INVESTMENT ACTIVITIES IN UKRAINE

According to the National Bank of Ukraine, the volume of foreign direct investments^[1]  into the economy of Ukraine (balances) (equity instruments and debt instruments) as of December 31, 2022 amounted to USD 50,986.7 million.

Investments are channeled to already developed areas of economic activity.

As of December 31, 2022, the largest volumes of direct investments (balances) were channeled to industrial enterprises - 41.9 percent and institutions and organizations engaged in wholesale and retail trade, repair of motor vehicles and motorcycles - 16.3 percent.

The main investor countries include Cyprus - 33.1 percent, the Netherlands -
19.5 percent, Switzerland - 5.1 percent, the United Kingdom of Great Britain and Northern Ireland - 4.8 percent, Germany – 4.97 percent, Austria - 3.2 percent, Luxembourg – 2.5 percent, and France – 2.2 percent.

According to the balance of payments published on the website of the National Bank, for eight months of 2023, the net inflow of direct foreign investments is estimated at USD 2.9 billion (including reinvestment of income³ - USD 2.3 billion).

The volume of implementation of capital investments of enterprises of Ukraine in
2022 amounted to UAH 409,660.0 million.

In 2022, the leading spheres of economic activity, in terms of the volume of disbursement of capital investments, are as follows: industry - 30.8 percent, agriculture, forestry and fishing - 12.6 percent, transport, warehousing, postal and courier activities – 12.1 percent, wholesale and retail trade; repair of motor vehicles and motorcycles - 9.0 percent, public administration and defense; mandatory social insurance – 8.9 percent, construction – 8.0 percent, health care and social assistance – 4.3 percent, information and telecommunications – 4.1 percent, real estate transactions - 3.5 percent.

In the conditions of military aggression by the russian federation and the introduction of martial law in the territory of Ukraine in accordance with Decree No. 64 of the President of Ukraine dated February 24, 2022, On the Introduction of Martial Law in Ukraine, the Verkhovna Rada of Ukraine and the Government are working, in particular, on restoring the economy, helping Ukrainian entrepreneurs and creating conditions for attracting investments to Ukraine.

In order to stimulate the attraction of strategic investors into the economy of Ukraine, increase Ukraine’s investment attractiveness, create new high-paying jobs, as well as increase the competitiveness of the economy through the introduction of state support for large investment projects, Law of Ukraine On State Support of Investment Projects with Significant Investments in Ukraine was adopted.

On August 9, 2023, the Verkhovna Rada of Ukraine adopted Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Regarding the Implementation of Investment Projects with Significant Investments (hereinafter - the Law), which entered into force.

The main purpose of the Law is to stimulate the attraction of foreign and domestic investments by simplifying the requirements for investment projects with significant investments, improving the forms of state support for the implementation of such projects, which will create favorable conditions for attracting a wider range of investors and increasing the number of investment projects with significant investments, as well as contribute the development of the regions where they will be implemented.

The Law, in particular, provides for the introduction of amendments to Law of Ukraine On State Support of Investment Projects with Significant Investments in Ukraine in part of:

the expansion of the spheres in which an investment project with significant investments can be implemented (the sphere of electronic communications, the production of bioethanol, which is intended for the production as a fuel component, the production of biogas and biomethane, has been added);

providing an opportunity to an applicant no earlier than 18 months before the date of submission of the application to the authorized body to make significant investments in investment objects in an amount not exceeding 30% of the total amount of significant investments required for the implementation of an investment project with significant investments;

enabling the applicant to act as an investor with significant investments, if it is a separate legal entity created for the implementation of an investment project, and a party to a special investment agreement as an investor;

addition of forms of state support, namely: compensation at the expense of state, local budgets and other sources, not prohibited by law, of the cost of engineering and transport infrastructure facilities built by the applicant or investor with significant investments (roads, communication lines, means of heat, gas, water and electricity supply, engineering communications, etc.), necessary for the implementation of an investment project with significant investments; compensation for the costs of joining and connection to engineering and transport networks, necessary for the implementation of an investment project with significant investments; exemption from compensation for forestry production losses for the implementation of an investment project with significant investments;

