TAX ESSENTIALS UKRAINE..SHORT TAX GUIDE
DLA Piper Ukraine, Kyiv, Ukraine, February 2009
CONTENTS
Corporate Profit Tax
Withholding tax on foreign legal entities
VAT
Personal income tax
Payroll Taxes
Other Taxes
Tax assessments and penalties
Foreign investment tax structuring
Exchange Controls
Challenging tax environment
DLA Piper Ukraine - Tax Team
OVERVIEW OF MAJOR TAXES
Corporate profit tax, including capital gains 25% *
Withholding Tax (Foreigh legal entities) 15% *
VAT 20% *
Personal Income Tax 15%/30% *
Paryroll Taxes around 41% **
* Different rates apply to some types of income, as explained in the relevant sections.
** Payroll tax base is capped at approximately UAH10k per month ($1.3K), therefore effective tax rate is less for midlevel and top salaries.
CORPORATE PROFIT TAX
Companies incorporated in Ukraine are recognised tax residents and taxed on their worldwide income. Permanent establishments of foreign entities are taxed on their Ukrainian-sourced income. Non-residents without a presence in Ukraine may be exposed to a withholding tax (see below).
The standard tax rate for residents and permanent establishments is 25%. Insurance companies apply a different tax regime, with either a 0% or 3% tax rate.
Tax accounting rules differ significantly from financial accounting rules. Many companies keep separate tax accounts and do not reconcile them with the IFRS or local statutory accounts. The effective tax rate is often higher than the nominal tax rate due to various restrictions in deducting operating expenses.
A tax year is a calendar year. Tax returns are filed quarterly, and an interim return is filed for 11 months. Tax is also paid quarterly and after 11 months. If a company pays out a dividend, an advance payment of corporate tax must be made simultaneously, at the rate of 25% on top of the dividend amount.
Tax losses may be carried forward indefinitely, according to the law. However, the government has introduced loss cutoffs and temporary limitations on several occasions, which may happen again in the future. Tax carry back is not allowed.
Anti-avoidance rules address transfer pricing, thin capitalisation and dealings with blacklisted tax havens. Yet, Ukrainian anti-avoidance measures are much less developed than those of Western jurisdictions.
WITHHOLDING TAX ON FOREIGN LEGAL ENTITES
Dividends, interest and royalties paid to non-resident companies are subject to a 15% withholding tax. The same applies to capital gains, lease payments and certain types of service (engineering, agency). Income from transportation (freight) is taxed at 6%. A separate tax, payable at the expense of the Ukrainian entity, is levied on advertising fees (20%) and certain types of insurance income (12%).
Double tax treaties usually reduce or eliminate withholding taxes, but not the tax on insurance and advertising income. Ukraine has double tax treaties with other EU countries (excluding, however, Luxembourg, Ireland and Malta), as well as with the United States, several African, Middle Eastern and Asian countries, and CIS member states. Treaties are predominantly based on the OECD or UN model, however, the authorities seldom use the relevant
commentaries for their interpretation.
Tax reduction or relief under a treaty is granted upfront, provided that a valid tax residence certificate is available.
VAT
20% VAT applies to domestic supplies and imports. Export supplies are zero-rated. Crossborder services are taxed according to special rules that are not exactly in line with the standard approach adopted by the EU and other Western jurisdictions.
Exempt transactions include, inter alia, banking services, securities trading, medical services and supplies of pharmaceuticals, supplies of printed periodicals and transfer of land.
VAT returns are filed monthly and the tax is payable within 10 days after the filing deadline.
The VAT refund procedure is extremely inefficient and may last several years. To restructure its multimillion debt, the Ukrainian government has recently proposed to convert outstanding VAT refunds into five-year bonds which can be traded.
