ALERT: Ukrainian agricultural land market – liberalisation or continued protectionism?
Since 2001 the sale of agricultural land in Ukraine has been prohibited. Most land plots used in the agricultural sector are done so based on long-term lease agreements.
On the 20th of September, the draft law “On the amendments to some legislative acts of Ukraine concerning the transactions with agricultural land” was published by the Cabinet of Ministers of Ukraine. Over the following two weeks MPs registered in the Parliament a number of different alternative Bills (No.2178-1, No.2178-2, No.2178-3, No.2178-4, No.2178-5, No.2178-6).
On the 2nd of October the Parliament included the Cabinet of Ministers’ draft law No.2178 in its agenda. On the 10th October the Head of the Agricultural Committee of the Ukrainian Parliament initiated and registered another alternative draft law No.2178-10.
On the 11th October the PM Oleksiy Honcharuk made a statement that the draft No.2178-10 was initiated after discussions with businesses and agrarians and, therefore, is a revised version of original Government’s Bill No.2178.
Besides that, in early October MPs registered two Bills (No.2194 and No.2195). Interestingly, those two draft laws do not compete with the initial Bill No.2178 or the other alternative Bills listed above but provide their own scope of land regulation, not dealing with the question of land ownership.
In this alert we will review the recent Bill No.2178-10, which is the most likely to be passed (with some comparisons to the Government’s initial Bill No.2178). In addition, we will look at two draft laws (No.2194 and No.2195) on the proposed detailed procedure on how to purchase land.
Who will be able to purchase and sell agricultural land?
According to the draft law No.2178-10, the following will be able to purchase and sell agricultural land (the same was proposed in the initial Bill No.2178):
- Ukrainian citizens (natural persons);
- Ukrainian legal entities;
- local communities;
- the State.
The initial draft law No.2178 proposed that foreign individuals and entities will not have the right to buy agricultural land directly. However, there were no restrictions on foreign-owned Ukrainian legal entities purchasing agricultural land. After long discussions this formula was revised completely.
The Bill No.2178-10 has the most striking difference with the Government’s Bill in this respect: it restricts foreign citizens or legal entities in the purchase of agricultural lands even indirectly through Ukrainian legal entities. The draft law No.2178-10 states that before 01/01/2024 legal entities where a person of significant control (PSC) is a foreign citizen, foreign legal entity or a foreign state will be forbidden from purchasing agricultural lands. Thus even a Ukrainian legal entity, if it has a foreign PSC, would not be allowed to participate in the land market.
However, there is one interesting exception that may benefit large Ukrainian agricultural companies: if the purchaser is an agricultural manufacturer and has a leasehold on agricultural land, it is allowed to buy agricultural lands even if the PSC of the legal entity is a foreign citizen or enterprise. In addition, its entity must have been incorporated at least 3 years ago and the leasehold agreement commenced before this Bill No.2178-10 comes into force.
What is the limitation on the quantity of agricultural land that can be purchased?
In draft law No.2178 the total area of agricultural land that can be owned by Ukrainian individuals or legal entities, including affiliated parties, is limited by the following rules:
- the area owned shall not exceed 15% of the agricultural land in one region (oblast);
- the area owned shall not exceed 0.5% of the total area of Ukraine’s agricultural land.
According the draft law No.2178-10 the total area of the ownership is restricted to:
- the area owned shall not exceed 35% of the agricultural land in one unified territorial community;
- the area owned shall not exceed 8% of the agricultural land in one region (oblast);
- the area owned shall not exceed 0.5% of the total area of Ukraine’s agricultural land.
Both Bills propose that all sale-purchase agreements concerning agricultural land shall be registered. The registrars (including private notaries) shall check the information concerning the separate agricultural land plots in the State Register of Rights, the State Land Cadastre and in the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations of Ukraine to verify the total area of agricultural land owned by a party acquiring land.
If the potential owner breaches the aforementioned limitations, the registrar will refuse to register the ownership of the additional agricultural land plots. The procedure of control over these limitations shall be additionally developed by the Cabinet of Ministers of Ukraine.
Who will have the pre-emptive right to buy the agricultural land?
Both Bills No.2178 and No.2178-10 state that a person or legal entity that has been leasing a land plot has a pre-emptive right to buy such land plot.
Who will have an additional preference when buying agricultural land?
According to both Bills the following citizens will have the right to buy, without an auction, agricultural land plots in installments paid within 5 years or less:
- citizens who hold the right of permanent use of agricultural land plots;
- citizens who have inherited lifetime possession of state or communally-owned agricultural land.
Such citizens will pay a price equal to the normative monetary evaluation of the land. These provisions are completely the same for both Bills No.2178 and No.2178-10.
When the draft law No.2178-10 is expected to come into force?
The draft law states that the regulation of the sale and purchase of agricultural land shall be in force from the 1st of October 2020. The President of Ukraine has instructed the Parliament to adopt a draft law on the sale and purchase of agricultural land by the 1st of December 2019. If the Parliament adopts draft law No.2178-10, then it will be possible to buy and sell agricultural land in one year from now subject to the restrictions of the law that passed.
