This country-specific Q&A provides an overview to tax laws and regulations that may occur in Ukraine.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/
How often is tax law amended and what are the processes for such amendments?
One of the main principles established by tax legislation of Ukraine is the principle of its stability and predictability. Accordingly, changes in any elements of taxes and charges can not be made earlier than six months before the commencement of the new budget period. Unfortunately, the Ukrainian parliament usually does not follow this requirement.
In practice, Ukrainian tax legislation can be amended at any time of the year upon the adoption of the respective bill by the Ukrainian Parliament.
During the last several years, the Verkhovna Rada of Ukraine (Ukrainian Parliament) has significantly amended the main legislative act in the tax area – the Tax Code of Ukraine.
Usually substantive changes are made in December, at the end of the fiscal year. At the same time, less significant changes can also be made throughout the year. For instance, during 2016, the Tax Code of Ukraine was amended seven times.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
According to Ukrainian legislation, the main procedural obligations of a taxpayer are:
- to be registered with the tax authorities;
- to keep records of income and expenses on the basis of primary accounting documents, ledgers, and financial statements;
- to file a tax return;
- to ensure the storage of documents related to fulfilment of tax obligations for not less than 1095 days from the date of submission of the tax reports, for preparation of which these documents were used.
Tax returns are usually filed at the end of the tax reporting period. Tax reporting periods may vary depending on the type of tax, peculiarities of a taxpayer, etc.
There are three typical tax reporting periods: monthly, quarterly and yearly. Tax returns for the monthly reporting period shall be filed within 20 calendar days following the last calendar day of the reporting month. Tax returns for the quarterly reporting shall be filed within 40 calendar days following the last calendar day of the reporting quarter. Tax returns for the yearly reporting period shall be filed within 60 calendar days following the last calendar day of the reporting year. Notwithstanding the abovementioned, in some cases, tax returns may be filed at other intervals.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The State Fiscal Service of Ukraine (hereinafter – SFS) and its territorial bodies are the main regulatory tax authorities in Ukraine. In most cases, it is not easy to deal with them.
If the taxpayer does not agree with the actions and decisions of the tax authorities, then one can appeal them by administrative procedure and/or in a judicial proceeding.
The administrative appeal procedure is not obligatory and is considered a pre-trial procedure for resolving a dispute. Usually it is not very effective. According to statistics provided by SFS, during 2016 taxpayers filed 11,758 initial complaints in administrative procedures against actions of the tax authorities. Only 3,024 of them were fully or partly satisfied.
However, a taxpayer is entitled to submit a complaint to the superior fiscal body within 10 calendar days after receiving a disputed decision. This term can be prolonged under certain circumstances, provided for by the law: for instance, in the case of the absence of a taxpayer on the territory of Ukraine.
After the receipt of the complaint, the relevant tax authority shall adopt a reasonable decision and send it to the taxpayer within 20 calendar days. At the same time, this term can be prolonged for not more than 60 calendar days under the decision of the head (deputy head or authorized person) of the relevant tax authority.
If the administrative procedure is not successful, the taxpayer shall have the right to file a lawsuit in court within one month. If the taxpayer does not use the administrative procedure, the term for appeal to the court is 1095 days.
In the case where the taxpayer is not sure of any tax issue, the taxpayer has the right to request that the tax authorities provide an individual tax consultation. If the taxpayer acts in accordance with such consultation, the fines for a violation of the tax legislation cannot be imposed on him/her. The term for the provision of the mentioned consultation is 25 calendar days, which can be prolonged for not more than 10 calendar days.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Except for the tax authorities, only courts of administrative jurisdiction are entitled to resolve tax disputes.
According to Ukrainian legislation, the judicial case in the court of first instance shall be considered and resolved within a reasonable time, but not more than a month from the date of the opening of the proceedings. The same provisions shall be applied for proceedings in appellate courts, cassation courts, and in the Supreme Court.
Generally judicial proceedings, in all instances, last at least one year. There are several factors which influence the mentioned duration of the proceeding:
- in almost all cases, tax authorities submit an appeal and a cassation to the courts of appeal, and the courts of cassation accordingly;
- notwithstanding the foregoing, usually courts do not comply with the term of one month for consideration of the case.
According to statistics provided by SFS, during 2016 there were 27,300 pending litigations against decisions and actions of the tax authorities.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The taxpayer is required to pay the amount of taxes specified in the filed tax return, within 10 calendar days following the last day of the relevant deadline provided for submission of the tax return.
