrorism and other crimes. dures of compulsory financial monitoring.
This “understanding” of the Law is still not perfect, i.e.
authorities are inclined to include tax crimes also. Internal financial monitoring can also be applied to
other financial transactions, when entity involved into
The system of financial monitoring consists of two lev- initial financial monitoring has grounds to believe that
els: the initial and the state level. such financial transaction is aimed at legalization of
“laundered” proceeds.
Following entities are involved in the initial level of fi-
nancial monitoring: Reporting to the FMU on a financial transaction subject
to internal financial monitoring is the result of an as-
• anks, insurance and other financial institutions; sessment which is based on subjective criteria.
• payment organizations, members of payment sys-
tems, acquiring and clearing institutions; ***
• commodity, stock and other exchanges; On 1 January 2006, changes to the previously men-
• professional operators in securities market; tioned Law came into force, in order to cover also the
• joint investment institutions; “terrorism” related activities. Based on a list provided
• gambling and pawn institutions and legal entities in- in October 2006, subjects of initial financial monitoring
volved in any kinds of lottery; are required to prevent for up to two days a financial
• enterprises, institution that manage investment funds operation to be executed, if a participant or beneficiary
or non-governmental pension funds; of a transaction is a person included in such list. The
• communication companies and associations, other FMU has the right to extend such time to up to 5 days.
non-crediting institutions that transfer funds;
• other legal entities that process financial transactions Subjects of the initial level of financial monitoring are
according to law. also obliged to “know their customers” and able to
The rapid growth of value of Ukrainian financial serv- Commercial Code of Ukraine, the Law of Ukraine “On
ices institutions and immense interest of foreign in- the National Bank of Ukraine”, dated 20 May 1999 (the
vestors to the Ukrainian financial sector has recently “National Bank Law”), the Law of Ukraine “On Banks
changed with a slowdown and evident slackening of and Banking Activity”, dated 7 December 2000 (the
financial sector deals and transactions, as well as for- “Banking Law”); and the Law of Ukraine “On Finan-
eign capital outflow from all sectors of Ukrainian econ- cial Services and the State Regulation of the Markets
omy, including financial sector. Such situation became of Financial Services”, dated 12 July 2001, as well as
a result of a global financial crisis continuing during the the Ukrainian legislation on joint stock companies and
last months of the year 2008. With the aim to neutral- other business entities, and the NBU regulations and
ize the impact of external financial crisis, to stabilize the banks’ respective constituent documents. Also, the
the banking system of Ukraine and maintain liquidity Banking Law permits operation in Ukraine of foreign
of Ukrainian banks, the National Bank of Ukraine (the bank`s branches as an integral part of Ukrainian bank-
“NBU”) imposed a number of restrictions with respect ing system. However, as of the current date, no such
to bank`s active and passive operations, foreign cur- branch was established in Ukraine.
rency transactions, etc. This review will focus briefly on
the current legal framework for banking and insurance 1.2. Role of the NBU
services in Ukraine, as well as on the consumer protec-
tion legislation aimed at protecting Ukrainian consum- The NBU is the central bank of Ukraine. Established in
ers of financial services. 1991 and governed by the Constitution of Ukraine and
the National Bank Law, the NBU is a specialized state
1. BANKING institution with the principal objective of ensuring the
external and internal stability of the national currency,
1.1. The Ukrainian Banking Sector for which it possesses broad regulatory and supervi-
sory functions in the banking sector. The NBU is em-
The Ukrainian banking sector is a two-tier structure powered to develop and conduct the monetary policy
consisting of the NBU and other banks, as well as for- of Ukraine, to organize banking settlements and the
eign bank’s branches, of various types and forms of foreign exchange system, to ensure the stability of the
ownership. These banks act in accordance with the monetary, financial, and banking systems of Ukraine,
Constitution of Ukraine, the Civil Code of Ukraine; the and to protect the interests of the commercial bank de-
www.chamber.ua
11
positors. The NBU is responsible for the re-organiza- 1.4. Regulation
tion or the closure and liquidation of insolvent banks, in
order to strengthen confidence in the banking sector. Banking activities in Ukraine are regulated by several
In 2001, one of Ukraine’s large banks, Bank Ukraina, laws and numerous regulations issued by the NBU. The
was declared insolvent by the NBU, a representative of principal legislation in this area is the National Bank
which was appointed as the liquidator of Bank Ukraina. Law and the Banking Law (collectively, the “Banking
As of 1 July 2008, 13 banks were under liquidation. Laws”). The NBU oversees compliance with the Bank-
ing Laws, regulations, and other legislation, and im-
The principal governing bodies of the NBU are the poses the appropriate sanctions for violations of those
Council and the Board. The Council, the highest gov- laws and regulations. The NBU, in accordance with the
erning body of the NBU, consists of 15 members, seven authority granted under the Banking Laws, has adopted
of whom are appointed by the Parliament and seven of the Banking Regulation Instruction, which establishes
whom are appointed by the President. The Chairman capital adequacy, liquidity, and other ratios. The NBU
of the NBU (nominated by the President and appointed also sets accounting, reporting, auditing, and other re-
by the Parliament for a five-year term) acts ex officio quirements for commercial banks. A bank may carry
as the fifteenth member of the Council. The Council is out so-called “exclusive banking activities” (i.e., taking
charged, in particular, with developing the principles of deposits, opening and maintaining bank accounts, and
Ukraine’s monetary policy. It has the right to veto the placement of raised funds) only on the basis of a bank-
Board’s decisions if they contravene those principles. ing license issued by the NBU. Banks are permitted
The Board, which is comprised of the Chairman, his to carry out additional banking transactions subject to
or her deputies, and other members of the Board, is obtaining a special written permit from the NBU.
responsible for implementing Ukraine’s monetary and
other policies in the banking sector and generally for 1.5. Reporting Requirements
managing the activity of the NBU.
Every bank is required to submit an annual report that
1.3. Monetary Policy contains audited financial statements, or consolidated
financial statements if the bank has affiliates under its
The NBU is charged with implementing Ukraine’s control, as well as a general description of the bank’s
monetary policy. Currently, the NBU implements this business. Financial statements are required to include
monetary policy through such instruments as manda- a balance sheet, an income statement, and sharehold-
tory reserve requirements for banks, interest rates, the ers’ equity and cash flow statements. The general de-
refinancing of banks, deposit operations, and reverse scription section must describe the basic features of
repo operations. The main channel for the release of the bank’s activity and its organization and manage-
funds into circulation is the foreign currency market. ment. Interim financial statements must be submitted
The NBU reduced the discount rate from 45 per cent by banks on a quarterly basis, and must consist of a
at the beginning of 2000, to 12.5 per cent by the end balance sheet, an income statement, an off-balance
of 2001, and 7.0 per cent in December 2002. Since sheet liabilities statement, trust management accounts,
then, the NBU has gradually increased the discount and a cover letter. The purpose of the cover letter is to
rate to 9.5 per cent (effective as of 10 August 2005), describe and explain the events and operations, which
and then decreased it to 8.5 per cent (effective as of are material and important for a fair presentation of
10 June 2006). As of 1 June 2007, the discount rate the financial position of the bank. Each bank is also
was 8.0 per cent, and has been further increased to required to submit to the NBU statistical data on daily,
12.0 per cent, as at 28 October 2008. Since 1 March weekly, and monthly bases, which ensure the perma-
2004, the NBU has been separately determining inter- nent review by the NBU of the bank’s performance and
est rates on overnight unsecured loans (16 per cent as financial position.
of 1 October 2008) and on overnight loans secured by
state securities (15.0 per cent as of 1 October 2008), 1.6. Securing Deposits of Individuals
as well as setting separate interest rates on deposits
from banks placed with the NBU for various terms. For The Law of Ukraine “On the Fund for Guaranteeing De-
example, as on 28 October 2008, the interest rates for posits of Individuals”, dated 20 September 2001, No.
14 day and 29 day deposits were 5.0 and 6.0 per cent 2740-III (the “Deposit Securing Law”), introduced a
respectively. system of securing deposits held by individuals with
Ukrainian banks, which modified the system estab-
The main goal of the NBU’s monetary policy in 2008, lished in 1998, by the Presidential Decree “On Measures
as declared by the NBU, is to maintain the stability of for the Protection of the Rights of Individuals — Depositors
the hryvnia and macroeconomic balance and to estab- of Commercial Banks of Ukraine”, dated 10 September
lish the prerequisites for the renewal of stable econom- 1998, No. 996/98 (the “Decree”). Pursuant to the De-
ic growth and the solution of current and longer-term posits Securing Law, commercial banks in Ukraine are
social and economic problems in Ukraine. obliged to remit to the Fund for Guaranteeing Deposits
In 2001, the NBU adopted regulations relating to the The NBU has established requirements for capital
mandatory reserves of commercial banks, which pro- adequacy, minimum statutory capital requirements
vide that the NBU will impose sanctions on banks for and minimum regulatory capital requirements. The
their failure to keep the prescribed amounts of man- minimum risk-based requirement for regulatory capital
datory reserves. Such sanctions are payable from (capital adequacy ratio) set by the NBU is 10 per cent
the bank’s profits. Currently, commercial banks are of the bank’s risk-weighted assets. For banks which
required to transfer annually to their reserves not less have been operating for less than 12 months, the regu-
than 5 per cent of their profits, until and unless such latory capital ratio is required to be not less than 15 per
reserves are equal to 25 per cent of their regulatory cent. Risk-weighted assets, or the credit risk profile of a
capital. The NBU may require commercial banks to in- bank, are calculated by applying various risk weights to
crease their mandatory reserve amounts even more. the bank’s assets and off-balance-sheet commitments
according to the terms set by the NBU.
The NBU has established mandatory reserve require-
ments, in order to maintain the liquidity of the banking On 4 October 2006, new amendments to the Banking
system and the stability of the Ukrainian hryvnia. Banks Law came into effect, whereby the minimum statutory
are required to maintain certain reserves in current ac- capital requirement for all new banks at the moment of
counts with the NBU. There are no restrictions on the registration is established at 10 million. This rule will
withdrawal of funds from the NBU; however, if the mini- apply only to those banks, which are established after
mum average requirements are not met, a bank may the law came into effect. In addition, the law provides
be subject to certain penalties. Reserve requirements that banks must be established only in the form of an
are computed as a percentage of certain of the bank’s open joint stock company or a cooperative bank (i.e.
liabilities. In particular, since 1 October 2006, reserves it will not be permitted to establish banks in the form
are required to be not less than the sum of one per of a closed joint stock company or a limited liability
cent of the amount of demand deposits and current ac- company). Those banks already established as closed
counts of customers in hryvnia, five per cent of demand joint stock companies or limited liability companies are
deposits and current accounts of customers in foreign obliged to be reorganized into open (public) joint stock
currency, 0.5 per cent of term deposits of customers in companies within not more than three years after the
hryvnia and four per cent of term deposits of customers entry into force of the above-mentioned amendments
in foreign currency. In 2005, the NBU changed certain to the Banking Law.
reserve requirements, for example, by excluding cash
held in vaults from being used by a bank to cover its The regulatory capital (i.e. the sum of the principal
mandatory reserves, and by significantly increasing the (core) capital and the additional capital) may not be less
www.chamber.ua
13
than the minimum statutory capital requirement and the have no foreign currency earnings); loans on the watch
minimum regulatory capital requirements established list (5 per cent or 10 per cent for loans in foreign cur-
by the NBU. From 1 May 2004, the NBU calculated the rency to borrowers who have no foreign currency earn-
minimum regulatory capital requirement in UAH in an ings); substandard loans (20 per cent or 40 per cent
amount equivalent to the euro amount set forth by the for loans in foreign currency to borrowers who have no
Banking Regulation Instruction. These regulatory capi- foreign currency earnings); doubtful loans (50 per cent
tal requirements were subject to periodic increases. or 80 per cent for loans in foreign currency to borrow-
ers who have no foreign currency earnings); and bad
As of 10 October 2008 the minimum regulatory capital re- loans (100 per cent). Provisioning requirements appli-
quirements in hryvnia is to be set forth annually by a sepa- cable to homogeneous consumer loans are: 2 per cent
rate NBU resolution for each following year. Such hryvnia for standard loans, 10 per cent for loans on watch, 40
minimum requirement is supposed to accordingly match per cent for substandard loans, 80 per cent for doubtful
existing threshold established by the NBU in Euro. loans and 100 per cent for bad loans. Banks were re-
quired to complete implementation of the newly estab-
1.9. Foreign Participation lished provisioning requirements by 1 October 2007.
www.chamber.ua
15
dent Insurer (Reinsurer)”, dated 4 February 2004; and • show that its headquarters registered in the WTO
(vi) the Law of Ukraine “On the Prevention of, and the country, which is also an active member of FATF;
Counteraction to the Legalization of, Money Laundering”,
dated 28 November 2002, as amended (the “Anti Mon- • show that Ukraine and its country of registration have
ey Laundering Law”). signed double taxation treaty and treaty on tax avoid-
ance and some other requirements.
2.2. Registration and Activity of an Insurance
Company The Insurance Law requires that an insurer must be es-
tablished by, and must exist with, at least three share-
A Ukrainian legal entity must undergo the following reg- holders (participants). Either a Ukrainian or a foreign
istrations, in order to be qualified to carry out insurance legal entity or individual may be a shareholder of an
activity: insurance company.
(a) state registration and various post-registrations, Life insurance must be the exclusive type of insurance
which qualify it as a legal entity; for a particular insurance company and, as a result,
life insurers are prohibited from carrying out any other
(b) registration with the State Register of Financial In- activity and/or providing any other types of insurance,
stitutions, which qualify it as a financial institution; and except for:
(c) receipt of an insurance license, either for life insur- (a) the re-insurance of life insurance;
ance services or general (non-life) insurance services.
(b) financial activities connected with the accumulation,
2.3. State Registration investment, and management of insurance reserves
(asset management);
Under the Insurance Law, a Ukrainian legal entity, and
only one in the form of a joint-stock company (open (c) crediting the insured individuals; and
or closed), a full partnership, a limited partnership, or
an additional responsibility company may become an (d) the performance of any operations aimed at satisfy-
insurer in Ukraine. However, following Ukraine’s ac- ing its own business needs.
cession to the WTO, foreign insurers are allowed to
conduct the insurance business straight on the Ukrain- The charter capital (fund) of an insurer must be paid in
ian market, but limited to the certain types of insurance cash, except that 25 per cent of it may be paid by state
business, as follows: securities at par value. The statutory minimum for the
charter capital of an insurer must be equal to the UAH
• insurance of risks, related to marine transportation, equivalent of EUR 1 000 000 for an insurance compa-
commercial aviation, outer space rocket launches ny not issuing life insurance, and to the UAH equivalent
and freight (including satellite), in case if object of the of EUR 1 500 000 for a life insurer. The overall amount
insurance is proprietary interests, related to goods to paid by an insurance company to the charter capital of
be transported and/or transporting vehicle and/or any any other Ukrainian insurer must not exceed 30% of
kind of responsibility arising out of such goods trans- the charter capital (fund) of such other insurer.
portation;
• reinsurance; 2.4. Registration as a Financial Institution
• insurance intermediation, such as brokerage and In order to obtain and maintain the status of a financial
agency operations concerning: marine reinsurance, institution, a company must comply with the following
outer space rocket launches and freight (including requirements.
satellite), in case if object of the insurance is proprie-
tary interests, related to goods to be transported and/ When filing its application for its registration with the
or transporting vehicle and/or any kind of responsibil- State Register of Financial Institutions, the company’s
ity arising out of such goods transportation; paid-in charter capital must be equal to or exceed the
UAH equivalent of EUR 1 000 000 (calculated in ac-
• auxiliary insurance services, such as consultancy, cordance with the exchange rate of the NBU as of the
evaluation of actuary risks and dealing with claims. date of its application) for an insurance company, or
EUR 1 500 000 for a life insurance company.
In order to establish a branch a foreign insurer has to
comply with the Law of Ukraine “On Amendments to the When filing its application for its registration with the
Law of Ukraine On Insurance” (the “Amendments Law”) State Register of Financial Institutions, the company
No. 357-V dated 16 November 2006. In particular it will must have the required number of qualified insurance
have to, inter alia: professionals, must have its premises, and must have
The State Commission on the Regulation of the Finan- (c) the available forms of credit, specifying the differ-
cial Services Markets of Ukraine (the “Regulator”) is ences between them;
the specialized state agency responsible for the regu-
lation and control of the insurance business in Ukraine. (d) the types of interest rates;
The Regulator is authorized to issue licenses to insur-
ance companies, as well as to adopt specific insurance (e) the maximum principal amount of the loan;
regulations. Also, the Regulator is authorized to hold
on-site inspections and documentary examinations of (f) the approximate total value of the loan and an esti-
insurance companies. Finally, the Regulator may ap- mate of the value of the services relating to the conclu-
point the additional annual audit of the financial state- sion of the consumer loan agreement (i.e., the list of
ments of an insurance company, which are to be con- all of the expenses connected with the loan, and its
ducted by an auditor appointed by the Regulator at the servicing and repayment, including administrative, in-
cost of the insurance company. surance, and legal services expenses);
Insurance companies are obliged to submit quarterly (g) the maximum maturity of the loan;
and annual reports to the Regulator. In addition, insur-
ance companies are obliged to prepare and publish (h) the options for the loan’s repayment (including the
their annual financial statements and consolidated re- possibility of its early repayment);
ports. The adequacy of these reports must be con-
firmed by an independent auditor. (i) the requirements for the assessment of the property1;
3. CONSUMER PROTECTION (j) the tax regime for the payment of interest and the
state subsidies to which the consumer is entitled; and
The area of financial services requires the strict protec-
tion of consumers of financial services against over- (k) the advantages and drawbacks of the proposed
protecting providers of financial services. Ukraine is forms of credit.
not an exception to other jurisdictions, and it has in
place various rules protecting consumers of financial The lender should also provide the consumer with in-
services. formation concerning the former’s name and location.
1 This may relate either to the property, which is being purchased with the funds received under the consumer loan, or to the property which
is being used as collateral for the loan, or both.
www.chamber.ua
17
providing the loan. Any personal data, received by quality, the consumer may demand from the seller either
the lender from the consumer, must be used solely for the reduction of the purchase price for such goods/servic-
purposes of the evaluation of the financial standing es or the termination of the relevant sale/purchase agree-
of the consumer and his/her capability to fulfill the ment with the repayment by the seller of the amounts
obligations under the consumer loan agreement. The paid for such goods/services and the indemnification of
lender may, however, provide such information about any damages. If the consumer, who used the consumer
the consumer to a credit bureau. loan to purchase such goods/services, decides to termi-
nate the sale/purchase agreement, the lender under the
The lender must also ensure that one of the originals respective consumer loan agreement will be obliged to
of the consumer loan agreement is provided to the return to the consumer all funds received from such con-
consumer. sumer under the consumer loan agreement. If the con-
sumer decides to demand the reduction of the purchase
The Consumers Protection Law generally provides that, price for such goods/services, the lender will be obliged
in the event of the fluctuation of the applicable interest to adjust the indebtedness of the consumer under the
rate, either as a result of the relevant change of the consumer loan agreement.
refinancing rate periodically established by the NBU or
other events set forth in the consumer loan agreement, A consumer loan agreement may entitle the lender
the lender must notify the consumer in writing of such to demand the prepayment of the loan or to enforce
fluctuation within seven calendar days from the date the security under the loan as a result of a violation by
when the interest rate was changed. Without such no- the consumer of specific terms of the consumer loan
tification, any change of the interest rate by the lender agreement.
will not be valid.
Furthermore, if the lender demands the prepayment
The consumer loan agreement (or certain provisions of the loan or the acceleration of the amortization in
thereof) may be recognized as being invalid by a respect of such loan, the consumer may make the re-
Ukrainian court if the agreement contains terms and quired payment within thirty days from the date of his/
conditions, which are deemed to be unfair or to violate her receipt of such demand. If the consumer remedies
the consumers’ rights established by the Consumers its default under the consumer loan agreement within
Protection Law. such 30-day period, then the lender may no longer re-
quest such prepayment or acceleration.
The consumer may, by written notice to the lender,
revoke the consumer loan agreement, within fourteen If the lender requests the consumer to repay the loan
days from the date of obtaining of his/her counterpart or other indebtedness before its maturity, the lender is
thereof, without any explanations. If such is the case, prohibited from demanding any remuneration in con-
the lender must return to the consumer the funds nection with such early repayment.
paid by the consumer according to the consumer
loan agreement not later than within seven days. The In addition, the lender is prohibited from:
lender will otherwise be liable to pay to the consumer
a penalty at the rate of 1% of the amounts to be re- (a) providing any untrue information about the conse-
turned by the lender for each day of delay. As far as quences of the consumer’s non-payment of the con-
the consumer is concerned, he/she does not have to sumer loan;
pay to the lender any amounts, except for the principal
amount of the loan and interest at the rate established (b) withdrawing goods from the consumer without his/
in the consumer loan agreement for the period from her consent or without the relevant court order;
the date of his/her receiving and the date of his/her
returning the funds extended under the consumer loan (c) specifying on the envelope with the notification of
agreement. the demand for such prepayment any information to
the effect that such notification relates to the non-pay-
This right to revoke the consumer loan agreement does ment of a consumer loan;
not apply to a consumer loan (i) secured by a mortgage,
(ii) extended for the purchase of a residential property, (d) demanding any sums, which are not provided for in
or (iii) extended for the purchase of a service which had the consumer loan agreement;
already been rendered to the consumer by the time of
the purported revocation. (e) obtaining information about the consumer’s finan-
cial status from any third parties, which are personally,
The consumer may also prepay the loan, including by professionally, or in any other way related to the con-
paying larger amortizing installments. sumer, without the consumer’s consent;
Furthermore, under the Consumers Protection Law, in (f) taking any actions, which are generally considered
the case of the purchase of goods/services of inadequate as being an unfair business practice; or
18 Uniting Leading Companies from over 50 Nations Across the Globe
(g) demanding the repayment of the loan after the expi- Overall Cost of Credit”, approved by NBU Resolution
ration of the statute of limitations. No.168 dated 10 May 2007, all banks are required
to disclose the effective rate of interest under loans
In 2007 the NBU adopted regulations on mandatory granted to individual consumers in the text of the loan
disclosure to individual customers of the essential in- agreement. Also, banks are required to obtain a written
formation relating to consumer loans by Ukrainian confirmation from the consumer stating that he/she has
banks. According to the NBU Regulation “Rules Gov- received all the information from the bank relating to
erning Disclosure of Consumer Information by Ukrain- the terms and conditions of the loan and, specifically,
ian Banks, Related to Consumer Loans Terms and the costs of the loan to the consumer.
www.chamber.ua
19
party, and the operation contravened the requirements these three categories of creditors has the same basic
of Ukrainian legislation or “threatened the interests of interest – prompt and complete payment of all debts –
depositors and creditors” of the bank; the law affords each distinctive rights and remedies.
Bankruptcy creditors are creditors which claims to the
(iii) within three years before the appointment of such debtor arose prior to the institution of bankruptcy pro-
provisional administrator, with the purpose of alienating ceedings and whose claims are not secured. Secured
any of the bank’s assets free of charge or purchasing creditors are bankruptcy creditors whose claims to the
assets or services by the bank at a price significantly debtor are secured. Current creditors mean creditors
higher than the value of such assets or services; which claims to the debtor arose after the institution of
bankruptcy proceedings.
(iv) within three years before the appointment of such
provisional administrator, with the purpose of conceal- Not all bankruptcy creditors may require settlement of
ing assets from the bank’s creditors or otherwise violat- their claims but only those that have submitted to the
ing the rights of such creditors; court their claims to the debtor within 30 days upon the
publication of the announcement about instituting the
(v) at any time, if such operation has been based on bankruptcy procedure in newspapers “Holos Ukrainy”
forged documents or if it was of fraudulent nature. or “Uryadovyi Kuryer”. The claims of bankruptcy credi-
tors stated after expiration of the period determined for
Institution of bankruptcy proceedings by the court their submission, or are not stated in general shall not be
examined and shall be considered as discharged. The
Upon a request of a debtor or a creditor the bankruptcy specified period is limited and shall not be subject to the
proceedings shall be instituted by the court if the aggre- renewal. Secured creditors shall have the right to put for-
gate indisputable claims of the creditor (creditors) to the ward claims to the debtor to the extent not covered by
debtor amount to at least 300 minimum wages (at the mo- the collateral or in the amount of the difference between
ment minimum wage equals UAH 545) and have not been the claim and the proceeds, which can be derived from
satisfied by the debtor within 3 months upon the deadline the sale of the collateral, if the value of the collateral is
set for the satisfaction of such claims. However, a creditor not sufficient for the satisfaction of the claim in full.
may submit application for institution of the bankruptcy
proceeding irrespective of the amount of its claims to the Interests of the creditors whose claims were included
debtor and the maturity of liabilities in case of absence of into the registry of the claims elect the committee of
management bodies of the debtor at the registered ad- the creditors at the meeting of the creditors for pres-
dress of the debtor, or in case of failure of the debtor to entation of their interests in the course of the bank-
submit to the state tax department tax declarations, ac- ruptcy proceedings. The committee of the creditors is
counting documents as required by Ukrainian law during entitled inter alia to apply to the court for termination
more than one year, or in case of other findings attesting of the powers of the arbitration manager and appoint-
to termination of debtor’s business activity. ment of the new arbitration manager, to approve ma-
terial agreements (agreements which book value ex-
The bankruptcy proceedings are held exclusively ceeds 1% of the property of the debtor’s assets), etc.
through the court. There are four stages of bankruptcy
proceedings according to the Bankruptcy Law: disposal Arbitration manager
of the debtor’s property; execution of amicable agree-
ment; sanation (restoration of solvency) of a debtor; Arbitration manager is a licensed person acting as a
and liquidation of a bankrupt. The debtor may be de- property manager, sanation manager or liquidator at
clared a bankrupt at any of the above stages. Ukrainian the respective stage of the bankruptcy proceedings.
bankruptcy law regulates in details each of the above The same person may act as arbitration manager
stages. (property manager, sanation manager, and liquidator)
at all stages of the bankruptcy proceedings.
Participants of the bankruptcy procedures
Upon appointment of the arbitration manager powers of
According to the Bankruptcy Law the following persons the manager and other management bodies of a debtor
may participate in bankruptcy proceedings: a court, a shall be considerably restricted or terminated. The Bank-
debtor, its owner(s), its creditors, arbitration manager, ruptcy Law empowers arbitration manager with wide
representative of the state authorities, etc. scope of authorities varying depending on the certain
stage of the bankruptcy proceedings. Thus, if on the
Creditors stage of disposal of the debtor’s property, the scope of
the authorities of the arbitration manager is rather narrow
All the creditors in bankruptcy proceedings are divided and includes approval of the debtor’s significant deci-
into three categories: (i) bankruptcy creditors, (ii) se- sions and material transactions related to disposal of the
cured creditors and (iii) current creditors. While each of debtor’s property, on the sanation and liquidation stages,
www.chamber.ua
21
ing. In the bankruptcy context it is regarded as a set non-residents seems to be the most attractive and
of organisational, financial, legal and technical meas- the most productive financial solution for both Ukrain-
ures aimed at improving the company’s financial con- ian companies and foreign investors. Ukrainian laws
dition, solvency, production effectiveness and ability generally permit assignment of monetary claims (such
to satisfy creditors’ demands. Solvent restructuring is as claims against a borrower under a loan agreement)
affected in connection with corporate reorganisations from a Ukrainian resident to a non-resident. However,
related to changes in profile of commercial activities, due to ambiguity of some of the provisions of Ukrainian
shareholding structure, and other similar issues re- legislation regulating assignments by the lender and
lated to the conduct of business or fine-tuning legal lack of precedents on such assignments as well as ab-
relationships between owners. These aspects of re- sence of any publicly available guidance from the regu-
structuring are regulated by general rules of the Civil lator, potential investors may face certain problems,
Code of Ukraine and the Economic Code of Ukraine which may considerably complicate the restructuring
both dated 16 January 2003 (as amended). Certain process. Some of the apparent problems are briefly
laws and regulations provide for specific restructuring highlighted below.
features for certain group of companies (e.g., banks,
special regime companies, or companies subject to (i) Currency control issues:
privatization). A number of rules are contained in the • a possibility of a substitution of a Ukrainian lender
Law of Ukraine “On Bankruptcy” No. 2343-XII dated with a foreign lender in general is not clearly spelled
May 14, 1992. With the added pressure of the finan- out in Ukrainian law, and since borrowing from for-
cial crisis, Ukrainian companies are beginning to con- eign lenders is subject to special regulation by the
sider various aspects of financial restructuring with the NBU, it is not entirely without doubt whether and how
view to revitalizing the loan portfolios, optimizing the the NBU will permit foreign lenders to take the place
repayment schedules and refinancing troubled loans of an original Ukrainian lender;
outside of bankruptcy proceedings and corporate re-
structurings. Financial restructuring entails restructur- • registration of a loan agreement with the National
ing of the company’s assets and liabilities, including Bank of Ukraine (the “NBU”) after an assignment
its debt-to-equity structures, in line with its cash-flow to a foreign lender of a loan initially extended by a
needs. In this sense financial restructuring embraces Ukrainian lender may be required under NBU regula-
various solutions, ranging from simple rearranging of tions governing loans extended by foreign residents
loan portfolio and refinancing exercise, to a more com- to Ukrainian residents;
plex combination of financings and M&A tools, such
as sales of distressed assets, recapitalizations, private • in the absence of NBU registration of the loan agree-
equity, leveraged buyouts, sales to financial or strate- ment, an individual licence from the NBU by Ukrain-
gic investors, etc. ian borrower may be needed to permit a Ukrainian
borrower to transfer, after an assignment of a loan
Corporate reorganisation (that could be a part of a to a non-resident creditor, funds abroad to a foreign
larger financial restructuring exercise) is the process of lender due to absence of any express requirement or
increasing the economic viability of the underlying busi- exemption on this issue from a general rule according
ness model. Under Ukrainian laws corporate restructur- to which payments abroad could not be made unless
ing along with liquidation is viewed as termination of the (a) there is either an individual license of the NBU or
company’s activity and can be exercised by merger, ac- registration of the NBU obtained for such payment or
cession, division or transformation. However, if looking (b) such payment falls under one of the available ex-
more widely, examples may also include sale of divi- emptions from licensing or registration requirement;
sions or abandonment of product lines, or cost-cutting
measures such as closing down unprofitable facilities. • since the assignment of a loan agreement to a foreign
In most turnarounds and bankruptcy situations, both fi- lender may trigger the NBU registration requirement,
nancial and operational restructuring are effectuated. maximum interest rate cap (the “MIR”) will apply at
the then determined rate established by the NBU for
Financial Restructuring loan agreements between Ukrainian borrowers and
foreign lenders. If MIR requirements are deemed ap-
Among various stress-induced financial solutions, ac- plicable, an assignment of a loan agreement would be
quisition of loans extended by Ukrainian lenders to prohibited in case aggregate amount of payments un-
• due to application of such rules, assignment between • Communications: a borrower and its subsidiaries are
banks by way of factoring of certain types of receivables often prohibited from conducting any corporate re-
could be restricted, including receivables under loans; organization or are required to obtain a prior written
consent from a lender. It should be noted however
• to avoid risks to the validity of such operations, a cer- that such restriction is typically limited by a material
tain fee or other consideration will need to be payable adverse affect caveat (defined in each separate loan
by the Ukrainian lender to a foreign lender acting as agreement). In addition, subject to certain specific
an assignee based on the general legal requirement requirements, intergroup reorganisations as well as
applicable to all financial services, including factoring corporate reorganisations required by law are of-
operations. ten required. Failure to comply with “no corporate
reorganisation” covenants and undertakings under
Corporate Reorganisation – Possible Restrictions customary provisions of financing agreements are
deemed to constitute an event of default under a loan
Corporate reorganisation is often inevitable for compa- agreement and trigger acceleration;
nies in or approaching financial distress, especially for
the subsidiaries and affiliates of large industrial groups • Interplay: special attention should be paid to inter-
and holdings. Well-planned corporate reorganisation relation between parents companies and subsidiar-
could assist in eliminating or mitigating financial prob- ies. Often parent company’s financing arrangements
lems of a group by diversifying and/or concentrating would prohibit corporate reorganisation for its affili-
its assets and liabilities and optimising its operational ates and/or subsidiaries, so whenever a reorganisa-
activities. However, in most cases any kind of corpo- tion of a company is considered it is advisable that
rate reorganisation is generally limited by financing ar- financing arrangements of both such company and
rangements (such as loan agreements) executed by its parent companies are examined.
group companies. This includes contractual provisions
ranging from early repayment right granted to lenders This article is intended as a summery overview of po-
in case of a change of control or corporate restructur- tential solutions, risks and considerations available to
ing to events of default of similar nature leading to im- Ukrainian and foreign companies in connection with
mediate acceleration under the respective loan. There- restructuring of Ukrainian entities. We should like to
fore, prior to exercising any corporate reorganisation, emphasize that resolving the above issues and taking
the following issues should be taken into consideration a decision on proceeding with a situation-specific re-
and possible brought up with existing lenders: structuring solution requires thorough analysis of com-
pany’s business, its financial conditions and prospects,
• Wording: exact wording should be checked and com- debt portfolio, capital structure as well as detailed ex-
pared against the contemplated action plan. Corpo- amination of all effective loan agreements and other
rate reorganisation is usually defined broadly in fi- related arrangements.
www.chamber.ua
23
LEASING
By Magisters
www.magisters.com
Initially being scarcely developed and poorly regulated Leasing relations in Ukraine are governed by the fol-
type of activity, leasing in Ukraine has developed rap- lowing main legislative acts:
idly in the recent years. One of the reasons for such
intensive development has been a heightened inter- (i) The Civil Code of Ukraine and the Economic Code
est towards Ukrainian leasing market shown by for- of Ukraine, both dated 16 January 2003 (the “Civil
eign banks and other participants of the international Code” and the “Economic Code”, respectively),
financial market that are active on the Ukrainian market setting forth general legal rules on leasing;
both directly from abroad and through their Ukrainian
subsidiaries. Increased accessibility of credit resources (ii) The Law of Ukraine “On Financial Leasing” dated
noted in 2005, 2006 and early 2007 also contributed to 16 December 1997 (the “Financial Leasing Law”),
the domestic leasing market growth. being a special legal act on financial leasing;
In particular, as at 31 December 2007, the portfo- (iii) The Law of Ukraine “On Financial Services and
lio of leasing contracts signed up by resident lessors State Regulation of Financial Services Markets” dat-
comprised approximately 15,200 agreements in the ed 12 July 2001 (the “Financial Services Law”),
aggregate amount of UAH 20.23 billion, including ap- defining financial leasing as a financial service and
proximately 4,200 agreements in the amount of UAH setting out powers of the Commission as the main
3.3 billion, which were entered into in 2006, and ap- regulator of the leasing market;
proximately 9,300 agreements in the amount of UAH
11.7 billion, which were executed in 20071. Analysis of (iv) The Law of Ukraine “On Banks and Banking” dated
the structure of the leasing contracts’ portfolio in terms 7 December 2000, governing leasing operations by
of the value of leased assets demonstrates that, as of banks;
December 31, 2007, various vehicles (such as railway
transport, aircraft, trucks, and passenger cars) ac- (v) The Law of Ukraine “On Taxation of Corporate In-
counted for the largest share in the leasing contracts’ come” dated 28 December 1994, (the “Corporate
portfolio (approximately 64%)2. Agricultural machin- Tax Law”), establishing, together with the Law of
ery and equipment accounted for the second largest Ukraine “On Value Added Tax” dated 3 April 1994,
share in the structure of the leasing portfolio (almost rules of taxation of leasing operations;
7%), while other equipment, including IT, printing, trade
and banking equipment, accounted for the remaining (vi) The Law of Ukraine “On the Prevention and Combat-
25%3. ing the Legalisation (Laundering) of Income Obtained
by Criminal Means” dated 28 November 2002, setting
Despite the increases in a number of indices, the forth the procedure of conducting financial monitoring
Ukrainian leasing market is still in its infancy. One of by lessors (the “Anti-Money Laundering Law”);
the reasons for this is that legislative measures to pro-
mote leasing are not among the government’s priori- (vii) “UNIDROIT Convention on International Finan-
ties, and that the pursuit of higher budget revenues has cial Leasing” dated 28 May 1988 and ratified by the
been making Ukrainian decision-makers reluctant to Verkhovna Rada of Ukraine on 11 January 2006,
offer tax benefits for leasing. being one of the major international agreements in
the sphere of international financial leasing.
