Provisions of the Tax Code of Ukraine on Corporate Income Tax Returns

In this article, we will try to understand the nuances and intricacies of taxpayers applying the provisions of sub-paragraph 140.5.4 of the Tax Code of Ukraine when preparing profit tax declarations for the reporting periods of 2018.

This sub-paragraph (as amended effective 01.01.2018) requires the adjustment (reduction) of financial expenses for the purpose of preparing the profit tax declaration by 30% of the value of goods (works, services) acquired from:

1. Non-profit organizations included in the Register of Non-profit Institutions and Organizations as of the date of such acquisition.
2. Non-residents registered in countries included in the List approved by Resolution of the Cabinet of Ministers of Ukraine No. 1045 dated 27.12.2017 (hereinafter – List No. 1045).
3. Non-residents whose organizational and legal form is included in the List approved by Resolution of the Cabinet of Ministers of Ukraine No. 480 dated 04.07.2017 (hereinafter – List No. 480).

However, each of the three aforementioned groups of counterparties has its own peculiarities, which we will try to clarify below.

Acquisition of goods (works, services) from non-profit organizations

The restrictions provided for by this sub-paragraph may not be applied by the taxpayer if the total amount of goods (works, services) received by the taxpayer from such non-profit organizations cumulatively during the tax year does not exceed 25 times the minimum wage established by law as of January 1 of such tax year – for 2018, this limit is UAH 93,075.

Furthermore, if such goods (works, services) were acquired by the taxpayer from a non-profit organization that is a budgetary institution, the "30-percent limitation" provided for by sub-paragraph 140.5.4 does not apply at all (regardless of the amount of such acquisition).

A similar exception is provided for a non-profit organization that is an association of insurers, if the insurer's participation in such an association is a condition for the insurer's activity in accordance with the law.

Acquisition of goods (works, services) from non-residents according to List No. 1045

This List came into force on 01.01.2018. Initially, 85 countries were included in it. However, by Resolution of the Cabinet of Ministers of Ukraine No. 108 dated 31.01.2018, which came into effect on 07.03.2018, 5 countries were excluded from this List: Georgia, the Republic of Estonia, the Republic of Latvia, the Republic of Malta, and Hungary. Thus, in 2018, we have two different periods ("before 06.03.2018" and "from 07.03.2018"), in which different applications of sub-paragraph 140.5.4 of the Tax Code of Ukraine are possible in the context of List No. 1045.

Unfortunately, the current tax legislation of Ukraine does not establish clear time limits for the application (non-application) of tax legislation norms for cases of excluding certain countries from the list of low-tax jurisdictions (unlike, for example, the List of specific organizational and legal forms of non-residents) – sub-paragraph 39.2.1.2 of the Tax Code of Ukraine defines such time limits only for cases of including new countries in this list (and even then, only for the purpose of classifying relevant operations as controlled). Therefore, in this situation, we have to rely on the viewpoint of the controlling authorities.

From Letter of the SFS dated 02.05.2018 No. 12908/7 / 99-99-15-02-01-17, it follows that the 30% limitation on the formation of "tax expenses" provided for by sub-paragraph 140.5.4 of the Tax Code of Ukraine should apply only to operations involving the acquisition of goods (works, services) from residents of Georgia, Latvia, Estonia, Malta, and Hungary, carried out in the period from 01.01.2018 to 06.03.2018.

Acquisition of goods (works, services) from non-residents according to List No. 480

Unlike the first two groups of counterparties, this group appeared in sub-paragraph 140.5.4 of the Tax Code of Ukraine only from 01.01.2018. List No. 480 includes 95 organizational and legal forms of non-residents from 26 countries, the acquisition of goods (works, services) from whom by a taxpayer requires the taxpayer to adjust (reduce) "tax expenses" by 30% of their value. Moreover, the provisions of sub-paragraph 140.5.4 of the Tax Code of Ukraine are drafted in such a way that the need to adjust "tax expenses" arises for the taxpayer from any operations of the taxpayer related to the acquisition of goods (works, services) from non-residents included in List No. 480.

In this regard, attention is drawn to the last paragraph of sub-paragraph 39.2.1.1 of the Tax Code of Ukraine – "if a non-resident, whose organizational and legal form is included in the list approved by the Cabinet of Ministers of Ukraine in accordance with sub-paragraph 'g' of this sub-paragraph, paid profit tax (corporate tax) in the reporting year, the taxpayer's business operations with them, in the absence of criteria defined by sub-paragraphs 'a' – 'c' of this sub-paragraph, are recognized as uncontrolled" (it is worth noting that List No. 480 itself was adopted "in accordance with sub-paragraph 'g' of sub-paragraph 39.2.1.1 of the Tax Code of Ukraine").

The SFS believes that if a non-resident provides a relevant certificate confirming the payment of profit tax (corporate tax) by them, the taxpayer's operations with such a non-resident will not be considered controlled, even if the organizational and legal form of such a non-resident is included in List No. 480.

However, unfortunately, from a formal point of view, such an exception (in case of confirmation by the non-resident of profit tax payment) is not mentioned for the purposes of applying the provisions of sub-paragraph 140.5.4 of the Tax Code of Ukraine. Therefore, for now (until relevant clarifications from the SFS appear), we would not recommend taxpayers to ignore the requirements of sub-paragraph 140.5.4 for operations involving the acquisition of goods (works, services) from non-residents included in List No. 480, even if such a non-resident provides documentary confirmation of their payment of profit tax (corporate tax) in the reporting period.

In addition to the specific nuances of applying the provisions of sub-paragraph 140.5.4 of the Tax Code of Ukraine for each of the aforementioned groups of counterparties, there are also a number of other quite important nuances (common to all three groups of such counterparties), which we will discuss in more detail in our other article.