UKRAINE BUSINESS NEWS - THREE ARTICLES
1. UKRAINE'S INSTABILITY THREATENS CRISIS, WEAKENS ITS
CANDIDACY FOR NATO, EU, WARNS COUNCIL ON FOREIGN
RELATIONS (CFR) REPORT BY STEVEN PIFER
Council on Foreign Relations (CFR), Washington/New York, Tue, Feb 24, 2009
2. UNAVAILABILITY OF CAPITAL & DEVALUATION OF THE HRYVNIA
ARE TOP PROBLEMS FOR UKRAINIAN COMPANIES ACCORDING
TO ERNST & YOUNG SURVEY (See attachment)
Natalia Partach, Senior PR Specialist, Ernst & Young, Kyiv, Ukraine, Tue, Feb 24, 2009
3. TAX ESSENTIALS UKRAINE..SHORT TAX GUIDE
DLA Piper Ukraine, Kyiv, Ukraine, Tuesday, February 24, 2009
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1. UKRAINE'S INSTABILITY THREATENS CRISIS, WEAKENS
ITS CANDIDACY FOR NATO, EU, WARNS COUNCIL ON
FOREIGN RELATIONS (CFR) REPORT BY STEVEN PIFER
Council on Foreign Relations, Washington/New York, Tue, Feb 24, 2009
WASHINGTON/NEW YORK - Ukraine's political infighting and tensions with Russia threaten its path to stability and integration with the West, warns a new Council on Foreign Relations (CRF) Special Report. "A more divided Ukraine would be less able to formulate a coherent foreign policy course with which the U.S. government could engage; it could even be driven to reorient itself on a more Moscow-focused course," says report author Steven Pifer, a visiting fellow at the Brookings Institution's Center on the United States and Europe and former U.S. ambassador to Ukraine.
On the crucial NATO question, the report, "Averting Crisis in Ukraine," urges the United States to support continued Ukrainian integration with the alliance, though it recommends waiting to back concrete steps toward membership until Kiev achieves consensus on this point. "What happens to Ukraine will matter to Washington," says the report, sponsored by CFR's Center for Preventive Action (CPA).
It says that the U.S. administration, "should maintain the goal of Ukraine's development as a stable, independent, democratic, and market-oriented country, increasingly integrated into European and Euro-Atlantic institutions."
Pifer analyzes the country's difficulties related to domestic conditions-such as fractious politics, a deeply divided public opinion, and economic recession. He also examines Russia's increasingly assertive foreign policy-including issues related to the continued presence and eventual withdrawal of Russia's Black Sea Fleet, Ukrainian and European dependence on Russia's energy, as well as Ukraine's potential membership in NATO.
"The Kremlin believes that an unstable Ukraine is in its interest. Such instability makes Ukraine an unattractive political model for Russians as well as an unattractive candidate for NATO or the European Union," says Pifer.
The report encourages the Obama administration to adopt a strategy that includes:
[1] Restoring regular high-level dialogue. "The administration should restore a high-level channel with Kiev. ...This could ensure that bilateral problems
are resolved in good time and offer a channel to convey candid, even tough, political messages."
[2] Counseling Ukrainian leadership. "Washington should quietly counsel [President Viktor] Yushchenko on choosing his fights with Russia in a
difficult political year. ...Washington must ensure absolute clarity in Kiev as to how much support Kiev can expect if it gets into a confrontation with
Moscow."
[3] Targeting technical assistance to promote economic opportunities in Sevastopol. "Drawing on the United States' experience with military base
closures, U.S. assistance should help to generate economic and business opportunities in Sevastopol so that the local economy does not face potential
devastation by the Black Sea Fleet's withdrawal."
[4] Increasing technical assistance to promote energy security. "Ukraine's energy dependency on Russia creates a major vulnerability. Washington
should target technical assistance to help Kiev adopt transparent arrangements for purchasing and transiting natural gas, expand domestic sources of
energy production, and allow energy prices within Ukraine to rise to market levels to promote conservation and greater domestic energy production."
[5] Supporting NATO integration. "The Obama administration should continue to support Ukraine's integration into NATO. However, given the
political turmoil in Kiev and allied reluctance to approve a membership action plan (MAP)," the administration should wait to support Ukraine's MAP
until it achieves "a greater degree of internal coherence on the NATO question, and [also builds] support among the elite and broader population."
