Tax Treaties and Residence
How many income tax treaties are currently in force in Ukraine?
A treaty with Ireland has been ratified by Verkhovna Rada (the Ukrainian Parliament, hereinafter – the “VR") this year, bringing the 72nd Ukrainian tax treaty into force. At present, 69 of those treaties were entered into by Ukraine as an independent State, while three treaties (with Japan, Spain and Malaysia) of the former Soviet Union are also being applied by Ukraine. There are also signed but as yet unratified agreements with Cuba, Malta and Luxembourg. It is also worth noting that there have been talks in the VR on denouncing the now-in-effect tax treaty with Cyprus, and bringing a new one in its place by 2019.
Do they generally follow the OECD Model Convention or another model?
Yes, most of the double tax agreements (“DTAs") follow the standard model; however there are several agreements that do not follow the OECD standard e.g. the old Soviet agreements or the agreement with the USA.
Do treaties have to be incorporated into domestic law before they take effect?
According to the Constitution of Ukraine, an international agreement enters into force (forms part of the national legislation) upon its ratification by the VR. The implementation of a tax treaty takes place by a special law passed by VR.
Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits" articles)?
Some of the anti-treaty shopping concepts are incorporated directly into the Tax Code of Ukraine. Notably, the beneficial owner principle is provided for by the Tax Code in relation to a recipient of dividends, royalties and/or interests, which states that “[a] person (tax agent) is entitled to apply an exemption from tax or a lower tax rate provided by a tax treaty to a payment in favor of a non-resident only in case if that non-resident is a “beneficial (actual) recipient (owner) of income".
A “beneficial (actual) recipient (owner) of income" is defined as a person that has a right to receive income, but excluding a person that is an agent, nominee recipient (nominee owner) or is merely an intermediary regarding that income.
Most of the DTAs currently in force incorporate these exact or very similar provisions.
Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)?
No. It is explicitly provided by the Tax Code of Ukraine that in case of a conflict between tax rules provided by an international agreement and tax rules provided by a national law, the rules provided by the international agreement shall prevail.
What is the test in domestic law for determining corporate residence?
Ukrainian tax legislation is silent on specific rules regarding the determination of a corporate residence-like place of effective management, or other concepts. Instead, Ukrainian tax law is very plain and recognises as a tax resident any legal entity and its “segregated persons" (e.g. branches, etc.) that are established and conducting its activity according to the laws of Ukraine.
Legal entities established under the foreign law are not considered tax resident, however their permanent establishments, while being recognised as a non-resident entity, have “for tax purposes a status equal to tax corporate resident".
Are there any documentary taxes in Ukraine?
There are no traditional stamp duties in Ukraine. However, certain transactions are subject to a mandatory contribution to the State Pension Fund and/or a State duty fee.
The State duty is levied in case of execution of notarial actions by a notary public (there are certain transactions that must be notarised in order to take legal effect) and for registration of a legal right/title. The rate at which a State duty is levied ranges from ~USD 0.01 to 1% of the contract price of the real estate.
The contribution to the State Pension Fund is paid by a buyer at the following rate in the following instances: 1% of the contract price for the purchase of real estate; 3%-5% of the contract price for the transfer of ownership of cars; for the sale of jewellery – 10% of the price of precious metal (gold, silver, platinum or palladium) of which the jewellery is made; and 2% of the sum of the transaction of purchase of foreign currency.
Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?
An operation on the supply of goods and/or services in the customs territory of Ukraine is subject to value-added tax (“VAT"). There are three rates provided for by the Tax Code. The main rate is 20%; a rate of 7% applies to the supply of medicines; and a rate of 0% is applied to the export of goods and certain other transactions.
Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?
The Ukrainian Tax Code provides for a special VAT regime for agrarian manufacturers (i.e. businesses, 75%+ of whose activities comprise of supplying agrarian goods or services). Under the special VAT regime, a sum of VAT received from a purchaser (VAT input/liability), after being set-off against the agrarian's VAT credit (output VAT), is not subject to transfer to the State budget, and instead becomes the property of the agrarian.
Is it always fully recoverable by all businesses? If not, what are the relevant restrictions?
The Tax Code states that VAT may be recovered by a VAT payer if the taxpayer's VAT credit (output) exceeds VAT liability (input). There are no special VAT regimes that, for example, provide for recovery as is possible in some jurisdictions; Ukraine's tax regime only provides the ability to pay tax.