If tax authorities discover any facts of breaching of the tax legislation, they are authorized to determine the amount of tax that shall be paid by the tax payer and send the respective tax notice decision to the taxpayer.
The taxpayer is obliged to pay the accrued amount of taxes stipulated in the tax notice decision within 10 calendar days following the day the tax notice decision is received, except in cases when during such a period, the taxpayer initiates a procedure of appeal against the decision of the tax authority.
According to Ukrainian legislation, during the period of the administrative appeal procedure and judicial proceeding, the amount of taxes to be payed shall be deemed as “not agreed”.
Taxes in dispute with the regulatory authority must be paid by a taxpayer only after the completion of the administrative appeal procedure, or if the taxpayer filed a lawsuit after the entry of court decision into legal force, and only in the event of losing the case.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
The status of taxpayer data as confidential information or as public information depends on type of the data.
The personal data of individual taxpayers is clearly defined as classified information. There are three types of classified information: confidential information, secret information, and information for internal use only.
The status of tax information regarding the taxpayers as legal entities is not clearly defined in Ukrainian legislation. According to Ukrainian legislation, confidential information is information which the access to is restricted by natural or legal persons. Thus, if a legal person restricts access to any of his/her information, it shall be classified as confidential information.
Tax authorities are obliged to prevent the disclosure of classified information received by them during fulfillment of their functions. This obligation is not absolute, and in cases expressly stipulated by law, tax authorities are entitled to disclose the abovementioned information.
The unlawful disclosure of classified information, including confidential information, is a criminal offence.
At the same time there are several official, open data registers with public information on taxpayers. For instance: The United State Register of Legal Entities, Individual Entrepreneurs, and Public Organizations of Ukraine; the Register of Value Added Tax Payers; the Register of Single Tax Payers; the Register of payers of Excise Tax for the Sale of Fuel; the Data on the Registration of Taxpayers, etc.
In these resources, everyone can find information regarding the status of tax payer as a VAT-payer, single tax-payer, the date of registration as a taxpayer, the types of activities of the taxpayer, the size of authorized capital of the taxpayer, etc.
Information regarding the beneficial ownership of companies is now publicly available on www.data.gov.ua and www.register.openownership.org.
Currently Ukraine is not a signatory of the Common Reporting Standard.
According to the Decree of the President of Ukraine “On Measures to Counter Base Erosion and Profit Shifting” No. 180/2016 dated on April 28, 2016, the Ukrainian government is obliged to organize work regarding the inclusion of Ukraine into the international initiatives of the Organization for Economic Co-operation and Development (OECD), in particular to the automatic exchange of tax information.
Also, on May 25, 2017, deputies of the Ukrainian parliament registered a bill draft No. 6503. This draft bill defines the notion of the automatic exchange of information, the list of subjects obliged to provide information within the framework of automatic exchange, their rights and duties, the type of information which is planned to exchange within the framework of automatic exchange, etc.
What are the tests for residence of the main business structures (including transparent entities)?
Resident taxpayers in Ukraine are legal entities registered in Ukraine, which carry out business activities both on the territory of Ukraine and abroad.
The definition of “tax residence” in Ukrainian legislative means mostly a "tax registration", and it is not connected with the placement of a taxpayer`s administrative office, or for example, its fixed place of business, etc. Thus, there are no special governmental tax residency rules in Ukrainian registration.
Also there is no transparent entity as a legal business structure in Ukraine. The most prevalent business structures are limited liability companies and joint-stock companies.
Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Some types of operations and deals that refer to money payments abroad can be the target of the tax authorities` attention.
An example of such an operation is the payment of passive income (dividends, royalties, or interest) using reduced rates established by double tax treaties of Ukraine. In this case, the issue that could be additionally checked by fiscal authorities, is the beneficiary status of the recipient of the payable income. The main point to be determined is if the non-resident recipient of income is not a conduit company. Another type of transactions to that are targeted by tax authorities are supply transactions between related parties. Such operations shall be deemed controlled, and the deal price should comply with “the arm's length” principle. Formation of the value of the products or services shall be marketable.
Operations are also risky in case of dealing with companies that are residents of countries from blacklisted jurisdictions or blacklisted companies (LLC, LLP, SLP, etc).
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
There are no CFC rules in Ukraine, but significant development of local legislation in this area is expected in the process of implementation of some initiatives from the Base Erosion and Profit Shifting (BEPS) Action Plan in the coming years. According to the Implementation Guidance Action Plan on BEPS, the CFC rules are not included in the minimum standards of its implementation.
