EBRD activities in Ukraine - FiFo Ost

chemicals, pharmaceutical products, veterinary medecines,
cosmetics and hygiene products. The main forms of foreign
participation are a full partnership, a limited partnership, a joint
stock company, or a limited liability company. Foreign investors
are guaranteed the right to repatriate profits in foreign currency,
as well as the original investment, unimpeded, if they have
registered with the authorities.
The hryvnia is not yet fully convertible. Of total hard-currency
receipts, 50 per cent generally need to be converted into
hryvnias through the interbank currency exchange. However,
most current-account transactions can be made through the
Ukrainian banking system without authorisation. Approval from
the NBU is required for capital account transactions, such as
loans abroad or loans from foreign sources. The NBU's
Regulation No. 602 (May 2000) provides Ukrainian residents
with an avenue for obtaining foreign currency loans and building
their creditworthiness on international markets. At the same
time, foreign investors no longer need to invest large amounts
of cash into the charter funds of their Ukrainian joint ventures.
Instead, they may contribute the minimum statutory amount to
their business venture's authorised capital and provide
loans/credit for the expansion of the Ukrainian business
venture's activities on the international market.
Recent legislation aims to improve the investment climate.
The passage in 1999 of the laws on production sharing and on
concessions aims to provide investors with incentives to invest
in natural resources and in infrastructure respectively. In addition,
in February 2000 a law was adopted introducing the concept of
national treatment for foreign-owned enterprises with respect to
tax and currency regulations. New regulations to further protect
minority shareholders against dilution of their stakes, issued by
the securities market regulator, took effect in October 2000 (see
Financial sector below). Legislation in the field of industrial
property and copyright is making good progress.
The extent of regulation, the tax burden, difficulties in
enforcing contracts, and corruption remain the main obstacles
for business in Ukraine, according to most surveys. An IFC
survey of SMEs, conducted in the three months to February
2000, indicated that government interference (especially
inspections), a high tax burden and difficulties in gaining
access to credit are among the main obstacles. However,
the earlier introduction of a simplified tax system for SMEs
has reduced the costs of tax compliance.
The new proposed Tax Code is more investor-friendly than the
current regime. The bill, which is still in discussion in the
Verkhovna Rada, proposes tax cuts, such as the reduction
of corporate tax from 30 to 20 per cent and of VAT from 20 to
15 per cent, simplification of the system by considerably
reducing the number of taxes, and extension of rights to appeal
(see Taxation and social expenditure below).
Special Economic Zones (SEZs)
Investment climate
Special (free) Economic Zones (SEZs) have been increasingly applied
as a vehicle for generating investment. The 1992 law on the
framework and principles for SEZs was made redundant by a series
of case-specific laws establishing separate tax holidays for individual
zones. In 1999 the government decided not to establish any more new
zones until a review of the entire process had been completed.
In spring 2000 the government approved regulations governing the
new Interport Kovel SEZ near the Polish border, which came into being
on 1 January 2000. The new regulations detail the documentary and
other requirements for investors who want to set up in the SEZ, and
also set out the way in which it will be managed. The zone's
administration will report to a council for its development, to include
representatives of the economy and transport ministries and of the
customs and tax services. Other SEZs in operation include
Zakarpatska, Lviv (Truskavets and Yavoriv SEZs), Kyiv (Slavutich SEZ),
Poltava (Kremenchuk SEZ), Odessa, Donetsk/Lugansk and the
Crimean Autonomous Republic (Sivash SEZ).
Typical incentives granted to enterprises located within a SEZ are likely
to include exemption from customs duty (and sometimes VAT) on
goods and services brought into Ukraine, lower corporate profit tax,
a reduction of tax on non-resident profits from investment activity, the
abolition or reduction of payments and fees into social security and
pension funds, and exemption of all foreign currency revenues from
sale of goods and services produced in the SEZ from mandatory
currency sale to Ukrainian banks on the interbank currency exchange.
For establishing a business within an SEZ investors are generally
obliged to invest a designated sum (from US$ 200,000 to
US$ 1 million), to build specific infrastructure elements, and to
ensure employment of local labour (50 per cent of the jobs created).
All investment-related business projects would typically have to be
aimed at job creation, the introduction of new technologies and
environmental protection. The life of an SEZ ranges from five
to 60 years.
In autumn 2000, the President signed a decree on additional
measures to strengthen the war on corruption and other illegal
actions in the socio-economic sphere. The Cabinet of Ministers
and other central bodies of executive power were instructed to
take additional effective and concrete measures to fight
Ukraine Investment Profile 9