The Law of Ukraine on the Regime of Foreign Investments (the "Foreign Investment Law") is the principal legislative act governing foreign investment in Ukraine.

Ukraine has also adopted legislation dealing with issues such as anti-monopoly, corporations, bankruptcy, pledge, currency regulation, corporate taxation, international arbitration and other areas of importance to foreign investors.

Ukraine adopted a package of laws on privatization in March of 1992. In addition, State Privatization Programs for 1992 and 1994 were adopted by Parliament. Privatization in 1995 and 1996 has been regulated by the Decrees of the President of Ukraine. The principal state organ responsible for privatization in Ukraine is the State Property Fund (SPF).

Ukraine has significantly increased the speed of privatization at the end of 1995. Although the government had begun to transform state enterprises into joint stock companies and to sell them through auctions and competitive tenders in 1993, the pace of privatization of medium and large enterprises had been slow. Most firms privatized up until 1995 had been small businesses involved in the spheres of retail trade, food service and other service-related activities. Furthermore, a significant portion of those enterprises which were privatized prior to 1995 had been privatized through a buyout of the enterprise by the enterprise's workers' collective.

Applicable Ukrainian legislation provides for three forms of ownership:

(i) private,
(ii) collective and
(iii) state.

All three forms are deemed equal and in theory should enjoy equal privileges. Ukrainian citizens and legal entities are permitted to own all types of property except those types which are directly prohibited from private ownership.

Ukrainian law provides that foreign legal entities, as well as joint ventures, international organizations, foreign citizens and persons without citizenship may own property in Ukraine. Foreign individuals are specifically allowed to own residential buildings, apartments, summer cottages and other objects of "personal use" (e.g., automobiles). Foreign legal entities are specifically permitted to own "buildings, facilities and other property of a social, cultural or industrial character."

There is no legal requirement for a foreign individual or foreign legal entity to establish any form of residency or presence (e.g., a representative office or a branch) prior to or as a condition for acquiring property in Ukraine.

Ukrainian citizens may own land in Ukraine for a limited number of purposes, including agricultural needs and the construction of a private house or other dwelling. Ukrainian legal entities may own land (in the form of "collective ownership") for agricultural purposes only. As a general matter Ukrainian citizens or legal entities needing to use land may only do so on the basis of so-called "rights of use" or through a lease.

In contrast, foreign individuals and foreign legal entities are not permitted to own land in Ukraine or to obtain "rights to use" land. They may only lease land. As a matter of practice, however, foreign legal entities and individuals who have purchased buildings do obtain the right to use the land surrounding the building on the basis of Article 30 of the Ukrainian Land Code.

Accounting principles and procedures in Ukraine are regulated by the Special Rules for the Organization of Accounting in Ukraine (the "Accounting Rules") approved by Decision No. 250 of the Cabinet of Ministers of Ukraine on April 3, 1993. The following summarizes a number of the relevant provisions from the Accounting Rules:

(a) Compliance with the Accounting Rules is mandatory for all Ukrainian enterprises regardless of their form of ownership. The Ministry of Finance is responsible for establishing the official accounting methods in Ukraine and is empowered to issue special regulations from time to time regarding the same.

(b) Official books and accounting records are to be maintained in the national currency of Ukraine. Transactions in foreign currency are to be recalculated into local currency at the official exchange rate of the National Bank of Ukraine (NBU) in effect at the moment of the transaction. A parallel entry may be made in the actual currency of the transaction.

(c) The director general of an enterprise is responsible for organizing bookkeeping and accounting procedures. Accounting is carried out by the accounting department, headed by a Chief Accountant, or by an outside organization if the enterprise does not have an accounting department.

(d) The fiscal year for all enterprises begins on January 1 and ends on December 31. For newly organized enterprises, the first fiscal year begins on the date of registration and ends on December 31. If the enterprise is registered later than October 1, its first fiscal year ends on December 31 of the following year.

Ukraine has a banking system in the process of development. It is two-tired, with the NBU and approximately 200 commercial banks. Of the commercial banks, five are the former specialized state banks: one is a savings bank, three are specialized lending banks (industrial investment, agricultural and social development) and one is the Export-Import Bank of Ukraine. The three specialized lending banks receive concessionary treatment from the NBU and are responsible for the vast majority of enterprise lending.

The NBU regulates and supervises commercial banks. However, the NBU's resources are often insufficient to provide for thorough supervision and regulation. It is anticipated that there will be significant amendments to the current legislation governing banking activities.

The fact that most of the commercial banks are lending to financially strapped enterprises has resulted in instability in the Ukrainian banking system. Foreign investors may confront delays in transferring funds both domestically and internationally, converting currency and repatriating profits in foreign currency (although the situation is rapidly improving). In addition, state authorities such as the tax inspectorate have wide-ranging powers to freeze bank accounts or to withdraw funds for payment of taxes or fines without the need to obtain a court order or authorization.

