Earlier, the Cabinet of Ministers of Ukraine also changed the list of legal forms of non-residents that do not pay profit tax and/or are not tax residents in the countries of their registration. In our article, we take a detailed look at all the TP-related changes in Ukraine.

Implementation of BEPS actions

A large portion of the TP-related changes in Ukraine concerns the long-awaited implementation of the BEPS Plan actions into the country’s tax law. Thus, the new legislation adopts the three-level structure of TP documentation according to Action 13 of BEPS. Hence, TP documentation shall consist of a master file, local file and a Country-by-Country Report (CbCR). In addition, Ukrainian entities of multinational companies (MNCs) will have to file notification about their participation in international groups of companies.

The suggested TP-related changes in Ukraine are generally in line with BEPS recommendations. Yet there are also some differences. For instance, although it envisages a general threshold of EUR 750 million and the presence of one circumstance, listed in the corresponding article, for submitting a CbCR, the master file may be requested by Ukrainian tax authorities if the annual consolidated group revenue is equal to or exceeds EUR 50 million.

The Draft Law introduces new penalties for failure to comply with the added reporting requirements, which may be quite significant. They are linked to subsistence wage amounts, which are gradually revisited. For example, the penalty for failure to submit a CbCR equals 1,000 times the subsistence wage, which would currently amount to UAH 2 million (roughly EUR 74,000 under the current exchange rate).

Business purpose

An important new feature is the introduction of the principle of business purpose for transactions. It means that taxpayers will be obliged to prove in TP documentation that controlled transactions on acquiring works (services), intangible assets, and items other than goods have a clear business purpose. The tax authorities may disregard transactions without a reasonable business purpose when calculating the base for profit tax.

Deemed dividends

According to the adopted TP-related changes in Ukraine, the amount of TP adjustment that increases the tax base in Ukraine may be treated as a deemed dividend distribution. Such dividend distribution would be subject to withholding tax (WHT) in Ukraine at the regular WHT rate of 15%, unless otherwise provided for by applicable double tax treaties.

Independence threshold

The threshold for recognising parties as related parties would be raised to 25% as compared to the current threshold of 20%. This change would bring Ukrainian legislation closer to dominant international practice.

List of business transactions that fall under TP control

It is specified that taxpayers should also report on transactions that reduce their income and/or financial result as a result of the full/partial, irrevocable/temporary transfer of functions together with (or without) tangible and/or intangible assets, benefits, risks and opportunities to another taxpayer (to another person), regardless of whether such transactions are reflected in accounting or not.

Special TP-related changes in Ukraine for commodities

The Draft Law introduces new rules for transactions with commodities. Namely, taxpayers would need to apply “quoted prices” for the TP analysis of some transactions with commodities. Quoted prices are defined as pricing data, which includes exchange quotations and price indices published by recognised agencies, statistical and government agencies. Also, taxpayers carrying out such transactions with commodities should notify the tax authorities upon the conclusion of the relevant contract.

The list of commodities subject to these rules as well as the procedure for applying the quoted prices would be adopted by the Cabinet of Ministers of Ukraine.

Introduction of rules for controlled foreign corporations

There are also some other changes, including the introduction of rules for controlled foreign corporations (CfC), which are new to Ukrainian legislation. In particular, along with the general provisions and explanations, it is stated that the tax authority may oblige the controlling entity to provide TP documentation on the transactions of CfC with related non-residents or with non-residents that fall under the Ukrainian list of low-tax states or the list of legal forms (covering fiscally transparent entities), if the total volume of transactions with such entity exceeds UAH 10 million (roughly EUR 345,000) per calendar year and the annual income of the CfC exceeds UAH 150 million (roughly EUR 5.2 million) per calendar year. If the TP documentation and/or copies of primary documents are not submitted, the tax authority increases the pre-tax profit of the CfC by 30% of the income/expenses for which the TP documentation/copies of primary documents were not submitted.

Also, the controlling entities are obliged to submit a report on the CfC and reports on the acquisition or termination of participation in the CfC.

