Settlements in Foreign Currency and Liability of Ukrainian Residents

Resolution of the Supreme Court of Ukraine, dated February 13, 2012, case No. 21-422а11. Available at http://reyestr.court.gov.ua/Review/22204833

In accordance with part 1 of Article 1 and part 1 of Article 2 of the Ukrainian Law On the Procedure for Settlements in Foreign Currency, import transactions of residents performed on a deferred payment basis must be finished within the term not exceeding 90 calendar days from the moment of making an advance payment or issuing a promissory note (a bill of exchange) in favor of a supplier of the products (works, services) that are being imported.

Part 1 of Article 4 of the Law On the Procedure for Settlements in Foreign Currency sets forth that failure of residents to comply with the time limits specified in Articles 1 and 2 of this Law shall lead to imposition of a penalty for each day of delay in the amount of 0.3 per cent of the amount of non-received proceeds in foreign currency (the customs value of the undelivered goods), calculated in Ukrainian hryvnias at the exchange rate of the Ukrainian National Bank on the date when the debt arose.

In accordance with part 2 of the same Article, if a court, the International Commercial Arbitration Court or the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry allows to proceed a resident’s lawsuit for recovery from a non-resident of the debt that arose as a result of non-compliance by the non-resident with the terms set forth by export-import contracts in question, the time limits specified in Articles 1 and 2 of this Law, shall be suspended, and penalties for falling short of the time limits shall not be paid while the suspension lasts.

Part 3 of Article 4 of the Law On the Procedure for Settlements in Foreign Currency provides that if a court decides to dismiss an action in whole or in part or to terminate (to close) proceedings or to dismiss an action without prejudice, the time limits, specified in Articles 1 and 2 of this Law, shall start running again, and the penalty for falling short of these time limits shall be paid for each day of delay, including the period during which they were suspended.

In the sense of paragraph 2 of article 32 of the Ukrainian Law On the International Commercial Arbitration, the arbitral tribunal shall issue an order for the termination of the arbitral proceedings when, in particular, the claimant withdraws his claim, unless the respondent objects thereto and the arbitral tribunal recognizes a legitimate interest on his part in obtaining a final settlement of the dispute.

The analysis of the above norms gives grounds to state that the time limits provided for in articles 1 and 2 of Law On the Procedure for Settlements in Foreign Currency can be suspended when a court, the International Commercial Arbitration Court or the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry allows to proceed a resident’s lawsuit for recovery from a non-resident of the debt that arose as a result of non-compliance by the non-resident with the terms set forth by respective export-import contracts, and a court’s judgment to grant the remedy shall be a basis for exemption from paying the penalty for falling short of the time limits.

The Ukrainian Supreme Court considers that the same effect should apply for the situation when proceedings are terminated upon a resident’s withdrawal of the action resulting from non-resident’s fulfillment of the obligations under an export-import contract after the action had been filed with the International Commercial Arbitration Court or the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry, because this very fact confirms lawfulness of the behavior of the resident.

So, imposing the penalty for falling short of the time limits should depend on grounds for termination of proceedings in a case. In particular, if the plaintiff withdraws an action because the defendant had performed the contractual obligations, this means that the non-resident had fallen short of the relevant time limits, and there should be no ground for the terms to start running again and for the penalty to accrue.

Resolution of the Higher Administrative Court of Ukraine, dated February 16, 2015, case No. 812/6331/13-а. Available at http://reyestr.court.gov.ua/Review/43050489

The authorized bank is obliged to preliminarily credit the proceeds in foreign currency that are subject to the mandatory sale to a separate sub-ledger account of the balance sheet account 2603 (clause 6 of the Decree).

Thus, it follows from the systematic analysis of legislation that legal entities have a right to open both national currency (UAH) accounts and foreign currency accounts for international commerce.

The date of transfer of currency proceeds to a corresponding foreign currency account should be regarded as the date of crediting the account.

Further movement of funds from a foreign currency account to a UAH current account of a legal entity, including the situation when the funds move from a clearing account, indicates that the funds are already used in the territory of Ukraine and arrival of funds in the national currency to a national currency account after the foreign currency proceeds that were subject to the mandatory sale have been sold and exchanged to the national currency may not be regarded as namely the initial passing of funds to the account of a Ukrainian resident.

