What are the main laws regulating real estate in Ukraine? What are legal restrictions on ownership of real estate by non-residents? Which parties are involved in a real estate transaction in Ukraine? These are the most frequently asked questions before investing in real estate in Ukraine.

Ukraine's real estate has seen extensive development in recent years and many investors, both locally and foreign, have benefited greatly. Real estate in Ukraine is a great investment whether you are planning on reselling, renting or business development. Here you will find most frequently asked questions and relevant ideas to reply.

What are the main laws regulating real estate in Ukraine?

Real estate relations are governed by a system of regulatory Acts pertaining to various branches of law – civil, land and town-planning:

• Civil Code of Ukraine No.435-IV, dated January 16, 2003 (“Civil Code”),
• Commercial Code of Ukraine No. 436-IV, dated January 16, 2003 (“Commercial Code”),
• Land Code of Ukraine No. 2768-III, dated October 25, 2001 (“Land Code”), and
• Act of Ukraine “On Property” No. 697-XII, dated February 7, 19 The Ukrainian real estate market is definitely worthy of consideration for international property investors seeking investment assets. Ukraine is going through a period of rapid growth, development and expansion. Its economic fortunes are flourishing and inward investment is strong. It is highly likely that well thought out and located property investments made today will reap an investor strong returns over the medium to long term. 91.

Principles and rules of international law and international treaties of Ukraine are generally recognized and form an integral part of the legal framework. Ukraine is a signatory to a number of bilateral inter-state agreements on promotion and mutual protection of foreign investments which guarantee the observance of foreign investors’ rights relating to investment in real estate objects in Ukraine.

Are there legal restrictions on ownership of real estate by non-residents?

No restrictions exist in respect of ownership of non-land real estate. The Land Code envisages certain restrictions on ownership rights of foreign entities for land plots in Ukraine.

Foreign entities are prohibited from ownership to land plots of agricultural designation. With respect to foreign ownership for non-agricultural land, the following rules apply:
1) Foreign individuals may acquire ownership title to:
(i) Land plots within settlements; and
(ii) Land plots outside settlements, on which real estate objects already owned by such individuals are located.
2) Foreign legal entities and joint ventures founded with foreign participation may acquire ownership title to:
(i) Land plots within settlements in case of a purchase of real estate/construction of real estate objects on such plots connected with business activity in Ukraine; and
(ii) Land plots outside settlements in case of a purchase of real estate objects located on such plots.

What rights over land are recognised and how are they protected? The Land Code establishes the following types of rights over land:
1) Ownership right for land comprising rights to possess, use and dispose of the land at one’s own free will (private, municipal and state); 2) Land use rights, including:
i) Right of permanent use comprising the right to possess and use land in state or municipal property (available to state and municipal owned enterprises, institutions and organisations, etc.);
ii) Right of limited use (land servitude is the right of limited chargeable or gracious use granted to a plot owner/user for a plot owned by other entity);
iii) Lease right (which is a contractual temporary right of possession and use for a plot, normally granted in exchange for consideration).

The Ukrainian Constitution guarantees ownership rights for land and the inviolability of private ownership. Guarantee of an ownership title means that an owner may not be deprived of his ownership rights other than by a court decision.

All land in Ukraine is subject to registration with the single system of the State land cadastre. All rights to land listed above are subject to mandatory state registration. Rights to land that have not been duly registered do not become effective. The coming into force of the lease right to land, being a purely contractual right, also depends on state registration of the lease agreement.

Ownership to land and real estate objects transfers to the buyer at the moment of state registration of a document evidencing the buyer’s title.

The formation of the single state registration system has not been completed in Ukraine. In absence of the unified real estate registration system, a buyer might need to consult a number of registers to verify the “purity” of title to a real estate object.

The State register of mortgages, the Single state register of real estate disposition bans and the Register of encumbrances over movable property are publicly accessible. Extracts from the mentioned registers may be obtained upon submission of a written request in the standard form to the corresponding administering authority. Information contained in the State register of lands and the Register of ownership titles to real estate is of limited access, and may be obtained only at the request of the following entities:
1) Owners (users) of land/owners of non-land real estate objects, inheritors (legal successors), persons in favour of which encumbrances were established as well as the authorised representatives thereof;
2) Courts, law enforcement agencies, prosecutor's office, state tax authorities, state enforce, notaries, security service of Ukraine and other state authorities (state officials).

What taxes are payable by the seller on the disposal of a property?

According to the Act of Ukraine On taxation of the Income of Physical Persons as of January 1, 2007, the tax rates applicable to individuals from sales of real estate (in relation to the real estate contract value) are:

Type of real estate Terms of sale 1st sale within one calendar year if the total area of real estate object does not exceed 100sqm 1st sale within one calendar year if the total area of real estate object exceeds 100sqm 2nd and the following sales within one calendar year (independent of the real estate area) Residential building, apartment, garden house 0% 1% from part of income proportionate to the excess in area over 100 sq m) 5% Other real estate 5% 5% 5%

Personal income tax is to be paid by the seller prior to notarization of the acquisition agreement.

According to the Act of Ukraine On Taxation of the Income of Physical Persons the state duty for notarization of the acquisition agreement is 1% of the contract value. The law does not specify which party to the contract is liable for the payment of the state duty.

According to the Act of Ukraine On Taxation of the Income of Physical Persons the State Pension fund levies a tax at the rate of 1% of the contract value for real estate buildings, houses, and apartments (not for the land). The buyer is liable for this tax payable prior to notarization of the acquisition agreement.

The corporate profit tax is established at the rate of 25% in accordance with the Act of Ukraine On Taxation of Profit of Enterprises dated December 28, 1994. Capital gains from the sale of Ukrainian real estate received by the company resident in Ukraine are subject to 25% corporate profit tax. Non-resident companies carrying business and receiving capital gains in Ukraine must pay 15% withholding tax on all incomes received if otherwise is not stipulated by international treaties.

