Working with clients from Ukraine: Inbound and outbound investments

Riga27-28 September 2012

Irina Paliashvili

CONTENT• Country profile and investment climate • Ukrainian antitrust regulation • Confidential information • Money-laundering regulation • Anticorruption regulation • Ukrainian taxes • Double taxation avoidance treaties • Cyprus, the Netherlands, Switzerland: bilateral treaties with

Ukraine• Tax information exchange• Offshore jurisdictions • Tax liability • Currency regulations • Dual citizenship • Family law, inheritance in Ukraine • Real estate • Recognition of decisions of foreign tribunals in Ukraine

COUNTRY PROFILE AND INVESTMENT CLIMATE• Ukraine is the second largest country in Europe after Russia by size;

• The population of Ukraine is 45.6 million people;• GDP for 2011 was US $165bn. GDP growth over 2011 accelerated visibly

to 5.2% compared with the 4.2% upturn in 2010. Domestic consumption and investments were the major driving forces of the GDP performance in 2011; Head of State Statistics Committee Osaulenko predicts GDP growth for 2012 of more than 2% (Bloomberg consensus forecast of 3.0%);

• The Ukrainian currency, which had been pegged at a rate of 5:1 to the U.S. dollar, was devalued to 8:1 and since 2010 was stabilized at that ratio, but a moderate correction in the exchange rate is expected in 2012; hryvnia depreciation will likely not start before the October parliamentary elections because the exchange rate in Ukraine is an influential political indicator;

• The reduction of inflation from 8% in 2010 to 4.6% as of the year-end 2011 was unexpected by the market and was achieved by administrative price control. Therefore it is evident that inflation risks are still high in 2012;

• In 2010 IMF approved US$15.1bn stand-by loan to support government’s economic adjustment and reform program, but only around $5 billion was received because the new program was frozen at the stage of the second review in spring 2011; subsequent disbursements are postponed; among the conditions for the resumption of financing are a hike in gas prices for households, greater flexibility of the exchange rate, achieving the planned budget deficit size, and the fulfillment of a number of objectives in the banking sector;

• EURO-2012 was a strong catalyst;• Significant dependence on performance of export-oriented sectors;• Political and economic uncertainties due to the upcoming parliamentary

elections in October 2012

UKRAINIAN ANTITRUST REGULATIONS

TRANSACTIONS THAT MAY BE SUBJECT TO ANTITRUST PRIOR APPROVAL

 

• merger or consolidation of a business entity• acquisition of direct/indirect control over a business entity: • direct or indirect acquisition, obtaining of ownership of, or management

over, the shares (participating interest) of the business entity, if such acquisition results in the obtaining of over 25 % (but under 50%) or 50% (or over 50%) of the voting rights of the target business entity

• establishment of a JV• acquisition of title, to assets comprising the integral property complex or

its part (structural subdivision), as well as the rent, lease, concession or acquisition by other means of the right to use such assets, including the acquisition of such assets from a business entity being liquidated

• appointment/election to the senior management position of an individual who already holds a similar level position in another legal entity;

• causing the cross-over of more than half of the members of the supervisory board, management, or another supervisory or executive body of two or more business entities

THE LIST IS NOT EXHAUSTIVE

THRESHOLDS FOR TRANSACTIONS SUBJECT TO PRIOR APPROVAL BY THE ANTIMONOPOLY

COMMITTEE OF UKRAINE (AMCU)(a) the combined worldwide total asset value or aggregated sales turnover for the last financial year of all participants in the concentration, taking into account their relations of controls, exceeds €12 million; and

(b) the worldwide total asset value or aggregated sales turnover for the last financial year of at least two participants of a concentration, taking into account their relations of controls, exceeds €1 million; and

(c) the total asset value or total sales of goods in the Ukraine for the last financial year of at least one participant in a concentration, taking into account its relations of controls, exceeds €1 million;

OR, irrespective of the above thresholds, 

one or all the participants of the concentration-together with controlled or controlling entities have a market share which exceeds 35% of this or an adjacent product market

