This document was prepared by the Ministry of Foreign Economic Relations
of Ukraine in the Summer of 1996 and has been posted to the Internet
with the permission of the NY District Office of the Ukrainian Trade Mission.
For further information, you may reach the Chief Ukrainian Trade Representative.
Mr. Ihor Gayduchok at the Consulate General of Ukraine, 240 E. 49th St.,
New York, NY. Voice/Fax message center: 212-371-5895 or by E-Mail at gayducho@panix.com
The successful transition to a market economy in Ukraine will depend to
a great extent on the development of an adequate legal infrastructure to
support an attractive and enabling investment environment. Traditionally,
international financial institutions and other multilateral aid organizations
have focused on the adoption of macro-economic structural reform measures
consisting of the elimination of exchange controls, price liberalization,
restrictive fiscal and credit policies and privatization to facilitate
the transition from command economies to market systems in the post-communist
societies of Central and Eastern Europe.
Within the past three years Ukraine has adopted several important legislative
measures which could serve as the foundation for the development of the
legal infrastructure necessary to support the transition to a market economy.
Nonetheless, a market oriented legal infrastructure is still at an early
stage of development in Ukraine. Essential regulatory mechanisms required
to support the institutional structures of a market economy in the areas
of banking, corporations, securities regulation and property rights must
be further developed in order to facilitate capital accumulation and financing
techniques - two essential elements for the development of a robust private
sector.
Certain existing impediments to private sector development and foreign
investment in Ukraine may be attributed to the vestiges of the communist
system which replaced a civil code tradition of property rights in Ukraine.
Those attributes of the legal framework are somewhat incompatible with
the concept of a market economy and will require a fundamental reorientation.
To this end, the Government is introducing a number of changes in the legal
framework to respond more positively to an emerging market economy.
Property Rights One of the most significant legal issues affecting the restructuring of
Ukraine's economy relates to property rights. The Law of the Ukrainian
SSR On Ownership , which was one of the first major parliamentary
measures adopted after sovereignty, but before the declaration of independence,
represented a significant step forward in the conceptual reorientation
of Ukraine's legal system of ownership toward more liberal principles.
In contrast to the rigid regime of state and collective ownership, the
Law on Ownership specifically recognizes private ownership and includes
Ukrainian residents, foreign individuals and foreign legal entities among
those entitled to own property in Ukraine. Moreover, the Law on Ownership
specifically permits owners of property, including foreign investors and
joint ventures, to use such property for commercial purposes, to lease
property and to keep the revenues, profits and production derived from
its use.
Notwithstanding the explicit recognition of private ownership, the Law
on Ownership does not establish a comprehensive regime regulating the
rights of ownership and the mechanisms for their transfer. Under the Soviet
model of ownership sophisticated mechanisms for transferring ownership
were unnecessary. Virtually all of the productive assets within the territory
of Ukraine were restricted to collective or state ownership, and most alienation
of property involved transfers for nominal value or no consideration between
state enterprises or between workers' collectives and various state agencies
or instrumentalities. Accordingly, both practice and theory required only
the most rudimentary mechanisms for the transfer of property or property
rights.
New measures must be enacted to redefine property rights and to develop
coherent mechanisms for the regulation, protection and transfer of ownership
rights and other property interests. The conceptual problems surrounding
the issue of property rights in Ukraine's current legal infrastructure
are best illustrated in the context of the ownership of land. Additional
problems stemming from an underdeveloped legal system of property rights
are explored in the Section XII below on Secured Transactions.
Land Ownership and Use Issues relating to the ownership, use and disposal of rights and interests
in land are regulated by the Land Code of Ukraine, adopted in 1992.
The Land Code formally recognizes three forms of ownership of land: state,
collective and private and provides that all three forms are equal in force
and effect before the law. On the other hand, the Land Code also provides
that all land in Ukraine is in the ownership of the state, except for land
granted in collective or private ownership, and sets forth in considerable
detail the various purposes for which the right to the use of land may
be granted by the local councils of people's deputies to joint ventures,
wholly foreign owned enterprises, foreign legal entities and foreign individuals.
As with the Law on Ownership, the Land Code contains a restrictive view
of what constitutes private ownership. Under the Land Code the right to
private ownership of land may be granted only to physical persons who are
citizens of Ukraine and generally for the limited purposes of the construction
of private residences and for agricultural subsistence. The Land Code specifically
prohibits the ownership of land by foreign persons, providing only for
the right to the "use" of land in such cases.
By definition, legal entities, whether resident Ukrainian companies or
foreign legal entities, cannot own land in Ukraine. Neither the right of
private ownership nor the right of collective ownership extends to such
entities. Under the Land Code such entities may possess land on the basis
of either lease rights or rights to the use of land.
While the concept of leasing is essentially consistent with the Western
understanding and includes rights incident to leasing, such as the right
to make improvements, the notion of a right to use a parcel of land is
an odd construct which has no analogy in western models. As with the "collective"
ownership of land, rights to the use of land are remnants of the socialist
legal framework which are fundamentally incompatible with a commercially
based regime of rights in real property.
Like the Law on Ownership, the Land Code is primarily concerned with proprietary
relationships between various levels of state administration and collectives,
especially with respect to agricultural and industrial land. Generally,
the disposal of land is carried out by state bodies (usually the local
council of people's deputies) either at the municipal, oblast (regional)
or republican level, who grant uses to land primarily to other levels of
government administration, to state enterprises or to collective associations
or enterprises. Predictably, such practice has led to the development of
only the most simplistic mechanisms for the transfer of interests in land.
Within the past year two narrow exceptions to the prohibition on the private
ownership of land have emerged in the form of Presidential Decrees. The
first Decree relates to the privatization of parcels of land accompanying
incomplete construction sites and the second Decree relates to the transfer
into private ownership of land surrounding privatized gasoline service
stations.
Recently, the President of Ukraine has taken a progressive position on
the question of land ownership in a major policy statement and in the form
of additional Presidential Decrees. This position faces fierce opposition,
however, from a conservative Parliament, whose communist/socialist/agrarian
majority block is staunchly opposed to any redefinition of ownership rights
to land.
On August 8, 1995, the President signed a decree (the "Land Decree")
principally aimed at the devolution of the so-called "collective"
form of ownership in the area of agriculture and at the facilitation of
the transition from socialist-era organizational forms of agriculture to
private farming in Ukraine. The Land Decree establishes a mechanism whereby
each member of the so-called "collective" agricultural enterprises
will secure his or her interest in a share of agricultural land owned by
the enterprise. Each member would be eligible to convert a land share into
a private parcel of land in the event that he wished to withdraw from the
enterprise.
