Andriy Reun, partner, head of tax at EVRIS law firm, specifically for Lexology, summarized what changes have been made recently. EVRIS is the exclusive information partner for them in the field of transfer pricing in Ukraine.
Identify the principal transfer pricing legislation.
Detailed transfer pricing rules were introduced to Ukraine's tax laws on 1 September 2013. Since then, the rules have been frequently revised in 2015, 2017, 2018 and 2019.
In general, Ukraine's transfer pricing rules are based on the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines and apply only for corporate income tax purposes.
If a transaction is subject to transfer pricing (ie, a transaction qualifies as being controlled for transfer pricing purposes), the prices should be arm's length.
The primary legislation governing transfer pricing in Ukraine is the Tax Code (2755).
In addition, certain transfer pricing rules are addressed in the following cabinet minister acts:
- Act 1045 – with respect to low-tax jurisdictions;
- Act 408 – with respect to organisational types of non-resident that do not pay corporate income tax;
- Act 381 – with respect to the procedure for calculating profit level indicator ranges;
- Act 504 – with respect to the procedure for concluding advance pricing agreements; and
- Act 616 – with respect to the commodities for applying the comparable uncontrolled price method.
As these acts undergo changes on a near-annual basis, it is important to verify which version applies to the period under review.
Which central government agency has primary responsibility for enforcing the transfer pricing rules?
The State Fiscal Service is the primary regulator authorised to:
- monitor compliance with transfer pricing rules;
- perform transfer pricing audits;
- clarify tax issues;
- issue private tax rulings; and
- sign advance pricing agreements.
The State Fiscal Service is being reorganised and separated into the State Tax Service and the State Customs Service. The State Tax Service is a successor to the State Fiscal Service in relation to transfer pricing regulations.
The Ministry of Finance is authorised to issue generalised tax rulings on any issues, including transfer pricing matters.
In addition, the Cabinet of Ministers issues specific acts in respect of transfer pricing issues.
What is the role of the OECD Transfer Pricing Guidelines?
The OECD Transfer Pricing Guidelines are not legally binding in Ukraine.
However, local transfer pricing rules are primarily consistent with the OECD Transfer Pricing Guidelines and include the same key principles. Further, the OECD guidelines are used as an additional source of guidance and the tax authorities consider them during transfer pricing audits and litigation.
To what types of transactions do the transfer pricing rules apply?
The Tax Code stipulates that controlled transactions are subject to transfer pricing rules.
For transfer pricing purposes, 'controlled transactions' are defined as business transactions that may have an effect on taxable income, including:
- business transactions with non-resident-related parties;
- business transactions concerning the sale or purchase of goods or services through non-resident commissionaires;
- business transactions with non-residents incorporated or resident in offshore jurisdictions (the Cabinet of Ministers determines the list of offshore jurisdictions);
- business transactions with non-residents that do not pay corporate income tax or are not tax residents of the country in which they are registered as legal entities (the Cabinet of Ministers determines the list of organisation forms of such non-residents with reference to specific states); and
- business transactions between
taxpayers and non-residents through non-related intermediaries
where the intermediary:
- performs no significant function;
- uses no significant assets; and
- bears no significant risks in respect of the transaction.
These transactions qualify as controlled if they simultaneously meet the following criteria:
- The annual amount of the transactions with one counterparty (calculated according to accounting rules) exceeds UAH10 million (approximately €312,000).
- The total annual revenue (calculated according to accounting rules) of the Ukrainian taxpayer from any type of activity exceeds UAH150 million (approximately €4.7 million).
From 2018 transactions between non-residents and permanent establishments in Ukraine are considered controlled if their value exceeds UAH10 million (approximately €312,000). For this type of controlled transaction, no annual revenue criterion applies (ie, the permanent establishment need not earn more than a specific amount).
In all of the above cases, the criteria for qualifying a transaction as controlled should be determined using arm's-length prices.
