As Ukraine recovers from a series of dramatic politicalevents, the new Ukrainian Government is forced to take tough decisions tostabilise the Ukrainian economy and demonstrate its credibility in order toattract new investment and financial aid.

On 27 March 2014, the Ukrainian Parliament adopted theLaw “On Prevention of Financial Catastrophe and Creating Opportunities forEconomic Growth in Ukraine” (the “Law”),introducing important amendments to the Ukrainian Tax Code and a number ofsocial security laws. Given the urgency, the Law came into force on 1 April2014, though some of its provisions will take effect later. The Law aims toreduce budget expenditures and decrease budget revenues. As the main targetgroups of the Law, its provisions have caused dissatisfaction among somecategories of civil servants and tax payers (both individuals and corporateentities). However, there are some provisions in the Law that should bepositively received by agriculture exporters and users of subsoil resources.

Social benefits

The Law reduces or limits a number of social benefitsguaranteed to certain categories of civil servants and employees ofbudget-funded entities (prosecutors and investigators of prosecutionauthorities; military servants, including reservists; militia; employees of theState Service for Specialised Communication and Protection of Information ofUkraine, civil defence agency and emergency response services; and certaincategories of social workers engaged in the areas of education, health care,culture, etc.).

Additionally, the Law: (i) reduces the number of personsworking in the prosecution authorities, State Security Service of Ukraine andinternal affairs agencies; (ii) reduces retirement pensions paid to people’sdeputies, public officials, judges, prosecutors and investigators ofprosecution authorities, diplomatic officials, military servants and officialsof self-government bodies; and (iii) amends the child benefit scheme byincreasing the first child payment and cancelling increases in payments forevery subsequent child. 

Social payments inCrimea

Social insurance payments guaranteed to unemployedpersons, or in case of an employee’s death, work accident and professionaldisease resulting in partial or full loss of ability to work, and pensions willnow be paid to Ukrainian nationals residing in Crimea solely from fundscollected within the Crimean territory. Additionally, pensions will only bepaid to those Ukrainian nationals residing in Crimea who refuse to draw apension and other social payments offered by the Russian Federation. Althoughthe Law sends a clear message that Crimea continues to be Ukrainian territoryand that Ukrainian nationals willing to stay with Ukraine shall not lose theprotection of the Ukrainian Government, it states that all budget socialpayments are to be made on account of funds received from Crimea and shall notbe subsidised by the other territory of Ukraine.

Payments to thePension Fund

The Law imposes a mandatory contribution to the statepension fund of 0.5%, payable by individuals and legal entities fromtransactions for the purchase of foreign currency.

Changes to the TaxCode

Changes to the Tax Code of Ukraine imposed by the Law canbe divided into the following categories:

-         basic taxes: corporate profit tax (CPT), VATand personal income tax;

-         excise duty and environmental tax;

-         subsoil use fee;

-         land and real estate related taxes; and

-         miscellaneous: gas tariff surcharge, fee forusing radio frequencies, fee for special water use.

Basic taxes

The Law:

-         repeals the gradual decrease of the CPT rate to17 % on 1 January 2015 and 16% on 1 January 2016. The current rate of 18% willnow be permanent. The VAT rate will not be decreased to 17% from 1 January 2015and will continue at 20%;

-         introduces a new 7% VAT for pharmaceuticalproducts,which are permitted for use and production in Ukraine and are included into theState Register of Pharmaceutical Products or list of goods used for medicalpurposes approved by the Cabinet of Ministers of Ukraine. Previously thesepharmaceutical products were taxed at a zero VAT rate;

-         decreases the threshold for VAT-free import of goodsfrom EUR 300 to EUR 150 per one shipment, including delivery costs; and

-         introduces a gradual rate for personal incometaxstarting from 1 July 2014. Depending on the taxable income individuals will pay15% (17% for private entrepreneurs who have not applied for the simplified taxationscheme for independent professional practitioners), 20% or 25%. Also, personalincome tax will be levied on pensions exceeding UAH 10,000. The gradualpersonal income tax rate will also apply to profit received as interest fromsavings accounts, savings certificates, deposits with credit unions,mortgage-backed securities, dividends, etc.