Quality of Legislation From a practical point of view, Ukrainian legislation often suffers from
a relative poor quality of the laws passed since Ukraine's proclamation
of sovereignty early in 1991.
In many respects the unsatisfactory condition of the laws is an understandable
result of the convergence of many factors affecting Ukraine since independence.
Independent Ukraine inherited a bureaucratic structure that was essentially
incapable of governing a modern state. Under the Soviet system Ukraine's
parliament had the limited function of implementing all-Union legislation
and its Ministry of Foreign Economic Relations consisted of a skeletal
staff which was directly responsible to central authorities in Moscow.
The expertise for developing policies and drafting coherent, sophisticated
legislation conforming to the standards of the industrialized world for
the most part was non-existent.
Moreover, after the collapse of the Soviet system Ukraine was suddenly
confronted with the overwhelming task not only of rebuilding its economy,
but of creating the institutions of a modern viable state. In addition,
the new Ukrainian leadership was preoccupied with the task of nation building;
the rush to pass laws became a symbolic exercise of sovereignty and the
development of a coherent body of commercial legislation to support market
reforms simply was not a priority.
For these reasons, a coherent legislative framework that can support the
influx of capital and the growth of a vibrant private sector has still
to be developed in Ukraine.
Enforcement Mechanisms Shortly after independence, the courts in Ukraine were, for the most part,
ill-suited to address complex commercial disputes. Foreign investors are
well advised to include carefully crafted dispute resolution provisions
in their joint venture agreements that provide for arbitration outside
Ukraine. Recent developments, however, provide ample reasons for the expectation
of improvement in this area.
As a general matter, the Law of Ukraine On Foreign Economic Activity
allows the parties to a commercial dispute to select a forum for the resolution
of their disputes. In addition to the guaranteed right to seek relief before
an ordinary civil court of law, the parties may appoint a permanent or
an ad hoc court of arbitration as the dispute resolution body. The arbitration
may be conducted within or beyond the territory of Ukraine.
On April 20, 1994, the Parliament enacted the Law of Ukraine On International
Commercial Arbitration ("LICA"). The LICA clarifies certain
issues that were not addressed in prior law and as a result places foreign
businesses in a much better position with respect to commercial disputes
which may arise in connection with their operations in Ukraine.
In particular, the LICA supports the principle of the exclusivity of the
arbitration jurisdiction designated by the parties in the event of a commercial
dispute. In addition, the LICA provides that a Ukrainian civil court
of law reviewing a dispute which is subject to a valid arbitration agreement
between the parties shall, if requested by any one of the parties, terminate
the proceedings and transfer the dispute to the organ appointed in the
arbitration agreement. In addition, the LICA guarantees that a valid arbitral
award shall be recognized in Ukraine irrespective of the country in which
the arbitration proceedings were conducted.
In spite of the progressive developments outlined above, Ukrainian legislation
governing international commercial arbitration still lacks clarity with
respect to a number of important issues.
In particular, the precise mechanism for enforcing a foreign arbitral award
is unclear. While the Civil Procedural Code of Ukraine contains
provisions which govern the enforcement of judgments of civil courts and
the awards of Ukrainian arbitration courts, it is unclear whether these
provisions are applicable to awards of foreign arbitration bodies. In fact,
the Civil Procedural Code provides that the procedure for enforcing foreign
arbitral awards shall be governed by international treaties. As a result,
the exact legal procedure that should be followed to enforce a foreign
arbitral award in Ukraine is unclear. Notwithstanding the foregoing, recent
examples in which foreign arbitral awards have been enforced in Ukraine
for the benefit of foreign investors suggest that Ukrainian domestic courts
are prepared to abide by Ukraine's treaty obligations, notwithstanding
the absence of clear implementing regulations.
FOREIGN INVESTMENT REGIME
The new Law of Ukraine "On the Regime of Foreign Investment"
(the "FIL") was officially published on April 25, 1996 after
having been adopted by the Parliament of Ukraine and signed by the President
on March 19, 1996. The FIL replaces Decree No. 55-93 of the Cabinet of
Ministers of Ukraine "On the Regime of Foreign Investment"
(the "Decree") which was in effect since June 1993.
As originally adopted, the Decree provided for a five (5) year tax holiday
on profits for enterprises with qualifying foreign investments. Effective
January 1, 1995, the Law "On the Taxation of the Profits of Enterprises",
adopted on December 28, 1994 (the "Corporate Tax Law"), repealed
the five year tax holiday previously available to Ukrainian enterprises
capitalized with a qualified foreign investment in accordance with the
Decree. However, enterprises with qualified foreign investments that were
registered on or prior to January 1, 1995 may still qualify for the five
year tax holiday under the Decree. In addition, certain residual benefits
still apply to enterprises with foreign investments registered after January
1, 1995.
The FIL does not change the rights and obligations previously extended
to foreign investors under the Decree in any significant way. The FIL also
does not reinstate the tax holiday once available to enterprises with qualifying
foreign investment under the Decree.
The FIL provides for a range of vehicles for carrying out a foreign investment
in Ukraine, including: establishing a new company with a Ukrainian partner
or purchase of an interest in an already existing Ukrainian company; establishing
a wholly-owned subsidiary or a branch or any other separate structural
unit of a foreign legal entity, or acquisition of an existing Ukrainian
company; direct acquisition of any kind of real or other property which
is not directly prohibited by applicable Ukrainian legislation, or acquisition
of shares of stock, bonds and/or other securities; acquisition of land
use rights or concessions for the development of natural resources (whether
independently or together with a Ukrainian partner); acquisition of other
property rights; and any other vehicle which is not directly prohibited
by applicable Ukrainian legislation, including investments in a joint cooperation
agreement with a Ukrainian partner.
The FIL's remaining key provisions may be summarized as follows:
An enterprise with foreign investment ("EFI") is defined as any
type of organizational form created in accordance with Ukrainian legislation
where the foreign investment in the charter fund is at least 10%.
Types of foreign investment permitted under the FIL include:
(i) foreign currency; (ii) reinvested Ukrainian currency; (iii) any type
of movable or immovable property, together with any rights associated therewith;
(iv) shares, bonds, other securities or corporate rights; (v) monetary
or contractual receivables guaranteed by a first class bank; (vi) intellectual
property rights; and (vii) rights to carry out economic activities, including
rights to natural resources.
