BUSINESS OPPORTUNITIES

Since the middle of April 1996 the shares of privatised companies have been offered for cash. The expansion of this process should encourage the creation of real market prices for assets being privatised; these prices were distorted because of imperfect methods of valuing an enterprise's property. Foreign investments play a very important role in Ukrainian privatisation.

The Savings Bank (Oschadnybank) distributed more than 34 million privatisation certificates on 1 October 1996. 4,281,375 compensation certificates with a nominal value of UAH 10 were issued together with 15,422,275 compensation certificates with a nominal value of UAH 20.

On 18 May 2000 the Verkhovna Rada adopted the Law on the State Privatisation Programme. The main aims of this Programme are to create the necessary conditions for successful privatisation and to provide the State Budget with revenues.
 According to this programme the main tasks of privatisation in Ukraine are:

• to create conditions for the development of the stocks exchange market;
• to implement marketing strategies for the objects o privatisation;
• to assist the development and restructuring of the Ukrainian economy;
• to develop international investors’ interest in Ukraine legal entities.

Six hundred new companies were to be included on the privatisation list for 2000-2002 - mostly large and strategically important ones. The program offers the compromise of leaving only 25% or 50% (plus one share) of the authorised capital of strategic companies in state ownership, while the rest is proposed for sale in large share packages (mainly controlling share blocks). One of the most important innovations in the program is the article about pre-sale restructuring of mega-enterprises with the pre-privatisation liquidation of certain enterprises' debts.

In January-April 2001, privatisation proceeds amounted to700 million UAH, which is 800 million UAH less than the targeted amount. Three major factors caused this failure:

• the postponement of the sales of share packages in electricity distribution companies (oblenergos) and Rivneazot.
• Political instability, which peaked with the Cabinet of Ministers’ dismissal. Under these conditions, investors preferred to withdraw from privatisation in Ukraine. In addition, the State Property Fund and the cabinet have largely lost their capacity to ensure the quality preparation of enterprises for privatisation and the conduct of tenders.
• stagnation of the Ukraine stock market.

Foreign Investment

Legal Regime of Foreign Investments
The Law extends a relatively minimal favourable treatment and guarantees to all types of foreign investments. The Ukrainian Law 'On foreign investment regime' defines 'foreign investment' as investment by foreign investors in compliance with Ukrainian law with the aim to gain profit or achieve a social benefit. A Ukrainian legal entity is recognised as a company with foreign investment if it has at least 10% foreign ownership in its charter capital (i.e. share capital); no minimum/maximum foreign capitalisation requirements are stated. Registration of foreign investment with the local authorities is required. Unregistered foreign investments do not enjoy the rights and privileges granted by the Law.

Types of Investments
The Law recognises that foreign investment can take place in a variety of forms, which amongst others are:

•  formation of a joint-venture company;
•  acquisition of stock (shares) in existing enterprises;
•  buying movable or immovable property;
•  creation of a company, wholly-owned by a foreign investor;
•  acquisition of property rights by purchasing securities;
•  buying the right to use land and concessions to exploit natural resources.

Foreign investors have the right to invest by using the following forms:

• hard currency
• Ukrainian currency as a re-investment into the existing or a newly established enterprise;
• any movable or immovable property and property rights connected with it;
• shares, bonds, other securities and other corporate rights;
• monetary claims and claims under contracts, valued in a hard currency and guaranteed by first rank banks;
• any intellectual property rights with confirmed estimation in hard currency according to the laws of the investor's country of residence, including copyrights, trademarks, firm names, know-how, and others;
• rights in respect of economic activities, including exploration and utilisation of natural resources valued in hard currency and conferred and valued under the laws of the investor's resident country.

Guarantees
Some guarantees for investors are set out in legislation as follows:

• 10 year grandfathering clause permitting any qualified investor to enjoy favourable treatment and guarantees contained in the Law in the event of a subsequent change in legislation;
• foreign investment is exempted from nationalisation, except for cases of natural disaster;
• foreign investors may seek damages (losses of profit and moral injury) resulting from the negligent acts or failure to perform an act by the state organs (if confirmed, compensation is payable in hard currency);
• when terminating its activity, an investor has 6 months to return its investment in kind or in cash without payment of customs duties, as well as any profits earned in kind or cash at their real market value;
• foreign investors are guaranteed unhindered and immediate right to repatriate the profit abroad after the investor complies with the withholding tax regulations.

State Protection of Foreign Investment
Ukrainian legislation on foreign investments sets out protection for foreign investment in Ukraine against state confiscation except for cases of national emergency. Such cases include evacuation / rescue measures in connection with disasters, accidents or epidemics. Foreign investors are eligible for compensation of losses caused by government bodies with respect to the above cases.

General economic growth will create favourable conditions for investments. The main stimulus to increase investments will be the need to extend production capacities in order to capture new market segments, while the main condition will be increased corporate profits.

