International Development of Italian Companies: Ukraine in Focus

Principal legal aspects of Ukrainian market

14 November 2016

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Oleg is the Head of the Central and Eastern Europe (CEE) Desk of RCC and coordinates matters related to the CEE region. He has an extensive experience in corporate and commercial law matters, with particular focus on outbound and inbound investments. Oleg gained significant wide-ranging and in-depth experience in structuring and implementing cross-border M&A and joint venture transactions in various countries of the Central and Eastern Europe, Central Asia, and Middle East. Oleg has also gained experience in dispute resolution, commercial litigation and international arbitration, focusing on competition disputes, trademark litigation, anti-counterfeit actions, and enforcement of international arbitration court awards.

Before RCC, Oleg advised clients on a broad range of matters that covered fashion and luxury, real-estate, international trade, communications, media, and technology, power and energy, oil and gas, construction materials, metallurgy, pharmaceuticals, food and beverages, retail.

Education

Magister Juris (MJur) – University of Oxford, 2006

Master of Laws – Institute of International Relations, Kyiv 1999

Practice areas

Central and Eastern Europe Investments Corporate and M&A

General Commercial

IP/IT

Dispute Resolution

Oleg Akhtyrskyi

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General Information

• Civil law country with codified law traditions similar to Italy

• No direct application of EU directives but many rules adjusted to EU standards, e.g., trade: EU-Ukraine Association Agreement

• National regime for foreign investors is granted with few exceptions

• Property protection is big issue on sate’s agenda, to minimise risks stay legal under all circumstances

• Fight with corruption is another big issue, be aware of anti-corruption mechanisms in place when dealing with local partners

• Pressure of fiscal authorities has not stopped completely, be ready to challenge unfair treatment in courts

• Incentives granted to foreign investors, investment climate and support of local authorities may differ depending on region

• Know your local counterparty, make adjustments for local business tradition and different understanding of common legal concepts

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• Contract Law is very formalistic, including Court Practice

• Application of INCOTERMS is common

• Bilingual contracts with good-quality Ukrainian translation advisable

• Be aware: governing foreign law can be challenged if contract contradicts mandatory Ukrainian provisions

• Opt for International Commercial Arbitration

• Be aware that certain issues are subject to Ukrainian law only, or fall under exclusive jurisdiction of local courts

• Verify scope of authority and appointment of Ukrainian representatives, see most recent incorporation status to verify good standing, make sure court record is clean, consider fiscal intelligence

• Use security (pledge, guarantee etc.) when possible, but foreclosure is often burdensome despite formal registration of encumbrance

• Local registration of TM is recommended, also register your TM and other IP objects at customs to prevent “gray import” and counterfeit

• Consider corporate presence in Ukraine for customs and other purposes

Export-Import Contracts

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• Easy and fast to open new business

• Typical forms for corporate business: Representative Office (not a separate legal entity), JSC (public, private), LLC – most common

• LLC: easy to enter and withdraw, right of first refusal for equity sale, 50% control but no dead-lock mechanism, poor protection of minority rights

• Shareholders Agreements often ineffective, avoid waiver of corporate right

• Litigation on most corporate maters only in Ukraine

• CEO can be local or Italian, fiducial duties non enforceable, authority is wide and general but can be limited in By-Laws

• For M&A use Asset Deal or Share Deal

• Buy existing company only in exceptional cases, e.g., for acquiring licenses and permits (generally non transferable), acquiring leasehold to agro land

• Make Due Diligence for any and every M&A, consider business intelligence, know ultimate beneficiaries of your target/partner

Corporate

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• Very pro-employee, Case Law favorable to employees

• Difficult to dismiss, prove negligence and lack of loyalty, certain categories of employees enjoy additional benefits and protection, limited liability for damage to employer/third parties/state, liability mainly on CEO and CFO

• Foreigners (also seconded) require work permits from state (except for limited number of officials in Rep. Office)

• Consider appointing local CEO, at least temporary at beginning

• Removal from corporate offices is easier but severance payment is high

• Recommended to have office contracts with top officials, provide in By-Laws grounds for dismissal of CEO and other officials

