Abridged phrases used in this article:
- Decree of the NBU No. 140 – the Decree of the Board of the National Bank of Ukraine “On settlement of the situation at the monetary-and-credit and foreign exchange market of Ukraine” as of March 03, 2016 No. 140;
- Decree of the NBU No. 281 – the Decree of the Board of the National Bank of Ukraine “On approval of the regulatory acts of the National Bank of Ukraine” as of August 10, 2005 No. 281;
- Decree of the NBU No. 597 – the Decree of the Board of the National Bank of Ukraine “On transfer of monetary sums in the national currency for the benefit of non-residents under certain operations” as of December 30, 2003 No. 597;
- Decree of the NBU No. 485 – the Decree of the Board of the National Bank of Ukraine “On approval of the Regulation on the procedure of issuance by the National Bank of Ukraine of individual licenses relating placement by the residents (legal entities and individual persons) of foreign currency assets at the bank accounts outside Ukraine” as of October 14, 2004 No. 485;
- Decree of the NBU No. 492 – the Decree of the Board of the National Bank of Ukraine “On approval of the Instruction on the procedure of opening, operating and closing the bank accounts in the national and foreign currencies” as of November 12, 2003 No. 492;
- SCD – shipping customs declaration.
It will hardly be an overstatement to say that current Ukrainian foreign currency limitations are among the most rigid in the World. In cases when residents of Ukraine need to make certain payments to non-residents the participants of the settlement operation face a large number of restrictions imposed by foreign exchange legislation of Ukraine onto payments made abroad. As a result the parties of the transactions sometimes have to withdraw from commercially expedient operations and structure the payments, and even from the whole model of relations with consideration for the rigid constraints imposed by foreign currency legislation of Ukraine.
Further we will describe the existing foreign currency restrictions which the residents of Ukraine have to face in the process of performance of international settlements, as well as zero in on all related problematic aspects.
This is, maybe, the most widespread limitation when in case of export of goods/services under the terms of “post-delivery payment” or import of goods/services under the pre-payment terms the money or goods/services must be transferred to Ukraine within a 90-day period. In case of violation of the mentioned deadline the resident will have to pay the penalty for each day of delay in the amount of 0.3% of the sum of short-received foreign currency proceeds or of the value of short-supplied goods/services (maximum amount of the fine must not exceed the amount of the overdue payment/value of the short-supplied goods/services).
As a matter of practice the mentioned limitation is, in particular, related to the following difficulties.
Firstly, the banks (acting as currency control agents in this case) are maintaining the approach according to which any transfer of monetary assets must be confirmed by SCDs or Statements of completion. Such an approach practically negates the rights of the parties to specify certain details of the settlements under the foreign economic agreements.
For example, internationally widespread is the mechanism of providing bonuses to contractors for reaching the volumes of purchasing goods can be used in Ukraine only upon execution of corresponding confirmation statements relating to the bonus due to a non-resident in the form of a marketing service with provisions to the bank of corresponding statements of confirmation as a proof of provision of corresponding services.
Provision by the resident of the discounts to non-residents after execution of the SCD relating to the export goods means violation by such resident of the said “90-day rule”. As a result the residents have to register the discounts as a decrease of the value of the future consignments of goods. Until recently the counterparties have used an option with provision of credit-notes with further set-off of the discount against a part of value of future consignments of goods. However, such option was gradually limited from 2014 firstly at the level of the letters issued by the NBU and then, at the level of its corresponding decrees (read about this limitation further).
Violation of the requirements of foreign exchange restrictions may be also represented by compensation by the resident of non-resident’s expenses (for example, travel and lodging expenses of the non-resident’s employees in Ukraine performing certain non-resident’s functions under the foreign economic agreement), reimbursement of expenses born by non-resident agent, compensation of the principal amount of liability to the non-resident warrantor. In this respect the parties usually include “compensation” payments into the general cost of supplies under the agreements and use the detailed descriptions of compensatory payments only as the documents for internal purposes (with consideration for the risk of application of sanctions to the resident).
Secondly, the said “90-day rule” actually makes it impossible to replace a party to the agreement in certain cases. According to the position provided in clarifications issued by fiscal authorities (accessible at “ZIR” knowledge data base at the web-site of the State Fiscal Service of Ukraine) transfer by the resident debtor (importer) of the indebtedness under foreign economic agreements to another resident, the same as assignment by the resident creditor (exporter) of the right of demand towards the non-resident to another resident constitute violation of foreign exchange legislation. Disputable also is the possibility of buying by the resident from a non-resident of the rights of demand towards another resident.
In this case the logic which guides the controlling authorities (which is often shared by the banks) is fairly simple: the “90-day rule” stipulates that fact that the resident transfers anything to a non-resident (money/goods/services) means that this particular resident must receive something from the non-resident.
It needs to be noted that the Law of Ukraine “On the procedure of making settlements in foreign currency” stipulates for 180-day (but not 90-day) period of closing of the import/export operation. 90-day period is of a temporary nature (is established by the constantly re-established decrees of the NBU with limited validity period extending the limitation in question). The term of validity of Decree of the NBU No. 140 (which at present establishes a 90-day period) expires on June 08, 2016 but the limitations stipulated by this Decree (analyzed in detail further) will likely be extended.