Anti-monopoly Regulations
In order to protect businesses from unfair competition and trade practices the Antimonopoly Committee of Ukraine (AMC) requires that approval be obtained for a transaction if that transaction may or will lead to a “concentration” in a specific segment of the Ukrainian market For example, approval of the AMC may be required in respect of mergers, acquisitions of shares and incorporation of a new company, in cases where:

• the parties' combined assets or turnover exceeds EURO 12 million for the last  financial year; and
• both of the parties have assets or turnover exceeding EURO 1 million as at the last day of financial year; and
• at least one party has assets or turnover in Ukraine exceeding EURO 1 million as at  the last day of financial year.

The anti-monopoly regulations may be subject to rapid changes, but is important to consider the potential application of such regulations to a merger/acquisition transaction. (on the top)

BUSINESS ENTITIES

Legal Entities in Ukraine

Joint Stock Companies
A joint stock company (JSC) is a common form of legal entity used in Ukrainian business. It is a limited liability company in which the shareholders are responsible for the liabilities of the entity only up to the nominal value of their shares. The minimum capital of a JSC must be at least 1,250 times the minimum wage amount. As of 1 February 2002, the minimum monthly wage amounts to UAH 140, which implies a minimum capital of VAH 175,500 (approximate1y USD 33,000 at I. February 2002).  From 1 July 2002, the minimum wage will increase to UAH 165, thus the corresponding minimum capital will increase to UAH 206,250 (or USD 39,000).

A joint stock company may be either 'open' (publicly held) or 'closed' (privately held). The shares of an 'open' joint stock company can be distributed through open subscription on the stock exchange. The shares of a 'closed' joint stock company are divided among the founders and cannot be distributed through subscription on the stock exchange. A closed joint stock company can be converted into a public joint stock company by registering its shares in accordance with the legislation on securities and the stock exchange and amending its Articles of Association.

Any legal entity and/or individuals can be founders of the JSC. At least two founding shareholders are necessary to create a joint stock company, although the two founding shareholders are free to determine among themselves the share distribution that each will have in the legal entity. Generally, a shareholder should pay 30% (for a public JSC) or 50% (for a private JSC) of its nominal share value to the temporary bank account of the JSC before registration with the state agency.

All joint stock companies, including those entirely held by foreign owners, are Ukrainian legal entities. They may enter into agreements, take on legal obligations, acquire property, and sue and be sued in their own names. Furthermore, these entities may engage in any commercial activity envisaged by their Articles of Association. Accounting records must be kept in UAH and comply with the Ukrainian National Accounting Standards, although accounts may also additionally be compiled according to any applicable international standards.

Limited Liability Companies
Limited liability companies (LLC) are also a popular form of corporate organisation. They are a good option through which foreign companies can conduct business in Ukraine. An LLC has similarities to both a US corporation and a US partnership. It is similar to a corporation in that it is a limited liability company in which the interest holders are liable only to the extent of their capital contributions. However, it is similar to a partnership in that ownership interests are expressed in terms of contractual rights arising from the statutory documents.

There is a lower initial capital requirement of 100 minimum monthly wages in UAH (UAH 14,000 or approximately USD 2640, as at 1 February 2002). Again, from July 1 2002, with the minimum wage to UAH 165, this capital requirement will increase to UAH 16,500 (or USD 3,000). At least two founding participants are necessary to create an LLC. Each partner should pay 30% of their interest in the authorised capital to the temporary bank account of the LLC before registration with the state agency. Transfer of ownership rights is conducted through an assignment of contractual rights. A LLC has two governing bodies: the participants' assembly and the directorate (management).

LLCs have a slightly simpler registration process than joint stock companies and compared to a JSC require a less complex structure as regards increase of capital and management.

Joint Ventures
Joint ventures in Ukraine are generally established in the forms of a joint stock company or limited liability company. Joint ventures enjoy the status of a Ukrainian legal entity and do not have to comply with additional special requirements.

Joint Activity Without Establishment of a Legal Entity
Ukrainian legislation provides a foreign investor with the right to invest in Ukraine without creating a legal entity by entering into a joint production or joint co-operation agreement with Ukrainian partners. Such investment is subject to state guarantees and should be registered as discussed above. A foreign investor is granted a right to get back their investment and repatriate the profit from it. (on the top)

Representative Offices of Foreign Companies in Ukraine

Procedure for Accreditation of a Representative Office
Foreign legal entities that intend to start a Representative office in the territory of Ukraine should submit the following documents to the Ministry of Economy of Ukraine:
1. An application letter addressed to the Ministry of Economy of Ukraine for registration of the Representative office. The letter, printed on the official letterhead of the company, should contain the following information:

• the official name of the company;
• the name of the country where the head office operates;
• its legal and postal addresses (if they differ), telephone and fax numbers;
• the name of the city where the Representative office is planned to be started with the indication of its future address and the number of any Representative office's branches within Ukraine;
• in case offices are planned to be opened in other cities in Ukraine, these cities should be indicated;
• the number of employees of the company;
• the date of incorporation of the company;
• the name of the bank where the company has its account and the account's number;
• information about the spheres of the company's activities;
• number of foreign citizens that intend to be employed in the Representative office (not more than three persons);
• the purpose of establishment of the Representative office and the scope of its activities and the information about business contacts with Ukrainian partners.

