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Investing in Ukraine: Key Legal Aspects

Preface

This guide is written as an introduction to Ukrainian legal system from the viewpoint of foreign investors, in particular Chinese ones, and will help you in deciding whether to do a deal in Ukraine and what strategy should be chosen when investing in this country. The digest of key legal issues may be found helpful both at the stage of initial investment research and in the course of a particular investment project. Of course, when the matter stops to be generic and relates to a specific practical situation, a separate legal advice should be sought in most cases.

The information included in this guide is current as of February 2013. We will be happy to provide you, upon request, with further updates on relevant matters or information regarding a specific industry or area of Ukrainian law, in which you may have a particular interest.

1. Country Profile

General Information

Ukraine is a country in Eastern Europe with a population of approx. 45 mil people, 77.8 percent of whom are ethnic Ukrainians, with sizable minorities of Russians (17%), Belarusians and Romanians. Ukraine occupies an area of 603,628 km², making it the second largest country on the European continent, after the Russian Federation. Ukraine borders the Russian Federation to the east and northeast, Belarus to the northwest, Poland, Slovakia and Hungary to the west, Romania and Moldova to the southwest, and the Black Sea and Sea of Azov to the south and southeast. Ukrainian is the official language of Ukraine. Russian is also widely spoken.

Ukraine is a unitary state composed of 24 provinces (oblast), 1 Autonomous Republic of Crimea, and 2 cities with a special status – Kiev, its capital, and Sevastopol, place of location of Russian naval forces.

The economy of Ukraine is an emerging free market. In 2008 the economic crisis greatly affected the Ukrainian economy and resulted in 15.1% decrease in Ukraine's GDP over 2008 and 2009. However, in July 2009 inflation slowed and further in the first quarter of 2010 the Ukrainian economy began to grow. The resumed economic revival has been helped by growth in neighbouring Russia, which is by far the country's largest trading partner and export market. Also, the revival has been greatly supported by inbound foreign investment flow attracted by the hugely successful Euro 2012 football championship cohosted by Ukraine, reconstructed airports and highways, energy resources tenders that brought in world oil & gas giants, new legislation to reduce red-tape and promote entrepreneurship.

Government and Court Structure

Ukraine is a socially and rule-of-law oriented republic with a presidential-parliamentary system having three separate branches of government – legislative, executive, and judicial.

The President is the formal head of state and is elected by popular vote for a five-year term. The President represents the nation in international relations, administers the foreign political activity of the state, conducts negotiations and concludes international treaties.

Legislative power is exercised by a 450-seat unicameral parliament - Verkhovna Rada - which is reelected every five years. The Parliament determines the principles of domestic and foreign policy, initiates legislation, ratifies and denounces international treaties, approves the national budget, designates elections of the President of Ukraine, impeaches the President, exercises certain control functions, etc.

The highest executive body is the Cabinet of Ministers headed by the Prime Minister who is nominated by the President and further appointed by the Parliament. The other members of the Cabinet of Ministers, the Ministers, are nominated by the Prime Minister and appointed by Parliament, except for the Ministers of Foreign Affairs and Defense who are directly appointed by the President. The Cabinet of Ministers issues resolutions and orders that are mandatory for execution. It also possesses the power of legislative initiative and may introduce its own bills to the Parliament.

Justice in Ukraine is administered solely by courts. Judgments issued by courts of general jurisdiction are not recognized as a source of law in Ukraine, but play a significant role in its interpretation. However, since 2010 the status of the Supreme Court's decision was upgraded from being binding only on the parties involved in a specific case to a source of law that all judges and administrative authorities in Ukraine must follow.

The judicial system comprises the Constitutional Court of Ukraine, which gives an official and mandatory interpretation of legislative enactments, and courts of general jurisdiction.

The system of courts of general jurisdiction encompasses:

(i) local courts as the first-instance courts, which include local general, commercial and administrative courts;

(ii) appellate general, commercial and administrative courts, which examine appeals in relation to judgments of respective local courts;

(iii) higher specialized courts reviewing cassation (second level) appeals from judgments of respective lower courts and issue recommendations regarding application of laws; and

(iv) the Supreme Court of Ukraine being the highest judicial institution of general jurisdiction.

