Transfer pricing - Ukraine

• The Tax Code stipulates that controlled transactions are subject to transfer pricing rules.
• For transfer pricing purposes, 'controlled transactions' are defined as business transactions that may have an effect on taxable income, including:
  • business transactions with non-resident-related parties.
  • As of 1 January 2025, a new criterion for determining related parties as an economic connection will be applied: a non-resident may be recognized as related to a Ukrainian company if the following criteria are met simultaneously:
    
    • if the income (expenses) from transactions with it is 75% or more of the income (expenses) with all non-residents;
    • such income (expenses) account for 50% or more of all income (expenses) of a Ukrainian company.
  • business transactions concerning the sale or purchase of goods or services through non-resident commissionaires;
  • business transactions with non-residents incorporated or resident in so-called 'low-tax' jurisdictions (the Cabinet of Ministers determines the list of this jurisdictions);
  • business transactions with non-residents that do not pay corporate income tax or are not tax residents of the country in which they are registered as legal entities (the Cabinet of Ministers determines the list of organization forms of such non-residents with reference to specific states); and
  • business transactions between taxpayers and non-residents through non-related intermediaries where the intermediary:
    
    • performs no significant function;
    • uses no significant assets; and
    • bears no significant risks in respect of the transaction.
• These transactions qualify as controlled if they simultaneously meet the following criteria:
  • The annual amount of the transactions with one counterparty (calculated according to accounting rules) exceeds UAH10 million (approximately €418 000).
  • The total annual revenue (calculated according to accounting rules) of the Ukrainian taxpayer from any type of activity exceeds UAH150 million (approximately €6,3 million).
• From 2018 transactions between non-residents and permanent establishments in Ukraine are considered controlled if their value exceeds UAH10 million (approximately €418 000). For this type of controlled transaction, no annual revenue criterion applies (i.e., the permanent establishment need not earn more than a specific amount).
  In all of the above cases, the criteria for qualifying a transaction as controlled should be determined using arm's-length prices.
• In addition, there are certain cases in which taxpayers should justify the arm's-length price of transactions below UAH10 million (approximately €418 000).

• Ukraine is not a member of the OECD.
• The OECD Transfer Pricing Guidelines are not legally binding in Ukraine.
• However, local transfer pricing rules are primarily consistent with the OECD Transfer Pricing Guidelines and include the same key principles. Further, the OECD guidelines are used as an additional source of guidance and the tax authorities consider them during transfer pricing audits and litigation.
• The Ukrainian tax authorities refer to the OECD Guidelines as well as other reference guides in their consultations and public opinions.
• Ukrainian law incorporates the main standards of the OECD Guidelines. A taxpayer taking part in a controlled transaction shall determine the amount of its taxable income pursuant to the arm’s-length principle. The array of methods and documentation requirements closely follows the OECD Guidelines

• Transfer pricing methods described in Chapter II of the OECD Guidelines are recognized and used in Ukraine.
• There is a specific hierarchy of these methods:
  1) CUP method
  2) Resale Price or Cost Plus method; and
  3) TNMM or Profit Split method.
• The taxpayer, uses any method that the taxpayer deems most appropriate; however, if there is a possibility to apply both the CUP and any other method, the CUP method is used.
• The CUP method is a priority for controlled commodity transactions. The list of commodities is defined and published by the Cabinet of Ministers of Ukraine. When applying the CUP method for these transactions, the taxpayer may compare the prices within the controlled transactions with the prices of comparable uncontrolled transactions (actually performed by the taxpayer or other unrelated parties) and/or with commodity quotations. The State Tax Service of Ukraine publishes a recommended (non-exclusive) list of data sources for obtaining commodity quotations on its official web portal before the beginning of the reporting year.

• Ukrainian legislation allows taxpayers to make transfer pricing adjustments.
• If the prices of the controlled transaction do not correspond with the arm's-length principle, the taxpayer may perform the respective self-adjustment and pay additional tax. Such self-adjustment can be made to maximum or minimum values of the range of prices (profitability). Taxpayers have the right to make a self-adjustment without incurring any penalties and fines until 1 October of the year following the reporting year.
• Taxpayers are prohibited from making self-adjustments during transfer pricing audits.
• Ukrainian legislation also provides for pro rata transfer pricing self-adjustments after the respective approval has been received from the tax authorities. Proportional adjustments are also allowed in case of transfer pricing assessments by the tax authorities and based on the provisions of double tax treaties.
• To date, there is no established practice; however, Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which should address conditions that prevent countries from effectively solving treaty-related disputes under the mutual agreement procedure.
• In Ukraine, for the first time in 2022, the tax authorities applied an approach whereby the amount by which the cost of goods (works, services) is understated or overstated in relation to the amount determined on an arm's length basis is treated as a dividend:
  • Constructive dividends arise in controlled transactions.
  • The provisions of the Tax Code of Ukraine set September 30 of the year following the reporting year as the deadline for payment of corporate income tax liabilities.
  • Constructive dividends are subject to the standard withholding tax rate, which is currently 15%. In the case of payment of income equivalent to dividends under Ukrainian law to a person who is a tax resident of a country with which an international treaty (a Double Tax Agreement (DDT)) is signed, the rules of the Double Tax Agreement are taken into account when taxing such income with respect to withholding tax, with the principle of precedence of the DDT over domestic legislation. 

