Myroslaw Smorodsky, Esq.

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This legal research page contains various laws and legislative acts of Ukraine and is maintained and provided by Myroslaw Smorodsky, Esq. as a professional courtesy and service to his fellow attorneys here in the United States. It is not intended to be exhaustive of the subject but merely a beginning point to explore those resources that are available on the Internet. These summaries of laws are categorized by subject matter and by date of adoption so as to give the reader a HISTORICAL PERSPECTIVE of the legislative process in Ukraine that is being followed towards the establishment of a market oriented economy. Please Note: These laws are from 1991 and 1992 and may have been supplemented modified or changed by subsequent legislation. It is strongly recommended that if the most current legislative pronouncement are at issue, then competent legal advice be obtained on the subject. These Web page are not intended to be a substitute for same nor are they intended to render such legal advice. 

Summaries of selected legislative acts of Ukraine by category and date of adoption.

Privatization

Taxation

Business & Foreign Investment

Privatization

LAW ON PRIVATIZATION OF THE ASSETS
OF STATE ENTERPRISES, adopted MARCH 4, 1992

* Article 3 of the law provides that privatization of government interests in foreign joint ventures shall be accomplished in accordance with civil law in force and the statutory documents of the joint venture. 

* Article 4 envisions an annual privatization program being proposed by the Cabinet of Ministers for each fiscal year with the Parliament approving the number of economic units that will be subject to privatization. Property owned by local governmental units will be subject to their privatization programs. 

* Article 5 lists the economic units that will be subject to privatization and specifically excludes certain types of properties. 

* In Articles 6 through 10, the various parties in the privatization process are described. The State Property Fund and its regional departments is primarily responsible for the implementation of the privatization program with local administrative territorial units performing local privatization programs and the Crimean autonomous republic being responsible for privatization on this territory. 

* Buyers of state assets are individuals and juridical persons from Ukraine, as well as individuals and legal entities from abroad. Citizens, as well as employees of an enterprise may create buyers associations in order to pool their resources for purposes of buying property in the privatization process. 

* Purchasing entities may not be more than 25% state owned nor can they be governmental agencies. Legal entities are required to disclose the identity of their equity participants. The State Property Fund may add additional restrictions and the participation of buyers in the privatization process. 

* Commercial trusts, associations holding companies and other intermediaries may also participate in the privatization process. 

* Part II of the legislation governs the procedures and methods of privatization. This section of the legislation provides for a four step process beginning with a submission of an application requesting privatization of a particular entity. The application may be initiated either by the State Privatization Fund or any buyer or group of buyers. 

* The application must be reviewed and a decision made within 30 days by the appropriate privatization agency. Denials of privatization requests may only be made for limited reasons. 

* Upon approval, the management of the asset to be privatized is notified and the enterprise continues to operate but it looses the right to dispose of its property or undertake other activity not in the usual course of business. 

* Within one month after approval a committee composed of buyers representatives, privatization agency representatives, local deputies and labor union. This committee prepares a privatization plan within a 60 day period. This privatization plan includes the time frame for sale of the asset, the form of payment and such other reorganization issues that may be applicable to the entity. Labor unions, not the enterprise, that disagree with the privatization plan have the right to submit an alternate proposal. Any party that disagrees with the privatization plan my appeal its approval to the State Property Fund within ten days. 

* Article 15 provides for the various methods that may be utilized to dispose of (sell) the asset. This includes

• sale at auction,
• public tenders (commercial bidding where buyers must meet given specifications for the sale and may include a variety of conditions such as maintaining certain type of production etc.),
• sale of the shares of stock of the enterprise at auction, by public offering,
• buy-out of leases by lease holders,
• buy-out of the enterprise by workers collectives
• such other forms of sale as the committee may dream up.

* Article 19 details the requirements for advertising and publicizing information regarding the privatization process including 30 day notification of any auctions, public tenders or competitive share offerings. State Property Fund is also required to develop the procedures for compulsory publication of information regarding such a privatization program. 

* Part III deals with the financial questions of the privatization process. Firstly, in determining the initial offering price of an asset, the law envisions that an evaluation or appraisal be made, however, the legislation is hazy as to how this value is to be calculated. 

