On 16 January 2020, the Ukrainian Parliament adopted law No 1210 "On amendments to the Tax Code related to the improvement of tax administration and elimination of technical and logical inconsistencies in the tax legislation" (the "Law").
It is likely that the President will sign the law in early to mid-February.
The most significant changes in the Law include:
I. Introduction of a mechanism to collect capital gains tax from a non-resident-seller
Capital gains on foreign to foreign sales of shares or corporate rights in a Ukrainian company will be subject to 15% withholding tax ("WHT"), unless provided otherwise in an effective double tax treaty ("DTT") between Ukraine and the jurisdiction of the foreign seller.
Although theoretically this was previously the case, Ukrainian domestic law had no provisions and effective mechanism for collection of this tax. Now, the Law obliges a foreign buyer to register with the Ukrainian tax authorities and pay WHT from the seller's capital gain to the Ukrainian budget.
Moreover, the Law provides for certain circumstances when even indirect capital gains (i.e., gains from the transfer of a Ukrainian company by sale of its foreign parent’s shares) will be subject to 15% WHT (mainly if there is no relevant or standard DTT and/or the Ukrainian subsidiary derives most of its value from real estate).
The above provisions become effective from 1 July 2020.
II. Taxation of controlled foreign companies ("CFC")
Becomes effective from 1 January 2021 and should have no retrospective effect.
A CFC is a foreign company under control of a Ukrainian entity or individual.
Unless eligible for certain exceptions, the controlling person must pay corporate income tax or personal income tax on the income earned by the CFC, even if it has not yet been distributed.
Failure to comply with CFC reporting and taxation may result in significant penalties, although effective from the 2023 reporting year.
III. Concept of constructive dividends
The relevant provision becomes effective from 1 January 2021.
For corporate income tax purposes, the difference between fair market price and the actual price in any transaction with a related non-resident or a non-resident registered in a "low tax" jurisdiction which leads to underpayment of corporate income tax will be treated as a distribution of constructive dividends. As a result, the company should pay WHT at a 15% rate (or a lower rate if provided by an effective DTT) from such constructive dividends.
IV. New thin capitalisation rules
Becomes effective from 1 January 2021.
For corporate income tax taxpayers having a debt-to-equity ratio of more than 3.5, certain additional limitations on deductibility of interest will apply.
According to the unofficial text of the Law, thin capitalisation rules will no longer apply to lease companies and financial institutions.
V. Introduction of a participation exemption
A Ukrainian company owning at least 10% in a foreign company may exclude from its taxable income the accrued dividends from such foreign company, or increase such foreign company's book value (if accounted for based on the equity method) in the Ukrainian company's balance sheet.
If the 10% ownership rule is met for 3 consecutive years, the Ukrainian company may adjust its taxable income for previous years, as relevant.
VI. Foreign companies deemed Ukrainian tax residents for corporate income tax purposes
A foreign company may be deemed as a Ukrainian corporate income taxpayer if the company is actually managed from Ukraine.
If the place of management is another jurisdiction, one of the following conditions would still be sufficient to cause the company to be deemed a Ukrainian taxpayer:
- bank accounts are managed from Ukraine; or
- financial or management accounts are prepared in Ukraine; or
- the foreign company's employees are managed from Ukraine.
Such foreign companies may register in Ukraine voluntarily and, if registered, cannot be deemed a CFC.
Notably, any entity qualifying as a non-resident according to an effective DTT cannot be considered as a Ukrainian tax taxpayer.
VII. Other notable changes
- For corporate income tax purposes, the taxable revenue is increased by 30% for certain goods/services sold to non-residents in "low tax" jurisdictions, or having a special form of incorporation (according to lists approved by the Cabinet of Ministers of Ukraine). The increase does not apply if the sale is at fair market value, as proved by transfer pricing documentation.
- Expenses without business purpose incurred on transactions with non-residents are not deductible.
- Permanent establishments of non-residents will not be allowed to use a currently available notional profitability of 70%. The Law obliges them to calculate their taxable income based on the arm's length principle.
- Quoted prices should be used to prove the arm's length level of transactions with commodities.
- The requirements for transfer pricing reporting and documentation for multinational entities will be broadened.
By Rob Shantz, Partner, Oleksandr Markov, Counsel, and Kateryna Kuzmenko, Tax Consultant, Redcliffe Partners