UKRAINIAN LAW

This work has been prepared by Arzinger & Partrners Kiev Office and is extracted from the 2006 dated book written by Attorney Timur Bondaryev and Attorney Serghij Schkljar, titled as “Ukraine – Getting the Deal Through.”

1. COMPANY LAW

1. INTRODUCTION

The majority of the rules followed by companies in Ukraine are contained in the Civil Code of Ukraine, the Commercial Code of Ukraine and the Law on Companies. The Civil Code is consistent with the institutional system of law, which in fact follows the German tradition (note BGB as an example, including basic principles of similar German acts on trade and companies and transformation of business entities), while the Commercial Code is based at large on the Western tradition of Commercial Codes but is not fully consistent with it. The main reason for this is the fact that both Codes were passed by the parliament at the same time (16 January 2003) while they were drafted by different teams of drafters without adequate coordination or common framework. Moreover, provisions of the Civil Code are not generally consistent with those of the Law on Companies. This causes ambiguity and prevents adequate construction of the legal framework. Therefore, the application of the Codes and the Law on Companies appears to cause difficulties and uncertainties (even though there is a certain difference in the level of superiority of these legal acts) and is generally left at the discretion of courts (i.e. summary resolutions of the Supreme Court and interpretations of the High Commercial Court).

Since the Treadty on Partnership and Cooperation between Ukraine and the European Union (hereinafter, “the Treaty”) was signed in 1994, Ukraine consistently takes measures to approximate its legislation to the EU legislation, regularly monitors the implementation of the relevant action plan and reports the progress of adaptation to the EU’s aquis communautaire. According to the Ukrainian Ministry of Economy and Ministry of Justice, the Civil and the Commercial Codes inasmuch as they regulate the company law in Ukraine will be harmonized with the EU company law as outlined in the EU directives. Since Ukraine has not applied for the EU membership yet, there is no official and comprehensive monitoring of the Ukrainian law and therefore no official reports on the issues in question.

Significant harmonization efforts are being made by the Ukrainian Ministry of Justice (particularly its Law Adaptation Department and the Interdepartmental Adaptation Council) and the National Council for the Adaptation of Ukrainian Law to the EU Law.

It should be noted that the Ukrainian Ministry of Justice has drafted numerous amendments to the Commercial Code to fix the conflicts between the Civil Code and the Commercial Code. Furthermore, a Law on Joint-Stock Companies has recently been drafted by the Government to introduce significant changes in the regulation of joint-stock companies.

2. THE UNIFIED STATE REGISTER.

NOTARIZATION.

LICENSED AND RESTRICTED AREAS OF BUSINESS

The purpose of the United State Register of Companies and Organizations was to establish a source of reliable unified information, which in fact is in line with the commitments under the Treaty with reference to the EU Compulsory Disclosure Directive (First Directive). However, neither the Register nor the entire system of state registration of legal entities work the way it were supposed to work. A major problem is the system of a “single window” registration which provides an opportunity to submit different documents in different locations anyway. This extends the process of state registration to several week or even months. Moreover, under the new Law on State Registration of Legal Entities and Individual Entrepreneurs, which is more approximated to the EU law, a new Register of Legal Entities and Individual Entrepreneurs should be established. This, however, has not happened yet. Therefore, while the Ukrainian laws on company registration seem to be generally well drafted and consistent with the principles of the EU law, their implementation remains poor.

The Register is maintained by government bodies subordinated to the Ukrainian Ministry of Statistics. Special regulations and technology ensure its accuracy and prevent outside interference. Despite this, it is the local authorities (registrars) who are generally responsible for registration of companies. At present, registrars may not be requested to disclose the information. The information may be requested from the bodies subordinate to the Ministry of Statistics. Certain information can only be obtained from a company related to the company about which the information is requested. The Register is kept electronically and any data from it can only be taken in a written form (excerpts, extracts or references).

The Register is unified. It means that its purpose is to have records on each company, nongovernmental organizations and institutions in Ukraine, and it’s function is to register any legal entities in Ukraine. The Register contains information only in Ukrainian. Therefore, any excerpts, extracts or references are provided in Ukrainian and need to be translated if necessary.

Requested information from the Register is provided for a fee and it includes only certain formal data. In fact it consists of the basic official information on the company (date of incorporation, its organizational form, official address, official representatives, etc.). Therefore, the Unified Register provides much more scarce information that the company registers in European countries.

The application to include a company in the Register is processed for a fee (registration fees). For instance, initial registration of a legal entitiy will cost UAH 170 (approx. EUR 30) while any subsequent changes are made for only 30% of the registration fee. Individuals pay a registration fee of UAH 34 (approx. EUR 6) respectively. The registration fee in Ukraine does not depend on the amount of share capital or any other changeable characteristics of a company. At the same time, a company which issued shares may not operate before the issue is registered with the State Commission on Securities and Stock Market (the SEC). This registration is an independent procedure and is also performed for a fee.

Certain documents submitted to the registrar need to be certified by a notary, including the application for registration, memorandum of association and application for any subsequent modifications in the Register as well as other documents submitted for this purpose. Furthermore, documents submitted by foreign companies (whether founders or other persons involved) should be legalized. The minutes of the shareholder meeting do not need to be certified by a notary.

A business entity is deemed registered and is allotted with the status of the business entity (whether legal entity or a natural person – entrepreneur) after the corresponding record is made in the Unified State Register, the unified identification code is assigned to the entity and the corresponding certificate of state registration is issued. It is also required that a business entity be assigned an identification number by the tax and social insurance authorities and a registration number by the tax and social insurance authorities and a registration number be appropriated to the constituent documents of a business entity, which may also take time.

Certain areas of activity also require a state license, permit, authorization or registration before a company may begin certain business. These types of business are listed in the Law on Licensing Certain Types of Business Activity and the Law on Patenting Certain Types of Business Activity. Certain types of activity are, however, regulated by both special laws (for power industry, telecommunications, financial services, securities) and general provisions of the laws mentioned above. Licenses, permits, authorizations or registrations should be obtained from respective ministries or agencies. Formal application procedures are set forth in various laws and regulations (mainly, subordinate legislation) and a state fee is charged as a rule. In most cases, certified copies of articles of association of the applicant company and the documents demonstrating relevant qualifications of the company personel and technical capacity of the company to carry out the activity that requires a license, permit, authorization or registration should be submitted together with the application to appropriate government agency. The general list (not exhaustive however) of agencies is set out in the Cabinet Decree approving the List of Licensing Authorities No. 1698 as of 14 November 2000 and the Cabinet Decree approving the List of Documents Required for Licensing Certain Types of Business Activity.

It is very likely that certain areas still have certain inconsistencies with the EU principles of freedom of incorporation and free movement of persons and services, but most requirements that need to be satisfied before one can engage in certain activity in Ukraine comport with respective EU provisions. Certain fields (like banking) have restrictions that are only planned to be lifted in the future.

3. FORMS OF BUSINESS ENTITIES

The Ukrainian law distinguishes several types of business entities. The Civil and Commercial Codes distinguish the following types of companies:

- Private Entrepreneur

- General Partnership

- Limited (commandite) Partnership

- Additional Liability Company

- Limited Liability Company

- Closed Joint-Stock Company

- Open Joint-Stock Company

A private entrepreneur (individual businessman) is an individual (natural person) who has his own business and is liable for his obligations with all of his assets. It has no status of legal entity. This is the only form of business entity through which an individual person can do business. All other forms include legal entities (the Ukrainian law provides that an individual (natural person) may establish a legal entity (private enterprise) and will be the sole founder of this business).

