Рrivate Wealth Planning and Legislative Barriers
Olena KIBENKO
Managing Partner, Kibenko, Onika & Partners, a counselor to the Advisory Board of the Supreme Court of Ukraine, a member of the Expert Council on Corporate Governance of the State Commission on Securities and Stock Market of Ukraine, and a member of the Social Council under the Ministry of Agrarian Policy and Food
Yaroslava ONIKA
Partner, Kibenko, Onika & Partners, advocate
PROfile
Kibenko, Onika & Partners
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- +380 57 717 7979
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Kibenko, Onika & Partners is a rapidly developing national law firm. Our head office is located in Kharkov, the British branch office is in London; and partner offices operating to support the international projects of our clients are in Warsaw and Nicosia.
The firm is currently led by 5 partners, and is a workplace for almost 20 lawyers, who specialize in numerous areas of law. The following are only the key areas of our practice: Corporate Law, M&A; Antitrust & Competition; Real Estate; Construction, Natural Resources; Agribusiness; International Trade & Customs; Due Diligence; Business Restructuring; Wealth Management, International Financing; Defense in Criminal Cases; Litigation & Arbitration; Enforcement Procedure, Family Law.
The firm’s partners serve as counselors to the Ministry of the Agrarian Policy and Food, the Supreme Court of Ukraine, and the State Commission on Securities and Stock Market of Ukraine.
The firm’s partners are internationally recognized (Best Lawyers, Who’s Who Legal, etc), and regularly enter the top positions of the national legal ratings (TOP-50 Ukrainian Law Firms and TOP-100 Best Lawyers of Ukraine).
Private Capital flight from Ukraine, or Whether Boom in Services is Coming in the Field of Private Wealth Planning
Over the last 12 months the demand for services increased significantly in the field of private wealth planning. The reasons for this appeared to be primarily economic and the financial crises that cause individuals to monetize their assets, to outflow them from Ukraine, to look for alternative sites for running business. The scale of capital flight from Ukraine may be different: the siphoning of the part of assets as reserves, formation of alternative/additional business structures abroad (from those realizing functions of a conventional wallet up to a full business), full business immigration.
Capital outflow also promotes a number of recent legislative changes, increased tax burden, tightening of exchange regulations. In the struggle for the exchange rate the NBU actually established a regime of realizing of export-import and other transactions with non-residents, which simply forces the business to go abroad.
While earlier issues of private wealth planning were in the scope of interest of owners of major wealth, the middle class is also currently thinking over this issue, thereby focusing primarily on the use of foreign and international instruments.
To solve tasks of private wealth planning related to relocation abroad of all or part of the assets it is necessary to go through two main stages:
— Choice of form/method of relocation of assets abroad;
— Choice of instrument to place one’s own welfare abroad (investments in real estate, securities and expensive assets (works of art, antiques), formation of the company / partnership / trust / fund, personal accounts in foreign currency / precious metals in foreign banks, companies accounts, insurance instruments and instruments of retirement savings, investment in training abroad).
The first stage — “relocation of assets abroad” is accompanied by significant difficulties because Ukraine has a number of permanent and temporary measures aimed at preventing capital flight.
Transfer of cash. In Ukraine there are restrictions on the export of foreign currency in cash — no more than EUR 10,000 per person. The user of rapid transfer systems (Western Union, Unistream, Monigram and so on) is allowed to make transfers in the amount of not more than about EUR 535 in one operational day. But questions arise regarding the beneficiary, the grounds for transfer. The withdrawal of foreign funds in foreign ATMs is also possible, but under the same restrictions (EUR 535 per day). But the most significant problem arises when someone tries to place cash into a bank account, as any operation with a significant amount of cash will be immediately classified by any foreign bank as suspicious. Moreover, National Bank of Ukraine (NBU) Resolution No.160 as of 3 March 2015, does not allow the purchase of a large amount of foreign currency legally (only EUR 107 per day).
Transfer of non-cash capital. For moving / accumulating large amounts abroad known business schemes are used, based on withdrawals from Ukraine of cash in the form of royalties, interest, dividends, rents, using of laying in the trading schemes, receiving payments for the sale of real estate, corporate law, intellectual property rights, etc. Through these schemes capital is accumulated not in Ukraine but abroad.
However, presently the use of many schemes is also almost blocked by Ukrainian legislation. Moreover, when trying to construct these schemes with almost zero taxation, as was done before, and what Ukrainian business has become accustomed to, schemes are blocked not only in Ukraine, but also at the level of foreign regulators.
Tax barriers. Speaking of tax limitations it should be noted that in 2015 the withholding tax on passive income is 15% for legal entities and 20% for individuals. The regime of application of conventions on avoidance of double taxation has been toughened; the issue here is conventions which reduce the tax rate (the use of intermediary companies is limited, stricter requirements are applied for determining the tax residency of companies).