In addition, there are certain cases in which taxpayers should justify the arm's-length price of transactions below UAH10 million (approximately €312,000).
Do the relevant transfer pricing rules adhere to the arm's-length principle?
Yes, transfer pricing rules adhere to the arm's-length principle.
Base erosion and profit shifting
How has the OECD's project on base erosion and profit shifting (BEPS) affected the applicable transfer pricing rules?
On 24 October 2018 the Ministry of Finance published the Draft Law On Amending the Tax Code of Ukraine Towards the Implementation of the Base Erosion and Profit Shifting Action Plan.
The draft law lays the foundation for implementing the OECD/G20 action plan on Base Erosion and Profit Shifting.
The draft law includes provisions concerning:
- tax of controlled foreign companies;
- new transfer pricing reporting forms for international groups of companies consisting of country-by-country reports and a master file – along with multinational companies with turnover exceeding €750 million, country-by-country report filing requirements will also apply to Ukrainian businesses with annual revenue exceeding €50 million;
- the replacement of the list of exchange commodities with a list of primary commodities;
- a business purpose test;
- low value-adding services; and
- constructive dividends, which equate to tax purposes, transfer pricing violations and a number of payments to non-residents with dividends.
It is not yet clear when the draft law will come into force. However, in 2019 the substance-over-form doctrine was implemented for transfer pricing purposes.
What transfer pricing methods are acceptable? What are the pros and cons of each method?
Tax legislation prescribes the possibility of using all methods described in Chapter II of the OECD Transfer Pricing Guidelines, specifically:
- the comparable uncontrolled price (CUP) method;
- the resale price method (RPM);
- the cost-plus method (CPM);
- the transactional net margin method (TNMM); and
- the profit split method (PSM).
The CUP method is based on a comparison of prices used in controlled transactions with the price or range of prices in comparable non-controlled transactions. The information about the prices in the comparable non-controlled transactions, which were actually performed by the taxpayer or other parties, is used.
The CUP method may be used:
- when exchange quotations are available;
- in transactions involving intellectual property (eg, royalties);
- in financial transactions (eg, loans and bonds); and
- in comparable transactions with non-related parties, if reliable information on the comparable transactions is available.
RPM may be used during the resale of goods if the following functions are performed:
- The goods are prepared for resale and transportation (eg, division of goods among the parties, forming deliveries, sorting and repacking).
- The goods are mixed, if the characteristics of the final (prefabricated) product is not significantly different to the mixed goods.
CPM may be used, for example, in regard to:
- the performance of works or services to related parties; and
- the sale of goods, raw materials or semi-finished products to related parties.
TNNM applies if the information that allows taxpayers to reasonably apply the previous transfer pricing methods is not available. It is often used in:
- the resale of goods;
- the performance of works or services; and
- the production of goods (in case of capital-intensive activity).
PSM is often used when other methods cannot be applied, particularly where:
- a significant relationship exists between controlled transactions and other transactions undertaken by the parties of controlled transactions with related parties; and
- parties of the controlled transaction hold the rights on intangible assets that have a significant impact on profitability.
Are cost-sharing arrangements permitted? Describe the acceptable cost-sharing pricing methods.
There is no specific transfer pricing guidance on cost-sharing arrangements. In practice, cost-sharing agreements are often replaced by service agreements.
What are the rules for selecting a transfer pricing method?
According to Ukrainian legislation, the CUP method takes priority over the other methods. If the CUP method cannot be applied, taxpayers can apply other methods specified in Article 39 of the Tax Code. However, where RPM, CPM, NPM or PSM are available, the first two methods are preferred. The application of methods that are not prescribed by the Tax Code is prohibited.
The transfer pricing method selected should be the most appropriate based on the facts and circumstances of the controlled transaction.
Can a taxpayer make transfer pricing adjustments?
Yes, Ukrainian legislation allows taxpayers to make transfer pricing adjustments.
