Ukraine: Treaties and transfer pricing developments
Ukraine signs a double tax treaty with Malta
On September 4 2013, Ukraine and Malta signed a double tax treaty. The treaty allows reducing withholding tax to 5% on dividends and to 10% on interest and royalties (conditions apply). The treaty will enter into force upon the exchange of ratification instruments and its provisions will apply from January 1 of the year following its entry into force.
New Ukrainian transfer pricing rules came into force
Starting September 1 2013, new transfer pricing rules finally became effective in Ukraine.
New regulations will apply to controlled transactions both for corporate profit tax and VAT purposes.
New transfer pricing rules introduced basic rules of functional and comparability analysis. Five methods, including comparable uncontrolled price, resale minus, cost plus, transactional net margin and profit split would be used for determining the arm's-length price for controlled transactions.
Controlled transactions for transfer pricing purposes will cover not only cross-border related party transactions, but also, in some cases, domestic related party transactions and even transactions with unrelated parties (for example located in low tax jurisdictions). The list of low tax jurisdictions will be adopted by the Ukrainian government. The annual threshold for controlled transactions is UAH50 million ($6.2 million).
An obligation to file transfer pricing reporting has been introduced. Transfer pricing documentation will have to be provided at the request of the tax authority. The first reporting period covers September to December 2013, and the first transfer pricing report is due by May 2014. Failure to report or to provide documentation will attract a prohibitive fine of 5% of the value of controlled transactions.
There will be a grace period on penalties for violation of transfer pricing rules from September 2013 to September 2014, but this grace period will not apply to penalties for failure to file the report or to provide documentation.
Although introduction of these more extensive transfer pricing rules is viewed as a positive development aimed at bringing Ukraine closer to OECD principles, many important matters are yet to be resolved. The government is expected to adopt secondary regulations explaining the new rules.
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