Doing business in Ukraine

Set up business in Ukraine

1.  The business environment
General information
Geographical position
Ukraine occupies an advantageous economic, geographic and geopolitical position in Eastern Europe at the crossroads of major railways and motor roads, oil, gas and product pipelines, and systems of communication between Western Europe (European Union), regions of Russia and Asian countries.
Ukraine is situated in the Eastern Europe between Moldova, Romania and Hungary on the Southwest, Slovakia on the West, Poland on the Northwest, Belarus on the North, and Russia on the Northeast, bordering the Black Sea and Asove sea. Ukraine is the largest country in Europe. The geographical center of Europe is the village Dilove, district of Rakhiv, province (Oblast) of Zakarpatia, in Western Ukraine.
The climate is temperate continental, with soft and humid winter and warm summer.
The territory of Ukraine is 603 thousand square kilometers populated by over than 48 mln. citizens.
Ukraine is administratively divided into 24 regions. The city of Kyiv is the capital of Ukraine.

History
The territory of Ukraine was a key centre of East Slavic culture in the Middle Ages, before being divided between a variety of powers. However, the history of Ukraine dates back many thousands of years. The territory has been settled continuously since at least 5000 BC, and is also a candidate site of the origins of the Proto-Indo-European language family.

State system
Ukraine is a unitary, democratic, social, law-governed state. The state power in the Republic of Ukraine is divided into legislative, executive and judicial branches.
The President of the Republic of Ukraine is the Head of State.
Executive power in the Republic of Ukraine is exercised by the Government, i.e. the Council of Ministers headed by the Prime Minister. The supreme representative and legislative body is Verkhovna Rada of Ukraine.

Population and language
The official language is Ukrainian.
The first Ukrainian Census was carried out by State Statistics Committee of Ukraine on 5 December 2001, twelve years after the last Soviet Union census in 1989.
The total actual population recorded was 48,457,100 persons, of which urban population was 32,574,500 (67.2%), rural: 15,882,600 (32.8%), male: 22,441,400 (46.3%), female: 26,015,700 (53.7%). The total permanent population recorded was 48,241,000 persons.
There were 454 cities and towns, 9 of them with population over 500,000. The census recorded over 130 nationalities.

Currency
Ukrainian national currency is the hryvna (UAH). As of July 1, 2009, the exchange rate was 7,64 hryvnas for USD 1.
Time, weights and measures
Ukraine is situated in the Central-European Time Zone: GMT +2.
Ukraine uses the metric system of weights and measures and the Celsius scale of temperature.

Business entities
There are no specific requirements for foreigners wishing to establish a business in Ukraine. Investors, whether Ukrainian or foreign, benefit from equal legal treatment and have the same right to establish business operations in Ukraine by incorporating separate legal entities. The procedure requires the fulfillment of certain legal formalities (registration in The Single State Register of Legal entities and individual entrepreneurs.
Forms of business organization
Companies are required to have their own name, share capital (the minimal amount of which is also established by law), management, registered offices and bank accounts.
Companies established in Ukraine are subject to Ukrainian law, but agreements concluded by Ukrainian companies can be governed by the law agreed between the parties.
The Ukrainian legislation allows for and defines six organizational - legal forms of business entity:
 Individual entrepreneur;
 Private unitary enterprise;
 Additional-liability company;
 Limited-liability company;
 Public joint-stock company;
 Private joint-stock company.
Other forms of doing business are representative offices and branches of foreign companies.
A legal entity created in Ukraine in any above mentioned forms, can be created:
 With the status of a commercial organization with foreign investments;
 Without the status of a commercial organization with foreign investments.
It is necessary to note, that such distinction concerns the status only, as a set of the law rules determining features of creation and activity of the legal entity, and not the organizational - legal form.
Most businesses in Ukraine are organizations, organized mainly as limited-liability companies or private joint-stock companies.
Limited-liability company (LLC)
A limited-liability company is a company with a number of shareholders not greater than ten, whose authorized fund is divided into shares of certain sizes that are stated in the founding documents.
The minimum size of the authorized fund of the company is determined by the laws and can not be less than 100 minimum wages. As of the April 1, 2009 the size of minimum wage is define by laws and amount 625 hryvnas (roughly equal to 75 USD).
The founding document of the Limited-liability company is Statute.
Organizational structure of the Limited-liability company includes:
 General members’ meeting.
General members’ meeting is the supreme authority of the Limited-liability company that decides the most important questions of company’s activity.
 Executive authority – Directorate or Director.
Private joint-stock company
The number of shareholders in the closed joint stock company can not exceed one hundred.
Minimally allowable size of the authorized fund for the Private joint-stock company is 1250 minimum wages. The size of minimum wage is determined by the laws of Ukraine, and on the April 1, 2009 it was 625 hryvnas, roughly equal to 75 USD.
Authorized capital is divided into a number of shares having the same nominal value.
The single founding document of the Closed joint-stock company is the Statute.
The organization structure of Private joint-stock company:
 General shareholder meeting.
General shareholder meeting is the supreme authority of the Private joint-stock company that decides the most important questions of company’s activity.
 Supervisory board
Supervisory board is the body to control executive body of the Private joint-stock company and is obligatory to create if the number of shareholder exceeds 10.
 Executive authority – Directorate or Director (Director general).
Shareholders are not liable for its obligations and bear the risk of losses associated with its activities of society within the limits of the value of their shares.
A shareholder may alienate its own shares only with the consent of other shareholders and/or to a limited number of individuals.
Private joint-stock company is not entitled to conduct an open subscription for shares issued to them or otherwise offer for the purchase of unlimited number of persons.

Business reorganization and liquidation
Liquidation of a company may occur voluntarily by the decision of the company’s shareholders or in other cases as prescribed by law (by court or by state recording authority).
The shareholders create the liquidation commission or appoint the liquidator, responsible for the implementation of all the formalities associated with the liquidation process.
Business reorganization in Ukraine is regulated by Ukrainian legislation and can be realized in the form of a merger, accession, division, separation, transformation.

Labour relations and working conditions
Legal regulation of employment
In Ukraine the field of employment is primarily regulated by the Labour Code. But, of course, there are many other acts of legislation that govern the narrower issues of labor relations.

Working hours and holidays
The normal working period is eight hours daily with a one-hour lunch break, five days per week. There are specific working conditions for night work, hard labour or employment of juveniles that are regulated in the contract or legislatively.
Any overtime work has to be remunerated additionally.
Employers are obliged to pay holiday pay. The minimum period of annual holiday is 24 days.

