The Parliament of Ukraine has adopted the new Tax Code of Ukraine (the Tax Code), which became effective on 1 January 2011. However, the section of the Tax Code on the corporate profit tax containing important tax novelties will come into force on 1 April 2011.
Under the Tax Code, insurance, co-insurance and reinsurance transactions remain VAT-exempt. Income earned by insurance companies from long-term life and pension insurance will still be taxed at a zero rate.
Insurance companies will no longer benefit from the current CIT rate of 3% and will pay CIT on a general basis as regular taxpayers starting from 1 April 2012. This means that the general CIT rate will apply to the taxable profit of insurance companies. However, the current general CIT rate of 25% will be gradually decreased as follows:
- 23% in 2011
- 21% in 2012
- 19% in 2013
- 16% in 2014
Insurance companies can still pay CIT at the reduced rate of 3% from 1 April 2011 to 1 April 2012. However, they must calculate the CIT liabilities based on the general taxation regime. These CIT liabilities calculated based on the general tax regime will not be payable to the state budget.
- Starting from 1 April 2012, when insurance companies will be subject to the general taxation regime, increases in insurance reserves (other than life and pension insurance) compared with the preceding reporting period (i.e. calendar quarter) will be tax deductible. Decreases in insurance reserves compared with the preceding reporting period will constitute taxable income.
- Starting from 1 April 2012 the tax base for CIT purposes regarding insurance companies will include both income from insurance (other than life and pension insurance) and other (i.e. non-insurance) activities, minus allowed deductible expenses.
- Insurance payments and compensations paid by local insurance companies to non-residents, including life insurance, will be subject to CIT at the rate of 12%. However, this can be reduced to 4% provided local insurance companies pay insurance compensations to non-residents under risk insurance outside of Ukraine.
- The tax can be reduced to 0% provided that:
- an insurance or reinsurance agreement is concluded with a non-resident insurance or reinsurance company having a sufficient financial rating; or
- a reinsurance agreement relates to the mandatory civil liability insurance of a nuclear facility operator against damage caused by a nuclear accident; or
- an insurance agreement relates to mandatory insurance whereby insurance compensation is paid to a non-resident natural person; or
- an insurance agreement relates to international Green Card system insurance.
This tax at the rate of 12% or 4% is accrued on the top of payments made by local insurance companies and is paid at their own expense.
Limited deductibility for certain expenses
The deductibility of certain typical expenses will be limited for tax purposes. Below are some of the typical expenses which will not be deductible for CIT purposes starting from 1 April 2011:
- consulting, marketing and advertising costs paid by Ukrainian companies to non-resident service providers who have an offshore status or to any other non-resident providers if they exceed 4% of the sale of goods (works, services) revenues for a year preceding the reporting year;
- expenses relating to the purchase of goods and services from private entrepreneurs who are unified tax payers (this, however, does not relate to IT related services);
- in some cases, certain royalty payments will not be tax deductible. Examples include:
- royalties paid to non-residents in excess of 4% of sales proceeds (net of VAT and excise duty) for the year preceding the reporting year;
- royalties paid to non-residents located in black-listed offshore jurisdictions, if a non-resident recipient of royalties is not the beneficial owner of the royalties (unless the recipient authorized a third party to accept such royalties);
- royalties that are paid for IP rights which were initially registered in the name of Ukrainian residents;
- royalties paid to Ukrainian legal entities which are exempt from CIT or who pay this tax at a reduced rate or as a part of other taxes. This, however, does not concern individuals who are subject to personal income tax.
The Tax Code contains a number of controversial provisions that have not yet been enforced. We expect substantial clarifications from the tax authorities in the near future.