Kyiv Tax Newsletter - November 2019

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Changes related to tax evasion 

The Law of Ukraine “On Introduction of Amendments into the Criminal Code of Ukraine and Code of Criminal Procedure of Ukraine in Connection with Decrease in Pressure on Business”, No. 101-IX, dated 18 September 2019, had entered into full force and effect.

The proposed changes to the Criminal Code of Ukraine liberalize, to a certain extent, the liability imposed on taxpayers for tax evasion:

  • The law cancelled Article 205 of the Criminal Code of Ukraine, which defined as criminally liable the incorporation or acquisition of business entities (legal entities) for the purpose of shielding unlawful activities or carrying out those types of activities, which are banned. Thus, the criminal liability for fictitious entrepreneurship, which was used by state bodies as a tool for placing pressure upon business, has been cancelled;
  • The law introduced changes into Article 212 of the Criminal Code of Ukraine, in particular, it increased the financial threshold for failure to transfer to the budget, taxes, dues and other payments, which is regarded as tax evasion and punishable as a criminal offence under Article 212 of the Criminal Code of Ukraine. 

Amendments of treaties on avoiding double taxation 

With Cyprus:

The Verkhovna Rada ratified a protocol on the introduction of amendments to the convention between the governments of Ukraine and Cyprus on avoiding double taxation and preventing evasion of income taxes.

The protocol’s provisions provide for the following:

  • Taxation of dividends at the rate of 5% (if the actual recipient of the dividends is the company holding at least 20% of the dividend-paying company’s capital and is reinvested into the purchase of shares or other rights of the company, at an amount the equivalent of no less than €100,000) and 10% in all other instances;
  • The interest taxation rate has been increased from 2% up to 5%;
  • Taxation of income arising from disposal of interest in companies, in which the share of real estate is equal to more than 50% of the total value of the assets of such companies.

With Turkey:

The Verkhovna Rada ratified the protocol between the Government of Ukraine and the Government of the Republic of Turkey on introducing amendments into the treaty on avoidance of double taxation and preventing fiscal evasion with respect to taxes on income and property.

The protocol’s provisions provide for the following:

  • The list of taxes governed by the treaty was brought into compliance with the domestic laws of the treaty member states;
  • A broadening of the term “resident” pursuant to the provisions of the model convention of the Organization for Economic Cooperation and Development;
  • An extension of the list of opportunities for data sharing, which provides for considerable broadening of the options available to the treaty member states for exchange of tax-related information without reservations related to the requirements of domestic tax interests or bank secrecy;
  • A new provision was introduced in connection with assistance in recovery of taxes, whereby the treaty member states (competent bodies) will help each other in recovering tax arrears from the debtors of the other state.

With Switzerland:

The Verkhovna Rada ratified the protocol on the introduction of amendments to the convention between the Governments of Ukraine and the Swiss Federal Council on avoiding double taxation and preventing tax evasion regarding income and capital taxes.

The protocol’s provisions provide for the following:

  • An increase in the interest and royalty taxation rates – from 0% up to 5%;
  • A new article to improve the mutual agreement procedure (resolution of tax disputes) using arbitration; 
  • An extension of possibilities for sharing information (sharing tax information without reservations regarding requirements in connection with tax interests or bank secrecy);
  • Provisions regarding exercise of the right to enjoy benefits (no tax benefits will be provided if one of the principal goals of any arrangement or agreement between the business entities consists solely in direct or indirect gaining such a tax benefit).

Thus, changes to the conventions include increase of dividend rates, interest rates, and improvement of the dispute resolution procedures and extension of the information sharing possibilities. These changes are aimed at improving efficiency of business structures, shifting the emphasis from tax avoidance using international structures to the efficient taxation of those structures that were established for a specific business.

With Malaysia: 

The Verkhovna Rada ratified the treaty between the Government of Ukraine and the Government of Malaysia on avoidance of double taxation and prevention of tax evasion with respect to income taxes.

The provisions of the treaty and protocol provide for the following:

  • Taxation of dividends at the rate of 5% − if the actual recipient of the dividends is a company that owns not less than 20% of the capital of the company that pays such dividends; 15% − in all other instances;
  • Interest taxation rate at the rate of 10%;
  • Royalty taxation rate at the rate of 8%;
  • Extension of the treaty member states’ possibilities of sharing tax information.

