Ukrainian Tax Reform Overview

On 28 December 2014 Parliament passed several laws that included significant changes in the rules relating to tax:

• Law of Ukraine “On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine Regarding Tax Reform” No 71-VIII, dated 28 December 2014;
• Law of Ukraine “On Amendments to the Tax Code of Ukraine Regarding Improving of Tax Control Over the Transfer Pricing” No 72-VIII, dated 28 December 2014; and
• Law of Ukraine “On Amendments to the Certain Legislative Acts of Ukraine Regarding Reformation of Compulsory State Social Insurance and Legalization of Payroll” No 77-VIII, dated 28 December 2014 (one and all “Laws”).

Laws were published during 30-31 December 2014 and came into force from 1 January 2015.

It should be noted that the number of taxes were reduced from 22 to 11 (including 2 local duties).

New laws also introduced the following changes to the Tax Code of Ukraine:

1. Corporate Income Tax (“CIT”)

The object of taxation will be calculated on the basis of accounting data by correcting the financial result prior to tax, as defined in the Financial Reporting for tax differences that increase or decrease the financial result prior to tax, relative to non-current assets amortization, reserves and financial transactions.

CIT is levied on the profit before tax, which determined in accordance with financial accounting of taxpayers with an income of more than UAH 20 million per year (approx. USD 1.2 million) subject to a limited number of corrections (apply to 5 % of the total number of taxpayers). Small enterprises (with an income of below UAH 20 million per year) may pay CIT based on their financial accounting results.

The date for the submission of a tax return has been changed. Tax reports should now be submitted by 1 June 2016.

The 5 % tax rate for IT industry has been cancelled.

In general, changes have affected tax accounting of fixed assets, tax accounting of transactions with securities, consideration in tax accounting reserves, doubtful and bad debts, procedure of financial expenditures recognition, taxation of returnable financial assistance, accounting for royalties, withholding taxation, taxation of dividends, and monthly advance payments.

2. Value added tax ("VAT”)

From 1 January 2015 a system of electronic VAT administration will be introduced. A transition period, has however been provided to taxpayers from 1 February 2015 to 30 June 2015.

Paper invoices have been cancelled. From 1 January 2015 all tax invoices will be subject to registration in the Unified Register of Tax Invoices regardless of the amount of VAT.

the threshold for mandatory VAT registration has been increased from UAH 300 thousand (approx. USD 18 thousand) to UAH 1 million (approx. USD 60 thousand).

The right to tax credit is no longer affected by the economic activity of the taxpayers. The tax credit will include all goods and services with VAT.

A new mechanism is put in place for the accrual of tax liabilities, on the value of the goods and services that are not used in economic activities (for example the individual did not previously have the right for tax credit for such operation).

The VAT refund period is reduced to one month. On 1 January 2015 negative VAT differences formed as a result of the reporting month will be subject to budgetary compensation.

The criteria for automatic refund were changed.

3. Transfer pricing

Transfer pricing methodology has not been substantially altered. Instead, the conditions for the recognition of certain transactions as controlled have been fundamentally changed.

Starting from 1 January 2015 controlled transactions recognised (i) transactions with related non-residents; (ii) transactions relating to the selling of goods through a non-resident commission agent; and (iii) transactions with persons resident in low-tax jurisdictions, as being included into the list approved by the Cabinet of Ministers of Ukraine.

The financial threshold for the recognition of controlled transaction was decreased to the (i) gross annual income of the taxpayer and its related parties exceeding UAH 20 million (approx. USD 1.2 million); and (ii) gross amount of transactions with one counterparty exceeding UAH 1 million (approx. USD 60 thousand) or 3% of taxable income.

Now transfer pricing will be used exclusively for controlling the calculation of CIT.

Rules of inspection of the controlled transactions by the State Fiscal Service of Ukraine underwent certain changes. The limitation period for the control of these transactions increased to 7 years.

4. Single tax

The number of single taxpayer groups was reduced from 6 to 4. The income limits for entrepreneurs increased as follow:

The taxpayers of the fixed agricultural tax now are included in the 4th group.

5. Personal Income Tax ("PIT”)

The rates of income tax and passive income tax have changed. The general PIT rate is now 15 %, and in relation to income, the total amount of which exceeds tenfold the monthly minimum wage (in 2015 it is about UAH 12 thousand (approx. USD 710)) is 20 % of the tax base.

For the taxation of passive income special rates that are not affected by paid income, is applied:

• 5% - in relation to income from dividends from shares and corporate rights accrued by CIT taxpayers (excluding income from dividends of joint investment institution); and
• 20% - for other types of passive income.

6. Single Social Contributions (“SSC”)

There are a number of changes to labour law. Employment Law has provided a number of changes to labour, administrative and criminal legislation.

An employee is not permitted to work without executing an employment contract in writing and without notification of the tax authority concerning admission to work.

The amount of fines for violation of (i) SSC accrual, (ii) SSC reporting, (iii) submission of doubtful information, (iv) non-payment and (v) late payment of SSC have increased.

Laws provide the possibility of reducing SSC rates from 41 % to 16.4 %.

7. Immovable property tax

Laws have changed the taxation of the residential property and set a new tax on non-residential property.

Parliament empowered the local authorities to set tax rates on immovable property. The Law sets the following rates of immovable property tax for legal entities:

• no more than 2 %of the minimum wage per 1 sq.m - for residential property; and
• no more than 1 % of the minimum wage per 1 sq.m. - for non-residential property.

The Law amended the list of residential and non-residential property that are not taxable objects for immovable tax purposes and now includes the following: (i) residential property in disrepair condition, (ii) objects of non-residential property used by small and medium legal entities operating in small architectural forms and markets, (iii) industrial building, (iv) buildings, agricultural producers structures that are used directly in agricultural activities, and (v) residential and non-residential property, owned by public organisations of disabled people and their business entities.

The total floor area is now considered a taxable base for a tax on immovable property (previously only the total useful floor area was subject to taxation). The Law has changed the size of relief that applies to residential properties. . Thus, the taxable base is decreased by:

• 60 sq.m. for apartments;
• 120 sq.m. for residential buildings; and
• 180 sq.m. for different types of immovable property owned by one taxpayer.

A taxpayer may only use one relief per tax year. Local authorities may increase the size of a relief, which may be applied by the taxpayers.

8. Land fee

The land fee is now included in the list of local taxes as part of the property tax. According to the law, it is mandatory for the local authority to set the land fee rate. The land fee rates consist of the following:

• 1 % of the target-ratio monetary based valuation for agricultural lands;
• 3 % of the target-ratio monetary based valuation for other land plots that have been subjected to the target-ratio monetary based valuation;
• 12 % of the target-ratio monetary based valuation for the entities that have land plots in constant use (excluding the state and municipal land).

Commencing from 1 January 2015 the list of preferences on land fees has been significantly reduced. The preferences for legal entities remained only for (i) the public organisations of disabled people of Ukraine, (ii) their sanatorium resort and healthcare establishments, (iii) rehabilitation institutions of the disabled people, (iv) enterprises and organisations established by them, (v) Olympic and Paralympic training bases, and (vi) space activities.

9. Excise tax

The numbers of excise taxpayers have increased (due to the inclusion of a fee as a surcharge to the current tariff for electricity and thermal energy). Now excise tax should also include:

• legal entities of retail trade that sell excisable goods;
• wholesale suppliers of electricity;
• producers of electricity who sell outside the wholesale electricity market; and
• owners of imported vehicles that remodel them in passenger cars.

Excise tax on sale/alienation of securities has been cancelled.