Getting Started in Ukraine

I N U K R A I N EGETTING STARTED

Practical Guidelines to Doing Business in Ukraine

Diplomacy or Bribery: That Is The QuestionUse of Local Consultants as Intermediaries

Most Commonly Used Business Structures

Resident vs. Non�resident StatusRepresentative OfficesResidents: Joint Stock and Limited Liability CompaniesCapitalization RequirementsCompany RegistrationDocument PreparationRegistration Process

Company Taxation

Corporate Income TaxValue Added Tax

Personal Income Tax

Taxation of Resident Individuals

Overview of Import�Export Legislation

Foreign Economic Activity and Import�Export ContractsMiscellaneous Supporting Legislation

Taxation of Cross�Border Transactions

Customs DutiesTaxable Rules for Customs Value DeterminationOther Taxes

Labor laws

Work Permits for Foreign Employees

Commercial and Residential Real Estate

Property Title ResearchBuying Buildings

Aquiring Land Rights

Every Investor’s DreamAllocation for a Specific PurposeForeigners and Other Non�ResidentsLand Tax

Currency Regulations

Commercial Arbitration

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Table of Contents

2 Getting Started Booklet

I. Introduction

As a rule, all foreign companies doingbusiness in Ukraine must interface withgovernment officials at one point or

another. In fact, each step of doing businessrequires some interaction with the stateauthorities that can negatively influence a giventransaction.

In the case of mass privatization, the StateProperty Fund (SPF) was the key agencyresponsible for continually failing to implementlarge and mid-scale privatization with strategic(foreign) investors. Joint ventures wereencouraged instead. In import-exportoperations, the state customs authorities play thelead role in expediting (or delaying) the customsclearance process. In all cases, each rayonadministration requires a company registrationcertificate and a valid lease agreement for acompany to engage in business activities.

Thus, prior to entering the Ukrainian market,foreign investors often ponder whether they willapproach the relevant state officials directly or,alternatively, send someone else to representtheir interests. This initial choice is importantbecause depending on the degree of preparation,the first official visit can either produceinsurmountable future barriers or provideimmediate positive results. This is especially vitalin the area of real estate construction.

II. Diplomacy or Bribery: That Is the Question

Multinational companies with large investmentprojects frequently attempt to "arrange" thesuccess of their transactions through diplomatic

PRACTICAL GUIDELINES TO DOING BUSINESS IN UKRAINE

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connections (ambassadors, commercial officers,congressmen, senators, etc.). Unfortunately,direct lobbying through diplomatic channels,however dignified, provides no guarantees thatsuch projects will materialize, because promisesby the President often do not carry much weightat the local level.

Other foreign companies, often registered inexotic off-shore zones, rely on a more directapproach, including, but not limited to, makingcash gifts or other presents of appropriatematerial value in exchange for various favors.Admittedly, in such situations the projectssometimes receive the green light with greaterdegree of expediency than through diplomaticconnections. This alternative, however, carriessignificant risks for the reputation of the company.

Many mid-size organizations cannot engage theattention of their ambassadors to represent theiragenda, and refuse to "reward" a Ukrainian stateemployee in his or her individual capacity. Smallbusinesses and non-profit organizations oftensimply cannot afford the amount of therequested payment. Still others, including manyU.S. companies, are legally handicapped by thenotorious Foreign Corrupt Practices Act, whoseprovisions they dare not violate.

Inability to wield influence through eitherdiplomatic or financial channels provides thesecompanies with the only, and arguably the mostefficient (and legal), alternative: using theinfrastructure available only to local consultants.

III. Use of Local Consultants as Intermediaries

Unlike foreign representatives, local consultantsare uniquely equipped to operate within theexisting system. The Soviet Union blessed localconsultants with bitter cynicism, enabling themto anticipate and avoid the numerous pitfalls inthe system that frequently entrap and frustratewealthy (foreign) entrepreneurs.

Dealing with local consultants is not foreveryone: through trial and error, foreigncompanies have learned that such dealings canbecome a cruel and unusual experience. Duringthe Kravchuk administration, it was notuncommon for members of various racket groupsto sign up as representatives of foreigncompanies, only to appropriate the goods storedin the warehouse for re-sale on the black market.Today, the Ukrainian government punishesanyone caught in the more obvious scams withgreater regularity, but we continue to recommendthat one select local consultants based on theirreputation in the field.

Unlike foreigners, local consultants have avariety of tools at their disposal, allowing themto "lobby" individual projects with greaterefficiency. Typically, the consultant will begin bygathering information about the parties involvedin the transaction. Analysis of this preliminaryinformation often provides clear guidelines indoing the follow-up work to achieve the ultimateresults. The actual follow-up can consist ofseveral steps (or events) aimed at building ageneral consensus of support for the given project.

Depending on the nature of the project, anumber of tools can be used to accomplish themore difficult projects. Sometimes, as in thecase of British Know-How Fund's privatizationof 5 vegetable bases and 40 stores, much of thesuccess depends on influencing the publicopinion through the press (newspapers, radioand television). Other times, successfultransactions depend on organizing a small,quiet, yet influential, base of support for a givenproject within a specific government ministry orits branch.

In this regard, it is far easier to mobilize supportwithin one ministry, where all the "players"know (and usually respect) each other. Thesituation becomes more difficult whenconsent-building must be coordinated with twoor more government agencies (e.g., in case of


privatization, the Cabinet of Ministers and theSPF). Because each situation is different, acase-specific approach increases the chances ofa successful transaction.

Sometimes a local consultant will need to retainthe services of a specialist with a uniqueexpertise in a certain area (e.g., securitiesregulations, banking, intellectual property, etc.).

If so, such arrangements are reached on a case-by-case basis, either at an hourly rate orreasonable flat fee basis (much like engaging alobbying group in Washington, D.C.). A sumviewed as "unreasonable" could, of course,amount to indirect bribery and would becounter-productive to the goal of transactingbusiness without violating the Foreign CorruptPractices Act.

IV. Conclusion

Foreign companies frequently try to enter theUkrainian market based on promises made bysenior government officials, only to be rebuffedat the local government level. Others try toarrange transactions themselves. As could beexpected, their high attrition rate since 1991 hasonly enhanced Ukraine's notoriety for itsdifficult working environment.

The first barrier preventing foreign investorsfrom working in Ukraine, is a "Catch-22"situation: as in any developing market,investment demands that careful due diligence isperformed. At the same time, foreign companiesrightfully complain that no useful information isavailable through official means.

Undoubtedly, the key to success lies in theprocurement of reliable information in a timelyfashion. Local consultants are the best resourcein procuring the necessary information andimplementing the investor's assignment.Conveniently, they are a worthy alternative tocorruption.

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T he Ukrainian Civil Code (No. 435-IV,dated January 16, 2003, effectiveJanuary 1, 2004) and Economic Code

(No. 436-IV, dated January 16, 2003, effectiveJanuary 1, 2004) in combination provide forvirtually any type of companies. Despite thedazzling range of business structures offeredunder Ukrainian law, foreign investors typicallychoose one of the following four alternativebusiness structures:

• representative office (which is not a legalentity, and can be either commercial ornon-commercial);

• wholly-owned foreign subsidiary orenterprise (usually with limited liabilityprovided in the founding documents);

• "joint ventures" — companies with foreignparticipation (either in the form of a closedstock company or a limited liabilitycompany); or

• agreements on joint cooperation andproduction, which do not require registrationof a separate legal entity, including tollmanufacturing or production outsourcingagreements.

RESIDENT VS. NON-RESIDENT STATUS

One significant consideration in selecting theappropriate business structure involvesUkrainian foreign currency legislation, whichcategorizes the above structures as either non-residents or residents, depending on the type ofactivities carried out.

Non-commercial representative offices are"non-residents" under currency regulations

and tax legislation, while commercialrepresentative offices, subsidiaries and jointventures are classified as "residents" becausethey are legal entities, registered and residing inUkraine for more than 183 days per year. Whilethe distinction is not clearly expressed in otherlaws, it is significant in terms of taxconsequences and the ability of foreignbusinessmen to effectuate transactions inforeign or Ukrainian currency.

Both subsidiaries and joint ventures have thestatus of separate corporate entities and, thus,both limit an investor's liability to its initialinvestment. As Ukrainian corporate entities,joint ventures and subsidiaries are consideredto be "residents" under Ukrainian currencyregulations and they are subject to a differentfinancial regime than "non-residents" (such asrepresentative offices). For instance, residentcompanies may only transact business inUkrainian currency.

REPRESENTATIVE OFFICES

By definition, a representative office of aforeign company is not a separate legal entity,but is viewed as an "arm" of a non-residentcompany. As such, a representative office isnot incorporated under Ukrainian law. Arepresentative office simply represents theinterests of a foreign legal entity on Ukrainianterritory and, consequently, there is flow-through liability for the parent company.

Another consequence: representative officesthat are accorded "non-resident" status underthe Ukrainian taxation system are subject to aspecial financial regime under tax laws andcurrency regulations. Foreign companiesinitially prefer to register their presence as non-

MOST COMMONLY USED BUSINESS STRUCTURES


resident representative offices, particularly incase of import-export activities or simpleresearch of the market opportunities andconditions.

The key function of such non-residentrepresentative offices is to service existingcontracts between the non-resident companyand a local customer, but not to engage incommercial activities on its own behalf.Engaging in the so-called "commercialactivities" (executing contracts in its own name,accepting payment for goods, etc.) may result ina representative office's re-classification as a"resident," thereby being taxed based on localrevenues derived from its activity in Ukraine.

Moreover, the Ukrainian corporate taxlegislation places non-residents into twocategories: those which effectuate profit-generating activities in Ukraine (a) through apermanent representative office (active), or (b)without a permanent office (passive). Differenttax rates and payment procedures attach to eachcategory. This significant distinction is aimed atclosing the loophole by which non-residentrepresentative offices circumvented currencyregulations and paid lower (if any) taxes inUkraine on activities typically performed byresident companies.

RESIDENTS: JOINT STOCK AND LIMITED LIABILITY COMPANIES

Wholly-owned foreign subsidiaries and jointventures usually take the form of either closedjoint stock companies or limited liabilitycompanies, depending on the particularrequirements of the project. Both structures areconsidered to be "residents" under theUkrainian currency regulations and tax laws,and both have the corporate shield, limiting theliability of founders or shareholders to the valueof their contributions to the company.

Several differences exist between the abovecompanies. For example, in a limited liabilitycompany, the founders own equity in thecompany, expressed by a percentage ofownership (i.e., such a company does not issueshares of stock). The main difference betweena limited liability company and a joint stockcompany, however, lies in the degree ofstructural complexity. Limited liabilitycompanies are relatively simplistic andaccommodate the interests of minority owners.In sharp contrast, joint stock companies can beextraordinarily complex, particularly in casesof highly negotiated joint ventures with state-owned enterprises, and do not give minorityshareholders very much protection.

