New tax and customs incentives for large-scale investment projects
Author: Olena Stepanova, Associate at Hillmont Partners
On March 28, 2021, law of Ukraine no. 1293-IX, amending the Tax Code of Ukraine and law of Ukraine no. 1294-IX, amending the Customs Code of Ukraine (both laws are dated March 2, 2021) came into force. The laws in question are aimed at implementation of another recently adopted law of Ukraine – “On state support of investment projects with significant investments in Ukraine”, providing a framework of state support for investment projects that comply with the list of criteria. Two recently signed laws specify the scope of tax and customs duties exemptions which investors who make significant investments may receive.
According to sub-clause 1 of the first clause of article 3 of the Law of Ukraine “On state support of investment projects with significant investments in Ukraine”, there is an exemption of payment of certain taxes according to the Tax Code of Ukraine. However, as amendments to the Tax Code of Ukraine can only be introduced by a separate law, the specific list of tax exemptions was not included in the main law.
The recently signed law no. 1293-IX “On amendments to Chapter XX “Transitory provisions” of the Tax Code of Ukraine regarding peculiarities of taxation of business entities that implementing investment projects with significant investments” specifies the scope of such exemptions. In particular, the law provides the following temporary (until January 1, 2035) tax exemptions for entities which are implementing investment projects with significant investments:
- VAT exemption for imports of new equipment necessary for implementation of investment projects with significant investments. The list of eligible equipment and its elements is defined in the Customs Code of Ukraine. This exemption is not applicable to goods purchased from an aggressor state or occupied territory of Ukraine.
- CIT exemption (except for investment projects conducted in extractive industries) for 5 consecutive years, in case the income which is subject to this tax is received as a result of implementation of an investment project with significant investments. This tax exemption is applied following special notification from an investor, but cannot be applied outside of the term of validity of a special investment agreement. Also, this provision is not applied to controlled operations and taxes paid by the controller of a controlled foreign company, which are subject to taxation according to special rules.
- Land tax reduction or exemption upon decision of a local governing body (as the rate of such tax is set by local self-governance). Such a reduction or exemption cannot be given to projects in extractive industries.
The law contains a number of restrictions for such exemptions – in particular, the sum of tax exemptions listed above is included in the total amount of state support received, which cannot exceed 30% of the amount of investment. In case the cap is reached, the investor loses the preferences described above and general taxation rules are applied after the cap.
If an investor sells customs duty-exempt equipment within 5 years of the date of import, uses it for purposes other than implementation of the relevant investment project, or in the case of early termination of a special investment agreement by investor, the full amount of tax exemptions and applicable penalties must be compensated to the state.
Customs duties exemptions
Similar to the tax preferences described above, exemptions for equipment necessary for implementation of investment projects with significant investments are directly prescribed in sub-clause 2 of clause 1 of article 3 of the Law of Ukraine “On state support of investment projects with significant investments in Ukraine”. In turn, law no. 1294-IX “On Amending clause 4 of chapter XXI “Final and transitory provisions” of the Customs code of Ukraine regarding exemption from payment of import customs duties of new equipment and its parts which are imported for the implementation of investment projects with significant investments according to a special investment agreement” specifies the list of equipment which is subject to such exemptions, as well as sets specific conditions for its implementation.
Similarly to the tax exemptions, the customs duties exemption is also temporary and available until January 1, 2035. The import duty exemption is provided within the term of validity of a special investment project, and is also included in the total amount of state support received. The import duty exemption cannot be applied to the import of goods, originating from an aggressor state or occupied territory of Ukraine. In case the imported equipment is sold within 5 years of the date of its import, or there is an early termination of the special investment agreement, the sum of the import duty exemption along with all applicable penalties must be compensated to the state.
Once laws no. 1293-IX and no. 1294-IX come into force, the main legislative framework for the state support mechanism for investment projects with significant investments will be finalized. At the same time, some secondary legislation will still need to be adopted. Hillmont’s Strategic Communications Practice has been providing regulatory monitoring and GR activities in the sphere of regulation designed to attract large investors to Ukraine.