When preparing the purchase and sale of corporate rights (shares in the authorised capital of an LLC, shares) of a Ukrainian company, it is imperative to consider the issue of taxation of such a transaction. After all, the notary does not act as a tax agent when notarising the deed, and the parties may receive income, the need to declare which and the corresponding taxation of which they may forget (or do not think about).

According to subparagraph 170.2.2. paragraph 170.2 of Article 170 of the Tax Code of Ukraine, investment profit is calculated as the positive difference between the income received by the seller from the sale of an investment asset, taking into account the exchange rate difference (if any) and its value, which is determined from the amount of documented expenses for the purchase of such an asset or the value of the investment asset according to the relevant tax return.

Thus, if the seller contributed one amount (for example, UAH 100,000) to the authorized capital as a contribution or paid the same amount when purchasing corporate rights, and then:

• sold the same corporate rights for the same amount (100,000 UAH), then no income arose;
• sold the same corporate rights for a larger sum (for example, 130,000 UAH), then the taxable income is equal to 30,000 UAH;

sold the same corporate rights for a smaller amount (80,000 UAH), then there is no income, but an investment loss arises, however, the buyer may have taxable income in the amount of 20,000 UAH.

According to subparagraph 170.2.1, paragraph 170.2, Article 170 of the Tax Code of Ukraine, the reporting period for financial transactions with investment assets is the year for which the tax return is filed.

Tax rate according to Article 167 of the Tax Code of Ukraine: 18%.

It should be taken into account that, according to subparagraph 170.2.8 paragraph 170.2 Article 170 of the Tax Code of Ukraine, investment income that does not exceed the amount specified in subparagraph 169.4.1 paragraph 169.4 of Article 169 of the Tax Code of Ukraine is not taxed and is not subject to declaration .

It should be taken into account that, according to subparagraph 170.2.8. paragraph 170.2 Article 170 of the Tax Code of Ukraine, investment income that does not exceed the amount specified in subparagraph 169.4.1 paragraph 169.4 of Article 169 of the Tax Code of Ukraine is not taxed and is not subject to declaration.

It is necessary to take into account that the taxation of the purchase and sale of affiliates, controlled foreign companies for such transactions may be different and requires a detailed analysis of the introductory conditions and consultation with a lawyer or auditor.
The purchase of company rights at a reduced price requires special attention and legal advice if 1) the seller’s investment costs were higher than the price under the sale and purchase agreement; and/or 2) the market value of the enterprise or enterprise rights is higher than the price of the corresponding enterprise rights under the sale and purchase agreement.

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The State Tax Service stated in the individual tax advice, that in such a case the beneficial owner still submits a CFC report, including data up to the date of loss of control over the foreign company.

The post Post-sale CFC report first appeared on Zilver.

The issue of double taxation is faced by citizens who have moved to a permanent place of residence in another country, as well as companies that receive income in two countries.

In order to resolve the issue of double taxation, countries sign relevant conventions (or agreements) on the avoidance of double taxation (hereinafter – “DTT”). Here are links on DTT of Germany, Ireland, Austria, Switzerland, USA, UK.

The content of conventions between different countries can vary greatly, while the structure of the conventions is often similar.

The main models of taxation according to the DTTs can be the following:

1. Income is taxed in only one country.
2. Income is taxed in both countries, but in the “second” country the amount of tax is reduced by the amount of tax paid in the “first” country. At the same time, which country is the “first” and which is the “second” is determined in the relevant article of the agreement between the countries.
3. Income is taxed in both countries, but in the “second” country the amount of tax cannot exceed a certain rate.
4. Income is taxed in both countries.

DTT have an article that defines the list of taxes to which such an treaty applies. They are usually listed in Art. 2 of the treaty. Social security taxes and duties a well as municipal taxes not included in this list do not get double taxation preferences; they will have to be paid (with rare exceptions).

Separate articles of the double taxation agreement define the taxation procedure for certain types of income (income from immovable property, business profits, dividends, interest, royalties, etc.). Accordingly, each separate article regulates the taxation of a particular type of income: in which country and how it is taxed, whether the tax paid in one country is applied when taxed in another country.

If separate articles do not define the procedure for taxing a particular type of income, or, according to such an article, double taxation is not excluded, then a special article (usually No. 23) of the agreement is applied, which is called “Elimination (also: avoiding) double taxation”. It also determines how a particular income is taxed.

Accordingly, in order to apply the provisions of the double tax treaty, the taxpayer must submit to the tax authorities a certificate of tax residency in another state and / or a tax return confirming the payment of relevant taxes in another state.

