The 2013–2014 Dignity Revolution ousted President Viktor Yanukovych and caused the country to choose the path of closer alignment with the European Union. The situation is complicated by the annexation of the Crimea by the Russian Federation and the continuing military standoff with pro-Russian separatist groups that have seized control of parts of the eastern Ukrainian regions of Donetsk and Luhansk. Coupled with the economic crisis, these events have had a substantial negative effect on the Ukrainian economy sending the country into deep recession.
On 27 June 2014 President Petro Poroshenko signed the Association Agreement with the EU. The Association Agreement was simultaneously ratified by the Verkhovna Rada (the parliament of Ukraine) and the European Parliament on 16 September 2014, however, the establishment of the deep and comprehensive free trade area (DCFTA) was moved to 31 December 2015.
Pursuant to the Association Agreement the Government of Ukraine is introducing legislation to harmonise Ukrainian legislation with that of the EU. Implementation of the Association Agreement creates new opportunities both for Ukrainian business in Europe and for the foreign investors in Ukraine.
Another substantial international instrument that influences Ukrainian legislative reforms is the Extended Fund Facility (EFF) between Ukraine and the International Monetary Fund (IMF), approved on 11 March 2015 by the IMF Executive Board, which suspended the previous stand-by arrangement. In accordance with the EFF Ukraine is obliged to implement number of fiscal, economic and legislative measures under the IMF supervision.
In compliance with the EFF significant amendments were introduced to such areas as banking and energy sector regulation, anti-money laundering, combat against corruption, protection of investors and investments etc. These significant shifts generally correspond to recognised international standards (including those of the IMF, the European Union and the Financial Action Task Force) in said areas, nevertheless the pace of reforms and their practical implementation remain modest.
In recent years Ukrainian businessmen were substantially focused on the effective wealth protection and management mechanisms. Current Ukrainian business environment makes wealth preservation and protection a number one priority.
Ukrainian legislation does not provide for the effective regulatory framework aimed at the preservation and protection of private wealth. Thus wealthy Ukrainian individuals prefer to structure their private capital through cross-border holding and trust structures headquartered outside Ukraine.
The holding structures utilising trusts or foundations proved to be a reliable option to achieve these goals, secure succession and effectively manage created wealth.
Taxation of individuals in Ukraine depends on the tax residence status, source and type of income.
i Tax residency
The Tax Code of Ukraine (the Tax Code) provides the following residency test to determine the individual's tax residency: (1) citizenship (all Ukrainian citizens are considered tax residents of Ukraine by default); (2) residence (permanent residence in Ukraine for a period exceeding 183 days); and (3) centre of vital interests (close economic and personal ties).
Registration of an individual as a sole trader in Ukraine is also sufficient to recognise this individual as a Ukrainian tax resident. In addition an individual may voluntarily accept to become a tax resident in Ukraine in accordance with the procedures set out in the Tax Code.
Despite all of the above tests, in practice the main criterion to determine the tax residency regularly applied by the Ukrainian tax authorities is the number of days spent by an individual in Ukraine in a calendar year.
For the purposes of the Tax Code any person who fails to qualify as a Ukrainian tax resident is considered to be a non-resident of Ukraine.
ii Source of income
Tax residents of Ukraine are taxed on their aggregate worldwide income. Non-residents are taxed on Ukrainian-sourced income only. Non-resident individuals are not eligible for certain deductions and exemptions available to residents for personal taxation purposes.
iii Types of taxable personal income
The Tax Code recognises both monetary and non-monetary personal income.
The Tax Code provides for the following taxable types of personal income (irrespective of residency): income from employment, interest and dividend income, gifts, inheritance, investment income, insurance payments, rental income, fringe benefits, amounts of received punitive damages and written off payment obligations to the third parties etc.
In addition the Tax Code specifically excludes certain types of income from the taxable basis of both residents and non-residents. Certain categories of low-income taxpayers are entitled to reduce their respective incomes by an amount of the 'social tax benefit'.
The Tax Code prescribes that if so provided by the respective international tax treaties, amount of taxes paid by a resident taxpayer outside of Ukraine may be used as credits against amount of taxes to be paid in Ukraine, provided that the taxpayer submits a written confirmation from the foreign tax authority acknowledging that such foreign taxes have in fact been paid. However the total amount of such foreign tax credits may not exceed the total amount of the personal income tax (PIT) due in Ukraine.
The Tax Code was significantly amended by the Verkhovna Rada on 28 December 2014 (the majority of such amendments became effective on 1 January 2015) as a part of the tax reforms announced by the government.
Starting from 1 January 2015 both residents and non-residents are taxable at the same tax rates of 15 per cent or 20 per cent which apply to the income from employment and some other related types of income. 15 per cent tax rate applies to monthly income not exceeding 10 minimum wages as of 1 January of the reporting (calendar) year (12,180 hryvnas for 2015). The monthly income exceeding this amount is taxable at the rate of 20 per cent.
The passive income which includes, inter alia, interest, investment profit, royalties and some types of dividends is taxed at a fixed rate of 20 per cent. The dividends received by an individual from Ukrainian companies that are subject to the corporate profit tax are taxed at the rate of 5 per cent.
