In the end of 2020, the Ukrainian Parliament has adopted a new law, which is soon to be enacted and will introduce a new type of investment agreement to be entered into between the investor and the state. Under that agreement, Ukraine shall provide support to the investment project, which may lie in exemption from taxes and customs duties, obligation of the state to grant lease title to land plots or to construct infrastructure at the budget’s expense, in exchange for the investor making the investment in term and manner specified in the agreement.
That new law of Ukraine “On State Support of the Investment Projects with Significant Investments” (the “Draft Law”) was adopted on 17 December 2020 and is expected to be signed by the President in the nearest future.
Per the Draft Law, foreign and domestic investors may enter into a special investment agreement with the state of Ukraine represented by the Cabinet of Ministers of Ukraine (the “Special Investment Agreement”) for a certain project bearing significant investments (the “Major Project”). The state shall provide support for developing the Major Project if the investor complies with the Special Investment Agreement terms, namely invests the designated costs within the defined term.
Apart from the state support, the Special Investment Agreement terms may provide for dispute resolution in international arbitration and the stabilization clause. This will be advantageous to secure the investment against unfavourable legislative changes, which is usually sought by the investors in the constantly changing economic and political environment.
Eligible Projects
To be eligible for the state support, the Major Project must meet all five criteria below.
Application Process
To enter into the Special Investment Agreement, the investor shall submit an application to the Ministry for Development of Economy, Trade and Agriculture of Ukraine (the “Ministry of Economy“) together with the draft Special Investment Agreement, the feasibility study for the Major Project and proof of the investor’s incorporation and structure.
The investor shall enter into the Special Investment Agreement through two companies: the parent company or several companies being the applicant (the “Applicant“), and its special purpose vehicle incorporated for the purpose of serving as an investor making the significant investment for the Major Project (the “Major Investor“).
The Applicant shall submit the application, which is reviewed and processed as illustrated below.
Types of State Support
Four types of state support may be offered under the Special Investment Agreement:
The state providing the lease title to land plots is the most ready-to-employ way of support, since the Draft Law introduces the necessary amendments to the Ukrainian laws allowing those land plots to be granted outside of otherwise necessary land auctions. The Draft Law explicitly allows the Major Investor to terminate the Special Investment Agreement if the title to the land plots is not formalized within six months after its execution unless caused by the Major Investor’s failing, which shall incentivise the state to ensure all necessary procedures on its part.
The exemption from taxes, levies and customs duties may not be exercised until the necessary amendments are introduced to the Tax Code of Ukraine and the Customs Code of Ukraine. In September 2020, the relevant draft laws under numbers No. 3761 and 3762 respectively have voted for in the first reading. They now await the second reading to be adopted and enter into effect. Per those draft laws, the tax exemptions will consist in the following:
It shall be noted that the corporate profit tax exemption applies only after the investment item has been commissioned, which implies that it applies to the Major Projects that involve construction. In case the Major Project does not involve actual construction that shall be commissioned, that issue shall be clarified in the wording of the Special Investment Agreement to make sure that the exemption still applies.
In addition, within six months after the Draft Law is signed, there should be adopted several resolutions of the Cabinet of Ministers of Ukraine, regulating the process of reviewing the applications and the draft Special Investment Agreements, requirements to the feasibility study and the Major Project itself, procedure of calculating the value of the state support, etc. Commonly, stakeholders are invited to participate in working groups and round tables concerning drafting the resolutions thus the interested businesses may offer their proposals and insights.
Value of state support. Consequences of breach of the Special Investment Agreement
The Special Investment Agreement shall contain a detailed list of the types and extent of the support offered by the state, and the amount and description of the investment to be made by the Major Investor.
The state support is expressed in the monetary value and shall not exceed 30% of the amount of the investment made by the Major Investor. The value of the state support will include the amount of all taxes, levies and customs duties not paid by the Major Investor due to applying the exemptions, including the land tax, and the costs for construction of infrastructure.
If the Major Investor breaches the Special Investment Agreement terms as to making the investment in full or meeting the deadline for investing, the Special Investment Agreement may be terminated, and the value of the state support shall be refunded to the state. This also means that the Major Investor shall relinquish the titles to the land plot.
Termination of the Special Investment Agreement does not entail the Major Investor losing its investment or termination of the project; yet the project will not be considered the Major Project and will cease to receive the state support. This shall be clarified in the Special Investment Agreement together with the necessary liability limitation of the investor in case of such breach.
Key Provisions of the Special Investment Agreement
The Draft Law introduces the following rules applicable to the Special Investment Agreement, that may be even more beneficial to the investor than the proposed types of state support.
Stabilization of the Ukrainian Laws
The rights and duties of the Major Investor shall be governed by the Ukrainian laws in effect at the date the Special Investment Agreement was executed unless the new law improves the Major Investor’s position.
