Ukrainian foreign economic, business, investment and commercial regime
Ukraine continues to maintain fees and licensing requirements and fees on
certain imports. Ukraine imposes several duties and taxes on imported goods:
customs/import tariffs, value added tax (VAT), and excise duties.
Additionally, imports into Ukraine are subject to customs processing fees, a
unified fee on vehicles crossing Ukraine's borders, and port fees.
Ukraine's tariff schedule provides for three rates of import duty: full
rates, Most Favored Nation (MFN) rates, and preferential rates. The full
rate of import duty can be from 2 times to 10 times higher than the MFN
rate. It currently is applied to a very small number of goods from 81
countries. In 2007, the number of goods still subject to the higher rates
was sharply reduced.
When it becomes a WTO Member, Ukraine would apply the MFN rate to all
goods originating from WTO Members, in accordance with Article I of the
GATT 1994, so the number of countries whose goods are subject to full
duties will decline sharply.
Preferential rates are applied to imports from countries with which Ukraine
has a Free Trade Agreement (FTA) or other preferential trade agreement.
Ukraine has an FTA with a number of CIS countries. Imports from the
United States are subject to the MFN rate.
Import duties are calculated in accordance with the law "On the Customs
Tariff of Ukraine." Their levels currently undergo annual changes already
provided for in the Customs Tariff Law, and Ukraine will implement
additional tariff liberalizations as a result of its negotiations on WTO
accession when it joins the WTO.
The customs tariff schedule comprises more than 11,000 tariff lines. Most
customs tariffs are levied at ad valorem rates, but 672 tariff line items
(5.97 percent) are subject to specific or combined rates of duty.
These specific and combined rates apply to approximately one-third of
tariff lines for agricultural goods, primarily those that are also produced
in Ukraine. These protected goods include grains, poultry products, sugar,
and vegetables such as carrots and potatoes.
For agricultural goods, the average applied tariff rate is 13.8 percent
(down from 19.7 percent in 2005). The number of tariffs lines subject to
combined rates of duty will be sharply reduced when Ukraine implements its
WTO accession tariff commitments and the average applied tariff rate will
drop to below 12 percent. By contrast, for industrial goods the average
applied rate is 4.4 percent (down from 8.3 percent).
High import tariffs on goods such as poultry act as a barrier to U.S.
exports. As a result of the March 2006 WTO bilateral Market Access
Agreement with the United States, tariffs on poultry and many other goods
will be reduced significantly when Ukraine becomes a Member of the WTO.
Ukraine applies excise duties to a limited set of goods imported into
Ukraine, such as alcoholic beverages, nonfilter cigarettes, motor vehicles,
and petroleum products. Discriminatory excise duties still hinder U.S.
exports of wine and grape spirits and automobiles to Ukraine.
The excise duty rate on imported wine and grape spirits is 12 times and 13
times higher, respectively, than on domestically-produced products, and this
difference is likely to remain at that level until Ukraine becomes a Member
of the WTO and excise rates on imported and domestic goods are unified.
Although VAT and excise tax exemptions for locally-produced vehicles were
eliminated on March 29, 2005, excise taxes on automobiles remain high,
ranging from 0.02 euros/cc for automobiles with smaller engines to 3.50
euros/cc for those with larger engines.
The import tariff on fully assembled automobiles was raised from 15 percent
to 25 percent during 2005 to compensate local producers for the loss of VAT
and excise privileges. This increase has negatively impacted importers of
fully assembled automobiles. Application of a lower tariff rate on
"semi-knocked down" vehicles further discourages imports of fully assembled
Import licenses are required for some goods. The list of goods covered by
the licensing regime and the license terms are decided annually by the
Cabinet of Ministers.
In 2007, the list included pesticides, alcohol products, optical media
production inputs, some industrial chemical products and equipment
containing them, official foreign postage stamps, excise marks, officially
stamped/headed paper, checks and securities, some goods that contain
sensitive encryption technologies, and ozone-depleting substances.
While the licenses themselves are granted automatically to applicants, some
products require a prior approval, which may or may not be automatic, from
the relevant administrative agency before receiving the necessary import
license from the Ministry of Economy.