INFORMATION THAT MUST BE DISCLOSED TO THE AMCU

• Detailed description of the transaction • Calculation of the aggregate value of assets and sales in the last fiscal year• Data about the parties to the concentration, their control relations• Information on significant shareholders (10% and more): ownership

structure up to their beneficial owners i.e. individuals who are substantial shareholders

• Information about principal activities in Ukraine including market shares • Lists of members of supervisory councils, other managing bodies • Lists of individuals who are spouses, parents, children or siblings who are

authorized to vote in the supreme management body • Foundation documents, registration certificates, transaction documents • Other specific documents that the AMCU requests to be provided, which

depend on the nature, type and specifics of the concentration• AMCU HAS THE RIGHT TO REQUEST ANY DOCUMENT/DATA IT DEEMS

NECESSARY FOR CONSIDERATION OF AN APPLICATION• Special procedure for filing confidential information: may be filed separately

in an envelope, must be marked as “CONFIDENTIAL DATA” on each page

CONFIDENTIAL INFORMATION

CONFIDENTIAL INFORMATION

personal data

commercial secret

secrecy of correspondence

advocate secrecy

bank secrecy

notary secrecy

audit secrecy

DISCLOSURE IS ALLOWED: 

1. Based on the consent of the owner of information

2. Based on the authority of the law enforcement bodies: (1) in the course of operative investigations prior to opening criminal case

- if data on law breach that entails criminal liability is available: upon decision of the head/deputy head of respective operative division - law enforcement authorities have the right to get acquainted only on site with documents and data describing companies’ activities, make copies thereof

- upon court decision – request such documents and data, as well as data on the suspects’ way of life, their income sources, etc.

- upon court decision to prevent crime or to determine the truth during investigation of a criminal case if information cannot be obtained otherwise: law enforcement authorities have the right to enter into premises secretly, collecting information from information channels, secret control over correspondence, etc.

  (2) in the course of a criminal case - upon investigator’s substantiated written decision – the right to request documents - upon court decision – the right to request documents containing bank secret, from

individuals’ apartment /other dominion, originals of source financial-economic/ bookkeeping documents

- upon investigator’s substantiated written decision under prosecutor’s sanction - to conduct search in the premises

- upon court decision - to conduct search in individuals’ apartment /other venue

3. No authority is allowed to demand disclosure of advocate secret from an advocate.

MONEY LAUNDERING REGULATIONS

ANTI-MONEY LAUNDERING REGULATIONS

180 days rule - requirement for the return of currency revenue: payments for goods/services exported by Ukrainian residents must be received by them within 180 days after delivery of goods/performance of services. Import of goods/services, paid in advance by Ukrainian residents, must be received by them within 180 days after they made the advanced payment.

 • 2010-2011 - Important amendments to Ukrainian regulations (under

FATF recommendations):- Tighten control over financial operations- Raise the amount of transactions subject to financial monitoring from UAH 80’000 to UAH 150’000- During the incorporation of a Ukrainian company the founders - legal entities must disclose their ownership structure up to their beneficial owners i.e. individuals who are substantial shareholders in those companies (if the Ukrainian company changes the owner(s), then such a disclosure is not required).- Restrictions regarding insider information - Counteracting financing of terrorism- Restrictions on manipulation on stock market

 • 28 October 2011 – Ukraine was removed from FATF “black list” for

improving its AML/CFT regime and: - Ukraine is no longer subject to FATF monitoring and cooperates with European Committee MONEYVAL on an ordinary basis- it is easier to do business with financial systems of countries labeled FATF-compliant, (U.S., U.K., etc.)- Ukraine needs to further improve its regulations according to new/developing FATF standards

ANTICORRUPTION REGULATIONS

ANTICORRUPTION REGULATIONS

• On 1 July 2011 new anticorruption Laws took effect: • Law of Ukraine No. 3206-VI "On the Fundamentals of

Corruption Prevention and Counteraction" dated 7 April 2011

 • Law of Ukraine No. 3207-VI "On Amending Certain

Ukrainian Legislative Acts Pertaining to Liability for Corruption Offences" dated 7 April 2011

• New categories of individuals subject to anticorruption restrictions

 • New kinds of restrictions (gifts, services, etc.)

