Q & A – Real estate in Ukraine
Topic I: introduction to the legal system & acquisition of real estate in Ukraine by foreign citizens.
Which Laws and Regulations govern the real estate market in Ukraine? The regulatory framework on real estate in Ukraine includes following Laws: Civil Code of Ukraine, Commercial Code of Ukraine, Land Code of Ukraine, Law of Ukraine On the Lease of Land, Law of Ukraine On State Registration of Property Rights to real estate and their Encumbrances.
What is the origin of the Ukrainian Law System?
The legal system of Ukraine is based on the framework of civil law, and belongs to the Romano-Germanic legal tradition. The main source is codified law.
What is the source of the influence on Ukrainian legislation?
Customary law and case law are not so common, however case law is often used in support of the written law, as in many other legal systems. Historically, the Ukrainian legal system is primarily influenced by the French civil code and Roman Law. The new civil law codes (enacted in 2004) were heavily influenced by the German Bürgerliches Gesetzbuch .
Who has the power to make laws?
The legislative power in Ukraine belongs to Ukrainian Parliament (Verkhovna Rada), but important place in legal system of Ukraine belongs to Regulations which adopted by executive power (the main regulatory body Cabinet of Ministry of Ukraine) which created from a big system of executive bodies. In recent years, it has become common for the legislature to create “framework laws” and delegate the creation of detailed rules to ministers or lower government departments such as Local administrations, Committees etc. After adopted laws are published in official newspaper Holos Ukrayiny and it come into force officially the next day.Ukrainian politicians and analysts have described the system of justice in Ukraine as “rotten to the core”.
Who is considered a lawyer in Ukraine?
Law is practiced in Ukraine by professionals (legal consultants, counsels, attorneys), awarded a diploma after graduation from a law department of any university. Mostly legal services in Ukraine provided by officially registrated Law companies which are maintained by lawyers.
What does it take to be a notary?
Notary in Ukraine is based on the guidelines set forth by the law entitled “On Notariate”. In Ukraine, notary operations are carried out by state notaries, private notaries or officials of executive bodies of local (village, settlement, city) councils, if there are no notaries therein. The difference between state and private notaries is the service fees imposed by public notaries are fixed by the state, whereas the only aspect regulated by the State in regards to private notaries is the price.
Any person who considers occupation of the notary post must be a citizen of Ukraine, have higher legal education (university, academy, institute), work on probation during 6 months in a state notary office or private notaries.
What restrictions and obstacles may prevent foreign investors from buying real estate in Ukraine? According to the Land Code of Ukraine, oversees investors such as individual foreigners, joint venture companies, foreign companies and foreign countries are not eligible to purchase agricultural land on the territory of Ukraine. Moreover, the lawmakers prohibit foreign companies from owning plots of land other than plots of land located inside the boundaries of populated areas in the case of the acquisition of real estate facilities located there or for the purpose of constructing facilities related to the buyer’s commercial activities in Ukraine. Allowed is also purchasing plots of land outside the boundaries of populated areas where the plot of land underlies a building or structure owned by the buyer.
What are the major requirements to foreign citizens and companies willing to buy land in Ukraine? In this case the foreign buyer must be legally eligible for doing business activities in Ukraine and and be registered as a subsidiary or a permanent establishment.
What are the main differences between buying the land from private owner and the Ukrainian state? The purchasing of the municipal plot of land must be officially approved by the Ukrainian Cabinet. In the second option – land owned by the Ukrainian state requires an approval from the higher institution – the Ukrainian Parliament
What are the main forms of ownership available to foreigners for buying real estate in Ukraine? The foreign investors may choose between three different forms of ownership – foreign individual, shareholder status within a legal entity registered abroad and shareholder status within a legal entity incorporated in Ukraine.
How does the process of purchasing a property in Ukraine look like?
First step includes choosing the right property and making sure, the foreign investor is eligible for this transaction. After the real estate object and prices have been discussed and agreed, it is required to sign a preliminary purchase contract. Currently, a standard deposit in Ukraine is 5% of the purchase price or the agreed upon amount. This agreement plays an important role in the transaction as it outlines the terms and the conditions of the purchase and defines the time needed to complete the buying process. The law requires the presence of a Ukrainian notary for signing the agreement. A notary has to be present on the day of the signing the deal, as well as in the moment of completing a banking payment.
If all foreign citizens are allowed to buy property in Ukraine and which type of it?
Yes, according to Ukrainian law all foreign citizens (non-residents) above 18 years old have the same rights as Ukrainian citizens in matters of real estate purchasing and its disposing.
It can be real estate objects such as: residential (apartments, private houses, etc.) and non-residential (offices, storages etc. ), facilities, property rights on non-built yet real estate and land for private or commercial using, however its forbidden to purchase land of agricultural purpose by non-resident.
Is there any specific conditions of buying land for non-residents?
Regarding the rights of non-residents to acquire land in Ukraine, there are certain restrictions. According to the Land Code, they can become owners of land in Ukraine in the following cases:
Buy non-agricultural land plots that are located within the boundaries of the city / village.
Acquire an allotment located outside the settlement allowed if on such land located a private property of a non-resident.