Two foreign banks, Credit Lyonnais and Societe General, have opened wholly owned subsidiary commercial banks. Other foreign banks are attempting to obtain a banking license, although there appears to be considerable opposition within the NBU for the granting of further banking licenses to subsidiaries of foreign banks.

In order to carry out business activities as a sole proprietorship, an individual is required to register as an "entrepreneur' with the local authorities. This is the only form of doing business in Ukraine that provides for a single tier of taxation. There is no requirement with regard to the minimum capitalization of a sole proprietorship. Registration of a sole proprietorship is subject to payment of a small official fee ranging from $10.0 to $25.0 U.S. dollars depending on the principal area of activity of the registered entrepreneur.

Ukrainian legislation does not provide for the creation of legal entities or partnerships which act as "flow-through" entities for tax purposes. Although the corporate legislation permits the creation of "full liability companies" (FLC), they are subject to two levels of taxation: at the corporate level and at the shareholder level. The creation of a "differentiated liability company" ("DLC") (similar to a US limited partnership) is also possible; however, it too is subject to two levels of taxation. There is no requirement with regard to the minimum capitalization of a FLC or DLC.

The Ukrainian Law on Business Associations (the "Corporations Law") provides for five corporate forms of legal entities: joint-stock companies (both open and closed) ("JSC"), limited liability companies ("LLC"), additional liability companies, FLCs and DLCs. As a practical matter, most business entities in Ukraine are established as JSCs or LLCs.

2.3.1 Joint Stock Company

A JSC is very similar in form and operation to a U.S. corporation. It is a limited liability company in which the shareholders are only liable for the obligations of the entity to the extent of their capital contributions. There are two levels of taxation: the JSC is taxed on its profits; the shareholders are then taxed when dividends are distributed.

There are two types of JSCs: open and closed. An open JSC is established through a public offering and subscription of shares; a closed JSC's shares are distributed privately among the founding shareholders. At least two founding shareholders are necessary to create a JSC. Minimum capitalization for registration of a JSC is currently approximately $10,700 U.S. dollars.

2.3.2 Limited Liability Company

A LLC is a cross between a U.S. corporation and a U.S. partnership. It is similar to a corporation in that it is a limited liability company in which the interestholders are only liable to the extent of their capital contributions. However, it is similar to a partnership in that ownership interests are expressed in terms of contractual rights that arise out of the foundation documents. Thus, transfer of ownership rights is carried out through an assignment of contractual rights.

There are two levels of taxation: the LLC is taxed on its profits; the interestholders are then taxed when dividends are distributed. At least two founding interestholders are necessary to create a LLC. Minimum capitalization for registration of a LLC is currently approximately $5,350 U.S. dollars.

Foreign legal entities are permitted to establish representative offices in Ukraine. A representative office is permitted to carry out marketing, promotional and other auxiliary functions on behalf of the foreign legal entity. It is less clear whether a foreign company can also carry out a trade or business through a representative office, although in practice many have been permitted to engage in activities that go well beyond the scope of traditional representative offices.

Although branches of foreign companies are permitted by the Investment Decree, they have yet to take root in Ukraine. The procedure for their registration remains unclear and untried.

Joint ventures in Ukraine are generally created in the form of a JSC or LLC. Ukrainian legislation also permits a foreign investor to invest in Ukraine without creating a legal entity by entering into a joint production or joint cooperation agreement with a Ukrainian legal entity.

The Law of Ukraine "On the Taxation System" provides for the categories of taxes which may be levied in Ukraine. A list of such taxes is included in Appendix 1.

From 1992 to the end of 1994 (except for the first quarter of 1993) Ukrainian legal entities were taxed on "dokhod". For purposes of the tax legislation, "dokhod" was defined as the difference between the value of products (works, services) sold and their cost of production. However, employee's salaries and interest paid on borrowed funds (except for short-term credits used for working capital needs) could not be applied as deductions in the calculation of the cost of production.

During the first quarter of 1993 and commencing on January 1, 1995, the concept of taxing "dokhod" was abolished and replaced with a tax on profits. Taxation of entities is currently governed by the Law "On the Taxation of the Profits of Enterprises" which was adopted on December 28, 1994 and became effective as of January 1, 1995 (the "Corporate Tax Law").

The Corporate Tax Law provides for the taxation of the following persons:

• Legal entities organized under the laws of Ukraine and which carry out business activities in Ukraine;

• International organizations which are not subject to immunity and diplomatic privileges and which carry out business activities in Ukraine;

• Affiliates, branches and other divisions of the above mentioned persons, if such affiliates, branches or divisions have a separate balance and current bank account;

• Non-resident legal entities which carry out business activities on the territory of Ukraine through a permanent establishment;

• Non-resident legal entities which repatriate Ukrainian-source profits abroad.

The Corporate Tax Law established a basic corporate tax rate of 30%. However, the rate of taxation for profits gained from intermediary activities or from the carrying out of auctions (except for auctions involving securities, ownership interests in legal entities, currency values and other financial instruments) is 45%. Profits from lotteries, casinos and other types of gambling activity are taxed at a rate of 60%.

