In August 2007, the European Business Association (EBA) introduced to the country a new report “Barriers to Investment in Ukraine”.
Every year the EBA identifies specific problems that both local and foreign companies face in Ukraine nowadays. Advocating the EBA member companies’ interests, the report has systemised and analysed these problems, and then provided proposals as to amendments to the Ukrainian aimed at resolving the same. Thus, annual editions by the European Business Association of “Barriers to Investment in Ukraine” become working documents for the President of Ukraine, the Cabinet of Ministers of Ukraine, and the Parliament of Ukraine, as well as for the Headquarters of the European Commission in Brussels and its Delegation to Ukraine.
This edition has always been and remains one of the main arguments of the EBA in its dialogue with the Ukrainian Government.
1. INVESTMENT CLIMATE OVERVIEW
The newly formed government must start with reforming itself into a state apparatus capable of efficiently designing and implementing an economic policy. The necessity of implementing the state administrative reform remains the number one priority in the Government’s efforts to further improve the investment climate in the country.
The package of reforms should include the following components:
- Redefine the approach of the Government to support private sector activities.
- Increase administration transparency and access to government information.
- Review functional, operational aspects of civil service.
- Coordination of activity of specialised government institutions responsible for the promotion of investment activity in Ukraine.
5. Introduce effective “incentives” and “control” systems (international experience suggests that an effective way to introduce an incentive system is to develop “programs” (or “projects”), as accompanied by performance-based budgeting, management and reporting).
2. KEY ECONOMIC REFORMS
Along with a comprehensive public administration reform, there is a number of other key measures that can substantially improve the investment climate in the country.
Improve the Predictability and Stability of the Legal Framework
Establishing a transparent, sustainable and fair national legal system is essential to attract a stable flow of foreign investments to Ukraine.
There are three major areas of concern that need improving, which will result in the overall legislative environment becoming much healthier:
1. Inconsistencies in current legislation
There is a tremendous number of ambiguities, inconsistencies and explicit contradictions in the current legislation. The most glaring example is the presence of conflicts between provisions of the Commercial and Civil Codes, two legislative acts constituting a basis for the whole legal system. Although adopted only a few years ago, the Commercial Code embodies concepts that contradict the principles of a market economy. The conflicts and inconsistencies between the two Codes are so numerous that it is hardly possible to bring them into compliance with each other by way of introducing amendments and modifications. Hence, settlement of such uncertainty would only be possible by abolishing the Commercial Code and incorporating some of its provisions to the Civil Code and to other applicable legislative acts.
2. Procedure of drafting laws
The presence of a large number of deficiencies in the legislation testifies that Ukraine has serious problems with the way it enacts laws. Eliminating the existing inconsistencies in the laws will be only a short-term relief, unless the system of drafting laws is not reformed.
3. Weak judiciary
The judiciary is a key element to ensure lawfulness in the state, in particular regarding protection of investors’ rights.
Improvement of Corporate Governance and Protection of Shareholders’ Rights
Inefficient corporate governance legislation and especially poor protection of shareholders’ rights discourage foreign companies from investing in Ukraine. Over recent years, the Ukrainian authorities have been actively introducing new rules to regulate the procedure for creating and operating joint stock companies. However, the country still suffers from many serious problems in the area of corporate governance, mainly due to inefficient legislation.
Liberalisation of Cross-border Movements of Goods and Capital
Liberal trade regime and softer capital control will attract efficiency-seeking investors, who will start-up production in Ukraine to sell the output outside, as well as inside the country. Although Ukraine has one of the largest domestic markets in the region, the size of its market in terms of purchasing power is still far below that of the EU. At the same time, relatively low wages (compared to the EU standards) and qualified labour resources make the country very attractive for efficiency-seeking investors, and those who wish to start-up production in Ukraine in order to sell output internationally. However, these investors are discouraged by the opaque and often corrupt customs procedures and strict capital movement control that nullify all the efficiency of low production costs.
3. GENERAL PROBLEMS FACING INVESTORS
Corporate Governance and Shareholder Rights
The new Civil and Commercial Codes, which came into force on 1 January 2004, introduced a number of changes relating to certain issues of corporate governance. However, legal regulation of many matters requires further improvement.
Proposed measures:
- To adopt new legislation, including as a top priority the new Law on Joint Stock Companies that would set out provisions for corporate governance, such as transparent relationships between the shareholders and the governing bodies of the company, for protection of the rights of minority shareholders, including articles requiring their consent to significant transactions including alienation of assets, attraction of loans and control over their use, the pledge of considerable quantity of assets and transactions with related parties. Also, these new legislative acts should formulate measures for preventing shareholder activities aimed at blocking the operation of joint stock companies.
