Import-Export in Ukraine

I N U K R A I N E

IMPORT�EXPORT

Table of Contents

Overview of Import�Export Legislation

Foreign Economic Activity and Import�Export ContractsMiscellaneous Supporting Legislation

The Basics of Ukrainian Contract Law

Form and Substance: Keeping within the Guidelines

Import�Export Taxes

Value�Added TaxExcise TaxCustoms DutiesMiscellaneous Costs: Labels and Certification

Customs Licensed Warehouses

Discussion Technical Requirements of a Customs Licensed WarehouseThe Procedure for Opening a Customs Licensed WarehouseStorage of Goods in Customs Licensed WarehouseFunctions of a Customs Licensed WarehouseCancellation and Suspension of a License and Liquidation

Certification of Goods and Services

Toll Manufacturing/Product Outsourcing

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I. Introduction

Since declaring its independence inAugust of 1991, the Ukrainiangovernment has struggled to establish a

legal system to accommodate its entrance intothe global commercial economy. For instance,commercial structures are described in suchlegislative acts as the Civil and EconomicCodes and the Law "On EconomicAssociations." In the case of joint stockcompanies, the Law "On Securities and theStock Exchange" and relevant Ministry ofFinance instructions will also apply.

Foreign investment is governed by the Laws"On the Protection of Foreign Investments inUkraine," "On the Foreign InvestmentRegime," "On Foreign Economic Activities,""On Privatization of State-Owned Property,""On Privatization of Small State Enterprises(Small-scale Privatization)," "On Restoration

of the Solvency of a Debtor or Recognition ofa Debtor as Bankrupt," and "On SecuredTransactions," as well as the Land Code. Inthe case of privatization, additional StateProperty Fund (SPF) instructions must beanalyzed. Other laws also impact foreigninvestment, such as taxation, currency andimport-export regulations, and intellectualproperty laws.

The Parliament of Ukraine adopted allrequired legislative acts for the WTO acces-sion. The new documents should be passed tothe WTO Working Group, which will assesswhether the laws meet the WTO standards.Afterwards, the laws should return to theParliament for the final ratification as a wholeand such ratification announce Ukraine’saccession. The legislation will liberalize andfacilitate the import-export transaction andwill promote stable trade relationships withother WTO-members.

OVERVIEW OF IMPORT�EXPORT LEGISLATION

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

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. 959-XII, is clearly outdated.Nevertheless, it is still technically effective, andtherefore deserves at least a superficial review.Drafted and enacted in the nostalgicpre-hyper-inflationary Soviet economic era,when the ruble zone provided Ukraine withnecessary economic support, much of thisantique law has been supplemented oramended, either legislatively or in practice. Theunaffected remainder does not reflect the sub-stantial changes in commercial legislation thathave occurred since Ukraine's independence.

In its heyday, this law encompassed all types of"foreign economic activities," including exportand import of goods, services and capital;servicing of foreign businesses; scientificactivity and training of personnel; internatio-nal financial operations and securities trading;credit and financial operations and the cre-ation of corresponding institutions; joint entre-

preneurial activity; entrepreneurial activitythrough the granting of licenses, patents,know-how, trademarks; conducting of shows,auctions, trade fairs, conferences, sympo-siums, seminars, etc.; wholesale, retail andconsignment trading for foreign currency; leas-ing operations; currency trade and sale throughcurrency auctions, currency exchanges andinter-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 involvingforeign 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 Foreign Eco-nomic Activities" never could: namely, providea functional structure for standard import-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 concluded in written form.Later, the Regulations "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 of

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the 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 requirementsfor the execution of agreements with Ukrainiancompanies was the appearance of twosignatures on behalf of the Ukrainian party.This requirement was repeatedly stated in theLaw of Ukraine "On Foreign EconomicActivities," as well as the above-mentionedRegulations. However, on October 21, 1999,the Parliament adopted the Law "OnAmendments to Article 6 of the Law ofUkraine 'On Foreign Economic Activities,'"No. 1182-XIV, which excluded the dualsignature 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 permissionfrom 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. That

said, however, Ukrainian individuals engagingin any commercial activities (local or foreign)must now register as "subjects ofentrepreneurial activity" with the local stateauthorities and pay the much-dreaded incometax. The introduction of a simplified taxationprocedure and a flat tax rate in 2004 (13% untilJanuary 1, 2007, and 15% thereafter), however,have made the payment of income taxationalmost commonplace.

Naturally, the parties to a foreign economiccontract have the right to choose foreign

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arbitration 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 willdictate 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 isdetermined by the place of execution thereof,unless the parties provide otherwise. Accordin-gly, a contract entered into in a foreign countrycannot be invalidated by Ukrainian laws forreasons of non-compliance with Ukrainianstandard forms. However, such foreign eco-nomic contract must adhere to substantiveUkrainian 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 the

export 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 specifiedperiod 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 other

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necessary 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 packet. However, inthe case of non-automatic licensing, thefollowing will apply:

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 themoment of submission of an application (in

case of the application of procedures ofconsideration pursuant to the order ofreceipt), such application shall not beconsidered. A subject of foreign economicactivity, which submitted a correspondingapplication, shall be informed in writing ofthe fact of the exhaustion of quotas withinseven (7) working days from the date of itsreceipt;

4) a decision on the issuance of a license shallbe taken, taking into account informationon earlier 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 and

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will 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,the licensing requirements do not apply to theexport of goods received by an investor on thebasis of production sharing agreements, unlessotherwise provided by the production sharingagreement itself. They also do not apply tocertain goods related to military production,atomic energy and state secrets of Ukraine onthe basis of Article 20 of the Law "On ForeignEconomic 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, ofthe volume 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 Which areEstablished Quotas in 2004," datedDecember 24, 2003;

• Resolution No. 136 of the National Bankof Ukraine "On Approval of the Instructionon the Procedure for Executing ControlOver and Obtaining Licenses for Export-Import and Leasing Operations," datedMarch 24, 1999 (as lastly amended onJune 17, 2004);

• Resolution No. 1104 of the Cabinet ofMinisters "On Approval of the Procedure for

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the 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 June 09, 2006); 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.

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 thatthe purchased goods must enter the Ukrainianterritory within 90 days of the payment date.Otherwise, the Ukrainian importer will besubject to a penalty in the amount of 0.3% ofthe customs value of the undelivered products.However, in certain cases, the above 90-dayterm may be extended if the Ukrainianimporter receives an individual license fromthe National Bank of Ukraine.

The supporting legislation wisely protectsagainst the more obvious abuses, such asinflating the contract price (for receivingkickbacks) or deflating them (for dumping onforeign markets). For instance, the"Regulations on the Method of Forming andUsing Indicative Prices," approved by theMinistry of Foreign Economic Trade in itsOrder No. 506 of August 8, 1996, impose

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indicative prices on all subjects involved inforeign economic activity for comparisonpurposes. Such indicative prices are based oncurrent international market prices for similargoods.

