Source: The Ukrainian Journal of Business Law

They expected to significantly liberalize foreign currency circulation within the territory of Ukraine and aimed at attraction of more investments into Ukraine and acceleration of further economic growth. At the time of adoption, new currency control regulations received positive assessment from business and expert community. However, over the period of practical implementation of such changes some issues are yet to be properly addressed.

New approach to foreign financing

Registration of foreign loans

One of the most anticipated changes was, undoubtedly, abolishment of mandatory registration of foreign loans with the NBU. Previously, no loan agreement with foreign lenders could became valid until it was registered with NBU, which generally took a lot of time and required Ukrainian borrowers to provide the NBU with significant amount of supportive documents. Since 7 February 2019, no registration of foreign loans is required in order to get debt financing from outside of Ukraine. Instead, banks servicing such loans simply have to notify the NBU about the loan agreement upon becoming aware of it – either based on a borrower’s notice or when the first payment under the loan is performed by such bank. Information on foreign loans is kept in special NBU database - automatic information system “Loans from non-residents”.

At the same time, under new NBU regulations loan payments can be carried out by a servicing bank only provided that it has all loan documentation and terms already reflected in the NBU database. Thus, from a practical point of view, borrowers are still required to inform its servicing bank about an upcoming loan prior to effecting any transactions as well as of any the amendments in the essential terms of the loan documentation. Meanwhile, those particularities did not significantly affected Ukrainian borrowers whose loans were previously registered with the NBU as all necessary information was automatically transferred into the new database.

Under the new procedure, a Ukrainian resident willing to receive foreign financing should apply to its bank and inform the bank of its intention to use the account in this bank as a settlement account under the loan agreement with a non-resident creditor as well as provide related information and documents. Once the bank receives all required information, it has five business days for filing a notification with the new database. As a general rule under the NBU regulations, the bank (i) must be informed and supplied with the documents, and (ii) send a notification to the NBU before any transfer under the financing arrangement at hand.

However, unlike the abolished rules, the new regulations do not specify the documents/information which should be submitted to the bank. Instead, it lists the information to be indicated in the notification which, inter alia, includes the financing terms and reference to the underlying financing documents as well as any other documents related to the project implementation and currency transactions thereunder. Hence, similarly to the previously existing registration of foreign loans, the new notification procedure requires Ukrainian borrowers to work closely with the bank well in advance of the planned disbursement to clarify the package of documents to be submitted and any other bank requirements.

Lifting of the maximum interest rate requirement

Since maximum interest rate cap for loan payments that applied for more than decade has been cancelled, parties to loan agreements expect more flexibility in implementing financing structure that corresponds to their commercial intentions.

Such payments, though, are now subject to additional check by the account bank based on recently introduced indicator for the additional verification by the bank - “inconsistency of the interest rate under certain loan agreements with market conditions”.

 In its letters, the NBU recommends to assess consistence of the interest rate with the market conditions based on two main criteria: (i) base rate, determining the value of financing in the relevant currency at the international/local markets (such as LIBOR or discount rate of the relevant country central bank ), and (ii) additional margin reflecting risks related to Ukrainian market and particular borrowers.

The NBU also mentions that if, apart from interest rate inconsistency, a bank also discovers that any other participant of the contemplated loan transaction is a related party to the borrower, such bank is required to conduct a thorough analysis of such transaction. In the NBU's view, occurrence of these two factors may indicate that the financing and settlements do not reflect real commercial activities.

This is another issue that Ukrainian borrowers should settle with their bank before implementing new financing project. As a starting point, one can use illustrative examples given by the NBU to comprehend the regulator's approach to the assessment of the interest rate. Bearing this in mind, parties of the loan agreement should include respective protection clauses in agreements to avoid breach of their obligations in case of delays caused by additional bank verification.

Foreign currency funds accumulation for debt service

Starting from 7 February 2019, resident borrowers are also able to accumulate foreign currency on their current accounts provided that this funds are used solely for the repayment of foreign loans. Such funds can be accumulated during a loan period and, once not used for loan purposes, will be automatically sold by a servicing bank. This approach would help borrowers hedge the currency fluctuation risk that previously could significantly reduce the attractiveness of foreign loans.

