Attitude toward Foreign Direct Investment
The security situation in the East continues to negatively impact the perception of political risk associated with the country, especially at corporate headquarters abroad, where the key decisions regarding FDI are taken. Due to extensive media coverage of the conflict in international media, the whole country is to a large extent associated with the military conflict in the East; no clear distinction is made between different regions of Ukraine. This view is problematic, as business conditions in Western or Central Ukraine materially differ from those in the conflict area, even though one cannot deny that they are not completely independent, as there is likely some impact (e.g. the military draft, foreign exchange restrictions that were taken in response to confidence crisis originating in the East, etc.).
In 2016 Ukraine rose in the World Bank’s “Doing Business” rankings (see Table 1) to 83 out of 189 countries measured – a consistent, 13-place improvement since the 2014 Maidan Revolution. During 2015 the government continued to streamline the process to start a business, with registrations having no cost and taking approximately two to three days. Authorities now process construction permits through a risk-based approval system, eliminating requirements for certain approvals and technical conditions and simplifying the process for registering real estate ownership rights. Ukraine continues to facilitate cross-border trade by releasing customs declarations more quickly and reducing the number of physical inspections. Finally, the government introduced an electronic system for filing and paying labor taxes. In addition to the efforts of central authorities, officials at local levels continue looking to attract investment and jobs to their regions.
Table 1: FDI Indicators
Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.
Weighing heavily over Ukraine’s FDI climate is the lack of progress in reforming Ukraine’s judiciary. The judicial system in Ukraine has never been an independent branch of power. The courts have often been used as an instrument for confrontation between the President and Parliament. During the presidency of Viktor Yanukovych (2010-2014), courts were actively used for persecution of dissidents, manipulation of election results and prohibition of mass gatherings. The lack of rule of law was one of the driving reasons for the 2014 Revolution of Dignity. Ukrainian civil society continues to demand punishment of judges deliberately involved in illegal decision-making, the guaranteed independence of the judiciary system, and end to corrupt practices in the system. However, resistance in the system and the unwillingness of the political elite to abandon such a convenient instrument for the legalization of their decisions impedes the passing of reforms. Political analysts and media describe the current Rada as pro-European and pro-reform, having made significant strides on urgently needed reforms, including a law strengthening local government and civil service, proposed reforms to public funding of political parties, and numerous pieces of legislation to meet IMF requirements. Additionally, the Rada has passed laws to reduce burdensome business regulations, encourage public-private partnerships, require media ownership transparency, and improve agricultural land policies.
Other Investment Policy Reviews
The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) have not conducted formal reviews since the 2015 Investment Climate Statement. Ukraine's first trade policy review as WTO member is scheduled for April 2016.
Laws/Regulations on Foreign Direct Investment
The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment. In addition, the following laws and regulations pertain to foreign investment: Law "On the Foreign Investment Regime" (1996); Law "On the Protection of Foreign Investment" (1991); Cabinet of Ministers Resolution, "On the Procedure for the State Registration of Foreign Investment" (1996); Law “On Production-Sharing Agreements,” (1999), amended in 2012; The Land Code (2001); National Bank of Ukraine Resolution "On Regulation of Foreign Investing in Ukraine" (2005); Law "On Amending Certain Laws of Ukraine with the Purpose of Overcoming Negative Impacts of the Financial Crisis" (2009); Tax Code (2010); Law “On Public-Private Partnerships” (2010); Law “On Preparation and Implementation of Investment Projects Based on the Principle of the Single Registration Window,” (enacted 2012); Customs Code (2012); Law “On Industrial Parks” (2012), Law ”On Amending Certain Laws of Ukraine with the Purpose of Increasing Protection of Investor Rights” (May 2015).
While the legislative framework for protection of investor rights is present, law enforcement remains uneven, as the judicial system needs a comprehensive reform. Laws and regulations are published on the Parliament’s web-site http://rada.gov.ua.
On January 1, 2016, the GoU amended the Law of Ukraine “On state registration of legal and physical entities – entrepreneurs and civil organizations.” This amendment modified the business and property registration system to grant approximately 7,000 notaries full authority to perform State Registrar’s duties, along with accredited banks and Centers for administrative services under City Councils. The amended law also introduces a provision allowing citizens to address any notary office in Ukraine to register their business and legalized online services that had been operating as pilot projects.
The Ministry of Justice of Ukraine launched a website for registration of private entrepreneurs and legal entities at http://irc.gov.ua/ua/el_reg. However, critics have said that the Unified State Registrar, State Pension Fund, State Fiscal Service, the State Committee of Statistics, and authorities need to better coordinate their date.
