Important changes in tax and legal legislation coming into effect in 2021
Tax & Legal Alert
We have prepared this alert to give an overview of key changes in tax and legal legislation that take effect in 2021. Our review is arranged into the following main topic areas:
- Corporate Taxation
- Transfer Pricing
- International Taxation
- Individual Taxation
- Other changes
1. Thin capitalization rules. Changes in the procedure for calculating deductibility limit for interest expenses in favor of non-residents:
- changed formula for interest expense limit calculation (30% of taxable profit instead of 50% EBITDA according to financial statements);
- expended list of transactions falling outside the specified rules, viz.: (1) amounts of interest found to be non-compliant with the arm's length principle under Art.39 of the Tax Code of Ukraine (i.e. TP rules); (2) in favor of international financial organizations, which, under the international treaties of Ukraine, have privileges and immunity granted under credits (loans) obtained by business entities and secured by the state or local guarantees; (3) amounts of interest accrued in favor of foreign banks;
- interest being subject to capitalization under provisions of international and/or national accounting standards is not accounted before the relevant asset is placed into service.
2. Business purpose. The concept of business purpose test as fiscal instrument has been amended in terms of the form and mechanism of its application. The right to challenge transactions subject to proving the circumstances that are indicative of the absence of reasonable economic reason (business purpose) of their conduct will be applicable:
- from 01 January 2021 through 31 December 2021 to all transactions which are deemed to be controlled in terms of transfer pricing (TP):
- rationale/justification of economic expediency and existence of business purpose is an integral part of TP documentation;
- controlling authorities are entitled not to include (recognize) a controlled transaction in the calculation of the taxpayer's profit/loss before tax, or a transaction may be substituted with an alternative one in order to match the terms and conditions of an agreement (contract) that would be agreed upon by non-related parties acting on commercially rational terms in comparable conditions;
- from 01 January 2022 and thereafter (1) all transactions recognized as controlled in terms of TP; (2) transactions that are not controlled but (a) are performed by non-residents which are registered in low tax jurisdictions or have organizational legal form according to the CMU's list - purchase/sale of goods (work, services), and (b) royalty accrual transactions with non-residents;
- the right to challenge (exclude) expenses incurred in the performance of any transactions with non-residents, subject to proving the absence of business purpose, remains applicable to the transactions performed from 23 May 2020 through 31 December 2020.
3. VAT. Changes in VAT to be applied in the movie and entertainment industries, specifically:
- 7% VAT rate will apply to transactions in the entertainment and hotel industries;
- certain VAT exemptions are introduced for the movie industry.
4. Excise duty. Changes in the application of excise duty: (1) the list of goods being subject to the excise duty is extended to include liquids used in electronic cigarettes; (2) individual rates are set for electrically heated cigarettes and tobacco products (EHTP).
5. Excise duty invoice and other forms for excise duty payers. Effective 27 January 2021, new forms of excise duty invoices, adjustment calculations thereto, and applications for residual fuel and ethyl alcohol replenishment (adjustment) will be used.
6. Single account for tax payments was introduced.
7. Real estate accounting. Provisions on calculating a real estate share in the assets of a Ukrainian company, if such real estate is used based on the right of operating or financial lease (leasing), have been improved. More specifically, such use should be reflected in the legal entity’s accounting/statements as an asset, including a right-of-use asset, as required by UAS or IFRS.
Transfer pricing (TP)
1. Three-tiered TP documentation. In addition to a local file, multinational enterprises (MNEs) would be required to prepare a Masterfile and a country-by-country (CbC) report. Proposed revenue thresholds are in line with OECD recommendations (i.e., EUR 50 million for master files and EUR 750 million for CbC reports). The first reporting year for Masterfile and CbC reports would be 2021 (but not earlier than when Ukraine joins the OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbCR MCAA)).
2. Dividend-equivalent payments. Transfer pricing adjustments and certain other payments to nonresidents (payments for buyout of shares and certain types of divestment) would be treated as dividend-equivalent payments subject to a 15% withholding tax. Effective date: 1 January 2021.
3. Analysis of transactions with commodities. Changes are to be implemented with respect to commodities: the concept of “quoted price” is introduced that includes not only stock exchange quotation but also prices indicated by information agencies. List of commodities is applicable from 1 January 2021. Recommended sources of information on “quoted prices” were specified at the end of 2020.
1. Tax-free liquidation of foreign legal entities and entities without legal entity status. Income from liquidation will be subject to a 1.5% military tax. To be eligible for PIT exemption, the liquidation should be started not earlier than 1 January 2020 and completed not later than 31 December 2021.
