Chapter 2. The policy framework for investment in Ukraine1
During 2014-15 Ukraine deployed significant efforts to improve its investment environment. The ratification of the Association Agreement with the European Union and the entry into force of its economic part in January 2016 have provided an anchor for many reforms. Recent initiatives have focused on reducing administrative burdens and improving public procurement. The government has also introduced significant tax reforms, resulting in better tax transparency, and made headway on reducing bribery and other forms of pressure on businesses with the establishment of a Business Ombudsman institution. Corruption nevertheless remains a serious challenge, and investors still complain about inadequate enforcement of anti-corruption legislation. Problems in applying laws and regulations continue to plague the business environment and public consultation mechanisms are not yet fully satisfactory. The overall policy and institutional framework for investment promotion and facilitation needs to be consolidated.
This chapter focuses on a range of policies having an impact on Ukraine’s investment environment, in particular investment policy, access to property, investment promotion and protection, privatisation, and international agreements. The analysis is based on the OECD Policy Framework for Investment (PFI). The PFI explores various policy domains, which influence countries’ investment climate (see Box 2.1) and analyse their contribution, interaction and coherence in support of a sound investment environment. Based on the areas of the PFI selected by the authorities.
The Policy Framework for Investment (PFI) is the most comprehensive and systematic approach for improving investment conditions ever developed. It helps governments mobilise private investment that supports steady economic growth and sustainable development, and thus contribute to the prosperity of countries and their citizens and the fight against poverty.
In response to new forces reshaping the global investment landscape and the numerous lessons learnt through its use over the years, the PFI has been updated to reflect new global economic fundamentals and to incorporate feedback from the international investment policy community. The update took place with the active participation of emerging and developing countries through an inclusive process led by an international task force co-chaired by Finland and Myanmar. A series of offline and online public consultations were held to gather comments from interested stakeholders. The updated PFI was endorsed on 3 June 2015 at the OECD Ministerial Council Meeting.
The 2015 update of the PFI looks at 12 different policy areas affecting investment: investment policy, investment promotion and facilitation, competition, trade, taxation, corporate governance, finance, infrastructure, developing human resources, policies to promote responsible business conduct and investment in support of green growth, and lastly broader issues of public governance. These policy areas are widely recognised as underpinning a healthy environment for all investors, from small- and medium-sized firms to multinational enterprises. However, while the PFI looks at policies from an investor perspective, its aim is to maximise the broader development impact from investment and not simply to raise corporate profitability.
The PFI is neither prescriptive nor binding. It emphasises the fundamental principles of rule of law, transparency, non-discrimination and the protection of property rights but leaves for the country concerned the choice of policies, based on its economic circumstances and institutional capabilities. It helps governments to design and implement policy reforms to create a truly attractive, robust and competitive environment for domestic and foreign investment.
By encouraging a structured process for formulating and implementing policies at all levels of government, the PFI can be used in various ways and purposes by different constituencies, including for self-evaluation and reform design by governments and peer reviews in regional or multilateral discussions.
For more information, see: www.oecd.org/investment/pfi.htm.
Overview of national investment-related legislation
Ukraine has an open and transparent legal regime for foreign investment that is broadly consistent with international norms. The Civil Code and the Commercial Code establish the principle of freedom of contract allowing the parties to select the type of contract appropriate to their situation.2 Either most businesses are incorporated as joint – stock companies (JSCs) or limited liability companies (LLCs). Article 13 of the Constitution enshrines the principle of State protection of rights for property and economic activity for all subjects, which are equal before the law; it also clarifies that property entails responsibility. The 2003 Commercial Code covers definitions of enterprises with foreign investments (Art. 116), foreign enterprises (Art. 117), and foreign investors (Art. 390); types (Art. 391) and forms (Art. 392) of foreign investments; the obligation to register (Art. 395); and the guarantees to foreign investors in case of termination of investment activities (Art. 399).
According to the Law of Ukraine “On the Regime of Foreign Investments” all investment, profits, legitimate interests and rights of foreign investors in the whole of Ukrainian territory enjoy the following protection and guarantees:
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Protection against changes in foreign investment legislation for a period of 10 years after their introduction (Article 8 of the Commercial Code).
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Protection against nationalisation, with the exception of emergency measures (e.g. national disasters or epidemics) and only if based on the decision of the Cabinet of Ministers of Ukraine. In case of nationalisation, a foreign investor must be compensated in the currency in which the investment was made or in any other currency acceptable for the investor. Decisions on requisition of foreign investment and compensation may be appealed in the courts (Article 9).
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Guarantee for compensation and reimbursement of losses resulting from the action, the omission of the action or the improper performance by the state or municipal bodies (Article 10).
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Guarantee in the event of the termination of investment activity to remit the revenues and withdraw the investment without paying export duties within six months after the termination of the investment activity (Article 11).
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Guarantee of repatriation of profits after the payment of taxes, duties and other mandatory payments (Article 12).
To qualify for these guarantees, foreign investors have to register (Article 13). The registration is linked to the investor, not to the company, and any ownership change must be accompanied by re-registration of the concerned entity.
Establishment procedures and permits – complex but progressively simplified
For their establishment, domestic and foreign investors remain subject to the same requirements, consisting of two or three steps, i.e. obtaining state registration, business permits and, for activities concerned, licensing. A foreign legal entity is required to present an additional document to confirm its registration in the country of residence, i.e. an extract from the trade, banking or judicial registry.3 The law also sets up the timeframe for this procedure (one working day) and the amount of the fees (UAH 170 or USD 8).4 The registration is carried out by some 680 registration offices operating as “single window” facilities and certificates do not expire. Companies, except single tax payer companies, with an annual turnover (excluding VAT) lower than UAH 300 000 (USD 14 086) are exempted from the obligation to obtain a VAT number.5 The number of permits was reduced from 143 to 85 in 2014.6
Law No. 191-VIII “On Amendments to Certain Legislative Acts of Ukraine on Simplification of the business environment (deregulation)” and Law No. 222-VIII “On Licensing of Certain Types of Business Activity” have been two of the most notable reform provisions since former Ukrainian President V. Yanukovych’s departure in February 2014. Adopted on 2 March 2015 and effective since 28 June 2015, Law No. 191-VIII cuts the number of licensing and approving procedures,7 eliminates permit centres (replaced by administrative service centres as a single window8), reduces the authorities’ influence on business activity, enhances investor protection, and improves the funding mechanism for the State Registration Service. The Housing Code was amended, simplifying the rules to re-equip and redevelop residential and commercial property, if such works do not interfere with the supporting structures and/or engineering systems for general use.
The Law No.191-VIII also aims at simplifying permit procedures in town planning, by authorizing village, settlement and municipal councils to i) grant, receive and register the documents required for conducting preparatory and construction works; ii) perform architectural and building inspections and iii) commission the objects.9 The Law also abolishes mandatory state registration of franchise agreements.10 With regard to scrap metal regulation the Law only introduces changes to the administrative and criminal liability, as more consequential proposals to abolish licensing, allocation of quotas for export and registration of export contracts were amended in the Parliament. Finally, the Law No. 191-VIII removed some ambiguities in the Code of Criminal Procedure that allowed the seizure of telecommunication equipment within criminal proceedings.11
In addition, the new legislation improves the system of electronic document flow between the United State Register of Legal Entities and Individual Entrepreneurs (maintained by the Ministry of Justice) and other state authorities.12 The right to obtain extracts, excerpts and statements (both in paper and in electronic forms) from the Register with respect to any business entity is granted to any person for a small fee (except for the state and municipal authorities).13 Information from the Register can be accessed via the official website of the Ministry of Justice. Previously, such information had to be published in official printed media.14
Adopted on 21 April 2015, Law No. 344 “On Amendments to Article 69 of the Tax Code of Ukraine regarding Simplification of Doing Business” requires banks to immediately notify the tax authorities on opening a bank account, entitles taxpayers to start expense transactions via their bank account from the date the bank notifies the tax authorities without needing to wait for any confirmation in reply from the tax authorities (unless registration is denied), and foresees a reduction of the term for value added tax registration from three business days to just one.
The Cabinet of Ministers also adopted an “Action plan for business deregulation” which contains 131 tasks to reduce the burden on businesses in different branches (agrifood, agriculture, construction…), diminish the number of entities controlling businesses and make business regulations more transparent and predictable. This comprehensive action plan also includes inspections by controlling entities, the reform of customs administration and a harmonisation of technical standards with EU Norms. The government plans to implement all these 131 tasks by the end of 2017. As of January 2016, Ukraine completed 37 tasks (i.e. relevant pieces of legislation adopted), while normative acts necessary to complete 23 other tasks were pending adoption in Parliament.
Efforts to reduce administrative burden are producing results and should be pursued
The 2000 Law on licensing initially listed 76 different activities subject to mandatory licensing, reduced to 30 in the new legislation of 2015.15 The government plans to reduce further the number of activities subject to licensing. The main innovation of this 2015 Law on Licensing is that licensing authorities will incorporate the details of all licenses into the United State Register of Legal Entities and Individual Entrepreneurs (available online, see above). The development of the necessary IT Infrastructure is at its final stage, while the Cabinet of Ministers is currently approving implementation Decrees detailing new approval procedures for obtaining licenses.
Ukraine has successfully carried out important business reforms, especially with respect to establishment procedures, as testified by its improving distance to frontier score on the indicator “Starting a business” in the World Bank Doing Business report (World Bank, 2016). The “distance to frontier” score is a tool to assess the absolute distance to best regulatory practices (on a scale from zero to 100) and its evolution over time. In the case of the indicator “Starting a business”, it has improved from 69.8 in 2010 to 93.9 in 2016 (reflecting data from July 2015). Chapter 2 provides a detailed analysis of Ukraine’s results in the World Bank’s Doing business 2016 ranking and accompanying report.
The government is also working on improving the ex-ante regulatory impact assessment (RIA) of draft business regulations (i.e. assessment of regulatory impact before adoption and implementation). Amendments to the current methodology16 will strengthen the standards for RIA by introducing mandatory cost-benefit analysis and specific SME-tests, in accordance with EU Standards in this field.
In 2015, the government set up the Better Regulation Delivery Office, financed under a three-year EU programme starting in 2016. The office is a non-government entity employing around 70 experts (lawyers, business analysts and experts on the DCFTA, the EU-Ukraine free trade agreement) to analyse the vast number of existing business-related norms and regulations. It will systematically analyse the regulatory environment for each sector, with a focus on issues relevant to SMEs, build coherent sector-specific “regulation trees” and make relevant recommendations (including new draft legislation or recommend to abolish existing norms).
The main problems remain an inadequate enforcement of existing legislation due to delays in the adoption of implementing regulations and often insufficient administrative and technical capacities of responsible executive agencies. The involvement of various agencies and interlocutors at different governmental levels and the lack of harmonisation in procedures inevitably leave room for discretion with an inherent risk of corruption. Some progress has been achieved since 2011 with the opportunity to file documents with the United State Register of Legal Entities and Individual Entrepreneurs in electronic form.17
Improving the quality of the public service is a key step to ensure expedient and efficient enforcement of business-related laws and regulations. In this regard, Ukraine’s Parliament adopted in December 2015 a new law on public service.18 Experts from the OECD/SIGMA Programme (a joint EU-OECD initiative) provided methodological support and recommendations throughout the drafting of the Civil service law. It increases public sector wages and introduces systematic competitive recruitment procedures and a transparent remuneration system, including a bonus based on individual performance. The Law also defines public service as a politically neutral professional body and limits the political activity of top public servants, while clearly distinguishing public servants from political appointees (subject to the spoils system, e.g. cabinet positions) or contractors in charge of support functions. The government plans to reduce significantly the number of public servants (around 300 000 as of January 2016) in the next two years.
Problems persist with ownership registration for land and other forms of property
Ukraine, possibly more than other transition economies, has found it complex to establish a formal ownership registration for land and other forms of property. As highlighted in the companion study on the Policy Framework for Investment in Agriculture in Ukraine, many property titles have not been formalised and the unified property and land cadastre is not yet operational. In addition, foreign individuals and foreign legal entities are not authorised to own either agricultural land or forests and purchase of publicly-owned land is possible but subject to complex procedures and requires consent by relevant ministries or the Parliament.19 The risk of misappropriations and fraudulent transactions remains high, courts are swamped with disputes, and investment, in particular from foreign multinationals, is discouraged.
There has been some major progress in recent years, however. Under the indicator “Registering property”, Ukraine’s distance to frontier in the 2016 World Bank Doing Business database (69.5) has improved compared to 2011 (51.3). However, there is still room for improvement: for instance, registering property in Ukraine requires more procedures (7, compared to 5 on average in Europe and Central Asia) and entails slightly longer delays (23 days against 22 in the region) than in the “Europe and Central Asia” regional grouping.20 Therefore, Ukraine’s performance on this indicator lags behind the average for Europe and Central Asia (75.3).
The 2015 Law on Business Deregulation also addresses several issues arising in agricultural land use. In particular, the Act significantly reduces the number of essential clauses in land lease agreements, directly authorizes the owners of land plots designated for subsistence farming to lease these land parcels to legal entities for commercial farming without any permitting procedures, and lifts or loosens special requirements governing crops use and rotation. A less positive amendment to the Land Code and the Act On Land Lease introduces a minimum seven-year term of agricultural land lease (this provision also covers subsistent farming), which may potentially result in higher transaction costs and risks.21 The Law further expressly allows leasing out of agricultural land designated for private farming to companies for commercial agriculture, with no requirement to change the designation. Finally, products that are already certified in the European Union will receive a Ukrainian certificate without any additional procedure.
Enforcement of contracts is affected by the poor state of the judiciary
According to the 2016 World Bank Doing Business database, under the indicator “Enforcing contracts”, Ukraine’s distance to frontier is 57.1 and has worsened compared to 2010 (67.2). Moreover, Ukraine’s performance on this indicator lags behind the average for Europe and Central Asia (66.4). Therefore, there is room for improvement in terms of the number of procedures, time and cost involved in payment disputes. Discussions with foreign investors in Ukraine confirm that they often do not see local courts as a viable option for the resolution of contract disputes. The judiciary – in principle the institution of choice for enforcing contracts – is not trusted by companies: courts in Ukraine are perceived as corrupt.22 Moreover, legal instruments have often proved ineffective in protecting the rights of minority shareholders, in particular to prevent profit-skimming or assets-stripping by controlling shareholders. The situation is projected to improve following the reduction of the minimum quorum for general shareholders’ meetings of joint stock companies (with or without state shareholding) and limited liability companies to be competent, from at least 60% to 50%+1 vote of the entire stock.23 This novelty will help resolve the “deadlocks” arising in the companies where minority shareholders (holding in total over 40% votes) could block the decision-making process merely by ignoring the general shareholders’ meetings.24 Another notable provision of the Law is introduction of a simplified procedure of recovery of dividends that were approved at the general shareholders’ meeting but which were not paid within 6 monthsafter the respective decision had been passed. Such dividends now will be recoverable by aggrieved shareholders extra-judicially, as “undisputed” accounts payable, through the execution certificate by a notary, and without recourse to courts.
In what is the first step in an expected major overhaul of the judicial system, new rules enhance the powers of the Supreme Court, extend the grounds for review of Cassation court decisions, and improve the selection and disciplining of judges.25 The law also tightens the professional requirements for judicial appointments.26 The law also amends the rules on professional misconduct by judges. Professional misconduct now encompasses groundless refusal of access to justice, unmotivated rejection of parties’ arguments in a court decision, failure to notify the law enforcement authorities of influence on the judge by outside persons, etc.27 While the new rules may delay consideration of court cases, they provide parties with more procedural tools to deal with an inconsistent or prejudiced approach by lower courts through revision by the Supreme Court.28 In addition, reflecting the influence of young reformers in post-Maidan Ukraine, civil society groups may now videotape judicial proceedings.
Expropriation has been rare
Whenever a government exercises its legitimate right of expropriation, there is a need for compensation. The compensation must be fair and adequate and paid promptly. In addition, the government decision to expropriate land or other property ought to be motivated by a public purpose, observe due process of law, and be non-discriminatory and guided by transparent rules. As expropriation is perceived as a major political risk for an investor, clear provisions regarding expropriation are needed and constitute an investment guarantee. In international investment law (see the following section on IIAs), the concept of expropriation typically includes indirect expropriation (i.e. situations where a state interferes in the use of a property or in the enjoyment of its benefits even where the property is not seized and the legal title to property is not affected). In domestic legal systems, state interference with property rights that does not constitute a direct expropriation is often not addressed under the concept of expropriation.
