Financial Instruments as Factors of Increasing Efficiency in Agricultural Business

Опубликовано: 11.11.2019

Money is the blood of the economy, said the classic. Money is the blood of all business processes, and vital organs are financial instruments that maintain the circulation of financial flows. In the context of this material, we are talking, first of all, about bank accounts and legal entities, their owners. The most indicative factors are the importance and effectiveness of such instruments in the work of an actively developing agricultural sector, especially in its export component.

With foreign supplies of Ukrainian agricultural products, domestic exporters quite often used and still use international business companies registered in countries that are optimal for specific working conditions, as well as accounts in foreign banks as their affiliated resellers. Low tax rates, stable legislation, lack of obligations to sell foreign currency and foreign exchange control, ability to accumulate funds for self-investment, protection against raiding and many other factors encourage exporters to use Swiss, Cypriot, and Hungarian companies in their trading schemes.

International initiatives to combat tax base erosion (BEPS), as well as information exchange, which Ukraine is joining, are forcing constant adjustments to export projects with the participation of international business companies. In this material, we will pay attention to topical issues of legal legalization of the mentioned financial instruments in the legislative field of Ukraine.

First of all, let’s discuss actual financial mechanisms, namely, international business companies and bank accounts. During the period of active implementation of BEPS, MLI and Compliance plans, i.e. international rules to identify and combat “erosion of the tax base and the requirement to link the location of financial instruments to the local business environment, the times of “export intermediaries” from Hong Kong with an account in a Riga bank and supplies from Odessa to Egypt are over. Foreign banks do not even consider such stories anymore.

We propose to use in this capacity companies and banks in countries that are located on the path of export transportation of Ukrainian agricultural products to end suppliers. Namely: Northern Europe – Estonia, Central Europe – Poland, Central and Southern Europe – Hungary, Africa and Asia – Turkey. If the optimal requirements for Compliance are met and there is a necessary document flow confirming the transportation of goods through these countries, local banks open accounts for such companies.

It should also be said about countries in which there are no strict requirements for Compliance, but where local banks, subject to their special requirements, open accounts for local companies. We offer our clients to look for Switzerland, Malta and England.

Separately, we should mention the recently emerged and unexpected option of opening a bank account for a non-resident company and without mandatory conditions for Compliance (!) We are talking about our good neighbor – Belarus. This option is already being resorted to by former clients of “failed” Baltic banks, as well as clients from banks where they were asked to close their accounts due to the inconsistency of Compliance.

The last option is banking payment systems. These are financial institutions with a limited banking license (without the ability to place deposits and issue loans), but the client’s due diligence procedure is the same as in a bank. By the way, the cost of payments from them is often lower than from banks. However, there is no state guarantee of payments of 100.000 euros applicable to banks. Such payment systems are popular in the Baltics, Poland, and the Czech Republic.

Finally, a very fresh (and tested by us) option – Ukraine! We are talking about opening accounts for Ukrainian companies in foreign banks and opening operational accounts for non-residents in Ukrainian banks. Depending on the tasks arising for Ukrainian agricultural exporters, either the first or the second option is used. In more detail:

Opening accounts for Ukrainian companies was possible earlier (with the condition of obtaining an individual license from the NBU), and very few people resorted to such an opportunity. But part 3 of Article 4 of the Law of Ukraine “On Currency and Currency Transactions” of February 2018 gives the right to residents of Ukraine, including legal entities, “to open accounts with foreign financial institutions and carry out foreign exchange transactions through such accounts”. As for the reporting of information about the presence of an account in a foreign bank with the SFS and about the movement of funds on such an account, the old MFI Order No. 207 of 25.12.1995 (as amended from 24.05.2017) and Resolution of the Cabinet of Ministers of Ukraine No. 419 of 28.02.2000 are in force, which regulate these issues. What does an account in a foreign bank provide for a Ukrainian exporter? Of course, the biggest bonus was the absence of the mandatory sale of 50% of the foreign exchange earnings, but now this requirement has been canceled. However:

– due diligence of Ukrainian companies in foreign banks, in fact, turned out to be more loyal than in Ukrainian ones;

– accounts are opened in international network banks, guaranteed to be reliable for Ukrainian clients and convenient for their foreign partners;

– these banks are more preferable for Ukrainian agrarian exporters from the point of view of the use of letters of credit, bank guarantees, etc.

– banks are considering the possibility of lending against the obligations of third parties for the purchase of agricultural products. If these are well-known players in the market (buyers), the interest on the loan can be quite acceptable;

– the presence of such accounts will be interesting for the formation of financial history and positive Compliance both for the Ukrainian enterprise and its beneficiaries;

– additionally, such an account is a fairly serious protection against raiding, “motivated” actions of the State Fiscal Service, “ordered” decisions of the courts and actions of the executive service.

