Ukraine: Ukrainian Agrimarket: On the Eve of Reforms

Appeal of Agrimarket for Foreign Investors: Facts

From a number of Ukraine's economy industries agribusiness is obviously the most attractive one for foreign investors. In 2009, in the thick of the financial crisis, Ukrainian agrarian companies managed to attract more than 12% of the world investments. Fitch Ratings predicts that in 2010-2012 capital investments in Ukrainian agrarian sector will constitute approximately USD 1.87 billion. The following several reasons for that are commonly mentioned: i) increase in the global customer demand for agro-products; ii) positive trends in Ukraine's economy; and iii) successful entry to the world market of Ukrainian agrarian companies. Generally, they regularly show good financial performance that, in its turn, causes increase in quotations for their financial instruments.

Placements of Ukrainian Agrarian Companies on the Foreign Exchanges

Ukrainian government also considers agrarian sector to be one of the main in the economy of the state. What is more, Ukraine plans to enter the TOP-5 world leading agrarian economies. For this purpose government intends to undertake a whole number of significant reforms.

Public Agrarian Sector: Concentration and Privatization

Today 479 state companies are subordinated to the Ministry of Agrarian Policy and Foods of Ukraine. Performance of these companies cannot be deemed satisfactory. Most of them are unprofitable; their concerns are used on different legal grounds by private companies. Sometimes the usage is conducted without a good reason or with substantial breach of economic interests of the public companies. The same applies to the land plots owned by these public companies. What is more, quite often, publicly owned assets and land plots are alienated not in compliance with the law or on unfavorable terms. The Ministry is not capable to efficiently control and manage such number of companies. As of 1 December 2010 one fifth of the companies subordinated to the Ministry undergo bankruptcy procedures.

Meanwhile, many of these companies may be very attractive for the foreign investors. Unfortunately, their privatization is blocked due to undeveloped legislation and numerous restrictions on privatization (about 40% of the state agrarian companies are prohibited for privatization).

It is planned that three strategies will be applied in respect of the state agrarian companies. Some of them will be privatized, some kept in public ownership, and some liquidated. Currently, the draft law, which will allow privatization of many state companies of the industry, is being developed. However, it would not be enough just to abolish restriction on privatization. To make the process effective it is necessary to make amendments to a number acts of legislation, notably the Act of Ukraine "On Peculiarities of Property Privatization in Agro-Industrial Complex" dated 10 July 1996 No.290/96-BP and the Act of Ukraine "On Privatization of State Property" dated 4 March 1992 No.2163-XII.

In 2010 the Ministry of Agrarian Policy and Foods of Ukraine actively conducted concentration (consolidation of the industry companies into concerns or fusion into one state company) of the subordinated state companies, which will be continued in 2011. This concentration is aimed to improve the Ministry's possibilities to manage the companies, as well as to prepare some of them for subsequent privatization.

As a result of such concentration the following consolidating entities have already been established:

• State Company "UKRSPIRT", which consolidated 46 active companies and will additionally receive the assets of 32 bankrupt companies;
• State Company "State Foods and Grain Corporation of Ukraine", which will be the owner of the liquid assets of the State Joint-Stock Company "Khlib Ukrainy"; as of today the Corporation already consolidates 36 companies and subsequently 13 more will be included.

In 2009 was established the State Concern "National Agro-Industrial Association "Masandra", which consolidated 8 state companies of winemaking industry. The Concern was established as a result of reorganization of the National Agro-Industrial Association "Masandra" in accordance with the government Resolution dated 9 September 2009 No.972 and is subordinated to the Cabinet of Ministers of Ukraine.

In addition, the following entities are in process of establishment:

• State Concern "AGROLIS";
• State Concern "Derzhvynprom";
• State Concern «Land Fund»;
• State Concern «Ukrvetsanzavod»;
• State Concern «Horse Breeding of Ukraine».

In case the concentration is successfully completed, about 10% of the state agro-companies will stay free-floating.

Land Issues

Ukraine cannot become one of the world's leading agrarian economies until the issue of agricultural land is resolved. It covers abolition of the moratorium on alienation of agricultural land, inventory of lands and establishment of the State Land Cadastre. To do that the following acts need to be adopted: the Act of Ukraine "On the State Land Cadastre", the Act of Ukraine "On Circulation of Agricultural Lands", the Act of Ukraine "On the State Fund of Agricultural Lands", and the Act of Ukraine "On Inventory of Land". The drafts of these Acts have already been prepared by the Ministry of Agrarian Policy and Foods of Ukraine and there is a chance that a great land reform will be launched in 2011. Some preconditions for this have also been created. In particular, under the administrative reform initiated by Ukraine's President in December 2010 the State Committee for Land Resources was transformed into the State Agency for Land Resources and subordinated to the Ministry. Following the governmental program of economic reforms, the land reform is expected to be accomplished by the end of 2012.

Tax Reform

On 1 January 2011 came into effect the Tax Code of Ukraine, which substantially changed the play rules for some businesses. Among the most significant changes are the following: i) decrease of corporate income tax rate from 25% to 16% and of VAT from 20% to 17%; ii) tax holiday for small-scale businesses; iii) temporary moratorium on corporate income tax for some industry-specific businesses (e.g. agro-machinery construction companies, companies producing energy from renewable energy sources, etc.).

Generally, adoption of the Tax Code has not materially influence on agro-businesses, due to the majority of them are payers of the fixed agricultural tax.

