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Quite often, Ukrainian shares become the commodity of deals involving non-residents. Therefore, a non-resident, who sells Ukrainian shares, needs to understand that deals with securities in Ukraine are governed by both civil and corporate law. A security purchase transaction between a Ukrainian resident (a business entity) and a non-resident is regarded as a foreign trade contract and is subject to numerous norms of Ukrainian legislation connected with foreign trade. Moreover, Ukrainian securities are regarded as currency valuables and transactions involving them are also subject to Ukrainian currency legislation.

We shall now consider in more detail some of most topical issues regarding trade in Ukrainian securities belonging to non-resident companies.

How can a resident sell Ukrainian securities?

The shares of Ukrainian issuers can be sold by a non-resident on established securities markets (at stock exchanges, non-exchange trade information systems), and on the unorganized (unregulated) stock exchanges in Ukraine and other nations.

The overwhelming majority of Ukrainian securities are traded on the Ukrainian Stock Exchange. The Ukrainian Stock Exchange and the First Stock Exchange Trading System are the major organizers of trade in Ukraine, with the latter having 97.4% of the total volume of the organized market’s volume of transactions in Ukraine in 2002.

Securities dealers with a license to issue and trade securities can be of assistance to non-residents selling stocks in Ukraine. If a non-resident operates on the stock market independently without a dealer, this kind of operation can be regarded as a professional one and requires the acquisition of the SCSSM license.

Are non-residents limited in their rights to deal with shares?

A non-resident who is a holder of Ukrainian shares is equally subject to the restrictions related to the right to deal with shares just as Ukrainian investors are. A non-resident who has acquired shares during the privatization process might be confined by a purchase contract with a privatization body. Moreover, according to the Companies Act, founders of open joint-stock companies, including non-residents, are obliged to hold at least 25% of the total number of company’s shares for at least 2 years.

How is a deal settled with a non-resident under a contract on purchase of shares?

The currency of payment is agreed upon by parties and is introduced to the contract on the purchase of shares. As a peculiarity of Ukrainian legislation, residents of Ukraine and non-residents need to acquire the NBU license to pay for shares, since securities are regarded to be currency valuables. The license of this kind is necessary regardless of the currency of payment – whether it be the national currency or a foreign currency (item а), part 4, Article 5, part 3, Article 7 of the Decree of the Cabinet of Ministers of Ukraine On Currency Regulation and Control System of 19 February 1993, No.15-93).

The licensing requirement is targeted at preventing currency outflows abroad under cover of a contract on purchase of securities, which can be overpriced compared with the market. According to the Ministry of Economy and European Integration, for several years the purchase of Ukrainian securities from non-residents served as the main way for exporting currency legally. The NBU could not but respond to the situation and passed a new Regulation of 29 January 2003 On Individual Licenses of the National Bank of Ukraine to Residents to Transfer Foreign Currencies Abroad With the Purpose of Payment for Currency Valuables. A new order of payment for non-residents makes such transactions quite complicated.

It is important that licensing is applied only to purchases of corporate rights in joint-stock companies from non-residents. However, one should remember that only shares are regarded as currency valuables. Other corporate rights of Ukrainian enterprises do not fall into the category of currency valuables and therefore can be alienated without the acquisition of an individual license from the NBU using the same pattern as with shares. And this does not necessitate participation of a securities dealer, which makes transactions simplier and more profitable.

What are the payment terms under a foreign contract on the purchase of shares between non-residents and residents of Ukraine?

According to the Order of Foreign Currency Payment Act of 23 September 1994 No.185/94-ВР, if a resident of Ukraine made an advance payment in a foreign currency under import transactions to the benefit of a non-resident, a term of the shares delivery in excess of 90 days after the date of the advance payment or the date of promissory note to the benefit of a non-resident would entail acquisition of an individual license from the NBU. Thus, the term of delivery of shares should not exceed 90 calendar days; otherwise sanctions are applied to a resident. Many lawyers contest the relevancy of this norm being applied to purchase of shares that are issued in a non-documentary form or are deprived of ownership (by being placed with a depository), as well as shares that were not taken outside Ukraine, because in this case there is no customs clearance of securities and, therefore, the customs price of the commodity cannot be determined. 

Residents who buy foreign currency from authorized banks to meet their obligations to non-residents, are obliged to make money transfers within 5 working days after the moment the purchased amounts enter their currency accounts. Otherwise, the authorized banks sell the purchased currency on the interbank currency market of Ukraine; a possible surplus that might occur at the transaction due to difference of rates is transferred to the State Budget of Ukraine, and possible losses are regarded as resulting from the resident’s business operation.

How do you re-register ownership rights when concluding a share purchase contract?

The order of re-registering ownership rights is governed exclusively by legislation of Ukraine and it is practically the same both for residents and non-residents. However, the procedure for the re-registration of ownership rights to shares varies depending on the form of shares – documentary or non-documentary.

Passing ownership rights to shares in the documentary form is registered by a registrar who keeps a register of shareholders of the company whose shares have been sold. The registrar is obliged to re-register ownership rights to shares within 5 working days after receipt of the necessary documents. A personal account is opened for the buyer of shares provided that he fills out a questionnaire and provides the necessary documents. After that, the registrar issues a new share certificate to the new owner.

