Investor considerations
- The standard corporate tax rate is 25%.
- For insurance companies, net insurance premiums are subject to a maximum tax of 3%.
- Qualifying small companies may opt to use a simplified tax system.
- There is no group consolidation.
- Depreciation is based on the reducing balance method, and relatively generous rates are available.
- Losses may be carried forward indefinitely (but are often restricted in practice).
- When companies pay dividends, they are generally required to pay advance corporate tax of 25%. They may also need to deduct up to 15% withholding tax.
- Taxable profit is based on the "first event rule."
- Returns and payments must be made on a quarterly basis. An eleven-month return is also required in 2007 (and in most years).
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Content
10.1 Corporate tax system
Companies
Ukrainian entities and foreign entities doing business in Ukraine through a permanent establishment are liable for corporate income tax. The standard rate is 25%.
Special rules apply to Ukraine insurance companies. Net insurance premiums (gross premiums less amounts paid to reinsurance companies) are taxed at 0% for long-term life insurance premiums and pension insurance premiums, and 3% otherwise. Profits earned by insurance companies from non-insurance activities are taxed at the standard rate.
Qualifying small legal entities may opt to use the simplified taxation, accounting and reporting system. VAT-registered entities pay 6% of their sales proceeds under the simplified tax system, while non-VAT-registered entities pay 10%.
Dividends
Companies paying dividends are generally required to pay advance corporate income tax at the standard rate. The advance payment is used to meet their subsequent corporate income tax liabilities (other than for insurance companies). If the advance tax is not able to be used in the year the dividend is paid, it is carried over to future income years, but it cannot be refunded.
The advance tax is not paid by companies deriving more than 90% of their income from dividends.
Companies must also deduct withholding tax from dividends paid to individuals and foreign entities. For dividends paid to resident or non-resident individuals, or to foreign entities (including those with a permanent establishment in Ukraine), the standard rate is 15%. A lower rate may apply under a relevant tax treaty.
Territoriality
Resident entities are legal and business entities whose personality or existence is established under Ukraine law. Non-resident entities are those whose existence is established under foreign law.
Resident entities are liable to Ukrainian tax on their worldwide income. Foreign taxes should be available for credit against Ukrainian tax liabilities, but may be difficult to obtain in practice.
Foreign entities are liable to Ukrainian tax only on income from sources in Ukraine. In broad terms, income will have a source in Ukraine if:
- The income arises from activities performed or property located in Ukraine; or
- In the case of dividends, interest, royalties and other passive income, the income is paid by a resident of Ukraine.
Professional services, except specific engineering services, are not treated as having a Ukraine source (so are not subject to withholding).
Consolidation
There is no system of group taxation in Ukraine. Members of a group must file separate tax returns. There are no provisions to offset the losses of group members against the profits of another group member.
Permanent establishments
The domestic definition for a permanent representation essentially adopts the definition for permanent establishment found in the OECD Model Tax Convention, but with the addition of stronger agency tests.
When a foreign company conducts business in Ukraine through a permanent establishment, taxable income should be determined on the same basis as for domestic entities. If it is not possible to determine taxable profit based on the "direct" method (taxable income less deductible expenses), the allocation method or notional method may apply.
The allocation method requires the taxpayer to allocate a portion of its worldwide income and expenses to Ukraine and is difficult to apply in practice. The tax authorities have a preference for the notional method, which involves applying a notional margin of 30% to gross revenues earned in respect of activities in Ukraine.
Ukraine has no special tax rules for non-commercial representative offices established to engage in liaison type activities. Such offices are subject to the normal corporate income tax, but an exemption from income tax may be available under a relevant tax treaty if the activities of the representative office are not sufficient to constitute a permanent establishment for the foreign entity.
10.2 Incentives
Ukraine currently has very few incentives, although some are available (for the publishing and agricultural industries, for example). There have been discussions in Parliament about the possibility of restoring special tax regimes but there is no certainty of any such measure.
Ukraine does offer generous depreciation rates for fixed assets (see Section 10.4).
10.3 Gross income
Accounting period
The reporting year for companies generally follows the calendar year. The exception is for agricultural manufacturers, which report based on a 30 June year-end.
Returns and payments must be made on a quarterly basis, generally reflecting accumulated income and expenses for the year.
In addition, an eleven-month return to November and corresponding payment is required for 2007 (and in most years).
Business profits
Taxable profits are defined to be "adjusted gross income" less "allowable gross expenses" and depreciation charges.
