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Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

The beneficial ownership test is still the main anti-avoidance instrument for the Ukrainian tax authorities. All taxpayers wishing to access treaty benefits must prove that the income’s recipients are its beneficial owners. In general, beneficial owners are determined based on the object and purpose of double taxation conventions, including the avoidance of double taxation and the prevention of fiscal evasion and avoidance, following the substance-over-form doctrine.

In 2019 the substance-over-form doctrine for transfer pricing purposes was introduced to the Tax Code. In addition, the Ukrainian government has developed a draft law on Amendments to the Tax Code of Ukraine for the Purposes of Implementing the Action Plan on Base Erosion and Profit Shifting. This draft law includes provisions concerning the taxation of controlled foreign companies (CFCs) – in particular, Ukrainian resident individuals which control of foreign companies will be subject to personal income tax on CFC profits.

The draft law also contains provisions in respect of three-tier transfer pricing documentation and constructive dividends. It also elaborates on and expands the concept of beneficial owners.

The draft law will have a significant impact on international groups and Ukrainian companies engaged in international business, as well as on individuals (ie, tax residents of Ukraine who own or control said businesses). These changes will require businesses and their owners to revise their existing group structures and established business practices.

Such changes are expected to be implemented in 2019.

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

The Ukrainian tax legislature on transfer pricing has focused on the implementation of the Base Erosion and Profit Shifting Action Plan in national tax legislation. Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on 23 July 2018.

Ukraine notified its intention to apply the following key provisions of the convention to all 77 of its applicable bilateral tax treaties with other Organisation for Economic Co-operation and Development (OECD) member countries:

  • the provisions dealing with the purpose of a covered tax agreement (Article 6), the prevention of treaty abuse and concept of ‘business purpose’ (Article 7) and the mutual agreement procedure (Article 16);
  • the provisions of Article 9(4) regarding capital gains derived from the alienation of shares or interests of entities deriving their value principally from immovable property; and
  • the provisions on artificial avoidance of permanent establishment status through the specific activity exemptions (Article 13).

The MLI will enter into force in Ukraine on the first day of the third month after Ukraine deposits its instrument of ratification with the OECD. Ukraine has not yet ratified the MLI and no timetable for ratification has been announced.

Is there a legal distinction between aggressive tax planning and tax avoidance?

There is no legislative distinction between aggressive tax planning and tax avoidance. However, the tax authorities always try to challenge aggressive tax planning and reclassify it as tax evasion since the latter qualifies as a criminal offence. Ukrainian legislation prescribes the following types of liability in case of breaches of tax law:

  • financial;
  • administrative; and
  • criminal.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

There are no specific penalties for non-compliance with anti-avoidance provisions. However, additional tax assessments, fines and late payment interest apply.

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