The management structure of a stock companyand that of a limited liability company is verysimilar with a few minor variations. Thethree-part structure is headed by the "generalassembly of shareholders" (or in case of alimited liability company, "general assembly ofparticipants") which represents the interests ofthe company owners. The next level, the"supervisory council" (a.k.a. the "board ofdirectors") is optional in both structures; it iscommonly employed in the stock companystructure, but smaller companies tend todisregard it. The final level, the managementboard, performs the company's day-to-dayfunctions.

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In practice, simple joint ventures or 100%foreign-owned companies usually register inthe form of a limited liability company. Thiscompany structure allows a relatively smallnumber of people to avoid a complexmulti-layered management structure composedof a general assembly, supervisory council andmanagement organs and to avoid theregistration of shares of stock. It is particularlyattractive in cases of 100% foreign-ownedcompanies because the charter (by-laws) canprovide for one executive organ where thefounder has complete and unequivocal control.

CAPITALIZATION REQUIREMENTS

The Law "On Economic Associations" governsthe formation of joint stock companies andlimited liability companies, and contains nolimitations on the size of share capital for jointstock companies, provided however that thecompany's authorized capital is divided intoshares of stock of equal nominal value.

The minimum capitalization for registration ofjoint stock companies is 1,250 minimummonthly salaries, while for limited liabilitycompanies it is 100 minimum monthly salaries.As of January 1, 2007, one minimum monthlysalary is equal to UAH 400 (from July 1, 2007it will increase to UAH 420 and fromDecember 1, 2007 to UAH 450). Note thatincreases of the minimum monthly salary arecommon; therefore, please verify thisinformation before calculating authorizedcapital, fines, fees, etc. Contributions to theauthorized capital of a company may be eitherin cash or in-kind.

Shareholders of stock companies and foundersin limited liability companies must make initialpre-registration deposits towards theircontributions prior to registration. Accordingto the Law "On Economic Associations," 50%of a shareholder's contribution must be paid


prior to registration if the shares are originallydistributed amongst the founders of a jointstock company or a limited liability company.The remaining sum must be paid, in itsentirety, no later than one year afterregistration of both types of companies.

COMPANY REGISTRATION

On July 1, 2004, the Law of Ukraine No. 755-IV"On State Registration of Legal Entities andPhysical Entities-Entrepreneurs," dated May 15,2003 (hereinafter the "Law"), came into force.The Law was specifically tailored to correspondwith the Civil and Economic Codes of Ukraine,which simultaneously came into effect onJanuary 1, 2004. The discussion below focuseson the registration of legal entities.

State registration in Ukraine evidences thecreation or liquidation of legal entities, as wellas any other registration activities whichrequire an entry into the Unified State Registerof Legal Entities and Physical Entities-Entrepreneurs (the "Register"). The Registershould be fully up and running in 2006,including a "one-window" registration point.

Registration is performed by a duly qualifiedstate registrar. They are responsible forregistering legal entities, reserving names oflegal entities (a novelty in Ukraine), providinginformation to various state authorities fromregistration cards, creating and storingregistration cards, filling out and issuingcertificates of registration and extracts from theUnified State Register, registering amendmentsin the founding documents of legal entities,registering terminations of activity.

DOCUMENT PREPARATION

All documents to be submitted for anyregistration activity must be personallysubmitted or sent by registered mail and mustbe written in Ukrainian. Registration cards

must be typewritten or handwritten in printand signed (in case of dispatch by registeredmail, the applicant's signature must benotarized). All founding documents (charters,founding agreements, if applicable,regulations) must completely conform to therequirements of Ukrainian legislation.

Please note that documents, which areexecuted and issued in a foreign country, mustbe duly signed, notarized with a certification ofthe notary's signature by the authority in theforeign country authorized to certify suchsignatures and, finally, legalized with theUkrainian Consulate in the foreign country orcertified by an Apostille, provided that theforeign country has recognized Ukraine as amember to the 1961 Hague ConventionAbolishing the Requirement of Legalizationfor Foreign Public Documents.

After a legal entity or entrepreneur is enteredinto the Unified State Register, the relevantstate registrar will create a registration file andassign it a registration number.

REGISTRATION PROCESS

The registration of a legal entity usually entailssubmission of the following documents:

• a duly filled in registration card for carryingout the state registration of the company;

• a copy of the resolution of the founders ortheir authorized bodies on the creation of alegal entity;

• two counterparts of the founding documents(according to the Civil and Economic Codes,the charter is the founding document of mosttypes of companies, including joint stockcompanies, limited liability companies andenterprises);

• the document evidencing payment of theregistration fee for the state registration of alegal entity; and

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• for legal entities established by a foreign legalentity (foreign legal entities), a duly legalized(certified by Apostille) extract from the trade,banking or court register in such entity's(entities') country of location, which extractevidences registration in such country.

Again, we stress that if the above documents areissued in a foreign country, then such documentsmust be notarized, certified and affixed with anApostille stamp in accordance with the 1961Hague Convention (or legalized in theUkrainian consulate in the country of origin) touse them officially in Ukraine. Importantly,"state registration" does not include mandatoryregistration with the social security funds, thePension Fund of Ukraine, the EmploymentCenter and the tax authorities.

In addition, the state registrar must provide tothe statistics bodies, the state tax authorities,the Pension Fund of Ukraine and the socialsecurity funds (hereinafter "Registration

Authorities") notice on the state registration ofthe company with an indication of the numberand date of registration and all information inthe company's registration card. This act alonewill be the basis for the inclusion of thecompany into the registers of theaforementioned state authorities.

Individuals, who carry out commercialactivities including the manufacturing and saleof products, the rendering of services or theperformance of certain jobs, must also registeras entrepreneurs for tax purposes. As a briefoverview, the state registration of entrepreneursincludes the submission of a duly executedregistration card and a copy of the individual'scertificate evidencing registration as a taxpayerand payer of other mandatory payments andthe payment of the registration fee.Entrepreneurs are also entered into the UnifiedState Register and their information is publiclyaccessible with the exception of their taxidentification codes.


The Ukrainian system of taxationcontains the following principle taxesand/or mandatory payments:

• Corporate Income Tax;• Value Added Tax;• Personal Income Tax;• Customs Duties;• Pension Fund and Social Security Fund

Contributions;• Excise Duties;• State Duties;• Land Tax;• Vehicle Owners Tax;• Payments for Licenses/Patents.

CORPORATE INCOME TAX (CIT)

1. Tax Jurisdiction

Legal entities incorporated and operating underthe legislation of Ukraine are normally treatedas tax residents and are taxable on theirworldwide income. Legal entities incorporatedabroad and operating under the laws of anothercountry are normally treated as foreign taxresidents (non-resident) and are taxable on twosources of income:

• Business income received from carrying outtrade or business in Ukraine; and

• Other non-business income received fromUkrainian sources.

According to the Law of Ukraine No. 334/94"On Taxation of Profits of Enterprises," datedDecember 28, 1994 (hereinafter the "Profit TaxLaw"), the tax on companies is known ascorporate income tax. Currently, this tax isgenerally calculated at a flat rate of 25% as of

January 1, 2004. Special tax rules may apply tocertain companies, such as insurance companies.

2. Taxation of Resident Entities

(a) Tax Accounting Rules

Under domestic tax accounting rules, tax items(including gross income and gross expenses) arenormally recognized on the basis of the cash-or-accrual method (e.g. first event rule). Under thismethod, income is recognized within thereporting period upon the occurrence of one ofthe following events, whichever occurs earlier:

COMPANY TAXATION

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i) the date of the transfer of funds from thepurchaser (customer) to the bank account ofthe taxpayer as payment for goods sold orservices (works) rendered or, in case of pay-ment in cash, the date of receipt of cash aspayment for such goods, works or services; OR

ii) the date of the unloading of the goods sold or,for works or services, the date of the factualprovision of the results of the works orservices by the taxpayer.

Expenses are recognized upon the occurrence ofthe one of the following events, whichever occursearlier:

i) the date of the write-off of goods from thebank account of the taxpayer as payment forgoods, works or services and, in case ofpayment in cash, the date of the withdrawalof cash from the cash register or cash reservesof the taxpayer; OR

ii) the date of the receipt of goods by thetaxpayer or, for works and services, the dateof the factual receipt of the results of suchworks or services.

The tax year corresponds to the calendar year.Taxpayers must submit tax returns for a calendarquarter, half year, three quarters, calendar yearand make quarterly tax payments. Quarterly taxreturns must be submitted within 40 daysfollowing the last calendar day of each calendarquarter, half year and three quarters and thefourth (i.e., last) quarter. There is no additionalannual tax return.

(b) Taxable Income

Resident entities are taxable on their worldwideincome received or accrued within a reportingperiod. The amount of taxable income isdetermined by subtracting allowable deductibleexpenses and capital allowance from grossincome.

(c) Gross Income

Gross income is defined as any income fromdomestic or foreign sources received or accruedby the taxpayer from any activity. Such incomemay be in monetary, tangible or intangible form.The following items are specifically included ingross income:

• Overall income from the sale or exchange ofgoods, works or services, including securities(except with respect to their initial issuanceor final extinguishment);

• Income from banking, insurance and otheroperations involving the provision offinancial services, currency sales, securitiesand debt instrument sales;

• Property and services received free of charge;

• Income from joint activity and in the form ofdividends from non-resident companies,unlike dividends received from residentcompanies, as well as interest, royalties, debtinstruments and income from leasingoperations (lease),

The following items are specifically excludedfrom gross income:

• Amounts of VAT received (accrued) by thetaxpayer on top of the cost of goods/services,except in cases when the taxpayer is not apayer of VAT;

• Income received from joint activity on theterritory of Ukraine without the creation of alegal entity, including dividends received fromresident companies, unlike dividends receivedfrom non-resident companies, whichdividends are taxed according to a specialprocedure;

• Monetary or in-kind contribution of capitalto an entity or partnership in exchange for anequity interest therein, irrespective of whether


the investor acquires a controlling interestfollowing such contribution.

(d) Deductible Expenses

Any current business-related expenses aredeductible unless such deduction is restricted ordisallowed by the Profit Tax Law. The followingitems are specifically included as deductibleexpenses:

• Compensation for goods or services to beused by a taxpayer in its business;

• Any current expense in connection withstarting-up, managing and carrying out ofbusiness;

• Capital asset improvement costs of up to10% of the total book value of all capitalassets at the beginning of the reporting year.Excess costs are capitalized.

