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Doing Business in Ukraine: Economic Recovery and Prominent Future

Contributed by Avellum

Last couple of years presented a tough challenge for Ukraine and exposed a number of political, as well as economic problems within the country. The scope of these problems led to a popular belief that the new Ukrainian government stands very little chance in taking meaningful steps to attract foreign investment in the near future.

However, since 2015, the Government proved to be capable of enhancing Ukraine’s investment appeal and creating favourable business environment in the country. A number of significant reforms were introduced boosting foreign investments and support of Ukrainian business in the aftermath of economic and political turmoil.

Corporate Governance

With the introduction of the Law of Ukraine “On Amendments of Certain Legislative Acts of Ukraine on the Improvement of the Level of Corporate Governance in Joint Stock Companies”, corporate governance in the country has undergone a massive positive change.
To begin with, we saw an introduction of a long-awaited pro-majority shareholder squeeze-out mechanism, a compulsory purchase of shares of minority shareholders of a joint stock company exercised by the holder of 95% (or more) of such company’s common shares. Secondly, the law introduced a pro-minority sell-out mechanism (exercised by minority shareholders compulsory sale of their shares to the dominant shareholder).
Furthermore, a legal framework for a concept of escrow accounts was created. It also introduced additional safeguards for pledges over bank accounts and eliminates burdensome formalities related to the change of the type of a joint stock company or its re-organisation.

Tender offer procedure

To protect the rights of minority shareholders, a tender offer procedure for private joint stock companies was substantially amended. This resulted in the introduction of detailed rules on the purchase price calculation and real liability for majority shareholder’s failure to comply with the procedure.

Energy

Energy industry was substantially reformed in the last couple of years. Ukraine now has a fully functioning natural gas market, an independent regulator and a long-anticipated Law of Ukraine “On Electricity Market”.

Recently introduced Electricity Market law creates a legal framework for the operation of a new, liberalised electricity market in compliance with the Third Energy Package. To be more specific, it establishes a new model of the market by eliminating a previously existing single-buyer wholesale electricity market.

Moreover, it improves bankability of renewable energy projects and creates liability for imbalances. It does so by imposing an obligation on producers of wind, solar and hydro renewable energy that sell electricity at “green” tariff and are also members of balancing groups to compensate for imbalances.

Public procurement

Ukraine’s public procurement sector has long been associated with corruption, with an estimated UAH 50 billion (USD 2 billion) loss annually through shady deals and luck of competition.

In light of the above, the introduction and following recent success of the ProZorro electronic procurement system seems rather remarkable.
Started as the NGO’s initiative, this transparency tool soon became a model for cooperation between the government and civil society. At times of growing frustration among Ukraine’s partners over the slow pace of the reforms, ProZorro also stands out as a cause for optimism.

To put it simply, the system has some specific attributes that make it a novelty in the procurement world. All information related to the tender process, including suppliers’ offers can be accessed and monitored by anyone. The system is an open source, with all data structured in line with the Open Contracting Data Standard, enabling cross-country data comparison and analysis.

Anti-raider legislation

Owners of immovable property and shareholders can sigh with a relief as now they have more protections during state registration of rights to immovable property and registration of legal entities. Among the key safeguards are the following:

  • ability to suspend unlawful registration by sending application to the registrar
  • introduction of criminal liability for state register’s’ that commit unlawful actions
  • transparency and public availability of corporate and real estate registers

Currency Controls

Along with signs of economic recovery, the NBU introduced a number of measures that demonstrate Ukraine’s willingness to lift existing currency control barriers and resume attracting foreign investment.

Early repayment of loans

The NBU substantially relaxed the prohibition on early repayment under cross-border FX loans (“FX loans”), which was initially introduced in 2014. Currently, Ukrainian borrowers may repay their cross-border FX loans before maturity, subject to some limitations. This should result in more active transfers of non-performing FX loans.

Moreover, the NBU excluded export-credit agency (“ECA”) premium or similar costs from its maximum interest rate limitation that applies to the FX loans. This is a major step, which should facilitate the attraction of the ECA-backed financing by Ukrainian borrowers.

Recently, the NBU also allowed early repayment of credits and loans to non-resident lenders should the borrower be under liquidation. If this is a case, the payment should be performed within liquidation procedure according to priority of creditors’ claims satisfaction, as determined by Ukrainian legislation.

Repatriation of dividends and investments

The NBU allowed repatriation of dividends abroad for the period between 2014 and 2016 years subject to one condition. The amount of such dividends must not exceed USD 5 million per one calendar month. However, the deregulation by the NBU did not stop just there. Effective from 15 November 2017, the NBU further allowed repatriation of dividends for the periods before 2014. Yet, the limit for the dividends accrued before 2014 is set to an equivalent of USD 2 million per one calendar month.