If the prices of the controlled transaction do not correspond with the arm's-length principle, the taxpayer may perform the respective self-adjustment and pay additional tax. Such self-adjustment can be made to maximum or minimum values of the range of prices (profitability). Taxpayers have the right to make a self-adjustment without incurring any penalties and fines until 1 October of the year following the reporting year.
Taxpayers are prohibited from making self-adjustments during transfer pricing audits.
Ukrainian legislation also provides for pro rata transfer pricing self-adjustments after the respective approval has been received from the tax authorities. Proportional adjustments are also allowed in case of transfer pricing assessments by the tax authorities and based on the provisions of double tax treaties.
To date, there is no established practice; however, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure.
Are special 'safe harbour' methods available for certain types of related-party transactions? What are these methods and what types of transactions do they apply to?
There are no formal safe harbours in Ukraine. However, taxpayers with an annual revenue below UAH150 million are not subject to transfer pricing control.
Even if the taxpayer reaches an annual income of more than UAH150 million but the volume of transactions with non-residents is below UA10 million, such transactions are not subject to transfer pricing control.
However, there are certain cases in which transactions below UA10 million should meet the arm's-length principle.
In addition, the Tax Code provides for the following circumstances under which prices qualify as arm's length if the relevant conditions are met:
- State-regulated prices and mark-ups with respect to certain goods or services may qualify as arm's length, unless the minimum or maximum price, mark-up or indicative price is established by the state.
- Mandatory valuations of transaction objects can be used to determine arm's-length prices.
- If goods are sold through a mandatory public auction, prices determined as a result of the auction may qualify as arm's length.
- If goods, including pledged property, are sold in an enforcement procedure in accordance with applicable legislation, the terms of such sales may qualify as arm's length.
Disclosures and documentation
Does the tax authority require taxpayers to submit transfer pricing documentation? Regardless of whether transfer pricing documentation is required, does preparing documentation confer any other benefits?
Ukrainian legislation requires only local transfer pricing documentation (on the request of the tax authorities) and reporting on controlled transactions (transfer pricing notification) to be filed (by 1 October of the following year). Neither the master file nor the country-by-country report are currently required.
The Tax Code sets out the requirements for local transfer pricing documentation. In particular, it should include:
- information regarding related parties, including information on parties which directly or indirectly own at least 20% of the taxpayer and parties of which the taxpayer owns at least 20% (directly or indirectly);
- information regarding the group, including its legal structure, a description of its activities and its transfer pricing policy – this should be provided with the information about the entities, which the taxpayer provides with local management reports (eg, names of entities and countries in which such entities have head offices);
- a description of the taxpayer's management structure (ie, its organisational structure);
- a description of the taxpayer's activities and business strategy (including information regarding economic conditions, an analysis of the markets in which the taxpayer operates and its main competitors);
- information regarding the taxpayer's participation in business restructurings or transfers of intangible assets during the reporting or preceding year, along with an explanation of the aspects of those transactions that had or still have an impact on its activity;
- a description and the conditions of the transaction, as well as copies of the relevant agreements (ie, contracts);
- a description of the goods, works or services;
- information regarding the payments that were made in the controlled transaction (ie, the amounts, currencies and dates of payments and payment documents);
- factors that influenced the price determination, including the business strategies of the parties to the controlled transaction (if any) that significantly affected the prices of the goods, works or services;
- a functional analysis of the controlled transaction (ie, information regarding the functions performed, assets used and economic risks assumed by the parties to the controlled transaction);
- an economic analysis, including:
- a benchmarking study;
- substantiation of the transfer pricing methods;
- the profitability indicators and sources of information used;
- the allocation of the supplier's income or expenses relating to the controlled transaction that were considered when calculating the profit-level indicator;
- a calculation of the arm's-length range of prices or profitability;
- a description and calculation of comparability adjustments performed in respect of controlled and non-controlled transactions; and
- substantiation of the use of several tax periods (years) for determining the profitability range and the calculation of the weighted average profitability indicator;
- information regarding the proportional transfer pricing adjustment performed by the taxpayer;
- information regarding the individuals and entities that are party to the controlled transaction and parties relating to the taxpayer (in the reporting period in which the controlled transaction was performed and at the time of submission of the transfer pricing documentation); and
- information regarding the taxpayer's total number of employees, with a breakdown based on its specific divisions as of the date of the transaction or the end of the reporting period.