Certain enterprises which carry out activities in the agricultural area are granted tax benefits. These are more fully described in point 3.6.3 below.

EFIs which have been registered as EFIs prior to January 1, 1995 are granted a five year tax holiday along with other privileges.

The corporate tax is levied on the gross profits of an enterprise. Gross profits are defined as revenues obtained by an enterprise from all of its activities carried out in Ukraine and abroad during the reporting period, including revenues: (i) from the sale of products (works, services), fixed assets, intangible assets, securities, currency values and other types of financial instruments and other material items; (ii) from leasing operations; (iii) from royalties; and (iv) from non-sales transactions, less the cost of production and other permitted expenses and deductions.

Under the Corporate Tax Law, revenues are to be increased by:

• the amount of losses incurred in connection with barter operations which were carried out at prices which are lower than those generally charged by the enterprise for such products or services;

• amounts which were allocated to special funds of the enterprise and which were included in the cost of production, and which subsequently were utilized for purposes different from those initially designated;

• funds (including currency values) and other tangible or intangible assets which were provided to an enterprise free of charge (including financial support which is not required to be returned or repaid) by another enterprise.

Gross profits may be decreased by:

• the amount of any tax on fixed assets levied against an enterprise (such a tax has not yet been introduced in Ukraine);

• the amount of any tax on land used for agricultural or industrial purposes which is levied against an enterprise;

• the amount of any transportation tax paid;

• costs incurred in maintaining facilities for social and cultural purposes;

• the value of any charitable contributions given to foundations, institutions, establishments and public and religious organizations which are non-profit and which engage in health, amateur sports, cultural, educational, scientific and charitable activities; however, the amount of such charitable contributions may not exceed 4% of gross profits.

The following, among others, are not included in revenues for purposes of determining gross profits:

• the amount of dividends (distributions) obtained by an enterprise from shares or other ownership interests in another legal entity;

• contributions to an enterprise's charter fund, as well as other amounts received by an enterprise as a result of an issuance of shares or other ownership interests;

• exchange rate gains;

• accounts receivable, including rights to demand payment in connection with outstanding drafts, promissory notes, letters of credit, checks, guarantees, bank orders and other financial instruments;

• return of capital by a foreign investor up to the amount of its actual foreign investment.

Unlike previous Ukrainian tax legislation, the Corporate Tax Law provides for clearer definitions of permitted costs and expenses. For example, interest payments for loans incurred for working capital needs and for the acquisition of fixed and intangible assets required for current production needs may now be included in the cost of production, as well as payments for investment management and depository services, expenses connected with the payment of dividends and expenditures for printing and issuing shares and other securities.

In addition, the following, among others, may be included in the calculation of the cost of production:

• costs incurred in the start-up and implementation of production;

• costs incurred in connection with the production process (materials, tooling, current maintenance etc.);

• costs for environmental protection measures;

• expenses associated with the management of the production process (e.g. mandatory audits, certification of products and business trips (within the limits stipulated by law));

• expenses for salaries and wages;

• expenses for training and retraining of employees;

• expenses for mandatory social security and pension payments and for voluntary social benefits provided to employees (e.g. cafeterias, transportation services);

• depreciation of fixed and intangible assets;

• costs incurred in marketing and selling products; however, costs for participation in fairs and entertainment expenses may not exceed two percent of sales volumes;

• payments for banking services.

3.6.1 Benefits Applicable to All Enterprises

If during the taxable period an enterprise (i) has depleted all depreciation deductions and all funds established for the expansion of production and (ii) has utilized additional funds for the expansion of production, such enterprise shall have the right to reduce the tax payable on gross profits by the amount of such additional funds, provided that such tax savings may not be greater than 20% of the tax payable and all such savings must be used for reconstructing and modernizing fixed assets which are currently being utilized in the production process. In addition, enterprises which provide material and other assistance to handicapped employees are eligible for tax reductions.

3.6.2 Enterprises with Foreign Investments

EFIs registered as of January 1, 1995, are subject to the general tax rates as specified in point 3.3 above. EFIs registered before January 1, 1995 are granted a five year holiday from the profit tax. Such five year period begins on the date an EFI receives a qualified foreign investment ($50,000 in kind or $500,000 in cash and such contribution is equal to at least 20% of the EFIs total charter fund). However, no tax holiday is available with respect to profits of EFIs obtained from conducting lotteries, leasing of premises, the auction of certain goods as determined by the Cabinet of Ministers, from casino operations and video salons and other video shows (irrespective of the manner in which they are demonstrated), the renting of video and audio cassettes and other recorded materials, as well as from arranging large scale concerts where the number of seats exceeds two thousand.

3.6.3 Agricultural Enterprises

Under the Corporate Tax Law, enterprises engaged in the growing or the processing of agricultural products using their own production facilities, in fishing or fish processing, in the construction of homes and other facilities in villages or in certain other types of agricultural production activities are exempt from payment of the profit tax.

