This country-specific Q&A provides an overview of Lending & Secured Finance laws and regulations applicable in Ukraine.
Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
There are no licensing or regulatory requirements for foreign lenders to extend loans or to take the benefit over collateral in Ukraine.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
Ukrainian legislation sets no maximum interest threshold or a total amount that can be charged as interest. However, if the interest rate under cross-border loan agreement exceeds average market interest rate for loan transactions in Ukraine, such transaction will be subject to scrutiny by a local servicing bank.
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
These issues are regulated by resolutions of the National Bank of Ukraine.
Resolution of the National Bank of Ukraine (the “NBU”) No. 5 “On Approval of Regulation on Safeguards and Procedures for Certain Transactions in Foreign Currency” dated 02 January 2019, sets requirements for purchase of foreign currency by local borrowers and transfer of such currency abroad in repayment of loans and payment of interest to foreign lenders. Specifically, the following documents may be required:
documented proof of the borrower’s obligations under a loan agreement, i.e. original or copy of the loan agreement;
in case of reimbursement to a non-resident-guarantor, documented proof of non-resident-guarantor’s fulfilment of the borrower’s obligations under the loan agreement.
In addition, information about a loan agreement must be included into the NBU’s Automated Informational System “Loan Agreements with Non-residents” (save for some exceptions, such as, e.g.: loan agreements with International Financial Institutions). Local servicing bank will not proceed with purchase of foreign currency or transfer abroad, unless information about a loan agreement is included into the NBU’s Automated Informational System “Loan Agreements with Non-residents”.
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.
A creditor (both local and foreign) may take a security over various types of assets in Ukraine.
Real property, including land, may be used as collateral via execution of a mortgage agreement. Mortgage agreements are subject to notarization and the mortgage is subject to registration with the State Register of Proprietary Rights over Immovable Property (the “Register of Immovable Property”).
If a plant is registered as a real estate object, it may be mortgaged as well. Otherwise, separate parts of a plant may be pledged as movable property.
Machinery, equipment, inventory, receivables and shares in companies incorporated in Ukraine can be used as collateral based on a pledge agreement executed in the written form (notarization is not required). However, registration of a pledge with the State Register of Encumbrances over Movable Property (the “Register of Encumbrances”) is highly recommended as it gives the first priority ranking over the pledged asset vis a vis third parties. Such registration may be performed by a pledgee or its representative authorized in a proper way and takes no more than 2 day.
In relation to receivables, the law requires to identify in a pledge agreement a person that is the pledgor’s debtor and to notify such person about the pledge of receivables.
Shares in legal entities incorporated in Ukraine may also be pledged as movable property.
Security over assets in Ukraine shall be created under a Ukrainian law governed document.
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
Companies incorporated in Ukraine can grant security over their future assets and for future obligations, subject to compliance with the following requirements.
A security for the future obligations may be granted only if such obligations will arise in the future based on the agreement effective on the date of granting the security.
Future assets may be pledged or mortgaged, provided that a pledgor/mortgagor can provide a documentary proof that he will obtain the ownership title over respective assets in the future.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
Security over such different types of assets as movable and immovable property shall be taken under separate agreements, i.e. mortgage agreement for immovable property and pledge agreement for movable property.
At the same time, there is no statutory restriction to cover all pledgor’s/mortgagor’s assets of the particular type (movable or immovable) by a single security agreement.
However, in practice different types of movable assets, such as machinery, equipment, inventory, receivables and shares are usually pledged under separate agreements.
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
Notarization of mortgage agreements by a notary is mandatory. Parties’ authorised persons execute a mortgage agreement in front of a notary. After that, the notary notarizes the agreement and registers it in the Register of Immovable Property.
There are no notarization requirements for pledge agreements. However, parties can agree to notarize a pledge agreement as well.
Ukrainian law sets no legalisation requirements for transactional documents. But, in case of issuance of a power-of-attorney by a foreign pledgee/mortgagee for execution of a pledge/mortgage agreement in Ukraine, such power-of-attorney must be notarized and apostilled pursuant to the Hague Convention dated October 5, 1961 in a country of issuance and translated into Ukrainian. In case the pledgee’s/mortgagee’s country is not a member to the said Hague Convention, respective PoA has to be legalised pursuant to local law and translated into Ukrainian.
Execution of a mortgage agreement also requires provision of the mortgagee’s statutory and some other official documents to a notary and such documents shall be apostilled or otherwise legalised and translated into Ukrainian as well.