Local transfer pricing documentation should be prepared in Ukrainian only.
Proper and comprehensively prepared transfer pricing documentation is a major factor in reducing transfer pricing audit risks. However, it does not confer penalty protection if transactions are not at arm's length.
Has the tax authority proposed or adopted country-by-country reporting? What are the differences between the local country-by-country reporting rules and the consensus framework of Chapter 5 of the OECD Transfer Pricing Guidelines?
To date, Ukrainian legislation does not contain provisions in respect of country-by-country reporting.
However, the Draft Law On Amending the Tax Code of Ukraine Towards the Implementation of the Base Erosion and Profit Shifting Action Plan contains specific provisions on the country-by-country report filing requirements that will also apply to Ukrainian businesses with annual revenue exceeding €50 million (along with multinational companies with turnover exceeding €750 million). The draft law contains a series of criteria for a business to qualify as a Ukrainian business.
Other rules for local country-by-country reporting are generally in line with Chapter 5 of the OECD Transfer Pricing Guidelines.
Timing of documentation
When must a taxpayer prepare and submit transfer pricing documentation?
According to Ukrainian legislation, all taxpayers performing controlled transactions must prepare and maintain local transfer pricing documentation for each reporting period (ie, per calendar year). Local transfer pricing documentation, substantiating the arm's-length nature of prices and profitability, should be submitted only on request of the tax authorities and within 30 calendar days. Such requests can be sent to the taxpayer no earlier than 1 October of the year following the calendar year in which the controlled transaction was performed.
In addition, all taxpayers performing controlled transactions should file a report on controlled transactions (transfer pricing notification) by 1 October of the year following the reporting year.
Failure to document
What are the consequences for failing to submit documentation?
Ukrainian legislation contains a number of specific transfer pricing penalties. The penalties are calculated using the value of the subsistence minimum (SM) established for 1 January of the reporting year (1 January 2019, UAH1,853 (approximately €58)).
The penalties for failing to submit documentation are:
- 3% of the controlled transaction value for failure to file transfer pricing documentation (limited to 200 SMs) for all controlled transactions in the respective tax year;
- 5 SMs for each calendar day for non-submission of transfer pricing documentation within 30 calendar days following the last day of the deadline for settlement of the fine; and
- 2 SMs for each calendar day (up to a maximum of 200 SMs) for late submission of transfer pricing documentation.
In addition, there are specific penalties for late submission, non-reporting or failing to submit the report on controlled transactions (transfer pricing notification).
However, paying penalties does not exempt the taxpayer from its obligation to file a report on a controlled transaction or prepare transfer pricing documentation.
Adjustments and settlement
Limitation period for authority review
How long does the tax authority have to review an income tax return?
The tax authorities may make transfer pricing adjustments within seven years (2,555 days) following the deadline for submission of the corporate income tax return for the tax year concerned (ordinary adjustments). If a taxpayer submits an adjusted corporate income tax return, this term is calculated as of the date of submission of the adjusted corporate income tax return.
The duration of a transfer pricing audit cannot exceed 18 months. The tax authorities should update the taxpayer on the status of the audit every six months. The audit may be extended for an additional 12 months if information is required from foreign tax authorities or an expert examination or translation is required.
In practice, the duration of transfer pricing audits is between nine and 11 months.
Rules and standards
What rules, standards or procedures govern the tax authorities' review of companies' compliance with transfer pricing rules? Does the tax authority or the taxpayer have the burden of proof?
