Currency restrictions in the form of lack of adequate regulatory support for their current status and compliance control

Excessive regulation, uncertainty and unclear application of currency restrictions currently create major obstacles to business.

When the new Act on Foreign Exchange and Foreign Currency Transactions was introduced in 2018, expectations regarding the principles and approaches declared therein, namely currency liberalization and freedom of circulation, were high. The principle is essentially the same as that specified in the Tax Ordinance: in the event of a conflict of interests, in the event of an ambiguous interpretation, the position of the interested person should be followed.

Unfortunately, in this period we have to work on many problems. They continue to have a negative impact on proportionality, which is one of the principles of good governance and is required of administrative courts.

An example worth mentioning is the limitation of payments in export-import transactions.

Before the entry into force of the Act “On Foreign Currency and Currency Transactions”, the Act “On the Procedure for Making Payments in Foreign Currency” specified restrictions on the deadline for returning income in foreign currencies.

There is no such limitation in the new act, but Art. 12 section 1 states that the NBU may apply certain protective measures in the event of threats to Ukraine’s balance of payments.

This article actually only has six paragraphs, and there are questions about how some of them apply to the current situation.

Therefore, the second paragraph of part 1 of Art. 12 of the Act “On foreign exchange and foreign exchange transactions” gives the regulatory body the right to set settlement dates for export and import transactions.

In January 2019, by Resolution No. 5, the NBU set settlement deadlines for export and import transactions at 365 days, i.e. in practice, one year. They came into force with the entry into force of the Act “On Currencies and Foreign Exchange Trading” in February 2019. In practice, however, the 180-day deadline is still in force, although the deadlines resulting from Resolution No. 5 have remained unchanged. .

Part 2 of Art. 12 of the relevant law states that the NBU Management Board has the right to introduce protective measures for a period not exceeding six months and to extend the validity of previous protective measures for a period not exceeding six months. Currently, they have been in force for over 5 years.

The “current” 180-day deadline was introduced by the regulator by Resolution of the NBU Management Board No. 113 of July 7, 2022, which entered into force on July 9, 2022 as an amendment to NBU Resolution No. 18 of February 24, 2022, and since then then 6 months passed, 18 months, even more. And the deadlines still apply.

At the same time, the total period of validity of protective measures resulting from the Act “On Foreign Exchange and Commerce” may not exceed 18 months within 24 months from the date of their first introduction. However, even after martial law was introduced in the country and the adoption of NBU Resolution No. 18, more than 24 months have passed, so the question arises whether there are legal grounds for introducing such restrictions?

From a practical point of view, this is a problem because currently, for various reasons, taxpayers may exceed the 180-day deadline for returning foreign currency income. Reasons may include delays in payment by the buyer, delayed delivery of products as agreed and procedural issues.

Tax controls under currency regulations on this issue were unblocked at the end of 2022. However, a procedural contradiction arose. The transitional provisions of the Tax Ordinance stated that they were allowed. However, a question arose as to whether this is separate from the unscheduled document checks provided for in Art. 78 (unscheduled document checks), or whether checks should be carried out solely on the basis provided for in that Article.

This legal conflict was resolved by further amendments to the regulations, but only in the summer of 2023. However, as noted above, this did not prevent the tax authorities from starting to audit what they considered to be violations of currency regulations from the end of 2020 to 2022, mainly with a view to imposing penalties – a fine of 0.3% per day on the amount of lost revenue or undelivered products.

The question is whether these sanctions are justified. In their objections to audit reports, taxpayers began to draw attention to the fact that the regulation is currently not in force, referring to the conditions under which the NBU may extend security measures for currency transactions, and even to the fact that, in accordance with NBU Resolution No. 2007/2013, Art. . 5 on protective measures, the conditions remained unchanged and amount to 365 days, because this is the nature of the restrictions resulting from NBU Resolution No. 18 and is it justified to apply sanctions for one in fact for the other? However, no substantiated responses were received from the tax authorities in the course of administrative proceedings and subsequent court proceedings.

We have never actually heard from the tax authorities on what basis they believe that these currency restrictions are currently in place. If we turn to the transitional and final provisions of the Act “On Foreign Exchange and Foreign Currency Transactions”, we find clause 5 therein, which requires that, upon the entry into force of the Act, security measures be established if the National Bank deems them necessary, and clause 9 , which states that the provisions establishing protective measures at the time of entry into force of this Act shall remain in force until their expiry. Therefore, the NBU adopted Resolution No. 5 as a regulatory act regarding such protective measures, in particular specifying a specific deadline of 365 days.

However, the wrong term is currently being used and the wrong measures are being taken. Currently, the deadline of 180 days is specified in NBU Resolution No. 18 of February 24, 2022, as amended. died However, even if we consider it a new protection measure, in accordance with the Act “On Currency and Foreign Exchange Transactions”, such measures are valid continuously for a maximum of 18 months. There is also no specific provision regarding new regulations, as is the case with regulations adopted in accordance with clause 5 of the final and transitional provisions of the Law on Foreign Exchange and Foreign Exchange Trading, which would potentially extend their period of validity beyond 18 months. Therefore, the currently applicable period of 180 days cannot be considered a security measure introduced and applicable under the Act “On Foreign Exchange and Foreign Exchange Trading”. The said act provides for the imposition of financial penalties for violating these measures. So what is the punishment now?

There is also the question of who to dialogue with on currency regulations. By law, currency supervisory agents – banks – are obliged to report any violations. The currency supervision authority is the central executive body responsible for implementing tax policy, i.e. the State Tax Service. However, in practice, inspections are not carried out by the STS but by its territorial subdivisions, which are other governmental entities, even though it is ostensibly a single legal entity.

The Tax Ordinance (Article 41) distinguishes the STS as the central executive body from its territorial bodies, which have different powers.

Pursuant to the Act “On Currency and Foreign Exchange Transactions”, only STS has the right to carry out appropriate inspections and impose sanctions, i.e. an appropriate penalty. In practice this does not happen. All attempts to contact the territorial tax authorities or STS itself regarding this matter were unsuccessful. There are cases with such arguments pending in courts, but unfortunately there are no resolutions even in the first instance, although the “oldest” cases have been ongoing for 8 months. The issue is truly complex, and the courts are clearly not ready to set precedents.

Currently, the degree of compliance with the law and the validity of currency regulations is rather low. Attempts to establish a dialogue with the National Bank and tax authorities on these issues, in particular on the issue of “proportionality” of balancing, i.e. ensuring that such activities do not harm the economy, have not yet yielded any really significant results.