Ukrainian law allows foreign investors to purchase real estate as a direct investment. At the same time, a range of restrictions and special rules apply and investors should be aware of these.
Foreign investors are not entitled to purchase and own agricultural land.
Foreign investors may acquire non-agricultural land but only in the following circumstances:
The restrictions mentioned above also apply to joint ventures, ie companies established under Ukrainian law with the participation of foreign investors and Ukrainian legal entities and/or individuals.
The purchase of non-agricultural municipal land by foreign investors and joint ventures requires approval from the Ukrainian government, and the purchase of non-agricultural state land requires approval from the Ukrainian parliament. In addition, a sale of state or municipal land to a foreign company requires the registration of a permanent establishment in Ukraine which has the right to conduct business activity. Other restrictions apply to certain types of land.
It should be noted that on 31 March 2020 the Law of Ukraine "On amending some legislative acts of Ukraine regarding conditions of the agricultural land circulation" was passed. The respective law allows foreigners to purchase and own agricultural land only subject to the consent provided by Ukrainian people in a national referendum.
Moreover, there is no definitive position as to whether Ukrainian companies that are 100% foreign owned may acquire plots of land in Ukraine. On the one hand, there are clarifications of the State Agency for Land Resources and court decisions stating that the acquisition of plots of land by Ukrainian companies that are 100% foreign owned is not provided for by Ukrainian law. On the other hand, there are court decisions stating that such companies should be allowed to acquire non-agricultural land in Ukraine.
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The applicable legislation does not lay down direct requirements for the registration of a permanent establishment for the purposes of investing in real estate situated in Ukraine.
However, the Ukrainian tax authorities have expressed the opinion that the ownership of Ukrainian real estate may be considered to constitute a permanent location of activity in Ukraine (ie a permanent establishment) subject to mandatory registration with the tax authorities. This position is arguable as mere ownership as such does not lead to permanent establishment in absence of commercial activities, or personnel acting on behalf of the foreign company etc. Moreover, there is a separate requirement for non-resident investors (foreign companies) to register with the Ukrainian tax authorities after acquiring a real estate asset which is subject to taxation in Ukraine.
A permanent establishment of a non-resident may be registered as a representative office in Ukraine. The representative office of a foreign entity is subject to registration with the Ukrainian Ministry of the Economy, the State Department of Statistics, the local tax authorities and the state pension fund. Employment records for all the employees of a permanent establishment must also be kept with the General Directorate for Servicing International Representative Offices.
The Ukrainian Ministry of the Economy will issue a registration certificate for the representative office within 60 working days following the payment of the state duty and the submission of all required documents. The registration of a representative office with the State Department of Statistics, local tax authorities and the state pension fund takes about three weeks.
The registration of a representative office with the Ukrainian Ministry of the Economy incurs a state duty of 2,270 UAH. Additional expenses (notary's fees, etc) may also be payable.
Under Ukrainian law, a representative office is not a legal entity and operates on behalf of the foreign corporate investor. Ukrainian law does not, therefore, regulate the corporate governance of representative office. The foreign company must, however, appoint the head of the representative office and grant him a power of attorney.
The existence of a permanent establishment once an investment in Ukrainian real estate has been made and the necessity to register a representative office should be reviewed in each particular case depending on the purpose for which the real estate is to be used.
As a rule, specifically in relation to investment in plots of land, foreign investors use a multi-step structure involving the incorporation of a joint venture company in an offshore jurisdiction, which then owns a Ukrainian company, which, in turn, owns another company which holds the real estate located in Ukraine.
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Ukrainian law provides for the following corporate vehicles:
A limited liability company is the best vehicle for real estate investment in Ukraine for the following reasons:
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A limited liability company has its charter capital divided into participatory shares, as specified in the foundation documents. Participants in a limited liability company are not liable for the company's obligations and bear the risk of losses related to the company's activities only up to the amount of their contributions to the charter capital.
On 6 February 2018 the Ukrainian parliament adopted the Law of Ukraine ‘On Limited Liability and Additional Liability Companies’ (LLC and ALC Law), which became effective on 17 June 2018. This law envisages many important changes with respect to incorporation, operation and governance of limited liability and additional liability companies.
The LLC and ALC Law cancelled some existing restrictions with regard to the limited/additional liability companies:
An additional liability company has its charter capital divided into shares as specified in its foundation documents. Participants are responsible for the company's obligations to the extent of their contributions to the charter capital. However, if these sums are insufficient to cover the company's debts, the participants are liable to the extent of their own assets. The limits to participant's liability are set out in the foundation documents.