In the WTO accession negotiations, the United States has sought assurances
from Ukraine that it will not impose restrictive import licensing
requirements without adequate WTO justification, (e.g., on imports of
mass-market, commercially-traded goods containing encryption that are
covered by the Information Technology Agreement).
In 2007, beef, pork, and poultry (fresh, chilled, or frozen) and related
live animals became subject to import licensing without prior approval.
Copper sulphate, optical polycarbonates for production of discs for
laser-reading systems, cane and beet sugar, and chemically pure sucrose
in solid form became subject to import licensing without prior approval.
For some goods, product certification is a prerequisite for an import
license. Importers can request that a foreign facility be certified as in
compliance with Ukraine's technical regulations that apply to imports. The
U.S. distilled spirits industry reports that this option usually involves a
burdensome and costly inspection visit by Ukrainian government officials.
If approved, the supplier receives a certificate of conformity valid for 2
years to 3 years and avoids the burden of certifying each shipment and
mandatory laboratory testing upon arrival in Ukraine.
STANDARDS, TESTING, LABELING, AND
For a number of years, U.S. investors have regarded Ukraine's product
certification system and standards regime as a significant obstacle to trade
Recently, Ukraine has passed several new laws and governmental decrees
aimed at bringing Ukrainian practices in this area into line with the WTO
Agreement on Technical Barriers to Trade. As of October 2007, more than
4,000 of Ukraine's standards were harmonized with international standards,
and approximately 8,000 remained to be harmonized.
Mandatory certification is required in Ukraine for many products. The
State Committee for Technical Regulation and Consumer Policy
(DerzhSpozhyvStandard) is the standardization and certification body
DerzhSpozhyvStandard has a network of 114 accredited product certifying
bodies, including 60 accredited certifying bodies for quality management
systems, as well as about 780 testing laboratories throughout Ukraine, 170
of which are accredited by the National Accreditation Agency as complying
with international standards. Appropriate resources, such as modern
analytical equipment and reactants, are not available in most laboratories.
DerzhSpozhynStandard's system includes 27 territorial departments for
consumer protection and 28 state centers for standardization, systematizing
weights and measures, and certification. Depending on the type of product,
testing, and applicable certification scheme, the certification process can
take from 3 days to 1 month.
Ukraine has both private certification bodies, which operate on a
profit-making basis and are more common in the area of technical regulations
compliance, and certification bodies affiliated with state agencies, which
are more common in ensuring compliance with sanitary and phytosanitary
Some certification agencies do much of their work with little or no
coordination with other Ukrainian bodies performing similar tests. Many
products require multiple certificates from different agencies, with local,
regional, and municipal authorities often requesting additional
documentation beyond that required by central bodies.
According to industry sources, numerous burdensome certification and
licensing procedures for equipment impede access to the Ukrainian market.
Experts allege that government officials responsible for issuing licenses
often require businesses to provide documents that are not mandatory
deliberately conceal information in order to confuse a potential licensee,
or delay issuing documents in order to induce licensees to offer a bribe.
These issues are being addressed during Ukraine's WTO accession
negotiations, and, as recently as September 13, 2007, Ukraine has reduced
the number of products subject to mandatory certification.
When it becomes a WTO Member, Ukraine will be obliged to apply such
mandatory requirements only in conformity with WTO provisions on technical
regulations, including ensuring that such measures are not more trade
restrictive than necessary to fulfill a legitimate objective, and reliance
on available scientific and technical information.
A May amendment to the law "On Standards, Technical Regulations, and
Conformity Assessment Procedures" helped to guarantee precedence of
international over regional standards and introduced provisions related to
conformity assessment recognition, although further amendments may be
needed to ensure that Ukraine's authorities will accept the results of
conformity assessment procedures performed in the United States.
Ukraine's National Accreditation Agency is taking steps to become a member
of the International Laboratory Accreditation Cooperation (ILAC),
anticipated in 2009. Once an ILAC member, Ukraine should significantly
increase the acceptance of test results of laboratories accredited with, and
notified by, ILAC member bodies.