It takes 11 procedures and 28 days to establish a foreign-owned limited liability company (LLC) in Ukraine (Kyiv). This is slower than the average of World Bank Investing Across Borders (IAB) countries in Europe and Central Asia, but still faster than the IAB global average. In addition to the procedures required of a domestic company, a foreign company establishing a subsidiary in Ukraine must legalize and translate the parent company’s documents abroad. While the registration of a foreign investment is optional, the majority of foreign investors register their investments. The State Registrar should forward new registrations to the State Committee of Statistics of Ukraine, the state social funds (the State Pension Fund, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance), and the tax. However, in practice, the State Registrar does not register with the State Committee of Statistics, and that registration is usually made by the company itself. Companies in Ukraine are free to open and maintain bank accounts in foreign currency.
Company registration is usually processed within three working days. For registration with the tax authorities (for VAT purposes), registration tends to take longer than three days and is supposed to be completed within 14 days. As the registering authority, the State Registrar issues a certificate of registration, which becomes the company's incorporation document. By implementing the one-stop shop system, Ukraine has eased registration with the Pension Fund, the Employment Fund, the Social Insurance Fund, the Industrial Accidents Fund, and the relevant tax authorities (except for VAT registration) through the Registration Office. This new system largely emerged following the Cabinet of Ministers Resolution, dated August 8, 2005, No. 321-��, "On Top-Priority Measures on Expediting Revision of Regulations and Enhancing Registration and Authorization Procedure." Pursuant to Order No. 317 of the State Tax Administration of Ukraine, dated August 8, 2005, No. 317 "On Amending Instruction on the Procedure for Keeping Record of Taxpayers," stand-alone tax registration was abandoned and incorporated into the one-stop shop system. Only a limited number of standard registration documents are available for download. Finally, although documents should be the same throughout the country, different districts use their own templates and not all districts provide templates online.
The World Bank Group provides a following ranking for starting a business in Ukraine:
(The distance to frontier score shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. DTF is measured on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier)
(A procedure is defined as any interaction of the company founders with external parties - for example, government agencies, lawyers, auditors or notaries).
(The measure captures the median duration that incorporation lawyers indicate is necessary to complete a procedure with minimum follow-up with government agencies and no extra payments).
(Cost is recorded as a percentage of the economy’s income per capita. It includes all official fees and fees for legal or professional services if such services are required by law).
Ukraine’s Civil Code defines micro, small, and medium-sized enterprises by the following criteria:
1) Micro-sized enterprises employ on average not more than 10 employees over a calendar year with annual revenue not to exceed an equivalent of €2 million estimated by an average annual National Bank of Ukraine rate.
2) Small-sized enterprises employ on average not more than 50 employees over a calendar year with annual revenue not to exceed an equivalent of €10 million estimated by an average annual National Bank of Ukraine rate.
3) Large-sized enterprises employ on average more than 250 employees over a calendar year with annual revenue exceeding an equivalent of €50 million estimated by an average annual National Bank of Ukraine rate.
4) Other economic entities fall under the category of medium-sized enterprises.
In March 2015 the Cabinet of Ministers initiated liquidation of the National Agency on Investments and National Projects and a draft law (No. 1256) “On development and State support for small and medium business in Ukraine” is being prepared for the second reading by the Verkhovna Rada.
Ukraine continues to struggle to build a legal system that effectively protects investor rights. The following major pieces of legislation – in addition to the Tax Code – affect foreign investment into Ukraine:
The law On Foreign Investment Regime sets out in broad terms Ukraine's policy on inward investment and the rights and obligations of foreign investors.
The Civil Code regulates civil relationships, the establishment of legal entities, and personal property rights.
The Commercial Code (enacted on the same day as the Civil Code) governs business relationships. The Commercial Code is intended to regulate issues that are not dealt with in the Civil Code, although in practice there is some overlap.
The law On Securities and Stock Market governs the public issuance and trading of securities.
The law On Protection of Economic Competition restricts business monopolies. The majority of mergers and acquisitions in Ukraine are likely to require pre-approval from the Antimonopoly Committee.
The law On Protection from Unfair Competition aims to protect business entities and consumers from unfair competition.
The Environmental Protection Law establishes a framework for pollution fees to be imposed on any legal entity that discharges contaminants into the environment.
The Law “On Stimulating Investment Activity in the Priority Sectors of the Economy in order to Create Jobs” envisages tax privileges for investment projects in such priority sectors as agriculture, communal and housing, machine building, transport infrastructure, resorts-recreation, metallurgy (http://zakon5.rada.gov.ua/laws/show/5205-17).
Legislative initiatives are available for viewing on the Parliament’s website (http://www.rada.gov.ua/en) as well as on websites of government agencies granted with legislative initiative authority; the principal agencies are the Ministry of Justice and the Ministry of Economic Development and Trade.
