The Ukrainian Parliament adopted a law that substantially changes the Ukrainian taxation system
Tax & Legal Alert
11 January 2018
The Law of Ukraine “On amendments to the Tax Code of Ukraine aimed at balancing 2018 budget receipts” (the “Law”) was published on 30 December 2017. Below you may find a summary of major tax legislation changes introduced by the Law.
Law of Ukraine “On amendments to the Tax Code of Ukraine aimed at balancing 2018 budget receipts”:
- Changes in the value threshold for major taxpayers: a taxpayer is included with major taxpayers if its income exceeds EUR 50 million over four successive tax (reporting) quarters, or if its total payments to the state budget for the same period exceed the equivalent of EUR 1 million (provided that the specified amount exceeds EUR 500 thousand exclusive of customs payments).
Value added tax
- VAT holiday on exports of certain industrial crops (a zero percent VAT rate was previously applied), in particular:
- Soybeans – from 1 September 2018 to 31 December 2021
- Rape and rocket-cress – from 1 January 2020 to 31 December 2021
This change will push exporters to impute VAT liabilities when purchasing these goods. A zero percent VAT rate will apply to the exports of other agricultural crops.
- The adjustment calculation reducing the amount of compensation for the cost of goods/services must be registered within 15 days from the receipt of the relevant adjustment calculation by the buyer.
- The taxpayer must additionally impute VAT liabilities in accordance with para. 198.5 of the TCU with respect to goods/services and non-current assets only if VAT was paid at the time of the purchase/production of such goods/services and non-current assets.
- VAT and excise duty holiday (until 31 December 2018) on the import and sale of electric vehicles (including those made in Ukraine) under commodity subheading 8703 90 10 10 in the Ukrainian Classification of Commodities for Foreign Economic Activities, in the customs territory of Ukraine.
- If the goods were purchased (made) before 14 April 2014 and remain within temporarily occupied territories and the engagement line as of 1 January 2017, such goods are not regarded as being used in the taxpayer’s non-business activities. For the purposes of this provision, the Free Economic Zone of the Crimea is to be treated as a temporarily occupied territory.
- All registered pharmaceuticals, medicinal products and medical devices are subject to VAT at seven percent.
- The Law extends the list of software, the delivery of which is VAT exempt: added copies of computer programs, their parts and components (either in physical or electronic form), updates, applications, extras/plug-ins and the rights to such extras/plug-ins. VAT exemption applies to all transactions involving such software, except royalty payments.
- The Law extends the applicability of VAT relief for entities engaged in space activities.
- Installment payment (up to 24 months) of VAT on the import of certain categories of machinery and equipment is applicable until 1 January 2020 in accordance with the procedure established by the Cabinet of Ministers.
- Goods with a total value of up to EUR 500 and weighing up to 50 kg are subject to VAT when imported into Ukraine (except if imported by air) in hand-luggage and/or accompanying baggage by a person who has been outside of Ukraine for less than 24 hours or arrives in Ukraine more than once within 72 hours, the tax base being the total value of such goods in excess of the equivalent of EUR 50.
- Goods with a total value of up to EUR 50 and weighing up to 50 kg are not subject to VAT when imported into Ukraine in hand-luggage and/or accompanying baggage, irrespective of the frequency of border crossing by the person importing the goods.
- The delivery of goods by one consignment (dispatch) in international express shipments (international postal items) to the address of one consignee – a legal entity or individual entrepreneur is not subject to VAT, provided that the total value of the goods shipped does not exceed EUR 150 (from 1 January 2019).
- Only the first three international postal/express shipments delivered within a month to the address of one consignee - individual with a value of up to EUR 150 each, will not be subject to VAT (from 01 January 2019).
Changes in VAT Invoice/Adjustment Calculation registration suspension
- The Law suspends the provision regarding the criteria of the automatic suspension of registration (hereinafter, the “Criteria”) of VAT Invoices/Adjustment Calculations (hereinafter, “VATIs/ACs”).
- Within three months from the effective date of the Law, the Cabinet of Ministers plans to elaborate a new procedure for suspending VATI/AC registration.
- Until the new procedure for suspending VAT invoices comes into effect, the provision regarding the sufficiency of VAT Invoice/Adjustment Calculation registration with the Single Register of VAT Invoices for inclusion of VAT amounts in VAT input without additional confirmation is suspended.
- Those VATIs/ACs, the registration of which was suspended in accordance with the Criteria, should be registered no later than 2 January 2018, except for:
- VATIs/ACs for which no explanations and copies of the documents were submitted as of 1 December 2017
- VATIs/ACs, the registration of which was rejected and no appeal procedures were initiated either administratively or through legal action as of 1 December 2017
- Those VATIs/ACs, the registration of which was suspended in accordance with the Criteria and for which the explanations were provided after 1 December 2017, are to be registered in accordance with the procedure that was applicable before the effective date of the Law. If no decision to refuse registration of such VATIs/ACs is made within five business days, the relevant VATIs/ACs will be registered on the next business day after the expiry of this term
- This change allows the taxpayers to freely register their VATIs/ACs; however, the taxpayers may have difficulties with providing explanations and filing documents on the VATIs/ACs that were blocked before 1 December 2017.
Corporate income tax
- The Law establishes a 60-day reporting period for an annual CIT Return prepared year-to-date.
- Financial result before tax is not to be reduced by the amount of dividends receivable from single tax payers.