On October 2, 1996, the National Bank ofUkraine's Directive No. 254 imposed a systemcalling for the "registration of foreigncontracts" whereby all licensed banks wererequired to provide guarantees for their clients'performance of contractual obligations if sucha foreign contract contained a pre-paymentprovision. Ukrainian banks suddenly foundthemselves liable for 100% of the contractamount if the goods were not delivered in atimely fashion and, as a result, no contractswere signed with "pre-payment" clauses.Fortunately, this Directive was canceled onJanuary 10, 1997, by Directive No. 2, and

pre-payment clauses are once again per-missible without limitations. Nevertheless,such theatrics should serve as a reminder of thenecessity to seek advice immediately prior toundertaking any transaction 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 Ukraineof Certain Types of Goods," dated March 29,2002, which takes effect from January 1, 2004.Generally, the Ukrainian customs officialsallow products to cross the Ukrainian borderonly upon presentation of a customsdeclaration and proof of payment of customsduties and value added tax (and, whereapplicable, excise tax).

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I. Introduction

A n import-export contract is known inUkrainian legalese as a "foreigneconomic sale-purchase agreement

(contract)," and it must correspond in formand substance with the Law of Ukraine No.959-12 "On Foreign Economic Activities"(hereinafter the "Law No. 959-12") and OrderNo. 201 of the Ministry of Economy andEuropean Integration Issues "On Approvingthe Regulations on the Form of ForeignEconomic Agreements (Contracts)," datedSeptember 6, 2001 and registered with theMinistry of Justice on September 21, 2001(registration No. 833/6024) (hereinafter the"Regulations").

When drafting a foreign economic agreement,the parties may use recognized internationalcustoms and recommendations of international

bodies and organizations, unless such use isdirectly and expressly prohibited by theprovisions of Law No. 959-12 and other Lawsof Ukraine. Notably, if Ukraine is a party tointernational treaties, which provide differentterms and conditions than contained in LawNo. 959-12, then the provisions of suchinternational treaties will prevail.

There are exceptions, however, such as in thecase with the UN Convention on contracts onthe international sale-purchase of goods (1980Vienna Convention). Ukraine has made areservation to the provisions which permit theparties to an international sale-purchaseagreement to conclude oral contracts orconclude written contracts by use of telegraphor teletype. Thus, Ukrainian law onlyrecognizes international sale-purchaseagreements which are concluded in writtenform and signed in original by the parties.

THE BASICS OF UKRAINIAN CONTRACT LAW

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The general rule is that a business entity or itsauthorized representative must execute aforeign economic agreement in a written form.Importantly, actions taken on behalf of aforeign business entity by a properly authorizedUkrainian business entity are deemed to beactions taken by such foreign business entityitself.

Finally, if the parties to an agreement(contract) fail to draft such agreement inaccordance with the requirements of therelevant Ukrainian laws or internationaltreaties to which Ukraine is a party, then acourt of law may recognize them as invalid.

II. Form and Substance: Keeping within the Guidelines

In general, the rights and duties of the partiesto a foreign economic agreement must be incompliance with the substantive andprocedural law of its place of conclusion.Importantly, from September 1, 2005, the Lawof Ukraine No. 2709-IV "On InternationalPrivate Law," dated June 23, 2005, came intoforce, which cancelled the provisions of theLaw "On Foreign Economic Activity" withrespect to certain cases of the mandatoryapplication of Ukrainian law to contracts.However, this new law still provides the partieswith the choice of governing law.

Importantly, if the parties fail to insert a choiceof law into a foreign economic contract, theLaw of Ukraine "On International PrivateLaw" provides that the law with the closestconnection to the transaction will be applied.Unless otherwise provided, the transaction ismost closely connected with the law of thecountry (place of residence or place oflocation) of the party, which must perform orwill have the decisive significance for thecontents of the transaction. In this case, theparties are as follows: (i) the Seller in case of asale-purchase agreement; (ii) the Service

Provider under an agreement on the provisionof services; (iii) the cargo carrier under ashipping agreement; (iv) the Agent under acommission agreement; (v) the legal ownerunder an agreement on commercialconcession, etc.

Significantly, the agreement may be deemed asnot concluded or it may be recognized asinvalid if the parties fail to comply with theeffective requirements of Ukrainian legislationregarding foreign economic agreements. Forthe record, the mandatory terms andconditions of a foreign economic agreement(including sale-purchase agreements forgoods, services and works and barteragreements) are as follows:

1. The agreement's title, number, date andplace of conclusion.

2. A properly drafted preamble. While this mayseem insignificant, the Ukrainianauthorities and, especially, judges look tothe preamble to provide a quick and concisesummary of the agreement. The preamblemust include (i) the full names of the partiesto the foreign economic transaction (as dulyregistered in their countries of origin); (ii)the names of countries; (iii) an abbreviatedidentification of the counterparts (e.g.,"Seller," "Buyer," etc.); (iv) the name of theperson on behalf of which the foreigneconomic agreement is being concluded;and (v) titles of the documents governing thecounterparts during the conclusion of theagreement (e.g., constituent documents,etc.).

3. The subject matter of the agreement. Thissection must determine the goods (servicesor works) that one counterpart undertakesto provide to or perform for the other,including accurate titles, brands, grades,sorts or the final result of any servicesprovided.


If the goods or services require descriptionin greater detail or the nomenclature of thegoods or services appears to be ratherextensive, then such items must bedescribed in an annex, which will becomean integral part of the agreement.Importantly, an appropriate provision to thiseffect must be set out in the text of theagreement as well.

An annex to an agreement for the processingof a customer's goods must state thecorresponding technological scheme ofsuch processing. Significantly, thistechnological scheme must reflect thefollowing:

i) all of the principal processing stages forthe materials and the process oftransforming the materials into afinished product;

ii) quantitative indicators of the materialsat each stage of processing, which mustinclude substantiated technologicallosses of materials; and

iii) the losses of the processing performer ateach stage of processing.

4. Quantity and quality of goods or scope ofprovided services. The parties must state,depending on the nomenclature, themeasurement unit accepted for the type ofgoods in question (e.g., ton, kilogram, units,etc.), its total quantity and the qualitativecharacteristics. In case of an agreement forthe provision of services, the parties muststate in the text the specific scope of theservices and the deadline for theirperformance.

5. Basic delivery terms of goods or acceptanceof provided services. The parties must statethe type of transportation and the basic

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terms of delivery which determine thecounterparts' duties regarding delivery of thegoods and which establish the momentwhen the relevant risks transfer from oneparty to the other. Of course, the agreementshould clearly set forth the specific term ofdelivery of the goods (specific shipmentsthereof).

As foreign economic agreements ofteninvolve international trade, it is best to usegenerally understood and accepted tradeterms in an agreement. The Decree of thePresident of Ukraine "On Application ofInternational Rules of Interpretation ofCommercial Terms," dated October 4, 1994,provides that Ukrainian entities must usethe current edition of INCOTERMS (2000)upon concluding any foreign economiccontract within Ukraine. Therefore, it isadvisable for foreign investors to applyINCOTERMS in their agreements withUkrainian counterparts to avoid anymisunderstanding of trade terms.

In case of an agreement for the provision ofservices, the parties must state in the text thespecific terms and conditions, as well as thedeadlines, for the provision of theappropriate services.

