Changes in Corporate Income Tax: Analysis of Key Innovations for Business

 

Recent changes in corporate income tax taxation require Ukrainian businesses to pay special attention to financial reporting details and the updating of tax differences. Constant updates to the Tax Code of Ukraine (TCU) directly affect the methodology for determining the tax base, the application of depreciation benefits, and the procedure for expense recognition.

In this article, experts from the LBA law firm have prepared a comprehensive overview of key innovations that will help your accounting department ensure the tax stability of your enterprise and avoid risks during tax audits.

New Circle of Income Tax Payers

The legislator has significantly expanded the list of entities that are now obliged to report on income tax, even while remaining on the simplified tax system.

• Simplified tax payers (legal entities): become payers when paying income to non-residents.
• Group 4 single tax payers: fall under taxation when paying dividends to a non-resident in controlled transactions.
• Individual entrepreneurs and “independents”: are now also income tax payers regarding payments to non-residents.

“The list of payers now also includes foreign companies that have a place of effective management in Ukraine (effective from Jan 1, 2021).”

Increase of the Non-adjustment Threshold to UAH 40 Million

One of the most anticipated changes was the increase of the annual income threshold from UAH 20 million to UAH 40 million. This allows more enterprises to avoid adjusting their financial results for tax differences (except for prior years’ losses).

Furthermore, entities with income up to UAH 40 million have the right to apply exclusively an annual reporting period.

Controlled Foreign Companies (CFC) and New Rates

Since 2021, the concept of a taxable object for Controlled Foreign Companies has been introduced. This requires separate accounting for each such company.

Rates and Reporting Features

• A base rate of 18% applies to the adjusted CFC profit.
• Differentiated rates for non-resident income have been implemented: from 0% to 20%.
• A mechanism is provided to reduce the tax by the amount of corporate tax already paid abroad.

Reform of Fixed Assets Accounting and Depreciation

Changes in the TCU have significantly altered approaches to asset capitalization and the calculation of their depreciation.

Value Criterion and Methods

The threshold for classifying assets as fixed assets (FA) has been raised from UAH 6,000 to UAH 20,000. This applies to new objects put into operation.

Regarding depreciation, the following rules have been introduced:

1. Use of the production method is allowed in tax accounting.
2. A clear prohibition on calculating depreciation during modernization, mothballing, or completion has been established.

Tax Differences and the “Business Purpose” Principle

Tax legislation is becoming increasingly strict regarding transactions with non-residents and the recognition of expenses.

• Business Purpose: The State Tax Service has the right to increase the financial result by the amount of expenses on transactions with non-residents if they lack a business purpose (the burden of proof lies with the tax authorities).
• Penalties: Expenses for fines, penalties, and forfeits must now necessarily increase the financial result before taxation.
• Thin Capitalization: Rules for limiting interest on debts to non-residents have been updated (if the debt exceeds capital by 3.5 times).

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