Despite the global economic crisis adventurous foreign investors still can find excellent business opportunities in Ukrainian agricultural sector. Ukraine still boasts enormous land reserves that can grow various grains, seeds, fruit and vegetables. And due to the crisis, at last everything and everyone is available for sale or rent at rock-bottom prices. In this work we will analyze the key issues involved in starting agricultural production in Ukraine including: 1) land rights; 2) importing equipment; 3) obtaining financing assistance during these difficult economic times.
1. Land Rights.
The main problem for foreign investors is whether there is any profit in buying Ukrainian farmland to start a farm business. At first glance land rights may appear to be a painful topic for investors since the current legislation temporarily prohibits the sale of agricultural land.
To avoid this legislation many investors have been successfully leasing farmland either on a short-term (2-5 years), medium-term (5-25 years) or long-term (up to 49 years) basis. In the process they have saved millions of dollars in cash, which would otherwise be necessary to purchase the land making their business more profitable. This is an excellent reason why investors prefer leasing Ukrainian farmland instead of owning it outright.
However, the sale of non-agricultural land (industrial property) does not fall under the same restrictions that apply to agricultural land (i.e. moratorium on sale). Thus, a foreign investor can build and operate a 100% foreign-owned processing facility on its own industrial land while leasing fields from agricultural landowners until the moratorium on sale of agricultural land is lifted.
In the past the validity of lease agreements was often questioned and this risk (of potential disruption or even termination of business activity due to a legal technicality) was too great for many investors. In today’s harsh economic climate, however, very few landowners would breach their lease agreements and refuse to lease their fields to a paying client. In order to lease agricultural land it is only necessary to conclude a land lease agreement with the landowner and simply comply with the terms of agreement. It is clear enough that the land agreement should be properly drafted, registered with the authorities, and notarized.
Obtaining land rights to start agricultural production is relatively simple in Ukraine. The legal framework is quite straightforward and the numerous examples of successful foreign-owned operations exist including Cargill and Chumak (formerly known as “South Foods”). While owning farmland is temporarily out of the question, a foreign investor may lease the fields anytime. It is obvious that certain inherent business risks remain, like with any other type of investment throughout the world, but this should not serve as prevention to taking advantage of Ukraine’s black and fertile soil.
2. Importing Equipment.
Importing foreign equipment is often a prerequisite to starting agricultural operations due to the lack of quality machinery and outrageous prices in Ukraine. There are several ways in which foreign equipment can be imported including:
a) by contributing such equipment to a 100% foreign-owned company’s share capital. This involves drafting and signing a founder’s resolution, amending the company’s charter, and registering amendments to the charter with the state authorities. In this case no customs duties apply. However, a 20% VAT will be applied.
b) via a leasing arrangement whereby the ownership of the equipment is retained by a non-resident, who receives regular payments for the use of the equipment. This arrangement is based on a financial leasing agreement which complies with the requirements of the Law on Leasing and pursuant to which the ownership rights to the equipment will pass to the lessee upon full payment of the leasing agreement. Importantly, under a financial leasing agreement both the customs duty and a 20% VAT will be applied to the imported equipment.
c) by purchasing the equipment via a sale-purchase agreement. Such agreement must, at a minimum, provide for fundamental material conditions including the subject matter, price, payment schedule, title transfer, etc. Again, both the customs duty and a 20% VAT will be applied to the imported equipment.
3. Obtaining Financing.
The current land-related legislation prohibits using agricultural land as collateral, precluding the possibility of obtaining much-needed financing. However, rights to future harvests can serve as liquid collateral giving rise to the possibility of financing according to the Civil Code of Ukraine and the Law on Pledges. Thus, in order to obtain a commercial loan from a creditor, an agricultural producer can conclude a loan agreement and secure the repayment of the loan by a pledge (collateral) agreement using the rights to future harvests as collateral. Normally, such pledge agreements are notarized and registered with the relevant state registry of pledges.
In conclusion, due to its enormous reserves of top-quality soil, Ukraine is undoubtedly one of the best places in the world for agricultural producers. Those investors who decide to set up production during these turbulent times will certainly be rewarded in the future as they corner the market before their competitors even enter Ukraine.
Selected bibliography:
1. http://advisors.com.ua/en/publications/show/28
2. http://info.ua.net/guide/51.html