Ukrainian Currency Control Legislation. Any Improvements?
Iryna O. Nikolayevska
This spring Ukrainian currency control legislation has been dramatically changed once again. On 15 May 2010 On Amendment of Certain Legislative Acts of Ukraine (Regarding Bank Loans and Foreign Investment Encouragement) Act of Ukraine No.2155–VI (Act) came into force. The Act eliminates a number of restrictions with respect to foreign currency loans and foreign investment in Ukraine which were introduced by the On Amendment of Certain Laws of Ukraine with the Purpose of Overcoming the Negative Consequences of the Financial Crisis Act No.1533-VI of 23 June 2009 which came into force on 24 November 2009 (Act No.1533). In particular, the requirements that all monetary foreign investments (the foreign investments) should be made only in Ukrainian Hryvnias and only through the investment accounts opened with Ukrainian banks as well as the mandatory registration of foreign investments by the National Bank of Ukraine (the NBU) have been canceled.
The positive impact of the Act should not be underestimated. However, as of today the NBU has still not amended its respective regulations in line with the Act. Therefore, the rules for operations in foreign currency in Ukraine have remained the same since the time of implementation of the restrictions established by Act No.1533. Furthermore, neither the recent amendments to the Ukrainian currency control legislation nor the NBU regulations address the numerous currency control difficulties faced by foreign investors in Ukraine in a comprehensive manner.
Payments for shares and other foreign investment issues
The Act canceled the requirement that all foreign investments should be made in Ukrainian Hryvnias only through the investment accounts opened with Ukrainian banks. However, as earlier, the NBU Regulation No.280 Regulation on the Procedure of Making Foreign Investments into Ukraine of 10 August 2005 (the Foreign Investment Regulation), provides that foreign investments into shares/corporate rights of Ukrainian companies should take place only in Ukrainian Hryvnias through the investment accounts opened with Ukrainian banks. While NBU Letter No.13-215/2974-9413 of 4 June 2010 (the NBU Letter), provides that in addition to the provisions of the Foreign Investment Regulation it is also allowed to make investments into shares/corporate rights of Ukrainian companies in foreign currency directly from the offshore account of a foreign investor. However, since the letters of the NBU do not have any official legal force, and the NBU may recall them at any time and for any reason, the situation remains unclear.
Additionally, the Foreign Investment Regulation provides that all settlements for shares/corporate rights of Ukrainian companies should take place through accounts opened with authorized Ukrainian banks. Nevertheless, in several of its explanatory letters the NBU explained that it was not its intention to limit offshore settlements for shares/corporate rights of Ukrainian companies, and such settlements should be permitted. However, at a later stage the NBU also issued several other explanatory letters confirming that offshore settlements are not allowed under the Foreign Investment Regulation. As a result, the issue of offshore settlements for shares/corporate rights in Ukrainian companies (considering the arguments stated above) has remained unclear for a long time.
The positive development in connection with the adoption of the changes to the Foreign Investment Regulation is the abolishment by the NBU of the technical mandatory requirement to make settlements through the securities broker’s bank account when investing in shares/corporate rights of Ukrainian companies, including the repatriation of investments. From 15 March 2010 any settlements with respect to foreign investments may be carried out without the involvement of the securities broker as a payment agent.
Cross-border payments in foreign currency: restrictive rules
The procedure for repatriation of investments is among others regulated by the NBU Resolution No.281 Regulation on the Procedure and Conditions for Trading in Foreign Currency of 10 August 2005 (the Currency Trading Rules), which sets out the rules for purchasing foreign currency and making cross-border payments in foreign currency. In particular, the Currency Trading Rules provide the mandatory list of documents to be submitted to the servicing Ukrainian bank in order to purchase foreign currency at the inter-bank currency market and/or transfer money outside Ukraine. Such a list of documents includes, among others, documents which can be difficult to obtain considering the inconsistencies among the rules and requirements of the NBU regulations and regulations of other state bodies, such as the tax authorities, local authorities and other public and municipal agencies authorized to issue such documents.
Thus, in order to repatriate a foreign investment (e.g., dividends, capital gain, etc.) from its investment account opened with a Ukrainian bank, the foreign investor shall submit to its Ukrainian servicing bank the certificate issued by the respective local tax inspectorate confirming payment of corporate profit tax by a non-resident (e.g., foreign investor) in Ukraine. The exception is the case when the sale price of a foreign investment object does not exceed the purchase price earlier paid by the foreign investor in Ukraine for this investment object or if the servicing bank acts as a tax agent with regard to such investment transaction of foreign investor. Prior to 15 May 2010 (the date of the latest amendment of Currency Trading Rules), in order to repatriate their investments, foreign investors were obliged to provide either respective certificate issued by a tax inspectorate or a tax residency certificate confirming that an investor is a resident of the country which is a party to the double taxation avoidance treaty concluded between Ukraine and such country.
In order to transfer the investment outside of Ukraine, the foreign investor shall provide its servicing Ukrainian bank with the bank’s certificate confirming the factual transfer of foreign currency into Ukraine and subsequent use of such foreign currency for making investments in Ukraine, except for cases when the acquisition of the investment object took place more than five years ago. In the absence of this document the foreign investor may face some difficulties regarding repatriation of investment (e.g., dividends or capital gain) outside of Ukraine.
Under the Act the mandatory registration of foreign investments is not required. However, according to the Currency Trading Rules, the foreign investor should submit a copy of the document confirming the state registration of the foreign investment to the servicing Ukrainian bank in order to repatriate its investment from Ukraine. Nevertheless, the NBU Letter allows the foreign investments to be repatriated without the document confirming the state registration of such investment, if the investor provides a written confirmation on the absence of such registration.
Furthermore, under the Currency Trading Rules the repatriation of portfolio investment (the investment is considered to be a portfolio investment if the investor acquires less than 10% of the shares of the Ukrainian issuer on the stock market) requires a share valuation report from an independent expert to be provided to the servicing Ukrainian bank, except for cases envisaged therein.
