With effect from January 1999, favourable investment and tax regimes were introduced for:

• two special economic areas (SEA) "Donetsk" and "Azov", located south of Donetsk and Mariupol cities, respectively (eastern Ukraine). These SEAs will exist for a period of 60 years.
• a number of cities in the Donetsk region were defined as areas of priority development (APD). APDs will exist for a period of 30 years; and
• investment projects in the Zakarpatsky region (western Ukraine, at the border with Hungary and Slovakia) for a period of 15 years.

The tax concessions available to business entities operation in these regions vary from region to region, but the key elements may be summarized as follows:

• exemption form import duty and import VAT;
• exemption from corporate profits tax or taxation at reduced rates;
• reduced rates of withholding tax on income derived by non-residents and on dividends; and
• exemption from mandatory conversion of revenues in foreign currency.

There are several draft laws, which propose introduction of various incentives for investments in certain locations within Ukraine.

 Product sharing, concessions

 The Government of Ukraine has taken new important steps to attract foreign investment. These measures provide for regulation of the special relationship with investors (product sharing, concessions). The following changes were implemented in the field of investment activity regulation:

• relations concerning product sharing of extracted under-ground resources throughout Ukraine were adjusted;
• terms of concessions of state and communal property were determined.

The Law "On product sharing" dated September 14, 1999 will have a significant impact on the investment climate in Ukraine. This law regulates relationships regarding the process of drafting, execution, and expiry of agreements on product sharing. According to these agreements, Ukraine charges investors for searching, prospecting, and extracting mineral resources at a determined site of underground resources; and the investor is responsible for fulfilling assigned operations at its own cost and risk, with further expense compensation and pront in the form of a share of the product.

The law creates the following conditions and benefits for investors:

• The agreement on product sharing is signed with the winner of a tender, held according to lawful procedure and creating equal starting conditions for all potential investors.
• Regarding parties' rights and responcibi1ities determined by the agreement on product sharing, the state guarantees application of the laws currently in effect on the date of the agreement, for the whole term. This regulation considerably reduces investor risks.
• Investors are not subject to normative and legal acts of executive and local authorities if these acts restrict investors' rights as determined by the agreement on product sharing, with the exception of orders of state bodies controlling and supervising underground resources usage.
• The state rejection of judicial immunity, immunity from preliminary subpoena, and court decision execution is provided in agreements on product sharing drafted with the investor's participation.
• Requisitioning from bank accounts opened by investors throughout Ukraine for servicing activities defined by the agreement on product sharing cannot be made without acceptance.
• Job placement of foreigners employed by investors in Ukraine, within the limits and professions determined by the agreements on product sharing, can be done without seeking permission to hire.

On the other side, the law establishes norms restricting investor activity freedom. The law defines that the agreements on product sharing should address the following investor responsibilities:

• preference to Ukrainian products, work, and services under equal terms of price, schedule time, quality, and compliance with international standards;
• employment predominantly of Ukrainian citizens throughout Ukraine for carrying out jobs determined by the agreement.

The Law of Ukraine "On concessions" dated July 16, 1999 is another important framework law. The law defines the meaning of a concession of state or communal property, and terms and procedure of its fulfillment. According to the law, a concession is the right to the construction and/or running of a concession granted to business entities by authorized executive or local authorities on a paying basis for a fixed period. The law specifies a list of fields of economic activities of state enterprises able to be provided at a concession. The list is long and contains sectors which are attractive for investment, in particular municipal infrastructure sectors.

The Cabinet of Ministers approves the list, while decisions on the concessions are made on basis of concession competitions. Thus, the law creates new opportunities for investment activity.

Property ownership

Foreign companies and individuals cannot directly own land in Ukraine, but they are able to lease land from a local authority for a period of up 50 years. In principle the foreign investment law allows the authorities to grant concessionaire rights to use land and natural resources for up to 99 years; however, the draft law has been delayed and the provision has yet to come into force.

Buildings and flats can be purchased or leased from the state or private companies and individuals. However, the process is often complicated by confusion about legal title and dogged by bureaucratic delay. Recent regulations have improved the process of verifying and transferring legal title, and this will be further improved by the creation of a land registry. Ownership of a building normally gives the owner a right to use the underlying land for as long as the building stands. Subject to approval of the relevant authorities, it may be possible to demolish a building and replace it with a new structure.

Although in principle a Ukrainian-registered company, which is owned by a foreign company or individual, may own non-agricultural land, this is not common in practice because a mechanism for land privatization has not yet been developed.