1 Source: Report on Activities of the State Commission for the Regulation of the Financial Services Market in Ukraine in 2007 approved by the
Instruction of the State Commission for the Regulation of the Financial Services Market in Ukraine dated 26 June 2008 N 778 and Report
on Activities of the State Commission for the Regulation of the Financial Services Market in Ukraine in 2006 approved by the Instruction of
the State Commission for the Regulation of the Financial Services Market in Ukraine dated 5 July 2007 N 7572
2 Ibid.
3 Ibid.
(1) Leasing companies which qualify as financial insti- It should be noted that Ukrainian and foreign legal enti-
tutions and are registered in the State Registry of Fi- ties, which are subject to individual licensing regimes
nancial Institutions (the “Registry”) in accordance with or temporary suspension of foreign economic activities
the Financial Services Law. As a rule, this category imposed by the Ministry of Economy of Ukraine, are
comprises leasing companies whose main business not allowed to enter into lease agreements with foreign
involves rendering, on a permanent basis, financial or Ukrainian entities, respectively.
leasing services, which might be combined with other
financial services, subject to certain exceptions (e.g. Leased asset
providing financial leasing services may not be com-
bined with professional activity on the stock market). According to Ukrainian legislation, non-consumable
To be registered as a financial institution, a company fixed assets (both movable and immovable) with
www.chamber.ua
25
individual characteristics, which could be freely traded payments under a notarized lease agreement have not
at the market and are not restricted from leasing, could been made within thirty days after the due date, repos-
serve as leased assets for the purposes of financial session claim may be also made through a notary’s
leasing. It is forbidden to lease, on financial leasing enforcement writ; such option is not available if a lease
terms, land plots, sub-soil or natural resources (e.g. agreement has not been certified by a notary.
coal), integral property complexes and structural
subdivisions of enterprises, as well as certain other The right to incontestably collect lease payments
assets.
According to the Financial Leasing Law, the lessor is
Lease agreements entitled to collect an outstanding debt from a lessee in
an incontestable manner on the grounds of a notary’s
Lease agreements are to be executed in written form, enforcement writ. However, current legislation is silent
and notarization of such agreements may be performed as to the mechanism for performance of such notary’s
upon request of one of the parties, but is not, subject to enforcement writ with respect to collection of an out-
the below exception, mandatory. Lease agreements in standing debt. Thus, practical implementation of this
relation to real estate objects that are entered into for provision remains unclear.
more than 3 year term should be certified by a notary
and are subject to state registration (currently, in the Issues related to transfer of title to leased asset to
State Register of Deeds). a lessee
Control over use of the leased asset and the right The Financial Leasing Law stipulates that a lessee may
to incontestable repossession of the leased asset have other rights and obligations in accordance with
the terms of a lease agreement. The above legal rule
Current legislation does not expressly provide for the could be interpreted as allowing the parties to incorpo-
lessor’s right to incontestable repossession of the rate relevant provisions on automatic transfer of title to
leased asset if the use and service conditions of such the leased asset into a financial lease agreement. How-
asset are inconsistent with the terms of a financial ever, the Financial Leasing Law is not explicit about
lease agreement or intended use of the leased asset. such option. Furthermore, according to the Civil Code,
From the legal perspective, there is also a lack of clarity agreements providing for transfer of title to real estate
in relation to whether a lessor has the right to exercise objects are subject to notarization and state registra-
financial control over operation of the leased asset by tion (currently, in the State Register of Deeds) and the
a lessee. At the same time, this does not prevent the title is deemed transferred to the buyer from the date
parties from specifying all these aspects in the lease of such state registration. Therefore, it remains unclear
agreement. whether title to a leased asset can be transferred au-
tomatically to the lessee at the expiration of a lease
Furthermore, the lessor is entitled to terminate the fi- agreement or a separate agreement is required for this
nancial lease agreement and to claim repossession of purpose, and parties usually opt to enter into a sepa-
the leased asset on grounds set forth in a lease agree- rate sale and purchase agreement in relation to the
ment or the law. As a general rule, repossession should leased asset, instead of using complex lease agree-
take place through a judicial procedure. However, if ments containing provisions on transfer of title.
The credit crisis that began in the United States and favourable locations are already taken by local entre-
quickly spread globally has slowed down retail growth and preneurs. Even regions nearby the capital experience
added to the financial stress of retailers worldwide. The a deficit in the civilized retail formats what proves the
accumulating threat of sales drop resulted in reconsidera- remaining low concentration of Ukrainian retail.
tion of the credits policy towards the retailers and first cast
in reduction of loan volumes and terms. As far as banks Under the difficult conditions of unstable finance trends
stop giving loans to retail sector the latter have started and growing competition Ukrainian retailers take their
cutting down their expansion plans having no sources of European counterparts as an example and develop
refinancing and paying down of current loans. new retail formats. Retailers admit that operation in dif-
ferent formats came to them due to the lack of suitable
Having a closer sight on the current status of the land plots offered for new outlets in the districts and
Ukrainian retail market from the point of view A. T. regions. Besides, the multi format operation allows re-
Kearney “Window of opportunities analysis” of the top tailers to adjust their chains to the demands in each
30 emerging markets we can conclude that Ukraine separate region and attract a larger number of custom-
slips from 5th to 17th place under the pressure of poor ers. Having in their structure hypermarkets retailers at-
infrastructure, bureaucratic red tape, ongoing political tract middle class families, with discounters they serve
instability and a soaring inflation1. for lower income population whilst opening premium
segment supermarkets attracts customers with more
On the other side, Ukraine became the official mem- sophisticated demands. For instance, Fozzy Group
ber of the WTO in May, 2008. Such membership gives owns Fozzy hypermarkets, Silpo supermarkets, Fora
the contemporary Ukrainian retail market the possibil- discounters etc., the same as Kviza trade company, the
ity of such changes as integration into the international owner of Velyka Kysnehya supermarkets chains and
market economy, resulting in stable and predictable Velyka Apteka drug stores. Though unlike their foreign
business and international trade, access to the interna- counterparts which have been practicing multi format
tional practice of problematic issues settlement, favo- operations at least half a century the Ukrainian trade
rable foreign investments climate and richer portfolio of business remains comparatively young. In view of that
articles and services2. some formats open more by intuition rather than based
on clear business targets what from time to time results
It should be also stressed that within the last sever- in their low proficiency and non-transparency4.
al years the share of sales via civilized trade formats
has been constantly increasing. Compared to the 90s For a stable growth of not only sales but profit from every
when street market trade occupied 65-70% of total re- square metre retailers need to add to their expansion a
tail sales in 2007 the turnover via civilized trade formats high level of customer service, competitive prices and
amounted already to 55%3. Such trend is also visible premium quality. Unfortunately, not all national retailers
through the growing substitution of old department are aware of that while more and more foreign investors
stores and “gastronomes” by new outlets of retail chains enter the Ukrainian retail market like the French Auchan
and shopping centres. Though, such changes are still which last year opened its first outlet in Kyiv and the
hardly noticeable in the regions of Ukraine where most Russian hypermarket chain O’Key with currently
www.chamber.ua
27
Window of opportunity analysis
Source: A.T. Kearney *EEO refers to entertainment, electronics and office retailing: DIY is do-it-yourself
operating 4 outlets in Kyiv, Horlovka, Zaporizhya and As for Ukraine the first own brand in retail was launched
Kharkiv. At the same time not all foreign retailers by Furshet retail chain in 2002 and titled with the same
succeeding in entering the Ukrainian market manage name. Obviously since then many retailers have ap-
to remain there. Like, the Russian Paterson which peared on the market and launched their own brands.
sold its three outlets to EKO discounters chain. The First cast due to the advantages own brands open for
shortage in suitable land plots retailers are still facing retailers: firstly – they have a possibility to allocate their
continues to increase the difference between demand own brands as they want with no charges for “better”
and offer which now equals to 4 times pushing retailers shelves; secondly – retailers save on advertising and
towards searching for additional ways of allocation and consequently offer customers a better price; thirdly –
development of own projects of expansion. own brands make retailers less dependent on suppli-
ers. Besides the customer loyalty to a certain chain
Own brands shake up retailers automatically transfers to its own brands and of course
provides rather an intensive demand for these articles.
Development of own brands is a top news on the cur- As a result the customer loyalty to a retail chain in-
rent market. Retailers are constantly widening their own creases.
brands assortment, producers to a limit criticize them and
customers talk and buy. Looking back two years ago own Despite the current dominance of domestic retailers
brands would have seemed nothing but a one day project on the Ukrainian market, foreign chains also make
of retailers. Today this is a considerable part of sales floor their contribution applying a rather rich experience in
and a notable profit which sometimes exceeds the profit this segment. Like taking the German METRO Cash
from sales of A-brands by 4-5 times Today up to 30% of and Carry Ukraine, part of the METRO Group, with a
all goods in the world are sold as own brands. The own portfolio of 17 own brand families now representing
brands market is growing and developing. Thus currently more than three thousand articles. As for the national
there are even several kinds of own brands: non-branded retailers the most successful in own brands promotion
goods, own brands with a different from the retail chain are Furshet, Fozzy Group, ATB-Market and Amstor
name, own brands named after the retailer etc. (Table 1)5.
Premiya
Furshet
Clever
Amstor
Retailers split the Ukrainian retail market Future development i. e. crisis overcome
Increase of disposable household profits of Ukrainian Changes of the international investment rating towards
population is the best condition for retail development in Ukraine for the worth results in increase of interest rates
the country. According to the State Committee of Statis- by international finance institutions for Ukrainian coun-
tics of Ukraine the volume of retail turnover has been sus- teragents what in its turn is a visible sign of economic
tainably growing yearly by 20% since 2003. Altogether development slow down for such dependent on exter-
the Ukrainian retail market has been demonstrating rath- nal economic environment economy like Ukrainian7.
er high growth and “tasty” perspectives both for domestic
and foreign retailers. The State Committee of Statistics of Retail is worth to be called one of the most important forces
Ukraine informs that the total turnover of domestic retail of economic progress in any country. Thus, retail develop-
in 2007 amounted to UAH 318.7 billion which is a 28.8% ment is of enormous importance in particular for the coun-
increase versus 2006. Whereas in January – Septem- tries with post modern type of economy where custom-
ber 2008 retail turnover has increased by 24.8% up to ers are very picky and competition is intensive. Speaking
UAH 177.5 billion. The most intensive increase of retail about the Ukrainian retail, its participants expect that due to
turnover has been noticed in Luhansk (UAH 5 billion and the amplifying competition many regional chains will have
633.1 Mio) and Mykolayiv (UAH 3 billion 766.6 Mio) re- to adjust their business – either to close down or put it for
gions. According to the same statistics consumption ex- sale. Trying to get additional funds for expansion many re-
penses play the first violin in formation of the GDP by tailers issue rated stock. Apart from bonded loans on the
end consumption segment. During the last 6-7 years the domestic capital market retailers will obviously attract for-
GDP has consisted by 75-77% of consumption expens- eign investments. Minimum five national retail chains like
es. In general during 2007 Ukrainians spent on goods Furshet, Vekyka Kyshenya, Silpo, Amstor and PAKKO are
and services more than 80% of their incomes6. preparing for attracting funds via listing their stock abroad.
Sales (EUR, m); No. of Stores in 2007 Top Retailers’ Development (Sales; LC; %)
6 www.unian.net
7 www.moodys.com
www.chamber.ua
29
III INTELLECTUAL PROPERTY RIGHTS
ENFORCING YOUR IP RIGHTS IN UKRAINE
By Magisters
www.magisters.com
Ukrainian legal system provides for standard set of instru- practice such prohibiting orders are well executed by
ments on enforcement of intellectual property (IP) rights, counterparty(s), which are legal entities, since of pos-
pretty the same as in the most developed countries. sible criminal sanctions for non-execution.
The system includes civil, administrative and criminal Almost in all cases concerning IP rights court expertise is
instruments allowing enforcement of IP rights. This necessary, for instance to decide on similarity of trade-
short review provides basic details on each option, its marks, whether the invention was actually used by re-
pluses and minuses. spondent etc. The expertise and court expert are appoint-
ed by the court. Expertise is usually paid by the party who
Civil option is interested in further review of the case, since without
payment the expert will not proceed with the expertise. The
Seems the most result-effective and at the same time law does not provide for time limitations and in practice
the most time and costs consuming option. expertise may take considerable time: from 6 months in
simple matters and up to 1,5 years for complex matters.
In order to enforce its IP rights one may apply to Ukrain-
ian courts. This could be commercial court (if the par- Court expertise is one of the reasons why IP court cas-
ties are legal entities and/or private entrepreneurs), es are reviewed for unreasonably long time. Another
general court (if at least one party is natural person) or reason is procedural means for different formal delays,
administrative court (if main respondent is state author- which can be used by the parties.
ity, which is rare).
Administrative option
General limitation period for applying to the court is 3
years, since claimant has become aware or should have Police, Tax Inspection, State IP Inspectors
become aware of infringement of his rights/interests.
Ukrainian legislation provides for administrative sanc-
The court action is filed to respective local court in re- tions for illegal use of IP rights. The sanctions are ap-
gion/district where one of respondents has its regis- plied if damages caused by infringement are not sig-
tered office, or where IP rights were infringed. nificant. The sanctions include fine up to USD 550,
seizure of counterfeited goods and equipment used for
Court fees are relatively small: about USD 50 if cancel- its production.
lation or infringement cease action, and 1% of dam-
ages claim but no more than USD 300 (if to general Limitation period for applying the sanctions is 3 months
courts) or USD 4,000 (if to commercial courts). after IP rights were infringed.
During the case review (and in commercial procedure Competent authorities to identify infringement are local
even before filing an action) the court may issue an police (mostly), tax inspection (during general company
order on interim measures prohibiting counterparty(s) tax audit) and state IP inspectors (in practice, only in
proceed with certain actions, if such actions may com- regard of CDs/DVDs), who detect the infringement,
plicate execution of future court decision. For instance produce respective protocol and submit to competent
this could be prohibition to sell goods marked by dis- local court. The court reviews the case and decides on
puted trademark, stop advertisement campaign, prohi- the merits and sanctions applied.
bition to transfer rights for disputed trademark, make
certain changes to state registers concerning trade- It is worth to mention that this instrument has significant
marks, pharmaceuticals, domains’ registers etc. In weak place. The matter is that IP rights owner or its
Anti-Monopoly Committee (AMC) is state body au- Customs authorities can also apply border measures
thorized to fight unfair competition. According to the ex officio. However no one ever heard about respective
Ukrainian legislation unfair competition is any act of examples.
competition contrary to honest practices in industrial or
commercial matters, including: Moreover despite of numerous number of IP rights
put into the customs register for some reason stop of
• all acts of such a nature as to create confusion by any counterfeit goods by the customs is very rear, although
means whatever with the establishment, the goods, or counterfeit goods successfully reach Ukrainian market.
the industrial or commercial activities, of a competitor;
• false allegations in the course of trade of such a nature Criminal option
as to discredit the establishment, the goods, or the in-
dustrial or commercial activities, of a competitor; Ukrainian legislation provides for criminal liability for in-
• indications or allegations the use of which in the fringement of IP rights and illegal collection and disclo-
course of trade is liable to mislead the public as to sure of trade secrets, if damages are significant.
the nature, the manufacturing process, the character-
istics, the suitability for their purpose, or the quantity, Criminal sanctions for such infringements are fines,
of the goods. imprisonment, seize of counterfeited goods and equip-
ment used for its production.
AMC can fine in the amount of 3% of all infringer’s
incomes for previous year. Limitation period for filing Procedure for applying criminal sanctions includes 3
application to AMC is 6 months after IP rights owner basic stages: investigation (police), pre-court exami-
became aware or should have become aware of in- nation (police or Prosecutor’s office) and court review
fringement of its rights. Filing application is free. (three court instances).
The weak side of this instrument is low power of AMC: Procedure starts upon application of IP rights owner,
its decisions and interim measures could not be en- whose rights were infringed. Filing application is free.
forced without infringer’s consent. In order to enforce
its decision AMC should apply to the court and go There are several weak sides in this option. The first is
through full-scale litigation. that there should be clear evidences that infringer knew
that he infringes IP rights of specific IP rights owner. In
In addition any AMC decision can be appealed to the order to fulfill this requirement often IP rights owners
court, which also provides for full-scale litigation. have to send warning letters to the infringer informing
on its rights.
Under such circumstances it is more reasonable to ap-
ply directly to court instead AMC with its unenforceable Another weak side is too much authorities involved that
and appealable decisions. can control and cancel each other decisions. This pro-
vides a pile of procedural instruments for the infringer
This makes AMC rare body resolving unfair competi- to delay and drug the case.
tion matters.
Notwithstanding the above weak sides criminal option
Border measures is quite effective. People are afraid of possible criminal
liability and often even start of criminal investigation and
Ukrainian legislation provides for stop of counterfeit active police actions result in cease of infringement.
www.chamber.ua
31
INFORMATION &
IV COMMUNICATION TECHNOLOGIES
1. General Market Information Ukraine has showed significant progress over the last
5 years – 1400% total revenue growth and a fourfold
Since declaring its independence in 1991, Ukraine has increase in salaries. Just five years ago, annual rev-
faced many challenges. For the period following the col- enues in Ukraine’s software development industry did
lapse of the Soviet Union, the economy suffered a rapid not exceed $50 million. In 2008 however, according to
decline. However, this trend has reversed itself and High Tech Initiative’s estimate, the market generated
Ukraine is now in a period of steady economic growth $700-800 million of revenue. The market is far from
and high annual real GDP growth. In 2008, Ukraine saturation and growth levels are likely to remain high
joined the World Trade Organization and is making for at least 2-3 years (more than 30% in 2008).
progress toward implementing the economic reforms
necessary for integration with the European Union (EU),
although membership still remains a distant prospect.
www.chamber.ua
33
3. IT Services IT consulting was one of the most dynamically grow-
ing market segments in 2007. Increasing numbers of
As the Ukrainian IT market is still hardware-oriented, customers view these services as one of the key parts
the IT services market remains underdeveloped. The of integrated IT-infrastructure optimization projects.
IT services market in Ukraine ranks below that of its Unlike more developed IT markets, IT consulting serv-
major CEE competitors, but also displays the most po- ices constitute only 9-10% of the market and their costs
tential. Until recently, companies often did not under- amount to only a small part of total project expenses.
stand the value of IT services and were not willing to This segment demonstrated a 30%-40% annual growth
pay for them. Today there is a much greater investment in 2007, inspiring many companies to strengthen their
in IT services, and the market is expected to burst in positions within the sector.
the coming years.
2008 also demonstrated an increase in the number of
According to some estimates, in 2007, the market value purely consulting projects (i.e. IT-infrastructure and se-
of IT services (including outsourced software develop- curity audits). The consulting market will continue its
ment) was $0.9-$1 billion with a 25% growth compared growth and is expected to increase its share in the total
to 2006. The market was characterized by minimal po- IT services cost structure.
litical influence, as most customers were from the com-
mercial sector. Increased SMB influence has also been In 2008, customers showed the most demand for IT
a trend in 2008. services, which helped improve the IT departments’
efficiency, cut operating costs, managed risks, and
Outsourcing represents about 80 percent of software automated IT service management processes. Infra-
development jobs in Ukraine. It includes anything from structure audits, network engineering, information life-
integration jobs, to quality assurance, to conversion cycle management, implementation, virtualization, and
projects. In 2007 compared to 2006, the outsourcing support of IT systems were among the most popular
market grew by 30% and amounted to $800 million. services.
This put Kyiv on the list of the Top 50 emerging out-
sourcing cities in the world, according to outsourcing IT services customers were mainly comprised of com-
advisory firm Tholons. Of the Global Services top 100 panies from industrial, financial and telecommunica-
offshore outsourcing companies in 2008, ‘SoftServe’ tions sectors. Financial institutions like banks and in-
is a Ukrainian company and another five – DataArt, surance companies were the most active customers at
Luxoft, EPAM Systems, GlobalLogic, and Exigen Serv- the beginning of 2008, but were overtaken by the retail,
ices – have their affiliations in Ukraine through acquisi- machine manufacturing, primary and metallurgical in-
tion of local development companies. The expansion of dustries.
this market continues and is considered another trend.
In 2009, demand for IT services will be highest within
Another noticeable trend is the increasing interest of competitive sectors – retail, supply chain, financial,
major local IT-companies. Most expand their branch- and industrial. Geographically-distributed companies,
es, enter into strategic contracts and increase the level diversified holdings and financial industrial groups that
of their IT service expertise. They aim to capitalize on implement complex integrated applications for busi-
the market’s potential, but most lack the experience of ness process automation are expected to show the
complex projects and only individual local companies most interest in this market.
have accumulated enough experience to manage na-
tion-wide projects. Lack of qualified personnel and the 4. Developers Market
deficit of professional teams are the most prominent
deterrents of market development. Ukraine is a unique country for software development.
Geographically, it is well placed, close to Russia and
Europe, and has substantial intellectual potential (e.g.,
in 2008, a Ukrainian student won the gold medal at the
annual Microsoft Imagine Cup international competi-
tion for young software developers).
Major investors in software development are larger in- 5. Protection of Intellectual Property Rights
ternational companies that have more secured market
shares and outsource the development of their soft- With an 83% piracy rate, Ukraine is continuously listed
ware – Microsoft, SAP, Oracle, IBM, Adobe, and oth- as one of the Top 20 countries with the highest piracy
ers. Foreign companies come to Ukraine because of rates, according to the annual BSA and IDC global
the higher quality of work and lower wages, in compari- software Piracy study 2007. Other countries include
son to the U.S. or Western Europe. These major inves- Indonesia (84%), Pakistan (84%), Algeria (84%),
tors represent about 85% of customers in the software Cameroon (84%), China (82%), Bolivia (82%), Nigeria
development market. (82%), as well as other African, South American, and
Asian countries. But Ukraine has improved 5 points in
Microsoft is an important driver for software develop- 5 years. Experts consider this improvement significant
ment in Ukraine. IDC estimates that the Microsoft eco- and as recognition of the Ukrainian government’s ef-
system – companies in Ukraine that sell products that forts in fighting piracy. The US Trade Representative
run with or on Microsoft software, or that service or dis- has moved Ukraine from the ‘priority watch list’ to the
tribute Microsoft software – employs 52 per cent of the ‘watch list’.
Ukrainian IT workforce and generates over 800 mil-
lion. IDC also estimates that for every 1 of Microsoft Yet the problem of IPR protection in the field of soft-
revenue, the Microsoft ecosystem generates an addi- ware still remains acute. State institutions widely use
tional 26 for other companies in the country. counterfeit and pirated software. If executive branch
central organs have software legislation programs that
When it comes to the most popular software design are at least partly supported, the situation in regional
and coding requests, the Microsoft Windows platform and district administrations is much more complicated.
dominates the Client side (95% of market share) which This problem has deep roots in different social and
leads to proliferation of Windows-oriented technolo- economic segments.
gies. In the client-server sector, Microsoft .NET technol-
ogy and Java-based scenarios (with very limited pres- First of all, this is a “painful” budget issue. Each year,
ence of other technologies) have equal shares. Web due to the high piracy levels, the Ukrainian economy
development occurs mainly on ASP.NET technologies, does not receive the tax revenue that would be gen-
Java- or JSP-related technologies and LAMP (Linux, erated by the sale of licensed software. According to
Apache, MySQL, PHP/Perl/Python) stack. IDC, in 2003-2008, Ukraine was owed $1.178 bln in
taxes. There is also a disturbing 5 year trend emerg-
According to some estimates, .NET was the market ing of decreased use of pirated software and increased
leader in 2008. This was also confirmed by job search financial losses.
sites which showed that .NET developer vacancies
outscored Java developer vacancies by a ratio of 4:3. Secondly, use of counterfeit and pirated software un-
dermines security of information. More than 50% of
Personnel stability was the most vital issue in 2008 and computers in government institutions have counterfeit
will be for some time to come. Although Ukrainian state and pirated software installed. Such software does not
universities generate about 11 thousand computer sci- guarantee full protection of information from various in-
ence graduates and 19 thousand tech students with IT trusions that may include viruses and hackers. Experts
skills, only a small percentage of them are qualified to also note limited functionality of these computers. For
work in software development. This creates tough em- example, these computers cannot use such features as
ployer competition. The industry is marked with high free software updates and are not able to download ad-
turnover rates, where on average people tend to change ditional services that may be needed for the software.
employers every two to three years. Understanding
this, industry leaders attempt to use different strategies Thirdly, using counterfeit and pirated software is ille-
to keep and develop the best talents, including raising gal according to Ukrainian legislation, as well as inter-
salaries, bonuses and social benefits packages. They national treaties signed by Ukraine when it joined the
also offer a better work environment, support for pro- WTO. The State guarantees the freedom and protection
fessional communities, and education at private institu- of IPR, including those for software. The administrative
tions or in partnership with national universities. code of Ukraine provides administrative and criminal
responsibility for violation of IPR, including distribution
All these measures result in increased business expens- and ownership of counterfeit and pirated software. Re-
es, therefore it is becoming more difficult for Ukrainian cent amendments to the Code also provide obligatory
developers to compete globally. In order for this indus- elimination of such software.
www.chamber.ua
35
The Ukrainian software industry is a fast growing glo- fied as their Western colleagues. For many however,
bal market that develops slowly and unsystematically. their potential remains unrealized because the State
The country is an importer of software and a lot of soft- does not provide favourable conditions for national IT
ware development is outsourced. It is not profitable for industry development.
national software companies to develop software prod-
ucts for the Ukrainian market and distribute it widely; it Finally, the absence of proper IPR protection resulted in
is considered more attractive to work with international a particular international image of Ukraine. The country
software vendors. The main reasons are the same: is associated with an unfavorable business climate and
weak protection of IPR and lack of awareness of the poor development conditions for businesses related to
threats caused by the use of counterfeit and pirated intellectual properties.
software.
The list of sectors with counterfeit and pirated software
According to experts from the National Academy of problems is not comprehensive. It is certainly enough
Sciences of Ukraine, the country has a lot of technical to consider the exceptionally high piracy rate of 83%
potential as well as qualified personnel needed for the as an urgent problem requiring nationwide attention.
successful development of the IT industry. Every year Unfortunately, the government has not paid enough at-
leading Ukrainian technical universities train thousands tention. The situation requires systematic and planned
of qualified IT specialists who are as skilled and quali- resolution on a state level.
Why Bother SaaS ? all SaaS application are built using multi-tenant
back-end, where one applications serves hundreds
SaaS (software-as-a-service) being on a hype in United or thousands of customers. So SaaS providers are
States and Europe is still a new, even unknown product leveraging enormous economies of scale in the
for Ukrainian B2B technology buyer. You can search deployment, management, support and through the
the net for all types of definitions of what SaaS is and Software Development Lifecycle allowing end-user
find mostly technical one. Still the ever-growing popu- enjoy a much lower cost of ownership.
larity of SaaS products are explained not by tech-fash-
ion, but by clear business indicator: SaaS is a tool that Other distinctions of SaaS products are scalability and
allows leveraging the corporate resources smart way. interoperability. Running on providers’ hosted servers,
there is no limit to how many users, how many proc-
All your typical software, be it individual like word esses, applications or whatever else you may need.
processing or corporate like CRM, help desk, call More over, as many SaaS products are built with inter-
center or data collection, can be delivered using SaaS operability in mind they can seamlessly integrate with
models and with considerably lower price tag. Anyone your current and legacy IT systems, including other
with access to a browser can use SaaS products. Be- SaaS products. This in turn opens enormous capabili-
cause they are web-hosted, there is nothing to down- ties to change, adjust and improve business processes
load, nothing to install, no maintenance and no admin- without the need to build form scratch.
istration.
The added benefit for most SaaS product is ubiquitous
For any business manager it means that you free trial – it is like a software test-drive with no obliga-
can skip the lengthy and costly deployment and tion to buy. Usually the free trial period is long enough
installation process and you do not need to make to properly evaluate several products available at the
any capital investments into the hardware, user market and make the right purchase.
licenses or seats. The only price you pay is a
subscription fee and you can start using the tools SaaS benefits
right away. The obvious benefit for SaaS-provider is
that subscription fee has to be paid every year. Still So, long thing said short SaaS products have a set of
even across several years it is usually considerably districts benefits and advantages compared to tradi-
lower that traditional software licensees, because tional software.
• Scalability – corporate buyer don’t have to worry • low level of IT skills – a lot of SMB personnel are not
about picking the wrong license of paying for users he confident computer-users, less so internet technology
don’t have. The end-user need not store software or users;
data stored on his computer so he doesn’t need large
data storage facilities. There is also the convenience • price – domestic SaaS solutions are almost non-
of not needing to constantly backup data - storage is existent, and the price for others maybe too high for a
the responsibility of the SaaS provider. The applica- local SMB especially if combined with lack of localized
tion growth with your business and provides corpo- versions and thus potential language barrier.
rate buyers an easy way to control expenses
Still, this vision is not pessimistic. It is just indicative
• Integration Capabilities – SaaS products can seam- on the current level of IT technologies penetration in
lessly integrate with current and legacy IT systems, Ukraine. So the first task any SaaS vendor will face is
including other SaaS products. This in turn opens the need to nurture awareness and prepare the market.
enormous capabilities to change, adjust and improve The most expected early buyers are departments of
business processes without the need to build form major companies or consultant companies serving
scratch. them. Couple of SaaS products can be purchased
locally even now, for example, Microsoft product on
• Fewer Personnel – SaaS reduces the need in IT per- SaaS model, presented by ISS (saas.com.ua) or online
sonnel. Because it is web-hosted, there is nothing to survey software presented by WorldAPP Ukraine
download, nothing to install, no maintenance and no (worldapp.com.ua). Still, the second major wave of
administration. The SaaS vendor provider will handle SaaS products is highly unlikely to happen before
these tasks. 2010-2011.
• Free-Trial – most SaaS applications come with a free Survey software as SaaS or customer and
“test-drive” period so you can try before you buy en- employee retention is ever-important
suring that you make the smart purchase.
Given the current economic situation worldwide, data
SaaS in Ukraine collection, form and survey applications based on
SaaS model become a lucrative product for both SMBs
When we start talking about SaaS in Ukraine the obvious and corporate buyers.
fact is that the market is only emerging. It is explained
by the fact that the initial development of SaaS market Besides evident SaaS advantages described above,
worldwide was driven by small and medium businesses these tools can solve a couple of other major challeng-
(SMB) needs, who became its early adopters. es faced by the business today.
