Since 24 February 2022, the Parliament has adopted special tax and customs incentives to ensure support for taxpayers during wartime. Apart from the incentives, the Parliament is currently working on changes to the Tax Code of Ukraine that are meant to discourage both Ukrainian and international groups of companies with subsidiaries and branches in Ukraine as well as other defined taxpayers from engaging in or conducting business in the “aggressor state”. This is to be achieved by introducing increased rates of a selected list of taxes. Thus, corporate income tax (CIT) is proposed to be increased to 27% from the regular 18% rate, being levied on any taxable income of the defined CIT payers, including that sourced in the “aggressor state”.
According to the terms of Bill No. 7232 (“Draft Law“), which was registered with the Parliament on 30 March 2022, it is proposed to increase standard tax rates of selected taxes by a factor of 1.5 for “enterprises conducting business in, or having economic ties with, Russia (“Targeted Business“). The increased rates (by a factor of 1.5) would apply to CIT (except for withholding tax), property tax, environmental tax and charge for subsoil usage (rent). On 1 April 2022, the Draft Law was passed in the first reading. The Parliament has ruled to prepare the Draft Law for the second reading under the expedited procedure. The text of the Draft Law for the second reading has not been made public yet.
Main provisions of the Draft Law. Targeted Businesses are defined based on multiple criteria. Thus, a Ukrainian subsidiary of multinational enterprise groups (MNE) may be regarded as a Targeted Business if any of the group’s members receives Russian-sourced income or provides economic support to Russia free-of-charge. The MNE-related criteria will require a comprehensive analysis of companies that may be viewed as participants of the group, as well as a proper definition of the ultimate parent entity. Other criteria include:
- Ukrainian legal entities directly or indirectly owned/ controlled by Russian residents/citizens/the state of Russia as of 23 February 2022, or
- Ukrainian legal entities that receive income from Russia or own a shareholding in another entity (either Ukrainian or non-resident) that receives income from Russia.
The Targeted Business will not be able to enjoy the newly introduced special single tax regime, i.e., 2% gross-based special single tax regime, earlier discussed in this Blog.
The Draft Law (i) proposes to create the Register of the Targeted Businesses and (ii) provides for a self-reporting mechanism for the inclusion in the Register of the Targeted Businesses. As of 1 July 2022, the taxpayers will have to assess whether they fall within the definition of the Targeted Business. As a part of self-reporting mechanism, the Targeted Businesses will be required to file the first notifications within 60 days from the date of the entry into force of the Draft Law (“Entry into Force“).
The tax liabilities, however, are to be recalculated using increased rates from 1 March 2022, i.e., with retroactive effect. It remains to be seen whether this retroactive provision will survive the second reading.
Special rules will apply to the companies intending to exit Russia. A taxpayer may avoid being reported in the Register of the Targeted Businesses by notifying the tax authorities of its intention to sever its economic ties with Russia. This intention must be reported in the notification filed within the self-reporting procedures, being corroborated, for example, by the parent company’s public announcement to cease business in Russia. The Draft Law affords 18 months from the Entry into Force to accomplish the exit. Otherwise, increased taxes and/or tax penalty would apply for all the period from 1 March 2022.
Some exemptions might be introduced, for example, for companies providing the essential goods permitting no substitution. A list of such businesses is yet to follow.
Failure to file a notification and/or apply increased tax rates may result in tax penalty of 1.5% of the company’s revenue. The tax authorities would be entitled to carry out the unscheduled tax audits if they were to receive information suggesting that a taxpayer has economic ties with Russia. Notably, it is proposed that martial law-driven suspension of tax audits will not apply to this type of tax audit.
Further considerations. Taxpayers may wish to consider testing their current structures against the proposed developments and the potential impact on the business in Ukraine. Separately, most bilateral investment treaties (BIT) contain clauses ensuring that national treatment is granted to foreign investments, e.g., the treatment, including taxation, shall be the same as that applicable to residents of the recipient state. We are now assessing the provisions of the Draft Law in light of the commitments undertaken by Ukraine under relevant BITs.
