Tax Reform Overview

Avellum Partners, Kyiv, Ukraine
Mon, Jan 12, 2015

On 28 December 2014 Verkhovna Rada of Ukraine(“Parliament”) approved a package oflaws, which significantly amend the system of taxation in Ukraine. These lawsinclude: Law of Ukraine “On Amendments tothe Tax Code of Ukraine and Certain Legislative Acts of Ukraine Regarding TaxReform” No 71-VIII, dated 28 December 2014; Law of Ukraine "On Amendments to the Tax Code of UkraineRegarding Improving of Tax Control Over the Transfer Pricing” No 72-VIII,dated 28 December 2014; and Law of Ukraine “OnAmendments to the Certain Legislative Acts of Ukraine Regarding Reformation ofCompulsory State Social Insurance and Legalization of Payroll” No 77-VIII,dated 28 December 2014. Below we describe key changes introduced by the above mentionedlaws.

General Provisions

·                    Numberof taxes was reduced from 22 to 11 (including 2 local duties).

·                    Taxauthorities are prohibited from carrying out audits of transactions, whichalready were subject to tax audits, if such audits are based on informationfrom third parties, deviations in tax returns or orders to conduct tax audit asa part of the criminal investigation.

·                    Informationon the amount of taxes paid by taxpayers who are subject to rent for use ofsubsoil (mainly, extraction companies) will be published and available online.

·                    Informationon companies with tax debt will be published and available online.

·                    Taxreturns must be submitted only when there are taxable objects or transactionsor when there is information subject to declaring to tax authorities. Therefore,dormant companies may be exempt from obligation to submit declaration providedthat they do not carry out any taxable transactions or do not have information subjectto declaring.

·                    Definitionof “royalty” was amended to exclude end-user licenses for software, paymentsfor electronic copies of IP objects and payments for hard copies of IP objects.

Transfer Pricing

·                    Transferpricing concept was amended in general. Under the new rules, transfer pricingis not an instrument to determine the price, but an instrument to verify thearm’s length character of the price in the transaction.

·                    Scopeof controlled transactions was significantly revised and now includes: (1)transactions with related non-residents; (2) transactions of sale of goodsthrough a non-resident commission agent; and (3) transactions with personsresident in low-tax jurisdictions included into the list approved by theCabinet of Ministers of Ukraine.

·                    Transferpricing requirements apply to corporate income tax (“CIT”) only. Value added tax (“VAT”)and rent for use of subsoil will not be subject to transfer pricing control.

·                    Financialthresholds for recognition of the transaction as controlled were significantlydecreased and are set forth as follows: (1) gross annual income of thetaxpayer and its related parties exceeds UAH20 million; and (2) grossamount of transactions with one counterparty exceeds UAH 1 million or 3%of taxable income.

·                    Taxpayersdealing with import and export of commodities are obliged to apply comparableuncontrolled price method of transfer pricing based on price quotation from thestock exchange included into the list to be approved by the Cabinet of Ministerof Ukraine. If such taxpayers decide to apply other methods of transferpricing, they must disclose their supply chains up to the unrelated counterparty.

·                    Transferpricing audit may continue up to 18 months from its commencement.

·                    Statuteof limitations for transfer pricing issues was extended to 7 years.

·                    Groundsfor transfer pricing audits include the mere submission of the transfer pricingreport on controlled transactions, which means that any taxpayer who carriesout controlled transactions may be subject to transfer pricing audit.

Corporate Income Tax

·                    CITis levied on the profit before tax determined in accordance with financialaccounting of the taxpayers subject to a limited number of corrections. Taxauthorities may audit financial accounts of the company and check correctnessof the financial accounting (either under Ukrainian GAAP or IFRS).

·                    Smallenterprises (with income below UAH20 million per year) may choose not to applytax corrections and pay CIT based on their financial accounting results.

·                    Thereis no general provision that expenses must be connected with the business.Therefore, any expenses deducted in the financial accounts must be deductiblefor tax purposes, unless there is a tax correction prescribed for such expensesin the Tax Code. However, there is no guarantee that tax authorities andadministrative courts will cease to apply the “business purpose” doctrine tochallenge expenses of the taxpayers.

