In May 2020, amendments to the Tax Code of Ukraine entered into force. They touched upon the improvement of tax administration, as well as the elimination of technical and logical inconsistencies in tax legislation.
What innovations can be considered as the major ones?
1) The rules on controlled foreign companies have been introduced.
A controlled foreign company is a legal entity registered in a foreign jurisdiction that is recognized as being under the control of a private person or legal entity – resident of Ukraine.
The presence of control is evidenced by:
– direct or indirect ownership of shares in a foreign company in the amount of more than 50%;
– direct or indirect ownership by several residents of Ukraine of shares in a foreign company in the amount of more than 10%, if such shares together exceed 50%;
– exercise, individually or together with other residents – associates, of actual control over a foreign company.
Actual control in this case is understood as the ability to directly influence the business of the company, including the ability to act on behalf of the company by proxy, carry out account transactions, negotiate, etc.
Recognition of a person as controlling entails tax consequences for him in the form of an obligation to submit a report on a controlled foreign company and to pay personal income tax or income tax on part of the adjusted profit of such a company in Ukraine.
The rules on controlled foreign companies enter into force on January 1, 2021.
2) Transfer pricing standards have undergone changes.
Transfer pricing requirements apply to the following controlled business transactions:
– operations with related non-resident persons;
– foreign economic operations on the sale and / or purchase of goods and / or services through non-resident general commission agents;
– operations carried out with non-residents registered in low-tax jurisdictions;
– operations with non-residents who do not pay income tax (corporate tax) and / or who are not tax residents in the jurisdiction of their registration;
– operations between a non-resident and his permanent mission in Ukraine.
In Ukraine, it is planned to introduce a three-level reporting system for transfer pricing:
– it is assumed that a taxpayer, a member of an international group of companies, is obligated to provide, upon request, global documentation on transfer pricing (master file) if the total consolidated income of the international group for the last reporting period was no less than 50 million Euros. A corresponding request for the first time can be sent for a fiscal year that ends in 2021.
– a taxpayer-resident of Ukraine, belonging to an international group of companies with consolidated income of 750 million Euros or more for the previous reporting period, is obliged to submit a country report (country-by-country report, CBC) if any of the following conditions is met:
1) the taxpayer is the parent company of the group;
2) the parent company of the group authorized the taxpayer to submit a report;
3) in the state of location of the parent company, the submission of such a report is not required, and other companies of the group are not authorized to submit it;
4) non-entry into force of the procedure for the exchange of country reports between Ukraine and the jurisdiction of the location of the parent company or the presence of systematic violations of the corresponding order by the latter.
3) in the state of location of the parent company, the submission of such a report is not required, and other companies of the group are not authorized to submit it;
4) non-entry into force of the procedure for the exchange of country reports between Ukraine and the jurisdiction of the location of the parent company or the presence of systematic violations of the corresponding order by the latter.
3) Certain types of payments are equated to dividends.
From January 1, 2021, dividends will be equal to:
a) the amount of income in the form of payments for securities (corporate rights) in controlled transactions, if they exceed the amount in accordance with the “outstretched hand” principle and are paid in favor of the following non-residents: related parties; persons registered (being residents) in low-tax jurisdictions; persons included in the corresponding list of legal forms of the CMU;
b) the value of goods (works, services) (except for securities and derivatives) purchased from a non-resident in controlled transactions and exceeding the amount in accordance with the “outstretched hand” principle, if such a non-resident is: a related party; a person registered (being a resident) in low tax jurisdictions; persons included in the corresponding list of legal forms of the CMU.
c) the amount of underestimation in accordance with the “outstretched hand” principle of the cost of goods (works, services) provided to a non-resident in controlled transactions, if such a non-resident is: a related party; a person registered (being a resident) in low tax jurisdictions; persons included in the corresponding list of legal forms of the CMU;
d) payments in cash or non-monetary form, made in favor of the founder and / or participant (s) of the company in connection with the distribution of net profit (its part);
e) payment in cash or non-monetary form, made in favor of the founder and / or non-resident participant of the company in connection with: a decrease in the authorized capital; redemption by the company of corporate rights in its own authorized capital; withdrawal of a participant from the membership or a similar transaction between a company and its participant in an amount leading to a decrease in retained earnings of a legal entity.
4) Taxation has been introduced on transactions with corporate rights of a non-resident, the value of which is formed by holding shares or stakes of legal entities in Ukraine that own real estate.
From July 1, 2020, income from the source of origin in Ukraine includes profit from the alienation of shares, stakesd, corporate and other similar rights in foreign companies, while meeting the following conditions:
a) at any time during the 365 days before the sale or disposal, the value of shares, stakes, corporate and other similar rights in foreign companies is formed by more than 50 percent from the shares or stakes in a Ukrainian company owned by such a foreign company directly or indirectly;
b) at any time during the 365 days before the sale or other alienation, the value of shares or stakes of a Ukrainian company by more than 50 percent is formed by real estate in Ukraine owned by such a company or used by it on the basis of a long-term lease, financial leasing or similar agreement .
