Ukrainian corporate income tax law distinguishes between domestic companies and foreign companies based on their place of incorporation. Domestic companies those incorporated in Ukraine) are taxed on their world-wide income whilst foreign companies are subject to corporate income tax on profits from business activities performed via a permanent establishment in Ukraine.
Permanent Establishment of Foreign Legal Entities
Non-residents engaging in business activities via a Permanent Establishment (PE) in Ukraine are subject to Ukrainian corporate profit tax. However, there are several methods of tax treatment for the PE. If a non-resident derives profit through a permanent establishment in Ukraine, the taxable profit in Ukraine is determined based on an allocation of profit to the PE via a split of business activity. To obtain this, a non-resident company should use exact figures from its internal accounting records, if available or can allocate the profit on the basis of revenues/expenditure. If it is impossible to determine profit allocated to the PE by this so called direct method, the taxable profit is determined as the difference between gross income and tax deductible expenses by implying a 30% profit margin based on sales, if known, or by grossing up expenses. The net effect of this calculation is a tax liability based on sales of 9% or a tax liability based on expenses of approximately 13%.
For corporate income tax purposes a tax year coincides with the calendar year.
Taxable profit is determined based on adjusted gross income reduced by deductible costs and tax depreciation. For corporate income tax purposes, adjusted gross income means gross income (i.e. a company's world-wide income) received (accrued) during the reporting period either in cash, in kind or in intangible form. Gross income includes total income from the sale of goods (work, services), fixed assets and gratuitous transfers.
Ukraine uses an accrual and cash method to record expenses, although there are some anomalies which should be looked at closely. Revenues are recognised at the earlier of the goods or services being provided or cash being received (e.g. if there is a prepayment).
The existing law generally allows reasonable business expenses as tax deductible, with the exception of expenses explicitly disallowed or restricted by the law in a detailed list.
Among the disallowed or restricted expenses the following are:
- fuel, repairs of company cars (except where the company's business is transportation);
- contractual penalties;
- expenses associated with warranty repairs (deductibility is restricted to 10% of the total price of such goods sold and still under warranty);
- expenses incurred in connection with receptions, celebrations and similar events held for advertising purposes and connected with business activity (deductibility is limited to 2% of the taxpayer's taxable profit for the respective period);
other expenses not connected with business activity.
TAX RATES AND PAYMENT DATES
The basic corporate tax rate is 30%. Special tax rates apply to certain types of income (e.g. income earned from Ukrainian sources by non-residents not engaged in business activities in Ukraine through a permanent establishment).
Corporate tax liabilities are self-assessed by taxpayers. Tax is payable on a quarterly basis. Quarterly tax returns are due within 40 days from the reporting quarter.
TAX RATES AND PAYMENTS TO RELATED PARTIES
In order to be deductible, expenses should be supported by documentary evidence. In respect of payments to individuals or entities associated with the taxpayer, the law explicitly states that the absence of documentary evidence concerning payments for services rendered can lead to disallowance. In practice this requirement becomes important in respect of management fees, payments under secondment contracts and other inter-group cost re-allocations. Transactions between related parties should be executed on the basis of 'fair market' prices, which would be paid under similar conditions to third (non-related) parties.
PAYMENTS TO NON-RESIDENTS IN DEEMED TAX HAVENS
A restriction applies to the deductibility of payments made to non-residents in deemed tax haven locations. Such payments provided that they are allowable deductions in the first place, can only be deducted at 85% of their total amount. The tax haven locations are referred to as those, which are to be listed in a relevant resolution of the Cabinet of Ministers of Ukraine.
The following are not included in taxable profit:
- capital contributions in return for a share in the equity (i.e. in return for corporate rights);
- contributions in cash or in kind under joint activity agreements in Ukraine without creation of a legal entity;
- share premium received by a share issuer (difference between the price of a share and its nominal value);
- dividends received provided they were taxed upon distribution in accordance with the Corporate Income Tax Law.
