Corporate Income Tax: Reloaded ~ U-Tax Blog

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).

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