The exchange rate for converting foreign investments into Ukrainian currency
shall be the rate established by the National Bank of Ukraine. The Decree
allowed the parties to an EFI to agree upon the exchange rate, provided
that the exchange rate for the Ukrainian currency was not higher than the
rate established by the National Bank of Ukraine.
The foreign investor is guaranteed the protection provided by the FIL for
10 years in the event Ukrainian foreign investment legislation is changed.
A foreign investor's investment may not be nationalized. A foreign investor
is guaranteed the right to remit its revenues and a right to withdraw investments
from Ukraine within six months upon the termination of the investment activity.
The Cabinet of Ministers of Ukraine shall establish procedures for the
registration of foreign investments.
A foreign investor may import property into Ukraine for the charter fund
of an EFI without paying custom duties. (While a VAT exemption was considered
in the first draft of the FIL, the adopted draft of the FIL does not include
a VAT exemption.)
When importing property for its charter fund, an EFI shall issue a promissory
note in the amount equivalent to the duty owed and with a maximum term
of 15 days. Such promissory note shall be extinguished once the property
is transferred to the account (balance) of the EFI and the local tax inspectorate
where the EFI is located notes such transfer on the promissory note.
The Cabinet of Ministers of Ukraine shall establish procedures for issuing,
recording and extinguishing promissory notes.
An EFI shall be required to pay import duties on the declared value of
foreign investment if, within three years of importation, the foreign investment
is alienated.
An EFI shall pay taxes in accordance with Ukrainian legislation.
Foreign investors may be granted rights to develop natural resources and
engage in economic activity with state owned objects based on concession
agreements. Concession agreements shall be between a foreign investor and
either the Cabinet of Ministers of Ukraine or some other state organ which
has appropriate authority under Ukrainian legislation. Concession agreements
shall not exceed 99 years. The Verhovna Rada must approve any concession
agreement which includes terms and conditions not foreseen by Ukrainian
legislation.
Foreign investors may carry out investment activities based on contracts/agreements
("Joint Activity Agreements") rather than through a legal entity.
However, such joint activities must have a separate accounting and separate
bank accounts for such operations. Joint Activity Agreements must be registered
in the manner established by the Cabinet of Ministers of Ukraine.
In addition to replacing the Decree, the FIL cancels the 1992 Law of Ukraine
"On Foreign Investment" and the Law "On the State Program
for the Promotion of Foreign Investment in Ukraine", dated December
1993.
Currently, legal entities can be created under two parallel bodies of law:
the Law of Ukraine On Enterprises and the Law of Ukraine On Business
Associations. The most common vehicles for business activity and the
preferred vehicles for foreign investors are the joint stock company and
the limited liability company, both of which incorporate the concepts of
limited liability for investors.
However, under Ukrainian law each of these vehicles is treated as a separately
taxable entity. As a result, neither foreign investors nor private domestic
investors have the option of engaging in business activities through a
Ukrainian legal entity that would afford the benefits of the pass through
or conduit method of taxation which is the principal advantage of
the partnership and smaller business ("S") corporation forms
of doing business in the United States.
Sole Proprietorship In order to carry out business activities as a sole proprietorship, an
individual is required to register as an "entrepreneur' with the local
authorities. This is the only form of doing business in Ukraine which provides
for a single tier of taxation. There is no requirement with regard to the
minimum capitalization of a sole proprietorship. Registration of a sole
proprietorship is subject to payment of a small official fee ranging from
$0.6 to $2.1 U.S. dollars depending on the principal area of activity of
the registered entrepreneur.
Partnership Ukrainian legislation does not provide for the creation of legal entities
or partnerships which act as "flow through" entities for tax
purposes. Although the corporate legislation permits the creation of "full
liability companies" ("FLC"), they are subject to two levels
of taxation: at the corporate level and at the shareholder level. The creation
of a "differentiated liability company" ("DLC") (similar
to a US limited partnership) is also possible; however, it too is subject
to two levels of taxation.
There is no requirement with regard to the minimum capitalization of a
FLC or DLC, although certain inimum investment thresholds have to be met
in order to obtain the benefits accorded EFIs under the FIL.
Corporations The Ukrainian Law on Business Associations (the "Companies Law")
provides for five corporate forms of legal entities: joint-stock companies
(both open and closed) ("JSC"), limited liability companies ("LLC"),
additional liability companies, FLCs and DLCs. As a practical matter, most
business entities in Ukraine are established as JSCs or LLCs.
Joint Stock Company. A JSC is very similar in form and operation to a U.S. corporation. It is
a limited liability company in which the shareholders are only liable for
the obligations of the entity to the extent of their capital contributions.
There are two levels of taxation: the JSC is taxed on its profits; the
shareholders are then taxed when dividends are distributed.
There are two types of JSCs: open and closed. An open JSC is established
through a public offering and subscription of shares; a closed JSC's shares
are distributed privately among the founding shareholders. At least two
founding shareholders are necessary to create a JSC. Minimum capitalization
for registration of a JSC is currently approximately $600 U.S. dollars.
Under the prior foreign investment Decree, a capital contribution of either
$50,000 in kind or $500,000 in cash is required in order for the JSC to
obtain the various benefits provided enterprises with foreign investments.
This requirement appears to have been eliminated in the FIL.
Limited Liability Company A LLC is a cross between a U.S. corporation and a U.S. partnership. It
is similar to a corporation in that it is a limited liability company in
which the interest holders are only liable to the extent of their capital
contributions. However, it is similar to a partnership in that ownership
interests are expressed in terms of contractual rights that arise out of
the foundation documents. Thus, transfer of ownership rights is carried
out through an assignment of contractual rights.
There are two levels of taxation: the LLC is taxed on its profits; the
interest holders are then taxed when dividends are distributed. At least
two founding interest holders are necessary to create a LLC. Minimum capitalization
for registration of a LLC is currently approximately $300 U.S. dollars.
Again, under the prior foreign investment Decree, a capital contribution
of either $50,000 in kind or $500,000 in cash is required in order for
the JSC to obtain the various benefits provided enterprises with foreign
investments. This requirement appears to have been eliminated in the FIL
Representative Offices Foreign legal entities are permitted to establish representative offices
in Ukraine. A representative office is permitted to carry out marketing,
promotional and other auxiliary functions on behalf of the foreign legal
entity. It is less clear whether a foreign company can also carry out a
trade or business through a representative office, although in practice
many have been permitted to engage in activities that go well beyond the
scope of traditional representative offices. A registration fee of $2,500
is to be paid in connection with the registration of a representative office.
Branches Although branches of foreign companies are permitted by the FIL, they have
yet to take root in Ukraine. The procedure for their registration remains
unclear and untried.
