Draft Law No.5600 on Amending the Tax Code is sent to the President for signature
Tax & Legal Alert
On 20 December 2021, the President signed Draft Law No.5600 on Amending the Tax Code of Ukraine and Certain Legislative Acts of Ukraine Aimed at Ensuring Balanced Fiscal Revenue (hereinafter, the Draft Law). The Draft Law introduces substantial changes to the tax legislation.
This alert provides a summary of key tax rules set out in the Draft Law that will have an effect on Ukrainian business. Changes to the Tax Code are effective from 01 January 2022, except for certain clauses specified below.
Corporate Income Tax
- Restriction on the utilization of tax losses. Effective from 2022, tax loss carry forwards for large taxpayers are limited to 50% of losses reported in the previous year (losses generated as a result of 2021, if any, can no longer be carried forward in full). However, if tax loss carried forward from previous years does not exceed 10 percent of taxable profit for the reporting period, the taxpayer may reduce the amount of profit/loss before tax for this tax (reporting) period in full. The restriction applies to large taxpayers.
First time application: in tax reporting submitted during 2022. Tax losses reported before 2022 may be carried forward without restrictions only in 2021.
- Non-repayable financial aid is not deductible. It is not allowed to recognize as deductible the non-repayable financial aid (goods, services) provided to a related party if the recipient reported tax losses in the previous reporting year.
- CIT exemption for green tariff power supply activities. For the time being, until 01 January 2024, green tariff power producers have the right not to include income/expenses related to such power supplies in the calculation of CIT liabilities (i.e. the profit from such activities will be not taxable).
Personal Income Tax
- The Draft Law formalized the taxation of an individual's foreign income from an unincorporated entity. The list of certain types of foreign income that are subject to special tax rules was amended to include income received from an entity having no legal status (such as partnership, trust, fund) and established on the grounds of a legal deed or registered under the laws of a foreign state (territory). Income received from such entity in connection with the distribution of profits or a part thereof for the current period and/or accumulated (retained) from previous periods, shall be included in the total annual taxable income of the recipient taxpayer and taxed at 9%.
- Changes in the rules for taxation of income from sale of immovable property. Income received by a taxpayer from the sale, over the course of one year, of a third and any subsequent immovable property (except alienation of residential property by the banks in the foreclosure procedure under mortgage agreements that secure a loan granted in foreign currency) or, in some cases, income received from the sale of a second and subsequent immovable property, shall be taxed at 18%. However, the amount of taxable income may be reduced by the amount of documented costs incurred to purchase such immovable property. Income received by a taxpayer from the sale, over the course of one year, of a third and any subsequent real property that was inherited, shall be taxed at 5%.
- The Draft Law clarifies the requirement to confirm expenses in order to claim tax relief. To confirm the taxpayer's expenses for tax relief purposes, the tax authorities may not request information, documents and/or copies of documents contained in the automated information and reference systems, registers, data banks (databases) of public authorities, information from which can be obtained by the tax authorities free of charge.
In 2021 and 2022, the taxpayers are allowed to claim tax relief to cover COVID-19 costs.
Henceforth, tax relief on certain types of expenses may be claimed by guardians, caregivers, adoptive parents and foster parents.
- Supply of goods/services using a local or global computer network was added to the list of criteria for mandatory registration of entities/individuals as VAT payers. The Draft Law specifies that an entity/individual must register as a VAT payer in case of supply of goods/services using a local or global computer network (including, but not limited to, the supply of goods/services by installing a dedicated application on smartphones, tablets or other digital devices) during 12 months, to the amount that exceeds UAH 1 million.
- Changes to the VAT treatment of software supply. The place of supply of software shall no longer be determined by the place where the recipient of services is registered as a business entity. Accordingly, the taxation of such supply is subject to general rules (i.e. the place of services supplier). However, the provision under which the supply of software products as well as the transactions involving software products are exempt from VAT, will remain in effect until 01 January 2023.
- Changes to the VAT treatment of tobacco products. The Draft Law introduces a new concept of VAT treatment of tobacco products for which maximum retail prices (MRPs) are set. According to the Draft Law, manufacturers of tobacco products, tobacco, industrial tobacco substitutes and liquids used in electronic cigarettes for which MRPs are set, as well as resident related parties and importers of such products will be responsible for payment of VAT on such products. MRP shall be the tax base. When resold, such products shall be exempt from VAT (except when sold to resident related entities). The list of parties related to tobacco manufacturers is to be approved by the Cabinet of Ministers of Ukraine (paras. 24 and 26 of the Draft Law, Articles 189.18, 190.1 and 197.27 of the TCU).
- The timeframe for including VAT amounts in VAT input is significantly reduced. The period during which the taxpayers have the right to include VAT amounts in VAT input is reduced from 1095 days to 365 days.
- The Draft Law introduces a new mechanism of imposition of retail excise duty on tobacco products, electrically heated tobacco products (EHTP) and liquids used in electronic cigarettes. Retail excise duty will be paid by manufacturers/importers on the maximum retail price (MRP) or contractual value (if MRP is not set) of the goods upon their supply. This procedure for payment of retail excise duty will become applicable only after the introduction of the mechanism for its payment to local budgets.
- Retail excise duty on liquids used in electronic cigarettes. Retail excise duty on liquids used in electronic cigarettes will be applied at the rate of 5%. Effective date: 01 January 2022, but not earlier than the effective date of amendments to the Budget Code of Ukraine regarding the introduction of mechanism for payment of excise duty on retail sale of excisable tobacco products, tobacco, industrial tobacco substitutes, and liquids used in electronic cigarettes, by business entities to local budgets.