Deductions of certain expense items isspecifically prohibited, including penalties andfees paid, dividend payments, corporate andpersonal income tax payments, as well as VATamounts included in the price of purchasedgoods (services) and amusement, entertainment,or recreational expenses. Of course, thisrestriction does not apply to expenses incurredby the taxpayer whose main business activity isfurnishing amusement, entertainment, orrecreation.

3. Corporate-Shareholder Taxation

The Profit Tax Law entitles Ukrainian residentcompanies to pay dividends to its shareholdersregardless of whether the paying entities haverecorded income or losses for the tax period.Moreover, the Profit Tax Law further providesthat there is no distinction between accountingand taxable income/loss for the purposes of thisrule.

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Ukrainian tax law treats taxes on dividends as aconstituent part of corporate income tax and notas a separate tax.

(a) Corporate Income Tax

Corporate income tax is paid on dividendsdistributed to residents and non-residents alikeat the rate of 25 % as of 1 January 2004. The taxis accrued on top of a dividend payment and ismade from the funds of the issuing company(e.g. corporate entity's funds). This means thatwhen the distribution is made (or before suchdistribution is made) a tax payment of 25 % ofthe dividend is remitted to the State, and thefull value of the dividend is paid to the shareholder.

At the end of the tax period, the taxpayingcompany is entitled to use the amount ofpreviously contributed tax on dividends as acredit against its corporate tax liabilities. If thetaxpayer does not have a sufficient corporate taxliability for the period, the amount of remittedtax on dividends may be carried forwardindefinitely into future taxable periods.

(b) Withholding Tax

Unless there is a better rate provided by therespective tax treaties, dividend payments madeto non-resident taxpayers are subject to a 15%withholding tax described above (e.g. Taxation ofNon-business income). The amount withheldshould be remitted to the State at the time of thedividend distribution.

Currently, there is no withholding tax forresident shareholders.

VALUE ADDED TAX

1. Taxable Transactions

In accordance with the Law of Ukraine No.168/97 "On Value Added Tax," dated April 3,1997, value added tax ("VAT") is imposed on:

(a) Domestic sale transactions of goods orservices, including payment for servicesunder lease agreements and operationsinvolving the transfer of ownership rights topledged objects to a creditor to extinguishdebt;

(b) Import of goods or services for use orconsumption in Ukraine, including theimport of property under leasingagreements, pledge agreements and/ormortgage agreements;

(c) Export of goods or services for use orconsumption outside of Ukraine.

VAT is levied at a rate of 20% of the taxableamount for domestic sales and imported goodsor services. For exported goods or services theVAT rate is zero percent. The general rule is thatthe taxable amount is defined on the basis of thecontractual value of the goods or services supplied.

2. Exempt Transactions

(a) Transactions Specifically Exempt from VAT

Certain transactions subject to the provisions ofthe "Law on Value Added Tax" ("the VAT Law")are exempt from VAT. These include, but are notlimited to, sale of domestically produced babyfood products, published periodicals, studentnotebooks, textbooks, books, and supplementarystudy materials, educational services byinstitutions with special permission (license) toprovide such services, special-purpose goods fordisabled individuals, pensions and monetaryassistance to the population, publictransportation services, among others.

(b) Transactions Not Subject to VAT

According to the VAT Law, certain transactionsare not subject to VAT. These include, but arenot limited to:


• Issuance of securities by enterprises, theNational Bank of Ukraine, the Ministry ofFinance of Ukraine, and by local authorities;

• Insurance and reinsurance services,including social and pension insurance;

• Transfer of lease property by a resident lessorto a lessee and the return of the leaseproperty by the lessee to the lessor; thepayment of interest or commission in lease(leasing) payments calculated on the value ofthe leased object (without calculating theportion of leasing payments provided ascompensation of a part of the value of theleased object pursuant to agreement);

• The pledge of property to a creditor pursuantto a credit agreement and the return of theproperty; the transfer by a resident creditor ofa mortgaged object into possession or use bya borrower; and cash payments of theprincipal amount and interest under amortgage;

• Payment of salary, pensions, stipends,subsidies and other cash or in-kind paymentsto natural persons at the expense of budgetsor social and insurance funds;

• Payment of dividends and royalties inmonetary form or in the form of securities;

• Provision of commission (brokerage) anddealer services for the sale or management ofsecurities;

• Transfer/import of fixed assets as acontribution to the authorized capital of alegal entity in exchange for equity interesttherein, provided that these assets are used toform a business (or part thereof) as a goingconcern.

3. Taxable Persons

There are several types of taxable persons definedas VAT-payers, based on the kind of business

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activity they perform. These VAT-payers include,but are not limited to, any person/entity which:

a) carries out or plans to carry out commercialactivity and voluntarily registers as a VAT-payer;

b) is subject to mandatory registration as a VAT-payer, including but not limited to, thefollowing cases:

(i) If the total amount from the carryingout of operations involving the supply ofgoods (services), including via the use ofa local or global computer network,subject to taxation pursuant to the VATLaw, is transferred (paid, provided) tosuch person/entity or as payment ofobligations to third parties within thelast 12 calendar months exceeds inaggregate 300,000 Ukrainian Hryvnia(without taking into account VAT);

(ii) The person/entity is supplying goods(services) on the customs territory ofUkraine with the use of the global or alocal computer networks. In this case, aperson/entity-non-resident may onlycarry out such activity via itspermanent representative registered onthe territory of Ukraine;

c) imports goods (accompanying services) involumes subject to taxation by VAT inaccordance with the law.

d) any person/entity which imports (for naturalpersons — imports or sends) goods(accompanying services) into the customsterritory of Ukraine for their use orconsumption on the customs territory ofUkraine, regardless of which regime oftaxation it uses pursuant to legislation, withthe exception of (a) natural persons, who arenot registered as VAT-payers and whichimport (send) goods (objects) in

accompanying luggage or receive them viapost office within the limits of non-tradeturnover in volumes not subject to taxation inaccordance with customs legislation (exceptthe import of transportation means or spareparts thereto by such natural persons) and (b)non-residents sending postal packagespursuant to the rules of the InternationalPostal Union into the territory of Ukraineand receivers of such postal packages.

Note that foreign legal entities are able toregister as VAT-payers in Ukraine only if theycarry out business in Ukraine through apermanent establishment.

4. Taxable Amount

For any taxable domestic sale, VAT ischargeable on the contractual value of money,goods/services or any other considerationreceived or accrued in connection with the sale.Should a taxable supply be made to a relatedperson, to a non-registered VAT person, or forany consideration other than money (in-kindconsideration), VAT is chargeable by thesupplier on normal price ("fair market value") ofgoods or services being sold or provided.

5. VAT Administration

(a) Remittance

VAT on domestic supplies and importation ofservices is administered by the tax service, whileVAT on the importation of goods isadministered by the customs service.

Any taxable person should assess the amount ofVAT to be remitted to the budget by reducing("crediting") its output VAT liability (VATcollected on outward taxable sales) with inputVAT credit (VAT incurred on inward taxablesales and import sales).

VAT on imported goods is payable by theimporter in cash at the customs border. A


taxable person responsible for paying importVAT and meeting certain requirements maydefer such payment by issuing a VAT promissorynote. This VAT promissory note should either besettled within a 30-day period or included inoutput VAT liabilities.

(b) VAT Credit

Any input VAT incurred by a taxable person oninward domestic sales and import sales iscreditable against output VAT liabilitiesprovided that such input VAT was incurred:

• In connection with the acquisition orproduction of goods (including upon theirimport) and services for purposes of theirfurther use in taxable operations in thecontext of the business activity of a VAT-payer; and

• In connection with the acquisition(construction, erection) of fixed assets(capital assets, including other non-turnovertangible assets and incomplete capitalinvestments in non-turnover capital assets),including upon their import, for purposes offurther use in production and/or the supply ofgoods (services) for taxable operations in thecontext of business activity of a VAT-payer.

If a VAT-payer acquires (produces) goods(services) and fixed assets, which are notintended for their use in operations not subjectto VAT or exempt from VAT, such VAT is notcreditable, but may be deductible ordepreciable/amortizable for CIT purposes. Ifproduced and/or acquired goods (works,services) are partially used in taxable operations,then that portion of the paid VAT is creditableupon their production or acquisition whichcorresponds to the portion of use of such goods(works, services) in taxable operations of thereporting period.

If a VAT-payer acquires (produces) tangible andintangible assets (services), which are not

intended for their use in the business activity ofsuch taxpayer, then the amount of VAT paid inconnection with such acquisition (production)is not creditable.

(c) Tax Refunds

Since export sales are zero rated, any taxableperson making sales of goods/services for use orconsumption outside of Ukraine may claim as acredit its input VAT incurred in connection withexported supplies.

Although the excess credit is refundable, verystrict requirements for such refunds areestablished. In fact, such requirements makeVAT refunds very difficult to obtain or at leastdelay them considerably. Needless to say, somevery entrepreneurial Ukrainians have made aprofitable business out of the refund of VAT;however they do charge high percentages inachieving the return of VAT in a quick manner.

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O n January 1, 2004, the new law "OnPersonal Income Tax" came intoeffect. Notwithstanding the number

of notable changes, the law inherits certain keyprinciples established by preceding acts oflegislation, among which is tax jurisdiction.

Individuals, who are tax residents in Ukraine,are subject to personal income taxation on theirworldwide income. Non-resident individualsare subject to taxation only on income fromUkrainian sources.

TAXATION OF RESIDENT INDIVIDUALS

1. Tax Residency

A tax resident of Ukraine is an individual, whohas permanent residence in Ukraine. If anindividual has a permanent residence in morethan one country, he or she will be qualified asUkrainian tax resident in case he or she hascloser personal or economic ties (e.g. center ofvital interests) in Ukraine.

If it is impossible to determine the country inwhich the individual has his center of vitalinterests or if the individual does not have apermanent residence in any country, theindividual will be considered a Ukrainian taxresident if present in Ukraine for at least 183days of the tax period (including days ofarrival and departure). Furthermore, if taxresidency is impossible to determine based onthe above provisions, the individual will be atax resident of Ukraine if he or she is a legalUkrainian citizen.

2. Tax Rates

Over the period from January 1, 2004 toDecember 31, 2006, the personal income tax ratewas a flat tax rate of 13%. However, the rate isincreased to 15% as of January 1, 2007.

In addition, from January 1, 2004 there is a 5%income tax on interest income received ondeposits and deposit certificates. Furthermore,income derived from gambling, winnings, etc.

PERSONAL INCOME TAX


will be taxed at a rate equal to double the flatrate (i.e. as of January 1, 2007 the rate is 30%).