• New criminal and administrative offences

INDIVIDUALS SUBJECT TO ANTICORRUPTION RESTRICTIONS

1. Persons authorized to perform responsibilities of the State or local self-governed bodies:

 - the President of Ukraine, Ministers, People's Deputies of Ukraine, Deputies of the Verkhovna Rada of the Autonomous Republic of Crimea, Deputies of local councils, Public servants and officials of local government, Military officers, Judges, officers and officials of public authorities, etc.

 2. Persons regarded as being authorized to perform the responsibilities of the State or local self-governed bodies:

 – Officers of public-law legal entities who receive their salary from the State or local

budget  

– Individuals rendering public services (auditors, notaries, and appraisers, as well as experts, arbitration managers, independent brokers, members of labor arbitration tribunals, arbitrators in the time of performance of these functions, other persons in cases established by law)

 – Officials of foreign states, international organizations

 3. Persons who hold permanently or temporarily positions of organizational-executive or administrative-economic functions, or the persons specially authorized to perform such duties in private law legal entities irrespective of their corporate form pursuant to the law;

 4. Officers of legal entities and individuals - if an unlawful benefit is received from them or through their involvement by the persons listed in cl. 1 - 2;

ANTICORRUPTION REGULATIONSMAIN RESTRICTIONS

• prohibition to use official powers with the purpose of gaining illegal benefit /the acceptance of a promise / offer of such a benefit for themselves or other persons

• restrictions for the persons authorized to perform responsibilities of the State or local self-governed bodies to be engaged in other paid or entrepreneurial activities (apart from teaching, scientific, and creative activities, medical practice, and sports coaching and referee practices)

• restrictions for persons authorized to perform responsibilities of the State or local self-governed bodies after resigning from position

• restrictions as to acceptance of gifts

• prohibition to refuse to provide individuals /legal entities with the information that must be provided under the law

 • Obligation of government official to submit declaration concerning the property,

income, expenses, and obligations of financial nature for the previous year, annually by April 01, at the place of their employment (service), but this obligation not applicable to relatives

 • individuals/legal entities are not allowed to provide goods and services to public

authorities or local self-governed bodies free of charge

UKRAINIAN TAXES

UKRAINIAN TAXES

• The Ukrainian tax system is one of the most burdensome in the world.

• In a tax systems ratings, Ukraine is usually placed well down the list.

• The Ukrainian tax system is developing.

• The Ukrainian tax reform is not sufficiently effective.

UKRAINIAN TAXES – BRIEF OVERVIEW

• Individuals - tax residents are taxed on worldwide income; residency is determined by several

criteria, among them the 183 days residency requirement. Both resident and non-resident

individuals are taxed at flat tax rates of: 15% or 17% (depending on the level of income).

Shareholder-Relief System: tax rate for dividends - 5% (including dividends from foreign sources)

• Corporate profits are subject to 21% tax in 2012. The tax rate will be gradually reduced to 19% by

2013, and to 16% by 2014. Various “single unified tax” options are available for small and medium

size businesses. Dividends from non-residents: currently 23%, will be gradually reduced to 16% (by

2014). Participation exemption of 0% for dividends from residents and controlled (non-offshore)

non-residents.

• Loss carry forward – unlimited, no loss carry back

• Withholding tax is 15 % (dividends, income from sale of shares, royalties, interests, certain other

incomes)

• No capital gains

• Inheritance tax depends on the object to be inherited, kinship and residency (0% / 5% / 15%)

• Tax consolidation provided

• The VAT rate is 20% and is to be reduced to 17% by 2014. No reduced rate

• Double Tax Treaty Network (over 60 DTTs): reduction /elimination of WTH taxation/refund of extra

