The Real Estate Law Review: Ukraine
Introduction to the legal framework
i Ownership of real estate
Foreign and Ukrainian investors frequently acquire and own real estate in Ukraine. Unlike in the case of contractual lease, which is also frequently used for structuring investments for the terms of up to 50 years, an owner exercises full range of powers, not only to possess and use but also to dispose of the property.
Some historical forms of possessing and using the property still occur in practice, such as the titles of permanent use, full commercial possession and operational management. They are designated for public entities, but also sometimes happen with already privatised entities. Those should be distinguished from ownership. Because the holders of these titles formally lack the right to dispose of a property and sometimes to lease it out, or need to follow a specific procedure for that, including the target property being held under such a title into an investment structure typically requires additional considerations.
Ukrainian laws differentiate land and other immovable property, which is located on land, such as buildings, premises, apartments and residential houses. Ownership title to land typically exists independently from the ownership title to the immovable property located on it. If the owners are different, they have mutual obligations, some of which arise from law, but can be clearly determined only through an agreement. The purchaser of the real estate usually receives the same title to the land that the former owner had; with the latest developments in law, little effort is now required for formalising that title and its registration.
Ownership of land does not include by itself any rights to the subsoils, which could usually be of interest to the investors.
Apart of private ownership of private individuals and legal entities, the state authorities and the municipal authorities exercise powers respectively over the state-owned property and the property belonging to territorial communities. Ukraine is also taking measures to liquidate remnants of a collective type of ownership, which historically was construed as being exercised by the labour collectives of enterprises and still occurs in practice.
Ukrainian legal entities and private individuals may freely own real estate in Ukraine. Foreign private individuals and legal entities may own real estate in Ukraine with some limitations, for example, the ownership of agricultural land plots.
Two or more individuals or entities may jointly own the same real estate simultaneously. The shares of the co-owners in the real estate may be determined by a proportion in the total area of the real estate. The co-owners may agree on determining their shares in the property to become sole owners of different parts of the real estate if the parts can practically constitute valid real estate.
When a private individual is involved, while the private property is registered to that individual, it might be in joint ownership with the current or former spouse, so that disposing of the property requires spousal consent. This ownership occurs as a result of the marital status, and no shares are predetermined.
As a special case of joint ownership, the owners of residential apartments and non-residential premises in a multi-apartment residential building co-own all common areas, structural elements and networks of the building. Such owners establish unions or hire a professional organisation to manage that property.
ii System of registration
According to Ukrainian legislation, the ownership right to real estate arises and is valid only after its state registration in the State Register of Property Rights to Real Estate (the Rights Register), which is operated electronically. A title to a real estate is confirmed by existence of its record in the Rights Register. An extract from the Rights Register can be obtained electronically through an online service of the Ministry of Justice. While anyone can obtain an extract on any real estate, authorities that might require this information have special access. All documents that form the basis for the registration are scanned and can be inspected by the authorities in the event of an investigation, even though they are not publicly available. The public availability of the information in the Rights Register promotes transparency and protects against fraud and corruption.
The registration of real estate ownership in the Rights Register may be performed by a state or private notary or a state registrar employed and provided by the state or municipal authority. The registration fee varies according to the time for registration that the applicant requests, which can be from two hours to five business days.
The titles that were formalised before 2013, when the Rights Register was introduced, and did not undergo any transactions later may still be missing from the Rights Register. These titles are recognised if they were registered under the laws that regulated their registration at that time. The title holder can register them with the Rights Register on request or the notary will register them with the Rights Register when notarising any agreement with respect to such real estate.
iii Choice of law
The rights to real estate in Ukraine are subject to Ukrainian laws. This concerns the scope of the ownership or other title, as well as the procedure for registration of that title. The parties sign contracts with respect to real property in front of a notary in Ukraine who usually also ensures the state registration of title to it. This implies that the contract must be governed by the laws of Ukraine. If the parties have arrangements governed by foreign laws, those are commonly put in a different agreement. To secure performance of these arrangements, a separate agreement to mortgage the property can be made under Ukrainian laws.
