Substantial update to Transfer Pricing (TP) rules: Cabinet of Ministers of Ukraine approved draft law

On 4 September, the Cabinet of Ministers of Ukraine approved and filed to the Verkhovna Rada of Ukraine for consideration draft law No. 16035 "On amendments to the Tax Code of Ukraine regarding further improvement of transfer pricing rules" (the "Draft Law").

The Draft Law aims to further align Ukrainian TP rules with OECD Guidelines and EU standards, strengthen the protection of Ukraine's tax base, enhance tax certainty for businesses, and reduce the number of tax disputes.

1. Expansion of types of transactions subject to TP compliance: The Draft Law proposes extending TP rules to certain transactions between related parties, including transactions with resident related parties that either reported annual losses exceeding EUR 3 million or benefit from preferential tax regimes.
2. Revision of controlled transaction thresholds: One of the most significant proposed changes is the removal of the existing thresholds to determine whether transactions qualify as controlled. At the same time, the Draft Law introduces materiality thresholds and TP risk level criteria for identifying transactions that would not be required to be included in TP documentation.
3. Enhanced requirements for TP analysis and substantiation of controlled transactions: The Draft Law expands and further refines the approaches to comparability analysis of controlled and uncontrolled transactions, clarifies the selection and application of TP methods, and strengthens the approaches to assessing the business purpose and commercial rationality of transactions.
4. Further development of TP rules for intangible assets: The Draft Law refines the approaches to analysing transactions involving intangible assets, including through the further development of the DEMPE analysis concept and profit allocation approaches based on the functions actually performed.
5. New approaches to TP analysis of financial transactions: The Draft Law provides that where a company merely provides funding on a contractual basis but does not exercise control over the associated risks, its return should be limited to a risk-free rate of return. An additional risk premium may only be recognised where actual control over the relevant risks exists. 
6. Revision of the penalty regime: The Draft Law proposes replacing the current penalty of 10% of the additional tax liability with a differentiated penalty system of 7%, 10%, or 15% of the TP adjustment amount, depending on the circumstances of the violation.

The Draft Law is expected to enter into force on 1 January 2028, providing businesses with sufficient time to adapt to the new requirements and reassess their existing pricing strategies and TP compliance processes.

The full text of the Draft Law is available at: https://itd.rada.gov.ua/billinfo/Bills/Card/70692

The proposed changes demonstrate Ukraine’s continued alignment of its TP rules with modern OECD standards. For many taxpayers, these changes may require a reassessment of existing pricing procedures and TP documentation processes, as well as a review of approaches to functional and benchmarking analyses and the analysis of intra-group financial transactions.

Our TP team is ready to assist businesses in assessing the potential impact of the forthcoming changes, adapting internal processes, and preparing for the new legislative requirements.