Sanitary and Phytosanitary (SPS) Measures
Ukraine applies a range of SPS measures that restrict imports of a number of
U.S. agricultural products, among them, pork, beef, and poultry. Industry
has repeatedly complained that Ukraine's certification and approval process
is lengthy, duplicative, and expensive.
Over the past several years, Ukraine has passed amendments to several laws
and regulations, most importantly to the law "On Veterinary Medicine" and
the law "Quality and Safety of Food Products and Food Raw Materials,"
to bring its legislative and regulatory framework into compliance with
requirements of the WTO SPS Agreement.
The following potentially trade distorting issues are subjects of discussion
between the United States and Ukraine as part of the negotiations on
Ukraine's accession to the WTO:
Overlapping State Authorities: Ukraine has maintained a complex and
nontransparent oversight system for human and animal health measures that
involves overlapping authority by the Veterinary Service, Sanitary Service,
and DerzhSpozhyv Standard.
Amendments to the law on "On Standards, Technical Regulations, and
Conformity Assessment Procedures," passed in May, made some progress
but failed to solve entirely the problem of overlapping authority.
Additional legislative or regulatory amendments are needed. Further
legislation has been enacted in 2007 that strengthens the legal separation
of authority over testing for SPS and Technical Barriers to Trade (TBT) issues.
Beef, Beef Products, and Pork: A bilateral agreement with Ukraine negotiated
at the same time as the March 2006 WTO bilateral Market Access Agreement,
addresses the terms of U.S. exports of beef, beef products, and pork to
Ukraine. As agreed, Ukraine has allowed the entry of certified U.S. beef and
pork that meets veterinary certificate requirements. The United States
continues to monitor ongoing trade.
In the past, Ukraine blocked the importation of beef and beef products due
to concerns over the use of growth promoting hormones as well as Bovine
Spongiform Encephalopathy (BSE). The United States is working with Ukraine
to ensure that any requirements imposed by Ukraine are consistent with World
Organization for Animal Health guidelines.
Ukraine's law "On Veterinary Medicine" was amended in November 2006 in
order to address this issue, and in 2007 additional regulatory amendments
were enacted to address concerns over maximum residue levels, animal
identification requirements, and the definition of contaminants.
U.S pork exports to Ukraine have been hampered by regulations concerning
trichinae. The United States is working with Ukraine to align Ukrainian
standards for trichinae with international norms.
Biotechnology: Ukraine has not established an approval process for
agricultural biotechnology products. The absence of an approval process has
resulted in unpredictable sales conditions for corn products, soybeans, and
The United States is working with Ukraine to establish procedures governing
biotechnology that are supported by science-based risk assessment principles
and guidelines, including those of the WTO SPS and TBT Agreements, the
Codex Alimentarius, and the International Plant Protection Convention
In May, Parliament passed a new law establishing a framework for the
creation, testing, and use of products of biotechnology. Implementing
regulations for the law are under development and scheduled to take effect
prior to Ukraine's WTO accession.
Fish Shelf life: In Ukraine's WTO accession talks, Ukraine committed to make
changes to its technical regulation on shelf life for fish such as salmon,
sardines, and roe to bring it into conformity with the CODEX Alimentarius
guidelines on the labeling of prepackaged food products.
Ukraine is not yet a signatory to the WTO Agreement on Government
Procurement (GPA), but committed to become an observer to the GPA when
it becomes a WTO Member, and to initiate negotiations for membership within
2 years after that. Ukraine's total government procurement stood at $4.11
billion for April through December of 2006.
All government procurement of goods and services valued at more than $10,000
and public works valued at more than $80,000 must be procured through
Open international tenders must be used when procurement is financed by any
entity outside of Ukraine. The Tender Chamber of Ukraine publishes
information on government procurement in the "State Procurement Bulletin."
Ukraine's recent amendments of the law "On Procurement of Goods, Works, and
Services Using State Funds" have moved it away from international norms. A
recent study on Ukraine by the Atlantic Council of the United States
concluded that "government procurement is one of the most corrupt spheres
of state activity."
