By Yuri Nikolaychuk, Associate Partner, Rödl & Partner, Kyiv, Ukraine
Ukraine’s state tax service has recently published a tax ruling (No 2891/IPK/99-00-21-02-02-06, dated 26 July) concerning tax implications of transactions between a Ukrainian taxpayer and a US limited liability company based in Texas. The tax service confirmed that such transactions can be subject both to the transfer pricing rules, if they qualify as controlled transactions, and to the general anti-avoidance rules, if they are not controlled transactions.
Under Ukrainian transfer pricing rules, controlled transactions include not only taxpayer’s transactions with foreign related entities, but also transactions with unrelated entities, if they are based in low-tax jurisdictions or are fiscally transparent entities. The list of legal forms of such fiscally transparent entities is approved by the government.
A Texas-based limited liability company is included in the Ukrainian list of fiscally transparent entities. Therefore, the transactions between a Ukrainian company and a US Texas-based limited liability company can qualify as controlled transactions, even if the companies are not related. There is, however, one important exception to this rule. The transaction will not qualify as controlled transaction if the Texas limited liability company has been paying corporate tax in the fiscal year concerned. Otherwise, the Ukrainian taxpayer shall comply with transfer pricing reporting and documentation requirements.
If the transaction does not qualify as a controlled transaction – for instance, because the Texas company has been paying corporate tax, the transaction value is under UAH 10 million (approximately USD 375,000), or the taxpayer’s annual income in the relevant fiscal year does not reach UAH 150 million (approximately USD 5.6 million) – the transaction will still be subject to general anti-avoidance rules.
Under these general anti-avoidance rules, the taxpayer shall increase its taxable income (earnings before tax) by 30% of the transaction value (both sale and purchase transactions are covered), unless the taxpayer can demonstrate that the pricing in such transaction is at arm’s length. For this purpose, the taxpayer shall prepare the transfer pricing documentation in accordance with transfer pricing regulations. If, as a result of the transfer pricing analysis, the taxpayer determines that the transaction prices exceed the arm’s-length prices, the taxpayer shall adjust its taxable income for the amount of difference between the transaction price and the arm’s-length price.
In addition to limited liability companies based in Texas, the Ukrainian list of fiscally transparent entities also mentions general partnerships and limited liability partnerships established in Delaware, California, Nevada, New Jersey, New York and Florida. The transactions of Ukrainian taxpayers with business partners established in these legal forms and in these states will have the same tax implications as those with respect to the Texas-based limited liability company.
The state tax service did not mention it its tax ruling whether payment of corporate tax by the US entity relieves the taxpayer from the obligation to adjust its taxable income by 30%, similarly to the exception which applies to controlled transactions. Under a conservative approach, the answer would be no, and the taxpayer would still be advised to prepare the transfer pricing documentation or apply the 30% adjustment to avoid tax assessment and penalties.
—Yuri Nikolaychuk is an Associate Partner at Rödl & Partner, Kyiv, Ukraine.
Be the first to comment