MEMBERSHIP DIRECTORY

2009

COUNTRY
PROFILE

1
2 Uniting Leading Companies from over 50 Nations Across the Globe
 COUNTRY PROFILE (OVERVIEW BY SECTOR)
I BANKING & FINANCIAL SERVICES
The Banking Sector: The Currency Control Regime. The Anti-Money Laundering Set-Up ............................................................. 149
Financial Policy and Financial Services: Regulatory Issues .............................................................................................................155
Bankruptcy / Financing Restructuring ..............................................................................................................................................163
Leasing ............................................................................................................................................................................................168

II FMCG
Overview of the Ukrainian Retail Market Development .................................................................................................................... 171

III INTELLECTUAL PROPERTY RIGHTS

Enforcing Your IP Rights in Ukraine .................................................................................................................................................174

IV INFORMATION & COMMUNICATION TECHNOLOGIES

Software Development Market in 2008 ............................................................................................................................................176
SAAS (Software-as-a-Service) in Ukraine ........................................................................................................................................ 180

V CUSTOMS REGULATION
Customs Audits of Business Entities in the Context of WTO Accession ......................................................................................... 183

VI INVESTMENT POLICY
Foreign Investment: Regulatory Issues............................................................................................................................................ 186
Overview of Ukrainian Market of Investment Funds ........................................................................................................................ 190

VII LABOR & EMPLOYMENT

Dismissal: Legal Aspects and Prospects ....................................................................................................................................... 194
Staff Management in Distribution Companies ................................................................................................................................ 197

VIII LEGAL SYSTEM OVERVIEW

Dispute Resolution in Ukraine ......................................................................................................................................................... 199
Defense of Business in Commercial Arbitration Courts: International and Domestic Aspects ....................................................... 204
The Law on Joint Stock Companies ............................................................................................................................................... 206
PPP in Ukraine – Infrastructure Investments ................................................................................................................................... 209
Corporate Governance in Ukraine ................................................................................................................................................... 214

IX MEDIA
Television Broadcasting and Programming Services ....................................................................................................................... 215

X RETAIL ESTATE DEVELOPMENT

Kyiv City Office Market Overview...................................................................................................................................................... 219
Real Estate Taxation ........................................................................................................................................................................ 226
Real Estate Law in Ukraine ............................................................................................................................................................. 228

XI TAXATION
Ukrainian VAT Treatment of Cross-Border Services as an Obstacle to Free Movement
of Services between Ukraine and the EU ....................................................................................................................................... 232
Tax Aspects of Mergers and Acquisitions in Ukraine ...................................................................................................................... 234
Tax Aspects of Business Administration under Various Forms of Management with Foreign Capital Participation ......................... 241
Tax Disputes in Ukraine................................................................................................................................................................... 246
Taxation of Non-resident Company Income Sources From Ukraine............................................................................................... 250
Personal Income Tax ....................................................................................................................................................................... 253

XII TRANSPORT & LOGISTICS

Integrated Logistics Solutions......................................................................................................................................................... 255
Leasing Industry in Ukraine............................................................................................................................................................. 258

XIII TRAVEL & TOURISM

The Business Travel Industry in Ukraine .......................................................................................................................................... 262
Analysis and Main Trends of Tourism Development in Ukraine ...................................................................................................... 263

We would like to thank AstapovLawyers International Law
Group, Baker & McKenzie – CIS, Limited, Baker Tilly Ukraine
(an Independent Member of Baker Tilly International),
BEITEN BURKHARDT, Calyon Bank Ukraine, CMS
Cameron McKenna LLC, Euro Leasing, Grant Thornton
Ukraine, Kievapartment.com (Save Travel), Knight Frank
LLC, Law Firm “Arzinger & Partners”, Magisters, METRO
Cash & Carry Ukraine Ltd, Microsoft Ukraine, LLC, OTP
Capital, PricewaterhouseCoopers, Juridical Corporation
PRINCIP, Salkom Law Firm, “Travel Centre “TRIME” – ITP
Partner in Ukraine, UVK, WorldAPP, Inc., Yug Contract Co.,
Ltd. (the companies listed alphabetically) for their generous
contribution to the Country Profile section in the Membership
Directory 2009.

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 COUNTRYOVERVIEW
PROFILEBY SECTOR
BANKING & FINANCIAL
I SERVICES
THE BANKING SECTOR. THE CURRENCY CONTROL
REGIME. THE ANTI-MONEY LAUNDERING SET-UP.
By Calyon Bank Ukraine
www.calyon.kiev.ua
BANKING SECTOR
• This report is based on data provided to the National Bank
of Ukraine (NBU) by the banks, as of 30 September 2008.
• Early October 2008, as a consequence of a raiders’ attack
on Prominvestbank (PIB) and a massive run on its depos-
its, the National Bank of Ukraine had to provide funding
and to takeover the management of this bank. In addition
the international financial crisis did hit Ukraine at the same
time and raised further worries about banks. Other runs
took place, the interbank market dried up and, at the initia-
tive of the bankers, those events necessitated the set-up
by the Regulator of harsh measures, including the ban to
withdraw a deposit before its maturity, the freeze of hard
currencies’ loans outstandings, for what is lent to non-ex-
porters (i.e. individuals and non-exporting corporations).
• Such quick fixes, the measures taken by the authorities
and, as a consequence, the support provided by the IMF
to Ukraine, have led to a stabilization of the market early
November 2008.
• This document, based on data as of the end of the 3rd
quarter 2008, is thus to be considered as a snapshot, at
that time, of such banking sector in Ukraine, after 10 years
of quasi uninterrupted growth in a favourable environ-
ment, and /or as a basis of the further structural changes
that will be the consequence of the world crisis impact on
Ukraine, given its banking sector’s situation today.
• Ukraine has about 181 active banks (Russia: 1300).
Two are state-owned: the savings bank - Oschadny
and UkrExImbank, previously named Vnesheconom-
bank (VEB) - External Economy Bank. As of 30 Sep-
tember 2008, state banks constitute only 8% of the
assets and the 6.6% of capital of the banking system
of Ukraine.
• Based on 30 September 2008 figures, western capital
controls more than a quarter (±30%) of the capital of
the Ukrainian banking sector, and ± 33% of its assets.
If one adds CIS and offshore owned banks, such pro-
portions amount to 43% and 47%. Those banks rely
heavily on foreign funding, especially for the western
banks, funded by their group. Global foreign funding
of banks is in the ± 35 bn USD at the end of 2008,
with the majority of it provided to western banks.
• Historically, Credit Lyonnais Bank Ukraine, now
Calyon Bank Ukraine, came in 1993. Six other
western banks came during the late 1990s: ING,
Citibank, Raiffeisen, HVB, Unicredito and PKO.
If ProCredit Bank Ukraine started in 2001, as
MicroFinance bank, the recent wave started in 2005:
SEB purchasing Bank Aggio, Raiffeisen purchasing
Aval, BNPP purchasing 51% of UkrSibbank, Credit
Agricole purchasing Index bank, OTP (Hungary)
purchasing the “historical” Raiffeisen. 2008
acquisitions: Unicredito – UkrSots bank, Bank of
Cyprus – AvtoZAZ bank, Intesa – Pravex bank.
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 Table 1. Western owned banks, as of 30 September 2008 (USD/UAH rate – 4.8610)
Rank by Rank by
NameEng Group Country Assets, M$ Capital, M$
Assets Capital
2 Raiffeisenbank Aval RZB Austria 10 812 2 1 178
3 Ukrsibbank BNP Paribas France 8 936 3 989
4 Ukrsotsbank UniCredit Italy 7 972 4 761
9 OTP Bank OTP Hungary 5 083 15 363
14 Forum Commerzbank Germany 3 402 14 395
20 Swedbank Swedbank Sweden 2 566 17 300
22 ING Bank Ukraine ING Netherland 1 778 30 153
23 Erste Bank Erste Austria 1 712 18 282
24 UniCredit Bank Ukraine UniCredit Italy 1683 28 168
25 Pravex Intesa Sanpaolo Italy 1 375 27 171
32 Kredobank Ukraine PKO Poland 1 018 47 80
35 Swedbank Invest Swedbank Sweden 895 33 123
39 Calyon Bank Ukraine Credit Agricole France 793 44 86
40 Citibank Ukraine Citi USA 757 35 116
41 Index-Bank Credit Agricole France 751 45 83
44 Procredit Bank ProCredit Germany 605 59 54
52 Volksbank Volksbank Austria 447 51 71
56 SEB Bank SEB Sweden 375 58 57
59 Home Credit Bank PPF Czech Republic 356 55 66
63 Faktorial SEB Sweden 300 64 44
86 International Mortgage Bank IMB USA 199 48 75
120 Plus-Bank Getting Holding Poland 105 75 34
155 Ikar-Bank Societe Generale France 44 155 13
174 Privatinvest PPF Czech Republic 19 167 11

• The past three years have been marked also by a mas-
sive coming of regional and neighbouring countries banks
with a business model dwelling on relatively cheap exter-
nal funding for further development of consumer, car and
mortgage lending. Such banks established presence via
2nd Tier banks like Universalbank (EFG Eurobank Er-
gasias), Piraeus Bank (both – Greece), Credit Europe
Bank (Turkey), Russian Standard Bank (Russia).
• Separate group is represented by leading Russian
banks moving to Ukraine to follow their clients and
touch the ground in retail business outside Russia.
Alfa-Bank, VTB Bank and Sberbank aim at reaching
the Top 10 list (Alfa – No.10, VTB – No.11 already)
and handle business of every kind and complexity.
• Some Ukrainian banks have managed to attract capi-
tal from portfolio and venture investors changing also
the map of the industry (Delta – 50% Russian money)
10 banks account for 49% of these assets, and the
top 50 account for 88%. (There is still a significant
number of “pocket banks”).
• Deposits of population, representing more than a half
of the bank deposits, amounted to USD 43 bn at the
end of September 2008. A 25% growth over 9 months
in 2008 to be compared to a 55% increase in 2007,
a 46% increase in 2006, a 76% increase in 2005 and
a 29% increase in 2004. In 1999 amount was USD
1bn only. Individuals in Ukraine are coming back to
banks, after having experienced losses in the 1990’s.
They still have for their savings no other choice but
banks because of today’s quasi inexistence of other
investment possibilities at other types of financial in-
stitutions or in other non-banks financial instruments
(quasi no mutual funds, no significant outstanding
in life insurance products, very illiquid stock market,
very illiquid fixed income market).

• Total bank assets: +/- USD 155 bn (9/2008), +/- USD
119 bn (12/2007), +/- USD 67.4 bn (12/2006), +/- USD
49 bn (06/2006), +/- USD 42 bn (12/2005), +/- USD
25 bn (12/04), +/- USD 19 bn (12/2003). Overall 6
times growth (USD) over the last four years. The top
• The loans to GDP ratio in Ukraine should be in the
+/- 80% range at the end of 2008. Even if not yet at
western European levels, such ratio did increase sig-
nificantly over the last years. At the end of Septem-
ber of 2008 loans to corporations in Ukraine reached

6 Uniting Leading Companies from over 50 Nations Across the Globe

Table 2. CIS and off-shore owned banks, as of 30 September 2008
Rank by Assets, Rank by Capital,
NameEng Group Country
Assets M$ Capital M$
10 Alfa-Bank Ukraine Alfa-Bank Russian Federation 4 824 9 514
11 VTB Bank VTB Russian Federation 4 211 11 484
16 KreditPromBank KreditPromBank Cyprus 2 911 19 273
26 VA Bank Kardan Group Israel 1 368 26 186
28 Universal Bank Universal Greece 1 274 37 107
33 Delta Bank Icon Private Equity Russian Federation 977 34 118
37 Sberbank of Russia Sberbank of Russia Russian Federation 802 24 217
38 Kyivska Rus Sharp Arrow Holdings Cyprus 802 56 63
43 BTA Bank BTA Kazakhstan 632 73 35
46 MorTransBank Marfin Popular Bank Cyprus 550 77 34
48 Renaissance Capital Renaissance Capital Russian Federation 534 83 31
50 BM-Bank Bank of Moscow Russian Federation 477 50 73
51 Piraeus Bank ICB Piraeus Bank Greece 471 40 97
53 Credit Europe Bank Credit Europe Bank Turkey 434 52 70
65 AvtoZAZbank Bank of Cyprus Cyprus 283 89 27
76 UBDP Bank of Georgia Georgia 232 79 34
83 Misto-bank Trasta Komercbanka Latvia 210 94 25
89 Petrokommerzbank Ukraine IFD Capital Russian Federation 190 82 31
125 Trust Russian Federation 95 124 17
135 Russian Standard Bank Russian Standard Bank Russian Federation 77 178 9
162 CreditWest Bank CreditWest Bank Turkey 31 152 14
169 Rada-Bank Russian Federation 23 179 8

USD 75 bn, after a 33% growth for the first 9 months
of 2008, after a 65% growth in 2007, and a 52%
growth in 2006. Loans to individuals progressed even
faster: outstandings at the end of September of 2008
amounted to USD 42 bn, an amount multiplied by 6
when and if compared to outstandings of December
2005 (USD 7 bn).
• The share of UAH loans and deposits which had been
in the +/- 60% for a few years declined today to 55%.
Banks in Ukraine are prevented to have significant
foreign exchange positions against the domestic cur-
rency, but individuals and corporations are not. The
very rapid pace of the development of the lending ac-
tivity having exceeded the pace of the development
of the availabilities in the domestic currency… banks’
hard currencies lending and borrowings increased
even faster - a situation that endangers the borrow-
ers, the lenders (banks) and thus Ukraine.
• Lending rates were at +/- 12 to 13% on average in
foreign currencies (up), and at +/- 16% on average
in UAH (up), but below inflation, expected to be over
20% in 2008. The money market in UAH is not devel-
oped (no UAH relevant T-bills issuance and activity,
no bullet proof possibility to hedge UAH interest rates
via UAH short-term interest rates derivatives). This
limits therefore the capacity of the banking sector to
borrow/lend UAH at a fixed rate for one year and over
tenors.
• The banks’ funding in foreign currencies, i.e. USD
and EUR mostly, has, over time, developed signifi-
cantly. Historically, a few trade finance lines for up
to one year transactions where in place. Second,
some Export Credit Agencies as Hermes, Sace,
Coface… accepted to open credit lines and later
increased their potential exposures by taking up
to 7 years (now) equipment financing related hard
currency risks on some banks, (UkrEximBank, Raif-
feisenbank Aval, Prominvestbank, UkrSotsbank…)
From 2003 on, but for increasing amounts over
time, some top ten “big banks”, first, and, second,
2nd tier banks succeeded to be funded for up to
one year tenors via the European syndicated loans
market (USD 1.9 bn for 9 months of 2008, USD 4.0
bn raised in 2007, USD 1.5 bn in 2006,). Exception:
early 2007 Raiffeisen Bank Aval raised USD 300 m
(maximum amount) via a two years syndicated loan
(the longest tenor). In addition, starting in 2003 also,

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 Ukrainian Banking System - Assets Growth
180,000
160,000
140,000
Assets, Mio USD
120,000
100,000
80,000
60,000
40,000
20,000
0
2006 EO 2007 EO
and so far only some banks from the top ten ones,
were able to tap the Eurobond market for up to USD
350 m transactions and up to 10 years tenors (USD
1.2 bn for 9 month of 2008, USD 6.4 bn in 2007,
USD 3.5 bn in 2006).
• Depending on the tenor and on the counterparty, the
cost of such hard currencies funding in 2008 was
from +/- 1% all in to +/- 5% all in (over LIBOR). The
2008 worldwide credit crunch is impacting Ukraine,
including its banks, especially its non-western owned
portion. But for banks, because also of the tight regu-
latory environment, such consequences were so far
much less severe than for other CIS countries (Rus-
sia and Kazakhstan especially).
• Total equity of Ukrainian banks as end of September
2008 amounted to USD 18.9 bn, a 32% increase over
the first 9 months of 2008, after an increase of 63%
in 2007, and an increase of 70% in 2006. All banks’
capital adequacy ratio slipped from 17% at end of
2002 to +/- 12% today, but has been stable over the
last 3 years.
• The banking sector is a +/- USD 10 bn per year busi-
ness today: the turnover / net banking income (NBI) at
banks in Ukraine, i.e. the addition of interest margins
on loans and deposits, of fees, of foreign exchange
and securities related gains amounted to USD 8 bn
as of 30 September 2008 (+ 2/3 over same period in
2007). Total NBI 2007: USD 7 bn. Banks’ NBI versus
GDP is in the 5% plus range. It is a high figure that re-
sults from intermediation costs that are still in the 6 to
7% range versus a 2-4% range in the western world.
Such cost for the economy in Ukraine results from
some deficiencies: weak, even if improving, legal en-
vironment and enforcement capabilities, small size
of banks (i.e. economies of scale would help), high
structural costs… But the development of the banking
sector and of its NBI has been significant over the last
years. In addition, today banks in Ukraine are much
more profitable: as to the end of September 2008 the
banks’ net profit was USD 1.37 bn (2007 banks’ net
profit: USD 1.32 bn).
8 Uniting Leading Companies from over 50 Nations Across the Globe
22,895 4. Venture and CIS
50,774 3. Western Capital
2. Ukr. Private
69,393
12,380 1. Ukr. State
2008 3Q
• Cards: 62 m as of the end of September 2008 ver-
sus 50m a year before. Visa and Master debit cards
mostly, but 21 m of credit cards.
• UAH “bonds”: for corporations, even if the “investors’”
market in Ukraine is quasi inexistent, there has been
a UAH corporate “bonds” development over the last
years. Notes in UAH for up to 2 years are being pro-
posed to investors, i.e. mostly local banks and non-
residents, notes issued by locally owned corpora-
tions, including some banks.
• The consumer loans market “exploded” over the last
years. For instance +/- 300 000 cars have been fi-
nanced by banks in 2007 (60% of new cars’ sales).
Top players: Privatbank, DeltaBank, UkrSotsbank,
Prostofinance (a consumer finance company owned
by SocGen). Mortgage loans developed also at a fast
pace, and 2 securitization deals have been conduct-
ed so far (Ukrgasbank, UAH 50 m; Privatbank, USD
134 m). In both cases, consumer and mortgages, the
majority of the financing is in hard currencies (USD
mostly). In the USD 42 bn loans to individuals out-
standings at end of 09/08, consumer finance repre-
sents the biggest share. Cars were, so far, for a still
to grow middle class, much more “affordable” than
housing related borrowings.
• The domestic clearing system is excellent. Ukraine is
a country where cheques do not exist and … trans-
fers are the rule.
• If banks involvement in financing in the economy
remains relatively low, expensive and should be im-
proved, the daily service provided by banks and es-
pecially the long time established in Ukraine Western
banks is good, cash management systems provided
by such banks being up to date also.
• The National Bank of Ukraine regulates the banking
activity, banks being subject to very significant con-
straints in their day to day activities, even if the NBU
enforcement capacity is not perfect. As highlighted
by the NBU, the Banking sector is faced, mostly
 for its non-western owned portion, with challenges:
fragmentation, capital adequacy, insider loans, tax
games, insufficient provisioning…
• For 10 years now the Ukrainian banking sector has de-
veloped at a fast pace, especially over the last 5 years.
No significant failure did exist during those 10 years.
The significant western banks presence today, espe-
cially in the retail banking area, will, within the next 10
years, make such a sector globally efficient, because
it will be much more industrialized and aligned with
the western best practices. But today’s world financial
crisis, and probable recession to come, which would
impact a bit more Ukraine, will put a lid on the develop-
ment of the Ukrainian banking sector, and could entail
a significant reshuffling of it over the next year or two.
CURRENCY CONTROL
In Ukraine, Currency Control is very strict and complex.
It is governed by laws and by regulations of the Nation-
al Bank of Ukraine (NBU). Since regulations change
frequently, therefore, please consult your banker.
The purpose of Currency Control is to prevent the il-
legal export and import of valuables, goods, services,
and the transfer of funds abroad, as well as to control
the timely settlement of payments for goods and serv-
ices under external trade contracts.
For individuals
Import/Export of cash:
Residents and non-residents may export and/or im-
port without declaration the equivalent of EUR 10 000.
Amount exceeding equivalent of EUR 10 000 should
be accompanied with a written declaration. For
amount exceeding EUR 10 000 the confirmation from
the bank evidencing that funds were withdrawn from
the individual’s account should be presented.
Funds @ disposal (possibility to withdraw cash wired
from abroad without account opening):
Disposable funds are limited per transaction and per
day to the equivalent of UAH 50 000 (applicable for
residents and non-residents).
Non-commercial transactions:
Wire transfers in foreign currency are limited to equiv-
alent of UAH 15 000 per month without account open-
ing as well as without supporting documents (before
29.10.2008 UAH 15 000 per day was allowed).
Wire transfers in foreign currency are limited to the
equivalent of UAH 75 000 per month if made from
current account and relevant supporting documents
are provided (before 29.10.2008 there were no limi-
tations in amount of wire transfer from individual’s
bank account, if relevant documents confirming the
source of foreign currency were provided).
Above-mentioned restrictions do not apply to transfers
related to medical treatment abroad, transportation of
sick people; cash reimbursements related to death, ex-
ecution of court decisions; expatriation (moving out of
Ukraine) of Ukrainian citizens.
For more details, please ask your banker.
For commercial operations/companies
The following administrations are involved in the cur-
rency control process:
• Customs – it controls the export/import of goods and
valuables.
• Banks – authorised by the National Bank of Ukraine,
control all operations and inform the NBU and State
Tax Administration (STA) in case of violations.
Main types of activities subject to Currency Con-
trol and some key rules or constraints:
• Export/import of valuables, goods and services:
Exporting companies should receive payment within
180 days after shipment of goods.
Importing companies can pre-pay 100% but should
receive goods or services within 180 days (except for
space related goods for which 500 days are set).
• Capital market operations (sale/purchase by non-
residents of domestic securities; sale/purchase by
residents of foreign securities; dividend payments
abroad, etc.).
• Non-resident UAH investments and divestments (divi-
dends, sale of shares…) must be channelled via such
non-resident investment account at a bank in Ukraine
and via a broker (banks usually have the latter capacity).
• Cross-border loans (loans granted by non-resident
lenders).
• Currency purchases.
Main documents used to perform Currency Control:
For sales/purchases of goods – trade contracts, cus-
toms declarations, invoices.
For services (including royalties) – Contracts and doc-
uments proving that services were provided. When
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9
 such services provided by same foreign supplier ex-
ceed equivalent of EUR100 000 it is required to obtain
in addition from a designated state entity a certificate
on price relevance.
For capital market divestments incl. dividend pay-
ments – investment agreement and a document proving
that investment was made and registered in Ukraine.
If shares are sold by a non-resident, or if a divestment
originally was made in kind and the proceeds are to
be repatriated, an “estimation certificate” issued by a
licensed Ukrainian appraiser is required. In addition,
cash divestments of investments made in kind must
have been made possible by a treaty between Ukraine
and divestor’s country.
For cross-border loans – loan agreement, NBU regis-
tration notice, and local bank’s consent to service such
a loan.
For currency purchases – contracts, invoices and cus-
tom declarations as mentioned above. Purchased For-
eign Currencies must be transferred within five banking
days.
ANTI-MONEY LAUNDERING SET-UP IN UKRAINE
Anti-Money Laundering measures are regulated by the
Law “On prevention and counteraction to the legaliza-
tion (laundering) of the proceeds from crime” of 28 No-
vember 2002, #249-IV.
The Law specifically excludes tax crimes from the list
of crimes subject to it. Laundering in Ukraine is related
to prostitution, drugs, arms, terrorism and other crimes.
This “understanding” of the Law is still not perfect, i.e.
authorities are inclined to include tax crimes also.
The system of financial monitoring consists of two lev-
els: the initial and the state level.
Following entities are involved in the initial level of fi-
nancial monitoring:
• anks, insurance and other financial institutions;
• payment organizations, members of payment sys-
tems, acquiring and clearing institutions;
• commodity, stock and other exchanges;
• professional operators in securities market;
• joint investment institutions;
• gambling and pawn institutions and legal entities in-
volved in any kinds of lottery;
• enterprises, institution that manage investment funds
or non-governmental pension funds;
• communication companies and associations, other
non-crediting institutions that transfer funds;
• other legal entities that process financial transactions
according to law.
10 Uniting Leading Companies from over 50 Nations Across the Globe
Following entities are involved in the state level of fi-
nancial monitoring:
• central executive authorities and the National Bank
of Ukraine which, pursuant to the law, regulate and
supervise the activity of legal entities engaged in fi-
nancial transactions,
• State Committee of Financial Monitoring or Finan-
cial Monitoring Unit (FMU): a more than 300 persons
staffed central organ of the executive branch whose
head is nominated by the President of Ukraine.
Financial transactions subject to compulsory fi-
nancial monitoring:
A financial transaction shall be subject to compulsory fi-
nancial monitoring if its amount equals or exceeds UAH
80 000 or its equivalent in foreign currencies and if such
financial transaction also has one or more of the specific
features stipulated in the Article 11 of the Law, i.e. if certain
objective criteria are being met, reporting is compulsory.
Financial transactions subject to internal financial
monitoring:
1. Nonstandard or complicated financial transaction
that has no evident economic sense or obvious le-
gal aim.
2. Noncompliance of financial transaction with the ac-
tivity of legal entity.
3. Repeated financial transactions, the nature of which
gives to believe that their aim is to evade the proce-
dures of compulsory financial monitoring.
Internal financial monitoring can also be applied to
other financial transactions, when entity involved into
initial financial monitoring has grounds to believe that
such financial transaction is aimed at legalization of
“laundered” proceeds.
Reporting to the FMU on a financial transaction subject
to internal financial monitoring is the result of an as-
sessment which is based on subjective criteria.
***
On 1 January 2006, changes to the previously men-
tioned Law came into force, in order to cover also the
“terrorism” related activities. Based on a list provided
in October 2006, subjects of initial financial monitoring
are required to prevent for up to two days a financial
operation to be executed, if a participant or beneficiary
of a transaction is a person included in such list. The
FMU has the right to extend such time to up to 5 days.
Subjects of the initial level of financial monitoring are
also obliged to “know their customers” and able to
prove it. I.e. in their files there should be the evidence
that such entities, banks and other financial institutions
have identified, according to the identification rules pre-
vailing in Ukraine, the ultimate/beneficiary owners of
companies, including banks that are their customers.
***
After more than 5 years of implementation, the anti-
money laundering set-up in Ukraine resulted in about 4
m transactions being reported to the FMU by the entities
involved in the initial level of the financial monitoring.
But a very low volume of judgments was rendered as a
consequence of such reporting (for example, 844 judg-
ments for 9 months of the year 2008).
At the same time, a new Draft Law 3062 dated
19.08.2008 “On prevention and counteraction to the
FINANCIAL POLICY AND FINANCIAL SERVICES:
REGULATORY ISSUES
By Baker & McKenzie – CIS, Limited
www.bakernet.com
The rapid growth of value of Ukrainian financial serv-
ices institutions and immense interest of foreign in-
vestors to the Ukrainian financial sector has recently
changed with a slowdown and evident slackening of
financial sector deals and transactions, as well as for-
eign capital outflow from all sectors of Ukrainian econ-
omy, including financial sector. Such situation became
a result of a global financial crisis continuing during the
last months of the year 2008. With the aim to neutral-
ize the impact of external financial crisis, to stabilize
the banking system of Ukraine and maintain liquidity
of Ukrainian banks, the National Bank of Ukraine (the
“NBU”) imposed a number of restrictions with respect
to bank`s active and passive operations, foreign cur-
rency transactions, etc. This review will focus briefly on
the current legal framework for banking and insurance
services in Ukraine, as well as on the consumer protec-
tion legislation aimed at protecting Ukrainian consum-
ers of financial services.
1. BANKING
1.1. The Ukrainian Banking Sector
The Ukrainian banking sector is a two-tier structure
consisting of the NBU and other banks, as well as for-
eign bank’s branches, of various types and forms of
ownership. These banks act in accordance with the
Constitution of Ukraine, the Civil Code of Ukraine; the
legalization (laundering) of the proceeds from crime”
has been approved in the first reading by Ukrainian
Verkhovna Rada on 25.09.2008. Said draft law in many
aspects respects international AML practice, as for in-
stance the addition of other sectors as law firms to be
subject to the initial level of the financial monitoring. But
it substantially increases the volume of transactions
that are subject to compulsory financial monitoring and
mandatory reporting to the FMU.
Also, it essentially enlarges the FMU authority in terms
of FMU requests for additional information sent to the
FMU and enables FMU’s inspections performed at the
entities involved in the initial level of the financial mon-
itoring. This is a questionable move for a country in
which counter powers need still to be developed and in
which the independence of State Regulators/ Supervi-
sors still are questioned.
Commercial Code of Ukraine, the Law of Ukraine “On
the National Bank of Ukraine”, dated 20 May 1999 (the
“National Bank Law”), the Law of Ukraine “On Banks
and Banking Activity”, dated 7 December 2000 (the
“Banking Law”); and the Law of Ukraine “On Finan-
cial Services and the State Regulation of the Markets
of Financial Services”, dated 12 July 2001, as well as
the Ukrainian legislation on joint stock companies and
other business entities, and the NBU regulations and
the banks’ respective constituent documents. Also, the
Banking Law permits operation in Ukraine of foreign
bank`s branches as an integral part of Ukrainian bank-
ing system. However, as of the current date, no such
branch was established in Ukraine.
1.2. Role of the NBU
The NBU is the central bank of Ukraine. Established in
1991 and governed by the Constitution of Ukraine and
the National Bank Law, the NBU is a specialized state
institution with the principal objective of ensuring the
external and internal stability of the national currency,
for which it possesses broad regulatory and supervi-
sory functions in the banking sector. The NBU is em-
powered to develop and conduct the monetary policy
of Ukraine, to organize banking settlements and the
foreign exchange system, to ensure the stability of the
monetary, financial, and banking systems of Ukraine,
and to protect the interests of the commercial bank de-
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11
 positors. The NBU is responsible for the re-organiza-
tion or the closure and liquidation of insolvent banks, in
order to strengthen confidence in the banking sector.
In 2001, one of Ukraine’s large banks, Bank Ukraina,
was declared insolvent by the NBU, a representative of
which was appointed as the liquidator of Bank Ukraina.
As of 1 July 2008, 13 banks were under liquidation.
The principal governing bodies of the NBU are the
Council and the Board. The Council, the highest gov-
erning body of the NBU, consists of 15 members, seven
of whom are appointed by the Parliament and seven of
whom are appointed by the President. The Chairman
of the NBU (nominated by the President and appointed
by the Parliament for a five-year term) acts ex officio
as the fifteenth member of the Council. The Council is
charged, in particular, with developing the principles of
Ukraine’s monetary policy. It has the right to veto the
Board’s decisions if they contravene those principles.
The Board, which is comprised of the Chairman, his
or her deputies, and other members of the Board, is
responsible for implementing Ukraine’s monetary and
other policies in the banking sector and generally for
managing the activity of the NBU.
1.3. Monetary Policy
The NBU is charged with implementing Ukraine’s
monetary policy. Currently, the NBU implements this
monetary policy through such instruments as manda-
tory reserve requirements for banks, interest rates, the
refinancing of banks, deposit operations, and reverse
repo operations. The main channel for the release of
funds into circulation is the foreign currency market.
The NBU reduced the discount rate from 45 per cent
at the beginning of 2000, to 12.5 per cent by the end
of 2001, and 7.0 per cent in December 2002. Since
then, the NBU has gradually increased the discount
rate to 9.5 per cent (effective as of 10 August 2005),
and then decreased it to 8.5 per cent (effective as of
10 June 2006). As of 1 June 2007, the discount rate
was 8.0 per cent, and has been further increased to
12.0 per cent, as at 28 October 2008. Since 1 March
2004, the NBU has been separately determining inter-
est rates on overnight unsecured loans (16 per cent as
of 1 October 2008) and on overnight loans secured by
state securities (15.0 per cent as of 1 October 2008),
as well as setting separate interest rates on deposits
from banks placed with the NBU for various terms. For
example, as on 28 October 2008, the interest rates for
14 day and 29 day deposits were 5.0 and 6.0 per cent
respectively.
The main goal of the NBU’s monetary policy in 2008,
as declared by the NBU, is to maintain the stability of
the hryvnia and macroeconomic balance and to estab-
lish the prerequisites for the renewal of stable econom-
ic growth and the solution of current and longer-term
social and economic problems in Ukraine.
12 Uniting Leading Companies from over 50 Nations Across the Globe
1.4. Regulation
Banking activities in Ukraine are regulated by several
laws and numerous regulations issued by the NBU. The
principal legislation in this area is the National Bank
Law and the Banking Law (collectively, the “Banking
Laws”). The NBU oversees compliance with the Bank-
ing Laws, regulations, and other legislation, and im-
poses the appropriate sanctions for violations of those
laws and regulations. The NBU, in accordance with the
authority granted under the Banking Laws, has adopted
the Banking Regulation Instruction, which establishes
capital adequacy, liquidity, and other ratios. The NBU
also sets accounting, reporting, auditing, and other re-
quirements for commercial banks. A bank may carry
out so-called “exclusive banking activities” (i.e., taking
deposits, opening and maintaining bank accounts, and
placement of raised funds) only on the basis of a bank-
ing license issued by the NBU. Banks are permitted
to carry out additional banking transactions subject to
obtaining a special written permit from the NBU.
1.5. Reporting Requirements
Every bank is required to submit an annual report that
contains audited financial statements, or consolidated
financial statements if the bank has affiliates under its
control, as well as a general description of the bank’s
business. Financial statements are required to include
a balance sheet, an income statement, and sharehold-
ers’ equity and cash flow statements. The general de-
scription section must describe the basic features of
the bank’s activity and its organization and manage-
ment. Interim financial statements must be submitted
by banks on a quarterly basis, and must consist of a
balance sheet, an income statement, an off-balance
sheet liabilities statement, trust management accounts,
and a cover letter. The purpose of the cover letter is to
describe and explain the events and operations, which
are material and important for a fair presentation of
the financial position of the bank. Each bank is also
required to submit to the NBU statistical data on daily,
weekly, and monthly bases, which ensure the perma-
nent review by the NBU of the bank’s performance and
financial position.
1.6. Securing Deposits of Individuals
The Law of Ukraine “On the Fund for Guaranteeing De-
posits of Individuals”, dated 20 September 2001, No.
2740-III (the “Deposit Securing Law”), introduced a
system of securing deposits held by individuals with
Ukrainian banks, which modified the system estab-
lished in 1998, by the Presidential Decree “On Measures
for the Protection of the Rights of Individuals — Depositors
of Commercial Banks of Ukraine”, dated 10 September
1998, No. 996/98 (the “Decree”). Pursuant to the De-
posits Securing Law, commercial banks in Ukraine are
obliged to remit to the Fund for Guaranteeing Deposits
of Individuals (the “Fund”), which was established un-
der the Decree and functions according to the Deposits
Securing Law, an initial duty in the amount of 1 per cent
of their respective registered charter capitals (payable
once after obtaining a banking license), a regular duty
in the amount of 0.25 per cent of the aggregate amount
of deposits including interest accrued (payable twice
a year), and a special duty that the Fund may levy, if
the income of the Fund would otherwise not be suf-
ficient to repay and service the loans borrowed by the
Fund to meet compensation claims following the col-
lapse of a bank in the banking system. The Fund guar-
antees deposits with every bank, including interest, up
to a maximum of UAH 50,000 per depositor with each
such bank from 11 September 2007. However, the
NBU officials voiced a concept of increasing the Fund
guarantees deposits up to a maximum amount of UAH
100 000 – 150 000 per depositor in the near future. De-
posits are recognized as “unavailable”, i.e., eligible for
compensation, on the date of the appointment of the
bank’s liquidator. As of 28 October 2008, the Fund had
178 member banks and 2 temporary member banks.
As of 1 October 2008, the total sum accumulated by
the Fund amounted to UAH 1.689 billion.
1.7. Reserve and Liquidity Requirements
In 2001, the NBU adopted regulations relating to the
mandatory reserves of commercial banks, which pro-
vide that the NBU will impose sanctions on banks for
their failure to keep the prescribed amounts of man-
datory reserves. Such sanctions are payable from
the bank’s profits. Currently, commercial banks are
required to transfer annually to their reserves not less
than 5 per cent of their profits, until and unless such
reserves are equal to 25 per cent of their regulatory
capital. The NBU may require commercial banks to in-
crease their mandatory reserve amounts even more.
The NBU has established mandatory reserve require-
ments, in order to maintain the liquidity of the banking
system and the stability of the Ukrainian hryvnia. Banks
are required to maintain certain reserves in current ac-
counts with the NBU. There are no restrictions on the
withdrawal of funds from the NBU; however, if the mini-
mum average requirements are not met, a bank may
be subject to certain penalties. Reserve requirements
are computed as a percentage of certain of the bank’s
liabilities. In particular, since 1 October 2006, reserves
are required to be not less than the sum of one per
cent of the amount of demand deposits and current ac-
counts of customers in hryvnia, five per cent of demand
deposits and current accounts of customers in foreign
currency, 0.5 per cent of term deposits of customers in
hryvnia and four per cent of term deposits of customers
in foreign currency. In 2005, the NBU changed certain
reserve requirements, for example, by excluding cash
held in vaults from being used by a bank to cover its
mandatory reserves, and by significantly increasing the
required daily balance at the bank’s correspondent ac-
counts with the NBU.
The NBU has also established three separate liquidity
ratios. A bank must have an instant liquidity ratio of
at least 20 per cent (i.e., the ratio of the bank’s corre-
spondent account funds and cash to its current liabili-
ties), a current liquidity ratio of at least 40 per cent (i.e.,
the ratio of the bank’s primary and secondary liquid as-
sets to its liabilities with corresponding due dates), and
a short-term liquidity ratio of at least 20 per cent (i.e.,
the ratio of liquid assets to short-term liabilities (with
maturities under one year)). The NBU has defined “liq-
uid assets” to include cash funds, bank metals, funds in
correspondent accounts, debt securities of state agen-
cies in the bank’s trade portfolio, available-for-sale
portfolio and held-to-maturity portfolio, and short-term
interbank deposits and loans. “Short-term liabilities”
are defined to include demand liabilities, budget funds,
short-term loans from the NBU and other banks, short-
term interbank and customer deposits, short-term debt
instruments issued by the bank, and liabilities under
all types of guarantees and committed credit lines to
banks and customers.
1.8. Capital Requirements
The NBU has established requirements for capital
adequacy, minimum statutory capital requirements
and minimum regulatory capital requirements. The
minimum risk-based requirement for regulatory capital
(capital adequacy ratio) set by the NBU is 10 per cent
of the bank’s risk-weighted assets. For banks which
have been operating for less than 12 months, the regu-
latory capital ratio is required to be not less than 15 per
cent. Risk-weighted assets, or the credit risk profile of a
bank, are calculated by applying various risk weights to
the bank’s assets and off-balance-sheet commitments
according to the terms set by the NBU.
On 4 October 2006, new amendments to the Banking
Law came into effect, whereby the minimum statutory
capital requirement for all new banks at the moment of
registration is established at 10 million. This rule will
apply only to those banks, which are established after
the law came into effect. In addition, the law provides
that banks must be established only in the form of an
open joint stock company or a cooperative bank (i.e.
it will not be permitted to establish banks in the form
of a closed joint stock company or a limited liability
company). Those banks already established as closed
joint stock companies or limited liability companies are
obliged to be reorganized into open (public) joint stock
companies within not more than three years after the
entry into force of the above-mentioned amendments
to the Banking Law.
The regulatory capital (i.e. the sum of the principal
(core) capital and the additional capital) may not be less
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13
 than the minimum statutory capital requirement and the
minimum regulatory capital requirements established
by the NBU. From 1 May 2004, the NBU calculated the
minimum regulatory capital requirement in UAH in an
amount equivalent to the euro amount set forth by the
Banking Regulation Instruction. These regulatory capi-
tal requirements were subject to periodic increases.
As of 10 October 2008 the minimum regulatory capital re-
quirements in hryvnia is to be set forth annually by a sepa-
rate NBU resolution for each following year. Such hryvnia
minimum requirement is supposed to accordingly match
existing threshold established by the NBU in Euro.
1.9. Foreign Participation
A foreign bank may establish its presence in Ukraine
through a representative office (with no right to conduct
banking business) and/or through a Ukrainian commer-
cial subsidiary bank. Also, see Par. 1.1 above regard-
ing branches of the foreign banks in Ukraine.
Foreign participation in a Ukrainian commercial bank
is not limited; however the prior permission of the NBU
is required for the establishment of a commercial bank
with foreign participation, or for the “conversion” of
an existing commercial bank into a bank with foreign
participation. Notwithstanding that the applicable leg-
islation does not limit the allowed participation in the
charter capital of a commercial bank to any maximum
threshold (unlike the previously established threshold
of 35% of the charter capital), the permission of the
NBU is still required for a Ukrainian or a foreign legal
entity, or for an individual, to directly or indirectly own,
hold, or control various thresholds of a commercial
bank’s charter capital or voting rights in its governing
body, i.e. 10% or more, 25% or more, 50% or more, or
75% or more. At each threshold, a new permission of
the NBU must be obtained.
1.10. Loan Provisioning
Banks must meet certain mandatory requirements to
cover net loan risks; they must review those require-
ments on a monthly basis. Some loan products, such
as so-called “budget loans”, real-estate backed leasing
transactions, subordinated loans, uncommitted off-bal-
ance sheet credit lines, and funds in foreign currency
transferred to the NBU under direct repo transactions,
do not have any such requirements. With effect from
10 April 2007, Ukrainian legislation sets forth sepa-
rate provisioning requirements for loans in the national
or foreign currencies as well as for certain consumer
loans. Each of the above groups of loans is classified
into five categories, subject to varying provisioning re-
quirements. The following provisioning requirements
are set forth for loans in the national currency: stand-
ard loans (1 per cent provisioning requirement, or 2
per cent for loans in foreign currency to borrowers who
14 Uniting Leading Companies from over 50 Nations Across the Globe
have no foreign currency earnings); loans on the watch
list (5 per cent or 10 per cent for loans in foreign cur-
rency to borrowers who have no foreign currency earn-
ings); substandard loans (20 per cent or 40 per cent
for loans in foreign currency to borrowers who have no
foreign currency earnings); doubtful loans (50 per cent
or 80 per cent for loans in foreign currency to borrow-
ers who have no foreign currency earnings); and bad
loans (100 per cent). Provisioning requirements appli-
cable to homogeneous consumer loans are: 2 per cent
for standard loans, 10 per cent for loans on watch, 40
per cent for substandard loans, 80 per cent for doubtful
loans and 100 per cent for bad loans. Banks were re-
quired to complete implementation of the newly estab-
lished provisioning requirements by 1 October 2007.
1.11. Competition
As of 1 October 2008, 197 commercial banks were
registered in Ukraine, out of which 181 banks were
granted licenses by the NBU to perform banking trans-
actions. As of 1 October 2008, the total net assets of all
commercial banks in Ukraine amounted to UAH 782.78
billion; their credit portfolio (including interbank loans)
amounted to UAH 628 billion, including UAH 365.3 bil-
lion of corporate loans and UAH 204.7 billion of retail
loans; their balance capital amounted to UAH 92.15 bil-
lion (over US$ 16.75 billion); their corporate deposits
and current accounts amounted to UAH 133.3 billion
(over US$ 24.23 billion); and their retail deposits and
current accounts amounted to UAH 202 billion (over
US$ 36.7 billion) (all of the figures in this paragraph
have been converted using the exchange rate of US$
1= UAH 5.5).
According to the NBU, during the nine months ended
30 September 2008, the statutory capital of all Ukrain-
ian banks having licenses to perform banking opera-
tions increased by 40.6 per cent, amounting to UAH
60.3 billion as at 1 October 2008, (compared to a 40.0
per cent. increase in statutory capital in 2007). During
the nine months ended 30 September 2008, the total
assets and total liabilities of Ukrainian banks having
licenses to perform banking operations increased by
26.5 per cent and 25.2 per cent, respectively (com-
pared to increases of 49.2 per cent. and 51.3 per cent.,
respectively, in 2007). The regulatory capital of all
Ukrainian banks increased by 34.17 per cent during the
nine months ended 30 September 2008, (compared to
a 75.6 per cent increase in 2007), amounting to UAH
96.96 billion as at 1 October 2008.
In 2008, commercial banks operating in Ukraine have
been divided by the NBU into four groups according
to the size of their assets as at 1 July 2008. In par-
ticular, 17 major banks each with total assets of more
than UAH 13 billion were classified in the first group;
17 banks with total assets ranging from UAH 3 billion
to UAH 12 billion were classified in the second group;
34 banks with total assets ranging from UAH 1 billion to
UAH 5 billion were classified in the third group; and 110
banks with total assets of less than UAH 2 billion were
classified in the fourth group. As at 1 April 2008, two of
the largest state-owned banks in Ukraine, Ukreximbank
and the State Savings Bank of Ukraine (Oschadsbank)
had approximately 8.3 per cent of the Ukrainian bank-
ing sector’s total assets. As of 1 October 2008, 50
banks in Ukraine had some foreign capital, of which
18 were fully foreign owned. Banks with foreign capital
comprise 39.8 per cent of the total statutory capital of
banks in Ukraine as at 1 October 2008. According to
NBU information, there are no plans to limit the amount
of foreign capital in the Ukrainian banking sector.
No single bank currently has a dominant position in any
banking business in Ukraine. The level of concentra-
tion in the Ukrainian banking industry (measured using
the Herfindahl-Hirschman index) is similar to the levels
in the United Kingdom or France.
Despite the NBU’s rate-cutting policies, the aver-
age annual lending rate of Ukrainian banks as at 1
October2008 was 18 per cent for loans in hryvnia and
12.5 per cent for loans in foreign currency, according
to NBU statistics.
1.12. Global financial crisis and the NBU measures
to stabilize the banking sector of Ukraine
As a result of a global financial crisis that reached Ukraine
in 2008, and its significant impact on banking sector of
the Ukrainian economy, the NBU has recently introduced
a number of restrictions on the activities of commercial
banks with the aim of stabilizing the banking sector of
Ukraine. The key restrictions, inter alia, are as follows:
• In respect of the liquidity of the banks:
the NBU will provide credit facilities to commer-
cial banks with a maturity of up to one year, with
at least a 15% fixed rate interest level, in the
amount of up to 60% of the banks’ regulatory
capital, but not exceeding 90% of the collateral
value;
when the volumes of the term deposits of the
commercial banks decrease by 2% during
any five (5) business days, the NBU permitted
banks to apply to the NBU for credit facilities
with the maturity of up to 1 year, with 15% in-
terest rate, in the amount of up to 60% of the
banks’ regulatory capital, secured by pledge
of shares in such banks by their sharehold-
ers having substantial shareholdings in such
banks, i.e. 10% or more in the share capital of
the bank; and
before approaching the NBU, a bank is required
to seek liquidity support from its shareholders
that own 10% or more of the share capital of the
bank.
• In respect of debit and credit transactions:
banks are required to limit their loans to borrow-
ers, who do not generate foreign currency reve-
nues, to the amount of indebtedness under such
loans existing as of 13 October 2008, however,
all other loans (i.e. in Hryvnia) are permitted so
long as the bank has sufficient funds to finance
such loans; and
the early withdrawal of deposits is disallowed.
• In respect of the timely payment of salaries, scholar-
ships, pensions, and social payments:
banks are obliged to maintain the uninterrupted
functioning of their ATMs and to ensure the suf-
ficient cash availability of their ATMs, as well as
to ensure the release of cash in their ATMs on
payment cards issued by other banks.
• In respect of foreign currency transactions:
the exchange of foreign currencies is allowed if
the currencies are within the same group un-
der the Classification of Foreign Currencies and
Banking Metals approved by NBU Resolution
No. 34, dated 4 February 1998;
the maximum deviation between the purchase
price, and, the sale price of any foreign currency
may not exceed 5%;
the purchase of foreign currency for the pur-
pose of early fulfilment of payment obligations
and making payments under import contracts
with non-residents without actual import of such
products to the territory of Ukraine is prohibited;
and the 20% reserve requirement on short-term
foreign loans (with a maturity not exceeding 183
days) attracted by Ukrainian banks has been
temporarily suspended.
2. INSURANCE
2.1. General
Insurance services in Ukraine are governed, inter alia,
by (i) the Law of Ukraine “On Insurance”, dated 7 March
1996, as restated on 4 October 2001 (the “Insurance
Law”); (ii) Order of the State Commission on the Regu-
lation of the Financial Services Markets of Ukraine No.
4934 “On the Approval of the Regulation for Entering Data
Regarding Legal Entities Seeking Insurer (Reinsurer) Sta-
tus into the State Registrar of Financial Institutions”, dated
22 November 2005; (iii) Order of the State Commission
on the Regulation of the Financial Services Markets of
Ukraine No. 40 “On the Approval of the Conditions on the
Licensing of Insurance Activity”, dated 28 August 2003
(the “Licensing Conditions”); (iv) Regulation of the Cab-
inet of Ministers of Ukraine No. 1523 “On the Procedure
for the Activity of Insurance Intermediaries”, dated 18 De-
cember 1996; (v) Regulation of the Cabinet of Ministers
of Ukraine No. 124 “On the Approval of Procedure for,
and the Requirements for, Reinsurance with a Non-Resi-
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15
 dent Insurer (Reinsurer)”, dated 4 February 2004; and
(vi) the Law of Ukraine “On the Prevention of, and the
Counteraction to the Legalization of, Money Laundering”,
dated 28 November 2002, as amended (the “Anti Mon-
ey Laundering Law”).
2.2. Registration and Activity of an Insurance
Company
A Ukrainian legal entity must undergo the following reg-
istrations, in order to be qualified to carry out insurance
activity:
(a) state registration and various post-registrations,
which qualify it as a legal entity;
(b) registration with the State Register of Financial In-
stitutions, which qualify it as a financial institution; and
(c) receipt of an insurance license, either for life insur-
ance services or general (non-life) insurance services.
2.3. State Registration
Under the Insurance Law, a Ukrainian legal entity, and
only one in the form of a joint-stock company (open
or closed), a full partnership, a limited partnership, or
an additional responsibility company may become an
insurer in Ukraine. However, following Ukraine’s ac-
cession to the WTO, foreign insurers are allowed to
conduct the insurance business straight on the Ukrain-
ian market, but limited to the certain types of insurance
business, as follows:
• insurance of risks, related to marine transportation,
commercial aviation, outer space rocket launches
and freight (including satellite), in case if object of the
insurance is proprietary interests, related to goods to
be transported and/or transporting vehicle and/or any
kind of responsibility arising out of such goods trans-
portation;
• reinsurance;
• insurance intermediation, such as brokerage and
agency operations concerning: marine reinsurance,
outer space rocket launches and freight (including
satellite), in case if object of the insurance is proprie-
tary interests, related to goods to be transported and/
or transporting vehicle and/or any kind of responsibil-
ity arising out of such goods transportation;
• auxiliary insurance services, such as consultancy,
evaluation of actuary risks and dealing with claims.
In order to establish a branch a foreign insurer has to
comply with the Law of Ukraine “On Amendments to the
Law of Ukraine On Insurance” (the “Amendments Law”)
No. 357-V dated 16 November 2006. In particular it will
have to, inter alia:
16 Uniting Leading Companies from over 50 Nations Across the Globe
• show that its headquarters registered in the WTO
country, which is also an active member of FATF;
• show that Ukraine and its country of registration have
signed double taxation treaty and treaty on tax avoid-
ance and some other requirements.
The Insurance Law requires that an insurer must be es-
tablished by, and must exist with, at least three share-
holders (participants). Either a Ukrainian or a foreign
legal entity or individual may be a shareholder of an
insurance company.
Life insurance must be the exclusive type of insurance
for a particular insurance company and, as a result,
life insurers are prohibited from carrying out any other
activity and/or providing any other types of insurance,
except for:
(a) the re-insurance of life insurance;
(b) financial activities connected with the accumulation,
investment, and management of insurance reserves
(asset management);
(c) crediting the insured individuals; and
(d) the performance of any operations aimed at satisfy-
ing its own business needs.
The charter capital (fund) of an insurer must be paid in
cash, except that 25 per cent of it may be paid by state
securities at par value. The statutory minimum for the
charter capital of an insurer must be equal to the UAH
equivalent of EUR 1 000 000 for an insurance compa-
ny not issuing life insurance, and to the UAH equivalent
of EUR 1 500 000 for a life insurer. The overall amount
paid by an insurance company to the charter capital of
any other Ukrainian insurer must not exceed 30% of
the charter capital (fund) of such other insurer.
2.4. Registration as a Financial Institution
In order to obtain and maintain the status of a financial
institution, a company must comply with the following
requirements.
When filing its application for its registration with the
State Register of Financial Institutions, the company’s
paid-in charter capital must be equal to or exceed the
UAH equivalent of EUR 1 000 000 (calculated in ac-
cordance with the exchange rate of the NBU as of the
date of its application) for an insurance company, or
EUR 1 500 000 for a life insurance company.
When filing its application for its registration with the
State Register of Financial Institutions, the company
must have the required number of qualified insurance
professionals, must have its premises, and must have
its software, hardware, and communication facilities
physically installed therein.
Finally, when filing its application for its registration with
the State Register of Financial Institutions, the compa-
ny must present a business plan of its insurance activ-
ity for not less than three years.
2.5. Regulation of Activity of an Insurance
Company
The State Commission on the Regulation of the Finan-
cial Services Markets of Ukraine (the “Regulator”) is
the specialized state agency responsible for the regu-
lation and control of the insurance business in Ukraine.
The Regulator is authorized to issue licenses to insur-
ance companies, as well as to adopt specific insurance
regulations. Also, the Regulator is authorized to hold
on-site inspections and documentary examinations of
insurance companies. Finally, the Regulator may ap-
point the additional annual audit of the financial state-
ments of an insurance company, which are to be con-
ducted by an auditor appointed by the Regulator at the
cost of the insurance company.
Insurance companies are obliged to submit quarterly
and annual reports to the Regulator. In addition, insur-
ance companies are obliged to prepare and publish
their annual financial statements and consolidated re-
ports. The adequacy of these reports must be con-
firmed by an independent auditor.
3. CONSUMER PROTECTION
The area of financial services requires the strict protec-
tion of consumers of financial services against over-
protecting providers of financial services. Ukraine is
not an exception to other jurisdictions, and it has in
place various rules protecting consumers of financial
services.
3.1. General
Consumer protection issues are governed by (i) the
Law of Ukraine “On the Protection of Consumers’ Rights”,
dated 12 May 1991 (the “Consumers Protection Law”);
and (ii) only generally, the Banking Law and the Civil
Code of Ukraine (the “Civil Code”) and the Economic
Code of Ukraine, both dated 16 January 2003, and ef-
fective as of 1 January 2004.
As the result of amendments introduced into the Con-
sumers Protection Law, this law now governs the legal
relationships arising out of a consumer loan agreement
between a bank or other financial institution and an
individual.
1 This may relate either to the property, which is being purchased with the funds received under the consumer loan, or to the property which
is being used as collateral for the loan, or both.
The Consumers Protection Law provides that a lender
(i.e. a bank or other financial institution) under a con-
sumer loan agreement, prior to the conclusion of such
agreement, must inform the consumer in writing about
all of the available conditions of a consumer loan, which
include, inter alia:
(a) the purpose for which the loan may be utilized;
(b) the types of security;
(c) the available forms of credit, specifying the differ-
ences between them;
(d) the types of interest rates;
(e) the maximum principal amount of the loan;
(f) the approximate total value of the loan and an esti-
mate of the value of the services relating to the conclu-
sion of the consumer loan agreement (i.e., the list of
all of the expenses connected with the loan, and its
servicing and repayment, including administrative, in-
surance, and legal services expenses);
(g) the maximum maturity of the loan;
(h) the options for the loan’s repayment (including the
possibility of its early repayment);
(i) the requirements for the assessment of the property1;
(j) the tax regime for the payment of interest and the
state subsidies to which the consumer is entitled; and
(k) the advantages and drawbacks of the proposed
forms of credit.
The lender should also provide the consumer with in-
formation concerning the former’s name and location.
If any of the above-specified information was not provided
to the consumer or was untrue or incomplete, the lender
may be subject to a fine in the amount of 30% of the value
of the provided services, but not less than 5 non-taxable
individual incomes (i.e. UAH 85 or approximately USD17).
In addition, the Consumers Protection Law contains a
vague provision, which may be interpreted as allowing
the consumer to terminate the consumer loan agreement
and to request compensation of his/her damages, if such
consumer, when entering into the consumer loan agree-
ment, was not provided with any of such information.
The lender may not request from the consumer any
other information, which is not required for the purposes
of determining the consumer’s creditworthiness or
www.chamber.ua
17
 providing the loan. Any personal data, received by
the lender from the consumer, must be used solely for
purposes of the evaluation of the financial standing
of the consumer and his/her capability to fulfill the
obligations under the consumer loan agreement. The
lender may, however, provide such information about
the consumer to a credit bureau.
The lender must also ensure that one of the originals
of the consumer loan agreement is provided to the
consumer.
The Consumers Protection Law generally provides that,
in the event of the fluctuation of the applicable interest
rate, either as a result of the relevant change of the
refinancing rate periodically established by the NBU or
other events set forth in the consumer loan agreement,
the lender must notify the consumer in writing of such
fluctuation within seven calendar days from the date
when the interest rate was changed. Without such no-
tification, any change of the interest rate by the lender
will not be valid.
The consumer loan agreement (or certain provisions
thereof) may be recognized as being invalid by a
Ukrainian court if the agreement contains terms and
conditions, which are deemed to be unfair or to violate
the consumers’ rights established by the Consumers
Protection Law.
The consumer may, by written notice to the lender,
revoke the consumer loan agreement, within fourteen
days from the date of obtaining of his/her counterpart
thereof, without any explanations. If such is the case,
the lender must return to the consumer the funds
paid by the consumer according to the consumer
loan agreement not later than within seven days. The
lender will otherwise be liable to pay to the consumer
a penalty at the rate of 1% of the amounts to be re-
turned by the lender for each day of delay. As far as
the consumer is concerned, he/she does not have to
pay to the lender any amounts, except for the principal
amount of the loan and interest at the rate established
in the consumer loan agreement for the period from
the date of his/her receiving and the date of his/her
returning the funds extended under the consumer loan
agreement.
This right to revoke the consumer loan agreement does
not apply to a consumer loan (i) secured by a mortgage,
(ii) extended for the purchase of a residential property,
or (iii) extended for the purchase of a service which had
already been rendered to the consumer by the time of
the purported revocation.
The consumer may also prepay the loan, including by
paying larger amortizing installments.
Furthermore, under the Consumers Protection Law, in
the case of the purchase of goods/services of inadequate
18 Uniting Leading Companies from over 50 Nations Across the Globe
quality, the consumer may demand from the seller either
the reduction of the purchase price for such goods/servic-
es or the termination of the relevant sale/purchase agree-
ment with the repayment by the seller of the amounts
paid for such goods/services and the indemnification of
any damages. If the consumer, who used the consumer
loan to purchase such goods/services, decides to termi-
nate the sale/purchase agreement, the lender under the
respective consumer loan agreement will be obliged to
return to the consumer all funds received from such con-
sumer under the consumer loan agreement. If the con-
sumer decides to demand the reduction of the purchase
price for such goods/services, the lender will be obliged
to adjust the indebtedness of the consumer under the
consumer loan agreement.
A consumer loan agreement may entitle the lender
to demand the prepayment of the loan or to enforce
the security under the loan as a result of a violation by
the consumer of specific terms of the consumer loan
agreement.
Furthermore, if the lender demands the prepayment
of the loan or the acceleration of the amortization in
respect of such loan, the consumer may make the re-
quired payment within thirty days from the date of his/
her receipt of such demand. If the consumer remedies
its default under the consumer loan agreement within
such 30-day period, then the lender may no longer re-
quest such prepayment or acceleration.
If the lender requests the consumer to repay the loan
or other indebtedness before its maturity, the lender is
prohibited from demanding any remuneration in con-
nection with such early repayment.
In addition, the lender is prohibited from:
(a) providing any untrue information about the conse-
quences of the consumer’s non-payment of the con-
sumer loan;
(b) withdrawing goods from the consumer without his/
her consent or without the relevant court order;
(c) specifying on the envelope with the notification of
the demand for such prepayment any information to
the effect that such notification relates to the non-pay-
ment of a consumer loan;
(d) demanding any sums, which are not provided for in
the consumer loan agreement;
(e) obtaining information about the consumer’s finan-
cial status from any third parties, which are personally,
professionally, or in any other way related to the con-
sumer, without the consumer’s consent;
(f) taking any actions, which are generally considered
as being an unfair business practice; or
(g) demanding the repayment of the loan after the expi-
ration of the statute of limitations.
In 2007 the NBU adopted regulations on mandatory
disclosure to individual customers of the essential in-
formation relating to consumer loans by Ukrainian
banks. According to the NBU Regulation “Rules Gov-
erning Disclosure of Consumer Information by Ukrain-
ian Banks, Related to Consumer Loans Terms and
BANKRUPTCY/ FINANCING RESTRUCTURING
By Magisters
www.magisters.com
BANKRUPTCY / RESTRUCTURING
Legal framework
Ukrainian bankruptcy law differs from the bankruptcy
laws of England and the United States, and is sub-
ject to varying interpretations. The primary legislation
in the sphere of bankruptcy is Law of Ukraine “On
bankruptcy” No. 2343-XII dated May 14, 1992 (“Bank-
ruptcy Law”). The Bankruptcy Law has been regularly
amended since 1993. Bankruptcy procedures are also
regulated by separate chapters of Commercial Proce-
dural Code of Ukraine No.1798-XII dated November 6,
1991, Commercial Code of Ukraine No.436-IV dated
January 16, 2003, and Civil Code of Ukraine No.435-IV
dated January 16, 2003. Furthermore, certain specific
rules for bankruptcy of banks are established by Law
of Ukraine “On banks and banking activity” No.2121-III
dated December 17, 2000 (“Banking Law”).
Insolvency
If a company is not able to fulfill its monetary obliga-
tions in due time with regard to other parties, a local
community or the state, in any way other than through
restoration of its solvency, this entity (a debtor) shall be
recognized insolvent. The owners of a debtor may try
to restore a debtor’s solvency. Debtor’s incapability to
restore its solvency and satisfy the creditors’ claims in
any way other than through liquidation procedure car-
ried out by the court shall be deemed as bankruptcy.
Bank’s insolvency. Provisional administration
In case of existence of considerable threat to the bank’s
solvency the National Bank of Ukraine (“NBU”) is entitled
to establish a provisional administration for not more than
one year. The provisional administration is imposed inter
Overall Cost of Credit”, approved by NBU Resolution
No.168 dated 10 May 2007, all banks are required
to disclose the effective rate of interest under loans
granted to individual consumers in the text of the loan
agreement. Also, banks are required to obtain a written
confirmation from the consumer stating that he/she has
received all the information from the bank relating to
the terms and conditions of the loan and, specifically,
the costs of the loan to the consumer.
alia in the following cases: systematic violations by a bank
of the NBU regulations, decreasing the bank’s regulative
capital by 30% within the last six months with simultane-
ous violation of at least one economic normative, failure
of a bank within 15 working days to fulfil at least 10 %
of its overdue liabilities, etc. Provisional administration is
carried out by a provisional administrator appointed by the
NBU. Since appointment of the provisional administration,
the powers of the General Shareholders’ Meeting, Super-
visory Board and Board of Directors of the bank are sus-
pended and transferred to the provisional administrator.
Since the day of his appointment the provisional ad-
ministrator has a full and exclusive right to manage
and control the bank, and to take any actions aimed
at restoring the bank to satisfactory financial condition,
or if possible, to prepare the bank for sale, reorgani-
sation or liquidation in order to protect the interests of
depositors or other creditors. For these purposes a pro-
visional administrator is entitled inter alia to continue or
stop any operations of the bank and to terminate any
contracts to which the bank had been a party that are,
in the judgement of the provisional administrator, no
longer necessary or beneficial to the bank. In addition,
the Banking Law permits a provisional administrator of
a bank to request a Ukrainian court to declare invalid,
among other agreements to which such bank may be
party, an agreement between the bank and a third
party, if there has been, under such agreement, “any
operation” (meaning a payment or other transaction):
(i) within a six month period before the appointment of
such provisional administrator, and the purpose of the
operation was to grant a preference to such third party
compared to the bank’s other creditors;
(ii) within one year before the appointment of such pro-
visional administrator between the bank and a related
www.chamber.ua
19
 party, and the operation contravened the requirements
of Ukrainian legislation or “threatened the interests of
depositors and creditors” of the bank;
(iii) within three years before the appointment of such
provisional administrator, with the purpose of alienating
any of the bank’s assets free of charge or purchasing
assets or services by the bank at a price significantly
higher than the value of such assets or services;
(iv) within three years before the appointment of such
provisional administrator, with the purpose of conceal-
ing assets from the bank’s creditors or otherwise violat-
ing the rights of such creditors;
(v) at any time, if such operation has been based on
forged documents or if it was of fraudulent nature.
Institution of bankruptcy proceedings by the court
Upon a request of a debtor or a creditor the bankruptcy
proceedings shall be instituted by the court if the aggre-
gate indisputable claims of the creditor (creditors) to the
debtor amount to at least 300 minimum wages (at the mo-
ment minimum wage equals UAH 545) and have not been
satisfied by the debtor within 3 months upon the deadline
set for the satisfaction of such claims. However, a creditor
may submit application for institution of the bankruptcy
proceeding irrespective of the amount of its claims to the
debtor and the maturity of liabilities in case of absence of
management bodies of the debtor at the registered ad-
dress of the debtor, or in case of failure of the debtor to
submit to the state tax department tax declarations, ac-
counting documents as required by Ukrainian law during
more than one year, or in case of other findings attesting
to termination of debtor’s business activity.
The bankruptcy proceedings are held exclusively
through the court. There are four stages of bankruptcy
proceedings according to the Bankruptcy Law: disposal
of the debtor’s property; execution of amicable agree-
ment; sanation (restoration of solvency) of a debtor;
and liquidation of a bankrupt. The debtor may be de-
clared a bankrupt at any of the above stages. Ukrainian
bankruptcy law regulates in details each of the above
stages.
Participants of the bankruptcy procedures
According to the Bankruptcy Law the following persons
may participate in bankruptcy proceedings: a court, a
debtor, its owner(s), its creditors, arbitration manager,
representative of the state authorities, etc.
Creditors
All the creditors in bankruptcy proceedings are divided
into three categories: (i) bankruptcy creditors, (ii) se-
cured creditors and (iii) current creditors. While each of
20 Uniting Leading Companies from over 50 Nations Across the Globe
these three categories of creditors has the same basic
interest – prompt and complete payment of all debts –
the law affords each distinctive rights and remedies.
Bankruptcy creditors are creditors which claims to the
debtor arose prior to the institution of bankruptcy pro-
ceedings and whose claims are not secured. Secured
creditors are bankruptcy creditors whose claims to the
debtor are secured. Current creditors mean creditors
which claims to the debtor arose after the institution of
bankruptcy proceedings.
Not all bankruptcy creditors may require settlement of
their claims but only those that have submitted to the
court their claims to the debtor within 30 days upon the
publication of the announcement about instituting the
bankruptcy procedure in newspapers “Holos Ukrainy”
or “Uryadovyi Kuryer”. The claims of bankruptcy credi-
tors stated after expiration of the period determined for
their submission, or are not stated in general shall not be
examined and shall be considered as discharged. The
specified period is limited and shall not be subject to the
renewal. Secured creditors shall have the right to put for-
ward claims to the debtor to the extent not covered by
the collateral or in the amount of the difference between
the claim and the proceeds, which can be derived from
the sale of the collateral, if the value of the collateral is
not sufficient for the satisfaction of the claim in full.
Interests of the creditors whose claims were included
into the registry of the claims elect the committee of
the creditors at the meeting of the creditors for pres-
entation of their interests in the course of the bank-
ruptcy proceedings. The committee of the creditors is
entitled inter alia to apply to the court for termination
of the powers of the arbitration manager and appoint-
ment of the new arbitration manager, to approve ma-
terial agreements (agreements which book value ex-
ceeds 1% of the property of the debtor’s assets), etc.
Arbitration manager
Arbitration manager is a licensed person acting as a
property manager, sanation manager or liquidator at
the respective stage of the bankruptcy proceedings.
The same person may act as arbitration manager
(property manager, sanation manager, and liquidator)
at all stages of the bankruptcy proceedings.
Upon appointment of the arbitration manager powers of
the manager and other management bodies of a debtor
shall be considerably restricted or terminated. The Bank-
ruptcy Law empowers arbitration manager with wide
scope of authorities varying depending on the certain
stage of the bankruptcy proceedings. Thus, if on the
stage of disposal of the debtor’s property, the scope of
the authorities of the arbitration manager is rather narrow
and includes approval of the debtor’s significant deci-
sions and material transactions related to disposal of the
debtor’s property, on the sanation and liquidation stages,
they also include certain authorities related to manage-
ment of the debtor, rights to refuse from performance
under debtor’s agreements and to recognize the agree-
ments executed by the debtor invalid through the court.
Moratorium
The court may introduce a moratorium for settlement of
creditors’ claims simultaneously with initiating of bank-
ruptcy proceedings and till their termination. As to banks
such moratorium may be established by the NBU during
the provisional administration (prior to the bank’s en-
tering into bankruptcy proceedings), but no longer than
for the six-month period. During the term of moratorium,
a debtor may not perform its monetary obligations and
obligations related to payment of taxes and other state
duties arose prior to imposition of moratorium. The
debtor may not be held liable for the non-performance
of its obligations to its creditors resulting from imposition
of moratorium. Upon the termination of the moratorium
the creditors would be entitled to make and to enforce
claims against the debtor in the amounts existing as of
the date when the moratorium was imposed.
Priority of Settlement of Creditors’ Claims
Often, a debtor lacks sufficient assets to pay all of his
creditors. In such a case, Ukrainian bankruptcy law es-
tablishes certain priority rules. The priority rules of the
Bankruptcy Law distinguish from the ones envisaged
by the Banking Law for banks. Thus, the Bankruptcy
Law establishes the following priority for settlement of
creditors’ claims:
1) secured claims and monetary claims related to the
salary, which have arisen from liabilities of the bank
to its employees prior to the initiation of the bank liqui-
dation procedure; expenses of the Individual Deposit
Guarantee Fund; court expenses;
2) liabilities that have arisen as a result of damaging life
and health of individuals;
3) liabilities related to payment of taxes and other state
duties (statutory payments);
4) not secured creditors’ claims, including claims of
creditors arising from the liabilities in the course of the
debtor’s property management or sanation procedure;
5) claims of debtor’s employees as to return of their
contributions into the debtor’s charter capital;
6) other claims.
The claims of each following line shall be satisfied as
long as funds derived from the sale of the bankrupt’s
property are received at the account and after the full
satisfaction of claims of the previous line.
The Banking Law envisages a slightly different priority
for settlement of creditors’ claims:
1) liabilities that have arisen as a result of damaging life
and health of individuals;
2) monetary claims related to the salary, which have
arisen from liabilities of the bank to its employees prior
to the initiation of the bank liquidation procedure;
3) claims of individual depositors in terms of excess
over the amount envisaged by the individual deposit
guarantee fund system, but not more than an amount
equivalent to UAH 50,000;
4) claims of individual depositors in excess of the
amount equivalent to UAH 50,000;
5) claims of the Individual Deposit Guarantee Fund;
6) claims of individuals, whose payments or payments
to whom have been blocked (except for individual en-
trepreneurs);
7) other claims.
Amicable agreement
At any stage of the bankruptcy proceedings the debtor
and creditors may conclude an amicable agreement
regarding the respite and/or deferral of the payment,
as well as remission (write off) of debtor’s debt by the
creditors.
On behalf of creditors, the decision to conclude an ami-
cable agreement shall be passed by the committee of
creditors by a majority vote and deemed adopted if all
secured creditors expressed their consent to the con-
clusion of the amicable agreement in writing. On behalf
of the debtor, the decision to conclude an amicable
agreement shall be taken by the debtor’s manager or
arbitration manager (property manager, sanation man-
ager, liquidator) acting as management bodies of the
debtor.
The amicable agreement shall be executed in writing
and subject to approval by the court. The amicable
agreement shall become valid from the date of its ap-
proval by the court. The amicable agreement may not
be terminated unilaterally. The approval of the amica-
ble agreement by the court shall constitute the grounds
for termination of bankruptcy proceedings.
FINANCING RESTRUCTURING
General
Ukrainian law views restructuring primarily through
the prism of insolvency and bankruptcy proceedings
and regulations or as a solvent corporate restructur-
www.chamber.ua
21
 ing. In the bankruptcy context it is regarded as a set
of organisational, financial, legal and technical meas-
ures aimed at improving the company’s financial con-
dition, solvency, production effectiveness and ability
to satisfy creditors’ demands. Solvent restructuring is
affected in connection with corporate reorganisations
related to changes in profile of commercial activities,
shareholding structure, and other similar issues re-
lated to the conduct of business or fine-tuning legal
relationships between owners. These aspects of re-
structuring are regulated by general rules of the Civil
Code of Ukraine and the Economic Code of Ukraine
both dated 16 January 2003 (as amended). Certain
laws and regulations provide for specific restructuring
features for certain group of companies (e.g., banks,
special regime companies, or companies subject to
privatization). A number of rules are contained in the
Law of Ukraine “On Bankruptcy” No. 2343-XII dated
May 14, 1992. With the added pressure of the finan-
cial crisis, Ukrainian companies are beginning to con-
sider various aspects of financial restructuring with the
view to revitalizing the loan portfolios, optimizing the
repayment schedules and refinancing troubled loans
outside of bankruptcy proceedings and corporate re-
structurings. Financial restructuring entails restructur-
ing of the company’s assets and liabilities, including
its debt-to-equity structures, in line with its cash-flow
needs. In this sense financial restructuring embraces
various solutions, ranging from simple rearranging of
loan portfolio and refinancing exercise, to a more com-
plex combination of financings and M&A tools, such
as sales of distressed assets, recapitalizations, private
equity, leveraged buyouts, sales to financial or strate-
gic investors, etc.
Corporate reorganisation (that could be a part of a
larger financial restructuring exercise) is the process of
increasing the economic viability of the underlying busi-
ness model. Under Ukrainian laws corporate restructur-
ing along with liquidation is viewed as termination of the
company’s activity and can be exercised by merger, ac-
cession, division or transformation. However, if looking
more widely, examples may also include sale of divi-
sions or abandonment of product lines, or cost-cutting
measures such as closing down unprofitable facilities.
In most turnarounds and bankruptcy situations, both fi-
nancial and operational restructuring are effectuated.
Financial Restructuring
Among various stress-induced financial solutions, ac-
quisition of loans extended by Ukrainian lenders to
non-residents seems to be the most attractive and
the most productive financial solution for both Ukrain-
ian companies and foreign investors. Ukrainian laws
generally permit assignment of monetary claims (such
as claims against a borrower under a loan agreement)
from a Ukrainian resident to a non-resident. However,
due to ambiguity of some of the provisions of Ukrainian
legislation regulating assignments by the lender and
lack of precedents on such assignments as well as ab-
sence of any publicly available guidance from the regu-
lator, potential investors may face certain problems,
which may considerably complicate the restructuring
process. Some of the apparent problems are briefly
highlighted below.
(i) Currency control issues:
• a possibility of a substitution of a Ukrainian lender
with a foreign lender in general is not clearly spelled
out in Ukrainian law, and since borrowing from for-
eign lenders is subject to special regulation by the
NBU, it is not entirely without doubt whether and how
the NBU will permit foreign lenders to take the place
of an original Ukrainian lender;
• registration of a loan agreement with the National
Bank of Ukraine (the “NBU”) after an assignment
to a foreign lender of a loan initially extended by a
Ukrainian lender may be required under NBU regula-
tions governing loans extended by foreign residents
to Ukrainian residents;
• in the absence of NBU registration of the loan agree-
ment, an individual licence from the NBU by Ukrain-
ian borrower may be needed to permit a Ukrainian
borrower to transfer, after an assignment of a loan
to a non-resident creditor, funds abroad to a foreign
lender due to absence of any express requirement or
exemption on this issue from a general rule according
to which payments abroad could not be made unless
(a) there is either an individual license of the NBU or
registration of the NBU obtained for such payment or
(b) such payment falls under one of the available ex-
emptions from licensing or registration requirement;
• since the assignment of a loan agreement to a foreign
lender may trigger the NBU registration requirement,
maximum interest rate cap (the “MIR”) will apply at
the then determined rate established by the NBU for
loan agreements between Ukrainian borrowers and
foreign lenders. If MIR requirements are deemed ap-
plicable, an assignment of a loan agreement would be
prohibited in case aggregate amount of payments un-