Foreign citizens can buy the above allotments under a barter, purchase and sale agreement and other civil law agreements. These lands belong to non-residents only by right of use.
How to find real estate objects for purchase and what is the best way to do it?
Since real estate market in Ukraine developing quite fast and has plenty of options, for buying property the best and the safest way is to use realtors and real estate agencies since they have huge own real estate database. They show properties to potential buyers and provide real estate due diligence before the deal. The commission charged by the real estate agencies varies from 1% to 5% which paid by the buyer but it also depends on agreement with a seller.
What is the process of buying the property and how long does it take?
Both sides, buyer and seller (or their representative) meet at any notary office, which they choose in advance (usually if to use realtor’s services they organize all such procedure). All is need to bring all required documents, put signatures and pay according to a chosen option. Other necessary actions makes notary including state registration of ownership title in Real Estate Government Register, what means there is no need to visit other departments therefore your ownership arise right after this registration in this Government Register at the same day and you get your signed agreement, which is the main document of your new ownership of a real estate.
Due Diligence is important in Ukraine in real estate matters?
IT’S ESPECIALLY IMPORTANT IN UKRAINE.
it’s especially important to do through due diligence when investing in Ukrainian real estate market.
The extent of legal due diligence depends, first and foremost, on the specificity of the asset (real estate – land, house with land, separately located building, apartment, office; corporate rights to the entity that owns the real estate property right, and other), as well as the history of ownership of such an asset (how the property was purchased, for example, through privatization, construction, purchase; the sole owner, or owners changed etc.
In any case, during the legal inspection of the object, the state registration of the ownership of the object will be checked, as well as the legal documents for the real estate will be examined and given a legal assessment for the presence of any legal defects or doubts. That is, in this case, the fact that the legally current seller has previously acquired the asset he is currently selling is also subject to review. For example, if the title deed is a court decision, even if it has come into force, it should be thoroughly acquainted with the case file and give a legal assessment of the decision and the circumstances in which it made in order to avoid unpleasant surprises in the future.
If you intend to purchase investment real estate in the construction object, the documents of the developer for the right to use the land, the permitting documentation for the construction, as well as the legal mechanism of the sale of the real estate under construction and those documents that will be offered by the developer for signing by the non-resident investor will be subject to legal review. .
Do mortgage financing is practical option in Ukraine?
Ukrainians don’t trust banks much and inflation is relatively high, banks must offer high deposit rates to attract funds. These deposit rates increase banks’ cost of funds and push up mortgage rates. As of early 2017, about two-thirds of Kiev real estate buyers used their own funds for purchases and a bit less than a third used deferred financing from property developers, while only about 3-4% used some form of credit financing.
Which rights and obligations arise after buying a property?
Non-resident as a property Owner has right:
-make as gift
Concerning non-residents, the only restriction on the disposal of their property is to lease it by themselves. Foreigners are required to do this through an intermediary – a legal entity or an individual entrepreneur, while such intermediaries have the functions of tax agents.
-sell or alienate.
In addition, a foreign owner of real estate in Ukraine can issue it as a pledge or as a contribution to the authorized capital (in the process of registering an enterprise).
What are the ways for non-residents to expatriate rental income from the lease of acquired real estate in Ukraine?
There are a few basic ways for non-residents to expatriate rental income from the lease of acquired real estate in Ukraine:
Via interest payments on the loan agreement under which your property was purchased–keeping in mind that such agreements are regulated by the National Bank of Ukraine, including a maximum interest rate on the loan agreements with non-residents (which ca vary depending on the term of the loan from about 10% to 11% per annum;
Rental income could be theoretically expatriated via dividend payments to the founder of the LLC that owns the property; however, from time to time the NBU has banned or restricted payment of dividends abroad to foreign investors, so seek legal counsel before proceeding with this strategy.
As was mentioned before, owner can lease out a property using only a local agent (an individual private entrepreneur or legal entity in Ukraine) –this agent has the ability to transfer the income received from the leased property overseas to the foreign account of the property’s owner
Which type of taxes and fees non-resident has to pay during a real estate purchasing?
Buyer side obligated to pay Pension Fund tax for 1% from a real estate sale amount and notary fee for preparation of a sale-purchase agreement, registration of ownership title in Real Estate Government Register.
Which documents are required from a foreign citizen for buying property?
Foreign citizen needs to provide:
Residence permit (in existence).
Taxpayer’s account card (forms in Ukraine based on PoA).
If the buyer is in official marriage or lives as one family without registration of marriage need to provide notarial certified statement of his/her wife/husband, that he/she has no objections for such purchase. In case if exist marriage agreement where specified that spouse has the right to make such deals without any permits from wife/husband than such agreement is required.
Passport of the Buyer’s spouse.
Power of Attorney for the deal in case if buyer wants to make purchase through legal representative
Passport of the Buyer’s representative.
All documents must be legalized and translated into Ukrainian language according to Ukrainian Law.
Which payments options are exist for individual non-resident buyers?
According to Law, individual buyers can do payment for purchase of real estate in Ukraine through a bank in Ukraine.
