UKRAINE BUSINESS NEWS - FOUR ARTICLES
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1. MAJOR LEGISLATIVE CHANGES IN INVESTMENT, CURRENCY
AND BANKING REGIMES
Legal Alert, RULG-Ukrainian Legal Group, Kyiv, Ukraine, Wed, Nov 25 2009
2. NATIONAL BANK OF UKRAINE INTRODUCES NEW RULES ON
CURRENCY EXCHANGE TRANSACTIONS
Squire, Sanders & Dempsey, Kyiv, Ukraine, Nov 26, 2009
3. ADOPTION OF THE LAW OF UKRAINE "ON AMENDING CERTAIN LAWS OF UKRAINE TO MITIGATE ADVERSE EFFECTS OF THE FINANCIAL CRISIS"
Vasil Kisil & Partners, Kyiv, Ukraine, Thu, Nov 26, 2009
4. NEW LAW INTENDED TO OVERCOME THE NEGATIVE CONSEQUENCES OF THE FINANCIAL CRISIS WILL COME INTO FORCE SOON
DLA Piper, Kyiv, Ukraine, November 24 2009
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1. MAJOR LEGISLATIVE CHANGES IN INVESTMENT,
CURRENCY AND BANKING REGIMES
Legal Alert, RULG-Ukrainian Legal Group, Kyiv, Ukraine, Wed, November 25, 2009
KYIV - The Law of Ukraine “On Amending Certain Laws of Ukraine with the Purpose of Overcoming Negative Impacts of the Financial Crisis” (hereinafter – the “Law”) took effect on 24 November 2009, introducing a number of important changes to Ukraine’s investment and currency regimes.
At the outset, we note that some of these changes will negatively affect the business environment and will result in increased bureaucratic red tape and unnecessary barriers and costs in the areas of currency regulation, investment and the financial sector. We provide a brief overview of the key changes introduced by the Law below.
It is also important to note that a new Draft Law on Amending Certain Legislative Acts of Ukraine (related to overcoming negative consequences of financial crisis) No. 5378 dated 4 December 2009 was just introduced to the Verkhovna Rada (the Parliament), which proposes to un-do the negative effects of the Law. The Law, however, already took effect, and the pending new Draft Law must be adopted as soon as possible in order to minimize the negative effects of the Law.
I. Currency Control Regulation
The Law tightens the archaic rule on the mandatory timeframe for receipt by Ukrainian businesses of foreign currency proceeds from sales (in case of export contracts) or goods (in case of import contracts). This rule was designed in early 90-s, allegedly to prevent capital flight, and while failing in this task it put a tremendous financial burden on legitimate business operations. Initially, the mandatory timeframe imposed on Ukrainian businesses for bringing into Ukraine hard currency proceeds (or goods, in case of import) was merely 90 days, but later this rule was relaxed by extending this timeframe from 90 to 180 days.
Nevertheless, the business community still insisted on cancellation of this rule altogether. Instead, the Law restores the draconian 90-day timeframe and increases the sanctions for noncompliance. For example, a Ukrainian exporter, after exporting goods to a foreign customer, is responsible for obtaining full payment from the customer for these goods within 90 days. In case the customer fails to provide full payment for any reason, the Ukrainian exporter is subject to severe fines and sanctions.
In particular, according to the Law, the mandatory timeframe for settlement under foreign-economic contracts is reduced from 180 to 90 days, meaning that in import transactions the goods/services must be received by a Ukrainian importer within 90 days after the date of the advance payment, and in export transactions foreign currency proceeds should be received by a Ukrainian exporter within 90 days after the date of delivery of the goods/services. In case of breach of this 90-day rule, the Ukrainian party shall be subject to a rather severe penalty of 0.3% of the amount of the delayed payment or delivery for each day of the delay.
It is not expressly stated in the Law whether the 90-day timeframe will retroactively apply to existing foreign-economic contracts, but such risk cannot be excluded.
II. Foreign Investment Regime
The Law restores the burdensome rule on mandatory conversion of monetary foreign currency investments into Ukrainian companies into local currency. This rule was first introduced by the National Bank of Ukraine in late 2004, creating severe obstacles to foreign investment, and was successfully challenged in court by investors. Later, this rule was cancelled. The Law now again requires monetary foreign currency investments to be made only through investment accounts opened in Ukrainian banks, with mandatory conversion in Ukrainian Hryvnias (UAH).
This rule also extends to purchasing ownership interests (in limited liability companies) and shares (in joint-stock companies) because such actions are also considered investment activity. In other words, investment operations, including with securities, between non-residents outside Ukraine, must be “domesticated” by the same procedure of opening “investment” accounts in Ukraine, converting foreign currency into UAH, etc.