Amendments to the procurement law in March 2006 transferred the authority to
coordinate government procurement from the Ministry of Economy to the
Antimonopoly Committee of Ukraine, a body with no particular expertise in
regulating public procurement.
The amendments also dispersed policy and oversight functions across several
bodies, including the Antimonopoly Committee, the Accounting Chamber of
Ukraine (reporting to Parliament), the State Control and Audit Unit (under
the Ministry of Finance), and the Tender Chamber of Ukraine.
The amendments have been criticized for creating an overlap in authority of
various regulatory agencies and decreasing the transparency of the system.
The 2006 amendments granted the Tender Chamber of Ukraine, purportedly
a nongovernmental organization, the authority to monitor the procurement
process, and to undertake key operational functions that are inherently
governmental. The Tender Chamber has exclusive authority to maintain a
catalog of bidders, consider claims of tender participants, and select
suppliers to be awarded contracts.
It also requires a UAH 7000 ($1,400) fee for bidders to be registered in the
catalogue, in contravention of the international practice of free listing
for all interested parties. The Tender Chamber has faced widespread
criticism as contributing to the procurement system's corruption and lack
Only the European Consulting Agency, a Ukrainian private enterprise with
links to the Tender Chamber has been allowed to operate a website announcing
tenders. Several observers have charged that this relationship fosters
corruption and decreases transparency.
In addition, the 2006 amendments introduced burdensome and lengthy
procurement procedures, and required all tender proposals to be secured by
collateral, limiting the number of tender participants and increasing the
cost of participation. For some procurement, the Tender Chamber assesses
fees of 4 percent of the value of the procurement, which is extremely high
by international norms.
Under the December 2006 amendments to the law, procurement rules do not
apply to some tenders of special public sectors, such as defense, postal and
telecommunications services, and railways.
The procurement law does not restrict foreign enterprises from participating
in government procurement, but in practice foreign companies claim that they
are rarely able to compete on an equal footing with domestic companies.
Foreign companies generally win only a tiny fraction of the total tenders
(0.01 percent during the first nine months of 2006).
Among the problems faced by foreign firms are:
(1) the lack of public notice of tender rules and requirements;
(2) covert preferences in tender awards;
(3) the imposition of conditions that were not part of the original tender
(4) ineffective grievance and dispute resolution mechanisms, which often
allow a losing bidder to block the tender after the contract has been
March 2007 amendments to the law eliminated preferences that favor domestic
bidders in tenders below certain values. However, some regulations still
exclude foreign bidders; for example, some firms report that there is a
practice in health sector procurement of only accepting bids from Ukrainian
resellers or Ukrainian producers of pharmaceuticals.
Exports of some categories of products are subject to registration by the
Ministry of Economy. Products that must be registered prior to export from
Ukraine include: precious metals and stones, rolled metal products exported
to the United States, textile products exported to the United States, scrap
metal, printer's ink, and paper with watermarks.
The government has eliminated most export duties, with the prominent
exceptions of natural gas, livestock, raw hides, some oil seeds, and scrap
metal. In the context of its WTO accession negotiations, Ukraine has
negotiated reductions in a number of these duties and the elimination of
Export Restrictions on Grains
Ukraine is the sixth largest wheat exporter in the world. The United States
continues to express its concern about the export restrictions that Ukraine
imposed on food and feed grain exports beginning in September 2006.
Ukraine readjusted the export restrictions in July, imposing
highly-restrictive quotas that served as a near export ban on each grain
type covered (wheat, barley, corn, and rye).
Ukraine plans to introduce somewhat more liberal quotas in January, 2008,
allowing more grain to be exported until April 2008. The measure will allow
traders to clear some stocks, but the level is approximately one-third of
what could be exported.
To date, Ukraine has not adequately justified the measures taken, i.e., it
has not convincingly explained how it faces a "critical shortage," as
required in order to maintain such a ban under Article XX of the GATT 1994.
Several studies point to the contrary.
