Setting up and operating a joint venture in Ukraine
10 January, 2023
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Structure
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Typical drivers for joint venture structures are industry practice, regulatory framework and taxation.
For instance, Ukraine has a long-standing practice of joint venture agreements for cooperation in the oil and gas industries, owing to certain tax considerations. Certain regulated business activities can only be conducted by legal entities that are registered in the designated form (eg, banks can only operate as a public joint-stock company). Owing to possible double taxation, joint venture parties sometimes prefer to cooperate as an unincorporated business in the initial stages before proceeding to a joint corporate entity.
Since February 2022, IT businesses that comply with certain criteria can apply for registration as so-called ‘Diya City residents’ and enjoy a number of statutory preferences, including a special taxation regime, flexibility hiring IT specialists and governing their engagement, the possibility to conclude non-competition agreements, and implement debt-to-equity swaps, etc.
Tax considerations
When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?
An incorporated joint venture is a taxpayer under the general rules (regarding corporate profit tax, value added tax (VAT), real estate and other taxes). Since February? 2022, IT joint ventures eligible for registration as so-called ‘Diya City residents’ can, instead of the general system of taxation with corporate profit tax (at 18 per cent), opt to pay capital withdrawal tax at the rate of 9 per cent. Small undertakings whose annual income does not exceed certain thresholds (approximately 7.5 million hryvnias in 2022) may enjoy preferential taxation regimes.
In the wake of the Russia-Ukraine war, which started on 24 February 2022, the Ukrainian government introduced an alternative system of taxation for joint ventures earning not more than 10 billion hryvnia annually: for the duration of martial law, such businesses can choose to pay 2 per cent turnover tax instead of 18 per cent corporate profit tax.
Temporary VAT and corporate profit tax exemptions exist in the cinematography industry, and in the space and aircraft industries. After 24 February 2022 and for the duration of martial law in Ukraine, most imports for defence purposes and humanitarian aid are released from import VAT and customs duties.
An unincorporated joint venture is subject to separate taxation, for which special tax accounting regulations apply. The joint venture agreement shall define a (resident) participant responsible for the venture’s tax accounting and payment; this participant and the agreement are registered by the tax office.
In-kind contributions (as opposed to cash contributions) of founders or participants into the (both incorporated and unincorporated) joint venture trigger Ukrainian VAT, subject to further tax credit and refund.
Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
The parties can agree on the contribution of any assets into an unincorporated joint venture. Importantly, the investments of the parties are deemed of equal value if the parties do not state otherwise in their joint venture agreement.
There are restrictions on the contribution of certain assets to the capital of a separate corporate entity. The following cannot be used for the formation of registered capital:
– budget and loaned funds;
– bills (promissory notes);
– state (municipal) property that cannot be privatised; and
– state property that is under the operational management of a state-financed institution.
Interaction between constitution and agreement
What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?
For unincorporated joint ventures, the joint venture agreement shall be registered with the local tax office for VAT purposes if the total volume of VAT transactions in the last 12 calendar months exceeds 1?million hryvnias. Additionally, the joint venture partner responsible for tax accounting is subject to a separate registration with the tax office.
In incorporated joint ventures, the parties can enter into a corporate (shareholder) agreement determining certain aspects of their cooperation as shareholders. Such agreement is not subject to registration and may not contradict the joint venture’s constituent documents (charter). In case of a conflict, the constituent documents shall prevail.
As of 2021, non-Ukrainian law may be chosen for a corporate agreement if at least one of the shareholders of the joint venture is a non-resident party.
Party interaction
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
In an incorporated joint venture entity, the shareholders can participate and vote at general shareholders’ meetings and, therefore, interact with the joint venture by governing it on the most important issues. The shareholders only have access to a limited amount of information regarding the entity.
Exercising control
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
In an unincorporated joint venture, the parties may agree that all affairs are to be carried out jointly by all shareholders. In such a case, the consent of all shareholders must be obtained to execute each transaction.
In incorporated joint ventures, the shareholders may exercise their will through participating in general shareholders’ meetings.
In joint-stock companies, most issues on the agenda of the general shareholders’ meetings are resolved by a simple majority vote of all participating shareholders. However, in a private joint-stock company, the shareholders can agree to a bigger quorum (eg, unanimous consent of all present shareholders) for any issues except:
– the pre-term termination of the powers of the company’s bodies’ officials;
– the commencement of a claim against the company’s officials regarding the reimbursement of damages incurred by the company; and
– the commencement of a claim regarding non-compliance with the law in the case of a significant transaction.
Therefore, a minority investor can have more power and control over a private joint-stock company.
In a joint-stock company, a qualified majority (more than 75 per cent of the present shareholders) is required to adopt the following decisions:
– an amendment of the company’s charter;
– a cancellation of the bought-out shares;
– changing the type of the company;
– regarding the placement of shares;
– changing the registered capital;
– the issue of securities that may be converted into shares; and
– the termination of the company.
In a limited liability company (LLC), as a general rule, all issues are decided by an absolute majority of votes. However, issues of changing the charter and registered capital, reorganisation or liquidation of the company require a qualified majority (at least 75 per cent of the total number of votes of participants of the company). Unless the company charter sets a lower number of votes (but no less than a majority), unanimous decisions of all participants are required for:
– the approval of the monetary assessment of a non-pecuniary contribution of a participant;
– the redistribution of the participants’ shares;
– the establishment of other corporate bodies; and
– the purchase of a participant’s share by the company.
