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  • Free Trade Zones / Bonded Warehouse

    Since 1996, a total of 21 special economic zones (SEZ) or priority development areas (PDA) have been established, reportedly covering some 10 per cent of Ukrainian territory. The creation of free economic zones has been adopted as a method of regional industrial development.

Under the Ukrainian Law "On Special (Free) Economic Zones," adopted in 1997, there are three types of special economic zones in Ukraine: 1) special (free) economic zones; 2) territories with a special investment regime; and 3) territories of priority development. They differ by tax concessions granted to business entities that choose to operate in the zones.

The priviledges enjoyed by enterprises operating in the zones can can be summarized as follows:

- exemption from corporate profit tax, or reduced corporate tax rates, during the first three to five years of project implementation and taxation at reduced rates during subsequent periods;
- exemption from import duty and import VAT;
- reduced rates of withholding tax on income derived by non-residents and on dividends;
- exemption from mandatory conversion of revenues in foreign currency;
- exemption from social insurance tax and payments to the state innovation fund;
- exemption from land tax or taxation at reduced rates, and others.

In addition, the territories of special investment regimes and of priority development do not have independent customs borders as free economic zones do. Each zone is managed by an administration that also approves and registers all investment projects to be carried out in the zone. Normally, free economic zones are created for a period of 10 to 30 years. The Cabinet of Ministers of Ukraine approved a standard contract for implementation of investment projects in free economic zones. The contract has to be signed by the investor and the zone administration. It lists tax, customs and other benefits to be awarded to an investor, specifies phases of project implementation, investment schedules, new jobs, etc. The contract should also list predicted annual volumes of production, sales or services. The contract should state as a condition that a project must begin no later than three months after the signing of a contract. Admission into an zone is frequently limited to large investors (e.g., investors investing more than $1 million in the zone). Enterprises within zone are subject to strict regulation and supervision by both the local bodies and the central Agency on Special Economic Zones, which is part of the Ministry of Economy. Procedures on the admission of investors to and their exiting from zone as well as the powers of bodies entitled to interfere with business activities in zone remain opaque.

The future of the zones remains uncertain. They have come under heavy criticism from the International Monetary Fund, since to a significant extent, investments in these zones seem to come at the expense of investments elsewhere in the country. International observers and donors question the zones' success in mobilizing investments that would not have been made anyway in Ukraine. It is also assumed that the fiscal benefits granted to business within the zones distort competition with business outside them.

In recent years the Ukrainian government has not followed up on publicly announced intentions to reduce the number of zones in Ukraine. In early 2001 the Cabinet of Ministers authorized the Ministry of Economy to monitor the viability of the zones with the intention of closing those zones which are deemed to be ineffective in attracting investment. In April, 2001, the Ministry recommended closure of the one zone and questioned the viability three others. Shortly thereafter, however, new zones were created in the Transcarpathian region. Amid all this uncertainty, large companies are tending to remain very cautious until the GOU delivers a clear policy on the future of the free economic zones.

Ukraine has 18 ports. Located on the Black Sea, the Sea of Azov, and the rivers Danube, Yuzhniy Bug and Dnieper, they are currently under the authority of the Ministry of Transportation's Department of Sea and River Transport. All seaports are state-owned, except Sevastopol. Most river ports have been turned into open or closed joint stock companies. The Porto-Franco in Odessa had free port status.

Bonded Warehouses
As in many other countries, import--export operations may be conducted as sales through bonded warehouses. Using this system, the customer collects ordered goods by presenting a sales receipt to warehouse operators. Since such operations often involve offshore contracts, the bonded warehouse is a device frequently employed by non-resident companies that do not directly do business in Ukraine. Such bonded warehouses can be either state customs points or privately-owned warehouses for the use of one or multiple clients (open versus closed warehouses).

Most foreign investors simply lease space in existing privately bonded warehouses. Larger importers may prefer to establish their own closed and secured facility. A representative office should note, however, that the establishment of an open warehouse may be considered a commercial activity by the Ukrainian Tax Inspectorate and possibly be subject to relevant Ukrainian taxes. Common business practice in Ukraine is to utilize a "closed" bonded warehouse; opening a bonded warehouse is a very complicated affair involving the State Customs Committee, a great deal of paperwork, and possibly organized crime.

To establish a bonded warehouse as an importer, one must first obtain a license to open a warehouse from the Ukrainian Customs Committee office nearest to where the warehouse will be established. To obtain such a license, one must present the following documents to Customs officials:

- an application (the application form should be obtained from the Customs Committee) stating that the enterprise wishes to establish a specialized bonded warehouse (solely for the storage of that enterprise's goods);
- a registration card of the entity opening a warehouse;
- a schematic diagram of the warehouse premises, indicating location of alarm systems and customs areas;
- an approximate list of goods intended to be stored in the warehouse.

Upon submission of the application and supporting documents, the warehouse must be ready for operation and equipped as a bonded warehouse. All interior renovations, including alarm systems, must be completed by this time. To open a warehouse, one must pay a set fee of the Ukrainian hryvnia equivalent of $500 (at the National Bank of Ukraine's official exchange rate). Formal registration of the warehouse is normally done within 15 days after an application has been submitted. As a bonded warehouse licensee, an enterprise should also note that it will have to hire an official customs inspector on an as-needed basis to actually clear and approve shipments of goods. As a licensee, the enterprise can hire its own personnel to supervise the submission of customs declarations, but the customs official actually approves final clearance.

Special Import Provisions

Parliament amended the Cabinet of Ministers decree "On the Unified Customs Tariff of Ukraine," dated June 12, 1997, to establish that changes in rates of duties stipulated in the Unified Customs Tariff are to be made only by the Parliament. However, temporarily, "until legislative regulation of issues involving the Unified Customs Tariff of Ukraine," the Cabinet of Ministers is granted the right to change customs duty rates on goods, except excise goods and goods for which duty rates are established by Ukrainian laws. Meanwhile, lowering duty rates for separate juridical and physical persons or on separate contracts, or exempting them from payment of the duty and postponing payment deadlines, are prohibited.




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