Ukraine opens its land market: Key opportunities and challenges for land users and investors

On March 31, 2020, the Verkhovna Rada of Ukraine adopted draft law No. 2178-10 (hereinafter – the “Law”), which introduces a land market in Ukraine from July 1, 2021. This historic event will have significant consequences, both for individual citizens of Ukraine and for the country.

Having analyzed the proposed changes, we will now explain the main legislative innovations.

Key issues:

  • Who can acquire property rights?
  • Who is not able to buy agricultural land in Ukraine?
  • Procedure for the acquisition of property rights
  • Government actions to implement the law within the next six months

Who can acquire property rights?

According to the changes introduced to the Land Code of Ukraine, property rights to agricultural land can be acquired by the following persons:

  • Citizens of Ukraine;
  • Ukrainian legal entities, established and registered under the legislation of Ukraine, the participants (shareholders, members) of which are only citizens of Ukraine, the state, orterritorial communities;
  • Territorial communities;
  • The State.

The law stipulates that property rights to agricultural land plots can also be acquired by banks, but only as collateral. Moreover, such land plots have to be sold by banks via land auctions within two years of the date of acquisition of the property rights.

The Law stipulates that foreigners, stateless persons and legal entities are prohibited from acquisition of a share in the authorized (statutory) capital, shares, stakes and membership of legal entities (except for the statutory capital of banks), which own the agricultural land plots.

However, the Law also provides for the possibility of granting such right to foreigners in the future, but only after a corresponding referendum.

The Law stipulates that foreigners, stateless persons and legal entities are prohibited from acquisition of a share in the authorized (statutory) capital, shares, stakes and membership of legal entities (except for the statutory capital of banks), which own the agricultural land plots.

Who is not able to buy agricultural land in Ukraine?

  • legal entities whose participants (shareholders, members) or ultimate beneficiaries are foreigners – this applies to state and communally owned land, land allocated to unit owners and land located less than 50 km from the state border of Ukraine (except for the state border that runs by the sea);
  • legal entities whose participants (shareholders, members) or ultimate beneficiaries are citizens of a state recognized by Ukraine as an aggressor state or an occupying state;
  • persons who have belonged or currently belong to terrorist organizations;
  • legal entities whose participants (shareholders, members) or ultimate beneficiaries are foreign states;
  • legal entities in which it is impossible to establish their ultimate beneficiary (controller);
  • legal entities whose beneficiary owners (controllers) are registered in offshore zones included in the list of offshore zones by the Cabinet of Ministers of Ukraine;
  • individuals and legal entities on whom special economic and other restrictive measures (sanctions) have been applied in accordance with the Law of Ukraine “On Sanctions” in the form of a prohibition on concluding transactions for the acquisition of land ownership, as well as related persons;
  • legal entities registered in accordance with the legislation of Ukraine, controlled by individuals and legal entities registered in the states included in the list of states that do not cooperate in the field of combating the laundering of proceeds of crime by the International Group on Combating Money Laundering (FATF).

The Law thus provides a wide range of precautionary measures and restrictions to prevent speculation in the land market, as well as to prevent land from falling into the “wrong hands”. However, the question of how all this will be put into practice remains open.

In addition, the Law also introduces restrictions on the area of the land plot that can be acquired.

The total area of agricultural land owned by a citizen cannot exceed ten thousand hectares.

The sale of agricultural land owned by the state or communally is prohibited.

The total area of the agricultural land owned by a legal entity (except banks) cannot exceed the total area of the agricultural land that can be owned by all its participants (members, shareholders), but not more than ten thousand hectares.

Moreover, if a citizen has a right of ownership to a share in the authorized (compound) capital in a mutual fund of a legal entity or only certain shares, for the purposes of this article, it is considered that such a citizen, in addition to the land plots belonging to him through standard property rights, also owns the property rights to agricultural land plots with a total area equal to the agricultural land plots owned by a legal entity of which he is a participant (member, shareholder ), multiplied by the size of the share of such a citizen, expressed as a percentage, in the authorized (compound) capital, mutual fund of this legal entity.

A very interesting point in this Law is that the legislation makes it necessary for the purchaser to have confirmation of the legality of the funds. This is significant both in the fight against money laundering and in the context of paying taxes.

It is worth noting that the sale of agricultural land owned by the state or communally is prohibited.

In order to implement the provisions of the Law and its main purpose (the opening of the land market in Ukraine) the following procedure for the acquisition of property rights is provided.