This will serve as a good ground to secure the risk of unfavourable laws changes. As a matter of good practice, the Special Investment Agreement shall contain a procedure for the Major Investor, and not the state, to decide that the new law is beneficial and thus shall apply.
Arbitration and Foreign Law
The parties to the Special Investment Agreement may choose foreign law to govern the Special Investment Agreement.
For resolution of disputes, the Draft Law allows to refer to mediation and non-binding expert proceedings, and to refer the disputes either to the Ukrainian court or an international arbitration institution chosen by the parties. To be able to refer the dispute to international arbitration, the Major Investor shall have at least 10% of its shares owned by a foreign person or legal entity.
Single-window investment authority
The Draft Law introduces a new authorized institution (the “Authorized Institution“), that will be responsible for cooperation with the investors in terms of receiving the state support for their investments.
The Authorized Institution’s functions will include aiding the investors in preparing their applications for entering into the Special Investment Agreements, arranging communication with the state authorities both during signing the Special Investment Agreement and performing it, as well as certain monitoring functions. This is the closest step so far to the “investment nanny” project announced by the government, which was supposed to provide the investors with a single window for communication with the authorities on all investment matters.
Prospects for realisation
Apart from the state support offered to the investor, having an option to utilize the stabilization clause in the Special Investment Agreement and refer the disputes to international arbitration may serve as additional incentives for the investors to initiate their projects in Ukraine, since they offer more security for the project and a more predictable business climate for it.
Although the Special Investment Agreement is meant to define the state’s obligation to provide the state support, it may contain further provisions not concerning the duties of the state. For example, the Special Investment Agreement may define what is considered an investment and the investor’s right to it, give definition of expropriation, that is not present in the Ukrainian laws, which may be referred to in case of investor-state disputes.
While considering the draft Special Investment Agreement, the state will regard it from a more formalistic point of view intending to draft its provisions as close as possible to the actual provisions of the laws. The state may be reluctant to introduce even best practice provisions and mechanisms to the Special Investment Agreement, if they are not explicitly described in the Ukrainian laws. Thus, while negotiating the draft Special Investment Agreement terms with the state, the investor shall be ready to justify and reason the investor’s opinion on each provision with references to the good international investment practice, analogy of law or statute and recent tendencies in investment dispute resolution.
Therefore, the newly introduced Special Investment Agreement potentially is an effective instrument to secure the state’s support, which will consist in granting tax and levies exemption, provision of lease title to the land plots, construction of infrastructure and offering a single-window authority to help carry out the project. The stabilization clause and reference of the disputes to the international arbitration shall contribute to the overall project security.
We may expect this new approach to attract investment to Ukraine since it will apply to many business areas, from manufacturing of goods to healthcare, education and recreation projects. Still, when drafting the Special Investment Agreement and negotiating it with the state, the investors shall pay attention to specifying the actual procedures for performing the state’s duties since they are not provided by the laws and watch out for the legislative gaps in the Draft Law to cure them by the wording of the Special Investment Agreement.
You might not think it’s possible to outperform the average Wall Street professional with just a single investment. Fund managers are highly educated and steeped in market data. They get paid a lot of money to make smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long run. You don’t need a doctorate or MBA, and you certainly don’t need to follow the everyday goings-on in the stock market. You just need to buy a single investment and hold it forever.
That’s because 88% of active large-cap fund managers have underperformed the S&P 500 index over the last 15 years thru Dec. 31, 2023, according to S&P Global’s most recent SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO), chances are that your investment will outperform the average active mutual fund in the long run.
It’s a good bet that the average fund manager is hardworking and well-trained. But there are at least two big factors working against active fund managers.
The first is that institutional investors make up roughly 80% of all trading in the U.S. stock market — far higher than it was years ago when retail investors dominated the market. That means a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much harder to gain an edge and outperform the benchmark index.
The more basic problem, though, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a wide enough margin to justify the fees they charge. And that reduces the odds that any given large-cap fund manager will be able to outperform an S&P 500 index fund by a significant amount.
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Warren Buffett is one of the smartest investors around, and he can’t think of a single better investment than an S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.
In his 2016 letter to shareholders, Buffett shared a rough calculation that the search for superior investment advice had cost investors, in aggregate, $100 billion over the previous decade relative to investing in a simple index fund.
Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) in Berkshire’s quarterly disclosures. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely an ETF price follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is an excellent option as a starting point.
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The numbers from the Department of Finance suggest they have struck taxation gold. But they’ve been wrong before
Published Apr 19, 2024 • Last updated 8 hours ago • 5 minute read
“99.87 per cent of Canadians will not pay a cent more,” the prime minister said this week, in reference to the budget announcement that his government will raise the inclusion rate on capital gains tax in June.