A general partnership is a company with consolidated (joint) capital divided between two or more participants (general partners) who agreed to engage in business on behalf of the partnership and are jointly liable for obligations of their partnership with all of their assets.

A limited (commandite) partnership is a company with consolidated (joint) capital divided between two or more persons who agreed to engage in business together, where at least one person (general partner) conducts the businesson behalf of the partnership and is liable for obligations of the partnership with all his assets, and at least one person (limited partner or dormant partner) is liable for obligations of the partnership within the amount of his contribution. Partnerships have to consist of two or more members. A limited (commandite) partnership should have at least one limited (dormant) partner. If the general partner remains on his own and the limited partnership has no dormant partners, it should be liquidated or reorganized. The general partner may not participate in more than one general or limited partnership. Partnerships operate on the basis of memorandum of association. In both cases, general partners must have the status of private entrepreneurs and therefore be able to act on behalf of the partnership without any specific power of attorney (unless otherwise provided in the memorandum of association). Partnerships are required to have consolidated capital but the law does not limit the number of members. The capital is composed of the partners’ contirubutions. A partner who decided to quit is given back his share in the joint capital within the period established by law or the memorandum of association.

A limited liability company and an additional liability company (thereinafter both referred to as “limited liability companies”) are the companies that have their joint capital divided into shares. A shareholder is not personally liable for obligations of the limited liability company but the limited liability company is liable for its obligations with all its assets. A company may not have a sole shareholder (single member company). The only difference between a limited liability company and an additional liability company is that shareholders of the latter are also liable with their assets proportionally to their contributions.

An open joint-stock company and a closed joint-stock company (thereinafter both referred to as “joint-stock companies”) are the companies that have their joint capital divided into shares. A shareholder is not personally liable for the obligations of the joint-stock company but the joint-stock company is liable for its obligations with all of its assets. Shares of the closed joint-stock company can only be distributed between the shareholders and may not be listed at stock exchanges while shares of the open joint-stock company can be freely traded.

Limited liability and joint-stock companies are operating under their articles of association. Usually companies have two or more participants. However, companies may also have only one shareholder. The Civil Code provides that a maximum number of shareholders in a limited liability company shall be established by law and a company must be transformed into a joint-stock company if it has more shareholders (and vice versa). However, the maximum number has not yet been established. A company that consists of only one shareholder is banned from holding a share in another company which, in its turn, is a sole owner of two or more companies. The law provides that the mere fact of holding shares in a company does not necessarily mean that the shareholder is engaged in entrepeneurship. Companies are required to have a charter (authorized) capital, the minimum amount of which is established by law. The charter capital of a limited liability company is composed of shareholders’ contributions and is divided into shares (securities) paid up by shareholders. A shareholder may request to a pay off his share in the charter capital within the period established by law or the memorandum of association.

The Civil Code also distinguishes nonprofit organizations and insitutions which are discussed below. Besides, the Commercial Code distinguishes enterprises – a general term for a company founded by one or two more individuals or legal entities, which may operate under various legal regimes depending on the type of ownership. The Code distinguishes state, municipal, private, collective, joint and foreign companies. It also distinguishes unitary and corporate companies depending on whether they have one or several owners.

The forms of private enterpreneurship, general and limited partnerships are not very popular among businessmen due to significant liability disadvantages. For the same reasons, additional liability companies also are not widespread. Besides, partners are legally prohibited from participating in more than one general partnership at one time; this ban also reduces the number of partnerships. Structure of the partnership is less complex and they have no requirements as to the minimum amount of contribution. The law does not impose any restrictions on partnership agreements, management structure, partners’ privileges and obligations, etc. Therefore, the organization and management of a partnership is less restrained than that of a company. Partnerships prove to be efficient as investment companies and they usually do not run a significant risk of their liabilities exceeding their assets.

Nevertheless, certain types of business need to be performed in specific organizational froms, i.e. insurance companies may only be established as a joint-stock or additional liability company or as a partnership; credit unions may only be established as nonprofit organizations; banks must be joint-stock or limited liability companies; private pawnshops (lombards) may only be established as general partnerships.

On the other hand, shareholders are generally not liable in person (except shareholders of additional liability companies which are not numerous in Ukraine anyway). This is the main reason why companies are far more popular (there are 30,000 to 40,000 joint-stock companies in Ukraine, while there are twice as many limited liability companies). At the same time, it should be taken into account that most joint-stock companies were created through privatization of state-owned enterprises as the privatization under te Ukrainian law results in the reorganization of a state enterprise into an open joint-stock company.

4. FOUNDATION OF A COMPANY

Companies may be established by any number of persons, including a single shareholder (except when a single shareholder is a company with one participant or in case of a limited liability company). During the establishment, the founders may conclude a foundation agreement or articles of association. According to law, the foundation agreement is treated as the founding document (memorandum of association) in case of a partnership while it is only a tool of pre-registration regulation for a company and is required only for joint-stock companies. The company’s sole charter document is the articles of association. For the purpose of state registration, legal entities are required to submit their foundation agreements and/or articles of association, application for registration and other required documents to the registrar.

The foundation agreement and articles of association must be signed by all founders and certified by a notary. In case of a single founder, a certified founding resolution of a company is used instead of the foundation agreement. A notary must also certify signature samples of the management board members, authorized representatives and the application for registration signed by the management board members. A certified foundation agreement may also be accompanied by an application to include the company in the Register.

There is no such status as the “company in formation” under the Ukrainian Law. It means that every legal entity in Ukraine achieves its legal status as well as legal capacity and capability (legal personality) from the moment it is enrolled in the Unified State Register. Therefore, a company may not assume responsibility or any legal action before it is properly registered. However, the founders of a legal entity may enter into legal relations, acquire certain rights and be liable on their own behalf. A legal entity succeeds to these rights and obligations from the date of its registration if any preceding activity of the founders is subsequently approved.

5. CHARTER CAPÝTAL, SHARE CAPITAL AND SHARES

The amount of minimum share capital in Ukraine is calculated by the minimum salary rate which is established each year by the parliament in the State Budget (it was UAH 350 (approx. EUR 57) as of 1 January 2006 but will be raised to UAH 375 (approx. EUR 61) on 1 July 2006). The minimum share capital required for the setting up an open joint-stock company is 1,250 minimum salaries, i.e. UAH 437,500 (approx. EUR 72,000). Shares may be paid up in cash or offered as non-monetary contributions (buildings, structures, equipment, other material assets, securities, easements and other property rights (including intellectual property rights), financial resources, including foreign currency, other than loans). The value of non-monetary contributions must be confirmed by an auditor in the manner described by law. According to the existing law, contributions to the charter/share capital by the foreign investors (non-residents) are exempt from import duty. However, a specific mechanism applies to direct monetary investments, involving the use of special investment accounts following the rules set forth by the NBU. Contributions are not exempt from the VAT at present. However, several bills that grant this privilege are discussed by the parliament and are being heavily lobbied by domestic and foreign organizations.

Besides their founders, open joint-stock companies may carry out an open subscription for shares. Every potential shareholder by subscriptino has to pay at least 10% of the share value in return for the founders’ obligation to sell the share to this shareholder. In case of open subscription, at least 60% of shares must be distributed by subscription to the date of company registration. The company must collect the total share capital no later than in one year after the state registration is completed. Founders of a joint-stock company must own at least 25% of shares for at least two years after registration of the company.

