Ukrainian legislation provides for a number of limitations to the placement of shares of Ukrainian companies outside of Ukraine, the main ones being:
1. The shares of Ukrainian companies can only be denominated in the national currency, the nominal value of shares must be given in the certificate of shares [1];
2. The pre-emptive right of existing shareholders in the company acquiring additional shares (in the case of closed (private) placement of shares);
3. The preferential right of existing shareholders to purchase company shares of additional issue (in the case of closed (private) placement of shares) [2];
4. The circulation of securities of Ukrainian issuers outside of Ukraine requires the permission of the Securities and Stock Market State Commission (hereinafter - SSMSC); for which the Ukrainian issuer must comply with a number of requirements established by the SSMSC, many of which are practically unenforceable.
With that, the process of granting permission the SSMSC on its sole discretion determines how and in what markets and trade information systems outside of Ukraine Ukrainian equities may be placed.
The disparity between the above provisions of Ukrainian legislation and the requirements of foreign stock exchanges, as well as active SSMSC involvement in the decision to be made by the issuer regarding the conditions of placement of shares, as well as the absence of clear procedures for obtaining permission to circulate shares abroad, lead to the actual impossibility of immediate (direct) placement of shares in Ukrainian companies at foreign stock exchanges (with the existing legislative framework).
In view of these challenges there has not been one direct placement of Ukrainian company shares in foreign jurisdictions. Accordingly, the issue of selecting a jurisdiction for the IPO by Ukrainian issuers deserves a detailed consideration.
Entering the foreign stock markets can be made through the issuance of global depository receipts (in the event of the European stock markets), American Depository Receipts (when entering the U.S. stock markets), the creation of holding companies, as well as by the use of an alternative structure of the "reverse takeover" (reverse merger), which is widely used in entering the public markets of the USA.
Since the advantages and disadvantages of all of the above structures have been analysed by us in the «IPO from A to Z: An Issuer’s Guide 2010" in this article we shall consider closely the criteria and requirements for setting up a holding company for the purpose of IPO by companies, holding Ukrainian assets and conducting business in Ukraine.
Creating a holding company (the issuer of shares, de jure), which controls the Ukrainian de facto issuer of shares is a less burdensome and a less costly option for the IPO, compared to the issue of depositary receipts or the use of the reverse takeover procedures, from the point of view of the administrative process, as well as taking into account time and financial resources necessary for its implementation.
This particular structuring of the IPO is acceptable to the foreign stock exchanges, given the fact that this transaction is subject to a number of regulatory restrictions dictated by legislation of Ukraine, which can be legally circumvented by creating a foreign holding company.
In structuring the transaction of the IPO by creating a foreign holding company one should consider the following aspects:
1. The shares of Ukrainian companies can only be denominated in the national currency, the nominal value of shares must be given in the certificate of shares [1];
2. The pre-emptive right of existing shareholders in the company acquiring additional shares (in the case of closed (private) placement of shares);
3. The preferential right of existing shareholders to purchase company shares of additional issue (in the case of closed (private) placement of shares) [2];
4. The circulation of securities of Ukrainian issuers outside of Ukraine requires the permission of the Securities and Stock Market State Commission (hereinafter - SSMSC); for which the Ukrainian issuer must comply with a number of requirements established by the SSMSC, many of which are practically unenforceable.
With that, the process of granting permission the SSMSC on its sole discretion determines how and in what markets and trade information systems outside of Ukraine Ukrainian equities may be placed.
The disparity between the above provisions of Ukrainian legislation and the requirements of foreign stock exchanges, as well as active SSMSC involvement in the decision to be made by the issuer regarding the conditions of placement of shares, as well as the absence of clear procedures for obtaining permission to circulate shares abroad, lead to the actual impossibility of immediate (direct) placement of shares in Ukrainian companies at foreign stock exchanges (with the existing legislative framework).
In view of these challenges there has not been one direct placement of Ukrainian company shares in foreign jurisdictions. Accordingly, the issue of selecting a jurisdiction for the IPO by Ukrainian issuers deserves a detailed consideration.
Entering the foreign stock markets can be made through the issuance of global depository receipts (in the event of the European stock markets), American Depository Receipts (when entering the U.S. stock markets), the creation of holding companies, as well as by the use of an alternative structure of the "reverse takeover" (reverse merger), which is widely used in entering the public markets of the USA.