What to expect next?
The Bill No.2178-10 is just an amendment to the Land Code of Ukraine and further technical detail shall be developed accordingly. For example, the procedures to the limit the ownership concentration of agricultural land and the procedure of sale of the state agricultural land still require elaboration. Both Bills – the initial No.2178 and its revised version No.2178-10 – are similar but at the same time have the most significant difference in a rule regarding the access to the land market for foreign investors. The latest news suggests that Ukraine is going to choose a restricted land market rather than an open one.
Technical issues – ancillary draft laws
The draft law No.2194 On Amendments of the Land Code of Ukraine On the Improvement of the System of Management and Deregulation in the Sphere of Land Relations was registered in the Parliament in early October. It is a complex Bill that attempts to improve the current system of state regulation and abolish artificial obstacles (certifications, procedures) for conducting business in Ukraine.
The draft law No.2194 establishes the reform of the State Service of Ukraine for Geodesy, Cartography and Cadastre (StateGeoCadastre) that is the central executive body that is coordinated by the Cabinet of Ministers of Ukraine. Currently the StateGeoCadastre is the fifth biggest (in terms of the quantity of employees) civil service executive body in the country. Taxpayers pay almost 2 billion UAH annually for this service (this excludes the cost of corruption within the service). The StateGeoCadastre has a wide scope of powers such as coordinating and ensuring state control in the sphere of topography, geodesy and cartography, management of state-owned agricultural land and administration of the State Land Cadastre.
The state regulation of lands is highly ineffective. For instance, one district of the region usually has one land inspector (who directly executes state control) and sometimes there is only one inspector for a few districts. This state executive body became one of the most powerful authorities in Ukraine after Parliament enacted the Land Code of Ukraine in 2002. Before 2002 territorial communities held more powers in land regulation.
Another crucial problem is land administration. Ukraine is a world leader in terms of the burden of land-related bureaucracy. Moreover, the work of land surveyors is highly ineffective and there are very high requirements for applicants to become a land surveyor. Therefore, the quantity of qualified land surveyors is limited and their prices are high.
The Bill No.2194 proposes:
- to deprive the StateGeoCadastre of its powers in land regulation and transform this executive body into a purely technical organisation that assists in geodesy and cartography;
- to empower local councils and regional state administrations with land regulation powers such as rights to establish borders of land parcels, to change the target value of land plots;
- to cancel most certificates, procedures and state examinations that overlap each other;
- to cancel the necessity to obtain an approval from the Cabinet of Ministers of Ukraine to sell nonagricultural state and communal lands to foreign legal entities;
- to abolish rules of law in the Land Code of Ukraine that restrict opportunities for foreign citizens and foreign legal entities to purchase land parcels in nonagricultural lands outside inhabited settlements;
- to draft all land administration documents electronically.
Thus the proposed amendments are going to reorganise the management of land in Ukraine. This Bill does not regulate any issues connected to the purchase and selling of agricultural lands.
The digitalisation of the land market
Another draft law in the Land Reform program initiated by the President of Ukraine is No.2195 On Amendments of Certain Legislative Acts On Selling State and Communal Owned Land Plots through Electronic Auctions. Currently the Law of Ukraine has a legal procedure of land auctions, however, they are not electronic. Digitalised auctions already showed their effectiveness in the small-scale privatisation procedures and public procurements. It is no doubt true that electronic auctions have benefits such as transparency, expedience of decisions and minimal subjectivity their outcomes.
Moreover, if an auction is electronic, there is no obligation for an individual to be present physically thus it will facilitate the convenience of purchasing land by allowing a potential to participate in the auction anywhere in the world.
The Bill No.2195 establishes the detailed procedure of electronic auctions that are going to be compulsory for selling (as well as executing lease agreements) state/communal owned lands, whereas privately owned lands may be sold without electronic auctions. For the purposes of such digital trading, special electronic platforms should be launched where operators of such platforms will facilitate trading between parties.
The crucial feature of such electronic auctions is that all documents relating to trading should be published (with all names, prices etc.) and be available for public access online.
If the draft law No.2178-10 is adopted it will give Ukrainian citizens and legal entities the possibility to buy and sell agricultural land in about one year. However, in contrast to the Government’s initial Bill it will not allow foreign citizens and foreign enterprises to participate in the land market until 2024.
The Bills No.2194 and No.2195 in one way supplement the draft law 2178-10 in elaborating technical issues and management regulations. Moreover, although draft laws No.2194 and No.2195 directly do not regulate issues relating to who may sell and purchase agricultural land, the complex legal reform that they contain may be implemented only after enacting the Bill No.2178-10.
To summarise, the adopted legislation is going to be a strong signal for potential investors. Although, at first, there was an intention to send a positive signal to international businesses and allow them to participate in agricultural projects in Ukraine, according to last PM’s statement, the Parliament is going to take a more protectionist stance in respect of agricultural land until 2024.
In any case land reform will not be completed solely by means of the adoption of these draft laws, and additional legal acts will need to be developed by the government in the nearest future.
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