Adjustment of financial result for tax (reporting) period

The Draft Law provides for the 30% adjustment of the financial result of the taxpayer, not only when purchasing but also when selling goods (including fixed assets), works and services (transactions that are not deemed controlled) to non-residents that fall under the Ukrainian list of low-tax states or the list of legal forms (covering fiscally transparent entities). However, such requirements would not be applicable if the transactions are controlled for TP purposes, or even for uncontrolled transactions, if the taxpayer still opts to confirm that the pricing is at “arm’s length”.

Also, the financial result of the tax (reporting) period should be increased by the amount of expenses incurred by the taxpayer in transactions with non-residents if such transactions do not have a business purpose.

Introduction of all the changes specified above

If enacted, such changes will come into effect from 1 January 2021. Even if the President of Ukraine vetoes the Draft Law, we expect that the BEPS-related amendments will still be introduced soon as a separate law comprising most of the rules outlined above.

Important changes to the list of legal forms of non-residents

The list of legal forms of non-residents that do not pay profit tax and/or are not tax residents in the countries of their registration has been changed as well.

Starting from 1 January 2020, the list of such legal forms of non-residents registered in Austria, Germany and Poland is as follows (additions to the list marked with italics):

The Republic of Austria

The Federal Republic of Germany

The Republic of Poland

For now, such new lists of legal forms of non-residents should be considered by the taxpayers when preparing TP documentation and reports on TP, as well as for the purpose of the 30% adjustment of the financial result. But, as we can see from Draft Law No. 1210, the amendments to such lists could affect TP rules significantly from 2021.

If you would like to know more about the latest TP-related changes in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

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By 1 January 2019 several important changes to the Estonian Income Tax Act are to be expected. Although the exact wording of the new law is not yet agreed, we can provide some insight into the draft law published in April this year.

In April 2018, the Estonian Ministry of Finance published its plans for changes to the Estonian Income Tax Act with the purpose of introducing measures against aggressive tax planning as proposed by EU Directive 2016/1164. This brings the following well-known concepts to Estonian tax laws: taxation of excessive borrowing costs (thin capitalisation), CFC and exit tax. Amendments are also being made to the general anti-avoidance regulation (GAAR), enabling the tax authorities to more easily set aside different legal structures (such as debt pushdown) and follow the principle of substance over form in a more resolute manner.

As the exact wording of the new regulation is not yet agreed, we can only provide some insight into the current version of the draft bill. Nevertheless, changes to the Estonian Income Tax Act will surely be implemented by 1 January 2019.

Thin cap according to the planned changes to the Estonian Income Tax Act

A well-known problem has been that profit generated by profit centres is shifted to some other entity through excessive interest costs. To give an example, an Estonian profit centre that receives a loan must pay loan interest. According to the planned changes to the Estonian Income Tax Act, loan interest is deemed to be not economically justified (not related to the business of the borrower) when it exceeds certain thresholds. As a result, excessive interest payments will attract corporate income tax. This targets Estonian entities with a high ratio of interest costs and which are profitable. Real estate developers may be one focus group for this regulation.

The following three criteria are taken into account in assessing whether loan interest is excessive or not:

• Excessive borrowing costs exceed EUR 3,000,000. Excessive borrowing costs means the amount by which the borrowing costs of an entity exceed the profit it makes from interest and equivalent sources. In addition to ordinary loan interest, a variety of payments with similar economic content will be taken into account as well (eg payments from convertible bonds, financing costs of a finance lease). Earning high interest income enables the entity to stay below the threshold. As the threshold is quite high, the new rules are designed not to affect smaller entities.
• Excessive borrowing costs exceed 30% of EBITDA. The law provides a formula for calculating EBITDA. This excludes income which would be tax-exempt upon distribution (eg participation exemption dividends which can be paid tax-exempt under section 50 sub-section 11 of the Estonian Income Tax Act).
• Profitability of the entity paying interest. If an entity paying interest has negative profitability and excessive borrowing costs that exceed EUR 3,000,000 and 30% of EBITDA do not exceed losses, there will be no need to pay tax. However, if the borrowing costs exceed losses, income tax liability may kick in to the respective extent. If the entity has been profitable, income tax falls due on excessive borrowing costs over EUR 3,000,000 and 30% of EBITDA.

