Wolf Theiss Guide to Diversification of Ukrainian Businesses

The war in Ukraine, in addition to untold humanitarian costs, has caused immense damage to Ukrainian
businesses and entrepreneurs. Both Ukrainian domestic and international businesses have been affected.
These businesses have been considering various measures aimed at (i) securing the continuation of their
operations, (ii) continuing transactions with their counterparties in Ukraine and abroad, (iii) supporting their
employees and (iv) ensuring that business can generally move forward as much as is possible.

Among the measures available to achieve these goals is the relocation in whole or in part of the operations or production. In some cases, it is possible to relocate the entire business process. For instance, this may be feasible for IT and tech-oriented businesses. In other cases, companies can consider a partial relocation of their business processes. The latter may be relevant for businesses which have their production facilities or raw materials in Ukraine, and which production facilities and raw materials, from the business point of view, makes sense to continue using in business processes.

Furthermore, in some cases, diversification may be something that businesses must implement to maintain relations with counterparties. Unfortunately, in some cases foreign companies are reluctant to transact with Ukrainian businesses, as the former are concerned that Ukrainian businesses, subject to the war-time pressures and limitations, may not be able to fulfil their contractual obligations. The diversification of business, production or logistic operations can increase the chances for Ukrainian businesses to give their foreign counterparties reasonable comfort that, despite the war, Ukrainian businesses will be able to deliver on their commercial commitments.

This guide addresses the most common issues that Ukraine-based businesses need to address when structuring and implementing their diversification.

1. Critical topics for Ukrainian businesses considering diversification

Businesses based in Ukraine wishing to diversify their operations need to take into consideration and analyse many aspects of their future activities in a foreign country as well as purely Ukrainian matters.

In particular, the following should be considered:

(i) The company

Partial relocation

As noted above, business diversification may envisage the relocation abroad of the operations in whole or in part. If the option of partial relocation is chosen, the relevant Ukrainian entity(-ies) would continue operations, although on a limited scale.

Under this scenario, from the legal perspective, the activities of the Ukrainian entity would not undergo any significant changes, save for those required to accommodate the smaller scale of operations or to consider the relocation within Ukraine. The Ukrainian company would still have to comply with applicable obligations concerning, among other things, tax payment and reporting, payment of salaries and performance of obligations with respect to counterparties.

In this context, the Ukrainian Chamber of Commerce and Industry (“UCCI”) in its letter No. 2024/02.0-7.1 dated 28 February 2022 confirmed that the military aggression of the Russian Federation against Ukraine, which was a reason for declaring martial law in Ukraine on 24 February 2022, shall be considered a force majeure event under Ukrainian law. Thus, if a Ukrainian company is unable to perform its contractual obligations, it may use the template letter prepared by UCCI to notify its counterparties of the occurrence of the force majeure event that should excuse any non-performance of contractual obligation by the notifying entity for the duration of martial law in Ukraine.

As to premises leases (especially if the leased property is located in an area of the active military conflict), it may be advisable that before invoking the force majeure mechanism, the parties first try to negotiate rent and service payment reductions. Currently, due to martial law, landlords are willing to reduce the rent by up to 100% while keeping the operational expenses and utilities payable. Thus, a supplemental agreement stipulating special payment provisions for the period of martial law might be an option that would provide comfort to both parties.

As to tax payment and reporting obligations, for the duration of martial law Ukrainian companies may not be held liable for the failure to pay relevant taxes, file tax reports or perform necessary tax registrations. Any outstanding obligations, however, should be performed in full no later than three months after martial law is lifted.

When planning activities of the Ukrainian company, it should also be considered that access to various Ukrainian state registers may be limited for the duration of martial law.

Additionally, various limitations have been placed on activities of notaries, although some of these limitations have been lifted. As the legal framework in this field is constantly changing, we recommend checking for any recent changes before any transaction or action is planned.

Full relocation

The situation would be different if the Ukrainian business in question would be fully (to the extent possible) relocated to a foreign country, including all of its employees, assets, business contracts, etc. In this case, the activities of the Ukrainian entity(-ies) would be discontinued, while the entity itself would turn into an inactive company that the founders would most likely consider disposing of.

There is currently no clarity whether any special procedures will be set up for rehabilitating or liquidating Ukrainian companies affected by the war if such companies are no longer able to perform business operations and turn into inactive companies. Given that, the standard Ukrainian law provisions and options on winding down of company operations should be currently applicable, namely: reorganisation (merger, consolidation, spin-off, conversion) and liquidation.

While reorganisation assumes that some of the rights and obligations of the original company will survive and may be carried over to the legal successor, the liquidation option would work to satisfy the need to shut down the operations of the company entirely and extinguish its rights and obligations.

The voluntary liquidation (i.e. not a court-ordered liquidation) of a Ukrainian company is a rather complicated and time-consuming procedure and includes the following stages:

1. Adopting a decision on company liquidation and appointment of a liquidator/liquidation commission, which will manage the company’s activity and finances throughout the liquidation procedure.
2. Notifying the state registrar on liquidation of the company within three days of adopting the decision. The state registrar should make the relevant record in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations (the “Company Register”).
3. Notifying the creditors of the company about the liquidation. The term for filing outstanding claims against the company should be from two (2) to six (6) months as of the day of making public the announcement on liquidation of the company. Each of the creditors’ claims should be considered by the liquidator (or liquidation commission) and the relevant decision with respect to the claim should be adopted, which should be notified to the creditor within 30 days.
4. Notifying all debtors of the company about the liquidation and taking all measures in order to recover all outstanding obligations owed to the company (including through filing court claims).
5. Taking stock of all assets of the company.
6. Final settlements with creditors, contractual counterparties, tax authorities, etc.
7. Closing down the company’s activity, i.e., termination of labour relations with employees, termination of lease agreements (except for the legal address), telecommunication services agreements and other agreements with counterparties, etc.
8. Preparing and filing accounting documentation of the company for inspections by the tax authorities, the Pensions Fund and the Social Security Fund; preparing the liquidation balance sheet.
9. Preparation and filing an application to the customs office for cancellation of accreditation and absence of property in temporary import mode (if applicable).
10. Closing bank accounts of the company, except the account used for settlements with the creditors.
11. Transfer of the remaining assets of the company to the shareholders.
12. Disposal of the corporate stamp and licenses/official approvals to be returned to the state authorities.
13. Filing of the company documentation with an archive.
14. Filing an application and documents with the state registrar in order to register the liquidation of the company

If the company lacks assets to satisfy claims of all its creditors, a court-administered bankruptcy procedure may be initiated at the request of either the creditor or the company under liquidation.

Importantly, due to the current martial law declared in Ukraine on 24 February 2022, active military conflict in certain areas of Ukraine as well as frequent legislative changes and limited operation of the Company Register, some or many of the above liquidation steps may not be implemented easily or at all. This may largely delay the liquidations process in practice. It is therefore recommended to conduct a thorough analysis of circumstances of each company to be liquidated to assess whether the liquidation is feasible and whether the liquidation procedure may be implemented.

Since the liquidation procedure under Ukrainian law is quite cumbersome and time-consuming, the shareholders and management of Ukrainian companies may consider keeping the companies as dormant (sleeping companies), which can be reactivated once it is possible to do so. While in such case the companies would still need to maintain their accounting and tax reporting, if the companies are not active, the amount of these reporting will be minimal.

(ii) Personnel

Certain personnel (e.g. the majority of men 18-60 years old) cannot be relocated outside of Ukraine. Military mobilisation regulations together with the clarifications of the State Border Services of Ukraine should be considered in this regard. For such categories of employees, the relocation to safer regions of Ukraine (i.e. regions without active combat activities) may be an option.

For employees who may be relocated abroad, we would also recommend continuing employment with their Ukrainian companies (if possible); this way, the employment-related payments can be made abroad from Ukraine without limitations to the Ukrainian employees. At the same time, tax advice may be required in this regard. For both categories of employees (in and out of Ukraine) the remote work regime, as available and regulated under the Ukrainian labour law, may be considered.

(iii) Cross-border transfers, banking products and benefits

The flow of funds is crucial for continuing business operations. Therefore, the currency-control restrictions introduced by the National Bank of Ukraine (the “NBU“) to prevent the capital outflow should be taken into account upon taking a decision on business diversification. Currently, only cross-border transfers and currency exchange transactions which are expressly listed by the NBU regulations are permitted.

Among such permitted transactions are import transactions for the purchase of critical import goods according to the list approved by the Cabinet of Ministers of Ukraine. This list is extended on a regular basis to include more goods and even services. For instance, Ukrainian residents are now allowed to pay abroad for software products, in particular for the computer programming outputs; copies of computer programmes and their components; changes, updates to the functionality of computer programmes, etc.

However, intragroup transfers such as e.g. transfers by a Ukrainian entity to its related non-Ukrainian entity (e.g. under intragroup loans or otherwise) including as a result of business relocation and setting up a new entity in any of the EU jurisdictions, would be restricted. Also restricted are payments by Ukrainian entities to bank accounts of their subcontractors (such as e.g. IT specialists engaged based on a civil-law contract basis) opened with non-Ukrainian banks.

Another factor which may impact any decision regarding diversification is the availability of financial support and similar programmes. In Ukraine, a private entrepreneur or an entity held by Ukrainian UBOs may now receive low interest rate loans (in some case a zero-rate loan) under the government programme “Affordable Loans 5-7-9%” for such purposes as investment projects, refinancing, and working capital financing.

With respect to the EU countries, in particular those that have become popular destinations for the diversification of Ukrainian businesses (such as Austria, Poland, Slovenia, and Slovakia), there are no similar financing programmes available for Ukrainian entrepreneurs and businesses. These countries are supporting Ukrainian refugees and businesses in general. For instance, Poland allowed Ukrainian citizens who are staying legally in Poland to carry out their individual business activity and register it in the Central Evidence of Business Entities. Ukrainians are also allowed to establish a partnership or an entity and register it in the National Court Register. The Polish Investment and Trade Agency S.A. (“PAIH”) has launched an assistance programme for Ukrainian entrepreneurs to support temporary business allocation for Ukrainian entrepreneurs. Within the framework of this programme, PAIH provides inter alia (i) free co-working space in the centre of Warsaw; (ii) maintains a database of immediately available logistical and production space; and (iii) provides all information necessary to quickly start business activity.

Additionally, in the above-mentioned counties, Ukrainian nationals may open bank accounts free of charge in certain banks (among others, Erste Bank, Raiffeisen Bank in Austria, Revolt Bank and SKB Bank in Slovenia; Bank PKO BP S.A., Bank PEKAO S.A. and some other in Poland). Certain Polish banks (such as Bank Pekao and Santander Bank Polska) do not charge commissions for certain transactions and provide other competitive conditions for corporate clients registered in Ukraine.

2. How to choose a country for diversification

When deciding on the country where to diversify business and operations, a number of issues should be analysed, including the requirements for the establishment of a company, registering as a sole (individual) entrepreneur, the tax regime, licensing requirements, the necessity to obtain a work permit and other relevant factors.