On November 18, 2011 the President of Ukraine signed the On Introducing Changes to the Tax Code of Ukraine and Certain Other Legislative Acts of Ukraine in respect of the Simplified System of Taxation, Accounting and Reporting Act of Ukraine (the “Simplified Tax Act”). The Simplified Tax Act will become effective as of 1 January 2012 with certain provisions coming into force at a later stage.

The principal changes introduced by the Simplified Tax Act include:

• Deductibility restriction in relation to costs incurred by corporate income tax (“CIT”) payers for purchase of goods, works or services from private entrepreneurs who have elected simplified tax system has been removed
• CIT payers will be required to submit a breakdown of income and expenses received from/ paid to unified tax payers together with CIT returns
• The threshold of income for unified tax payers was increased up to UAH 3 million for private entrepreneurs and up to UAH 5 million for legal entities
• Simplified tax payers shall be divided into 4 groups. Private entrepreneurs providing services to CIT payers will be attributed to the 3rd group, implying a unified tax rate of 3% plus value-added tax (“VAT”) or a 5% unified tax rate
• The unified tax rates vary from 1 – 20 per cent of the minimal salary (1st and 2nd groups) up to 3-5 per cent of received income (3rd and 4th groups)
• The unified tax payers of the 3rd and 4th groups will be eligible for registration as VAT payers
• Legal entities having opted to use the simplified tax system would be eligible to simplified statutory accounting
• Simplified tax payers shall recognize income on a cash basis (i.e. upon actual receipt of cash funds, free-of-charge received goods or expiry of the statute of limitation period in respect of the indebtedness due)
• Unified tax payers shall have to perform settlements in monetary form. Otherwise, an increased tax rate shall apply
• The law explicitly provides that flow-through funds (e.g. sales proceeds under agency arrangements), credit funds, dividends received, capital contributions, as well as certain other types of receivables would not be attributed to the income of unified tax payers
• Such businesses as gambling, currency exchange transactions, production/sale of excisable goods, sale of jewels and precious metals, objects of arts, investment funds and companies and other financial institutions, as well as non-residents, private entrepreneurs-auditors and certain others shall not be eligible to use the simplified tax system

If you have any questions regarding the Simplified Tax Act and/or tax planning opportunities which may be available in connection with this act entering into effect commencing 1 January 2012, please contact Sergey Popov (SPopov@kpmg.ua) or Andrey Reun (AReun@kpmg.ua) at +380 (44) 490 55 07 or via e-mail.