However, there are certain exceptions regarding recovery – a tax resident is entitled to VAT reimbursement if it was registered as a VAT payer for 12 or more months previous to its application for recovery.
Non-residents are not entitled to VAT recovery unless they are acting via a permanent establishment that is a registered VAT payer.
VAT reimbursement is a very sensitive subject in Ukraine. The State budget has always lacked funds for recovery, and receiving the reimbursement has always been problematic. There has also been much corruption within the tax authorities, some officers of which provided for VAT reimbursement ahead of the line in exchange for personal rewards.
To combat the possibility of corruption, a system of electronic administration of VAT was introduced in 2015, which aims to provide for a more transparent and efficient way of administrating VAT.
Are there any other transaction taxes payable by companies?
There are no other transaction taxes except for those described above.
Are there any other indirect taxes of which we should be aware?
There are a number of excise tax and customs duties applicable in 2015. Excise tax is imposed on the sale and importation of excisable goods which include: ethanol; spirits; beer, tobacco goods; oil; liquefied gas; components of motor fuel; alternative fuel; cars; car bodies; trailers; motorbikes; vehicles for the transport of 10 persons or more; and vehicles for the transport of goods.
Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident?
Yes. According to the Tax Code, dividends paid to a non-resident are subject to withholding tax at a rate of 15%.
However, this rate, as well as the withholding tax rate imposed on interests and royalties, can be reduced by applying a double tax treaty. Most of Ukraine's DTAs provide a rate of 5% or 10%; however, treaties with Finland, France, the Netherlands and Sweden provide for a 0% withholding tax rate subject to certain conditions.
As briefly described in question 1.4, an exemption from taxation or a reduced tax rate provided by a tax treaty is effected by a resident conducting payment to a non-resident (usually a bank). The withholding tax is conducted upon payment. In order to apply a reduced tax rate or exemption from taxation, a payer must provide the institution conducting the transfer of funds (the bank) with a residency certificate.
Would there be any withholding tax on royalties paid by a local company to a non-resident?
Yes, the Ukrainian withholding tax applies to royalties. The basic tax rate provided for by the Tax Code is 15%. Most of the Ukrainian DTAs limit the tax rate at 10% or 5%. The DTAs with Spain, the UK and the USA provide for a 0% withholding tax.
However, it should be noted that royalties in an amount not exceeding 4% of the net income from the sale of goods (works, services) are recognised as expenses. This limitation can be avoided by submitting a transfer pricing report that proves that the royalties were paid completely at arm's length.
Would there be any withholding tax on interest paid by a local company to a non-resident?
Yes, there is a withholding tax on interest. Most of the tax treaties provide for a withholding tax rate of 5% or 10%. However, several treaties provide for a 0% or reduced rate, including the DTAs with Cyprus (2% withholding tax rate), the Netherlands (a rate of 2% applies to payments in favour of financial institutions, among which intra-group financing companies are recognised), and the United Kingdom (0% withholding tax rate).
Would relief for interest so paid be restricted by reference to “thin capitalisation" rules?
Yes, there are restrictions provided by thin capitalisation rules. Thin capitalisation rules were newly introduced in 2015 (before then, rules with a very similar effect were in force) with a massive overhaul of the corporate tax regime. The thin capitalisation ratio is set at 3.5:1. Should the total aggregate amount of the borrowings received from related parties exceed the equity of the borrower by 3.5 or more times, the borrower is allowed to recognise as expenses interest payments in an amount not exceeding 50% of EBITDA.
Three important points must be highlighted:
- Parties are considered related when, among other criteria, the ratio of borrowing to equity between them is 3.5:1 or higher.
- Any borrowing by a non-resident in a currency other than UAH must be registered with the National Bank of Ukraine.
- The Ukrainian legislation sets a cap on the interest rate for borrowing in a foreign currency from a non-resident lender. In case of receiving a convertible currency loan, the maximum interest rate must not exceed: 11% per annum for loans with a maturity of over three years; 10% per annum for loans with a maturity of one to three years; 9.8% per annum for loans repayable in less than one year; and LIBOR + 750 basic points per annum for floating rate loans.
If so, is there a “safe harbour" by reference to which tax relief is assured?
