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RUSSIA: Tougher rules on repatriation of loans to non-residents

Currency repatriation requirements were extended on 14 April to cover loans issued by Russian residents to foreign borrowers, reducing the opportunities for businesses to shift funds abroad through non-repayable loans.

The new obligations and penalties for Russian lenders will make life much harder for residents, who must now ensure they receive foreign or Russian currency from non-resident borrowers through bank accounts with authorised banks, and within the terms established in future loan agreements.

New amendments to Russian currency controls entered into force on 14 April 2018 (the Law), extending currency repatriation requirements to loans issued by residents to foreign borrowers. The changes are meant to reduce the opportunities for Russian businesses to shift funds abroad. The Law will make life much harder for residents by establishing new obligations in the administration of loans.

The Law's adoption was not entirely unexpected, given that the bill was proposed in autumn 2015. To a certain degree, the Law continues recent trends in enforcement. Russian currency control authorities are more frequently attempting to impose administrative penalties on Russian lenders where loans are not repaid by non-resident borrowers. The Law’s adoption makes the risk of violation of currency law by a resident in this respect more real.

Repatriation of currency under foreign trade contracts

Before the new provisions entered into force, the RF Currency Control Law (the CCL) only required currency residents to repatriate funds (whether in foreign currency or in rubles) owed to residents under foreign trade agreements:

• for goods, information, and intellectual property transferred to non-residents, or work and services performed for non-residents; and

• paid to non-residents for goods, information and intellectual property not imported into the RF, or for work and services not performed.

As the foreign trade contract repatriation requirements were in place for some time, foreign trade participants developed a good understanding of the risks relating to violation of these requirements. Residents rely on the guidance on enforcement of these rules produced by currency control authorities and agents on the basis of enforcement practice.

What's new?

Henceforth, the repatriation requirements will also apply to loan agreements under which residents provide financing to non-residents. Resident lenders must ensure they receive foreign currency or RF currency from non-resident borrowers through bank accounts with authorized banks and within the terms established in their loan agreements.

What exceptions are there to the rules on repatriation of currency under loans?

First, the new rules will not apply to loan agreements concluded before the Law entered into force. However, there is one exception: if the material terms of an agreement are amended after the effective date of the Law, the new rules will apply.

Second, the Law defines the operations not covered by the loan repatriation obligations. They include operations previously only conducted with respect to foreign trade contracts, and new exceptions:

• provision of a loan relating to financing of geological studies, exploration and/or extraction of extractable resources, as listed in article 337 RF TC;4

• set-off of similar counter-claims under loan agreements (provided the non-resident's counter-claim arose as a result of providing the resident a loan by transfer to the resident’s account with a Russian bank); and

• provision of a loan relating to financing of investment and/or innovation (in a number of cases).

Penalties for failure to return loans to the RF

Residents failing to perform their obligations will be penalised for violation of repatriation requirements, under the RF Administrative Penal Code, namely, fines for legal entities of:

• 1/150 of the CB RF refinancing rate on amounts not promptly transferred to an account, for each day of delay; and/or

• from 75% to 100% of the amount not transferred to an account.

As from of 14 May 2018, a fine ranging from 20,000 to 30,000 rubles may also be imposed on officers of a resident legal entity brought to administrative liability for currency law violations.

Transaction passports abolished

More positive news for resident lenders is the abolition of the requirement to generate a transaction passport for relations governed by a loan agreement, as well as for foreign trade contracts.

As of 1 March 2018, the CB RF has introduced a new procedure for registering foreign trade agreements. The transaction passport has been replaced with an agreement registration system and the assignment of unique identification numbers. The agreement registration system is essentially necessary to achieve the same purpose as the passport transaction procedure. Registration of a foreign trade contract or loan agreement with a bank is expected to be faster and simpler than opening a transaction passport. The resident entity will need to provide the bank with a copy of the agreement or an extract indicating the main information on the agreement (type, date, number, agreement currency, amount of obligation, completion date of performance of the obligation under the agreement, and details of the non-resident counterparty)

Registration of a foreign trade agreement will be required if the price of the agreement is at least:

• 3,000,000 rubles – for loan agreements and import foreign trade contracts; and

• 6,000,000 rubles – for export of goods/works/services/information and intellectual property.

Notably, authorised banks will automatically close transaction passports opened before the entry into force of Instruction 181-I and the respective agreements will be duly registered.