Resolution of the Higher Administrative Court of Ukraine, dated March 26, 2014, case No. 2а/0570/17552/11. Available at http://reyestr.court.gov.ua/Review/38053487

When granting the sought relief, the lower courts quite objectively reached the conclusion that a taxpayer can be exempt from liability for failure to meet the time limits for crediting the account with foreign currency funds in case an appropriate court allows to proceed a resident’s lawsuit for recovery and, as a result, grants the remedy by its judgment.

In this case, taking into account the bankruptcy of the purchaser, who is a non-resident, the plaintiff’s submission of the application for inclusion into the register of creditors of the debtor was a proper measure for recovering the debt under the contract with this non-resident. The courts correctly noted that in this case, the legal effect of the conclusion of the settlement in the bankruptcy procedure is identical to the legal effect of delivering a judgment in favor of the plaintiff by which the debt is recovered, while the tax authorities were casual about the nature of the foreign court decision made in favor of the taxpayer.

Ruling of the Higher Administrative Court of Ukraine, dated February 10, 2013, case No. К-19849/10. Available at http://reyestr.court.gov.ua/Review/31152950

As the case file demonstrates, on March 1, 2005 Pol Inter Trans LLC (transport operator) and Orlan-Trans France s.a.r.l. (France) (client) concluded between themselves contract No. 3 according to which the plaintiff had organized the cargo transportation and forwarding services in the interests of the client on the route Nerac (France) – Korsun-Shevchenkivskyi (Ukraine) for the price of EUR 2600. The provision of the services by the Plaintiff is confirmed by CMR waybill A No. 0875342 and by service acceptance certificate No. 16, signed by authorized representatives of the parties. Orlan-Trans France s.a.r.l. (France) did not pay for the provided services even though the plaintiff had issued a corresponding invoice.

However, the plaintiff received a notification dated April 25, 2005, CW/ZE/5288/PRO, from Fabian Windenberg-Jenner, the person appointed by the Strasbourg court as an authorized liquidator in the bankruptcy procedure of Orlan-Trans France s.a.r.l., by which Pol Inter Trans LLC was invited to file a claim, and Pol Inter Trans LLC submitted the claim requesting to recover EUR 2600 from Orlan-Trans France s.a.r.l. under contract No. 3.

Nonetheless, on January 19, 2006 Fabian Windenberg-Jenner, the authorized liquidator, sent to the plaintiff a certificate of debt irrecoverability by which he informed that within the scope of the Orlan-Trans France s.a.r.l. bankruptcy procedure it was impossible to recover the debt in the amount of EUR 2600 because the debtor had no assets.

In accordance with article 32 (2) of the Ukrainian Law On the International Commercial Arbitration the arbitral tribunal shall issue an order for the termination of the arbitral proceedings when: the claimant withdraws his claim, unless the respondent objects thereto and the arbitral tribunal recognizes a legitimate interest on his part in obtaining a final settlement of the dispute; the parties agree on the termination of the proceedings; the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible.

The analysis of the above mentioned norms allows to think that the time limits specified in Articles 1 and 2 of the Law On the Procedure for Settlements in Foreign Currency shall be suspended in case the International Commercial Arbitration Court or the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry allows to proceed a resident’s lawsuit for recovery from a non-resident of the debt that arose as a result of non-compliance by the non-resident with the terms set forth by export-import contracts in question, and the ground for exempting form paying penalties for falling short of the time limits shall be a corresponding judgement by which court grants the remedy.

The court of appeals properly reached the conclusion, supported by the court of cassation appeals, that the same effect should be in the situation when non-resident’s indebtedness to a resident is confirmed by a certificate of debt irrecoverability due to absence of assets for the recovery, and this should serve as confirmation of lawfulness of the conduct of the resident.

Ruling of the Higher Administrative Court of Ukraine, dated February 17, 2016, case No. К/800/8296/14. Available at http://reyestr.court.gov.ua/Review/55908744

As it follows from the case file, on March 12, 2004 the State Aviation Enterprise “Ukraina” and AIRBUS, S.N.C. (France) entered into sale contract No. ССС 337.0013/04 under which AIRBUS, S.N.C. should sell and the plaintiff should buy and carry out delivery of one aircraft “Airbus A319-133 Corporate Jetliner”, in accordance with the specification, on the delivery date and in the delivery place, and with the provisions of the contract.

