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Corporate Tax 2019 | Ukraine
Overview of corporate tax work over last year
Types of corporate tax work
The competence of the tax authorities has substantially increased over the past few years. Combined with the termination of the moratorium on tax audits of small and medium-sized businesses, the increased scope of tax audits during the last 12 months has resulted in more administrative (pre-litigation) and litigation corporate tax work.
One example is the aggressive review, during tax audits, of the depreciation of real estate as investment property. The tax authorities were aiming to deny the right to apply the method of “initial cost less accumulated depreciation” and insisted that the fair value model for accounting of investment property had to be applied in cases when the taxpayer carried out the revaluation of such property in the past, even before the respective “Accounting Standard for Investment property” was introduced in 2008.
Significant deals and themes
From its low point in 2016, Ukrainian M&A has recorded two consecutive years of double-digit growth, with the top 10 major deals dominating the metals & mining and agriculture sectors.1
It should be noted that information about some deals is not easily available in the public domain, while other deals are widely reported. As to the latter, substantial deals were concluded in the sphere of electricity production from renewable sources (with solar power plant projects dominating) and real estate and construction.
The year 2018 also saw a record volume of deals in the Ukrainian technology sector – IT companies and start-ups raised $323 million (excluding NDA deals). Thus, starting from 2013, Ukrainian IT companies have received a total of $1 billion in investments, which makes the country one of the top funding destinations in Central and Eastern Europe.2
Key developments affecting corporate tax law and practice
Ukrainian Parliament still rather frequently adopts laws amending the Tax Code, with roughly eight changes per year during the last three years.
The main changes related to CIT introduced in the Tax Code in 2018 and effective as of January 1, 2019 include:
• adoption of the “substance over form” principle in transfer pricing regulation; and
• prolongation of accelerated two-years’ depreciation for machinery and equipment (group 4) purchased and put into operation in 2019.
Tax climate in Ukraine
The common perception is that the tax climate in Ukraine has improved over the past five years, especially with regard to tax administration, introduction of a transparent VAT refund system, and a more meaningful (as opposed to purely formal in the past) administrative procedure for the review of tax notification-decisions issued by tax authorities following tax audits.
Improvements in the review of tax audit results by the State Fiscal Service of Ukraine as the appeal body within the administrative procedure may also be attributed to the active work of the Business Ombudsman Council, funded through the Multi-Donor Account for Ukraine set up at the European Bank for Reconstruction and Development in 2014.
Developments affecting attractiveness of Ukraine for holding companies
While there is a special law regulating holding companies (the law “On Holding Companies in Ukraine”), the Tax Code does not recognise the special holding companies’ regime. The relatively low flat CIT rate of 18% applies to all taxpayers, including those which in substance are holding companies. For CIT payers, investment income from other CIT payers and single taxpayers, including dividends from CIT payers, is excluded from taxable income. Investment losses in subsidiaries and joint ventures are not deductible for tax purposes.
For a number of reasons, Ukrainian investors often use offshore jurisdictions for establishing holding companies. However, two major recent changes in legislation may reduce such reasons, namely:
• adoption of a new law regulating limited liability companies (effective starting June 17, 2018, with the period for updating companies’ by-laws until June 17, 2019) – the LLC law incorporates global best practices and provides regulation (including corporate governance, corporate/shareholders agreement, irrevocable PoA, flexible rules for shares transfers, prevention of hostile takeovers, etc.), that was earlier sought in other jurisdictions; and
• new law “On Currency and Currency Operations” (fully effective starting February 7, 2019) and subsequent regulations from the National Bank of Ukraine, aimed at lifting restrictions and liberalising foreign currency operations for both individuals and business entities.
The year ahead
The issues related to the future tax reforms have been subject to debate and constituted the cornerstone element of the election programmes of many Ukrainian political powers in 2018–2019. Currently discussed steps in the reformation of corporate taxation relate mainly to the following issues:
Exit Capital Tax (“ECT”)
The most significant measure publicly discussed among political and business stakeholders is the tax on withdrawn capital aiming to replace the existing corporate income tax system. The main idea of the ECT (also referred to as the “Distributed Profit Tax”) consists of making distributed profits taxable, namely income taken from the turnover of the enterprise in the form of dividends and equivalent operations rather than financial profits. Such fundamental changes in the corporate taxation system aim primarily to enhance the attractiveness of Ukraine for investment by decreasing both the general tax and administrative burdens. The respective draft law was submitted to Parliament in July 2018 and was recommended by the special Parliament committee. Although the introduction of the ECT was one of the key measures of tax reform publicly declared and supported by the current President of Ukraine as part of his recent election campaign, as of today respective changes are still subject to debate. The main concerns are connected with the short-term fiscal impact of the CPT replacement, in particular the potential fiscal shortfall in the first years following the implementation of the ECT.
Implementation of BEPS Action Plan
In October 2018, the Ukrainian Ministry of Finance and National Bank of Ukraine announced the draft law on Implementation of the BEPS Action Plan in Ukraine (“BEPS Draft Law”). The BEPS Draft Law covers eight actions, including disclosure of holding in controlled foreign companies (“CFCs”), limitations for expenses in related-party transactions, preventing double tax treaties (“DTTs”) abuse and further elaboration of transfer pricing control. It is anticipated that the BEPS Draft Law will serve not only as an effective instrument against tax abuses, but also as one of the crucial elements to be implemented within the liberalisation of the currency regulations under the new law “On Currency and Currency Operations”. Thus, the lifting of the currently existing restrictions in the field of currency regulations, inter alia, the settlements deadline in goods export and import operations, is subject to the adoption of the BEPS counteraction law.
The BEPS Draft Law envisages the introduction of CFC taxation in Ukraine in order to prevent tax avoidance or evasion by means of international structuring. According to the wording of the Draft Law, the profits of a legal entity qualified as a CFC are subject to taxation in Ukraine proportionally to the individual’s share interest in CFC capital. The Ukrainian resident natural person who controls the CFC undertakes to include the adjusted CFC’s profits to his/her taxable income. Meanwhile, the individual will be qualified as controller if he/she (i) holds 50% or more of the shares in a CFC, (ii) takes de facto control over the foreign company, or (iii) holds a 25% share in a CFC and, jointly with other Ukrainian individuals, holds 50% or more of the shares in the CFC. The principle of taxation of CFC profits may also apply to entities having no legal personality, namely to funds, trusts, partnerships or other establishments.
Another issue that in the near future may significantly affect corporate taxation in Ukraine is the implementation of the MLI rules. The MLI was ratified by the Ukrainian Parliament on February 28, 2019. Ukraine included 76 DTTs to the list of treaties to be modified by means of the MLI (all DTTs except the treaty with Qatar, which was ratified this year). Ukrainian DTTs may be changed in regards to rules related to the definition of permanent establishment (“PE”), application of the principle purpose test, anti-abuse regulation for PEs situated in third jurisdictions and the 365-day rule for capital gains, as well as issues regarding the mutual agreement procedure (“MAP”).
Yuri KushnirManaging partner of Kushnir, Yakymyak & Partners Law FirmAlla SkrypnykAssociate of Kushnir, Yakymyak & Partners Law FirmGlobal Legal Insights September 2019
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