The share capital may be divided into shares of different classes and different values. The minimum nominal value of a share is UAH 0,01 (approx. EUR 0,0015). The number of shares per shareholder is not limited for joint-stock companies. A share in a limited liability and additional liability company is only a part of the charter capital and does not exist as a security. An open joint-stock company may list its shareholders on the stock Exchange or conduct the IPO to attract capital from the public.

In practice, there are two types of shares: nominal shares and shares payable to bearer. The difference between these types of shares in terms of legal regulation is not significant and is generally limited to accounting procedures. On the other hand, holders of nominal shares are entitled to personal participation in the general meeting. An open joint-stock company may issue both nominal shares and shares to the bearer. It may also issue preferred shares which may not exceed 25% of the total share capital, and convertible securities (warrants). The Law on Securities and Stock Exchange allows for other types of shares but does not specify them. Shares may be issued in documentary or electronic form. The former is represented by a certificate while the latter is represented by a statement of securities accounts maintained by the custodian. Shares issued in a documentary form are accounted by the registrar (or by the company itself, if it has up to 500 shareholders) while electronic shares are accounted by a contracted custodian.

It should be noted that under the new Law on Securities and Stock Market, a joint-stock company may issue only nominal shares in electronic form, and previously issued shares to bearer will not be traded at the stock market when the law enters into force in May 2006.

Shares of all joint-stock companies must be registered with the SEC and a share issue must be deposited with a depository institution (whether a registrar or a depository) which maintains the share register of a respective company and keeps records of all share transactions. In order to register shares, shareholders have to submit a set of required documents to the SEC and to sign an agreement with a depository institution.

The minimum share capital of a closed joint-stock company is also 1,250 minimum salaries (UAH 437,500 (approx. EUR 72,000)). The value of non-monetary contributions is determined in the manner described by the company’s articles of association or the law. Closed joint-stock companies are required to register their shares with the SEC and contract a depository institution. Closed joint-stock company may not issue shares to the bearer. The restrictions set forth by the new Law on Securities and Stock Market apply as well.

The minimum charter capital of a limited liability company is 100 minimum salaries (UAH 35,000 (approx. EUR 5,700).

The Civil Code currently requires that the net assets by the end of second and all subsequent years should not be less than the charter capital. Otherwise the charter capital must be decreased and corresponding changes must be registered with the registrar. The company is subject to liquidation if within the established period the net assets become less than the minimum charter capital. The charter capital may also be decreased if shares are bought out by the company from its participants or shareholders. There is no limitation as to the total value of shares that could be bought out. In this case, however, every share must be redistributed within a year or the charter capital should be decreased. Until such redistribution, the votes of all participants are added less the bought out shares. The draft Law on Joint-Stock Companies proposes to limit the buy-out to 20% of the company’s share capital.

2. REAL ESTATE

1. INTRODUCTION

Real estate operations have always been one of the most profitable profit source, and the real estate – one of the most attractive ways of securing liabilities.

Since the moden institute of private property has not existed in the USSR, operations with real estate as private property object started after its dissolution and independency of seperate states. Ukraine was never an exception. After gaining independence in 1991 and creation of first sources of law declaring inviolability of private property right, the interest in real estate transactions in Ukraine has been growing in spite of many bureaucratic and legislation restrictions in this sphere, imperfect legislation or even lack of regulation in certain spheres.

However, the volume of investments in real estate as well as rate of growth of Ukrainian real estate market are still considerably low compared to respective values of neighbour countries such as Slovakia, Czech Republic and Poland, in spite of Ukraine’s place among the biggest European states as to its territory and population.

This may be explained by the fact that many investors are indecisive about coming to Ukraine, testing the grounds for many years before taking the investment decision, due to excessive regulation of real estate operations, lack of transparency in construction legislation, and absence of a register of title as usual and common for foreign companies. The distinguishing feature of Ukrainian legal system in legal sphere is the approach to land plots and buildings as individual property objects, which are subject to registration with seperate registers. Transactions with land plots and buildings are regulated by different laws, which sometimes contradict or do not correspond to each other.

In the following chapter the author shall make a clear distinction between land plots and buildings as real estates.

This condition often causes misunderstandings of foreign investors, who are used to different regulations of legal relationships in real estate sphere. Whereas the legislation in the sphere of transactions with real estate objects (buildings) is relatively loyal, the civil turnover of land plots still remains under strict state control, and the land legislation contains many special norms aimed at barring of free turnover of land plots and creation of the land market as such.

However, lawmakers do not set forth any restrictions for purchase of buildings by non-residents of Ukraine as well as Ukrainian companies with foreign capital, therefore almost every person or entity may purchase real estate objects (buildings) in Ukraine.

2. SOURCES OF LAW

Land issues are regulated by the Land Code of Ukraine (hereinafter referred to as – the LCU), in force since January 01, 2002, which started the new era in land relations, granting private persons, including legal entities with foreign capital the right to purchase land plots. The LCU contains fundamental provisions as to subjects and objects of land relations, sets forth the competence of state and municipal bodies in this sphere as well as restrictions in land turnover etc. Land issues are also regulated by the Laws of Ukraine “On land lease”, “On land payment”, “On land appraisal” etc.

Numerous subordinate by-laws regulate specific technical issues in the sphere of land relations. There is no unified legislative act to regulate the legal status of real estate objects (buildings), however, respective provisions can be found in laws and by-laws regulating other legal spheres.

We should note that the largest regulative wave took place within the last few years, when such global legislative acts as the Civil Code of Ukraine, the Commercial Code of Ukraine, the Law of Ukraine “On state registration of property rights to real estate and their restrictions” and others came in force. Ukrainian legislation also contains many laws and by-laws to regulate and guarantee investment activities in Ukraine.

The Laws of Ukraine “On investment activity” and “On regime of foreign investments” regulate the issues of investment activity and observance of rights and interests of foreign investors related to their investment projects in Ukraine. Ukraine has joined many bilateral international treaties on promotion and protection of foreign investments (BIT). Such treaties have been concluded with many European states. These treaties guarantee observance of rights of foreign investors, including investments in real estate objects.

3. REGISTRATION OF TITLE TO REAL ESTATE

The Ukrainian system of registration of title to real estate is not transparent, and is under reformation. The land registry (Grundbuch) as in Europe does not exist in Ukraine. The title to buildings is registered by municipal enterprises – Bureau of technical inventory and registration of title to real estate objects (hereinafter referrad to as – the BTI) at the location of real estate objects – buildings, however, there is no unified register of real estate objects. In some places, there is no BTI, and local municipal authorities carry out registration of title to real estate objects – buildings.

The title to land plots is registered in a seperate register, which is not related to the register of title to real estate objects – buildings. The inventory of land plots has not been finished yet, which sometimes causes issue of title documents for the same land plot to different places.

The parallel register of encumbrances of real estate and the register of mortgages have duplicate functions. The land cadastre also exists as a seperate register. It is understood that the amount of registers for real estate makes foreign investors feel unconfident, and they take the realization of their investment intentions with certain reservation.

As stated before, the registration of title to real estate objects – finished constructions is carried by the BTI based on the regional principle. For example, real estate objects in Kiev are registered by the BTI of Kiev. We should note that third parties have no access to the register of title to real estate; - the official information real estate objects may only be provided to the owner. Almost all registers (excluding the state land cadastre) are administered by the state enterprise “Information centre” of the Ministry of Justice of Ukraine, to which the latter, being the holder of this register, has transferred all administrative functions.