6. Price and total value of the agreement. Theparties must determine the price for themeasurement units of the goods and thetotal value of the goods or provided servicesdelivered (performed) under the agreement(except when the price of the goods iscalculated according to a specific formula),as well as the monetary currency of thecontract. If the parties deliver goods ofvarious quality and assortment under anagreement, the price must be determinedseparately for the unit of goods of each sort.The total value of such agreement must beset out in a separate provision. In this case,the pricing indicators may be set out in

annexes with the relevant references theretoin the agreement.

If the price of the agreement is determinedaccording to a formula, then the partiesmust state the estimated value of theagreement as of the date of its conclusion.In case of an agreement (contract) for theprocessing of a customer's materials, theparties must state the collateral value of thematerials, the price and total value of thefinished products and the total cost ofprocessing.

7. Payment terms. The parties must state thecurrency of payment, method of payment,order (procedure) and deadlines forfinancial settlements, as well as the parties'security for the performance of their mutualpayment obligations. The parties mustinclude the following into the agreement:

i) the terms of the bank transfer prior to(advance payment) and/or following thedispatch (shipment) of goods or theterms and conditions of thedocumentary letter of credit or cashcollection with a guarantee in the formdetermined by Resolution No. 444 ofthe Cabinet of Ministers of Ukraine andthe National Bank of Ukraine, datedJune 21, 1995; and

ii) the terms and conditions of theguarantee, if any, and if necessary thetype of guarantee (demand guarantee,conditional guarantee, etc.), theeffective term of the guarantee and thepossibility to change the terms andconditions of the agreement withoutchanging the provisions of theguarantee.

The terms and conditions of payment arevital in that they determine what willhappen if a purchaser fails to make timely


payment or complete payment, includingthe amount of penalty for such violations.These terms and conditions also shouldindicate which party and in which volumetaxes, customs fees and other mandatorypayments will be paid.

8. Terms of accepting and turning over goods orservices. The parties must state the dates andplace for the actual turning over of the goods(or final performance of services) and thelist of title documents to such goods. Goodsare accepted according to the titledocuments as far as the quantity isconcerned. As far as quality is concerned,goods or services are accepted according tothe documents that certify their quality.

9. Packaging and marking. The parties mustinclude the information regarding the

packaging of the goods (boxes, sacks,containers, etc.), proper markings placedthereon (name of both the seller and thebuyer, number of the agreement, place ofdestination, dimensions, specific storageand transportation conditions, etc.) and, ifnecessary, the terms for returning the goods.

10.Force Majeure. As in most cross-borderagreements, the parties must describe theforce majeure events that would allow themto dispense with the terms and conditions oftheir agreement (e.g., acts of God, hostili-ties, embargo, intrusion by governmentalauthorities, etc.). Under such circum-stances, the parties are typically relieved oftheir duty to comply with the terms andconditions of the agreement for the specificduration of the circumstances, or they may

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decline to perform the agreement in part orin full without additional financial responsi-bility. In most agreements, the parties mustreceive confirmation of the existence andduration of Force Majeure circumstancesfrom the chamber of commerce and indus-try of the country where such circumstancesoccur.

11. Sanctions and complaints. The parties mustset out the procedure for applying penalties,recovering damages and lodging claims inconnection with the failure to perform orthe improper performance of theirrespective obligations.

Importantly, the parties must expressly setout the size of the penalties (in percentage ofthe value of non-delivered goods or servicesor non-paid amounts), the terms of penaltypayments (i.e., when the penalty starts toapply and how long it remains applicable),or any limitations on penalty amounts. Theparties must also set forth the terms duringwhich claims may be lodged, the parties'rights and duties in such cases and themethods of settling claims.

12. Dispute resolution. The parties must set outthe procedure for dispute resolution incourts, which disputes may arise out of theinterpretation, failure to perform orimproper performance of the agreement.This section must also expressly state theforum and/or the express criteria fordetermining the forum by any of the partiesdepending on the subject matter and natureof the dispute, as well as the parties'selection of the substantive and procedurallaw that will be applied by the forum and therules of procedure.

In Ukraine, the principal legislationgoverning arbitration includes the Law of

Ukraine "On International CommercialArbitration", the 1958 New YorkConvention on the recognition andenforcement of arbitration decisions, andthe European Convention "On ForeignTrade Arbitration" of 1961. Arbitration ispopular with foreign investors in Ukrainedue to their mistrust of the unstable legalsystem and incompetent or corrupt judges.Arbitration is also quicker and less expensivethan bringing disputes to nationalcommercial courts.

13. Finally, any cross-border agreement mustreflect the place of the parties' location(residence), mailing and their bankingrequisites (account number, name andlocation of the bank, etc.). This informationis important for any notices that must besent under the terms and conditions of theagreement and for other obvious reasons.

The above list of material terms and conditionsfor cross-border agreements in Ukraine is byno means exhaustive. The parties may agree toset out additional requirements regardinginsurance, quality guarantees, agents, freightforwarders, as they see fit.

III. Conclusion

Many foreign companies apply their worldwideagreements to Ukrainian transactions withoutforeseeing the risks involved. This often leadsto problems in the intended transaction whenUkrainian legislation does not recognizeprovisions included in standard companyagreements. Once a Ukrainian courtrecognizes a contract as null and void, theprocess of collecting debt becomes impossible.Therefore, companies without experience inUkraine should seek professional advice beforeapplying their standard agreements to the non-standard Ukrainian market.


I. Introduction

A s in other European countries,Ukrainian import-export operationsare subject to various taxes, including,

but not limited to, customs duties and valueadded tax. Further, depending on the specificproduct, excise tax and other official costsassociated with obtaining licenses or necessaryproduct labels may be applicable. The Cabinetof Ministers has also implemented a licensingsystem for the import of certain goods, such aschemical substances, fertilizers, pharmaceuti-cals, cosmetics and veterinary items, amongothers.

The various taxes associated with standardimport operations are summarized below.

II. Value-Added Tax

Ever since December 26, 1992, when theCabinet of Ministers executed its Decree

No. 14-92, "On Value Added Tax," the legisla-tion governing value added tax ("VAT") haschanged frequently, arousing the ire of manycompanies, foreign and local, large and small.

Staying true to its reputation for constantlyamending key legislation, on April 3, 1997, theParliament approved a new and improved VATlaw, which became effective on October 1, 1997(as lastly amended on November 28, 2003).Subsequently, the Cabinet of Ministers passedResolution No. 540, dated June 9, 1997,implementing a new VAT payment procedure.

Generally, the law continues to apply a 20% taxfor all businesses and other legal entities (suchas funds) providing goods and services on theterritory of Ukraine, but the calculationmechanism has been liberalized somewhat.The new law finally closed one of the lastloopholes by canceling tax holidays for non-profit "Chernobyl-type" organizations, butkept the exemptions for products used by

IMPORT�EXPORT TAXES

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underprivileged children and the disabled,(e.g., children's food products, magazines andnewspapers, etc.). The law also implemented anew mechanism for effectuating the paymentof value added tax: the importer simply posteda promissory note instead of effectuating a cashpayment.

Ukrainian VAT legislation sets up a two-tierstructure, designed to effectively protectdomestic market from foreign imports. Belowwe describe each of the two VAT tiersseparately.

