Thursday, March 26, 2015

Corporate Income Tax: Reloaded

Co-authored by Anton Babak 

Within the scope of the Tax Reform of 2015 the Corporate Income Chapter of the Tax Code of Ukraine has been completely recast. What follows is a brief description of new corporate income tax (“CIT”) rules mainly being in force as from 1 January 2015.

General Changes

-  CIT is no more levied on profits determined under special tax accounting rules. It is now levied on pre-tax profits calculated in accordance with book accounting standards, but subject to certain adjustments (tax differences);

- Tax differences are not mandatory for small enterprises (with annual income up to UAH 20 million). They may opt for not to apply the tax differences. In this case CIT is chargeable on the amount of “raw” book profits;

- Tax authorities has obtained the right to audit book accounts of taxpayers (either under the Ukrainian GAAP or the IFRS). This does not come as a surprise as at present book profits do make up the basis of the tax assessment;

- Approach to the expenditures that are not associated with the conduct of the taxpayer's business has dramatically changed. As for now, these expenditures are generally allowable;

- 4% limitation on the deductibility of consulting, marketing, advertising and engineering services bought from non-residents do not apply anymore;

- Borrowers under inter-companies interest free loans are no more chargeable to CIT on the deemed interest accrued on such loans and in certain cases on the principal of such loans;

Tax Differences

- Depreciation and amortization: special depreciation and amortization rules provided by the Tax Code of Ukraine apply. They do not differ in any material respect from those being in effect formerly;

- Transfer pricing rules: pre-tax book profits can be increased taking account of differences between arm’s length and contractual prices;

- Thin-capitalization rules: certain interest expenses incurred in respect of related non-residents are now disallowed. The restriction normally applies to taxpayers whose debt-to-equity ratio exceeds 3.5 (for banks and financial organizations - 10);

- Purchases from residents of blacklisted jurisdictions and non-profit organizations: a deductibility restriction is now set at 70% of the amount of the actual expense. The restriction can be overridden where the taxpayer is able to justify under transfer pricing rules the arm’s length character of the underlying transactions;

- Royalty: deductibility restrictions essentially remain the same as before (e.g. a full non-deductibility of royalties paid out to residents of blacklisted jurisdictions and a 4% restriction on the deductibility of royalties paid out to other non-residents). The novelty is that the above restrictions can now be circumvented where the taxpayer is able to justify under transfer pricing rules the arm’s length character of the underlying transactions;

- Transactions in securities: special tax accounting rules disabling the utilization of securities-related losses remain in force.

Administration Novelties

- New rules concerning advance CIT on dividends operates. Advance CIT is nowadays payable not on the full amount of the dividend distribution, but only on the excess of this amount over the taxed profits of the corresponding tax period;

- New rules with regard to filing tax returns and paying monthly advance payments have been laid down (will be effective from 2016). The new deadline for filing annual tax returns will be 1 June of the year following the tax year. The threshold for those required to pay monthly advance payments of CIT will increase to UAH 20 million of the annual income (as against current UAH 10 million). A twelve-month period for the calculation of monthly advance payments will be determined from June of the current tax year through May of the next tax year (as against the present March-February period).

* - Photo from

Tuesday, March 10, 2015

Blocked VAT-Accounts Finally Get Started

Co-authored by Andrii Kuleba 
 (Junior Associate of 
Lavrynovych & Partners Law Firm)
Ukraine has finally implemented the system of blocked VAT-accounts to combat VAT-fraud. Ukrainian system of blocked VAT-accounts is innovative and does not have any equivalents in the world. It is based on a prepayment principle. A supplier in first place remits VAT to his blocked VAT account, and only after that the purchaser can enjoy his resultant input VAT deduction.

There is a special formula to calculate the limit on issuance of VAT invoices. Under this formula the maximum amount for which a supplier is permitted to issue a VAT invoice is determined taking account of his input VAT. Should the supplier intends to issue a VAT invoice for the amount exceeding one calculated according to the formula, he first needs to deposit additional funds to his blocked VAT-account.

The system of blocked VAT-accounts also entails the fully electronic administration of VAT:

- VAT invoices and VAT returns are issued/filed in electronic format only;

- All VAT invoices are subject to registration in the electronic register maintained by the state fiscal authorities. Only based on VAT invoices registered with the above register a purchaser can claim his input VAT deduction.

Blocked VAT-accounts have been in test-mode operation since 1 February 2015. The test-mode operation means that VAT is administered electronically and VAT liabilities are settled towards the state revenues through blocked VAT-accounts. However, over this transitory period of time the limit on issuance of VAT invoices (calculated under the special formula) does not apply. Thus, suppliers are not supposed to finance their blocked VAT-accounts before making taxable supplies in certain cases.

Since 1 July 2015 the system of blocked VAT-accounts will become fully-operational, which first and foremost mean the application of the limit on the issuance of VAT invoices.

It is also worthwhile to mention that the current system of blocked VAT-accounts has been seriously modified in response to the severe criticism of business society in respect of its adverse effect on VAT taxable persons.

First, there is now the real possibility for taxable persons to return the overpayments of tax accumulated in their blocked VAT-accounts.

Second, taxable persons are now given the opportunity to increase the limit on issuance of VAT invoices (calculated under the special formula) by the surplus of their input tax of previous tax periods.

Third, in order to minimize distractions of working capital, the limit on issuance of VAT invoices (calculated under the special formula) will automatically increase by the average monthly amount of VAT liabilities remitted to the state revenues by the taxable persons over the last 12 months.