The registration in respective registers is carried out by state and/or private notaries, and/or state notary archives, and/or the above named state enterprise and its affiliates, and in case with the register of title to buildings – respective BTIs.

The system of registration of rights to title to real estate in Ukraine is under reformation now. The creation of unified state register of land plots, real estate objects – buildings and rights of title to them within the state land cadastre, which shall gather all information on the real estate object, its owner, quality and encumbrances, is planned. The holder of the new register shall be the State Committee on land resources, administrator of the register – the state enterprise Centre of the state land cadastre and the State Committee on land resources. However, the functions of register holder have not yet been transferred from the Ministry of Justice of Ukraine to the State Committee on land resources.

4. TITLE

Ukrainian Constitution sets forth three property forms: private, state and municipal property. Article 78 of the LCU also sets forth that Ukrainian land may be in private, state and municipal property. Additionally to the said property forms, Ukrainian legislation sets forth specific forms of title, which are inherent in post-soviet countries only. These are the right of operative management, the right of complete business maintenance.

Forms of land title are:

1 – Property (private, state and municipal);

2 – Temporary use based on the lease agreement (lease);

3 – Right of permanent use of land.

4 – Right of servitude.

Forms of title to real estate (buildings) are:

1 – Property (private, state and municipal);

2 – Right of operative management;

3 – Right of complete business maintenance;

4 – Lease.

RESTITUTION

Under section 4 Article 78 of the LCU persons (their heirs), which owned land plots before 15.05.1992, shall not be entitled to their restitution.

Thus, the legislator has solved the issue of claims of persons, whose property was nationalized in Ukraine after the revolution of 1917.

We should note that Ukrainian legislation does not contain any specific provisions as to right for restitution of real estate objects – buildings; however, it is presumed that no such rights are granted by Ukrainian laws. According to some opinions, with Ukraine moving towards European Union and adaptation of national legislation, it may face the requirements on amending the legislation in this sphere and granting respective restitution rights to persons, whose property has been nationalized. Whereas it is too early to address this issue now, however, on some experts’ opinions, this time may come very soon.

5. GENERAL INFORMATION ON REAL ESTATE LAW IN UKRAINE

5.1 Land Plots

The LCU is fundamental act regulating land relations in Ukraine. According to LCU provisions a land plot is a part of earth surface, which is determined by the location and rights existing as to this land plot. The right of title to the land plot extends within its limits to the surface (ground) layer, as well as water objects, forest and perennial plants located on it.

5.2 Purpose of Land Plots and Its Change

The LCU sets forth 9 categories of land plots, predetermining th eway of use of land plots depending on their purpose:

- agricultural land plots;

- land plots for construction of residential and public buildings;

- land plots of natural preserves and of environmental protection meaning;

- land plots of health-improving meaning;

- land plots of recreational meaning;

- land plots of historic and cultural meaning;

- land plots of forests;

- land plots of water reserves;

- land plots of industry, transportation, energy, defence and other purpose.

The attribution of land plots to the certain category takes place based on the decision of state and local authorities within their competence.

The purpose of the plot shall be chosen depending on the intended activity to be carried out on it.

The purpose of the land plot, which does not correspond to the intended investment project may be changed based on the application of the interested persons.

Change of land plot’s purpose in property of individuals or legal entities takes place upon application of their owners as set forth by the Ukrainian Government. Change of purpose of land plots under forests takes place under consideration of conclusions of executive authorities as to issues of environment and forest protection. The procedure of change of purpose of the land plot sets forth compensation payment by the interested persons to local authorities at the rate, which is set forth basedt on the procedure approved by the Ukrainian Government.

The order of determining the compensation rate payable for loss of agricultural and forests land plots is set forth by the Ukrainian Government. The possibility of changing of land plot’s purpose has a special meaning due to the deficit of land plots with the purpose of industrial construction outside residential areas.

Today, there are very few industrial land plots of big area outside big residential areas, which are suitable for construction of big industrial, logistics or trade objects. Most land plots have agricultural purpose and may not be built on without preliminary change of their purpose. Therefore, it is necessary to change the purpose of the land plots.

5.3 Subjects of Right of Title to the Land Plots. Acquisition of Right of Title to Land Plots by Foreign Legal Entities and Individuals and Enterprises with Foreign Investments.

As stated above, the LCU sets forth a range of limitations as to realization of the right of title to land related to the subjects of right of title to land. According to Article 80 of the LCU the subject of right of title to land are:

1. individuals and legal entities – for land plots in private property;

2. territorial communities implementing this right directly or through local municipal authorities – for land plots in municipal property;

3. the state implementing this right through respective state authorities – for land plots in state property.

According to LCU provisions land plots of all purposes may be purchased almost without limitations by Ukrainian citizen and legal entities – residents of Ukraine established with participation of Ukrainian residents.

However, foreign legal entities and foreign citizen as well as joint ventures established with foreign participation may purchase land only in orden and with limitations set forth by the Land Code. Foreign individuals, foreign legal entities and joint ventures with foreign participation may NOT purchase agricultural land plots.

Foreign citizen nd persons without citizenship may purchase non-agricultural land plots inside of residential areas as well as non-agricultural land plots outside of residential areas under real estate objects being their property.

Foreign legal entities may pruchase non-agricultural land plots:

1. inside of residential areas when purchasing real estate objects and for construction of real estate objects related to business activity in Ukraine;

2. outside of residential areas when purchasing real estate objects.

Joint ventures established with participation of foreign legal entities and individuals may purchase non-agricultural land plots in the same cases as set forth for foreign legal entities.

Land plots in state property, apart from land plots under objects subject to privatization, shall be sold to foreign states and foreign legal entities by the Ukrainian Government upon agreement with the Parliament of Ukraine. Land plots in property of territorial communities shall be sold to foreign states and foreign legal entities by respective local council s upon agreement with the Ukrainian Government.

Land plots in state property and property of territorial communities shall be sold to foreign legal entities after registration of their representative offices with the right to carry out commercial activity in Ukraine. Based on the existing practice, the procedure of Government’s approval of land plot’s purchase is very bureaucratic, that is why purchasers try to avoid it using different legal structures.

We also should draw to the reader’s attention to the fact that the LCU does not list enterprises with 100% foreign investment as subjects of accrual of rights of title to land plots in property of the state and territorial communities. According to current interpretations of LCU provisions, the above stated limitations as to purchase of land plots by foreign legal entities and enterprises with foreign capital apply only to purchase of land plots in state or municipal property. The above named limitations do not apply to individuals.

However, we would like to note that this is doctrinal interpretation only, which has ambiguous position in Ukraine.

5.4 Moratorium

Until January 1st, 2015 individuals and legal entities may purchase agricultural land plots with the total area of 100 hectares. This area may be increase in case of legal inheritance of land plots.

Until January 1st, 2007, it is forbidden to bring in rights to land shares in charter capitals of business companies.

Untila January 1st, 2007 individuals and legal entities owning land plots for agricultural (farmer) activity and other agricultural commodity production, as well as Ukrainian citizen – owners of land shares may not sel lor in any other way alienate the land plots and land shares, except for their transfer for inheritance and for seizure of land for community purposes.