2. Power of attorney in accordance with the law of the country of the company's residence, issued to a specific person to perform representative functions in Ukraine with an indication of the powers/authorities granted to the representative (including authorisation to open bank accounts of the Representative Office in a Ukrainian bank);
3. Extract from the trade or banking register of the country where the company is resident attesting its registration (including the date of registration and registration number of the company);
4. Letter of good standing from the bank in which the company operates its official account with identification of the account number;
5. Articles of incorporation of the company;
6. If different, the by-laws of the company;
7. A copy of the resolution of the company's management to open a representative office in Ukraine and to appoint a representative.
All the above documents should be notarised at the place of issue, duly legalised at the Consulate of Ukraine in the country of residence of the company, and translated into Ukrainian with the translation attested by the notary (if translation into Ukrainian is done outside Ukraine, the stamp and signature of the translator/notary-translator should be also confirmed by the Consulate of Ukraine). All these documents should be submitted to the Ministry of Economy of Ukraine not later than six months from the date of the issue.
The state registration fee is currently USD 2,530 and is to be transferred upon receipt of the application for registration of the Representative Office by the Ministry of Economy. The term of registration in Ministry of Economy is 60 working days from the moment of crediting the above mentioned state fee to the account of state treasury fund.
Contact information:
Ministry of Economy and European Intagration of Ukraine
01008, Grushevsky street, 12/2, Kyiv, Ukraine
tel: 00380-044-212-50-52, fax: 00380-044-212-02-41
e-mail: ustanov@mfert.gov.ua
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Bankruptcy

Mergers, Liquidation, Reorganisation

A Company may be terminated:

• by a decision of its highest governing body (i.e. shareholders);
• upon expiration of the term for which it was established;
• by a court decision if the company has become insolvent.

BUSINESS ENVIRONMENT

As mentioned in the previous Chapters, the last two years have been witness to a number of positive trends in the Ukrainian economy. Ukraine's economy is expected to grow over the next few years. However, this growth will be particularly sensitive to political instability in the run up to the parliamentary elections, which may to push government policy off course.

Growth rates in the food and textile sectors remained high, due to buoyant consumer demand. A stable positive growth rate was recorded in the machine-building sector. In particular, due to capital replacements and renovations in metallurgy, output growth in metallurgy machine building was substantial. However, the ferrous metal sector lost its leading position after conditions in export markets deteriorated.

Companies have started to develop long term business strategies, investing their profits in production and broadening and deepening their markets. Economic growth will determine new patterns of strategic behaviour in the business sector. Business will allocate more efforts to searching for new business contacts and partners.
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The Banking System

After independence, Ukraine had to establish its own banking system. The National Bank of Ukraine (NBU) was created to control the national currency, supervise the banking system and enable the creation of the current banking regulations.

The current banking system is two-tiered, comprising the NBU and 189 commercial banks. Five of the commercial banks are the former specialised state banks: one is a savings bank (Oschadnybank), two are specialised lending banks (Prominvestbank and Ukrsotsbank), and one is the Export-Import Bank of Ukraine (Ukreximbank).  Oschadnybank and Ukreximbank are still state owned. Prominvestbank and Ukrsotsbank receive concessionary treatment from the NBU and are responsible for the vast majority of corporate lending. There are also 'new banks'. Most of these are based in the major industrial centres. They were generally formed by groups of companies to manage their treasury and payment systems. Some of these banks have grown significantly (e.g. Pravexbank, Privatbank and Aval). There are currently six main banking companies in Ukraine with foreign ownership: Credit Lyonnais, Citibank, Bank Austria Creditanstalt, ING, Raiffeisenbank and First Ukrainian International Bank.

Notwithstanding the banking sector's difficulties, the procedures for settlements, particularly relating to domestic transfers, have proven efficient. Foreign investors no longer encounter delays in converting currency and remitting profits in foreign currency as a result of the banking system.

Numerous Ukrainian commercial banks have joined the Society for Worldwide Interbank Financial Telecommunications (SWIFT). SWIFT provides financial data communication and processing services supporting the business activities of banks around the world.  Participating Ukrainian banks can instantly settle transactions with other banks on-line with SWIFT. Western Union also has a funds transfer service between Ukraine and other countries. Currently the banking system of Ukraine is demonstrating signs of stabilisation after the 1998 financial crisis (following on from that in Russia). Since January 1999 the NBU has decreased its prime rate from 82% to 15%. (on the top)

Exchange Controls and Currency Regulation

The Ukrainian currency control regulations underwent dramatic changes during 1998/99. The National Bank of Ukraine introduced new currency controls as a temporary anti-crisis measure, which was expected to have some short-term negative impact on foreign investment into Ukraine. Most of these measures have since been lifted or relaxed.

