Amendments to the Tax Code – anti-BEPS
On January 16, 2020, the Verkhovna Rada passed, in a second and final reading, the Law of Ukraine No. 1210 "On the Introduction of Amendments into the Tax Code of Ukraine in Connection with Improvement of the Administration of Taxes, Elimination of Technical and Logical Discrepancies in the Tax Laws" (hereinafter referred to as the "Law"), which brings essential changes to the current tax laws and is aimed at the launch of the fight against BEPS in Ukraine.
The changes are aimed at de-offshoring, though they complicate the procedure of reporting by taxpayers and impose more severe liability on taxpayers before the tax bodies.
Currently, the Law has not been signed by the Chairman of the Verkhovna Rada of Ukraine and, correspondingly, it has not yet been submitted for signing by the President of Ukraine (after it is signed by the President, it will be published).
In consideration of the above, our review of the amendments to the Tax Code of Ukraine ("TCU") is preliminary and more detailed information will be available after publication of the official text of the Law.
1. Taxation of profits of non-residents as a result of share disposals
Taxation of profits derived from disposal of shares, interests, corporate or other similar rights was introduced:
- For a foreign legal entity: when 50 or more per cent of the cost of shares, interests, corporate or other similar rights are created due to the shares/interests in the Ukrainian legal entity, which are owned directly or indirectly by such foreign legal entity;
- For a foreign legal entity: when 50 and more per cent of its shares/interests in the Ukrainian legal entity are created due to the real estate located in Ukraine;
provided that such sale/disposal is effected at any time during the year.
The aforesaid changes are related to non-residents, who directly or indirectly own interests in the Ukrainian companies (or hold interests created primarily due to the real estate) and dispose of their shares, interests, corporate or other similar rights in the Ukrainian companies.
These changes are to enter into full force and effect, commencing July 1, 2020.
2. Taxation of payments equated with dividends
It is established that the following payments are equated with dividends:
- Payment in monetary or non-monetary form, which is made by the Ukrainian legal entity in favor of its founder and/or participant(s) in connection with distribution of net profits (a part thereof);
- Income in the form of payments due for securities (corporate rights), which are paid in favor of a non-resident under controlled transactions, exceeding the amount that complies with the arm's length principle (in other words, in instances when there is a difference between the market price and purchase price);
- Cost of goods (works, services), which are purchased from a non-resident under controlled transactions, exceeding the amount that complies with the arm's length principle;
- Amount of understatement of the cost of goods (works, services), which are sold to a non-resident under controlled transactions, in comparison with the amount that complies with the arm's length principle;
- Payment (in monetary or non-monetary form) made by a legal entity in favor of its founder and/or participant, which is a non-resident of Ukraine, in connection with reduction of authorized capital, redemption by, or withdrawal of, the participant.
The changes are to enter into full force and effect from January 1, 2021.
3. Clarifications regarding the permanent establishment criteria
- The qualifying term for acknowledgment as permanent establishment for a construction site, construction, warehouse or assembling-related facilities, etc. or supervisory activities related thereto was extended from six to 12 months;
- The term for provision of consultation services, which does not lead to the creation of permanent establishment, was limited to 183 days;
- Clarifications were provided in relation to the permanent establishment created pursuant to agreement or another deed between a resident tax payer and non-resident if the resident has actual powers and is actually exercising powers granted by the non-resident under such an agreement;
- Clarifications were provided in relation to the criteria for creation of a permanent establishment in the instances when activities are carried out through "dependent" and "independent" agents, etc.
These changes are to enter into full force and effect on the day subsequent to the day of publication of the Law.
4. It was established that tax adjustments are required in the instances when transactions with no business-related purpose are carried out with non-residents
It was established that for taxation-related purposes, a transaction made with non-residents will have no rational economic reason and will lead to negative tax consequences in the following instances:
- A principal goal or one of the principal goals of such a transaction and/or its result includes non-payment (incomplete payment) of the amount of taxes and/or reduction of the taxable amount of the taxpayer's profit;
- In comparable conditions, a person/entity would not have been ready to purchase from (or sell to) non-related parties, the respective works (services), intangible assets, other items of business transactions, which are different from goods.
Taxpayers shall be obliged to increase the respective result before taxation, by the amount of expenses incurred when conducting transactions with non-residents, if such transactions are conducted with no business-related purpose.
The changes are to enter into full force and effect on the day subsequent to the day of publication of the Law.
5. Changes to transfer pricing
The definition of "international group of companies" was introduced for the purpose of assessing transfer pricing: two or more legal entities (or an entity without legal status), which are tax residents of different countries and are related to each other due to the criteria of ownership or control.
Clarifications were provided in connection with the criteria of related parties: in particular, such criteria include instances when one legal entity is directly and/or indirectly (through related parties) holding the corporate rights of another legal entity in the amount of 25 or more per cent.
A three-level model of submission of reports related to the controlled transactions of Ukrainian residents, which are members of international groups of companies, was introduced (report on the controlled transactions; master file; and report broken down by countries).
Such reports may be subject to automatic information exchange as tax-related and financial information.
An inquiry regarding the master file may be received by a company if the total consolidated income of the international group of companies is equal to €50 million or more.
The report broken down by countries must be submitted by a company if the total consolidated income of the international group of companies is equal to €750 million.
The changes related to the three-level system of reporting are to enter into full force and effect, commencing January 1, 2021.
