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Tax structuring of inbound investments to UkraineTax structuring of inbound investments to Ukraine
Sergey Popov, Partner, KPMG Ukraine
Switzerland, 18 September 2008
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AgendaAgenda
Tax aspects of entering the Ukrainian marketTax aspects of entering the Ukrainian market
Overview of operational tax issuesOverview of operational tax issues
Repatriation of profits and exit strategiesRepatriation of profits and exit strategies
Questions and answersQuestions and answers
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oror
Tax aspects of entering the Ukrainian marketTax aspects of entering the Ukrainian market
Setting up or acquiringa Legal Entity (LE)
in the form of:
LLC JSC
Setting up a Representative
Office
Acquiring an existing entityAcquiring an existing entity
Setting up a new Setting up a new entity entity
RO
Common ways to establish business presence in Ukraine:Common ways to establish business presence in Ukraine:
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Tax aspects of entering the Ukrainian marketSetting up an entityTax aspects of entering the Ukrainian marketSetting up an entity
A company is subject to corporate profits tax on A company is subject to corporate profits tax on its worldwide profitits worldwide profit
Profits are calculated as a difference between Profits are calculated as a difference between taxable proceeds and deductible expenses and taxable proceeds and deductible expenses and depreciation charges. Deductibility is available in depreciation charges. Deductibility is available in respect of reasonable business expenses, subject respect of reasonable business expenses, subject to some limitationsto some limitations
Operational losses can be carried forward Operational losses can be carried forward indefinitelyindefinitely
Registration of foreign investments is not Registration of foreign investments is not mandatory. Contributions in kind are exempt from mandatory. Contributions in kind are exempt from import duty if they are registeredimport duty if they are registered
A foreign legal entity doing business in Ukraine A foreign legal entity doing business in Ukraine through its RO is only taxed on the activities through its RO is only taxed on the activities attributed to Ukraineattributed to Ukraine
The profits tax due by a RO is calculated The profits tax due by a RO is calculated on the on the direct method or conditional method (split balance direct method or conditional method (split balance or gross income)or gross income)
IF IF RO carries out commercial activities it is RO carries out commercial activities it is required to be registered as a permanent required to be registered as a permanent establishment (PE) for tax purposesestablishment (PE) for tax purposes
Legal EntityLegal EntityRepresentative OfficeRepresentative Office
Certain tax characteristics of a RO and a LECertain tax characteristics of a RO and a LE
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Tax aspects of entering the Ukrainian marketTax aspects of entering the Ukrainian market
Subject to VAT unless specific Subject to VAT unless specific exempts applyexempts apply
Results in significant additional tax Results in significant additional tax costs (e.g. state duty costs (e.g. state duty –– 1%, Pension fund 1%, Pension fund duty duty –– 1%, etc.)1%, etc.)
Tax risks are mitigatedTax risks are mitigated
Asset deals tend to be more timeAsset deals tend to be more time--consuming and expensive (e.g. receipt of consuming and expensive (e.g. receipt of new licenses/permits, etc.) new licenses/permits, etc.)
Enable the purchaser to benefit from Enable the purchaser to benefit from lossloss--carry forwardscarry forwards
Share deals transfer potential risks to Share deals transfer potential risks to the purchaser (can be mitigated through the purchaser (can be mitigated through incorporating the relevant protective incorporating the relevant protective provisions in the SPA)provisions in the SPA)
Usually exempt from VATUsually exempt from VAT
Cost of goodwill cannot be deducted or Cost of goodwill cannot be deducted or depreciated for Corporate Profits Tax depreciated for Corporate Profits Tax purposes purposes
Asset dealAsset dealShare dealShare deal
Share deal vs. asset deal Share deal vs. asset deal –– overview of important tax implicationsoverview of important tax implications::
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Overview of operational tax issuesCorporate Profits Tax – 25%General principles
Overview of operational tax issuesCorporate Profits Tax – 25%General principles
Payments to tax haven locations Payments to tax haven locations –– 85% of such 85% of such payments (e.g. Jersey, Guernsey, Gibraltar, BVI)payments (e.g. Jersey, Guernsey, Gibraltar, BVI)
Interest payments to nonInterest payments to non--resident shareholders and resident shareholders and their related parties their related parties –– generally 50% of taxable profitsgenerally 50% of taxable profits
