Anti-BEPS in Action: Ukraine Amends Its Tax Code

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The Law of Ukraine No. 466-IX “On Amendments to the Tax Code of Ukraine Improving Tax Administration and Removing Technical and Logical Discrepancies in the Tax Legislation” dated 16 January 2020 (the “Amendment Law”) has been officially published and came into effect.  The Amendment Law purports to implement OECD action plans for base erosion and profit shifting (BEPS).

Below we summarise the most important novelties introduced by the Amendment Law which may have a significant impact on cross-border transactions:

  • Financial Reporting:  Corporate taxpayers which are obliged to publish their annual financial statements (for example, public joint stock companies) must submit their financial statements to the tax authorities together with the respective auditor’s report not later than 10 June of the year following the reporting year.
  • Tax Losses:  In the event of merger, tax losses may be transferred to the absorbing company in the amount that does not exceed the net assets of the absorbed company provided that these companies were related longer than 18 months prior to the merger.
  • Constructive Dividends:  Introduction to the Tax Code of Ukraine of a “constructive dividends” concept which would be applicable from 1 January 2021.  This concept is transposed to the Tax Code of Ukraine to counteract hidden distributions allowing tax authorities to reclassify as dividends any amounts payable in excess of an amount which would otherwise be formed on an “arms length” basis.  The same approach would also, for example, apply to payments for goods and services purchased from a foreign counterparty which is related to the Ukrainian buyer and certain other related party trades and distributions such as decrease of charter capital, shareholder’s exit or shares buyouts.
  • Accelerated Depreciation:  Can apply to certain new fixed assets (for example, 2 years instead of 5 for new transport vehicles acquired in 2020).
  • Removal of Thin Capitalisation Rule for Interest Deductions:  New rules will apply from 1 January 2021 to transactions with related and unrelated parties (including both residents and non-residents) if the company’s debt is 3.5 times larger than equity.  Currently, only debt with related non-resident entities is exposed.  If debt-to-equity ratio is exceeded, interest deductions shall be limited to 30% of tax EBITDA (in comparison with current 50% of financial EBITDA).  Non-deductible interest might be carried forward indefinitely, but it shall be subject to annual 5% disallowance.  Financial institutions, including banks, and leasing companies are exempt from these limitations.
  • Business Purpose Test:  The Amendment Law introduces certain anti-abuse rules, including a business purpose test for transactions with non-residents for corporate tax and transfer pricing purposes and the disapplication of tax treaty benefits where one of the principal purposes of a transaction is to claim relief at source or a lower withholding tax rate in Ukraine under a relevant tax treaty.
  • Sales to “Unreliable” Counterparties:  Ukrainian companies will be required to increase their taxable base for corporate tax purposes by 30% of the value of goods and services sold to non-residents from low tax jurisdictions and/or existing in special legal forms (for example, limited partnership), unless the Ukrainian taxpayer applied relevant transfer pricing rules or the price is confirmed as market price based on the procedures described for that purpose in the Tax Code of Ukraine.
  • Real Estate Share Deals:  From 1 July 2020 a 15% withholding tax would apply to gains obtained by non-Ukrainian companies from transfers of Ukrainian shares that derive their value mostly from real property located in Ukraine to non-Ukrainian buyers, whereas those buyers will be obliged to register in Ukraine for tax purposes prior to such purchase.
  • Country-by-Country (CbC) Reports:  From 1 January 2021 multinational companies shall be required to prepare a master file and a country-by-country report in addition to any local filing requirements.  Proposed revenue thresholds are in line with the OECD recommendations (i.e., EUR 50 million for master file and EUR 750 million for CbC report).  The first reporting year for master files and CbC reports shall be 2021 (but not earlier than when Ukraine joins the OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports).
  • Principal Purpose Test:  In order to claim benefits under tax treaties of Ukraine, a “look-through approach” for beneficial ownership purposes is introduced, according to which if the immediate recipient of a Ukraine sourced income is not the beneficial owner of that income, then the tax treaty with the jurisdiction of the beneficial owner may apply in Ukraine, and a “principal purpose test” shall apply, according to which a tax treaty would not apply if the main purpose of the arrangement or structure is to obtain tax treaty benefits.
  • Controlled Foreign Companies:  Gradually, from 1 January 2021, the Amendment Law introduces controlled foreign company (CFC) rules that shall tax the undistributed profits of CFCs at the level of their Ukrainian owners (controllers).  A CFC is defined broadly to include corporate entities, as well as certain transparent entities (e.g., trusts, investment funds, partnerships etc.). 18% tax shall apply to undistributed income of a CFC.  Distributed income of a CFC shall be subject to an 18% or 9% rate depending on the period of distribution.
  • Related Party Recognition: For related party purposes, the recognition threshold is increased to 25% instead of 20%.
  • Permanent Establishment: Definition of a permanent establishment (PE) is amended to align with the updated definition under the 2017 OECD Model Tax Treaty, solely direct method applies to determine the taxable income of a PE and UAH 100,000 shall be the fine for failure of a non-Ukrainian company to register its PE in Ukraine in addition to the assessed taxes and late payment penalties.
  • Payroll Reassessment:  For personal tax purposes, payroll tax may re-assessed by the fiscal authorities for last 7 years.
  • Share Sales by Individuals:  For personal tax purposes, a profit (not income) from sale of shares by a Ukrainian individual to a non-Ukrainian buyer shall be taxed.

The Amendment Law will enter into force within the period from 2020 to 2023 (please see some specific dates above).

For further information, please contact Dmytro Ivanusa, Partner,

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