General Legal Issues on Investment Activities in Ukraine

The 10 largest investing countries account for 84% of total FDI coming to Ukraine: Germany – US$5.68 billion; Cyprus – US$4.13 billion; Austria – US$1.96 billion; the Netherlands – US$1.86 billion; UK – US$1.8 billion; US – US$1.38 billion; Russian Federation – US$1.24 billion; France – US$935 million; British Virgin Islands – US$813 million; and Switzerland – US$580 million.

About 30% of total FDI attracted to Ukraine was invested in industrial enterprises. Considerable FDI was made into financial institutions (14.6%), enterprises of trade, car repair, household appliances and FMCG sectors (10.4%), and organisations engaged in transactions with real estate, leasing, engineering and service provision (8%). The interest of investors in enterprises producing iron and steel, finished metal ware, food products, drinks, and tobacco products is also steady.

Despite the generally favourable investment climate in Ukraine, a number of issues create serious threats to foreign investors. Among them are political and legislative instability, deficiencies of the banking system and the stock market, and lack of an established stable practice of project finance for enterprises which hampers efforts to obtain loans for implementing promising investment projects.

Discrepancies in the Ukrainian legislation and high levels of corruption in Ukrainian courts give rise to a great number of hostile takeovers in Ukraine, which can step beyond the bounds of the civilized business practice. In view of these obstacles, investors in Ukraine have to invent some sophisticated schemes.

M&A transactions in the developed countries of the world have been carried out for many years and thus already have their established practices and relevant rules and governmental regulations. In Ukraine, these transactions are still relatively new but are in the process of being developed.

Many instruments that could easily be used by investors in other countries do not exist or simply do not work in Ukraine (for instance, escrow accounts). On the contrary: investment accounts could be considered a pure Ukrainian instrument. Such accounts, introduced upon request of the tax authorities by the National Bank of Ukraine, usually create significant problems for investors willing to acquire an investment target in Ukraine, especially in a situation when initial acquisition had not been done through these investment accounts. The existing currency control procedures could also be mentioned among the numerous obstacles arising along the way of foreign investors during the investment process in Ukraine.

As to the sphere of taxation, transactions with shares must be accounted separately from other proceeds and expenses of a taxpayer. If, at the end of the tax period, the proceeds exceed the expenses, the received income is included in the total taxable income of the taxpayer and is taxed by the corporate tax at the rate of 25%. The loss shall be carried forward to the next period.

Certain types of non-resident's income (such as dividends, royalties and interest) are taxed at the rate of 15% and shall be withheld either by a resident payer or a permanent establishment of the non-resident receiving income before or at the time of the proceeds transfer out of Ukraine, provided that the lower rate is not established by an international treaty to which Ukraine is a party. In the meantime, the individuals' income tax is equal to 15%.

Unlike share deals, asset deals with a company as an object of the transaction are infrequently used in Ukraine. This could be explained by the lack of regulatory procedures as well as tax. Sometimes, even notaries certifying the deal do not know how the deal should be structured.

The impact of the negative issues mentioned above can be grave for business if precautionary measures are not dealt with at early stages of a transaction. The existing and potential misfortunes for an investor can be greatly reduced if the whole process is carefully crafted by an experienced local counsel and the reward for the investor can be very significant – after all, high risk brings high returns.

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