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Inward Processing in Ukraine

April 2019 - Projects, Energy & Natural Resources. Legal Developments by DLF attorneys-at-law.

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For years the Ukrainian government has been making efforts to find effective solutions to increase the Ukrainian economy efficiency and to create conditions for its further growth. To find such solutions is not an easy task. It is also important to take a closer look at the experience of the countries that used to have similar economic starting positions as Ukraine has now.

In this case, the Central and Eastern European members of the European Union serve as a good example for Ukraine. Their economic success can be partially explained by the fact that, at the time of their economies transformation, these countries succeeded in increasing industrial exports, which in turn was achieved through increasing integration into international supply chains.

The processing industry has become a major issue, as it is very difficult for a developing country to organize the high-tech products export. However, this can be achieved through inward processing. At the moment, Ukraine has all the prerequisites to attract the increasing investment in the processing industry from European companies. In particular, the combination of a relatively cheap workforce, favorable geographical position adjacent to the European Union, huge logistics potential, the EU-Ukraine Association Agreement which has entered into force and favorable provisions of the Ukrainian customs regulations make the country an appealing processing base.

Importing goods to Ukraine for the purpose of inward processing has a number of advantages, mainly related to the enterprises modernization and better use of workforce and enterprises’ production facilities. For Ukraine, on the other hand, it means that the processing industry will allow making a transition to its own development and production in the future.

It should be noted that for the state itself such measures are associated with low costs. The state should only ensure statutory regulation and favorable conditions for doing business. The rest is done by foreign businesses.

Ukrainian laws contain regulations providing for the conditions for the temporary import of foreign goods into the Ukrainian customs territory for a period of up to one year under customs procedure called “Inward Processing”. Under this customs procedure, foreign goods, being legally processed and then re-exported, shall be exempt from all taxes and customs duties, provided that the processed products are re-exported from Ukraine. Moreover, such goods are not subject to certification.

Legal Framework/i>

Inward processing is defined in Ukrainian laws as a process of importing raw materials for their further processing into a finished product. It should be noted that the cost of raw materials supplied by the importer for the purpose of inward processing shall be at least 20% of the total value of finished products at each stage of processing. The goods may be processed under the Inward processing customs procedure only after obtaining the respective authorization.

The application for an inward processing authorization shall be submitted by the goods owner to the customs authorities. The customs authorities shall, within five business days after receiving the application, issue the inward processing authorization free of charge. However, before obtaining the authorization, the applicant shall demonstrate, usually in the application itself, that it has sufficient infrastructure and technological equipment, as well as production and storage facilities. The applicant can also find out whether it meets the requirements of the inward processing customs procedure. For this purpose, the applicant may request the customs authorities’ provisional decision.

When applying for an inward processing authorization, the applicant shall, inter alia, submit the foreign trade contract containing information on the quantity of the goods to be processed and the scope of works and the timeframes for their execution, as well as a processing plan (this does not apply to the goods repair) with details of all processing stages.

The timeframes for the goods processing are set on a case-by-case basis, but may not exceed one year. In each case, the term begins from the day of importing the goods to be processed into the customs territory of Ukraine.

The number of processing operations under inward processing is not limited. The processing operations may involve the actual processing of goods (including their conditioning), assembly/disassembly operations, use of certain products contributing to or facilitating the production operations with the processed goods and repair of goods (including their modernization, calibration, restoration and adjustment).

The goods imported into the Ukrainian customs territory for the purpose of inward processing and processed products are subject to customs supervision. Customs authorities check, inter alia, if the volume of the processed products is in compliance with the quantities specified in the foreign trade contract. Experts may be invited to review complicated processing operations.

The company, having obtained an inward processing authorization, shall be liable for the violation of the processing procedure. Failure to comply with the law is subject to a fine. If the company, having obtained an inward processing authorization, does not comply with the Ukrainian customs regulations, the authorization may be revoked. In that case, the processing operations that have already begun shall, within 20 days from the date on which the authorization is revoked, be completed and the goods imported for the purpose of inward processing shall, within 30 days, be re-exported from the customs territory or assigned another customs procedure. If the processing operations that have already begun cannot be completed within 20 days without irreparably affecting the goods or the technological equipment, the operations shall be completed in accordance with the processing plan; thereafter, the processed products shall, within the following 10 days, be re-exported or assigned another customs procedure.

The Ukrainian goods or components used during inward processing are subject to customs duties at the time of the processed products exportation. The processed products may be also exported via another customs checkpoint. There, the paid deposit shall be returned when the goods are exported.

Application of the Association Agreement

Many European companies seek to apply the provisions of the Association Agreement between the European Union and Ukraine for their own benefit. After importation into Ukraine, the companies assume that the Ukrainian production partner will apply for a EUR.1 certificate for the finished products, re-exported to the European Union, certifying the Ukrainian origin of the goods. Under the Association Agreement, such finished products may be further exported abroad as goods of the European origin.

It should be noted that not all purchased parts from which the finished products are made in Ukraine have the European origin, even if they were previously imported into the EU and customs cleared. If the purchased parts originate in a third country, they shall be imported into Ukraine for inward processing as purchased parts originating in a third country. The application for a EUR.1 certificate in Ukraine and thus the use of preferences are possible only if finished products are made from purchased parts of the European origin.

There are no customs duties to be paid on purchased parts originating in a third country used for inward processing in Ukraine if the finished products are re-exported to the EU within one year. In this case, the finished products are not considered by the EU to be of the European origin. If a EUR.1 certificate is issued in Ukraine, purchased parts originating in a third country are subject to customs duties. In this case, the finished products shall be considered by the EU goods of the European origin.

Summary

The legal regulation of inward processing, the favorable conditions in Ukraine and the large workforce provide excellent opportunities for international companies to process their goods. Although there is still a need to reform the existing legal framework, several foreign companies are already successfully using the inward processing in Ukraine in cooperation with local production partners or by setting up their own production facilities.