The Ukrainian Civil Code (No. 435-IV, dated January 16, 2003, effective January 1, 2004) and Economic Code (No. 436-IV, dated January 16, 2003, effective January 1, 2004) in combination provide for virtually any type of companies. Despite the dazzling range of business structures offered under Ukrainian law, foreign investors typically choose one of the following four alternative business structures:
· representative office (which is not a legal entity, and can be either commercial or non-commercial);
· wholly-owned foreign subsidiary or enterprise (usually with limited liability provided in the founding documents);
· "joint ventures" — companies with foreign participation (either in the form of a closed stock company or a limited liability company); or agreements on joint cooperation and production, which do not require registration of a separate legal entity, including toll manufacturing or production outsourcing agreements.
Resident vs. Non-resident Status
One significant consideration in selecting the appropriate business structure involves Ukrainian foreign currency legislation, which categorizes the above structures as either non-residents or residents, depending on the type of activities carried out.
Non-commercial representative offices are "non-residents" under currency regulations and tax legislation, while commercial representative offices, subsidiaries and joint ventures are classified as "residents" because they are legal entities, registered and residing in Ukraine for more than 183 days per year. While the distinction is not clearly expressed in other laws, it is significant in terms of tax consequences and the ability of foreign businessmen to effectuate transactions in foreign or Ukrainian currency.
Both subsidiaries and joint ventures have the status of separate corporate entities and, thus, both limit an investor's liability to its initial investment. As Ukrainian corporate entities, joint ventures and subsidiaries are considered to be "residents" under Ukrainian currency regulations and they are subject to a different financial regime than "non-residents" (such as representative offices). For instance, resident companies may only transact business in Ukrainian currency.
Representative Offices
By definition, a representative office of a foreign company is not a separate legal entity, but is viewed as an "arm" of a non-resident company. As such, a representative office is not incorporated under Ukrainian law. A representative office simply represents the interests of a foreign legal entity on Ukrainian territory and, consequently, there is flow-through liability for the parent company.
Another consequence: representative offices that are accorded "non-resident" status under the Ukrainian taxation system are subject to a special financial regime under tax laws and currency regulations. Foreign companies initially prefer to register their presence as non
resident representative offices, particularly in case of import-export activities or simple research of the market opportunities and conditions.
The key function of such non-resident representative offices is to service existing contracts between the non-resident company and a local customer, but not to engage in commercial activities on its own behalf. Engaging in the so-called "commercial activities" (executing contracts in its own name, accepting payment for goods, etc.) may result in a representative office's re-classification as a "resident," thereby being taxed based on local revenues derived from its activity in Ukraine.
Moreover, the Ukrainian corporate tax legislation places non-residents into two categories: those which effectuate profit-generating activities in Ukraine (a) through a permanent representative office (active), or (b) without a permanent office (passive). Different tax rates and payment procedures attach to each category. This significant distinction is aimed at closing the loophole by which non-resident representative offices circumvented currency regulations and paid lower (if any) taxes in Ukraine on activities typically performed by resident companies.
Residents: Joint Stock and Limited Liability Companies
Wholly-owned foreign subsidiaries and joint ventures usually take the form of either closed joint stock companies or limited liability companies, depending on the particular requirements of the project. Both structures are considered to be "residents" under the Ukrainian currency regulations and tax laws, and both have the corporate shield, limiting the liability of founders or shareholders to the value of their contributions to the company.
Several differences exist between the above companies. For example, in a limited liability company, the founders own equity in the company, expressed by a percentage of ownership (i.e., such a company does not issue shares of stock). The main difference between a limited liability company and a joint stock company, however, lies in the degree of structural complexity. Limited liability companies are relatively simplistic and accommodate the interests of minority owners. In sharp contrast, joint stock companies can be extraordinarily complex, particularly in cases of highly negotiated joint ventures with state-owned enterprises, and do not give minority shareholders very much protection.
The management structure of a stock company and that of a limited liability company is very similar with a few minor variations. The three-part structure is headed by the "general assembly of shareholders" (or in case of a limited liability company, "general assembly of participants") which represents the interests of the company owners. The next level, the "supervisory council" (a.k.a. the "board of directors") is optional in both structures; it is commonly employed in the stock company structure, but smaller companies tend to disregard it. The final level, the management board, performs the company's day-to-day functions.
In practice, simple joint ventures or 100% foreign-owned companies usually register in the form of a limited liability company. This company structure allows a relatively small number of people to avoid a complex multi-layered management structure composed of a general assembly, supervisory council and management organs and to avoid the registration of shares of stock. It is particularly attractive in cases of 100% foreign-owned companies because the charter (by-laws) can provide for one executive organ where the founder has complete and unequivocal control.
Capitalization Requirements
The Law "On Economic Associations" governs the formation of joint stock companies and limited liability companies, and contains no limitations on the size of share capital for joint stock companies, provided however that the company's authorized capital is divided into shares of stock of equal nominal value.