The World Bank's November 2006 report titled "The Quotas on Grain Exports
in Ukraine: ineffective, inefficient, and nontransparent" states that the
introduction of the quota was not justified, as domestic grain supply was
amply adequate to cover all domestic needs. Data from the Food and
Agriculture Organization of the United Nations and industry confirm this
Further questions are raised by the scope of the measures: the quotas and
licenses are also being applied to corn and barley, which are not being used
for the production of bread in Ukraine, and to corn, barley, and wheat used
More recently, Ukraine has sometimes argued that export restrictions are
needed to combat rising food prices. Ukraine has threatened to extend the
export restrictions to sunflower oil in order to combat rising domestic
prices of this product.
Industry reports that the initial mismanagement of the issuance of licenses
compounded the problem, leaving a large volume of grain in storage in
Ukraine's ports, where in some cases it deteriorated past the point where
it could be used for human consumption, or even animal feedstock.
The World Bank estimated that during the 2006/2007 marketing year the
costs to grain traders of demurrage and losses from rotting or otherwise
compromised grain that was not able to leave Ukraine's ports exceeded
The Ukrainian economy is sustaining some of these losses, including lost
export opportunities. These measures have tarnished Ukraine's investment
climate and damaged its reputation as a reliable grain exporter and a
country that upholds contracts. Ukraine has committed to remove its current
quotas prior to becoming a WTO Member, and to apply any future restrictions
in conformity with WTO provisions.
Live cattle, sheep, hides, and skins
Export duties have been in place on live cattle, sheep, hides, and skins
since 1996. For live calves the duty is 75 percent of the customs value (but
no less than 1500 euros/ton of live weight); for live cows it is 55 percent
(but no less than 540 euros/ton of live weight); and for live sheep it is 50
percent (but no less than 390 euros/ton of live weight).
For raw hides of cattle the duty is 30 percent (but no less than 400
euros/ton of live weight); for sheep hides it is 30 percent (but no less
than 1 euro/hide); and for pigskins the duty is 27 percent (but no less than
170 euros/ton of live weight).
In November 2006, Parliament enacted amendments to the law that will lower
these export duties gradually upon WTO accession. Export duties on live
calves, cows, and sheep will fall to 10 percent, 8 years after accession.
Export duties on raw hides will fall to 20 percent, 10 years after Ukraine
becomes a WTO Member.
Since January 2003, Ukraine has imposed an export duty of 30 euros/metric
ton on ferrous steel scrap and has had, in effect, a ban on exports of
nonferrous metals. The ferrous scrap export duty contributed to a decline in
scrap exports from Ukraine, when global demand and prices for steel scrap
were rising. Ukrainian metallurgical producers benefited from scrap inputs
at prices lower than world levels.
As part of its March 2006 bilateral WTO Market Access Agreement with the
United States, Ukraine agreed to significantly lower these export duties.
Laws passed in the fall of 2006, and amended in May, provide for staged
duty reductions to 10 euros/metric ton over a period of 6 years for ferrous
metals and reductions to 15 percent ad valorem over a period of 5 years for
Sunflower seeds have been subject to an export duty since June 2001, to the
benefit of local sunflower oil producers. In July 2005, the export duty on
sunflower seeds was lowered to 16 percent of its customs value with further
1 percent annual reductions to be made upon WTO accession, reaching a final
duty of 10 percent, 6 years after accession.
INTELLECTUAL PROPERTY RIGHTS (IPR)
Recent years have seen steady improvement in Ukraine's protection of
intellectual property rights, but problems remain. On January 23, 2006, the
United States reinstated GSP benefits for Ukraine and lowered Ukraine's
designation under Special 301 from Priority Foreign Country to Priority
Also in January 2006, Ukraine agreed to work with the U.S. Government
and with U.S. and domestic industry to monitor the progress of future
enforcement efforts through the IPR Enforcement Cooperation Group.
This bilateral group has conducted a series of successful dialogues, meeting
roughly once every 4 months, throughout 2007. Ukraine has also agreed to
meet biannually with European Commission officials as part of an EU-
Ukraine IP Dialogue.
