On May 21, the President signed the Law No 466-IX "On amendments to the Tax Code of Ukraine regarding the improvement of tax administration, removal of technical and logical inconsistencies in the tax legislation" (the "Law"). The Law provides in particular for rules aimed at implementation of the BEPS plan and the MLI Convention in Ukraine. Together with signing the Law the President proposed to introduce a number of amendments to improve the provisions of the Law. However, almost none of them has been implemented so far. At the same time, on August 8, 2020, the President signed the Law No 786IX "On amendments to the Tax code of Ukraine on electronic cabinets and simplifying the work of Individual Entrepreneurs" which provided for only a few amendments to rules introduced by the Law.

Though both laws are already in force, some of the most important changes will be gradually implemented over time. Despite the hopes that implementation of key provisions such as CFC rules will be deferred, the latest Law No 786-IX does not provide for any. However, even before their factual implementation, the rules provided by the Law already affect large Ukrainian businesses with foreign companies in their structures which do not conduct any real economic activities but are rather instruments of tax minimisation. As a result of the implementation of such rules, such companies will become less attractive, and their maintenance will become more expensive. Such changes make Ukrainian businesses reconsider the necessity of such companies and restructure.

However, such corporate restructuration with tax purposes shall be conducted in compliance not only with tax law but also with antitrust law. In particular, one shall bear in mind that restructuring in tax purposes can require a prior merger clearance of the Antimonopoly Committee of Ukraine (the "AMC"). In this article we will consider key `deoffshoring' steps introduced by the Law and their potential impact on business structures in Ukraine as well as analyse when and why an anti-BEPS corporate restructuring can require a merger clearance and what are the consequences of failure to obtain such.

Measures to be introduced by the Law and their impact on current structures of Ukrainian businesses

Among numerous changes, an important step to affect the current structures of Ukrainian businesses is the introduction of the "controlled foreign company" ("CFC") and taxation of their income. Commencing January 1, 2021, individuals and legal entities which are tax residents of Ukraine will have to disclose and pay tax on the part of adjusted income of a CFC proportionate to the share of the CFC which such individual/legal entity controls (legally or factually). CFC rules can be applied to foreign trusts, partnerships, funds and other transparent entities, except for irrevocable discretionary trusts.

At the same time, the Law provides for a number of exceptions to the taxation of CFCs' income. An income of a CFC shall not be subject to taxation in Ukraine if the following conditions are met: (i) there is a double taxation treaty in force between Ukraine and the jurisdiction in which the CFC is active; (ii) the CFC pays income tax at the effective rate not less than 13% or (iii) the share of passive income of the CFC (such as royalties, interest on loans) does not exceed 50% (or if exceeds, a CFC is still economically present in such jurisdiction and receives active income). Moreover, irrespectively of the above factors, the CFC taxation rules will not be applied if the cumulative income of all CFCs controlled by the tax resident of Ukraine does not exceed EUR 2 million or if shares of the CFC is traded on a recognised stock exchange or if the CFC is a charity organisation.

Tax residents of Ukraine (both legal entities and individuals) will have to submit CFC reports and notify the Ukrainian tax service of each acquisition and cease of control over a CFC (first report for 2021 shall be filed in 2022). At the same time, it would be difficult to conceal such information given that other state bodies and banks will be obliged to notify the tax service of any revealed CFC. Except for this, in 2020-2021 Ukraine is expected to introduce exchange of tax data between the Ukrainian tax service and foreign banks at the CRS standard, which will ensure regular automatic exchange of information on residents of Ukraine, which are beneficiaries of offshore companies, as well as on their real income.

However, the Law gives an opportunity for individual controllers to liquidate a CFC with no tax consequences if the liquidation is started no earlier than January 1, 2020, and finished by December 31, 2020, or by December 31, 2021, if the decision on liquidation is taken no later than June 30, 2020. This provision, however, enters into force only on January 1, 2021. Meanwhile, the Law 786-IX provided for an interim provision exempting income for 2020-2021 resulting from liquidation of a CFC from personal income tax provided that such liquidation is started not earlier than January 1, 2020 and is finished no later than December 31, 2021. Except for this, the Law allows voluntary recognition of a foreign company as a tax resident of Ukraine by the place of effective management criterion. In such case, CFC rules will not be applied to such foreign company.

Such measures already make Ukrainian tax residents reconsider their business structures and, if necessary, ensure their real economic presence in offshore jurisdictions or restructure such corporate organisations to avoid paying income tax at the effective rate.