1 Currently, the following MIRs are effective:

(i) if a loan agreement with a foreign lender is registered with the NBU before 27 October 2008:
a) for loans with maturities of not more than one year - 9.8 per cent per annum;
b) for loans with maturities more than one year and less than three years – 10 per cent per annum, and
c) for loans with maturities more than three years – 11 per cent per annum.
(ii) for loan agreements with a foreign lender registered with the NBU after 27 October 2008:
a) for loans with maturities not more than one year - 11 per cent per annum, and
b) for loans with maturities over one year - no MIR is applicable.

22 Uniting Leading Companies from over 50 Nations Across the Globe

 der a loan agreement exceeds the MIR applicable to
loans from a foreign lender with similar maturities2.
(ii) Factoring issues:
• where an assignment could be deemed a factoring
operation, (i.e. a financing extended in consideration
for an assignment of a monetary claim), specific rules
regulating factoring would apply;
• due to application of such rules, assignment between
banks by way of factoring of certain types of receivables
could be restricted, including receivables under loans;
• to avoid risks to the validity of such operations, a cer-
tain fee or other consideration will need to be payable
by the Ukrainian lender to a foreign lender acting as
an assignee based on the general legal requirement
applicable to all financial services, including factoring
operations.
Corporate Reorganisation – Possible Restrictions
Corporate reorganisation is often inevitable for compa-
nies in or approaching financial distress, especially for
the subsidiaries and affiliates of large industrial groups
and holdings. Well-planned corporate reorganisation
could assist in eliminating or mitigating financial prob-
lems of a group by diversifying and/or concentrating
its assets and liabilities and optimising its operational
activities. However, in most cases any kind of corpo-
rate reorganisation is generally limited by financing ar-
rangements (such as loan agreements) executed by
group companies. This includes contractual provisions
ranging from early repayment right granted to lenders
in case of a change of control or corporate restructur-
ing to events of default of similar nature leading to im-
mediate acceleration under the respective loan. There-
fore, prior to exercising any corporate reorganisation,
the following issues should be taken into consideration
and possible brought up with existing lenders:
• Wording: exact wording should be checked and com-
pared against the contemplated action plan. Corpo-
rate reorganisation is usually defined broadly in fi-
nancing agreement and may include announcement
or occurrence of any amalgamation, merger, division,
spin-off, transformation or other reorganisation or re-
structuring under applicable Ukrainian legislation, or
any other reorganisation or restructuring under the
laws of any other relevant jurisdiction and, as such,
should be construed more widely than what can be
expected under the Ukrainian laws;
• Communications: a borrower and its subsidiaries are
often prohibited from conducting any corporate re-
organization or are required to obtain a prior written
consent from a lender. It should be noted however
that such restriction is typically limited by a material
adverse affect caveat (defined in each separate loan
agreement). In addition, subject to certain specific
requirements, intergroup reorganisations as well as
corporate reorganisations required by law are of-
ten required. Failure to comply with “no corporate
reorganisation” covenants and undertakings under
customary provisions of financing agreements are
deemed to constitute an event of default under a loan
agreement and trigger acceleration;
• Interplay: special attention should be paid to inter-
relation between parents companies and subsidiar-
ies. Often parent company’s financing arrangements
would prohibit corporate reorganisation for its affili-
ates and/or subsidiaries, so whenever a reorganisa-
tion of a company is considered it is advisable that
financing arrangements of both such company and
its parent companies are examined.
This article is intended as a summery overview of po-
tential solutions, risks and considerations available to
Ukrainian and foreign companies in connection with
restructuring of Ukrainian entities. We should like to
emphasize that resolving the above issues and taking
a decision on proceeding with a situation-specific re-
structuring solution requires thorough analysis of com-
pany’s business, its financial conditions and prospects,
debt portfolio, capital structure as well as detailed ex-
amination of all effective loan agreements and other
related arrangements.
www.chamber.ua
23
 LEASING
By Magisters
www.magisters.com
Ukrainian Financial Leasing Market
Initially being scarcely developed and poorly regulated
type of activity, leasing in Ukraine has developed rap-
idly in the recent years. One of the reasons for such
intensive development has been a heightened inter-
est towards Ukrainian leasing market shown by for-
eign banks and other participants of the international
financial market that are active on the Ukrainian market
both directly from abroad and through their Ukrainian
subsidiaries. Increased accessibility of credit resources
noted in 2005, 2006 and early 2007 also contributed to
the domestic leasing market growth.
In particular, as at 31 December 2007, the portfo-
lio of leasing contracts signed up by resident lessors
comprised approximately 15,200 agreements in the
aggregate amount of UAH 20.23 billion, including ap-
proximately 4,200 agreements in the amount of UAH
3.3 billion, which were entered into in 2006, and ap-
proximately 9,300 agreements in the amount of UAH
11.7 billion, which were executed in 20071. Analysis of
the structure of the leasing contracts’ portfolio in terms
of the value of leased assets demonstrates that, as of
December 31, 2007, various vehicles (such as railway
transport, aircraft, trucks, and passenger cars) ac-
counted for the largest share in the leasing contracts’
portfolio (approximately 64%)2. Agricultural machin-
ery and equipment accounted for the second largest
share in the structure of the leasing portfolio (almost
7%), while other equipment, including IT, printing, trade
and banking equipment, accounted for the remaining
25%3.
Despite the increases in a number of indices, the
Ukrainian leasing market is still in its infancy. One of
the reasons for this is that legislative measures to pro-
mote leasing are not among the government’s priori-
ties, and that the pursuit of higher budget revenues has
been making Ukrainian decision-makers reluctant to
offer tax benefits for leasing.
1 Source: Report on Activities of the State Commission for the Regulation of the Financial Services Market in Ukraine in 2007 approved by the
Instruction of the State Commission for the Regulation of the Financial Services Market in Ukraine dated 26 June 2008 N 778 and Report
on Activities of the State Commission for the Regulation of the Financial Services Market in Ukraine in 2006 approved by the Instruction of
the State Commission for the Regulation of the Financial Services Market in Ukraine dated 5 July 2007 N 7572
2 Ibid.
3 Ibid.
24 Uniting Leading Companies from over 50 Nations Across the Globe
Legal framework
Leasing relations in Ukraine are governed by the fol-
lowing main legislative acts:
(i) The Civil Code of Ukraine and the Economic Code
of Ukraine, both dated 16 January 2003 (the “Civil
Code” and the “Economic Code”, respectively),
setting forth general legal rules on leasing;
(ii) The Law of Ukraine “On Financial Leasing” dated
16 December 1997 (the “Financial Leasing Law”),
being a special legal act on financial leasing;
(iii) The Law of Ukraine “On Financial Services and
State Regulation of Financial Services Markets” dat-
ed 12 July 2001 (the “Financial Services Law”),
defining financial leasing as a financial service and
setting out powers of the Commission as the main
regulator of the leasing market;
(iv) The Law of Ukraine “On Banks and Banking” dated
7 December 2000, governing leasing operations by
banks;
(v) The Law of Ukraine “On Taxation of Corporate In-
come” dated 28 December 1994, (the “Corporate
Tax Law”), establishing, together with the Law of
Ukraine “On Value Added Tax” dated 3 April 1994,
rules of taxation of leasing operations;
(vi) The Law of Ukraine “On the Prevention and Combat-
ing the Legalisation (Laundering) of Income Obtained
by Criminal Means” dated 28 November 2002, setting
forth the procedure of conducting financial monitoring
by lessors (the “Anti-Money Laundering Law”);
(vii) “UNIDROIT Convention on International Finan-
cial Leasing” dated 28 May 1988 and ratified by the
Verkhovna Rada of Ukraine on 11 January 2006,
being one of the major international agreements in
the sphere of international financial leasing.
Despite the existence of the abovementioned acts,
Ukrainian legislation in the sphere of financial leasing
is generally perceived as not sufficiently developed and
containing a number of substantial gaps. Furthermore,
inconsistencies between and among laws, governmen-
tal and ministerial orders, decisions, resolutions and
other acts, ambiguous wording of laws and regulations
and their lack of specificity raise difficulties in imple-
mentation and interpretation of their provisions. Such
gaps and incoherence of legislation complicate opera-
tions of entities providing leasing services and make it
difficult for the court to consistently implement respec-
tive legal rules while resolving disputes.
Collisions described above may be seen, among other
things, in the definitions of terms that are fundamental
for leasing regulation. For instance, the world practice
identifies two main types of leasing: operational and
financial. Such breakdown was also provided for in the
Law of Ukraine “On Leasing”, effective till 2004; while
the Financial Leasing Law, which is currently in force,
governs only financial leasing issues. At the same time,
the Civil Code operates with such terms as “direct” and
“indirect” leasing, and the definition of “financial leas-
ing” given in the Financial Leasing Law is very close
(but not similar) to the definition of “indirect leasing” un-
der the Civil Code. As defined in the Financial Leasing
Law, “financial leasing” is a legal civil relation based
on a financial lease agreement, under which a lessor
is obliged to (i) acquire an asset/object from a seller
(supplier) in accordance with specifications and terms
established by a lessee, and (ii) transfer, in exchange
for a consideration (lease payments), such asset for
utilization by the lessee during a specified period of
time but not less than one year. It should be noted that
the Corporate Tax Law contains a more detailed defini-
tion of “financial leasing” used for tax purposes, as well
as a definition of “operational leasing” meaning any
commercial leasing, which does not meet the financial
leasing criteria imposed thereby.
Main participants of the financial leasing market
Resident lessors
All resident companies operating in the Ukrainian leasing
market could be divided into the following categories:
(1) Leasing companies which qualify as financial insti-
tutions and are registered in the State Registry of Fi-
nancial Institutions (the “Registry”) in accordance with
the Financial Services Law. As a rule, this category
comprises leasing companies whose main business
involves rendering, on a permanent basis, financial
leasing services, which might be combined with other
financial services, subject to certain exceptions (e.g.
providing financial leasing services may not be com-
bined with professional activity on the stock market).
To be registered as a financial institution, a company
should comply with certain requirements, including
having as follows: (a) shareholders’ equity of not less
than UAH 3 million; (b) qualified stuff, including chief
executive officer and chief accountant who meet cer-
tain educational and professional requirements set by
the Commission; and (c) certain computer software
and hardware. As any other financial institution, leas-
ing companies have to file periodic reports with the
Commission and comply with the Anti-Money Launder-
ing Law and other legislation in this sphere. According
to the statistics presented by the Commission, as at 1
January 2008, only 27 leasing companies were regis-
tered with the Commission as financial institutions, and
only 3 of these companies have been actually conduct-
ing leasing transactions.
(2) Legal entities which do not qualify as financial insti-
tutions but may from time to time be involved in finan-
cial leasing business. These companies are recorded
by the Commission in the List of legal entities which
are entitled to carry out financial services (the “List”),
for the period of participation in financial leasing trans-
actions. Such leasing companies have to meet certain
requirements (e.g., their qualified staff which is directly
engaged in financial leasing transactions should have
higher education in finance, economy or laws) and fall
under the reporting requirements set by the Commis-
sion. In addition, legal entities should comply with the
Anti-Money Laundering Law and other legislative acts
in this sphere. According to the statistics prepared by
the Commission, as at 1 January 2008, 171 companies
were recorded in the List.
(3) Banks, which are entitled to provide leasing serv-
ices in accordance with a banking license issued by
the National Bank of Ukraine and are not subject to any
additional registration with the Commission.
Non-resident lessors
Although only resident companies are allowed to be
registered in the Registry or recorded in the List, non-
resident lessors wishing to lease assets to Ukrainian
residents from abroad may undertake such financial
leasing transactions without any license or registration,
provided that generally applicable currency control
rules are complied with, if any.
It should be noted that Ukrainian and foreign legal enti-
ties, which are subject to individual licensing regimes
or temporary suspension of foreign economic activities
imposed by the Ministry of Economy of Ukraine, are
not allowed to enter into lease agreements with foreign
or Ukrainian entities, respectively.
Leased asset
According to Ukrainian legislation, non-consumable
fixed assets (both movable and immovable) with
www.chamber.ua
25
 individual characteristics, which could be freely traded
at the market and are not restricted from leasing, could
serve as leased assets for the purposes of financial
leasing. It is forbidden to lease, on financial leasing
terms, land plots, sub-soil or natural resources (e.g.
coal), integral property complexes and structural
subdivisions of enterprises, as well as certain other
assets.
Lease agreements
Lease agreements are to be executed in written form,
and notarization of such agreements may be performed
upon request of one of the parties, but is not, subject to
the below exception, mandatory. Lease agreements in
relation to real estate objects that are entered into for
more than 3 year term should be certified by a notary
and are subject to state registration (currently, in the
State Register of Deeds).
Control over use of the leased asset and the right
to incontestable repossession of the leased asset
Current legislation does not expressly provide for the
lessor’s right to incontestable repossession of the
leased asset if the use and service conditions of such
asset are inconsistent with the terms of a financial
lease agreement or intended use of the leased asset.
From the legal perspective, there is also a lack of clarity
in relation to whether a lessor has the right to exercise
financial control over operation of the leased asset by
a lessee. At the same time, this does not prevent the
parties from specifying all these aspects in the lease
agreement.
Furthermore, the lessor is entitled to terminate the fi-
nancial lease agreement and to claim repossession of
the leased asset on grounds set forth in a lease agree-
ment or the law. As a general rule, repossession should
take place through a judicial procedure. However, if
26 Uniting Leading Companies from over 50 Nations Across the Globe
payments under a notarized lease agreement have not
been made within thirty days after the due date, repos-
session claim may be also made through a notary’s
enforcement writ; such option is not available if a lease
agreement has not been certified by a notary.
The right to incontestably collect lease payments
According to the Financial Leasing Law, the lessor is
entitled to collect an outstanding debt from a lessee in
an incontestable manner on the grounds of a notary’s
enforcement writ. However, current legislation is silent
as to the mechanism for performance of such notary’s
enforcement writ with respect to collection of an out-
standing debt. Thus, practical implementation of this
provision remains unclear.
Issues related to transfer of title to leased asset to
a lessee
The Financial Leasing Law stipulates that a lessee may
have other rights and obligations in accordance with
the terms of a lease agreement. The above legal rule
could be interpreted as allowing the parties to incorpo-
rate relevant provisions on automatic transfer of title to
the leased asset into a financial lease agreement. How-
ever, the Financial Leasing Law is not explicit about
such option. Furthermore, according to the Civil Code,
agreements providing for transfer of title to real estate
objects are subject to notarization and state registra-
tion (currently, in the State Register of Deeds) and the
title is deemed transferred to the buyer from the date
of such state registration. Therefore, it remains unclear
whether title to a leased asset can be transferred au-
tomatically to the lessee at the expiration of a lease
agreement or a separate agreement is required for this
purpose, and parties usually opt to enter into a sepa-
rate sale and purchase agreement in relation to the
leased asset, instead of using complex lease agree-
ments containing provisions on transfer of title.
 II FMCG MARKET
OVERVIEW OF THE UKRAINIAN RETAIL MARKET
DEVELOPMENT
By METRO Cash & Carry Ukraine Ltd.
www.metro.ua
The credit crisis that began in the United States and
quickly spread globally has slowed down retail growth and
added to the financial stress of retailers worldwide. The
accumulating threat of sales drop resulted in reconsidera-
tion of the credits policy towards the retailers and first cast
in reduction of loan volumes and terms. As far as banks
stop giving loans to retail sector the latter have started
cutting down their expansion plans having no sources of
refinancing and paying down of current loans.
Having a closer sight on the current status of the
Ukrainian retail market from the point of view A. T.
Kearney “Window of opportunities analysis” of the top
30 emerging markets we can conclude that Ukraine
slips from 5th to 17th place under the pressure of poor
infrastructure, bureaucratic red tape, ongoing political
instability and a soaring inflation1.
On the other side, Ukraine became the official mem-
ber of the WTO in May, 2008. Such membership gives
the contemporary Ukrainian retail market the possibil-
ity of such changes as integration into the international
market economy, resulting in stable and predictable
business and international trade, access to the interna-
tional practice of problematic issues settlement, favo-
rable foreign investments climate and richer portfolio of
articles and services2.
It should be also stressed that within the last sever-
al years the share of sales via civilized trade formats
has been constantly increasing. Compared to the 90s
when street market trade occupied 65-70% of total re-
tail sales in 2007 the turnover via civilized trade formats
amounted already to 55%3. Such trend is also visible
through the growing substitution of old department
stores and “gastronomes” by new outlets of retail chains
and shopping centres. Though, such changes are still
hardly noticeable in the regions of Ukraine where most
1 A. T. Kearney Emerging opportunities for global retailers. 2008
2 http://me.kmu.gov.ua/control/uk/publish/category/system?cat_id=38226
3 ProRetail monthly journal, 6(9), p. 36
4 ProRetail monthly journal, 30.09.08, p.12-16
favourable locations are already taken by local entre-
preneurs. Even regions nearby the capital experience
a deficit in the civilized retail formats what proves the
remaining low concentration of Ukrainian retail.
Under the difficult conditions of unstable finance trends
and growing competition Ukrainian retailers take their
European counterparts as an example and develop
new retail formats. Retailers admit that operation in dif-
ferent formats came to them due to the lack of suitable
land plots offered for new outlets in the districts and
regions. Besides, the multi format operation allows re-
tailers to adjust their chains to the demands in each
separate region and attract a larger number of custom-
ers. Having in their structure hypermarkets retailers at-
tract middle class families, with discounters they serve
for lower income population whilst opening premium
segment supermarkets attracts customers with more
sophisticated demands. For instance, Fozzy Group
owns Fozzy hypermarkets, Silpo supermarkets, Fora
discounters etc., the same as Kviza trade company, the
owner of Velyka Kysnehya supermarkets chains and
Velyka Apteka drug stores. Though unlike their foreign
counterparts which have been practicing multi format
operations at least half a century the Ukrainian trade
business remains comparatively young. In view of that
some formats open more by intuition rather than based
on clear business targets what from time to time results
in their low proficiency and non-transparency4.
For a stable growth of not only sales but profit from every
square metre retailers need to add to their expansion a
high level of customer service, competitive prices and
premium quality. Unfortunately, not all national retailers
are aware of that while more and more foreign investors
enter the Ukrainian retail market like the French Auchan
which last year opened its first outlet in Kyiv and the
Russian hypermarket chain O’Key with currently
www.chamber.ua
27
 Window of opportunity analysis
Source: A.T. Kearney *EEO refers to entertainment, electronics and office retailing: DIY is do-it-yourself
operating 4 outlets in Kyiv, Horlovka, Zaporizhya and
Kharkiv. At the same time not all foreign retailers
succeeding in entering the Ukrainian market manage
to remain there. Like, the Russian Paterson which
sold its three outlets to EKO discounters chain. The
shortage in suitable land plots retailers are still facing
continues to increase the difference between demand
and offer which now equals to 4 times pushing retailers
towards searching for additional ways of allocation and
development of own projects of expansion.
Own brands shake up retailers
Development of own brands is a top news on the cur-
rent market. Retailers are constantly widening their own
brands assortment, producers to a limit criticize them and
customers talk and buy. Looking back two years ago own
brands would have seemed nothing but a one day project
of retailers. Today this is a considerable part of sales floor
and a notable profit which sometimes exceeds the profit
from sales of A-brands by 4-5 times Today up to 30% of
all goods in the world are sold as own brands. The own
brands market is growing and developing. Thus currently
there are even several kinds of own brands: non-branded
goods, own brands with a different from the retail chain
name, own brands named after the retailer etc.
5 Delo daily newspaper, 03.09.08, p. 12-13
28 Uniting Leading Companies from over 50 Nations Across the Globe
As for Ukraine the first own brand in retail was launched
by Furshet retail chain in 2002 and titled with the same
name. Obviously since then many retailers have ap-
peared on the market and launched their own brands.
First cast due to the advantages own brands open for
retailers: firstly – they have a possibility to allocate their
own brands as they want with no charges for “better”
shelves; secondly – retailers save on advertising and
consequently offer customers a better price; thirdly –
own brands make retailers less dependent on suppli-
ers. Besides the customer loyalty to a certain chain
automatically transfers to its own brands and of course
provides rather an intensive demand for these articles.
As a result the customer loyalty to a retail chain in-
creases.
Despite the current dominance of domestic retailers
on the Ukrainian market, foreign chains also make
their contribution applying a rather rich experience in
this segment. Like taking the German METRO Cash
and Carry Ukraine, part of the METRO Group, with a
portfolio of 17 own brand families now representing
more than three thousand articles. As for the national
retailers the most successful in own brands promotion
are Furshet, Fozzy Group, ATB-Market and Amstor
(Table 1)5.
Table 1
Own Brands Promoted by the Largest Retailers in Ukraine
Retail Chain Own Brand Name
Premiya
Furshet
Aro, Natura Verde, Ocean
Twin, Active, H-Line, Ter-
rington House, Horeca
Select, etc.
Figaro, Rybny Den, Sladko,
Pirate, Sytny Riad, Dobry
Kukhar, etc.
Clever
Amstor
Retailers split the Ukrainian retail market
Increase of disposable household profits of Ukrainian
population is the best condition for retail development in
the country. According to the State Committee of Statis-
tics of Ukraine the volume of retail turnover has been sus-
tainably growing yearly by 20% since 2003. Altogether
the Ukrainian retail market has been demonstrating rath-
er high growth and “tasty” perspectives both for domestic
and foreign retailers. The State Committee of Statistics of
Ukraine informs that the total turnover of domestic retail
in 2007 amounted to UAH 318.7 billion which is a 28.8%
increase versus 2006. Whereas in January – Septem-
ber 2008 retail turnover has increased by 24.8% up to
UAH 177.5 billion. The most intensive increase of retail
turnover has been noticed in Luhansk (UAH 5 billion and
633.1 Mio) and Mykolayiv (UAH 3 billion 766.6 Mio) re-
gions. According to the same statistics consumption ex-
penses play the first violin in formation of the GDP by
end consumption segment. During the last 6-7 years the
GDP has consisted by 75-77% of consumption expens-
es. In general during 2007 Ukrainians spent on goods
and services more than 80% of their incomes6.
Sales (EUR, m); No. of Stores in 2007
6 www.unian.net
7 www.moodys.com
Food and Non Food Products
preserved food, cereals, pasta,
sun flower and olive oil, dairy,
confectionery, sources, ice-
cream, juices, snacks, fruit and
vegetables; half cooked dishes,
household, home decoration;
Future development i. e. crisis overcome
Changes of the international investment rating towards
Ukraine for the worth results in increase of interest rates
by international finance institutions for Ukrainian coun-
teragents what in its turn is a visible sign of economic
development slow down for such dependent on exter-
nal economic environment economy like Ukrainian7.
Retail is worth to be called one of the most important forces
of economic progress in any country. Thus, retail develop-
ment is of enormous importance in particular for the coun-
tries with post modern type of economy where custom-
ers are very picky and competition is intensive. Speaking
about the Ukrainian retail, its participants expect that due to
the amplifying competition many regional chains will have
to adjust their business – either to close down or put it for
sale. Trying to get additional funds for expansion many re-
tailers issue rated stock. Apart from bonded loans on the
domestic capital market retailers will obviously attract for-
eign investments. Minimum five national retail chains like
Furshet, Vekyka Kyshenya, Silpo, Amstor and PAKKO are
preparing for attracting funds via listing their stock abroad.
Top Retailers’ Development (Sales; LC; %)
www.chamber.ua
29
 III INTELLECTUAL PROPERTY RIGHTS
ENFORCING YOUR IP RIGHTS IN UKRAINE
By Magisters
www.magisters.com
Ukrainian legal system provides for standard set of instru-
ments on enforcement of intellectual property (IP) rights,
pretty the same as in the most developed countries.
The system includes civil, administrative and criminal
instruments allowing enforcement of IP rights. This
short review provides basic details on each option, its
pluses and minuses.
Civil option
Seems the most result-effective and at the same time
the most time and costs consuming option.
In order to enforce its IP rights one may apply to Ukrain-
ian courts. This could be commercial court (if the par-
ties are legal entities and/or private entrepreneurs),
general court (if at least one party is natural person) or
administrative court (if main respondent is state author-
ity, which is rare).
General limitation period for applying to the court is 3
years, since claimant has become aware or should have
become aware of infringement of his rights/interests.
The court action is filed to respective local court in re-
gion/district where one of respondents has its regis-
tered office, or where IP rights were infringed.
Court fees are relatively small: about USD 50 if cancel-
lation or infringement cease action, and 1% of dam-
ages claim but no more than USD 300 (if to general
courts) or USD 4,000 (if to commercial courts).
During the case review (and in commercial procedure
even before filing an action) the court may issue an
order on interim measures prohibiting counterparty(s)
proceed with certain actions, if such actions may com-
plicate execution of future court decision. For instance
this could be prohibition to sell goods marked by dis-
puted trademark, stop advertisement campaign, prohi-
bition to transfer rights for disputed trademark, make
certain changes to state registers concerning trade-
marks, pharmaceuticals, domains’ registers etc. In
30 Uniting Leading Companies from over 50 Nations Across the Globe
practice such prohibiting orders are well executed by
counterparty(s), which are legal entities, since of pos-
sible criminal sanctions for non-execution.
Almost in all cases concerning IP rights court expertise is
necessary, for instance to decide on similarity of trade-
marks, whether the invention was actually used by re-
spondent etc. The expertise and court expert are appoint-
ed by the court. Expertise is usually paid by the party who
is interested in further review of the case, since without
payment the expert will not proceed with the expertise. The
law does not provide for time limitations and in practice
expertise may take considerable time: from 6 months in
simple matters and up to 1,5 years for complex matters.
Court expertise is one of the reasons why IP court cas-
es are reviewed for unreasonably long time. Another
reason is procedural means for different formal delays,
which can be used by the parties.
Administrative option
Police, Tax Inspection, State IP Inspectors
Ukrainian legislation provides for administrative sanc-
tions for illegal use of IP rights. The sanctions are ap-
plied if damages caused by infringement are not sig-
nificant. The sanctions include fine up to USD 550,
seizure of counterfeited goods and equipment used for
its production.
Limitation period for applying the sanctions is 3 months
after IP rights were infringed.
Competent authorities to identify infringement are local
police (mostly), tax inspection (during general company
tax audit) and state IP inspectors (in practice, only in
regard of CDs/DVDs), who detect the infringement,
produce respective protocol and submit to competent
local court. The court reviews the case and decides on
the merits and sanctions applied.
It is worth to mention that this instrument has significant
weak place. The matter is that IP rights owner or its
representative should participate in the procedure,
otherwise the matter will be closed. Of course it is unreal for
local police to identify authorized owner’s representative
within the short limitation period. On the other side it could
be not effective for IP right owner representative visit local
police, courts etc. in order to cease small infringement.
This makes this instrument very rarely applicable.
AMC
Anti-Monopoly Committee (AMC) is state body au-
thorized to fight unfair competition. According to the
Ukrainian legislation unfair competition is any act of
competition contrary to honest practices in industrial or
commercial matters, including:
• all acts of such a nature as to create confusion by any
means whatever with the establishment, the goods, or
the industrial or commercial activities, of a competitor;
• false allegations in the course of trade of such a nature
as to discredit the establishment, the goods, or the in-
dustrial or commercial activities, of a competitor;
• indications or allegations the use of which in the
course of trade is liable to mislead the public as to
the nature, the manufacturing process, the character-
istics, the suitability for their purpose, or the quantity,
of the goods.
AMC can fine in the amount of 3% of all infringer’s
incomes for previous year. Limitation period for filing
application to AMC is 6 months after IP rights owner
became aware or should have become aware of in-
fringement of its rights. Filing application is free.
The weak side of this instrument is low power of AMC:
its decisions and interim measures could not be en-
forced without infringer’s consent. In order to enforce
its decision AMC should apply to the court and go
through full-scale litigation.
In addition any AMC decision can be appealed to the
court, which also provides for full-scale litigation.
Under such circumstances it is more reasonable to ap-
ply directly to court instead AMC with its unenforceable
and appealable decisions.
This makes AMC rare body resolving unfair competi-
tion matters.
Border measures
Ukrainian legislation provides for stop of counterfeit
goods imported to or exported out of Ukraine. State
body authorized to proceed with such measures is
State Customs service.
Counterfeited goods can be stopped if respective IP
rights were included in special customs register upon
IP rights owner request. Filing request is free, however
IP right owner usually should put EUR 5,000 on cus-
toms deposit to cover damages, if border measures
were applied mistakenly.
Customs authorities can also apply border measures
ex officio. However no one ever heard about respective
examples.
Moreover despite of numerous number of IP rights
put into the customs register for some reason stop of
counterfeit goods by the customs is very rear, although
counterfeit goods successfully reach Ukrainian market.
Criminal option
Ukrainian legislation provides for criminal liability for in-
fringement of IP rights and illegal collection and disclo-
sure of trade secrets, if damages are significant.
Criminal sanctions for such infringements are fines,
imprisonment, seize of counterfeited goods and equip-
ment used for its production.
Procedure for applying criminal sanctions includes 3
basic stages: investigation (police), pre-court exami-
nation (police or Prosecutor’s office) and court review
(three court instances).
Procedure starts upon application of IP rights owner,
whose rights were infringed. Filing application is free.
There are several weak sides in this option. The first is
that there should be clear evidences that infringer knew
that he infringes IP rights of specific IP rights owner. In
order to fulfill this requirement often IP rights owners
have to send warning letters to the infringer informing
on its rights.
Another weak side is too much authorities involved that
can control and cancel each other decisions. This pro-
vides a pile of procedural instruments for the infringer
to delay and drug the case.
Notwithstanding the above weak sides criminal option
is quite effective. People are afraid of possible criminal
liability and often even start of criminal investigation and
active police actions result in cease of infringement.
www.chamber.ua
31
 INFORMATION &
IV COMMUNICATION TECHNOLOGIES

SOFTWARE DEVELOPMENT MARKET IN 2008

By Microsoft Ukraine, LLC
www.microsoft.ua

1. General Market Information
Since declaring its independence in 1991, Ukraine has
faced many challenges. For the period following the col-
lapse of the Soviet Union, the economy suffered a rapid
decline. However, this trend has reversed itself and
Ukraine is now in a period of steady economic growth
and high annual real GDP growth. In 2008, Ukraine
joined the World Trade Organization and is making
progress toward implementing the economic reforms
necessary for integration with the European Union (EU),
although membership still remains a distant prospect.
Ukraine has showed significant progress over the last
5 years – 1400% total revenue growth and a fourfold
increase in salaries. Just five years ago, annual rev-
enues in Ukraine’s software development industry did
not exceed $50 million. In 2008 however, according to
High Tech Initiative’s estimate, the market generated
$700-800 million of revenue. The market is far from
saturation and growth levels are likely to remain high
for at least 2-3 years (more than 30% in 2008).

