Parliament adopts important changes to recently enacted BEPS legislation
18 December 2020
On 17 December 2020, the Ukraine parliament adopted a tax reform bill containing important changes to the BEPS tax legislation enacted in May 2020.
The bill would defer certain measures to 1 January 2021 (or 2022 in some cases), while amending the scope and application of other measures. The changes primarily relate to permanent establishments (PEs), transfer pricing, controlled foreign companies (CFCs), thin capitalization rules, and general anti-abuse rules.
The bill now awaits the president’s approval and will be enacted into law after publication in the official gazette.
Taxation of permanent establishments
Amendments to the definition of a PE that came into effect on 23 May 2020, now would come into effect on 1 January 2021. The amendments include stricter rules for agency PEs with Ukraine-based personnel involved in contract negotiations (even if such personnel have no legal authority to sign contracts).
Similarly, the requirement that all PEs must compute their taxable income in accordance with the arm’s length principle, which came into effect on 23 May 2020, now would come into effect on 1 January 2021. The abolition of other methods as from 23 May 2020 has caused difficulty for taxpayers with PEs as they had to adjust quickly to the new arm’s length method.
For nonresidents that carry on business operations in Ukraine giving rise to a PE, the deadline for registering such PE would be 1 April 2021. As before, the tax authorities will have greater powers when auditing PE activities, and, if violations are discovered, issuing tax assessments and penalties to nonresidents.
The bill would introduce stricter requirements for substantiation of the business purpose of transactions subject to transfer pricing regulations. In addition, the bill would give greater powers to tax authorities when evaluating transactions; for example, one of the provisions enables tax authorities to disregard or “substitute” a taxpayer’s transaction should the tax authorities prove that unrelated parties “acting rationally” would not have entered into such a transaction.
There were no changes to the timing requirements for master files and country-by-country reports, both of which will have the first reporting year be 2021.
Controlled foreign companies
The year of enactment of the new CFC rules (which tax undistributed CFC profits at the resident shareholder’s level) would be postponed from 1 January 2021 to 1 January 2022. A grace period covering the years 2022 to 2023 also would be introduced. No penalties would apply during the grace period, but taxpayers still would be obligated to meet all reporting requirements.
Thin capitalization rules
The tax bill narrows the scope of the new thin capitalization rules, which rules are effective as from 1 January 2021. The rules would apply only to loans received from nonresidents (both related and unrelated). In addition, loans received from international finance institutions and foreign banks would be excluded from the scope of the rules.
Taxation of indirect transfers of shares in asset-rich companies
The introduction of a 15% withholding tax on gains derived by nonresidents from the indirect transfer of shares deriving most of their value from real estate situated in Ukraine would be deferred until 1 January 2021.
Business purpose test for corporate income tax purposes
The rules allowing the tax authorities to deny the deduction of expenses incurred in transactions with no business purpose would be deferred until 1 January 2022. Also, the scope of these rules would be limited to royalty payments to nonresidents, as well as transactions involving low-tax jurisdictions and entities incorporated in certain legal forms.
It is unclear how these rules will interact with the business purpose rules for transfer pricing purposes (discussed above), as both sets of rules are not particularly aligned and may be difficult to reconcile in practice.
The measures foreseen by the tax bill signify important changes to the BEPS tax legislation enacted in May 2020. Most measures would take effect as from 1 January 2021. Taxpayers should assess their cross-border structures and transactions to determine any potential impact of the new legislation.
Should you have any questions about the above Tax Alert, please contact the experts of the Tax and Legal department.