26. Investment policy and national economy of Ukraine

The Investment Policy Review of Ukraine builds on the 1993 OECD Investment Guide for Ukraine and is primarily intended to further advance the policy dialogue and co-operation between the OECD and Ukrainian decision-makers on investment issues. It is part of OECD's efforts to help drive the much needed policy reforms in Ukraine.

The review attempts to assess the implementation of the legal rules, with an emphasis on their practical enforcement, and identifies gaps in legislation and institutional frameworks, distilling an array of policy recommendations. In addition to the legal and institutional setting specifically dealing with foreign investment issues, the review encompasses salient features of the overall business regime in Ukraine, such as legislation ensuring the rule of law, contract and property protection, corporate legislation, secured lending and financial sector legislation, taxation, public governance, including privatisation, competition and anti-corruption measures.

On December 28, 2001, Ukraine’s Cabinet of Ministers approved a Program to Develop Investment Activities for 2002-2010. The Program lists a number of preferred investment areas: food production, farm product processing, wholesale trade, brokering, financial services, machine-building, chemical and oil processing, steel and other metals, and technology development. It also aims to establish a more attractive investment climate and develop the necessary infrastructure for investment activities to insure stable economic growth.

Regulating foreign investment

Ukraine regulates foreign investment activity through two main laws: the Law “On Protecting Foreign Investments in Ukraine” dated September 10, 1999, and the Law “On the Foreign Investment Regime” dated March 19, 1996. The National Bank of Ukraine has also adopted a number of resolutions that regulate currency issues involving foreign investment.

Investment guarantees

The current law offers a number of guarantees to foreign investors:

• Unencumbered repatriation of profits from investments in Ukraine;

• Protection against nationalization and expropriation, except in the case of natural disasters, emergencies, epidemics, epizootics, where appropriate and effective compensation would be offered, and investors retain the right to reinvest their profits in Ukraine;

• Compensation of losses incurred as a result of unlawful action or inaction on the part of state agencies or government officials;

• Protection against future changes in legislation affecting these guarantees for a period of 10 years; and

• Exemption from customs duties on fixed assets imported to Ukraine as contribution to the charter fund of a company.

Foreign investors also enjoy the standard domestic regime for investing and doing business in Ukraine. The law states that foreign investors who implement projects in accordance with state programs for the development of priority branches of the economy and the social sphere may be granted preferential treatment.

What is a foreign investor?

As defined by the Foreign Investment Law, a foreign investor may be any legal entity established in accordance with the laws of any country, any individual whose permanent place of residence is outside Ukraine, any foreign state or international organization, or any other foreign subject of investment activity.

Foreign investments: What and how

Foreign investment instruments may take any number of forms:

• convertible currency;

• Ukrainian currency (only for reinvesting);

• any form of movable and immovable property and any rights attached to it;

• securities, bonds and corporate rights;

• monetary claims; intellectual property rights;

• rights to carry out specific commercial activity, including rights to use subsoil and natural resources.

Foreign investment may be undertaken in a variety of ways:

• participating in a company;

• establishing a subsidiary, an affiliate, or division of the foreign investor or acquiring the assets of an existing Ukrainian legal entity;

• acquiring other property rights;

• engaging in other investment activities;

• engaging in commercial activities based on product distribution agreements.

In addition, these kinds of investment activity, the Foreign Investment Law also allows a foreign investor to enter into a contract with a Ukrainian entity for non-corporate joint activity. Parties to this type of contract are required to maintain separate books, records and reports on operations connected with the joint activity and are entitled to open separate accounts in Ukrainian banks for the purpose of making payments and settlements connected with this joint activity. Property imported into Ukraine by a foreign investor for joint activity for a period of at least three years is exempt from customs duties. However, if the property is sold prior to the expiration of the three-year period, customs duties must be paid.

Registering a foreign investment

A foreign investment need not be registered in Ukraine. However, to enjoy guarantees offered to foreign investors by the law, a foreign investment should be registered with the appropriate state authorities within three business days after the investment has been contributed. The official fee for registration of foreign investment is about $40.

Special investment regimes

Ukraine has in the past maintained two forms of special economic zones (SEZs): Free Economic Zones (FEZs) and Territories of Priority Development (TPDs). In April 2005, Ukraine cancelled all tax exemptions (i.e. land tax, corporate income tax, import duty, and VAT on imports) to investors in all SEZs, to stop large scale abuse of such zones for both tax evasion and smuggling. While this step reduced corruption and expanded the tax base, the abrupt dropping of tax breaks and lack of compensatory provisions caused some legitimate investors to suffer losses.

At the end of 2006, the Ukrainian Government announced its intention to renew tax privileges granted to businesses operating in some SEZs and to introduce a compensatory mechanism for investors, but a bill on the matter never went forward. At least one SEZ retained tax privileges due to a court ruling, but those and all other privileges were annulled once more by the new Ukrainian Government in December 2007.

In November 2005, the Parliament adopted legislation to set up technology parks, providing some government financial support, targeted subsidies and tax privileges for a list of 16 techno parks based on existing R&D facilities.