Ukraine has earned a reputation for political instability because of the battles between the main rival factions, the Orange groups and Party of Regions. However, annual real GDP growth has been impressive, export prospects are constantly improving and, despite the occasional spike, the currency has been stable under the firm grip of the central bank, the National Bank of Ukraine, and inflation is forecast to ease. All of this has added up to an increasingly attractive environment for foreign investment as governments learn the importance of providing the requisite conditions to engage outside capital.

Political upheavals of the last two years have tended to obscure the commercial opportunities in Ukraine. Only two years ago the country went through the Orange revolution and, in September, an extraordinary general election. However, it has been business as usual in a relatively stable commercial sector. Although vested commercial interests still have significant influence over the Orange parties, which won a slim majority in the September elections, and the rival Party of the Regions, the pace of reform in the sector has proceeded uninterrupted. The authorities continue to integrate Ukraine into the world economy through legislation harmonising the legal infrastructure for entry into GATT and the World Trade Organisation. At the same time closer ties are being formed with the EU that bring practices closer to European norms.

The broad economic indicators look robust, with real GDP growing by 6.8 percent over 2007 and forecast to maintain an average six percent between now and 2012 on the back of strong domestic demand and growing exports. The currency, the hyrvnia is broadly stable against the US dollar and the National Bank of the Ukraine pursues a sound monetary policy. Consumer price inflation is expected to run at over five percent on average until 2012, a sharp drop from the current 11.3 percent.

Governments continue to run deficit budgets as they pursue policies of high social spending. In 2006, the public finance was 3.7 percent more than income, for example. Gross external debt is rising, up by 37 percent to $14.7bn.

Foreign investment

Foreign investors, who in general are acting on the assumption that future governments will be willing to let market forces operate more freely than they do at present, continue to show their faith in this fast-expanding economy. Over 2006-2007, net FDI inflow totalled $5.3bn, nearly twice as much as in 2005 when, in fact, capital inflows were boosted by one-off privatisations. Moreover, the origin of the investment has diversified rapidly, especially in the last two years, as well as the channels through which it arrives. Originally, the bulk of FDI came direct from the US and western Europe, in particular from the Netherlands and Germany. Now a growing number of multi-nationals, although generally based in US and western Europe, prefer to invest through central European subsidiaries established in countries such as Poland.

There has however been some alarm at government interference in the booming oil and gas sector. Royal Dutch Shell is lobbying for the withdrawal of Decree 31, a law introduced in early 2007 that sets a price cap on gas sold by companies involved in joint-activity agreements (JAAs) with the state. Intended to subsidise energy supplies for domestic consumers as well as to boost state income, the decree obligates companies involved in JAA arrangements to sell gas to stateowned oil and gas company Naftogaz Ukrainy at a fixed rate of around $1.50 per 1,000 cubic feet, a fraction of the current market rate. One independent oil and gas concern, Cardinal Resources, recently announced it was selling up and leaving the Ukraine after unsuccessfully Robust growth in the economy complaining to the government that the price it sets does not cover production costs. Cardinal Resources had stored supplies pending a decision.

Corporate structures

Ukrainian corporate legislation provides for a wide variety of investment vehicles and organisational structures for foreign companies seeking to do business there. Options range from such familiar legal entities as joint-stock, limited liability, wholly-owned or subsidiary companies to quasi-legal formations including representative offices and branch structures. Alternatively, many companies opt for simpler arrangements such as contract manufacturing, joint ventures and other informal structures that do not require the prior establishment of legal entities.

Inevitably, because some commercial activities require compulsory licensing by government and other regulatory authorities, the precise nature of the chosen vehicle will depend on the business activity. In practice, most foreign companies opt for one of three main alternatives: a representative office, hollyowned subsidiary or the acquisition of a shareholding in an existing domestic company.


With the Ukraine parliament fine-tuning its new tax rules for 2008, few expect the fiscal environment to introduce any more business-friendly measures than are already in the pipeline. Indeed resident Victor Yuschenko has just vetoed proposals for an investment tax credit that would have provided for the deferral of taxes on profits

in the case of government-registered commercial entities, as well as a reduction to five percent in tax liability payable on dividends. However, Trident Law Firm predicts the new code will drop the socalled ‘tax on dividends’ under which tax is paid in advance on dividend income by joint investment vehicles such as venture

funds and holding companies.

In general though, governments have steadily reduced the generous range of exemptions and benefits available to foreign investors at the beginning of independence. As a general rule, foreign investors enjoy no special advantages relative to domestic investors apart from state guarantees against nationalisation. In practice that means capital is invested on the basis of the potential of the investment itself rather than any tax or other outside factor. One important aspect of the tax code foreign investors should bear in mind is that cash investments are exempt from VAT unlike in-kind investments, for instance through exchange of assets or other considerations, that are subject to 20 percent VAT.