A. Import VAT

The VAT rate under Ukrainian law is 20%, aslevied against taxable turnover, which does notinclude VAT. Taxable turnover for import VATis calculated as the customs value of the goods,including customs duties and any applicableexcise taxes. This import VAT is due andpayable at the same time customs duties arebeing assessed (with a potential thirty-dayextension made at the discretion of the customsoffice).

B. VAT on Retail Sale in Ukraine

Of course, VAT is levied on all products andservices manufactured and sold in Ukraine.Costs associated with obtaining/maintainingequipment that are reflected in the final priceof the goods also are subject to VAT.

Any goods or services sold in Ukraine aresubject to a 20% VAT, which is levied against thecosts of the materials and is included in thesale/purchase price (i.e., sales turnover). Uponresale, sales VAT is levied on the total differencebetween customer-paid VAT and the VAT paidby the seller for all component materials.

In the event that an imported product is re-soldin Ukraine, VAT is paid on the differencebetween the sale price and the customs value(including customs duties and any excise taxes)plus import VAT.

III. Excise Tax

The Ukrainian government has always leviedexcise tax on luxury items imported intoUkraine, such as alcoholic beverages andtobacco products, and the letter from the StateTax Inspection "On Excise Tax," No. 16-1221/10-7232, dated September 9, 1997,merely reaffirms this fact. Other legislationgoverning excise tax includes Decree No. 18-92 of the Cabinet of Ministers "On Excise Tax,"dated December 26, 1992 and the Law ofUkraine No. 329/95-VR "On Excise Tax onAlcoholic Beverages and Tobacco Products,"dated September 15, 1995.

In the past, there was no clear system oftracking the importation and distribution ofcigarettes and liquor products. Naturally, thesale of unchecked contraband productsresulted in a gold mine of tax-freeopportunities for all types of traders, whosupplied Ukraine with well-recognized viceswith virtually no payment of taxes.

In an attempt to control the illegal importationand distribution of cigarettes and liquor, onJuly 12, 1995, the President executed OrderNo. 609/95, "On Excise Stamps on AlcoholicBeverages and Tobacco Products." Unlike theexcise tax law, this order provided a newapproach for collection of excise tax byrequiring importers to purchase specialcustoms stamps and place them on each bottleof alcohol and every individual cigarette pack.Without such stamps, no alcohol or tobaccoproducts could henceforth enter or be sold inUkraine and, if found in Ukraine, they aresubject to confiscation.

Entirely too much legislative attention hasbeen devoted to alcohol and tobacco, asevidenced by the Parliament's Resolution,dated September 15, 1995, "On the Procedurefor Implementing the Law of Ukraine 'OnExcise Tax on Alcohol Drinks and Tobacco


Products;'" the Cabinet of Ministers'Resolution No. 1755 "On the Term of Validityof Licenses for Carrying Out Certain Types ofEconomic Activity and the Procedure forCalculating the Payment Amount for theIssuance Thereof," dated Novemder 29, 2000;Decree No. 666 "On Measures forImplementing Excise Stamps on DomesticAlcohol Drinks," dated June 20, 1996; DecreeNo. 493 "On the Temporary Procedure forIssuing Licenses for Import, Export and theWholesale Trade of Ethyl Alcohol, CognacAlcohol Drinks and Tobacco Products," datedMay 13, 1996, among others.

Other luxury items are also subject to the excisetax, and they are identified in the Cabinet ofMinisters' Resolution No. 1078, datedSeptember 29, 1997, as caviar, crab, shrimp,chocolate, automobile tires, audio and videocassettes, televisions, among others.Interestingly, the minimum rates for televisionand video equipment imported by Sony andPanasonic were higher than for Daewoo andLG Electronics, but no official explanation wasgiven.

The excise tax rates and the listed productstend to change constantly, which keeps theimporters on their toes. On June 2, 1997, forinstance, the Cabinet of Ministers imposedminimum customs values for certain foodstuffs(e.g., coffee, black caviar, frozen chicken andturkey legs, among others.) and clothing (furcoats and leather jackets).

IV. Customs Duties

As a rule, all imports are subject to payment ofcustoms duty (and, of course, the much-hatedvalue added tax). The only exception applies toforeign investors who contribute qualifiedforeign investment into a Ukrainian residentcompany's authorized capital in exchange forthe ownership rights in such company.

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The Foreign Investment Law expresslyprovides that in-kind investment imported intoUkraine as a foreign partner's contribution tothe authorized capital of any Ukrainiancompany, such as a joint venture or a 100%foreign-owned subsidiary, is exempt fromcustoms duty and value added tax. If, however,the above foreign investor's property isalienated within three (3) years from the date itis credited to the Ukrainian company'sbalance, the Ukrainian company will need topay customs duty and value added tax thereon.

The specific rates for various products may befound in various laws starting with the CustomsCode of Ukraine, effective on January 1, 2004,and the Cabinet of Ministers' Decree No. 4-93,"On Unified Customs Tariff," dated January 11,1993. Other legislation evidencing that importduty rates are subject to constant changesinclude the Cabinet's Resolution No. 1648 "OnIntroduction of Amendments to and Recogni-tion of Certain Resolutions of the Cabinet ofMinisters of Ukraine Which Were RenderedIneffective," dated December 13; Law No. 313/96-VR, "On Rates of Excise Tax andImport Duties on Certain Products," datedJuly 11, 1996, as amended on May 22, 2003;the Law of Ukraine No. 2097-XII "OnUniform Customs Tariff," dated February 5,1992, among others.

On December 21, 2000, the Parliamentadopted amendments to the Law "On theUnified Customs Tariff," according to whichthe Cabinet of Ministers no longer has theauthority to establish rates of customs duties.Reacting swiftly, on January 12, 2001, theCabinet of Ministers adopted Resolution No. 16 "On Amending the Rates of ImportDuties for Certain Types of Products andCertain Resolutions of the Cabinet of Ministersof Ukraine," which was thereafter renderedineffective by the Cabinet of Minister'sResolution No. 1648 of December 13, 2001.

Currently, the Law "On the Unified CustomsTariff" bestows upon the Parliament the

authority to have the final approval over theCabinet's proposals regarding the unifiedcustoms tariff. Additionally, the Law ofUkraine No. 2371-III "On Customs Tariff" waspassed on April 5, 2001, which replaced the oldCommodity Nomenclature for ForeignEconomic Activity with the UkrainianClassification of Goods of Foreign EconomicActivity.

V. Miscellaneous Costs: Labels and Certification

Several categories of import products aresubject to special licenses or "certifications"such as pharmaceutical, agro-chemical andfood products (e.g., the Cabinet of Ministers'Resolution No. 1996 "On the List of Goods,the Importation and Exportation of Which isSubject to Licensing and On Which Quotas areEstablished").

Naturally, cigarettes and alcohol are subject toa mandatory "certification" process underOrders Nos. 378 and 379 of the StateCommittee on Standards, Metrology andCertification, entitled "The Rules of ObligatoryCertification of Tobacco Products" and "TheRules of Obligatory Certification of AlcoholProducts," both dated September 13, 1996.