For full text of the report, visit: http://www.cfr.org/content/publications/attachments/Ukraine_CSR41.pdf
Council for Foreign Relations Special Reports (CSRs) are concise policy briefs that provide timely responses to developing crises or contribute to debates on current policy dilemmas. CSRs are written by individual authors in consultation with an advisory committee. The content of the reports is the sole responsibility of the authors.
CFR's Center for Preventive Action (CPA) seeks to help prevent, defuse, or resolve deadly conflicts around the world and to expand the body of
knowledge on conflict prevention.
The Council on Foreign Relations (CFR) is an independent, nonpartisan membership organization, think tank, and publisher dedicated to being a
resource for its members, government officials, business executives, journalists, educators and students, civic and religious leaders, and other
interested citizens in order to help them better understand the world and the foreign policy choices facing the United States and other countries.
LINK: http://www.cfr.org/publication/18423/averting_crisis_in_ukraine.html
NOTE: Steven Pifer serves as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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2. UNAVAILABILITY OF CAPITAL & DEVALUATION OF THE
HRYVNIA ARE TOP PROBLEMS FOR UKRAINIAN COMPANIES
ACCORDING TO ERNST & YOUNG SURVEY (See attachment)
Natalia Partach, Senior PR Specialist, Ernst & Young, Kyiv, Ukraine, Tue, Feb 24, 2009
KYIV - The second Ernst & Young’s survey Impact of the Economic Crisis on Ukrainian Companies shows that 84% of the polled companies reported devaluation of the Hryvnia their top business issue. 66% are struggling with delayed payments by partners and clients; 54% are trying to reduce overall operating expenses while 53% are worried about the increased cost of financing (NOTE: for complete survey results see the attachment to this e-mail.)
Overall, 107 major Ukrainian and foreign companies working in Ukraine participated in the survey run by Ernst & Young with the support of the European Business Association from 30 January to 13 February 2009.
Analyzing changes that happened after September-October 2008, survey participants noted that most of all the following aspects of running business suffered: ability to access loans/capital (76% of the respondents), ability to invest in capital programs (70%), and cask position (69%). Meanwhile businesses also received new opportunities for development, though only 26% of the participants noted that.
Companies’ sales volumes continue to fall. 58% of businesses are already seeing lower quarter to quarter sales volumes in Q4 2008 than in Q4 2007.
Alexei Kredisov, Managing Partner of Ernst & Young, said “Today survey participants name decreased access to loans and capital and devaluation of the Ukrainian Hryvnia as their top problems.
"Here we witness Ukraine moving into the next phase of the economic crisis on the back of local finance and currency issues. Financing the business and cost reduction are at the top of the agenda.”
77% of companies reported that they will treat cost reduction with much more importance given the foreseeable market conditions. Businesses opt for traditional ways of reducing their costs: 80% of respondents reported they are reducing or have already reduced administrative expenses, 57% are negotiating better terms with landlords or property owners, 51% are streamlining their operations, and 47% are going through reductions in personnel.
Two-thirds of respondents are planning their 2009 budget in a currency other than Hryvnia. The Euro is the most popular currency, with 40% of respondents reporting they are going to use it. For budgeting and planning, the range of exchange rate used was surprisingly wide - between 7.50 and 13.20, the average was 10.40. 34% of businesses use the Ukrainian Hryvnia as a major budgeting currency.
Finally, 23% of respondents use the US Dollar for budgeting purposes. The exchange rates used range from 5.05 to 9.00, according to most of the respondents.
Adlai Goldberg, Business Advisory Services Leader with Ernst & Young Ukraine says, “Over the three month period since the last survey, profit outlook has sharpened, either significantly improving or worsening. Overall, the poll shows that the Ukrainian business community has become more pessimistic with regard to their business results in 2009.”
Most respondents (65%) anticipate lower profits in 2009 than in 2008: 39% of respondents anticipate moderately lower profits, while 26% expect profits to fall dramatically. Meanwhile only one-third expects the same level or even higher profits in 2009 than last year. (NOTE: See attachment to this e-mail)
ABOUT THE SURVEY
The second Ernst & Young questionnaire survey of the impact of the economic crisis on Ukrainian companies was conducted among companies working in Ukraine from 30 January to 13 February 2009. Overall, 107 companies participated in the survey; 18% were domestic enterprises and the other 82% were foreign companies working in Ukraine (multinational, European and regional).
