The  National Bank of Ukraine launches a public consultation to garner opinion on the legislative amendments required to adopt a new model  of more relaxed FX controls. On 1 December 2017, the NBU adopted a policy on a new model of relaxed FX controls.

This policy gives a green light to FX operations based on the principle what is not forbidden by the law, is allowed”. This means that any operations in domestic and foreign currencies between residents and nonresidents are allowed without any restrictions. The new model of FX regulation is not only more liberal compared with the current one but also is in line  with international practices - EU Council Directive 88/361/EEC on the Liberalization of Capital Movements and the EU-Ukraine Association Agreement.

As provided for by the Constitution, the hryvnia has retained its function as money, remaining the sole legal tender accepted as for payment for goods and services. However, the proposed model of FX regulation provides for the special use of foreign currency for the purpose of making foreign investment, performing investment-related operations, and rendering banking services.

Therefore, the NBU believes that under the new model of FX regulation market-related instruments over administrative (anti-crisis) instruments. The regime of the free movement of capital means that there are no foreign exchange restrictions on capital movements and therefore there is no need to keep in place FX controls as an instrument of control over compliance with these restrictions. Instead, foreign exchange supervision will be primarily responsible for overseeing compliance with foreign exchange legislation and regulations.

Under the regime of the free movement of capital, procedures will be more of an informative nature (to serve statistical purposes such as the BOP calculation rather than permissive one, as they have been until now. For instance, the regulator has proposed to repeal the requirement for individuals  to obtain individual licenses, as well as  the requirement for entities engaged in foreign economic activity to meet the contract execution deadlines, allowing them to declare the estimated deadlines without imposing any penalties as this information is required only for statistical purposes.

Under the new model of FX regulation, the NBU will have to change its approach to applying FX restrictions. FX restrictions should be put in place only to stave off or overcome a crisis and be kept in place for a short term. The NBU may put in place FX restrictions when there are clear signs  of unsustainable financial position of the banking system or arising threats to banking and/or financial stability of the country  and if the balance of payments comes under pressure,  thereby posing a threat to the achievement of monetary policy objectives. The Financial Stability Council has to acknowledge that the prerequisites are in place for the NBU to put in place FX controls, which should be maintained only  for a limited period of time - not longer than six months.

At the same time, the temporary restrictions that were imposed in 2014-2015 and remain in place until now should be relaxed in a gradual manner as long as favorable macrofinancial prerequisites are in place and effective tax controls are put in place.

In particular, the NBU believes that it will be  impossible to remove administrative FX restrictions until after the adoption of harmonized legislation on taxation, which shall:

• set out taxation rules for controlled foreign companies;
• introduce reports for groups of international companies;
• impose limitations for expenses in the related party transactions;
• set out taxation rules for the permanent establishment status;
• prevent the abuse of double tax treaties (DTTs);
• set out the dispute settlement procedure in line with the international convention on the avoidance of double taxation; and 
• adopt international standards for the automatic exchange of information between the tax authorities.

It should be noted that last year two draft laws designed to counteract the erosion of the taxable base and profit-shifting abroad (BEPS-related draft laws) was prepared in line with the OECD’s BEPS recommendations by  the Parliamentary Committee on Tax and Customs Policy with the support from the NBU. The draft laws were presented to the National Council of Reforms and tabled to parliament for consideration.  Also, these draft laws are intended to implement five key and most urgent among 15 OECD recommendations on countering the tax base reduction and moving profits abroad (BEPS) and  provide for Ukraine’s joining the framework for automatic exchange of information between the tax authorities of other countries, as well as granting FX amnesty and the introduction of a “one-off declaration”.

However, it is impossible to adopt a new model  of more relaxed FX controls under the current regulatory framework for foreign exchange regulation, which is  obsolete and cumbersome. The adoption  a new model  of more relaxed FX controls  require the replacement  of Decree of the Cabinet of Ministers of Ukraine On Foreign Exchange Regulation and Foreign Exchange Control System of 1993 and numerous legal acts with the new legislation. Since November 2016, an NBU task force, consisting - among others - of experts invited by the European Commission, has been developing a new draft law as part of the EU-FINSTAR project.

As a result, the NBU has developed  proposals on the legislative amendments required to adopt a new model  of more relaxed FX controls. The NBU proposes to develop a new draft law, called the Currency Law, which will be a single framework law, setting out the main principles for foreign exchange regulation in the country. At the same time, specific issues will be covered by related regulations.

The NBU plans to discuss the proposed legislative amendments with representatives of the business and expert community, banking industry,  and public institutions throughout the next three weeks.

“The NBU’s proposals taking into account comments and suggestions that we will receive will be tabled to the National Council of Reforms,” said NBU Deputy Governor Oleg Churiy. “We hope that our vision of the steps required to be taken for a shift to a new model  of more relaxed FX controls will be backed by the National Council of Reforms”.

According to the NBU’s proposals, following the adoption of the Currency Law by  parliament, the transition period will take six months during which NBU regulations will be brought into line with the new law. After this the Currency Law shall come into force.