Environmental protection

Ukraine has adopted laws to prevent or reduce industrial pollution and control harmful substances. Under the 1991 Environment Protection Act, companies are required to keep records about discharges of harmful substances into the environment and their compliance with targets for pollution and the use of natural resources. If demanded, information must be given to the relevant authorities free of charge. In general, legal entities usually have a duty to:

• conduct environmental audits before beginning industrial activity;
• comply with established environmental regulations and discharge limits, including rules governing the disposal and handling of waste and harmful substances; and
• pay compensation for the use of natural resources and for pollution or other damage caused to the natural environment.

Anti-monopoly regulations

Strict controls are placed on the creation of new businesses and on mergers and acquisitions of existing businesses, which lead to a concentration of market share. Written approval from the Anti-Monopoly Committee (AMC) must be obtained prior to the incorporation of a new company, or the formation of a contractual association between existing companies, in cases where:

• the aggregate value of the assets or sales turnover of all participants exceeds the equivalent of US$12 million and the assets or sales turnover of at least two of the participants are worth more than US$600,000 per each of participant;
• the market share of one of the participants exceeds 35% of a specific market; and
• the market share of the entity created will exceed 35% of a specific market.

Approval of the AMC is required before the direct or indirect acquisition of shares in a company if the aggregate value of the shares acquired exceeds US$100,000 and the acquisition breaches thresholds of 25% or 50% of voting rights. If 10% or more of a company's shares are acquired on the stock exchange, or at an auction, the AMC must be notified within one month of the transaction being completed.

The anti-monopoly regulations are changing rapidly, and the authorities enforce them with vigour. Ensuring that an investment complies with the regulations is an indispensable part of any due diligence exercise, especially in the case of high-profile or large-scale investments.

 Joint ventures

A joint venture (JV) can take the form of a company, which has a distinct legal personality, or an un-incorporated entity, which does not.

If an un-incorporated joint venture agreement is concluded between a resident and a foreign entity, it must be registered with the state authorities. The management of the venture is normally delegated to one of the parties. An un-incorporated JV does not have the status of a separate legal entity. However, it is treated separately for tax purposes and its operating partner is required to file separate reports in respect of the JV's operation. Profits of a JV are subject to 30% withholding tax, and profits distribution is treated as dividend payments for Ukrainian tax purposes.

The activities of the venture, the use of the property contributed by the parties to the JV, and the distribution of profits generated by the venture are governed by the terms of the JV agreement.

Greenfield investments

Greenfield investments can be undertaken through any legal form allowed by current Ukrainian legislation (see below).

 The forms of business representation most commonly used by foreign investors in Ukraine are joint stock companies, limited liability companies and representative offices. Other types of legal entities available under Ukrainian legislation include various types of partnerships, which, however, are not common.

Joint stock companies

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. The assets of a joint stock company are owned by the company. Shareholders enjoy certain rights arising from ownership of the shares, such as the right to receive dividends, participate in management, and receive a share of residual assets on the liquidation or dissolution of the company.

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. A closed joint stock company may be converted into an open joint stock company by amending its articles of association and founding agreement.

The minimum capital requirement for a joint stock company is UAH 92,500. At least 50% of the share capital of a closed joint stock company must be paid up before the company. s registration. Shareholders' liability is limited to the amount paid for the shares. The statutory bodies are the general meeting of shareholders and a board of directors, which is responsible for the day-to-day management of the company. The shareholders may decide to appoint a supervisory board to oversee the actions of the directors. Where a company has at least 50 shareholders, the appointment of a supervisory board is compulsory.

Limited liability companies

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 members. The minimum capital requirement is UAH 46,250, at least 30% of which must be paid up before the company is registered. The liability of the members in respect of the company's debts is limited to the value of their individual contributions. Limited liability companies are managed by a board of directors appointed by the general meeting of members.

Representative offices

A foreign company can set up a representative office in Ukraine, which is similar to an un-incorporated branch, subject to registration with the state authorities. 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.

Property, except consumable goods, used by a representative office in the course of its operations, and the personal effects of its expatriate employees, may be imported to Ukraine on a temporary basis, free of customs duty.

 The registration of companies is handled by the company registration departments of state district administrations. A registration certificate must be issued within five business days of the requisite documents being filed with a department; however, the regulations are applied with varying degrees of consistency between authorities. By election, an accelerated registration procedure is available which can be completed within one business day.

Companies registration

To register a joint stock company and a limited liability company the following documents must be filed with the company registration department of a state district administration:

• minutes of the meeting of the founders regarding establishment of the company;
• the founding agreement and company statue;
• documentary evidence of the registration of the founder (if a legal entity);
• evidence that the required minimum percentage of the statutory capital has been paid prior to the registration;
• evidence that the registration fee has been paid; a duly completed registration form; and
• lease agreement, purchase agreement, etc. evidencing the legal address of the company.