Fuel for cars and car rental costs Fuel for cars and car rental costs –– 50% of costs50% of costsWarranty repairs Warranty repairs –– 10% of total price of goods sold10% of total price of goods soldNonNon--mandatory insurance expenses mandatory insurance expenses –– 5% of all 5% of all
deductible expenses for relevant perioddeductible expenses for relevant periodReceptions, celebrations and similar event held for Receptions, celebrations and similar event held for
advertising purposes advertising purposes –– 2 percent of the taxpayer2 percent of the taxpayer’’s s taxable profit for the previous tax yeartaxable profit for the previous tax year
DividendsDividendsShare premiumsShare premiumsContractual fines and penaltiesContractual fines and penaltiesCosts relating to maintenance Costs relating to maintenance
of holding companiesof holding companiesExpenses not connected with Expenses not connected with
business activity (e.g. costs business activity (e.g. costs covering personal needs of covering personal needs of management, etc) management, etc)
Expenses not supported by Expenses not supported by primary documentationprimary documentation
Limited deductibility of certain expensesLimited deductibility of certain expensesDisallowed expensesDisallowed expenses
Worldwide income of Worldwide income of all entities that are all entities that are resident for CPT resident for CPT purposespurposes
Taxable Taxable incomeincome
Capital contributionsCapital contributionsShare premiumShare premiumDividends from Ukrainian entities (if Dividends from Ukrainian entities (if
taxed upon distribution)taxed upon distribution)
NonNon--taxable taxable incomeincome
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Overview of operational tax issuesCorporate profits taxOverview of operational tax issuesCorporate profits tax
No tax electionNo tax electionNo advance pricing arrangementsNo advance pricing arrangementsNo group consolidationNo group consolidation
OtherOther
Usually available if there is a double tax treaty in place and cUsually available if there is a double tax treaty in place and confirmation of foreign taxes onfirmation of foreign taxes payment is receivedpayment is received
Foreign tax Foreign tax creditscredits
No participation exemption rulesNo participation exemption rulesParticipation Participation ExemptionExemption
4 Groups: (1) 4 Groups: (1) -- buildings, premises; (2) buildings, premises; (2) –– vehicles, furniture and office equipmentvehicles, furniture and office equipment; (3) -fixed assets which are not included into Groups 1, 2 and 4; (4) fixed assets which are not included into Groups 1, 2 and 4; (4) –– computers and other computers and other electronic devices, computer software.electronic devices, computer software.
Rates for quarter reducing balance basis: (1) Rates for quarter reducing balance basis: (1) –– 2%, (2) 2%, (2) –– 10%, (3) 10%, (3) –– 6%, (4) 6%, (4) –– 15%.15%.
Tax Tax Depreciation Depreciation
The scope of these rules is broad enough to apply to transactionThe scope of these rules is broad enough to apply to transactions between related s between related persons as well as to transactions involving taxpersons as well as to transactions involving tax--exempt persons or persons that are paying exempt persons or persons that are paying taxes at reduced ratestaxes at reduced rates
For CPT purposes, all transactions between related parties shouFor CPT purposes, all transactions between related parties should be at armld be at arm’’s lengths length
Transfer Transfer Pricing RulesPricing Rules
A person is deemed to exercise control if the person holds, dirA person is deemed to exercise control if the person holds, directly or indirectly, at least ectly or indirectly, at least 20% of the authorized capital/voting rights of the taxpayer20% of the authorized capital/voting rights of the taxpayer
Related Related PartiesParties
May be carried forward indefinitelyMay be carried forward indefinitely but but from time to time the parliament enacts from time to time the parliament enacts legislation that effectively legislation that effectively ““cutscuts--offoff”” operating losses that can be carried forwardoperating losses that can be carried forward
No lossNo loss--carry back is allowedcarry back is allowedTax LossesTax Losses
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Overview of operational tax issuesWHTOverview of operational tax issuesWHT
Standard withholding tax rate is 15 % (dividends, interest, royaStandard withholding tax rate is 15 % (dividends, interest, royalties)lties)To be withheld upon or prior to paymentTo be withheld upon or prior to paymentReimbursement is difficult to obtain, credit is allowed against Reimbursement is difficult to obtain, credit is allowed against tax liabilities of a taxpayer tax liabilities of a taxpayer A significant number of double tax treatiesA significant number of double tax treaties
* Rate of tax depends on the terms and conditions set forth in t* Rate of tax depends on the terms and conditions set forth in the DTThe DTT** Minimum ownership requirements should be met** Minimum ownership requirements should be met