PERSONAL INCOME TAX
Residents are taxed at a rate of 15% on their worldwide income. Reduced rates apply to income from mutual investment funds (5%), disposals of passenger cars (1%), disposals of real estate (0% or 1%), certain types of gift and inheritance (0% or 5%). An increased rate (30%) applies to income from lotteries and prize drawings. Some types of fringe benefit may be exempt from tax, if properly structured.
Non-residents’ income from Ukrainian sources is, in principle, taxed at 30%. However, a 15% rate applies to interest, dividends and royalties. The tax on salaries of expatriate personnel is also often reduced to 15%. Double tax treaties may offer more attractive tax rates.
Salaries and other income from employment are taxed on a pay-as-you-earn basis. Employers are responsible for the proper calculation of tax and timely withholding. For income which is not taxed at source, individuals must file annual tax returns by 1 April of the following year.
PAYROLL TAXES
Social insurance contributions are paid by employers and employees. Currently, there are four separate charges (for retirement pensions, temporary disability relating to illness or pregnancy, unemployment and work accidents). The government announced plans to replace these with a unified social tax. As of December 2008, the average total charge makes 41% of the total payroll, of which 37.5% is paid at the employer’s expense and 3.5% is withheld from the salary.
The rate of work accident insurance varies from industry to industry depending on professional hazard levels. The tax base for social insurance contributions is capped at 15 times the official living wage. Currently, the cap is UAH10k, or $1.3k at the December 2008 exchange rate. Therefore, the
maximum possible charge is slightly above $500 per person.
The companies that do not meet the 4% employment quota for disabled people pay an additional charge equal to one average salary for each vacant position within the quota.
OTHER TAXES
Real estate transfer taxes apply to the transfers of land (1%) and other immovable property (2%), and are payable prior to the deal notarisation. Transfers of passenger cars are subject to a 3% tax.
The purchase of any foreign currency through a bank account gives rise to a special currency conversion tax (referred to as the Pension Fund levy) withheld by the bank. The tax rate is currently 0.2% of the transaction amount. Excise taxes apply to imports and domestic supplies of cars, tyres, alcohol, beer, tobacco and fuels.
Import customs duties are charged on most types of commodity. Privileged rates apply to imports from the WTO member states. Goods imported from the CIS member states and Macedonia are exempt from duty under the free trade regime, with some exceptions. Export duties apply only to a few groups of commodities (oil seeds, livestock, raw hides and metal scrap).
Other important taxes include land tax, car owner tax, environmental charges and some industry-specific taxes. Small businesses and agricultural companies may opt for an alternative simplified tax regime.
TAX ASSESSMENTS AND PENALTIES
Most taxes are levied on a self-assessment basis. The penalties for understating tax liabilities and late payment are very high, sometimes reaching 100% to 200% of the unpaid tax. An alternative 5% self-assessment fine applies when a taxpayer adjusts the mistake prior to a tax audit.
Certain tax offences give rise to a pledge on the total assets of a person or a temporary arrest of the bank accounts and other assets. Tax reassessments are possible within the 1,095-day statute of limitation. However, no limitations apply for withholding taxes and for the underpayments caused by tax evasion.
FOREIGN INVESTMENT TAX STRUCTURING
Foreign companies usually structure their Ukrainian presence through a resident limited liability company or a non-commercial representative office. Doing business through a branch or a partnership has not been popular due to the uncertainties in their tax treatment. As an exception, partnerships (referred to as joint activity agreements) are often encountered in oil and gas projects, for non-tax reasons.
The preferred holding jurisdictions are Cyprus and the Netherlands. Other treaty-protected countries are also used in tax structuring.
When purchasing shares of an existing Ukrainian company, a full-scale tax due diligence is recommended in all cases, as many companies would have material historical tax risks. An investment through an asset deal reduces the tax exposure. However, since capital gains on an asset transfer are subject to tax in Ukraine, sellers prefer to structure the transaction as a share deal, usually at an offshore level.
