CMS Expert Guide to cash pooling in Ukraine

a) There is no specific legal framework that governs cash pooling in Ukraine. One may say that the concept of cash pooling has not been widely developed yet. However, Ukrainian law does allow companies to enter into arrangements that have the commercial effects that are similar to the standard cash pooling concept.

Types of arrangements in Ukraine

Physical cash pooling 

In the absence of a separate cash pooling legal concept, funds transferred as part of a cash pooling mechanism would generally be considered as loans. Such transfer of funds must be based on contractual obligations and formalised. Physical cash pooling can be achieved in Ukraine through the following types of arrangement: 

(i) Refundable financial assistance (RFA)

With RFA, a company receives interest-free funds for a definite period of time under a financial assistance agreement. An RFA is therefore an interest-free loan, which enables one or more group companies to make a liquid sum of funds available to other group companies in a similar manner to physical cash pooling. An RFA agreement designed to facilitate cash pooling should clearly establish the rights and obligations of the participating parties, so that the basis on which they will provide funds to each other is certain. Alternatively, the RFA agreement may provide that companies will receive funds from a defined company within the group – such defined company having collected the funds from the other participating companies. 

If one of the contributing participants is a non-resident, the RFA agreement must be notified to the National Bank of Ukraine through the servicing bank. In addition, under the martial law regime introduced in Ukraine, repayment of a cross-border RFA is currently prohibited. 

(ii) An interest-bearing loan 

An alternative structure for a cash pooling arrangement in Ukraine is to make use of a standard interest-bearing loan, pursuant to a loan agreement. To optimise this, the parties may opt for borrower-friendly terms on repayment and interest. However, it is important to note that a key qualification on this structure is that, to provide a loan, a corporate Ukrainian entity must have special authorisation. Loans granted by or to foreign companies must be also notified to the National Bank of Ukraine. The bank is authorised to verify the compliance of the interest rate under a cross-border loan with the market standard rate and request an adjustment if needed.

Under the martial law regime introduced in Ukraine, payment of interest and/or repayment of a cross-border loan is currently prohibited to accounts outside of Ukraine in foreign currency. 

(iii) Alternatives for branch offices

For branch offices that do not have the status of a legal entity and are separate subdivisions within a parent company, some Ukrainian banks offer automatic transfers of positive balances on their accounts to a master account of the parent company, thereby achieving a zero-balancing or target-balancing effect. 

Apart from establishing intra-group contractual arrangements, the parent company may also consider entering into a (master) loan agreement with the bank. Under the terms of such an agreement, the bank may, among other things, make a facility available to the parent company, including by way of an overdraft in respect of the parent company’s bank account.

It is also uncommon in Ukraine for the banks to offer a complex cash pooling mechanism and regulate it via a separate cash pooling agreement. At the same time, alternative cash pooling mechanisms are used with the use of bank deposits and bank loans as well as the structures with the use of loans from investment funds within the group of related companies.  

Virtual cash pooling 

Some Ukrainian banks do offer groups of companies a virtual cash pooling service. However, such a service has yet to be tested for its legal enforceability in Ukraine.

b) Social interest and due diligence

As a general rule, the director’s duties are owed to the company itself, rather than to its participants (shareholders). In practice, when the company is solvent, this means acting in the best interests of shareholders as a whole. Concerning the interests of a company, a mere interest of the group would not suffice to execute an RFA or interest-bearing loan agreement providing financial support to another company of the group which is currently suffering financial difficulties. The company’s protection shall prevail or at least be balanced between the interests of the group and the interests of the shareholders’ company. Company supervisory board and executive body members are required to act in good faith and reasonably in the interests of the company. Company directors shall therefore assess the risks deriving from cash pooling with due care and diligence in the best interests of the company itself.

c) Shareholder’s loan provisions

Generally, shareholder’s loans provided by a shareholder solely or jointly with its affiliated parties holding or controlling 20% equity in the charter capital of a limited liability company (or its affiliate) or 25% shares of a joint stock company in Ukraine (unless such joint stock company is wholly owned by a sole shareholder) may be  considered interested-party transactions and may require special corporate authorisations as provided by the company’s articles of association. If the respective requirements for execution of the shareholder’s loans are not complied with by the company officials, they bear solidary liability for damages caused to the company. 

d) Liquidity protection

Prior to entering into cash pooling arrangements, directors of a Ukrainian company shall consider the financial impact with particular concern to liquidity protection. 

If net asset value of a limited liability company decreases by more than 50% as compared to the end of the previous year, directors of the company must convoke a shareholders meeting to address the issue. In case of the company’s insolvency, failure to comply with this requirement triggers directors subsidiary liability for the debts of the company.

e) Hidden distribution of profits

In Ukraine, no decision on the payment of dividends may be taken in a limited liability company, if the company assets are not sufficient or will be insufficient in result of the dividend payments to cover the creditor’s claims that are due. There are also restrictions on the payment of dividends in joint stock companies. In particular, no dividends could be paid to the holders of the ordinary shares, if the company's equity capital is less than the sum of its authorized capital, reserve capital and the amount of the excess of the liquidation value of the preference shares over their nominal value. There are certain specifics for the holders of the preference shares, however, allowing them to receive dividend payments covered from the reserve fund or other special fund of a company, even in the above unfavourable financial situation.  

Hidden distribution of profits is not permitted, and the company directors shall be personally liable for the damages caused to the company, if such dividends are paid.

f) Insolvency proceedings – contestation of transactions    

Cash pooling can become disadvantageous in cases where participating companies become insolvent. As regards the insolvency proceedings, the participating companies in a cash pooling structure in Ukraine should bear in mind that the bankruptcy administrator may consider a related-party transaction or another financial transaction resulting into the insolvency of the company to be invalid, if it has occurred within three years prior to the request to commence the proceedings or after the proceedings have started.

a) When setting up a cash pool structure various liability risks may become relevant, especially with reference to the directors and shareholders of the participating companies.

b) Liability of directors

The directors of a Ukrainian company are obliged to act in good faith and reasonably in the best interests of the company, avoiding any conflict of interest. Directors are liable towards the company for any damages caused by their actions (omissions). Directors especially shall be held liable for misinforming the shareholders on the financial state of the company, which resulted into inappropriate payments, for execution of material transaction or interested-party transactions without shareholders’ consent etc. A member of the executive body is exonerated from its liabilities against the company when it is proven that there has not been any fault in his/her actions. The company may act in court against the director within three years as of the occurrence or disclosure of the breach claiming compensation and/or nullity of actions.

c) Liability of shareholders

Shareholders of Ukrainian companies as a rule are not held liable with respect to the corporate governance of their companies. However, in view of the implementation of a cash pooling system, some general principles shall be considered, especially in relation to the control, supervision, management and compliance of the company. 

The liability of the shareholders is mostly related to abusive and misleading actions taken against the interests and properties of the company. In the context of cash pooling, the link between the abusive and misleading actions performed during the implementation of the structure and the consequent adverse financial situation endured by the company should be established.

a) The following risk avoidance measures should be borne in mind when carrying out a cash pooling transaction: 

b) Corporate power

All necessary corporate approvals (required pursuant to the law and the company’s articles of association) must be obtained prior to entering into the cash pooling arrangement, or else the directors risk an ultra vires situation, making the agreement void. In addition, the directors should have all the necessary powers to enter into the RFA, loan agreement or any other agreement entered into in connection with the cash pooling arrangements on behalf of the company, to avoid abuse of power. 

c) RFA, loan agreements 

All cash pooling arrangements must be executed in writing.

It is also advisable that contributing participants have the right to terminate their participation in the arrangement and receive repayment of any sums contributed (together with accrued interest, if applicable) on demand. This will allow the contributor to seek the return of its contributions should it be faced with its own liquidity issues, whilst also ensuring that it can take the contributions back if another participant in the cash pooling arrangement has solvency problems that threaten to swallow the pooled cash.

d) Facility agreement

e) Guarantee

The participant’s protection has also to be considered when the bank offering the cash pooling demands a guarantee from the participant for a debit position. The guarantor should consider if a timely revocation of such a guarantee can be effected.

a) The concept of cash pooling is not specifically defined in Ukraine's tax laws as general legislation. However, the loan granting mechanism mentioned above allows companies to enter into specific arrangements similar to the standard cash pooling concept. Thus, the following description of the tax consequences derives from the loan mechanism as an option of the cash pooling concept. Accordingly, further information regarding cash pooling mechanisms is provided below based on this distinction. 

b) Thin capitalisation rules

Starting from 1 January 2021, the following rules apply to legal entities whose debts to all non-residents (not only related parties) exceed equity by 3.5 times:

• The deduction of interest expense under transaction with all counterparties for these taxpayers is limited by the amount of 30% of the CIT base increased by the amount of financial expenses under accounting rules and tax depreciation;
• Interest that has been capitalised as part of the value of non-current assets shall be included with interest expenses proportionately to the depreciation of such assets for the respective reporting period;
• If the amount of interest expenses within a controlled transaction exceeds the amount determined in accordance with the arm’s-length principle, then thin capitalisation rules will apply only to the amount of interest that corresponds with the arm’s-length principle;
• The thin capitalisation rules will no longer apply to financial institutions and companies engaged exclusively in leasing activities.

c) Interest deductibility

Interest payments are ordinarily subject to deduction for income tax purposes.

d) Transfer pricing

The Ukrainian Tax Code specifies that controlled transactions are subject to transfer pricing rules. Controlled transactions are defined as business transactions that may affect taxable income, including:

• commercial transactions with non-resident-related parties;
• commercial transactions concerning the sale or purchase of goods or services through non-resident commissionaires;
• commercial transactions with non-residents incorporated in offshore jurisdictions (list approved by the Cabinet of Ministers);
• commercial transactions with non-residents that do not pay corporate income tax or are not tax residents of the country in which they are registered as legal entities;
• transactions (including intracompany settlements) performed between a non-resident and its permanent representative office in Ukraine. 

These transactions qualify as controlled if they simultaneously meet the following criteria:

• The annual income of the company from any activity determined by the accounting rules exceeds UAH 150 million (after deduction of indirect taxes) for the relevant tax (reporting) year;
• The volume of such business transactions of the taxpayer with each counterparty as determined in accordance with the accounting rules exceeds UAH 10 million (net of indirect taxes) for the relevant tax (reporting) year.

Interest rate and loan conditions must comply with local transfer pricing rules. 

e) Withholding tax

Interest from Ukrainian sources paid to non-resident entities is generally subject to 15% withholding tax. However, under the relevant double taxation tax treaty, the rate of withholding taxes may be reduced.

The 15% withholding tax rate applies to income (rather than capital gain) on the sale of real estate and on profits from the sale of securities.

f) Corporation tax

Not applicable.

g) VAT rules

Finance transactions, including the loan granting mechanism, are VAT-exempt.