Payment for labour
The size of minimum wage is determined by the laws of Ukraine, and on the April 1, 2009 it was 625 hryvnas, roughly equal to 75 USD. The size of minimum wage varies for 4 quarter of the year.

Foreign employees
Ukrainian visa for entering the country is required for citizens of most countries.
No visas are required for citizens of the following countries: Poland, Hungary, Romania, Mongolia, Former USSR countries (except for Lithuania, Latvia, Estonia), сitizens of EC, Switzerland, Japan, Canada and United States.
Please note that there are four kinds of visas to Ukraine: transit, private, tourist and business. In order to apply for a tourist visa, you need to have a set of documentation including a Visa Support Letter from a third party. This letter, prepared for you by our company, is a third party confirmation that you are indeed going to the Ukraine. This document is faxed to you for submission to the Ukraine Consulate nearest to you. In the past, hotel confirmation number was enough but not anymore. Ukrainian Consulates all over the world accept fax copies of these documents. After receiving a Visa Support Letter you need to apply for the visa.

Business visa is designed to persons, who are entering Ukraine as co-founders of joint enterpeizes or representatives of companies (firms, associations) for realization of control for implementation of contracts or as a consultants from foreign companies (firms, associations), and also to personnel of representative offices of foreign companies, which are having economic activity, in Ukraine; (Rules of design of visa documents for entry to Ukraine, p. 9).
For all types of ukrainian visas the following must be submitted:
1. A passport or travel document, valid for at least one month after the expiration date of the requested visa and having at least one blank visa designated pages;
2. One Visa Application form per travel document holder - answered completely and legibly typed or printed in ink in block letters, dated and personally signed by the applicant.
3.One photo - recent, passport-sized, resembling applicant’s travel document photo.
4. Certificate of permanent or temporary stay on the territory of Poland (In the case, if business-visa, will be designed in the Ukrainian consulate on the territory of Poland)
An original invitation (in some exclusive cases a legible fax version may be also accepted) from a legal entity duly registered in Ukraine, but invitation is NOT necessary for citizens of US, Canada, Japan, Switzerland, Slovak Republic, Turkey and citizens of the countries of the European Union for obtaining official, business, private, cultural/ sporting and scientific visas. (Rules of design of visa documents for entry to Ukraine, p. 12).
Visa fee is not charged for US citizens
The Consulate has full authority to evaluate and request more documents than those submitted by the applicant. The latter is hereby informed that submitting the aforementioned documents does not guarantee automatic issuance of the visa.
We may give you detailed instructions anf consultations how to fill the Ukrainian Visa Application.

Staying on the territory of Ukraine
In pursuance of the international treaty, the Protocol on Ukraine’s accession to the WTO, and Article 19 of the Rules of entry of foreigners and stateless persons to Ukraine, their exit from Ukraine and transit across its territory approved by the Cabinet of Ministers of Ukraine Resolution No. 1074 of 9 December 1995, registration of foreigners in Ukraine for the period of their short-term stay is now done at Ukrainian state border crossing points:
foreigners and stateless persons of the states having visa-based entry – for the visa duration but no longer than 90 days unless other period is specified in international agreements;
foreigners and stateless persons of the states having visa-free entry – for no longer than 90 days within 180 days unless other period is specified in international agreements;
foreigners and stateless persons of the WTO member states for 180 days within a year.
In order to secure these functions, the State Border Guard Service of Ukraine established and implemented 24 November 2008 a database called “Data on foreigners and stateless persons having exceeded the term of registration of passport documents in Ukraine”. Periods of foreigners’ stay in Ukraine are counted automatically since 1 July 2008.

Permanent residence in Ukraine
The permission for permanent residence gives foreigners the right for permanent residence in Ukraine. Permanent residence permit — is a document which justifies the right of the foreign citizen or stateless citizen to permanently reside in Ukraine.
Upon arrival in Ukraine a foreign citizen is obliged to address the immigration authorities with the application to issue a permanent residence permit.
Immigration authorities should issue a permanent residence permit within one week after receiving the application.
Permission for labour activity
Foreigners have the right to labour activity on conditions of obtaining the special permission for labour activity.
The permission for labour activity is issued as usual for the term of one year. The term of permission may be prolonged for 1 year.