The provisions of the treaty shall enter into full force on the date of receipt of the last written notification of the completion by the member states of all domestic procedures necessary for their entry into force.

With Great Britain and Northern Ireland: 

The Verkhovna Rada ratified the Protocol between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland to Amend the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and capital gains.

The protocol’s provisions provide for the following:

  • The taxation of dividends at a rate of 5%, if the beneficial owner of the dividends is the company (other than a partnership) that holds directly at least 20% of the capital of the company paying the dividends, and the increase in the rate from 10% up to 15% in all other cases;
  • Increase in the interest taxation rate from 0 % up to 5%;
  • Increase in the royalty taxation rate from 0 % up to 5%;
  • New wording of the article concerning the exchange of information, which significantly extends the contracting states’ possibilities of sharing tax-related information;
  • Provisions on the entitlement to benefits: benefits shall not be granted in respect of an item of income or a capital gain, if obtaining that benefit was one of the principal purposes of any arrangement or transaction between business entities that resulted directly or indirectly in that benefit.

Thus, the amendments to the conventions provide for the increase of dividend rates, interest rates, and improvement of the dispute resolution procedures and extension of the information sharing possibilities. These amendments are aimed at improving the efficiency of business structures, shifting the emphasis from tax avoidance by the establishment of international structures, to the efficient taxation of those structures that were established for a specific business purpose.

The FATCA Agreement ratified

The Verkhovna Rada ratified the agreement between the Government of Ukraine and the Government of the United States of America to improve tax compliance and to apply the provisions of the United States Foreign Account Tax Compliance Act (FATCA).

The agreement is aimed at enhancing compliance with international tax law and ensuring the application of the FATCA provisions through internal reporting and automatic information sharing.

For the purposes of implementing the agreement and amending the procedure for compliance with the requirements of the FATCA law by the financial institutions of Ukraine, amendments to Ukrainian legislation (draft laws), in particular, to the Tax Code and the Laws "On Banks and Banking Activity" and "On the Depository System of Ukraine" were elaborated. These amendments concern:

  • The procedure for disclosing bank secrecy;
  • Access to the information kept in the depository accounting system;
  • The definition of terms:
    • A reportable account and its holders, financial agent and financial account;
    • Special aspects of filing reports under reportable accounts;
    • Collecting and receiving tax information from financial agents by controlling authorities;
    • Imposition of penalty for failure to file reports under reportable accounts, or filing such reports in violation of the established procedures, or filing reports containing inaccurate data or errors. 

The aforementioned amendments will ensure compliance with the requirements of the FATCA law in Ukraine through internal reporting and automatic provision of information on accounts opened by US taxpayers with the Ukrainian financial institutions by the State Tax Service of Ukraine to the US Internal Revenue Service.

Amendments to the Customs Code of Ukraine regarding authorized economic operators 

The Law “On Amendments to the Customs Code of Ukraine regarding certain issues of functioning of authorized economic operators” entered into full legal force and effect. Certain provisions of the law will take effect 180 days and three years after the date of entry into force of the document.

The law provides for the introduction of the Institute of Authorized Economic Operators (AEOs) that is similar to the one functioning in the EU, with the intention to mutually recognize their status in the future. The future recognition of the status of the national АЕОs by the customs authorities of the EU countries is expected to ensure the participation of Ukrainian AEOs in the formation of secure goods supply chains and enhance their competitiveness on foreign and domestic markets.

An authorized economic operator is an enterprise resident in Ukraine that is granted the right to apply special simplified customs formalities. 

An АЕО may be authorized as follows: 

  • АЕО-С − which grants the right to apply special simplified formalities;
  • АЕО-Б − which confirms safety and reliability.

In order to obtain АЕО status, an AEO candidate must meet the following criteria: 

  • Compliance with the requirements of the customs and tax legislation of Ukraine, as well as the absence of criminal prosecution;
  • Proper accounting system, commercial and transportation document record system;
  • Stable financial condition;
  • Ensuring practical standards of competence or professional qualification of the responsible official of the enterprise;
  • Compliance with security and reliability standards.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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