APK-Inform starts publication of series of articles by Elena Balbekova, Senior Associate AGA Partners Law Firm Attorney-at-law, Ukraine
1.2. Business activity
Legal entities, generally described above, incorporated to and operating under the legislation of Ukraine are normally treated as tax residents and are taxable on their world wide income. Legal entities incorporated abroad and operating under the laws of another country, obviously, are normally treated as foreign tax residents and are taxable on two sources of income:
a. Business income received from carrying out trade or business in Ukraine, and
b. Other non-business income received from Ukrainian sources.
According to the Law of Ukraine No. 334/94 "On Taxation of Profits of Enterprises", dated December 28, 1994 (herein the "Profit Tax Law"), the tax on companies is known as corporate income tax. Currently, this profit tax is calculated at a flat rate 25%. However, that separate tax rules pertain to insurance companies, operations with securities and to agricultural enterprises.
Under domestic tax accounting rules, tax items are normally recognized on the basis of the cash-accrual method (first event rule). The tax year corresponds to the calendar year. Taxpayers must submit tax returns for a calendar quarter, half year, three quarters and calendar year, and make quarterly tax payments. Quarterly tax returns must be submitted within 40 days following the last calendar day of each calendar quarter, half year and three quarters and the fourth quarter.
Resident entities are taxable on their worldwide income received or accrued within a reporting period. The amount of taxable income is determined by subtracting allowable deductible expenses and capital allowance from gross income.
Gross income is defined as any income from domestic or foreign sources received or accrued by taxpayer from any activity. Such income may be in monetary, tangible and intangible form. The "Profit Tax Law" also describes the items included in and excluded from the gross income, deductible expenses etc. Capital allowance or, in other words, depreciation of fixed assets and intangible assets, under the "Tax Profit Law" means - the gradual carrying forward of expenses for the acquisition, manufacturing or improvement of such fixed and intangible assets and for decreasing the adjusted profit of a taxpayer.
Non-business income from Ukrainian sources is normally subject to withholding tax on a gross basis, provided such income is not attributable to a non-residents permanent establishment in Ukraine. Withholding is made by a resident taxpayer when income is paid to a non-resident.
For withholding tax purposes, the following items of income are treated as received from a Ukrainian source: interest income, dividends income, rents, income from immovable property, insurance income, royalty income, winnings, commissions, broker or agent fees, and other income.
Taxation of non-residents shall be discussed in a separate document, since the author of the present legal overview is describing the legislation rules and procedures mainly for the whole -owned foreign subsidiaries, incorporated under the Ukrainian legislation.
The Profit Tax Law entitles Ukrainian resident companies to pay dividends to its shareholders regardless of whether the paying entities have recorded income or losses for the tax period. Moreover, the Profit Tax Law further provides that there is no distinction between accounting and taxable income/loss for the purposes of this rule. Corporate income tax is paid on dividends distributed - at the rate 25 %. The tax accrued on top of a dividend payment and is made from the funds of the issuing company. This means that when the distribution is made a tax payment of 25 % of the dividend is remitted to the State and the full value of the dividend is paid to the shareholder, who is a foreign investor, in the case considered. At the end of the tax period, the paying company has the right to use the amount of previously contributed tax in dividends as a credit against its corporate tax liabilities, as it is stated by the Profit Tax Law. However on practice, the mechanism is hardly implemented.
It is important to mention, that dividend payments made to non-resident taxpayers are subject to a 15 percent withholding tax described above (unless other is not established by the respective tax treaties between Ukraine and other States). The amount of it withheld should be remitted to the State at the time of the dividend distribution.
In accordance with the Law of Ukraine "On Value Added Tax", dated April 3, 1997, value added tax (herein "VAT") is imposed on:
" the supply of goods, and services in Ukraine in the course of business; and
" the import of goods and services into Ukraine.
Supplies of goods and services by entities that qualify as VAT payers are subject to VAT irrespective of whether they are made for a consideration or free of charge.