Are there any security registration requirements in your jurisdiction?
In addition to notarization, mortgage agreements are also subject to registration by a notary in the Register of Immovable Property. Such registration shall be made within 5 days after execution of the mortgage agreement. But, as a matter of practice, it is usually done on the same day or the next business day at the latest.
There are no registration requirements regarding pledge agreements. But, in order to perfect a pledge and receive the first priority ranking over the collateral, a pledgee has to register the pledge in the Register of Encumbrances. Such registration is made via a notary no later than the next business day after filing of respective application.
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement?
Parties to security agreements may bear the following costs:
Parties are charged with notarial fee for notarization of a mortgage agreement and registration of the mortgage in the Register of Immovable Property. Registration in the Register of Immovable Property is also subject to administration fee. Particular amount of the fee depends on the scope of documentation and registration actions to be performed by a notary. In practice it may vary from EUR 200 to several thousand euro.
Registration of an encumbrance under a pledge agreement in the Register of Encumbrances is only subject to notarial fee. Approximate amount of the fee in EUR is 30 euro.
Notary fees may be paid by any party to an agreement or may be shared by the parties in any proportion.
Fees related to enforcement of a security agreement
The court fee for filing a claim on foreclosure on a security with a court amounts to 1.5 percent of a claim amount, but no more than UAH 794,500 (appx. EUR 24,000) and is subject to compensation by a defendant if a court decision is in favour of the creditor.
Enforcement fee for actual enforcement of a court decisions is 10% of an amount actually recovered as a result of the enforcement.
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?
Under Ukrainian legislation, only banks or other non-banking financial institutions can issue guarantees. Nevertheless, other companies can secure obligations of third parties via provision of a suretyship on a free-of-charge basis. If a surety obtains any remuneration for provision of a suretyship, this may be considered as provision of financial services, which could be provided exclusively by banks and non-banking financial institutions.
Moreover, a pledge or a mortgage may be provided by a company as security for performance of third party’s obligations. Such company will be deemed to be a property surety provider under Ukrainian law, meaning that it will be liable only within the value of the collateral.
Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?
The concept of the corporate benefit does not have support in the local court practice in relation to issue of guarantees and suretyships.
So, it is most important for the creditor is to make sure that all corporate approvals of the guarantor/surety are in place, have been obtained in a proper way and that the document is signed by an authorized person. It is highly advisable for creditors to have original hard copies of respective corporate approvals of the guarantor/surety.
It is also advisable to have a confirmation from a surety that it issues the suretyship on a free-of-charge basis. Such confirmation may be included into the text of the suretyship agreement or be provided in a separate letter (for more details on sureties see question 10 above).
Are there any restrictions against providing security to support borrowings incurred for the purposes of acquiring shares: (i) of the company; (ii) of any company which directly/indirectly owns shares in the company; or (iii) in a related company?
There are no such restrictions regarding securing a loan agreement concluded for abovementioned purposes.
At the same time, if provision of a guarantee/security falls under the definition of the “related party transaction”, a special procedure of corporate approval of such transaction may be required.
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
Ukrainian legislation does not have any specific regulation of syndicate lending.
The most common legal concepts used for appointment of a security agent are the concepts of trust and parallel debt. Neither of these concepts is recognized by the Ukrainian law and both are rather doubtful in terms of prospects for judicial protection in Ukraine. At the same time, the joint and several creditor concept is recognized by Ukrainian law and is the safest one for creditors in terms of legal protection. However, it is not always exercisable in practice, especially in projects involving multiple creditors from various jurisdictions. Therefore, in practice creditors often have to accept the risk associated with the first two options.
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
Usually creditors use the concept of parallel debt . In cases where appointment of a join and several creditor as a security agent is possible, creditors prefer this option.
Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?
Domestic lenders are not charged with the withholding tax. Meanwhile, payments of interest to foreign lenders by Ukrainian borrowers are subject to withholding tax. The withholding tax also applies to an income from sale of real property and securities.
If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?
Standard withholding tax rate for payments of interest to foreign lenders by Ukrainian borrowers equals to 15%. However, there are more than 60 effective double taxation treaties signed by Ukraine. Most of double taxation treaties set a threshold for interests’ withholding tax rate in amount of 10%. However, some of them set lower tax rate for withholding tax rate, e.g. 2% withholding tax rate or even not charging a withholding tax on interest at all.
