Transcript Ukrainetag - All Ready Solutions

Investment in Ukraine: legal aspects
by Marina Tegypko
March 2009
Contents
I.
Introduction
II.
Corporate forms of investment
III.
Restrictions on foreign investments
IV.
Licensing of a target‘s business
V.
Antimonopoly matters
VI.
Shareholders agreements
VII. Transfer of funds
VIII. Taxation
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I. Introduction

Ukrainian laws provide for freedom of investment in Ukraine save for certain
economic sectors where the laws restrict foreign investments.

The most popular kinds of companies for investment are:
 joint stock company (akzionerne tovarystvo), and
 limited liability company (tovarystvo z obmezhenoju vidpovidalnistiu).

Other kinds (such as additional liability company, special partnership and private
enterprise) are not so popular.
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II. Corporate forms of investment

Limited liability company:
minimum capital requirements for these companies are 100 statutory defined
minimum wages (that is currently UAH 60,500 (about EUR 5,550); starting from 1
April 2009 – UAH 62,500 (about EUR 5,750);
the contributions must be paid in full during the first year of the company’s
activity;
 only paid up shares (parts thereof) can be transferred;
convening of the general meeting requires presence of the participants holding
at least 60% of the voting rights;
voting at the general meeting is made by simple majority of votes present at the
meeting. Special majority requires 50% plus one vote and is mandatory for
determining major directions and plan of the company's activities, approval of
management reports, amending the charter and withdrawing participant from the
company.
Therefore, the equity interest that exceeds 60% of the equity capital would
guarantee full control over the company’s running.
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II. Corporate forms of investment (continued)

Joint Stock Company:
 minimum capital requirements for these companies are 1,250 statutory defined
minimum wages (that is currently UAH 756,250 (about EUR 69,400); starting from
1 April 2009 – UAH 781,250 (about EUR 71,700);

convening of the general meeting requires presence of the shareholders holding
at least 60% of the voting rights (if the matter is to be voted with privileged shares,
convening of a meeting also requires shareholders holding 60% of the privileged
shares);

Generally, the decisions at the general shareholders meetings are made with
simple majority of votes present at the meeting. Certain matters (e.g. changes to
the charter and liquidation of the company) require 75% of the votes present at the
meeting.

Consequently, full control could be achieved with 75% of shares.
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II. Corporate forms of investment (continued)

New Law on Joint Stock Companies will enter into force starting from 30 April 2009. It
substantially changes the regulatory framework:

open and closed JSC turn to public and private JSC:
 Private JSC: should not exceed 100 shareholders; only private placement of
shares; shares cannot be listed at any stock exchange; pre-emptive rights must be
stipulated in charter;
 Public JSC: both public and private placement is possible; no limitations on
transferability of shares (pre-emptive rights arise only with regard to new issues of
shares); permanent listing at minimum one stock exchange.

additional protection of minority shareholders:
 In case of acquiring over 10% of shares, shareholder must notify the company of
such acquisition in 30 days, at latest.
 If a person or a group of affiliated persons have acquired 50% or more of shares,
they must within 20 days offer other shareholders to purchase remaining shares;
 Each shareholder may request a company to purchase his shares if such
shareholder has voted against any material agreement of the company, changes
to the company’s charter or authorised capital.
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II. Corporate forms of investment (continued)
 Matters to be decided with qualified majority of 75% of the total number of voting
shares:
 amendment of the charter
 decrease/increase of the authorized capital
 cancelation of the redeemed shares by the company
 change of the company’s form
 issue of shares
 spin-off and winding up of the company, except for particular cases stipulated
by law
 liquidation of the company and related procedures
 disposal of the company’s assets valued at over 50% of the company’s total
assets
 Further issues to be approved by a qualified majority may not be specified in the
charter of public JSC, but may be specified in the charter of private JSC.
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III. Restrictions on foreign investments
 Ukrainian laws impose restrictions on foreign investment in specific areas. There is
no codified act on limitation of foreign investments and, therefore, prospective
investor should pay special attention to the relevant field of legislation.
 Some points to consider:

