26 May 2020
Following delayed signing and publishing, Law No. 466-IX dated 16 January 2020 "On amendments to the Tax Code of Ukraine related to the improvement of tax administration and elimination of technical and logical inconsistencies in the tax legislation" (the "Law") was officially published and became effective on 23 May 2020.
We would like to remind you of the most significant changes we highlighted in our alert of January this year, and of the dates when these start to apply. These dates, however, can be further changed as the President announced that the Law needs to be improved in certain areas, and encouraged the government to work on these improvements so that taxpayers would be able to adapt to the changes.
- A mechanism to collect capital gains tax from a non-resident seller – 1 July 2020
A non-resident buyer of shares or corporate rights, which derive most of their value from real estate, will have to register with the Ukrainian tax authorities and withdraw 15% from the capital gain of a non-resident seller, unless as otherwise provided by the double tax treaty concluded between Ukraine and country of the seller. The same rules apply when non-residents buy and sell structures having extraction rights to Ukrainian mineral resources.
Even indirect capital gains (i.e., gains from the transfer of a Ukrainian company by sale of its foreign parent’s shares) might be subject to 15% withholding tax, again depending on double tax treaty provisions and/or whether the Ukrainian subsidiary derives most of its value from immovables.
- Taxation of controlled foreign companies ("CFCs") – 1 January 2021
A CFC is a foreign company under the control of a Ukrainian entity or individual. Unless eligible for certain exemptions, the controlling person must pay corporate income tax or personal income tax on the income earned by the CFC, even if it has not yet been distributed.
The Law provides for significant penalties for omissions in calculations of the CFC's income which will apply from 2023. By then and effective from 2021, huge penalties may apply for failure to report the CFC's existence to the tax authorities.
Importantly, the Law provides for the possibility of liquidating a CFC without any tax consequences where an individual shareholder meets certain conditions. In particular, the liquidating procedure should start not later than 30 June 2020.
- Taxation of constructive dividends – 1 January 2021
The difference between fair market price and the actual price in any transaction with a related non-resident or a non-resident registered in a "low tax" jurisdiction can be treated as a distribution of dividends and taxed as it would be taxed at source.
- New thin capitalisation rules – 1 January 2021
The amount of deductible interest will be limited to 30% of EBITDA (currently a 50% limitation applies). However, the rules will no longer apply to financial institutions and leasing companies.
- Participation exemption – 23 May 2020
A Ukrainian company owning at least 10% of a foreign company during a one-year period may exclude from its taxable income the accrued dividends from such foreign company, or increase such foreign company's book value (if accounted for based on the equity method) in the Ukrainian company's balance sheet. If the 10% ownership rule is met in previous tax periods and the received dividends were taxed, the Ukrainian company may adjust its taxable income for previous years, subject to certain conditions.
- Foreign companies may be deemed Ukrainian tax residents for corporate income tax purposes from 1 January 2021
The provision will apply if a foreign company is actually managed from Ukraine. Ukrainian residency may be obtained voluntarily. Further, such foreign company can reject Ukrainian residency, and if that is for tax purposes, will equate to its liquidation. Currently no exit tax should apply.
- Reincarnation of business purpose test – 23 May 2020
Expenses without business purposes incurred on transactions with non-residents are not deductible.
For corporate income tax purposes, the taxable revenue is increased by 30% for certain goods/services sold to non-residents in "low tax" jurisdictions, or having a special form of incorporation (according to lists approved by the Cabinet of Ministers of Ukraine). The increase does not apply if the sale is at fair market value, as proved by transfer pricing documentation.