50% of participants represent small businesses (up to 200 employees); 27% – medium businesses (200-1,000 employees); and big businesses (more than 1,000 employees) accounted for 23%. Companies that took part in the survey work in the retail and consumer products sector (18%), real estate and construction (13%), IT and telecommunications (13%), financial services (10%), and other areas. (NOTE: See attachment to this e-mail)
ABOUT ERNST & YOUNG
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential.
In Ukraine Ernst & Young established its practice in 1991. Ernst & Young Ukraine now employs more than 570 professionals providing a full range of services to a number of multinational corporations and Ukrainian enterprises. For more information, please visit www.ey.com/ukraine.
CONTACT: Natalia Partach, Senior PR Specialist, Marketing and Business Development, Ernst & Young LLC,
Khreschatyk Street 19A, 01001 Kyiv, Ukraine; Phone: +380 (44) 490 3000 ext 8714, Mobile: +380 (67) 659 0388
E-Mail: Natalia.Partach@ua.ey.com, Website: www.ey.com/ukraine
NOTE: Ernst & Young Ukraine is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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3. TAX ESSENTIALS UKRAINE..SHORT TAX GUIDE
DLA Piper Ukraine, Kyiv, Ukraine, Tuesday, February 24, 2009
KYIV - DLA Piper Ukraine has issued a new report entitled, "Tax Essentials Ukraine...Short Tax Guide." The entire report is published below:
CONTENTS ---------------------------
Corporate Profit Tax
Withholding tax on foreign legal entities
VAT
Personal income tax
Payroll Taxes
Other Taxes
Tax assessments and penalties
Foreign investment tax structuring
Exchange Controls
Challenging tax environment
DLA Piper Ukraine - Tax Team
OVERVIEW OF MAJOR TAXES
Corporate profit tax, including capital gains 25% *
Withholding Tax (Foreign legal entities) 15% *
VAT 20% *
Personal Income Tax 15%/30% *
Payroll Taxes around 41% **
* Different rates apply to some types of income, as explained in the relevant sections.
** Payroll tax base is capped at approximately UAH10k per month ($1.3K), therefore effective tax rate is less for midlevel and top salaries.
CORPORATE PROFIT TAX
Companies incorporated in Ukraine are recognised tax residents and taxed on their worldwide income. Permanent establishments of foreign entities are taxed on their Ukrainian-sourced income. Non-residents without a presence in Ukraine may be exposed to a withholding tax (see below).
The standard tax rate for residents and permanent establishments is 25%. Insurance companies apply a different tax regime, with either a 0% or 3% tax rate.
Tax accounting rules differ significantly from financial accounting rules. Many companies keep separate tax accounts and do not reconcile them with the IFRS or local statutory accounts. The effective tax rate is often higher than the nominal tax rate due to various restrictions in deducting operating expenses.
A tax year is a calendar year. Tax returns are filed quarterly, and an interim return is filed for 11 months. Tax is also paid quarterly and after 11 months. If a company pays out a dividend, an advance payment of corporate tax must be made simultaneously, at the rate of 25% on top of the dividend amount.
Tax losses may be carried forward indefinitely, according to the law. However, the government has introduced loss cutoffs and temporary limitations on several occasions, which may happen again in the future. Tax carry back is not allowed.
Anti-avoidance rules address transfer pricing, thin capitalisation and dealings with blacklisted tax havens. Yet, Ukrainian anti-avoidance measures are much less developed than those of Western jurisdictions.
WITHHOLDING TAX ON FOREIGN LEGAL ENTITIES
Dividends, interest and royalties paid to non-resident companies are subject to a 15% withholding tax. The same applies to capital gains, lease payments and certain types of service (engineering, agency). Income from transportation (freight) is taxed at 6%. A separate tax, payable at the expense of the Ukrainian entity, is levied on advertising fees (20%) and certain types of insurance income (12%).
Double tax treaties usually reduce or eliminate withholding taxes, but not the tax on insurance and advertising income. Ukraine has double tax treaties with other EU countries (excluding, however, Luxembourg, Ireland and Malta), as well as with the United States, several African, Middle Eastern and Asian countries, and CIS member states. Treaties are predominantly based on the OECD or UN model, however, the authorities seldom use the relevant
commentaries for their interpretation.
