In Ukraine, each legal entity is taxed individually.
The transfer pricing rules apply for CIT purposes only. The list of controlled transactions for transfer pricing purposes includes business transactions that may have an impact on taxable profits and that are:
- Business transactions with related parties that are non-residents of Ukraine.
- Cross-border business transactions on sale and/or purchase of goods and/or services through non-resident commissionaires.
- Business transactions with non-residents that are registered in or are residents of jurisdictions determined by the Cabinet of Ministers of Ukraine that meet the following criteria:
- States (territories) where the CIT rate is lower than Ukraine’s CIT rate by 5 and more percentage points or some tax benefits on CIT are available.
- Countries with no DTT with Ukraine containing provisions on exchange of information.
- States the competent authorities of which do not accomplish timely and full exchange of tax and financial information upon request of the Ukrainian tax authorities.
- Transactions with non-residents that do not pay CIT, including on revenues received outside of the state of registration of such non-residents, and/or that are not tax residents of the country where they are registered as legal entities. The list of organisational and legal forms of such non-residents in terms of states (territories) is established by the Cabinet of Ministers of Ukraine. If such non-residents pay CIT in the reporting year, the transactions with such non-residents are not considered as controlled if other criteria for the recognition of controlled transactions are not met.
- Transactions (including intra-organizational settlements) performed between a non-resident and its PE in Ukraine.
- If within a chain of business transactions between Ukrainian taxpayer and non-resident, regarding whom the above criteria are met, the ownership of the subject matter of the transaction (or its result) before being transferred from one of the counterparties to another was transferred to one or more intermediaries and transactions between the taxpayer and such non-resident are not considered as controlled (the above criteria are not met), these cross-border transactions between them are considered to be controlled if the intermediary performs no significant functions, employs no significant assets, and/or bears no significant risks in respect of the transactions.
In addition, starting from 23 May 2020, the transfer (full or partial) of functions/risks/assets from one counterparty to another, which leads to a decrease in the income/financial result of Ukrainian taxpayer (in cases where in a relationship between unrelated parties such transfer would not have taken place without compensation) is also subject to transfer pricing rules.
Transactions with the same counterparty are considered to be controlled if the total annual amount of the transactions with any counterparty (calculated according to accounting rules) exceeds UAH 10 million (net of indirect taxes), provided the total annual income (calculated according to the accounting rules) of the taxpayer received as a result of any type of activity exceeds UAH 150 million (net of indirect taxes).
Transactions performed between a non-resident and its PE in Ukraine are considered to be controlled if their value, determined in accordance with the accounting rules, exceeds UAH 10 million (net of indirect taxes) for the corresponding tax (reporting) year.
For all cases listed above, the value criteria for recognition of transactions as controlled should be calculated at prices that are in line with the arm’s-length principle.
Some transactions are considered to be at arm’s-length (i.e. transactions in which prices are subject to state regulation, transactions subject to mandatory valuation, transactions in which prices are determined by mandatory auction, transactions on forced sale of collateral) if the conditions of transactions meet the respective legislation requirements.
The Tax Code of Ukraine provides five methods for determining the arm's-length nature of controlled transactions:
- Comparable uncontrolled price (CUP) method.
- Resale price method.
- Cost plus method.
- Net profit method.
- Profit split method.
According to the Tax Code, the selected transfer pricing method should be the one that the taxpayer reasonably considers as being most appropriate according to the facts and circumstances of the controlled transaction.
For controlled transactions on transfer of functions/risks/assets from one counterparty to another if it is not possible to apply one of the methods prescribed above the special methodology is prescribed. However, the CUP method is a priority for controlled commodity transactions. The list of commodities is defined and published by the Cabinet of Ministers of Ukraine. When applying the CUP method for these transactions, the taxpayer may compare the prices within the controlled transactions with the prices of comparable uncontrolled transactions (actually performed by the taxpayer or other unrelated parties) and/or with commodity quotations. The State Tax Service of Ukraine publishes a recommended (non-exclusive) list of data sources for obtaining commodity quotations on its official web portal before the beginning of the reporting year.