Switzerland Switzerland ––UkraineUkraine
Double Tax Double Tax TreatyTreaty
Withholding TaxWithholding TaxRatesRates
InterestInterest0/10%*0/10%*
RoyaltiesRoyalties0/100/10 %%
DividendsDividends5**/15%*5**/15%*
Withholding TaxWithholding Tax
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Overview of operational tax issuesVATOverview of operational tax issuesVAT
Education servicesEducation servicesArtistic and cultural Artistic and cultural
servicesservicesHealthcare servicesHealthcare servicesSale of certain Sale of certain
pharmaceutical pharmaceutical productsproducts
Certain mass media Certain mass media servicesservices
Privatization Privatization servicesservices
Sale of sharesSale of sharesMost banking transactionsMost banking transactionsTransfer and return of Transfer and return of
property under operating leasesproperty under operating leasesLease interest payments up to Lease interest payments up to
an established threshold under an established threshold under financial leasesfinancial leases
Insurance and reinsurance Insurance and reinsurance transactionstransactions
Royalty paymentsRoyalty payments
Applicable to Applicable to sales of sales of goods outside goods outside Ukraine Ukraine (export of (export of goods)goods)
Applicable to Applicable to all goods and all goods and services services supplied in supplied in Ukraine and/or Ukraine and/or apart from the apart from the exceptions set exceptions set out in other out in other sections of this sections of this tabletable
VATVAT--exemptexemptTransactionsTransactions
NonNon--VATableVATableTransactionsTransactions
0% VAT0% VAT20% VAT20% VAT
VAT RatesVAT Rates
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Overview of operational tax issuesVATOverview of operational tax issuesVAT
If the VAT registration threshold (UAH 300,000 [approximately USIf the VAT registration threshold (UAH 300,000 [approximately USD 60,000]) is exceeded then a D 60,000]) is exceeded then a company is to be registered as a VAT payer. company is to be registered as a VAT payer. A voluntary registration as a VAT payer is possibleA voluntary registration as a VAT payer is possibleThe VAT refund is available only in respect of that portion of tThe VAT refund is available only in respect of that portion of the VAT refund which equals to the he VAT refund which equals to the amount of VAT actually paid by the taxpayer toamount of VAT actually paid by the taxpayer to its suppliers in the preceding tax periodits suppliers in the preceding tax periodIn practice, the registration is not possible without registratiIn practice, the registration is not possible without registration of a legal presence in any form (e.g. a on of a legal presence in any form (e.g. a subsidiary or a PE)subsidiary or a PE)Reporting period is usually one month and Reporting period is usually one month and VAT returns are filed within 20 days following the end of VAT returns are filed within 20 days following the end of the reporting month. VAT should be paid within 10 days followingthe reporting month. VAT should be paid within 10 days following the filing deadlinethe filing deadlineVAT invoiceVAT invoice: :
Purpose is to support the amounts of input VAT and allow to offset such amounts against output VAT arising on VAT-able suppliesIt should be issued by the seller at the request of the buyer upon sale If the VAT invoice does not contain the obligatory items, the purchaser is not eligible to recover such input VAT
VAT issues for new and existing entitiesVAT issues for new and existing entities
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Overview of operational tax issuesOverview of operational tax issues
The exchange of the local currency into The exchange of the local currency into hard currency hard currency -- 0.5% of the currency value0.5% of the currency value
Purchase of real estate Purchase of real estate –– 1% Pension 1% Pension Fund charge and 1% State DutyFund charge and 1% State Duty
Purchase of cars Purchase of cars –– 3% of the car value 3% of the car value
Personal Income Tax (flat rate 15%)Personal Income Tax (flat rate 15%)Payroll charges due from a company Payroll charges due from a company
(including various pension and social (including various pension and social security charges) amount to ~ 38% of the security charges) amount to ~ 38% of the salaries grosssalaries gross
However, the tax base for the calculation However, the tax base for the calculation of such charges and various payroll charges of such charges and various payroll charges of up to 3.5% due by employees are of up to 3.5% due by employees are currently capped at ~ EUR1,290 currently capped at ~ EUR1,290 (UAH9,735)(UAH9,735)
Special Tax Charges:Special Tax Charges:Payroll Taxes and chargesPayroll Taxes and charges
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Overview of operational tax issuesTax PenaltiesOverview of operational tax issuesTax Penalties
Penalties are calculated as 10% of additionally assessed taxes for each tax period when they remain outstanding, but should not exceed 50% of the underpaid taxes
