On 23 May 2020, the Law of Ukraine "On Amendments to the Tax Code of Ukraine Purposed to Improve the Administration of Taxes, Eliminate Technical and Logical Inconsistencies in the Tax Legislation" ('Anti-BEPS Law') became effective with certain provisions being phased out.
At the same time, certain provisions of the Anti-BEPS Law have called for the extension of their entry into force or elaboration thereof.
Separately, the President of Ukraine referred to the Cabinet of Ministers with a number of recommendations purposed to enhance the Anti-BEPS Law concerning, inter alia, the CFC Rules, protection of data reported by taxpayers and obtained from the foreign jurisdictions.
To this end, on 14 July 2020, the Parliament of Ukraine passed Law No. 786-IX "On Amendments to the Tax Code of Ukraine with respect to Functioning of the Electronic Cabinet and Simplification of Work of Private Entrepreneurs" ('Amending Law'). On 8 August 2020, the Amending Law entered into force.
Despite the Amending Law being largely aimed at extending the entry into force or elaboration of the Anti-BEPS Law provisions, it was materially altered through the course of the oral debates on the Parliament's floor.
The Amending Law suggests that:
- the CFC rules ARE NOT delayed till 1 January 2022 but come into force on 1 January 2021;
- the Business Purpose Test continues to apply to any transaction with any foreign counterparty, whether related or not;
- taxation of capital gains arising from the offshore sale of real estate rich companies deriving their value from immovable property located in Ukraine applies as originally scheduled from 1 July 2020; in addition, the sale of Ukrainian real estate rich company would as well be subject to tax;
- NO extension of the enhanced permanent establishment rules; and
- the tax-free liquidation of CFCs is formally extended through 31 December 2021.
In more detail
Controlled Foreign Companies
- The proposal for extending the CFC rules' entry into force was not sustained.
- Effective 1 January 2021, the CFC Rules introduce taxation of income of controlled foreign entities ('CFCs') at the hands of Ukrainian 'controlling' persons (individuals/companies).
- The CFC Rules will target Ukrainian individuals and companies with an ownership interest in a foreign entity of (i) more than 50%, or (ii) more than 10% (25% and more in 2021-2022) provided Ukrainian individuals (companies) jointly own a share 50% and more, or (iii) in case of established de facto control over a foreign entity.
- Notably, the Amending Law extends tax-free liquidation of CFCs through 31 December 2021 with no tax applicable to the liquidation proceeds.
- While being not a part of the Anti-BEPS Law and the Amending Law, the CFC regime is still expected to be complemented with the contemplated Voluntary Disclosure (Tax Amnesty) relief. Under the proposed Tax Amnesty Bill, Ukrainian tax residents would be pardoned for tax offences disclosed by such residents voluntarily. The disclosed qualifying income is proposed to be taxed at PIT rates varying from 2.5% to 10%.
Corporate Income Tax
- Business Purpose: The proposal for extending the Business Purpose Test entry into force was not sustained. Accordingly, the Business Purpose Test continues to apply to any transaction with any foreign counterparty.
- At the same time, the Amending Law slightly narrows the principle of "reasonable economic purpose (business purpose)". In this connection, transactions with non-residents should be deemed to lack business purpose if:
- the principal or one of the principal purposes of a transaction is found to be tax evasion or underpayment;
- under comparable conditions, a taxpayer would not be able to purchase/sell same goods/services/works from/to an unrelated party.
- Capital Gains: Taxation of capital gains arising from the offshore sale of real estate rich companies deriving their value from immovable property located in Ukraine applies as originally scheduled from 1 July 2020.
In addition, capital gains from the direct alienation of shares/participatory interest in Ukrainian real estate rich companies would as well be subject to tax.
- Constructive Dividends: The concept of 'constructive dividends' will be introduced starting 1 January 2021. At the same time, taxpayers should be relieved from the obligation to pay advance CIT payments on constructive dividends.
- For the proposal for extending the enhanced permanent establishment ('PE') rules entry into force was not sustained, they apply as originally scheduled from 23 May 2020.
- In this connection, the tax office has espoused the position that the key change concerning the methods of PE taxation, namely the Authorized OECD Approach, should be applied by the taxpayers.
- The Amending Law advances the taxpayer's e-cabinet's functions with the view to enhancing means for electronic communication between the tax office and a taxpayer.
With this in mind, the Anti-BEPS Law shall apply effective from:
- 23 May 2020 - with respect to PE taxation, business purpose test, principal purpose test, definition of 'beneficial owner', PIT taxation of foreign-sourced investment income, majority of the transfer pricing provisions, tax audits;
- 1 July 2020 - with respect to taxation of capital gains;
- 1 January 2021 - with respect to the CFC Rules, earning stripping restriction and 'constructive dividends'.
For a more detailed discussion on the Anti-BEPS Law, please follow this link.
Actions to consider
The Anti-BEPS Law will significantly affect most international corporate structures as well as domestic companies. In light of the already effective and upcoming changes in taxation, you may wish to consider the following actions to mitigate possible transition stress:
- review your corporate structure and identify entities that may be recognized as CFCs in Ukraine;
- assess the soundness of the economic (business) purpose in your transactions with non-residents;
- test the 'look-through' approach within your international corporate structures, financial or IP arrangements, management or services agreements, and assess the potential for corporate migration;
- prepare for new reporting obligations;
- review the current model of attribution and taxation of profits, if you have a PE in Ukraine, and adjust the model to address the new requirement to determine PE's profits under the 'arm's length' principle;
- consider the tax efficiency of the existing structure and the potential for restructuring if necessary;
- assess contemplated restructuring against the novelties of the Anti-BEPS Law;
- assess the PE risks, if you act through a dependent agent or have individual contractors working in Ukraine;
- consider establishing corporate presence to align your activities in Ukraine with the new tax rules.