tax

DOUBLE TAXATION AVOIDANCE TREATIES

UKRAINE’S DOUBLE TAXATION AVOIDANCE TREATIES

Austria Georgia Libya 2010 Syria

Azerbaijan Germany Lithuania Slovakia

Algeria Greece Macedonia Slovenia

Armenia Hungary Malaysia USSR DTAA Spain USSR DTAA

Belgium Iceland Morocco 2009 Switzerland

Belorussia India Moldova Sweden

Brazil Indonesia Mongolia Tajikistan

Bulgaria Iran Montenegro Thailand

Canada Israel the Netherlands Turkey

China Italy Norway Turkmenistan

Croatia Japan USSR DTAA Pakistan 2011 United Arab Emirates

Cyprus USSR DTAA Jordan Poland UK

Czech Republic Kazakhstan Portugal USA

Denmark Republic of Korea Romania Uzbekistan

Egypt Kuwait Russian Federation Vietnam

Estonia Kyrgyz Republic Republic of South Africa

Finland Latvia Serbia

France Lebanon Singapore 2009

CYPRUS, THE NETHERLANDS, SWITZERLAND: BILATERAL TREATIES WITH UKRAINE

CYPRUS, THE NETHERLANDS, SWITZERLAND: BILATERAL TREATIES WITH UKRAINE

AREA CYPRUS The NETHERLANDS

SWITZERLAND

Legal assistance in civil cases

Avoidance of double taxation of incomes and property

Legal assistance in criminal cases

Promotion and mutual protection of investments

Readmission of illegally staying persons

Combating money laundering and crime

Cooperation in the area of competition policy

Legalization of official foreign documents

Kyoto Protocol on climate change

CYPRUS, THE NETHERLANDS, SWITZERLAND: BILATERAL TREATIES WITH UKRAINE

AREA CYPRUS The NETHERLANDS

SWITZERLAND

Uniform law for bills of exchange and promissory notes

Economic, scientific, technical and industrial cooperation

Energy community Cancellation of visas for holders of diplomatic and service passports

Culture Tourism Trade International highway service

Establishment of visa-free regime for entrance into

USSR-CYPRUS AGREEMENT ON AVOIDANCE OF

DOUBLE TAXATION• In general, old USSR agreements for the avoidance of double taxation are

valid in Ukraine until new agreements are made and take effect.

• the USSR-Cyprus Agreement (signing date: 29.10.82) is still in effect• the Agreement is applicable to the persons who are treated for tax

purposes as having permanent residence in one or both States• the Agreement is applicable to national and local taxes levied in

accordance with the laws of each State• incomes derived in one State by a person that has permanent residence in

the other State are only taxable in the first State if derived through a permanent representative office located there and only to the extent covering the operations of the permanent representative office

• tax exemptions apply to any incomes that arise in Ukraine or Cyprus, including dividends, interest, royalty, property alienation proceeds, etc., that are remitted from one country to the other one, except for some taxes levied on individuals and permanent representative offices’ incomes

Note: a new Bill concerning the denouncement of the USSR-Cyprus Agreement was submitted to the Verkhovna Rada (Parliament) of Ukraine

on 7 June 2012. The Bill is currently pending in the Rada committees.

TAX INFORMATION EXCHANGE

TAX INFORMATION EXCHANGE: GROUNDS

Multilateral treaties

• Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters (1988) Agreement between the States-Members of the CIS on Cooperation and Mutual Aid Regarding Observance of Tax Legislation and Combating Infringements Thereof (1999) •European Convention on Mutual Assistance in Criminal Matters (1959) with additional Protocol of 1978

Bilateral Double Taxation Avoidance Treaties (69 countries)

Special Bilateral Agreements With Tax Authorities:

National Regulations (mostly adopted by the State Tax Administration):• Procedure of Information Exchange Pursuant to Special Requests • Procedure for Implementing Cooperation Between Trade and Economic Missions of Ukraine's Diplomatic Institutions Abroad and the State Tax Administration of Ukraine

Azerbaijan Lithuania

Poland

Belgium Moldova Slovakia

Estonia the Netherlands USA

27

TAX INFORMATION EXCHANGE: INFOMRATION SUBJECT TO EXCHANGE

Types of tax information exchange• per request• automated (periodic)• spontaneous exchange• simultaneous tax checks

The following information regarding taxpayer may be subject to exchange

• residence status of an individual or a legal entity, • taxpayer status of the legal entity, • income type in the country of origin, • officially declared revenues and expenses, • bank information, • financial reports, • accounting information, • information on prices under contracts, • names and addresses of company management and employees etc.