State registration of foreign investments now becomes mandatory for monetary contributions. While the procedure of registration of in-kind investments remains the same (i.e. by local state administrations), monetary investments will have to be registered according to a procedure yet to be adopted by the National Bank of Ukraine (NBU).
Therefore, before this procedure becomes effective, such mandatory registration of monetary foreign investments technically will not be possible. Even though there are no penalties envisaged for non-compliance with the registration requirement, in practice such non-registration is likely to result in difficulties in connection with repatriation of the investment.
These changes to the foreign investment regime will be effective for the period from 24 November 2009 through 1 January 2011.
III. Loans from Non-residents
The Law prohibits accelerated payments (early repayment) of loans taken by Ukrainian borrowers in foreign currency from non-resident lenders. This provision applies retroactively, i.e. not only to loan agreements entered into after the effective date of the Law, but also to currently effective loan agreements entered into before this Law came into effect. Also, the NBU will not register amendments to loan agreements reducing the term for repayment of the loan obligations. These provisions will be effective until 1 January 2011.
IV. Other Changes
The Law introduces some changes to taxation laws, and in particular establishes a cash method of tax accounting of income received by banks from loan operations.
It introduces a temporary (through 2010) moratorium on evictions of individual mortgagors from mortgaged residential property in cases when such property is the only place of residence of such a mortgagor and provided that interest payments are not more than two months overdue, and a debt restructuring agreement is entered into between the borrower and the mortgagee bank.
The Law prohibits granting loans in foreign currency to individuals with the exception of loans taken for the purposes of payment for medical care and education abroad.
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2. NATIONAL BANK OF UKRAINE INTRODUCES NEW RULES
ON CURRENCY EXCHANGE TRANSACTIONS
Squire, Sanders & Dempsey, Kyiv, Ukraine, November 26, 2009
KYIV - On November 20, 2009 regulatory changes introduced by the National Bank of Ukraine (NBU) came into effect in an attempt to limit speculation on the foreign currency exchange market and prevent the use of Ukraine’s banking system for money laundering.
These changes were the result of the amendments to the NBU Regulation No. 502 dated December 12, 2002, "On Approval of Instruction on Procedure of Organization and Carrying Out Currency Exchange Transactions on the Territory of Ukraine" (NBU Regulation No. 502), available online in Ukrainian. A summary of the changes is provided below.
Definition of Currency Exchange Transactions
Pursuant to NBU Regulation No. 502, the following cash transactions are considered currency exchange transactions:
Bank purchases of foreign currency for hryvnia from residents and nonresident individuals
Sale of foreign currency for hryvnia by a bank to resident individuals
Reverse exchange to nonresident individuals of unused hryvnia for foreign currency
Sale or purchase of travelers cheques for foreign currency or hryvnia
Exchange of one foreign currency for another foreign currency
Cashing of foreign currency banknotes and personal checks
Changes Introduced to the Procedure of Currency Exchange Transactions
Pursuant to the amended NBU Regulation No. 502:
Banks are prohibited from selling to one person during one banking day foreign currency in an amount exceeding the equivalent of 80,000 UAH (approximately US$10,000). The NBU believes this will help curtail the use of Ukraine’s banking system for money laundering. However, some banking experts believe that this measure may complicate the lives of law-abiding citizens who need to purchase large amounts of foreign currency to service loans drawn on foreign currency. (According to the same banking experts, though, currency exchanges exceeding 80,000 UAH for loan repayment purposes occurring within one banking day are rare).
Banks may not revise their established foreign currency exchange rate during the course of the same banking day.
The foreign currency exchange rate should be established by the head of the bank’s board of directors. The other bank managers are not allowed to establish foreign currency exchange rates.
The NBU has the right to establish the maximum level of margin for currency exchange transactions on the cash market. At the end of last year, NBU introduced a maximum margin, which was circumvented by the banks through the use of commissions for performing currency exchange transactions. NBU soon cancelled this maximum margin limitation.
No bank’s commission is allowed for sale and purchase of foreign currency for hryvnia. The bank’s commission fee for sale and purchase of travelers cheques, exchange of foreign currency cash, cashing of foreign currency banknotes and personal checks should be paid only in hryvnia.
If a person carries out currency exchange transactions of more than 15,000 UAH (approximately US$1,870), he or she must present to the bank an identification document (usually a passport). The person’s name must be printed on the receipt issued by the bank after the completion of the currency exchange transaction. It should be noted that this client identification requirement contradicts the Law of Ukraine "On Banks and Banking Activity" No. 2121-III dated December 7, 2000 (Banking Law).