Also, the Law introduced the new criteria for the definition of permanent establishments (without formal registration). In particular, provision of services on behalf of a non-resident for more than 183 days per year, the negotiation of essential terms of contracts in the interests of a non-resident (if such agent services are not the main activities of the negotiator), and so on shall be considered as a permanent establishment for the tax purposes. Moreover, the Law cancels the current option for taxation of income of permanent establishments (income multiplied by the 0.7 coefficient) and permits accounting of the taxable income only at the "arm's length" principle, which can significantly reduce the attractiveness of such business structure.

Except for the above, the Law reinforced the earning stripping restriction: commencing January 1, 2021 Ukrainian companies with a debt-to-equity ratio exceeding 3.5:1 can include in their expenses interest on loans from all non-residents in the amount not exceeding 30% EBITDA. An exception is provided only for financial and leasing companies. This rule is justified by the fact that such scheme of capitalisation is often considered as a method of tax optimisation or even an attempt to avoid paying taxes since interest on loans from non-residents reduces the tax base for income tax. Due to this measure, such scheme will become less attractive for Ukrainian companies, since most of the interest on loans from non-residents will be included in the financial result of the Ukrainian company and will be taxed in accordance with Ukrainian legislation in force.

The Law also introduced regulation of the so-called "constructive" dividends, that is, operations that do not meet the "arm's length" principle, as well as operations with founders/participants - non-residents for redemption of corporate rights, reduction of the authorised capital, withdrawal of a participant from the company, etc., which lead to a decrease in retained earnings of the Ukrainian enterprise. As a result, the amount of payments exceeding the amount under the "arm's length" principle shall be subject to 15% repatriation tax, unless otherwise provided by the double tax treaty in force.

Also, the Law clarified the criteria for determining the ultimate beneficiaries for applying the reduced tax rate under a double taxation treaty. For this purpose, a recipient of income who does not have sufficient authority to manage such income, and/or transfers such income in favour of another person and does not perform essential functions in transactions, and/or does not have the appropriate resources to perform functions and risk management associated with such income cannot be considered as an ultimate beneficial owner.

In addition, the Anti-BEPS Laws introduced taxation of profits of non-residents from direct and direct divestment of companies deriving their value from real estate in Ukraine. According to the Law, since July 1, 2020 profits from the sale of the corporate rights of a foreign company (except for those traded on a recognised stock exchange) that directly or indirectly owns a Ukrainian real estate company are subject to taxation in Ukraine if, within 356 days before the sale: (i) the value of the corporate rights of a foreign company by 50 or more percent is generated from the shares/corporate rights in Ukrainian company; and (ii) the value of the corporate rights of such Ukrainian company by 50 or more percent is generated from real estate in Ukraine. The income from such transactions will be subject to 15% tax in Ukraine. In its turn, the Law No 786-IX extended such taxation to direct divestment of Ukrainian legal entities by non-residents commencing August 8, 2020.

The Law also provided for changes regarding transfer pricing. In particular, the threshold for recognising companies as related for transfer pricing purposes is increased from 20% to 25%. In addition, the Law introduces a 3-tiered approach to transfer pricing reporting: (i) a local file; (ii) a master file for international groups with income EUR 50 million (upon request of a tax) and (iii) a country-by-country report for international groups with income 750 million euros.

In addition to the above, the Law also provides for many other measures aimed at toughening the control over and taxation of transactions with non-residents, such as the rules of the "business purpose" (which were slightly loosened by the Law No. 786-IX) and the principal purpose test, 30% tax difference when export operations with non-residents from offshore jurisdictions and foreign transparent entities, etc.

The measures provided by the Law significantly reduces the attractiveness of structuring a business through foreign (including offshore) jurisdictions and forces Ukrainian business to audit its current business structures and, if necessary, to restructure.

Other factors to consider

Banks, as subjects of initial financial monitoring, have already reinforced their compliance procedures to prevent stripping off money and transfer of them to offshore jurisdictions. Now banks can refuse to work with companies with signs of shell companies, for example, if the company does not perform real economic activities or the bank cannot identify the real beneficiary owner. Identification of real, not nominal beneficiary owner, as well as clear and legal corporate structure are necessary to work with both Ukrainian and foreign banks, especially in case of attraction of external funding. It should be noted here that in April 2020, the Parliament strengthened the rules on disclosure of ownership structures and UBOs of businesses to banks as subjects of initial financial monitoring. In particular, banks shall carry out the "Know your client" procedure in accordance with international anti-money laundering standards. The purpose of this procedure is to determine the real, not the nominal beneficial owner, using all available resources not limited to Ukrainian state registries. If the bank fails to establish the real beneficial owner of the business, it must refuse to open an account. Therefore, a legal and transparent structure is a prerequisite for the normal functioning of the business both abroad and in Ukraine.

