Legal News Ukraine Doing agricultural business in Ukraine

Ukraine is one of the world’s leading exporters of agricultural products. The geographical location, climatic conditions, and soil properties create very favourable conditions for crop production. In addition, lasting tradition of farming, qualified personnel, and agronomic schools allow the agricultural business in Ukraine to grow rapidly and increase its investment potential.

At the same time, Ukrainian agribusiness has some peculiarities due primarily to the initial conditions of its development. Being one of the post-Soviet countries, Ukraine at the very beginning of the formation of its independent economy faced the incompatibility of the legal system in particular, and the architecture of the agricultural economy as a whole with market relations.

For almost thirty years, the state remained the principal owner of agricultural land. Land was divided up into millions of parcels and handed over to the former participants of the Soviet agricultural enterprises (kolkhozes). Agricultural infrastructure and production assets were also parcelled out.

Historically, this situation has greatly hindered the formation of an efficient agricultural industry. But over time, and through reforms, Ukraine has developed a competitive agribusiness that has been able to leverage land resources and production assets, as well as to attract investment and enhance its own production and technological capacity.

In 2021, the process of transferring agricultural land to private ownership started. Despite significant restrictions, this process has established additional instruments of control over land assets and created new investment opportunities in Ukraine. Today, Ukraine’s agricultural business is a unique ecosystem that is one of the most profitable sectors of the economy. However, it has a number of peculiarities that need to be considered in order to do business effectively in Ukraine. This brochure reflects such peculiarities in the context of building and running an agribusiness in Ukraine.

On 24 February 2022, the russian federation invaded Ukraine, opening one of the most difficult and tragic pages of our country’s history. Martial law was introduced in Ukraine. Nevertheless, Ukraine’s agricultural sector continued to function under such difficult conditions. Considering the current situation, this brochure has been supplemented with peculiarities of wartime legal regulation.

1.1. General overview

In Ukraine, the traditional legal forms for conducting agribusiness are:

• limited liability company (LLC);
• joint stock company (JSC);
• private enterprise (PE);
• farming household (FH);
• agrarian cooperatives (AC).

LLC is the most widespread legal form for all kinds of agribusiness. It has a short term for registration, a simple management system and no limitation for participation of foreigners, number of shareholders, and size of authorized capital. Foreigners or foreign companies can own up to 100% of shares and be appointed as directors.

JSC is more common for privatized elevators, plants, and processing business. JSC has a more complicated process of registration, management, and reporting. This form is not so popular for agribusiness as LLC.

PE is an archaic form of legal entity from the early 2000s. This form is not illegal, but it is poorly regulated with contemporary Ukrainian legislation. However, lot of agricultural companies, established before and in the early 2000s are still functioning in this form. PE is available for buying, but not suitable for establishing.

FH is available only to Ukrainian citizens. FH could be established by one person or several persons, who are relatives. FH cannot be bought or invested as a legal entity with share participation.

AC is a legal entity established by agricultural producers. However, an extremely complicated management system, decision making procedures, and ownership status, as well as a huge number of members (as a rule) make this form unable to meet today’s agribusiness challenges. AC cannot be bought but can be invested through participation in it.

1.2. Agribusiness assets peculiarities

Before establishing or buying an agribusiness in Ukraine it is worth considering the following features inherent in the Ukrainian agricultural assets:

• the typical structure of a Ukrainian agricultural asset usually includes a land operator company and an elevator operator company;
• the major share of industrial real estate and infrastructure of Ukrainian agricultural companies was obtained by them in the process of privatization and division of state and collective property;
• the vast majority of agricultural companies do not own land, but use it on a lease basis;
• the vast majority of agricultural companies in Ukraine rent not large plots of land but thousands of small patches of land (from 1 to 8 hectares) from thousands of owners-individuals;
• the vast majority of agricultural companies that own agricultural production assets and land use rights, have quite a long and often improperly documented corporate history;
• different taxation regimes may apply to companies within the same production group (e.g., the simplified taxation system applies to the land operator company, and the general taxation system applies to the elevator operator company);
• a newly established agricultural company cannot use the preferential agricultural tax regime from the very beginning.

1.3. Choosing the way to start agribusiness

The acquisition of agricultural companies is the most effective way for foreign investors to start growing crops in Ukraine. First of all, this is due to the peculiarities of the accumulation of productive land areas.