2. Investment
The foreign ownership regulations are realized under the Ukrainian legislation namely the Law “On the regime of foreign investment”. Foreign investors are the subjects (individual, legal entities) which carry out investment activity on territory of Ukraine and do not have permanent residency permission on Ukraine territory. Legal entity with foreign investments is a legal entity (juridical person) of any legal form created in accordance with the legislation of Ukraine and foreign investment of which consist not less than 10 percents.
Foreign investments may be invested in the form of Ukrainian or foreign currency, immovable chattels and related property rights, shares, bonds, other securities, and also corporate rights, intellectual rights and in other forms envisaged by Ukrainian legislation.
The special procedure of foreign investments is design with the purpose of providing additional guarantees for foreign investors.
2.1. Investment climate
Ukrainian authorities regularly declare a keenness to encourage foreign investment and the broader public is well disposed to foreign investment.
There are few restrictions on foreign ownership. The major exceptions are publishing and broadcasting, and the manufacture of weapons. Otherwise, the regulatory framework for the establishment and operation of businesses in Ukraine by foreign investors is similar to domestic investors. As a general rule, investment permits are not required, but all enterprises must be established according to the form and procedure prescribed by law and registered with appropriate government agencies. Foreign investors are generally not required to seek special approval from authorities for foreign direct investments.
Both domestic and foreign investors still encounter difficulties at a practical level. These do not relate specifically to the issue of foreign ownership or investment, but rather to administrative hurdles that are arbitrarily enforced, or random delays.
Total foreign direct investment at 1 January 2007 stood at around USD 23.2 billion, according to data from the State Statistics Committee. Foreign direct investment in 2006 totalled USD 6.3 billion.
2.2. Regulatory legislation
Ukraine is still struggling to build a legal system that facilitates easy interaction with the international community. Many issues are not dealt with by a single law, so it may be necessary to piece several laws together to develop understanding of an issue. The various laws may also be ambiguous or contradictory, which complicates the issue further. There is no consolidated tax code, although there are plans to introduce one by 1 January 2008.
The following major pieces of legislation (in addition to taxation law) affect foreign investment into Ukraine:
• On Procedure for Foreign Investments sets out in broad terms Ukraine’s policy on inward investment and the rights and obligations of foreign investors.
• The Civil Code regulates civil relationships, the establishment of legal entities and personal property rights.
• The Commercial Code was enacted on the same day as the Civil Code, and governs business relationships. The Commercial Code is intended to regulate issues that are not dealt with in the Civil Code, although in practice there is some overlap.
• On Securities and Stock Market governs the public issuance and trading of securities.
• On Protection of Economic Competition restricts business monopolies, and aims to ensure an efficient operation of the Ukraine economy through the development of competition. The majority of mergers and acquisitions in Ukraine are likely to require pre-approval from the Anti-monopoly Commission.
• On Protection from Unfair Competition aims to protect business entities and consumers against unfair competition.
• On Environmental Protection establishes a framework for pollution charges to be imposed on any legal entity that discharges contaminants into the environment.
• Intellectual property rights are governed by various laws, including On Protection of Rights to Inventions and Useful Models, On Protection of Rights on Industrial Design, On Protection of Rights for Trademarks for Goods and Services, and On Copyright and Related Rights.
2.3. Restrictions on foreign investment
As mentioned above, restrictions exist for foreign investments in the publishing and broadcasting sectors, and foreigners are not allowed to participate in the manufacturing of weapons.
2.4. Investment incentives
Ukraine eliminated all investment incentives in March 2005. In August 2006, Parliament supported a draft resolution recommending that special tax regimes in free economic zones and tax incentives for technology parks be restored.
The draft resolution has not been approved at the time of writing, and it remains unclear what government policy on incentives will be in the future.
2.5. Foreign exchange issues
Foreign currency is regulated by the 1993 Cabinet of Ministers Decree, On The System Of Currency Regulation And Currency Control, as well as a number of implementing rules issued by the National Bank of Ukraine (NBU). A number of foreign currency transactions may only be undertaken if an individual license is obtained from the NBU. However, there has been an ongoing trend toward less restrictive rules, the most recent development being the removal of the requirement that Ukrainian residents convert at least 50% of any foreign currency proceeds into local currency (hryvnia).
A 1% Pension Fund charge applies to the acquisition of foreign currency.
2.5. Repatriation of capital and earnings
Foreign investors are entitled to repatriate profit, income or other funds relating to investments without any restrictions, after the payment of applicable taxes. Foreign investors are guaranteed the right to the prompt and unimpeded repatriation of profits and other funds in foreign currency derived from their investments in Ukraine. Conversion of funds for repatriation is effected through the Ukrainian Inter-bank Currency Exchange.
Although not strictly required under the law, registration of the foreign investment may reduce complications in the future (withdrawal of capital, for example). This involves submitting a prescribed set of registration documents to the regional (oblast) state administration, the Kyiv or Sevastopol state administration, or the government of the Autonomous Republic of Crimea, as appropriate.
2.6. Guarantees and rights
Foreign investments are not to be subject to nationalisation, expropriation, requisition, or any other measure of similar effect, except when this is in the public interest. In such cases, compensation must be provided to the investor based on the market value of the property.
2.7. Privatisation
Background
Privatisation of medium and large-scale enterprises was developed in 1995 under the “Mass Privatisation Program” (MPP) project sponsored by USAID. In parallel, the State Property Fund (SPF), the government’s privatisation authority, privatised many small-scale enterprises, primarily for cash. The MPP was initially planned for one year (1995-96), but ended up applying through to 1999.
On privatisation program for 2000-2002 was approved in mid-2000, and ended mass privatisation in favour of selling large, ideally controlling, stakes of strategic industrial enterprises to investors who would then develop the enterprise. Although only intended to define government policy for two years, the law continues to apply.
Kryvorizhstal sale (2004 and 2005)
Before 2005, many privatisation deals were considered questionable. Most prominent was the sale of the 93.02% stake in the Kryvorizhstal steel mill in June 2004 for USD 800 million to a local consortium.
When the new President, Viktor Yushchenko, took office in early 2005, he initiated court action against the Kryvorizhstal deal. In June 2005, the courts dismissed the deal and ordered that the company be resold. In October 2005, in a bidding process broadcast live on Ukrainian television, the stake was sold for USD 4.81 billion, well in excess of the USD 3 billion predicted by analysts.
The Kryvorizhstal sale demonstrated that transparent privatisation sales in Ukraine are possible. The previous government initially indicated that several other large pre-2005 sales would be reviewed for irregularities and a limited number are being pursued. However, there is no longer a clearly defined government policy of revisiting other sales.

Legacy of privatisation
The impact of Ukraine’s privatisation can be assessed in terms of the following strategic changes in Ukraine’s economy:
• The State has given up majority ownership in 90% of the industrial enterprises it owned in 1991. Millions of Ukrainian citizens have become shareholders and more than 60% of Ukraine’s labour force work for private enterprises.
• Although many directors and managers of privatised enterprises are from the Soviet era, they are gradually being replaced by a new post-Soviet generation of directors and managers.
• In many cases, the new generation of investment fund managers, who have become major shareholders via the privatisation program, are putting in place new enterprise directors and managers and introducing new management techniques.
• State budget support for unprofitable enterprises has been greatly reduced.
Privatisation calendar
It is difficult to talk of a privatisation calendar in Ukraine. Political considerations mean that the list of potential privatisations can be a moving target. For example, one of the more attractive entities still to be privatised is Ukrtelecom (a monopolist in the fixed-line communications market). Originally it was contemplated that a 92.9% interest would be sold, with analysts expecting proceeds in the region of USD 4.9 billion. Currently, the thinking appears to be toward the sale of a non-controlling interest.
Another example is Odessa Pryportovyi Plant. Analysts anticipate that a 94.5% interest will realise in the region of USD 1.4 billion. Because of its perceived strategic importance, however, the Plant has moved on and off the list several times in the past few years.
There is some volatility in the privatisation list, and it is necessary to monitor ongoing developments to identify opportunities that may arise. Currently, there are more than 500 entities on the privatisation list for 2007, but very little activity.