foreign entity (a company under full control of non-resident) may not be
established in sectors having strategic importance to the state security;

laws prohibit investment or interest in the assets of a companies that cannot
be privatized;

the share of the foreign investor in Ukrainian information agency may not
exceed 35%;

the share of the foreign investor in the equity capital of publishing
companies may not exceed 30%; and

laws of Ukraine on licensing provide that any company applying for the
license must be incorporated in Ukraine.
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III. Restrictions on foreign investments (continued)

Strategic importance: effective laws do not specify particular economic sectors and
industries, although there is a test for defining whether the enterprise has a strategic
importance, i.e. where it meets one ore more criteria below:
a) is natural monopoly and conducts its activities in the national commodity
market;
b) enjoys a monopoly (a dominating position) in the national commodity market
provided that such commodity is of high social and economic importance;
c) is engaged in the state defense and security (in particular, enterprises of the
military and industrial complex);
d)
belongs to the fuel and energy industry which are part of the unified energy
system;
e)
ensures operation of the national infrastructure, in particular,
telecommunication and mail, aircraft, railway and sea transportation, longdistance oil and natural gas pipelines;
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III. Restrictions on foreign investments (continued)
f) is engaged in production and processing of nationally important minerals;
g) represents scientific and technical capacity of the country;
h) has over 0.5% share in the total export of goods, works and services
produced in Ukraine;
i) has over 5,000 employees; or
j) is classified as a major tax payer.
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III. Restrictions on foreign investments (continued)

Companies, which cannot be privatized:
state radio and television channels;
the companies ensuring integrity of the Ukrainian single electricity system;
 international and trunk transmission lines;
nuclear power plants, water power plants and dams;
water-supplying and melioration utilities;
heat and power plants;
main oil and natural gas pipelines (transit and serving Ukrainian system in
general);
underground oil and gas storages; as well as property complexes of enterprises
that produce ethanol.

These companies, however, are not prevented from entering into contractual joint
ventures, although any operations with their fixed assets are subject to approval by
the government and its respective agencies.
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IV. Licensing of a target‘s business

Often application for a license requires information on equity holders. In general,
licensee shall notify the licensing authority about any changes in the documents or
information provided for obtaining a license, in particular, information on the change of
control. The license may be revoked if the licensing authority determines that company
no longer matches the licensing terms and conditions.

Depending on particular kind of license, it may be preferable not to transfer the interest
in the ultimate investment object, in order to avoid change of the license terms. In such
cases, transfer of the interest in the parent company (usually an SPV) takes place.
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V. Antimonopoly matters

If investment constitutes concentration within the meaning of Ukrainian antimonopoly
laws, and exceeds statutory defined assets value threshold, - it requires permit from the
Antimonopoly Committee of Ukraine.

Assets value threshold established by Ukrainian antimonopoly legislation is relatively
small:
 a concentration of a group of companies whose total assets (or aggregate sales
turnover) for the year preceding the concentration exceeds EUR 12,000,000,
provided that
 total amount of assets (or aggregate value of the sales’ turnover) of at least two
participants to the concentration, including their assets/income abroad, exceeds EUR
1,000,000 for the year preceding the concentration; and
 total amount of assets (or aggregate value of the sales’ turnover) in Ukraine of at
least one participant to the concentration, exceeds EUR 1,000,000 for the year
preceding the concentration.
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V. Antimonopoly matters (continued)

Antimonopoly approval for concentration is provided on three levels: up to 25%, up to
50% and over 50% of control. Control might be achieved either through share
purchase, M&A transaction etc.

