DOING BUSINESS IN UKRAINE
Foreign investors, either in the form of a legal entity or an individual may generally acquire up to 100% participation in a Ukrainian business. Virtually no restrictions are made on the form of the contemplated investment in Ukraine. Capital contributions can be in cash or in kind (either tangible or intangible assets). However, government licensing and administrative bodies may restrict the business areas of investment. Foreign investment in armaments, explosives, drugs and other areas of national interest are prohibited. There are as well some restrictions on the amount of the participation of foreign entities in Ukrainian insurance, telecommunications, banking and some other businesses.
LEGAL REGIME OF FOREIGN INVESTMENTS
The Law extends a relatively minimal favourable treatment and guarantees to all types of foreign investments. The Ukrainian Law 'On foreign investment regime' defines 'foreign investment' as investment by foreign investors in compliance with Ukrainian law with the aim to gain profit or achieve a social benefit. A Ukrainian legal entity is recognised as a company with foreign investment if it has at least 10% foreign ownership in its charter capital (i.e. share capital); no minimum/maximum foreign capitalisation requirements are stated. Registration of foreign investment with the local authorities is required. Unregistered foreign investments do not enjoy the rights and privileges granted by the Law.
TYPES OF INVESTMENTS
The Law recognises that foreign investment can take place in a variety of forms, which amongst others are:
- formation of a joint-venture company;
- acquisition of stock (shares) in existing enterprises;
- buying movable or immovable property;
- creation of a company, wholly-owned by a foreign investor;
- acquisition of property rights by purchasing securities;
buying the right to use land and concessions to exploit natural resources.
Foreign investors have the right to invest by using the following forms:
- hard currency
- Ukrainian currency as a re-investment into the existing or a newly established enterprise;
- any movable or immovable property and property rights connected with it;
- shares, bonds, other securities and other corporate rights;
- monetary claims and claims under contracts, valued in a hard currency and guaranteed by first rank banks;
- any intellectual property rights with confirmed estimation in hard currency according to the laws of the investor's country of residence, including copyrights, trademarks, firm names, know-how, and others;
rights in respect of economic activities, including exploration and utilisation of natural resources valued in hard currency and conferred and valued under the laws of the investor's resident country.
Foreign investment can be executed in the form of contribution of fixed assets in return for a share in the equity capital of a Ukrainian company. If the investment is disposed of within 3 years from the moment of registering a foreign investment in the books of the Ukrainian entity, all the relevant import duties will be due.
Some guarantees for investors are set out in legislation as follows:
- 10 year grandfathering clause permitting any qualified investor to enjoy favourable treatment and guarantees contained in the Law in the event of a subsequent change in legislation;
- foreign investment is exempted from nationalisation, except for cases of natural disaster;
- foreign investors may seek damages (losses of profit and moral injury) resulting from the negligent acts or failure to perform an act by the state organs (if confirmed, compensation is payable in hard currency);
- when terminating its activity, an investor has 6 months to return its investment in kind or in cash without payment of customs duties, as well as any profits earned in kind or cash at their real market value;
foreign investors are guaranteed unhindered and immediate right to repatriate the profit abroad after the investor complies with the withholding tax regulations.
STATE PROTECTION OF FOREIGN INVESTMENT
Ukrainian legislation on foreign investments sets out protection for foreign investment in Ukraine against state confiscation except for cases of national emergency. Such cases include evacuation / rescue measures in connection with disasters, accidents or epidemics. Foreign investors are eligible for compensation of losses caused by government bodies with respect to the above cases.
General economic growth will create favourable conditions for investments. The main stimulus to increase investments will be the need to extend production capacities in order to capture new market segments, while the main condition will be increased corporate profits.
Under the Ukrainian system, legal entities were owned by the state and controlled centrally. As reforms in Ukraine have progressed, these entities have been replaced by and integrated with various types of market-oriented entities. As a result of legislation designed to encourage market reform, Ukraine has seen a substantial growth in the number of newly established legal entities.
Joint Stock Companies
A joint stock company (JSC) is a common form of legal entity used in Ukrainian business. It is a limited liability company in which the shareholders are responsible for the liabilities of the entity only up to the nominal value of their shares. The minimum capital of a JSC must be at least 1,250 times the minimum wage amount which is nearly about US $35000 to 45000.
A joint stock company may be either 'open' (publicly held) or 'closed' (privately held). The shares of an 'open' joint stock company can be distributed through open subscription on the stock exchange. The shares of a 'closed' joint stock company are divided among the founders and cannot be distributed through subscription on the stock exchange. A closed joint stock company can be converted into a public joint stock company by registering its shares in accordance with the legislation on securities and the stock exchange and amending its Articles of Association.
