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17 January 2013

Annual Review: Important Changes in the Ukrainian Tax Legislation in 2012

New Ukraine/Cyprus tax treaty

Following several years of negotiations a new double taxation treaty between the governments of Ukraine and Cyprus was signed on 8 November 2012. It is due to replace the 30 years' old USSR-Cyprus treaty that provided no withholding on dividends, interest and royalties, and lacked any beneficial ownership or anti-avoidance provisions.

The main changes introduced by the new treaty may be summarized as follows:

  Old treaty New treaty
Interest 0% 2%
Dividends 0% 5/15%
Royalties 0% 5/10%
Capital gains 0% 0/15%

The signed treaty requires further ratification by the parliaments of both countries in order to enter into force. Unless otherwise provided by the new treaty, if such ratification is completed in 2013, the new treaty can be expected to enter into force from 1 January 2014.

Tax losses 2010

Based on questionable interpretation of the transitional provisions of the Tax Code, the Ukrainian tax authorities disallowed tax losses accumulated as of 31 December 2010 from carrying forward. Such denial resulted in massive suing by taxpayers until tax authorities changed their position intending to cease all litigation on the issue of businesses' transfers of losses from previous years to subsequent periods, except litigations with the companies "with which there are economic questions."

Finally, the Parliament of Ukraine adopted the law allowing companies with income exceeding UAH1mln to repay the declared 2010 and 2011 corporate tax losses in installments by 2015.

Unified tax

Simplified tax system (where qualifying businesses pay the discounted unified tax instead of several other taxes and charges) was amended and two new groups, V and VI, with an annual turnover up to UAH20mln, were added to the range of unified tax payers.

2011 losses from transactions with securities

The Ukrainian tax authorities interpret tax rules so that, commencing from the 1st half 2012, taxpayers with 2011 income over UAH1mln are allowed to reflect in their 2012-2015 corporate tax returns only 25% of losses from transactions with securities, corporate rights and derivatives accounted as of 1 January 2012.

Transfer pricing

From 1 January 2013 new methods and procedures for transfer pricing will come in force. However, the 20% safe harbor rule will continue.

Corporate tax rate and advance payments

From 1 January 2013 corporate tax rate reduces from 21% to 19%.

Taxpayers with annual income exceeding UAH10mln will be obliged to pay a corporate tax in advance on a monthly basis in the amount not less than 1/12 of the last year tax. Tax returns remain to be due on a quarterly basis.

Real estate tax

From 1 January 2013 residential real estate, which living area is within the range from 120 to 240 m2 for apartments and from 250 to 500 m2 for houses, will be subject to tax at rate to be determined by municipalities, which rate, however, can not be higher than 1% of the minimum monthly wage per 1m2. Rates for the real estate exceeding these ranges can not be higher than 2.7% of the minimum wage per 1m2.

Special excise tax and reduced corporate tax on transactions with securities

From 1 January 2013 sale or other disposal of securities will be subject to a special excise tax at rates ranging from 0% to 1.5%, depending on the type of securities. Thus, for example, deposit certificates, shares in private joint-stock companies, shares in limited liability companies, securities issued by non-residents, State securities (including sovereign bonds) are tax exempt. 0% rate applies to transactions carried through a stock exchange, 0.1% – to disposal of listed securities on the over-the-counter market, 1.5% – to disposal of non-listed securities and UAH85 – for each derivative on the over-the-counter market.

The tax base is the contractual price of the securities, whereas transfer pricing does not apply. Tax is to be withheld and paid by a tax agent (a securities broker or a bank) on behalf of the seller. No protection against this tax is available under any tax treaty to a non-resident seller as soon as this is not direct tax.

Any profit from disposal of securities is subject to 10% corporate tax (in comparison with a standard 19% rate).

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