Special reasons for exemption from liability for non-repatriation of foreign currency earnings

Under the current circumstances, proper execution of transactions between foreign counterparties has become significantly harder. This is due to the fact that participants of foreign economic activities are forced to adapt not only to newly emerging domestic restrictions and prohibitions, but also consider measures taken by other jurisdictions in one way or another related to the performance of the contract.

Emerging regulatory difficulties often simply prevent from performing the contract “according to the plan”, which inevitably entails the violation of not only contractual obligations, but also requirements of the currency legislation. It should be reminded that currency residents of the Russian Federation (hereinafter, the residents) shall comply with the rules on repatriation of foreign and Russian currency as part of carrying out foreign trade activities, as well as granting of loans to non-residents. Namely:

  • Under export contracts residents shall ensure that non-residents pay for goods delivered, works performed, services rendered, information and intellectual property transferred;
  • In case of non-performance by the counterparty of an import contract that provides for the transfer of an advance, residents shall ensure a refund of the money paid for outstanding obligations, including goods not imported to Russia, works not performed, services not rendered, etc.;
  • When granting a loan to a non-resident, a resident shall also ensure the repayment of the principal amount and accrued interest in accordance with the terms of such agreement.

Residents set the terms within which the above obligations should be performed at their own discretion in accordance with the conditions of the agreement for the relevant foreign economic transaction. In turn, violation of such terms entails administrative liability both for companies and officials in the form of fines and warnings.

However, in the current situation, participants of foreign economic activities are increasingly forced to violate terms of contracts, and consequently requirements of the currency legislation of the Russian Federation. In view of the current conditions, the Ministry of Finance of the Russian Federation issued the explanation of the actions required to avoid bringing residents to administrative liability in case non-residents as foreign counterparties fail to perform their respective obligations. We refer to the Information Letter published on 20.03.2020 on the official website (hereinafter, the Information Letter). It should be noted that the explanation is purely informational, has no official details or the status of a regulatory legal act. Law enforcement authorities will undoubtedly take into account this interpretation of the Ministry of Finance, but the final decision will depend solely on specific factual circumstances (which is emphasized by the Information Letter itself).

In accordance with this statement of the Ministry of Finance, non-performance by a non-resident of its obligations to deliver (pay for) goods or non-repayment of funds previously granted to it in the form of advance under a concluded foreign trade agreement due to force majeure, including measures taken by foreign governments to prevent the spread of the new virus, may indicate the absence of the resident’s fault in committing administrative offenses.

The Information Letter also points out that the issue of bringing a resident to liability shall be considered individually in each specific case taking into account all the circumstances of the case, including reasonableness and bona fide of the actions of participants of foreign trade contracts. In other words, the pandemic shall not be considered a generic force majeure. Accordingly, residents should pay special attention to the preparation of an evidence base that will allow them to exclude administrative liability in a specific case. Any factual data work fine if they serve as basis for the dispute resolution body to establish a) the presence of force majeure in the performance of a specific foreign trade contract, b) the absence of the resident’s fault in non-repatriation of foreign currency earnings, and c) other circumstances that are relevant for a proper adjudication.

Upon registration of the inability to perform obligations in due time, residents shall apply to the Chamber of Commerce and Industry of the Russian Federation for the Force Majeure Certificate, as only this body verifies such circumstances under the terms of foreign trade transactions.

It is also necessary to communicate with a foreign counterparty in order to obtain a similar confirmation from the competent authorities. For example, in People’s Republic of China such competent authority is the China Council for the Promotion of International Trade (CCPIT) (and its 115 branches and local subdivisions), in Italy – Italian chambers of commerce, in Luxembourg – Chamber of Commerce and Industry of Luxembourg, in Poland – Polish Chamber of Commerce, in India –Department of Commerce of the Ministry of Commerce and Industry of India, in the UK – London Chamber of Commerce and Industry, in Austria – ICC Austria – International Chamber of Commerce, in Czech Republic – Czech Chamber of Commerce, etc.

Residents should pay attention to the plan of actions for the parties in the event of force majeure provided for in the foreign trade contract. Compliance with the mechanism specified in the agreement may affect the decision of the competent authority to issue a supporting document, as well as count in resolving an administrative case of violation of the currency legislation.

Furthermore, it makes sense to prepare evidence “verifying that a resident has taken all possible measures to comply with requirements of the currency legislation”. Particularly, such evidence may include all official written and electronic correspondence with a foreign counterparty: filing a claim, attempts to agree upon another way to perform the obligations stipulated in the contract, payment claims, etc. It should be noted that all the evidence in the aggregate is important, since the issue of bringing a resident to liability will be resolved taking into account all the circumstances of the case.

At the moment, explanations on the exemption of residents from liability for non-repatriation of foreign currency earnings on the basis of force majeure are given only in relation to foreign trade contracts (export and import contracts for delivery, performance of works, provision of services, etc.). There is no mention of loan agreements in the Information Letter. It is almost impossible to prove the objective impossibility of performing a monetary obligation, because banking organizations do not suspend their activities and actually operate in the same mode, which makes it possible for counterparties to make non-cash payments. Moreover, non-payment of loans cannot be explained by the failure to perform a reciprocal obligation (e.g. non-delivery of goods, non-performance of works, etc.) and remains exclusively the risk borne by the lender. Therefore, whether the pandemic will be recognized as force majeure under loan agreements between residents and non-residents will be answered by judicial practice on these types of disputes, or by newly adopted explanations. However, all of the above recommendations on the preparation of evidence on taking all possible measures by a resident are relevant for any types of administrative offenses for non-repatriation of foreign currency earnings.

In conclusion, it is worth pointing out once again that the spread of the new virus and measures taken in its regard do not “automatically” exempt all participants of foreign economic activities from administrative liability. In each particular case it will be a matter of evidence and persuasion of the dispute resolution authority. Residents need to develop in advance their legal position, all arguments and evidence in favor of the objective impossibility to perform the contract, and consequently, requirements of the currency legislation, as well as the absence of their fault. One should not neglect the possibility of making timely amendments to the terms of performance of obligations with counterparties. It makes sense to reach out to the debtor and review the contractual terms, because the liability for non-repatriation of foreign currency earnings may turn out much more costly than one’s concessions to the counterparty.

Ekaterina Sechkareva

Junior Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

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