Joint Ventures; Joint Production Agreements Joint ventures in Ukraine are generally created in the form of a JSC or
LLC. Ukrainian legislation also permits a foreign investor to invest in
Ukraine without creating a legal entity by entering into a joint production
or joint cooperation agreement with a Ukrainian legal entity.
TAXATION
On January 1, 1995, a new corporate tax law governing the taxation of entities
in Ukraine, the Law "On the Taxation of the Profits of Enterprises"
(the "Corporate Tax Law") took effect. The Corporate Tax Law
provides new tax rates for entities in Ukraine and additionally has modified
the basis on which entities are taxed so as to bring Ukrainian taxation
principles more in line with Western practice. Significantly for the foreign
investor, the Corporate Tax Law repealed the five year tax holiday available
to Ukrainian enterprises capitalized with a qualified foreign investment
in accordance with Decree No. 55-93 of the Cabinet of Ministers of Ukraine
"On the Regime of Foreign Investment", dated June 5, 1993 (the
"Decree"). However, enterprises with qualified foreign investments
that were registered on or prior to January 1, 1995 may still qualify for
the five year tax holiday under the Decree.
The Corporate Tax Law abolished the concept of taxing "dokhod",
which was defined as the difference between the value of products (works,
services) sold and their cost of production (not including employee's salaries
and most interest paid on borrowed funds). Commencing on January 1, 1995,
the concept of taxing "dokhod" was replaced with a tax on profits.
The Corporate Tax Law established a basic corporate tax rate of 30%. However,
the rate of taxation for profits gained from intermediary activities or
from the carrying out of auctions (except for auctions involving securities,
ownership interests in legal entities, currency values and other financial
instruments) is 45%. Profits from lotteries, casinos and other types of
gambling activity are taxed at a rate of 60%. In certain cases, reduced
tax rates or tax exemptions are available to enterprises which carry out
activities in the agricultural field or which are engaged in the construction
of homes and other facilities in rural areas.
The corporate tax is levied on the gross profits of an enterprise. Gross
profits are defined as revenues obtained by an enterprise from all of its
activities carried out in Ukraine and abroad during the reporting period,
including revenues: (i) from the sale of products (works, services), fixed
assets, intangible assets, securities, currency values and other types
of financial instruments and other material items; (ii) from leasing operations;
(iii) from royalties; and (iv) from non-sales transactions, less
the cost of production and other permitted expenses and deductions.
Unlike previous Ukrainian tax legislation, the Corporate Tax Law provides
for clearer definitions of permitted costs and expenses. For example, interest
payments for loans incurred for working capital needs and for the acquisition
of fixed and intangible assets required for current production needs may
now be included in the cost of production, as well as payments for investment
management and depository services, expenses connected with the payment
of dividends and expenditures for printing and issuing shares and other
securities.
Depreciation is calculated on the basis of book value (as re-valued) in
accordance with the rates of depreciation established under regulations
issued by the Council of Ministers of former USSR.
Prior to the adoption of the Corporate Tax Law, depreciation rates were
very conservative. Rates for most types of equipment were normally from
8 to 10 years; accelerated depreciation was permitted only for enterprises
with qualifying foreign investment, enterprises engaged in military conversion
and enterprises operating in priority branches of the Ukrainian economy.
The Corporate Tax Law permits enterprises to determine independently their
own accelerated rates of depreciation. However, such rates may not be more
than twice that established by the applicable regulations and they may
not lead to an increase in the prices of products produced by the enterprise.
Depreciation of intangible assets is calculated based on their initial
cost of acquisition and period of effective use (but not more than 10 years).
Intangible assets whose value does not decrease as a result of their use
in the production process (e.g. goodwill) are not subject to depreciation.
The Corporate Tax Law does not contain any specific provisions governing
the taxation of capital gains. As a result, capital gains are taxed at
the basic rate of 30%. Capital gains are taxed at the moment securities
are actually sold.
The Corporate Tax Law provides that a foreign legal entity carrying out
business activities on the territory of Ukraine through a "permanent
establishment" is subject to tax on all profits generated by the activities
of such permanent establishment. A permanent establishment is defined under
the Corporate Tax Law as (i) any structure in Ukraine which is not a legal
entity through which a foreign legal entity either partially or fully carries
out business activities in Ukraine or (ii) an individual who represents
and is employed by a foreign legal entity in Ukraine. However, the determination
of whether a "permanent establishment" exists would be subject
to the provisions of any applicable tax treaties.
Profits generated by a permanent establishment are now subject to a 30%
tax. Profits for purposes of this tax are deemed to be those profits which
a permanent establishment would have obtained if it (i) were a separate
independent enterprise involved in similar activities on the same conditions
as the foreign legal entity and (ii) had acted independently with respect
to the foreign legal entity.
In the event it is not possible to determine such profit, an alternative
method may be negotiated with the Ukrainian tax inspectorate. In practice,
the most common method is for a permanent establishment to pay a 30% tax
on a deemed profit equal to 30% of the expenses attributable to such permanent
establishment.
Passive Ukrainian source income received by a non-resident who does not
carry out business activities in Ukraine through a permanent establishment
(e.g. dividend, interest, lease and royalty payments and payments for insurance
premiums), as well as Ukrainian source income obtained from technical engineering
services is subject to a 15% withholding tax upon repatriation from Ukraine.
Such withholding tax rate would be subject to the provisions of any applicable
tax treaty. Ukraine has indicated that it will adhere to the USSR tax treaties
until such time as Ukraine has entered into new treaties with such countries.
Ukraine has signed its own treaties with Poland, Canada, the United States,
Great Britain and others. Many others are currently under negotiation.
Income obtained by non-residents from freight charges paid by Ukrainian
enterprises are subject to a 6% withholding tax. Interest payments received
in connection with loans granted to the National Bank of Ukraine or to
the Cabinet of Ministers are not subject to withholding tax upon repatriation.
VAT of 20% is currently levied on the sale of goods and services on the
territory of Ukraine, although exports, sales of certain essential goods
and sales in foreign currency are not subject to VAT. In addition, early
in 1994 an "import VAT" was introduced on all imported goods
other than contributions to charter funds of enterprises with foreign investment
("EFIs"), equipment and raw materials needed for the production
purposes of enterprises and fuel, energy and agricultural materials which
will be utilized on the territory of Ukraine.
Excise taxes are levied on certain goods. A tax of 0.2% is currently levied
on all transactions involving securities.
