Member Article

On 10 July 2003 the Verkhovna Rada of the Ukraine adopted the Amendment to the Land Code of the Ukraine (Amendment) Act of the Ukraine. The Amendment came into force on 31 July 2003. Under this Amendment, Article 82 of the Land Code of the Ukraine (Land Code) is amended, the very article which regulates land ownership of legal entities. The legal core of the Amendment Act of the Ukraine is that joint ventures, established with the participation of foreign citizens and foreign legal entities (Joint Ventures) can acquire right of ownership to non-agricultural land plots subject to the acquisition procedure, envisaged for foreign legal entities. Before the Amendment To comprehend the rationale of the Amendment we need to turn to the history of Article 82 of the Land Code. The problem of Article 82 of the Land Code was rooted in the definition of the term "Ukrainian legal entity". The point is that before the Amendment became valid, under Article 82 of the Land Code there were two types of legal entities qualified to own land in the Ukraine: Ukrainian legal entities and foreign legal entities, with the former specified as those established by Ukrainian citizens or Ukrainian legal entities. Thus, the definition of a Ukrainian legal entity appeared to be limited to legal entities without any foreign participation, leaving out foreign owned Ukrainian companies. Therefore, literal interpretation of Article 82 of the Land Code precluded foreign owned Ukrainian companies from owning land in the Ukraine. Interpretation and application of Article 82 of the Land Code was never totally uniform, varying from municipality to municipality, and changing over time. Three basic interpretations of Article 82 can be distinguished: 1. Liberal: foreign owned Ukrainian companies come under the definition of a Ukrainian legal entity and, as such, can buy land under the procedure envisaged for Ukrainian companies without foreign investment. 2. Literal: Ukrainian companies with foreign participation are not specified in the Land Code as entitled to own land; therefore, foreign-owned Ukrainian companies cannot buy land. 3. Balanced: although Ukrainian companies with foreign capital are not mentioned among those entitled to buy land, they still can buy land, but subject to the procedure stipulated for foreign companies. (Under this procedure, municipally owned land can be sold by municipalities to foreign companies subject to the endorsement of the Cabinet of Ministers of the Ukraine, while state-owned land can be sold by the Cabinet of Ministers of the Ukraine to foreign entities subject to the approval of the Verkhovna Rada of the Ukraine). As certain municipalities were following liberal or balanced interpretation of Article 82 of the Land Code, many foreign-owned Ukrainian companies managed to purchase land according to the normal procedure provided for Ukrainian owned companies. At the same time, regardless of the interpretation, the fact has always been that Article 82 of the Land Code contains a serious legislative defect. At the end of 2002 the State Committee of the Ukraine for Land Resources developed the draft Amendment to eliminate the defect in question. On 25 February 2003 the Cabinet of Ministers of the Ukraine submitted the draft Amendment to the Verkhovna Rada of the Ukraine. At the beginning of 2003, the State Committee of the Ukraine for Land Resources in its various official letters started to insist on literal interpretation of Article 82 of the Land Code, thus forcing the municipalities to introduce defacto a moratorium on land sales to Ukrainian companies with foreign investment until such times when the above mentioned draft Amendment is adopted by the Verkhovna Rada. The paradox of the situation was that technically, foreign-owned Ukrainian companies could not privatize land, while foreign companies could. It is unlikely that the intention of the legislator was to provide foreign companies with privileges over Ukrainian companies with foreign capital in respect of land ownership. At the same time, the fact is that many successful foreign-owned Ukrainian businesses could not privatize land relating to their commercial and industrial real estate, this affecting, among other things, their ability to raise western debt finance. After the Amendment Although the adoption of the Amendment was generally welcomed, the wording of the amended Article 82 of the Land Code still does not appear to be prefect: 1. 100% foreign owned companies Paragraph 3 of Article 82 stipulates that joint ventures, established with the participation of foreign legal entities and foreign citizens, are entitled to acquire right of ownership to nonagricultural land. Under Article 1 of the Foreign Trade Activity Act of the Ukraine of 16 April 1991, the definition of the legal term joint venture implies the combination of Ukrainian and foreign capital in the company. Therefore, the new reading of Article 82 of the Land Code, if interpreted literally, excludes subsidiary companies, i.e. 100 % foreign-owned Ukrainian companies, from those entitled to own land. If it was not the intention of the legislator to deprive 100% foreignowned companies of the right to own land, then we face a trivial legislative mistake. To rectify this, the wording joint ventures established with the participation of foreign legal entities and foreign citizens should be changed to legal entities, established by foreign legal entities or foreign citizens, or with the participation of foreign legal entities or foreign citizens. Also, the fact should be noted that there are 100 % foreign owned Ukrainian companies that have managed to purchase land plots under the procedure envisaged for Ukrainian companies with no foreign capital. If the above legislative mistake (if it is a mistake!) is not rectified in such a manner, so that 100 % foreign-owned Ukrainian companies are allowed to own land, then land ownership of such companies would turn into a legal anomaly. That being the case, such companies would, most probably, have to be reorganized into joint ventures. 2. Ukrainian companies with foreign capital that have purchased land without various licenses and documents envisaged for foreign companies. During the period between the date from which the current Land Code came into force, but before the above de-facto moratorium was introduced, many foreign-owned Ukrainian companies managed to purchase land. One of the defects of the current reading of the Amendment is that it does not specify the legal status of the land plots that have been purchased by foreign-owned Ukrainian companies based upon the procedure envisaged for Ukrainian companies with no foreign ownership (i.e. without relevant licenses). The Amendment should have stated that all land plots purchased by foreign-owned Ukrainian companies without licenses relevant to the procedure provided for foreign companies, shall be deemed as legitimately purchased. Unfortunately, the Amendment is silent on this issue, which creates a defect in the title to land plots owned by the above mentioned category of companies, because in light of the new reading of Article 82 of the Land Code such companies may be supposed to have purchased their land plots in violation of the applicable acts.

 

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