Exceptions

A taxpayer that is a member of a consolidated group for financial accounting purposes can apply one of the following exceptions if it is more tax efficient compared to the above:

• Excessive borrowing costs are not taxed if the taxpayer can demonstrate that the ratio of its equity over total assets is equal to or higher than the equivalent ratio of the group (a 2% difference is allowed). This applies if the whole group is financed heavily with loans and there is no reason to assume that the purpose of financing the Estonian entity is to shift profits. To apply this exception, the assets and liabilities must be assessed based on the same methods for the whole group.
• This exception enables application of a higher monetary threshold to excessive borrowing costs as described above. This is calculated based on excessive borrowing costs related to third parties, group EBITDA and EBITDA of the entity.

Click here and read the full article about the planned changes to the Estonian Income Tax Act, including exit tax, CFC and GAAR on the homepage of Sorainen, the exclusive partner of WTS Global in Estonia!

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Romanian Fiscal Code was amended starting 1 January 2018 for transposing the provisions of Directive 2016/1164/EU of 12 July 2016. The new rules concerning also Romanian corporate income tax are intended to address tax evasion.

The most significant revisions to the Romanian corporate income tax

With few exceptions, the exceeding borrowing costs (calculated as the difference between any debt-related costs, including foreign exchange losses, debt-related costs about loans granted by financial institutions, capitalized interest – and the interest income and other equivalent income) incurred in a fiscal period, which exceed the deductible threshold of EUR 200,000 will be deductible for corporate income tax (CIT) up to the limit of 10% of a fiscal EBIDTA. In case of a negative fiscal EBITDA, only the costs up to the threshold of EUR 200,000 are deductible. Non-deductible exceeding borrowing costs are fiscally carried forward for an unlimited period.

A possible increase of the threshold from EUR 200,000 to EUR 3,000,000 is currently under discussion at the Romanian authorities level.

Exit taxation was introduced in Romania in cases of transfer of assets, tax residence and/or economic activity carried out through a permanent establishment for which Romania loses the right to tax. The tax base for 16% CIT is computed as a difference between the market value of the assets transferred and their fiscal value.

Existing General anti-abuse rule stipulated by the art 11 of the Fiscal Code was strengthened. According to this rule tax authorities can ignore a series of arrangements which have been put into place with the sole aim of obtaining a tax advantage, but such decisions should be justified.

Controlled Foreign Companies (CFC) Rules

Under these rules, a Romanian taxpayer should include in its taxable base, in proportion with its holding in the controlled foreign company, the latter’s non-distributed income derived from: interests, royalties, dividends, income from disposal of shares, income from financial leasing, from insurance and financial activities, income from certain transactions performed with associated companies. CFC is an entity held, directly or indirectly, more than 50% by the Romanian taxpayer, entity paying a lower CIT than the difference between CIT that would have been charged for the entity under the applicable Romanian law provisions, and the actual CIT paid.

Tax on micro-company revenues

Starting 1 January 2018, all companies which obtained in the previous year revenues up to RON equivalent of EUR 1,000,000 at the exchange rate valid at the year end, which are not owned by the state and are not in dissolution/ liquidation procedure have been obliged to apply micro-companies tax instead of Romanian corporate income tax.

Micro-companies tax is computed based on total revenues obtained, to which a percentage of 1% in case of companies with 1 employee, or 3% in case of companies with no employees is applied. The level of expenses recorded does not influence the taxable base in this fiscal regime, affecting businesses with low mark-up. Moreover, fiscal losses cannot be carried forward during the period in which the company applies micro-company tax regime, affecting businesses in set-up / investment phase.

In order to limit the disadvantages of micro-company tax, the Ordinance 25 published on 30 March 2018 introduces an exception to the rule above, allowing companies with a share capital of at least RON 45,000 (roughly EUR 9,600) and at least 2 employees to opt for becoming a Romanian corporate income tax payer starting 1 April 2018.

If you would like to know more about the regulation of Romanian corporate income tax, please visit the homepage of Ensight, the exclusive representative of WTS Global in Romania.

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