Depreciation and amortisation
Assets whose values are more than UAH 20,000 that have a useful life exceeding one year are required to be depreciated for tax purposes. Depreciation is determined on a monthly basis and computed using the following methods:
- Reducing balance.
- Method of accelerated reduction of a residual value.
Fixed assets are divided into 16 groups according to their statutory minimal useful life. The useful life of fixed assets may be extended by the taxpayer.
The application of a reduced statutory minimum useful life is allowed to the following fixed assets, which are used in business activities of the taxpayer (subject to some exceptions):
- Machines and equipment purchased during the period between 1 January 2017 and 31 December 2030.
- Vehicles, transmitting devices, and other fixed assets purchased between 1 January 2020 and 31 December 2030.
Depreciation is not accrued for the period when a fixed asset is not used in business activities due to its modernisation, repairs, reconstruction, and conservation.
There are no special rules prescribed for tax accounting of repair costs in respect of production fixed assets and intangible assets. Ukrainian accounting principles or IFRS rules should apply. Expenses on repairs and reconstruction of non-production fixed assets and intangible assets are not deductible.
The following intangible assets may be amortised using one of the above-mentioned methods over the period of an asset's lifetime as defined in the documents certifying the rights to the intangibles and considering the minimum period set by the law:
- Rights to use natural resources.
- Rights to use property.
- Rights on intangible assets.
- Technology, know how (not less than five years).
- Copyrights (not less than two years).
- Other intangible assets.
Taxpayers are entitled to set the amortisation period of the intangible assets on their own, but it must not be less than two years and not more than ten years of continuous operation (this only applies when the documents establishing the right to use do not specify a term for the use). NPBT is adjusted by the amount(s) of residual value of written-off non-production equipment and intangible assets as per accounting data.
The abovementioned rules are not applied to the right-of-use assets recognised under the IFRS 16. At the same time, the above rules still apply to the assets under finance leasing, recognised under the Ukrainian accounting principles.
Amortisation of goodwill is not permitted (i.e. not deductible) for tax purposes.
Organisational and start-up expenses
There is no limitation for deduction of organisational and start-up expenses incurred prior to the entity's registration (accounting rules should apply).
Research and development (R&D) expenses
R&D expenses are deductible according to financial accounting rules.
Interest accrued is generally deductible for CIT purposes, but the deduction of interest expense is limited according to the thin capitalisation or transfer pricing rules (see the Group taxation section).
Bad debt / loss allowance
NPBT can be reduced by the amount of written-off debts/receivables that qualify as bad debts under the Tax Code (including the write-off, performed within the amount of bad debts provision). The Tax Code contains the detailed list of criteria for debts to be qualified as bad ones.
Loan loss provisions (LLPs) for banks and other financial institutions
Banks and other financial institutions create LLPs according to IFRS. The expenses from the write-off of bad debts are deductible in the period when criteria for recognition of bad debt is met.
Other reserves (provisions)
Deduction of provisions for vacation and salary payments are allowed in the period of accrual.
Deduction of other provisions for future costs (i.e. warranty, contingent liabilities, etc.) are disallowed in the period of accrual. Respective expenses covered by these provisions (except vacation and salary payments) are deductible when actually incurred.
Only 70% of payments for goods or services to non-profit organisations (except budgetary ones) is tax deductible.
The deductibility of the costs of goods or services supplied for free to non-profit organisations is limited by 4% of the previous year’s taxable profit (by 8% of the previous year’s taxable profit in respect of payments to non-profit organisations in the sphere of sport, physical culture, and physical culture education).
Changes related to the introduction of martial law
Due to the introduction of martial law in 2022, the following changes are applied and remain relevant until the abolition of martial law:
- The range of recipients of funds/goods as charitable assistance for whom the abovementioned limitation on deductibility of the costs of goods or services in the amount of 4% of profit is not applied has been expanded. In particular, the following recipients were added: Ukrainian armed forces, other military units formed in accordance with the laws of Ukraine, the Ministry of Internal Affairs, a central executive power body responsible for civil defense, state/communal health protection institutions and units of local health protection authorities, etc.
- The deductibility of the costs of goods or services supplied for free to non-profit organisations is not limited by 4% of the previous year’s taxable profit in respect to the following goods and services:
- special personal protective equipment (helmets, body armour), technical means of observation, medicines and medical devices, personal hygiene products, food, other goods, performed works, and rendered services according to the list determined by the Cabinet of Ministers of Ukraine.