There are three options:
Foreign currency of 1st and 2nd Group of Classifier of Foreign Currencies (including US Dollars, EUR, GBP and others) from overseas to an account of the seller (if seller has suitable account for such transactions). Mostly such possible with construction companies.
Through an investment bank account opened with one of the Ukrainian banks in 1st and 2nd Group of Classifier of Foreign Currencies to the account of the seller. In such case, currency automatically will be converting in national currency.
Through an investment bank account opened with one of the Ukrainian banks in national currency (UAH – Ukrainian Hryvna)
You can transfer money on you Ukrainian bank account also through SWIFT-transaction and by cash.
In case if to pay in to a bank account by cash need to provide legal origin of this money such as income reference on the territory of Ukraine (in case if foreigner legally work according to Immigration Ukrainian Law)or other legal ways. Also need to mention that foreigner allowed bringing cash through Ukrainian border not more than 15000 USA dollars or its equivalent in other currency, which must be declared.
It is important to know that the Resolution of the Board of the National Bank of Ukraine No. 407 of November 25, 2016 “On Setting the Limit Amount for Cash Payments” establishes a limit amount of cash payments under notarized purchase and sale contracts in the amount of UAH 50 thousand, equivalent to $ 1800 US Dollars. Thus, based on real estate prices, any purchase and sale agreement makes by non-cash payment.
However, despite provisions of the law payments in real estate often performed in cash, but in such case non-resident , may has some issues in the future in disposing this property and getting profits from it.
Which type of taxes the Owner obligated to pay for the property?
Depending on the location and types of the property in the amount not exceeding 1.5% of the minimum salary established by the local government on January 1 of the reporting (tax) year, per 1 sq. m of tax base (for 2019, the maximum is UAH 70.98 per square metre).
There is a specific partial tax exemption for residential property for individuals, where by the first 60 square metres for flats or 120 square metres for single residential house are not subject to tax.
If the taxpayer owns the residential property objects, including his or her owned shares which in total area exceeds 300 square meters (for an apartment) and / or 500 square meters (for a residential house ) the amount of tax increases by UAH 25,000.00 (approximately 1000 USA dollars) per year for each residential property (it’s shares).
The tax must be paid by individuals within 60 days upon receipt of a tax assessment issued by tax authorities.
In addition, there is a land tax, which is 3% from an official total amount of this land plot.
In case of leasing out a property, the foreigner will be required to pay income tax in the amount of 18% and military fee 1.5% from the profit.
Which type of taxes and fees non-resident has to pay during a real estate selling?
The procedure of selling a property to a foreigner is similar to the purchase procedure and will require an almost identical package of documents but have some essential difference in taxation of selling it.
A foreigner, like a resident, will be exempt from income tax and military fee in case if:
- They sell residential real estate, country house with a land plot.
- This is the first sale of real estate during this reporting year.
- The owner has owned this property for more than 3 years.
In all other cases, the foreigner will be required to pay income tax in the amount of 18% of the sale amount and 1.5% of the military fee.
- Is there any mandatory difference between buying a property and property right to have it in the future (new build real estate objects)?
Yes, nowadays in Ukraine u may see that level of new constructions increased compare to the last years and its quite common to make investing in non-yet built objects since the price will be less comparing with already exist property but important difference between it is that
It will be just Acquisition of property rights to real estate.
The essence of such an acquisition is to raise funds from the population to finance the construction of real estate by concluding contracts of sale of property rights or the right to demand a property to be built but not buying the property since it still not exist according to a Law.
- What are the risks can arise when buying a property in non-yet built real estate?
The main risks to the buyer of the property under construction are the following:
- Delaying the completion of construction or putting into operation
- Non-completion of the construction object
- The impossibility of putting into operation an object constructed with violations of building codes
- obtaining as a result of an object other than that planned (for example, lack of landscaping)
According to the Law of Ukraine “On state registration of property rights to real estate and their restrictions», No. 1952-IV dated July 1, 2004, real estate transactions are concluded if the ownership of the property is registered. The ownership of newly created real estate (residential buildings, buildings, structures, etc.) arise from the moment of completion of construction (creation of property). Therefore, the sale of a house (apartment) under construction or proposed for construction as future property is impossible, because before the creation of the property and its registration, it does not have a right holder.
However, there are different types of financing mechanisms for construction therefore future real estate investor can find the best option according to his/her interests and wishes.
- Does real estate ownership on the territory of Ukraine give some benefits for a foreign citizen?
Foreigners often ask whether the purchase of real estate is an investment in the Ukrainian economy and, accordingly, the basis for obtaining an immigration permit. No, the purchase of real estate as an individual buyer is not an investment in the economy of Ukraine and, accordingly, is not a basis for obtaining permission to immigrate.
Topic II. The banking system in Ukraine. Q&A
- What are the main institutions within current Ukrainian banking system and their responsibilities? The banking sector in Ukraine has a two-tier structure made and includes the National Bank of Ukraine (NBU) and several commercial banks, which operate in private as well in state ownerships.
- a) The main responsibilities of the NBU include monetary policy, licensing of commercial banks, and supervision of their activities.
b) Regarding commercial banks, the Ukrainian law differentiate between universal and commercial banks and “specialized” commercial banks, with the latter including savings, investment, mortgage, and settlement banks. In order to be able to provide banking services, the commercial banks need to obtain the banking license issued by the National Bank of Ukraine.