In United States as well as in Europe it was SMBs that Customer retention – with all the advertising and mar-
being more flexible and in dire need of spending their keting budgets being cut, and customers cutting their
resources smart, embraced the SaaS products. Then expenses the will known saying that “it is cheaper to
came the departmental-level buyers from corporate keep an existing customer than to find new one” gains
sector who were choosing SaaS products, because even more weight. Customer retention often depends
the associated costs were low enough not to be run on the quality of customer service. The better you in-
through lengthy approval procedures. And only during teract, the more customers you keep. However, every
the couple of the last years, major buyers are engaged time you fail to meet a customer’s expectations, you
into buying SaaS products on a corporate level. lose business. With online survey tools, you will ob-
In Ukraine the situation is determined by the fact that tain feedback in a timely and efficient manner. You will
www.chamber.ua
37
know what you do well and how you can improve. As In addition, Key Survey delivers the power of workflow
a result, you can make instantaneous decisions that with workgroups where you define user roles and assign
keep your customers coming back for more. permissions for certain functions and access levels.
Employee retention – however many employees you Key Survey offers a set of integration opportunities that
have, it is vital to efficiently find out what they think. On- will allow leading businesses worldwide to build new
line survey tool not only gives you a means to gather processes around online data collection. This is the
all kinds of information; it helps you focus on what is next successful step in product evolution towards the
valuable and relevant. Dynamic, web-based employ- SaaS 2.0 model.
ee surveys now play an increasingly important role in
both larger and medium-sized companies. Distributing In 2001, WorldAPP entered the online survey software
employee surveys online has proven superior to other market with the SaaS 1.0 ready tool, which offers the
forms of survey deployment for one major reason: in following key attributes:
online surveys, people express themselves more freely
because they have complete anonymity. • An optimized process of online data collection.
Data collection solutions on SaaS model • It is easy to use and allows really fast roll-out because
no learning curve is involved.
WorldAPP, the leader in web-based data collection
technologies, markets web based applications for col- • No IT skills are required for use.
lecting, managing and leveraging data throughout the
enterprise. • It has rich functionality, which extends its use beyond
just online surveys.
WorldAPP`s flagship product - Key Survey is an intelligent
survey technology that’s help businesses worldwide to • It has been configurable and has had flexible customi-
automate the online data collection process and ensure zation for application, integration, security, and per-
complete accuracy. Its intuitive user interface enables an- mission-based access.
yone to create and administer professional-looking online
surveys. “From the very beginning our goal was to develop more
than just an online survey tool. We wanted to provide
Key Survey enables you to create, manage, deploy, and our users with an instrument that would change the
dynamically manipulate your surveys in just about any way they collect online data,” said WorldAPP CEO
way imaginable. You can customize your respondents’ ex- Cal Brown. “The recently announced Salesforce and
perience using logic transitions, set-up workflow alerts to QlikView integration which is available out of the box is
improve reaction and launch personalized e-mail invitation a clear indication of the direction we are moving in.”
and e-mail reminders to improve response rates. You can
access survey results real-time and generate customized With all the robust application and data integration ca-
reports and analysis on demand. pabilities, along with improved workflow, Key Survey is
heading towards the SaaS 2.0 model. Now Key Survey
WorldAPP designed Key Survey multi-user solutions to users can go beyond improving existing data collection
meet the administrative challenges of the large enter- processes - they can start building new ones around
prise while retaining its renowned user-friendly interface. the technology available.
Below we analyse whether the customs authorities are In 1998 the President of Ukraine authorised the customs
ready to audit the importers; the legal basis for this; authorities to carry out audits of business entities. Howev-
how customs audits are carried out; and how audit pro- er, wide-scale audits were not implemented due to the lack
cedures could be further improved. of relevant procedures and the authorities’ inexperience.
www.chamber.ua
39
Ukraine’s Law “On Payment of Taxes” of 21 December • Unscheduled customs audits may be carried out at
2000, No. 2181-III, appointed customs the controlling random, e.g. if the customs authorities obtains facts
authority responsible for the collection of customs du- that indicate a business entity has violated the cus-
ties and other taxes (excise tax and VAT) paid during toms law. Unscheduled customs audits can last for
imports of goods. The law explicitly established that the unlimited period of time. Court decisions are not re-
controlling authorities (including customs authorities) quired for unscheduled customs audits (as opposed
were entitled to audit tax payment. to unscheduled tax audits).
However, until the introduction of the 2004 Customs • The customs authorities need to inform business
Code, the rights of the customs authorities when con- entities about scheduled audits 10 calendar days in
ducting customs audits were still vague. The customs advance. No advance notification is required for un-
authorities were empowered to audit business entities, scheduled customs audits.
but the customs doctrine recognised that customs con-
trol end with the release of goods into free circulation. • A customs officer must have written authorisation to
The customs authorities did not have the status of law carry out a customs audit. The Head of the customs
enforcement authorities and thus their ability to con- office should approve the order outlining the scope of
duct post-entry audits was disputable. the customs audit.
The 2004 Customs Code established that customs • During a customs audit, the customs authorities have
control may be performed after the customs authori- wide powers. Specifically, they may:
ties released goods into free circulation, if there were check financial and accounting documents and
sufficient grounds to conclude that there were infringe- records, including electronic information in pos-
ments of law. The Customs Code also permitted the session of the business entity;
customs authorities to check business entities’ records inspect manufacturing, warehousing, commer-
with respect to goods moved across the border. cial and other premises;
measure volume of construction, erection, repair
In 2004 the government passed a resolution defining and other works, conduct analysis of raw materi-
the primary rights of the customs authorities when con- als, etc.;
ducting customs audits. It also determined the grounds obtain explanations and copies of documents
for scheduled and unscheduled customs audits. and other data related to computation and pay-
ment of taxes.
To enhance their capacities, in 2004 the tax and customs
authorities issued regulations on joint procedures for au- • The customs authorities prepare an act (report) at the
diting business entities. Then, in 2005 the government end of the customs audit, which should be signed by
passed a resolution that required that the tax and customs the customs officers and the chief officials of the au-
authorities to further coordinate audits of business entities. dited business entity.
Finally, in 2006 the customs authorities approved reg- Specific areas that the authorities have focused on
ulations that stipulated the procedure for undertaking elsewhere and are expected to focus on in Ukraine in-
customs audits. clude:
Current status of customs audits • Potential adjustment of customs values of goods for
transportation costs, which may be added to or de-
Since 2003 there has been a specific unit within the cus- ducted from the customs value;
toms authorities responsible for post-entry audits – the
Central Bureau of Risks Analysis and Audit. Between • Revealing cases where in-kind contributions to capi-
2005 and 2007 this unit developed into the Department tal of Ukrainian legal entities or joint-ventures were
of Risks Analysis and Audit further renamed into the disposed of during a 3-year period. If this happens,
Department of Analytical Work and Informational Moni- the customs duty for which exemption was granted
toring. Furthermore, similar units were created in each during import should be paid;
customs office.
• Reviewing toll manufacturing transactions. For this,
The procedures for customs audits are as follows: the customs authorities examine whether exemptions
from taxes were correctly applied to the raw materials
• The customs authorities plan scheduled customs imported for processing;
audits quarterly. Scheduled audits can last up to 30
days and the customs authorities may audit a busi- • Inclusion of royalties in the customs value of imported
ness entity once a year. goods;
• Country of origin of imported goods, especially in cas- In addition to existing powers, the draft Code envis-
es where the goods were imported free of customs ages that the customs authorities would be authorised
duty under Free Trade Agreements; to carry out customs cross-audits. This would mean
that the customs office may audit any business entity
• Inclusion artwork, design, engineering works into cus- that had any business relations with the entity that im-
toms value of imported goods ; ported/exported goods. The customs authorities would
carry out cross-audits without prior notification of the
• Verifying prices of imported goods between related business entities. Currently the customs authorities oc-
entities and revealing whether relations could impact casionally perform cross-audits, although there are no
the customs values of imported goods. sufficient grounds for this. The draft Code would pro-
vide legal grounds for cross-audits.
There are a number of circumstances that may pre-
vent the further development of customs audits in the Conclusion
short term. These circumstances include the lack of
experience of the customs authorities in carrying out Currently there are sufficient legislative grounds for the
audits and the lack of experienced personnel who may customs authorities to carry out customs audits. The
be involved in the audits. Nevertheless, it is likely that customs authorities occasionally use these rights and
within the next year or two “real” audits will become audit business entities, though with a limited scope.
common.
As their skill improves, the customs authorities will car-
Further development of customs audit procedures ry out customs audits more frequently and extend the
scope of these audits. The Kyoto Convention also en-
In 2006 Ukraine joined the Protocol of Amendment visages customs audits and the authorities will develop
to the International Convention on the simplification audits in order to comply with the Convention. Moreo-
and harmonisation of customs procedures (Kyoto ver, the Kyoto Convention strives to facilitate customs
Convention)1. The Kyoto Convention aims at introduc- control during customs clearance, meaning that certain
ing a more rapid customs clearance of goods through portion of customs control will move to a post-entry re-
the use of information technology and new techniques view period. The Ukrainian customs authorities will fol-
for customs control, such as risk assessment and au- low these guidelines.
dit-based control. The Convention defines “audit-based
control” as measures by which the customs authorities The reduction of customs duties after WTO accession
satisfy themselves as to the accuracy and authenticity and the decrease of imports, due to the economic slow-
of declarations through the examination of the relevant down, will force the authorities to actively seek other
books, records, business systems and commercial methods of increasing state revenues. In this regard,
data held by persons concerned (i.e., importers). the customs authorities may use customs audits to ver-
ify importers’ past compliance with customs regulations
The customs authorities are now reviewing the customs and assess additional duties and taxes. Thus, compli-
legislation to bring it into compliance with the require- ance issues are growing more important than ever.
ments of the Kyoto Convention. Based on this review,
they are proposing a number of amendments to the We would recommend that importers analyse customs
current Customs Code. procedures, identify risky areas and develop defence
files (if needed). This particularly relates to entities that
The draft Customs Code, which now is under the pay royalties on imported goods, carry out toll manu-
Verkhovna Rada’s consideration, incorporates a facturing, purchase goods from related entities, import
detailed section on customs audits of business goods under free trade agreements or enjoy tax prefer-
entities. In particular, the customs authorities would ences. Finally, a thorough customs review by external
be entitled to: advisors is recommended.
1 The Law of Ukraine “On the Accession of Ukraine to the Protocol of Amendment to the International Convention on the simplification and
harmonisation of customs procedures” of 5 October 2006, No. 227-V.
www.chamber.ua
41
VI INVESTMENT POLICY
Ukrainian legislation provides that (with some few ex- Pursuant to the Commercial Code and the Foreign In-
ceptions) foreign investors are authorized to carry out vestment Law, any Ukrainian company will qualify as
their investment activities in Ukraine on the same basis an “enterprise with foreign investment” if foreign invest-
as Ukrainian domestic investors. This relates to the ments in its charter fund amount to at least 10%.
types of investments, the available investment vehi-
cles, and the investment targets. Foreign investors are entitled to certain privileges and
guarantees under the Foreign Investment Law, provided
1. Laws on Foreign Investment that their investments have been duly registered with
the appropriate local state authorities under the terms
The Law of Ukraine On Investment Activity, adopted on and conditions of Investment Registration Resolution.
18 September 1991, establishes the general principles The registration is not mandatory, but does enable
for investment activity on the territory of Ukraine, irre- investors to use privileges and guarantees set forth
spective of the nationality of the investor. The particu- by the legislation. Such privileges and guarantees in-
larities of making foreign investments in Ukraine are clude, inter alia, the following:
regulated by the following key laws and regulations:
• Protection Against Changes in Legislation: foreign
• Law of Ukraine On the Regime of Foreign Investment investors are guaranteed protection against changes
(the Foreign Investment Law), adopted on 19 March in the foreign investment legislation for a period of
1996; ten years, although certain changes in other areas of
Ukrainian legislation and their implementation have,
• Law of Ukraine On the Protection of Foreign Investment in fact, limited the applicability of the above guarantee
(the Investment Protection Law), adopted on 10 Sep- to changes in Ukrainian legislation on matters relating
tember 1991; to nationalization, expropriation, and similar matters;
• Resolution of the Cabinet of Ministers On the Proce- • Protection Against Nationalization: foreign invest-
dure for the State Registration of Foreign Investment ments may not be nationalized. State bodies may not
(the Investment Registration Resolution), adopted on expropriate foreign investments, with the exception of
7 August 1996; emergency measures (such as national disasters, ac-
cidents, epidemics, etc.) and then only on the basis
• Resolution of the National Bank of Ukraine On Regula- of decisions of bodies authorized to that effect by the
tion of Foreign Investing in Ukraine (the Foreign Invest- Cabinet of Ministers of Ukraine;
ing Resolution), adopted on 10 August 2005;
• Guarantee for Compensation and Reimbursement
Under the Foreign Investment Law, the term “foreign of Losses: foreign investors have the right to be re-
investment” refers to all forms of value invested by imbursed for their losses, including lost profits and
foreign investors into objects of investment activity in moral damages incurred as a result of the actions,
accordance with the applicable Ukrainian legislation the failure to act, or the improper performance on the
for purposes of obtaining profits or achieving social ef- part of state or municipal bodies of Ukraine or their of-
fects. Such broad definition, however, makes unclear ficials with regard to their obligations owed to foreign
if certain types of investment activities can be deter- investors or enterprises with foreign investment as
mined as foreign investment. required by law. All expenses and losses of foreign
The Foreign Investment Law also extends certain privi- • To open an investment bank account in Ukraine and
leges to “enterprises with foreign investments.” The to transfer funds in foreign currency from abroad to
latter are exempt from paying import duties on their this investment account;
foreign investors’ in-kind contributions to their charter
funds (except for goods for sale or goods provided for • To transfer funds in foreign currency from an invest-
such enterprises’ own consumption). However, in the ment account opened at a Ukrainian commercial
event that the corresponding assets are sold or oth- bank to current bank account of a Ukrainian resident
erwise disposed of by such enterprises within three (in case of portfolio investments, this would be a bank
years from the date of their respective contributions to account of a licensed Ukrainian securities trader);
their charter funds (including in the event of the termi-
nation of the activities of such enterprises), then the • To convert funds in foreign currency kept in an invest-
enterprises will be required to pay the applicable im- ment account at a Ukrainian commercial bank into
port duty in full on the aggregate value of the alienated Ukrainian currency for further direct investment (this
assets. applies only to direct investment); and
Two categories of restrictions apply to foreign invest- • To transfer funds in Ukrainian currency received as
ment activity in Ukraine. The first relates to general profits, interest, and other proceeds from investment
restrictions on investment activity, which are applied activity in Ukraine from an investment account to a
both to foreign and domestic investors. Under the current bank account of a resident (in the case of
Ukrainian law, certain types of business activity may portfolio investment, this would be a current bank ac-
be pursued only by state-owned enterprises (e.g., the count of a licensed Ukrainian securities trader).
rocketry industry, the production of bio-ethanol, ban-
knotes, blank forms of securities in certificated form, Under the Foreign Investing Resolution, any foreign in-
etc.). vestor may repatriate portfolio investments or direct in-
vestments and profits received on such investments in
The second category relates to certain restrictions ap- Ukraine through any of the following options:
plicable only to foreign investors. Principally, such re-
strictions represent the legally established threshold on • To transfer foreign currency funds to the foreign bank
the maximum permissible percentage of foreign invest- account of the foreign investor from the current bank
ment in the charter fund of a Ukrainian enterprise doing account in foreign currency of the Ukrainian resident
business in a particular industry. The number of such (under direct foreign investment only, provided that the
restricted industries is extremely limited and is expect- investment was initially transferred to a current bank
ed to decrease even further. For instance, such restric- account in foreign currency of the Ukrainian resident);
tions currently apply to the publishing business – the
share of foreign investors’ participation in an Ukrainian • To transfer foreign currency funds to the investment bank
publishing house is limited to 30%. In addition, foreign account of the foreign investor in Ukraine from the cur-
citizens and legal entities are prohibited from owning rent bank account in foreign currency of the Ukrainian
agricultural land in Ukraine, and are authorized to own resident (under direct foreign investment only, provided
only land designated for non-agricultural use, under the that the investment was initially transferred to the invest-
Land Code. ment bank account of the foreign investor in Ukraine);
www.chamber.ua
43
• To transfer foreign currency funds to the foreign bank Depending on where the foreign investment activity
account of the foreign investor from the current bank may be deemed to be economically concentrated, the
account in foreign currency of the licensed Ukrainian foreign investment may be voluntary registered with the
securities trader (under portfolio foreign investment regional (oblast) state administration, the state adminis-
only, provided that the investment was initially trans- tration of the Cities of Kyiv or Sevastopol, or the gov-
ferred to the current bank account in foreign currency ernment of the Autonomous Republic of Crimea. The
of the licensed Ukrainian securities trader); registration of a foreign investment must be affected
in the course of three business days following the sub-
• To transfer foreign currency funds to the investment mission of the required set of registration documents.
bank account of the foreign investor in Ukraine from
the current bank account in foreign currency of the In order for a foreign investment to be registered, an
licensed Ukrainian securities trader (under portfolio investor or its authorized representative is required to
foreign investment only, provided that the investment submit the following documents to the relevant regis-
was initially transferred to the investment bank ac- tration body: an informational notification of the foreign
count of the foreign investor in Ukraine); investment confirmed by the local state tax administra-
tion; documents certifying the form of the foreign invest-
• To transfer Ukrainian currency funds from the current ment (e.g. copies of the constituent documents of the
bank account in Ukrainian currency of the Ukrainian Ukrainian company into which the foreign investment is
resident to the investment bank account of the foreign made, or a copy of a joint activity agreement, a conces-
investor in Ukraine for the purpose of further reinvest- sion agreement, etc.); documents evidencing the value
ment in Ukraine; and of the foreign investment; and documents evidencing
the payment of the state registration fee.
• To transfer Ukrainian/foreign currency funds from
the investment bank account of foreign investor in The registration of a foreign investment may be denied
Ukraine to the investment bank account of another only in the event of the violation of the established reg-
foreign investor in Ukraine for the purpose of pay- istration procedure. The denial of the registration of a
ment for the investment object in Ukraine. foreign investment must be documented in written form
and must specify the reasons for such denial. The de-
The repatriation of foreign currency investments pro- nial may be challenged in court.
ceeds may be subject to certain additional requirements
related to the foreign currency purchase in Ukraine 3. Divestiture
when investment proceeds are received in Ukrainian
currency. In particular, to be able to purchase foreign The Foreign Investment Law provides that, in the event
currency for purposes of repatriation, a foreign inves- of the termination of its investment activity, a foreign
tor should have a set of specific documents ready for investor has the right, within six months from the date
submission to its servicing bank in Ukraine who will be of the termination of such activity, to recover its invest-
purchasing foreign currency for such an investor. In ment in-kind or in the currency of the investment in the
particular, the principal documents that investor should amount of the actual contribution (taking into account
have include, inter alia: (a) a copy of the information any possible reduction of the charter fund), without the
notification on registration of foreign investment, (b) a payment of any fees or duties. A foreign investor has
notarized copy of the investment (sale and purchase) the right to recover the benefits from its investments in
agreement, (c) and the confirmation of the Ukrain- cash or in-kind on the basis of the actual market value
ian bank certifying receipt of investment amount in of the investment at the moment of the termination of
Ukraine. the investment activity, unless otherwise stipulated
by the applicable Ukrainian legislation or international
Foreign investors are not required to obtain an individual agreements to which Ukraine is a party.
license of the National Bank of Ukraine for using funds
in foreign currency as means of payment on the territory 4. Investment Incentives
of Ukraine when transferring funds in foreign currency
from their investment accounts opened with Ukrainian All enterprises with foreign investment are taxed on
commercial banks to bank accounts of Ukrainian resi- their profits on a par with other Ukrainian domestic en-
dents for the payment for objects of investment. terprises, with the exception of certain state guarantees
for foreign investments, and the duty-free import of in-
Foreign investors also may make foreign currency in- kind contributions to charter funds of enterprises with
vestment deposits with Ukrainian commercial banks. foreign investment (see Section 1 above). The Foreign
However, the current procedures for such investment Investment Law also contemplates the possibility of the
deposits have some discrepancies and the key regula- establishment of a priority regime with respect to cer-
tions governing such deposits were recently challenged tain projects with the participation of foreign investors,
at the local court. which will be implemented pursuant to state programs
www.chamber.ua
45
OVERVIEW OF UKRAINIAN MARKET
OF INVESTMENT FUNDS
By OTP Capital
www.otpcapital.com.ua
History and Market Structure SSMSC to provide asset management activity. Since
that time Market of Investment Funds in Ukraine has
Market of Investment Funds is one of the youngest and been demonstrating significant growth year to year
the most fast growing financial sector in Ukraine. First considering both the number of Asset Management
Investment Companies and Investment Funds were es- Companies and Investment Funds and the volume of
tablished after adopting of the Decree of the President assets accumulated in them.
of Ukraine “On Investment funds and investment com-
panies” in 1994 aimed to support the process of mass As of the 1st of July 2008 the number of Asset Man-
privatization. They did not accumulate investors’ mon- agement Companies has increased to 394 and number
ey for further investing aimed to gain investment profit. of Investment Funds ran up 1086.
Real Investment Funds appeared in Ukraine lately after
adopting the Law of Ukraine “On institutes of mutual Dynamics of Asset Management Companies and
investment (mutual and corporate investment funds)” Investment Funds
which together with the Law of Ukraine “On securities
market state regulation in Ukraine” defined principles
of functioning and infrastructure of Ukrainian Market of
Investment Funds which includes:
Key Developments
Dynamics of correlation between assets invested by individuals in investment funds and banking
deposits
01.01.2006
Volume of Increase Volume of Increase Volume of Increase
assets, UAH since assets, UAH since assets, UAH since
mln 01.01.2006 mln 01.01.2006 mln 01.01.2006
www.chamber.ua
47
Certainly it requires more than some years of active In 2007-2008 Asset Management Companies paid a lot of
work with population to achieve structure of savings dis- attention to the issue of development of regional sales net-
tribution character for population of developed countries. work to make Investment Funds available for Ukrainians
However active creation of new public Investment Funds in all regions. This process is supported by Asset Man-
even in 2008 year (during the global financial crisis) agement Companies which are created by Ukrainian sub-
shows serious plans of market players to realize signifi- sidiaries of international banks which represent interests of
cant potential of domestic Market of Investment Funds. international financial-banking groups, have wide regional
branch network and influence positively to the develop-
Insurance Companies are also very important target ment of Investment Funds. Using experience and technol-
audience for Asset Management Companies. Their co- ogies of their mother companies such Asset Management
operation can cover direct participation of Insurance Companies introduce to the Ukrainian market high profes-
Companies in Investment Funds, managing of assets sional asset management and investment service.
accumulated in insurance reserves by Asset Manage-
ment Companies and creation of unit-linked products. Non- State Pension Funds
Unlike in developed countries Insurance Companies
gain the biggest part of their income from investments, in Development of Non-State Pension Funds is also very
Ukraine investment activity of Insurance Business is still important for further development of Ukrainian Stock
low. However market players, in particular companies Market and Investment Funds Market. According to the
that belong to international financial groups, supported Law of Ukraine”On the General Mandatory State Pension
by UAIB intend to develop co-operation between Asset Insurance” and the Law of Ukraine “On Non-State Pen-
Management and Insurance Companies understanding sion Provision” that were adopted in 2003 pension provi-
mutual benefits and perspectives of such partnership. sion in Ukraine will be covered by three-level system:
Regional Structure • the first level covers general mandatory state pension
insurance;
Almost 70% of Investment Funds in Ukraine are cre- • the second level is a part of the system of general
ated in Kiev and Kiev region and accumulate 75% of all mandatory state pension insurance and based on the
invested assets. Also in other big Ukrainian cities such principle of accumulating and further investing pen-
as Dnepropetrovsk, Kharkov, Donetsk and Zaporozh’e sion contributions;
which are important industrial centers, Investment • the third level stipulates voluntary participation of indi-
Funds are developing actively. viduals, employers and their associations in pension
formations in addition to Mandatory State Pension In-
Number of Investment Funds by the Regions surance aimed to provide additional pension pay-out
and investment income.
www.chamber.ua
49
VII LABOR & EMPLOYMENT
www.astapovlawyers.com
At the same time, to prevent even greater losses in the fu- Staff Redundancy
ture the employers should act in full accord with the Ukrain-
ian labour legislation. For this purpose we provide a brief Staff redundancy shall be affected by issuing of an ad-
overview of the legal aspects of dismissal according to the ministrative order on staff redundancy. According to the
applicable legislation and the prospects which will come applicable legislation, an employer shall give the two
into force according to the draft Labour Code of Ukraine. months personal notice to employees to be reduced. At
the same time the employer shall offer such employees
The basic legislation on dismissals includes the following: another job in the company.
• The Labour Code of Ukraine of 10 December 1971; If the employee refuses the offer and/or the company
is unable to offer an adequate job, the employer shall
• The Law of Ukraine “On Joint-Stock Companies” of notify the public employment service of the prospective
17 September 2008. staff redundancy, including, inter alia, jobs, qualifica-
tions and salaries.
Legal Reasons to Terminate Labour Relations
Moreover, when employing staff redundancy the em-
Article 36 of the Labour Code of Ukraine establishes ployer shall take into consideration the priority right to
a comprehensive list of the reasons for employment stay at work set forth by Article 42 of the Labour Code
agreement termination. However, it is more natural to Ukraine.
classify such legal reasons in the following way:
Furthermore, the draft Labour Code of Ukraine is ex-
• employment agreement termination; pected to implement a new regulation on protection
• mutual agreement of the parties (employer and em- of the employees’ right. This provision would ensure
ployee); avoiding mass dismissals for a redundancy reason.
For all that it is necessary to remember that the redun- Failure to Properly Perform Employment Duties
dant employees must be paid two months loss-of-em-
ployment compensation. In the event of dismissal due to failure to properly per-
form employment duties it is necessary to fix the re-
spective failure in a staff report. In this regard the em-
Inconsistency with the Job
ployee who committed the breach is required to furnish
a note of explanation. If the employee refuses to furnish
According to the applicable legislation, an employee
such explanation this fact shall be reflected in the rel-
may be dismissed for inconsistency with the job due to:
evant statement that shall be drawn up and certified by
two employees. After that a dismissal order is issued.
• insufficient qualification;
• health condition; It is necessary to remember that in order to have legal
• suspension of the state secrecy clearance if the latter grounds to dismiss an employee due to regular failure
is required to perform duties. to perform employment duties at least two notices or
reprimands on failure to perform employment duties
It is expected that Article 105 of the draft Labour Code should be issued to the employee during the period of
of Ukraine will provide for “revocation of driving license” one year.
instead of current wording “suspension of the state se-
crecy clearance”. * dismissal of particular categories of employees
When dismissing an employee for insufficient qualifica- The cases of failure to properly perform employment du-
tion the employer shall take into account that this reason ties listed above (Chart 1), may serve as legal grounds
should be supported by evidence. Thus, the evidence to dismiss each category of employees. However,
may include a staff report on untimely accomplishment some categories of employees fall under the following
of assignments, poor performance of the duties, wrong special dismissal reasons singled out by the law:
decisions as well as the employee certification results.
• culpable actions of the employee whose work is di-
It is necessary to point out that the draft Labour Code rectly related to money facilities and commodity if
provides for establishment of the certification proce- these actions entailed loss of trust of the employer;
dure, and the certification will be carried out not more • immoral behaviour of the employee performing edu-
than once in three years. To carry out the employee cation-related duties;
certification the administration shall issue an order on • single gross breach of the employment duties by
regular certification, and the employees shall be noti- some categories of employees.
fied thereof at least two months before the certification. The list contained in the draft Labour Code is supple-
Then, a certifying commission (participation of a trade mented by the following provisions:
union representative therein is mandatory) develops a • breach of the state secret, disclosure of commercial
list of questions for the certification purposes. The em- or other information protected by the law (provided
ployees should be made aware of the list no later than the non-disclosure obligation is signed).
a month before the certification.
* dismissal of a director
Recommendations of the certifying commission may in-
clude the necessity of the professional development of Discussing special dismissal reasons it is necessary
an employee, raising of the salary or raising the skills. It to cover a delicate issue of dismissing a directory of a
legal entity.
is worth mentioning that the dismissal of an employee
due to the insufficient qualification may become effec-
According to the applicable labour legislation, a director
www.chamber.ua
51
of the company may be dismissed for the following Alteration of Material Conditions of the
reasons: Employment Agreement
• single gross breach of the employment duties;
• wrongful acts resulting either in non-payment of sal- As in some cases employers are hesitant about em-
ary or payment of salary at the lower rates than mini- ploying redundancy they use alternative option to issue
mum wage as defined by the law. order on alteration of material labour conditions. Thus,
according to the applicable labour legislation, the alter-
According to the draft Labour Code, one more reason ation of the material labour conditions includes chang-
to dismiss a board of directors is the violation of the es in the system and amount of payment, privileges,
rights of the company founders or members by a direc- conditions of work, establishing or countermanding
tor or members of the board of directors. a part-time working hours, combining of professions,
changing of grades and names of the positions etc. It
An important step forward was made by adopting the is necessary to remember that prior to changing labour
Law of Ukraine “On Joint Stock Companies” of 17 Sep- terms an employer shall give the two-month written no-
tember 2008 signed by the President of Ukraine on 22 tice to an employee on the forthcoming changes.
October 2008. According to this Law, authorities of a
director or members of the board of directors of a joint Article 36.6 of the Labour Code of Ukraine provides for
stock company may be terminated by a decision of the the right of an employee to resign due to the change of
supervisory board of the joint stock company. material labour conditions. At the same time, accord-
ing to the draft Labour Code, if an employee resigns
At the same time, the joint stock company charter may due to the change of material labour conditions, the
provide for termination of the authorities of a director labour agreement shall be terminated for the reason of
or members of the board of directors to the compe- redundancy.
tence of the general meeting. In this case the supervi-
sory board may dismiss a director or chairman of the Finally, it is necessary to add that in most cases em-
board of directors whose acts or omissions violate the ployees are fired as a result of labour conflicts. There
rights of the shareholders or the company. However, is no doubt that each and every employer makes its
the supervisory board shall convene, within ten days, best endeavours to minimize risks related to dismissed
the extraordinary general meeting which agenda shall employee’s recourse to court or labour inspection. This
include election of a new director or chairman of the is why strict observance of law when dismissing is the
board of directors. only right decision to avoid negative effects.
The 90ies of the last century may be considered as really strong team, oriented on one common goal, is an
the beginning of distribution market formation for dig- ongoing process that has no time frame.
ital products and consumer electronics, when the inde-
pendence proclamation of Ukraine stimulated develop- Yug Contract Company began to form its team as far
ment of new forms for business activity. back as 14 years ago, virtually from the date of its
foundation in 1994, and a few years later this team
At the same time, a new kind of specialists oriented on transformed Yug Contract from a small enterprise into
new branch development began to form. a nationwide Company.
As of today, domestic market of digital products and Certainly, a continuous work on strategy formation for
customer electronics is at the development stage ap- personnel development and its implementation in prac-
proaching to worldwide principles of distribution busi- tice preceded this transformation.
ness practices.
For the moment one can single out six basic principals
The process of active branch development revealed of staff management in Yug Contract Company:
acute shortage of professional managers and special-
ists who are able to react immediately to changing mar- 1. Democratic approach to solution of any problem and
ket and introduce innovative approaches in organiza- openness of Сompany’s managers to innovative
tion management of the distributor company. ideas and elaborations of each employee;
The existing problem of qualified staff can be solved in 2. Existence of project and working groups for discus-
two ways: sion and implementation of solutions;
1. To involve professional managers and specialists on 3. Staff management in balance with degree of free-
contract conditions; dom for each employee within their own activity and
level of personal responsibility for results;
2. To form a strong team by means of investments in
development and career advancement of employees. 4. Perception of a staff as the main Сompany’s value;
There is no doubt that to get a good specialist, sub- 5. Maximally effective use of employees’ potential;
stantially immediately, at first seems an ideal solution
of a problem, though one should no forget that contract 6. Open attitudes and confidence formation.
work conditions have temporary character, whereas
the development of actual staff is truly good investment These principles are axiomatic only for Yug Contract
for the future. Company and surely may differ from those used by
other companies according to set goals and employees’
Distribution is a specific business in which successful attitude to a company.
work of all company is directly related to each employ-
ee’s contribution, their perception and appreciation of Readiness and willingness for advancement of a po-
a company, desire to implement their skills in common tential employee, their expectations from a company
goal achievement. and as a result their future attitude to it can be already
defined on interview stage.
That is to say that distributor companies claiming to
be successful in this business should necessarily pay There is such marketing notion as “high market en-
attention to formation of positive microclimate inside a trance barrier”, so the analogous barrier principle
company and straightening of thought-out work with should be used to entry any distributor company. Bar-
staff. rier is a requirement to candidates for vacancies and
most of all to potential and willingness for development
Investment in personnel development and formation of together with a company.
www.chamber.ua
53
For example in order to get an offer of appointment in 3. Adjustment of tasks and development plans for next
Yug Contract the Company has worked out some in- period;
terview stages that allow to learn about personal and
professional qualities of each candidate as much as 4. Improvement of mutual understanding between em-
possible. All finalists for a position have a meeting with ployee and director, arrangement of conditions for the
Chief Executive of the Сompany in central office. most effective performance.
Such scheme of staff recruitment allows, on the one Such scheme of individual communication allows an
hand, exclusion of a possibility to hire employees with employee to clearly understand the ways of their further
low responsibility level and lack of willingness for pro- advancement and new opportunities that lay before
fessional development; and on the other hand, a posi- them in accordance with their requests and Сompany’s
tive attitude to the company and a desire to work ex- capabilities.
actly in this team are already formed in candidates on
the interview stage. Along with employee development a distributor should
strengthen and advance a system of company’s man-
The adaptation process of a new employee in a staff agement. Of course it required investments, though it
group and responsibility area should become an impor- should be noted that only highly qualified manager is
tant factor in formation of a professional team member able to generate innovative ideas for company’s busi-
for any distributor company. ness development, to control their direction of work and
colleagues that are subordinate to them.
