Date of publication: 25 July 2020
Bets Nina, Lawyer
Source: Ukrainian Law Firms 2020
Starting from 2019 a new currency regulation system has been launched in Ukraine. Laws of Ukraine No. 2473-VIII On Currency and Currency Transactions, which introduced significant liberalization of currency transactions and capital movements, came into force.
The basic principle of the new currency legislation of Ukraine is now “everything which is not expressly forbidden by law is allowed”, i.e. it provides an opportunity to carry out any currency transactions that are not directly prohibited by the laws of Ukraine.
Currency control has been replaced by currency supervision as a system of measures aimed at ensuring compliance by the subjects of currency transactions and authorized institutions with the currency legislation. The foundations for transition from the system of total currency control in each transaction to currency supervision, built upon the principle “greater risks – more attention, smaller risks – less attention”, are being laid.
The following major currency restrictions, which put foreign investors off Ukraine, have been lifted:
- The dividends repatriation limit has been abolished. It is now possible to transfer foreign currency abroad in order to pay dividends to the non-resident founder without any restrictions.
- The procedure of obligatory registration of loan agreements with non-residents has been canceled. According to the latest amendments, instead of registering, the servicing banks are only required to submit information to the National Bank of Ukraine about the conclusion of such an agreement for statistical purposes. To this end, a special automated information system of the National Bank of Ukraine, called Credit Agreements with Non-Residents, was created.
- The restriction on early repayment of interests under the loan agreements with non-residents has been canceled. According to the rules applied before, the early repayment of interests under the loan agreements with non-residents was not previously possible.
- The requirement for mandatory sale of currency received under agreements concluded with non-residents has been abolished. The canceled rules required the business to carry out a mandatory sale of 30% of the foreign exchange proceeds.
- The currency supervision over the following transactions has been canceled:
– export and import transactions up to UAH 150 thousand;
– import of goods under state defense contracts;
– import of services or medicines under agreements of the Ministry of Health of Ukraine with specialized organizations, as well as import of services for treatment of rare diseases;
– import of goods used for the production of space and aviation equipment and units;
– export and import of goods within the framework of production sharing agreements;
– export of works, services (except transportation and insurance services and works) and intellectual property rights.
This means that all of the above transactions are not subject to currency supervision by Ukrainian banks, are not subject to a payment (settlement) deadline, and no penalties can be applied by the Ukrainian tax authorities for breach of such payment deadlines.
- Sanctions in the form of termination of foreign economic activity for violation of payment deadlines are abolished.
- Currency forwards for the hedge of export, import and debt transactions are allowed.
- Transactions on the accounts of non-resident legal entities opened in Ukrainian banks are now allowed. Previously, non-residents were allowed to open only so-called investment accounts in Ukrainian banks, which was a rather difficult procedure. Foreign companies are now allowed to open current accounts and make payments using these accounts.
- It is allowed to buy and accumulate foreign currency in the external borrowings’ accounts.
Previously, the possibility of buying and accumulating foreign currency in the accounts was denied. In addition to Laws of Ukraine No. 2473-VIII On Currency and Currency Transactions, the new system of currency regulation of Ukraine consists of eight major resolutions of the Board of the National Bank, which replaced the previous regulatory base consisting of 56 regulatory acts:
– Resolution No. 1: On Approval of Regulation on the Structure of the Foreign Exchange Market of Ukraine, Terms, Conditions and Procedure for Trade in Foreign Currency and Precious Metals in the Foreign Exchange Market of Ukraine;
– Resolution No. 2: On Approval of Regulation on Transactions with Currency Assets;
– Resolution No. 3: On Approval of Regulation on Cross-Border Movement of Currency Values;
– Resolution No. 4: On Approval of Regulation on the List of Safeguard Measures, the Procedure and Criteria for Their Introduction, Extension and Early Termination;
– Resolution No. 5: On Approval of Regulation on Safeguard Measures and Determination of Procedure for Carrying Out Certain Transactions in Foreign Currency;
– Resolution No. 6: On Approval of Regulation on the Procedure for the Provision by Banks to the National Bank of Ukraine of Information on Contracts, which Envisage the Performance by Residents of Their Debt Obligations to Non-Resident Creditors on Loans and Credits Received by the Residents;
– Resolution No. 7: On Approval of Instruction on the Procedure for Currency Supervision by the Banks over the Residents’ Compliance with the Payment Deadlines in Export and Import Transactions;
– Resolution No. 8: On Approval of Regulation on the Procedure for Conducting by the Authorized Institutions of the Analysis and Verification of Documents (Information) on Currency Transactions.