If the taxpayer decides to apply methods other than CUP for commodities transactions, the taxpayer should include in its transfer pricing documentation (Local File):
- the profitability of all related parties (and certain other types of non-residents) involved in the chain of such business transactions;
- justification that the CUP method cannot be applied or that the CUP method is not the most appropriate method considering the facts and circumstances of the controlled transactions.
The Tax Code also provides the possibility for the use of several transfer pricing methods (or a combination thereof) to substantiate the arm's-length nature of controlled transactions. The application of methods that are not prescribed by the Tax Code (see above) is prohibited.
For the purposes of applying transfer pricing methods, the following information may be used:
- information on comparable transactions of the taxpayer as well as its counterparty with non-related parties (internal comparables);
- any publicly available sources that provide information on comparable transactions and parties;
- other sources from which information was received by the taxpayer in compliance with the law, if such information was provided to the tax authorities;
- information received by the tax authorities under the international agreements in effect concluded by the Parliament of Ukraine.
All taxpayers performing controlled transactions should file a report on controlled transactions (transfer pricing notification) and notification on participation in an international group of companies by 1 October of the year following the reporting year.
Starting from 23 May 2020, three-tier transfer pricing documentation is introduced in Ukraine, which includes the following:
- Country-by-country report (CbCR) (submitted for the first time for the financial year ending in 2021) – CbCR is mandatory if the taxpayer belongs to the international group of companies and the total consolidated income of such group for the financial year preceding the reporting year exceeds EUR 750 million, and if one of the other additional circumstances, prescribed by the Tax Code, is satisfied. The taxpayer submits CbCR to the tax authorities within twelve months after the end of the financial year, which is defined by the parent company of an international group of companies.
- Global transfer pricing documentation (Master File) (submitted for the first time for the financial year ending in 2021) – Master File is mandatory if the taxpayer belongs to the international group of companies and the total consolidated income of such group for the financial year preceding the reporting year exceeds EUR 50 million. The taxpayer submits the Master File only upon request of the tax authorities within 90 calendar days upon its receipt. Such request should be sent not earlier than twelve months and not later than thirty-six months from the date of the end of the financial year, that is established by the international group of companies to which the taxpayer belongs.
- Transfer pricing documentation (Local File) is mandatory if the taxpayer performed controlled transactions in the reporting year. It should be submitted only upon request of the tax authorities within 30 calendar days upon its receipt. The request on the provision of transfer pricing documentation can be sent to the taxpayer not earlier than on 1 October of the year following the calendar year in which the controlled transaction was performed.
Transfer pricing documentation and global transfer pricing documentation (Master File) should be prepared in Ukrainian only in any format (either a single document or a set of documents); however, the precise rules regarding the content of the documentation should be followed.
The Tax Code of Ukraine contains a detailed list of information to be included in transfer pricing documentation (Local File), global transfer pricing documentation (Master File), CbCR and notification on participation in an international group of companies.
Starting from 23 May 2020, the requirements for the content of transfer pricing documentation (Local File) were extended. The most important changes are that the taxpayer should include in Local File a description of supply chain (value chain) within the controlled transactions and justification of the business purpose (economic benefits) for controlled transactions on the purchase of services, intangible assets (including licenses) and items of business transactions other than goods.
If the prices/profitability of the controlled transaction do not correspond with the arm's-length principle, the taxpayer should perform the respective transfer pricing adjustment and pay additional tax. The parties to the controlled transaction are entitled to perform a proportional transfer pricing adjustment. The proportional adjustment for Ukrainian taxpayers is allowed if the counterparty is a related party to the taxpayer and has made an actual adjustment of its tax liabilities. In addition, there should be an effective DTT between Ukraine and the jurisdiction of the non-resident related party.
The interquartile range of benchmark prices/price level index (PLI) is considered to be a yardstick used for substantiation of the arm’s-length nature of the transactions. The taxpayers should adjust the financial result/prices of the transactions to the levels corresponding with the lower/higher quartiles, while the adjustments, assessed by the tax authorities, are made to the median of the interquartile range. The adjustments are made based on the results of the reporting (tax) year.