Foreign currency can be purchased for the following main purposes:

• payment to overseas suppliers of goods/services;
• payment of dividends, interest, royalty;
• repayment of a hard currency loan registered with the NBU both to a resident and  non-resident.

• establishment of a subsidiary company in another country and transferring capital to  fund its operations;
• purchase of foreign securities;
• opening bank accounts with foreign banks.

Accounting

With effect from 1 January 2001, Ukraine has been implementing National Accounting Standards, which are primarily based on international Accounting Standards, but with a number of differences and omissions. Currently 22 of these new Standards have been implemented.

Background
Since 1991 the newly independent countries have taken significant steps to develop market economies. However, this has not been followed by development in their accounting practices. The nature of the economic system m the Soviet Union required a different set of accounting principles Soviet management did not require all information that market-oriented management requires and in the Soviet Union, accounting focused on:

• the implementation of production objectives at the calculated cost price;
• the preparation of reports in a specific form (monthly, quarterly and annually) for  the authorities monitoring a company's operations; and
• the use of unified systems of accounts, which were intended to provide statistical information required by the national economy.

Accounting was organised so that reporting to authorities was more important than the enterprise’s own management information needs. Ukrainian accounting remains: primarily a means for computing tax liabilities.

The principal features of the present Ukrainian accounting system are:

• financial statements, with itemised schedules, are prepared on state approved forms;
• the chief accountant manages the accounting and preparation of financial  statements;
• foreign-owned Ukrainian entities must adopt and follow the Ukrainian chart of  accounts and accounting principles (but simultaneously may use their own system);
• the accounts must be prepared in compliance with the chart of accounts and  directions for making entries according to National Accounting Standards  promulgated by the government as law;
• all “local” accounting material must be in Ukrainian;
• the Hryvnia is the basic accounting currency unit. Any transactions denominated in  foreign currency must also be recorded separately in Hryvnia (generally at the rate  of exchange on the date of the transaction) for official accounting purposes; and;
• the financial year of a Ukrainian enterprise is the calendar year.

Format of Accounts
Previously Ukrainian financial statements focused on the balance sheet. A number of items were grossed up in the balance sheet. External readers often initially found this difficult to understand. The-volume of transactions through various equity accounts in the balance sheet also led to confusion.

The most obvious difference between International and Ukrainian accounting was the calculation of net profit or loss. Since calculation of profit or loss occurred primarily through balance sheet accounts, the Ukrainian income statement constituted merely additional information appended to the balance sheet. Even with its notes, the income statement does not contain the detailed information external readers require.

Under National Accounting Standards financial statements consist of balance sheet, income statement and cash flow statement. These are now more in line with internationally recognisable formats however, they are still on pre-printed forms and based on a specified chart of accounts.

Accounting Principles
The most important Ukrainian accounting principles are:

• the accounting directives ensure certain uniformity and continuity;
• the prescribed form of the accounts is established in National Accounting  Standards;
• the form of a transaction, rather than its substance, dictates its accounting;
• accounting rules are defined by National Accounting Standards which are law.

Insurance

According to the Law on Insurance, insurance activities may be conducted only by resident entities. Insurance agents and brokers may not act as intermediaries of foreign insurers in Ukraine, except for re-insurance activity.(on the top)

Labour

The Ukrainian labour legislation is inherited from Soviet times and therefore the emphasis is made on protecting the rights of the employees rather than of the employers. An illustration is article 9 of the Code, which states that the provisions of the individual labour agreements which worsen the working conditions of the employees compared to those which are stipulated by the Ukrainian labour legislation are considered ineffective in Ukraine.

Under Ukrainian law, all business documentation in Ukraine is required to be made in the Ukrainian language. Accordingly, it is advisable to ensure that employment agreements are prepared both in English and Ukrainian. This is especially important in view of the fact that all disputes under these agreements are envisaged to be settled in the Ukrainian courts.
The laws relating to employment matters in the count may be expected to change frequently to reflect shift in the social and economic arrangements. Currently, the principal laws applicable to employment arrangements are provided by the Code.

Ukrainian legislation introduced in 199J allows individuals to choose their place of work and enter into direct labour agreements with employers. Additionally, Ukrainian foreign investment law allows enterprises with foreign investment to hire Ukrainian employees and enter into collective agreements or individual labour agreements.

Currently the minimum official gross monthly salary is set at UAH 140  (approximately USD 26). From 1 July 2002, the minimum gross monthly salary will increase to UAH 165 (approximately USD 31).

Labour Agreements
The Ukrainian labour legislation provides a typical form of a labour agreement and provisions to be included in such an agreement, although, failure to comply with this form does not give rise to sanctions. According to Ukrainian legislation, any enterprise may be required to honour its employees' request to conclude a collective agreement, even if there is no trade unison presence at the enterprise.

