Law No. 466-IX of 16.01.2020 introduced numerous changes to the tax legislation of Ukraine. Such changes include, but not limited to, the rules of collecting corporate tax from a Ukrainian company if it gets revenues from “offshore” companies or certain organizational and legal forms of companies in certain countries.

In particular, the financial result is now increased by 30% of the value of goods (including non-current assets), works and services (except for controlled ones) sold to the benefit of:

  1. Non-residents registered in the list established by the Cabinet of Ministers of Ukraine.
  2. Non-residents whose organizational and legal form is included in the list approved by the Cabinet of Ministers of Ukraine.
  • It should be noted that these lists are reviewed from time to time.

It means that if certain conditions coincide, the sale of the software to your controlled company in the State of Delaware (USA) or Estonia will mean a mandatory additional accrual of profits amounting to 30% of the sale amount. Thus, the legislator tries to exclude the possibility of accumulating profit abroad without its taxation in Ukraine.  

It means that if a Ukrainian Limited Liability Company sells software to an Estonian company for resale in the EU, or to a Delaware company for resale in the USA, the received profit will have to be multiplied by the coefficient of 1.3 when charging corporation tax.

At the same time, there are several “BUTs”:

  1. Actually the first list is clear as in most cases the offshore jurisdictions (including the Republic of Cyprus, an EU member state) are stated there, but the second list requires more detailed study. This list mainly includes partnerships and limited partnerships that are exempt from taxation. However, the list includes such forms as:

– Lepinguline investeerimisfond – Republic of Estonia;

– Limited liability partnership and Limited liability company – the states of Delaware, California, Nevada, New Jersey, New York, Texas, Florida.

That is why it is reasonable for you to check your company to see whether its organizational and legal form is in the approved list. In most cases, IT-companies use other organizational and legal forms, which means that the new paragraph of the Tax Code of Ukraine shall not be applied and additional corporation tax shall not be charged.

  1. If the organizational and legal form from the list coincided with the form of your company, to avoid additional accruals you should have a confirmation that the price is formed in accordance with the arm’s length principle. A lot has been written about this principle, it can be briefly described as the “market price principle”. In other words, it is necessary to prepare and have proof that the price is fair, not undervalued.

Since the price formation in the IT-sphere is not always subject to an objective assessment by an outside party, it is undesirable to let the situation get to the stage described in Clause 2. Any disputes with fiscal authorities regarding the cost of a certain software will be complex, costly and time-consuming. In most cases, the case will lead to an appeal to the court, and thus to the expenses on lawyers and experts.

Conclusion: check your business structure and exclude work with enterprises from the above lists. If this is not possible, you will have to change the structure of the IT-business. 

If you need the help of an international lawyer, tax lawyer, IT-lawyer, our team of experienced attorneys and lawyers will help you to change the structure of the business to optimize the tax burden and protect the property and income. You can contact the team of the Zilver Law Company by phone: + 38 050 140 95 60, e-mail:  info@zilver.com.ua.

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