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Managing Partner, Attorney-at-law, Legitimus Law Firm
Legitimus Law Firm
The Path to Free Movement of Capital in Ukraine. The First Steps
Over the last few years, the currency system has been undergoing constant changes and improvement. Limitations established earlier are now being abolished, and these are followed by exemptions, which become the basis for liberalization of the Ukrainian currency system.
It’s worth recalling that certain obsolete statutory provisions, prohibiting or restricting the conduct of currency transactions by investors, were previously in force. Moreover, there were certain issues related to the opening of accounts in Ukrainian banks by investors and the list of available transactions was quite limited.
Starting from 2019, a number of regulations have been enacted in Ukraine, whose ultimate objective is to change the obsolete and imperfect system of currency regulation and to bring the regulatory and legal framework into line with the statutory provisions of European legislation. Hence, such liberalization should be followed by the abolition of restrictions that were in effect until recently and by creating the possibility for the free movement of capital.
It should be noted that, after all, the main objective of “currency liberalization” is to improve the investment attractiveness of Ukraine for foreign investors.
It’s important for investors not only to make a profit and to freely manage their own funds but to feel protected. At the same time, an important issue for investors will be the country ranking in relation to Doing Business.
Over the past few years, Ukraine’s position has improved a little, partially due to the introduction of changes to regulations on corporate governance of economic entities, the implementation of additional mechanisms to protect shareholder rights and of mechanisms to regulate relations between these. In particular, many things have already been borrowed from relevant corporate instruments and institutions from the Anglo-Saxon legal system and European legal standards (the institution of corporate agreement, escrow account, option agreements).
The country’s currency policy will always remain important for investors and it will, in any case, determine “attractiveness” for such an investor.
Until recently, a sufficiently massive but obsolete system of currency regulation was in effect in Ukraine. Among the basic regulations, the following should be noted: the Decree of the Cabinet of Ministers of Ukraine On the System of Currency Regulation and Currency Control No. 15-93 (hereinafter — the Decree), the Law of Ukraine On the Procedure for Settlement in Foreign Currency No. 185/94-VR of 23 September 1994 and the Decree of the President of Ukraine On the Regulation of the Procedure for Receiving Loans, Foreign Currency Loans from Non-Residents by Residents and Application of Penalties for Violation of Currency Legislation No. 734 of 27 June 1999.
The Law of Ukraine On Currency and Currency Transactions No. 2473-VIII has been adopted to replace the mentioned regulations, and a number of other Regulations of the National Bank of Ukraine were drafted.
The Law became the basis for the new system of currency regulation and control implementation in Ukraine intended to simplify currency circulation, improve bank processes and abolish existing currency restrictions. Specific provisions, regulatory mechanisms, and requirements are being implemented by the National Bank in the form of a number of resolutions.
Some NBU resolutions are in force on a permanent basis, and some will have a temporary or conditional period of being in force.
The objective of the updated legislative framework is to simplify the conduct of banking transactions for residents of Ukraine and non-residents.
We would like to highlight the changes and features of the updated procedures related to currency regulation in Ukraine which could be interesting and useful for a foreign investor.
First of all, the dividend payment limit has been significantly increased. The payment of dividends for 2017 is now allowed for the benefit of foreign investors within a single limit of up to EUR 12 million per month and to return investments made in the amount of up to EUR 5 million per month.
Therefore, the established limit will provide even more demand for currency on the part of companies willing to pay dividends to foreign investors, while minimizing the impact of payments on the status of the Interbank Currency Market.
Also, one of the important changes is amendments made to the procedure for obtaining loans from non-residents.
From now on, a resident will have the right to be financed from abroad in the form of a loan/credit without registering the relevant loan agreement with the NBU.
Currently, the procedure for such loan agreements registration has been replaced by notification on conclusion of relevant agreements, which should be sent to the NBU. Under the new rules, the servicing bank will check all the transaction documents and introduce information about the agreement into an automated information system which, in fact, allows for further transfer of funds. Moreover, the restrictions on the amount of the maximum interest rate on such loan agreements were abolished, which would enable the building of relationships between the creditor and borrower in real market terms and conditions.
Along with cancellation of registration of credit agreements, the prohibition on early repayment of loans was canceled. This decision by the NBU will enable business entities to manage their own debt obligations to non-residents more effectively and repay obligations in advance.
One of the positive changes is prolonging the deadline for settlement under export and import agreements from 180 to 365 days. Moreover, the liability in the form of termination of foreign economic activity for violation of the settlement deadline is abolished, followed by establishment of more lenient financial penalties.
An interesting novelty for Ukraine is the change in the regime of bank accounts that non-residents can now open in authorized Ukrainian banks.
Now non-resident legal entities can open not only investment accounts in authorized Ukrainian banks, which have kind of reduced the possibilities to use funds available (use of funds only for investment and investment-related payments), but also simple bank accounts without restriction on the use of available funds. This will facilitate the activities of non-resident companies in Ukraine and making of investment in Ukraine to a great extent, and enable Ukrainian banks to compete with foreign ones.
The interesting novelty is the possibility of investing in Ukraine not only in the currencies of the first but also of the second group of the currency classifier. This could be of interest to investors from CIS countries and the East, as this will allow investment to be made in Ukraine in national currencies and avoid currency risks and losses when buying currencies of the first group of the currency classifier to actually make the investment.
The main objective of changes in the currency legislation of Ukraine is the replacement of the “currency control” concept to “currency supervision”, which is carried out to establish the compliance of foreign exchange transactions with currency legislation, taking into account the risk-oriented approach.
The main objective is to implement the internal compliance of each client and financial monitoring over transactions by the authorized banks themselves. This practice has long been used around the world, particularly in the European Union, where banks are the first to check their clients and their transactions for compliance with legislation. This greatly reduces interference by the state in the system of currency regulation and the banking system as a whole.
In any case, all other existing currency restrictions in Ukraine will be gradually replaced with relevant legislative changes until full freedom of foreign exchange transactions is reached, subject to favorable economic conditions.
This is in some way related to the commitments undertaken by Ukraine, particular with regard to implementation of the BEPS (Base Erosion and Profit Shifting) Plan, the introduction of the Common Reporting Standard and bringing Ukrainian legislation into line with European Union legislation, in particular, regarding the free movement of capital, which Ukraine undertook within the framework of the Association Agreement signed with the EU.
If we analyze all the legislative changes regarding the updated currency regulation procedure in Ukraine in more detail, weighing up all the pros and cons, we can confidently claim that the first and perhaps the most important step towards the establishment of favorable investment conditions in Ukraine, the construction of a financial system in Ukraine, which could provide business entities with the same tools and benefits that the financial systems of developed countries use, have already been made.