This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit:

The bad news is that failure to maintain the net asset requirement may trigger unfavourable implications. The good news is that there are solutions.


Ukrainian law establishes specific requirements regarding the level of net assets companies should maintain. A similar requirement is established in the new Joint Stock Company Law1 (the Law). In particular, if the net assets of a joint stock company (JSC) after the second financial year, and then for all subsequent financial years, are less in value than the registered share capital, the company must declare a decrease of its share capital (but no lower than the minimum established by law) and register the appropriate amendments to the charter. If the value of net assets drops below the minimum share capital established by law, the company is obliged to take action within 10 months following its occurrence or liquidate.

New significance for public JSCs

While the requirement to maintain a positive net asset balance has existed in Ukrainian law since 2004, and is therefore not a novelty in itself, it may now acquire more importance for JSCs and, in particular, public JSCs. Starting on 29 April 2009, when the Law entered into force, all public JSCs in Ukraine (i.e. newly established JSCs and existing JSCs re-registered to comply with the Law) are required to maintain a listing on at least one registered stock exchange in Ukraine.

Pursuant to the Regulations on Operations of the Stock Exchange2, an issuer of shares (e.g. a public JSC) may only be listed if it meets a number of criteria, maintains a specific level of net assets and does not have losses over a certain period of time. The minimum level of net assets required to qualify for a first-tier listing is currently UAH 100,000,000 (ca. EUR 8,541,8983) and for a second- tier listing UAH 50,000,000 (ca. EUR 4,270,949). Furthermore, the issuer may not have had losses during two of the last three financial years to qualify for the firsttier listing and during the last financial year for the second tier4. Therefore, those public JSCs which do not qualify for either the first- or second-tier listing due to a lack of net assets or a loss-making position in the relevant period could be in breach of the requirement of the Law related to listing on one of the stock exchanges.

There is a running debate over whether the current listing requirements should be modified or simplified to facilitate the long-term compliance of public JSC with the requirements of the Law. This is especially important in a time of crisis when there is a stronger likelihood that issuers will not be able to demonstrate non-loss making positions and the required levels of net assets to get listed. It is generally expected that, is in the financial year 2008, in the financial year 2009 many companies will not generate enough income to cover operational losses and therefore face these issues.

Maintaining required net asset levels

No specific sanctions are established for non-compliance with the above net assets requirements. Listings are made on a discretionary basis. From a formal perspective, a public JSC that does not comply with the listing requirement could be required to transform into a private JSC, while non-compliance with the net assets requirement could theoretically result in a demand to liquidate.

In order to comply with the Ukrainian net assets requirements, these companies should generate additional income (other than income from their business activities) to cover the losses. Options available for JSC companies to maintain the required level of net assets follow.

Revaluation of fixed assets for accounting purposes

This option provides for revaluation of fixed and intangible assets in order to increase their book value, provided it is lower than the fair market value. The amount of the revaluation reserve may be recognised as additional capital which increases the value of net assets. This revaluation, however, does not affect depreciation of the fixed or intangible asset in the tax books, so this option is tax neutral. Once performed, revaluation of fixed assets must be held on a regular basis in order to keep the book value of the fixed assets in line with their fair market value.

Gains from trade in securities

A company's profits (and, consequently, net assets) may be increased by receiving gains from the trade in securities (e.g. bonds, shares of other entities, etc). If a company acquires shares/bonds of a (related or unrelated) third party and subsequently resells them for a gain, it will realise profit for accounting purposes. From a tax perspective, the taxable gain arising from this transaction may be offset against expenses incurred in respect of the purchase of other shares/bonds within the same tax period.

Receipt of non-repayable financing

A company may consider receiving non-repayable financing from its shareholders or related parties in an amount sufficient to increase the net assets to the required level. From an accounting perspective, non-repayable financing may be recognised as income or additional capital (depending on the accounting policies applied), which would increase the company's net assets. From a tax perspective, non-repayable financing is treated as taxable income and is subject to corporate profit tax at the rate of 25%.

Share premiums

From the Ukrainian accounting perspective, share premiums (i.e. the amount by which the proceeds gained from the sale of the company's shares exceeds their face value) may be treated as additional paid-in capital and should therefore increase the value of net assets. From a tax perspective, receipt of share premiums should be tax neutral. Although this option appears to be tax efficient, it may be impossible to implement in practice. In particular, in order to gain the share premium a JSC must issue new shares. However, according to the current Regulations on the Procedures of Increase (Decrease) of the Share Capital of Joint Stock Companies5, a JSC is prohibited from deciding to increase its share capital if, after the second and then in subsequent financial years, its net assets are lower than the registered share capital. Therefore, it could be practically impossible to use payment of the share premium to address the issue with net assets.

Given the lack of consistent market practice and the complex requirements regarding maintenance of a positive balance of net assets, companies are strongly encouraged to monitor the level of their net assets on a regular basis. The earlier the threat of the net assets decrease is identified, the less cost (including taxes) and effort will be are required to address the problem.

There is a running debate over whether the current listing requirements should be modified or simplified to facilitate the long-term compliance of public joint stock companies with the requirements of the new Joint Stock Company Law.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit:


1 The Law of Ukraine "On Joint Stock Companies in Ukraine" dated 17 September 2008, No.514-vi.

2 Approved by the Decision of the SCSSMU dated 19 December 2006, No. 1542, as amended.

3 Based on the exchange rate EUR 1=UAH 11.707.

4 Please note that there could be further requirements established by the relevant stock exchange regarding the listing.

5 Approved by the Decision of the SCSSMU dated 22 February 2007, No. 387.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.