- What are the main challenges and problems of the Ukrainian banking sector nowadays? A) The recent crisis and a sharp decline in the number of banks continue to affect the current situation in the banking system, including a very slow loan growth. B) The economic crisis and slow economic recovery reduce the range of banks’ potential clients. C) High share of Forex (FX) assets bears the risk of their depreciation in case of rapid devaluation of the national currency. D) The tight monetary policy of the NBU reduces the prospects of declining interest rates in the market in the near future. E) The potential volume of PI (principal and interest) lending is limited by weak consumer demand.
- What were the key Ukrainians banks’ priorities and new legislative projects for 2019? The banks had to focus on resuming corporate lending in full and to clean up further their balance sheets of non-performing loans (NPLs). Particularly, in 2019, National Bank of Ukraine had introduced the concept for a new structure of regulatory capital, as well as the Net Stable Funding Ratio. The new regulations will come into effect after they have been discussed with the commercial banks. At the same time, the banks will be given a grace period to ease their transition to operation under the new regulations.
- Does banking legal system in Ukraine allow a foreign ownership in the country? Yes, foreign banks are also actively operation in Ukraine. Banks with foreign ownership (including Russian as well as European companies) account for 32.9% of statutory capital. However, the market share of West European banks in the Ukrainian banking sector dropped down in the last four years.
Topic III. The rights of foreign citizens in Ukrainian banks. Q&A
- On 7 February 2019, the new Law of Ukraine “On Currency and Currency Transactions” and new currency control regulations came into force, making an important step towards liberalization of foreign exchange controls. What are the major aspects of the new regulatory framework for foreign citizens within Ukrainian banking system?
- The provisions include, for instance, that payments within Ukraine must be made in Ukrainian currency hryvnia only, excluding particular transactions authorised in a foreign currency (provision of banking or other financial services by Ukrainian banks; issuance, interest payment under, or repayment of, bonds or notes denominated in a foreign currency; sale and purchase of government securities; foreign investments in Ukraine).
- Can foreign citizens, with are doing financial transactions in Ukraine, be penalised for violation the new regulations? Yes, penalty of up to 100% of the amount of a foreign currency denominated transaction may be imposed for breaching of foreign exchange legislation and non-compliance with transaction requirements.
- In case of payments under contractual obligations, are there other international currencies permitted for such transactions? Yes, residents of Ukraine can make or receive payments to or from non-residents (under trade and capital transactions) either in Ukrainian Hryvnia or in a foreign currency such as Euro, US Dollars, British Pounds etc.
- If a foreign citizen or company does not have an official status of Ukrainian resident, would he be prevented from opening a bank account in one of the state or commercial banks in Ukraine? No, non-resident companies and individuals (sole entrepreneurs etc.) are allowed to open current accounts with banks in Ukraine for the purposes of foreign investments in Ukraine or other authorised financial transactions. The current law “On Currency and Currency Transactions” guarantees that non-residents will have the same rights in respect of foreign currency denominated transactions as granted to the local citizens and residents.
- What type of financial transactions are permitted for foreign business owners (if non- residents) using a bank account in Ukraine? A non-resident company can use its current account with a Ukrainian bank for most of its business transactions, including, without limitation, for instance, payments to its Ukrainian partners and clients under export, import or other contract, lending to Ukrainian borrowers, or foreign investments in Ukraine. Cross-border transfer amounts from such account are not subject to any limit.
Topic IV. Taxes and other payments for foreign citizens in Ukraine. Q&A
- How is the legal status of foreign citizens in Ukraine defined in terms of tax payments?
The citizens of the foreign countries (individuals or companies) without a permanent residency permit are the subject to international taxation in Ukraine. A “non-resident” legal entity is defined for local tax purposes as an entity established and operating under foreign law. In respect of individuals, they are defined as non-residents in case such individuals are not treated as residents of Ukraine.
- What types of the income, generated from the business activities, fall within the scope of the international taxation in Ukraine? And how are they usually taxed?
A. Business income derived through a branch office (permanent establishment) is taxed in a similar manner to business earnings of regular corporate taxpayers in Ukraine. Domestic definition of permanent establishment is similar to that provided for in the OECD Model Convention (though some provisions are based on the UN Model).
B. Business income from the sale of goods, works and/or services, attributable to a permanent establishment, may be distributed free of Ukrainian withholding tax to a non-resident as a matter of Ukrainian tax law. Applicable double taxation treaties may mitigate other Ukraine domestic tax.
- Can foreign citizens be a subject to international taxation if the individual (or company) does not generate any active income in Ukraine?
Yes, in this case a non-resident entity is taxable on other Ukrainian sources — non-business (passive) income.
- What does “passive income” mean for international citizens according to the Tax Code of Ukraine?
Passive income may include a designated non-business income from Ukrainian sources which is usually subject to Ukrainian withholding tax unless attributable to a non-resident’s permanent establishment in Ukraine (such as dividends, interest, royalties, rental income, income from the sale of immovable property, from trading with securities, freight, engineering fees, agent’s commissions, etc.)