After registration, the founders must appoint a board of directors who then open the company's bank accounts, register the company with the tax office and the Ministry of Statistics and complete other formalities.

In cases outlined by Ukrainian legislation, foundation of a company requires the consent of the Antimonopoly Committee of Ukraine.

Representative offices registration

At the time of writing the procedure for setting up a foreign company's noncommercial representative office in Ukraine involves registration with the Ministry of External Economic Relations and Trade. The registration is subject to a fee of US$2,500 and takes a maximum of 60 days from the date of the submission of the following documents:

• a written application drafted in accordance with a prescribed format;
• power of attorney authorising a representative to act on behalf of the founding company;
• documentary evidence of the company's registration; a letter of good standing from the bank; and
• evidence that the registration fee has been paid.

The registration documents must be notarised according to the laws of the country of issue, translated into Ukrainian by a certified translator, and legalised by a Ukrainian embassy. After taking out a registration certificate, a representative office must register with the local tax office and other relevant authorities.

No registration with the Ministry of External Economic Relations and Trade is required for a commercial representative office, which is supposed to constitute a taxable permanent establishment of a foreign company. In this case a permanent establishment must be registered with the local tax authorities prior to undertaking profit-generating activities.

Setting up a representative office (including a branch) of an existing Ukrainian company does not require state registration. However, the founding company must issue a charter governing its status and a power of attorney for the director. Where the representative office is located in the territorial community other than the head company, it may be treated as a separate taxpayer and should be registered with the local tax and other relevant authorities.

A major reform of the tax system was undertaken in 1997. The reform aimed at increasing government revenues by reducing the number of special tax exemptions and simplifying and streamlining compliance procedures. The reform is expected to be completed in the year 2000 when a new tax code will be introduced. The principal taxes and compulsory payments in Ukraine are as follows:

• corporate profits tax
• personal income tax
• Value-Added Tax
• payroll taxes
• excise tax land tax
• road tax
• tax on owners of motor vehicles
• innovation fund charge
• import duties

Other taxes and charges include stamp duty, royalties on oil and gas extraction, tax on non-regular trade at the "flea market", charges for the exploitation of natural resources, environmental pollution and charges for retail trade patents. In addition, there are 16 different local taxes that may be levied at the discretion of the local authorities.

Corporate profits tax

The current corporate profits tax regime was introduced by the Corporate Profits Tax Law dated 22 May 1997 effective from 1 July 1997. Under the law, a uniform tax at the rate of 30% applies to taxable profits earned by resident entities and permanent establishments of foreign companies. For domestic insurance companies, tax is levied based on adjusted gross income at the rate of three percent.

Taxable profits

Taxable profits are defined as adjusted gross income less allowable gross expenses and depreciation charges. Gross income includes any sales or non-sales income received or accrued within a reporting period (i.e. quarter). Gross income is deemed to be received at the earlier of shipping the goods or rendering services to the customer, and receiving payment from the customer. Gross expenses include any expense actually incurred or accrued in respect of the taxpayer's business excluding non-allowable expenses specified by the law. Gross expenses are recognized either at the date of payment to a supplier (contractor) or at the date of obtaining ownership of the goods, works or services, whichever occurs first.

Ukrainian source income

Ukrainian source income is defined as any income received by a resident or nonresident entity from any activity in the territory of Ukraine, including interest, dividends and royalties; leasing income in respect of property located in Ukraine; income from the disposal of real estate located in Ukraine; insurance and re-insurance payments and premiums relating to risk insurance in Ukraine; and other income arising from commercial activity conducted in Ukraine or customs bonded warehouses.

Non-resident entities and permanent establishments of non-resident entities, which receive income from Ukrainian sources, qualify as taxpayers for Ukrainian corporate profits tax purposes.

Permanent establishments

The Ukrainian definition of a permanent establishment fully corresponds to the provisions of OECD Tax Convention Model of 1992 and includes:

• a fixed place of business through which the business activity of a non-resident entity is wholly or partly carried on in Ukraine. A permanent establishment includes: a place of management, a branch, an office, a plant, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; and
• a Ukrainian resident business entity which has the authority to act in the name of a non-resident entity and which results in civil rights and obligations for the non-resident entity (e.g. conclude contracts in the name of a non-resident; maintain a stock of goods belonging to the non-resident for supply on behalf of the non-resident). A resident is defined as a legal entity or business entity without a status of a legal entity (e.g. a branch, a representative office etc) incorporated and acting in accordance with Ukrainian legislation.