The gross profits of enterprises engaged in servicing the agricultural production sector are subject to a 15% tax.

3.7.1 Fixed Assets

Fixed assets are initially recorded at the price at which they were acquired. In order to take into account inflation, the Cabinet of Ministers from time to time issues decrees which provide for a revaluation of fixed assets. Such revaluations occurred in 1992, 1993, 1995 and in July of 1996.

According to the recently adopted Decision of the Cabinet of Ministers of Ukraine, commencing from January 1, 1997 enterprises will be allowed to reassess the value of their fixed assets on quarterly basis proportionately to the rate of inflation, if the quarterly rate of inflation has exceeded 2.5%.

3.7.2 Inventory

Raw and other production materials, fuel, semi-finished products and components and other inventory are initially recorded at the price at which they were acquired or produced. Materials obtained under a conversion contract are not recorded on the balance of the enterprise. Finished products are recorded based on their actual manufacturing costs. In order to take into account inflation, enterprises are permitted to revalue inventory based on the monthly official rate of inflation. Upon the sale of products, the revaluation amounts are not deemed as profit if they are subsequently used for working capital needs.

Depreciation must be utilized for the reconstruction, renovation and maintenance of fixed assets, including fixed assets used pursuant to a leasing arrangement. Depreciation is calculated on the basis of book value (as revalued) in accordance with the rates of depreciation established under regulations issued by the Council of Ministers of the former USSR.

Prior to the adoption of the Corporate Tax Law, depreciation rates were very conservative. For example, rates for most types of equipment were normally from 8 to 10 years; accelerated depreciation was permitted only for EFIs, enterprises engaged in military conversion and enterprises operating in priority branches of the Ukrainian economy.

The Corporate Tax Law permits enterprises to determine independently their own accelerated rates of depreciation. However, such rates may not be more than twice those established by the applicable regulations and they may not lead to an increase in the prices of products produced by the enterprise.

Depreciation of intangible assets is calculated based on their initial cost of acquisition and period of effective use (but not more than 10 years). Intangible assets whose value does not decrease as a result of their use in the production process (e.g. goodwill) are not subject to depreciation.

Commencing January 1, 1997 new depreciation rates will be introduced. According to a provision in the recently adopted decision of the Cabinet of Ministers of Ukraine, all fixed assets will be divided into three groups as follows:

• buildings, constructions, their structural components and transmission equipment-with a term of depreciation of 20 years (group 1);

• transport facilities (including trucks and passenger cars), furniture, office equipment, consumer electromechanical devices and tools, information systems (including computers)--with a term of depreciation of 4 years (group 2);

• other fixed assets, which have not been mentioned above (groups 1 and 2), including agricultural equipment and tools--with a term of depreciation of 7 years (group 3).

Accelerated depreciation may be applied to the assets included into group 3 with a depreciation rate of 80% of the value of the assets during the first four years. Unfortunately, it is not clear how the rules for accelerated depreciation, foreseen by the decision of the Cabinet of Ministers (especially for the assets of group 3), will comply with the rules established by the Corporate Tax Law.

The Corporate Tax Law does not contain any specific provisions governing the taxation of capital gains. As a result, capital gains are taxed at the basic rate of 30 percent. Capital gains are taxed at the moment securities are actually sold.

3.11.1 Representative Offices of Foreign Companies

The Corporate Tax Law provides that a foreign legal entity carrying out business activities on the territory of Ukraine through a "permanent establishment" is subject to tax on all profits generated by the activities of such permanent establishment. A permanent establishment is defined under the Corporate Tax Law as (i) any structure in Ukraine which is not a legal entity through which a foreign legal entity either partially or fully carries out business activities in Ukraine or (ii) an individual who represents and is employed by a foreign legal entity in Ukraine. However, the determination of whether a "permanent establishment" exists would be subject to the provisions of any applicable tax treaties (see point 7 below).

Profits generated by a permanent establishment are subject to a 30% tax. Profits for purposes of this tax are deemed to be those profits which a permanent establishment would have obtained if it (i) were a separate independent enterprise involved in similar activities on the same conditions as the foreign legal entity and (ii) had acted independently with respect to the foreign legal entity.

In the event it is not possible to determine such profit, an alternative method may be negotiated with the Ukrainian tax inspectorate. In practice, the most common method is for a permanent establishment to pay a 30% tax on a deemed profit equal to 30% of the expenses attributable to such permanent establishment.

3.11.2 Taxation of Ukrainian Source Income in the Absence of a Permanent Establishment

Passive Ukrainian source income received by a non-resident who does not carry out business activities in Ukraine through a permanent establishment (e.g. dividend, interest, lease and royalty payments and payments for insurance premiums), as well as Ukrainian source income obtained from technical engineering services is subject to a 15% withholding tax upon repatriation from Ukraine. Such a withholding tax rate would be subject to the provisions of any applicable tax treaty.