Ukraine is eager to capitalize on the opportunities of

the knowledge economy. Its plan includes developing
education systems, which will provide a framework for
training new talent, and the development of local soft-
ware and business communities that will create jobs
within the industry. The benefits of such a plan would
include economic growth, while becoming more attrac-
tive to foreign investors and safeguarding local industry
from global competition.

Ukraine’s economy is largely dominated by agriculture

and heavy industry, with a small Information Technol-
ogy (IT) sector. The country ranks lower than many of
its regional competitors at #70 in the World Economic
Forum’s 2007/8 Global Information Technology Readi-
ness Index and #73 in the Forum’s 2007/8 Global Com-
petitiveness, below both Poland and Hungary.
Although Ukraine still has a long way to go to be fully
equipped for the modern knowledge economy, its soft-
ware market is one of the most promising in CEE. It has
the advantage of using the experiences of developed
countries to avoid making early mistakes that are com-
mon in this developing industry. In 2007, it ranked #1 in
CEE in the speed of market growth, and #4 in IT market
volume (in capital) after Russia, Poland and the Czech
Republic. IT spending constituted 2.53% of the coun-
try’s GDP – above the global average of 2.5 per cent.
As is common with other emerging IT economies,
Ukraine has an undeveloped IT-services market.
Hardware spending far exceeds software. According to
IDC, overall spending in the Ukrainian IT market was
$2.8 billion in 2007, divided into hardware, software
and services at a ratio of 85% : 8% : 7% respectively.
Of the 8% spent on software, approximately 80% of
the market share belonged to international vendors –
Microsoft, Oracle, and SAP – and the remainder be-
longed to local software developers targeting the local
market.
This is evidence that Ukraine is at the beginning of the
traditional developmental cycle, as more mature mar-
kets evolve toward a – 60% : 20% : 20% ratio, and
typically local software developers hold a larger stake
in software spending.

32 Uniting Leading Companies from over 50 Nations Across the Globe

Developing markets, such as Ukraine, are often hard-
ware based for several reasons. Firstly, Ukraine has a
low level of PC access (about 13 PCs per 100 people in
2008) and consumers struggle with high inflation (24%
unofficially). Also, the Ukrainian market has the highest
level of piracy in the region (83%) and is noted for its
lack of state policy within the IT sphere. This actively
prevents growth and limits investments. Therefore,
sales of software and IT-services fall behind hardware
demand, creating a hardware-oriented market.
However, the market share of software is expected to
increase significantly, with spending expected to grow
by over 15 per cent per year. Despite the disparity
between hardware and software spending, more than
30% of the 72 000 Ukrainians working in IT are in soft-
ware-related employment. Currently the Ukrainian IT
market is actively consolidating as major local players
merge with international companies looking to expand
their local presence. Software development becomes a
viable business opportunity in smaller regional centers
and is no longer limited to a few large cities.
2. Main Market Trends
The economic downturn at the end of 2008 displayed
the strategic role of IT, triggering the resurgence of
infrastructure management programs, and stimulated
companies to seek integrated solutions that would help
in cost cutting and provide new opportunities for reve-
nue. Technologies like server virtualization that provide
savings on hardware and unify communications were
most in demand in 2008.
One of the main trends on the Ukrainian market was the
growth of internet access in all segments. The number
of Ukrainian internet users has grown to about 8.9 mil-
lion in 2008 up from 6 million in 2007 and 4 million in
2006. These numbers encourage development of web
software and online services.
Localization was another trend on the market – major
software vendors have presented products in Ukrain-
ian. This will not contribute greatly to their corporate
sales but is very important to supplying the public sec-
tor, academic institutions and the retail industry. This
trend is solid evidence of the growing interest by global
software leaders in Ukraine.
The corporate software market showed an annual
growth of 25%-30%, including $40-45 million in licens-
es. The total volume is estimated at double this after
taking into account supplementary consulting services
and personnel training. The growth of activity within the
Small and Medium Business sector (SMB) has been
another noticeable trend in 2008.
Retail box sales grew, but still constitute only a small
part of the total software sales volume. At the moment,
games represent more than half of box sales volume,
but the share of other software is growing.
Software development outsourcing which was very
positive for the Ukrainian economy in past years, has
started hampering market development. Compared to
its neighbors like the Czech Republic, Poland and Rus-
sia, the product development segment is a very small
part of the Ukrainian software development market,
and successful projects of individual companies proves
that there is potential.
In order for the market to develop, Ukraine needs to im-
plement the product model for software development
and focus on protection of intellectual property rights to
enable national companies to secure their profits.
Socially responsible activity has also been a trend in
2008. The market witnessed several major initiatives
addressing education and other social issues.
Major market players train personnel at their own edu-
cational institutions, and often form partnerships with
universities in Ukraine. This year Microsoft, in col-
laboration with Intel and Cisco Systems, opened the
Microsoft Innovation Center at the National Taras
Shevchenko University, Ukraine’s #1 University for
supplying students, academics and public sector staff
with development tools, providing free trainings and ex-
pertise and thus, helping to develop talents and foster
growth in the local software economy.
In 2008, the Coalition for Child safety online was
established by Microsoft in Ukraine with goals of uniting
NGOs, commercial organizations, state institutions,
including the Ministry of Internal Affairs, and public
figures.
This year the Coalition has launched several projects.
It began with the ‘On-landia’ web site, where children,
parents and teachers can learn the rules of safe inter-
net browsing. After the web site launch, the Coalition
organized a round table on child safety online to dis-
cuss and develop recommendations for parliament to
improve Ukrainian legislation toward better protection
of our children from incidents on the internet.
The Coalition also initiated a series of training programs
for schools to teach the rules of safe online work.
Another joint initiative on the market was the Best CIO
2008 contest supported by Microsoft, Intel, HP, SAP,
and Sun Microsystems. The contest chose the best
professionals among CIOs working in Ukrainian com-
panies. The contest was based on multiple criteria,
including the level of a company’s infrastructure, ef-
ficiency of their business solutions, IT management
excellence, and personal characteristics. Participants
were awarded in 10 industry nominations.
www.chamber.ua
33
 3. IT Services
As the Ukrainian IT market is still hardware-oriented,
the IT services market remains underdeveloped. The
IT services market in Ukraine ranks below that of its
major CEE competitors, but also displays the most po-
tential. Until recently, companies often did not under-
stand the value of IT services and were not willing to
pay for them. Today there is a much greater investment
in IT services, and the market is expected to burst in
the coming years.
According to some estimates, in 2007, the market value
of IT services (including outsourced software develop-
ment) was $0.9-$1 billion with a 25% growth compared
to 2006. The market was characterized by minimal po-
litical influence, as most customers were from the com-
mercial sector. Increased SMB influence has also been
a trend in 2008.
Outsourcing represents about 80 percent of software
development jobs in Ukraine. It includes anything from
integration jobs, to quality assurance, to conversion
projects. In 2007 compared to 2006, the outsourcing
market grew by 30% and amounted to $800 million.
This put Kyiv on the list of the Top 50 emerging out-
sourcing cities in the world, according to outsourcing
advisory firm Tholons. Of the Global Services top 100
offshore outsourcing companies in 2008, ‘SoftServe’
is a Ukrainian company and another five – DataArt,
Luxoft, EPAM Systems, GlobalLogic, and Exigen Serv-
ices – have their affiliations in Ukraine through acquisi-
tion of local development companies. The expansion of
this market continues and is considered another trend.
Another noticeable trend is the increasing interest of
major local IT-companies. Most expand their branch-
es, enter into strategic contracts and increase the level
of their IT service expertise. They aim to capitalize on
the market’s potential, but most lack the experience of
complex projects and only individual local companies
have accumulated enough experience to manage na-
tion-wide projects. Lack of qualified personnel and the
deficit of professional teams are the most prominent
deterrents of market development.
34 Uniting Leading Companies from over 50 Nations Across the Globe
IT consulting was one of the most dynamically grow-
ing market segments in 2007. Increasing numbers of
customers view these services as one of the key parts
of integrated IT-infrastructure optimization projects.
Unlike more developed IT markets, IT consulting serv-
ices constitute only 9-10% of the market and their costs
amount to only a small part of total project expenses.
This segment demonstrated a 30%-40% annual growth
in 2007, inspiring many companies to strengthen their
positions within the sector.
2008 also demonstrated an increase in the number of
purely consulting projects (i.e. IT-infrastructure and se-
curity audits). The consulting market will continue its
growth and is expected to increase its share in the total
IT services cost structure.
In 2008, customers showed the most demand for IT
services, which helped improve the IT departments’
efficiency, cut operating costs, managed risks, and
automated IT service management processes. Infra-
structure audits, network engineering, information life-
cycle management, implementation, virtualization, and
support of IT systems were among the most popular
services.
IT services customers were mainly comprised of com-
panies from industrial, financial and telecommunica-
tions sectors. Financial institutions like banks and in-
surance companies were the most active customers at
the beginning of 2008, but were overtaken by the retail,
machine manufacturing, primary and metallurgical in-
dustries.
In 2009, demand for IT services will be highest within
competitive sectors – retail, supply chain, financial,
and industrial. Geographically-distributed companies,
diversified holdings and financial industrial groups that
implement complex integrated applications for busi-
ness process automation are expected to show the
most interest in this market.
4. Developers Market
Ukraine is a unique country for software development.
Geographically, it is well placed, close to Russia and
Europe, and has substantial intellectual potential (e.g.,
in 2008, a Ukrainian student won the gold medal at the
annual Microsoft Imagine Cup international competi-
tion for young software developers).
Ukraine is in an exceptional position because it is
relatively small compared to larger markets like India,
Russia, China, and the United States, but has devel-
oped large numbers of exceptional programmers. The
Ukrainian population of professional software develop-
ers includes approximately 30 thousand profession-
als and another 5 thousand part-time employees and
interns. Of these workers, 80-85% are in outsourcing,
while the remaining 15-20% are evenly distributed be-
tween product development, and web development
and design.
Major investors in software development are larger in-
ternational companies that have more secured market
shares and outsource the development of their soft-
ware – Microsoft, SAP, Oracle, IBM, Adobe, and oth-
ers. Foreign companies come to Ukraine because of
the higher quality of work and lower wages, in compari-
son to the U.S. or Western Europe. These major inves-
tors represent about 85% of customers in the software
development market.
Microsoft is an important driver for software develop-
ment in Ukraine. IDC estimates that the Microsoft eco-
system – companies in Ukraine that sell products that
run with or on Microsoft software, or that service or dis-
tribute Microsoft software – employs 52 per cent of the
Ukrainian IT workforce and generates over 800 mil-
lion. IDC also estimates that for every 1 of Microsoft
revenue, the Microsoft ecosystem generates an addi-
tional 26 for other companies in the country.
When it comes to the most popular software design
and coding requests, the Microsoft Windows platform
dominates the Client side (95% of market share) which
leads to proliferation of Windows-oriented technolo-
gies. In the client-server sector, Microsoft .NET technol-
ogy and Java-based scenarios (with very limited pres-
ence of other technologies) have equal shares. Web
development occurs mainly on ASP.NET technologies,
Java- or JSP-related technologies and LAMP (Linux,
Apache, MySQL, PHP/Perl/Python) stack.
According to some estimates, .NET was the market
leader in 2008. This was also confirmed by job search
sites which showed that .NET developer vacancies
outscored Java developer vacancies by a ratio of 4:3.
Personnel stability was the most vital issue in 2008 and
will be for some time to come. Although Ukrainian state
universities generate about 11 thousand computer sci-
ence graduates and 19 thousand tech students with IT
skills, only a small percentage of them are qualified to
work in software development. This creates tough em-
ployer competition. The industry is marked with high
turnover rates, where on average people tend to change
employers every two to three years. Understanding
this, industry leaders attempt to use different strategies
to keep and develop the best talents, including raising
salaries, bonuses and social benefits packages. They
also offer a better work environment, support for pro-
fessional communities, and education at private institu-
tions or in partnership with national universities.
All these measures result in increased business expens-
es, therefore it is becoming more difficult for Ukrainian
developers to compete globally. In order for this indus-
try to develop and stabilize, the government needs to
ensure better intellectual property rights protection and
introduce special IT development programs.
5. Protection of Intellectual Property Rights
With an 83% piracy rate, Ukraine is continuously listed
as one of the Top 20 countries with the highest piracy
rates, according to the annual BSA and IDC global
software Piracy study 2007. Other countries include
Indonesia (84%), Pakistan (84%), Algeria (84%),
Cameroon (84%), China (82%), Bolivia (82%), Nigeria
(82%), as well as other African, South American, and
Asian countries. But Ukraine has improved 5 points in
5 years. Experts consider this improvement significant
and as recognition of the Ukrainian government’s ef-
forts in fighting piracy. The US Trade Representative
has moved Ukraine from the ‘priority watch list’ to the
‘watch list’.
Yet the problem of IPR protection in the field of soft-
ware still remains acute. State institutions widely use
counterfeit and pirated software. If executive branch
central organs have software legislation programs that
are at least partly supported, the situation in regional
and district administrations is much more complicated.
This problem has deep roots in different social and
economic segments.
First of all, this is a “painful” budget issue. Each year,
due to the high piracy levels, the Ukrainian economy
does not receive the tax revenue that would be gen-
erated by the sale of licensed software. According to
IDC, in 2003-2008, Ukraine was owed $1.178 bln in
taxes. There is also a disturbing 5 year trend emerg-
ing of decreased use of pirated software and increased
financial losses.
Secondly, use of counterfeit and pirated software un-
dermines security of information. More than 50% of
computers in government institutions have counterfeit
and pirated software installed. Such software does not
guarantee full protection of information from various in-
trusions that may include viruses and hackers. Experts
also note limited functionality of these computers. For
example, these computers cannot use such features as
free software updates and are not able to download ad-
ditional services that may be needed for the software.
Thirdly, using counterfeit and pirated software is ille-
gal according to Ukrainian legislation, as well as inter-
national treaties signed by Ukraine when it joined the
WTO. The State guarantees the freedom and protection
of IPR, including those for software. The administrative
code of Ukraine provides administrative and criminal
responsibility for violation of IPR, including distribution
and ownership of counterfeit and pirated software. Re-
cent amendments to the Code also provide obligatory
elimination of such software.
www.chamber.ua
35
 The Ukrainian software industry is a fast growing glo-
bal market that develops slowly and unsystematically.
The country is an importer of software and a lot of soft-
ware development is outsourced. It is not profitable for
national software companies to develop software prod-
ucts for the Ukrainian market and distribute it widely; it
is considered more attractive to work with international
software vendors. The main reasons are the same:
weak protection of IPR and lack of awareness of the
threats caused by the use of counterfeit and pirated
software.
According to experts from the National Academy of
Sciences of Ukraine, the country has a lot of technical
potential as well as qualified personnel needed for the
successful development of the IT industry. Every year
leading Ukrainian technical universities train thousands
of qualified IT specialists who are as skilled and quali-
SAAS (SOFTWARE-AS-A-SERVICE) IN UKRAINE
By WorldAPP, Inc.
www.worldapp.com
Why Bother SaaS ?
SaaS (software-as-a-service) being on a hype in United
States and Europe is still a new, even unknown product
for Ukrainian B2B technology buyer. You can search
the net for all types of definitions of what SaaS is and
find mostly technical one. Still the ever-growing popu-
larity of SaaS products are explained not by tech-fash-
ion, but by clear business indicator: SaaS is a tool that
allows leveraging the corporate resources smart way.
All your typical software, be it individual like word
processing or corporate like CRM, help desk, call
center or data collection, can be delivered using SaaS
models and with considerably lower price tag. Anyone
with access to a browser can use SaaS products. Be-
cause they are web-hosted, there is nothing to down-
load, nothing to install, no maintenance and no admin-
istration.
For any business manager it means that you
can skip the lengthy and costly deployment and
installation process and you do not need to make
any capital investments into the hardware, user
licenses or seats. The only price you pay is a
subscription fee and you can start using the tools
right away. The obvious benefit for SaaS-provider is
that subscription fee has to be paid every year. Still
even across several years it is usually considerably
lower that traditional software licensees, because
36 Uniting Leading Companies from over 50 Nations Across the Globe
fied as their Western colleagues. For many however,
their potential remains unrealized because the State
does not provide favourable conditions for national IT
industry development.
Finally, the absence of proper IPR protection resulted in
a particular international image of Ukraine. The country
is associated with an unfavorable business climate and
poor development conditions for businesses related to
intellectual properties.
The list of sectors with counterfeit and pirated software
problems is not comprehensive. It is certainly enough
to consider the exceptionally high piracy rate of 83%
as an urgent problem requiring nationwide attention.
Unfortunately, the government has not paid enough at-
tention. The situation requires systematic and planned
resolution on a state level.
all SaaS application are built using multi-tenant
back-end, where one applications serves hundreds
or thousands of customers. So SaaS providers are
leveraging enormous economies of scale in the
deployment, management, support and through the
Software Development Lifecycle allowing end-user
enjoy a much lower cost of ownership.
Other distinctions of SaaS products are scalability and
interoperability. Running on providers’ hosted servers,
there is no limit to how many users, how many proc-
esses, applications or whatever else you may need.
More over, as many SaaS products are built with inter-
operability in mind they can seamlessly integrate with
your current and legacy IT systems, including other
SaaS products. This in turn opens enormous capabili-
ties to change, adjust and improve business processes
without the need to build form scratch.
The added benefit for most SaaS product is ubiquitous
free trial – it is like a software test-drive with no obliga-
tion to buy. Usually the free trial period is long enough
to properly evaluate several products available at the
market and make the right purchase.
SaaS benefits
So, long thing said short SaaS products have a set of
districts benefits and advantages compared to tradi-
tional software.
• Lower Costs - the corporate buyer does not need to
pay a single (usually large) license fee. He only needs
to pay recurring (usually lower) subscription fees. He
also does not have to inverts into hardware, addition-
al IT resources and maintenance.
• Accessibility – all the end user need is a web-brows-
er, so the corporate buyer doesn’t have to worry as to
how many installation he has to purchase and how to
manage them assuming regular employee turn-over.
No matter the number of location in the country or
around the world they conveniently use one and the
same application.
• Scalability – corporate buyer don’t have to worry
about picking the wrong license of paying for users he
don’t have. The end-user need not store software or
data stored on his computer so he doesn’t need large
data storage facilities. There is also the convenience
of not needing to constantly backup data - storage is
the responsibility of the SaaS provider. The applica-
tion growth with your business and provides corpo-
rate buyers an easy way to control expenses
• Integration Capabilities – SaaS products can seam-
lessly integrate with current and legacy IT systems,
including other SaaS products. This in turn opens
enormous capabilities to change, adjust and improve
business processes without the need to build form
scratch.
• Fewer Personnel – SaaS reduces the need in IT per-
sonnel. Because it is web-hosted, there is nothing to
download, nothing to install, no maintenance and no
administration. The SaaS vendor provider will handle
these tasks.
• Free-Trial – most SaaS applications come with a free
“test-drive” period so you can try before you buy en-
suring that you make the smart purchase.
SaaS in Ukraine
When we start talking about SaaS in Ukraine the obvious
fact is that the market is only emerging. It is explained
by the fact that the initial development of SaaS market
worldwide was driven by small and medium businesses
(SMB) needs, who became its early adopters.
In United States as well as in Europe it was SMBs that
being more flexible and in dire need of spending their
resources smart, embraced the SaaS products. Then
came the departmental-level buyers from corporate
sector who were choosing SaaS products, because
the associated costs were low enough not to be run
through lengthy approval procedures. And only during
the couple of the last years, major buyers are engaged
into buying SaaS products on a corporate level.
In Ukraine the situation is determined by the fact that
the overall penetration of IT technologies (including
internet) is 4 to 6 years behind United States, for ex-
ample. The biggest deference is about the fact that
Ukrainian SMBs are not aware of it:
• “traditional” IT mistrust – as customers data resides
on SaaS vendor servers, many potential customers
just do not trust it;
• lack of awareness – SaaS advantages are about low-
er cost of software ownership, availability, scalability
and business process optimization – issues still dis-
regarded by many Ukrainian SMB;
• low level of IT skills – a lot of SMB personnel are not
confident computer-users, less so internet technology
users;
• price – domestic SaaS solutions are almost non-
existent, and the price for others maybe too high for a
local SMB especially if combined with lack of localized
versions and thus potential language barrier.
Still, this vision is not pessimistic. It is just indicative
on the current level of IT technologies penetration in
Ukraine. So the first task any SaaS vendor will face is
the need to nurture awareness and prepare the market.
The most expected early buyers are departments of
major companies or consultant companies serving
them. Couple of SaaS products can be purchased
locally even now, for example, Microsoft product on
SaaS model, presented by ISS (saas.com.ua) or online
survey software presented by WorldAPP Ukraine
(worldapp.com.ua). Still, the second major wave of
SaaS products is highly unlikely to happen before
2010-2011.
Survey software as SaaS or customer and
employee retention is ever-important
Given the current economic situation worldwide, data
collection, form and survey applications based on
SaaS model become a lucrative product for both SMBs
and corporate buyers.
Besides evident SaaS advantages described above,
these tools can solve a couple of other major challeng-
es faced by the business today.
Customer retention – with all the advertising and mar-
keting budgets being cut, and customers cutting their
expenses the will known saying that “it is cheaper to
keep an existing customer than to find new one” gains
even more weight. Customer retention often depends
on the quality of customer service. The better you in-
teract, the more customers you keep. However, every
time you fail to meet a customer’s expectations, you
lose business. With online survey tools, you will ob-
tain feedback in a timely and efficient manner. You will
www.chamber.ua
37
 know what you do well and how you can improve. As
a result, you can make instantaneous decisions that
keep your customers coming back for more.
Employee retention – however many employees you
have, it is vital to efficiently find out what they think. On-
line survey tool not only gives you a means to gather
all kinds of information; it helps you focus on what is
valuable and relevant. Dynamic, web-based employ-
ee surveys now play an increasingly important role in
both larger and medium-sized companies. Distributing
employee surveys online has proven superior to other
forms of survey deployment for one major reason: in
online surveys, people express themselves more freely
because they have complete anonymity.
Data collection solutions on SaaS model
WorldAPP, the leader in web-based data collection
technologies, markets web based applications for col-
lecting, managing and leveraging data throughout the
enterprise.
WorldAPP`s flagship product - Key Survey is an intelligent
survey technology that’s help businesses worldwide to
automate the online data collection process and ensure
complete accuracy. Its intuitive user interface enables an-
yone to create and administer professional-looking online
surveys.
Key Survey enables you to create, manage, deploy, and
dynamically manipulate your surveys in just about any
way imaginable. You can customize your respondents’ ex-
perience using logic transitions, set-up workflow alerts to
improve reaction and launch personalized e-mail invitation
and e-mail reminders to improve response rates. You can
access survey results real-time and generate customized
reports and analysis on demand.
WorldAPP designed Key Survey multi-user solutions to
meet the administrative challenges of the large enter-
prise while retaining its renowned user-friendly interface.
38 Uniting Leading Companies from over 50 Nations Across the Globe
In addition, Key Survey delivers the power of workflow
with workgroups where you define user roles and assign
permissions for certain functions and access levels.
Key Survey offers a set of integration opportunities that
will allow leading businesses worldwide to build new
processes around online data collection. This is the
next successful step in product evolution towards the
SaaS 2.0 model.
In 2001, WorldAPP entered the online survey software
market with the SaaS 1.0 ready tool, which offers the
following key attributes:
• An optimized process of online data collection.
• It is easy to use and allows really fast roll-out because
no learning curve is involved.
• No IT skills are required for use.
• It has rich functionality, which extends its use beyond
just online surveys.
• It has been configurable and has had flexible customi-
zation for application, integration, security, and per-
mission-based access.
“From the very beginning our goal was to develop more
than just an online survey tool. We wanted to provide
our users with an instrument that would change the
way they collect online data,” said WorldAPP CEO
Cal Brown. “The recently announced Salesforce and
QlikView integration which is available out of the box is
a clear indication of the direction we are moving in.”
With all the robust application and data integration ca-
pabilities, along with improved workflow, Key Survey is
heading towards the SaaS 2.0 model. Now Key Survey
users can go beyond improving existing data collection
processes - they can start building new ones around
the technology available.
 V CUSTOMS REGULATION
CUSTOMS AUDITS OF BUSINESS ENTITIES IN THE CONTEXT
OF WTO ACCESSION
By PricewaterhouseCoopers
www.pwc.com/ua
On 16 May 2008 Ukraine became the 152nd member
of the World Trade Organisation. This event greatly im-
pacted Ukraine’s customs regulations as follows:
• Customs processing fees were abolished (except for
overtime and off-location customs clearance fees);
• Significant reduction of customs duties for a number
of goods (reduction of an average duty from 21%
to 10.66% for agricultural goods and from 6.7% to
4.95% for industrial goods);
• Reduced duty rate of duty will apply to goods originat-
ing from 151 WTO countries. Previously there were
about 80 countries whose goods were subject to re-
duced duties;
• Export duties for certain goods were reduced.
All these factors are likely to result in a drop in customs
duties and taxes collected by the customs authorities
during the customs clearance of goods. According to
Mr. Valery Khoroshkovsky, the Chairman of the State
Customs Service of Ukraine, by the end of 2008 the
authorities will have lost roughly UAH 4 bln in duties to
the state budget as a result of accession.
Furthermore, the recent economic slowdown will re-
duce imports into Ukraine. According to the customs
authorities in the first half of October 2008 imports of
goods into Ukraine was reduced by 40%.
It is clear that the WTO accession combined with the
global economic slowdown means that the customs au-
thorities will be collecting less duties and taxes. Hence,
they will be seeking additional ways of compensating
this. One method for this is likely to be a more extensive
use of customs audits of importers.
Below we analyse whether the customs authorities are
ready to audit the importers; the legal basis for this;
how customs audits are carried out; and how audit pro-
cedures could be further improved.
General outlook
The customs authorities have had the right to audit
business entities from 1998. However, they started
the detailed audits only in early 2004 (before this there
were occasional audits). Recent developments of cus-
toms legislation indicate that within the next few years
the customs authorities will conduct regular and more
frequent customs audits of business entities. This
means that the customs authorities will gradually shift
their focus from maximum customs control during cus-
toms clearance procedures to customs control after
goods are released. In the short term, it is likely that the
customs authorities will actively pursue customs audits
and apply penalties wherever possible.
The customs authorities need to further develop cus-
toms audits to verify the customs value of imported
goods. The 2004 Customs Code of Ukraine introduced
a new definition of customs value which serves as the
basis for levying customs duties and VAT upon the cus-
toms clearance of goods. Since 2004, the Ukrainian
definition of a customs value (with later amendments)
has been based on the provisions of the Agreement on
Implementation of Article VII of the GATT. Upon WTO
accession Ukraine committed to honour this Agree-
ment. These provisions allow importers to adjust cus-
toms values for various costs.
A customs audit will check whether the importer cor-
rectly determined the customs value by including cer-
tain costs (e.g. royalties, assists, etc.) in the dutiable
value. In many cases verification may only be possible
through reviewing the importer’s accounting records
after customs clearance of goods, as this data is not
available during customs clearance.
Right to customs audit: legislation
In 1998 the President of Ukraine authorised the customs
authorities to carry out audits of business entities. Howev-
er, wide-scale audits were not implemented due to the lack
of relevant procedures and the authorities’ inexperience.
www.chamber.ua
39
 Ukraine’s Law “On Payment of Taxes” of 21 December
2000, No. 2181-III, appointed customs the controlling
authority responsible for the collection of customs du-
ties and other taxes (excise tax and VAT) paid during
imports of goods. The law explicitly established that the
controlling authorities (including customs authorities)
were entitled to audit tax payment.
However, until the introduction of the 2004 Customs
Code, the rights of the customs authorities when con-
ducting customs audits were still vague. The customs
authorities were empowered to audit business entities,
but the customs doctrine recognised that customs con-
trol end with the release of goods into free circulation.
The customs authorities did not have the status of law
enforcement authorities and thus their ability to con-
duct post-entry audits was disputable.
The 2004 Customs Code established that customs
control may be performed after the customs authori-
ties released goods into free circulation, if there were
sufficient grounds to conclude that there were infringe-
ments of law. The Customs Code also permitted the
customs authorities to check business entities’ records
with respect to goods moved across the border.
In 2004 the government passed a resolution defining
the primary rights of the customs authorities when con-
ducting customs audits. It also determined the grounds
for scheduled and unscheduled customs audits.
To enhance their capacities, in 2004 the tax and customs
authorities issued regulations on joint procedures for au-
diting business entities. Then, in 2005 the government
passed a resolution that required that the tax and customs
authorities to further coordinate audits of business entities.
Finally, in 2006 the customs authorities approved reg-
ulations that stipulated the procedure for undertaking
customs audits.
Current status of customs audits
Since 2003 there has been a specific unit within the cus-
toms authorities responsible for post-entry audits – the
Central Bureau of Risks Analysis and Audit. Between
2005 and 2007 this unit developed into the Department
of Risks Analysis and Audit further renamed into the
Department of Analytical Work and Informational Moni-
toring. Furthermore, similar units were created in each
customs office.
The procedures for customs audits are as follows:
• The customs authorities plan scheduled customs
audits quarterly. Scheduled audits can last up to 30
days and the customs authorities may audit a busi-
ness entity once a year.
40 Uniting Leading Companies from over 50 Nations Across the Globe
• Unscheduled customs audits may be carried out at
random, e.g. if the customs authorities obtains facts
that indicate a business entity has violated the cus-
toms law. Unscheduled customs audits can last for
unlimited period of time. Court decisions are not re-
quired for unscheduled customs audits (as opposed
to unscheduled tax audits).
• The customs authorities need to inform business
entities about scheduled audits 10 calendar days in
advance. No advance notification is required for un-
scheduled customs audits.
• A customs officer must have written authorisation to
carry out a customs audit. The Head of the customs
office should approve the order outlining the scope of
the customs audit.
• During a customs audit, the customs authorities have
wide powers. Specifically, they may:
check financial and accounting documents and
records, including electronic information in pos-
session of the business entity;
inspect manufacturing, warehousing, commer-
cial and other premises;
measure volume of construction, erection, repair
and other works, conduct analysis of raw materi-
als, etc.;
obtain explanations and copies of documents
and other data related to computation and pay-
ment of taxes.
• The customs authorities prepare an act (report) at the
end of the customs audit, which should be signed by
the customs officers and the chief officials of the au-
dited business entity.
Specific areas that the authorities have focused on
elsewhere and are expected to focus on in Ukraine in-
clude:
• Potential adjustment of customs values of goods for
transportation costs, which may be added to or de-
ducted from the customs value;
• Revealing cases where in-kind contributions to capi-
tal of Ukrainian legal entities or joint-ventures were
disposed of during a 3-year period. If this happens,
the customs duty for which exemption was granted
during import should be paid;
• Reviewing toll manufacturing transactions. For this,
the customs authorities examine whether exemptions
from taxes were correctly applied to the raw materials
imported for processing;
• Inclusion of royalties in the customs value of imported
goods;
• Verifying whether exemptions from customs duties
and taxes were correctly applied on imported goods.
We anticipate that during future customs audits, the
customs authorities will also review:
• Classifications of imported goods. They will specifi-
cally focus on cases where revised tariff codes would
attract higher customs duties and VAT;
• Country of origin of imported goods, especially in cas-
es where the goods were imported free of customs
duty under Free Trade Agreements;
• Inclusion artwork, design, engineering works into cus-
toms value of imported goods ;
• Verifying prices of imported goods between related
entities and revealing whether relations could impact
the customs values of imported goods.
There are a number of circumstances that may pre-
vent the further development of customs audits in the
short term. These circumstances include the lack of
experience of the customs authorities in carrying out
audits and the lack of experienced personnel who may
be involved in the audits. Nevertheless, it is likely that
within the next year or two “real” audits will become
common.
Further development of customs audit procedures
In 2006 Ukraine joined the Protocol of Amendment
to the International Convention on the simplification
and harmonisation of customs procedures (Kyoto
Convention)1. The Kyoto Convention aims at introduc-
ing a more rapid customs clearance of goods through
the use of information technology and new techniques
for customs control, such as risk assessment and au-
dit-based control. The Convention defines “audit-based
control” as measures by which the customs authorities
satisfy themselves as to the accuracy and authenticity
of declarations through the examination of the relevant
books, records, business systems and commercial
data held by persons concerned (i.e., importers).
The customs authorities are now reviewing the customs
legislation to bring it into compliance with the require-
ments of the Kyoto Convention. Based on this review,
they are proposing a number of amendments to the
current Customs Code.
The draft Customs Code, which now is under the
Verkhovna Rada’s consideration, incorporates a
detailed section on customs audits of business
entities. In particular, the customs authorities would
be entitled to:
1 The Law of Ukraine “On the Accession of Ukraine to the Protocol of Amendment to the International Convention on the simplification and
harmonisation of customs procedures” of 5 October 2006, No. 227-V.
• Verify payment of customs duty and import taxes;
• Verify the entitlement of importers to tax exemptions;
• Verify correct classification of goods for customs
purposes;
• Verify if there were sufficient legal grounds for
importing goods.
In addition to existing powers, the draft Code envis-
ages that the customs authorities would be authorised
to carry out customs cross-audits. This would mean
that the customs office may audit any business entity
that had any business relations with the entity that im-
ported/exported goods. The customs authorities would
carry out cross-audits without prior notification of the
business entities. Currently the customs authorities oc-
casionally perform cross-audits, although there are no
sufficient grounds for this. The draft Code would pro-
vide legal grounds for cross-audits.
Conclusion
Currently there are sufficient legislative grounds for the
customs authorities to carry out customs audits. The
customs authorities occasionally use these rights and
audit business entities, though with a limited scope.
As their skill improves, the customs authorities will car-
ry out customs audits more frequently and extend the
scope of these audits. The Kyoto Convention also en-
visages customs audits and the authorities will develop
audits in order to comply with the Convention. Moreo-
ver, the Kyoto Convention strives to facilitate customs
control during customs clearance, meaning that certain
portion of customs control will move to a post-entry re-
view period. The Ukrainian customs authorities will fol-
low these guidelines.
The reduction of customs duties after WTO accession
and the decrease of imports, due to the economic slow-
down, will force the authorities to actively seek other
methods of increasing state revenues. In this regard,
the customs authorities may use customs audits to ver-
ify importers’ past compliance with customs regulations
and assess additional duties and taxes. Thus, compli-
ance issues are growing more important than ever.
We would recommend that importers analyse customs
procedures, identify risky areas and develop defence
files (if needed). This particularly relates to entities that
pay royalties on imported goods, carry out toll manu-
facturing, purchase goods from related entities, import
goods under free trade agreements or enjoy tax prefer-
ences. Finally, a thorough customs review by external
advisors is recommended.
www.chamber.ua
41
 VI INVESTMENT POLICY
FOREIGN INVESTMENT: REGULATORY ISSUES
By Baker & McKenzie – CIS, Limited
www.bakernet.com
Ukrainian legislation provides that (with some few ex-
ceptions) foreign investors are authorized to carry out
their investment activities in Ukraine on the same basis
as Ukrainian domestic investors. This relates to the
types of investments, the available investment vehi-
cles, and the investment targets.
1. Laws on Foreign Investment
The Law of Ukraine On Investment Activity, adopted on
18 September 1991, establishes the general principles
for investment activity on the territory of Ukraine, irre-
spective of the nationality of the investor. The particu-
larities of making foreign investments in Ukraine are
regulated by the following key laws and regulations:
• Law of Ukraine On the Regime of Foreign Investment
(the Foreign Investment Law), adopted on 19 March
1996;
• Law of Ukraine On the Protection of Foreign Investment
(the Investment Protection Law), adopted on 10 Sep-
tember 1991;
• Resolution of the Cabinet of Ministers On the Proce-
dure for the State Registration of Foreign Investment
(the Investment Registration Resolution), adopted on
7 August 1996;
• Resolution of the National Bank of Ukraine On Regula-
tion of Foreign Investing in Ukraine (the Foreign Invest-
ing Resolution), adopted on 10 August 2005;
Under the Foreign Investment Law, the term “foreign
investment” refers to all forms of value invested by
foreign investors into objects of investment activity in
accordance with the applicable Ukrainian legislation
for purposes of obtaining profits or achieving social ef-
fects. Such broad definition, however, makes unclear
if certain types of investment activities can be deter-
mined as foreign investment.
42 Uniting Leading Companies from over 50 Nations Across the Globe
Pursuant to the Commercial Code and the Foreign In-
vestment Law, any Ukrainian company will qualify as
an “enterprise with foreign investment” if foreign invest-
ments in its charter fund amount to at least 10%.
Foreign investors are entitled to certain privileges and
guarantees under the Foreign Investment Law, provided
that their investments have been duly registered with
the appropriate local state authorities under the terms
and conditions of Investment Registration Resolution.
The registration is not mandatory, but does enable
investors to use privileges and guarantees set forth
by the legislation. Such privileges and guarantees in-
clude, inter alia, the following:
• Protection Against Changes in Legislation: foreign
investors are guaranteed protection against changes
in the foreign investment legislation for a period of
ten years, although certain changes in other areas of
Ukrainian legislation and their implementation have,
in fact, limited the applicability of the above guarantee
to changes in Ukrainian legislation on matters relating
to nationalization, expropriation, and similar matters;
• Protection Against Nationalization: foreign invest-
ments may not be nationalized. State bodies may not
expropriate foreign investments, with the exception of
emergency measures (such as national disasters, ac-
cidents, epidemics, etc.) and then only on the basis
of decisions of bodies authorized to that effect by the
Cabinet of Ministers of Ukraine;
• Guarantee for Compensation and Reimbursement
of Losses: foreign investors have the right to be re-
imbursed for their losses, including lost profits and
moral damages incurred as a result of the actions,
the failure to act, or the improper performance on the
part of state or municipal bodies of Ukraine or their of-
ficials with regard to their obligations owed to foreign
investors or enterprises with foreign investment as
required by law. All expenses and losses of foreign
 investors must be reimbursed at the current market
rate and/or on the basis of a well-founded valuation
certified by an independent auditor or auditing firm;
• Guarantee in the Event of the Termination of Invest-
ment Activity: foreign investors are guaranteed the
right to remit their revenues and to withdraw their in-
vestments from Ukraine free from export duties within
six months from the termination of their investment
activity; and
• Guarantee of Repatriation of Profits: after the pay-
ment of taxes, duties, and other mandatory pay-
ments, foreign investors are guaranteed the right to
the unimpeded and immediate transfer abroad of all
profits and other proceeds in foreign currency legally
earned as a result of their investment activity.
The Foreign Investment Law also extends certain privi-
leges to “enterprises with foreign investments.” The
latter are exempt from paying import duties on their
foreign investors’ in-kind contributions to their charter
funds (except for goods for sale or goods provided for
such enterprises’ own consumption). However, in the
event that the corresponding assets are sold or oth-
erwise disposed of by such enterprises within three
years from the date of their respective contributions to
their charter funds (including in the event of the termi-
nation of the activities of such enterprises), then the
enterprises will be required to pay the applicable im-
port duty in full on the aggregate value of the alienated
assets.
Two categories of restrictions apply to foreign invest-
ment activity in Ukraine. The first relates to general
restrictions on investment activity, which are applied
both to foreign and domestic investors. Under the
Ukrainian law, certain types of business activity may
be pursued only by state-owned enterprises (e.g., the
rocketry industry, the production of bio-ethanol, ban-
knotes, blank forms of securities in certificated form,
etc.).
The second category relates to certain restrictions ap-
plicable only to foreign investors. Principally, such re-
strictions represent the legally established threshold on
the maximum permissible percentage of foreign invest-
ment in the charter fund of a Ukrainian enterprise doing
business in a particular industry. The number of such
restricted industries is extremely limited and is expect-
ed to decrease even further. For instance, such restric-
tions currently apply to the publishing business – the
share of foreign investors’ participation in an Ukrainian
publishing house is limited to 30%. In addition, foreign
citizens and legal entities are prohibited from owning
agricultural land in Ukraine, and are authorized to own
only land designated for non-agricultural use, under the
Land Code.
2. Foreign Investment Execution, Repatriation and
Registration Procedure
A foreign investor may make a cash contribution to a
Ukrainian legal entity either through special investment
accounts opened by the foreign investor with a Ukrainian
commercial bank or by transferring funds from abroad
directly to the bank account of its Ukrainian subsidiary.
Generally, foreign investors have the following options
when making portfolio investments or direct investments
into Ukraine:
• To transfer funds in foreign currency from abroad to
a bank account of a resident in Ukraine (in case of
portfolio investments, this would be a current bank
account of a licensed Ukrainian securities trader);
• To open an investment bank account in Ukraine and
to transfer funds in foreign currency from abroad to
this investment account;
• To transfer funds in foreign currency from an invest-
ment account opened at a Ukrainian commercial
bank to current bank account of a Ukrainian resident
(in case of portfolio investments, this would be a bank
account of a licensed Ukrainian securities trader);
• To convert funds in foreign currency kept in an invest-
ment account at a Ukrainian commercial bank into
Ukrainian currency for further direct investment (this
applies only to direct investment); and
• To transfer funds in Ukrainian currency received as
profits, interest, and other proceeds from investment
activity in Ukraine from an investment account to a
current bank account of a resident (in the case of
portfolio investment, this would be a current bank ac-
count of a licensed Ukrainian securities trader).
Under the Foreign Investing Resolution, any foreign in-
vestor may repatriate portfolio investments or direct in-
vestments and profits received on such investments in
Ukraine through any of the following options:
• To transfer foreign currency funds to the foreign bank
account of the foreign investor from the current bank
account in foreign currency of the Ukrainian resident
(under direct foreign investment only, provided that the
investment was initially transferred to a current bank
account in foreign currency of the Ukrainian resident);
• To transfer foreign currency funds to the investment bank
account of the foreign investor in Ukraine from the cur-
rent bank account in foreign currency of the Ukrainian
resident (under direct foreign investment only, provided
that the investment was initially transferred to the invest-
ment bank account of the foreign investor in Ukraine);
www.chamber.ua
43
 • To transfer foreign currency funds to the foreign bank
account of the foreign investor from the current bank
account in foreign currency of the licensed Ukrainian
securities trader (under portfolio foreign investment
only, provided that the investment was initially trans-
ferred to the current bank account in foreign currency
of the licensed Ukrainian securities trader);
• To transfer foreign currency funds to the investment
bank account of the foreign investor in Ukraine from
the current bank account in foreign currency of the
licensed Ukrainian securities trader (under portfolio
foreign investment only, provided that the investment
was initially transferred to the investment bank ac-
count of the foreign investor in Ukraine);
• To transfer Ukrainian currency funds from the current
bank account in Ukrainian currency of the Ukrainian
resident to the investment bank account of the foreign
investor in Ukraine for the purpose of further reinvest-
ment in Ukraine; and
• To transfer Ukrainian/foreign currency funds from
the investment bank account of foreign investor in
Ukraine to the investment bank account of another
foreign investor in Ukraine for the purpose of pay-
ment for the investment object in Ukraine.
The repatriation of foreign currency investments pro-
ceeds may be subject to certain additional requirements
related to the foreign currency purchase in Ukraine
when investment proceeds are received in Ukrainian
currency. In particular, to be able to purchase foreign
currency for purposes of repatriation, a foreign inves-
tor should have a set of specific documents ready for
submission to its servicing bank in Ukraine who will be
purchasing foreign currency for such an investor. In
particular, the principal documents that investor should
have include, inter alia: (a) a copy of the information
notification on registration of foreign investment, (b) a
notarized copy of the investment (sale and purchase)
agreement, (c) and the confirmation of the Ukrain-
ian bank certifying receipt of investment amount in
Ukraine.
Foreign investors are not required to obtain an individual
license of the National Bank of Ukraine for using funds
in foreign currency as means of payment on the territory
of Ukraine when transferring funds in foreign currency
from their investment accounts opened with Ukrainian
commercial banks to bank accounts of Ukrainian resi-
dents for the payment for objects of investment.
Foreign investors also may make foreign currency in-
vestment deposits with Ukrainian commercial banks.
However, the current procedures for such investment
deposits have some discrepancies and the key regula-
tions governing such deposits were recently challenged
at the local court.
44 Uniting Leading Companies from over 50 Nations Across the Globe
Depending on where the foreign investment activity
may be deemed to be economically concentrated, the
foreign investment may be voluntary registered with the
regional (oblast) state administration, the state adminis-
tration of the Cities of Kyiv or Sevastopol, or the gov-
ernment of the Autonomous Republic of Crimea. The
registration of a foreign investment must be affected
in the course of three business days following the sub-
mission of the required set of registration documents.
In order for a foreign investment to be registered, an
investor or its authorized representative is required to
submit the following documents to the relevant regis-
tration body: an informational notification of the foreign
investment confirmed by the local state tax administra-
tion; documents certifying the form of the foreign invest-
ment (e.g. copies of the constituent documents of the
Ukrainian company into which the foreign investment is
made, or a copy of a joint activity agreement, a conces-
sion agreement, etc.); documents evidencing the value
of the foreign investment; and documents evidencing
the payment of the state registration fee.
The registration of a foreign investment may be denied
only in the event of the violation of the established reg-
istration procedure. The denial of the registration of a
foreign investment must be documented in written form
and must specify the reasons for such denial. The de-
nial may be challenged in court.
3. Divestiture
The Foreign Investment Law provides that, in the event
of the termination of its investment activity, a foreign
investor has the right, within six months from the date
of the termination of such activity, to recover its invest-
ment in-kind or in the currency of the investment in the
amount of the actual contribution (taking into account
any possible reduction of the charter fund), without the
payment of any fees or duties. A foreign investor has
the right to recover the benefits from its investments in
cash or in-kind on the basis of the actual market value
of the investment at the moment of the termination of
the investment activity, unless otherwise stipulated
by the applicable Ukrainian legislation or international
agreements to which Ukraine is a party.
4. Investment Incentives
All enterprises with foreign investment are taxed on
their profits on a par with other Ukrainian domestic en-
terprises, with the exception of certain state guarantees
for foreign investments, and the duty-free import of in-
kind contributions to charter funds of enterprises with
foreign investment (see Section 1 above). The Foreign
Investment Law also contemplates the possibility of the
establishment of a priority regime with respect to cer-
tain projects with the participation of foreign investors,
which will be implemented pursuant to state programs
promoting key sectors of the economy, the social
sphere, and territories.
In addition, free economic zones may be created under
the Ukrainian law. The legal status of foreign invest-
ments into such zones is regulated by separate leg-
islation on free economic zones, under which foreign
investors may be granted additional privileges and
benefits.
5. Dispute Resolution
In the event of a dispute arising with respect to a for-
eign investment, a foreign investor may seek recourse
through a number of institutions.
As a general matter, the Foreign Investment Law pro-
vides that a dispute arising between a foreign investor
and the state of Ukraine must be settled in the Ukrain-
ian courts, unless otherwise provided by international
treaties, while all other disputes involving a foreign
investor must be settled in the Ukrainian courts or in
courts of arbitration (including international arbitration
courts).
Furthermore, the Law of Ukraine On Foreign Economic
Activity (the LFEA), allows the parties to a commercial
dispute to select a forum for its resolution. In accordance
with Article 38 of the LFEA, disputes between parties re-
garding foreign economic activity may be resolved by:
the Ukrainian courts; the International Commercial Ar-
bitration Court or the Maritime Arbitration Commission
of the Chamber of Commerce and Industry of Ukraine;
or other bodies of dispute resolution chosen by the par-
ties to the dispute. In addition, the Law of Ukraine On
the International Commercial Arbitration Court (the Law On
International Arbitration) specifically provides that both
foreign investors and Ukrainian enterprises with foreign
investment have the right to resolve disputes between
themselves and third parties in international commercial
arbitration courts.
However, the Law of Ukraine On International Private Law
assigns certain disputes within exclusive competence
of Ukrainian courts. Such disputes include, inter alia,
disputes related to the issuance the securities, regis-
tered in Ukraine and disputes relating to real estate ob-
jects located in Ukraine.
6. Investment Treaties
Ukraine is currently a signatory to Treaties on the Mutual
Protection of Foreign Investments with various countries,
including:
Albania (effectiveness pending); Argentina; Armenia;
Austria; Azerbaijan; Belarus; Bosnia and Herzegovi-
na; Brunei; Bulgaria; Canada; Chile; China; Croatia;
Cuba; The Czech Republic; Denmark; Egypt; Estonia;
Finland; France; Gambia; Georgia; Germany; Greece;
Hungary; India; Indonesia; Iran; Israel; Italy; Jordan;
Kazakhstan; Korea; Kuwait; Kyrgyzstan; Latvia; Leba-
non; Libya; Lithuania; Macedonia; Moldova; Mongo-
lia; Morocco; The Netherlands; Oman (effectiveness
pending); Panama; Poland; Portugal (effectiveness
pending); The Russian Federation; Saudi Arabia (ef-
fectiveness pending); Singapore; Slovakia; Slovenia;
Spain; Sweden; Switzerland; Syria; Tajikistan; Turkey;
Turkmenistan; The United Arab Emirates; The United
Kingdom; The United States of America; Uzbekistan;
Vietnam; Yemen; and Yugoslavia.
Ukraine has also signed the Treaty on Partnership and
Cooperation between Ukraine and the European Union.
www.chamber.ua
45
 OVERVIEW OF UKRAINIAN MARKET
OF INVESTMENT FUNDS
By OTP Capital
www.otpcapital.com.ua