- How high if the current rate of the withholding tax in Ukraine?
The withholding tax (WHT) rate is generally established at 15%. Special WHT rates varying from 0% to 18% apply to certain Ukrainian-source income, for instance, income on interest free bonds and treasuries, international freight fees and insurance payments. 20% surtax applies to payments for advertisement services.
Topic V. Property taxation of foreign citizens in Ukraine. Q&A
- What type of international taxation is applied to the property owned or leased by foreign nationals in Ukraine?
Passive income, such as rent, proceeds from the sale of Ukrainian real estate property, falls within the scope of the withholding tax (WHT) in Ukraine. Moreover, other payments, such as profits from trading in securities, engineering fees, agent’s commissions and other Ukrainian source income of a non-residents, with some limited exceptions, are also subject to the withholding tax. Ukrainian WHT may be reduced or eliminated in certain cases based on applicable Ukraine’s double tax treaties.
- What are the major components of the Property Tax in Ukraine?
The property tax includes the following elements: a) Immovable property tax; b) Land fee; c) Transport tax.
- How high is the current VAT for Real Estate in Ukraine?
Generally, when planning real estate operations, foreign citizens should consider that undertakings relating to the sale and purchase or leasing of real estate are subject to 20% Ukrainian VAT. However the sale of land plots or sale of residential property (except for the first sale), are exempt from VAT.
- Is there a separate taxation procedure for transactions with Ukrainian land?
When planning business transactions related to land plots, non-residents should consider, along with other legislation requirements related to transactions with land, the special tax regime for the transactions with land plots.
- How high is the current Real Property Tax in Ukraine and how it is normally calculated?
Land tax is imposed on the owner/user at rates, generally up to 12% on the lands estimated value depending on the location and use of the land. Legal entities (including non-residents) that own residential or non-residential Real Estate are subject to the tax at the rate equivalent to 1,5% of the minimum salary as of 1st January of the reporting year per square meter owned. If the real estates total area exceeds 300 square meters (for apartments) and/or 500 square meters (for houses), the amount of tax calculated will be increased by UAN 25,000 per property per year (or part thereof).
Topic VI. New areas of investment into Ukraine. Q&A
- What advantages does Ukraine possess to attract investment from the global market?
Ukraine has most of the necessary ingredients to be a major manufacturing hub for Europe – low-cost, skilled human resources, engineering prowess, geographical location and improving infrastructure. Moreover, in the case of IT and agriculture, Ukraine has the capability to lead the world in terms of innovation and productivity. This is especially true in the areas where IT and agriculture converge, such as in the burgeoning field of AgTech. Ukraine is a hidden gem that has been tarnished by its past, but with a bit of good PR, could be discovered.
- What are the most common types of foreign investments in Ukraine?
The current investment flows mainly include Direct Investment from Home Jurisdiction and Indirect Investment through Intermediary Holding Structures. Direct investment into Ukraine will often be an attractive option for foreign investors residing in countries which have concluded a double tax treaty with Ukraine. On the other hand, holding companies may not always improve tax efficiencies.
- The current Ukrainian Laws defining Foreign Direct Investments (FDI).
The fundamental Ukrainian statute in this area of law is the Law of Ukraine “On Foreign Investment Treatment” (signed on March 19, 1996 by the Parliament —Verkhovna Rada of Ukraine). The Law on Foreign Investment Treatment defines the specifics of foreign investment treatment in the territory of Ukraine, arising from the goals, principles and provisions of Ukrainian legislation.
- What were the largest Mergers & Acquisition deals in Ukraine, which could define a new directions for the overseas cash-flows into Ukrainian economy?
Based on the latest reports and numbers, Agriculture together with Metals and Mining sectors are currently the most attractive directions for foreign investments. Two-thirds of total deal volume was spread across four sectors; real estate and construction, agriculture, banking and insurance and consumer markets. To mention but a few, the largest deals of 2018-2019:
Pokrovske Colliery and Svyato-Varvarynska coal enrichment factory (the target) has been acquired by Metals and mining Metinvest Holding, Altana Ltd, Misandyco Holdings Ltd and Treimur Investments for 714 Million USD.
- Next one, Mriya Agro Holding (Agriculture) has been acquired by Saudi Agricultural and Livestock Investment Company for 242 Million USD.
Evraz DMZ (Metals and mining) has been bought by Development Construction Holding LLC for 106 Million USD. Among other industry sectors needs to be mentioned OOO Ukrrosleasing (Transport and infrastructure), which has been acquired by ODELUS-Construkt Kft for 50 Million USD.
Topic VII. Agreements between Ukraine and Europe. Q&A
- Is Ukraine currently a member of the European Union (EU)?
No, Ukraine is not a part of the European Union: and EU-Ukraine relations are governed by the Association Agreement signed on the 27th of June 2014 and ratified on the 16th of September 2014.
- What was the timely framework for implementation of the Association Agreement?