Taxation

Starting from 1 January 2017, Ukraine experienced a number of important amendments mostly related to tax administration, as well as to the application of corporate income tax, VAT, personal income tax and certain other taxes. These amendments were part of a package to reform the State Fiscal Service of Ukraine and are already contributing to the prevention of corruption within the Ukrainian taxation system.

Moreover, Ukrainian transfer pricing rules were improved by increasing the thresholds for transactions covered by the rules and further extended the list of controlled transactions. In particular, transactions with non-residents incorporated in certain corporate forms.

VAT

To eliminate corruption risks within State Fiscal Service, Ukrainian government launched an electronic register that automatically refunds VAT owed to exporters. The International Monetary Fund approved and backed up this reform, highlighting its significant role in establishing transparent public control over VAT refund.

However, tax reforms did not stop just there, effective from 1 July 2017, a properly registered VAT invoice became sufficient to deduct VAT credit without the need for any other documents. Moreover, in light of that, State Fiscal Service introduced effective mechanisms to combat VAT fraud through the special procedure on the suspension of the registration of VAT invoices. This procedure enables tax authorities to suspend registration of VAT invoices that fall within the risk assessment criteria adopted by the Ministry of Finance of Ukraine.

BEPS

Ukraine joined the Inclusive Framework of the Base Erosion and Profit Shifting (“BEPS”) Plan of the Organisation for Cooperation and Economic Development (“OECD”). Thus, starting from 1 January 2017 Ukraine became the 88 official BEPS Inclusive Framework member and declared its commitment to implement at least four minimum BEPS standards.

Land reform

Speaking about land reform, in the recent years we could witness a significant simplification of the requirements to land lease agreements (the “Lease Agreements”). Now, the Lease Agreements must contain only three mandatory terms instead of eleven mostly formal terms that were obligatory in the past. The reform had a major impact and resulted in decreased number of disputes, where the Lease Agreements were considered invalid based on formal grounds.

Another major development worth mentioning was establishing the 7-year mandatory minimum period for the lease of land plots intended for commercial, farming or individual agricultural production. To put it simply, this reform created stability in the land lease market and ensured the rational use of mentioned land plots.

Another good news is the decrease in the number of grounds for avoiding a land auction for lease of municipal and state land. This will certainly bring more transparency to the competition process, promote the amounts of lease payments and facilitate the investments into Ukrainian agricultural sector. Furthermore, the Government made certain steps towards implementation of electronic auction for lease of the state agricultural lands. However, the procedure should be further elaborated.

Improvements of Judicial System

To combat corruption in the judiciary, Ukraine simplified its court system, replacing the existing High Commercial Court of Ukraine, the High Administrative Court of Ukraine, and the High Specialised Court of Ukraine on Civil and Criminal Cases with the restructured Supreme Court. Additionally, two high specialised courts – the High Court on Intellectual Property and the High Anticorruption Court – will be established to consider intellectual property and anticorruption cases as the first instance courts.

The new Supreme Court of Ukraine has already been created and its first plenum is scheduled for 30 November 2017. The plenum will decide when the court will start to operate. To amplify the judicial reform, substantial amendments to the procedural laws were adopted on 3 October 2017 and subsequently signed by the President on 23 November 2017.

All through 2017, the High Qualification Commission of Judges and the Hugh Council of Justice identified 120 candidates in the vigorous testing and selection process, 113 of which were appointed as justices of the Supreme Court of Ukraine. The G7 Ambassadors pointed out that the selection process was “much more transparent and competitive” than ever before.

Finally, efforts were made to improve professionalism of judges and to reduce their temptation to accept bribes. In particular, numerous amendments aim to reform the status of judges, procedure for their appointment and to increase their liability.

Apart from that, Ukraine tried to improve and enhance its enforcement system.The new Law of Ukraine “On Enforcement Proceedings” allows creditors to employ the services of private bailiffs. Moreover, the law introduces safeguards against dissipation of assets by debtors and adds flexibility to the enforcement mechanics.

Employment of foreigners

It is now easier for foreigners to be employed in Ukraine. The Parliament simplified procedural requirements for employment of foreigners by adopting the Law “On Amendments to Certain Legal Acts Regarding Elimination of Barriers for Attraction of Foreign Investments”.

The law (i) reduces the list of necessary documents for obtaining a permit by half and cancels the requirement to confirm lack of skilled Ukrainian employees to obtain a permit; (ii) extends the maximum permit validity term for certain specific categories of employees from 1 to 3 years; (iii) provides for a minimum salary of foreign employees in non-governmental organisations, charity organisations and educational institutions; and (iv) makes it possible to obtain temporary residency permit for foreigners, whose share in the charter capital of Ukrainian legal entities is not less than EUR100,000.

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