Taxable profits of a Ukrainian permanent establishment can be determined by applying:

• the direct method, i.e. the difference between the gross taxable income (i.e. income attributable to the permanent establishment received onshore or offshore) and allowable expenses incurred by the permanent establishment (i.e. expenses incurred onshore);
• the allocation method, based on data provided by the parent company about the permanent establishment's share of worldwide expenses, number of employees, fixed assets and working capital. (Used by non-resident entities which operate both in Ukraine and in other countries and which do not determine profits from activities carried on through a permanent establishment in Ukraine); and
• the notional method, which involves applying a notional margin of 30% to gross revenues earned in respect of activities in Ukraine.

Depreciation

Quarterly depreciation charges are applied on the basis of the reducing balance method to the following three groups of fixed assets:

• Group 1 (buildings) - 1 .25%
• Group 2 (transport vehicles, furniture, office equipment, household equipment, optical, electronic and electric appliances, information networks systems including computers, telephone sets) - 6.25%
• Group 3 (all other assets) 3.75%

For newly purchased Group 3 assets accelerated depreciation is allowed over a seven-year period by election.

Intangible assets may be depreciated by using the straight-line method over the useful economic life of the asset up to a maximum of 10 years.

Transfer pricing

Transactions between related parties are subject to scrutiny of transfer pricing regulations.

Related parties include:

• a legal person that exercises control over the taxpayer, is controlled by the taxpayer, or is under common control with such taxpayer;
• an individual or member of a family of that individual who exercises control over a taxpayer; and
• a company official who is authorized to execute, in the name of the company, binding legal agreements, and family members of such an official.

The exercise of control over the taxpayer means holding, directly or indirectly through a number of related entities, the largest participating interest (shares) in the charter fund of the taxpayer, or control the majority of votes in the governing body of such a taxpayer, or possession of participatory interests amounting to at least 20% of the charter fund of the taxpayer.

For tax purposes, the following rules apply where the taxpayer is engaged in transactions with related parties:

• income received by a taxpayer from transactions with a related party is determined based on contractual prices which cannot be less than the usual market prices on the date of the transaction;
• a taxpayer's expenses in connection with the purchase of goods or services from a related entity are determined based on contractual prices which cannot exceed the usual market prices on the date of the transaction;
• if a service fee is paid to a related party, it is tax deductible only if there is documentary evidence that the fee was paid in respect of services actually rendered; and
• the taxpayer's expenses in connection with payment of interest on deposits, rent and other contractual payments to a related entity cannot exceed the usual market prices (interest on the date of the transaction).

The usual price is defined as the price that can be obtained by a seller from the sale of goods, works or services to non-related entities in the normal course of the seller's business. Tax authorities can determine usual prices on the basis of the price data derived from official Ukrainian statistical publications.

Losses carry forward

Resident taxpayers can carry forward losses incurred during the reporting period to a future reporting period for twenty quarters commencing from the quarter when the loss occurred.

Bad debts

Taxpayers are allowed to adjust the amount of gross income relating to the relevant reporting period by the amount of unpaid trade debts (i.e. debts older than 30 days from the date they were due for payment), provided that a claim against the debtor has been filed with the relevant court.

Tax accounting and reporting

Resident companies and non-resident entities that have a permanent establishment in Ukraine are obliged to keep accounts in accordance with Ukrainian accounting standards.

Tax returns must be filed both by resident and non-resident taxpayers on a quarterly basis by the 25^th of January, April, July and October. Non-resident entities should pay tax quarterly by the 20^th day of the month following the reporting quarter. Resident taxpayers, except agricultural producers, are required to pay tax in advance in monthly installments followed by the final payment by the 20^th day of the month following the reporting quarter.

Withholding tax

Income earned by non-residents from Ukrainian sources is subject to withholding tax at the following rates:

• 15% on interest; dividends; royalties; reinsurance premiums, payments and bonuses; payments for engineering services; rental (leasing) income from property; income from the disposal of real estate; gains from securities trading; income earned by an un-incorporated joint venture in Ukraine; income from long-term contracts; fees from cultural, educational, religious, sporting and entertainment activities; broker's or agent's fees in respect of services performed in Ukraine; income from lotteries and gambling business other than the state lottery; charitable donations payable to non-residents; other income from business activity in Ukraine except for sums payable to non-residents for goods, works or services supplied to Ukrainian residents.
• 30% on income earned from investments in interest bearing bonds, treasury bills and discounted bonds issued by resident entities; insurance payments, premiums and bonuses; advertising fees; and dividends.
• 6% on income earned from freight services.

Income from government bonds sold by authorized agents abroad and interest on loans granted to the government by to non-resident creditors is exempt from withholding tax.