Based on the specialization principle, the courts of general jurisdiction consider the following types of cases: civil, criminal, commercial and administrative and also cases on administrative offences.

The highest judicial institution of general jurisdiction is the Supreme Court. The Supreme Court reviews cassation appeals when they are based on different application of a legal rule by specialized courts in similar cases.

Legal System – Key Rules

Ukraine is a civil-law country with the Constitution being its main legislative act, which was adopted in 1996 and determined basic civil rights, general legal principles and the structure, functions and powers of the national government. The main sources of law are acts promulgated by the legislative and executive branches of state power.

Business custom is recognized as an independent source of law, which is, however, subordinate to statutory law. Certain customary rules operate as part of the law because there is a reference to them in a statute or decree. For example, under Ukrainian banking law, Ukrainian banks can use payment instruments recognized in international banking practice, and Ukrainian companies trading with foreign counterparts must refer in sale contracts to INCOTERMS rules issued by the International Chamber of Commerce.

With its independence from the Soviet Union in 1991 Ukraine inherited a vast body of Soviet law, which is still effective to the extent that it has not been expressly repealed or superseded by new legislation. Each year the area of pre-independence regulations becomes smaller, and it is now fairly insignificant.

The new enactments, however, sometimes lack clarity and consistency. The old tradition of Soviet law to include general principles and declaratory statements into statutes, while specific rules of law directly applicable to transactions, are included into implementing regulations and administrative instructions, continues to be a mainstream of Ukrainian lawmaking. It often results in "non-working principles" due to absence of relevant regulations or in a conflict between principles and regulations, when the latter deviate from or "develop" statutory provisions. The legislation is often adopted to introduce specific policy measures in response to the day-to-day needs and political pressures. This results in inconsistencies between different legislative acts, their ambiguity and frequently inefficient application in practice. One of the examples of such uncoordinated lawmaking is the adoption in 2003 of the Civil and Commercial Codes, which openly conflict with one another in several instances.

Thus, the most common risks associated with the Ukrainian legal system include (i) inconsistencies between the Constitution of Ukraine, statutes, presidential decrees, governmental, ministerial and local regulations, and other administrative acts; (ii) ambiguous provisions in the statutes and regulations resulting in difficulties with their implementation or interpretation; and (iii) inconsistent judicial and administrative review of similar cases.

Under productive criticism from local and international legal and political communities, the Ukraine's legal system slowly, but gradually improves and moves toward international standards. The country has taken a legislative obligation to harmonize its laws and regulations with acquis communautaire of the European Union Ukraine aims to join.

In investment and commercial area, major amendments of Ukraine's legislation have been enacted during the last decade. Ukraine has also signed a significant number of bilateral investment and tax treaties.

2. Foreign Investment Regime

Ukrainian authorities regularly announce their keenness to encourage foreign investment. In general, Ukrainian legislation provides that (with some few exceptions) foreign investors are authorized to carry out their investment activities in Ukraine on the same basis as domestic ones. Foreign investors are generally not required to seek a special approval from authorities to invest in Ukraine, however their presence must be duly formalized according to the procedure prescribed by Ukrainian law.

The basics of investment activity in Ukraine, the rights and obligations of foreign investors, irrespective of their residency, are provided for in the Laws of Ukraine "On Investment Activity" and "On Foreign Investment Regime". Generally, Ukraine welcomes foreign investments and Ukrainian law contains many provisions designed to encourage foreign participation in Ukraine's economy. Under the above laws investors are declared to have certain privileges and guarantees which inter alia include:

(i) legislative change guarantee: foreign investors are protected against changes in legislation for 10 years since such changes enter into force, however, the period of protection does not cover certain changes related to national security, environment protection matters, etc.;

(ii) nationalization protection guarantee: as a general rule, foreign investments cannot not be subject to nationalization. State bodies may only expropriate the foreign investment on the basis of respective authority's decision made in case of emergency when natural disasters, accidents, epidemics, etc. occur;

(iii) losses compensation and reimbursement guarantee: foreign investors are entitled to reimbursement of losses, including loss of expected profit and moral damage inflicted as a result of action, inaction or undue performance of obligations by state bodies or their officials;

(iv) investment activity termination guarantee: foreign investors have the right to return their investments, as well as income derived from Ukraine, without paying any export duty within 6 months since the termination of investment activity;

(v) profits repatriation guarantee: after paying all applicable Ukrainian obligatory payments, foreign investors can conveniently and immediately remit abroad all the profits, incomes and other amounts in foreign currency, which were legally derived from investment projects in Ukraine according to the procedure established by the National Bank of Ukraine ("NBU").

