Doing Business In: Ukraine

Mikhail Ilyashev, Attorney at Law, Managing Partner, Honored Lawyer of Ukraine

Source: The Legal 500

Starting from 05:30 of 24 February 2022, Ukraine imposed martial law on its whole territory as a result of the military aggression of the Russian Federation. On the first day of the full-scale invasion, the President of Ukraine signed the Decrees On the Formation of Military Administrations and On General Mobilization.

During 2022, almost one million people were mobilized into the ranks of the Ukrainian Armed Forces. According to the Ukrainian Parliament Commissioner for Human Rights, another 14.5 million Ukrainians, mainly women and children, left the country in 2022. Additionally, 4.7 million people changed their place of residence in Ukraine and were registered as internally displaced persons.

The year 2022, marked by the war, was notable for the adoption of normative legal acts that significantly changed the Ukrainian legal framework. During the year, the Ukrainian Parliament adopted 399 wartime laws and regulations.

Businesses in Ukraine had to adapt to working conditions between air raids, energy breakdowns due to the terrorist missile attacks on energy infrastructure, and curfews, amid sharp revenue declines, constant changes in the legal field and a personnel crisis due to migration and mobilization of employees. According to USAID, since the start of the war, 19% of Ukrainian companies were forced to relocate, most of them from the East of Ukraine.

Flexibility in such a situation was the only way for the business to survive. Production chains on the domestic market underwent significant changes. Thanks to international aid in the form of equipment and modern air defense systems, Ukraine is gradually moving away from power outages giving the businesses the opportunity to plan their activities ahead.

Ukraine’s Economy

The Ukrainian government estimates that the national economy fell by about a third after the most difficult year in the country’s recent history. Irreversible losses in industry have already exceeded 30%. According to the Center for Economic Strategy, such an annual decline will be the largest in the entire history of Ukrainian independence.

Some sectors of the economy have been affected much more. The metallurgical industry, historically one of the locomotives of the Ukrainian economy and exports in particular, has suffered some of the most significant losses. The mining and metallurgical complex finished 2022 with a 70% decline in both production and exports as a result of the Russian occupation, the destruction of two large metallurgical plants in Mariupol and the closure of seaports through which products were exported. Other sectors, such as aviation, have completely vanished.

According to the Kyiv School of Economics, by the end of 2022 direct and indirect losses of Ukraine exceed USD 600 billion, of which about USD 138 billion is infrastructure and production destruction.

The Ukrainian’s ability to avoid the most negative and pessimistic scenarios was due to the unprecedented support of partner countries and the fact that citizens and businesses have learned to live in the harsh conditions dictated by the war. Throughout 2022, Ukraine received more than USD 30 billion in grants and concessional loans. This aid is expected to reach USD 38 billion in 2023.

Business Environment

Ukraine’s possible EU accession

The prospect of EU accession is one of the key changes that improved the business climate in Ukraine. On 4 October 2022, the OECD Council recognized Ukraine as a potential member and started an initial dialogue on accession.

The prospect of EU membership is an important driver of reforms: preparations for membership will require the completing a comprehensive transformation of all areas. Thanks to the candidate status and movement towards membership, the business climate in Ukraine will approach the conditions of the EU countries.

Cancellation of duties and quotas on Ukrainian exports

In May 2022, the EU introduced a duty-free trade regime with Ukraine for a period of one year. The abolition of customs duties and quotas on Ukrainian exports gave Ukrainian manufacturers the opportunity to more widely present their products on European markets. The same right of duty-free export for Ukrainian products is provided by Canada and Great Britain. During the war, Ukrainian manufacturers were able to sell almost USD 37 billion worth of products abroad. The main export goods with a share of about 13% are sunflower oil and corn, which were exported by sea thanks to the grain agreement. It is expected that the duty-free trade regime will be extended for another year.

Transport visa-free regime with the EU

On 29 June 2022, Ukraine and the EU signed the Agreement on Road Freight Transport, also known as the “transport visa-free regime”. The agreement abolishes the need for Ukrainian carriers to obtain permits for bilateral and transit traffic to EU countries and allows to avoid stopping the export of Ukrainian products through road checkpoints. The agreement also provides for measures to simplify the recognition of driver’s documents. The agreement has been extended until 30 June 2024.

Export logistics

One of the main consequences of the Russian invasion was an almost complete change in the country’s export logistics. This was caused by the capture and blockade by the enemy of most of the seaports, through which almost 75% of Ukraine’s total trade passed, which is 120 million tons of cargo per year. And while the Black Sea grain corridor has started to work for agricultural market, the situation remains critical for the metallurgy. In the absence of the same export opportunity that the Ukrainian agribusiness was provided with through the Black Sea grain deal reached through the mediation of the UN and Turkey, metallurgical exports fell by 62%.

In July 2022, the European Commission made changes to the indicative maps of the Trans-European Transport Network (TEN-T), including Ukrainian logistics routes. This decision contributed to the implementation of the “Paths of Solidarity” initiative regarding the export of Ukrainian agricultural products and the delivery of humanitarian aid to Ukraine.

Tax benefits and regulatory policy

From the first days of Russia’s full-scale invasion into Ukraine, the Verkhovna Rada of Ukraine and its committees actively began working on wartime legislative acts in the economic sphere.