History and Market Structure
Market of Investment Funds is one of the youngest and
the most fast growing financial sector in Ukraine. First
Investment Companies and Investment Funds were es-
tablished after adopting of the Decree of the President
of Ukraine “On Investment funds and investment com-
panies” in 1994 aimed to support the process of mass
privatization. They did not accumulate investors’ mon-
ey for further investing aimed to gain investment profit.
Real Investment Funds appeared in Ukraine lately after
adopting the Law of Ukraine “On institutes of mutual
investment (mutual and corporate investment funds)”
which together with the Law of Ukraine “On securities
market state regulation in Ukraine” defined principles
of functioning and infrastructure of Ukrainian Market of
Investment Funds which includes:
SSMSC to provide asset management activity. Since
that time Market of Investment Funds in Ukraine has
been demonstrating significant growth year to year
considering both the number of Asset Management
Companies and Investment Funds and the volume of
assets accumulated in them.
As of the 1st of July 2008 the number of Asset Man-
agement Companies has increased to 394 and number
of Investment Funds ran up 1086.
Dynamics of Asset Management Companies and
Investment Funds

• Securities and Stock Market State Commission (SSM-

SC) that carries out forming and insures provisions of
the single state policy concerning development and
functioning of securities and derivatives market in
Ukraine and also co-ordination of State Authorities’
activities in the sphere mentioned above. SSMSC
provides licenses to participants of Stock Market and
controls their activity;
Source: UAIB
• Ukrainian Association of Investment Business (UAIB)
is a voluntary non-governmental non-profit organi- The volume of assets accumulated in Investment
zation that in 2002 got the status of a self-regulated Funds has been growing rapidly (in average by 145%
organization that unites Asset Management Compa- per year) and as of the 1st of July 2008 has achieved
nies. Presently it is the only self-regulated organiza- UAH 45.7 bn.
tion on the Stock Market which exercises the functions
of pre-licensing preparation for Asset Management Investment Funds Net Asset Value Dynamics
Companies;

• Asset Management Companies that establish Invest-

ment Funds and manage its assets for the purpose of
gaining investment income. The obligatory condition
for providing of such activity is obtaining license from
SSMSC.

Key Developments

In 2003 first Asset Management Companies and In-

vestment Funds that are acting according to the Law
of Ukraine “On institutes of mutual investment (mutual
and corporate investment funds)” obtained licenses of Source: UAIB

46 Uniting Leading Companies from over 50 Nations Across the Globe

Role of Venture and Public Investment Funds
According to Ukrainian legislation seven types of In-
vestment Funds could be created by Asset Manage-
ment Companies in Ukraine including five types that
could be offered to individual investors:
venture funds are not Mutual Investment Funds in tra-
ditional understanding as they have limited list of inves-
tors, assets for investments and time-defined terms.
Structure of Asset Management in Investment
Funds by the Types of Funds

1. Mutual Investment Funds:

• Open-end funds (for both individual and corporate in-

vestors)

• Interval funds (for both individual and corporate investors)

• Close-end diversified funds (for both individual and

corporate investors)
Source: UAIB
• Close-end non-diversified funds (for corporate inves-
tors only)
Little weight of public Investment Funds is substantially
caused by absence of investment traditions in Ukraine.
• Venture funds (for corporate investors only)
First Investment funds for individuals appeared in 2003.
Because of short investment story, taxation of invest-
2. Corporate Investment Funds:
ment income (unlike deposits) and low level of knowl-
edge about Stock market among population, individual
• Close-end non-diversified funds (for both individual
investors demonstrate low activity in the sphere of mu-
and corporate investors)
tual investments. Situation is complicated by memories
about “trust funds scandals in 90s”. People prefer clas-
• Venture funds (for corporate investors only)
sical banking deposits which guarantee return of mon-
ey and ensure fix non-taxable income. Asset Manage-
One of the peculiarities of Ukrainian Investment Funds
ment Companies which are oriented to work with public
Market is dominance of venture funds. Legal entities
funds provide active enlightening work with population
which have mutual financial interests take part in the
aimed to popularize Investment Funds. Substantial aid
projects aimed to invest money into securities of affili-
is provided by UAIB – self-regulating organization con-
ate companies, real estate and trade projects etc. As
solidated participants of Ukrainian Market of Investment
of the 1st of October 2008 weight of venture funds as-
Funds. As a result – every year increases both number
sets achieved 92.5% of the whole assets accumulated
of public Investment Funds and volume of assets un-
in Investment Funds. By the one hand creating of such
der their management. Moreover correlation between
type of funds influences positively on the economy of
assets invested by individuals in Investment funds and
Ukraine seeing return of significant amounts of money
banking deposits has been changing constantly show-
from off-shore countries and financing it to the number
ing growing interest of population to mutual investing.
of high-profitable industries. By the other hand Ukrainian

Dynamics of correlation between assets invested by individuals in investment funds and banking
deposits

01.04.2006 01.01.2007 01.10.2007

01.01.2006
Volume of Increase Volume of Increase Volume of Increase
assets, UAH since assets, UAH since assets, UAH since
mln 01.01.2006 mln 01.01.2006 mln 01.01.2006

Volume of assets in-

vested by individuals in a 73201.77 117300 +60.24% 106885 +46.01% 141227 +92.93%
deposits, UAH mln
Volume of assets
invested by individuals
b 48.48 563.417 +1062.16% 473.588 +876.87% 1222.51 +2421.68%
in invested funds, UAH
mln
Correlation ( a/b) c 1510 208 - 226 - 116 -
Source: UAIB

www.chamber.ua
47
 Certainly it requires more than some years of active
work with population to achieve structure of savings dis-
tribution character for population of developed countries.
However active creation of new public Investment Funds
even in 2008 year (during the global financial crisis)
shows serious plans of market players to realize signifi-
cant potential of domestic Market of Investment Funds.
Insurance Companies are also very important target
audience for Asset Management Companies. Their co-
operation can cover direct participation of Insurance
Companies in Investment Funds, managing of assets
accumulated in insurance reserves by Asset Manage-
ment Companies and creation of unit-linked products.
Unlike in developed countries Insurance Companies
gain the biggest part of their income from investments, in
Ukraine investment activity of Insurance Business is still
low. However market players, in particular companies
that belong to international financial groups, supported
by UAIB intend to develop co-operation between Asset
Management and Insurance Companies understanding
mutual benefits and perspectives of such partnership.
Regional Structure
Almost 70% of Investment Funds in Ukraine are cre-
ated in Kiev and Kiev region and accumulate 75% of all
invested assets. Also in other big Ukrainian cities such
as Dnepropetrovsk, Kharkov, Donetsk and Zaporozh’e
which are important industrial centers, Investment
Funds are developing actively.
Number of Investment Funds by the Regions
Source: UAIB
Volume of Assets Accumulated in Investment
Funds by the Regions
Source: UAIB
48 Uniting Leading Companies from over 50 Nations Across the Globe
In 2007-2008 Asset Management Companies paid a lot of
attention to the issue of development of regional sales net-
work to make Investment Funds available for Ukrainians
in all regions. This process is supported by Asset Man-
agement Companies which are created by Ukrainian sub-
sidiaries of international banks which represent interests of
international financial-banking groups, have wide regional
branch network and influence positively to the develop-
ment of Investment Funds. Using experience and technol-
ogies of their mother companies such Asset Management
Companies introduce to the Ukrainian market high profes-
sional asset management and investment service.
Non- State Pension Funds
Development of Non-State Pension Funds is also very
important for further development of Ukrainian Stock
Market and Investment Funds Market. According to the
Law of Ukraine”On the General Mandatory State Pension
Insurance” and the Law of Ukraine “On Non-State Pen-
sion Provision” that were adopted in 2003 pension provi-
sion in Ukraine will be covered by three-level system:
• the first level covers general mandatory state pension
insurance;
• the second level is a part of the system of general
mandatory state pension insurance and based on the
principle of accumulating and further investing pen-
sion contributions;
• the third level stipulates voluntary participation of indi-
viduals, employers and their associations in pension
formations in addition to Mandatory State Pension In-
surance aimed to provide additional pension pay-out
and investment income.
The first and third levels of abovementioned system
are already working. The second level is planned to be
launched in 2009 and it is expected that approximately
UAH 1.5 – 3.0 bn will be accumulated by Non-State
Pension Funds during the first year only. This could
significantly increase the volume of investments in real
economy of Ukraine through the Stock Market. As of
the 1st of July 2008 in Ukraine were registered 103
Non-State Pension Funds and the volume of assets
accumulated in such funds ran up to UAH 278 mln.
Assets Accumulated in Non-State Pension Funds,
UAH mln.
Source: UAIB
Outlook
Liberalization of legislation which governs activity of in-
vestment Funds is a key issue for further development
of Investment Funds Market. Last changes to the Law
of Ukraine “On institutes of mutual investment (mu-
tual and corporate investment funds)” were provided
in 2005. Stock market has been changed significantly
since that time as well as Investment Funds Market.
Fast growth of Investment Funds number, populariza-
tion of investment products among population, coming
of new players including international groups to the mar-
ket influenced on the vision of perspectives. Necessity
to ensure gradual liberalization of existing legislation is
evident. Now Asset Management Companies are strict-
ly limited in regard to the range of financial instruments
available for them to diversify investment funds portfo-
lios. Financial crisis demonstrated that too strict limita-
tions of diversification established to safe interests of
investors on the young fast-growing stock market don’t
work on the falling market. During the crisis period so
called “money market funds” could be really interesting
for investors as such funds have better possibility to
save investor’s capital from negative influence of falling
equity market. In September proposal to make related
changes in the Law of Ukraine “On institutes of mutual
investment (mutual and corporate investment funds)”
was accepted by Verkhovna Rada of Ukraine in the first
reading. All players are waiting for the second reading
as according to this proposal diversified funds can in-
vest all money to the fixed income assets (e.g. bonds
and deposits) and decrease risk level on investments.
One more key issue is an absence of possibility to
invest money into foreign securities. Firstly, National
Depository System doesn’t let custodians to set up
correspondence relationships with representatives of
foreign Depository systems. Secondly, currency legis-
lation requires obtain a separate license from Nation-
al Bank of Ukraine for every transaction of purchase
securities issued by foreign issuers. Moreover, there
is additional requirements to purchase only securities
which are admitted to trading on as minimum two from
five leading world Stock Exchanges that significantly
limits list of foreign securities available for Ukrainian In-
vestment Funds.
All market players hope that changes to the Law of
Ukraine “On institutes of mutual investment (mutual
and corporate investment funds)” will be adopted as
soon as possible. They intend to continue active work
aimed to develop and improve legislative base and in-
frastructure of Investment Funds Market realizing con-
siderable potential of Ukraine in this sphere. Ukraine
offers significant possibilities for both domestic and
foreign investors. Ukrainian stocks look very promis-
ing and have good upside regarding prices and growth
potential.
www.chamber.ua
49
 VII LABOR & EMPLOYMENT
DISMISSAL: LEGAL ASPECTS AND PROSPECTS
By AstapovLawyers International Law Group
www.astapovlawyers.com
The Center for Research on Globalization is entirely
convinced that the financial crisis of 2008 is the larg-
est financial failure since the Great Depression. Begun
in the United States, it spread rapidly worldwide. The
crisis of 2008 adversely affected national economies in
general and businesses in particular.
Therefore, the International Labour Organization (ILO)
predicts mass dismissals to continue up to the end of
2009. Currently, Ukrainian companies are suffering the
first losses. In order to survive a number of companies
have started a wave of dismissals. Metallurgy, machinery
and chemical production have already suffered the staff
redundancy. According to the ILO forecast, the wave
of dismissals may have the most effect on tourism,
construction and financial sectors of economy.
At the same time, to prevent even greater losses in the fu-
ture the employers should act in full accord with the Ukrain-
ian labour legislation. For this purpose we provide a brief
overview of the legal aspects of dismissal according to the
applicable legislation and the prospects which will come
into force according to the draft Labour Code of Ukraine.
The basic legislation on dismissals includes the following:
• The Labour Code of Ukraine of 10 December 1971;
• The Law of Ukraine “On Joint-Stock Companies” of
17 September 2008.
Legal Reasons to Terminate Labour Relations
Article 36 of the Labour Code of Ukraine establishes
a comprehensive list of the reasons for employment
agreement termination. However, it is more natural to
classify such legal reasons in the following way:
• employment agreement termination;
• mutual agreement of the parties (employer and em-
ployee);
50 Uniting Leading Companies from over 50 Nations Across the Globe
• dismissal;
• resignation;
• other reasons independent of the parties’ will.
Article 40 of the Labour Code of Ukraine contains gen-
eral provisions to dismiss an employee. Relevant provi-
sions are expected to be implemented in a new Labour
Code of Ukraine. Moreover, the list of reasons is ex-
pected to be added (Table: Reasons of Dismissal).
Currently, the most usual reasons for dismissals are
the staff redundancy, inconsistency with the job, failure
to properly perform employment duties. But one should
bear in mind that these reasons for dismissals are not
valid during the period of an employee’s temporary dis-
ability and/or his/her being on leave.
Staff Redundancy
Staff redundancy shall be affected by issuing of an ad-
ministrative order on staff redundancy. According to the
applicable legislation, an employer shall give the two
months personal notice to employees to be reduced. At
the same time the employer shall offer such employees
another job in the company.
If the employee refuses the offer and/or the company
is unable to offer an adequate job, the employer shall
notify the public employment service of the prospective
staff redundancy, including, inter alia, jobs, qualifica-
tions and salaries.
Moreover, when employing staff redundancy the em-
ployer shall take into consideration the priority right to
stay at work set forth by Article 42 of the Labour Code
Ukraine.
Furthermore, the draft Labour Code of Ukraine is ex-
pected to implement a new regulation on protection
of the employees’ right. This provision would ensure
avoiding mass dismissals for a redundancy reason.
Thus, the employer would have to counteract staff re-
dundancy by means of:
• limitation or termination of hiring new employees;
• limitation of overtime work and/or work on holiday;
• work suspension of a legal entity or its departments
with a vacation without or with partial payment for a
period not exceeding two months;
• establishment of a part-time work, but not less then
a half-time, for a legal entity or its departments for a
period not exceeding six months;
• step-by-step staff redundancy;
• providing opportunities to study, retraining or raising
skills etc.
For all that it is necessary to remember that the redun-
dant employees must be paid two months loss-of-em-
ployment compensation.
Inconsistency with the Job
According to the applicable legislation, an employee
may be dismissed for inconsistency with the job due to:
• insufficient qualification;
• health condition;
• suspension of the state secrecy clearance if the latter
is required to perform duties.
It is expected that Article 105 of the draft Labour Code
of Ukraine will provide for “revocation of driving license”
instead of current wording “suspension of the state se-
crecy clearance”.
When dismissing an employee for insufficient qualifica-
tion the employer shall take into account that this reason
should be supported by evidence. Thus, the evidence
may include a staff report on untimely accomplishment
of assignments, poor performance of the duties, wrong
decisions as well as the employee certification results.
It is necessary to point out that the draft Labour Code
provides for establishment of the certification proce-
dure, and the certification will be carried out not more
than once in three years. To carry out the employee
certification the administration shall issue an order on
regular certification, and the employees shall be noti-
fied thereof at least two months before the certification.
Then, a certifying commission (participation of a trade
union representative therein is mandatory) develops a
list of questions for the certification purposes. The em-
ployees should be made aware of the list no later than
a month before the certification.
Recommendations of the certifying commission may in-
clude the necessity of the professional development of
an employee, raising of the salary or raising the skills. It
is worth mentioning that the dismissal of an employee
due to the insufficient qualification may become effec-
tive within two months since the date the relevant deci-
sion of the certifying commission has been announced.
Also the draft Labour Code will contain provisions on
the categories of employees exempted from certifica-
tion, inter alia:
• employees holding their positions for the period less
than one year;
• pregnant women;
• employees who have children under three or a disabled
child;
• under-age individuals;
• employees elected or promoted to the respective position;
• employees reinstated after a court decision for the
period of one year.
Failure to Properly Perform Employment Duties
In the event of dismissal due to failure to properly per-
form employment duties it is necessary to fix the re-
spective failure in a staff report. In this regard the em-
ployee who committed the breach is required to furnish
a note of explanation. If the employee refuses to furnish
such explanation this fact shall be reflected in the rel-
evant statement that shall be drawn up and certified by
two employees. After that a dismissal order is issued.
It is necessary to remember that in order to have legal
grounds to dismiss an employee due to regular failure
to perform employment duties at least two notices or
reprimands on failure to perform employment duties
should be issued to the employee during the period of
one year.
* dismissal of particular categories of employees
The cases of failure to properly perform employment du-
ties listed above (Chart 1), may serve as legal grounds
to dismiss each category of employees. However,
some categories of employees fall under the following
special dismissal reasons singled out by the law:
• culpable actions of the employee whose work is di-
rectly related to money facilities and commodity if
these actions entailed loss of trust of the employer;
• immoral behaviour of the employee performing edu-
cation-related duties;
• single gross breach of the employment duties by
some categories of employees.
The list contained in the draft Labour Code is supple-
mented by the following provisions:
• breach of the state secret, disclosure of commercial
or other information protected by the law (provided
the non-disclosure obligation is signed).
* dismissal of a director
Discussing special dismissal reasons it is necessary
to cover a delicate issue of dismissing a directory of a
legal entity.
According to the applicable labour legislation, a director
www.chamber.ua
51
 of the company may be dismissed for the following
reasons:
• single gross breach of the employment duties;
• wrongful acts resulting either in non-payment of sal-
ary or payment of salary at the lower rates than mini-
mum wage as defined by the law.
According to the draft Labour Code, one more reason
to dismiss a board of directors is the violation of the
rights of the company founders or members by a direc-
tor or members of the board of directors.
An important step forward was made by adopting the
Law of Ukraine “On Joint Stock Companies” of 17 Sep-
tember 2008 signed by the President of Ukraine on 22
October 2008. According to this Law, authorities of a
director or members of the board of directors of a joint
stock company may be terminated by a decision of the
supervisory board of the joint stock company.
At the same time, the joint stock company charter may
provide for termination of the authorities of a director
or members of the board of directors to the compe-
tence of the general meeting. In this case the supervi-
sory board may dismiss a director or chairman of the
board of directors whose acts or omissions violate the
rights of the shareholders or the company. However,
the supervisory board shall convene, within ten days,
the extraordinary general meeting which agenda shall
include election of a new director or chairman of the
board of directors.
Table: Reasons of Dismissal
52 Uniting Leading Companies from over 50 Nations Across the Globe
Alteration of Material Conditions of the
Employment Agreement
As in some cases employers are hesitant about em-
ploying redundancy they use alternative option to issue
order on alteration of material labour conditions. Thus,
according to the applicable labour legislation, the alter-
ation of the material labour conditions includes chang-
es in the system and amount of payment, privileges,
conditions of work, establishing or countermanding
a part-time working hours, combining of professions,
changing of grades and names of the positions etc. It
is necessary to remember that prior to changing labour
terms an employer shall give the two-month written no-
tice to an employee on the forthcoming changes.
Article 36.6 of the Labour Code of Ukraine provides for
the right of an employee to resign due to the change of
material labour conditions. At the same time, accord-
ing to the draft Labour Code, if an employee resigns
due to the change of material labour conditions, the
labour agreement shall be terminated for the reason of
redundancy.
Finally, it is necessary to add that in most cases em-
ployees are fired as a result of labour conflicts. There
is no doubt that each and every employer makes its
best endeavours to minimize risks related to dismissed
employee’s recourse to court or labour inspection. This
is why strict observance of law when dismissing is the
only right decision to avoid negative effects.
STAFF MANAGEMENT IN DISTRIBUTION COMPANIES
By Yug Contract Co., Ltd
www.yugcontract.ua
The 90ies of the last century may be considered as
the beginning of distribution market formation for dig-
ital products and consumer electronics, when the inde-
pendence proclamation of Ukraine stimulated develop-
ment of new forms for business activity.
At the same time, a new kind of specialists oriented on
new branch development began to form.
As of today, domestic market of digital products and
customer electronics is at the development stage ap-
proaching to worldwide principles of distribution busi-
ness practices.
The process of active branch development revealed
acute shortage of professional managers and special-
ists who are able to react immediately to changing mar-
ket and introduce innovative approaches in organiza-
tion management of the distributor company.
The existing problem of qualified staff can be solved in
two ways:
1. To involve professional managers and specialists on
contract conditions;
2. To form a strong team by means of investments in
development and career advancement of employees.
There is no doubt that to get a good specialist, sub-
stantially immediately, at first seems an ideal solution
of a problem, though one should no forget that contract
work conditions have temporary character, whereas
the development of actual staff is truly good investment
for the future.
Distribution is a specific business in which successful
work of all company is directly related to each employ-
ee’s contribution, their perception and appreciation of
a company, desire to implement their skills in common
goal achievement.
That is to say that distributor companies claiming to
be successful in this business should necessarily pay
attention to formation of positive microclimate inside a
company and straightening of thought-out work with
staff.
Investment in personnel development and formation of
really strong team, oriented on one common goal, is an
ongoing process that has no time frame.
Yug Contract Company began to form its team as far
back as 14 years ago, virtually from the date of its
foundation in 1994, and a few years later this team
transformed Yug Contract from a small enterprise into
a nationwide Company.
Certainly, a continuous work on strategy formation for
personnel development and its implementation in prac-
tice preceded this transformation.
For the moment one can single out six basic principals
of staff management in Yug Contract Company:
1. Democratic approach to solution of any problem and
openness of Сompany’s managers to innovative
ideas and elaborations of each employee;
2. Existence of project and working groups for discus-
sion and implementation of solutions;
3. Staff management in balance with degree of free-
dom for each employee within their own activity and
level of personal responsibility for results;
4. Perception of a staff as the main Сompany’s value;
5. Maximally effective use of employees’ potential;
6. Open attitudes and confidence formation.
These principles are axiomatic only for Yug Contract
Company and surely may differ from those used by
other companies according to set goals and employees’
attitude to a company.
Readiness and willingness for advancement of a po-
tential employee, their expectations from a company
and as a result their future attitude to it can be already
defined on interview stage.
There is such marketing notion as “high market en-
trance barrier”, so the analogous barrier principle
should be used to entry any distributor company. Bar-
rier is a requirement to candidates for vacancies and
most of all to potential and willingness for development
together with a company.
www.chamber.ua
53
 For example in order to get an offer of appointment in
Yug Contract the Company has worked out some in-
terview stages that allow to learn about personal and
professional qualities of each candidate as much as
possible. All finalists for a position have a meeting with
Chief Executive of the Сompany in central office.
Such scheme of staff recruitment allows, on the one
hand, exclusion of a possibility to hire employees with
low responsibility level and lack of willingness for pro-
fessional development; and on the other hand, a posi-
tive attitude to the company and a desire to work ex-
actly in this team are already formed in candidates on
the interview stage.
The adaptation process of a new employee in a staff
group and responsibility area should become an impor-
tant factor in formation of a professional team member
for any distributor company.
This requires a special work scheme that should include
well-defined tasks for probationary period, appointed
curator of a new employee and the most important de-
tail – a framed atmosphere of the dialogue between an
employee, curator and HR-specialists.
In that case a new employee feels support and pos-
sibility to get an opinion that in its turn also increases
the loyalty level towards a distributor company on early
introduction stage.
It’s important for an employer to remember that to-
gether with development of an employee their vision of
professional future is also changed and this should be
revealed to correct a work process in time in order not
to lose a professional in whose training and advance-
ment сompany makes investments.
Therefore for instance a System of Performance As-
sessment was introduced in Yug Contract’s practices
trough which all Сompany’s staff goes twice a year.
Performance assessment and employee advancement
planning constitute a complex of measures aimed at:
1. Co-ordination for performance evaluation and de-
velopment tendencies of previous period between
employee and director;
2. Identification of requirements and content of meas-
ures for increase of professional level and perform-
ance according to current and future functions of an
employee;
54 Uniting Leading Companies from over 50 Nations Across the Globe
3. Adjustment of tasks and development plans for next
period;
4. Improvement of mutual understanding between em-
ployee and director, arrangement of conditions for the
most effective performance.
Such scheme of individual communication allows an
employee to clearly understand the ways of their further
advancement and new opportunities that lay before
them in accordance with their requests and Сompany’s
capabilities.
Along with employee development a distributor should
strengthen and advance a system of company’s man-
agement. Of course it required investments, though it
should be noted that only highly qualified manager is
able to generate innovative ideas for company’s busi-
ness development, to control their direction of work and
colleagues that are subordinate to them.
Therefore a special attention should be given to world
experience of distribution business conduct and lead-
ing business schools that hold trainings for managers
of distributor companies all over the world, including
Ukraine.
Thus Yug Contract became the first domestic company
that organized a corporate training in “coaching” style
delivered by Marilyn Atkinson, the President of Erick-
son College International (Canada).
Nikolay Fabro, the Chief Executive of Yug Contract
Company: “Coaching approach in management is a
powerful development tool for employees as well as for
directors. As any high-tech tool this one requires some
defined level of professional and personal compe-
tences. I think that professional level of our managers
allows adapting ideas and coaching tools for solution
of company’s development tasks. Along with universal
management programs, we try on a regular basis to
introduce to our directors different authors approaches
in management choosing those issues that correspond
as much as possible to our plans. Thus, we create a
unique management system – Yug Contract’s Man-
agement System”.
Contemporary digital products and consumer electronics
market in Ukraine changes increasingly applying world
business standards. Today staff becomes one of the main
competitive advantages of distributor companies. Highly
qualified professionals should be formed inside any dis-
tributor company without fear to invest in the future.
VIII LEGAL SYSTEM OVERVIEW
DISPUTE RESOLUTION IN UKRAINE
By Baker & McKenzie – CIS, Limited
www.bakernet.com

1. COURT STRUCTURE
The court system, consisting of the Constitutional
Court and the courts of general jurisdiction, exercises
independent judicial power in Ukraine.
The Constitutional Court is the highest and only judi-
cial body of constitutional jurisdiction. It has exclusive
jurisdiction over interpretation of the Constitution and
laws of Ukraine and acts as final arbiter on constitu-
tional issues. The Constitutional Court is comprised of
18 judges, appointed in equal proportions by the Presi-
dent, the Verkhovna Rada (the Ukrainian parliament)
and the Conference of Judges of Ukraine, with each
judge serving a single term of nine years.
Under the Constitution, the courts of general jurisdiction
are organized according to the principles of territoriality
and specialization and include three instances: (i) local
courts; (ii) appellate courts; and (iii) cassation courts.
Local courts consist of courts of general jurisdiction (in-
cluding military courts) and specialized courts (i.e. com-
mercial and administrative courts). Local courts of gen-
eral jurisdiction predominantly adjudicate civil and criminal
cases. Local commercial courts exercise jurisdiction over
disputes arising out of commercial and corporate rela-
tions, while local administrative courts administer justice in
disputes connected with legal relations in the area of state
government and municipalities (except military disputes).
The appellate instance courts are comprised of relevant
appellate courts, which review decisions and procedur-
al orders of the local courts. As a matter of rule, the
appellate review is carried out according to the rules of
reviewing cases by the courts of the first instance.

Graphically, the system of Ukrainian courts may be illustrated as follows:

(i) Cassation review of decisions SUPREME COURT OF UKRAINE

of courts of general jurisdiction;
(ii) “Second cassation” review
of commercial and corporate Civil Criminal Commercial Administra- Military
Third disputes. Chamber Chamber Chamber tive Chamber Collegium
Instance

Cassation review of commer- SUPREME SUPREME

cial and administrative cases, COMMERCIAL ADMINISTRATIVE
respectively. COURT COURT

Consideration of cases falling COURT OF APPEAL OF UKRAINE

within its jurisdiction in order of (consisting of Criminal and Military
appeal. Chambers)
Second
Instance
APPELATE COURTS APPELATE APPELATE
Consideration of cases in order
OF GENERAL COMMERCIAL ADMINISTRATIVE
of appeal.
JURISDICTION COURTS COURTS

LOCAL COURTS OF LOCAL LOCAL

First
Initial consideration of cases. GENERAL JURIS- COMMERCIAL ADMINISTRATIVE
Instance
DICTION COURTS COURTS

