Last year saw a significant drop in the amount of foreign direct investment (FDI) coming into Ukraine. The reasons for this slump were multiple, and while a lot could be attributed to the ongoing coronavirus pandemic, one could also argue that Ukraine has begun to lose its allure for foreign investors due to solely domestic issues. This represents a setback for Ukrainian President Volodymyr Zelenskyy, who set himself the goal of making Ukraine more attractive to foreign businesses and hopes to attract major strategic investments to help finance Ukraine’s ambitious infrastructure projects.
Efforts are now underway to rectify the situation. One of the most recent steps designed to improve the investment climate in Ukraine was the enactment of a new Law of Ukraine on State Support of Large Investment Projects in Ukraine (the so-called “Nanny Law”) in February 2021. This was followed by two further laws on tax and customs duties exemptions which were approved by Ukraine’s parliament in early March of this year.
The Nanny Law is designed to help attract strategic investors, both foreign and domestic, by way of granting them state support. The envisioned measures aim to improve the investment climate in Ukraine and promote incoming direct investments.
The Nanny Law provides for support to investors implementing projects with investments exceeding EUR 20 million in a range of industries including processing, transport, treatment of waste, warehouses, mail delivery and couriers, logistics, education, science and research, culture, tourism, healthcare and recreation, and sports. Among the principal requirements for such investment projects is that they must be implemented in Ukraine, must create at least 80 new jobs, and should last for up to five years.
In order to qualify under the terms of the Nanny Law, an investment project must entail a new construction, modernization, technical and/or technological overhaul of investment facilities, or acquisition of necessary equipment and components.
Implementation of suitable investment projects will be guaranteed by execution of a direct agreement between the investor and the government, complete with supervision and assistance by UkraineInvest, a specially created body, and extension of a number of preferences. These preferences include tax and customs incentives such as exemption from payment of income tax for five years, exemption from payment of customs duties and VAT for importation of new equipment and machines in Ukraine, and state permission to use infrastructure required for the implementation of the investment project. The latter feature includes construction of new roads or the use of existing roads, communication lines, power transmission lines, heating, gas, and water as well as other pipelines. In total, the level of state support for investment projects within the framework of the Nanny Law could reach up 30 percent of the total cost of the project.
In accordance with the two additional laws approved by parliament on 2 March, investors approved by the “Nanny” Office of the Cabinet of Ministers of Ukraine will receive import VAT and customs duties exemption, together with corporate income tax exemption for five consecutive years from the date of commissioning of the investment facility, and a discount on the land lease fee paid to the local Ukrainian authorities. The laws concerning tax exemptions and customs duties are expected to be signed by the president quite soon.
While these legislative moves are encouraging, Ukraine has a rather mixed record when it comes to the treatment of foreign investors. Even without having to dig too far into history, it is easy to see why investors might remain cautious. In late 2019, Ukraine passed investor-friendly legislation to enable the implementation of large-scale concessions of seaports and highway infrastructure. However, at approximately the same time as this was taking place, another arm of the government (the state-owned Guaranteed Buyer responsible for making purchases of electricity from private producers in line with government commitments) was generating multi-billion dollar debts by delaying payment of feed-in tariffs to strategic investors in the renewable energy sector. This raised the possibility of multiple investment claims against Ukraine. Whether these debts are going to be repaid remains an open question.
While it is encouraging to see Ukraine continuing to expand financial incentives and tax exemptions for investment projects, additional work clearly needs to be done in order to make Ukraine more attractive to foreign investors. In that regard, the recently adopted Nanny Law is a step into the right direction. One could argue, though, that an integrated approach including judicial reform and anti-corruption measures would be far more effective in terms of marketing Ukraine to the outside world as an attractive destination for international investment.