At present corporate profits are taxed at a rate of 25 percent, withholding tax (for instance, on dividends) at 15 percent subject to lower rates being applicable under international treaties, personal income tax at 15 percent. A heavy burden is employers’ payroll tax rated at 36 percent on top of payroll.

Taxes have however not proved much of an impediment on private-sector profits in heavy industry where pre-tax profits rose by over 19 percent. Those of light industry suffered a decline largely because of the price of imported raw materials. However, overall, 70 percent of industry was in the black. According to the National Bank of Ukraine, the immediate constraints on profits are the cost of raw materials, demand for energy and high taxes.

Finance sector

The banks and financial services sector, both domestic and foreign-owned, are expanding their range of activities beyond consumer and commercial lending to include equity ownership and leasing in the property sector as well as asset management and refinancing among other niche areas of business. Surprisingly, in view of the high number of domestic institutions, these areas have been neglected until recently. The arrival of foreign banks with more sophisticated practices has stimulated the domestic financial sector to adopt innovative practices and raise standards.

About the law firm

Trident Law Firm was established to service mainly corporate clients, both foreign and domestic, across multiple disciplines. Its partners, who are all Ukrainian professionals, have decades of experience working with foreign and domestic institutions such as lawyers Altheimer & Gray, Philip Morris, PepsiCo, Arthur Andersen and Ukraine’s Ministry of Foreign Affairs among others. The firm has grown rapidly since it first opened its doors in the capital, Kyiv, in early 2004 through its ability to offer a wide range of rofessional services. Trident is now ranked 35th of Ukraine’s top 50 law firms in the latest listing of Yuridicheskaya Practika (Law Practice), the leading legal publication. The firm’s range of expertise is wide, covering bankruptcy, finance and banking law, M&A, property including commercial and residential mortgages and related law, securities, commercial rights, taxation and planning, competition, intellectual property, advertising and marketing. Trident Law Firm also maintains links with legal practices in Europe, the Baltics, Belarus and Russia. Trident has established satellite offices in Moscow, Minsk in Belarus and Tbilis in Georgia.

"Commercial banks’ prime rate is forecast to fall steadily through to 2012 when it should reach single figures."

National Bank of Ukraine, the central bank, oversees a broadly stable financial sector marked by rapid growth in deposits from domestic and foreign sources, underpinned by a system of current deposit guarantees. Ukrainian banks’ capital jumped by more than 67 percent over 2006 and its regulatory capital under international rules grew by 56 percent.

By contrast the state-run sector is overdue for an injection of private-sector skills, particularly where it has a monopoly in such areas as mining and the provision of municipal services. Both urgently need private investment. However, muchneeded reform has been delayed by the heavy-handed approach of regulatory authorities placing unnecessary barriers in the way of potential investors, both domestic and foreign.

Equity finance

Meantime equity and finance markets are maturing rapidly and will continue to do so for the next three to five years. Until domestic banks become more proficient in these areas, internal financing through the company’s existing resources remains the preferred and cheapest option to develop and expand operations within Ukraine until borrowing rates decline, as they are expected to do. Commercial banks’ prime rate, currently running at 14 percent, is forecast to fall steadily through to 2012 when it should reach single figures. Similarly, the exchange rate against both the euro and US dollar is steady, forecast to hold around 6.60-7.50 against the euro and just over $5 against for the next several years.

Regional differences

Foreign investors generally require guidance in navigating the marked regional differences that are a feature of commerce in Ukraine. For instance, one investor sought our advice after being told by a regional authority that local law required him to transfer five percent of the total investment value of a multi-million pound investment to the municipal accounts. The advice was mistaken but it took a meeting of all the parties to resolve it and the investor ended up paying nothing. Although these isunderstandings are by no means common, they are a reflection of an economy that is still coming to terms with new and increasingly transparent rules.

Different regions are also defined by certain concentrations of business activity. For instance, heavy industry and mining has congregated in the eastern regions of Ukraine, agriculture dominates the central regions, and foreign investment entities such as head and branch offices have assembled in the capital, Kyiv, because of its proximity to government and the chief regulatory bodies.

Levels of red tape also differ across regions. In Trident Law Firm’s experience, bureaucracy is still serving its apprenticeship in a more diversified economy and often confuses state law with local practices. In general, red tape has nothing do with state policy but with regional behaviour, and domestic companies endure it equally with foreign ones. Meantime all companies are subject to the same rules.

The future

Ukraine is steadily moving in the right direction towards the establishment of a western-style market economy with transparent rules, albeit with its own characteristics. The country is aware that it must encourage investment in most areas - technology and intellectual property as well as commercial property and heavy industry - and is learning to provide a favourable environment for fresh capital. As the country adopts international standards, it is likely to become a preferred location for new investment.

Igor Mikhailenko

Head of Law Practice

World Finance, December-January 2008, p.154-156



Copyright © 2011. All rights reserved.