In Ukraine, protection against expropriation is guaranteed by the Constitution. Conditions and procedures for expropriation are also stipulated in the 1996 Foreign Investment Regimes Act as well as in legislation addressing private land, in national defence-related legislation and in privatisation laws. Most of Ukraine’s investment partners are also protected by provisions under international investment agreements (IIAs and investment provisions of FTAs).
Article 41 of Ukraine’s Constitution (as amended) guarantees private property rights and stipulates that no one can be deprived of his/her property, except in cases where “social necessity” (public interest) has been demonstrated and “on the condition of advance and complete compensation of their value”. Article 41 further states that confiscation of property may be applied only pursuant to a court decision in the extent and by the procedure established by law. Under the 1996 Law of Ukraine on “Regime of Foreign Investments” (as amended), a qualified foreign investor is provided guarantees against nationalisation, except in cases of emergency measures in the event of natural disaster, accidents, epidemics or epizootics.29 There is no discrimination between foreign and national investors as regards expropriation, as the principle is embodied in Article 7 of the law. All expenses and losses incurred by the foreign investor are to be compensated on the basis of the current market prices and/or a substantiated evaluation, certified by an auditor or auditing company. Compensation paid to the foreign investor is to be prompt, adequate and efficient.30 The right to recourse for administrative decisions and judicial actions regarding an expropriation is guaranteed.
Other legal expropriation of property is regulated by the law on the alienation of land plots and property for public needs, the law on the legal regime of emergency state, and the law on the legal regime of martial law. The law on the alienation of land lots governs the procedure, rights and obligations to be fulfilled for the expropriation of land plots and other immovable properties owned by individuals or legal entities for public use or to satisfy public requirements.31 In addition to providing for a clear definition of public needs, the law includes a list of possible reasons for expropriation for such public needs (e.g. national security and defence; construction, modernisation and maintenance of line facilities and properties for transport and energy supply infrastructure; accommodation and maintenance of facilities connected with mining operations), fair-price fixing mechanisms, modalities of compensation and rules for appeals. Pursuant to the law, in the event of expropriation of a land plot and other immovable properties for public needs, the owner(s) of such property may receive compensation in monetary form or may acquire ownership of a similar land plot or item of real estate, the value of which will be taken into account during calculation of the repurchase price. In case of disagreement over the calculated repurchase value, the owner may bring the issue to court. Compensation shall be paid after the relevant decision of the competent authorities and before the issuance of property title document for the new owner.32
As in many other countries, Ukraine’s legislation also provides protection to investors in case of emergency situations. Private property may be legally expropriated for defence or emergency purposes with mandatory substantiated evaluation and compensation.33 For example, Article 15 of the Law On the Legal Regime of Martial Law (“The Content of Measures Introduced under the Legal Regime of Martial Law”) provides that, where Martial Law is effective, the Military Command is empowered to “temporarily expropriate (for defence needs) the property and assets of. (…) enterprises, institutions and organisations (both publicly and privately owned)”. Article 15 clarifies that “the procedures for the introduction of restrictions on the rights and legitimate interests of legal entities under Martial Law are pre-determined by the Laws of Ukraine”. According to Article 25 of the Law “On the Legal Regime of a State of Emergency”, “legal entities, whose property and resources were used for the prevention or elimination of situations that brought about the introduction of a state of emergency, shall be fully reimbursed according to the procedures specified by law”.
While Ukraine’s legal framework on expropriation does not contain provisions on indirect expropriation, most IIAs surveyed for the present review cover both direct and indirect expropriation (see Section on IIAs below). The absence of provisions on indirect expropriation in domestic law, however, does not mean that investors have no recourse against state interference with property rights that does not involve a formal transfer of title. Administrative law remedies in domestic law, such as judicial review of administrative decisions, are typically available to investors who seek redress against government action. Contrary to investment law remedies, where investors are usually paid compensation when they prevail against the state, advanced systems of domestic administrative law often grant primary remedies, such as annulling the illegal administrative decision or prohibiting or requiring specified government action (Gaukrodger and Gordon, 2012: 26).
Expropriation of property in Ukraine has been rare. According to the US Department of State (2013), one case of expropriation occurred in 2008 when a Production Sharing Agreement with an investor was cancelled by the authorities for exploring oil and gas in the Black Sea (US State Department, 2013). Another case occurred in early 2015, when Ukraine’s Supreme Court approved the expropriation of a controlling stake by a Russian company in an aluminium plant, because of unpaid debts.34 Ukrainian Law allows the government of Ukraine, with court permission, to revoke ownership when owners of privatized enterprises fail to complete payment of an enterprise or to otherwise implement the purchase agreement.
Following the events regarding the Autonomous Republic of Crimea in the spring of 2014, a major issue for business active in Crimea has become expropriation as the result of the adoption by the Crimean parliament of a law “On Redistribution of Strategic Facilities in Crimea” in July 2014. Enforcement of the legislation has reportedly affected many businesses in addition to state-owned enterprises and property: from March to December 2014, around 4 000 enterprises, organisations, and agencies had their real estate and other assets expropriated according to Ukraine’s Justice Ministry.35 In August 2015, Ukraine’s prosecuting authorities suggested that the value of the property expropriated was more than UAH 50 billion (USD 2.3 billion).36 Several UNCITRAL cases have been brought by Ukrainian investors against the Russian Federation based on the Ukraine-Russia IIA, alleging violations of the treaty by Russia against Ukrainian investments established in the Autonomous Republic of Crimea (see section on IIAs below).
State-owned enterprise reform is a priority, privatisation programme gaining new momentum
State-owned Enterprises (SOEs) control a significant share of the Ukrainian economy; the State is considered the largest enterprise owner in Ukraine, employing around 1 million people (Ministry of Economic Development and Trade, 2015a). SOEs, defined as entities in which the share of the State exceeds 50%, are present in most sectors of the economy and include (2015 estimate) 3 350 companies, of which 1 833 are operational: total revenue was USD 17.3 billion in 2014 (Ministry of Economic Development and Trade, 2015b). The top 100 SOEs account for 92% of the revenues, but a little over half are losing money.37 The first annual review of Top 100 SOEs, published by the Ministry of Economic Development and Trade (2014) which is supervising the ongoing SOE reform, highlights that the main challenges for the SOE sector are inefficiency, governance, transparency and accountability.
The State Property Fund has the right to be represented on the supervisory boards of joint-stock companies with the State’s share exceeding 25%. Corporate governance of SOEs is generally not good: for example, out of the 100 largest SOEs, 82 are organised as “unitary enterprises” (a form of corporation without full legal personality which, among other things, do not have ownership of all their assets) and do not have boards of directors. The quality of information is also poor: less than 5% of SOEs are audited according to internationally recognised standards. The SOE Reform Action Plan aims at raising transparency and accountability, improving corporate governance, setting clear objectives, and preparing the privatisation list.
Changes have been introduced to improve governance of SOEs based on the 2015 OECD Guidelines on Corporate Governance of State-Owned Enterprises (OECD SOE Guidelines), which are being used as a framework for reform. These include:38
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Strategic management and planning: Ordinance 662-r of the Cabinet of Minister “On approval of the Strategy on improving the effectiveness of the entities in the public sector” was approved on 27 May 2015. Guidelines on strategic planning and management were developed and sent to enterprises in June 2015.
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Mandatory audits: Decree “On certain issues related to financial audit of SOEs” approved; requiring 146 largest SOEs to complete audits by an independent qualified audit firm, the first time such audits have ever been required. The audits of 10 large SOEs have already been completed, while other audits are being undertaken.
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Boards of directors: Amendments to legislation on appointment of independent members of the board of directors of especially important enterprises have been drafted and agreed by the Cabinet of Ministers and relevant ministries, and have been submitted to Verhovna Rada for approval.
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Qualified executive management: A process to appoint qualified executives has been ongoing. The procedures for competitive selection of key executives was agreed on in February 2015. Following the results of and experience with the first round of competition, the procedures were amended by the relevant Ministries, agreed to, and approved by the Cabinet of Ministers of Ukraine in August 2015. A Nomination Committee has been established and its procedures approved through a Decree “On approval of principles of Nomination Committee”.39 The Ukrainian authorities have reported that the committee consists of 10 members, including five ministries and representatives of the business community and international financial institutions. CEOs for four SOEs (Ukrgasbank, Ukrgasdobycha, Ukrnafta, and Food and Grain Corporation of Ukraine) have already been appointed by the Committee, and short-listed candidates for four other SOEs were being assessed by the Committee in early 2016. Nine SOEs were running the internal nomination procedures, while positions in four more SOEs remained to be filled and responsible ministries had to approve selection criteria and start the selection process.
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Corporatisation: The legislation on the corporatisation process of SOEs (except fiscal enterprises) has been changed. Decree “On adoption of transformation process of state unitary commercial enterprise into joint stock company (Draft Resolution of the Cabinet of Ministers “On approval of the transformation of state unitary commercial enterprise into a corporation”) has been developed and agreed with responsible ministries, and approved by the Cabinet of Ministers. At the beginning of 2016, the Ministry of Economic Development and trade was preparing a list of SOEs to be corporatized and defining relevant timelines.
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National Holding Company: The shareholder function of strategic SOEs (i.e. not intended for privatisation) will be transferred from Ministries to a national holding company. The key objective of the holding would be to manage SOEs professionally, in line with the OECD SOE Guidelines, while increasing SOE efficiency and return on assets. This would separate the State’s ownership function and regulatory functions (Ministry of Economic Development and Trade, 2015c).
Of particular note is the ongoing reform of Naftogaz, which is the largest company in Ukraine and effectively controls the entire Ukrainian oil and gas sector. A large majority (76 %) of combined net losses of the top 100 SOEs in 2014 were losses by Naftogaz. Naftogaz is also the largest holder of debt among all SOEs (Ministry of Economic Development and Trade, 2015d). Naftogaz corporate restructuring action plan, which was designed by the EBRD and based on the OECD SOE Guidelines, includes the creation of a supervisory board of independent and qualified directors, the introduction of internal audit, compliance, anti-corruption and risk management functions and an ownership and governance structure in line with the OECD SOE Guidelines. The government has agreed on the plan, and conditional upon the reform, EBRD provided a USD 300 million loan to finance purchases of gas for the winter heating period.40 On 5 December, the government adopted Naftogaz’s new by-laws, which includes a supervisory board of 5 Directors, among which 3 will be independent Directors. The shareholder function of Naftogaz has been transferred to the Ministry of Economy and Trade.41
Regarding privatisation, Resolution “On Conducting a Transparent and Competitive Privatization in 2015-16”42 lists 345 SOEs subject to privatisation in 2015-2016, which is the largest in recent years. The list includes, in particular:
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78.29% stake in Centrenergo, one of the major power generating companies, and several large combined heat and power generating companies;
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a 50% stake in Azovmash PJSC, one of the largest heavy machinery manufacturers;
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Odessa Port Plant, one of the largest chemical producers, and majority shareholdings in other chemical companies (Sumykhimprom and Svema);
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Various agri-business concerns such as “Horse-breeding of Ukraine” (approximately 40 000 hectares of land), a poultry farm, a greenhouse plant, a sugar mill, and a sugar supply company;
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In the trading sector – 50% of shares in “Ukrnaftoproduct”;
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In banking, the Ukrainian Bank for Reconstruction and Development and 51% of the shares in Spetseksimstrah.
The list also includes some SOEs that had previously not been subject to privatization, such as 13 seaports, the Ukrainian Danube Shipping Company, the Black Sea General Shipping Agency “Inflot”, and a number of mines and quarries. Additionally, the government has reported that a list of companies (913 companies) excluded from privatisation has also been created and submitted to the Parliament for approval43 as an amendment to the “Law on the list of state property excluded from privatization”.44 Alternative draft laws have been developed for companies engaged in alcohol production and maritime transportation and submitted to the Parliament for approval.
The privatisation programme will be open to all domestic and foreign investors, except to those that are more than 25% equity owned by a state (i.e. any state, a foreign state or the state of Ukraine) as under Ukraine’s current legislation such investors are barred from taking part in privatisation of state or communal property in Ukraine. However, the government is preparing amendments to the Privatisation Law in order to limit the scope of this restriction to Ukrainian SOEs. If these amendment are adopted, foreign SOEs (or foreign companies where a state owns more than 25 % of the share capital) would thus be allowed to take part in privatisations. This would open privatisation tenders to a broader scope of foreign investors in key sectors (like electricity generation) and allow more competition between bidders. Legal entities and citizens from an Aggressor-State,45 as well as their Ukrainian affiliates, would nevertheless be prohibited to take part in the privatisation process.46
The State Property Fund of Ukraine is responsible for putting the companies and assets up for sale via open competitive auctions. The terms of privatisation of G group companies47 and energy sector companies are determined by in a Resolution of the Cabinet of Ministers and subject to reinforced disclosure requirements prior to privatisation auctions. Because of delays in the process, most privatisations are now planned in 2016. The State Property Fund of Ukraine plans to hire privatisation advisors among leading investment banks to provide technical assistance in the privatisation of certain large SOEs. In October 2015, the Fund concluded a contract with an international investment Bank to provide technical assistance in the privatisation of the Odessa Port Plant.48
New policies are being enacted for the purpose of creating a more transparent and efficient environment for public procurement
Public procurement represents an important share of Ukraine’s economy. In 2013, the aggregate value of public procurement amounted approximately to 13% of the country’s GDP. During the first nine months of 2014, public procurement amounted to UAH 93 billion (USD 4.37 billion) for a total of almost 55 000 contracts (OECD, 2015).
Increased corruption in public procurement characterized the years after the 2004 “Orange Revolution”. Legislation on public procurement was amended many times in recent years, but these amendments had a minimal effect on the levels of corruption. Furthermore, the 2012 amendments eradicated transparency in public bids, allowing for the embezzlement of state funds.49 In 2014, the Minister of Justice noted that experts had estimated that abuse in tenders for public procurement in the previous four years led to a reduction of the country’s GDP by 6-7%.50
In response to the corruption challenges in public procurements, and with the view to improving the business environment in Ukraine, a number of actions have been taken. On 20 April 2014, a new version of the Law on Public Procurement, designed to facilitate and streamline the government procurement procedures in Ukraine, came into force.51 The law was developed in the framework of the EU-Ukraine Association Agreement and is thus largely modelled on the 2004 EU Procurement Directives. Amended several times since then, the Law contains several provisions aimed at upholding the principles of transparency and procedural fairness. Efficiency, equal opportunity, fair competition and corruption prevention are principles governing procurement proceedings expressly stated in Article 3 of the law. The law also refers explicitly to the principle of non-discrimination, stating that domestic and foreign bidders shall participate in the procurement procedures on an equal basis and that the procuring entity may not set discriminatory requirements for bidders,52 unless the bidders are registered offshore.53
As compared to previous legislation dating back to 2010,54 the law has broadened the scope of application and reduced the number of exemptions from the public procurement regulations. In 2013, only 35% of public procurement by value used competitive methods (World Bank, 2014). The law has cancelled 30 exemptions from the scope of public procurement, reducing their number to categories usually found in international procurement practices (Yaremenko and Shatkovskiy, 2014). New financial thresholds that make a public tender mandatory also apply. Since September 2015, all government procurement of goods and services valued more than UAH 200 000 (USD 9 200) and works (such as construction works) valued at more than UAH 1.5 million (USD 75 000) must be procured through competitive tenders.55 Besides requiring open public tenders for all purchases above certain threshold amounts purchasers, the law also limits sole-source procurements.
This process has gone hand in hand with the availability of appeal mechanisms for better oversight of procurement processes. The Public Procurement Law adopted in June 2010 assigned the function of the appeal authority for considering claims of tender participants to the Antimonopoly Committee of Ukraine. This arrangement has been preserved in the 2014 Public Procurement Law, which specifies the appeal procedure in the case of complaints.56 The public procurement proceedings may also be appealed before a court. The 2014 Law has also preserved the function of monitoring body to the Ministry of Economic Development and Trade (MEDT).57 Its role includes issuing opinions on compliance of the procurement procedure with the requirements of the legislation; making recommendations to the procuring entities regarding correction and prevention of violations detected in the course of monitoring, including cancellation of the procedure; and the possibility to submit materials to law enforcement authorities about such violations. All opinions issued by MEDT are accessible on the Ministry’s website. In addition, reflecting the influence of young reformers in post-Maidan Ukraine, journalists and civil society groups may now attend bid openings and videotape the proceedings. In order to enhance transparency further, the government now regularly publishes information about procurements made by state-owned enterprises.58
The government has also been increasing efforts to render electronic public bidding proceedings and make them accessible through the web, in order to increase efficiency and transparency. Announcements of upcoming calls for bids in relation to the major part of public procurements are now made available on the official national web-portal on public procurements of the Ministry of Economy: www.tender.me.gov.ua.59 Announcements of tenders the value of which exceeds EUR 200 000 for goods, EUR 300 000 for services and EUR 500 000 for works are made in both English and Ukrainian languages, whereas announcements of tenders below such values are made in Ukrainian only. Registration is free. Furthermore, the law requires annual procurement plans of contracting authorities to be published on the website of the Ministry of Economic Development and Trade and within a strict deadline – no longer than five days from the date of their approval. This provision aims at increasing accessibility of information about planned public procurement to potential bidders.