The move will be limited to 40,000 wealthy taxpayers. “We’re going to make them pay a little bit more,” Justin Trudeau said.
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But it’s hard to see how that number can be true when the budget document also says 307,000 corporations will also be caught in the dragnet that raises the inclusion rate on capital gains to 66 per cent from 50 per cent.
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Many of those corporations are holding companies set up by professionals and small-business owners who are relying on their portfolios for their retirement.
The budget offers the example of the nurse earning $70,000 who faces a combined federal-provincial marginal rate of 29.7 per cent on his or her income. “In comparison, a wealthy individual in Ontario with $1 million in income would face a marginal rate of 26.86 per cent on their capital gain,” it says.
Policy wonks argue that the change improves the efficiency and equity of the tax system, meaning capital gains are now taxed at a similar level to dividends, interest and paid income. The Department of Finance is an enthusiastic supporter of this view, which should have set alarm bells ringing on the political side.
That’s not to say it’s not a valid argument. But against it you could put forward the counterpoint that capital gains tax is a form of double taxation, the income having already been taxed at the individual and corporate level, which explains why the inclusion rate is not 100 per cent.
The prospect of capital gains is an incentive to invest particularly for people who, unlike wage earners, usually do not have pensions or other employment benefits.
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That was recognized by Bill Morneau, Trudeau’s former finance minister, who said increasing the capital gains rate was proposed when he was in politics but he resisted the proposal.
Morneau criticized the new tax hike as “a disincentive for investment … I don’t think there’s any way to sugar-coat it.”
Regardless of the high-minded policy explanations that are advanced about neutrality in the tax system, it is clear that the impetus for the tax increase was the need to raise revenues by a government with a spending addiction, and to engage in wedge politics for one with a popularity problem.
The most pressing question right now is: how many people are affected — or, just as importantly, think they might be affected?
One recent Leger poll said 78 per cent of Canadians would support a new tax on people with wealth over $10 million.
But what about those regular folks who stand to make a once-in-a-lifetime windfall by selling the family cottage? We will need to wait a few weeks before it becomes clear how many people feel they might be affected.
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The numbers supplied to Trudeau by the Department of Finance suggest they have struck taxation gold: plucking the largest amount of feathers ($21.9 billion in new revenues over five years) with the least amount of hissing (impacting just 0.13 per cent of taxpayers).
The worry for Trudeau and Finance Minister Chrystia Freeland is that Finance has been wrong before.
Political veterans recall former Conservative finance minister Jim Flaherty’s volte face in 2007, when he was forced to drop a proposal to cancel the ability of Canadian companies to deduct the interest costs on money they borrowed to expand abroad.
“Tax officials vastly underestimated the number of taxpayers affected when it came to corporations,” said one person who was there, pointing out that such miscalculations tend to happen when Finance has been pushing a particular policy for years.
Trudeau’s government has some experience of this phenomenon, having been obliged to reverse itself after introducing a range of measures in 2017, aimed at dissuading professionals from incorporating in order to pay less tax. It was a defensible public policy objective but the blowback from small-business owners and professionals who felt they were unfairly being labelled tax cheats precipitated an ignoble retreat.
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Speaking after the budget was delivered, Freeland was unperturbed about the prospect of blowback. “No one likes to pay more tax, even — or perhaps more particularly — those who can afford it the most,” she said.
She’d best hope such sanguinity is justified: failure to raise the promised sums will blow a hole in her budget and cut loose her fiscal anchors of declining deficits and a tumbling debt-to-GDP ratio.
That probably won’t be apparent for a year or so: the government projected that $6.9 billion in capital gains revenue will be recorded this fiscal year, largely because the implementation date has been delayed until the end of June. We are likely to see a flood of transactions before then, so that investors can sell before the inclusion rate goes up.
After that, you can imagine asset sales will be minimized, particularly if the Conservatives promise to lower the rate again (though on that front, it was noticeable that during question period this week, not one Conservative raised the new $21 billion tax hike).
The calculated nature of the timing is in line with the surreptitious nature of the narrative: presenting a blatant revenue grab as a principled fight for “fairness.” The move has the added attraction of inflicting pain on the highest earners, a desirable end in itself for an ultra-progressive government that views wealth creation as a wrong that should be punished.
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Trudeau’s biggest problem is that not many voters still associate him with principles, particularly after he sold out his own climate policy with the home heating oil exemption.
The tax hike smacks of a shift inspired by polling that indicates that Canadians prefer that any new taxes only affect the people richer than them.
Success or failure may depend on the number of unaffected Canadians being close to the 99.87-per-cent number supplied by the Finance Department.
History suggests that may be a shaky foundation on which to build a budget.
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