www.chamber.ua
55
 Cassation supervision is carried out by the Supreme
Court of Ukraine (for courts of general jurisdiction) and
relevant Supreme Courts of special jurisdiction (for
commercial and administrative courts). Also, in cer-
tain cases identified by procedural rules, the “second
cassation” review by the Supreme Court of Ukraine is
available in commercial and corporate disputes.
Since Ukraine is a civil law country, the exercise of judi-
cial power is based solely on the application of statutes.
Court decisions do not constitute binding precedents,
although decisions by the Supreme Court of Ukraine
and the Supreme Commercial Court are summarized,
in order to introduce uniformity to the interpretation and
application of the applicable legislation, and are fol-
lowed by the lower courts on a quasi-mandatory basis.
2. JURISDICTION AND VENUE
Commercial courts of Ukraine will accept jurisdiction
over disputes between legal entities, including foreign
legal entities, Ukrainian legal entities and individual en-
trepreneurs, arising out of the conclusion, modification,
termination and performance of commercial agree-
ments (including privatization). Commercial courts
are also in charge of administering bankruptcy cases
of legal entities and certain cases initiated by the An-
timonopoly Committee of Ukraine and the Accounting
Chamber.
According to recent changes, the commercial courts of
Ukraine administer justice in disputes arising out of cor-
porate governance, including those involving physical
persons. Such cases include disputes between a legal
entity and its present or former participant (as well as
disputes between participants of a legal entity) related
to foundation, activity, administration and cessation of
such legal entity, except for labor disputes.
It should be noted that, currently, administrative courts
adjudicate disputes with the subjects of sovereign au-
thority regarding challenging their decisions, actions
or inactions, as well as some other cases related to
sphere of public law. Thus, the administrative courts
are currently handling tax, customs, and certain anti-
monopoly disputes which previously used to be under
jurisdiction of commercial courts.
Under the Commercial Procedure Code, normally, the
court venue is determined following the territorial prin-
ciple. As a general rule, the disputes are adjudicated by
the commercial court at the place of location of the de-
fendant (in bankruptcy cases, of the debtor). The cases
for conclusion, modification, termination or recognition
as null and void of agreements are considered by the
court at the location of a debtor party to such agree-
ment (i.e. a party under obligation to provide services,
transfer property, etc.).
56 Uniting Leading Companies from over 50 Nations Across the Globe
Exclusive venue is established for disputes involving
title to real estate property, illegal use of real estate
property or removal of obstacles to use real estate
property (i.e. by the court at the location of such prop-
erty), disputes arising out of transportation agreements
(i.e. by the court at the location of transportation body),
or where the defendant is a central governmental au-
thority or certain state secret is involved (i.e. by the
Kyiv City Commercial Court).
3. COMMERCIAL LITIGATION IN UKRAINE
(a) Initial Review of Cases
To defend substantive rights in a business-related dis-
pute, a foreign or Ukrainian legal entity or individual en-
trepreneur may apply to an appropriate Ukrainian court.
A legal entity’s/individual’s right to apply to a Ukrainian
court may not be waived by contract, even by an arbi-
tration agreement between the parties. If an arbitration
agreement exists between the parties, the party object-
ing to the dispute’s review by a Ukrainian court must
raise such objection in the relevant court proceeding
before hearing of the case on the merits; otherwise, the
court will accept jurisdiction and will proceed to review
the dispute and to render a judgment.
Currently, there are specialized commercial courts that ex-
ist within the system of courts of general jurisdiction (hos-
podarski sudy). Any business-related dispute between
business entities (including individual entrepreneurs) will
be reviewed by the commercial court having jurisdiction
over the location of the respondent. As a rule, a commer-
cial court will not accept jurisdiction over a dispute involv-
ing a foreign respondent that has no registered presence
in Ukraine. In general, there are no limitations (including
monetary limits) on the jurisdiction of the commercial
courts other than specialization and territorial factors.
If at least one party to the commercial dispute is a
physical person who is not an individual entrepreneur,
the commercial dispute will be adjudicated in local
courts of general jurisdiction with the applicable civil
procedure rules (i.e. unlike adjudication of the dispute
in the commercial court with applicable commercial
procedure rules). This rule, however, does not concern
corporate governance disputes, which are adjudicated
by the commercial courts regardless of the status of
the parties to such disputes.
The dispute is decided by rendering a judgment on the
merits of the case. The judgment must be executed in
writing and signed by the judge(s). As a rule, the judg-
ment may not adjudicate beyond the claims presented
by the party in its claim. However, the court may go
beyond the scope of the claim when it is necessary
to protect the rights of the plaintiff or third parties with
independent claims in the dispute.
The judgment is announced in the name of Ukraine and
contains a number of formal requisites prescribed by the
Commercial Procedure Code, including, inter alia, the
name of the court, the number of the case, the full names
of the parties to the proceedings and the name(s) of the
judge(s). The judgment must also contain a concise de-
scription of the claim and a statement of the defense,
motions and pleadings, and a description of actions con-
ducted by the court, which is followed by the reasoning of
the court, description of reviewed evidence and analysis
of the applicable law. At the conclusion of the judgment,
the court must state whether the claims of the plaintiff
have been satisfied or denied. The judgment must also
specify what the parties are obliged to do, the term dur-
ing which such actions must be completed, the amount
of money to be paid and other relevant details necessary
for prompt and expedient execution of the judgment.
The judgment is announced by the judge at end of the
hearing. Upon consent of the parties, the judge may an-
nounce only the introductory and operational parts of the
decision. In this case, the full text of the judgment shall
be prepared and signed by the judge within five days fol-
lowing the partial announcement of the judgment.
The judgment itself enters into force after ten days from
its full announcement (in case of announcement of in-
troductory and operational parts of the judgment – from
its signing), unless either party files an appeal against
the judgment within such period. Involuntary enforce-
ment of the effective judgment is possible after expira-
tion of the period provided by the enforcement authori-
ties for voluntary performance by the debtor.
Upon request of the parties, the court may render expla-
nations to the judgment without altering its substantive
content. The court may also eliminate obvious blunders
or mathematical errors.
(b) Appellate Review of Cases
A judgment that has not yet come into force and certain
court orders may be appealed to a relevant appellate
court. A party to a dispute may file an appeal within a
period of ten days from the date when the judgment/
order was signed. The filing of an appeal suspends ex-
ecution of the judgment, but does not necessarily sus-
pend effectiveness of the procedural order.
An appeal submission must be made in writing and
must identify the challenged judgment/order and the
grounds for its appeal.1 Appeal submissions are filed
with the commercial court of the first instance that ren-
dered the appealed judgment/order. The commercial
court of the first instance verifies compliance of the
appeal application with the formal requirements of the
Commercial Procedure Code and forwards it to a com-
petent appellate court for consideration.
1 The list of grounds for appeal is stipulated in the Commercial Procedure Code.
The appellate court reviews the dispute on the merits
according to the same rules of procedure as prescribed
by the Commercial Procedure Code for the courts of
the first instance, with the additional requirement that
no new claims may be considered on appeal. New evi-
dence is admitted at the appellate instance only if the
appellant proves that such evidence was not available
upon hearing of the dispute in the court of the first in-
stance. By its decision the appellate court may either (i)
reject the appeal and confirm the challenged judgment;
or may (ii) cancel the challenged judgment in full or in
part and render a new judgment; or may (iii) cancel
the challenged judgment in full or in part and stop the
proceedings, or leave the claim without consideration
completely or in part; or may (iv) change the judgment.
The appellate court must consider an appeal within two
months of receiving the appellate submission from the
commercial court of the first instance.
Resolutions of the appellate courts are effective imme-
diately upon their rendering and may be further chal-
lenged in the order of cassation review.
(c) Cassation Review of Cases
Cassation is recourse against final judgments of the
commercial courts of the first instance and resolutions
of the appellate courts. Cassation must be sought
within one month of entry into force of the challenged
judgment of the commercial court of the first instance
or resolution of the appellate court. Cassation may be
sought by the parties to the proceedings or by persons
who did not participate in the proceedings but whose
rights and obligations were affected by the challenged
judgment. The Supreme Commercial Court of Ukraine
reviews cassation complaints in commercial disputes.
The cassation court reviews the case on the basis of
the facts already established in the lower courts and
determines correctness of application of substantive
and procedural law provisions. The cassation court
does not review claims that were not considered by the
court of the first instance.
The cassation application must be executed in writing
and filed with the court that decided the matter. Such
court must then send the complaint accompanied by
the case file to the Supreme Commercial Court of
Ukraine.
Upon review, the cassation court may (i) reject the ap-
peal and confirm the challenged judgment/order; or
may (ii) cancel the challenged judgment in full or in
part and render a new judgment; or may (iii) cancel the
judgment of the court of the first instance and submit
the matter for new consideration; or may (iv) cancel the
challenged judgment in full or in part and terminate the
proceedings or leave the claim without consideration
www.chamber.ua
57
 completely or in part; or may (v) change the judgment
of the court of the first instance or order of the appellate
court; or may (vi) leave one of the previously rendered
judgments or orders in force.
Cassation review must be completed within two months
of receipt of the cassation submission by the Supreme
Commercial Court of Ukraine.
As a part of the cassation submission or by separate
motion, the parties may request the cassation court to
suspend execution of the court’s judgment that is being
reviewed.
(d) Second Cassation Review of Cases
Resolutions and orders of the Supreme Commercial
Court of Ukraine may be challenged to the Supreme
Court of Ukraine which accepts jurisdiction in cases
when (i) laws applied by the Supreme Commercial
Court of Ukraine do not correspond to the Constitution;
or when (ii) such resolutions or orders are contrary to
the decisions of the Supreme Court of Ukraine, the Su-
preme Commercial Court of Ukraine or the Supreme
Administrative Court of Ukraine; or when (iii) the Su-
preme Court of Ukraine establishes different applica-
tion of the same provision of the law by the Supreme
Commercial Court of Ukraine; or when (iv) such reso-
lutions or orders do not comply with the international
treaties of Ukraine; or when (v) the resolution or order
of the Supreme Commercial Court of Ukraine is recog-
nized by an international judicial institution as violating
the obligations of Ukraine.
Upon its review, the Supreme Court of Ukraine may (i)
confirm the challenged resolution or order; (ii) cancel
the resolution and return the case for new considera-
tion by the court of the first instance or cancel the or-
der and return the case for new consideration by the
Supreme Commercial Court of Ukraine; or (iii) cancel
the challenged resolution or order and terminate the
proceedings.
4. ENFORCEMENT PROCEEDINGS
(a) Ukrainian Court Judgments
Enforcement is a process whereby enforcement of court
judgments and other decisions subject to enforcement
is ensured. The Department of the State Enforcement
Service of the Ministry of Justice of Ukraine (the SES)
is a designated governmental agency that carries out
all necessary actions in connection with enforcement.
An enforcement writ must first be filed with SES before
the enforcement process can commence. An enforce-
ment writ is an official document issued by a competent
authority in a prescribed form which includes final judg-
ments, court orders, court-approved settlement agree-
ments, arbitration awards, notary deeds, recognized
58 Uniting Leading Companies from over 50 Nations Across the Globe
foreign judgments subject to enforcement, monetary
claims duly accepted by the debtor, certifications of
commissions on labor disputes, decision of bodies au-
thorized to consider cases on administrative infringe-
ments and decisions of other state authorities provided
by the law.
Commencement of enforcement proceedings is usu-
ally ordered by a SES officer upon the request of the
creditor or prosecutor in cases where he represents in-
terests of a citizen or state in the court. Enforcement is
carried out by an officer who has jurisdiction over the
place of residence of a debtor, place of his employment
or location of his property. If the debtor is a legal entity,
enforcement is carried out by an officer with jurisdiction
over the place of the debtor’s registered office or loca-
tion of its property. The creditor has a right to chose
between SES bodies entitled to provide execution on
the territory of their competence.
The limitation period for enforcement varies depend-
ing on the type of enforcement writ. For instance, judg-
ments of courts of general jurisdiction and commercial
courts must be filed with the SES within three years
of the judgment becoming final, while certifications of
commissions on labor disputes and decision of bodies
authorized to consider cases on administrative infringe-
ments must be filed within three months. As a rule, all
other enforcement writs must be filed within one year.
Upon filing of an enforcement writ with the SES, an SES
officer must notify the debtor about commencement of
enforcement proceedings and establish a time period
during which a voluntary performance by a debtor must
be carried out. If a debtor does not voluntarily perform
under the enforcement writ within the prescribed pe-
riod, an SES officer starts involuntary enforcement im-
mediately. Involuntary enforcement, except in cases
where sale of the attached property is required, must
be completed within six months from the date of open-
ing of enforcement proceedings and within two months
for enforcement of writs of non-material nature.
(b) Foreign Court Judgments
Foreign court judgments will normally not be recognized
and enforced in Ukraine in the absence of an interna-
tional treaty providing for the reciprocal enforcement
of foreign judgments between Ukraine and the country
in which the judgment was made. Ukraine has such
agreements with only a few countries, mostly members
of the former Soviet Union.
Recognition and enforcement of foreign judgments un-
der Ukrainian law means that when a foreign judgment
is recognized, it is considered as having the same effect
as a domestic judgment and is executed accordingly.
Foreign judgments are recognized and enforced in
Ukraine provided that: (i) such recognition is envisaged
by an international treaty to which Ukraine is a party;
or (ii) on the basis of reciprocity with the country where
judgment to be enforced in Ukraine was rendered, ac-
cording to an ad hoc agreement between Ukraine and
such foreign country. The general statutory term for
filing application for recognition and enforcement of
the foreign court judgment is three years from the date
when such judgment came into its legal force.
A foreign judgment will not be recognized in Ukraine
if it is determined that (i) such foreign judgment has
not entered into legal force; (ii) the concerned party
has not participated in the consideration of the dispute
due to its failure to receive notification of the same; (iii)
Ukrainian courts or other authorized body possess ex-
clusive jurisdiction over such disputes under Ukrainian
law; (iv) a Ukrainian court has rendered judgment in
the same matter between the same parties and on the
same grounds which came into legal force or there is
a pending litigation initiated before commencement of
the proceedings in the foreign court; (v) the term for
recognition and enforcement of the foreign judgment
has expired; (vi) under Ukrainian law, the subject mat-
ter of the dispute cannot be reviewed by courts; or (vii)
the enforcement of the foreign judgment would threat-
en the interests of Ukraine. There may also exist other
grounds for refusal to recognize and enforce foreign
judgment in Ukraine established by international trea-
ties to which Ukraine is a party or by national Ukrainian
legislation.
5. ARBITRATION
(a) Commercial Arbitration
A business-related dispute may be referred to arbitra-
tion, either domestic or international. A dispute between
a foreign legal entity or individual entrepreneur and a
Ukrainian legal entity or individual entrepreneur may be
referred by the agreement of the parties for settlement
by either an ad hoc or an institutional international com-
mercial arbitration, either within or outside of Ukraine.
On the other hand, a business-related dispute involving
only Ukrainian parties (without any foreign element) may
be referred to either an ad hoc or an institutional domes-
tic arbitration.
2 Ukraine is also a party to the European Convention on Foreign Trade Arbitration (Geneva, 21 April 1961).
An arbitration award rendered outside of Ukraine will
be enforceable in Ukraine in accordance with the terms
of the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (New York, 10
June 1958), to which Ukraine is a party2.
It should be also noted that there was recently adopt-
ed an initiative in the framework of the CIS regarding
foundation of respective Center for Settlement of Com-
mercial Disputes. Such new arbitration institute is en-
visaged to settle disputes between commercial entities
within the CIS and work along with other recognized
arbitration institutions.
(b) Enforcement of Foreign Arbitration Awards
Foreign arbitration awards are, in general, easier to en-
force in Ukraine than foreign court judgments because
Ukraine is a member to 1958 New York Convention
on the Recognition and Enforcement of Foreign Arbitral
Awards.
A foreign arbitral award should be recognized as bind-
ing and enforced upon filing an appropriate motion with
the competent Ukrainian court, unless the losing party
proves that: (i) the agreement to arbitrate is invalid
under the chosen law; or (ii) one of the parties while
entering into the arbitration agreement was legally in-
capable; or (iii) the losing party was not duly notified
of the appointment of the arbiter or the conduct of the
arbitration proceedings; or (iv) the losing party could
not submit its explanations for valid reasons; or (v) the
arbitration award was rendered on the issue outside
the scope of the arbitration agreement; or (vi) the arbi-
tration panel or procedure did not comply with the arbi-
tration agreement; or (vii) the arbitration award did not
enter into force or was annulled or its execution was
suspended by the court of the country, according to the
laws of which such arbitration award was rendered.
Similarly, the arbitration award may be unenforceable
in Ukraine if the Ukrainian court determines that (i) the
object of the dispute cannot be subject to arbitration
under Ukrainian legislation; or (ii) the recognition and
enforcement of the arbitral award is contrary to the
public order of Ukraine.
www.chamber.ua
59
 DEFENSE OF BUSINESS IN COMMERCIAL ARBITRATION
COURTS: INTERNATIONAL AND DOMESTIC ASPECTS
By Juridical Corporation PRINCIP
www.princip.com.ua
Till 1991 the traditional for our country procedure of so-
called economic disputes solving that developed in the
state arbitration system was adapted to the needs of
soviet economy. The situation cardinally changed when
Ukraine became an independent state and member of
international economic relations. In today’s Ukraine the
situation is slowly but surely changing towards the in-
crease of the role of arbitration courts of both domestic
jurisdiction (arbitration courts of Ukraine), and interna-
tional jurisdiction (international commercial arbitration
courts).
Arbitration courts of Ukraine are functioning in accord-
ance with the law of Ukraine “Оn arbitration courts”
dated May 11, 2004. In fact, arbitration court is the third
independent party of a dispute that performs arbitration
functions. Advantages of such institution are the follow-
ing: it is not corrupted; decisions of arbitration courts
are not subject to appeal and are obligatory along with
decisions of the state courts. Legal entities and/or natu-
ral persons have the right to refer to an arbitration court
any dispute arising out of civil or economic matters, ex-
cept cases stipulated by law. As of October 2008 the
Ministry of Justice had registered more than 300 stand-
ing arbitration courts in Ukraine. One of the biggest ar-
bitration courts is the standing arbitration court of the
Juridical Corporation “Princip”. 159 qualified arbiters
are working there. It has 53 branches. Besides, special
arbitration courts are also starting to function actively
in Ukraine. For instance, Land arbitration court of the
All-Ukrainian Arbitration League is registered and func-
tions successfully. This court specializes in moot cases
solving in the sphere of land relations between legal
entities and natural persons, which is the most actual
sphere of law enforcement in Ukraine at the moment.
However, one should take into account that in accord-
ance with the Ukrainian legislation arbitration courts of
Ukraine have no rights to settle disputes between legal
entities and natural persons, which are not Ukrainian
residents. Therefore, international arbitration courts
are more suitable in such cases. All participants of the
foreign economic activity of Ukraine without exception
may apply to the international arbitration courts. Law
“On the international commercial arbitration” (1994),
which regulates the procedure of establishment and
activity as well as the procedure of international dis-
putes solving by international arbitration courts in the
territory of Ukraine that was developed pursuant to the
60 Uniting Leading Companies from over 50 Nations Across the Globe
UNCITRAL model law “On international commercial ar-
bitrage” (1985), is in force and effect in Ukraine.
On the whole, both international and domestic arbi-
tration courts are divided into ad hoc courts (created
for solving of a particular matter) and standing courts.
When we speak about ad hoc arbitration, we speak
about cases, where parties of a foreign trade contract
that have a dispute agree to refer it to the particular
members of the arbitration court (arbiters), quantitative
and personal composition of which is determined in ac-
cordance to the agreement of such parties.
In such a way the arbitration court composition forms. It
is deemed competent to settle a dispute of the parties
and has the right to make a decision, which shall be
final and legally bounding for both parties.
The parties also have the right to choose the substan-
tive law of one country or another, which is to be used
by arbiters for settlement of a dispute. In practice, the
cases, when the parties regulate all or most of the mat-
ters of procedure in the arbitration agreement, are rare.
As a rule, the parties negotiate quantitative composi-
tion of the arbitration court, language and place of ar-
bitration. To make it easier for the parties to agree the
arbitration procedure in ad hoc courts, special Rules
recommended for ad hoc arbitration were developed
under the aegis of UNO. These are the following
Rules:
• Arbitration rules of the United Nations Economic
Commission for Europe, 1966;
• Arbitration rules of the United Nations Commission on
International Trade Law (UNCITRAL), 1976;
• International commercial arbitration rules of the Unit-
ed Nations Economic Commission for Asia and the Far
East (ECAFE), 1966.
Moreover, after settlement of a dispute and announce-
ment an arbitration decision the ad hoc arbitration
ceased to exist as an arbitration court.
Unlike ad hoc arbitrations, standing international ar-
bitration courts are founded as institutional bodies for
creation of the necessary conditions of settlement of
disputes arising between subjects of international com-
mercial relations. Such institutions, as the rule, are
founded pursuant to legislation of the country of foun-
dation as a part of associations, international organiza-
tions, chambers of commerce and industry of different
countries, etc.
Standing international arbitration bodies are function-
ing in accordance with legislation for international com-
mercial arbitration of the country of location thereof.
They are functioning as well pursuant to the Rules be-
ing the Regulations of such arbitration bodies and spe-
cific codes of practice used for disputes settlement.
In order to empower one standing arbitration court or
another to settle a specific dispute between contractual
parties and make a legally bounding decision, the par-
ties should indicate such court in the arbitration agree-
ment.
As regards International arbitration decisions execu-
tion then during the existence of New-York Convention
(1958) it was mostly customary to differentiate domes-
tic and international arbitrage, particularly, because the
above Convention demanded execution of internation-
al arbitration decisions (Article I). However, in Western
Europe differentiation between domestic and interna-
tional arbitrage is gradually loosing grounds. When
the new Arbitration Law had been passed in 1986 in
Netherlands, application thereof was deemed both for
domestic and international arbitration. The same hap-
pened, for example, in Great Britain, Germany, Swe-
den and many other countries.
As for the choice of applicable law a particular arbitra-
tion dispute must be settled in accordance therewith,
one should take several factors into consideration. It is
not recommended to subordinate arbitration to the law
different from the law of a country, where it should take
place. Besides, it is very unusual. The choice of place
and law of arbitration must go hand in hand. Place of
arbitration is the primary factor in determination of an
applicable law of arbitration agreement in the absence
of the explicit arrangement about law that regulates
arbitration agreement. I would like to underline once
again that the parties’ choice of one law or another ap-
plicable to the commercial obligation or the merit of dis-
pute does not mean that the parties have subordinated
the arbitration agreements to the same law.
www.chamber.ua
61
 THE LAW ON JOINT STOCK COMPANIES
By Salkom Law Firm
www.salkom.ua
It would be no exaggeration to say that the Law of
Ukraine on Joint Stock Companies adopted by the
Verkhovna Rada (Parliament) of Ukraine and signed
by the President is a landmark in the development of
the Ukrainian legal system, in particular, in its segment
providing for entrepreneurial activity.
The background of this Law is the Law of Ukraine on
Commercial Partnerships adopted in 1991 which has
created a rather solid legal basis for the formation of
the business infrastructure, in which the important
place belonged to companies with limited liability and
joint stock companies. At the time this law was pro-
gressive and had significant regulatory potential.
At the same time, by 1995-1996, it became obvious
that the core provisions contained in the Law on Com-
mercial Partnerships require further improvement.
Hence, in 1996 a number of importance amendments
and changes were made in this Law.
A new Civil Code was a new stage in the development
of the corporate law and, in particular, law on joint stock
companies as it embraced a number of the important
conceptual provisions which created a basically new
approach to a status of joint stock companies in par-
ticular and commercial partnerships in general.
The authors of the Civil Code intended this law as a start-
ing point for a new legislation on joint stock companies
and so almost all provisions of the Civil Code dedicated
to the joint stock companies, e.g. Articles 153 – 155,
157 – 161 and others, refer to a special law. The Civil
Code’s authors have not aimed to set out the detailed
rules according to which the joint stock companies and
other commercial partnerships would act.
Since then more than four years have elapsed but no
special law that had been referred to in the Civil Code
have not been developed yet. A rather awkward situa-
tion has arisen where the new law i.e. the Civil Code,
which was adopted in 2003 and came into force on 01
January 2004, referred to the Law of Ukraine on Com-
mercial Partnerships adopted as far as in 1991 as to its
special provisions.
Numerous attempts to adopt a new law on joint stock
companies have been made in the Parliament, but to
no avail as opponents of this law had been fighting
hard against it. That is exactly why the Law on Joint
Stock Companies, when it was finally adopted, should
62 Uniting Leading Companies from over 50 Nations Across the Globe
be viewed as a positive occurrence as it provides for
the free-market mechanisms for regulating relations in
joint stock companies and conforms to the standards
applied to laws of other countries.
At the same time there are some problems that
remain unsolved. First of all, it concerns the transition
provisions.
The Law on Joint Stock Companies should be treated
as a compromise of some sort as it applies not to all joint
stock companies but only to those that will be set up only
after this Law has come into forth, i.e. after 6 month’s
period has elapsed after it was officially published.
The open joint stock companies that were registered
before the new law took effect may make no amend-
ments in their statutory documents and their activity
will be governed by the Law on Commercial Partner-
ships of 1991 provided that no attempts to issue new
shares and register them are made. Otherwise these
joint stock companies will have to re-register their ar-
ticles of association and proceed with the emission of
new shares as the new law prescribes. A status of the
closed joint stock companies will remain unchanged as
the Law on the Commercial Partnerships will apply to
them regardless the new law coming into force. On the
other hand, taking into consideration that the new law
does not provide for the joint stock companies of this
sort, six months after the Law has been published it will
become impossible to register such companies.
Hence, after the new Law on Joint Stock Companies
took effect a variety of legal provisions will exist in
Ukraine.
1) The closed joint stock companies will be governed
by the Law of Ukraine on Commercial Partnerships of
1991 and will be able to exist for an unlimited period of
time;
2) The open joint stock companies will be able to carry out
its activity on the basis of the old Law on Commercial Part-
nerships provided they do not issue additional shares;
3) New joint stock companies incorporated after the
Law on Joint Stock Companies has been enacted will
be governed accordingly by the new Law.
The Law on Joint Stock Companies distinguishes
between two types of shareholding companies, i.e.
public shareholding companies and private sharehold-
ing companies. At the same time the Law establishes
that a number of shareholders in private sharehold-
ing companies should not exceed one hundred. One
of the most important novelties is the ability of pub-
lic shareholding companies to make both private and
public placings of their shares. Private shareholding
companies may only do a private placing. If the gener-
al meeting of a private shareholding company decides
to issue its shares to the public such company should
be reorganised into a public company and the relevant
changes in its statutory document must be registered
beforehand.
When analysing the differences between public and pri-
vate shareholding companies, it should be mentioned
that the pre-emptive right exists in private shareholding
companies, as stated in Article 7 of the Law. Share-
holders of a private shareholding company have the
right to buy shares that the company or another share-
holder offers before they are offered to somebody else
on the same conditions pro rata a number of shares
that already belongs to a shareholder. The pre-emp-
tive right is valid for two months after the company
has been notified by a shareholder unless its Articles
provide for a shorter term. Shareholders of the public
shareholding companies may dispose of their shares
without consent of either a company or other share-
holders.
It should be mentioned that the pre-emptive right ap-
plies also to any new shares issued by a company.
Pursuant to Article 27 of the Law, holders of ordinary
inscribed shares may buy the ordinary shares issued
by the company pro rata a number of the ordinary
shares they already own in the company. The share-
holders who own ordinary shares have the pre-emp-
tive right to buy shares of this type when such shares
are being placed in a private placing. The State Com-
mission on Securities and Fund Markets is to control
that the pre-emptive right is obeyed. This authority
may declare the emission of shares unfair and termi-
nate the placing of the relevant shares if it finds out
that a shareholding company violated the pre-emptive
right of shareholders.
Under the Law on Joint Stock Companies, the share-
holding companies, in general, retain the same struc-
ture of managing and supervisory bodies as it was be-
fore, i.e. the general meeting, supervisory board, the
board of directors (if it is a collegial body) or a direc-
tor (a sole person), and an auditor (audit board). If a
shareholding company has more than 100 sharehold-
ers the audit board must be set up, otherwise an audi-
tor is appointed.
The new law regulates, quite thoroughly and systemati-
cally, the matters pertaining to corporate management,
including proceedings of the general meeting and su-
pervisory board, and also it does not leave without at-
tention the board of directors and audit board. Suffice
to say that more than 30 articles of the Law are dedi-
cated to regulating the activity of company’s corporate
management and controlling bodies. It can be admit-
ted that even though the Law has its own pitfalls, it is
a significant step forward in comparison with the ac-
tive Law on Commercial Partnerships. When drafting
this law the legistor took into consideration the main
principles of corporate governance developed by the
Organisation for Economic Co-operation and Develop-
ment (OECD) so the efficient corporate governance
combines with protection of rights of shareholders as
a shareholder may personally participate in corporate
governance and receive information how this function
is fulfilled by the relevant company’s officials.
The provisions of the new Law on a buy-back (including
mandatory buy-back) of the shares issued by a share-
holding company have a special meaning for minority
shareholders. The most importance is placed on a rule
for assessing a market price of the buy-back shares
specified by Article 8. A price of the shares that are
issued by a company which is not listed on a stock ex-
change is estimated on the basis of an expert opinion
prepared according to the law on corporate rights and
professional survey activity. A price of the shares that
are traded on a stock exchange is defined as a price of
securities set out according to the law on securities and
fund markets.
In particular, the novelty of the Law on Join Stock Com-
panies is a provision prescribing a mandatory buy-
back of the shares on request of a shareholder if the
shareholder voted against the general meeting’s reso-
lution on merger, acquisition, split, reorganisation, and
change of a type (becoming private) or on approving
company’s entering into a large deal or change in its
authorised capital.
In this respect, definitions of a large deal and deals
which are not at arm’s length, and actions aimed at
reorganisation of a company provided by the new
Law, can be considered certain protection for rights
of minority shareholders which our current corporate
law is missing.
The Law specifies which the most important documents
that govern the activity of a shareholding company
must be kept on its premises. Information contained in
these documents must be submitted on a request of a
shareholder. Among these documents are the Articles
of Association (with amendments if any), Memoran-
dum of Association, Certificate of Registration, Provi-
sions on general meetings, supervisory board, board
of directors and any other internal regulations (with
amendments if any), regulations on each company’s
branch or representative office; documents confirming
company’s title to its property; principles of the corpo-
www.chamber.ua
63
 rate governance; minutes of the general meeting, other
documents with which the shareholders may familiar-
ise themselves when preparing to the general meet-
ing; minutes of the meetings of the supervisory board
and board of directors, resolutions of the board of di-
rectors or the director; minutes of the meeting of the
audit board and its opinions and resolutions; and other
documents pertaining to company’s activity. The only
exception is the documents concerning accounting and
bookkeeping provided they do not relate to large deals
or not-arm’s-length transactions if the law does not pro-
vide otherwise.
Hence, from now on the opportunity for shareholders
to exercise their right to free access to information on
company’s activity has been expanded significantly
and this should be deemed as a positive factor in the
regulation of activity of shareholding companies.
The wording of the Law of Joint Stock Companies as
it has been passed by the Verkhovna Rada is a com-
promise between its various drafts and, similarly to any
other compromises, it has both positive and negative
sides.
The unconditional positive aspect of the new Law is,
64 Uniting Leading Companies from over 50 Nations Across the Globe
first of all, the prospects for the development of corpo-
rate relations on the completely new basis in particular
and development of the securities market in general.
Such development is ensured by introduction of pub-
lic shareholding companies that can trade on stock
exchanges. Secondly, the new Law more thoroughly
provides for principles and procedures for corporate
governance including powers and proceedings at the
general meeting, voting at the general meeting, and
regulates the activity of the supervisory board and ex-
ecutive bodies, which can be the board of directors
(collegial body) or director (individual body). Doubtless
the definition of large deals and not-arm’s-length trans-
actions, which did not exist until the new Law had been
adopted, is an important step in development of corpo-
rate legislation.
At the same time there are many pitfalls in which our
business community with no exception of lawyers ren-
dering services in this area is most likely to fall in six
months’ time. It includes the varying conditions for
shareholding companies’ activity, different statuses of
such companies, conditions for the exercising of cor-
porate governance and will create difficulties in settling
disputes by courts. Only time will tell whether the posi-
tive aspects of the Law prevail or its pitfalls.
PPP IN UKRAINE – INFRASTRUCTURE INVESTMENTS
By Law Firm “Arzinger & Partners”
www.arzinger.ua
I. INTRODUCTION
In anticipation of the forthcoming European Foot-
ball Championship 2012, to be held in Poland and in
Ukraine, a hectic discussion has developed regarding
the implementation of existing tasks through public-pri-
vate partnership. It is clear that neither the state nor
the municipalities are able, either financially or from the
point of view of expertise, to manage to complete in
the next 4 years all the necessary measures to create
the desired infrastructure, to include the construction of
roads and airports. Euro 2012 is one reason, but not
the only one, for this developing issue. The problem is
much more serious. The infrastructure is, in many sec-
tors, at the end, or well past, its useful service life. Now,
the lack of investment over the last 60 years must be
resolved. Only new modern infrastructure can form the
fundamentals for long lasting economic growth.
The implication of the unclear “legal term” Public-Pri-
vate Partnership in Ukraine is just as obscurely under-
stood as elsewhere. However, the common denomina-
tor for PPP is the joint implementation of traditionally
public tasks by the state and private sector together.
Here one should distinguish a strictly commercial activ-
ity within the public sector, should it be in the sphere
of procurements (for example, the purchase of office
equipment for public institutions) or business activity
(state or half state enterprises). The classic example of
the implementation of public tasks through the private
sector is through concessions; and this is also the case
in Ukraine.
First of all, it is vital to understand that PPP is not a magic
word and not always the best way of implementing
Overview of the advantages and disadvantages of PPP
Pros
Additional financial resources
Optimized risk sharing
Experience/Know-how/Efficiency
Longer guarantees and better service
Avoidance of corruption
Compact solution
• Financing & Know-how
• Construction & Project Management
• Operation & Service
public tasks. The obligation to determine the best
method of implementation (PPP versus the traditional
implementation of tasks) takes place in a draft law on
PPP (art. 7). In each separate case all the pros and
cons of the private implementation of tasks should be
considered.
A great advantage is that the private partner is usually
liable for the whole life cycle of the object and that is
why he is highly interested in optimized processes and
the highest quality of his (construction) work. In addi-
tion, a principle is applied according to which the part-
ner shall be liable for the risks he can manage best.
The disadvantages are the extra expenses of time
and financial resources in the public sector during the
preparation of PPP projects. In order to “design” a plan
intelligently so that over the next 25, 30 or 50 years it
still remains in its full service capacity, a great number
of professionals (experts) should be involved in the
project itself and in the contract drafting process. Be-
sides legal issues, technical and financial requirements
should also be satisfied.
Furthermore, these pre-operational expenses grow dis-
proportionally with the size of the project and are there-
fore uncoupled, so that the relevant cost load of small
projects turns out to be explicitly higher. That is why,
in general, projects with a cost of over 25 million euro
tend to be the most affordable when choosing PPP.
The high (re)financing costs of private companies come
from lower credit ratings in comparison with the possi-
bility of facility borrowing by the state or municipalities;
this ultimately is reflected in the final price and could
only be redeemed by the provision of state guarantees.
Cons
Preparation more time-intensive
Preparation more cost-intensive
Lower credit ratings of private companies
www.chamber.ua
65
 Currently, the biggest issue for PPP is the lack of a reli-
able public partner (primarily on the state level). Parlia-
ments and governments which change almost every
year are not a proper foundation for long lasting and
stable relationships. In addition, traditionally a change
in government also has meant a change in policy in
Ukraine. As opposed to developed democracies, where
there is a logical transition, a discontinuity occurs in the
functioning of the state, and more specifically in PPP
projects. This could mean a PPP project may be aban-
doned by a new government.
A law alone won’t help here, therefore Ukraine should
live it. And want it!
II. LEGAL BASIS
The essential legal basis for PPP is found in the laws
of Ukraine “On concessions”, “On concessions for the
construction and operation of roads”, “On agreements
on product distribution”, “On financial leasing”, “On
leasehold of state property”, and the law of Ukraine
“On management of state property objects”. All this has
to now receive a common and universal regulation by
the draft law on PPP.
With codifying, Ukraine continues the tradition that only
that which is described by the law is possible. We have
already referred to the danger of codifying in the leg-
islative process, i.e. adverse conclusions. The current
draft law now contains flexibility in choosing various
PPP forms. With this in mind, there is no excuse there-
fore that certain amendments should be made to the
legislation in order to create a favourable basis for PPP
(for instance, revenue tax exemptions for certain trans-
actions) or making some forms of PPP possible (espe-
cially where private companies have to be granted the
rights to intervention.
We will give a further detailed consideration to PPP-
related laws.
1. PPP Law (Draft Law)
In autumn 2008 the Cabinet of Ministers of Ukraine ap-
proved a draft law “On the general provisions of devel-
opment for public-private partnership in Ukraine.” The
“legislation” in art. 1 accomplishes this by giving a defi-
nition of PPP and qualifies it as “a system of relation-
ships between the state and the private partner during
the realization of which the resources shall be amal-
gamated along with the respective distribution of risks,
liability and compensation between the state and the
private partner for mutually profitable and long lasting
cooperation with the purpose of the realization and/or
modernization (reconstruction) of new objects requiring
investments and for operation (use) of these objects”.
Where it is written “state” it should be understood that
this includes “municipal.”
66 Uniting Leading Companies from over 50 Nations Across the Globe
These principles are given in detail in art. 2. We should
pay special attention to the compulsory call for tenders,
the procedure of which shall be determined by the Cab-
inet. Thus, we should expect a special regulation on
tender procedures for PPP-projects.
Objects, implemented within the scope of PPP, shall
be of a “special social importance” and shall be ap-
proved by the Cabinet of Ministers (state property
objects) or municipal offices (communal property ob-
jects). Since, for the implementation of tasks, the third
person’s property objects are required (especially if it
concerns land plots), the right of intervention should
be granted through license, purchase or expropriation
agreements.
The relevant law on expropriation is, however, still
available only as a draft.
Forms of PPP pursuant to legislation are contract forms
and the establishment of a legal person.
Contract forms shall be as follows:
• concession;
• leasehold of state property objects;
• lease;
• agreements on product distribution (common with
mining operations);
• management of state property;
• joint activity agreements; and,
• other forms not prohibited by law. (Comment: flexibil-
ity for agreements sui generis).
Art.7, as already described in the introduction, provides
for an efficiency (profitability) comparative analysis in
the course of which the efficiency of the PPP is being
compared with that of the traditional implementation
of tasks before a decision is made on the completion
of public tasks through PPP. The procedure of PPP-
projects efficiency analysis shall be determined by the
Cabinet of Ministers of Ukraine.
The most important regulation of the draft law is un-
doubtedly the guarantees.
First of all, art. 9 provides for a so called right in perpe-
tuity, pursuant to which the legal circumstances, which
were valid at the moment of a contract’s conclusion,
are insured for the lifetime of the project, or until new
conditions appear that are more favourable for a pri-
vate partner. One more guarantee is provided in art.
11. According to it, the state undertakes “to redeem all
reasonably incurred expenses during the realization of
PPP project as had been agreed by the contract par-
ties”. With this regulation the state practically under-
takes full economic risk in the field of costs of the pri-
vate partner. We will see how viable this appears.
An interesting regulation is contained in art. 10. Pursu-
ant to this article a PPP contract shall be grounds for
obtaining all expedient licenses, permits and documents
ensuring the right of the private company to usage of rel-
evant land plots, until it remains legally grounded. This
does not substitute for the needed permits, etc.; but, it
doesn’t provide latitude in issuing these licenses, at all.
All other provisions have the nature of a “letter of intent”.
Noteworthy is an intention specified in art. 15 to trans-
fer the tariff policy (primarily concerning municipal
services) into a policy based on supply and demand
market orientation.
Land laws should also be reformed. The division of
property into land and buildings (construction) which
are on it should be discontinued. Finally, the legal basis
should be improved in favour of the real estate devel-
oper concerning the development of land plots which
belong to someone else.
2. Law On Concessions
In fact, the law on concessions as of 1999 (“On conces-
sions”) had to be amended with the adoption of the law
“On Public Private Partnership”. Currently the amend-
ments are in the development stage; but because the
law has not been presented yet as a draft law, there
are no official statements in this regard. The effective
wording of the law is inconsistent with the draft law on
Public Private Partnership. Many provisions of the law
on concessions are canceled by the draft law on PPP.
Due to these anticipated changes only a short descrip-
tion of the law on concessions is included.
The law on concessions comprises 19 branches,
namely the following:
• water supply, drainage system, sewage system
cleaning;
• provision of services with city public transport;
• waste collection and processing;
• water supply;
• construction and management of roads (see par. 3)
• formation and management of information highways;
• construction and operation of cargo and passenger
ports;
• construction and management of airports;
• provision of communication services;
• provision of mail services;
• transportation and distribution of natural gas;
• production and (or) delivery of electricity;
• provision of municipal housing services;
• construction and management of hotels and tourist
establishments.
The law defines the procedure for selecting projects,
procedure for the provision of state orders, rights and
obligations of parties and the most important para-
graphs to be included in concession agreements.
The concession agreements are registered in the spe-
cial register of the State Property Fund. It is also im-
portant to mention that a standard agreement for mu-
nicipal services, defined by regulatory bodies, cannot
be changed, but may only be filled out and amended
(supplemented) by the Parties.
The right to a concession requires a duty payment to
the ‘state.’ The Cabinet of Ministers determines the
concession duties. The concession duties are subject
to payment from a newly constructed object from the
moment of receipt by the concessioner of profit from
the concession, but no later than 6 months after bring-
ing the object into operation. The duties are subject
to payment irrespective of the economic results from
operating the object. This provision does not comply
with the described guaranties of the draft law on Public
Private Partnership.
The legal destiny of the concession object is restrict-
ed. Transferred objects of the public sector (for repair,
sanitation, in management/operation etc.) remain
public property. The property “created” in the process
of executing the agreement is also transferred into
public property; the “acquired” property becomes a
property of a concessioner. These legislative restric-
tions narrow the contractual possibilities and as a re-
sult the application of many PPP models is excluded
in advance.
This is another example confirming that less (regula-
tions) is most often more. If the object at the end of the
validity term of the agreement (minimum 10 and maxi-
mum 50 years) is privatized then the concessioner has
the first right or option to buy if he himself contributed a
minimum 25 per cent of the price of the object.
The new law on concessions will hopefully provide the
Parties with more freedom.
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67
 3. The Concession Law Regarding Road
Construction
The concession law on road construction is based on
the law on concessions. The “Law on concession for
construction and exploitation of roads” of 1999 was
amended in 2008, although it is still draft form (“On
concession for construction and/ or exploitation of
roads”). Thus, the specialized law is ahead of the gen-
eral law (because different ministries, the Ministry of
Transport from one side and the Ministry of Economics
from the other side, were engaged in drafting amend-
ments thereto).
At present, there are two projects based on this law
where a tender procedure was performed; however,
the projects themselves are not completed. One of
the reasons is the fact that the current law provides for
the building of new “real tolls”, and alternative free of
charge roads alongside them. The new project provides
more freedom to the parties of the agreement and in-
cludes needed repair of available roads. The draft law
envisages the concession right to be paid for, and “re-
imbursement of investments” can be based on the dif-
ferent models. The law names the following ways for
financing:
• Payment for “passing (driving) through” by a user
(“real toll”);
• Payment for the availability by the concessionee
(“availability fee”);
• Reimbursement by way of usage of supporting enter-
prises (service establishments along the roads);
• State subsidy;
• Compensation payments (with unprofitable projects);
• Other payments pursuant to the concession agree-
ment.
Frames of duties and amounts of subsidies/ compen-
sation are determined by the Cabinet of Ministers.
In the case of “real toll” the legislature envisages charg-
ing fees by the concessioner. For this reason the “Ger-
man model”, where the state (via a private enterprise)
charges duties and allocates it to the concessioner for
the corresponding part of a road, is excluded.
The subject of the draft law is mainly roads of “state
significance” that are determined by the Cabinet of Min-
isters on the basis of the state development program.
Pursuant to article 2, paragraph 3 of the draft law re-
68 Uniting Leading Companies from over 50 Nations Across the Globe
garding the right of the concessioner for construction,
the concession agreement enters into force only upon
“the receipt of title in land plots, on which the conces-
sion objects are located” by the concessioner (and in
this way provides the concessioner with the right for
usage). It follows that the concession agreement is ex-
ecuted at a rather early stage when there is no readi-
ness for the commencement of construction. This fact
can affect the temporary and financial plans of the con-
cessioner, because he has to withhold resources for an
indefinite period of time.
Pursuant to the present draft law the concessionee is
obliged to guarantee to the concessioner:
• Minimum revenue “if necessary”;
• Preemptive right for the construction of service estab-
lishments along the roadway with equal proposals;
• Providing all the necessary permits and licenses.
Regarding guarantees, the concession law trails behind
PPP law, which states that obligations of the state are
for at least the cost value. How the concessionee (the
state represented by the Cabinet of Ministers) is going
to guarantee the receipt of all permits remains unclear
because of the further distribution of competences in
the permitting process.
Furthermore, the right of the concessioner to transfer
the concession right as a “property right” into pledge (se-
cured transaction) raises doubts, because pursuant to
article 4 of the Law on concessions, the separate rights
arising from the concession agreement may be trans-
ferred only upon the permission of the concessionee,
and in such a way where the right will not be subject
to a lien. If the concession rights in general are meant
here, then there is a question about the change of the
party to the agreement that is also connected with the
permit of the other party to the agreement. Finally, third
persons obtaining such a right will usually face difficul-
ties in utilizing it and therefore this collateral might be of
less value for them. Only the bank that provides financ-
ing is interested in this “guarantee”, that is, however,
represented with help of the right of assumption in the
agreement (which is the subject to a multilateral agree-
ment between the concessioner and concessionee).
However, the regulation is meaningful, according to
which the procedure of the provision of state orders
must be performed in Ukrainian and English (even if
the Ukrainian version prevails in uncertain cases). Due
to this, foreign participants have a real chance to par-
ticipate in the procedure. The draft law foresees in its
final provisions, VAT tax exemptions for transfer and
return of the concession objects.
III. PRACTICAL DIFFICULTIES AND POSSIBLE
SOLUTIONS
It would be very optimistic to say that Ukraine in eco-
nomic, political and legal regard could offer a favour-
able environment for PPP-projects.
The state needs more stability to enable private partners
to find state partners. Stability is a factor that can influ-
ence currency risk (currency exchange risk). It is worth
taking into consideration that financing is provided ei-
ther in US dollars or Euros, and the project itself gener-
ates revenue only in the national currency (hryvnya).
Despite this, politics should provide a signal for the fu-
ture. Because the draft laws are on everyone’s lips, and
investors as well as state authorities expect the corre-
sponding laws to be passed (and until now the state
and investors have refused to act), the first wording of
the law is to go into force even if updates are foreseen.
For financing, the state may establish the state invest-
ment agency (“Infrastructure Fund”) with costs that are
usually spent for self-financing placed in this fund. With
the help of this fund it is possible to compensate for
gaps in financing that arise because of a financial cri-
sis. As a result, the adverse credit rating of Ukraine is
less influential in decision making.
Irrespective of this, Ukraine, without its own participa-
tion, will not solve infrastructure problems only with the
help of PPP’s. With the purpose of decreasing major
transaction costs arising with PPP-projects, it is neces-
sary to create a PPP-Task Force (group of experts) that
will provide consultations to the state and community in
the preparation and execution of PPP-projects. One of
the tasks of the said group must be the standardization
of certain types of PPP-agreements.
Construction projects must be prepared by state au-
thorities in such a way that a partner to the agreement
(a winner of the tender) could directly commence the
execution of the task. Investors cannot wait an indefi-
nite time for obtaining permits for construction and this
is why they might not decide to participate in a tender at
all. Permitting for construction must begin immediately
after the tender is won. Because currently in Ukraine
this permit is issued to a certain person, and not for
the project, corresponding changes to the legislation
are necessary. In the meantime, projects could all be
transferred to a special purpose vehicle (SPV) and
then transferred pursuant to a share deal to the win-
ner of the tender. Foreign participants face additional
difficulties in relation to obtaining a permit for construc-
tion. For this license the foreign participant must show
commercial viability in Ukraine, i.e. the availability of
certain production facilities that will be purchased by
the investor only if the corresponding project exists. In
this case it is necessary to implement simplified and
time restricted procedures for issuing permits that
would take into consideration the fact that the investors
may not be present in Ukraine, but have a commercial
viability abroad.
When constructing roads it is necessary to pay atten-
tion to the fact that the consumer is not always ready
or prepared to pay duties for the usage of roads. In
this situation it is worth starting with industrial transport
(duties from trucks) following the example of Germany.
Private users can firstly make minimal contributions
that may, for example, be charged with the help of an
obligatory receipt of a year pass card.
In the municipal sector, the fee level is too low to war-
rant private operation of this type of task. In this case
it is necessary to introduce a payment that complies
with market demands (separation of price policy from
social policy). The state and municipal enterprises that
provide subsidies for municipal services to all consum-
ers will thus be relieved. The funds saved can then be
used for the formation of a functioning system of social
supply and granted for those who really need them.
In each case it is necessary to realize that all problems
will not be solved with the introduction of PPP-struc-
tures even on a theoretical level. Here it is worth adher-
ing to the known slogan ‘Just do it’.
www.chamber.ua
69
 CORPORATE GOVERNANCE IN UKRAINE
By Law Firm “Arzinger & Partners”
www.arzinger.ua
GENERAL OVERVIEW
Owners of companies as well as investors wishing to
build long-lasting and stable business in Ukraine pay
much attention to the proper governance which helps
to protect rights of the owners and to increase value of
business.
Level of corporate governance in Ukraine is rather low due
to lack of the respective regulation and understanding of
its importance by national businessmen. Now the corpo-
rate governance in Ukraine is in the process of changes
due to adoption of long-awaited law “On Joint-Stock Com-
panies”. One of the main goals of the law is to improve the
corporate governance of joint-stock companies which will
have to change their systems of corporate governance in
order to bring them in line with the new law.
In order to help Ukrainian companies to create system
of corporate governance which will be efficient and at-
tractive for investors the State commission for secu-
rities and stock exchange adopted non-biding recom-
mendations for the companies - Principles of corporate
governance of Ukraine which absorbed the best world
practices of corporate governance with account for the
national peculiarities.
Corporate governance in Ukrainian companies is usu-
ally based on three-tier system and includes general
meeting of shareholders, supervisory board and exec-
utive body (either single or collegial). Executive’s body
activity and financial performance of a company is con-
trolled by revision commission.
General Shareholder Meeting
All shareholders of the company are entitled to partici-
pate in the meeting. The meeting is considered valid
if it is attended by shareholders holding more than 60
votes in the meeting (usually it corresponds to 60% of
the charter capital). According to the JSC Law it is not
less than 60% of voting shares.
Supervisory Board
Supervisory boards are the bodies which are envisaged
for joint-sock companies, although it is not prohibited to
use them in other types of companies. According to the
JSC Law it is obligatory to elect supervisory board for
the companies with more than 10 shareholders – own-
ers of ordinary shares.
70 Uniting Leading Companies from over 50 Nations Across the Globe
According to the JSC Law members of supervisory
board will be elected only from among individuals
and only for three years. The members of supervisory
boards may be elected either by cumulative voting (for
both public and private JSC) or through pro rata repre-
sentation of shareholders (only for private JSC).
Supervisory board appoints temporary or permanent
committees on different matters within its authority.
Executive Body
Executive body of Ukrainian company may be either
collegial or single. It carries-out day-to-day manage-
ment of the company except for the matters reserved
for the General Shareholders Meeting or supervisory
board.
Members of supervisory board and representative of
trade-union or other body which represented employees
as a party to collective labor agreement are entitled to
participate in the meetings of collegial executive body.
Revision Commission
The Law on JSC provides for the possibility not to elect
the commission in the companies with less than 100
shareholders, but to envisage position of company’s
revisor.
Members of the revision commission are elected exclu-
sively by cumulative voting and from among individuals
with full capability.
Corporate Secretary
The law on JSC provides for the position of a corporate
secretary – the person responsible for the interactions
between the company and its shareholders. Corporate
secretary is elected by the supervisory board of the
company.
Code of Corporate Governance
One of the exclusive authorities of the shareholders
meeting is adoption of principles (code) of corporate gov-
ernance. Public (open) Joint-Stock companies should
disclose information about adoption of corporate gov-
ernance codes and complying with them in their annual
statements submitted to the State commission on securi-
ties and stock market.
 IX MEDIA
TELEVISION BROADCASTING AND PROGRAMMING
SERVICES
By BEITEN BURKHARDT
www.bblaw.com
General regulatory environment and licensing
authority
Among the mass media outlets in Ukraine, television
undoubtedly leads as the primary conduit influencing
public opinion. Regulating the television industry and,
in particular, those players which contribute to the
public opinion is therefore one of the priorities on the
national security agenda in Ukraine. In view of past
political abuses and absent a defined cultural agenda,
Ukraine perceives mass media as an “field of sphere”
where information wars can are fought and hostile cul-
tural penetrations can be made. Accordingly, some
laws exceed the usual regulatory standards employed
in many established democracies.
General regulatory environment and licensing
authority
The principal regulatory requirements governing
Ukrainian television market are provided for by the
Law of Ukraine “On Television and Radio Broadcast-
ing” (the “Broadcasting Law”), as well as in the nu-
merous regulations introduced by the National Council
of Television and Radio Broadcasting (the “National
Council”), the state body charged with implement-
ing policy in the television market. The Broadcasting
Law was amended in 2006 to provide for a new regu-
latory approach to the then existing licensing regime
for television and radio broadcasting. The actual airing
of telecommunication services is governed by a sepa-
rate set of legislation, with the principal regulatory act
being the Law of Ukraine “On Telecommunications”
(the “Telecommunications Law”). The legal frame-
work distinguishes between broadcasting content and
telecommunications network carriage services, even
though they may be provided by the same market par-
ticipant.
The Broadcasting Law is generally designed for terres-
trial broadcasting, and the transition from analog to dig-
ital television, although it is fairly undeveloped in terms
of modern technologies for content distribution, such
as operation of satellite TV platforms, internet TV and
provision of various pay-per-view services. Presently,
the Broadcasting Law does not provide a sustainable
regulatory mechanism for effective regulation of the tel-
evision market participants. As a result, the National
Council adopts bylaws to gap fill, leading to provisions
that go beyond the Broadcasting Law. For this and
other reasons, the regulations of the National Council
are not usually registered with the Ministry of Justice of
Ukraine, even though such registration is mandatory.
This situation in turn provokes numerous discussions
in the media on the general legitimacy, validity and en-
forceability of the National Council regulations.
Another important document is the Trans-Frontier Tele-
vision Convention of 5 May 1989 (the “Trans-Frontier
TV Convention”). Even though it has not been not rati-
fied by the Verkhovna Rada of Ukraine (the Parliament
of Ukraine), both the Broadcasting Law and regulations
of the National Council contain numerous references to
it, and declare adherence to the EU Council policy on
the provision of cross-border television services.
Broadcasting Law licensing regime
The Broadcasting Law defines two types of activities
in the television market subject to licensing by the Na-
tional Council. Broadcasting services firstly mandate
licensing, after which an entity is then obliged to re-
ceive a license for packaging and programming televi-
sion programs for provision to customers.
Additionally, the Broadcasting Law applies extrater-
ritorially - to broadcasters located and acting abroad,
but only to the extent that they disseminate programs
in Ukraine. Certain exemptions may be provided by in-
ternational treaties effective in Ukraine. In particular,
Article 42 of the Broadcasting Law prescribes that no
restriction shall be made against the re-transmission of
www.chamber.ua
71
 the foreign broadcasted signal within Ukraine, provid-
ed, however, that the content of the broadcasted signal
complies with the requirements of the Trans-Frontier
Television Convention.
Substantively, the Broadcasting Law requires a broad-
casting license for creation, packaging and/ or bundling
of broadcast programming, program packaging and TV
programs, and their transmission or re-transmission
(whether encrypted or not) to customers. At the same
time, there is no guidance as to what such “packaging”
and “bundling” actually mean. Although not expressly
provided by law, a license appears to be required for
any activities which result in the dissemination of such
programs or their packages (sets) to the public, where-
as the mere creation of television programs (content) is
not licensed. No specific rules exist for television text,
teleshopping and other telemedia services.
The National Council issues different licenses for satel-
lite, on-air (terrestrial), cable, wire, and multi-channel
(includes digital broadcasting with the use of radiofre-
quency) broadcasting for corresponding types of the
organizational and technological program transmis-
sion. Licenses are also issued for different territorial
areas covered, that is, the broadcasting licenses may
be for:
(1) national broadcasting (covering more than two
thirds of the population of each oblast), or regional
(covering more than a half of Ukrainian regions/ ob-
lasts);
(2) local broadcasting (covering one or several neigh-
boring inhabited areas extending to more than half
an oblast area), or
(3) foreign broadcasting (covering territory outside
Ukraine).
There are two licensing procedures for broadcasters.
Initially, a tender is required for issuance of a broad-
casting license with the use of limited radiofrequen-
cies, such as terrestrial broadcasting and multi-chan-
nel broadcasting using radio-frequency resources. The
National Council issues satellite, cable and wire broad-
casting licenses based on applications.
Accordingly, the term of a broadcasting license also
depends on the type of broadcasting. The National
Council issues licenses for terrestrial and multi-channel
network broadcasting for seven years, while license for
satellite, wire and cable broadcasting are for ten years.
Irrespective of the procedure or type of broadcast-
ing license, an applicant should prepare a program
broadcasting scheme. Such concept should include:
(1) the share of the in-house produced programs, (2)
72 Uniting Leading Companies from over 50 Nations Across the Globe
the minimum share of national audio and video prod-
uct (under the Broadcasting Law, the minimum share
must be at least 50 per cent), (3) the maximum share
of foreign audio and video product, (4) the maximum
amount of re-broadcasting and the approximate list of
programs (by genre) intended for retransmission, and
(5) the genre allocation of programs. Broadcasted con-
tent may consist of informational, analytical, cultural,
scientific and educational, and entertaining programs.
The minimum quota for European (including Ukrainian)
content broadcasted between 7 a.m. and 11 p.m. is 80
per cent., with Ukrainian content amounting to at least
a 50 per cent share. These quotas, however, do not
apply to satellite broadcasting.
Within the limits set by the law, a licensee may freely
define its programming concept, but may not substan-
tially deviate therefrom.
Licensing of Program Service Provider
The new licensing regime introduced in 2006, with the
enactment of the restated Broadcasting Law, raised
widespread discussions both in terms of the law’s stat-
utory provisions and the policy behind their introduc-
tion. A number of issues remain unclear.
Under the Broadcasting Law “the provision of subscrib-
ers with the possibility to watch program packages on
a contractual basis using multi-channel television net-
works” is a licensed activity requiring a provider’s li-
cense. The licensing requirement, however, is linked to
several terms, which, unfortunately, are not defined or
poorly defined by the law.
The “programming service” is defined as “assembling
(bundling) program packages and provision of sub-
scribers with the possibility to watch them based on a
contractual arrangement”. However, there is no clear
definition for ‘assembling’. ‘Program packages’ are de-
fined broadly, as a number of TV programs which a
provider gives access to its subscribers.
The term “multi-channel networks” under the Broad-
casting Law incorporates telecommunication networks
with the capacity to simultaneously transmit more than
one TV for and capable of integrating with other regu-
lated telecommunication networks. In defining the tel-
ecommunication network, however, the Broadcasting
Law refers only to cable and terrestrial multi-channel
networks, without ever mentioning other signal delivery
media. Market participants use this omission to justify
their provision of programming services without a pro-
vider’s license if they use other telecommunications
means (for example, satellite).
Under the Broadcasting, a provider may use the mul-
ti-channel telecommunication network based on an
agreement with the network’s owner, which itself must
be licensed as an operator of such telecommunication
network under the Telecommunications Law. Alterna-
tively, an operator of the telecommunication network
may receive a provider’s license, as expressly permit-
ted by the Broadcasting Law. Since enactment of the
restated Broadcasting Law in 2006, cable operators
have usually adhered to the latter licensing structure,
while they complained that the law imposes obligation
of dual licensing for the same service. Moreover, if the
cable operator makes any alterations to the program
packages and transmits to customers (for example, ad-
aptation to local legal requirements, advertisement, in-
teractivity etc.), such operator may fall under definition
of a “broadcasting organization” and, accordingly, the
National Council will require them to obtain a broad-
casting license.
Until recently, there has been an inconsistency be-
tween the Broadcasting Law and the National Council
regulation as to the documentation required the licens-
ing application, with the list of the National Council be-
ing much longer. The situation changed this Autumn
when the National Council enacted new licensing re-
quirements for providers, – Regulation on the Licens-
ing Procedure for Program Service Providers, Introduc-
ing Amendments to the Licensing of Program Service
Providers and Issuance of a Duplicate License of the
Program Service Provider, adopted by the National
Council regulation No.1741 dated 8 October 2008 (the
“Regulation 1741”). As of the date of this article, the
lists of the documents to be filed by an applicant for a
license under the Broadcasting Law and Regulations
are almost identical, while the licensing procedure be-
came more transparent and straightforward.
The program services provider’s license is issued based
on an application procedure for a term of 10 years.
One of the most debated provisions of the Broadcast-
ing Law is the requirement for the service provider
to prepare and submit a general program packaging
concept, which is then adopted by the National Coun-
cil as an annex to the provider’s license. No specific
requirements are set by the law for the concept. Thus,
the applicant is free to develop the concept at its own
discretion. The concept must be re-filed and registered
annually, while the licensed provider must ensure that
it has complied with its effective concept during the
preceding year.
Under Regulation, program packages may include pro-
grams that are: (1) licensed by the National Council
(that is, Ukrainian broadcasters), (2) owned by produc-
ers/ copyright holders subject to the jurisdiction of a
country that ratified the Trans-Frontier TV Convention,
and program providers not under items (2), but who
televise in compliance with the requirements of the
Trans-Frontier TV Convention. Compliance of content
is determined by the National Council, and, as of No-
vember 2008, 83 programs under criteria (1)-(3) are
included in the list of the programs permitted for broad-
cast. This means, arguably, that these programs do not
require adaptation, see Program Adapation infra. As of
1 October 2008, the National Council requires program
providers to remove from their packages any programs
not approved by the National Council. Mostly, this re-
quest concerns unadapted programs from Russian tel-
evision predominantly watched by the Russian-speak-
ing population. This decision has been labeled political
and scandalous, and has been countered by certain
diplomatic moves by the Russian Federation. Never-
theless, as of publication of this article, cable operators
are still providing these programs to their subscribers,
notwithstanding the decision of the regulator. Applica-
ble fines for violation can be as harsh, including sus-
pension of a license.
The Broadcasting Law also requires providers include
the so-called social package in any of its packages, or
“universal program service”, which mainly includes pro-
grams of terrestrial broadcasters in the provider’s serv-
ice area. The composition of this package is affirmed
and regularly reviewed by the National Council.
Program Adaptation
Under the Broadcasting Law, the contents of retrans-
mitted programs must be adapted to comply with the
requirements of Ukrainian law if “producers/ right hold-
ers” of the retransmitted programs are located in the
countries that have not ratified the Trans-Frontier TV
Convention. As discussed above, such an adaptation
will require a broadcasting license. The Trans-Frontier
TV Convention requires that a major share of national
transmission time be reserved for European content,
objective news and social programming; the Conven-
tion also sets certain restrictions such as the protection
of minors. Despite numerous references by the Nation-
al Council to similar practices abroad, the alleged re-
quirements of the Broadcasting Law and the decisions
of the National Council on adaptation do not seem to
exist in other states - parties to the Trans-Frontier TV
Convention.
Statutorily, the term “adaptation” is not defined, nor is
there any criterion for such adaptation or specific re-
quirements under Ukrainian law. This uncertainty pro-
vokes a great deal of speculation, both from the Na-
tional Council and from TV services providers. In an
attempt to clarify the situation, the National Council has
adopted several instruments with regard to content ad-
aptation requirements.
For instance, in the Regulation on the Licensing Pro-
cedure for Cable Broadcasting and Retransmission
www.chamber.ua
73
 of Television Programs and Shows, introduced by the
decision No.1787 dated 12 December 2007, the Na-
tional Council adopted specific requirements that re-
transmitted programs must comply with: (1) limitations
on the freedom of broadcasting (that is, fair coverage
of events, prohibition of propaganda of war, violence,
racial discrimination, violent overthrow of constitutional
order of Ukraine, etc.); (2) adherence to copyright pro-
tection and related rights; (3) special restrictions re-
garding the protection of public moral and minors; (4)
Ukrainian advertisement rules etc. Neither this regula-
tion, nor any other document of the National Council
clarifies the procedure or technology for such adapta-
tion.
Over the past several months, much speculation has
been circulating in the Ukrainian media regarding the
mandatory use of Ukrainian language in the programs
retransmitted by service providers. Under the Broad-
casting Law, with regard to multi-channel networks, the
application of the Ukrainian language requirements ap-
pears to be limited to the retransmission of programs
and shows of Ukrainian broadcasters licensed by the
National Council. For retransmission of the programs
of foreign broadcasters, the Broadcasting Law allows
the use of the original language.
Nevertheless, some members of the National Council
have made controversial statements on this matter,
making some service providers believe that the ad-
aptation procedure requires a Ukrainian translation of
74 Uniting Leading Companies from over 50 Nations Across the Globe
every retransmitted program, which is in a language
other than Ukrainian. Finally, in several press state-
ments, as well as in draft regulation No.1037 dated 28
May 2008, the National Council has officially confirmed
that that the mandatory use of the Ukrainian language
as specified in the Broadcasting Law did not apply to
foreign broadcasters that plan retransmission of their
programs through cable network(s) in Ukraine.
Another relevant document is a list of programs of for-
eign broadcasters (introduced by decision of the Na-
tional Council No.652 dated 2 April 2008) that comply
with the requirements of the Trans-Frontier TV Con-
vention. Based on this, the programs in the list do not
require adaptation to the requirements of Ukrainian
law. The basis for the development of such list and the
criteria for the National Council are unclear. It was also
surprising to see that the list included certain programs
apparently produced by some well-known Russian-
based channels transmitted (or retransmitted) through
business entities in the EU countries. Despite numerous
requests from the programming service providers, the
National Council members were reluctant to disclose
their reasoning. Nevertheless, the National Council is
expected to extend the list of permitted programs to
include more than 300 programs.
It remains unclear, though, whether it is legal to re-
transmit programs that have been adapted to the re-
quirements of Ukrainian law but not included into the
list by the National Council.
 X REAL ESTATE DEVELOPMENT
KYIV CITY OFFICE MARKET OVERVIEW
By Knight Frank LLC

www. knightfrank.com.ua

Kyiv City Office Market Overview

Key Indicators Class А Class В (В+/B-)

Total stock by October 1, 2008 (A & B- classes), thousand
1,018.4*
sq m
Delivered by October 2008, thousand sq m 109.2
Vacancy rate, % 2-4% 3-5%
Triple net rents ($/sq m/annum) as of November, 2008 $900-$1,020 $480-$780
Operating expenses ($/sq m/annum) $78-$120 $54-$72
Offered prices for sale ($/sq m) No sales $4,500 - $10,000
Data include reclassification of office properties from A-B-C classes to A-/B+/B- classes
Source: Knight Frank Research

Key Trends of the Office Market
• In January-August 2008, Kyiv office market experienced
a steady growth of rents while the vacancy rate was re-
maining low, showing that demand is outpacing supply.
By August 2008, rents for professional office spaces in
CBD area had reached $1,320 per sq m per annum.
• In September 2008, the upward rent trend changed –
growth of rent rates slowed down. In October they
dropped minimum by 10%.
ka) and Golosiivskyi (Zhylyanska and Antonovycha
Streets) city districts. Due to the lower rents, com-
pared to the city center, office properties in outlying
districts are well demanded by the tenants.
Office Supply
By October 2008, about 109.2 thousand sq m of newly
developed office properties have been delivered to the
market. Thus, the total stock of professional offices in
Kyiv made 1,018.4 thousand sq m.

