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Foreign Investors, Ukrainian Markets

Written by: Sergiy Oberkovych - Attorneys at Law
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Ukraine’s desire to move toward Europe, becoming a member of the World Trade Organization as well as a strong commitment to join and the North Atlantic Treaty Organization has contributed to an improved business climate in which in which the volume of foreign investment has grown faster than expected. And even despite continued political tensions which have played out over the past ten years, economic growth remains strong as large returns in high growth sectors and long-term prospects bring new investment capital into the country. As a result, demand for qualified legal services is outpacing supply.

Amid this increased need for domestic legal services by international outlets, there also exists the very real dilemma of how to find a Ukrainian law firm which suites the specific needs of the potential clients and which is familiar with all aspects of doing business in Ukraine while practicing according to western standards. More and more foreign clients are opting to use the services of those Ukrainian law firms which are able to cost effectively bridge this divide. Gvozdiy & Oberkovych Attorneys at Law offers the diverse professional skills of such qualified attorneys, lawyers, legal consultants and legal assistants, while providing viable and comprehensive solutions for its clients. Since its foundation, the U.S. and Ukrainian trained legal counselors at Gvozdiy & Oberkovych have focused on assisting foreign clients in navigating the nuances of Ukrainian and international laws and avoiding costly legal traps while doing business in Ukraine.
In order to meet the highest standards of its clients, Gvozdiy & Oberkovych has developed a multi-field legal practice to provide comprehensive legal support to corporate and private clients based on a client-oriented attitude, an in-depth knowledge of the law, substantial experience, a deep understanding of the operating environment, and effective technology.

Many Opportunities for Foreign Investors in Ukraine

In recent years, Gvozdiy & Oberkovych attorneys are increasingly involved in supporting foreign investors in Ukraine. One of the main practices of the law firm is transactional work, including due diligence investigations, drafting and negotiating of acquisitions and other complex agreements. Our attorneys have gained a solid experience providing foreign clients with legal support on a number of mergers and acquisition transactions by conducting prior full scale due diligence. Among the most recent such successful deals for foreign clients was the active collaboration with other international law firms on a number of transactions on acquisitions of banks, independent due diligence and drafting of share purchase agreements in the course of acquisition of telecommunications and software development companies, companies in the oil and gas sector, providers of services, agricultural producers and companies involved in the development of natural resources.

“Based on our prior practice conducting due diligence investigations, the attorneys of Gvozdiy & Oberkovych can prevent our clients from many unexpected developments and problems while entering the Ukrainian market. As an example, while one of our U.S. based clients was planning to acquire a Ukrainian group of software development companies, we discovered in the course of due diligence a number of problems related to the asset’s property rights, costly labor litigations and substantial non-fulfilled tax obligations. Based on our advice not to acquire the business, the U.S. company avoided what would have been substantial financial losses,” says Sergiy Oberkovych, a partner in charge of the Gvozdiy & Oberkovych firm’s M&A group. “With globalization of the world economy, companies are growing by merger and acquisition in a bid to expand operations and remain competitive. Foreign investors must take into consideration that government agencies play a very substantial role in Ukrainian M&A transactions. Sometimes, depending on a market share, value and relative share in the target, it may be necessary to obtain prior approval from the Ukrainian State Anti-Monopoly Committee which requires a detailed preparation of an antitrust file.”

Gvozdiy & Oberkovych Attorneys at Law has a strong tax practice headed by Valentyn Gvozdiy who also serves as the Head of the tax committee of the Ukrainian Bar Association and a member of working group of the Ukrainian State Tax Administration on developing a new tax code for Ukraine. The firm advises clients on tax matters in M&A transactions, financing, real estate, land acquisitions and other transactions. The lawyers of Gvozdiy & Oberkovych are often involved in the early stages of business transactions, during which the firm acts as counsel. It provides a full package of tax planning services, including domestic and international corporate structure planning, applicable tax treaties and foreign tax laws, individual income tax planning, state and local tax consulting, resolution of tax disputes and litigation, due diligence and risk management of projects, VAT and indirect taxes, customs duty, taxation of nonresidents, including taxation of profit received from investment activity in Ukraine, and taxation of enterprises with foreign investments. “The tax system of Ukraine is still rather complex and requires constant attention for the clients. We are all looking forward to adoption of a new Tax Code which will unite a number of legislative acts and remove certain contradictions and unclear definitions in Ukrainian tax legislation which will allow businesses to operate more effectively. But it would be fare to say that the Ukrainian tax system is beneficial for investors, the rate of corporate income tax is 25% and the value added tax (VAT) is 20%, which is less than that in many other jurisdictions. Investors understand that as well as the beneficial taxation allowed under numerous bilateral tax treaties existing between Ukraine and other countries,” says partner Valentyn Gvozdiy.

