march 2009 investment in ukraine: legal aspects by marina tegypko

March 2009

Investment in Ukraine: legal aspectsInvestment in Ukraine: legal aspects

by Marina Tegypko

Contents

I. Introduction

II. Corporate forms of investment

III. Restrictions on foreign investments

IV. Licensing of a target‘s business

V. Antimonopoly matters

VI. Shareholders agreements

VII. Transfer of funds

VIII. Taxation

I. Introduction

Ukrainian laws provide for freedom of investment in Ukraine save for certain economic sectors where the laws restrict foreign investments.

The most popular kinds of companies for investment are:

joint stock company (akzionerne tovarystvo), and

limited liability company (tovarystvo z obmezhenoju vidpovidalnistiu).

Other kinds (such as additional liability company, special partnership and private enterprise) are not so popular.

Limited liability company:

minimum capital requirements for these companies are 100 statutory defined minimum wages (that is currently UAH 60,500 (about EUR 5,550); starting from 1 April 2009 – UAH 62,500 (about EUR 5,750);

the contributions must be paid in full during the first year of the company’s activity;

only paid up shares (parts thereof) can be transferred;

convening of the general meeting requires presence of the participants holding at least 60% of the voting rights;

voting at the general meeting is made by simple majority of votes present at the meeting. Special majority requires 50% plus one vote and is mandatory for determining major directions and plan of the company's activities, approval of management reports, amending the charter and withdrawing participant from the company.

Therefore, the equity interest that exceeds 60% of the equity capital would guarantee full control over the company’s running.

II. Corporate forms of investment

Joint Stock Company: minimum capital requirements for these companies are 1,250 statutory defined

minimum wages (that is currently UAH 756,250 (about EUR 69,400); starting from 1 April 2009 – UAH 781,250 (about EUR 71,700);

convening of the general meeting requires presence of the shareholders holding at least 60% of the voting rights (if the matter is to be voted with privileged shares, convening of a meeting also requires shareholders holding 60% of the privileged shares);

Generally, the decisions at the general shareholders meetings are made with simple majority of votes present at the meeting. Certain matters (e.g. changes to the charter and liquidation of the company) require 75% of the votes present at the meeting.

Consequently, full control could be achieved with 75% of shares.

II. Corporate forms of investment (continued)

New Law on Joint Stock Companies will enter into force starting from 30 April 2009. It substantially changes the regulatory framework:

open and closed JSC turn to public and private JSC:

Private JSC: should not exceed 100 shareholders; only private placement of shares; shares cannot be listed at any stock exchange; pre-emptive rights must be stipulated in charter;

Public JSC: both public and private placement is possible; no limitations on transferability of shares (pre-emptive rights arise only with regard to new issues of shares); permanent listing at minimum one stock exchange.

additional protection of minority shareholders:

In case of acquiring over 10% of shares, shareholder must notify the company of such acquisition in 30 days, at latest.

If a person or a group of affiliated persons have acquired 50% or more of shares, they must within 20 days offer other shareholders to purchase remaining shares;

Each shareholder may request a company to purchase his shares if such shareholder has voted against any material agreement of the company, changes to the company’s charter or authorised capital.


Matters to be decided with qualified majority of 75% of the total number of voting shares:

amendment of the charter

decrease/increase of the authorized capital

cancelation of the redeemed shares by the company

change of the company’s form

issue of shares

spin-off and winding up of the company, except for particular cases stipulated by law

liquidation of the company and related procedures

disposal of the company’s assets valued at over 50% of the company’s total assets

Further issues to be approved by a qualified majority may not be specified in the charter of public JSC, but may be specified in the charter of private JSC.


III. Restrictions on foreign investments

Ukrainian laws impose restrictions on foreign investment in specific areas. There is no codified act on limitation of foreign investments and, therefore, prospective investor should pay special attention to the relevant field of legislation.

Some points to consider:

foreign entity (a company under full control of non-resident) may not be established in sectors having strategic importance to the state security;

laws prohibit investment or interest in the assets of a companies that cannot be privatized;

the share of the foreign investor in Ukrainian information agency may not exceed 35%;

the share of the foreign investor in the equity capital of publishing companies may not exceed 30%; and

laws of Ukraine on licensing provide that any company applying for the license must be incorporated in Ukraine.

Strategic importance: effective laws do not specify particular economic sectors and industries, although there is a test for defining whether the enterprise has a strategic importance, i.e. where it meets one ore more criteria below:

a) is natural monopoly and conducts its activities in the national commodity market;

b) enjoys a monopoly (a dominating position) in the national commodity market provided that such commodity is of high social and economic importance;

c) is engaged in the state defense and security (in particular, enterprises of the military and industrial complex);

d) belongs to the fuel and energy industry which are part of the unified energy system;

e) ensures operation of the national infrastructure, in particular, telecommunication and mail, aircraft, railway and sea transportation, long-distance oil and natural gas pipelines;

III. Restrictions on foreign investments (continued)


f) is engaged in production and processing of nationally important minerals;

g) represents scientific and technical capacity of the country;

h) has over 0.5% share in the total export of goods, works and services produced in Ukraine;

i) has over 5,000 employees; or

j) is classified as a major tax payer.


Companies, which cannot be privatized:

state radio and television channels;

the companies ensuring integrity of the Ukrainian single electricity system;

international and trunk transmission lines;

nuclear power plants, water power plants and dams;

water-supplying and melioration utilities;

heat and power plants;

main oil and natural gas pipelines (transit and serving Ukrainian system in general);

underground oil and gas storages; as well as property complexes of enterprises that produce ethanol.