Despite the significant reduction of illegal production of optical discs,
the retail sale of copyrighted goods in large markets - especially Kyiv's
well-known Petrivka market and similar markets in other large cities - is
still widespread. The transit of pirated goods also remains a serious
Internet piracy is a growing problem in Ukraine. Industry states that many
Ukraine-based websites offer pirated material for download with the full
knowledge of their Internet Service Providers (ISPs).
The United States continues to work with the Ukrainian government to monitor
and combat the spread of illegal download websites, and, at one meeting of
the IPR Enforcement Cooperation Group, GOU officials agreed to begin
monitoring suspected pirate sites jointly with industry.
Royalty Collecting Societies
Rights holders have complained repeatedly that some royalty collecting
societies collect fees for public use of copyrighted material without
authorization and do not properly return royalty payments to rights holders.
An initial draft amendment to the Copyright Law failed to address industry
concerns, and the draft is now being reworked.
Additional IPR Efforts
Ukraine has made some important revisions to its IPR laws as part of the WTO
accession process. Parliament passed amendments to its Customs Code in
November 2006 that provide customs officials the ability to use ex officio
authority to seize suspected pirated or counterfeit goods.
Parliament also passed a law amending the Civil and Criminal Codes of
Ukraine in order to provide for the seizure and destruction of
IPR-infringing goods and equipment, in line with Article 46 of WTO Agreement
on Trade Related Aspects of Intellectual Property Rights (TRIPS).
As a result of commitments agreed to as part of its March 2006 WTO bilateral
Market Access Agreement with the United States, Ukraine amended its law
"On Medicinal Drugs" in November 2006 to provide a 5 year period for the
protection of pharmaceutical test data that is submitted to government
authorities to obtain marketing approval. The Ministry of Health issued a
regulatory act to ensure implementation of this law and to clarify some
Pharmaceutical industry representatives complain that implementation of the
law remains a problem, however. Parliament also passed an amendment to the
law "On Pesticides and Agrochemicals" in November 2006 that provides a 10
year period of protection for agricultural chemicals. In September, the
Cabinet of Ministers issued a regulation to abolish discriminatory fees on
the testing and registration of plant varieties.
Parliament also passed an amendment to the law "On Protection of Rights for
Indications of Origin of Goods" in November 2006, but Ukraine recognizes
that further amendments are necessary in light of TRIPS provisions.
Patent and Trademark
Trademarked and copyrighted goods must be registered for a fee in the
Customs Service's rights holder database in order to be guaranteed
protection. Industry has reported instances of production of counterfeit
cigarettes within Ukraine as well as growth in the amount of counterfeit
pesticides and apparel on the market.
The Ukrainian Ministry of Health does not routinely check the validity of
patents when it grants marketing approval in Ukraine.
In 2006, Ukraine adopted the Singapore Treaty on the Law of Trademarks
aiming at establishing a uniform mechanism for administrative trademark
Civil IPR lawsuits remain rare because of a general lack of confidence in
Ukraine's legal system, and because there are few judges properly trained in
IPR law. However, a recording company won a landmark civil court case
against the Ukrainian music download site.
The court ruling imposed substantive penalties on the owners of mp3.ua and
was subsequently upheld on appeal. February 2006 amendments to the Criminal
Code drastically lowered the required threshold (from roughly $5,200 to
$700) needed to pursue criminal prosecution and increased penalties up to 7
years imprisonment for major offenders.
The amendments have helped bolster criminal enforcement in the courts. The
U.S. Government has worked closely with the Government of Ukraine to
provide specialized IPR training.
Restrictions on services exist in areas such as insurance, banking
activities, auditing, legal services, television and radio broadcasting, and
During bilateral negotiations on services market access with a number of
countries in the context of Ukraine's negotiations to join the WTO, Ukraine
agreed to open access for foreign service suppliers in a number of areas,
including energy services, banking and insurance branches, professional
services, express delivery, and telecommunications. When these commitments
are fully implemented, Ukraine will have one of the most liberal services
markets in the region.
In 2005, Parliament adopted legislation that will, within 5 years after
Ukraine becomes a WTO Member, permit foreign insurance companies to
open subsidiaries in Ukraine.
