Despite the steadfast growth of Eastern European real estate
markets, such as Poland, the Czech Republic, Slovakia, Romanian
and Hungary, investors are looking in the direction of Ukraine,
with its profitable real estate development and efficient
investment schemes. Yield compression in the already
established Eastern European markets plays a large role in this
interest. It is essential that foreign companies seeking to
invest in Ukraine are aware of the legislation that regulates
the market and the upcoming trends.
Without question there are many reasons to invest in
Ukraine. The country is strategically located, connecting the
Commonwealth of Independent States, Eastern Europe and the EU.
In addition, the construction deficit within Ukraine has
resulted in increasing residential and commercial property
values. With many markets being saturated quickly,
international investors are finding Ukraine to be the new
The construction law of Ukraine is undergoing rapid change.
There is no unified codification of state construction
regulations. The state construction norms adopted at the time
of the Soviet Union are still applicable. Some of them need
changes to reflect development of construction technologies,
know-how and materials. An important factor in the construction
process is construction approval and licensing procedures.
These often constitute obstacles for foreign investors.
The young and prospective Ukrainian market is developing
rapidly, providing large proceeds to the investors from all
over the world. It is undergoing long-awaited changes in real
estate and construction legislation. It comes as no surprise
that the Ukrainian Law On the State Budget of Ukraine for 2008
and changes to some legislative acts have already resonated
deeply. That Law introduces a number of fundamental changes
that are to be considered when investing in the real estate and
construction markets of Ukraine.
One of the most discussed innovations is laid down in
Article 82 of the Law on the State Budget. The newly adopted
provision provides for a new procedure for sale and lease of
community and state-owned land. Starting from January 1 2008
any land in state or communal property can be alienated or
leased by a land auction only. The new procedure is not
applicable to those land plots where the real estate objects
belonging to prospective owners or tenants are located.
Most market insiders and players acknowledge that the
existing legislation was not well-prepared for this radical
alteration. The peculiarity of the issue lies in the fact that
although conducting land auctions is a new type of activity
subject to licensing, respective licensing requirements have
not been established yet. The procedure for conducting land
auctions is to be established by legislation. On February 22
2008 the Resolution of the Cabinet of Ministers of Ukraine 90
was adopted, introducing the procedure for conducting land
auctions. The Draft Law on the Land Market also contains
chapters setting forth auction procedures.
Still the situation is vague. It is obvious that a period of
time will be needed to launch the process in a proper way.
The Law on the State Budget has prolonged an overdue land
moratorium with regard to some types of agricultural land.
Initially, the moratorium was established to prevent
uncontrolled sale of agricultural land to those entities not
interested in using it for farming. Since 2005 the moratorium
has been extended several times. The moratorium has almost
halted development of the commercial real estate market. It has
increased development costs and resulted in longer time periods
for completing development projects.
That issue needs to be resolved in the close future.
However, pursuant to recent amendments of the Transitional
Provisions of the Land Code, the moratorium was prolonged until
the laws on state land cadastre and land market were adopted.
The moratorium prescribes that:
- It is prohibited to contribute land-share rights to
authorised capital of commercial companies.
- It is prohibited to sell or purchase agricultural land
plots of state and/or communal property except as buy-outs
for public purposes.
- It is not permitted to sell or otherwise alienate as well
as change the designation of agricultural land plots owned by
citizens and legal entities for carrying out market
agricultural production, for conducting individual farming,
except for inheritance transfer, barter of one land plot to
another land plot and for transfer of land plot for public
This moratorium encompasses restrictions on alienation of
agricultural land of marketable designation. The adjournment
sets an uncertain timeframe. Still, the final versions of the
Draft Laws on land market and state land cadastre will be
submitted to the Supreme Council of Ukraine by April 1 2008.
The drafts still contain many ambiguous provisions.
Land market development
The Ukraine's Draft Law On the Land Market enlarges the
powers vested in privatisation and land resource agencies
providing that sale and lease of land in state and communal
property will be performed by the Cabinet of Ministers of
Ukraine, Council of Ministers of Autonomic Republic of Crimea,
local councils, local state administrations, privatisation
authorities and the State Agency of Land Recources of
The Draft Law toughens the standards for changing
designation of land plots in the following way:
- Sale of private land is performed without changing its
- Change of state and community-owned land designation may
be performed if necessary before the decision to sell or
lease has been taken.
- Change of the agricultural land designation is banned
within 10 years from the date of its sale/transfer into
- In the sale of an agricultural land plot for agricultural
market production (right to lease it) within five years of
the date of state registration of the purchase agreement for
the price exceeding the previous purchase price, the seller
will be obliged to pay a certain amount of state tax.