Pursuant to the Banking Law, a bank must identify the client performing cash transactions for an amount exceeding the equivalent of 50,000 UAH (approximately US$6,250). The changes to NBU Regulation No. 502 establishing this significantly lower threshold for client identification do not comply with the rules established by the Banking Law.
For currency exchange transactions of more than 50,000 UAH (approximately US$6,250), in addition to the requirements established for transactions over 15,000 UAH, the bank receipt must also indicate the individual’s passport details, place of residence and tax ID number (if any). Copies of the appropriate passport pages must be stored with the bank’s "documents of the day."
The NBU’s new rules on the limitations and additional requirements imposed on cash currency exchange transactions performed by individuals seem to be a step in the right direction, although they may require further refinement, as they still may be circumvented by those looking to take advantage of Ukraine’s volatile currency exchange market.
It remains to be seen whether NBU’s prohibition on revising the exchange rate during the course of the day will be effective in combating currency exchange speculations.
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3. ADOPTION OF THE LAW OF UKRAINE "ON AMENDING CERTAIN LAWS
OF UKRAINE TO MITIGATE ADVERSE EFFECTS OF THE FINANCIAL CRISIS"
Vasil Kisil & Partners, Kyiv, Ukraine, Thu, Nov 26, 2009
KYIV - Vasil Kisil & Partners Law Firm hereby informs you of the recent amendments to the laws of Ukraine governing foreign investment regime, foreign currency control, and to banking and tax legislation. .
On November 19, 2009, the President of Ukraine signed the Law of Ukraine "On Amending Certain Laws of Ukraine to Mitigate Adverse Effects of the Financial Crisis" (the "Law"). The law was officially published on November 24, 2009 and entered into force upon the date of its publication.
Please find below an overview of the main novelties of the said Law.
Cutting Down Settlement and Delivery Periods under Agreements with Non-residents
The Law introduced amendments to the Law of Ukraine No. 185/94-VR "On the Procedure of Foreign Currency Settlements," dated September 23, 1994, whereunder the period of foreign currency receivables’ transfer to accounts of Ukrainian residents is reduced from 180 (one hundred and eighty) to 90 (ninety) calendar days starting from the date when a customs export declaration is obtained (in case of export of works/services, intellectual property rights– from the date when the respective act/protocol is signed by the parties).
Besides, a maximum delivery period related to import transactions of residents on deferred delivery basis is reduced from 180 (one hundred and eighty) to 90 (ninety) calendar days from the advance payment date.
Temporary Tightening of the Regime of Foreign Investments into Ukraine
The Law amends the Law of Ukraine No. 93/96-VR "On the Regime of Foreign Investments," dated March 19, 1996, whereunder foreign investors shall make investments in cash only through investment accounts opened with authorized banks in Ukraine. As a requirement for making foreign investments, foreign currency could be transferred to investment accounts if such currency is recognized by the National Bank of Ukraine (the "NBU") as freely convertible.
Foreign investments in cash in the territory of Ukraine shall be made in the national currency of Ukraine under the procedure prescribed by the NBU.
Thus, foreign investment in a foreign currency, which is transferred to an investment account with the authorized bank in Ukraine, shall be converted into the national currency of Ukraine.
This Law does not provide for any specific rules or exceptions from the foregoing procedure. It is expected that the procedure established by the NBU in the Regulation on the Procedure for Making Foreign Investments into Ukraine, which was approved by Resolution No. 280 of the NBU Board, dated August 10, 2005, will be adjusted to reflect new provisions of the Law.
These amendments are effective till January 01, 2011. Prior to the above-mentioned amendments, direct foreign investments (e.g. contribution to the registered capital of a Ukrainian LLC by a non-resident shareholder) could have been made by direct money transfer to a current account with an authorized bank in Ukraine without mandatory money transfer to an investment account and/or conversion into the Ukrainian currency, which significantly simplified the procedure for making foreign investments into Ukraine.
Mandatory Registration of Foreign Investments into Ukraine
Pursuant to the above Law, foreign investments, both in cash and in kind, shall be subject to mandatory state registration. Before adoption of the Law, the state registration of foreign investments was not mandatory and remained at the discretion of the investor.
The procedure for registration of foreign investments is currently governed by the Regulation on the State Registration of Foreign Investments, which was approved by Resolution No. 928 of the Cabinet of Ministers of Ukraine, dated August 7, 1996, which determines the 3
requirements for state registration of foreign investments in any form whatsoever (both in cash and in kind).
