Legal Framework for Subsoil Use in Ukraine: Opportunities for Investors and Key Risks

Valeriia Gudiy, Attorney at Law, Partner

Oleh Trokhymchuk, Attorney at Law, Counsel, Co-Head of Dispute Resolution Practice

Source: Yurydychna Gazeta

Ukraine is a nation with a formidable mineral and raw material base. Significant deposits of iron ore, titanium, lithium, manganese, uranium, graphite, and rare earth elements form the foundation for the development of the mining industry and the attraction of investment. At the same time, subsoil use in Ukraine is one of the most regulatory-intensive sectors of economic activity. It integrates licensing procedures, tax and royalty obligations, environmental requirements, state control over strategic resources, and, in current conditions, sanctions restrictions.

The practice of supporting investment projects in the field of subsoil use demonstrates that project success depends not only on the availability of a deposit but, primarily, on proper legal structuring at the initial stage.

How Can a Foreign Investor Enter the Minerals and Mining Market in Ukraine?

According to the Constitution of Ukraine and the Subsoil Code of Ukraine, subsoil resources are the property of the Ukrainian people and may be granted exclusively for use. An investor does not acquire ownership of the deposit but obtains the right to use the subsoil for a specified term and under established conditions. This principle is fundamental and dictates the entire logic of legal regulation in this industry in Ukraine.

This means that:

• the state maintains control over compliance with the terms of use;
• failure to execute work programs or reporting requirements may serve as grounds for sanctions;
• usage rights may be suspended or terminated in cases prescribed by law.

The primary instrument for market entry is obtaining a special permit for subsoil use, which generally grants the right to geological study of the subsoil, including pilot-industrial development and commercial extraction of minerals.

Key Mechanisms for Acquiring Subsoil Use Rights

From a practical standpoint, a foreign investor has three mechanisms for obtaining a special permit for subsoil use.

1. Participation in an auction (electronic bidding). Today, the vast majority of special permits are granted through open auctions (electronic bidding) on the Prozorro.Sale platform. This formally ensures equal access for both foreign and national companies. Based on our experience, before deciding to participate in an auction, an investor should focus on the following aspects:

• check for potential sanctions restrictions for the investor, both in Ukraine and in other states;
• conduct a preliminary analysis of geological information (cases where information submitted for the auction is outdated are frequent);
• verify the formation of the financial model, accounting for royalty payments and tax liabilities;
• verify the land and environmental restrictions of the plot. Insufficient verification of these aspects before participating in the auction can create risks even after the permit is obtained.

2. Acquisition of corporate rights in a company that already has the status of an active subsoil user. Another common mechanism is the acquisition of corporate rights in a company that already holds a special permit for subsoil use. Such an approach allows for a faster start to project implementation but requires meticulous legal due diligence, specifically regarding:

• the legality of the initial permit acquisition;
• compliance with usage terms;
• tax liabilities;
• environmental requirements;
• existence of litigation. Judicial practice indicates that formal violations committed by a previous owner can result in the loss of subsoil use rights.

3. Production Sharing Agreement (PSA). A PSA is a special mechanism typically applied to large-scale, capital-intensive, or strategic projects. Such a mechanism involves:

• determination of the procedure for distributing extracted products;
• coordination of special taxation conditions;
• establishment of long-term stability guarantees. The parties to a production sharing agreement are the investor(s) and the State, represented by the Cabinet of Ministers of Ukraine.

Among the advantages of a PSA for an investor are long-term stable conditions, the possibility of fixing the tax regime and environmental rules, and a higher level of investor protection. Among the primary disadvantages are the complex and politically sensitive procedure for concluding a PSA, which requires decisions by the Cabinet of Ministers of Ukraine. Additionally, imperfect legislation and unsettled judicial practice may increase uncertainty regarding the protection of investor rights.

The procedure and conditions for the tender to conclude a production sharing agreement are determined by the Law of Ukraine “On Production Sharing Agreements.” A special permit for subsoil use under PSA conditions is issued based on the concluded production sharing agreement, specifying the type of subsoil use for the performance of works (conduct of activities) provided for by the agreement, and must contain all types of subsoil use, other data, and information provided for by such an agreement.

It should be noted that subsoil use rights granted by a special permit under PSA conditions may be transferred to third parties simultaneously with the transfer of rights and obligations under the relevant production sharing agreement, with the mandatory re-issuance of the special permit for subsoil use by introducing amendments to it. Amendments to the special permit, extension of its validity, suspension, termination, and renewal of its validity are carried out by the relevant permitting authority in the manner established by the Subsoil Code of Ukraine.

In general, a foreign investor must realize that they do not receive ownership of the subsoil but a right to use it, which is linked to certain obligations, such as: conducting geological work/extraction within specific timeframes, executing work programs, submitting reports to the State Service of Geology and Subsoil and other bodies, and complying with environmental norms, safety standards, and land use rules.

Prospects of Working in Ukraine: Potential and Limitations

Ukraine has officially defined a list of strategic and critical minerals that are of particular importance for national security and the economy (CMU Resolution No. 845 dated July 14, 2025). This means increased state control, potential special access conditions, and heightened attention to the end-use of products. Thus, for an investor, this is not only a risk but an opportunity, as the state is interested in attracting technology and capital specifically to these segments.

Recent years have been characterized by attempts to reform the industry, including the digitalization of procedures, the opening of part of the geological data, and the implementation of EITI standards. All these steps contribute to creating a more transparent and predictable institutional system. At the same time, subsoil reform remains incomplete, and law enforcement practice is often contradictory.

Also, all potential investors considering investment in Ukraine currently take into account security and military factors. No investor can ignore the war factor in Ukraine, which in practice means the necessity of war risk insurance, working with international financial institutions, and choosing regions with lower security threats.