• In January-October 2008, the delivery of new offices Figure 1. Total Supply of A and B (+/-) Class
reached 109.2 thousand sq m. It is expected that by Offices in the City of Kyiv, thousand sq m
the end of 2008 total annual delivery would make
148.7 thousand sq m.

• One third of office properties announced for commis-

sioning in 2008 will be delivered in 2009-2010.

• New regulations provided by Kyiv City Council for

2009 have introduced new service charges for of-
fice users that are 5-10 times higher as compared to
2008. This is likely to drive the rents down.
• Geography of new business centres is gradually
expanding beyond the CBD. Office projects are an-
nounced in Podilskyi, Shevchenkivskyi (Lukyaniv-
Source: Knight Frank Research
The volume of non-professional offices including offices
located in residential properties, research institutions and
other administrative buildings still remains significant on
the market and is estimated at 1.2 mln sq m.

www.chamber.ua
75
 Table 1. Key Projects, Delivered in 2008
Business Centre Location
BC “Deloitte” 47-50, Zhylyanska Str.
BC “Mikom Palace” 27, Dehtyarivska Str.
BC “Renome” 5, Dymytrova Str.
Business Centre 172, Antonovycha Str.
BC “Illinskiy”, 2nd stage 8, Illinska Str.
Business Center 4, Verkhniy Val
BC “Fahrenheit” 28, Fizkultury Str.
Business Center 25B, Sagaidachnogo Str.
Business Center 25/12, Khoryva Str.
Business Center 8/16, R.Okipnoi Str.
Total
Source: Knight Frank Research
Due to redevelopment of the old-type non-residential
properties and development of new office centres, a
share of professional offices has grown up to 46% of
the total office stock in Kyiv.
The market experiences delays in delivery of the ma-
jority of announced projects. In the beginning of 2008,
the developers announced commissioning of 353 thou-
sand sq m of office properties. In 2008 actual delivery
may reach 148.7 thousand sq m.
In 2008 the delivery volumes have dropped more than
twofold as compared to 2007. Current office market
saturation ratio makes 371 sq m per 1,000 inhabitants
which is twice lower as compared to the Moscow mar-
ket. The latter enjoys office saturation ratio at 800 sq
m per 1,000 inhabitants. In Kyiv office market vacancy
varies from 2 to 5% in average. In 2008 offices with
central location enjoyed 2-4% vacancy, while those in
outlying areas experienced 3-5% vacancy.
In the short term the vacancy in office segment will in-
crease, especially in A and B+ class offices. Due to the
financial crisis and economic instability, a lot of tenants
shorten their staff and budgets. Therefore high office
rents will be a heavy burden for the large-scale ten-
ants. In 2008 the B- class office premises and even
non-professional offices will be well demanded due to
the low rents.
Currently, the structure of professional office market
shows: 16% - the A- class offices, 32% - the B+ class,
and 52% - the B- class. In the short run the market
structure is likely to change towards increasing shares
of the B+ and B- class office properties. However, if
the A- class office project Esplanada will be commis-
sioned in 2009, the share of the A- class offices may
reach 17%.
76 Uniting Leading Companies from over 50 Nations Across the Globe
Class Total area, sq m
А 9,600
B+ 11,000
B+ 6,700
В+ 5,100
B+ 30,000
B+ 15,000
B+ 11,500
B+ 5,000
B- 4,800
B- 10,500
109,200
Figure 2. Kyiv Office Market Structure, %
Source: Knight Frank Research
Demand for Offices in Kyiv City
Professional offices in the city centre and in Podil area are
highly demanded as usual, though a target area of desir-
able office locations is expanding. A significant number
of companies consider leasing office space in Solomyan-
skyi, Obolonskyi (Petrivka), Shevchenkivskyi, and Golosi-
ivskyi city districts. The trend toward expansion of office
locations is gaining strength due to the high rent rates in
CBD and attractive rent rates in the distant districts.
The main tenants’ office requirements include: well-
developed infrastructure, good transport accessibil-
ity, open layout, sufficient parking space, professional
property management and office engineering etc. In
professional offices sector the 200-500 and 500-1,000
sq m lots are in the highest demand.
In 2007 and the first half of 2008, offices were well demand-
ed by the FMCG and IT companies, as well as by financial
market players. Their share in the total take up was 47%.
Economic crisis started in 2008 with following recession
in 2009-2010 are expected to diminish office demand and
drive the rents down. Optimization of companies’ struc-
tures and staff reduction will reduce the main tenants’ re-
quirements for office premises at least by 30%. Sublease
offers shall become a key trend of the next year.
Figure 3. Area Required (sq m), %
The sale prices for high-quality offices had remained
nearly unchanged in the course of 2007. The A-class
offices are not offered for sale on the market. The B+
class offices prices could vary from $4,500 to $10,000/
sq m net of taxes. More often sales of the high-quality
offices are executed through the investment deals for
the whole property.

For 2009 the Kyiv City Council has introduced new

Source: Knight Frank Research
Figure 4. Demand Breakdown by Client Profiles, %
service charges for companies, operating in the city.
Thus, service charges for tenants and office owners
have increased 5-10 times, reaching $15-$25/sq m/
month. This shall negatively affect the market by further
declining of office rents and shortening the demand.

Table 2. Office Projects Commissioned in 4Q 2008

Total Area,
Business Center Location Class
sq m
BC «Irva» 10/14, Radish-
В- 12,000
(2nd stage) cheva Str.
31, Zhylyanska
BC «Capital Hall» В- 12,000
Str.
BPnd«Protasoff» 2/1, Hrinchenko
В- 15,500
(2 stage) Str.
Other:
Consulting – 4.5% Embassies – 2.5% Total 39,500
Marketing/Ad– 4% Media – 2.3%
Law companies – 3.5% Tourism – 2.3% Source: Knight Frank Research
Printing – 3.1% Transport/logistics– 1.3%
Retail – 2.5%
The office segment is one of the most attractive for
Source: Knight Frank Research investors. The majority of developers are involved in
construction of office centres and mixed-use projects
Office Rents with significant office spaces. High rents and significant
demand for office facilities encouraged appearance of
In 1H 2008 office rent rates had significantly increased. new office facilities on the market. The new offices’ av-
Delivery of new business centres has not affected erage size is growing together with a quality of man-
market rates. Lack of the A- and B+ -office supply had agement and engineering.
driven the rents up. In 1H 2008 rents had grown by
18% for the A-class properties and by 16% for the B+/B- Figure 6. Total Kyiv Office Stock Forecast,
class properties. The annual offices’ rents range had thousand sq m
reached: $960-$1,320/sq m for the А-class, $720-$900/
sq m for the B+ class, and $600-$720/sq m for B- class.
In October 2008, office rents have gradually slid down
by 10-15% on average. Current rent rates vary from
$900-$1,020/sq m for the А-class, $600-$780/sq m for
B+ class, and $480-$600/sq m for B- class.

Figure 5. Office Average Rent Rates ($/sq m/year)

in Kyiv
Source: Knight Frank Research

Within a couple of years the market will continue to grow

with a low pace. The pipeline of office projects anticipated
delivery of 544 thousand sq m of office properties in 2009
and some 1.5 million sq m in 2010. However, economic
and financial crisis corrected the developers’ plans. All
large-scale projects have been delayed for several years.
The developers are likely to continue construction of the
Source: Knight Frank Research small and middle-scale projects (up to 50 thousand sq
m) which are currently on the latest construction stages.

www.chamber.ua
77
 Therefore, in 2009 the total office stock in Kyiv may be
supplied with additional 130.2 thousand sq m of office
properties. Office rents are likely to remain at $420-$600
for B+/B- class office properties and $600-$780 for A-
class properties. Primarily, new launched projects will
include small-scale properties (up to 20 thousand sq m)
that do not require serious financing and are located in
the areas with good transportation accessibility. Market
revival will significantly depend on the availability of bank
crediting, interest rates and economic development of
the country, especially in the real estate sector.
Kyiv City Warehouse Market Overview
Key Indicators Class А
Total stock by November, 2008
419
(A&B Class), thousand sq m
Delivered as of October, 2008,
218.8
thousand sq m
Projects to be commissioned by the
9.3
end of 2008, thousand sq m
Vacancy rate, % 5%
Triple net rents ($/sq m/annum) $111-
as of November, 2008 $126
Operating expenses ($/sq m/annum) $21-$26 $15-$24
Source: Knight Frank Research
Supply
Since 2005, development of warehouse market had been
accelerating. Starting from that period, a significant number
of professional warehouses had been delivering to the mar-
ket. In 2006, the total stock grew up by 94% as compared
with 2005. In 2007 total stock in the sector increased by
60.4%. During 10 months in 2008, 230.4 thousand sq m
of newly developed warehouse properties were delivered
to the market. Thus, the total supply of professional ware-
house in Kyiv and Kyiv region made 628.4 thousand sq m.
Before the year-end, a new warehouse complex Impeco is
expected to be launched, making a total supply of the A-
and B-class warehouse properties reaching 638 thousand
sq m. This will contribute to a 60.3% growth in 2008.
Figure 7. Total Stock of A and B (+/-) Class Ware-
houses in Kyiv and Kyiv Region, thousand sq m
Source: Knight Frank Research
78 Uniting Leading Companies from over 50 Nations Across the Globe
Some 45% of the warehouse market belongs to profes-
sional properties, the rest 55% belongs to law-grade prop-
erties represented by converted industrial facilities and
hangars located in industrial Kyiv areas and satellite towns.
This type of warehouses is well demanded because of their
suitable location and possibilities for renting small areas.
Professional warehouses enjoy high-quality param-
eters (no less than 9.6 m ceiling height, availability of
fire alarm and automatic fire-extinguishing systems,
total temperature control, autonomous power supply,
air-conditioning systems), a wide-range services, pro-
fessional management, and large storage space. The
sizes of new warehouse complexes gradually grow.
Class В
(В+/B-) Since 2007, first warehouse complexes exceeding 40
thousand sq m were commissioned to the market, in-
209.4 cluding GLD, MLP-Chaika. It is notable, that the com-
panies building warehouses for their own needs prefer
11.6 their sizes within 10-20 thousand sq m.
Table 3. Key Projects, Delivered in 2008
Total Area,
$128- Warehouse Class
sq m
$147
West Gate Logistic (phases 1,2) А 16,000
MLP-Chaika A 94,800
Kopylov Logistics Park А 27,500
Raben Ukrane A 20,000
Biocon (phase 1) А 10,000
Warehouse complex (Kviza) А 20,000
Warehouse complex (Domotekhnika) А 16,500
Warehouse complex (Foxtrot) А 14,000
Warehouse complex (Artur-K) B 2,600
Prommash-Brovary (phase 2) В 9,000
Total 230,400
Source: Knight Frank Research
The warehouses location structure shows that Zhytomyr
direction remains more favorable among others with 8
complexes located here. 5 complexes located in each
of the following directions: Boryspil, Warsaw, and
Brovary – total 15.
In 2007, lack of high-quality logistic properties caused
developers’ interest in construction of warehouse
complexes. As a result, a number of developing companies
declared their entering logistics market and purchase
of land plots. Since the developers had focused on
purchasing facade land plots along main highways of the
Kyiv region, this contributed to enormous growth of land
prices. While in 2006 the land plots suitable for logistics
projects development were offered at $20/sq m, by 2008
the land price had reached $50 - $90/sq m. The land plots
along the Kyiv Ring Road were offered at $150 - $250/
sq m. European and Russian companies specialized in
Map 1. Location of Warehouses in the Kyiv Region
Source: Knight Frank Research
logistic properties development entering the Ukrainian
market stirred up interest in this market segment. The
market players announced some 5.5 million sq m of
warehouses complexes to be delivered by 2012.
However, in 2008 sector quick growth has been hin-
dered by a number of following factors:
• Deficit of land plots ready for development with a
proper zoning and documentation. As a rule, offered
land plots included those with agricultural zoning to
be converted into industrial lands. Non-transparent
land allocation procedures and obtaining of a proper
land zoning that take from half a year to one year
delayed launch of many projects.
• An overheated demand for land and overprice land
plots caused many developers to postpone project
development for several years.
• Lack of experience in development of logistic proper-
ties by national developers and seeking for partnership
in joint projects development. The speculative market
caused overrated price expectations of the Ukrainian
developers negotiating with foreign partners.
• Lack of well-though strategy for logistics projects devel-
opment. Many developers announced launch of their
projects guided by speculative demand in the segment.
Stabilization of lease rates together with growth of the
cost of construction and construction materials prices
during the end of 2007 – 1H 2008 forced developers to
recalculate projects’ profitability and review their plans.
• Overrated demand on the market: deficit of the profession-
al warehouse properties, active seeking for free spaces
by quick-growing FMCG companies, and foreign logistic
companies entering the market – all contributed to grow-
ing demand for professional properties. However, the
real demand has been overrated more than 2-3 times.
•High capital intensity of the projects and need for ex-
ternal financing. As a rule, warehouse project of 50
thousand sq m requires about $40 million of invest-
ments to be attracted either by lending funds or by
creation of joint venture with a partner. Seeking for
partners and preparation of the project for bank lend-
ing require fulfillment of a number of time consuming
procedures.
Thus by November 2008 only 240 thousand sq m of
properties out of 700 thousand sq m announced before
have been commissioned.
Despite considerable volumes of the new properties commis-
sioned in 2008, the segment development is slowing down.
This trend has been deepened by the general economic
downturn in the country and limited projects’ financing.
www.chamber.ua
79
 Table 4. Warehouse Projects to Be Commissioned a steady demand for the properties located nearly in all
in 2009 directions. Nevertheless, the warehouse properties lo-
cated in Zhytomyr and Brovary directions were in the
Total Area, highest demand.
Warehouse Class
sq m
Komodor А 66,960 The demanded lots primarily depend on the type of
West Gate Logistic (phase 3) А 62,000 tenants. The areas of 2,000–3,000 sq m are the most
demanded among distribution companies, while logistic
MMK А 32,000
companies prefer areas of 6,000–10,000 sq m.
Brovary Logistic Centre A 49,180
Warehouse in Martusivka
A 50,490
In 2005 – 1H 2008, an active demand have been sub-
(phase 1) stantially exceeding the supply. Nearly all new ware-
IIG - Aladdin A 30,000 house complexes had been leased out prior to the date
Total 290,630 of commissioning. The majority of properties delivered
to the market in 2008 have been already pre-leased in
Source: Knight Frank Research 2007 or in 1H 2008.

Currently, almost 200 thousand sq m of new warehouse
complexes have been completed, however their official
commissioning should be expected no earlier than in
2009. The segment analysis shows that in 2009 no less
than 290.6 thousand sq m of new properties should be
commissioned. Thus, by 2010 the total stock of profes-
sional properties in the segment shall have exceeded
929 thousand sq m.
Figure 8. Total Kyiv Warehouse Stock Forecast,
thousand sq m
The objects due to be commissioned in 2009 already
have pre-lease agreements for 60-70% of the total area.
Thus, in 2009 after 290 thousand sq m of new logis-
tic properties are commissioned, de facto only no more
than 80-100 thousand sq m will remain vacant.
In 1H 2008, the average vacancy rate for operating
warehouses made about 1-2%. Starting form 2H 2008,
the vacancy rate in the segment have been growing,
reaching 5% in November 2008. The economy crisis
caused critical review of retailers’ strategies and reduc-
ing demand for logistic properties.

Since the summer of 2008, the demand for logistic cent-

ers outside the city also declined due to new regulations
by the Kyiv City Administration, restricting motor trans-
port entering Kyiv in day-time that made logistics more
complicated for many tenants.

Rents

Source: Knight Frank Research
Figure 9. Warehouse Market Structure, %
As of November 2008, the annual rent rates for profes-
sional logistic properties reached $111-126/ sq m for
the A-class and $128-$147/ sq m for the B-class. In 1H
2008, the rent rates had been growing due to a sup-
ply deficit and increase of the construction costs and
construction materials prices. At the same time the B-
class logistic properties’ offered rent rates exceed the
demanded A-class rent rates by 10-15%. The overrated
rents for the B-class logistic properties are resulted from
their proximity to the city and availability of leasing small
lots.

Since 3Q 2008 a market trend for rent rates stabiliza-

Source: Knight Frank Research
Demand
In 2008, the analysis of tenants’ geographical preferenc-
es for warehouses locations in the city suburbs showed
tions has been strengthening, while a few objects’ rent
rates dropped by 5-7%. Decline of economic activities
in all sectors caused reviews of leasing plans by the cli-
ents. Many companies decreased the volumes of de-
manded lots or delayed decisions until the spring 2009.
As a result, the vacancy rates have risen by 10-15%. In
order to attract tenants landlords had to offer more con-
siderable list of services and extra benefits.

80 Uniting Leading Companies from over 50 Nations Across the Globe

Figure 10. Warehouse Average Rent Rates ($/sq m/year) in Kyiv and Kyiv Region
Source: Knight Frank Research
Considering the trends of 2008 and perspectives of the
country’s economic development for 2009, the growth
for professional logistic properties’ rent rates is not ex-
pected in 2009. Meanwhile the rent rates are more likely
to remain at the level of 2008.
The Outlook for Development
Next year the sector development will nearly come to
a stop. The projects due to be officially commissioned
in 2009 have already been leased by 65%. Thus, no
more than 80-100 thousand sq m of vacant spaces will
be supplied to the market. Considering current 5%, in
2009 the total supply of vacant space should not ex-
ceed 90-130 thousand sq m.
New vacant properties will be gradually absorbed by the
market in 2009 while, considering the current economic
crisis, new properties’ rent rates will remain at the level
of 4Q 2008. The demand for new warehouses outside
the Kyiv city will rise due to the increase of service
charges for businesses located in Kyiv by the Kyiv City
Administration more than 4-5 times.
Considerable heating costs for logistic properties within
the city will force tenants to seek vacant properties out-
side the capital’s boundaries.
Currently, the market is gradually moving to the build-
to-suit format. Thus, developers insure themselves from
possible risks of not leasing the space for expected
rates, while tenants are planning their business develop-
ment for the next few years. Considering current market
trends, development of the new projects of this format
and virtually rejection of the build-to-lease format projects
may be expected during the next several years.
The thorough market analysis shows that nearly all new
projects announced to be launched in 2010 have been
halted due to lack of external financing. Thus, in 2010
the sector will be faced with a severe deficit of a new
supply and following rent rates growth.
www.chamber.ua
81
 REAL ESTATE TAXATION
By Baker & McKenzie - CIS, Limited

www.bakernet.com

ACQUISITION OF THE REAL ESTATE INVESTMENT
1. Acquisition of the Real Estate Property
1.1. Acquisitions Exempt from VAT
No VAT applies to acquisitions of land plots, except for
land plots, which are acquired together with, and con-
stituting an intrinsic value of, real estate situated there-
upon.
No VAT applies to acquisitions of residential premises
at the secondary market.
1.2. Acquisition Subject to VAT
VAT is applicable to:
1. Purchase of a building,
2. Purchase of a building together with a land plot lo-
cated thereunder;
3. Purchase of a building under construction works;
4. Purchase of residential premises at the primary market.
2. Acquisition of Shares of a Real Estate Oriented
Company
Ukrainian legislation does not provide any special tax
treatment of the transactions with shares of real estate
oriented companies operating in Ukraine.
Instead, the trade operations of a Ukrainian CPT payor
with shares and corporate rights, including shares or
corporate rights of real estate oriented companies, are
subject to a separate tax accounting of the financial re-
sults of such operations. A CPT payor is liable to 25%
CPT with respect to the so-called “positive financial re-
sult” of the operations with shares and corporate rights
ascertained in accordance with such tax accounting
rules.
A foreign entity, in contrast, in the absence of a perma-
nent establishment in Ukraine, is liable to 15% Ukraini-
an Withholding Tax with respect to the capital gains de-
rived from the sale of shares of Ukrainian companies,
unless an applicable tax treaty provides otherwise.

Rate 20% The transactions with shares, including shares of real

The higher of the sale price and the mar-
estate oriented companies, are not subject to 20%
Basis ket value if the market value exceeds the Ukrainian VAT if the settlement for shares is made in
sale price by more then 20%. monetary terms.
Date of payment As per terms of the contract.
3. Financing the Investment
Liable person Seller but financed by the purchaser.
Only if the purchaser conducts activity For tax purposes, the deduction of interest payments
subject to VAT (property developers/
Recoverability may be deferred by the application of the Ukrainian
lease under VAT regime) and is a regis-
tered VAT payer. “earning stripping” rules. Besides, a withholding tax
may be levied on interest paid to a foreign lender.
1.3. Other Acquisition Costs
3.1. Earning Stripping Rules
Land: 1% of the higher of the sale price or
the state monetary valuation of land. Interest expense is, in principle, deductible in full to
Building: 1% of the higher of the sale price a Ukrainian borrower, provided that it is incurred in
Notary fees or the Bureau of Technical Inventory’s regis- connection with its ordinary and necessary business
tration value, but not less than the statutory
activity. However, under certain conditions, so-called
tax exempt income of individuals (approxi-
mately USD4). “earning stripping” restrictions will apply if interest will
be paid to the foreign shareholder of a Ukrainian bor-
1% of sale price of real estate set forth in
Pension fund
Sale and Purchase Agreement financed by rower or to such foreign shareholder’s foreign affiliate.
duty
the purchaser. For the restriction to apply, foreign shareholders must
State regis- own at least 50% of the charter capital of a Ukrainian
tration fee
Fixed fee of approximately USD20. borrower. Under such circumstances, the applicable
Tax deduct- law will, in general terms, allow to deduct interest ex-
Immediately.
ibility for CPT penses incurred (accrued) on a shareholder’s loan in
a given tax reported period in the amount, which does
82 Uniting Leading Companies from over 50 Nations Across the Globe
not exceed the sum total of (i) any interest received
by the borrower in, and (ii) 50% of its “taxable profit”
ascertained in accordance with such earning stripping
rules of, such given tax reported period.
However, any portion of the interest expense, which
will remain non-deducted as a result of the operation of
such restriction, may be carried forward until deducted
in full according to the aforementioned earning stripping
rules.
Earning stripping rules will not apply, and, therefore, in-
terest will be deductible in full as accrued or paid, in
case of loan being granted by (a) Ukrainian or foreign
bank, (b) other Ukrainian or foreign financial institution,
(c) foreign government or official agency or international
financial institution, (d) any foreign company other than
the borrower’s shareholder or shareholder’s affiliate,
provided, however, that interest is incurred in connec-
tion with its ordinary and necessary business activity.
From the legal standpoint, however, under loans ma-
turing in less than a year, the borrower will be disal-
lowed paying interest to a foreign lender, if such inter-
est would exceed the maximum interest rate. Currently,
such maximum rate is established at 11% per annum.
No maximum interest rate limitation applies to loans
with the maturity over one year.
3.2. Withholding Tax on Interest
Under Ukrainian law, 15% domestic withholding tax is
withheld by a Ukrainian borrower from the amount of
interest paid to a foreign lender. This withholding tax
may be reduced or entirely eliminated by an applicable
bilateral double taxation treaty. No domestic exemp-
tions are provided for a withholding tax on interest.
2. Distribution of Profit
• Dividends are taxed at the distributing
entity level at a rate of 25%, which is
charged on, and in addition to, such
Withholding dividends. The distributing entity may credit
tax on
such tax levied on dividends against its
dividends
distributed corporate profits tax liability.
by a local
company
to a foreign
• 15% Ukrainian withholding tax will apply
shareholder to dividends paid by Ukrainian distributing
entity to a foreign shareholder unless an
applicable double taxation treaty provides
otherwise.
If dividends are taxes at the level of the
distributing entity as described above, such
dividends are not taxable at the level of a
Taxation of
dividends local company. If dividends are received by
received a Ukrainian shareholder, as a CPT payor,
by a local from a foreign distributing entity then such
corporation
Ukrainian shareholder would be liable to
25% Ukrainian CPT with respect to such
foreign dividends
SELLING THE REAL ESTATE INVESTMENT
1. Selling the Real Estate Property
See above: acquisition of a real estate
Selling costs
property.
Capital gain
taxation
Standard 25% CPT rate will apply.

HOLDING THE REAL ESTATE INVESTMENT Sale by 15% Ukrainian withholding tax, unless an
corporate applicable bilateral double taxation treaty
non-residents provides otherwise.
1. Rental Activity

Rental Rental income is subject to the CPT at the rate 2. Selling the Shares of the Real Estate Oriented
Income of 25%. Company
• Land is not subject to depreciation, unless
such land is acquired together with real estate
situated thereon, in which eventuality the 1% state duty (notary fee) if the sale of
purchase price of such land would be subject to shares is caused in the form of the notary
Selling costs
Deprecia- depreciation allowances at rates applicable to deed (such notary deed is not mandatory
tion real estate. required).
• Buildings, other real estate is subject to de-
preciation allowances at a quarterly rate of 2% Capital gain
taxation
Standard 25% CPT rate will apply.
applicable to the declining balance sheet value
thereof.
Lease by a VAT payor of both residential build- Sale by corpo- 15% Ukrainian withholding tax, unless an
ings and nonresidential premises (for instance rate non-resi- applicable bilateral double taxation treaty
VAT
offices building, warehouses, shopping centers) dents provides otherwise.
are subject to 20% VAT.