According to the Tax Code of Ukraine, a number of payments in favor of non-residents, especially with offshore residence, in whole or in part do not have the status of being deductible.
Currency barriers. Not fewer barriers to the capital outflow are contained in the currency legislation of Ukraine. Temporary currency outflow restrictions have been in place since August 2014. In particular, currency payout operations so far prohibited include: early repayment of financing to non-Ukrainian creditors; payment to non-Ukrainian buyer of shares out of Ukraine; payment of dividends out of Ukraine; using an individual banking license for any currency pay-out operation, even if received.
The transfer abroad of interest under the loan agreement is possible only in case of registration of such an agreement with the NBU.
According to the provisions of NBU Resolution No. 597 of 30 December 2003, any payments abroad on paper only operations (for works, services, intellectual property objects) are possible only if there is an opinion of cost examination and the amount of a contract is over EUR 25,000.
In case of advanced payment under the contract with price of over USD 50,000, it can be done only by submitting a letter of credit (except for advanced payment for essential commodities). Moreover, the timing of delivery of goods, works and services may not exceed 90 days from the date of transfer abroad of the advanced payment (to evade this provision the hryvnia is used as an instrument of payment, however, then it can be difficult to convert it into other currencies and the position of the tax service about the application of the 90-day rule to payments in the currency of Ukraine is ambiguous).
Investments abroad demand obtaining an individual NBU license (in monetary form) or a license from the Ministry of Economy (in the form of property). It is necessary to notify the NBU within three days from the date of opening of an account abroad, and for crediting funds onto this account it is necessary to obtain an individual license from the NBU, which is currently prohibited. An exception is the case of account opening for persons who are temporarily abroad. But when leaving the country these persons have an obligation to close the accounts.
Ukrainians evade these limitations by opening an account not for an individual but for the company which shares this individual receives as a gift. Through such a simple operation the individual legally avoids the need to obtain two licenses of the NBU (on investing abroad and on crediting of money to foreign accounts). But the obligation to declare the receipt of shares as a gift remains with the physical person and in case of payment of dividends on these shares, they are also subject to declaration.
There is also a more principal method of avoiding currency restrictions associated with a change of residence or citizenship of an individual.
Disclosure of information about beneficiary. A recently adopted law providing the need to disclose information on beneficiaries of a foreign legal entity prevents the use of foreign companies as holdings for Ukrainian assets. However, even before the adoption of this law the information was subject to disclosure when opening accounts in Ukrainian banks under the procedure of identification of the client (KYC procedure). Thus, such information was protected by banking secrecy, whereas the information from the USR in accordance with Article 20 of the On State Registration of Legal Entities and Individual Entrepreneurs Act of Ukraine No. 755-IVas of15 May 2003 is open to the public. If permission from the Antimonopoly Committee is required then information is subject to disclosure as well. (Also, according to the recent changes, all Ukrainian companies are required to disclose information regarding their ultimate beneficial owners (UBOs) by 25 May 2015, otherwise the company’s officer is liable for failure to do so — the penalty is up to USD 365. The tax and anti-monopoly authorities may also use this information for compliance checks).
AML.Particular hindrance to the use of foreign instruments is the fact that the On Prevention and Counteraction to Legalization (Laundering) of Proceeds Criminally Obtained, Terrorism Financing and the Financing of Proliferation of Weapons of Mass Destruction Act No.1702-VII as of 14 October 2014 any operations, related to accounts opening abroad or to foreign companies, classifies as doubtful — this means that Ukrainian counsels (law and auditing firms), which a client has contacts with, have an obligation to inform authorized bodies regarding such operation (State Finance Monitoring). This impedes qualified rendering of services in the field of private wealth planning, as it forces a person to contact for help of uncertified consultants who are often working illegally, or use the services exclusively of foreign counsels who are not always well versed in Ukrainian realities and, therefore, offer the client solutions that are insecure in terms of Ukrainian legislation.
Exchange of information on non-resident accounts. Global changes in the field of private wealth planning can take place in 2016, when the agreement on automatic exchange of information on the accounts of non-residents will come into force. It was signed in Berlin in Octo- ber 2014 (first exchange of such information is planned in 2017 on the results of 2016). If information about the opened account will be delivered by the bank to the tax authority by location of the Ukrainian beneficiary of the company, it can lead to a massive rejection in the use of foreign companies or, conversely, to the legalization of ownership of their shares. While there is no adopted law on controlled foreign companies in Ukraine, such legalization is relatively harmless, but it definitely violates the principle of confidentiality of information about the actual owner of the company, who often acted as one of the main attractive features when using foreign companies.