OFFSHORE JURISDICTIONS

DISINCENTIVES FOR PAYMENTS TO BLACKLISTED OFFSHORE JURISDICTIONS

The Ukrainian CPT payer is restricted in accounting its payments as tax-deductable costs if those are paid to a company located in a blacklisted offshore jurisdiction.

Not tax-deductable Marketing services/works Consulting services/works Advertising services/works Engineering services/works Royalties

Tax-deductable in the amount of 85% of the payment all other payments to a company located in a blacklisted offshore

jurisdiction

BLACK LIST OF OFFSHORE JURISDICTIONS

British Insular Regions Africa Caribbean Region

Alderney Liberia Anguilla

Guernsey Seychelles Antigua and Barbuda

Jersey Aruba

Isle of Man Pacific Region the Bahamas

Vanuatu Barbados

Middle East Marshall Islands the Bermudas

Bahrain Nauru British Virgin Islands

Niue U.S. Virgin Islands

Central America Cook Islands Grenada

Belize Samoa Cayman Islands

Montserrat

Europe South Asia Netherlands Antilles

Andorra Maldives Republic Puerto Rico

Gibraltar Saint Vincent and Grenadines

Monaco Saint Kitts and Nevis

Saint Lucia

Commonwealth of Dominica

Turks & Caicos Islands31

TAX LIABILITY

TAX LIABILITY

Criminal liability of company official/individual• Liability threshold 53,650 EUR.• Criminal fines ranging 1,700 EUR up to 42,500 EUR

+ restriction to hold certain positions or exercise certain activities up to 3 years

+ confiscation of property• Not applicable if taxes and fines are paid prior to the individual being charged

Administrative liability of company official/individual• Fines up to 34 EUR

Financial Liability of the company• Most fines range up to 102 EUR• Violation of rules of amending tax declarations:

fine - 5% of the amount of tax due reduction• Lowering of tax dues or increase of the VAT compensation:

fine - 25% of the unpaid tax amount, 50% thereof if repeated• Violation of rules of charging, withholding and payment of taxes at the payment

source fine - 25%, 50%, or 75% of the unpaid tax amount• A penalty (interest) is applied to the undue tax payments at the rate of 9% yearly

CURRENCY REGULATONS

GENERAL FOREIGN CURRENCY REGULATONS

• Overregulated and archaic currency regime

• Foreign currency allowed in economic transactions of Ukrainian residents with non-residents

• Licenses are issued by the National Bank of Ukraine (NBU) to allow banks and financial institutions to perform foreign currency transactions

• Registration/prior expertise of certain services contracts» contract on works/services/royalties the payment under which exceeds

100,000 EUR requires an evaluation» loans made to a Ukrainian entity by a foreign entity, including inter-

company loans • 180 days rule - requirement for the return of currency revenue: payments for

goods/services exported by Ukrainian residents must be received by them within 180 days after delivery of goods/performance of services. Import of goods/services, paid in advance by Ukrainian residents, must be received by them within 180 days after they made the advanced payment.

CROSS-BORDER TRANSFER LIMITATIONS

Individuals may perform only non-trade and non-investment cross-border transactions without a license from NBU.

A Ukrainian individual may (without opening a bank account):send 15000 UAH (~1500 EUR) per bank dayreceive 50000 UAH (~5000 EUR) per bank day

A Ukrainian resident must receive an NBU one-time individual licenses for:

• placement of currency valuables in bank accounts abroad• transferring foreign currency for payments in foreign currency abroad• making investments abroad• making a loan abroad

A foreign contract on works/services/royalties, the payment under which exceeds 100,000 EUR, requires a prior expert evaluation by the State Information-Analytical Centre for Monitoring Foreign Commodity Markets.

DISCLOSURE OF COMPANY BENEFICIARY OWNERS

Legal entities must disclose their ownership

structure up to their beneficial owners i.e.

individuals who are substantial shareholders (10%

and more) in those companies, during the

incorporation of a Ukrainian company.

DUAL CITIZENSHIP

DUAL CITIZENSHIP IN UKRAINE

• Dual citizenship is forbidden de jure, but is widely spread de facto.

