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Ukraine Parliament Approves Implementation of BEPS and Other Measures

The Ukraine government has announced the adoption by parliament on 16 January 2020 of draft laws on the improvement of administration of taxes and elimination of certain inconsistencies in tax legislation (Law No. 1209-1 and Law No. 1210), which includes the implementation of several BEPS related measures and certain others. The main measures include:

  • The introduction of controlled foreign corporation (CFC) rules and related disclosure requirements with the corporate income tax return, including that a foreign company is considered a CFC if a Ukraine resident owns 50% of the company, owns 10% with at least 50% of the company owned by Ukraine residents, or exercises effective control, with the profits of a CFC included in a controlling person's taxable income, unless:
    • there is an income tax treaty or tax information exchange agreement between Ukraine and the foreign jurisdiction of the CFC;
    • the foreign jurisdiction is not included in the list of states (territories) approved by the Cabinet of Ministers of Ukraine; and
    • either of the following is true:
      • the CFC actually pays corporate income tax at an effective rate that is not less than the corporate income tax rate in Ukraine, or less than the Ukraine rate by no more than five percentage points; or
      • the passive income of the CFC is no more than 50% of the total income of the CFC from all sources;
  • The revision of the interest deduction limit rules, including a reduction in the percentage of EBITDA-based interest deduction limit from 50% to 30%, which applies where a 3.5:1 debt-equity ratio is exceeded, as well as the removal of the condition that the debt is with non-resident related parties (i.e., all debt with non-residents, related or not, is subject to the restriction);
  • The update of the permanent establishment rules to counter avoidance, including an anti-fragmentation (contract-splitting) rule;
  • The expansion of existing documentation requirements in line with the three-tiered documentation of BEPS Action 13, which includes:
    • expanded local transfer pricing documentation (local file) requirements, including a description of the supply chain (value creation) in controlled transactions, information on economic benefits and the existence of a business purpose for transactions, information on material intra-group transactions affecting pricing, and copies of APAs and other tax rulings, auditor reports on financial statements, and contracts under which controlled transactions are carried out;
    • a new global transfer pricing documentation (Master file) requirement in line with OECD guidelines that applies if group revenue in the prior year is equal to or exceeds the equivalent of EUR 50 million, and is due within 90 days of request, but no earlier than 12 months after the end of the group's fiscal year;
    • a new Country-by-Country (CbC) reporting requirement if group revenue exceeds the equivalent of EUR 750 million, which is due within 12 months following the end of the reporting fiscal year if:
      • the Ukraine taxpayer is the ultimate parent of the group;
      • the Ukraine taxpayer has been appointed by the parent company to submit the CbC report;
      • the ultimate parent is not required to submit a report in its jurisdiction of residence and has not appointed another group member to submit the report in another jurisdiction; or
      • there is an international agreement for the exchange of information between Ukraine and the jurisdiction of the ultimate parent or other authorized reporting group member, but there is no agreement in force for CbC exchange or there is a systemic failure for exchange;
    • a group participation notification requirement, which is due with the annual report on controlled transactions and includes information on the ultimate parent of the group, information on the group member authorized to submit a CbC report, the date of the end of reporting fiscal year, and information on consolidated group revenue of the prior year;
  • The implementation of the rules resulting from BEPS Actions 8–10 (Transfer Pricing) on the distribution of functions, risks, and intangible assets within a group of companies, as well as improving the rules for commodity transactions;
  • The amendment of the rules for the determination of related parties, including an increase in the ownership threshold from 20% to 25%;
  • The introduction of new rules for the taxation of indirect transfers of shares in Ukrainian companies deriving more than 50% of their value from immovable property situated in Ukraine at any time in the 365 days preceding the alienation;
  • The addition of a general principal purpose test for granting treaty benefits, including that the application of a tax treaty is not allowed if the main or overriding purpose of conducting a business transaction with a non-resident was to obtain directly or indirectly the benefits provided by the treaty in the form of a tax exemption or a reduced tax rate, unless it is established that the providing such benefits is consistent with the object and purpose of the treaty;
  • The introduction of new rules for handling MAP requests; and
  • The establishment of a new Board of Appeals to handle taxpayer complaints.

The measures generally apply from 23 May 2020, although several of the key BEPS measures apply from 1 January 2021, including the new CFC rules, interest deduction rules, and the CbC report and Master file requirements. However, the CbC report requirements are subject to the condition that they will only apply after Ukraine has signed the multilateral agreement for the exchange of CbC reports. Further, the new rules on transfers of shares deriving value from immovable property apply from 1 July 2020.

- Note this article has been updated, including with respect to effective dates, following the publication of the law in the Official Gazette on 22 May 2020.

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