- Changes in the method of excise duty calculation for some excisable product categories. The Draft Law provides for amendments to the tax treatment of beer, namely, the establishing of a tax rate based on the alcohol content of the beverage. The rate will be UAH 59.82 per liter of 100% alcohol compared to UAH 2.78 per liter of liquid as a whole. The above changes will come into effect from the first day of the third month following the effective date of this Law.
- Penalty for late payment of excise tax. Penalty at the rate of 10 percent of excise tax will be applied in case of late payment of excise tax at the purchase of excise stamps for tobacco products.
- Changed timeframe for the receipt of excise tax stamps. Timeframe for the receipt of excise tax stamps has been changed: previously, it was not more than five business days from the date of filing of relevant documents; according to the Draft Law, it shall not exceed three business days.
- Environmental tax rates increase. Proportional increase in the tax rates starting from 01 January 2022.
Rent for mineral extraction
- Changes in the calculation of the rent for subsoils use for iron ore mining. The actual sales price for iron ore is determined as an average value of iron ore according to IODEX 62% FE CFR China, translated into UAH per ton at the exchange rate of the National Bank of Ukraine, based on the information officially provided by Platts (international information agency).
New rental rates for iron and manganese ores are established. The rental rate will depend on the average value of iron ore according to the respective IODEX index, which is officially determined by Platts.
Adjustment factors are applied to the rental rates for subsoils use for mineral extraction that are determined based on a mineral resource (primary mineral product) type and its extraction conditions. In addition, the adjustment factor of 0.90 is approved for a new mineral resource category: "iron and manganese ore mining".
- Increase in local taxes and duties rates. Among other things, rental rates are increased for the use of subsoils for any purposes other than mining, the use of radio frequency resources, special use of surface water, and special use of forest reserves.
- The list of taxpayers has been updated and the definition of taxable item has been expanded. The procedure for determining the tax base for a land plot that was not subjected to a standard monetary valuation has been clarified.
- A new tax rate has been set and the list of taxpayers of the group IV has been updated. A new single tax rate has been set for taxpayers of the group IV which is to be calculated based on 1 ha of agricultural land or water fund land. In addition, it has been clarified that business entities engaged in poultry breeding or poultry meat production cannot be included in the group IV.
- The applicability of the group IV has been updated. The IV single taxpayer group shall be applicable until 01 January of the year that follows the year in which the Law of Ukraine on stimulating the development of Ukrainian agro-industrial complex in the light of the Common Agricultural Policy of the European Union in terms of provision of the state aid and rural development comes into force.
- Overseas travel ban for executives. The tax authorities are proposed to be entitled to apply to court for imposition of a temporary restriction on the right of a taxpayer's executive to go abroad (always provided that tax liabilities exceeding UAH 1 million were not cleared within 240 calendar days from the date the relevant tax request was sent (served), (para. 87.13 of the TCU)). In view of the above, the tax authorities' rights to obtain information about such executives or apply to court have been expanded. Effective date: 21 November 2021, but not earlier than the day that follows the date of publication of this Law.
- The notion of “minimum tax liability” has been introduced. This notion will be applied to individuals, individual entrepreneurs and legal entities who are owners or lessees of agricultural land or users of such land on other terms. That is, the payable amount of minimum tax liabilities will be calculated using a formula, and if this amount exceeds minimum tax liability, the difference shall be subject to payment. In order to calculate the difference, minimum tax liability will be compared to taxes and duties paid to the budget (including single tax, land tax, rent for special use of water, personal income tax, etc.). The first tax year is 2022. However, the penalties will be applied starting from 2023.
- The use of video recording devices during the tax audits has been allowed. Tax authorities and taxpayers have been allowed to openly use technical devices and technical means with sound, photo and video recording features during the tax audits. Such materials may serve as a ground for conclusions in the tax audit reports.
- Criteria for an unscheduled full-scope tax audit have been extended. It has been additionally stipulated that an unscheduled full-scope tax audit may be performed upon the receipt of information being indicative of violations of legislation on combatting and preventing the legalization (laundering) of proceeds from crime, financing of terrorism and financing of proliferation of weapons of mass destruction.
- Criteria for an unscheduled tax audit of VAT refund from the budget have been extended. The tax authority shall notify of an unscheduled tax audit, except the tax audit of VAT refund from the budget, 30 days prior to the audit.
- VAT exemption period for waste and scrap supply has been extended. VAT exemption period for supply of ferrous and non-ferrous metal waste and scrap as well as paper and cardboard for further recycling has been extended until 2027.
- The definition of royalty has been expanded. The Law has extended the definition of royalty (in particular, payments made by the user of copyrighted items and (or) related rights) in favor of collective management organizations are recognized as royalties); also, it contains a provision that includes royalties in the list of costs directly related to the receipt of income by an individual entrepreneur.
- Automatic exchange of information. The transitional provisions were complemented with a paragraph on automatic exchange of information on financial accounts within the framework of the Multilateral Competent Authority Agreement on automatic exchange of information on financial accounts (from the effective date of this agreement for Ukraine with at least one foreign jurisdiction).
Certain fiscal provisions contained in the previous wordings have not been included in the Draft Law:
- The final version of the law does not contain rules on tax lien for non-agreed amounts of monetary obligations.
- There are no rules regarding the limitation of VAT refund possibility only for certain sectors of the economy.
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