reduction of the limit of the amount of significant investments (from EUR 20 million to EUR 12 million) and the number of new jobs created during the implementation period of an investment project with significant investments, namely: the requirements for the creation of jobs to involve in the investment process a larger range of economic entities - not only large, but also medium-sized enterprises - have been changed and differentiated;

identifying of opportunities for finalizing and not returning of documents submitted by the investor, in particular a technical and economic feasibility study and a special investment agreement, as part of the evaluation of the investment project with significant investments, as well as the possibility of conducting negotiations involving representatives of an authorized institution to agree on the provisions of a special investment agreement after receiving an opinion on the feasibility of implementing an investment project with significant investments and concluding a special investment agreement;

providing for the return of state support in full in case of failure to reach the amount of significant investments defined by the draft law (12 million euros), the impossibility of increasing the amount of state support when in fact the amount of significant investments is more than that specified in the special investment agreement, as well as the possibility of adjusting the amount of state support, if the actual volume of significant investments is less than provided for in a special investment agreement, by amending such an agreement.

Amendments to the Land Code of Ukraine are also provided for in terms of adding provisions on exemption from compensation for losses of forestry production of an investor with significant investments to implement an investment project with significant investments.

Another mechanism for attracting investments is industrial parks - potential industrial sites for the relocation of companies from other countries with the aim of diversifying supply chains, which solve the issue of reducing the time before the start of the work (Time-to-Market) of companies, taking into account the time needed to find the optimal location, start of construction and commissioning of facilities.

Law of Ukraine On Industrial Parks provides for a simplified procedure for the lease or ownership of land plots within industrial parks, the durability and stability of economic relations within industrial parks, and the provision of state incentives for the development of registered industrial parks. Such state stimulation may be carried out at the expense of funds from the state and local budgets and from other sources not prohibited by law, as well as by accompanying investors by local and central executive authorities, specialized institutions and organizations in solving issues related to the development of industrial parks.

In addition, on June 21, 2022, the Verkhovna Rada of Ukraine adopted Laws of Ukraine On Amending the Tax Code of Ukraine on Creating Favorable Conditions for Activities of Industrial Parks in Ukraine (hereinafter - Law No. 2330) and On Amending Article 287 of the Customs Code of Ukraine on Creating Favorable Conditions for Activities of Industrial Parks in Ukraine (hereinafter - Law No. 2331).

Background: Law No. 2330 amends the Tax Code of Ukraine, which, in particular, introduces:

- exemption from value added tax on operations of importation into the customs territory of Ukraine under the customs regime of import of new machinery (equipment) imported by participants of industrial parks, exclusively for their own use to conduct activities in the spheres of processing industry or scientific research activities in the territory of (within) the industrial park (without the right to rent, lease or transfer for use to third parties under any other conditions);

- exemption from income tax for ten years;

- granting the right to local self-government authorities to establish preferential rates of real estate tax and land fees.

Law No. 2331 amends the Customs Code of Ukraine, which, in particular, introduces the exemption from customs taxation of new machinery (equipment) imported by participants of industrial parks exclusively for their own use to conduct activities in the spheres of processing industry or scientific research activities in the territory of (within) the industrial park (without the right to rent, lease or transfer for use to third parties under any other conditions).

In accordance with the legislation, initiators of creation and management companies of industrial parks may also create small systems of distribution of electric energy of industrial parks.

The creation of small electricity distribution systems of industrial parks can significantly simplify and speed up the connection of participants and other subjects of industrial parks to the power supply system.

Despite the objective difficulties associated with the possibility of state stimulation of industrial parks (there is no corresponding funding from the state budget this year), the Government continues to interact with central and local executive authorities, other state authorities and institutions (in particular, SI Investment Attraction and Support Office), local self-government authorities, non-governmental organizations, as well as international and foreign partners on the issues of creating conditions for the development of industrial parks in Ukraine.