An employment relationship is subject to labour legislation in Ukraine, internal employer regulations, the collective agreement of the employer and direct employment agreements. The employee is entitled, as a minimum, to the rights and benefits afforded under Ukrainian labour laws. In addition to these rights, Ukrainian labour legislation also governs such areas as duration and termination of agreements.

Rights of Employees
Ukrainian labour legislation provides certain guarantees for employees, including the following:

• right to reinstatement in a prior job upon the expiration of the term of an elected  office;
• wages for time spent away from work for performing the functions of a trade union  officer, appearing in court, going to vote and fulfilling other state or social  responsibilities;
• the right to keep one’s job when on a training programme;
• wages while hospitalised;
• compensation for the depreciation in value of their own tools, when used far the  employer's work;
• severance pay in certain situations;
• certain social benefits: maternity leave, paid holidays and vacation time;
• minimum pay guidelines.

• The length of a working week is not to exceed 40 hours.
• Overtime may not exceed two hours per day or 120 hours per year. In practice, many employees of foreign firms work more or less than the normal working week prescribes, subject to their voluntary individual agreements with the employer, work during weekends is not officially allowed. Exceptions could be for natural catastrophes or emergency occasions.
• An employer is not permitted to demand work from an employee beyond that included m the labour agreement, without the consent of the employee except in certain circumstances. These include temporary transfers of one month in the event of an industrial emergency and transfers ensuing from disciplinary proceedings;
• In general, employees are entitled to annual leave of 24 calendar days. Some employees, such as those involved m training, research or investigation, may be entitled to more than 24 day’s annual leave.

Women are entitled to paid maternity leave for the 70 days prior to and 56 (sometimes 70) days after childbirth. A woman will be entitled to partially paid leave until the child reaches the age of three. Employees have the right to organise trade unions and participate in the management of production. The local committee of the trade union at the enterprise represents the interests of the employees, manages social funds, oversees, compliance with the terms of the collective agreement between the enterprise and the local trade union committee and participates in resolving labour disputes according to Ukrainian law.

Labour Book
Ukrainian labour legislation requires that a labour book be kept for each employee working for an enterprise longer than five days. This is the basic document concerning the activities of the employee, reasons for dismissal, etc. As the labour book is a legal requirement, all enterprises are generally required to sign, stamp and hold such labour books for their employees. In order to hire a Ukrainian citizen, an employer should receive the employee's labour book and passport.

Duration of Agreements
A labour agreement may be concluded for an indefinite period of time, a specific term which is settled through mutual consent of the parties, or for the amount of time necessary to perform the work.

Generally, the probation period of an employee may not exceed three months but depending on the classification of such a worker the time may be reduced to one month. If the employee continues to work after such period has expired, the employee is considered to have 'passed the test' and is entitled to all rights and protection under Ukrainian law.

Termination of Agreements
Grounds for termination of employment under Ukrainian Labour Law include:

• agreement of the parties;
• expiry of the term of the employment agreement;
• drafting or enlistment of a manual or office worker into military service;
• criminal conviction and confinement of the employee which prevents the worker  from continuing his work;
• the transfer of a worker, with the worker's consent, to other work, or a switch to  another positron;
• refusal of the worker to be transferred to work in another location together with the  enterprise, institution or organisation upon its relocation;
• cancellation of the labour agreement at the initiative of the worker (as set forth  below);
• cancellation of the labour agreement at the initiative of management.

In general, an employer may terminate an agreement under the following circumstances: dissolution of the enterprise or reduction m personnel; reinstatement of a worker who previously performed the job; systematic non-fulfilment of work duties without good cause; absence without good reason; absence from work for more than four months as a result of a temporary disablement (not including maternity leave), unless a longer period of time for retaining the position is established by applicable legislation in the case of a specific illness. This list of specific reasons for termination is not complete. The agreement may specify additional reasons for termination, such as disclosure of confidential information. Dismissals cannot be arbitrary (e.g., for pregnancy or personal reasons unrelated to employment).

In addition, an employee must be warned of essential changes in work terms no less than two months in advance. If the former terms cannot be maintained and the employee disagrees with the new terms, the labour agreement can be discontinued. In this case, the employee shall receive severance pay.

Upon being dismissed from a job as a result of redundancy ensuing from changes in the organisation of the work, the employer shall continue to pay a salary to the dismissed employee until the latter finds new employment, or for a maximum period of three months.

An employee can be transferred to a temporary job only with his consent. No consent is required in the following cases:

• safety reasons (to prevent accidents or industrial disasters);
• substitution of an absent employee (duration of transfer cannot exceed one month);
• termination of activities;
• health reasons.

TAXATION

Corporate Residence

Profits Tax

For corporate income tax purposes a tax year coincides with the calendar year.

Taxable Base
Taxable profit is determined based on adjusted gross income reduced by deductible costs and tax depreciation. For corporate income tax purposes, adjusted gross income means gross income (i.e. a company's world-wide income) received (accrued) during the reporting period either in cash, in kind or in intangible form. Gross income includes total income from the sale of goods (work, services), fixed assets and gratuitous transfers.
Ukraine uses an accrual and cash method to record expenses, although there are some anomalies which should be looked at closely. Revenues are recognised at the earlier of the goods or services being provided or cash being received (e.g. if there is a prepayment).