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Personal income tax

 Ukrainian and expatriate individuals resident in Ukraine are subject to personal income tax, which is levied at a number of marginal rates up to a maximum of 40%. Employers are required to deduct personal income tax and State Pension and Social Security charges from employees' wages and salaries and pay them to the state authorities.

Residence for individual income tax purposes is defined as the physical presence in Ukraine of an individual (either Ukrainian or foreign national) for more than 1 83 days within a calendar year.

Expatriate individuals working in Ukraine are subject to Ukrainian income tax on the following basis:

• if an expatriate has a source of income in Ukraine, a withholding tax of 20% is applied at source regardless of whether the individual is resident in Ukraine for tax purposes or not; and
• an expatriate who is resident in Ukraine for tax purposes (i.e. present in the country for more than 183 days in a calendar year) is taxed at the marginal rates, based on his worldwide income.

Tax returns are based on income received in the calendar quarters and year. Non-residents who are residents of Ukraine for tax purposes must submit quarterly returns and an annual return, which is due by 1 February of the year following the reporting year. The full amount of the tax is payable when a tax assessment is issued by the tax authorities.

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Value-Added Tax (VAT)

 VAT payers, whether residents or non-residents, include:

• entities whose volume of VATable transactions exceeded 1,200 non-taxable allowances (currently UAH 20,400 in any period during the previous 12 months;
• importers of goods, services or works;
• entities which engage in trade for cash, regardless of their monthly sales turnover; and
• entities which engage in the transport of cargo or passengers via the territory of Ukraine.

Any entity qualifying as a VAT payer is required to obtain a VAT registration number. Registered VAT payers must issue a VAT invoice in the prescribed format at the customer's request.

Taxable and non-taxable transactions

The following transactions are subject to VAT: sale of goods, works or services in Ukraine; import of goods, works or services into Ukraine; and the export of goods, works or services from Ukraine.

The following transactions are not subject to VAT: the issue, sale and exchange of securities; depository, clearing and registrar activities in respect of securities; the transfer of property by a domestic lessor to a lessee and the return of property upon expiry of the lease; lease payments under financial lease agreements and rental payments for an apartment which is the main residence of the lessee; insurance and reinsurance services specified in the Law on Insurance; financial loans and bank guarantees; dividends; funds under loan, deposit, insurance or proxy agreements; brokerage and dealer services in respect of securities transactions held at recognized commodity and stock exchanges; contributions of fixed assets to a company's charter fund; the purchase of a taxpayer's property by another taxpayer in the course of acquiring a company; scientific and other research financed by the state; items defined by the government as critical imports, excluding raw materials supplied for processing; services relating to the transit of passengers and cargo through Ukraine.

Tax rates

VAT is levied at two rates:

• 20% on domestic sales 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; sales of coal, electricity and imported natural gas.

Tax liability and credit

A taxpayer's VAT liability equals the total amount of VAT collected within a reporting period, and arises on the earlier of the date of shipping goods to a customer or the date of receiving payment from the customer.

A VAT credit is the amount that a taxpayer is entitled to offset against his VAT liability in a reporting period. Rights to VAT credits will arise on the earlier of the date of payment to the supplier or the date the VAT invoice is received.

Tax reporting

The amount of VAT, payable to or refundable by the tax authorities, is defined as the difference between the VAT liability and VAT credit for the reporting period.

The reporting period for taxpayers whose volume of VATable transactions in the preceding calendar year exceeded 7,200 non-taxable allowances (currently UAH 1,222,400) is a calendar month. Taxpayers, whose volume of VATable transactions is below this threshold, may opt for either a monthly or quarterly reporting period. Taxpayers may change their reporting period during a calendar year from quarterly to monthly.

VAT is payable and a VAT return must be submitted to the tax authorities on the 20^th day of the month following the end of the reporting period.

Tax refunds

VAT refunds for zero rated operations must be paid to the taxpayer in the month following the reporting period. VAT refunds for operations other than zero-rated may be offset against VAT liabilities arising during next three months following the reporting period. If not offset during three months, the VAT must be refunded to a taxpayer within a month from the date of filing VAT returns. A taxpayer may opt to offset the VAT refund against future VAT or other state tax payments. If VAT is not refunded by the tax authorities, as required by the law, interest must be paid on the non-refunded amount. The interest is calculated based on the National Bank of Ukraine's prime rate increased by the coefficient 1.2.

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Other taxes and charges

Payroll taxes

Employers are required to pay the following payroll taxes for their employees in

Ukraine based on gross salary:

• 32% of an employee's gross salary to the Pension Fund;
• 4% of an employee's gross salary to the Social Security Fund; and
• 1.5% to the Unemployment Insurance Fund.

