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Doing business and investing in Ukraine

2013 Edition Partner’s letter Contents

I am very pleased to present the 2013 edition of our guide: Doing Business and 1 Country profile and investment climate 1 5.10 audits 20 Investing in Ukraine. The guide is based on the laws as at 31 July 2013 and 5.11 Administrative issues 20 information made available through mid-July 2013. We prepared this new edition 1.1 Introduction 2 due to the number of significant changes that have been implemented since the 1.2 Government structure 2 6 Business entities 21 publication of our 2011 edition. 1.3 Legal system 2 6.1 Legal framework 22 1.4 People 2 6.2 Forms of business organisations 22 Ukraine, like many other countries in the region and around the globe today, 1.5 Economy 3 6.3 Net asset requirement 22 continues to face exceptional economic challenges. So far the country has weathered the storm better than many commentators had expected. Clearly, its 1.6 Foreign 4 6.4 Limited liability companies 22 geographic position and natural resources, as well as the ‘human factor’, have all 2 Business environment 5 6.5 Joint stock companies 23 played important roles in this achievement. Ukraine’s proximity to both the 6.6 Foreign directors 24 2.1 Business climate 6 European Union and Russia, the sheer quantity of its consumers (nearly 46 million) 6.7 Partnerships and joint activities 24 and the physical size of the country make it an excellent location for businesses to 2.2 Economic development plans 6 6.8 Branches 25 expand both locally and regionally. The 2012 UEFA European Football 2.3 zones 7 6.9 Representative offices 25 Championship was a success, and investment for that event has significantly 2.4 European Union, NATO, WTO 7 improved infrastructure (roads, railway, and airports). 6.10 Brief comparison of JSCs and LLCs 26 2.5 International agreements 7 2.6 Property market 8 7 Labour relations and social security 27 Free trade with the EU continues to be discussed, and there remains hope that this Bryan Disher may be signed by the year’s end. This would clearly increase the attractiveness of 2.7 Foreign investor associations 8 7.1 Labour relations and the Labour Code 28 Managing Partner Ukraine as an investment destination. Ukraine’s ratings in the World Bank ease of 3 Foreign investment and privatisation 9 7.2 Working conditions 28 doing business index, while still lower than we would hope, continues to improve. 7.3 Social security system 29 3.1 Foreign investment 10 The Ukrainian Government appears committed to improving the country’s 7.4 Foreign personnel 30 performance in the World Bank paying survey, which should also continue to 3.2 Simplification of permit process 10 improve Ukraine’s attractiveness as an investment location. 3.3 Privatisation 11 8 Accounting and audit requirements 31 8.1 Accounting 32 For over 20 years PwC has been advising companies and individuals on how to do 4 Banking, finance and insurance 12 8.2 Chart of accounts 32 business in Ukraine. It is a challenging market, but it can be very rewarding. We 4.1 Banking system 13 8.3 Audit requirements 32 draw on our significant experience in the local market, as well as the strength of our 4.2 Foreign currency rules 13 international network to help to build value, manage risks and improve the 4.3 Specialised financial institutions 14 9 system and administration 34 performance of your business in Ukraine. Apart from our vast experience in serving 4.4 Investment institutions 14 9.1 Tax system 35 multinational and blue chip Ukrainian companies, we have a particular focus on middle market and private clients with dedicated teams serving these segments. 4.5 Capital markets 14 9.2 Direct and burden 35 4.6 Insurance 14 9.3 Principal taxes 35 A brief guide such as this cannot answer all your questions. However, it will provide 5 Importing and exporting 15 9.4 Legislative framework 36 you with some valuable insight into the Ukrainian market and make you better 9.5 Tax treaties 36 prepared to meet the challenges ahead. 5.1 Trends in customs policy 16 9.6 Administration of the tax system 36 5.2 Import restrictions 16 9.7 Registration requirements 36 We look forward to hearing from you and having the opportunity to work with you 5.3 Customs duties 16 in the future. 9.8 Tax returns and payments 36 5.4 Temporary import relief 17 9.9 Assessments 37 5.5 Customs duties incentives 17 August 2013 9.10 Appeals 37 5.6 Customs control 17 9.11 Withholding taxes 37 www.pwc.com/ua 5.7 Warehousing and storage 18 9.12 Tax audits 38 5.8 19 9.13 Penalties 38 5.9 Protection of intellectual property rights 20 9.14 Tax ruling 39

Doing business and investing in Ukraine iii 10 Taxation of corporations 40 Office locations in Ukraine 10.1 system 41 10.2 Incentives and special tax regimes 42 PwC’s offices in Ukraine are located at the 10.3 Gross income 43 following addresses: 10.4 Deductibility of expenses 44 10.5 Special tax rules 46 Kyiv office 10.6 rules 47 75 Zhylyanska Street 10.7 Transactions with land 48 Kyiv, 01032 10.8 Other taxes 48 Country profile and Tel.: +380 44 490 6777 11 Taxation of individuals 50 Fax: +340 44 490 6738 11.1 Territoriality and residence 51 investment climate 11.2 Private entrepreneurs 52 Donetsk office 11.3 Gross income 52 51A Artyoma Street 11.4 Tax-exempt income 54 Donetsk, 83008 11.5 Deductions 54 Tel.: +380 62 202 8190 11.6 Foreign tax credits 54 Fax: +340 62 202 8191 11.7 Taxation of non-residents 55 11.8 Tax compliance 55 Dnipropetrovsk office 12 Value-added tax 56 1A K. Marks Avenue Dnipropetrovsk 49005 12.1 Introduction 57 Investor considerations • Ukrainian parliamentary elections Tel.: + 380 56 733 5010 were held on 28 October 2012.The 12.2 Taxable activities 57 • Ukraine has a population of 45.5 Fax: + 380 56 733 5015 Party of Regions won 185 seats (out of million people. The population has 12.3 Zero-rating 57 the total 445 seats) in the Ukrainian 12.4 Exempt supplies 58 decreased by 6% since 2001. Lviv office ParliamentImage and rule in a minority 12.5 Tax base 58 • Real GDP remained flat in 2012 coalition government. 72 Heroiv UPA Street (growth of 0.2% compared to 5.2% 12.6 Input tax credits 58 • Hints for business visitors may be Lviv, 79015 in 2011). The first six months of 2013 12.7 VAT compliance 58 found in Appendix A. Tel./Fax: +380 32 242 5305 have also been flat (or negative). 13 Introduction to PwC 61 • Nominal GDP for 2012 was USD 176.3 PwC in Ukraine 62 billion in comparison with USD 163.4 Assurance services 62 billion in 2011 (i.e. 8% growth). Advisory services 63 • The IMF and the Ukrainian Tax and legal services 63 government continue to discuss a Key contacts 65 new bailout program of up to USD 15 billion. Appendices 66 Appendix A – Hints for business visitors 66 Appendix B – Useful sources of information 67 Appendix C – Withholding taxes as at 1 July 2013 68 Appendix D – Selected customs duties and tax rates 71 Appendix E – Short form Chart of Accounts under Decree No. 291 72

Laws and regulations change constantly. For updated information, please check our website: www.pwc.com/ua

Doing business and investing in Ukraine 1 1.1 Introduction the members of the Cabinet of Ministers region, plus Kyiv and Sevastopol), Religion Ukraine, located in the heart of Eastern based on nominations from the prime interregional courts of appeal and the The majority of the population are Europe and occupying a land area of minister. The current government is not Highest Commercial Court of Ukraine. members of one of the branches of the 603,700 sq km, is the second largest expected to change until the 2015 Orthodox Church. National holidays • The administrative court system country in Europe after Russia. It is presidential elections. include Christmas (January 7), Easter decides disputes involving state bordered by Poland, Slovakia, Hungary, and Holy Trinity Day. Around 8% of the authorities. Its structure mirrors the Moldova and Romania to the west, Administratively, Ukraine is composed population are Catholic, while 4% are commercial court system. Russia to the north-east, Belarus to the of 24 regions and the Autonomous Muslim (and mostly reside in the north and the Black Sea and the Azov Republic of Crimea. The cities of Kyiv Autonomous Republic of Crimea). Under the Constitution of Ukraine, the Sea to the south. and Sevastopol have special legal status. Supreme Court heads the judicial system Language and has the power to review decisions of Ukraine declared independence on 24 1.3 Legal system The official language is Ukrainian, all three branches of the court system. August 1991 following the dissolution of Ukraine is a civil law country. although a majority of the population is However, as a result of 2010 judicial the Soviet Union. On 1 December 1991, bilingual, speaking both Ukrainian and reform, the powers of this Court have 90.3% of voters approved a referendum The constitution, adopted in June 1996, Russian fluently. The 2012 law ‘On the been significantly diminished. The formalising independence from the lays out the structure of the national principles of the state language policy’ highest courts of all three branches have Soviet Union. On 25 December 1991 government along with its powers and gives Russian or any other minority now become the courts of last instances Ukraine’s independence was officially functions. The powers of government language the status of a ‘regional and have the right to admit cases for recognised by the international are divided into three branches - language’ in administrative districts reconsideration to the Supreme Court at community. legislative, executive and judicial. where the percentage of representatives their sole discretion. of national minorities exceeds 10% of 1.2 Government structure Laws adopted by the parliament are the total population. As an alternative to litigation, Ukraine The head of state is the president. He/ forwarded to the president for signing. allows for third-party arbitration. she is elected by popular vote for a Technically, the president should sign English is also used in business, although Ukrainian law also allows foreign five-year term. In February 2010, Victor the law within a 15-day period, but this not extensively outside of Kyiv. Many companies to include international Yanukovych (from the Party of Regions) does not always happen in practice. The state agencies websites have an English arbitration clauses in their contracts was elected President of Ukraine. president has also the right to veto language version (see Appendix B). with Ukrainian entities. legislation within the 15-day period, but Legislative power is exercised by a the veto can be overridden by a 2/3 Living standards 1.4 People single-chamber parliament called the majority of the parliament. Per capita income has been rising, but Verkhovna Rada, which is comprised of average wages remain low compared to Population 450 deputies who are elected every five The Constitutional Court of Ukraine is European standards. The official Ukraine’s population was estimated at years. According to the latest the sole organ of constitutional average monthly salary for employees in 45.5 million people as of June 2013, amendments, half of the parliament is jurisdiction in Ukraine. The 18 judges Ukraine was UAH 3,380 (USD 423) in which is 6% lower than the population elected by party-list proportional are appointed for a one-time, nine-year June 2013. Average salaries in Kyiv were recorded in the 2001 census. Five cities representation and the other half under term. The president, the parliament and 50% higher than in the rest of the have a population close to or exceeding the majority system in single-member the Congress of Ukrainian Judges each country. Many companies continue the one million people, including the capital electoral districts. The last appoint six judges. Those judges then practice of paying salaries ‘in envelopes’, Kyiv with 2.8 million people. parliamentary elections were held in select the chief judge from among so official numbers may not accurately October 2012. 445 deputies were themselves. reflect the actual level of personal Ukraine does not allow dual citizenship elected to the Ukrainian Parliament (the income. although in practice this is not Central Election Committee declared it The court system in Ukraine has three uncommon. It is estimated that Unemployment impossible to determine the results of branches: Despite these negative statistics, Ukrainian nationals make up 78% of the In June 2013 the official average the elections in five single-member Ukraine has developed an affluent • The general court system decides population, while Russian nationals unemployment rate was about 8%, but electoral districts). The Party of Regions middle class. Minimum rents in Kyiv are civil disputes and criminal cases. The account for 17%. More than two-thirds the actual rate is likely to be higher in formed a minority coalition between USD 300-400 per month. structure consists of local district of the population live in urban areas. some regions (and lower in Kyiv). government. Restaurant prices in Kyiv are courts, regional courts of appeal Females constitute 54% of the approaching, if not exceeding, those of and the Highest Specialised Court of population, which is likely to cause 1.5 Economy The highest executive body is the major European cities. Ukraine. demographic problems in the future. The Ukrainian economy grew at an Cabinet of Ministers. The prime minister annual rate of over 7% from 2000 to is appointed by the president upon the • The commercial court system Ukraine has a sizeable unofficial, 2008, and nominal GDP reached UAH parliament’s consent. The current prime generally resolves business disputes underground economy that accounts for 950 billion (USD 180 billion). However, minister is Mykola Azarov, also from the between legal entities. It consists of up to 30-40% of GDP. in the fall of 2008, the global economic Party of Regions. The president appoints local commercial courts (one in each crisis resulted in a contraction of

2 Doing business and investing in Ukraine 3 Ukrainian industrial production, a In 2011, Ukraine started implementing a devaluation of the national currency, comprehensive transport strategy to and a severe credit crunch. GDP develop and elaborate sub-sector contracted by approximately 15% in transport programmes, which is to be 2009 but then grew at an average of 5% completed by 2020. A road safety p.a. in 2010 and 2011 before a further strategy was adopted in May 2011, and a recession in the second half of 2012. revised Air Code entered into force in September 2011. For the whole year 2012, the Ukrainian real GDP grew by only 0.2% while the Communications inflation rate amounted to 0.6% in 2012 The mobile cellular telephone system Business environment (compared to 8% in 2011). The real GDP has been rapidly expanding in recent for the first quarter of 2013 contracted years. The three main mobile operators for about 1%, and the inflation rate is – MTS, KyivStar, Life:) – have a total of less than 1% annualised. more than 54 million subscribers. There are over 17 million internet users. During 2013 the IMF mission has visited Ukraine several times to discuss 1.6 Foreign trade economic policies that could be Ukraine’s main products are supported by a new stand-by metals and agriculture products arrangement in the amount of SDR 10 (together accounting for 40% of billion (USD 15.4 billion). Important exports). The main items imported are policy issues regarding the reduction of mineral fuel, petroleum and petroleum the fiscal and current account deficits distillation products, machines and and reformation of the energy and equipment, and chemicals. Investor considerations • There was a dramatic drop in the real banking sectors remained unresolved estate market during the 2008-2009 • Ukraine remains a challenging place in and further discussion is forthcoming. CIS and European countries account for economic crisis (prices declined by which to do business. There is no certainty that this stand-by more than 70% of Ukraine’s foreign about 50%). arrangement will be finalised in the trade. • Many investment opportunities exist, • In 2012, Ukraine (together with near future. but Ukraine is still developing the legal Poland) co-hosted the Euro 2012 According to Doing Business 2013, and institutional frameworks required Football Championship. This event Transport published by the World Bank Group, to fully support international business. attracted about 1.8 million visitors. Ukraine has a well-developed Ukraine stands at 145 in the ranking of • Ukraine joined the WTO in 2008 The estimated investments in transportation infrastructure and is 185 economies on the ease of trading and became a member of the Energy infrastructure and other preparations readily accessible by land and air. across borders. The indicator is based on Community in 2011. amounted to USD 5 billion. the number of documents required and A significant boost in the country’s the time and cost to export and import. • Ukraine has a comprehensive free- transportation infrastructure was with Russia/CIS noticed during preparation for a major countries. continental sport event, the UEFA Euro • In 2011, negotiations with the EU on 2012. There are now intercity trains an Association Agreement, including between the Euro 2012 cities (Kyiv, Lviv, a Deep and Comprehensive Free Kharkiv, and Donetsk). Trade Area, were concluded. It may be signed by the end of 2013. Ukraine is Ukraine has 22,000 kilometres of also discussing a Customs Union with railway, 169,477 kilometres of Russia. highways, 4,400 kilometres of navigable waterways and 16 airports that are open to commercial air traffic. Most international flights go to Boryspil International Airport, about 29 km southeast of Kyiv, or Zhulyany Airport (near the city centre).

4 Doing business and investing in Ukraine 5 2.1 Business climate • Restrictions on deductions mean the between Ukraine and Europe. 2.3 Free trade zones Since becoming independent in 1991, effective corporate is closer to On 30 July 2012, Ukraine ratified an Ukraine has struggled to shift from a 22%. The World Bank ranked Ukraine 137 out agreement establishing a free trade zone centrally-planned economy to a market of 185 countries in its Ease of Doing in the Commonwealth of Independent • Social security contributions on environment. Business index in 2013, which is a 15 States (CIS) countries - Russia, Ukraine, employee income are significant. places improvement from the year Belarus, Kazakhstan, Armenia, In 2013, employer contributions The economy grew at an annual rate of before. Ukraine still compares Kyrgyzstan, Moldova, Tajikistan and to various funds exceeded 36% over 7% over the period from 2000 to unfavourably with its neighbouring Uzbekistan. The government expects of employees’ earnings. The 2008. This growth was fuelled by strong countries: Poland – 55, Belarus – 58, the this FTA will help increase trade earnings base, which is subject to domestic demand and solid consumer Russian Federation – 112. turnover between Ukraine and the CIS social contributions, is capped at and investor confidence. The economic countries by 35% in the medium term. UAH 19,499 (approximately USD and financial crisis that unfolded in The indication of the negative trends is 2,400) per individual per month, 2008 shook investor confidence and that the European Business Association The mentioned FTA has a number of and will increase to UAH 20,706 stalled the inflow of capital. Ukraine assessed Ukraine’s investment climate exceptions in respect of goods, the (approximately USD 2,600) in remained in recession throughout 2009, and gave it a rating of 2.12 out of 5 in 4Q import and export of which is critical for December 2013. Therefore, it but experienced a recovery in 2010 and 2012, “the lowest score for four years.” Ukraine. They include preservation of does not impact higher levels of 2011 as global conditions slightly This index is a perception-based export on ferroalloys, scrap metal compensation (see Chapter 7.3 for improved. The recovery continued in indicator of over 100 Ukrainian and and sunflower seeds as envisaged by the more information). 2012, but at a slower pace. Growth in international business leaders in the agreements with WTO, and a 50% sugar Ukraine is expected to be close to zero • Due to VAT refund constraints, VAT country. import duty. A 30% Russian gas export in 2013. can become a significant cost to doing duty is valid for Ukraine. business (although the introduction The European Commission emphasises Ukraine allows foreigners to purchase of an automatic VAT refund system for the necessity for Ukraine to improve its The FTA between Ukraine and EFTA - businesses and property (with the exporters has alleviated this problem business climate. Pressure and the European Free Trade Association exception of agricultural land), to to a certain extent). harassment of businesses by various (Iceland, Lichtenstein, Switzerland and particularly with respect to emergency repatriate revenue and profits, and to authorities and law enforcement bodies, Norway) came into force on 1 June situations, technical cooperation, receive compensation if their property is Presently, the EU cooperates with corruption, and a general deficiency of 2012. scientific studies and military and nationalised. Reform is still needed as Ukraine within its ‘neighbourhood rule of law are major obstacles to doing defence reforms. complex laws/regulations and weak policy’. After 21 rounds of negotiations business in Ukraine. Ukraine is also a party to FTAs with enforcement of contracts by the courts over the EU-Ukraine Association Georgia, Macedonia, Montenegro and is The General Council of the World Trade hinder foreign direct investment. At the Agreement (AA), both parties finalised 2.2 Economic development plans in the process of negotiating such Organisation approved Ukraine’s same time, Ukraine is a party to over 40 the negotiation process on 19 December In March 2013, the Cabinet of Ministers arrangements with Canada, Turkey, accession on 5 February 2008, and bilateral agreements on cooperation and 2011. The signing of the EU-Ukraine of Ukraine published the State Economic Syria, Serbia, Singapore, Morocco and Ukraine became the WTO’s 152nd mutual protection of investments, which Political and Free Trade Agreement Stimulation Program for 2013-2014. It Israel (as well as the EU agreement member on 16 May 2008. provide additional protection for foreign (FTA) was frozen in December 2011, proposes developing priority industries, mentioned above). investments, including internationally but, according to the European promoting positive structural changes in 2.5 International agreements recognised dispute resolution Commissioner for Enlargement and the economy, diversifying energy 2.4 European Union, NATO, WTO Ukraine has established diplomatic mechanisms (e.g. ICSID). European Neighbourhood Policy, if sources, and reducing the energy In 2005, former President Victor relations with over 170 countries. Ukraine achieves tangible progress on intensity of production. Yushchenko stated that membership in There was much interest in mergers & the benchmarks set by the European the EU was a strategic goal of his foreign Ukraine is a member of the United acquisitions (M&A) between 2004 and Foreign Affairs Council, the AA The program stipulates the involvement policy and current President Victor Nations, the Council of Europe, the 2008. However, the volume of (including the FTA) could be signed of banks to finance priority projects (i.e. Yanukovych has confirmed his International Monetary Fund (IMF), the transactions has declined due to “possibly by the time of the Eastern import substitution, energy efficiency commitment to the EU. In practice, World Bank, the European Bank for economic uncertainties following the Partnership Summit in Vilnius in projects), to take part in the selection of Ukraine maintains especially close ties Reconstruction and Development global economic crisis, difficulties in November 2013”. projects that will get state support with Russia (including energy (EBRD), the World Trade Organisation defining a fair price for transactions and (including loan guarantees or interest dependence) and balancing this (WTO) as well as a number of other anxiety over country-specific risks. The FTA is an integral part of the AA. In rate compensation), and to oversee the relationship affects the speed at which international organisations. It also July 2012, the final stage of initialling of proper use of the allocated funds. It is Ukraine can move toward integration cooperates with the Organisation for At first glance, taxes appear quite low at the AA was reached when the sides not clear how this program will be with the EU. Economic Cooperation and Develo- 19% (16% – starting from 1 January finished editing and coordinating implemented or what its impact will be pment (OECD), but is not a member. 2014) for corporations and 15-17% for approvals of the economic part of the AA on the economy. Ukraine also maintains a close individuals, while value-added tax (FTA). The provisions of the economic relationship with the North Atlantic In addition, Ukraine has concluded (VAT) is 20% (17% – starting from 1 part of the AA are set to improve the Treaty Organisation (NATO), numerous bilateral agreements January 2014). However, there are investment climate in Ukraine and to concerning trade, the avoidance of certain issues: help develop business cooperation

6 Doing business and investing in Ukraine 7 , and mutual guarantees of investments.

2.6 Property market Foreign citizens and legal entities have the right to own apartments, houses and other facilities. Ownership of non- agricultural land is also possible, although legal and regulatory restrictions can significantly complicate the process. Foreign investment

Ukraine’s property markets remain depressed, though there are signs of and privatisation some stabilisation. The commercial property market has been characterised by relatively stable rental rates and slightly decreased vacancy rates. The rent for Class A office buildings peaked in 2008 at over USD 70 per square metre and has since fallen to an average of USD 25-30 per square metre, depending on the region.

Residential property has yet to recover Investor considerations from the housing bubble, when prices • There are very few restrictions on increased by 550% between 2002 and foreign investment. 2007. • Total FDI at 1 April 2013 was USD 55.7 2.7 Foreign investor associations billion (USD 1,222 per capita). There are a number of foreign business • The Ukrainian legal system is still chambers in Ukraine including the evolving. American Chamber of Commerce (www. chamber.ua), the European Business • Ukraine has a number of foreign Association (www.eba.com.ua). There currency exchange restrictions, but are also business associations for these should not create unmanageable German, British and Japanese problems and are gradually being businesses, among others. removed. • Privatisation continues to be on the Around 28 domestic and foreign groups government agenda. (originating from the USA, UK, Austria, Poland, Russia, Turkey, Japan and other countries) make up the Domestic and Foreign Investors Advisory Council (DFIAC) – an advisory organisation under the President of Ukraine.

Contact details are provided in Appendix B.

