The Tax Code of Ukraine (the "Code") effective as of 1 January 2011 has substantially increased taxes on hydrocarbon extraction in Ukraine. At the same time, the legislator is making efforts to stimulate the implementation of energy saving technologies.
Hydrocarbon extraction charges
Royalty payments are calculated per 1,000 m3 of natural gas (including oil gas) and per one ton of oil (including gas condensate) and vary depending on the depth of production and other factors. Natural gas and oil extracted from depths above 5,000 m is subject to a charge of UAH 237 (approx. EUR 21.70) and UAH 2141.86 (EUR 196.30) respectively; natural gas and oil extracted from depths below 5,000 m is subject to a charge of UAH 118.50 (EUR 10.90) and UAH 792.54 (EUR 72.70) respectively.
Natural gas supplied to residential customers
Reduced royalty payments apply to natural gas extracted offshore and supplied to residential customers and is subject to a charge of UAH 11.85 (EUR 1.10). Natural gas supplied to residential customers and extracted from depths above 5,000 m is subject to a charge of UAH 59.25 (EUR 5.40), while natural gas extracted from depths below 5,000 m is subject to a charge of UAH 47.40 (EUR 4.30).
Subsoil use charges
The Code increased the subsoil use charge to UAH 37.78 (EUR 3.40) for natural gas production and to UAH 147.63 (EUR 13.50) for oil production.
Royalty payments for oil are subject to an adjustment index, which is calculated by dividing the average price of one barrel of Ural oil on the London Exchange in the calendar month by the base price of oil, which under the Code amounts to UAH 560 (EUR 51.30) for one barrel.
Royalty payments for natural gas are subject to an adjustment index calculated by dividing the average customs price of natural gas imported in Ukraine in the calendar month by the base price of natural gas, which under the Code amounts to USD 179.50 per 1,000 m3. The adjustment index does not apply to natural gas to be supplied to residential customers.
Preferential tax regime for energy efficient projects
The Code exempts 80% of the taxable profit earned from sales of own production goods on the territory of Ukraine which fall within the following categories (the detailed list of such goods shall be elaborated by the government):
- equipment that uses renewable energy;
- materials, equipment and components used for energy production from renewable energy sources;
- energy efficient equipment and materials whose application results in rational use of fuel and energy;
- appliances for measurements, control and management of fuel and energy;
- equipment for alternative fuel production.
The tax-exempted profit shall be directed to increase production under the procedure set forth by the government. Otherwise, the corporate profit tax liability and interest (if applicable) shall be accrued and paid to the state budget.
Furthermore, the Code exempts 50% of taxable profit of companies which are listed in the State Register of Companies which Develop, Apply and Use Energy Efficient Measures and Projects and implement energy saving measures and projects. To be registered in this Register, a company must first be examined by the state authorities. The procedure and criteria of the examination are yet to be adopted.
The tax benefits described above are valid for five years from the moment of the first profit received from implementation of the energy efficient projects.