Any legal entity and/or individuals can be founders of the JSC. At least two founding shareholders are necessary to create a joint stock company, although the two founding shareholders are free to determine among themselves the share distribution that each will have in the legal entity. Generally, a shareholder should pay 30% (for a public JSC) or 50% (for a private JSC) of its nominal share value to the temporary bank account of the JSC before registration with the state agency.
All joint stock companies, including those entirely held by foreign owners, are Ukrainian legal entities. They may enter into agreements, take on legal obligations, acquire property, and sue and be sued in their own names. Furthermore, these entities may engage in any commercial activity envisaged by their Articles of Association. Accounting records must be kept in UAH and comply with the Ukrainian National Accounting Standards, although accounts may also additionally be compiled according to any applicable international standards.
Limited Liability Companies
Limited liability companies (LLC) are also a popular form of corporate organisation. They are a good option through which foreign companies can conduct business in Ukraine. An LLC has similarities to both a US corporation and a US partnership. It is similar to a corporation in that it is a limited liability company in which the interest holders are liable only to the extent of their capital contributions. However, it is similar to a partnership in that ownership interests are expressed in terms of contractual rights arising from the statutory documents.
There is a lower initial capital requirement of 100 minimum monthly wages is approximately USD 3,000- 3,500. At least two founding participants are necessary to create an LLC. Each partner should pay 30% of their interest in the authorised capital to the temporary bank account of the LLC before registration with the state agency. Transfer of ownership rights is conducted through an assignment of contractual rights. A LLC has two governing bodies: the participants' assembly and the directorate (management).
LLCs have a slightly simpler registration process than joint stock companies and compared to a JSC require a less complex structure as regards increase of capital and management.
Joint ventures in Ukraine are generally established in the forms of a joint stock company or limited liability company. Joint ventures enjoy the status of a Ukrainian legal entity and do not have to comply with additional special requirements.
Joint Activity Without Establishment of a Legal Entity
Ukrainian legislation provides a foreign investor with the right to invest in Ukraine without creating a legal entity by entering into a joint production or joint co-operation agreement with Ukrainian partners. Such investment is subject to state guarantees and should be registered as discussed above. A foreign investor is granted a right to get back their investment and repatriate the profit from it.
Representative Offices of Foreign Companies in Ukraine
A Representative office of a non-resident in Ukraine is a place of the non-resident's business activity in the territory of Ukraine. Non-resident legal entities which carry out their activities via a Representative office in Ukraine do not exercise the status of the legal entity in Ukraine and are subject to the legislation of the country of their permanent establishment. Representative off ice execute accounting and reporting in accordance with the Ukrainian law.
The registration of the Representative offices is carried out by the Ministry of Economy of Ukraine. Business activities of Representative offices are regulated by the relevant Laws of Ukraine. Foreign investment activities of Representative Offices are regulated by the Ukrainian legislation on foreign investment. On 26 February 1993 the Cabinet of Minister issued a resolution which provides the Procedure for Accreditation of a Representative offices of Ukraine.
PROCEDURE FOR ACCREDITATION OF A REPRESENTATIVE OFFICE
Foreign legal entities that intend to start a Representative office in the territory of Ukraine should submit the following documents to the Ministry of Economy of Ukraine:
- An application letter addressed to the Ministry of Economy of Ukraine for registration of the Representative office. The letter, printed on the official letterhead of the company, should contain the following information:
- the official name of the company;
- the name of the country where the head office operates;
- its legal and postal addresses (if they differ), telephone and fax numbers;
- the name of the city where the Representative office is planned to be started with the indication of its future address and the number of any Representative office's branches within Ukraine;
- in case offices are planned to be opened in other cities in Ukraine, these cities should be indicated;
- the number of employees of the company;
- the date of incorporation of the company;
- the name of the bank where the company has its account and the account's number;
- information about the spheres of the company's activities;
- number of foreign citizens that intend to be employed in the Representative office (not more than three persons);
- the purpose of establishment of the Representative office and the scope of its activities and the information about business contacts with Ukrainian partners.
- Power of attorney in accordance with the law of the country of the company's residence, issued to a specific person to perform representative functions in Ukraine with an indication of the powers/authorities granted to the representative (including authorization to open bank accounts of the Representative Office in a Ukrainian bank);
- Extract from the trade or banking register of the country where the company is resident attesting its registration (including the date of registration and registration number of the company);
- Letter of good standing from the bank in which the company operates its official account with identification of the account number;
- Articles of incorporation of the company;
- If different, the by-laws of the company;
A copy of the resolution of the company's management to open a representative office in Ukraine and to appoint a representative.
All the above documents should be notarised at the place of issue, duly legalised at the Consulate of Ukraine in the country of residence of the company, and translated into Ukrainian with the translation attested by the notary (if translation into Ukrainian is done outside Ukraine, the stamp and signature of the translator/notary-translator should be also confirmed by the Consulate of Ukraine). All these documents should be submitted to the Ministry of Economy of Ukraine not later than six months from the date of the issue.