8 Doing business and investing in Ukraine 9 3.1 Foreign investment Regulatory legislation Restrictions on foreign investment A ‘silent consent’ principle has been • The state has given up majority Ukraine continues to struggle to build a Foreign companies are restricted from established for obtaining most, but not ownership in 90% of the industrial Investment climate legal system that facilitates easy owning agricultural land, all, permits. If an application for a enterprises it owned in 1991. Millions The Ukrainian authorities regularly interaction with the international manufacturing carrier rockets, and permit and the respective supporting of Ukrainian citizens have become declare their support for foreign community. Many issues are not dealt some publishing activities. documents have been properly shareholders and more than 60% of investment, and the broader public is with by a single piece of legislation, so it submitted and the authorities fail to Ukraine's labour force work for private well disposed to it. may be necessary to piece several laws Investment incentives respond within the term established by enterprises. together to develop a full understanding The Tax Code has introduced a number law, the applicant is allowed to pursue • In many cases, the new generation of In general, the regulatory framework for of an issue (although the 2011 Tax Code of tax incentives for a range of investors the activities as if the permit had been investment fund managers, who have the establishment and operation of is an exception). The various laws may (see Chapters 9-12 for detailed issued. Nevertheless, obtaining a permit become major shareholders via the businesses in Ukraine by foreign also be ambiguous or contradictory, information). is still advisable. privatisation program, are putting investors is similar to that for domestic which further complicates matters. The in place new enterprise directors investors (apart from the ownership of following major pieces of legislation – in Foreign exchange issues In Ukraine, certain types of activities and managers and introducing new agricultural land). addition to the Tax Code – affect foreign Foreign currency turnover is regulated are subject to obtaining a special state management techniques. investment into Ukraine: by the 1993 Cabinet of Ministers decree permit document/licence. The list of As a general rule, investment permits On the System of Currency Regulation activities which have to be licensed is • State budget support for unprofitable • The law On Foreign Investment are not required, but all enterprises and Currency Control, as well as a being gradually reduced. There are less enterprises has been greatly reduced. Regime sets out in broad terms must be established according to the number of implementation rules issued than 60 types of activities (groups of Ukraine's policy on inward investment form and procedure prescribed by law by the National Bank of Ukraine (NBU). related activities) that are subject to Privatisation prospects and the rights and obligations of and registered with the appropriate A number of foreign currency licensing. A revised State Privatisation Programme foreign investors. government agencies. Foreign investors transactions may be undertaken only if (SPP) for 2012-2014 was adopted by the are generally not required to seek • The Civil Code regulates civil an individual licence has been obtained Licences are issued for an indefinite Ukrainian parliament in December special approval for foreign direct relationships, the establishment of from the NBU (see Chapter 4.2). period unless a limited term of validity 2011. The implementation of this investments, but may register with the legal entities, and personal property has been established by the government programme is aimed at concluding the state authorities. Registration of a rights. Repatriation of capital and earnings for a particular type of licence. Even in privatisation process in Ukraine. foreign investment may ease the Foreign investors are entitled to such cases, the term of validity will be • The Commercial Code (enacted restrictions on the remittance of repatriate profit, income or other funds not less than five years. The SPP introduced a new approach on the same day as the Civil Code) dividends abroad. relating to investments without any – any state enterprise may be privatised governs business relationships. The restrictions, provided the investment 3.3 Privatisation unless it is on the special list of strategic Commercial Code is intended to Unfortunately, many investors still was made in accordance with applicable enterprises that may not be privatised. regulate issues that are not dealt with encounter difficulties at a practical level. legislation and after the payment of Background The number of enterprises in this in the Civil Code, although in practice These do not relate specifically to the applicable taxes. Foreign investors are The vast majority of state-owned restricted group is going to be reduced there is some overlap. issue of foreign ownership or guaranteed the right to prompt and enterprises were privatised by 2004, but from around 1500 to less than 300. investment, but rather to arbitrarily • The law On Securities and Stock unimpeded repatriation of profits. a number of significant enterprises enforced administrative hurdles and/or Market governs the public issuance remain in state ownership. Therefore, the SPF is entitled to sell, random delays. and trading of securities. Guarantees and rights among other things, key energy and oil/ Foreign investments duly registered A few major privatisations have been gas transportation enterprises, TV and • The law On Protection of Economic As at 1 July 2013 the total stock of FDI in with the state authorities are not subject conducted since the privatisation rush of radio transmission centres, publishing Competition restricts business Ukraine reached USD 55.3 billion (or to nationalisation, expropriation, 2004. The most prominent recent houses, distilleries, sports complexes, monopolies. The majority of mergers USD 1,222 per capita), according to the requisition or any other measure of privatisation involved Ukrtelekom pools and stadiums (with certain and acquisitions in Ukraine are likely State Statistics Service. This represents similar effect, except when it is in the (Ukraine's monopoly in the fixed-line exceptions). to require pre-approval from the Anti- a 9.7% year-on-year increase. Ukraine’s public interest. In such cases, communication market), which was monopoly Committee. major investors included Cyprus (31.8% compensation must be provided to the finally privatised in 2011. In 2012, most In accordance with the new law On the of total FDI), Germany (11%), the • The law On Protection from Unfair investor based on the market value of regional gas distribution companies Peculiarities of the Privatisation of Coal Netherlands (9.4%), Russia (6.8%), and Competition aims to protect business the property. were privatised, and the State Property Mines adopted in April 2012, the Austria (6.1%). Overall, the level of FDI entities and consumers from unfair Fund (SPF) launched the privatisation of privatisation of coal mines has been inflows remains significantly lower than competition. 3.2 Simplification of permit heating plants. announced as a priority for 2013. pre crisis level, and the 2007 peak for process • The Environmental Protection Law FDI inflows is not expected to be Since late 2009, the procedure for Legacy of privatisation During 2013-2014 the government is establishes a framework for pollution exceeded until 2014 (at least). obtaining permits has been simplified, The impact of Ukraine's privatisation planning to gradually shift from charges to be imposed on any legal although in practice, difficulties remain. can be assessed in terms of the following privatisation procedures to the efficient entity that discharges contaminants strategic changes in Ukraine's economy: management of the remaining state into the environment. property.

10 Doing business and investing in Ukraine 11 4.1 Banking system Though money market liquidity levels As at 1 July 2013, key provisions of Ukraine has a two-tier banking system. were very volatile during 2010-2012, Ukraine's currency exchange control The National Bank of Ukraine (NBU) is measures undertaken by the regulations are: Ukraine's central bank. Commercial government and the NBU ensured a • Payments under foreign trade banks, including the state-owned stable exchange rate of the Ukrainian contracts between a resident and a Export-Import Bank of Ukraine hryvnia against major foreign non-resident entity may be either in (Ukreximbank) and the State Savings currencies. foreign currency or in UAH. Bank of Ukraine (Oschadbank), operate under the authorisation and supervision Banking sector • Payments in foreign currencies of the NBU. Three private banks became As at 1 July 2013, 178 banks were between residents in the territory of Banking, finance and state-owned in 2009 after recapitali- registered and granted licences by the Ukraine are generally prohibited (a sation by the government to support NBU to perform banking transactions in specific licence is required). their liquidity. Ukraine. insurance • Salaries to Ukrainian staff must be paid in UAH (but expatriate employees National Bank of Ukraine The Ukrainian banking sector is highly can be paid in hard currency). According to the National Bank Law concentrated. According to 2012 data (1999), the primary function of the NBU published by the NBU, about 53% of the • Foreign loans must be registered with is ensuring the stability of the national banking sector's total assets were held the NBU before funds are remitted to currency of Ukraine – hryvnia (UAH). by the ten largest banks. As of 1 July Ukraine. There is a maximum interest Other NBU objectives are to ensure the 2013, the total loans granted by banks rate (including other charges) that stability of the banking system and amounted to UAH 833 billion (USD 104 may be applied to foreign currency sustainability of economic growth, as billion) while their total statutory loans obtained from non-residents well as to support the economic policy of capital amounted to UAH 176 billion (approximately 11% p.a. – refer the government, provided it does not (USD 22 billion). At least 51 bank in below). Investor considerations • Over 2012 there was significant prevent the NBU from carrying out its Ukraine had some foreign capital, of • The maximum allowable interest rates divestment of foreign institutions from primary function. which 21 were fully owned from abroad. • A full range of traditional banking for foreign fixed rate loans in hard the Ukrainian banking sector, as well Ukrainian banks with foreign capital services is available in Ukraine, but currency is 9.8% p.a. for loans of up to as a decrease in the number of banks. The highest governing body of the NBU (including four of the ten largest) intermediation costs remain high. 1 year; 10% p.a. for loans of 1-3 years is a council consisting of 15 members. account for approximately 35% of the • Consumer credit facilities are at and 11% p.a. for loans of over 3 years. • Branches of foreign banks are Seven members are appointed by the total statutory capital of Ukrainian minimal levels due to the economic For loans with floating interest rates, technically permitted to enter parliament and seven by the president. banks. slowdown. the maximum allowable interest rate Ukraine following the WTO accession The governor (who acts ex-officio as the is three months USD LIBOR plus 7.5% document from 2008. • There are strict currency regulations fifteenth member) is nominated by the Banks are required to obtain a licence p.a. in the country (including compulsory president and appointed by the from the NBU for operations. The NBU • Non-resident insurance companies conversion of 50% of currency parliament. The council is responsible has established requirements for banks • Proceeds from exports must be are entitled to open branches as well; earnings and a ‘90 day rule’ for foreign for developing the principles of in respect of minimum statutory capital, credited to the exporter's Ukrainian however, the scope of their permitted transactions). Ukraine's monetary policy. minimum regulatory capital and capital bank account within 90 days activities is limited. adequacy. The minimum regulatory (potentially to be increased to 180 • Prior to the 2008 crisis there had been Banking environment capital requirement is UAH 120 million days from 20 November 2013) from a significant level of international The Ukrainian banks were seriously (approximately USD 15 million). the date of customs clearance (for investment in the banking and affected by the 2008 global financial goods) or the date of service delivery. insurance sectors, but there has been a crisis. Historically characterised by a Since 2012, banks have been required to Similarly, goods subject to prepayment recent trend to exit the country. number of significant weaknesses, at the prepare financial statements in must be imported and cleared through outset of financial crisis and periodically accordance with International Financial customs within 90 days of payment. thereafter, Ukrainian banks have Reporting Standards (IFRS). Failure to do so results in a fine of suffered from a lack of liquidity. 0.3% of the amount due or paid for 4.2 Foreign currency rules each day of delay. Both the borrowers of Ukrainian banks Foreign currency operations are • 50% of hard currency export proceeds and market for many types of collateral, regulated by the 1993 Cabinet of must be converted into UAH by the especially real estate, have been Ministers decree, On the System of exporter’s bank on the interbank severely affected by the financial and Currency Regulation and Currency currency exchange market within 1 economic environment, resulting in a Control, as well as a number of working day of receipt. reduced ability to repay the amounts implementing rules issued by the NBU. owed together with a low level of liquidity for certain types of assets.

12 Doing business and investing in Ukraine 13 • Payments by Ukrainian business and re-investments (corporate profits premiums. While a broad range of entities for services rendered by ). They flourished in insurance services is available, over 30% non-residents and royalties paid to 2006-2007, but the 75% drop in the of insurance services are related to car non-residents for amounts exceeding Ukrainian stock market in 2008 led to a insurance. EUR 100,000 (annually) require drastic decrease in their popularity with confirmation from the Foreign Markets investors. The Ukrainian insurance market is Monitoring Centre (FMMC) that the highly concentrated. The ten largest life fee for the services does not exceed Asset management companies, licensed insurance companies represent about market prices. This process cannot by the State Securities and Stock Market 90% of gross premiums written in the be taken lightly as no payment will Commission of Ukraine, are permitted area of life insurance while the top be permitted if the FMMC rejects an to manage assets of both corporate and twenty non-life insurance companies Importing and exporting application. non-governmental pension funds. An are responsible for over 50% of gross investment fund, when created and premiums written in the area of non-life Both Ukrainian companies and registered with the State Securities and insurance. individuals are required to obtain a Stock Market Commission of Ukraine, licence from the NBU for a number of issues securities (investment certificates The market is regulated by the State transactions, including the following: or shares) to investors. The money from Financial Markets Commission, and the investors is used to invest in the initiatives to strengthen industry • cash investments abroad for the securities of other issuers in practices are ongoing. The activity of acquisition of fixed assets, intangible participatory interest, real estate, bank foreign insurance companies in Ukraine assets, corporate rights, securities and metals and other assets, as permitted by is limited to re-insurance and certain derivatives the legislation. types of insurance activity specifically • purchase of Ukrainian securities from stated in the law. non-residents (however, a licence is 4.5 Capital markets not required if payments are made Capital market transactions in securities The insurance sector most affected by Investor considerations • The customs authorities often through a Ukrainian securities trader are regulated primarily by the law on the economic crisis was that providing scrutinise customs values and the • Ukraine joined the World Trade who obtained a general licence from Securities and the Stock Market and the insurance to individuals. Nonetheless, a classification of imported goods and Organisation (WTO) in 2008. the NBU [a bank for example]), and law On State Regulation of the Stock number of new insurance companies conduct post-entry customs audits. Market in Ukraine. The law regulating (both in the life and non-life insurance • Ukrainian customs valuation rules This can lead to delays and disputes. • transfer of funds to bank accounts joint stock company activity was actively fields) were registered in 2012. There generally comply with WTO rules. opened abroad. • The new Customs Code and a number amended throughout 2012 and 2013. are significant restrictions on the ability Ukraine’s customs procedures are of new regulations have come into of Ukrainian residents to make based on the Kyoto Convention on the 4.3 Specialised financial force in June 2012. All transactions on the stock market are insurance payments abroad. Simplification and Harmonisation of institutions under the control of the State Securities Customs Procedures. • During 2013 the Tax and Customs The Ukraine leasing market had been Commission of Ukraine. structures have merged into the growing until 2009. • Ukraine has a free-trade agreement Ministry of Revenues and Duties. with Georgia, Macedonia, Current currency control regulations According to information published by Montenegro, CIS and EFTA countries and cross-border investments rules, the Ukrainian Union of Lessors, during and is negotiating another one coupled with the current economic 2012 and 2013 the number of leasing with the EU and a number of other situation, discourage foreign investors operations continued to shrink. countries. from making investments in Ukraine through the stock exchange. • Goods imported into Ukraine are Transport, farm machinery, and subject to customs duties, excise tax (if construction and IT equipment 4.6 Insurance applicable) and value-added tax (VAT constitute the largest part of the leasing Although approximately 420 insurance – 20% in 2013, 17% from 1 January market. companies are currently registered and 2014). operating in Ukraine, the size of the 4.4 Investment institutions insurance market is fairly small and The law On Joint Investment further decreased throughout 2012 and Institutions (Unit and Corporate the first half of 2013. Investment Funds) was enacted in 2001 and provides a framework for the At 1 July 2013 there were over 60 life establishment of mutual investment insurance companies; however, they funds. The investment funds boast an represented only 5.5% of written gross attractive tax regime for investments

14 Doing business and investing in Ukraine 15 5.1 Trends in customs policy food products, military and dual use In practice the valuation issues (due to allow many goods to be imported into 5.4 Temporary import relief Inward processing In recent years, Ukrainian customs goods and equipment, optical aggressive interpretation of the rules by Ukraine duty-free (or with reduced rates Permission for temporary import with Goods imported into Ukraine for regulations have continued evolving polycarbonate for manufacturing disks the customs authorities) can result in of duty), subject to compliance with full conditional exemption from import processing, repair, assembly, etc. enjoy towards greater compliance with used in laser reading systems, and significant delays and disputes. preferential rules of origin. taxes may be issued in a number of cases exemption from import taxes and duties international practice. others. specified by the International (including VAT), provided the finished WTO valuation decisions Ukraine has recently completed the Convention on Temporary Admission products are re-exported from Ukraine In 2008, Ukraine joined the WTO. This 5.3 Customs duties A number of important WTO customs negotiation of a free trade agreement (Istanbul Convention). The list of goods within the period specified by the resulted in a further reduction of import valuation guidelines were implemented with the EU; however, there is no which may be temporarily imported customs authorities (up to 365 days, duties and post-entry audits becoming Classification of goods in the 2012 Customs Code, including: certainty when this agreement will be duty free includes: depending on the product). more frequent. The Ukrainian Classification of Goods in finally signed and come into force (see • Carrier media with recorded computer • goods intended for display or use Foreign Economic Activities (UCG FEA), Chapter 2). Ukrainian importers may import programs should be valued for during exhibitions, fairs, conferences Ukraine is a signatory to major based on the Harmonised Commodity materials for processing (a tax customs based on the value of the and similar events international customs conventions, Description and Coding System (edition Excise tax exemption would be available) with the carrier media (i.e. the cost or value of including the Kyoto Convention on the 2007), is the effective customs Excise tax is payable by manufacturers • professional equipment used by mass release of the finished goods to free the computer program should not be Simplification and Harmonisation of classification system in use in Ukraine. and importers of ethyl alcohol, media or required for making films circulation. Finished goods would be taken into account). Customs Procedures, the International UCG FEA serves as the basis for alcoholic beverages, tobacco and cleared through customs as if they were • containers, pallets, packaging or any Convention on the Harmonised Ukraine's Customs . When • Generally, interest charges under a tobacco products, cars, car bodies, imported into Ukraine. This option is other goods imported in connection Commodity Description and Coding classifying the goods the customs financing agreement entered into by motorbikes, liquefied gas, petrol, diesel suitable where the duty rate for the with commercial transactions System and the Istanbul Convention on authorities generally follow the World the buyer and related to the purchase fuel, and certain other oil products. finished products is lower than for the Temporary Admission. Customs Organisation’s classification of the imported goods should not be Rates of excise tax may be ad valorem, • transport vehicles used for moving imported materials. approaches. regarded as part of the customs value. specific, or combination of both. The passengers and goods across the In June 2012, Ukraine implemented a list of selected rates can be found in Ukrainian border During processing operations the new Customs Code. The new Code Valuation rules Tariff rates Appendix D. Ukrainian importer may use Ukrainian • aircrafts imported by the Ukrainian introduced many ‘innovations’, such as Ukrainian customs valuation rules There are two rates of import duty raw materials and then import airline companies under operational an institute of Authorised Economic generally comply with the Agreement on under the Customs Tariff: Import VAT respective amount of analogous raw lease agreements (this exemption is Operators (AEO), updated procedures of Implementation of Article VII of the VAT is imposed on imported goods at a materials with exemption from import • Reduced duty rates apply to goods available under the Customs Code customs valuation and brought other GATT 1994. This means that the rate of 20%, unless expressly exempt taxes (equivalent compensation). originating from all WTO countries only), and other items. significant changes to the customs transaction value should be generally under the Tax Code (will be reduced to and countries that have granted regulations. used as the basis for determining 17% in 2014). The taxable base is either Outward processing Ukraine ‘Most Favoured Nation’ trade Partial exemption from customs duty dutiable value. The customs value the contractual or customs value of the During the import of finished goods into status. and VAT is available for many other Although the legal framework has been should be determined in accordance goods, whichever is higher, plus the Ukraine, a partial exemption from goods that do not qualify for full tax brought into compliance with with one of the six WTO valuation • Full rates of duty apply to goods amount of any customs duty and excise customs payments applies. The amount exemption. The amount of tax paid is international norms, in certain cases methods, which apply in sequential originating from other countries, or tax (if any). of customs duty and VAT payable is computed as 3% of the total amount of administrative practices still remain order. where the country of origin cannot be calculated as the difference between import duty and VAT payable multiplied unchanged. For instance, although the determined. Customs processing fee customs payments on the imported by the number of months of temporary Ukrainian customs authorities have The customs authorities are required to A customs processing fee is applied only finished goods less customs payments import. obtained extensive powers to conduct automatically accept the transaction In practice, the reduced rates and full for overtime and off-location customs on the Ukrainian materials used for post-entry audits to verify compliance value declared by importers with the rates of duty are equal in many cases. clearance of goods at an hourly rate processing abroad (as if these materials Temporary importation is allowed for a with customs and tax legislation, in status of Authorised Economic Operator. Rates of duty may be ad valorem, ranging from EUR 20 to EUR 50 for the were imported into Ukraine). maximum of three years (may be practice, the authorities sometimes specific (in monetary units per unit of work of one customs inspector. extended by the customs authorities). conduct deep customs control during the In other cases, where the customs goods), or a combination of both. There 5.6 Customs control physical entry of goods into Ukraine. authorities doubt the truth or accuracy are seasonal, special, anti-dumping and Payments All goods crossing the border are subject 5.5 Customs duties incentives of the declared value, they need to countervailing duties. A selection of Import duties and taxes are payable by to customs control, which includes Ukraine introduced the option of explain why. Where these explanations customs duty rates can be found in the importer in UAH before or upon specific procedures aimed at ensuring Charter capital contributions electronic filing of customs declarations, are absent, the importer is considered to Appendix D. customs clearance. In certain cases, compliance with customs rules. The Property (except goods for resale or and all types of customs declarations have determined the customs value customs payments must be deposited customs authorities may conduct goods that will not be used in business) may now be filed electronically. correctly. If the customs authorities Free-trade agreements with customs before the goods cross the post-entry audits to verify compliance contributed by a foreign investor to the believe that the relationship between Ukraine has concluded free-trade Ukrainian border. Excise duty on with customs and tax legislation. In charter capital of a Ukrainian entity or 5.2 Import restrictions related parties impacted the price, the agreements with the CIS and EFTA imported cigarettes and alcoholic addition to customs control, Ukrainian to a joint investment activity may be Certain imports to Ukraine require authorities need to prove this in writing. countries, as well as Georgia, Macedonia beverages is payable prior to customs authorities may conduct other types of imported free of customs duty, but will licences and permits from the Ukrainian In the absence of such explanations, the and Montenegro. These agreements clearance during purchase of excise state control, including sanitary, still be subject to VAT. Customs duty authorities. The list of these goods relationship is not considered to have stamps. For other excisable goods, veterinary, phytosanitary, radiological, becomes payable if the property is includes plant protection chemicals, impacted the price. excise tax is payable during customs ecological, and control over cross-border disposed of within three years from the ozone-damaging substances, printer clearance. movement of cultural valuables. date of import. ink, paper with watermarks and certain

16 Doing business and investing in Ukraine 17 Duration of customs clearance the company may declare the goods and 5. other payment and/or accounting goods. Certain goods are not allowed for The Customs Code explicitly prescribes clear them through any customs office documents confirming the value of storage in the CBW. that the duration of customs clearance within Ukraine. the imported goods (if any) should not exceed 4 hours. This limit The 2012 Customs Code permits the 6. transport (shipping) documents, if may be exceeded only in certain cases. Documentation transfer of title for foreign goods stored the price of the transportation is not Goods crossing Ukraine's border should in a customs bonded warehouse. This included in the value of the goods Authorised economic operators be declared to the customs authorities, allows the sale of the goods prior to their Qualifying entities may obtain the either by the importer or a licensed 7. import licence (if applicable) customs clearance for import. status of an authorised economic customs broker on behalf of the 8. insurance documents (if applicable) operator (AEO), and, thereby, enjoy the importer. The importation of goods must Operating a CBW requires a permission following benefits: be supported by complete issued by the local customs authorities. In certain cases, the importer must also documentation. The following import To obtain such permission, the CBW • simplified customs clearance provide additional documents. The documents are required for all owner should comply with technical exact list of such documents is • scheduled customs audit once every shipments to Ukraine: requirements (safety regulations, established by the Customs Code. If 30 months (instead of the standard 12 warehousing equipment, etc.). • import customs declaration these documents are not available, or if months), and the customs office has well-grounded • declaration of customs value In practice, due to vague (and • automatic acceptance of the customs doubts about the data provided by the contradictory) currency control value by the customs authorities based • cross-border contract importer, the customs office may legislation, usage of the CBW as a on minimal documentation. determine the customs value based on • invoice and waybill trading hub may attract currency the available information on prices for The criteria for qualifying as an AEO are control issues; however, proper • compliance certificate (if any) identical or similar goods. as follows: structuring of trading hub operations • certificate of origin should mitigate possible issues. • conducting import-export activities for Where the importer does not agree with more than three years • evidence of customs duty and tax the customs value determined by the 5.8 Exports payment, and customs office, the importer may release • absence of underpayments and tax the goods to free circulation against debts • any other documents that may be Restrictions financial guarantees. The importer may requested by the customs authorities. A limited number of exports are subject • absence of unpaid tax assessments as a then appeal the determination of the to licensing and/or quotas. Examples result of customs audits customs value by the customs An invoice and declaration of customs include silver and gold, certain metal authorities to a higher customs office or • absence of violations of customs rules, value should be attached to the customs products exported to the EU and Russia, to the courts. and declaration. Other documents should be and oil or gas of Ukrainian origin. provided to the customs authorities • system of accounting of goods which 5.7 Warehousing and storage upon request. Export duties allows the customs authorities The goods may be stored in a temporary Ukraine has limited export duties on to reconcile data in the customs storage warehouse (TSW) under In practice, missing or deficient natural gas, scrap metal, livestock, raw declarations with internal accounting customs control for up to three months documents are likely to cause delays hides and certain oil seeds. documents. before they are released under a specific during customs clearance. customs regime. The TSW operator must VAT treatment of exported goods In practice, AEO status is still not obtain a permit from the customs Declaration of customs value Export of goods is zero-rated for VAT available to Ukrainian entities (as of the authorities for operating the TSW. There Customs value is declared by filing a purposes. The zero rating also applies to middle of 2013) due to absence of are two types of TSW: customs declaration and submitting the the re-export of goods that are returned appropriate regulations. following documents: • open TSW, which is available to any to a non-resident due to nonfulfillment users on a contractual basis with the of the contractual terms. Registration of importers 1. declaration of customs value, TSW owner, and Any business entity (including including a reference to the valuation However, any other re-export of goods representative offices of non-residents) method used • closed TSW, which can only be used by (e.g. after inward processing or that is engaged in cross-border its owner. 2. foreign trade contract (agreement) temporary import) is VAT exempt. movement of goods is required to Re-exporting goods with VAT exemption register with the customs office that 3. invoice or pro forma invoice Alternatively, imported goods may be may negatively impact the VAT credit of serves the area in which the company is stored in an opened or closed customs 4. banking documents related to the the re-exporting entity. incorporated. This registration may be bonded warehouse (CBW) under goods being valued done electronically. After registration customs control without payment of with the Ukrainian customs authorities, import duty and taxes for up to three years, depending on the nature of the