In order to benefit from these statutory privileges and guarantees, foreign investments have to be registered with respective local state administration. Nevertheless, such registration is not obligatory in Ukraine and does not have a permissive nature. That is to say, the foreign investment can be done without the registration, however, in such a case a foreign investor will not have the right to enjoy the above privileges and guarantees.

Though creating equal conditions for national and foreign investors, Ukrainian legislation still somewhat restricts direct foreign investments in certain spheres, such as in publishing, broadcasting, defense, etc. However, it is still possible to invest in these areas by way of proper structuring of business.

In the event of a dispute arising with respect to a foreign investment, a foreign investor may seek recourse through a number of institutions. Generally, the law provides that disputes between investors and state are to be settled in national courts, unless otherwise provided for by international treaties. Most investors, however, use their right to settle the dispute in respective international investment arbitration tribunals granted to them by bilateral investment treaties concluded by Ukraine and aimed at a reciprocal promotion and protection of foreign investments.

3. Outline of Ukraine's Company Law

The basic laws covering the issues of foundation and operation of Ukrainian companies are the Civil Code, the Commercial Code, the Business Associations Law and the Joint Stock Companies Law. These laws provide for different forms of legal entities, which can be used to conduct business in Ukraine. Alternatively, a foreign investor may engage in business through a representative office, which is not a separate legal entity.

Types of Companies

The Civil Code provides for six types of commercial legal entities: a joint stock company, a limited liability company, an additional liability company, a full partnership, a limited partnership, and a production cooperative.

Forms of businesses most frequently used by international investors and, which are reviewed in more detail below, are:

· a joint stock company ("JSC"), which must issue shares registered by the National Securities and Stock Market Commission (the "Commission"). The owners of shares are liable for company debts only to the extent of the value of the shares they own. There can be two types of JSC: public JSC and private JSC;

· a limited liability company ("LLC"), in which holders of equity are not liable for the debts of the company beyond the capital they contributed or agreed to contribute; and

· a representative office (the "RepOffice"), which is similar to a branch office of the investor with the authority to act on behalf of the investor in Ukraine; the RepOffice must be registered with state authorities, but is not a separate legal entity.

Joint Stock Company vs. Limited Liability Company

Incorporation and Members of a Company

One or more founders may create a JSC or an LLC. However, the Civil Code specifies two scenarios when a company cannot have a sole founder:

· LLC or JSC may not be created by a sole founder, if such founder, in its turn, is also established by one person; and

· a parent of a wholly-owned Ukrainian LLC may not be a sole participant in another wholly-owned Ukrainian LLC.

LLC can have no more than 100 participants. Public JSCs are not limited in the number of shareholders. Private JSCs can have no more than 100 shareholders and if they have more shareholders they must be converted into a public JSC or some other suitable corporate formation.

Also, a legal entity may be incorporated based on a Model Charter. In November 2011 the Cabinet of Ministers of Ukraine adopted the Model Charter of LLC.

Capital Requirements

The stated or "charter" capital (the "Capital Fund") of a Ukrainian JSC is divided into a specified number of shares, each with a stated nominal value, while in an LLC it is divided into equity interests, and may be increased or decreased. Capital contributions may be made in cash or in kind, including buildings, equipment, securities (except for state owned money, debt financing and bonds, assets of state (municipal) owned companies, which cannot be privatized), licenses, intellectual property, lease rights or rights to use land; however, personal services may not be included as part of a capital contribution.

Currently, the minimum capitalization requirement for the creation of a JSC is 1,250 minimum wages (as of now, a minimum wage equaled UAH 1,147 (approx. USD 145), but it is raised each year by the State Budget Law gradually on a nearly quarterly basis). The charter capital must be paid in prior to registration of the JSC.

There are no minimum capitalization requirements for LLCs (as well as for most other less widely used types of companies) although some Capital Fund must be stated in the charter at the time of registration and the stated amount, even though it can be minimal, must be paid in within 1 year of registration.