This requires a special work scheme that should include
well-defined tasks for probationary period, appointed Therefore a special attention should be given to world
curator of a new employee and the most important de- experience of distribution business conduct and lead-
tail – a framed atmosphere of the dialogue between an ing business schools that hold trainings for managers
employee, curator and HR-specialists. of distributor companies all over the world, including
Ukraine.
In that case a new employee feels support and pos-
sibility to get an opinion that in its turn also increases Thus Yug Contract became the first domestic company
the loyalty level towards a distributor company on early that organized a corporate training in “coaching” style
introduction stage. delivered by Marilyn Atkinson, the President of Erick-
son College International (Canada).
It’s important for an employer to remember that to-
gether with development of an employee their vision of Nikolay Fabro, the Chief Executive of Yug Contract
professional future is also changed and this should be Company: “Coaching approach in management is a
revealed to correct a work process in time in order not powerful development tool for employees as well as for
to lose a professional in whose training and advance- directors. As any high-tech tool this one requires some
ment сompany makes investments. defined level of professional and personal compe-
tences. I think that professional level of our managers
Therefore for instance a System of Performance As- allows adapting ideas and coaching tools for solution
sessment was introduced in Yug Contract’s practices of company’s development tasks. Along with universal
trough which all Сompany’s staff goes twice a year. management programs, we try on a regular basis to
introduce to our directors different authors approaches
Performance assessment and employee advancement in management choosing those issues that correspond
planning constitute a complex of measures aimed at: as much as possible to our plans. Thus, we create a
unique management system – Yug Contract’s Man-
1. Co-ordination for performance evaluation and de- agement System”.
velopment tendencies of previous period between
employee and director; Contemporary digital products and consumer electronics
market in Ukraine changes increasingly applying world
2. Identification of requirements and content of meas- business standards. Today staff becomes one of the main
ures for increase of professional level and perform- competitive advantages of distributor companies. Highly
ance according to current and future functions of an qualified professionals should be formed inside any dis-
employee; tributor company without fear to invest in the future.
1. COURT STRUCTURE and specialization and include three instances: (i) local
courts; (ii) appellate courts; and (iii) cassation courts.
The court system, consisting of the Constitutional
Court and the courts of general jurisdiction, exercises Local courts consist of courts of general jurisdiction (in-
independent judicial power in Ukraine. cluding military courts) and specialized courts (i.e. com-
mercial and administrative courts). Local courts of gen-
The Constitutional Court is the highest and only judi- eral jurisdiction predominantly adjudicate civil and criminal
cial body of constitutional jurisdiction. It has exclusive cases. Local commercial courts exercise jurisdiction over
jurisdiction over interpretation of the Constitution and disputes arising out of commercial and corporate rela-
laws of Ukraine and acts as final arbiter on constitu- tions, while local administrative courts administer justice in
tional issues. The Constitutional Court is comprised of disputes connected with legal relations in the area of state
18 judges, appointed in equal proportions by the Presi- government and municipalities (except military disputes).
dent, the Verkhovna Rada (the Ukrainian parliament)
and the Conference of Judges of Ukraine, with each The appellate instance courts are comprised of relevant
judge serving a single term of nine years. appellate courts, which review decisions and procedur-
al orders of the local courts. As a matter of rule, the
Under the Constitution, the courts of general jurisdiction appellate review is carried out according to the rules of
are organized according to the principles of territoriality reviewing cases by the courts of the first instance.
www.chamber.ua
55
Cassation supervision is carried out by the Supreme Exclusive venue is established for disputes involving
Court of Ukraine (for courts of general jurisdiction) and title to real estate property, illegal use of real estate
relevant Supreme Courts of special jurisdiction (for property or removal of obstacles to use real estate
commercial and administrative courts). Also, in cer- property (i.e. by the court at the location of such prop-
tain cases identified by procedural rules, the “second erty), disputes arising out of transportation agreements
cassation” review by the Supreme Court of Ukraine is (i.e. by the court at the location of transportation body),
available in commercial and corporate disputes. or where the defendant is a central governmental au-
thority or certain state secret is involved (i.e. by the
Since Ukraine is a civil law country, the exercise of judi- Kyiv City Commercial Court).
cial power is based solely on the application of statutes.
Court decisions do not constitute binding precedents, 3. COMMERCIAL LITIGATION IN UKRAINE
although decisions by the Supreme Court of Ukraine
and the Supreme Commercial Court are summarized, (a) Initial Review of Cases
in order to introduce uniformity to the interpretation and
application of the applicable legislation, and are fol- To defend substantive rights in a business-related dis-
lowed by the lower courts on a quasi-mandatory basis. pute, a foreign or Ukrainian legal entity or individual en-
trepreneur may apply to an appropriate Ukrainian court.
2. JURISDICTION AND VENUE A legal entity’s/individual’s right to apply to a Ukrainian
court may not be waived by contract, even by an arbi-
Commercial courts of Ukraine will accept jurisdiction tration agreement between the parties. If an arbitration
over disputes between legal entities, including foreign agreement exists between the parties, the party object-
legal entities, Ukrainian legal entities and individual en- ing to the dispute’s review by a Ukrainian court must
trepreneurs, arising out of the conclusion, modification, raise such objection in the relevant court proceeding
termination and performance of commercial agree- before hearing of the case on the merits; otherwise, the
ments (including privatization). Commercial courts court will accept jurisdiction and will proceed to review
are also in charge of administering bankruptcy cases the dispute and to render a judgment.
of legal entities and certain cases initiated by the An-
timonopoly Committee of Ukraine and the Accounting Currently, there are specialized commercial courts that ex-
Chamber. ist within the system of courts of general jurisdiction (hos-
podarski sudy). Any business-related dispute between
According to recent changes, the commercial courts of business entities (including individual entrepreneurs) will
Ukraine administer justice in disputes arising out of cor- be reviewed by the commercial court having jurisdiction
porate governance, including those involving physical over the location of the respondent. As a rule, a commer-
persons. Such cases include disputes between a legal cial court will not accept jurisdiction over a dispute involv-
entity and its present or former participant (as well as ing a foreign respondent that has no registered presence
disputes between participants of a legal entity) related in Ukraine. In general, there are no limitations (including
to foundation, activity, administration and cessation of monetary limits) on the jurisdiction of the commercial
such legal entity, except for labor disputes. courts other than specialization and territorial factors.
It should be noted that, currently, administrative courts If at least one party to the commercial dispute is a
adjudicate disputes with the subjects of sovereign au- physical person who is not an individual entrepreneur,
thority regarding challenging their decisions, actions the commercial dispute will be adjudicated in local
or inactions, as well as some other cases related to courts of general jurisdiction with the applicable civil
sphere of public law. Thus, the administrative courts procedure rules (i.e. unlike adjudication of the dispute
are currently handling tax, customs, and certain anti- in the commercial court with applicable commercial
monopoly disputes which previously used to be under procedure rules). This rule, however, does not concern
jurisdiction of commercial courts. corporate governance disputes, which are adjudicated
by the commercial courts regardless of the status of
Under the Commercial Procedure Code, normally, the the parties to such disputes.
court venue is determined following the territorial prin-
ciple. As a general rule, the disputes are adjudicated by The dispute is decided by rendering a judgment on the
the commercial court at the place of location of the de- merits of the case. The judgment must be executed in
fendant (in bankruptcy cases, of the debtor). The cases writing and signed by the judge(s). As a rule, the judg-
for conclusion, modification, termination or recognition ment may not adjudicate beyond the claims presented
as null and void of agreements are considered by the by the party in its claim. However, the court may go
court at the location of a debtor party to such agree- beyond the scope of the claim when it is necessary
ment (i.e. a party under obligation to provide services, to protect the rights of the plaintiff or third parties with
transfer property, etc.). independent claims in the dispute.
The judgment itself enters into force after ten days from Cassation is recourse against final judgments of the
its full announcement (in case of announcement of in- commercial courts of the first instance and resolutions
troductory and operational parts of the judgment – from of the appellate courts. Cassation must be sought
its signing), unless either party files an appeal against within one month of entry into force of the challenged
the judgment within such period. Involuntary enforce- judgment of the commercial court of the first instance
ment of the effective judgment is possible after expira- or resolution of the appellate court. Cassation may be
tion of the period provided by the enforcement authori- sought by the parties to the proceedings or by persons
ties for voluntary performance by the debtor. who did not participate in the proceedings but whose
rights and obligations were affected by the challenged
Upon request of the parties, the court may render expla- judgment. The Supreme Commercial Court of Ukraine
nations to the judgment without altering its substantive reviews cassation complaints in commercial disputes.
content. The court may also eliminate obvious blunders
or mathematical errors. The cassation court reviews the case on the basis of
the facts already established in the lower courts and
(b) Appellate Review of Cases determines correctness of application of substantive
and procedural law provisions. The cassation court
A judgment that has not yet come into force and certain does not review claims that were not considered by the
court orders may be appealed to a relevant appellate court of the first instance.
court. A party to a dispute may file an appeal within a
period of ten days from the date when the judgment/ The cassation application must be executed in writing
order was signed. The filing of an appeal suspends ex- and filed with the court that decided the matter. Such
ecution of the judgment, but does not necessarily sus- court must then send the complaint accompanied by
pend effectiveness of the procedural order. the case file to the Supreme Commercial Court of
Ukraine.
An appeal submission must be made in writing and
must identify the challenged judgment/order and the Upon review, the cassation court may (i) reject the ap-
grounds for its appeal.1 Appeal submissions are filed peal and confirm the challenged judgment/order; or
with the commercial court of the first instance that ren- may (ii) cancel the challenged judgment in full or in
dered the appealed judgment/order. The commercial part and render a new judgment; or may (iii) cancel the
court of the first instance verifies compliance of the judgment of the court of the first instance and submit
appeal application with the formal requirements of the the matter for new consideration; or may (iv) cancel the
Commercial Procedure Code and forwards it to a com- challenged judgment in full or in part and terminate the
petent appellate court for consideration. proceedings or leave the claim without consideration
1 The list of grounds for appeal is stipulated in the Commercial Procedure Code.
www.chamber.ua
57
completely or in part; or may (v) change the judgment foreign judgments subject to enforcement, monetary
of the court of the first instance or order of the appellate claims duly accepted by the debtor, certifications of
court; or may (vi) leave one of the previously rendered commissions on labor disputes, decision of bodies au-
judgments or orders in force. thorized to consider cases on administrative infringe-
ments and decisions of other state authorities provided
Cassation review must be completed within two months by the law.
of receipt of the cassation submission by the Supreme
Commercial Court of Ukraine. Commencement of enforcement proceedings is usu-
ally ordered by a SES officer upon the request of the
As a part of the cassation submission or by separate creditor or prosecutor in cases where he represents in-
motion, the parties may request the cassation court to terests of a citizen or state in the court. Enforcement is
suspend execution of the court’s judgment that is being carried out by an officer who has jurisdiction over the
reviewed. place of residence of a debtor, place of his employment
or location of his property. If the debtor is a legal entity,
(d) Second Cassation Review of Cases enforcement is carried out by an officer with jurisdiction
over the place of the debtor’s registered office or loca-
Resolutions and orders of the Supreme Commercial tion of its property. The creditor has a right to chose
Court of Ukraine may be challenged to the Supreme between SES bodies entitled to provide execution on
Court of Ukraine which accepts jurisdiction in cases the territory of their competence.
when (i) laws applied by the Supreme Commercial
Court of Ukraine do not correspond to the Constitution; The limitation period for enforcement varies depend-
or when (ii) such resolutions or orders are contrary to ing on the type of enforcement writ. For instance, judg-
the decisions of the Supreme Court of Ukraine, the Su- ments of courts of general jurisdiction and commercial
preme Commercial Court of Ukraine or the Supreme courts must be filed with the SES within three years
Administrative Court of Ukraine; or when (iii) the Su- of the judgment becoming final, while certifications of
preme Court of Ukraine establishes different applica- commissions on labor disputes and decision of bodies
tion of the same provision of the law by the Supreme authorized to consider cases on administrative infringe-
Commercial Court of Ukraine; or when (iv) such reso- ments must be filed within three months. As a rule, all
lutions or orders do not comply with the international other enforcement writs must be filed within one year.
treaties of Ukraine; or when (v) the resolution or order
of the Supreme Commercial Court of Ukraine is recog- Upon filing of an enforcement writ with the SES, an SES
nized by an international judicial institution as violating officer must notify the debtor about commencement of
the obligations of Ukraine. enforcement proceedings and establish a time period
during which a voluntary performance by a debtor must
Upon its review, the Supreme Court of Ukraine may (i) be carried out. If a debtor does not voluntarily perform
confirm the challenged resolution or order; (ii) cancel under the enforcement writ within the prescribed pe-
the resolution and return the case for new considera- riod, an SES officer starts involuntary enforcement im-
tion by the court of the first instance or cancel the or- mediately. Involuntary enforcement, except in cases
der and return the case for new consideration by the where sale of the attached property is required, must
Supreme Commercial Court of Ukraine; or (iii) cancel be completed within six months from the date of open-
the challenged resolution or order and terminate the ing of enforcement proceedings and within two months
proceedings. for enforcement of writs of non-material nature.
(a) Ukrainian Court Judgments Foreign court judgments will normally not be recognized
and enforced in Ukraine in the absence of an interna-
Enforcement is a process whereby enforcement of court tional treaty providing for the reciprocal enforcement
judgments and other decisions subject to enforcement of foreign judgments between Ukraine and the country
is ensured. The Department of the State Enforcement in which the judgment was made. Ukraine has such
Service of the Ministry of Justice of Ukraine (the SES) agreements with only a few countries, mostly members
is a designated governmental agency that carries out of the former Soviet Union.
all necessary actions in connection with enforcement.
An enforcement writ must first be filed with SES before Recognition and enforcement of foreign judgments un-
the enforcement process can commence. An enforce- der Ukrainian law means that when a foreign judgment
ment writ is an official document issued by a competent is recognized, it is considered as having the same effect
authority in a prescribed form which includes final judg- as a domestic judgment and is executed accordingly.
ments, court orders, court-approved settlement agree- Foreign judgments are recognized and enforced in
ments, arbitration awards, notary deeds, recognized Ukraine provided that: (i) such recognition is envisaged
2 Ukraine is also a party to the European Convention on Foreign Trade Arbitration (Geneva, 21 April 1961).
www.chamber.ua
59
DEFENSE OF BUSINESS IN COMMERCIAL ARBITRATION
COURTS: INTERNATIONAL AND DOMESTIC ASPECTS
By Juridical Corporation PRINCIP
www.princip.com.ua
Till 1991 the traditional for our country procedure of so- UNCITRAL model law “On international commercial ar-
called economic disputes solving that developed in the bitrage” (1985), is in force and effect in Ukraine.
state arbitration system was adapted to the needs of
soviet economy. The situation cardinally changed when On the whole, both international and domestic arbi-
Ukraine became an independent state and member of tration courts are divided into ad hoc courts (created
international economic relations. In today’s Ukraine the for solving of a particular matter) and standing courts.
situation is slowly but surely changing towards the in- When we speak about ad hoc arbitration, we speak
crease of the role of arbitration courts of both domestic about cases, where parties of a foreign trade contract
jurisdiction (arbitration courts of Ukraine), and interna- that have a dispute agree to refer it to the particular
tional jurisdiction (international commercial arbitration members of the arbitration court (arbiters), quantitative
courts). and personal composition of which is determined in ac-
cordance to the agreement of such parties.
Arbitration courts of Ukraine are functioning in accord-
ance with the law of Ukraine “Оn arbitration courts” In such a way the arbitration court composition forms. It
dated May 11, 2004. In fact, arbitration court is the third is deemed competent to settle a dispute of the parties
independent party of a dispute that performs arbitration and has the right to make a decision, which shall be
functions. Advantages of such institution are the follow- final and legally bounding for both parties.
ing: it is not corrupted; decisions of arbitration courts
are not subject to appeal and are obligatory along with The parties also have the right to choose the substan-
decisions of the state courts. Legal entities and/or natu- tive law of one country or another, which is to be used
ral persons have the right to refer to an arbitration court by arbiters for settlement of a dispute. In practice, the
any dispute arising out of civil or economic matters, ex- cases, when the parties regulate all or most of the mat-
cept cases stipulated by law. As of October 2008 the ters of procedure in the arbitration agreement, are rare.
Ministry of Justice had registered more than 300 stand- As a rule, the parties negotiate quantitative composi-
ing arbitration courts in Ukraine. One of the biggest ar- tion of the arbitration court, language and place of ar-
bitration courts is the standing arbitration court of the bitration. To make it easier for the parties to agree the
Juridical Corporation “Princip”. 159 qualified arbiters arbitration procedure in ad hoc courts, special Rules
are working there. It has 53 branches. Besides, special recommended for ad hoc arbitration were developed
arbitration courts are also starting to function actively under the aegis of UNO. These are the following
in Ukraine. For instance, Land arbitration court of the Rules:
All-Ukrainian Arbitration League is registered and func-
tions successfully. This court specializes in moot cases • Arbitration rules of the United Nations Economic
solving in the sphere of land relations between legal Commission for Europe, 1966;
entities and natural persons, which is the most actual
sphere of law enforcement in Ukraine at the moment. • Arbitration rules of the United Nations Commission on
International Trade Law (UNCITRAL), 1976;
However, one should take into account that in accord-
ance with the Ukrainian legislation arbitration courts of • International commercial arbitration rules of the Unit-
Ukraine have no rights to settle disputes between legal ed Nations Economic Commission for Asia and the Far
entities and natural persons, which are not Ukrainian East (ECAFE), 1966.
residents. Therefore, international arbitration courts
are more suitable in such cases. All participants of the Moreover, after settlement of a dispute and announce-
foreign economic activity of Ukraine without exception ment an arbitration decision the ad hoc arbitration
may apply to the international arbitration courts. Law ceased to exist as an arbitration court.
“On the international commercial arbitration” (1994),
which regulates the procedure of establishment and Unlike ad hoc arbitrations, standing international ar-
activity as well as the procedure of international dis- bitration courts are founded as institutional bodies for
putes solving by international arbitration courts in the creation of the necessary conditions of settlement of
territory of Ukraine that was developed pursuant to the disputes arising between subjects of international com-
www.chamber.ua
61
THE LAW ON JOINT STOCK COMPANIES
By Salkom Law Firm
www.salkom.ua
It would be no exaggeration to say that the Law of be viewed as a positive occurrence as it provides for
Ukraine on Joint Stock Companies adopted by the the free-market mechanisms for regulating relations in
Verkhovna Rada (Parliament) of Ukraine and signed joint stock companies and conforms to the standards
by the President is a landmark in the development of applied to laws of other countries.
the Ukrainian legal system, in particular, in its segment
providing for entrepreneurial activity. At the same time there are some problems that
remain unsolved. First of all, it concerns the transition
The background of this Law is the Law of Ukraine on provisions.
Commercial Partnerships adopted in 1991 which has
created a rather solid legal basis for the formation of The Law on Joint Stock Companies should be treated
the business infrastructure, in which the important as a compromise of some sort as it applies not to all joint
place belonged to companies with limited liability and stock companies but only to those that will be set up only
joint stock companies. At the time this law was pro- after this Law has come into forth, i.e. after 6 month’s
gressive and had significant regulatory potential. period has elapsed after it was officially published.
At the same time, by 1995-1996, it became obvious The open joint stock companies that were registered
that the core provisions contained in the Law on Com- before the new law took effect may make no amend-
mercial Partnerships require further improvement. ments in their statutory documents and their activity
Hence, in 1996 a number of importance amendments will be governed by the Law on Commercial Partner-
and changes were made in this Law. ships of 1991 provided that no attempts to issue new
shares and register them are made. Otherwise these
A new Civil Code was a new stage in the development joint stock companies will have to re-register their ar-
of the corporate law and, in particular, law on joint stock ticles of association and proceed with the emission of
companies as it embraced a number of the important new shares as the new law prescribes. A status of the
conceptual provisions which created a basically new closed joint stock companies will remain unchanged as
approach to a status of joint stock companies in par- the Law on the Commercial Partnerships will apply to
ticular and commercial partnerships in general. them regardless the new law coming into force. On the
other hand, taking into consideration that the new law
The authors of the Civil Code intended this law as a start- does not provide for the joint stock companies of this
ing point for a new legislation on joint stock companies sort, six months after the Law has been published it will
and so almost all provisions of the Civil Code dedicated become impossible to register such companies.
to the joint stock companies, e.g. Articles 153 – 155,
157 – 161 and others, refer to a special law. The Civil Hence, after the new Law on Joint Stock Companies
Code’s authors have not aimed to set out the detailed took effect a variety of legal provisions will exist in
rules according to which the joint stock companies and Ukraine.
other commercial partnerships would act.
1) The closed joint stock companies will be governed
Since then more than four years have elapsed but no by the Law of Ukraine on Commercial Partnerships of
special law that had been referred to in the Civil Code 1991 and will be able to exist for an unlimited period of
have not been developed yet. A rather awkward situa- time;
tion has arisen where the new law i.e. the Civil Code,
which was adopted in 2003 and came into force on 01 2) The open joint stock companies will be able to carry out
January 2004, referred to the Law of Ukraine on Com- its activity on the basis of the old Law on Commercial Part-
mercial Partnerships adopted as far as in 1991 as to its nerships provided they do not issue additional shares;
special provisions.
3) New joint stock companies incorporated after the
Numerous attempts to adopt a new law on joint stock Law on Joint Stock Companies has been enacted will
companies have been made in the Parliament, but to be governed accordingly by the new Law.
no avail as opponents of this law had been fighting
hard against it. That is exactly why the Law on Joint The Law on Joint Stock Companies distinguishes
Stock Companies, when it was finally adopted, should between two types of shareholding companies, i.e.
62 Uniting Leading Companies from over 50 Nations Across the Globe
public shareholding companies and private sharehold- pervisory board, and also it does not leave without at-
ing companies. At the same time the Law establishes tention the board of directors and audit board. Suffice
that a number of shareholders in private sharehold- to say that more than 30 articles of the Law are dedi-
ing companies should not exceed one hundred. One cated to regulating the activity of company’s corporate
of the most important novelties is the ability of pub- management and controlling bodies. It can be admit-
lic shareholding companies to make both private and ted that even though the Law has its own pitfalls, it is
public placings of their shares. Private shareholding a significant step forward in comparison with the ac-
companies may only do a private placing. If the gener- tive Law on Commercial Partnerships. When drafting
al meeting of a private shareholding company decides this law the legistor took into consideration the main
to issue its shares to the public such company should principles of corporate governance developed by the
be reorganised into a public company and the relevant Organisation for Economic Co-operation and Develop-
changes in its statutory document must be registered ment (OECD) so the efficient corporate governance
beforehand. combines with protection of rights of shareholders as
a shareholder may personally participate in corporate
When analysing the differences between public and pri- governance and receive information how this function
vate shareholding companies, it should be mentioned is fulfilled by the relevant company’s officials.
that the pre-emptive right exists in private shareholding
companies, as stated in Article 7 of the Law. Share- The provisions of the new Law on a buy-back (including
holders of a private shareholding company have the mandatory buy-back) of the shares issued by a share-
right to buy shares that the company or another share- holding company have a special meaning for minority
holder offers before they are offered to somebody else shareholders. The most importance is placed on a rule
on the same conditions pro rata a number of shares for assessing a market price of the buy-back shares
that already belongs to a shareholder. The pre-emp- specified by Article 8. A price of the shares that are
tive right is valid for two months after the company issued by a company which is not listed on a stock ex-
has been notified by a shareholder unless its Articles change is estimated on the basis of an expert opinion
provide for a shorter term. Shareholders of the public prepared according to the law on corporate rights and
shareholding companies may dispose of their shares professional survey activity. A price of the shares that
without consent of either a company or other share- are traded on a stock exchange is defined as a price of
holders. securities set out according to the law on securities and
fund markets.
It should be mentioned that the pre-emptive right ap-
plies also to any new shares issued by a company. In particular, the novelty of the Law on Join Stock Com-
Pursuant to Article 27 of the Law, holders of ordinary panies is a provision prescribing a mandatory buy-
inscribed shares may buy the ordinary shares issued back of the shares on request of a shareholder if the
by the company pro rata a number of the ordinary shareholder voted against the general meeting’s reso-
shares they already own in the company. The share- lution on merger, acquisition, split, reorganisation, and
holders who own ordinary shares have the pre-emp- change of a type (becoming private) or on approving
tive right to buy shares of this type when such shares company’s entering into a large deal or change in its
are being placed in a private placing. The State Com- authorised capital.
mission on Securities and Fund Markets is to control
that the pre-emptive right is obeyed. This authority In this respect, definitions of a large deal and deals
may declare the emission of shares unfair and termi- which are not at arm’s length, and actions aimed at
nate the placing of the relevant shares if it finds out reorganisation of a company provided by the new
that a shareholding company violated the pre-emptive Law, can be considered certain protection for rights
right of shareholders. of minority shareholders which our current corporate
law is missing.
Under the Law on Joint Stock Companies, the share-
holding companies, in general, retain the same struc- The Law specifies which the most important documents
ture of managing and supervisory bodies as it was be- that govern the activity of a shareholding company
fore, i.e. the general meeting, supervisory board, the must be kept on its premises. Information contained in
board of directors (if it is a collegial body) or a direc- these documents must be submitted on a request of a
tor (a sole person), and an auditor (audit board). If a shareholder. Among these documents are the Articles
shareholding company has more than 100 sharehold- of Association (with amendments if any), Memoran-
ers the audit board must be set up, otherwise an audi- dum of Association, Certificate of Registration, Provi-
tor is appointed. sions on general meetings, supervisory board, board
of directors and any other internal regulations (with
The new law regulates, quite thoroughly and systemati- amendments if any), regulations on each company’s
cally, the matters pertaining to corporate management, branch or representative office; documents confirming
including proceedings of the general meeting and su- company’s title to its property; principles of the corpo-
www.chamber.ua
63
rate governance; minutes of the general meeting, other first of all, the prospects for the development of corpo-
documents with which the shareholders may familiar- rate relations on the completely new basis in particular
ise themselves when preparing to the general meet- and development of the securities market in general.
ing; minutes of the meetings of the supervisory board Such development is ensured by introduction of pub-
and board of directors, resolutions of the board of di- lic shareholding companies that can trade on stock
rectors or the director; minutes of the meeting of the exchanges. Secondly, the new Law more thoroughly
audit board and its opinions and resolutions; and other provides for principles and procedures for corporate
documents pertaining to company’s activity. The only governance including powers and proceedings at the
exception is the documents concerning accounting and general meeting, voting at the general meeting, and
bookkeeping provided they do not relate to large deals regulates the activity of the supervisory board and ex-
or not-arm’s-length transactions if the law does not pro- ecutive bodies, which can be the board of directors
vide otherwise. (collegial body) or director (individual body). Doubtless
the definition of large deals and not-arm’s-length trans-
Hence, from now on the opportunity for shareholders actions, which did not exist until the new Law had been
to exercise their right to free access to information on adopted, is an important step in development of corpo-
company’s activity has been expanded significantly rate legislation.
and this should be deemed as a positive factor in the
regulation of activity of shareholding companies. At the same time there are many pitfalls in which our
business community with no exception of lawyers ren-
The wording of the Law of Joint Stock Companies as dering services in this area is most likely to fall in six
it has been passed by the Verkhovna Rada is a com- months’ time. It includes the varying conditions for
promise between its various drafts and, similarly to any shareholding companies’ activity, different statuses of
other compromises, it has both positive and negative such companies, conditions for the exercising of cor-
sides. porate governance and will create difficulties in settling
disputes by courts. Only time will tell whether the posi-
The unconditional positive aspect of the new Law is, tive aspects of the Law prevail or its pitfalls.
www.arzinger.ua
www.chamber.ua
65
Currently, the biggest issue for PPP is the lack of a reli- These principles are given in detail in art. 2. We should
able public partner (primarily on the state level). Parlia- pay special attention to the compulsory call for tenders,
ments and governments which change almost every the procedure of which shall be determined by the Cab-
year are not a proper foundation for long lasting and inet. Thus, we should expect a special regulation on
stable relationships. In addition, traditionally a change tender procedures for PPP-projects.
in government also has meant a change in policy in
Ukraine. As opposed to developed democracies, where Objects, implemented within the scope of PPP, shall
there is a logical transition, a discontinuity occurs in the be of a “special social importance” and shall be ap-
functioning of the state, and more specifically in PPP proved by the Cabinet of Ministers (state property
projects. This could mean a PPP project may be aban- objects) or municipal offices (communal property ob-
doned by a new government. jects). Since, for the implementation of tasks, the third
person’s property objects are required (especially if it
A law alone won’t help here, therefore Ukraine should concerns land plots), the right of intervention should
live it. And want it! be granted through license, purchase or expropriation
agreements.
II. LEGAL BASIS
The relevant law on expropriation is, however, still
The essential legal basis for PPP is found in the laws available only as a draft.
of Ukraine “On concessions”, “On concessions for the
construction and operation of roads”, “On agreements Forms of PPP pursuant to legislation are contract forms
on product distribution”, “On financial leasing”, “On and the establishment of a legal person.
leasehold of state property”, and the law of Ukraine Contract forms shall be as follows:
“On management of state property objects”. All this has
to now receive a common and universal regulation by • concession;
the draft law on PPP.
• leasehold of state property objects;
With codifying, Ukraine continues the tradition that only
that which is described by the law is possible. We have • lease;
already referred to the danger of codifying in the leg-
islative process, i.e. adverse conclusions. The current • agreements on product distribution (common with
draft law now contains flexibility in choosing various mining operations);
PPP forms. With this in mind, there is no excuse there-
fore that certain amendments should be made to the • management of state property;
legislation in order to create a favourable basis for PPP
(for instance, revenue tax exemptions for certain trans- • joint activity agreements; and,
actions) or making some forms of PPP possible (espe-
cially where private companies have to be granted the • other forms not prohibited by law. (Comment: flexibil-
rights to intervention. ity for agreements sui generis).
We will give a further detailed consideration to PPP- Art.7, as already described in the introduction, provides
related laws. for an efficiency (profitability) comparative analysis in
the course of which the efficiency of the PPP is being
1. PPP Law (Draft Law) compared with that of the traditional implementation
of tasks before a decision is made on the completion
In autumn 2008 the Cabinet of Ministers of Ukraine ap- of public tasks through PPP. The procedure of PPP-
proved a draft law “On the general provisions of devel- projects efficiency analysis shall be determined by the
opment for public-private partnership in Ukraine.” The Cabinet of Ministers of Ukraine.
“legislation” in art. 1 accomplishes this by giving a defi-
nition of PPP and qualifies it as “a system of relation- The most important regulation of the draft law is un-
ships between the state and the private partner during doubtedly the guarantees.
the realization of which the resources shall be amal-
gamated along with the respective distribution of risks, First of all, art. 9 provides for a so called right in perpe-
liability and compensation between the state and the tuity, pursuant to which the legal circumstances, which
private partner for mutually profitable and long lasting were valid at the moment of a contract’s conclusion,
cooperation with the purpose of the realization and/or are insured for the lifetime of the project, or until new
modernization (reconstruction) of new objects requiring conditions appear that are more favourable for a pri-
investments and for operation (use) of these objects”. vate partner. One more guarantee is provided in art.
Where it is written “state” it should be understood that 11. According to it, the state undertakes “to redeem all
this includes “municipal.” reasonably incurred expenses during the realization of
Noteworthy is an intention specified in art. 15 to trans- The law defines the procedure for selecting projects,
fer the tariff policy (primarily concerning municipal procedure for the provision of state orders, rights and
services) into a policy based on supply and demand obligations of parties and the most important para-
market orientation. graphs to be included in concession agreements.
Land laws should also be reformed. The division of The concession agreements are registered in the spe-
property into land and buildings (construction) which cial register of the State Property Fund. It is also im-
are on it should be discontinued. Finally, the legal basis portant to mention that a standard agreement for mu-
should be improved in favour of the real estate devel- nicipal services, defined by regulatory bodies, cannot
oper concerning the development of land plots which be changed, but may only be filled out and amended
belong to someone else. (supplemented) by the Parties.
• construction and operation of cargo and passenger The new law on concessions will hopefully provide the
ports; Parties with more freedom.
www.chamber.ua
67
3. The Concession Law Regarding Road garding the right of the concessioner for construction,
Construction the concession agreement enters into force only upon
“the receipt of title in land plots, on which the conces-
The concession law on road construction is based on sion objects are located” by the concessioner (and in
the law on concessions. The “Law on concession for this way provides the concessioner with the right for
construction and exploitation of roads” of 1999 was usage). It follows that the concession agreement is ex-
amended in 2008, although it is still draft form (“On ecuted at a rather early stage when there is no readi-
concession for construction and/ or exploitation of ness for the commencement of construction. This fact
roads”). Thus, the specialized law is ahead of the gen- can affect the temporary and financial plans of the con-
eral law (because different ministries, the Ministry of cessioner, because he has to withhold resources for an
Transport from one side and the Ministry of Economics indefinite period of time.
from the other side, were engaged in drafting amend-
ments thereto). Pursuant to the present draft law the concessionee is
obliged to guarantee to the concessioner:
At present, there are two projects based on this law
where a tender procedure was performed; however, • Minimum revenue “if necessary”;
the projects themselves are not completed. One of
the reasons is the fact that the current law provides for • Preemptive right for the construction of service estab-
the building of new “real tolls”, and alternative free of lishments along the roadway with equal proposals;
charge roads alongside them. The new project provides
more freedom to the parties of the agreement and in- • Providing all the necessary permits and licenses.
cludes needed repair of available roads. The draft law
envisages the concession right to be paid for, and “re- Regarding guarantees, the concession law trails behind
imbursement of investments” can be based on the dif- PPP law, which states that obligations of the state are
ferent models. The law names the following ways for for at least the cost value. How the concessionee (the
financing: state represented by the Cabinet of Ministers) is going
to guarantee the receipt of all permits remains unclear
• Payment for “passing (driving) through” by a user because of the further distribution of competences in
(“real toll”); the permitting process.