* According to Article 21, buyers may use personal funds or privatization certificates (Ukrainian Citizens only) as the form of payment. Borrowed money may be utilized, however, the money cannot be borrowed from banks in which the government owns more than 25% of the equity. A buyer must disclose the source of income of its funds if it exceeds 25%, the minimum monthly wage of the buyer. 

* Foreign investors must use hard currency and the exchange rate will be a special rate yet to be established by the National Bank of Ukraine. It may not necessarily be the actual official exchange rate. 

* Article 22 governs the volume of privatization certificates that will be issued. The total nominal value of these certificates may not be less than 40% of the total value of property that will be privatized. 

* Employees of the enterprise which is being privatized do have certain priority rights and preferences which are listed in Article 25 of the legislation. These include the right to have an installment plan of payment of the purchase price. 

* Part V of the legislation provides that the sale of estate or an asset to an ultimate buyer is formalized by a purchase agreement which may include a variety of obligations that the buyer is assuming (such as maintaining the scope of products to be produced, assumption of the debts or the enterprise, and maintenance of certain social services, and other such obligations) for a period of two years. However, all of these conditions must have been originally provided for in the privatization plan prior to the bidding or actual sale of the property unless the parties otherwise agree. 

* The purchasers of privatized property shall have the preferential right to enter into long term leases for the land that is being occupied by the asset that is being purchased with the option to buy. 

* Part IV creates criminal and civil liabilities for persons who are guilty of violating the privatization legislation. It should be noted that Paragraph 3 of Article 7 imposes personal responsibility on officials of the State Property Fund for their actions and stiff fines are imposed for arbitrary behavior of these officials. 

* Buyers who do not pay the purchase price within 60 days of executing the purchase and sale agreement, must pay a penalty equal to 20% of the purchase price. 

* All disputes that arise in the process of privatization are subject to adjudication in either law courts or arbitration courts. 

LAW ON THE PRIVATIZATION OF 
SMALL STATE ENTERPRISES, adopted MARCH 4, 1992

* The building and/or portion thereof on which the enterprise is located will be privatized along with the business unless there is a prohibition by law. In that event, the purchaser will obtain a long term lease for the premises. 

* The small privatization program envisions three types of sales:

• buy-out by workers of the enterprise,
• sale at auction,
• and sale by public tender or bidding.

* Section II of the legislation governs the privatization process of small scale enterprises. In essence, it is similar to large scale privatization wherein the authorities will determine initial offering of price. The process to privatize may be initiated by the buyers as well as by the state and a decision must be made within 30 days. The law details the personal and financial information applicants must file with the privatization agency together with a registration fee in order to initiate the process. 

* Section III of the law governs the sale of small privatization units by means of buy-out, the advertising procedure that must be followed and the procedure for determination of the initial price. 

* Article 4 governs the sale of privatization units at auction or public tender and details at length the information that must be published if these modes of disposition are utilized. Public auctions and tenders must have at least three participants; each participant must pay a registration fee. If the unit is to be sold for hard currency (to a foreign investor), the registration fee is $200.00 US 

* A 10% deposit of the initial offering price must be made by the bidder. Potential buyers must file their applications prior to the auction or public tender. 

* Articles 18 and 19 describe the auction and public tender procedures. It should be noted that during the auction process, the auctioneer may reduce the purchase price only by 30%. If no bidders, then the property is removed from the market and re-advertised for sale. 

* Public tenders require the creation of a committee of 5 to 9 persons which established the appropriate specifications for the bid. Once these specifications are approved, they are put out to bid; the bids are submitted for the committee's consideration in closed session. After a winner is announced other bidders have 5 days to submit secondary bids, at which time, the final successful bidder is selected. 

* Article 20 provides that privatization bodies may decide that certain sales will accept only privatization certificates or local currency. Other sales may be designated as hard currency sales only. 

* An auction or public tender may be suspended at the request of any of the participants or by the privatization body only under limited circumstances and awards may be set aside for similar grounds only within 30 days of the award by means of court action. 

* The successful bidder develops an ownership right in the purchased property from the moment of the auctioneer's award or the issuance of an award by a committee. However, a purchase agreement must be executed between the buyer and the selling privatization agency and payment must be made within 30 calendar days of possession. The time for payment may be extended for another 30 days provided that 50% of the purchase price is paid prior to the requested extension 

* Upon full payment, a bill of sale evidencing the transfer will be executed. The purchase agreement is registered with the local council of deputies to evidence the transaction. 