Settlements under import/export operations

The new currency regulations give far more freedom to business in respect of settlement under import/export operations. Therefore, one of the most important innovation, which concerned almost everyone, was extension of the deadline for settlement of export-import operations from 180 days to 365.

The list of grounds for exemption from penalties has also been extended and now includes, in particular: (i) circumstances of force majeure, (ii) the approval of consideration of a claim by international commercial arbitration, or (iii) adoption by the competent authority of the respective state of the document for the collection of indebtedness in favour of a resident in a pre-trial proceeding.

Previously only decisions on the Ukrainian courts, the International Commercial Arbitration Court or the Marine Arbitration Commission at the Ukrainian Chamber of Commerce could be considered as a ground for liability exemption.

Moreover, the NBU regulations introduced the concept of “insignificant amount of currency operation” (up to UAH 150,000). Consequently, banks do not monitor export-import operations the amount of which does not exceed the limit and, respectively, banks do not require the submission of documents confirming the settlement under such transactions.

However, the NBU regulations have not lifted the liability for any violation of 180 period that took place before such regulations came into force. In case of violation of such period, penalty in the amount of 0.3% of the transaction for each day of delay still remains.

New rules for monitoring of foreign currency transactions

Even though many restrictions for foreign currency transactions have been set aside, the new regulations still require Ukrainian banks additionally verify most foreign currency transactions. This rule applies to majority of payments made abroad by Ukrainian residents.

In particular, banks are required to carry out additional verification of any foreign currency transfer:

·        under a cross-border loan agreement;

·        for repatriation of dividends to a non-resident;

·        for repatriation of funds to a non-resident received from the sale of corporate rights;

·        for investments outside of Ukraine;

·        in any other case deemed necessary by the bank.

The process of such verification includes, inter alia:

·        examining financial statement of the parties to a transaction;

·        analysis of the sources of the funds;

·        assessment whether the transaction is in line with regular business activities of the parties; and

·        identification of the ultimate beneficial owners of the parties.

Taking into account significant fines that could be imposed on banks for violation of monitoring procedure, they tend to carefully examine all confirming documents in respect of transactions that fall outside of the scope of insignificant ones (i.e. exceed UAH 150,000).

Liability under new regulations

Business environment particularly prized the abolishment of the most severe sanction for violation of foreign currency requirements - suspension of foreign economic activity. Still one should not rejoice in such changes since the penalties can still be applied, while the NBU regulations have not made it more clearly for what kind of violations. Under the Law of Ukraine “On currency and currency operations”, the State Fiscal Service is empowered to apply penalties to legal entities in the amount of up to 100% of operations carried out in breach of the currency legislation.

At the same time, the procedure for imposition of such penalties has not been adopted yet. Recently the State Fiscal Service has published for public discussion its draft procedure and proposed to establish the fines in the amount of 100% of operation carried out in breach of NBU regulations requirements for the following types of violation:

·        carrying out settlements on the territory of Ukraine in breach of the procedure established by law

·        violation of the procedure for cross-border transfer of currency

·        violation of protection measures introduced by the NBU.

However, prospects of the proposed approach of State Fiscal Service are rather unclear, as its public discussion is still ongoing and may significantly influence on the final version of the fine imposition procedure.

Remaining restrictions

Despite the NBU declared intention to reduce pressure on the currency market, a number of restrictions still remain in force, in particular:

• repatriation of dividends cannot exceed EUR 7 mln per calendar month;

·        repatriation of funds received by foreign investors from the sale of securities, corporate rights in Ukrainian companies, or reductions of a subsidiary’s share capital cannot exceed EUR 5 mln per calendar month;

·        mandatory sale of foreign currency proceeds in amount of 30%; and

• foreign currency cannot be purchased with borrowed UAH funds.

Under the NBU regulations, such restrictions would cease to exist only after Ukrainian finance market became steady once again.

Notwithstanding the remaining restrictions, business community has certainly gained the opportunity to benefit from the liberal currency control as well as use it to accelerate its further economic growth. At the same time, one should pay special attention to the pitfalls of the NBU regulations and contemplated updates of the regulatory framework.

Oleksandr Rudenko, Manager, KPMG in Ukraine

Yuliia Pidlisna, Consultant, KPMG in Ukraine