The obligatory Ukrainian social security insurance contributions, including state pension contributions charged on payroll expenses, are deductible for employers.
There are no limitations prescribed for the deduction of the employer’s payment to non-state pension organisations (financial accounting rules should apply).
Payment for directors
Payments (including bonuses) relating to business are normally deductible payments.
Fines and penalties
Fines, penalties, and forfeits, which were accrued in accordance with civil legislation for the benefit of entities that are not CIT payers (except for private individuals) or that are taxed at a 0% CIT rate, are not tax deductible.
Fines, penalties, and late payment interest accrued by tax and other regulating authorities for violation of provisions of Ukrainian legislation are not tax deductible.
CIT and VAT incurred on purchases are not deductible. VAT is deductible if it cannot be recovered.
WHT and PIT withheld by a tax agent from the income paid are not deductible, as the whole amount of payment itself may be treated as expenses for CIT purposes.
WHT paid at the cost of the taxpayer (i.e. not withheld from the amount of income paid to a non-resident) is deductible for CIT purposes.
Other taxes not mentioned above are generally deductible in full.
Other significant items
There is no requirement to prove the connection of costs to the company’s 'business activities'. The exception is the need to differentiate between business and non-business fixed assets.
Another exception is the need to have business purpose for expenses incurred in transactions with non-residents. The burden of proving the absence of business purpose in the transactions rests on the tax authorities. Business purpose of the transaction exists if:
- the taxpayer intends to receive economic effect from such transaction (i.e. increase or preserve its assets)
- achievement of tax benefits is not the main purpose of the transaction, and
- in comparable conditions, the taxpayer would be ready to conduct such transaction with the non-related party.
General requirements for the documentation of the transactions for accounting needs (i.e. contracts, acts of acceptance, etc.) will also apply for the substantiation of expenses for tax purposes.
Non-repayable financial aid (goods, services), which was provided free of charge for the benefit of its recipients (other than duly registered non-profit organisations) that are not CIT payers or that are taxed at a 0% CIT rate, is not deductible.
Starting from 1 January 2022, the amount of irrevocable financial aid provided to taxpayers - related parties (if the recipient of the irrevocable financial aid declares a negative value for the object of taxation for the tax (reporting) year preceding the year in which this irrevocable financial aid was provided (provided that such aid was included in the cost) is not tax deductible.
As a part of tax measures related to COVID-19, the following incentives were introduced to Ukrainian tax legislation:
- Donors of funds or medical goods and other listed goods during the quarantine period will be able to fully deduct the respective expenses for tax purposes until the last day of the month in which the quarantine period ends.
- State and municipal health care institutions that have received funds or free of charge medical goods and other listed goods during the quarantine period shall not tax income from the receipt / tax deduct expenses from the use of such funds and goods for tax periods of 2020 and 2021.
Net operating losses
Starting from 1 January 2022, tax losses can be carried forward with certain limitations for large taxpayers. In particular, large taxpayers may utilise only up to 50% of accumulated tax losses from previous reporting (tax) years in their current tax return. The amount of not utilised tax losses is carried forward to the future periods until their full utilisation. If the amount of tax losses is less than 10% of the positive tax base, such tax losses may be utilised in full.
Ukrainian tax legislation does not provide for refunds for losses carried back.
Payments to foreign affiliates
The following rules need to be followed with regard to payments to foreign affiliates:
- Only 70% of payments for goods or services to residents of low-tax jurisdictions and non-resident entities established under certain legal forms are tax deductible. The lists of low-tax jurisdictions and legal forms (e.g. a partnership) are approved by the Cabinet of Ministers of Ukraine and are being amended from time to time.
- Deduction of royalties paid to a non-resident is limited to royalty income plus 4% of net income of the previous year.
- Royalties paid to (i) non-beneficial owners (unless a beneficial owner grants the right to receive the royalties to other parties), (ii) non-residents that are exempt from tax on royalties in the country of their residence, and (iii) non-residents for intellectual property (IP) rights originated from Ukraine are not tax deductible.
- Expenses incurred in transactions with non-residents are not tax deductible if they do not have business purpose (for information on business purpose, see Other significant items above).
The first and the second of the above limitations do not apply if the transaction is controlled for transfer pricing purposes. Even if the transaction is uncontrolled, the limitations can be waived if a taxpayer confirms the arm’s-length level of payments in accordance with the transfer pricing rules.
The latter limitation should apply at any case (even if the payments are at 'arm's-length' level).