Ukraine introduces tax and customs incentives for large investors
19.07.2021
Background
- On February 13, 2021 the Law of Ukraine No.1116-IX “On State Aid for Investment Projects with Significant Investments” (the “Law“) came into force. It stipulates the main requirements to investment projects and applicants to be eligible for the state aid
- In addition, on March 28, 2021 Laws of Ukraine No.1293-IX and No.1294-IX (the “Incentive Laws“) which stipulate the scope of tax and customs incentives for investors came into force
Eligible investment projects
To become eligible for state aid the investment project should meet the following requirements:
- be implemented on the territory of Ukraine
- cover such industries as processing industry (except for activities for the production and circulation of tobacco products, ethyl alcohol, cognac and fruit alcohol, alcoholic beverages), mineral production (except for coal and lignite, crude oil and natural gas), waste management, transport, warehousing, postal and courier activities, logistics, education, scientific and technical activities, healthcare, arts, culture, sports, tourism, resort and recreation
- the form of investment should be construction, modernization, technical and/or technological refit of investment objects, acquisition of equipment and spare parts, construction of related infrastructure facilities
- create 80+ jobs with an average salary of at least 15% higher than the average salary for the relevant activity in the project region for the preceding year
- amount of investment – more than EUR 20 mln
- term of the project implementation – up to 5 years
Eligible applicants
An applicant that intends to implement the investment project shall meet the following requirements:
- be a legal entity (either Ukrainian or foreign). NB! An investor shall be a Ukrainian legal entity (SPV)
- comply with requirements on financial capability (sufficiency of total equity, sufficiency of net operation cash flow, and availability of financing sources to cover investments) and prove this with respective documents, or
- comply with requirements on financial stability, profitability, and liquidity established by the Government of Ukraine. The same requirements apply to an entity (if involved) which will finance the investment project via the attracted funds
- applicant’s banks and auditors should comply with certain requirements
The applicant cannot apply to the state aid if:
- it is registered in offshore jurisdictions or more than 50% of its shares belong (directly or indirectly) to legal entities registered in such jurisdictions
- it is registered in the aggressor state
- its beneficial owners are residents of the aggressor state (subject to some exceptions applicable to listed companies)
- it is registered in the FATF`s blacklist jurisdictions or at least 10% of its shares belong (directly or indirectly) to legal entities registered in such jurisdictions
- it is subject to Ukrainian or international sanctions
Tax and сustoms incentives
The Incentive Laws stipulate that investors may receive the following tax and customs benefits:
- exemption from import customs duties on new (manufactured not earlier than 3 years before the import date) equipment and its spare parts which are imported to implement the investment project. Such equipment should fall under the specifically listed HS codes
- exemption from value added tax (the “VAT“) applicable to import of the same new equipment and its spare parts (as opposed to basic import VAT of 20%)
- exemption from corporate profit tax (the “CPT“) for 5 consecutive years from the date chosen by the investor in the special application submitted to the tax authority (as opposed to basic CPT of 18%)
- land tax reduction or exemption and land lease payments reduction, subject to the adoption of the decision by municipal authorities
The above tax and customs incentives are subject to the following restrictions:
- amounts of tax and customs exemptions shall be included to the total amount of state aid volume, which shall be established in the special investment agreement and cannot exceed 30% of the investment. Upon reaching this threshold, general taxation rules shall apply
- exemption from CPT shall not apply to (i) transactions which are subject to transfer pricing rules and do not comply with the arm’s length principle and (ii) profit of controlled foreign companies
- land tax reduction or exemption, land lease payments reduction and CPT exemption cannot be given to projects in extractive industries for further beneficiation and/or processing of minerals
- the import duty exemption and VAT exemption cannot be applied to import of goods originating and/or imported from an aggressor state and/or state-occupant, and/or imported from occupied territory of Ukraine
- the investor may be obliged to reimburse the exempt taxes and customs duties along with payment of fines and/or late fee in case of alienation of the imported equipment within 5 years of the date of its import, misuse of the equipment, or there is an early termination of the special investment agreement (unless the termination is caused by the breach of Ukraine`s obligations on provision of state aid under the special investment agreement or force-majeure circumstances). Tax and customs consequences vary depending on the type of event.
All tax and customs incentives are effective until January 1, 2035.
Other incentives and benefits
In addition to the above, investors may be entitled to the following incentives:
- granting the preemptive right to use the land for project implementation
- construction of the project-related infrastructure (highways, heat, gas, water and electricity, utilities, etc.) by the state or municipalities
- state aid related to the utilities systems (heating, gas, water and electricity supply systems, utility supply lines, etc.).
The investors are also subject to the following warranties:
- stabilization clause (no change of business conditions)
- choice of laws applicable to the special investment agreement
- international arbitration for the dispute settlements and losses recovery
How can we help?
The above-described legal, tax and customs framework provides unique opportunities for foreign investors to receive state aid and protection in Ukraine.
Being a full-service law firm with a client-oriented approach, INTEGRITES provides legal support to investors who looking for business opportunities in Ukraine, in particular:
- analyzing the eligibility of the applicant and investment project
- assessing the possibility to apply for specific incentives and choosing the most beneficial one
- drafting the special investment agreement
- collecting all the required documents, as well as representing the applicant and investor during the application process
- providing legal, tax and customs support to an investor at each stage of the project implementation
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