On 1 April 2011 all the provisions of the newly-adopted Tax Code of Ukraine dated 2 December 2010 No.2756-VI came into force. Principle changes introduced by the Tax Code concern corporate income tax.

One of the positive amendments is decrease in the corporate income tax rate from 25% to 16%. However, the decrease will be implemented on a step-by-step basis:

  • from 1 April 2011 and until 31December 2011 the applicable rate of corporate income tax will make up 23%;
  • in 2012 the rate will be decreased to 21 %;
  • in 2013 the rate will be 19%; and
  • in 2014 the rate of corporate income tax will run down to 16%.

In addition, according to the Tax Code some businesses enjoy privilege of being released from corporate income tax for some period of time, which can be 5 or even more years. The "tax holidays" are applied mainly to the companies from economy sectors that are most attractive for investments. Within this group fall bioenergetics, infrastructure facilities for EURO 2012 (e.g. hotels), agribusiness, etc. Thus, the Tax Code clearly defined taxpayers, which are entitled to enjoy "tax holidays" benefits. The mentioned companies are allowed not to pay corporate income tax that makes Ukrainian environment more attractive for doing business.

Let's consider in more detail the privileges proposed by the Tax Code of Ukraine.

Businesses exempt from corporate income tax by their income rate

For the period from 1 April 2011 and until 1 January 2016 a zero rate of income tax shall be applied to businesses that obtain income of not more than UAH 3 million per year and pay to their staff not less than 2 minimal salaries per month. The amount of minimal salary is annually set by the Act of Ukraine "On State Budget" for a specific year. Currently, the amount of a minimal salary is UAH 960 (approximately, USD 120). By the end of 2011 the figure will increase to UAH 1004 (approximately, USD 125.5). To enjoy the privilege a business must also comply with one of the following criteria:

  • be established after 1 April 2011; or
  • in case of acting business, to have income of not more than UAH 3 million per year during the last three years and employ not more than 20 employees;
  • in case of individual entrepreneurs, who are single tax payers, to be registered before 1 January 2011 and have the last year income of not more than UAH 1 million and the number of employees of not more than 50.

It should be emphasized that tax holidays are not applied to the businesses that were created after 1 January 2011 via reorganization, privatization and corporatization or perform in one of the following fields of activity:

  • entertainment;
  • production, wholesale, export or import of goods that are subject to excise tax;
  • production, retail and wholesale of fuel and lubricants;
  • operations with real estate, including lease;
  • foreign-economic activity;
  • wholesale and agency of wholesale, etc.

Businesses exempt from corporate income tax by their type of activity

Biofuel Producers

Production of biofuel contributes a lot to reduce negative anthropogenic load on the atmosphere. The environment is quite polluted in Ukraine, and, therefore, the Ukrainian government tries to involve foreign capital in order to develop biofuel production in Ukraine and in such a way not only to develop national economy but to reduce atmosphere pollution rate. To promote investments in the bioenergetics of Ukraine the Tax Code prescribes for tax holidays in Ukraine for businesses operating in this area.

In particular, in accordance with the Tax Code during the period up to 1 January 2020 income tax is not payable by:

  • biofuel producers;
  • businesses that produce electrical and thermal energy and/or produce thermal energy from biofuel;
  • national producers of equipment and machinery using biofuel.

Hotels

Ukraine is one of the host countries for the upcoming EURO 2012. To comply with the requirements of UEFA Ukraine need to ensure accommodation for the visitors in the amount of 15 655 rooms in 3 types of hotels (3-5 star). It is not an easy task, taking in account the remaining time. Because of this the Tax Code contains tax privileges to encourage the companies involved in construction and operation of hotels. Specifically, the companies that build 3, 4 and 5 star hotels are released from corporate income tax for 10 years starting from 1 January 2011.

Agribusiness

Ukraine is rich in natural resources and can boast of advantageous geographical location. Ukraine is rich in fertile soil (60% of Ukrainian agricultural lands are chernozem), has a good-developed hydrological system and optimal climatic conditions. All these ensure rapid development of agricultural business in Ukraine. However, Ukrainian agrarians feel lack in affordable modern agricultural equipment and machinery. For these reasons and to encourage the national producers the Tax Code introduced tax holidays for businesses operating in the field of farm machinery. These businesses are authorized to apply 0 rate of income tax until 1 January 2021.

Others

A lot of other companies that are operating in the different sectors of economy were granted tax benefits and privileges. However, duration of such benefits and privileges is different and is industry-specific.

Among the industries that may apply tax privileges are light industry, electric power engineering, shipbuilding and aircraft constructiion. The companies from these industries are released from corporate income tax for 10 years, starting from 1 January 2011.

Tax benefits are granted to businesses involved in extraction of gas (methane) from coal fields. Such businesses get exemption until 1 January 2020.

Tax holidays cover also publishing houses that print books on the territory of Ukraine (exemption is valid until 1 January 2015) and producers of national films and cartoons (exemption is valid until 1 January 2016).

Peculiarities of Tax Holidays

Tax regulations clearly specify that funds saved based on the tax privileges and benefits are to be used strictly for the purposes determined by the law.

In particular, the above funds are to be used for:

  • increase in production volume;
  • re-equipping the physical infrastructure;
  • introduction of the latest technology; or
  • repayment of loans and interest thereunder.

The procedure for use of the funds saved via tax exemptions is to be set by the Cabinet of Ministers of Ukraine. As of today, there is an approved procedure for businesses that are involved in extraction and use of gas (methane) from coal fields. As to other businesses, the relevant procedures are being developed by the government and after their approval will be applied through the period until 1 April 2021.

In case of failure to comply with the set regulations for the use of funds, a business will be required to pay in full the income tax for the period of failure duration. In addition, the penalties will be imposed in accordance with the Tax Code.

Doing business in such spheres as bioenergetics, agriculture, hotels and other may not only be interesting but tax efficient in Ukraine. Tax holidays introduced by the Tax Code promote establishing new businesses in Ukraine and development of the existing ones. Of course, there are some requirements to the businesses in order to get tax benefits. However, they are quite reasonable, while tax benefits open substantial prospects in Ukrainian business environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.