As of 1st of September 2014 relevant parts of the Association Agreement came into effect under conditions of provisional application until its full entry into force upon finalisation of the ratification process by all EU Member States. Implementation of the Association Agreement is being held on the basis of respective Action Plan for 2014-2017 as approved by Ukraine’s Government on the 17th of September 2014. Ukraine is also a partner country within the Eastern Partnership and the European Neighbourhood Policy.
- What are the main elements in establishment a EU-Ukraine association according to the Association Agreement? This association provides for the enhancement of political dialogue and cooperation in the context of both the EU-Ukraine Summit (highest political level) and the Association Council (ministerial level). With the institutionalisation of political dialogue the following goals are sought: (a) to deepen political association and increase the consistency and efficiency in the areas of foreign and security policy. (b) to ensure international stability based on the effective functioning of the multilateral security system. (c) to enhance cooperation on international security and crisis management, particularly to address global and regional challenges and threats (d) to strengthen respect of democratic principles, rule of law and good governance, human rights and fundamental freedoms, including the rights of national minorities (e) to contribute to the process of consolidation and stabilisation of internal political reforms. Finally, the contracting parties undertake the obligation to cooperate in the promotion of peace and international justice by ratifying and implementing the Rome Statute of the International Criminal Court.
- What are the major milestones and projects of the Programmes for Early Recovery (ERP) and Municipal Infrastructure (UMIP) by the European Investment Bank and EU Commission?
As one of the first measures under the Special Action Plan for Ukraine, the EIB developed together with the European Commission a EUR 200m Early Recovery Programme (ERP). The purpose of this operation is to provide humanitarian help to the conflict-affected areas in the Donetsk and Luhansk oblasts under the control of the Ukrainian Government, the three surrounding oblasts (Kharkiv, Dnipropetrovsk, Zaporizhzhia) and city councils in other oblasts countrywide, enabling them to cope with the impact of a heavy influx of internally displaced people. So far, in a first batch about 70 small-sized projects – hospitals and medical facilities, schools and kindergartens, housing and public buildings – have been selected, providing some 240,000 people with improved shelter and living conditions. A second, even larger batch of similar projects is currently under preparation. The EIB has also set up a EUR 400m investment programme for municipal projects across Ukraine, the Ukraine Municipal Infrastructure Programme (UMIP), focusing on energy efficiency in public buildings, street lighting, district heating, water supply, wastewater and solid waste management.
Topic VIII. Agreements between Canada and Ukraine. Q&A
- What are the major aspects of the CUFTA —Canada-Ukraine Free Trade Agreement ?
The Agreement establishes mechanisms that allow Canadian and Ukrainian residents to submit written questions to either country regarding obligations in the chapter. The Agreement also provides that Canadians and Ukrainians may request an investigation of violations of environmental laws. Once established, the Environmental Chapter will be overseen by the Committee on the Environment, and will be composed of officials from Environment and Climate Change Canada and the Ukrainian Ministry of the Environment and Natural Resources.
- The main objectives of the Agreement between Canada and Ukraine?
Canada is committed to pursuing policies that promote sustainable development and sound environmental management. The Canada-Ukraine Free Trade Agreement (FTA) reinforces the mutual supportiveness between trade and environment policies and the need to implement this Agreement in a manner consistent with environmental protection and conservation.
- What is the main current convention governing bilateral tax treaties between Ukraine and Canada? The major key points of this agreement?
This particularly include Convention between Government of Ukraine and Canada on Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income and estate. This convention governs following points: taxes covered, residential status of a Contracting State, legislative points of Permanent Establishments, Income from Immovable Property, Income from Immovable Property, Shipping and Air Transport, Associated Enterprises, Dividends, Interests, Royalties, Capital Gains, Independent Personal Services, Dependent Personal Services, Directors’ Fees, the wide range of the self-employed professions by residents and non-residents, Pensions and Annuities, Government Services, Student Treaties, other income, Elimination of Double Taxation, Non-Discrimination, Mutual Agreement Procedure, Exchange of Information, Members of Diplomatic Missions and Consular Posts, Miscellaneous Rules, Entry into Force and, finally, Termination clauses.
- Which Article of this treaty is most important to consider in terms of avoiding double taxation? And why?
The Article 23 — Elimination of Double Taxation. For the purposes of this Article, profits, income or gains of a resident of a Contracting State which are taxed in the other Contracting State in accordance with this Convention shall be deemed to arise from sources in that other State. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.
Topic IX. Business opportunities between Ukraine and India. Q&A
- What is the major bilateral agreement on tax treaties between India and Ukraine? What of the scope of taxes the Convention is applicable to?
Convention between the Government of the Republic of India and the Government of the Ukraine for the Avoidance of Double Taxation and the Prevention of fiscal Evasion with Respect to Taxes on Income and on Capital.
- The existing taxes to which this Convention shall apply are in particular: (a) In Ukraine — the profits tax of enterprise; the individual income-tax; tax on property of enterprises; tax on immovable property of citizens (hereinafter referred to as “Ukrainian tax”). (b) In India — (the income-tax, including any surcharge thereon; the wealth-tax (hereinafter referred to as “Indian tax”).
- The most important points of this agreement are aspects in regard to the legal residential status of foreign citizens. How the Convention govern this definitions?
