The corporate income tax in 2021 has undergone significant changes. In particular, the form of the income tax return and annexes to it has been updated, and all enterprises with an income of less than UAH 40 million will have the right to report once a year. What else do corporate income taxpayers need to know?
New reporting forms
At the end of December 2020, the Ministry of Finance of Ukraine updated the form of income tax return and its annexes TR, CE, IT. The new edition contains annexes TD, TN, AВ, as well as new ones.
It is necessary to submit the declaration according to the updated form starting from the reporting period, which is the first quarter of 2021.
For 2020, income tax reporting should follow the old form.
What is considered dividends
According to Law of Ukraine “On Amendments to the Tax Code of Ukraine to Improve Tax Administration, Eliminate Technical and Logical Inconsistencies in Tax Legislation” (hereinafter – Law No. 466) from January 1, 2021 for tax purposes payments to non-residents in the form of so-called constructive dividends from paragraphs four to seven of the new version of paragraph 14.1.49 of the Tax Code of Ukraine (hereinafter – the Tax Code) are considered as dividends.
Therefore, dividends are the amounts of excess or understatement in controlled transactions with certain non-residents and payments to non-resident participants in connection with the reduction of authorized capital or their withdrawal from the company.
From now on, in case of payment of such amounts to non-residents, they must subtract withholding tax (upon payment to legal entities) or personal income tax (upon payment to individuals) according to the rules established for dividends.
About high-income earners
From January 1, 2021 item 137.5 of the Tax Code contains an instruction that all enterprises – payers of income tax, whose income is less than UAH 40 million, have the right to report once a year.
In addition, income taxpayers who reported quarterly in 2020 because the income was more than UAH 20 million but less than UAH 40 million, and whose annual accounting income for 2020 is within UAH 40 million, are entitled to:
- not to adjust the financial result of 2020 for tax differences - paragraph 134.1.1 of the Tax Code;
- report on income tax only for the year (paragraph “c” of item 137.5 of the Tax Code).
Non-residents
From January 1, 2021, non-residents are required to register with the tax office at the location of their permanent representative office. This should be done before the start of business through such a representative office.
From this date, a non-resident who starts a business through a permanent representative office before registration with the tax authority will be considered tax-evaded, and the income received – as hidden from taxation.
As the registration process is quite long, the legislation allows non-residents who have active permanent representative office in Ukraine as of January 1, 2021, to register by April 1, 2021.
Permanent representative offices
From the beginning of 2021, permanent representative offices must calculate income tax only by the direct method of determining taxable income (paragraph 141.4.7 of the Tax Code).
Differences in interest rates
From the beginning of 2021, the rules for the application of fine capitalization, provided for in item 140.2 of the Tax Code, have been updated. These changes in the Tax Code were introduced by Law No. 466.
The thin capitalization rules set out in item 140.2 of the Tax Code apply only to borrowings received from non-residents.
Tax differences for grants
From December 23, 2021, new tax differences appear in the Tax Code. From this date, income taxpayers will have the right to:
1) reduce their pre-tax financial result by the amount of received budget grants and included in revenues (paragraph 140.4.8 of the Tax Code);
2) increase the financial result by the amount of expenses related to the implementation of the terms of the budget grant agreement incurred in the current reporting period due to such grants (but not more than the amount of such grants) and included in the expenses of the period (paragraph 140.5.16 of the Tax Code)
As we can see, budget grants completely bypass the object of income tax.
Withholding tax
In the case of payment of withholding tax on income paid in kind to non-residents from the territory of Ukraine, from January 1, 2021, the tax should be calculated according to the formula contained in paragraph 141.4.2 of the Tax Code.
Business purpose
The legislation introduces restrictions on the application of rules on business purposes. It is now clearly stated that the business purpose does not apply to all transactions, but only to:
- implementation of controlled operations;
- carrying out operations on purchase and sale of goods with non-residents, which are listed in two offshore lists;
- royalty accrual transactions in favor of any non-resident.
Controlled transactions
From the beginning of 2021, there has been another improvement in the rules for determining transfer operations. Namely:
1) the rules for submitting global documentation on transfer pricing by a payer who is a member of an international group of companies upon request from the State Tax Service of Ukraine have been determined;
2) the tax authorities, assessing the controlled transaction between related parties, may try to prove that such a transaction has no business purpose. If successful, the tax authorities may exclude such a transaction from the financial result or replace its financial result with a transaction with an unrelated party;
3) it will be prescribed exactly how to choose the most appropriate method of transfer pricing to determine the compliance of the conditions of the controlled transactions with the arm length principle.