6. Controlled Foreign Companies (CFCs)
- The definition of "controlled foreign company" was introduced; it is a legal entity that is registered in a foreign country (or in a territory that is acknowledged as a foreign country) and is under control of an individual who is a resident of Ukraine, or is under control of a legal entity that is a resident of Ukraine) pursuant to the rules determined by this code.
- A company is a CFC if:
An individual, who is a resident of Ukraine (or a legal entity, which is a resident of Ukraine) (hereinafter referred to as the "controlling person"):
- Owns an interest in a foreign legal entity in an amount that is more than 50 per cent, or owns an interest in a foreign legal entity in an amount which is more than 10 per cent, provided that several individuals, which are residents of Ukraine (and/or legal entities, which are residents of Ukraine) own interests in a foreign legal entity and the total amount of such interests is more than 50 or more per cent, or
- Individually or jointly with other residents of Ukraine (related parties) exercises actual control over a foreign legal entity.
- A procedure for taxation of the
CFC's profits was introduced:
- The corporate profit taxpayer of the controlled foreign company is the controlling person, which is the Ukrainian taxpayer.
- The object of taxation in connection with the personal income tax (or corporate profit tax) of the controlling person is the part of the adjusted profit of the controlled foreign company that is pro rata to the interest owned or controlled by such individual (legal entity) as of the last day of the reporting period.
Thus, the Ukrainian individual or legal entity, which is the controlling person, must pay a profit tax in Ukraine (18%); whereas an individual, who is a resident of Ukraine, must pay an income tax at the rate of 18% and temporary military tax at the rate of 1.5%, out of the CFC's profits.
These changes are to enter into full force and effect, commencing January 1, 2021.
7. VAT allowances are cancelled for transactions related to
bringing goods of the 8502 31 00 00 category into the customs
territory of Ukraine
- Value-added tax exemption is cancelled for transactions related to bringing into the customs territory of Ukraine, and supplying throughout the customs territory of Ukraine, wind-energy electricity-generating installations (goods subcategory: 8502 31 00 00).
The changes are to enter into full force and effect on the day subsequent to the day of publication of the Law.
8. Administration of taxes
- The following profit taxpayer's duty was introduced: to publish annual financial statements and annual consolidated financial statements, along with the auditors' report and simultaneously with the respective tax declaration, in compliance with the procedure stipulated for submission of the tax declaration;
- Clarifications were provided in relation to the procedure for individual tax consultations, in particular: such consultations may be provided verbally and in paper and electronic forms. An individual tax consultation provided in paper or electronic form is subject to registration in the unified register of individual tax consultations;
- Clarifications were provided in relation to the procedure for filing of complaints: a taxpayer is entitled to file their complaint, along with a plea seeking renewal of the missed time limit, which is set for filing a complaint subject to administrative procedure, and copies of the confirming documents, within six months from the date of the expiry of such time limit;
- A procedure was introduced for
registration of non-residents, that:
- Carry out their activities in Ukraine through separate units, including permanent establishments, or
- Purchase real estate assets or obtain proprietary rights thereto in Ukraine, or
- Open accounts at Ukrainian banks.
- A procedure for conducting audits of non-residents was introduced; in particular, such audits will be conducted if the tax bodies receive information that a non-resident carries out its business activities through the permanent establishment in the Ukrainian territory without registration as a taxpayer;
- A mutual coordination procedure between a taxpayer and controlling bodies under the double taxation avoidance treaties was introduced for the instances when, as a result of actions or decisions of the controlling body of Ukraine, such a taxpayer is subject to taxation that does not comply with the provisions of the international treaty;
- More detailed requirements were rendered in connection with holding the taxpayers and their representatives liable, including the presence of "fault" on the part of a taxpayer and intention to "deliberately and purposefully" refrain from performing tax liabilities;
- A procedure was introduced for holding controlling bodies liable before taxpayers, as well as a procedure of compensation of the damage caused by illegal decisions, actions or inactivity on the part of controlling bodies;
- Fines for violations of procedures for registration, filing of tax reports, transfer pricing and controlled foreign companies, were increased.
Some changes will take effect from the day subsequent to the day of publication of the Law.
Some changes (in particular regarding the review of certain complaints by the collegial body, the right to file documents related to objections to the audit certificate, documents that prove the absence of the taxpayer's fault, liability of the tax bodies before taxpayers) will come into force on 1 July, 2020.
Amendments to the Double Taxation Avoidance Treaty with Singapore
On January 14, 2020, the Verkhovna Rada of Ukraine ratified a Protocol amending the Agreement between the Government of Ukraine and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
The provisions of the Protocol meet the requirements of the OECD Model Convention on the Information Exchange. Thus, in particular, the parties have agreed as follows:
- That each of the contracting states, in order to obtain the requested information, should undertake all possible efforts for gathering such information, even if the other state may not require such information for its own tax purposes.
- That any information obtained by the contracting state is considered confidential and may only be disclosed to persons or authorities (including courts and administrative authorities) involved in the preparation of tax calculations or tax collection, enforcement of taxes, or in the court investigations or review of the tax-related appeals.
- In no case should the provisions of this article be construed as permitting the contracting state to refuse to provide information solely on the ground that the information belongs to a bank, another financial institution, designated individual (nominal holder) or a person acting as an agent or fiduciary, or on the grounds that such information relates to the proprietary interests in an entity.
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