The tax authorities monitor transfer pricing risks in several stages. After the deadline for submitting a report on controlled transactions has passed, the tax authorities review such reports and identify taxpayers which did not submit the report or indicated abnormal profit level indicators or non-typical information. Subsequently, the tax authorities send a request for transfer pricing documentation to the respective taxpayers. At this stage, the tax authorities consider the documents provided to determine whether the taxpayer's justifications regarding the arm's-length nature of its controlled transactions are feasible. If the transfer pricing documentation is not submitted, the taxpayer submits incomplete documentation or its conclusions are insufficient, the tax authorities may initiate a transfer pricing audit.
The burden of proof lies with the tax authorities. During the tax audit, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the taxpayer selected an unsubstantiated method
If the tax authority asserts a transfer pricing adjustment, what options does the taxpayer have to dispute the adjustment?
Taxpayers can appeal tax assessments by way of an administrative procedure or in the courts.
During an appeal procedure (either administrative or in court) the requirement to pay a tax assessment notice is suspended.
After exhausting the administrative appeal procedure, taxpayers may initiate a court appeal in order to avoid the tax assessment becoming due. According to the current tax jurisprudence, taxpayers may submit a court claim to challenge unreasonable tax assessments within 1,095 calendar days from the date of receiving the notice of tax assessment.
In addition, the effective double-tax treaties allow taxpayers to challenge the adjustment under mutual agreement procedures. However, mutual agreement procedure is not used in practice yet.
Relief from double taxation
Does the country have a comprehensive income tax treaty network? Do these treaties have effective mutual agreement procedures?
Ukraine has entered into more than 70 double tax treaties.
Mutual agreement procedure opportunities are available. Most of Ukraine's double tax treaties provide three-year limitation periods for filing mutual agreement procedure applications.
However, the mutual agreement procedures are not used in practice. It is expected that once the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting and the Draft Law On amending the Tax Code of Ukraine come into force, this procedure will be used more frequently.
How can a taxpayer request relief from double taxation under the mutual agreement procedure of a tax treaty? Are there published procedures?
To date, there are no mutual agreement procedures that would supplement the tax treaties.
However, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address the conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure. In addition, it is expected that the Draft Law On amending the Tax Code of Ukraine will implement such procedures into Ukrainian legislation.
When relief is available
When may a taxpayer request assistance from the competent authority?
There are no published procedures in addition to tax treaties. The mutual agreement procedure is not yet used in practice.
Limits on relief
Are there limitations on the type of relief that the competent authority will seek, both generally and in specific cases?
There are no published procedures in addition to tax treaties. The mutual agreement procedure is not yet used in practice.
How effective is the competent authority in obtaining relief from double taxation?
Advance pricing agreements
Does the country have an advance pricing agreement (APA) programme? If so, is the programme widely used? Are unilateral, bilateral and multilateral APAs available?
APAs are available for large taxpayers only.
APAs are concluded for a limited period (up to five years) between the large taxpayer and the State Fiscal Service (SFS), with the possible participation of fiscal authorities from other states.
An APA can set out special pricing criteria and select the most appropriate transfer pricing methodology tools for determining whether future controlled transactions of the taxpayer are at arm's length. Such arrangements may be:
- bilateral; or
An effective double tax treaty with the countries of residence of the parties to the transaction is a prerequisite for engaging the fiscal authorities of the respective countries in an APA procedure.
APAs are not used in practice. No APA has been signed to date.
Describe the process for obtaining an APA, including a brief description of the submission requirements and any applicable user fees.
The requirements and procedures regarding the application for an APA are outlined in detail in the Cabinet of Ministers of Ukraine Act 504.
Before the APA process, a taxpayer may submit a request for preliminary examination of the relevant transaction to the SFS, which has 60 days to confirm whether it would be reasonable to begin the APA procedure.