The sum that amounts to the initial payment under the obligation is US$ 5,000,000 has been paid to AIRBUS, S.N.C. before the date of entering into this sale contract and should count towards the to be the first payment under the sale contract. Before the delivery the plaintiff should have paid to AIRBUS, S.N.C., as part of the final price (“Payment before the delivery”) and not later than April 05, 2004, US$ 11,000,000 as provided in clause 5.3., and if AIRBUS, S.N.C. did not receive the payment before the delivery, AIRBUS, S.N.C. or the installer should not start the completion works specified in the completion works contract, and the date of return of the aircraft under the completion works contract would depend on receiving the payment in question. Additionally, AIRBUS, S.N.C. had a right to place the aircraft on the market, if by March 19, 2004 no payment was received.

Subclause 5.3.3. of the contract sets forth that each payment received by AIRBUS, S.N.C. before the delivery (including, for the avoidance of doubt, the deposit referred to in clause 5.2.) should be considered as a following contribution to the payment for the basic price and should be deducted from the basic price when drawing up the final price balance.

In accordance with clause 5.3.4. of the contract AIRBUS, S.N.C. should have a right to posses and use each before the delivery payment as its absolute owner, while undertaking only to deduct each such before the delivery payment from the basic price while balancing the final price; and to pay to the plaintiff the amount equal to the before the delivery payments, as provided by clause 13.5. In any other case AIRBUS, S.N.C. is not obliged to return the sums of the before the delivery payments made by the plaintiff.

The State Aviation Enterprise “Ukraina” and AIRBUS, S.N.C. on November 03, 2004 also executed Amendment No. 1 to sale contract No. ССС 337.0013/04. Clause 1.2. of the Amendment provides, that regardless of paragraph 4 of the Debt Transfer Agreement AIRBUS, S.N.C. agrees to reimburse to the Ukrainian Credit Bank the charge for the reservation in the amount of US$ 5,000,000, referred to in the above-mentioned paragraph, within 5 bank days after receiving from the plaintiff US$ 2,000,000 (Deposit). This deposit should be placed by the plaintiff with AIRBUS, S.N.C., and the amount specified in subclause 5.2. (“Deposit”) of the Aircraft Purchase Contract should be equal to the Deposit, and no longer should be equal to the amount of the payment for the obligation.

On November 12, 2004 the plaintiff, in order to perform the contract and amendments in question, transferred US$ 2,000,000 by payment order No. 89 via Ukreximbank to the account of the French company AIRBUS, S.N.C.

According to the available copy of the payment order this sum is a deposit payment under Amendment No. 1 to sale contract No. ССС 337.0013/04 of March 12, 2004 the transfer of which is made on the ground of license No. 315 issued by the Ukrainian National Bank on November 12, 2014.

Article 6 of the Ukrainian Law On the Foreign Economic Activity provides that a foreign economic agreement (contract) shall be drawn up in conformity to this and other laws of Ukraine with due account for international treaties of Ukraine. Economic entities engaged in foreign economic activity, when drawing up the text of a foreign economic agreement (contract), have a right to use established international customs, recommendations of international agencies and organizations, if it is not forbidden in a direct and exclusive fashion by this law and other Ukrainian laws.

According to the first part of Article 4.1 of the Principles of International Commercial Contracts (UNIDROIT Principles) of 1995, an international commercial contract should be interpreted in accordance with the general intentions of the parties.

Article 4.3 of the Unidroit Principles states that in applying Article 4.1, the following circumstances must be taken into account: the conduct of the parties subsequent to the conclusion of the contract; the nature and purpose of the contract; the meaning commonly given to terms and expressions in the trade concerned.

As the lower courts ascertained the plaintiff had transferred US$ 2,000,000 under contract No. ССС 337.0013/04 of March 12, 2004, and the payment purpose description according to payment order No. 89 was depositing funds in accordance with Amendment No. 1 and invoice No. 331.0005/04 of November 12, 2004 for the purchase of the aircraft А 319-100.