- The Law extends the list of non-residents, business relations with which may bring an increase in financial results by 30 percent of the cost of goods/services purchased, to include non-residents that are not corporate income tax payers (including on income sourced outside the country of their registration) and are not tax residents in the countries of their incorporation. The list of organizational legal forms of such non-residents is to be approved by the Cabinet of Ministers
- According to the regulations added, the financial result before tax is required to be increased by:
- The amount of funds, the cost of goods/provided services transferred free-of-charge during the reporting year to entities operating in the area of physical training and sports, which are not-for-profit organizations as of the date of such transfer of funds, goods, work, services in the amount exceeding eight percent of the taxable income for the previous reporting year;
- The amount of full or partial compensation paid once a calendar year to an employee to cover the cost of vouchers for the employee’s and/or his/her underage children’s rest, recreation and medical treatment in Ukraine, by the employer as a CIT payer, unless such compensation is included in the total monthly (annual) taxable income of the individual – PIT payer, as provided for by the TCU.
- The Law lifts the limitation on costs related to assets provisioning which banks and other financial institutions include in their taxable income. At the same time, they may reduce their financial result before tax by the unused part of excess over the limit that was added to the financial result before tax in the previous periods. Such a reduction is to be made quarterly in equal parts throughout 2018-2019.
- The law makes clarifications regarding the non-applicability of adjustments to the financial result before tax by the amounts of used provisions in case a lender forgives a debt (except for the debts of related individuals and some categories of individuals that were or are employed by the lender).
- Any increase/decrease of provisions for the assets of banks and other financial institutions in view of the introduction of IFRS 9 (as will be shown on capital accounts) must be included in their expenses/income for the purpose of calculating their taxable income.
- Taxpayers are allowed to reduce the CIT amount by the amount of excise tax paid on diesel fuel used by diesel locomotives and dump trucks with a carrying capacity of over 75 tons.
- If the volume of business transactions between a non-resident and its permanent establishment exceeds UAH 10 million in the relevant year, such transactions are to be treated as controlled. However, seeing that the non-resident and its permanent establishment constitute one and the same legal entity, this gives rise to questions regarding the applicability of the provision.
- To determine whether or not the taxpayer’s business transactions are to be treated as controlled, the volume of such transactions should be calculated based on arm’s length prices (instead of contractual prices as was previously commonly used in practice). These changes are intended to eliminate possible abuses such as a deliberate understatement of contractual prices; however, they may give rise to disputes with the tax authorities concerning the determination of whether the transactions should be treated as controlled.
- A request for filing transfer pricing documentation should not be sent until 1 October of the year that follows the year of the controlled transaction concerned. This means that the request deadline is aligned with the deadline for filing a report on controlled transactions.
- Self-adjustments regarding controlled transactions performed in 2015 and 2016 should be made in accordance with the regulations in effect at the time of such adjustments. This is a favorable change since it allows the adjustment of 2015 and 2016 transactions according to the regulations now in force (to the maximum/minimum market range value rather than the median value).
- The related parties list for transfer pricing purposes is extended to include, in particular, cases when:
- The ultimate beneficial owner of legal entities is one and the same individual
- An individual is the ultimate beneficial owner of a legal entity
- One and the same person exercises the authority of a sole executive body
- Extended criteria for including states in the list of low-tax jurisdictions. The list will be formed depending on whether there is a preferential tax treatment and whether it is possible not to pay corporate income tax in such jurisdictions.
- An updated list of information on the taxpayer and related parties to be included in TP documentation. Such information must be up-to-date in the reporting period in which the controlled transaction was performed and current as of the date of filing the TP documentation.
- The tax authorities are allowed to check on the compliance of the company’s payments to non-residents from low-tax jurisdictions, non-profit organizations, and royalty payments (under paragraphs 140.5.4, 140.5.6 of the Tax Code of Ukraine) with the arm’s length principle, during regular scheduled audits. Thus, the Law has eliminated the existing legislation lapse and permitted the checking of non-controlled transactions for compliance with CIT requirements within a routine audit.
- The tax authorities may now perform transfer pricing crosschecks.
- Substantial changes/amendments regarding preliminary pricing approval agreements (“PPAAs”), specifically:
- Should a taxpayer fail to comply with the terms and conditions of a PPAA, the latter shall become void from its effective date.
- A PPAA may apply to previous periods.
- The terms and conditions of a PPAA remain unchanged in case of changes in tax legislation.
- Payers of single tax are exempt from single tax advance payments on the distribution of dividends.
- Taxpayers must pay withholding tax on income paid to non-residents.
- Group 4 taxpayers are to calculate 2017 tax liabilities using a consumer price index of 1.
Local taxes and rent
- Introduction of the “new well” concept for the purpose of applying an individual rent rate to natural gas production.
- Rent rates for condensate are reduced to 29 percent for pools fully or partially deposited at a depth not exceeding 5,000 meters, and to 14 percent for pools fully deposited at a depth exceeding 5,000 meters (from 1 January 2019).
- The incentive rate of subsoil use rent is set for five years for natural gas produced from new wells.
- Coalbed methane degassing volume is not subject to taxation.
- Coalbed methane use will be exempt from CIT until 1 January 2020.
- Increase in environmental tax rate.
- The Law clarifies that payment for the transfer of the right to distribute intellectual property without the right to reproduce such intellectual property is not to be treated as a royalty.
- “Live fermentation” rye beer (kvass) is excluded from the list of excisable goods.
- Special rules regarding source documents that support tax reporting and are within the occupied territories and the engagement line, are extended to the Free Economic Zone of the Crimea.
- A controlling authority official is accountable to the state by way of recourse in the amount of compensation paid from the budget due to unlawful decisions, acts or omissions of such official (officer).
- The Law provides a definition of a new term, “syndicated financial loan”. A special provision is introduced regarding the possibility of applying the provisions of conventions on the elimination of double taxation with each lender’s country in case of the payment of interest on syndicated loans through the arranger of such a loan.
If you have any questions or comments regarding the information contained in this alert, please do not hesitate to contact our Tax & Legal professionals.