Under the new Law, registration of foreign investments in the form of cash (currency valuables) is made according to the procedure stipulated by the NBU.
Currently, no such procedure is available. Pursuant to the Transition Provisions of the Law, the relevant procedure is to be approved by the NBU within one (1) month period.
Temporary Tightening of Lending and Loan Repayment Policy
The Law imposes the following restrictions in respect of lending transactions that will be effective till January 01, 2011:
• The right of financial institutions to grant foreign currency loans (credits) to individuals being residents or non-residents of Ukraine (other than registered private entrepreneurs) is limited to payment for services rendered by non-residents in relation to medical treatment and education abroad. Loans will be granted by Ukrainian banks through direct transfer of funds to the account of the medical or education institution, provided that the respective supporting documents are submitted by the borrower;
• Prohibition for resident individuals and legal entities to introduce amendments to the loan agreements with non-residents which reduce the term of performance by resident borrowers of their obligations towards non-resident lenders or which provide for an early performance of such obligations;
• Registration by the NBU of amendments to loan agreements with non-residents is temporarily suspended where such amendments relate to reduction of the term for performance by resident borrowers of their obligations towards non-residents under such agreements;
• Prohibition of early performance by resident individuals and legal entities of their obligations towards non-resident lenders under loan agreements. Moreover, the Law provides that such prohibition also applies to the agreements entered into before the Law became effective.
Alterations to Banking and Financial Legislation
• Formation of Bank’s Registered Capital The Law provides for a minimum amount of the bank’s registered capital no less than UAH 75 million as of the bank’s registration date (previously such minimum amount of the bank’s registered capital was EUR 10 million). Moreover, the Law expressly stipulates that the NBU is not entitled to require any change of the registered capital of the banks established before the Law came into effect.
The requirement to adjust the amount of the registered capital by hryvnya devaluation index and revaluation index following the annual results based on the financial statements is no longer applicable. Pursuant to the Law, the funds borrowed as subordinated debt may be included into the bank’s regulatory capital in the amount up to one hundred percent (100%) of the bank’s Tier 1 capital till January 01, 2012.
Funds borrowed within this period as subordinated debt are to be included into the bank’s capital in full regardless of restrictions set for the bank’s additional capital (previously the Law of Ukraine "On Banks and Banking" stipulated that the whole amount of the additional capital, including the amount of the subordinated debt, could not exceed 100 percent of the regulatory capital).
The Law also envisages that the subordinated debt is to be included into the bank’s capital without mandatory annual decrease by 20 percent of its initial amount till January 01, 2012 (previously, the amount of subordinated debt included into the capital was subject to annual mandatory decrease by 20 percent of its initial amount during the last five (5) years of validity of the loan agreement under which the funds were borrowed by the bank).
• Credit Restructuring Until December 31, 2010, commercial banks are entitled to restructure loans of individual borrowers under the mutual consent with the borrowers. Such restructuring may be applied to: 1) loans granted before October 01, 2008; 2) loans with the nominal value not exceeding UAH 1,000,000.00 (one million hryvnyas), including the loans denominated in foreign currency (in such case the official NBU rate as of October 1, 2008 applies).
The Law provides for the following restructuring methods: prolongation of the term for the loan repayment of up to two (2) years; extension of the loan agreement’s validity period, taking into account restrictions set forth by commercial banks and the borrower’s financial standing; change of the interest calculation mechanism so that monthly loan payments would not exceed thirty-five percent (35%) of the aggregate monthly income of the borrower’s family.
Banks are also obliged to release borrowers from paying any penalties applicable due to borrower’s untimely performance of loan agreements that occurred before the restructuring date, provided that the restructuring was implemented in accordance with the terms and conditions prescribed by the Law.
Moreover, the Law provides for some particularities in relation to restructuring of mortgage loans by commercial banks, such as:
1. only mortgage loans secured by residential real estate being the only residence of the borrower and his/her family are subject to restructuring;
2. a moratorium for compulsory re-possession will be in place during 2009 - 2010 in relation to those residential premises where an individual mortgagor is registered and which is his/her only residence, provided that interest accrued in accordance with the residential mortgage loan agreement is paid timely or a delay of payment of such interest does not exceed two (2) months, and debt restructuring arrangements have been agreed by the parties in writing.