The Tax Code also provides for a specialised transfer pricing audit as the tax authorities are not allowed to examine pricing in controlled transactions during normal full-scope tax audits. The audit duration cannot exceed 18 months, although extension is possible for another 12 months. Such period is also suspended until the completion of court proceedings on claims by the taxpayer regarding issues related to the assignment, conduct or subject of such audit.
The tax authorities cannot conduct more than one transfer pricing audit within one calendar year, although other (non-transfer pricing) tax audits can be conducted during this period. The statutory limitation period for transfer pricing assessments is seven years.
The tax authorities have the right to use the information obtained in the course of transfer pricing audit from the taxpayers who were parties to the tested controlled transactions or were involved in supply chain with regard to the subject of controlled transactions. In case of failure to provide information, the tax authorities have the right to cross-audit such taxpayers.
Starting from 1 January 2019, the 'substance over form' principle was introduced in the Tax Code, which means that commercial and/or financial characteristics of the controlled transactions are determined by the actual actions of the parties thereto and the actual conditions/circumstances of its conduct even in the absence of documentary evidence or in case of contradiction with terms and conditions of the relevant agreement.
The Tax Code defines the following penalties for non-compliance with the transfer pricing rules:
- non-submission (or late submission) of the report on controlled transactions, notification on participation in an international group of companies, transfer pricing documentation (Local File), global transfer pricing documentation (Master File) and CbCR;
- omission of certain controlled transactions in the report on controlled transaction and/or omission of certain information in CbCR;
- provision of inaccurate information in notification on participation in an international group of companies and/or in CbCR.
Payment of such penalties does not exempt the taxpayer from the obligation to file the transfer pricing documents prescribed above.
Large taxpayers have the right to enter into Advance Pricing Agreements (APAs) with the tax authorities in order to agree on certain terms of controlled transactions in advance. For a large taxpayer, it is also possible to pre-align pricing in controlled transactions that are or will be carried out by those large taxpayers.
The following rules apply to legal entities whose debts to non-resident related parties exceed equity by 3.5 times (10 times for financial institutions/leasing companies):
- The deduction of interest expense under transactions with non-resident related parties for these taxpayers is limited by the amount of 50% of earnings before interest, taxes, depreciation, and amortisation (EBITDA).
- The non-deductible portion of interest can be carried forward indefinitely. However, each following year the residual amount of such interest should be reduced by 5%.
- For the purposes of thin capitalisation rules, debt includes any loan, deposit, repo transactions, financial leasing, and any other debenture, regardless of its legal form.
Starting from 1 January 2021, the following changes will be introduced to thin capitalisation rules:
- Rules will apply to legal entities whose debts to all non-residents (not only related parties) exceed equity by 3.5 times.
- The deduction of interest expense under transaction with all counterparties (including residents) for these taxpayers will be limited by the amount of 30% of corporate income tax base increased with the amount of financial expenses under accounting rules and tax depreciation.
- Interest that has been capitalized as part of the value of non-current assets shall be included to interest expenses proportionately to the depreciation of such assets for the respective reporting period.
- If the amount of interest expenses within a controlled transaction exceeds the amount determined in accordance with the “arm’s length” principle, then “thin capitalisation” rules will apply only to the amount of interest that corresponds with the arm’s length principle.
- The "thin capitalisation” rules will no longer apply to financial institutions and companies engaged exclusively in leasing activities.
Controlled foreign companies (CFCs)
The CFC rules in Ukraine will come into force on 1 January 2021.The first reports should be submitted in 2022 for the year of 2021.
Broadly, under the CFC regime, a Ukraine resident company or individual may be taxed on a proportion of the profits of certain entities that are owned or controlled by a Ukrainian tax resident. The profits of a CFC are included into taxable income of the controlling person and are taxed at standard income tax rate and rules. Please note there are a few specific tax rates for individuals.