All such factors will make Ukrainian businesses conduct internal corporate restructuring or, if necessary, corporate restructuring with external counteragents (such sale of asset/shares in companies).

When corporate restructuring can require prior merger approval of the AMC

Transactions with external counteragents which result in a change of relations of control, a prior merger approval shall be required in case the parties to the transaction exceed the established financial thresholds. The Law of Ukraine "On Protection of Economic Competition" establishes the following merger control thresholds:

- the aggregate asset value or the aggregate sales volume of the participating undertakings (including their related by control entities/persons and calculated on a worldwide basis) exceed the Hryvnya equivalent of EUR 30 million, and

- the aggregate assets value or the aggregate sales volume on the territory of Ukraine exceed the Hryvnya equivalent of EUR 4 million for each of at least two participants to a concentration (including entities/persons related by control);


- the aggregate asset value or the aggregate sales volume of the target or at least one founder of a joint venture (including entities/persons related by control) on the territory of Ukraine exceeds the Hryvna equivalent of EUR 8 million, and

- the aggregate sales volume of at least one other participant to a concentration (including entities/persons related by control and calculated on a worldwide basis) exceeds the Hryvna equivalent of EUR 150 million.

At the same time, intragroup restructurings do not require a merger approval, even if parties to them exceed the established thresholds, as far as they do not provide for change of control. However, this rule works only if transactions resulted into the existing relations of control within the group were conducted with prior merger approval provided that such approval was required at the moment of such respective transactions. It means that if transactions which formed of the group of entities in its current state required prior approval of the AMC but which was not obtained, parties to the ongoing intragroup restructuring shall apply to the AMC for a merger approval for such reorganisation, provided that the established financial thresholds are exceeded.

The statute of limitation for gun jumping makes five years. However, even afterwards, the legality of a historical transaction can still be questionable. It means a risk of an antitrust violation at subsequent transactions, including intragroup, which would require a merger clearance. Gun jumping can result in a fine in the amount of up to 5% of the revenue of the group, including abroad, for the year previous to the year in which the AMC makes the decision.

The intragroup restructuring can remain unnoticed by the AMC at the moment its implementation, but the fact of such reorganisation can "pop up" later during a merger control procedure at a subsequent sale of a company/asset of the group or attraction of an external investor by loan or sale of shares. Attracting external investors usually triggers an audit of the existing group and the history of its formation, including from an antitrust standpoint, which reveals any internal reorganisations.

The AMC pays close attention to the historical aspects of the transaction (for example, how and when did the seller gain control over the object of the transaction, whether respective merger approval was obtained). Therefore, the chances that at future purchase/sale of a company/asset of the group and obtaining (if necessary) a merger approval the AMC will not be interested the legality of a prior restructuring, are small. In practice, this applies not only to the direct participants in the concentration but to the whole group as well and can significantly complicate the process of obtaining permission for the ongoing transaction.

Currently, to the best of our knowledge, there are no cases of fines for not obtaining permission for intragroup restructuring. Still, there have already been several precedents of imposing significant penalties on parties to historical transactions carried out without prior merger approval. In April 2019, the AMC imposed record fines for gun jumping: (i) UAH 58 million (appr. EUR 2 million) on the DCH group for the indirect purchase of shares of PJSC "Dneprovsky Metallurgical Plant"; (ii) UAH 55 million (appr. EUR 1,9 million) on the TAS group for the acquisition of PJSC "Dneprometiz".

Therefore, "cleaning" of the group for the tax purposes in the light of BEPS plan implementation should also be carried out in compliance with both tax and antitrust laws. In this case, it is necessary to analyse the existing structure of the group and the desired one (taking into account tax issues) and determine whether it is necessary to obtain approvals of the AMC for such restructuring. To make sure that the planned restructuring meets the requirements of antitrust law, a business shall audit the historical transactions that led to the formation of the group in its current state and their compliance with the requirements of antitrust law in force at the time of such transactions. If in the course of such audit it is discovered that the group was formed without full compliance with antitrust laws, it is necessary to obtain merger approval for the current restructuring, even if such restructuring does not provide for a change in control relations.