• Off-sourcing practiced rarely

• Widely used Self Employed Individuals through hired under civil contracts: both employment and tax efficient in certain cases

• Collective bargaining agreements and Trade Unions have little power

Labor

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• CPT 18% (including dividends and profit abroad), OECD transfer pricing rules apply, deductibility of interest payments can be limited in case of foreign lender-shareholder, CPT exemption exist in certain areas (textile industry, aircraft producers, shipbuilders and producers of agricultural machinery), favorable tax regime for energy-efficient technologies and alternative energy sources

• WHT 15% (including dividends, interests, royalties), subject to DTT (including Italy, most commonly: Cyprus, UK, Dutch)

• VAT 20%, including import operations, 7% for listed pharma and medical products, 0% for export operations, budget VAT refund burdensome

• PIT 18% (employers as tax agents), local dividends 5%, military tax 1.5%

• Social contributions 22%

• Simplified (single tax) system for SME still exists for most operations

• Local Accounting Standards slightly differ from IAS and IFRS

Tax

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• All payments between residents in local currency only (UAH), residents require license for outbound investments

• Foreigners can open bank accounts in any currency, for launching Rep. Office (profit and non-profit) and for Investment Operations in country

• NBU policy very strict and pro-governmental, main focus on fighting outflow of capital, Commercial Banks serve currency control agents

• Currently restricted: repatriation amount of royalty and dividends, set-offs under export agreements, pledge of foreign currency under UAH loans, new purchase of foreign currency if own currency funds are still available, etc.

• Loans from non-residents require registration, interest rate is capped, early repayment is restricted

• Mandatory sale of foreign currency proceeds (currently 65%), 120-day rule for settlement returns under importation contracts

• Tendency to release control and simplify contractual formalities (IT)

Currency Control

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Dispute Resolution

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• Decisions of foreign State Court in most cases unenforceable

• International Commercial Arbitration (ICA) is recommended: NY Convention applies, faster, confidential, BUT more expensive, no collection of evidence, no interim measures BUT provisional remedies are possible at enforcement

• Recognition and enforcement of ICA awards takes approx. 6 months (longer if appealed), can be challenged on formal grounds: avoid mistakes in arbitration clause, adhere strictly to arbitration procedure at all stages

• Specialisations of State Courts: Common, Commercial, Administrative courts

• 3+1 levels of jurisdiction: First, Appellate, Cassation + Supreme court (under limited circumstances), each level takes approx. 2 months

• Commercial courts consider businesses cases, incl. with foreign elements (sale contracts, property, bankruptcy, loan contracts, insurance, etc.)

• EU Court of Human Rights can serves as last resort, decisions are binding

• Bankruptcy procedure often results in no assets for debt recovery

• State Land Cadastre and State Register of Rights to Real Estate (including encumbrances), both available for public

• Real-Estate contracts always in writing

• Transfer of title and long-term lease (3+ years) of non-residential property must be certified by notary

• Land can be Private, Municipal, or State. State and Municipal land is purchased through auction (with exceptions, e.g., if comes with building)

• Foreigners can own only certain non-Agricultural Land

• Moratorium on alienation of Agricultural Land is currently in place also for residents (with few exceptions)

• Land lease and sublease generally unrestricted (up to 50 years), minimum rent level applies, leasehold used as quasi commodity typically transferred via Share Deals

• Generally no restrictions for transactions with other Real-Estate objects (buildings, infrastructure elements, industrial objects)

Real-Estate and Agro

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This material and the information contained herein are confidential and may not be reproduced in whole or in part without the prior written consent of Studio Legale Riolo Calderaro Crisostomo e Associati.

Oleg Akhtyrskyi Head of Central and Eastern Europe Desk

Studio Legale RCC

Via Boschetti 1

20121 Milano

Italia

Tel. +39 02 32160400

Mobile phone +39 34 43 846 849

Fax +39 02 32161400

Heron Tower, 110 Bishopsgate

London EC2N 4AY

United Kingdom

Tel. +44 (0)207 961 07300

Email oleg.akhtyrskyi@rcclex.com

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