Rights and Obligations of an Investor in the Strategic Minerals Sector

A foreign investor, in particular, has the right to:

• exercise subsoil use within the limits of a special permit or PSA;
• export extracted products (subject to restrictions);
• repatriate profits abroad;
• benefit from international legal protection of investments. In the event of a dispute, an investor may utilize international arbitration if provided for by a contract or international agreement.

At the same time, the investor has obligations, the key ones being:

• compliance with license conditions;
• timely payment of royalties and taxes;
• compliance with environmental requirements and land reclamation;
• reporting to state authorities. In practice, it is precisely the violation of formal procedures that often becomes the basis for conflicts with the regulator.

Sanctions Restrictions as an Investment Risk Factor

During the support of foreign investments in the extractive industry of Ukraine, Ilyashev & Partners Law Firm has repeatedly encountered recurring strategic errors that significantly complicate project implementation, leading to prolonged disputes or even loss of assets.

Some investors mistakenly believe that the permit itself guarantees continuous activity. However, subsoil legislation and the case law formed by the Supreme Court establish that non-compliance with conditions – including reporting or environmental requirements – can lead to the suspension or revocation of the permit.

At the same time, the Supreme Court, within the Cassation Administrative Court, has repeatedly emphasized the importance of proper procedural and substantive compliance with the grounds for terminating subsoil use rights and checking all circumstances of the regulator’s decision, noting that revocation is possible only under clearly defined circumstances and with proper evidence of violations. Thus, every formal requirement of a special permit should be interpreted as a potential ground for a dispute, and its compliance must be meticulously monitored.

Revocation of a Special Permit: Application of NSCU Sanctions

The experience of Ilyashev & Partners includes a case that served as an illustration of a negative scenario for a foreign investor who held a substantial stake in a Ukrainian enterprise that had conducted business in the subsoil use sector for many years based on a special permit issued by the State Service of Geology and Subsoil of Ukraine.

The enterprise fulfilled its obligations under the terms of the subsoil use agreement, invested in geological study, exploration, and field preparation, built infrastructure, provided jobs, and consistently planned a long-term extraction project. For a significant period, the investor made capital investments based on the predictability of the regulatory environment and legal guarantees recorded in both the special permit and the investment agreement with the state. The investor’s expectations were typical for the mining industry: continuity of subsoil use rights, the possibility of profiting from field development, and protection against unreasonable state interference.

However, the situation changed dramatically after relevant decisions by the authorities. Thus, in 2021, a sanction in the form of suspension and revocation of the special permit was applied to some Ukrainian subsoil users (which also had foreign investment) pursuant to the decision of the National Security and Defense Council of Ukraine (NSCU) dated June 18, 2021, enacted by Presidential Decree No. 266/2021.

Effectively, this meant the instantaneous loss of the key asset – the right to develop the field. Subsoil users lost the opportunity to continue operational activities, and years of investment by foreign partners became economically worthless. The investor, who had no relation to the grounds underlying the sanctions, found themselves in a situation where corporate rights and invested capital lost their value.

Therefore, the most problematic aspect for a foreign investor is the application of NSCU sanctions, namely the suspension or revocation of a special permit, as such a sanction is:

• immediate and, in practice, irreversible;
• challenging sanctions in Ukrainian courts currently does not yield positive results, in part due to the Supreme Court’s position regarding the impossibility of judicial control over the lawfulness of the NSCU decision and the Presidential Decree;
• practically leads to an expropriatory effect, as subsoil use rights are the primary asset of any mining company.

Presidential Decrees enacting NSCU decisions can be appealed to the Supreme Court, which considers such claims as a court of first instance. Currently, Ukrainian courts have not made positive decisions in defense of the interests of subsoil users, and complaints have been filed in some cases with the European Court of Human Rights, which have not yet been considered.

American Companies and the Ukraine-U.S. Agreement: Are There Preferences?

The agreement between Ukraine and the U.S. on the creation of the American-Ukrainian Reconstruction Investment Fund, which provides for cooperation in the sphere of strategic resources, has created a new reality for the market. It does not grant automatic rights to the subsoil, but it provides political and financial guarantees and potentially creates a priority regime for access to financing.

Effectively, this is not a “monopoly” but an institutional advantage that other countries do not currently have. Although the agreement does not grant American companies ownership rights or automatic permits (licenses) for subsoil use, it establishes certain political and structural provisions that can affect actual access.

The Fund is intended to be the main channel through which Ukrainian companies or the state can seek external investors for projects in the extractive sphere. Thus, the Fund has the right to propose an American or other investor, if one exists, before a Ukrainian claimant can independently seek external financing, which effectively creates a priority for partners determined by the Fund.

At the same time, investors from other regions, including the European Union, Asia, and the Middle East, operate within the general foreign investment regime, with equal access to auctions and standard PSA conditions. Formally,there is no discrimination, but in practice, the Fund’s mechanism, the associated cooperation, and the lack of special bilateral support mechanisms may place investors from other regions at a disadvantage compared to American companies.

Therefore, potential investors from other regions (EU, Asia, etc.) should conduct an analysis of the agreement between Ukraine and the U.S. regarding its impact on their own investment strategy. As an option, such an investor could position themselves as a partner for the Fund by joining consortia or joint ventures that could be considered by the Fund as project partners.

Conclusion

Today, subsoil use in Ukraine is a sphere of great opportunities and no less significant risks. For companies interested in mineral extraction or already involved in this activity, the following are decisive:

• the correct choice of the market entry method;
• meticulous legal due diligence of assets;
• compliance with the terms of the special permit;
• assessment of sanctions and litigation risks.

Undoubtedly, Ukraine needs foreign investment in the extractive industry; however, this market requires long-term thinking, legal discipline, and a strategic approach.