The same Law “On Currency” provides for the right of a non-resident company to open an account with a Ukrainian bank. This refers to the current account, and not the investment and securities account. On April 4, 2019, innovations came into force in the NBU instructions on the procedure for opening and closing accounts. Before deciding to open an account for an international business company in a Ukrainian bank, you need to pay attention to two points:

– when opening an account, a non-resident needs to register with the “local regulatory authority” at the place of opening the account. A similar situation in Georgia has led to the fact that non-residents have been equated to permanent establishments in terms of tax residency over time;

– the updated instruction also suggests using a mechanism for the bank to identify the shell enterprise among non-residents to prevent the use of banks for the purpose of laundering money obtained in a criminal way, both in Ukraine and abroad. What is defined as a “shell enterprise” in the Instructions is rather vague, and the definition if an enterprise is shell or not is decided by the bank, which must do it “independently, considering risk-oriented approaches.”

The second part of this material is no less interesting from a practical point of view, namely: legalization of financial instruments (international business companies and bank accounts) in the legislative field of Ukraine. With legal entities (non-residents with accounts in Ukrainian banks and Ukrainian companies in foreign banks) it is more or less clear. A very important point is the interests of the beneficiary, resident of Ukraine (who is somehow involved in financial instruments) in the context of BEPS, MLI and information exchange.

Currently there is a war for the global privacy of everyone, in every sense (sorry for the pathos), and a bank account and “own” non-resident company are among the functions of privacy, or at least its financial side. What is actually happening: by 2025, the overwhelming number of countries will have fully accepted the BEPS, CRS and MLI rules of total tax transparency. All (!) information about a person (in the financial part) will be available and looped back from the data of the previous tax return; any income received by them in any country in the world as an individual, as a beneficial owner of businesses, and what expenses they incurred. At the same time, such factors are taken into account: a person’s tax residence, the center of their economic interests, the correlation of tax rates, leadin to them as an individual along the entire chain of their businesses. As a result, they recceive an invoice for paying taxes, taking into account all of the above. Well, rather a monthly receipt for payment from the housing office now.

The following questions have been added to the main task that our clients have been solving together with us throughout the years of our cooperation: how to build an optimal management/business ownership structure in terms of security and tax optimization;

Resolving issues of legalization of a citizen of Ukraine as a beneficiary of businesses in Ukraine and abroad. Perhaps, given the fact that businesses appeared some time ago;

Formation of the history of the beneficiary’s income.

How to structure business and income from it for citizens of Ukraine who are beneficiaries of non-resident companies for the future.

One way or another, today or tomorrow a tax resident of Ukraine will have to identify themselves as a beneficiary of a non-resident company. There are a number of options for legalizing a citizen of Ukraine as a shareholder of a foreign company:

– Contract of donation of shares;

– Purchase of shares for income received abroad (salary, sale of art objects, etc.);

– Purchase of shares of a non-resident within the framework of an e-declaration (USD 50 thousand);

– Purchase of shares of companies that are quoted on foreign financial markets.

A year earlier, there was an opportunity to buy shares from a non-resident for UAH (which was canceled by the NBU Resolution), but there are other options.

When deciding on the legalization of a citizen of Ukraine as a beneficiary, they also need to resolve the issue of the history of the funds at the expense of which they became the owner of a non-resident company.

– Many beneficiaries, having operated in business for a long time, took care of the long-declared income. These are dividends, interest on deposits, income from the purchase and sale of securities, government bonds (which, however, are already in the past). All of this may well serve as the primary source of the “history” of income;

– Income from sold real estate (taxation at 1%);

– Income from corporate rights converted from real estate, if they are not restricted by 3 years;

– Dividends received from mutual funds of 10.5%, as less costly and, for a long time, popular (the well-known “Hontareva’s scheme”);

– Income received abroad in the form of salaries, sales of IT technologies, art objects. Yes, it is expensive (18%), but this is real income earned abroad;

– Dividends received by a resident of Ukraine as a shareholder of a foreign company (9%);

– Incomes of the “remember everything” type. Debts repaid ten years ago. Good option for deputies. There are also lotteries, sports betting (Liashko’s variant);

– Legalized income as a result of the tax amnesty. Some advisers to the new president insist on it.

How to plan for the long-term income for citizens of Ukraine who are beneficiaries of non-resident companies, especially if they are beneficiaries of Ukrainian companies and issues of transfer pricing and CFCs (controlled foreign companies)? There are options: from structuring the entire business scheme (in Ukraine and abroad) with the removal of points of “doing business” and points of “personal economic and vital interests” in optimal tax jurisdictions, to a simple change of tax jurisdiction by a beneficiary. In any case, these issues are resolved purely individually, there is no general recipe.

Since 2014, our legislators have been getting close to the full implementation of the rules regarding CFCs and CRS (identification of undeclared assets and income and taxation at the level of beneficiaries). So far, Ukraine is in a favorable “suspended” state: the CFCs and CRS rules have not yet been integrated into Ukrainian legislation, there is no automatic exchange of information, there is no definition of “a place of effective management and a center of vital interests.” Such quiet “counter deoffshorization” is favorable for Ukrainian manufacturing and exporters. After all, they are at a disadvantage in comparison with foreign competitors who operate with huge financial resources, attract loans at meager interest rates, “hold” the markets for their products and do not let outsiders go there; they use invented rules such as BEPS, CRS, MLI to “eliminate unhealthy tax competition”. Under such conditions, for Ukrainian farmers, financial instruments will remain a significant factor in increasing the efficiency of their business for a long time.

Volodymyr Harkusha, CEO of K.A.C. Group

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