The minority investors are also entitled to demand internal and external audits. For instance, minority shareholders that hold over 10 per cent of a joint-stock company may request a special review by an internal auditing committee or a proper inspection of financial accounts by an independent auditing firm.
Governance issues
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
In an unincorporated joint venture, the parties are free to establish special procedures relating to adopting decisions and running the business in a practical manner, according to the terms and conditions of a joint venture agreement.
The two most common governance issues that arise for joint venture corporate entities are the presence of a quorum and adopting decisions on specific issues.
In the case of corporate disputes, the parties may resolve them in the courts or through arbitration tribunals. Shareholders have more freedom and flexibility to handle governance issues through shareholder agreements.
Nominee directors
With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?
In Ukraine, a majority shareholder (participant) usually nominates a director, but the former must act in the best interests of the joint venture company.
In LLCs, supervision over the board of directors can be exercised by a supervisory board (if foreseen by the charter) or another corporate body appointed by the general shareholders’ meeting, or both. The general shareholders’ meeting may delegate certain powers to the supervisory board, including the appointment and dismissal or suspension of the board of directors. Moreover, shareholders that hold at least 10 per cent of the charter capital may initiate a financial audit of the company by an independent auditor. The board of directors is obliged to provide documents regarding the company at the request of the auditor.
In a joint-stock company, the executive body is accountable to the general shareholders’ meeting and supervisory board (including its standing auditing committee). The general shareholders’ meeting can elect an auditing commission as a separate corporate body as well. In public joint-stock companies, an annual audit by an independent and certified auditor is obligatory. The board of directors is obliged to provide documents regarding the company at the request of the audit commission or an auditor.
Competition law
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
Assuming the turnover thresholds are met, the creation and operation of the joint venture may trigger the need to obtain certain approvals. Depending on whether a joint venture will be full-function or not, there may be a need for clearance of:
– merger: in the case of a joint venture’s creation, if operating permanently, all the functions of an autonomous economic entity (full-function joint venture) and such a creation will not lead to coordination of competitive behaviour between the parent companies of the joint venture themselves, or between the joint venture and its parent companies; or
– concerted actions: if a joint venture is established with an objective of, or results in the coordination of, competitive behaviour between the parent companies of the joint venture themselves or between the joint venture and its parent companies.
Provision of services
What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?
In an unincorporated joint venture, in the case of a simple partnership, the approval of all parties is needed for the execution of every transaction unless stated otherwise in the simple partnership agreement.
In a joint-stock company, provision of services to the joint venture entity by joint venture parties (ie, its shareholders) may be recognised as an interested-party transaction if the transaction value exceeds 1 per cent of the company’s asset value, unless the company charter sets a lower value. The party interested in the transaction may be a shareholder (or shareholders or their affiliated persons) who alone or jointly owns 25 per cent or more of the company’s shares. Interested-party transactions with a value of up to 10 per cent of the company’s asset value require the approval of the company’s supervisory board and transactions with a value of more than 10 per cent of the company’s asset value require the approval of a general shareholders’ meeting. During the voting process, the shareholders interested in the transaction do not have the right to vote and a decision on this matter is made by a majority of votes of the non-interested shareholders present at the meeting.
In an LLC, a transaction is considered an interested-party transaction if the other party is, inter alia, a shareholder (or shareholders or their affiliated persons) who alone or jointly owns 20 per cent or more of the company’s shares. However, it is entirely up to the shareholders to provide in the company charter for regulations concerning the need for pre-approval for interested-party transactions. All shareholders shall approve the relevant charter provisions unanimously. If the charter does not contain such provisions, no restrictions regarding interested-party transactions apply, except that such transactions shall be at arm’s length.
Employment rights
What impact do statutory employment rights have in joint ventures?
Employees are entitled to all available statutory employment rights in joint ventures. Transferring the business will result in the automatic transfer of its employees to the new employer. At the same time, the mere fact of the business transfer may not serve as a reason for dismissal. In the case of transferring foreign employees, the employer must obtain a work permit prior to commencing the foreign party’s employment with a Ukrainian company. Under general labour laws, a transfer to another job in the same company and a transfer to another company, or other area or location, requires the consent of the employee concerned. However, in the context of the Russia-Ukraine war, after 24 February 2022 and during the validity of martial law, no employee consent is required in some instances (related to the liquidation of consequences of such aggression).
In the case of non-incorporated joint ventures, employees will be employed directly by the joint venture parties.
Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
The parties of a non-incorporated joint venture can regulate issues of ownership and use of their intellectual property (IP) rights either in their joint venture agreement or in a separate agreement such as a licence agreement. The same applies to an incorporated joint venture.
Economic (proprietary) IP rights may be transferred or assigned for ownership or use (eg, under a licence agreement) to an incorporated joint venture. On the termination of the joint venture, IP rights are dealt with in the same manner as any other proprietary rights; they are either sold (transferred) to third parties to pay off debts or distributed between the shareholders of the company.