Under the current corporate profit tax legislation, with one exception, no tax holidays or exemptions are provided to foreign investments. 5-year tax holidays used to be provided to foreign investors in previous years but these have been cancelled and are no longer applicable. There is a tax holiday available, however, for an investment of USD 150 million or more in the automotive industry.
FOREIGN TAX CREDIT
A tax credit system is effective to avoid double taxation of income derived from abroad. A credit is allowed for foreign taxes paid up to the amount of Ukrainian tax due on such income, provided there is a tax treaty with the state in which the tax was paid and proof of taxes paid can be obtained.
UKRAINIAN REPATRIATION TAX
Under current Ukrainian tax legislation Ukrainian source income, such as dividends, interest or royalties payable to non-Ukrainian residents is subject to 15% withholding tax upon repatriation. However, the rate of 15% can be reduced based on the provisions of a relevant double tax treaty.
GROUPING/CONSOLIDATED TAX RETURNS AND LOSS RELIEF
Grouping/consolidated tax returns are allowed for resident taxpayers and their branches or other units without legal entity status. There is no group relief for losses and profits of separate Ukrainian legal entities. There is a requirement that a branch should be located in a different region from the head office. An application to switch to payment of tax on a consolidated basis should be filed before the new reporting year. The detailed procedure for paying consolidated tax is established by the State Tax Administration of Ukraine.
Resident taxpayers carry forwards are granted to resident taxpayers. The term is limited to 5 years from the moment the loss is recorded in the accounting records.
DIVIDENDS & OTHER PAYMENTS
Tax Withholdings on Dividends Distributed to Ukrainian Resident
Dividends payable by a Ukrainian domestic company to its Ukrainian resident shareholders are subject to 30% withholdings due from the dividends. The tax on dividends should be paid prior to or simultaneously with the payment of dividends. However, the tax can be offset against corporate income tax liabilities of the entity distributing the dividends.
As indicated above, dividends distributed by a Ukrainian company to its non-resident shareholders are classified as income derived from Ukrainian sources. Repatriation of dividends abroad is subject to 15% withholding tax due from the dividends paid. However, the 15% tax rate can be reduced based on provisions of a relevant double tax treaty concluded with Ukraine.
VALUE ADDED TAX (VAT)
Scope of VAT
The VAT law provides for the uniform treatment of both production and merchandising entities: under the VAT law VAT due to the State is assessed as the difference between VAT collected from customers and VAT paid to suppliers. All turnover from the sale of goods and services in Ukraine is within the scope of the tax (but subject to specific exemptions or exclusions as noted below), as are imports of goods and services.
For VAT purposes the law distinguishes between four types of transactions. These transactions are those which are:
- subject to VAT and are taxed at the standard rate of 20%. This applies to all goods and services apart from the exceptions set out below.
- subject to Zero-rate VAT. The list of transactions primarily includes:
- Sales of goods outside Ukraine (export of goods);
Sales of services which are intended to be used or consumed outside Ukraine.
Whilst the criteria for defining exported services are not really clear at the moment, the law provides for the list of services that are a priori considered as exported. This list includes services on transfer of copyrights, licences, patents, and a right for non-residents to use trademarks.
- Non-VATable transactions. Some of these transactions are:
- Fixed assets contributed in exchange for a share of enterprises with foreign investment;
- Transfer of property for leasing from a Ukrainian lessor to a lessee and its return to the lessor on the termination of the lease;
- Rent payments under financial leases;
- Insurance and reinsurance transactions;
Most banking services.
VAT exempt transactions. These include:
- Education services;
- Artistic and cultural services;
- Healthcare services;
- Certain mass media services;
In general, VAT is payable by:
- An entity with a volume of VATable transactions in excess of 3,600 non-taxable allowances (i.e. UAH 61,200 currently approximately USD 11,500) for any preceding 12 months of operation;
- An importer of goods, services or works;
- An entity that is engaged in trade for cash regardless of the volume of sales.
Any entity qualified as a VAT payer is required to register for VAT purposes.
VAT registration is compulsory for all Ukrainian companies which qualify as VAT payers. Foreign legal entities engaged in production or other commercial activity in the territory of Ukraine are considered to be VAT payers and required to register for VAT purpose. Foreign legal entities registered as VAT in the same manner as Ukrainian enterprises.