Fixed Agricultural Tax

Since 1998 agricultural companies may apply privileged taxation regime, which implies payment of the fixed agricultural tax. Payers of this tax are exempt from some taxes payable by the regular taxpayers (e.g. corporate income tax, land tax, municipal tax, fee for purchase of trading patent to conduct trading activity, due for special water usage). Another advantage of this taxation regime is that the amount of the fixed agricultural tax to be paid depends on the assessment of the agricultural lands owned by the company made on 1 July 1995. The rate of the fixed agricultural tax is 0.03-0.45% of the land assessment and does not depend on the amount of a company's income.

The principal requirement for a company to become a payer of fixed agricultural tax is that the amounts received from realization of its own agricultural produce and processed produce for the previous reporting year must exceed 75% of the total amount of the company's gross income (total amount of income received by a taxpayer from any activities in the territory of Ukraine and abroad).

Tax Code did not introduce any substantial amendments to the fixed agricultural tax regime. All the amendments made are of cosmetic character.

Repayment and Use of VAT

Amendments to the VAT regulations introduced by the Tax Code are of great concern for the dairy and meat industry companies. Formerly dairy and meat producers, as well as processing companies enjoyed certain privileges on VAT payment, notably:

1. Operations of producers on supply of milk and live weight meat to processing companies were exempt from VAT.
2. VAT amounts to be paid by processing companies received in result of milk and meat realization were subsidized to the producers. The said amounts were transferred to a special account of a producer or paid in cash. Producers had to use the subsidy in accordance with the set purpose designation.
3. VAT amounts to be paid by agricultural producers received in result of realization of milk, cattle, poultry, etc., produced in their own processing subdivisions could be forwarded for maintenance of production facilities

Tax Code introduced 2 VAT regimes (regular and special), which the agricultural companies may choose.

The companies, which choose special VAT regime, are authorized not to pay VAT amounts to the budget. They are accumulated on a special account opened under the procedure set forth by the Cabinet of Ministers and can be used by the company to compensate the VAT paid to the suppliers and the rest for other needs of the company.

Agricultural companies, which are regular VAT payers, are authorized to use the VAT funds received from realization of their own milk, cattle, poultry and wool, as well as from realization of dairy produce, raw milk produce and meat foods produced in their own processing subdivisions, for maintenance of the production facilities.

However, temporary, until 1 January 2015, the VAT amounts payable by the processing companies to the state budget from realization of milk, raw milk produce and dairy produce, meat and meat foods, and other products of processing of cattle, purchased on live weight, will be accumulated in a special fund of the state budget. The procedure for calculating, payment and use of these amounts shall be determined by the Cabinet of Ministers of Ukraine. As of today such a procedure has not been approved.

Produce Export/Import and Reform of Exchange Market

Due to membership of Ukraine in WTO and ratification of several industry-specific international treaties, environment of Ukrainian agricultural market materially changed that entailed relevant changes in the regulatory policy of the state and legislation.

In 2009-2010 Ukraine felt lack of meat and processing facilities. Prices on the internal market increased, if compared with the world prices of the leading exporters and producers of meat (Polish, Danish and Argentinean, ect.). Because of this national meat processing companies had to import raw produce. In addition, Ukrainian parliament did not support renewal for 2011 of 0% customs duty on import of some dairy products and foods (condensed milk, cream powder, potatoes, etc.). This decision was motivated by the fact that in 2010 the said privilege had not significantly influence Ukrainian market. Currently, the Ministry of Agrarian Policy and Foods of Ukraine is intended to undertake drastic measures in respect of import of vegetables and fruit, which are also planted in Ukraine. This may lead to increase in import duty on these products and even up to complete ban on their import.

On the other hand, in 2009-2010 export of crops and oil-bearing plants substantially increased that allowed Ukraine to get a leading position in the world's market. Unfortunately, crops export is currently artificially restrained by the government. 4 October 2010 Cabinet of Ministers of Ukraine adopted Resolution "On Quotas until 31 December 2010 for Some Types of Agricultural Produce, which Export is Subject to Licensing" No.938. Besides, in accordance with the General Agreement on Tariffs and Trade and Agreement on Agriculture there are quite few reasons for introduction of quantity restrictions upon trade in agricultural produce, including crops. National traders and producers are very anxious about such situation. It is also of great concern for foreign investors, who made significant investments in the development of Ukrainian agrarian industry, and are actually crop co-producers. Provisions of the mentioned agreements imply that governments with their resolutions and decisions are to help and support exporters but not create restrictions. The main thing for the market players is not introduction or abolition of quotas but clear and stable rules of game. Experts believe that the situation will change in 2011 and the volume of crops export transactions will increase in several times.

Presently, the foreign-economic contracts in respect of the produce, which is subject to state price regulation, are to be registered with the state. However, such registration is performed not by a governmental agency but the commodity exchanges, where the contracts are made. According to statistics data there are 350 commodity exchanges in Ukraine.

Recently, Ministry of Agrarian Policy and Foods proposed that the above registration to be performed exclusively by the state Agrarian Exchange and the private commodity exchanges that obtained relevant permits from the Cabinet of Ministers of Ukraine. Obviously, this initiative may cause additional expenses for auction participants because services of the Agrarian Exchange cost higher than the similar services currently rendered by private commodity exchanges. Furthermore, Agrarian Exchange is a governmental organization that may lead to intensification of the market state regulation. However, the proposed changes will allow centralizing the registration procedures on one exchange and preventing from use of the commodity exchanges in shadow schemes. Additionally, this will ensure transparent price setting in the market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.