Penalties may be avoided if a taxpayer voluntary self-assesses and pays the taxes along with a 5% penalty before the tax authorities’audit
Tax statute of limitation is 3 years (exceptions: if intentional underpayment of tax is proved and if returns for a particular period were not filed with the tax authorities)
Main Tax Main Tax PenaltiesPenalties
If underpaid taxes are significant, additional penalties up to 50% of the underpaid taxes are assessed (i.e., resulting in penalties at 100% of the underpaid taxes)
For taxes that involve withholding or assessment at source such as PIT, advance CPT on distributions of dividends and withholding tax, the penalty is 200%
Penalties for undocumented salaries payments up to 300% of the undocumented salaries
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Repatriation of profits and exit strategiesRepatriation of profits and exit strategies
NonNon--ResidentResident
DividendsDividends
InterestInterestRoyaltiesRoyalties
15% WHT unless mitigated under DTT15% WHT unless mitigated under DTT
Capital gainsCapital gains
LiquidationLiquidationproceedsproceeds
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Repatriation of profits and exit strategiesRepatriation of profits and exit strategies
DividendsDividendsSubject to advance corporate profits tax at a rate of 25% beforemaking the dividend distributionNo VAT
RoyaltiesRoyaltiesPrice evaluation is required if total amount of the contract exceeds EUR 100,000No VAT
InterestInterest
Limitation of tax deductibility (50% of taxable profits if interest paid to non-resident shareholders and their related parties)Loan registration with the Central Bank and limitation of maximuminterest rate (e.g. for loans exceeding 3 years the rate is 11%)
Capital gainsCapital gains Investment accountsProtection under respective DTT
LiquidationLiquidationproceedsproceeds
Difference between the value of the obtained assets (moneys) andthe historic value of the contributions is subject to WHT
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Questions and answersQuestions and answers
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Contact InformationContact Information
Sergey PopovPartner, [email protected].: + 380 44 492 96 81Fax: + 380 44 492 82 98
19.09.2008
Swiss-Ukrainian Business Forum, 18th September 2008
REAL ESTATE ISSUES(LAND AND BUILDINGS)
Konstantin PilkovLavrynovych & Partners LLC, UkraineSenior Associate
www.Lp.ua - 1 -
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REAL ESTATE
inseparably attached to land at the basement;
may not be disattached from land without devaluing or changing its purpose;
is subject to mandatory state registration.
www.Lp.ua 19.09.2008
REAL ESTATE OBJECTS
A land plot –a part of the earth’s surface with fixed boundaries, defined location and specified rights thereto.
An object attached to a land plot, which may not be separated without devaluing it or changing its purpose
Aircraft and sea vessels, inland vessels, space objects and other objects of ownership which are subject to state registration
Construction in progress
Integral property complex of an enterprise
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LEGAL SOURCES
• Real Estate: Civil Code of Ukraine and the Commercial Code of Ukraine of 16 January 2003, Law “On State Registration of Proprietary Rights to Real Property and Their Encumbrances”, Law “On Lease of State Owned and Communal Property”, the Law “On Mortgage”, the Law “On Privatization of State Owned Property”
• Construction: Law “On Planning and Development of Territory”, the Law “On Architectural Activity”, Law “On Fundamentals of Urban Development”
• Land Issues: Land Code of Ukraine, effective from 01 January 2002, Law “On Land Lease”, Law “On Land Payment”, Law “On Land Appraisal”, Law “On State Control of Use and Protection of Land”, Law “On Delimitation of State Owned and Communal Land”
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REAL RIGHTS TO LAND:
Ownership (private, state and communal);
Temporary use based on a lease agreement (lease);
Right of permanent use of land;
Easement;
Emphytheusis;
Superficies.
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REGISTRATION OF REAL ESTATE
State Register of Titles to Real Estate;
State Register of Prohibitions on Alienation of Real Property;
State Register of Encumbrances of Movables;
State Register of Mortgages;
State Register of Agreements;
State Land Register.
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FINANCING OF REAL ESTATE
Private investment
Bank loans
Construction financing funds and real estate operations funds
Institutions of joint investment
Agreements on joint activity
Bonds and options
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REAL ESTATE TRANSACTIONS
Acquisition of realestate
Land plot acquisition
?
Moment of origin of ownership title
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REAL ESTATE TRANSACTIONS
Asset deal
Advantages:The purchaser acquires assets and it does not succeed to any debts and liabilities of the seller.