Adjusted gross income encompasses all revenues received by a taxpayer from all economic activities, unless the revenues are expressly exempted under the law. Allowable gross expenses encompass all expenses incurred in relation to "business activities," unless a specific provision in the law restricts the deduction. "Business activities" are defined in the law as "any type of activity carried out by a person, aimed at making profits in the pecuniary form and creating tangible and intangible assets, provided such activity is regular, stable, and substantial."
There are significant differences between tax and financial accounting rules. Consequently, it is common for companies to prepare separate financial and tax accounts, which is very time consuming. The recent PricewaterhouseCoopers / World Bank "Paying Taxes" study estimated that a modest-sized domestic business would require 425 hours per year to comply with its corporate tax compliance requirements.
Accounting for income
Income should generally be recognised on the earlier of the date on which payment is received, or goods or services are supplied.
For goods, the date of supply is generally the date of shipment.
For services, the practice in Ukraine is for the parties to a services contract to sign an "acceptance act" document once the services are delivered, and this is generally considered to be the date of supply.
Special rules are available to deal with the recognition of income from long-term construction contracts and R&D contracts.
Inventory valuation
Inventories may be valued for tax purposes using any of the following methods:
- Identified value of the appropriate inventory unit.
- Weighted average value of uniform inventories.
- First-in-first-out (FIFO) value of inventories.
- Target expenses.
- For inventories sold on a retail basis, the inventory sales price.
The selected method must be applied consistently for inventories having the same designated purpose and utilisation conditions. The method must also be applied consistently throughout each income year.
Securities
Income from securities is calculated separately from other income, and is based on a pooling method. Taxable income is determined by deducting the aggregate cost of acquiring each class of securities from the aggregate proceeds from selling such securities. If aggregate acquisition costs for the year exceed aggregate sales proceeds, the excess is carried forward and applied against sales of securities in subsequent years.
Exempt income
Dividends derived by a Ukrainian entity from another Ukrainian entity are exempt from tax.
10.4 Deductibility of expenses
Business expenses
Expenses incurred in the furtherance of a taxpayer's business activities should be deductible, unless a specific provision in the law says otherwise (refer below).
Special rules apply to payments for goods or services to foreign entities in listed jurisdictions operating offshore tax regimes (36 tax haven jurisdictions are listed). Only 85% of payments to an entity in one of these jurisdictions will be deductible, unless evidence is held that the entity is subject to the ordinary tax rules of that jurisdiction (i.e., it does not benefit from the offshore tax regime).
Non-deductible expenses
The following are the main items that are not deductible for corporate income tax purposes:
- Expenses that are not supported by relevant documents (e.g.,contract, voucher, receipt, check, etc.).
- Expenses incurred for receptions, presentations, entertainment, and the provision of free samples and services for advertising purposes in excess of 2% of the taxpayer's taxable profits for the previous year, unless the taxpayer is in the business of providing such services.
- Insurance premiums (other than for medical, pension and mandatory insurance) in excess of 5% of the total deductible expense from the beginning of the year up to the end of the reporting period.
- Expenses for professional education and training, etc., in excess of 3% of employee compensation for the period.
- Business trip expenses for individuals that are not employees.
- Expenses relating to the financing of management bodies including holding companies.
- Payments in respect of goodwill, and amortization of goodwill.
- Expenses for car parking and the maintenance of cars. Further, only 50% of payments under an operating lease for cars or expenses relating to the purchase of fuel and lubricants for cars may be deducted. There is, however, no obligation for the taxpayer to prove that such expenses are related to its business.
- Expenses for provision of warranty services in excess of 10% of the value of goods sold.
- Expenses related to repairs to fixed assets subject to depreciation in excess of 10% of the aggregate book value of all groups of fixed assets as of the beginning of the reporting period (the excess is capitalised).
Accounting for expenses
The general rule is that expenses should be recognised on the earlier of the date on which goods or services were received or the date on which payment was made. Special rules apply for inventory. When payment is made to a non-resident, a tax-exempt entity or an entity paying tax at reduced rates (e.g., a small business that has opted to pay the unitary tax), expenses are recognised on the date on which goods or services were received.