Corporate Governance

a. Joint-Stock Companies

General Meeting of Shareholders ("GMS") and an executive body (either an individual CEO or executive board ("EB")) are the governing bodies of a JSC. Ukrainian law also requires JSC with at least 10 shareholders to have a Supervisory Board ("SB") as a check on the management. The highest governing body of a JSC is GMS, which (among other things) has the authority to: (i) amend the company's charter, (ii) authorize the issuance of shares and repurchase of shares, (iii) approve transactions, which value exceeds 25 percent of the JSC's assets, (iv) elect SB and the Audit Committee ("AC"), and (v) approve distribution of dividends. GMS may delegate some of its authority to SB or to the executive body.

Each JSC must have an executive body in charge of the day-to-day business operation of the company. An executive body may consist of a single-person CEO (such as director or general manager) or EB headed by a chairperson. The drawback of EB is that all executive decisions must be approved in the board's meeting. The entire powers of the board cannot be delegated to any of its members (even the chairperson) and all matters must be decided through collective action of the body in a meeting. This is quite difficult to accomplish in the day-to-day operations. For this reason, unless there are other considerations, JSCs often choose a single-person executive (CEO).

SB organizes GMSs, appoints CEO or EB, approves material transactions with value between 10 and 25 percent of the company's assets, and performs other specific functions assigned by the charter or by a decision of GMS. SB may consist of both individuals and legal entities provided that an elected legal entity must be a shareholder.

Under the JSC Law, members of SB are supposed to be elected by cumulative voting, however in a private JSC they may be alternatively selected based on the number of votes linked to the number of seats in SB as specified in the JSC's charter.

SB oversees activities of EB. Unless the charter provides otherwise, SB appoints, dismisses, and suspends CEO or EB and sets the conditions of their employment.

JSCs may appoint an internal AC separate from both EB and SC. Instead of forming AC, JSCs with fewer than 100 shareholders can appoint a single auditor who is viewed as the company's officer and is distinct from an outside auditor. Alternatively, JSCs may appoint an outside contractual auditor.

b. Limited Liability Companies

The highest governing body of LLC is the general meeting of its participants (“GMP”) held at least twice a year, unless otherwise specified in the charter. The quorum for GMP is the registration for it of the participants owning equity interest in more than 60 percent of the Capital Fund. Most decisions require a simple majority vote of the participants present at GMP. However, a majority of owners of all equity interests in LLC must vote for approval of (i) amendments to the company's charter, (ii) changes in the Capital Fund, (iii) fundamental principles of the company's activity and reports on their implementation, and (iv) expulsion of a participant from the company. Participants cumulatively holding at least 20 percent equity interest in LLC may demand convocation of an extraordinary GMP at any time for any reason.

A single Director or EB (directorate) headed by the General Director may act as an executive body of LLC. EB reports directly to GMP and the General Director may act on behalf of LLC without a power of attorney. For the reasons discussed above in the context of JSCs, a single executive officer is in most cases a more flexible option. Participants can generally establish an appropriate management structure and specify the competence of the governing bodies of LLC in its charter.

Registration and Company Register

Companies are viewed established as separate legal persons upon their registration in the Company Register. The original registration fee equals 10 non-taxable minimum incomes (UAH 170 that is approx. equals to USD 21). The register is nationwide, but is administered by state registrars employed by local authorities (city councils or district councils in large cities or rural areas).

Most registered information, except for corporate charters filed with the state registrar, is public. Public information in the Company Register includes information about company's chief executive acting on behalf of the company and limitations of executive's authority. However, this information cannot be fully relied upon by third parties to ensure that their contracts with the company are duly authorized by the company. In practice a third party intending to enter into a significant contract with any company should request from the counterparty at the very least the following documents: either a power of attorney or the corporate charter, relevant corporate regulation (if any), and corporate resolution appointing the person acting on behalf of the company to verify the signatory's authority.

In addition to registration as legal entities in the Company Register, JSCs and LLCs (as well as other types of legal entities) must be registered with the local tax authority (VAT registration, where it is required, is separate), the State Committee of Statistics, and the State Pension Fund. Every JSC must also register its share issue(s) with the Commission. Equity investment by a foreign investor may be registered as a foreign investment with the regional state administration. This registration, while optional, secures certain expanded state guarantees for the investment, including facilitation of its repatriation.

