Corporate Tax in Ukraine
Corporate Income Tax (CIT) is one of the main taxes applicable on income of business entities. CIT applies on financial result from business activity in the reporting period, defined in accordance with Ukrainian National or IFRS standards. In addition, in most cases companies are obliged to adjust financial result for tax differences as prescribed by Tax Code of Ukraine.
In Ukraine CIT is payable on world-wide income of residents of Ukraine (including subsidiaries of foreign companies) and on certain types of income derived from Ukraine of non-residents of Ukraine. Permanent establishments of non-residents are subject to state registration in Ukraine and treated as separate entity for CIT taxation purposes. Non-profitable organizations and companies on Simplified Tax Regime are exempt from CIT.
This article provides overview of Corporate Income Tax in Ukraine (hereinafter – CIT), tax rates, rules of taxation and procedure of filing tax return. Transfer pricing rules and reporting procedure are out of the scope of this article.
Under Ukrainian law Corporate Income Tax -payers are the following:
- Residents of Ukraine: legal entities, registered in Ukraine and operating under Ukrainian laws (including subsidiaries of foreign companies). Legal-entities-residents of Ukraine pay tax on their world-wide income. Non-profitable organizations and legal entities which are registered as Unified Tax payers (i.e. use Simplified Tax Regime) are not Corporate Income Tax-payers.
- Non-residents of Ukraine:
- Legal entities-non residents, which receive income with origin from Ukrainian territory (amount of dividends,royalty, lease payments, money from sale of property in Ukraine etc). Income received as compensation for goods, works and services, delivered to resident from non-resident, is exempt from taxation by Corporate income tax in Ukraine.
- Permanent establishments of non-residents (PE). PE is subject to state registration in Ukraine and is treated as separate entity for taxation purposes.
CIT rate is 18% (accrued on Taxable Profit as defined below).
However, certain types of business activity and tax-payers are subject to special taxation rules (insurance, banking, gambling, income of non-residents and others).
Insurance companies in addition to 18 % CIT, accrued on their taxable profit, have to pay special CIT at 0% and 3 % from their income, which reduces amount of taxable profit.
Legal entities, involved in gambling activities, in addition to 18 % CIT , accrued on their taxable profit, have to pay special CIT at 10% and 18 % from their income, which does not reduce amount of taxable profit.
Income of Non-residents
Legal entities-non residents
Legal entities-non-residents shall pay CIT at 0 %, 4 %, 6 %, 12 %, 15% and 20 % from their income (tax rate varies depending on type of income).
In most cases legal entities-non-residents pay CIT at 15 % (such CIT from non-residents is withheld by resident or permanent establishment who is paying income to non-resident). Namely, the following types of income are taxed at 15 %:
- proceeds, discounted income, interest under loan or other debt instruments
- dividends from resident
- engineering income
- lease / rent payments, paid by resident or permanent establishment to non-resident
- income from sale of real-estate, located in Ukraine (note that tax is accrued on full amount of income not capital gain)
- profit from sale of securities, derivatives or other corporate rights (except non-interest (discount) bonds or treasury bonds)
- income from joint activity on the territory of Ukraine, income from long-term contracts on the territory of Ukraine
- remuneration from cultural, educational, religious, sportive, entertainment activity on the territory of Ukraine
- broker activity, agent, commission operations, received from resident or permanent establishment
- insurance installments from insured-residents for insurance from risks overseas
- income received from entertainment activity (except lotteries)
- income from charity
- other income from business activity, received by non-resident in Ukraine, except income from sale of goods and services to residents or permanent establishments of non-residents
Additionally, the certain income of non-residents is taxed as follows:
- Freight Income of Non-residents is taxed at 6 %
- Income from non-interest (discount) bonds or treasury bonds are taxed at 18 %
- Income from Production and Distribution of Advertisement is taxed at 20 %
- Insurance payments to non-resident from insurance of risks, paid by insurer-resident of Ukraine, is taxed at 0 %, 4 % or 12 % at the cost of insurer (depending on type of insurance)
Permanent establishments for taxation purposes are considered as separate entity, they file reporting and pay taxes on their own. Tax rates and Taxable profit for permanent establishments are the same as for residents of Ukraine.
There are two ways to define Taxable Profit
Profit or loss is calculated as difference between income and expenses under the National Accounting Standards or IFRS. As a rule, accounting standards are adopted in Accounting Policy of the company at Company’s own discretion. However in certain cases, company is obliged to file reporting based on IFRS standards (for example, public joint stock companies, insurance companies, banks and some others as defined by law).
