Investments In Ukraine: An Overview Of Available Tools And Future Tasks

Investors working in Ukraine face a number of serious obstacles. On the one hand, Ukraine offers them special stimulating tools, and on the other hand, the list of what needs to be done is many times longer than the list of what has already been done.

To attract direct investment, Ukraine has introduced special investment regimes, such as state incentives for industrial parks and the special legal regime Diya.City. Along with these comprehensive investment support programs, Ukraine also offers various investment incentives for priority sectors of the economy. Some of them were introduced even before the start of the
war, others – after its beginning.

In the IT sector, the Law On Stimulating the Development of Digital Economy in Ukraine introduced the concept of a virtual economic zone known as Diya.City.

The Diya.City virtual economic zone offers a variety of benefits to its residents, including a special corporate income tax regime under which they can pay a 9% tax on withdrawn capital instead of the 18% income tax that applies to everyone. Residents are also entitled to 0% tax on dividends accrued by a resident company, provided they are paid biennially. The zone also provides tax breaks for investments in Ukrainian startups and allows a new form of cooperation between residents and IT specialists through the so-called gig contracts where specialists pay 5% personal income tax and can include clauses such as non-disclosure obligations , non-competes and foreign currency awards. Diya.City also provides venture investment tools, such as the right to increase the company's authorized capital through a convertible loan mechanism, employee stock ownership plan mechanisms, guarantees, liquidated damages provisions, etc.

The work of industrial parks is governed by the Law On Industrial Parks and by-laws, which provide for a number of measures to support the development of industrial parks in Ukraine. The legislation determines the requirements for the creation, management, and operation of industrial parks. A number of incentives are provided for management companies, initiators, and participants of industrial parks, inter alia, the following:

• compensation of interest rates on loans taken out for the creation or conduct of business activities within the park;
•  non-refundable funding for the development of the park and related infrastructure;
•  ten-year exemption from corporate income tax on condition of reinvestment of funds, exemption from paying VAT when importing equipment for park participants;
•  preferential rates of land tax and others.

In Zakarpattia (Transcarpathia), industrial parks are registered in Solomoniv (automotive industry) and Solotvyn (Maramuresh park relates to woodworking and furniture industry). Also, in Kamiansk, the industrial park plans to deal with logistics and processing of agricultural products and is already in the final stage of its creation. In Uzhgorod, the industrial park is also at the final stage of construction. Building materials and industrial housing will be produced here
from perlite insulation.

In agriculture and processing of agricultural products in Ukraine, there’s a state program Affordable loans 5-7-9%.

A well-known large-scale initiative to attract investments to Ukraine was provided for by the Law On State Support of Investment Projects with Significant Investments, or simply so-called investment nannies, which was adopted in January 2021. The idea was to provide investors with tax and customs benefits in order to encourage them to invest significant funds in Ukraine, namely, the minimum amount of investment should exceed the hryvnia equivalent of 20 million euros at the NBU exchange rate.

More than two years have passed since the introduction of the so-called investment nannies initiative, but so far it has not achieved any success. The beginning of the war may be an explanation for this. For example, three out of five applicants were submitted to the Ministry of Economy at the end of 2021, and the process was stalled due to the war. Currently, companies are updating calculations and waiting for the end of the active phase of the war, two more
applications were received during the war, precisely at the end of December 2022 – the beginning of January 2023.

Of course, in order for this mechanism to win the trust of businesses, it is necessary to create comprehensive and transparent by-laws and practices, as well as to correct the existing shortcomings and inconsistencies in the legislation.

There are also several areas that clearly need some improvement in order to increase investment attractiveness in the post-war period.

First of all, it is extremely important to increase the transparency of public procurement. Businesses need to know that public procurement processes are fair and in line with international best practices. This involves further increasing transparency, banning discriminatory tender conditions, and improving the appeals mechanism. A business should feel that it can effectively defend its rights both in the Antimonopoly Committee of Ukraine and in court if it believes that the public procurement process is unfair or biased. Without this, it will be difficult to attract large international companies to participate in reconstruction tenders held by Ukrainian state institutions, state, or utility companies.

Another thing worth paying attention to is the improvement of public-private partnerships. The government should ensure that the public-private partnership is structured in such a way that it is beneficial for both parties. This will help strengthen confidence among businesses and increase the attractiveness of investment opportunities in the country. First of all, it is expedient
to retain ownership of the newly created or reconstructed object for the private partner until the partnership agreement expires, for which it is necessary to make appropriate changes to the legislation.

In addition to the above, we should mention certain general rules applicable to private investors.

Investors looking to invest in Ukraine need to consider several important factors to ensure proper structuring and investment protection. First of all, in order to achieve the planned goal of the transaction, it is extremely important to conduct a pre-investment audit (due diligence). Quite a few Ukrainian enterprises have historical risks that must be eliminated before closing the deal or otherwise accounted for in the deal documents.

Another sensitive area is the creation of joint ventures, as it is often found that business practices and expectations of partners may differ. Proper regulation of legal relations between partners is important for any investor. This includes having well-drafted legal documentation such as the Shareholder Agreement (SHA), option mechanisms, security instruments (UBO guarantees, etc.), as well as business plans and other operational documents.

In addition to the SHA and other transactional documentation, it is also important for investors to have adequate operational control over their investments and company operations. This may include the appointment of one of the directors (board members to oversee investments), access to bank accounts and financial records, etc.

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No investment conference will produce tangible results without painstaking planned work in the country. Authorities must remember that every existing or potential risk directly affects the investor’s choice of jurisdiction to operate. Currently, many investors choose to use a holding company registered in a foreign jurisdiction to protect their investment. Foreign jurisdictions have a number of international conventions aimed at protecting investments, and the provisions of these conventions can be invoked if the state violates the investor’s rights. This is the assessment that current Ukraine receives from them.

In addition to work on the actual investment instruments, such long-awaited changes can improve this assessment. Final reform of the judicial system, effective fight against corruption, prevention of abuses by state bodies in relation to business, predictable state policy and a stable legal environment are key prerequisites for success in attracting investments to Ukraine.

Read this article by Serhii Benedysiuk in  russian  and  Ukrainian.