Representative Office

The RepOffice is not a legal entity under Ukrainian law but rather a permanent place of activity, through which a non-resident company carries out a part or all of its business in Ukraine. The RepOffice is used to accommodate regular negotiating contracts, advertising and marketing goods and services of the parent company, sometimes - small-scale production and commercial services provision in Ukraine.

The RepOffice is required to register with the Ministry of Economy of Ukraine and certain other state agencies (such as the local tax authority, the State Committee of Statistics, and the State Pension Fund). The RepOffice registration takes up to 2 months, which is much longer than registration of a subsidiary entity in the form of LLC. It requires submission of a set of application documents (an application letter, extract from the foreign trade register, banking certificate, power of attorney, etc.) and payment of the registration fee in the amount of approx. USD 2,500.

The head of RepOffice acts pursuant to registered RepOffice regulations and under a power of attorney issued by the parent company.

4. Ukrainian Tax System Peculiarities

With the view of improving investment climate, the tax reform was carried out in Ukraine recently resulting, particularly, in adoption of the Tax Code of Ukraine in 2010.

The Tax Code includes major tax rules. The Law on Unified Social Contribution is the most important exception. Along with the general taxation system, the Tax Code provides for so called 'simplified taxation system' available for small businesses as well as for special tax regimes ('tax holidays') available for some sectors of economy. The tax regime is further softened by a great number of Double Tax Treaties Ukraine is a party to.

Principal taxes include the Corporate Profit Tax ("CPT"), Value Added Tax ("VAT"), Personal Income Tax ("PIT") and Unified Social Contribution.

Corporate Profit Tax

General rules

Ukrainian legal entities and permanent establishments of non-resident companies are treated as CPT payers. The tax is charged on the profit determined according to a "worldwide" income concept (i.e., both Ukrainian and foreign-sourced incomes are taxable in Ukraine). The taxable profits are calculated as taxable incomes reduced by tax deductible expenses, including depreciation charges (if any). The current CPT rate is 19%, but the rate will be gradually reduced to 16% (starting from 1 January 2014).

Restrictions on Deductible Expenses

Reasonable business expenses are generally tax deductible. However, there are a number of anti-tax avoidance provisions in the tax laws, including:

a. Limitations on the Deductibility of Certain Expenses

The Tax Code imposes restrictions on tax deductibility of royalties, expenses related to purchase of marketing, advertising and consulting services from non-residents. These payments are generally tax deductible to the extent they do not exceed 4% of the Ukrainian taxpayer's sales (revenue) for the previous calendar year. A similar restriction applies to engineering services purchased from non-residents. In this case the limitation is 5% of customs value of the equipment imported pursuant to the respective contract.

All the above payments, irrespective their amount, are not deductible, if they are made to non-residents registered in an offshore jurisdiction included in the list approved by the Ukrainian government.

b. Transfer Pricing Rules

Under Ukrainian transfer pricing rules, Ukrainian taxpayers may not deduct expenses exceeding a fair market price for the purchased goods or services. Similarly, when the taxpayers sell goods or render services – their price should not be lower that the relevant fair market price.

c. Limitations on Deductibility of Interest Payments

Under general rule, interest accrued on the loan received by a Ukrainian company from a non-resident is tax deductible. At the same time, if interest payments are made to non-resident shareholders and/or their affiliates controlling more than 50% of the Ukrainian company, the deductible interest may not exceed 50% of the taxable profit plus interest received in a particular tax period (a quarter). The excessive interest, which may not be deducted in a particular tax period (a quarter), may be carried forward and deducted in subsequent periods provided that in these periods the deductible interest (including the carry-forwards) is within the above limitation.

Dividends Distribution

Payment of dividends is subject to a 19% CPT advance payment, which may be further utilized by a taxpayer in subsequent reporting periods against its taxable profits for CPT purposes. Exceptions from the CPT advance payment rule include (a) payment of dividends by a Ukrainian holding company within the amounts of its dividends previously received from its Ukrainian subsidiary(ies) and (b) payment of dividends to individuals and/or fixed agriculture tax payers.