2. Permanent establishments of foreign companies in Ukraine. The entry into force of updated rules for determination of a permanent establishment (“PE”), which, in fact, have been in force since 23 May 2020, has been postponed to 01 January 2021.
All permanent establishments of non-residents that actually operate but have not been registered yet should be registered by 01 April 2021. Starting from 01 July 2021, the tax authorities will be authorized to inspect the activities of non-residents and independently register PEs if there are grounds to do so.
If a non-resident is registered by a supervisory authority in view of non-resident's operation through a permanent establishment, such registration now constitutes a reason for unfreezing property.
Liability for carrying out activities by a non-resident without tax registration will apply to tax periods from 01 January 2021.
3. Calculation of PEs’ profits. Calculation of taxable profit of a permanent establishment under the new rules (i.e. only based on a ‘direct’ method in compliance with the arm’s length principle) is applicable from 01 January 2021.
4. Taxation of income from direct and indirect sale of Ukrainian companies between non-residents. The new rules of taxation of non-resident legal entities' income from alienation of investment assets (in particular, shares and other corporate rights) came into force on 01 January 2021. This applies primarily to the taxation of direct and indirect sale of Ukrainian companies whose value derives from real estate located in Ukraine. In particular, a 15% withholding tax is applied to the profit from such transaction, unless otherwise stipulated in the relevant international agreement. If a non-resident seller does not have a permanent establishment in Ukraine, a buyer of such corporate rights (shares) is determined as a payer of WHT tax.
5. Double Tax Treaties. Certain Double Tax Treaties of Ukraine starting from 01 January 2021 are modified by provisions Multilateral Instrument (MLI), for example, Double Tax Treaties with Cyprus, Latvia, Russia, Saudi Arabia, as well as new protocols that have entered into force (Switzerland). For more details, please follow our website for updates.
1. Tax liability. Effective from 01 January 2021, the penalties for delays in payment of agreed tax liability (according to filed tax return) have changed as follows:
- delay for up to 30 calendar days inclusively – 5% of the amount of past due tax liability (instead of 10% applied previously);
- delay for more than 30 calendar days inclusively – 10% of the amount of past due tax liability (instead of 20% applied previously).
2. Personal income tax (PIT) return. Amendments were made to the annual PIT return form. Although the relevant order is in force from 01 January 2021, the new form of the PIT return should be filed starting from 01 January 2022.
3. Employers’ reporting on accrual of unified social tax (UST) for employees. Starting from 2021, the UST reports shall be submitted within employers’ PIT reporting statements (1-DF forms). Accordingly, in addition to PIT, the updated 1DF form now also includes the UST amounts. For the first time, updated 1FD forms will be filed for Q1 2021.
4. Foreign investment income. In annual PIT return for 2020 reporting year, for the first time, the individual taxpayers will have the possibility to determine foreign investment income using the same rules which are provided for taxation of Ukrainian-sourced investment income. The provisions are in force from 23 May 2020. However, as declaration of individuals' income earned in 2020 starts at the beginning of 2021, in practice the new rules are applied from January 2021.
5. Accounting of income and expenses for individuals. The requirements regarding the accounting of income and expenses for individuals registered as subjects of entrepreneurial activities are simplified (Law of Ukraine No.786-IX dated 14 July 2020). The form of the tax return for private entrepreneurs using simplified taxation system (unified tax payers) is updated (Order of the Ministry of Finance of Ukraine No. 752 dated 09 December 2020).
6. Rules for the use of cash registers. During 2021, regardless the amount of income received, the use of cash registers will be mandatory for individual entrepreneurs - unified tax payers of groups 2-4 engaged in the sale of:
- technically complex household products subject to warranty repair;
- medicines, medical devices, and provision of paid health care services;
- jewelry and household products made of precious metals, precious stones, precious stones of organogenic formation, and semi-precious stones.
1. Procedure for interaction between the reporting entities and the State Financial Monitoring Service of Ukraine. Information shall be submitted to the state body in electronic form via personal accounts.
2. The concept of fault in tax violations. The amount of penalties for certain offenses may be affected by the taxpayer's intent or liability mitigating circumstances. The list of circumstances that release from financial liability for tax offenses and for violating other legislation, the compliance of which is monitored by the supervisory authorities, has been systematized and somewhat expanded.
If you have any questions regarding the information contained in this alert, please do not hesitate to contact our Tax & Legal professionals.