The 2014 Public Procurement Law also provides for an option to carry out procurement procedures in electronic format, paving the way for the introduction of e-procurement in the near future. In late 2014, the government embarked on a pilot project on electronic state procurement to test a basic e‐procurement platform (called “ProZorro”) for low value tenders with several public entities.60 The ProZorro platform has been designed by NGOs (including Transparency International Ukraine) with the support of the government and commercial electronic tender platforms. It aims at ensuring transparency in public procurement, improving business confidence and eliminating corruption. Electronic procurement also simplifies access of SMEs to public tenders, can reduce budget expenditures and may ensure greater public control over the auction process.
The first purchases conducted under this new system have involved the ministries of Justice, Defence, Economic Development and Trade, Infrastructure, Health, and the State Affairs Department, as well as the National Bank of Ukraine, Energoatom, and the Kyiv City State Administration. State-owned enterprises (SOEs) affiliated to these Ministries (for instance, SOEs affiliated to the Ministry of Infrastructure, such as the Railways administration, Ports and airports, etc.) are also encouraged to use the ProZorro e-procurement platform. This pilot project should lead to broad scale introduction of e-procurement for the entire public sector in the near future, as required by the EU.61 In this respect, the Ukrainian authorities developed in the second half of the year a new law “On Public Procurement” according to which all public procurements would be carried out through electronic means. In December 2015, the authorities were reviewing the draft.
Although the results of the introduction of the above-mentioned changes in the legislation are yet to be seen, they represent a substantial progress with respect to openness, transparency and procedural fairness. Institutions such as the Council of Europe, the European Union and the World Bank have welcomed the new legislation,62 which has been seen as bringing greater alignment with good international practices in public procurement, in particular through limiting the cases for exception to categories commonly found in international procurement practices. To assist in meeting the commitments under the OECD Declaration on International Investment and Multinational Enterprises, Ukraine should continue is efforts to simplify and make more transparent public procurement proceedings, including through e‐registration.
Ukraine has also been negotiating its accession to the WTO Agreement on Government Procurement (GPA). Ukraine became observer to the GPA in February 2009 and submitted its first offer to accede in March 2014. Ukraine submitted a second offer in October 2014 and the Committee on Government Procurement provided positive comments on Ukraine’s GPA accession bid in February 2015. In summer 2015, a final offer of Ukraine was circulated among Parties.63 Based on further amendments to the public procurement law, the WTO’s Committee on Government Procurement agreed to invite Ukraine to join the GPA on 11 November 2015.
International investment agreements
International investment agreements (IIAs or investment treaties) are an important element of Ukraine’s investment policy framework.64 As of January 2016, Ukraine had 72 investment treaties in force.65 More than half of the agreements were ratified in the 1992-2000 period, immediately after Ukraine gained independence.
Ukraine’s bilateral IIAs typically contain substantive investment protection provisions, such as protection against expropriation without compensation and against discrimination, and they give covered investors access to investor-State dispute settlement mechanisms (ISDS) to enforce those provisions (see Box 2.3 on common features of IIAs).
Ukraine is also a party to several multilateral investment agreements. In particular, Ukraine ratified the Energy Charter Treaty in 1998. It offers protection for covered investments “associated with an Economic Activity in the Energy Sector”.66 The Ukrainian free trade agreement with the European Free Trade Association, which entered into force in June 2012, also contains an investment chapter and offers protection in the country’s investment relations with Iceland, Liechtenstein, Norway and Switzerland. Finally, in the 2014 EU-Ukraine Association Agreement, the parties agreed to review the agreement with a view to “including investment protection provisions and investor-to-state dispute settlement procedures”.67 The sections below give an overview of selected provisions in Ukrainian IIAs based on a sample of publicly available treaties.68 Ukraine’s legal and institutional framework for the settlement of disputes between the state and foreign investors is also presented.
The review of the substantive and procedural provisions suggests that Ukraine should consider updating its investment treaties with a view to ensuring that they well-reflect government intent and emerging trends in investment treaty policy. In addition to reflecting the suggested changes in their future agreements, Ukraine might, together with its treaty partners, also wish to consider changes to its existing treaties. Table 2.3 below gives some useful information on the temporal validity of investment treaties in this regard, which could inform Ukraine’s timetable to engage with its treaty partners.
Further specification of investment protection provisions would help to better reflect government intent
International practice shows that investment protection standards in IIAs have been typically relatively vague, especially in older treaties. This gives investment arbitrators broad discretion to interpret and thereby determine the scope of protection they provide. In general, Ukrainian IIAs follow this older tradition.
Recently, however, many countries have taken a more active role in managing their investment treaty policy. As part of this strategy, they have included more specific language on core protection standards, such as expropriation, fair and equitable treatment and most-favoured nation treatment. Since Ukraine has not been an active treaty negotiator in recent years, many of these innovations are not reflected in Ukraine’s investment treaties. While recent Ukrainian treaties contain more specific language on fair and equitable treatment and most-favoured nation treatment provisions, the provisions on expropriation remain relatively vague.
IIAs, entered into between two or more countries, typically offer covered foreign investors substantive and procedural protection. They provide additional protection to covered foreign investors beyond that provided to all investors and or to foreign investors specifically in national legal frameworks.
Substantive protections generally include protection against expropriation without compensation and against discrimination, by for example guaranteeing that covered foreign investors will be treated no less favourably than investors from the host state (national treatment, or NT) or third states (most-favoured nation treatment, or MFN). Particularly important for policy considerations are guarantees of fair and equitable (FET) treatment or treatment, which can be equated (or not) with the international minimum standard of treatment of aliens under customary international law (MST). The FET provision has been the provision most frequently invoked by foreign investors in recent years (UNCTAD, 2012). Additional clauses in IIAs can facilitate the transfer of profits, or limit or exclude certain performance requirements, such as local content rules.
IIAs can also foster liberalisation of investment by including commitments to open sectors to more foreign investment (market access) or give prospective covered foreign investors certain rights with regard to their efforts to make investments.
IIAs usually provide for procedural venues to enforce the host state’s obligations under the substantive standards. Today, most IIAs give investors themselves the right to bring claims against the host state before international arbitration tribunals for an alleged breach of the IIA – the so-called investor-state dispute settlement mechanism (ISDS) (Pohl et al., 2012; Gaukrodger and Gordon, 2012). The number of ISDS claims under IIAs has risen significantly in recent years and that there are currently over 600 known claims (UNCTAD, 2015). Precise numbers of the cases are difficult to establish because of the confidentiality of certain arbitral proceedings.
Direct and indirect expropriation
Most Ukrainian IIAs require host states not to expropriate unless the measures are taken in the public interest, on a non-discriminatory basis and under due process of law, with prompt, adequate and effective compensation.69 The relevant provisions typically address the determination and modalities of payment of compensation as well. Ukrainian treaties distinguish and cover both direct and indirect expropriation.70 These involve different policy considerations. Direct expropriation generally refers to an actual taking of legal title to property or a physical seizure of property by a government. As a result, the host state is enriched by and the investor is deprived of the value of the expropriated property. Indirect expropriation is a more complex and sensitive issue. Regulatory action or other behaviour by a government can sometimes have a dramatic effect on an investment, without involving a formal transfer of title or outright seizure. At the same time, provisions on indirect expropriation can affect the host state’s policy space because regulatory action can give rise to claims for compensation. Because most policy issues relating to expropriation arise with regard to indirect expropriation, this section focuses on Ukraine’s policy in that area.
Most Ukrainian IIAs explicitly cover indirect expropriation, but none of the treaties clarifies the circumstances under which regulatory measures do not amount to expropriation and where therefore no compensation has to be paid.71 This gives arbitrators discretion to draw the line between indirect expropriations that entitle the covered investor to compensation, and legitimate regulation that has a significant economic impact on the investor without obligating the government to pay compensation. Under treaties that refer only generally to indirect expropriation, ISDS tribunals have used varying approaches to determining whether an indirect expropriation has occurred (UNCTAD, 2012).
Ambiguity entails risks for Ukraine and does not facilitate predictability for investors. In the context of intense world competition for attracting FDI, Ukraine’s on-going efforts to improve the business climate should take more into account the need to review treaty language in order to better reflect Ukrainian government intent and the evolving treaty policy of international partners. The recent experience of Ukraine’s treaty partners could be useful in this regard. A growing number of treaties provide that except in rare circumstances, non-discriminatory regulatory actions that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations or can only do so in “rare circumstances”.72 These provisions clarify the limits on claims for indirect expropriation, but do not address liability under other treaty provisions and in particular the fair and equitable treatment provision for the same measure.
Fair and equitable treatment and the international minimum standard of treatment of aliens
The fair and equitable treatment (FET) standard is another standard at the centre of international investment protection. It is also at the centre of investment treaty claims. Since the early 2000s, investors have invoked the standard in virtually every investment treaty claim, including claims against Ukraine (Bonnitcha, 2012; see also Table 2.1 below on cases against Ukraine). Most Ukrainian IIAs grant covered investors fair and equitable treatment.73 These treaties often merely state that foreign investors shall be accorded fair and equitable treatment without providing further specification.74 Provisions providing generally for fair and equitable treatment have been considered or applied by tribunals in a broad range of claims.75
There is a growing trend to define fair and equitable treatment provisions, both in Ukraine and internationally. The Ukrainian treaties with Japan, the US, and Canada link the fair and equitable treatment standard to international law.76 Other countries in the Americas and Asia have done so as well. In their subsequent treaty practice, the United States and Canada have further clarified the scope of the fair and equitable treatment provision by linking it to the minimum standard of treatment under customary international law (see also Box 2.4).77 The EU and other countries have more recently developed another approach to defining and limiting the FET provision by explicitly listing the content of the protection that the standard confers upon covered investors (see Box 2.4).
In addition to the language already reflected in Ukraine’s treaties, two important approaches to further specifying the scope of fair and equitable treatment have emerged:
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Limitation to the minimum standard of treatment under customary international law (MST): This approach has been used in a number of major recent treaties in Asia and the Americas. A FET provision limited to MST has been repeatedly interpreted under NAFTA. It has been interpreted more narrowly than FET provisions under other treaties and NAFTA governments have had much greater success than other governments in defending FET claims (UNCTAD, 2012: 61).
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Defined lists of elements of FET: The European Union’s Comprehensive Economic and Trade Agreement (CETA) with Canada contains a defined list of elements of the FET provision. Article X.9 of the draft text from 2014 lists the elements that can constitute a breach of the standard, namely denial of justice, fundamental breach of due process, targeted discrimination on manifestly wrongful grounds, and abusive treatment of investors. While it is a closed list, this approach is broader than some interpretations of MST. Under the CETA draft, the parties may agree to add further elements to the list. The article also provides that the tribunal “may take into account” specific representations that created legitimate expectations.
Both options are more specific than the broad language of treaties that only refer to “fair and equitable” treatment. This does not mean, however, that issues of interpretation might not arise. The specific content of the minimum standard of treatment, for example, is subject to important debates as are a number of elements in the list in CETA.
Most-favoured nation treatment
Virtually all investment treaties entered into by Ukraine contain most-favoured nation (MFN) treatment provisions which guarantee that covered investors will not be treated less favourably than those of third states. Similarly to the other investment treaty provisions reviewed above, the Ukrainian IIAs typically use general language to accord MFN treatment to foreign investors.
The meaning of general wording in an MFN clause has been subject to doctrinal and arbitral debates. With respect to investment protection granted to nationals of third states in investment treaties, one important element is the question of whether the MFN provision only applies to substantive protection provisions – such as the indirect expropriation or FET provisions discussed above – or also to procedural aspects, and notably the ISDS mechanism (Dolzer and Schreuer, 2012).
On this particular question, Ukraine’s investment treaties with Japan and the United Arab Emirates explicitly exclude the application of the MFN provisions to ISDS provisions in other treaties.78 This treaty also specifies that, in general, “[m]easures that have to be taken for reasons of public security and order, public health or morality shall not be deemed “treatment less favourable” within the meaning of this Article”.79
More specific language in investment protection provisions would lead to increased predictability and thereby benefit both investors and governments. The specifications also reflect policy choices. In some cases, the specifications may affect the degree of protection for covered foreign investors. Policy-makers need to carefully consider the costs and benefits of these choices, and their potential impact on foreign investors, domestic investors, as well as the host state’s legitimate regulatory interests and exposure to investment claims.
Recently, IIAs have come under increasing scrutiny by a variety of stakeholders, including civil society and academia, but also contracting parties to IIAs themselves. Critics argue that international investment agreements unduly restrict governments’ “right to regulate” and that arbitral proceedings are subject to important flaws. In this process, a number of core assumptions have been challenged. Econometric studies, for example, have failed to demonstrate conclusively that IIAs actually lead to increased FDI flows – a policy goal commonly associated with the investment protection regime (Sauvant and Sachs, 2009). Furthermore, while it has been contended that IIAs advance the international rule of law and good governance in host states by providing mechanisms to hold governments accountable, critics argue that its opaque legal proceedings and potential conflicts of interest of arbitrators are contrary to rule of law standards (Van Harten, 2008). Moreover, the availability of international investment arbitration to investors has been seen by some as an instrument that could circumvent, and thereby weaken domestic legal and governance institutions instead of strengthening them (Ginsburg, 2005).
Treatment of domestic and foreign investors
Ukraine should seek to guarantee a sound investment climate for both domestic and foreign investors. Parts of Ukraine’s legal framework applicable to investment protection, such as its constitutional provision on expropriation, apply to both domestic and foreign investors. Ukrainian law also contains many provisions that exclusively cover only some foreign investors, such as IIAs, or only foreign but not domestic investors, such as the Foreign Investment Regimes Act. Ukraine should consider whether distortions to efficient investment decisions may occur because of more favourable regulatory conditions for certain investors based on nationality. At the same time, many governments see the value or the need to provide certain extra incentives and guarantees to attract foreign investment in a highly competitive market for that investment. The balance between these interests is a delicate one and may evolve over time.
Ukraine’s international investment agreements are starting to be used by policy-makers to foster investment liberalisation, sustainable development goals, and responsible business conduct
Investment treaties have been commonly seen as instruments to protect foreign investors. Newer treaties, both in Ukraine and internationally, show that they can also be used to foster liberalisation of investment activity, and to advance sustainable development and responsible business conduct goals.
Investment treaties as a tool to liberalise investment policy
While econometric studies have failed to establish a clear link between investment protection and FDI flows, they show that investment treaties might lead to more FDI flows when they facilitate investment, for example by reducing barriers and restrictions to foreign investments (Berger et al., 2013). Overall, provisions that seek to foster liberalisation remain the exception in the Ukrainian treaties. Some treaties, however, do grant so-called “pre-establishment” most favoured-nation and national treatment to covered investors prior to their establishment, i.e. while they are seeking to make an investment. The Ukrainian investment treaty with Canada, for example, provides that the parties shall permit the establishment of a new business enterprise on a basis no less favourable than that which is accorded to its own and third state investors.80 Provisions of this type are typically accompanied by lists of exclusions, known as negative lists. Ukraine’s on-going efforts aimed at facilitating the establishment of foreign investment could be an opportunity for policy-makers to consider a more widespread inclusion of such liberalisation provisions into new or existing treaties.
Sustainable development and responsible business conduct considerations
A new emphasis in recent treaty making has been on sustainable development and responsible business conduct considerations. While specific investor obligations are so far not encountered in treaty practice, treaties often make investment protection conditional on compliance with host state law. The Ukrainian IIAs use different ways to ensure that only investments that do not violate host state law are covered. These include making legality a condition for application of the treaties or by defining covered investments as those made in accordance with host state law.81 Such requirements serve as a filter mechanism and can potentially incentivise investors to be more mindful of obligations that they have under host state law. The 2015 Ukraine-Japan treaty requires compliance with host state as well as home state law.82
Other Ukrainian IIA clauses address sustainable development considerations more generally or focus on the rights of the government with regard to such considerations. The underlying free trade agreement of the investment chapter between Ukraine and the EFTA states provides that the parties shall review the entire agreement within three years after its entry into force “in light of developments in the field of trade and sustainable development”.83 Some Ukrainian treaties specify that the host country’s policy space in particular areas shall not be affected by the investment protection provisions. Similar to specification of treaty language of the indirect expropriation provision discussed above, a few treaties include general exceptions clauses. Article XVII of the Ukraine-Canada IIA refers to environmental measures to protect human, animal or plant life or health or relating to the conservation of living or non-living exhaustible natural resources that a government shall not be prevented from taking.84 The EU-Ukraine Association Agreement does not yet contain investment protection provisions but it provides for their negotiation. In light of the Association Agreement’s explicit references to responsible business conduct and the “right to regulate”,85 and the EU’s emerging investment treaty policy, it can be expected that future investment protection provisions in this Agreement will be subject to such considerations as well.
