The official text of the new Corporate Profits Tax Law dated 22 May 1997 was published on 12 June 1997. The new corporate profits taxation regime will be introduced with effect from 1 July 1997.
With regard to government securities the new taxation regime will apply in respect of securities purchased after 1 July 1997.
The main changes are in corporate profits tax regime are detailed below.
Definition of permanent establishment
The new Law provides that a permanent establishment of a foreign company is deemed to be created in Ukraine where:
- a foreign company carries on commercial activities through a representation; and/or
- a foreign company is represented in Ukraine by an individual who is authorised to represent the company's interests in Ukraine; and/or
- a foreign company is represented in Ukraine by a Ukrainian legal activity.
Under present corporate profits tax law foreign company's operations in Ukraine through a Ukrainian legal entity does not lead to a permanent establishment creation.
Ukrainian source income
The definition of income from Ukrainian source includes any income received by a resident or non-resident entity from any activity in the territory of Ukraine, including:
- passive income such as interest, dividends, royalty;
- leasing income in respect of property located in Ukraine;
- income from disposal of real estate located in Ukraine;
- insurance and reinsurance payments and premiums relating to risk insurance in the territory of Ukraine;
- other income arising from commercial activity in the territory of Ukraine or territory of customs bounded warehouses.
Non-residents and permanent establishments of non-residents which receive income from Ukrainian sources are required to pay corporate profits tax in Ukraine.
Tax rate
From 1 July 1997 the uniform tax rate of 30% will apply to profits from any activities of the taxpayer.
Calculation of taxable profits
Taxable profits are determined as adjusted gross expenses and depreciation charges.
Gross is deemed to be increased at either the date of the goods shipment to the customer or at the date of receiving the payment from the customer, whichever occurs first. Gross expenses are deemed to be increased at either the date of payment to the supplier or at the date of obtaining ownership for the goods, works or services whichever occurs first.
Notably, the list of allowable expenses is replaced now by a comprehensive list of non-allowable expenses. Establishing of restrictions for deductability of expenses in addition to those stipulated by the Law is not allowed. Examples of non-allowable expenses include:
- entertainment which is not related to charity or advertising campaigns;
- financing of management bodies which are separate legal entities;
- direct investments;
- payment of dividends;
- fees or other remuneration paid to associated enterprises provided that no documentary evidence exists that fees or remuneration are paid in respect of the services actually delivered;
- any expense which is not supported by relevant accounting documents.
Expenses in respect of purchases of goods, works or services by Ukrainian entities from suppliers registered in tax jurisdictions or countries which do not have agreements for avoidance of double taxation are deductible for taxation purposes in the amount equal to 85% of the value of goods, work or services purchased. List of tax haven jurisdictions should be published by the Cabinet of Ministers annually.
Transactions between associated enterprises
The Law provides that where the taxpayer is engaged in transactions with associated entities (eg transactions between a parent company and its subsidiary) the prices charged or paid by the taxpayer should be in line with usual prices. Usual price is defined as the price which can be obtained by a seller from the selling goods, works or services to non-related entities under the normal course of the seller's business. Where the tax authorities have grounds for doubting the prices charged or paid by a taxpayer, the taxpayer is obliged to validate the feasibility of the price, at the request of the tax authorities.
Loss carry forward rule
Resident taxpayers can carry forward losses occurred during the reporting period (eg calendar quarter or year) to future reporting periods within five years commencing from the year when the loss occurred.
Bad debt
Taxpayers are allowed to adjust the amount of the gross income relating to the relevant reporting period by the amount of unpaid trade debt (eg debts older than 30 days from the date due for payment) provided that the claim to the debtor was filed with the relevant court.
Depreciation charges
Annual depreciation charges are applied on the basis of the reducing balance method to the following three groups of fixed assets:
- Group 1 (buildings) - 5%
- Group 2 (transport vehicles, office equipment, electric appliances, information network systems including computers) - 25%
- Group 3 (all other assets) - 15%
Intangibles may be depreciated by using the straight line method over the useful economic life of the asset but not longer than 10 years. For newly purchased group 3 assets, accelerated depreciation is allowed during a seven year period by election.
Expenses relating to the purchase and repair of cars (except those used for taxi services or rent) are not subject to depreciation.
Tax accounting and reporting
The new law explicitly provides that non-residents which have a permanent establishment in Ukraine are obliged to keep accounts in accordance with Ukrainian accounting standards.
Tax returns should be filed both by resident and non-resident taxpayers on quarterly basis by 25 January, April. July and October.
Annual balance sheet and financial reports should be filed with the tax authorities by 15 February of the year following the reporting one.
Under the new law taxpayers are allowed to mail the tax returns. The tax returns should be mailed not later than 10 days before the reporting deadline. Procedure for mailing the tax returns is to be adopted by the Cabinet of Ministers of Ukraine.
Resident taxpayers (except agricultural manufacturers) should pay tax in advance on a monthly basis by 20 of the second and third months of the calendar quarter. Non-resident taxpayers should pay tax on quarterly basis.
The final payment in respect of the reporting quarter should be made by 20 of the January, April, July and October.
The profits tax is payable to local governments in locations where the taxpayer or its unincorporated branches (divisions) are registered.
Consolidated payment of tax
The Law provides that a consolidated payment of tax under the procedure to be determined by the Tax Administration may be possible. Application for consolidated tax payments should be made before 1 July of the year proceeding the year the taxpayer wishes to pay consolidated tax.
Withholding tax
Gross income earned by non residents from Ukrainian sources is subject to withholding tax at the rate of 15%. Certain types of income from Ukrainian sources are subject to withholding tax at the rates specified below.
Type of income Withholding tax rate Interest (income) arising from 30% transactions with government securities Freight 6% Re-insurance payment and premiums 10% Insurance payment and premiums 30% Payments for advertising services 30% in the territory of Ukraine Dividends payable in respect of 30% Ukrainian corporate rights.Double taxation agreements
In accordance with the Law international agreements ratified by the Verkhovna Rada shall override the domestic legislation.
Tax holidays for enterprises registered before 1 January 1995
The Verkhovna Rada has rejected the President's draft bill designed to preserve corporate profits tax holiday for enterprises with qualifying foreign investment registered before 1 January 1995. If further attempts of the President to pursue the Verkhovna Rada to pass this bill fail, tax holidays will be terminated with effect from 1 July 1997. Accordingly, the tax on profits earned after 1 July 1997 will be payable on 20 August 1997.
Registration of foreign companies' representation offices
From 1 July 1997 the procedure of registration of foreign companies' representative offices in Ukraine with the Ministry of External Economic Relations and Trade should be replaced by the registration of tax authorities. Procedures for such registration should be adopted by the Tax Administration (Law On Corporate Profits Tax dated 22 May 1997)
This newsletter is provided for informational purposes only and should not be treated as constituting advice. Professional advice should be sought before acting on any information contained herein.
If you need further information please contact Vladimir Didenko or Belinda Luke on Tel: +380 44 244 54 78/9 or Fax: +380 44 216 4558.
