Wine Making Industry: Legal Framework
1. Market Overview and Legal Framework
The national wine industry originated in the XIX century and is one of the oldest in Ukraine. Today approximately 200 enterprises handle the processing of grapes and manufacturing of wine, champagne and cognac. Two large groups can be singled out from them: traditional companies with their own vineyards and new companies dealing exclusively with bottling of wine. Current wine production is much lower than the pre-1985 level (that year a massive anti-alcohol campaign was begun which resulted in cutting of vineyards, drop in wine production volume, etc.). Vineyards in 2009 covered 93,300 hectares, which is three times less than in 1990. In 2008 the volume of wine production amounted to 20408,5 million dal. Compared with 1990, the index fell by 35%. Meanwhile, manufacturing of sparkling wines rose by 41.5% (90% of output is produced by the accelerated method and only 3 companies from 12 apply classic French technology). Wine products in Ukraine are manufactured foremost in Odessa, Nikolayev, Kherson and Zakarpattya Region, and in the Autonomous Republic of Crimea (ARC). The companies from these regions produce from 92% to 97% of all national grapes. In the last few years Ukraine has significantly lowered volume of export in the field and turned into a big importer of wine products. The volume of Ukrainian export constitutes only 4%. At the same time, neighboring Poland exports about 60% of its products.
In general the following are the basic features of Ukrainian winemaking in 1992-2009: reduction of vineyards; dominance of imports over export; lowering of wine and cognac quality; lack of government control and regulation of production; rise in fake wine; loss of traditional wine and cognac markets (Russian Federation, Belorussia, Kazakhstan, etc.). Ukrainian experts believe that the national wine industry has great potential for growth and development but lacks proper government support.
The basic law governing processing of grapes and manufacturing of wine products in Ukraine is the On Grapes and Wine Act of Ukraine of 16 June 2005. Chapter 2 of the said Act regulates winemaking (grapes planting, harvest collection, etc.) and Chapter 3 covers manufacturing of wine products (cognac, wine, etc.). This Act establishes general requirements for looking after vineyards, manufacturing wine materials and wines, vermouths, cognac and brandy. In addition, the production of wine, wholesale and retail trade matters are governed by the On State Regulation of Production and Circulation of Ethyl Alcohol, Cognac and Fruit Alcohol, Alcohol Beverages and Tobacco Goods Act of Ukraine of 19 December 1995, No.481/95-BP. Under this Act winemakers must have their production attested, certify their products and obtain the required licenses (for wholesale and retail sale). The main laws in the field do not provide measures to support the industry although they are contained in other legislation.
2. Government Support for the Industry
The necessity for government support of the industry has not only economic but also crucial social grounds. Winemaking is a socially oriented sector of the economy and makes a substantial contribution to budget formation in many regions. If winemaking companies seize to exist, the government will have to spend significant funds to support these regions, create new jobs, and eliminate economic difficulties therein.
On 21 July 2008 the Cabinet of Ministers of Ukraine (CMU) approved the Program of winegrowing and winemaking development in Ukraine for the period till 2025. In accordance with this Program investment in the sum of UAH 11 billion (USD 1.375 billion) will be assigned from the state budget for developing the sector.
Under the On the Development of Winegrowing, Gardening and Hop-growing Act of Ukraine of 1999 a duty in the amount of 1% is levied on income received from wholesale and retail sale of alcoholic beverages. The funds accumulated are directed at advancement of winegrowing, gardening, and hop-growing. Thanks to these funds thousands of hectares of new vineyards were planted in Ukraine. On 5 March 2009 the said Act was extended till 2014.
