The 21st June 2018 marked a turning point for the Ukrainian financial market and economy as a whole. After more than 25 years of the fragmentary, contradictory and obsolete rules of the Cabinet of Ministers’ Decree on the system of currency regulation and currency control and its auxiliary legislation, the Ukrainian Parliament has adopted a brand new law “On Currency and Exchange Transactions” (the “Currency Law”).
The key game changer introduced by the Currency Law is a new principle - "everything which is not forbidden is allowed" - underpinning the entire system of currency regulation in Ukraine and being the direct opposite of what was practiced in the past. The new rules are to prevail over any other laws and regulations, making the Currency Law a primary and final point of reference. The Currency Law therefore seems to significantly limit the discretion of the regulatory bodies and vests market players with a wider freedom of action.
The Currency Law came into effect on 07 July 2018, however, it will only become applicable on 07 February 2019. The full picture of the new currency control system is also not yet complete without auxiliary legislation that will be adopted by the National Bank of Ukraine (the “NBU”) based on the Currency Law. There are a few key points, however, that should be considered now at this stage.
Liberalisation of foreign currency controls
Under the Currency Law, currency operations shall be carried out without restrictions, unless provided otherwise by applicable anti money laundering laws, national security laws, applicable international treaties or protection measures introduced by the NBU in line with the Currency Law.
In accordance with this approach, the Currency Law, amongst others things, introduces the following:
- Ukrainian residents will not require an individual license from the NBU in order to open accounts with foreign banks, perform their obligations towards and under agreements with non-residents in foreign currency or purchase assets abroad. This novelty creates a window of opportunity for investments abroad, including investments into securities, property rights, real estate located abroad and depositing foreign currency with foreign banks (including the currency originated from Ukraine), etc.
- Non-residents will be able to open accounts with Ukrainian banks and carry out currency operations in Ukraine, enjoying the same rights as Ukrainian residents.
- Currency transactions in connection with the import or export of goods under UAH 150,000 shall no longer be subject to currency control, which is often a time-consuming and burdensome process in Ukrainian banks.
Maximum term for settlements under export and import contracts
Unless introduced by the NBU, the maximum term established for settlements under export and import contracts (the “Maximum Term”) shall no longer be applicable to (i) the return of foreign currency proceeds under export contracts after the supply of goods/services/works/non-property rights outside of Ukraine and (ii) to the supply of goods/services/works/non-property rights under import contracts after an advance payment abroad made by a Ukrainian resident.
The NBU may introduce some exemptions or peculiarities of applying the Maximum Term in relation to certain goods and/or industries and establish minimal value thresholds that will trigger application of the Maximum Term.
Elimination of special economic sanctions
The Currency Law eliminates special economic sanctions for the violation of laws on foreign economic activity that previously included (i) fines, (ii) individual licensing regime, and (iii) suspension of foreign economic activity for both resident and non-resident businesses.
Instead, the Currency Law creates a more clear-cut system of sanctions with different mechanisms being applied to banks, non-bank financial institutions, legal entities and individuals. Fines that can be handed down to legal entities (other than banks and financial institutions) will be determined by the Ministry of Finance and can reach up to 100% of the value of the illegal operation being sanctioned. Fines for individuals are set in the Administrative Code and may be up to UAH 68,000 (depending on an individual’s status and the violation in question).
On a positive note, any sanctions can be applied only within a 6-month period commencing once a violation has been revealed, but not later than 3 years after its occurrence. The Currency Law also allows only one sanction per violation.
Registration of cross-border loans
The Currency Law cancels a Presidential Decree which sets a requirement for all cross-border loans to be registered with the NBU. It thus can be reasonably expected that the registration requirement will no longer apply once the Currency Law becomes operational. Even if the NBU chooses to keep the requirement to register cross-border loans as a Protective Measure (please see below), its application will be subject to time limitations, as detailed below.
Protection Measures by the NBU
In order to ensure the country's economic security, the NBU will not be deprived of the necessary powers to supervise Ukraine’s currency market and re-establish regulatory prohibitions for the conduct of currency transactions.
In case of instability of the banking system, deterioration of the balance of payments of Ukraine, or threat to the banking and financial systems of Ukraine, the NBU will be able to introduce the following protection measures (the “Protective Measures”):
- mandatory sale of foreign currency proceeds;
- maximum term for settlements under export and import contracts;
- specific requirements applicable to capital movement transactions (e.g., cross-border loans, cross-border payments under guarantees and/or sureties, leasing agreements, factoring agreements, foreign investments and divestitures, payments of dividends abroad, transactions with securities, depositing foreign currency with foreign banks, etc.);
- special permits or limits applicable to certain currency transactions;
- reservation of funds under currency transactions; or
- other measures, an exhaustive list of which shall be adopted by the NBU on the basis of Article 71 of the Law of Ukraine “On the National Bank of Ukraine”, which might be applied in case of risks to the stability of the banking system of Ukraine and might include a temporary prohibition of currency operations.
While the Protective Measures can have quite a broad application, the Currency Law ensures that such Protective Measures will only be of a temporary nature. If adopted, a Protective Measure will have to be renewed every 6 months and in total (starting from the day it is first introduced) it may not last for more than 18 months during every 24-month period. However, on a negative note, the Protective Measures that will be adopted prior to 7 February 2019 will come into force together with the Currency Law and remain effective until cancelled by the NBU.
Following three months after the adoption of a new Protective Measure (if the previous Protective Measure has expired less than 6 months ago) or the renewal of an existing Protective Measure, the NBU shall submit a report to the banking committee of the Ukrainian Parliament which shall inter alia explain the reasons for adopting a Protective Measure and demonstrate how it will resolve any issues of the financial/banking system at hand and how justified and effective such Measure has been in the past. Such report shall be publicly available on the NBU website and shall add more transparency to the process of introducing Protective Measures.
Promise of Future Legislative Developments
Within 6 months of the Currency Law coming into force, the Cabinet of Ministers of Ukraine together with the NBU shall develop and submit to the Ukrainian Parliament draft laws on international cooperation in tax matters, which are to include:
- CFC rules;
- country-by-country reporting rules;
- rules on limiting the costs of financial operations with related parties;
- rules for the taxation of permanent establishments;
- measures preventing abuse of double taxation treaties;
- dispute resolution procedures on the application of double taxation treaties; and
- implementation of international standards for the automatic exchange of information.
It is undeniable that the Currency Law is an important step forward in the development of a more open and investor-friendly currency market in Ukraine. At the same time, the Currency Law leaves the steering wheel of currency control liberalisation in the hands of the NBU. Given the positive trends seen in 2017-2018, the hope is that the NBU will continue to pursue the approach of lifting FX restrictions and the positive sentiments expressed following adoption of the Currency Law will not be overshadowed by harsh Protective Measures.
Legislation:
Law of Ukraine “On Currency and Exchange Transactions” No. 2473-VIII dated 21 June 2018