Special Tax Regimes

A special 10-year CPT exemption is granted to aircraft producers, shipbuilders, hotels, green energy generation companies, and producers of agricultural machinery. Companies involved in the development and use of energy-efficient technology or alternative energy sources may enjoy special favourable tax regime.

Flat Tax

Legal entities (i) with no more than 50 employees and up to UAH 5 million (approx. USD 625,000) in annual income or (ii) with up to UAH 20 million (approx. USD 2.5 million) in annual income, may opt for the Flat Tax. In this case, the income of the fist abovementioned group will be taxed at 5% or, if the company is a registered VAT payer, at a mere 3%, and of the second one – 7% and 5% respectively.

Withholding Tax

The non-resident's Ukrainian sourced income (mostly passive income, such as dividends, interest or royalties) is subject to the 15% withholding tax ("WHT"), which is withheld by a Ukrainian payer with subsequent remittance to the state budget. Exemptions and reduced WHT rates are possible under one of Ukraine's double tax treaties ("DTT").

There are the following WHT rates under DTT with China, as well as with Cyprus, the Netherlands and the United Kingdom, which are primarily used for structuring foreign investments into Ukraine:

Recipient is Residing in

Date of Signing

Date of Entry into Force

WHT Rate

Dividends

Interests

Royalties

Country with no DTT

15

15

15

China

04.12.95

18.10.96

5/10

0[1]/10

10

Cyprus[2]

29.10.82

26.08.83

0

0

0

Netherlands

24.10.95

02.11.96

0/5/15

0[3]/2/10

0/10

United Kingdom

10.02.93

02.11.96

5/10

0

0

Beneficial Ownership Requirement

Under the Tax Code, the DTT treaty benefits are available only to beneficial owners of Ukrainian-sourced incomes. The concept of beneficial ownership is not well developed in Ukraine and tax authorities are not very experienced in applying this concept in practice.

This results in uncertainty with its application towards DTTs and leads to relevant tax risks.

Value Added Tax

Supply of goods and provision of services in Ukraine are subject to Ukrainian VAT. Import and export of goods are also VAT-able transactions. The tax is generally charged by the supplier/seller and is added to the price. The import VAT is charged by Ukrainian customs during the customs clearance.

A company with VAT-able supplies exceeding UAH 300,000 (approximately USD 37,550) during preceding 12 months is required to register as a VAT payer.

The current VAT rate is 20% and will be reduced to 17% starting from 1 January 2014. Export of goods from Ukraine is currently subject to 0% VAT.

VAT payable to the state budget is determined as the positive difference between VAT collected from customers (output VAT) and VAT paid to suppliers (input VAT). If input VAT in the respective reporting period (month) exceeds output VAT the tax payer is entitled to VAT recovery. VAT can be recovered either as (i) a credit against output VAT or (ii) cash refund from the state budget. The latter is subject to a set of cumbersome requirements, including strict documentary support. As a practical matter, Ukrainian companies experience severe difficulties in receiving VAT refund in cash from the state budget.

Personal Income Tax

The PIT rate is 15% or 17% and applies irrespective of the individual's tax residency status. PIT is a tax charged on individuals' incomes and does not apply to legal entities/employers normally acting as tax agents withholding PIT from the relevant payments, such as salary, bonuses etc.

Monthly income not exceeding 10 minimum wage amounts (currently, approximately USD 1,434) is subject to 15% PIT, the balance (if any) – to 17% PIT. Dividends received by individuals from Ukrainian companies are subject to 5% withholding. Ukrainian interest income derived from bank deposits is exempt from tax until 1 January 2015. Subsequently the 5% tax will start to apply.

Mandatory Unified Social Contribution

In addition to PIT, employers are also required to pay contributions to the Pension Fund, which distributes them among several other state social insurance funds in charge of unemployment, temporary sickness, and workplace accidents insurance. These contributions vary from 36.76% to 49.7% of a company's payroll expenses (the specific rate applicable to each company is determined by the sector of the economy where the company operates and the level of workplace incident risk prevalent in the sector). In addition to its own social contributions the employer is also required to withhold the social contribution charged to the employee in the amount ranging from 2% to 6.1% depending on the industry (the rate applicable to most of the businesses is 3.6%).

A monthly salary exceeding established threshold (currently, approximately USD 2,437) is not subject to the social contribution.