Currently the amount of salary exceeding UAH 1 ,000 per month is not subject to payroll taxes.

In addition, Ukrainian employees are obliged to contribute 1% or 2% of their gross salary (i.e., depending on salary amount) to the State Pension Fund and 0.5% of their gross salary to the Unemployment Insurance Fund.

Excise tax

Excise tax is applied to certain goods imported into, or produced in, Ukraine. The list of excisable goods includes alcoholic beverages, beer, tobacco and tobacco products, coffee, certain delicatessen meat products, chocolate, caviar, cars, imported tires, petrol and diesel fuel, video and audio tape recorders and cassettes, compact disks, colour TV sets, sport and hunting guns, jewelry, fur and leather clothes, microwave ovens and metal dinner sets plated with silver and gold.

Land tax

Land tax is paid by the owners or users of land. The rate depends on the nature and location of the land and is paid monthly in advance.

Road tax

Road tax is paid on a monthly basis at the rate of up to 1.2% of turnover (output volume) for manufacturing companies or volume of works or services sold for non-manufacturing business. Wholesale or retail businesses should pay road tax at the rate of 0.06% of the sale turnover. This tax was effective until 1 January 2000.

Tax on owners of motor vehicles

This tax is paid by legal entities and individuals that own motor vehicles registered in Ukraine. The tax rate depends on the power output of the vehicle's engine and currently varies from 0.5 to 4.55 EURO per 100 cc of the engine displacement. The tax is paid annually before the date of technical inspection.

Innovation Fund charge

Innovation Fund charge is paid by business entities monthly at the rate of 1% of sales turnover.

Special taxes

To raise funds for payment of outstanding pensions at the end of 1 998 a number of special taxes payable to the State Pension Fund were introduced. These include:

• 1% charge based on the value of a foreign exchange transaction. The charge is payable by legal entities and individuals carrying out foreign exchange transactions;
• 5% charge based on the value of jewelry sales (except for wedding rings). The charge is payable by businesses involved in trade with jewelry; and
• 3% charge based on the transfer value of a car (except for cars designed for disabled people and inherited cars). The charge is payable by legal entities and individuals, which dispose of cars.

The above changes will be in force until the date when parliament makes a decision that all debts on pension payments are settled.

At the time of writing Ukraine continues to honour the double taxation treaties of the former Soviet Union with the following countries: Austria, Belgium, Cyprus, Czech Republic, France, India, Italy, Japan, Malaysia, Mongolia, Spain, Switzerland and the United States of America. These treaties will be effective until replaced by the new treaties.

The list of new treaties which are effective at the time of writing includes treaties

with: Armenia, Belarus, Bulgaria, Canada, China, Denmark, Estonia, Finland,

Germany, Hungary, Kazakhstan, Latvia, Lithuania, Moldova, the Netherlands,

Norway, Poland, Romania, Slovakia, Sweden, Turkey, the United Kingdom, and

Uzbekistan.

The list of treaties signed by Ukraine, but not effective yet, includes treaties with:

Austria, Belgium, Czech Republic, Croatia, Egypt, France, Indonesia, Iran, Italy, Georgia, Kyrgyzstan, Luxembourg, Macedonia, Russia, Turkmenistan, Vietnam and the United States of America.

Financial issues

Accounting and financial reporting

Ukrainian accounts consist of a body of regulations issued by the Ministry of Finance, which largely dates from the Soviet era. The regulations are mainly geared to providing information required to calculate tax liability and provide little meaningful information about the financial position of enterprises. However, an increasing number of enterprises are preparing accounts in accordance with International Accounting Standards (lAS) which are scrutinized by external auditors. A new law, which will introduce a revised national chart of accounts closer to internationally accepted accounting standards, is currently being prepared.

Ukraine has a legally defined national chart of accounts that every business entity, including foreign companies operating via a representative office, is required to use. Accountants are required to apply rigid accounting rules and are not expected to exercise professional judgement in the course of their work. The concept of a "going concern is not recognized in the law. Consequently, even if an enterprise is expected to cease trading in the near future this will not be mentioned in the statutory accounts. The accruals concept is not always followed by Ukrainian enterprises. Enterprises are taxed individually, and for tax purposes their accounts are assessed individually. Accounts are only consolidated for statistical purposes. No group accounting occurs and no adjustments are made for inter-company balances or trade. Although most enterprises apply accounting rules with reasonable consistency between accounting periods, this is becoming less common because of frequent changes in the regulations.