Depreciation
Assets costing more than UAH 1,000 and with a useful life exceeding one year are required to be depreciated. Depreciation is determined on a quarterly basis, and is computed using the reducing-balance method. Taxpayers may adopt any depreciation rate up to the following maximum quarterly rate:
Description of assets | Acquisition date |
 | Pre-1 Jan 04 | Post-1 Jan 04 |
| Group 1: Buildings, constructions, premises | 1.25% | 2 % |
| Group 2: Motor transport, spare parts, furniture, household electronic, optical and engineering devices and tools | 6.25% | 10 % |
| Group 3: All other assets, except intangible assets and Group 4 assets | 3.75% | 6 % |
| Group 4: Computers, telephones, etc. | N/A | 15% |
Land may not be depreciated. Intangible assets may be amortized using the straight-line method over the lesser of the asset's useful economic life or ten years.
If the inflation index exceeds 10% in a calendar year, taxpayers may adjust the book value of their assets for depreciation purposes by the amount of the excess.
Interest
As a general rule interest will be deductible if the related debt is used to fund business activities of the taxpayer.
There are restrictions on deductibility if a Ukrainian company is 50% or more owned or controlled by non-resident or tax-exempt persons, and interest is paid to those persons or their related parties. The deductible interest paid to those persons and their related parties cannot exceed the amount of interest income derived plus 50% of the company's taxable profit (excluding interest income and before the deduction of interest and depreciation). Any interest paid to affiliates in excess of this limit is carried forward to future income years.
Foreign exchange
Realised foreign exchange gains and losses are taxable/deductible.
In addition, foreign currency loans and similar, deposits and cash at bank are revalued quarterly and the difference is taxable/deductible. This revaluation does not apply for foreign currency credits and receivables.
Bad and doubtful debts
To claim a deduction for bad or doubtful debts, a taxpayer must initiate an action for collection. A deduction for bad or doubtful debts is allowed if:
- The creditor applies to the court with claim for debt collection or initiating bankruptcy.
- The debtor has not yet paid 90 days after the sale, the creditor attempts to collect the debt through the pre-court dispute settlement process, and either: (a) the debtor sends a notice accepting the claim; or (b) the debtor does not receive an acceptance notice within one month.
- The creditor has a note of execution for collection executed by a notary.
If the taxpayer subsequently recovers an amount that has been deducted as a bad or doubtful debt, the amount recovered is included in taxable income.
When a creditor pursues action to recover a debt, and the debtor fails to pay, the debtor is required to recognise income either 90 days after the deadline for payment under the contract or accepted claim, or 30 days after the court resolution or the execution of a note of execution by the notary. If the debt is subsequently repaid, the debtor may claim a deduction at the time of repayment.
Royalties and service fees
Royalties and service fees are deductible payments. When service fees are made to related parties, however, the payer is required to hold documentary evidence that the payments are for services actually rendered. The amount of the payment also may not exceed the usual (market) price.
Leasing
Lease payments on operating leases are deductible. The lessor would claim a deduction for depreciation of the leased assets.
Financial leasing is treated for tax purposes as if a sale had been made. The lessee would include the value of the property in the relevant group of fixed assets and claim depreciation charges. The lessee would also deduct the interest and commission elements of the lease payments in the period in which they are payable. Similarly, the lessor would recognize taxable income for the total principal amount of the lease at time when the asset is transferred, and would recognise the interest and commission element of the payments over the term of the lease.
A lease is treated as a financial lease if it meets any of the following conditions:
- The leased property is transferred for a period during which at least 75% of its acquisition cost would be depreciated under tax depreciation rules, and the lessee is obliged to acquire title to the property during or at the end of the lease period.
- The sum of the lease payments equals or exceeds the acquisition cost of the property.
- The leased property has already been more than 50% depreciated by the lessor, and the lease payments (excluding the financing component using the discount rate of the NBU) equal or exceed 90% of the normal price for the property.
- The property has been manufactured to the order of the lessee and cannot be used by other entities when the lease expires because of the property's process and quality features.
Even if a lease meets one (or all) of these conditions, the parties may still agree to treat the lease as an operating lease for income tax purposes. If they do so, however, they must continue to treat it as an operating lease throughout the term of the lease.
Employee remuneration
Employee remuneration is deductible. However, when an individual and members of his family own 20% or more of the shares in a company, compensation paid to those individuals cannot be deducted in excess of usual (market) compensation.
Expenses relating to providing employees with uniforms, safety clothes and shoes, as well as food, are non-deductible if the amount exceeds norms established by the Cabinet of Ministers of Ukraine.
Other deductions
Research and development expenses, other than those subject to amortization, are deductible when incurred.
Charitable donations and contributions to non-profit organisations are deductible within certain limits.
Ukrainian taxes, other than income tax, are generally deductible. For VAT-registered persons, revenues and expenses are determined net of VAT. For non-VAT-registered persons, the VAT component of any expenses will be included in deductible costs.