Individual licensing by the NBU
Article 5 of the Decree of the Cabinet of Ministers of Ukraine “On the system of foreign exchange regulation and control” stipulates that any transfers of foreign currency abroad are subject to licensing except for the exhaustive list of operations. The list of exceptions includes, in particular, transfer of foreign currency to non-residents for the purchase of goods/services, intellectual property rights and other proprietary rights under foreign economic agreements, payment of the profits of foreign investors, and return of foreign investments.
Moreover, the said Decree established that licensing procedure is compulsory for the investments made by the residents to foreign countries (i.e. acquisition by the residents of the assets, such as corporate rights and real estate abroad), as well as placement by the residents of foreign exchange currency assets at the accounts in foreign financial institutions.
The last mentioned limitation is related not only to the monetary assets, but also to securities.
Unfortunately, in practice such strict limitations make cooperation between the parties to foreign economic agreements more complicated in a number of instances.
For example, if the mentioned compensations by the residents of the expenses born by non-residents and settlement of bonuses to the non-residents as such (not registered as services) are not related to any exception to the general rule concerning the necessity to obtain an individual NBU license, such payments formally require obtaining an individual NBU license (in addition to association with risks of violation by the resident of the “90-day rule”).
License requirements towards investments abroad led to execution of fictitious agreements on donation of shares of foreign companies to residents of Ukraine (as soon as donation and inheritance of foreign assets constitutes an exception to the rule requiring no licensing).
The procedure of obtaining individual licenses relating to various types of operations with non-residents is governed by certain decrees of the NBU which, unfortunately, not always conform with the mentioned Decree. Article 5 of the Decree allows not to receive an individual license for placement of assets abroad in case of opening such accounts for non-commercial representative offices in other countries. However, the NBU Decree No. 485 (which governs obtaining the license for placement of assets at foreign bank accounts) does not mention such a possibility in the list of corresponding operations. As a result in practice certain banks refuse to transfer monetary assets to the foreign accounts of non-commercial representative offices of Ukrainian resident companies demanding provision of an individual NBU license issued in relation of such transfers.
Purchase of foreign currency
Decree of the NBU No. 281 strictly regulates conditions of purchasing foreign currency for making payments to non-residents.
If purchase of foreign currency under certain operation is not directly stipulated in this Decree there is a great risk that the servicing bank will decline the purchase request. Further we will provide several examples of problematic issues with purchase of foreign currency related to the gaps existing in the Decree of the NBU No. 281.
It needs to be said that Decree of the NBU No. 281 does not mention clear grounds for purchasing foreign currency by permanent representative offices of non-residents under the foreign-economic contracts regardless of the fact that current legislation does not impose any limitations in their right of conducting foreign economic activities.
The Chapter 1, Section 2 of the Decree of the NBU No. 281, which regulates the grounds for purchasing foreign currency under the trade operations, directly excludes permanent representative offices from the list of participants of such operations by narrowing the meaning of the term “client-resident” in relation to classic foreign economic operations (including import of goods). The possibility of the permanent representative offices to purchase foreign currency is directly mentioned only in relation to the purchase of foreign currency for participation in the seminars, exhibitions, conferences etc. In this regard there are known examples when the servicing banks declined foreign currency purchase applications in case of import of goods by permanent representative offices.
Also in connection with the specific definition of the term “goods” for the purpose of foreign currency control (through unknown reasons such term does not include proprietary rights/right of demand) Decree of the NBU No. 281 does not contain clear grounds for purchase of foreign currency to buy rights of demand.
It means that formally the resident of Ukraine does not have the grounds for purchasing the foreign currency for settlement of the non-resident’s right of demand as soon as purchase of the right of demand does not constitute settlement under the trade operation (purchase of goods) and is not covered by any other grounds for purchase of the foreign currency.
Transfer of foreign currency assets
The possibility to transfer foreign currency abroad, first and foremost, is conditioned by the limitation nature of foreign currency accounts, which is regulated by Decree of the NBU No. 492. As for legal entities-residents this Decree contains open list of possible transfers made abroad (which ends by the phrase “and other transfers which do not contradict current Ukrainian laws”). At the same time as for the permanent representative offices – non-residents such list is exhaustive and does not stipulate for the possibility of settlements with non-residents except as transfer for the benefit of the head office of the permanent representative office abroad and compensation of credit indebtedness (including interests).
There are real instances when exhaustive wording of the Decree of the NBU No. 492 constituted the ground for the servicing bank to transfer foreign currency to the non-resident under the import agreement concluded between such non-resident and permanent representative office.
Prohibition for the permanent representative offices to make settlements under the import agreements is established at the level of subordinate act (NBU No. 492) contradicts the Law of Ukraine “On foreign economic activities” which stipulates for the right of a permanent representative office to carry out import operations (articles 3 and 4), as well as forbids passing of the subordinate acts deteriorating the terms of performance of foreign economic operations compared to this law.