Taking into account all the restrictions combined (cap on the interest rate, thin capitalisation and transfer pricing) it is hardly possible to highlight an all-encompassing solution. However, the application of SPVs established in Cyprus, the Netherlands and the Czech Republic/Slovakia provide for the most efficient tax planning solutions.
Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?
All of the abovementioned limitations apply to any guarantor.
Are there any other restrictions on tax relief for interest payments by a local company to a non-resident?
There are no other restrictions or reliefs. In order to borrow at a rate higher than the cap set by the legislation, a borrower may obtain an individual licence from the National Bank of Ukraine.
Is there any withholding tax on property rental payments made to non-residents?
Yes, the Ukrainian Tax Code provides for a withholding tax on real estate (immovable property to be exact) rental payments at a rate of 15%.
Does Ukraine have transfer pricing rules?
Yes. The transfer pricing rules were introduced in 2013, and since that time have been constantly rewritten. Generally, the obligation to comply with the transfer pricing rules is realised by requiring an annually submitted transfer pricing report “on controlled transactions", which must include: transactions with related parties; and transactions with residents of black-listed countries.
Tax on Business Operations: General
What is the headline rate of tax on corporate profits?
The corporate profit tax is levied at a rate of 18%.
Is the tax base accounting profit subject to adjustments, or something else?
Before 2015, the Ukrainian Tax Code provided rules for separate “tax accounting", which Ukrainian residents were obliged to maintain. In 2015 the corporate tax regime was completely rewritten and, instead of providing for separate tax accounting, the Tax Code contains rules that provide for adjustment (increase or decrease) of the financial result (profit or loss) before taxation.
If the tax base is accounting profit subject to adjustments, what are the main adjustments?
The main adjustments, as mentioned above, are:
- The limitation relating to thin capitalisation (question 3.4).
- The limitation relating to the payment of royalties (question 3.2).
There is also an adjustment which provides that the financial result before taxation must be increased by 30% of total expenses incurred in transactions with residents of transfer pricing black-listed jurisdictions (only 70% of expenses are recognised as such), unless these transactions are completely at arm's length.
Are there any tax grouping rules? Do these allow for relief in Ukraine for losses of overseas subsidiaries?
Tax grouping rules were abolished in 2010. At present there are no such rules in Ukraine.
Do tax losses survive a change of ownership?
Yes, tax losses do survive a change of ownership.
Is tax imposed at a different rate upon distributed, as opposed to retained, profits?
Profits are taxed at the same rate regardless of whether they were distributed or retained. However, it should be noted that in order to distribute ad interim dividends, a company must pay an advance corporate tax at the standard rate (18%) which applies to the amount of distributed dividends. The amount of tax paid is then set-off against the taxpayer's tax liabilities.
Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property?
The most significant taxes are the corporate profit tax, the tax on income of individuals, VAT and excise, as well as ecological tax, rent payment (levied for the use of subsoil) and State duty.
There are also local taxes (as opposed to previously mentioned State-level taxes) which are as follows:
- Personal property tax.
- Single tax.
- Contribution for car parking places.
- Contribution for tourism.
Is there a special set of rules for taxing capital gains and losses?
There is no capital gains tax provided for by the Ukrainian Tax Code. However, most capital gains are taxed by the corporate profit tax, specifically profits arising from: trading in securities; sale of capital assets and investment profits; and profits arising from the exchange of foreign currency.
Is there a participation exemption for capital gains?
Yes and no. There is a participation exemption provided in relation to dividends received by a resident holding company from its resident subsidiary; however dividends received from a non-resident subsidiary are generally taxed.
Profit arising from trading in securities is always taxed.
Is there any special relief for reinvestment?
Ukrainian legislation provides for tax relief for investing in governmental bonds (withholding tax is not levied) which are offered to the public or admitted to trading outside of Ukraine.
Does Ukraine impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares?
The Tax Code of Ukraine provides for a withholding tax on profit received by a non-resident from trading in securities and other corporate rights. This tax is withheld by a tax agent – a broker in Ukraine.
Local Branch or Subsidiary?
What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?
There is no capital or similar duty provided for by the Ukrainian law.
What is the difference, if any, between the taxation of a locally formed subsidiary and the branch of a non-resident company?
Principally, there are no substantial tax differences. Registration as a tax payer of a subsidiary and of a branch is regulated by different instructions and different documents are provided to the tax authority. The tax regime is the same.
How would the taxable profits of a local branch be determined in its jurisdiction?
