Features of loan raising by independent contractors

In the IT industry, specialists who deliver services as independent contractors often have a need to raise additional funding. In order to not be confused by the need of legal support of loan relationships between the contracting parties and not to get into the trap of tax liability accruals – let’s take a look at a few instances.
We will address the occurrences when a lender is a non-resident and a legal entity registered within the jurisdiction of Ukraine.
Occurence one. Non-resident entity lends a loan to an individual entrepreneur. In this case, funds could be raised under interest or interest-free terms. However, until recently, there was an obligation to register such agreements – containing a foreign element – by the National Bank of Ukraine. Although, considering liberalization of exchange control, the Regulation, setting the rules was repealed, the obligation to register agreements had been left in the past, but there are some details with which compliance is obligatory.
Borrowers must have an open foreign currency account in a Ukrainian bank, which will be used for borrowing. The main moment of raising such a loan is in accordance with the external lending cost of a separate agreement within similar market conditions (particularly, discount rate in a jurisdiction of non-resident must correspond to the loan conditions).
Moreover, banks performing such operations must submit official information providing correspondence of the matter, and amount, of the loan to the financial state and context of activities of the individual entrepreneur and lender. Additionally, the bank must have no grounds that the lender and borrower are related parties according to the Tax Code of Ukraine. It is worth mentioning that transferred funds are firstly processed to the clearing bank account, and after passing the bank`s verification are transferred into the individual entrepreneur`s account and become available for use.
Having an alternative variant when a non-resident owns a subsidiary registered within the jurisdiction of Ukraine, it is worth considering a model of raising funds from a Ukrainian company.
However, if an individual entrepreneur has an open currency account abroad (in the EU countries, generally), funds can be raised into that account without the need to perform actions mentioned above. Considering the opportunity to use such an account in the Single Euro Payments Area (SEPA), the process of raising funds into such an account shall be accompanied with minimal entry fees. But withdrawing funds into Ukraine is possible through the banks supporting European IBAN.
Sure, if an individual entrepreneur or an individual has an open account in a foreign bank institution, Ukrainian tax authorities cannot track such operations, but if those funds are transferred into an account of an individual in Ukraine – it shall become a ground of recognising such funds as the ones originated from abroad, what leads to paying individual income tax and military tax.
Now let’s take a closer look at the features of raising a loan when a lender for an individual entrepreneur is a legal entity within Ukrainian jurisdiction.
In this case a loan agreement is concluded, in which it is obligatory to mention that interests for using it are not calculated. In that case such a loan is seen as repayable financial aid according to the Tax Code of Ukraine.
From the moment of transfer of such money into the entrepreneur’s account, an individual entrepreneur has 12 calendar months to return the funds to a lender. In the loan agreement also must be mentioned the order of transfer and return of the amount of loan.
For an individual entrepreneur`s financial reporting, it is important that the amount of the loan, received according to the agreement, was returned to a lender within the term mentioned in the Tax Code of Ukraine(12 months) – then those funds will not be included into the income of the payer of the individual income tax. If the amount of financial aid is not returned to a lender – it will be taxable on individual income tax and military tax.
The next important instance is the interest-free nature of such loans. According to the Ukrainian laws “credit” is considered as a financial service, but only financial institutions can provide financial services, a lending company is not one. Hence, if a loan is of interest-bearing nature, it could be a ground for recognizing such loan agreement as a financial credit agreement and a ground for the lending company to be inspected by the controlling authority.
Also, it is necessary to mention the opportunity to establish collateral in the agreement. Civil legislation of Ukraine allows establishing collateral on property which the collateral establisher – individual entrepreneur – shall receive after collateral occurrence. In other words, with agreement, the purpose of transferred funds and subjects of collateral – property acquired by an individual entrepreneur after using funds received by the loan agreement, is stated.
The risk of such a model is that an individual entrepreneur will use the money acquired not for performing economic activity or that they may transfer acquired funds into his personal account. Such activities may attract tax authorities and if the use of funds on non-entrepreneurial activities will be established – they will be taxable on individual income tax and military tax. In order to avoid such problems, funds can be transferred into a private individual`s account, not an individual entrepreneur`s account. In this case, an individual can use those funds to satisfy his/her own needs, and it will be possible to establish a collateral, but it is necessary to keep in mind about the 12-month term for the loan repayment and interest-free nature of the agreement.
To conclude, practical mechanisms for funds raising are available for various subject contents of loan relationships. In each case it is necessary to find a thorough approach of a proper legal support of such relationships involving competent specialists who may assist.