Except for the limitations in the form of the account regime there are also special limitations of the possibility to transfer foreign currency to non-residents, which are related to purchase of works, services and settlement of royalties (established by the Decree of the NBU No. 597). If the sum of royalty settlements, as well as payments for one type of works/services according to the classifier DK 012-97 exceeds EUR 50 000.00 per calendar year it will be necessary to obtain the act of cost examination (relating to the excess amount) of the State information and analytical center for monitoring external product markets (on conformance of prices to the market operating environment) and provide this act to the servicing bank. No transfer of foreign currency for the benefit of the non-resident shall take place without such act.
In this connection it needs to be stated that recently the State information and analytical center for monitoring external product markets has been paying close attention to credibility and economic substantiation of purchase of works/services from the non-resident, requiring provision of information about the workforce, availability of resources, including the web-site of the non-resident contractor.
Temporary stabilization limitations
Starting from 2014 the NBU has been gradually introducing “temporary” limitations established by certain special Decrees term of validity of which constitutes several months, but upon expiration of such decrees the NBU passes new similar decrees extending prohibitions and limitations. The declared aim of such measures is to stabilize the situation at the foreign currency market of Ukraine. However, the mentioned measures create considerable obstacles for conducting business between the residents and non-residents.
At present the Decree of the NBU № 140 (valid from February 05, 2016 till June 08, 2016) may serve as the example of the Decrees issued by the National Bank of Ukraine.
Further we will mention the key limitations stipulated by this Decree (apart from the mentioned shortened 90-day period of making settlements under export-import operations):
- obligatory sale of 75% of foreign currency proceeds of the non-residents and (conditioned by this requirement) prohibition on making set-offs under the export operations (prohibition of set-offs is applied to the requirements in the 1-st group of the classifier, in rubles, as well as in other currencies, if the general sum of obligations ceased by the set-off under one agreement exceeds the equivalent of USD 500 000.00);
- prohibition to make premature settlement of any payments under the loan agreements with non-resident acting as the creditor. It needs to be noted that the Decree of the NBU No. 140 has somehow liberalized such limitation compared to the previous similar decrees issued by the NBU allowing premature settlement of interests it the term of their settlement is decreased by not more than 180 days. In view of existence of such a problem it would be reasonable to stipulate quarterly or annual settlement of interests, as well as full part of the loan, in the loan agreements concluded with the associated non-resident creditors. In view of the associated nature of the persons in future such settlement may be carried over in a way convenient for the parties through execution of additional agreements. At the same time the non-resident borrower will have a possibility to make expedient settlements abroad. By reason of the abovementioned limitation of the terms of the loan agreements, stipulating settlement of interests and repayment of principal amount of loan at the end of the contract validity period with the right of premature settlement, are unacceptable as soon as they essentially limit rapidness of making settlements under the loans;
- prohibition to purchase foreign currency for economic entity if they keep in all Ukrainian banks, at all current and deposit accounts, the total amount of sums constituting USD 25 000.00 and more. In such case the resident must use its own foreign currency to carry out settlements with a non-resident;
- prohibition to purchase and/or transfer foreign currency if the NBU expressly prohibits such an operation, as well as if the NBU requests additional documents under such operation. Actually the NBU is vested with obligations to control over any settlements with non-residents with the right to block operations which it considers suspicious;
- prohibition to purchase and transfer foreign currency with the aim of reimbursement of the monetary assets received by a foreign investor from sale of securities of Ukrainian issuers (except for sale of the State government bonds and debt securities at stock exchanges), as well as with the aim of sale of corporate rights unexecuted in the form of shares, decrease of the charter capitals, settlements made in case of withdrawal of the foreign investor from economic entities, and settlement of dividends. As a result of these prohibitions foreign investors are actually deprived of the simplest means of return of their monetary assets invested to Ukraine as well as of receiving profits from their investments.
As a conclusion it needs to be stated that in view of a considerable quantity of foreign currency restrictions planning of any settlement made to the non-resident must include analysis of the following matters:
- the possibility to purchase foreign currency (availability of grounds pursuant to the Decree of the NBU No. 281);
- the possibility to transfer foreign currency (with consideration for the limitation nature of the accounts – particular attention must be paid to the list of operations allowed for this type of the account by the Decree of the NBU No. 492, as well as with considerations for application of special limitations: as temporary, established by the Decree of the NBU No. 140, as well as permanent, for example obtaining of the act of cost examination Decree of the NBU No. 597 etc.);
- the possibility to obtain an individual license of the NBU;
- concordance of the settlements under the foreign economic agreement with the “90-day rule”.
Of importance is also coordination with the servicing bank of all the aspects of settlements under the foreign economic agreement as early as at the stage of discussion of the draft of the agreement with the non-resident contractor. As soon as the banks, as agents of foreign currency control, have considerable discretional powers relating to the matters of application of foreign currency limitations there are instances when the residents open accounts (aimed at certain foreign currency operations) at the servicing banks which take more liberal stance towards certain foreign currency limitations.