Ukraine tax: Anti-crisis bill introduces changes to financial market

The President of Ukraine signed a law on 19 November 2009 that contains measures to address the global financial crisis (Law No. 1533-VI, "Amendment of Certain Laws of the Ukraine to Overcome the Negative Consequences of Financial Crisis"). The law, which became effective on 24 November 2009, includes changes to the tax rules, foreign currency control regulations and foreign investment procedures, all of which may affect the activities of banks and non-banking financial institutions, foreign investors and borrowers.


Loss allowances

The major amendments relate to the deductibility of allowances on the active operations of financial institutions (including provisions on securities, guarantees, etc.). Under the new law, the allowance is deductible up to 80% (100% for banks until 1 January 2011) of the total amount of the allowance calculated under the methodology of the National Bank of Ukraine. This is in contrast to the previous rule, which permitted the allowance on non-standard indebtedness to be deductible only up to 10% of the bank's total loan portfolio (15% for non-banking financial institutions).

The taxpayer must retroactively re-compute the 1 January 2009 allowance balance using the new rules. Any difference between the allowance reported as of 31 December 2008 and re-calculated 1 January 2009 balance is not taxable/deductible and any increase/decrease in the allowance from the re-computed 1 January 2009 balance to the reporting date is deductible/taxable. The practical effect of this measure is that if, as of 31 December 2008, a bank had any allowance that was not deducted for tax purposes (i.e. deferred tax asset), that amount becomes a nondeductible permanent difference.

Since most Ukrainian banks were actively reserving against losses during 2009, this change will significantly impact 2009 taxable income.


Interest income

According to the tax accounting rules, interest income on loans is taxable to a bank at the time the income is accrued (i.e. on the payment date stipulated in the loan agreement). No reserves are allowable against interest income. This creates a significant tax disadvantage with respect to non-performing loans where borrowers default on payments but interest income is still taxable to the bank. The law eliminates this discrepancy by providing that, for the period 1 January 2009 until 1 January 2011, interest income is taxable to banks only when actually received.


Worthless securities

The law clarifies the point at which securities can be written off for tax purposes as worthless, i.e. notes and other debt obligations can be written off (offset against reserves) when the issuer is declared statutorily bankrupt. Shares and other corporate rights can be written off (offset against reserves) when the State Registrar makes a de-registration of shares public.

Other changes:
- The tax exemption for interest income on deposits by individuals is extended until 1 January 2013.
- Early settlement of inbound loans is prohibited until 1 January 2011 and no amendments may be made to any existing inbound loan agreements that envisage the acceleration of maturity of the loan. This provision significantly impacts the companies that were relying on the repayment of inbound loans as a repatriation mechanism.
- Subordinated debt in an amount of up to 100% of tier 1 capital must be included in the tier 2 capital of a bank. Moreover, until 1 January 2012, the 20% annual reduction to subordinated debt that is included in tier 2 does not apply.
- Foreign investors are required to make investments exclusively through investment accounts opened with authorized Ukrainian banks. Importantly, foreign currency contributed into Ukraine as investment now must be converted into Hryvnia.
- The state registration of foreign investments in monetary and non-monetary form is obligatory until 1 January 2011.
- The time in which an exporter must receive cash from a foreign customer is shortened from 180 days to 90 days. Importers that make prepayments must receive the goods/services within 90 days of prepayment (previously 180 days).