Food products were the next in line forcertification. As of January 1, 1997, allimported food products undergo a"certification" process, during which therequired labels containing various information(in the Ukrainian language) must be affixedonto the product. The required informationincludes the product's name, volume,chemicals and additives, expiration date, andcalorie content, among others.

On November 4, 1997, the Cabinet ofMinisters' Resolution No. 1211 "On Approvalof the Procedure of the Customs Clearance ofImported Goods (Products) Which AreSubject to Mandatory Certification inUkraine" approved the procedure for the


customs clearance of imported productssubject to obligatory certification in Ukraine.Four years later, on December 13, 2001, theabove procedure was slightly amended by theCabinet's Resolution No. 1671.

The practical implementation of the otherwisereasonable certification requirements continuesto cause great anxiety amongst importers.Many foreign companies complain, and right-fully so, that clear and transparent compliancewith this particular piece of legislation is oftenpossible only after rewarding (in cash or in-kind) the state official(s) responsible for granti-ng the necessary permissions. Regrettably, thisviewpoint has merit.

While product certification is designed toensure consumer safety and quality standards,it can also become a good tool to protectdomestic producers from importers. A goodexample of this dichotomy is provided byProcter & Gamble's struggles with theUkrainian authorities. On March 3, 1998, theState Committee for Standardization,Certification and Metrology ("DerzhStandart")revoked Proctor & Gamble's laundry detergentcertificates, which reportedly cost thecompany USD 135,000 to acquire. TheDerzhStandart asserted that the formula usedto produce Procter & Gamble's soap powderwas of inferior quality and was aimed at thepoor Ukrainian public.

Procter & Gamble disagreed wholeheartedly,and launched a counter-attack on March 20,1998, by requesting that the PresidentialIndependent Chamber on Foreign Investmentsform an expert panel to resolve this conflict,and initiating a criminal investigation to traceits payment of USD135,000 for the certificates.In the meantime, the dispute had a negativeside-effect on Procter & Gamble's activities.

VI. Conclusion

As a rule, in any import-export transactionsomething can always go wrong at anymoment. Even a miniscule degree of non-compliance with Ukrainian import rules maylead to significant delays, increased costs,additional efforts, and even lost profits(especially in case of perishable goods). Aslegislation in this area changes all toofrequently, foreign business entities wishing tosell their products in Ukraine must informthemselves about the latest applicable importtaxes and duties, certificates and licenses,contract formalities and related matters.

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I. Introduction

All countries do their best to monitor andcontrol import-export flows that passthrough their borders. While some

European countries have significantexperience in these activities, contemporaryUkraine is continually developing its customscontrol systems (and supporting legislation) dueto its rather short history.

As elsewhere, the Customs Service of Ukraine("Customs Service") plays the most importantfunction in monitoring goods during theirpassage through the Ukrainian borders. TheUkrainian Customs Code (hereinafter the"Customs Code," dated July 11, 2002 andeffective January 1, 2004) serves as basis for the

Customs Service to control the creation andoperation of customs warehouses, among otherthings.

Originally, the Customs Code was supposed tocome into force on January 1, 2003. However,most customs authorities were not prepared forits novelties, so the Code was postponed untilJanuary 1, 2004. Unfortunately, the Ukrainiancustoms authorities are still not yet completelyprepared for the provisions of the new CustomsCode, thus it is extremely important to seekexpert advice when dealing with Ukrainiancustoms authorities.

Significantly, the Customs Code distinguishesbetween ordinary customs warehouses and so-called "Customs Licensed Warehouses."

CUSTOMS LICENSED WAREHOUSES


II. Discussion

A. Ordinary Customs Warehouse

Ordinary customs warehouses are defined asspecially-equipped buildings for the storage ofgoods and other items, which are owned andused by the Ukrainian Customs authorities.

The following goods are subject to mandatorytransfer for storage in ordinary customswarehouses:

1. Goods which are prohibited from passageinto Ukraine due to established bans orrestrictions on their importation intoUkraine or transit through Ukrainianterritory, provided that such goods will notbe exported from Ukraine on the same dayof import;

2. Goods which are subject to duties andcustoms fees during importation intoUkraine, provided that the said duties andcustoms fees have not been paid and theimporter has no documents evidencingdeferred or installment payments thereof;

3. Goods which before the expiration theirterm of temporary storage by an enterprisewere not declared by the owner or itsauthorized person/body in accordance witha customs regime;

4. Goods which were declared in a regime ofabandonment in favor of the state.

B. Customs Licensed Warehouses

The Customs Code also allows any subject ofentrepreneurial activity to own a so-called"customs licensed warehouse," if such entityreceives a license to open and operate acustoms licensed warehouse and complies withthe Regulations on Opening and OperatingCustoms Licensed Warehouses.

On December 2, 1996, as a New Year's presentto the Ukrainian business community, theCabinet of Ministers ordered the CustomsService to approve a new text for theRegulations On Opening and OperatingCustoms Licensed Warehouses. On Dece-mber 31, 1996, the Customs Service amendedthe Regulations once again via Regulation No. 592, aptly entitled "On Approval of theRegulation for Opening and OperatingCustoms Licensed Warehouses" (as lastlyamended on December 24, 2003).

The said Regulations subject a customslicensed warehouse to a special regimepursuant to which goods imported intoUkraine are kept under customs controlwithout payment of any duties and other taxes.Further, non-tariff regulations and otherrestrictions are not imposed during the storageof such goods. If the goods are to be exportedfrom Ukraine, such goods are kept undercustoms control from the beginning of theircustoms clearance until their actual exportfrom the territory of Ukraine.

Ukrainian legislation provides for the followingtwo (2) types of customs licensed warehouses:

1. open customs licensed warehouses, whichare used for the storage of goods by anyperson, and

2. closed customs licensed warehouses, whichare used for the storage of goods that belongstrictly to the owner of such warehouse.

The Cabinet of Ministers of Ukraine establishesthe state fee for receiving a license to open andoperate a customs licensed warehouse.Currently, those entities who wish to receivesuch a license must pay a fee equal to USD 2,500, payable in Ukrainian Hryvnias atthe exchange rate of the National Bank ofUkraine as of the date of filing the relevantdocuments with the Customs Service ofUkraine.

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III. Technical Requirements of a Customs Licensed Warehouse

Any duly equipped buildings or other premisesdesignated for storage of goods within thecustoms warehouse regime can serve as acustoms licensed warehouse. Notably, theterritory of a customs licensed warehouse mustbe fenced in, and the following facilities mustbe available:

(a) security and fire-safety alarm devices areconnected to the guard post of theorganization hired as security for thecustoms licensed warehouse;

(b)communication means in the placesdesignated for the customs officials toexercise customs control in such warehouse;and

(c) metal grating on the internal side of thewarehouse's windows, if applicable.

Additionally, the owner of a warehouse mustprovide the relevant logistical equipmentnecessary for the warehouse's operation. At thesame time, the Ukrainian customs authoritieshave the authority to set additionalrequirements for outfitting customs licensedwarehouse facilities in order to ensure the safestorage of goods.

