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22 January 2018, 15:47

Purchase of real estate by a foreign citizen in Ukraine as a reliable investment

Volodymyr Yakubovskyy
Volodymyr Yakubovskyy Partner NOBLES
Vasyl Fedorenko
Vasyl Fedorenko Junior Associate NOBLES

Ukraine has always been one of the most picturesque countries in Europe with a friendly nation and rich history. Besides, there is a huge potential of economic development in commercial and residential real estate sectors. Therefore, many foreign nationals seek an opportunity to purchase residential property in Ukraine. Under the effective legislation, real property purchase by a foreigner is recognized as an investment, meaning it is covered not only by the general legal regulation, but is also subject to more specific safeguards, providing investment protection guarantees.

The Ukrainian real estate market is rather attractive for non-residents, as it offers a great variety of benefits and opportunities for its participants:

  • Real property is affordable;
  • A wide-range of offers, starting from “economy” to “business” and “luxury” classes of real property to fit any budget;
  • Relative simplicity of the acquisition procedure;
  • Low maintenance expenses;
  • Possibility for high profit margin from rental activity;
  • Investment-protection guarantees.

In this article we will discuss legal implications on how to buy residential real estate, offered either as an investment into the construction of an apartment or a direct purchase of a finished object. We will cover the advantages of these options and discuss possible risks.

Investment into an unfinished real estate object is attractive due to affordable prices and the use of modern housing technologies, which reduce possible maintenance expenses.

However, such option is not secured from possible risks. The major one is that one apartment could be re-sold to many persons by a fraudulent construction company, which would lead to the loss of both real estate object and investment funds. Another risk is that the construction could be “frozen” or title documents not procured in time.

One of the peculiarities of an investment purchase is that all the agreements with a construction company are concluded with participation of investment institutions. Those investment institutions shall fulfill a high level of requirements to stay on the financial market, including the full liability to the buyers. The current legislation sets four schemes for investment into the real estate construction: (i) construction financing fund, (ii) real estate management fund, (iii) collective investment scheme, and (iv) issue of bonds, the obligation under which shall be fulfilled by the transfer of a real estate object (or part of it). Any other way of investment is deemed illegal, which can be a sign of a dishonest construction company and lead to negative consequences.

The other peculiarity is that the buyer cannot obtain any ownership rights for the apartment in an unfinished building. Such an apartment can not have any title documents at the stage of construction, that is why the parties usually sign a preliminary agreement with an obligation to transfer real property rights in the future. The preliminary agreement shall define all essential terms and conditions of the future apartment transfer, enshrine the price for the object and payment terms, define the rights, obligations and guarantees of the parties. As soon as the real estate object is finished and all the title documents are obtained from the regulatory authorities, the parties sign the principal agreement which finalizes the procedure of apartment purchase and is a title document for the new owner.

Besides the purchase price of the apartment, the parties will have to pay extra 2% from the purchase price as the notary fee for the certification of the principal agreement and the State Pension Fund charge. Usually, the parties are also charged around UAH 4000 (~ USD 138) for the producing of the title documents for the apartment by the respective authorities. Another additional payment will be for the compulsory monetary evaluation of the apartment, which is usual around UAH 1000 (~ USD 34). There is no legal obligation on who should cover these expenses, but in practice the buyer and the seller share the above expenses related to the deal equally.

Please note that under Ukrainian legislation signing the purchase agreement does not confer real property rights upon the buyer automatically. The ownership right is subject to a separate state registration procedure, which can be done at property registration offices or by a notary immediately after the certification of the principal agreement. Pay attention that the abovewritten notary fee does not cover the state registration of the property rights, so it must be paid additionally by the buyer. The price is negotiable, but usually makes around UAH 2,500 (~ USD 86).

To minimize the risk of facing any problems with dishonest developers, we strongly recommend following the below recommendations:

  • to choose a developer with a good reputation;
  • to find trustworthy positive feedbacks on its previous projects,
  • to examine all the construction documents thoroughly;
  • to check any litigation background of the developer;
  • to invest in objects with a high degree of completion.

However, since the Ukrainian experience has shown that there are many dishonest developers on the market, involving a local agent or a law firm for purchasing an unfinished apartment would be the best option to avoid all related risks.

An apartment in a constructed and commissioned real estate object with all the title documents is the other option available for purchase. Such type of an apartment is always more expensive, but the buyer would not face most of the risks of investing into construction, which are mentioned above.