Alterations to Tax Legislation
The Law of Ukraine "On Corporate Profit Tax" dated December 28, 1994, No. 334/94-BP is amended as follows:
• Starting from January 01, 2009 (retrospectively), banks are eligible to treat 100% (and 80%, after January 1, 2011) of aggregate provisions from to cover possible losses from loan transactions as deductible expenses. Certain non-banking financial institutions are eligible to treat 80% of all losses provisions as tax deductible. We note that the previous maximum amount of provisions was limited to 10% of the aggregate amount of debts for banks, and 15% for non-banking financial institutions;
• Once the Law is effective, banks and financial institutions shall be entitled to compensate their loss at the account of provisions release upon enforcement of pledged property. Subject to certain conditions, if an amount received by the bank after enforcement of the pledged property, or estimated value of such property is less than the amount of outstanding loan, amount of provisions equal to the amount of outstanding indebtedness is not considered as the bank’s taxable income;
• Bank’s income derived from credit transactions accrued in 2009 (retrospectively) and 2010, but not actually received as of January 1, 2011 shall be recorded in tax accounts as taxable income upon their actual receipt only, i.e. cash method of tax accounting shall apply.
Certain amendments are also introduced to the Law of Ukraine "On Personal Income Tax" dated May 22, 2003, No. 889-IV, the most significant of which is release of legal entities (including banks) from acting as tax agents for individuals in relation to the deemed income earned by such individuals from uncollectable debt write-off where limitation period has expired.
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4. NEW LAW INTENDED TO OVERCOME THE NEGATIVE CONSEQUENCES
OF THE FINANCIAL CRISIS WILL COME INTO FORCE SOON
DLA Piper, Kyiv, Ukraine, November 24 2009
On 19 November 2009 the President of Ukraine signed the Law of Ukraine "On the Introduction of Amendments to Certain Laws of Ukraine Aimed at Overcoming the Negative Consequences of the Financial Crisis" No. 1533 ("the Law") adopted by Verkhovna Rada on 23 June 2009.
The Law introduces certain amendments relating, inter alia, to banking activity, lending, foreign investments, currency control and fiscal issues. We would like to highlight the following most important changes.
Foreign Investments
The Law introduces substantial temporary amendments to the legal framework on foreign investment activity which will be effective until 1 January 2011. Such amendments include:
▪ mandatory state registration of foreign investments;
▪ foreign investments in monetary form must be made only through Ukrainian investment accounts; and
▪ monetary investments must be made in UAH only (which effectively means mandatory conversion of foreign currency in order to make an investment).
Currency Control
Currently, under Ukrainian law currency proceeds must be credited to the account of a Ukrainian exporter within 180 days upon exporting of goods or services. The same 180- days rule applies to importers: any goods or services must be imported within 180 days upon the making of a prepayment by an importer. Extension of this term is subject to the approval of the Ministry of Economy of Ukraine. Under The Law this term is reduced to only 90 days for both import and export transactions.
Foreign Loans
The Law establishes the following restrictions on the regulatory framework for foreign loans:
▪ restrictions on any amendment to the loan agreements between Ukrainian borrowers and Ukrainian lenders, if such amendments have the effect of reducing the term of the loan or envisage a prepayment of the loan;
▪ any such amendments must be registered by the National Bank of Ukraine; and
▪ restrictions on any prepayment by Ukrainian borrowers of loans obtained from foreign creditors, including prepayment under the loan agreements entered into before The Law comes into force.
Such restrictions will be effective until 1 January 2011.
Banking Activity
Until 1 January 2012 the maximum amount of subordinated debt that Ukrainian banks are allowed to include in their regulatory capital will be equal to the amount of their main capital. Moreover, any subordinated debt taken on before the said deadline will be included in the bank's capital in full, without any reductions applicable to the supplementary capital. In addition subordinated debt will not be subject to an annual 20% reduction of its value for capital accounting purposes.
According to the Law, the minimal charter capital of the Ukrainian banks now amounts to UAH 75 million as compared to the current minimum threshold of EUR 10 million. Until 1 January 2011 Ukrainian banks and other financial institutions will not be allowed to perform consumer lending in foreign currency, unless the loan is used for payment to foreign institutions for medical or education services. In this case the creditor must transfer the loan directly to such foreign institution.
Other Issues
The Law sets out a legal framework for the restructuring of loans provided to individual borrowers.
There is a moratorium for the period from 2009 to 2010 on foreclosure of mortgaged residential property. The moratorium applies only if the following conditions are met:
▪ the mortgaged property is the only residence of the mortgagee;
▪ there is not more than a 2 month delay in interest payments; and
▪ the debt is restructured as agreed by the bank and the borrower;
The Law also introduces certain amendments to the taxation of banks and other financial institutions.
The Law comes into force upon its official publication, which is expected shortly.
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