Ukrainian resident entities and foreign entities doing business in Ukraine through a permanent establishment are liable for corporate income tax. The Corporate Profit Tax Law (hereinafter – “the CPT Law”) has established the basic corporate tax rate of 25%. Taxable profits are defined to be "adjusted gross income" less "allowable gross expenses" and depreciation charges.
The following are subject to the corporate profits tax:
- Resident legal entities, state, public, and other types of enterprises, institutions, and organizations which generate profits from their activity, both within and outside of the territory of Ukraine;
- Non-resident physical persons and legal entities which derive profits from Ukrainian sources;
- Branches, divisions of taxpayers;
- Representative offices of non-residents.
The CPT Law the following are treated as income received by a foreign company in Ukraine:
- Foreign exchange gains and losses are taxable/deductible;
- Profits from sale of real estate;
- Profits from securities;
- Profits from investment;
- Other profits from business activi¬ties in Ukraine.
There are three methods available for calculating taxable profit of a permanent establishment:
• Direct method: taxable profit is determined as a difference between gross income and deductible expenses and depreciation charges.
• Allocated (split) balance sheet method: taxable profit is calculated by apportioning worldwide revenue of a non-resident attributable to Ukraine based on the average ratio of expenses, employees and fixed assets related to or located in Ukraine.
• Indirect method: the taxable profit attributable to permanent establishment is determined as the difference between the known (actual) gross income and the deemed deductible expenses.
Apart from quite disadvantageous and ambiguous calculation of CPT, the permanent establishment tax treatment may have other unfavorable specifics:
• Ukrainian tax authorities usually regard financing received from its head office as taxable income, which is subject to 25% CPT;
• Indirect method, which is most commonly applied by the permanent establishments in Ukraine, may be rather disadvantageous since it does not provide for deduction of any actual expenses;
• The Ukrainian tax legislation is also not clear in that whether a permanent establishment applying direct method would be allowed to carry forward its losses for Ukrainian CPT purposes.
Accounting and deductibility. Income should generally be recognized on the earlier of the date on which payment is received, or goods or services are supplied. Returns and payments must be made on a quarterly basis.
Under the Corporate Profits Tax Law all reasonable business expenses incurred in the furtherance of a taxpayer's business activities are allowed as deductions (Interest will be deductible if the related debt is used to fund business activities), unless they are expressly limited or prohibited by law, which include:
- Interest payments on a loan by the borrower, in which the share of the foreign shareholder is 50% or more;
- Payments to non-residents, which are deemed to have off-shore status;
- Expenses which are not related to the business activities of the taxpayer;
- Expenses incurred in connection with the acquisition of land plots;
- Certain types of payments to affiliated companies.
Depreciation. Assets costing more than UAH 1,000 and with a useful life exceeding one year are required to be depreciated. There are two main purposes of managing tax depreciation — to decrease taxable income and to manage losses. According to the Corporate Profits Tax Law, if the inflation index exceeds 10% in a calendar year, taxpayers may adjust the book value of their assets for tax purposes by the amount of the surplus. Such indexation will result in raising depreciation charges and allowances for deduction of expenses. An accelerated 25% rate of depreciation is applicable for group 3 fixed assets belonging to industrial enterprises. If a company is in a loss-making position there is no benefit in applying maximum tax depreciation rates, but only the risk of losing tax losses and reducing future potential inflation adjustment.
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