These clauses aim at specifying the policy space of the host states and at ensuring that government will not be liable to pay compensation when its pursues policy goals and regulates investor behaviour in specific areas.
Another set of clauses imposes obligations relating to sustainable development considerations on the governments themselves. In the Ukraine-Japan IIA, for example, both countries provide that they should not “encourage investment … by relaxing its health, safety or environmental measures, or by lowering its labour standards”.86 The enforcement of these clauses, however, is subject to state-to-state dispute settlement mechanisms, and practice suggests that contracting parties have rarely sought to enforce this type of commitment.87
Ukraine’s legal framework for investor-state dispute settlement
Like many other adherents to the OECD Declaration on International Investment and Multinational Enterprises, Ukraine has been facing investment claims. Since 1998, Ukraine has been a respondent in 20 known investment claims, several of which are still pending (see Table 2.1). Such claims can be costly for the authorities to defend, even if no damages are accorded to the investors.
All of these claims have been brought under treaty clauses providing for investor-state arbitration. Starting in the 1990s, direct venues for covered investors to bring claims – ISDS mechanisms – have become a frequent feature of international investment agreements, both in Ukraine and internationally. OECD research (2012) shows that around 96% of global IIA stock provide access to ISDS (Pohl et al., 2012). All of the bilateral investment treaties to which Ukraine is a party, as well as the Energy Charter Treaty, contain ISDS provisions. The investment chapter of the multilateral free trade agreement with the EFTA countries does not give investors access to arbitral remedies; the agreement is subject to state to state dispute settlement. The investment chapter states that covered investors shall be granted national and most-favoured nation treatment with respect to the jurisdiction of its courts as well as its administrative tribunals and agencies.88
The main benefit commonly advanced for ISDS is that it provides a forum to settle disputes that is independent from both the host state and the investor, although this view has been challenged by some groups and commentators in recent years.89 Issues raised in the debate include among other things the characteristics of the pool of investment arbitrators, conflicts of interest, and lack of transparency (Gaukrodger and Gordon, 2012). Some jurisdictions have therefore been actively considering changes to the prevailing ISDS model. In September 2015, the EU Commission announced a proposal on a new Investment Court System for all its on-going and future investment negotiations.90 Accordingly, the proposal is likely to form the basis for future negotiations on an investment dispute settlement mechanism under the EU-Ukraine Association Agreement as well.
For Ukraine, like other countries, it is important to manage exposure to potential claims and to prevent them as far as possible. As discussed later in the section of the review addressing investment promotion and facilitation, Ukraine has established the Business Ombudsman Council (BOC), which has been construed as the first point of contact for companies seeking redress against unfair treatment (Wehrlé, 2015). Such forms of dispute prevention mechanisms are important tools to manage the exposure of governments to investors’ claims because they can reduce the likelihood of formal investment treaty claims arising. Several case studies published by the BOC suggest that investors have successfully sought redress through the Ombudsman without having to resort to arbitration (BOC, 2015).
A low level of regulation of ISDS proceedings is still a predominant feature in Ukrainian investment agreements
The experience of Ukraine shows that not all arising disputes can be prevented by such mechanisms. Investment policy-makers therefore need to ensure that ISDS proceedings are properly regulated. OECD research suggests that ISDS mechanisms in investment treaties are typically subject to only low levels of regulation (Pohl et al., 2012: 39). Some issues are addressed by the arbitration rules, but as rules designed for commercial disputes between private parties, they may need adjustment in light of the nature of investment claims. Other issues remain unregulated if the treaties refrain from doing so. The available data suggest that Ukrainian IIAs do not provide a high level of regulation and remain even below the average level of regulation found in the global treaty stock.91
Few agreements in Ukraine, for example, specify for how long after the alleged violation of the IIA the covered investor can bring a claim. A few recent treaties provide for a three-year period.92 Most agreements in Ukraine, however, follow the international practice providing that the parties must engage in amicable efforts to resolve a dispute, often subject to so-called “cooling-off” periods. For Ukraine, these periods typically vary between three and six months. In some cases, Ukrainian treaties require investors to exhaust local remedies before having access to investment arbitration. Ukrainian treaties also do not expressly address the issue of shareholder claims for reflective loss (see Box 2.6) or the early dismissal of frivolous claims. As part of the government’s drive to improve the country’s business climate, Ukraine could consider assessing whether this low level of regulation of ISDS proceedings appropriately reflects its treaty policy objectives.
Many ISDS claims today are by foreign shareholders for reflective loss (see Table 2.1). Many Ukrainian IIAs generally do not expressly address the issue of claims by shareholders’ reflective loss. (Shareholders’ reflective loss is incurred as a result of injury to “their” company, typically a loss in value of the shares; it is generally contrasted with direct injury to shareholder rights, such as interference with shareholder voting rights.) Advanced systems of corporate law generally bar individual shareholder claims for reflective loss. Only the directly-injured company can recover the loss.
In ISDS claims brought under typical bilateral investment treaties (BITs) that – like the Ukrainian treaties – do not expressly address the issue of reflective loss, arbitrators have consistently permitted shareholders to claim for reflective loss. Outcomes for shareholders thus differ under advanced systems of corporate law and typical BITs (Gaukrodger, 2013: 32-51).
Extensive analysis and discussion of shareholder claims for reflective loss at the OECD have demonstrated that the availability of reflective loss claims raises a broad range of policy issues for governments.1 These include the risk of multiple claims and inconsistent decisions arising out of a single injury, exposure to double recovery, the impact on predictability, hindering settlement, facilitating treaty shopping by investors, and upsetting the hierarchy of claims against corporate assets under corporate law so that a claimant gets better treatment than under normal legal principles.2 To date, no strong arguments have been identified to explain the different approach taken in investment treaties as opposed to advanced corporate law. It is widely recognised by governments that the issue merits further attention.3 Ukraine could consider addressing the issue of reflective loss expressly, for example through clarifications to treaty language.
← 1. Cf. Eilís Ferran, Summary of FOI Roundtable 19, pp. 18-19. In addition to shareholders, creditors can also suffer reflective loss and may be able to file claims for such loss under some treaties. Summary available at: www.oecd.org/investment/investment-policy/19thFOIroundtableSummary.pdf.
← 2. Summary of FOI Roundtable 19, pp. 18-19.
← 3. Summary of FOI Roundtable 19, pp. 18-19.
Arbitral proceedings and enforcement of awards
Since investment arbitration claims are not brought before public courts but administered by arbitral tribunals, these proceedings need to be regulated and the decisions and awards enforced. The international community has developed specific institutions and rules to guarantee the effectiveness of arbitral justice. Ukraine has adhered to two of the most important conventions for investment arbitration: the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the “New York Convention”.
The New York Convention addresses the recognition and enforcement of awards. For investors it is important to know that awards can and will be enforced, and the New York Convention is likely to increase investor confidence in this regard. The national courts of contracting parties to the New York Convention must generally recognise arbitration awards rendered in other contracting parties, subject to narrow exceptions set out in the Convention, and enforce the awards in accordance with their rules of procedure. Since Ukraine is a contracting party to the New York Convention, investors that have prevailed in arbitral proceedings against Ukraine know the conditions under which the awards will be recognised and enforced in Ukraine. The New York Convention also facilitates the recognition and enforcement of Ukrainian awards in third countries that are party to it.
The ICSID Convention addresses both the arbitral proceedings and the enforcement of awards rendered under these proceedings. ICSID proceedings follow the rules established under the ICSID regime, which governs questions such as the applicable law, the constitution of the tribunal, and the powers of the arbitrators.93 Importantly, the recognition and enforcement of awards rendered under this regime is solely governed by the ICSID Convention itself – the ICSID regime is largely self-contained in this respect. The awards cannot be reviewed by national courts of the country in which their enforcement is sought. While a Ukrainian court could refuse the enforcement of an award for reasons of public policy under the New York Convention, enforcement of an ICSID award cannot be refused on grounds of public policy. However, the ICSID rules on enforcement only apply to ICSID awards.
ICSID has been a prominent forum to hear investment claims against Ukraine: 14 of the 20 claims against it were brought under the ICSID regime. However, not all investor-state disputes are administered under ICSID. Frequently, Ukrainian IIAs give investors the choice between multiple arbitration rules and/or arbitration institutions to settle their disputes with the host state. Most offer the choice between proceedings under the auspices of ICSID and ad hoc proceedings under the UNCITRAL arbitration rules. Others also allow investors to bring claims under the arbitration rules of the International Chamber of Commerce (ICC), the Stockholm Chamber of Commerce (SCC) or rules as agreed on by the parties.94 Awards under these arbitration rules fall outside of the scope of the ICSID Convention; their enforcement is generally sought using the New York Convention.
Giving investors the choice between various arbitration rules or arbitration institutions may affect important aspects of the arbitral proceedings. For example, it can affect the appointment of the chair of the arbitration tribunal, which is often considered to be one of the most important steps in an arbitration proceeding. Arbitration rules typically allow the parties (or the party-appointed arbitrators) to agree on a chair. However, in the event that no agreement can be reached, different arbitration rules designate different bodies as the default appointing authority for the chair. Typically, in private arbitral institutions that primarily administer commercial arbitration cases between business entities, such as the ICC or SCC, the appointing authority is itself composed of persons nominated by business interests.
Allowing covered investors to choose among different arbitration rules and fora may give the investor influence over the identity of the default appointing authority and thus potentially a degree of influence over the selection of a default chair; this can in turn affect the negotiating environment for the selection of an agreed chair. A number of recent treaties have addressed this concern by defining a single appointing authority regardless of the arbitration rules selected by the investor (Gaukrodger and Gordon, 2012; OECD, 2012).95
The lack of transparency of arbitral proceedings features high on the list of concerns regarding the IIA regime. Investor-state proceedings usually involve issues of public interest: it is at stake when the investor challenges regulatory measures ostensibly or actually taken in the public interest, or when the host state, i.e. the taxpayer, has to pay compensation. Transparency of arbitral proceedings is an important means to shed light on these questions and how they are dealt with. In general, the argument in favour of confidentiality is less convincing than in private proceedings, between two companies, for example.
Beyond regulations in IIAs, regulations on transparency are sometimes provided by arbitration rules. More important consequences on the transparency of arbitral proceedings are to be expected from the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, which came into effect in 2014. Under the Rules, basic information about the dispute has to be made public through UNCITRAL’s Transparency Registry; written submissions by the disputing parties, non-disputing parties and third parties have to be made publicly available; the oral hearings are open to the public and transcripts of those hearings have to be made publicly available; finally, all orders, decisions and awards are made publicly available. The requirements are subject to certain requirements regarding confidential and protected information.
In principle, the Rules apply to any UNCITRAL arbitration under an IIA that was concluded on or after 1 April 2014. (This is not the case when contracting parties to the IIA exclude the application of the Rules; or when the IIA allows excluding the application and both disputing parties agree to do so). For IIAs concluded before that date, the Rules only apply if the disputing parties agree to the application, or the contracting parties provide for their application on or after 1 April 2014. By signing and ratifying the UN Convention on Transparency in Treaty-Based Investor-State Arbitration, open for signature since 17 March 2015, a country makes the Rules applicable to its IIAs concluded before 1 April 2014.
ISDS practice – defensive and offensive use of Ukrainian treaties
It is difficult to establish a precise number and status of investment claims by foreign investors against Ukraine due to the confidentiality of certain ISDS proceedings (see Box 2.7 on Transparency). The ICSID website indicates that there have been 14 ICSID cases against Ukraine,96 three of which are still pending. Three of the cases were settled; in four the investor’s claims were dismissed; in one the tribunal declined jurisdiction. Investors were awarded damages in three cases (USD 3 million, USD 8.7 million, EUR 3 million respectively). For the non-ICSID cases that were reported, the outcomes are similarly divided: in one case, the claims were dismissed; in another case, the parties settled; in two cases the investors were awarded damages (USD 4.5 million, and USD 112 million plus interest respectively) and two more known cases are still pending, with an emergency arbitrator award already rendered in one of them.97 The pending and concluded cases against Ukraine do not show a unique pattern: claims have been brought in different sectors and based on different investment agreements, with the Energy Charter Treaty and the investment treaties with the Netherlands and the United States being the most-invoked agreements.98
With regards to cases brought by Ukrainian investors against foreign states (see Table 2.2), there are two known cases in which Ukrainian state-owned enterprises have brought claims against the Republic of Moldova, invoking the Energy Charter Treaty. In a first case, under the UNCITRAL rules, damages were awarded. In the second case, under the Arbitration Institute of the Stockholm Chamber of Commerce rules, the tribunal declined jurisdiction. In addition, a Ukrainian investor issued a notice of intent of arbitration in 2013, referring to the Ukraine-Belarus IIA, but it appears that no claim has been filed so far. More recently, there have been reports about several UNCITRAL cases brought by Ukrainian investors against the Russian Federation based on the Ukraine-Russia IIA, alleging violations of the treaty by the Russian Federation against Ukrainian investments established in the Autonomous Republic of Crimea.99
Decisions about review and possible renegotiation of existing investment treaties should take account of their temporal validity
Review and renegotiation of investment treaties takes time. It may be more easily conducted without the time pressure of either an imminent tacit renewal for an extended period or its denunciation with the attendant publicity. Ukraine should accordingly monitor the temporal validity of its treaties in order to allow it sufficient time to approach treaty partners where appropriate. Ukraine’s treaties have varying duration and different mechanisms for renewal and termination. Bilateral investment treaties generally contain, in the final provisions, the definition of an initial validity period; at the end of this period, treaties are often extended tacitly either for an indefinite period or for another fixed term. Denunciation is possible at certain points in time, but requires an advance notice. Most treaties define an additional period during which the treaty has effect for existing investments following termination (Pohl, 2013).
Table 2.3 shows for each of Ukraine’s treaties the dates of signature and entry into force and key characteristics of their temporal validity (fixed term validity or open-ended validity; indefinite extension or renewal for fixed terms). Treaties that renew for fixed terms require more monitoring, as they limit the possibilities to update or unilaterally end the agreement. For all treaties, Table 2.3 also shows additional information such as the approximate date when the current period to give notice of denunciation ends (i.e. the last notice date before tacit renewal) and the approximate first date when the treaty could cease to be in force.100
The temporal validity of Ukraine’s treaties can also inform discussions on possible joint interpretations of treaty provisions with treaty partners. Joint interpretations can be issued at any time and can be a simpler and faster device than renegotiation to address some aspects of treaty policy providing that the existing treaty text allows sufficient scope to achieve the jointly-desired interpretation. This may often be the case in older treaties with vague provisions. Discussions and exchanges of views with treaty partners about proposed joint interpretations in advance of treaty renewal dates can also help inform future negotiations and decisions about treaties.
Investment promotion and facilitation
Persistent political and macroeconomic instability have endangered promotion activities
Attracting FDI and invigorating investment promotion activities through various means, including by enhancing deregulation and liberalisation of entrepreneurial activities, improving corporate rights and bankruptcy procedures, facilitating privatisation and developing infrastructures, have long been core government’s objectives. Nonetheless, neither the Programme for the Development of Investment Activity for 2002-2010 agreed in 2001101 nor the December 2008 Programme Counteracting the Effect of the World Financial and Economic Crisis on Continued Development, and the September 2010 Concept of the State Specific Economic Programme of Investment Activity Development in 2011-2015102 have been effective in this regard. Persistent political and macroeconomic instability have endangered promotion activities.
In the past, the authorities addressed investment promotion largely through fragmented, piecemeal efforts. For example, the Law No. 5205-VI of 6 September 2012 “On Stimulation of Investment Activity in the Priority Sectors of the Economy to Create New Jobs” sought to provide state support for investment activities in some priority sectors through budget funds and exemption from the import duty and VAT deferral. Ukraine parliament also passed in 2012 the Law on Industrial Parks.103 The law was enacted with the intent of increasing the investment attractiveness of Ukraine, creating new jobs, stimulating the economic development, and developing infrastructure for the market and industry.