In the economic sphere the Verkhovna Rada of Ukraine also adopted a number of laws, in particular:

• introduced monitoring of existing and potential threats to the national security of Ukraine in state banks, state-owned enterprises, and companies (No. 2182-IX);
• simplified the mechanism for obtaining state funds by business entities for compensation of losses related to martial law (No. 2175-IX);
• provided protection in the field of intellectual property during martial law (No. 2174-IX).
• introduced a new type of sanctions – confiscation of assets owned by individual persons or legal entities, whose actions posed a significant threat to national security, sovereignty or territorial integrity of Ukraine (No. 2257-IX);
• determined the conditions for relocation processes of enterprises under martial law (No. 2468-IX).

In 2022, a total of 46 laws in the field of finance, tax and customs policy were adopted by the Verkhovna Rada of Ukraine since the full-scale invasion of the Russian Federation into the territory of Ukraine.

The shock experienced by the business from the start of the war was softened by introducing tax benefits and easing reporting requirements. The Ukrainian Parliament passed two laws that postponed the taxes payments and reporting, introduced a moratorium on all types of tax audits, and exempted those who could not pay taxes on time from liability.

Starting from 1 March 2022, land fees (land tax and rent for state and communal land plots) were abolished. This rule will expire on December 31 of the year following the year in which martial law is lifted.

In June 2022 the Verkhovna Rada introduced tax incentives for industrial parks. The said incentives provide for the exemption from VAT and import duties on importation of new equipment (without the right to leasing or use by third parties), exemption from income tax throughout a ten-year period (if the tax amount is invested in production) and the right of local self-governing bodies to establish preferential property tax rates and land fees.

Confiscation of private assets of the aggressor and its supporters

Ukraine has become the first country to define on a legislative level the possibility of applying the sanction of confiscation of private assets of the aggressor and its supporters. On 2 May 2022, corresponding amendments were made to the Law of Ukraine On Sanctions according to which assets are subject to confiscation for actions that posed a significant threat to the national security, sovereignty or territorial integrity of Ukraine (including through armed aggression or terrorist activities) or significantly contributed (including through financing) to the commission of such actions by other persons.

The said applies to the assets of people who made decisions or participated in armed aggression against Ukraine, as well as collaborators who supported the occupation administrations and authorities or held referendums or elections in the occupied territories. The second category is represented by the assets of persons who directly contributed to the invasion and persons indirectly related to the war. They include:

• those who expressed the intention and readiness to use their army to promote armed aggression, provided Russia with the use of territory, civil or military infrastructure for the accommodation of its army and supplies, allowed the Russian army to cross its border into the territory of Ukraine;
• big business represented by the companies that over the last year paid over USD 1 million in taxes to the Russian state budget;
• benefactors and donors who made donations to state authorities or the military administration of Russia for more than USD 20.500 (UAH 750.000);
• buyers of Russia Government Bonds in the amount of USD 82.000 (UAH 3 million) per year;
• propagandists and distributors of Russian narratives.

The conditions for confiscation of assets are as follows:

– it can only be applied during the period of the legal regime of martial law;

– preliminary application of sanctions on assets in the form of their blocking.

Confiscation of assets is possible only if these two conditions are present. The legal regime of martial law narrows in time the possibility of confiscation of assets and encourages the state to impose sanctions as quickly as possible.

Ukraine’s partners, who have already imposed unprecedented sanctions against Russia and froze private Russian assets worth billions, and also introduced a corresponding instrument or are actively looking for ways to confiscate and use these funds.

The Ukrainian practice will serve as an example for future approaches and to confirm or refute the viability of such sanctions as confiscation of assets of persons who promote military aggression, and, accordingly, the possibility of using such tools to effectively prevent wars and compensate the affected countries.

Current Opportunities for Investors

The Ukrainian authorities are doing everything possible to kickstart the investment process in the country’s recovery now, rather than waiting for the end of the war.

In July 2022, Ukraine presented a powerful and comprehensive reconstruction plan at a conference in Lugano. The implementation of this strategy is designed for ten years and has been enthusiastically welcomed and supported by international partners. Ukraine sets itself an ambitious, but quite realistic goal: to make the leap from a transitional to a developing economy by 2032.

A unique electronic platform Advantage Ukraine has already been created to attract foreign investors to the Ukrainian economy. The platform includes more than 500 investment projects and opportunities in 10 sectors of the economy. After the registration on the platform each potential investor will receive comprehensive information about investment opportunities, specific projects and the benefits that it will have from investing in the economy of Ukraine.

In particular, Ukraine is expecting private investments in defense, agriculture, IT, renewable energy, gas production and storage, development of logistics, construction, and more. Ukraine offers facilities for construction that can be located in industrial parks, tax benefits, financing from international financial organizations and coverage of credit risks.

According to the Ministry of Economy of Ukraine, as of December 2022 Advantage Ukraine platform Ukraine has received more than 500 applications for future investments in the country.

Forecast for 2023

In 2023, Ukraine will focus on meeting the requirements for its accession to the EU. Entrepreneurs are waiting for the tax system and customs reforms and hope for the rapid and effective reformation of a judicial system and a real fight against corruption. There are high expectations for implementation of the National Recovery Plan, which is estimated at USD 750 billion.

The key risk to the functioning of the Ukrainian economy in 2023 will be a decline in production and an increase in unemployment. Investment development of the country will be difficult due to war risks, withdrawal of labor resources to the ranks of the armed forces, energy terror, and logistical problems.