LAW ON PRIVATIZATION CERTIFICATES, adopted MARCH 4, 1992

* Privatization certificates will be issued by the Savings Bank of Ukraine in accordance with the rules and procedures to be established by the National Bank of Ukraine. Each citizen of Ukraine will be issued privatization certificates in amounts to be determined by the privatization plan and will be individually assigned to citizens. In order to obtain these certificates a tax will be paid (amount not stated in the legislation). The privatization certificate will be non-transferable. 

* The purpose of the certificates is to permit citizens to bid on properties during the course of the privatization programs and may be used only as a form of payment for assets acquired during the privatization process. Separate privatization certificates will be issued for different areas of privatization. (housing, land, enterprises) However, they will be convertible from one area to the other on conversion formulas to be established by the Cabinet of Ministers. 

* Article Seven of this law does permit brokerage activity and the establishment of mutual funds for the pooling of privatization certificates. This type of activity will be subject to licensing procedures in accordance with other Ukrainian legislation. 

TAXATION

LAW ON THE TAXATION SYSTEM, adopted JUNE 25, 1991

* General Principles: taxation is the exclusive right of the Ukrainian republic exercised through Parliament. Local taxes may be imposed, however, within specified rate limits (Art. 4). 

* Type of Taxes: the national government may impose a variety taxes which include the following type of taxes: turnover tax, excise tax, a surplus value tax, export-import tax, custom duties, tax on owners of transportation, tax on collective farm workers' wages, payment for use of land, payment for use of natural resources, a forest tax, an ecological tax, and a profit and income tax. 

* The tax on profits may be imposed by the government for business entities (with exception of government owned entities) operating in Ukraine and the rate is the same as that for income tax for individuals.(Art. 6). Profits earned by a foreign entity in Ukraine are subject to tax in accordance with rules established by the Cabinet of Ministers. (Art. 7). 

* The section of the legislation relating to income tax states that foreign investors are obligated to pay a tax at the time of repatriation of profits to their home country. Additionally, foreign entities who have no business representation in Ukraine, are not obligated to pay a tax on income derived from passive investments in Ukraine (dividends, interest, license fees, authors rights, lease payments or other indirect earned income) (Art. 12). 

* Additionally, citizens of Ukraine residing on its territory are taxed on all income irrespective of borders. Non-resident Ukrainian citizens are taxed only on Ukrainian generated income. In order to prevent double taxation, the legislation provides that taxes paid abroad are deducted from the amount of taxes due in Ukraine. 

LAW ON CUSTOMS ACTIVITY, adopted JUNE 25, 1991

LAW ON INCOME TAX, adopted JULY 5, 1991

* Certain incomes, about 25 categories, are exempt from taxation. They range from social welfare payments to inheritance and lottery winnings. (Art. 3 and 9). Other listed incomes are taxed at a reduced rate. (Art. 10). 

* There is a provision in the law which permits a deduction from taxable income of charitable and educational donations. (Art. 4). Certain categories of persons are totally exempt from taxation or from specific types of tax. (Art. 4). These categories include students, collective farmers, veterans, etc. Other categories of taxpayers (Art. 4 sub-par. 2) pay taxes at a reduced rate. 

* Section II of the law defines what constitutes taxable income for workers. This definition includes not only their earnings but also "stock dividends" and the value of social and material benefits received at their place of employment. The employees of joint ventures are specifically included in this definition. The income tax rates are graduated and range from 12% to 30%. The legislation contemplates a withholding tax system, with the employer paying the tax on behalf of the employee. State operated entities make the withholding payment when they obtain funding to make salary payments. All other entities make the withholding payments within 24 hours after payment of the salary. 

* Section III of the law provides for taxation of independent contractors and free lance workers (defined as numerous jobs of less then 5 days or one job less then 2 months). The tax rate is graduated from 2% to 30%. It should be noted that the payor must withhold the tax payment and transfer it to the state. 