Definition of a CFC
An entity is deemed to be a CFC if it is:
- not considered to be a Ukrainian resident for tax purposes or permanent establishment, but
- controlled by a Ukrainian tax resident (either a natural person or a legal entity). Control is determined based on ownership share and other criteria.
Foreign establishments without the status of a legal entity (such as partnerships, trusts, funds, foundations, etc.) are also equated to an entity for CFC purposes.
A controlling person of a foreign company is defined as:
- a person who holds a share in a foreign company of more than 50%, or
- a person who owns more than 10% (25% for years of 2021 and 2022) of a foreign company, provided several Ukrainian residents hold 50% and more of shares in such a foreign company, or
- a person who exercises actual control over foreign company.
Control may be established directly or through a chain of indirect ownership.
Available CFC exemptions
The CFC Law provides that under following circumstances profits are exempt from CFC taxation in Ukraine:
- there is a double tax treaty or a treaty for exchange of tax information between Ukraine and the state of registration (location) of the CFC, and
- the CFC pays income tax at the effective rate of not less than 13%, or a share of passive income of CFC is not more than 50% of its total income (and specific substance criteria are met);
- the total aggregated income from all CFCs owned by one controlling person does not exceed the equivalent of EUR 2 million at the end of the reporting period;
- CFC is a public company shares of which are traded on a recognized stock exchange;
- CFC is a non-profit organization that does not distribute profits.
Determining taxable profits
CFC's taxable profits are calculated as net profits before tax as per its unconsolidated financial statements for a relevant calendar year, prepared under domestic GAAP or IFRS adjusted per specific list of tax adjustments. The Tax Code does not provide for a mandatory audit of financial statements, however the tax authorities may request an audit report if they have doubts about .
Losses incurred by a CFC may be carried forward and decrease taxable profits of this CFC in the future. Loss from revaluation of securities in non-deductible, only loss from trading operations can be deducted.
Foreign taxes paid on the profits of a CFC, either under Ukrainian law or the laws of a foreign jurisdiction, may be offset against the Ukrainian personal income tax liabilities charged on the CFC’s profits (i.e. only for individuals).
Implications for affected entities
If none of the available exemptions may be applied, the CFC’s chargeable profits must be apportioned among the relevant Ukrainian controlling persons in proportion to their interest(s) in the CFC as at the final day of reporting period. Such persons should be taxed on their portion(s) at the applicable rate of income tax. However, the Ukrainian CFC rules have no implications for the CFC itself.
Treatment of inter-company items
Ukrainian tax legislation provides the following treatment for inter-company items:
- Dividends received by a Ukrainian entity from another Ukrainian entity that is a CIT payer are exempt from CIT. Dividends received by a Ukrainian entity from a non-resident are exempt from CIT only if: (i) Ukrainian entity owns at least 10% share in equity of such non-resident during the calendar year, and (ii) Such non-resident is not registered in low-tax jurisdiction, or even if such non-resident is registered in a low tax jurisdiction, but Ukraine has a double tax treaty concluded with respective low tax jurisdiction.
- There is no limitation on the deduction of expenses in relation to the financing of management bodies, including holding companies (except for the limitations mentioned below).
- The deduction of cost-sharing and similar intra-group payments, other than remuneration for services actually rendered, is not specifically limited for CIT purposes (except for the limitations mentioned below).
In addition to the above:
- Certain limitations apply to deduction of royalties paid to non-residents (see Payments to foreign affiliates in the Deductions section for more information).
- Transactions for the receipt (provision) of financial aid between a taxpayer and its branches and other separate units without legal entity status located in Ukraine shall not affect their taxable income or deductible expenses (except for non-repayable financial aid that was provided free of charge for the benefit of its recipients that are not CIT payers or that are taxed at a 0% CIT rate).
- Interest on loans is limited (see Thin capitalisation and Transfer pricing above).
- Certain limitations apply to payments to residents of low-tax jurisdictions and non-resident entities established under certain legal forms (see Payments to foreign affiliates in the Deductions section for more information).
- Expenses incurred in transactions that are subject to TP control will be deductible only in part that corresponds with the arm’s length principle (see Transfer pricing above).
- 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 in the Deductions section).