The essence of the BEPS (Base Erosion and Profit Shifting) plan comes down to combating cross-border tax planning schemes, developing appropriate recommendations for national authorities and their further implementation into national legislation.
The idea of the BEPS plan is to revolutionize the game rules, but not punish taxpayers. Although not without that…
On May 23, 2020, the Law No. 466-IX (previously the Bill No. 1210) came into force, which initiated the main phase of the BEPS plan implementation in Ukraine.
The new tax rules provide for:
- The rule of “principal purpose test”, which allows the tax authorities to deny the taxpayer the benefits application under the agreement on double taxation avoidance (for example, reduced rates application, costs deduction, etc.), if the application of such benefits was the main purpose of the transaction with the non-resident. There is a risk that the tax authorities will apply the principal purpose test to transactions with all foreign jurisdictions.
- Toughening of the “beneficial owner” definition. According to the Law No. 466-IX a beneficiary cannot be considered a person who performs intermediary functions in relation to the income received and does not control the fate of this income. Ukrainian companies that pay passive incomes to non-residents should prepare a justification that these non-residents are not intermediaries in relation to the incomes received, but are their beneficial owners.
- Concept of “constructive” (conditional) dividends. From 01.01.2021, Ukrainian companies will recognize as dividends the amount of overstatement/understatement of the value of goods, works, services that are purchased from a non-resident/sold by a non-resident in controlled transactions, compared to their market value calculated according to the “arm’s length” rules. Such dividends will be taxed at the 15% rate, unless a different rate is provided for by the agreements on double taxation avoidance.
- Taxation of income from the indirect sale of corporate rights in Ukrainian companies. For example, structuring a transaction for the indirect sale of a Ukrainian company that owns real estate in Ukraine through a foreign holding will be subject to income tax of foreign companies at the 15% rate, unless a different rate is provided for by the agreements on double taxation avoidance. The taxpayer must be the purchaser.
- Expansion of the “permanent representation” concept. In particular, persons who have and exercise the authority to negotiate with respect to the material terms of transactions will also be recognized as permanent representatives of non-residents, as a result of which non-residents conclude contracts without material changes of the terms.
- Return to the practice of confirming expenses in accordance with the “business purpose” rules. Now the taxpayer must increase the financial result by the amount of expenses incurred in a transaction that is not related to the economic activities of such a taxpayer. The business purpose rules apply exclusively to transactions with non-residents from the so-called “offshore lists” and during royalties accruals in favor of any non-residents.
- The rules of taxation of controlled foreign companies (CFCs) have been introduced, which provide for the profits taxation of foreign companies, funds, trusts in Ukraine, if the latter is under the control of individuals or legal entities – residents of Ukraine.
The aforesaid mainly relate to large businesses, but VigoLex also advises medium-sized businesses and start-ups that intend to attract investments to check their business processes for compliance with the new tax rules.
Among other things, VigoLex specialists are ready to:
- help in collecting documentation and prepare arguments in order to successfully pass the main purpose test during a tax audit;
- help in supporting the cases related to defending the payers’ beneficial status;
- conduct an internal analysis of agency and commission transactions of the group of companies;
- revise intragroup contracts and supporting documentation with regional offices for compliance with the “business purpose”, etc.;
- Identify controlled foreign companies (CFCs), as well as consult on CFC optimization.