REAL ESTATE OBJECTS – BUILDINGS

Contrary to the land plots, the legal status of real estate objects – buildings is far less regulated. Current Ukrainian legislation does not classify real estate objects as to their purpose. Such classification only exists in by-laws regulating construction conditions. The real estate objects diversify depending on their purpose – industrial real estate, trade, residential, office and other assets. Ukrainian legislation does not contain any limitations as to subjects and/or objects of participants in respective legal relations, except for the objects in state and/or municipal property of strategic meaning, which may not be transferred to private property by law and are not subject to privatization respectively.

Ukrainian legislation does NOT require any specific consent to be given by the state authorities to enterprises with foreign capital intending to purchase real estate objects – buildings, except for purchase of objects in state and municipal property during privatization process. In this case the respective consent is given in the way of determination of the winner in the respective privatization procedure and conclusion of the sale-purchase agreement. However, the registration of title to real estate objects for location of diplomatic missions, consular offices and international intergovernmental organizations as well as issuing of the certificate of title to real estate is carried out only based on the respective note of the Ministry of Foreign Affairs of Ukraine.

The registration of title to real estate objects for location of international non-governmental and foreign organizations is carried out based on the letter of General direction for services to foreign representative offices (GDIP), Council of Ministers of the Crimean Autonomy, the regional or Sevastopol city state administration.

6. REAL ESTATE TRANSACTIONS

6.1 Lease of Real Estate Objects - Buildings

Ukrainian legislation does not contain any limitations as to subjects and/or objects of lease relations. There is specific regulation as to the lease of state and municipal property of objects in the Law of Ukraine “On the lease of state and municipal property”, which sets forth the list of objects not transferable to lease. The Decree of Cabinet of Ministers of Ukraine “On the list of property complexes of state enterprises, organizations and their structural departments of main production, which may not be privatized or leased” also sets forth the list of state-owned objects not transferable to lease.

This limitation applies to the integrated property complexes of respective state and municipal enterprises, and is caused by the fact that these enterprises complete strategic tasks and secure vital functions of the state.

Objects, which have not been included in the list, may be leased subject to specific conditions set forth below. The legal regulation of lease of real estate objects – buildings has been significanty changed in the last years, however, such changes were perceived by real estate market players differently.

In particular, the regulation on state registration and notary certification of long-term lease agreements as well as the order of lease of real estate owned by non-residents in Ukraine were introduced. According to Ukrainian legilsation lease agreement for real estate with the term exceeding 1 (one) year shall be certified by a notary and registered with the state register of deeds.

Lease agreements with individuals shall also be certified by a notary and registered with the state register of deeds regardless of their terms. We should note that the state fee for notary certifiation of the lease agreement amounts to 1% of rental payments for the whole term of lease agreement.

So, the sum of the state fee can be very impressive when executing a long-term lease agreement for real estate object. This will change from 01.01.2007, after coming in force of the law decreasing this fee to 0.1%, however, a maximum of UAH 850.

Nevertheless, the obligatory notary certification of real estate lease agreements caused a problem in conclusion of lease agreements for real estate to be built in future (pre-lease agreement), which are directly related to the developer’s activity.

The landlord shall provide the notary with the original constituent document confirming the title to the real estate for the notary certification of the lease agreement. Since the object has not been constructed yet, it is possible to provide the constituent document, and therefore impossible to execute a valid lease agreement.

This problem can be solved through conclusion of a preliminary agreement or letter of intent as to such lease agreement. There are certain taxation requirements, whereas the non-resident owner of the real estate in Ukraine is obliged to establish a representative office with the right to carry out business activity in Ukraine, or to conclude an agreement with Ukrainian resident on estate administration.

Failure to fulfil this obligation is considered as tax evasion under Ukrainian laws. This obligation was introduced due to the fact that recently non-resident of Ukraine have been entitled to lease real estate objects on the territory of Ukraine, receive lease payments abroand and therefore evade tax payments in Ukraine.

With the introduction of the above limitation the legislator obliged all non-residents to carry out all settlements for use of real estate objects on the territory of Ukraine through Ukrainian banks and therefore declare their profits in Ukraine.

In practice the scheme of lease payments for real estate objects owned by non-residents on the territory of Ukraine is as follows:

- Lease paymens are transferred by the lessee to the account of non-resident’s representative office with Ukrainian bank;

- The representative office deducts taxes and repatriates the lease payment to mother company less the witholding tax, unless other provisions are set forth by the respective double taxation treaty between Ukraine and the land of residence of the landlord.

Undoubtedly, the ways to avoid this prohibition were found. It is a common practice to divide the lease payments in two parts, whereas one part is paid in Ukraine and the other – directly abroad.

The amount of lease payments as to real estate objects is not subject to state regulation, except for the lease paymens for state and municipal property objects, where the lease payment is calculated based on the procedure approved by the Ukrainian Government.

However, according to some information, there are plans to develop minimum rates of lease payments for use of real estate owned by individuals, in order to prohibit tax evasion as described above.

Minimal rates of lease payments shall be set forth depending on the location, purpose and state of the real estate object, which shall be applied to the respective object for the means of taxation. Unfortunately, we have no information on the ways and terms of implementation of these intentions.

6.2 Lease of Land Plots

Lease of land plots is regulated by the Law of Ukraine “On land lease”, which sets forth some fundamental provisions and requirements as to the land lease agreement.

The term of land lease may not exceed 50 years. The land lease agreement shall be certified by a notary and registered with the state register of deeds. The agreement is invalid if the above conditions are violated. The Law “On land lease” sets forth mandatory (essential) conditions of land lease agreement.

These are the following:

- Lease object (location and area of the land plot);

- Term of the lease agreement;

- Lease payments with the indication of their amounts, indexation, payment forms, ways of their payment and revision as well as liability for non-payment;

- Conditions on use and purpose of the land plot subject to lease;

- Conditions on maintenance of the leased object;

- Conditions and terms on transfer of the land plot to the lessee;

- Conditions on use of the land plot to the landlord;

- Existing limitations (encumbrances) as to use of the land plot;

- Determination of the party bearing the risk of accidental damage or destruction of the leased object or its part;

- Liability of the parties.

Absence of at least one of the above named essential conditions shall lead to the rejection of the state registration of the lease agreement as well as declaration of the lease agreement as well as set forth by the law.

The integrated parts of the lease agreement are the following:

- Plan or scheme of the land plot subject to the lease;

- Cadastre plan of the land plot with indication of limitations (encumbrances) of the use and land servitudes;

- Deed on determination of borders of the land plot:

- Transfer protocol of the leased object;

- Project of land allotment in cases set forth by law.

The Ukrainian Government sets forth the standard form of the land lease agreement, which shall be followed. This standard form contains all essential provisions set forth by law and is widely used in practice.

The amount, ways and terms of lease payments shall be agreed upon by the parties and set forth in the lease agreement, except for lease payments for land plots in state and municipal property, which are set forth under the Law of Ukraine “On land payments.”

Lease payments can be made in monetry form, paid in kind, as well as in form of services rendered to the landlord. The parties can agree upon combination of different forms of lease payments in the lease agreement. Lease payments for land plots in state and municipal property shall be made only in monetary form. The state fee for notary certification of the land lease agreement amounts to 0,01% of the monetary evaluation of the land plot. If there is no monetary evaluation, the state fee shall amount to 1% of the agreement sum, but minimum of UAH 17.

6.3 Sale – Purchase

Sale-purchase agreements of real estate shall be certified by a notary and registered with the state register of deeds, which is mandatory for their coming into force.

Notary certification takes place at the location of the real estate.

