How to Get Profit from Investment in Property in Ukraine – a Guide for Investors
The real estate market of Ukraine is still very promising, despite the presence of conflict in the eastern part of the country. Especially if it is viewed from the perspective of investing by non-residents: the volume of potential investments in one facility is rather low, as for investors from Western countries, short payback periods, the perspective of real estate prices rising, etc. It should be noted that real estate prices in Ukraine are in the price-bottom zone, and therefore for a little bit more than 100 thousand US dollars a foreigner can find a rather interesting variant of an apartment in the historic center of the city. The area of such an apartment will be significant, minimum 70 square meters or sometimes much more. At the same time, after repair, such an apartment can be rented out, and you can claim a monthly rent of 2-3, or even more, thousands of US dollars. In this article the main strategies for legal purchase of real estate in Ukraine, the investor’s withdrawal of rental income from real estate that is owned by non-residents and income from its sale are described.
Acquisition of income through the purchase of real estate
Currently, there are several legal ways to get some income by buying real estate in Ukraine:
– a buyer can open a limited liability company in Ukraine with an authorized capital in the amount commensurate with the value of the property with the subsequent acquisition of such an object by the company;
– a buyer can open a limited liability company in Ukraine with a minimum authorized capital and then obtain a loan for the company from abroad for the purchase of real estate. However, such a loan, received by residents of Ukraine from non-residents, is subject to registration in the National Bank of Ukraine, and therefore it is necessary to spend a little more time for the procedure;
– a buyer can open a personal investment account and purchase real estate by paying for it from his/her account. This process is longer, because it requires the presence of a foreigner in a Ukrainian bank for the necessary operations;
– a buyer can pay for the property from his account directly in the currency if a seller of real estate has a foreign currency account in the Ukrainian bank, and if that seller is a non-resident of Ukraine and has bank accounts opened abroad, the settlement between the foreign bank accounts of buyer and seller is allowed.
In this case, each of these methods has its pros and cons:
– opening of a limited liability company give the foreign investor a variety of opportunities for withdrawing income received in Ukraine, for example, using the corporate card of such a LLC for personal purposes, albeit with some restrictions on the types of costs, or paying dividends, which in some cases, can be carried out at low tax rates. In addition, LLC provides an opportunity to sell property by selling corporate rights of such a company, which allows you not to pay tax on the sale of real estate. At the same time, the creation of LLC includes additional costs and takes some time. In addition, to manage the company, a non-resident-founder must either appoint a Ukrainian director, who will be paid a minimum monthly salary, or get a work permit in Ukraine and become a director of his company, or if the investment amount is more than $ 100 thousand USA, get a permanent residence permit and then become a director of his company.
– Advantage of acquiring real estate in Ukraine through direct transfer of funds from abroad to the seller’s account is its simplicity, since it only requires the signing of a contract of sale. The disadvantage can be only the credit of trust in the transaction, because SWIFT translation takes some time (about 1-3 days). Ukrainian sellers do not want to wait for money for such a long time, because everyone loves calculating here and now.
– Opening of an investment account is somewhat more complicated and requires the physical presence of a buyer (the account holder) in Ukraine at the date of opening the account. However, having officially registered an investment account and depositing more than 100 thousand US dollars on it, a buyer gets the right to apply for a permanent residence permit in Ukraine, which may also be of interest to some foreigners.
Acquisition of income from real estate for non-resident owners
Non-resident’s income, received from leasing of the acquired real estate, can be transferred from Ukraine in several ways, depending on a person the real estate was acquired by, on a natural person or legal entity:
1. If a foreigner has opened a legal entity in Ukraine and contributed money as a loan from a non-resident, the current income from the renting out of real estate can be deduct by paying interest on the loan agreement. However, there is a restriction established by the National Bank of Ukraine: the amount of interest on such a loan cannot be higher than the rates set by the National Bank of Ukraine, which is about 9-11% per annum for hard currencies (euro, US dollar, Swiss franc, pound sterling, etc.).
2. If a foreigner has opened a legal entity in Ukraine and contributed money as a contribution to the authorized capital, he can receive income in form of dividends. It is worth understanding that for such dividend tax must be paid, and one must take into account whether there is an agreement with the country of residence of foreigner to avoid double taxation.
3. If a foreigner has opened a legal entity in Ukraine, he can open a corporate card in his company’s name and use the income at his discretion. However, there are some restrictions on the types of purchases on such a corporate card: the purchase should not clearly look like a personal waste of a non-resident, for example, paying in a nightclub or renting a water motorcycle. Nevertheless, to buy a laptop, pay for tickets, etc. is quite possible.
4. The next option is leasing of the property with the involvement of an agent (a natural person, an entrepreneur or a legal entity). Being an intermediary between the owner and the lessee, the agent has the opportunity to transfer the income received from the leasing of the object to the foreign account of the owner of the real estate or give this money in cash to the foreigner when he is in Ukraine. Nevertheless, this option has some disadvantages as well. Attracting an agent, the owner runs the risk of getting some unscrupulous intermediaries who can abuse their authority at the expense of the owner, and therefore, special attention should be give when choosing an agent.
5. To rent an apartment out and get regular cash payments independently. This option is good only in cases where a foreigner often comes to Ukraine, lives here, or has relatives (for example, is married to a Ukrainian citizen who has relatives here).
Ways of transfer of funds received by non-resident from the sale of a real estate object outside Ukraine
If a foreigner in addition to income from leasing of real estate wants to earn on the growth of the market price of the apartment he has purchased, then eventually he will face the issue of withdrawal of funds received from sale outside Ukraine. There may also be several options:
– liquidation of LLC, if it was used to purchase real estate, with subsequent payment to the founder-foreigner of his contribution and all funds left after liquidation;
– sale of corporate rights to LLC, which has purchased real estate on its balance sheet, with transfer of money to the account of a foreigner as a payment for corporate rights;
– repayment of a debt under a loan agreement by a limited liability company if a loan was involved in the purchase;
– sale a by non-resident of a real estate object with transfer of received funds to an investment bank account in Ukraine for subsequent withdrawal of funds abroad.
Taxes for foreign proprietors
Independently, a non-resident can lease his property for rent only in case of obtaining the status of a tax resident of Ukraine. Such status can be granted to a citizen of a foreign country if he has a temporary or permanent residence permit, if he resides in Ukraine for at least 6 months a year. Without the status of a tax resident of Ukraine a non-resident individual can lease his immovable property only through an agent. In practice, to attract an individual entrepreneur as an agent is often more profitable, since the agent uses a simplified taxation regime in comparison with legal entities.
Payment of dividends to the founder of the LLC, who owns the property and leases it, is attractive if the founder is a resident of the country with which Ukraine has agreed on a reduced tax on the repatriation of capital and dividends.
We hope that this article will give a general idea of the real estate market in Ukraine and its perspective as an investment object to interested foreigners. It should be understood that this article is not a full-fledged legal advice and does not describe all legal opportunities and moments that may be. Therefore, when completing a transaction, we strongly recommend looking for qualified legal assistance.
Author: Kydalov Igor