A new Internal Revenue Code has been approved this month (November 18) by the Ukraine Parliament and is now due to come into force next year,  becoming one of the most controversial rulings for the last five years, with critics suggesting that abolition of flat rate taxes for entrepreneurs opens up more opportunities for intervention by corrupt officials. On 2 December 2010 the Verkhovna Rada re-adopted the Code accepting all amendments proposed by the President. The Code was signed by the President and then published on 4 December 2010.

Main Points

The main changes we expect to come into effect in 2011 following the new Tax Code are:

• Corporation Profit Tax – the rate is to change, with 19 % (2011-2012), 18 % (2013-2014), 17 % (2015) and 16 % (2016). Currently the rate is 25 %.

• Tax relief for 10 years for specific types of enterprises (consumer industry, hotels etc).

• VAT decreasing from the current 20% to a rate of 17 % by 2015.

• Tax on deposits at a rate of 5 % (currently 0%).

• Reduction of 12 different specific taxes.

• Real Estate Tax – new tax, imposed on real estate ownership, other than tenancy of land.

From the 1st January 2012 the tax will be imposed on flats of more than 120 sq m and houses bigger than 250 sq m.

• Private Entrepreneurs, simplified tax system: some activities carried out by private entrepreneurs will be excluded from the imposition of the simplified tax system. A unified rate tax will be levied on IT specialists, increasing fivefold (UAH 1000).

• 5% tax on profit from savings deposits exceeding UAH 200,000  ($25 000) .

The Code includes a detailed list of tax deductible expenses, and a list for which deductibility is limited or denied. Excluded from tax deductible expenses are payments (for goods and services) to individuals-entrepreneurs who use simplified tax system.  Deductibility of royalty payments and payments for services to non-residents is limited as described below:

The Code limits deductibility of royalty payments to non-residents to an amount not exceeding 4% of income (revenues) received from the sale of products (goods, works, services) received during the year that precedes the reporting year (exclusive of value added tax and excise tax).  This limitation does not apply to:

(i) royalty payments to permanent establishments of non-residents in Ukraine which are taxed in Ukraine;
(ii) payments made by businesses in the sphere of television and radio broadcasting according to the Law of Ukraine “On Television and Radio Broadcasting”; and
(iii) payments for the right to use copyright and related rights to motion pictures produced abroad, as well as to musical and literary works.

Tax holidays (0% profit tax rate) are introduced as of 1 April 2011 until 1 January 2016 for companies incorporated after 1 April 2011, or to previously incorporated companies, within defined limits of yearly turnover, activity types and number of personnel.  Additionally, their employees’ average salary must be not less than 2 minimal wages a month.

In addition, companies engaged in certain types of activity, e.g. aircraft construction, ship building, are exempt from profit tax until 2015 irrespective of the turnover or number of employees.

For more details refer to the web-sites below:

http://www.ukrainebusinessinsight.com/news/54/Tax_changes_adopted