Legal Conditions of Doing Business

Despite more than 70 years of soviet rule, even its final years of “perestroika,” in over 20, years of independent development, Ukraine has moved significantly toward a free market economy.


Market overview

Ukraine is a market economy at the crossroads of Eastern Europe, Russia, and the Middle East. It has become an increasingly important market for foreign trade and investment.

Ukraine’s resources and economic strengths include rich agricultural land, a strong scientific establishment, an educated and skilled workforce, and significant mineral reserves. Ukraine has achieved significant progress in opening its market to exports and investment, particularly in the last few years. Its gross domestic product (GDP) in 2015 was officially UAH 1 979 458 million, comprising heavy and light industry, oil and gas transit, coal and mineral extraction, oil refining, chemicals, agriculture, and food processing.

In 2008 Ukraine became the 152nd country to join the World Trade Organisation (WTO).


Ukraine – EU Association

On 27 June 2014 Ukraine signed an Association Agreement with the European Union. The Association Agreement will become effective upon its ratification by the national parliaments of the EU Member States and the Ukrainian Parliament (as of the date of this publication it has been ratified by a majority of EU Member States). The Agreement provides for approximation of policies and legislation of Ukraine with the European Union. The parties commit to co-operate and converge policy, legislation, and regulation across a broad range of areas, including visa-free movement of people, cooperation in the economic area, justice, and the modernisation of Ukraine’s energy infrastructure.

The free trade area between Ukraine and the European Union is to be established for a 10-year transition period after the Association Agreement becomes effective. The EU agreed to provide Ukraine with political and financial support and access to EU markets. On 23 April 2014 the EU unilaterally introduced the autonomous preferential trade regime for Ukrainian goods applying zero import duties for Ukrainian exporters through 31 December 2015.


Market opportunities

Ukraine remains an attractive country for business. Highly qualified and relatively cheap labour, developed transportation and communications infrastructure, and a favourable geographic location make Ukraine attractive for companies interested in this part of the globe. Promising sectors include: oil and natural-gas extraction; energy efficiency technology; telecommunications; travel and tourism; the provision of computer software and services; the retail trade; and the manufacture of: oil and gas-field machinery; electrical power systems; agricultural machinery; pharmaceuticals; food processing and packaging equipment; computers and peripherals; agricultural chemicals; automotive parts/services equipment; building materials. In the near future there may be significant investment opportunities for investors in the gas and oil industry, energy efficiency, electrical power systems, telecommunications, commercial real estate, transportation infrastructure development, and commercial banking. The country is also an attractive place to deploy manufacturing sites and service centres for customers located in the European Union and Russia. In fact, Ukraine’s geographic location, communications infrastructure, and improving political and economic environment make it an effective transportation corridor between the European Union and the Commonwealth of Independent States (CIS) countries.


Market-entry strategy

The geographic size of Ukraine and its relatively high level of population dispersion make establishing a viable distribution network of great importance to foreign investors. Having a local representative and competent distributor are essential, since strong business information networks and transparent market rules have yet to develop. Companies considering entering this market should seek legal counsel before and while doing business in Ukraine. Given the tenuous commercial environment and weak legal infrastructure,


Privatization

The process of privatization or selling off state commercial and other assets started in 1992. This process is governed by the laws on privatization of state-owned property and a set of regulatory documents. Admittedly, the privatization process was not an easy one and there were undoubtedly a number of irregularities. The vast majority of state-owned enterprises were privatized by 2004, but a number of significant enterprises remain in state ownership. A few major privatizations have been conducted since the privatization rush of 2004. The most prominent recent privatization involved Ukrtelekom (Ukraine's monopoly in the fixed-line communication market), which was finally privatized in 2011. In 2012, most regional gas distribution companies were privatized, and the State Property Fund (SPF) launched the privatization of heating plants.

The impact of Ukraine's privatization can be assessed in terms of the following strategic changes in Ukraine's economy:

• The state has given up majority ownership in 90% of the industrial enterprises it owned in 1991. Millions of Ukrainian citizens have become shareholders and more than 60% of Ukraine's labor force work for private enterprises.
• In many cases, the new generation of investment fund managers, who have become major shareholders via the privatization program, are putting in place new enterprise directors and managers and introducing new management techniques.
• State budget support for unprofitable enterprises has been greatly reduced.

In 2005, the Tymoshenko Government began to counter such irregularities. This led to the high-profile re-privatization of KryvorizhStal, the country’s largest steel plant and one of the largest in the world. The result was a six-fold increase in the original price and the arrival of a strong international investor, India’s Mittal Steel, in 2005. It sent out a signal to foreign investors that future privatization auctions would be held in a more honest, transparent manner that would not a priori exclude suitable buyers through the manipulation of tender conditions.