3.Banking system
The evolution of the national banking system in Ukraine started in March, 1991, after the adoption of the Law of Ukraine “On Banks and Banking” by the Ukrainian Verhovna Rada. The Ukrainian banking system is a two-tier structure consisting of the National Bank of Ukraine and commercial banks of various types and forms of ownership including the state-owned Export-Import Bank and a specialized commercial Savings Bank.
The National Bank of Ukraine serves as the country’s central bank which pursues a uniform state monetary policy to ensure the national currency stability.
Commercial banks are formed as joint-stock companies or as companies on an equal footing with both legal and natural persons involved. The range of commercial banks activities includes: receiving deposits of enterprizes, institutions and households, crediting of economic entities and households, investments in securities, formation of cash balance and reserves, as well as other assets, cash and settlement servicing of the economy, foreign exchange operations and other services to natural persons and legal bodies.
The banks act in accordance with the Constitution of Ukraine, the Laws of Ukraine “On the National Bank of Ukraine”, “On Banks and Banking”, the Ukrainian legislation on joint-stock companies and other economic entities, as well as with the normative regulations of the National Bank of Ukraine and their Statutes.

4. Tax system and administration in Ukraine
General information
• Ukraine has a volatile tax system, and legislative amendments are frequent.
• Residents are taxed on worldwide income. Non-residents are taxed only on income from Ukrainian sources.
• Corporate profits are subject to 25% tax. Dividends are separately taxed at the shareholder level in the hands of individuals and foreign shareholders.
• Ukraine has a relatively high VAT rate (20%), but a low flat rate of tax on individuals (15%).
• With the exception of agricultural enterprises, the fiscal year for taxpayers follows the calendar year.
• The penalty for failing to deduct and remit withholding tax when required is 200%, plus interest.
• A recent World Bank study concluded that Ukraine was one of the most difficult countries in which to pay taxes out of the 185 countries surveyed.
4.1 Tax system
The Ukrainian tax system is evolving rapidly. The direction of reform is generally positive, although it is sometimes unpredictable. Tax laws have been revised frequently, sometimes several times in one month, and there are still many issues that need to be addressed. Tax law is often poorly worded, which results in ambiguous interpretation and increases the risk of disagreements between taxpayers and tax authorities.
Ukraine is not an easy country in which to pay taxes. In the recent “Paying Taxes” study released by PricewaterhouseCoopers and the World Bank, Ukraine was identified as one of the most difficult countries in which to pay taxes out of the 185 countries surveyed. Many companies employ tax accountants in addition to financial accountants as tax accounts are separate from financial accounts. The study estimated that a modest-sized domestic business would need to make 98 tax payments each year, and would require 2,185 hours per year to comply with its tax compliance requirements.
For several years, there have been discussions about consolidating the various revenue laws into a single Tax Code, which should ease compliance and administration. A new initiative is underway to have this introduced into Parliament sometime in 2007, and to apply from January 2008.
An interesting feature of the Ukrainian tax system is a simplified or unitary tax available for many small businesses. Qualifying sole proprietors opting to use the system pay a fixed amount of tax, while eligible entities pay a fixed rate of tax based on their revenues. In both cases, the businesses are exempted from income tax, a number of other small taxes, and potentially value-added tax (VAT).
4.2 Direct and indirect tax burden
Taxation accounts for around 73% of government revenues. More than three-quarters of this is collected through corporate income (profits) tax (CPT), personal income tax (PIT), and VAT.
Tax collections have increased rapidly over the past five years. The trend in income tax and VAT collections for the period 2002 to 2006 is illustrated in diagram 1.
Source: Ministry of Finance
It can be seen that the reduction of the individual tax rate in 2004 significantly increased the collection of individual taxation.
A 15% increase in overall tax revenues is forecast for 2007.
4.3 Principal taxes
On Taxation System, the law that provides the general framework for taxation in Ukraine, provides for 28 national taxes that may be imposed. The principal taxes and compulsory payments are:

On Taxation System also provides for two taxes and 14 duties that may be levied at the discretion of local authorities. The main local taxes affecting business are the advertising tax, municipal tax, and the charge for using local symbols.
Employers and employees must also make mandatory contributions to the state pension and social security funds. The rates and maximum contributions are set in the annual budget law and may result in a significant cost burden for employers. There has been widespread discussion on reducing the burden as it is considered to have a negative impact on economic growth.
4.4 Legislative framework
Statute law
According to the Constitution, taxes and levies, as well as penalties for non-compliance, may only be established by laws enacted by Parliament. Parliament exercises this prerogative frequently, and it is quite common for more than twenty amendments to be made to the various Ukraine tax laws each year, sometimes with potentially retroactive effect. Although many amendments are very minor, the frequent changes, as well as the government’s failure to proceed with declared intentions and schedules for tax reform, have earned Ukraine the reputation of having an unpredictable tax system.
Strictly speaking, the State Tax Authority (STA) does not have discretion to amend the law, but in practice, the STA often issues tax clarifications that are not always consistent with the law, although this can be a function of ambiguities in the law as much as anything else. Nevertheless, it is prudent to consider STA interpretations and the risk of conflict with the STA before taking a position based on the law.
4.5 Tax treaties
Ukraine has a broad network of tax treaties, with 60 treaties in force as at 1 January 2007. Rates are reduced to as low as 0% under some treaties for dividends, interest and royalties.
Taxpayers do not require confirmation from the tax authorities before claiming relief under a treaty. However, the withholding agent must hold a certificate of residence from the treaty country for the person to whom income is paid. If the certificate is issued in a form prescribed by legislation of the treaty country it must be properly legalized (apostilled) and translated into Ukrainian language. The certificate is only valid for the calendar year of its issuance and must, therefore, be renewed annually.
Currently, one of the most favourable treaties is the Ukraine-Cyprus treaty, which provides for 0% withholding tax on dividends, interest and royalties. However, the treaty has recently been renegotiated (but not ratified), and increased rates will apply (10% on interest and royalties, 5/15% on dividends) after it has been ratified.
4.6 Administration of the tax system
National taxes are administered by the STA. Local taxes are administered by the various local governments.
The allocation of revenues between national and local governments is set out in the annual budget law. Revenues are allocated based on source, rather than by amount. For example, revenues from personal income tax, although administered by the STA, are often allocated to local government. One consequence is that payments for some national taxes may need to be made to local government accounts.
4.7 Registration requirements
All taxpayers are required to register with the STA and to obtain a tax number. Registration is undertaken through the local tax office where the individual or business is located.
Without a tax number, it is not possible to open a bank account in Ukraine.
4.8 Tax returns and payments
Personal income tax returns are filed for each calendar year. Individual taxpayers whose entire income is subject to withholding tax at source (e.g., salaries) are not required to file income tax returns, although they may choose to do so if they are entitled to a tax credit. The personal income tax return must be filed by 31 March of the following year.
Corporate income tax returns are filed on a quarterly basis, and returns must be filed within 40 calendar days of the end of each quarter. Resident companies and non-resident entities with a permanent establishment in Ukraine must keep records that comply with Ukrainian tax rules.
Withholding taxes must be paid to the state not later than the date that the income is paid. Tax in respect of income that is accrued but not paid to individuals should be transferred to the state within 20 calendar days of the last day of the reporting month.
Value-added tax returns are generally filed on a monthly basis. The return must be filed within 20 calendar days of the last day of each month. As an exception, VAT-registered persons with annual sales of less than UAH 300,000 may opt for quarterly filing.
If the filing date for any return falls on a weekend or a public holiday, the return should be filed on the following working day.
Payment of tax must be made within ten calendar days from the day on which the return is required to be filed or the assessment is issued. Payments are normally made through designated bank accounts.
4.9 Assessments
Taxpayers make returns and payments on a self-assessment basis. However, if the tax authorities determine that the tax shown on the return is incorrect, they may assess taxes within 1,095 days (three years) from the deadline for filing a return or the date on which the return is actually filed, whichever comes later.
There is no limit on the period in which an assessment may be made if a taxpayer has deliberately evaded tax (if proven in court) or when a taxpayer fails to file a return. The tax authorities will also charge significant penalties for late filing or understatement of taxliabilities.
4.10 Appeals
Assessments may be appealed administratively or through the court system. The initial appeal is made to the local tax office that issued the assessment. If an appeal is rejected, a taxpayer may appeal in turn to the regional and national office.
An administrative appeal must be filed to the relevant level of the tax administration within ten calendar days of receiving an assessment or official advice that an administrative appeal has been rejected at a lower level.
The tax authorities must respond to the appeal within 20 calendar days. If they fail to do so, the appeal is deemed to be decided in favour of the taxpayer. The 20-day period may be extended by up to 60 days, but only if the authorities advise the taxpayer in writing within the initial 20-day period.
At any stage of the process, or if the national office rejects the appeal, a taxpayer is entitled to pursue an action through the courts instead.
Submitting an appeal suspends the requirement to pay the assessed tax, as well as the accrual of interest and penalties. Interest and late payment penalties will apply only if the taxpayer fails to pay the taxes by a revised due date after the appeal is finally resolved.
4.11 Withholding taxes
It is very important to ensure that withholding taxes are properly deducted and accounted for. Businesses generally have an obligation to withhold tax on payments to individuals (including sole proprietors) and payments to non-residents. Failure to withhold tax can attract a 200% penalty, as well as interest.
Withholding tax must be remitted to the authorities no later than the date when the payment is made to the income recipient.
Passive income (dividends, interest, royalties) from Ukrainian sources that is paid to non-resident entities is generally subject to 15% withholding tax. Other payments, including “engineering services,” lease payments, agency and brokerage fees, are also subject to 15% withholding tax, but payments for most other services are not subject to withholding.
In addition, 15% withholding tax applies to gain on the sale of property, including real estate and securities, when paid by a resident to a non-resident entity.
All withholding tax rates may be reduced under a relevant tax treaty.
Payments to non-resident persons for advertising services performed in Ukraine are not subject to withholding. However, the resident payer is required to pay, from its own funds, a 20% tax based on the value of such services.
A resident payer is similarly required to pay, from its own funds a 12% tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does not meet requirements set by the authorised state agency. A 0% rate applies otherwise.
As the taxes on advertising and insurance are levied on the resident party, they cannot be relieved using a tax treaty.
4.12 Tax audits
The tax authorities may carry out scheduled audits a maximum of once each year. Business entities must be notified of the audit in writing at least ten days before the scheduled audit. For normal business entities, the scheduled audit should be carried out within 20 business days, although the period may be extended by up to ten days.
In addition, the tax authorities may perform out-of-schedule audits in any of the following circumstances:
• A taxpayer does not respond within ten days to a request for information from the tax authorities when the tax authorities are cross-checking information, the cross-audit of another business entity has revealed a violation by the taxpayer, or the data in a tax return is inadequate.
• A business entity does not file tax returns on a timely basis;
• A taxpayer initiates an appeal process against an assessment;
• A business entity is reorganized or liquidated;
• A tax police investigation requires that a taxpayer’s accounts be audited;
• A taxpayer claims a VAT refund for an amount exceeding UAH 100,000.

The duration of an out-of-schedule audit cannot exceed ten business days.
Before starting an audit, the tax inspector must present a written order to the taxpayer, outlining the scope and period of the tax audit.
4.13 Penalties
Penalties are often specified in terms of a multiple of the monthly “non-taxable allowances,” which is currently UAH 17.
Multiple penalties may be imposed, and total penalties may potentially exceed 150% of the tax. Liability is assessed by the tax authorities.
Late filing
In addition to a nominal penalty, if the tax authorities assess tax when a taxpayer fails to file a return, penalties could reach up to 50% of the tax assessed, depending on the period of delay.
Late payment of tax
If a taxpayer does not pay the amount of tax shown in its tax return on time, or fails to pay an assessment within the time shown on the assessment notice (or if the taxpayer appeals the assessment, within ten days of the final resolution of the appeal), penalties are imposed as follows:
• 10% of the underpaid tax for delays of up to 30 calendar days;
• 20% of the underpaid tax for delays of 31 to 90 calendar days;
• 50% of the underpaid tax for delays exceeding 90 calendar days.

