The President of Ukraine signed the Law of Ukraine “On Amendments to the Tax Code of Ukraine regarding the Improvement of Administration of Taxes, Elimination of Technical and Logical Inconsistencies in Tax Legislation” № 466-IX, adopted by the Verkhovna Rada of Ukraine on January 16, 2020 (Bill 1210).
The Law introduces a number of provisions of the Plan of Counteraction against Base Erosion and Profit Shifting (BEPS) and will have a significant impact on the taxation of international groups of companies and their shareholders/beneficiaries in Ukraine: the taxation of controlled foreign companies is introduced, the approach to permanent representative offices is extended, transfer pricing rules are enhanced, the test of the main business purpose of a transaction is introduced, "constructive" dividends are defined, provisions on thin capitalization are introduced.
Briefly about the main provisions:
1. Transfer pricing (TP).
- A three-level TP reporting structure is introduced. The first reporting period is 2021. Value criteria for master file (MF) reporting is EUR 50 million, for country-by-country reporting (CbCR) is EUR 750 million.
MF is submitted within 90 days from the date of the receipt of an inquiry, which may be received not earlier than 12 months and not later than 36 months after the end of the financial year of a group. The penalty for non-submission of the report is up to 300 living wages.
CbCR is submitted within 12 months after the end of the financial year of a group. The penalty for non-submission is set forth in the amount of up to 1,000 living wages.
Notice of membership is submitted by October 1 of the year following the reporting year. The penalty for non-submission is up to 50 living wages. The notice is submitted for the first time in 2021 for 2020.
- Income tax of 15% for payments for non-residents equated to dividends is introduced. Among them: transactions of the purchase/sale of goods (works, services) and income in the form of payments for securities (corporate rights).
- Сonnection criteria have been supplemented: changes from 20% to 25%; if accounts payable exceed equity by 3.5 times; membership in joint activities of 25% or more is determined as an additional sign of connection.
- Transactions of CFC with related non-residents, residents from “low-tax” jurisdictions are subject to control in respect of TP, if the volume of transactions of CFC with one of such counterparties exceeds UAH 10 million, and at the same time the CFC’s annual income exceeds UAH 150 million.
- In the documentation in respect of TR it is necessary to indicate information on beneficiaries, the value chain, as well as to ground the economic expediency of transactions, in respect of transactions of the purchase of works/services, intangible assets, other subjecs of transactions that are not goods.
- Adjustments in respect of TP should be made if terms of transactions do not meet a reasonable economic purpose (business purpose).
2. Transactions with non-residents.
- The definition of dividends is extended. In addition to adjustments under TP rules, dividends are equated to certain types of payments in favor of non-residents: return of funds to a non-resident in connection with the withdrawal of a member or redemption of a share, reduction of an authorized capital, as well as in similar transactions in the amount that leads to a decrease in retained profits of a taxpayer - legal entity.
- Taxation in Ukraine of transactions with shares and corporate rights of foreign companies, the value of which is formed mainly from real estate in Ukraine, including leased one. It is provided that non-residents will have to pay a tax in this case (a seller, and if a seller has no representative office in Ukraine, then a buyer). At the same time a non-resident buyer of the asset will have to register themselves with Ukrainian supervisory authorities for these purposes. The value of shares, stocks and real estate is determined on the basis of the balance sheet (residual) value according to accounting data and is compared with the balance sheet value of other property (assets) of a company according to accounting data.
- The rules of determining the object of taxation for corporate income tax for permanent representative offices change. The object of taxation of a representative office must be determined according to TP rules and correspond to the profit of an independent enterprise that carries out the same or similar activities in similar conditions and operates in complete independence from the non-resident whose permanent representative office it is.
3. The institution of Controlled Foreign Companies (CFC) is introduced.
A controlled foreign company is any legal entity registered in a foreign state that is recognized as the one which is under the control of an individual - resident of Ukraine or a legal entity - resident of Ukraine. The following persons will be deemed controlling persons:
- owner (shareholder) of the company with shareholding of over 50%;
- owner (shareholder) of the company with shareholding of more than 10% or more, if the company has Ukrainian owners (shareholders) and all of them own in total 50% or more of the company's shares;
- a person who independently or together with other residents of Ukraine actually controls a foreign company.
CFC must be declared to Ukrainian tax authorities. It is necessary to declare the amount of an adjusted profit of such companies.
The adjusted profit is a pre-tax profit for the reporting period, which is included in the total annual taxable income of a controlling person (PIT) or which increases the object of taxation of a controlling person (income tax) according to results of the reporting tax year.