According to the Convention, the term Resident – for the purposes of the Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of registration or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources or capital situated in the Contracting State.
- In case if an individual is a resident of both Contracting States, how does the Convention apply?
Then his status shall be determined as follows: he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in other Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
- How is the term “permanent establishment”defined, relevant for foreign nationals?
The term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term “permanent establishment” includes especially: a place of management; a branch; an office; a factory; a workshop; a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; a warehouse in relation to a person providing storage facilities for others; a premises or warehouse used as a sales outlet or for receiving or soliciting orders; an installation or structure used for the exploration or exploitation of natural resources; a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months.
Topic X-XI. Entrepreneurship (Self-employment) in Ukraine. Q&A
- Private business owners and entrepreneurs can be registered as sole entrepreneurs but also open their own companies. What are the most widely used types of companies in Ukraine? These are limited liability companies (LLCs) and joint-stock companies (JSCs). JSCs are further subdivided into public and private with the major difference being that a public JSC may offer its shares either through public or private offering while a private JSC, in contrast, is permitted to allocate its shares solely through a private offering. Other types of companies (additional liability companies, full liability companies (general partnerships); differentiated liability companies (limited partnerships), private enterprises, cooperatives, etc.) are available, although in practice these are infrequently used and are therefore not specifically addressed here.
- What is the main differences between LLC and JSC? An LLC, which is roughly the equivalent of a private limited company or a GmbH, is more common. You would use a public JSC (a public JSC is the equivalent of a public limited company in the UK or an Aktiengesellschaft in Germany) if required by law (such as for a bank) or if you intend to list your company on a stock exchange or to meet requirements for a specific type of business. The advantages of an LLC include: (1) it is cheaper and there are fewer formalities, (2) it is flexible and (3) it can conduct almost any kind of business with a few exceptions where a JSC or other type of company is expressly required.
- How does taxation of Individual Entrepreneurs and Self-Employed Individuals (residents and non-residents) function in Ukraine?
Apart from individual entrepreneurs — single tax payers, the individual entrepreneurs shall independently determine and pay the PIT (Personal Income Tax) from the amount of net taxable income at the rate of 18 per cent. Net taxable income is determined as the difference between total taxable income (revenue in specie or in kind) and documented expenses associated with business activity of such individual entrepreneurs. Personal income tax withheld from individual entrepreneurs is paid by advance installments on a quarterly basis, as calculated on the basis of the tax amount accrued in the previous year. The final tax calculation for the tax reporting year shall be made by a taxpayer in the annual tax return in view of the advance installments made. Individual entrepreneurs are obliged to keep the Ledger of income and expenditure wherein all income received and all expenses incurred are itemized in chronological order. The income of self-employed persons carrying out independent professional activities shall be taxed in a similar way, yet without making advance installments.
- What are the common self-employed business activities and professions in Ukraine? And how foreign citizens should register their enterprises?
Such independent professional roles refer to individual participation in scientific, literary, artistic, educational or teaching activities, activities of doctors, private notaries, lawyers, auditors, accountants, appraisers, engineers or architects, persons engaged in religious (missionary) activities, other similar activities, provided that such person is not an employee or an individual entrepreneur and employs staff of no more than four people. Self-employed professionals shall be registered as such with the tax authorities. Foreigners and stateless persons, registered in regulatory authorities as private entrepreneurs or self-employed persons, are considered to be residents of Ukraine for the taxation purposes and, along with the income from carrying out an independent professional activity, other Ukraine-sourced income and foreign income should be specified in the annual tax return.
- What is PIT? And how are foreign residents (and non-residents) are treated in accordance with the current Tax Law in Ukraine?
Income tax Personal Income Tax (“PIT”) is a tax levied on income of physical persons. For the PIT purposes in Ukraine, the compilation of two taxation principles are applied: the income of the tax residents is taxed on the basis of the unlimited tax liability; and the income of non- residents shall be subject to taxation if received from sources located on the territory of Ukraine (limited tax liability). Payers of the PIT are individuals — residents and non-residents as well as tax agents. Tax residency for the PIT purposes a resident refers to an individual (physical person) having a place of residence in Ukraine. In cases where the individual (physical person) has a place of residence in a foreign country, he or she is considered to be a resident if such a person has a permanent residence in Ukraine; if the person has a permanent residence in a foreign country, he or she is considered to be a resident if there are close personal or economic ties (centre of vital interests) in Ukraine. If it is impossible to determine the state of the person’s centre of vital interests, or if physical person does not have a permanent place of residence in one of the states, he or she is considered to be a resident if he or she resides in Ukraine for at least 183 days (including the day of arrival and departure) during the fiscal year period(s). Sufficient (but not exclusive) condition to determine the location of the centre of vital interests of an individual (physical person) would be a permanent place of residence of the members of his/her family or his/her registration as a business entity. If the resident status of an individual (physical person) cannot be determined, using the provisions of this sub-clause above, an Individual is considered to be a resident if he or she is a citizen of Ukraine. If, contrary to the law, an individual — citizen of Ukraine, is a citizen of another country as well, for the PIT purposes such person is deemed to be a citizen of Ukraine not eligible for foreign tax credit provided for by the Tax Code of Ukraine or by provisions of international treaties of Ukraine. If an individual (physical person) is stateless and is not subject to the provisions of paragraphs one through four of this sub-clause, his/her status is to be determined in accordance with international law. Sufficient basis to determine if the person is a resident is an independent determination of his/her primary residence in the territory of Ukraine in the manner prescribed by the Tax Code of Ukraine or his/her registration as a self-employed person.