* Section IV governs the taxation of royalties and imposes as graduated tax from 2 to 30% on the author himself. However, if the royalties are being collected by an heir or successor, the rates on such income start at 60% (500 rubles) and gradually increase to 90% for incomes over 15,000 rubles. The payments are to be withheld by the payor. Tax returns from royalties are to be filed each year by March 1. The legislation does provide for the deduction from income of the cost of producing the royalty. However, the law is hazy on how these deductions are to be calculated. 

* Section V governs taxation of businesses and other income resulting from the various forms of business activity. The taxes are imposed only on taxable income which is defined as gross income less various business deductions such as costs of production, wages and depreciation, etc. The graduated tax rate ranges from 12% to 30%. The law requires that estimated taxes be paid quarterly on March 15th, June 15th, September 15th and December 15th, with a final annual return being filed by January 15th of each year. Payments of any balance due for taxes or (a payment of a refund) will be made by March 15th of each year. 

* Section VI governs taxation of the farming industry which is the same as for regular workers (graduated tax 12 to 30%), however, the farmers themselves must pay the withholding amount of 10% monthly. 

* Section VII states that the foreign citizens are taxed the same as Ukrainian citizens. However, included in taxable income are bonus payments made by employer to employees for transferring to Ukraine, and payments made by an employer for employees' children's education, or payments made by the employer for the employee's family vacations. Excluded from taxable income are reimbursed business trips and expenses. 

* Foreign citizens must file tax declarations by March 1st of each year and a final tax declaration must be filed one month prior to departure. The foreign taxpayer is obligated to pay 75% of his estimated tax in three monthly installments by May 15th, August 15th and November 15th. 

* The legislation provides that late payment of taxes will subject the taxpayer to an interest rate of 5% per day on a penalty equal to 50% of the tax payment. Filing false tax returns and other tax fraud will subject the taxpayer to a penalty ranging from one year's tax payment to five times that amount. 

* A resolution of the Supreme Soviet of July 5th, 1991 called for additional legislation to be submitted January 1st, 1993 to further expand the law on income taxation.

LAW ON TAXATION OF OWNERS OF VEHICLES AND OTHER AUTOMOTIVE MACHINES, adopted DECEMBER 11, 1991

LAW ON STATE DUTIES (FILING FEES & COSTS) adopted DECEMBER 11, 1991

LAW ON EXCISE DUTIES, adopted DECEMBER 18, 1991 
AND 
RESOLUTION OF THE VERCHOVNA RADA (PARLIAMENT)
ON BRINGING INTO FORCE THE LAW ON EXCISE DUTIES, adopted DECEMBER 18, 1991

LAW ON VALUE ADDED TAX, 
adopted DECEMBER 20, 1991 effective date JANUARY 1, 1992

* The added value tax rate is 28% on all taxable items and 22% on products that are subject to price control. Added value taxes are paid on the 15th of each month for the prior calendar month. 

RESOLUTION VERCHOVNA RADA (PARLIAMENT) ON
TAX ON FOREIGN CURRENCY EARNINGS 
adopted FEBRUARY 5, 1992

BUSINESS & FOREIGN INVESTMENT

LAW ON ENTREPRENEURSHIP, adopted FEBRUARY 7, 1991

LAW ON ENTERPRISES adopted MARCH 27, 1991

* Chapter II discusses the procedures for establishment of an enterprise and the requisite rules for its registration. 

* Chapter III discusses enterprise property, its formation and utilization, the enterprise's right to possess and use natural resources, and the right of an enterprise to issue and to sell its own stock and securities. 

* In Chapter IV, the principles of enterprise management are discussed, as well as the operation of labor collectives at these entities. 

* The profits of the business, internal economic activity, and social activities of the enterprise are addressed in chapter V. 

* The inter-relationship of the enterprise to the state is discussed in Chapter VI, including accounting and reporting requirements and the relationship of the business to the local council of peoples deputies. 

* Chapter VII addresses the procedures for liquidation, shutdown and reorganization of enterprises and requires the establishment of a commission to oversee such shutdowns. The Chapter also discusses the creation of meetings of creditors and satisfaction of their debts during the wind-down process. 

LAW ON FOREIGN ECONOMIC ACTIVITY, adopted APRIL 16, 1991

* This statute requires registration of entities which will undertake foreign activity with the Ministry of Foreign Trade as a pre-requisite and provides detailed procedures on signing of contracts involved with international trade. This section also discusses the applicable conflict of laws to such contracts. 