Foreign companies terminating their activities in Ukraine are obliged to file a final tax declaration with the relevant tax authorities.
Under Ukrainian law, VAT is recoverable provided that the goods (works, services) are deductible for corporate profits tax purposes or, in the case of fixed assets, are subject to depreciation. VAT incurred on business expenses may normally be recovered as a credit against output VAT or as a refund, with the following exceptions:
- VAT on inputs corresponding to exempt supplies;
VAT on certain expenses, which by virtue of the corporate tax legislation, are not deductible for corporate profits tax purposes.
Generally, an input tax credit can only be claimed if the VAT has been paid to the supplier although there are some exceptions. VAT paid (accrued) by a taxpayer during the reporting period in relation to acquisition (construction) of fixed assets subject to tax depreciation are included as a tax credit for that reporting period regardless of the time the fixed assets are put into operation.
There is no clear or effective mechanism for VAT refund by foreign entities that are not registered as VAT payers in Ukraine.
There are no specific partial exemption rules. Companies making wholly taxable supplies can recover the VAT element of their expenses whilst those making wholly exempt supplies do not enjoy recovery. Partly exempt companies which make both taxable and exempt supplies are required to make a calculation as to what proportion of the input tax they should recover. Any exempt supplies will trigger a partial disallowance of input tax.
To qualify as export and consequently to be Zero-rated, goods should be physically exported outside the customs territory of Ukraine. Documentary evidence of export is important (i.e. supply contract, proof of payment, export customs declarations).
Imports of Goods
The transfer of goods into the customs territory of Ukraine is chargeable to VAT.
Exported Services (Zero-rated)
Under the VAT law, sales of services in the customs territory of Ukraine and import of services from a non-resident service provider are subject to VAT.
In order for a zero VAT rate to be applicable for the export of services from Ukraine two conditions should be satisfied:
- Services should be consumed by a non-resident entity;
Services should be used or consumed outside Ukraine.
The services to be used abroad are taxed at a Zero rate. The zero-rated services inter alia include:
- Services provided in relation to lease, charter and freight of aircraft, ships, shuttles, etc.;
- Export of royalties, patents, trade marks, licences, etc.;
- Advertising services to be used outside the territory of Ukraine;
- International communication services;
Sales of goods in duty free shops.
For VAT payers whose reporting period is one month VAT returns are required to be filed no later than the 20th day of the following month. VAT payers whose reporting period is quarter, must file their returns within 40 days of the end previous quarter.
Under VAT legislation all VAT liable transactions are to be properly documented with tax invoices. The legislation provides for an explicit list of items to be included in a tax invoice, primarily selling price, VAT amount, registration number of the tax payer, etc. To be treated as a deductible, VAT paid to suppliers should be properly supported with tax invoices. The tax invoices can only be issued by entities or individuals registered as taxpayers for VAT purposes.
Interest is charged based on 120% of the National Bank of Ukraine prime rate (currently 12.5%). The interest charged on late VAT payments is, therefore, 15 % per annum at present.
Generally the following customs duties are payable by the importer upon importation of goods into Ukraine:
- customs fees at the rate of 2% of the customs value of the goods but not more than USD 1000 (for goods customs value of which exceed USD 1,000);
- customs duty in accordance with the Unified Customs Tariff;
- excise duty levied on a limited list of goods, mainly consumer and luxury items (for instance cars, alcohol and tobacco products, jewellery, etc.). The basis for calculation constitutes the customs value of goods inclusive of customs fees and import duty paid.
- Customs value is defined as the invoice value increased by the following items:
- actual costs of transportation, loading, unloading and insurance incurred up to the moment of crossing the Ukrainian border;
- amounts of commissions and broker's fees paid;
fees for intellectual property rights relating to goods which must be paid as a condition of their importation.
Under Ukrainian law, there are relieved and full rates applied depending on the country of manufacture or origin.
