Ukraine's Law No. 2245-VIII "On Introduction of Changes to the Tax Code of Ukraine and Some Legislative Acts of Ukraine on Ensuring the Balance of Budget Revenues in 2018," which came into effect on January 1, 2018, includes important changes to transfer pricing (TP) regulations. These changes are outlined below.
Permanent establishment and threshold for TP purposes
Business transactions between a non-resident and its Ukrainian permanent establishment qualify as controlled transactions (CTs) when the annual volume of such transactions exceeds UAH10 million. For this type of CT, there is no annual income criterion (ie, the permanent establishment does not need to earn income beyond a specific level). In contrast, for other CTs to be subject to transfer pricing rules in Ukraine, the resident would need to have earned an annual income of UAH150 million or above and the annual volume of transactions between the resident and non-resident entity would have to be UAH10 million or above.
The volume of transactions amount must be calculated based on arm's length pricing. In the past, this threshold was calculated based on contractual prices.
Non-residents: low-tax jurisdictions and legal forms
For TP purposes in Ukraine, transactions of Ukrainian entities with entities located in low-tax jurisdictions as well as with entities of special legal forms may be subject to TP control, even if the parties are not related.
The list of low-tax jurisdictions is approved by the Cabinet of Ministers and includes states and territories (a) with a corporate tax rate lower than the tax rate in Ukraine by 5 percent or more; (b) which do not have double tax treaties with Ukraine; and (c) which do not provide tax information upon the request of Ukrainian tax authorities in full and in a timely manner.
The list of legal forms of non-residents was introduced in 2017 and includes tax transparent entities such as LLPs in UK or K/S in Denmark as well as many others (around 90 legal forms from 27 jurisdictions). The new law clarifies that any changes to the list of the legal forms (such as inclusion or exclusion of legal forms) come into force on 1 January of the year following the year when those changes were introduced.
The Ukrainian government has not introduced the three-tiered documentation requirements that are part of the OECD BEPS Action Plan. Instead, the requirements for the contents of local Ukrainian TP documentation have been modified as follows:
- Information on parties to CTs and taxpayer's related persons should be provided for the period when the transaction was performed and as of the date of documentation submission.
- Description of the taxpayer's management structure and organizational chart have to contain information on the total number of employees (with a breakdown by individual units) as of the date of the transaction or at the end of the reporting period.
Advance Pricing Agreements
Most importantly, the revised rules in 2018 allow for the possibility to apply for Advance Pricing Agreements (APAs) retroactively, potentially covering reporting periods before 2018 when the APA rules came into force. In order to qualify to apply for an APA, a taxpayer needs to be a large taxpayer. The APA can be done on a bilateral basis.
For taxpayers that have concluded an APA, it is guaranteed that the provisions of the APA will remain stable and unchanged in case of any legislative changes to the procedure in respect of the conclusion, amendment or termination of APAs or if the taxpayer loses the status of a large taxpayer. If changes are made to the criteria of CTs that need to comply with the arm's length principle or if legislative changes affect the activities of a large taxpayer, then the tax authorities and the taxpayer are entitled to propose an amendment to the APA. If either party rejects the proposed changes, the APA shall be terminated.
In case of non-compliance with the terms and conditions of the APA by the taxpayer, such APA becomes void from the day of its entry into force. In this case, the tax authorities may charge additional tax liabilities and apply financial sanctions with regard to CTs that do not meet the arm's length principle.
Although so far the Ukrainian TP rules have not been updated to reflect international standards arising from the OECD BEPS Action Plan, some significant changes have been implemented in the Ukrainian TP rules from January 1, 2018. Among these changes are the inclusion of certain dealings between a non-resident's head office with its Ukrainian permanent establishments; such dealings will now be subject to the arm's length principle in Ukraine. Importantly, the volume of transactions must be now calculated based on arm's length prices instead of contractual prices. In addition, the local TP documentation requirements in Ukraine have been amended, requiring that more information be provided.
The update of an APA regime in Ukraine is a welcomed development, because it allows taxpayers to secure their transfer pricing positions in Ukraine, thereby providing greater certainty.