Income obtained by non-residents from freight charges paid by Ukrainian enterprises are subject to a 6 percent withholding tax. Interest payments received in connection with loans granted to the NBU or to the Cabinet of Ministers are not subject to withholding tax upon repatriation.

The Corporate Tax Law permits the creation of tax exempt legal entities. Specifically, companies established on the territory of Ukraine will not be subject to a Ukrainian profits tax in the event they meet the following criteria:

• the shareholders of the company are all non-residents;

• the company does not have any Ukrainian source income;

• the company carries out all of its financial operations through a Ukrainian bank;

• the management and administrative staff of the company is comprised exclusively of Ukrainian citizens;

• the company does not carry out any activities on the territory of Ukraine on behalf of any of its shareholders;

• the company's financial activities are subject to an annual audit carried out by a Ukrainian auditing organization.

The procedure for registering tax exempt companies is to be established by the Cabinet of Ministers of Ukraine.

3.13.1 Ukrainian Enterprises

An enterprise is required to calculate its tax obligations. If an enterprise has obtained profits from activities subject to different tax rates, the calculation of the applicable tax is to be carried out individually for each type of activity.

All enterprises (including EFIs not subject to a tax holiday) are required to make tax prepayments to the state budget. Such prepayments are to be made on a monthly basis and are to be based on approximate profits obtained in the month in question. Prepayments are to be made no later than on the 25th day of the month which follows the month in question.

At the end of each quarter an enterprise is required to base its next monthly prepayment on the approximate profit obtained from the beginning of the fiscal year to the end of such quarter. The amount of the prepayment is to be adjusted taking into account the approximate profit earned and the actual prepayments made during such period. Each quarterly prepayment is to be made no later than the 20th day of the month following the quarter in question. A final annual tax payment is due by February 15 of the year following the end of the fiscal year.

3.13.2 Non-Resident Companies

A foreign legal entity carrying out business activities in Ukraine through a permanent establishment is required to file an audited annual tax return by February 5 of the year following the end of the fiscal year. Taxes are assessed and payable in local currency.

Issues of personal income taxation are principally regulated by the Decree of the Ukrainian Cabinet of Ministers "On Personal Income Tax", adopted on December 26, 1992, as subsequently amended (the "Personal Tax Decree"). In the event the international treaties of Ukraine provide for tax rules which are different from those in the Personal Tax Decree and other Ukrainian legislative acts, the provisions of such international treaties would apply. A draft of a new law on personal income tax is currently being discussed by the Ukrainian Parliament and is expected to be adopted by the end of 1996.

The Personal Tax Decree provides for the taxation of the following physical persons:

(i) residents--defined as citizens of Ukraine and foreign individuals who are physically present in Ukraine at least 183 days in a calendar year; and
(ii) non-residents--defined as all physical persons who do not qualify as a resident.

Residents are taxed on their aggregate worldwide income.

Non-residents are taxed on all income derived from sources in Ukraine, but they are not eligible to receive exemptions or deductions available to residents.

The Personal Tax Decree provides that a tax is levied on wages received and on other taxable income received whether in cash or in kind. The value of in-kind income is based on free market prices, unless other rules are established by the Personal Tax Decree. Income received in foreign currency is recalculated into Ukrainian currency at the NBU exchange rate in effect on the date such income is received.

Taxes paid outside Ukraine may be taken as a credit toward Ukrainian taxes due in the event the taxpayer provides written acknowledgement from the foreign tax authority that such foreign taxes have in fact been paid. However, total foreign tax credits may not exceed the amount of Ukrainian personal income tax due.

Foreign individuals who are residents are required to prepay their Ukrainian taxes quarterly and to file a final tax return by February 1 of the year following the taxable period. Non-residents (Ukrainian or foreign individuals) obtaining Ukrainian source income are to be taxed by the source of income.

Ukrainian citizens who are residents are currently not required to file tax returns if their only source of income is their principal place of employment. (Employers are required to carry out monthly withholding of taxes due on wages). If a Ukrainian citizen who is a resident has income from sources other than his principal place of employment, then such individual must file a personal tax return by March 1 of the year following the taxable period.

Taxes are payable in local currency.

Ukrainian legislation does not provide a definition of income or of taxable income. Rather, from the provisions of the Personal Tax Decree taxable income is deemed to be the difference between the aggregate amount of a taxpayer's annual income and the aggregate exemptions available to such taxpayer under the applicable Ukrainian tax legislation. Taxable income may be further reduced by applying deductions available under the tax legislation.

4.1.1 Employment Income

Employment income is defined as income derived from a taxpayer's principal place of employment, including wages, other payments received by such taxpayer at his principal place of employment for work which is outside the scope of his employment duties, dividends and any other benefits received in cash or in kind from the employer.