Overview of real estate activity
The real estate market in Ukraine is active with both national and foreign investors.
According to the State Statistics Service of Ukraine, the total area of residential buildings at the beginning of their construction for the period from January to June 2021 is 4,449,686m², where 4,289,538m² are two- and multiple-dwelling buildings, 157,700m² are one-dwelling buildings, and 2,448m² are residences for communities.2 The total area of non-residential buildings at the beginning of their construction for the same period is 2,133,928m², where significant shares are represented by industrial buildings and warehouses, wholesale and retail trade buildings, offices, real estate for public entertainment, education, hospital or institutional care buildings, hotels, and traffic and communication buildings.3
According to the official reports of the Ministry of Justice of Ukraine,4 in the third quarter of 2021, there were 79,019 agreements involving land and 141,651 agreements involving other real estate.
According to the Ministry of Agrarian Policy and Food of Ukraine,5 56,964 agreements on sale and purchase of agricultural land plots were made by 2 December 2021 since the end of the moratorium on land trade and the start of the land market in Ukraine on 1 July 2021. The aggregate area of the sold agricultural land amounted to 143,880.6456 hectares. The aggregate amount of the prices of the deals was 2,512,553,691 hryvnias.
A significant feature of the market is the presence of state-owned real estate, which is available either for lease or for privatisation through the State Property Fund of Ukraine.
According to the Ministry for Development of Economy, Trade and Agriculture of Ukraine,6 at the beginning of the 2021, there were 192 ongoing contracts under public-private partnership schemes in their broad understanding, including 39 in operation: 29 concession agreements, six joint venture agreements, and four of other types.
The government embarked on major repair and new construction of roads comprising pan-European transport corridors passing through Ukraine and connecting seaports. New legislation was earlier adopted7 to allow and enable toll roads to be constructed under the concession in Ukraine, and Parliament also proposes further amendments.
Overseas investors may acquire ownership rights to non-agricultural land plots within settlements, as well as non-agricultural land plots outside settlements underlying the real estate objects privately owned by them.
Agricultural lands in Ukraine may belong to foreigners only on the right of lease. Foreigners and foreign legal entities are prohibited to acquire agricultural land in Ukraine. In the event of inheritance of agricultural lands by a foreigner, the foreigner is obliged to dispose of the ownership right to the agricultural land within one year.
The land that is designated for individual or collective gardening may belong to foreigners only on the right of lease.
There are no restrictions that apply to the lease of the land plots, or the ownership or lease of buildings and facilities by foreigners and foreign legal entities.
Structuring the investment
An investment can be structured in a variety of ways, which usually involves either establishing or acquiring a company in Ukraine. While the direct ownership of real estate by foreign individuals is not forbidden, it tends to be less favourable with respect to taxation of proceeds from that real estate or its operation. Limited liability company is the most universal and popular choice of legal form for a company. Some investors who command considerable investments may incorporate an investment venture fund, which is subject to securities market regulations and which profits are generally excluded from corporate profit taxation.
When acquiring existing real estate, traditional options are available of either purchasing the real estate directly from the existing owner or by acquiring shares in its holding company.
The most common way to acquire the real estate directly from the owner is executing the sale and purchase agreement. According to Ukrainian legislation, the sale and purchase agreement of real estate shall be concluded in writing and notarised. For sale and purchase, the valuation of real estate by a certified professional appraiser is performed for determination of the market value of real estate and the correct calculation of the stamp duty amount. It is mandatory for purchasing from individuals. It is optional if the parties are legal entities, but it is still often ordered in practice. The appraiser registers its report in the special database where the tax authorities have access and may compare the prices for similar property.
Instead of purchasing the real estate directly from a company, the shares in this company can be acquired. This usually involves some presale preparation of the company to remove the assets and relocate activities, in which the purchaser is not interested. The company may carry some risks associated with its former activities. In any case, a legal due diligence is recommended for assessment of legal risks whether the company or the real estate is being acquired.