The tax incentives for foreign investment are very limited. The most important privilege is the full exemption from import customs duties which applies to in-kind capital contributions. There are also temporary incentives for certain industries (eg shipbuilding and aircraft) and incentives for energy-saving projects. Special economic zones existed in different parts of Ukraine but were abolished overnight in 2005.
EXCHANGE CONTROLS
Ukraine has a complex and restrictive system of exchange controls, which has been further tightened in response to the global financial downturn in order to prevent capital flight.
Some of the most important rules are listed below: Outward investment and l ending, as well as some other crossborder transactions, may not be performed without a National Bank licence.
Ukrainian companies and individuals are not allowed to keep their money outside Ukraine without a National Bank licence.
Foreign currency may not be used for payments between Ukrainian entities.
Inbound investment should be registered to facilitate profit repatriation. In some cases, foreign investors are required to channel money via a special-purpose investment account in a Ukrainian bank.
Inbound loans must be registered with the National Bank prior to receipt. The National Bank establishes interest rate caps on such loans from time to time.
Service, licensing and lease agreements are subject to price controls when the contract value exceeds euro100,000.
Prepayments for imported goods and services may not exceed 180 days. Similarly, a delay in payment for exported goods and services may not exceed 180 days. Written contracts must be put in place for most types of crossborder transaction and the formal requirements for these transactions must be observed.
To purchase foreign currency, a company has to provide the bank with a set of supporting documentation, the scope of which is established by the National Bank.
CHALLENGING TAX ENVIRONMENT
The Ukrainian tax system has gone through many reforms over the last 17 years and is still evolving. The country has no tax code. Numerous tax laws and subordinate legislation are often contradictory, while the tax authorities are reluctant to issue official interpretations of the tax rules. Tax rulings are not binding and may be overruled by a senior tax authority or revoked. As a result, companies face continued uncertainty in their tax affairs.
A form-over-substance approach prevails in tax assessments. Excessive documentation is required to support routine expenses, and sometimes companies have to put considerable effort into explaining the rationale of more complex transactions to the authorities, where such transactions are not directly addressed in the law.
Tax audits are frequent and often result in unfair charges, as tax inspectors have informal collection targets for each audit. A non-transparent and inefficient court system makes the appeals against tax reassessments costly and time consuming.
Overall, the administrative burden of tax compliance is high. Ukraine has been rated 180th out of 181 countries surveyed by the World Bank Group for the ease of paying taxes.
At the same time, tax evasion is widespread and little is done to fight it. Corruption is often named as one of the major reasons behind low tax morale. In addition, tax authorities lack technical knowledge and professional skills to identify and eliminate tax fraud.
Despite all these challenges, Ukraine remains an attractive investment destination. By placing greater emphasis on the tax function and risk management, foreign investors can avoid tax pitfalls and achieve success with their Ukrainian projects.
DLA PIPER UKRAINE – TAX TEAM
[1] Svitlana Musienko, Legal Director, Head of Tax, T +380 44 490 9564, svitlana.musienko@dlapiper.com
[2] Yulia Logunova, Senior Associate, T +380 44 490 9587, lia.logunova@dlapiper.com
[3] Illya Sverdlov, Senior Associate, +380 44 490 9575, lya.sverdlov@dlapiper.com
[4] Dmytro Donets, Associate, +380 44 490 9575, ytro.donets@dlapiper.com
[5] Lilia Sylvestrova, Associate, +380 44 490 9575, lia.sylvestrova@dlapiper.com
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation. International Law Firm of the Year 2008 in Ukraine. Kyiv switchboard
T +380 44 490 9575
The matters covered in this guide are intended as a general overview. This guide is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper Ukraine LLC will accept no responsibility for any actions taken or not taken on the basis of this guide. If you would like further advice, please contact the Tax Team at +380 44 490 9575.
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com/structure. A list of offices can be found at www.dlapiper.com. Ukraine Switchboard +380 44 490 9575.
NOTE: DLA Piper Ukraine is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.com.
