Currency Exchange Rate

Prior to September 1998, foreign exchange was readily available at market-determined rates, and investors could convert their earnings into foreign currency through their commercial bank at the Ukrainian Interbank Currency Exchange's (UICE) daily auction.

However, the financial uncertainties in Ukraine and instability in Asian and, especially Russian financial markets have made maintenance of the previous conversion regime difficult. As a result in September last year the National Bank of Ukraine introduced stricter currency regulations, which envisage the following procedures for purchase of hard currency at the UICE and the regulations concerning payments in hard currency:

1. A 50% mandatory sale of hard currency receipts by resident legal entities, with the exception of the following:

  • Loans from non-residents, provided that the loan has been registered with the NBU;
  • Loans from Ukrainian commercial banks;
  • Hard currency receipts which are used for the repayment of the above hard currency loans;
  • Contributions transferred into Ukraine for investment purposes;
  • Funds paid back by non-residents, if contractual obligations are not fulfilled by Ukrainian counterparts provided that these funds were not previously purchased at the UICE;
  • Return of deposits in hard currency.

2. Hard currency purchases at the UICE have been restricted significantly, especially with regard to payments for imported goods and services. This includes provisions to the effect that prepayment amounts for an import contract, exceeding US $100,000 require appropriate permission of NBU, and hard currency may be purchased for advance payment for an import contract in an amount not higher than 20% of the contract value.

3. Hard currency payments out of the bank account of a resident (from both purchased and held funds) are allowed, should the following liabilities to non-residents exist:

  • Repayment of the principal and interest only on foreign bank loans, registered by the NBU;
  • Payment for services to non-residents, subject to payment of applicable withholding tax;
  • Return of previous investments and payment of income derived from investment activities.

However, throughout 1999 Ukraine gradually liberalized its currency market in keeping with IMF recommendations. The first restrictions removed included the ban on residents taking foreign loans at rates higher than those received by the government, and the prohibition against issuance of hard currency credits to enterprises not involved in export operations. In July 1999, the NBU also lifted restrictions on purchase of hard currency for advance payment for imports.

In January 2000, the NBU exempted enterprises with foreign investments registered as such under the 1992 Law “On Foreign Investment” from mandatory sale of 50% of their hard currency earnings. Besides, the NBU also stated that other companies with foreign investments might apply for such an exemption, though their applications will be treated by the NBU on a discretionary case by case basis. By a different decree, the NBU also lifted restrictions on hard currency lending by local banks.

The current Ukrainian foreign investment law guarantees foreign investors the "unhindered transfer" of profits, revenues, dividends and other proceeds in foreign currency after covering taxes and other mandatory payments. In addition, the law clearly states that, in the event that a foreign investor terminates his investment activity in Ukraine, he has the right to repatriate his investment within six months of the date the activity was terminated. There is currently no limitation on the frequency of repatriation of earnings (previously it was allowed only once a year). Further, with reference to loans, the Ukrainian entity with foreign investment has no restrictions on its ability to remit funds for the repayment of principal or interest. Licensing with the NBU is not required for repatriation of interest payments on: (i) loans and profits from foreign investments; (ii) transfer from Ukraine, upon termination of investment activities, of hard currency previously invested in Ukraine; (iii) payments abroad for imported goods, services, works, etc. However, current legislation does not provide any specific guarantees against currency inconvertibility.

According to the Corporate Income Tax Law, adopted in 1997, a 15% repatriation tax is charged on transfers of foreign currency abroad, except for transfers to those countries which have signed a bilateral agreement with Ukraine on avoiding double taxation. In the latter case, the tax rate is defined by the bilateral agreement. Ukraine adheres to various Soviet tax treaties, and has entered into additional tax treaties in its own right, which may reduce or eliminate this tax altogether.

Income in the form of interest on a loan, extended by a foreign lender to its Ukrainian subsidiary is subject to a corporate tax of 30% and 15% withholding tax paid by the subsidiary, unless a corresponding tax treaty applies. If the Ukrainian borrower is not a subsidiary of a foreign lender, than he is subject for withholding tax only, unless, again, a corresponding tax treaty applies.

