Ukrainian Overview of 2008 and Legal Initiatives in Response to the Financial Recession

22.12.2008

This newsletter is devoted to the recent changes in the Ukrainian legislation adopted during the year 2008 and legislative acts initiated as a response to the financial recession. We selected most important legal norms from our point of view in the following areas: corporate, tax, real estate, WTO, foreign trade and finance.

Corporate Issues

Tax Issues

Real Estate Issues

WTO Accession

Foreign Trade and Finance Issues

Corporate Issues

On 17 September, 2008 the Parliament of Ukraine adopted the Law "On Joint Stock Companies" (hereinafter - the "Law"). This Law eliminates a considerable part of existing legislative loopholes in the sphere of joint stock companies functioning and advances Ukraine to civilized standards of corporate governance. The Law contains provisions directed upon the protection of shareholders' rights, including those of minority shareholders

The Law comes into force from 30 April, 2009 and in two years thereafter norms of the applicable Law of Ukraine "On Business Companies" will become invalid in the respect of joint stock companies. As is known, 25 articles of the effective Law are directly devoted to the regulation of joint stock companies' activity and so many conflicts and disputes among shareholders and between shareholders and companies that have arisen in Ukraine up to now were exactly caused by the insufficient regulation.

Experts predict that the new Law will contribute to the development of securities market and to the improvement of investment climate in Ukraine.

The Law provides for the establishment of public joint stock companies (which may carry out public and private share offerings) and private joint stock companies (which may carry out only a private share offering).

Closed and open joint stock companies established in accordance with the current Law of Ukraine "On Business Companies" shall bring their articles of association and other internal documents in line with the Law provisions not later than 2 years from the effective date of the Law.

Among principal innovations of the Law, directed upon the protection of minority shareholders' rights, the following provisions that are new for the Ukrainian legislation on joint stock companies may be pointed out:

  • proposals of shareholder(s) which collectively hold 5 or more per cent of ordinary shares are subject to mandatory inclusion into the agenda of the general meeting;
  • selection of the supervisory board members of a joint stock company is exclusively carried out by means of cumulative voting);
  • procedure for the acquisition of a controlling stake of shares (50 and more percent of ordinary shares) contains provisions that obliged the acquirer to submit to other shareholders an offer to acquire their shares at the price not lower than the market price;
  • the Law provides for the possibility of a shareholder in cases when he/she voted against the approval of certain decisions by the general meeting to demand the mandatory redemption of shares by the joint stock company. The redemption of shares shall be carried out at the price not lower than the market price.

The requirement of the Law as to the mandatory listing procedure for the public joint stock company and its registration in the register of at least one stock exchange is directed upon the revival of the Ukrainian stock market and increase of its investment attractiveness. The law-makers have also envisaged that the conclusion of share sales and purchase agreements of the public joint stock company which has gone through the listing procedure on a stock exchange shall be carried out only on this stock exchange.

Tax Issues

In Ukraine the expiring year 2008 has not been marked by substantial reforms or alterations in the sphere of taxation while in other neighboring countries the reforming process has been steadily seen throughout the year. According to the World Bank and PriceWaterhouseCoopers' "Paying Taxes 2008" publication, countries of Eastern Europe and Central Asia are among top tax reformers accounting for about a third of the reforms.

With respect to Ukraine the above publication says that it does not belong to such countries occupying top bottom positions in terms of the ease of paying taxes, tax payments and compliance hours. Particularly, the Ukrainian tax system occupies the 177th place of 178 countries, only Belarus is behind it. There are 99 kinds of taxes in Ukraine and it takes 2,085 hours per year for Ukrainian businesses to comply with all tax requirements - in this category we can compete only with Brazil with its 2,600 hours.

During the year 2008 there were several attempts to improve to the tax legislation either through the introduction of amendments to the existing laws or through the adoption of new ones. Some legislative drafts that proposed the increase of tax burden were adopted. As such, the amount of pension contributions paid by legal entities was increased to 33,2% of wage costs, excise duty rates for tobacco products and alcoholic beverages were as well increased, income of individuals from securities except for interest is now taxed etc.

The current global economic recession seems to have united to some extent Ukrainian lawmakers in their effort to minimize the negative impact of the economic crisis on Ukraine, which, after all, resulted in the adoption of the Law of Ukraine "On Immediate Measures on the Prevention of Negative Consequences of the Financial Crisis". Unfortunately, the given Law did not provide for any fundamental changes in the tax legislation except for the special favourable VAT taxation for agricultural producers.

At the same time developed world countries have already examined the effectiveness of their tax systems, reduced or cancelled some taxes, decreased tax rates and generally improved tax systems and administration of taxes for the benefit of businesses and individuals.

Unfortunately, Ukraine is lagging behind in this respect. Only on 19 November 2008 substantial amendments in the tax legislation were proposed in the submitted to the parliament draft Law "On Amending Some Laws of Ukraine (as to the decrease of tax burden and forcing the development of domestic market)" # 3396 (hereinafter - "the draft Law").