3. Taxable Income

Resident individuals are taxable on theirworldwide income, i.e., on income "received"from both domestic and foreign sources.Income is taxable irrespective of whether it isreceived in cash or in-kind. If a residentindividual receives benefits in-kind, the amountof taxable income is determined on the basis ofthe fair market value of the property, services orother benefits received.

Certain benefits, received by a residentindividual, are specifically excluded frompersonal income taxation, such as StatePension and social security insurancepayments, alimony, gifts made by spouses; statesocial insurance and state welfare payments,housing subsidies, and other payments andcompensations payable from the state budget,the Pension Fund and social security funds, thevalue of state-owned apartments (buildings)received by individuals on a no-charge basis.

The Personal Tax Law contains a list of itemsspecifically included in the gross income of anindividual. These include, among others, gifts,insurance payments and premiums, rentalincome, fringe benefits (including the cost ofreceived rent, property, food, assistance of homeservants, expense reimbursements, amounts offinancial aid), amounts of punitive (vs. actual)damages received, forgiven debts andobligations, interest and dividend income,investment income, and inheritance.

4. Taxation of Foreign Citizens Resident in Ukraine

Foreign citizens, who are tax residents ofUkraine, are taxed under the very same rulesapplicable to Ukrainian tax resident-citizens. Inaddition, resident foreign citizens can enjoy afew employer-provided allowances, which are

specifically excluded from their taxable income,such as car, travel and housing allowances, theirsocial security contributions and state pension.

(a) Assessments and Payments

Tax forecasts are to be filed by tax agents on aquarterly basis. Under the Personal Tax Law, atax agent is a person responsible for withholdingand paying taxes to the budget. Tax forecastsshould be filed with the tax authorities within 40days from the end of a tax reporting period.

(b) Taxation of Non-resident Individuals

Non-resident individuals are taxable only onincome received from Ukrainian sources. Underthe Law, income is considered to be derived fromUkrainian sources if it is received or earned inUkraine.

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I. Introduction

Since declaring its independence in Augustof 1991, the Ukrainian government hasstruggled to establish a legal system to

accommodate its entrance into the globalcommercial economy. For instance, commercialstructures are described in such legislative acts asthe Civil and Economic Codes and the Law "OnEconomic Associations." In the case of jointstock companies, the Law "On Securities and theStock Exchange" and relevant Ministry ofFinance instructions will also apply.

Foreign investment is governed by the Laws "Onthe Protection of Foreign Investments inUkraine," "On the Foreign Investment Regime,""On Foreign Economic Activities," "OnPrivatization of State-Owned Property," "OnPrivatization of Small State Enterprises (Small-scale Privatization)," "On Restoration of theSolvency of a Debtor or Recognition of a Debtoras Bankrupt," and "On Secured Transactions," aswell as the Land Code. In the case of privatiza-tion, additional SPF instructions must beanalyzed. Other laws also impact foreigninvestment, such as taxation, currency andimport-export regulations, and intellectualproperty laws.

The Parliament of Ukraine adopted all requiredlegislative acts for the WTO accession. The newdocuments should be passed to the WTOWorking Group, which will assess whether thelaws meet the WTO standards. Afterwards, thelaws should return to the Parliament for the finalratification as a whole and such ratificationannounce Ukraine’s accession. The legislationwill liberalize and facilitate the import-exporttransaction and will promote stable traderelationships with other WTO-members.

Therefore, it is incorrect to say that Ukraine'slegislation is not functional. Admittedly, some

provisions in Ukrainian legislation areambiguous, and sometimes contradictory, whileothers are plainly unenforceable. Nevertheless, ajigsaw puzzle-like legislative system exists and, asdysfunctional as it may be, deserves the analysiscontained herein. By way of introduction to thepeculiarities of Ukrainian commercial law, webegin with an overview of the foreign economicactivities and, specifically, import-export aspectsof Ukrainian legislation.

OVERVIEW OF IMPORT�EXPORT LEGISLATION


A. The Law "On Foreign Economic Activities"

All foreign entities (legal and physical) canengage in various forms of business activies inUkraine and effectuate many types ofinvestment. As a rule, any activity contemplatingforeign participation is classified as "foreigneconomic activity," and is therefore subject to aspecific legislative regime.

The 1991 Law "On Foreign EconomicActivities," No. 0959, is clearly outdated.Nevertheless, it is still technically effective, andtherefore deserves at least a superficial review.Drafted and enacted in the nostalgic pre-hyper-inflationary Soviet economic era, when the rublezone provided Ukraine with necessary economicsupport, much of this antique law has beensupplemented or amended, either legislatively orin practice. The unaffected remainder does notreflect the substantial changes in commerciallegislation that have occurred since Ukraine'sindependence.

In its heyday, this law encompassed all types of"foreign economic activities," including exportand import of goods, services and capital;servicing of foreign businesses; scientific activityand training of personnel; internationalfinancial operations and securities trading;credit and financial operations and the creationof corresponding institutions; jointentrepreneurial activity; entrepreneurial activitythrough the granting of licenses, patents, know-how, trademarks; conducting of shows,auctions, trade fairs, conferences, symposiums,seminars, etc.; wholesale, retail andconsignment trading for foreign currency;leasing operations; currency trade and salethrough currency auctions, currency exchangesand inter-bank currency markets; contractsbetween Ukrainian citizens and foreign legalentities; employment of foreigners in Ukraine,among others.

Regardless of the self-proclaimed breadth of itsjurisdiction over all transactions involving

foreign entities, in reality the law "On ForeignEconomic Activities" primarily serves as a basisfor effectuating import-export operations.Immediately below, we summarize the variousfacets of Ukrainian import-export legislation,as reflected by the supporting laws whichaccomplish what the law "On ForeignEconomic Activities" never could: namely,provide a functional structure for standardimport-export operations.

With this brief overview, we can begin ouranalysis of the relationships and rights betweenUkrainian entities and foreign importers.

B. Import-Export Contracts

According to the Law "On Foreign EconomicActivities," the single most important rule isthat a foreign economic (or cross-border)contract must be in written form. Later, theRegulations "On the Form of ForeignEconomic Agreements (Contracts)," approvedby Order No. 75 of the Ministry of ForeignEconomic Relations and Trade of Ukraine onOctober 5, 1995, provided a variety of standardclauses to be incorporated into foreigneconomic agreements executed in Ukraine.

Subsequently, Order No. 75 was renderedineffective by Order No. 201 "On Approval ofthe Regulation on the Form of ForeignEconomic Agreements (Contracts)" issued bythe Ministry of Economy and EuropeanIntegration on September 6, 2001, whichprovides the guidelines regarding the materialterms and conditions of foreign economiccontracts, taking into consideration therelevant provisions of international agreementsto which Ukraine is a party.

Until the end of October 1999, it was relativelywell-settled that one of the key requirements forthe execution of agreements with Ukrainiancompanies was the appearance of two signatureson the behalf of the Ukrainian party. Thisrequirement was repeatedly stated in the Law of

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Ukraine "On Foreign Economic Activities," aswell as the above-mentioned Regulations.However, on October 21, 1999, the Parliamentadopted the Law "On Amendments to Article 6of the Law of Ukraine 'On Foreign EconomicActivities,'" No. 1182-XIV, which excluded thedual signature requirement for foreign economicagreements.

No additional permissions or registrations offoreign contracts are usually required by thestate administrative authorities, unlessspecifically provided otherwise by Ukrainianlegislation or unless licensing is required in thespecific import-export transaction. Severalexceptions exist, however, including barter andcounter-trade contracts with foreign parties,almost all contractual arrangements withUkrainian state-owned enterprises (which aresubject to review and approval by suchenterprises' higher-standing organization, suchas its Ministry), certain transactions in foreigncurrency (which require special permission

from the National Bank) and, recently, jointinvestment agreements with foreign entities.

Today, any Ukrainian physical or legal entitymay enter into foreign trade contracts withoutobtaining any special state permissions. Thatsaid, however, Ukrainian individuals engagingin any commercial activities (local or foreign)must now register as "subjects of entrepreneurialactivity" with the local state authorities and paythe much-dreaded income tax. The int-roduction of a simplified taxation procedureand a flat tax rate in 2004 (13% until January 1,2007, and 15% thereafter), however, have madethe payment of income taxation almostcommonplace.

Naturally, the parties to a foreign economiccontract have the right to choose foreignarbitration for settlement of disputes.Alternatively, such issues can be resolved inUkraine under foreign law by agreement of theparties. If the parties failed to agree as to choiceof law under a contract, Ukrainian law will


dictate the law to be applied to the contract.However, there are notable exceptions. Forexample, contracts for the construction oracquisition of immovable property on theterritory of Ukraine are governed exclusively byUkrainian laws.

The form of foreign economic contracts isdetesmined by the place of execution thereof,unless the parties provide otherwise.Accordingly, a contract entered into in aforeign country cannot be invalidated byUkrainian laws for reasons of non-compliancewith Ukrainian standard forms. However, suchforeign economic contract must adhere tosubstantive Ukrainian laws.

On the other hand, a foreign economiccontract must be complete in form as well assubstance if such contract is executed inUkraine. Under Ukrainian law, either a foreignagreement or some of its provisions may bedeclared invalid or void by a court if it does notcomply with the requirements of Ukrainian lawor international agreements of Ukraine. Anagreement is void under Ukrainian law fromthe moment of its execution.

C. New Licensing Requirements

The Law of Ukraine No. 1315-IV, datedNovember 20, 2003, introduced amendmentsto Article 16 of the Law "On Foreign EconomicActivity" regarding the licensing of certainforeign economic operations. Suchamendments deal with the licensing of theexport/import of goods into Ukraine undereither an "automatic" licensing procedure or a"non-automatic" licensing procedure in certaincases. Automatic licensing grants permission tosubjects of foreign economic activity for theexport or import of goods within a specifiedperiod provided that such goods are not subjectto a quota. Conversely, non-automaticlicensing grants permission to subjects offoreign economic activity within a specified

period for the export or import of goods, whichare subject to quotas (quantitative or otherwiselimited).

Export is subject to licensing in Ukraine ifthere is a disbalance of certain vitally importantgoods on the internal market or to protect thepopulation, animals, plants, the environment,public morale, national wealth, intellectualproperty or state security. Likewise, import ofgoods is subject to licensing in case of(i) certain fiscal problems; (ii) a decrease ingold-currency reserves; (iii) necessity toprotect the population, animals, plants, theenvironment, public morale, national wealth,intellectual property or state security;(iv) importinig precious metals (except bankmetals); (v) protecting national production ofgoods and patents, trademarks and copyrights;and (vi) fulfilling international agreements ofUkraine.