4.1.1.1 Fringe Benefits

The following fringe benefits are excluded from taxable income:

(a) all social insurance payments (except sick leave), including maternity payments, lump-sum payments granted upon the birth of a child, payments for child care, additional payments to parents who support three or more children under the age of 16, additional payments in support of handicapped children, additional payments for children under the age of 16 (or 18 if they are students), additional payments to single mothers, additional payments to children of enlisted military servicemen, additional payments to children under guardianship, payment of funeral expenses and additional payments to the minors whose parents do not pay alimony; and

(b) amounts spent on domestic rest vacations organized through a travel bureau, trade union or similar organizations or to health clinics, sanatoriums or children's rest camps in Ukraine.

4.1.1.2 Director's Fees

Ukrainian legislation does not contain any special provisions which regulate the issue of taxation of director's fees. As a result, director's fees would be treated as ordinary taxable income to an individual.

4.1.1.3 Pension Income

Pension payments received under a government pension program or under a pension program to which an employee made voluntary contributions are not subject to taxation. All other types of pension income is included in taxable income.

4.1.2 Other Income

4.1.2.1 Dividends; Interest; Royalties; and Rent

Dividends and other distributions of profits by legal entities are taxed at a rate of 15% (see point 4.2.4 below).

Interest derived from personal bank accounts, savings certificates, government bonds, government loans and government lotteries are exempt from taxation. All other types of interest income are taxed at the rates described in point 4.2.1 below.

Royalties paid to an author are taxed at the standard personal income tax rates described in point 4.2.1 below. Royalties paid to an author's heirs are taxed at the rates described in point 4.2.2 below. Rental income is taxed at the standard personal income tax rates described in point 4.2.1 below.

4.1.2.2 Capital Gains

Ukrainian legislation does not at present contain the concept of capital gains. Income received from the sale of personal property is not subject to tax if:

(a) such sale was not carried out as part of the individual's trade or business;

(b) the property sold was sold pursuant to a notarized sale-purchase agreement and the applicable state duty with respect to such sale was paid.

Although the Personal Tax Decree is unclear on the issue, an argument can be made that all other income received from the sale of personal property would be subject to taxation.

4.1.3 Allowances; Exemptions; Deductions; and Credits

4.1.3.1 Allowances

Ukrainian legislation is silent as to the ability of an individual who is not a registered entrepreneur to take any depreciation or other allowances for property or other assets owned. Individuals who are registered as entrepreneurs may partially utilize the depreciation rates and allowances as applied to Ukrainian legal entities.

4.1.3.2 Exemptions

The Personal Tax Decree provides for the following exemptions from taxable income:

(a) fringe benefits described in point 4.1.1.1 above;

(b) alimony payments;

(c) pension payments received under a government pension program or under a pension program to which an employee made voluntary contributions;

(d) all compensation payments except for compensation for unused vacations if such compensation is paid upon the termination of a labor contract;

(e) all wages and other compensation received by individuals for service in the Armed Forces and the Ministry of Internal Affairs;

(f) income received from the sale of personal property if (i) such sale was not carried out as part of the individual's trade or business and (ii) the property sold was sold pursuant to a notarized sale-purchase agreement and the applicable state duty with respect to such sale was paid;

(g) income from the sale of agricultural products, cattle and poultry raised or grown on a personal auxiliary plot of land;

(h) money received as a gift or as an inheritance, except for sums listed in point 4.2.2 below;

(i) interest income as described in point 4.1.2.1 above;

(j) all insurance benefits received, except for those which were provided at the employer's expense;

(k) any financial or in-kind benefits provided to individuals by the government or trade unions in connection with natural, ecological or technological disasters (including support provided by foreign governments);

(l) income reinvested into shares of stock or into the reconstruction or expansion of the company or business from which such income is derived;

(m) charitable contributions in the amount of up to 12 times the minimum monthly wage;

(n) payments made to employees for health damage incurred at work;

(o) payments received for acting as a donor;

(p) payments received from the Ukrainian statistical authorities for maintaining family budget records;

(q) all income of (i) individuals who are performing seasonal or temporary agricultural or construction works in rural areas and (ii) members of student construction teams who are carrying out construction works in rural areas;

(r) income of employees of agricultural and fishing enterprises despite the forms of ownership of those enterprises, and employees of fishing collective farms paid in kind (agricultural goods and fish, produced by these enterprises; products from the processing of these commodities in accordance with a list established by the Cabinet of Ministers of Ukraine). An income in this situation is defined on the basis of the costs of production of the above mentioned goods.

4.1.3.3 Deductions

Ukrainian legislation permits the following deductions from taxable income:

(a) the amount of one minimum monthly deduction for each calendar month of the year (currently approximately $10);

(b) the amount of one minimum monthly deduction for each child of the taxpayer provided that such deduction is applied to the aggregate monthly taxable income of one parent only and that the aggregate monthly taxable income of such parent does not exceed the amount of ten minimum monthly salaries;

(c) deductions permitted for certain categories of individuals (e.g. disabled individuals and participants of the Second World War).

4.1.3.4 Credits

Other than credits for foreign taxes paid, Ukrainian legislation does not contain the concept of tax credits.