A joint-stock company has its charter capital divided into shares of equal nominal value. Shareholders in a joint stock company are not liable for the company's obligations and bear the risk of losses related to the company's activities only up to the value of their shares.
A partnership is an entity where all participants are engaged in a joint entrepreneurial activity and are jointly liable for the partnership's debts up to the extent of their own assets. The partnership is managed in accordance with the foundation agreement. The partnership's activities may be carried out by all the partners, by only one partner or by a group of partners acting on behalf of the partnership under a power of attorney issued by the other partners.
A commandite partnership is an entity in which the one or more partners carrying out business activities on behalf of the partnership are held jointly liable to the extent of their own assets for the partnership's commitments (general partners), while the remaining partners, who are not involved directly in business activities, enjoy limited liability up to the extent of their contributions to the charter capital only (limited partners). Only general partners may manage the partnership and limited partners are not allowed to participate in management decisions. A commandite partnership must terminate its activities if all the general partners withdraw from the business.
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As from April 2011 there are no requirements as to the minimum charter capital of a limited liability company or additional liability company.
The minimum charter capital of a joint-stock company should not be less than 1,250 times the minimum monthly wage stipulated by Ukrainian legislation at the moment of registration. The minimum share capital is about UAH 7.5 million.
There is no minimum charter capital requirement.
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Incorporating any of the above entities in Ukraine involves:
According to the Law of Ukraine ‘On Amending Certain Laws of Ukraine Relating to the Identification of the Final Beneficiaries of Legal Entities and Public Individuals’ No. 1701-VII dated 14 October 2014, during the state registration of a new legal entity, a list of and information about the founders of legal entity being registered, information about its final beneficial owners and the structure of the founding legal entities must be disclosed. In the process of the state registration of a legal entity, the state registrar to identify beneficiary owners thereof shall obtain from such legal entity a notarized copy of the identification document of a beneficiary owner as well as the ownership structure of the legal entity.
With effect from 1 January 2016 the procedure for state registration of the incorporation of legal entities in Ukraine has been simplified by the Law of Ukraine No. 835-VIII dated 26 November 2015. This has amended the Law of Ukraine ‘On State Registration of Legal Entities and Individual Entrepreneurs’.
The principle of exterritoriality of registration activities has been adopted in Ukraine. As of today, this principle applies with some limits established for business securing. Thus, it is possible to register a new legal entity with any registration body regardless of the location of the legal entity, but within boundaries of Autonomous Republic of Crimea, a region and cities of Kyiv or Sevastopil, where the initial registration of such entity was performed. However, if the documents for registration activities are submitted in electronic form, the registration is effected irrespectively of location of a legal entity within Ukraine. Any registration activity regarding any legal entity can now be undertaken with any Ukrainian notary, but within boundaries of Autonomous Republic of Crimea, a region and cities of Kyiv or Sevastopil. Notaries can effect the registration and liquidation of legal entities, and introduce amendments to the constitutional documents etc on equal terms with state registrars.
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About four weeks. After registering with all the relevant authorities, obtaining the necessary certificates and opening a bank account, the entity can begin operating.
Depending upon the type of joint-stock company, incorporation takes from five months to a year.
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On 6 February 2018 the Ukrainian parliament adopted the Law of Ukraine ‘On Limited Liability and Additional Liability Companies’ (LLC and ALC Law), which became effective on 17 June 2018. This law makes the corporate governance in limited and additional liability companies more liberal and progressive, and extend a number of issues that may be regulated by the charter.
The highest governing body of a limited liability company or an additional liability company is the general meeting of participants. This can resolve any issues relating to the company's activities and certain issues must be decided exclusively by the general meeting of participants. The participants, at their own discretion, may additionally determine in the charter other issues, which must be decided exclusively by the general meeting of participants. There is no requirement related to a minimal number of votes to be present for the general meeting of participants be quorate. At the same time, certain issues must be decided by the participants only unanimously. For the other issues, the participants may establish in the charter any other quantity of votes needed for adoption of a decision (in any way not less than a simple majority).
The participants may decide to establish a supervisory board for controlling and regulating the activity of a company’s executive body. Upon discretion of the participants the supervisory board may have the authorities to elect an executive body of the company and terminate its powers. The powers of the general meeting of participants, except for its exclusive competence, may also be vested in the supervisory board. Please note that according to Ukrainian law, a managing company may perform functions of the executive body of the company subject to limitations envisaged by law.
The executive body which carries out the company's day to day business operations and implements the resolutions of the general meeting of participants can be either a board of directors headed by a general director or an individual director. The board of directors/director is elected by the general meeting of participants or the supervisory board (if it is established and has respective authorities). The company's charter may limit the authority of the board of directors/director.