www.chamber.ua
83
 REAL ESTATE LAW IN UKRAINE
Dr. Julian Ries, Partner,
Beiten Burkhardt Kyiv
www.bblaw.com
Market Overview
The recent global economic changes has influenced
the economy of Ukraine in all major industries. The
real estate market is no exception. Debt financing for
projects has become very difficult to near impossible
due to highly restrictive financing criteria for foreign
banks. With even big developers strapped for cash
absent further financing, many construction projects
around the country are being delayed, and some even
suspended indefinitely. What is more, some predict
that some developers might need to sell some of their
projects in order to financing others. Should bank loans
become due, it may be that certain projects are even
sold at a marked discount to avoid default. While some
may falter, others are laying in wait to pick up the pro-
verbial bricks albeit at a much lower price.
With the onset of signs of recession, Ukraine’s indus-
tries, in particular the metallurgical and chemical indus-
tries, are reeling from reduced demand, with layoffs
anticipated in the near future. This may seriously af-
fect the overall economic situation in Ukraine with high
unemployment rates, crippled economy and weakened
state budget.
However, how much this will influence the real estate
market remains unclear. Some market observers as-
sume there will be a decrease in rental rates for about
25 – 40 %. Others believe that prices especially for
office premises will not be seriously affected, if at all,
because the demand for quality premises still by far
outstrips supply on the market.
In the first half of 2009, a considerable slow down is
predicted in real estate transactions and investments,
however, Ukraine’s fundamental data will still make the
country an attractive market for real estate investment.
The following overview shall summarize some basic
principles of Ukrainian real estate law, giving investors
and their advisors a first impression of the legal envi-
ronment.
Ownership title to land and buildings
Unlike in most Western countries, buildings and other
structures are not treated as essential elements of a
parcel of land in Ukraine, and may be subject to dif-
84 Uniting Leading Companies from over 50 Nations Across the Globe
ferent law. In this regard, the ownership of land and
the ownership of any buildings or structures thereon
may be treated separately. However, circumstances
exist in which Ukrainian law does adhere more to the
Western model, with land and buildings being treated
collectively.
Due to the lingering influence of the previous Soviet le-
gal system, buildings are still given more significance
than the land itself in the Civil Code. Land is treated as
a component of a building, particularly in cases where
the land belongs to the building owner. As a result, own-
ership of a parcel of land on which a building is located
transfers to the purchaser of the building where the
seller has ownership of both the land and the building.
If the area of the land transferred to the purchaser of a
building is not specifically agreed upon, the buyer also
acquires ownership of the area of land on which the real
estate stands, as well as those parts that are essential
to the building’s use. However, where a purchaser ac-
quires ownership of a building located on the land of
another owner, the purchaser can only acquire a right
of use on the part of the land on which the building is lo-
cated and needed in order to make use of the building.
Free transfer of ownership
In Ukraine, the free transfer of real estate is permitted,
with exception to a handful of restrictions, such as that
on the permissibility to purchase agricultural land. A
“moratorium” currently prohibits legal entities or natural
persons from selling off agricultural land designated for
agrarian use, or who acquired it via privatization (de-
fined in the latter case as so-called “Paj” land). Until the
moratorium is lifted, it is neither permissible to change
the designated purpose of “Paj” land, nor can agricul-
tural land for agrarian purposes be transferred into the
capital stock of a business corporation.
Additionally, in accordance with Ukrainian law, agricul-
tural land cannot become the property of foreign natu-
ral persons or legal entities. However, agricultural land
may be leased by natural persons and foreign legal en-
tities for the purpose of engaging in agricultural activi-
ties over a period not to exceed 50 years.
Foreign ownership to real estate property
Foreign legal entities may acquire property rights to
non-agricultural land within city, town, or village limits,
insofar as they acquire property rights to real estate
objects on the land (buildings, other structures, etc.)
or wish to erect the same for the purpose of conduct-
ing business activities in Ukraine. Land outside of city,
town, and village limits can be acquired by foreign legal
entities only to the extent they purchase realty erected
on the land.
For foreign legal entities, the purchase of municipal or
state property is only permissible if they have a regis-
tered representative office in Ukraine.
Registration of property rights
Ownership and other immovable property rights, as
well as their creation, restriction, transfer, and dissolu-
tion, must be registered with the state authorities. For
example, mortgages are recorded in the Real Estate
Registry as real rights. The procedures for register-
ing rights to real estate are prescribed in the Law of
Ukraine “On State Registration of Real Rights to Im-
movable Property and Restriction of these Rights” en-
acted July 1, 2004 (hereafter RegRR).
The purpose of the RegRR is to establish a unified reg-
istry of rights to real estate, including any restrictions
thereto. All previous registries will be amassed in this
central registry, which will contain all information per-
taining to land and buildings throughout the country.
Practice will show whether this central registry will fulfill
the same functions as real estate registries do in some
countries (e.g. various County Recording System in the
USA, and the Grundbuch in Germany, for example).
However, until the Real Estate Registry is established,
registration remains in the hands of several discon-
nected state bodies. Data concerning rights to real es-
tate is recorded in the following state registries:
• Registry of Real Estate Ownership (but not land own-
ership);
• Land Cadastre (registry listing the rights to parcels
of land);
• Registry for Mortgages;
• Registry of Instances where Sale of Real Estate Ob-
jects is Prohibited;
• Registry of Legal Transactions.
The designation purpose of land
A special designated purpose is assigned to every
land plot in Ukraine, meaning that the particular land
is zoned only for a specific use. In practice, one must
differentiate between the designated purpose of a land
plot and the designated purpose (so-called designated
function) of a land plot in the general plans of the towns
and cities.
As treated in general plans (urban planning), land may
not have a fixed designated use prescribed by the
Land Code, but is categorized according to a designat-
ed function prescribed in the ordinances of the build-
ing and development committee on a national level.
Here, land is divided into three categories: residential,
industrial, and recreational, with all the permissible
construction objects specifically listed for each of the
three categories.
The existence of a designated function means that spe-
cific plots of land can only be developed with objects
allowed under the general plan. For example, if the
Land Cadastre lists a certain piece of land under the
category “Areas for Residential Complexes and Apart-
ment Buildings,” and the general plan only refers to the
construction of residential complexes, there can only
be a residential housing development. In this regard,
before an office building can be erected on residen-
tially designated property, the designated function of
the land would have to be revised. This would require
adherence with the procedures prescribed for revising
the designated purpose of a parcel of land. The re-
spective city council would have to issue a resolution
to that effect.
Acquisition of land
In Ukraine, the distinction between the primary market
(purchase from the state or municipality) and second-
ary market (purchase from other private entities) is
particularly important because different rules apply.
1. Purchase from the state or municipality
As a matter of principle, municipal or state owned
property is sold by auction, with a couple of exceptions
applying to land encumbered by buildings owned by
the buyer, where the buyer has a mining right, pursues
certain social activity and others, in which cases the
buyer is entitled to acquire the land directly absent an
auction.
For foreign legal entities, the purchase of municipal
or state owned property is only permissible with the
establishment of a tax-registered place of business in
Ukraine. Moreover, the sale of municipal or state prop-
erty to foreign legal entities, or to domestic legal enti-
ties having foreign investment is only permissible with
the prior consent of the Cabinet of Ministers and/or the
Ukrainian Parliament.
2. Purchase from private entities
The acquisition of land from other private entities is
less restrictive, and the principle of freedom of con-
tract applies.
www.chamber.ua
85
 Land use
An agreement conveying a right to possess and use
land must be finalized in a lease contract. The lease
contract must be in writing and subsequently recorded
in the State Registry, with the contract taking effect
only being recorded in the State Registry. Any use of
the land is prohibited prior to recording.
A lease contract must address several fundamen-
tal contractual elements, including identification of
the lease object, duration of the contract, lease pay-
ment terms, conditions on and designated purposes
of the land, and conditions regarding maintenance of
the leased object, among others. Moreover, the lease
agreement must contain a set of attachments related
to the metes and bounds diagram of the leased land,
a cadastral plan, a survey certificate delineating the
land boundaries, in addition to a transfer protocol for
the leased object. Failure to include these mandatory
essential elements in the lease contract may lead to
a refusal to register and/or to annulment of the lease
contract.
Encumbrance of land and other real property
Mortgage encumbrances are treated comprehensively
in the Law of Ukraine on Mortgages. Land can only be
pledged as collateral to a mortgage with a simultane-
ous pledge of the buildings or unfinished construction
objects that are also property of the mortgagor. Where
buildings on the encumbered land are not owned by
the mortgagor and a creditor forecloses on the mort-
gage, the new landowner must honor the building own-
er’s rights of use just as they were allowed by the mort-
gagee.
A mortgage contract must be certified by a notary pub-
lic, and the mortgage must be recorded in the State
Registry. However, until the system is set up com-
pletely, these records go to the Registry for Mortgages.
Ukrainian legislation adheres to a pure race theory,
whereby the first to record a mortgage has priority.
Where a mortgage is not entered into the Registry, the
mortgage contract remains effective, but the claim of a
mortgagee creditor will not have priority against claims
by other persons who have first recorded their interests
in the State Registry in the particular piece of land.
Unlike the legal systems of most European countries,
under Ukrainian law a pledge at maturity can also be
agreed upon, with the result that the mortgage object
can fall to the mortgagee creditor on expiration, or that
the mortgagee creditor may sell the mortgage object in
the name of the owner. A contractual agreement on a
pledge at maturity, or for private sale, can be arranged
in the interim until there is a court decision to enforce
foreclosure rights on the land.
86 Uniting Leading Companies from over 50 Nations Across the Globe
Taxation
Land ownership is taxed in Ukraine. Property taxes (lit-
erally called a “land levy” and, in extended sense, a
“land tax”) are prescribed in the law “On Payments for
Land”, and is payable by the legal entities and natu-
ral persons owning the land. The tax rate depends on
a formula determined annually for the particular land
unit (1 square meter, or 1 hectare), with the unit used
depending on whether a valuation of the land has
been performed. After recent changes in the property
tax provisions, property is no longer taxed based on
its normative value, but rather on the value according
to the price the parties agreed on in a sale purchase
transaction.
Revenue derived from real estate (rental payments) is
subject to general individual income tax. In accordance
with income tax law in Ukraine, the income of a natural
person is subject to a flat rate of 15 percent. The in-
come of nonresidents is taxed at 30 percent, while the
tax on capital gains (interest) by nonresidents is often
calculated differently due to international tax treaties
for avoidance of double taxation.
Profit earned by Ukrainian legal entities is taxed at a
rate of 25 percent according to the “Profit Tax Law”.
Revenues of foreign companies are subject to taxation
in Ukraine if their activities in the country are perma-
nently established. A permanent establishment of a
foreign company is automatically presumed where a
company owns real estate in Ukraine.
Gains from real estate transactions are taxed differ-
ently for natural persons and legal entities. The income
of a natural person from a sales transaction regarding
residential premises is not taxed, as long as they do
not execute more than one sale transaction per year
and the total area of the building does not exceed 100
square meters. If the total area exceeds 100 square
meters, income from the sale of the property in excess
of 100 square meters is taxed at the rate of 1 percent.
If more than one piece of real estate is conveyed within
a year, any additional revenue from the second sale
will be taxed at a rate of 5 percent. The income of legal
entities from real estate transactions is taxable accord-
ing to the general provisions of the Profit Tax Law in
Ukraine.
In Ukraine, the rate of value-added tax on sales trans-
actions is generally 20 percent. There are special rates
and exemptions for certain types of merchandise.
Building sales are generally subject to a 20 percent
value-added tax, although residential property is an ex-
ception. Sales of residential properties re not subject
to VAT, with the exception of the first time it changes
hands after building or restoration.
The transfer of land ownership is not subject to value-
added tax if the land is not transferred as a component
of the building. The latter does not occur in real prac-
tice, because properties are registered under different
regulations.
Fees and Levies
The government takes a fee on real estate transactions
subject to notarial certification. In principle, these fees
are paid by the person or legal entity benefiting (i.e.,
the purchaser), and it is not permissible to formulate a
contrary agreement on this in the contract.
A list of the amount of government fees pertinent to
certain common transactions is provided below:
• The notarization of contracts involving the sale of
houses, apartments, vacation and garden cottages,
garages, and other real estate objects that are the
property of natural persons incurs a fee of 1 percent
of the contract value, but not less than the applicable
minimum income tax (17 UAH, ca. 3 USD).
• Notarization of contracts involving the sale of land
owned by a natural person incur a government fee in
the amount of 1 percent of the contract value, but not
less than the income tax free minimum.
• Notarization of a contract on land lease (sublease) in-
curs a government fee in the amount of 0.01 percent
of the declared land value. Where the value of the
land has not been assessed, a fee in the amount of
1 percent of the value of the contract is due, but the
fee may not be less than the minimum basic personal
allowance.
• Notarization of a mortgage contract incurs a fee of
0.01 percent of the value of the mortgaged object.
• Notarization of a lease on real estate (sublease) in-
curs a state fee of 0.01 percent of the contract value,
but the fee may not be less than five times and not
more than fifty times the minimum basic personal al-
lowance.
• Notarization of a pledge contract incurs a government
fee of 0.01 percent of the pledged object, but the fee
may not be less than five times and not more than
fifty times the minimum basic personal allowance.
• Notarization of a contract for the purchase of property
from a government-owned business incurs a fee in
the amount of 0.1 percent of the purchased property.
• A real estate auction (but not a foreclosure auction)
of property belonging to a natural person is subject to
a fee in the amount of 1 percent of the sales value of
every real estate object that is auctioned off, but not
less than one minimum basic personal allowance.
• On acquisition of a building, a fee that goes to the
nation’s Pension Fund is charged in the amount of 1
percent of the contract value, in addition to the gov-
ernment fee mentioned above.
www.chamber.ua
87
 XI TAXATION
UKRAINIAN VAT TREATMENT OF CROSS-BORDER
SERVICES AS AN OBSTACLE TO FREE MOVEMENT OF
SERVICES BETWEEN UKRAINE AND THE EU
By PricewaterhouseCoopers
www.pwc.com/ua
There is a stated policy of developing and enhancing
the service industry in Ukraine. Also there is an abun-
dance of high quality staff and opportunities to improve
GDP through the development of this sector. However,
the current VAT legislation is “arguably” creating a com-
petitive disadvantage for Ukrainian service providers.
Are in fact Ukrainian VAT regulations a barrier and
competitive disadvantage for Ukrainian companies
providing their services cross-border? This question
can be analysed from many different points of view. In
practice, the three aspects described below influence
the international trade in services most.
No right to deduct input VAT related to “exported”
services
Under the Ukrainian VAT Law, taxpayers cannot recov-
er input VAT related to supplies, which are exempt from
VAT and those which are out of scope of VAT (based
on respective regulations or because the place of sup-
ply is not in Ukraine). As a result, businesses that are
engaged in the provision of cross-border services often
have to bear higher costs related to the unrecoverable
portion of VAT. Since service suppliers cannot recover
input VAT incurred on their purchases, the value of the
unrecoverable portion of the input VAT increases the
overall costs of providing the services and may consti-
tute a substantial element of the service price.
The approach resulting from the Ukrainian VAT regula-
tions evidently breaches the basic principles of the VAT
system. The right to deduct input tax is an integral part
of the VAT scheme and in principle, it cannot be limited.
The deduction system is meant to relieve the trader,
entirely, of the burden of the VAT payable or paid in the
1 Council Directive 2006/112/EC dated 28.11.2006 on the common system of value added tax.
88 Uniting Leading Companies from over 50 Nations Across the Globe
course of its economic activities. In particular, under ar-
ticle 169 of the EU VAT Directive1 , the recovery of input
VAT is granted if the incurred VAT relates to activities
carried out (i.e. with the place of supply) outside the EU
Member State in which that tax is due or paid and in
respect of which the VAT would be deductible, if the ac-
tivities had been carried out within that Member State.
Consequently, because Ukrainian service providers are
not allowed to recover input VAT incurred on purchases
attributable to their supplies for which the place of sup-
ply is deemed to be outside Ukraine, this may create
significant barriers and additional costs for Ukrainian
companies. As a result, provision of services for ex-
port may be viewed as less profitable in comparison
to domestic sales. Moreover, the services provided by
Ukrainian companies will be less competitive for for-
eign purchasers (more expensive due to the unrecov-
erable VAT included in their price) in comparison with
analogous services provided by other suppliers from
other countries. This situation in particular discriminates
against the innovative sectors of the economy (like
providers of services related to development of new
technologies (e.g. engineering services, data process-
ing, provision of information, assignment of copyrights,
granting of licenses, patents, etc) as well as consulting,
advisory, accounting services, etc).
Place of supply of services – export vs. import
Under the Ukrainian VAT Law (art. 6) – the place of sup-
ply rule for the provision of services to non-residents is
generally the place where the supplier is registered as
a VAT payer. Thus, if the service supplier is a Ukrain-
ian entity, the place of supply would be in Ukraine and
the transaction would be subject to 20% local VAT. The
procedure for determining the place of supply for certain
types of services rendered to no-residents differs from the
above rule. The exceptions cover, among others:
• Services connected with real estate – the place of
supply is where the real estate is or will be located;
• Services in cultural, artistic, sports, scientific, enter-
tainment or similar activities, activities supporting
transportation (like loading, unloading, reloading,
storehouse handling and other similar work, including
insurance) and the valuation of real estate – the place
of their physical performance;
• Supplies of intellectual property rights, advertising
and promotional services, services of consultants,
engineers, attorneys, accountants, auditors, actuar-
ies and other similar services, data processing and
the provision of information; leasing of movable prop-
erty to non-residents, which do not have a perma-
nent representative office, address or residence in
Ukraine – the place of the buyer’s registration.
If services are provided by a non-resident supplier to a
Ukrainian VAT taxpayer, different criteria for determin-
ing the place of supply apply. The place of supply co-
incides with the place of registration of the representa-
tive office of the non-resident supplier in Ukraine or its
Ukrainian agent, who acts on behalf of the non-resident.
If the non-resident has no representative office or agent
in Ukraine, the place of supply of services would be the
place of the purchaser’s location. Therefore, under the
wording of the VAT Law, it can be argued that whenever
a foreign supplier provides a service to a Ukrainian tax-
payer, the transaction will be subject to VAT in Ukraine.
Resulting from the above, under the Ukrainian VAT Law,
the same services provided by a Ukrainian company to
a foreign recipient and provided to a Ukrainian com-
pany from a foreign recipient are not treated equally, in
terms of determining the place of supply. This may lead
to double taxation of the same service (i.e. the transac-
tion may be subject to VAT in the country of the service
supplier and in Ukraine). In certain situations, e.g. for
businesses which cannot recover VAT in full, this will
have an adverse impact on their costs.
Misinterpretation and poor wording of place of
supply rules
In addition to the above, because of the poor wording of
the respective provisions in the VAT law, there current-
ly are many doubts on the VAT treatment of so called
“intangible services”. The tax authorities have issued
contradictory interpretations and based on various ar-
guments tend to state that for services provided to non-
residents the place of VAT taxation is to be determined
based on the physical ‘place of delivery’ of the services
(they disregard the rules of determining the place of
supply of services regulated in article 6.5). Under such
interpretation however, there would be no logic in set-
ting up specific rules for determining the place of sup-
ply of services in the VAT Act at all.
Being aware of this fiscal approach of the tax au-
thorities, in practice many Ukrainian service provid-
ers charge 20% Ukrainian VAT on the value of their
services, (even if under the place of supply rules, the
service should be treated as “out of scope” of Ukrainian
VAT). The amount of Ukrainian VAT is not recoverable
for foreign clients, which increases the entire cost of
the services and makes Ukrainian suppliers less com-
petitive with providers from other countries.
Conclusions
The rules of settling VAT on cross-border services
implemented in Ukraine, as well as the poor wording
of the respective legal acts which enable various in-
terpretations, indeed influence the competitiveness of
Ukrainian service providers. This, in particular, is re-
lated to the so called ‘intangible’ services, such as the
IT sector, consulting, engineering, accounting, etc.
What measures should be taken to solve the problem
and create a fair VAT trading environment for services
between Ukraine and other countries? The answer is
quite simple:
• Assuring the ability to deduct input VAT resulting from
purchases attributable to the provision of services for
which the place of supply is outside Ukraine, in order
not to discriminate against Ukrainian service provid-
ers; and
• Modifying the place of supply rules to ensure that the
rules incorporated into the Ukrainian VAT Law corre-
spond to similar rules governing EU countries. In ad-
dition, the same rules of place of supply should apply
to cross border services rendered and purchased by
Ukrainian companies.
www.chamber.ua
89
 TAX ASPECTS OF MERGERS AND ACQUISITIONS IN
UKRAINE
By PricewaterhouseCoopers
www.pwc.com/ua
I. INTRODUCTION
Tax environment for M&A
The Ukrainian tax environment for M&A is character-
ized by numerous challenges and huge uncertainties.
Ukraine is a post-communist country with a largely
underdeveloped and constantly evolving tax system.
Ukrainian tax legislation is often poorly worded and
there are numerous areas which are not specifically
covered. There is always room for controversial inter-
pretations of legislative provisions, which increases
the risk of disputes with the tax authorities. Although
theoretically it is possible to obtain rulings from the tax
authorities, these rulings are not legally binding and do
not provide guaranteed defence against potential tax
assessments.
On the other hand, Ukrainian tax legislation does not
contain a number of rules and doctrines which can
generally be found in the tax legislation of developed
countries (e.g. CFC rules, anti abuse or specific treaty
shopping regulations). There are, however, certain pro-
visions in the Ukrainian civil law that may allow the tax
authorities to apply a substance over form approach to
transactions which are considered as ‘’sham’’ by the
court. It should also be noted that the tax authorities
and courts have recently started to closely examine
economic justifications of business transactions.
This article explains how the Ukrainian tax regime af-
fects M&A transactions, identifies major drawbacks and
outlines benefits of various structuring options. At the
same time, such transactions require detailed advice
tailored to the facts of each particular deal to ensure
that both significant and sustainable tax savings are
achieved and risks are properly managed. And, one
should always bear in mind that tax is only the top of
the transaction structuring iceberg.
Corporate tax
Ukrainian legal entities are generally subject to corpo-
rate profits tax on their worldwide income at the rate
of 25%. Foreign taxes should be available for credit
against Ukrainian tax liabilities under Ukraine’s double
tax treaties.
Special rules apply to insurance and agricultural com-
panies. Insurance companies are taxed at 0% on net
90 Uniting Leading Companies from over 50 Nations Across the Globe
insurance premiums for long-term life insurance pre-
miums and pension insurance premiums and at 3%
otherwise. Agricultural producers may elect to pay a
single agricultural tax instead of corporate profits tax,
as well as certain other taxes, provided several qualify-
ing requirements are met. The amount of single agri-
cultural tax depends on the type and size of the land
plot owned or leased by an agricultural producer.
Where a foreign legal entity conducts business in
Ukraine through a permanent establishment, taxable
income should be determined on the same basis as
for domestic legal entities. If this is not possible, the
allocation or notional method may apply. The alloca-
tion 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 30% margin to gross revenues earned from
Ukrainian sources.
Withholding tax
Foreign legal entities that do not have a permanent
establishment in Ukraine are liable for withholding tax
only on income from Ukrainian sources. Broadly, in-
come is considered to be from Ukrainian sources if:
• The income arises from activities performed or prop-
erty located in Ukraine; or
• In the case of dividends, interest, royalties and other
passive income paid from Ukraine.
Professional services, except for specific ‘‘engineering’’
services and agency / brokerage fees, are not treated
as having a Ukrainian source and therefore are exempt
from withholding tax.
The standard rate of withholding tax is 15%, with a
special 6% rate applying to freight. The standard rate
of withholding tax may be reduced or eliminated under
a relevant tax treaty. Ukraine has an extensive net-
work of double tax treaties with more than 60 coun-
tries. Some of these treaties provide for elimination of
Ukrainian withholding tax for dividends, interest and
royalties. It is not entirely clear under Ukrainian domes-
tic legislation whether profit distributions from a perma-
nent establishment of a foreign legal entity should be
subject to withholding tax. However, the exemption for
such distributions should generally be available under
Ukraine’s double tax treaties.
Ukrainian legislation requires that the responsibility to
collect withholding tax rests with the Ukrainian resident
or permanent establishment of a non-resident. Conse-
quently, there does not appear to be a mechanism to
pay withholding tax if the transaction is between two
non-residents.
Taxation of dividend distributions
Companies paying dividends are required to pay ad-
vance corporate tax at the standard 25% rate, based
on the amount of dividends payable to shareholders.
The advance corporate tax remitted to the state can be
offset against future corporate profits tax liabilities, but
is not refundable.
Advance tax does not apply to payment of dividends
by a holding company which receives more than 90%
of their income in the form of dividends from Ukrainian
subsidiaries.
Dividends received by a Ukrainian legal entity from its
Ukrainian subsidiaries are exempt from corporate prof-
its tax. Dividends received by a Ukrainian legal entity
from foreign subsidiaries are taxed at 25% with a credit
for foreign taxes if there is a double tax treaty between
Ukraine and the state that is the source of dividends.
Otherwise, taxes suffered on dividend income abroad
will not be creditable for the Ukrainian legal entity.
Payment of dividends to foreign shareholders is sub-
ject to 15% withholding tax, unless a relevant double
tax treaty provides otherwise.
Tax losses
Ukrainian tax legislation provides for tax losses to be
carried forward without any time limitations. However,
the annual Budget Laws have continually imposed
one-year restrictions on utilisation of tax losses. The
2008 Budget Law passed by the Ukrainian Parliament
does not contain provisions restricting utilisation of tax
losses in 2008. Despite the restriction being removed
for the current year, there is a risk that a future Budget
Law will reintroduce the loss carry forward restriction
in the future.
There is no tax consolidation in Ukraine and tax losses
of each company are accounted for on a stand alone
basis.
Interest capping rules
Ukrainian tax legislation does not contain any specific
thin capitalisation rules. There are, however, interest
capping rules which limit the deduction of interest ex-
penses at the level of the Ukrainian borrowing entity.
Interest capping rules apply if non-residents hold at
least 50% in the borrower’s capital and the interest is
payable to non-resident shareholders and their related
entities. The limitation is calculated as interest income
of the borrower plus 50% of the taxable income before
interest, tax and depreciation. Interest in excess of this
amount is carried forward to future periods without limi-
tations, and deductible applying the same rules.
Transfer pricing regulations
Under Ukrainian tax legislation, transactions with relat-
ed parties must comply with the arms’ length principle.
So far, there is very little guidance regarding the ap-
plication of the arms’ length principle in practice. Also,
the tax authorities currently do not have well-developed
transfer pricing procedures or methodologies.
However, recent practice shows that the Ukrainian tax
authorities have started pay greater attention to the
justification of arm’s length prices in transactions be-
tween related parties. There is also a draft legislation
introducing a number of changes to Ukrainian transfer
pricing regulations.
VAT
VAT is imposed on the domestic supply and import of
goods and services. The standard VAT rate is 20%.
The supply of certain goods and services is exempt
from VAT. Exported goods and related services are
zero-rated. The supply of certain goods (e.g. shares)
and services is exempt from VAT.
Input VAT on purchases of goods or services related
to VATable sales may be credited against output VAT.
Surplus input VAT may be carried forward against fu-
ture output VAT liabilities or refunded in cash. However,
obtaining a VAT refund in cash is extremely difficult in
Ukraine.
Unlike many other countries, in Ukraine the contribution
of assets into the share capital of a legal entity is a VAT-
able transaction. While the VAT regulations are unclear
on this issue, the tax authorities currently accept that
the receiving entity should be entitled to VAT credit.
Transfer taxes
Sales of buildings are subject to a 1% pension fund
charge payable by the buyer. Also, notarisation of agree-
ments on alienation of immovable property attracts a 1%
stamp duty. The underlying legislation does not specify
which party is liable for the stamp duty, and this is gen-
erally subject to negotiations between the contracting
parties. Sales of shares in Ukrainian legal entities are
not subject to pension fund charge or stamp duty.
In 2008 purchase of foreign currency to pay interest
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91
 or dividends abroad attracts 0.5% pension fund
charge based on the amount of foreign currency to be
purchased. The charge is not payable if a Ukrainian
legal entity has sufficient reserves of foreign currency
to remit abroad.
II. ACQUISITIONS
What is an acquisition?
Generally, an acquisition can be structured as a pur-
chase of separate assets, transfer of an entire busi-
ness, or a share purchase. From the buyer’s point of
view, a share purchase transaction can be structured
in two different ways: (1) purchase of the shares di-
rectly from the vendors of the target company; or (2)
purchase of the shares through a newly established
Ukrainian or foreign company.
Assets vs. Shares
The acquisition of assets has several advantages over
the acquisition of shares, including:
• The purchase price can be depreciated for tax pur-
poses;
• An effective allocation of a purchase price, which may
enable an uplift of the tax book value of assets;
• Contingent tax and other liabilities of the target com-
pany are not inherited;
• Easier to push debt down to the asset level; and
• Flexibility with respect to partial acquisition of busi-
ness.
The share acquisition, in its turn, has the following ad-
vantages over the asset acquisition:
• Likely to be more tax efficient for the seller, therefore
the acquisition price is generally lower;
• No VAT and hence lower financing costs;
• Allows to retain critical licenses and contracts;
• Possibility to utilize tax losses accumulated in the tar-
get company;
• Simplified transaction formalities (e.g. contracts may
remain undisturbed); and
• No material transfer taxes.
The advantages of one route are effectively disadvan-
tages of another. In practice, asset deals are extremely
rare in the Ukrainian market. The major reason behind
92 Uniting Leading Companies from over 50 Nations Across the Globe
this is that the sellers are unwilling to undertake asset
deals unless the buyer is prepared to compensate the
seller’s tax burden.
Funding the acquisition
Purchasers will typically use a mix of debt and equity to
fund an acquisition. Maximization of debt funding at the
Ukrainian level has several advantages. The principal
advantage of debt funding is a tax deduction of interest
expenses in Ukraine at 25%. Also, repayment of debt
principal and interest is an effective method of cash
repatriation from Ukraine.
(a) Debt funding
Business purpose test
As a general rule, interest is deductible for tax purpos-
es if incurred by a relevant taxpayer in connection with
business activities, i.e. generation of taxable income.
The acquisition of both assets and shares should
qualify as business related transactions. However, ro-
bust documentation and strong economic justification
should be put in place to justify compliance with the
business purpose test.
Interest capping rules
Interest capping rules apply if non-residents hold at
least 50% of the Ukrainian borrower’s capital and the
interest is payable to such non-resident shareholders
and their related entities. The limitation is calculated as
interest income of the borrower plus 50% of the taxable
income before interest, tax and depreciation. Interest
in excess of this amount is carried forward to future
periods without limitations, and deductible applying the
same rules.
In practice the interest limitation has not proven to be
a major burden and there are a number of options to
circumvent this restriction. One option is to utilise the
services of international banks for “back to back” trans-
actions. Another option is the interposition of a Ukrain-
ian legal entity between the Ukrainian borrower and its
non-resident shareholder.
Transfer pricing rules
The interest charged on intra-group debt financing will
not be deductible for the borrower to the extent that the
interest expense exceeds the arm’s length interest.
In the past, the tax authorities have accepted the maxi-
mum interest rates established by the National Bank
of Ukraine (up to 11% p.a.) as arm’s length for tax
purposes. In response to the global financial crisis the
National Bank of Ukraine has recently abolished maxi-
mum interest on loans from non-residents with a matu-
rity period of over one year (for loans with a maturity of
less than one year, the maximum rate was increased
from 9.8% to 11% ). As non-residents will no longer be
restricted from charging high interest rates on loans to
their Ukrainian related parties, it can be expected that
the tax authorities will start closely monitoring compli-
ance with the arms’ length principle in debt funding.
Interest payments to tax haven jurisdictions
The tax deduction of interest payments to tax haven
jurisdictions will be restricted to 85% of the actual inter-
est costs. The list of tax haven jurisdictions is published
by the Ukrainian Cabinet of Ministers and currently in-
cludes 38 countries. Cyprus, which is commonly used
for channelling debt funding into Ukraine, is not cur-
rently on the list. However, the Cabinet of Ministers
have already announced their intension to put Cyprus
on this list due to the reluctance of Cyprus to sign the
new double tax treaty with Ukraine.
Withholding tax
Interest paid to foreign legal entities is subject to 15%
withholding tax, unless a double tax treaty provides
otherwise. The Ukrainian double tax treaties with Cy-
prus, Spain, the UK and US provide for the reduction of
withholding tax on interest payments to 0%.
(b) Equity
Taxation of equity injections
Equity contributions to a Ukrainian company’s regis-
tered capital (direct investment) are not subject to cor-
porate profits tax or any other taxes.
It is important that documents supporting capital con-
tributions (e.g. shareholders resolution and company’s
charter fixing the amount of capital) are prepared prior
to remitting cash and are properly registered with the
authorities. In the absence of proper supporting docu-
ments, the tax authorities may challenge the entitle-
ment to tax exemption.
Equity requirements
Most investors tend to keep equity to the minimum (cur-
rently, minimum share capital for a Limited Liability Com-
pany is approximately USD 11,000; for a Joint Stock
Company approximately USD 140,000). However, the
net assets of a Ukrainian company need to be closely
monitored to ensure that the amount of equity is suffi-
cient to comply with the net assets rule (see below).
Taxation of dividend distributions
Companies paying dividends are required to pay ad-
vance corporate tax at the standard 25% rate, based
on the amount of dividends payable to shareholders.
The tax is the company’s liability, i.e. it is not withheld
from the amount of the dividends paid. The advance
corporate tax can be offset against future corporate
profits tax liabilities, but is not refundable.
Advance tax does not apply to payment of dividends
by a holding company that receives more than 90 %
of its income in the form of dividends from Ukrainian
subsidiaries.
Withholding tax on dividend payments
Under Ukrainian domestic legislation, dividends paid
to non-resident shareholders are subject to 15% with-
holding tax. The double tax treaties concluded by
Ukraine with Cyprus, the Netherlands, France, Swe-
den and Finland allow the Ukrainian withholding tax on
dividends to be avoided, subject to certain conditions.
A number of other treaties (e.g., with the UK, Switzer-
land, the US, Germany) allow the withholding tax to be
reduced to 5%.
Other structuring and post-deal issues
Minimize after-tax cost of debt
Since Ukrainian tax legislation does not provide for the
possibility of tax consolidation, a legal merger is gener-
ally the only option to deduct the interest expenses of
the acquisition vehicle against taxable income of the
target company. Notwithstanding the lack of clarity in
the law, a debt push down strategy has been pursued
by many foreign investors. A legal merger is a com-
plicated process from both the tax and legal perspec-
tives, and may take considerable time and effort to
complete.
Cash repatriation
The common methods of repatriation of cash are
through payments of:
• Dividends;
• Interest and loan principal;
• Royalties (trademark or know-how);
• Payment of service fees; or
• Reduction of share capital (repurchase of shares).
It is essential that the payment of dividends is care-
fully planned so that arising upon distributions advance
corporate profits tax does not cause significant prob-
lems. It should also be noted that LLCs in Ukraine are
allowed to distribute dividends more often than JSCs.
Hence, from this perspective, it is more beneficial to
choose an LLC as an investment vehicle in Ukraine.
To ensure full tax deductibility of interest, royalties and
service fees, their payment should be economically
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93
 justified, comply with the arm’s length principle and
properly documented. Payments of dividends, interest
and royalties are normally subject to withholding tax,
at rates, which may be reduced, even eliminated by
relevant double tax treaties.
The foreign buyer may also consider other options,
such as a reduction of share capital (repurchase of
shares).
Non-core disposals
Non-core disposals can be achieved in several ways.
The assets can simply be sold, or contributed to the
capital of a subsidiary, which is then sold. Both of
these methods are viewed as a sale for tax purposes.
Alternatively, a re-organization in the form of a split-
off can be undertaken. This gives the added flexibility
of transferring an entire business, including liabilities.
Such transactions are gaining popularity as experience
grows in executing them. However, a split-off should be
considered as a complex transaction from both legal
and tax perspectives, which needs to be well planned
to mitigate tax risks that may arise as a result of am-
biguity in the legislation in respect of the treatment of
such deals.
Preservation of existing tax attributes
A change in ownership of the shares of a company does
not alter the company’s tax losses available for carry-
forward or any other tax asset, such as tax refunds due
from the budget. In a share purchase transaction the
balance sheet value of the assets carries over.
Holding structures and joint ventures
It is widely accepted that JVs are very difficult to ex-
ecute, operate and exit if necessary.
We have seen a lot of cases where the foreign partner
usually contributes the capital and modern equipment/
expertise, and the Ukrainian partner contributes old,
or partially complete infrastructure, land and goodwill
measured in a variety of ways. It is generally a stretch
to bring values in line with desired investment propor-
tions. Also, based on our experience, the foreign inves-
tor has a much longer-term view of the start-up timeline
and the ability to continue to fund start-up costs on a
more sustained basis, whereas the Ukrainian partner
may be looking for immediate benefits and may have
serious difficulty bringing in additional investment should
that become necessary to fund start-up operations. If the
JV becomes burdened with additional capital needs and
the Ukrainian partner cannot, or will not contribute, but
refuses to take a dilution, the parties reach an impasse. If
the operations are set up in the compound of the Ukrain-
ian partner, unfriendly relations can result in limitation of
access to facilities and assets by the foreign investor.
94 Uniting Leading Companies from over 50 Nations Across the Globe
Also, Ukrainian corporate law does not ensure a suf-
ficient level of comprehension and flexibility as to gov-
erning relationships between shareholders. Further-
more, Ukrainian courts do not recognise and thus do
not enforce shareholders agreements.
One common investment strategy that helps mitigate
some of these issues is the use of an offshore holding
company for the joint investment, with this company
owning Ukrainian operations. The major advantage
of this strategy is better protection and/or flexibility of
shareholder rights under the legal system of the holding
jurisdiction than available under Ukrainian law. Other
added advantages of an offshore holding company are
offshore financing, offshore licensing of activities, etc.
III. MERGERS
Legal forms
Ukrainian civil legislation recognizes five types of cor-
porate re-organization:
• Merger;
• Absorption (merger into);
• Division (demerger);
• Split-off; and
• Change of the form of business entity.
In the course of any corporate re-organization, the com-
pany under re-organization is required to notify both its
creditors and contract holders, who then have the right
to withdraw from existing contracts. As a result, com-
mercial issues, as well as tax, must be considered prior
to undertaking a re-organization.
Current practice
Legal re-organizations were not commonly done in
the past due to the lack of clarity of the tax and legal
treatment. Notwithstanding the fact that the legislation
on mergers has not changed fundamentally in recent
years, there is a clear trend toward effectuating these
re-organization strategies. There is a lot of activity
related to corporate absorptions and changes of the
forms of business.
Corporate re-organization is a complicated process
from both tax and legal perspectives. Experience
shows that corporate re-organization may take from
four months to one year, depending on the type of re-
organization and prior history of the company, with the
major part of this time being for the tax audit of the
company undertaking re-organization.
Tax consequences
Ukrainian tax legislation does not contain clear guide-
lines regarding tax implications arising upon corporate
re-organizations. There are numerous areas related to
the process of re-organization which are not specifi-
cally covered in the tax law, thus giving room for dif-
ferent interpretations and potential claims from the tax
authorities. Therefore, any type of re-organization re-
quires very careful analysis, planning and assessment
of associated tax risks. Below we provide general com-
ments on a number of tax issues associated with re-or-
ganizations, but these should not be considered as the
only ones. It is likely that the merger would be carefully
reviewed by the tax authorities and the company un-
dertaking the merger must be prepared to challenge a
negative assessment in the court.
All financial and tax results (including losses carried
forward and VAT credit) of the dissolving entity should
be consolidated with the financial and tax results of the
surviving entity.
Any transfer of assets in the course of any form of cor-
porate re-organization (including merger, absorption, di-
vision, and split-off) should not be considered as either
a sale or supply for tax purposes. In the past the tax
authorities have confirmed this in a number of their let-
ters. However, recently the tax authorities have changed
their approach and claim that the transfer of assets in
the course of a merger should be subject to VAT. In our
view, the the tax authorities’ line of argument lacks legal
basis, but this may need to be proven in court.
All assets and liabilities of the merged company are
transferred to the surviving company at their book val-
ue. Thus, no gain or loss will be recognized with respect
to the merger. There will be no deemed dividend, or
any other type of gain or loss recognized with respect
to liquidation of the remaining company or companies
for the shareholders.
IV. EXIT STRATEGIES
Generally, foreign buyers elect to sell either shares
or assets to exit from Ukrainian projects. The foreign
buyer can consider other alternatives such as a capital
reduction or liquidation of a Ukrainian company.
Sale of shares
Ukrainian legislation provides for a special ‘’pooling
method’’ for computing capital gains on sales of shares.
Under this method, income and expenses from trans-
actions with shares are recognized in the respective
pool. If the aggregate income from shares/corporate
rights exceeds the aggregate expenses incurred on the
acquisition of the shares, the excess is treated as or-
dinary income subject to 25% corporate profits tax. A
negative result is not tax deductible, but carried forward
to offset future income from trading in shares.
Under Ukrainian domestic legislation, capital gains
arising on sales of shares in Ukrainian companies by
non-residents are subject to 15% withholding tax.
This tax can be eliminated under the double tax treaties
concluded by Ukraine. In theory, the ‘’pooling method’’
for computing capital gains on sale of shares should
also apply to non-residents. In practice, capital gains
from the sale of shares in Ukrainian companies by non-
residents are computed by deducting the cost of shares
from the selling price of the same shares.
Sales of shares are not subject to any other taxes.
Sale of assets
A Ukrainian company that sells any assets, including
its entire business, is liable to 25% tax on any gain
derived on the sale. Generally, the gain is calculated
as the difference between the sale proceeds less the
tax book value of the assets. With certain assets (e.g.
transport vehicles, data processing equipment), the
sale proceeds reduce the tax book value of the relevant
tax group and not an individual asset.
Capital gains realised by a non-resident from the assets
located in Ukraine are considered Ukrainian source in-
come subject to 15% withholding tax. Generally, this
tax can be eliminated under Ukrainian double tax trea-
ties. However, treaty protection is not available for the
sale of real estate property located in Ukraine.
A sale of assets will usually be subject to 20% VAT.
There may be also transfer taxes if real estate is being
disposed.
Preparing a company for sale
“Split-off” of assets
Certain business units, or processes, can be “split-off”
prior to the sale of the remainder of the business or
businesses, which, however, requires planning to miti-
gate tax risks that may arise.
Contribution in-kind
Under Ukrainian tax legislation, the contribution of as-
sets into the share capital of an entity is subject to cor-
porate profits tax and VAT. The transfer is also subject
to transfer pricing regulations.
Pre-sale dividends
No special rules exist with respect to pre-sale divi-
dends. Therefore, general rules should apply to such
dividend distributions.
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95
 V. OTHER PERTINENT ISSUES
Forms of Legal Entities
The most common forms of legal entities in Ukraine
are a limited liability company (TOV), closed (private)
joint-stock company (ZAT) and open (public) joint-stock
company (VAT). In all of these entities, the sharehold-
ers’ liabilities are limited to the amount of contributed
capital, although in certain circumstances the share-
holders may also be liable for the amount of declared
but unpaid capital. From a tax perspective, all are treat-
ed similarly. However, a TOV is able to distribute divi-
dends more frequently, which makes this vehicle more
attractive from a cash management viewpoint. Joint-
stock companies (ZAT and VAT) are subject to addi-
tional reporting to the State Commission on Securities
and Securities Markets.
One of the primary reasons many foreign investors use a
TOV is simpler administration (i.e. no filings are required
to be made to the State Commission on Securities and
Securities Markets, which, especially in the case of char-
ter capital uplifts, can be administratively time consum-
ing). However, a TOV is normally not advisable in joint
venture scenarios, because of the difficulties of operating
and exits, when there are disagreements with the part-
ner. Nevertheless, this disadvantage may be essentially
reduced if an off-shore holding structure is used.
It is also worth noting that the Law of Ukraine “On Joint-
Stock Companies” was recently adopted. The law
96 Uniting Leading Companies from over 50 Nations Across the Globe
comes into effect on 30 April 2009. Although the Law
introduces many positive innovations, it will take some
time to unify the approach to its interpretation and the
practical application of certain provisions.
Another popular investment vehicle is a commercial
representative office of a foreign corporation (in es-
sence this is a branch in its common meaning), which,
unlike a company, is not a separate legal entity.
Foreign exchange controls
Ukraine has foreign exchange (currency) controls in
place, which may impact the structure of the transac-
tion. Certain types of share and asset purchases be-
tween Ukrainian residents and non-residents, as well
as certain types of financing should comply with spe-
cific Ukrainian currency control requirements.
Approvals for transactions
Both the purchase of assets and the purchase of shares
above a certain threshold may require the approval of
the Antimonopoly Committee of Ukraine.
Negative net assets
If, at the end of the second year of its existence, a
Ukrainian legal entity has negative net assets, such
legal entity might be forced to be liquidated at the re-
quest of the registration authorities. In practice, this is
not enforced.
TAX ASPECTS OF BUSINESS ADMINISTRATION UNDER
VARIOUS FORMS OF MANAGEMENT WITH FOREIGN
CAPITAL PARTICIPATION
By Baker Tilly Ukraine
(an Independent Member
of Baker Tilly International)
www.bakertillyukraine.com
1. Forms of business structure in the territory of
Ukraine and their tax consequences:
A. Enterprise with foreign capital in the form of a limited
liability Company;
B. Representation; and
C. Joint venture.
During the last few years Ukraine has become more
and more attractive for foreign investors. The record
growth achieved (during the last 17 years) of direct for-
eign investments into the Ukrainian economy, accord-
ing to the results of the first quarter of 2008 only gives
additional proof of this fact. The principal countries – in-
vestors providing 83% of capital, apart from Germany
and Cyprus, includes such countries as the Nether-
lands, Austria, United Kingdom - $2.1 billion, Russian
Federation, the United States of America, Sweden, Vir-
gin Island France.
In connection with this, information about the legal and
tax aspects of foreign investments into Ukraine is of
current interest for investors. The principal question is
the form of the enterprise to be established. Among the
alternatives there are: a separate company with foreign
investment, a joint venture with a Ukrainian company,
or a representative office. The possibility for additional
funding of the investment is also important for consid-
eration.
Let us study the main aspects of each structure:
а) A limited liability company with foreign
investment
Such an enterprise will be considered to be resident
of Ukraine. Its taxation will be subject to the rules es-
tablished for Ukrainian enterprises. However, there
are some peculiarities of registration of foreign invest-
ments, as well as certain benefits.
Registration of foreign investment
Investing in Ukrainian business, the investors may:
• participate in the share capital of the enterprises (par-
tially), jointly with Ukrainian individuals and legal per-
sons, or acquire the shares of an existing enterprise;
• create an enterprise which will be fully owned by the
investor, or acquire the existing one.
Both these cases require registration of the foreign in-
vestment. This procedure is determined by:
1) Section ІІІ of the Law of Ukraine «On the Proce-
dure of Foreign Investing» as of 19.03.96 No.93/
96-VR;
2) Provision on the Procedure of State Registration
of Foreign Investments, approved by Decree of
Cabinet of Ministers of Ukraine as of 07.08.96
No. 928;
3) Order of state tax authorities approval of infor-
mation notices about actual injection of the for-
eign investments and notes issued during import
to Ukraine of property being a foreign investor’s
contribution into the share capital of the enter-
prise with foreign investments, as well as under
the contracts for joint venture, approved by Or-
der of State Tax Administration of Ukraine as of
29.06.05 No. 238.
The registration is conducted by city or state admin-
istration within a period of three banking days after
receiving the investment according to the procedures
adopted by the Cabinet of Ministers of Ukraine.
Benefits for foreign investment
Such benefits are established by Law of Ukraine «On
the Procedure of Foreign Investing». Firstly, preferential
conditions are applied to the property imported as
foreign investment (in the form of contribution into the
share capital). Its import is not subject to charges. The
procedure of exemption is realized through the issue
of a promissory note which is paid after property has
been reflected in accounting of the enterprise with
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 foreign investment. However, charges are to be paid in
case such property will be disposed within three years
(except for cases when it is exported).
Secondly, the following guarantees for protection of in-
vestments are defined in the statutory documents:
• unimpeded transfer abroad of profits, revenues and
other funds received as a result of the investing activ-
ity after tax payments;
• in the case of investing activity termination - the right
for the return of the investment no later than 6 months
from the date of suspension of activity;
• the right for compensation of losses (including the
losses of opportunity and moral damage) resulting
from actions, inactions or improper fulfillment of the
duties related to foreign investor by Ukrainian State
Authorities or their executives.
It should be noted that these guarantees will remain
valid even in case of changes in Ukrainian laws (dur-
ing 10 years from the date when new legislative rules
becomes effective).
Additional attraction of investment via credit
facilities
Non-residents investing into Ukrainian businesses
can subsequently be faced with the need of attracting
additional funds from abroad. But this time the investor
does not want the injection of investment to be con-
ducted by virtue of an increase of share capital. The
question is how a non-resident should transfer the
funds to the established enterprises with foreign invest-
ment. The answer lies in loan or credit financing. Let’s
consider the main aspects of it.
Legal aspects
Ukrainian laws require the registration of credits from
non-residents. The relevant procedure is stipulated by
the Provision on the procedure of obtaining by resi-
dents credits and loans in foreign currency from non-
residents and granting the loans by residents to non-
residents, approved by the Board of National Bank of
Ukraine as of 17.06.04 No. 270.
First thing to pay attention to is that credits are only al-
lowed to be received in a non-cash form (i.e. physical
cash funds may not be used.). Their receipt should be
made through authorized banks of Ukraine, which have
agreed to support the transactions under the contract.
If the contract with a non-resident assumes receiv-
ing the credit from abroad (foreign currency will be
transferred to the resident-borrower’s account outside
Ukraine and/or repayment of credit will be made from
98 Uniting Leading Companies from over 50 Nations Across the Globe
the non-resident’s account from abroad), then indi-
vidual licenses of the National Bank of Ukraine are
required. Thereafter, for repayment of credit from resi-
dent-borrower’s account from abroad, such resident is
to submit the original of registration certificate and orig-
inal or copies of payment documents confirming credit
payment which are certified by the foreign bank to the
authorized bank.
The second important thing is the procedure of regis-
tration.
Resident-borrower has to receive the registration cer-
tificate. With this purpose he submits the package of
documents to the corresponding territorial Administra-
tion of the National Bank.
The third thing to be considered is the amount of inter-
est. The law does not define the limits for credit granted
by a non-resident. But there are limits for the amount of
interest which can be charged for using the borrowed
funds.
Thus, the amount of payments (taking into considera-
tion the commissions, forfeits and other payments un-
der the contract, including sanctions for undue fulfill-
ment of contract terms) should not exceed the amount
of payments for such credit, calculated based on maxi-
mum interest rate established by the National Bank of
Ukraine.
Maximum interest rate is established for:
а) contracts in foreign currency of the first group of a
Classifier - on the basis of value of governmental
borrowings in external financial markets;
b) contracts in foreign currency of the second or third
groups of a Classifier - on the basis of weighted
average interest rate, at which the authorized banks
grant the credits to entities in the internal credit mar-
ket.
(p.1.11, 1.12 of Provision on the procedure of receiving
credits, loans in foreign currency by residents from non-
residents and granting the loans in foreign currency to
non-residents, approved by the Decree of Board of the
National Bank of Ukraine as of 17.06.04 No. 270).
Tax Aspects
Granting of the credit and its receipt in of itself has no
taxation effects. The credit recipient does not include
these amounts in gross profits (p.7.9, of the Law of
Ukraine “On the taxation of the enterprises’ profits”)
and does not levy any VAT (p.3.1, subparagraph 3.2.5
of the Law of Ukraine “On Value Added Tax”).
A different matter is the interest. An enterprise paying
interest (credit recipient) will be able to claim for inclu-
sion of the interest amount in its gross expenses taking
into consideration the following limitations:
1) Credit funds must be used for purposes related to
business activity of an enterprise (subparagraph1.32,
p.5.5.1 of the Law of Ukraine “On the taxation of the
enterprises’ profits”);
2) The amount of gross expenses relating to interest
is limited for enterprises, provided that fifty per cent or
more of their equity is owned or controlled by a non-
resident (non-residents) (subparagraph 5.5.2 of the
Law of Ukraine “On the taxation of the enterprises’
profits”). Following this paragraph of the Law, for tax
purposes the non-residents are also considered to be:
a. Legal persons exempted from this tax in ac-
cordance with pp.7.11-7.13, 7.19 of the Law of
Ukraine “On the taxation of the enterprises’ prof-
its”;
b. Those persons who in accordance with laws pay
the income tax at the rates other than it is stipu-
lated by p.7.2 or Article 10 of the Law of Ukraine
“On the taxation of the enterprises’ profits”.
The inclusion of interest on credits to the gross ex-
penses in favour of such non-residents or their related
persons is allowed in the amount not exceeding such
taxpayer’s profits received in the reporting period in the
shape of interest from its own assets placement, in-
creased by the amount of fifty per cent from taxable
income of the reporting period, not taking into consid-
eration the amount of such interest received.
Besides, interests in favor of non-residents are allocat-
ed to profits with the source of origin in Ukraine (p.13.1
of the Law of Ukraine “On the taxation of the enter-
prises’ profits”). On income payment, withholding tax
should be paid at the rate of 15 % from the amount of
such payment and against it (p.13.2). But in the case
there is an agreement for avoiding double taxation
with non-resident’s country, this tax will not be paid.
To confirm this, it is necessary to receive a Certificate
(or its notarized copy), stating that the non-resident is
the resident of country for which an international agree-
ment has been concluded. Such Certificate is issued
by the authorized body of the corresponding country
in accordance to Appendix 1 to the Order approved
by the Decree of the Cabinet of Ministers of Ukraine
dated 06.05.01 No. 470, or according to the laws of
such state.
b) Representation
Foreign economic entities which intend to carry out
business activity in Ukraine may open a representa-
tion (Article 5 of the Law of Ukraine “On the external
economic activities”, dated 16.04.1991, No.959-XII).
They are registered by the state authority of execu-
tive branch on the issues of economic policy, within 60
days starting from submission.
However, permanent representations in the territory of
Ukraine are not separate legal entities and act based
on the powers, written down in the Provision about rep-
resentation (Article 95 of the Civil Code of Ukraine).
Notably this is an institution or a person, which actually
represents the interests of the foreign economic entity
in Ukraine and possesses the duly executed appropri-
ate authority to do that (Article 1 of the Law of Ukraine
“On the external economic activities”).
But despite the fact that the representation is not a sep-
arate legal entity it is subject to registration in the tax
authorities and social insurance funds. Accordingly, it
is required to make tax payments.
Income tax
In accordance with Paragraph 1.17 of the Law of
Ukraine «On the taxation of the enterprises’ profits» a
permanent representation of a non-resident in Ukraine
is a permanent place of operation, through which the
economic activities of a non-resident are carried out
fully or partially in the territory of Ukraine. Among such
representations there are: place of management, sub-
sidiary, office, plant, factory, workshop, etc.
Before carrying out any business activity a permanent
representation shall be registered as an income tax-
payer as provided by the Order of the State Tax Ad-
ministration of Ukraine No.293, dated 12.08.1997. Af-
terwards it is obliged to pay tax on its income under the
rate of 25%. Thus, a representation may independently
choose the framework for calculation of income tax (p.
13.8. of the Law of Ukraine «On the taxation of the en-
terprises’ profits»):
1) In general, income tax is calculated on difference
between the income, received by a representation,
and its expenses, allowed by the legislation.
2) In case when a non-resident carries out its activi-
ties not only in Ukraine, but also abroad, and does
not define income from its activities, carried out in
the territory of Ukraine through the representation,
the amount of taxable income is determined on the
basis of balance of its financial and economic ac-
tivities. Such balance is prepared separately for a
permanent representation within the scope of its ac-
tivity and agreed with tax authorities.
3) In case when it is impossible to define the profits re-
ceived by a non-resident in the territory of Ukraine,
the taxable income is calculated by tax authority as
a difference between the gross income and gross
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99
 expenses, defined by way of application of 0, 7 coef-
ficients to the amount of gained income.
Thus by carrying out business activity in the territory of
Ukraine a permanent representation pays the tax from
its income received at the rate of 25%.
Value added tax (VAT)
Permanent representations of a foreign enterprise are
subject to general procedure of registration by a tax-
payer of value added tax (paragraph 1.2. of the Law of
Ukraine “On the Value-Added Tax”). Therefore in the
case that the amount of transactions for goods sales
exceeds UAH 300 thousand (approximately USD 60
thousand), it has to be registered as a value added
tax payer. Hereinafter it is subject to the same rules of
imposing value added tax which are effective for the
residents of Ukraine.
Social funds
When using the work of employees the representation
of foreign enterprises shall be registered at:
• Pension Fund;
• Social insurance fund in connection with temporary
disability;
• Fund of mandatory state social insurance in case of
unemployment;
• Fund of mandatory state social insurance in case of
accidents occurred in the course of production and
also professional diseases.
As a consequence, contributions are paid to the men-
tioned funds on the basis of the labor compensation
fund (salary).
Existing rules of international agreements in the
course of operating permanent representations
When paying income to a non-resident, the permanent
representation may face additional expenses related to
tax payments. Thus, when representation pays income
originated from Ukraine, withholding tax is paid at the
rate of 15%.
Exemption from or reduction of taxation on such profits
is legislated within international agreements on double
tax elimination. Thus, Paragraph 3 of Order, approved
by Decree of the Cabinet of Ministers of Ukraine No.
470, dated 06.05.01 indicates that rules of international
agreement are applied by way of:
• exemption from taxation of profits received in
Ukraine;
100 Uniting Leading Companies from over 50 Nations Across the Globe
• reduction of tax rate;
• return of difference between the amounts of tax paid
and the amount a non-resident has to pay in accord-
ance with the rules of international agreements.
In order to avoid double taxation a Certificate (or its
notarized copy) should be obtained which confirms that
a non-resident is a resident of the country having con-
cluded the international agreement. Such Certificate
is issued by competent authorities of an appropriate
country according to the Appendix 1 to the Procedure of
exemption (reduction) of tax of income originated from
Ukraine in order to avoid double taxation, approved by
Decree of the Cabinet of Ministers of Ukraine No.470,
dated 06.05.01 or under the laws of such country.
c) Joint venture
Another way of making investments in Ukraine is
through a joint venture. It should be mentioned that
carrying out business activity in Ukraine according to
such a scheme is exposed to a great number of tax
risks. The reason for this is the unclear and incomplete
description of taxation process of above mentioned
transactions in Ukrainian laws. As a result the partici-
pants of joint activity face many situations which are
unregulated.
Civil and tax rules interpret joint activity in different
ways.
Since Article 1130 of the Civil Code of Ukraine indi-
cates that according to an “agreement for joint venture,
the Parties (Participants) are obliged to operate jointly
without a creation of legal person in order to achieve a
particular goal which does not contradict the law. Joint
activity can be carried out on the basis of pooling of
all participants’ contributions (common association) or
without such pooling”. In this case the agreement is
concluded in the written form (Article 1131).
Under terms of the Civil Law a joint activity is not a legal
entity and it can be followed both with the pooling of all
participants’ contributions and without it.
The absence of legal person results in the impossibil-
ity of inclusion of such an agreement into the Uniform
State Register of Enterprises and Organizations of
Ukraine with appropriate assignment (USREO).
Moreover, in case when a non-resident takes part in a
joint venture such agreement is subject to state regis-
tration in the Ministry for Economic Affairs. The proce-
dure contains the Provision for the procedure of state
registration of agreements (contracts) for joint invest-
ment activity with the participation of foreign investor
approved by the Decree of the Cabinet of Ministers of
Ukraine No.112, dated 30.01.1997.
Tax laws stipulate that a joint venture without a legal
person creation is carried out on the basis of a joint
activity agreement assuming pooling the cash funds
or property of the participants to achieve common
business purposes (subparagraph 7.7.1 of the Law of
Ukraine “On the taxation of the enterprises’ profits”).
This means that recognition of joint venture for tax pur-
poses is possible only in case there are some contri-
butions. Following this condition, the mentioned agree-
ment is registered in the tax authorities according to
Procedure of accounting for payers of taxes, charges
(compulsory payments), approved by Order of State
Tax Administration of Ukraine as of 19.02.98 No. 80
the Law of Ukraine “On the taxation of the enterprises’
profits”);
3) to follow tax purposes, operations carried out be-
tween the joint venture participants are considered to
be relationships on the basis of separate civil law con-
tracts (subparagraph 7.7.6 of the Law of Ukraine “On
the taxation of the enterprises’ profits”).
In other words, joint ventures require appointing an op-
erator (a person responsible for accounting keeping),
- income taxpayer. It is this person who will be respon-
sible for taxation payments (accruals) on the part of
income received by joint venture participants.

To make a decision about establishing the joint venture
for tax purposes, it is necessary to consider the follow-
ing issues:
1) Participants’ contributions into joint venture are
exempted only in case cash investments take place.
Transfer of tangible assets is levied on a common ba-
sis (subparagraph 4.2.5 of the Law of Ukraine “On the
taxation of the enterprises’ profits”, p. 12 of Procedure
of tax accounting of the results of joint venture in the
territory of Ukraine without legal person creation).
2) accounting of results of joint venture is kept by an in-
come tax payer, who is authorized to it by other parties
according to agreement terms (subparagraph 7.7.2 of
Along with it, when a resident is a participant in the joint
venture, there is a risk of double taxation on payment of
income received from joint venture to this person. This
risk is connected with such rules:
1) subparagraph 7.7.3 of the Law of Ukraine “On the
taxation of the enterprises’ profits” - payment (accru-
als) of the part of income received by joint venture par-
ticipants is to be levied by tax at the rate of 25% irre-
spectively of the receiver of this payment;
2) subparagraph «e» of p. 13.1 of the Law of Ukraine
“On the taxation of the enterprises’ profits” – resident’s
profits received from joint venture in the territory of
Ukraine are taxable at rate of 15%. A similar require-

Standard
# LLC Representative Office Joint Activity
of Comparison
Is not a legal entity (3 art. Without creation of legal entity
1 Legal S tatus Legal Body
95 CKU) (i. 1 art. 1130 CKU)
Determines by the legal On a certain term (i. 5 art. 1141
On a certain term or on indefinite
2 Terms of creation body who creates repre- CKU) or permanently (i. 1 art.
term (i. 5 art. 1576 CKU)
sentative office 1142 CKU)
The size of statutory fund must Joint activity can be carried
put together not less the equiva- out on the basis of participants
Legislative requirement is
3 Statutory fund size lent of 100 minimum wages at the association (simple society) or
absent
moment of LLC creation (i. 52 art. without the participants associa-
1576 CKU) tion (i. 2 art. 1130 CKU)
Before state registration 50%,
Statutory fund man-
4 other – during the year (i. 3 art.
ner of payment
144 CKU)
Statutory docu- Enactment, issued by le- Agreement on joint activity, in
5 Statute (art. 143 CKU)
ments gal body (i. 3 art. 95 CKU) writing (art. 1131 CKU)
Legal body, who created
6 Founders Physical and legal bodies Physical and legal bodies
representative office
Minimum – one (i. 2 art. 141 CKU)
Legal body, who created
7 Founders number Or Not less than two
representative office
Maximum – ten (i. 1 art. 141 CKU)
Changeable legal body,
Obligation respon- Within the limits of cost of hold-
8 who created representa- By agreements of parties
sibilities ings (i. 2 art. 140)
tive office
Distribution of profit is car-
ried out by a legal entity Order of profit distribution is
9 Profit sharing Participants draw dividends
who created a representa- established by agreement
tive office

www.chamber.ua
101
 ment is contained in p.9 of Procedure of tax accounting
of the results of joint venture in the territory of Ukraine
without legal person creation), approved by Order of
State Tax Administration of Ukraine as of 30.09.04 No.
571. Legislation also does not contain any direct possi-
bilities for offsetting the mentioned amounts. Moreover,
sticking to State Tax Administration of Ukraine in Kiev
city: “income from joint venture is subject to taxation at
the rate of 25%, and if a non-resident represents the
party of the joint venture agreement, then on payment
of income from joint activity, the authorized taxpayer is
to withhold the tax from such income” (see Letter as of
19.01.06 No. 86/10/31-106).
Taking into consideration this interpretation of the rules,
TAX DISPUTES IN UKRAINE
By CMS Cameron McKenna LLC
www.law-now.com
Introduction
This article provides some general guidance on tax
disputes in Ukraine, with particular emphasis on cer-
tain practical considerations. The way tax disputes
are handled is similar to other European countries, but
Ukraine has its own peculiarities that should be kept in
mind when planning to do business.
Disputes between taxpayers and tax authorities could
initially arise when conducting a tax audit. At this stage
taxpayers may try to contest the grounds for a tax audit
or claim that the tax authority has no grounds for re-
questing certain documents. The results of a tax audit
are set out in an “act of tax audit” (if a tax violation is
revealed) or in a “reference” (if no tax violation is re-
vealed). On the basis of these, the tax authority sends
out a “tax assessment notification” to a taxpayer, which
sets out the amount of tax that they are liable for. To
protect the taxpayer’s rights, special legal procedures
apply.
Set out below is a description of the types of tax audit,
the legal grounds for conducting them and the proce-
dure that must be followed. Also included is informa-
tion about tax assessment and the types of penalties
that apply, the legal process used to protect taxpay-
er’s rights and the point at which avoiding paying tax
amounts to a criminal offence.
102 Uniting Leading Companies from over 50 Nations Across the Globe
is seems rather difficult to avoid double taxation. One
of the variants is to protect one’s own interests in the
court.
Apart from income tax, the joint activity also relates to
the person subject to registration by a VAT payer (p.
1.2 of the Law of Ukraine “On Value Added Tax” as of
03.04.97 No. 168/97-VR). There are also no privileges
for the mentioned operations established by the laws.
Basically, nowadays the existence of joint venture in
Ukraine is connected with many issues and situations
which are still unregulated. This leads to participants’
having certain problems, the solution of which is often
connected with tax risks.
Tax audits
Scheduled, ad hoc and cameral tax audits conducted
by the tax authorities.
Scheduled tax audits are conducted at a taxpayer’s
premises and inspect every tax that a taxpayer is obliged
to pay. This type of audit may only be performed by the
tax authorities once a year. The tax authorities must
provide written notification to the taxpayer of the audit
at least 10 calendar days before it is due to start. The
audit must then be completed within 20 business days,
although this period can be extended by up to 10 busi-
ness days. Small businesses should be audited within
10 business days, but this can be extended by up to
five business days.
Ad hoc tax audits are also conducted at a taxpayer’s
premises, but are aimed at inspecting a specific tax
due and/or some of a taxpayer’s transactions. There
is no limit on the number of times it may be performed,
and the tax authority does not need to provide prior
written notice. An ad hoc tax audit must be based on
one of the following grounds:
• if a taxpayer fails to provide the tax authority with a
written response or explanation on a tax authority’s
request;
• if a taxpayer fails to file tax returns in a timely manner;
www.chamber.ua
103
 • if a taxpayer has filed a complaint against a tax in-
spector’s violations committed in the course of a tax
audit;
• if a taxpayer initiates a reorganization or liquidation
procedure;
• if an audit is required for a criminal case, and is initi-
ated by the tax police to investigate a taxpayer’s busi-
ness transactions and the supporting documentation;
• if a disciplinary or criminal procedure is initiated
against a tax inspector who has conducted a tax au-
dit, provided that the tax audit in question resulted in
a lower amount of tax paid to the State budget than
expected;
• if a taxpayer claims a value added tax (VAT) re-
fund in an amount exceeding UAH100,000 (approx.
USD20,000).
An ad hoc tax audit must not exceed 10 business days,
although this period can be extended by up to five busi-
ness days. The audit of small businesses must not last
longer than five business days, although this may be
extended by two business days.
Before starting a scheduled or ad hoc tax audit at tax-
payer’s premises, a tax inspector must provide the tax-
payer with a letter of referral issued by the tax authority.
This sets out the scope, legal grounds and duration of
the tax audit, as well as identifying the tax inspectors.
In addition, a special written order issued by the tax
authority must also be provided to a taxpayer when an
ad hoc tax audit is initiated. Failure to provide these
documents is a sufficient legal ground for a taxpayer to
disallow the tax audit.
Cameral tax audits are conducted at a tax authority’s
premises and are aimed at discovering mathematical
and/or methodological mistakes in tax returns submit-
ted by taxpayers.
Tax assessment
An assessment of a taxpayer’s tax liability (or the
amount of a tax refund due) is conducted either by self-
assessment (filing relevant tax returns), or by the re-
sults of a tax audit performed by a tax authority. Only
the latter is discussed here.
Within 10 business days of the tax audit, the tax au-
thority must send out a tax assessment notification.
This sets out the amount of tax due, as well as any
applicable penalties. As a general rule, the amount of
the tax liability is the basis for calculating any penalties
due. Below is the list of the most frequently applied
penalties:
• UAH170, if a taxpayer fails to submit a tax return on
a timely basis;
• 10% for each month of delay in filing a tax return, but
not exceeding in aggregate 50% of the assessed tax
104 Uniting Leading Companies from over 50 Nations Across the Globe
liabilities (this fine applies in addition to the previous
one);
• 10% of the understated tax liabilities for each report-
ing period, but not exceeding in aggregate 50% of the
understated tax liabilities;
• 5% of the assessed tax liabilities as a result of cam-
eral tax audit;
• 50% of assessed tax liabilities if they constitute a
‘large’ amount, which is UAH772,500 for the year
2008 (this fine applies in addition to other fines listed
herein);
• 10% of the paid tax liabilities, if payment is up to 30
calendar days late;
• 20% of the paid tax liabilities, if payment is between
31 to 90 calendar days late;
• 50% of the paid tax liabilities, if payment is above 90
calendar days late; and
• 200% of unpaid tax, if a taxpayer fails to pay it when
it is a compulsory precondition of the sale of goods
or where a taxpayer fails to withhold tax when it is
required by law.
With regards to VAT, a tax authority may issue a tax
assessment-notification indicating the refusal of a VAT
refund, or stating the amount of understated or over-
stated VAT. In these cases the penalties listed above
do not apply.
Criminal liability for the avoidance of tax
If unpaid tax liabilities exceed a threshold especial-
ly calculated for each year (UAH 257,500 [approx.
USD50,000] for the year 2008) the intentional avoid-
ance of tax is a crime. Only individuals can be criminal-
ly liable for tax evasion. With regards to legal entities,
only individuals that represent them can be criminally
liable (for example, a Chief Executive Officer, Chief Fi-
nancial Officer or Chief Accountant).
Statute of limitation for tax assessment
The statute of limitation for tax assessments provides
that assessments must be made within 1095 days (ap-
proximately three years) from the date on which either
a tax return was filed, or the deadline for filing a tax
return passed. If the tax authorities do not conduct an
assessment within this period an assessment cannot
be made, a taxpayer is not liable for any unpaid tax
and a claim cannot be brought in court. Despite this, a
tax assessment can be conducted or a dispute can be
brought to court if: (i) a tax return was not submitted; or
(ii) the individual or entity committed tax evasion, which
is confirmed by a court decision.
Appeal- administrative procedure
Having received a tax assessment notification, a tax-
payer is entitled to appeal it via an administrative pro-
cedure or a court procedure.
The obligation to pay assessed tax liabilities is post-
poned until the administrative procedure is complete.
An administrative appeal must be filed with the relevant
level of tax authority, which basically consists of three
stages. Initially a taxpayer must file its complaint to
a local tax authority that issued the tax assessment-
notification. Then, if the local tax authority refuses to
uphold the complaint, the taxpayer is entitled to appeal
to a regional tax authority. Finally, a taxpayer has the
right to appeal the regional tax authority’s decision to
the central tax authority (the State Tax Administration
of Ukraine).
A taxpayer has 10 calendar days after receiving the
tax notification, and at every stage of appeal, to file a
complaint. At each level of appeal the relevant tax au-
thority has 20 calendar days to respond to a taxpayer’s
appeal, although this period could be extended to 60
calendar days. If a tax authority fails to respond in 20
calendar days and this term is not extended, the tax-
payer’s complaint is upheld.
A decision of the central tax authority is final and means
the end of the administrative procedure. However, a
taxpayer may at any stage of the administrative proce-
dure address the court instead (which also brings ad-
ministrative procedure to an end). A taxpayer may not
return to the administrative procedure once the court
procedure has been started.
If a taxpayer does not contest a tax assessment-no-
tification administratively and/or through the court, it
is obligated to pay the assessed amount of tax to the
State budget.
Burden of proof under administrative procedure
Generally, it is a taxpayer’s obligation to prove under
the administrative procedure that a tax assessment
made by a tax authority is faulty and misleading.
Tax compromise under administrative procedure
A “tax compromise” occurs when a taxpayer’s complaint
under administrative procedure is partially satisfied in
exchange for a taxpayer’s consent to pay part of the
assessed tax liabilities. The justification for entering into
a tax compromise is that it will provide a quicker resolu-
tion when compared to a lengthy court procedure, and
payment of some, if not all, of the unpaid tax.
Conflict of interests rule
If the legislative provision that sets out taxpayers’ rights
and obligations could be interpreted in a way favour-
able to the tax authority or the taxpayer, the interpreta-
tion used and relevant decision must be in favour of
the taxpayer.
Tax clarifications
A taxpayer is entitled to apply to a tax authority, includ-
ing the central tax authority, for clarification on provi-
sions of tax legislation. As a general rule tax authorities
must not bring claims against taxpayers that perform
their activities in accordance with the guidelines provid-
ed in a tax clarification. However, tax clarifications are
not legally binding so they are not a complete defence
against tax assessments and penalties.
Appeal-court procedure
A taxpayer may skip the administrative procedure and
address the court directly, claiming that the tax assess-
ment notification is invalid. If the taxpayer is success-
ful, the notification will be declared void. The obligation
to pay the assessed tax liabilities is postponed until the
case is decided by the court.
The administrative courts of Ukraine that deal with tax
assessment notifications are local courts, courts of ap-
peal and the court of cassation (High Administrative
Court of Ukraine). In practice, it takes approximately
one and a half to two years to go through all of the
courts.
In very rare cases (e.g., where court decisions of the
High Administrative Courts vary despite similar facts),
the decision of the court of cassation can be reconsid-
ered by the Supreme Court of Ukraine.
Case Law
There is no case law in Ukraine. However, in prac-
tice local courts and courts of appeal tend to follow the
position of the court of cassation if the facts of the dis-
putes are similar.
Burden of proof in the court
Formally, the burden of proof to show that the tax as-
sessment notification was issued on legal grounds is
with the tax authority. However, as a matter of practice
it is in a taxpayer’s interest to provide its own relevant
evidence to enhance its arguments before the court.
Time frames to file the claim
Ukrainian law does not set clear timeframes within which
a claim must be filed with the court. A number of tax law-
yers and consultants suggest that a claim must be filed
within 1095 days (approximately three years). However,
tax authorities state that a claim must be made within
10 days of either the date on which the tax notification
was received, or the date on which a response from the
tax authority was received. If a taxpayer files a claim
within this period, the amount of the tax liability remains
unsettled until the outcome of the court proceedings. If
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105
 a claim is made after this 10 day period, according to
the tax authority’ standpoint, the tax liability specified be-
comes settled, and the taxpayer must pay the tax (and
later try to get a refund, if its claim is upheld).
Validity of the court decision
A decision of a local administrative court comes into
force immediately after a court of appeal has reviewed
the case, or alternatively after the term for appealing
the decision has expired.
In practice, the vast majority of decisions come into
force after a court of appeal considers the case. How-
ever, the decision of the court coming into effect on
this date may cause some inconvenience. Consider
the following example. A taxpayer loses a case in the
court of appeal, and because of this, the tax liability is
settled and the taxpayer must pay (and actually pays)
TAXATION OF NON-RESIDENT COMPANIES` INCOME
SOURCED FROM UKRAINE
By BEITEN BURKHARDT
www.bblaw.com
Non-residents inNon-residents entities in Ukraine are
considered to be foreign companies (e.g., legal enti-
ties established in different forms and branches, rep-
resentative offices) operating according to the laws
of another country. Income received by non-resident
companies from their business activities in Ukraine is
subject to withholding tax. The basic rate of withholding
tax for non-residents is 15%.
The following types of income are deemed to be in-
come derived from the business activities of non-resi-
dent companies in Ukraine (i.e., income derived from
Ukraine):
• interest, discount income, which is paid in favour of
a non-resident, including interest on debt obligations
issued by a resident;
• dividends paid (accrued) by a resident;
• income in the form of royalty, freight and income de-
rived from engineering services;
• leasing (rental) income received by a non-resident
(i.e. Lessor) from residents and permanent repre-
sentative offices;
• income derived from the sale of real estate property
106 Uniting Leading Companies from over 50 Nations Across the Globe
this amount to the State budget. At the same time, the
taxpayer has appealed to the court of cassation and is
waiting for its case to be heard. In this situation a tax-
payer may face the following problems: (i) practically
there is quite a long period of time between appealing
the decision and the court of cassation considering the
case; and (ii) there is no clear legislative procedure to
refund taxes paid following a decision of the court of
appeal if the court of cassation then revokes that deci-
sion.
Recent trends in court practice
The Supreme Court of Ukraine tends to use terms that
do not have a clear definition in Ukrainian tax laws, for
example, ‘economic substance of transactions’ and
‘true business goal of transactions’. This should be
taken into account when a taxpayer is planning its evi-
dence strategy.
owned by a non-resident and located in Ukraine (it
also includes the property of permanent representa-
tive office);
• income derived from trading in securities or other cor-
porate rights;
• income earned from joint venture activities and ful-
filment of long-term contractual relationships in
Ukraine;
• fees from the performance of cultural, educational,
religious, sport, and entertainment activities by non-
residents (or by their authorized person) in Ukraine;
• fees for broker, agent or commission services per-
formed by a non-resident in Ukraine and derived from
residents or permanent establishments;
• insurance contributions and premiums or reinsurance
of risks in Ukraine, including insurance of life risks or
insurance of residents for risks outside of Ukraine;
• lottery winnings (except for state lottery), and other
gambling proceeds made in Ukraine;
• income from charitable contributions and donations in
favour of non-residents;
• other income received from the business activities
of a non-resident (its permanent establishment) in
Ukraine, except for income in the form of compen-
Table No. 1
Withholding tax rate ap-
No. The type of income:
plicable to the income:

1. Interest derived by non-resident from certain types of state securities or bonds 0%

Insurance or re-insurance payments for risk insuarance (including life insur-

2. ance) to foreign insurers or re-insurers if the rating of financial reliability of 0%
such insurers corresponds to the set requirements
3. Income from freight 6%
Payments under insurance or reinsurance agreements (including insurance of
4. life) concluded with non-residents insurers (reinsurers) the financial reliability 12%
of which does not correspond to the set requirements (in other cases)
Income paid by resident entities to non-residents for advertising services
5. 20%
performed in Ukraine*

6. Income derived from sale of discount bonds or state treasury bills 25%

sation for the value of goods (services), transferred
(rendered) to residents from non-residents (its per-
manent establishment), including the value of inter-
national telecommunication or international informa-
tion support services.
Some income is taxed at other rates ranged from 0% to
25%. Particularly, special withholding tax rates apply to
the following types of income as described in Table #1.
Tax is withheld before or simutlaneously with payment
of the income derived in Ukraine to a non-resident, un-
less the effective income tax treaty between Ukraine
and the other contracting state envisages otherwise.
Thus, the tax rates mentioned above may be reduced or
avoided, should the provisions of the applicable income
tax treaty apply. The main condition for application of an
income tax treaty is the evidence of a residence certifi-
cate issued by an authorized body of the foreign coun-
try. A residence certificate must be properly legalized
(apostilled) and translated into Ukrainian language.
According to Ukrainian legislation, the income of a non-
resident generated from its permanent establishment
in Ukraine is subject to taxation following the rules set
for Ukrainian residents. Such income is taxed at a rate
of 25%.
• The individual maintains an established residence in
Ukraine, despite additionally maintaining a foreign
residence (likely accompanied by a residency per-
mit);
• The individual maintains its centre of vital interests in
Ukraine (e.g. family members of an individual live in
Ukraine, an individual is registered as a private entre-
preneur in Ukraine, etc.);
• The individual spent greater than than 182 days on
the territory of Ukraine in the tax reporting period (as
evidenced by the entry/departure stamps made by
the immigration office of Ukraine in the individual’s
passport);
• The individual is a stateless person with no citizenship
or nationality, the status of such individual should be
defined in compliance with international law regula-
tions.
Any other individual not within the one of the aforemen-
tioned categories is not considered a resident of Ukraine
for taxation purposes, regardless of whether they are
considered a resident of another country or not.
Residents of foreign countries are taxed only on income
derived from Ukraine, including any and all income ac-
crued or obtained for the performance of activities or
services in Ukraine.