These companies, however, are not prevented from entering into contractual joint ventures, although any operations with their fixed assets are subject to approval by the government and its respective agencies.

Often application for a license requires information on equity holders. In general, licensee shall notify the licensing authority about any changes in the documents or information provided for obtaining a license, in particular, information on the change of control. The license may be revoked if the licensing authority determines that company no longer matches the licensing terms and conditions.

Depending on particular kind of license, it may be preferable not to transfer the interest in the ultimate investment object, in order to avoid change of the license terms. In such cases, transfer of the interest in the parent company (usually an SPV) takes place.

IV. Licensing of a target‘s business

V. Antimonopoly matters

If investment constitutes concentration within the meaning of Ukrainian antimonopoly laws, and exceeds statutory defined assets value threshold, - it requires permit from the Antimonopoly Committee of Ukraine.

Assets value threshold established by Ukrainian antimonopoly legislation is relatively small:

a concentration of a group of companies whose total assets (or aggregate sales turnover) for the year preceding the concentration exceeds EUR 12,000,000, provided that

total amount of assets (or aggregate value of the sales’ turnover) of at least two participants to the concentration, including their assets/income abroad, exceeds EUR 1,000,000 for the year preceding the concentration; and

total amount of assets (or aggregate value of the sales’ turnover) in Ukraine of at least one participant to the concentration, exceeds EUR 1,000,000 for the year preceding the concentration.

Antimonopoly approval for concentration is provided on three levels: up to 25%, up to 50% and over 50% of control. Control might be achieved either through share purchase, M&A transaction etc.

If the market share of at least one participant (alone or with affiliates) exceeds 35% in the same or similar market as the one where the merger or concentration event is to occur, antimonopoly permit is necessary regardless of the assets value threshold.

V. Antimonopoly matters (continued)

Shareholders agreements generally are rarely enforceable in Ukraine.

From the standpoint of Ukrainian laws and judiciary, relations between the shareholders should be governed by laws and corporate articles of association.

In particular, shareholders agreements establishing voting procedure for the meetings, or obligation to participate in the meetings, or specific procedure of forming the company’s board etc., might be invalidated in courts.

Parties cannot subject validity of their shareholders agreement to the law of another jurisdiction – if the company was incorporated in Ukraine, Ukrainian laws will mandatorily apply.

VI. Shareholders agreements

VII. Transfer of funds

directly to the charter capital of the target

company

TRANSFER OF FUNDS

to the selling investor(share / equity holder)

directly from account in a foreign bank

using “investment account” at a Ukrainian bank

VII. Transfer of funds (continued)

“Investment account” – special account opened with Ukrainian bank and designated for investment (and re-investment) transfers in Ukraine and for repatriation of profits.

Use of investment account is usually recommended from currency control point of view.

Ukrainian currency control regulations are very strict. Currency transfer from Ukraine is subject to numerous rules (subject to the purpose of transfer and available contractual documentation, repatriation of profits might require individual license of the National Bank of Ukraine). Use of an “investment account” for the transfer of investment funds to Ukraine substantially facilitates future investment repatriation.

Taxation of dividends:

the payer must make an advance profit tax payment in amount of 25% of dividends without reduction of the amount payable. The advance tax payment shall be transferred to the budget before or simultaneously with the transfer of dividends. The payer then reduces accordingly the amount of profit tax payable by the end of same reporting period;

dividends paid to a non-resident is a Ukrainian source income subject to a 15% withholding tax, unless otherwise is provided by the relevant double tax treaty. The amount is reduced accordingly and the tax must be paid by the payer not later than on the date when dividends are paid to the equity holders. Withholding tax does not apply to payment of dividends to a non-resident individual;

if payee is a non-resident individual, the dividend is subject to a 15% personal income tax. The tax is paid on the account of the payee by the payer as its tax agent. The provisions of the double tax treaties can be utilised to reduce the rate of personal income tax.

VIII. Taxation

Investment income is taxed in Ukraine (withholding tax):

Investment income - the difference between purchase price of shares or corporate rights and sale price of such shares or corporate rights;

Applicable rate – 15%. In case of individuals (as opposed to corporates) the gain and loss from sales of shares and corporate rights is aggregated for the calendar year (which is also a fiscal year). If the difference is positive, it is subject to 15% tax. If the difference is negative, the loss can be carried forward to the next year.

Check Double Tax Treaty: most of the double tax treaties provide that investment income received in Ukraine should be taxed only in another country where foreign investor is resident.

VIII. Taxation (continued)

Double Tax Treaty between Ukraine and Sweden:

In case Ukrainian company (as opposed to partnership) pays dividends to Swedish company, the following tax rates apply:

If Swedish company owns at least 25% of the voting shares of Ukrainian company, and at least 50% of the voting shares in Swedish company are held by Swedish nationals - 0% tax rate;

If Swedish company owns at least 20% of the authorized capital of Ukrainian company - 5% tax rate;

Other cases - 10% tax rate.

Investment income received by Swedish investors in Ukraine should be taxed only in Sweden (except for the income received from sale of real estate, or the sale of shares in the company which assets are primarily composed of real estate).

VIII. Taxation (continued)

Contact details

Marina Tegypko, partner

E-mail: [email protected]

BEITEN BURKHARDT KYIV

Address: 38 Turhenevska St., 01054 Kyiv, Ukraine

Phone:+380 44 4940400

Fax:+380 44 4940401

E-mail: [email protected]

mailto:[email protected]

mailto:[email protected]

Thank you very much for your attention!

march 2009 investment in ukraine: legal aspects by marina tegypko

Documents

general meeting

privileged shares

private jsc

shares parts

joint stock companies

additional liability

freedom of investment

taxation slide