In 2015 certain tax rules regarding royalties were eased. Henceforth residents paying royalties to non-residents may account as expenditure the amount that does not exceed 4 per cent of their net income plus profit from royalties in the calendar year. However, 100 per cent of royalties paid may be accounted as expenditure, if the tax payer may confirm that royalties are paid on the arms length basis. Though applicable accounting standards make it rather complicated to prove that the quantum of royalties is determined on the arms length basis.
Income derived from a disposal of real estate is taxed at the rate of either zero per cent or 5 per cent depending on (1) the type of property, (2) the frequency of disposals, and (3) the duration the title to such property was held by the seller.
v Gift and succession taxes
Gifts and inheritance are taxable income and both are subject to the PIT at the rates of zero per cent, 5 per cent or 15 per cent (20 per cent). The exact applicable rate depends on the residency status of the donator or the testator and on the degree of relation between the donator or the testator and the recipient or the heir (varying from zero per cent for spouses and children to 20 per cent for inheritance or gifts received from or by non-residents).
Tax residents shall pay income tax on inheritance and gifts irrespective of the location of the acquired assets.
There is no wealth tax in Ukraine, however, amendments to the tax law introducing the wealth tax are currently being considered.
vi Assets tax
The amendments to the Tax Code effective as of 1 January 2015 have introduced consolidated assets tax, which consists of land tax, non-land real estate tax and transport tax. Before these amendments were introduced there were separate taxes on the land and on the residential real estate.
The land tax is payable by individuals holding title to or a right of permanent use of land plots in Ukraine irrespective of their tax residency. Particular land tax rates are determined by the municipal authorities and shall not exceed 12 per cent of the cadastral value of a land plot depending on the type of the land plot and the particular rights of its holder (i.e., either title to, or the right of permanent use). The Tax Code provides for a number of tax exemptions regarding land tax depending, inter alia, on the status of an individual, the type of a land plot, its square and purpose of its use.
Residential and non-residential real estate owned by an individual is subject to a non-land real estate tax. The tax rates are set forth by the municipal authorities but shall not exceed 2 per cent of the minimum wages as of 1 January of the reporting (calendar) year per square metre of the real estate owned by an individual. At the same time the Tax Code sets forth certain exemptions for the real estate tax (e.g., the minimum real estate square, which shall not be subject to the real estate tax).
Owners of luxury vehicles registered in Ukraine irrespective of their residency are subject to the transport tax in amount of 25,000 hryvnas per each vehicle with the following qualifications: the vehicle is used by its owner for less than five years, and such vehicle's engine capacity exceeds 3,000 cubic centimetres.
vii Military duty
In view of the current political situation in Ukraine, the Verkhovna Rada has introduced a military duty. In 2015 military duty is levied on the Ukrainian-sourced income of non-residents and on the worldwide income of the tax residents of Ukraine at the rate of 1.5 per cent.
viii Issues relating to cross-border structuring
Ukraine has a wide network of the double taxation treaties with approximately 70 countries. On 15 July 2015 the Verkhovna Rada passed a law ratifying the double taxation treaty with Ireland, which enters into force on 16 August 2015. Meanwhile the double taxation treaties with such countries as Malta and Luxembourg are still pending their ratification. The majority of the double taxation treaties entered into by Ukraine are based on the OECD model convention.
Currently while considering trans-border structuring options Ukrainian private business is focused on such jurisdictions as the Netherlands, Estonia, Hungary, Slovakia and Latvia due to the favourable provisions of the respective double taxation treaties between Ukraine and these countries. While Cyprus remains to be one of the most popular and attractive cross-border structuring option for the majority of Ukrainian businessmen in tax planning and private wealth protection and preservation, the interest in structuring through the Netherlands, Estonia, Hungary, Malta, Luxembourg and other jurisdictions with favourable tax regimes for holding, financial and operational companies will continue to grow for the observable future.
As a part of the tax reform the transfer pricing rules set in the Tax Code were significantly amended (amendments effective as of 1 January 2015), in particular with regard to the list of transactions that are subject to the transfer pricing regulation (the New TP Rules). The New TP Rules are based on the OECD Transfer Pricing Guidelines. These regulations require that prices for goods and services in certain transactions shall be set on an arm's-length basis.
The New TP Rules apply primarily to cross-border transactions with related foreign entities. However, they may also apply to transactions between unrelated parties (e.g., cross‑border transactions involving counterparties from certain 'low-tax' jurisdictions). A list of such jurisdictions is established and updated by the government (in 2015 three jurisdictions – Hong Kong, Turkmenistan and Niue – were added to the revised list).
The above transactions are subject to the New TP Rules provided that the following criteria are met: the total taxable income of the respective Ukrainian taxpayer or its related parties exceeds 20 million hryvnas in the relevant calendar year; and the volume of such transactions with any particular counterparty exceeds 1 million hryvnas (exclusive of VAT) or 3 per cent of total taxable income of the respective Ukrainian taxpayer for the relevant calendar year (each such transaction a 'controlled transaction'). Ukrainian taxpayers are required to report all controlled transactions they were party to the tax authorities on an annual basis.
Based on such reporting as well as on their own monitoring and tax audits Ukrainian tax authorities can make transfer pricing adjustments and impose additional tax liabilities in respect to the controlled transaction if the terms and conditions of a particular controlled transaction are not an arm's-length basis.
The arm's-length price in respect of a controlled transaction may be established through application of various methods, including comparable uncontrolled price, resale price, cost plus, net profit and profit distribution methods.
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