Cabinet of Ministers of Ukraine approves list of countries to monitor controlled transactions with unrelated non-residents
On 31 December 2013, the Cabinet of Ministers of Ukraine (CMU) published a list of countries with corporate income tax (CIT) rates 5 or more percentage points lower than the Ukrainian tax rate (Resolution No. 1042-р dated 25 December 2013).
The list has been developed in the context of the transfer pricing rules implementation in Ukraine. If a counterparty is registered in a low-tax jurisdiction, the transaction may be treated as a controlled one (provided that a UAH 50m threshold is achieved). Therefore, the list is developed primarily to define officially the low-tax jurisdictions for transfer pricing purposes.
According to the Explanatory Note to the draft Resolution, controlled transactions shall include operations with the countries that applied CIT rates of 14% or less in 2013. Starting from 1 January 2014, only transactions with countries where the CIT rate is less than 13% shall be subject to control.
The approved list basically includes the countries that are treated as tax haven jurisdictions in Ukraine. The list also includes European countries, such as Luxembourg, Switzerland and Malta, as they apply special tax regimes that provide for a CIT rate below 14%.
We believe it is quite disputable whether such countries should be qualified as low-tax jurisdictions. The total tax rate in these countries exceeds 20%. The tax rate in Luxemburg and Switzerland may be reduced to 5-8% only based on the special tax treatment that applies subject to certain conditions. However, such preferential tax treatment is not generally available to all taxpayers. Special tax treatment applies only to certain activities and is subject to the appropriate approval of these countries’ tax authorities.
Most of the countries apply such tax treatment to facilitate development of various industries. Likewise, companies operating in certain industries in classic tax haven jurisdictions may pay CIT at 14% or more. However, the adopted list is limited to the most popular jurisdictions among Ukrainian industrial and agricultural groups.
The tax authorities explain verbally that they will define low-tax jurisdictions on a case by case basis by analyzing the counterparty’s effective tax rate in various jurisdictions. Probably, the tax authorities will send inquiries to tax authorities of the counterparty’s country. We stand for such approach but the tax authorities have to act transparently and within legal environment
As regards Malta, please note that the effective tax rate for companies in this jurisdiction is 35%, from the economic viewpoint. The effective tax refund mechanism applies to the company’s shareholder (no tax is refunded to the company’s corporate account). The shareholder is free to dispose of the funds so refunded per its discretion, either reinvest in its Maltese company or invest in any other business. Therefore, no tax refund amount is under the direct control of the company in Malta. This tax benefit does not influence the effective tax rate in Malta, and the special tax treatment is only an investment incentive for shareholders of companies. It is not exactly correct to say that the CIT rate for companies in Malta is below 14%.
Also, according to the Explanatory Table to the list, in Malta the tax can be refunded in full. This is not quite correct given that a shareholder can refund up to 6/7 of the tax paid in Malta.
Please also note that the list has been developed only in order to identify controlled transactions and is not a list of tax haven jurisdictions to apply deductibility limitations for CIT purposes.
If you have any questions regarding the information contained in this alert, please do not hesitate to contact our Tax & Legal professionals:
Victoria Chornovol, Partner, Tax & Legal Services
Yevgen Zanoza, Partner, Tax & Legal Services
Andriy Servetnyk, Partner, Tax & Legal Services