A non-resident acquiring shares, stakes, corporate and other similar rights in the relevant foreign company is required to withhold a tax of 15% on payments for such an acquisition, unless otherwise provided by the agreement on avoidance of double taxation with the jurisdiction of residence of persons in whose favor the relevant payments are made.
5) The rules on insufficient capitalization have been changed.
Restrictions on the deduction of interest payments will apply if the amount of debt in transactions with non-residents exceeds their own capital by more than 3.5 times. In this case, the size of the restriction on interest costs is set at 30% of the object of taxation with income tax for the corresponding period, increased by the amount of financial costs and depreciation.
The rules of insufficient capitalization do not apply and the financial result for taxation does not increase by the amount of interest subject to capitalization and does not affect the financial result for taxation until the relevant non-current asset is put into operation.
6) The criteria of the beneficial owner of the income have been clarified.
From May 23, 2020, the following shall not be recognized as the beneficial owner of income:
– persons without sufficient authority or in the absence of the right to use and dispose of the income received, if the latter is confirmed by facts and circumstances;
– persons who transfer the received income or its predominant part in favor of another person, regardless of the method of registration of such a transfer and in the absence of significant functions, assets and risks in such a transfer, and / or do not have sufficient resources (qualified personnel, fixed assets, sufficient equity capital, etc.) necessary for the performance of functions, the use of assets and risk management, which are associated with obtaining the appropriate income.
7) The provisions on increasing the financial result for certain transactions with non-residents have been amended.
The legislator envisaged the introduction of rules from May 23, 2020 to increase the financial result for the reporting period, in particular in such cases:
1) in the amount of 30% of the value of goods, including fixed assets, works and services (other than controlled operations) realized in favor of:
– non-residents registered in low tax jurisdictions;
– non-residents in the legal forms included in the corresponding list of CMU.
2) the amount of expenses incurred by the taxpayer in transactions with non-residents, if such operations do not have a business purpose.
8) Limited access to contractual benefits in inappropriate situations.
No tax exemption or reduced source tax rate under the double tax treaty is provided if the main or one of the main objectives of the operation is to directly or indirectly obtain the relevant contractual benefits.
The negative consequences of applying this rule do not occur if the acquisition of contractual benefits is recognized as being consistent with the object and aims of the international treaty of Ukraine. At the same time, this rule is not applicable if other rules are provided for by the current international treaty of Ukraine.
9) The provisions on the tax consequences of transactions of individuals with investment assets have been amended.
In the case of transactions for the sale or purchase by an private person resident of Ukraine of an investment asset (for example, shares or stakes in a foreign company), the income and expenses of such operations should be determined in accordance with the “outstretched hand” principle, that is, not to be undercharged during the sale and not to be overcharged during the purchase in comparison with the regular price. The resulting investment profit from such operations should be taxed on the income of private persons in Ukraine.
Innovations concern only transactions with non-residents who are related parties or are registered in low-tax jurisdictions.
10) The possibility of establishing the residency of Ukraine for foreign legal entities has been introduced.
Legal entities that are established in other jurisdictions, but at the same time have an effective place of management in Ukraine, are recognized as payers of income tax in Ukraine, which may indicate compliance with any of the following criteria:
– meetings of the executive body of a foreign company occur more often in Ukraine than in other jurisdictions;
– adoption of management decisions and the implementation of other current (operational) activities of a foreign company by its officials mainly from Ukraine;
– actual management of the activities of a foreign company from Ukraine, regardless of formal authority (managing a bank account of a foreign company; maintaining accounting or management records of a foreign company; managing personnel of a foreign company).
11) Amendments were made regarding the identification and taxation of the permanent representation of a non-resident.
To establish the presence of a permanent representation it is enough to meet one of the following criteria:
– the presence of a construction site, a construction, prefabricated or assembly facility or the conduct of related surveillance activities if the total duration of work associated with such a site, facility or activity (within the framework of one project or related projects) that is carried out by a non-resident through employees or other personnel hired by him for such purposes for more than 12 months;
– a person, on the basis of an agreement or actually, has and usually exercises the authority to negotiate with respect to the essential conditions of transactions, which leads to the conclusion by the non-resident of agreements (contracts) without significant changes in the latter;
– a person, on the basis of an agreement or actually, has and usually exercises authority to conclude agreements (contracts) on behalf of a non-resident in case if the specified activity is carried out by a person in the interests, at the expense and / or in favor of only one non-resident and / or associated with him non-resident persons .