4.1.4 Special Regime for Expatriates

All foreign individuals physically present in Ukraine for more than 183 calendar days in a given calendar year are deemed Ukrainian residents for tax purposes. As such, they are subject to Ukrainian tax on their worldwide income.

Foreign individuals are eligible to receive the same deductions and exemptions as Ukrainian individuals. In addition, the following specific provisions are applicable to foreign individuals only:

(a) Amounts paid to an expatriate resident as hardship payments for working in Ukraine or for the education of his children, meals and travel expenses for personal needs are included in taxable income.

(b) Taxable income of expatriate residents does not include (i) payments made by an expatriate's employer to any social security and pension fund, (ii) reimbursements for housing and automobile expenses if the automobile is used for business purposes and (iii) expenses incurred for business trips.

The Personal Tax Decree provides for several groups of personal income tax rates:

(a) tax rates applicable to income derived from a taxpayer's principal place of employment (the "Permanent Income Tax Rates");

(b) tax rates applicable to income derived periodically by an author's heirs as a result of the inheritance of a stream of remuneration payments for authorship (the "Inherited Author's Income Tax Rates");

(c) tax rates applicable to (i) income derived from a source other than a taxpayer's principal place of employment and (ii) Ukrainian source income of a non-resident (the "Outside Income Tax Rates");

(d) tax rates applicable to income derived from dividends on shares of stock and other corporate ownership interests (the "Corporate Income Tax Rates").

4.2.1 Permanent Income Tax Rates

The Personal Tax Decree provides for the following tax brackets and is based on a minimum monthly deduction (currently approximately $10) which is established from time to time by the Ukrainian government:

(a) 0% tax bracket--monthly income rqual to one minimum monthly deduction;

(b) 10% tax bracket--for greater than one to five minimum monthly deductions;

(c) 15% tax bracket--for greater than five to 10 minimum monthly deductions;

(d) 20% tax bracket--for greater than 10 to 60 minimum monthly deductions;

(e) 30% tax bracket--for greater than 60 to 100 minimum monthly deductions;

(f) 40% tax bracket--for greater than 100 minimum monthly deductions.

Applicable tax rates are applied after deductions have been taken (if any).

4.2.2 Inherited Author's Income Tax Rates

Income derived periodically by an author's heirs as a result of the inheritance of a stream of remuneration payments for authorship are taxed at a rate which is twice the Permanent Income Tax Rates, but not greater than 70%.

4.2.3 Outside Income Tax Rates

Income derived from a source other than a taxpayer's principal place of employment or Ukrainian source income of a non-resident are taxed at the rate of 20%.

4.2.4 Corporate Income Tax Rates

Income derived from dividends on shares of stock and other corporate ownership interests is taxed at the rate of 15%.

Under Article 31 of the Investment Decree, all foreign investors (including non-resident individuals) are subject to a 15% withholding tax upon the repatriation of income derived from their investment in an EFI or in a joint cooperation agreement. Dividends from a Ukrainian enterprise which is not an EFI is subject to a 20% withholding tax as described in point 4.2.3 above.

Ukrainian legislation does not provide for any special rules regarding assessment of personal property.

A list of local taxes is included in Appendix 1. Such taxes are established and collected by the regional and municipal authorities.

Until January 1, 1995 the following local taxes were paid by enterprises from profits (on the condition that the total amount of such local taxes was not be greater than 10% of gross profits):

• fees for participation in trotting matches at race courses;

• municipal taxes;

• transit fee for crossing the Ukrainian border by means of car or truck;

• fees for the issuance of trade permits;

• fees for rights to conduct filming;

• fees for the right to conduct local auctions and lotteries;

• taxes on sale of imported goods.

Commencing January 1, 1995 all taxes (including local) are deductible for tax purposes.

Employees in Ukraine are guaranteed social security and pension benefits to the extent that their employer has made contributions on their behalf to the appropriate state funds. Such contributions are not deducted from employees' salaries, but must be paid by the employer in addition to salaries and wages.

The following mandatory payroll taxes are applicable to Ukrainian legal entities:

Pension and Social Security Fund: 37%
Chornobyl Fund: 12%
Employment Fund: 2%
Total: 51%

Although the issue is unclear under current law, an argument can be made that representative offices carrying out representative activity of a preparatory or auxiliary character for the parent company's business are only required to make mandatory payments to the Pension and Social Security Fund.

5.3.1 Tax on Fixed Assets, Real Estate and Land

Although the Law "On the Taxation System" provides for the possibility of the application of a tax on fixed assets and real estate, to date such taxes have not been implemented. However, the Ukrainian Parliament is currently considering legislation which would introduce such taxes in 1997.

The Law "On the Payment for Land" was adopted in 1992 and establishes two types of payments: payment for the use of agricultural lands and payment for the use of non-agricultural land. The rates of payment are established by the Parliament of Crimea, the various oblast (regional) councils of peoples' deputies and the councils of the city of Kiev and Sevastopil on the basis of average tax rates as established by the Ukrainian Parliament, local land values and the location of the land.

