New tax benefits available only to limited number of entrepreneurs
Kyiv. 1 April, 2011
Taras Rozputenko, attorney-at-law with Volkov & Partners Law Firm
believes that narrowness of criteria provided by the Tax Code, which is
effective from April 1, 2011, and used for applicability of tax
benefits and tax holidays for small and medium-sized enterprises, puts
in question applicability of such benefits for majority of
He commented to “Interfax-Ukraine” Agency regarding separate provisions
of the new Tax Code that came into force on April 1 and which itself
envisage reduction of corporate profit tax rate from 25% to 23%,
introduction of tax benefits for certain industries, and tax holidays
for enterprises with annual profit not exceeding UAH3 millions; as well
as regarding Chapter III in full, which regulates corporate profits tax.
”Very narrow criteria for applicability of tax benefits in corporate
profit tax, which makes impossible for majority of entrepreneurs to use
it, could not be recognised as “tax benefits” or “tax holidays”. Such
reality also puts in question government declarations with regard to tax
breaks for small and medium-sized businesses,” said the expert.
Mr. Rozputenko believes that for straightforward understanding of tax
code provisions regarding sound application of tax benefits by
entrepreneurs it would be better to envisage clear requirements and
specify industries to enable entrepreneurs to use mentioned tax
benefits, rather than provide exclusive clauses.
"Moreover, if the structure and rough writing of regulations is anything
to go by, it seems that law-maker develops laws for itself rather than
for its people," emphasized Mr. Rozputenko.
According to him, for example, if to consider tax holidays prescribed
for enterprises with annual profit up to UAH 3 million, only individual
companies will be able to put it into a practice.
As the lawyer explained, the Tax Code sets forth zero rate of profit
tax, effective during the period from April 1, 2011 to January 1, 2016,
for taxpayers, whose annual profit does not exceed UAH3 million, and
monthly salary of each employee amounts to at least two floor wages. In
addition, a company must meet one of the following criteria: 1) it is
established after April 1, 2011; or 2) a number of its employees is
equal or less that 20 and annual profit for the last three years amounts
up to UAH3 million; or 3) it has been registered as a flat tax payer
before the Tax Code came into force, its profit for the previous year
amounts up to a million hryvnias, and average number of employees is
less than 50.
Mr. Rozputenko wonders how many Ukrainian companies comply with the foregoing criteria.
At the same time, he adds that not only all criteria and restrictions,
but also supplementary terms must be complied with, in particular, tax
exemption will not be applied, among others, to entertainment companies,
companies involved with production, wholesale, and export/import of
excisable goods or fuels and lubricants; financial, law, accounting,
engineering and provision of services activities.
In addition, on April 1, 2011 Article 154 of the Tax Code reads to
exempt from profit tax enterprises that were established by social
organization of disabled people; receive their proceeds selling baby
food products of in-house production – moreover, such income must be
purposed to increase production volumes and reduce prices – but the list
of baby food products to be determined by the Cabinet of Ministers Of
Ukraine; as well as Chernobyl NPP; state enterprises, namely, Artek ICC
and Molodaya Gvardiya (the Young Guards) UCC; and enterprises of power
Another fact is that the Tax Code set forth to exempt from income tax
enterprises producing biofuel and biofuel appliances before January 1,
2020. Within the following ten years, beginning from April 1, 2011 and
until January 1, 2015, some enterprises are exempt from the tax in
question, in particular, hotels of the 4-star category and higher,
enterprises of light industry, shipbuilding and aircraft construction
industries and agricultural engineering industry, companies producing
renewable energy, and those involved with printing and publishing
activity. If a film or cartoon production company places received funds
or property to produce national films, than amounts of funds and cost of
property will not be accounted as profits until January 1, 2016.
At the same time, under the Government’s decree No. 229 dated February
28, 2011, “On approval of procedure of application of funds, which are
exempt from taxation due to corporate profit tax benefits applied in
compliance with clauses 15, 17-19 of section 4 of Chapter XX
"Transitional Provisions" of the Tax Code of Ukraine” (the Government’s
decree), enterprises eligible for corporate profit tax benefits
undertake to invest funds, to which tax benefits are applied, in
production development or repayment of production development loans.
Also, under the document, if a taxpayer fails to apply exempted balance
until April 1 of the year following the tax benefit introduction, its
relative tax liabilities for the 1Q of such year will be increased by
amount of such balance.
Exempted funds must be duly reflected in bookkeeping documents as the
separate subaccount of “Target financing and receipts” account for
reporting and taxation purposes.
Based on results of each fiscal (tax) period, the taxpayer reports on
application of funds exempted from tax. Such report is presented on form
approved by the State Tax Service of Ukraine (STSU). Then the report
and corporate profit tax declaration are filed with the STSU.
The Government’s decree comes into force from its publication date and is in effect until April 1, 2021.
Legal entities that purchase goods and services from individuals
benefiting from the flat tax will no longer be able to account such
payments as gross expenses. In other words, these payments will be
subject to corporate profit tax. This rule is introduced by the new Tax
Code and becomes effective from April 1, 2011.