Thus, based on the results of the joint interaction of local self-government authorities, the Ministry of Economy and the Ministry of Finance, the Government has recently amended the Procedure for the Exercise of Powers by the State Treasury Service in a special regime under martial law, approved by Resolution No. 590  of the CMU dated June 09, 2021.

In accordance with these changes, local self-government authorities may spend local budget funds on preparing design (design and estimate) documentation, new construction, reconstruction, capital repair of engineering and transport infrastructure facilities, necessary for the creation and operation of registered industrial parks located outside their territory.

The Ministry of Economy, supported by the UNIDO technical assistance and with the participation of interested central executive authorities, is forming a policy to promote the introduction of the eco-industrial park model in Ukraine.

In addition, by Order No. 176 of the Cabinet of Ministers of Ukraine dated February 24, 2023, the Strategy for the Development of Industrial Parks for 2023-2030 (hereinafter – the Strategy) was approved. The Strategy is aimed to help use the potential of industrial parks more effectively as part of the process of decentralization of management and contribute to solving issues related to stopping environmental degradation, creating added value and new qualified jobs.

Another tool is Production Sharing Agreements (hereinafter – the Agreements). According to the Agreement, one party – Ukraine - entrusts the other party - the investor - for a specified period of time, with the search, exploration and extraction of minerals in a specified area of the subsoil and conducting works related to the agreement, and the investor undertakes to perform the assigned works at its own expense and at its own risk with the subsequent compensation of expenses and receipt of payment (reward) in the form of a part of the profitable products.

Public-private partnership (hereinafter – PPP) is one of the effective tools for attracting additional investments in the state sector of the economy of Ukraine and at the same time is an effective mechanism that promotes the development of relations between state authorities and business. The state guarantees the compliance with the conditions established by the legislation of Ukraine for the conduct of activities of private partners, related to the performance of contracts concluded within the framework of PPP, the compliance with the rights and legitimate interests of private partners.

One of the forms of the implementation of PPP is concession, which provides for the grant by the concessionaire to the concessionaire of the right to create and/or build (new construction, reconstruction, restoration, capital repair and technical re-equipment), and/or management (use, operation, maintenance) by the object of the concession, and/or the provision of socially significant services in accordance with the procedure and under the conditions specified by the concession agreement, and also provides for the transfer to the concessionaire of the majority of the operational risk, which includes the risk of demand and/or the risk of supply.

Despite all the challenges and difficulties brought by the war in Ukraine, the Government of Ukraine is working to create conditions for the effective attraction of domestic and foreign investments in the economy of Ukraine.

Thus, amendments to the budget legislation introduced in 2022 opened a new mechanism for attracting funds for the implementation of projects under PPP conditions, which enables state partners to make long-term commitments within the framework of PPP contracts, and gives private partners (concessionaires) confidence in the state’s fulfillment of its obligations and functioning of the PPP (concession) mechanism.

This is an important step for the implementation of socially significant projects, which are most often implemented according to the PPP model based on the availability of infrastructure with payments for operational readiness.

In addition, the Ministry of Economy of Ukraine is currently working on amendments to some legislative acts to improve the mechanism of attracting private investment through the PPP mechanism to accelerate the restoration of facilities destroyed by the war and the construction of new facilities related to post-war economic recovery of Ukraine.

The main principles of the infrastructure reconstruction strategy in Ukraine (which will be based on innovation, social responsibility) and the main prerequisites for the successful use of PPPs in Ukraine are, in particular:

• strong institutional capacity and support of international financial institutions (IFIs) and development financing institutions (DFIs), including international development banks;
• payment guarantees for private partners;
• insurance against repeated risks of military operations;
• a clear and consistent list of viable projects;
• optimized and standardized transparent investor selection procedures;
• tender documentation templates available for a group of projects.