A branch is not a separate legal entity from the non-resident company and therefore the non-resident (and not the branch separately) is subject to tax in Ukraine. Of course only the profits of non-residents originating from Ukraine are subject to tax. Should it be impossible to distinguish profits of a non-resident originating from Ukraine from profits originating outside of Ukraine, 70% of all profits earned by the non-residents worldwide are taxed in Ukraine
Would such a branch be subject to a branch profits tax (or other tax limited to branches of non-resident companies)?
There are no special taxes applicable to branches or branches of non-residents specifically.
Would a branch benefit from double tax relief in its jurisdiction?
Passive incomes paid to a branch (permanent establishment) are not taxed by the withholding tax in Ukraine, unless these passive incomes are paid into a bank account with a local bank. However, once the permanent establishment repatriates these incomes outside of Ukraine, the tax is withheld.
Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch?
A transfer of funds between a non-resident and its branch (and vice versa) is not generally subject to tax, however there are certain specific cases, as highlighted above, when such transfer is taxed.
Does Ukraine tax profits earned in overseas branches?
Unless the branch is a separate legal entity according to the Law of Ukraine, the profits are taxed regardless of where they originate from.
Is tax imposed on the receipt of dividends by a local company from a non-resident company?
Before 2015, such tax was directly imposed. However, after the massive overhaul of the corporate tax regime in 2015, there are no provisions for such taxation. Nonetheless, there are no direct provisions for tax relief.
Does Ukraine have “controlled foreign company" rules and, if so, when do these apply?
There is no CFC legislation in Ukraine; instead, a much stricter regime is in place. Under the currency control legislation, the acquisition of corporate rights in foreign companies by residents of Ukraine is a currency operation that can be effected only after having obtained an authorisation (an individual licence) from the National Bank of Ukraine.
Taxation of Real Estate
Are non-residents taxed on the disposal of real estate in Ukraine?
A disposal of real estate is subject to a withholding tax at a rate of 15% unless otherwise is provided by a DTA.
Does Ukraine impose tax on the transfer of an indirect interest in real estate located in Ukraine and, if so, what constitutes an indirect interest?
There are no specific tax rules regulating indirect disposal of real estate e.g. sale of a corporate right in an entity that owns real estate instead of sale of real estate. However, such schemes are ineffective due to the fact that profits from the sale of corporate rights in Ukrainian entities are subject to withholding.
Income of a non-resident individual arising from the sale or alienation of real estate in Ukraine is subject to tax at a rate of 15% or 20%.
Does Ukraine have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent?
There are collective investment schemes in Ukraine (hereinafter referred to as the “CIS") that are very similar to REITs. CISs are not subject to tax and are quasi-tax transparent (while still being subject to tax, profits received by a CIS from investing (e.g. capital gains, interests, dividends, etc.) are not taxable. A CIS acts as a tax agent, and in certain cases withholds individual income tax, or a withholding tax at standard rates). Tax structures involving CISs are commonly used in building and development; however they are also often applied to minimise taxation.
Does Ukraine have a general anti-avoidance or anti-abuse rule?
There are no solid anti-avoidance rules at the legislative level. There is, however, a statutory definition or “reasonable economic purpose" in the Tax Code which is not applied elsewhere in the Tax Code.
However, court practice on the application of anti-avoidance/abuse rules is very strong. The courts and the tax authorities often apply doctrines of unjustified tax benefit, economic purpose (substance) and substance over form, as well as contesting allocation of costs of certain business transactions to the company's expenses.
Is there a requirement to make special disclosure of avoidance schemes?
No, there are no such requirements.
BEPS and Tax Competition
Has Ukraine introduced any legislation in response to the OECD's project targeting Base Erosion and Profit Shifting (BEPS)?
There were no specific declarations made relating to the BEPS project. The tax law of Ukraine is unfortunately many years behind. However, the most recent amendments of the Ukrainian tax law generally comply with the BEPS project and provide for a very strict and effective mechanism applying OECD-developed solutions such as thin capitalisation and transfer pricing against tax-avoidance and aggressive tax planning.
Does Ukraine maintain any preferential tax regimes such as a patent box?
All the preferential tax regimes were abolished following the ratification of the Ukraine-EU association agreement which, as well as EU legislation, prohibits State aid. Only a questionable special agrarian VAT regime is still in effect, however it is also scheduled for termination from 2017.