Legal entities which do not produce agricultural products are required to pay land taxes on a monthly basis before the 15th day of the month following the month in question. Legal entities which produce agricultural products and individual users of land are required to pay land taxes twice a year--before August 15 and November 15.

6.1.1 General Provisions

VAT is levied on the sale of goods and services on the territory of Ukraine, although exports, sales of certain essential goods and sales in foreign currency are not subject to VAT.

Payers of VAT are Ukrainian legal entities and individuals, as well as international associations and foreign legal entities and individuals, who carry out business activities on the territory of Ukraine.

Currently the rate of VAT is 20%.

6.1.2 VAT on Import of Goods and Services

In February 1994, the Law of Ukraine "On the State Budget for 1994" (the "Budget Law") introduced a 28% VAT for products (works, services) imported into the territory of Ukraine based on the full declared customs value of such goods or services, plus import duties, custom's fees and excise tax, if applicable. It was established that Import VAT was payable at the moment the goods crossed the Ukrainian customs border. Thereafter, the rate of taxation was decreased to 20% and certain goods were exempted from taxation if imported into Ukraine for personal use or for production purposes.

6.2.1 Excise Tax

Tobacco and alcohol products, chocolate, caviar, cars, jewelry products and other luxury goods are subject to excise tax in Ukraine. Excise tax rates are established by Parliament and currently range from 10% to 50%, although a fixed rate is established for certain types of products (e.g. alcohol and tobacco products, cars).

Goods exported for foreign currency are not subject to excise tax.

6.2.2 Import-Export Duties

Import duties are levied in accordance with the Ukrainian Unified Custom Tariffs which were approved on January 13, 1993 (the "UCT"). The UCT provides for three levels of custom duties for products being imported into Ukraine:

(i) preferential;
(ii) most favored nation; and
(iii) full.

The first level is applied to products originating (i) from countries with whom Ukraine has entered into a customs union, (ii) from countries with whom Ukraine has created special customs zones, (iii) from countries which have provided "preferential" treatment to Ukraine pursuant to a bilateral agreement and (iv) countries which are classified as "developing countries" by Ukraine (the list currently includes 145 countries), except for those products from developing countries which fall within classification Nos. 25-97.

The second level is applied to those countries which have granted Ukraine most favored nation status and to products from developing countries which fall within classification Nos. 25-97. Currently, thirty countries have established a most favored nation regime with Ukraine. The third level is applied to all other goods.

Few goods are subject to export duties in Ukraine at the present time.

6.3.1 Transfer of Immovable Property

A 5% state fee is generally levied in connection with the transfer of immovable property (e.g buildings, apartments, dachas and garages). The state fee is decreased to a maximum of 1% in the event immovable property is transferred among immediate family members. Foreign legal entities and individuals may own immovable property in Ukraine, although they are currently prohibited from owning land.

6.3.2 Transfer of Securities

The registration of an offering of securities is subject to a state fee equal to 0.1% of the nominal value of the securities being issued. Each securities transaction (other than an initial issuance) is subject to a state fee equal to 0.2% of the transaction's value.

Ukraine has indicated that it will adhere to the tax treaties entered into by the former USSR until such time as it has entered into its own tax treaties. At present, Ukraine has ratified its own treaty with approximately 20 countries. In addition, a handful of treaties with other countries have been signed, but are not yet ratified or are in the process of negotiation.

The following summarizes the withholding tax treatment under the Ukrainian tax treaties ratified as of October 1, 1996, although there has been no exchange of diplomatic notes for some of them.

• VAT;
• excise tax;
• income tax on enterprises and organizations;
• personal income tax;
• import and export duties;
• state fees (including fees for securities transactions);
• tax on fixed assets of enterprises (not implemented);
• tax on real estate of individuals (not implemented);
• payments for land;
• tax from owners of transport facilities;
• tax on the commercial activities of physical persons;
• tax on geological exploration works;
• payments for special utilization of mineral resources;
• payments for the right to emit pollutants;
• payments for road construction and maintenance;
• payments to Chornobyl Fund;
• payments to Employment Fund;
• payments to Social Security Fund;
• payments to Pension Fund;
• import VAT.

• hotel fees;
• parking fees for automobiles;
• consumer market duty;
• fee for the issuance of occupancy rights to an apartment;
• resorts fees;
• advertising tax;
• fee for participation in trotting matches at race courses;
• fee for winning in trotting matches at race courses;
• fee for gambling at race courses;
• fee for the use of municipal symbols and emblems;
• municipal tax;
• transit fee for crossing the Ukrainian border by means of car or truck;
• fee for the issuance of trade permits;
• fee for rights to conduct filming;
• fee for the right to conduct local auctions and lotteries;
• tax on sale of imported goods.

Note: Please contact Ukraine's Trade & Economic Mission in the United States for current information about Ukraine's tax structure.