Tax Gross Up Loan Agreement

This is a common market practice for loan contracts (also known as facilitated contracts), whether bilateral or syndicated, until: apparently, in response, the prohibition of the “gross up” clause was explicitly included in section 161 of the tax code. Article 161 prohibits the inclusion of crude clauses in any type of cross-border agreement. Any gross clause, which is nevertheless contained in a cross-border contract, is non-contractual. As a result, the National Bank of Ukraine should refuse to register agreements with such “gross” clauses (for which registration of foreign payments is required in accordance with current foreign exchange control rules) and the service bank (the bank by which payments abroad must be made under an agreement made by a resident debtor in accordance with Ukrainian foreign exchange control rules) should refuse to make transfers abroad on the basis of these Agreements. As a result of restrictions on service rates and interest rates, as well as relatively high interest rates imposed on most Ukrainian borrowers, the solution to mitigate the effects of the ban on the gross clause will generally be a combination of the two approaches, imposing additional fees and higher interest rates. If the lender only reacts to the gross problem if the registration is refused to give consent and then adds additional fees and interest to cover the withholding tax, it appears that this replaces the non-tax clause and can therefore be attacked as a disguised attempt to transfer the tax burden and violate the prohibition on Ukrainian borrowers who bear the Ukrainian withholding tax on their lenders. The prohibition on detention is general and applies to any form of detention. It would, for example, prevent the borrower from deducting an amount owed to the borrower by the lender. An exception to the prohibition is that any deduction imposed by law can be deducted from a payment. Since withholding tax on interest is generally the only type of statutory deduction for loan payments, the only withholding tax authorized under a loan is probably withholding tax, so the prohibition applies to any other type of withholding that is not required by law.

Similarly, there appears to be some opportunities to avoid or mitigate the negative consequences of banning gross tax clauses in cross-border agreements. One possible solution, particularly in the context of a fixed income loan contract, would be to include in the cross-border loan contract a royalty owed to the foreign creditor (for example). B a transaction tax) roughly equal to the total amount of withholding tax on interest. Borrowers may wish for a proportionate reduction in this deposit in the event of an advance payment of the financing. Such a levy could allow a foreign creditor to obtain the equivalent of the full interest that would otherwise be owed for financing. However, under Ukrainian stock market control laws and NBU rules, the transfer of surplus abroad, which can take time and sometimes be difficult to obtain in practice, requires a certificate of pricing expertise from the National Observatory for Information and Analysis of External Commodity Markets when the fees paid for services exceed 100,000 euros.