Exemption from taxation of CFC is possible provided:
- there is a valid agreement between Ukraine and a foreign jurisdiction of CFC on the elimination of double taxation or the exchange of tax information;
- each of the following conditions is met:
CFC actually pays income tax at the effective rate which is not less than the rate of corporate income tax in Ukraine or less than such a rate by not more than 5%;
the share of passive income of CFC is not more than 50% of the total amount of income of CFC from all sources.
Notwithstanding the above conditions of the exemption, the adjusted profit of CFC is not subject to personal income tax and is not subject to income tax if the total joint income of all CFC does not exceed EUR 2 million as of the end of the reporting year.
for non-submission of the report on CFC - a penalty of 100 minimum wages;
for non-disclosure in the report on CFC of information on existing CFC - a penalty of 3% of the amount of income of CFC or 25% of the adjusted profit of CFC for the relevant year, not disclosed in the report, whichever is larger, but not more than 1000 minimum wages for each fact of non-disclosure of CFC and/or for all undisclosed amounts.
The provisions in respect of the taxation of CFC shall enter into force on January 1, 2021.
4. The criteria of the permanent representative office of a non-resident have been changed:
- construction site, construction, assembly or installation facility or related supervisory activities, if the total duration of work (within one project or related projects), performed by a non-resident through employees or other staff hired by them for such purposes, exceeds 12 months;
- the provision of services by a non-resident (other than personnel provision services), including consultancy services, through staff employed by them for such purposes, if such activities are carried out (within one project or a related project) in Ukraine during a period or periods a total duration of which is more than 183 days in any monthly period;
- the presence of persons who have and usually exercise powers to negotiate the essential terms of agreements, as a result of which a non-resident enters into agreements (contracts) without significant changes in such terms, and/or to enter into agreements (contracts) on behalf of a non-resident in case if the said activity is carried out by the person in the interests, at the expense and/or for the benefit of a non-resident only and/or related persons-non-residents;
- the presence of persons who have and usually exercise powers to keep (store) stocks (goods) belonging to a non-resident, from which stocks (goods) are supplied on behalf of a non-resident, except for residents - owners of warehouses of temporary storage or customs warehouses.
When calculating the total period during which a non-resident carries out activity in Ukraine, the following shall be added:
• duration of the activity of a non-resident in Ukraine, which is carried out during several consecutive or non-consecutive periods, which are separately less than a full calendar month, but in total exceed 30 days;
• duration of activity of related persons of this non-resident in Ukraine, if such an activity is closely related to the activity of a non-resident determined in subparagraphs “a” and “b” and is carried out for several consecutive or non-consecutive periods which in total exceed 30 days.
The activity that has signs of a permanent representative office may be evidenced by:
• the provision of mandatory instructions by a non-resident (including by means of electronic communication or by transfer of electronic media) and their performance by a person;
• a person has and uses an e-mail address of the non-resident's corporate e-mail and/or their related persons for communication with the non-resident and/or third parties with whom the non-resident has already concluded or will conclude contracts or other agreements;
• exercise by a person of the right of ownership or disposal of stocks (goods) or other assets of a non-resident in Ukraine or their significant share on the basis of relevant instructions of a non-resident;
• a person has premises leased on their own behalf for storage of property acquired at the expense of a non-resident or owned by a non-resident or third parties and subject to transfer to third parties at the instruction of the non-resident or for other purposes specified by the non-resident.
The permanent representative office of a non-resident in Ukraine is also recognized in case if the activity in Ukraine is carried out by several non-residents - related persons, if such joint activity goes beyond the activities of a preparatory or ancillary nature for such a group of non-residents - related persons.
The recognition of a person as a controlling person is not a permanent representative office.
A non-resident is not considered the one who has a permanent representative office in Ukraine if they carry out economic activities through a resident intermediary, but at the same time the provision of agency, trust, commission and other similar intermediary services of the sale or purchase of goods (works, services) at the expense, in the interests and/or in favor of the non-resident is carried out within the main (ordinary) activities of the resident and under normal conditions.
5. Changes in the conditions of application of International Tax Conventions.
An international convention does not apply if the main purpose of a transaction or structure is to obtain a tax advantage under the convention.
Requirements regarding a beneficial owner for purposes of application of the International Convention have been specified. The possibility and conditions of using the International Convention are provided, but not with the direct recipient of income (if such a recipient is not a beneficial owner), but with another person who is the beneficiary of such income. It is also provided that the requirement in respect of a beneficial owner may not apply if the relevant condition is not provided for in the International Convention.