The following transactions are outside the scope of Ukrainian VAT:
" the issue, sale and exchange of securities;
" depository, clearing and registrar activities in respect of securities;
" the provision of property by a lessor to a lessee under operating lease and return of property upon expiry of the operating lease;
" interest element of lease payments under financial lease agreements;
" provision of financial loans and bank guarantees;
" exchange of foreign currency; insurance and reinsurance services specified in the Law on Insurance;
" contribution of fixed assets to the statutory fund of a Ukrainian legal entity, both domestic and cross-border;
" payment of dividends and royalties in cash;
" funds under loan, deposit, insurance or proxy agreements;
" brokerage and dealer services in respect of securities transaction;
" transfer of a taxpayer's assets to another taxpayer in the course of business transformation;
" transit of cargoes and passengers through Ukraine.
VAT payers, whether residents or non-residents, include:
" entities whose volume of VATable transactions exceeded UAH 300,000 in any period during the previous 12 months;
" importers of goods or services;
" entities which engage in trade for cash, regardless of their monthly sales turnover; and
" entities which engage in the transport of cargo or passengers via the territory of Ukraine.
VAT is levied at two rates:
" 20% on domestic sales and imports of goods, works and services, and
" 0% on export of goods and provision of works or services to be used outside Ukraine; sales via duty free shops; international transport services.
A person qualifying as a taxable person is obliged to register with the tax authority at the place of its location and to receive a VAT registration number. The application for VAT registration must be submitted by the correspondent person to the local tax authority not later than the 20th calendar day following the date when the volume of taxable supplies exceeds the above threshold.
Any person that intends to trade for cash must apply to register for VAT 10 days prior to commencing trading irrespective of the anticipated volume of its supplies.
A voluntary VAT registration is available to any person whose turnover does not exceed the compulsory registration threshold. Voluntary registration is effective from the date of the issue of the registration certificate.
The local tax authority should issue a VAT registration certificate to the applicant within 10 business days. The registration takes effect from the date specified on the registration certificate.
VAT due to the state (or subject to refund) is calculated using the input - output method. A taxable person's VAT liability in any VAT accounting period is the total amount of output tax due on its supplies less the input VAT they have incurred on related expenditure that the person has incurred during the same period.
a. On the supply of goods a person's liability to account for VAT arises on the date the goods are shipped to the customer or the date the payment is received from the customer, whichever occurs earlier. Goods that are not shipped or moved (such as land, buildings or machinery) are taken to be supplied at the time when they are actually transferred (i.e. when legal ownership passes).
b. On the import of goods the liability to account for VAT arises on the date of filing the import customs declaration.
c. On the supply of services a person's liability to account for VAT arises either at the time of the execution of the document evidencing delivery of the service or on receipt of payment from the customer, whichever occurs earlier. It is usual commercial practice for there to be a formal document (the format of which is not prescribed) signed by both the supplier and customer, evidencing the actual delivery of the service.
d. On the import of services the liability to account for VAT arises on the customer through a reverse charge mechanism either at the date of payment to the service provider or at the date of the execution of the document evidencing receipt of the services, whichever occurs earlier.
Generally, the amount of VAT to be paid is based on the contractually agreed price of the goods and/or services. In the case of imported goods, the value is based on the contractual price, which cannot be less than the customs value of the goods inclusive of any customs and/or excise duty.
Domestic supplies must include the VAT in the stated sale price.
VAT should be charged based on the actual price of goods or services but this must not be less than the usual (i.e. market) price in the following cases:
" barter transactions;
" free of charge supplies;
" transactions between related entities; and
" supplies to business entities not registered for VAT.
Generally, VAT incurred by a registered person on the purchase and/or importation of goods and services used for the purpose of its own business (except for VAT incurred in relation to exempt supplies) can be recovered either by way a credit against output VAT or as a repayment. VAT cannot, generally, be recovered if it relates to expenses that are not deductible for corporate income tax purposes or to fixed and intangible assets that are not subject to depreciation.
A VAT refund in relation to zero-rated exports is available to the exporter within 30 calendar days following the date of submission to the tax authority of the set of documents prescribed by law.
The exporter can claim a VAT refund of the full amount of its input VAT provided it can demonstrate that it has made full payment to its suppliers and received payment from the buyer.