Double taxation treaty with France. Withholding tax rate shall not exceed 2% of interest’s gross sum if, in particular, the lender is a bank or any other financial institution. In any other case, such interest rate shall not exceed 10% of interest’s gross sum.
Double taxation treaty with Switzerland. Withholding tax rate shall not exceed 10% of a total amount of interests. In the case if a lender is a bank or other financial institution withholding tax rate is not levied.
Double taxation treaty with the United States. No withholding tax is charged.
Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction?
There are no such additional tax issues to be considered by foreign creditors when lending to Ukraine.
Are there any tax incentives available for foreign lenders lending into your jurisdiction?
Ukrainian tax law offers no tax incentives for foreign lenders.
Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
We are not aware of any financing structures being challenged by Ukrainian tax authorities.
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
In general, Ukrainian courts give effect to contractual choice of law. However, in some cases application of Ukrainian law is mandatory. For example, some matters in connection to Ukrainian based assets are governed exclusively by Ukrainian law, i.e. matters regarding emergence and termination of property rights, enforcement procedure involving immovable property and registration of security agreements.
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Ukrainian courts do recognise and enforce judgements of foreign courts. Under Ukrainian legislation, judgements of foreign courts or commercial arbitrations can be recognised and enforced if such recognition and enforcement is foreseen by international treaty or, if there is no such treaty, according to a principle of reciprocity.
Neither international treaty that foresees a recognition and enforcement of judgements has been signed by Ukraine with the United Kingdom or with the United States. Therefore, decisions of the United States and English courts will be enforced based on a principle of reciprocity.
Ukraine is a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards since its ratification in 1960.
What (briefly) is the insolvency process in your jurisdiction?
Ukrainian insolvency process consists of three stages: asset management (first stage during which a debtor’s net assets and liabilities value are determined), financial rehabilitation (second stage of implementing a turnaround plan approved by both creditors and a court) and liquidation (third stage of insolvency associated with fire sale of the debtor’s assets and subsequent fund distributions to the creditors).
An insolvency case may be initiated either by a creditor or a borrower itself.
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
After the insolvency case has been opened, any enforcement over the security is possible only after obtaining an insolvency court permission and if the security is not used in the debtors’ ordinary course of business generating cash flow. A secured creditor may also clawback asset-disposal or claim-burdening agreements, which might be helpful for cleaning the debtor’s liabilities and increasing net assets additionally to the security (if the secured creditor, as often, has both a secured and unsecured part of the total claim).
At all insolvency stages the secured creditor’s claim remains in super priority meaning exclusive rights for receiving any funds obtained from enforcement over the security. Moreover, if the process comes to fire sales of the debtor’s assets and the security has not been sold via two bidding rounds, such secured creditor is entitled to take the unsold security in its own possession. The security’s price is to be set-off with the secured creditor’s claim amount.
Please comment on transactions voidable upon insolvency.
Any creditor or an insolvency administrator may ask for clawback of any asset-disposal or debt-burdening agreement concluded within 3 years before opening of the insolvency case. Such agreement must meet one of the general requirements as:
causing damages to either of creditors or the debtor itself;
using an unfair pricing of asset disposal;
putting an excessive debt burdening over the debtor already being in distress; or
being concluded with parties affiliated with the debtor.
Is set off recognised on insolvency?
Yes, but only in few situations – a secured creditor obtaining possession over the unsold security and within a creditor- and court-approved turnaround plan.
Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?
Besides only few such cases appeared after the insolvency reform of November 2019, generally enforcement through insolvency procedures remains less effective in terms of time\costs\exposure balance as compared with an out-of-insolvency enforcement.
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
There is no such reform on the agenda. Though, within recent years local legislation has been changed significantly for the benefit of creditors and foreign creditors in particular. To name but a few, completely new foreign currency control legislation which significantly improved position of foreign creditors and lifted some barriers which caused complications to cross-border lending.
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
The majority of funds are provided as loans under bilateral or syndicated loan agreements. The main trend is decrease of exposure to one borrower both by local and foreign banks. The most active creditors are IFIs such as EBRD and IFC.
Raising funds in the international capital markets via issue of Eurobonds or similar instruments is available to a very limited group of private and state owned companies.
Please comment on external factors causing changes to the drafting of secured lending documentation and the structuring of such deals such as (i) Brexit (ii) LIBOR transition and/or (iii) COVID 19
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