In September 2008, Ukraine adopted the Law “On Joint Stock Companies,” which was a major step toward improving the investment climate in the country. The law introduces regulations to protect companies from illegal seizure. The law also provides for a procedure for voting at general shareholders’ meetings that excludes any shareholders who have tried to illegally take-over a company. All joint stock companies with over 100 shareholders must vote using ballot papers signed by each shareholder individually. It also institutes a special procedure for the alienation of shares.


Legislation overview

Ukraine is a civil law country. The main sources of law are acts promulgated by legislative and executive branches of state power. The Constitution is considered as the fundamental source of law.

Today, the country is an independent player at the international marketplace. To achieve this, Ukraine has had to radically modify its legal system in order to match modern conditions, (including requirements that have to be met as a WTO member). As a result, Ukraine has quite a number of new and amended laws.

One of the first new laws, the Law on Ownership, specifically recognizes private ownership and the right of both Ukrainian residents and foreign individuals and legal entities to own property in Ukraine, to use such property for commercial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. In addition, the following laws effectively establish the basic framework for business activity in Ukraine and 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 (adopted along with 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 Anti-monopoly 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 charges to be imposed on any legal entity that discharges contaminants into the environment.
• The Tax Code has introduced a number of tax incentives for a range of investors. which entered into force on 1 January 2011 and introduced significant amendments to tax rules and administration. Since that time, the Code has been repeatedly changed and there are a number of important novelties, which came in force in 2014 and 2015. The Tax Code has introduced a number of tax incentives for a range of investors.

The 1996 Constitution (as amended) lays legal ground for a market-based economy. The Constitution contains the following provisions important in business regulation:

• commits Ukraine to the principles of democracy and rule of law;
• recognizes private ownership, including private ownership of land;
• guarantees free disposition of property and submits any expropriation to a procedure prescribed by law and providing for prior full compensation;
• declares entrepreneurial freedom and the protection of competition in business;
• guarantees foreign residents in Ukraine, including foreign investors, equal rights and protections with Ukrainian citizens;
• provides for compensation for losses from illegal action or inaction of state authorities or officials;
• requires publication of all legislation as a condition of its validity;
• outlaws retroactive legislation;
• provides recourse to courts against acts of state authorities and officials; and
• requires the creation of an independent judiciary.

Following the legal tradition of continental European market economies, Ukraine uses a Civil Code at the core of contract and property protection. Effective 1 January 2004, Ukraine substituted its old Soviet Civil Code of 1963 with a new Civil Code and introduced the Commercial Code.


The Civil Code and the Commercial Code

The Civil Code consists of six books, or chapters, which include a general first book providing basic definitions and concepts, such as persons and legal capacity, objects of civil rights, legal acts, representation, and statute of limitations; and five books dealing with such specific matters.

Ukrainian labor law is still based on the Labor Code of Ukraine of 1971 (as amended), which is very pro-employee, thus reflecting the socialist principles of full and statecoordinated employment. This results in problems for the employer in planning an efficient employment policy in compliance with Ukrainian law.

Ukrainian and foreign individuals are employed under an employment agreement, which is often formalized not as one written agreement, but rather as an exchange of an application signed by the employee and an order issued by the company’s executive and appointing the employee to the appropriate position. The employment agreement may not deviate from labor law and reduce protections offered to the employee by the law. Grounds for dismissals are limited and social guarantees for many categories of employees are generous. Certain categories of employees may not be dismissed or laid off at all or without guaranteed subsequent employment. Oral or even factual (i.e., based on actual performance of job functions) employment agreements are permitted. Only the so-called “employment contracts” can modify the default rules of employment law if the parties expressly agree so in writing. However, employment contracts can only be used where they are expressly authorized by law and for this reason they cannot be used with a vast majority of employees. One major exception is the CEO of a company: the Labor and Commercial Codes specifically authorize companies to enter into employment contracts with their top managers (CEOs). The difference between employment agreements and employment contracts is quite important and until recently unless there was a written document signed with the CEO entitled “employment contract” with relevant dismissal clauses the employer was not able to dismiss the CEO at will even in case of discovered irregularities, lack of confidence or conflicts. However, in 2014 the Labor Code was amended to allow an employment dismissal (within or without an employment contract) of corporate officers (including CEOs) upon termination of their respective corporate functions. The latter may be terminated on the grounds included in the company’s charter.