The relieved duty rates apply to goods manufactured in the countries that signed trade agreements with Ukraine for the most-favoured-nation status. Countries which qualify for this favourable trade regime include Austria, Belgium, Canada, China, Denmark, Egypt, Estonia, Finland, France, Germany, the United Kingdom, Greece, Hungary, Italy, Japan, the Netherlands, Switzerland, Sweden, Turkey, and the USA. Relieved import duty rates may also apply to goods manufactured in countries which have entered into free trade agreements with Ukraine (e.g. Belarus, Russia).
Full rates are applied to goods from a limited list of countries with whom trading is not specifically encouraged or when the origin of goods cannot be defined.
Import duty is payable in local currency and may be deferred for the period of one month by way of a bank guarantee.
An exemptions from import duty for a very limited number of items (Ukrainian and foreign currency, securities, goods exempt from import duty under international agreement concluding by Ukraine, etc.)
The Unified Customs Tariff is based on the Ukrainian Nomenclature of Foreign Trade compiled in accordance with the Harmonised Commodity Description and Coding System accepted in the EU.
Excise duty is an indirect tax levied on certain profitable and monopolised goods (products) which is included in the price of these goods (products). All business entities producing or importing excisable goods (products) are the payers of excise duty.
The list of excisable goods currently includes the following items: alcoholic beverages, tobacco and tobacco products, imported cars, fuel, tyres, jewellery.
Rates of excise duty are uniform for the whole territory of Ukraine. For example, alcoholic drinks' excise duty ranges from ECU 0.15 (on a sold item) / ECU 0.6 (for import) for 1 litre of grape wine and up to ECU 3 (on a sold item) / ECU 7.5 for 1 litre for vodka and 100% spirits. The amounts of excise duty levied on transport vehicles depend on their engine capacity.
Excise duties are not levied when excisable goods are exported for foreign currency.
TAXATION OF INDIVIDUALS
Individuals are subject to personal income tax in Ukraine. Non-residents are taxed in Ukraine in the cases stipulated below.
The income tax rates range from 0% to 40%. The tax year for individuals is a calendar year. Non-residents are subject to a fixed withholding tax of 20% on their incomes from Ukraine unless another rate is mentioned in the relevant double tax treaty.
In Ukraine, foreign individuals are considered as residents for personal income tax purposes by using, a '183-day' test. An individual is deemed to be a permanent resident in Ukraine if he or she is physically present in Ukraine for not less than 183 days in a calendar year. If this rule is applicable, such foreign individuals are obliged to pay tax in Ukraine on their worldwide income.
Taxable income includes any income received in cash or in kind (in local or foreign currency). Income received in foreign currency must be converted into Hryvnias at the rate of the National Bank of Ukraine on the date of its receipt. Income received in kind is valued at fair market prices except for income received from agricultural companies which is valued at state controlled prices.
Taxable income, in particular, includes the following:
- Wages, bonuses;
- Profits from stock options;
- Annual (additional) paid vacation;
- Reimbursement in cash of unused vacation;
- Student and other fellowships;
- Cost of company products handed over to an employee as remuneration in kind;
- Use of company car for personal purposes;
Moving allowances for unsubstantiated purposes;
- Housing allowances for foreign nationals (i.e. up to the rent actually paid);
- Amounts contributed on behalf of the employee to Ukrainian state pension or social insurance funds;
- Use of car for business purposes;
- Business trip costs;
- Income from deposits maintained with banks in Ukraine;
- Dividends received from Ukrainian legal entities;
Financial aid to an employee on condition that such aid is provided once per year and does not exceed the living minimum (i.e. currently UAH 342, approximately USD 65)
FOREIGN TAX RELIEF
In Ukraine, relief for foreign income tax is usually recognised in the form of a foreign tax credit up to the amount of tax that would have been suffered in respect of the same income in Ukraine. As a rule, a foreign tax credit is recognised by the Ukrainian tax authorities if written confirmation is available from the foreign tax authorities of the country where the tax was paid.
Currently, Ukraine has a broad network of double tax treaties, including former USSR agreements which are still recognised by Ukraine. Where an individual is a resident for treaty purposes of another state an exemption or reduced rate in respect of Ukrainian income tax can be obtained.