The Law of Ukraine on Investment Activity contains provisions intended to restrict investment mechanisms in residential construction to prevent shifting entrepreneurial risks of construction projects onto the consumers. Investment and financing of residential construction, with the use of private funds attracted from individuals and legal entities, may be carried out exclusively through construction financing funds, real estate operation funds, mutual investment institutions, as well as by issuing special purpose corporate bonds, the fulfilment of obligations under which is carried out by transferring the target property or the part of the target property of residential construction.
Investment in property rights to real estate is also a common market option to structure acquisition of real estate under construction. When acquired from the developer, the investor receives the rights to register ownership title to the real estate once it is commissioned into operation. At the moment, this right is not registered, which may lead to collisions in practice.
Real estate ownership
Territorial planning is carried out at the state, regional and local levels by the relevant executive bodies and local governments. The instrument of state regulation of territorial planning is town planning documentation on paper and electronic media, which is divided into documentation of state, regional and local levels.
Territorial planning at the local level is carried out by developing and approving general plans of settlements, zoning plans and detailed plans of the territory.
The general plan of the settlement is the main type of town planning documentation at the local level and determines the basic decisions of development, planning, building and other use of the territory of the settlement.
The zoning plan (zoning) is developed based on and as a part of the general plan of the settlement or the comprehensive plan for the spatial development. It determines the conditions and restrictions of land use for urban needs within certain zones, and establishes functional purpose and requirements for building and landscaping.
The detailed plan of the territory specifies the provisions of the general plan of the settlement and determines the planning organisation and development of the territory. For settlements with a population of up to 50,000 people, general plans can be combined with detailed plans of the entire territory of these settlements. As part of the detailed plan of the territory, a land management project is also being developed.
The zoning plan of the territory and the detailed plan of the territory as secondary in relation to the general plan type of town planning documentation are not subject to examination.
Change of the intended use of the land plot that does not correspond to the zoning plan of the territory or the detailed plan of the territory is prohibited.
The contamination of land plots is considered as a violation of land legislation. For the violation of land legislation, private individuals and legal entities are subject to civil, administrative and criminal liability.
Administrative liability is the most common type of legal liability for land offences. Contamination of land plot may lead to the imposition of administrative fines to the equivalent of 340 hryvnias up to 1,360 hryvnias.
Civil liability consists in the obligation to reimburse for the damage caused by the private individual or legal entity that results from the contamination of land plots.
Criminal liability is the most severe type of legal liability for land offences. Contamination of land plots may result in a fine in the amount of 17,000 hryvnias up to 68,000 hryvnias or deprivation of the right to hold certain positions or engage in certain activities for up to three years.
If the contamination caused the death of people, their mass illness or other serious consequences, the guilty person shall be punished by imprisonment for a term of two to five years.
Ukrainian legislation distinguishes between real estate tax and land tax.
Real estate tax
Real estate taxpayers are private individuals and legal entities, including non-residents who own residential or non-residential real estate. The main factor that will determine whether a person is a payer of real estate tax is the fact of ownership of real estate, namely buildings. The ownership right to real estate shall be duly registered in the Rights Register. For the leased real estate, the taxpayer is the owner. For the unfinished construction projects the real estate tax shall not be paid. If the residential or non-residential real estate is in shared ownership, the real estate tax shall be paid by each owner proportionally. If the residential or non-residential real estate is in joint ownership, the real estate tax shall be paid by one of the owners, who shall be determined by the consent of all owners.
The object of taxation is the residential and non-residential real estate, including its share.
Legal entities shall calculate the real estate tax independently as of 1 January each year. The calculation shall be made one year in advance, starting from 1 January and ending on 31 December of the same year.
The tax rate is set by the decision of the local municipality depending on the location (zoning) and types of such real estate. The maximum rate of real estate tax is 1.5 per cent of the minimum wage established by law on 1 January of the reporting tax year per 1 square metre of tax base. In 2021, the minimum wage constituted of 6,500 hryvnias. Thus, the maximum tax rate in 2021 did not exceed 97.50 hryvnias per square metre.
Land tax shall be paid by owners of land plots (shares) and permanent land users. Objects of the land tax are as follows:
- land plots that are owned or used; and
- land shares that are owned.