The draft Law aims to increase the competitiveness of domestic business, improve the taxation of leasing companies, promote export and modernization of production, promote the production and implementation of energy-saving technologies and use of alternative sources of energy, implement the fair system of taxation and taxation of passive incomes for the purposes of attracting investments in the sphere of production, adaptation of the Ukrainian legislation to the EU legislation and further integration of Ukraine into the world community.

Real Estate Issues

Currently the residential real estate market seems to have suffered most from the recession. In addition to the common reasons for recession, the sales reduction of residential real estate objects has been also caused by numerous scandals, connected with shady deals in the primary real estate market. Besides that, the share of consumer credits in this segment is truly significant. Therefore, transactions in the real estate market will be carried out mainly at the secondary real estate market.

Slow reduction of prices for land plots in comparison to other real estate objects in Ukraine, unfortunately, stems from a mere political background, but not economic. Effective voting on June 3, 2008 for the draft law concerning amendments to the Land Code of Ukraine and the Law of Ukraine "On land lease" actually resulted in the freezing of public land market for an indefinite period of time. In 2009 expected fall of prices for land plots will be not so noticeable compared to relevant fall of prices for residential real estate objects due to the limited supply.

The recession has also affected the commercial real estate segment in spite of the shortage of office and retail areas. The construction of commercial real estate objects is greatly dependant on long-term credits. So, the completion of existing projects is expected, but launching of new ones is hardly probable.

The year 2008 has been rich on legislative changes in the field of real estate. The start of the year was marked by amendments in the state and municipal land lease procedure. It was forbidden to lease state and municipal land plots without relevant auctions. Despite such prohibition no specific procedure of conducting such land auctions has been developed until now.

In June, 2008 the Parliament of Ukraine adopted the Law No 309-VI "On changes to some legislative acts of Ukraine". This legislative act prolonged the validity of the so called "land moratorium" for an indefinite term and finalized the auction order of leasing land plots of state and municipal property. Nevertheless the auction procedure has not been finally regulated yet.

On September 16, 2008 the Parliament of Ukraine enacted the Law No 509-VI "On changes to some legislative acts of Ukraine in regard to construction assistance" (hereinafter - the "Law 509-VI"). The indicated Law provides for a stagewise reformation of construction procedures in Ukraine.

WTO Accession

Accession of Ukraine to the World Trade Organization significantly influenced Ukrainian legislation in commercial and contract law in 2008. In particular, the following major changes came into force as of the date of Ukraine's accession to the WTO:

  • the number of customs duties was significantly reduced;
  • foreign banks became entitled to open branches in Ukraine, which will carry out banking activity subject to compliance with the range of requirements and accreditation with the National Bank of Ukraine;
  • for 5 years starting from Ukraine's accession to the WTO residents may enter into insurance agreements with foreign insurance companies only in certain cases; five years after accession, branches of foreign insurance companies maybe registered in Ukraine;
  • five years after Ukraine's accession to the WTO, the prohibition on establishment and operation of organizations dealing with distribution of printed output with more than 30% foreign investment share in the share capital will be cancelled;
  • government control of milk production and sale was diminished;
  • for 5 years starting from Ukraine's accession to the WTO only specialized metallurgical enterprises may export alloyed iron and nonferrous scrap subject to export duty; gradually the export duty on iron scrap and wastes will decrease.

Foreign Trade and Finance Issues

International financial crisis has also affected Ukraine significantly, and responding to this challenge Ukrainian commercial law has been modified. Accordingly, we featured the major changes in the commercial legislation attaching special emphasis to the export-import and currency regulations.

As of the 1 January 2008 the term for settlement of payments for the goods delivered by the Ukrainian companies outside Ukraine and the term for delivery of goods to Ukraine on the basis of prepayment was increased from 90 to 180 days.

Within the year of 2008 the National Bank of Ukraine increased its refinance rate twice: as of 1 January 2008 - from 8 % p.a. to 10 % p.a. and as from the 30 April 2008 up to 12 % p.a.

5 November 2008 the guarantees to every customer-depositor of a bank that is a participant (temporary participant) of the Fund for the Guaranteeing of Deposits of Natural Persons increased from UAH 50,000 to UAH 150,000 for deposits.

On 1 January 2008 new regulations on international borrowings of Ukrainian lenders came into force, which modified the procedure of registration of loan agreements entered into between foreign lenders and Ukrainian borrowers as well as introduced certain additional requirements to such agreements.

As of 27 October 2008 thresholds applicable to interest rates in loan agreements between foreign lenders and Ukrainian borrowers significantly changed:

" thresholds for interest rates in relation to hard currency loans received by Ukrainian entities from foreign entities were increased from 9.8% p.a. for short-term loans (up to 1 year) to 11% p.a., respectively; " thresholds for interest rates for long-term loans (more than 1 year) were completely revoked.

Starting from 12 April 2008 Ukrainian companies may issue corporate bonds of total nominal value not exceeding that threefold amount of their asset/equity ratio with is more liberal and objective criterion than limitation effective before- the amount of share capital.