The Draft Law lays down that the sale or lease of state and
community owned agricultural land from the reserved lands where
no real estate objects are located shall be conducted by the
State Agency of Land Resources of Ukraine through land auction
only. It stipulates that the auctions on leasehold sale are
held only on availability of the worked-out land allotment
Sale of state and communal non-agricultural land from the
reserved lands is conducted by the local executive authorities
and councils in an amount that shall not exceed 15% of the
total amount of the reserved lands in a year. In the sale of
state or communal land together with the real estate subject to
privatisation and real estate belonging to the purchaser of
these land plots (non-agricultural land) no auction is
Another Draft Law of Ukraine On Amendments to the Land Code
regarding Supplementation of the Definition Categories of Land
according to their designation submitted to the Parliament on
February 19 2008, provides for changes of designated categories
stipulated by the Land Code. The advisability of this change is
disputable. The current edition does not meet today's needs,
but the legislator could also have taken into account that
Ukrainian legislation lacks an updated version of the
classification of land designations, which the Letter of the
State Committee for Land Resources of 1998 presently
Licensing in construction
Particular reformations have also occurred in licensing
regulations. A number of construction works in Ukraine require
licensing. The basic provisions of construction works licensing
in Ukraine are specified by the Law of Ukraine On Licensing of
Certain Types of Economic Activity. On May 16 2007 the
Ukrainian Parliament enacted essential amendments to the Law,
which came into force on January 1 2008. In accordance with
these amendments the licensing of construction activity was
extracted from the Law on Licensing of Certain Types of
Economic Activity. It has been specified that such licensing
shall be determined by the special construction laws.
The basic construction laws are the Law of Ukraine On
Architectural Activity and the Law of Ukraine On Basics of
Urban Development. These laws contain ground rules for the
licensing of construction activity. Therefore, on December 5
2007 the Cabinet of Ministers of Ukraine passed Resolution 1396
which specifies the licensing procedure for construction works.
It is significant that this Resolution has determined the State
Architectural and Construction Inspection to act as a licensor
from January 1 2008.
On February 27 2008 the Draft Law On Amendments to Article
17 of the Law on Architecture Activity (On Licensing of Some
Types of Economic Activity in Construction) was submitted to
the Parliament. The main objective of the Draft Law is to
determine relations with regard to licensing of construction
activity as related to the creation of architectural
It is important to note that performance of the general
contractor functions is expected to be subject to licensing in
the near future. Because many organisations perform this type
of activity, and because a new licensing procedure is absent,
the innovation may cause confusion.
Pursuant to the Draft Law, the following types of
construction-related activity shall be subject to
- Exploratory activity for construction.
- Creation of town-planning documentation.
- Engineering architecture objects.
- Construction/erection activity.
- Erection of engineering networks.
- Construction of transportation networks.
- Engineering activity in construction, including: the
function of a general developer in designing; technical
inspection and estimation of buildings, constructions and
engineering networks; examination of technical state of
buildings, constructions and engineering networks; the
function of a general contractor in construction; the
function of engineering supervision in construction; geodesic
control in construction; project or performance of
We expect that licensing provisions will soon change.
Foreigners real estate investment
Foreign legal entities, foreign citizens and joint ventures
with foreign participation may purchase land only according to
the agreed procedures set out in the Land Code and are subject
to its limitations. All foreign entities, citizens and joint
ventures with foreign participation are prohibited from owning
agricultural land. Foreign citizens, foreign entities and
stateless persons are entitled to purchase non-agricultural
land within and outside city limits, provided that they
purchase the real estate property located there.
With the consent of Parliament, state-owned land (except for
land where real estate objects subject to privatisation are
located) may be sold to foreign states and foreign legal
entities by the Cabinet of Ministers. Land owned by communities
may be sold to foreign states and foreign legal entities by the
local council with the consent of the Cabinet of Ministers.
There is no legislation detailing the procedures for obtaining
such approval. As a result, the process is lengthy and
The registration of a foreign legal entity's representative
office in Ukraine is compulsory for acquisition of state or
communal land. Once foreign legal entities' representative
offices (ROs) are registered to conduct commercial activity in
Ukraine, such land may be purchased. The Land Code does not
list wholly foreign-invested entities among the parties that
may purchase state or community-owned land. In spite of this,
there have been cases where such enterprises successfully
solicited approval of the Cabinet of Ministers to purchase such
According to currency regulations, a foreign investor
intending to purchase real estate in Ukraine should open a
special investment account with a Ukrainian bank for making
payments for real estate.
There is a problem with determining the moment of
origination of ownership title to real estate. According to
Article 334 of the Civil Code the ownership of real estate
originates after state registration of the agreement. In
contrast with this Article, Article 331 of the Civil Code
provides for origination of ownership title of real estate from
the moment of registration of this title with the respective
register. In practice, provisions of Article 331 prevail.
