Investing in Ukraine during war: war bonds

Legal Alerts
08.04.2022 4529

On 25 February 2022, the Cabinet of Ministers of Ukraine by Resolution No. 156 ("Resolution") decided to implement state domestic borrowings in the amount of up to UAH 400 billion through the gradual issuance of the domestic government loan bonds "War Bonds".


War bonds as domestic government loan bonds of Ukraine

In accordance with Clause 3 of Article 16 of the Law of Ukraine "On Capital Markets and Organized Commodity Markets", domestic government loan bonds of Ukraine ("OVDPs") are securities that are placed exclusively on domestic capital markets and confirm Ukraine's obligation to repay the nominal value of such bonds to the bondholders with payment of income in accordance with the terms of OVDPs' placement. OVDPs are government bonds that exist only in electronic form.

The Ministry of Finance of Ukraine is the issuer of OVDPs in accordance with to its obligations under the Budget Code of Ukraine. The National Bank of Ukraine ("NBU") conducts public debt service operations related to the placement of OVDPs, their redemption and payment of income on them. The latter also conducts depository activities for such securities. The specifics of such depository activities are determined by the National Securities and Stock Market Commission ("NSSMC") subject to NBU's approval.


Terms of OVDPs "War Bonds"

OVDPs "War Bonds" is a form of raising additional funds for enlargement of the budget during the martial law. The Resolution provides for the following main terms of such OVDPs:

  • currency - hryvnia;
  • nominal value of one bond - UAH 1,000;
  • tenure - 1 year;
  • yield - 11 percent per annum;
  • term of circulation - up to 15 years.


Purchase of war bonds

Both individuals and legal entities can purchase war bonds through banks or brokers. For the convenience of investors, the Ministry of Finance of Ukraine has published information (in Ukrainian only) on primary dealer banks and licensed brokers.

After choosing a bank or broker, you need to approach them in the specified manner (contact the branch, manager, use a mobile application or otherwise) to enter into an agreement, open a securities account and place an order to purchase war bonds. Some banks and brokers have cancelled commissions and simplified the procedure for registering new clients.

Non-residents can also purchase war bonds. To this end, the NSSMC by Decision No. 162 dated 13 March 2022 allowed non-residents to open accounts and enter into military bond agreements under a simplified procedure: for non-resident individuals on the basis of passport data and for non-resident legal entities on the basis of a code/number from commercial, bank or court register, registration certificate of the local authority of a foreign state on the registration of a legal entity. Unlike residents of Ukraine, who can pay for war bonds denominated in hryvnia only in hryvnia, non-residents can pay for war bonds denominated in hryvnia, both in hryvnia and in foreign currency.

In addition to hryvnia war bonds, investors can purchase military bonds denominated in foreign currency. In particular, the NSSMC by Decision No. 163 dated 14 March 2022 supplemented the list of securities allowed to be traded on the secondary market during wartime, and thus admitted dollar war bonds to the capital markets. The purchase price of such war bonds is paid by residents and non-residents either in dollars or in hryvnia according to the applicable exchange rate. The Ministry of Finance of Ukraine pays interest on such bonds and redeems them in dollars, respectively.


Financial monitoring and taxation

There is no need to prove the source of funds to purchase war bonds. Due to the Resolution of the NBU Board No. 47 dated 11 March 2022, in the case of financial transactions for the transfer of cash to the accounts of Ukrainian banks for the purchase of domestic government loan bonds "War bonds", the banks do not verify the sources of funds according to the Law of Ukraine "On Prevention and Counteraction to Legalization (Laundering) of Proceeds of Crime, Terrorist Financing and Financing of Proliferation of Weapons of Mass Destruction" and regulations of the NBU. Such Resolution of the NBU Board is valid for the period of validity of the Order of the President of Ukraine No. 64/2022 dated 24 February 2022 "On the Imposition of Martial Law in Ukraine".

An additional advantage of OVDPs for individual investors is that the amount of income received in the form of interest accrued on government securities (in accordance with Subclause 165.1.2, Clause 165.1 of Article 165 of the Tax Code of Ukraine) and investment income received from transactions with government securities (in accordance with Subclause 165.1.52, Clause 165.1 of Article 165 of the Tax Code of Ukraine), are not included in the total monthly (annual) taxable income of a taxpayer.

In addition, the Law of Ukraine "On Amendments to the Tax Code of Ukraine on Improvement of Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation" No. 466-IX dated 16 January 2020 amended para 1 of Subclause 1.7 of Clause 16-1 of Subsection 10 "Other Transitional Provisions" of the Tax Code of Ukraine, according to which the amount of income received in the form of interest accrued on OVDPs and investment income received from OVDPs is not subject to military tax.

Accordingly, individual investors receive a guaranteed non-taxed income from OVDPs. Taxation of income of investors-legal entities depends on selected taxation system. For example, the amount of income from OVDPs received on the account of a legal entity-payer of the unified tax is subject to taxation.


Other legal aspects concerning war bonds

According to para 2 of Clause 7 of Article 11 of the Law of Ukraine "On Capital Markets and Organized Commodity Markets", early redemption of government bonds is allowed if such a possibility is provided by the terms of their placement. As for war bonds, there is no possibility of early redemption.

An investor has the right to sell war bonds on the secondary market if needed. For this the investor has to contact a securities trader who has a brokerage license issued by the NSSMC. Some banks provide their clients with the opportunity to sell OVDPs online.

Additionally, the above-mentioned Decision of the NSSMC No. 162 dated 13 March 2022 provides, inter alia, that depository institutions may conduct operations in relation to pledge of government securities in banks, change and termination of such pledge, as well as foreclosure on pledged property. Thus, war bonds can serve as pledged property, including, for obtaining loans.


This legal alert was prepared by Olha Horodniuk, EVERLEGAL Associate.

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