To begin the APA procedure, a taxpayer must file a petition with the SFS, which must include:
- a copy of the taxpayer's organisational documents;
- the taxpayer's accounting and financial reporting documents for the preceding three years;
- a description of any ongoing tax disputes involving the transaction;
- a certificate of tax residence of the relevant foreign parties to the controlled transaction;
- a description of how an applicable tax treaty between Ukraine and the relevant foreign jurisdiction would affect the transaction;
- an analysis of the possible influence of the APA on the tax liabilities of the parties to the controlled transaction;
- copies of any documents submitted to the relevant foreign tax authority for an APA by the taxpayer or the counterparty to the transaction;
- copies of documents granting authority to the taxpayer's representative to take part in the price coordination procedure;
- transfer pricing documentation in respect of such transactions; and
- any other documentation or information deemed relevant by the taxpayer or requested by the SFS.
Once all required documentation has been submitted and reviewed, the SFS will inform the taxpayer in writing whether it is ready to move forward and conclude an APA. If the SFS rejects the petition, the taxpayer may file an appeal within 15 days of the decision. The SFS must respond to the appeal with its decision within 30 days.
There is no government fee for APA requests.
The APA application, supporting documentation and materials should be prepared in Ukrainian. Any documents prepared in foreign languages must be filed with their Ukrainian translation. In the case of bilateral and multilateral APA applications, any provided documentation must also be translated into English.
Information provided to the tax authorities during the APA process cannot be used as a reason to conduct a tax audit.
How long does it typically take to obtain a unilateral and a bilateral APA?
To date, no APA has been signed.
How many years can an APA cover prospectively? Are rollbacks available?
An APA can cover up to five years.
Rollbacks are available, although the number of years are not specified in the Tax Code.
What types of related-party transactions or issues can be covered by APAs?
There are no limitations with respect to the list of controlled transactions that may be subject to the APA procedure.
Is the APA programme independent from the tax authority's examination function? Is it independent from the competent authority staff that handle other double tax cases?
The same representatives of the tax authorities can be involved in the APA procedure and in tax audits. However, Ukrainian legislation stipulates that the tax authorities cannot use information received during APA procedures as a reason to conduct a tax audit.
Advantages and disadvantages
What are the key advantages and disadvantages to obtaining an APA with the tax authority?
The main advantage of concluding an APA is that if it is complied with, the SFS has no authority to assess additional tax liabilities, late payment interest or penalties for controlled transactions covered by the APA.
However, if a taxpayer fails to comply with an APA's terms and conditions, the APA becomes void from the effective date. In this case, the tax authorities may charge additional tax liabilities and apply financial penalties for controlled transactions that do not meet the arm's-length principle.
Is the tax authority generally required to respect the form of related-party transactions as actually structured? In what circumstances can the tax authority disregard or recharacterise related-party transactions?
The tax authority is generally required to respect the form of related-party transactions as actually structured. However, the tax authority can recharacterise related party transactions based on results of analysis of the actual functions, risks and assets within such transactions. In addition, in 2018 the 'substance over form' doctrine was implemented for transfer pricing.
What are some of the important factors that the tax authority takes into account in selecting and evaluating comparables? In particular, does the tax authority require the use of country-specific comparable companies, or are comparables from several jurisdictions acceptable?
Ukrainian legislation contains the following mandatory criteria for the selection of comparable legal entities, which must be met simultaneously:
- The activity must be comparable with the activity of the tested party within the controlled transaction. Comparability is determined by the national (ie, Ukrainian) or international classifiers of economic activities.
- Comparable companies must have operating losses in no more than one reporting period within the analysed period.
- Comparable companies must not directly or indirectly own more than 20% of the corporate rights in another company. Further, the shareholders of the comparable company must not be legal entities with more than 20% direct or indirect ownership per shareholder.
