Publication

Foreign investors selling Ukrainian business will be taxed in Ukraine

25/06/2020

Roman Yemets

Associate

PPP and Procurement,
Real Estate and Construction,
Construction and Development,
Transport and Infrastructure

Alexander Borodkin

Partner, Attorney-at-Law

Real Estate and Construction,
Tax,
Trade and Commercial,
Renewables,
Transport and Infrastructure

Since 01 July 2020, the foreign companies will have to pay Ukrainian corporate tax on proceeds from sale of the Ukrainian companies and the foreign companies indirectly holding the Ukrainian real estate.

Many investors use foreign jurisdictions to structure holdings and transactions with their Ukrainian businesses and assets. There are multiple reasons for that: greater flexibility in common law jurisdictions, subordination to international arbitration rather than local Ukrainian courts, settlements in hard currency, etc. The tax implications of foreign deals are as well more favourable for the sellers in comparison to the domestic ones – the acquisition vehicles are usually located in the jurisdictions where the capital gains are low-tax or even fully tax-exempt. Ukraine did not tax such transactions either. However, very soon the situation will change dramatically and Ukrainian corporate tax (CPT) would apply to the foreign companies' gains from the sale of:

  • shares and other corporate rights of any kind in Ukrainian companies; and 
  • shares in foreign companies, holding directly or indirectly Ukrainian subsidiaries if (1) the shares derive 50% and more of their value from the Ukrainian subsidiaries value; and (2) the Ukrainian subsidiaries derive 50% and more of their value from Ukrainian real estate, including land, either owned or leased.

The value of shares, corporate rights and real estate is determined as the balance sheet value according to an accounting data and is compared with a balance sheet value of the other company's assets according to its accounting data.

The CPT applies at the rate 15% unless a reduced rate or an exemption is provided by relevant double taxation treaty (DTT) between Ukraine and country of the seller's residency. DTTs are based on OECD model convention and have unified approach to the capital gains taxation. Thus, usually according to the DTTs direct sale of the Ukrainian companies is taxed only in the country of the seller's residency and indirect sale of Ukrainian real estate is taxed both in Ukraine and the seller's home country. If the sale is taxed in both jurisdictions the DTTs usually allow deducting from the CPT payable in the seller's home country an amount equal to the CPT paid in Ukraine. Such approach would be true, for example, for British or Swiss company selling Ukrainian investment assets. 

However, some DTTs may contain special exemptions. For example, due to Cyprus-Ukraine DTT Cyprus company's gains form indirect sale of Ukrainian real estate are taxed only in Cyprus if the business is carried in immovable property from which the foreign company shares derived their value. Tax consequences for Cyprus company gains derived from selling other Ukrainian investment assets are the same as for British or Swiss company.

Nevertheless, the above approach was introduced few years ago and the DTTs ratified more than 10-15 years ago may tax capital gains differently. For example, according to Turkey-Ukraine DTT the gains derived by a Turkish company from sale of Ukrainian investment assets are taxed only in Turkey. However, if the time between their acquisition and alienation does not exceed one year such gains may be taxed both in Ukraine and Turkey, which would normally allow set-off of Ukrainian tax.

The above changes will not affect sale of shares in foreign companies:

  • if Ukrainian real estate is not their core asset and the shares value derives from it for less than 50%;
  • if they directly hold Ukrainian real estate;
  • if they are listed on a foreign stock exchange, recognised by the Cabinet of Ministers of Ukraine.

The seller with a permanent establishment in Ukraine is responsible for paying the CT. In case the seller does not have one, it is the duty of the buyer, including a foreign company, to pay the CT. A foreign buyer will have to register itself with the Ukrainian tax authorities for these purposes prior to executing the deal. Otherwise, the buyer will not be able to pay the CPT timely and will be subject to fines. The place of the buyer's tax registration shall be the place where the Ukrainian company has its registered office. The above rules apply to the sale of a foreign company indirectly holding Ukrainian real estate. However, the law does not identify a person responsible for CPT payment if two foreigners without permanent establishment in Ukraine execute the deal regarding a Ukrainian company.

The tax base for the CPT is the seller's profit from sale deducted by its expenses for acquisition of the same investment asset. If it is the buyer's responsibility to pay the CPT than it has to submit to the tax authority the documents confirming the seller's expenses for acquisition of relevant investment asset. Hence, the seller needs to provide the buyer with the documents set out above. Otherwise, the whole price of the investment asset will be the tax base for the CPT.

The CPT shall be taken from the transaction price and not on top of it.

The CPT is payable:

  • within 10 days after the deadline for submitting annual tax declaration if the seller pays the CPT; and
  • on the payment date under relevant sale purchase agreement if the buyer pays the CPT.

The law does not stipulate the CPT due date if the buyer pays the advance payments, the price is paid in instalments or is adjusted after the deal closing. Given the existing wording of the law, the tax authorities may consider the buyer obliged to pay CPT to the state budget on each payment of the transaction price.

The following fines are imposed on the responsible person for payment of the CPT:

  • 10% of the CPT amount if delay of tax payment is 30 days and less; and
  • 20% of the CPT amount if the delay exceeds 30 days.

Therefore, shopping the jurisdictions for transactions with Ukrainian assets should become more sophisticated. The parties need to mind and properly plan Ukrainian tax consequences. In transactions with foreign company shares the seller should first check the correlation of the shares price with the value of Ukrainian real estate forming such price. In case a transaction involving Ukrainian investment asset raises the Ukrainian CPT considerations the parties should carefully verify in which jurisdictions may such transaction be conducted given the availability of DTT with Ukraine and their terms. Where the Ukrainian CPT does arise in Ukraine, the parties should structure the price and settlements to accommodate and timely pay it to the budget.

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