18 Doing business and investing in Ukraine 19 5.9 Protection of intellectual engineering works, etc. into the The appeals procedure is similar to that property rights customs value of imported goods of the tax authorities (see Chapter 9.10 Owners of intellectual property rights below). • grounds for tax exemptions during may request that the Ukrainian customs customs clearance of the imported authorities register goods containing 5.11 Administrative issues goods intellectual property in order to prevent the illegal import or export of pirated or • compliance of actual usage of the Customs rulings counterfeit goods. In this case, the imported goods with the aim declared A business entity may request an customs authorities may delay the during customs clearance, and individual ruling from the customs customs clearance of such goods until it office. The customs authorities may • legality of importation of the goods can be proven that no breach of issue general customs rulings, which Business entities into Ukraine. intellectual property rights has taken can be used by any business entity. place. If the importer or exporter does These rulings are not legally binding but Scheduled customs audits not submit sufficient evidence, the reflect the best understanding of the law The customs authorities need to inform customs office may seize the goods and by the customs authorities. The business business entities about a scheduled audit impose penalties. entity may appeal the customs ruling to 10 calendar days in advance. The higher customs authorities or the court. duration of a scheduled audit is up to 30 5.10 Customs audits If an entity acted according to a ruling days, which can be extended up to 15 The customs authorities are entitled to which was subsequently revoked, days. The customs authorities may carry conduct post-entry audits. At the current penalties would not be applied. out a scheduled audit of an entity once stage, the customs authorities view in 12 months (once in 30 months for customs audits as a priority area of Conflict of interests entities with AEO status). customs control. If law provisions or by-law acts allow multiple interpretations, the decision Unscheduled customs audits Customs audits include scheduled and should be taken in favour of the business Investor considerations • The procedure of registering an No advance notification is required for unscheduled field (at the premises of the entity. Nonetheless, in practice, LLC established by a non-resident an unscheduled customs audit. • For representation, information company) and desk audits (at the Ukrainian authorities and courts may entity can be complex due to the Unscheduled customs audits may be gathering and liaison activities, a premises of the customs authorities). not follow this rule. introduction of changes to anti-money carried out at random, for example, if non-commercial representative office laundering legislation. the company fails to provide an answer is likely to be an efficient vehicle. The customs authorities may request Merge of tax and customs authorities to a query from the Ukrainian customs • Unincorporated joint ventures and financial and business information, From 2013 the Tax and Customs • Establishing a legal entity is authorities within 10 days, or the partnerships exist as investment conduct counter-checks, perform authorities have merged into the recommended for commercial customs authorities have reasonable vehicles, but have uncertain legal examination tests, etc. in the course of Ministry of Revenues and Duties. At the activities, although a commercial grounds to believe the business entity status and are not widely used. customs audits. time of writing the merger is in representative office (permanent violated customs law. The duration of an progress. establishment) may be effective for a • Branches of foreign entities are not unscheduled customs audit is the same Areas of customs audits limited range of business activities. explicitly recognised by law and would as for scheduled audit. Under the new Customs Code the prove difficult to establish. • For a 100% investment, a limited customs authorities focus on the Assessments liability company (LLC) is usually following areas during customs audits: The statute of limitation period for tax recommended. It is cheaper and • accuracy of payment of import taxes assessments by customs authorities is quicker to establish than a joint stock by Ukrainian importers three years. company (JSC) and is less regulated. There are no requirements regarding • classification of imported goods, If the customs audit detects an minimal capital for an LLC. The specifically in cases where revised underpayment of duty and VAT, minimal share capital for a JSC is tariff codes would attract higher penalties ranging from 25% to 50% of 1,250 Ukrainian minimum monthly amounts of customs duty and VAT the underpayment may apply. Late salaries (approximately USD 179,000). • country of origin of imported goods, payment interest at the rate of 120% of especially in cases where the goods the National Bank of Ukraine discount were imported free of customs duty rate is applicable if the conditions of under free-trade agreements exemption from customs duty and VAT are breached. • inclusion of costs for transportation, insurance, royalties, artwork, design,

20 Doing business and investing in Ukraine 21 6.1 Legal framework At the same time, the legislation Under the law, the National Securities • A participant's personal creditors Charter will need to be amended to and is responsible for managing the covering this area requires the and Stock Market Commission has the may demand to withdraw the record the change. day-to-day activities of the LLC and Legal framework for business entities identification of an LLC’s ultimate right to initiate liquidation proceedings participant's share in an LLC’s assets representing the LLC before third The primary framework for establishing shareholders during its state registration against JSCs that violate the net assets in order to settle his debts, provided Generally, incorporation will take three parties. The structure of the Board, its and operating legal entities in Ukraine is in Ukraine. Namely, the founders (legal rule, and they tend to scrutinise this the participant's other property is to four weeks from the day documents authority and its working procedures found in the 2004 Civil Code. Legal entities) have to disclose their issue (particularly for banks and insufficient to satisfy the creditors' are filed with the registration authority. are specified in the Charter. entities may be established in the form ownership structure up to the level of insurance companies). As for the LLC, claims. An LLC is deemed to exist as a legal of joint stock companies, limited individuals with a significant the procedure for initiating liquidation entity from the date of its state Liquidation, receivership • Because a participant may withdraw liability companies, additional liability shareholding (10% of shares or more). is not clear, and we are not aware of any registration. An LLC is liquidated if its participants from the LLC, it is unclear whether companies, general partnerships or company being liquidated due to agree to liquidate it, its corporate term contributions to such LLCs should limited partnerships. Due to the lack of developed practice, non-compliance with the net assets rule. Capital structure expires (if such term is specified in the be reported as equity or as a liability additional data/documents may be There is currently no minimum amount Charter), or it is ordered to be liquidated from the LLC to the participant. This The Civil Code, the 1991 law On required from the state authorities 6.4 Limited liability companies for the charter capital of an LLC. The by a court. In a voluntary liquidation the issue should not have any implications Business Associations, as well as the regarding disclosure of the ownership A limited liability company (LLC) does participants may establish its amount at claims should generally be satisfied in from a tax or legal perspective, but 2009 law On Joint Stock Companies (the structure. not have shares in a traditional sense. their own discretion. the following order: may impact the LLC's ability to obtain JSC Law) deal with such issues as Instead, participants in an LLC own a financing from external sources, and 1. Indemnification of losses caused by shareholder rights and obligations, This requirement does not apply in cases percentage in the company's capital The LLC’s Charter capital must be paid could also impact the IFRS accounting. disability, other health injuries or corporate governance and minimum where an entity is first established by a (participatory interest), as specified in within the first twelve months of the death, as well as creditors' demands capital requirements. physical individual and his corporate its Charter. Because the investors' • An LLC does not generally require a LLC's activity. It is possible for secured by pledge or otherwise; rights are further sold to a non-resident interests in an LLC are not ‘securities’ as financial audit unless one is demanded participants to contribute assets in kind Commercial law company (i.e. the ultimate founder). defined by law, they are not subject to by its participants. to an LLC. 2. Employee claims connected with The 2004 Commercial Code governs registration with the National Securities labour relations; business relationships and was intended If an investor intends to carry out only and Stock Market Commission. This If an LLC is 100% owned by one foreign An LLC must create reserve capital from 3. Taxes and duties; to regulate issues that are not dealt with preparatory or auxiliary activities in means that an LLC can be established investor, these issues are likely to have net profits in the amount of at least 25% in the Civil Code. In reality, parts of the Ukraine such as representation, more quickly than a JSC, and is easier to little practical implication. However, if of its Charter capital. At least 5% of 4. All other claims. two Codes overlap, including a number information gathering and liaison maintain. there are two or more participants, the annual after-tax profit must be of provisions dealing with the activities, establishing a non- aforementioned issues need to be transferred to this reserve until the The sequence is slightly different for establishment and operation of legal commercial representative office is a Nonetheless, there are a number of key considered. Some issues, such as the entire 25% fund is fully paid (this is not liquidation through compulsory entities. viable and convenient option, provided points that investors need to be aware of notice period required for withdrawal tax deductible). liquidation (bankruptcy). there is double protection. before establishing an LLC: from the LLC and the method of 6.2 Forms of business compensation could be addressed by The conversion of debt into equity is not 6.5 Joint stock companies • Participants in an LLC may transfer organisations It is not possible for foreign entities to including appropriate timeframes and feasible for an LLC. A joint stock company (JSC) is a legal their participatory interest in the conduct full commercial activities constraints in the LLC's Charter, entity whose Charter capital is divided company's capital to third parties Choice of business entity through a commercial representative provided they do not contradict the law. Relationship of participants, directors into a specified number of shares with (non-participants). However, other Establishing a legal entity in Ukraine office (i.e. ). and officers equal nominal value. The liability of participants have a pre-emptive right involves registering with the local state Nonetheless, a number of law firms and Formation procedures LLCs have two corporate bodies. shareholders in a JSC is limited to the to acquire the participatory interest in registrar, the tax authorities, the other service providers have established An LLC may be established by a single value of their capital contribution. the LLC. statistics office and the pension fund, as their presence in Ukraine in this participant, provided that the founding The General Participants' Meeting well as opening a bank account, and manner. • A participant may withdraw from company is not itself owned by a single consists of the participants of the LLC According to the JSC Law, all JSCs shall other formalities. an LLC at any time by giving three participant. Also, a person (legal entity who vote proportionally to their interest be established as either ‘public’ or 6.3 Net asset requirement months’ notice. Upon withdrawal, or individual) may not establish more in the LLC’s charter capital. The Quorum ‘private’. From a foreign investor's perspective, According to the Commercial Code, if a participant is entitled to his than one LLC with a single participant. for a General Participants' Meeting the choice will tend to be either an LLC, the value of a company's (LLC or JSC) proportionate share of the assets of The governing document of an LLC is its requires the presence of participants The legal framework for JSCs is for the a JSC, or in certain circumstances a net assets at the end of the second and the LLC, which often involves a cash Charter. The Charter determines the holding at least 60% of all votes. Most most part similar to that for LLCs. representative office engaged in either each subsequent financial year is less settlement. company's objectives, scope of activities, resolutions are approved by a simple However, the JSC Law regulates many commercial or non-commercial than its registered share capital, the the size of its Charter capital, the majority of the voters present at the peculiarities of JSC activities. A brief • A participant who systematically activities. company must decrease its share capital composition and competencies of the General Participants' Meeting, although comparative of the two vehicles is ignores or improperly fulfils his and make relevant amendments to its governing bodies and the rules for resolutions amending the Charter and a provided in Table 1 on page 26. duties, or whose actions interfere with For a 100% investment, using an LLC Charter. In addition, the law states that decision making. limited number of other decisions must reaching the aims of the LLC, may be tends to be more convenient. It is easier if the value of net assets falls below the be approved by a majority of all Shares excluded from the LLC by a majority and quicker to establish (up to 4 weeks, statutory minimum capital, the The distribution of the LLC’s participants' votes. • Currently all shares of the JSCs shall vote. The excluded participant is including opening a bank account), has company "shall be liquidated". participatory interest is set out in its exist only in non-documentary form. entitled to his proportionate share of no minimum capitalisation Charter. If the participatory interest is The Board of Directors (or single the assets of the LLC at the time of • Public JSC may perform public and requirements and is less regulated. further transferred or alienated, the Director) is the executive body of an LLC exclusion. private placement of shares which may

22 Doing business and investing in Ukraine 23 be further traded on a stock exchange. Formation procedures publish their annual report in official commonly referred to as ‘joint activity representative office, provided there is a There is no agreed upon standard By contrast, private JSC may only The issued shares of JSCs (private and media not later than 30 April of the agreements’. double tax treaty in place. regarding how the titles of laws should perform private placement of shares. public) must be registered with the following year. be translated. For example, the National Securities and Stock Market The use of joint activity agreements is Generally, if the contemplated activities Commercial Code is often referred to as • Existing shareholders in a private JSC Commission of Ukraine, which involves 6.6 Foreign directors still relatively unexplored. There are no are limited to the provision of services, the Economic Code. have pre-emptive rights to purchase filing a set of documents prescribed by A foreign national can be appointed as a minimum capital requirements or establishing a commercial/taxable shares offered for sale by the other law. Processing of the application by the director only after obtaining a work capital impairment rules with which to representative office may be a suitable Individual words within the text of the shareholders, as long as such rights are Commission may take up to a month. permit. Also a written employment contend. A partner may still withdraw option. A number of professional firms laws may also be rendered in different provided by the Charter. agreement (contract) concluded by giving three months’ notice, but operate in this manner. ways. For example, the Ukrainian word • Public JSCs must be included into the Capital structure between the Ukrainian company and legislation considers that this could be товариство in the Civil Code is equally stock list of at least one stock exchange The minimum capital requirement for a the individual must be provided to the treated as a breach of contract and that A representative office should be rendered in English as company, in Ukraine. Shares of public JSCs may JSC is the equivalent of 1,250 Ukrainian authorities. it may necessitate the payment of registered with the Ministry of association, society or partnership. be purchased or sold on the stock monthly minimum salaries at the time damages. Economic Development and Trade exchange. when the JSC is formed. The minimum A foreign national that is to be appointed (currently subject to a registration fee of As with investment in any other country, capital requirement for JSCs as at July as a director of a Ukrainian company 6.8 Branches USD 2,500), the statistics authorities, one cannot assume that the labels used Corporate 2013 was UAH 1,433,750 (USD needs to obtain a Ukrainian Tax In Ukraine, it is not currently possible to the tax authorities and the pension fund. in Ukraine will mean the same as they • The number of shareholders in a 179,000). A JSC must create a reserve Individual Number (Tax ID). Obtaining register a branch of a foreign legal A representative office must also obtain do in the investor's home country. private JSC may not exceed 100. capital from net profits and retained a Tax ID can take up to 10 days and this entity. a permit from the respective department earnings in an amount not less than 15% can slow down the employment process of the Ministry of Internal Affairs of • All shareholders must be notified in of its Charter capital. At least 5% of (see Chapter 11.1 for more details). 6.9 Representative offices Ukraine to use its official stamp. Once writing of the General Shareholder’s annual net profits must be transferred to A representative office is not a separate the representative office has been Meeting 30 days before said meeting. this reserve until the entire 15% fund is After the Ukrainian company has been legal entity, and operates in Ukraine on registered with the tax authorities and • Cumulative voting will be either fully paid (this is not tax deductible). registered with all required state behalf of the foreign company it has obtained a permit for the official mandatory or voluntary (depending authorities, it will be required to obtain represents. stamp, it may open accounts in hryvnia on the type of JSC and the number Minority shareholders a work permit for all foreign employees. and foreign currency in a Ukrainian of shareholders) for the appointment The JSC Law provides specific protection Ukrainian legislation prohibits From a tax perspective, local rules for bank. of the members of the Supervisory for minority shareholders through: employing a foreign individual without representative offices are broadly in line Board and/or the Audit Committee. obtaining a work permit. Refer to with those of other countries. The Representative offices are subject to • determination of the right of the Cumulative voting means voting Chapter 11 for a discussion of taxation of problem is that the broader legal normal corporate profits (income) tax. shareholder to receive detailed during the election of the JSC’s bodies, foreigners in Ukraine. framework has not been updated, which However, an exemption may be information on the JSC’s activity where the total votes of a shareholder can create uncertainty when dealing available if the activities of the are multiplied by the number of • abolition of the practice of paying 6.7 Partnerships and joint with the state authorities. representative office are not sufficient to members of the JSC’s body that are dividends with products produced by activities establish a taxable permanent being elected. The shareholder is the JSC The Civil Code of Ukraine provides for Foreign nationals employed by establishment as defined by the relevant entitled to give all the votes so counted the establishment of general representative offices must obtain tax treaty. • introduction of the right of for one candidate or to distribute the partnerships and limited partnerships as special ‘service cards’ issued by the shareholders to conclude shareholder votes among several candidates. legal entities, but such types are not Ministry of Economic Development and Non-commercial representative offices agreements widely used. Because partnerships are Trade. As opposed to a legal entity, a are generally not subject to VAT. A • JSCs (both public and private) having • possibility of requesting the legal entities, there are no regulatory or representative office is not required to commercial representative office must 25 shareholders or less may approve mandatory buyout of shares in cases legal advantages to conducting business obtain work permits for its foreign register for VAT once its taxable sales for their decisions by correspondence, provided for by the JSC Law, and through a partnership. Taxation is also employees. The number of foreign the previous 12 calendar months exceed as opposed to voting in person at the imposed at two levels – at the assignees who could be employed with UAH 300,000. The Ukrainian tax General Shareholders' Meeting. • disclosure of conflicts of interest partnership level and in the hands of the an RO in Ukraine (and receive a service authorities are very aggressive about during acquisitions. • A sole shareholder is exempt from partners. card) is limited by the number indicated challenging the ‘non-taxable’ status of the requirement to convene and hold in the registration documents of a foreign representative offices that claim Reporting requirements General Shareholders' Meetings. Joint ventures typically involve the representative office. to be non-commercial. JSCs are required to submit quarterly Instead, the powers vested in the establishment of a separate legal entity and annual reports to the National General Shareholders' Meetings will (JSC or LLC) in Ukraine. However, the Nonetheless, if the foreign company Lost in translation Securities and Stock Market be performed by the sole shareholder. Civil Code does recognise the concept of intends to carry out only non- Ukrainian legislation is written in Commission. These reports include the a joint venture without the need to commercial activities such as Ukrainian. Professional services firms • It is legally possible to convert annual audited financial reports, establish a separate legal entity. In such representation, market monitoring, typically provide advice to foreign debt into equity in a JSC, but the quarterly financial reports, reports on cases, the relationship between the gathering of information and liaising, it investors in English or other foreign National Securities and Stock Market securities circulation and details of any parties will be governed by the should be sufficient to establish a languages. Commission has yet to develop shareholders owning more than 10% of agreement. Such agreements are appropriate regulations. the total shares. JSCs should also

24 Doing business and investing in Ukraine 25 6.10 Brief comparison of joint stock companies and limited liability companies

Table 1

Joint stock company (JSC) Limited liability company (LLC)

Registration Primary registration is made with the State Primary registration is made with the local State Registration Department. Administration.

JSC shares must be registered with the National Securities and Stock Market Commission. Labour relations and Minimum capital 1,250 Ukrainian monthly minimum salaries Not required (approximately USD 179,000). social security Transfer of shares There are generally no restrictions on the Unless the Charter sets forth otherwise, the transfer of shares in a public JSC. There are existing participants have a pre-emptive right to specific regulations regarding significant purchase the participant’s share in LLC. shareholdings and mandatory buyouts.

In a private JSC, the existing shareholders may have a pre-emptive right to purchase shares.

Supervision Regular reporting to the National Securities Regular reporting to the tax and other local au- and Stock Market Commission and to the tax thorities, filing of annual accounts. and other local authorities, filing of annual Investor considerations • Under the new law On Employment, valid from 1 January 2013, Ukrainian accounts. • Ukrainian labour law still contains companies are required to employ many socialist concepts, including a Management requirements • The General Shareholders’ Meeting and the • The General Participants’ Meeting. socially protected people (including strong sense of the employee’s right Supervisory Board (not required if there are less those registered as unemployed, recent • Single Director or the Board of Directors to work and restrictive conditions on than 10 shareholders). graduates) as 5% of their headcount. headed by the General Director. employment. • Single Director or a Board of directors headed by Some social benefits (compensation of the General Director, or another body stipulated • Labour records must be kept for up to USC portion) are available instead. 75 years. in the Charter. • The new Labour Code is expected to • Audit Committee or Internal Auditor (if there are • Employer unified social contributions be adopted in the next few years. This fewer than 100 shareholders). exceed 36% of an employee’s gross is likely to be in line with western income (cap of approximately USD principals. Statutory audits There is a requirement to submit an annual Not directly required by the law. In practice, most 2,400 per employee per month • Foreign employees require work audit report to the National Securities and LLCs do not conduct audits applies to the income subject to permits and temporary residence Stock Market Commission. contributions). permits. Risks Liquidation if the net assets are less than the • Liquidation if the net assets are less than the • Companies with more than eight minimum requirements of the law. minimum requirements of the law. employees are required to employ disabled individuals as 4% of their • Participants may withdraw from the LLC at any headcount. Failure to do so attracts stage with three month notice. substantial penalties. IFRS Shares and undistributed reserves are treated Because contributors may request withdrawal of as equity. their contributions at any time and the company has the right to defer the withdrawal for at least 12 months, contributions of the participants and undistributed reserves are reported as non-cur- rent liabilities to participants (not equity).

