Currency restrictions in terms of the lack of proper regulatory support for their current status and control over compliance

Excessive regulation, uncertainty, and unclear application of currency restrictions are currently creating major obstacles for business.

When the new law on currency and currency transactions was introduced in 2018, there were high expectations regarding the principles and approaches declared there, namely currency liberalization and freedom of transactions. The principle is essentially the same as that laid down in the Tax Code: in case of a conflict of interest, in case of ambiguous interpretation, the position of the person concerned should be applied.

Unfortunately, there are a lot of problems we have to work with in the current period. They still have a negative impact in terms of proportionality, which is one of the principles of good governance and is required of administrative courts.

One example worth mentioning is the restriction on payments for export-import transactions.

Prior to the entry into force of the law «On Currency and Currency Transactions,» the law «On the Procedure for Making Payments in Foreign Currency» set restrictions on the timing of the return of foreign currency earnings.

The new law has no such restriction, but Article 12(1) provides that the NBU may apply certain protection measures when there are risks to Ukraine’s balance of payments.

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

Thus, subparagraph two of part 1 of Article 12 of the Law «On Currency and Currency Transactions» gives the regulator the right to set deadlines for settlements for export and import transactions.

In January 2019, the NBU established by Resolution No. 5 the deadlines for settlements under export and import transactions of 365 days, i.e., effectively one year. They came into force with the entry into force of the Law «On Currency and Currency Transactions» in February 2019. In practice, however, the 180-day time limit is still applied, although the time limits under Resolution No. 5 have remained unchanged.

Part 2 of Article 12 of the relevant law stipulates that the NBU 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 effect for more than 5 years.

The “current” 180-day deadline was introduced by the regulator by NBU Board Resolution No. 113 dated 07.07.2022, which came into force on 09.07.2022 as an amendment to NBU Resolution No. 18 dated February 24, 2022. And since then, 6 months, 18 months, and even more have passed. And the deadlines still apply.

At the same time, the total term of protection measures under the Law «On Currency and Currency Transactions» may not exceed 18 months within 24 months from the date of their first introduction. But even after the introduction of martial law 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 such restrictions?

From a practical point of view, this is a problem, as currently taxpayers may exceed the 180-day deadline for returning foreign currency earnings for various reasons. The reasons may include late payment by the buyer, late delivery of products under the contract, and procedural issues.

Tax audits under currency legislation on these issues were unblocked at the end of 2022. However, a procedural contradiction arose then. The transitional provisions of the Tax Code stated that they were allowed. However, there was a question whether this was something separate from the unscheduled documentary audits provided for in Article 78 (unscheduled documentary audits), or whether audits should be conducted only on the grounds provided for in this article.

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

The question arises whether these sanctions are legitimate. In their objections to the audit reports, the taxpayers began to point out that the regulation is currently not in force, referring to the terms for which the NBU can extend the safeguard measures for currency transactions, and even the fact that under NBU Resolution No. 5 on safeguard measures the terms remained unchanged at 365 days, as this is the nature of the restrictions under NBU Resolution No. 18, and is it legitimate to apply sanctions for one thing in fact to another? However, there have been no substantiated responses from the tax authorities in the course of administrative appeals and further in court proceedings.

In fact, we have never heard from the tax authorities what grounds they have to believe that these currency restrictions are currently in effect. If we turn to the transitional and final provisions of the law «On Currency and Currency Transactions», there is clause 5, which requires that at the time of the law’s entry into force, protective measures be established if the National Bank considers them necessary, and clause 9, which states that the regulations that establish protective measures at the time of the entry into force of this law are valid until their termination. In pursuance of this, the NBU adopted Resolution No. 5 as a regulatory act on such protection measures and, in particular, a specific deadline of 365 days.

However, the wrong deadline is currently being applied, and the wrong measures are being taken. The 180-day deadline currently in question is set out in NBU Resolution No. 18 of February 24, 2022, as amended. However, even if we recognize this as a new measure of protection, according to the Law «On Currency and Currency Transactions», such remedies are valid for a maximum of 18 months continuously. And there is no special provision for new regulations as there is for regulations adopted in accordance with clause 5 of the final and transitional provisions of the Currency and Currency Transactions Law, which would potentially extend their effect beyond 18 months. Therefore, the 180-day period currently applicable cannot be recognized as a protective measure introduced and applicable in accordance with the Law «On Currency and Currency Transactions». And the said law provides for the imposition of fines for violation of these measures. So what is the penalty for now?

The question also arises as to whom to engage in a dialog on currency regulation. According to the law, currency supervision agents – banks – must report if they see any violations. However, the currency supervisory authority, in turn, is the central executive body responsible for implementing tax policy, i.e. the State Tax Service. However, in practice, inspections are not conducted by the STS, but by its territorial bodies, which are other governmental entities, despite the fact that it is supposedly a single legal entity.

The Tax Code (Article 41) distinguishes between the STS as a central executive body and its territorial bodies, which have different powers.

According to the Law «On Currency and Currency Transactions,» only the STS has the right to conduct relevant inspections and impose sanctions, i.e., the corresponding penalty. In practice, this does not happen. Any attempts to reach out to the territorial tax authorities or the STS itself on this issue have so far failed. There are cases in the courts with this argumentation, but unfortunately, again, there are no decisions even in the first instance, although the “oldest” cases have already been pending for 8 months. The issue is really complex, and the courts are obviously not ready to set precedents.

Currently, the degree of compliance with the law and the reasonableness of currency regulation is rather low. Attempts to engage in a dialog with the National Bank and tax authorities on these issues, in particular, the issue of “proportionality” of balancing, i.e., that such measures do not harm the economy, have not yet led to any real significant results.