- To provide for the protection of minority shareholders of JSCs by introducing a clear mechanism for the assessment of shares purchased by the majority shareholders from minority shareholders.
- To take actions of harmonisation of the Ukrainian corporate legislation with that of the European Union.
RIGHTS TO LAND
Significant measures have been taken in Ukraine recently to ensure greater transparency in the system of acquiring ownership rights to immovable property, but there are still many unresolved issues. One of the largest barriers on the way to attraction of foreign investments to Ukraine is imperfection of the land laws.
Proposed measures:
- To introduce amendments to the Land Code that would clearly envisage the possibility of acquiring non-agricultural land plots by Ukrainian legal entities with foreign participants/shareholders (legal entities and/or individuals), including wholly-owned subsidiaries of foreign legal entities or individuals, namely to amend Article 82 of the Land Code in order to balance interests of all legal entities founded and registered in compliance with the Ukrainian laws as regard to their property rights to non-agricultural land plots.
- To legislatively establish transparent and comprehensive procedures for acquiring property rights to non-agricultural land plots at the level of the Cabinet of Ministers of Ukraine Resolution.
- To adopt the Cabinet of Ministers Resolution establishing clear criteria for the evaluation of an investor’s project by various state bodies with respect to the feasibility of its implementation.
intellectual property objects
As it is seen from a wide range of laws and specifying legal acts, one uses the notion “counterfeit goods” when talking about the good produced or used by other means which leads to infringement of intellectual property rights. Though neither the Civil Code of Ukraine, nor the Law of Ukraine on Protection of Rights to Trademarks, nor other laws in this sphere give a clear definition of “counterfeit goods”. Thus, the rules that refer to the stated notion are unjustified and cannot be used in full.
Proposed measures:
- To amend the current laws of Ukraine in the sphere of protection of rights to intellectual property objects, in particular the Ukrainian Law on Protection of Rights to Trademarks No. 3689-12, dated 15 December 1993, in order to ensure the common unified definition of a counterfeit good.
BANKRUPTCY
Ukraine has a fairly well developed legal framework regulating rehabilitation (sanation), insolvency and bankruptcy issues. The Law of Ukraine “On Restoration of Solvency of a Debtor and Recognition of Bankruptcy Thereof”, as adopted on May 14, 1992, as per No. 2343-XII, (hereinafter Bankruptcy Law) was restated in 2000. The practice of the recent years with application of the Bankruptcy Law has demonstrated the need for it to be improved. The amendments made to the Law during 2000-2006 have significantly improved the regulation of bankruptcy. Among the positive changes made, those worth noting are: improvement in the debtor rehabilitation (sanation) procedure; designation of the creditor status as priority and unsecured creditors, and also ensuring their respective rights; fulfilment of debtor liabilities by third parties. Nevertheless, there remain some problems that require resolution.
Proposed measures:
- To amend the Bankruptcy Law and establish settlement of claims concerning payment of taxes, and charges and of demands of the central executive body regulating the state reserve, into one order of priority with other creditors, the claims of whom are not secured by pledge.
- to annul, in order to safeguard the rights of creditors, the effect of the moratorium on the sale of property owned by enterprises, in the authorized fund of which the state share is not less than 25%, or companies in the fuel and energy sectors and mining enterprises, during bankruptcy proceedings.
- To supplement the Bankruptcy Law with a new section pertaining to trans-border aspects of bankruptcy, which must necessarily provide for the criteria of defining the insolvency proceedings as international, and also include provisions of main and additional bankruptcy proceedings, definitions of the criteria of distinguishing main and additional bankruptcy proceedings.
ENFORCEMENT PROCEEDINGS
It has been almost 8 years since the procedure for enforcement of court judgments, arbitral awards, state authority orders and other legal decisions had last undergone revision. The effective laws were changed significantly in 1999 with the adoption of the Law of Ukraine “On Enforcement Proceedings” (hereinafter the Law) No. 606-XIV, dated 21 April 1999. Many legal experts admit, however, that not all of the changes implemented by the named Law were for the best. The Law actually established a complicated and often non-functional enforcement system, in particular, for court decisions. In terms of practice, this results in situations where a creditor with a court decision for recovery, for example, of a specific amount of money, is unable to collect the amount due because, for unknown reasons, the laws treat debtors “loyally”.
Proposed measures:
- To clearly reinforce the right of the enforcement officer of the court to collect any of the debtor’s assets, and not only those listed in the court decision, in order to satisfy the legal requirement of the creditor.
- To develop a mechanism of pecuniary liability, envisaging the imposition of a fine on a debtor intentionally avoiding the enforcement of a court decision.
- To develop procedures for recovery of debt by foreign investors in a foreign currency.