The local governments independently set the land tax rates that shall be paid in the relevant territory.
The annual tax rate for land plots, for which a normative monetary valuation is available, shall not exceed:
- 3 per cent of their normative monetary valuation;
- for public lands – 1 per cent of their normative monetary valuation;
- for agricultural lands – 1 per cent but not less than 0.3 per cent of their normative monetary valuation;
- for forest lands – 0.1 per cent of their normative monetary valuation; and
- for land plots in permanent use of private legal entities – 12 per cent of their normative monetary valuation.
Annual land tax rates for land plots, for which a normative monetary valuation is not available, are set:
- for all land plots – up to 5 per cent of the normative monetary valuation of a unit of arable land area in the relevant region;
- for agricultural lands – between 0.3 per cent and 5 per cent of the normative monetary valuation of a unit of arable land area; and
- for forest lands – up to 0.1 per cent of the normative monetary valuation of a unit of arable land area.
iv Finance and security
Any person may finance the acquisition of real estate in Ukraine and become an investor. Investors can be both private individuals and legal entities. Financing of real estate can be carried out also by banks. Usually, financing is done through a loan.
As a general rule, investors intend to provide a loan when there is a high probability of its repayment with the appropriate interest. The loan security may be introduced by the real estate mortgage.
Mortgage is a type of security for real estate, which remains in the possession and use of the mortgagor, according to which the mortgagee has the right in the event of default by the debtor secured by the mortgage obligation to obtain satisfaction of claims at the expense of the mortgage prior to other creditors.
The mortgage may be established over real estate, land plots, unfinished construction, property rights to it and the right to lease or use real estate, which gives the tenant or user the right to build, own and dispose of real estate. The mortgage may be established over the part of a real estate only after its allocation in kind and registration of ownership right to it as to a separate real estate item.
The mortgage is established by the mortgage agreement. The mortgage agreement shall be executed in writing and notarised. Ukrainian legislation provides for the possibility of transferring the subject of the mortgage to the next mortgage but with the consent of the previous mortgagee. The previous mortgage has a higher priority over subsequent mortgages.
Leases of business premises
Commercial premises may be leased based on a lease agreement. The material conditions of the commercial premises lease agreement are as follows:
- object of lease, which should include composition and value of the property, taking into account its indexation;
- term of the lease agreement;
- rent taking into account its indexation;
- procedure for using depreciation deductions;
- restoration of the leased property; and
- conditions of its return or redemption.
If any material condition is missing, the lease agreement shall be considered as not concluded, which may be the ground for eviction of the tenant, creating obstacles for the tenants in accessing the property and issues with regulatory authorities. The other conditions may be included in the lease agreement by agreement of the parties.
The commercial premises lease agreement shall be executed in writing. Leases agreement may be concluded for a short-term period (up to three years) and a long-term period (three years and more). Long-term lease agreements require notarisation, and the lease right is subject to state registration in the Rights Register.
The leased property shall be described in the lease agreement accurately and completely in accordance with the title documents in order to prevent further disputes.
The fact of transfer of commercial premises into lease is certified by the transfer and acceptance protocol. It also indicates the property condition at the time of transfer to the tenant.
A material condition of a lease agreement is the specified amount of rent. If the amount of rent is not set out in the lease agreement of commercial premises, the agreement is considered as not concluded. The rent rate may be changed within the period specified in the lease agreement.
The commercial premises lease agreement may provide for insurance by the lessee of the leased property against the risks of accidental destruction or damage.
Termination of property lease is possible either by agreement of parties, on the grounds expressly provided in the agreement or by court decision.
Developments in practice
i Simultaneous transfer of the right to land plot and real estate
The legislator further eliminated gaps in regulations of registration and transfer of rights to a land plot in case of acquisition of ownership right to real estate that is located on the land plot. The changes are intended to eventually connect the rights to the land plot and the real estate located on it, which are treated as independent real estate items under the laws of Ukraine.
