“The law on deoffshorization” in action. What should one expect from the initiated tax reforms?
Law № 466-IX “On Amendments to the Tax Code of Ukraine regarding Improvement of Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation” was published in the official newspaper “Voice of Ukraine” on May 22, 2020.
Legislators note that Law No. 466-IX has been developed in order to implement international tax control standards provided by the BEPS Action Plan, particularly in regard to amending tax laws. The adoption of Law No. 466-IX is expected to increase the transparency of international transactions. This, in turn, will contribute to the state budget, as well as promoting fair taxation in Ukraine in accordance with current international standards.
The changes provided by Law №466-IX will come into force in stages. The first stage came into force on May 23, 2020, with the other two stages scheduled to start on July 1, 2020 and January 1, 2021. However, the possibility of postponing the entry into force of some provisions, in particular those concerning controlled foreign companies (CFC), to January 2022 is currently being considered.
The Law enacts the following key changes:
- The term “permanent establishment” has been expanded for tax purposes;
- It is now possible to determine whether a non-resident is not considered to have a permanent establishment in Ukraine;
- It is now possible to determine what is not a permanent establishment under the Tax Code of Ukraine;
- The procedure for determining the permanent establishment of a non-resident, in the case of activities in Ukraine by several related non-residents, has been established;
- The methodology of income taxation of permanent establishments has been determined.
Transfer Pricing (TP)
- Requirements for the contents of TP documentation and global documentation (master files) have been implemented;
- The obligation and procedure for submitting a report in terms of countries of the international group of companies and its content have been determined.
Controlled Foreign Companies (CFC)
- The concepts of “controlled foreign company” and “controlling person” have been introduced;
- The mechanism of CFC profit taxation is determined;
- The procedure for calculation and settlement of CFCs’ adjusted profits has been determined;
- Cases of CFC tax exemptions have been determined;
- The procedure for CFC tax control has been determined;
- Provisions have been made for the voluntary recognition of foreign companies as tax residents of Ukraine based on the criterion of the location of effective management.
- The limit for the annual reporting period and determining the object of taxation without adjusting the tax difference has been increased (UAH 20 million → UAH 40 million);
- The concept of taxpayer guilt has been introduced;
- The limit for installments and deferrals of monetary obligations or taxpayers’ tax debts has been increased (UAH 1 million → UAH 10 million);
- The absence of taxpayer liability for his actions in accordance with the provided individual tax advice has been cancelled;
- The possibility of compensation for damage caused by illegal decisions, actions or inaction of the regulatory authorities has been established;
- The conditions for bringing individuals and companies to financial responsibility for tax offenses have been established;
- The circumstances mitigating the liability of a person for tax violations have been determined;
The limit used for the fixed asset determination has been increased (UAH 6,000 → UAH 20,000).
One of the main objectives of Law No. 466-IX is to implement the provisions of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan). By adopting the law, Ukraine has taken a significant step in this direction. It is obvious that despite the economic feasibility and potential positive impact of such changes on the country’s economy as a whole, business representatives are unlikely to perceive the new rules positively.
However, it is worth noting that, alongside the additional restrictions, the Law also contains a number of unprecedented positive business novelties, including the possibility of compensation for damages caused by unlawful decisions, actions or inaction of the regulatory authorities. Therefore it can be stated that these changes as a whole bring the tax legislation of Ukraine closer to the legislation of European countries, and this should have a positive impact on the country’s economy and investment climate.
We will publish an analysis of some novelties of the Law and their practical impact on businesses in the near future. We therefore encourage you to closely follow our information updates.