November 1998

by Maxim Bougriy

There are three basic forms of business organization a U.S. company can use to establish a presence in Ukraine: representative office, wholly owned subsidiary, or joint venture with a Ukrainian company. There are pros and cons to each option, and each entails a specific process and price of registration.

The majority of foreign companies in Ukraine operate through a representative office. By law, a representative office is not a legal entity and its activities are limited to representation, market research, and making preparations for business operations. For a foreign company exporting to Ukraine, one benefit of having a representative office is that the local customer can be required to handle customs procedures and duties, thus avoiding the 30 percent profit tax. The disadvantages of a representative office include the difficulties the company may face in marketing and distributing of its products, as it is illegal for a representative office to perform these functions. In addition, a representative office cannot sign contracts in its own name.

In many cases, foreign companies, especially those involved in large-scale manufacturing and/or distribution, will need to establish either a Ukrainian subsidiary or a joint venture. Subsidiaries and joint ventures can be registered either as a limited liability company (LLC) or a joint-stock company (JSC) (closed or open). By assuming any of these forms of representation, the foreign company becomes subject to Ukrainian commercial law and needs to register in the same way as a Ukrainian company registers.

Registering a Representative Office
To register a representative office in Ukraine, a company must submit to the Ministry of Foreign Economic Relations and Trade (MFERT) a registration application with the required supplementary documents. The registration application must be signed by the foreign company's executive and must contain foreign company information, including name and address, bank reference and account number, number of employees, date of establishment, and type of activity. Similar information should be provided about the Ukrainian representative office.

Supplementary documents that must be submitted together with the application include:

• A copy of the company's registration documents in the parent country;
  
• A letter from the foreign company's home bank which includes the company's bank account number and bank employee's signature; and
  
• A Power of Attorney for the company's Ukraine representative, signed by the company's executive.
  

All documents must be: 1) stamped and sealed; 2) notarized; 3) translated into Ukrainian; and 4) pre-certified with the Ukrainian Consulate in the parent country. MFERT also has its own requirements as to the appearance of the documents (every page has to be signed and stamped, papers must be stapled in a special way, etc.).

The fee for registering a representative office is US$2,500. On average, the registration process takes 1 month. However, Ukrainian law allows MFERT up to 60 days to register a company.

Joint Ventures and Subsidiaries
During the summer of this year, the Government of Ukraine introduced important measures to simplify registration for Ukrainian companies, as well as for joint ventures and subsidiaries of foreign companies. The number of government agencies with which a company must register was reduced from 16 to 3 and the time frame in which to do so was shortened.

According to these new procedures, business registration is performed by local state administrations, as opposed to various local and federal authorities. Businesses must submit an application and company information, including proof of registration in the parent country. The company's address may be the owner's home or office address, certified by a copy of a lease agreement.

The registration fee is about US$50 and government authorities must register a business within 5 working days, or pay back 20 percent of the registration fee to the company for each day that the authorities delay the registration. Upon receipt of the registration confirmation and the registration number issued by the State Statistics Committee, the company must register with the taxation authorities. By law, this step must be done within 2 working days after receipt of the registration certificate and number. To register a corporate stamp and seal, the company must apply to the militia (police). This process must not exceed 5 days. Lastly, the company must open a bank account.

For companies that target a significant share of the Ukrainian market, registration usually requires the approval of the Anti-Monopoly Committee (AMC). According to Myron Rabij of Salans Hertzfeld & Heilbronn (Kiev), AMC approval is a critical step for a large foreign company, but one that is often overlooked by investors. It is important to note that the AMC requirements do not clearly define "products" for which an applicant should seek approval. Also note that, by law, it usually takes 1 month to get AMC approval.

While the registration process still requires several steps and can take some time, the new legislation aims to streamline the process. It may be difficult, however, for an American company to navigate the process on its own. Thus, American companies interested in entering this market should consider hiring either a local law firm or international corporate lawyers to perform all the necessary registration steps.

For more information on Ukraine, visit BISNIS OnLine at www.mac.doc.gov/bisnis/country/westnis.htm#Ukraine.

Maxim Bougriy represents BISNIS in Kiev.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)