Understated tax liabilities
If during an audit the tax authorities determine that the tax liability shown in the taxpayer’s return is understated, they will impose penalties of up to 50% of the tax assessed, depending on the timeframe involved.
Furthermore, a penalty of 50% of the tax assessed will be imposed if a taxpayer understates its tax liabilities by a “large” amount. The Criminal Code defines “large” to be any amount over UAH 600,000 for 2007. Consequently, a total penalty of 100% may apply.
Tax evasion
In addition to the above, if a taxpayer (or officials of the company) are convicted of tax evasion, a penalty of 50% of the tax due will be imposed.
The individual taxpayer (or officials) may also be subject to penalties under the Criminal Code. For a first offence, fines of up to UAH 340,000, prohibition from occupying certain positions or engaging into certain activities for up to three years, or imprisonment for up to five years may be imposed.
Failure to withhold and pay tax
If a taxpayer does not pay tax when it is a mandatory condition for the sale of goods, or a taxpayer fails to withhold tax when required, a penalty of 200% of the deficient tax is imposed.
Arithmetic or methodological errors in tax return
If the tax authorities determine during a “desk review” that arithmetic or methodological errors in a tax return resulted in an understatement of tax liabilities, a penalty will be imposed of 5% of the additional tax assessed.
Interest for late payments
When tax is not paid on time, interest for late payment is charged on a daily basis in addition to the above penalties. The rate is 120% of the NBU prime rate that is effective at the date the payment was due or the date that payment was made, whichever is higher.
For amounts calculated on the tax return, interest accrues from the date the tax was due. When the tax authorities assess tax, interest accrues from the due date for payment shown on the notice.
Interest is charged on the entire outstanding tax, including penalties.
Voluntary disclosures
If a taxpayer voluntarily discloses and pays the underpaid tax before the tax authorities commence an audit:
• A 5% penalty should be paid based on the amount of under-declared tax.
• Interest will not be charged.

To benefit from this rule, a taxpayer must have filed an amended tax return. Normal penalties and interest will also still accrue if a court rules that the taxpayer had evaded tax.
Penalties during appeal
Penalties and interest do not accrue during the appeal process appeal process .
4.14 Tax clarifications
Tax clarifications may be sought from the tax authorities, and thetax authorities are required to issue such clarifications.
Tax clarifications are not legally binding and do not provide solid protection against tax assessments and penalties. However, in practice tax clarifications are useful in resolving disputes with local tax authorities regarding uncertainty in the tax legislation.

5. Taxation of corporations
Investor considerations
• The standard corporate tax rate is 25%.
• For insurance companies, net insurance premiums are subject to a maximum tax of 3%.
• Qualifying small companies may opt to use a simplified tax system.
• There is no group consolidation.
• Depreciation is based on the reducing balance method, and relatively generous rates are available.
• Losses may be carried forward indefinitely (but are often restricted in practice).
• When companies pay dividends, they are generally required to pay advance corporate tax of 25%. They may also need to deduct up to 15% withholding tax.
• Taxable profit is based on the “first event rule.”
Returns and payments must be made on a quarterly basis. An eleven-month return is also required in 2007 (and in most years).

5.1 Corporate tax system
Companies
Ukrainian entities and foreign entities doing business in Ukraine through a permanent establishment are liable for corporate income tax. The standard rate is 25%.
Special rules apply to Ukraine insurance companies. Net insurance premiums (gross premiums less amounts paid to reinsurance companies) are taxed at 0% for long-term life insurance premiums and pension insurance premiums, and 3% otherwise. Profits earned by insurance companies from non-insurance activities are taxed at the standard rate.
Qualifying small legal entities may opt to use the simplified taxation, accounting and reporting system. VAT-registered entities pay 6% of their sales proceeds under the simplified tax system, while non-VAT-registered entities pay 10%.
Dividends
Companies paying dividends are generally required to pay advance corporate income tax at the standard rate. The advance payment is used to meet their subsequent corporate income tax liabilities (other than for insurance companies). If the advance tax is not able to be used in the year the dividend is paid, it is carried over to future income years, but it cannot be refunded.
The advance tax is not paid by companies deriving more than 90% of their income from dividends.
Companies must also deduct withholding tax from dividends paid to individuals and foreign entities. For dividends paid to resident or non-resident individuals, or to foreign entities (including those with a permanent establishment in Ukraine), the standard rate is 15%. A lower rate may apply under a relevant tax treaty.
Territoriality
Resident entities are legal and business entities whose personality or existence is established under Ukraine law. Non-resident entities are those whose existence is established under foreign law.
Resident entities are liable to Ukrainian tax on their worldwide income. Foreign taxes should be available for credit against Ukrainian tax liabilities, but may be difficult to obtain in practice.
Foreign entities are liable to Ukrainian tax only on income from sources in Ukraine. In broad terms, income will have a source in Ukraine if:
• The income arises from activities performed or property located in Ukraine; or
• In the case of dividends, interest, royalties and other passive income, the income is paid by a resident of Ukraine.

Professional services, except specific engineering services, are not treated as having a Ukraine source (so are not subject to withholding).
Consolidation
There is no system of group taxation in Ukraine. Members of a group must file separate tax returns. There are no provisions to offset the losses of group members against the profits of another group member.
Permanent establishments
The domestic definition for a permanent representation essentially adopts the definition for permanent establishment found in the OECD Model Tax Convention, but with the addition of stronger agency tests.
When a foreign company conducts business in Ukraine through a permanent establishment, taxable income should be determined on the same basis as for domestic entities. If it is not possible to determine taxable profit based on the “direct” method (taxable income less deductible expenses), the allocation method or notional method may apply.
The allocation method requires the taxpayer to allocate a portion of its worldwide income and expenses to Ukraine and is difficult to apply in practice. The tax authorities have a preference for the notional method, which involves applying a notional margin of 30% to gross revenues earned in respect of activities in Ukraine.
Ukraine has no special tax rules for non-commercial representative offices established to engage in liaison type activities. Such offices are subject to the normal corporate income tax, but an exemption from income tax may be available under a relevant tax treaty if the activities of the representative office are not sufficient to constitute a permanent establishment for the foreign entity.
5.2 Incentives
Ukraine currently has very few incentives, although some are available (for the publishing and agricultural industries, for example). There have been discussions in Parliament about the possibility of restoring special tax regimes but there is no certainty of any such measure.
Ukraine does offer generous depreciation rates for fixed assets.
5.3 Gross income
Accounting period
The reporting year for companies generally follows the calendar year. The exception is for agricultural manufacturers, which report based on a 30 June year-end.
Returns and payments must be made on a quarterly basis, generally reflecting accumulated income and expenses for the year.
In addition, an eleven-month return to November and corresponding payment is required for 2007 (and in most years).
Business profits
Taxable profits are defined to be “adjusted gross income” less “allowable gross expenses” and depreciation charges.
Adjusted gross income encompasses all revenues received by a taxpayer from all economic activities, unless the revenues are expressly exempted under the law. Allowable gross expenses encompass all expenses incurred in relation to “business activities,” unless a specific provision in the law restricts the deduction. “Business activities” are defined in the law as “any type of activity carried out by a person, aimed at making profits in the pecuniary form and creating tangible and intangible assets, provided such activity is regular, stable, and substantial.”
There are significant differences between tax and financial accounting rules. Consequently, it is common for companies to prepare separate financial and tax accounts, which is very time consuming. The recent PricewaterhouseCoopers / World Bank “Paying Taxes” study estimated that a modest-sized domestic business would require 425 hours per year to comply with its corporate tax compliance requirements.
Accounting for income
Income should generally be recognised on the earlier of the date on which payment is received, or goods or services are supplied.
For goods, the date of supply is generally the date of shipment.
For services, the practice in Ukraine is for the parties to a services contract to sign an “acceptance act” document once the services are delivered, and this is generally considered to be the date of supply.
Special rules are available to deal with the recognition of income from long-term construction contracts and R&D contracts.
Inventory valuation
Inventories may be valued for tax purposes using any of the following methods:
• Identified value of the appropriate inventory unit.
• Weighted average value of uniform inventories.
• First-in-first-out (FIFO) value of inventories.
• Target expenses.
• For inventories sold on a retail basis, the inventory sales price.

