UKRAINE: OPTIONS AS TAX PLANNING INSTRUMENTS/
MEDICINE, METALLURGY & TRADE 

Vasil Kisil & Partners, Kyiv, Ukraine, Monday, 20 July, 2009
 
KYIV - On July 16, 2009, a press conference was held in the press center of LIGABusinessInform Information Agency highlighting Options as Tax Planning Instruments in selected industries: Medicine, Metallurgy, and Trade. Distinguished speakers of the event were Senior Associate of Vasil Kisil & Partners Natalia Dotsenko-Belous and Dmytro Oliynyk, executive director of the Pro-Consulting Investment Group.

An option is a useful instrument for manufacturers due to certain taxation aspects of its application. By applying options to a trade transaction, it is possible to reduce VAT liabilities and take down significantly the tax burden on the added value.

An option premium is exempt from VAT taxation in accordance with section 3.2.1. of the Law of Ukraine “On the Value Added Tax” and excluded from gross income as proceeds from placing securities in accordance with sections 4.1.1 and 7.6 of the Law of Ukraine “On Enterprise Profit Taxation.” Besides, options enable to receive prepayments for delivery of products or services, being no less important than reduction of tax implications.

Commercial real estate operators were immensely motivated to use options due to the 20% profitability limit imposed by the Cabinet of Ministers of Ukraine in March 2009 on lease of commercial real estate. Options used in real estate lease enable to include profits in the option premium and thus avoid their 20% limit.

The event also highlighted such issues as application of options to medical services as a way to optimize tax implications and an instrument of consumer protection. Their application is beneficial both for an option issuer and a customer of medical services who hedges its risks of increasing product or service prices, which is quite probable in current inflation trends, as well as its risk related to such product or service not being received at a later day.

Since an option give a buyer the right, but not the obligation, to buy a product or service, then such buyer may, if immediately available funds are required to be raised, sell, with minimum loss possible or even with benefits, such a security on the secondary market. Therefore, this instrument comparing to an insurance policy, enables a buyer to be more flexible with its funds assigned to medical treatment.

VASIL KISIL & PARTNERS: NATALIA DOTSENKO-BELOUS  
Natalia Dotsenko-Belous explained in details an application of options in the metallurgy industry: “In terms of deferred demand for rolled metal products, Ukrainian metal manufacturers and metal traders face a dilemma: how to find the working capital and satisfy the deferred demand avoiding reduction in the current production, and where to find reserves to cut down prices of metal products without prejudice to profitability performances. We propose to use options for supply of rolled metal products.”

A metal manufacturer issuing an option gains, among other things, such benefits as replenishing the working capital with option premium proceeds from a buyer and no VAT and profit tax deductible from the amount received by the issuer as proceeds from placing such option. Moreover, a metal manufacturer benefits from forming a portfolio of anticipated purchase orders.

In turn, implementation of such financial instrument gives a metal trader buying an option the right to buy rolled metal products at the crisis price formed as of the date such option was bought. Alternatively, it may refuse to buy rolled metal products in pursuance of the option.

“An intending metal trader or metal manufacturer may issue options for supply of rolled metal products of different classes at the fixed prices per one ton which existed as of the date of buying the option. Moreover, an intending buyer initially buys an option as a security, as the right to future purchase of metal products at the price of the crisis period, as a result the option issuer receives an option premium long before the intended delivery,” - as Natalia Dotsenko-Belous explains a mechanism of option transactions.

In addition, the dilemma faced by metal traders and metal manufacturers may be alternatively resolved by using share undiversified venture funds which might concentrate among their assets metal manufacturers’ liabilities and corporate rights, and options.

REFERENCE
An option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset at a later day at an agreed price.

An Option for Supply of Rolled Metal Products is a derivative which issue was registered by the State Securities and Stock Market Commission, evidencing the right to buy a particular product at a later day at the price agreed on the date of buying such option.

NOTE: Vasil Kisil & Partners is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.