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Changes in the Tax Code

On 08.08.2020 Law No. 786-IX, which amends the Tax Code1, entered into force.

The Law was expected to extend the effective date of the CFC (Controlled Foreign Corporation) taxation rule, as well as introduce other significant changes to the Tax Code.

However, the final version of the Law reflects only some nuances of taxation that do not have a fundamental impact on the reform embodied in Law No. 466-IX (“On Amendments to the Tax Code of Ukraine regarding the improvement of tax administration, elimination of technical and logical discrepancies in tax legislation).

Let us consider them:

1. For payments equated to dividends (these are payments of a legal entity in favor of its founder or participant in connection with the distribution of net profit (a part thereof) specified in clause 14.1.49 (and in the version of the Code, which will enter into force starting from 2021, also payments for corporate rights, amounts of understating the cost of goods (works, services), etc.), the rule of payment of an advance payment shall not apply.

As a general rule: when paying dividends in favor of its founder, a Ukrainian company must make an advance payment of income tax.

Law No. 786-IX clarified that this rule does not apply to those payments that are not dividends in the literal sense of the word, but are equated to dividends due to the fact that they have features of a disguised distribution of profits. Such payments should be taxed at the rates as dividends, however, an advance payment on them should not be paid (this is stated by the new clause 57.11.7 of the Tax Code).

2. Tax exemption of income from liquidation of CFC (Controlled Foreign Corporation) shall be valid until the end of 2021, while the very CFC taxation rule entering into force was not postponed to 2022 as it had been planned.

The proposed rule in the draft Law on taxing CFC income starting from 2022 (not from 2021) was rejected by a vote.

In other words, information about the CFC for 2021 will have to be submitted to the tax authorities in 2022 along with the report of the controller (a Ukrainian person or Ukrainian company that are the beneficiaries of the CFC); and the CFC’s income for 2021 will have to be included in the controller’s declaration.

However, it remains possible to liquidate the CFC with tax exemptions for the income that will be received by the Ukrainian beneficiary as a result of the CFC liquidation, provided that the liquidation of the CFC began no earlier than in 2020 and ended no later than in 2021 (item 14 of subsection 1 of the Transitional Provisions).

It should be noted that there is some collision between this new paragraph and those provisions on the CFC liquidation terms that will come into force in 2021 under Law No. 466-IX. In order to eliminate this collision, it is necessary to make some amendments to item 170.131 of Law No. 466-IX, which probably will be done by the end of 2021.

3. The regulatory framework for the smooth functioning of the electronic cabinet of the taxpayer has been updated + starting from 2021 individual entrepreneurs shall be allowed to keep records of income and expenses without a standardized Book of Income and Expenses (it is allowed to keep records in paper form as well as by means of the electronic cabinet).

The norms that relate to the electronic cabinet of the taxpayer have been clarified, and it is stipulated that a special procedure for the functioning of such cabinet will be developed (item 14.1.562). Item 177.10 of the Tax Code as amended stipulates that individual entrepreneurs are required to keep records of income and expenses and have supporting documents on the origin of the goods.

Starting from 2021 the accounting of income and expenses can be kept in paper and / or electronic form, including by means of an electronic cabinet. At the same time, it is stipulated that the standard forms, according to which the income and expenses are to be recorded, will be determined by the State Fiscal Service (i.e. the Books of Income and Expenses are being canceled, but most likely new standardized forms will be approved).