On February 11 2010, the Law of Ukraine On the Procedure for Settlements in Foreign Currency No.185/94-BP, dated September 23 1994 (the Settlements Law), was amended to restore the previously existing 180 Day Rule. This Rule provides that (1) the receipt of payment by a Ukrainian exporter for its delivery abroad of goods (defined to include works, services and intellectual property rights) in advance of payment, and (2) the receipt of goods from abroad by a Ukrainian importer where payment has been made in advance of the delivery of the goods, is required to occur within 180 days from the corresponding advance delivery or advance payment. This 180 day timeframe may only be extended pursuant to a special decision of the Ministry of Economy of Ukraine.
Prior to this amendment to the Settlements Law the 180 Day Rule had been amended by the Law of Ukraine On Amending Some Laws of Ukraine to Overcome the Negative Consequences of the Financial Crisis No.1533-VI, dated June 23 2009 (effective on November 24 2009) to provide for such settlements to be carried out within 90 days from the advance delivery of goods or advance payment for goods.
The 180 Day Rule remains subject to certain special exemptions, such as for participants in space activity and certain sectors of the aircraft industry for which such settlements may occur within 500 days from the date of an advance payment made for the production (development) of aggregates, space rocket systems (space carriers), space vehicles, the ground segment of space flight systems and their components, and the development, production, reconstruction, repairing, modification and technical maintenance of aircraft engines and aviation equipment.
Tax gross-up clauses
Tax gross-up clauses expressly imposing an obligation on Ukrainian parties to cross-border loan agreements to reimburse their foreign lenders for payments of taxes or other mandatory duties in Ukraine have been widely used. This has been the case, following the general international practice, despite doubts raised by certain Ukrainian legal commentators on the validity of such clauses for cross-border transactions involving Ukrainian entities. There were until recently, no official explanations from the Ukrainian tax authorities as to whether the use of such provisions complied with Ukrainian tax laws prohibiting the payment of profit taxes applicable to non-residents by third parties, such as by their Ukrainian resident contract counterparties.
However, the State Tax Administration of Ukraine (STA) has now addressed this issue at the request of the National Bank of Ukraine (NBU). In its Letter No.14086/5/22-5016, dated November 18 2009 (STA Letter), the STA discussed its position on tax gross-up clauses in cross-border agreements, concluding that any payment of amounts by a resident Ukrainian to compensate its non-resident contract counterparty for any profit taxes withheld in Ukraine violates Ukrainian law. The STA based its conclusion on the wording of Article 18.2 of the Law of Ukraine On Corporate Profit Tax No.334/94-BP, dated December 28 1994, that prohibits the use of contract clauses that oblige a Ukrainian resident company making a payment in favour of a non-resident to pay the Ukrainian profit taxes applicable to such non-residents. Despite this clear statutory language, some Ukrainian lawyers have expressed doubts about its actual application.
The STA's explanation makes it highly likely that Ukrainian courts will invalidate such contract gross-up clauses, despite their general use in cross-border loan agreements with Ukrainian borrowers. Moreover, after the issuance of the STA letter, the NBU circulated its Letter No.13-210/8254-23814, dated December 22 2009, in which it instructed Ukrainian banks to follow the STA Letter in their application of exchange controls when asked to make payments abroad. Ukrainian banks may therefore refuse to handle payments abroad under tax gross-up clauses.
In addition, any tax gross-up payments and other tax reimbursements in favour of non-resident contract counterparties may also be subject to the risk of challenge under Ukrainian exchange control laws and regulations by the NBU, the STA and Ukrainian banks handling settlements under the cross-border transactions, if such payments are not viewed as being compensation for goods, services or intellectual property rights obtained or to be obtained from non-residents. If a payment is not evidenced to be for such compensation, then under Ukrainian exchange control rules, it should not be permitted to be made except pursuant to a specially granted individual NBU license. It seems unlikely, in view of the STA Letter and the NBU's involvement, that such a special individual license would be issued by the NBU. The penalty for a violation of such NBU licensing requirement equals the amount of the unauthorised payment.
Bate Toms and Svitlana Petrenko
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