On May 23, 2020, the Law of Ukraine On Amendments to the Tax Code of Ukraine regarding the improvement of tax administration, elimination of technical and logical inconsistencies in tax legislation No. 466-IX dd. 16.01.2020 came into force.
In addition to more than significant changes in the existing tax legislation, in particular, the terms of reporting and payment of taxes, changes in penalties for violation of tax laws, changes in the procedure for registration of VAT payers and cancellation of their registration, etc., the Law introduced new provisions on taxation of income of residents in foreign jurisdictions.
The Law implemented the principle of anti-BEPS (base erosion and profit shifting), which is very common in the European Union and North America.
First of all, the use of anti-BEPS will affect the large multinational companies in Ukraine, which coordinate the manipulation of profits within the financial (holding) group and move it from countries with high tax burden (Ukraine, France, Italy, etc.) to countries where taxes are not paid at all or are paid at a low rate (Cyprus, Ireland, Estonia, offshore).
According to the amendments, the taxpayers are the residents - actual controllers of such companies registered in a foreign country or territory. Also, in certain cases, a foreign entity without the status of a legal entity may be equated to a controlled foreign company (if this is allowed by the legislation of the country of registration of the legal entity and also falls under the criteria defined by the Tax Code of Ukraine).
At the same time, the ownership of corporate rights of a foreign company by a resident of Ukraine shall be determined by one (or a combination of) the following features that grant the right to an individual or a legal entity:
- influence on the respective share of votes in the supreme management body of a foreign legal entity (general meeting of shareholders, participants or other similar body)
- to receive the relevant part of the foreign legal entity's profits;
- blocking the decision on distribution of a part of the profit of a foreign legal entity;
- to receive the relevant part of the assets of the foreign legal entity in case of its liquidation or termination.
At the same time, the Law provides for exemption from taxes on income of a foreign-controlled legal entity if one of the following conditions is met:
- as long as the following conditions are met:
a) between Ukraine and a foreign jurisdiction the location (registration) of a controlled foreign company is a valid double taxation avoidance or tax information exchange agreement
and
b) any of the following conditions are met:
- the controlled foreign company actually pays income tax at the effective rate, the amount of which is not less than the basic (main) rate of corporate income tax in Ukraine, or less for such rate not, more than five percentage points,
or
- the share of passive income of a controlled foreign company is not more than 50 percent of the total income of a controlled foreign company from all sources.
- total comprehensive income of all controlled foreign companies of one controlling entity from all sources according to the financial statements does not exceed the equivalent of EUR 2 million at the end of the reporting period;
- a foreign-controlled company is a public company whose shares (stakes) are traded on a recognized stock exchange. The list of exchanges and the requirements for recognition of shares (stakes) of public companies that are in circulation on the said stock exchange shall be established by the Cabinet of Ministers of Ukraine;
- a controlled foreign company is an organization that, in accordance with the legislation of the relevant foreign jurisdiction, carries out charitable activities and does not distribute income to its founders (participants).