Ukrainian Capital Markets Still Underdeveloped

The increasing number of portfolio investors increased a number of hedge funds and real estate investment funds, bonds and IPOs requiring Ukrainian lawyers to be involved in servicing international capital market transaction. Ukrainian capital markets are still underdeveloped and real domestic IPO is not really suitable for corporate finance strategies. Due to the number of strict regulations by Ukrainian securities regulators an IPO of Ukrainian companies’ shares at international markets is done through founded for this purpose foreign companies and supported the assets of Ukrainian companies. Foreign investors are transferring capital through loans or investments in capital of those companies. “Foreign investors are attracted by comparatively low withholding tax on the dividends”, acknowledge Gina Berg, “according to Ukrainian law, dividends paid by Ukrainian joint stock company to a foreign investor are subject to 15% withholding tax which can be reduced by means of application of correspondent tax treaty”. Another way to inject financial resources into Ukrainian company is a loan from a foreign investor. “Borrowings from a foreign company are subject of a special license of the National Bank of Ukraine, but this instrument is still widely used for the purpose of effective financing” says Sergiy Oberkovych.

Real Estate and Construction Boom in Ukraine Continues to Grow

A very substantial portion of direct foreign investments is directed into the real estate market of Ukraine. In general, real estate law in Ukraine requires careful attention to detail and full due diligence. While there are many more title and other disputes in Ukraine than in Western countries, almost all of these problems are attributable not to Ukrainian legal problems but rather to an absence of careful legal work. Gvozdiy & Oberkovych has an extensive practice supporting clients in constriction of commercial real estate as well as industrial facilities. “One of our current projects is counseling a Czech construction company on a multi-mullion Euro deal, which is developing a co-generation electrical plant in western Ukraine. This pilot project is unique in terms of its importance for the Ukrainian economy and can lead to many similar projects in the future. Ukraine may benefit from it not only in terms of straightening its energy infrastructure but also in getting additional income through the Kyoto protocol on the levels of allowable emissions”, says Sergiy Oberkovych.

As democracy steadily develops, Ukraine becomes very attractive for foreign media companies which are making their first careful steps into the country. The Ukrainian legislation has traditionally limited direct foreign participation in television and radio broadcasting entities, information agencies and publishing houses, but this has not decreased the interest in this attractive market.

Private Property Rights Key to Maximizing Ukraine Investments

Foreign investors are always cautious about getting extra protection of their investments granted by the state. “We always advise our clients to register their foreign investments in Ukraine in order to insure their extra protection provided by the state and to allow a tax free return of investments if necessary, as well as easing movement abroad of dividends or the so-called interest over capital, or the price received upon the sale thereof in Ukraine,” acknowledges Gina Berg, US Attorney, an international Partner of Gvozdiy & Oberkovych Attorneys at Law.

The level of private property rights protection is the main concern of investors when they are coming into a new country. It is common for any country that disputes over property rights or fulfillment of contractual obligations may lead to litigation. Disputes between companies arising out of their business relations considered under the rules of commercial proceeding adopted in Ukraine, other disputes with state authorities regarding their functions are resolved under the Administrative Proceedings Code of Ukraine. According to Sergiy Oberkovych, “Depending from the nature of a deal we advise our clients what is in their best interests, to choose a foreign or Ukrainian law as a governing law in their external business relations, to use international arbitrary courts or chose a jurisdiction of Ukrainian courts. One of the most regular and dangerous threats for foreign investors is an unlawful corporate takeover which can lead to a long-lasting court battle over a corporate dispute and in view of such undesirable consequences it is virtually important to structure a corporate deal in a proper, secure manner using the correct legal instruments.”

There are a number of ways to structure and secure a deal with foreign investments: a wide array of instruments starting from proper corporate structure, beneficial financing and suitable usage of secured transactions instruments.

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