Topic XII. VAT Tax in Ukraine. Q&A
- What are the objects of taxation by the Value Added Tax (VAT)? The following transactions are subject to VAT in Ukraine: Supply of goods (works, services) on the customs territory of Ukraine. Import of goods (works, services) into Ukraine (including importation of property under lease agreements). Export of goods (works, services). Barter transactions and disposals for no consideration. The VAT Act also provides a list of transactions that are not subject to VAT such as the majority of bank transactions, etc. The VAT Act also establishes the list of transactions, which are VAT exempt; e.g., royalty is exempt from VAT. Please note that foreign entities providing services to Ukrainian companies not through permanent establishments in Ukraine with those services being consumed in Ukraine are not considered to be VAT payers. In such case the obligation to pay VAT is levied on the Ukrainian recipient of respective services.
- What types of individuals or companies can be payers of VAT?
The scope of VAT payers include legal entities and entrepreneurs with domestic supplies of goods (works, services), the value of which exceeded UAH 300,000 (approximately EURO 28,436) within any period in the last 12 calendar months. The second group — Legal entities and individuals that import goods (works, services) into Ukraine. It shall be noted that entities registered as VAT payers, but which are not engaged in taxable supplies for a year, loose the status of taxpayer. Consequently, any VAT credit accumulated during preceding years will be lost.
- How high is the current VAT rate?
Tax rates The tax rates might be either 20% or 0%. There are no rates “in between”. Majority of transactions involving the domestic sale of goods (works, services), importation of goods into Ukraine, as well as supply of services by non-residents for consumption on the customs territory of Ukraine are subject to VAT at the standard rate of 20 percent. Export of goods from the territory of Ukraine and related services are taxed at zero rate.
- What is the procedure for calculation of the VAT tax for residents and non-residents of Ukraine?
Calculation of VAT VAT due to the budget is calculated as the difference between VAT collected from customers for sold goods (works, services) and VAT paid to suppliers (VAT credit). A VAT credit is allowed for input VAT paid in connection with the acquisition of goods (works, services) to the extent that the expense is connected with business activity of the taxpayer. Only those who are registered with the tax authorities as VAT payers are allowed to claim VAT credit. There is no VAT credit available in respect of VAT incurred while purchasing goods (works, services), which are not intended for business activity of taxpayer. VAT credit is also not available for taxpayers carrying out transactions not subject to or exempt from VAT pro rata to the volume of taxable/non-taxable operations (this is often the case for banking institutions, whose services are in large part not subject to VAT). Any negative difference between VAT collected from customers and VAT paid to suppliers (VAT credit) is to be refunded from the state budget or offset against VAT liabilities of the current or following period(s). Any positive difference must be paid across to the state budget. All VAT-able transactions are to be properly documented with tax vouchers (in particular, to be treated as a tax credit, VAT paid to suppliers should be properly supported with tax vouchers). Tax vouchers can only be issued by entities (individuals) registered as taxpayers for VAT purposes. Services obtained from a non-resident entity for use or consumption on the customs territory of Ukraine are subject to VAT at 20 percent, to be paid by the Ukrainian recipient of the services under a reverse-charge mechanism. This VAT would subsequently be claimed as a credit (provided that the expenses for acquiring the services are tax deductible).
Topic XIII. Double taxation treaties. Q&A
- What is the purpose of the international taxation treaties in Ukraine?
Ukraine has concluded 74 double tax treaties, 73 of which are currently in force (the treaty with Cuba has been ratified but has not yet entered into force). These double tax treaties are important for foreign investors in that they generally mitigate the effects of Ukrainian domestic tax law. As with treaties in general, the key provisions of Ukraine’s double tax treaties allocate taxing entitlements between Ukraine and its treaty partners in key areas such as permanent establishment, withholding tax on dividends, interest and royalties and taxation of capital gains. The double tax treaties also provide for exchange of information. No unilateral relief is available domestically in Ukraine for foreign taxes paid on foreign source income.
- What are the major current Double Tax Treaties supported by Ukraine?
(A) Currently, Ukraine is a party to the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
(B) On 1st of January 2017 the county became a member of the Inclusive Framework on the Base Erosion and Profit Shifting (BEPS) project and committed to implement four minimum standards of the reform package:
Action 5 (“Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”);
Action 6 (“Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”); Action 13 (“Transfer Pricing Documentation and Country-byCountry Reporting”); Action 14 (“Making Dispute Resolution Mechanisms More Effective”).
On 23 July 2018, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
- Is Ukraine a part of the Organisation for Economic Co-operation and
Development (OECD) double taxation treaties?
Yes and No. Ukraine generally follows the OECD Model Convention in concluding its double tax treaties and has adopted the OECD Commentaries as the basis for interpreting them, though not itself an OECD member.