The Ukraine Parliament approved a package of laws on December 28, 2014, which significantly amend the system of taxation in Ukraine.
Key changes are summarized below;
General Provisions
- Number of taxes was decreased from 22 to 11 (including 2 local duties).
- Tax authorities are prohibited from carrying out audits of transactions, which already were subject to tax audits, if such audits are based on information from third parties, deviations in tax returns or orders to conduct tax audit as a part of the criminal investigation.
- Information on the amount of taxes paid by taxpayers who are subject to rent for use of subsoil (mainly, extraction companies) will be published and available online.
- Information on companies with tax debt will be published and available online.
- Tax returns must be submitted only when there are taxable objects or transactions or when there is information subject to declaring to tax authorities. Therefore, dormant companies may be exempt from obligation to submit declaration provided that they do not carry out any taxable transactions or do not have information subject to declaring.
- Definition of “royalty” was amended to exclude end-user licenses for software, payments for electronic copies of IP objects and payments for hard copies of IP objects.
Transfer Pricing
- Transfer pricing concept was amended in general. Under the new rules, transfer pricing is not an instrument to determine the price, but an instrument to verify the arm’s length character of the price in the transaction.
- Scope of controlled transactions was significantly revised and now includes: (1) transactions with related non-residents; (2) transactions of sale of goods through a non-resident commission agent; and (3) transactions with persons resident in low-tax jurisdictions included into the list approved by the Cabinet of Ministers of Ukraine.
- Transfer pricing 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.
- Financial thresholds for recognition of the transaction as controlled were significantly decreased and are set forth as follows: (1) gross annual income of the taxpayer and its related parties exceeds UAH20 million; and (2) gross amount of transactions with one counterparty exceeds UAH 1 million or 3% of taxable income.
- Taxpayers dealing with import and export of commodities are obliged to apply comparable uncontrolled price method of transfer pricing based on price quotation from the stock exchange included into the list to be approved by the Cabinet of Minister of Ukraine. If such taxpayers decide to apply other methods of transfer pricing, they must disclose their supply chains up to the unrelated counterparty.
- Transfer pricing audit may continue up to 18 months from its commencement.
- Statute of limitations for transfer pricing issues was extended to 7 years.
- Grounds for transfer pricing audits include the mere submission of the transfer pricing report on controlled transactions, which means that any taxpayer who carries out controlled transactions may be subject to transfer pricing audit
Corporate Income Tax
- CIT is levied on the profit before tax determined in accordance with financial accounting of the taxpayers subject to a limited number of corrections. Tax authorities may audit financial accounts of the company and check correctness of the financial accounting (either under Ukrainian GAAP or IFRS).
- Small enterprises (with income below UAH20 million per year) may choose not to apply tax corrections and pay CIT based on their financial accounting results.
- There is no general provision that expenses must be connected with the business. Therefore, any expenses deducted in the financial accounts must be deductible for tax purposes, unless there is a tax correction prescribed for such expenses in the Tax Code.
- Participation exemption for dividends apply only to dividends received from companies subject to CIT (dividends distributed by non-residents are, therefore, taxable).
- Deduction of interest paid to related non-residents by thin-capitalisation restriction is limited 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.
- Advance corporate income tax on payment of dividends is paid only on excess of the amount of distributed dividends over the taxable profits of the period, for which the dividends are paid.
- No deemed interest income accrues for borrowers on interest-free loans.
- All income of mutual investment funds is fully exempt from CIT.
- Deductibility restriction on payments of royalty is revised and now applies to royalty exceeding 4% of the income increased by the amount of royalty income.
- Deductibility restriction on payments to companies included into the list of low-tax jurisdictions for transfer pricing purposes is now set at 70% of the amount of expense.
- Two deductibility restrictions mentioned above do not apply if taxpayer proves the arm’s length character of payments in accordance with the transfer pricing rules
Personal Income Tax
- PIT rate on income exceeding 10 minimum salaries was increased from 17% to 20%.
- Passive income is subject to 20% PIT. Dividends distributed by mutual investment funds are considered as passive income.
- Dividends distributed by Ukrainian companies are subject to 5% PIT. Dividends from sources outside of Ukraine are subject to PIT under general rates (15%/20%).
Single Social Contribution
- Ordinary single social contribution rates remain unchanged.
- Maximum amount taxable with the single social contribution remains unchanged (at 17 living minimums).
- Special measures for legalisation of salaries were approved by the Parliament. Companies, which increase their payroll, may apply lower contribution rates. In order to apply the preference, the company must comply with the following criteria: (1) the average salary in the company increased by 30% compared to the average salary in 2014; (2) the average amount of single social contribution per insured 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 single social contribution is increased in 2.5 times or more compared to 2014, the company may apply 0.4 coefficient to the single social contribution rate. If the overall increase of the gross taxable amount is less than 2.5, the coefficient must be determined as the ratio of current gross monthly taxable amount to the average monthly taxable amount in 2014.
Value Added Tax
- Threshold for mandatory VAT registration was increased to UAH 1million.
- VAT accounts will be introduced starting from 1 July 2015. Starting from 1 February 2015 they will operate in a test mode.
- Excess of cash on the VAT accounts will be repayable.
- Negative VAT balances accumulated as of 1 February 2015 may be included into VAT accounts system in order to increase gross amount of VAT invoices allowed for issuance.
- The law prohibits tax audits of VAT refund after commencement of VAT accounts system.
- Failure to register the VAT invoice in the State Register of VAT Invoices is subject to fines. Amount of fine depends on the time of delay of registration and may constitute up to 40% of the VAT amount.