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Tax Code Overhaul in Ukraine
Baker McKenzie, Kyiv, Ukraine,
June 04, Thu 2020
On 21 May 2020, the President of Ukraine finally signed the Law of Ukraine "On Amendments to the Tax Code of Ukraine Purposed to Improve the Administration of Taxes, Eliminate Technical and Logical Inconsistencies in the Tax Legislation" ("Anti-BEPS Law").
On 23 May 2020, the Anti-BEPS Law became effective with certain provisions being phased out.
The Anti-BEPS Law introduces a number of fundamental novelties aimed at combating tax base erosion and profit shifting practices, improving transparency, tax compliance and administration, formally instituting the substance-over-form principle and other important anti-avoidance rules, generally modernizing the tax framework of Ukraine in vein with the OECD-driven initiatives. This new piece of tax legislation also fine-tunes numerous definitions, extends the range of penalized tax offences, and amends a large body of the Tax Code provisions that govern various taxes and procedures.
The new rules substantially alter the tax landscape for both Ukrainian individuals and legal entities as well as for non-residents that carry on business in Ukraine.
At the same time, with the Anti-BEPS Law being in force now, there are provisions that already call for the extension of their entry into force or elaboration thereof. Certain further legislative developments in this regard may be reasonably expected.
Separately, the President of Ukraine referred to the Cabinet of Ministers with a number of recommendations purposed to enhance the Anti-BEPS Law concerning, inter alia, the CFC Rules, protection of data reported by taxpayers and obtained from the foreign jurisdictions.
Key Tax Developments
Controlled Foreign Companies
► Effective 1 January 2021, the CFC Rules introduce taxation of income of controlled foreign entities ("CFCs") at the hands of Ukrainian "controlling" persons (individuals / companies).
► The CFC Rules will target Ukrainian individuals and companies with an ownership interest in a foreign entity of (i) more than 50%, or (ii) more than 10% (25% and more in 2021-2022) provided Ukrainian individuals (companies) jointly own a share 50% and more, or (iii) in case of established de facto control over a foreign entity.
► Notably, the CFC Rules also extend to arrangements that include foreign trusts, foundations and transparent entities, while granting certain exemptions for, say, irrevocable discretionary trusts.
► Ukrainian "controlling" persons would be responsible for, inter alia:
- annual reporting and taxation in Ukraine of undistributed CFC's income pro rata to their stakes in the CFC;
- annual reporting of existing CFCs, irrespective of whether there is any reportable income;
- control, as well as the establishment / liquidation of trusts or other transparent entities.de factoreporting of acquisition / alienation of shares in the CFCs or discharging other