Deductions
The existing law generally allows reasonable business expenses as tax deductible, with the exception of expenses explicitly disallowed or restricted by the law in a detailed list.

Among the disallowed or restricted expenses the following are:

• fuel, repairs of company cars (except where the company's business is transportation);
• contractual penalties;
• expenses associated with warranty repairs (deductibility is restricted to 10% of the total price of such goods sold and still under warranty);
• expenses incurred in connection with receptions, celebrations and similar events held for advertising purposes and connected with business activity (deductibility is limited to 2% of the taxpayer's taxable profit for the respective period);
• other expenses not connected with business activity.

Corporate tax liabilities are self-assessed by taxpayers. Tax is payable on a quarterly basis. Quarterly tax returns are due within 40 days from the reporting quarter.

Tax Rates and Payments to Related Parties
In order to be deductible, expenses should be supported by documentary evidence. In respect of payments to individuals or entities associated with the taxpayer, the law explicitly states that the absence of documentary evidence concerning payments for services rendered can lead to disallowance. In practice this requirement becomes important in respect of management fees, payments under secondment contracts and other inter-group cost re-allocations. Transactions between related parties should be executed on the basis of 'fair market' prices, which would be paid under similar conditions to third (non-related) parties.

Payments to Non-residents in Deemed Tax Havens
A restriction applies to the deductibility of payments made to non-residents in deemed tax haven locations. Such payments provided that they are allowable deductions in the first place, can only be deducted at 85% of their total amount. The tax haven locations are referred to as those, which are to be listed in a relevant resolution of the Cabinet of Ministers of Ukraine.

Interest
Interest payments on loans required for the taxpayer's business are deductible. Specifically for companies with 50% or more foreign investment, the law contains a restriction which in essence provides that such companies in a reporting period cannot reduce their taxable income by more than 50% through the deduction of interest. Interest expenses thus disallowed can be carried forward to subsequent periods indefinitely. Some double taxation treaties, however, attempt to override this domestic provision in the way they are drafted but the practical examples of when such provisions have been invoked are very limited to date.

Exemptions
The following are not included in taxable profit:

• capital contributions in return for a share in the equity (i.e. in return for corporate rights);
• contributions in cash or in kind under joint activity agreements in Ukraine without creation of a legal entity;
• share premium received by a share issuer (difference between the price of a share and its nominal value);
• dividends received provided they were taxed upon distribution in accordance with the Corporate Income Tax Law.

Foreign Tax Credit
A tax credit system is effective to avoid double taxation of income derived from abroad. A credit is allowed for foreign taxes paid up to the amount of Ukrainian tax due on such income, provided there is a tax treaty with the state in which the tax was paid and proof of taxes paid can be obtained.

Ukrainian Repatriation Tax
Under current Ukrainian tax legislation Ukrainian source income, such as dividends, interest or royalties payable to non-Ukrainian residents is subject to 15% withholding tax upon repatriation. However, the rate of 15% can be reduced based on the provisions of a relevant double tax treaty.

Grouping/Consolidated Tax Returns and Loss Relief
Grouping/consolidated tax returns are allowed for resident taxpayers and their branches or other units without legal entity status. There is no group relief for losses and profits of separate Ukrainian legal entities. There is a requirement that a branch should be located in a different region from the head office. An application to switch to payment of tax on a consolidated basis should be filed before the new reporting year. The detailed procedure for paying consolidated tax is established by the State Tax Administration of Ukraine.

Resident taxpayers carry forwards are granted to resident taxpayers. The term is limited to 5 years from the moment the loss is recorded in the accounting records.
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Dividends & Other Payments

Repatriation Tax
As indicated above, dividends distributed by a Ukrainian company to its non-resident shareholders are classified as income derived from Ukrainian sources. Repatriation of dividends abroad is subject to 15% withholding tax due from the dividends paid. However, the 15% tax rate can be reduced based on provisions of a relevant double tax treaty concluded with Ukraine. (on the top)

Value Added Tax (VAT)

VAT Rates
For VAT purposes the law distinguishes between four types of transactions. These transactions are those which are:

1. subject to VAT and are taxed at the standard rate of 20%. This applies to all goods and services apart from the exceptions set out below.
2. subject to Zero-rate VAT. The list of transactions primarily includes:

• Sales of goods outside Ukraine (export of goods);
• Sales of services which are intended to be used or consumed outside Ukraine.

3. Non-VATable transactions. Some of these transactions are:

• Fixed assets contributed in exchange for a share of enterprises with foreign investment;
• Transfer of property for leasing from a Ukrainian lessor to a lessee and its return to the lessor on the termination of the lease;
• Rent payments under financial leases;
• Insurance and reinsurance transactions;
• Most banking services.

