Leakage of profits to offshore locations and tax evasion through aggressive planning has always been a hot topic in Ukraine. However, it must be said that, with the exception of the introduction of transfer pricing rules in 2013, little has been done to address the issue comprehensively. An overarching tax reform was not completed in 2015 and will therefore likely have to be addressed in 2016.
But at the end of April 2016, Petro Poroshenko, the President of Ukraine, signed the Decree On actions concerning countering of tax base erosion and profit shifting calling for the creation of a special Working Group tasked with drafting laws by mid-June 2016 embodying a comprehensive de-offshorization reform.
The Working Group recently released a concept paper listing major points of this upcoming de-offshorization reform:
- Establishing control of foreign companies (CFC) rules
- Ensuring automatic exchange of tax information with tax authorities in other jurisdictions (including joining the FATCA and Common Reporting Standard Multilateral Competent Authorities Agreement)
- Recognizing foreign entities as tax residents within Ukraine (that is, creating place of control rules)
- Setting limitations on interest deduction and other financial payments
- Preventing double taxation treaty (DTT) abuse (via general anti-avoidance rules or limitations on benefits clauses in such treaties)
- Preventing artificial avoidance of permanent establishment (PE) status
- Changing transfer pricing rules (by introducing country-by-country reporting and the group's master file)
- Enacting new VAT rules covering e-commerce
- Liberalizing currency control.
The above reforms attempt to implement recommendations of the OECD BEPS action plan (actions 3,4,6,7 and 13) into Ukrainian tax law. Specifically, the reforms will (presuming they go live after being rectified by Parliament) attempt to counter the leakage of funds to offshore locations as well as aggressive tax practices, establish transparency and work to follow the OECD rules.
Who will be affected by the reform? Six key points
1. Generally, the following will be affected:
- Ukrainian groups with a shareholder structure involving entities based in low- tax jurisdictions
- Ukrainian individuals owning shares in foreign companies (especially those which are based in low-tax jurisdictions)
- Foreign-based companies effectively controlled and managed from Ukraine.
2. Politically Exposed Persons and high-net-worth individuals may be subject to CFC rules which lead to the taxation of foreign profits in Ukraine.
3. Ukrainian and international groups with a presence in Ukraine and which are subject to Ukrainian TP compliance should prepare to disclose information on their participation in foreign entities and/or foreign accounts via the automatic exchange of a tax information mechanism.
4. Representative offices of international companies in Ukraine that claim non-taxable status may be impacted by the requirement to submit the group's master file and country-by-country TP reporting, especially if there are entities with inadequate economic substance in the structure that are used to divert profits from Ukraine
5. A non-taxable status may be reviewed and challenged under new stricter rules. This would affect Ukrainian residents effecting cross-border payments with the application of DTT benefits
6. Application of DTT benefits (i.e., reduced rates of withholding tax or full exemption) in many cases may be scrutinized and challenged. Moreover, additional limitations on deduction may be introduced. This would be relevant to non-resident entities selling to Ukrainian residents via the Internet (e-commerce). These entities may be required to register in Ukraine as VAT payers and then pay VAT in relation to such Internet sales.
What can be done?
Depending on the facts and circumstances, a lot can be done to adapt to this new reality.
As a starting point, companies should consider:
- Closely monitoring this reform's developments
- Reviewing their current structure
- Identifying points of concern
- Running a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis and building an action plan to address challenges.
Please contact us to discuss how this reform may affect you and your business and what can be done to address the challenges. We will monitor these important developments and will keep you posted on the matter of de-offshorization reform in the future. We can also provide you with a Russian-language version of this article.
This article was updated on July 8, 2016.