Businesses are required to file the following information with the State Tax Administration: a quarterly corporate profits tax return and a monthly or quarterly VAT return.  In addition, financial information must be made available to the Ministry of Statistics, the National Bank of Ukraine (which is responsible for enforcing the foreign exchange regulations) and the State Pension Fund.

Banking system

The Ukrainian banking system is characterized by under-capitalization and a high incidence of bad and doubtful debt. When inflation was extremely high the banks could make considerable profits by speculating in foreign currency. However, as inflation fell these opportunities were progressively reduced and many Ukrainian banks experienced financial difficulties. The National Bank of Ukraine (NBU) has gained a reputation as a staunch enforcer of tight monetary policy and sound financial practice. It has resisted demands by state-owned enterprises for new credit, and has imposed a tough supervisory regime on the banks. From January 1998 all Ukrainian banks were required to introduce a new accounting system compatible with lAS. This move increases the efficiency of banking and makes the banking system more transparent.

Changes to the banking law in February 1 996 provided for a phased tightening of the minimum capital requirement for existing banks from ECU1OO,000 as at 1 June 1996 to ECU l million as at 1 January 1998. The law also lifted the previous restrictions on banks investing or participating in other legal entities and cleared the way for the creation of diversified financial-industrial groups similar to those that have emerged in Russia. The regulations governing foreign banks in Ukraine have also been tightened, for example, they can no longer operate through an unincorporated branch. The minimum capital requirement for-banks in which the foreign shareholding is between 10% and 50% is EURO 5 million and for banks in which the foreign shareholding exceeds 50%, EURO 10 million.

Payments

Ukrainian legislation requires companies to make all payments through the domestic banking system and imposes penalties for non-compliance. A modern nation-wide electronic payment system has been set up and is considered to be among the best in the former Soviet Union. The main features of the regulations governing payment practices are as follows:

• with effect from 1 January 1999 companies are allowed to operate an unlimited number of current bank accounts;
• interest is levied on late payments by law; and
• foreign currency cannot be used for cash payments between residents.

Domestic transactions can be settled by bank transfers, documentary collection and letters of credit. Although the government has encouraged the use of cheques, promissory notes and bills of exchange, so far these have not found favour with Ukrainian enterprises. Bills of exchange are coming into use for certain tax payments, such as customs duties, import VAT and payments for electricity supply. In certain situations, such as the enforced collection of tax arrears or claims by other privileged creditors, documented claims presented to a bank must be paid unconditionally and without the prior permission of the account holder.

Although the non-payment of debts is causing severe financial difficulties throughout the economy, many state-owned enterprises (SOEs) continue to supply insolvent customers. The government is unwilling to force large SOEs into bankruptcy because it does not want to push unemployment up. Further, there is no proper legal procedure for creditors' claims to be enforced. In marked contrast to the state sector, most private companies operate on a pre-paid basis.

Types of account for representative offices

Current banking regulations distinguish between non-commercial and commercial local currency bank accounts held by the representative offices of non-resident entities:

• "N" accounts. These are available to representative offices, which are not engaged in commercial activity in Ukraine. Funds in such accounts may only be used to meet the operational needs of the representative office, such as the payment of salaries, rent, transport, insurance of property and maintenance of the office etc. This bank account cannot be used to receive payments from customers (except payments for sales of the representative office's property);
• "P" accounts. These are available to representative offices, which are engaged in commercial activity in Ukraine. Such accounts have the same status as the current accounts of domestic companies and may be used for any lawful purpose with the exception of investment and credit transactions.

A licence from the NBU is required to open a type "N" or type "P" bank account.

 Ukrainian staff

Conditions of complement in Ukraine are governed by the Labour Code. An individual labour agreement is defined as an agreement between an employee and employer under which the employee undertakes to do specified work, and the employer, subject to the provisions of the law and the terms and conditions of the agreement, agrees to pay a certain salary or wage and provide working conditions suitable to the performance of the task in question. Other terms and conditions may also be specified in an individual labour agreement as defined in the Labour Code. In certain circumstances the individual labour agreement must be made in writing. An employee can terminate an individual labour agreement by giving the employer at least two weeks' written notice.

The legislation also provides for a special form of labour agreement, known as a "contract", which can be concluded between an employer and employee. A contract only applies under certain legally defined circumstances.

The main requirements under Ukraine's employment legislation are as follows:

• the normal duration of a five-day working week is 40 hours. The normal duration of a working day in a five-day working week is eight hours. An employer may introduce a six-day working week, in which case the working day may not exceed seven hours;
• an employee's minimum annual holiday entitlement is 24 calendar days, including Saturdays. However, it may be longer depending on the number of years worked, working conditions and the employee's po5ition;
• the notice period in the event of termination of the employment agreement by the employee is at least two weeks. The statutory termination notice for the dismissal of an employee on the basis of the employer's initiative (e.g. staff redundancy or reorganization of the company's structure) is two months; and
• normal retirement age is 55 years for women and 60 years for men.