3. Winemaking and WTO Membership
Ukraine’s WTO membership has had a negative influence on the national wine industry. Membership terms do not reflect the peculiarities of the national economy and are unfavorable for winegrowers and winemakers. After import duty rates were reduced (as required under the terms of the WTO membership) traders from Moldova, Georgia, Turkey, Azerbaijan and other countries filled Ukraine with cheap grape juice and wine materials. Meanwhile, the quality of imported products is very low in most cases. In addition, by entering the WTO Ukraine actually reversed state control over the quality of imported wine and wine materials which had been introduced by the On Grapes and Wine Act of Ukraine. The next step in WTO membership is the customs-free regime of international trade. European winemakers have already alleged that this would allow them to get an additional 25% of the Ukrainian market.
To prevent negative consequences for the national wine industry the Ministry of Agrarian Policy on 14 November 2008 adopted Resolution No.755 On Approval of Measures to Support the Development of Winegrowing and Winemaking in the Course of WTO Membership of Ukraine. These measures are aimed at restoring and renewing the technical basis of the industry, stimulating export of national wine products and easing the tax burden for winegrowers and winemakers.
4. Battle for Quality
Experts believe that the production of fake wine and wine materials and the manufacture of low quality produce is a serious problem for the Ukrainian market. In December 2009 the Ministry of Agrarian Policy published the Draft Resolution of the CMU On Establishment of the State Winegrowing and Winemaking Inspection. The Inspection shall be subordinated to the Ministry of Agrarian Policy and shall ensure observance of winegrowing and winemaking laws by all the participants of the national wine market, discover and prevent fake wine, control use of public funds for establishing new vineyards and maintenance of existing ones. It is planned that territorial subdivisions of the Inspection will be created in Simferopol, Odessa and Uzhgorod.
5. Taxes
Winegrowers that are treated under the law as agricultural manufacturers enjoy substantial tax privileges.
The On Fixed Agricultural Tax Act of Ukraine of 17 December 1998, No.320-XIV provides that they have the right to pay this tax instead of the following ones: corporate income tax, land tax, municipal tax, duty for geological and exploration works conducted at public expense, fee for the purchase of a trade patent, duty for specialized water use. All other taxes are payable under the general rules. In addition, agricultural manufacturers are exempted from VAT (sums of VAT are accumulated in a special account and subsequently used for renewal of fixed assets).
At the same time winemakers do not have such privileges. Moreover, the On the Rates of Excise Tax on Ethyl Alcohol and Alcohol Beverages Act of Ukraine of 7 May 1996, No.178/96-BP lists wine as a good which is taxed with excised tax.
In Verkhovna Rada (Parliament) was registered a draft law in December which prescribes a rise in the rates of excise tax. It proposes to raise the tax rate on fortified wines from 50 kopecks to UAH 34.00 per liter of 100% ethyl alcohol. These rates shall be applicable to wines with addition of alcohol and fortified wines, except for checked wines. The rate of excise tax for checked wines shall be 50 kopecks per liter. The new rates shall not be applied to natural wines.
6. Privatization Prospects
At present, privatization of state winemaking enterprises is prohibited under s.5 of the On Privatization of State Property Act of Ukraine. Though there is no direct restriction regarding state winegrowers, almost all these enterprises are included in the list of objects which cannot be privatized (Act of Ukraine of 7 July 1999, No.847-XIV).
Nevertheless, many of them have already changed their owners through lease, bankruptcy, reorganization and other similar schemes. However, the state still keeps the most attractive assets (e.g. State Enterprise Livadiya, Novyi Svet Plant of Sparkling Wines, Kharkov Plant of Sparkling Wines, etc.). Moreover, in accordance with the On the Lease of State and Municipal Property Act of Ukraine of 10 April 1992, No.2269-XII winemaking enterprises cannot be leased either.
7. Moratorium on Agricultural Land Alienation
According to the Land Code of Ukraine of 25 October 2001, No.2768-III it is prohibited to alienate agricultural land plots until acts of Ukraine on state land cadastre and land market come into force. A ruling of the Constitutional Court of Ukraine of 24 November 2009 caused many disputes among professionals as to the validity of the moratorium. However, most experts believe that the moratorium is still effective, and any transactions with agricultural land shall be deemed unlawful. And this, in its turn, prevents investors from putting money into winemaking companies.