As for Thin Cap regime, in the majority of developed countries, the debt-to-equity ratio should not exceed 3:1; however, in Ukraine, this ratio is 3.5:1 (10:1 – for financial institutions). In case the amount of dept received from the related party(s) exceeds the equity of the borrower by more than 3.5 times, then the borrower can deduct the interest payments as expenses by an amount that does not exceed 50% of the financial profit (before tax), financial expenses, and depreciation charges of the borrower (EBITDA). If amount of debt does not exceed the above mentioned ratio, the borrower can deduct the full amount of interest payment.
Transfer pricing rules were introduced in 2013, and since that time have been constantly changing. Transactions with affiliated non-residents, the sale of goods through non-resident agents, as well as transactions with non-residents from countries listed by the Cabinet of Ministers of Ukraine, should be deemed as controlled. However, according to the changes from 2017, the Tax Code of Ukraine foresees that if the taxpayer’s annual revenue does not exceed UAH 150 million and/or the volume of transactions with each counterparty does not exceed UAH 10 million, those transactions shall not be recognized as controlled.
The transfer pricing rules provide five permissible transfer pricing methods: the comparable uncontrolled price method, the resale price method, the cost-plus method, the transactional net margin method, and the profit-split method. Special regulations are anticipated for cross-border sales of goods, which are traded on a commodity exchange, with residents in the jurisdictions included in the Cabinet of Ministers of Ukraine list.
Taxpayers are required to submit a report of controlled transactions by the 1st of October and other transfer pricing documentation within one month of a request by the tax authorities.
Also, it is possible for great taxpayers to obtain an advance pricing agreement (APA) in Ukraine.
In order to determine feasibility of the APA conclusion and ensure proper preparation of the required documents and information, taxpayers have the right to submit an early engagement request to the State Fiscal Service of Ukraine. The State Fiscal Service of Ukraine shall review the request and respond to the taxpayer within 60 calendar days regarding the feasibility of submitting an APA application.
Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?
The legislation of Ukraine does not envisage specific anti-avoidance rules. However there is a statutory definition of “reasonable economic purpose” in the Tax Code of Ukraine. If there is no real aim of dealing with a contractor, the taxpayer has no right for compensation of amount of VAT. or for the deduction of its expenses for basis of assessment for CIT. The anti-avoidance rules may also involve thin capitalization rules and transfer pricing rules.
Also to prevent tax avoidance, limitations are imposed on the deductibility of payments to non-profit and government-financed organizations; payments to nonresidents registered in “low-tax” jurisdictions; and royalty payments to nonresidents.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Ukraine became a member of the inclusive framework for BEPS implementation on the 1st of January 2017. Some recommendations were implementing during the tax reform of 2016 as part of transfer pricing rules. In May 2017, the Ministry of Finance of Ukraine adopted the Implementation Guidance Action Plan on BEPS. It contains four actions that are the minimum standards to implement the Plan on BEPS: the Action 5 is “countering harmful tax practices more effectively, taking into account transparency and substance”; Action 6 is “preventing the granting of treaty benefits in inappropriate circumstances”; Action 13 is “guidance on transfer pricing documentation and country-by-country reporting”; Action 14 is “making dispute resolution mechanisms more effective”. It is planned that these actions will be completed by 2019.
How will BEPS impact on the government’s tax policies?
As every country that started the process of implementation of the BEPs recommendations, Ukraine has to enter a set of tax reforms that it required by OECD. The implementation of the BEPS Minimum Action Plan standard will effectively counteract aggressive tax planning, erosion of the tax base and the elimination of tax-free profits. And the first reforms will refer to CFC rules, new types of reports for transfer pricing operations and prevention of abuse of international tax treaties.
As any elements of taxes and charges can not be made later than six months before the start of the new budget period, the process of implementation of the BEPS Plan will be take a few years.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Ukraine does broadly follow the recognized OECD model of taxation.
Business profits are subject to taxation by profit tax. As a general rule, profit tax is a flat rate of 18%. However, in cases established by the Tax Code of Ukraine, the profit tax rate may differ. For example, for taxation of income under insurance agreements, the profit tax rate may be increased depending on the type of insurance agreement.
Employment income and pensions are subject to personal income tax. Employment income is taxed at flat rate of 18%. Pensions are subject to taxation only if their amount exceeds ten subsistence minimums for disabled persons, (in a month) established on January 1 of the reporting tax year. In this case, part of such excess is taxed at a flat rate of 18% unless otherwise established by the law.
Savings income, royalties, and capital gains are also taxed at flat rate of 18%.
