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13 February 2017, 14:35

Recent Trends in Ukrainian Investment Regulation and Outlook on Legal Services in This Field

Anna Babych
Anna Babych Partner AEQUO
Oksana Krasnokutskaya
Oksana Krasnokutskaya Of Counsel AEQUO

The laws governing foreign investments have undergone significant changes in recent few years.

Liberalising and Improving the Legal Regulation of Investments

On 31 May 2016, the Verkhovna Rada of Ukraine (Ukrainian Parliament) adopted the Law of Ukraine “On Amendments to Some Legislative Acts Regarding the Cancellation of Mandatory State Registration of Foreign Investments” setting aside the requirement for mandatory registration of foreign investments (the “Law”).

The state registration of foreign investments has been mandatory since 1996 as a precondition for enjoying benefits and investment protection in Ukraine so that registered investments in the form of property contributions only have been exempt from import duty and could not be nationalised.

The Law overturned Article 395 of the Commercial Code of Ukraine and certain provisions of Articles 13 and 14 of the Law of Ukraine “On Foreign Investment Treatment”, which required mandatory registration of foreign investments, having thereby abrogated the preferential treatment of registered foreign investments.

On 27 September 2016, the Cabinet of Ministers of Ukraine in its turn revoked the Procedure for State Registration (Re-Registration) of Foreign Investments and Cancellation of State Registration of Foreign Investments, dated 6 March 2013 and registered under No. 139.

Please note that other positive changes that have definitely improved the investment climate in the recent years are the simplified procedure for obtaining employment permits, the introduction of ProZorro electronic sales system, the simplified procedure for obtaining merger clearance permits in Ukraine, reformed and improved corporate governance system for joint-stock companies to procure a better protection of investors' rights in Ukraine in general and in the state-owned and municipal companies in particular, and a moratorium on inspection of business entities.

Besides, we should particularly emphasise the legislative initiatives aimed at improving the investment climate in Ukraine.

Legislative Initiatives to Attract and Protect Investments

The Draft Law amending the Law of Ukraine “On Investment Activities” (regarding powers and authorities of finance and investment ombudsman) was registered with the Ukrainian Parliament at the end of 2015 under registration number 3292 introducing the position of finance and investment ombudsman.

According to the aforementioned draft law, the ombudsman’s key objective is to secure and protect rights and legitimate interests of investors by facilitating whether pre-trial or out-of-court resolution of disputes arising in the implementation of investment projects.

The Draft Law “On Limited Liability Companies and Additional Limited Liability Companies” registered with the Ukrainian Parliament on 13 May 2016 under registration No. 4666 puts into practice an innovative regulatory framework for limited liability companies and additional limited liability companies to replace the outdated one in the Law of Ukraine “On Commercial Companies”, which was adopted as far back as 1991.

The draft law introduces the flexible and innovative regulatory framework to meet the needs of the modern society, and mechanisms for protecting investors' rights and interests, prompt and fair resolution of internal conflicts between members of companies, which may pose a threat to the survivability of business.

Another instrument to attract investors in Ukraine is the introduction of the concept of industrial parks. To date, there are 12 such parks in Ukraine.

The Law of Ukraine “On Industrial Parks” adopted yet on 21 June 2012 under No. 5018-VI sets out the fundamental principles of establishing and operating industrial parks in Ukraine and provides a number of benefits such as exemption of industrial park entities from share participation in the development of infrastructure of populated areas and from payment of import duty when importing equipment of non-Ukrainian origin.

The Draft Law amending Section ХХ (Transitory Provisions) of the Tax Code of Ukraine and related to the development of domestic production by encouraging investments in the real sector of the economy through industrial parks, which was registered with the Ukrainian Parliament under registration No. 2554а-д on 25 October 2016, introduced yet another tax benefits for industrial parks.

Among them are the introduction of zero corporate profit tax for industrial park members and a 4.5% tax rate for the next 5 years, payment by instalments (during 5 years) of VAT charged to industrial park residents who import equipment in Ukraine provided that they use such equipment for infrastructure development of industrial parks or carrying out business activities within their territory.

The adoption of such draft law will facilitate the promotion of investment activities, encourage the industrial production and introduce the new high-tech productions with the use of technological parks.

Stabilising Balance of Payments vs. Attracting Investments

Notwithstanding the simplified procedure for making foreign investments in Ukraine and other positive changes, the National Bank of Ukraine has imposed during recent few years rather stringent restrictions regarding the return of foreign investments from Ukraine in order to fix and stabilise the situation on loan market and foreign exchange market of Ukraine.

The ban on purchasing foreign currency to make payments under certain transactions is among the restrictions to which foreign investors are most susceptible. Such transactions include, inter alia, sale by foreign legal entities of their participatory interests in Ukrainian legal entitles, withdrawal of foreign investors from business entities and returning abroad of their corporate shares, restrictions on transfer of dividends to foreign investors abroad.

For several succeeding years, those restrictions have made foreign investors to consider how to make any further investments in Ukraine and search for alternative ways to move abroad profits made in Ukraine.

Regrettably, such restrictions on the return of foreign investments only promoted making further investments by foreign holding companies only, structuring of asset purchase transactions by foreign holding companies only and making payments under share purchase agreements outside Ukraine.

Though restricting, to a certain extent, sums payable to foreign investors, some liberalisation of dividend payments based on companies' performances in 2014 and 2015 partially eased a rather significant pressure on investors.

Perspectives of Investment-Related Legal Services in Ukraine

Any legislative changes with regard to investments would certainly impact legal services which might be required by both national and foreign investors.

Recent improvements in the governance of joint-stock companies, namely, public joint-stock companies have caused investors’ increased demand for legal services such as advising to bring activities of joint-stock companies in line with recent amendments to the Law of Ukraine “On Joint-Stock Companies”. Likewise, cancelling the maximum number of shareholders in private joint-stock companies drove up the demand for changing of public joint-stock companies to private joint-stock companies.

The existing restriction on the return of foreign investments abroad gives rise to foreign investors' demand for services related to business restructuring involving foreign holding companies, and for legal support of transactions made by holding companies and governed by foreign law.

The adoption of the Law of Ukraine “On Limited Liability Companies” will boost the demand of investors and business entities for legal services to bring Charters (Articles of Associations) of limited liability companies in line with the requirements of the new law, to draft corporate agreements and restructure joint-stock companies for them to become LLCs.

Tax benefits introduced for the particular business entities, namely, industrial parks, will undoubtedly boost the demand for tax optimisation services through the establishment of industrial parks and integrating those into the current structure of business.

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