Forms of Business Representation of Foreign Investors

The forms of business representation most commonly used by foreign investors in Ukraine are joint stock companies, limited liability companies and representative offices.

A joint stock company is a legal entity whose capital is divided into a specified number of shares and which must have at least two shareholders. There are two types of joint stock company: "open" joint stock company and "closed" joint stock company. Shares in an open joint stock company may be offered to the general public and traded on a stock exchange, whereas ownership of shares in a closed joint stock company is limited to the founding members. The minimum capital requirement for a joint stock company is 1,250 minimum salaries (currently equal to UAH 500,000).

A limited liability company does not have shares in the usual sense. Participants in the company own a percentage of the company's capital on the basis of a written agreement between at least two founding participants. The minimum capital requirement is 100 minimum salaries (currently equals UAH 40,000). The liability of the participants in respect of the company's debts is limited to the value of their individual contributions.

A foreign company can establish a representative office in Ukraine, which is similar to an un-incorporated branch. The representative office does not constitute a legal entity and operates in Ukraine on behalf of the foreign company it represents. A non-resident company operating a representative office is deemed to be conducting business activity in Ukraine through a permanent establishment and may be subject to corporate profits tax unless protected by a double taxation treaty.

Taxation
The principal taxes in Ukraine are corporate profits tax, personal income tax, Value Added Tax, payroll taxes, excise tax, land tax, and import duties. Other taxes and charges include tax on owners of motor vehicles, stamp duty, royalties on oil and gas extraction; charges for the exploitation of natural resources, charges on environmental pollution and charges for retail trade patents. In addition, there are 16 different specific local taxes that may be levied by the local authorities.

The Tax Code, which is in the process of elaboration, is expected to introduce considerable changes into the Ukrainian taxation system.

A uniform profit tax at the rate of 25% applies to taxable profits earned by resident entities and permanent establishments of foreign companies. A special tax regime applies to Ukrainian insurance companies. Taxable profits are defined as adjusted gross income (taxable income) less allowable gross expenses (deductible expenses) and depreciation charges.

Residents of Ukraine are subject to personal income tax on their worldwide income. Ukrainian and foreign individuals are residents in Ukraine for personal income tax purposes if they are physically present in Ukraine for not less than 183 days in a calendar year. Personal income tax is levied at the rate of 13%. Non-residents are taxed only on their Ukrainian-source income (income actually paid by a Ukrainian registered entity, income derived from property located in Ukraine). Employers are required to withhold personal income tax and state pension and social insurance contributions from compensation paid to their employees.

Sale of goods, works or services in Ukraine; import of goods, works or services into Ukraine; and export of goods, works or services from Ukraine are subject to Value Added Tax. VAT is levied at two rates: 20% on domestic sales of goods and services, and imports of goods, works and services; and 0% on export of goods and provision of works or services to be used outside Ukraine; sales via duty free shops; international transport services. Transactions that are not subject to VAT include issue, sale and exchange of securities; certain financial services; provision of financial loans and bank guarantees; insurance and re-insurance services; lease payments under financial lease agreements, cash payment of dividends, royalties and other.

Excise tax is applied to a limited range of goods imported into or produced in Ukraine, including: alcoholic beverages, beer, tobacco and tobacco products, cars, petrol, diesel fuel and jewellery.

Owners or users of land are subject to a land tax. The rate depends on the nature and location of the land, and is paid annually.

Income earned by non-residents from Ukrainian sources is subject to withholding tax at the rates of 15% or 30% depending on the source of the income. However these rates are substantially lowered by respective bilateral tax treaties of Ukraine with near 50 countries worldwide. For instance, according to the Ukraine-Canada tax treaty withholding tax rates are 5/15 per cent for dividends and 0/10 per cent for interests and royalties.

Regime for Foreign Investments
The Law of Ukraine On Foreign Investment Regime is the core legislative act regulating the foreign investments into the country. The Law provides that national regime of investment and business activity applies to foreign investors. In most instances the law provides for equal treatment of foreign and Ukrainian-owned businesses. However, there are certain restrictions for foreign investments in publishing and broadcasting sectors. Foreigners are not allowed to participate in the manufacturing of weapons or alcoholic spirits. Ukraine has concluded investment protection and promotion treaties with approximately 50 countries worldwide (incl. Canada).

Investment protection under current Ukrainian legislation includes the following guarantees:
? protection for a period of 10 years against adverse changes to the legislation;
? investments cannot be expropriated, except in case of national emergency and with proper compensation;
? compensation for losses due to negligence of state bodies; and
? the right to repatriate the original investment in the event of termination of the investment.

Foreign investors are entitled to repatriate profit, income or other funds relating to investments without any restrictions, after the payment of any taxes due.

In order to attract foreign investments into the country there have been a number of investment incentives introduced in the Ukrainian legislation. Property (except for goods for re-sale) contributed by a foreign investor to the statutory fund of a Ukrainian entity can be imported free of import duty. In addition, exemption from import VAT is available for fixed assets imported into Ukraine as an in-kind contribution to the statutory fund of a Ukrainian legal entity.

Direct foreign investments
In the course of the year, direct foreign investments grew 1.8 times - mostly, thanks to results of the fourth quarter. In 2005, foreign companies and organizations brought USD 7,868.1 mn of direct investments to the economy of Ukraine, while non-residents withdrew capital worth USD 375.2 mn. As of January 1, 2006, aggregate volume of direct foreign investments made USD 16,375.2 mn, per capita figure making USD 349.

By and large in 2005 foreign capital increased by USD 7,328.2 mn, or 81% against investment volumes recorded at the beginning of the year.

Direct foreign investments to Ukraine arrived from 118 countries of the world. The largest volumes were contributed by non-residents of Germany - USD 5,505.5 mn (33.6% in total volume), Cyprus - USD 1,562.0 mn (9.5%), Austria - USD 1,423.6 mn (8.7%), the USA - USD 1,374.1 mn (8.4%), the United Kingdom - USD 1,155.3 mn (7.1%), the Russian Federation - USD 799.7 mn (4.9%), the Netherlands - USD 721.8 mn (4.4%), British Virgin Islands - USD 688.7 mn (4.2%), Switzerland - USD 445.9 mn (2.7%), and Poland - USD 224.0 mn (1.4%).

The companies, which have investment attractiveness, are involved in fast turnover sector, for instance, wholesale and commercial intermediation - 10.8% of the total investment volume; metallurgy and metal working industry - 7.5%, as well as foodstuff and agricultural produce processing - 7.1%. Investors are also interested in enterprises running financial activities - 6.4% of total investments; dealing with real estate, lease, and services to legal entities - 5.7%; transportation and communication companies - 4.5%, machine building - 4.2%, as well as chemical and petrochemical industries - 3.6%.

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