The purchase and sale of land plots will be subject to preemptive rights. The pre-emptive right to acquire a land plot may be transferred by the subject to another person, about which the subject must notify the owner of the land plot in writing.

If a person is transferred the ownership right to the land which legally cannot be acquired, the land must be sold by the owner within one year of the moment of transfer of the rights.

If, in accordance with the Law, the owner of the land is obliged to sell it within a certain period and he has not sold the land within such a period, the land shall be subject to confiscation through a court decision.

The Law stipulates that in the case of a violation of the limit of the total area of the agricultural land which can be owned by one person, the land plots exceeding specified limits are to be confiscated through a court decision.

The changes will also affect citizens who own the right of permanent use, the right of lifetime use of state and communal land plots intended for farming, as well as tenants of land plots who acquired the right to lease land by renewing their right of permanent use of the land before 2010.

These people will have the right to redeem such land plots by means of installment payments for a period of up to ten years at a price equal to the normative monetary valuation of such land plots without land tenders.

Citizens of Ukraine are allowed to acquire property rights to agricultural land with a total area of up to 100 hectares.

According to the Law, until January 1, 2024:

  • Citizens of Ukraine are allowed to acquire property rights to agricultural land with a total area of up to 100 hectares.
  • It is prohibited to buy and sell or otherwise dispose of in a way which benefits legal entities land plots which are privately owned and classified as commercial agricultural land, land plots allocated in kind (on the ground) to owners of land shares (units) for farming, as well as land shares (units), except for the transfer of ownership rights to the land to banks as a collateral, inheritance of land, exchange (change) of the land plot for another land plot with a valuation difference of no more than 10% and the transfer of land for municipal needs.
  • Agreements (including power of attorney) concluded during the prohibition of the sale and purchase or any other transfer of land plots and land shares (units) established by this subparagraph, regarding their sale and purchase and other forms of transfer in favour of legal entities, as well as the sale of rights to the transfer of these land plots and land shares (units) in favour of legal entities in the future (including conclusion of the preliminary agreements) are invalid from the moment they are signed (certification).

Until January 1, 2030:

  • The selling price of agricultural land plots allocated in kind to owners of land shares (units) cannot be less than their normative monetary valuation.

The Verkhovna Rada has paid particular attention to the technical aspects of this issue

It is therefore stipulated that the interaction of information between the State Land Cadastre, the State Register of Rights to Real Estate, the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Associations will be supported with the software of the State Land Cadastre in order to obtain information on the total area of agricultural land owned by an individual, as well as legal entities of which he is a participant (shareholder, member).

The solution of technical and organizational issues will play the most important role in the implementation of changes and opening of the land market in Ukraine.

Government actions to implement the law within the next six months

The Cabinet of Ministers of Ukraine is obliged:

  • to develop and approve the procedure for providing financial support to citizens and legal entities (including farms) for the acquisition of agricultural land plots;
  • to develop and submit to the Verkhovna Rada of Ukraine a Draft Law of Ukraine on amendments to the Budget Code of Ukraine regarding the establishment of the Rural Development Fund using the special funds of the State and local budgets, the monetary funds from which money is taken for infrastructure, energy saving, education, and medical care in the rural areas, as well as implementation of state programs for the development of small and medium-sized agricultural producers;
  • to bring its normative legal acts into compliance with this Law;
  • to ensure that the relevant central executive bodies review and bring their respective legal acts into compliance with this Law.

The adoption of the Law represents only the first step for Ukraine in its introduction of a land market, with further decisions taken at the level of the Cabinet of Ministers and the Verkhovna Rada.

Conclusion

The Law will enter into force on July 1, 2021. Here is a summary of the major changes that the Law brings:

  • Banks will not be able to buy land (only to take it as collateral);
  • Payments are carried out only in non-cash formats with verification of the origin of funds.
  • In the first two years, there will be certain restrictions on the purchase of the land – the total area cannot exceed 100 hectares. From 2024, an individual will be allowed to own up to 10,000 hectares of land.
  • The preemptive right of the current tenant to purchase land is provided;
  • The purchase of land within 50 km of a land border is prohibited;
  • Foreigners will only be able to buy land subject to approval by a referendum
  • Only Ukrainians, territorial communities, the state and legal entities will be able to acquire property rights to agricultural land;
  • It is prohibited to sell agricultural land belonging to the state or communal ownership;
  • A minimum selling price of the land plots is to be set. It cannot be less than the normative monetary valuation of the land plots.