Ukrainian employees are required to submit a formal employment record (labor books) to employers for proper registration of employment. Labor book information is used for hiring purposes and, along with centralized records of mandatory social security contribution, for calculation of pensions. Trade unions are traditionally strong and have a number of important functions in the termination and dispute resolution procedures.

The Ukrainian intellectual property laws provide for the protection of various intellectual property objects such as copyright and related rights, trademarks, designs, inventions and utility models, trade name and commercial secret, etc. Ukraine is a party to many basic international treaties on intellectual property rights such as the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Madrid Agreement Concerning the International Registration of Marks and Protocol thereto, Patent Cooperation Treaty, etc.

Legal protection of copyright in Ukraine does not require any formal registration, although, voluntary registration of copyright is available. For the enforcement purposes an evidence of title in the copyrights object is normally required.

Legal protection of rights to trademarks, designs, inventions and utility models is granted subject to registration and obtainment of the respective certificate or patent. To obtain such registration the respective application shall be filed with the State Intellectual Property Service of Ukraine (SIPS). For the purposes of representation before SIPS a foreign entity or individual shall appoint a representative certified as a patent attorney of Ukraine.

A trademark registration certificate shall be granted subject to the examination of the application for both absolute and relative (e.g. prior rights) grounds for refusal. The law allows an interested party to file an opposition to a trademark application. However, currently trademark applications are not published for opposition purposes, therefore the opportunities to use the opposition procedure are quite limited.

Ukraine recognizes protection of well-known trademarks. A trademark can be recognized as well- known by either the SIPS’ Chamber of Appeal or court. An established well-known trademark receives the same protection as the trademark registered in Ukraine with the exception that such protection also covers goods and services other than those for which the well-known status is recognized.


Types of Companies

The Civil Code provides for six types of commercial legal entities: a joint stock company, a limited liability company, an additional liability company, a full partnership, a limited partnership and a production cooperative.

Under the Commercial Code, a business entity may have a form, inter alia, of a private enterprise, state enterprise, an enterprise based on collective ownership, municipal enterprise and joint municipal enterprise created by local communities. A company established by one founder is a “unitary” enterprise, while a company with several founders is a corporate enterprise.
Forms of businesses most frequently used by international investors are:

• a joint stock company (“JSC”), which must issue shares registered by the National Commission on Securities and Stock Market. The shareholders are liable for company debts only to the extent of the par value of their shares. There can be two types of the JSC: public JSC and private JSC;
• a limited liability company (“LLC”), in which holders of equity are not liable for the debts of the company beyond the capital they contributed or agreed to contribute; and
• a representative office (“RO”), which is similar to a branch office of the investor with the authority to act on behalf of the investor in Ukraine; an RO must be registered with state authorities, but is not a separate legal entity.

Business activities in Ukraine are often subject to licensing by different state agencies. Moreover, starting up a business usually means registering with the tax and pension authorities, among others, and getting numerous permits and approvals, such as fire safety, labor, sanitary, and so on. Since 2006, the state has been working to set up a network of “one-stop-shops” where entrepreneurs can register with all necessary entities in a single location and cut down the amount of time required to set up shop.

The Ukrainian authorities regularly declare their support for foreign investment, and the broader public is well disposed to it.

Before starting a project in Ukraine, an investor should obtain qualified local advice since Ukrainian laws tend to be vague, allowing for different interpretations, particularly tax laws, which can carry different implications.

As a general rule, 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 government agencies. Foreign investors are generally not required to seek special approval for foreign direct investments, but may register with the state authorities. Registration of a foreign investment may ease the restrictions on the remittance of dividends abroad.
Establishing a legal entity in Ukraine involves registering with the local state registrar, the tax authorities, the statistics office and the pension fund, as well as opening a bank account, and other formalities.

International treaties ratified by the Parliament become a part of national legislation directly applicable as a source of law prevailing where they conflict with domestic law. Many international treaties of the former Soviet Union remain binding on Ukraine. Business customs are recognized an independent source of law, which is, however, subordinate to statutory law. Certain customary rules operate as part of the law because there is a reference to them in a statute or decree. For example, under Ukrainian banking law, Ukrainian banks can use payment instruments recognized in international banking practice and Ukrainian companies trading with foreign counterparts must refer in sale contracts to INCOTERMS rules issued by the International Chamber of Commerce. Judicial decisions are not considered a formal source of law, but play a significant role in its interpretation.

Decisions of the Constitutional Court are an official interpretation of legislative enactments and mandatory for governmental agencies, legal entities and natural persons. Most judgments of the Supreme Court issued since 2010 have a similar status. Courts of lower instances need to take into account Supreme Court’s position as to correct interpretation of specific laws and regulations established in its decisions.