Recently adopted Law on Tax Reform introduced important changes to Tax Code coming into effect in 2015. Some minor taxes are cancelled, new taxes on businesses introduced, tax rates increased and tax administration procedures changed significantly for some key taxes.
The main changes are summarized below.
- The official total number of national and local tax and duties is now 11 (last year – 22). In fact, few taxes were actually eliminated, while other taxes were renamed and regrouped under new headings. Importantly, trade patent tax and securities transactions tax were abolished, which should be good news for retail businesses and those dealing in securities.
- Corporate Profit Tax (CPT). As a move towards simplification for taxpayers, under the new rules the taxable base for CPT will be financial accounting profits adjusted for certain differences (depreciation, royalty and interest payments, reserves, payments to low-tax jurisdictions and some other). In general, the list of differences is quite shorter, compared to the list of restricted deductions under the previous rules.
- New electronic VAT administration system (VAT accounts) will start operating in Ukraine from 1 February 2015 till 1 July 2015 (in test regime) and after that in normal course. The law also introduces electronic VAT invoices only, and paper invoices are abolished. All invoices are subject to registration with central database of tax authority starting 1 February 2015. Penalties are introduced on the supplier for failure to register VAT invoice (up to 50% of the amount of VAT indicated in the invoice). While VAT reform is aimed at prevention of VAT abuse, the new rules may also effect prudent taxpayers.
- For payroll taxes, the cost for employees will increase, since the maximum rate of personal income tax has been increased from 17% to 20% (for the amounts exceeding UAH 12,180 in 2015). Military tax of 1.5% on salaries has also been prolonged for 2015 until the separate decision of the Parliament. Payroll tax costs for most employers remain the same.
- Starting 2015, property tax was extended to cover commercial real estate owned by companies and individuals (previously, only residential real estate was subject to tax). Tax rates shall be determined by local councils and shall not exceed 2% of the minimum statutory salary per 1 sq. m. per year (in 2015, the nonresidential real estate is subject to preferential tax rate of no more than 1%). The statutory exemptions from tax are rather few (e.g., production facilities and warehouses of industrial enterprises, buildings and constructions used in agricultural production). The amounts of property tax on commercial real estate paid by the company can be credited/set-off against the corporate profit tax (CPT) payable by such company.
- Companies in commercial real estate (retail, office, warehouse), will likely be affected. For loss-making companies, the tax can also become the additional cost.
- Land tax for non-agricultural land has been increased from 1% to up to 3% of the land plot value for land owners, and from 1% to up to 12% for those who use land under the right of permanent use. For businesses, the cost of owning land increased, and the difference is removed as to tax costs of having land in permanent use instead of leasing the land.
- Tax (pension fund duty) on purchase of foreign currency has been increased from 0.5% to 2%, but now applies to purchases in cash only. Purchases of noncash foreign currency are now exempted. The effect is that burden of this tax is shifted from businesses to individuals.
- New transport tax on luxury cars is payable by companies and individuals owning cars with engine of more than 3 liters and less the 5 years old. Tax rate is UAH 25,000 per annum. Car leasing companies as well as companies with corporate fleet are likely to be affected.
Other important changes include cancellation of special regime for Ukrainian IT companies, which previously allowed them to pay profit tax at preferential rate of 5% (standard rate - 18%).
The new rules have many uncertainties, and more are likely to be discovered in the process of their application. Government already announced its intention to propose amendments in February 2015.
Businesses should be aware that new rules are likely to be interpreted by tax authorities in adverse and fiscal way. As a risk management measure, taxpayers are advised to closely monitor changes and generalized tax rulings, as well as request individual tax rulings, where practical.