• Education services;
• Artistic and cultural services;
• Healthcare services;
• Certain mass media services;
• Privatisation services.

• An entity with a volume of  VATable transactions in excess of 3,600 non-taxable allowances (i.e. UAH 61,200 currently approximately USD 11,500) for any preceding 12 months of operation;
• An importer of goods, services or works;
• An entity that is engaged in trade for cash regardless of the volume of sales.
• Any entity qualified as a VAT payer is required to register for VAT purposes.

Foreign companies terminating their activities in Ukraine are obliged to file a final tax declaration with the relevant tax authorities.

VAT Recovery
Under Ukrainian law, VAT is recoverable provided that the goods (works, services) are deductible for corporate profits tax purposes or, in the case of fixed assets, are subject to depreciation. VAT incurred on business expenses may normally be recovered as a credit against output VAT or as a refund, with the following exceptions:

• VAT on inputs corresponding to exempt supplies;
• VAT on certain expenses, which by virtue of the corporate tax legislation, are not deductible for corporate profits tax purposes.

There is no clear or effective mechanism for VAT refund by foreign entities that are not registered as VAT payers in Ukraine.

Partial Exemption
There are no specific partial exemption rules. Companies making wholly taxable supplies can recover the VAT element of their expenses whilst those making wholly exempt supplies do not enjoy recovery. Partly exempt companies which make both taxable and exempt supplies are required to make a calculation as to what proportion of the input tax they should recover. Any exempt supplies will trigger a partial disallowance of input tax.

Cross-Border Transactions
To qualify as export and consequently to be Zero-rated, goods should be physically exported outside the customs territory of Ukraine. Documentary evidence of export is important (i.e. supply contract, proof of payment, export customs declarations).

Imports of Goods
The transfer of goods into the customs territory of Ukraine is chargeable to VAT.

Exported Services (Zero-rated)
Under the VAT law, sales of services in the customs territory of Ukraine and import of services from a non-resident service provider are subject to VAT.

In order for a zero VAT rate to be applicable for the export of services from Ukraine two conditions should be satisfied:

• Services should be consumed by a non-resident entity;
• Services should be used or consumed outside Ukraine.

• Services provided in relation to lease, charter and freight of aircraft, ships, shuttles, etc.;
• Export of royalties, patents, trade marks, licences, etc.;
• Advertising services to be used outside the territory of Ukraine;
• International communication services;
• Sales of goods in duty free shops.

Inter CIS Supplies
Ukraine, unlike certain other member states of the CIS, does not operate within an integrated VAT system whereby inter-CIS sales are taxed at the point of origin, with input VAT claimed in the country of destination.

Time of Supply
The VAT liability arises either at the date of the goods' shipment or at the date of receiving the payment from the customer depending on which event occurs first.

Gifts, Donations, Internal Consumption
Donations of goods and services are taxable in the same way as sales. The output VAT is due on an imputed market value.

Leasing
Under the Ukrainian legislation the transfer of property for leasing from a lessor to a lessee is not subject to VAT. Lease payments under financial lease agreements are not liable to VAT. Operational lease payments attract 20% VAT.

VAT Returns
For VAT payers whose reporting period is one month VAT returns are required to be filed no later than the 20th day of the following month. VAT payers whose reporting period is quarter, must file their returns within 40 days of the end previous quarter.

VAT Invoices
Under VAT legislation all VAT liable transactions are to be properly documented with tax invoices. The legislation provides for an explicit list of items to be included in a tax invoice, primarily selling price, VAT amount, registration number of the tax payer, etc. To be treated as a deductible, VAT paid to suppliers should be properly supported with tax invoices. The tax invoices can only be issued by entities or individuals registered as taxpayers for VAT purposes.

Interest
Interest is charged based on 120% of the National Bank of Ukraine prime rate (currently 12.5%). The interest charged on late VAT payments is, therefore, 15 %  per annum at present.

Customs Duties
Generally the following customs duties are payable by the importer upon importation of goods into Ukraine:

• customs fees at the rate of 2% of the customs value of the goods but not more than USD 1000 (for goods customs value of which exceed USD 1,000);
• customs duty in accordance with the Unified Customs Tariff;
• excise duty levied on a limited list of goods, mainly consumer and luxury items (for instance cars, alcohol and tobacco products, jewellery, etc.). The basis for calculation constitutes the customs value of goods inclusive of customs fees and import duty paid.
• Customs value is defined as the invoice value increased by the following items:
• actual costs of transportation, loading, unloading and insurance incurred up to the moment of crossing the Ukrainian border;
• amounts of commissions and broker's fees paid;
• fees for intellectual property rights relating to goods which must be paid as a condition of their importation.

The relieved duty rates apply to goods manufactured in the countries that signed trade agreements with Ukraine for the most-favoured-nation status. Countries which qualify for this favourable trade regime include Austria, Belgium, Canada, China, Denmark, Egypt, Estonia, Finland, France, Germany, the United Kingdom, Greece, Hungary, Italy, Japan, the Netherlands, Switzerland, Sweden, Turkey, and the USA. Relieved import duty rates may also apply to goods manufactured in countries which have entered into free trade agreements with Ukraine (e.g. Belarus, Russia).

