Ukraine is one the countries with strict rules of currency control. They are mainly caused be political and economic crises of the last years. Nevertheless lack of knowledge of key issues of currency regulations may significantly affect business activities of foreign investors that have an intention to invest in Ukraine.
What should foreign business know about 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 above mentioned term. The same term applies to import of goods if a prepayment of currency was carried out in favor of non-resident supplier. Even taking into account that this term has doubled since 2014, when it consisted only 90 days, such requirements remain an obstacle to the business. Besides, in case of violation a fine will be charged for each day of delay and state authorities will have grounds to impose on the company individual regime of licensing which require obtaining a personal permission of 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 opinion, 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 the legislation does not contain any direct prohibitions.
Neither should foreign business count on the flexibility of agents of currency control – banks, because the latter have strict instructions regulate all their steps. These instructions though are not comprehensive and do not provide answers to many situations, so the bank usually informs the fiscal authorities about the violation of the currency legislation and delegate them authority to decide whether such violation really had taken 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 framework of the legislation is put on it.
The court precedents also don’t clarify this situation, because there are different decisions in favor of state authorities as well as in favor of commercial entities with the contradicting legal opinions.
That’s why in this situation it is quite difficult to find a balance between continuing to engage in international business and fulfillment of all the rules and requirements established by different state authorities. Superficially assessment of the situation may lead to negative consequences, so it is advisable to undertake a deep analysis and make comprehensive decision.
Purchase and sale of foreign currency
Another essential issue is purchase and sale of foreign currency in Ukraine. For today 50% of currency earnings, received by resident company from overseas, is subject to obligatory sale. Thus Ukrainian company receives a half of settlement in hryvnia and only other 50% in foreign currency. In addition, currency may only be purchased at inter-bank currency market under the established procedure that may last up to several days in some cases. Therefore an urgent transfer of foreign currency to the non-resident counterparty under the agreement may be delayed just because of 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 according to a client’s payment order a bank should verify the participants of such transaction and check the documents made up 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 usually is not a problem for settlements between the parties under direct foreign economic agreements. However, in case of complication of the scheme of legal relations (by means of using third-party beneficiary contracts, assignment of rights or delegation of duties, etc.) or conducting of non-core activities, a bank may not carry out transaction until receipt of additional information confirming legality of client’s actions.
Thus, it is advisable to negotiate with the bank on the texts of contracts and other necessary documents prior to conduct 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 loans in foreign currency to non-residents, investments abroad etc.
Temporary restrictive measures
Starting from 2013 the National Bank of Ukraine has introduced temporary restrictive measures for preventing the outflow of foreign currency from the country. Such measures are subject to regular review depending on current situation at 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.
Concerning prohibition on preterm payment of loans by Ukrainian borrowers to non-residents the list of exceptions from this rule has been extended during this year. Still because of a lot of conditions each loan should be checked individually.
In general 2017 year has showed trend for step-by-step liberalization of currency legislation and abolishment of restrictions on currency payments. The National Bank of Ukraine regularly reviews its regulations and analyzes expediency of introduced mechanisms of preventing outflow of currency abroad. Free movement of capital is one of the requirements of integration into the European Union; nevertheless abolishment of restrictions depends on current economic situation in Ukraine.
Head of Tax practice