Risks due to the new NBU’s requirements on the disclosure of ultimate beneficial owners of non-resident creditors

02 June, 2017 Newsletters

The Board of the National Bank of Ukraine adopted the Resolution “On Amending Certain Regulatory acts of the National Bank of Ukraine” No. 41 as of May 25, 20171 (hereinafter – “Resolution No. 41”), which provides a range of liberalizations of the monetary policy of the regulator. In particular, it concerns prolongation of term for settlement under the export/import agreements to 180 days, providing foreign investors a possibility to repatriate funds from the sale of corporate rights in foreign currency and other easements of the monetary regulation.

Besides the liberalizing measures, Resolution No. 41 has also introduced a new requirement2 which reads as follows:

“Authorized bank is eligible to initiate registration of the agreement concluded by resident borrower that is not a bank (including a case provided by subparagraph 2 of paragraph 3 of Chapter 2 of Section I of this Regulation), only after finding out on the basis of documents and/or information (including information obtained from official or public sources) data, allowing to establish the ultimate beneficial owners of non-resident creditor which is a legal person, including an absence of grounds to consider that it uses agents, nominees or intermediaries in order to conceal the ultimate beneficiary owner(s) [controller(s)]”.

In other words, the NBU establishes a new mandatory condition under which, if the Ukrainian company (resident-borrower) wants to get a credit/loan from a foreign company (non-resident creditor), it needs to provide information regarding the ultimate (beneficial) owner of the creditor. The bank that will provide the loan agreement for registration to the NBU, in any case, shall provide such information to the regulator, otherwise, an agreement will not be registered and the borrower will not receive the credit.

It should be noted that this requirement is not effective yet; it will come into effect on June 12, 20173.

In this newsletter we will focus only on the mentioned requirement, namely on its possible tax consequences.

In case of paying interest on the loan to the non-resident creditor, as a general rule, resident borrower shall withhold a tax at a rate of 15 % from such income of the non-resident creditor and pay it to the budget (para. 141.4 of the TC of Ukraine).

At the same time, if such income is paid to a resident of the State that has concluded a convention on the avoidance of double taxation with Ukraine which provides a condition of exemption of such income from an income tax in Ukraine or reducing the tax rate, the resident borrower can independently apply such provisions and don’t withhold an income tax in Ukraine according to the rules of art. 103 of the TC of Ukraine.

Currently, most of the double taxation conventions stipulate provisions which allow either don’t withhold tax on interest paid at all or apply its lowered rate.

However, according to para. 103.2 of the TC of Ukraine, there are compulsory conditions for application of the provisions of the conventions: (1) the creditor’s residency in the country, which signed the convention, and (2) the creditor has to be a beneficial (actual) recipient of an income.

The tax risks of registration of the loan agreement concluded with non-resident may arise in connection namely with the second condition.

So, sec. 2 of para. 103.3 of the TC of Ukraine provides that

“The beneficiary (actual) receiver (owner) of the income cannot be a legal entity or an individual, even if such person is entitled to receive income but is an agent, nominal holder (nominal owner) or just an intermediary in respect of such income“.

That is to say, if the resident borrower apply the provisions of the Convention paying the interest to his creditor abroad, and then tax authorities find out that a recipient is not beneficial, the result will be the imposition of appropriate tax surcharges and penalties provided by para. 127.1 of the TC of Ukraine in the amount of 25 to 75 % depending on the amount of the violations found in the last 1095 days.

In connection with the new requirement of the NBU, such information should be provided to the bank in the due course of registration of the agreement, and therefore, taking to account the exchange of information between government agencies, tax authorities will be able to detect such violations and to apply surcharges and appropriate penalties more quickly.

We want to warn those who will decide to provide false information on the final recipient of the interest in filing for registration of the contract to the bank.

Such actions constitute a criminal offense under Art. 366 of the Criminal Code of Ukraine. The sanction of the article provides: either fine of up to UAH 4250, or restraint of liberty for up to 3 years with deprivation of the right to occupy certain positions or engage in certain activities for up to 3 years; and if such actions are aggravated4 – imprisonment from 2 to 5 years, with deprivation of the right to occupy certain positions or engage in certain activities for up to 3 years with a fine of UAH 4250 to 12 750.

Thus, if a person deliberately provides false information on the beneficial owner of the non-resident lender that is a recipient of the interest on the loan, in addition to the tax consequences, it also creates the risk of criminal charge.

The above commentary presents the general statement information purposes only and as such may not be practically used in specific cases without professional advice.

Footnotes:

1Resolution of the Board of the National Bank of Ukraine “On Amending Certain Regulatory acts of the National Bank of Ukraine” as of May 25, 2017, is published by link.

2Para. 2 of the Resolution no. 41 and subpara. 1 of para. 1 of the Amendments to the Regulations on the procedure for obtaining credits, loans in foreign currency from non-residents and provision of foreign currency loans by residents to the non-residents, adopted by the Resolution no. 41.

3According to para. 5of the Resolution no.41.

4According to para. 4 of the Note to Art. 364 of the Criminal Code of Ukraine, grave consequences shall mean any consequences that equal or exceed 200 000 UAH.

Kind regards,

© WTS Consulting LLC, 2017

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