Full rates are applied to goods from a limited list of countries with whom trading is not specifically encouraged or when the origin of goods cannot be defined.
Import duty is payable in local currency and may be deferred for the period of one month by way of a bank guarantee.

Exemptions
An exemptions from import duty for a very limited number of items (Ukrainian and foreign currency, securities, goods exempt from import duty under international agreement concluding by Ukraine, etc.)
The Unified Customs Tariff is based on the Ukrainian Nomenclature of Foreign Trade compiled in accordance with the Harmonised Commodity Description and Coding System accepted in the EU.

Excise Duties
Excise duty is an indirect tax levied on certain profitable and monopolised goods (products) which is included in the price of these goods (products). All business entities producing or importing excisable goods (products) are the payers of excise duty.
The list of excisable goods currently includes the following items: alcoholic beverages, tobacco and tobacco products, imported cars, fuel, tyres, jewellery.
Rates of excise duty are uniform for the whole territory of Ukraine. For example, alcoholic drinks' excise duty ranges from ECU 0.15 (on a sold item) / ECU 0.6 (for import) for 1 litre of grape wine and up to ECU 3 (on a sold item) / ECU 7.5 for 1 litre for vodka and 100% spirits. The amounts of excise duty levied on transport vehicles depend on their engine capacity.
Excise duties are not levied when excisable goods are exported for foreign currency. (on the top)

Taxation of Individuals

The income tax rates range from 0% to 40%. The tax year for individuals is a calendar year. Non-residents are subject to a fixed withholding tax of 20% on their incomes from Ukraine unless another rate is mentioned in the relevant double tax treaty.

Residence
In Ukraine, foreign individuals are considered as residents for personal income tax purposes by using, a '183-day' test. An individual is deemed to be a permanent resident in Ukraine if he or she is physically present in Ukraine for not less than 183 days in a calendar year. If this rule is applicable, such foreign individuals are obliged to pay tax in Ukraine on their worldwide income.

Taxable Income
Taxable income includes any income received in cash or in kind (in local or foreign currency). Income received in foreign currency must be converted into Hryvnias at the rate of the National Bank of Ukraine on the date of its receipt. Income received in kind is valued at fair market prices except for income received from agricultural companies which is valued at state controlled prices.

Taxable income, in particular, includes the following:

• Wages, bonuses;
• Profits from stock options;
• Annual (additional) paid vacation;
• Reimbursement in cash of unused vacation;
• Student and other fellowships;
• Cost of company products handed over to an employee as remuneration in kind;
• Use of company car for personal purposes;
• Moving allowances for unsubstantiated purposes;

• Housing allowances for foreign nationals (i.e. up to the rent actually paid);
• Amounts contributed on behalf of the employee to Ukrainian state pension or social insurance funds;
• Use of car for business purposes;
• Business trip costs;
• Income from deposits maintained with banks in Ukraine;
• Dividends received from Ukrainian legal entities;
• Financial aid to an employee on condition that such aid is provided once per year and does not exceed the living minimum (i.e. currently UAH 342, approximately USD 65)

Currently, Ukraine has a broad network of double tax treaties, including former USSR agreements which are still recognised by Ukraine. Where an individual is a resident for treaty purposes of another state an exemption or reduced rate in respect of Ukrainian income tax can be obtained.

Payroll Taxes
An employer, whether a Ukrainian business entity or a permanent establishment of a foreign entity, is generally required to make monthly contributions to the State Pension Fund, Employment Fund, Disease Security Fund and Accident Insurance Fund.

The statutory payments are made in one lump sum payment for all employee’s and are calculated as a percentage of the employee's gross monthly salary as follows:
 

 Additionally, an employer is obliged to withhold from an employee’s salary the following (the rates are applied to the gross salary):
 

The taxable base for the above employer’s and employee’s contributions to social funds is currently capped at UAH 1,600 per month. For salaries exceeding UAH 1,600 per month deductions are based on UAH 1,600 rather than on the actual gross amount.
The above payments must be made by made by an employer directly to the tax authorities at the same time or before payment of the salary.

Source: KPGM Ukraine
(on the top)
 

Useful Links

State institutions
Cabinet of Ministers of Ukraine
National Bank of Ukraine
Ministry of Finance of Ukraine
Ministry of Agrarian Policy of Ukraine

State Property Fund of Ukraine General information
Investment, Privatization

Non governmental and other organization
The Ukrainian center for post privatization support
Ukrainian Industrial Internet Exhibition (UIIE)
Ukrainian Yellow Pages

Foreign organizations and offices
World Bank Representative Office

Media, News agencies
Eastern Economist
Business weekly newspaper (in Russian)
Galytski Contracty weekly (in Ukrainian)

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