In addition, during the comparability analysis of the conditions of controlled and non-controlled transactions, certain elements must be analysed (eg, economic conditions of the activities of the parties to the transaction, including the analysis of the relevant markets of goods, works and services that significantly affect the prices of goods, works and services).
There are no straight rules for comparables from the same country. In practice, the first stage of a benchmarking study is the search of comparables in the same country as a tested party's country of residence. If the absence of comparables from one country is identified, a pan-European set of comparables could potentially be acceptable for a tested party located in a particular European country.
What is the tax authority's position and practice with respect to secret comparables? If secret comparables are ever used, what procedures are in place to allow a taxpayer to defend its own transfer pricing position against the tax authority's position based on secret comparables?
Ukrainian legislation does not allow the use of a comparable whose data is not disclosed to the public or the taxpayer but rather is known only to the tax authority which is making the transfer pricing adjustment.
According to the legislation, when preparing transfer pricing documentation a taxpayer and the tax authorities can use sources of information, which allows for the comparison of commercial and financial conditions of transactions, in particular:
- information regarding comparable transactions of the taxpayer as well as its counterparty with non-related parties;
- any publicly available sources of information which provide information on comparable transactions;
- other sources of information, from which the information was received by the taxpayer in compliance with the legislation requirements and which provide information on comparable transactions or persons and entities, provided that the taxpayer provides such information to the tax authorities; and
- information obtained by the tax authorities under international agreements concluded by Ukraine.
During the tax audit, the tax authorities should use the same transfer pricing method and source of information used by the taxpayer, unless it is proven that the taxpayer selected an incorrect method or source of information.
Are secondary transfer pricing adjustments required? What form do they take and what are their tax consequences? Are procedures available to obtain relief from the adverse tax consequences of certain secondary adjustments?
Ukrainian legislation does not provide secondary transfer pricing adjustments.
However, the Draft Law On Amending the Tax Code of Ukraine Towards the Implementation of the Base Erosion and Profit Shifting Action Plan contains provisions concerning constructive dividends.
Non-deductible intercompany payments
Are any categories of intercompany payments non-deductible?
The following rules must be followed with regard to payments to foreign affiliates:
- Only 70% of payments for goods or services to residents of low-tax jurisdictions and zero-tax non-residents are tax deductible.
- Deduction of royalties paid to a non-resident is limited to royalty income plus 4% of net revenue of the previous year.
- Royalties paid to the following are
not tax deductible:
- non-beneficial owners (unless a beneficial owner grants the right to receive the royalties to other parties);
- non-residents that are exempt from tax on royalties in the country of their residence; and
- non-residents for trademarks originated from Ukraine.
The first and the second of these limitations can be waived if a taxpayer confirms the arm's-length level of payments in accordance with the transfer pricing rules (even if the transactions are not controlled for transfer pricing purposes).
In addition, the thin capitalisation rule applies to all loans received from non-residents where the amount of debt is more than 3.5 times larger than the borrower's equity. Interest paid on such loans is limited to 50% of the borrower's profit before tax plus the amount of financial and depreciation expenses in the relevant tax period. Non-deductible interest exceeding the prescribed limit can be carried forward and deducted in a subsequent tax period subject to the same limitation. Carried forward non-deductible interest is annually decreased by 5%.
What legislative and regulatory initiatives (besides transfer pricing rules) has the government taken to combat tax avoidance with respect to related-party transactions? What are the penalties or other consequences for non-compliance with these anti-avoidance provisions?
The beneficial ownership test is still the main anti-avoidance instrument for the tax authorities. In general, beneficial owners are determined based on the object and purpose of double taxation conventions, including the avoidance of double taxation and the prevention of fiscal evasion and avoidance, following the 'substance over form' doctrine.
In 2019 the 'substance over form' doctrine for transfer pricing purposes was introduced to the Tax Code.
In addition, one of the most widespread initiatives is challenging actual performance of transactions and disregarding such transactions for tax purposes.