• Ukrainian legislation requires the following transfer pricing documentation:
  • The local transfer pricing documentation (on the request of the tax authorities)
  • The reporting on controlled transactions (transfer pricing notification) to be filed (by 1 October of the following year)
  • The master file (on the request of the tax authorities) in case consolidated income of the group (MGC) exceeds EUR 50 million
  • Taxpayers participating in multinational groups of companies with the total consolidated income which is equivalent to or exceeds EUR 750 million for the year preceding the reporting year, and under certain additional circumstances in place, are required to file a Country-by-Country Report. The first Country-by-Country Report should be submitted for the financial year ending in 2021 calendar year.
• The Tax Code sets out the requirements for the local transfer pricing documentation and master file.
• Transfer pricing documentation should be prepared in Ukrainian only.
• Proper and comprehensively prepared transfer pricing documentation is a major factor in reducing transfer pricing audit risks. However, it does not confer penalty protection if transactions are not at arm's length.
• Taxpayers are required to send notifications of their participation in multinational groups of companies. The first such notification should be provided for 2020.

Three-tiered TP reporting are introduced, which consist of a Master File, TP Documentation (Local File) and a Country-by-Country Report.

Taxpayers participating in multinational groups of companies with the total consolidated income which is equivalent to or exceeds EUR 50 million for the year preceding the reporting year, are required to make the global TP documentation (Master File) in a national official language. The first global TP documentation may be requested in 2022 for the financial year ending in 2021 calendar year.

The Tax Code sets out the requirements for local transfer pricing documentation. In particular, it should include:

• information regarding related parties, including information on parties which directly or indirectly own at least 25% of the taxpayer and parties of which the taxpayer owns at least 25% (directly or indirectly)
• information regarding the group, including its legal structure, a description of its activities, and its transfer pricing policy – this should be provided with the information about the entities, which the taxpayer provides with local management reports (eg names of entities and countries in which such entities have head offices)
• a description of the taxpayer's management structure (ie its organisational structure)
• a description of the taxpayer's activities and business strategy (including information regarding economic conditions, an analysis of the markets in which the taxpayer operates and its main competitors)
• information regarding the taxpayer's participation in business restructurings or transfers of intangible assets during the reporting or preceding year, along with an explanation of the aspects of those transactions that had or still have an impact on its activity
• a description and the conditions of the transaction, as well as copies of the relevant agreements (ie contracts)
• a description of the goods, works or services
• information regarding the payments that were made in the controlled transaction (ie the amounts, currencies and dates of payments and payment documents)
• factors that influenced the price determination, including the business strategies of the parties to the controlled transaction (if any) that significantly affected the prices of the goods, works, or services
• functional analysis of the controlled transaction (ie information regarding the functions performed, assets used and economic risks assumed by the parties to the controlled transaction);
• an economic analysis, including:
  
  • a benchmarking study
  • substantiation of the transfer pricing methods
  • the profitability indicators and sources of information used
  • the allocation of the supplier's income or expenses relating to the controlled transaction that were considered when calculating the profit-level indicator
  • a calculation of the arm's-length range of prices or profitability
  • a description and calculation of comparability adjustments performed in respect of controlled and non-controlled transactions
  • substantiation of the use of several tax periods (years) for determining the profitability range and the calculation of the weighted average profitability indicator.
• information regarding the proportional transfer pricing adjustment performed by the taxpayer
• information regarding the individuals and entities that are party to the controlled transaction and parties relating to the taxpayer (in the reporting period in which the controlled transaction was performed and at the time of submission of the transfer pricing documentation)
• information regarding the taxpayer's total number of employees, with a breakdown based on its specific divisions as of the date of the transaction or the end of the reporting period.

