On 24 December 2015 Parliament passed a Law On Amendments of the Tax Code of Ukraine and Some Other Legal Acts to Balance Budget Revenues (hereinafter – the “Law”). The Law is a compromise text agreed by the Parliament and the Cabinet of Ministers of Ukraine following a widely-reported heated debate on what Ukraine's tax reform should look like - an IMF-compliant version pushed by the government or a more populist version promoted by certain factions in parliament.
Notwithstanding that the Law does not constitute a complete overhaul of the Tax Code, it nevertheless introduces significant improvements to Ukraine's tax regime.
Although the final text of the Law is not yet available, as the final changes to the Law were voted on the floor of the Parliament, the new rules should increase the overall transparency, coherence and effectiveness of tax administration in Ukraine by broadening the tax base, increasing revenues, beginning to eliminate the shadow economy, and stimulating investment.
1. Corporate Profits Tax (“CPT”)
The Law introduces significant improvements to the administration of corporate profit tax. Although no changes have been made regarding the calculation of CPT or the effective CPT rate (18%), the Law introduces quarterly reporting instead of yearly tax returns, except for newly registered taxpayers, agricultural producers, and for taxpayers whose previous year income before tax does not exceed UAH 20 million.
Crucially, the Law abolishes advance CPT payments, which led to cash outflows and tax overpayments by business, although taxpayers will still be obliged to make advance CPT payments for the first three quarters of 2016.
2. Value Added Tax (“VAT”)
The VAT rate remains at the current 20% level. Major improvements have been introduced to the administration of the value added tax, specifically with respect to VAT credits and VAT refunds, and the elimination of certain requirements regarding VAT registration.
The tax authorities are no longer permitted to cancel the VAT registration of a taxpayer just because the taxpayer is not residing at its registered place of business. This amendment is significant protection from the tax authorities’ practice of misusing provisions of the law by cancelling VAT registration of taxpayers if they were not found at their registered place, which resulted in additional VAT liabilities to the taxpayers.
Further, starting from 1 January 2016, the tax authorities will be prohibited from canceling VAT credit based on formalistic grounds, such as minor deficiencies in VAT invoices. Previously, even minor mistakes in VAT invoices could put a taxpayer’s VAT credit at risk of being denied by the tax authorities. Following the amendments introduced by the Law, only an incorrect tax number of a buyer and/or supplier in a VAT invoice should lead to a non-acknowledgement of VAT credit.
Significant changes were introduced to the procedure of VAT refunds.
The Law provides for the establishment of a public register of VAT refund claims. The refunds will now be based on the order of priority of entering refund claims into the public register.
Importantly, the Law abolishes provisions of the Tax Code on the non-eligibility for VAT refunds of certain taxpayers. Starting from 1 January 2016 both newly registered VAT payers and VAT payers with VAT-able transactions lower than the amount of a claimed VAT refund shall be entitled to claim VAT refund according to the regime of general application. Previously such taxpayers were banned from claiming a VAT refund.
The Law also introduced the availability of an automatic refund to a greater number of VAT payers.
New VAT-able transactions and new VAT exemptions
The Law introduces 20% VAT on the services of natural gas transportation starting from 1 January 2016. The Law also cancels temporary VAT exemption previously granted for supplies of certain types of grain crops.
At the same time, the Law exempts from VAT assets acquired by banks through security enforcement.
Additionally, the Law expands VAT exemption to supplies of goods and services provided pursuant to international technical assistance.
3. Social Security Contribution (“SSC”)
The Law introduces significant changes into payroll taxation, specifically with regard to social security contributions, which should reduce the payroll tax burden on business and which should facilitate the legalization of salary payments in the shadow economy.
Starting from 1 January 2016, individuals will be relieved of paying a portion of the source deductions from income (previously SSC at 3.6% and 2.6% was withheld from salaries and from payments under civil law agreements accordingly).
The Law also decreases the SSC burden on employers/income payers as well: a flat rate of 22% SSC shall be applied by employers/income payers instead of various rates ranging from 36.76% up to 49.7%.
At the same time, the maximum cap for levying SSC was increased from 17 to 25 minimum statutory wages and will constitute UAH 34,450 as in January –April 2016, UAH 36,250 in May – November 2016 and UAH 38,750 in December 2016.
4. Personal Income Tax (“PIT”)
PIT will be levied at a flat rate of 18% instead of 15% (applicable to that part of income not exceeding ten minimal statutory wages) and 20% (applicable to part of income exceeding ten minimal statutory wages). Dividends paid by CPT payers will be taxed at the same 5% PIT rate as it was previously. All other types of passive incomes will be subject to a general 18% PIT rate.
Importantly, the Law abolishes the requirement of individuals to file a yearly tax return in respect of receiving income from two or more tax agents. This will relieve the administrative burden on both affected individuals and the tax authorities.
5. Unified Tax
Changes into unified tax regulations will impact on only two groups of unified tax payers, individuals and legal entities (the so-called 3rd category), and those working in the agrarian sector (the so-called 4th category):
- The maximum income of unified tax payers in the third category is decreased from UAH 20 million to UAH 5 million;
- At the same time, the rates of unified tax for this group were increased from 2% to 3% (plus VAT) and from 4% to 5% (VAT included);
- Rates of unified tax for agrarians were increased by 1.8%.
6. Rent Payments
To spur investment, the Law significantly decreases rent payments regarding the extraction of natural resources:
- Rent payment rate for extraction of natural gas (for production purposes) will decrease from 55% to 29% (for deposits up to 5,000 m) and from 28% to 14% (for deposits over 5,000 m).
- Starting from 1 April 2016, the rent payment rate for extraction of natural gas (for population needs) will decrease from 70% to 29% (for deposits up to 5,000 m); for deposits over 5,000 m remains 14% rate.
- Significantly, the Law abolishes rent payment in respect of the transit transportation of natural gas through the territory of Ukraine.
7. Real Estate Tax
The Law increases the maximum threshold for real estate tax rates from 2% to 3% of the minimum statutory wage. The exact rates are established by local self-governing authorities.
The Law introduces a new flat rate of real estate tax applicable to apartments of more than 300 sq. m. and living houses of more than 500 sq. m. The applicable rate for mentioned types of real estate will be UAH 25,000.
As previously, CPT payers are entitled to deduct the amount of real estate tax paid in relation to commercial real estate. However, following amendments introduced by the Law, carrying forward non-deducted amounts real estate tax is clearly prohibited.
8. Excise Tax
Along with an increase of excise tax on fuel by 13%, the Law introduces a completely new electronic system for accounting for fuel sales, in particular, by way of an electronic excise invoice (similar to the electronic VAT invoice). This new system will apply starting from 1 July 2016.