Corporate structures in Ukraine

Corporate structures in Ukraine

The majority of Acts that define basic principles of corporate law in Ukraine goes back to 1991, when Ukraine became an independent state. Application of these Acts over the years has shown numerous inadequacies and gaps, so these obsolete Acts must have been replaced with new ones. Now Ukraine is actively developing a new legislative framework in the area of corporate law.

As of 1 January 2004 two fundamental laws addressing corporate issues, the Civil Code and the Commercial Code, became effective. On 1 July 2004 the new State Registration of Legal Entities and Private Entrepreneurs Act came into force. The last one guidelines a simplified procedure for the state registration of all business entities. The act regulates the terms of state registration for all types of legal entities, although special registration regimes may be specified (for instance, for banks, financial institutions, political parties, trade unions, etc.).

So, as of 1 July 2004 companies are able to apply to a single state registrar, which acts as a “one registration window”. Registration must take just three business days for legal entities and two business days for private entrepreneurs. The new act stipulates that upon payment a certain fee the name of the company may be reserved by the founders of a company.

The most commonly used type of legal entities is companies (so-called “business associations”) which may be incorporated as:

a joint stock company; a limited liability company; an additional liability company (whose members are liable to the extent of their contributions to the charter capital and, in addition, within a certain agreed amount; a full liability company (in which members bear joint liability for the company's liabilities to the full extent of their property); a differentiated liability company (where the liability of some members is limited to their contribution to the charter capital while the others are liable to the full extent of their property.

Both Ukrainian and foreign persons may take part in establishment of business associations. Joint stock companies (JSC), limited liability companies (LLC) and additional liability companies are established and operate pursuant to a Foundation Agreement and a Charter (Statute). Full liability and differentiated liability companies operate solely pursuant to a Foundation Agreement. Foundation Agreement is a contract among the founders, governing their mutual rights and obligations with respect to formation and capitalization of the company. The Charter functions as a company's by-laws (Articles of Association), setting out its organizational structure, business activities, corporate management, etc. The law establishes a number of requirements as to the content of the foundation documents.

There are two types of joint stock companies: "open" joint stock company (OJSC) and "closed" joint stock company (CJSC). Shares in an OJSC may be offered to the general public and traded on a stock exchange, whereas ownership of shares in a CJSC is limited to the founders. OJSC is suitable when business intends to collect substantial capital by means of the issuance and sale of shares to the public. A CJSC is typically financed mostly by its founders. The Companies Act of 1991 has been regularly criticized for virtually disregarding these important distinctions between OJSCs and CJSCs. A good example is the lengthy procedure (45 days) for convening the General Meeting of Shareholders (GMS), which under the present law is required for both OJSCs and CJSCs.

The minimum capital is required for a joint stock company. At least 50% of the share capital of a CJSC must be paid up before the company’s registration. Shareholders' liability is limited to the amount paid for the shares. Usually the charter bodies are GMS and board of directors that is responsible for everyday company’s management. Shareholders may decide to appoint a supervisory board to oversee the actions of directors. When a company has at least 50 shareholders, the appointment of a supervisory board is compulsory.

Generally, Ukrainian companies are most frequently established in the form of an LLC or a CJSC. Given equal tax treatment of LLCs and CJSCs under the Ukrainian law, the LLC form is recommended where a foreign company intends to establish a subsidiary without Ukrainian partners. In this case, a foreign founder will not be exposed to the risk of forcible expulsion from the LLC, which is allowed under the Ukrainian law in certain situations. Establishment of an LLC can be completed in less time, because it does not require the registration of share issuance and corresponding procedures. Opening of a LLC requires a smaller budget because the minimum charter capital required for an LLC is lower. The minimum capital is required, at least 50% of which must be paid up before the company is registered. The liability of the members in respect of the company's debts is limited to the value of their individual contributions (so-called “portions”). LLC is managed by board of directors appointed by general meeting of members.

There is no limitation on the percentage of ownership by a foreign investor in most types of Ukrainian companies. Some industries, including banks, insurance companies, financial institutions, are more heavily regulated, so these entities must be established in compliance with specific requirements.

