Cabinet of Ministers Extends the Number of Countries Classified as Low-tax in Ukraine

On 27 December 2017, the Cabinet of Ministers of Ukraine passed Decree (hereinafter, the “Decree”) “On Approval of the List of Countries (Territories) That Meet the Criteria Set Forth in Article 39.2.1.2 of the Tax Code of Ukraine” (hereinafter, the “List”). The list includes the so-called “low-tax” jurisdictions (complete list is attached).

The Decree extends the List from 65 to 85 countries by adding 22 countries (including the United Arab Emirates, Malta, Morocco, Georgia, Estonia, Latvia and Hungary) and removing 2 countries (Kingdom of Lesotho and French Guiana).

Under Article 39.2.1.2 of the Tax Code of Ukraine, transactions with a counterparty registered in the country (territory) included in the List shall be treated as controlled transactions from 1 January 2018. Before that date, the previous list of “low-tax” jurisdictions shall be applied. Given the significant extension of the List, the number of taxpayers’ transactions to be treated as controlled may increase in 2018.

We advise you to check the countries of registration of your non-resident counterparties against those included in the List in order to find out whether the List extends the number of the controlled transactions of your company.

The following special rules shall be applied to the transactions with the residents of the countries included in the List:

• Business transactions of taxpayers with all residents of the countries (territories) included in the List shall be treated as controlled transactions for transfer pricing purposes (irrespective of whether or not such residents are related parties).
• Taxpayers lose the right to deduct 30% of the cost of goods, work, services purchased from residents of such countries (territories) within non-controlled transactions only, unless the taxpayers prove that the terms of such transactions are arm’s length.