Repatriation of funds under loan agreements with non-residents in Russia
Author: Irina Krapivko, lawyer at Accountor Russia
Currency control over loans to non-residents has been tightened since April 14, 2018.
What is loan repatriation?
A rule has been introduced to prevent capital outflow and incite businessmen to keep their earnings on accounts in Russian banks. Russian companies issuing loans to non-residents must now ensure the repatriation of foreign and Russian currency.
Repatriation occurs when a non-resident counterparty returns the money it received under a loan from a Russian company.
For example, if a Russian company lends money to a foreign company’s representative office in Moscow, then the Russian company will be required to ensure the return of the money it provided to the non-resident.
Who are non-residents?
The entities pertaining to the following four categories are referred to as non-residents:
- Foreign nationals, stateless persons and persons with a residence permit who do not reside in Russia;
- Foreign companies and organizations that are not located in Russia as well as their divisions in Russia;
- Diplomatic missions;
- Interstate and intergovernmental organizations as well as their branches and representative offices in Russia.
Procedure for repatriation of monetary funds under loan agreements
If a Russian company issues a loan to a non-resident, the Russian company will be required to:
- Ensure repatriation, i.e. repayment of borrowed funds to its bank accounts within the time periods provided in the loan agreement. This can be done as follows:
- The Russian company enters into an independent guarantee agreement (for example, a bank guarantee agreement) under which the guarantor (bank) undertakes to pay the funds to fulfill the repatriation requirement;
- The Russian company enters into an agency agreement under which the guarantor is responsible for the fulfillment of the obligation to repay the loan by the non-resident;
- By providing in the loan agreement with the non-resident for a monetary penalty that the non-resident will be required to pay to the Russian company in case of non-repayment of the loan within the period specified in the loan agreement. If the resident has to pay an administrative fine for failure of loan repatriation due to late repayment by the non-resident, then compensation for damages over and above the penalty will be required to pay for the part of the fine not covered by the penalty;
- By entering into a pledge agreement with the non-resident under which the Russian company is entitled to satisfaction against the value of the non-resident’s pledged asset in case of non-repayment of the loan by the non-resident within the time period specified in the loan agreement;
- By insuring the monetary funds under the loan agreement in case the non-resident fails to repay the loan amount.
- Notify an authorized bank of when money under the loan agreement is to be repaid by the non-resident;
- When the loan amount exceeds RUB 3 million, register the loan agreement with an authorized Russian bank and make payments under the loan agreement only through accounts in this bank.
Any loan agreements concluded since April 14, 2018 must meet these requirements. These requirements also apply to any loan agreements concluded earlier if their essential terms and conditions are amended after April 14, 2018.
When is it possible not to fulfill repatriation requirements?
Cases where the requirements for repatriation of foreign or Russian currency do not apply:
- Loan agreements entered into before April 14, 2018 provided their essential terms and conditions are not amended after that date;
- If a loan is issued to finance geological survey, prospection or extraction of minerals, repayment depends on production and extraction volume or sales proceeds. If the invested funds are greater than the value of the minerals found or extracted, then repatriation is not required;
- A resident issues a loan to a non-resident, then the non-resident company issues a loan back to the resident. The non-resident providing a similar loan to the resident should deposit money to the resident’s account in a Russian bank so that there is no need for repatriation under the first loan ;
- The list of legal entities providing state support to innovative activities approved by the Russian Government includes: Joint Stock Company ROSNANO in Moscow and the Foundation for Infrastructure and Educational Programs in Moscow. If one of these organizations issues a loan to a non-resident, and money is not returned in the amount of the lender’s contribution to the share capital, securities, debt contraction of the non-resident, or if the non-resident is declared bankrupt, the lender will not be subject to the repatriation procedure.
When are repatriation requirements deemed fulfilled?
Repatriation requirements are deemed fulfilled in two cases:
- When borrowed money is repaid in due time and is in a Russian bank account;
- When a non-resident fails to fulfill the loan requirements, but the funds are insured in case of default and the resident company receives the insurance payment.
Currency control agents may request insurance contracts and documents confirming transactions and settlements for currency control purposes.
What are the consequences of non-fulfillment of repatriation requirements?
Building legal relations with non-residents is a complex affair for various reasons starting with the protection of rights in relations with a foreign element and ending with exchange rate fluctuations.
Any failure to comply with currency law requirements is subject to the following penalties:
- Penalty from 75% to 100% of the amount of the unlawful currency transaction for individual entrepreneurs and legal entities involved in such transaction;
- Fine from RUB 20,000 to RUB 30,000 for company officers involved in such transaction.
In case of late repatriation, individual entrepreneurs and legal entities are to pay a penalty of:
- 1/150 of the key rate of the Central Bank of Russia on the accrued overdue amount for each day of delay;
- From 75% to 100% of the unpaid amount for the required repatriation.
A fine from RUB 20,000 to RUB 30,000 will be imposed on the company officers involved in such case. They will also be disqualified from 6 months to 3 years in case of any repeated violation of currency law requirements. In such case, there is no statute of limitation for the initial violation.
It should be noted that in case of late repatriation the lender is not considered at fault if it had the opportunity and took all necessary and sufficient repatriation measures.
The issue of the beginning of overdue period should also be addressed and clarified. The period for non-residents to repatriate money to their accounts coincide with the period for payment under loan agreements. If a loan agreement provides for a specific term of, for example, 30 calendar days from the conclusion of the loan agreement, then liability for late payment arises on the day following the last day for fulfillment of the payment obligation. When no deadlines are provided in the agreement, the rule on reasonable terms applies so it is either the expiry date of the loan agreement entailing the termination of all obligations, or the date for fulfillment of all obligations under the agreement as specified in the transaction certificate opened for the agreement.