- To annex the effective legislation with detailed provisions in respect of enforcement of the awards, as rendered by courts of arbitration, the International Commercial Arbitration Court with the Ukrainian Chamber of Commerce and Industry, as well as the decisions, as taken by foreign judicial authorities, both governmental ones and those of arbitration.
TAXATION
According to investors opinion, most of systematic problems in terms of taxation have failed to be resolved. Changes have been made to the list of specific “technical” issues requiring solutions. Investors propose some new measures that, according to their opinion, would enable accelerating elimination of barriers for investment activity.
Proposed measures:
- To take consistent and coordinated measures that will ensure predictability of the tax system for investors and its reform, which, basically, includes accessibility to reliable information on proposed amendments to tax legislation and compliance with the declared intentions (or prior notification of any changes of such intentions).
- To take measures to ensure compliance, in practice, with the principles of the governmental regulatory policy (expediency, adequacy, effectiveness, balance, predictability, transparency and consideration of public opinion).
- To provide for mandatory and timely involvement of public professionals (lawyers, accountants etc.) in the discussion of draft regulatory acts on taxation issues.
- To create a unified and comprehensive tax clarification database that would be easily accessible to all taxpayers.
VALUE ADDED TAX
Investors have no understanding of the Value Added Tax (hereinafter the VAT) levied on operations of contribution of property to the statutory fund and believe it to be an unreasonable burden. It is true that enterprises are bound to pay the value added tax even before commencing their business activities. This being the case, refunding of the tax paid is rather a complicated and protracted process. In the event of legal operations, as performed between Ukrainian legal entities, the laws have even no express prescription to the effect who may have the right to a tax credit and under what conditions, and whether any such right shall arise at all.
Taxation of investments (and this is exactly what is happening) jeopardizes both foreign investors’ plans regarding Ukraine and local investors’ activity.
Proposed measures:
- To introduce taxation of operations related to the contribution of capital funds to the authorized fund based on a zero rate (including events of import of capital funds).
CURRENCY REGULATION
In April 2005, the National Bank of Ukraine (hereinafter the NBU) repealed Resolution No. 482, regulating the Procedure for Making Foreign Investments in Ukraine in a Monetary Form, and the Return of Investment to a Foreign Investor, as well as of Repatriation of Profits, Incomes and other Funds Obtained from Investment Activity in Ukraine (hereinafter Resolution No. 482). As it is well known, Resolution No. 482 caused dissatisfaction of investors due to the numerous limitations and complications with regard to the procedure of making foreign investments and of return thereof. In August 2005, Resolution No. 482 was substituted by Resolution No. 280 of NBU, which enacted the Regulation on the Procedure of Foreign Investments in Ukraine (hereinafter the Regulation).
As compared to Resolution No. 482 repealed, the Regulation has introduced a more liberal treatment of making foreign investments and returning the same. Nevertheless, likewise Resolution No. 482, the Resolution, by establishing unreasonable and inconsistent requirements, complicates the procedures both for making investments, and for returning investments to the investor, for paying dividends, selling objects of investment, and thereby increasing, by way of administrative actions, the value of transactions and reducing the economic gain of the investment activity in Ukraine and lowering the transaction liquidity.
Proposed measures:
- To adopt new editions of the Regulation and the Rules, which would improve the legal basis of foreign investment in Ukraine and the respective rules of acquisition of foreign currency; cancel discriminatory measures limiting the rights and guarantees of the activity of foreign investors at the territory of Ukraine, as well as contradicting the provisions of laws in force and international agreements. Establish clear and transparent rules, under which the investor could freely repatriate income derived from investments and alienate the investment object inside Ukraine as well as abroad.
LABOUR LAWS
The current Ukrainian Labour Code has not undergone any major revisions since the date of its adoption in 1971. As a result, it fails to reflect the nature of the employment relationship in modern Ukraine and burdens the employers with numerous formalities, which hardly serve the interests of employees, and, at the same, require material efforts on part of the employers.
Proposed measures:
- To accelerate the adoption of the new Labour Code.
- For the Ministry for Foreign Affairs to settle the matter concerning simplification of issuance of IM-1 Work Visas to foreign nationals.
- To elaborate the procedure for obtaining work permits in Ukraine by foreign businessmen – physical entities, as well as foreigners, who have established their relations with employers on the basis of civil law agreements
- For the Ministry for Labour and Social Policy of Ukraine to issue guidelines to the local employment centres or to arrange explanatory work conducted with them as regards the application scope of point 7 paragraph 3 of Resolution No. 2028.
- For the Cabinet of Ministers of Ukraine to approve a procedure for executing and issuing temporary residence certificates as soon as practicable; provide an opportunity to obtain temporary residence certificates and work permits at a single authority.