The Cabinet of Ministers is empowered toapply quotas and establish a licensing regimeon certain goods at the request of the centralbody of the executive branch responsible forissues of economic policy or other authorizedbody. According to the amendments to Article16, only one type of license may be issued foreach type of product. The licenses themselvesare issued by the central body of the executivebranch responsible for issues of economicpolicy or other authorized body on the basis ofapplications. In some cases, the grantingauthority may also request to review anydocuments and information necessary toconfirm the data in an application, as well asthe foreign economic agreement itself.

In the case of automatic licensing, theapplication for a license and the othernecessary documents may be submitted on anyworking day before the customs clearance ofgoods. The term for issuing a license should notexceed ten (10) working days from the date ofreceipt of the application. However, in the case

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of non-automatic licensing, the following willapply:

1) the term for considering applications shouldnot exceed 30 days from the date of receiptof applications if they are considered in theorder of their receipt, but not more than 60days commencing from the date of theexpiration of the announced term foracceptance of applications if they areconsidered simultaneously;

2) a license shall be issued on the basis of anapplication within the limits of a quota withan indication of the validity term of thelicense;

3) if established quotas are exhausted at thetime of application, such application shallnot be considered. A subject of foreigneconomic activity, which submitted acorresponding application, shall beinformed in writing of the fact of theexhaustion of quotas within seven (7)working days from the date of its receipt;

4) a decision on the issuance of a license shall betaken, taking into account information onearlier received licenses provided that theapplicant observes the requirements of thelegislation on the protection of economiccompetition.

Upon payment of the issuance fee andacceptance of the application, a license will beissued to the subject of foreign economicactivity. The customs clearance of goods willonly take place upon the presentation of anoriginal license. A copy of the license will beattached to the cargo customs declaration andwill serve as one of the grounds for theadmission of the goods across the customsborder of Ukraine.

Each month the regional customs authoritiesreceive information on the issuance of licensesfor the export or import of goods falling undera licensing regime. For its part, the regionalcustoms authorities inform the central bodyresponsible for issues of economic policy onthe volume of the export or import of goods.


The licensing requirements also apply to barteroperations with goods falling under a licensingregime and to the export or import of disks forlaser reading systems, matrixes, equipment andraw materials for their production. However, thelicensing requirements do not apply to the exportof goods received by an investor on the basis ofproduction sharing agreements, unless otherwiseprovided by the production sharing agreementitself. They also do not apply to certain goodsrelated to military production, atomic energy andstate secrets of Ukraine on the basis of Article 20of the Law "On Foreign Economic Activity."

Finally, the list of goods, the export or importof which fall under a regime of licensing, thevalidity term of licenses and any amendmentsto such information, as well as the procedurefor the submission and consideration of licenseapplications is published in the officialpublications of Ukraine with a notice to thecorresponding committee of the World TradeOrganization (WTO) within 60 days from theday of the publication and the presentation ofcopies of such publications.

If a quota is allocated amongst countries-suppliers, information on such allocation ispublished with a notice about the allocation toother countries interested in the supply ofcertain goods in Ukraine. The officialpublication must take place no later than thedate of the introduction of a licensing regime.At the request of an interested member of theWTO, the corresponding information must beprovided regarding the following:

1) the procedure for the application oflimitations;

2) the quantity of issued licenses for a specificperiod with an indication, if necessary, of thevolume and/or value of goods;

3) the allocation of licenses amongst countries-suppliers;

4) the statistical information regarding thevolume and/or value of goods.

II. Miscellaneous Supporting Legislation

The simplicity of the Law "On ForeignEconomic Activity" ultimately necessitatedadditional legislation to provide a commonpayment mechanism for effectuating variousimport-export transactions. A separate set ofsupporting instructions governs case-specifictransactions, such as barter or consignmentagreements. As should be expected, therefore,numerous supporting legislative acts governimport-export transactions, including:

• Resolution No. 1996 of the Cabinet ofMinisters "On Lists of Products, theExportation and Importation of Which areSubject to Licensing and Upon WhichQuotas are Established in 2004," datedDecember 24, 2003;

• Resolution No. 136 of the National Bank ofUkraine "On Approval of the Instruction onthe Procedure for Executing Control Over andObtaining Licenses for Export-Import andLeasing Operations," dated March 24, 1999(as lastly amended on February 12, 2003);

• Resolution No. 1104 of the Cabinet ofMinisters "On Approval of the Procedure forthe Issuance, Circulation and Repayment ofPromissory Notes Which Are Drawn In TheAmount of VAT When Importing (Carrying)Products Onto the Customs Territory ofUkraine," dated October 1, 1997 (as lastlyamended on May 12, 2003); and

• Order No. 201 of the Ministry of Economyand European Integration "On Approval ofthe Regulation on the Form of ForeignEconomic Agreements (Contracts)," datedSeptember 6, 2001 and registered with theMinistry of Justice on September 21, 2001under No. 833/6024.

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In combination, these directives create asystem whereby a Ukrainian resident canexecute a contract to sell or purchase anydesired goods or services. In a typical importtransaction, for instance, a Ukrainian residentcan convert Hryvnia, the Ukrainian nationalcurrency, into virtually any foreign convertiblecurrency. The contractually agreed-uponamount will then be wired to the seller aspayment under a foreign economic agreement(e.g., sale-purchase of goods or services).

Note that Ukrainian legislation requires that thepurchased goods must enter the Ukrainianterritory within 90 days of the payment date.Otherwise, the Ukrainian importer will be subjectto a penalty in the amount of 0.3% of the customsvalue of the undelivered products. However, incertain cases, the above 90-day term may beextended if the Ukrainian importer receives anindividual license from the National Bank ofUkraine.

The supporting legislation wisely protects againstthe more obvious abuses, such as inflating thecontract price (for receiving kickbacks) ordeflating them (for dumping on foreign markets).For instance, the "Regulations on the Method ofForming and Using Indicative Prices," approvedby the Ministry of Foreign Economic Trade in itsOrder No. 506 of August 8, 1996, impose indica-tive prices on all subjects involved in foreigneconomic activity for comparison purposes. Suchindicative prices are based on currentinternational market prices for similar goods.

On October 2, 1996, the National Bank ofUkraine's Directive No. 254 imposed a systemcalling for the "registration of foreign contracts"whereby all licensed banks were required toprovide guarantees for their clients' performanceof contractual obligations if such a foreigncontract contained a pre-payment provision.Ukrainian banks suddenly found themselvesliable for 100% of the contract amount if thegoods were not delivered in a timely fashion and,as a result, no contracts were signed with"pre-payment" clauses. Fortunately, thisDirective was canceled on January 10, 1997, byDirective No. 2, and pre-payment clauses areonce again permissible without limitations.Nevertheless, such theatrics should serve as areminder of the necessity to seek adviceimmediately prior to undertaking anytransaction in Ukraine.

The last significant step in completing the cycleof an import transaction under the Law "OnForeign Economic Activities" involves clearingUkrainian customs taking into account theCabinet of Minister's Resolution No. 390 "Onthe Importation onto the Territory of Ukraine ofCertain Types of Goods," dated March 29,2002, which takes effect from January 1, 2004.Generally, the Ukrainian customs officials allowproducts to cross the Ukrainian border onlyupon presentation of a customs declaration andproof of payment of customs duties and valueadded tax (and, where applicable, excise tax).


1. Outbound Transactions

Since resident entities are taxable on theirworldwide income and may also be tax-able by foreign countries on their

income derived from sources within that coun-try or from carrying on business in such coun-tries, the same income is potentially subject todouble taxation.

In order to avoid this double taxation, Ukraineuses a foreign tax credit method in its doubletaxation treaties. Under this method, foreigntaxes paid by a resident taxpayer on foreignsource income may be credited against itsUkrainian tax liabilities on such foreign sourceincome.

Excess foreign tax credit may not be offsetagainst a resident taxpayer's Ukrainian taxliabilities on any domestic source income, normay it be carried forward or backward.

2. Inbound Transactions and Double Taxation Treaties

Ukraine has a surprisingly extensive globaltreaty network. To date, it has concludeddouble taxation treaties with over 50 countries,which generally follow the OECD ModelIncome Tax Convention. Plus, Ukraine was alegal successor to a number of double taxationtreaties concluded by the former Soviet Union.We attach a table at the end of our InvestmentGuide for your perusal.

CUSTOMS DUTIES

Customs duties are imposed on most goodsimported into Ukraine and certain goodsexported from Ukraine. Customs duties arenormally levied on the customs value of taxablegoods in accordance with the Unified CustomsTariff of Ukraine.

TAXATION OF CROSS�BORDER TRANSACTIONS

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Under the current Unified Customs Tariff,goods are classified through the harmonizedsystem of numbers, which is similar to theEuropean Union's harmonized customsclassification. Customs duties are normallylevied at rates ranging from 2 to 50%, withmost rates ranging from 5 to 20%.

The new Customs Code was approved andbecame effective as of January 1, 2004. ThisCustoms Code introduces new concepts ofcustoms value determination, an amendedprocedure for determining the country oforigin of goods.

Below we provide a description of the existingcustoms rules, as well as the changes to customslegislation.

TAXABLE RULES FOR CUSTOMS VALUE DETERMINATION

1. Past Provisions

Under the old rules, the customs value meantthe price actually paid for goods or the priceestablished at the moment the goods crossed thecustoms border of Ukraine. The followingexpenses, provided that they were not includedin the original payment for goods, should havealso been added to the customs value of thegoods to determine the duties:

• Transportation costs, loading, reloading andunloading expenses, as well as insurance upto the point of entry to the customs territoryof Ukraine;

• Commission and brokerage fees;

• License and other fees for the use ofintellectual property attributable to theimported goods that should have been paidby the importer or exporter either directly orindirectly as a condition of importation ofthese goods.

If the declared customs value was substantiallymisstated or if it was impossible to verify theappropriateness of the customs value declared,then the Customs Authority had the authorityto determine the customs value based on thevalue of identical goods, or if not available,based on the value of similar goods that areusually established in the main countries —exporters of the goods in question.

2. Current Provisions of the Customs Code

The new Customs Code introduces a newconcept of customs value which follows thestandards of GATT/WTO. In terms of thegeneral definition, the customs value of goodsshall mean the value of goods at the momentthey cross the customs border of Ukraine asdeclared by the declarer (the importer or hisagent) or as calculated by the customsauthorities. In addition to the generaldefinition, the Customs Code also provides6 methods for the determination of customsvalue as follows:

Method 1: According to the value in the agreement under which the goods were imported;

Method 2: According to the value in anagreement for identical goods;

Method 3: According to the value in an agreement for similar (analogous) goods;

Method 4: On the basis of subtraction of the value;

Method 5: On the basis of addition of the value;and

Method 6: Reserve method (GATT).