In the event that shares have been issued in a non-documentary form or collectively deposited with a custodian (registered in a Ukrainian bank or by a licensed security dealer), or, in other words they have been deprived of ownership, the procedure for re-registering ownership rights is determined by the Regulation On Depository Activities approved by the SCSSM’s Decision of 26 May 1998, No.61, and the Regulation On the Record of Ownership Rights of Non-Residents to Ukrainian Issuers’ Securities approved by the SCSSM’s Decision of 20 April 2001, No.138. A buyer of shares is obliged to open a securities account with a custodian to enter the purchased shares, for which purpose he fills out a questionnaire and submits the necessary documents. An excerpt from the securities account is an instrument that confirms the right of ownership to the purchased shares.

What are the cases when documents issued abroad do not need legalization?

Non-resident’s documents that are issued abroad and presented for the purpose of re-registration of ownership rights in securities should be legalized if otherwise not established by international agreements of Ukraine. Provisions on the exemption of foreign official documents from the legalization procedure are contained in international agreements of Ukraine on legal redress. The exceptions are agreements with Vietnam, Greece, Iraq, Yemen, Cyprus, Tunisia, Finland, and Italy.

If there is no international agreement relieving non-residents of the necessity to legalize documents, documents issued abroad are recognized valid on the territory of Ukraine provided that:

• they are legalized at consular institutions of Ukraine;
•  they have a special sign — apostille.

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What is consular legalization of documents?

Consular legalization of documents is a procedure of  authentication of the original copies of official documents that are issued abroad. Consular legalization is carried out by consular institutions of Ukraine in accordance with the provisions of the Instruction on Consular Legalization of Official Documents in Ukraine and Abroad approved by the Order of the Ukrainian Ministry of Foreign Affairs of 4 June 2002, No.113.

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What is an apostille?

According to provisions of the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961, the only way to legalize official documents is to mark them with an apostille. The  apostille can be an attachment on a separate sheet of paper or a special stamp on a document. Each country independently designates agencies which have the power to enter an apostille.
Ukraine joined the Hague Convention of 1961 along with 78 countries (Act of Ukraine of 10 January 2002, No.2933-III).

Taxes on sale of shares

The sale of shares by a non-resident to a resident is governed by bilateral international agreements of Ukraine on preventing double taxation.

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Ukraine’s agreements on double taxation

As of 1 January 2003, international agreements on preventing double taxation with the following countries came into effect: Austria, Azerbaijan, Armenia, Belgium, Belorussia, Bulgaria, Great Britain, Hungary, Vietnam, Georgia, Denmark, Egypt, Estonia, India, Indonesia, Iran, Kazakhstan, Canada, Kyrgyzstan, China, Korea, Latvia, Lithuania, Macedonia, Moldova, the Netherlands, Norway, Poland, Russian Federation, Romania, Slovakia, the USA, Turkey, Turkmenistan, Uzbekistan, Finland, France, German Federal Republic, Croatia, Czech Republic, Sweden, Switzerland, and Yugoslavia. Moreover, according to Article 7 of the Succession of Ukraine Act, Ukraine applies agreements of the USSR on the prevention of double taxation that are valid until new agreements come into force. The USSR agreements are valid for Ukraine’s relations with Spain, Italy, Cyprus, Malaysia, Mongolia and Japan.
According to the provisions of agreements on preventing double taxation, profits from the sale of shares and other securities are taxable under legislation of the country of the seller being a resident. Therefore, the profit earned by non-residents from sales of Ukrainian shares should not be subject to the profit tax, except in cases that are directly provided for by agreements on prevention of double taxation.
If there is no agreement on prevention of double taxation, the issues related to taxation on share sales are regulated by both Ukrainian legislation and the legislation of the country in question. 

According to the Ukrainian Profit Taxation Act, the proceeds received by a non-resident from the sale of shares to a resident of Ukraine are not liable to the 15% tax (tax on non-resident’s profits that originate from Ukraine – i.e. repatriation income tax). Exceptions are cases when shares are purchased by a non-resident from a resident of Ukraine and then sold to a resident (only in this case, the amount of profit earned by the non-resident shall be regarded as income originating from Ukraine). In such cases, the 15% tax is imposed on the amount equal to the difference between the sale and purchase process (in the event of a debit balance). It should be said that a resident of Ukraine who buys shares from a non-resident is unable to calculate the non-resident’s profit which the latter receives after the purchase transaction (the former does not know the amount the non-resident paid to purchase the shares). Thus, in most cases the provisions of the Ukrainian Profit Taxation Act are admittedly impracticable.
The Value Added Tax Act establishes that money proceeds or other securities resulting from the sale of shares are not subject to VAT. However, alienation of shares in exchange for goods, works, or services is subject to VAT. 

Ukrainian legislation on the buying and selling of Ukrainian shares between non-residents
Transactions involving Ukrainian shares between non-residents of Ukraine are governed exclusively by foreign legislation (including the concluding of contracts, the manner of payment and currency of payment, etc.). In this case, the legislation of Ukraine only governs issues related to the re-registration of corporate rights.

The export of shares in a documentary form by a non-resident company implies acquisition of an individual license from the NBU. As a rule, the shares of Ukrainian issuers that are traded on the stock market of Ukraine are in a non-documentary form or are deprived of ownership, and the documents confirming the property right to such shares can be exported by non-residents from Ukraine without any limitations.