Losses
Special rules apply to losses arising from the sale of securities and land. Expenses related to the acquisition of land are non-deductible. Losses incurred in the disposition of land are also non-deductible. However, gains from the sale of land remain taxable.
For operating losses, Ukraine does not have any rules permitting losses to be carried back. In principle, tax losses incurred from 1 January 2003 may be carried forward indefinitely, but in practice, Parliament has passed annual laws that have effectively restricted the carry forward to a single year. Currently it is understood that unutilised losses from 2003 to 2006 will be available for offset in 2008 unless Parliament suspends the law further.
10.5 Related party transactions
Special rules apply to transactions between related entities. Related entities are:
- A legal person that exercises control over a taxpayer, is controlled by a taxpayer, or is under common control with a taxpayer. Control is defined to include an interest of 20% or more in an entity.
- An individual (or family member of that individual) who exercises control over a taxpayer; or
- A company official (or family member of that official) who is authorized to execute binding legal agreements in the name of a taxpayer.
The tax authorities may adjust the price of transactions between related parties to the "usual price" for income tax purposes. The usual price is essentially the market price for equivalent transactions. There are some reasonably detailed rules in the law for determining the usual price and these are generally in line with principles followed internationally for determining market prices. Significantly, if it is not possible to determine the usual price because information on comparable transactions is absent or not publicly available, the law deems the contractual price to be the usual price.
If questioned by the tax authorities, taxpayers are required to justify the level of their prices. Nonetheless, the onus is on the tax authorities to demonstrate that the contractual price does not satisfy the usual price requirement.
10.6 Other taxes
Special Pension Fund charges
The following special charges are payable to the State Pension Fund:
- 1% charge on the purchase of foreign currency in the foreign exchange market (withheld by the bank).
- 3% charge based on the transfer value of a car (except for cars designed for disabled people and cars that were inherited). The charge is payable by legal entities and individuals that acquire cars.
- 1% charge on the acquisition of real estate payable by individuals and legal entities that purchase real estate. The tax base is the contractual value of the real estate.
- 7.5% charge on mobile communication services. The tax base is the value of services charged by an operator of a mobile phone network. The charge is payable by individuals and companies that use mobile communications services, and is collected by the service providers through their billings.
There are a few other business activities that require contributions to be made to the Special Pension Fund, but they are unlikely to have an impact for most businesses.
Stamp duty
Stamp duty is imposed on certain actions, including notarisation of contracts and filing documents with courts. In most cases, the amounts involved are nominal, although there are exceptions. Operations carried out at commodity exchanges and sales of real property attract a stamp duty of 1%.
Excise tax
Excise tax is payable on cars, alcoholic beverages, tobacco products, beer, petrol and diesel fuel, whether imported or produced domestically. Rates of excise duty are specific. A list of selected rates.
Land tax
Land tax is assessed annually for the following year and is paid monthly by the owners or users of land. The rate depends on the nature and location of the land.
Charge on environmental pollution
Environmental pollution charges are imposed on any legal entity that discharges contaminants into the environment (air or water) or disposes of wastes. The charge rate depends on the type and toxicity of each contaminant.
The law also establishes maximum concentrations for contaminants. If the maximum concentration is exceeded, the charge rate is multiplied by five.
Local taxes and duties
The principal local taxes and duties affecting business are:
- Advertising tax. This tax is payable by legal entities placing advertisement in mass media, on outdoor advertising or through other means. The maximum rate of advertisement tax is limited to 0.5% of the advertisement services cost. Advertising agencies or other entities that place advertisements should collect the tax.
- Municipal tax. This tax is payable by legal entities monthly and is calculated as a maximum of 10% of the individual non-taxable allowance, multiplied by the number of employees. Currently, the monthly tax is UAH 1.7 per employee.
- Charge for use of local symbols. The charge is payable by legal entities that, for commercial purposes, use local symbols (e.g., city emblem, name or image of architectural or historical monuments). The maximum rate of the charge is limited to 0.1% of the value of the goods/services using the local symbols that are sold.
There are 13 other local duties that may be levied at the discretion of the local authorities. Few of them apply to business entities. It is unlikely that these duties will place a significant burden on companies.
10.7 Holding companies
There are no rules to permit the grouping or consolidation of income and losses among a commonly owned group. Dividend income received from another Ukrainian company is not subject to tax.
With effect from January 2007, companies deriving more than 90% of their income from domestic dividends are exempt from paying advance corporate tax.