* PART II elaborates on the government's regulation of foreign economic activity by defines the roles of the various Ministries and local bodies created for this purpose. 

* In Article 7, the principles of taxation of foreign trade entities are discussed as is the obligatory apportionment of profits derived in hard or foreign currency. 

* Other topics discussed by this extensive piece of legislation include: customs regulation, insurance of foreign economic activities, import-export licensing and quotas, banned exports and imports, procedures for applying health and safety standards, special import procedures, antitrust measures, record keeping and reporting, and the availability of information for foreign business enterprises. 

* Parts IV - VI of the law discuss special legal rules for foreign economic activities such as; special economic zones, anti-dumping, imposition of trade quotas and embargoes, and restrictions on re-export. Also discussed are the responsibilities of participants in foreign economic activities and sanctions for violation of this law. 

* Chapter VII governs controversies and dispute resolution. The available forms of dispute resolution are:

• Ukrainian law courts if one of the parties is a natural person.
• Arbitrazh courts if the parties are all business entities.
• Arbitration panels or other forums as may be agreed to by the parties.
• Disputes with the Ukrainian government are determined by the Ukrainian courts.

LAW ON INVESTMENT ACTIVITY, adopted SEPTEMBER 18, 1991

* This legislation also outlines in general terms government control of overall investment activity (Art. 11) and, in more detail, government control of national and municipal investments. (Art. 12-15). The legislation also provides equal protection for investors, including foreign investors, irrespective of the form of investment or ownership. (Sec. IV). 

LAW ON BUSINESS ASSOCIATIONS, 
adopted SEPTEMBER 19, 1991 effective date OCTOBER 1, 1991

• a stock company,
• a limited liability company (no stock issued but liability limited to extent provided for in charter),
• a company with extended liability beyond its capital but limited to a stated amount,
• a full liability company (akin to full partnership under western legal concepts),
• a limited partnership type of entity.

* Foreign persons and entities may participate and be members in all of the various forms of the economic associations. These associations are created in accordance with their charter and by-laws and become legally viable on registration with the government. 

* The law also details how the capital fund of the entity is constituted, the various reserve funds that must created, and how net profits should be calculated. 

LAW ON FOREIGN INVESTMENT, adopted MARCH 11, 1992

- Investments where foreign entity has 20% equity or $100,000.00 US investment. 

- Specifically excluded are ruble investments from other CIS Republics. 

Form of Investment:

- Cash, chattels, real or tangible property or services. 

Form of Implementation:

- Equity participation with Ukrainian partner. 

- Acquisition of shares of existing Ukrainian company. 

- Branch office or subsidiary of foreign investor. 

- Acquisition of real property or other chattels, ownership of which is not specifically prohibited by law. 

- Acquisition of rights to use of land and natural resources. 

- Other and tangible property rights. 

Valuation of Investment:

- Foreigner's investment valued in hard currency or in local currency at an exchange rate as agreed by parties but not lower then official rate of exchange. 

Ukrainian Government Guarantees:

- Legislation in effect at time of investment will govern foreign investment for a period of 10 years. 

Nationalization:

- of a foreign investment prohibited except in case of natural disasters etc. subject to court challenge. 

Damages:

- Foreign investor to be compensated for damages and "lost business opportunity" and "moral" damages resulting from government action or inaction in contradiction to established legislation. These damages and losses resulting from nationalization shall be valued a market prices and promptly paid. 

Repatriation of Investment of Profits:

- Within six months of termination of venture, foreign investor may repatriate capital investment in cash or goods. 

- Repatriation of profits guaranteed after payment of taxes as per regulations to be established by the National Bank of Ukraine (no mention of guarantee of convertibility of profits). 

- Profits may be reinvested in Ukraine in accordance with law of Ukraine on investment activity. 

- Profit may be used to purchase goods for export--license free. 

- Profits in local currency may be used to buy hard currency at auction. 

Registration Procedures:

- Foreign investment entity files two copies of application before, during or after being established in Ukraine pursuant to other legislation. The application is to be filed with the Ministry of Finance as per regulations but information to be limited to scope, type, duration and form of investment. 

