What You should Know Prior to Investing in Ukraine
By Andrey Reun and Valentin Zagariya
Spenser & Kauffmann
In the last few years, the
Ukrainian investment market
has constantly shown
strong performance and significant
growth. This is primarily due
to the investment attractiveness
of Ukraine. From the investment
perspective, Ukraine can be described
as a country providing
for a significant number of opportunities to multiply invested
funds in the short term. This is one of the reasons why foreign
investors (including private equity funds) are interested in having
Ukrainian businesses in their investment portfolio.
As a general comment, Ukrainian investment legislation
is rather extensive, does not always provide for clear-cut
rules and guidelines and sometimes allows for ambiguous
interpretation. Nonetheless, investment market players have
developed ways of overcoming legislative uncertainties and
restrictions.
In this article we shall briefly touch upon the Ukrainian
legislative framework regulating investment activities, the
general legal environment for foreign investments, legislative
restrictions as to foreign investments as well as issues which
need to be considered prior to investing in Ukraine.
Ukraine is a party to more than 60 international treaties on
mutual assistance and protection of investments. Apart from
these treaties, investment activities in Ukraine are regulated
by basic laws, laws regulating specific businesses (e.g. bank activities,
publishing business, television and radio broadcasting,
insurance activities etc.), Civil, Commercial and Land Codes
as well as by the respective subordinate legislation.
Ukraine provides foreign investments with guarantees
similar to those granted by international investment protection
treaties.
Foreign investments cannot be nationalized. Requisition
of foreign investments is allowed only in the event of natural
disasters, accidents, epidemies, and epizooties. In this case,
compensation payable to a foreign investor should be adequate
and effective.
Following payment of taxes, contributions and other mandatory
payments, foreign investors are guaranteed free and
immediate transfer of their profits, income and other funds in
foreign currency, legally derived from their investments.
Subject to observance of special rules and procedures,
Ukrainian laws provide for customs duties exemption of inkind
contributions (except for goods for sale or consumption)
of a foreign investor into the authorized capital of a Ukrainian
legal entity, where the foreign investor holds a stake of
10% or more.
It should be noted that foreign investments must be registered
with the competent state authorities in order to enjoy
the privileges and guarantees provided by law. Although
Ukrainian legislation does not provide for material incentives
for foreign investments, in practice, the majority of foreign
investors do not register their investments, even though such
registration may allow overcoming unnecessary issues upon
repatriation of profits or divestment in future.
Generally, foreign investors are granted the same regime
of investment and business activities as local ones. However,
there are certain particularities relating to making foreign investments,
profit repatriation and areas of investments. Below
we shall outline some of the key issues to be considered
by foreign investors prior to making investments in Ukraine:
Making investments. Monetary foreign investments are
to be made in hard currency (e.g. USD, EUR, etc.). No licenses are generally required to effect the transaction. Settlements
for investment objects are to be made through accounts
opened in Ukrainian banks only.
Ukrainian currency legislation in force distinguishes between
direct and portfolio foreign investments.
An investment qualifies as direct if the investment transaction
envisages acquisition of movable and immovable
property and the property rights associated therewith as well
as contribution of the funds and property to the authorized
capital of the legal entity in exchange to the corporate rights
issued by such a legal entity. The following 2 main options exist
for a non-resident investor for making a direct investment
in cash: (i) the foreign investor may transfer the funds directly
from his bank account abroad, to the current bank account of
a Ukrainian resident (e.g. the Ukrainian subsidiary of the foreign
investor); (ii) alternatively, the foreign investor may open
an investment bank account in Ukraine and transfer the funds
thereto. Thereafter, the funds will be payable to the current
bank account of the Ukrainian resident. The foreign investor
may effect the payment in hard currency or convert the funds
into Ukrainian hryvnias and transfer them to the current account
of the Ukrainian resident in national currency.
Portfolio investment implies the acquisition of securities,
their derivatives and other financial assets on the stock exchange.
To effect the in-cash portfolio investment the foreign
investor is inter alia entitled to (i) transfer the funds in hard
currency to the bank account of the securities trader directly
from his bank account abroad; or (ii) open the investment account
and transfer the funds in hard currency thereto from
abroad.
Repatriation. The repatriation of foreign investment, profits,
income and other funds derived from investment activities
in Ukraine is required to be channelled in the same way
as inbound investment. Therefore, the particular cash transfer
procedure depends on the way in which the inbound investment
was made.
Legislative restrictions. Ukrainian laws provide for certain
restrictions as to the participation of foreign investors and
businesses in conducting business activities in Ukraine. Major
restrictions consist of the following:
(i) foreign legal entities and individuals cannot act as the
founders of Ukrainian television and radio organizations;
(ii) foreign participation in publishing houses and the
distributors of printed output is limited by 30% of foreign
ownership;
(iii) foreign ownership in information agencies cannot exceed
35%;
(iv) foreign legal entities and individuals as well as their
Ukrainian subsidiaries are prohibited from owning agricultural
land; in addition, foreign investors and their Ukrainian
subsidiaries must observe certain rules to purchase non-agricultural
land plots;
(v) foreign insurance companies are not allowed to conduct
insurance activity in Ukraine.
We are aware of examples when the restrictions mentioned
in cl.cl. (i) – (iv) above have been successfully side-stepped.
Antimonopoly issues. In certain cases, the prior permit of
the Antimonopoly Committee of Ukraine on economic concentration
is required before the foreign investment is made.
Generally, the prior permit of the Antimonopoly Committee
of Ukraine on economic concentration is required
where, for example, a legal entity is established by at least two
shareholders and certain criteria as to the value of their assets
and the total sales are met. The same will also apply in cases
when the foreign investor acquires control over significant assets
(e.g. integral property complex) or acquires 25% or more
of the equity in a Ukrainian legal entity or the same percentage
of votes in the governing bodies thereof, on condition that
certain criteria as to the value of their assets and the total sales
are met too.
Obviously, acquiring the permit from the Antimonopoly
Committee may cause delays in the making of the contemplated
investment. However, considering the legal risks which
could materialize in the event of failure to obtain the required
permit (up to the invalidation of the investment transaction),
it is advisable to verify the necessity of obtaining is prior to
making any investment.
Depending on the area of investment, permits from other
government authorities may be required.
Summing up the above, before making an investment
foreign investors should at least consider restrictions as to foreign
investments, the kind and form of the contemplated investment,
the way of channeling the investment and the need
to obtain ahead of time permits from government authorities.
So as to ensure the tax effective repatriation of profits and/or
divestment, the jurisdiction from which the investment is to
be made should be considered as well.
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