On 1 January 2011 the Tax Code of Ukraine came into effect, which significantly changed the rules of taxation of non-residents. The new rules were aimed to block tax minimization schemes with involvement of foreign structures and holdings that were commonly used by Ukrainian business people. Additionally, the rules contributed to clarifying flows of funds outside Ukraine. Meanwhile, a lot of companies with foreign investments, Ukrainian subsidiaries of foreign companies, as well as purely national companies working with foreign partners had to change their regular way of doing business to adapt to the game rules.
But every cloud has a silver lining. The Tax Code introduced favorable regulations for a number of industries. Specifically, until 1 January 2021, hotels (3, 4 and 5 stars), as well as electricity and light industry companies, shipbuilding and aircraft companies are released from corporate income tax. Until 1 January 2016, companies with the income that does not exceed UAH 3 million and staff is not more than 25 persons are not subject to corporate income tax. A lot of benefits and privileges are given to companies that provide services in the sphere of informatization. They open a wide range of investment opportunities in Ukraine, especially with a view of upcoming EURO-2012.
Investing in Ukraine
Under s.5 of the Act of Ukraine "On Regime of Foreign Investments" dated 19 March 1996 No. 93/96-ВР either of the following transactions is deemed to be a foreign investment:
- establishment of a joint venture with Ukrainian companies or individuals;
- acquisition of shareholding in the existing joint ventures or purely national companies;
- establishment of a subsidiary or branch in Ukraine;
- purchase of real estate;
- purchase of securities issued by Ukrainian companies (stocks, bonds, etc.);
- acquisition of rights to use land, etc.
It ought to be noted that the rules of taxation of contributions to the registered capital of Ukrainian legal entities slightly changed. Before adoption of the Tax Code in-kind contribution to the registered capital of company was treated for taxation purposes as sale of fixed assets. The Tax Code in its turn introduced a clear regulation specifying that total taxable income of a taxpayer does not include value of in-kind and monetary contributions to the registered capital of a legal entity - issuer of corporate rights, received in exchange for such contributions. It means that a non-resident making contribution to the registered capital is not obliged to pay income tax. However, operations on making in-kind contributions to the registered capital of a company are subject to VAT.
Profit Making & Taxes
Main changes to the tax regulations introduced by the Tax Code concern taxation of income generated in the territory of Ukraine. In accordance with the Tax Code taxable income of non-resident, which is subject to taxation in Ukraine, includes:
- interest, dividends, royalties and rent (passive income);
- freight and engineering fees;
- income from sale of real estate;
- income from securities trading, unincorporated joint ventures and performance of long-term contracts;
- payments in respect of cultural, educational, religious, sport or entertainment activities;
- agent, commission or brokerage fees;
- insurance payments and premiums;
- charitable contributions and donations;
- other business income.
It is worth saying that for purposes of taxation permanent establishments of foreign companies are considered as non-residents of Ukraine. Previous tax laws considered them as residents.
Royalty, Dividends and Interest
Royalty
New rules of taxation of royalty can become a serious constraint in using this instrument in business transactions and tax planning.
According to the provisions of the Tax Code, expenditures of a taxpayer does not include the costs of royalties calculated for non-residents in the amount exceeding 4% of revenue from sale of products for the previous reporting year. Moreover, there are several conditions which prevent including royalty to the expenditures, even when their amount is within the 4% threshold. These are:
- if a non-resident enjoys the status of off-shore company;
- if a non-resident is not the beneficial receiver of a royalty; the only exception from this rule is when a royalty is received by the person authorized by the beneficial receiver;
- if a royalty has paid for the objects of intellectual property, which were first registered in the Ukraine by a resident from Ukraine.
- if a royalty received by non-resident is not subject to taxation in jurisdiction of a non-resident.
However, these rules do not apply to royalties paid to a non-resident's permanent establishment Ukraine.
Dividends
The rules of taxation of dividends have changed slightly. Ukrainian company, when paying dividends to non-resident, has to contribute at its own expenses an advance fee to the state budget at the rate of corporate profit tax. There are exceptions from this general rule. If dividends are paid to an individual, it is not subject to advance fee. Advance fee shall not be charged, if dividends are payable by investment funds, as well as by a holding company in proportion to the amount of dividends received from its subsidiaries, etc.
Currently the rate of corporate profit tax is 23%; it was reduced from 25%. Further, the rate will be reduced more. During 1 January 2012 - 31 December 2012 the rate of the tax will be 21% and during 1 January 2013 - 31 December 2013 – 19%. Starting from 1 January 2014, it will be reduced to 16%.
Interest
The Tax Code has not changed the restrictive regulation of taxation of interest payable under loan agreements by Ukrainian company to the foreign company, which owns or manages 50% and more of its registered capital (shares). The amount of interest that can be included to the expenditures of Ukrainian company and subsequently offset against corporate profit tax liabilities cannot exceed the threshold specified by the Tax Code. That threshold is calculated as the sum of interest received by the Ukrainian company from placement of its own assets and 50% of taxable profit received by Ukrainian company during reporting period. It ought to be mentioned that the said 50% of taxable profit must be calculated without considering the amount of interest payable to the foreign company. This is a "thin capitalization" rule.
If passive income is payable to an individual, who is a non-resident, then it shall be taxed with individual income tax at the rate of 15%. Tax Code established a "proportional" rate of individual income tax. This means that if the amount of income exceeds the sum of 10 minimal salaries (currently – UAH 9 600.00 that is approximately USD 1 200.00), the rate of tax increases up to 17%. The 17% rate is applied to the difference between the actual income amount and the said threshold. The rate of individual income tax was substantially reduced. Previously the individual income tax rate for non-residents was 30%.
Withholding tax
Tax Code provides that the income paid to a non-resident is subject to withholding tax at the rate of 15%. The sum of income transferred to non-resident shall be decreased for the amount of withholding tax. The payer of income is considered as tax agent and is obliged to calculate, withhold and pay this tax to the budget.
However, Ukraine is a party to a number of double taxation treaties that makes possible, depending on the jurisdiction of the non-resident, to apply a reduced tax rate or exemption from taxation in Ukraine.
Generally, the rules of taxation of non-residents introduced by the Tax Code are quite positive and close to the European standards of taxation. Nevertheless, the Tax Code imposed some restrictions, which are aimed to prevent minimization of taxes and must be considered by foreign companies when planning transactions with Ukrainian partners. The rules of game changed but it does not mean that foreigners cannot efficiently conduct business in Ukraine.
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.
