Land Law: what the owners of agricultural land should get ready for

Sourse: Liga Business

On March 30, 2020, the Verkhovna Rada of Ukraine’s deputies during the extraordinary session adopted the draft law No 2178-10, which opens the land market in Ukraine, and on April 28, 2020, the President signed it. Discussions around this document have been ongoing since the moment of its introduction in October last year. So what should the citizens expect from the land market opening?

 Who can be the owner of agricultural land?

The Law provides that the owners of agricultural land can be:

  • the citizens of Ukraine;
  • Ukrainian legal entities, where exclusively the citizens of Ukraine, the state, territorial communities are ultimate beneficial owners of such an entity;
  • the territorial communities themselves;
  • the state itself.

The Law introduced the following innovation: banks may become agricultural landowners under foreclosure procedure regarding such land being a subject of collateral. At the same time, the bank is obliged to sell such land at land auctions within the next two years. This rule is a definite plus for farmers who will borrow money secured by their land with peace of mind.

 Will the foreigners buy up the land?

During the discussions on the open land market, foreigners’ question to become the owners of Ukrainian lands was repeatedly raised. The Law leaves the solution to this issue at the “mercy” of the All-Ukrainian referendum. Until such a decision is made in a referendum, foreigners cannot become owners of agricultural land even under indirect ownership through legal entities that are founded and registered under the legislation of Ukraine. Moreover, foreigners, stateless persons, and legal entities are prohibited from purchasing shares in the authorized capital, stocks, share units, or membership in legal entities (except bank authorized capital) that are agricultural landowners. It should be mentioned that there is no law on the referendum itself, and it is undefined when it will be presented for the discussion. Therefore, whether foreigners will be allowed to buy land and how soon this may happen remains under wraps.

 Who is banned from buying agricultural land?

At the same time, the Law presents an exact list of persons prohibited from acquiring agricultural land ownership. Such a prohibition will apply in any case, regardless of the results of the all-Ukrainian referendum. It applies to:

  • legal entities with participants/ultimate beneficiaries not-citizens of Ukraine – regarding agricultural land plots of state and municipal property, agricultural land plots allocated in kind (on the ground) to the owners of land shares (share units) and which are located closer than 50 kilometers from the state border of Ukraine (except for the state border of Ukraine, which runs along the sea);
  • legal entities with participants/ultimate beneficiaries – citizens of the Russian Federation;
  • individuals who are or were related to terrorist organizations;
  • legal entities with participants/ultimate beneficiaries – foreign states;
  • legal entities where the establishment of the beneficial owner (controller) is impossible;
  • legal entities whose beneficial owners (controllers) are registered in offshore zones classified in the list of offshore zones by the Cabinet of Ministers of Ukraine;
  • individuals and legal entities which are under special economic and other restrictive measures (sanctions) following the Law of Ukraine “On Sanctions” in the form of a ban on concluding transactions for the acquisition of ownership of land plots, as well as related persons;
  • Ukrainian legal entities controlled by individuals and legal entities registered in Iran and the DPRK, the so-called FATF blacklist.

 What other restrictions are there?

The moratorium on the sale of agricultural land of state and municipal property is established. There are about 10 million hectares of such land in Ukraine, which is approx. 26% of all agricultural land. The plots located in the temporarily occupied territories in Donetsk and Luhansk regions, the Autonomous Republic of Crimea, and the city of Sevastopol were also not spared. The Law provides for a ban on the alienation of land shares (share units), agricultural plots of state and municipal property, the alienation, and change of the designated purpose of private agricultural land plots allocated in kind (on the ground) to the owners of land shares (share units) located in such territories, except for their inheritance.

Individuals can acquire ownership of agricultural land for the area not exceeding a total of 10,000 hectares. At the same time, the land plot that belongs to a legal entity by right of ownership (except for a bank) cannot exceed the total area of agricultural land plots that may be owned by all participants in such a legal entity (members, shareholders), but not more than ten thousand hectares. Moreover, suppose an individual is a participant in any legal entity. When calculating the land owned by an individual, the area of land owned by the legal entity will also be taken into account in the percentage of his participation in the authorized capital.

Despite the established area of 10,000 hectares, until January 1, 2024, a limit of 100 hectares is set. And the right to its purchase is granted exclusively to individuals.

 Restrictions on individuals and the amount of land to be owned will cause the shadow market to grow and update land “purchase” schemes. After all, despite everything, the companies will “enter the race” and will register land for “trusted” persons to further transfer the land to the ownership of the legal entity.

 How much will the land cost?

As for the sale price, the Law sets a restriction on agricultural plots’ sale price until January 1, 2030. The cost of such plots cannot be less than their standard monetary value. Payments for land should be carried out exclusively in non-cash form and only if the purchaser can present documents confirming the sources of origin of funds or other assets used for the purchase of the land.

The size of the normative monetary value is published annually by the State Tax Administration on its website, which is formed on the basis of data from the State Service of Ukraine for Geodesy, Cartography, and Cadastre. Where does it come from, and on what principle is it calculated? The basis for calculating the normative monetary value is the rental income from the land plot’s use for a certain period. For a simplified understanding, rental income is, in fact, the money that can be raised from the most efficient use of a land plot for its intended purpose. For a land plot for agricultural purposes outside the settlement, this income will be determined due to the sale of grain grown on the land plot for a certain period. Moreover, if the plot belongs to an individual, the quality of the soil covering such a plot is also taken into consideration. Today, on average, in Ukraine, the size of the land’s normative monetary value is UAH 27,500. At the same time, the lowest standard monetary value for 1 hectare of the arable land is in Zhytomyr region (21,411.00 UAH), Lviv region (21,492.00 UAH), Volyn region (21,806.00 UAH), Rivne region (21,938.00 UAH), and the highest – in Cherkasy region (33 646.00 UAH), Chernivtsi region (33 264.00 UAH), Kharkiv region (32 237.00 UAH), Kirovograd region (31 888.00 UAH).

No fair price for farmland is expected in the coming years. This is mainly due to restrictions on land ownership both in terms of areas and in terms of the circle of people, lack of a market, poverty of the country’s residents, especially of rural residents, for whom sometimes $ 1500-2000 is their annual income, political instability in the country, etc.

Today, the average price of 1 hectare of arable land in Ukraine fluctuates between 1000 and 1500 US dollars per hectare, i.e., within + 10% -20% to the normative monetary value. According to various estimates and forecasts of different experts, after the land market is opened and in the next 2.5 years after the opening, the cost of 1 hectare of arable land in Ukraine will fluctuate from 1000 to 3000 US dollars per hectare. From 2024, after legal entities will be granted the right to purchase the agricultural land, the price for 1 hectare of arable land will be growing within 10-15% per year. The cost will also be influenced by both the economic and political situation in the country.

If we talk about the first-place purchase, it may be the land under the emphyteusis contracts, that in recent years was used to disguise the real sale of the land, and of course, those agricultural lands actively distributed by local councils in the last two years in the land plots of 2 hectares, mainly for beneficiaries: Afghan and Chernobyl victims, ATO participants, etc.

According to Nikolai Solskiy’s estimates, “During the first two years after the market opening, 1.6 million hectares of land can be purchased. These are just emphyteusis contracts and long-term leases.”