The proportion of input VAT credit that is subject to refund is calculated as a percentage by dividing the total value of export sales by the total value of taxable transactions (standard-rated and zero-rated but excluding the amount of any VAT) during that period, where a person makes both standard-rated domestic supplies and zero-rated exports in the same reporting period.
VAT returns must be made and liabilities paid on either a monthly or quarterly basis, depending on the person's volume of taxable transactions. The reporting period for a person whose volume of taxable transactions in the preceding calendar year exceeded 7,200 non-taxable allowances (currently UAH 122,400 or approximately 20,000 EURO) is a calendar month. A taxable person whose volume of taxable transactions is below this threshold may opt for either a monthly or quarterly reporting period and may change its reporting period any time during a calendar year from quarterly to monthly.
VAT should be paid within 10 calendar days following the date when the tax return has to be filed.
Salary or similar employment compensation payable to domestic employees by Ukrainian entities or by subsidiaries of foreign companies located in Ukraine is subject to the personal income tax.
For 2004-2006 the standard tax rate for tax residents is 13%, and from 1 January 2007 the tax rate will be 15%. The standard rate is applicable to most types of incomes, including salary income, dividends, royalties, investment income, gifts (with certain exceptions).
Income in form of prizes (except for prizes from the state lottery in cash) is taxed at double standard rates (i.e. 26% for 2004-2006) except for interest, royalty, dividends and salary incomes paid by Ukrainian employer.
Income earned by non-residents from sources in Ukraine in form of interest, dividends and royalty is taxed at the same rates as for residents (see above).
The PIT Law provides that any other income earned by non-residents from sources in Ukraine is taxed at double standard rates (i.e. 26%). However, the PIT Law is unclear whether standard or double rates apply to salary income earned by non-residents in Ukraine. In accordance with the tax clarification issued by the State Tax Administration of Ukraine, salary income paid to a non-resident individuals by a Ukrainian resident employer shall be taxed at standard rate (i.e. 13%).
The more detailed analysis on employment compensation and other types of taxes shall be conducted upon an additional request.
1.2.2. Subsequent investments in business, domestic profit investments.
The procedure of increasing the statutory capital of joint-stock companies and limited liability companies is maintained by the variety of laws and standings. General norms on the increase of the statutory capital contain Civil code, Economic Code and Law "On Economic Associations". However, the issue of the statutory capital increase by the joint stock companies is minutely described in the "Regulations on the Procedure for increasing (decreasing) the size of the authorized capital of a joint stock company", presumably to introduce transparent rules, necessary to prevent a wide range of abuses prevalent among shareholders.
The Regulations set forth two methods for increasing the size of the statutory capital: 1. additional contributions (including tangible assets); 2. reinvesting dividends. Additionally, increases in the size of the statutory capital can take place in one or two ways: 1. increasing the quantity of shares in their existing par value; 2. increasing the par value of the existing shares.
The Regulations establish a number of requirements to the statutory fund increase, as well as some limitations. The procedure differs if the increase is carried out by the open joint stock company or closed joint stock company.
In many cases the statute of the joint stock company permits the management to increase the size of its statutory capital at the expense of additional contributions, with certain limitations applied.
The procedure for increasing the size of the statutory capital via the reinvestment of the dividends is also worthy to be considered additionally by the investor in case of the necessity of such increase, evoked by a number of factors.
In comparison to the procedure of statutory capital increase in the joint stock companies, the procedure of statutory capital increase by the limited liability companies is more simple and omits such steps as 45 days prior notification of the shareholders on the General meeting devoted to the statutory capital increase, issuing a share of stocks, registration of the issue in the State Commission on Securities and Fund market etc.
The issue on domestic profit investments shall be considered referring to the certain project commenced by the foreign investor in Ukraine and the respective plans for profit investments (e.g. the special regime for profit investments is provided for insurance companies, pension funds, and some other financial institutions).
As a major areas of interest for the domestic investments, stipulated by the concurrent factors and events are: securities (mainly municipal and State bonds/eurobonds), insurance programs, real estate, venture investments in IT sector, investment funds etc.
To be continued...