In the fall of 2006, it adopted amendments to the law on "Banks and Banking"
that would permit foreign banks to open subsidiaries and branches, a law "On
Advocacy" that eliminates the nationality requirements for legal services,
and amendments to the law "On Publishing" that will cancel limitations on
foreign investment in publication services over a 5 year transition period.
In May 2007, Parliament amended the law "On Insurance" to allow for
unrestricted reinsurance of risks related to waterway transportation,
commercial aviation, and space launch (including satellites) from the date
of WTO accession.
Foreign professionals are permitted to work in Ukraine, but a lack of
transparency hinders foreign access to the Ukrainian services market. A
local content requirement exists for radio and television broadcasting,
although it has not been stringently enforced in most cases. All foreign
films are required to be dubbed or subtitled in Ukrainian.
In 2006, U.S. industry identified efforts to limit the ability of foreign
credit and debit card service providers to provide their services to clients
of national electronic payments systems as a significant barrier to trade.
When Ukraine becomes a WTO Members, it must take on services
commitments in the context of WTO negotiations to maintain an open and
competitive banking system, including with respect to credit and debit
cards, with full market access to electronic payments services. At present,
Ukraine applies no formal restrictions. The United States continues to
monitor Ukraine's actions in this important area.
The government is working to streamline regulations and eliminate
duplicative and confusing laws regarding investment and business. In 2005,
Ukraine created several agencies in order to attract investment to Ukraine,
including the State Center for Foreign Investment Promotion (known as
InvestUkraine) and the State Agency for Investment and Innovation.
In 2007, the Cabinet of Ministers of Ukraine created the Council of
Investors, a government advisory body, and the Committee for Modernization
of the Investment Environment and Development of Capital Markets
Infrastructure, to be chaired by the Minister of Finance.
The United States has a bilateral investment treaty (BIT) with Ukraine,
which took effect in 1996. The BIT guarantees U.S. investors the better of
national and MFN treatment, the right to make financial transfers freely and
without delay, international legal standards for expropriation and
compensation, and access to international arbitration. Despite the BIT,
there are a number of longstanding investment disputes faced by several
These disputes mainly date from the early 1990s and the initial opening of
the Ukrainian economy to foreign investors. In most cases, however, there
has been little progress toward resolution of these cases under subsequent
Ukrainian governments despite intensive advocacy by the United States.
Ukraine currently maintains a corporate profit tax (25 percent), a personal
income tax (flat rate of 15 percent), a Value Added Tax (20 percent), and a
payroll tax (variable, between 36.66 percent and 49.6 percent) that funds
pension and social insurance programs. Many analysts single out the payroll
tax as being exceptionally high and the main reason why shadow wage payments
remain common in Ukraine.
Arrears in the payment of VAT refunds to exporters have also been a serious
problem. Ukraine decreased the pace of VAT refunds beginning in August
2006, reimbursing only 76 percent of verified claims, down from 87 percent
refunded in 2005. VAT refund problems continued in 2007, leading to calls
for an overhaul of the VAT reimbursement mechanism.
Industry claims that delays in reimbursements create opportunities for tax
officials to demand kickbacks in return for quicker processing of rebates,
and several companies reported being approached by "middlemen" who
claimed that, for a fee, they could speed up the reimbursement process.
Currently, the process for obtaining a refund of VAT payments can take
from 3 to 18 months for foreign companies. Increasingly, the delays in
reimbursement are becoming an important cost factor for many foreign
companies and are seriously affecting the profitability of planned
investments. Foreign companies have the right to use promissory notes
for the payment of VAT on inputs to goods destined for export.
Foreign investors complain that the tax regime for nonresidents'
representative offices is discriminatory. Funds transferred from a company's
foreign home office to its representative office in Ukraine as part of the
latter's operational expenses are taxed, while funds transferred from one
office to another within Ukraine are not.
