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- Olga Savchenko
Partner, ALTELAW LAW FIRM
Industrial Parks: New Opportunities for Business in Ukraine
The process of creating industrial parks in Ukraine dates back to the 1990s, when a significant number of the country’s regions initiated the creation of similar entities on their territory to satisfy both public and private interests.
However, at that time there was no legislative regulation on the functioning of industrial parks, and the main requirements for their activities were laid down in regional programs of socio-economic development.
Officially, the process of legalization of industrial parks began in 2012 with the adoption of the Law of Ukraine On Industrial Parks of 21 June 2012 No. 5018-VI (hereinafter – the Law of Ukraine On Industrial Parks, or the Law), which defined the legal and organizational principles for the creation and operation of industrial parks on the territory of Ukraine with the aim of ensuring economic development and increasing the competitiveness of territories, intensifying investment activities, creating new jobs and developing modern production and market infrastructure.
This Law has been regulating the specifics of activities of industrial parks for more than 10 years, but in July 2022 it underwent some changes aimed at attracting investment into the economy’s industrial sector for the here and now and for the post-war recovery period.
Below, we would like to draw attention to the main aspects of the legal regulation of the creation and operation of industrial parks, because the implementation of such a complex for a large business or a manufacturing conglomerate is quite a profitable solution.
The first main point is to understand what activities can be carried out on the territory of an industrial park.
Initially, the Law of Ukraine On Industrial Parks defined an industrial park as a territory designated by the initiator of the creation of the industrial park in accordance with urban planning documentation, equipped with the appropriate infrastructure, within which the participants of the industrial park can carry out economic activities in the following areas:
- industrial production;
- research activities;
- activities in the field of information and telecommunications.
Later, in 2021, amendments were adopted to the legislation, which updated the list of areas of economic activity that can be carried out within the boundaries of industrial parks, namely:
- processing industry,
- processing of industrial and/or household waste (except waste disposal),
- scientific and technical activity,
- activities in the field of information and telecommunications.
At the same time, the Law contains a stipulation that the production of excisable goods cannot be carried out on the territory of industrial parks (except for the production of passenger cars, their bodies, trailers and semi-trailers, motorcycles, vehicles intended for the transportation of 10 people or more, vehicles for the transportation of goods), as well as business activities that are subject to licensing cannot be carried out, namely: issuing and holding lotteries, activities in the gambling market, mediation in employment abroad; industrial fishing of aquatic biological resources outside the jurisdiction of Ukraine; cultivation of plants included in table I of the List of narcotic drugs, psychotropic substances and precursors; disposal of household waste.
In the event that the planned activity of the initiator of the creation of an industrial park corresponds to the types of activities that are possible within the framework of the industrial park itself, the initiator can proceed to choose the location of the future park.
It was stated that industrial parks could be created on the territory (one or several land plots) with a total area of 15 to 700 hectares until October 2021.
As of today, the minimum and maximum marginal areas of such land plots have been changed, and the area of land plots on which an industrial park can be located must be at least 10 hectares and no more than 1,000 hectares, which in turn helps to attract new investors due to the reduction in the minimum threshold barrier (the size of the land plot on which an industrial park can be created).
An important and invariable condition is the intended use of the land plot, namely: such a land plot must belong to industrial lands (codes of the intended use KVTSPZ 11.01-11.04).
At the same time, an industrial park can be created both on privately-owned land and on municipally-owned or state-owned land. The right to create industrial parks on state and municipally-owned lands belongs to state authorities, local self-government bodies, which, according to the Constitution of Ukraine, exercise the right of the owner to land on behalf of the Ukrainian people and, in accordance with the law, are empowered to dispose of land plots, as well as tenants of land plots. The right to create industrial parks on privately-owned land belongs to owners or tenants of land plots that meet the requirements of the Law of Ukraine On Industrial Parks. At the same time, if the creation of an industrial park is planned on leased land, such information must be included in the lease agreement in advance, and the concept of the industrial park must be agreed with the lessor of the land plot. It is worth noting that after the carrying out decentralization reform, one of the elements of which was the redistribution of tax for businesses, every state authority or local self-government in the regions is interested in the creation of industrial parks and is ready to consider proposals and projects.
The term of use of a land plot within the industrial park must be at least 30 years from the date of adoption of the decision on the creation of the industrial park, and this is actually the minimum term for a park’s creation.
The third important point in determining the possibility of creating an industrial park is the understanding of subjects in the context of who can actually initiate such creation.