Constituent documents for the real estate object shall be provided to the notary for the execution of the agreement. As to the buildings, such constituent document is any document confirming the accrual of right of title to the real estate object as set forth by Ukrainian legislation. This document shall contain the note on its registration by respective authorities (Bureau of technical inventory).

As to the land plots, such constituent document is only the state title deed registered with the state register of deeds.

If a party to the sale-purchase agreement is an individual, he/she shall provide the statement of his/her spouse on consent to the deal, which shall be certified by the notary.

During the preparation of the deal we recommend to examine the charter document of legal entities – parties to the agreement very carefully in order to determine limitations as to execution of real estate agreements or asset deals with limitations as to their value by their management bodies.

In practice, real estate deals often require preliminary consent of legal entity’s bodies such as supervisory board or general meeting of founders, in order to prevent abuses by the management bodies of a company. Specific requirements are set forth by the legislator to the deals with participation of foreign elemets (see above).

Purchase of a legal entity, which possesses land rights, does NOT require any consent of the Ukrainian Government or Parliament; therefore such structure is often used. Before execution of the deal we recommend to control the technical state of the real estate object and its compliance with the project documents.

So, if during the use of the object its owner made constructional changes, which have not been coordinated with the local authorities, such changes may prevent the future re-registration of title or mortgage to such real estate objects.

The value of the real estate object is agreed upon by the parties; however, this value should not be lower than the expert evaluation of the land plot and the balance value of the real estate object as stated in the BTI certificate.

The value of the real estate objects in state or municipal property subject to sale in privatization process shall be determined by experts. The state fee for the notary certification of the real estate sale-purchase agreement amounting to 1% and the payment to the Pension funds of Ukraine amounting to 1% of the contractual value of the real estate, however not less than the balance value of the real estate object as stated in the BTI certificate or the expert evaulation of the land plot, shall be paid at the execution of the sale-purchase agreement.

As stated above, there are no limitations as to purchase of corporate rights of enterprises posessing right to real estate objects by foreign capital, therefore this procedure (share deal) is rather popular in Ukraine as well as direct purchase of real estate objects (asset deal). Each purchase procedure has its advantages and disadvantages, which shall be carefully evaluated during preparation of the deal.

3. TAXATION

1. INTRODUCTION

1.1 Tax System

The tax system of Ukraine is composed of more than 30 taxes and levies charged on the base of Law of Ukraine “On the Taxation System”, dated 25.06.1991, # 1251-XII, with further amendments and includes national and local taxes and levies.

The main national taxes and levies paid by legal and individual persons are:

- Corporate Profit Tax;

- Personal Income Tax;

- Value Added Tax;

- Excise Duty;

- Compulsory State Social Security Levies;

- Land Tax;

- Customs duties; and others.

The main local taxes and levies are the advertising tax municipal tax, car-parking contribution, market levy, other taxes and levies.

National taxes and levies are adopted by the Parliament of Ukraine (Verkhovna Rada) and are mandatory for payment on the entire territory of Ukraine. Local taxes and levies are colected in the order established by the relevant municipalities. The rates of local taxes are established within the limits adopted by the Parliament of Ukraine in the relevant laws.

Collection of taxes is controlled and administered by the State Tax Administration while payment of customs duties is administered by the State Customs Service. All legal and individual persons that are engaged in business activities must register at the local tax administration and regularly report all taxable transactions and taxes paid.

It should be noted that the legislation of Ukraine (including the legislation on taxes) is subject to quite frequent amendments that makes certain difficulties even for the local taxpayers.

1.2 Taxpayers’ Status

The payment of taxes depends on the residential status of taxpayers. The residential status of legal and individual persons for the purposes of taxation is defined by the relevant tax laws regulating taxation of legal and individual persons, respectively.

A legal person as well as a permanent establishment without the status of a legal person (e.g. a representative office or a branch) is considered to be resident, if it is registered and conducts its business in accordance with the legislation of Ukraine.

Determination of the residential status of an individual is more complicated. Thus, an individual is considered to be resident, if his/her domicile is in the territory of Ukraine. In case an individual is also domiciled in another country, he/she will be considered a resident if his/her place of permanent residence is situated in the territory of Ukraine. If an individual has a place of permanent residence both in Ukraine or in another country, he/she will be considered resident if he/she has closer economic ties (the centre of vital interests) in Ukraine.

If the residential status of a person could not be defined with the help of the above rules a person will be considered resident if he/she stays in Ukraine for the period of at least 183 calendar days during a tax year. If this rule cannot be applied, a person will be considered resident if he/she is a citizen of Ukraine. If a person regardless of the provisions of the law has also a citizenship of another country, for the purposes of taxation this person will be considered a resident of Ukraine and will not be able to apply any privileges or exemptions envisaged by the international agreements signed by Ukraine.

If a person is stateless, his/her status will be determined in accordance with the rules of the international law.

2. CORPORATE PROFIT TAX

The main direct tax paid by legal persons is a corporate profit tax, which is regulated by the Law of Ukraine “On Taxation of Enterprises’ Profit” (Corporate Tax Act) dated 28.12.1994 # 334/94-VR with further amendments.

2.1 Taxpayers

The tax is paid by legal persons and permanent establishments (like representative offices and branches) of legal persons. Ukrainian residents are subject to taxation on their worldwide profit while non-residents are taxable only on their income received from the Ukrainian sources.

2.2 Tax Rate

The basic rate of the corporate tax is 25%.

2.3 Tax Period

Taxable periods are considered to be a calendar quarter, half a year, three quarters, a year. A taxable period starts at the first calendar day of the tax period and ends at the last calendar day of the taxable period. An exemption from this rule exists for the producers of agricultural products. The annual tax period begins on January 1st and ends on December 31st.

2.4 Object of Taxation

The object of taxation is the profit which is determined by deducting the permitted gross expenses and permitted depreciation and amortization from the gross income.

2.5 Gross Income

The gross income is the overall income received by a taxpayer in the territory of Ukraine or abroad from all types of activity in monetary, material or immaterial forms, within the reporting period.

The law specifically mentions some transactions as transactions genetaring taxable income. These, for example, include:

- Overall income received from the sale of goods, service sor works, including income from the sale of securities (except for their initial issuance or final extinguishment);

- Income from the joint activity and income received in the form of dividends from non-resident companies, interests, royalties, debt instruments and rents (leasing payments);

- Value of goods and services (works) received free of charge;

- Amounts of permanent (non-returnable) financial aid;

- Amounts of returnable financial aidi f such amounts have not been returned up to the end of the reporting period; and others.

Some transactions are specifically excluded from the ones that generate taxable income (exempt transactions). For example, the value of the following items used in non-taxable transactions is not included in the gross income:

- Amounts of VAT received or accrued by a taxpayer on the cost of goods or services (works) sold, provided that this taxpayer is not VAT exempt;

- Cash or property received by a taxpayer as a direct investment or reinvestment in corporate rights issued by this taxpayer, including investments in joint ventures formed without the status of a legal person in the territory of Ukraine;

- Cash or property being returned to the owner of corporate rights after the liquidation of the legal entity that had issued such corporate rights, provided that the value received did not exceed the nominal value of such corporate rights (shares, quotas, units). The excess amount is included in the taxable income;

- Some other items that have more specific and narrow application and that is why are less widely used.