For determining the value of goods exported fromUkraine, the rules similar to the old CustomsCode are applied (see above "Past Provisions").


OTHER TAXES

1. Value Added Tax

a) Import of Goods

For import of goods, VAT is chargeable on thecontractual value of the goods imported.However, if their contractual value is less thantheir customs value, the taxable amount is theircustoms value.

The customs value of any imported goods isequal to their value in terms of the customslaws of Ukraine, including expenses fortransportation; loading, unloading, reloadingand insurance up until the customs crossingpoint of Ukraine; payment of brokers, agency,commission and other fees connected with theimport of such goods, payment for use ofrelated intellectual property, excise duty,import duty, and other fees and duties includedinto the price of such goods.

b) Import of Services

Should services be imported for use orconsumption within Ukraine, VAT ischargeable on the contractual value of servicesreceived under the "reverse-charge mechanism".This mechanism is defined by the VAT law asfollows: "For services provided by non-residents on the customs territory of Ukraine,the basis for taxation is the contractual value ofsuch works or services taking into accountexcise duty and other taxes and fees (mandatory

payments), which are included into the price ofsuch works or services, excluding VAT. Thedetermined value is recalculated intoUkrainian Hryvnia according to the currencyexchange rate of the National Bank of Ukraineeffective at the end of the operational daypreceding the day on which the act certifyingthe fact of receipt of the services was executed."

2. Excise Duty

Excise duty is imposed on taxable itemsproduced in, or imported into, Ukraine and isincluded in the price of such goods. Inaddition, excise tax at the rate of zero percentis imposed on export sales. Since excise dutyworks as an indirect tax, any excise duty paid inconnection with exported items produced inUkraine can normally be refunded to theexporter.

Excise duty is imposed on alcohol and tobaccoproducts, motor fuels, motor vehicles, beer andjewelry. Excise duty is normally imposed when ataxable item is sold for domestically producedarticles or prior to its entering Ukraine forimported articles.

3. Customs Fees

Under the rules of the tax and customs laws ofUkraine, customs fees are collected for customsregistration of goods and other articles in zonesof customs control that are located on thepremises of the enterprises storing these goods(i.e., customs bonded warehouses). Customsfees are also charged for the storage of goods andother articles under the jurisdiction of a customswarehouse in cases when their detainment onthe territory of the customs-house is notobligatory.

As of January 1, 2006, the Rates of Customs Feesshall be established by Resolution No. 93 of theCabinet of Ministers of Ukraine dated January18, 2003.

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Ukrainian labor law categorizes allpersons residing in Ukraine into twogroups of employment relationships:

(1) labor employment agreements governed bythe Labor Code of Ukraine; or (2) sub-contractual agreements governed by the CivilCode of Ukraine.

The first category is further divided into threedifferent types of labor agreements: (a) laboragreements of indefinite duration; (b) laboragreements of specific duration; and (c) laboragreements effective for the duration of aspecific project.

At the initial stages of employment, anemployee is hired on the basis of a laboragreement, and may be placed on probation fora period not exceeding either three months orone month, depending on the classification ofsuch worker under Ukrainian law.

Ukrainian employees are entitled to socialsecurity benefits and must be paid at least theminimum monthly salary (as of January 1,2007 it is UAH 400, and from July 1, 2007 itwill increase to UAH 420 and from December 1,2007 to UAH 460) during the course of a normal work week of no more than 40 hours.Any additional time put in by the employee,even if he or she is hired on a temporary basis,is subject to overtime payment rates.Depending on the actual duration of theemployment term, the employee also isentitled to vacation and sick leave (at least24 calendar days, depending on tenure,working conditions and position) and a regularschedule of salary payments twice a month.

Under the current legislation, 33.2% of actualexpenditures of a company, which areallocated for the payment of wages subject topersonal income tax, is paid to the Pension

LABOR LAWS


Fund, 1.5% is paid to the social security fundfor cases of temporary disability, 1.3% to thesocial security fund for cases ofunemployment, and from 0.66% to 13.6% tothe social accident fund (depending on thetype of activity of the company and the class ofrisk at work). All social security payments aremade by the employer, in Ukrainian Hryvnia,on top of the employee's salary (i.e., not takenout of the employee's paycheck).

Various employers, including wholly-ownedforeign subsidiaries, joint ventures and evenrepresentative offices, employ so-called "laborcontracts" as their favorite form of laboragreements because only a "labor contract" maycontain provisions in addition to those containedin the Labor Code, including employmentperiod, rights, obligations and responsibilities ofthe parties.

Importantly, all employers, includingenterprises, institutions and organizations,must maintain labor books for all of their fulltime employees (i.e., everyone other thansubcontractors or part-timers) includingseasonal and temporary workers. Such laborbooks typically contain information about thetype of work performed, any awards and theduration of employment. In essence, laborbooks serve as a basis for ascertaining theemployee's work longevity, which willdetermine his or her social security andpension rights after retirement.

In contrast to labor agreements, sub-contractualagreements typically contemplate hiring aworker to complete a specific task, work orservice at his or her own risk (i.e., free lanceworkers). As elsewhere in the world, thesub-contractor maintains relative independencein performing the designated task and typicallyreceives payment upon completion of services.Notably, the sub-contractor does not receivethe benefits of social security and isindependently responsible for paying his or herown personal income tax.

WORK PERMITS FOR FOREIGN EMPLOYEES

According to Ukrainian legislation, all foreignemployees working in Ukraine must submit anapplication to obtain a work permit in Ukraine.This requirement specifically applies to foreigncitizens who are sent to Ukraine by a foreignemployer to work on the basis of a contractbetween such employer and a Ukrainianresident enterprise. The application for a workpermit must be accompanied by variousdocuments, such as an employment contract.

An exception is made for foreigners employedby representative offices of foreign companiesand foreigners registered as privateentrepreneurs in accordance with Ukrainianlegislation. These subjects are not required toapply for work permits.

Administrative penalties apply for a foreignemployee's failure to obtain a work permit.These penalties can be applied to the foreignemployee and the employer itself in the amountof 10-20 non-taxable minimum incomes by thelocal police. Further, the state employmentauthorities may also apply a fine on entitiesemploying foreigners without work permits.

The State Center of Employment of theMinistry of Labor of Ukraine or its authorizedregional or city bodies (the "EmploymentCenter") issues work permits. General workpermits are not issued, and instead a foreignerobtains permission to work at a specificposition at a specific enterprise, institution ororganization. Work permits also must beregistered at the appropriate regionalEmployment Center of the Republic ofCrimea, the oblasts, or the cities of Kiev andSevastopol.

Work permits are valid for up to one year, butmay be extended if an application is filed with theEmployment Center up to one month beforeexpiration of the current term.

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Ever since 1991, foreigners have routinelypurchased all kinds of real estate. Someacquired large communal apartments for

personal use while other converted them foroffice use. Still others purchased free-standingbuildings and have obtained that coveted "freeand permanent use of land" thereunder. In otherwords, the real estate market in Kiev reached itspeak a long time ago.

In the early years of 1991-1996, only threeWestern-quality residential and commercialproperties existed: Maculan, Regina Centerand Kiev-Donbass. Each charged near-extortionate fees ranging from USD 65 to USD 85 per square meter per month, and usedtheir monopoly positions to lock up multi-national companies in a lease for up to 5 years.

One thing that has remained consistent in theever-changing Ukrainian real estate market islegislation that expressly allows foreigners topurchase real estate (except land).

Property Title Research

In all cases involving real estate (purchase orlease), questions of security in the property'stitle and ownership rights predominate theagenda, frequently causing confusion anddistrust. The reason is simple: fraudulent trans-actions are abound and, as a consequence, allissues connected with title transfer and identityof the true owner must be flushed out before theactual execution of a sale-purchase (or lease)agreement in front of a notary public.

In the past, gullible companies incurredsignificant financial losses after effectuatingsubstantial pre-payment (up to 6 months' oflease price) to false lessors, only to find thattheir newly leased apartment actually belongedto an innocent third party. Other cases involvedpremature termination of fake lease agre-ements (often following repairs at the lessee'sexpense). Of course, recourse to the law hasminimal, if any, effect on reimbursement of the

COMMERCIAL AND RESIDENTIAL REAL ESTATE


expenses or provisions for alternative officespace.

To avoid the various pitfalls, any potentialpurchaser or lessee must insist on reviewing thebackground documentation, which serves asthe ultimate proof of ownership. The variousdocuments include:

1. sale-purchase agreement, gift agreement orprivatization certificate for the property;

2. "technical characteristic" certificate from theKiev City Bureau of Technical Inventory;and

3. certificate from the 1st Kiev City NotaryPublic that the property is not secured bycollateral or subject to encumbrances (i.e., ithas no liens or "arrests" placed on it).

Other documents may be necessary, such as awaiver of the children's rights to the property. Incase the alleged owner is a legal entity, theseller's foundation documents are most helpful.If the owner is a physical person (individual),his/her passport must be verified.

Various excuses, such as lost documentsnecessary to confirm ownership rights, or thata particular document original is somehowinaccessible, is an indication of a potentialproblem. Contrary to a popular misperception,property ownership records are kept inmeticulous order somewhere in the statearchives. In fact, we once tracked a completeset of documents dating as far back as 1944,which granted land rights to a Soviet armygeneral, whose children wanted to sell hishouse to a foreign investor before immigrating.

All of the above documents should contain therelevant seals of the state authorities, and shouldbe collected within 3 months from the date oftheir presentation for professional review. Basedon these documents, a legal opinion will be

drafted, confirming or rejecting the ownershiprights to any given property.

Buying Buildings

A title search, however, is only a part of thechain of legal dilemmas surroundingprocurement of property. The supportinglegislation concerning currency regulationsand taxation can also play a large role indeciding the best way to structure real estatetransactions and secure long-term possessionand quiet enjoyment of the premises.

Procedurally, Article 657 of the Civil Code ofUkraine states that real estate transactionsmust be executed before a notary public inwritten form and are subject to stateregistration. Alternatively, the Law "OnCommodity Exchanges" permits certaincommodity exchanges to execute real propertysale-purchase agreements.

In the past, purchasers had significantdifficulties with state-owned notary publicsand, because an alternative existed, 99% of allproperty transactions were executed atcommodity exchanges. Since then, Ukrainehas introduced a system of "private notaries" toundertake this role, with varying degrees ofsuccess. Currently, sale-purchase agreementsare executed either before a state notary publicor before a private notary.