You may like
A new law on virtual assets: the picture is formed, but without details. On September 8, 2021, the Verkhovna Rada has finally adopted the long-awaited law "On Virtual Assets", which clarified many ambiguous points. This is especially true for the status of cryptocurrency and the rules of its circulation in the country. Let`s take a closer look at novelties. An ambiguous term Let's start with what the legislator actually means by "virtual assets". There are the following features:  they are an intangible good (cannot be represented on tangible media)  fall under the list of objects of civil rights (that is, they can be owned and be disposed of)  represent an electronic form of a set of data (essentially, they are blocks of information put in order);  the existence and circulation of assets are due to software tools (specific electronic environment). From these features we can draw the following conclusion: virtual assets are not limited to cryptocurrency. Digital currency is part of the concept, but other instruments, such as tokens, NFTs, or even in-game items, fall under the definition. Actually, the actual existence of most digital products, having a certain value, is due to the software environment (ecosystem), either it is blockchain technology, a trading platform, or an online game server. It should be noted that the attempt to define virtual assets was already made in the adopted Law of Ukraine in counteracting money laundering. In this act, they understand it as digital means of payment, which goes against the new definition. As a result, there are now two different explanations for virtual assets, which causes significant confusion not only in regulation but also in interpretation. It is definitely necessary to expect clarifications from competent state bodies. Let's return to the new law. Its application covers legal relations in which the "Ukrainian element" is present:  provider or recipient of services represented in Ukraine;  an agreement according to which the turnover of virtual assets is carried out in accordance with Ukrainian legislation;  the acquirer of assets (or both counterparties) is a resident(s) of Ukraine. The law also introduces an interesting division of all virtual assets into two groups: secured and unsecured. Here again, there is a problem of interpretation. The first category includes products exchanged for (state) currency, the second category includes instruments that can be exchanged only for other digital assets. There is an alternative opinion: that the turnover of secured assets is supported by real goods (money or other property), while unsecured ones are not supported by anything. The latter interpretation is the most credible, as the new law stipulates that virtual assets are NOT means of payment. Moreover, they cannot be exchanged for real goods, be they property, services or money. This significantly narrows the potential for the use of virtual assets not only for commercial but also for civilian purposes. About obligatory licensing The new law states that in some cases, the use of virtual assets will require licensing. The 4 types of activity are mentioned:  storage and management of virtual assets (or its` keys)  servicing of exchange operations with virtual assets (both for other analogues and for real goods);  translation of digital assets;  any intermediary services. A list is quite impressive, but there are some important exclusions:  if your service works with cryptocurrency wallet (it means users can dispose of accumulations into cryptocurrency independently);  If your service works on smart contracts or decentralized protocol, based on which internal transfers are performed. As to intermediary services, everything is more compicated. Actually, any mediation is based on the public share offering. That is why it is subject to licensing. How to get a license? A company that wishes on legal grounds to engage in virtual assets must satisfy legislative requirements. The key role is played by the minimum amount of the statutory capital, which equals 1,19 million hryvnyas (for non-residents it is 5,95 million hryvnyas) in case of storage and administration. For other types of activity (trading, translation and mediation services) the minimum size of the statutory capital amounts to 595 thousand hryvnyas (for non-residents is 2,98 million hryvnyas). The order of the registration of license:  to compose an application and prepare documents.  to pay state fee (68-136 thousand hryvnyas for residents and 340-680 thousand hryvnyas is for non-residents).  to pend review of the request (30 days).  to get a license. The duration of the license is 1 year. No norms about the continuation of legal force of permission are set (we are expecting amendments or explanations from the Ministry of Digital transformation of Ukraine). Notably that non-residents must pay a far greater sum, than domestic companies. The Ukrainian legislator obviously encourages an internal market, getting rid of a strong foreign presence (that, in fact, coincide with modern politics of the state on the whole). Together with an application, the following documents must be prepared: The access code to the copy of the Statute of the company (or the foundation agreement) kept in an electronic file in the database of the Unified State Register of Enterprises and Organizations (USREO);  Funding sources of the statutory capital (where the money are taken from);  confirmation of the actual injection of money;  information about beneficiaries (special attention must be paid to business reputation);  the information about the director and founders;  the check about payment of state fee;  the internal regulations, in accordance with which ones, the privacy policy rules are regulated. In the terms of volume of necessary documentation of licensing is very alike with complete registration of legal entity. It is understood that the state wants the severe adjusting of activity of organizations that will engage in virtual assets. Is it already possible to get a license? The adoption of the law by the parliament is a significant step forward in adjusting and legal market of virtual assets creation in Ukraine. However, the new rules haven`t come into effect yet - their term of introduction depends on making amendments in the Internal Revenue Code. It is yet unknown, when a legislator will decide to enter the renewed system of taxation for such assets. Being "IT-hub" and territory, where cryptocurrency enjoys large popularity, the question of taxes must be decided maximally safely. Despite the presence of obvious gaps in interpretation, a new law on virtual assets gives the official narrative of what takes place and that, how the legal relationships related to cryptocurrency will be regulated. It is to be hoped that in the nearest time the Ministry of digital information will give out the detailed explanations concerning debatable norms.
We will
call you