When acquiring and registering rights to a land plot, it is mandatory to also transfer rights to the real estate located on the land plot. Similarly, when acquiring and registering rights to a real estate other than land, it is mandatory to obtain and register rights to the underlying land plot. These requirements do not apply to the purchase and sale of apartments in residential complexes, or to state-owned or municipal land plots.
ii Zoning of lands within the united territorial communities and dissemination of comprehensive plans for spatial development of communities
The legislator has started merging the databases of town planning and land cadastres. The intention is to stop developing similar town planning and land management documentation for different purposes. The comprehensive plan for spatial development is introduced as a new type of documentation to replace them by giving the town-planning documentation the status of land management documentation.
The comprehensive plan for the spatial development of the community is simultaneously town planning documentation at the local level and land management documentation. It determines planning organisation, functional purpose of the territory, basic principles and directions of formation of a unified system of public services, road network, utility and transport infrastructure, land development and landscaping, civil protection of the territory and population from hazardous natural and industrial processes, protection of land and of other environmental components, formation of ecological network, protection and preservation of cultural heritage and of traditional nature of habitat in settlements, as well as a sequence of implementation of decisions, including stages of development of the territory.
The formation of land plots must be carried out in compliance with approved complex plans of spatial development of the territory of territorial communities.
iii New procedure for changing the intended use of the land plot
The landowners will be able to change the intended use of land plots at their own discretion without obtaining decisions of relevant state or municipal authorities or developing land management documentation. That will be possible where the new intended use of the land plot corresponds to the type of functional use of the territory under the comprehensive plan for the spatial development or the general plan of territory.
The functional zones are defined in the town planning documentation, but the information on those functional zones will be entered and made available with the State Land Cadastre. When this information is not available with the State Land Cadastre, it is still possible to obtain an extract from the town planning documentation to confirm the functional zone. As long as the new intended use of the land plot is allowed for the functional zone where the land plot is located, it will be possible to change the intended use of the land plot without developing land management documentation.
iv Opening of the agricultural land market in Ukraine
In 2020, the Ukraine parliament adopted a law that lifts the long-standing moratorium on agricultural land trade in Ukraine. This law came into effect on 1 July 2021. From that date, the agricultural land market is open in Ukraine. However, the opening is gradual and introduces additional limitations on who can own the agricultural land and the number of owners.
The agricultural land plots can be acquired only by:
- citizens of Ukraine, territorial communities, and the state of Ukraine – since 1 July 2021; and
- legal entities, of which participants or shareholders are exclusively the aforementioned actors – from 1 January 2024.
Legal entities, foreigners and stateless persons are not allowed to acquire participation interest or shares in Ukrainian legal entities owning agricultural land. The law explicitly indicates that a nationwide referendum may allow such transactions. However, to date, no such referendum has been initiated. Meanwhile, this practically prevents making new holding structures with companies owning agricultural land in Ukraine.
Subject to some exceptions, an individual or a legal entity is not allowed to own more the 10,000 hectares of agricultural land. When an individual owns shares in a company that owns agricultural land, a part of that land, which is calculated in proportion to the amount of the shares of the individual in the company, counts against such shareholder's quota. Furthermore, a legal entity is not allowed to acquire land if it may put its shareholders or participants over their quotas.
Meanwhile, the necessary mechanisms are being introduced to allow notaries to check that the parties of a deal comply with the restrictions prescribed by the law with respect to owning agricultural land or owning participation interest or shares in the companies that own agricultural land.
v Electronic land auctions
The legislator introduced a fundamentally new procedure for selling and leasing state-owned or municipal land plots, which requires offering such land plots through electronic auctions in the electronic trading system.
Land auctions must be held in a unified electronic trading system in the form of an electronic auction in real time on the internet. As a result of such auction, a sale and purchase, lease, superficies or emphyteusis agreement is executed for the winner of the land auction (i.e., the person who offered the highest price). The area of a land plot that may be offered at an electronic auction may not exceed 20 hectares.
vi Minimum tax liability
A new notion was introduced with the Ukrainian tax legislation: the minimum tax liability. In relation to land tax, minimum tax liability means the minimum amount of tax that must be paid for agricultural land.
