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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 entrepreneurs.
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 industry.
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.
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