The Verkhovna Rada committee on Taxation and Customs Policy recommends Verkhovna Rada adopting the Bill No.8557 on the tax on withdrawn capital, registered in July 2018, as a basis.
According to the explanatory note, the bill envisages the replacement of the corporate tax with the tax on the withdrawn capital. The use of corporate profit tax by banks is allowed upon their decision for 3 years (until December 31, 2021).
The object of taxation of the deductible capital is determined by transactions of capital withdrawal and operations equated with capital withdrawal.
Capital withdrawal operations which will be taxed:
– payment of dividends in favor of a non-taxpayer;
– payment of part of profit by state non-corporations or communal enterprises, the return of contributions to a non-taxpayer owner of corporate rights (in the amount exceeding the cost of the contribution made by a founder and/or an owner to the authorized capital of this legal entity), etc.
Operations equated with capital withdrawals which will be taxed:
– interest paid to non-resident related parties and non-residents registered in low-tax jurisdictions;
-payments under insurance or reinsurance contracts in favor of non-resident insurers (in some cases);
-financial assistance provided by a taxpayer to a non-taxpayer, which is not subject to return or provided to a related party;
– payment (transfer), carried out in connection with:
– transfer of funds from accounts in Ukrainian banks to taxpayer accounts abroad;
– the repayment of obligations arising out of contracts, the execution of which does not result in the transfer of funds to accounts of taxpayers in Ukrainian banks or before a taxpayer receives property, works, services;
– economic operations recognized as controlled by the rules of transfer pricing, if their conditions do not correspond to the principle of “arm’s length” in part of the amounts of funds assessed;
– operations on providing a non-payer with free property (except for certain cases);
– payments carried out due to investing in objects (including the acquisition of property) which are located outside the territory of Ukraine, purchasing works and services from a non-resident non-payer of a taxes, and/or transfer of property, provision of works, and services to a non-resident non-payer of taxes (if payments or provision of property, works, and services for the relevant transactions are not made in 360 days or other terms in accordance with the legislation);
– funds and/or the value of the property transferred to the statutory capital of a non-payer of taxes;
– funds and or the value of property paid in connection with the purchase of products and services from related individuals using the simplified taxation system;
– payment of royalties in amounts exceeding the limit and other individual cases.
Payers of the tax on withdrawn capital are intended to identify residents (economic entities – legal entities carrying out economic activities both in the territory of Ukraine and abroad) and non-residents (legal entities carrying out activities specified in the Code in the territory of Ukraine, as well as permanent representations of non-residents which carry out activities in the territory of Ukraine).
It is proposed to apply the following tax rates on withdrawn capital:
15% – for operations regarding capital withdrawals;
20% – for operations equivalent to capital withdrawals (except for the following 5% tax deductible transactions);
5% – for funds paid for executing debt obligations by related non-resident parties. In case of exceeding the aggregate amount of debt obligations to all related non-resident individuals over own payers’ capital by more than 3.5 times (for financial institutions and companies engaged in only leasing activities – in more than 10 times) or registration of a non-resident in low-tax jurisdictions, the rate of 20% will be applied.
The bill raises a number of opposing assessments. In particular, business in Ukraine calls for the bill to be adopted immediately, which can be explained by numerous shortcomings of the current income tax. However, the IMF and Ukrainian economic experts are concerned not about the bill but the lack of a mechanism for its implementation. Without a compensation mechanism, the tax on withdrawn capital may become corrupted in several years. Moreover, according to the estimates of the Ministry of Economic Development and Trade, the adoption of the bill as it is can lead to losses of 1.2-1.3% of Ukraine’s GDP, which will negatively affect the state budget.