Tax Gross Up Loan Agreement

If the tax is legally required to be withheld from a payment (e.g. B withholding tax on interest), obliges a borrower (subject to limited derogations) to pay an additional sum which, after deduction of tax, deprives the lender of the same amount as he would have been entitled if it were not necessary to withhold the tax on the payment – this tax is apparently called gross tax as a response, the prohibition of the extrapolation clause was expressly incorporated into Article 161 of the Tax Code. Article 161 prohibits the inclusion of extrapolation clauses in any type of cross-border agreement. Any gross clause which nevertheless appears in a cross-border treaty is countervailable. Accordingly, the National Bank of Ukraine should refuse the registration of agreements that contain such extrapolation clauses (for which registration is necessary to allow payments abroad under the current rules on exchange control) and the service bank (the bank through which payments abroad are to be made by a resident debtor under an agreement, in accordance with Ukrainian exchange control rules) refused to make transfers abroad on the basis of such agreements. However, since the relevant provision was probably vague, contractual gross tax clauses have always been included in cross-border credit agreements. Due to the aforementioned restrictions on service rates and interest rate restrictions, as well as relatively high interest rates for most Ukrainian borrowers, the solution to mitigate the effects of the prohibition of the gross clause will usually be a combination of both approaches by imposing additional fees and higher interest rates. As regards credit agreements (also known as facilities), whether bilateral or unionised, the market is compliant: it seems that there are still some possibilities to avoid or mitigate the negative effects of the prohibition of contractual gross tax clauses in cross-border agreements. A possible solution, in particular in the context of a fixed-rate loan agreement, is confirmed by the fact that, in the cross-border loan agreement, a royalty due to the foreign creditor (e.g.B. a transaction tax) which could roughly correspond to the total amount lost by the withholding tax on interest. Borrowers may wish for a proportional reduction in these anticipated fees in the event of a down payment of the financing. Such a fee could enable a foreign creditor to obtain the equivalent of all the interest that would otherwise be payable on financing. However, according to Ukrainian exchange control laws and NBU regulations, if the amount of fees paid for services exceeds $100,000 ($132,000), a certificate of price expertise from the National Center for Information and Analysis of External Raw Materials Markets is required to transfer the surplus abroad, which can be tedious and sometimes difficult to obtain in practice.

Another possible solution to avoid the effects of the prohibition of extrapolation clauses is first of all to increase the interest rate due on the financing to the extent necessary for the bank to receive sufficient interest income after withholding. . . .

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