укр eng рус est

Publications

Recent news
References
Chambers Europe

“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

Tax Aspects of International Business Restructuring

17.12.2018

Nina Bets, lawyer

The international community is fighting against tax evasion, terrorist financing and money laundering. The use of offshore companies within the international structures is no longer possible.

Day after day the banking control regulations are becoming more and more severe, and those, in turn, wary of heavy fines, resort to studying their customers in detail.

Now, in order to open an account in a foreign bank, it is necessary to prove the actual presence of the company at the place of its registration. It is necessary to provide evidence confirming the existence of a real office, employed personnel, as well as evidence confirming the conduct of business, namely, the presence of real counterparties and contracts entered into therewith.

Today, in order to take advantage of the agreement for avoidance of double taxation when paying passive income to a non-resident, the availability of a certificate confirming the status of a tax resident is no longer sufficient. In order to apply a preferential tax rate, it is necessary to prove that the income earner is the beneficial (actual) owner of such income. At the same time, the beneficial (actual) recipient (owner) of income cannot be a legal entity or individual being an agent, nominal holder (nominal owner) or only an intermediary with respect to such income, even if such legal entity or individual has the right to receive income. Furthermore, in order to prevent the abuse of tax agreements, it is planned to introduce a Principal Purpose Test. The Principal Purpose Test aims to ensure that the tax benefits under the tax agreement will not be provided for profit or capital if there is any reason to believe that obtaining such benefits is one of the main objectives of the transaction. Attention will be paid to whether the commercial purpose and essence of the transaction, or the transaction in general, is mainly aimed at obtaining tax benefits.

There are many tax aspects requiring consideration within a framework of international restructuring; the major ones, in my opinion, are the transfer pricing rules, the thin capitalization rule, and the reporting rules of international groups of companies by countries (CbC Report / local file).

Transfer pricing rules.

The transfer pricing rules imply that the profit from all cross-border transactions (meeting the criteria of controlled transactions) should be determined in accordance with the arm’s length principle. According to the arm’s length principle, the amount of taxable profit is considered to be determined correctly if the terms and conditions (prices) of a transaction between related parties are the same as in the market.

In case of discrepancies between the terms and conditions of one or more controlled transactions and the market terms and conditions, the taxpayer will be charged with additional tax liabilities that would have otherwise arisen subject to market pricing and correct determination of profit.

The criteria to determine a transaction as a controlled one are provided for in the Tax Code of Ukraine, namely in paragraph 39.2. The controlled operations are the taxpayer’s business operations which may have influence on the object of taxation by virtue of the income tax imposed on the taxpayer’s enterprises, in particular:

a) economic transactions with non-resident related persons;
b) foreign economic transactions for the sale and/or purchase of goods and/or services through the non-resident commissioners;
c) economic transactions with non-residents registered in the states (territories) included on the list of states (territories) approved by the Cabinet of Ministers of Ukraine;
d) economic transactions with non-residents which do not pay the income tax (corporate tax), including on income received outside the state of registration of such non-residents, and/or which are not the tax residents of the state in which they are registered as legal entities. The list of organizational and legal forms of such non-residents by the states (territories) is approved by the Cabinet of Ministers of Ukraine;
e) economic transactions between the non-resident and its permanent representative office in Ukraine.

At the same time, the economic transactions with non-residents (save for the transactions between the non-resident and its permanent representative office in Ukraine) shall simultaneously meet the following conditions:

– the annual taxable income of the taxpayer from any activity exceeds UAH 150 mln (net of VAT and excise duties);
– the total amount of taxpayer’s transactions with a related non-resident party exceeds UAH 10 mln per year (net of VAT and excise duties).

In the case of a permanent representative office, the economic transactions between a non-resident and its permanent representative office in Ukraine shall be considered controlled if the amount of such transactions exceeds UAH 10 mln per year (net of VAT and excise duties).

Thin capitalization rule.

Thin capitalization rule is based on the peculiarities of loan interests’ reflection in the tax accounting.

Where the amount of debt obligations to non-residents exceeds the amount of the taxpayer’s equity capital by more than 3.5 times (for financial institutions and leasing companies by more than 10 times), the interest expenses related to such obligations are accounted according to special rules.

Should the sum of all loans (credits) or returnable financial aid from one legal entity and/or loans (credits) or returnable financial aid from other legal entities, guaranteed by one legal entity, to another legal entity exceed the amount of equity capital by more than 3.5 times (for financial institutions and leasing companies by more than 10 times), then such taxpayers increase their financial result before tax by the excess amount of interests on loan (credit or other debt obligations) accrued in accounting records, for 50% of:

– financial result before tax;
– financial expenses;
– depreciation reflected in the financial statements of the reporting tax period in which such interest was accrued.

Reporting rules of international groups of companies by countries (CbC Report / local file).

This rule is not yet reflected in the national tax legislation, but its introduction is expected with the implementation of the BEPS Plan.

It envisages the need to prepare consolidated financial statements in cases, where two or more legal entities or entities having no status of a legal entity are interrelated with respect to ownership or control in such a way that, pursuant to the international financial reporting standards or other internationally recognized standards, the financial reporting is mandatory.

The Draft Law on Amendments to the Tax Code of Ukraine to Implement the Action Plan on Base Erosion and Profit Shifting (BEPS Plan), prepared by the Ministry of Finance and the National Bank of Ukraine, also provides for other tax aspects to be taken into account when conducting business restructuring.

 
© 2019 Ilyashev & Partners / Mobile version