Supported by the OECD, the Base Erosion and Profit Shifting (BEPS) Action Plan is spreading across the world to eliminate different tax avoidance strategies. On May 23, the supreme legislative body of Ukraine (Verkhovna Rada) adopted the so-called Anti-BEPS Law #466-IX that has already become a game-changing point. Known in Ukraine as the Tax Bill 1210, the Law introduces modern, anti-tax avoidance standards and encourages tax transparency.
Controlled Foreign Company (CFC) rules
The changes will affect Ukrainian beneficiaries who own or control a foreign legal entity. Rules introduce taxation of income for controlling persons with a 19,5% rate effective as of January 1st 2021.
The Law applies to Ukrainians holding >50% of a CFC independently or >25% of a CFC with another resident of Ukraine who owns >50% or controls the CFC, regardless of the equity participation (limitations apply).
Income would be out of the scope of CFC Rules if:
- Total annual income of CFC is ( EUR 2 million;
- There is a suitable Double Tax Treaty agreement in place with
the CFC's country and:
o The CFC pays corporate income tax of more than 13% or
o The passive income form of a CFC is (50%
- The CFC is a public company traded on a stock exchange;
- The CFC is a charitable organization.
Permanent Establishments (PE)
The Law introduces corrections to the definition of a Permanent Establishment (PE) so as to align it with the OECD BEPS Action 7 meaning. PEs are required to use transfer pricing methods in taxation. Unregistered (qualification period – 183 days) permanent establishments are now in the scope of authorities. Severe penalties apply effective May 23rd 2020.
The Anti-BEPS Law introduces a new 3- layer reporting approach to the Tax Code of Ukraine. As of May 23rd 2020, taxpayers are asked to provide to the Ukrainian authorities the following documentation
- A report on controlled transactions (to prove "arm's length" principle),
- A Master File (if consolidated revenue is >EUR 50 million),
- Country-by-Country Report (if consolidated annual revenue
is > EUR 750 million).
Effective date: May 23, 2020 (conditions apply).
The Business Purpose Test
As of the 23rd of May 2020 a transaction lacking adequate economic reason (business purpose) will no longer be considered as expenses for income tax purposes if:
- the main objective of a transaction is tax reduction or avoidance;
- under comparable conditions ("arm's length" principle), a person would not be willing to buy (sell) an asset from unrelated persons.
The Anti-BEPS Law offers amendments to the definition of Beneficial owner of the Tax Code. The look-through approach clarifies the phrasing of a beneficiary as "a person receiving the benefits and actually dispose of the income".
Thus, a person that has no right to dispose income, or performs no principal role, or cannot perform the functions due to insufficient resources (act as an intermediary) would not be qualified as a beneficiary.
Effective date: May 23, 2020
Constructive Dividends (CD)
"Constructive Dividends" is a worldwide known tool for calculating the difference between the transaction value and real value (defined with the "arm's length" principle). Such disparities in transactions are subject to tax in Ukraine.
As at January 1st 2021, equal rules of CD apply to payments between Ukrainian entities and non-resident shareholders in the case of a decrease of charter capital, withdrawal of a participant/shareholder, share buy-back and other similar transaction that lead to a decrease of undistributed profit.
Single Tax amendments
The annual revenue limits for the taxation of private entrepreneurs (not legal entities) have been significantly extended in Article 291 of the Tax Code of Ukraine as at May 23rd 2020:
- The first group – up to UAH 1 mln;
- The second group – up to UAH 5 mln;
- The third group – up to UAH 7 mln.
Overall, the adoption of the Anti-BEPS Law is an important step in the transition to transparency and prosperity. These amendments outline Ukrainian response to OECD`s BEPS Action Plan and set up a field for a wide discussion between businesses, people and authorities.
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.