Following the Russian invasion of Ukraine in February 2022, Ukraine introduced martial law, which was still in effect as of 1 October 2023. As a result, the Ukrainian M&A market has dramatically contracted in 2022 and 2023 as compared to prior years.

From legal point of view, the Ukrainian legal landscape has also undergone noticeable changes that affect M&A deals, specifically in the areas of sanctions, currency control and cross-border settlement rules. Though legally possible, the sale of assets located in temporarily occupied territories, or territories where active hostilities are ongoing, typically poses a number of practical issues that need to be addressed on case-by-case basis.

Typical due diligence issues

Typical due diligence in Ukraine includes an investigation of corporate, intellectual property, real estate, commercial, environmental and litigation issues. The recent enhancement of compliance regulation worldwide has forced potential business partners to put compliance issues to the top of the agenda. This attention is well warranted given that, despite all of the opportunities presented by an emerging economy, Ukraine belongs to a jurisdiction with a high corruption index.

To minimize the risk of compliance breaches resulting in significant fines, damage of reputation and clean-up costs and efforts, a buyer should place great emphasis on due diligence of the potential target's compliance with anti-bribery, money laundering and sanction laws before engaging in business activity in Ukraine.

Pricing and payment

Generally, an independent appraisal is not required to support the valuation of the target in a share deal or an asset deal. Usually, the price is adjusted after due diligence has been done.

Payments between Ukrainian companies must be made in local currency (Ukrainian hryvnia (UAH)), while the foreign equivalent may be indicated. If a buyer or seller is a non-Ukrainian entity, payments can be settled in foreign currencies. Capital inflow into Ukraine has little to no restrictions. However, the institution of martial law in Ukraine since 24 February 2022, has resulted in significant capital outflow limitations and stricter foreign exchange controls. Currently, the overall foreign exchange regime in Ukraine remains highly restrictive, and transactions not explicitly permitted by the National Bank of Ukraine (NBU) are prohibited during the martial law period, or until the NBU lifts the relevant restrictions.

Signing/closing

Share sale

In the majority of cases, signing and closing are not simultaneous. Usually, closing takes place after all the conditions identified in the share purchase agreement have been fulfilled.

Asset sale

When a business is being transferred by way of an asset purchase, each individual asset needs to be transferred in accordance with the transfer formalities that apply to that type of asset. For example, an agreement for the transfer of real estate is subject to mandatory notarization (e.g., real estate), and the transfer of certain types of assets (e.g., vehicles) must be documented in a prescribed form.

In such cases, the transfer of title occurs after the registration with the relevant authorities.

Foreign investment restrictions

There is currently no general foreign investment screening procedure. However, Ukraine has introduced numerous legislative restrictions and special rules aimed at preventing or terminating any Russian ownership of Ukrainian assets.

Antitrust/merger control

Ukraine has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

Usually, the acquisition of shares or assets of a Ukrainian company does not require other regulatory or governmental approvals. However, in some cases, some industry-specific approvals may be required.

In a share purchase, the position of the employees remains the same as all rights, duties and liabilities owed by, or to, the employees of the target company continue to be owed by, or to, the target company. The buyer inherits all those rights, duties and liabilities by virtue of being the new owner of the target company. The transaction itself will not affect the employment arrangements with employees of the target company, including pension, benefits, relocation, and payroll issues.

In an asset sale, the transfer of employees from the target company to the buyer is not within the discretion of the parties, but is subject to each employee's consent. On balance, the buyer is not obliged to employ all (or any) of the employees, unless it wishes to hire all (or some) of them.

Generally, Ukrainian legislation does not provide for any stamp duty or similar transfer taxes to be paid in connection with the sale or purchase of shares (or any other corporate rights) in a Ukrainian legal entity. However, if the parties choose to execute the agreement in notarized form (which is not mandatory). Value-added tax (VAT) is generally not payable on the purchase of shares.

In an acquisition of assets, state duty may apply to notarized transactions on the sale of real property. The rate of the state duty may vary significantly, depending on the nature of the transaction. In addition, the sale of a company's assets will be subject to VAT at a rate of 20%.

Additionally, the transfer of assets as part of a corporate reorganization (e.g., a merger) is generally not subject to VAT if certain conditions are met.

There is a mechanism to tax capital gains arising from the sale of real estate-rich companies deriving their value from immovable property located in Ukraine. Capital gains from the alienation of shares/participatory interest in a foreign company, which directly or indirectly owns a Ukrainian real estate-rich company, would be subject to taxation in Ukraine, if for any period during the last 365 days: (i) the foreign company's shares/participatory interest derive more than 50% of the value from the capital in the Ukrainian company; and (ii) more than 50% of the value of the Ukrainian company was generated by real estate located in Ukraine. Please refer to Tax section below for more details.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.