The minimum capitalization for registration of joint stock companies is 1,250 minimum monthly salaries, while for limited liability companies it is 100 minimum monthly salaries. As of January 1, 2007, one minimum monthly salary is equal to UAH 400 (from July 1, 2007 it will increase to UAH 420 and from December 1, 2007 to UAH 460). Note that increases of the minimum monthly salary are common; therefore, please verify this information before calculating authorized capital, fines, fees, etc. Contributions to the authorized capital of a company may be either in cash or in-kind.
Shareholders of stock companies and founders in limited liability companies must make initial pre-registration deposits towards their contributions prior to registration. According to the Law "On Economic Associations," 50% of a shareholder's contribution must be paid prior to registration if the shares are originally distributed amongst the founders of a joint stock company or a limited liability company. The remaining sum must be paid in its entirety, no later than one year after registration of both types of companies.
Company Registration
On July 1, 2004, the Law of Ukraine No. 755-IV "On State Registration of Legal Entities and Physical Entities-Entrepreneurs," dated May 15, 2003 (hereinafter the "Law"), came into force. The Law was specifically tailored to correspond with the Civil and Economic Codes of Ukraine, which simultaneously came into effect on January 1, 2004. The discussion below focuses on the registration of legal entities.
State registration in Ukraine evidences the creation or liquidation of legal entities, as well as any other registration activities which require an entry into the Unified State Register of Legal Entities and Physical Entities-Entrepreneurs (the "Register"). The Register should be fully up and running in 2006, including a "one-window" registration point.
Registration is performed by a duly qualified state registrar. They are responsible for registering legal entities, reserving names of legal entities (a novelty in Ukraine) providing information to various state authorities from registration cards, creating and storing registration cards, filling out and issuing certificates of registration and extracts from the Unified State Register, registering amendments in the founding documents of legal entities, registering terminations of activity.
Document Preparation
All documents to be submitted for any registration activity must be personally submitted or sent by registered mail and must be written in Ukrainian. Registration cards must be typewritten or handwritten in print and signed (in case of dispatch by registered mail, the applicant's signature must be notarized). All founding documents (charters, founding agreements, if applicable, regulations) must completely conform to the requirements of Ukrainian legislation.
Please note that documents, which are executed and issued in a foreign country, must be duly signed, notarized with a certification of the notary's signature by the authority in the foreign country authorized to certify such signatures and, finally, legalized with the Ukrainian Consulate in the foreign country or certified by an Apostille, provided that the foreign country has recognized Ukraine as a member to the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents.
After a legal entity or entrepreneur is entered into the Unified State Register, the relevant state registrar will create a registration file and assign it a registration number.
Registration Process
The registration of a legal entity usually entails submission of the following documents:
· a duly filled in registration card for carrying out the state registration of the company;
· a copy of the resolution of the founders or their authorized bodies on the creation of a legal entity;
· two counterparts of the founding documents (according to the Civil and Economic Codes, the charter is the founding document of most types of companies,including joint stock companies, limited liability companies and enterprises);
· the document evidencing payment of the registration fee for the state registration of a legal entity; and for legal entities established by a foreign legal entity (foreign legal entities), a duly legalized (certified by Apostille) extract from the trade, banking or court register in such entity's (entities') country of location, which extract evidences registration in such country.
Again, we stress that if the above documents are issued in a foreign country, then such documents must be notarized, certified and affixed with an Apostille stamp in accordance with the 1961 Hague Convention (or legalized in the Ukrainian consulate in the country of origin) to use them officially in Ukraine. Importantly, "state registration" does not include mandatory registration with the social security funds, the Pension Fund of Ukraine, the Employment Center and the tax authorities.
In addition, the state registrar must provide to the statistics bodies, the state tax authorities, the Pension Fund of Ukraine and the social security funds (hereinafter "Registration Authorities") notice on the state registration of the company with an indication of the number and date of registration and all information in the company's registration card. This act alone will be the basis for the inclusion of the company into the registers of the aforementioned state authorities.
Individuals, who carry out commercial activities including the manufacturing and sale of products, the rendering of services or the performance of certain jobs, must also register as entrepreneurs for tax purposes. As a brief overview, the state registration of entrepreneurs includes the submission of a duly executed registration card and a copy of the individual's certificate evidencing registration as a taxpayer and payer of other mandatory payments and the payment of the registration fee. Information on the procedure for export or temporary performance from Ukraine of works of art, literature, musical instruments and other objects that have or may have cultural value available at the link: https://mkip.gov.ua/content/informaciya-pro-poryadok-vivezennya-abo-timchasovogo-vivezennya-z-ukraini-tvoriv-mistectva-literaturi-muzichnih-instrumentiv-ta-inshih-predmetiv-shcho-mayut-abo-mozhut-mati-kulturnu-cinnist.html