Practice Areas

Partner, Arzinger

Partner, Arzinger

In М&Аrch rate

Despite the significant work done by legislators in the reform of corporate law, the imperfect legal framework still acts as a brake on activities in mergers and acquisitions. According to participants of M&A transactions, Ukrainian legislation is still not aimed at protecting the rights of investors. The tax aspects, particular the peculiarities of the country’s tax system, have a significant effect on the structuring of transactions. At the same time, some standard practices used by Ukrainian business for optimization of tax burden today, will soon be ineffective

When the decision to purchase (merge) a business is made, which means that a suitable object has been found and preliminary agreements regarding the price have been reached, lawyers will have to structure the transaction in a competent way. Determining the transaction structure requires answers to a number of difficult questions: what exactly is being acquired: assets or shares (stocks) of a company, what applicable law to use, what tax risks exist and how to avoid them, which foreign jurisdiction to choose, etc.



When structuring complex transactions, English law is often used as it’s more developed and flexible in comparison with Ukrainian law. The main arguments in favor of English law are legal protection efficiency, its world practice use in M&A transactions and minimization of risks connected with imperfection and instability of the Ukrainian legal system. Because of these factors investors prefer foreign law and, as a result, a foreign jurisdiction for structuring transactions. For the majority of Ukrainian lawyers, the question of choosing the law when drawing up sale and purchase agreements, shareholders agreements, letters of intent, which are used in structuring M&A transactions, do not even arise, since in most cases English law is applied.



Neither representatives of Ukrainian business nor foreign investors use the Ukrainian legal framework as the governing law in M&A transactions. And there are a number of reasons for this. According to participants of M&A transactions, Ukrainian law is not aimed at protecting the rights of investors, does not use tools popular in other jurisdictions and the rules of law are mandatory, not allowing the parties to govern their relations independently. In addition, the unpredictability of the Ukrainian judicial system and cases of enforcement of court decisions do not add desire to investors to get related to Ukrainian law.

Representatives of the legal community and the entire country understand this very well and work to change the situation. This is why 2017 was under the sign of reforms, including in corporate law. Laws on corporate contracts, on squeeze-out and sell-out mechanisms were adopted in 2017. The business community has developed a number of draft laws (draft law No. 2764 on the debt-to-equity swap mechanism, draft law No. 5592-д on simplifying the attraction of investments by securities issuers, draft law No. 6540 on improving the investment climate), whose main objective is to attract foreign investments into Ukraine. Certain positive expectations are also associated with large-scale judicial reform in Ukraine, including with the formation of the new Supreme Court. But the most anticipated event for corporate lawyers is still adoption of the law on limited and additional liability companies, work on which is continuing in full swing.



The tax aspects, particularly the features of the country’s tax system, have a significant effect on the structuring of transactions. And if the tax rates in Ukraine are rather competitive in comparison with the rates in most European countries, the negative factors, associated with the taxation system, complicate positive decision-making by the investor. This includes the broad discretionary powers held by  the tax authorities, the prevalence of the fiscal component in tax policy, lack of uniform practice on the interpretation and use of standards of the Tax Code of Ukraine. All these factors form an additional basis for refusing to consider Ukraine as a jurisdiction for M&A.

We should also pay attention to the desire of business to optimize the tax burden during a transaction. A number of jurisdictions (including European ones) can significantly reduce the cost of taxes for participants. Moreover, the funds obtained by the seller remain on the accounts of European banks and can be used in future for investment in other countries without the need to undergo bureaucratic procedures in Ukraine connected with obtaining individual licenses, etc.

At the same time, some standard practices, used today by the Ukrainian business sector to optimize the tax burden, will soon be ineffective. This is due to the fact that the global trend of deoffshorization is coming gradually to Ukraine. The Ukrainian authorities declare their intentions, particularly about the introduction of legislation on controlled foreign companies (CFC) — a regime, when the retained earnings of foreign companies of a group are taxed by the real owner (individual beneficiary); accession to the regime of automatic exchange of financial information (AEI) with other countries in the near future has been announced. A total of 102 jurisdictions had already joined AEI as of 15 November, 2017. How will CFC and AEI affect the Ukrainian owner of a foreign business? It means, among other things:

—  an obligation to declare the companies, which the resident/citizen of Ukraine owns or actually controls;

—  an obligation to submit financial statements of such companies to the Ukrainian tax authorities;

—  an obligation to pay income taxes in Ukraine from the profit of such companies, which remains undistributed (if dividends are not paid), except for the profit of companies from high-tax jurisdictions and some specially defined cases;

—  transfer of information on funds on accounts, on other financial assets, as well as on the actual owner of the foreign companies to the Ukrainian tax authorities from foreign colleagues;

—  the lack of opportunity "to hide" behind standard multistage structures.

At the same time, our forecast is that it will be much more difficult and risky to use special structures (special-purpose vehicles), created for M&A transactions, in the near future. Today, there are a number of mechanisms provided by the legislation of European countries and double taxation avoidance agreements, which allow the consequences of transactions, carried out to optimize the tax burden (tax  avoidance) not to be taken into account. And if Ukraine introduces a number of similar rules to legislation and joins the multilateral instrument on amending the double taxation avoidance agreement, the tax authorities will receive a practical tool for disputing the tax consequences of M&A transactions taken beyond the territory of Ukraine.