Most Ukrainian legal entities are required to pay as of December 1, 1994
a total of 51% in payroll taxes in connection with their employees. These
include 37% to the pension and social security funds, 12% to the Chernobyl
fund and 2% to the employment fund.
Ukrainian accounting practices do not yet conform to internationally accepted
accounting principles. All taxes with the exception of withholding taxes
on dividends, interest, freight and engineering services are paid in local
currency.
CURRENCY REGULATION
In 1992, Ukraine introduced as its temporary currency the karbovanets (commonly
referred to as the "coupon"), which resulted in Ukraine effectively
ceasing to be a member of the ruble zone of the former Soviet Union. It
is anticipated that after several announcements a new currency, the "hryvnia"
will finally be introduced in 1997.
In March 1993, the Cabinet of Ministers of Ukraine published three decrees
concerning currency regulation in Ukraine:
(i) Decree No. 1593, "On the System of Currency Regulations and
Currency Control";
(ii) Decree No. 1693, "On Provisional Procedures for the Use of
Foreign Currency Earnings"; and
(iii) Decree No. 1793, "On the Procedure for Settling Accounts
in Foreign Currency" (together the "Currency Decrees").
Decree No. 1793 has since been replaced by the Law of Ukraine "On
the Procedure for Settling Accounts in Foreign Currency", adopted
in November 1994.
In addition, the National Bank of Ukraine ("NBU") has issued
several instructions and regulations which address a number of the issues
covered in the Currency Decrees. A new draft law on currency regulation
is currently being debated by Parliament and is expected to be adopted
with the introduction of the new national currency, the hryvnia.
The Currency Decrees are structured around the general principle that Ukrainian
currency is the only lawful form of payment on the territory of Ukraine
which may be accepted without limitation for the settlement of debts and
obligations. Accordingly, Article 5 (4)(d) of the Decree provides that
an individual license must be obtained from the National Bank of Ukraine
in order to use foreign currency on the territory of Ukraine as a means
of payment.
As a general exception to the foregoing principle, Article 7 of the Decree
No. 15-93 provides that all commercial transactions between a resident
and non-resident in the sphere of `trade turnover' (torhovelniy oborot)
must be carried out in foreign convertible currency and only through
authorized Ukrainian banking institutions. As such, a non-resident wishing
to carry out commercial transactions within the scope of `trade turnover'
in local currency on the territory of Ukraine would need to apply for an
individual license from the National Bank of Ukraine.
The Currency Decrees provide that individual licenses have to be obtained
from the NBU for the carrying out, inter alia, of the following
operations:
(i) hard currency transactions on the territory of Ukraine between residents
(as of August 1, 1995 such licenses are no longer available for cash transactions);
(ii) use of hard currency on the territory of Ukraine as a form of security;
(iii) opening by a resident of bank accounts abroad;
(iv) making of investments abroad by a resident or, except in the event
of inheritance, the acquisition of shares or an ownership interest by a
resident in a non-Ukrainian legal entity;
(v) obtaining or granting of loans in hard currency by a resident if the
amount of the loan is in excess of minimum levels established by the NBU;
(vi) making hard currency payments from Ukraine abroad (with the exception
of instances listed in the following paragraph).
Individual licenses are not required, inter alia, for the following
transactions:
(i) payments abroad in hard currency which are carried out by residents
in order to fulfill obligations in such currency before nonresidents in
connection with payment for goods, services, works, intellectual property
rights and other property rights;
(ii) payments abroad in hard currency made in the form of interest payments
on loans and profits from foreign investments;
(iii) transfer, upon the termination of investment activities, of hard
currency from Ukraine which had been previously invested in Ukraine.
According to a Resolution of the Board of National Bank of Ukraine dated
May 16, 1995, the use of foreign currency for cash payments on the territory
of Ukraine was prohibited as of August 1, 1995. Unless otherwise provided
in the individual license, the obtaining of an individual license by one
of the parties to a currency operation means that permission for the execution
of such operation has also been granted to the other party to the transaction.
The Currency Decrees provide as a basic principle that all resident legal
entities are required to sell 100% of their hard currency revenues for
coupons to a Ukrainian commercial bank at the interbank currency auction
rate. However, as a temporary measure until the Ukrainian currency
stabilizes, the Currency Decrees provide (i) that enterprises with foreign
investments (e.g. joint ventures and wholly-owned foreign subsidiaries)
will be permitted to keep 100% of hard currency revenues generated through
the export of goods or services which qualify as their "own production"
and (ii) that all other Ukrainian legal entities would be required to sell
50% of their hard currency revenues for coupons to a Ukrainian commercial
bank.
Commencing in 1993, the system of forced conversion of 50% of all foreign
currency revenues was instituted. Given the sharp decline of the karbovanets
against the dollar, in the summer of 1993 an official exchange rate fixed
by the Cabinet of Ministers was introduced and applied to all mandatory
conversion of foreign currency under applicable law; in November 1993,
the government ordered the Ukrainian Interbank Currency Exchange (UICEX)
to suspend operations and a currency tender committee under the government
was formed to allocate foreign currency reserves. In addition, in early
1994, the NBU commenced controlled auctions for foreign currencies. These
measures created tremendous distortions in the Ukrainian currency market
and resulted in a significant spread between the official and "black
market" rate for the Ukrainian currency.
Presidential decrees and NBU decisions in late 1994 resulted in the reopening
of the
UICEX, the abolishment of the currency tender committee and the NBU auctions
and the establishment of an official exchange rate which is determined
on the basis of the rate fixed at the previous UICEX auction. As a result,
the official and "black market" rates have moved closely together.
At the present time, forced conversion of foreign currency revenues is
carried out at the rate established at the UICEX.
CONVERTIBILITY AND REPATRIATION
OF PROFITS
The Ukrainian currency is at present not fully convertible, although significant
measures have been undertaken recently in order to progress towards that
goal. Currencies are traded at auctions held by the UICEX. In addition
currencies may now be traded at the informal interbank currency market.
Currently, the U.S. dollar and the Russian ruble trade on the UICEX daily,
the German DM trades twice weekly and the Italian lira and the French franc
trade once per week each.
Figures released for the months of July and August 1995 indicate that the
volume of US dollar trading on the UICEX exceeded an average of US $325
million per month.
Prior to November 1994, foreign currency could be obtained only for the
purpose of importing certain essential goods. At present, the rules have
been substantially relaxed and a Ukrainian legal entity may convert local
currency into a foreign currency in the event it has entered into a foreign
economic contract or provides other justification for the foreign currency.
(Repatriation of foreign currency dividends or invested capital to a foreign
investor would serve as a valid justification for obtaining foreign currency).