IV. The Procedure for Opening a Customs Licensed Warehouse

An entity, which intends to open and operate acustoms licensed warehouse, must file anapplication for the applicable license to openand operate such a warehouse. This applicationmust be filed with the relevant customs officein the customs zone at the location of thewarehouse.

The following documents must be attached tothe application form:


(a) copies of the foundation and registrationdocuments (i.e., the charter, foundingagreement, registration certificate, etc.) ofthe entity seeking to receive a license;

(b) documents confirming the right to own anduse the building(s) designated as thewarehouse;

(c) the economic grounds for the necessity toopen a customs licensed warehouse;

(d) the blueprints of the building designated asa customs licensed warehouse specificallymarking the areas designated for use bycustoms employees;

(e) the security and fire-safety alarm plansapproved by the relevant authorities;

(f) an agreement on the provision of securityservices for the premises with the authoritiesof the Ministry of Internal Affairs or with anentity possessing a license to providesecurity services, issued by the Ministry ofInternal Affairs;

(g) any relevant permits issued by theauthorities for sanitary and ecologicalcontrol (for warehouses which aredesignated for the storage of goods subjectto control by such authorities);

(h) a technological scheme, including themeans of control and inventory (thispertains only to warehouses designated forthe storage of liquid and granular (loose orpoured) goods); and

(i) a list of goods to be stored in the warehouse(this is related only to closed customslicensed warehouses).

The local customs office at the location of thecustoms licensed warehouse reviews theapplication within thirty (30) days from the

date of its receipt. If the local customs officegrants preliminary permission to open acustoms licensed warehouse, it will establish aso-called "Procedure of Organization of aCustoms Regime - Customs Warehouse"(hereinafter the "Procedure").

Significantly, while each Procedure isestablished on a case-by-case basis, it includesproviding a list of employees who will haveaccess to the customs licensed warehouse, thehead of the customs licensed warehouse, thenumber of customs officials who willparticipate in the clearance of goods, theworking hours, etc. Additionally, the customsoffice may establish a simplified methodologyfor the customs clearance of goods for closedcustoms licensed warehouses.

Once the Procedure has been finalized, thelocal customs office delivers the package ofdocuments to the main office of the CustomsService of Ukraine. The Customs Service thenmakes a final decision on issuing a licensewithin thirty (30) days. If necessary, themanagement of the Customs Service mayextend the term for consideration of the abovematter for an additional thirty (30) days.

In the final stage, the Customs Service willissue a license signed by the Chairman orDeputy Chairman of the Customs Service.Licenses can remain in force for an indefiniteperiod of time, provided that the customslicensed warehouse is re-registered annually.The state fee for such annual re-registration isequivalent to USD 1,500, which must be paidin Ukrainian Hryvnias as of the date of filingthe relevant documents with the CustomsService. Significantly, the license to open andoperate a customs licensed warehouse is nottransferable to third persons.

The Customs Service may refuse to issue alicense if: (i) the facilities/equipment of thebuilding(s) designated for the customs licensed

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warehouse do not comply with theRegulations; (ii) not all required documentswere submitted for consideration, or (iii) theinformation contained in the filed documentscontradicts applicable legislation. In case ofrefusal, the Customs Service will inform theapplicant in writing, specifying its reason forsuch a refusal. Fortunately, the decision of theCustoms Service is not final, and the applicantmay appeal the refusal.

V. Storage of Goods in Customs Licensed Warehouse

All goods, regardless of their origin (Ukrainianor foreign), may be stored in a customs licensedwarehouse, except goods associated withhumanitarian assistance, the storage of whichthe Customs Code specifically forbids incustoms licensed warehouses.

Various goods in transit through Ukrainianterritory may be placed in customs licensedwarehouses if they are to be reloaded from one

type of transport onto another. It is worthnoting, however, that certain goods, which arenot permitted to be imported into or exportedfrom Ukraine, as well as goods which arespecifically prohibited from being contained incustoms licensed warehouses pursuant to thelaws of Ukraine, will be denied storage in suchwarehouses.

Ultrahazardous goods require the priorconsent of the Customs Service if their storagenecessitates special conditions due to toxicity,inflammability, etc. Such goods may be storedonly in specially equipped areas of a customslicensed warehouse. Naturally, all items storedin a customs licensed warehouse are undercustoms control and strict supervision by thecustoms authorities. Along with the saidsecurity measures, the seal of the owner of thecustoms licensed warehouse must be availableat all times. Goods placed in a customslicensed warehouse may be released only in thepresence of authorized customs officials. Alloperations in a customs licensed warehouse are


carried out with the permission of the customsauthorities and at the expense of the warehouseowner.

As a general rule, goods imported into Ukrainecan be stored in a customs licensed warehousefor a maximum of three (3) years. However, thecustoms authorities can reduce this period forcertain goods. In contrast, goods to beexported from Ukraine can be stored in acustoms warehouse for a maximum of three (3)months before actual export. In all cases,however, the specific term for storage of goodswithin the above periods is determined jointlyby the owner of the warehouse and the personplacing the goods for storage.

During the transportation of imported goodsfrom one customs warehouse to another, theterm for storage of these goods starts from thedate of their initial placement into the customswarehouse regime. After expiration of thestorage term, such goods must be transferredfor storage to a customs office, or a newcustoms-warehousing period must be declaredand approved. In the latter case, the customsclearance of goods will be effectuated pursuantto the terms of the newly-declared regime.

VI. Functions of a Customs Licensed Warehouse

A customs licensed warehouse may only beused to store goods specifically declared forstorage in certain customs warehouse. To storesuch goods in a customs licensed warehouse,the owner or holder of the goods must submit awell-grounded application to the relevantcustoms authority stating the purpose of thestorage of such goods.

If the goods will be stored pursuant to along-term agreement, the application must besubmitted upon the storage of the firstconsignment of goods. In this case, the goodsmay be stored in the warehouse for theduration of the agreement or one calendar year.In all cases, goods stored in a customs

warehouse are subject to declaration,regardless of their value, by filling out a cargocustoms declaration and submitting thefollowing documents:

1) the agreement on the storage of goods in thecustoms licensed warehouse between theowner of the customs licensed warehouseand the entity, which stores such goods inthe warehouse, and the foreign economicagreement (contract) pursuant to which thegoods are imported or exported into/fromUkraine;

2) the transportation and other accompanyingdocuments (way-bills, bills of lading,certifications, invoices, etc.);

3) permission of state bodies, which carry outcontrol during the crossing of goods via thecustoms border of Ukraine.

If the goods are subject to certification afterimport into Ukraine, then the certificate ofconformity does not have to be submitted withthe above documents. In all cases, the storageof goods in a customs licensed warehouse mustbe carried out in the presence of a customsofficial.

A customs licensed warehouse may performcertain operations with goods stored therein inorder to ensure storage, including themovement of goods within the warehouse forpurposes of rational storage, cleaning,ventilation, creation of optimal temperature,painting, protection from corrosion,inventorying, etc. Additionally, to prepare forsale and transportation, a customs licensedwarehouse may split up consignments of goods,prepare shipments, and sort, pack, re-pack,mark, load, unload, reload and test goods.Operations involving the equipping and/orrepairing of warehouse premises may also beconducted by a customs licensed warehouse.Regardless of the operation conducted, the

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description and nature of goods may notchange in relation to their classification underthe Ukrainian Classification of Goods ofForeign Economic Activity.