The effective legislation of Ukraine determines that the subjects of the creation of an industrial park are the initiator, which is the owner or lessee of the land plot, the management company and a direct participant of the industrial park. The main function of the initiator of the creation of an industrial park is to make a decision on the creation of an industrial park based on the approved concept of the industrial park.
The decision to create an industrial park is the basis for the conclusion of an agreement on the creation and operation of an industrial park between the initiator of the creation and the management company of the industrial park.
The management company must, in turn, be a legal entity, regardless of the organizational form, with which the initiator of the creation concluded an agreement on the creation and operation of the industrial park.
The selection of the management company for the industrial park created on the lands of state or municipal property is carried out by the initiator of the creation of such a park on a competitive basis by organizing and conducting an open competition in the manner specified by the Law. If the land plots intended for the creation of an industrial park are privately-owned, the management company is determined independently by the initiator of the creation. If the initiator of the creation is the lessee of the land plot, the management company of such a park is determined by him independently with a written notification regarding this to the relevant state authority, local self-government body and the lessor no later than within three working days.
Another subject that participates in the activities of the industrial park is the participant of the industrial park, i.e. a legal entity of any form of ownership, registered on the territory (within the boundaries) of the industrial park, which according to the law has acquired the right to a land plot and /or another object (part of an object) of immovable property within the industrial park, entered into an agreement with the management company on the implementation of economic activities within the industrial park in accordance with the concept of the industrial park and must carry out activities exclusively in the field of the processing industry, processing of industrial and/or household waste (except waste disposal), as well as scientific and technical activities, activities in the field of information and telecommunications only on the territory (within the boundaries) of the industrial park.
It is worth noting that with the beginning of the armed aggression of the russian federation on the territory of Ukraine, a provision was included in the legislation on industrial parks, according to which the initiator of the creation of an industrial park, or the management company, cannot be a legal entity whose founders are citizens of a state recognized by the Verkhovna Rada of Ukraine as an aggressor state or an occupying state, or legal or related to them entities registered in a state recognized by the Verkhovna Rada of Ukraine as an aggressor state or an occupying state, or in respect of which sanctions have been applied in accordance with the legislation of Ukraine or international law, or legal entities – owners of 10 percent or more of shares and/or the ultimate beneficial owner (controller) of which is a resident of a state recognized by the Verkhovna Rada of Ukraine as an aggressor state or an occupying state, or a state recognized by the Verkhovna Rada of Ukraine as an aggressor state or an occupying state, and /or business entities connected by economic ties with the aggressor state within the meaning of the Tax Code of Ukraine.
It should also be noted that in addition to the requirements for the types of activities, entities of creation and the territory of location, the Law establishes a number of additional requirements for the creation of industrial parks.
In particular, industrial parks must be included in the Register of Industrial Parks. At the same time, an industrial park can be included in the Register on condition that at the time of inclusion on its territory (within the limits) there are no industrial facilities with completed construction that have been put into operation within the last 10 years before the decision on the creation of the industrial park and/or there are no production facilities that were operational during the last five years before the decision was adopted to create an industrial park.
At the same time, buildings commissioned into use more than 10 years ago are mostly subject to modernization, and commissioning the building into use can be carried out not only within the framework of new construction, but also reconstruction or capital repair.
The procedure for including an industrial park in the Register is simple, in order to make a decision to include an industrial park in the Register of Industrial Parks, the initiator of its creation submits the following documents to the authorized state body:
- application for inclusion of an industrial park in the Register of Industrial Parks;
- initiator’s decision to create an industrial park;
- the concept of an industrial park;
- an extract from the State Land Cadaster regarding the land plot and title documents for real estate objects located on it;
- name of the management company and participants (if applicable).
The inclusion of an industrial park in the Register of Industrial Parks takes place within 45 working days from the moment the application from the initiator of its creation is received by the authorized state body.
In the analysis of the activity of industrial parks and the features of their creation, it is necessary to pay special attention to those preferences that are possible when choosing this type of activity or participation in an industrial park.
For the purpose of creation and functioning of industrial parks, the following benefits are provided to management companies, initiators of creation – legal entities and participants of industrial parks at the expense of funds from state and local budgets and from other sources not prohibited by law:
- full or partial compensation of the interest on credits (loans) for arranging and/or carrying out economic activities within industrial parks in accordance with the procedure established by the Cabinet of Ministers of Ukraine;
- funds on a non-refundable basis for arranging industrial parks and/or ensuring the construction of adjacent infrastructure facilities (roads, communication lines, means of heat, gas, water and electricity supply, engineering communications, etc.) necessary for the creation and functioning of industrial parks in accordance with the procedure established by the Cabinet of Ministers of Ukraine;
- compensation of costs for connection to engineering and transport networks in accordance with the procedure established by the Cabinet of Ministers of Ukraine;
- tax and customs incentives in accordance with legislation.