The state registration fee is currently USD 2,530 and is to be transferred upon receipt of the application for registration of the Representative Office by the Ministry of Economy. The term of registration in Ministry of Economy is 60 working days from the moment of crediting the above mentioned state fee to the account of state treasury fund.
The main body of laws covering the Ukrainian labour rules is the Labour Code of Ukraine (Code). According to the relevant provisions of the Code a Ukrainian employee can conclude only one employment agreement with the same employer.
The Ukrainian labour legislation is inherited from Soviet times and therefore the emphasis is made on protecting the rights of the employees rather than of the employers. An illustration is article 9 of the Code, which states that the provisions of the individual labour agreements which worsen the working conditions of the employees compared to those which are stipulated by the Ukrainian labour legislation are considered ineffective in Ukraine.
Under Ukrainian law, all business documentation in Ukraine is required to be made in the Ukrainian language. Accordingly, it is advisable to ensure that employment agreements are prepared both in English and Ukrainian. This is especially important in view of the fact that all disputes under these agreements are envisaged to be settled in the Ukrainian courts.
The laws relating to employment matters in the count may be expected to change frequently to reflect shift in the social and economic arrangements. Currently, the principal laws applicable to employment arrangements are provided by the Code.
Ukrainian legislation introduced in 199J allows individuals to choose their place of work and enter into direct labour agreements with employers. Additionally, Ukrainian foreign investment law allows enterprises with foreign investment to hire Ukrainian employees and enter into collective agreements or individual labour agreements.
The Ukrainian labour legislation provides a typical form of a labour agreement and provisions to be included in such an agreement, although, failure to comply with this form does not give rise to sanctions. According to Ukrainian legislation, any enterprise may be required to honour its employees' request to conclude a collective agreement, even if there is no trade unison presence at the enterprise.
An employment relationship is subject to labour legislation in Ukraine, internal employer regulations, the collective agreement of the employer and direct employment agreements. The employee is entitled, as a minimum, to the rights and benefits afforded under Ukrainian labour laws. In addition to these rights, Ukrainian labour legislation also governs such areas as duration and termination of agreements.
RIGHTS OF EMPLOYEES
Ukrainian labour legislation provides certain guarantees for employees, including the following:
- right to reinstatement in a prior job upon the expiration of the term of an elected office;
- wages for time spent away from work for performing the functions of a trade union officer, appearing in court, going to vote and fulfilling other state or social responsibilities;
- the right to keep one's job when on a training programme;
- wages while hospitalised;
- compensation for the depreciation in value of their own tools, when used far the employer's work;
- severance pay in certain situations;
- certain social benefits: maternity leave, paid holidays and vacation time;
minimum pay guidelines.
In addition, the following is provided by the labour legislation:
- The length of a working week is not to exceed 40 hours.
- Overtime may not exceed two hours per day or 120 hours per year. In practice, many employees of foreign firms work more or less than the normal working week prescribes, subject to their voluntary individual agreements with the employer, work during weekends is not officially allowed. Exceptions could be for natural catastrophes or emergency occasions.
- An employer is not permitted to demand work from an employee beyond that included m the labour agreement, without the consent of the employee except in certain circumstances. These include temporary transfers of one month in the event of an industrial emergency and transfers ensuing from disciplinary proceedings;
In general, employees are entitled to annual leave of 24 calendar days. Some employees, such as those involved m training, research or investigation, may be entitled to more than 24 day's annual leave.
Employees are generally entitled to sick leave benefits. Such benefits are based on the employee's wages and vary between 60% and 100%.
Women are entitled to paid maternity leave for the 70 days prior to and 56 (sometimes 70) days after childbirth. A woman will be entitled to partially paid leave until the child reaches the age of three. Employees have the right to organise trade unions and participate in the management of production. The local committee of the trade union at the enterprise represents the interests of the employees, manages social funds, oversees, compliance with the terms of the collective agreement between the enterprise and the local trade union committee and participates in resolving labour disputes according to Ukrainian law.
Ukrainian labour legislation requires that a labour book be kept for each employee working for an enterprise longer than five days. This is the basic document concerning the activities of the employee, reasons for dismissal, etc. As the labour book is a legal requirement, all enterprises are generally required to sign, stamp and hold such labour books for their employees. In order to hire a Ukrainian citizen, an employer should receive the employee's labour book and passport.
DURATION OF AGREEMENTS
A labour agreement may be concluded for an indefinite period of time, a specific term which is settled through mutual consent of the parties, or for the amount of time necessary to perform the work.
Generally, the probation period of an employee may not exceed three months but depending on the classification of such a worker the time may be reduced to one month. If the employee continues to work after such period has expired, the employee is considered to have 'passed the test' and is entitled to all rights and protection under Ukrainian law.