Institutional framework for investment promotion
On the promotion side, a potential investor looking for information on Ukraine is not confronted with a wealth of helpful resources. Ukraine’s underperformance has contrasted with its potential competitors among the countries of Europe and Central Asia as most of them, especially in Central and Eastern Europe, have considerably improved their investment promotion activities in recent years (OECD, 2011).
Probably the most important weakness of Ukraine’s investment promotion activities has been frequent changes in the institutional and organisational structure, which led in the past to the multiplication of agencies with often unclearly delimited and overlapping responsibilities. After several institutional changes in the 2000s, in 2010, the authorities took a new overhaul of the institutional framework for investment promotion with the declared aim to streamline and rationalise the country’s activities in this area. Under a Decree of the President of Ukraine, the State Agency for Investment and National Projects (SAINP) of Ukraine became responsible for the promotion of foreign investment in Ukraine.104 In parallel, under the principle of “One Window” established by Law No. 2623-VI of 21 October 2010, a “single window” facility for foreign investors called InvestUkraine was created to assist them in their establishment.105 The Law introduced regional centres of investment and development (“Investment Centres”) as state authorities in charge of a one-window system of preparation and implementation of investment projects in Ukraine. In particular, investors could submit any requests in connection with their investment projects to the regional centres. The relevant regional centre had to provide the investor with an action plan and documents necessary for implementation of the investment project.
SAINP was liquidated in 2014 and its functions were passed to the Ministry of Economic Development and Trade. Since then Ukraine has lacked a properly structured, funded and staffed agency for investment promotion. Furthermore, although the government has been committed to attracting foreign investment, government-led initiatives specifically focusing on investment promotion have been very sporadic. Until recently information exchange with investors had primarily taken place in the context of events sponsored by private organisations, such as the Ukrainian Investment Dialogue, a private sector-led initiative launched in 2014 with the support of the Ministry of Foreign Affairs and some other public organisations.106 Since mid-2015, there have been increasing efforts to inform foreign investors about investment opportunities in the framework of investment forums outside of Ukraine sponsored by the Ukrainian government and foreign countries. Three such fora were held in 2015: the US-Ukraine Investment and Business Forum in Washington, DC, in July 2015; the German-Ukrainian Investment and Business Forum, held in Berlin in October 2015; and the French-Ukrainian Investment and Business Forum held in Paris in November 2015. In these forums, Ukrainian government officials presented the reforms agenda and its implementation, plans for improving the business and investment climate and opportunities for conducting business in Ukraine.
While the later initiatives bear witness to the growing attention the authorities are giving to the need to publicize Ukraine’s attractiveness, government promotional initiatives require strengthening. Ukraine has yet to adopt a comprehensive foreign investment promotion programme. Local state authorities and self-government authorities have been more proactive by setting up regional investment agencies in territorial-administrative units. Several of them have been operating user-friendly and frequently updated investor portals that list current projects, highlight assistance available to potential investors, including navigating bureaucratic hurdles, and that provide advertising for specific regions or cities. These efforts nevertheless remain too fragmented. More consideration must be given to the provision of public support to foreign investors in the form of business services and informational assistance.
Frequent changes in the organisation structures and shifting in responsibilities also usually do not facilitate transparency and accessibility of the country’s foreign investment promotion activities, especially for new foreign investors unfamiliar with local economic and legal environment, though this category of investors is in principle the main target group of investment promotion agencies. The efficiency and relevance of new agencies involved in investment promotion will mainly depend on financial and human resources made available to them. In the context of intense world competition for attracting FDI, the ongoing reform of Ukraine’s investment promotion activities has to focus on key functions in this area, notably developing an updated information service to prospective investors both on‐line and in response to their direct inquiries and providing an active support in foreign investors’ establishment and operations in the country. The recent experience of Chile can be useful in this regard.
The Ukrainian government recently outlined key priority sectors relevant to its investment promotion activities: Agribusiness (with an emphasis on agro-processing), the IT Sector (the government hopes that other IT companies will emulate Samsung, which is upgrading its R&D Centre in Ukraine) and transport infrastructure (Ministry of Economic Development and Trade, 2015e).
Chile relies strongly on FDI and, thanks to an open investment regime and a robust regulatory and institutional environment, boasts one of the highest ratios of FDI to GDP in the OECD. There are no prior-approval or screening requirements for FDI, and foreigners are legally granted the same treatment as nationals. To remain competitive vis-à-vis competitors that are sharpening their investment promotion, Chile has recently decided to update the investment policy and institutional framework. The Framework Law for Foreign Investment is designed to support Chile’s further integration in global value chains (GVCs) through more and better FDI.
Against this background, in 2014 the OECD worked in partnership with Chile’s Foreign Investment Committee (FIC) to turn it into a modern IPA, develop a well-crafted investment promotion strategy and provide concrete recommendations on the way forward. The OECD Investment Committee and OECD IPAs held a peer review of the FIC on 2 December 2014, in Paris.
The report recommends adopting a pro-active and carefully targeted investment promotion, while also ensuring a careful calibration of policies and implementation to avoid duplication of tasks. In particular, responsibilities should be clearly assigned for country-image building, investment generation, linkage promotion and policy advocacy. For the FIC to play a more pro-active role in defining Chile’s strategic policy orientation towards FDI it must transition from a regulatory body to an entity capable of developing its own vision in terms of target markets and priority sectors. It must also gain a strong institutional position with a legally defined mandate and clearly stipulated core functions. Ideally the FIC should have direct reporting lines to the Minister of Economy. The OECD stresses the necessity of guaranteeing that the FIC has sufficient room to manoeuvre to execute its services in the way investors expect and in line with the government’s priorities.
On the other hand, successful investment promotion and facilitation cannot be undertaken in isolation by one agency alone, but relies on a dynamic investment ecosystem consisting of local industry clusters, multi-national enterprises (MNEs), well-coordinated public policies and agencies, including in the area of research and development and innovation, and a well-functioning international network.
Furthermore, the resources and skills needed to carry-out new investment promotion and facilitation tasks will require the relevant agencies to focus more on policies to attract foreign investments with potentially strong spill-over effects, and to strengthen the linkages of these investments with the domestic economy. These investment-targeting policies can be useful to enhance the absorptive capacity of the domestic economy, but any new programmes that target specific sectors and firms should carefully balance costs and benefits, to avoid the pitfalls of special incentive schemes for foreign investment.
Dialogue with investors
Investment promotion agencies or dedicated bodies can play an important role in facilitating communication and consultation with investors, and in providing an effective channel to relay investors’ concerns to relevant governmental agencies, thus potentially influencing government activities, decisions, and regulations having an impact on the investment climate.
Prior to 2014, dialogue with investors was largely formalistic and ineffective (OECD, 2014). There were various mechanisms for involving entrepreneurs, business associations and industry representatives in the decision-making process, such as the Council of Local and Foreign Investors and the State Administration for Entrepreneurship and Regulatory Policy, but their activities did not have a significant impact on policy-making in the country.107 Since the Maidan events, as part of the government’s drive to improve the country’s business climate, Ukraine has been stepping up its efforts to enhance dialogue with investors and a central element of this campaign has been the establishment of a Business Ombudsman institution.108
The Business Ombudsman Council (BOC) is a key element in an Anti-Corruption Initiative agreed among the Ukrainian government, international organisations, including the EBRD and the OECD, and a number of Ukrainian business associations (Wehrlé, 2015). It allows businesses to report claims of corruption and unfair practices against companies such as repetitive tax audits or investigations, excessive inspection fees, threats, retaliation or other business abuse by Ukraine’s public agencies. The Ombudsman’s role is to look into whether an administrative decision has been taken place in accordance with the regulations in force. It does not constitute a judicial body; instead, it offers a simplified, faster way to settle issues, while still recognizing the right of companies to take their grievances to courts or use other procedures. One of the strengths of the Business Ombudsman institution is its power to initiate a dialogue with managers of the public agency about which the complaint is made to obtain a speedy response to resolve issues. The mechanism also encompasses an advisory role for government. The Ombudsman has the power to report publicly on the systematic causes of the unfair treatment of business. It is also empowered to make proposals to the government on how to improve the business climate in Ukraine, including proposals to amend legislation and regulations.
The establishment of the Business Ombudsman institution holds great promise for improvement of Ukraine’s business climate and is expected to yield tangible results. During the third quarter of 2015, the newly established institution processed 197 complaints: a 14% increase from the 172 complaints submitted in the first reporting quarter (second quarter of 2015).109 Forty cases were successfully investigated, with a direct financial impact of more than UAH 115 million (Business Ombudsman Council, 2015b). From May to November 2015, government agencies most subject to complaints were the State Fiscal Service of Ukraine (42% of complaints), followed by criminal law enforcement agencies (12%), municipal administrations (councils) (9%), and the Ministry of Internal Affairs (Business Ombudsman Council, 2015a). Most complaints received by the Business Ombudsman were made in relation to taxation (VAT refund delays, refusal of VAT taxpayer registration, excessive tax inspections), non-enforcement of court rulings by local and central government officials, baseless criminal investigations and unfair regulatory compliance in the area of export-import operations. On average the review and resolution of cases was completed within 4 weeks (see Box 2.9 on matters addressed and solved by the Business Ombudsman Council).
Case 1: Law enforcement authorities pressuring a foreign-owned company through baseless criminal proceedings
An international company established in Ukraine complained that its premises had been searched, its employees summoned for interrogation, and corporate documents had been seized as part of an ongoing criminal investigation. The criminal investigation into the company’s activities was launched for alleged VAT avoidance. In their complaint to the Business Ombudsman institution, the company’s officers said that the investigation had been launched to exercise pressure on the company, citing court rulings in its favour.
After the company’s complaint had passed the first filter and being evaluated by the Council’s experts, the Council met with representatives of the Ministry of Interior and the investigator in charge of the case to address the complainant’s concerns. Based on this meeting and a review of relevant legislation, the experts came to the conclusion that the investigators’ actions were excessive and likely intended to put pressure on the company and its management. With the inputs of the experts, the Business Ombudsman Council presented a set of observations to the Ministry of Interior’s Main Investigative Bureau, including the legal requirement for the investigators to strictly abide by the Criminal Procedural Code. These observations resulted in the issuance of formal letter of apology to the complainant by the Bureau and a commitment to abstain from such incidents in the future. The resolution of the case was completed within 4 weeks.
Case 2: Illegal actions by the Regional State Tax Inspection
A complaint was lodged against Ukraine’s Regional State Inspection for groundlessly depriving the complainant’s ability to register its tax invoices electronically. The Business Ombudsman’s secretariat called the Anti-Corruption Bureau of the State Fiscal Service, inquiring about the situation. Because of this action, the complainant’s issue was resolved within two days. Specifically, the complainant’s ability to conduct normal business operations and to file tax invoices electronically was restored.
Source: Business Ombudsman Council, Quarterly Report April-June 2015.
Apart from the establishment of the Business Ombudsman, the authorities have made further efforts to institutionalize public-private consultations within the framework of the National Investment Council. The Council was established at the end of 2014 in replacement of the former Council of Local and Foreign Investors with the declared aim to offer a platform that will promote the interaction between the government and investors.110 A consultative and advisory body chaired by the President and composed of representatives of domestic and foreign entities involved in investment activities as well as of business associations, audit and legal companies and financial institutions, the Council aims at serving as a high-level policy dialogue to involve investors in the reform and decision-making process. In the absence of implementing regulations, it nevertheless remains to be seen the extent to which the Council will be able to accomplish its role in advising the President on how to improve the investment climate in the country, intensify the development of the investment potential of Ukraine, increase the volume of foreign investments, and ensure the protection of the investors’ rights. As noted above, in the past similar bodies did not have a significant impact on the policy-making process.
In the interim, the main venue for public-private dialogue beyond the Ombudsman Council remains public hearings and public consultations on draft regulations and laws. Draft laws (including those that are foreign and domestic investment-related) are usually discussed during parliamentary hearings organised by the profile committees of Ukraine’s parliament, where representatives of the business sector may be invited to participate depending on the subject matter. To that end, parliamentary committees have established websites that are kept up to date and invite the public to comment on specific drafts. Pursuant to the law, stakeholders are also given an opportunity to comment on new draft legislation initiated by relevant ministries and agencies prior to its submission for consideration to the Cabinet of Ministers and the Verkhovna Rada of Ukraine.111 Announcements of public discussions are posted on the relevant agencies’ website, as well as on the government’s portal. Consultations also take place in the framework of working groups established by ministries that bring together Ukrainian public officials and industry representatives. Since the political changes in March 2014, business representatives have cited an unprecedented amount of cooperation and communication between the Ukrainian government and the private sector through government established working groups.
Private sector influence on regulatory decisions could nevertheless be further increased. Developing additional tools to ensure the broader participation of the private sector in creating a relevant legal environment for business should be a priority for improving Ukraine’s competiveness. The activity of the newly established National Investment Council under the leadership of Ukraine’s President needs to ensure that consultations take place on a regular basis, discussion topics are submitted early enough for private sector representatives to provide comments, and alternative proposals, comments and recommendations directed at eliminating barriers for business are taken into consideration. Information on the outcomes of the Council’s activity should be provided as well, as this knowledge can contribute towards greater trust among investors in this type of institution. This information could typically be published in a yearly or quarterly report, as it is in the case with the Business Ombudsman.
Investment incentives and the tax system
The OECD Declaration on International Investment includes the Instrument on International Investment Incentives and Disincentives, which encourages adherents to ensure that incentives as well as disincentives are as transparent as possible so that their scale and purpose may be easily determined. The Instrument also provides for consultations and review procedures among adherent countries to facilitate international cooperation in this area. The OECD Policy Framework for Investment also encourages countries to evaluate the costs and benefits of incentives, in particular the use of tax incentives together with the level of tax burden they impose on businesses with a view of meeting its investment promotion objectives. The OECD Checklist for Foreign Direct Investment Incentive Policies also helps raise awareness of decision-makers in assessing the usefulness and relevance of investment incentives. In addition, the OECD Tax and Development Programme developed the Principles to Enhance the Transparency and Governance of Tax Incentives for Investment in Developing Countries to promote the management and administration of tax incentives for investment in a transparent, consistent manner, limit discretion and increase accountability.
Inventory of incentive regimes
The Tax Code of Ukraine, adopted on 2 December 2010 (as amended), and the Customs Code of Ukraine, adopted on 13 March 2013 (as amended), primarily govern the Ukrainian tax incentives regime.112 Over the past two years, the Ukrainian authorities have considerably reduced the number of tax incentives available to investors with the view of simplifying Ukrainian tax administration to ease the conditions of doing business in Ukraine, and of raising revenue to finance government expenses. Below is a brief overview of the most significant tax incentive regimes currently existing in Ukraine. They can be categorized as follows: general incentives, sectoral incentives, special tax regimes, and regional incentives.
Until recently, subject to certain limitations and eligibility criteria, tax “holidays” and incentives favoured certain prioritized sectors of Ukraine’s economy, including the production of IT goods; manufacturing of certain consumer goods (the so-called “light industry”); ship- and aircraft-building industries; production of machinery for the agricultural industry; three to five star hotels; power generation from renewable sources; and investments resulting in job creation in qualifying industries, including high- tech, eco-friendly, and manufacturing and export-oriented industries.
Effective 1 January 2015, new legislation has cancelled tax incentives in the following areas: production of IT goods113; extraction and use of gas (methane) and of coal deposits; bio-energy fuel, electric and heat energy generated from bio-energy fuel, and domestic equipment powered with bio-energy power production; “light industry”; ship-building and aircraft industries; machinery construction for the agricultural industry; operations on medicines and medical products supplies; hotels; and investments in qualifying large investment projects (those resulting in job creation) in qualifying industries.114
As a result of these recent legislative changes, Ukraine now provides for much more limited tax “holidays” and incentives. Specifically, under the Customs Code of Ukraine, enterprises with foreign investments are exempted from paying import duties on in-kind contributions made by foreign investors into the charter capital (except for goods for sale or use for purposes not directly related to business activities). Foreign investors can also benefit from specific tax provisions made available to small and medium enterprises. This category of enterprises (which includes legal entities with annual revenue of up to UAH 20 million [about USD 809 000]) is subject to the simplified taxation system, paying a single tax not including other taxes such as corporate income tax, land tax, duty for special use of natural resources, communal taxes and duty for obligatory state pension insurance.115 This preferential taxation system associated with the possibility of simplified accounting and reporting has sought to promote the development of SMEs in Ukraine.116 Ukraine also offers depreciation rates for fixed assets, including buildings and constructions for both foreign and domestic investors.117 Foreign investors, like domestic ones, can also benefit from total exemption from VAT that applies to the publishing industry (production and trade of locally produced books, newspapers and magazines).118 The cinematography industry (production, distribution, sale of Ukrainian movies and foreign movies dubbed in Ukrainian or with subtitles in Ukrainian) is also exempt from VAT until 1 January 2016.119
In addition, tax is not levied on income of foreign investor withheld at source in Ukraine received under production sharing agreement (“PSA”) with the Ukrainian authorities, which is paid by its permanent establishment. Funds/property transferred by non-resident investor of Ukraine to its permanent establishment aimed at financing activity under PSA in accordance with agenda and budget costs are not subject to corporate income tax. In 2013, the government also adopted regulations that offer preferential tax treatment for development of the depleted fields and reserves of oil and gas that are difficult to access. The tax rate for such projects is 2% and, since 2015, applies to companies with a state share of 25% or more.