The selected method must be applied consistently for inventories having the same designated purpose and utilisation conditions. The method must also be applied consistently throughout each income year.
Securities
Income from securities is calculated separately from other income, and is based on a pooling method. Taxable income is determined by deducting the aggregate cost of acquiring each class of securities from the aggregate proceeds from selling such securities. If aggregate acquisition costs for the year exceed aggregate sales proceeds, the excess is carried forward and applied against sales of securities in subsequent years.
Exempt income
Dividends derived by a Ukrainian entity from another Ukrainian entity are exempt from tax.
5.4 Deductibility of expenses
Business expenses
Expenses incurred in the furtherance of a taxpayer’s business activities should be deductible, unless a specific provision in the law says otherwise (refer below).
Special rules apply to payments for goods or services to foreign entities in listed jurisdictions operating offshore tax regimes (36 tax haven jurisdictions are listed). Only 85% of payments to an entity in one of these jurisdictions will be deductible, unless evidence is held that the entity is subject to the ordinary tax rules of that jurisdiction (i.e., it does not benefit from the offshore tax regime).
Non-deductible expenses
The following are the main items that are not deductible for corporate income tax purposes:
• Expenses that are not supported by relevant documents (e.g.,contract, voucher, receipt, check, etc.).
• Expenses incurred for receptions, presentations, entertainment, and the provision of free samples and services for advertising purposes in excess of 2% of the taxpayer’s taxable profits for the previous year, unless the taxpayer is in the business of providing such services.
• Insurance premiums (other than for medical, pension and mandatory insurance) in excess of 5% of the total deductible expense from the beginning of the year up to the end of the reporting period.
• Expenses for professional education and training, etc., in excess of 3% of employee compensation for the period.
• Business trip expenses for individuals that are not employees.
• Expenses relating to the financing of management bodies including holding companies.
• Payments in respect of goodwill, and amortization of goodwill.
• Expenses for car parking and the maintenance of cars. Further, only 50% of payments under an operating lease for cars or expenses relating to the purchase of fuel and lubricants for cars may be deducted. There is, however, no obligation for the taxpayer to prove that such expenses are related to its business.
• Expenses for provision of warranty services in excess of 10% of the value of goods sold.
• Expenses related to repairs to fixed assets subject to depreciation in excess of 10% of the aggregate book value of all groups of fixed assets as of the beginning of the reporting period (the excess is capitalised).
Accounting for expenses
The general rule is that expenses should be recognised on the earlier of the date on which goods or services were received or the date on which payment was made. Special rules apply for inventory. When payment is made to a non-resident, a tax-exempt entity or an entity paying tax at reduced rates (e.g., a small business that has opted to pay the unitary tax), expenses are recognised on the date on which goods or services were received.
Depreciation
Assets costing more than UAH 1,000 and with a useful life exceeding one year are required to be depreciated. Depreciation is determined on a quarterly basis, and is computed using the reducing-balance method. Taxpayers may adopt any depreciation rate up to the following maximum quarterly rate:
Land may not be depreciated. Intangible assets may be amortized using the straight-line method over the lesser of the asset’s useful economic life or ten years.
If the inflation index exceeds 10% in a calendar year, taxpayers may adjust the book value of their assets for depreciation purposes by the amount of the excess.
Interest
As a general rule interest will be deductible if the related debt is used to fund business activities of the taxpayer.
There are restrictions on deductibility if a Ukrainian company is 50% or more owned or controlled by non-resident or tax-exempt persons, and interest is paid to those persons or their related parties. The deductible interest paid to those persons and their related parties cannot exceed the amount of interest income derived plus 50% of the company’s taxable profit (excluding interest income and before the deduction of interest and depreciation). Any interest paid to affiliates in excess of this limit is carried forward to future income years.
Foreign exchange
Realised foreign exchange gains and losses are taxable/deductible.
In addition, foreign currency loans and similar, deposits and cash at bank are revalued quarterly and the difference is taxable/deductible. This revaluation does not apply for foreign currency credits and receivables.
Bad and doubtful debts
To claim a deduction for bad or doubtful debts, a taxpayer must initiate an action for collection. A deduction for bad or doubtful debts is allowed if:
• The creditor applies to the court with claim for debt collection or initiating bankruptcy.
• The debtor has not yet paid 90 days after the sale, the creditor attempts to collect the debt through the pre-court dispute settlement process, and either: (a) the debtor sends a notice accepting the claim; or (b) the debtor does not receive an acceptance notice within one month.
• The creditor has a note of execution for collection executed by a notary.