It should be noted, that the currently aforementioned personal income is also subject to taxation by a temporary military contribution at flat rate of 1.5%.
The VAT is set at a flat rate of 20%. However, in cases established by the Tax Code of Ukraine, it may be set at rates of 7% (for example, for the supply of medicinal products authorized for production and use in Ukraine, and entered into the State Register of Medicinal Products) or 0% (for example for the export of goods). Therewith, certain supplies are not subject to VAT or exempt from taxation.
The land tax is a kind of property tax. Rates of land tax are set by local governments within the limits established by the Tax Code of Ukraine. Therewith, land tax rates depend on the type, location, and land appraisal - if it was made. If there was no appraisal of land, tax rates depend on the land area.
Ukraine does not impose stamp and/or capital duties.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, profit tax is charged to, broadly, the revenue profits of a business as computed according to the national accounting standards and international financial reporting standards. Therewith, the annual revenue from any activity determined in accordance with accounting rules includes income (revenue) from the sale of products (goods, works, services), other operating income, financial income, and other income.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
In Ukraine only limited liability companies, joint-stock companies, individual entrepreneurs, etc., are recognized as taxable entities. Therewith, partnerships, trusts are not recognized as taxable entities in Ukraine and there are no companies which are transparent for tax purposes.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Taxpayers of profit taxes are resident companies, which receive profits from a source of origin in Ukraine and from abroad and non-resident companies which receive profit from a source of origin in Ukraine.
The determinative factor concerning whether a company is a resident of Ukraine, is the fact of its registration on the territory of Ukraine. Resident taxpayers are legal entities registered in Ukraine, which carry out their business activities - both on the territory of Ukraine and abroad. Non-resident taxpayers are legal entities registered abroad, which receive income from a source of origin from Ukraine, and permanent representative offices of non-residents that receive income from a source of origin from Ukraine or perform agency (representative) and other functions related to such non-residents or their founders, unless otherwise established by the law.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
In Ukraine, companies and individual entrepreneurs, which meet requirements established by the Tax Code of Ukraine, may choose a simplified taxation regime, which means they don’t pay profit taxes but instead must pay a single tax at max rate of 5 %.
The Tax Code of Ukraine establishes three groups of taxpayers of the single tax. The affiliation of companies and individual entrepreneurs to the respective group, depends on the type of business activity, the number of employees, and the amount of income within calendar year.
Therewith, the Tax Code of Ukraine establishes a special fourth group for the simplified taxation regime for agricultural commodity producers. For payers of the single tax of the fourth group, the size of the single tax rates depends on area, appraisal, and location of agricultural lands.
In addition there are some other tax incentives in a wide range of prioritized sectors of the economy (agriculture, information technology, aircraft, etc.).
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There are no particular tax regimes applicable to intellectual property, such as a patent box.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Ukraine does not provide for fiscal consolidation of company groups. Each company must pay profit tax on its profits and individually bear the risk of losses.
Are there any withholding taxes?
As a general rule, non-residents’ profits from a source of origin from Ukraine are taxed by withholding taxes at rate 15%. Therewith, the aforementioned tax rate may be reduced in accordance with a tax treaty on avoiding double taxation, and in cases established by the Tax Code of Ukraine.
Are there any recognised environmental taxes payable by businesses?
Yes, companies pay environmental tax at graduated rates established by the Tax Code of Ukraine, if during their activities on the territory of Ukraine and within its continental shelf and exclusive (marine) economic zone, any of the following are carried out: emission of pollutants into the air by stationary sources of pollution, discharges of pollutants directly into water bodies; waste disposal (except for the placement of certain types/classes of waste as secondary raw materials, placed on their own territories (objects) of entities), etc.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
In Ukraine dividend income received from resident and/or non-resident companies is taxed.
If an individual receives dividends, such income is subject to taxation at the personal income tax at rate 5% or 9%, plus the military contribution rate of 1.5%.
If such dividends are paid by a resident company, the company shall act as a tax agent, and shall hold and pay the taxes on behalf of the individual. If such dividends are paid by non-resident company, the individual who receives them shall declare such income and pay all taxes by himself.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
There are several significant advantages of Ukrainian tax system:
- an extensive system of double taxation treaties;
- the existence of broad variety of tax incentives in a wide range of prioritized sectors of the economy (agriculture, information technology, aircraft, etc.);
- the existence of simplified taxation regime;
- an active moratorium on tax inspections.
At the same time there are also several disadvantages of Ukrainian tax system:
- the lack of stable tax legislation;
- an unstable judicial practice in tax disputes;
- difficulties in interacting with tax authorities.