Andriy Dovbenko, managing partner, explores the legislative opportunities and obstacles to investments in Ukraine, exclusively for “Business Ukraine”.
Ukraine is slowly but steadily creeping up the annual Ease of Doing Business rankings, but Ukrainian corporate law remains very inflexible. Before embarking on any investment plans in Ukraine, it worth seeking answers to a range of legal questions.
Ukraine has adopted a number of new business-related legislation in recent years. However, in many cases, these laws have yet to enter into force. Others remain untested. With this in mind, potential investors may want to consider setting up a joint venture established in another jurisdiction and functioning as a non-resident holding company. This way, you could structure the required documentation and agreements at that level, meaning a Shareholders Agreement or option agreements could be concluded and governed by the laws of a jurisdiction where such agreements have been tested by the courts.
Over the last few years, thresholds for acquisitions requiring Antimonopoly Committee of Ukraine (AMC) clearance have increased, but they remain relatively low compared to most jurisdictions. Even in cases where your planned acquisition is just a small- or medium-sized business, you should still check if AMC approval is required.
It is not always easy to prove liability regarding the actions of local management, even in cases of misconduct, making it hard to get losses reimbursed. It is often useful to include clauses in your Corporate Charter restricting the ability of local directors to act in certain instances. This can relate to capital issues like the disposal of key assets, or when entering into transactions exceeding certain thresholds, as well as with regard to payments over a set amount. You can introduce requirements for pre-approval by a shareholders’ meeting or a two-signature policy, for example. These limitations should also feature in the Company Register and banking documents.
Investors need to appreciate that the National Bank of Ukraine has introduced a number of specific limitations on payments from Ukraine. Such limitations may affect the repatriation of invested sums or the proceeds from any investments. In particular, these limitations concern payment of dividends for certain periods as well as early repayment of loans to non-residents.
With all this in mind, investors should consider the following five issues when doing business in Ukraine. First priority is the tax environment. Ukraine levies seven statewide taxes, as well as two local taxes and two local mandatory fees. The major taxes payable by Ukrainian businesses include corporate income tax (18%), value added tax (20%), and payroll related taxes: personal income tax (18%), unified social contribution (22%), and military tax (1.5%). For businesses such as oil and gas extraction, mining, the tobacco industry, alcohol businesses, and car dealers, rent tax and excise tax will also represent a material portion of their tax bills.
Choosing the right form of business presence and taxation system is key. Depending on your area of business, making the correct choice could allow you to reduce your tax burden. For instance, permanent establishments engaged in the services industry can determine their CIT based on the simple method of applying taxation at a flat 30% rate of revenues. Agricultural companies may opt for a simplified tax system, replacing CIT with a single tax based on the value of land used in agricultural production, irrespective of income generated from the sale of agricultural products.
Your choice of jurisdiction for parent, financing, and/or licensing companies requires some thought too. Ukraine levies withholding tax (WHT) at a rate of 15% upon distribution of dividends, payment of interest or royalties, and certain other types of income to foreign recipients. WHT can be significantly reduced or even eliminated based on over 70 double tax treaties to which Ukraine is a party. The proper choice of jurisdiction for parent, financing, and licensing companies is important to ensure the overall tax efficiency of an international business structure.
Tax incentives and reduced tax rates are another hugely important topic. Ukrainian tax laws provide for significant tax incentives for large infrastructure projects related to inter-governmental agreements. In certain cases, the Ukrainian parliament voted for laws granting tax incentives for specific infrastructure projects, including full CIT and VAT exemptions. It is possible to eliminate the WHT rate for interest on financing attracted from foreign lenders that have raised financing on foreign stock exchanges, or to reduce it to 5%. With regard to special rates of VAT, a reduced rate of 7% applies to imports and sales of pharmaceuticals and medical devices. Software supplies are VAT exempt until 2023. Qualified agricultural producers are entitled to VAT subsidies. No excise tax applies to supplies of electricity produced from renewable sources.
Finally, transfer pricing rules should certainly be taken into account. Transactions with foreign partners may trigger transfer pricing (TP) implications. Ukrainian transfer pricing rules generally follow OECD guidelines and require that controlled transactions take place at arm’s length. Ukraine sets relatively low transfer pricing thresholds. For example, if annual sales reach EUR 4 million, or if transactions with certain foreign partners reach or exceed EUR 285 000 in a specific year, either of these could qualify as controlled transactions for Ukrainian TP purposes. Transactions meeting these thresholds qualify as controlled transactions if the foreign partner of a Ukrainian company is a related party, a company incorporated in a low-tax jurisdiction, and/or a specific kind of entity mentioned in the relevant Ukrainian government list. The EUR 285 000 threshold also applies to transactions with Ukrainian permanent establishments of foreign companies. Ukraine has not yet introduced a country-by-country reporting obligation, but as far as controlled transactions is concerned, Ukrainian businesses must prepare the relevant TP documentations and submit annual transfer pricing reports.
These are all issues that conscientious investors should address prior to proceeding with Ukraine market entry. However, it is also worth emphasizing that economic and legislatively speaking, there has never been a better time to invest in Ukraine.