- Application to be stamped as proof of filing which must be acted upon by Ministry within three business days, 21 days if special government incentive program is applied for. Refusals can be appealed to the Courts. 

Procedure to Create a Foreign Investment:

- A new entity may be created or a foreign investor may purchase part or all of the equity of an existing Ukrainian business entity in accordance with existing legislation. 

Scope of Activity:

- Any type of business activity not specifically prohibited. Brokerage, insurance and securities dealers require special licensing from Ministry of Finance. Banking requires special licensing from National Bank of Ukraine. 

Custom Duties:

- Initial capital investment exempt for the time period as per law of Ukraine on Business Associations. 

- Additional capital investments, goods and raw materials for in-house requirements, and items needed by foreign employees are exempt from duties in accordance with regulations established by Custom Duties Legislation. 

Export:

- All hard currency profits from sale of own manufactured goods remain property of the enterprise. Sale of other goods subject to other legislation. 

Currency Regulation:

- All hard currency expenses of an enterprise including repatriation of profit shall be "covered" by the business activity of the enterprise or other sources of foreign currency pursuant to existing legislation. [Editorial query: Can hard currency purchased at auction be repatriated?] 

Income Tax Incentives:

- Enterprises with foreign capital which have Ukrainian partners and are involved in brokerage activity have a two year income tax holiday. If they are involved in wholesale or retail trade, said entities have a three year income tax holiday. Thereafter, these enterprises pay tax equal to 70% of the normal rates. 

- All other enterprises with foreign capital which have Ukrainian partners, enjoy a five year tax holiday after which taxes are imposed for 50% of normal rates. The tax holidays commence to toll only after the first year's profits have been earned and declared by the entity. 

Income Tax Incentives for Wholly Foreign Owned Enterprises:

- Such entities are entitled to deduct from taxable income the amount of foreign investment made by the investor. This deduction may be carried forward into subsequent years if it exceeds taxable income for the fiscal year of which the deduction is taken. All foreign capital enterprises (wholly or partially foreign owned) may deduct from taxable income the amount of any capital reinvested in Ukraine. 

Value Added Tax Incentive:

- Foreign capital enterprises with Ukrainian partners have a five year tax holiday from value added taxes calculated from day of registration. 

Protection from Future Changes in Tax Law:

- The future legislation creates new taxes. Only those in force at the time of the adoption of the law will be applicable to the enterprise and the company will be entitled to all the tax incentives outlined above. 

Tax on Repatriated Profits:

- Law imposes a 15% withholding tax on repatriated profits. 

Financial Reporting:

- All financial audits and tax reports may only be performed by officially registered auditors. 

Labor Relations:

- Are subject to collective bargaining or individual labor contracts, however, "these agreements should not undermine the status of hired workers" provided for by other Ukrainian legislation. 

- Trade Union agreements are subject to Ukrainian legislation. 

Social Insurance of Employees:

- Regulated by local legislation and enterprises make payment to the Social Insurance Fund of Ukraine for all employees. 

Other Laws:

- Purchase of stock on the Stock Exchange is governed by the Law on Securities and Stock Exchange. 

- Participation of foreign investors in privatization will be governed by the legislation to be effected in Ukraine. 

- Property rights to land and other resources will be subject to the Land Code of Ukraine. 

- Leasing of property will be subject to legislation in effect in Ukraine. 

Concession Agreements to Natural Resources:

- Concession Agreements to exploit natural resources executed by the Cabinet of Ministers or other competent state of organ but these agreements will not exceed the term of 99 years. 

- All other contracts relating to joint production agreements or other joint activity with foreign investors are governed by the Law of Foreign Economic Activity. Tax preferences envisioned by this law are not applicable to such agreements. 

- Foreign companies doing business and free economic zones shall have such conditions as may be envisioned by such legislation but the conditions will not be less favorable than this statute. 

- Disputes between foreign investor and the government may be resolved in the Courts of Ukraine. 

- All other disputes shall be submitted to Ukrainian Law Courts or Arbitrazh Courts or by arbitration, in Ukraine or abroad, if so agreed by the parties. 

This web page created December 29, 1995; Last Updated December 31, 1995 

Copyright 1995: MYROSLAW SMORODSKY, All Rights Reserved

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