At the same time, operations on the export and supply tothe territory of Ukraine of grain and technical crops will be temporarily(until 1 October 2014) VAT exempt. The exemption does not apply to producersand primary suppliers (suppliers that purchase crops directly from producers tosell them in Ukraine). 

Excise duty andenvironmental taxes

The Law increases:

-         excise duties (roughly by 20%-40%)on alcohol and spirits (effective from 1 May 2014 and 1 September 2014,depending on the category), tobacco (effective from 1 July 2014), on import ofnew motor vehicles, including motorcycles, and their bodies;

-         payment for the first registration of motorvehicles and motor boats; and

-         environmental tax applying topollution of air by stationary sources and mobile sources (paid by gasolinetraders), pollution of water bodies, disposal of waste, generation and storageof radioactive waste.

Subsoil use fee

The legislators have revised the object of taxation. Fromnow on the subsoil use fee will be levied on the volume of marketable commodity(i.e., that which meets certain industry standards), rather than the volume ofthe mineral resource extracted from subsoil in raw state. This means thatproducers should not pay a subsoil use fee for minerals lost during extractionor processing (so-called technological losses, such as flaring).

At the same time, the valuation principles fordetermining the taxable value of the mineral resources remain largelyunchanged; producers should not expect any increase of the tax assessment base.

In general, the subsoil use fee rates were considerablyincreased for ore mineral resources. From 1 April 2014, the rates for hydrocarbons are as follows:

The Law also increases subsoil use fee rates (by about10%) for using the subsurface for purposes not related to the production ofmineral resources (e.g., storing hydrocarbons, wares etc.).

Additionally, the subsoil use fee will also be paid byland owners or tenants extracting underground waters: (i) under special wateruse permits; or (ii) with the help of electric equipment in volumes exceeding13 cubic meters per month. The rates of the subsoil use fee shall correspond tothe rates of the special water use fee for the extraction of undergroundwaters.

Land and real estaterelated taxes

The Law increases the land tax rates, for land plotslocated within populated areas that have not undergone normative monetary landevaluation, by approximately 8%.

Additionally, the minimum rent payment for land plots,which was previously differentiated for agricultural and other lands and basedon the amount of land tax, is now fixed at 3% of the normative monetary landevaluation.

From 1 January 2015, the fixed agricultural tax will besubject to indexation. The indexation method will be identical to theindexation of the normative monetary land evaluation.

The changes have also affected the real estate tax, withthe total area of the relevant premises (not only the living area) now beingtaken into account for the purpose of its assessment.

Miscellaneous

The “special-purpose surcharge to the current tariff fornatural gas” (gas tariff surcharge) amounting to 2% (4% if the gas is suppliedto the population) of the value of natural gas supplied is required to be paidby suppliers of natural gas, although suppliers usually include this within thegas supply tariff and the surcharge is actually paid by gas consumers.According to the Law, the gas tariff surcharge will now also be paid byentities independently importing natural gas for their own consumption andnatural gas producers consuming their own gas.

The Law also doubles the fee for using radio frequency,and increases the fee for special water use by roughly 10%.

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Due to recent political changes in the country we expectmore amendments to the tax legislation and will keep you informed of any newdevelopments.

LAW: No.1166-VII “OnPrevention of Financial Catastrophe and Creating Opportunities for EconomicGrowth in Ukraine” dated 27 March 2014

Authors:

DanielBilak, Managing Partner, daniel.bilak@cms-cmck.com

OlexanderMartinenko, Senior Partner, olexander.martinenko@cms-cmck.com

VictoriaKaplan, Senior Associate, victoria.kaplan@cms-cmck.com

Volodymyr Kolvakh, Lawyer, tetyana.mykhailenko@cms-cmck.com