Separately, we should focus on tax and customs benefits, which have undergone significant changes in connection with changes to legislation that took place in June 2022.
Generally, such benefits can be divided into 3 (three) groups:
- exemption from income tax;
- exemption from VAT on operations involving import into the customs territory of Ukraine under the customs regime of import of new equipment and components for it for use in the activities of industrial parks;
- exemption from payment of import duty.
However, the right to receive such benefits is not unconditional, and requires the fulfillment of a number of requirements by the beneficiary.
Exemption of an Industrial Park Participant from Income Tax
Exemption from income tax is allowed on condition that the participant of the industrial park has the status of such a participant for at least 10 years and during these 10 years carries out economic activity exclusively on the territory and within the boundaries of the industrial park, accrues and does not pay dividends (equivalent payments) in favor of the owners of corporate rights, and the amount of funds exempted from taxation (amounts of income tax that are not paid to the budget and remain at the disposal of the taxpayer – the participant of the industrial park) is directed at developing the activities of the participant of the industrial park within the boundaries of such an industrial park no later than December 31 of the next calendar year.
Exemption from VAT
Exemption of the participant of the industrial park from VAT on the operations of import into the customs territory of Ukraine of new equipment and components for it is carried out on the condition that such imported equipment and components for it will not be alienated within 5 years from the date of import, and also not will be used during the specified period for any unintended purpose.
It is not known how the fact of intended or non-intended use of the equipment will be determined by the supervisory authorities. However, under normal conditions, such equipment must be put into operation, depreciated and used in economic activity under normal conditions. However, it is known that the procedure for import and intended use of goods will be established by the Cabinet of Ministers of Ukraine.
Exemption from Import Duty
Another benefit for participants of industrial parks is the exemption from import duty of equipment and components, provided that such equipment or components are new (that is, no more than 3 years have passed from the date of manufacture to the date of import into the customs territory of Ukraine), are imported by participants of industrial parks exclusively for their own use on the territory (within the boundaries) of the industrial park without the right of alienation, transfer to rent, leasing or other right of use to third parties under any conditions earlier than five years from the date of their import to the customs territory of Ukraine, and they also do not originate from a country recognized as the occupying state in accordance with the law and/or by the aggressor state in relation to Ukraine in accordance with legislation, and/or are not imported from the territory of the occupying state (aggressor) and/or from the occupied territory of Ukraine, defined as such in accordance with the effective legislation of Ukraine.
It is important that in the event of loss of the status of an industrial park’s participant before five years have passed from the date of import of equipment or components into the customs territory of Ukraine, such a participant must pay the amount of VAT for such equipment, a penalty for its late payment; as well as import duty and a penalty for its late payment.
In this regard, it is necessary to take care of the minimization of possible circumstances that constitute grounds for loss of status of an industrial park participant. At the same time, the grounds for losing the status of an industrial park participant are the termination of the contract concluded with the management company on the implementation of economic activities within the industrial park and/or the termination of rights to the land plot and/or to all other objects (parts of objects) of real estate property within the industrial park and/or violation of the requirements of the Law of Ukraine On Industrial Parks. That is, the participant of the industrial park must ensure that, as of the moment of receipt of the relevant benefits, more than 5 years remain until the termination of the contract with the management company, or before the termination of the contract for the use of a land plot or an object of real estate within the boundaries of the industrial park and such a contract cannot be terminated prematurely.
Exemption from Paying Land Tax
An additional innovation is that local self-government bodies for land plots included in the territory of industrial parks can set land tax rates and rent for state and municipal land in the amount lower than the amount of land tax, or exempt them from paying land tax; and establish benefits from the tax paid in the relevant territory on non-residential real estate located on the territory of the industrial park and owned by participants of the industrial park. For example, in the city of Vinnytsia, the rental rate for the use of land plots on which industrial parks are located was reduced from 3% to 1%, and the Ternopil City Territorial Community in October 2022 established the rent rate for land plots for construction, creation and the functioning of the industrial park in the amount of 0.09% of the normative monetary evaluation of the land.
In summing up, it should be noted that the concept of creating industrial parks is not new for Ukraine or the international community, but Ukraine is currently doing everything possible to improve the procedures of such a business organization mechanism. There is hope that industrial parks will be created as part of the post-war recovery and will become a kind of oasis for business, because with the correct application of all stimulating mechanisms, such parks are an excellent opportunity to organize large industrial complexes on favorable terms.