If the taxpayer subsequently recovers an amount that has been deducted as a bad or doubtful debt, the amount recovered is included in taxable income.
When a creditor pursues action to recover a debt, and the debtor fails to pay, the debtor is required to recognise income either 90 days after the deadline for payment under the contract or accepted claim, or 30 days after the court resolution or the execution of a note of execution by the notary. If the debt is subsequently repaid, the debtor may claim a deduction at the time of repayment.
Royalties and service fees
Royalties and service fees are deductible payments. When service fees are made to related parties, however, the payer is required to hold documentary evidence that the payments are for services actually rendered. The amount of the payment also may not exceed the usual (market) price.
Leasing
Lease payments on operating leases are deductible. The lessor would claim a deduction for depreciation of the leased assets.
Financial leasing is treated for tax purposes as if a sale had been made. The lessee would include the value of the property in the relevant group of fixed assets and claim depreciation charges. The lessee would also deduct the interest and commission elements of the lease payments in the period in which they are payable. Similarly, the lessor would recognize taxable income for the total principal amount of the lease at time when the asset is transferred, and would recognise the interest and commission element of the payments over the term of the lease.
A lease is treated as a financial lease if it meets any of the following conditions:
• The leased property is transferred for a period during which at least 75% of its acquisition cost would be depreciated under tax depreciation rules, and the lessee is obliged to acquire title to the property during or at the end of the lease period.
• The sum of the lease payments equals or exceeds the acquisition cost of the property.
• The leased property has already been more than 50% depreciated by the lessor, and the lease payments (excluding the financing component using the discount rate of the NBU) equal or exceed 90% of the normal price for the property.
• The property has been manufactured to the order of the lessee and cannot be used by other entities when the lease expires because of the property’s process and quality features.

Even if a lease meets one (or all) of these conditions, the parties may still agree to treat the lease as an operating lease for income tax purposes. If they do so, however, they must continue to treat it as an operating lease throughout the term of the lease.
Employee remuneration
Employee remuneration is deductible. However, when an individual and members of his family own 20% or more of the shares in a company, compensation paid to those individuals cannot be deducted in excess of usual (market) compensation.
Expenses relating to providing employees with uniforms, safety clothes and shoes, as well as food, are non-deductible if the amount exceeds norms established by the Cabinet of Ministers of Ukraine.
Other deductions
Research and development expenses, other than those subject to amortization, are deductible when incurred.
Charitable donations and contributions to non-profit organisations are deductible within certain limits.
Ukrainian taxes, other than income tax, are generally deductible. For VAT-registered persons, revenues and expenses are determined net of VAT. For non-VAT-registered persons, the VAT component of any expenses will be included in deductible costs.
Losses
Special rules apply to losses arising from the sale of securities and land. Expenses related to the acquisition of land are non-deductible. Losses incurred in the disposition of land are also non-deductible. However, gains from the sale of land remain taxable.
For operating losses, Ukraine does not have any rules permitting losses to be carried back. In principle, tax losses incurred from 1 January 2003 may be carried forward indefinitely, but in practice, Parliament has passed annual laws that have effectively restricted the carry forward to a single year. Currently it is understood that unutilised losses from 2003 to 2006 will be available for offset in 2008 unless Parliament suspends the law further.
5.5 Related party transactions
Special rules apply to transactions between related entities. Related entities are:
• A legal person that exercises control over a taxpayer, is controlled by a taxpayer, or is under common control with a taxpayer. Control is defined to include an interest of 20% or more in an entity.
• An individual (or family member of that individual) who exercises control over a taxpayer; or
• A company official (or family member of that official) who is authorized to execute binding legal agreements in the name of a taxpayer.

The tax authorities may adjust the price of transactions between related parties to the “usual price” for income tax purposes. The usual price is essentially the market price for equivalent transactions. There are some reasonably detailed rules in the law for determining the usual price and these are generally in line with principles followed internationally for determining market prices. Significantly, if it is not possible to determine the usual price because information on comparable transactions is absent or not publicly available, the law deems the contractual price to be the usual price.
If questioned by the tax authorities, taxpayers are required to justify the level of their prices. Nonetheless, the onus is on the tax authorities to demonstrate that the contractual price does not satisfy the usual price requirement.
5.6 Other taxes
Special Pension Fund charges
The following special charges are payable to the State Pension Fund:
• 1% charge on the purchase of foreign currency in the foreign exchange market (withheld by the bank).
• 3% charge based on the transfer value of a car (except for cars designed for disabled people and cars that were inherited). The charge is payable by legal entities and individuals that acquire cars.
• 1% charge on the acquisition of real estate payable by individuals and legal entities that purchase real estate. The tax base is the contractual value of the real estate.
• 7.5% charge on mobile communication services. The tax base is the value of services charged by an operator of a mobile phone network. The charge is payable by individuals and companies that use mobile communications services, and is collected by the service providers through their billings.

There are a few other business activities that require contributions to be made to the Special Pension Fund, but they are unlikely to have an impact for most businesses.
Stamp duty
Stamp duty is imposed on certain actions, including notarisation of contracts and filing documents with courts. In most cases, the amounts involved are nominal, although there are exceptions. Operations carried out at commodity exchanges and sales of real property attract a stamp duty of 1%.
Excise tax
Excise tax is payable on cars, alcoholic beverages, tobacco products, beer, petrol and diesel fuel, whether imported or produced domestically. Rates of excise duty are specific.
Land tax
Land tax is assessed annually for the following year and is paid monthly by the owners or users of land. The rate depends on the nature and location of the land.
Charge on environmental pollution
Environmental pollution charges are imposed on any legal entity that discharges contaminants into the environment (air or water) or disposes of wastes. The charge rate depends on the type and toxicity of each contaminant.
The law also establishes maximum concentrations for contaminants. If the maximum concentration is exceeded, the charge rate is multiplied by five.
Local taxes and duties
The principal local taxes and duties affecting business are:
• Advertising tax. This tax is payable by legal entities placing advertisement in mass media, on outdoor advertising or through other means. The maximum rate of advertisement tax is limited to 0.5% of the advertisement services cost. Advertising agencies or other entities that place advertisements should collect the tax.
• Municipal tax. This tax is payable by legal entities monthly and is calculated as a maximum of 10% of the individual non-taxable allowance, multiplied by the number of employees. Currently, the monthly tax is UAH 1.7 per employee.
• Charge for use of local symbols. The charge is payable by legal entities that, for commercial purposes, use local symbols (e.g., city emblem, name or image of architectural or historical monuments). The maximum rate of the charge is limited to 0.1% of the value of the goods/services using the local symbols that are sold.

There are 13 other local duties that may be levied at the discretion of the local authorities. Few of them apply to business entities. It is unlikely that these duties will place a significant burden on companies.
5.7 Holding companies
There are no rules to permit the grouping or consolidation of income and losses among a commonly owned group. Dividend income received from another Ukrainian company is not subject to tax.
With effect from January 2007, companies deriving more than 90% of their income from domestic dividends are exempt from paying advance corporate tax.