On 1 January 2011 the new Tax Code of Ukraine became effective, although a number of its provisions will become effective later. Some of the major changes concerning corporate profit tax ("CPT"), VAT and personal income tax ("PIT") are as follows:
Corporate Profit Tax
The Code gradually reduces CPT rate (generally by 2 pp annually) from 23% applicable from 1 April 2011 to 16% from 1 January 2014. The lawmakers tried to make CPT accounting closer to statutory bookkeeping regulations. In particular recognition of income and expenses for tax purposes will be generally based on the national financial accounting standards (with some restrictions and exceptions). The new Code does not contain restrictions on carry forward of tax losses.
The Tax Code imposes a restriction on tax deductibility of royalties, expenses related to purchase of marketing, advertising and consulting services from non-residents (unless such services are provided by the non-resident's Ukrainian PE and, respectively, are subject to tax in Ukraine). These payments are tax deductible to the extent they do not exceed 4% of the Ukrainian taxpayer's sales (revenue) for the previous year. A similar restriction applies to engineering services purchased from non-residents. In this case the limitation is 5% of customs value of the equipment imported pursuant to the respective contract. All of the above payments, no matter the amount, are not deductible if they are made to non-residents registered in an offshore jurisdiction appearing on the list approved by the Ukrainian government.
In respect of the dividends distributed by a Ukrainian company, the Tax Code specifically exempts CPT payers from advance CPT on dividends payable to individuals. Furthermore, unlike previous tax regulations, the Code allows shareholders (including non-residents) to extend financial aid to Ukrainian subsidiaries on the tax-free basis provided that such financial aid is returned by the subsidiary within 365 days.
Starting from 1 April 2011, depreciation of all groups of fixed assets will be calculated for each item separately (in contrast to the group-based approach in the previous legislation). The Code has substantially increased the number of fixed assets groups: 16 for tangible assets and 6 for intangible assets.
A 10-year exemption from CPT is granted to, inter alia, aircraft makers, shipbuilders, hotels, light industry, and producers of agricultural machinery.
The Tax Code establishes a concept of service permanent establishment. Provision of services (including consulting, but except for provision of personnel) by a non-resident in Ukraine though its personnel shall constitute a taxable PE, if such services are related to a single project and are provided for more than 6 months in any 12-month period.
Value Added Tax
The current 20% VAT rate is to be reduced to 17% in 2014. Consulting, engineering, legal, audit, actuarial and other services of consulting nature, and supply of software, its development and/or testing as well as other IT-related services are now exempted from VAT in Ukraine. Until 1 January 2014 supply of grain and industrial crops (except for their first supply by the producers) is exempt from VAT.
Due to a technical inconsistency in the previous legislation reorganization of a legal entity required adjustment of input VAT, resulting in VAT liabilities for such transactions as merger, spin-off, etc. The Code eliminated this inconsistency making reorganization transactions free from VAT liabilities.
The Code introduces a procedure for automatic VAT refund for exporters and establishes a penalty for untimely VAT refund. The VAT invoices giving the right to declare input VAT for amounts exceeding certain thresholds are subject to mandatory state registration upon exceeding of certain thresholds. Also, under the Code VAT invoices are only valid and can be used to declare tax credit only within 365 days from their issuance.
Personal Income Tax
Unlike previous legislation, the Tax Code generally establishes the same rate of 15-17% for resident and non-resident individuals. For this reason it is no longer necessary for foreign nationals to obtain Ukrainian tax residency certificates.
Monthly income that does not exceed 10 minimum wage amounts (currently approx. US $1,176) is subject to 15% PIT, the balance (if any) – 17% PIT. Dividends received by individuals from Ukrainian companies are subject to 5% rate (previously – 15%). Ukrainian-sourced interest income is generally exempted from tax till 1 January 2015. Afterwards a 5% rate will apply.
The Code makes it possible for tax authorities to reclassify civil-law services contracts concluded by a company with individuals as establishing employment rather than independent contractor relations resulting in the relevant tax consequences. However, the criteria and procedure for such reclassification are currently unclear.