Despite generally similar procedures of apartment purchase in both a constructed and an unfinished building, the legal aspects are different. The principal difference is that a finished apartment shall have all the title documents at the moment of agreement execution. That means that the buyer receives his property rights immediately after the execution of the purchase agreement payment of the purchase price and certification by the notary.

The purchase of a finished apartment is accompanied with the same additional payments that are applicable to an unfinished real estate object – 2% from the agreement price as the notary fee for the certification of the agreement and the State Pension Fund charge. Compulsory evaluation of the apartment will cost around UAH 1000 (~USD 34). The buyer and the seller are free to negotiate on who should cover all those expenses. The only difference from additional payments for unfinished apartment is that the buyer will not have to pay for the obtaining of the title documents from the respective state authorities. Also, as you already know, the real property rights are subject to a separate state registration. The procedure and applicable rates for registration are the same as for the abovewritten option regarding unfinished buildings.

Apartment’s background check

Finding a suitable apartment to buy is only a halfway. We strongly recommend asking your lawyer or agent to check the background of the apartment. Prior to the purchase, the buyer has to be sure that the apartment truly belongs to the seller and there are no documented issues with it. Professionals are able to make a complex due diligence of the real estate, investigating the full history of the property, gathering information on the construction company/owner and any related parties, making sure there are no arrests or restrictions imposed on the real estate and the future owner would not be bound by any obligation he did not consent to. Besides that, a lawyer or an agent, authorized by the buyer, can negotiate with the seller the price of the apartment and any provision of the agreement, to protect the interests of the buyer as safely as possible.

Documents required from the foreigner

To purchase an apartment in both finished and uncompleted building the foreigner will need the following documents:

  • a passport ;
  • a copy of the marriage certificate and a copy of the spouse's consent to buy property in Ukraine - in case he is married;
  • a notarized card with a sample of a signature;
  • the Ukrainian taxpayer’s identification code.

The last two are compulsory to be eligible to enter into real estate agreements in Ukraine and for opening a bank account. They can be easily obtained within 5-7 business days from a local notary and public authorities.

Opening a bank account and payment of the purchase price

Beyond the general provisions of currency control legislation, any real estate purchase in Ukraine by the foreigner is subject to a specific regulation as an investment activity. It offers a number of benefits for foreigners, such as additional legal guarantees and procedure of investment repatriation abroad. In addition, the effective monetary laws oblige everyone to make all payments over UAH 50,000 via cashless transactions, which makes the usage of a bank account essential.

Considering it, to obtain all the benefits from the investment protection and to meet the legislation requirements, a foreigner is urged to open an investment account in a local Ukrainian bank, which is simple and usually takes no more than one hour. As soon as the investment account is opened, the foreigner can transfer his money to it and proceed with the purchase.

It should be taken into consideration that for any transaction a bank could charge a service fee, which depends on the chosen bank, amount and type of transaction (usually in a range of 0,1 - 2% from each transaction).

Tax considerations

Any apartment in Ukraine is subject to additional real estate taxation. All the applicable taxes, rates and amount to be paid depend on the characteristics of a particular apartment.

The real estate tax applies to the part of apartments that exceeds 60 m². The tax rate is approved by local councils and may not exceed 1,5% of the minimum statutory wage per 1 m². In Kyiv, the tax rate for residential apartments was approved by the Kyiv City Council in 2017 and is applicable (until the adoption of a respective decision) for 2018. As of today it equals to 1% of the minimum wage (UAH 37.23 or ~USD 1.3) per 1 m². The real estate tax is payable annually.

Apartments larger than 300 m² are subject to an additional (luxury) tax of UAH 25,000 (~USD 866) per annum.

In case the foreigner decides to sell his apartment, the income generated from the transaction will be subject to the Ukrainian personal income tax. The effective tax rate applicable to non-residents is currently 18% + 1.5% temporary war tax. However, if the apartment has been owned for no less than three (3) years, no income and war tax apply to the very first transaction in a calendar (tax) year.

The inheritance tax (a type of the income tax) of 18% (plus 1.5% war tax) is applicable to heirs of a non-resident as well as to non-residents inheriting from a resident. For such tax the 3-year privilege is not applied.

To avoid double taxation of the property, non-residents can take advantage of a double taxation treaty between their home country and Ukraine.

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