Capital gains received from the sale of shares in a real estate company are subject to the same tax regime. There is no mechanism in Ukraine for taxation of capital gains arising on transactions between non-residents outside Ukraine.

The direct sale of real property by a Ukrainian legal entity or physical person – entrepreneur is subject to VAT at the rate of 20% charged on the contract value. The sale of pure land is exempt of VAT according to the Act of Ukraine On Value Added Tax of April 3, 1997.

What are the general rules governing business lease?

The Civil and Commercial Codes provide general rules relating to the lease of real estate held in private ownership. The Act on the Lease of State and Municipal Property of April 10, 1992 specifically regulates the lease of real estate held as State or Municipal Property. Moreover, rules pertaining to the lease of land plots are established by the Act on Lease of Land dated October 6, 1998.

In principle, foreign citizens and legal entities enjoy the same rights to lease real estate including land plots of state and municipal property, as Ukrainian entities.

Further, the rules and essential provisions for lease agreements (length of term, rent increases, tenant’s right to sell or sub-lease, repairs, etc.) are standard and similar to rules used in other European countries. On the market, business real estate can be leased as office, retail, warehouse or industrial premises. However, this classification has no legal implications.

Which parties are involved in a real estate transaction in Ukraine? How are they remunerated?

1) Realtors are responsible for searching for real estate that meets the requirements of potential buyers or tenants. They also assist owners in selling or leasing out their real estate. The role of realtors is either limited to merely “introducing” the contracting parties, or also pertaining to negotiations and helping the parties reach an agreement on the contractual terms and conditions. Realtors are usually remunerated for their services with a success fee that normally amounts 1% to 5% of the contract value.
2) Lawyers as a rule start working at the negotiation stage: they conduct due diligence on the real estate involved in the transaction, prepare a draft agreement, participate in negotiating its terms and conditions and, finally, prepare the text for execution and arrange the registration of a deal and/ or title conveyance with the Registry. The work of outside lawyers is usually paid in accordance with an agreement, on the basis of hourly rates or an agreed cost estimate.
3) Notaries, since notarisation of real estate purchase agreements is compulsory, make an integral part of the transactions. Notaries are liable for collecting state duties and other official duties. Their fees are settled according to an agreement.
4) Registrars are State officers who formally check the compliance of the deal subject to registration with the laws applicable, and implement registration thereof and/ or the title conveyance. Fee varies depending on the period of time for applications and usually does not exceed Euro 300.

What security is used in real estate property financing?

Lending money to finance real estate is governed by the Civil Code, in the first place. The law in general does not make a distinction between Ukrainian and foreign borrowers and lenders, or between individual persons and corporate entities, except to specific currency and tax regulations and some foreigner’s limitations. A mortgage, a pledge over other assets, suretyship, and guarantees of Ukrainian financial institutions are all common forms of security used in Ukrainian real property financings:

1) Mortgage
The mortgage is a specific type of pledge that may be created over land or buildings. A mortgage may be imposed on the basis of agreement, court decision or law. Unfinished buildings may also be mortgaged. The mortgage of a building or construction must include the mortgage of underlying land plot, otherwise it shall be deemed invalid. A mortgage may be included in the agreement establishing a principal obligation (i.e. a loan agreement) or established in a separate mortgage agreement. The mortgage agreement must be executed in writing and is subject to notarisation. It must also include the essential mandatory terms required by the law. The mortgage is subject to registration in the State Register of Mortgages. Failure to register does not invalidate the agreement.

2) Pledges
In the event a debtor does not fulfil the obligation secured by the pledge, a creditor shall have the right to satisfaction at the expense of the pledged property prior to other creditors of this debtor. The Ukrainian law considers mortgage and pawn as specific types of pledge. Mortgage shall be pledge of the real property that remains in possession of a pledgor or a third person. While, pawn (in Ukrainian - “zaklad”) shall be pledge of movable property being transferred into possession of a pledgee or by his order – into possession of a third person. Under the Ukrainian law pledges can be created under agreement, law or court decision. A pledge agreement must be concluded in writing. Notarisation is required for mortgages of immovable property. The parties may also agree to notarise other pledge agreements. Upon the parties’ decision, a pledge over movable property may be registered. The Ukrainian law recognises such types of pledges as pledge of goods in circulation, pledge of rights, pledge of shares, pledge of bank accounts, etc.

3) Suretyship
Under a surety agreement, a surety assumes liability before a creditor of another person (the primary debtor) for the performance by the primary debtor’s obligation towards the creditor in full or in part. A surety may be provided by one person or several persons. In case the primary debtor fails to perform (or performs improperly) the obligation secured by a surety agreement, the surety provider and the primary debtor shall be jointly and severally liable towards the creditor. Upon default, the creditor may require the discharge of the obligation directly from the surety provider rather than first applying for the discharge by the primary debtor. A surety agreement must be executed in writing. Generally, a surety agreement defines the scope of liability of the surety provider, otherwise, the surety provider will be liable to a creditor to the same extent as the primary debtor (including payment of interest, reimbursement of court expenses for recovery of the debt and other losses of the creditor caused).

4) Guarantee
By means of the guarantee, a bank or another financial institution (for instance, an insurance company) gives a written commitment to pay an amount in cash to the creditor according with the conditions of the guarantee given by the guarantor upon the creditor’s presentation of a written demand that such amount be paid. The guarantee is similar in some respects to a suretyship. The difference is that the guarantee can be issued only by a bank, financial institution or insurance company. Similar to the suretyship the guarantor is liable to the creditor when the debtor fails to perform his obligation.