The Resolutions Nos. 1-3 will be in force until the National Bank has the need to apply foreign exchange market safeguards to prevent circumstances threatening the macro-financial stability. The Resolutions Nos.4 and 6 define the general list of possible safeguards and the criteria for their application in the foreign exchange market, and also establish a procedure for maintaining statistical records of credit agreements with non-residents. The Resolution No.5 is of a temporary nature and defines specific safeguards introduced by the National Bank. These measures will be lifted with the improvement in the macro-financial situation. The Resolution No.7 also temporarily determines the procedure for the banks to exercise currency supervision over compliance with the payment deadlines within a framework of export and import transactions, until such requirement is completely abolished. The Regulation No. 8 is one of the key documents in implementing a risk-based approach to currency supervision.
The currency restrictions that may affect the interests of foreign businesses in Ukraine and still remain in force are specified below.
The National Bank sets the deadlines for payments in the goods export and import transactions.
These restrictions imply that, in accordance with a foreign trade contract concluded between a resident of Ukraine and a foreign company, the funds should be credited to the accounts of residents in Ukrainian banks within the terms specified in the contracts, but not later than within 365 days. The term of debt payment is calculated from the date of customs clearance of the exported products.
As regards the import of goods, their delivery must be made within the terms specified in the contract, but not later than within 365 days from the date of advance payment. Failure of a resident to meet the payment terms entails a penalty for each day of delay in the amount of 0.3% of the unpaid amount under the contract (cost of non-delivered goods).
The suspension of payment deadlines may take place in case of force majeure or in case the court or international commercial arbitration accepts the resident’s claim for debt recovery from non-resident. Also, upon a resident’s request and subject to proper grounds, the payment deadlines may be extended on the basis of a special opinion of the Ministry of Economic Development and Trade of Ukraine.
Another restriction affecting the interests of foreign business in Ukraine is the prohibition imposed on Ukrainian banks from conducting cash withdrawal in foreign currency from the customers’ accounts in the territory of Ukraine. However, such relaxation in currency regulation does not mean that Ukrainian banks do not exercise control over the foreign currency transactions. The procedure for currency supervision is set forth in the Resolution of the National Bank of Ukraine On Approval of the Regulation on Currency Supervision No.13 of 3 January 2019.
The Regulation defines the basic principles of implementation by the National Bank and the authorized institutions of currency supervision in Ukraine, the grounds and the procedure for application by the National Bank of the enforcement actions to the authorized institutions for violation of currency legislation requirements. Banks are the authorized foreign exchange supervisors responsible for monitoring compliance with currency laws by residents and non-residents during transactions. Such supervision involves establishing the compliance of foreign currency transactions of the clients (residents and non-residents) with the requirements of Ukrainian currency legislation, preventing clients from conducting through the bank of foreign exchange transactions that do not meet the requirements of foreign exchange legislation, and/or timely informing – as an authorized institution – the National Bank in accordance with the procedure established by the laws of Ukraine, including by the normative legal acts of the National Bank, of the currency transactions that do not meet the requirements of currency legislation. The absence of documents with the banks (in hard/soft copy) confirming compliance of their clients’ currency transactions with the currency legislation, provided that no more than five years have passed since the date of these currency transactions, qualifies as the banks’ failure to exercise or improper exercising of currency supervision as related to non-fulfillment of their obligation to prevent their clients from conducting currency transactions that do not meet the currency legislation requirements.
In addition, the National Bank conducts financial monitoring to prevent the use of the banking system of Ukraine for legalization of proceeds of crime. Financial monitoring means the activity of detecting illegally obtained proceeds and preventing the terrorism financing. The National Bank establishes requirements for banks and non-banking institutions to counteract the laundering of illegally obtained proceeds and checks their compliance. When conducting financial monitoring, banks and non-banking financial institutions audit clients and analyze their financial transactions. In case of suspicious transactions, the banks inform the State Financial Monitoring Service and the law enforcement agencies of Ukraine. In the aforesaid activity the National Bank acts in accordance with the International Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (FATF).
The National Bank, together with the experts of the International Monetary Fund, developed a further Currency Liberalization Roadmap, which envisages a step-by-step lifting of all currency restrictions with the improvement of macroeconomic conditions in Ukraine. The lifting of currency restrictions will be preceded by an assessment by the National Bank of such macroeconomic indicators as GDP growth rate, inflation dynamics, currency market conditions, financial stability, foreign markets situation, etc. At the same time, the currency liberalization foreseen by the Roadmap has no timeframe. Accordingly, the sooner macroeconomic and financial conditions become favorable, the faster the National Bank of Ukraine removes restrictions on the foreign exchange market, and vice versa.