For professional resolution of issues with specific situations, we strongly recommend contacting tax lawyers and tax consultants.

Examples of the work of our lawyers on the issue of double taxation :

Protected from double taxation

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How are dividends paid by Ukrainian companies to their founder in Austria taxed?

The issue is more related to double taxation and the ability to minimize the tax burden on dividends paid. 

What taxes are provided under Ukrainian law?

From dividends paid to individuals (including non-residents), the tax on individuals is withheld at the rate of:

– 9% if the profit is distributed by a non-resident non-payer of income tax (p.167.5.4. P. 167.5 of Article 167 of the Tax Code Ukraine);

– 5% if the profit is distributed by a resident-payer of income tax (p.167.5.2. P. 167.5 of Article 167 of the Tax Code of Ukraine);

– 1.5% military tax (paragraph 16-1 of subsection 10 of section XX of the Tax Code of Ukraine). 

Dividends paid to legal entities (including non-residents) are subject to income tax at the rate of 15% (subparagraph 141.4.1 paragraph 141.4 of Article 141 of the Tax Code of Ukraine). 

Avoidance of double taxation

Under the Convention between the Government of the Republic of Austria and the Government of Ukraine for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (hereinafter referred to as the “Convention”), dividends shall not be taxed twice.

According to Art. 10 of the Convention, dividends are taxed in the country from which the dividends are paid. They may also be taxed in the recipient’s country, but not more than:

• 5% of the total amount of dividends, if the actual owner of the dividends is a company that directly owns at least 10% of the capital of the company that pays dividends;
• 10% of the total amount of dividends in all other cases.

Accordingly, when a Ukrainian company pays dividends to an Austrian participant, taxes will be paid in Ukraine in accordance with the Tax Code of Ukraine, and in Austria the tax burden should be limited to 5% or 10% depending on individual conditions.

Please note that in order to use the Convention, you must obtain a certificate of taxes paid in Ukraine (or claim the decisions of the Ukrainian tax authorities).

For legal assistance in working with foreign companies, payment of dividends abroad, appeals against the results of tax audits, you can contact the law firm “Zilver”: +380501409560 (Viber, WhatsApp, Telegram), e -mail: info@zilver.com.ua  

We also recommend that you read the legal advice:

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Regardless of the type of activity, all Ukrainian companies pay:

• Income tax or Single tax.
• VAT (only those who are VAT payers).
• Taxes and fees on salaries: income tax, military tax, single social contribution.

Depending on the taxes paid (income tax vs. single tax, income tax and VAT vs single tax), there are “general taxation system” and “simplified taxation system”.

LLCs pay the following taxes:

1. General taxation system:
   1. Income tax – 18%.
   2. VAT – 20%
2. Simplified taxation system (* conditions see below):
   1. VAT payer:
      1. The single income tax is 3%.
      2. VAT – 20%
   2. VAT non-payer:
      1. The single income tax is 5%.
      2. VAT – no.

In addition, investors should keep in mind that, regardless of the tax system used, employees’ salaries will be taxed as follows:

1. Personal income tax: 18% (payable)
2. Military tax – 1.5% (charged from salary)
3. Unique social contribution – 22% (charged from the payroll)

Thus, the payment of a salary of UAH 1,000. will mean for LLC:

1. Transfer of a “net” salary to an employee – UAH 805. (1000 – 18% – 1.5%)
2. Transfer of taxes withheld from salary – 195 UAH. (18% + 1.5% of 1000)
3. Transfer of the single social contribution deducted from the wage fund (company funds) – UAH 220 (1000 * 22%)

** read below about the use of FOP with a tax burden of 5% + SSC.

* Only those LLCs may sue a simplified system of taxation, which:

1. Do not include in their founders companies that are not payers of the unique (single tax), which own a 25% or more share in the authorized capital of LLC (see paragraphs 291.5.5. Paragraph 291.5 of Article 291 of the Tax Code of Ukraine)
2. Whose annual income does not exceed 1167 minimum wages set as of January 1 of the tax (reporting) year (in 2021 6000 * 1167 = 700200 UAH.)
3. Do not engage in certain activities (gambling, currency exchange, production and sale of excisable goods, etc. – see paragraph 291.5 of Article 291 of the Tax Code of Ukraine)
4. Do not have a tax debt (see Item 291.5.8 item 291.5 of Article 291 of the Tax Code of Ukraine)
5. (For details, see Article 291 of the Tax Code of Ukraine)

** If the LLC transfers funds as payment for services / works / goods to Sole proprietor, the following amounts are taken into account and taxed personally by the sole proprietor:

1. On the simplified system (3 groups) – 5% (single tax, excluding VAT) or 3% (single tax) + 20% (VAT, taking into account the system of tax credit formation). Additionally, the SSC is paid monthly (possibly: the minimum rate).
2. In the general system – 18% (income tax) + 1.5% (military tax) + 20% (VAT, including the system of tax credit).