The company's finances are subject to review by an independent auditor (audit firm) upon request of a participant or participants holding not less than 10% of votes in the charter capital of the company.
LLC and ALC Law also provided for a possibility to conclude a corporate agreement (shareholders’ agreement), where the participants may stipulate the framework for effecting their corporate rights and powers (eg terms upon which a participant may/is obliged to sell or buy-out a participatory share). In addition, the participants may issue the irrevocable powers-of-attorney for effecting the obligations under the corporate agreement.
The governing body of a joint-stock company is the shareholders' general meeting. This body can resolve any issues relating to the company's activities except for certain issues, which are exclusive competence of the supervisory board. At the same time, certain issues can only be decided on by the shareholders' meeting. The number of votes of a shareholder is equal to the number of shares held.
Decisions of the shareholders' general meeting are adopted by a simple majority vote of the shareholders present, although there are some issues which require a qualified majority of not less than three quarters of the votes of shareholders present at the meeting.
The shareholders' general meeting is quorate if shareholders holding more than 50% of the total number of votes are present.
Other governing and controlling body of a joint-stock company is the supervisory board. The establishment of a supervisory board is compulsory for public joint-stock companies and banks irrespective of a number of shareholders, and for private joint-stock companies, where the number of shareholders is 10 or more, unless all these shareholders are affiliated to each other. Otherwise it is optional. The members of the supervisory board are elected for the period not more than 3 years by the shareholders' general meeting and must be only individuals.
The executive body, which carries out the company's day to day business operations and implements the resolutions of the general meeting and supervisory board, can be either a board of directors or an individual director. The board of directors/director is appointed by the supervisory board or, if a supervisory board has not been formed, by the shareholders' general meeting. The company's charter may limit the authority of the board of directors/director.
The company's finances are subject to review by an audit committee or an independent auditor (audit firm) in case of review of annual financial reporting of a public joint-stock company. The members of the audit committee are elected by the shareholders' general meeting and must be individuals. The members of the supervisory body, the executive body and other bodies of the joint-stock company as well as persons who have no legal capacity are all barred from being members of the audit committee.
The corporate governance of a partnership is set out in the partnership agreement.
A partnership may be managed collectively by all the partners or by one or more partners who are authorized by the others.
Only general partners may manage the partnership. Limited partners may not interfere with the general partners' management decisions.
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This depends on the fees of the professional advisors providing the service and the business activities of the company or partnership.
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Corporate vehicles incorporated in Ukraine are recognized as tax residents and are therefore taxed on their worldwide income. The standard corporate profit tax rate is 18 percent.
Taxable supplies of goods/services are normally subject to 20 percent VAT.
Legal entities and individuals pay property tax in respect of real estate assets. Property tax applicable to real estate consists of:
The rates of immovable property tax are set by municipalities and for residential and commercial property may not exceed (per sq. m of the area of the property) 1.5 percent of the statutory minimum salary, effective on 1 January of the tax year.
Municipalities are free to decide on whether to set immovable property tax for particular vicinity and on the rate to apply subject to the mentioned cap (ie 1.5 percent).
The taxable value for immovable property tax includes the total area of residential/non-residential property.
Immovable property tax on individuals is assessed by tax authorities. Legal entities self-assess the tax and file the relevant tax return annually.
Land payment consists of:
The value for land tax purposes is:
The amount of land tax in regions with an established normative valuation cannot exceed the following thresholds (irrespective of where the property is located):
The amount of land tax applicable to plots of land which are located outside developed areas and which have not undergone normative valuation cannot exceed 5 percent of the normative valuation of a standard unit of arable land established for the relevant region (oblast). For agricultural land plots which are located outside developed areas and which have not undergone normative valuation land tax cannot be less than 0.3 percent and cannot exceed 5 percent of the normative valuation of a standard unit of arable land established for the relevant region.
The amount of land rent is stipulated in the lease contract between the lessee and state/municipal state authority. The land lease contract is subject to registration.
The law stipulates that land rent cannot be less than the amount of land tax for respective plot and more than 12 percent of the normative valuation.
Land tax is assessed annually for the following year and is paid monthly by the owners or users of land. Land rent is also paid monthly.
Withholding tax may also apply to outgoing cross-border payments (dividends, interest, etc) at the standard rate of 15 percent unless otherwise stipulated by a relevant double tax treaty.
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How much does corporate and accounting compliance cost for each type of corporate vehicle used to invest in real estate?
This depends on the fees of the professional advisors providing the service and the business activities of the company or partnership.
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