Special Economic Zones (SEZs)
Ukraine has in the past maintained two forms of special economic zones
(SEZs): Free Economic Zones (FEZs) and Priority Development Territories
In April 2005, Ukraine canceled all tax exemptions (i.e., from land tax,
corporate income tax, import duty, and VAT on imports) to investors in all
SEZs to stop large-scale misuse of these zones for tax evasion and
While the step reduced corruption and expanded the tax base, the abrupt
cancellation of privileges and lack of compensatory provisions caused
losses to some legitimate investors.
In November 2005, the Parliament adopted legislation to create technology
parks, providing for some government financial support, targeted subsidies,
and tax privileges for a list of 16 technoparks based on existing scientific
and research institutes.
At the end of 2006, the Ukrainian government announced its intention to
renew tax privileges granted to businesses operating in some SEZs and to
introduce a compensation mechanism for investors, but a draft law on the
subject never went forward.
The State Property Fund oversees the privatization process in Ukraine.
Privatization rules generally apply to both foreign and domestic investors,
and, in theory, a relatively level playing field exists. Observers claim,
however, that a common abuse of privatization laws is the adjustment of
the terms of a privatization contest to fit the characteristics of a
certain, pre-selected bidder.
Few major, new privatizations have been conducted since the privatization
rush of 2004. As of September 2007, revenues from privatization were only
15.4 percent ($320 million) of the fiscal year's target.
In 2005, Ukraine revoked the privatization of the Krivorizhstal steel
factory, which had been sold to a group of domestic investors for $800
million, and subsequently sold it in a fair and transparent tender to Mittal
Steel for $4.8 billion, in what is generally viewed as Ukraine's most
transparent major privatization to date. Since then, Ukraine has taken no
further steps to reverse previous privatizations.
The few privatizations that took place in 2007 were often marked by
controversy. In March, the State Property Fund sold a majority share in
Luganskteplovoz (a Ukrainian locomotive manufacturer) to Russian-owned
CJSC Bryansk Machine Building Plant.
Only two related bidders were able to meet the tender requirements as set by
the State Property Fund, and the Fund may also have violated rules governing
the announcement of the tender, making it impossible for potential investors
to learn of the tender in time to submit bids. The President of Ukraine has
appealed the decision in court, claiming noncompetitiveness and lack of
transparency in the sale.
In August 2007, the state sold a 28 percent stake in Dniproenergo, a
regional electricity distributor, to the Donbas Fuel and Energy Company
(DTEK), owned by a Member of Parliament in the ruling coalition.
The sale was conducted as a controversial debt-for-shares swap, whereby
DTEK acquired the shares in exchange for covering a debt owed by
Dniproenergo to coal suppliers. Some experts claimed that DTEK acquired
the shares in Dniproenergo for only 30 percent to 40 percent of the market
In August, Ukraine announced its intention to move forward with the
long-awaited privatization of the Odesa Portside Plant, one of Ukraine's
largest chemical producers. The State Property Fund canceled the tender in
October, however, after the President complained that the tender plan failed
to include environmental safety provisions and could allow the formation of
a monopoly in the sector.
Ukraine's Parliament amended the Land Code of Ukraine in October 2006,
extending a moratorium on the sale of farmland until January 1, 2008. This
provision blocks private investors from purchasing some of the 33 million
hectares of arable land in Ukraine and constitutes a serious obstacle to the
development of the agricultural sector. As of October 2007, Ukraine had
failed to adopt new legislation necessary to open the land market. As a
result, the ban on the sale of agricultural land may be prolonged again.
Ukraine is currently experiencing an escalation in corporate hijacking
activity. Some researchers claim that as many as 2,500 Ukrainian enterprises
have suffered hijacking attempts in the last several years.
These hijackers frequently purchase a small stake in a company, and then
take advantage of deficient legislation, corrupt courts, and a weak
regulatory system to gain control of companies to the detriment of rightful
This development harms investors, including U.S. companies and shareholders,
and has damaged the image of Ukraine among foreign investors. The Ukrainian
government has recognized the seriousness of this problem and has taken some
limited steps to address it, convening a special state commission in
In May, Parliament passed in the first reading a draft law "On Joint Stock
Companies," considered critical to stopping corporate hijacking, but a
protracted political crisis prevented the law from moving forward.
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