September 2012

New Tax Rules in Ukraine: Taxation of Dividends, CPT Advance Payments,
New Tax Stimulus and VAT Registration Procedure

In recent months, the Ukrainian parliament adopted legislation introducing a number of amendments to the Tax Code of Ukraine and other laws and regulations (the "Laws"). Despite the fact that the majority of amendments are of a technical character, some of them are crucial for a number of taxpayers and definitely worth paying close attention to. Below, we provide a flash summary of the major amendments.

1. Taxation of individual's foreign-sourced dividends

The new rules brought clarity in tax rates applicable to the foreign-sourced dividends received by individual tax residents. In particular, the newly introduced tax law provides for a 5 percent personal income tax rate on dividends received from companies incorporated outside Ukraine. The adoption of the new rules rectifies the disbalance in taxation which existed previously. Previously, the Ukrainian law provided for 15 to 17 percent tax rate for foreign-sourced dividends while the Ukrainian-sourced dividends were subject to 5 percent tax. Currently, the new tax rules allow a taxpayer to apply the 5 percent rate to both Ukrainian and foreign-sourced dividends.

Dividends received by an individual tax resident must be declared in his/her annual tax return. The filing deadline for the tax return is the 1st May of the year, following the reporting one. The tax liabilities stemming from the tax return must be paid by the 1st of August.

2. CPT advance payments

In addition to the numerous technical amendments, the Ukrainian Parliament introduced one of the most challenging and controversial novelties - a new procedure for payment of the corporate profit tax ("CPT"). The procedure will be effective starting 1 January 2013 and shall apply to companies with annual income exceeding UAH 10 million (approx. USD 1.25 million). The new rules will not apply to companies with the income of less than UAH 10 million, non-profit organizations, agricultural and newly established companies. Previously CPT was paid by such companies on the quarterly basis with taxpayer calculating taxable profit based on the financial results of the respective quarter. Under the new procedure the taxpayer pays CPT monthly using financial figures for the preceding year. Under this procedure the monthly CPT payment will be generally determined as the profit for the preceding year divided by 12. Basically, the taxpayer is being required to pay the same tax as it paid last year irrespective of financial results of the current year. At the end of the year the CPT should be generally recalculated based on the actual taxpayer's financial results and the monthly advance CPT payments made by the taxpayer.

3. New rules for tax losses carry-forward (2012 � 2015)

A long-awaited "tax-loss carry-forward" rule was introduced to clarify the status of tax losses incurred by the taxpayers prior to 1 April 2011. Historically, the tax authorities attempted to disallow the tax losses incurred prior to the above date based on their interpretation of the new Tax Code provisions. Businesses believed that this restriction is illegal and initiated a number of court disputes in this respect.

The new amendments introduce partial tax loss-carry forward procedure of historical tax losses during several consecutive years. Particularly, under the new rules the total amount of tax losses incurred before January 1, 2012 (including those incurred by 1 April 2011) will be divided into quarters and deducted for CPT purposes during four consecutive years of 2012 - 2015.

This '25 percent' tax loss limitation will be applicable only to the companies whose income in 2011 exceeded or was equal to UAH 1 million (approx. USD 125 thousand). For companies with the income below this threshold the historical tax losses will be deductible in full.

4. Simplified procedure for VAT registration

One of the positive changes with regard to the value added tax ("VAT") is the introduction of new rules regarding voluntary VAT registration. Unlike in previous versions of the law, to be eligible for VAT registration the taxpayer will need only to prove that it makes VAT-able supplies irrespective of the value of such supplies, VAT status of taxpayer's clients and amount of taxpayer's charter capital. Moreover, from now on the tax authorities are required to complete the VAT registration based on the relevant application within 5 days (in contrast to 10 days previously).

5. Investment-oriented tax stimulus

IT-Industry. In 2011, the Ukrainian government launched the initiative aimed at boosting the Ukrainian IT-industry and make it a more competitive player on a global scale. For accomplish this, the Ukrainian government attempted to pass several draft laws. Although some of the most liberal initiatives were rejected by the Parliament, some of the incentives have been adopted successfully. Particularly, these laws introduced the following tax incentives to Ukrainian IT companies:

  1. CPT. The tax rate will be reduced from 21 percent down to 5 percent. This preferential tax treatment is provided to companies involved in software development, database and software design, management and administration of computer systems, IT consulting, etc. To enjoy this special benefit, the company must meet certain statutory criteria (e.g., good tax standing and a minimum value of the company's assets (approximately USD 57,000).
  2. VAT. Now in addition to 'foreign' supplies the VAT exemption will apply to the domestic sales of system software, computer games, websites, online services, data protection software, etc. Prior to this amendment, the domestic supply of software was taxable at 20% rate.

The above tax initiatives will become effective for a 10-year period starting from 1 January 2013.

Investment projects. In addition to above investment-driven initiatives, the Ukrainian parliament adopted a package of laws aimed to support investment in Ukraine. If signed by the President, such laws would become effective after 1 January 2013. In particular, the laws introduce certain tax benefits for the companies implementing investment projects defined by Ukrainian government. The laws generally describe the eligibility of projects to be implemented with the governmental support, however, the laws also specify other key criteria to enjoy the tax benefits (i.e. estimated cost of capital expenditures, new jobs created, average salary etc.) The tax benefits to be available to the projects are as follows:

  1. CPT. The reduced tax rates will be granted to the companies implementing investment projects. Particularly, the tax rate will be nil from 2013 to 2017, 8 percent from 2018 to 2022 and 16 percent as from 2023. To compare, currently, the CPT rate is 21 percent. Also, the tax-exempt profits must be directed solely for supporting business growth, installation of new facilities or technologies, loan interest payments etc.
  2. VAT. Tax benefits apply to companies implementing investment projects that import equipment and spare parts which have no equivalents in Ukraine (the exact list of equipment must be enacted by the government). The companies may defer VAT (which is normally paid on imports) for the period of 60 days. For VAT deferral purposes, a promissory note would be issued by the company for the benefit of the customs authorities. Also, based on the recent initiative, the company implementing investment projects will enjoy an exemption from import duties relating to the mentioned equipment and spare parts.

For further information please contact managing partner Oleksiy Didkovskiy,
counsel Alexey Khomyakov and senior tax associate Constantin Solyar

© Asters 2012
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