Ukraine tax reform 2020: BEPS legislation is adopted in the first reading
5 December 2019
On 3 December 2019 the Verkhovna Rada of Ukraine adopted in the first reading a draft law "On Amendments to the Tax Code of Ukraine on Improving Tax Administration, Removing Technical and Logical Mismatches in the Tax Legislation" No.1210 of 30 August 2019 (hereinafter, “the BEPS Draft Law”).
The BEPS Draft Law suggests amendments to the Tax Code of Ukraine aimed at introducing measures to counteract BEPS in Ukraine and significant charges to tax administration procedures. The key proposed changes are as follows:
Corporate Income Tax and Transfer Pricing
- Rules for calculation of limitation for deductible interest expenses in financial transactions would change significantly: (1) limitation would apply regardless of debt to equity ratio of the Ukrainian borrower; (2) 30% tax EBITDA would be set as a cap for deductible expense instead of 50% financial EBITDA; (3) the limitation would apply to all interest expenses; (4) non-deductible expenses cannot be carried forward to future tax periods.
- 30% upward adjustment in sales to residents from low-tax jurisdictions and to fiscally transparent entities: resident companies would increase taxable basis for corporate income tax by 30% of the value of goods/ works/ services sold to residents of “low tax” jurisdictions, and foreign companies having special legal forms (exceptions may apply).
- Introduction of a “business purpose test” in transactions with nonresidents for the purposes of corporate income tax and transfer pricing (hereinafter - “TP”).
- Implementation of three-tiered TP reporting in accordance with the OECD BEPS Action Plan: in addition to local file, multinational groups would be required to prepare a master file and a country-by-country report. Proposed revenue thresholds are in line with OECD recommendations: EUR 50 mln. for the master file and EUR 750 mln. for the country-by-country report.
- Introduction of new tax adjustments: FX exchange profit/ loss, royalty expenses in transaction with Ukrainian joint investment institutions, and some other adjustments.
Controlled Foreign Companies
- Introduction of controlled foreign companies (CFC) rules in Ukraine that suggest taxation of undistributed profit of CFCs at the level of Ukraine-resident owner (natural or legal person).
Transactions with Nonresidents
- Adjustment of the price to arm’s-length level under TP rules and certain other payments to nonresidents of Ukraine would be treated as dividend equivalent payments that are subject to 15% withholding tax and 18% advance corporate income tax.
- Conditions for claiming benefits under the tax treaties would change: (1) if the immediate recipient of Ukraine-source income is not a beneficial owner of income, the tax treaty with the jurisdiction of the beneficial owner could apply in Ukraine (look-through approach would be allowed); (2) introduction of a principal purpose test in the Ukraine domestic laws (the convention does not apply if the main purpose of the arrangement or the structure is to obtain tax benefits).
- Taxation of indirect transfer of shares in asset-rich companies: 15% withholding tax would apply to profit derived by nonresident companies in offshore transfer of shares that directly or indirectly derive their value from real property situated in Ukraine (including leased property).
- Permanent establishments of nonresident companies: (1) the domestic definition of a permanent establishment would be amended to align it with the updated definition under the OECD Model Income Tax Treaty; (2) new administrative procedure would be introduced to inspect nonresidents that carry on business operations in Ukraine raising to the level of taxable permanent establishment but fail to register and pay taxes in Ukraine.
Tax Administration Procedures
- The amounts of fines for violation of tax laws would be increased. The concept of “willful misconduct” would be introduced as a condition for applying higher fines to taxpayers.
- The mutual agreement (MAP) procedure for resolving tax disputes under the double taxation conventions would be introduced in domestic laws (effective tax legislation does not provide for relevant rules).
- 20% VAT would be charged on the negative difference between sale price and acquisition cost/ arm’s-length value of the goods in export operations.
Please follow the link for detailed comments on the changes proposed by the BEPS Draft Law (in Ukrainian).
Please note that the BEPS Draft Law is now being prepared for the second reading by the Parliament of Ukraine, and the text of the bill may change. Notably, according to information from the transcripts of the session of the Parliament, the key changes to the draft law may refer to interest expenses limitation rules, CFC rules, penalties, etc.