It is also important to take into account the extremely conservative mentality of the rural population in Ukraine. Owners are unlikely to enter into a land lease agreement (even on better terms) with a new unknown company when they are already accustomed to a local farmer or a local agricultural company, personally know the heads of local farms and relatively trust them.

The next point to be considered is that a newly established agricompany cannot use the preferential agricultural tax regime from the moment of its establishing.

Starting an agricultural business from scratch can be justified when it comes to building elevators, livestock, poultry. However, in the case of growing agricultural products, it is certainly more cost-effective to acquire a basic agricultural asset – an agricultural company that already operates a land bank.

1.4. Buying an agricultural company

The procedure for acquiring an agricultural company in Ukraine generally has a typical M&A structure, but it is important to consider regional specifics. If they are not considered, the acquisition of agricultural companies in Ukraine can be long, costly, and quite risky.

1.5. Privatization of state-owned agricultural assets

There are generally no requirements for a special prior government approval for buying state-owned agricultural assets by foreign investors. But all such acquisition must be carried out under a special procedure – privatization.

Privatization is the most common way for acquisition of grain storages, infrastructure objects, and production assets.

1.6. Agro peculiarities of anti- monopoly regulation

The issues of compliance of agricultural assets transactions to the Ukrainian antimonopoly legislation have certain peculiarities. Usually, when it comes to small groups of companies that do not have a significant market share, such issues may be given insufficient attention. Still, it should be borne in mind that even small agricultural companies in the market sense can have a significant asset value and sales volumes. This is primarily due to the specifics of agricultural business in general – large volumes of sales of agricultural products in Ukraine.

Moreover, many of such companies have on their balance sheet a great number of illiquid or even non-existent property obtained in the process of division or privatization (currents, open granaries, silos, social facilities, old equipment, etc.). The companies whose real value as a business is low, may have sufficient assets value and sales volume to trigger the requirements for obtaining a permit from the Antimonopoly Committee of Ukraine (AMCU) at the time of their acquisition by the owner of the target asset.

Generally, mergers and equity/share purchases that would give a company a controlling interest in a Ukrainian company (including agricultural companies) are subject to merger control by the AMCU.

1.7. Establishing a new agricultural company

If you are to start an agribusiness, not involving land use (grain storage, logistics, consulting, production), you can establish a new agricultural company. An LLC is the most popular, flexible, and suitable legal vehicle for conducting agribusiness in Ukraine.

The main peculiarity of establishing an LLC for agribusiness purposes is the list of specific agricultural activities in its charter. Besides, it is important to take into account, that the preferential agricultural tax regime will be available for a new agricultural LLC from the next year after its registration. Before applying for the 4th Group of single tax payers, a newly established LLC must have a share of at least 75% in agricultural commodity production in the previous period.

1.8. Martial law peculiarities

From 24 February 2022, registration activities with respect to legal entities are partially restricted (it remains possible to create charitable organizations and public formations and change the data on them, to appoint a new chief of the company if the previous one died, to change the company location, etc.). There is also a moratorium on registration activities in some regions of Ukraine where there is an active combat zone.

State registration is carried out regardless of the location of a legal entity.

The registration procedure remains to be subject to the provision of documents on an ultimate beneficiary if it is associated with the russian federation.

Joint-stock companies which are unable to hold general meetings may hold them remotely or within 90 days after the end of martial law. At the same time, if the powers of the joint stock company’s governing bodies are terminated during martial law, such powers are deemed to be extended until the date of termination of martial law.

During martial law, the Antimonopoly Committee of Ukraine has suspended a number of actions, in particular,

• processing of applications for breach of legislation on protection of economic competition and against unfair competition;
• consideration of applications and cases on granting clearance for concentration and concerted actions (regardless of their stage of processing), as well as applications for preliminary conclusions as to the necessity to obtain such clearance;
• progress of deadlines for the delivery of information on requests and other inquiries of the AMCU’s authorized state officials.

Meanwhile, this does not exempt concentration participants from the obligation to submit applications for approval of concentrations.

2. More information

You can find more information about doing agricultural business in Ukraine, e.g.

• taxation and financing of agribusiness
• foreign investment regulation
• acquiring and holding agricultural land
• labour relations
• force majeure in agreements during the war

in the following document: