Until May 7, 1997, much to the ongoing dismay of the Western financial world, debt financing was not an option for most Ukrainian companies. The key obstacle was the now-cancelled National Bank's Provision No. 329, dated December 29, 1995, which strictly required all Ukrainian residents to obtain a special license prior to receiving loans in foreign currency from foreign creditors. Naturally, such licenses were not generally granted to the average Ukrainian company, barring most Ukrainian enterprises from dealing with foreign creditors altogether.
In light of the above prohibition, the National Bank's Resolution No. 144 "On Adoption of the Regulations 'On the Procedure of Registration of Loans in Foreign Currency Received by Residents From Foreign Creditors," dated May 7, 1997, was nothing short of revolutionary: the beginning of debt financing practices in Ukraine, at last! Resolution No. 144 specifically granted Ukrainian resident legal entities the right to obtain loans in foreign currency from foreign creditors to conduct activities provided for in their foundation documents. Technically, all borrowers would repay all of their obligations under the loan agreement (including interest and any fines) by purchasing with Hryvnia the necessary amount of foreign currency on the Interbank Currency Market and transferring it abroad.
On June 27, 1999, the President of Ukraine issued Edict No. 734/99 "On Performing the Procedure for Obtaining Credits and Loans in Foreign Currency by Residents from Non-residents and Application of Fines for Violation of Currency Legislation." and based on this Edict, on December 22, 1999, the National Bank approved Resolution No. 602 "Regulations on the Procedure for Registering Agreements Which Provide for the Fulfillment of Debt Obligations by Residents to Non-residents Under Credits and Loans in Foreign Currency Procured From Non-residents."
Resolution No. 602 set forth the mechanism for Ukrainian residents to obtain funds from non-residents in order to carry out their business activities. Importantly, the above Presidential Edict contained sanctions for the failure to register loan agreements. Specifically, if a loan agreement was not registered as provided by law, the resident debtor was subject to a fine in the amount of 1% of the principal of the loan. The fine had to be paid in Ukrainian currency according to the official exchange rate established by the National Bank as of the date of the receipt of the loan. Further, payment of a fine did not relieve the debtor from the mandatory registration of the loan agreement.
On June 17, 2004, the National Bank once again amended the rules for the granting of loans from non-residents to residents in Resolution No. 270 simply entitled "On Approval of the Regulations on the Procedure of the Receipt by Residents of Credits and Loans in Foreign Currency from Non-residents and the Granting by Residents of Loans in Foreign Currency to Non-residents" (Resolution No. 270). Resolution No. 270 marked the first time that the National Bank referred to the ability of residents to provide loans in foreign currency to non-residents, surely a sign of the further liberalization of Ukraine's currency market.
II. Resolution No. 270
Resolution No. 270 contains the procedure for the receipt by residents of credits and loans in foreign currency from non-residents, including the procedure for the registration of agreements providing for the performance by residents of debt obligations before non-residents for the receipt of such credits or loans. On June 15, 2012, the National Bank of Ukraine introduced amendments to Resolution No. 270, which puts the onus on servicing banks to complete the registration of loan agreements between residents and non-residents with the National Bank. Once such agreements are registered, the resident will receive a loan notice with the National Bank's endorsement, allowing it to conduct foreign currency transactions pursuant to such agreements.
Resolution No. 270 also sets forth the procedure for the granting of loans by residents in foreign currency to non-residents and the issuance of individual licenses to transfer foreign currency abroad for the purpose of granting loans in foreign currency to non-residents. The novelty here is that the National Bank has provided Ukrainian companies and individuals with the possibility to finance their companies registered abroad or to provide loans to foreign entities and individuals.
According to Resolution No. 270, any resident entity (including joint stock companies and limited liability companies with foreign investment) or natural person ("Resident") may receive loans in foreign currency from non-residents, including financial aid, for the purpose determined in the relevant agreement registered with the National Bank. Because the loan/credit agreements must be registered with the National Bank, it is difficult for resident debtors to deny the receipt of a loan, especially since credits may only be received in non-cash form. By registering such agreement, however, the National Bank does not take any obligations upon itself before the parties to an agreement.
Procedurally, Residents receive loans from non-residents via authorized banks of Ukraine, which agree to service the operations of the residents under their agreements with non-residents ("Servicing Bank"). The Servicing Bank's branches or separate departments may also service loans from non-residents to residents on behalf of the Servicing Bank. Importantly, such loan agreements may only be serviced by one bank on one account opened by the resident in the Servicing Bank.
In general, Residents are required to register loan/credit agreements before they can receive the credit itself. If, however, a loan/credit agreement with a non-resident provides for the receipt of credit by the transfer of funds to an account of a Resident in a foreign bank and/or on the condition that the repayment of the debt shall be effectuated from the Resident's foreign bank, then the Resident must obtain an individual license to place currency valuables on accounts and in investments abroad.
If an agreement with a non-resident provides for credit by a foreign creditor via the transfer of funds to settle the obligations of a Resident pursuant to a foreign economic contract without transferring such funds to the Resident's account in an authorized bank, then the transfer of funds to the non-resident for purposes of settling the debt (principal amount of debt, interest, commissions, fines and other fees under the contract) will only take place upon receipt from the foreign bank creditor of its SWIFT code or a telex notice or the submission by the Resident to the Servicing Bank of the documents, which confirm the payment by the foreign creditor of credit funds to the non-resident under a foreign economic agreement. Such documents must be certified by the foreign bank or financial institution on the originals or copies of the payment documents and must contain the requisites of the foreign economic agreement and the date and amount of credit funds transferred to the non-resident.
In case an agreement with a non-resident transfers credit to a Resident's account in a foreign bank on the basis of an individual license, then the transfer to the non-resident of funds from the Resident's bank account for the purpose of extinguishing the debt will take place upon submission by the Resident of originals or copies of the payment documents certified by a foreign bank or institution, confirming the payment of loan funds by the foreign creditor to the Resident and the subsequent use of such funds. If such payment documents are set forth in a foreign language (except Russian), then certified translations must also be submitted to the Servicing Bank. As an alternative method of confirmation, the foreign bank or institution where the Resident opened an account may directly send to the Servicing Bank a SWIFT or telex notice, which contains the corresponding key with an indication of the date and amount of credit funds received and the date, amount and purpose of the use of such funds.
A natural person may only use credit amounts in foreign currency for making settlements with non-residents for the performance of the personal obligations of such individual with respect to the payment for goods, works or services. Alternatively, they may sell the foreign currency for hryvnias on the interbank currency market of Ukraine with the transfer of hryvnias to the personal current account of the individual in an authorized bank for the purpose of their further use on the territory of Ukraine in non-cash form or withdrawal in hryvnias.
III. Loan Registration
As a rule, any agreements that provide for a Resident's settlement of debt obligations in foreign currency for credits or loans received from non-residents, regardless of whether they are interest-bearing loans or not, are subject to mandatory registration by the National Bank. Residents, which are not banks, must register their loan agreements with the territorial department of the National Bank at the place of location of the Servicing Bank. In case the National Bank or its territorial departments become aware of the receipt of a loan in foreign currency by a Resident from a non-resident without registration of the loan agreement, the state tax inspection will be notified at the place of registration of the Resident as a taxpayer within seven (7) working days from the receipt of such information.
Significantly, agreements involving the receipt by Residents from non-residents of commercial credits and credits obtained under guarantee of the Cabinet of Ministers are not subject to registration by the National Bank.
In addition, in cases when a loan agreement provides for the provision of a loan or credit to more than one Resident borrower, then the loan agreement must separately be registered by each of the borrowers. Each borrower's loan notice application must indicate the total loan/credit amount that each borrower will receive separately from the others. If this information is absent from the registration application, then a total loan amount will be calculated for each borrower in the application.
In order to register a loan agreement (or amendments thereto) with the National Bank, Residents are required to submit the following documents to their Servicing Bank:
1) A so-called "notice on the agreement" (hereinafter "Loan Notice") or "notice on amendments to the agreement". The Loan Notice must be in hard-copy according to the form established by the National Bank;
2) The loan agreement and all additional contracts/agreements/arrangements and documents, which are related to the execution of the agreement and currency operations under the agreement. As the rules provide for the submission of the original loan agreement, the parties should execute and sign an additional original for purposes of registration;
3) A copy of the payment receipt for the registration service of the National Bank.
If the loan agreement or any other documents are executed in a foreign language, then the Resident is responsible for providing a certified translation into Ukrainian with the translator's signature certified by a notary or a translation certified only by a notary. Documents executed in Russian or with simultaneous translation into Ukrainian do not require such certification.
In the above-mentioned cases, where the Resident must procure an individual license from the National Bank for placing currency valuables on accounts and investments abroad, the individual license must also be submitted along with the other required documentation.
In case an agreement with a non-resident calls for the provision to a Resident of credit by way of payment by a foreign creditor of funds for the obligations of such Resident pursuant to a foreign trade contract without the transfer of such funds to the account of the Resident in an authorized bank, then the Resident must also submit the originals and copies of the foreign trade contracts, which must contain provisions requiring the location in Ukraine of goods, the performance of works or rendering of services in Ukraine, or the receipt in Ukraine of intellectual property objects. The originals of such documents will be returned to the Resident within two (2) working days and their copies will remain with the authorized bank.
Moreover, if an agreement with a non-resident provides for payment by a foreign creditor (without transferring such funds onto the account of the resident in an authorized bank) for works, services and intellectual property rights pursuant to a foreign economic trade contract for a total amount of over 100,000 Euro or its equivalent at the official exchange rate of Ukrainian Hryvnia to foreign currencies established by the National Bank of Ukraine on the date of the contract, then the Resident debtor in addition to the above-listed documents must submit the original or a copy of the appraisal act of the State Informational-Analytical Center of Monitoring of Foreign Trade Markets (the "Center") on the correspondence of contract prices for works, services or intellectual property rights provided in the contract and certified by the said Center or by a notary. If the Center refuses to conduct an appraisal, the consent of the National Bank of Ukraine shall be submitted in its place.
Upon receipt of the documentation, the Servicing Bank will place the date of receipt on the Loan Notice and affix the Loan Notice with its stamp and authorized signature. The Servicing Bank must verify whether the Loan Notice has the correct date, requisites, necessary signatures and stamp, and all information is completely filled in. The Servicing Bank must also verify whether the information in the Loan Notice corresponds with the information in the accompanying registration documents. Importantly, the Servicing Bank will verify whether the payment amounts for the use of the credit funds (interest, commissions, penalties, etc.) under the agreement does not exceed the payment amounts under the loan agreement based on the maximum interest rate permitted by the National Bank for such loan agreements. The maximum interest rate will depend on the declared loan period, the interest accrual periods (annual, semi-annual, quarterly, etc.), the type of interest rate (fixed, fluxuating, etc.), ability to make early repayment, tranches, etc. Finally, the Servicing Bank must verify whether the Resident has included the mandatory provision that the loan agreement will only come into force from the date of its registration with the National Bank or later.
Once the Servicing Bank has verified the above information in accordance with Ukrainian law, it will place a compliance confirmation remark on the backside of the last page of the Loan Notice. The Servicing Bank will keep an original counterpart of the Loan Notice with its compliance remark and all notarized or bank certified copies of the documents submitted by the Resident for registration of the loan agreement (thus the need for an extra original loan agreement).
The Servicing Bank will also send to the relevant territorial department of the National Bank a secured copy of the loan agreement in electronic form, the Loan Notice (with the Servicing Bank's compliance remark) in electronic form, and confirmation of the Servicing Bank's consent to service the loan operation. The Servicing Bank is responsible for the for ensuring that the information in all hard copy documents is identical to the information sent to the National Bank in electronic form.
The term for consideration of the registration documents by the Servicing Bank, from submission of all documents by the Resident until either their return to the Resident for additional information or their dispatch to the territorial department of the National Bank in electronic form, may not exceed four (4) working days. After receipt of all required documents from the Servicing Bank, the territorial department of the National Bank will register the loan agreement and return a hard copy of the Loan Notice with its certification (stamp and signature) to the Servicing Bank.
Interestingly, the latest amendments to Resolution No. 270, which come into legal force on November 9, 2012, do not provide a clear maximum registration term within which the National Bank must register loan agreements. However, since this registration procedure is "analogous" to the registration of a loan received by a Ukrainian bank and, therefore, the procedure should arguably not take more than five (5) working days from the date after the receipt of all required documents.
Once a Loan Notice is received from a Servicing Bank in electronic form, the relevant territorial department of the National Bank will print out the Loan Notice and proceed with the registration of the loan agreement. The territorial department has the right to request additional information from the Servicing Bank in order to take its final decision on registration of a loan agreement. The Servicing Bank must request such such additional information from the Resident and provide it to the National Bank within three (3) working days. In such cases, the registration term will be calculated from the date of the receipt of the last required document received for registration.
The territorial department of the National Bank will verify the proper execution of the Loan Notice and the compliance of the loan agreement's terms and conditions with the National Bank's requirements. If the National Bank determines that the loan agreement is fit for registration, then it will place a corresponding notation to such effect on the Loan Notice, which will serve as confirmation of registration of the loan agreement and will indicate the loan registration number and date. The said notation must be certified by an authorized signature of the territorial department and affixed with its official seal. One counterpart of the Loan Notice will remain with the territorial department for control purposes.
Any amendments or changes to a registered loan agreement which are connected with the parties, loan amount, currency, loan term, interest rate, commissions or other payments for the use of the loan funds, including penalties for improper performance of the loan agreement, must also be registered with the National Bank. The procedure for registering such amendments is the same as the registration procedure of the initial loan agreement. Changes related to the total amount of payments for the use of a loan will not be permitted in case of the prolongation of the loan term or the increase of the total loan amount (including those at the expense of capitalization of delayed interest), interests rate, commissions, penalties and other payments if they exceed the maximum permissible interest rate on the date of the receipt by the National Bank of the documents required for registering changes to the loan agreement.
The National Bank will refuse to register a loan agreement or changes thereto in the following cases:
1) the Loan Notice contains inaccurate or conflicting information;
2) the Servicing Bank fails to provide or untimely provides additional information upon request of the territorial department;
3) the amount of annual payments for the use of the loan exceeds the maximum amount permissible;
4) the terms and conditions of the loan agreement do not comply with the requirements of Resolution No. 270.
An agreement will not pass registration if its terms and conditions provide for the payment by Residents of interest for the use of credit funds before the actual location of such funds from non-residents in Ukraine or before payment by non-residents of foreign trade contracts of Residents abroad or before credit funds are credited to the account of Residents opened abroad. If the terms and conditions of a loan agreement evidence that the credit operation is subject to financial monitoring or that they are not in compliance with Resolution No. 270, the Territorial Department will refuse to issue a registration certificate. The Resident may appeal the National Bank's decision to refuse registration of a loan agreement or changes thereto in a court of law.
After the territorial department of the National Bank completes its registration procedure, it will send to the Servicing Bank a counterpart of the Loan Notice with its registration notation in electronic form. It will also send to the Resident a certified Loan Notice (hard copy) with a notation on registration to the address indicated in the Resident's application to register the loan agreement (duly completed Loan Notice). The National Bank's registration notation should be printed on the backside of the first page of the Loan Notice and duly signed and stamped (all additional pages must be duly numbered and bound to the first page).
The Servicing Bank should also print out the electronic version of the Loan Notice it received from the National Bank via its special software system for its files and control. In case of the National Bank's refusal to register the loan agreement, the Servicing Bank will receive a refusal notice and must send it to the Resident no later than the working day following the date of receipt of the refusal notice.
Residents may also elect to change the bank that services the loan/credit agreement at anytime and for various reasons. This must be done via the new Servicing Bank in the same manner and based on the same documents required for the initial registration of the loan agreement. A simple change of the Servicing Bank by the Resident will not be grounds for the reconsideration of the terms and conditions of the loan agreement. Within five (5) working days after the date of receipt of the required documents the territorial department will place a notation on the Loan Notice and send it to the new Servicing Bank and Resident. At the same time, it will send notice to the former Servicing Bank regarding the termination of servicing of the loan agreement in connection with the Resident's transfer to a new Servicing Bank.
If the Resident does not receive the loan in full or in part within 180 calendar days from the date of registration of the loan agreement and the loan agreement's registration expires due to non-receipt of funds, then the National Bank will annul the loan's registration on the basis of a written request of the Resident or Servicing Bank. Likewise, the territorial department will annul a loan's registration in case it does not receive statistical reporting with respect to the loan over three reporting periods in a row.
The Resident may also choose to request annulment of a loan agreement in case one of the parties refuses to accept or transfer the loan funds for some reason, the loan agreement is re-executed into another form of agreement, or the debt is transferred to the non-resident. Of course, registration will be annulled by the National Bank in case false information is discovered in any of the registration documents or information is received that the Resident has violated currency regulation rules.
Regulation No. 270 provides Ukrainian residents with a wider avenue for obtaining foreign currency loans than ever before, all the while building their creditworthiness on international markets. As one beneficial consequence, foreign investors are not required to invest large amounts of cash into the authorized capital of their Ukrainian business entities. Instead, they may contribute the absolute minimum statutory amount to their business venture's authorized capital while concurrently providing loans/credits for the expansion of the Ukrainian business venture's activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.