Taxation of Non-Resident Individuals in Ukraine
An individual is considered to be a tax resident of
Ukraine, provided one of the following conditions is sat-
isfied:
A tax rate of 15% applies only to the salary of non-resi-
dents of Ukraine paid by a tax agent (i.e., a resident
entity) and a double tax rate (i.e., 30%) applies to any
other income derived in Ukraine and received by a
non-resident during a reporting period.

• The individual is a citizen of Ukraine; A non-resident with income sources in Ukraine will be
• The individual maintains a place of residence in taxed at the applicable personal income tax rates, as
Ukraine; are summarized in the table below.

* Withholding tax is paid by the resident from its own funds.

www.chamber.ua
107
 A non-resident is exempt from taxation on certain do- • Amounts of compulsory state social security levies;
mestic income sources, including: • Some other payments.

• Income from state bonds issued by the Ministry of Fi-
nance of Ukraine and winnings from state lotteries;
• Alimony received from residents;
• Amounts received from employers with respect to
certain types of medical treatment and services;
• Amounts of some charitable payments;
Non-residents may be to avoid double taxation and
credit tax paid in Ukraine in their country of residence
should there be an income tax treaty between Ukraine
and the individual’s country of residence, which pro-
vides for tax credits or deductions for qualified foreign
taxes.

Table No. 2
Tax rate applicable
No. The type of income:
to the income:
Employment income and income of non-residents derived from domestic sources, and
equated with employment income, e.g.. income of the non-residents who:
• work for companies located in Ukraine, including representative offices of non-resident
1. 15%
legal entities, regardless of the payment source of such income;
• are members of the managerial bodies of the company/private entrepreneur resident of
Ukraine, other benefits at the expense of such resident.
5% (no taxation ap-
2. Interest
plicable till 2010)
3. Dividends and royalty 15%
Income obtained from the sale of immovable property, provided the immovable property
sold by the non-resident exceeds 100 sq. m. per calendar year; should the square of the
4. 30%
sold immovable property exceed 100 sq. m., the part of income proportional to the square
of the property exceeding 100 sq. m. is subject to taxation.
5. Income obtained from the sale of movable property 30%
6. Gifts (except for gifts from relatives) 30%
7. Inheritance (regardless of relation degree with the testator) 30%
Investment income, determined as a positive difference between the profit obtained by a
8. 30%
non-resident from sale of the investment assets and the initial value of acquisition
9. Prizes 30%
10. Income obtained from civil-law agreements, lease agreements etc. 30%

108 Uniting Leading Companies from over 50 Nations Across the Globe
PERSONAL INCOME TAX
By Grant Thornton Ukraine
www.gtukraine.com
The basic legislative act governing personal income
tax (PIT) in Ukraine is the Law of Ukraine “On Tax on
Profits of Individual” (the PIT Law), dated 22 May 2003,
as amended. The PIT Law became effective from 1
January 2004. It replaced the Decree of the Cabinet
of Ministers of Ukraine “On the Personal Income Tax,”
that has been remaining the paramount legislative act
in the field of personal income taxation for more than
ten years. The PIT Law has introduced a number of
significant changes and amendments to the taxation of
individuals, including tax rates; rules and principles of
tax residency qualification and taxable income deter-
mination; tax administration; favorable tax credit rules;
and others.
Tax Residency
The new PIT Law establishes a new definition for the
taxpayer’s residency. The concept of the determination
of tax residency is now very similar to that of most bilat-
eral double taxation treaties drafted on the basis of the
OECD Model Tax Convention.
Specifically, unlike the prior Ukrainian legislation which
linked the taxable status of a foreign individual solely
to his/her physical presence in Ukraine during more
than 183 days in a tax (calendar) year, the PIT Law
lays down a number of other conditions (e.g., domicile,
center of vital interests, citizenship, etc.), under which
a foreign individual may be treated as a tax resident in
Ukraine.
To be more precise, pursuant to the PIT Law, the
following criteria are used to determine the resident
status of a person:
• A tax resident of Ukraine is an individual who has a
permanent residence in Ukraine;
• If an individual has a permanent residence in more
than one country, he/she will be a tax resident in that
country, with which he/she has closer personal or
economic, ties (e.g., his/her center of vital interests).
The PIT Law specifically outlines that the place of the
permanent residence of the members of an individu-
al’s family or the place of an individual’s registration
as a business entity (as a subject of entrepreneurial
activity) will be a sufficient (but not an exclusive) con-
dition for determining the location of the center of vital
interests of such individual;
• It is impossible to determine the country in which the
individual has his/her center of vital interests, or if the
individual does not have a permanent residence in
any country, then the individual will be considered a
Ukrainian tax resident if he/she is present in Ukraine
for at least 183 days of the tax period (including days
of arrival and departure);
• If tax residency is impossible to determine on the
basis of the above provisions, then the individual will
be a tax resident of Ukraine if he/she is a Ukrainian
citizen; and
• The PIT Law stipulates that an individual’s own iden-
tification of his/her principal place of residence on
the territory of Ukraine according to the procedure
established by the PIT Law, or the registration of an
individual as a self-employed person in Ukraine, will
constitute a sufficient basis for identifying such indi-
vidual as a tax resident of Ukraine.
A person who fails to qualify as a Ukrainian tax resident
will be considered a “non-resident” for purposes of the
PIT Law.
The latter criterion of “one’s own identification,” as well
as the variety of the criteria in and of themselves, com-
bined with the absence of clear guidance, might create
situations where an individual is treated as being a tax
resident in several jurisdictions simultaneously. Moreo-
ver, the above set of criteria makes it difficult in practice
to identify the solely correct criterion when several of
them can be easily applied. The latter circumstances
can also raise a conflict between two residences. Cer-
tainly, in the majority of cases, the rules of the effective
double tax treaties may be applied to solve such resi-
dency conflicts.
Taxable Income
Ukrainian residents are taxed on their aggregate world-
wide income. Non-residents are taxed on all income
derived from sources within Ukraine, but are not eligi-
ble for certain exemptions or deductions available to
residents.
The PIT Law provides for a list of items specifically in-
cluded in the gross income of either a resident or a
non-resident individual. These include, among others,
wages and salaries, gifts, insurance payments and
www.chamber.ua
109
 premiums, rental income, fringe benefits (including
the cost of received rent, property, food, assistance
of home servants, expense reimbursements, amounts
of financial aid, etc.), amounts of punitive (vs. actual)
damages received, forgiven debts and obligations, in-
terest and dividend income, investment income and
inheritances.
At the same time, a number of items are specifically
excluded from the taxable income of both residents
and non-residents. Apart from such excluded items,
the PIT Law allows an individual resident taxpayer to
claim as non-taxable credits certain expenses made
during the taxable year, provided that such expenses
can be confirmed by the relevant documents. In par-
ticular, an individual resident taxpayer will be able to
claim as his/her tax credit, inter alia, the following: a
part of the interest payments made under a loan se-
cured by a mortgage, provided that the loan is used to
finance the purchase or construction of the taxpayer’s
principal home; charitable contributions of not less
than 2% but not more than 5%, of the taxpayer’s an-
nual taxable income; a certain amount of expenses
made in favor of educational institutions for receiv-
ing professional or higher education; and a certain
amount of expenses paid to health institutions for per-
sonal medical needs.
The PIT Law also allows certain categories of taxpay-
ers to reduce their respective incomes by an amount of
one minimum statutory salary (calculated on a monthly
basis) effective 1 January of the relevant tax year. This
is similar to a tax exemption and is called a “social tax
benefit”. Special groups of taxpayers (e.g. students,
single mothers, war veterans, et al.) are eligible for an
increased social tax benefit.
Taxes paid by a resident taxpayer outside Ukraine may
be taken as credits against Ukrainian taxes due, in the
event that the taxpayer provides a written acknowledg-
ment from the foreign tax authority that such foreign
taxes have, in fact, been paid. However, the total of
such foreign tax credits may not exceed the amount of
the Ukrainian personal income tax due.
Таx Rates
As of 1 January 2004 the progressive PIT was replaced
with a flat tax rate system. Effective from 1 January
2007, the 15% flat tax rate applies to almost all income
received by a resident individual in Ukraine, regardless
of the source of income.
Special rules, however, are applied or will be applied to
the taxation of:
110 Uniting Leading Companies from over 50 Nations Across the Globe
• bank deposits which will become subject to income
tax at the rate of 5% commencing 1 January 2010;
• prizes (except for the state lottery), which are subject
to income tax at the double rate, i.e., 30%;
• real estate which is subject to tax at a rate of 0%, 1%,
or 5% of the appraisal value of the real estate de-
pending on the size of the real estate and the number
of real estate sale transactions over a year);
Special rules of taxation are established for transac-
tions with immovable and movable property, inherited
property, and other specific items.
Income received by foreign individuals from Ukrainian
sources is subject to tax at the double rate, i.e., 30%, with
the exception of certain types of income, namely, inter-
est, dividends, and royalties, which are subject to tax at
the rate of 15%. It is necessary to notice, that according
to Tax Administration official letter #50 from 29 October
2004 incomes of non-residents in the form of wages and
rental income are subject to tax at the rate of 15 % too.
It is necessary to notice that the specified tax rates to in-
comes of the non-resident are applied taking into account
tax rates and the privileges provided Dable Tax Treaty.
Tax Administration
The general rule of the PIT Law is that the duty to
charge, collect, and remit personal income tax to the
Government is placed on the payers of the relevant in-
come, i.e. tax agents in the parlance of tile PIT Law.
Thus, employers are deemed to be tax agents with re-
spect to the personal income tax clue on the wages
and salaries payable to their employees. The PIT re-
turns should be filed on a quarterly basis, not later than
the 40th calendar day of the subsequent quarter. The
tax due should be transferred to the tax authorities si-
multaneously with wages payment.
If income is received through payers which are not re-
garded by the PIT Law as tax agents, then the payees
thereof’ will be obligated to file an annual tax return for
the year in which such income will have been received.
A tax return may also be lodged voluntarily if a tax resi-
dent, otherwise not required to file a tax return, wishes
to claim the applicable tax credits. In these cases the
annual tax return should be filed to the tax authorities
not later than the April, 1st of the subsequent year.
Personal income tax liability must be extinguished within
30 calendar days after the issuance of the relevant tax
invoice by the payee’s local tax office. Personal income
taxes are payable in the local Ukrainian currency.
 XII TRANSPORT & LOGISTICS
INTEGRATED LOGISTICS SOLUTIONS
By UVK
www.uvk.ua
Ukrainian Logistics Sector’s Current Stage and
Future Prospects. 3PL’s Solutions for Retailers’
Regional Expansion
Logistics ‘Made in Ukraine’
In January-September 2008 [by the date of writing this
article] Ukraine’s logistics market featured growth index
– nearly +8%, like-for-like; to compare: the same period
in Europe showed as few as +3%, and such index is re-
peatable for the last several years. The earlier forecast
production sector’s +8% and retail’s +10% trends prom-
ised a lot for the local logistics. However, the global cri-
sis – to affect (despite multiple objective declarations)
Ukraine’s economy, which had been standing from the
knees and ignited to integrate in global business envi-
ronment after joining the WTO – has forced the market
players to, at least many, put an initiative on hold.
According to the results of an own all-round research,
the volume of the local segment of contracted, or 3PL,
logisitcs amounted to some US$ 225-250 mln in 2007.
Actually, this amount is aggregate revenues of 8 pro-
fessional 3PL companies operating in Ukraine (with
UVK holding an 18% share thereof). However, judging
from Ukraine’s 2007 goods turnover volume of some
US$ 40 bln, the potential is all ahead.
A globally recognized trend for outsourcing non-core
business activities is currently spreading in Ukraine like
never before, as one might say. To note, outsourcing
of logistics processes is becoming even more proven-
popular in all target groups (with different dynamics
though), representing such sectors:
• Retail (including franchising)
• Automotive aftersales
• Chemicals and household goods
• PC products, softwares, and household / portable
electronics
• Food and non-food production
• DYI products
• Fashion and footwear
As long as Ukraine’s logistics is showing positive indi-
ces of growth, it will probably attract more new (trans-
national) 3PL’s planning to penetrate the local sector,
including through M&A deals with regional operators
as experts in local specifics. However, not all 3PL’s are
pursuing the strategy to provide integrated logistics so-
lutions, as many of them would decide on specializing in
a chosen segment or on best-performance services.
Also, logistics’ key target groups are quite consistent
in evolutionarily increasing their requirements (in quan-
tity and quality) set before integrated logistics services
providers, which in turn urges the players to continu-
ously improve service level, demanding even more op-
erational flexibility.
Besides the above, there is another trend related to
logistics’ allied sectors, such as capital and financial
services market, industrial development, and others.
Until lately, all these had shown an obvious growth,
however, they are now pending re-structuring and
amalgamation.
There are certain factors to negatively influence the
market’s future development, among which:
1) stagnation in a global and Ukrainian banking and
finances sectors, that is halting major investment
projects;
2) lack of in-demand logistics capacities (A class
ambient, temperature-controlling and specialized
warehouses, high-quality vehicles, etc.) from allied
developers and transportation companies;
3) a strong deficit of qualified personnel for the mar-
ket, both ‘white’ and ‘blue collars’ (especially, in the
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111
 context of the gradually increasing requirements to
each employee in a chart, demanding multi-func-
tionality);
4) under-development of certain sub-contractors,
which makes it materially more difficult for a 3PL to
assure an adjusted and anticipated service level at
all times;
5) a present-day mental unpreparedness and econom-
ics under-education of a majority of the logistics’
target groups, to some extent, hampers a massive
dissemination of an outsourcing philosophy;
6) lack of logistics and related local laws to regulate the
sector; and
7) non-transparency of certain local logistics’ domains
(such as customs clearance);
8) a very sensitive dependency of the market situation
on US Dollar’s up’s and down’s and fuel price fluc-
tuations.
What Change to Implement in Crisis?
The global logistics history has repeatedly proven that
CEP and 3PL operators feature the utmost flexibility for
change at hard times, in contrast with other logistics
market players. Leading Ukraine-operating 3PL’s cur-
rently view these tasks as their primary:
1) optimization of internal processes and procedures;
2) enhanced client-oriented marketing;
3) revision of strategy and further development plans,
focusing on core markets and being selective with
big investment projects;
4) providing tailor-made services and diversifying prod-
uct offering;
5) stricter management of human resources, and
6) remaining a predictable partner through quality as-
surance and cost management.
Focus on Retailers
Retail is obviously the major target market for logisitcs
services providers. Ukraine’s retail can be briefly char-
acterized today by these:
• over 1,000 stores nation-wide;
• over 150 retailers (of which 20 are top operators);
• all contemporary retail formats and commodity cat-
egories exist;
112 Uniting Leading Companies from over 50 Nations Across the Globe
• market volume approximated at US$ 32 bln in 2007
(4.3 times more than in 2000; +23% ‘like-to-like’).
The so-called ‘modern trade’ comprises 29 nation-wide
and regional FMCG retailers with over 800 stores all
over Ukraine, whose money share is nearing 10% of
the gross turnover in the retail sector.
Outlining latest trends on the retail market, The Euro-
pean Logistics Association mentions “re-structuring by
retailers of their costs”, with a shift from own logistics
management to value-added services (such as region-
ally demanding packaging and adaptation of products
to consumers’ tastes). Outsourcing logistics services
definitely enables retailers to focus on core business.
This is exactly the way certain global players are pur-
suing, enjoying up to 25% of logistics costs (i.e. 1-2%
off on-shelf prices) optimized through cooperating with
3PL’s (according to A. T. Kearney’s studies). As a retail
market develops, and competition becomes stricter,
these issues are believed of a paramount importance,
such as:
• guaranteed deliveries to stores;
• high level of stock management;
• professional management of DC’s, and
• intra-chain distribution.
At crisis times when a retailer’s goal is to maximize
earnings from every single sq. m at stores, struggling
hard to keep on-shelf prices unchanged, the following
tasks become even more critical and are often the only
healing means:
• internal optimization – through getting rid of non-profit
and non-core assets, revising in-house processes,
and dismissing non-core departments;
• stronger marketing – through realizing a conserva-
tive assortment policy and starting private label pro-
grams;
• implementation of new technologies – through bar-
coding products, introducing promo-units, and online
retailing, and
• outsourcing of non-core activities.
And normally, these are the benefits that a 3PL can
bring a retailer by serving outsourced logistics:
1) retailer’s investment purposes relate to own core busi-
ness development (i.e. stores, working capital etc.);
2) retailer’s enjoying benefits from a 3PL’s network
services (including innovations);
3) retailer is faster in expanding regionally – through a
3PL’s distribution logistics network;
4) retailer benefits from a change implemented by a
3PL as a client-dedicated service provider;
5) retailer is smoother to enter a high / low season, tak-
ing advantage of a 3PL’s flexibility.
Future Perspectives
To conclude from the foregoing, Ukraine’s logistics
sector will survive. And the following principles are be-
lieved to be key and decisive in ‘to be’ or ‘not to be’ for
a 3PL: team-working and result orientation, innovative-
ness and professionalism, dedication and flexibility.
Monitoring of latest innovations is an important activity
of any 3PL, especially Ukrainian logisitcs services pro-
viders. Local operators fully realize that to benchmark
international logistics practice and localize best know-
how’s enables to meet key accounts’ expectations ‘to-
morrow’ and is very likely to tangibly contribute to the
success in a more strategic prospective. Innovations
are not already restricted, for example, to an operator
just integrating WMS, TMS, and CRM into one single IT
system or launching a 2-level bar-coding technology to
lessen an acceptance lead time. Present-day initiatives
are aimed at creating information platforms, integrated
with clients, friendly for clients, and with their require-
ments realized. Innovativeness is definitely proving a
must-have business approach; to add, at a whole com-
pany’s level.
Legislatively, the mentioned under-development of
Ukrainian legislation relating to logistics, customs clear-
ance, and related domains is nothing but the opportu-
nity for the market players to ‘knock’ on statespersons’
doors to declare bottle-neck issues, suggest solutions,
and get involved in developing the system to regulate
the sector.
Operationally, 3PL’s are likely to tend to (among other
things) unify standards for clients’ goods and cargos in
logistics management, as well as for consumables (pack-
age) within value-added services (such as assembly of
promo-units, etc.) and trays. In performance sense, lead-
ing 3PL’s might wish to compete with ‘low-cost’ ware-
house operators or freight forwarders – instead, more
focusing on improving service level and nation-wide dis-
tribution system (based on representation in regions).
Target groups are, in turn, expected to shift their de-
mands from ad-hoc ordering separate services from
3PLs towards assigning for integrated solutions on a
long-term basis. Commercial offices of well-known mul-
ti-national FMCG producers (who enjoy a better-quality
service level in enhanced economies) are likely to play
‘the first violin’ in appealing to local logistics services
providers for new standards of work – to not only get
limited to operational performance, but also cover HR,
managerial system, EDI, QMS certification and other
critical issues.
In marketing terms, the getting-even-more-severe
‘fight’ for a target client would probably force logistics
companies to realize pro-active policies, with missions
focused on partner-style protection of their client’s busi-
ness interests, assistance in clients’ further successful
progress, and contribution to the latter’s increasing rev-
enues and profits, as well as with marketing communi-
cations targeted on increase of loyalty.
Objectively, a major issue is about logistics processes
proving even more sophisticated on a global level. It is
merely on a weekly basis that new supply chains and
new routes appear, while distances between trans-na-
tionals’ headquarters and subsidiaries extend – which
breaks an instantly found coordination of all players
involved in 3PL’s chains. Considering the current insta-
bility and unpredictability of trade, a 3PL’s function to
comprehensively manage all processes within a supply
chain turns from a primary to vitally important task. All
processes under a distribution logistics or supply chain
management concept become subordinate to the ul-
timate goal of logistics as it is – to just-in-time deliver
a client’s goods, safe from damage and at an agreed
cost.
Alternatively to 3P-logistics, 4PL and 5PL are quite ac-
tive in developing, meaning a complete client’s stock
and cash flows management, and virtual (electronic)
logistics management, respectively. And it is nice
to mention that these trends are also remarkable for
Ukraine.
All in all, the logistics sector is facing the era of con-
tinuous change, which – among otherwise – would re-
quire internal change at 3PL’s, including coaching and
training, improvement of in-house processes and pro-
cedures, etc. All these are mandatory to comply with
in order to survive in the new business realities in the
long run.
www.chamber.ua
113
 LEASING INDUSTRY IN UKRAINE
By Euro Leasing
www.lease.com.ua
Faster than in Europe!
“You are surrounded by simple, obvious solutions that
can dramatically increase your income, power, influ-
ence and success. The problem is, you just don’t see
them”.
Just since the first leasing company was established,
the rapid growth of leasing industry started. It is the
Ukrainian leasing market which develops most actively
in the East European countries and is the most promis-
ing in the next 5 years.
The figures prove the leasing constant growth – let’s
look at the charts below. In 2007 leasing portfolio grew
tremendously: from $716 million as of January 1, 2007
up to $3,792 million as of January 1, 2008 (according
to IFC and UUL Association data). Leasing portfolio is
a figure that shows the volume of leased assets. Leas-
ing growth is determined by many factors: growth of
the leasing market volume, growth of number of leas-
ing companies, greater number of clients’ attraction,
development of secondary market of fixed assets, ex-
pansion to new regions, etc. Ukraine’s economy fol-
lows European trends which show significant excess
of growth rates of companies leased fleets over growth
rates of companies own fleets.
Source: Ukrainian Union of Lessors Association, 2008
114 Uniting Leading Companies from over 50 Nations Across the Globe
According to Ukrainian leasing market research carried
out in 2007 by IFC and UUL Association, the number of
leasing companies in Ukraine, against the background
of the increased interest towards leasing of banks with
foreign investments operating in Ukraine, grew by 38%:
up to 90 companies. 72% of those companies are lo-
cated in Kyiv. Within the research, a rating of Ukrainian
leasing companies was prepared which on the base of
their leasing portfolios volume as of January 1, 2008.
Among motor transport leasing companies Euro Leas-
ing was ranked the first. That fact testifies that the com-
panies which provide only the high quality services can
achieve success.
Leasing makes businesses more competitive
Why there is so much attention for leasing? The thing is
that, first of all, this is a modern efficient way of vehicles
financing. It is a long-term hire that allows a company
to have no ownership risks related with a vehicle.
Secondly, company receives a wide range of benefits
choosing leasing with service, namely:
• Vehicle purchase finance
• Payments administration – all the accountancy and
Herewith, the number of signed lease contracts increased by 98% in 2007 as compared to 2006: 12.1
thousand contracts
Source: Ukrainian Union of Lessors Association, 2008
other documents related with the vehicle use and own-
ership, the leasing company process and books on its
balance. The client makes only one payment on the
monthly basis.
• Registration of the vehicle, paying all the taxes and
charges (transport tax, 3% to Pension Fund)
• Installation of all the necessary additional equipment
• Scheduled maintenance exclusively in a network of
official service stations
• Setting of the winter tires
• Tires change and storage at a specialized storehouse
of the leasing company
• CASCO insurance in the best insurance companies
under the optimal terms
• Obligatory third parties liability insurance with cover-
age of USD 1 thousand
• The 24-hours technical support «8-800»
• Provision and administration of credit fuel cards
• Delivery of a car to/from the office of a client, an airport
• Provision of pre-delivery cars, replacement cars, etc.
Thirdly, leasing has very quick decision-making proc-
ess – from 1 hour. While taking a loan a bank may
consider the inquiry from legal entities 2 or 4 weeks.
Leasing companies do not have problems with the
large credit. And when a company purchases a car
at its own expense, considerable amount of capital is
drawn away from the main business functions, and this
is a problem. Such problem is solved when companies
lease a car.
Fourthly, leasing provides more flexible schemes
than the bank loans, for instance. Leasing companies
always try to be closer to its clients; therefore every
leasing agreement meets all the specific needs of the
Lessees. Moreover leasing doesn’t usually require any
mortgage, which is another benefit for legal entities,
isn’t it?
What is fleet management?
In order to provide high quality solutions for business
problems, today Ukrainian leasing companies move in
two directions:
1. Net leasing (just the vehicle purchase finance)
2. Leasing plus additional service.
Many businesses represent the increasing demand for
outsourcing certain administration functions related to
corporate fleets’ organization, its functioning and cost
control measures. Some leasing companies in Ukraine
have in their product portfolios fleet management pro-
grams with full range of different services.
Fleet management was developed specially for com-
panies having more than one car. This service allows
companies to focus on their business and core com-
petitive advantages without wasting a lot of time and
resources. This contributes to higher profits as the ef-
ficiency of the transport costs management increases
significantly. The outsourcing allows increasing overall
productivity of the businesses due to investments of
discharged resources in other business functions, in
particular for sales expansion.
What are the reasons for companies to apply for
fleet management program?
1. To cut expenses on fleet maintenance and
management. As leasing companies are ones of
www.chamber.ua
115
 the largest vehicle purchasers in the country, they
can provide value enhanced agreements on car
purchase, insurance or technical maintenance with
their partners. It gives the clients’ business more
benefits including volume discount pricing.
2. To accurately forecast and control the fleet expen-
ditures. Using fleet management the clients receive
regular reports and monitor fleet’s activity online.
3. To get free of time-consuming administrative tasks,
including the relationships with suppliers as to the
procedures, checking and payment of the invoices,
preparation of all necessary reports. Passing these
tasks to leasing company, definitely leads to optimi-
zation of the staff structure, administrative and tax
burden.
4. To increase the productivity of the fleet. Providing
the replacement cars in the case of repairs, techni-
cal maintenance and inspection any company can
reduce losses caused by delays. Usually the repairs
after traffic accident are carried out before getting
the insurance compensation. Therefore the effective
administration of all the repairs and loss accident
increases the useful life of the vehicles in the fleet.
5. To facilitate accounting and documents flow due to
centralized invoice payments – a company makes only
one monthly payment to its fleet management partner.
Hereby there is a strong background for considering the
fleet management service the best tool to adapt every
business for current market conditions. In Ukraine only
a few companies provide the fleet management. The
most experienced and well organized company among
them - Euro Leasing - provides fleet management serv-
ice for more than 200 Ukrainian and foreign compa-
nies, has highly skilled service specialists and the wide
regional service network.
The main lessees are legal entities, particularly big enterprises.
Source: Ukrainian Union of Lessors Association, 2008
116 Uniting Leading Companies from over 50 Nations Across the Globe
Fleet management involves a lot of different services
and options. Choosing this or that option any company
can thus build up their “individual service package” and
easily use them to facilitate the business:
• Technical maintenance administration and repairs
control, which frequently involves a personal service-
manager, 24-hour technical support line, car delivery
to the technical examination place, and every place
within Ukraine, free evacuator all over Ukraine, fuel
supply and provision with the repair facilities on the
road, provision of technical consultation on car use,
the nearest service stations addresses upon request,
medical and legal consultations in case of traffic ac-
cidents, and other options;
• Administration of loss accidents, namely: carrying
out the repairs just after the traffic accident without
waiting for insurance compensation, call of the State
Automotive Inspectorate, ambulance, evacuator to
the place of traffic accident, gathering the documents
package for insurance company and organization of
the damage expertise, representation of the clients’
interests at the insurance company;
• Administration of the seasonal tire change, as well
as waste tires: tire change without queues, advance
time reservation for tire change, tire keeping at spe-
cialized warehouses, tires delivery to any region of
Ukraine, mobile tire fitting;
• Fuel management: administration of relationships
with fuel suppliers, trip tickets, all documents and re-
ports preparation;
• Organization of the new vehicles purchase and trade-
in: selection of the proper supplier considering price/
quality ratio, carrying out a tender procedure for sup-
pliers, vehicles order from the dealer, completing the
vehicle with the additional equipment, registration and
 deregistration, annual technical inspection and so on;
• Drivers’ services to any city of Ukraine, railway sta-
tion, airport, the long-term parking provision, the car
washing and dry cleaning organization, etc.;
• Defensive driving study programs for company’s car
users, which also includes estimation of driving skills
for the personnel.
According to the research conducted by Euro Leas-
ing among large Ukrainian and foreign companies, the
most popular services for the corporate fleet include:
1. Replacement car in the case of repairs, administra-
tion of the rental agreement, and accountancy;
2. Priority booking the time for undergoing the regular
maintenance;
3. Document flow facilitation – the company makes
only one monthly payment to its fleet management
company instead of 10 payments to different service
companies;
4. 24-hour technical support service helpline by the ter-
ritory of Ukraine.
Therefore, when a company faces a need in effec-
tive fleet activity and cost reduction, services of leas-
ing companies provide high-quality decisions for every
business whether it is small, medium or large.
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117
 XIII TRAVEL & TOURISM
THE BUSINESS TRAVEL INDUSTRY IN UKRAINE
By ”Travel Centre “TRIME” –
ITP Partner in Ukraine
www.trime.ua
The organization of business travel as a separate niche
of tourism in Ukraine started developing approximately
ten years ago. During the 1990s the organisation of
business travel was the sole realm of Ukrainian tour
agencies, mostly being facultative. In their turn, cus-
tomers turned to such services only in extreme cases -
when they needed to solve complex problems (confer-
ences, scientific forums, exhibitions etc.), which were
of great value. While the market progresses, numerous
tour companies have billed themselves as business
travel agencies, but there are few of them sticking to
their alleged niche. Even though the market of busi-
ness travel services began to take off just a couple
years ago, specialists say that the sphere of the busi-
ness trip is developing promptly across the globe, and
Ukraine itself is being integrated in the process at a
rocketing rate.
The service demanded by time
The progress of business in today’s Ukraine will quite
obviously set its own rules as Ukraine’s WTO member-
ship opens new horizons for international cooperation.
With this in mind, the need for professionally organised
business travel comes to the fore, with firms’ employ-
ees taking part in training courses and conferences,
including the representation of companies’ activities at
well-known resorts, and the organization of corporate
breaks either at home or abroad.
Nowadays the Occident and Russia consider spending
money on such events not to be expenditures, but vice
versa – to be necessary investments – to create a top-
class team and strengthen a company’s position on the
market, thereby extending its share in it.
Concerning the national market, as Ukrainian spe-
cialists say, services in the organising of business
trips have become of great demand over the last few
years. Obviously, more and more companies realize
that “face-to-face” communication with both business
partners and consumers allow for the exchange of
information regarding company’s activities, its newly
118 Uniting Leading Companies from over 50 Nations Across the Globe
designed products and latest technologies in a quick
and effective way. Just visiting exhibitions, participat-
ing in international branch-wise forums and seminars,
one can be in touch with all the relative news and track
the development trends in this or that sphere, with the
aim of maintaining the competitiveness of your own
business.
TMCs helping hand
It’s doubtless now, that the development of Internet re-
sources allows companies to deal with the organisation
of their corporate travel, booking air tickets, hotels etc
more freely. But still company executives should un-
derstand that their employees, scouring the Internet for
hours in search of more advantageous variants, can
be a waste of staff resources, and frequently the cho-
sen one will not happen to be the best deal or package
available. A recent study by Consumer Reports shows
that millions of passengers who booked directly were
getting a bad deal for their travel dollar. Up to 40% of
the flying public pays too much for their travel, hun-
dreds of dollars more than they should to fly the exact
same route, same seat, same plane, same class of
service, same everything.
So here comes the helping hand of business travel
providers, so called Travel Management Companies
(TMC). They are professional in organising business
travel for companies, whose business efficiency is in-
dissolubly related to consuming business travel serv-
ices.
The principle advantage of TMCs is their contact with
airlines, hotels and other providers that allows for the
finding of an optimal solution in the organising of busi-
ness travel and the planning of travel budgets for each
corporate client individually. Travel management is a
specialised business function that balances employee
needs with corporate goals, financial and otherwise.
Travel management ensures cost tracking and control,
facilitates adherence to corporate travel policies, real-
ises savings through negotiated discounts, and serves
as a valuable information centre for employees and
managers in times when travel is not as smooth and
carefree as it used to be.
Good Travel Management Companies can help a con-
sumer wade through the thousands of airline and tour
fares that are out there and provide unbiased, objective
counselling on all of the options available. They are ex-
perts in understanding the intricacies of the system and
helping you take full advantage of them. They provide
a one-stop shopping service for all corporate travel
needs, whether it is an airline ticket, car rental, hotel,
tour package, or cruise. And, they will help companies
stay within their budget.
Obstacles to slow the progress down
Not only business travel providers but also consumer-
companies come together to face one of the reasons,
causing difficulties – there is no legislatively authorized
notion “business travel” existing, therefore so is not
the necessity of such expenses for effective business.
These “spokes in travel business’ wheels” either lead to
difficulties when organizing trips or holding some other
corporate measures, and when validating such events
for bookkeepers record or fiscal account.
Speaking about the hardship of business travel industry
in Ukraine we should also mention laborious and time-
taking procedure of drawing up visas for Ukrainian citi-
zens in consulates of foreign states. When going abroad
on business trips it does considerably complicate the
process of planning and organizing business travel.
ANALYSIS AND MAIN TRENDS OF TOURISM
DEVELOPMENT IN UKRAINE
By Kievapartment.com
www.kievapartment.com
In opinion of the World Tourist Organization Ukraine is
one of the most perspective tourist centers in the world.
In particular it concerns business tourism which rep-
resents one of the leading and the most dynamically
developing branches of the world economy.
The development of tourism and resort industries during
the last five years distinguishes by its positive and
stable dynamics. A new image of the Ukrainian tourist
product competitive both in our country and abroad,
a complex approach to the development of tourism
and resorts at a local level, and the support of small
and medium tourist businesses caused a constantly
Expanding the horizons
Stressing the fact, those were mostly foreign compa-
nies and representatives to use the services of busi-
ness travel providers. However last years show us quite
more Ukrainian companies and corporations extending
their travel-budgets in light of expanding and progress-
ing own business, searching for new activity directions
and partners abroad. On the grounds of the regional
business development the most popular in-Ukraine di-
rections traditionally are the big regional and industrial
cities: Donetsk, Dnepropetrovsk, Odessa, Kharkov,
Zaporozgye and Lvov. As for the international direc-
tions, one can find the expenditure of corporate travel
to the Occident and the Orient, America, and Moscow
as well.
For the last two years we’ve seen the notable activation
of the movement in direction of the South-Eastern Asia
states, also China and India, where large international
corporations place their manufactures, and organize big
industrial exhibitions and conferences. One of the most
important directions of business travel industry which is
developing at especially rapid rates is MICE (Meeting,
Incentives, Conferences, Events), what makes the serv-
ices connected with organization and holding corporate
events of a great need. Taking the development trends
into consideration, especially, as the Ukraine advances
in the road to world economics, one may predict the rock-
eting growth of business travel industry within the next
few years. Therefore, the role of business travel within
the corporate structure must be placed in proper context
so that its value can be measured and appreciated.
growing number of tourists and the scope of services
rendered to them.
As a result of sustainable development of international
cooperation in the tourism sphere the number of in-
coming (foreign) tourists who visit Ukraine grows with
every passing year.
During the last 6 month over 11.3 million incoming
travelers had visited Ukraine, that is more by 19% (or
over 1.8 million) more then during the same term in
2007. The increase of the incoming travelers in 2008
had been caused by the bigger number of private trip
www.chamber.ua
119
 purposes from the following countries: - Poland 16% Segmentation of Incoming Tourism by Motivation
growth (or 336.6 thousand people), Belarus 33% (or (Jan-Jun 2008)
304.5 thousand people) growth, Moldova 16% growth
(or 264 thousand people), Russia 9.4% (or 226 thou-
sand people). This segments caries value of 90% of all
the incoming travel flow.

It is indeed worth to mention that there is change in the

sphere of organized tourism. At the first 6 months of
2008 the growth in this segment had turned to be 59%
(or 223.8 thousand people) while in 2007 it decreased
by 15%. The increase of this segment is coming from
Poland (235% or 143.3 thousand people), Russia
(49.7% or 47 thousand people) and Germany (42% or Segmentation of Incoming Tourism by Motivation
8.7 thousand people). (Jan-Jun 2007)

Dynamics of Incoming Flow 6M 2006-2008

There are the follows changes in the structure of in-

coming travel to Ukraine: share of organized tourism
and business trips equally increased from 4% in 2007
to 5% in 2008. In the meantime share of private trips
Dynamics of IncomingTourism Flow by Motivation
decreased from 92% to 90%.
6M, 2006-2008
Structure of the travelers by the countries:

6.4 million 57 % growth by 17 % or

Cis Countries
people flow 1.7 mln people

growth by 19 %
4.0 million 36 %
Eu Countries or 646.4 thousand
people flow
people

growth by 26 %
Other 0.8 million 7 %
or 174.7 thousand
Countries people flow
people

The growth of the incoming travelers form the EU coun-

Structure of incoming travel by motivation: tries came from the increasing of the travelers form the
follows countries: Poland (by 22% or 500 thousand
543.5 growth by 34.5% or people), the Slovak Republic (by 59% or 13 thousand
Business
thousand 5% flow for 139.5 thousand people), Germany (by 15.6% or 13 thousand people),
Trips
people people Czech Republic (by 25% or 4.1 thousand people).
602.5 growth by 59 % or
Organized TRAVEL TIPS FOR VISITING UKRAINE
thousand 5% flow for 223.8 thousand
Tourism
people people
When preparing your tip to Ukraine, check if you need a
10112.7 visa to enter Ukraine. EU, USA, Canada, CIS countries
Private growth by 15. % or
thousand or 90% flow
Trips for 1.4 mln people citizens do not need a visa if it’s short-term visit. The
people
best way to obtain visa is through the Ukrainian con-
sulate or embassy Fin your country prior to departure.
You may check all information at: www.mfa.gova.ua

120 Uniting Leading Companies from over 50 Nations Across the Globe
Rating of top 10 main courtiers by incoming travelers:
# Number of Person
Total for JAN-JUL 2008 11258808
1 Russia 2920440
2 Poland 2791659
3 Moldova 1973766
4 Belarus 1333691
5 Romania 643397
6 Hungary 573066
8 The Slovak Republic 339978
7 Germany 96069
9 USA 59345
10 Azerbaijan 36463
Total 10 countries 10767874
When entering Ukraine you may proceed either through
Green or Red customs line. Save all documents you
receive and fill out going through customs – your will
need these to leave the country.
Arriving hall at the airport is small but full of taxi drivers
trying to offer you their services. Not cheap but they are
willing to barging.
We suggest that you will arrange a pick up with our
company prior to your arrival. Simply look for the sign
of your name or company and go directly to your driv-
er – who is ready to help you with your needs and safe-
ly take you to the place. You can be sure they will have
more responsibilities before you. As if you will not be
happy they will not have their jobs again – unlike the
taxi drivers at the airport – no responsibilities and no
care that you will be happy as you more likely never
use them again.
The trip to Kiev from the airport would usually take 30
minutes if not get stuck in the traffic. The first impres-
sion of Kiev is a city of high rises and apartments com-
plexes. But the more you get to the center the more
you see of a green city. The city with golden domes
and number of chestnut trees, the city of beautiful and
hospitable people, the city of modern and old architec-
ture. There are places to see and must to see! Staring
from the Mother of Mother Land (or as local call her Big
Mama) as she welcomes you into the city, following by
the Golden Lavra monastery and interring deep to the
history with several Cathedrals and old Podol district.
Hotel or your apartment must be located in the center
to be close to every possible event. There are not a
big choice of 3, 4, 5 stars hotels in Kiev. So, you may
find that price for hotel room is not corresponded to the
quality and range of services provided.
Share Jan-Jun 08 / Jan-Jun 07
100 % + 18.3 %
25.9 % + 12.7 %
24.8 % + 21.8 %
17.5 % + 16.1 %
11.8 % + 33.5 %
5.7 % + 33.9 %
5.1 % -4.0 %
3.0 % + 59.3 %
0.9 % + 15.6 %
0.5 % + 9.4 %
0.3 % + 3.6 %
96 %
Lately, it is more and more popular had become to rent
apartments for a few day or weeks of stay at the center of
Kiev. You get more space and more extra services. Before
going to the benefits it should be mentioned the lacks: no
hotel level concierge directly at the apartment – but you
have 24 hours assistance and company staff will be hap-
py to fulfill your orders, the location is in the center but very
seldom company have several units at the same building
and the entrance might not be the best but the apartment
is. Advantages – the renovation and style of the apartment
is much nicer then a hotel – you get what you pay for and
feel yourself comfortable as at home. If you wish to spend
100$ then you will get the level of 3 star hotel; $150-200 –
4 star hotel and over $250 - 5 star hotel – for a double.
You get the space and can have as many guests as you
want and they can stay as late as YOU will permit them to.
Apartments have jacuzzi and saunas at the unit, free high
speed internet and free local calls, some companies offer
free cell phone rental. Furthermore some companies will
offer to gain Sky Team (Delta, Air France, KLM alliance,
North West) miles for every dollar you spend – no matter
what you travel for business or leisure you will use the
extra miles for the next trip elsewhere.
While booking an apartments same as hotel you may pay
in cash, bank transfers or by means of major credit cards
as American Express, Master card, Visa and Discover
card (please note that there only few apartment-hotel
company in Kiev who accepts credit card payment with no
limitation – such as “Hotel Service” “Teren Plus”, “Estate
2000”, “KievApartment.com”, ”Sherborne Guest House”,
“Kiev-Deluxe.com”). Using other apartment boutique travel
companies please check for all necessary travel licenses.
Safety – if you are not looking for a trouble – troubles
will not find you. Kiev is safe place to be – especially
center. Nevertheless you will need to use common
sense while out on the street.
www.chamber.ua
121
 Here are some obvious benefits of the apartments in comparison to the hotels:

APARTMENTS Benefits Hotel Room in Kiev

From $80 up to $300 per night with a term gradation the - $120-550 per night, less expensive hotels
Price
longer your stay the cheaper each day. are located far off from the city center
Spacey area – from 20 m2 for the smallest studio rooms
Area - Standard double room for two – 20 -30m2
and up to 150m2 for 3 rooms apartment
Comfortable for 2-6 people – depending on the size of
Accommodation - Comfortable only for 1-2 people on double
the apartment
Set of the services: visa support, transfers, tours, shop- - Check in and registration
Services
ping and etc - 24 hour check in
Feel yourself home and do not change any habits. - standard rooms with standard set of furni-
All apartments are unique and you can choose the one ture: bed(s), few stands, TV, bath
that is more looks like your own: - big beds are only in 4-5 star hotels from
comfortable furniture, big( king and queen size) beds $220 and up per night
tea, coffee, electrical tea pot, all kitchen supplies, hair - no kitchen
Qualities dryer, iron, iron board, personal slippers, soap. - in some of the hotels still no hot water during
All apartments have their own boilers –you have hot the summer season
water all the time - air condition also only in 4-5 hotels or at the
All apartments have air conditions 3 star where the price starts from 200$
No limits on your guests - no guests or limits on guest and time of visits
Cleaning each 5 days or upon request - cleaning every day
- most of the apartments have work area - in most of the hotels the only place to meet is
- direct local phone number to rent a conference room or lobby
Stay connected
- high speed internet - all phone services ad not free - only several
- free cell phone rentals (varies on the company you use) hotels offer free internet
- all local phones calls are free - chargeable local phone calls
Phones - direct Kiev phone number - internet is charged by day/hours or minutes
- free high speed internet (varies on the company you use) - depending on the hotel
- comfortable furniture
- video, DVD - bed, chair, TV - minimum comfortable
- CD player furniture
Rest area
- A/C units - 4-5 star hotels are equipped as you used to
- independent heaters inn other countries
- satellite or cable TV
- fully equipped kitchen - no kitchen
- all kitchen necessities: tea pot, fridge, frying pen, pots, - expensive restaurants at the hotels
Nourishment
salt, sugar, tea, coffee, cups and glasses - in some hotels breakfast is included into the
- no breakfast included price
- un named discount card for the future visits
- free Delta miles for each dollar you spend (varies on - named discount card ( no one can use but
Bonuses the company you use) you unless it is a corporate card)
- free transfers ( see conditions), (varies on the company - car rental bonuses and free nights offers.
you use)

122 Uniting Leading Companies from over 50 Nations Across the Globe