Ukrainian tax legislation also allows agriculture companies to take advantage of a special VAT regime until 1 January 2018, according to which VAT collected from them is not payable to the government, but should instead be retained by these companies and transferred to special bank accounts of agricultural producers. These funds may only be used for the business purposes of agricultural producers.120 The law also allows them to choose between the general system of taxation and the Fixed Agricultural Tax (FAT), a special tax regime according to which qualified agriculture companies whose activities for 75% consist of agricultural production may choose to pay FAT in the form of single tax payment instead of corporate income tax, land tax, charge for special use of water, and special taxes for certain types of activities. The amount of FAT paid is calculated based on the size and type of land plot. In addition to this, based on the applicable Ukrainian tax laws, the local authorities may grant privileges regarding land tax.121 As an incentive to investments in green energy, a reduced land tax rate also applies to renewable energy sources producers until 31 December 2015. Pursuant to this preferential regime, investors pay only 25% of the land tax.122
Local governments are also entitled to grant tax privileges in order to stimulate certain projects. Pursuant to the Tax Code of Ukraine, they may:123
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Establish exemptions from the tax on real property, other than land, as provided in paragraph 266.4.2 article 266 of the Tax Code;
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Establish exemptions of tax on real property, other than land, as provided in paragraph 266.4.2 article 266 of the Tax Code;
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regulate rates of the land tax within the maximum defined in paragraph 284.1 article 284 of the Tax Code;
Also, the fourth paragraph of Article 40 of the Law of Ukraine “On regulation of urban development” provides exemption from payment for participation in local infrastructure development for the following buildings: schools, cultural and sports centres, medical and recreational facilities; social and affordable housing; objects, built as the result of investment tenders or auctions; objects if they contain objects of social infrastructure; objects built to replace those that are damaged or destroyed due to human actions or natural disasters; engineering facilities, transport infrastructure, energy, communications and road facilities (except of road service); objects within industrial parks constructed by the founders of industrial parks, industrial park management companies, members of industrial parks.
Special economic zones
In 1998-2000 Ukraine established a specific customs and tax regime for Special Economic Zones (SEZs) and the priority development territories (PDTs) under the Law “On Special (Free) Economic Zones”, adopted in 1997, and other legislation.124 A total of 12 SEZs and 9 PDTs, reportedly covering more than 10% of the whole area of Ukraine, were created. Given the very poor record of accomplishment of these incentives – in terms of tax avoidance and evasion125 and corruption,126 a 2005 law abolished both the customs regulations and the special tax regime granted to these zones.127 As a result, all existing projects were cancelled either after the expiration of their contracts or at the initiative of investors.
In 2010, the government announced its intention to re-establish SEZs and PDTs as they were prior to the 2005 law but a draft law on the subject never went forward. The SEZ debate in Ukraine received new impetus in 2014 when a free economic zone was established in the territory of the Autonomous Republic of Crimea and Sevastopol City.128 Pursuant to the Law of Ukraine on SEZ, the free economic zone of Crimea will be valid for 10 full calendar years (i.e. until 27 September 2024) and governed by a so-called Management Company which will be state property. The SEZ grants foreign and domestic companies registered in the Autonomous Republic of Crimea tax breaks for their investments in the country, including full exemption from corporate income tax, individual income tax, VAT, excise tax, environmental tax, the obligatory state pension insurance, and exemptions from fees for land, the transport of oil and oil products through main pipelines, and for transit transport of natural gaz. The provisions of double taxation treaties are not applicable to incomes of such legal entities and individuals registered in the SEZ. No exemption applies to the obligation to pay local taxes.129 Customs duties also apply to the supply of goods and provision of services from Crimea to the mainland Ukraine and vice-versa.130
As of January 2016, against the background of the law of Russia “On Admission of the Republic of Crimea and Establishment of the New Federal Subjects of the Russian Federation” adopted on 20 March 2014, the fact that Russian legislation was de facto applied in Crimea, and of the parallel establishment by Russia of a special economic zone in Crimea to encourage investment in priority sectors such as tourism, recreation, spa and curative industries,131 the impact of Ukraine’s law on Crimea’s SEZ was unclear. Furthermore, a number of countries recognising Crimea as an integral part of Ukraine had taken measures aimed at prohibiting new investments by persons or entities under their jurisdiction, thus making unlikely foreign investors investing or operating on the territory of Crimea and Sevastopol City.132 In practice, as of January 2016, due to increased legal uncertainty, a growing number of businesses were switching legal jurisdictions, with their Crimean affiliates starting operating as part of Russia’s market.
Industrial parks
In June 2012, Ukraine established industrial parks with the intent of increasing the investment attractiveness, creating new jobs, stimulating economic development and developing infrastructure for the market and industry.133 In the framework of this new instrument, foreign and domestic investors were to benefit from tax incentives and ready infrastructure with a view to reducing operating costs and cutting the time it takes projects to reach the market. The proposed tax benefits included duty-free import of equipment not produced in Ukraine. In practice, although 12 industrial parks were registered with the national authorities after the Law’s adoption, given the existence of administrative barriers and insufficient support from the central authorities, as of January 2016 only four of them were operational.134 In an effort to address many of the omissions left by the 2012 Law and to streamline the procedures for industrial parks development and management, Ukraine’s parliament adopted amendments to the Law and other relevant laws (land code, Law on land lease) in November 2015.135 These amendments also exonerate industrial park’s management companies from rents on leasing state or communal land for the first 3 years of industrial park’s operations.
Industrial parks can be used to accelerate economic development. When properly designed, the parks have the potential to become growth hubs, creating high growth territories that drive national economic development. Integrated with area education and training institutions, the parks can support start-ups, new enterprise incubation, the development of knowledge-based businesses, and offer an environment where local and multinational enterprises can interact with each other for mutual benefit. International experience points to a number of good practice examples that Ukraine could follow in connection with any decision to revamp its legislation. The design and establishment of industrial parks should nevertheless be subject to rigorous ex ante and ex post cost-benefit analysis (OECD, 2014).
Evaluation of the cost of investment incentives
Tax expenditures – the revenue loss attributable to investment incentives and special exemptions – have translated into less money available to the government for other public expenditures. Amid renewed crisis, falling tax revenues, including revenue losses from the East, and rising debt, Ukraine has been facing serious fiscal consolidation needs. Over the past five years, the government primarily relied on generous tax incentives and holidays to stimulate private investment, often at the expense of much needed general government revenues. The large number of exemptions also seriously compromised fiscal transparency in Ukraine.
The Ministry of Finance publicly released tax expenditures reports aimed at evaluating the costs and benefits of existing incentives in the past.136 In 2011, the losses of budget revenue due to tax incentives were 25.9% of consolidated budget.137 Since 2014, the Ministry has issued quarterly reports on tax expenditures to the IMF. Although most recent data are not publicly available, the overall size of tax expenditures has been a concern for the current government, especially when considering the low tax revenue collection figures, with the tax revenue to GDP ratio recorded at 18.3% in 2012.138 Ensuring Ukraine’s macroeconomic stability has become a major priority for the Ukrainian authorities to guarantee that the investor-friendly framework conditions are in place. To that end, the health of public finances, including stabilisation of the country’s public sector debt and fiscal consolidation, has been high on the agenda of Ukrainian policy-makers. As noted above, a number of measures aiming at expanding the tax base through elimination of the most ineffective tax exemptions and privileges in order to increase tax revenues have been undertaken during the past two years. In February 2015, pursuant to the conditionalities attached to the IMF loans, the government further committed to eliminate tax exemptions.139
To assist in meeting the commitments under the instrument on International Investment Incentives and Disincentives, Ukraine is invited to use the OECD Checklist for Foreign Direct Investment Incentive Policies which is based on good practices in in this area, as well as the OECD Principles to enhance the transparency and governance of tax incentives for investment in developing countries. Both instruments encourage governments to promote the management and administration of incentives in a transparent and consistent manner and to set up a mechanism to assess incentives through costs-benefits analysis. Engagement with the Committee of Fiscal Affairs to conduct analyses of tax policy for investment would also be beneficial; in particular, the OECD Tax and Development Programme can provide assistance in comprehensive analysis of tax incentives for investment.
VAT refund
While the timely payment of VAT refunds is a legal obligation of the state, the enormous accumulation of arrears to domestic and foreign-owned companies has plagued the Ukrainian economy. In April 2010, the amount of VAT subject to refund was equal to UAH 28.4 billion (USD 1.3 billion), which corresponded to 2.6% of GDP.140 Five years later, as of December 2015, the amount of non-refunded VAT was approximately UAH 15 billion.141 Primarily affected have been export-oriented companies, which can claim VAT paid on inputs, while their exports are zero-rated. Within the export sectors, agriculture has been the hardest hit in both absolute and relative terms.
Tackling this problem figured prominently in the Program of Economic Reform 2010-14 and in the IMF-Ukraine agreement reached in July 2010. The objective of redeeming all export VAT-refund arrears by end-2011 was not met, however. In July 2013, VAT arrears amounted to UAH 4.5 billion (USD 200 000), while UAH 11 billion (USD 500 000) worth of refunds were being disputed in courts; automatic VAT refund payments were UAH 24.2 billion (USD 1.1 billion) in 2013, which was 4.5% more than in 2012, and 52.2% more than in 2011. In the meantime, VAT refunds were still doled out manually and bribes continued to be solicited to obtain refunds.142 As a result, fraud reportedly cost the government upwards of approximately UAH 24.19 billion (USD 1.13 billion) in 2014.143
Since February 2015, pursuant to the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Tax Reform” of 28 December 2014, all VAT payers in Ukraine have been required to use special VAT accounts for VAT payment purposes and soon VAT reporting will be made electronically only as foreseen by the law.144 Taxpayers will not be able to make any transfers from their VAT accounts to the state budget.145 The VAT tax base of the purchased goods or services cannot be lower than their purchase price, tax base of the produced goods or services should be at the level of the production costs at least, the tax base of the non-current assets should be at their book value as of the last reporting date or higher. The new law provides for automatic and non-automatic VAT refund. Since 1 July 2015, VAT refund does not require any tax audit or inspection.
Ongoing tax reforms
The VAT-related measures are part of an ambitious tax reform package seeking to reduce the share of taxes in business costs and ease tax related management for enterprises. The government’s strategy is bearing fruits: According to the 2016 World Bank Doing Business database, under the indicator “Paying taxes”, Ukraine’s distance to frontier (a useful tool in assessing the absolute distance to best regulatory practices and its evolution over time, on a 0 to 100 scale) has improved from 18 in 2010 to 70.7 in 2016. The business community has been actively involved in discussions regarding a comprehensive tax reform.
While postponing a systemic overhaul of the tax system to 2016, Parliament adopted significant changes to the tax code in December 2015 (together with the preliminary 2016 budget). The tax code, as amended, substantially reduces the tax burden on labour: the single social security contribution levied on wages decreases from the previous 41 % (on average) to 22 %, while the small contribution paid by employees (previously 3.6 %) is abolished. Parliament also introduced a flat personal income tax at 18 %, while increasing excise duties on fuel, spirits, alcohol and tobacco. By doing so, the government and Parliament have hoped that cutting tax rates on labour would shrink the informal economy (notably under-reporting of tax and employment), improve tax compliance and thus bolster fiscal revenues. However, World Bank experts have pinpointed that coordinated reforms to improve the inefficient tax administration, broaden the tax base and fight corruption are indispensable to deliver results over time.146 Therefore, the short-term effect of the reduction of the burden on labour might be limited.
On 25 February 2015, in order to stabilise its balance of payment, Ukraine also introduced temporary import duties147 of 5 % to 10 % on most import items (except for a few “essential articles” entailing natural gas, coal, petroleum products and other energy commodities and certain medicines). As prescribed by the IMF Program, these temporary import duties have been removed in January 2016. This move is expected to lower the cost of key inputs and thus likely enhance the attractiveness of Ukraine to foreign investors.
Benchmarking Ukraine’s business environment
A realistic assessment of relative FDI attractiveness requires considering a broader assessment of the business climate than regulatory restrictions and constraints. The World Bank’s Doing Business indicators (World Bank, 2016) regularly measure particular time and costs required to comply with basic establishment and business-related procedures. According to the 2015 survey (“Doing Business 2016”), Ukraine came at 83rd out of 189 countries, which is an improvement from 87th in the previous year. The average distance to frontier (as indicated above, the distance to frontier is the absolute distance to the best regulatory practices) across all indicators has constantly improved since 2010. The average distance to frontier went up from 39.7 in 2010 to 63 in 2016 (Figure 2.1), meaning that Ukrainian business regulations got closer to the best regulatory practices over time.
* 2016 ranking reflects data as of June 2015.
Source: World Bank (2016), Doing business, www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16-Chapters/DB16-Mini-Book.pdf.
Despite this progress, Ukraine continues to rank poorly in a group of 15 countries from the former Soviet Union and Central and Eastern Europe (Figure 2.2). Indeed, the Doing business 2016 ranking suggests that the gap between Ukraine’s performance and the best business regulations at any point in time is still larger than for most of its neighbours. However, some improvements in business regulations detailed in this chapter are not yet factored in Doing business 2016 as the survey reflects data as of June 2015.
Source: World Bank (2016), Doing business, www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16-Chapters/DB16-Mini-Book.pdf.
Figure 2.3 measures the gap between the Ukrainian performance and against the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. An economy’s distance to frontier is reflected on a scale from zero to 100, where zero represents the lowest performance and 100 represents the frontier (World Bank, 2016). Figure 2.3 suggests that Ukraine in now very close to the frontier regarding business registration procedures (“Starting a business”: distance to frontier: 93.9). Indeed, a dramatic improvement was registered in 2016 concerning this indicator (Ukraine’s rank improved from 70th to 30th last year). However, Ukraine is still very far from best regulatory practices regarding other key indicators such as “Resolving insolvency” (assessing bankruptcy system and procedures, distance to frontier: 31), “Getting electricity” (distance to frontier: 54.9), “Protecting minority investors” (assessing the protection of minority shareholders in the corporate governance framework, distance to frontier: 53.3) and “Enforcing contracts” (assessing commercial dispute resolution through courts, distance to frontier: 57.1).
Source: World Bank (2016), Doing business, www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16-Chapters/DB16-Mini-Book.pdf.
The government is undertaking significant reforms in the areas covered by the indicators “Protecting minority investors”, “Resolving insolvency” and “Enforcing contracts”. As detailed in Chaper 3 of this report, the authorities introduced tighter regulations regarding related-party lending and the credit information system is being strengthened (Unified credit registry). Efforts are also ongoing to improve the corporate insolvency (the gap to best regulatory practices is the largest across all indicators regarding “Resolving insolvency”) and credit enforcement regime. Judicial and corporate governance reforms covered in Chapter 2 (section on “Enforcement of contracts despite a poor state of the judiciary”) will also help address issues regarding commercial disputes (“Enforcing contracts”) and the rights of minority shareholders.
However, these developments and on-going reforms aimed at further improving Ukraine’s business environment represent only a small part of a larger picture. Feedback from domestic and foreign enterprises indicates that the overall business environment in Ukraine continues to be critically weakened by corruption and weak rule of law. In late 2015, out of 99 companies surveyed by the American Chamber of Commerce of Ukraine, 73% of respondents said that they do not believe that corruption in Ukraine has fallen since March 2014. 88% of them said that they continue to face corruption while carrying out business activities (91% in 2014).148
The survey conducted by the American Chamber of Commerce shows that bribe solicitation by public officials continue to pose constant challenges for many companies if they wish to access to certain services or public procurement, obtain licences, get VAT refunds that they are legally entitled to or protect themselves from illegal actions. For example, reportedly, corruption would be pervasive throughout the entire energy industry sector, from getting the licence to securing the tariff to keeping the licence each year. As a result, the majority (82%) of members of the American Chamber of Commerce believed that the fight against corruption was a top priority for Ukraine to address.