Minimal dividend payment Not required Not required

Reserve capital/fund Not less than 15% of share capital Not less than 25% of share capital

26 Doing business and investing in Ukraine 27 7.1 Labour relations and the employee, or before overtime hours can Employers must also, if requested, grant individual. If an employer does not meet Under employment legislation, the Employee contributions Labour Code be implemented. a shortened working day or working this quota, it is required to make a retirement age is generally in the range For employees of Ukrainian entities week at proportional pay to pregnant payment to the Fund for the Social between 55-60 for women, depending (including those employed by a Employer/employee relations The Labour Code recognises collective women, women with a disabled child or Protection of Disabled People equivalent on the date of their birth, and 60 for representative office), USC is withheld In Ukraine, employment relations are agreements and employers must a child under the age of 14. to the company’s annual average salary men. by the employer at the source from generally governed by a Labour Code conclude such agreements if demanded (50% for companies with 8 to 15 salary payments and remitted directly to adopted in 1971, when Ukraine was still by their employees. Paid holidays employees) for each working place that 7.3 Social security system the appropriate authorities. part of the Soviet Union. The Labour There are ten official public holidays in is not occupied by a disabled person. Code is historically employee friendly If a collective agreement is concluded, it Ukraine per year. An employee’s The calculation of the quota should be Coverage For 2013, the contribution is 3.6% for and contains many socialist concepts, will be binding for all employees, even minimum annual holiday entitlement is made every month. The social security system in Ukraine Ukrainians and foreign nationals (based including a strong sense of the non-union members. The trade union 24 calendar days. This increases to 31 covers pensioners, workers and their on gross remuneration/cap). For employee’s right to work and many will also monitor the employer’s calendar days for employees under the Termination of employment dependents for work-related accidents, individuals providing entities with instruments for the protection of compliance with the agreement. age of 18. When determining the length Employment agreements are generally illnesses, retirement, death and services based on civil agreements, the employees. of vacation for purposes of complying concluded for an indefinite period. disability benefits, sickness and contribution is 2.6% (based on gross 7.2 Working conditions with the Labour Code, weekends during Employment contracts, since they are a maternity benefits, medical care, reward/cap). Potential employers should familiarise the vacation period are counted as special form of employment agreement, severance benefits and provides for child themselves with the general provisions Salaries and wages vacation days, but public holidays are may be concluded for a fixed period with and family allowances. Individuals remaining on a foreign of the Labour Code and other pieces of Minimum salary levels are prescribed in excluded. certain types of employees (e.g. the payroll are not liable to pay mandatory the labour legislation. As is the case with the annual budget law. According to the director of the company). Employees on Contributions USC in Ukraine from this income. Also, many other countries, complying with 2013 Budget Law of Ukraine, the The legislation also requires additional indefinite term employment agreements Ukrainian mandatory state Unified under the opinion of the Pension Fund of local labour legislation tends to be one minimum salary as of 1 July 2013 is set social leave to be granted to: may terminate the employment Social Contributions (USC) apply to all Ukraine, foreign employees of of the more difficult challenges facing at UAH 1,147 (approximately USD 140) relationship at any time by giving at salaries paid through the payroll of a representative offices are not required to • women having two or more children investors. per month. The minimum salary level is least two weeks’ notice, whereas under Ukrainian entity or a Ukrainian pay employees’ USC. under the age of 15 increased on a regular basis. the contract for fixed term employment representative office of a foreign entity, Although employers can enter into • women having a disabled or an an employee may terminate employment as well as remuneration paid to Employer contributions individual labour contracts with Wages and other payments to Ukrainian adopted child, and only on grounds of sickness or disability, individuals performing works / Ukrainian employers are liable to pay employees, the conditions of such employees should be paid in local preventing him/her from performing rendering services under civil USC in respect of all Ukrainian and • single parents. agreements may not be worse than currency (hryvnia). Salaries should be his work. The employment contract may agreements. In addition, it is possible for foreign national employees. those guaranteed by the labour paid at least twice each month. Wages also be terminated according to the individuals to make a voluntarily Employees engaged in part-time studies legislation. Contracting out the and other payments to foreign conditions specifically stipulated in it, or Ukrainian state unified social For 2013, the following rates apply to may also be entitled to additional study provisions of labour legislation is not employees may be paid in foreign other conditions stipulated by the contribution (up to the cap established gross remuneration: 36.76% - 49.7%, vacation leave. possible. currency. legislation. by law). depending on the level of risk of accidents in the entity’s industry sector Paid maternity leave is required for up When disputable issues arise, they tend Working hours The Labour Code permits employers to The taxable base for contributions (both (34.7% for remuneration of services to 70 calendar days before and up to 56 to be pursued directly with the courts. In general, working time is limited to 40 terminate employment relationships at employee and employer) is capped. For based on civil agreements). The majority calendar days after childbirth. Payment In practice, if employers are aware of hours per week with a five-day working their initiative on the grounds of 2013, the cap is set at 17 times the of entities are subject to the lower rates. is funded by the Social Security Fund and respect the rights of employees, no week, although an employer may reorganisation of the company, failure of subsistence minimum set for able- and is based on levels of income used for significant issues for employers should introduce a six-day working week. In the employee to perform his/her duties, bodied individuals (based on the Administration social security contribution purposes, arise in Ukraine. case of the latter, employees should not or a loss of trust in employees involved subsistence minimum valid as of 1 July Employers are required to file a monthly not actual salaries. work more than seven hours per day. in financial matters (theft, etc.) and 2013, the cap is approximately USD personified report with the Pension Unions other grounds. It is important, however, 2,437 per employee per month). The cap Fund of Ukraine by the 20th of the Equal opportunity and disabled In Ukraine, trade unions have a visible According to the labour legislation, to ensure that all termination will be increased to approximately USD month following the reporting month. employees place in the labour market and there is a employers may introduce overtime in formalities are complied with in full 2,588 in December 2013. The Constitution of Ukraine and the specific law for them. They are easy to exceptional cases. The legislation accordance with legislation. Among Penalties for non-compliance Labour Code both preclude establish and are granted certain requires overtime to be paid at double these, the employer must follow the Currently, there are several draft laws There are severe penalties for non- discrimination based on race, colour of benefits by the legislation. The largest rates. requirement for two months termination that consider decreased USC rates, with compliance with social security skin, political, religious and other trade union organisation in Ukraine is notice prior to the actual termination of or without moving some portion from obligations: beliefs, sex, ethnic and social origin, called the Federation of Trade Unions of The Labour Code also contains employment relations. the employer to employee, as well as the property status, place of residence, • Avoidance of registration or untimely Ukraine (FPU). This union claims to provisions that entitle some employees cancellation of the capped base for USC linguistic or other characteristics. registration is penalised in the amount unite more than eight million trade to work shorter weeks. The working In practice, employment is quite often calculation. If the latter change is of 10 times the minimal amount of union members and provides for a week is limited to 36 hours for terminated by mutual agreement and it adopted, it may significantly increase In addition, Ukrainian law requires income not subject to personal income variety of approaches to the protection employees performing work under is rare for disputes to arise. the cost of employment of highly paid enterprises employing eight or more tax (approximately USD 21 currently). and status of trade unions. For instance, harmful working conditions, while the individuals in Ukraine. individuals to employ a minimum approval of the trade union is required night shift is one hour shorter (as is the number of disabled people – 4% of their in some cases before termination of day before a national holiday). total headcount but no less than one employment relations with the

28 Doing business and investing in Ukraine 29 • Non-payment (non-remittance) or a (cumulatively) in Ukraine, unless a To obtain a work permit, foreign delay with payment (remittance) of shorter period is specifically indicated in nationals are required to provide a contributions is subject to a penalty in the visa. range of documents, including the amount of 10% of the outstanding apostilled copies of their certificates/ amounts/amounts paid late. If a foreign national, due to serious diplomas, a criminal clearance reasons, has to stay in Ukraine for more certificate, and medical certificates. • Contributions additionally assessed by than 90 days (cumulatively) during a the Pension Fund or employer should 180-day period, his/her passport must Non-compliance with the requirements be paid together with a penalty of be registered with the State Migration of the work permit is subject to penalties 5% of such additional assessments authority (formerly OVIR). The written (see below), as well as potential for each month of delay, but not application of the foreign national and deportation of the foreign national from Accounting and audit more than 50% of such additional the inviting party must be submitted no Ukraine (at the employer’s expense). assessments. later than 15 days before the 90-days • Late reporting, incorrect reporting or period expires. The extended Work permits are not required for the requirements non-reporting is subject to a penalty registration will be evidenced by a personnel of representative offices of in the amount of 10 times the minimal registration stamp affixed to the foreign foreign companies who are employed amount of income not subject to national’s passport. abroad. Such personnel should be personal (approximately accredited with the Ministry of USD 21 currently). Foreign nationals that have Ukrainian Economic Development and Trade of work permits or other document Ukraine. The accreditation is valid for • Inappropriate bookkeeping is subject confirming employment/assignment up to three years. to a penalty in the amount of 8-15 (see below) or their relatives who are times the minimal amount of income accompanying them in Ukraine should Penalties for non-compliance with the not subject to personal income tax obtain a temporary residence permit immigration legislation (currently up to approximately USD instead of a registration. According to the current Ukrainian Investor considerations 32). legislation, various types of non- • In principle, local accounting • An interest penalty on late payments Work permit compliance with immigration legislation standards should not contradict is charged at the rate of 0.1% per Ukrainian employers must obtain work may be subject to the following penalties international accounting standards. day, based on the amount of the permits for foreign nationals who are for individuals and/or their employers: In reality, there are gaps between the outstanding contributions. either directly employed by local • fines in the range of UAH 170 – 23,480 two. companies, seconded to work in Ukraine • Also, Ukrainian legislation provides (approximately USD 21 – 2,935), by foreign companies, are intra- • JSCs are subject to an annual audit for administrative / criminal depending on the violation company cessionaries (i.e. foreign requirement and must publish their responsibility for violating the USC nationals assigned to work in Ukraine • summary deportation of the foreign annual financial statements. legislation and the avoidance of USC on a temporary basis at the subsidiaries national, and payment. • Tax accounting is directly connected in Ukraine if their employer is a resident • administrative imprisonment and to financial accounting in most areas. of a WTO member country), or are 7.4 Foreign personnel property confiscation (may apply in Tax officials are not familiar with providing services to affiliates based on exceptional cases). accounting standards, and this could consulting agreements or agreements on Tax registration of foreigners lead to disputes. provision of personnel. The requirements for tax registration of • All Ukrainian legal entities should use foreigners are described in Chapter 11.1. A work permit is generally issued for up the specified chart of accounts. to one year with subsequent renewal. Residence permit/registration with the Intra-company cessionaries may apply immigration authorities for a work permit valid for up to three Foreign nationals arriving legally in years and are eligible for renewal lasting Ukraine may temporarily stay in the two more years. The overall time of country on the basis of their passport employment in Ukraine is not limited. and relevant entry visa (if required – see Appendix A). The stamp affixed to the The labour authorities must consider an foreign national’s passport by a Frontier application for a work permit within 30 Service officer upon initial entry into days of its date of submission. Ukraine is considered to be automatic registration for a period of 90 days

30 Doing business and investing in Ukraine 31 8.1 Accounting The enterprise’s owners or the 8.2 Chart of accounts Services Markets maintain their own managing director are responsible for According to Decree # 291 of the registers of auditors or audit companies International Financial Reporting organising the accounting function and Ministry of Finance, all Ukrainian legal or both. Standards ensuring that all economic transactions entities should use the specified chart of The law On Accounting and Financial are recorded in supporting documents, accounts. The chart of accounts In 2003, the UCA adopted the Reporting, effective from 1 January ledgers and financial statements. represents the system of accounts, International Standards on Auditing 2000, introduced National Accounting within which each account has a title (ISA) as the national auditing standards Regulations (Standards) (NR(S)AU). Differences between NR(S)AU and IFRS and numerical symbol and is assigned to of Ukraine. The law states that local standards Although NR(S)AU are generally based a specific class or group of transactions should not contradict international on IFRS, they are not identical. There or balances. Several other laws (e.g. the law On financial reporting standards (IFRS), are still areas for which no local Financial Services and State Regulation but in practice, there are gaps between standards have been introduced (e.g. Banks should use the separate chart of of Financial Services Markets, the law them. accounting for government grants and accounts issued by the National Bank of On Banks and Banking Activities, the disclosure of government assistance, Ukraine. law On Securities and Stock Market, the Ukrainian accounting regulations interim financial reporting, insurance law On Insurance) establish additional Ukrainian entities, as well as contracts, share-based payments). In Small businesses, non-profit non- requirements for audits and auditors for representative offices of foreign entities, addition, when local standards do exist, governmental organisations and foreign selected industries. must maintain accounting records and they often lack the detail and some of business entities’ representative offices financial statements in accordance with the disclosure requirements found in are permitted to use a simplified set of Audits required by law NR(S)AU. Financial statements are IFRS. accounting rules. In addition to the Under Ukrainian law, audits are prepared for a calendar year and statutory accounts, Ukrainian taxpayers mandatory for a range of enterprises, in relevant interim periods and must be NR(S)AU have less interpretative need to maintain a separate set of tax particular: prepared with Ukrainian UAH as the guidance, explanations and illustrations accounting records. • banks reporting currency. The financial than IFRS do, which inevitably leads to statements include the balance sheet, some confusion in the application of A short form of the Chart of Accounts for • insurance companies income statement, cash flow statement, local standards. This undermines the non-banking entities may be found in • JSCs statement of changes in equity and notes comparability and quality of financial Appendix E. to financial statements. Financial statements in Ukraine. Since 1 April • bond issuers statements should be submitted to the 2011, the majority of revenues and 8.3 Audit requirements • investment funds, trusts and other founders or shareholders of a legal expenses for corporate tax purposes Auditing is regulated primarily by the financial institutions entity, labour collectives (upon request) have been based on the statutory law On Auditing, which outlines and the state registrar. Other financial statements. The tax office and requirements for auditing firms and • brokers and traders, and government agencies (e.g. National many chief accountants are not very auditors in individual practice, regulates • other companies that are required to Securities and Stock Market familiar with NR(S)AU / IFRS yet. auditing methodology and sets out the publish their financial statements. Commission, NBU, State Commission on legal framework of operations for the Regulation of Financial Services The adoption of the 2011 Tax Code has Ukrainian Chamber of Auditors (UCA) Markets in Ukraine) prescribe additional resulted in additional matters to and the Professional Public Union of requirements for entities under their consider. Calculating deferred tax and Auditors of Ukraine. jurisdiction. applying the new tax base for fixed assets and the new corporate profits The UCA is responsible for approving JSCs, bond issuers, banks, trusts, stock (income) tax rates may have a audit regulations and standards, exchanges, investment funds and significant impact on accounting carrying out the certification of auditors, investment companies, credit unions, practices. The Tax Code seeks to reduce approving programs of professional non-state pension funds, insurance the number of differences between tax training for auditors and maintaining companies and other financial and accounting records, for example, the register of auditing firms and institutions are required to publish their through implementing new rules on the auditors in individual practice that are annual financial statements and timing of recording expenses and eligible to provide audit services in consolidated financial statements in the revenues in tax records. However, Ukraine. In addition, certain regulators, periodical press or by distributing them certain temporary differences between such as the NBU, National Securities and in the form of individual printed tax and accounting balances will Stock Market Commission, National editions. remain, affecting deferred tax Commission for Regulation of Financial calculation.

32 Doing business and investing in Ukraine 33 9.1 Tax system Diagram 1. Tax collections Ukraine is not an easy country in which to pay taxes. In the report, ‘Doing Tax system and administration Business 2013’, released by the World Bank, Ukraine is still identified as one of the most difficult countries in which to pay taxes out of the 185 countries surveyed. The study estimated that a medium-sized domestic business would need to make 28 tax payments each year (including social security), and would require 491 hours per year to be compliant with its tax requirements.

Nevertheless, Ukraine’s paying taxes rank in the Doing Business report improved from 183 in 2012 to 165 in Investor considerations • There is a simplified tax system 2013. Obviously, one of the reasons for available for small business such improvement was the introduction • The Ukrainian tax system continues entrepreneurs and legal entities. of the Tax Code in 2010, which entered to develop. The Tax Code entered into into force on 1 January 2011 and Source: Ministry of Finance of Ukraine force on 1 January 2011 and continues • The VAT rate is 20% and is to be introduced significant amendments to to be amended. There are a number reducedImage to 17% from 2014. VAT tax rules and administration. Since that of important novelties that came into legislation and regulations are not time, the Code has been repeatedly force from 1 January 2013. Also, fully consistent with EU legislation. are paying more and more attention to • personal income tax (PIT) (see changed and there are a number of comprehensive transfer pricing rules the economic substance of taxpayers’ Chapter 11) • With the exception of agricultural important novelties, which came in transactions and consider the ‘overall apply from 1 September 2013. • value-added tax (VAT) (see Chapter enterprises, the fiscal year for legal force on 1 January 2013. picture’’. 12) • According to a World Bank study, entities is calendar year. Notwithstanding, there are many the paying taxes rank for Ukraine clauses in the text of the document with • There are penalties of up to 75% 9.2 Direct and indirect tax burden • unified social security contribution improved compared to previous years, unclear wording, which lead to for failing to withhold and remit For 2012, taxation accounted for around (see Chapter 7.3) but the rank is still low. ambiguous interpretations and 85% of government revenues. More than withholding tax. • excise tax and import duties (see disagreement between taxpayers and 3/4 of this is collected through corporate • Individual tax residents are taxed on Chapter 5) • The courts and the tax authorities are the tax authorities. worldwide income. Non-residents profits (income) tax (CPT), personal starting to look at the substance of are taxed only on income from income tax (PIT) and VAT. Tax • land tax (see Chapter 10.7) transactions, but form over substance An interesting feature of the Ukrainian collection has increased rapidly over the Ukrainian sources. Both resident and • (see Chapter 10.8), and continues to prevail. tax system is a simplified or unified tax non-resident individuals are taxed at past years. The trend in income taxes available for many small businesses. rates of 15-17%. and VAT collections for the period 2007 • fee for subsoil usage (see Chapter Qualifying sole proprietors opting to use to 2012 is illustrated in diagram 1. 10.8). • Corporate profits are subject to 19% the system pay a fixed amount of tax/ tax in 2013. The tax rate will be pay a tax from turnover on a low rate. 9.3 Principal taxes Employers and employees are obliged to reduced to 16% for 2014 and following The corporate tax regime is discussed in The Tax Code provides the general make a unified mandatory contribution years. Chapter 10.1, while the regime for framework for taxation in Ukraine and to the state social security fund. The private entrepreneurs is discussed in sets the taxes that may be imposed. The maximum cap for such contributions Chapter 11.2. principal taxes and compulsory depends on the level of the minimal payments are: salary, which is set in the annual budget Although the form over substance law and may result in a significant cost • corporate profits (income) tax (CPT) concept continues to dominate in burden for employers (see Chapter 7.3 (see Chapter 10) Ukraine, this is likely to change. In for further information). practice, the tax authorities and courts

34 Doing business and investing in Ukraine 35 9.4 Legislative framework treaty sets forth the beneficial be performed automatically after their Taxpayers with annual turnover for the The tax authorities have recently been At any stage of the process, or if the ownership requirement in order to enjoy state registration by the tax office where previous year exceeding UAH 10 million focusing on non-commercial national office rejects the appeal, a Statute law reduced WHT rates on dividends, the business or private entrepreneur is (excluding agricultural producers) have representative offices. In many cases, taxpayer is entitled to pursue action According to the Constitution, taxes and interest and royalties. It introduces the located. Generally, such registration is to make monthly advance CPT payments the tax authorities have considered through the administrative court system levies, as well as penalties for non- following WHT rates: dividends – confirmed by the respective extract from (by the 30th day of each month) in the these entities to be taxable and applied (there is no separate tax court system). compliance, may only be established by 5%/15%; interest – 5%/10%; royalties the State register. amount of 1/12 of the previous year’s significant penalties. laws enacted by parliament. – 5%/10%. If ratification by the tax liabilities. These taxpayers do not Submitting an appeal (both parliaments of the two states happens Also it is an obligatory requirement for need to file separate quarterly returns. 9.9 Assessments administrative and court) suspends the Strictly speaking, the Ministry of before 31 December 2013, the new individuals (including private Taxpayers file returns and execute requirement to pay the assessed tax, as Revenues and Duties of Ukraine treaty will apply from 1 January 2014. entrepreneurs and non-residents) to Value-added tax returns are generally payments on a self-assessment basis. If well as the accrual of interest and (MRDU) (which was organised in the have an ID number for receiving filed on a monthly basis. the tax authorities determine that the penalties. Late payment interest (for the course of consolidating the State Tax Taxpayers do not require confirmation payments from the Ukrainian tax agents tax shown on the return is incorrect, whole period of understatement Service and State Customs Service from the tax authorities before claiming (Ukrainian legal entities, other private Monthly tax returns should be filed they may assess taxes within 1,095 days including appeal proceedings) and during 2012-2013) does not have the relief under a treaty. However, the entrepreneurs, etc.). Moreover, it is not within 20 calendar days following the (three years) from the deadline for filing penalties will apply only if the taxpayer power to amend the law. However, in withholding agent must hold a possible to open a bank account in last day of the reporting month. a return or the date on which the return finally fails to win the case. practice, the tax authorities often issue certificate of residence from the treaty Ukraine without a tax ID number. The Quarterly returns are due within 40 is actually filed, whichever comes later. tax clarifications (general and country for the person to whom income latter is issued by the local tax office calendar days following the last day of The taxpayer cannot ground the individual) that are not always is paid. upon the request of an individual. the reporting quarter. Annual returns There is no limit on the period in which administrative or court appeal on consistent with the law; although this are due within 60 calendar days an assessment may be made if a documents not provided to the tax could be a reflection of ambiguities in The certificate is valid for the calendar Permanent establishments of non- following the last day of the reporting taxpayer has deliberately evaded tax (if authorities in the course of the tax audit. the law itself as much as anything else. year of its issuance. It should be properly residents and representative offices of year. proven in court) or when a taxpayer fails legalised and translated into Ukrainian. foreign entities (both commercial and to file a return. The tax authorities will The tax authorities have recently been 9.5 Tax treaties non-commercial) are required to follow Tax returns should be filed in electronic also charge significant penalties for late threatening to apply criminal As of 31 July 2013, Ukraine has 70 In addition to the above, the Tax Code the tax registration procedure by form by all businesses (except small). filing or understatement of tax liabilities responsibility against officers of the double tax treaties in effect. The double requires the recipient of all types of submitting a request to the tax office. (see Chapter 9.13). company if assessed taxes are not tax treaty with Cuba and the new double income from Ukraine to be the Registration with the tax office in such If the filing date for any return falls on a accepted. tax treaty with Cyprus have both been beneficial owner (actual recipient) of the cases may take up to 10 calendar days weekend or a public holiday, the return 9.10 Appeals ratified by the Parliament but have not respective income. Agents, nominee and is confirmed by a special may be filed on the following working Assessments may be appealed 9.11 Withholding taxes come into force yet. Also, there are 2 holders and other intermediaries in notification form. There is a direct day. administratively or through the court Businesses generally have an obligation treaties that have not been ratified yet respect of the received income cannot be provision in the Tax Code that a system. The initial administrative to withhold taxes on payments to (treaties with Luxemburg and Ireland). beneficial owners of income sourced in permanent establishment, which started Payment of taxes should be generally appeal is made to the regional tax office individuals (and, in some cases, to sole Ukraine and, therefore, are not entitled its business activity in Ukraine before made within 10 calendar days from the which supervises the tax office that proprietors) and payments to non- Withholding taxes (WHT) on interest, to favourable treaty provisions. registration with the tax authorities, is day on which the return is required to be made the assessment. If an appeal is residents. It is very important to ensure dividends and royalties are typically treated as having committed tax filed or the assessment is issued. rejected, a taxpayer may appeal in turn that all withholding taxes (i.e. personal reduced by the treaties. A summary of The Ukrainian tax authorities are evasion. Payments are normally made through to a national office. Large taxpayers income tax where required; and withholding rates under the various increasing their awareness of the taxpayers’ bank accounts. appeal directly to a national office. withholding tax from payments to treaties is provided in Appendix C. beneficial owner concept. 9.8 Tax returns and payments non-residents) are properly withheld PIT returns are filed for each calendar Withholding taxes must be remitted to An administrative appeal must be filed and accounted for. Historically, one of the most favourable 9.6 Administration of the tax year, but individual taxpayers whose the authorities no later than the date to the relevant level of the tax treaties was the Ukraine - Cyprus treaty, system entire income is subject to withholding when the payment is made to the authorities within 10 calendar days of Penalties of up to 75% apply for failure which provided for 0% withholding tax National and local taxes are tax at the source (e.g. salaries) are not income recipient (e.g no later than the receiving an assessment or official to withhold taxes. on dividends, interest and royalties. administered by the MRDU. required to file PIT returns unless they date the income is paid abroad in case of advice that an administrative appeal has obtain income from two or more payments to non-residents). been rejected at a lower level. Generally, the following withholding tax However, a new tax treaty between The allocation of revenues between the sources. PIT returns for individuals must rates apply to income paid to non- Ukraine and Cyprus and a protocol to state and local budgets is set out in the be filed by 30 April of the following year. A non-resident that does not have a The tax authorities must respond to the residents: the treaty were ratified and are effective annual budget law. Revenues are Tax returns for private entrepreneurs permanent establishment in Ukraine is appeal within 20 calendar days. If they • Passive income (dividends, interest, from 1 January 2014. The new treaty allocated based on source, rather than must be filed by 9 February of the not liable to file tax returns or pay tax in fail to do so, the appeal is deemed to be royalties) from Ukrainian sources provides for the following WHT rates: by amount. One consequence is that following year. Ukraine. decided in favour of the taxpayer. The that is paid to non-resident entities is dividends – 5%/15%; interest – 2%; payments for some state taxes may need 20-day period may be extended by up to generally subject to 15% withholding royalties – 5%/10%. to be made to local budget accounts. Tax returns for CPT should be generally Resident companies and non-resident 60 days, but only if the authorities tax. submitted on an annual basis, but some entities with a permanent establishment advise the taxpayer in writing within Also, on 19 April 2013, a new tax treaty 9.7 Registration requirements taxpayers will have to submit them in Ukraine must keep records that the initial 20-day period. • Other payments, including between Ukraine and Ireland and a The tax registration of legal entities and quarterly (see Chapter 10.1). comply with tax rules. ‘engineering services’, lease payments, protocol to the treaty were signed. This private entrepreneurs in Ukraine should agency and brokerage fees are also