Tax reduction or relief under a treaty is granted upfront, provided that a valid tax residence certificate is available.
VAT
20% VAT applies to domestic supplies and imports. Export supplies are zero-rated. Crossborder services are taxed according to special rules that are not exactly in line with the standard approach adopted by the EU and other Western jurisdictions.
Exempt transactions include, inter alia, banking services, securities trading, medical services and supplies of pharmaceuticals, supplies of printed periodicals and transfer of land.
VAT returns are filed monthly and the tax is payable within 10 days after the filing deadline.
The VAT refund procedure is extremely inefficient and may last several years. To restructure its multimillion debt, the Ukrainian government has recently proposed to convert outstanding VAT refunds into five-year bonds which can be traded.
PERSONAL INCOME TAX
Residents are taxed at a rate of 15% on their worldwide income. Reduced rates apply to income from mutual investment funds (5%), disposals of passenger cars (1%), disposals of real estate (0% or 1%), certain types of gift and inheritance (0% or 5%). An increased rate (30%) applies to income from lotteries and prize drawings. Some types of fringe benefit may be exempt from tax, if properly structured.
Non-residents’ income from Ukrainian sources is, in principle, taxed at 30%. However, a 15% rate applies to interest, dividends and royalties. The tax on salaries of expatriate personnel is also often reduced to 15%. Double tax treaties may offer more attractive tax rates.
Salaries and other income from employment are taxed on a pay-as-you-earn basis. Employers are responsible for the proper calculation of tax and timely withholding. For income which is not taxed at source, individuals must file annual tax returns by 1 April of the following year.
PAYROLL TAXES
Social insurance contributions are paid by employers and employees. Currently, there are four separate charges (for retirement pensions, temporary disability relating to illness or pregnancy, unemployment and work accidents). The government announced plans to replace these with a unified social tax. As of December 2008, the average total charge makes 41% of the total payroll, of which 37.5% is paid at the employer’s expense and 3.5% is withheld from the salary.
The rate of work accident insurance varies from industry to industry depending on professional hazard levels. The tax base for social insurance contributions is capped at 15 times the official living wage. Currently, the cap is UAH10k, or $1.3k at the December 2008 exchange rate. Therefore, the
maximum possible charge is slightly above $500 per person.
The companies that do not meet the 4% employment quota for disabled people pay an additional charge equal to one average salary for each vacant position within the quota.
OTHER TAXES
Real estate transfer taxes apply to the transfers of land (1%) and other immovable property (2%), and are payable prior to the deal notarisation. Transfers of passenger cars are subject to a 3% tax.
The purchase of any foreign currency through a bank account gives rise to a special currency conversion tax (referred to as the Pension Fund levy) withheld by the bank. The tax rate is currently 0.2% of the transaction amount. Excise taxes apply to imports and domestic supplies of cars, tyres, alcohol, beer, tobacco and fuels.
Import customs duties are charged on most types of commodity. Privileged rates apply to imports from the WTO member states. Goods imported from the CIS member states and Macedonia are exempt from duty under the free trade regime, with some exceptions. Export duties apply only to a few groups of commodities (oil seeds, livestock, raw hides and metal scrap).
Other important taxes include land tax, car owner tax, environmental charges and some industry-specific taxes. Small businesses and agricultural companies may opt for an alternative simplified tax regime.
TAX ASSESSMENTS AND PENALTIES
Most taxes are levied on a self-assessment basis. The penalties for understating tax liabilities and late payment are very high, sometimes reaching 100% to 200% of the unpaid tax. An alternative 5% self-assessment fine applies when a taxpayer adjusts the mistake prior to a tax audit.
Certain tax offences give rise to a pledge on the total assets of a person or a temporary arrest of the bank accounts and other assets. Tax reassessments are possible within the 1,095-day statute of limitation. However, no limitations apply for withholding taxes and for the underpayments caused by tax evasion.
FOREIGN INVESTMENT TAX STRUCTURING
Foreign companies usually structure their Ukrainian presence through a resident limited liability company or a non-commercial representative office. Doing business through a branch or a partnership has not been popular due to the uncertainties in their tax treatment. As an exception, partnerships (referred to as joint activity agreements) are often encountered in oil and gas projects, for non-tax reasons.
The preferred holding jurisdictions are Cyprus and the Netherlands. Other treaty-protected countries are also used in tax structuring.
