Property and Land in a Farming Enterprise

The property of a farming enterprise, or its contributed capital, is a set of assets transferred by members of a farming enterprise for temporary gratuitous use for a specified period for agricultural production. The procedure for forming the property of the enterprise is stipulated in its constituent document, namely its articles of association.

Definition. Property (contributed capital) may include land, water and other natural resources, buildings, residential houses, structures, equipment, means of production, as well as property rights (including intellectual property rights) that are necessary for carrying out commercial agricultural production.

It should be taken into account that a farming enterprise may hold ownership or use rights to a land plot. A founder (member) of a farming enterprise may transfer not the property itself (movable or immovable assets), but the right to use such property.                                                                                                 In order to avoid problems in the future, all issues related to the formation of property must be set out in the articles of association. This applies in particular to:

• the timeframes and procedure for transferring property rights (property);
• the procedure for possession, use and disposal of property by the farming enterprise;
• the size of the member’s share in the property of the farming enterprise and the procedure for receiving it in the event of liquidation of the enterprise or termination of membership in it.

Procedure for Transfer of Property

A member of a farming enterprise may contribute their immovable property (a land plot, building, premises, etc.) to the contributed capital based on either a lease agreement or an agreement on contribution of property to the contributed capital.

Please note: if it is a lease agreement, it must provide for the transfer of property for use for a specific fee and for a specific term (Article 759 of the Civil Code of Ukraine). A similar provision is contained in the Law of Ukraine dated 06.10.1998 No. 161-XIV “On Land Lease.”

Regardless of whether movable or immovable property, including land plots, is being leased out, a lease agreement must be executed. Such agreements are concluded in writing, signed by the parties, and may be subject to state registration.

In particular, state registration is required for: the right to use a land plot for agricultural needs (emphyteusis, or perpetual lease); the right of lease (sublease) of a land plot; the right to use (rent or lease) a building or other capital structure (or a separate part thereof) arising from an agreement where the period of use is not less than 3 years. If a member of a farming enterprise decides to lease the above-mentioned property for one year, such an agreement is not subject to state registration.

If a decision is made to transfer property as part of the contributed capital, this is carried out in accordance with the procedure set out in the articles of association.

Such a procedure provides for the submission by the member of a written application (in free form) expressing the intention to contribute the property. In turn, the founders of the farming enterprise must make a decision to accept such property into the contributed capital (by drawing up minutes) and amend the articles of association (which are restated). After that, the amendments to the articles of association must be registered in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Associations. Amendments to the articles of association take effect from the date of their state registration.

It should be noted that the members of a farming enterprise themselves decide for what period they contribute property to the contributed capital: permanently (for the duration of the farming enterprise’s activity), for a certain period, or until their withdrawal from the enterprise. Such a period is stated in their application.

Such a period must also be specified in the articles of association of the farming enterprise.
If property owned by a member of the farming enterprise is contributed, title to such property is transferred to the enterprise (pursuant to Article 115 of the Civil Code of Ukraine).

Use of Land Plots

One of the components of the property of a farming enterprise is land plots. In accordance with current legislation, lands of a farming enterprise may include:

• land plots owned by the farming enterprise if the owner is a legal entity;
• land plots owned by individuals that are members of the farming enterprise as private property;
• land plots used by the farming enterprise on a lease basis.

Current legislation does not limit the amount of land that a farming enterprise and its members may acquire ownership of or lease. A farming enterprise may use land plots under short-term or long-term lease conditions.

Please note. Pursuant to part 6 of the Transitional Provisions of the Land Code, the amount of lease payment for land plots must not exceed the amount of land tax.

Members of a farming enterprise are entitled to receive, free of charge, land plots from state-owned and municipally-owned land in an amount corresponding to their land share (parcel), which may be contributed to the authorised capital of the farming enterprise.

Please note that land may be used not only by members of the farming enterprise. Individuals have the right to freely walk on lands of farming enterprises. They may also travel by all types of transport on roads, move by boats, swim in water bodies located on land plots owned or leased by farming enterprises, set up tents and stay in them, make fires, and perform other actions permitted with the consent of landowners, except in cases where land servitudes are established by a court decision, provided that natural components are preserved in an environmentally sound condition.

Legal entities that own facilities (gas and oil pipelines, power transmission lines, communication lines, etc.) passing through land plots of farming enterprises have the right of access to such facilities on the basis of an agreement concluded with the relevant farming enterprise, in accordance with approved land management documentation or an established land servitude.

In turn, a farming enterprise, in accordance with the requirements of current natural resource legislation, has the right to use for the needs of the enterprise commonly occurring minerals (sand, clay, gravel, peat, etc.), forest lands, water bodies, and fresh underground waters located on its land plot.

Property Relations within a Farming Enterprise

The property (contributed capital) of a farming enterprise may include not only land plots, but also residential houses, farm buildings and structures (storages, farms); means of production such as tractors, combines, machinery, mechanisms, equipment, vehicles; products and tangible assets such as crops, perennial plantations, productive and working livestock, poultry, bee colonies, grain, feed, etc.; financial resources such as cash (in accounts) and securities; property rights including intellectual property rights and the right to use natural resources (water, forests); as well as enterprise income, including undistributed profit from business activities.

It should be taken into account that the property of a farming enterprise is owned by it, if it is a legal entity. Property rights included in the contributed capital are transferred to the enterprise for the period specified in the articles of association. Legislation also allows the use of property under the right of joint ownership by all members of the enterprise, unless otherwise provided for in the agreement between them, where the farming enterprise operates without legal entity status and is established by an individual entrepreneur. In this context, joint ownership is the predominant form of ownership in such enterprises.

The property of a farming enterprise must be used exclusively for commercial agricultural production, processing, and sale of products.

In turn, a farming enterprise as an integrated property complex or its individual parts may be sold, gifted, or otherwise transferred by decision of the members of the enterprise. Property may also serve as collateral for obtaining loans to conduct business activities (for example, to purchase machinery, fuel and lubricants, or for sowing campaigns). A farming enterprise has the right to dispose of and acquire property on the basis of civil law agreements.

In the event of termination of membership or death of a member of a farming enterprise, their share of property (or a share in the contributed capital) may be inherited. Upon withdrawal from the enterprise, if the property was transferred for use rather than into ownership, it is returned in full. If the property was transferred into ownership, the member has the right to receive a share of the property of the farming enterprise or its monetary value upon liquidation of the enterprise (or upon termination of membership). The amount of the share and the procedure for receiving it are stipulated in the articles of association.

Finally, it should be noted that a farm is liable for its obligations to the extent of the assets it owns. Movable property is used first to resolve any issues. If the farming enterprise has insufficient movable property, or no other property at all against which enforcement proceedings can be brought, then enforcement proceedings may be brought against the land plots granted for ownership for the purpose of running the farming enterprise.

Nataliia Shcherbak, Accounting and Tax Consultant