36 Doing business and investing in Ukraine 37 subject to 15% withholding tax, but In addition, the tax authorities may of a large taxpayer may be paused. a three year period will result in before the tax authorities commence an payments for most other services are perform unscheduled audits in any of Before starting an audit, the tax penalties of 25%, for a second offense audit, there will be a 3% penalty applied not subject to withholding. the following circumstances: inspector must present a written order and any subsequent breach - 50%. to the amount of under-declared tax. to the taxpayer, outlining the reason for, • 15% withholding tax applies to income • A taxpayer does not respond within 10 scope and period of the tax audit. The same penalties apply for If the taxpayer pays the underpaid tax on the sale of real estate and on profits days to a request for information from overstatement of VAT refunds. disclosed in the return for the tax period from sales of securities. the tax authorities when the latter are A possibility to request an electronic tax (without filing the adjusting tax return) cross-checking information, or when • Payments for freight services audit from the tax authorities, in order Criminal responsibility a 5% penalty applies. the cross-audit of another business (including sea freight) are subject to to verify tax compliance, will be The individual taxpayer (or officials) entity has revealed a violation by the 6% withholding tax. available for payers of simplified tax may be subject to criminal penalties if Submitting an adjusted tax return in the taxpayer. from 2014; for ‘micro’, ‘small’ and is proven. For tax evasion, course of a scheduled or unscheduled Withholding tax rates may be reduced • A business entity does not file tax ‘medium’ business taxpayers - from fines of up to UAH 425,000 (in certain tax audit is prohibited if the tax return under a relevant tax treaty (see Chapter returns on a timely basis. 2015; and for other taxpayers - from cases – not less than the amount of tax relates to the period covered by the tax 9.5). 2016. assessment) may be imposed in audit. • A taxpayer submits adjusting tax combination with the prohibition from returns for periods covered by the Payments to non-resident persons for 9.13 Penalties occupying certain positions or engaging Penalties during appeal audits of the tax authorities. advertising services are not subject to in certain activities for up to three years, Penalties and interest are not accrued withholding. However, the resident • A taxpayer initiates an appeal process Late filing or confiscation of property (depending during the appeal process (see Chapter payer is required to pay a 20% surtax against an assessment and refers to In addition to a nominal penalty for late of the amount of the tax assessed). 9.10). based on the value of the services for the facts, which were not investigated filing (UAH 170 for the first and UAH production and/or distribution of the during the audit. 1020 for a second within one year), if The individual could be dismissed from 9.14 Tax ruling advertisement from its own cost. the tax authorities assess tax when a criminal responsibility if all the tax A tax clarification (ruling) may be • A business entity is reorganised or taxpayer fails to file a return, penalties assessments with penalties and interest sought from the tax authorities, who are liquidated. A resident payer is also required to pay a could reach up to 50% of the tax are paid before the criminal proceedings required to issue such clarifications. Tax 12% tax if a payment is made to a • A taxpayer claims a VAT refund for assessed. against them are instituted. clarifications are not legally binding for foreign insurer or reinsurer whose an amount exceeding UAH 100,000 the taxpayer and may be challenged in rating of financial reliability does not (the unscheduled audit can only Late payment of tax If an individual is found guilty and is not court. A taxpayer may use the tax ruling meet the requirements set by the be performed in respect of such a If a taxpayer (i) does not pay the amount willing or able to pay the fine, the court as guidance on the methodology to be authorised state agency. refund). of tax shown in its tax return or monthly has the ability to convert the fine into applied by the taxpayer. amount of advance payment of CPT on imprisonment (capped by 10 years for • If a taxpayer does not provide a VAT As the taxes on advertising and time, or (ii) fails to pay an assessment tax evasion). In practice, the tax ruling does not invoice or provides an invalid VAT insurance are levied on the resident within the time shown on the provide solid protection against tax invoice and a respective claim is party, they cannot be relieved using a assessment notice (within 10 days of the Interest for late payments assessments and penalties. submitted, but the taxpayer does not tax treaty. final resolution of the appeal, if the When tax is not paid on time, interest respond to the written request from assessment is appealed), penalties are for late payment is charged on a daily However, it is prudent to consider the tax authorities within 10 days from 9.12 Tax audits imposed as follows: basis in addition to the above penalties. MRDU interpretations that substantially the date of receiving the request. The frequency of the scheduled audits Under a general rule, the rate is 120% of reduce the risk of conflict with the • 10% of the underpaid tax for delays of performed by the tax authorities • The courts, investigation authorities, the NBU discount rate that is effective at MRDU. up to 30 calendar days, and depends on the risk rate of activities state investigators or public the date the payment was due or the carried out by a taxpayer. In general, the prosecutors make a decision within a • 20% of the underpaid tax for delays date the payment was made, whichever frequency of scheduled tax audits for criminal case. exceeding 30 calendar days. is higher. Interest is charged on the high-risk business is limited to one time entire outstanding tax, including • If, in respect of the tax officer who per year. Business entities must be Understated tax liabilities penalties. conducted the tax audit, a criminal notified of the audit in writing at least If, during an audit, the tax authorities case or internal investigation was 10 days before the scheduled audit. The determine that the tax liability shown in For amounts additionally assessed by started. scheduled audit should be carried out the taxpayer’s return is understated, the tax authorities, interest is accrued within a maximum of 30 business days they will impose penalties of up to 50% from the date the tax was due using the The duration of an unscheduled audit (i.e. for large taxpayers – 30 days, for of the tax assessed, depending on NBU discount rate effective at this date. cannot exceed 15 business days for large small – 10 days, for others – 20 days), number of similar breaches during the taxpayers (5 and 10 days for small and although the period may be extended by three-year period. Voluntary disclosures other taxpayers respectively), but may up to 15 days (15, 5 and 10 days If a taxpayer voluntarily discloses be prolonged by an additional 10 respectively depending on the size of the According to the Tax Code, the first through the submission of an adjusting business days (2 and 5 days taxpayer) or the audit may be paused breach of the respective tax rules within tax return and pays the underpaid tax respectively). The unscheduled tax audit (for large taxpayers).

38 Doing business and investing in Ukraine 39 10.1 Corporate tax system • the income arises from activities Taxpayers with annual turnover for the performed or the property is located in previous year not exceeding UAH 10 Companies Ukraine; or million and newly established Taxation of corporations Ukrainian entities and foreign entities companies have to submit an annual tax • in the case of dividends, interest, doing business in Ukraine through a return and pay CPT on an annual basis. royalties and other passive income, permanent establishment are liable for the income is paid by a resident of corporate profits (income) tax (CPT). Tax returns are based on the financial Ukraine. The tax rate is 19% for the year 2013 statements of the company. (and will be reduced to 16% for 2014 Professional services, except specific and the following years). Permanent establishments engineering services, are not subject to The domestic definition for a permanent withholding. Reduced CPT rates of 0% and 3% are representation essentially adopts the applicable for the income of insurance definition of a permanent establishment Accounting period (compliance) companies. Long-term life insurance found in the OECD Model Tax The reporting year for companies premiums and pension insurance Convention. generally follows the calendar year. The premiums are subject to a 0% rate, but exception is for agricultural manufa- the 3% rate applies for gross insurance The Tax Code of Ukraine provides three cturers, which report based on a June 30 Investor considerations • When companies pay dividends, premiums regarding other insurance, tests as follows which are used to year end. they are generally required to pay investment income, and some other determine whether or not activity of a • The standard corporate tax rate is 19% advance corporate tax (ACT) on income from insurance activities non-resident creates a permanent for 2013 and will be reduced to 16% in Starting from 1 January 2013 taxpayers dividends at the standard corporate (commissions received for agent and establishment in Ukraine: 2014 and following years. with an annual turnover exceeding UAH profits (income) tax rate with some other similar services, penalties for the 10 million (excluding agricultural • a fixed place of business test (through • Qualifying small companies may opt to exceptions. This is in addition to breach of a contract, etc.). Profits earned producers) make monthly advance which the non-resident carries out all use a simplified tax system (with very potential withholding taxes of up to by insurance companies from non- corporate tax payments in the amount of or part of its business activities) favourable tax rules). 15% (subject to treaty relief). insurance activities are taxed at the 1/12 of the previous year’s tax liabilities. standard CPT rate. • a dependent agent test, and • There is no group consolidation. • and respective expenses are based on the date of Together with an annual tax return such • a service permanent establishment • Five major depreciation methods may Qualifying small companies may elect to transfer of the title on goods/ issuance taxpayers have to provide a calculation test. be utilised. be taxed under a simplified tax regime of services acceptance act. of monthly advance payments for the at beneficial rates (refer below). • Losses may be carried forward next 12 months. Such taxpayers are not The term ‘permanent establishment’ • The concept of beneficial ownership is indefinitely, subject to certain required to file quarterly corporate tax specifically includes, inter alia, mentioned in the Tax Code. Resident entities are liable for Ukrainian limitations (but not by non-residents). returns. headquarters, branches, offices, tax on their worldwide income. Foreign • The Tax Code provides for the concept factories, workshops, mines, oil or gas • Taxpayers with annual turnover for taxes should be available for credit of a ‘service permanent establishment’. If the taxpayer is expected to pay wells, quarries and any other places the previous year exceeding UAH 10 against Ukrainian tax liabilities, but monthly advanced corporate tax where natural resources are extracted. million only have to submit an annual • Extensive transfer pricing rules have difficult to obtain in practice. The payments but did not have a taxable tax return but have to make monthly been adopted and will apply from amount of foreign is limited to profit or was in a tax loss position in the A resident acting on behalf of a non- advance corporate tax payments 1 September 2013. They generally the amount of Ukrainian tax that would first quarter of the reporting year, the resident is not treated as an agency (ACT) in the amount of 1/12 of the comply with the international arise from the equivalent income in taxpayer may elect to file a CPT return permanent establishment if (a) it acts on previous year’s tax liabilities. standards. Ukraine. and pay tax on a quarterly basis. Similar behalf of more than one non-resident, requirements apply to taxpayers with an and/or (b) it acts in the ordinary course Foreign entities are liable for Ukrainian annual turnover exceeding UAH 10 of its business. tax only on income from sources in million that did not receive taxable Ukraine. In broad terms, income will profit for the previous year but appear in The service permanent establishment have a source in Ukraine if: a tax payable position in respect of the test provides that the provision of first quarter of the reporting year. services by a non-resident through its

40 Doing business and investing in Ukraine 41 employees or other personnel in Ukraine Holding companies and group taxation non-VAT-registered entities pay 5% tax The list of qualifying IT activities, in Other tax incentives • The profits of producers of qualifying (apart from the provision of personnel) There is no system of group taxation in accordingly. particular, includes production/sale of Apart from small businesses, baby food products from the sale of shall constitute a permanent Ukraine. All members of a group must software, computer programming and agricultural producers, IT companies such domestically produced products • Legal entities with an annual revenue establishment provided such activities file separate tax returns. similar activities, consulting on and qualifying investors discussed are tax exempt. of up to UAH 20 million, without (within the frame of one project) last informatisation, implementation and above, the Tax Code provides for certain limitation on number of employees • An investor’s income derived from more than 6 months in any 12-month Dividends received by a Ukrainian management of IT systems, and data additional tax ‘holidays’ and incentives. (‘sixth group’ of ). Such qualifying investment projects period. entity from another Ukrainian entity are processing. Specifically, the following businesses are VAT-registered entities pay 5% of their (resulting in job creation) in qualifying exempt from CPT. entitled to benefit from 10 years of CPT income, while non-VAT-registered industries is exempt from CPT until A construction site in Ukraine may also Some value-added tax (VAT) incentives exemption from 1 January 2011 (subject entities pay 7% tax accordingly. 2018 and will be taxed at a reduced give rise to a permanent establishment, Dividends received by Ukrainian are also available for the supply of IT to certain limitations and qualifying CPT rate of 8% from 2018 to 2023. provided the length of the construction companies from foreign companies products. criteria): This regime also foresees easier activities exceeds six months. controlled (at least 20% shareholding) • Qualifying IT companies are entitled reporting for small businesses under the • ‘light’ industry by these Ukrainian companies (except Favourable tax regime for investors to use a reduced CPT rate of 5% until simplified tax system. When a foreign company conducts for those having ‘offshore status’) are Starting from 1 January 2013 until 1 • ship- and aircraft-building industries 2023. business in Ukraine through a exempt from CPT. January 2018, Ukraine provides a rate of However, specific types of business • enterprises that produce machinery • Taxable gains on sales of securities are permanent establishment, taxable 0% CPT for taxation of investor’s income activities are prohibited under this tax for the agricultural industry subject to a reduced CPT rate of 10%. income should be determined on the Cost sharing and similar intra-group derived from qualifying investment regime (inter alia, transactions with same basis as for domestic entities. If it payments, other than remuneration for projects resulting in job creation in • power generating companies that • There are also certain tax incentives certain excisable products, the is not possible to determine taxable services actually rendered, may not be qualifying industries. receive profit from the generation of for the fuel and energy sectors and for exploration/production/sale of precious profit in Ukraine based on the ‘direct’ deductible. electric energy from renewable energy enterprises supplying water, heat, and metals and stones, company method (taxable income less deductible The government has yet to provide the sources, and wastewater disposal services. management and communication expenses), the allocation method or 10.2 Incentives and special tax details of the industries that will qualify services). • three, four and five star hotels. notional method should be used. regimes for this incentive, but the list of such In addition to the above, Ukraine offers qualifying industries is likely to include There are a number of industry specific generous depreciation rates for most Agricultural producers The allocation method requires the Tax holidays high-tech, eco-friendly, manufacturing tax incentives available: fixed assets, i.e. property, plant and Agricultural producers are entitled to taxpayer to allocate a portion of its Tax holidays may be available until the and export-oriented industries. equipment (see Chapter 10.4). use a very favourable tax regime (with • The publishing and cinematography worldwide income and expenses to end of 2015 for small businesses, but are exemption from CPT), provided certain industries will benefit from an Ukraine. This method is difficult to unlikely to impact international The incentives are granted for both new 10.3 Gross income requirements are met. The main incentive regime until 1 January 2015 apply and is rarely used in practice. The investors. A zero CPT rate is applicable investment projects and for criterion requires that income from the and 1 January 2016 respectively. tax authorities prefer the notional for those taxpayers who meet certain reconstruction or modernisation of Business profits sale of their own agricultural products method, which involves applying a criteria (including maximum amount of existing enterprises. • Certain incentives are available for Taxable profits are calculated as taxable constitutes not less than 75% of their notional margin of 30% to gross total income for reporting period, taxation of profit of investment funds. income less the allowable expenses, total gross revenue of the previous tax revenues earned in respect of activities minimal amount of salary paid to The incentives are provided under the which include depreciation charges. (reporting) year. • For enterprises selling domestically in Ukraine (generally, all funds that are employees, date of incorporation, etc.) following conditions: produced energy-saving goods in received by local permanent Taxable income encompasses all Under this regime the amount of tax due • the value of the investment should Ukraine, up to 80% of profits may establishments and representative Single (unified) tax revenues received by a taxpayer from all depends on the square of the agricultural exceed 3 million euros (EUR) for be tax exempt; and for enterprises offices). Qualifying small legal entities (only economic activities, unless the revenues land plot owned or rented by agricultural large businesses, EUR 1 million - for adopting energy-saving projects, up to companies that are 75% owned by are expressly exempted under the law, producers. The tax rates vary from 0.03% medium businesses, and EUR 0.5 50% of profits may be exempt. Ukraine has no special tax rules for individual investors or other legal and includes income from operating to 1% and apply to the normative million - for small businesses non-commercial representative offices entities on a single tax) may opt to use • Income from the sale of bio-energy activity and other income. monetary value of one hectare of established to engage in liaison-type the simplified taxation, accounting and • the number of new jobs created should fuel by producers of bio-energy fuel agricultural land. The tax rates also activities. Such offices are subject to reporting system. exceed 150 for large businesses, 50 - is exempt from CPT until 2020. Also, Allowable expenses encompass all depend on the type of such land. normal CPT, but an exemption from for medium businesses, and 25 - for the same tax exemption is available for expenses incurred in relation to income tax may be available for the There are now two categories for legal small businesses producers of electric and heat energy ‘business activities’ resulting in a IT companies representative offices carrying out entities subject to the single (unified) generated from bio-energy fuel, as reduction of economic benefits by a Qualifying IT companies are entitled to • the salary level should exceed 2.5 activities of an auxiliary and tax: well as for producers of domestic decrease in assets or an increase in utilise the reduced CPT rate of 5% from times the minimum monthly salary set preparatory nature for a foreign entity. equipment powered with bio-energy liabilities unless a specific provision in • Legal entities with annual revenue of 1 January 2013 until 1 January 2023. at 1 January of the reporting year (the power. the law restricts the deduction. There up to UAH 5 million, and an annual The main criterion requires that income minimum salary as of 1 January 2013 In practice, the tax authorities tend to are two major categories of expenses: average number of employees up to from IT activity for the last four is equal to UAH 1,147) • An exemption from CPT is available challenge the tax exempt status of operational expenses (those related to 50 persons (‘fourth group’ of single consecutive quarters (two for newly for producers of gas (methane) until non-commercial representative offices the cost of goods/services sold) and tax). Such VAT-registered entities established companies) constitutes not 2020. and courts have tended to support the ‘other’ expenses. pay 3% of their income, while less than 70% of the total gross revenue. assessments.

42 Doing business and investing in Ukraine 43 ‘Business activities’ are defined in the VAT. For non-VAT-registered persons, • Expenses incurred in connection Foreign income Assets may be depreciated using any of law as “activities related to the the VAT component of most expenses with the acquisition of consulting, Foreign income is taxed under the the following five methods: production and/or sale of goods or the will be included in deductible expenses, marketing and advertising services general rules, and there are no special 1. Straight-line method provision of works/services, aimed at except for the VAT related to the from a non-resident at a rate in excess rules regarding anti-deferral or income generation, and carried out by a purchase and repair of fixed assets, of 4% of the income (net of VAT and unremitted earnings. 2. Residual value method person (either an individual or a legal which form their balance value, subject excise tax) for the year preceding 3. Accelerated residual value method entity) on their own and/or via its to depreciation. the reporting year (unless provided Inventory valuation (used only for machinery and branches, or any other person acting for through permanent establishments A taxpayer is entitled to adopt any of the vehicles) the benefit of this person, including Research and development expenses of non-residents, which are taxed methods of inventory valuation acting under agency agreements”. other than those subject to amortisation accordingly). If the non-resident is a prescribed by the accounting standards, 4. Cumulative method are deductible when incurred, provided resident of an offshore tax regime, the namely: the first-in, first-out (FIFO) 5. Production method Despite the Tax Code reconciling tax they are business related. expenses above are not deductible. method; weighted average methods; accounting with financial accounting, identified cost of unit of goods; • Expenses incurred in connection with At the same time, ‘other assets’, some differences still remain. Starting The deduction of loan loss provisions normative cost; or sale price. The last-in, the acquisition of engineering services temporary facilities and returnable from the reporting periods of 2013, created by banks against lending and first-out (LIFO) method does not apply from non-residents at a rate exceeding containers are only subject to the taxpayers will be required to provide other active operations is capped at 20% in Ukraine. 5% of the customs value of the straight-line and production methods. information on tax differences in their of a bank’s total amount of indebtedness equipment imported under a related financial statements based on the forms due, i.e. loan portfolio. Other financial Depreciation and amortisation contract (unless provided through Expenses related to repairs of fixed and methodology approved by the institutions (excluding insurance Assets costing more than UAH 2,500 permanent establishments, which are assets (including leasehold) are subject Ministry of Finance of Ukraine. companies) are entitled to deduct loan and with a useful life exceeding one taxed accordingly). If the non-resident to depreciation in excess of 10% of the loss provisions in an amount up to 10% year are subject to depreciation. is the resident of an offshore, or the aggregate book value of all assets as of Accounting for income of all debt claims. Depreciation is determined on a enterprise to which the fee is charged the beginning of the tax year (the Income from the sale of goods is monthly basis. Each asset is accounted for the engineering services is not the amount below the limit is deductible). recognised at the date of transfer to the Non-deductible expenses for separately. beneficial owner of such services, the buyer of the title of ownership of the The main items that are not deductible expenses above are not deductible. The following intangible assets may be goods. for CPT purposes are: Fixed assets are divided into 16 groups amortised using one of the above- Payments for goods or services to foreign according to their statutory minimal • Expenses that are not supported by mentioned methods over the period of Income from supply of services is entities in listed jurisdictions operating useful life. The useful life of fixed assets relevant documents (e.g. contract, an asset’s lifetime (considering the recognised at the date an acceptance offshore tax regimes (36 may be extended by a taxpayer (see voucher, receipt). minimum period set by the law for some statement or another document is issued jurisdictions are listed) have limited table below): classes): in accordance with existing laws, which • Organisation of receptions, deductibility. Only 85% of the amount confirms the execution of works and presentations, festivals, entertainment of such payments is deductible, unless Group Minimum • rights to use natural resources services. and recreation, and the procurement evidence is shown that the entity is operating period, years • rights to use property and distribution of gifts (other than subject to the ordinary tax rules of that Other income shall be recognised with advertising purposes). jurisdiction (i.e. it does not benefit from • rights on intangible assets Land − according to statutory accounting rules, the offshore tax regime). • Amortisation of goodwill. • technology, know-how (not less than except for special cases provided for Capital costs for land 15 Royalties paid to non-residents also have five years) under the Tax Code. • Cost of goods sold to related parties, to improvement limited deductibility (refer below). the extent that the sale price does not Buildings 20 • copyrights (not less than two years), Ukrainian banks should recognise exceed such cost (until 1 September and Accounting for expenses taxable income from lending on the date 2013). Transmitting devices 10 The expenses that form the cost of goods • other intangible assets. when interest income is recognised Machinery and 5 • Expenses related to the maintenance sold, work performed and services according to the accounting rules. equipment of management bodies, including rendered, should be recognised in the If not stated in the primary documents, mother companies. reporting period when income from the (including some 2 the useful life of an intangible asset is 10 10.4 Deductibility of expenses sale of such goods or services rendered electronic devices) years of continuous use. • Dividends paid. was recognised. Business expenses Vehicles 5 • Fines and penalties. Interest Expenses incurred in the furtherance of Other expenses are recognised in the Tools, devices, and 4 Ukraine does not have thin a taxpayer’s business activities should be • Repairs of fixed assets (including reporting period in which they were furniture capitalisation rules as such. The Tax deductible, unless a specific provision in leaseholds) subject to depreciation actually incurred subject to certain Code provides that interest is deductible the law says otherwise (see below). in excess of 10% of the aggregate Other fixed assets 12 requirements set by the law. if the related debt is used to fund the book value of all assets as of the Temporary facilities 5 business activities of the taxpayer. For VAT-registered persons, revenues beginning of the tax year (the excess is Returnable containers 6 and expenses are calculated without capitalised).

