Improvement of the investment activity taxation

The Draft Law on Amendments to the Tax Code of Ukraine, registered by the Verkhovna Rada of Ukraine under number 4766 was adopted by the Verkhovna Rada of Ukraine on October 7, 2014.

Contrary to the current legislation, the Draft Law provides for the opportunity to bear responsibility for the payment of taxes not only by the operator of production sharing agreement,  which was usually the Ukrainian participant, but also by all participants of such agreement, including non-residents. Such changes in legislation, in our opinion, are attractive for investors of large projects working under the conditions of a production sharing agreement (PSA), as they will ensure opportunity to control tax obligations and proportionate allocation of negative value of the difference between the amount of tax liability and the amount of tax credit for all investors under the PSA.

The Draft Law, in particular, offers the following main changes to the tax legislation:

  • Introduction of editorial corrections to the definition of the term “investor (operator)”
  • Provision of sequential application of the term “investor (operator)”
  • Introducing the possibility of put rights and obligations regarding the registration as VAT payers under the agreement, the calculation and payment of value added tax and filing tax returns on value added tax under multilateral agreement for each investor and/or on every operator in order,  determined by agreement
  • Implementing the opportunity of the reflection of the remaining negative value of the difference between tax obligations and tax credit,  accumulated as a result of previous reporting (tax) period, by other investors in proportions determined under  agreement,  assuming that every investor is registered as a VAT payer
  • Introducing the possibility of refunding the investor (the operator) the amount of VAT in the manner and terms provided under the production sharing agreement, approved by the Cabinet of Ministers of Ukraine, including the right of the investor (operator) to an automatic budgetary refund of such amount of VAT in full

Creation of the free economic zone Crimea

Law of Ukraine “On the creation of the free economic zone Crimea and on the peculiarities of realizing the economic activities of the temporarily occupied territory of Ukraine” No. 1636 dated 12 September 2014 effective from September 27, 2014.

The Law defines the specifics of realizing economic activity on the temporarily occupied territory of Ukraine in accordance with article 13 of the Law of Ukraine “On Ensuring the Rights and Freedoms of Citizens and the Legal Regime on the Temporarily Occupied Territory of Ukraine,” creating a free economic zone “Crimea” (hereinafter - FEZ “Crimea”), and regulates other aspects of legal relations between individuals and legal entities located on the temporarily occupied territory or outside it.

The provisions of the Law aimed at the regulation of relations between the individuals and legal entities that are on the temporarily occupied territory or outside it under ordinary conditions, and also partially govern relations arising between the temporarily occupied territory and other territory of Ukraine.

Thus, in particular, the Law provides for the following peculiarities of doing business in/with the FEZ “Crimea”:

  • FEZ “Crimea” is established within two administrative-territorial units of Ukraine: the Autonomous Republic of Crimea and the city of Sevastopol
  • FEZ “Crimea” is introduced for the period of ten full calendar years
  • Within the FEZ “Crimea” a free customs zone is created which is by its functional type a free customs zone of commercial, service and industrial type in accordance with article 430 of the Customs Code of Ukraine
  • State taxes and duties defined by article 9 of the Tax Code of Ukraine, and the mandatory state pension insurance provided by the law of Ukraine “On mandatory State pension insurance” are not withdrawn on the territory of FEZ “Crimea”
  • The relationship between persons who have the tax address on the territory of FEZ “Crimea” and persons who have a tax address on another Ukrainian territory is deemed to be controlled operations in accordance with article 39 of the Tax Code of Ukraine
  • An individual who has the tax address (residence) and  a legal entity (branch), which has a tax address (location) on the territory of FEZ “Crimea”, are treated as non-residents for tax purposes
  • Any income sourced from the territory of FEZ “Crimea” received by a person treated as a  resident, are taxed as foreign income under the general rules established by the Tax Code of Ukraine
  • The expenses of the legal entity, treated as the resident, that were incurred on payment of the cost of goods (works, services), supplied by the person treated as the non-resident, may be reflected as deductible expenses of such person in the amount contemplated by paragraph 161.2 of the article 161 of the Tax Code of Ukraine for offshore companies (i.e., 85 percent)
  • Multicurrency regime may apply on the territory of FEZ “Crimea” under which the payment of the cost of goods (works, services) sold (provided) within the FEZ “Crimea” is accepted in such currency as Hryvnia and currencies of foreign countries, included by the National Bank of Ukraine to the 1-2 group of classifier of foreign currencies and precious metals