Expatriate staff

Ukrainian companies are required to secure a valid work permit for foreign individuals employed in Ukraine or seconded to Ukraine. Work permits are issued for up to one year and may be renewed upon application. However, the total period of employment in Ukraine may not exceed four years. After an interval of at least six months it is possible to re-apply for a repeat work permit. Managers of foreign companies' representative offices in Ukraine do not need to obtain a work permit.

Depending on the purpose of their visit, recent regulations require foreign nationals staying in Ukraine to register with the Ministry of Foreign Affairs, a police office or a hotel upon their arrival in the country.

International trade Issues

 The liberalization of foreign trade was made a condition of Ukraine's participation in the World Trade Organization (WTO) and access to financial assistance from the World Bank and International Monetary Fund (IMF). Ukrainian companies are free to engage in foreign trade without special permission from the authorities. Although the number of products subject to licencing and quotas has fallen in recent years, a licence is required to import or export a number of certain products.

Import requirements

Import licences are required for pesticides; plant protection chemicals; pharmaceutical products; veterinary preparations; cosmetics and personal care products; matrices and forms for manufacturing phonograms; ozone damaging substances.

A compulsory certification procedure was introduced in 1993 with the purpose of ensuring that imported goods comply with national standards. The certification is provided by the Ukrainian certification authorities (UkrSEPRO) in respect to a wide range of imported goods by issuing a Ukrainian Compliance Certificate.

Export requirements

Export contracts for certain categories of product, such as those falling under antidumping regulations, are subject to registration by the Ministry of Foreign Economic Relations and Trade. The following goods can be exported from Ukraine subject to quotas and licencing; precious metals and stones, ferrous metals. Textiles and ferrous silicon manganese, ozone damaging substances.

There is a general requirement that export prices should not be lower than world prices for similar goods, and the Ministry of Foreign Economic Relations and Trade is empowered to establish mandatory indicative export prices for certain categories of goods.

Custom clearance procedures

Any business entity that is engaged in export/import operations is required to obtain accreditation at the customs office, which serves the area in which the company is located. Entire goods crossing Ukraine. s border should be declared to the customs authorities, either by the importer or a licenced customs broker on behalf of the importer.

Import duties and taxes

The following import taxes and duties are payable by the importer when goods are imported into Ukraine:

• customs fees at the rate 0.2% based on the customs value of the goods up to a maximum of US$1,000 per customs declaration;
• import duty in accordance with the Unified Customs Tariff. Currently there are two rates of duty; relieved rates and full rates. Relieved rates of duty apply to goods manufactured in countries which have granted Ukraine Most Favoured Nation (MFN) trade status or which have concluded free trade agreement with Ukraine (see below). Full rates of duty apply to goods manufactured in other countries;
• excise duty is level on a limited range of mainly consumer goods (see Taxation issues section), for example, cars, videos, tobacco products, alcoholic beverages and chocolate; and
• VAT on imported goods, services and works (currently 20%).

For the purpose of calculation VAT, the government has established minimum customs values for certain imported goods such as cars, TV sets and tobacco. Import duty and taxes are payable by the importer in local currency before or upon customs clearance.

Goods exported form Ukraine are subject to customs fees at the rate of 0.2% based on the customs value up to a maximum of US$1,000 per customs declaration.

There are no export duties except on livestock and raw hides. Exported goods and services are zero rated for VAT purposes.

Trade agreements

Ukraine has concluded free trade agreements, which allow duty-free import of goods from the following countries: Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Turkmenistan and Uzbekistan. Exemption from import VAT is available under the free trade agreements with Russia and Belarus.

Other countries that have favourable trade regimes with Ukraine include: Austria, Algeria, Argentina, Belgium, Bulgaria, Brazil, Canada, China, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Great Britain, Guinea, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Kyrgyzstan, Korean People's Democratic Republic, Lebanon, Libya, Luxembourg, Mongolia, The Netherlands, Norway, Poland, Portugal, Romanra, Slovakia, Slovenia, South Korea, Spain, Switzerland, Sweden, Tunisia, Turkey, Turkmenistan, United Arab Emirates, USA, Vietnam and Yugoslavia.

Embassy of Ukraine in Canada
310 Somerset Street West
Ottawa, Ontario K2P 0J9
Tel.: (613) 230-2961
fax: (613) 230-2400
e-mail: ukremb@cyberus.ca
web-site: www.cyberus.ca/~ukremb