Since the advantages and disadvantages of all of the above structures have been analysed by us in the «IPO from A to Z: An Issuer’s Guide 2010" in this article we shall consider closely the criteria and requirements for setting up a holding company for the purpose of IPO by companies, holding Ukrainian assets and conducting business in Ukraine.
Creating a holding company (the issuer of shares, de jure), which controls the Ukrainian de facto issuer of shares is a less burdensome and a less costly option for the IPO, compared to the issue of depositary receipts or the use of the reverse takeover procedures, from the point of view of the administrative process, as well as taking into account time and financial resources necessary for its implementation.
This particular structuring of the IPO is acceptable to the foreign stock exchanges, given the fact that this transaction is subject to a number of regulatory restrictions dictated by legislation of Ukraine, which can be legally circumvented by creating a foreign holding company.
In structuring the transaction of the IPO by creating a foreign holding company one should consider the following aspects:
- The reputation of the jurisdiction;
- Whether or not there is an adequate level of protection of the rights and interests of shareholders and investors, provided by the legislation of a foreign jurisdiction;
- The possibility of effective tax planning (including the presence of a bilateral convention on double taxation avoidance between Ukraine and the jurisdiction of the holding).
While implementing this type of structuring one should also pay attention to the following criteria, which the holding company must meet for an IPO to be successful:
- "Transparent" ownership structure;
- An effective system of corporate governance;
- The possibility of preparing consolidated financial statements;
- The availability of officers with a positive business reputation, accountants, auditors and lawyers at the holding company in question
Based on the above criteria, the most popular jurisdictions for the establishment of a holding company, which later will be used to display the Ukrainian issuer's IPO, are: Cyprus, the Netherlands and Luxembourg (although the choice of Luxembourg require additional tax planning due to lack of convention with Ukraine for the avoidance of double taxation.)
The main function of the implementation of which requires the holding company in structuring transactions in the IPO is the direction of the proceeds from the IPO of the group, the receipt and payment of dividends with a minimum tax burden.
As alternative instruments of income from the holding company of the de facto Ukrainian issuer of shares the following may be used: (i) interest paid on the loan (should this option be chosen one should take into account the need to register the loan agreement with the National Bank of Ukraine (hereinafter - the "NBU") and restrictions set forth by the NBU on the maximum interest rates on loans from non-residents); (ii) lease payments; (iii) royalty payments based on licensing agreements.
The application of each of these tools designed to profit the holding company alone or combined calls for effective tax planning to minimize the tax burden.
For the purpose of tax planning when choosing the most appropriate jurisdiction for the IPO one should take into account the basic tax rate applicable in foreign jurisdictions [3]:
| State | The existence of a convention on the avoidance of double taxation | Tax rate on dividends | Tax rate on interest payments | Tax rate on royalty |
| Cyprus | A convention signed by the former USSR on 26.08.1983 is applied to Ukraine | 0 % | 0 % | 0 % |
| The Netherlands | Is in effect in relations to Ukraine as of 02.11.1996 | 5 % | 2 % | 10 % |
| Luxembourg | Does not exist | 15 % | 0 % | 5, 8 % |
In the absence of the convention on the avoidance of double taxation between Ukraine and Luxembourg, Luxembourg, as a rule, is used to create top-holding company, with an intermediate holding company established in Cyprus in order to reduce the tax burden. In this case, one of the advantages of Luxembourg is the fact that it is considered a prestigious tax jurisdiction by European stock exchanges and foreign investors. An additional argument in favour of the decision to establish a top-holding company in Luxembourg is a very high degree of confidentiality: obtaining information about the company by a third party – be it foreign private firms and/or government agencies - is difficult because of the current corporate law.
In addition to these factors, when jurisdiction shopping, you should also pay attention to its litigation practice, as you must plan not just the taxation in a foreign country, but also consider possible legal and tax risks.
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[1] Article 6, Law of Ukraine "On Securities and Stock Market", dated 23 February 2006
[2] Section 2, Article 6, Law of Ukraine "On Securities and Stock Market" dated February 23, 2006 and Art. 27 of the Law of Ukraine "On Joint Stock Companies" dated September 17, 2008;
[3] These tax rates apply to the conditions laid down in the conventions for the avoidance of double taxation (if any)
IPO from A to Z: the guide for the issuer - 2011 (DAGDA)
Authors: Denis Lysenko, Yulia Kyrpa