• Payment for the availability by the concessionee Furthermore, the right of the concessioner to transfer
(“availability fee”); the concession right as a “property right” into pledge (se-
cured transaction) raises doubts, because pursuant to
• Reimbursement by way of usage of supporting enter- article 4 of the Law on concessions, the separate rights
prises (service establishments along the roads); arising from the concession agreement may be trans-
ferred only upon the permission of the concessionee,
• State subsidy; and in such a way where the right will not be subject
to a lien. If the concession rights in general are meant
• Compensation payments (with unprofitable projects); here, then there is a question about the change of the
party to the agreement that is also connected with the
• Other payments pursuant to the concession agree- permit of the other party to the agreement. Finally, third
ment. persons obtaining such a right will usually face difficul-
ties in utilizing it and therefore this collateral might be of
Frames of duties and amounts of subsidies/ compen- less value for them. Only the bank that provides financ-
sation are determined by the Cabinet of Ministers. ing is interested in this “guarantee”, that is, however,
represented with help of the right of assumption in the
In the case of “real toll” the legislature envisages charg- agreement (which is the subject to a multilateral agree-
ing fees by the concessioner. For this reason the “Ger- ment between the concessioner and concessionee).
man model”, where the state (via a private enterprise)
charges duties and allocates it to the concessioner for However, the regulation is meaningful, according to
the corresponding part of a road, is excluded. which the procedure of the provision of state orders
must be performed in Ukrainian and English (even if
The subject of the draft law is mainly roads of “state the Ukrainian version prevails in uncertain cases). Due
significance” that are determined by the Cabinet of Min- to this, foreign participants have a real chance to par-
isters on the basis of the state development program. ticipate in the procedure. The draft law foresees in its
final provisions, VAT tax exemptions for transfer and
Pursuant to article 2, paragraph 3 of the draft law re- return of the concession objects.
www.chamber.ua
69
CORPORATE GOVERNANCE IN UKRAINE
By Law Firm “Arzinger & Partners”
www.arzinger.ua
In order to help Ukrainian companies to create system Members of supervisory board and representative of
of corporate governance which will be efficient and at- trade-union or other body which represented employees
tractive for investors the State commission for secu- as a party to collective labor agreement are entitled to
rities and stock exchange adopted non-biding recom- participate in the meetings of collegial executive body.
mendations for the companies - Principles of corporate
governance of Ukraine which absorbed the best world Revision Commission
practices of corporate governance with account for the
national peculiarities. The Law on JSC provides for the possibility not to elect
the commission in the companies with less than 100
Corporate governance in Ukrainian companies is usu- shareholders, but to envisage position of company’s
ally based on three-tier system and includes general revisor.
meeting of shareholders, supervisory board and exec-
utive body (either single or collegial). Executive’s body Members of the revision commission are elected exclu-
activity and financial performance of a company is con- sively by cumulative voting and from among individuals
trolled by revision commission. with full capability.
All shareholders of the company are entitled to partici- The law on JSC provides for the position of a corporate
pate in the meeting. The meeting is considered valid secretary – the person responsible for the interactions
if it is attended by shareholders holding more than 60 between the company and its shareholders. Corporate
votes in the meeting (usually it corresponds to 60% of secretary is elected by the supervisory board of the
the charter capital). According to the JSC Law it is not company.
less than 60% of voting shares.
Code of Corporate Governance
Supervisory Board
One of the exclusive authorities of the shareholders
Supervisory boards are the bodies which are envisaged meeting is adoption of principles (code) of corporate gov-
for joint-sock companies, although it is not prohibited to ernance. Public (open) Joint-Stock companies should
use them in other types of companies. According to the disclose information about adoption of corporate gov-
JSC Law it is obligatory to elect supervisory board for ernance codes and complying with them in their annual
the companies with more than 10 shareholders – own- statements submitted to the State commission on securi-
ers of ordinary shares. ties and stock market.
70 Uniting Leading Companies from over 50 Nations Across the Globe
IX MEDIA
TELEVISION BROADCASTING AND PROGRAMMING
SERVICES
By BEITEN BURKHARDT
www.bblaw.com
General regulatory environment and licensing ital television, although it is fairly undeveloped in terms
authority of modern technologies for content distribution, such
as operation of satellite TV platforms, internet TV and
Among the mass media outlets in Ukraine, television provision of various pay-per-view services. Presently,
undoubtedly leads as the primary conduit influencing the Broadcasting Law does not provide a sustainable
public opinion. Regulating the television industry and, regulatory mechanism for effective regulation of the tel-
in particular, those players which contribute to the evision market participants. As a result, the National
public opinion is therefore one of the priorities on the Council adopts bylaws to gap fill, leading to provisions
national security agenda in Ukraine. In view of past that go beyond the Broadcasting Law. For this and
political abuses and absent a defined cultural agenda, other reasons, the regulations of the National Council
Ukraine perceives mass media as an “field of sphere” are not usually registered with the Ministry of Justice of
where information wars can are fought and hostile cul- Ukraine, even though such registration is mandatory.
tural penetrations can be made. Accordingly, some This situation in turn provokes numerous discussions
laws exceed the usual regulatory standards employed in the media on the general legitimacy, validity and en-
in many established democracies. forceability of the National Council regulations.
General regulatory environment and licensing Another important document is the Trans-Frontier Tele-
authority vision Convention of 5 May 1989 (the “Trans-Frontier
TV Convention”). Even though it has not been not rati-
The principal regulatory requirements governing fied by the Verkhovna Rada of Ukraine (the Parliament
Ukrainian television market are provided for by the of Ukraine), both the Broadcasting Law and regulations
Law of Ukraine “On Television and Radio Broadcast- of the National Council contain numerous references to
ing” (the “Broadcasting Law”), as well as in the nu- it, and declare adherence to the EU Council policy on
merous regulations introduced by the National Council the provision of cross-border television services.
of Television and Radio Broadcasting (the “National
Council”), the state body charged with implement- Broadcasting Law licensing regime
ing policy in the television market. The Broadcasting
Law was amended in 2006 to provide for a new regu- The Broadcasting Law defines two types of activities
latory approach to the then existing licensing regime in the television market subject to licensing by the Na-
for television and radio broadcasting. The actual airing tional Council. Broadcasting services firstly mandate
of telecommunication services is governed by a sepa- licensing, after which an entity is then obliged to re-
rate set of legislation, with the principal regulatory act ceive a license for packaging and programming televi-
being the Law of Ukraine “On Telecommunications” sion programs for provision to customers.
(the “Telecommunications Law”). The legal frame-
work distinguishes between broadcasting content and Additionally, the Broadcasting Law applies extrater-
telecommunications network carriage services, even ritorially - to broadcasters located and acting abroad,
though they may be provided by the same market par- but only to the extent that they disseminate programs
ticipant. in Ukraine. Certain exemptions may be provided by in-
ternational treaties effective in Ukraine. In particular,
The Broadcasting Law is generally designed for terres- Article 42 of the Broadcasting Law prescribes that no
trial broadcasting, and the transition from analog to dig- restriction shall be made against the re-transmission of
www.chamber.ua
71
the foreign broadcasted signal within Ukraine, provid- the minimum share of national audio and video prod-
ed, however, that the content of the broadcasted signal uct (under the Broadcasting Law, the minimum share
complies with the requirements of the Trans-Frontier must be at least 50 per cent), (3) the maximum share
Television Convention. of foreign audio and video product, (4) the maximum
amount of re-broadcasting and the approximate list of
Substantively, the Broadcasting Law requires a broad- programs (by genre) intended for retransmission, and
casting license for creation, packaging and/ or bundling (5) the genre allocation of programs. Broadcasted con-
of broadcast programming, program packaging and TV tent may consist of informational, analytical, cultural,
programs, and their transmission or re-transmission scientific and educational, and entertaining programs.
(whether encrypted or not) to customers. At the same The minimum quota for European (including Ukrainian)
time, there is no guidance as to what such “packaging” content broadcasted between 7 a.m. and 11 p.m. is 80
and “bundling” actually mean. Although not expressly per cent., with Ukrainian content amounting to at least
provided by law, a license appears to be required for a 50 per cent share. These quotas, however, do not
any activities which result in the dissemination of such apply to satellite broadcasting.
programs or their packages (sets) to the public, where-
as the mere creation of television programs (content) is Within the limits set by the law, a licensee may freely
not licensed. No specific rules exist for television text, define its programming concept, but may not substan-
teleshopping and other telemedia services. tially deviate therefrom.
The National Council issues different licenses for satel- Licensing of Program Service Provider
lite, on-air (terrestrial), cable, wire, and multi-channel
(includes digital broadcasting with the use of radiofre- The new licensing regime introduced in 2006, with the
quency) broadcasting for corresponding types of the enactment of the restated Broadcasting Law, raised
organizational and technological program transmis- widespread discussions both in terms of the law’s stat-
sion. Licenses are also issued for different territorial utory provisions and the policy behind their introduc-
areas covered, that is, the broadcasting licenses may tion. A number of issues remain unclear.
be for:
Under the Broadcasting Law “the provision of subscrib-
(1) national broadcasting (covering more than two ers with the possibility to watch program packages on
thirds of the population of each oblast), or regional a contractual basis using multi-channel television net-
(covering more than a half of Ukrainian regions/ ob- works” is a licensed activity requiring a provider’s li-
lasts); cense. The licensing requirement, however, is linked to
several terms, which, unfortunately, are not defined or
(2) local broadcasting (covering one or several neigh- poorly defined by the law.
boring inhabited areas extending to more than half
an oblast area), or The “programming service” is defined as “assembling
(bundling) program packages and provision of sub-
(3) foreign broadcasting (covering territory outside scribers with the possibility to watch them based on a
Ukraine). contractual arrangement”. However, there is no clear
definition for ‘assembling’. ‘Program packages’ are de-
There are two licensing procedures for broadcasters. fined broadly, as a number of TV programs which a
Initially, a tender is required for issuance of a broad- provider gives access to its subscribers.
casting license with the use of limited radiofrequen-
cies, such as terrestrial broadcasting and multi-chan- The term “multi-channel networks” under the Broad-
nel broadcasting using radio-frequency resources. The casting Law incorporates telecommunication networks
National Council issues satellite, cable and wire broad- with the capacity to simultaneously transmit more than
casting licenses based on applications. one TV for and capable of integrating with other regu-
lated telecommunication networks. In defining the tel-
Accordingly, the term of a broadcasting license also ecommunication network, however, the Broadcasting
depends on the type of broadcasting. The National Law refers only to cable and terrestrial multi-channel
Council issues licenses for terrestrial and multi-channel networks, without ever mentioning other signal delivery
network broadcasting for seven years, while license for media. Market participants use this omission to justify
satellite, wire and cable broadcasting are for ten years. their provision of programming services without a pro-
vider’s license if they use other telecommunications
Irrespective of the procedure or type of broadcast- means (for example, satellite).
ing license, an applicant should prepare a program
broadcasting scheme. Such concept should include: Under the Broadcasting, a provider may use the mul-
(1) the share of the in-house produced programs, (2) ti-channel telecommunication network based on an
www.chamber.ua
73
of Television Programs and Shows, introduced by the every retransmitted program, which is in a language
decision No.1787 dated 12 December 2007, the Na- other than Ukrainian. Finally, in several press state-
tional Council adopted specific requirements that re- ments, as well as in draft regulation No.1037 dated 28
transmitted programs must comply with: (1) limitations May 2008, the National Council has officially confirmed
on the freedom of broadcasting (that is, fair coverage that that the mandatory use of the Ukrainian language
of events, prohibition of propaganda of war, violence, as specified in the Broadcasting Law did not apply to
racial discrimination, violent overthrow of constitutional foreign broadcasters that plan retransmission of their
order of Ukraine, etc.); (2) adherence to copyright pro- programs through cable network(s) in Ukraine.
tection and related rights; (3) special restrictions re-
garding the protection of public moral and minors; (4) Another relevant document is a list of programs of for-
Ukrainian advertisement rules etc. Neither this regula- eign broadcasters (introduced by decision of the Na-
tion, nor any other document of the National Council tional Council No.652 dated 2 April 2008) that comply
clarifies the procedure or technology for such adapta- with the requirements of the Trans-Frontier TV Con-
tion. vention. Based on this, the programs in the list do not
require adaptation to the requirements of Ukrainian
Over the past several months, much speculation has law. The basis for the development of such list and the
been circulating in the Ukrainian media regarding the criteria for the National Council are unclear. It was also
mandatory use of Ukrainian language in the programs surprising to see that the list included certain programs
retransmitted by service providers. Under the Broad- apparently produced by some well-known Russian-
casting Law, with regard to multi-channel networks, the based channels transmitted (or retransmitted) through
application of the Ukrainian language requirements ap- business entities in the EU countries. Despite numerous
pears to be limited to the retransmission of programs requests from the programming service providers, the
and shows of Ukrainian broadcasters licensed by the National Council members were reluctant to disclose
National Council. For retransmission of the programs their reasoning. Nevertheless, the National Council is
of foreign broadcasters, the Broadcasting Law allows expected to extend the list of permitted programs to
the use of the original language. include more than 300 programs.
Nevertheless, some members of the National Council It remains unclear, though, whether it is legal to re-
have made controversial statements on this matter, transmit programs that have been adapted to the re-
making some service providers believe that the ad- quirements of Ukrainian law but not included into the
aptation procedure requires a Ukrainian translation of list by the National Council.
www. knightfrank.com.ua
Key Trends of the Office Market ka) and Golosiivskyi (Zhylyanska and Antonovycha
Streets) city districts. Due to the lower rents, com-
• In January-August 2008, Kyiv office market experienced pared to the city center, office properties in outlying
a steady growth of rents while the vacancy rate was re- districts are well demanded by the tenants.
maining low, showing that demand is outpacing supply.
By August 2008, rents for professional office spaces in Office Supply
CBD area had reached $1,320 per sq m per annum.
By October 2008, about 109.2 thousand sq m of newly
• In September 2008, the upward rent trend changed – developed office properties have been delivered to the
growth of rent rates slowed down. In October they market. Thus, the total stock of professional offices in
dropped minimum by 10%. Kyiv made 1,018.4 thousand sq m.
• In January-October 2008, the delivery of new offices Figure 1. Total Supply of A and B (+/-) Class
reached 109.2 thousand sq m. It is expected that by Offices in the City of Kyiv, thousand sq m
the end of 2008 total annual delivery would make
148.7 thousand sq m.
www.chamber.ua
75
Table 1. Key Projects, Delivered in 2008
Business Centre Location Class Total area, sq m
BC “Deloitte” 47-50, Zhylyanska Str. А 9,600
BC “Mikom Palace” 27, Dehtyarivska Str. B+ 11,000
BC “Renome” 5, Dymytrova Str. B+ 6,700
Business Centre 172, Antonovycha Str. В+ 5,100
BC “Illinskiy”, 2nd stage 8, Illinska Str. B+ 30,000
Business Center 4, Verkhniy Val B+ 15,000
BC “Fahrenheit” 28, Fizkultury Str. B+ 11,500
Business Center 25B, Sagaidachnogo Str. B+ 5,000
Business Center 25/12, Khoryva Str. B- 4,800
Business Center 8/16, R.Okipnoi Str. B- 10,500
Total 109,200
Source: Knight Frank Research
In 2008 the delivery volumes have dropped more than Demand for Offices in Kyiv City
twofold as compared to 2007. Current office market
saturation ratio makes 371 sq m per 1,000 inhabitants Professional offices in the city centre and in Podil area are
which is twice lower as compared to the Moscow mar- highly demanded as usual, though a target area of desir-
ket. The latter enjoys office saturation ratio at 800 sq able office locations is expanding. A significant number
m per 1,000 inhabitants. In Kyiv office market vacancy of companies consider leasing office space in Solomyan-
varies from 2 to 5% in average. In 2008 offices with skyi, Obolonskyi (Petrivka), Shevchenkivskyi, and Golosi-
central location enjoyed 2-4% vacancy, while those in ivskyi city districts. The trend toward expansion of office
outlying areas experienced 3-5% vacancy. locations is gaining strength due to the high rent rates in
CBD and attractive rent rates in the distant districts.
In the short term the vacancy in office segment will in-
crease, especially in A and B+ class offices. Due to the The main tenants’ office requirements include: well-
financial crisis and economic instability, a lot of tenants developed infrastructure, good transport accessibil-
shorten their staff and budgets. Therefore high office ity, open layout, sufficient parking space, professional
rents will be a heavy burden for the large-scale ten- property management and office engineering etc. In
ants. In 2008 the B- class office premises and even professional offices sector the 200-500 and 500-1,000
non-professional offices will be well demanded due to sq m lots are in the highest demand.
the low rents.
In 2007 and the first half of 2008, offices were well demand-
Currently, the structure of professional office market ed by the FMCG and IT companies, as well as by financial
shows: 16% - the A- class offices, 32% - the B+ class, market players. Their share in the total take up was 47%.
and 52% - the B- class. In the short run the market Economic crisis started in 2008 with following recession
structure is likely to change towards increasing shares in 2009-2010 are expected to diminish office demand and
of the B+ and B- class office properties. However, if drive the rents down. Optimization of companies’ struc-
the A- class office project Esplanada will be commis- tures and staff reduction will reduce the main tenants’ re-
sioned in 2009, the share of the A- class offices may quirements for office premises at least by 30%. Sublease
reach 17%. offers shall become a key trend of the next year.
www.chamber.ua
77
Therefore, in 2009 the total office stock in Kyiv may be Some 45% of the warehouse market belongs to profes-
supplied with additional 130.2 thousand sq m of office sional properties, the rest 55% belongs to law-grade prop-
properties. Office rents are likely to remain at $420-$600 erties represented by converted industrial facilities and
for B+/B- class office properties and $600-$780 for A- hangars located in industrial Kyiv areas and satellite towns.
class properties. Primarily, new launched projects will This type of warehouses is well demanded because of their
include small-scale properties (up to 20 thousand sq m) suitable location and possibilities for renting small areas.
that do not require serious financing and are located in
the areas with good transportation accessibility. Market Professional warehouses enjoy high-quality param-
revival will significantly depend on the availability of bank eters (no less than 9.6 m ceiling height, availability of
crediting, interest rates and economic development of fire alarm and automatic fire-extinguishing systems,
the country, especially in the real estate sector. total temperature control, autonomous power supply,
air-conditioning systems), a wide-range services, pro-
Kyiv City Warehouse Market Overview fessional management, and large storage space. The
sizes of new warehouse complexes gradually grow.
Class В
Key Indicators Class А
(В+/B-) Since 2007, first warehouse complexes exceeding 40
Total stock by November, 2008 thousand sq m were commissioned to the market, in-
419 209.4 cluding GLD, MLP-Chaika. It is notable, that the com-
(A&B Class), thousand sq m
Delivered as of October, 2008, panies building warehouses for their own needs prefer
218.8 11.6 their sizes within 10-20 thousand sq m.
thousand sq m
Projects to be commissioned by the
9.3 Table 3. Key Projects, Delivered in 2008
end of 2008, thousand sq m
Vacancy rate, % 5%
Total Area,
Triple net rents ($/sq m/annum) $111- $128- Warehouse Class
sq m
as of November, 2008 $126 $147
West Gate Logistic (phases 1,2) А 16,000
Operating expenses ($/sq m/annum) $21-$26 $15-$24
MLP-Chaika A 94,800
Source: Knight Frank Research Kopylov Logistics Park А 27,500
Raben Ukrane A 20,000
Supply Biocon (phase 1) А 10,000
Warehouse complex (Kviza) А 20,000
Since 2005, development of warehouse market had been
accelerating. Starting from that period, a significant number Warehouse complex (Domotekhnika) А 16,500
of professional warehouses had been delivering to the mar- Warehouse complex (Foxtrot) А 14,000
ket. In 2006, the total stock grew up by 94% as compared Warehouse complex (Artur-K) B 2,600
with 2005. In 2007 total stock in the sector increased by Prommash-Brovary (phase 2) В 9,000
60.4%. During 10 months in 2008, 230.4 thousand sq m
Total 230,400
of newly developed warehouse properties were delivered
to the market. Thus, the total supply of professional ware-
house in Kyiv and Kyiv region made 628.4 thousand sq m. Source: Knight Frank Research
Before the year-end, a new warehouse complex Impeco is
expected to be launched, making a total supply of the A- The warehouses location structure shows that Zhytomyr
and B-class warehouse properties reaching 638 thousand direction remains more favorable among others with 8
sq m. This will contribute to a 60.3% growth in 2008. complexes located here. 5 complexes located in each
of the following directions: Boryspil, Warsaw, and
Figure 7. Total Stock of A and B (+/-) Class Ware- Brovary – total 15.
houses in Kyiv and Kyiv Region, thousand sq m
In 2007, lack of high-quality logistic properties caused
developers’ interest in construction of warehouse
complexes. As a result, a number of developing companies
declared their entering logistics market and purchase
of land plots. Since the developers had focused on
purchasing facade land plots along main highways of the
Kyiv region, this contributed to enormous growth of land
prices. While in 2006 the land plots suitable for logistics
projects development were offered at $20/sq m, by 2008
the land price had reached $50 - $90/sq m. The land plots
Source: Knight Frank Research along the Kyiv Ring Road were offered at $150 - $250/
sq m. European and Russian companies specialized in
logistic properties development entering the Ukrainian Stabilization of lease rates together with growth of the
market stirred up interest in this market segment. The cost of construction and construction materials prices
market players announced some 5.5 million sq m of during the end of 2007 – 1H 2008 forced developers to
warehouses complexes to be delivered by 2012. recalculate projects’ profitability and review their plans.
However, in 2008 sector quick growth has been hin- • Overrated demand on the market: deficit of the profession-
dered by a number of following factors: al warehouse properties, active seeking for free spaces
by quick-growing FMCG companies, and foreign logistic
• Deficit of land plots ready for development with a companies entering the market – all contributed to grow-
proper zoning and documentation. As a rule, offered ing demand for professional properties. However, the
land plots included those with agricultural zoning to real demand has been overrated more than 2-3 times.
be converted into industrial lands. Non-transparent
land allocation procedures and obtaining of a proper •High capital intensity of the projects and need for ex-
land zoning that take from half a year to one year ternal financing. As a rule, warehouse project of 50
delayed launch of many projects. thousand sq m requires about $40 million of invest-
ments to be attracted either by lending funds or by
• An overheated demand for land and overprice land creation of joint venture with a partner. Seeking for
plots caused many developers to postpone project partners and preparation of the project for bank lend-
development for several years. ing require fulfillment of a number of time consuming
procedures.
• Lack of experience in development of logistic proper-
ties by national developers and seeking for partnership Thus by November 2008 only 240 thousand sq m of
in joint projects development. The speculative market properties out of 700 thousand sq m announced before
caused overrated price expectations of the Ukrainian have been commissioned.
developers negotiating with foreign partners.
Despite considerable volumes of the new properties commis-
• Lack of well-though strategy for logistics projects devel- sioned in 2008, the segment development is slowing down.
opment. Many developers announced launch of their This trend has been deepened by the general economic
projects guided by speculative demand in the segment. downturn in the country and limited projects’ financing.
www.chamber.ua
79
Table 4. Warehouse Projects to Be Commissioned a steady demand for the properties located nearly in all
in 2009 directions. Nevertheless, the warehouse properties lo-
cated in Zhytomyr and Brovary directions were in the
Total Area, highest demand.
Warehouse Class
sq m
Komodor А 66,960 The demanded lots primarily depend on the type of
West Gate Logistic (phase 3) А 62,000 tenants. The areas of 2,000–3,000 sq m are the most
demanded among distribution companies, while logistic
MMK А 32,000
companies prefer areas of 6,000–10,000 sq m.
Brovary Logistic Centre A 49,180
Warehouse in Martusivka
A 50,490
In 2005 – 1H 2008, an active demand have been sub-
(phase 1) stantially exceeding the supply. Nearly all new ware-
IIG - Aladdin A 30,000 house complexes had been leased out prior to the date
Total 290,630 of commissioning. The majority of properties delivered
to the market in 2008 have been already pre-leased in
Source: Knight Frank Research 2007 or in 1H 2008.
Currently, almost 200 thousand sq m of new warehouse The objects due to be commissioned in 2009 already
complexes have been completed, however their official have pre-lease agreements for 60-70% of the total area.
commissioning should be expected no earlier than in Thus, in 2009 after 290 thousand sq m of new logis-
2009. The segment analysis shows that in 2009 no less tic properties are commissioned, de facto only no more
than 290.6 thousand sq m of new properties should be than 80-100 thousand sq m will remain vacant.
commissioned. Thus, by 2010 the total stock of profes-
sional properties in the segment shall have exceeded In 1H 2008, the average vacancy rate for operating
929 thousand sq m. warehouses made about 1-2%. Starting form 2H 2008,
the vacancy rate in the segment have been growing,
Figure 8. Total Kyiv Warehouse Stock Forecast, reaching 5% in November 2008. The economy crisis
thousand sq m caused critical review of retailers’ strategies and reduc-
ing demand for logistic properties.
Rents
Source: Knight Frank Research As of November 2008, the annual rent rates for profes-
sional logistic properties reached $111-126/ sq m for
Figure 9. Warehouse Market Structure, % the A-class and $128-$147/ sq m for the B-class. In 1H
2008, the rent rates had been growing due to a sup-
ply deficit and increase of the construction costs and
construction materials prices. At the same time the B-
class logistic properties’ offered rent rates exceed the
demanded A-class rent rates by 10-15%. The overrated
rents for the B-class logistic properties are resulted from
their proximity to the city and availability of leasing small
lots.
Considering the trends of 2008 and perspectives of the charges for businesses located in Kyiv by the Kyiv City
country’s economic development for 2009, the growth Administration more than 4-5 times.
for professional logistic properties’ rent rates is not ex-
pected in 2009. Meanwhile the rent rates are more likely Considerable heating costs for logistic properties within
to remain at the level of 2008. the city will force tenants to seek vacant properties out-
side the capital’s boundaries.
The Outlook for Development
Currently, the market is gradually moving to the build-
Next year the sector development will nearly come to to-suit format. Thus, developers insure themselves from
a stop. The projects due to be officially commissioned possible risks of not leasing the space for expected
in 2009 have already been leased by 65%. Thus, no rates, while tenants are planning their business develop-
more than 80-100 thousand sq m of vacant spaces will ment for the next few years. Considering current market
be supplied to the market. Considering current 5%, in trends, development of the new projects of this format
2009 the total supply of vacant space should not ex- and virtually rejection of the build-to-lease format projects
ceed 90-130 thousand sq m. may be expected during the next several years.
New vacant properties will be gradually absorbed by the The thorough market analysis shows that nearly all new
market in 2009 while, considering the current economic projects announced to be launched in 2010 have been
crisis, new properties’ rent rates will remain at the level halted due to lack of external financing. Thus, in 2010
of 4Q 2008. The demand for new warehouses outside the sector will be faced with a severe deficit of a new
the Kyiv city will rise due to the increase of service supply and following rent rates growth.
www.chamber.ua
81
REAL ESTATE TAXATION
By Baker & McKenzie - CIS, Limited
www.bakernet.com
ACQUISITION OF THE REAL ESTATE INVESTMENT 2. Acquisition of Shares of a Real Estate Oriented
Company
1. Acquisition of the Real Estate Property
Ukrainian legislation does not provide any special tax
1.1. Acquisitions Exempt from VAT treatment of the transactions with shares of real estate
oriented companies operating in Ukraine.
No VAT applies to acquisitions of land plots, except for
land plots, which are acquired together with, and con- Instead, the trade operations of a Ukrainian CPT payor
stituting an intrinsic value of, real estate situated there- with shares and corporate rights, including shares or
upon. corporate rights of real estate oriented companies, are
subject to a separate tax accounting of the financial re-
No VAT applies to acquisitions of residential premises sults of such operations. A CPT payor is liable to 25%
at the secondary market. CPT with respect to the so-called “positive financial re-
sult” of the operations with shares and corporate rights
1.2. Acquisition Subject to VAT ascertained in accordance with such tax accounting
rules.
VAT is applicable to:
1. Purchase of a building, A foreign entity, in contrast, in the absence of a perma-
2. Purchase of a building together with a land plot lo- nent establishment in Ukraine, is liable to 15% Ukraini-
cated thereunder; an Withholding Tax with respect to the capital gains de-
3. Purchase of a building under construction works; rived from the sale of shares of Ukrainian companies,
4. Purchase of residential premises at the primary market. unless an applicable tax treaty provides otherwise.
HOLDING THE REAL ESTATE INVESTMENT Sale by 15% Ukrainian withholding tax, unless an
corporate applicable bilateral double taxation treaty
non-residents provides otherwise.
1. Rental Activity
Rental Rental income is subject to the CPT at the rate 2. Selling the Shares of the Real Estate Oriented
Income of 25%. Company
• Land is not subject to depreciation, unless
such land is acquired together with real estate
situated thereon, in which eventuality the 1% state duty (notary fee) if the sale of
purchase price of such land would be subject to shares is caused in the form of the notary
Selling costs
Deprecia- depreciation allowances at rates applicable to deed (such notary deed is not mandatory
tion real estate. required).
• Buildings, other real estate is subject to de-
preciation allowances at a quarterly rate of 2% Capital gain
taxation
Standard 25% CPT rate will apply.
applicable to the declining balance sheet value
thereof.
Lease by a VAT payor of both residential build- Sale by corpo- 15% Ukrainian withholding tax, unless an
ings and nonresidential premises (for instance rate non-resi- applicable bilateral double taxation treaty
VAT
offices building, warehouses, shopping centers) dents provides otherwise.
are subject to 20% VAT.
www.chamber.ua
83
REAL ESTATE LAW IN UKRAINE
Dr. Julian Ries, Partner,
Beiten Burkhardt Kyiv
www.bblaw.com
Market Overview ferent law. In this regard, the ownership of land and
the ownership of any buildings or structures thereon
The recent global economic changes has influenced may be treated separately. However, circumstances
the economy of Ukraine in all major industries. The exist in which Ukrainian law does adhere more to the
real estate market is no exception. Debt financing for Western model, with land and buildings being treated
projects has become very difficult to near impossible collectively.
due to highly restrictive financing criteria for foreign
banks. With even big developers strapped for cash Due to the lingering influence of the previous Soviet le-
absent further financing, many construction projects gal system, buildings are still given more significance
around the country are being delayed, and some even than the land itself in the Civil Code. Land is treated as
suspended indefinitely. What is more, some predict a component of a building, particularly in cases where
that some developers might need to sell some of their the land belongs to the building owner. As a result, own-
projects in order to financing others. Should bank loans ership of a parcel of land on which a building is located
become due, it may be that certain projects are even transfers to the purchaser of the building where the
sold at a marked discount to avoid default. While some seller has ownership of both the land and the building.
may falter, others are laying in wait to pick up the pro- If the area of the land transferred to the purchaser of a
verbial bricks albeit at a much lower price. building is not specifically agreed upon, the buyer also
acquires ownership of the area of land on which the real
With the onset of signs of recession, Ukraine’s indus- estate stands, as well as those parts that are essential
tries, in particular the metallurgical and chemical indus- to the building’s use. However, where a purchaser ac-
tries, are reeling from reduced demand, with layoffs quires ownership of a building located on the land of
anticipated in the near future. This may seriously af- another owner, the purchaser can only acquire a right
fect the overall economic situation in Ukraine with high of use on the part of the land on which the building is lo-
unemployment rates, crippled economy and weakened cated and needed in order to make use of the building.
state budget.
Free transfer of ownership
However, how much this will influence the real estate
market remains unclear. Some market observers as- In Ukraine, the free transfer of real estate is permitted,
sume there will be a decrease in rental rates for about with exception to a handful of restrictions, such as that
25 – 40 %. Others believe that prices especially for on the permissibility to purchase agricultural land. A
office premises will not be seriously affected, if at all, “moratorium” currently prohibits legal entities or natural
because the demand for quality premises still by far persons from selling off agricultural land designated for
outstrips supply on the market. agrarian use, or who acquired it via privatization (de-
fined in the latter case as so-called “Paj” land). Until the
In the first half of 2009, a considerable slow down is moratorium is lifted, it is neither permissible to change
predicted in real estate transactions and investments, the designated purpose of “Paj” land, nor can agricul-
however, Ukraine’s fundamental data will still make the tural land for agrarian purposes be transferred into the
country an attractive market for real estate investment. capital stock of a business corporation.
The following overview shall summarize some basic
principles of Ukrainian real estate law, giving investors Additionally, in accordance with Ukrainian law, agricul-
and their advisors a first impression of the legal envi- tural land cannot become the property of foreign natu-
ronment. ral persons or legal entities. However, agricultural land
may be leased by natural persons and foreign legal en-
Ownership title to land and buildings tities for the purpose of engaging in agricultural activi-
ties over a period not to exceed 50 years.