There are Two Options for Companies to Define Taxable Profit
- With Tax Adjustments. All the tax payers may use tax adjustments. Taxpayers, whose annual income (net of indirect taxes) exceeds UAH 20 mio, are obliged to adjust financial result for tax differences as prescribed by Tax Code of Ukraine.
- Without Tax Adjustments (based only on financial result under accounting rules). Taxpayers whose annual income (net of indirect taxes) does not exceed UAH 20 mio, are allowed (upon their own decision) to calculate Taxable profit based on their financial accounting result without any adjustments for tax differences (other than tax loss carryforwards).
As a rule, expenses, born within Company’s business activity, are deducted when calculating Taxable Profit. However companies, which adjust their financial result for tax differences, shall not deduct certain expenses as defined in Tax Code of Ukraine as well as certain types of income is not included in Taxable profit.
Amount of dividends, received by legal entity-resident of Ukraine from CIT-payer, is deductible.
However dividends, received from non-resident are not tax-deductible. Dividends, received by legal entities non-residents, are taxed at 15 % (if otherwise not prescribed by the respective Double Tax Treaty)
Interest are usually deductible from Taxable Profit. However Tax Code of Ukraine limits deduction of interests, paid to related party non-resident (see Thin Capitalization Rules below)
Royalty is deductible from Taxable Profit. However deduction of royalty paid to non-resident is limited to royalty plus 4 % of net income for the previous year. In addition, not tax-deductible is royalty paid to the following persons:
- residents of low-tax jurisdictions, or
- if in owner’s jurisdiction there is no tax on royalty, or
- to non-resident, who is not beneficial receiving party of royalty
- to non-resident if intellectual property originally appeared with resident of Ukraine
However such expenses are deductible if they are justified and supported by transfer pricing documentation.
Payments to Non-profit Organizations and Non-residents in Low Tax Jurisdictions
Ukrainian law limits deductions from Taxable Profit of amounts paid to: non-profitable organizations, and non-residents from low-tax jurisdictions: namely, 30 % of the value of such transactions may not be deducted from the Taxable Profit. However such expenses are deductible if they are justified and supported by transfer pricing documentation.
Other adjustments as defined under Tax Code of Ukraine. Among others, such adjustments are required as per Ukrainian Transfer Pricing Rules (if applicable). See more information on adjustments in Sections Thin Capitalization Rules and Transactions with Low-tax Jurisdictions.
Property Tax Reduces Amount of CIT Due
Amount of CIT can be reduced for the amount of Real-estate Property Tax, payable by tax-payer during the year for commercial real-estate. This rule does not apply to property tax on residential real-estate and land plots.
Thin Capitalization Rules
Applicable for Companies who define taxable profit with adjustements
Ukrainian law limits deduction of interest expense from loans, REPO transactions, financial lease agreements and other borrowing in favor of related party-non-resident. Namely, in cases when debt-to-equity ratio exceeds 3.5:1 (for financial and leasing companies – 10:1), deduction of interest paid on loans exceeding the above-mentioned ratio is limited to 50 % of Taxable Profit , financial losses and accounting depreciation.
Interests, not deducted in the reporting period, can be carried-forward to the next reporting periods, however reduced by 5 % (until interest in fully deducted)
In case the debt-to-equity ratio is less than 3.5:1 (for financial and leasing companies – 10:1), the tax-payer may deduct interest in full.
Transactions with Low Tax Jurisdictions
Applicable for Companies who define taxable profit with adjustements
Ukrainian law envisages number of limitations as per deduction of expenses born by tax-payers from transactions with low tax jurisdictions, for example royalty, paid to low tax jurisdiction is not deductible; taxable profit is increased by 30 % of the value of goods, work and services, bought from low-tax jurisdiction) and others. However such expenses are deductible if they are justified and supported by transfer pricing documentation.