44 Doing business and investing in Ukraine 45 At the same time, there are restrictions payments (and foreign exchange losses) provision on reflecting tax losses in by individual transactions, but the currency account balances are computed Joint investment activity on the deductibility of interest payable in the period in which they are accrued. further reporting periods is not stated taxable gain will be calculated on an according to accounting standards. Joint investment activity (JIA) qualifies to non-resident related parties. Such clearly in the Tax Code. The amount of aggregate basis. The aggregate gain is as an autonomous taxpayer and should interest is deductible within the amount The lessor recognises taxable income for tax losses as of 1 January 2012 includes subject to a 10% CPT, and the aggregate Bad and doubtful debts be registered with the local tax of interest income plus 50% of the the total principal amount of the lease losses accumulated as at 1 January loss can be carried forward. To claim a deduction for bad or doubtful authorities. One of the participants to company’s taxable profit (excluding when the asset is transferred, and 2011. debts, a taxpayer must initiate an action the JIA should be appointed responsible interest income). Any interest paid to recognises the interest and commission Gains and losses should be calculated for collection. A reduction of taxable for accounting the results of the JIA. affiliates in excess of this limit is carried element of the payments over the term Ukrainian tax legislation does not and reported separately for stock income for bad or doubtful debts is Profits of JIA accrued or distributed forward to future tax periods. of the lease. provide for refunds for losses carried exchange transactions and off-stock allowed if: between the participants are subject to back. exchange transactions. CPT. The participant authorised for • the creditor applies to the court with Interest received by taxpayers is A lease is treated as a financial lease if it accounting is responsible for the tax a claim for debt collection or for included in their taxable income on a meets any of the following conditions: 10.5 Special tax rules The maximum carryforward period for payment. JIA is taxable under the initiating bankruptcy proceedings, or general basis. losses from off-stock exchange general rules and does not benefit from • The leased property is transferred for a Dividends – Advance Corporate Tax transactions with securities and • the creditor has a note of execution for any specific tax incentives. period during which at least 75% of its Interest-free loans from non-residents (ACT) derivatives is three years. collection executed by a notary. acquisition cost would be depreciated are taxable (and deductible upon Dividends derived by a Ukrainian entity Other special tax rules under tax depreciation rules, and the repayment), unless they are received from their affiliates, both resident and Accumulated taxable losses from At the same time, the expenses related Special rules are available to deal with lessee is obliged to acquire the title to from shareholders for a period not non-resident companies located in transactions with securities and to income from the underlying goods/ the recognition of income/expenses the property during or at the end of exceeding 365 calendar days. non-tax haven jurisdictions, are exempt derivatives as of 1 January 2013 cannot services should be decreased as well. from long-term construction contracts the lease period. from corporate tax. be utilised. The cost of securities held at and ship-building contracts. Royalties • The amount of the lease payments that date will be deducted in arriving at If the taxpayer subsequently recovers an Royalties paid to non-residents in an equals or exceeds the acquisition cost Companies paying dividends are taxable gain when these securities are amount that has been deducted as a bad The positive difference between output amount exceeding 4% of income (net of of the property. required to pay ACT at the standard sold. or doubtful debt, the amount recovered and input VAT for agricultural VAT and excise tax) for the prior year rate, unless the dividends are paid to is included into taxable income (with enterprises subject to special tax regime • The book value of the leased property are not deductible. individuals or out of received dividends See the information on the special respective deductible expenses). is included into taxable income and at the end of the leasing agreement (with some other exceptions). The excise tax on disposal of securities subject to the standard CPT rate. does not exceed 25% of the original Furthermore, royalties paid (i) to advance payment is used to meet below. When a creditor pursues action to cost of the property at the beginning of non-residents in offshore zones, (ii) to subsequent CPT liabilities (other than recover a debt and the debtor fails to 10.6 Transfer pricing rules the agreement. non-beneficial owners of the respective for insurance companies). Foreign exchange pay, the debtor is required to reduce Recently the Parliament of Ukraine payment, (iii) to a person who shall not • The property has been manufactured Taxable income in foreign currency is deductible expenses in the period when adopted the Law ‘On Changes to the Tax be taxed with regard to such royalty in to the order of the lessee and cannot If ACT is not able to be used in the year revaluated in Ukrainian hryvni at the the court issues the respective resolution Code of Ukraine in respect of transfer the country of their residence or (iv) for be used by other entities when the the dividend is paid, it is carried over to National Bank of Ukraine’s (NBU’s) or the execution of a note duly executed pricing rules’ (hereinafter – the Law on intellectual property rights generated in lease expires because of the property’s future years, but cannot be refunded. official exchange rate at the date when by a notary. If the debt is subsequently TP) which comes into force on 1 Ukraine are not tax deductible at all. processing and quality features. the respective taxable income should be repaid, the debtor may claim a September 2013. According to the law, companies are recognised under the general rules of deduction. Income from royalties received by Notwithstanding the above-determined entitled to offset ACT on dividends the Tax Code, and, in terms of TP rules apply for the purposes of CPT taxpayers is included in their taxable rules, the parties may agree to treat the against ‘general’ advance CPT, which is previously received payments, at the Incentives for gas and oil industries and VAT. According to the Law on TP, income on a general basis. lease as an operating lease for CPT payable by taxpayers whose annual exchange rate on the receipt date. (Product Sharing Agreement) the list of controlled transactions purposes. If they do so, they must turnover for the previous year exceeds The Tax Code has a specific section on includes: Operating Leases continue to treat it as an operating lease UAH 10 million for the year. If the Expenses incurred (and not paid) by the Product Sharing Agreements (PSAs). • transactions with related parties-non- Lease payments on operating leases are throughout the term of the lease. amount of ACT on dividends exceeds the taxpayer in a foreign currency on the residents of Ukraine. tax deductible for the lessee. The lessor total amount of ‘general’ advance CPT, purchase of goods, works, and services According to the Tax Code, parties to a is entitled to claim a deduction for Losses the excess of ACT may decrease the are recognised at the NBU’s official PSA are exempt from paying taxes other • transactions with related parties- depreciation of the leased assets. Ukrainian tax legislation does not future ‘general’ advance CPT until it is exchange rate on the date of such than corporate profits tax, value-added residents of Ukraine that: provide refunds for deductions. fully utilised. purchase, and, in case of a prepayment, tax, personal income tax, a single charge –– declared tax losses for the previous Financial Leases However, tax losses may be carried at the exchange rate on the payment for mandatory state social security in tax year For tax purposes, financial leasing is forward, subject to certain limitations. Securities date. respect of Ukrainian employees and treated as if a sale has been made. The New rules on taxing transactions with foreign individuals employed in –– apply special tax regimes lessee is entitled to claim depreciation In particular, tax losses accumulated as securities were introduced in 2013. Realised and non-realised foreign Ukraine, state charges and duties for –– apply CPT and / or VAT rates other charges on such property. of 1 January 2012 by taxpayers with exchange gains/losses are generally receipt of state services (if any) and than the standard rates annual revenues for 2011 not less than Taxable gains on sales of securities are treated as taxable/deductible. Foreign charges for subsoil use. Charges for The lessee deducts the interest and UAH 1 million can be utilised during subject to a reduced CPT rate, while currency differences arising from subsoil use are calculated based on –– are non-CPT and / or non-VAT commission elements of the lease 2012-2015, 25% each year. The losses are available to offset future unsettled debt balances and foreign reduced tax rates. payers. gains. Gains/losses should be computed

46 Doing business and investing in Ukraine 47 • transactions with residents of low tax • 5% of the controlled transaction deducted. If the land plot is sold in the motorbikes, certain trailers, liquefied usage are calculated as follows: jurisdictions (where the corporate value - for failure to file a report on future, the purchase cost is offset gas, petrol, diesel fuel, and certain other profits (income) tax rate is less than controlled transactions against the proceeds. oil products. The rates are specific for Payments for subsoil use for the Ukrainian rate by 5% and more). each product or group of products hydrocarbon producers should be • 100 minimum monthly salaries (UAH The list of the low tax jurisdictions will Losses incurred in the disposition of subject to excise tax. calculated as a percentage of the value 114,700 based on the minimum salary be set by the Cabinet of Ministers of land are non-deductible. of extracted products (for gas – the as at 1 July 2013) - for failure to file TP Ukraine (CMU). Rates of excise tax can be ad valorem (a average customs value of imported gas, documentation. Land tax percentage of the value of the goods), for oil – the average price for Urals at the The threshold for controlled Land tax is assessed annually for the specific (in monetary units per unit of London International Petroleum Large taxpayers have the right to transactions is UAH 50 million (USD following year and is paid monthly in goods), or combined. A list of selected Exchange). Separate charge rates for the conclude Advance Pricing Agreements 6.25 million), net of VAT. This threshold equal instalments by the owners or users rates can be found in Appendix D. use of subsoil apply to the storage of oil and agree in advance on certain terms of applies cumulatively for all transactions of land. The rate of land tax depends on and gas products. controlled transactions with the Ministry with one counterparty per year. the category, location and existence of Special excise tax applies to disposal of of Revenues and Duties of Ukraine. the state valuation of each particular securities and transactions with Hydrocarbons extracted under a The Law on TP provides five pricing land plot. derivatives with the following criteria Production Sharing Agreement are The Law on TP prescribes transitional methods that can be used to determine and tax rates: subject to reduced tax rates – 1.25% for provisions till 1 January 2018 for foreign the market price: 10.8 Other taxes gas and 2% for oil. trade transactions with residents of low • 0% for stock exchange transactions • Comparable uncontrolled price (CUP) tax jurisdictions in respect of the with derivatives Special Pension Fund charges Charges for the use of subsoil are method prescribed types of commodities, such The following special Pension Fund • 0.1% for off-stock exchange deductible for CPT purposes. as agricultural, metal, iron ore and • Resale price method charges are payable to the budget: transactions with listed securities chemical products. Local taxes and duties • Cost plus method • 3%, 4% or 5% charge on the value of • 1.5% for off-stock exchange The principal local taxes and duties that Taxpayers performing these a new car, which is subject to the first transactions with non-listed securities, • Profit split method may affect business are: transactions shall use, according to their registration with the state authority and • Net profit (margin) method own choice, one of the following two (State Traffic Inspection), depending • duty charged for certain business • 5 tax-free allowances (currently UAH options for the determination of prices on the said value (for the year 2013, activities 85) for transactions with off-exchange The CUP method is the primary transfer for tax purposes: the following criteria apply: up to UAH derivatives. • tourism duty pricing method to be used over all other 189,255 – 3%; above UAH 189,255, • use the information about the prices of methods. but not more than UAH 332,630 – 4%; • tax on immovable property (property the stock exchange (for commodities Shares of private joint stock companies, above UAH 332,630 – 5%) tax) traded on the stock exchange) or corporate rights issued in a form other All affected taxpayers should file a prices published in the official sources • 1% charge on the acquisition of real than securities, securities issued by • duty for parking of a transport vehicle, report on controlled transactions by the of information set by the CMU (for estate payable by individuals and legal non-residents, and a few other financial and first of May (each year) of the year other commodities) and adhere to the entities that purchase real estate instruments and transactions are following the reporting year. The • single (unified) tax. permissible deviation percentage of exempt from excise tax. documentation on TP, substantiating the • 7.5% charge on mobile communication up to 5%; or market level of prices, should be services Charge on environmental pollution submitted only upon the request of the • justify the prices by using one of • 5% charge on sales of jewellery. Environmental pollution charges tax authorities. the methods set by Article 39 of the (ecological tax) are imposed on any Tax Code and disclose copies of the Stamp duty legal entity that discharges The Law on TP introduces a new type of contracts for subsequent sales of Stamp duty is imposed on certain contaminants into the environment (air tax audit - specialised TP audit, which commodities to unrelated parties. actions, including the notarisation of or water) or disposes of waste. The will be conducted if a TP report and/or contracts and the filing of documents actual rate depends on the type and TP documentation is not filed, the TP The Law on TP establishes a penalty of with the courts. In most cases, the toxicity of each contaminant. documentation is filed with violations or UAH 1 for each violation related to amounts involved are nominal. the prices in controlled transactions are understatement of taxes according to Charge for subsoil usage identified as deviating from the market the new rules during the first year of Operations carried out at commodity Companies engaged in extracting level. The duration of a TP audit cannot their application. exchanges and real estate sales attract a mineral resources in Ukraine, regardless exceed 12 months. stamp duty of 1%. of the form of their ownership, are liable 10.7 Transactions with land to a charge for use of subsoil. The Law on TP establishes the following Excise tax penalties for non-compliance with the Corporate tax Excise tax applies to certain goods The payments to be made for subsoil TP rules: Special rules apply to expenses/losses imported to or produced in Ukraine. arising from the purchase/sale of land. Excisable goods include ethyl alcohol, Expenses related to the acquisition of value of extracted mineral resources * alcoholic beverages, tobacco and land are neither depreciated nor specific tax rate (%) * coefficient tobacco products, cars, car bodies,

48 Doing business and investing in Ukraine 49 11.1 Territoriality and residence Individuals registered as Ukrainian In practice, non-resident individuals Individuals are classified into two freelancers or private entrepreneurs also whose income from Ukraine is exempt categories for income tax purposes: qualify as Ukrainian tax residents. under a relevant tax treaty will not need Taxation of individuals to obtain a tax ID number unless it is • Residents are liable for tax on their Tax registration required for purposes other than worldwide income. All taxpayers, including foreign taxation. • Non-residents are liable for tax only nationals, must register with the State on their Ukrainian-sourced income Registry for Individual Taxpayers and be Individuals are obliged by law to inform (including salary paid by a foreign assigned a personal tax ID number. This the tax authorities of their valid tax company for work in Ukraine). number is required for various address. This information should be transactions such as registering submitted to the local tax office where Ukrainian companies, renting the foreign national is registered. The According to the legislation, a person is apartments, opening bank accounts and procedure is similar to initial tax ID a tax resident in Ukraine if they have a paying personal income tax. Receiving registration. place of abode in Ukraine. If the person the ID number is also one of the also has a place of abode in another conditions for obtaining the right to Tax rates country, they are deemed to be a claim a tax deduction in respect of The following tax rates are applicable resident of Ukraine if they have a certain expenses incurred by a taxpayer for the main types of income in Ukraine: permanent place of abode (domicile) in during the reporting year. Investor considerations • A 30% rate applies to income received Ukraine. as winnings or prizes (except for • The tax year is the calendar year. Salary, other benefits under employment and civil agreements, state and state or non-state money lotteries, If the individual has a permanent place non-state money lottery winnings or gambling, foreign income and other • Ukrainian tax residents are taxed sport competitions or gambling) of abode (domicile) in Ukraine and income not covered elsewhere on their worldwide income. received by both tax residents and tax another country, the person is deemed Non-residents are subject to Ukrainian non-residents. to be a resident of Ukraine if their centre up to UAH 11,470* per month 15% tax only on their Ukrainian-sourced of vital interests is in Ukraine. • Social security matters are a major cost income. exceeding UAH 11,470 per month 17% and administrative issue in Ukraine If an individual’s centre of vital interests • The standard tax rates of 15% - 17% and are discussed in Chapter 7.3. Winnings or prizes (except for state or non-state money lotteries cannot be determined, the individual 30% apply to most types of income for both or gambling) will be deemed to be a resident of tax residents and tax non-residents. Ukraine if they stay in Ukraine for at Interest: The 17% rate applies to income in least 183 days during the tax year excess of UAH 11,470 (approximately (calendar year). from Ukrainian and foreign banks until 31 December 2014 Exempt USD 1,430) per month. from Ukrainian banks after 1 January 2015 5% • Dividends received are generally If residential status cannot be from foreign banks after 1 January 2015 15-17% subject to a 5% tax rate. determined based on the aforementioned, an individual will be • Interest income from current or Dividends: deemed to be a resident of Ukraine if deposit bank accounts is currently tax they are a citizen of Ukraine. from Ukrainian and foreign companies 5% exempt. Notwithstanding the above, the Ukrainian Disposal of real estate by tax residents: tax authorities could consider that all Ukrainian citizens are tax residents of first sale 0% Ukraine and subject to personal income second and further sales 5% tax, even if they reside abroad. first and subsequent sales of property abroad 15-17% An individual may also voluntarily choose Disposal of real estate and movable property by non-residents 15-17% that their main place of abode (and therefore tax residence) is in Ukraine. * For 2013, to be indexed further according to the minimum salary increase.

50 Doing business and investing in Ukraine 51 11.2 Private entrepreneurs –– Tax rate applied: 1-10% of the In addition, such private entrepreneurs • accommodations or other tangible methodology established by the Cabinet subsequent years. Sales proceeds and minimal monthly salary. are required to pay compulsory Unified or intangible assets provided for an of Ministers of Ukraine. expenses must be supported with General tax system Social Contributions equal to 34.7% of employee's use free of charge documents. For taxation purposes, –– Reporting period - calendar year. As a general rule, the taxable income for the statutory minimum salary (for the A non-resident individual may rent out equity received as a gift or an • the value of goods and food provided individuals registered as private –– Tax payment deadline - 20th day of 3Q 2013 – minimum monthly Ukrainian real estate only via a inheritance is considered as bought for a to employees free of charge entrepreneurs (including foreign each month. contribution is USD 50 and will increase Ukrainian individual private price equal to the state duty and tax is nationals) is calculated as the difference by the end of the year to USD 53). • the reimbursement of an employee's entrepreneur or a resident legal entity, paid as a result of the receipt of the gift/ Private entrepreneurs in the ‘second’ between gross income and the Entrepreneurs can make extra personal expenses or losses, except for based on a written contract with such inheritance. group: documented expenses connected to contributions for their social security on items specifically exempt from tax private entrepreneur or resident legal their activity, subject to the standard –– Annual revenue does not exceed a voluntary basis (up to the cap entity. Incompliance with this If an investment asset is sold to a related • financial aid 15% - 17% rates. UAH 1,000,000 and the private established by the law). requirement is considered tax evasion. person at a loss, the loss is disregarded. entrepreneur has no more than 10 • the value of goods and services Losses are also disregarded when an An entrepreneur on the general tax employees. Income from independent professional provided free of charge and the value If the lessee is a business entity, it is asset is gifted. regime is entitled to deductions from activities of discounts when goods and services obliged to act as a tax agent and to –– Tax rate applied: 2-20% of the their gross income on the same basis as Income from independent professional are sold to employees at less than withhold tax from rent payments to an The following transactions are also minimal salary per month. corporations. activities (scientific, literary, market price, and individual, unless that individual is treated as the sale of an investment –– Reporting period - calendar year. educational, accounting, medical, etc.) registered as a private entrepreneur asset: • amounts paid by an employer to the Tax returns should be filed by 9 is subject to the standard rates of whose activity is renting out property. –– Tax payment deadline - 20th day of benefit of an employee under any • the exchange of one investment asset February of the year following the taxation (15%-17%). Individuals who each month. voluntary insurance. for another investment asset. The sales reporting year and should indicate all perform such activity should be If rental income is received from proceeds are deemed to be the market forms of income (i.e. from registered with the tax authorities. They someone other than a tax agent, the Private entrepreneurs in the ‘third’ There are a number of important value of the shares that the individual entrepreneurial and non- can utilise the right to deduct expenses recipient is obliged to pay tax from such group: exceptions: transfers entrepreneurial activities). Advance tax as entrepreneurs on the general tax income on a self-assessment basis every is paid in four instalments throughout –– Annual revenue does not exceed system. • The value of the use of, or quarter. • the redemption of corporate rights by the year. The final tax payment is due by UAH 3,000,000 (w/o VAT) and the compensation for, housing or other an issuer 19 February of the year following the private entrepreneur has no more 11.3 Gross income tangible and intangible assets that Income from prizes and winnings • the return of funds or property in reporting one. than 20 employees. Resident taxpayers are liable to pay tax belong to the employer and are Cash prizes from the state lottery are the authorised fund of a company if in respect of any income received or provided to an employee for free are exempt from tax in an amount not –– Tax rate applied: 3% of revenue the taxpayer ceases to be a founder/ The applicable rate of Unified Social credited/accrued in Ukraine or abroad taxable for the employee, except for exceeding 50 minimal monthly salaries. for VAT payers; 5% of revenue for participant or if the company is Contribution for private entrepreneurs during the reporting period, except for cases when they are required for the Prizes and winnings are taxed at 30% non-VAT payers. liquidated. on general taxation is 34.7% of the items specifically exempted from tax fulfilment of the employee’s labour (except for state or non-state money taxable entrepreneur’s income (subject –– Reporting period - calendar quarter. under the law. duties based on a labour agreement, lotteries or gambling). If prizes or In practice, the Ukrainian tax to a cap). prescribed by a so-called ‘collective winnings are received in non-monetary –– Tax payment deadline - 10 days authorities tend to disallow the Employment income agreement’ (an agreement between form, the income is grossed-up to after the reporting deadline. deduction of expenses for acquisitions in Single (unified) tax All income received or credited from the owner and the personnel), or the determine the tax base. The tax is respect of investment income received Individuals registered as private employment in monetary form or in law, within the limitations set therein. withheld by the entity paying the prize Private entrepreneurs in the ‘fifth’ from abroad, and impose tax on gross entrepreneurs (including foreign kind during a calendar year is subject to or winnings. group: • Limited employer contributions for sales proceeds from such income. nationals) may elect to be covered by the personal income tax. This includes all voluntary long-term life insurance or ‘single (unified) tax’ regime if they meet –– Annual revenue does not exceed basic pay, overtime pay, supplemental Investment income non-state pension insurance for the Disposal of real estate the qualification criteria. UAH 20,000,000 (w/o VAT). pay, awards and bonuses, compensation Dividend income received from benefit of an employee are not taxable. A residents’ gross revenue from the sale for unused vacations, honoraria, taxable Ukrainian and foreign companies is –– Tax rate applied: 5% of revenue of real estate (including incomplete The current legislation establishes four pensions, tax reimbursements, • Amounts paid by employers to generally subject to tax at a 5% rate. for VAT payers; 7% of revenue for constructions) is subject to tax at either groups of individual private allowances (e.g. living, education, educational institutions for training/ non-VAT payers. 0% or 5%, depending on the nature of entrepreneurs subject to the simplified transportation, entertainment and the re-training of employees are not Income from the sale of investment the real estate, the number of years of tax regime (which differ depending on –– Reporting period - calendar quarter. like), fees (including directors' fees), and taxable within limited amounts. assets is determined independently from possession by the seller, and the number the scope of activities that they are other income of a similar nature, other income. The gain or loss is –– Tax payment deadline - 10 days of real estate sales performed by the allowed to perform) and two groups for whether monetary, in kind, or made by Rental income determined for each investment asset after the reporting deadline. same taxpayer during a calendar year. legal entities (see Chapter 10.2). way of a payment to third parties on Rental income is subject to tax at the sold (sales proceeds less acquisition behalf of an employee. standard 15%-17% tax rates. This costs), and then aggregated for the year. Passive income (dividends, interest, The tax is based on the price indicated in Private entrepreneurs in the ‘first’ income is determined based on the If the aggregate amount is positive, it is royalties) received by individuals, as the sale agreement, but cannot be lower group: Additional benefits granted by contractual fee, but cannot be lower subject to tax at the standard 15%-17% well as income from the sale of real than the property's value calculated by employers also constitute taxable than the minimum rental fee tax rates. If the aggregate amount is –– Annual revenue does not exceed estate or transport assets (even if it was an authorised institution. The tax income and include the following main determined according to the negative, it is carried forward and UAH 150,000 and the private used for entrepreneurial activity) shall should be paid before the notarisation of items: applied against investment income in entrepreneur has no employees. be excluded from income subject to the the sale agreement. unified tax.

