Prospects of Deoffshorization in Ukraine

30/ 01/ 2017

Author: Alexandra Yulina, lawyer of Dmitrieva & Partners

Offshore companies are perceived by the Ukrainian society as a means of tax evasion or money laundering.

Today we have several draft laws in respect of deoffshorization. Let us consider the main ones, which attract our attention more:

– The draft law “On Amendments to the Tax Code of Ukraine concerning Prevention of Erosion of the Tax Base and Shifting of Profit into Offshore Zones” № 4636 of 11.05.2016 (hereinafter – “the Draft Law on CFC”);
– The draft laws “On Measures of Deoffshorization” № 4678 of 17.05.2016 and № 4678-1 of 02.06.2016 ;
– The draft law “On the Tax Sovereignty of Ukraine and Offshore Companies» № 4380 of 12.04.2016


The global trend of erosion prevention of the tax base and profit shifting, which is reflected in the plan BEPS (Base Erosion and Profit Shifting), has become the ground for the emergence of the draft law on CFC in Ukraine. The BEPS plan lies in strengthening of rules regarding controlled foreign companies (controlled foreign companies rules) (hereinafter – “CFC”).

Taxation of CFC is considered to be the most effective preventive instrument of capital’s “flight”, which should have a positive impact not only on the volume of budget revenue in the form of income tax and tax on personal income, but also lead to the loss of the economic sense in the use of offshore companies in general.

The draft law defines the terms:

  • “CFC” is a non-resident legal entity or a foreign structure without creation of a legal entity, registered in a foreign country (territory), which provides preferential tax regime (offshore zones), the controlling person of which is a resident of Ukraine.
  • “Controlling persons” (hereinafter – “CP”) are a residents of Ukraine, legal or physical persons, who directly and/or indirectly own corporate rights in the CFC in the amount of 50% or more; or the share exceeds 10%, if the share of all residents of Ukraine in this CFC is 50% or more.

When determining the share both the direct membership and the indirect membership through spouse and/or minor children are taken into account.

The states (territories), in which the total rate of corporate income tax (corporate tax) is less than 10% or the states, with which Ukraine hasn’t concluded international agreements containing provisions on exchange of information or double tax treaties, are referred to offshore zones

The obligation is introduced for CP to provide to regulatory authorities the certificate of CFC in any written form by March 1st of the year following the reporting tax year.

Apart from the certificate, CP should provide:

– financial statements of the CFC for the relevant calendar year, confirmed by the audit report drawn up in accordance with International Financial Reporting. At the same time if the legislation of the place of the location of CFC doesn’t provide for the obligation of the financial statements preparation, the CP should ensure the preparation of such financial statements;
– information on whether the taxpayer is a founder (member) of a foreign structure without creation of a legal entity CP;
– the existence of the grounds for exemption of the income of the CFC from taxation.

These are the following conditions:

1) the CFC is registered in any country with which the double tax treaty is concluded;
2) the CFC is a party to a production-sharing agreement, concession agreement, member of a public-private partnership;
3) the CFC is the issuer of the bonds placed on international stock exchanges, the list of which is approved by the National Commission on Securities and Stock Market.

Failure to provide or delay in provision of the certificate, financial statements of the CFC and also provision of knowingly false information shall result in the fine of UAH 20 000 for each such failure to provide or delay in the submission in respect of each CFC.

For CP-individuals the profit of the CFC is included in the total annual taxable income and is subject to representation in the annual tax return in the general order and is taxed at the general rate of personal income tax (18%).

For CP-legal entities which are payers of income tax it results in the increase of the tax liability or reduction of the negative value of the object of taxation in respect of the income tax.

It is planned to set a specific deadline for voluntary provision of information on CFC during which CP will be exempt from financial liability for acts related to non-payment or understating the amounts of tax liabilities due to non-inclusion in the base/object of taxation of income of CFC.

DRAFT LAW № 4678

The draft law “On Deoffshorization Measures“ № 4678 of 17.05.2016 reflects the desire to ban the membership of citizens and legal persons of Ukraine in offshore companies until the recovery of the Ukrainian economy, namely:

– to act as an attorney during the registration of an offshore company;
– to have registration or actual location within an offshore tax jurisdiction;
– to have the asset management company that falls under the definition of an offshore company;
– to make any payment in favor of an anonymous person – their beneficiary or through a non-anonymous person in favor of an anonymous person or in favor of the company of the management of assets of such a foundation;
– to have the status of an offshore company and/or make payments in favor of an anonymous person, offshore company or other offshore beneficiary.

It seems that you can not even say the word “offshore”.

DRAFT LAW 4678-1

The alternative proposal can be seen in the draft law “On Deoffshorization Measures” № 4678-1 of 02.06.2016, but unlike the previous draft law (№ 4678 of 17.05.2016), the question is on the prohibition of membership in offshore companies of national public figures only (hereinafter “NPF”) and members of their families, including:

– to own, directly or indirectly, corporate rights or be the beneficiary of the CFC, registered in offshore;
– to act as an attorney during the registration of an offshore company, to have registration (actual place of location) within offshore tax jurisdiction or the asset management company that falls under the definition of an offshore company;
– to organize, directly or indirectly, ensure or perform placement or transfer of funds if at least one of the parties – participants of a financial transaction is registered in an offshore zone, and also transfer funds to the account opened in a financial institution registered in an offshore zone.

The draft law provides for voluntary taxation, i.e., within 6 months from the date of enactment of the law, NPF and members of their families, who own corporate rights of CFC, have the opportunity to pay voluntarily taxes and dues for the period of their activity from the date of registration of an offshore company in the amount of 18% of income tax, except for taxes paid in a foreign country (territory). After voluntary payment the NPF shall officially publish the report.

In the case of non-payment of taxes and dues within this period, penalties shall be imposed in the amount of double rate of the said tax. Willful tax evasion entails criminal liability.

DRAFT LAW № 4380

The peculiarity of the draft law “On the Tax Sovereignty of Ukraine and Offshore Companies” no 4380 of 12.04.2016 is the introduction of the term “the Offshore Duty”, which is a domestic tax that does not fall under the regulation of international agreements for the purpose of reduction of the attractiveness of the use of offshore companies.

It is provided that all politically significant persons (hereinafter – “PSP”) are obliged to declare their property, which is within the offshore jurisdiction and pay “the offshore duty”.

Besides, one should declare such property as a precondition for the registration a candidate for the President of Ukraine, deputy of the parliament or deputy of the local council, judge, prosecutor and other PSP and for filling any position in the executive authority of Ukraine or the executive departments of its territorial communities.

A separate ground for dismissal (resignation) of PSP from office is owing (being a beneficiary) of an offshore company (offshore or anonymous account) by them.

Also, the draft law determines as offshore 136 countries and territories and 14 countries that have not formally come within the definition of offshore, but allow the establishment within their own tax jurisdictions “offshore” companies having tax-free of low-tax signs.

Ukraine is not a participant of the automatic exchange of information, although the intention to join was announced, but no real steps have been made yet. This process requires not only signing of the agreement by the state, but also adoption of the appropriate domestic legislation and technical equipment. Ukraine’s participation is expected in 2017-2018 years approximately, but it is not an official information.

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