Additionally, transactions with low-tax jurisdictions are subject to transfer pricing rules and annual reporting in case that:
- total annual income of tax-payer exceeds UAH 50 mio (net of indirect tax); and
- amount of transactions with such counter-party exceeds UAH 5 mio
The official list of low-tax jurisdiction is defined by the Cabinet of Ministers of Ukraine subject to annual review. Such list includes jurisdictions:
- where CIT rate is 5 % or more lower than in Ukraine; and
- there is no treaty with Ukraine on exchange of information
The latest list of low tax jurisdictions was approved by the Cabinet of Ministers of Ukraine on 16th of September, 2015 in the the Instruction №977-r that specifies the new list of 65 countries of the low tax jurisdictions, namely:
|Andorra||Cyprus||Madeira||Saint Kitts and Nevis|
|Antigua and Barbuda||French Guyana||Maldives||Saint Lucia|
|Aruba||Gibraltar||Martinique||Saint Vincent and the Grenadines|
|Bahamas||Grenada||Marshall Islands||San Marino|
|Bahrain||Guernsey||Micronesia||Sao Tome and Principe|
|Barbados||Hong Kong||Moldova||Serbia (Kosovo and Metohija)|
|Bermuda||Isle of Man||Montserrat||Sint Maarten (Dutch part)|
|Bosnia and Herzegovina||Jersey||Nauru||Sudan|
|British Virgin Islands||Kyrgyzstan||Niue||Timor-Leste|
|Brunei Darussalam||Labuan||Northern Mariana Islands||Turkmenistan|
|Bulgaria||Lesotho||Oman||Turks and Caicos Islands|
|Canary Islands||Liberia||Palau||US Virgin Islands|
Minimal terms of amortization can be extended by the tax-payer
All capital assets (fixed and intangible property, apart from land, goodwill, immovable property under conservation and capital assets not used for business activity) are subject to amortization under the applicable accounting standards (Ukrainian National Accounting Standards rules or IFRS). Tax Code stipulates minimal terms of amortization, however useful life of fixed assets may be extended under decision of the tax-payer.
Tax Reporting and Filings
Reporting period for CIT is quarter, half a year, 3 quarters and year. Tax returns are filed on quarterly basis within 40 calendar days following the last day of the reporting period. Tax due has to be paid within 10 days upon deadline for filing of tax return.
Tax year is equal to calendar year, except agricultural producers whose tax year may start on the 1st of July and end 30th of June of the following year.
As an exception, certain categories of tax-payers are allowed to file annual tax declaration, namely:
- companies, newly-registered in the reporting year
- agricultural producers
- taxpayers which annual income (net of indirect taxes) does not exceed UAH 20 mio
Such tax-payers file tax return on annual basis within 60 calendar days following the last day of the reporting period. Tax due has to be paid within 10 days upon deadline for filing of tax return.
Starting from 2016 monthly advance payment of CIT is not envisaged. However under special provisions of Tax Code, in 2016 CIT-payers, who file tax return on quarterly basis, until 31st of December, 2016 are obliged to pay advance CIT in the amount of 2/9 of CIT, calculated based on tax returns for 3 quarters of 2016. Note that such advance payment will be deducted when calculating CIT under annual tax return for 2016.
Ukraine Double Tax Treaties
Ukraine is a party to large number of Double Tax Treaties, which provide:
- relief from double taxation
- limit the taxation by one of state of the company with residency in the other
- protect companies with residency in one state from discriminatory taxation approach in the other country.
In cases, when Ukrainian law contradicts with such DTT, rules of DTT shall apply.
Corporate Income Tax is one of the key taxes accrued on business income derived Ukraine. CIT is accrued on Taxable income, however in some cases full amount of income is taxed (for example sale amount of real-estate by legal entity-non-resident).
Residents of Ukraine pay CIT on their world-wide income. Taxable profit is defined under national or IFRS Accounting standards. The financial result is subject to adjustment for the tax differences for taxpayers which annual income (net of indirect taxes) exceeds UAH 20 mio. In most cases, CIT amounts 18 % from Taxable Profit, however certain types of income and tax-payers have special tax rates and taxation rules. Tax return is filed by residents on quarterly basis. As an exception, newly-registered companies, agricultural producers and taxpayers which annual income (net of indirect taxes) does not exceed UAH 20 mio are allowed to file annual tax declaration.
Non-residents pay CIT only on income, originated from Ukraine. They pay CIT at 0 %, 4 %, 6 %, 12 %, 15% and 20 % from their income or profit (tax rate varies depending on type of income). The tax amount is withheld by the tax agent (resident who is paying such income to the non-resident). Permanent establishments are considered separate entities for taxation purposes, they pay taxes on the same types of income as legal-entities-non residents, but they pay taxes on their own and at the rates for residents of Ukraine.
Tax legislation of Ukraine is changing very fast, regulations are complex and often controversial. For these reasons in order to define your financial result for taxation correctly, it is highly recommended to involve professional tax consultant for these purposes.
Here are some additional resources about setting up a legal structure in Ukraine that you might find useful :
- Business Structures in Ukraine
- Taxes in Ukraine
- Foreign Investment in Ukraine
For further information, please contact us.