52 Doing business and investing in Ukraine 53 Income of non-residents is subject to tax confirmed by the appropriate tax resident taxpayer may claim a stamped with Apostille. If the above and remitting them to the state budget following the reporting year. Tax due on according to the same rules at 15%-17% documentation deduction from the annual taxable official confirmation is not available by and the appropriate authorities. the return must be paid by 31 July of the tax rates. income for a limited amount of the Ukrainian tax return filing deadline year following the reporting year. • proceeds from property insurance, documented expenses incurred in the (30 April of the year following the Tax agents should remit the tax Payment must be made in local currency provided the amount of No deduction is permitted for the cost of reporting year for: reporting one), the taxpayer should withheld to the state not later than the (UAH). There is no mechanism reimbursement does not exceed the the property. apply in writing for an extension of the date of the payment of the income to established by the Ukrainian legislation market value of the insured property • a limited amount of interest on a filing deadline till 31 December of the individuals. Tax in respect of income for payment of personal income tax in (increased by insurance payments), qualified mortgage, provided it is Disposal of movable property year following the reporting one. that is accrued but not paid to the foreign currency. and used to finance the acquisition of a A resident’s gross revenue from the sale individuals should be transferred to the taxpayer’s ‘main place of residence’ of movable property is subject to tax at a • proceeds from civil responsibility 11.7 Taxation of non-residents state within 20 calendar days following A taxpayer can officially apply for a 5% rate. insurance, provided the amount of • limited premiums for qualified Non-resident individuals are subject to the end of the reporting month. filing extension to 31 December of the reimbursement does not exceed the Ukrainian voluntary long-term life Ukrainian tax only on income that has a year following the reporting year, if the There is an exception for one sale per amount of damage actually incurred insurance or non-state pension source in Ukraine. The source rules for The tax is payable before or at the time documents from the foreign jurisdiction calendar year of a car, a motorcycle or a by the beneficiary, which is defined insurance for the benefit of a taxpayer individuals are broader than those for of the income payment. If income is paid are not available by the standard/ scooter, which is non-taxable. based on usual prices. and their family members (spouse, corporations. For individuals, any in kind, the tax agent should remit the general deadline for claiming a foreign parents, children), and income received from activities tax to the state no later than the next tax credit. The tax is based on the price indicated in Proceeds from life insurance when an performed, capital employed or property banking day following the date of • donations to Ukrainian charities the sale agreement, but cannot be lower insured person dies are taxed on the used in Ukraine will have a Ukrainian ‘payment’. If a tax resident departs from Ukraine, and not-for-profit organisations in than the value of the property calculated same basis as an inheritance. source. the individual must submit a ‘departure an amount not exceeding 4% of the by an authorised institution or its Tax agents who fail to withhold tax from tax return’ no less than 60 days before taxpayer's annual taxable income. ‘average market value’, depending on Other insurance proceeds are generally Income earned by non-residents from income paid to individuals are his departure, and settle the tax due the taxpayer’s choice. The tax should be subject to tax at the standard 15%-17% sources in Ukraine is generally taxed responsible for payment of the tax based on the assessment issued by the The total deductions may not exceed the paid before the notarisation of the sale tax rate. under the same rules and at the same liability plus 25%-75% fines, as well as tax authorities. No such requirement amount of taxable income received in agreement. rates as for tax residents (15%-17%), interest penalties depending on the exists for non-resident individuals. the form of salaries. Amounts not 11.4 Tax-exempt income unless otherwise specifically provided period of delay of payment. The deducted from the income of the Income of non-residents is subject to tax Apart from the exceptions already by the law. individual concerned is not obliged to Overpaid personal income tax should be reporting year cannot be carried according to the same rules at 15%-17% noted, the following are the main items settle the tax liability (i.e. the tax returned to the taxpayer within 60 forward. tax rates. No deduction is permitted for of income that are exempt from Consideration should also be given to authorities may only recover the tax by calendar days from the date of filing the the cost of the property. taxation: the provisions in the Ukrainian tax pursuing the tax agent). tax return. Upon the taxpayer’s request, Social security contributions treaties, which often exempt income the overpayment may be offset against • income from investments in securities Taxable income is reduced by the Inheritance and gifts earned by individuals from short-term Tax agents must file quarterly reports on the taxpayer’s future tax liabilities. issued by the Ukrainian Ministry of amount of an employee’s mandatory Income received as an inheritance or visits to Ukraine from Ukrainian tax. income paid to individuals and the Finance and cash prizes or winnings USC paid. The employer's mandatory gift is subject to tax at a 0% rate if amount of tax withheld from that Penalties for non-compliance: from state lotteries (not exceeding 50 USC is not included in the taxable received from a resident spouse, son, There is also an unclear provision that income. minimal monthly salaries) income of the employee. • Late reporting or non-reporting daughter or parent. A 5% rate applies if was in the previous PIT Law, but was not attracts a penalty in the amount of received from resident testators other • alimony received from residents enforced in practice. If ‘Ukrainian Tax returns for individuals For details on Social Security UAH 170 – 1,020 (approx. USD 20 than those mentioned. 15%-17% rates source’ income is paid to a non-resident An individual is obliged to file a tax • shares received from the capitalisation contributions, see Chapter 7. - 128). apply to inheritance and gifts received by another non-resident, such income return if, during the year, they received of undistributed profits by a resident from/provided to a non-resident. must be transferred to an account income from non-tax agents (e.g. foreign • Late tax payment is subject to a entity, provided that the allocation of 11.6 Foreign tax credits opened by a recipient at a Ukrainian income), or income subject to tax at 15% 10%/20% penalty depending on the shares between shareholders remains Tax residents are allowed to credit Gifts are non-taxable if their monthly bank. The bank should act as a tax agent - 17% rates from two or more tax agents period of delay (30 days of delay unchanged, and foreign taxes paid on income received value does not exceed 50% of the for this income. In practice, this if the total annual amount exceeds 120 inclusively or more). abroad, provided there is a valid double minimal salary set as of 1 January of the • interest income from current bank provision was not functioning and minimum monthly salaries set as of 1 tax treaty between Ukraine and the • An interest fine in the amount of 120% reporting year (for 2013 – about USD accounts, deposits placed with banks non-residents filed tax returns and paid January of the reporting year (for 2013, relevant foreign state. The amount of of the National Bank of Ukraine’s 72), except for cash payments in any and non-banking financial institutions tax due on a self-assessment basis. approximately USD 17,200). foreign tax credit is limited to the discount rate (at the current NBU’s amount. and from saving certificates. This amount of Ukrainian tax that would discount rate of 7%, the penalty is exemption is available until 31 11.8 Tax compliance If the individual wishes to claim a tax arise from the equivalent income in approximately 0.02% per day) may Insurance proceeds December 2014. deduction for expenses incurred during Ukraine (i.e. maximum 15%-17%). To be levied for each day of delay in Receipts from insurance companies Obligations of tax agents the year, or to claim a foreign tax credit, claim a tax credit, the taxpayer needs an payment. under the following forms of insurance 11.5 Deductions Employers and other business entities he/she may file a return voluntarily. official confirmation of the amounts of contracts are exempt from tax: that pay income to individuals are • Tax assessed by the tax authorities income subject to tax abroad and the tax Non-business defined as tax agents and are The return should be filed with the local based on the tax return may be subject • proceeds from health insurance, paid therefrom that is issued/verified by There are no major deductions available responsible for withholding the tax and office where the individual resides / is to a 25%/50% penalty. provided the insured event is the relevant foreign tax authority. This to individuals in Ukraine. A registered mandatory unified social contribution registered by 30 April of the year document should be duly legalised or • Criminal responsibility exists for the avoidance of tax payment.

54 Doing business and investing in Ukraine 55 12.1 Introduction • If the goods do not need to be • Place of immovable property Ukraine first introduced a value-added transported, the supply takes place location: realtor services, preparing tax (VAT), or podatok na dodanu vartist where the goods are located at the and conducting construction works, Value-added tax (PDV) as it is known in Ukrainian, in moment of their sale. and other services related to real 1992. Ukraine operates the input-output estate • When goods that require assembly model of VAT. VAT-registered persons or installation are sold, the supply deduct the VAT paid on their inputs from VAT on imports and partial exemption occurs at the place of such assembly or the VAT charged on their sales and Unless expressly exempted under the installation. account for the difference. If output VAT law, imported goods are subject to 20% exceeds input VAT, the difference is paid • The supply of goods to sea, air or VAT payable during customs clearance. to the budget. Otherwise, it is subject to railroad vessels occurs at the place of The taxable base is the higher of the a refund (if eligible) or could be carried their departure. contractual or customs value of the forward to offset future liabilities. goods, plus the amount of any import Place of supply for services and excise duties. For 2013, the standard rate of VAT on The general rule is that the place of domestic sales of goods and services and supply for services is the place of the A full or partial VAT exemption is the importation of goods is 20%. supplier’s VAT registration. available for goods imported Investor considerations • Buyers must ensure that VAT invoices Starting from 1 January 2014, the VAT temporarily. A full VAT exemption can fully comply with the established rate will be reduced to 17%. Exported In respect of certain services, there are only be received for a very limited list of • The standard rate of VAT is 20%. criteria. The tax authorities look at goods and certain types of services are specific rules for determining the place goods. A partial exemption from VAT Starting from 1 January 2014, the VAT invoices closely and disallow zero-rated. Other services provided to of supply. In particular, the place of implies paying 3% of the total amount of VAT rate will be reduced to 17%. The input tax credits, even if the defects in non-residents could be outside of scope supply of the following services could be VAT per each month of temporary export of goods and a very limited the invoice are relatively minor. of VAT or subject to VAT at the standard defined as follows: import. The paid amounts of tax are range of services are zero-rated. rate depending on their nature. included in the tax credit. • Partial exemptions on temporary • Place of services provision: services • Most services provided to imports are available. related to transportation of cargoes non-residents are either subject to 12.2 Taxable activities Upon expiration of a three-year period, and passengers as well as auxiliary to 20% VAT or effectively considered • VAT returns and payments must Unless there is an express exemption in the customs authorities may extend the transportation services, expertise and outside the scope of VAT (i.e. exempt generally be made on a monthly basis. the Tax Code, VAT applies to: temporary import without payment of valuation of movable property, repair services). This has an impact on VAT. If the goods temporarily imported • the supply of goods and services where and processing services, services the recoverability of input VAT. Image are cleared into free circulation within the place of supply is in Ukraine, involving organising chargeable Non-residents are unable to recover the initial three-year period, VAT is including when the supply is made exhibitions, conferences, seminars and Ukrainian VAT. payable in full less the amounts already free of charge other similar activities paid under the partial exemption • Refunds are available according • the transfer of the object of a financial • Place of customer’s registration: procedure plus late payment interest to the law, but obtaining them is lease to the lessee transfer of intellectual property (120% of the discount rate of the NBU). very difficult and is a major issue rights; advertising, consulting, for many investors. The automatic • the import of goods into Ukraine engineering, accounting, legal, 12.3 Zero-rating refund procedure has alleviated this • the export of goods out of Ukraine, audit, and actuarial services; services The export of goods under certain issue for exporters. There are certain and involving the development, supply and customs regimes (i.e. export, free limitations to refunds during the first testing of software; data processing customs zone, duty-free trade, re-export year of VAT registration. • international transportation services. and IT consulting; the provision in case of non-fulfilment of the cross- of information and other services border contract) is zero-rated. Zero- Place of supply for goods in the sphere of informatisation; rating also applies to the supply of The place of supply for goods is telecommunication; radio and international transportation services determined by the following rules: telecasting; forwarding services; and and inward processing services (if the • If goods are to be transported, the leasing of movable property (except finished goods are then exported from supply takes place where the goods for vehicles and bank safes) Ukraine). are located at the moment of their dispatch.

56 Doing business and investing in Ukraine 57 12.4 Exempt supplies (for controlled transactions [see Chapter 10.6] – not exceeding the market price). • the number of the VAT invoice and the are subject to such registration account for VAT on such a transaction Ukrainian law distinguishes VAT- 10.6] – not less than the market price). Until 1 September 2013, the market date the invoice was issued irrespective of the VAT amount. would report the VAT as output tax in exempt transactions from transactions Until 1 September 2013, for most price should be the base for input VAT the VAT return for the month in which • the full name and registration number that are outside the scope of VAT, but, transactions, the market price should be credit if the transaction price exceeds A VAT invoice should be registered in the transaction is required to be of both the buyer and the seller from a practical perspective, the considered as a tax base if it exceeds the the market price by more than 20%. the Unified Register within 15 calendar recognised. The corresponding input tax distinction is not important. In either transaction price by more than 20%. • the address of the supplier days of its issuance. would then be claimed as a credit in the case, a person making such sales will 12.7 VAT compliance following month (if the buyer is entitled • the type and quantity of the goods and not be entitled to claim an input tax For further sale of previously imported If the VAT invoice is not registered with to a VAT credit). services provided credit against those sales. goods, VAT is based on the higher of the Registration the Unified Register, the customer is not contract price or the customs value An entity engaged in taxable supplies is • the sales price (excluding VAT), the entitled to credit input VAT unless it Returns and payments A number of transactions are specifically stated in the customs declaration required to register for VAT if its rate, the amount of VAT and the submits a claim to the tax authorities. VAT-registered persons are required to ‘exempt’ from VAT, including: increased by the cost of bringing those for the past 12 months exceed UAH total amount payable file VAT returns on a monthly basis goods into Ukraine and the excise taxes 300,000. Such registration should be The VAT invoice may be included to the (except for unified taxpayers and small • re-export of goods • the type of civil agreement and duties payable at the time of import done with the tax authorities at the customer’s VAT credit within 365 days businesses subject to a 0% CPT rate). • most financial services and the transfer (effective until 1 September 2013 - see place where its business is located. The • product code per the Customs tariff from the date of its issuance. The return must be filed within 20 of certain financial instruments (as Chapter 10.6). application for registration should be (in case the supply relates to excisable calendar days following the end of the exemptions are defined with respect to submitted by the director or an goods and goods that have been Date of VAT Output and VAT Input reporting month (or the next working specific transactions, the transactions 12.6 Input tax credits authorised representative of the legal previously imported into Ukraine), recognition day if the 20th day falls on a weekend or must be reviewed individually to The general rules for crediting input entity within 10 days following the and VAT Output is accounted for as follows: a public holiday). confirm whether an exemption VAT are as follows: month in which the registration • the number and date of the customs • VAT on the sale of goods is generally applies) threshold was reached. Along with the VAT return, taxpayers • VAT paid on goods and services that declaration for the supply of goods accounted for on the date the goods are obliged to submit the copy of the • depository, clearing and registrar will be used to make taxable sales may that have been previously imported are delivered to the customer or the The local tax authorities should issue a Register of issued and received VAT activities in the securities market, as be claimed as an input tax credit. into Ukraine. date that the payment is received from VAT registration certificate to the invoices in electronic form. well as brokerage and dealer services the customer, whichever comes first. • VAT incurred to purchase or import applicant within 5 calendar days. VAT for securities transactions Separate invoices are required for goods and services that will be used registration takes effect from the date • VAT on the sale of services is generally VAT payments must be made within 10 taxable and exempt transactions. • the issue, sale and exchange of to make sales that are VAT-exempt or specified on the registration certificate. accounted for at the time a document calendar days following the VAT return Invoices for exempt transactions must securities and corporate rights, the outside of scope of VAT may not be is executed evidencing delivery of submission deadline. include the words ‘без ПДВ’ (bez PDV - payment of dividends and royalties in claimed as a credit. A taxpayer engaged in business with the service (‘act of acceptance’) or without VAT) and a reference to the cash or securities taxable sales below this threshold may receipt of payment from the customer, Refunds • When goods and services are used appropriate article of the Tax Code. register voluntarily. The application for whichever comes first. It is usual VAT-registered persons may apply for a • the sale/supply by banks and other to make partly taxable and partly VAT registration should be submitted to commercial practice for both the refund if they have been in a VAT- financial institutions of collateral non-taxable sales, the input tax credit Buyers need to pay particular attention the tax office not later than 20 calendar supplier and the customer to sign receivable position for two consecutive repossessed from individuals and is apportioned between the taxable to the information contained in the VAT days before the beginning of the month a formal document evidencing the months. The refund is limited to the private entrepreneurs and non-taxable sales. The pro-rata invoices, especially when significant from which a taxpayer will be delivery of the service. amount of input tax actually paid in the coefficient is calculated based on amounts are involved. The tax • the interest or commission element considered as a VAT payer. previous and reporting months. the volume of sales of the previous authorities pay close attention to the • VAT liabilities for imported goods arise of payments under a financial lease calendar year and is applicable details on invoices when they conduct on the date of customs clearance. (however, the transfer of property Accounting requirements According to the law, if an application within the whole current calendar audits and will disallow input tax credits under a financial lease is treated as a VAT-registered persons are required to VAT Input is accounted for as follows: for a refund is filed, the tax authorities year. At the end of the year it should even if the defects in the invoice are taxable sale) issue VAT invoices, to keep electronic are required to check and confirm the be re-calculated based on the actual relatively minor. • Entitlement to an input tax credit registers of input and output VAT entitlement within 65 days. The State • insurance and reinsurance services taxable and non-taxable transactions for purchases arises on the date of invoices, and to keep separate accounts Treasury should then remit the money to supplied by licensed insurers, agents of the current year. In respect of Taxpayers are obliged to account for all payment to the supplier or the date, on for taxable and VAT-exempt sales and the applicant’s bank account or issue and brokers non-current assets, such recalculation issued and received VAT invoices in the which the goods/services are received, purchases. treasury promissory note within five should be done annually within the special electronic Register of input and whichever comes first. • the transit of cargo and passengers business days after receiving approval first three years of usage. output VAT invoices which should be through Ukraine Information on VAT invoices • Entitlement to an input tax credit for from the tax authorities. submitted to the tax authorities on a A VAT-registered person is required to imported goods or services arises on • the reorganisation of legal entities A claim for input tax must be supported monthly basis. provide a VAT invoice for all supplies the date the tax is paid. An automatic VAT refund procedure is (i.e. mergers, accessions, spin-offs, by a valid VAT invoice issued by a (except for supplies outside the scope of technically available for eligible divisions and changes of legal form). VAT-registered person or a duly Suppliers should register VAT invoices VAT). Reverse charge taxpayers (exporting companies). Under executed import customs declaration. with amounts of VAT in excess of UAH Services acquired from non-residents this procedure, the tax authorities are 12.5 Tax base 10,000 in the Unified Register of tax The invoice must include the following with a place of supply in Ukraine are required to check and confirm the In most cases, the amount of VAT should In most cases, input tax credits should invoices. VAT invoices related to the information: subject to the application of a VAT entitlement for a VAT refund within 23 be determined based on the transaction be based on the transaction price (for supply of excisable or imported goods reverse charge. A person required to days. The State Treasury should then price for the supply of goods or services controlled transactions [see Chapter

58 Doing business and investing in Ukraine 59 remit the money to the applicant’s bank –– The net book value of fixed assets account or issue treasury promissory exceeds the VAT refund for the note within three business days after previous 12 calendar months receiving approval from the tax –– The ratio between CPT liabilities authorities. and income received in the previous reporting year is higher than the In order to qualify for an automatic VAT average within the industry refund, the following criteria should be met: Large taxpayers are not entitled to apply • The volume of zero-rated transactions for an automatic VAT refund if they Introduction to PwC of the taxpayer should not be less claim losses for the previous reporting than 40% of the total supply during year. the preceding twelve consecutive tax reporting periods (months)/four If the taxpayer does not meet the quarters. criteria, the tax authorities should notify them within 17 days of the deadline for • The total discrepancies between the the VAT return submission. If the tax VAT credit of the taxpayer and the authorities don’t notify the taxpayer on VAT liabilities of its contractors, based time, the taxpayer is considered as on the VAT invoices issued during the having met the mentioned criteria. three preceding months, should not exceed 10% of the total amount of the In case of a VAT refund delay, the VAT claimed for refund. government shall pay a daily fine of • The average employee salary for the 120% of the National Bank of Ukraine last four reporting quarters should discount rate. exceed the minimum level by at least two and a half times. Obtaining VAT refunds has been a major problem area for investors. As an • The taxpayer should not have a tax alternative to a cash refund, the debt. legislation allows them to be obtained in • The taxpayer should not be the form of a promissory note or to be undergoing the bankruptcy procedure. offset against future VAT liabilities. • The State Unified Register of Legal VAT-registered persons are specifically Entities and Individuals-entrepreneurs not entitled to refunds if: should not contain information about: • they have been registered for VAT for –– the taxpayer’s absence from its legal less than 12 calendar months before address the month from which a refund is –– unconfirmed details about the sought, except where a refund relates taxpayer to input tax paid on the purchase or construction of fixed assets, or –– decision on a spin-off or termination • the amount of the refund claimed –– invalidity (including partial) of the exceeds the taxable sales for the last statutory documents, or 12 calendar months, except for a –– termination of the state registration. refund of input tax on the purchase or construction of fixed assets. • One of the following criteria should be met: –– During the last four reporting quarters the number of employees exceeded 20

60 Doing business and investing in Ukraine 61 PwC has been present on the Ukrainian Engagements are generally staffed by a advise on the likely impact that the pace • Capital Markets group - provides to transactions, such as identification where the tax and legal system is market since 1993. PwC Ukraine is a combination of Ukrainian specialists, and direction of economic and financial support at every stage of the listing and evaluation of a transaction through complex and subject to constant member of the PwC network of firms; a with knowledge of local conditions and change will have on commercial activity process. We provide services either due diligence, structuring services, revision, professional advice is even network which exists in 158 countries regulations, and international in Ukraine. as an advisor to management and market analysis and post-deal services more of a necessity to achieve success. and draws on the talents of close to consultants, who have expertise in owners, or as an independent auditor are provided. 180,000 people. Our clients benefit tackling issues faced by international As a result of its long-term presence, responsible for providing opinions and Therefore, companies who seek the very from working with our staff’s enterprises and who are practised in PwC Ukraine has developed strong verifying financial information in the Consulting: Our Consulting team is best in tax and legal advice in Ukraine combination of Ukrainian experts and dealing in the Ukrainian environment. relationships with key contacts, prospectus. dedicated to helping clients improve turn to PwC for a complete solution to expatriate professionals that bring The key element of PwC success in including government ministries and their financial and operational their complex business problems. Clients • PwC Academy – business training and knowledge and experience from PwC Ukraine is the quality of its staff, to leading professional organisations. performance. Our Group works closely realise that by seeking our expert development services in the area of firms worldwide. which partners are committed to These relationships enable the firm to be with other advisory practices in the firm advice, considerable savings can be finance and accounting, IT systems, providing the most up to date well placed to assist in resolving queries to assist clients in meeting their most achieved. risk management and management We’re committed to delivering quality in management training throughout their on accounting, reporting and related pressing challenges. development. assurance, tax, legal and advisory careers. regulatory issues. Our team of local and expatriate services. Our goal of building an iconic The assistance we provide is targeted at professionals have expertise in all areas Advisory services professional services firm is Our team is divided into three service Available Assurance services include: strengthening management control, of taxation – corporate and personal, The Advisory Services practice provides underpinned by our business strategy lines: Assurance Services, Advisory increasing operational effectiveness and direct and indirect, corporate law – to • Audit – statutory and regulatory audit two main types of services: and performance goals. We set the Services, and Tax and Legal Services. thereby increasing shareholder value. help clients maximise their tax and treasury services. standard and drive the agenda for our We know from experience that advantages and minimise their Deals: Deals Services refers to profession. Assurance services improving performance requires exposures. We advise both national and Our audit is aligned with business assistance with and execution of all Assurance Services provide assurance companies to focus on four distinct international companies based upon our functions, not just financial processes. types of financial transactions, Our reputation lies in building lasting on the financial performance and aspects: business model, financial knowledge of Ukrainian legislation and Businesses need auditors and advisors providing advice on mergers and relationships with our clients and operations of our clients’ business drivers, management system and value its interrelationship with international who understand their strategy and can acquisitions, privatisations, financial delivering value in all we do. Let us through external and internal audits, creation system. laws and treaties. This knowledge, reflect this in their audit approach. and operational due diligence, value apply our world-class capabilities to financial and accounting reviews and together with our focus on specific Using our approach and working advisory and business valuation your business goals. investigations, regulatory consulting In our experience, projects are judged a markets and industries, helps us to add alongside our clients, our lead partner including real estate and asset valuation, and training courses. success when the expected business value to our clients’ businesses and give provides strong control from the centre. feasibility studies and business plans, PwC in Ukraine benefits are clearly defined up front and them the edge they need in the We put great emphasis on market analysis, project finance Coopers & Lybrand and Price The Ukrainian practice is comprised of when the project is managed to marketplace. understanding our clients’ strategies (including Public-Private Partnership Waterhouse established their Ukrainian Ukrainian and international specialists demonstrate achievement of those and the need to address all risks. This schemes), finance raising and post-deal operations in 1993 and 1995 possessing a deep knowledge of both business benefits. By employing this Our Tax and Legal Services practice is approach represents, we believe, an services. respectively before merging in 1998. national and international financial principle in our methodologies, the divided into six main areas of expertise: important step forward in client service, Having continued to expand its services reporting standards. As part of our Performance Improvement team strives audit quality and efficiency. PwC provides a full range of services to and knowledge of Ukraine’s business long-term development strategy, we to provide superior value to our clients. Corporate tax: Our team has extensive guide clients through complex business environment, PwC provides the highest encourage local employees to obtain an • Accounting and regulatory advice experience in advising clients based on transactions, and supports companies level of professional services to internationally recognised professional – corporate structures, technical Our dispute analysis and investigations Ukrainian laws and their interpretation through every aspect of a transaction, international and Ukrainian enterprises. qualification in accounting (UK ACCA). accounting advice (supported by practice involves corporate by tax authorities, as well as their from identifying the appropriate Overseen by 23 partners and directors Our firm has the largest number of Global Corporate Reporting [GCR]), investigations, fraud risk management, interrelation with international acquisition or divestiture candidates to and employing more than 450 ACCA graduates of any professional review of treasury operations, background research of entities, regulations and treaties. Our specialists assisting with deal structuring and specialists and support staff, PwC service firm in Ukraine. In addition, we compliance with current and new computer forensics and cybercrime are highly qualified to advise on all capital sourcing. A wide range of operates in Ukraine from its offices in have a large number of certified regulations. investigations, as well investigations of aspects of inward investments into privatisation services including lead Kyiv, Donetsk, Dnipropetrovsk and Lviv. Ukrainian auditors holding either insolvency, bankruptcy, and intellectual Ukraine, and the structuring of those • Attest and attest-related services – advisory, target identification, company banking audit or commercial audit property. investments in terms of corporate profits independent assessment of financial profiles, analysis of privatisation The combination of local experience and qualifications. tax, withholding tax, dividend taxation and non-financial data. options, and transaction support are a one-firm culture enables PwC to Tax and legal services and local tax regulations. The team available, as well as assistance and provide advice that is consistent. In PwC knowledge and experience gained • Public services audit and advisory Effective tax planning is vital for the provides proactive advice on support for companies seeking new addition, its global standards are over seventeen years of reforms in – audit, internal audit and associated growth and development of any international tax planning and capital, or companies involved in an responsive to local conditions and Ukraine, enables our specialists to services for government, education organisation. Few major decisions can structuring, mergers and restructuring, acquisition, divestiture, restructuring or requirements. advise not only on assurance matters, and other non-profit organisations. be taken without considering their tax and undertakes company health checks shareholder buyout. Services in relation but also to put them into context and and legal implications. In Ukraine, and due diligence projects, as well as

