Inward Processing in Ukraine

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.

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