There are no specific penalties for non-compliance with anti-avoidance provisions. However, additional tax assessments, fines and late payment interest apply.
How are location savings and other location-specific attributes treated under the applicable transfer pricing rules? How are they treated by the tax authority in practice?
Ukrainian legislation does not provide definitions or rules for location savings and other location-specific attributes.
However, Ukrainian legislation provides a list of low-tax jurisdictions. This list differs from the European Union's blacklist of tax havens and includes 79 countries. In addition, there is a list of zero-tax non-residents (the list includes the organisation forms of such non-residents with reference to specific states).
When monitoring taxpayer activity, the Ukrainian tax authorities pay attention to transactions with such non-residents on a first-priority basis.
Branches and permanent establishments
How are profits attributed to a branch or permanent establishment (PE)? Does the tax authority treat the branch or PE as a functionally separate enterprise and apply arm's-length principles? If not, what other approach is applied?
From 2018 transactions between non-residents and permanent establishments in Ukraine are considered controlled if their value exceeds UAH10 million (approximately €312,000). For this type of controlled transaction, no annual income criterion applies (ie, the permanent establishment need not earn more than a specific amount).
For transfer pricing purposes, only transactions between a non-resident and its permanent establishment qualify as controlled transactions. Transactions between a non-resident and representative office (branch) which is not a permanent establishment are not considered controlled transactions.
Although the Tax Code does not provide the list of transactions between a non-resident and a permanent establishment which are considered to be controlled transactions, it can be assumed that the amount of financing received from head office will be taken into account when determining the total value of transactions between a non-resident and its permanent establishment.
The Tax Code does not provide special rules for transfer pricing analysis of transactions between a non-resident and its permanent establishment. Hence, the analysis of such operations should be based on the general rules applicable to transactions between associated legal entities but taking into account that a permanent establishment is not a separate legal entity and is considered as a distinct taxpayer for tax purposes only.
Are any exit charges imposed on restructurings? How are they determined?
No, there are no exit charges imposed on restructurings.
However, the Draft Law On Amending the Tax Code of Ukraine Towards the Implementation of the Base Erosion and Profit Shifting Action Plan prescribes provisions under which transactions of restructurings will be considered to be controlled. The transfer pricing rules should be applied in those cases where such transfer would not be performed without compensation between unrelated parties.
Temporary exemptions and reductions
Are temporary special tax exemptions or rate reductions provided through government bodies such as local industrial development boards?
Update and trends
Tax authority focus and BEPS
What are the current issues of note and trends relating to transfer pricing in your country? Are there particular areas on which the taxing authority is focused? Have there been any notable legislative, administrative, enforcement or judicial developments? In particular, how is the OECD's project on base erosion and profit shifting affecting both policymakers and tax administrators?
In 2018 the following changes concerning transfer pricing were implemented:
- Transactions between non-residents and permanent establishments in Ukraine qualify as being controlled transactions.
- The volume of controlled transactions should be calculated based on arm's-length prices rather than contractual prices.
- The advance pricing agreement procedure was updated.
The Ukrainian tax legislation on transfer pricing has focused on the implementation of the Base Erosion and Profit Shifting Action Plan in national tax legislation. Ukraine signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting on 23 July 2018.
The Draft Law On Amending the Tax Code of Ukraine Towards the Implementation of the Base Erosion and Profit Shifting Action Plan provides for significant changes to the transfer pricing procedure (both amending the edition currently in force and introducing completely new concepts and provisions), namely those concerning:
- criteria for recognising individuals as related;
- a list of controlled transactions;
- information that must be included in transfer pricing documentation;
- functional and economic analysis of the terms of controlled transactions;
- replacement of the list of exchange commodities with a list of primary commodities;
- the business purpose test;
- low value-adding services;
- new transfer pricing reporting
- notification of being a part of an international group of companies;
- transfer pricing global documentation (master file);
- a country-by-country report; and
- an increase in the number of penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.