• Ukraine is powerless against the persons of dual citizenship.

• Government believes that dual citizenship problem threatens national security of Ukraine.

• Amendments to the legislation - a distracting step that does not solve the dual citizenship problem. The bill that stipulates penalties for dual citizenship was registered with the Verkhovna Rada in February 2012. Consideration of this bill was postponed for an indefinite period of time.

FAMILY LAWINHERITANCE IN UKRAINE

FAMILY LAW ISSUES

• Joint spousal property

• Specifics of joint spousal property disposal

• Recognition of pre-marriage and marriage agreements

- Existing and future property rights - The scope of children’s rights cannot be less than statutory- “Extremely unfavorable position” of a spouse

• Corporate rights

• Foreign companies– remedy against marital and family risks

INHERITANCE IN UKRAINE

• General inheritance matters

- Inheritance structure- Inheritance types- Order of heirs - Exercising the right to inherit- Inheritance acceptance timeframe

• Inheriting corporate rights

• Recognition and enforcement of judgments

• Minimizing inheritance risks via foreign structures

REAL ESTATE

REAL ESTATE

• Foreign individuals and legal entities have the same rights as Ukrainian individuals and legal entities in acquisition of real estate, except for agricultural land

• Single State Register of Property Rights to be operative in 2013

• Moratorium on sale of agricultural land has been extended

• Formalization of titles to real estate

• Taxes

TRUSTS AND NON-CHARITABLE FUNDS

• Management of property as defined by Ukrainian law

• Trust companies

• Mutual funds in the sphere of construction

• Collective Investment InstitutionsNote: a new Law "On Collective Investment Institutions“ will

restate the current Law "On Collective Investment Institutions (Unit Investment Funds and Corporate Investment Funds)“ on 1 January 2014.

• Consultancy instead of trust management

RECOGNITION OF DECISIONS OF FOREIGN TRIBUNALS IN UKRAINE

RECOGNITION OF DECISIONS OF FOREIGN TRIBUNALS IN UKRAINE

Subjects to recognition and execution in Ukraine are:

1. Decisions of the international commercial arbitrations made in the territory of other states than Ukraine, but which are the subject to execution in Ukraine (i.e. execution of foreign arbitral awards) – based on international treaties and conventions.

2. Decisions of courts of the foreign states, which are subject to execution in Ukraine - based on international treaties and conventions, or based on reciprocity.

BILATERAL AGREEMENTS

Ukraine has concluded bilateral international agreements:

• on legal assistance in civil, family and criminal cases with Latvia, Lithuania, the CIS countries;

• on legal assistance in civil and criminal cases with Vietnam, Georgia, China, Moldova, Mongolia, Poland, Uzbekistan, Estonia, Cyprus, Cuba, Korea, Syria, Iran, Germany, Libya, Hungary;

• on legal assistance in criminal cases with the Netherlands, Switzerland, Hong Kong, the USA, Brazil, India, Panama, Egypt;

• on legal assistance in civil cases with Hungary, Greece, Macedonia, Turkey, Czech Republic, Bulgaria, Romania.

MULTINATIONAL TREATIES

Multinational treaties signed by Ukraine:

•European Convention on Human Rights•New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards•European Convention on International Commercial Arbitration•Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention)•CIS Agreement on Procedure of Commercial Disputes Resolution •CIS Agreement on Legal Assistance in Civil, Family and Criminal Cases

RECOGNITION OF FOREIGN TRIBUNALS DECISIONS IN UKRAINE

Procedure for execution of foreign arbitral awards

1. Initiation and carrying out of recognition and execution procedure.

2. The courts competent to consider cases on recognition and execution of foreign arbitral awards

3. Decisions of the courts on cases on recognition and execution of foreign arbitral awards

RECOGNITION OF FOREIGN TRIBUNALS DECISIONS IN UKRAINE

Procedure for execution of foreign court decisions

1. The courts, competent to consider cases on recognition and execution of foreign arbitral awards

2. Initiation and passing of recognition and execution procedure.

3. Decisions of the courts on cases on recognition and execution of foreign arbitral awards.

Thank you!