Disadvantages:It is necessary to re-register ownership to real property;The date of formalizing the ownership title may be postponed (2-3 weeks for building, 4-6 months for land plots);In case of the sale of a real estate object built on a leased land plot, a land lease agreement in practice will not be automatically assigned to the new owner of the real estate;In the event of sale of a land plot, construction documents and other permits for construction activities on a land plot may not be automatically transferred to the new owner;Increased transaction costs (state fees and payment to the State Pension Fund) amount to 1% + 1%;Purchase price is subject to VAT;Limitations for foreign capital in respect of land relations;Ukrainian law is applicable to an agreement since the property is located in Ukraine.
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REAL ESTATE TRANSACTIONS
Share deal
Advantages:
A relatively fast procedure for registration of documents necessary for transfer of corporate rights (5 days under the law);An offshore exit is possible;It is not necessary to re-register the right of ownership to real property;Land lease agreement remains;All licenses, building permits, project documentation and other permits for a planned investment project remain in force;VAT does not apply;Low transaction costs;No limitations for acquisition by foreign investors;Foreign governing law and foreign arbitration may be considered.
Disadvantages:
A due diligence of the target company is necessary;A permit from the Antimonopoly Committee may be necessary.
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REAL ESTATECONSTRUCTION
Stages of developing a construction project:
obtaining a land plot for construction;
obtaining a construction permit;
obtaining initial data for design works;
approval of design;
obtaining a permit for execution of construction works;
construction itself;
acceptance of construction works;
putting object into operation;
conducting technical inventory;
registration of ownership rights to the object.
www.Lp.ua 19.09.2008- 11 -
Swiss-Ukrainian Business Forum, 18th September 2008
Thank you!Konstantin PilkovSenior Associate"Lavrynovych & Partners" Law Firm14/24, Klovskiy uzviz,of.101, Kyiv, 01021, Ukraine
tel.: 380-44-494-27-27fax: [email protected]
www.Lp.ua 19.09.2008- 12 -
Copyright © Osec 2008. Alle Rechte vorbehalten.
SIPPO Swiss Import Promotion Programme
• SIPPO Swiss Import Programme is a mandate of the Swiss Government, underthe patronage of State Secretariat of Economic Affairs SECO
• The mandate is being caried out by Osec for the period 2008 - 2011.
• Promotion of exports from selected transition markets to CH and EU
• Contribution to the integration of transition markets into the international market
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Countries supported by SIPPO Programme
• Colombia, Peru
• Ghana, South Africa
• Egypt, Jordan
• Albania, BIH, Serbia, Macedonia, Montenegro, Ukraine
• Indonesia, Vietnam
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• Agricultural products and processed food,
• Fish, herbs, fruits & vegetables,
• Home interior design, Furniture,
• Jewellery, Handicrafts, Toys
• Fashion & clothes, Home textile,
• Technical products (Timber for industrial purposes, metal and plastic processing,
electronic components, machine parts, software applications)
Sectors involved in trade promotion activities
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Services offered by SIPPO Programme• O Information ServicesTrade and market information, such as importing
rules, product / branch overviews
• O Technical AssistanceTrainings, Workshops on: Design & quality,
norms & standards, export marketing
• O Match Making ServicesCollective stands at leading international trade
fairs, Buyer & Selling Missions, Direct business partner search, Road Shows
EXPORT
Buying Missions
Selling MissionsTrade fairs
Direct Business Partner search
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Trade promotion – a process of added value
Analyse Trends &
OpportunitiesDiscover niche products and market needs
Identify Companies
Increase of core
competences Product
adaptation, Transfer of marketing know how
Matching of Exporters & Importers
Follow –up Support
Creating value by moving companies through the process
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• O All projects open (involved now - companies from sectors:Home interior design, Software Applications, Technical Products)
• O Conditions (SME, private businesses, export ready products or services, no international market experience and network)
• O How to apply – www.sippo.ch email: [email protected]
Osec
SIPPO Swiss Import Promotion Programme
Stampfenbachstrasse 85
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Projects open to Ukrainian companies
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An example:
• In Cooperation with Swiss Procurement Forum and USPP, Kiev - Procurement mission for Swiss companies active in the machine building sector 07 -13 September 2008
• Visits to Donetsk and Odessa – Meetings with approx 30 Ukrainian companies,
• 9 Ukrainian suppliers visited at place
• Drawings and request for offers to be sent to some potential Ukrainian suppliers•
Find a cooperation partner in Ukraine