5. Currency Regulations and Restrictions on Cross-Border Transactions

Ukrainian companies and individuals must sell their products and services only for the national currency, Hryvnia, and may exchange it for foreign currencies only for limited purposes including, inter alia, for (i) making a contractual payment to a non-resident, (ii) paying interest on loans to foreign lenders, (iii) placing currency on bank and deposit accounts abroad, (iv) paying dividends abroad and certain other properly documented limited expenses incurred abroad, and (v) investing abroad.

Most transactions with foreign currencies are subject to licensing by NBU. For example, Ukrainian residents need a license from NBU to operate a bank account abroad.

Generally, trade in foreign currency is allowed in Ukraine only through an authorized bank or other licensed financial institution on the regulated Ukrainian interbank currency market.

Foreign currency can be used as a means of payment between residents and non-residents in commercial activities only through an authorized bank, which possesses a license to engage in foreign currency operations. Purchase and sale transactions outside Ukraine are usually executed in foreign currency. Proof of the legitimate business purpose of the transaction (such as a contract and invoice) must be submitted to the bank through which such transfer is made. After recent legislative changes the Ukrainian currency can also be used as a means of payment between residents and non-residents in commercial transactions.

Resident companies and individuals holding currency or other assets outside Ukraine must declare them to NBU.

Unless there is an exemption, the Ukrainian borrower needs to register a foreign currency loan from a non-resident with NBU.

Ukrainian residents wishing to remit foreign currency for services provided to them by non-residents in the amount exceeding the equivalent of EUR 100,000 must provide their bank with a report from the International Market Monitoring Center affiliated with the Ministry of Economy confirming that the price paid for the services does not exceed the prevailing market prices.

Ukrainian exporters are to be paid within 180 days from the shipment of exported goods, while Ukrainian importers must receive imported goods within 180 days after any prepayment made to a non-resident. If they do not, they must pay to the State Treasury a penalty equal to 0.3 percent of the debt for each day the payment is overdue. Ukrainian banks and tax authorities are charged with enforcing these rules. There is a statutory provision, which suspends counting a penalty, i.e. by filing a claim against a non-resident to the International Commercial Arbitration Court of the Ukrainian Chamber of Commerce and Industry.

6. Licensing Procedure

Under Ukrainian law, certain types of economic activities require prior obtainment of respective licenses and/or permits.

The basic law, which defines the types of economic activity being subject to licensing, sets forth major licensing procedures, determines liability for violation of licensing procedures, is the Law of Ukraine "On Licensing of Certain Types of Economic Activities" (the "Licensing Law").

The Licensing Law determines more than 40 types of business activities, which require possessing a licensee. Among the most important are:

· production and repair of weapons;

· production of industrial explosives and especially dangerous chemical agents;

· production of precious metals and stones, semiprecious stones;

· production of veterinary drugs and medicines, wholesale and retail sale thereof;

· trade in pesticides and agrochemicals (plant growth regulators only);

· transportation of oil, oil products by main pipelines, transportation of natural gas, petroleum gas and methane by pipelines and their distribution;

· supply of natural gas and methane under regulated and unregulated tariffs;

· natural gas and methane storage in volumes exceeding those established by licensing requirements;

· medical and veterinary practice;

· transportation of passengers, luggage and dangerous cargoes by river, sea, automobile and railway transport;

· production, export and import of matrixes, discs for laser reader systems;

· production and supply of heat energy, transportation thereof by main and local (distribution) heat networks; etc.

The law does not, however, cover licensing procedures and requirements applicable to activities in the fields of banking and financial services, stock market professional activities, foreign economic activity, broadcasting, telecommunications, electric power industry and use of nuclear energy, construction, passenger transportation, etc. These are regulated by special laws.

Generally, licenses are issued for an indefinite period. There could be exceptional cases where the Cabinet of Ministers of Ukraine can limit terms of validity of particular types of licenses; however, such terms in no case can be less than five years. In order to get a license, a licensee shall comply with specific licensing requirements approved by respective governmental authority and file with a licensing authority an application supported by a list of relevant documents.

Though the procedure for obtaining licenses has been significantly simplified within the last years (e.g. a number of business activities were excluded from the list of activities requiring a license) and, yet more, there are a number of forthcoming governmental initiatives to further improve licensing procedure, it still remains quite sophisticated and protracted mostly due to a high level of bureaucracy with state licensing authorities and corruption among their public servants.