• Company is unprofitable during several reporting (tax) periods;
• Inconsistency of financial results (profitability indicators) with the average indicators in the industry in Ukraine;
• A significant amount of transactions for the provision / receipt of intragroup services, paid royalties and / or interest on financial borrowings;
• Conducting business transactions that are not typical for the current activities of the enterprise;
• A significant volume of business transactions with non-resident-related parties incorporated or resident in 'low-tax' jurisdictions (the Cabinet of Ministers determines the list of this jurisdictions);
• A significant volume of business transactions with non-resident-related parties that do not pay corporate income tax or are not tax residents of the country in which they are registered as legal entities (the Cabinet of Ministers determines the list of organization forms of such non-residents with reference to specific states);
• Significant volume of transactions with intangible assets, such as royalties, licences, fees for the use of patents, trademarks, know-how, etc., as well as any other intellectual property; 
• Negative net assets in the presence of loans, borrowings and other debt obligations arising from transactions with related non-resident parties; 
• Inconsistency between the recipients of goods according to customs clearance data and the parties to the contract (use of indirect contracts); 
• Lack of significant fixed assets, etc.

• Ukrainian legislation contains a number of specific transfer pricing penalties. The penalties are calculated using the value of the subsistence minimum (SM) established for 1 January of the reporting year (1 January 2024, UAH 3,028 (approximately €68)).
• For non-submission or non-reporting of certain controlled transactions the following penalties may be accrued:
  • 100 costs of living (UAH 302 800 thousand ~ EUR 6.8 thousand) - for non-submission of notification on participation in an international group of companies;
  • 50 costs of living (UAH 151 400 thousand ~ EUR 3.4 thousand) – late submission of notification on participation in an international group of companies;
  • 300 costs of living (UAH 908.4 thousand ~ EUR 20.3 thousand) – for non-submission of report on controlled transactions;
  • 1% of the value of the controlled transactions (but not more than 300 costs of living – UAH 908.4 thousand ~ EUR 20.3 thousand) – for not reported controlled transactions in the submitted report on controlled transactions;
  • 3% of the value of the controlled transactions (but not more than 200 costs of living – UAH 605.6 thousand ~ EUR 13.6 thousand) – for the lack of transfer pricing documentation;
  • 5 costs of living (UAH 15.4 thousand ~ EUR 339) for each day of non-submission of report on controlled transactions and/or TP documentation after the expiry of 30 days following the last day of the deadline for paying the fines, described above.
• For untimely submission of report and documentation the following penalties may be accrued:
  • 1 cost of living (UAH 3 thousand ~ EUR 68) for each day of delay (but not more than 300 costs of living – UAH 908.4 thousand ~ EUR 20.3 thousand, or 0.5% of the amount of declared controlled transactions (whichever is the lower) – for late submission of report on controlled transactions;
  • 1 cost of living (UAH 3 thousand ~ EUR 68) for each day of delay (but not more than 300 costs of living – UAH 908.4 thousand ~ EUR 20.3 thousand) – in case of late declaring of controlled transactions in report on controlled transactions;
  • 2 costs of living (UAH 6 thousand ~ EUR 135,6) for each day of delay (but not more than 200 costs of living – UAH 605.6 thousand ~ EUR 13.6 thousand) – for late submission of transfer pricing documentation.
• A taxpayer should file a notification on participation in an international group of companies if it belongs to an international group of companies and performing controlled transactions in the reporting year.
• If the price or profitability of controlled transactions is out of the range determined by transfer pricing documentation, additional corporate profit tax should be calculated to the minimum or maximum of the arm’s length range (for self-identified adjustments) or to the median of the arm’s length range (for adjustments calculated by the tax authorities). Corporate profit tax rate is 18%.

• Taxpayer may be charged with penalties for understating tax liabilities in amount from 10 to 50% of such liability.

• The tax authorities monitor transfer pricing risks in several stages. After the deadline for submitting a report on controlled transactions has passed, the tax authorities review such reports and identify taxpayers which did not submit the report or indicated abnormal profit level indicators or non-typical information. Subsequently, the tax authorities send a request for transfer pricing documentation to the respective taxpayers. At this stage, the tax authorities consider the documents provided to determine whether the taxpayer's justifications regarding the arm's-length nature of its controlled transactions are feasible. If the transfer pricing documentation is not submitted, the taxpayer submits incomplete documentation or its conclusions are insufficient, the tax authorities may initiate a transfer pricing audit.
• The burden of proof lies with the tax authorities. During the tax audit, the tax authorities should use the same transfer pricing method (or combination of methods) used by the taxpayer, unless it is proven that the taxpayer selected an unsubstantiated method

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