Goods may be released from a customslicensed warehouse:

1) into free circulation on the customsterritory of Ukraine;

2) outside of the customs territory of Ukraine;

3) for temporary use on the territory of Ukraineunder a regime of temporary import;

4) for processing on the territory of Ukraine;

5) for transfer to a customs warehouse forstorage or, in case of their abandonment, infavor of the state;

6) for destruction under the control of acustoms body;

7) for transfer to another customs body for thepurpose of customs clearance under theselected customs regime;

8) temporarily with the subsequent return for:

(a) demonstration at an internationalexhibition carried out in Ukraine; or

(b) certification by the state standardsauthorities of Ukraine or examinationby other state bodies (i.e., sanitary-epidemic, veterinary-sanitary, phyto-sanitary and ecological authorities).

In order to release imported goods from acustoms licensed warehouse, the declaringparty must submit to the relevant customs bodya duly executed cargo customs declaration andall other documents required for carrying outcustoms clearance of the goods and paying all


taxes and duties established by law. Thecustoms value of goods is determined duringthe release of goods from a customs licensedwarehouse.

If goods are released for demonstration at aninternational exhibition or for certification orexamination, however, the owner of thewarehouse must submit to the relevant customsauthority an application for permission torelease the goods. The application mustcontain the following:

1) information on the good(s) (name, quantity,weight, value) with a mandatory indicationof its code under the UkrainianClassification of Goods of ForeignEconomic Activity;

2) information on the purpose of the release ofthe good(s) temporarily with its (their)subsequent return;

3) information on the documents pursuant towhich the goods were stored in the customslicensed warehouse;

4) the obligation to return the good(s) to thecustoms licensed warehouse with anindication of the term for return;

5) the obligation to pay the taxes and duties(mandatory payments) due in case of thefailure to return the good(s) to the customslicensed warehouse within the establishedterm;

6) information on the director of the customslicensed warehouse (surname, name andpatronymic).

Additionally, the following documents must besubmitted along with the application:

1) the agreement between the owner (orholder) of the goods and the entity carryingout the examination, listing the quantity of

samples of the good and the term forperforming the work; or

2) the certificate of the correspondingcontrolling body, affirming the existence ofa valid agreement, containing the number ofsuch agreement, the date of its execution,quantity of samples of the good and the termfor performing the work.

The term of releasing the goods from a customslicensed warehouse temporarily withsubsequent return for demonstration at aninternational exhibition held in Ukraine maynot exceed the term of such exhibition, takinginto consideration the time necessary for thetransportation of the exhibits and theconstruction and deconstruction of theexhibition. In contrast, the term for thetemporary release of goods from a customslicensed warehouse with subsequent return forcarrying out certification or examination maynot exceed 45 calendar days. If it is impossibleto carry out an examination within 45 calendardays, such term may be extended uponsubmission to the relevant customs body of adocument confirming such impossibility,issued by the corresponding controlling body.

If, upon the carrying out of certification orexamination, samples of goods are completelyused up or destroyed, and are not returned tothe customs licensed warehouse, they are takeninto account in the consignment of goodsduring the customs clearance into freecirculation on the customs territory ofUkraine. The quantity of samples, which arereleased from a customs licensed warehouse,may not exceed the norms established by theauthorized state body for certain types ofgoods.

In cases of transfer of goods from one customslicensed warehouse to another within the zoneof activity of one customs body, the goods mayonly be transferred during the term of their

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storage. However, the procedure of customscontrol over the transfer of such goods must beapproved by an order of the customs body.Transfer is permitted in the following cases:

1) the liquidation of the customs licensedwarehouse in which the goods are stored;

2) force majeure circumstances, which maycause the loss or damage of the goods storedat the customs licensed warehouse;

3) the termination of the storage agreementconcluded between the owner of thecustoms licensed warehouse and the entity,which stored the goods in the warehouse,and the signing of a new storage agreementwith an owner of another customs licensedwarehouse.

The transportation of goods to anothercustoms body to carry out customs clearanceper selected customs regime takes place whenthe declaring party submits to the customsbody an internal transit document, pursuant tothe procedure established by the State CustomsService of Ukraine.

If a customs licensed warehouse released goodswithout the permission of a customs body, or ifthe goods somehow mysteriously vanish(except in cases of force majeure or naturaldeterioration (wear and tear) or a decrease dueto normal conditions of storage), the owner ofthe customs licensed warehouse bears liabilitypursuant to the Customs Code of Ukraine andmust pay cash in the amount of import (export)taxes and fees, which should have been paidhad the goods been cleared pursuant to thecustoms regime of import (export).

VII. Cancellation and Suspension of a Licenseand Liquidation

A license to operate a customs licensedwarehouse can be suspended for a period of upto three (3) months, or even cancelledaltogether, by the Customs Service in thefollowing cases:

(a) if the operations of a customs licensedwarehouse are halted for over four (4)months;

(b) if the owner of the warehouse or personswith access to the warehouse repeatedly


violate the Regulations and applicablecustoms legislation;

(c) if the owner of the customs licensedwarehouse violates foreign economiclegislation after receiving notice to ceaseand desist certain activities;

(d) non-fulfillment of the requirements setforth in the head of the local customs office'sdecision to suspend the validity of a license;

(e) if a customs licensed warehouse continuesthe violations mentioned in paragraphs (a),(b) and (c) in this list of suspension cases,provided that temporary suspension of thevalidity of a license has been earlier applied;

(f) if a criminal case is initiated against thecustoms licensed warehouse with respect toits foreign economic activity; and

(g) if the Customs Service uncovers violationsof applicable legislation during aninspection of the customs licensedwarehouse.

The head of the Customs Service will cancel alicense upon petition of a local customs office.Upon cancellation of a license, the owner ofthe warehouse must return the license to thelocal customs office no later than seven (7)days from the date of such cancellation.

VIII. Conclusion

The provisions of the Customs Code concerningcustoms licensed warehouses are ratherstraightforward, although proponents ofeconomic reforms constantly urgeamendments to the legislation governing thistopic (taking into account the new CustomsCode). Instead, what is sorely needed is aconcentrated effort to implement in atransparent manner this otherwise well-developed and comprehensive legislation.

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I n Ukraine, all goods and services mustundergo a mandatory certificationprocess that involves two state entities:

the Ministry of Health and the DerzhStandart(the State Committee for Standardization,Certification and Metrology). This certifica-tion process is expensive and lengthy, whichadds to the price of the goods and servicesoffered by the producers. For instance, a com-pany must receive a so-called "hygienic con-clusion" from the Ministry of Health with thecorresponding certification of the goods andservices from Derzhstandart.

Likewise, any Ukrainian company that wishesto utilize European technology in Ukrainemust present the equipment/machinery to thelaboratory of DerzhStandart in order to receivea certificate for its use. Although thiscertification means absolutely nothing in

Europe, it raises the price of the goods to beproduced because literally every nook andcranny must be checked and certified. Notsurprisingly, this cumbersome barrier to entrydoes not sit favorably with foreign companies.