In practice, 3 groups, non-payers of VAT, are most often used, so they pay a single tax of 5% of the amount of income and a single social contribution (minimum monthly rate 22% of the minimum wage, for example, with a minimum wage of UAH 6,000, the minimum SSC rate is UAH 1,320).

Depending on the type of activity, sales, founders and other conditions, different types of taxes and different rates may apply. Therefore, in the framework of this legal advice, excise duties, customs duties, land taxes were not considered.

Regarding taxation, legal assistance in developing business plans, appealing the results of tax audits, you can contact the specialists of the law firm “Zilver” by phone: +380501409560, Email: info@zilver.com.ua

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What is a CFC (controlled foreign company)?

CFC is a company registered in a foreign state or territory that is recognized as such and is under the control of a resident of Ukraine (a legal entity, or an individual living in Ukraine for more than 183 calendar days of 365). The CFC category includes not only legal entities but also partnerships, trusts, foundations and charitable organizations, i.e. formations without legal entity status.

In this case, a foreign company shall be deemed to be controlled if a resident of Ukraine:

– owns a share in a foreign company in the amount of 50% or more, or

– together with other residents of Ukraine, owns a share in a foreign company, which is at least 25% (during the transitional period of application of the Law 2021-2022), later – at least 10%, provided that several residents of Ukraine own shares in a foreign legal entity, the amount of which is 50 percent or more in aggregate, or

– separately or jointly with other residents – related parties, exercises effective control over a foreign company.

If these conditions are not observed, the company will not be recognized as controlled, and there will be no consequences for such a shareholder (member) in the form of reporting and special taxation.

What are the consequences of owning a CFC?

If you are the owner of a CFC, the following obligations arise: to file reports and, under certain conditions, pay taxes.

Each CFC owner shall annually file a CFC report, as well as notify the tax service of any change in the status of the controller of a foreign structure (acquisition of a share in a foreign legal entity or effective control, alienation of a share or termination of effective control, creation, acquisition, liquidation or alienation of property rights in the assets of entities without legal entity status).

The CFC report shall contain data on the company: country of incorporation, ownership structure, information on income, employees and movement of funds.

The report based on the results of 2021 shall be filed for the first time in 2022.

The obligation to pay consolidated taxes on CFC’s profits in Ukraine arises excluding any of the following exceptions:

1. The CFC was established in a country with which Ukraine concluded an agreement on the avoidance of double taxation, exchange of tax information and one of the following conditions was fulfilled:

– The CFC shall actually pay income tax at an effective rate that shall be no less than a base rate (18%) or at a rate of at least 13%, or

– more than 50% of CFC’s income shall be active.

2. The total income of all CFCs of one controlling person shall not exceed EUR 2 million.
3. CFC shall be a public company listed on a recognized exchange;
4. CFC shall be an organization that, in accordance with the legislation of the relevant foreign jurisdiction, carries out charitable activities and does not allocate income in favor of its founders (members).

Nevertheless, if a foreign company does not meet the above criteria, and a resident individual will be a controller as per the criteria, it will be necessary to pay tax on the CFC’s unallocated profit.

Penalties are established for failure to file the report or late filing of a CFC report, failure to notify the acquisition of a share in a foreign company or the establishment of effective control (applied from 2023).

For details about opening a company abroad, filing reports and disputes with tax services, you can contact the Zilver Law Firm specialists: +380501409560, info@zilver.com.ua.

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After 10 working days from the date when the inspection report was given to the company, the head of the supervisory authority shall issue the tax assessment notice that specifies the violations of the tax legislation and the amount of tax obligations (fines and penalties) that shall be accrued to the company for payment.

If the company does not agree with the accrued tax obligations, it is necessary to appeal against such decisions (tax assessment notice, tax order).

The current legislation of Ukraine (the Tax Code of Ukraine, the Code of Administrative Court Procedure of Ukraine) provides for such options for appealing against the actions of tax authorities as administrative appeal and judicial appeal:

• The administrative appeal is the filing of complaints to the bodies of the State Fiscal Service of Ukraine (to a higher authority). Usually, such appeal is ineffective and is used only for saving time to prepare and file a claim to the court (without charging penalties and fines for failure to pay the accrued tax obligations).
• The judicial appeal is the filing of a claim (suit) to the appropriate administrative court.

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