Tax structuring of inbound investments to UkraineSep 18, 2008 · Tax structuring of inbound investments to Ukraine Sergey Popov, Partner, KPMG Ukraine Switzerland, 18 September 2008

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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


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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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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NonNon--ResidentResident

DividendsDividends

InterestInterestRoyaltiesRoyalties

15% WHT unless mitigated under DTT15% WHT unless mitigated under DTT

Capital gainsCapital gains

LiquidationLiquidationproceedsproceeds

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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

www.Lp.ua 19.09.2008- 3 -

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”

www.Lp.ua 19.09.2008- 4 -

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.

www.Lp.ua 19.09.2008- 5 -

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.

www.Lp.ua 19.09.2008- 6 -

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

www.Lp.ua 19.09.2008- 7 -

REAL ESTATE TRANSACTIONS

Acquisition of realestate

Land plot acquisition

?

Moment of origin of ownership title

www.Lp.ua 19.09.2008- 8 -


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.

www.Lp.ua 19.09.2008- 9 -


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.

www.Lp.ua 19.09.2008- 10 -

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


Countries supported by SIPPO Programme

• Colombia, Peru

• Ghana, South Africa

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• Indonesia, Vietnam


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• Technical products (Timber for industrial purposes, metal and plastic processing,

electronic components, machine parts, software applications)

Sectors involved in trade promotion activities


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

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fairs, Buyer & Selling Missions, Direct business partner search, Road Shows

EXPORT

Buying Missions

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• O How to apply – www.sippo.ch email: [email protected]

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SIPPO Swiss Import Promotion Programme

Stampfenbachstrasse 85

POB 2407

CH -8021 Zurich

Projects open to Ukrainian companies


An example:

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• Visits to Donetsk and Odessa – Meetings with approx 30 Ukrainian companies,

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Find a cooperation partner in Ukraine

Documents

Tax structuring of inbound investments to UkraineSep 18, 2008 · Tax structuring of inbound investments to Ukraine Sergey Popov, Partner, KPMG Ukraine Switzerland, 18 September 2008