The Legal Environment for Investing in Ukraine
Despite the decrease in number of investment projects and M&A transactions in the first half of 2009, starting July 2009 one may observe increased interest of investors in Ukrainian assets and companies operating at commercial real estate market, in the area of telecommunications, retail business as well as in financial sector (primarily, bank institutions, leasing companies and insurance companies). Among the reasons of such an increased interest investment analytics name the reduction in prices as well as preparedness of investors to make long-term investments.
In this article we shall briefly touch upon Ukrainian legislative framework regulating investment activities, general legal environment for foreign investments, legislative restrictions as to foreign investments, as well as novelties in Ukrainian legislation which might affect the foreign investors carrying out investment activity in Ukraine.
Legislative Framework
Ukraine is a party to more than 60 international treaties on mutual assistance and protection of investments. Apart from these treaties, investment activities in Ukraine are regulated by basic laws, laws regulating specific businesses (e.g. bank activities, publishing business, television and radio broadcasting, insurance activities, etc.), Civil, Commercial, and Land Codes as well as by the respective subordinate legislation.
Key Issues
Generally, foreign investors are granted the same regime of investment and business activities as local ones. However, there are certain particularities relating to making foreign investments, profit repatriation, and areas of investments.
Protection of Foreign Investments
The majority of legislative instruments enacted in the past few years to protect foreign investments in Ukraine remain in force. Protective regulations provided by effective Ukrainian legislation include the following:
foreign investments cannot be nationalized;
requisition of foreign investments under specific circumstances (e.g. natural disasters, accidents, epidemics, and epizooties) can only be effected provided that compensation payable to a foreign investor is adequate and effective;
foreign investors are guaranteed free and immediate transfer of their profits, income, and other funds in foreign currency, legally derived from their investments.
Incentives
Subject to observance of special rules and procedures, Ukrainian laws provide for the import customs duty exemption of in-kind contribution (except for goods for sale or consumption) of a foreign investor into the authorized capital of a Ukrainian legal entity, where the foreign investor holds 10% or more.
Registration of Foreign Investments
Foreign investments must be registered with the competent state authorities. A requirement on mandatory registration of foreign investments has been introduced by the On Amending Certain Laws of Ukraine Aimed at Overcoming Negative Impact of Financial Crisis Act No.1533–VI (the Act 1533) effective since 24 November 2009. Unless the said Act is abolished or amended such requirement shall remain in force until 1 January 2011.
Mechanism for Making Monetary Investments
Pursuant to Act 1533, monetary foreign investments are to be made exclusively through the investment accounts of the foreign investors opened with Ukrainian banks. Foreign in-cash investments at the territory of Ukraine shall be made in Ukrainian hryvnias.
The mechanism for making in-cash foreign investments implies transfer by a foreign investor of funds in hard currency (e.g. USD, EUR) to its investment account, conversion of such funds into Ukrainian hryvnias and further investment into or making settlements for Ukrainian investment target in hryvnias. There are no restrictions as to the reinvestment by foreign investors of hryvnias available on their investment accounts (e.g. received as a result of withdrawal of previous investments) into Ukrainian investment objects.
Unless Act 1533 is abolished or amended, the above-mentioned rules for making monetary foreign investments shall apply until 1 January 2011.
Repatriation of Investments
In the absence of amendments to the Act 1533 or specific clarifications thereof by Ukrainian state authorities it is likely that until 1 January 2011 Ukrainian bank institutions will insist that repatriation of majority of foreign investments should be channelled through the investment accounts of foreign investors.
Restrictions and Special Procedures
Ukrainian laws provide for certain restrictions on participation of foreign investors in certain areas of business (e.g. publishing, radio and television, news agencies, agricultural land, etc.). Although we are aware of instances when some of these restrictions have been side-stepped, a possibility to overcome legislative restrictions should be analyzed in each particular case.
In certain cases, the prior permit of the Antimonopoly Committee of Ukraine is required before making the foreign investment. This is the case, for instance, where establishment of the new company qualifies as concerted action under Ukrainian antimonopoly legislation or where the contemplated investment qualifies as the economic concentration requiring the prior permit of the Antimonopoly Committee of Ukraine, etc. (e.g. when a foreign entity acquires control over significant assets or acquires (directly or indirectly) a shareholding of 25% or more in a Ukrainian legal entity holding significant assets).
Novelties
On Amendments to the Mutual Investment Institutes Act of Ukraine
Having come into force in the middle of February 2009, this Act was positively commented on by mutual investment funds and asset managment companies. The Act significantly softened the requirements to the composition of assets of the diversified and closed-ended mutual investment funds.
In addition, the Act provided for a possibility to prolong the term of the closed-ended funds (venture funds) if their net assets decreased by 20% or more in the last 12 months, thus allowing the investors to avoid losses by disposing off of the fund’s assets in distressed times. Pursuant to the Act, subject to approval by all the investors, upon liquidation of the closed-ended venture fund, the assets of the fund could be distributed from among investors in-kind (this is especially important for real estate venture funds).
Development of Public-Private Partnerships Legislation
Ukrainian state authorities ascertained the need to attract investments into underdeveloped sectors of the economy. This is relevant to housing and utilities economy, research, exploration and mining of mineral deposits, construction of motorways, railways, flight landing strips at airdromes, bridges, tunnels and subways, sea and river ports and their infrastructure, healthcare, waste treatment, electric-power generation, property management, etc.
Ukrainian legislature and government are constantly improving Ukrainian legislation in the area of investments into infrastructure projects. In January 2009, the Ukrainian Parliament restated the Concessions for Motorways Construction Act. The restated Act envisages additional sources of revenues for the concessionaires (e.g. payments from the concession granter for the concessionaire making the road available for use, payments for the use of service areas, subsidies and/or compensations from the concession granter, etc.). In September 2009, the Ukrainian government approved a Concept of development of public-private partnership in housing and utilities economy, acknowledging the public-private partnerships as the most effective option of solving the current issues in the sector.
In parallel with the above-mentioned normative acts, since April 2009 Ukrainian members of parliament actively discuss several bills aimed to regulate the general terms of public — private partnerships in Ukraine. Each of these bills provides for selection of private partners on a tender basis, equality of state and private partners in front of the law, guarantees of protection of private partners’ interests, agreeing the interests of state and private partners for the mutual benefit and fair distribution of risks relating to performance of contracts concluded within the framework of public-private partnerships.
Conclusion
Although in certain cases Ukrainian legislation is ambiguous and underdeveloped, this provides room for favourable interpretation. Investors operating on the Ukrainian market have definitely appreciated the stability of Ukrainian laws in terms of protection of foreign investments, as well as constant improvements of effective legislation in the area of investments. Despite the financial slowdown, Ukraine remains very attractive from the investment perspective and provides for great opportunities to strategic investors, intending to implement long-term investment projects. In view of the forthcoming European Football Championships 2012, we expect that the Ukrainian Parliament and government will be more active in development and implementation of public-private partnership legislation and involve investors in mutually beneficial infrastructure development projects.