The minimum tax liability is calculated according to the following formula: the normative monetary valuation of the land plot multiplied by a factor of 0.05, multiplied by the number of months of land ownership, and divided by 12. If the normative monetary valuation was not performed, the regional averages are determined and taken for calculation instead. The minimum tax liability is not imposed for land plots with the intended use for gardening, for land plots of summer houses and gardening cooperatives, as well as for agricultural lands located within the boundaries of settlements.
The minimum tax liability will not apply to landowners who rent out their land plots.
vii Changes to sale's taxation
The legislator amended taxation of proceeds from the selling of real estate and agricultural land by individuals to take into consideration the investment activities in real estate and agricultural land.
Typically, the individual's income from selling a residential or similar real estate is free from taxation in Ukraine if it is the first sale of real estate in the current year and it was owned by the seller for at least three years. In other cases, 5 per cent income tax used to apply. The latter will still be true for the second sale of residential or similar real estate during a year or for the first sale of other real estate during a year. For other cases, starting with the third sale of residential real estate or the second sale of non-residential real estate during the year, the tax at a rate of 18 per cent of net income will apply. To determine the net income, the seller will be able to declare expenses incurred for acquisition or construction of the real estate. This rate does not apply to the sale of inherited real estate, probably because it is not associated with investment activity, and it is not possible to declare expenses for it.
While the above summarises the changes, the law elaborates in more detail what real estate is considered residential or similar for those taxation purposes, including agricultural land directly received by the taxpayer in the process of:
- the privatisation of land of state collective agricultural enterprises;
- the privatisation of land that was used by such a taxpayer; or
- the allocation to the owner of a land share; and
- the inheritance of such land plots by the taxpayer.
When the income tax is paid, the military contribution tax also applies as usual at the rate of 1.5 per cent.
viii Lease of land with a water body located on it
From June 2021, all lease agreements of water bodies must be concluded in accordance with the new standard lease agreement approved by the legislator. The water bodies lease agreements concluded in accordance with the previous standard water bodies lease agreements will remain valid until the expiration of their validity.
Outlook and conclusions
Ukraine is not standing still. Given all that is described in this chapter, Ukraine is taking determined steps to simplify the regulation of numerous procedures concerning construction and land. Thus, the town planning and land management documentation will be combined and a new type of documentation will be introduced instead – a comprehensive plan for spatial development. It is expected to simplify, among other things, the procedure for changing the intended use of the land plot while being free from the Soviet principles of determining the categories of land by their planned intended use and further determining the intended use of the land plot within such categories. This change is discussed in more detail above.
The legislator has elaborated on regulations for the taxation of investors in land and real estate while devising mechanisms to prevent the burdening of common owners and users. This includes introduction of the minimum tax liability, which is the minimum amount of land tax that must be paid for agricultural land, as well as changes to the taxation of individuals' income from frequent selling of real estate, introducing taxation at a rate of 18 per cent of the net income.
Ukraine is keeping up with the times and implementing electronic auctions. It is no longer necessary to be physically present at land auctions; information about land auctions will be publicly available, and they will be held in competition and will be available to a wider audience of potential participants. Now, everyone who has access to the internet is expected to be able to bid in e-auctions. The auctions will take place through a special platform at Prozorro. The Ministry of Economy of Ukraine is responsible for the functioning of the electronic trading system.
Finally, notably, in 2021, as planned, the land market in Ukraine was started. This means that the long-lasting moratorium on land trade, which had existed for decades, was lifted. The opening of the land market in Ukraine is gradual. Currently, the sale of agricultural land plots to citizens of Ukraine is allowed and, from 2024, it will also be allowed for Ukrainian legal entities.
1 Alexander Borodkin is a partner, Roman Riabenko is a senior associate and Mariia Novyk is an associate at Vasil Kisil & Partners.
7 The Law of Ukraine “On Sources of Financing of Road Infrastructure of Ukraine” No. 1562-XII dated 18 September 1991 and the Law of Ukraine “On Concession” No. 155-IX dated 3 October 2019.