Alinga principals have been living and working in the CIS market since 1994, and with our clients, have lived through more than one crisis experienced by the business community. We have accumulated extensive experience in ever-changing circumstances. We offer our clients – both those who are already working in the market and those who are only contemplating a presence – analysis on current changes and prospects that are opening up. We will also accompany your transactions in the Ukrainian market.
Investors face great prospects in the energy, agricultural, and refining sectors, as well as through liberalization of the land market.
Weakening of the hryvnia makes the labor market attractive to investors. A relatively inexpensive skilled workforce improves the possibility of transferring production and opening back offices in Ukraine.
We offer you a quick overview of the changes in recent times:
Changes in Ukraine
- Forecasted changes in Ukraine’s investment climate
- Primary changes in Ukraine’s tax laws
- Changes in registration procedures
- Changes related to the adoption of a new Law on Amending Certain Legislative Acts of Ukraine with Respect to Reduction of the Number of Permitting Documents.
1. Forecasted changes in Ukraine’s investment climate
Ukraine’s economy, along with global economy, is going through hard times. However, according to experts at the World Bank, resumed cooperation with the IMF and other international organizations can enhance investor confidence in Ukraine and reduce the cost of external financing.
The European Business Association (EBA) has calculated Ukraine’s investment attractiveness index. In the first quarter of 2014, the index was 2.72, the highest since 2011, which was especially noteworthy after it was the lowest in the history of the index – 1.81 in the fourth quarter of 2013. According to the study, estimates of changed expectations regarding the investment climate in the next three months are the highest for the entire study period and were 3.6.
According to the EBA, businesses view the most significant changes in the current period as the change in government, the possibility of open dialogue between government and society, as well as the expectation of active professional actions by the new team and obtaining help from European countries to solve financial problems. However, according to the EBA, businesses view the government's slow movement negatively, as well as its vague position in dealing with the crisis and the general economic and political instability related to it.
Experts note that Ukraine must now carry out numerous reforms and reduce its budget deficit and the amount of debt held by the state.
To stabilize the country’s economy, the Ministry of Economic Development has developed an anti-crisis program called "100 Days - 100 steps of Government,” which it has submitted to the government for review. Its measures are aimed at reducing budget expenditures. Increasing state budget revenues is planned with the help of international organizations, privatization and abandonment of tax breaks. In addition, the program aims to create favorable conditions for business in the country, such as an automatic VAT refund, the introduction of EU standards and technical regulations, and liberalization of the foreign exchange market. Reform of the energy market will continue, with the energy sector introducing electronic auctions for access to networks, eliminating cross-subsidies, gradually raising electricity prices for the public, and introducing exchange trading for coal. However, we believe that most of the rules set out in this document cannot be implemented in 100 days.
2. Primary changes in Ukraine’s tax laws
Beginning April 1, new rules on anti-crisis changes in Ukraine’s tax legislation went into effect. Excise tax rates were increased by 25-42%, as were transport charges, environmental charges, fees for land and other fees. VAT and income tax rates were left at 20% and 18%, with abandonment of the gradual reduction in these rates that had previously been decided. Starting on July 1, the tax rate on individual dividends will increase significantly. Previously, the tax was 5%, but it will now be calculated on a progressive scale from 15% to 25%.
The only sector not affected by the tax changes is agriculture. A special tax regime that excludes VAT has been stipulated for agricultural producers.
According to specialists at the Ukrainian Agrarian Association (UAA), an important factor for Ukraine’s grain market is the ability for the system to operate after October 1 and to keep working in the future.
One innovation is the introduction of price regulation in the land rental market. Previously, the minimum amount of rent for agricultural land was tied to the amount of the land tax. Now rental payments for land cannot be less than 3% of the normative monetary valuation of the land for all categories of land (i.e., for agricultural land the average is no less than UAH 619/hectare). These changes effectively mean the introduction of price regulation in the land rental market, as normative monetary valuation of land is tightly regulated by decrees issued by the Cabinet of Ministers of Ukraine. Price regulation by the state can be explained by the fact that the government wants to receive more taxes, since tax from individual income, among other things, goes into the state budget.
The new law increases the fixed agricultural tax by a minimum of 5.6 times starting January 1, 2015. Whereas previously the fixed agricultural tax (0.15%) was taken from the normative monetary value of one hectare of agricultural land held as of July 1, 1995, now it will take into account the annual indexation coefficient. It is currently unknown what the indexation factor will be in 2015. Since the issue is about small amounts compared to the amount of rent for the land, the legislators do not see major problems for farmers in connection with this increase. However, the UAA also notes that the size of the fixed agricultural tax should be considered in conjunction with other taxes that agricultural enterprises pay, including the issue of a VAT refund on grain exports.
In 2015, the government plans to introduce a new tax system that provides for a broader tax base and reduce the number of taxes to eight.
3. Changes in registration procedures
A positive introduction is the easing of several administrative procedures, in particular simplification of registration procedures for single tax payers and VAT. It is now possible to submit an application for registration in electronic form together with a registration card for state registration of a legal entity or individual entrepreneur. The time to register an enterprise as a single tax payer has also been reduced from ten days to two days.
4. Changes related to the adoption of a new Law on Amending Certain Legislative Acts of Ukraine with Respect to Reduction of the Number of Permitting Documents.
On April 9, a new Law on Amending Certain Legislative Acts of Ukraine with Respect to Reduction of the Number of Permitting Documents was adopted. This law repeals more than 100 permits and prohibits requiring business entities to obtain permits that are not included in the list of permits. Most of the repealed documents concern the primary sector of the economy. Exceptions are defined in the areas of state export control, state regulation of financial services markets, protection of state secrets, protection of economic competition, and the use of nuclear energy. The validity period of individual permits has been increased, and the possibility of pursuing economic activities on the basis of a declaration without the permit documents themselves has been established. Experts believe that this law is very timely and necessary because it significantly improves the business environment by removing unnecessary restrictions and bureaucracy when it comes to engaging in business activity.
The development of Ukraine’s economy in the current environment is a complex process that requires sustained action. State support for industry is a very important component on the path toward stability.