The start of 2020 saw major amendments proposed for the Tax Code of Ukraine, affecting individuals as well. The draft law has not yet been signed by the President of Ukraine, however, we do not expect any significant changes due to the presidential approval. We expect the new rules to come into force on 01/01/2021, however, some of the rules may take effect already within the year 2020 once the law is officially published.
Controlled foreign company (CFC)
The rules of CFC’s taxation – as the step on implementation of OECD’s recommendations on BEPS plan – will start working in Ukraine from 2021.
An individual resident of Ukraine owning a respective share or controlling the foreign company (partnership, fund, trust) is liable to:
Part of CFC’s adjusted profit proportional to the individual’s share in CFC (with some exceptions established by the Tax Code) is subject to taxation with Military Tax (1.5%) and PIT at the standard rate (18%). Yet, the PIT rate may be reduced to 5% or 9% provided that certain criteria stipulated by the Tax Code are met.
Fines and interest penalties for violation in determining and calculating the profit of a CFC shall not be applied according to the results of 2021 – 2022 reporting years.
Draft law suggests an extension of the definition of the ‘dividends’ term by adding to the definition payments that shall be qualified as dividends for the purpose of taxation, inter alia, payments made by a legal entity to its non-resident holder and/or participant which is related to reduction of chartered capital, purchase by a legal entity of own corporate rights, withdrawal of the participant from a business entity, and other similar transactions between a legal entity and its participant, if the transaction results in a reduction of the undistributed profits.
The draft law also sets aside treatment of “preferred dividends or dividends of other status that envisages the payment of a fixed dividends amount, accrued to the taxpayer under the shares or other corporate rights”. Such dividends shall be treated as salary for taxation purposes and taxed with PIT at the rate of 18% instead of: 5% (if paid by a Ukrainian legal entity – CPT taxpayer) or 9% (if paid by a non-resident or Ukrainian legal entity – non-payer of CPT). Military Tax (1.5%) is also applied.
Mutual agreement procedure (MAP)
The mutual agreement procedure is envisaged in Ukrainian double tax treaties; however, the Tax Code did not envisage the procedure of pre-trial dispute resolution in this regard. The draft law finally introduces the mechanism of MAP to the Tax Code.
A taxpayer (resident or non-resident of Ukraine) considering that he/she is taxed or will be taxed by Ukrainian or foreign tax authorities in the way not corresponding with the provi-sions of Ukrainian DTTs, is entitled to apply for MAP if such is envisaged by the respective DTT.
If the tax authority accrued additional taxes on the issues raised in MAP application, such assessments are considered unsettled and are not due to be paid until MAP is completed. MAP might be applied for after the procedure of administrative appeal has ended.
Introduction of MAP is essential for taxpayers, as it is intended to become an additional defence mechanism for taxpayers before initiating court litigation.
Amendments for the year 2020 due to COVID-19 outbreak
Law on amendments to the Tax Code and other Laws to support taxpayers (effective since March 18, 2020):
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