The entity would be required to carry out the conversion through its commercial
bank: the commercial bank receives a conversion request from its client,
reviews the basis on which the entity is requesting foreign currency and
participates in the UICEX auction to purchase the currency on behalf of
its client.
Foreign investors are guaranteed the right of repatriation abroad, in foreign
currency, of their revenues, profits and other sums obtained legally in
connection with their investment. A foreign investor may currently convert
local currency into a foreign currency through the UICEX. Such an investor
would request its commercial bank to participate in the auction and convert
local currency into foreign currency. Foreign investors are permitted to
convert local currency into foreign currency for the purpose of repatriating
legally obtained profits or investments abroad.
BANKS AND BANKING REGULATION
Ukraine has a banking system in the process of developing. It is two-tiered,
with the NBU and approximately 250 commercial banks. Of the commercial
banks, five are the former specialized state banks: one is a savings bank
(Oschadbank), three are specialized lending banks (industrial investment,
agricultural and social development) and one is the Export-Import Bank
of Ukraine. The three specialized lending banks receive concessionary treatment
from the NBU and are responsible for the vast majority of enterprise lending.
There are reports that a three-tiered banking system comprised of the NBU,
specialized banks and commercial banks may be introduced in the near future.
The NBU regulates and supervises commercial banks. However, the NBU's resources
are often insufficient to provide for thorough supervision and regulation.
It is anticipated that there will be significant amendments to the current
legislation governing banking activities.
The fact that most of the commercial banks are lending to financially strapped
state enterprises has resulted in tremendous instability in the Ukrainian
banking system. In addition, bank clients face considerable problems with
the disclosure of confidential information by banks and their employees
to unauthorized third parties; state authorities such as the tax inspectorate
have wide-ranging powers to freeze bank accounts or to withdraw funds for
payment of taxes or fines without the need to obtain a court order or authorization.
Notwithstanding the foregoing difficulties in the banking sector the mechanism
for settlements, particularly relating to domestic transfers, has proven
to be extremely efficient and has won praise from many observers. Although
the situation is rapidly improving foreign investors are confronted with
delays in converting currency and repatriating profits in foreign currency.
One foreign bank, Credit Lyonnais, has opened a wholly-owned subsidiary
commercial bank. Société Générale has also
obtained a commercial banking license from the NBU and is expected to open
a full service branch in Kiev in the near future. Other foreign banks are
attempting to obtain a banking license, although there appears to be considerable
opposition within the NBU for the granting of further banking licenses
to subsidiaries of foreign banks.
Numerous Ukrainian commercial banks have joined the international Society
for Worldwide Interbank Financial Telecommunications (SWIFT). SWIFT provides
financial data communication and processing services to support the business
activities of banks around the world. Through SWIFT, the participating
Ukrainian banks may complete instantaneous transactions with other U.S.
banks on line with SWIFT. Western Union has also recently begun a money
transfer service between Ukraine and the outside world.
IMPORT AND EXPORT REGIME
The regulation of foreign trade over the last three years has moved in
cyclical patterns, from little control to significant barriers and restrictions.
In the beginning of 1993, the Cabinet of Ministers adopted a Decree which
established quotas and required licenses for the export of a large number
of export products. In May of 1993 a decree on the liberalization of foreign
economic activities was enacted and decreased the number of export products
requiring quotas and licenses. At the end of 1993, the Cabinet of Ministers
reversed course and reinstated a restrictive license and quota system.
In the spring of 1994, quota and license requirements were again relaxed
and in October 1994, the Cabinet of Ministers as part of Ukraine's agreement
with the IMF embarked on a course of radical trade liberalization, eliminating
almost entirely all license and quota requirements. Unfortunately, the
positive effects of such measures have been significantly undercut by a
recent Presidential Decree requiring the registration of a significant
portion of foreign trade contracts with the Ministry of Foreign Economic
Relations and Trade.
At present, a limited number of goods must be licensed by the Ministry
of Foreign Economic Relations in order to be imported into Ukraine. A Presidential
Decree was issued in September 1994 which may create additional trade barriers
for imported goods in an attempt to protect domestic producers and decrease
the country's trade deficit.
In 1994 and again in 1995 there were no export taxes or duties levied in
Ukraine. None are expected for 1996. Import duties exist with respect to
certain products. There are three levels of import duty rates which are
applied; the exact rate depends on the imported item's country of origin.
The Cabinet of ministers of Ukraine has published figures indicating that
during the first quarter of 1995 Ukrainian exports equaled 1.99 billion
dollars and imports 2.78 billion dollars. More recent information reported
in the financial press indicates that for the period January - July 1995,
for the first time since independence Ukraine achieved a positive balance
of payments structure with exports valued at 5.77 billion dollars and imports
for the same period valued at 5.73 billion dollars.
In accordance with the Law of Ukraine On the State Budget for 1994,
as of January 1, 1994, all imported goods are subject to VAT at their full
import value which consists of the declared customs value, plus import
duty, custom's fees and excise taxes, if any. The new VAT regime also extends
to goods imported to Ukraine on a temporary basis. VAT is generally payable
at the moment of customs clearance by the importer. The current VAT rate
on imported goods in 20%. Notwithstanding the foregoing, however, based
on the June 30, 1995 Presidential Decree On the Application of Value
Added Taxes to Imported Goods (the "Import VAT Decree"),
a limited number of goods, including raw materials, component parts, equipment,
machinery and other goods and materials, including energy supplies (oil
and gas) imported by commercial enterprises for "production purposes
and their own needs" (excluding goods imported for sale or other disposition)
are exempt from value added taxes.
Significant changes have been introduced to the import regime of goods
that are subject to excise taxes as recently as December 12, 1995, with
the implementation of the Law of Ukraine On Certain Questions Concerning
the Taxation of Excise Goods, dated November 16, 1995 (the "Excise
Tax Law"). Based on the provisions of the Excise Tax Law
and subsequently adopted implementing regulations a serious risk exists
that, at least under current interpretation of the Excise Tax Law,
to the extent any of the imported goods are subject to excise taxes, such
goods will also be subject to all other import duties, import VAT and other
import related charges, regardless of the intended use of the goods,
including goods imported as capital contributions to enterprises with qualifying
foreign investments.
