Anton Kleshnin ,
Analyst at the TP Department
In the practice of Ukrainian taxpayers, risks often arise from transactions conducted with non-residents whose legal forms are included in the List approved by the Cabinet of Ministers of Ukraine (CMU) Resolution No. 480.
Based on our team’s extensive experience in supporting clients with transfer pricing (TP), we have prepared recommendations to help avoid groundless adjustments to the financial result and minimize the likelihood of disputes with regulatory authorities.
Table of Contents
1. When the Obligation to Adjust the Financial Result Arises
According to sub-paragraphs 140.5.4 and 140.5.5-1 of paragraph 140.5 of Article 140 of the Tax Code of Ukraine (TCU), the financial result before taxation is subject to a 30% increase on the value of goods (works, services) purchased from and/or sold to non-residents whose legal form is included in the special List (Resolution No. 480).
The logic behind this norm is that the List includes non-residents who typically do not pay corporate income tax in their country of residence. The tax authority operates under a presumption of increased risk of profit shifting to foreign jurisdictions with lower tax burdens.
2. When Operations are Recognized as Non-Controlled
In accordance with sub-paragraph 39.2.1.2-1 of the Tax Code of Ukraine (TCU), a taxpayer’s operations with a non-resident whose legal form is included in List No. 480 are recognized as non-controlled (in the absence of other criteria for controlled operations), provided that at least one of the following conditions is met:
- →The non-resident is a resident of a state (territory) with which Ukraine has concluded an international treaty for the avoidance of double taxation;
- →All participants (partners) of the non-resident are residents of states (territories) with which Ukraine has concluded international treaties for the avoidance of double taxation.
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Exceptions are states (territories) included in the list of states (territories) approved by the Cabinet of Ministers of Ukraine in accordance with sub-paragraph 39.2.1.2 of the TCU (List No. 1045)!
To apply these provisions, the taxpayer must submit the relevant Certificates from the non-residents to the supervisory authority by October 1 of the year following the reporting year. These may be provided in paper or electronic form, adhering to the requirements of the Laws of Ukraine “On Electronic Documents and Electronic Document Management” and “On Electronic Identification and Electronic Trust Services.”
However, in practice, Ukrainian companies face critical questions: What exactly should such a certificate contain? What is its required form? Is legalization always necessary? And which competent authority in the non-resident’s country is authorized to issue it?
3. The Tax Authority’s Position
In practical situations and when providing Individual Tax Consultations (ITCs), the State Tax Service (STS) insists that a Certificate of Tax Residency (which confirms that a non-resident is a resident of a country with a double taxation treaty) is not identical to a document confirming the payment of corporate income tax by that non-resident. Consequently, a simple residency certificate cannot be used to exempt a company from the obligation to increase its financial result under sub-paragraphs $140.5 .4$ and $140.5 .5^1$ of the TCU.
The tax authority maintains that such a certificate must contain specific information regarding the actual payment of corporate income tax by the non-resident. This must apply specifically to the non-resident counterparty of the Ukrainian taxpayer, rather than other individuals, legal entities, or formations without legal status (such as the founders of a partnership, even if that is the non-resident’s legal form).
The Certificate must be submitted in accordance with paragraph $103.5$ of the TCU, following the form approved by the legislation of the respective country. It must be properly legalized (apostilled or consular legalization) and translated into Ukrainian (notarized). This document is issued by the competent authority of the respective country as defined by Ukraine’s international treaty.
Important: The original document obtained from the non-resident counterparty must be kept by the taxpayer and provided upon the request of the supervisory authority.
Conclusion
A taxpayer conducting operations with a non-resident whose legal form is included in List No. 480 can only be exempted from the 30% financial result adjustment if they provide a Certificate confirming the payment of corporate income tax for the reporting year by that specific non-resident. This document must be issued by the financial (tax) authority of the foreign state, follow the form approved by that country’s law, and be properly legalized and translated.
Our Recommendations
To avoid unnecessary tax assessments and preempt questions from the tax authorities, taxpayers working with entities on List No. 480 should either prepare Transfer Pricing (TP) Documentation to justify the “arm’s length” nature of the transactions under Article $39$ of the TCU, or arrange for the following supporting documents in advance:
- →Certificate of Tax Residency (for the non-resident and/or its participants) — to classify the operation as non-controlled and avoid TP reporting.
- →Certificate of Corporate Tax Payment — specifically to be exempt from the 30% financial result adjustment.
Why is it important to act now? Simply having a paper from your counterparty does not guarantee success. Tax authorities meticulously check the form of the certificate, the authority of the issuing body, and the correctness of its legalization. A single error in wording or the lack of a current date could result in unexpected tax liabilities for your company.
The Audit Invest team of experts is ready to serve as your reliable shield in TP matters and the protection of your financial results. We offer:
- →Expert Consulting: We analyze your non-resident’s legal form and determine exactly which certificate is required and how to legalize it properly.
- →TP Documentation Preparation: We develop a full package of documents to justify transaction conditions under the “arm’s length principle.”
- →Tax Risk Analysis: We perform an audit of your foreign economic contracts to uncover “hidden” dangers.
Do not let formalities affect your business’s profitability. Entrust the protection of your financial results to the professionals at Audit Invest.
Ready to prepare your Transfer Pricing documentation?Audit Invest will help: screening of operations with non-residents, CO reports, and a full package of transfer pricing documentation.
