Thursday, 30 March 2017

Ukraine's tax reform

Tax reform law includes withholding tax rate reduction and new limits on deductibility of royalty payments.

Tax rates
The standard corporate tax rate remains at 18%.
The withholding tax rate on interest paid to nonresidents on loans made to Ukrainian residents is reduced from 15% to 5% if the following requirements are met:

  • The amounts loaned by the nonresident were generated from the issuance of Eurobonds listed on an international stock exchange recognized by the Cabinet of Ministers;
  • The nonresident issued the Eurobonds for the purpose of providing direct or indirect financing to Ukrainian residents; and
  • The nonresident (or the person receiving interest on behalf of such nonresident) is not tax resident in a “low tax jurisdiction,” as defined by the Cabinet of Ministers on the date the Eurobonds were issued.

Thin capitalization rules
The thin capitalization (debt-to-equity) ratio remains at 3.5. Total deductions for interest on nonresident related party debt are limited to 50% of the taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA).
Previously, the thin capitalization interest deduction restriction covered interest on all debt.

Deductibility of royalty payments to nonresidents
The restrictions on the deductibility of royalty payments made to nonresidents have been enhanced. Such payments (including payments made at arm’s length) now are nondeductible if:

  • The nonresident recipient is not the beneficial owner of the royalties;
  • The rights to the underlying intellectual property originated in Ukraine; or
  • The royalties are not subject to tax in the country where the recipient is resident.

Previously, a full deduction was allowed for royalty payments to nonresidents, provided the taxpayer could provide documentation to substantiate that the payment was made at arm’s length.

Tax administration
The law requires the tax authorities to maintain on their website a public register of applications for extension/deferral of payment of tax liabilities, a database of individual tax rulings and the annual schedule of full-scope tax audits.
In addition, the previous two separate registers used for VAT refunds are merged into a single registry, which should provide for more transparency regarding refunds.

Source: Deloitte