Premium conditions for significant foreign investments into Ukraine
Max Lebedev
Golaw, Kyiv
m.lebedev@golaw.ua
Investors looking for long-term opportunities in emerging markets always assess political stability, economic stability and the transparency of government institutions in those markets. These factors determine the viability of a project: whether a business will attract debt financing, will acquire real estate or will receive the necessary licences and permits in a timely manner.
Premium solution for significant investments
Ukraine makes a significant effort to overcome its challenges regarding transparency and stability. One solution is the recent law, ‘On State Support to Projects with Significant Investments’. The legislation is aimed at removing bureaucracy and creating investment incentives. In addition to state support for projects, the government will provide ongoing assistance by assigning a state liaison (‘investment manager’). Investment managers will advise investors, free of charge, and ensure the cooperation of central and local governments during the project. These premium conditions will come into force from 1 January 2022.
What projects can qualify for state support?
The new legal framework is not a public-private partnership nor does it cover the privatisation of state-owned assets and companies. The law facilitates the state's support of the private sector under special agreement with the government, but without its participation in the project. However, a project and an investor should meet certain state requirements.
The investment should be at least €20m in monetary funds. It may be owned or borrowed capital or a mix of both. An investor will be required to register a special purpose vehicle (SPV) for the project. The Ukrainian SPV can make the investment but only into non-current assets. Intangible assets and goodwill are excluded from investment targets; investors can count only on asset deals with immovable property and not stock M&A transactions. Targets can be land, real estate, or plant/factories with equipment. Investment also can be made into the construction of buildings and ancillary infrastructure, such as roads and pipelines. The investment should be limited to the following industries:
- processing;
- extraction for processing and/or enrichment of minerals;
- waste management;
- transport and logistics;
- warehousing;
- postal and courier activities;
- education, science and inventions;
- healthcare;
- arts and culture;
- sports; and
- tourism and recreation.
Exemptions to this list include the production and distribution of tobacco products and alcoholic beverages, and the extraction and further processing of coal, oil and gas.
The investment also shall create at least 80 new jobs with salaries exceeding the average salary in the region by at least 15 per cent.
Finally, an investor will have to complete the project within five years, while the investment agreement with the government will be concluded within 15 years.
What state support is available?
First and foremost, sate assistance will cover only up to 30 per cent of the planned investment value. The type of the aid will be agreed with the government. The investor may receive:
- exemption from taxes and import duty (VAT, corporate income tax);
- leasehold over state-owned or communally owned land within an accelerated procedure;
- the right to buy out the land after the expiry of the investment agreement;
- ancillary infrastructure, which can be constructed for the project and sponsored by state or municipal budgets; or
- connection to electrical grid and utilities, such as heat, gas, and water supply infrastructure.
What are the practical challenges for a foreign investor?
An investor may require a deep understanding of Ukrainian regulations to benefit from the new regime. The law is accompanied with several enactments, which may influence a decision to launch the project and success in getting state aid.
Tax benefits have limits
The value of tax reliefs that an investor may receive should be within the 30 per cent limit of state support. Therefore, once the total of reliefs surpasses that ceiling, the investor will pay all taxes as usual.
Value added tax
Relief from value added tax (VAT) and import duty will be provided only until 2035. Exemptions do not cover everything that will be supplied for the project, and there is a comprehensive list of goods with specific commodity codes may be exempted from VAT and import duties. Moreover, imported goods should be new (less than three years old) and not have been used previously. The investor cannot sell the goods for five years and cannot use them for other purposes.
For any earlier alienation or violation of designated use, the investor will have to reimburse VAT, import duties and pay tax interest. The procedure for import and control of permitted goods will be set by the government. In practice, this will mean additional reporting requirements for an investor.
Corporate income tax
Exemptions from corporate income tax (CIT) have similar limitations. Investors will be exempt from paying CIT until 2035. However, the tax relief becomes effective only after making the investment in full and the commissioning of the investment project. CIT exemption will not apply to controlled transactions, if transfer pricing rules apply, nor to income of controlled foreign companies.
In effect, an investment project may operate for longer than for the term of a CIT exemption and will require an optimal tax burden. Investors should analyse their corporate structures for compliance with Ukrainian tax rules and perhaps restructure ownership before making an investment in Ukraine.
Land tax
Land tax relief is also temporary until 2035. Investor can either receive lower rates of land tax or be completely relieved of paying land tax. Investors may also receive lower rent for the land leased from the state or from local council.
Investor and project requirements
Supplementary regulations to the new law prescribe a number of requirements in connection to an investor’s financial position. Financials will be assessed according to three criteria: sufficient owned capital, cash flow and source of financing. The investor will need assistance from local advisers to submit a package of documents confirming compliance with criteria. The supporting documentation will need to include an auditor's report, details of ownership structure and statements of lender's reliability.
Investors should also take local advice when preparing the investment project along with feasibility studies and a draft investment agreement. The project will be assessed by several state bodies for environmental risks, antitrust issues and to ensure the compliance of the investment agreement. There is no model investment agreement, so investors will have to prepare drafts without a reference point.
The feasibility study that investors should submit will be a complex document. Aside from financial calculations, the regulation requires legal due diligence of the project. This part should include an analysis of applicable Ukrainian laws governing:
- relations with the government and local councils;
- use of land;
- the environment;
- relevant industry regulations; and
- required licences and permits governing construction and city development.
To gain state support for a project, investors will need professional advice from variety of professional, including legal counsels. Assigned state liaisons will be useful in handling Ukrainian bureaucracy, but they have limited powers and expertise. For example, they cannot represent a client in proceedings, and they cannot be experts in all areas of law, as found at a professional law firm.
Indeed, qualified lawyers, in cooperation with a state liaison, will ensure a truly premium service for any foreign investment project in Ukraine.