The available copy of the letter of September 04, 2006 confirms that the amount of the US$ 2,000,000 was transferred namely as a deposit, and not as an advance payment.

Clause 1.3 of Amendment No. 1 to sale contract No. ССС 337.0013/04 of March 12, 2004 introduces division of payments into deposit payments and payments before the delivery of the aircraft.

The plaintiff, as a state-owned enterprise financed from the state budget, is a recipient of state budget funds, and in its activities are guided by Ukrainian budget legislation. The chief controller of the enterprise’s funds is the State Management of Affairs that manages budget allocations and monitors accuracy of budget money transfers to recipients.

Later, the State Management of Affairs suspended state financing of the said program, and the plaintiff was not able to transfer the first payment AIRBUS, S.N.C. for the aircraft A 319CJ.

In addition, AIRBUS, S.N.C. retained the deposit in accordance with subclause 13.2.2 of contract No. ССС 337.0013/04, which provides that in case of termination of the contract due to fulfillment of the obligations by the buyer, the seller (while not limiting his other rights under the contract or in accordance with law) shall retain hold of all the payments before delivery, deposits, option fees, and any other funds paid to him by the seller under this contract.

Thus, as correctly stated by the lower courts, the amount of US$ 2,000,000 by virtue of its nature is a deposit (retaining fee), not an advance payment, because no payment was made before the delivery, and consequently the plaintiff did not breach Article 2 of the Ukrainian Law On the Procedure for Settlements in Foreign Currency, which, in turn, confirms unlawfulness of disputed respondent’s decision on imposition of penalties No. 0001562220/0, dated 30.06.2006.

The lower courts ascertained that the plaintiff had submitted to the tax office currency valuables declarations No. 18/23 –1437, dated April 12, 2005, No. 22/23-1437, dated July 12, 2005, No. 25/22-236, dated October 14, 2005, in which the US$ 2,000,000 are placed as a debt receivable into Section II Financial Investments of Clause 14 Transferred for other purposes. However, according to the defendant’s allegations, these overdue receivables must have been placed into Section II Financial Investments of Clause 13 The amount of funds transferred abroad and import contracts promissory notes with overdue obligations on the reporting date.

As specified in article 9 (1) of the Decree of the Cabinet of Ministers of Ukraine On the system of currency regulation and currency control currency valuables and other property of residents, which is located outside Ukraine, shall be subject to obligatory declaring to the Ukrainian National Bank.

Article 10 (2) of the Decree On the system of currency regulation and currency control provides that failure to submit in time, concealment or misstatements in reporting on currency transactions entails the responsibility specified in Article 16 of the Decree.

In accordance with article 16 (2) of the Decree the following measures (financial sanctions) should be imposed on residents, non-residents guilty of infringement of currency regulation and control rules: a fine in the amount established by the Ukrainian National Bank for resident’s failure to meet requirements on declaring currency valuables and other property as provided in article 9 of the Decree.

Clause 2.7. of the Regulation on currency control, approved by the Resolution of the Ukrainian National Bank No. 49 dated February 08, 2000, sets forth that for failure of residents to meet the requirements regarding the procedure and terms for declaring currency valuables and other property entails the following responsibility: violation of the procedure of declaring should lead to imposition of a fine amounting to 20 tax-free minimum incomes.

Submission of false information or misstatements in a corresponding declaration should be qualified as violation of the procedure of declaring if such activities serve to concealment by residents of currency valuables and other property located outside Ukraine.

Pursuant to clause 2.8 of the Regulation failure to submit in time, concealment or misstatements in approved by the Ukrainian National Bank reporting on currency transactions entails imposition of a fine amounting to 20 tax-free minimum incomes.

However, since the declared by the plaintiff US$ 2,000,000 can not be regarded as an advance payment, but were transferred by the plaintiff in accordance with the contract and in order to secure performance of the obligation, placing this sum into Section II Financial Investments of Clause 13 The amount of funds transferred abroad and import contracts promissory notes with overdue obligations on the reporting date is ill founded and unreasonable. Given that, the lower courts reached a properly reasoned conclusion that decision on imposition of penalties No. 0001562220/0, dated 30.06.2006 was illegal and should be cancelled.