Income in the form of dividends payable by a Ukrainian company to its foreign shareholder is subject to a Tax on Non-Resident’s Dividends of 30% of the amount of the dividends, and 15% Repatriation Tax at source, unless a corresponding tax treaty applies.

Income in the form of Management Fees, payable by a Ukrainian company to its foreign parent company is subject to a corporate tax of 30% and 15% withholding tax payable by the subsidiary, unless a corresponding tax treaty applies.

Ukraine is a signatory to a number of tax treaties with various countries. The tax treaties determine whether or not withholding tax is paid and at what percentage of earnings it is calculated. Ukraine has indicated that it will adhere to the tax treaties entered into by the former USSR until such time as it has entered into its own tax treaties. At present, Ukraine has ratified its own treaty with approximately 20 countries. In addition, a number of treaties with other countries have been signed but are not yet ratified, or are in the process of negotiation.

Table: Existing Ukrainian and Former USSR Treaties

Country
Dividends
(inter-company)
Dividends
(portfolio)
Interest
Royalties
Armenia
5
15
0/10
0
Austria
0
0
0
0
Belarus
15
15
10
15
Belgium
15
15
0/15
15
Bulgaria
5
15
0/10
10
Canada
5
15
0/10
0/10
China
5
10
0/10
10
Croatia
5
10
10
10
Cyprus
0
0
0
0
Czech Rep.
0
0
0
0
Denmark
5
15
0/10
0/10
Egypt
12
12
12
12
Estonia
5
15
0/10
10
Finland
0/5
15
0/5/10
5/10
France
15
15
10
0
Georgia
5
10
10
10
Germany
5
10
0/2/5
0/5
Hungary
5
15
0/10
5
India
15
15
0/15
15
Italy
15
15
0
0
Japan
15
15
0/10
0/10
Kazakhstan
5
15
10
10
Kyrgyzstan
5
15
10
10
Latvia
5
15
0/10
10
Lithuania
5
15
10
10
Malaysia
15
15
0/15
10/15
Moldova
5
15
0/10
10
Mongolia
0
0
0
0
Netherlands
0/5/15
15
0/2/10
0/10
Norway
5
15
0/10
5/10
Poland
5
15
0/10
10
Romania
0
0
0
0
Russia
5/15
5/15
0/10
10
Slovakia
10
10
10
10
Spain
15
15
0
0/5
Sweden
5
10
0/10
0/10
Switzerland
15
15
15
0
Turkmenistan
0/10
10
10
10
U. K.
5
10
0
0
USA
5
15
0
10
Uzbekistan
10
10
0/10
10


In addition, the following countries have signed bilateral investment agreements with Ukraine: Canada (1994), France (1994), Germany (1993), Italy (1993), Bulgaria (1994), the Czech Republic (1994), Hungary (1995), Poland (1993), Slovakia (1994), Armenia (1994), Estonia (1995), Georgia (1995), Kazakhstan (1994), Kyrgyzstan (1993), Lithuania (1994), Moldova (1995), Uzbekistan (1993), the P.R. of China (1992), Cuba (1995), Egypt (1992), Greece (1994), Israel (1995), USA (1996), Turkmenistan (1999), Russia (1999) and Mongolia (1992). The agreement with China has a five-year term. All of the others have a term of ten or more years.

Most agreements contain general provisions regarding guarantees against expropriation and nationalization, permission to transfer capital, procedures for resolution of legal conflict, etc.. Most of the newly concluded tax treaties follow the OECD model, allowing for either advance exemption from, or subsequent reimbursement of withholding tax. In practice however, foreign investors have faced numerous difficulties in avoiding withholding tax payments on loan interest and asset sales. This is due to the fact that the tax authorities currently have no clear procedures for reimbursing withheld taxes to foreign investors and typically do not allow advance exemption. It is hoped that these gaps in the legislation will be filled soon.