2.6 Deductible Expenses

As a rule, any business related expense is allowed for deduction. It means that any amounts paid by a taxpayer as compensation for goods, works, services used in its business activity could be deducted from the taxable income. Some expenses are specifically permitted for deduction. These include:

- Any expenses incurred during the taxable period in connection with the start, management and execution of business activities;

- Charitable contributions in the amount of more than 2% not-to-exceed 5% of the taxable profit for the previous tax year;

- Expenses incurred in connection with the improvement of capital assets in the amount not exceeding 10% of the aggregate book value of all capital assets as of the beginning of the reporting period. The excess amount should be capitalized;

- Any amount of financial aid given for national film production and broadcast;

- Expenses for the purchase, creation and production of audiovisual products;

- Some other expenses.

Some expenses do not qualify for deduction:

- Any expenses which are not connected with other business activities, such as;

- those related to receptions, presentations, entertainment, recreation and distribution of gifts, provided that the main business activity of the taxpayer is not connected with this type of business;

- Expenses for lotteries and gambling;

- Expenses for financing of personal needs of physical persons (with some exceptions);

- Expenses (in excess of 10% of the aggregate book value of all capital assets as of the beginning of the reporting period) for the purchase, construction, reconstruction, modenization and repair of capital assets, including expenses for the purchase of intangible assets, if such assets are subject to depreciation or amortization in accordance with the legislation. If the assets are not subject to depreciation and amortization, the expenses are permitted for deduction;

- Penalties and fines paid;

- Dividend payments;

- Any expenses which is not supported by a relevant document;

- Some other expenses.

Some special rules are used for taxation of particular operations. This includes special rules for deduction of some expenses, e.g. deduction of interests paid, cost of inventories, labour cost, and cost of compulsory state social contributions.

3. PROPERTY TAX

There’s no property tax in Ukraine.

4. VALUE ADDED TAX

Payment of the value added tax is regulated by the Law of Ukraine “On Value Added Tax” (VAT law) dated 03.04.1997, # 168/97-VR, as amended.

VAT is a tax on consumer expenditure. It is collected by sellers on business transactions in the territory of Ukraine, imports of goods and concomitant services into the customs territory of Ukraine. Business transactions in the territory of Ukraine include supplies of goods of services. The consumer pays VAT to the seller on top of the goods/works/services cost. Teh seller reports the collected tax to the tax authorities and pays it to the budget.

4.1 Tax Rate

The rate of VAT is 20%.

Export (with certain exemptions) is taxed at zero rate. Zero rate for export is not applied if the goods are exempt from taxation in accordance with the law.

Some transactions within the territory of Ukraine are also taxed at zero rate.

So transactions could be:

- VAT taxed at full rate of 20%;

- VAT taxed at 0%;

- Exempt from VAT;

- VAT non-taxable.

4.2 Reporting Period

The VAT reporting period is 1 calendar month.

4.3 Taxpayers

The taxpayers of VAT (persons who pay VAT to the budget) under the VAT law are:

- Any person willing to be engaged in commercial activities and is voluntarily registered as a VAT payer;

- Any legal person, permanent establishment of a non-resident, joint venture or an entrepreneur that has an aggregate value of 12 months domestic supplies of more than 300,000 hrivna;

- Any person (legal or individual, resident or non-resident) that imports goods or concomitant services into the customs territory of Ukraine in volumes above the exempt level;

- Persons engaged in sales of confiscated property;

- Any person performing e-trade in the territory of Ukraine. Non-residents could provide such operations only through their permanent establishments duly registered in Ukraine.

5. EXCISE DUTY

Excise duty is a non-direct tax payable on some types of products produced in or imported into the customs territory of Ukraine, and is included in the product cost. The payment of this tax is regulated by the Decree of Cabinet of Ministers of Ukraine dated 26.12.1992, # 18-92. The rates of tax for particular excise products are established by the special laws of Ukraine.

Presently, the following products are subject to excise duty:

- tobacco products;

- alcohol products and beer;

- certain motor vehicles;

- certain motor fuels.

6. PAYROLL TAXES (COMPULSORY STATE SOCIAL SECURITY LEVIES)

6.1 General Information

Salary and other salary like compensations payable to employees are subject to payroll taxes. The payroll taxes are payable by an employer and by an employee. An employer is responsible for calculation and payment of taxes on salaries/compensations paid to employees and for witholding taxes from employees. The taxes are withheld when the salary/compensation is accrued to an employee.

The payroll taxes include:

- Payments to the State Pension Fund:

31,8% - payable by an employer;

1% (if the overall taxable income does not exceed 150 hrivna) or 2% (if the overall taxable income exceeds 150 hrivna) – payable by an employee.

- Payments to the State Temporally Disability Fund:

2,9% - payable by an employer;

0,5% - payable by an employee (if the salary is lower than the cost of living) – 496 hrivna up to 30.09.2006 and 505 hrivna afterwards or 1% if the salary is higher than the cost of living.

- Paymens to the State Unemployment Fund:

1,3% - payable by an employer;

0,5% - payable by an employee.

- Payments to the State Professional Accident and Sickness Fund:

The rates depend on the profession (0,66% - 13% for year 2006) payable by an employer.

Special lower rates are applied to the handicapped employees and organizations employing handicapped persons.

7. LAND TAX

The land tax is payable by land owners and depends on the land value and location. The land tax for estimated plots of land located in cities and towns is 1% of the total land plot value. If the plot of land is not evaluated, the tax is calculated in UAH per square meter depending on the number of population of the city/town in which the land plot is situated.

Those who rent land from land owners pay rents. The amount of rent is agreed upon between the parties.

8. CUSTOMS DUTIES

The goods and products that are transferred through the customs territory of Ukraine are subject to customs duties and taxes.

The payment of customs duties is regulated by Law of Ukraine “On Unified Customs Rate” dated 05.02.1992, # 2097-XII, with further changes and by Decree of Cabinet of Ministers of Ukraine “On Unified Customs Rate of Ukraine” dated 11.01.1993, #4-93, with further changes. The documents establish the types of duties and the principles of levying the customs duties on goods and products.

The import customs duties are levied on the goods and products transferred ino the customs territory of Ukraine and the rates of duty depend on the types of goods and product. The rates of import customs duties are established by Law of Ukraine “On Customs Rates and Ukraine” dated 05.04.2001, # 2371-III, with further changes.

The customs fees are levied on customs processing of goods and products at the zones of customs control. The rates of customs fees are established by Resolution of the Cabinet of Ministers of Ukraine dated 27.01.1997, # 65, and vary depending on the type of customs operations and the value of goods and products processed.

9. PERSONAL INCOME TAX

Payment of the personal income tax is regulated by Law of Ukraine “On Personal Income Tax” dated 22.05.2003, # 889-IV, with further changes.

9.1 Tax Payers

The tax is payable by the Ukrainian tax residents on their worldwide income and by non-residents on their Ukrainian source of income. Non-residents having diplomatic status and privileges are exempt from the personal income tax on their income received from such diplomatic activity.

9.2 Object of Taxation

For residents of Ukraine the object of taxation is determined as the overall taxable income received in the territory of Ukraine or abroad regardless of the fact if the income is received in cash or in kind. If the income is received in kind, fair market prices are applied in order to determine the taxable income. A fair market price is magnified by the coefficient calculated by a special formula.

For non-residents taxable income includes only the income received from the Ukrainian sources. If the Ukrainian source income is paid to a non-resident by another non-resident, such payment should be effected through a bank account opened in an authorized Ukrainian bank. If the payment is effected in cash or in kind, the non-resident who receives such payment should personally calculate and pay the tax to the budget within 20 calendar days after the receipt of such payment.

