Mariya Sukhan: No more lending in foreign currency will take place for home mortgages, only for education, medical care.
New legislation recently took effect which will impact foreign investments made into the country and lending. If you have not already spoken to your lawyer about how your business may be affected and what adjustments will be needed, allow me to provide the basics.
And pay particular attention if your business is currently in loan talks with international lenders, or planning an investment into Ukraine as these legislative changes may noticeably affect such transactions.
The legislation, numbered 1533-VI and officially called the ‘Law On Amendments to Certain Laws of Ukraine Aimed at Overcoming Negative Consequences of the Financial Crisis,’ was adopted way back in June of this year, but it only took effect in November.
It introduces many important changes on taxes, banks, mortgage loans and foreclosures. I will touch upon how the new rules affect mortgage loans, but I will focus mainly on how it changes the rules for foreign lending, foreign currency proceeds and investments made into Ukraine.
Restrictions regarding foreign lending boil down to two very important issues: It is now prohibited to accelerate payments under foreign loans or other types of financing. At least until Jan. 1 2011, the National Bank of Ukraine will suspend registration of changes to existing loan or financing documentation in which the parties agree to accelerate the payments of the principal and interest. In addition, any early repayments that have already been agreed by the parties and registered with the National Bank of Ukraine prior to Nov. 24 2009 will not be allowed. The restrictions imposed by the new law apply to such payments as well.
Formally, the restriction does not exclude instances when early repayment is made due to a breach by the borrower. And this clearly impacts the rights of the lender.
However, to the best of our knowledge, the NBU is about to ask parliament to amend this new law to avoid restrictions regarding loans that have already been registered. Hopefully, the lawmakers will also allow early repayments due to breach by the borrower and repayments of intra- group facilities – at least in the amounts which were drawn up.
In addition, all foreign currency proceeds that your business generates will have to be credited to your Ukrainian accounts no later than 90 calendar days from when the export customs declaration, or protocol of acceptance of services, is signed. Similarly, if you made prepayment for goods or services to be imported into Ukraine, such goods must be available and services delivered within 90 calendar days.
On the other hand, the sanctions imposed upon those who fail to comply with these requirements have not been increased. And the new law does not reinforce the requirement to sell foreign currency proceeds that was abolished in 2005. It was debated, but luckily, no measures were taken.
Now, a few words about how the changes will impact investment activities in Ukraine.
Firstly, now all monetary investments and payments regarding Ukrainian investments are to be made in domestic currency, the Ukrainian hryvnia.
How can this be done? Well, it’s “easy.”
Your Ukrainian bankers will be happy to offer you to open a so-called “investment account” to perform these transactions; and they will make sure that you’ve paid taxes when you transfer investment proceeds abroad. They’ll be happy to generate some fees for this assistance too, and you have to be ready from now on you, as investors, to have to either deposit your own signature with a Ukrainian bank to be able to operate such an account, or trust someone locally to do it.
Some businesses operating in Ukraine were lucky to avoid these procedures notwithstanding that the rule was initially introduced back in 2005. Now, all of us are in the same boat – so-called investment accounts are required. And you can invest or dispose of your investment only using the relevant investment account with a Ukrainian bank.
Practical implementation raises many issues which fall beyond the scope of this article, but I am personally very curious to see how these new requirements will be interpreted by, for instance, Ukrainian custodians. Formally, they do not trace the payment for the securities and act based on the transfer-acceptance instructions from their clients.
Will their approach be influenced by the new rules? It remains to be seen.
Secondly, all foreign investments – whether in cash or in kind – will have to be registered. In kind investments will continue to be registered by the local state administrations.
Such registration used to be very important in the early years of our independence when registered foreign investment brought significant incentives, including tax exemptions. For more than 10 years, registration has been optional, notwithstanding that it has been, and still is, formally required in practice to buy foreign currency to transfer dividends or withdraw your investment abroad.
Starting Nov. 24 2009, registration of the investment – either in cash or in kind – is mandatory. And the central bank will introduce new requirements regarding registration of monetary investments.
Unless further changes are adopted, you will need to apply for registration of investment in kind within three days of the date that the foreign investment is recorded on the balance sheet of a Ukrainian recipient.
Three days is not long in practical terms. I hope that the Department of Economy and Investments in the Kyiv City Administration is now busy developing new rules regarding the extension of its working hours, not only registration fees. The requirement for obligatory registration is thought to be temporary, yet reality shows that in Ukraine a temporary measure can easily become permanent.
I promised to limit my comments to issues that would be of interest to foreign investors and businessmen, but I am also tempted to shed light on the new requirements regarding consumer lending in Ukraine.
To sum up, if you are a Ukrainian citizen, there is some good news for you. Under the new law, your bank has the right to restructure your loan before Dec. 31 2010, provided that you received it before Oct. 1 2008, and its amount does not exceed Hr 1 million.
For this purpose, your foreign currency loan will be denominated in hryvnia at the exchange rate of the NBU as of Oct. 1 2008.
In mortgage loans, sector the restructuring will be performed only regarding those mortgage loans that are secured by the residential premises which are the only premises where the borrower can reside.
Finally, the law introduced a moratorium on forced eviction of the individuals from mortgaged residential premises if such premises are the only place where the mortgagor can reside. A mortgage loan can qualify for such a moratorium, provided that the interest on the mortgage loan is being paid in a timely manner (or with no more than two months delay) and the mortgagor has signed a debt restructuring arrangement with the bankers.
The bad news is that there will be no more individual lending in foreign currency, for purposes other than studies or medical treatment abroad.
It remains to be seen how this will impact consumer lending, especially in the real estate sector. As of yet, no regulations have been introduced to denominate foreign currency deposits into hryvnia.
I guess we should all feel lucky for now.
Mariya Sukhan is the head of M&A and corporate law practice at the Kyiv office of Schoenherr, a Vienna-headquartered law firm with a strong presence in Europe. She is extensively involved in structuring major foreign investments in both the financial and industrial sectors. Sukhan can be reached at [email protected].