·                    Participationexemption for dividends apply only to dividends received from companies subjectto CIT (dividends distributed by non-residents are, therefore, taxable).

·                    Deductionof interest paid to related non-residents by thin-capitalisation restriction islimited only if the debt-to-equity ratio of the company exceeds 3.5. Otherwise,thin-capitalisation rules do not apply and interest is fully deductible.

·                    Advancecorporate income tax on payment of dividends is paid only on excess of theamount of distributed dividends over the taxable profits of the period, forwhich the dividends are paid.

·                    Nodeemed interest income accrues for borrowers on interest-free loans.

·                    Allincome of mutual investment funds is fully exempt from CIT.

·                    Deductibilityrestriction on payments of royalty is revised and now applies to royaltyexceeding 4% of the income increased by the amount of royalty income.

·                    Deductibilityrestriction on payments to companies included into the list of low-tax jurisdictionsfor transfer pricing purposes is now  setat 70% of the amount of expense.

·                    Twodeductibility restrictions mentioned above do not apply if taxpayer proves thearm’s length character of payments in accordance with the transfer pricingrules.

Personal Income Tax

·                    PITrate on income exceeding 10 minimum salaries was increased from 17% to 20%.

·                    Passiveincome is subject to 20% PIT. Dividends distributed by mutual investment fundsare considered as passive income.

·                    Dividendsdistributed by Ukrainian companies are subject to 5% PIT. Dividends fromsources outside of Ukraine are subject to PIT under general rates (15%/20%).

·                    Militaryduty was extended until completion of military reform in Ukraine.

Single Social Contribution

·                    Ordinarysingle social contribution rates remain unchanged.

·                    Maximumamount taxable with the single social contribution remains unchanged (at 17living minimums).

·                    Specialmeasures for legalisation of salaries were approved by the Parliament. Companies,which increase their payroll, may apply lower contribution rates. In order toapply the preference, the company must comply with the following criteria:(1) the average salary in the company increased by 30% compared to the averagesalary in 2014; (2) the average amount of single social contribution perinsured person after application of the preference is not less than UAH700;(3) the average salary in the company is not less than 3 minimum salaries.If the conditions above are met and the gross amount taxable with the singlesocial contribution is increased in 2.5 times or more compared to 2014, thecompany may apply 0.4 coefficient to the single social contribution rate. Ifthe overall increase of the gross taxable amount is less than 2.5, thecoefficient must be determined as the ratio of current gross monthly taxableamount to the average monthly taxable amount in 2014.

Value Added Tax

·                    Thresholdfor mandatory VAT registration was increased to UAH 1million.

·                    VATaccounts will be introduced starting from 1 July 2015. Starting from 1 February2015 they will operate in a test mode.

·                    Excessof cash on the VAT accounts will be repayable.

·                    NegativeVAT balances accumulated as of 1 February 2015 may be included into VATaccounts system in order to increase gross amount of VAT invoices allowed forissuance.

·                    Thelaw prohibits tax audits of VAT refund after commencement of VAT accountssystem.

·                    Failureto register the VAT invoice in the State Register of VAT Invoices is subject tofines. Amount of fine depends on the time of delay of registration and mayconstitute up to 40% of the VAT amount.

Real Estate Tax

·                    Commercialreal estate is subject to real estate tax. Industrial and agriculturalbuildings are not subject to real estate tax. These, however, may not coveradministrative and general premises of the industrial and agriculturalcompanies.

·                    Thresholdsfor residential real estate exempt from the tax were decreased.

·                    Thetax rate will be determined by the local (municipal) authorities, but it maynot exceed 2% of the minimum salary per square meter (the tax rate forcommercial real estate in 2015 may not exceed 1% of the minimum salary persquare meter).

Transport Tax

·                    Carswith engines volume exceeding 3 litres, which are less than 5 years old, aresubject to transport tax. The amount of tax is UAH25,000 per year per vehicle.

Simplified Tax Regimes

·                    Singletax remains in effect with minor amendments and decrease in tax rates.

·                    Fixedagricultural tax is incorporated into single tax as the fourth group of singletax taxpayers.

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