If the market share of at least one participant (alone or with affiliates) exceeds 35% in
the same or similar market as the one where the merger or concentration event is to
occur, antimonopoly permit is necessary regardless of the assets value threshold.
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VI. Shareholders agreements
 Shareholders agreements generally are rarely enforceable in Ukraine.
 From the standpoint of Ukrainian laws and judiciary, relations between the shareholders
should be governed by laws and corporate articles of association.
 In particular, shareholders agreements establishing voting procedure for the meetings, or
obligation to participate in the meetings, or specific procedure of forming the company’s
board etc., might be invalidated in courts.
 Parties cannot subject validity of their shareholders agreement to the law of another
jurisdiction – if the company was incorporated in Ukraine, Ukrainian laws will mandatorily
apply.
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VII.
Transfer of funds
TRANSFER OF FUNDS
directly to the charter
capital of the target
company
directly from account
in a foreign bank
to the selling investor
(share / equity holder)
using
“investment account”
at a Ukrainian bank
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VII.
Transfer of funds (continued)
 “Investment account” – special account opened with Ukrainian bank and designated
for investment (and re-investment) transfers in Ukraine and for repatriation of
profits.
 Use of investment account is usually recommended from currency control point of
view.
 Ukrainian currency control regulations are very strict. Currency transfer from
Ukraine is subject to numerous rules (subject to the purpose of transfer and
available contractual documentation, repatriation of profits might require individual
license of the National Bank of Ukraine). Use of an “investment account” for the
transfer of investment funds to Ukraine substantially facilitates future investment
repatriation.
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VIII. Taxation
 Taxation of dividends:
 the payer must make an advance profit tax payment in amount of 25% of dividends
without reduction of the amount payable. The advance tax payment shall be
transferred to the budget before or simultaneously with the transfer of dividends. The
payer then reduces accordingly the amount of profit tax payable by the end of same
reporting period;
dividends paid to a non-resident is a Ukrainian source income subject to a 15%
withholding tax, unless otherwise is provided by the relevant double tax treaty. The
amount is reduced accordingly and the tax must be paid by the payer not later than on
the date when dividends are paid to the equity holders. Withholding tax does not apply
to payment of dividends to a non-resident individual;
if payee is a non-resident individual, the dividend is subject to a 15% personal
income tax. The tax is paid on the account of the payee by the payer as its tax agent.
The provisions of the double tax treaties can be utilised to reduce the rate of personal
income tax.
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VIII. Taxation (continued)
 Investment income is taxed in Ukraine (withholding tax):
 Investment income - the difference between purchase price of shares or corporate
rights and sale price of such shares or corporate rights;
Applicable rate – 15%. In case of individuals (as opposed to corporates) the gain and
loss from sales of shares and corporate rights is aggregated for the calendar year
(which is also a fiscal year). If the difference is positive, it is subject to 15% tax. If the
difference is negative, the loss can be carried forward to the next year.
Check Double Tax Treaty: most of the double tax treaties provide that investment
income received in Ukraine should be taxed only in another country where foreign
investor is resident.
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VIII. Taxation (continued)
 Double Tax Treaty between Ukraine and Sweden:
 In case Ukrainian company (as opposed to partnership) pays dividends to Swedish
company, the following tax rates apply:
If Swedish company owns at least 25% of the voting shares of Ukrainian company,
and at least 50% of the voting shares in Swedish company are held by Swedish
nationals - 0% tax rate;
If Swedish company owns at least 20% of the authorized capital of Ukrainian
company - 5% tax rate;
Other cases - 10% tax rate.
 Investment income received by Swedish investors in Ukraine should be taxed only in
Sweden (except for the income received from sale of real estate, or the sale of shares in
the company which assets are primarily composed of real estate).
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Contact details
Marina Tegypko, partner
E-mail: [email protected]
BEITEN BURKHARDT KYIV
Address: 38 Turhenevska St., 01054 Kyiv, Ukraine

Phone:+380 44 4940400
Fax:+380 44 4940401

E-mail: [email protected]
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Thank you very much for your attention!