62 Doing business and investing in Ukraine 63 provides assistance with tax authorities Ukraine’s personal income taxation (during tax inspections and the lodging legislation, salary surveys, outplacement PwC Ukraine of objections). and human resources audit. Key contacts Within the corporate tax team, we have Accounting, Payroll and Tax a large number of staff dedicated to Compliance Services: In today’s transactions services, mergers and challenging economic environment in Bryan Disher Andrew Broadhead acquisitions and international tax which the regulatory landscape is structuring. rapidly changing, accounting and Managing Partner Assurance Director compliance management have become [email protected] [email protected] VAT and other indirect tax: Our increasingly important areas associated indirect tax specialists have extensive with inherent difficulties and risks. John Campbell Wayne Gordon experience in resolving complex issues Operating successfully in different Partner, Assurance Services Assurance Director related to indirect taxes, customs countries requires coordinating [email protected] [email protected] procedures and foreign trade. Services subsidiaries that may have diverse available include VAT consultancy and accounting practices, legislative Vladimir Demushkin Dmytro Hrynchyshyn tax reviews, VAT planning and environments and local business Partner, Assurance Services Assurance Director developing efficiency schemes for customs. [email protected] [email protected] domestic and cross-border operations, assistance during tax inspections and We provide the services for international Liusia Pakhuchaya Taras Kovalenko support and advice during appeals. corporations and Ukrainian companies to meet your governance and regulatory Partner, Assurance Services Assurance Director Customs and international trade: We obligations: accounting compliance, [email protected] [email protected] have a broad experience in customs intercompany reporting, corporate profit related activities including: developing tax compliance, value added tax Julia Paranich Alexander Ryjov customs legislation, understanding the compliance, payroll services, payroll Partner, Assurance Services Assurance Director relevant requirements, and negotiating taxes and reporting, tax function [email protected] [email protected] with the customs authorities. Customs consulting and other services. consulting includes tax planning for Oleg Tymkiv Olena Volkova minimising import duties, assistance in Legal services: Transactions, contracts, Partner, Advisory Services Leader Assurance Director complying with customs procedures, use employment and competition are just a [email protected] [email protected] of bonded warehouses, intellectual few of the many aspects of business that property rights, obtaining import/ require appropriate consideration of the Rafal Krasnodebski Olga Andrienko-Bentz export licences, assistance during legal issues involved. Close cooperation customs clearance and audits and of lawyers within the PwC Global Legal Partner, Advisory Services Advisory Director support during customs litigation or Services network enables us to render [email protected] [email protected] complaints. legal services to our clients on an international scale. This is particularly Ron Barden Thompson McDaniel Human Resources Services (HRS): important in cross-border transactions Partner, Tax & Legal Services Advisory Director HRS brings together all of the as well as for MNCs. Leader [email protected] professionals working in the human [email protected] resource consulting arena – specialists PwC in Ukraine provides the following Anna Onyshchenko in individual tax, payroll, benefits, legal services: tax litigation, Rob Shantz Advisory Director assessment, education, equity, reward, incorporation, structuring investments, Partner, Tax & Legal Services [email protected] staffing, regulatory, legal, and process corporate changes, merger and [email protected] management – offering clients an acquisition, real estate, financial sector, Svetlana Bilyk unmatched breadth and depth of local labour, and antitrust and competition. and global expertise. Available services Slava Vlasov Tax Services Director include individual advice, ranging from Partner, Tax & Legal Services [email protected] assistance with obtaining work and [email protected] residence permits, to advice and Andy Kuzich assistance with all matters regarding Business Development Director [email protected]

64 Doing business and investing in Ukraine 65 Appendix A Appendix B Hints for business visitors Useful sources of information

Visas and other entry formalities Additionally, the citizens of some Public holidays Government websites Citizens of the USA, Canada, countries African, Asian and CIS countries, e.g. In 2013, the following public holidays Many government websites have pages written in English. These can be useful to get of the Commonwealth of Independent Moldova, Afghanistan, Tajikistan, are in place: a flavour of government policies and initiatives in various areas of the economy. States (except Turkmenistan), countries Turkmenistan, the Republic of South Caution should be exercised, however, before relying on information in English. • New Year’s Day (1 January) of the European Union, Andorra, Africa, India, etc. (excluding ethnic Although the Ukrainian web pages are generally well maintained and up to date, the Iceland, Japan, Liechtenstein, Monaco, Ukrainians with confirming documents) • Orthodox Christmas (7 January) same cannot be said for the English version. To obtain current information, the only Mongolia, Montenegro, Norway, San should have proof of their financial real solution is to have someone review the Ukrainian and provide a translation. • International Women's Day (8 March) Marino, Serbia and Switzerland do not security for the period of their stay in need a visa to enter Ukraine if the Ukraine. Citizens from ‘risk countries’ • Labour Days (1 & 2 May) At the time of writing, the following of the major state agencies have English pages duration of their stay does not exceed 90 must have available funds (or on their websites: • Orthodox Easter (5 May) days from the first entry within a last guarantees) in the amount of 20 6-month period, unless a shorter period subsistence salaries (for 2013 – UAH • Victory Day (9 May) Cabinet of Ministers kmu.gov.ua/control/en is specifically indicated in the 23,480, approximately USD 2,935) per • Orthodox Holy Trinity (23 June) National Agency of Ukraine on Civil Service nads.gov.ua/control/en/index agreement. However, they do need to person for every full or incomplete Ministry of Economic Development and Trade me.gov.ua/control/en/index hold a passport that is valid for at least month of their stay in Ukraine. • Constitution Day (28 June) six months from the date of their entry Ministry of Finance minfin.gov.ua/control/en/index • Independence Day (24 August) into Ukraine. For citizens of other Currency Ministry of Foreign Affairs mfa.gov.ua/mfa/en/news/top.htm countries, an entry visa is obligatory. Currently, the National Bank of Ukraine If a holiday falls on a Saturday or (NBU) adopts a de facto peg of the Ministry of Revenues and Duties minrd.gov.ua (under development) Sunday, the following Monday will be a Countries whose citizens require a visa Ukrainian currency (Ukrainian non-working day. If a holiday falls on a National Academy of Sciences nas.gov.ua/en/Pages/default.aspx to enter Ukraine need an invitation Hryvnia) against the US dollar. The Tuesday or a Thursday, it is common for certificate for business and private visits, official US dollar/UAH exchange rate National Bank bank.gov.ua/Engl/default.htm the parliament to recommend that the which should be duly issued by the State was fixed to 5.05 from April 2005 until Monday or Friday be declared as a President of Ukraine president.gov.ua/en/ Migration authority. The original May 2008. The global financial crisis hit holiday as well, and for a Saturday of invitation is submitted with the the stability of the national currency State Statistics Service ukrstat.gov.ua/ another week to be made a working day appropriate application to the Ukrainian and the hryvnia devalued by more than to compensate (such recommendations State Property Fund spfu.gov.ua/spfu.gov.ua/default.aspx Embassy/Consulate abroad. An 70% against the dollar by the end of are not applied to the post, treasury and invitation is not required to obtain a 2008. As of 1 July 2013, the US dollar/ Verkhovna Rada (Parliament) rada.gov.ua/en banking institutions and are not work visa, as working visas are issued on UAH exchange rate amounts to compulsory for private entities). the grounds that the original of the work approximately 8 UAH. permit is available. Business groups It is common practice in Ukraine for American Chamber of Commerce (Amcham) European Business Association (EBA) The specific documents to be submitted some prices to be set in US dollars, and Horizon Park Business Centre, 12 Amosova Str. 1A Andrijivskyy Uzviz Str. together with the visa application are to a lesser extent Euros, particularly for 15 Floor, Kyiv 03038 1st floor, Kyiv 04070 consistent across all embassies and high-value items. Property rentals, for Tel.: +380 44 490 5800 Tel.: +380 44 496 0601 consulates. Generally, it is required to example, will typically be expressed in Fax: +380 44 490 5801 Fax: +380 44 496 0602 come to the embassy or consulate in dollars. In most cases, however, www.chamber.ua www.eba.com.ua person in order to obtain a visa. Persons settlement will still be made in hryvnia. travelling to Ukraine should confirm the British-Ukrainian Chamber of Commerce German Economic Club (DWK) visa rules from a reliable source before Suite 7, 18/1 Prorizna Str. Horizon Tower, 42-44 Shovkovychna Str. departure. Kyiv 01034 15 Floor, Kyiv 01601 Tel.: +380 44 278 1000 Tel: +380 44 498 49 96 Fax.: +380 44 278 6508 Fax: +380 44 490 55 29 www.bucc.com.ua www.dwk.org.ua

66 Doing business and investing in Ukraine 67 Country Dividends (%) Interest (2) Royalties (3) Non-portfolio (1) Portfolio (%) (%)

Appendix C Japan (7) 15 15 10 0 / 10 Jordan 10 15 10 10 Withholding taxes as at 1 July 2013 Kazakhstan 5 15 10 10 Korea (ROK) 5 15 5 5 Kuwait 5 5 0 10 Kyrgyzstan 5 15 10 10 Country Dividends (%) Interest (2) Royalties (3) Latvia 5 15 10 10 Non-portfolio (1) Portfolio (%) (%) Lebanon 5 15 10 10 Domestic rates: Libya 5 15 10 10 Non-resident individuals 5 / 15 (4) 5 / 15 (4) 5 / 15 (5) 15 Lithuania 5 15 10 10 Non-resident corporations 15 15 15 15 Macedonia 5 15 10 10 Malaysia (7) 15 15 15 10 / 15 Treaty rates: Mexico 5 (18) 15 10 10 Algeria 5 15 10 10 Moldova 5 15 10 10 Armenia 5 15 10 0 Mongolia 10 10 10 10 Austria 5 10 2 / 5 (6) 0 / 5 Morocco 10 10 10 10 Azerbaijan 10 10 10 10 Netherlands 0 / 5 (13) 15 2 / 10 (6) 0 / 10 Belarus 15 15 10 15 Norway 5 15 10 5 / 10 Belgium 5 15 2 / 10 (6) 0 / 10 Pakistan 10 15 10 10 Brazil 10 15 15 15 Poland 5 15 10 10 Bulgaria 5 15 10 10 Portugal 10 / 15 (14) 15 10 10 Canada 5 15 10 0/10 Romania 10 15 10 10 / 15 China (PRC) 5 10 10 10 Russian Federation 5 (15) 15 10 10 Croatia 5 10 10 10 Saudi Arabia 5 (19) 15 10 10 Cyprus until 31 December 2013(7) 0 0 0 0 Serbia and Montenegro 5 10 10 10 Cyprus from 1 January 2014(8) 5 15 2 5/10 Singapore 5 15 10 7.5 Czech Republic 5 15 5 10 Slovakia 10 10 10 10 Denmark 5 15 0 / 10 (9) 0 / 10 Slovenia 5 15 5 5 / 10 Egypt 12 12 12 12 South Africa 5 15 10 10 Estonia 5 15 10 10 Spain (7) 15 15 0 0 / 5 Finland 0 / 5 (10) 15 5 / 10 (9) 0 / 5 / 10 Sweden 0 / 5 (16) 10 0 / 10 (6) 0 / 10 France 0 / 5 (11) 15 2 / 10 (6) 0 / 5 / 10 Switzerland 5 15 0 / 10 (6) 0 / 10 Georgia 5 10 10 10 Syria 10 10 10 15 Germany 5 10 2 / 5 (6) 0 / 5 Tajikistan 10 10 10 10 Greece 5 10 10 10 Thailand 10 15 10 / 15 (12) 15 Hungary 5 15 10 5 Turkey 10 15 10 10 Iceland 5 15 10 10 Turkmenistan 10 10 10 10 India 10 15 10 10 United Arab Emirates 5 15 3 0 / 10 Indonesia 10 15 10 10 United Kingdom 5 10 0 0 (17) Iran 10 10 10 10 U.S.A. 5 15 0 10 Israel 5/10 15 5 / 10 (12) 10 Uzbekistan 10 10 10 10 Italy 5 15 10 7 Vietnam 10 10 10 10

68 Doing business and investing in Ukraine 69 1) The ownership threshold for the non-portfolio rate is 10%, 14) The 10% rate applies if the company receiving the 20%, 25% or 50%, depending on the specific provisions in dividend has, for an uninterrupted period of two years the treaty. before the dividend is paid, owned at least 25% of the capital stock of the company paying the dividends. Appendix D 2) Several treaties contain a rate of 0% on interest paid to or guaranteed by a government or one of its agencies. 15) The 5% rate applies if the capital invested is at least USD 50,000. Selected customs duties and excise tax rates 3) If more than one rate is shown, this means that the rate will depend on the type of royalties paid. 16) The 0% rate applies if the Swedish company holds directly at least 25% of the voting power of the company 4) Dividend income is subject to tax at a rate of 5%. The 15% paying the dividends, and at least 50% of the Swedish applies to dividends from privileged shares or other fixed Selected customs duties rates as company is held by Swedish residents. payments on shares, as well as to disguised employment of 1 July 2013 income. 17) The 0% rate applies only if the royalties are taxable in the United Kingdom. 5) The lower rate will apply to interest on current or deposit Rates of duty Product or Group of Products bank accounts, certificates of deposit and contributions to 18) The 5% rate applies if the investor (other than Reduced rate, % Full rate, % Products originating in CIS, % credit unions starting from 1 January 2015. Until this date partnership) being a beneficial owner holds at least 25% IT equipment 0 – 10 0 – 10 exempt such types of income are exempt from taxation. of the capital of the company paying the dividends. Cars 6 – 10 10 exempt 6) The lower rate applies to interest paid on certain credit 19) The 5% rate applies if the investor being a beneficial Office equipment, including paper 0 – 10 0 – 10 exempt sales, and on loans granted by a financial institution. owner holds at least 20% of the capital of the company paying the dividends. Coffee, tea 0 – 10 0 – 10 exempt 7) The treaties with Cyprus, Japan, Malaysia and Spain were entered into by the USSR before it dissolved. Ukraine Beer EUR 0.05 per litre EUR 0.05 per litre exempt will continue to honour these treaties, unless they are Chocolate products 10 – 15 10 – 15 exempt superseded. Pharmaceuticals 0 0 exempt 8) The new treaty with Cyprus has been recently ratified Agricultural equipment 0 – 10 0 – 10 exempt by both Cyprus and Ukraine; it is most likely that the exchange of the ratification notices will happen in 2013 and, thus, the provisions of the new treaty will apply from Selected excise tax rates 1 January 2014. 9) The lower rate applies to interest paid in connection Product Excise duty rate with the sale on credit of any industrial, commercial or Beer UAH 0.87 per 1 litre scientific equipment, unless the indebtedness is between Wine base of grapes UAH 0.01 per 1 litre associated enterprises. Fortified wine UAH 2.51 per 1 litre 10) The 0% rate applies if the investor holds at least 50% of Wine, sparkling wine, vermouth UAH 2.51 – UAH 3.65 per litre the capital of the company paying the dividends and the Fermented fruit beverages with added alcohol UAH 49.49 per litre of 100% alcohol capital invested is at least USD 1,000,000; the payer of dividend should not operate in the field of gambling, show Fermented fruit beverages without added alcohol UAH 0.50 per litre business or intermediation business, or auctions. Ethyl alcohol and other spirits, liqueurs and other UAH 49.49 per litre of 100% alcohol spirituous beverages 11) The 0% rate will apply if a French company or companies hold directly or indirectly at least 50% of the capital of Spirit distillates and other spirit beverages from grape wine UAH 49.49 per litre of 100% alcohol the Ukrainian company, and the aggregate investments Tobacco raw materials, tobacco wastes UAH 217.60 per 1 netto kilogram exceeds 5 million French francs. Cigars, cigarillos UAH 217.60 per 1 netto kilogram 12) The lower rate applies to interest paid on any loan granted Cigarettes without filter UAH 72.70 per 1000 sticks and 12% of sale turnover by a bank. Cigarettes with filter UAH 162.60 per 1000 sticks and 12% of sale turnover 13) The 0% rate applies if the investor holds directly at least Tobacco for smoking, chewing tobacco or snuff UAH 217.60 per netto kilogram 50% of the capital of the company paying the dividends, Other Tobacco UAH 217.60 per netto kilogram and the capital invested is at least USD 300,000. New cars EUR 0.03 – EUR 1.09 1 per cubic centimetre Used cars EUR 1.09 – EUR 3.81 per cubic centimetre Other vehicles EUR 0.65 per cubic centimetre; EUR 109 per 1 unit Car bodies EUR 109 - EUR 436 per 1 unit Motorcycles, motor bikes EUR 0.22 per cubic centimetre; 11 EUR per 1 unit Petrol and diesel and gas EUR 30 – EUR 198 per 1000 kilograms

70 Doing business and investing in Ukraine 71 Synthetic Accounts (1st Tier Accounts) Sub-accounts Appendix E Code Name Code Class 4. Equity and Provision for Liabilities Short form Chart of Accounts under Decree No. 291 40 Statutory Capital 41 Share Capital 42 Additional Capital 421-425 43 Reserve Capital 44 Retained Earnings (Loses) 441-443 45 Withdrawn Capital 451-453 46 Unpaid Capital Synthetic Accounts (1st Tier Accounts) Sub-accounts 47 Provision for Future Expenses and Payments 471-478 Code Name Code 48 Targeted Finance 481-484 49 Insurance Reserves 491-496 Class 1. Non-current Assets Class 5. Long-Term Liabilities 10 Fixed Assets 100-109 50 Long-Term Borrowings 501-506 11 Other Non-current Tangible Assets 111-117 51 Long-Term Promissory Notes payable 511-512 12 Intangible Assets 121-127 52 Long-Term Liabilities in Respect of Bonds issued 521-523 13 Depreciation of Non-current Assets 131-135 53 Long-Term Lease Liabilities 531-532 14 Long-Term Financial Investments 141-143 54 Deferred Tax Liabilities 15 Capital Investments 151-155 55 Other Long-Term Liabilities 16 Long-Term Biological Assets 161-166 56-59 17 Deferred Tax Assets Class 6. Current Liabilities 18 Long-Term Account Receivables and other Non-current Assets 181-184 60 Short-Term Loans 601-606 19 Goodwill 191-193 61 Current Debt on Long Term Liabilities 611-612 Class 2. Stock (Inventories) 62 Short-Term Promissory Notes payable 621-622 20 Inventories 201-209 63 Settlements with Suppliers and Contractors 631-633 21 Current Biological Assets 211-213 64 Settlements on Taxes and Payments 641-644 22 Low-Value Items 65 https://employeerespss.coair.com/employeeres/error.aspx Settlements on Insurance 651-655 23 Production (Manufacture) 66 Settlements on Payments to Employees 661-663 24 Production Wastage 67 Settlements with Participants (or shareholders) 671-672 25 Semi-finished Goods 68 Other settlements 680-685 26 Finished Goods 69 Deferred Income 27 Agricultural Produce Class 7. Revenue and Results of Operations 28 Goods (Stock) 281-286 70 Sale Revenue 701-705 29 71 Other Operating Income 710-719 Class 3. Cash, Settlements and Other Assets 72 Income from Interest in Equity 721-723 30 Cash in Hand 301-302 73 Other Financial Income 731-733 31 Bank’s Accounts 311-314 74 Other Income 741-746 32 75 Extraordinary Income 751-752 33 Other Funds 331-334 76 Insurance Payments 34 Short Term Promissory Notes Receivable 341 -342 77 35 Current Financial Investments 351-352 78 36 Settlements with Buyers and Customers 361-364 79 Financial Results 791-794 37 Settlements with Various Debtors 371-379 38 Provision for Doubtful Debts 39 Deferred Expenses 72 Doing business and investing in Ukraine 73 Synthetic Accounts (1st Tier Accounts) Sub-accounts Code Name Code

Class 8. Expenses by nature 80 Material Expenses 801-809 81 Labour Costs 811-816 82 Social Payments 821-824 83 Depreciation and amortisation 831-833 84 Other Operating Expenses 85 Other Costs 86-89 Class 9. Operating expenses 90 Cost of Sales 901-904 91 Production Costs (Overheads) 92 Administrative expenses 93 Selling Expenses 94 Other Operating Expenses 940-949 95 Financial Expenses 951-952 96 Loss from Interest in Equity 961-963 97 Other Expenses 971-977 98 Income tax expense 981-982 99 Extraordinary Expenses 991-993 Class 10. Off balance sheet accounts 01 Leased Non-current Assets 02 Third-party Assets in Store 021-025 03 Contractual Liabilities 04 Contingent Assets and Liabilities 041 042 05 Guarantees and Security Given 06 Guarantees and Security Received 07 Written-off Assets 071 072 08 Strict Accounting Forms 09 Depreciation Charges

74 Doing business and investing in Ukraine 75 © 2013 Limited liability company «PricewaterhouseCoopers» and Limited liability company Audit firm «PricewaterhouseCoopers (Audit). All rights reserved.

PwC refers to the Ukrainian member firms, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.