9.3 Non-Taxable Income

- Amounts of state social insurance and state welfare payments;

- Income from the state bonds issued by the Ministry of Finance of Ukraine and from the state lotteries winnings;

- Amounts of some charitable payments;

- Amounts of other compulsory state social levies;

- Some other payments.

9.4 Tax Rate

Currently the basic tax rate is 13%. This rate is applicable till 31.12.2006, and from 01.01.2007 the rate will be 15%.

This rate is applied to the taxation of income of residents and to the taxation of passive income (dividends, royalties, interests) of non-residents. Other income of non-residents is taxed at the rate of 26% (applicable till 31.12.2006) as of today and will be taxed at the rate 30% from 01.01.2007.

Reduced rate of 5% is applied to the taxation of some interest income of residents. Gambling income, including income from lotteries (excluding state lotteries) gained by residents and non-residents is taxed at 26% up to 31.12.2006, and will be taxed at 30% from 01.01.2007.

Property inherited by the residents is taxed at the rates from 0% to 26% (30% from 01.01.2007) depending on the types of property and on the relation degree between the testator and the legatee. The gifts are taxed at the same rules as the inheritance.

4. VISA REGULATIONS, RESIDENCE AND WORK PERMITS

VISAS

According to the Law of Ukraine on Legal Status of Foreigners and Stateless Persons (Pro pravovity status inozemziv ta osib bez gromadyanstva) and Rules of issuance of visa ducoments for entry to Ukraine (Pravyla oformlenniya vizvykh dokumentiv dlya vjizdu v Ukrainu), foreigners are obliged to obtain a visa prior to crossing the Ukrainian border. At the same time, according to international agreements citizens of a number countries are relieved from an obligation of obtaining visa, among them:

- Republic of Albania (for holders of diplomatic and service passports only)

- Republic of Argentina (for holders of diplomatic, service or official passports only)

- Republic of Armenia

- Republic of Azerbaijan

- Republic of Belarus

- Bosnia and Herzegovina (for holders of diplomatic and service passports only)

- Federative Republic of Brazil (for holders of diplomatic and service passports only)

- Republic of Bulgaria (for holders of diplomatic and service passports only)

- Kingdom of Cambodia (for holders of diplomatic and service passports only)

- Republic of Chile (for holders of diplomatic, service or official passports only)

- People’s Republic of China (for holders of diplomatic, service passports and national passports of official visit purpose only)

- Republic of Croatia (for holders of diplomatic and service passports only)

- Republic of Cuba (for holders of diplomatic and service passports only as well as those coming to Ukraine with purpose of treatment)

- Dominican Republic ((for holders of diplomatic and service passports only)

- Republic of Estonia (for holders of diplomatic passports only)

- Georgia

- Republic of Guinea (for holders of diplomatic and service passports only)

- Republic of Hungary

- Islamic Republic of Iran (for holders of diplomatic and service passports only)

- State of Israel (for holders of diplomatic passports only)

- Republic of Kazakhstan

- People’s Democratic Republic of Korea (for holders of diplomatic and service passports only)

- Republic of Kyrgyzstan

- People’s Democratic Republic of Laos (for holders of diplomatic and service passports only)

- Republic of Latvia (for holders of diplomatic passports only)

- Republic of Lithuania

- United Mexican States (for holders of diplomatic passports only)

- Republic of Moldova

- Mongolia

- Republic of Panama (for holders of diplomatic and service passports only)

- Republic of Poland

- Romania (for holders of diplomatic and service passports only)

- Russian Federation

- Serbia (for holders of diplomatic and service passports only)

- Confederation of Switzerland (for holders of diplomatic and service passports only)

- Republic of Turkey (for holders of diplomatic, service or special passports only)

- Tajikistan

- Turkmenistan (for holders of diplomatic and service passports only)

- Socialist Republic of Vietnam (for holders of diplomatic and service passports only)

- Republic of Uzbekistan

Besides, citizens of USA, Japan, Canada, Swiss Confederation, Principality of Liechtenstein as well as members of EU may enter Ukraine for the period of 90 days without a visa.

Ukrainian legislation provides that all foreigners, entering Ukraine on a visa-free basis, may stay in the country up to 90 days counted as from the first entry into Ukraine without registration with the Ministry of Interior. After expiration of this term they should either leave Ukraine or respectively register their stay provided that they have a legitimate purpose for that.

Visas are issued by Ukrainian diplomatic and consular institutions abroad, the Consular Department under the Ministry of Foreign Affairs of Ukraine. Certain powers as regards visa prolongation are also vested upon the Ministry of Interior of Ukraine. The consular fee for receiving a visa varies from USD 16 to USD 200.

RESIDENCE AND WORK PERMITS

Foreigners who are planning to immigrate in Ukraine for permanent stay or who are planning to work or be engaged in any other legal activities have to obtain a permanent or temporary residence permit. The procedure of receiving a permanent residence permit is regulated by the Law on Immigration (Pro immigratsiyu). Those foreigners who obtain a permanent residence permit can be employed in Ukraine without a special permit for employment on terms equal to that enjoyed by Ukrainian citizens. All other foreigners seeking employment or intending to engage in any other lawful activity in Ukraine shall apply for such permit, issued by the Ministry of Labour in Ukraine.

A foreigner is required to submit the following documents in order to receive a permanent residence permit:

- Standard application form;

- Three photos;

- Copy of the document certifying the identity of the person;

- Document evidencing the place of a person’s residence;

- Information about the person’s family members, a copy of marriage certificate (if any);

- Document certifying the state of health;

Additional documents may also be required due to particular reason of a stay in Ukraine: (e.g. copies of documents, certifying relative relations with an Ukrainian citizen(s), a copy of the document certifying state registration of investment in the amount not less than 100,000 USD etc.)

The permanent residence permit is issued by the Ministry of Interior for an unlimited period of time. The Ministry is obliged to adopt a decision on the requested permanent residence permit within one year. As a general rule, foreigners applying for a residence permit for the first time are obliged to submit a respective application to the Ukrainian diplomatic or consular institution abroad. The Ministry of Interior considers applications, submitted by foreigners during his/her lawful stay in Ukraine. Annually special immigration quotas are established by the Government of Ukraine for particular categories of immigrants, defined in the Law on immigration.

A foreigner wishing to be employed in Ukraine under an employment contract must receive a work permit. However, such permit is not obligatory for foreigners who:

- Hold a permanent residence permit;

- Are employed by investor under product distribution agreement or in other cases stipulated by legislation.

Work permits are issued by the State Employment Center under the Ministry of Labor and Social Protection of Ukraine, which has to adopt a decision on the requested work permit within 30 days. Work permits may be issued for a period not exceeding one year. After expiration of this term the work permit may be prolonged for another term within one-year period.

For obtaining a work permit an employer submits the following documents to the State Employment Center:

- Application (in a provisional form);

- Substantiating the necessity of foreigners’ labor and possibilities for establishing proper conditions of their stay and activities;

- A duly certified copy of employer’s charter and registration certificate;

- The list of foreigners with indication of their full names, year of birth, passport number, profession, sex;

- Copy of the draft contract between the employer and employee – a foreign citizen;

- Valid document, certifying the right of employer’s representative to represent his/her interest in the Employment Center;

- Copies of documents on education and qualification;

- A certificate, proving payment of all taxes;

- A receipt, certifying payment of the application fee.

The issuance of a permanent residence permit costs 85 UAH, a temporary residence permit – 34 UAH. The fee for obtaining a work permit is set at the rate of 170 UAH.