Lawyers offer guide to Ukraine’s legislative jungle

Ukraine agriculture.JPG

Ukrainian lawyers told investors in Brussels yesterday (31 January) that they had little if any chance of doing business involving the use of land for agriculture or other activities, unless they hire a local partner to keep them “away from disappointment”. 

The lawyers didn’t shy from saying the country was “subject of legal instability and corruption”, in the presence of a diplomat from the Ukrainian mission to the EU.

But at the same time they argued that foreign investment in Ukraine, including in agriculture, remained highly profitable and was worth the effort.

In successive presentations, lawyers from the Kyiv-based Arzinger law firm guided the Brussels audience through Ukraine’s ongoing land legislation reform, which includes the creation of a state property register and rules for consolidation of small land parcels.

As foreigners are banned from owning agricultural land, investors must lease land from Ukrainian legal owners. A foreigner can buy real estate or even land only in a residential area, for the purpose of building. Outside a residential area, a foreigner can buy only existing buildings, but cannot buy land for the purpose of building.

The legal term “emphyteusis” is used to describe the “use by a third part” of agricultural land. Similarly, the term “superficius” describes the use of land by a foreigner for construction building purposes.

Ukraine's “Moratorium on Alienation of Farm Land” (see background) has been introduced in 2005 and will remain in place at least until 2016, the law firm representatives said.

There are three types of property in Ukraine – private, state owned and municipal.

State-owned land can be sold to foreigner with the approval of the Parliament, but apparently this possibility remains only theoretical. Also in theory, municipalities can sell land, although the firm representatives advised against doing so.

For purchasing agricultural land, the lawyers advised setting up a structure where the foreign company establishes a first tier subsidiary in Ukraine, in liaison with a second tier Ukrainian subsidiary who legally owns the parcel.

Ukraine is a bureaucratic country and in spite of some attempts to reform, bureaucrats at various levels don’t want to lose their power, the lawyers said.

But their main message was that investing in Ukraine requires assistance of experienced and reliable advisors and partners.

“Only a local expert can keep you away from disappointment,” one of them said.

He also argued that corruption can be avoided, “if you know how to lobby, to put pressure on authorities and not play the game of corruption.”

Ukraine has more than 60 million hectares of land, of which some 42 million is agricultural land. In comparison, France has 29 million hectares of agricultural land.

According to specialists, the price of land in Ukraine is currently €360 to 505 per hectare. In comparison, the average price of arable land per hectare in France is €4,580.

Over the last few years, 26 million hectares of arable land have been divided into seven million pieces of land and distributed to small farmers. Ukraine is unusual in that it has donated land to millions of smallholder farmers and issued them with property documents.

However, most farmers own this land only in theory, as they are unable to cultivate it. In practice they are compelled to lease it to large agricultural businesses.

Historically the “Moratorium on Alienation of Farm Land” has banned foreign investors from owning farmland in the country.  To circumnavigate this moratorium, foreign investors have had to lease small parcels of land from individual farmers under long-term lease arrangements (up to 50 years) with an option to buy out such land whenever the moratorium was lifted.

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