A. State Notary Public

With reference to real estate, the Ukrainiangovernment is represented by various entities,such as notary publics (state and private), theKiev City Bureau of Technical Inventory andthe local ZHEK (literally translated as"Residential Exploitation Committee"). Thesebodies attest to the Ukrainian seller's ownershipand occupancy rights to any property.

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State notary publics are usually state officialsand, as a rule, use their own standard forms formost transactions. In the context of realproperty transfers, the standard 2-page notaryform for sale-purchase agreements recites onlythe most fundamental information concerningthe property transfer, such as the names of theparties, the property's address, etc., and bearsthe parties' signatures and the notary's seal.Negotiated provisions, including representationsand warranties, are viewed as irrelevant.

To encourage sellers and purchasers to staterealistic sales price in the sale-purchaseagreements (instead of a fraction of such value,as was the long-standing practice to avoidproperty tax), in the spring of 2000, thegovernment decreased the state fee fornotarization of agreements on the alienation ofimmovable property from 5% to 1% of theamount of the transaction (i.e., the total amountindicated in the sale-purchase agreement).

B. Private Notary Public

Ukrainian legislation generously permits theexistence of private notary publics. Oncelicensed, their powers are equal to those of statenotary publics without the drawbacks of thebureaucracy. By law, private notary publicscannot charge less than the current state fee tonotarize real estate sale-purchase agreements.Although private notaries are permitted to take ahigher percentage, most private notary publicsdo not charge higher than the state notarypublics due to the tight competition betweenprivate notary publics these days.

In all cases, however, follow-up registrationsmust take place with the Kiev City Bureau ofTechnical Inventory (establishing the newowner's identity), the notary public (central andrayon) and ZHEK.


A s a starting reference point, Ukrainianland is either state-owned or it isalready in private hands. This obvious

distinction is absolutely vital, because no saneinvestor wants to deal with a governmentbureaucracy, especially a Ukrainian one.

Getting access to state-owned land forconstruction purposes, whether by leasing orauction purchase, requires significant time andfinancial investment. Plus, foreign investors areconfronted by a separate set of legal hurdlesaltogether, forcing them to employ creativelegal solutions. And yet, the government hasthe most land available in the best locations...So what's a poor investor (resident and non-resident) to do?

Every Investor’s Dream

Every investor's dream (the "Dream") is toacquire permanent free use to a legally defined

parcel of land with a specific purpose allocationto construct a building to the investor's needs andspecifications (e.g., a residential/office high-rise,a two-story restaurant).

Theoretically, such a parcel of land existssomewhere on the secondary (private) market inUkraine, but finding and acquiring such a parcelin Kiev remains a Dream. Even if an investorfinds an acceptable privately-owned land parcelin the center of Kiev, there will probably be aneed to change the initially allocated "specificpurpose" (see below) to fit its new owner'sbusiness profile.

The next best option, entering into a leaseagreement with the Kiev City Council, isextraordinarily risky due to the Council'srecent unilateral cancellation of numerouslease agreements. This unprecedented eventput a harsh spotlight on the fragile legal statusof lease agreements in today's booming real

ACQUIRING LAND RIGHTS

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estate environment. Hence, by default the nextbest choice is to purchase a desired land parcelfrom the government at one of the manyupcoming land auctions.

Allocation for a Specific Purpose

In accordance with today's legislation, landparcels can be (a) leased (short or long term) or(b) purchased. Unfortunately, permanent freeuse of land is now granted only to non-profitorganizations (invalids), state-owned andcommunally-owned companies and connectedenterprises, as well as persons who already ownfinished buildings on the land. The latter areallowed to purchase the land they have alwaysused at new, outrageous prices.

In either case, according to Article 19-20 of theLand Code, the land has to be allocated for aspecific purpose (e.g., an office building or arestaurant). Subsequent deviation from theinitial purpose designation may result intermination of the land ownership or use/leaserights (see Land Code, Article 141-143). Plus,to a far less significant degree, there is anadministrative fine of between 3 and 25 ofuntaxed monthly minimum wages.

If the party with land rights tries to transfer(sell) its rights to another entity, the originalallocation purpose must be preserved. Shouldthe subsequent land user alter the purpose ofthe land (e.g., change from an office buildingto a casino), it must legally revise the allocationaccordingly. The terribly painful, drawn-outand expensive process is similar to the initialland allocation itself. This pathetic reality istrue regardless whether the land is ingovernment or private hands.

In accordance with the Law "On LandValuation," dated Decemder 11, 2003, anystate or communally-owned land alienationmust undergo a "valuation" process. Accordingto Art. 127 of the Land Code, the sale of state-

owned land to legal entities and natural personstakes place on a competitive basis (auctions,competitions), except buy-outs of land withfinished buildings thereon. Unfortunately,experienced land developers routinely com-plain that the best parcels never make it to theauction.

Foreigners and Other Non-Residents

Foreign investors without political connectionscannot buy land directly from Ukrainiangovernment because the sale of federally-owned land to non-residents (i.e., foreign legalentities and governments alike) requiresconsent of the Cabinet of Ministers, togetherwith approval of the Supreme Council ofUkraine (a.k.a, the Parliament).

On a local level, the sale of communally-ownedland to foreigners requires consent of the localcouncil of people's deputies, the consent of theCabinet of Ministers. To completely emasculatea non-resident's chances of land allocation, noinstructions exist regarding the timing forobtaining such a consent.

In cases where an investor takes thecomparatively easy route by entering into alease or a sale-purchase agreement (via anauction), the land bureaucrats have a "take-it-or-leave-it" attitude. No meaningfulnegotiations regarding specific provisions takeplace, even in cases of unreasonably shortterms in lease agreements or near-extortionateprices in sale-purchase agreements. Thenagain, the government has all the bestproperties, so the negotiating power is truly onthe side of its underpaid employees.

Notwithstanding the above reality, Section 1 ofArticle 82 of the Land Code of Ukraine statesthat legal entities (founded by citizens ofUkraine or legal entities of Ukraine) can acquireplot lands for their business activity if:


(i) plot lands are acquired on the basis of sale-purchase, gift, exchange or other civil lawagreements;

(ii) land plots are contributed to the charter fundby its founders;

(iii) land plots are inherited;

(iv) land plots are acquired based on othergrounds provided by law.

Section 2 of Article 82 of the Land Code ofUkraine expressly allows foreign legal entities toacquire title (ownership rights) to land plots ofnon-agricultural designation:

(a) within the populated districts if they acquireimmovable property thereon and for thepurpose of the construction of objectsconnected with the carrying out of businessactivity in Ukraine;

(b) outside of the populated districts if theyacquire immovable property on such land.

Section 3 of the Land Code of Ukraine statesthat joint ventures founded with the participationof foreign legal entities and physical persons canacquire title to non-agricultural land plots incases defined by Sections 1 and 2 of Article 82 ofthe Land Code of Ukraine (see above) and theprocedure established by the Land Code forforeign legal entities.

Given the above, it is likely that many foreigncompanies cannot directly purchase the targetland plot without firstly purchasing immovableproperty (i.e., a building, structure, etc.) on topof the land to be purchased. However, it is stillpossible to indirectly purchase the land by wayof acquiring corporate rights in the businessentities which are the owners of land.

Land Tax

There is a land tax imposed on owners and usersof land. The amount of tax depends on the use

(e.g., farmland) and location of the land. If thereis a value estimate attached to the land, then theland tax is calculated at 1% of that estimate.Otherwise, the amount of land tax ranges fromUAH 4.65 per square meter in towns populatedwith less than 200 people to UAH 65.10 persquare meter in cities populated with more than1 million people. For regional centers, zonecoefficients range from 1.2 to 3.

Conclusion

Due to the abundance of privately ownedproperty in Kiev, foreign investors can easilypurchase (or lease) virtually any real estateobject, provided they are willing to payastronomic prices. Reviewing ownershipdocuments, drafting (and executing) the sale-purchase agreement, and registering theproperty at the Bureau of Technical Inventory,are the necessary technical details thataccompany any transfer of property rights.Unlike the old times, such follow-upregistrations have become routine and easy toperform.

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Currency operations on the territory ofUkraine are under state currency con-trol. A key feature of currency control

is the concept of residency. The currencyrestrictions imposed on residents are moresevere than those for non-residents. Under theregulations, a resident of Ukraine is defined as:

• Any natural person, including foreigncitizens, permanently residing in Ukraine,including those citizens temporarily stayingoutside of Ukraine;

• Legal entities, branches or other structuralsubdivisions thereof located and performingbusiness activities on the territory of Ukraine;

• Ukrainian diplomatic, consulate, trade andother official governmental institutionsabroad that enjoy diplomatic privileges andimmunity;

• Branches or other structural subdivisions ofUkrainian companies and organizations

abroad if such subdivisions performrepresentative functions and are not engagedin business.

Any other person or structural subdivision,which is not a resident of Ukraine, is treated asa non-resident for the purposes of exchangecontrol regulations. The basic rules of currencyregulations include the following:

• Only local currency may be used in businesstransactions between residents;

• Foreign currency is the only means ofpayment between residents and non-residents involved in internationaltransactions (trade and investment) throughauthorized banks;

• Foreign currency proceeds received by acompany from its foreign customers must becredited to a local bank account no later than90 days after the day of export of theservices/goods. Failure to comply with this

CURRENCY REGULATIONS


provision renders the Ukrainian companyliable to a penalty of 0.3% of non-receivedproceeds per day;

• Goods must be imported into Ukrainewithin a period of 90 days after pre-paymentshave been made by a Ukrainian company toits suppliers. Failure to comply with thisprovision renders the Ukrainian companyliable to a penalty of 0.3% of non-receivedproceeds per day.

Other transactions with local and foreigncurrency are subject to licenses from theNational Bank of Ukraine (e.g. settlements inforeign currency on the territory of Ukraine).Technically, Ukrainian residents are alsorequired to obtain an individual license formaking investments abroad, opening anaccount with a foreign bank and issuing ortaking out foreign currency loans. If one partyto a currency transaction has obtained therequired license, the other party is also treatedas having acquired this license.

An NBU license is issued for a certain period oftime and with a limited amount of foreigncurrency specified. The procedure for obtain-ing an individual license is quite troublesomeand requires a specific set of documents to besubmitted to the NBU for approval. Normally,a license can be obtained within 4-6 weeksfrom the date of filing the required set of docu-ments with the NBU, unless the latter findssufficient grounds to reject the application.

The NBU establishes the exchange rates ofUAH to other currencies on a daily basis.Authorized banks when trading in currenciesmay establish different rates to those establishedby the NBU; however, the rates used by thebanks do not usually differ dramatically fromthose established by the NBU.

Procedurally, all residents must carry out foreigncurrency transactions through a Ukrainian bankthat is licensed to perform currency operations.

Residents may purchase foreign currency fromsuch banks for a specific business purpose,which must be declared at the time of thepurchase. This includes procurement of foreigncurrency for payment under an import contract.

Salaries paid in Ukraine may only be paid inlocal currency. Ukrainian residents are prohi-bited from opening and maintaining foreignbank accounts, unless they have permissionfrom the National Bank of Ukraine. Similarly,they cannot effectuate any investments abroad,including the purchase of foreign or Ukrainiansecurities from non-residents, without firstobtaining a corresponding individual licensefrom the National Bank.

All residents (i) must declare their ownership ofcurrency and property located outside Ukraine;(ii) must declare their worldwide income and(iii) must submit monthly reports regardingtheir foreign currency operations to the regionalbranch office of the National Bank, as well as tothe local tax inspections. Failure to disclose suchownership is subject to a fine set by the NationalBank of Ukraine.

Finally, in order for a resident business entity toeffectuate payment to a non-resident businessentity, which renders or performs services orworks or transfers intellectual property rights tosuch resident entity under a foreign economicagreement in a total amount exceeding EUR 100,000, such resident will be required toobtain a so-called "act of price examination"from the Ukrainian state information and analytic center for monitoring external markets.

39www.frishberg.com

I n an effort to accommodate the businessneeds of multi-national corporate clients,the world's leading nations have entered

into bilateral or multilateral international arbitralagreements. Such agreements set the stage forimplementing the accepted internationalarbitration rules and executing the resultingjudgments on a local level.

Similarly, Ukraine has established a forum forinternational commercial disputes at theUkrainian Chamber of Commerce andIndustry, the rules of which are based on theLaw of Ukraine "On InternationalCommercial Arbitration." Actually, the Law ofUkraine "On International CommercialArbitration" is based on the UNCITRALModel Law. Additionally, Ukraine is a party tothe New York Convention on the Recognitionand Enforcement of Foreign Arbitral Awards of1958, and the European Convention onCommercial Arbitration of 1961.

Overall, Ukraine's local and foreign arbitrationlegislation is in accordance with worldstandards. As in other countries, the parties tointernational agreements have the freedom toselect either the domestic (Ukrainian) nationalcourt system or international arbitration in anycountry (including Ukraine). The final awardor ruling can be executed in Ukraine under the1958 New York Convention, assuming that allparties involved in the arbitration aresignatories to that Convention.

Under Ukrainian legislation, foreign investorsmay submit disputes for resolution to either (1)the Ukrainian national arbitration courts or (2)any other international arbitration tribunal. Thesecond option can be further separated into twocategories: (a) arbitration conducted in Kiev atthe Ukrainian Chamber of Commerce andIndustry or (b) arbitration held in a thirdcountry (e.g., Sweden, Great Britain, U.S.A.)

COMMERCIAL ARBITRATION


As of January 15, 2002, foreign investors wereprovided with yet another option for settlingany disputes with their Ukrainian counterpartswith the coming into effect of Law No. 2860-III "On the Recognition and Enforcement ofForeign Court Decisions in Ukraine," datedNovember 29, 2001. Law No. 2860 is designedto solve the age-old problem in Ukraine whenforeign investors (or other holders of validforeign judgments) would go through thelengthy process of obtaining a foreignjudgment in their favor, only to find thatenforcement of such judgment is impossible inUkraine.

Law No. 2860 broadly encompasses thedecisions of most foreign courts involving civil,labor and family matters, as well as thoseportions of criminal verdicts, which are relatedto the confiscation of property and thecompensation of damages to victims. The Lawalso applies to the decisions of foreignarbitration courts and acts of other bodies offoreign governments empowered to considercivil, labor and family matters.

Law No. 2860 applies to the said decisions onlyif they have come into force and are subject toenforcement on the territory of Ukraine inaccordance with international agreements towhich Ukraine is a party. Conversely, if adecision is made by a foreign court in acountry without an international agreementwith Ukraine, such decision is not subject toenforcement under Law No. 2860, and mayonly be subject to enforcement under a specialprocedure in Ukrainian legislation.

Importantly, all foreign investors, as well asUkrainian residents (such as joint ventures andwholly-owned foreign subsidiaries), have theright to submit their disputes with otherUkrainian entities to national commercialcourts. In fact, unless a provision in aninternational agreement specifically defersarbitration to take place elsewhere (e.g., theUkrainian Chamber of Commerce and

Industry), then national commercial courtshave jurisdiction.

The Highest Commercial Court of Ukraine isthe highest body for resolving economicdisputes. The Highest Commercial Court ofUkraine supervises the lower courts' judgmentsand exercises control over their activities. TheHighest Commercial Court of Ukraine is alsoresponsible for the preparation and selection ofcandidates for judgeships, the improvement ofthe qualification of the commercial courts'employees, among other functions.

Ukrainian courts have become more and moreconducive to rendering fair judgments withrespect to the enforcement foreign moneyjudgments and following the rules of theinternational treaties to which Ukraine hasbecome a party. As a consequence, Ukrainiannational courts have also become moretransparent and fair in rendering decisionsregarding domestic disputes and disputeresolution clauses in foreign economiccontracts on the territory of Ukraine.

41www.frishberg.com


• Advanced Logic Solutions, Inc.• AMADEUS GLOBAL TRAVEL

DISTRIBUTION, S.A.• Baltic Beverages Holding;• Bank Austria Creditanstalt• British Energy• Bruhn Internationale Transporte GmbH• BT Global Services• Chumak• Commerzbank Aktiengesellschaft• Credit Commercial de France• CTB, Inc.• Deloitte• Direct EDI Inc• DUROPACK• Emilceramica SpA• Fiat Auto• FL Smidth & Co.• Freshfields Bruckhaus Deringer• Hewlett-Packard Company• Imanto AG• INDEVCO• Jahn General Products Ukraine• Jabil Circuit, Inc.

• Quality Schools International• KLM Royal Dutch Airlines• KPN Royal Dutch Telecom• Linklaters• Notaro & Michalos• Philips Electronics• Robert Fleming & Company, Ltd.• SCL Corporate Finance SA• Sealed Air Limited• Skanska East Europe OY• Stragen Chemical SA• Sun Microsystems• Theeuwes de Jong B.V.• The Danish Investment Fund for Central

and Eastern Europe• Thornkild Kristensen Properties AS• Tyco Electronics AMP GmbH• Van Oostveen Medical B.V.• Vetropack Holding Ltd.• The Embassy of Austria• The Embassy of Sweden• The US Embassy• Vimpel Communications, among others.

THE FIRM'S CLIENTS INCLUDE:

43www.frishberg.com

"Since 1992 we have the pleasure of being theclient of Frishberg & Partners, and recent resultsjust confirm that this was and still is a very rightchoice for KLM Royal Dutch Airlines."

Sergey Fomenko, KLM Royal Dutch Airlines

"We are very satisfied with the services of yourlaw firm and especially appreciate the quick,accurate and business- minded responses andanalysis."

Dr. Brigitte Carbonare-Hartsleben, BT Global Services

"I really appreciate the capability andprofessionalism of your lawyers and the efforts yourcompany successfully put in the defense of ours. Wethank you for your assistance and cooperation."

Flavia Smiraglio, Fiat Auto S.p.A.

"We at Sun and I am personally as legal counsel forSun operation in CIS region, are very pleased witha level of expertise and service which were and areprovided to our company in Ukraine by Frishberg& Partners. I would like to particularly mentionalso a constant effort of F&P lawyers to keep itsclients updated on the most recent developments ofUkrainian legal environment and theirresponsiveness to our needs in that country."

Dr. Andrei Zalivako, Sun Microsystems

"Frishberg & Partners' advice and services are ofexcellent quality, very timely, reliable and to thepoint, and with a good understanding of ourbusiness interests."

Christoph Zeyen, Tyco Electronics

"As always, thank you for your immediateattention to our needs. Your assistance will help

enable us to successfully complete a very largecontract and to keep a very good customer."

Lori K. Rose, CTB, Inc.

"Emilceramica appreciates Frishberg & Partners'professional collaboration in supporting the project"Joint Venture Zeus Keramik" with Ukrainianparticipation. In this regard, Emilceramica hopesto have Frishberg & Partners' assistance in future."

Dr. Efrem Montepietra, Emilceramica SpA

"Thank you and the colleagues at Frishberg &Partners for your assistance and the veryvaluable input you provided. We are all happywith the outcome of the matter that was handledwell, based on a good sense of judgment, lots ofwisdom, good decision making and good use ofpast learnings from previous experiences in thiscountry."

Elias N. Ashkar, INDEVCO Group

"You did an excellent job for Joss Chemicals BV,and you prepared an excellent report on our behalf.This was very positive for us, and it allowed us to setup our business in Ukraine. Now we are activelypursuing this business thanks to your excellentlawyers."

Jan Huijbregts, Joss Chemicals BV

"We hired Frishberg & Partners to analyzecertain issues in the Ukrainian legislation in theprocess of acquiring a company in Ukraine andwere very happy with the services we received.All your lawyers we worked with are extremelyprofessional, competent and helpful. Thank youfor a job well done."

Dmitriy Kasyanenko, Vimpel Communications

REFERENCES


If you have additional questions, please contact us at:

10 Gorky Street, Suite 801004 Kiev, Ukrainetel.: +38 (044) 585-8464; 585-8465fax: +38 (044) 235-6342; [email protected]

Over the last 15 years, Frishberg & Partners hasserved as corporate counsel to multinationalcompanies and banks (see our list of clients).We have registered a multitude of joint ven-tures, subsidiaries and representative offices inUkraine. By now, the registration process iswell-established, as is liquidation.

Acquisition of controlling blocks of shares inUkrainian companies, however, is an entirelydifferent game, requiring knowledge andexperience of local corporate legal specialists.Because each target company is unique, thereis no standard approach. That is why ourlawyers provide a comprehensive analysis ofalternative corporate and tax-efficientacquisition structures in light of the client'sspecific goals.

Strategic investment is often structured aroundreal property, and sometimes land plots. Togetherwith our real estate specialists, we can set up turn-key operations on industrial greenfield sites, fromland right allocations and construction permits tothe finished enterprise, fully commissioned andready for use. Just turn the key.

After the acquisition has taken place, wecontinue to work closely with our clients toresolve the day-to-day issues, includingemployment law, capital increases or decreases,tax and customs matters.

At the corporate law firm of Frishberg &Partners, our clients truly benefit from gettingthe most complete package of corporate legalservices available on the Ukrainian legal market.

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