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Notes
← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
← 2. The contracts between domestic and foreign companies have to be drafted in Ukrainian and in one language used by the foreign party. The absence of the bi‐lingual form of foreign contracts can justify their invalidation by courts. A representative office of a foreign company is not considered as a legal entity and should be registered with the Ministry of Economy, tax authorities and the Statistics Committee. It can be exempted from corporate profit tax if provided so by international double taxation treaties concluded by Ukraine.
← 3. Law No. 755-IV “On State Registration of Legal Entities and Individual Entrepreneurs” (15 May 2003).
← 4. All USD Conversions in this Review are based on the official NBU Exchange rate as of 19.10.2015 (1 USD/UAH 21.297).
← 5. Tax Code of Ukraine No. 2755-VI (2 December 2012).
← 6. Law No. 1193-VII “On Introducing Amendments to Certain Legislative Acts of Ukraine with Regard to Reduction of the Number of Permits” (9 April 2014).
← 7. The Act cancelled licenses in 20 fields of business activities. For instance, security guard activities, creating forms for securities, conducting land evaluation works and land tenders, collecting and using information that includes credit history, sales of liquid fuel made from biomass and biogas, sales of pesticide and agricultural chemicals, etc.
← 8. The businesses can choose between obtaining licenses and permits either directly through a competent authority, or through the centres of administrative services. The list of suchlicenses and permits will be approved by the Cabinet of Ministers.
← 9. Prior to the Act, the State Architectural and Construction Inspectorate and its regional departments performed these functions.
← 10. In the past, the standard practice was not to register franchise agreements, which negatively affected the parties to such agreements (for instance when the tax authorities refused to assign royalties paid by Ukrainian franchisees to deductible expenses without due registration of franchise agreements). Foreign franchisors considered the registration requirement with no transparent registration procedure in place to be a burdensome ambiguity.
← 11. Ukrainian IT business has long complained that authorities seized computer equipment (servers) during investigation of copyright infringement, distribution of pornography, etc. Despite the need for only a few gigabytes the authorities seized all servers, which literally paralyzed business activities. The 2015 bill replaces seizure of servers with copying of information. The temporary seizure of the computer equipment is limited to instances where: 1) it is necessary for the investigation of physical properties, which are relevant for criminal proceeding, and 2) there is a court order. However, the notion of “relevant for criminal proceedings” is rather ambiguous and still leaves discretion.
← 12. When obtained in electronic form from the Register, extracts (“виписка”), excerpts (“витяг”) and statements (“довідка”) on business entities will enjoy equal legal force with the respective documents obtained in a paper form.
← 13. The fees vary from 19 UAH to 46UAH (or USD 0.89 to USD 2.2) depending on the type and the form of the document requested.
← 14. In addition to the above, the Parliament of Ukraine is currently considering draft law envisaging mitigation of risks related to performance of registration formalities based on forged documents. Draft law No. 1475 (16 December 2015) contemplates performance of registration formalities (e.g. altering charter or changing management of a legal entity) based on the originals of the respective corporate decision (current version of the Law on State Registration provides for the possibility of performing such registration formalities also based on copies of such documents).
← 15. Law No. 222-VIII “On Licensing of Certain Types of Business Activity” (2 March 2015), Article 7.
← 16. Currently the methodology for regulatory impact assessment of business regulations is defined by Resolution 308 of the Cabinet of Ministers (adopted on 11.03.204), as amended.
← 17. See Law “On Amendments to the Law of Ukraine ’On State Registration of Legal Entities and Individual Entrepreneurs of Ukraine on Electronic Registration’” (14 August 2011) and Order of Ministry of Justice No. 997/19735 “On Approval of Procedure of Application and Electronic Documents Flow to the State Registrar” (23 August 2011).
← 18. Law No. 889-VIII “On Civil Service” (10 December 2015).
← 19. After the repeated rejection by the Parliament of the draft laws on the land market and the land cadastre, the moratorium on sales ofagricultural land to foreigners was extended in 2009 and continued to apply in 2015. Law No. 11315 “On Introduction of Changes into Land Code of Ukraine”.
← 20. Before the 2015 changes, land lease agreements were concluded on the basis of a standard form containing 15 essential provisions and five mandatory integral annexes.
← 21. Previously, there was no minimum duration for land leases (while the maximum duration remains 50 years).
← 22. The majority (95%) of members of the American Chamber of Commerce in Ukraine believe that judicial corruption is the most widespread in Ukraine, next to illegal tax pressure (unjustified additional sanctions) for bribery purpose: Report by the Anti-Corruption Working Group of the American Chamber of Commerce of Ukraine (November 2015).
← 23. Law No. 272-VIII “On Amending the Joint Stock Companies Law” (19 March 2015); Law No. 816-VIII “On amendment to Article 60 of the Law ‘On Companies’ (24 November 2015)”.
← 24. This has been the case for instance at Ukrnafta, where Ukraine’s pre-eminent oligarch, Ihor Kolomoisky, owned 43% with the state holding another 51%.
← 25. Law No. 1656 “On Ensuring the Right to a Fair Trial” (April 2015). The new grounds for review include inconsistent application of procedural rules by the cassation courts preventing further consideration of cases, lower courts not properly applying the rules on jurisdiction, as well as incompatibility of a cassation court’s decision with the legal positions of the Supreme Court.Legal positions endorsed by the Supreme Court are binding for all public bodies including lower courts, which can however deviate from those positions on reasonable grounds.
← 26. Judges are appointed for an initial five-year term by the President upon the recommendations of the High Council of Justice of Ukraine. The High Qualification Commission of Judges is responsible for the initial selection of candidates.
← 27. Only licensed attorneys admitted to the Bar can now file complaints against unlawful actions of a judge on behalf of a legal entity. Disciplinary cases concerning judges of the local and appellate courts will be considered by the High Qualification Commission of Judges and the High Council of Justice will consider those involving judges of the higher courts and the Supreme Court. The Law also extends the range of disciplinary sanctions applicable to judges, which now include a warning, reprimand, temporary removal from office (up to six months), transfer of a judge to a court of lower instance or the High Council of Justice filing a motion on complete removal from office (in cases of violation of the judicial oath).
← 28. As noted earlier, litigation in Ukrainian courts has been seen by foreign investors as lacking the objectivity that an investor desires. As a matter of practice, Ukrainian courts tend to apply Ukrainian domestic laws even if they fall short of standards and rules provided by international treaties. Therefore, the national courts are often not the last resort in settlement of investment disputes.
← 29. Article 9 of the Law of Ukraine “On the Regime of Foreign Investments” No. 93/96-BP of 19 March 1996.
← 30. Article10 of the Law “On the Regime of Foreign Investments”.
← 31. Law No. 1565-VI of 17 December 2009 “On Alienation of Private Land Plots and Real Estate Facilities Located on Them for Public Needs or Due to Public Necessity”.
← 32. Resolution of the Cabinet of Ministers of Ukraine No. 284 dated April 19, 1993 “On the Procedure of Determination of and Compensation for Losses to Owners of Land and Land Users”.
← 33. Law No. 1550-III “On the Legal Regime of a State of Emergency” (as amended) (16 March 2000) and Law No. 1647-III “On the Legal Regime of Martial Law” (as amended) (6 April 2000).
← 34. See Reuters, “Kiev says will take over Rusal’s stake in ZALK aluminium complex”, 12 March 2015, www.reuters.com/article/2015/03/12/ukraine-crisis-rusal-idUSL5 N0WE3PN20150312.
← 35. The Associated Press, “Change of leadership in Crimea means property grab”, 2 December 2014, www.dailymail.co.uk/wires/ap/article-2857238/Change-leadership-Crimea-means-property-grab.html.
← 36. Ukraine Today, “Ukraine reports 50 bln losses due to ‘nationalisation’ in Crimea”, 15-24August 2015, http://uatoday.tv/news/ukraine-reports-50-bln-losses-due-to-nationalisation-in-crimea-478774.html.
← 37. See interview in BNE, “Ukraine economy minister tightens grip on state companies”, 14 May 2015, www.bne.eu/content/story/interview-ukraine-economy-minister-tightens-grip-state-companies.
← 38. As reflected on the government website outlining reforms (http://reforms.in.ua/en/reforms/state-owned-enterprise-governance-reform) and as reported to the OECD.
← 39. Order No. 157 of the Minister for Economic Development and Trade (23 February 2015).
← 40. www.ebrd.com/news/2015/ebrd-ukraine-agree-naftogaz-reform-sign-us-300-million-loan-for-winter-gas-purchases.html.
← 41. Resolution of the Cabinet of Ministers No. 1002 (adopted 5 December 2015).
← 42. Resolution of the Cabinet of Ministers No. 271 (adopted on 12 May 2015), as amended.
← 43. Draft Law No. 1567 (deposed on 22 December 2014).
← 44. Law No. 847-XIV (7 July 1999), as amended.
← 45. An “Aggressor-State” is a state that undertook an armed aggression against Ukraine and occupied a part of Ukrainian territory. In January 2015, the Ukrainian Parliament recognized the Russian Federation as an Aggressor-state (Parliamentary Resolution No. 129-XIX adopted on 27 January 2015).
← 46. In November 2015, the Parliament was discussing Government Draft Law No. 2319a amending the Privatisation Law in order to adjust it to international standards and make the privatisations more transparent. If adopted, this draft law would exclude legal entities and citizens from an Aggressor-State, as well as their Ukrainian affiliates from privatizations.
← 47. The G Group of state-owned companies, as defined by the 1992 Law “On Privatisation of State Property” (Law No. 2544-XII of 4 March 1992), comprises enterprises “of strategic importance for the economy and national security” (according to a list established by the Cabinet of Ministers), enterprises of the defence sector and enterprises with dominant market positions.
← 48. Press release of the State Property Fund of Ukraine (10 October 2015).
← 49. Law of Ukraine No. 5044-VI dated 4 July 2012 “On Amendments to Certain Regulations on Public Procurement in Ukraine”. See: Policy Brief, National Institute of Strategic Studies, 2014, “On fighting corruption in public procurementin Ukraine”, www.niss.gov.ua/articles/1486.
← 50. Unian News Agency Report dated 9 September 2014. Earlier that year, Ukrainian Prime Minister Yatsenyuk noted that 40% t of the EUR 20 billion spent annually on public procurement had stayed in the “corrupt pockets of the people who carry out these purchase”, 10 April 2014, www.reuters.com/article/2014/04/10/us-ukraine-crisis-imf-idUSBREA390R520140410.
← 51. Law No. 1197-VII “On Public Procurement” (20 April 2014).
← 52. Article 5 of Law No. 1197-VII.
← 53. The law forbids participation by firms registered offshore. See Article 17.2.3 of Law No. 1197-VII.
← 54. Law No. 2289-VI “On Public Procurements” adopted by Parliament on 1 June 2010.
← 55. Article 2 of Law No. 1197-VII as amended on 15 September 2015; these thresholds are to be reviewed every 12 months. Higher thresholds apply to the procurement of goods, services or works by natural monopolies and other similar public sector entities. Previously, pursuant to an amendment made in 2012 to the 2010 law “On Public Procurements”, no tender was required for public companies when procurement contracts were not funded from the state budget of Ukraine.
← 56. Article 8 of Law No. 1197-VII.
← 57. The procedure of conducting monitoring is established by the Order of MEDT No. 155 of 19 November 2011 “On Public Procurement Monitoring”.
← 58. Centre for Transport Strategies, “Ukraine’s Infrastructure Ministry Discloses Information About Procurements By 58 State Companies From 2012 To March 2015”, 28 August 2015, http://en.cfts.org.ua/news/ukraines_infrastructure_ministry_discloses_ information_about_procurements_by_58_state_companies_from_2012_to_march_2015.
← 59. Law No. 1197-VII has in particular introduced mandatory publication of procurement information by publicly-owned companies (enterprises with 50% or more state or municipal ownership) on the Ministry’s web portal.
← 60. During this pilot phase, tenders will be limited to UAH 100 000 (USD 4 695) for goods and UAH 1 million (USD 46 953) for services. For further details regarding the ProZorro e-procurement platform, please refer to: http://prozorro.org/en/faq/.
← 61. See reports in Unian News Agency, “Abromavicius expects state procurement law to be passed in June as prerequisite for EU aid”, 27 May 2015, www.unian.info/economics/1082608-abromavicius-expects-state-procurement-law-to-be-passed-in-june-as-prerequisite-for-eu-aid.html.
← 62. See for instance Council of Europe, Joint First and Second Evaluation Round: Fifth Addendum to the Compliance Report on Ukraine, 10 July 2015, www.coe.int/t/dghl/monitoring/greco/evaluations/round2/GrecoRC1&2(2009)1_FifthAdd_Ukraine_EN.pdf; EU Delegation to Ukraine, 2 December 2014, http://euukrainecoop.com/2014/12/02/eu-procurement/; “World Bank Statement on Amendments to Ukraine’s Public Procurement Law”, 10 April 2014, www.worldbank.org/en/news/press-release/2014/04/10/world-bank-statement-on-amendments-to-ukraine-public-procurement-law.
← 63. World Trade Organization, “Committee on Government Procurement moves ahead on multiple accessions”, 11 February 2015, www.wto.org/english/news_e/news15_e/gpro_11feb15_e.htm;European Bank for Reconstruction and Development, EBRD GPA Technical Cooperation Facility, 27 May 2015, http://ukraine.ppl.ebrd.com/gpa_deliverables.php.
← 64. IIAs herein refer to stand-alone investment treaties like bilateral investment treaties (BITs) and investment chapters in broader agreements such as free trade agreements (FTAs).
← 65. Ukraine has concluded 74 bilateral investment treaties, 70 of which were in force in November 2015. Earlier treaties with Finland and Israel were terminated and replaced by new ones. The remaining treaties were signed but do not appear to be in force yet, among them the most recent IIA, signed with Japan in early 2015. IIA databases of OECD, UNCTAD, the Ukrainian Arbitration Association, the website http://arbitration.kiev.ua and the official Ukrainian government repository show discrepancies regarding the number of Ukrainian IIAs signed and in force.
← 66. Energy Charter Treaty, Art. 10.
← 67. EU-Ukraine Association Agreement, Art. 89(2).
← 68. UNCTAD, OECD, Ukrainian Arbitration Association.
← 69. The Ukrainian investment treaty with the United Arab Emirates differs by providing additional criteria for the lawfulness of expropriations, such as the non-violation of contractual stabilisation commitments (Ukraine-United Arab Emirates IIA, Art. 6.1.).
← 70. E.g. Ukraine-Chile IIA, Art. 6(1), referringto measures “depriving, directly or indirectly, an investor of the other contracting Party of an investment…”.
← 71. In Ukrainian treaties, the concept of indirect expropriation is referred to in general terms, e.g. “Neither Contracting Party shall take any measures depriving, directly or indirectly…” (Ukraine-Netherlands IIA, Art. 6); “Investments or returns of investors of either Contracting Party shall not be nationalized, expropriated or subjected to measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as “expropriation”…)” (Ukraine-Canada IIA, Art. VIII(1)).
← 72. US Model BIT 2012 Annex B(4)(b): “Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”; Comprehensive Economic and Trade Agreement (CETA) draft between the European Union and Canada, Annex X.11(3): “For greater certainty, except in the rare circumstance where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.”; ASEAN Comprehensive Investment Agreement (ACIA) Annex 2, para. 4: “Non-discriminatory measures of a Member State that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an expropriation of the type referred to in sub-paragraph2(b).”
← 73. Some Ukrainian investment treaties do not contain any language on fair and equitable treatment at all or refer to it only in the preamble. See Ukraine-Russia IIA; Ukraine-Croatia IIA; Ukraine-Turkey IIA, Preamble: “Agreeing that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources”.
← 74. Ukraine-United Arab Emirates IIA, Art. 2.3.: “Each Contracting State shall at all times ensure fair and equitable treatment to the investments of investors of the other Contracting State.”; Ukraine-Belgium Luxembourg IIA, Art. 3.1.: “Tous les investissements, directs ou indirects, effectués par des investisseurs de l’une des Parties contractantes, jouissent, sur le territoire de l’autre Partie contractante, d’un traitement juste et équitable” ; Ukraine-Croatia IIA, Art. Ukraine-Germany IIA, Art. 2: “Sie wird Kapitalanlagen in jedem Fall gerecht und billig behandeln”; Ukraine-Portugal IIA, Art. 2.1.: “Em qualquer caso, concederão aos investimentos tratamento justo e equitativo.”; Ukraine-Argentina IIA, Art. 3.1.: “Cada Parte Contratante asegurará en todo momento un tratamiento justo y equitativo a las inversiones.”