Unlike in most Western countries, buildings and other
structures are not treated as essential elements of a Foreign ownership to real estate property
parcel of land in Ukraine, and may be subject to dif-
For foreign legal entities, the purchase of municipal or The existence of a designated function means that spe-
state property is only permissible if they have a regis- cific plots of land can only be developed with objects
tered representative office in Ukraine. allowed under the general plan. For example, if the
Land Cadastre lists a certain piece of land under the
Registration of property rights
category “Areas for Residential Complexes and Apart-
ment Buildings,” and the general plan only refers to the
Ownership and other immovable property rights, as
construction of residential complexes, there can only
well as their creation, restriction, transfer, and dissolu-
be a residential housing development. In this regard,
tion, must be registered with the state authorities. For
example, mortgages are recorded in the Real Estate before an office building can be erected on residen-
Registry as real rights. The procedures for register- tially designated property, the designated function of
ing rights to real estate are prescribed in the Law of the land would have to be revised. This would require
Ukraine “On State Registration of Real Rights to Im- adherence with the procedures prescribed for revising
movable Property and Restriction of these Rights” en- the designated purpose of a parcel of land. The re-
acted July 1, 2004 (hereafter RegRR). spective city council would have to issue a resolution
to that effect.
The purpose of the RegRR is to establish a unified reg-
istry of rights to real estate, including any restrictions Acquisition of land
thereto. All previous registries will be amassed in this
central registry, which will contain all information per- In Ukraine, the distinction between the primary market
taining to land and buildings throughout the country. (purchase from the state or municipality) and second-
Practice will show whether this central registry will fulfill ary market (purchase from other private entities) is
the same functions as real estate registries do in some particularly important because different rules apply.
countries (e.g. various County Recording System in the
USA, and the Grundbuch in Germany, for example). 1. Purchase from the state or municipality
However, until the Real Estate Registry is established, As a matter of principle, municipal or state owned
registration remains in the hands of several discon- property is sold by auction, with a couple of exceptions
nected state bodies. Data concerning rights to real es- applying to land encumbered by buildings owned by
tate is recorded in the following state registries: the buyer, where the buyer has a mining right, pursues
certain social activity and others, in which cases the
• Registry of Real Estate Ownership (but not land own- buyer is entitled to acquire the land directly absent an
ership); auction.
• Land Cadastre (registry listing the rights to parcels
of land);
For foreign legal entities, the purchase of municipal
• Registry for Mortgages;
or state owned property is only permissible with the
• Registry of Instances where Sale of Real Estate Ob-
establishment of a tax-registered place of business in
jects is Prohibited;
Ukraine. Moreover, the sale of municipal or state prop-
• Registry of Legal Transactions.
erty to foreign legal entities, or to domestic legal enti-
The designation purpose of land ties having foreign investment is only permissible with
the prior consent of the Cabinet of Ministers and/or the
A special designated purpose is assigned to every Ukrainian Parliament.
land plot in Ukraine, meaning that the particular land
is zoned only for a specific use. In practice, one must 2. Purchase from private entities
differentiate between the designated purpose of a land
plot and the designated purpose (so-called designated The acquisition of land from other private entities is
function) of a land plot in the general plans of the towns less restrictive, and the principle of freedom of con-
and cities. tract applies.
www.chamber.ua
85
Land use Taxation
An agreement conveying a right to possess and use Land ownership is taxed in Ukraine. Property taxes (lit-
land must be finalized in a lease contract. The lease erally called a “land levy” and, in extended sense, a
contract must be in writing and subsequently recorded “land tax”) are prescribed in the law “On Payments for
in the State Registry, with the contract taking effect Land”, and is payable by the legal entities and natu-
only being recorded in the State Registry. Any use of ral persons owning the land. The tax rate depends on
the land is prohibited prior to recording. a formula determined annually for the particular land
unit (1 square meter, or 1 hectare), with the unit used
A lease contract must address several fundamen- depending on whether a valuation of the land has
tal contractual elements, including identification of been performed. After recent changes in the property
the lease object, duration of the contract, lease pay- tax provisions, property is no longer taxed based on
ment terms, conditions on and designated purposes its normative value, but rather on the value according
of the land, and conditions regarding maintenance of to the price the parties agreed on in a sale purchase
the leased object, among others. Moreover, the lease transaction.
agreement must contain a set of attachments related
to the metes and bounds diagram of the leased land, Revenue derived from real estate (rental payments) is
a cadastral plan, a survey certificate delineating the subject to general individual income tax. In accordance
land boundaries, in addition to a transfer protocol for with income tax law in Ukraine, the income of a natural
the leased object. Failure to include these mandatory person is subject to a flat rate of 15 percent. The in-
essential elements in the lease contract may lead to come of nonresidents is taxed at 30 percent, while the
a refusal to register and/or to annulment of the lease tax on capital gains (interest) by nonresidents is often
contract. calculated differently due to international tax treaties
for avoidance of double taxation.
Encumbrance of land and other real property
Profit earned by Ukrainian legal entities is taxed at a
Mortgage encumbrances are treated comprehensively rate of 25 percent according to the “Profit Tax Law”.
in the Law of Ukraine on Mortgages. Land can only be Revenues of foreign companies are subject to taxation
pledged as collateral to a mortgage with a simultane- in Ukraine if their activities in the country are perma-
ous pledge of the buildings or unfinished construction nently established. A permanent establishment of a
objects that are also property of the mortgagor. Where foreign company is automatically presumed where a
buildings on the encumbered land are not owned by company owns real estate in Ukraine.
the mortgagor and a creditor forecloses on the mort-
gage, the new landowner must honor the building own- Gains from real estate transactions are taxed differ-
er’s rights of use just as they were allowed by the mort- ently for natural persons and legal entities. The income
gagee. of a natural person from a sales transaction regarding
residential premises is not taxed, as long as they do
A mortgage contract must be certified by a notary pub- not execute more than one sale transaction per year
lic, and the mortgage must be recorded in the State and the total area of the building does not exceed 100
Registry. However, until the system is set up com- square meters. If the total area exceeds 100 square
pletely, these records go to the Registry for Mortgages. meters, income from the sale of the property in excess
Ukrainian legislation adheres to a pure race theory, of 100 square meters is taxed at the rate of 1 percent.
whereby the first to record a mortgage has priority. If more than one piece of real estate is conveyed within
Where a mortgage is not entered into the Registry, the a year, any additional revenue from the second sale
mortgage contract remains effective, but the claim of a will be taxed at a rate of 5 percent. The income of legal
mortgagee creditor will not have priority against claims entities from real estate transactions is taxable accord-
by other persons who have first recorded their interests ing to the general provisions of the Profit Tax Law in
in the State Registry in the particular piece of land. Ukraine.
Unlike the legal systems of most European countries, In Ukraine, the rate of value-added tax on sales trans-
under Ukrainian law a pledge at maturity can also be actions is generally 20 percent. There are special rates
agreed upon, with the result that the mortgage object and exemptions for certain types of merchandise.
can fall to the mortgagee creditor on expiration, or that Building sales are generally subject to a 20 percent
the mortgagee creditor may sell the mortgage object in value-added tax, although residential property is an ex-
the name of the owner. A contractual agreement on a ception. Sales of residential properties re not subject
pledge at maturity, or for private sale, can be arranged to VAT, with the exception of the first time it changes
in the interim until there is a court decision to enforce hands after building or restoration.
foreclosure rights on the land.
The transfer of land ownership is not subject to value-
The government takes a fee on real estate transactions • Notarization of a lease on real estate (sublease) in-
subject to notarial certification. In principle, these fees curs a state fee of 0.01 percent of the contract value,
are paid by the person or legal entity benefiting (i.e., but the fee may not be less than five times and not
the purchaser), and it is not permissible to formulate a more than fifty times the minimum basic personal al-
contrary agreement on this in the contract. lowance.
A list of the amount of government fees pertinent to • Notarization of a pledge contract incurs a government
certain common transactions is provided below: fee of 0.01 percent of the pledged object, but the fee
may not be less than five times and not more than
• The notarization of contracts involving the sale of fifty times the minimum basic personal allowance.
houses, apartments, vacation and garden cottages,
garages, and other real estate objects that are the • Notarization of a contract for the purchase of property
property of natural persons incurs a fee of 1 percent from a government-owned business incurs a fee in
of the contract value, but not less than the applicable the amount of 0.1 percent of the purchased property.
minimum income tax (17 UAH, ca. 3 USD).
• A real estate auction (but not a foreclosure auction)
• Notarization of contracts involving the sale of land of property belonging to a natural person is subject to
owned by a natural person incur a government fee in a fee in the amount of 1 percent of the sales value of
the amount of 1 percent of the contract value, but not every real estate object that is auctioned off, but not
less than the income tax free minimum. less than one minimum basic personal allowance.
• Notarization of a contract on land lease (sublease) in- • On acquisition of a building, a fee that goes to the
curs a government fee in the amount of 0.01 percent nation’s Pension Fund is charged in the amount of 1
of the declared land value. Where the value of the percent of the contract value, in addition to the gov-
land has not been assessed, a fee in the amount of ernment fee mentioned above.
www.chamber.ua
87
XI TAXATION
There is a stated policy of developing and enhancing course of its economic activities. In particular, under ar-
the service industry in Ukraine. Also there is an abun- ticle 169 of the EU VAT Directive1 , the recovery of input
dance of high quality staff and opportunities to improve VAT is granted if the incurred VAT relates to activities
GDP through the development of this sector. However, carried out (i.e. with the place of supply) outside the EU
the current VAT legislation is “arguably” creating a com- Member State in which that tax is due or paid and in
petitive disadvantage for Ukrainian service providers. respect of which the VAT would be deductible, if the ac-
tivities had been carried out within that Member State.
Are in fact Ukrainian VAT regulations a barrier and
competitive disadvantage for Ukrainian companies Consequently, because Ukrainian service providers are
providing their services cross-border? This question not allowed to recover input VAT incurred on purchases
can be analysed from many different points of view. In attributable to their supplies for which the place of sup-
practice, the three aspects described below influence ply is deemed to be outside Ukraine, this may create
the international trade in services most. significant barriers and additional costs for Ukrainian
companies. As a result, provision of services for ex-
No right to deduct input VAT related to “exported” port may be viewed as less profitable in comparison
services to domestic sales. Moreover, the services provided by
Ukrainian companies will be less competitive for for-
Under the Ukrainian VAT Law, taxpayers cannot recov- eign purchasers (more expensive due to the unrecov-
er input VAT related to supplies, which are exempt from erable VAT included in their price) in comparison with
VAT and those which are out of scope of VAT (based analogous services provided by other suppliers from
on respective regulations or because the place of sup- other countries. This situation in particular discriminates
ply is not in Ukraine). As a result, businesses that are against the innovative sectors of the economy (like
engaged in the provision of cross-border services often providers of services related to development of new
have to bear higher costs related to the unrecoverable technologies (e.g. engineering services, data process-
portion of VAT. Since service suppliers cannot recover ing, provision of information, assignment of copyrights,
input VAT incurred on their purchases, the value of the granting of licenses, patents, etc) as well as consulting,
unrecoverable portion of the input VAT increases the advisory, accounting services, etc).
overall costs of providing the services and may consti-
tute a substantial element of the service price. Place of supply of services – export vs. import
The approach resulting from the Ukrainian VAT regula- Under the Ukrainian VAT Law (art. 6) – the place of sup-
tions evidently breaches the basic principles of the VAT ply rule for the provision of services to non-residents is
system. The right to deduct input tax is an integral part generally the place where the supplier is registered as
of the VAT scheme and in principle, it cannot be limited. a VAT payer. Thus, if the service supplier is a Ukrain-
ian entity, the place of supply would be in Ukraine and
The deduction system is meant to relieve the trader, the transaction would be subject to 20% local VAT. The
entirely, of the burden of the VAT payable or paid in the procedure for determining the place of supply for certain
1 Council Directive 2006/112/EC dated 28.11.2006 on the common system of value added tax.
• Supplies of intellectual property rights, advertising Being aware of this fiscal approach of the tax au-
and promotional services, services of consultants, thorities, in practice many Ukrainian service provid-
engineers, attorneys, accountants, auditors, actuar- ers charge 20% Ukrainian VAT on the value of their
ies and other similar services, data processing and services, (even if under the place of supply rules, the
the provision of information; leasing of movable prop- service should be treated as “out of scope” of Ukrainian
erty to non-residents, which do not have a perma- VAT). The amount of Ukrainian VAT is not recoverable
nent representative office, address or residence in for foreign clients, which increases the entire cost of
Ukraine – the place of the buyer’s registration. the services and makes Ukrainian suppliers less com-
petitive with providers from other countries.
If services are provided by a non-resident supplier to a
Ukrainian VAT taxpayer, different criteria for determin- Conclusions
ing the place of supply apply. The place of supply co-
incides with the place of registration of the representa- The rules of settling VAT on cross-border services
tive office of the non-resident supplier in Ukraine or its implemented in Ukraine, as well as the poor wording
Ukrainian agent, who acts on behalf of the non-resident. of the respective legal acts which enable various in-
If the non-resident has no representative office or agent terpretations, indeed influence the competitiveness of
in Ukraine, the place of supply of services would be the Ukrainian service providers. This, in particular, is re-
place of the purchaser’s location. Therefore, under the lated to the so called ‘intangible’ services, such as the
wording of the VAT Law, it can be argued that whenever IT sector, consulting, engineering, accounting, etc.
a foreign supplier provides a service to a Ukrainian tax-
payer, the transaction will be subject to VAT in Ukraine. What measures should be taken to solve the problem
and create a fair VAT trading environment for services
Resulting from the above, under the Ukrainian VAT Law, between Ukraine and other countries? The answer is
the same services provided by a Ukrainian company to quite simple:
a foreign recipient and provided to a Ukrainian com-
pany from a foreign recipient are not treated equally, in • Assuring the ability to deduct input VAT resulting from
terms of determining the place of supply. This may lead purchases attributable to the provision of services for
to double taxation of the same service (i.e. the transac- which the place of supply is outside Ukraine, in order
tion may be subject to VAT in the country of the service not to discriminate against Ukrainian service provid-
supplier and in Ukraine). In certain situations, e.g. for ers; and
businesses which cannot recover VAT in full, this will
have an adverse impact on their costs. • Modifying the place of supply rules to ensure that the
rules incorporated into the Ukrainian VAT Law corre-
Misinterpretation and poor wording of place of spond to similar rules governing EU countries. In ad-
supply rules dition, the same rules of place of supply should apply
to cross border services rendered and purchased by
In addition to the above, because of the poor wording of Ukrainian companies.
www.chamber.ua
89
TAX ASPECTS OF MERGERS AND ACQUISITIONS IN
UKRAINE
By PricewaterhouseCoopers
www.pwc.com/ua
Companies paying dividends are required to pay ad- Under Ukrainian tax legislation, transactions with relat-
vance corporate tax at the standard 25% rate, based ed parties must comply with the arms’ length principle.
on the amount of dividends payable to shareholders. So far, there is very little guidance regarding the ap-
The advance corporate tax remitted to the state can be plication of the arms’ length principle in practice. Also,
offset against future corporate profits tax liabilities, but the tax authorities currently do not have well-developed
is not refundable. transfer pricing procedures or methodologies.
Advance tax does not apply to payment of dividends However, recent practice shows that the Ukrainian tax
by a holding company which receives more than 90% authorities have started pay greater attention to the
of their income in the form of dividends from Ukrainian justification of arm’s length prices in transactions be-
subsidiaries. tween related parties. There is also a draft legislation
introducing a number of changes to Ukrainian transfer
Dividends received by a Ukrainian legal entity from its pricing regulations.
Ukrainian subsidiaries are exempt from corporate prof-
its tax. Dividends received by a Ukrainian legal entity VAT
from foreign subsidiaries are taxed at 25% with a credit
for foreign taxes if there is a double tax treaty between VAT is imposed on the domestic supply and import of
Ukraine and the state that is the source of dividends. goods and services. The standard VAT rate is 20%.
Otherwise, taxes suffered on dividend income abroad The supply of certain goods and services is exempt
will not be creditable for the Ukrainian legal entity. from VAT. Exported goods and related services are
zero-rated. The supply of certain goods (e.g. shares)
Payment of dividends to foreign shareholders is sub- and services is exempt from VAT.
ject to 15% withholding tax, unless a relevant double
tax treaty provides otherwise. Input VAT on purchases of goods or services related
to VATable sales may be credited against output VAT.
Tax losses Surplus input VAT may be carried forward against fu-
ture output VAT liabilities or refunded in cash. However,
Ukrainian tax legislation provides for tax losses to be obtaining a VAT refund in cash is extremely difficult in
carried forward without any time limitations. However, Ukraine.
the annual Budget Laws have continually imposed
one-year restrictions on utilisation of tax losses. The Unlike many other countries, in Ukraine the contribution
2008 Budget Law passed by the Ukrainian Parliament of assets into the share capital of a legal entity is a VAT-
does not contain provisions restricting utilisation of tax able transaction. While the VAT regulations are unclear
losses in 2008. Despite the restriction being removed on this issue, the tax authorities currently accept that
for the current year, there is a risk that a future Budget the receiving entity should be entitled to VAT credit.
Law will reintroduce the loss carry forward restriction
in the future. Transfer taxes
There is no tax consolidation in Ukraine and tax losses Sales of buildings are subject to a 1% pension fund
of each company are accounted for on a stand alone charge payable by the buyer. Also, notarisation of agree-
basis. ments on alienation of immovable property attracts a 1%
stamp duty. The underlying legislation does not specify
Interest capping rules which party is liable for the stamp duty, and this is gen-
erally subject to negotiations between the contracting
Ukrainian tax legislation does not contain any specific parties. Sales of shares in Ukrainian legal entities are
thin capitalisation rules. There are, however, interest not subject to pension fund charge or stamp duty.
capping rules which limit the deduction of interest ex- In 2008 purchase of foreign currency to pay interest
www.chamber.ua
91
or dividends abroad attracts 0.5% pension fund this is that the sellers are unwilling to undertake asset
charge based on the amount of foreign currency to be deals unless the buyer is prepared to compensate the
purchased. The charge is not payable if a Ukrainian seller’s tax burden.
legal entity has sufficient reserves of foreign currency
to remit abroad. Funding the acquisition
II. ACQUISITIONS Purchasers will typically use a mix of debt and equity to
fund an acquisition. Maximization of debt funding at the
What is an acquisition? Ukrainian level has several advantages. The principal
advantage of debt funding is a tax deduction of interest
Generally, an acquisition can be structured as a pur- expenses in Ukraine at 25%. Also, repayment of debt
chase of separate assets, transfer of an entire busi- principal and interest is an effective method of cash
ness, or a share purchase. From the buyer’s point of repatriation from Ukraine.
view, a share purchase transaction can be structured
in two different ways: (1) purchase of the shares di- (a) Debt funding
rectly from the vendors of the target company; or (2)
purchase of the shares through a newly established Business purpose test
Ukrainian or foreign company.
As a general rule, interest is deductible for tax purpos-
Assets vs. Shares es if incurred by a relevant taxpayer in connection with
business activities, i.e. generation of taxable income.
The acquisition of assets has several advantages over The acquisition of both assets and shares should
the acquisition of shares, including: qualify as business related transactions. However, ro-
bust documentation and strong economic justification
• The purchase price can be depreciated for tax pur- should be put in place to justify compliance with the
poses; business purpose test.
Interest paid to foreign legal entities is subject to 15% Other structuring and post-deal issues
withholding tax, unless a double tax treaty provides
otherwise. The Ukrainian double tax treaties with Cy- Minimize after-tax cost of debt
prus, Spain, the UK and US provide for the reduction of
withholding tax on interest payments to 0%. Since Ukrainian tax legislation does not provide for the
possibility of tax consolidation, a legal merger is gener-
(b) Equity ally the only option to deduct the interest expenses of
the acquisition vehicle against taxable income of the
Taxation of equity injections target company. Notwithstanding the lack of clarity in
the law, a debt push down strategy has been pursued
Equity contributions to a Ukrainian company’s regis- by many foreign investors. A legal merger is a com-
tered capital (direct investment) are not subject to cor- plicated process from both the tax and legal perspec-
porate profits tax or any other taxes. tives, and may take considerable time and effort to
complete.
It is important that documents supporting capital con-
tributions (e.g. shareholders resolution and company’s Cash repatriation
charter fixing the amount of capital) are prepared prior
to remitting cash and are properly registered with the The common methods of repatriation of cash are
authorities. In the absence of proper supporting docu- through payments of:
ments, the tax authorities may challenge the entitle-
ment to tax exemption. • Dividends;
• Interest and loan principal;
Equity requirements • Royalties (trademark or know-how);
• Payment of service fees; or
Most investors tend to keep equity to the minimum (cur- • Reduction of share capital (repurchase of shares).
rently, minimum share capital for a Limited Liability Com-
pany is approximately USD 11,000; for a Joint Stock It is essential that the payment of dividends is care-
Company approximately USD 140,000). However, the fully planned so that arising upon distributions advance
net assets of a Ukrainian company need to be closely corporate profits tax does not cause significant prob-
monitored to ensure that the amount of equity is suffi- lems. It should also be noted that LLCs in Ukraine are
cient to comply with the net assets rule (see below). allowed to distribute dividends more often than JSCs.
Hence, from this perspective, it is more beneficial to
Taxation of dividend distributions choose an LLC as an investment vehicle in Ukraine.
Companies paying dividends are required to pay ad- To ensure full tax deductibility of interest, royalties and
vance corporate tax at the standard 25% rate, based service fees, their payment should be economically
www.chamber.ua
93
justified, comply with the arm’s length principle and Also, Ukrainian corporate law does not ensure a suf-
properly documented. Payments of dividends, interest ficient level of comprehension and flexibility as to gov-
and royalties are normally subject to withholding tax, erning relationships between shareholders. Further-
at rates, which may be reduced, even eliminated by more, Ukrainian courts do not recognise and thus do
relevant double tax treaties. not enforce shareholders agreements.
The foreign buyer may also consider other options, One common investment strategy that helps mitigate
such as a reduction of share capital (repurchase of some of these issues is the use of an offshore holding
shares). company for the joint investment, with this company
owning Ukrainian operations. The major advantage
Non-core disposals of this strategy is better protection and/or flexibility of
shareholder rights under the legal system of the holding
Non-core disposals can be achieved in several ways. jurisdiction than available under Ukrainian law. Other
The assets can simply be sold, or contributed to the added advantages of an offshore holding company are
capital of a subsidiary, which is then sold. Both of offshore financing, offshore licensing of activities, etc.
these methods are viewed as a sale for tax purposes.
Alternatively, a re-organization in the form of a split- III. MERGERS
off can be undertaken. This gives the added flexibility
of transferring an entire business, including liabilities. Legal forms
Such transactions are gaining popularity as experience
grows in executing them. However, a split-off should be Ukrainian civil legislation recognizes five types of cor-
considered as a complex transaction from both legal porate re-organization:
and tax perspectives, which needs to be well planned
to mitigate tax risks that may arise as a result of am- • Merger;
biguity in the legislation in respect of the treatment of • Absorption (merger into);
such deals. • Division (demerger);
• Split-off; and
Preservation of existing tax attributes • Change of the form of business entity.
A change in ownership of the shares of a company does In the course of any corporate re-organization, the com-
not alter the company’s tax losses available for carry- pany under re-organization is required to notify both its
forward or any other tax asset, such as tax refunds due creditors and contract holders, who then have the right
from the budget. In a share purchase transaction the to withdraw from existing contracts. As a result, com-
balance sheet value of the assets carries over. mercial issues, as well as tax, must be considered prior
to undertaking a re-organization.
Holding structures and joint ventures
Current practice
It is widely accepted that JVs are very difficult to ex-
ecute, operate and exit if necessary. Legal re-organizations were not commonly done in
the past due to the lack of clarity of the tax and legal
We have seen a lot of cases where the foreign partner treatment. Notwithstanding the fact that the legislation
usually contributes the capital and modern equipment/ on mergers has not changed fundamentally in recent
expertise, and the Ukrainian partner contributes old, years, there is a clear trend toward effectuating these
or partially complete infrastructure, land and goodwill re-organization strategies. There is a lot of activity
measured in a variety of ways. It is generally a stretch related to corporate absorptions and changes of the
to bring values in line with desired investment propor- forms of business.
tions. Also, based on our experience, the foreign inves-
tor has a much longer-term view of the start-up timeline Corporate re-organization is a complicated process
and the ability to continue to fund start-up costs on a from both tax and legal perspectives. Experience
more sustained basis, whereas the Ukrainian partner shows that corporate re-organization may take from
may be looking for immediate benefits and may have four months to one year, depending on the type of re-
serious difficulty bringing in additional investment should organization and prior history of the company, with the
that become necessary to fund start-up operations. If the major part of this time being for the tax audit of the
JV becomes burdened with additional capital needs and company undertaking re-organization.
the Ukrainian partner cannot, or will not contribute, but
refuses to take a dilution, the parties reach an impasse. If Tax consequences
the operations are set up in the compound of the Ukrain-
ian partner, unfriendly relations can result in limitation of Ukrainian tax legislation does not contain clear guide-
access to facilities and assets by the foreign investor. lines regarding tax implications arising upon corporate
All financial and tax results (including losses carried Sale of assets
forward and VAT credit) of the dissolving entity should
be consolidated with the financial and tax results of the A Ukrainian company that sells any assets, including
surviving entity. its entire business, is liable to 25% tax on any gain
derived on the sale. Generally, the gain is calculated
Any transfer of assets in the course of any form of cor- as the difference between the sale proceeds less the
porate re-organization (including merger, absorption, di- tax book value of the assets. With certain assets (e.g.
vision, and split-off) should not be considered as either transport vehicles, data processing equipment), the
a sale or supply for tax purposes. In the past the tax sale proceeds reduce the tax book value of the relevant
authorities have confirmed this in a number of their let- tax group and not an individual asset.
ters. However, recently the tax authorities have changed
their approach and claim that the transfer of assets in Capital gains realised by a non-resident from the assets
the course of a merger should be subject to VAT. In our located in Ukraine are considered Ukrainian source in-
view, the the tax authorities’ line of argument lacks legal come subject to 15% withholding tax. Generally, this
basis, but this may need to be proven in court. tax can be eliminated under Ukrainian double tax trea-
ties. However, treaty protection is not available for the
All assets and liabilities of the merged company are sale of real estate property located in Ukraine.
transferred to the surviving company at their book val-
ue. Thus, no gain or loss will be recognized with respect A sale of assets will usually be subject to 20% VAT.
to the merger. There will be no deemed dividend, or There may be also transfer taxes if real estate is being
any other type of gain or loss recognized with respect disposed.
to liquidation of the remaining company or companies
for the shareholders. Preparing a company for sale
Generally, foreign buyers elect to sell either shares Certain business units, or processes, can be “split-off”
or assets to exit from Ukrainian projects. The foreign prior to the sale of the remainder of the business or
buyer can consider other alternatives such as a capital businesses, which, however, requires planning to miti-
reduction or liquidation of a Ukrainian company. gate tax risks that may arise.
Ukrainian legislation provides for a special ‘’pooling Under Ukrainian tax legislation, the contribution of as-
method’’ for computing capital gains on sales of shares. sets into the share capital of an entity is subject to cor-
Under this method, income and expenses from trans- porate profits tax and VAT. The transfer is also subject
actions with shares are recognized in the respective to transfer pricing regulations.
pool. If the aggregate income from shares/corporate
rights exceeds the aggregate expenses incurred on the Pre-sale dividends
acquisition of the shares, the excess is treated as or-
dinary income subject to 25% corporate profits tax. A No special rules exist with respect to pre-sale divi-
negative result is not tax deductible, but carried forward dends. Therefore, general rules should apply to such
to offset future income from trading in shares. dividend distributions.
www.chamber.ua
95
V. OTHER PERTINENT ISSUES comes into effect on 30 April 2009. Although the Law
introduces many positive innovations, it will take some
Forms of Legal Entities time to unify the approach to its interpretation and the
practical application of certain provisions.
The most common forms of legal entities in Ukraine
are a limited liability company (TOV), closed (private) Another popular investment vehicle is a commercial
joint-stock company (ZAT) and open (public) joint-stock representative office of a foreign corporation (in es-
company (VAT). In all of these entities, the sharehold- sence this is a branch in its common meaning), which,
ers’ liabilities are limited to the amount of contributed unlike a company, is not a separate legal entity.
capital, although in certain circumstances the share-
holders may also be liable for the amount of declared Foreign exchange controls
but unpaid capital. From a tax perspective, all are treat-
ed similarly. However, a TOV is able to distribute divi- Ukraine has foreign exchange (currency) controls in
dends more frequently, which makes this vehicle more place, which may impact the structure of the transac-
attractive from a cash management viewpoint. Joint- tion. Certain types of share and asset purchases be-
stock companies (ZAT and VAT) are subject to addi- tween Ukrainian residents and non-residents, as well
tional reporting to the State Commission on Securities as certain types of financing should comply with spe-
and Securities Markets. cific Ukrainian currency control requirements.
One of the primary reasons many foreign investors use a Approvals for transactions
TOV is simpler administration (i.e. no filings are required
to be made to the State Commission on Securities and Both the purchase of assets and the purchase of shares
Securities Markets, which, especially in the case of char- above a certain threshold may require the approval of
ter capital uplifts, can be administratively time consum- the Antimonopoly Committee of Ukraine.
ing). However, a TOV is normally not advisable in joint
venture scenarios, because of the difficulties of operating Negative net assets
and exits, when there are disagreements with the part-
ner. Nevertheless, this disadvantage may be essentially If, at the end of the second year of its existence, a
reduced if an off-shore holding structure is used. Ukrainian legal entity has negative net assets, such
legal entity might be forced to be liquidated at the re-
It is also worth noting that the Law of Ukraine “On Joint- quest of the registration authorities. In practice, this is
Stock Companies” was recently adopted. The law not enforced.
1. Forms of business structure in the territory of Investing in Ukrainian business, the investors may:
Ukraine and their tax consequences:
• participate in the share capital of the enterprises (par-
A. Enterprise with foreign capital in the form of a limited tially), jointly with Ukrainian individuals and legal per-
liability Company; sons, or acquire the shares of an existing enterprise;
• create an enterprise which will be fully owned by the
B. Representation; and investor, or acquire the existing one.
C. Joint venture. Both these cases require registration of the foreign in-
vestment. This procedure is determined by:
During the last few years Ukraine has become more
and more attractive for foreign investors. The record 1) Section ІІІ of the Law of Ukraine «On the Proce-
growth achieved (during the last 17 years) of direct for- dure of Foreign Investing» as of 19.03.96 No.93/
eign investments into the Ukrainian economy, accord- 96-VR;
ing to the results of the first quarter of 2008 only gives
additional proof of this fact. The principal countries – in- 2) Provision on the Procedure of State Registration
vestors providing 83% of capital, apart from Germany of Foreign Investments, approved by Decree of
and Cyprus, includes such countries as the Nether- Cabinet of Ministers of Ukraine as of 07.08.96
lands, Austria, United Kingdom - $2.1 billion, Russian No. 928;
Federation, the United States of America, Sweden, Vir-
gin Island France. 3) Order of state tax authorities approval of infor-
mation notices about actual injection of the for-
In connection with this, information about the legal and eign investments and notes issued during import
tax aspects of foreign investments into Ukraine is of to Ukraine of property being a foreign investor’s
current interest for investors. The principal question is contribution into the share capital of the enter-
the form of the enterprise to be established. Among the prise with foreign investments, as well as under
alternatives there are: a separate company with foreign the contracts for joint venture, approved by Or-
investment, a joint venture with a Ukrainian company, der of State Tax Administration of Ukraine as of
or a representative office. The possibility for additional 29.06.05 No. 238.
funding of the investment is also important for consid-
eration. The registration is conducted by city or state admin-
istration within a period of three banking days after
Let us study the main aspects of each structure: receiving the investment according to the procedures
adopted by the Cabinet of Ministers of Ukraine.
а) A limited liability company with foreign
investment Benefits for foreign investment
Such an enterprise will be considered to be resident Such benefits are established by Law of Ukraine «On
of Ukraine. Its taxation will be subject to the rules es- the Procedure of Foreign Investing». Firstly, preferential
tablished for Ukrainian enterprises. However, there conditions are applied to the property imported as
are some peculiarities of registration of foreign invest- foreign investment (in the form of contribution into the
ments, as well as certain benefits. share capital). Its import is not subject to charges. The
procedure of exemption is realized through the issue
Registration of foreign investment of a promissory note which is paid after property has
been reflected in accounting of the enterprise with
www.chamber.ua
97
foreign investment. However, charges are to be paid in the non-resident’s account from abroad), then indi-
case such property will be disposed within three years vidual licenses of the National Bank of Ukraine are
(except for cases when it is exported). required. Thereafter, for repayment of credit from resi-
dent-borrower’s account from abroad, such resident is
Secondly, the following guarantees for protection of in- to submit the original of registration certificate and orig-
vestments are defined in the statutory documents: inal or copies of payment documents confirming credit
payment which are certified by the foreign bank to the
• unimpeded transfer abroad of profits, revenues and authorized bank.
other funds received as a result of the investing activ-
ity after tax payments; The second important thing is the procedure of regis-
tration.