Furthermore, DerzhStandart establishes thesize of packages and the storage term forproducts. Therefore, if a company wishes toproduce, for example, three and a half literbottles of a soft drink and such bottle sizes arenot provided for by DerzhStandart, then thecompany does not have the right to producesuch bottles. Additionally, DerzhStandart canestablish a storage term for the soft drink at15-20 months while the correspondingcertificate will be valid for only six (6) months.

If taken literally, this means that every six (6)months the company must re-certify the soft

CERTIFICATION OF GOODS AND SERVICES


drink, which will be done at the same cost asthe first certification. Officially, the cost forcertification can run between UAH 1,000 and1,500 each time certification becomes neces-sary. Taking all of these costs into considera-tion, the price of goods and services canincrease by as much as 10-15% of the actualcost. Ultimately, this cost increase negativelyaffects the buying power of the customer.

Importantly, the Presidential Decree No. 817/98 "On Certain Measures for the De-regulation of Entrepreneurial Activity," datedJuly 23, 1998, exempts products (except foodproducts) whose quality is confirmed bycertificate issued outside of Ukraine inaccordance with the international standardISO or other international standards, fromhaving to repeat the certification for suchgoods in Ukraine.

This being said, however, Ukraine is still not amember of the European Co-operation forAccreditation ("EA"), therefore the accreditationof goods in a Ukrainian laboratory for theirsubsequent export is not accepted by mostmember states of the EA (i.e., the goods mustbe examined in a European laboratory).Likewise, goods imported into Ukraine mustgo through the accreditation process in aUkrainian laboratory if Ukrainian accreditationis not accepted in the country of origin. Again,this affects the price for which goods will besold on the market.

In a related matter, on December 1, 1999, theParliament issued Resolution No. 1258-XIV"On the Draft Law 'On Liability of Suppliersfor the Manufacture and Sale of Poor Qualityand Dangerous Products.'" The draft law wasprepared by DerzhStandart and it finallyresulted in the Law of Ukraine No. 1393 "OnExtraction From Circulation, Processing,Utilization, Destruction or Further Use ofPoor Quality and Dangerous Products," datedJanuary 14, which covers one of the

requirements for joining the European Union,namely the quality maintenance of sanitaryand ecological norms in accordance withinternational standards. Among other clauses,it levies disciplinary, administrative, civiland/or criminal liability for supplying poorquality or dangerous products and failing tocomply with the provisions of the law.

Although many of the old practices remain incustom, the Ukrainian government has takensignificant steps in implementing moretransparent certification procedures. This isevidenced by the passing of Order No. 9 of theMinistry of Health Protection "On Approval ofthe Procedure for Carrying Out Certificationof Pharmaceuticals for International Trade,"dated January 14, 2004, and registered with theMinistry of Justice on January 30, 2004 underNo. 129/8728.

In the near future, hopefully, Ukraine willpermit the construction of Western and/orEuropean accreditation laboratories on theterritory of Ukraine thereby making theaccreditation procedure faster and decreasingthe price of goods which still require bothWestern and Ukrainian accreditation.

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Ukrainian law provides for a so-called"tolling transaction," which is actual-ly a specific type of outsourcing

known traditionally as production outsourcing.Tolling transactions, whereby Ukrainian pro-ducers manufacture items by using raw materi-als imported by foreign customers, have becomeincreasingly common in Ukraine. Many foreigncompanies currently apply a tolling strategy,which enables them to minimize expenses forthe assembly of the intended finished productsand to avoid the necessity to upgrade their ownproduction facilities and hire additionalworkforce in the home country.

According to the general principles of a tollingtransaction, a customer supplies a producerwith raw materials for further processingand/or manufacturing of finished products.

The relationship between customer andproducer is based upon a remuneration basis(either in cash or by a portion of finishedproducts and/or raw materials) for payment bythe customer to the producer. Practically, aforeign customer may either import the rawmaterials into Ukraine or purchase them onthe territory of Ukraine.

After production, the finished products areexported (re-exported) to the customer accord-ing to the terms and conditions of the specificagreement between the customer and producer.The imported raw materials and the finishedproducts made therefrom are exempt fromimport taxes (with the exception of customsfees) and VAT under a tolling transactionprovided that such transaction meets therequirements of the applicable Ukrainian laws.

TOLL MANUFACTURING/PRODUCT OUTSOURCING


MINIMAL VALUE OF TOLLING RAW MATERIALS - THE 20% RULE

Ukrainian law prescribes that raw materialsused in tolling transactions must have a value ofno less than 20% of the value of the finishedproducts made therefrom and must be suppliedto the producer before commencing themanufacture of the finished products. If thevalue of the raw materials is less than 20% ofthe value of the finished products, then thetransaction will not be considered by law as atolling transaction. When calculating the valueof the raw materials into the value of thefinished products, the value of all raw materialsand the expenses incurred in connection withthe transportation of the raw materials to theproducer must both be taken intoconsideration.

TITLE TO THE TOLLING RAW MATERIALS

According to Ukrainian law, the ownershiprights to tolling raw materials at each stage oftheir processing and the ownership rights to thefinished products manufactured from such rawmaterials belong to the customer throughoutthe entire transaction.

THE 90-DAY RULE

Tolling raw materials, which are imported ontoUkrainian territory by a foreign customer, aresubject to import duties according to the ratesas set forth in the Unified Customs Tariff ofUkraine, whereas taxes and fees associatedwith import of raw materials are governed bygeneral Ukrainian legislation. The payment ofimport duties, taxes and fees (with the excep-tion of customs fees) is effectuated by theUkrainian producer by way of a promissorynote to the tax body at the producer's locationwith a repayment term equal to the period of

time required for completion of the tollingtransaction.

Importantly, the repayment term may notexceed ninety (90) calendar days from the dateof execution of the import customs declara-tion. If finished products manufactured fromtolling raw materials are exported fromUkrainian territory within the above 90-dayterm, the promissory note will be deemed asrepaid and the import duties, taxes and fees(with the exception of customs fees) will not becollected. If, however, the finished products arenot exported from Ukraine within 90 days,then, in addition to taxes owed, the Ukrainianproducer will be subject to a fine in the amountof 0.3% of the total value of the undeliveredfinished products for each day of delay.

TECHNOLOGICAL SCHEME

As an important rule, the implementation of atolling transaction requires preparation of a so-called "technological scheme" for processingraw materials. Such scheme must be given tothe Ukrainian customs authorities in order todetermine the indices of the specific propor-tion of raw materials as a percentage of thevalue of the finished products.

FORM OF AN AGREEMENT (CONTRACT) FOR PROCESSING RAW MATERIALS ON A TOLL MANUFACTURING BASIS

As one of the parties to an agreement (con-tract) for processing tolling raw materials mustbe a Ukrainian non-resident (a foreign busi-ness entity), such agreement (a contract) willbe deemed a foreign economic agreement (acontract) and must meet the requirements forthe form and contents of such agreementsunder Ukrainian law.

35www.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:


"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

37www.frishberg.com

ABOUT THE FIRM

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-efficient acqui-sition structures in light of the client's specificgoals.

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.


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]

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