Transparency: The Ukrainian Government is contemplating e-commerce registration as a mechanism to increase transparency. For example, the Government of Ukraine in 2014 implemented an automated VAT-refund system to reduce opportunities for bribery. Electronic government procurement has also been introduced to combat corruption. The newly implemented open-source system of electronic procurement ProZorro is estimated to save about UAH 500 million of budget funds per year.
The World Economic Forum’s 2015-2016 Global Competitiveness Index ranked Ukraine 79 of 140 countries. In particular the report cited as adverse conditions the lack of transparency in policy-making, high level of favoritism in decision-making, poor judicial independence, weak protection of property rights and minority shareholders’ interests, endemic issues with bribery, burdensome regulation, inefficient legal framework in settling disputes and challenging regulations, and weak auditing and reporting standards. The 2015 International Business Compass ranked Ukraine 89th, 20 spots up from its 109 position in 2014. The 2016 WB Doing Business Index ranked Ukraine 83 out of 189 countries, a four point improvement from 2015. The key reform, according to the Index, was made in Starting a Business where Ukraine moved 40 spots up, from position 70 to 30.
Limit on Foreign Control and Right to Private Ownership and Establishment
Aside from ownership of agricultural land, the regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors. Accreditation of representative offices of foreign companies and their branches significantly lags behind the simplified registration procedures for Ukrainian business. Accreditation by MEDT takes 60 days and costs $2,000. Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity. Investment permits are not required, but all enterprises must be established according to the form and procedure prescribed by law and registered with the appropriate state authorities. Foreign companies are restricted from owning agricultural land, manufacturing carrier rockets, producing bio-ethanol, and some publishing activities. In addition, Ukrainian law authorizes the government to set limits on foreign participation in "strategically important areas," but the wording is vague and the law is rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment into Ukrainian firms in these sectors.
The new government is looking into further expanding the list of companies slated for privatization in order to increase management efficiencies. The first tender under the new government, of licenses to provide nationwide 3G mobile telecommunications services, was generally regarded as transparent and drew interest of major players in the local market. In February, 2016 the Parliament approved legislation intended to facilitate large privatizations this year. The new legislation allows the State Property Fund to hire foreign advisors, increases transparency of asset evaluation procedures, removes the mandatory requirement to sell 5-10 percent of a privatized entity via a securities exchange and banned Russian and off-shore companies from participating in privatization in Ukraine. In March 2015, the government approved a list of companies to be privatized in 2015-2016. Due to the delays in adopting the legislation, the original privatization plans were postponed. Currently, the government is preparing to privatize 20 large state-owned enterprises in 2016, including an ammonium plant, a large energy generator and several energy distribution companies.
The State Property Fund oversees privatizations. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder. The new government has made statements that there will be no revisions of past privatizations. Still, some court cases have surfaced from private companies challenging earlier privatizations. Judicial reform is critical to ensure fair treatment of the cases. There will be more privatizations in the near-term as a means to plug budgetary gaps; the transparency of these transactions will be a good indicator of the new government’s approach to business and investment.
Screening of FDI
In April 2015 the Cabinet of Ministers passed a resolution to liquidate the State Agency for Investment and National Projects of Ukraine, which served as a clearing house for state-approved investment projects, in 2011-2015. Instead, a Department for Attracting Investments was established at the Ministry of Economic Development and Trade (MEDT). Thus, MEDT has the lead in the formation of government policy to improve Ukraine’s investment climate and attract new investments. To achieve these goals, the Ministry has developed a plan of business forums in different countries; 2016 fora will take place in the Netherlands, France and Canada.
The ministry responsible for attracting investment is:
The government is reforming Ukraine's Anti-Monopoly Committee (AMC) to ensure fair competition and consumer protection. Based on current legislation, companies found to be violating fair competition rules may be fined up to 10 percent of the prior year's turnover, and if unfairly gained profit exceeds 10 percent of income, up to three times the normal penalty can be collected. New AMC leadership worked with the Parliament to amend a 2002 Law "On Protection of Economic Competition,” leading to the November 15 passage of amendments that made AMC tasks more transparent and predictable, allowed the government to perform stricter controls of mergers and acquisitions, and gave it more effective tools to destroy existing and prevent new monopolies in sensitive sectors such as energy and utilities. The international business community has found the new AMC leadership to be more open and transparent, a significant shift from past years. However, there remain concerns with entrenched corrupt officials at the staff level, as well as an overarching lack of training for investigators and economists. With IMF support, the Government of Ukraine is working to establish a level playing field. USAID is launching an assistance program with the AMC under which U.S. anti-trust advisors will work with AMC and MEDT officials to develop a sound competition policy.