The following documents should be produced for registration: the company charter (if applicable), registration card which is an application for official registration, a document certifying payment of the official registration fee, a certificate of prepayment to the charter capital (if applicable). If an owner is a foreign legal entity, an extract from the registrar, bank or court register must be produced to certify the investor’s registration in the country of origin (translated into Ukrainian and legalized). For a foreign company investing into a Ukrainian company it’s reasonable to provide its bylaws, certificate of incorporation and power of attorney beforehand. Previously, these documents had to be translated into the Ukrainian language and legalized. However, Ukraine has ratified the Convention de La Haye du Octobre 5 1961 Abolishing the Requirement of Legalization for Foreign Public Documents, which came into force in Ukraine on 22 December 2003. The convention will not affect relations between Ukraine and Belgium and Germany who objected to Ukraine's accession to the convention. Now there is no need to legalize public documents. Instead they should be certified by the competent authority of the state from which the document originates with the title "Apostille" and translated into Ukrainian.

After registration founders must appoint a board of directors who then complete other formalities like opening bank accounts, registration with the tax authorities, etc. In certain cases foundation of a company may require the consent of the Antimonopoly Committee of Ukraine.

Following the entry into force of the new Civil Code on 1 January 2004 several new rules became effective. One of these rules allows to create a LLC or JSC by just one person - whether a natural person (i.e. a Ukrainian citizen, foreign citizen or stateless person) or legal entity (Ukrainian or foreign). Previously, at least two members were required to establish and run a LLC and JSC.

Although the Civil Code does not define rules on the activities of companies created by a sole member in details, it is assumed that all general requirements will apply to such companies. Decisions of the sole member will be considered as decisions of the general meeting of members. The competence of this highest body cannot be delegated to any other body within the company. The sole member is entitled to create an executive body of the company - whether in the form of a board or an individual officer - with the right to appoint and to recall its members correspondingly.

Regarding the sole participation in a company the Civil Code determines some restrictions as follows:

LLC and JSC cannot have a business association as a sole member if that business association also has got a sole member; A person can be a sole member in only one LLC if the LLC also has got a sole member.

One more preferred form of doing business in Ukraine for a foreign company is a representative office similar to an un-incorporated branch. For regulatory and taxation purposes representative offices are treated like independent legal entities. A representative office can either carry out marketing, promotional and other auxiliary and preparatory functions on behalf of the company, or it can conduct commercial activities like any other legal entity. The representative office does not constitute a legal entity and operates in Ukraine on behalf of the foreign company it represents. A non-resident company running a representative office is deemed conducting business activity in Ukraine through a permanent establishment and may be subject to corporate profit tax unless protected by a double taxation treaty.

There is no prohibition for a foreign legal entity to have both a representative office and to establish a wholly owned company at the same time. Registration of representative offices of foreign companies is handled by the Ministry of Economy and European Integration matters of Ukraine, and is done within 60 days of submission. The official payment fee is US$2,500.

For registration of a representative office, the Ukrainian Ministry of Economy and European Integration requests the following documents:

Application for registration on the letterhead of a company signed by the head of the company and with its corporate seal affixed. The application must contain company name, company address, telephone and fax numbers, name of a city, where a representative office is established, and future address, number of foreign employees in a representative office, date of establishment of the company, name of a bank and number of account, field of activities of the company, purpose of establishing the representative office and the field of activities of the representative office (representation activities only), information on business relations with Ukrainian partners and prospects of cooperative development; Extract from the Registrar of the country where the officially registered central management body (office) of the foreign entity is located; Certificate of a bank that services the company, containing the account number; Power of attorney in the name of the specific person appointed to execute the representative functions in Ukraine, indicating the specific authority of the attorney.

Originals of the above documents (excluding the application) should be duly legalized and translated into Ukrainian. The documents must be submitted not later than 6 months after being issued in the country of origin. Within a month since obtaining a registration certificate, a representative office must be registered with local tax authorities.

There is one more interesting type of business presence in Ukraine. It’s a so-called “joint venture agreement” (JV). An un-incorporated JV does not have the status of a separate legal entity. However, it is treated separately for tax purposes and its operating partner is required to file separate reports in respect of the JV's operations. Profits of a JV are subject to withholding tax, and profit distribution is treated as dividend payments for Ukrainian tax purposes. The activities of the JV, the use of the property contributed by the parties to the JV, and the distribution of profits generated by the venture are governed by the terms of the JV agreement.

As of 1 January 2004 there changes have also been made to the business types which must be licensed. 67 types of business activity may be carried out in Ukraine only with a special license, pursuant to the Act on Licensing of Certain Types of Business Activity of 1 June 2000. There are also several laws which regulate specific fields of business activity and define special licensing procedure (e.g., banking, financial services, foreign economic activity, education, etc.). So, the corresponding foundation documents must contain exact list of kinds of activities the company intends to conduct.

The above is intended to provide a brief guide only. It is essential that appropriate professional advice is obtained. Our company will be glad to assist you in this respect. Please do not hesitate to contact us.