• in the case of investing activity termination - the right
for the return of the investment no later than 6 months Resident-borrower has to receive the registration cer-
from the date of suspension of activity; tificate. With this purpose he submits the package of
documents to the corresponding territorial Administra-
• the right for compensation of losses (including the tion of the National Bank.
losses of opportunity and moral damage) resulting
from actions, inactions or improper fulfillment of the The third thing to be considered is the amount of inter-
duties related to foreign investor by Ukrainian State est. The law does not define the limits for credit granted
Authorities or their executives. by a non-resident. But there are limits for the amount of
interest which can be charged for using the borrowed
It should be noted that these guarantees will remain funds.
valid even in case of changes in Ukrainian laws (dur-
ing 10 years from the date when new legislative rules Thus, the amount of payments (taking into considera-
becomes effective). tion the commissions, forfeits and other payments un-
der the contract, including sanctions for undue fulfill-
Additional attraction of investment via credit ment of contract terms) should not exceed the amount
facilities of payments for such credit, calculated based on maxi-
mum interest rate established by the National Bank of
Non-residents investing into Ukrainian businesses Ukraine.
can subsequently be faced with the need of attracting
additional funds from abroad. But this time the investor Maximum interest rate is established for:
does not want the injection of investment to be con-
ducted by virtue of an increase of share capital. The а) contracts in foreign currency of the first group of a
question is how a non-resident should transfer the Classifier - on the basis of value of governmental
funds to the established enterprises with foreign invest- borrowings in external financial markets;
ment. The answer lies in loan or credit financing. Let’s
consider the main aspects of it. b) contracts in foreign currency of the second or third
groups of a Classifier - on the basis of weighted
Legal aspects average interest rate, at which the authorized banks
grant the credits to entities in the internal credit mar-
Ukrainian laws require the registration of credits from ket.
non-residents. The relevant procedure is stipulated by
the Provision on the procedure of obtaining by resi- (p.1.11, 1.12 of Provision on the procedure of receiving
dents credits and loans in foreign currency from non- credits, loans in foreign currency by residents from non-
residents and granting the loans by residents to non- residents and granting the loans in foreign currency to
residents, approved by the Board of National Bank of non-residents, approved by the Decree of Board of the
Ukraine as of 17.06.04 No. 270. National Bank of Ukraine as of 17.06.04 No. 270).
First thing to pay attention to is that credits are only al- Tax Aspects
lowed to be received in a non-cash form (i.e. physical
cash funds may not be used.). Their receipt should be Granting of the credit and its receipt in of itself has no
made through authorized banks of Ukraine, which have taxation effects. The credit recipient does not include
agreed to support the transactions under the contract. these amounts in gross profits (p.7.9, of the Law of
Ukraine “On the taxation of the enterprises’ profits”)
If the contract with a non-resident assumes receiv- and does not levy any VAT (p.3.1, subparagraph 3.2.5
ing the credit from abroad (foreign currency will be of the Law of Ukraine “On Value Added Tax”).
transferred to the resident-borrower’s account outside
Ukraine and/or repayment of credit will be made from A different matter is the interest. An enterprise paying
b. Those persons who in accordance with laws pay In accordance with Paragraph 1.17 of the Law of
the income tax at the rates other than it is stipu- Ukraine «On the taxation of the enterprises’ profits» a
lated by p.7.2 or Article 10 of the Law of Ukraine permanent representation of a non-resident in Ukraine
“On the taxation of the enterprises’ profits”. is a permanent place of operation, through which the
economic activities of a non-resident are carried out
The inclusion of interest on credits to the gross ex- fully or partially in the territory of Ukraine. Among such
penses in favour of such non-residents or their related representations there are: place of management, sub-
persons is allowed in the amount not exceeding such sidiary, office, plant, factory, workshop, etc.
taxpayer’s profits received in the reporting period in the
shape of interest from its own assets placement, in- Before carrying out any business activity a permanent
creased by the amount of fifty per cent from taxable representation shall be registered as an income tax-
income of the reporting period, not taking into consid- payer as provided by the Order of the State Tax Ad-
eration the amount of such interest received. ministration of Ukraine No.293, dated 12.08.1997. Af-
terwards it is obliged to pay tax on its income under the
Besides, interests in favor of non-residents are allocat- rate of 25%. Thus, a representation may independently
ed to profits with the source of origin in Ukraine (p.13.1 choose the framework for calculation of income tax (p.
of the Law of Ukraine “On the taxation of the enter- 13.8. of the Law of Ukraine «On the taxation of the en-
prises’ profits”). On income payment, withholding tax terprises’ profits»):
should be paid at the rate of 15 % from the amount of
such payment and against it (p.13.2). But in the case 1) In general, income tax is calculated on difference
there is an agreement for avoiding double taxation between the income, received by a representation,
with non-resident’s country, this tax will not be paid. and its expenses, allowed by the legislation.
To confirm this, it is necessary to receive a Certificate
(or its notarized copy), stating that the non-resident is 2) In case when a non-resident carries out its activi-
the resident of country for which an international agree- ties not only in Ukraine, but also abroad, and does
ment has been concluded. Such Certificate is issued not define income from its activities, carried out in
by the authorized body of the corresponding country the territory of Ukraine through the representation,
in accordance to Appendix 1 to the Order approved the amount of taxable income is determined on the
by the Decree of the Cabinet of Ministers of Ukraine basis of balance of its financial and economic ac-
dated 06.05.01 No. 470, or according to the laws of tivities. Such balance is prepared separately for a
such state. permanent representation within the scope of its ac-
tivity and agreed with tax authorities.
b) Representation
3) In case when it is impossible to define the profits re-
Foreign economic entities which intend to carry out ceived by a non-resident in the territory of Ukraine,
business activity in Ukraine may open a representa- the taxable income is calculated by tax authority as
tion (Article 5 of the Law of Ukraine “On the external a difference between the gross income and gross
www.chamber.ua
99
expenses, defined by way of application of 0, 7 coef- • reduction of tax rate;
ficients to the amount of gained income.
• return of difference between the amounts of tax paid
Thus by carrying out business activity in the territory of and the amount a non-resident has to pay in accord-
Ukraine a permanent representation pays the tax from ance with the rules of international agreements.
its income received at the rate of 25%.
In order to avoid double taxation a Certificate (or its
Value added tax (VAT) notarized copy) should be obtained which confirms that
a non-resident is a resident of the country having con-
Permanent representations of a foreign enterprise are cluded the international agreement. Such Certificate
subject to general procedure of registration by a tax- is issued by competent authorities of an appropriate
payer of value added tax (paragraph 1.2. of the Law of country according to the Appendix 1 to the Procedure of
Ukraine “On the Value-Added Tax”). Therefore in the exemption (reduction) of tax of income originated from
case that the amount of transactions for goods sales Ukraine in order to avoid double taxation, approved by
exceeds UAH 300 thousand (approximately USD 60 Decree of the Cabinet of Ministers of Ukraine No.470,
thousand), it has to be registered as a value added dated 06.05.01 or under the laws of such country.
tax payer. Hereinafter it is subject to the same rules of
imposing value added tax which are effective for the c) Joint venture
residents of Ukraine.
Another way of making investments in Ukraine is
Social funds through a joint venture. It should be mentioned that
carrying out business activity in Ukraine according to
When using the work of employees the representation such a scheme is exposed to a great number of tax
of foreign enterprises shall be registered at: risks. The reason for this is the unclear and incomplete
description of taxation process of above mentioned
• Pension Fund; transactions in Ukrainian laws. As a result the partici-
pants of joint activity face many situations which are
• Social insurance fund in connection with temporary unregulated.
disability;
Civil and tax rules interpret joint activity in different
• Fund of mandatory state social insurance in case of ways.
unemployment;
Since Article 1130 of the Civil Code of Ukraine indi-
• Fund of mandatory state social insurance in case of cates that according to an “agreement for joint venture,
accidents occurred in the course of production and the Parties (Participants) are obliged to operate jointly
also professional diseases. without a creation of legal person in order to achieve a
particular goal which does not contradict the law. Joint
As a consequence, contributions are paid to the men- activity can be carried out on the basis of pooling of
tioned funds on the basis of the labor compensation all participants’ contributions (common association) or
fund (salary). without such pooling”. In this case the agreement is
concluded in the written form (Article 1131).
Existing rules of international agreements in the
course of operating permanent representations Under terms of the Civil Law a joint activity is not a legal
entity and it can be followed both with the pooling of all
When paying income to a non-resident, the permanent participants’ contributions and without it.
representation may face additional expenses related to
tax payments. Thus, when representation pays income The absence of legal person results in the impossibil-
originated from Ukraine, withholding tax is paid at the ity of inclusion of such an agreement into the Uniform
rate of 15%. State Register of Enterprises and Organizations of
Ukraine with appropriate assignment (USREO).
Exemption from or reduction of taxation on such profits
is legislated within international agreements on double Moreover, in case when a non-resident takes part in a
tax elimination. Thus, Paragraph 3 of Order, approved joint venture such agreement is subject to state regis-
by Decree of the Cabinet of Ministers of Ukraine No. tration in the Ministry for Economic Affairs. The proce-
470, dated 06.05.01 indicates that rules of international dure contains the Provision for the procedure of state
agreement are applied by way of: registration of agreements (contracts) for joint invest-
ment activity with the participation of foreign investor
• exemption from taxation of profits received in approved by the Decree of the Cabinet of Ministers of
Ukraine; Ukraine No.112, dated 30.01.1997.
100 Uniting Leading Companies from over 50 Nations Across the Globe
Tax laws stipulate that a joint venture without a legal the Law of Ukraine “On the taxation of the enterprises’
person creation is carried out on the basis of a joint profits”);
activity agreement assuming pooling the cash funds
or property of the participants to achieve common 3) to follow tax purposes, operations carried out be-
business purposes (subparagraph 7.7.1 of the Law of tween the joint venture participants are considered to
Ukraine “On the taxation of the enterprises’ profits”). be relationships on the basis of separate civil law con-
tracts (subparagraph 7.7.6 of the Law of Ukraine “On
This means that recognition of joint venture for tax pur- the taxation of the enterprises’ profits”).
poses is possible only in case there are some contri-
butions. Following this condition, the mentioned agree- In other words, joint ventures require appointing an op-
ment is registered in the tax authorities according to erator (a person responsible for accounting keeping),
Procedure of accounting for payers of taxes, charges - income taxpayer. It is this person who will be respon-
(compulsory payments), approved by Order of State sible for taxation payments (accruals) on the part of
Tax Administration of Ukraine as of 19.02.98 No. 80 income received by joint venture participants.
To make a decision about establishing the joint venture Along with it, when a resident is a participant in the joint
for tax purposes, it is necessary to consider the follow- venture, there is a risk of double taxation on payment of
ing issues: income received from joint venture to this person. This
risk is connected with such rules:
1) Participants’ contributions into joint venture are
exempted only in case cash investments take place. 1) subparagraph 7.7.3 of the Law of Ukraine “On the
Transfer of tangible assets is levied on a common ba- taxation of the enterprises’ profits” - payment (accru-
sis (subparagraph 4.2.5 of the Law of Ukraine “On the als) of the part of income received by joint venture par-
taxation of the enterprises’ profits”, p. 12 of Procedure ticipants is to be levied by tax at the rate of 25% irre-
of tax accounting of the results of joint venture in the spectively of the receiver of this payment;
territory of Ukraine without legal person creation).
2) subparagraph «e» of p. 13.1 of the Law of Ukraine
2) accounting of results of joint venture is kept by an in- “On the taxation of the enterprises’ profits” – resident’s
come tax payer, who is authorized to it by other parties profits received from joint venture in the territory of
according to agreement terms (subparagraph 7.7.2 of Ukraine are taxable at rate of 15%. A similar require-
Standard
# LLC Representative Office Joint Activity
of Comparison
Is not a legal entity (3 art. Without creation of legal entity
1 Legal S tatus Legal Body
95 CKU) (i. 1 art. 1130 CKU)
Determines by the legal On a certain term (i. 5 art. 1141
On a certain term or on indefinite
2 Terms of creation body who creates repre- CKU) or permanently (i. 1 art.
term (i. 5 art. 1576 CKU)
sentative office 1142 CKU)
The size of statutory fund must Joint activity can be carried
put together not less the equiva- out on the basis of participants
Legislative requirement is
3 Statutory fund size lent of 100 minimum wages at the association (simple society) or
absent
moment of LLC creation (i. 52 art. without the participants associa-
1576 CKU) tion (i. 2 art. 1130 CKU)
Before state registration 50%,
Statutory fund man-
4 other – during the year (i. 3 art.
ner of payment
144 CKU)
Statutory docu- Enactment, issued by le- Agreement on joint activity, in
5 Statute (art. 143 CKU)
ments gal body (i. 3 art. 95 CKU) writing (art. 1131 CKU)
Legal body, who created
6 Founders Physical and legal bodies Physical and legal bodies
representative office
Minimum – one (i. 2 art. 141 CKU)
Legal body, who created
7 Founders number Or Not less than two
representative office
Maximum – ten (i. 1 art. 141 CKU)
Changeable legal body,
Obligation respon- Within the limits of cost of hold-
8 who created representa- By agreements of parties
sibilities ings (i. 2 art. 140)
tive office
Distribution of profit is car-
ried out by a legal entity Order of profit distribution is
9 Profit sharing Participants draw dividends
who created a representa- established by agreement
tive office
www.chamber.ua
101
ment is contained in p.9 of Procedure of tax accounting is seems rather difficult to avoid double taxation. One
of the results of joint venture in the territory of Ukraine of the variants is to protect one’s own interests in the
without legal person creation), approved by Order of court.
State Tax Administration of Ukraine as of 30.09.04 No.
571. Legislation also does not contain any direct possi- Apart from income tax, the joint activity also relates to
bilities for offsetting the mentioned amounts. Moreover, the person subject to registration by a VAT payer (p.
sticking to State Tax Administration of Ukraine in Kiev 1.2 of the Law of Ukraine “On Value Added Tax” as of
city: “income from joint venture is subject to taxation at 03.04.97 No. 168/97-VR). There are also no privileges
the rate of 25%, and if a non-resident represents the for the mentioned operations established by the laws.
party of the joint venture agreement, then on payment
of income from joint activity, the authorized taxpayer is Basically, nowadays the existence of joint venture in
to withhold the tax from such income” (see Letter as of Ukraine is connected with many issues and situations
19.01.06 No. 86/10/31-106). which are still unregulated. This leads to participants’
having certain problems, the solution of which is often
Taking into consideration this interpretation of the rules, connected with tax risks.
This article provides some general guidance on tax Scheduled, ad hoc and cameral tax audits conducted
disputes in Ukraine, with particular emphasis on cer- by the tax authorities.
tain practical considerations. The way tax disputes
are handled is similar to other European countries, but Scheduled tax audits are conducted at a taxpayer’s
Ukraine has its own peculiarities that should be kept in premises and inspect every tax that a taxpayer is obliged
mind when planning to do business. to pay. This type of audit may only be performed by the
tax authorities once a year. The tax authorities must
Disputes between taxpayers and tax authorities could provide written notification to the taxpayer of the audit
initially arise when conducting a tax audit. At this stage at least 10 calendar days before it is due to start. The
taxpayers may try to contest the grounds for a tax audit audit must then be completed within 20 business days,
or claim that the tax authority has no grounds for re- although this period can be extended by up to 10 busi-
questing certain documents. The results of a tax audit ness days. Small businesses should be audited within
are set out in an “act of tax audit” (if a tax violation is 10 business days, but this can be extended by up to
revealed) or in a “reference” (if no tax violation is re- five business days.
vealed). On the basis of these, the tax authority sends
out a “tax assessment notification” to a taxpayer, which Ad hoc tax audits are also conducted at a taxpayer’s
sets out the amount of tax that they are liable for. To premises, but are aimed at inspecting a specific tax
protect the taxpayer’s rights, special legal procedures due and/or some of a taxpayer’s transactions. There
apply. is no limit on the number of times it may be performed,
and the tax authority does not need to provide prior
Set out below is a description of the types of tax audit, written notice. An ad hoc tax audit must be based on
the legal grounds for conducting them and the proce- one of the following grounds:
dure that must be followed. Also included is informa-
tion about tax assessment and the types of penalties • if a taxpayer fails to provide the tax authority with a
that apply, the legal process used to protect taxpay- written response or explanation on a tax authority’s
er’s rights and the point at which avoiding paying tax request;
amounts to a criminal offence. • if a taxpayer fails to file tax returns in a timely manner;
102 Uniting Leading Companies from over 50 Nations Across the Globe
www.chamber.ua
103
• if a taxpayer has filed a complaint against a tax in- liabilities (this fine applies in addition to the previous
spector’s violations committed in the course of a tax one);
audit; • 10% of the understated tax liabilities for each report-
• if a taxpayer initiates a reorganization or liquidation ing period, but not exceeding in aggregate 50% of the
procedure; understated tax liabilities;
• if an audit is required for a criminal case, and is initi- • 5% of the assessed tax liabilities as a result of cam-
ated by the tax police to investigate a taxpayer’s busi- eral tax audit;
ness transactions and the supporting documentation; • 50% of assessed tax liabilities if they constitute a
• if a disciplinary or criminal procedure is initiated ‘large’ amount, which is UAH772,500 for the year
against a tax inspector who has conducted a tax au- 2008 (this fine applies in addition to other fines listed
dit, provided that the tax audit in question resulted in herein);
a lower amount of tax paid to the State budget than • 10% of the paid tax liabilities, if payment is up to 30
expected; calendar days late;
• if a taxpayer claims a value added tax (VAT) re- • 20% of the paid tax liabilities, if payment is between
fund in an amount exceeding UAH100,000 (approx. 31 to 90 calendar days late;
USD20,000). • 50% of the paid tax liabilities, if payment is above 90
calendar days late; and
An ad hoc tax audit must not exceed 10 business days, • 200% of unpaid tax, if a taxpayer fails to pay it when
although this period can be extended by up to five busi- it is a compulsory precondition of the sale of goods
ness days. The audit of small businesses must not last or where a taxpayer fails to withhold tax when it is
longer than five business days, although this may be required by law.
extended by two business days.
With regards to VAT, a tax authority may issue a tax
Before starting a scheduled or ad hoc tax audit at tax- assessment-notification indicating the refusal of a VAT
payer’s premises, a tax inspector must provide the tax- refund, or stating the amount of understated or over-
payer with a letter of referral issued by the tax authority. stated VAT. In these cases the penalties listed above
This sets out the scope, legal grounds and duration of do not apply.
the tax audit, as well as identifying the tax inspectors.
In addition, a special written order issued by the tax Criminal liability for the avoidance of tax
authority must also be provided to a taxpayer when an
ad hoc tax audit is initiated. Failure to provide these If unpaid tax liabilities exceed a threshold especial-
documents is a sufficient legal ground for a taxpayer to ly calculated for each year (UAH 257,500 [approx.
disallow the tax audit. USD50,000] for the year 2008) the intentional avoid-
ance of tax is a crime. Only individuals can be criminal-
Cameral tax audits are conducted at a tax authority’s ly liable for tax evasion. With regards to legal entities,
premises and are aimed at discovering mathematical only individuals that represent them can be criminally
and/or methodological mistakes in tax returns submit- liable (for example, a Chief Executive Officer, Chief Fi-
ted by taxpayers. nancial Officer or Chief Accountant).
An assessment of a taxpayer’s tax liability (or the The statute of limitation for tax assessments provides
amount of a tax refund due) is conducted either by self- that assessments must be made within 1095 days (ap-
assessment (filing relevant tax returns), or by the re- proximately three years) from the date on which either
sults of a tax audit performed by a tax authority. Only a tax return was filed, or the deadline for filing a tax
the latter is discussed here. return passed. If the tax authorities do not conduct an
assessment within this period an assessment cannot
Within 10 business days of the tax audit, the tax au- be made, a taxpayer is not liable for any unpaid tax
thority must send out a tax assessment notification. and a claim cannot be brought in court. Despite this, a
This sets out the amount of tax due, as well as any tax assessment can be conducted or a dispute can be
applicable penalties. As a general rule, the amount of brought to court if: (i) a tax return was not submitted; or
the tax liability is the basis for calculating any penalties (ii) the individual or entity committed tax evasion, which
due. Below is the list of the most frequently applied is confirmed by a court decision.
penalties:
Appeal- administrative procedure
• UAH170, if a taxpayer fails to submit a tax return on
a timely basis; Having received a tax assessment notification, a tax-
• 10% for each month of delay in filing a tax return, but payer is entitled to appeal it via an administrative pro-
not exceeding in aggregate 50% of the assessed tax cedure or a court procedure.
104 Uniting Leading Companies from over 50 Nations Across the Globe
The obligation to pay assessed tax liabilities is post- Tax clarifications
poned until the administrative procedure is complete.
A taxpayer is entitled to apply to a tax authority, includ-
An administrative appeal must be filed with the relevant ing the central tax authority, for clarification on provi-
level of tax authority, which basically consists of three sions of tax legislation. As a general rule tax authorities
stages. Initially a taxpayer must file its complaint to must not bring claims against taxpayers that perform
a local tax authority that issued the tax assessment- their activities in accordance with the guidelines provid-
notification. Then, if the local tax authority refuses to ed in a tax clarification. However, tax clarifications are
uphold the complaint, the taxpayer is entitled to appeal not legally binding so they are not a complete defence
to a regional tax authority. Finally, a taxpayer has the against tax assessments and penalties.
right to appeal the regional tax authority’s decision to
the central tax authority (the State Tax Administration Appeal-court procedure
of Ukraine).
A taxpayer may skip the administrative procedure and
A taxpayer has 10 calendar days after receiving the address the court directly, claiming that the tax assess-
tax notification, and at every stage of appeal, to file a ment notification is invalid. If the taxpayer is success-
complaint. At each level of appeal the relevant tax au- ful, the notification will be declared void. The obligation
thority has 20 calendar days to respond to a taxpayer’s to pay the assessed tax liabilities is postponed until the
appeal, although this period could be extended to 60 case is decided by the court.
calendar days. If a tax authority fails to respond in 20
calendar days and this term is not extended, the tax- The administrative courts of Ukraine that deal with tax
payer’s complaint is upheld. assessment notifications are local courts, courts of ap-
peal and the court of cassation (High Administrative
A decision of the central tax authority is final and means Court of Ukraine). In practice, it takes approximately
the end of the administrative procedure. However, a one and a half to two years to go through all of the
taxpayer may at any stage of the administrative proce- courts.
dure address the court instead (which also brings ad-
ministrative procedure to an end). A taxpayer may not In very rare cases (e.g., where court decisions of the
return to the administrative procedure once the court High Administrative Courts vary despite similar facts),
procedure has been started. the decision of the court of cassation can be reconsid-
ered by the Supreme Court of Ukraine.
If a taxpayer does not contest a tax assessment-no-
tification administratively and/or through the court, it Case Law
is obligated to pay the assessed amount of tax to the
State budget. There is no case law in Ukraine. However, in prac-
tice local courts and courts of appeal tend to follow the
Burden of proof under administrative procedure position of the court of cassation if the facts of the dis-
putes are similar.
Generally, it is a taxpayer’s obligation to prove under
the administrative procedure that a tax assessment Burden of proof in the court
made by a tax authority is faulty and misleading.
Formally, the burden of proof to show that the tax as-
Tax compromise under administrative procedure sessment notification was issued on legal grounds is
with the tax authority. However, as a matter of practice
A “tax compromise” occurs when a taxpayer’s complaint it is in a taxpayer’s interest to provide its own relevant
under administrative procedure is partially satisfied in evidence to enhance its arguments before the court.
exchange for a taxpayer’s consent to pay part of the
assessed tax liabilities. The justification for entering into Time frames to file the claim
a tax compromise is that it will provide a quicker resolu-
tion when compared to a lengthy court procedure, and Ukrainian law does not set clear timeframes within which
payment of some, if not all, of the unpaid tax. a claim must be filed with the court. A number of tax law-
yers and consultants suggest that a claim must be filed
Conflict of interests rule within 1095 days (approximately three years). However,
tax authorities state that a claim must be made within
If the legislative provision that sets out taxpayers’ rights 10 days of either the date on which the tax notification
and obligations could be interpreted in a way favour- was received, or the date on which a response from the
able to the tax authority or the taxpayer, the interpreta- tax authority was received. If a taxpayer files a claim
tion used and relevant decision must be in favour of within this period, the amount of the tax liability remains
the taxpayer. unsettled until the outcome of the court proceedings. If
www.chamber.ua
105
a claim is made after this 10 day period, according to this amount to the State budget. At the same time, the
the tax authority’ standpoint, the tax liability specified be- taxpayer has appealed to the court of cassation and is
comes settled, and the taxpayer must pay the tax (and waiting for its case to be heard. In this situation a tax-
later try to get a refund, if its claim is upheld). payer may face the following problems: (i) practically
there is quite a long period of time between appealing
Validity of the court decision the decision and the court of cassation considering the
case; and (ii) there is no clear legislative procedure to
A decision of a local administrative court comes into refund taxes paid following a decision of the court of
force immediately after a court of appeal has reviewed appeal if the court of cassation then revokes that deci-
the case, or alternatively after the term for appealing sion.
the decision has expired.
Recent trends in court practice
In practice, the vast majority of decisions come into
force after a court of appeal considers the case. How- The Supreme Court of Ukraine tends to use terms that
ever, the decision of the court coming into effect on do not have a clear definition in Ukrainian tax laws, for
this date may cause some inconvenience. Consider example, ‘economic substance of transactions’ and
the following example. A taxpayer loses a case in the ‘true business goal of transactions’. This should be
court of appeal, and because of this, the tax liability is taken into account when a taxpayer is planning its evi-
settled and the taxpayer must pay (and actually pays) dence strategy.
Non-residents inNon-residents entities in Ukraine are owned by a non-resident and located in Ukraine (it
considered to be foreign companies (e.g., legal enti- also includes the property of permanent representa-
ties established in different forms and branches, rep- tive office);
resentative offices) operating according to the laws • income derived from trading in securities or other cor-
of another country. Income received by non-resident porate rights;
companies from their business activities in Ukraine is • income earned from joint venture activities and ful-
subject to withholding tax. The basic rate of withholding filment of long-term contractual relationships in
tax for non-residents is 15%. Ukraine;
• fees from the performance of cultural, educational,
The following types of income are deemed to be in- religious, sport, and entertainment activities by non-
come derived from the business activities of non-resi- residents (or by their authorized person) in Ukraine;
dent companies in Ukraine (i.e., income derived from • fees for broker, agent or commission services per-
Ukraine): formed by a non-resident in Ukraine and derived from
residents or permanent establishments;
• interest, discount income, which is paid in favour of • insurance contributions and premiums or reinsurance
a non-resident, including interest on debt obligations of risks in Ukraine, including insurance of life risks or
issued by a resident; insurance of residents for risks outside of Ukraine;
• dividends paid (accrued) by a resident; • lottery winnings (except for state lottery), and other
• income in the form of royalty, freight and income de- gambling proceeds made in Ukraine;
rived from engineering services; • income from charitable contributions and donations in
• leasing (rental) income received by a non-resident favour of non-residents;
(i.e. Lessor) from residents and permanent repre- • other income received from the business activities
sentative offices; of a non-resident (its permanent establishment) in
• income derived from the sale of real estate property Ukraine, except for income in the form of compen-
106 Uniting Leading Companies from over 50 Nations Across the Globe
Table No. 1
Withholding tax rate ap-
No. The type of income:
plicable to the income:
6. Income derived from sale of discount bonds or state treasury bills 25%
sation for the value of goods (services), transferred • The individual maintains an established residence in
(rendered) to residents from non-residents (its per- Ukraine, despite additionally maintaining a foreign
manent establishment), including the value of inter- residence (likely accompanied by a residency per-
national telecommunication or international informa- mit);
tion support services. • The individual maintains its centre of vital interests in
Ukraine (e.g. family members of an individual live in
Some income is taxed at other rates ranged from 0% to Ukraine, an individual is registered as a private entre-
25%. Particularly, special withholding tax rates apply to preneur in Ukraine, etc.);
the following types of income as described in Table #1. • The individual spent greater than than 182 days on
the territory of Ukraine in the tax reporting period (as
Tax is withheld before or simutlaneously with payment evidenced by the entry/departure stamps made by
of the income derived in Ukraine to a non-resident, un- the immigration office of Ukraine in the individual’s
less the effective income tax treaty between Ukraine passport);
and the other contracting state envisages otherwise. • The individual is a stateless person with no citizenship
Thus, the tax rates mentioned above may be reduced or or nationality, the status of such individual should be
avoided, should the provisions of the applicable income defined in compliance with international law regula-
tax treaty apply. The main condition for application of an tions.
income tax treaty is the evidence of a residence certifi-
cate issued by an authorized body of the foreign coun- Any other individual not within the one of the aforemen-
try. A residence certificate must be properly legalized tioned categories is not considered a resident of Ukraine
(apostilled) and translated into Ukrainian language. for taxation purposes, regardless of whether they are
considered a resident of another country or not.
According to Ukrainian legislation, the income of a non-
resident generated from its permanent establishment Residents of foreign countries are taxed only on income
in Ukraine is subject to taxation following the rules set derived from Ukraine, including any and all income ac-
for Ukrainian residents. Such income is taxed at a rate crued or obtained for the performance of activities or
of 25%. services in Ukraine.
Taxation of Non-Resident Individuals in Ukraine A tax rate of 15% applies only to the salary of non-resi-
dents of Ukraine paid by a tax agent (i.e., a resident
An individual is considered to be a tax resident of entity) and a double tax rate (i.e., 30%) applies to any
Ukraine, provided one of the following conditions is sat- other income derived in Ukraine and received by a
isfied: non-resident during a reporting period.
• The individual is a citizen of Ukraine; A non-resident with income sources in Ukraine will be
• The individual maintains a place of residence in taxed at the applicable personal income tax rates, as
Ukraine; are summarized in the table below.
www.chamber.ua
107
A non-resident is exempt from taxation on certain do- • Amounts of compulsory state social security levies;
mestic income sources, including: • Some other payments.
• Income from state bonds issued by the Ministry of Fi- Non-residents may be to avoid double taxation and
nance of Ukraine and winnings from state lotteries; credit tax paid in Ukraine in their country of residence
• Alimony received from residents; should there be an income tax treaty between Ukraine
• Amounts received from employers with respect to and the individual’s country of residence, which pro-
certain types of medical treatment and services; vides for tax credits or deductions for qualified foreign
• Amounts of some charitable payments; taxes.
Table No. 2
Tax rate applicable
No. The type of income:
to the income:
Employment income and income of non-residents derived from domestic sources, and
equated with employment income, e.g.. income of the non-residents who:
• work for companies located in Ukraine, including representative offices of non-resident
1. 15%
legal entities, regardless of the payment source of such income;
• are members of the managerial bodies of the company/private entrepreneur resident of
Ukraine, other benefits at the expense of such resident.
5% (no taxation ap-
2. Interest
plicable till 2010)
3. Dividends and royalty 15%
Income obtained from the sale of immovable property, provided the immovable property
sold by the non-resident exceeds 100 sq. m. per calendar year; should the square of the
4. 30%
sold immovable property exceed 100 sq. m., the part of income proportional to the square
of the property exceeding 100 sq. m. is subject to taxation.
5. Income obtained from the sale of movable property 30%
6. Gifts (except for gifts from relatives) 30%
7. Inheritance (regardless of relation degree with the testator) 30%
Investment income, determined as a positive difference between the profit obtained by a
8. 30%
non-resident from sale of the investment assets and the initial value of acquisition
9. Prizes 30%
10. Income obtained from civil-law agreements, lease agreements etc. 30%
108 Uniting Leading Companies from over 50 Nations Across the Globe
PERSONAL INCOME TAX
By Grant Thornton Ukraine
www.gtukraine.com
The basic legislative act governing personal income • It is impossible to determine the country in which the
tax (PIT) in Ukraine is the Law of Ukraine “On Tax on individual has his/her center of vital interests, or if the
Profits of Individual” (the PIT Law), dated 22 May 2003, individual does not have a permanent residence in
as amended. The PIT Law became effective from 1 any country, then the individual will be considered a
January 2004. It replaced the Decree of the Cabinet Ukrainian tax resident if he/she is present in Ukraine
of Ministers of Ukraine “On the Personal Income Tax,” for at least 183 days of the tax period (including days
that has been remaining the paramount legislative act of arrival and departure);
in the field of personal income taxation for more than
ten years. The PIT Law has introduced a number of • If tax residency is impossible to determine on the
significant changes and amendments to the taxation of basis of the above provisions, then the individual will
individuals, including tax rates; rules and principles of be a tax resident of Ukraine if he/she is a Ukrainian
tax residency qualification and taxable income deter- citizen; and
mination; tax administration; favorable tax credit rules;
and others. • The PIT Law stipulates that an individual’s own iden-
tification of his/her principal place of residence on
Tax Residency the territory of Ukraine according to the procedure
established by the PIT Law, or the registration of an
The new PIT Law establishes a new definition for the individual as a self-employed person in Ukraine, will
taxpayer’s residency. The concept of the determination constitute a sufficient basis for identifying such indi-
of tax residency is now very similar to that of most bilat- vidual as a tax resident of Ukraine.
eral double taxation treaties drafted on the basis of the
OECD Model Tax Convention. A person who fails to qualify as a Ukrainian tax resident
will be considered a “non-resident” for purposes of the
Specifically, unlike the prior Ukrainian legislation which PIT Law.
linked the taxable status of a foreign individual solely
to his/her physical presence in Ukraine during more The latter criterion of “one’s own identification,” as well
than 183 days in a tax (calendar) year, the PIT Law as the variety of the criteria in and of themselves, com-
lays down a number of other conditions (e.g., domicile, bined with the absence of clear guidance, might create
center of vital interests, citizenship, etc.), under which situations where an individual is treated as being a tax
a foreign individual may be treated as a tax resident in resident in several jurisdictions simultaneously. Moreo-
Ukraine. ver, the above set of criteria makes it difficult in practice
to identify the solely correct criterion when several of
To be more precise, pursuant to the PIT Law, the them can be easily applied. The latter circumstances
following criteria are used to determine the resident can also raise a conflict between two residences. Cer-
status of a person: tainly, in the majority of cases, the rules of the effective
double tax treaties may be applied to solve such resi-
• A tax resident of Ukraine is an individual who has a dency conflicts.
permanent residence in Ukraine;
Taxable Income
• If an individual has a permanent residence in more
than one country, he/she will be a tax resident in that Ukrainian residents are taxed on their aggregate world-
country, with which he/she has closer personal or wide income. Non-residents are taxed on all income
economic, ties (e.g., his/her center of vital interests). derived from sources within Ukraine, but are not eligi-
The PIT Law specifically outlines that the place of the ble for certain exemptions or deductions available to
permanent residence of the members of an individu- residents.
al’s family or the place of an individual’s registration
as a business entity (as a subject of entrepreneurial The PIT Law provides for a list of items specifically in-
activity) will be a sufficient (but not an exclusive) con- cluded in the gross income of either a resident or a
dition for determining the location of the center of vital non-resident individual. These include, among others,
interests of such individual; wages and salaries, gifts, insurance payments and
www.chamber.ua
109
premiums, rental income, fringe benefits (including • bank deposits which will become subject to income
the cost of received rent, property, food, assistance tax at the rate of 5% commencing 1 January 2010;
of home servants, expense reimbursements, amounts
of financial aid, etc.), amounts of punitive (vs. actual) • prizes (except for the state lottery), which are subject
damages received, forgiven debts and obligations, in- to income tax at the double rate, i.e., 30%;
terest and dividend income, investment income and
inheritances. • real estate which is subject to tax at a rate of 0%, 1%,
or 5% of the appraisal value of the real estate de-
At the same time, a number of items are specifically pending on the size of the real estate and the number
excluded from the taxable income of both residents of real estate sale transactions over a year);
and non-residents. Apart from such excluded items,
the PIT Law allows an individual resident taxpayer to Special rules of taxation are established for transac-
claim as non-taxable credits certain expenses made tions with immovable and movable property, inherited
during the taxable year, provided that such expenses property, and other specific items.
can be confirmed by the relevant documents. In par-
ticular, an individual resident taxpayer will be able to Income received by foreign individuals from Ukrainian
claim as his/her tax credit, inter alia, the following: a sources is subject to tax at the double rate, i.e., 30%, with
part of the interest payments made under a loan se- the exception of certain types of income, namely, inter-
cured by a mortgage, provided that the loan is used to est, dividends, and royalties, which are subject to tax at
finance the purchase or construction of the taxpayer’s the rate of 15%. It is necessary to notice, that according
principal home; charitable contributions of not less to Tax Administration official letter #50 from 29 October
than 2% but not more than 5%, of the taxpayer’s an- 2004 incomes of non-residents in the form of wages and
nual taxable income; a certain amount of expenses rental income are subject to tax at the rate of 15 % too.
made in favor of educational institutions for receiv- It is necessary to notice that the specified tax rates to in-
ing professional or higher education; and a certain comes of the non-resident are applied taking into account
amount of expenses paid to health institutions for per- tax rates and the privileges provided Dable Tax Treaty.
sonal medical needs.