← 75. Claims have related to the stability of the legal framework, the protection of covered foreign investors’ “legitimate expectations”, compliance with contractual obligations, the transparency of the legal framework and regulatory measures, arbitrary government action, denial of justice, procedural propriety and due process, good faith, and freedom fromcoercion and harassment (Dolzer and Schreuer, 2012: 145 ff.).
← 76. The Ukraine-Canada IIA states that governments shall accord fair and equitable treatment “in accordance with principles of international law” (Ukraine-Canada IIA, Art. II.2). Similarly, the 2015 agreement with Japan, which has yet to enter into force, states that investors shall be accorded treatment “in accordance with international law, including fair and equitable treatment…” (Ukraine-Japan IIA, Art. 6.1.). The Agreement with the United States provides that investors shall be accorded “fair and equitable treatment […] and shall in no case be accorded treatment less than that required by international law.” (Ukraine-USA IIA, Art. 2.3.).
← 77. See NAFTA Free Trade Commission: Notes of interpretation of certain Chapter 11 provisions, 31 July 2001, www.sice.oas.org/tpd/nafta/Commission/CH11understanding_ e.asp, and US model BIT, Art. 5(2).
← 78. Ukraine-United Arab Emirates IIA, Protocol, Art. 5: “With respect to Article 3 – It is agreed by both contracting parties that the most favourable treatment shall not apply to any investment disputes’’; Ukraine-Japan IIA, signed in 2015, Art. 5(4).
← 79. Ukraine-United Arab Emirates IIA, Protocol, Art. 2.
← 80. Ukraine-Canada IIA, Art. II(3)(a) and (b); Ukraine-Finland IIA, Art. 2(3), limited to MFN.
← 81. Ukraine-Chile IIA,Art. 2; Ukraine-Finland IIA, Art. 1(1). Several issues regarding these types of clauses are unclear, among them i) whether it is necessary to provide for a legality requirement or whether it also applies when it is absent from the treaty language, ii) whether the requirement only applies to the time the investment is made or also to its execution; and iii) whether and which are de minimis thresholds to find that an investment is not covered because it violated the (host) state laws.
← 82. Ukraine-Japan IIA, Note, Art. 1(1): “It is confirmed that nothing in the Agreement shall apply to investments made by investors of a Contracting Party in violation of the applicable laws and regulations of either or both of the Contracting Parties.”
← 83. Ukraine-EFTA FTA, Art. 10.4.
← 84. Ukraine-Canada IIA, Art. XVII(3): “Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures: a) necessary to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; b) necessary to protect human, animal or plant life or health; or e) relating to the conservation of living or non-living exhaustible natural resources.”
← 85. See Chapter 5 of this review on responsible business conduct and the OECD Guidelines for Multinational Enterprises and references in the Association Agreement, e.g. Art. 290 on the “right to regulate” and Art. 422 on responsible businesspractices, referring explicitly to the OECD Guidelines.
← 86. Ukraine-Japan IIA, Art. 25. Similar clauses have emerged more broadly in more recent treaty practice.
← 87. United States Government Accountability Office (2009), “Four Free Trade Agreements GAO Have Reviewed Have Resulted in Commercial Benefits, but Challenges on Labor and Environment Remain”, www.gao.gov/assets/300/292204.pdf. In 2014, the United States has brought a claim against Guatemala for an alleged breach of obligations regarding labor rights under CAFTA-DR.
← 88. Ukraine-EFTA IIA, Art. 4.6.
← 89. OECD (2015), Conference on Investment Treaties: Policy Goals and Public Support, 16 March 2015, www.oecd.org/investment/investment-policy/2015-conference-investment-treaties.htm.
← 90. EU Commission, Press release, 16 September 2015, http://europa.eu/rapid/press-release_IP-15-5651_en.htm.
← 91. For the purposes of this analysis, the focus is on investment treaties between Ukraine and participants of the OECD’s Freedom of Investment Roundtable.
← 92. Ukraine-Japan IIA, Art. 18(6); Ukraine-CanadaIIA, Art. XIII(12)(a)(iv).
← 93. Unless otherwise agreed by the parties, the ICSID Arbitration Rules apply to ICSID proceedings pursuant to Art. 44 ICSID Convention.
← 94. Ukraine-United Kingdom IIA, Art. 8(2) allows the investors to choose between all options listed in this paragraph and to submit the claim to an “international arbitrator or ad hoc arbitration tribunal to be appointed by a special agreement.”
← 95. This approach is followed in the CETA draft from 2014, Chapter 10, Section 6, Art. 25.
← 96. The earliest case (ARB(AF)/98/1) was administered by the Additional Facility of ICSID, which is open to disputes where at least one party is a contracting party to the ICSID Convention. Arbitral proceedings and awards administered under the Additional Facility do not fall under the scope of the ICSID Convention.
← 97. IAReporter (2015), “Investor takes emergency arbitrator award under Energy CharterTreaty to a Ukraine court and obtains enforcement of tax-freeze holdings”, 29 June 2015.
← 98. In addition to cases brought on the basis of IIAs, several contract disputes against Ukraine are pending before arbitral tribunals, see IAReporter, “Ukraine: Updates on arbitrator resignations, costs-order collections, and other recent arbitral developments”, 8 October 2015.
← 99. IAReporter (2015), “First UNCITRAL arbitral tribunal is finalized to hear claim that Russia is liable for harm befalling investments in annexed Crimean peninsula”, 14 July 2015; IAReporter (2015), “A second UNCITRAL arbitral tribunal is constituted to hear Crimea claims against Russia, as tribunal selection begins in three further cases”, 14 July 2015.
← 100. This information is provided as a matter of general analysis and should not be relied on with regard to individual treaties. Recourse should be had to the precise treaty text in each case. The dates do not take into consideration the possibility of an agreement by the treaty partners to amend and/or terminate the treaty. The reference date for the calculation is 11 December 2015. The calculation is also approximate due to the different length of months and years.
← 101. Regulation of the Cabinet of Ministers of Ukraine No. 180 (28 December 2001).
← 102. Resolution of the Cabinet of Ministers Resolution No. 1900-p (29 September 2010).
← 103. Law of Ukraine No. 5018-VI on Industrial Parks of 21 June 2012.
← 104. Decree of the President of Ukraine of 12 May2011 No. 583/2011 on the State Agency for Investment and National Projects of Ukraine.
← 105. Law No. 2623-VI of 21 October 2010 “On Preparation and Implementation of Investment Projects under the One Window Principle”.
← 106. “International project Ukrainian Investment dialogue can help Ukraine to attract investment”, 26 November 2014, http://lifeinua.info/international-project-ukrainian-investment-dialogue-can-help-ukraine-attract-investment/; “International investment project Ukrainian Investment Dialog 2015”, Ukraine’s Ministry of Foreign Affairs website, 16 March 2015, http://chicago.mfa.gov.ua/en/news/notes/3667-mizhnarodnij-investicijno-komunikacijnij-projekt-ukrainian-investment-dialog-2015.
← 107. An example of lack of proper consultations with business was the drafting of the new Tax Code in 2010, which resulted in public protests from companies and business associations. See OECD (2015), Anti-Corruption Reforms in Ukraine: Round 3 Monitoring of the Istanbul Anti-Corruption Action Plan, Anti-Corruption Network for Eastern Europe and Central Asia, Paris, p.177.
← 108. Decree of the Government No. 691 dated 26 November 2014 “On the Establishment of the Business Ombudsman Council”.
← 109. The Business Ombudsman Council for Ukraine began operations in May 2015.
← 110. President official website, “President has established the National Investment Council”, 25 December 2015, www.president.gov.ua/en/news/glava-derzhavi-stvoriv-nacionalnu-investicijnu-radu-34447.
← 111. Resolution of the Cabinet of Ministers of Ukraine No. 996 dated 3 November 2010 “On Ensuring Citizen Participation in State Policy Formation and Implementation”.
← 112. Tax Code of Ukraine of December 2, 2010 (Law No. 2755-VI). In 2014 and 2015, several new laws introduced significant amendments to the Ukrainian Tax Code.
← 113. The 5% profit tax rate for IT industry that applied until January 2015 has been cancelled. The standard rate – 18% – now applies.
← 114. Under previous legislation, Ukraine provided a 0% corporate profit tax (CPT) rate on income derived from investment projects resulting in job creation in qualifying industries. These priority industries were set out in the Law of Ukraine of 2012 “On Stimulation of Investment Activity in Priority Sectors of the Economy for the Creation of New Work Places” and included certain sectors in the agro-complex, machine-building complex, transportation infrastructure and tourism, recreation and processing industries, and communal and housing services. The incentives were granted for both newly created businesses in Ukraine and for restructuring/modernisationof existing enterprises.
← 115. Specific types of business activities are prohibited under this tax regime, including exploration, production or sale of precious metals and communication services.
← 116. According to a 2012 OECD study, the contribution of Ukraine’s SMEs to the economy decreased between 2007 and 2010. Employment decreased particularly in medium-sized enterprises, approximately 10% each year; in terms of turnover, the share of the SME sector dropped from 60.7% in 2007 to 51.2% in 2010: SME Policy Index: Eastern Partner Countries 2012 – Progress in the Implementation of the Small Business Act for Europe (OECD Publishing, 2012).
← 117. A fixed asset with a cost exceeding 2 500 UAH (USD 117.4) and useful economic life exceeding one year is allocated to one of 16 classes of fixed assets. Each fixed asset is depreciated. The minimum statutory periods vary from 2 years (for computers and similar electronic devices) to 20 years (for property).
← 118. Tax code of Ukraine (Law No. 2755-VI adopted on 2 December, 2010; as amended), Article 197.1.25.
← 119. Tax code of Ukraine (op. cit.), Chapter XX (Concluding statements), para. 2.12 and 2.13. Ukrainian movies are movies produced in Ukraine and whose original version is in Ukrainian.
← 120. At the time of writing, the authorities were working on a reform plan aimed at bringing the preferential VAT treatment of this sector closer to the general VAT regime pursuant to the Memorandum on Economic and Financial Policies agreed by the Ukrainian government with the International Monetary Fund (IMF)in February 2015. According to this agreement, the beneficial VAT taxation regime applied to the agricultural sector would be abolished in 2016 (see IMF, “Ukraine: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding”, 27 February 2015, C:\Users\wehrle_f\AppData\ Local\Microsoft\Windows\Temporary Internet Files\Content.Outlook\KE4E6SH1\ Information Note to EU business operating and\or investing in Crimea\ Sevastopol).
← 121. For example, under current legislation, renewable energy sources producer pay only 25% of the land tax.
← 122. The Land tax is usually 1% of the normative pecuniary valuation of land.
← 123. Source: Ministry of Economic Development and Trade, November 2015.
← 124. For example, the Law No. 1276-XIV “On the Special Regime of Investment Activities in the Priority Development Territories in Zhytomyr Oblast” (3 December 1999).
← 125. The Ministry of Finance estimated that the tax expenditures on SEZs and PDTs, i.e. the revenue loss attributable to investment incentives and special exemptions, at 10.5 billion UAH during 1997-2005. Against this, the total revenues generated by SEZs and PDTs projects, including payroll taxes, amounted to only 5.5 billion UAH: OECD Economic Surveys: Ukraine 2007 (OECD Publishing, 2007), p. 81.
← 126. See work by Violeta Skrypnykova, “Channels of Corruption in Establishment of Special Economic Zones of Ukraine”,MA Thesis, Kyiv School of Economics, 2013.
← 127. Law No. 2505 “On the Introduction of Amendments to the Law of Ukraine on the State Budget of Ukraine for 2005 and Some Other Legislative Acts of Ukraine” (25 March 2005).
← 128. Law No. 1636-VII “On Establishment of the Free Economic Zone of Crimea and Special Aspects of Economic Activity in the Temporarily Occupied Territory of Ukraine” (12 August 2014). The law entered into force on 27 September 2014.
← 129. The law foresees the possibility for the Management Company of the SEZ to abolish such taxes.
← 130. Under the law, any supply of goods and/or provision of services from the mainland through the administrative borders of the FEZ (or vice versa) shall be treated as import/export operations and shall be subject to the applicable duties and measures.
← 131. Federal Law No. 377-FZ of 29 November 2014. The related tax package entered into force on 1 January 2015. Investors who will invest in Crimea more than 100 million roubles over three years will be granted a tax relief.
← 132. For example, the EU Council adopted on 25 June 2014 a decision (No. 2014/386/CFSP) and a Regulation (No. 692/2014) that prohibit the import to the European Union of goods originating in Crimea, unless a certificate of origin issued by Ukraine’s authorities accompanies them. On 30 July, the Council adopted a Decision (2014/507/CFSP) and a Regulation (825/2014) amending the previous Council Decision and Regulation to prohibit investment in Crimea in infrastructure projectsin the sectors of transport, energy and telecommunications as well as trade in certain goods with Crimea. See European Commission, Information Note to EU business operating and/or investing in Crimea/Sevastopol (SWD[2014] 300 final/3, 10 June 2015). Similarly, American companies have been prohibited from participating in certain transactions in Crimea, which is subject to sanctions under Executive Order 13685 dated 19 December 2014.
← 133. Law of Ukraine No. 5018-VI of June 21, 2012 “On Industrial Parks”.
← 134. Press release of the Ministry of Economy and Trade (25 November 2015): “The Parliament supported industrial parks ’development and Public-Private Partnerships”, www.me.gov.ua/News/Detail?lang=uk-UA&id=fe1f367c-0fb9-4fba-ad1c-cbd663cf2ecd&title=VerkhovnaRadaPidtrimalaRozvitokIndustrialnikhParkivTa DerzhavnoprivatnogoPartnerstva.
← 135. Law of Ukraine No. 818-VIII “On amendments to certain normative acts to lift existing obstacles to the development of a network of industrial parks in Ukraine” (24 November 2015).
← 136. Ministry of Revenue and Duties of Ukraine (2012), Information about revenue losses due to tax benefits in the first half of 2012 [Informatsiya pro vtraty bjudgetu vnaslidok podatkovyh pil“g za pershe pivrichja 2012 roku].
← 137. See Olena Liakhovets, “Tax Incentives Effectiveness for the Innovation Activity of Industrial Enterprises in Ukraine”, Economics & Sociology, Vol. 7, No 1, 2014, pp. 72-84.
← 138. World Bank data: Tax revenue (% of GDP).
← 139. IMF, “Ukraine: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding”, 27 February 2015, www.imf.org/external/np/loi/2015/ukr/022715.pdf.
← 140. Berlin Economics (2010), “VAT Refund Arrears in Ukraine: Analysis and Recommendations on How to Solve the Problem, With a Special Focus on Agriculture”, www.berlin-economics.com/download/policypapers/VAT Refund Arreas UKR BE_en.pdf.
← 141. Source: Ukraine’s Ministry of Finance.
← 142. See Kyiv Post, “US prosecutors expose Ukraine’s corruption in VAT-refund payments”, 26 December 2013, www.kyivpost.com/content/business/us-prosecutors-expose-ukraines-corruption-in-vat-refund-payments-2-334308.html.
← 143. Speech of Ukrainian Finance Minister Natalie Jaresko at the Chatham House on 24 March 2015.
← 144. The law has abolished paper invoices and requires the use of electronic VAT invoices. It is now mandatory to register electronic VAT invoices with the Unified Register of Tax Invoices when the turnover from taxable operations for the preceding 12 months exceeds UAH 1 million (USD 50 000). In the past, this threshold was set at UAH 300 000 (USD 14 086).
← 145. The new rules would also apply to agricultural VAT tax payers. In 2016-17, supply of grains of commodity items 1001-1008 (save for commodity item 1006 and commodity sub-category 1008 10 00 00) and of industrial crops of commodity items 1205 and 1206 (per the UCGFEA) will be VAT-exempt (except for supply of such grains and industrial crops by producers and companies, which purchased such grains and industrial crops from producers). Unlike previous years, this exemption will not apply to exports by producers of such grains and industrial crops grown on agricultural land which is owned, or perpetually used, or leased.
← 146. See “Ukraine’s tax reform must be equitable, affordable” by Mr Qimiao Fan (World Bank country Director for Ukraine), Opinion Column, Kiyv Post, 4 December 2015, www.worldbank.org/en/news/opinion/2015/12/04/ukraines-tax-reform-must-be-equitable-affordable.
← 147. These temporary import duties fall under Article 12 of the 1994 General Agreement onTariffs and Trade “Restrictions to Safeguard the Balance of Payments”.
← 148. 2015 Report by the Anti-Corruption Working Group of the American Chamber of Commerce of Ukraine (Kyiv, November 2015)