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Lead Associate, Tax practice, MORIS GROUP
Currency Control in Ukraine
Ukraine is one the countries which has strict currency control rules. They are mainly the result of the political and economic crises of the last few years. Nevertheless, a lack of knowledge of key issues of currency regulations may significantly affect the business activities of foreign investors that have an intention to invest in Ukraine.
What should foreign business know about the currency control system?
Terms of Currency Settlements
First of all, there are established terms for fulfillment of currency settlements — 180 days. Residents that have exported goods or provided transport and insurance services in accordance with foreign economic agreement should receive currency payment within this term. The same term applies to the import of goods if prepayment of currency was carried out in favor of a non-resident supplier. Even taking into account that this term has doubled since 2014, when it was only 90 days, such requirements remain an obstacle to business. Besides, in case of violation a fine will be charged for each day of delay and the state authorities will have grounds to impose an individual licensing regime on the company, which requires obtaining a personal permit from the Ministry of Economic Development and Trade of Ukraine to conduct any foreign economic operation.
Another dilemma is the fact that, according to the fiscal authorities, the parties cannot terminate their obligation under the contract by using other legal instruments that are common in commercial activities between two residents (for example by offset against counterclaims, assignments of rights or delegation of duties), although legislation does not contain any direct prohibitions.
Neither should a foreign business count on the flexibility of agents of currency control — banks, because the latter have strict instructions that regulate all their steps. However, their instructions are not comprehensive and do not provide answers to many situations, so the bank usually informs the fiscal authorities about a violation of currency legislation and delegates them powers to decide whether such a violation really did take place.
Thus, the company is actually accused of violating the rules of currency settlements and the obligation to prove that all operations are carried out within the legislative framework is put upon it.
Neither do court precedents clarify this situation, because there are different decisions in favor of state authorities and in favor of commercial entities with contradictory legal opinions.
That’s why it is quite difficult to find a balance in this situation between continuing to engage in international business and fulfillment of all the rules and requirements established by different state authorities. Superficial assessment of the situation may lead to negative consequences, so it is advisable to undertake deep analysis and adopt a comprehensive decision.
Purchase and Sale of Foreign Currency
Another essential issue is the purchase and sale of foreign currency in Ukraine. As of today, 50% of currency earnings received by a resident company from overseas is subject to mandatory sale. Thus, a Ukrainian company receives half of the settlement in hryvnia and only 50% in foreign currency. In addition, this currency may only be purchased on the Inter-bank Currency market under the established procedure which, in some cases, may last up to several days. Therefore, urgent transfer of foreign currency to the non-resident counterparty under the agreement may be delayed purely due to technical procedures. In addition, such a time gap and high volatility of the foreign exchange rate may also lead to direct financial losses.
Analysis of Documents and Participants in a Financial Transaction
Prior to the currency transfer in accordance with a client’s payment order, a bank should verify the participants of such transaction and check the documents concluded between the parties. Mentioned obligations are established by the National Bank of Ukraine in order to prevent any risky activities. In particular, a bank should find out the economic purpose of the transaction, the compliance of the essence of the financial transaction with the fields of commercial activities of its participants, source of funds, disclose beneficial owners, etc.
Such verification is usually not a problem for settlements between the parties under direct foreign economic agreements. However, in case of complication of the scheme of legal relations (via use of third-party beneficiary contracts, assignment of rights or delegation of duties, etc.) or conducting of non-core activities, a bank may not carry out a transaction until receipt of additional information confirming the legality of a client’s actions.
Thus, it is advisable to negotiate with the bank on the texts of contracts and other necessary documents prior to conducting settlements under foreign economic operations.
Individual Licenses of the National Bank of Ukraine
Some transactions involving the use of foreign currency may be carried out only after obtaining an individual license from the National Bank of Ukraine for their conduct. Among others, such transactions include settlements in foreign currency within the territory of Ukraine, granting of loans in foreign currency to non-residents, investments abroad, etc.
Temporary Restrictive Measures
Starting from 2013 the National Bank of Ukraine introduced temporary restrictive measures to prevent the outflow of foreign currency from the country. Such measures are subject to regular review depending on the current situation on the currency market. During 2017 a lot of them were eliminated, but a range of restrictions are still valid. Key temporary restrictions include limitation on the repatriation of investment by non-resident investors. They may return such investment, made into a Ukrainian company, upon the sale of their corporate rights or shares, the decrease of the company’s share capital or the investor’s withdrawal from the company in an amount not exceeding USD 5 million per month.
Foreign investors may repatriate dividends accumulated in 2016, in an amount not exceeding USD 5 million per calendar month.
As to prohibition on pre-term payment of loans by Ukrainian borrowers to non-residents, the list of exceptions from this rule was extended during this year. Nevertheless, because of a lot of conditions each loan should be checked individually.
In general terms, 2017 displayed a trend for step-by-step liberalization of currency legislation and abolition of restrictions on currency payments. The National Bank of Ukraine regularly reviews its regulations and analyzes the expediency of introduced mechanisms on preventing the outflow of currency abroad. Free movement of capital is one of the requirements of integration into the European Union; nevertheless, abolition of restrictions depends on the current economic situation in Ukraine.