Tax Administration
The PIT Law also allows certain categories of taxpay-
ers to reduce their respective incomes by an amount of The general rule of the PIT Law is that the duty to
one minimum statutory salary (calculated on a monthly charge, collect, and remit personal income tax to the
basis) effective 1 January of the relevant tax year. This Government is placed on the payers of the relevant in-
is similar to a tax exemption and is called a “social tax come, i.e. tax agents in the parlance of tile PIT Law.
benefit”. Special groups of taxpayers (e.g. students, Thus, employers are deemed to be tax agents with re-
single mothers, war veterans, et al.) are eligible for an spect to the personal income tax clue on the wages
increased social tax benefit. and salaries payable to their employees. The PIT re-
turns should be filed on a quarterly basis, not later than
Taxes paid by a resident taxpayer outside Ukraine may the 40th calendar day of the subsequent quarter. The
be taken as credits against Ukrainian taxes due, in the tax due should be transferred to the tax authorities si-
event that the taxpayer provides a written acknowledg- multaneously with wages payment.
ment from the foreign tax authority that such foreign
taxes have, in fact, been paid. However, the total of If income is received through payers which are not re-
such foreign tax credits may not exceed the amount of garded by the PIT Law as tax agents, then the payees
the Ukrainian personal income tax due. thereof’ will be obligated to file an annual tax return for
the year in which such income will have been received.
Таx Rates A tax return may also be lodged voluntarily if a tax resi-
dent, otherwise not required to file a tax return, wishes
As of 1 January 2004 the progressive PIT was replaced to claim the applicable tax credits. In these cases the
with a flat tax rate system. Effective from 1 January annual tax return should be filed to the tax authorities
2007, the 15% flat tax rate applies to almost all income not later than the April, 1st of the subsequent year.
received by a resident individual in Ukraine, regardless
of the source of income. Personal income tax liability must be extinguished within
30 calendar days after the issuance of the relevant tax
Special rules, however, are applied or will be applied to invoice by the payee’s local tax office. Personal income
the taxation of: taxes are payable in the local Ukrainian currency.
110 Uniting Leading Companies from over 50 Nations Across the Globe
XII TRANSPORT & LOGISTICS
INTEGRATED LOGISTICS SOLUTIONS
By UVK
www.uvk.ua
Ukrainian Logistics Sector’s Current Stage and • Food and non-food production
Future Prospects. 3PL’s Solutions for Retailers’
Regional Expansion • DYI products
In January-September 2008 [by the date of writing this As long as Ukraine’s logistics is showing positive indi-
article] Ukraine’s logistics market featured growth index ces of growth, it will probably attract more new (trans-
– nearly +8%, like-for-like; to compare: the same period national) 3PL’s planning to penetrate the local sector,
in Europe showed as few as +3%, and such index is re- including through M&A deals with regional operators
peatable for the last several years. The earlier forecast as experts in local specifics. However, not all 3PL’s are
production sector’s +8% and retail’s +10% trends prom- pursuing the strategy to provide integrated logistics so-
ised a lot for the local logistics. However, the global cri- lutions, as many of them would decide on specializing in
sis – to affect (despite multiple objective declarations) a chosen segment or on best-performance services.
Ukraine’s economy, which had been standing from the
knees and ignited to integrate in global business envi- Also, logistics’ key target groups are quite consistent
ronment after joining the WTO – has forced the market in evolutionarily increasing their requirements (in quan-
players to, at least many, put an initiative on hold. tity and quality) set before integrated logistics services
providers, which in turn urges the players to continu-
According to the results of an own all-round research, ously improve service level, demanding even more op-
the volume of the local segment of contracted, or 3PL, erational flexibility.
logisitcs amounted to some US$ 225-250 mln in 2007.
Actually, this amount is aggregate revenues of 8 pro- Besides the above, there is another trend related to
fessional 3PL companies operating in Ukraine (with logistics’ allied sectors, such as capital and financial
UVK holding an 18% share thereof). However, judging services market, industrial development, and others.
from Ukraine’s 2007 goods turnover volume of some Until lately, all these had shown an obvious growth,
US$ 40 bln, the potential is all ahead. however, they are now pending re-structuring and
amalgamation.
A globally recognized trend for outsourcing non-core
business activities is currently spreading in Ukraine like There are certain factors to negatively influence the
never before, as one might say. To note, outsourcing market’s future development, among which:
of logistics processes is becoming even more proven-
popular in all target groups (with different dynamics 1) stagnation in a global and Ukrainian banking and
though), representing such sectors: finances sectors, that is halting major investment
projects;
• Retail (including franchising)
2) lack of in-demand logistics capacities (A class
• Automotive aftersales ambient, temperature-controlling and specialized
warehouses, high-quality vehicles, etc.) from allied
• Chemicals and household goods developers and transportation companies;
• PC products, softwares, and household / portable 3) a strong deficit of qualified personnel for the mar-
electronics ket, both ‘white’ and ‘blue collars’ (especially, in the
www.chamber.ua
111
context of the gradually increasing requirements to • market volume approximated at US$ 32 bln in 2007
each employee in a chart, demanding multi-func- (4.3 times more than in 2000; +23% ‘like-to-like’).
tionality);
The so-called ‘modern trade’ comprises 29 nation-wide
4) under-development of certain sub-contractors, and regional FMCG retailers with over 800 stores all
which makes it materially more difficult for a 3PL to over Ukraine, whose money share is nearing 10% of
assure an adjusted and anticipated service level at the gross turnover in the retail sector.
all times;
Outlining latest trends on the retail market, The Euro-
5) a present-day mental unpreparedness and econom- pean Logistics Association mentions “re-structuring by
ics under-education of a majority of the logistics’ retailers of their costs”, with a shift from own logistics
target groups, to some extent, hampers a massive management to value-added services (such as region-
dissemination of an outsourcing philosophy; ally demanding packaging and adaptation of products
to consumers’ tastes). Outsourcing logistics services
6) lack of logistics and related local laws to regulate the definitely enables retailers to focus on core business.
sector; and This is exactly the way certain global players are pur-
suing, enjoying up to 25% of logistics costs (i.e. 1-2%
7) non-transparency of certain local logistics’ domains off on-shelf prices) optimized through cooperating with
(such as customs clearance); 3PL’s (according to A. T. Kearney’s studies). As a retail
market develops, and competition becomes stricter,
8) a very sensitive dependency of the market situation these issues are believed of a paramount importance,
on US Dollar’s up’s and down’s and fuel price fluc- such as:
tuations.
• guaranteed deliveries to stores;
What Change to Implement in Crisis?
• high level of stock management;
The global logistics history has repeatedly proven that
CEP and 3PL operators feature the utmost flexibility for • professional management of DC’s, and
change at hard times, in contrast with other logistics
market players. Leading Ukraine-operating 3PL’s cur- • intra-chain distribution.
rently view these tasks as their primary:
At crisis times when a retailer’s goal is to maximize
1) optimization of internal processes and procedures; earnings from every single sq. m at stores, struggling
hard to keep on-shelf prices unchanged, the following
2) enhanced client-oriented marketing; tasks become even more critical and are often the only
healing means:
3) revision of strategy and further development plans,
focusing on core markets and being selective with • internal optimization – through getting rid of non-profit
big investment projects; and non-core assets, revising in-house processes,
and dismissing non-core departments;
4) providing tailor-made services and diversifying prod-
uct offering; • stronger marketing – through realizing a conserva-
tive assortment policy and starting private label pro-
5) stricter management of human resources, and grams;
6) remaining a predictable partner through quality as- • implementation of new technologies – through bar-
surance and cost management. coding products, introducing promo-units, and online
retailing, and
Focus on Retailers
• outsourcing of non-core activities.
Retail is obviously the major target market for logisitcs
services providers. Ukraine’s retail can be briefly char- And normally, these are the benefits that a 3PL can
acterized today by these: bring a retailer by serving outsourced logistics:
• over 1,000 stores nation-wide; 1) retailer’s investment purposes relate to own core busi-
ness development (i.e. stores, working capital etc.);
• over 150 retailers (of which 20 are top operators);
• all contemporary retail formats and commodity cat- 2) retailer’s enjoying benefits from a 3PL’s network
egories exist; services (including innovations);
112 Uniting Leading Companies from over 50 Nations Across the Globe
3) retailer is faster in expanding regionally – through a Target groups are, in turn, expected to shift their de-
3PL’s distribution logistics network; mands from ad-hoc ordering separate services from
3PLs towards assigning for integrated solutions on a
4) retailer benefits from a change implemented by a long-term basis. Commercial offices of well-known mul-
3PL as a client-dedicated service provider; ti-national FMCG producers (who enjoy a better-quality
service level in enhanced economies) are likely to play
5) retailer is smoother to enter a high / low season, tak- ‘the first violin’ in appealing to local logistics services
ing advantage of a 3PL’s flexibility. providers for new standards of work – to not only get
limited to operational performance, but also cover HR,
Future Perspectives managerial system, EDI, QMS certification and other
critical issues.
To conclude from the foregoing, Ukraine’s logistics
sector will survive. And the following principles are be- In marketing terms, the getting-even-more-severe
lieved to be key and decisive in ‘to be’ or ‘not to be’ for ‘fight’ for a target client would probably force logistics
a 3PL: team-working and result orientation, innovative- companies to realize pro-active policies, with missions
ness and professionalism, dedication and flexibility. focused on partner-style protection of their client’s busi-
ness interests, assistance in clients’ further successful
Monitoring of latest innovations is an important activity progress, and contribution to the latter’s increasing rev-
of any 3PL, especially Ukrainian logisitcs services pro- enues and profits, as well as with marketing communi-
viders. Local operators fully realize that to benchmark cations targeted on increase of loyalty.
international logistics practice and localize best know-
how’s enables to meet key accounts’ expectations ‘to- Objectively, a major issue is about logistics processes
morrow’ and is very likely to tangibly contribute to the proving even more sophisticated on a global level. It is
success in a more strategic prospective. Innovations merely on a weekly basis that new supply chains and
are not already restricted, for example, to an operator new routes appear, while distances between trans-na-
just integrating WMS, TMS, and CRM into one single IT tionals’ headquarters and subsidiaries extend – which
system or launching a 2-level bar-coding technology to breaks an instantly found coordination of all players
lessen an acceptance lead time. Present-day initiatives involved in 3PL’s chains. Considering the current insta-
are aimed at creating information platforms, integrated bility and unpredictability of trade, a 3PL’s function to
with clients, friendly for clients, and with their require- comprehensively manage all processes within a supply
ments realized. Innovativeness is definitely proving a chain turns from a primary to vitally important task. All
must-have business approach; to add, at a whole com- processes under a distribution logistics or supply chain
pany’s level. management concept become subordinate to the ul-
timate goal of logistics as it is – to just-in-time deliver
Legislatively, the mentioned under-development of a client’s goods, safe from damage and at an agreed
Ukrainian legislation relating to logistics, customs clear- cost.
ance, and related domains is nothing but the opportu-
nity for the market players to ‘knock’ on statespersons’ Alternatively to 3P-logistics, 4PL and 5PL are quite ac-
doors to declare bottle-neck issues, suggest solutions, tive in developing, meaning a complete client’s stock
and get involved in developing the system to regulate and cash flows management, and virtual (electronic)
the sector. logistics management, respectively. And it is nice
to mention that these trends are also remarkable for
Operationally, 3PL’s are likely to tend to (among other Ukraine.
things) unify standards for clients’ goods and cargos in
logistics management, as well as for consumables (pack- All in all, the logistics sector is facing the era of con-
age) within value-added services (such as assembly of tinuous change, which – among otherwise – would re-
promo-units, etc.) and trays. In performance sense, lead- quire internal change at 3PL’s, including coaching and
ing 3PL’s might wish to compete with ‘low-cost’ ware- training, improvement of in-house processes and pro-
house operators or freight forwarders – instead, more cedures, etc. All these are mandatory to comply with
focusing on improving service level and nation-wide dis- in order to survive in the new business realities in the
tribution system (based on representation in regions). long run.
www.chamber.ua
113
LEASING INDUSTRY IN UKRAINE
By Euro Leasing
www.lease.com.ua
114 Uniting Leading Companies from over 50 Nations Across the Globe
Herewith, the number of signed lease contracts increased by 98% in 2007 as compared to 2006: 12.1
thousand contracts
other documents related with the vehicle use and own- Fourthly, leasing provides more flexible schemes
ership, the leasing company process and books on its than the bank loans, for instance. Leasing companies
balance. The client makes only one payment on the always try to be closer to its clients; therefore every
monthly basis. leasing agreement meets all the specific needs of the
Lessees. Moreover leasing doesn’t usually require any
• Registration of the vehicle, paying all the taxes and mortgage, which is another benefit for legal entities,
charges (transport tax, 3% to Pension Fund) isn’t it?
• Scheduled maintenance exclusively in a network of In order to provide high quality solutions for business
official service stations problems, today Ukrainian leasing companies move in
two directions:
• Setting of the winter tires
1. Net leasing (just the vehicle purchase finance)
• Tires change and storage at a specialized storehouse
of the leasing company 2. Leasing plus additional service.
• CASCO insurance in the best insurance companies Many businesses represent the increasing demand for
under the optimal terms outsourcing certain administration functions related to
corporate fleets’ organization, its functioning and cost
• Obligatory third parties liability insurance with cover- control measures. Some leasing companies in Ukraine
age of USD 1 thousand have in their product portfolios fleet management pro-
grams with full range of different services.
• The 24-hours technical support «8-800»
Fleet management was developed specially for com-
• Provision and administration of credit fuel cards panies having more than one car. This service allows
companies to focus on their business and core com-
• Delivery of a car to/from the office of a client, an airport petitive advantages without wasting a lot of time and
resources. This contributes to higher profits as the ef-
• Provision of pre-delivery cars, replacement cars, etc. ficiency of the transport costs management increases
significantly. The outsourcing allows increasing overall
Thirdly, leasing has very quick decision-making proc- productivity of the businesses due to investments of
ess – from 1 hour. While taking a loan a bank may discharged resources in other business functions, in
consider the inquiry from legal entities 2 or 4 weeks. particular for sales expansion.
Leasing companies do not have problems with the
large credit. And when a company purchases a car What are the reasons for companies to apply for
at its own expense, considerable amount of capital is fleet management program?
drawn away from the main business functions, and this
is a problem. Such problem is solved when companies 1. To cut expenses on fleet maintenance and
lease a car. management. As leasing companies are ones of
www.chamber.ua
115
the largest vehicle purchasers in the country, they Fleet management involves a lot of different services
can provide value enhanced agreements on car and options. Choosing this or that option any company
purchase, insurance or technical maintenance with can thus build up their “individual service package” and
their partners. It gives the clients’ business more easily use them to facilitate the business:
benefits including volume discount pricing.
• Technical maintenance administration and repairs
2. To accurately forecast and control the fleet expen- control, which frequently involves a personal service-
ditures. Using fleet management the clients receive manager, 24-hour technical support line, car delivery
regular reports and monitor fleet’s activity online. to the technical examination place, and every place
within Ukraine, free evacuator all over Ukraine, fuel
3. To get free of time-consuming administrative tasks, supply and provision with the repair facilities on the
including the relationships with suppliers as to the road, provision of technical consultation on car use,
procedures, checking and payment of the invoices, the nearest service stations addresses upon request,
preparation of all necessary reports. Passing these medical and legal consultations in case of traffic ac-
tasks to leasing company, definitely leads to optimi- cidents, and other options;
zation of the staff structure, administrative and tax
burden. • Administration of loss accidents, namely: carrying
out the repairs just after the traffic accident without
4. To increase the productivity of the fleet. Providing waiting for insurance compensation, call of the State
the replacement cars in the case of repairs, techni- Automotive Inspectorate, ambulance, evacuator to
cal maintenance and inspection any company can the place of traffic accident, gathering the documents
reduce losses caused by delays. Usually the repairs package for insurance company and organization of
after traffic accident are carried out before getting the damage expertise, representation of the clients’
the insurance compensation. Therefore the effective interests at the insurance company;
administration of all the repairs and loss accident
increases the useful life of the vehicles in the fleet. • Administration of the seasonal tire change, as well
as waste tires: tire change without queues, advance
5. To facilitate accounting and documents flow due to time reservation for tire change, tire keeping at spe-
centralized invoice payments – a company makes only cialized warehouses, tires delivery to any region of
one monthly payment to its fleet management partner. Ukraine, mobile tire fitting;
Hereby there is a strong background for considering the • Fuel management: administration of relationships
fleet management service the best tool to adapt every with fuel suppliers, trip tickets, all documents and re-
business for current market conditions. In Ukraine only ports preparation;
a few companies provide the fleet management. The
most experienced and well organized company among • Organization of the new vehicles purchase and trade-
them - Euro Leasing - provides fleet management serv- in: selection of the proper supplier considering price/
ice for more than 200 Ukrainian and foreign compa- quality ratio, carrying out a tender procedure for sup-
nies, has highly skilled service specialists and the wide pliers, vehicles order from the dealer, completing the
regional service network. vehicle with the additional equipment, registration and
116 Uniting Leading Companies from over 50 Nations Across the Globe
deregistration, annual technical inspection and so on; 2. Priority booking the time for undergoing the regular
maintenance;
• Drivers’ services to any city of Ukraine, railway sta-
tion, airport, the long-term parking provision, the car 3. Document flow facilitation – the company makes
washing and dry cleaning organization, etc.; only one monthly payment to its fleet management
company instead of 10 payments to different service
• Defensive driving study programs for company’s car companies;
users, which also includes estimation of driving skills
for the personnel. 4. 24-hour technical support service helpline by the ter-
ritory of Ukraine.
According to the research conducted by Euro Leas-
ing among large Ukrainian and foreign companies, the Therefore, when a company faces a need in effec-
most popular services for the corporate fleet include: tive fleet activity and cost reduction, services of leas-
ing companies provide high-quality decisions for every
1. Replacement car in the case of repairs, administra- business whether it is small, medium or large.
tion of the rental agreement, and accountancy;
www.chamber.ua
117
XIII TRAVEL & TOURISM
THE BUSINESS TRAVEL INDUSTRY IN UKRAINE
By ”Travel Centre “TRIME” –
ITP Partner in Ukraine
www.trime.ua
The organization of business travel as a separate niche designed products and latest technologies in a quick
of tourism in Ukraine started developing approximately and effective way. Just visiting exhibitions, participat-
ten years ago. During the 1990s the organisation of ing in international branch-wise forums and seminars,
business travel was the sole realm of Ukrainian tour one can be in touch with all the relative news and track
agencies, mostly being facultative. In their turn, cus- the development trends in this or that sphere, with the
tomers turned to such services only in extreme cases - aim of maintaining the competitiveness of your own
when they needed to solve complex problems (confer- business.
ences, scientific forums, exhibitions etc.), which were
of great value. While the market progresses, numerous TMCs helping hand
tour companies have billed themselves as business
travel agencies, but there are few of them sticking to It’s doubtless now, that the development of Internet re-
their alleged niche. Even though the market of busi- sources allows companies to deal with the organisation
ness travel services began to take off just a couple of their corporate travel, booking air tickets, hotels etc
years ago, specialists say that the sphere of the busi- more freely. But still company executives should un-
ness trip is developing promptly across the globe, and derstand that their employees, scouring the Internet for
Ukraine itself is being integrated in the process at a hours in search of more advantageous variants, can
rocketing rate. be a waste of staff resources, and frequently the cho-
sen one will not happen to be the best deal or package
The service demanded by time available. A recent study by Consumer Reports shows
that millions of passengers who booked directly were
The progress of business in today’s Ukraine will quite getting a bad deal for their travel dollar. Up to 40% of
obviously set its own rules as Ukraine’s WTO member- the flying public pays too much for their travel, hun-
ship opens new horizons for international cooperation. dreds of dollars more than they should to fly the exact
With this in mind, the need for professionally organised same route, same seat, same plane, same class of
business travel comes to the fore, with firms’ employ- service, same everything.
ees taking part in training courses and conferences,
including the representation of companies’ activities at So here comes the helping hand of business travel
well-known resorts, and the organization of corporate providers, so called Travel Management Companies
breaks either at home or abroad. (TMC). They are professional in organising business
travel for companies, whose business efficiency is in-
Nowadays the Occident and Russia consider spending dissolubly related to consuming business travel serv-
money on such events not to be expenditures, but vice ices.
versa – to be necessary investments – to create a top-
class team and strengthen a company’s position on the The principle advantage of TMCs is their contact with
market, thereby extending its share in it. airlines, hotels and other providers that allows for the
finding of an optimal solution in the organising of busi-
Concerning the national market, as Ukrainian spe- ness travel and the planning of travel budgets for each
cialists say, services in the organising of business corporate client individually. Travel management is a
trips have become of great demand over the last few specialised business function that balances employee
years. Obviously, more and more companies realize needs with corporate goals, financial and otherwise.
that “face-to-face” communication with both business Travel management ensures cost tracking and control,
partners and consumers allow for the exchange of facilitates adherence to corporate travel policies, real-
information regarding company’s activities, its newly ises savings through negotiated discounts, and serves
118 Uniting Leading Companies from over 50 Nations Across the Globe
as a valuable information centre for employees and Expanding the horizons
managers in times when travel is not as smooth and
carefree as it used to be. Stressing the fact, those were mostly foreign compa-
nies and representatives to use the services of busi-
Good Travel Management Companies can help a con- ness travel providers. However last years show us quite
sumer wade through the thousands of airline and tour more Ukrainian companies and corporations extending
fares that are out there and provide unbiased, objective their travel-budgets in light of expanding and progress-
counselling on all of the options available. They are ex- ing own business, searching for new activity directions
perts in understanding the intricacies of the system and and partners abroad. On the grounds of the regional
helping you take full advantage of them. They provide business development the most popular in-Ukraine di-
a one-stop shopping service for all corporate travel rections traditionally are the big regional and industrial
needs, whether it is an airline ticket, car rental, hotel, cities: Donetsk, Dnepropetrovsk, Odessa, Kharkov,
tour package, or cruise. And, they will help companies Zaporozgye and Lvov. As for the international direc-
stay within their budget. tions, one can find the expenditure of corporate travel
to the Occident and the Orient, America, and Moscow
Obstacles to slow the progress down as well.
Not only business travel providers but also consumer- For the last two years we’ve seen the notable activation
companies come together to face one of the reasons, of the movement in direction of the South-Eastern Asia
causing difficulties – there is no legislatively authorized states, also China and India, where large international
notion “business travel” existing, therefore so is not corporations place their manufactures, and organize big
the necessity of such expenses for effective business. industrial exhibitions and conferences. One of the most
These “spokes in travel business’ wheels” either lead to important directions of business travel industry which is
difficulties when organizing trips or holding some other developing at especially rapid rates is MICE (Meeting,
corporate measures, and when validating such events Incentives, Conferences, Events), what makes the serv-
for bookkeepers record or fiscal account. ices connected with organization and holding corporate
events of a great need. Taking the development trends
Speaking about the hardship of business travel industry into consideration, especially, as the Ukraine advances
in Ukraine we should also mention laborious and time- in the road to world economics, one may predict the rock-
taking procedure of drawing up visas for Ukrainian citi- eting growth of business travel industry within the next
zens in consulates of foreign states. When going abroad few years. Therefore, the role of business travel within
on business trips it does considerably complicate the the corporate structure must be placed in proper context
process of planning and organizing business travel. so that its value can be measured and appreciated.
In opinion of the World Tourist Organization Ukraine is growing number of tourists and the scope of services
one of the most perspective tourist centers in the world. rendered to them.
In particular it concerns business tourism which rep-
resents one of the leading and the most dynamically As a result of sustainable development of international
developing branches of the world economy. cooperation in the tourism sphere the number of in-
coming (foreign) tourists who visit Ukraine grows with
The development of tourism and resort industries during every passing year.
the last five years distinguishes by its positive and
stable dynamics. A new image of the Ukrainian tourist During the last 6 month over 11.3 million incoming
product competitive both in our country and abroad, travelers had visited Ukraine, that is more by 19% (or
a complex approach to the development of tourism over 1.8 million) more then during the same term in
and resorts at a local level, and the support of small 2007. The increase of the incoming travelers in 2008
and medium tourist businesses caused a constantly had been caused by the bigger number of private trip
www.chamber.ua
119
purposes from the following countries: - Poland 16% Segmentation of Incoming Tourism by Motivation
growth (or 336.6 thousand people), Belarus 33% (or (Jan-Jun 2008)
304.5 thousand people) growth, Moldova 16% growth
(or 264 thousand people), Russia 9.4% (or 226 thou-
sand people). This segments caries value of 90% of all
the incoming travel flow.
growth by 19 %
4.0 million 36 %
Eu Countries or 646.4 thousand
people flow
people
growth by 26 %
Other 0.8 million 7 %
or 174.7 thousand
Countries people flow
people
120 Uniting Leading Companies from over 50 Nations Across the Globe
Rating of top 10 main courtiers by incoming travelers:
# Number of Person Share Jan-Jun 08 / Jan-Jun 07
Total for JAN-JUL 2008 11258808 100 % + 18.3 %
1 Russia 2920440 25.9 % + 12.7 %
2 Poland 2791659 24.8 % + 21.8 %
3 Moldova 1973766 17.5 % + 16.1 %
4 Belarus 1333691 11.8 % + 33.5 %
5 Romania 643397 5.7 % + 33.9 %
6 Hungary 573066 5.1 % -4.0 %
8 The Slovak Republic 339978 3.0 % + 59.3 %
7 Germany 96069 0.9 % + 15.6 %
9 USA 59345 0.5 % + 9.4 %
10 Azerbaijan 36463 0.3 % + 3.6 %
Total 10 countries 10767874 96 %
When entering Ukraine you may proceed either through Lately, it is more and more popular had become to rent
Green or Red customs line. Save all documents you apartments for a few day or weeks of stay at the center of
receive and fill out going through customs – your will Kiev. You get more space and more extra services. Before
need these to leave the country. going to the benefits it should be mentioned the lacks: no
hotel level concierge directly at the apartment – but you
Arriving hall at the airport is small but full of taxi drivers have 24 hours assistance and company staff will be hap-
trying to offer you their services. Not cheap but they are py to fulfill your orders, the location is in the center but very
willing to barging. seldom company have several units at the same building
and the entrance might not be the best but the apartment
We suggest that you will arrange a pick up with our is. Advantages – the renovation and style of the apartment
company prior to your arrival. Simply look for the sign is much nicer then a hotel – you get what you pay for and
of your name or company and go directly to your driv- feel yourself comfortable as at home. If you wish to spend
er – who is ready to help you with your needs and safe- 100$ then you will get the level of 3 star hotel; $150-200 –
ly take you to the place. You can be sure they will have 4 star hotel and over $250 - 5 star hotel – for a double.
more responsibilities before you. As if you will not be You get the space and can have as many guests as you
happy they will not have their jobs again – unlike the want and they can stay as late as YOU will permit them to.
taxi drivers at the airport – no responsibilities and no Apartments have jacuzzi and saunas at the unit, free high
care that you will be happy as you more likely never speed internet and free local calls, some companies offer
use them again. free cell phone rental. Furthermore some companies will
offer to gain Sky Team (Delta, Air France, KLM alliance,
The trip to Kiev from the airport would usually take 30 North West) miles for every dollar you spend – no matter
minutes if not get stuck in the traffic. The first impres- what you travel for business or leisure you will use the
sion of Kiev is a city of high rises and apartments com- extra miles for the next trip elsewhere.
plexes. But the more you get to the center the more
you see of a green city. The city with golden domes While booking an apartments same as hotel you may pay
and number of chestnut trees, the city of beautiful and in cash, bank transfers or by means of major credit cards
hospitable people, the city of modern and old architec- as American Express, Master card, Visa and Discover
ture. There are places to see and must to see! Staring card (please note that there only few apartment-hotel
from the Mother of Mother Land (or as local call her Big company in Kiev who accepts credit card payment with no
Mama) as she welcomes you into the city, following by limitation – such as “Hotel Service” “Teren Plus”, “Estate
the Golden Lavra monastery and interring deep to the 2000”, “KievApartment.com”, ”Sherborne Guest House”,
history with several Cathedrals and old Podol district. “Kiev-Deluxe.com”). Using other apartment boutique travel
companies please check for all necessary travel licenses.
Hotel or your apartment must be located in the center
to be close to every possible event. There are not a Safety – if you are not looking for a trouble – troubles
big choice of 3, 4, 5 stars hotels in Kiev. So, you may will not find you. Kiev is safe place to be – especially
find that price for hotel room is not corresponded to the center. Nevertheless you will need to use common
quality and range of services provided. sense while out on the street.
www.chamber.ua
121
Here are some obvious benefits of the apartments in comparison to the hotels:
From $80 up to $300 per night with a term gradation the - $120-550 per night, less expensive hotels
Price
longer your stay the cheaper each day. are located far off from the city center
Spacey area – from 20 m2 for the smallest studio rooms
Area - Standard double room for two – 20 -30m2
and up to 150m2 for 3 rooms apartment
Comfortable for 2-6 people – depending on the size of
Accommodation - Comfortable only for 1-2 people on double
the apartment
Set of the services: visa support, transfers, tours, shop- - Check in and registration
Services
ping and etc - 24 hour check in
Feel yourself home and do not change any habits. - standard rooms with standard set of furni-
All apartments are unique and you can choose the one ture: bed(s), few stands, TV, bath
that is more looks like your own: - big beds are only in 4-5 star hotels from
comfortable furniture, big( king and queen size) beds $220 and up per night
tea, coffee, electrical tea pot, all kitchen supplies, hair - no kitchen
Qualities dryer, iron, iron board, personal slippers, soap. - in some of the hotels still no hot water during
All apartments have their own boilers –you have hot the summer season
water all the time - air condition also only in 4-5 hotels or at the
All apartments have air conditions 3 star where the price starts from 200$
No limits on your guests - no guests or limits on guest and time of visits
Cleaning each 5 days or upon request - cleaning every day
- most of the apartments have work area - in most of the hotels the only place to meet is
- direct local phone number to rent a conference room or lobby
Stay connected
- high speed internet - all phone services ad not free - only several
- free cell phone rentals (varies on the company you use) hotels offer free internet
- all local phones calls are free - chargeable local phone calls
Phones - direct Kiev phone number - internet is charged by day/hours or minutes
- free high speed internet (varies on the company you use) - depending on the hotel
- comfortable furniture
- video, DVD - bed, chair, TV - minimum comfortable
- CD player furniture
Rest area
- A/C units - 4-5 star hotels are equipped as you used to
- independent heaters inn other countries
- satellite or cable TV
- fully equipped kitchen - no kitchen
- all kitchen necessities: tea pot, fridge, frying pen, pots, - expensive restaurants at the hotels
Nourishment
salt, sugar, tea, coffee, cups and glasses - in some hotels breakfast is included into the
- no breakfast included price
- un named discount card for the future visits
- free Delta miles for each dollar you spend (varies on - named discount card ( no one can use but
Bonuses the company you use) you unless it is a corporate card)
- free transfers ( see conditions), (varies on the company - car rental bonuses and free nights offers.
you use)
122 Uniting Leading Companies from over 50 Nations Across the Globe