When purchasing shares of an existing Ukrainian company, a full-scale tax due diligence is recommended in all cases, as many companies would have material historical tax risks. An investment through an asset deal reduces the tax exposure. However, since capital gains on an asset transfer are subject to tax in Ukraine, sellers prefer to structure the transaction as a share deal, usually at an offshore level.
The tax incentives for foreign investment are very limited. The most important privilege is the full exemption from import customs duties which applies to in-kind capital contributions. There are also temporary incentives for certain industries (eg shipbuilding and aircraft) and incentives for energy-saving projects. Special economic zones existed in different parts of Ukraine but were abolished overnight in 2005.
EXCHANGE CONTROLS
Ukraine has a complex and restrictive system of exchange controls, which has been further tightened in response to the global financial downturn in order to prevent capital flight.
Some of the most important rules are listed below: Outward investment and lending, as well as some other crossborder transactions, may not be performed without a National Bank licence.
Ukrainian companies and individuals are not allowed to keep their money outside Ukraine without a National Bank licence.
Foreign currency may not be used for payments between Ukrainian entities.
Inbound investment should be registered to facilitate profit repatriation. In some cases, foreign investors are required to channel money via a special-purpose investment account in a Ukrainian bank.
Inbound loans must be registered with the National Bank prior to receipt. The National Bank establishes interest rate caps on such loans from time to time.
Service, licensing and lease agreements are subject to price controls when the contract value exceeds euro100,000.
Prepayments for imported goods and services may not exceed 180 days. Similarly, a delay in payment for exported goods and services may not exceed 180 days. Written contracts must be put in place for most types of crossborder transaction and the formal requirements for these transactions must be observed.
To purchase foreign currency, a company has to provide the bank with a set of supporting documentation, the scope of which is established by the National Bank.
CHALLENGING TAX ENVIRONMENT
The Ukrainian tax system has gone through many reforms over the last 17 years and is still evolving. The country has no tax code. Numerous tax laws and subordinate legislation are often contradictory, while the tax authorities are reluctant to issue official interpretations of the tax rules. Tax rulings are not binding and may be overruled by a senior tax authority or revoked. As a result, companies face continued uncertainty in their tax affairs.
A form-over-substance approach prevails in tax assessments. Excessive documentation is required to support routine expenses, and sometimes companies have to put considerable effort into explaining the rationale of more complex transactions to the authorities, where such transactions are not directly addressed in the law.
Tax audits are frequent and often result in unfair charges, as tax inspectors have informal collection targets for each audit. A non-transparent and inefficient court system makes the appeals against tax reassessments costly and time consuming.
Overall, the administrative burden of tax compliance is high. Ukraine has been rated 180th out of 181 countries surveyed by the World Bank Group for the ease of paying taxes.
At the same time, tax evasion is widespread and little is done to fight it. Corruption is often named as one of the major reasons behind low tax morale. In addition, tax authorities lack technical knowledge and professional skills to identify and eliminate tax fraud.
Despite all these challenges, Ukraine remains an attractive investment destination. By placing greater emphasis on the tax function and risk management, foreign investors can avoid tax pitfalls and achieve success with their Ukrainian projects.
DLA PIPER UKRAINE – TAX TEAM
[1] Svitlana Musienko, Legal Director, Head of Tax, T +380 44 490 9564, svitlana.musienko@dlapiper.com
[2] Yulia Logunova, Senior Associate, T +380 44 490 9587, lia.logunova@dlapiper.com
[3] Illya Sverdlov, Senior Associate, +380 44 490 9575, lya.sverdlov@dlapiper.com
[4] Dmytro Donets, Associate, +380 44 490 9575, ytro.donets@dlapiper.com
[5] Lilia Sylvestrova, Associate, +380 44 490 9575, lia.sylvestrova@dlapiper.com
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation. International Law Firm of the Year 2008 in Ukraine. Kyiv switchboard
T +380 44 490 9575
The matters covered in this guide are intended as a general overview. This guide is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper Ukraine LLC will accept no responsibility for any actions taken or not taken on the basis of this guide. If you would like further advice, please contact the Tax Team at +380 44 490 9575.
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com/structure. A list of offices can be found at www.dlapiper.com. Ukraine Switchboard +380 44 490 9575.
NOTE: DLA Piper Ukraine LLC is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.