ANTI-MONOPOLY AND UNFAIR COMPETITION
LAWS
During the period from 1992 to 1994, the Parliament, the Cabinet of Ministers
and the Anti-Monopoly Committee ("AMC") of Ukraine adopted a
series of laws, decrees and regulations which form the basis for the Ukrainian
anti-monopoly legislation including:
(i) The Law of Ukraine On Restriction of Monopolism and Prevention of
Unfair Competition in Entrepreneurial Activity, effective March 15,
1992 (the "Law");
(ii) Regulations on the Methods for Determining the Monopolistic Position
of Enterprises in the Market, approved by Order No. 1-R of the AMC,
dated March 10, 1994 (the "Regulations"); and
(iii) The Cabinet of Ministers of Ukraine Decree No. 765 "On the
Introduction of the Mechanism for Preventing the Monopolization of Product
Markets" adopted November 11, 1994 (the "Anti-Monopoly Decree").
Under the Anti-Monopoly Decree, the approval of the AMC is required for
the creation, merger, and acquisition of enterprises which may result in
the formation of a new monopoly enterprise; and in certain instances, the
acquisition of the assets of, or the ownership interests in, enterprises.
AMC Approval for the Creation of an Enterprise A legal entity may be established in Ukraine only upon the AMC's approval
if:
the entity is to be formed by two or more founders and (i) the total value
of the assets of all of the founders (the "Asset Value") or the
total sales volume of all of the founders' goods or services in the last
financial year (the "Sales Volume") is in excess of an amount
which is equal to $2 million U.S. dollars in local currency (calculated
at the official exchange rate in effect at the end of the previous financial
year) and (ii) the Asset Value or the Sales Volume of at least two of the
founders is in excess of $100,000 U.S. dollars; or
the entity is to be formed by two or more founders which operate in a given
product market and the total share of such founders of such product market
exceeds 35 per cent; or
the share of a given product market of the entity which is to be formed
will exceed 35 per cent.
AMC Approval for the Merger or Acquisition of Enterprises The Anti-Monopoly Decree provides that a merger of enterprises or the acquisition
by one enterprise of another enterprise must be approved by the AMC if:
any of the participating enterprises enjoys a monopolistic position in
a given product market; or
although none of the participating enterprises enjoys a monopolistic position
in a given product market, the Asset Value or Sales Volume of all of the
participating enterprises in local currency is equal to $1 million U.S.
dollars and the Asset Value or the Sales Volume in local currency of at
least two of the participating enterprises exceeds $100,000 U.S. dollars.
AMC Approval for the Purchase of Ownership Interest in an Enterprise The AMC must approve any direct or indirect purchase of ownership interest
in an enterprise which results in the buyer acquiring 10, 25, 33 or 50
per cent of voting rights in the enterprise if the total value of the ownership
interest which is to be bought exceeds the local currency equivalent of
$100,000 U.S. dollars calculated at the official exchange rate which is
in effect on the date when the purchase of the ownership interest is made.
The AMC's approval is also required to acquire an ownership interest in
an enterprise which enjoys a monopolistic position regardless of the value
of the ownership interest which is to be acquired.
AMC Approval for the Purchase of Assets of an Enterprise
The AMC must approve the direct or indirect purchase of assets of an enterprise
if the assets which are to be acquired are "substantially all"
of the assets of the enterprise. Such a requirement would apply if the
value of the assets exceeds the local currency equivalent of $100,000 U.S.
dollars.
PRIVATIZATION
Ukraine enacted three major pieces of legislation on privatization in March
of 1992, covering large scale privatization, the privatization of small-scale
enterprises and privatization through privatization certificates. These
measures were supplemented by the State Privatization Program for 1992,
the State Privatization Program for 1994 (the "1994 Program"),
and more recently the March 19, 1996 Presidential Decree "On the Goals
and Specifics of the Privatization of State Assets in 1996" (the "1996
Presidential Decree"). In addition, a law on the lease of the property
of state enterprises and organizations was originally adopted in April
of 1992 which provided workers with rights to lease (and subsequently to
buy out) the assets of state enterprises on favorable terms. The Lease
Law was amended and restated in March 1995.
The Law on Privatization Certificates contemplates the exchange of state
property for privatization certificates distributed by the state to all
citizens of Ukraine. According to the 1994 Program, approximately 70% of
the value of all state property to be privatized is to be distributed at
no cost to Ukrainian citizens through privatization certificates.
Privatization certificates were introduced into circulation in Ukraine
in January 1995. Since the inception of the privatization certificate program
in November 1992, privatization "certificates" have existed only
in the form of amounts credited to special privatization deposit accounts
opened by the government for each citizen of Ukraine at branches of the
State Savings Bank, the "Oschadbank".
In accordance with Resolution No. 34 of the Cabinet of Ministers of Ukraine
"On the Indexation of Fixed Assets and the Designation of Amortization
Rates for their Full Depreciation in 1995", dated January 17, 1995,
the nominal value of privatization certificates was increased from the
original nominal value of 1,050,000 Ukrainian karbovanets to 50,000,000
Ukrainian karbovanets. At current commercial exchange rates, the value
of the privatization certificate is approximately $280 U.S. dollars; this
compares with the substantially lower value of approximately $8 U.S. dollars
attributable to the privatization certificates prior to their revaluation.
Unlike in Russia, privatization certificates are not issued as bearer instruments
and therefore not freely transferable. In addition, amounts credited to
a privatization deposit account in Oschadbank are also not freely transferable.
In view of the erosion in the face value of privatization certificates
as a result of inflation and currency devaluation, in accordance with a
Presidential Decree, issued on November 26, 1994, Ukrainian citizens will
benefit from a significant indexation of monies held in savings accounts.
Such indexed amounts may be converted into "savings certificates"
which can be used by Ukrainian citizens as a supplement to their privatization
certificates in order to purchase shares in privatized enterprises. Unlike
privatization certificates, these "savings certificates" will
be freely transferable. According to the November 26, 1994 Presidential
Decree, shares of open joint stock companies held by the state after the
sale of shares to workers and management on preferential terms and the
issuance of shares to Ukrainian citizens in exchange for their privatization
certificates at privatization certificate auctions, will be transferred
to Ukrainian citizens in exchange for their savings certificates as compensation
for their losses from the devaluation of their savings on accounts at Oschadbank,
the State Savings Bank of Ukraine.
The 1994 Program projected an ambitious schedule for privatizing over 20,000
small-scale enterprises, 1,400 incomplete construction projects and 8,000
large and medium-scale enterprises (including the state's share in joint
ventures and enterprises that enjoy a monopoly market position), with a
view to reducing the state's ownership in productive assets from 98% to
approximately 74% by the year end. By 1996, the state share in enterprises
was projected to be reduced to 44%.