Although the Law of Ukraine On the Taxation System provides
for a real estate tax, such a tax does not exist in fact. In
recent years all attempts to introduce it have been failed
because the Parliament has refused to support the initiatives.
Nonetheless, most specialists acknowledge that the relevant law
could be adopted in a tight schedule.
At the same time a land tax exists in Ukraine. It is
estimated in accordance with the Law on Land Payment and
special method of the Cabinet of Ministers of Ukraine.
Current tax legislation does not clearly stipulate what
shall be deemed an assessment basis for withholding tax. The
Law on Corporate Profit Tax prescribes that a withholding tax
shall be paid on a total income earned from sale of real
estate. The State Tax Administration of Ukraine states that the
withholding tax shall be paid on the difference between total
purchase price of a real estate object and its current book
value. In practice, legal entities that are nonresidents pay
the withholding tax on the difference.
At present, both tax legislation and current practice lack
procedures for payment of VAT by a nonresident. As opposed to
its RO, nonresidents cannot directly register as VAT payers.
Thus, nonresidents sometimes pay VAT through their ROs in
accordance with their own procedures. It should be mentioned,
however, that payment of VAT on real estate transactions of
nonresident legal entities are not controlled effectively.
Notaries are not responsible to inspect whether a seller of
real estate pays VAT.
Hence, many nonresident sellers do not pay VAT on sale of
real estate in favour of individuals, because, in contrast to
legal entities, individuals cannot act as tax agents for
payment of VAT to a budget. It is difficult to foresee whether
the procedure for a VAT payment will change in the near future.
The question is often raised by both taxpayers and tax
authorities. It should be mentioned, though, that current
legislation provides for responsibility of those persons that
Although the Law on Land Lease prescribes that the amount,
form and terms of land lease payments are set forth upon
agreement between a landlord and a tenant, said Law stipulates
minimum and maximum rates of lease payment for community and
state owned land. According to that Law with the recent
amendments introduced by the Law on the State Budget, a minimum
annual lease payment for agricultural land is 1% of their
normative monetary value. For other land it is 3% or more of
its normative monetary value.
Pursuant to the Law on Land Lease, the annual lease payment
for community and state-owned land may not exceed 12% of its
normative monetary value. Such a limit can be increased if a
tenancy is determined by the results of a land auction.
There is a requirement that a foreign owner leasing real
estate in Ukraine to Ukrainian lessees should establish a
representative office or appoint a Ukrainian representative,
which should report rental income to Ukrainian tax authorities.
Payment of rental in respect of real property should be through
The amount of lease payments to real estate objects is not
subject to state regulation, except for lease payments for
state and communal property objects, which are calculated on
the basis of procedure approved by the Ukrainian government.
Nevertheless, the Cabinet of Ministers of Ukraine approved the
procedure for calculating minimal amount of lease payment for
real estate owned by private persons. The aim of the procedure
was to prevent income tax avoidance. But there is little
guidance on existing practice for applying the procedure.
It is not an exaggeration to say that the Ukrainian real
estate and construction markets are among the most prospective
and lucrative for foreign investors. However, liberalisation
and unification of national legislation in the field of
investment activity still has to be performed. The development
of real estate and construction is a slow steady process; but
there are definite signs of improvement, as the legislation
gradually becomes more mature.
Arzinger & Partners Ukraine
Timur Bondaryev is Co-Founder, Partner, and Head of
Real Estate and Construction Desk.
Real estate and construction, corporate law,
M&A, anti-monopoly law, foreign investments
2006: Bournemouth Business School
1998: Vienna Economic University (international
commercial and tax law, summer university)
1994-1998: National Taras Shevchenko University of
Kyiv, Institute of International Relations
(international private law, interpreter of German
1992 - 1994: Horlovka High School of Foreign
2002-present: Arzinger & Partners,
Ukraine. Partner, Head of Real Estate and Construction
2000-2002: Ukrainian Aluminium, Kyiv, Ukraine
(subsidiary of Russian Aluminium), head of legal
1997-2000: State Property Fund of Ukraine, head of
Membership: International Bar
Association, Ukrainian Bar Association, Kyiv Bar,
Ukrainian-German Society of Lawyers
Academic activities: Lecturing at
law faculty of the National University of Ukraine,
Kyiv-Mohyla Academy, writing books Real Estate and
Construction in Ukraine 2006, 2007 and 2008, Getting
the deal through in Ukraine 2007, 2008, M&A in
Central Europe and CIS 2008.
Languages: Ukrainian, Russian,
German and English