7. Employment Outlines

Ukrainian labour law is still based on the Labour Code of Ukraine of 1971 (as amended), which is very pro-employee, thus reflecting the socialist principles of full and state coordinated employment. This results in problems for the employer in planning an efficient employment policy in compliance with Ukrainian law.

Ukrainian and foreign individuals are employed under an employment agreement, which is often formalized not as one written agreement, but rather as an exchange of an application signed by the employee and an order issued by the company's executive and appointing the employee to the appropriate position. The employment agreement may not deviate from labour law and reduce protections offered to the employee by the law. Grounds for dismissals are limited and social guarantees for many categories of employees are generous. Certain categories of employees may not be dismissed or laid off at all or without guaranteed subsequent employment. Oral or even factual (i.e., based on actual performance of job functions) employment agreements are permitted.

Only the so-called "employment contracts" can modify the default rules of employment law if the parties expressly agree so in writing. However, employment contracts can only be used where they are expressly authorized by law and for this reason they cannot be used with a vast majority of employees. One of the major exceptions is CEO of a company: the Labour Code specifically authorizes companies to enter into employment contracts with their top managers.

The difference between employment agreements and employment contracts is quite important and unless there is a written document signed with CEO entitled "employment contract" with relevant dismissal clauses the employer is not able to dismiss CEO at will even in case of discovered irregularities, lack of confidence or conflicts. In the case of the employment agreement concluded with CEO, the legal grounds for his/her dismissal are strictly limited to those specified in the Labour Code. By contrast, the "employment contract" may provide for termination of the CEO's employment with the company immediately upon respective decision of GMS/GMP or SB of the company (depending on the type of the company).

Ukrainian employees are required to submit a formal employment record (labour books) to employers for proper registration of employment. Labour book information is used for hiring purposes and, along with centralized records of mandatory pension fund contributions, for calculation of pensions. Since the Soviet times, trade unions have significantly lost in their statue and actual powers though still formally possess a number of important functions in the termination and dispute resolution procedures.

Employment of foreigners, including executive officers, is generally possible only after obtaining work permits from the Labour Inspectorate. The application fee is 4 minimum wages and a fine for commencing work prior to obtaining a permit is 20 minimum wages (as of now, a minimum wage equaled UAH 1,147 (approx. USD 145), but it is raised each year by the State Budget Law gradually on a nearly quarterly basis). The usual term of the employment permit is 1 year, and the maximum possible for certain employee categories – 3 years.

Apart from direct employment, a company may benefit from alternative forms of staff engagement such as personnel outsourcing, leasing and outstaffing.

Outsourcing is popular among fast-growing companies concentrating on key operational processes and willing to transfer auxiliary functions to companies specialising in such areas. The customer and provider companies conclude a services agreement whereby the provider undertakes to cover the agreed activity areas of the customer, for example, accounting, legal, HR, or IT. Respective services are rendered by the provider employees subordinated to the provider only. As a rule, the customer doesn't intervene with the designated employee selection by the provider and the process of their work, but rather controls the services' result only.

Under a personnel leasing scheme, the provider transfers to the customer the agreed professionals to perform certain work. In the process, such specialists remain formally employed by the provider, but may be actually subordinated to the customer. Such a staff engagement option has a number of advantages over usual employment.

Indeed, the customer has much more flexibility in changing personnel without the need to comply with stringent requirements of labour law on employee dismissal. Also, the customer doesn't waste time finding substitutes for those dismissed. All these and other personnel administration functions as well as labour law exposure are the responsibility and risk of the provider.

Personnel outstaffing resembles personnel leasing, but is structured in two stages. Firstly, by agreement of all parties involved, a customer's staffer's employment is terminated with simultaneous hiring of such a professional by the provider. Secondly, such a newly-hired employee is dispatched by the provider to the customer on the personnel leasing basis described above. This kind of personnel engagement relieves the customer from labour law compliance and exposure burden, but, obviously, it requires the full trust and cooperation of the employee.

Author: Vadym Samoilenko, Oles Kvyat, Anna Vlasiuk, Oksana Varakina
Source: Investment Overseas. – China. – 2013.