The ambitious privatization agenda set forth in the 1994 Program was confirmed
in 1995 by the Presidential Decree "On Measures for the Implementation
of Privatization in 1995" (the "Privatization Decree"),
issued on June 23, 1995. This Privatization Decree was introduced by the
President in the face of the failure of Parliament to adopt a State Privatization
Program for 1995.
The implementation of the President's privatization agenda progressed further
with the adoption of the 1996 Privatization Decree in which the President
put forward his ambitious plan to privatize during 1996 a total of: 4,085
medium and large-scale state owned enterprises and open joint-stock companies;
8,682 small-scale state-owned enterprises (of which 957 are agricultural
companies);
4,043 incomplete construction sites; and
the state-owned shares of 654 open joint-stock companies, whose privatized
has begun but has yet to be completed.
The 1996 Privatization Decree provides that the privatization of small-scale
state-owned enterprises should be completed by July 1, 1996 and that Ukrainian
citizens will have until December 31, 1996 to invest their privatization
certificates. To date, according to reports issued by the SPF, approximately
32 million citizens, or 62% of the population have redeemed their privatization
certificates. In addition, the 1996 Privatization Decree provides for the
implementation in 1996 of a regime in which foreign investors may participate
in the privatization process on equal terms with Ukrainian residents.
Notwithstanding the foregoing measures, however, until recently, an effective
program for the systematic large-scale transfer of state-owned assets to
private entities or individuals has not been implemented in Ukraine. Although
the government has begun to transform state enterprises into joint stock
companies in the "corporatization" process, and to sell them
through auctions and competitive tenders, most enterprises privatized to
date have been small businesses involved in the spheres of retail trade,
food service and other service-related activities. A significant portion
of those enterprises which have been privatized have done so through a
buy-out of the enterprise by the workers' collective. Based on a report
prepared by the SPF, during 1993 62% of those state assets which were privatized
had been privatized through a buy-out by workers' collectives on the basis
of lease agreements with buy-out options.
Compared to the relative stagnation of the privatization process in past
years, however, the pace of privatization has increased dramatically in
the last quarter of 1995 and during the first quarter of 1996, especially
after the adoption of the 1996 Presidential Decree. According to announcements
made recently by the SPF, the first quarter targets for privatization of
small and medium-scale enterprises were exceeded. In January and February,
3,070 small businesses were privatized, equivalent to 25% of the total
planned for 1996, while 583 medium- and large-scale enterprises were privatized,
representing 15% of the targets for the year.
SECURED TRANSACTIONS
The Law of Ukraine On Pledges, represents an important step forward
in addressing the absence of mechanisms to facilitate secured transactions
in Ukraine. Significantly, the Law on Pledges allows for the pledge of
tangible as well as intangible property and recognizes the concept of the
floating lien. In addition, the secured lender is endowed with extensive
rights of seizure and sale in the event of a default.
At the same time, the Law on Pledges is insufficiently detailed and underdeveloped
to facilitate major financings, including project financings. In this respect,
two principal deficiencies should be mentioned.
The Law on Pledges fails to provide for a uniform, easily accessible and
reliable mechanism for registering a pledge in collateral in order to give
adequate notice to third party creditors. In accordance with existing mechanisms
for effecting pledges in assets the pledge agreement should be registered
with a notary public, but only with respect to certain categories of property,
including inventory, vehicles and immovable property. With respect to all
other forms of collateral, the only mechanism available for "perfecting"
a security interest is to make a notation of the fact of the pledge in
the borrower's register of pledged assets. The absence of a registration
and recording procedure becomes particularly problematic where there is
more than one creditor.
In the current legal framework it will be virtually impossible for a creditor
to determine with any level of certainty whether property has been pledged.
Accordingly, a prospective creditor would have to rely on the records (if
any) kept at the appropriate office of notary public and/or notations which
may be found in the pledgor's book of pledged assets. This is further complicated
by the fact that apart from the defects of the pledge mechanism it is generally
difficult to confirm the validity of title or other interests in property
in Ukraine.
Second, at least initially, a burdensome state fees structure accompanied
the process of notarization of pledge agreements. For certain types of
property the state fee payable when registering a pledge agreement with
the notary public were equivalent to five percent (5%) of the "value
of the agreement". The state fee for the registration of a pledge
agreement was reduced in 1995 from 5% to 0.1% of the value of the pledged
property.
PROTECTION OF INTELLECTUAL PROPERTY
RIGHTS
Ukraine has already established a comprehensive legislative system for
the protection of the intellectual property rights. Since 1993 Ukraine
has enacted legislation relating to patents on inventions, models, industrial
designs, plant varieties, seeds, and cattle breeding, as well as laws on
trademarks, copyrights and related rights, and laws on the protection of
information in automated systems. Special amendments have been made to
the Criminal and Administrative Codes of Ukraine to provide criminal and
administrative sanctions for disclosure of trade secrets and unfair competition.
Ukraine is a member of the Paris and Madrid Unions, and a party to the
Patent Co-operation Treaty and Universal Copyright Convention. In addition,
on May 31, 1995, the Parliament passed a law whereby it acceded to the
Berne Convention for the Protection of Literary and Artistic Works (the
Paris Text of July 24, 1991, as amended). The accession by Ukraine to the
Berne Convention represents further positive developments in the area of
the protection of intellectual property rights. Application of the Berne
Convention is limited to literary and artistic works which have not yet
become a part of the public domain in Ukraine. According to the Law of
Ukraine On International Treaties of Ukraine all international agreements
to which Ukraine is a party constitute integral parts of its domestic legislation.
Accordingly, the provisions of the foregoing conventions form part of Ukraine's
legislative regime on intellectual property.
The weak point in Ukrainian intellectual property law is the issue of remedies
and their enforceability. As a matter of practice, ordinarily only civil
remedies (injunctive relief, compensation for damages including punitive
damages, specific performance, etc.) may be sought by the injured party
in courts. Ukrainian legislation does not provide for any criminal sanctions,
except for violations of trade secrets. Administrative liability in the
form of fines, confiscation of products, equipment and raw materials may
be sought in the event that an infringement of intellectual property rights
is accompanies by unfair competition on the part of the infringer.
The notion of unfair competition under Ukrainian legislation is formulated
very broadly to include, any unlawful use of patents, trademarks, brand
names or markings, unlawful copying of the product's form, packaging, trade
dress, imitations, direct counterfeiting, violation of trade secrets and
confidential information, public defamation, etc. On the other hand, the
amounts of administrative fines provided for in the Code of Administrative
Offenses are symbolic at best when compared to the profits which could
be generated by infringers.
