En­cap­su­lated tax­a­tion of agri­cul­tural busi­ness

Kyiv Post Legal Quarterly - - Contents -

Alexan­der Minin Se­nior Part­ner, At­tor­ney at Law

The agri­cul­tural sec­tor is one of the most im­por­tant in the Ukrainian econ­omy. The tax­a­tion of the agri­cul­tural sec­tor is re­spec­tively un­der spe­cial at­ten­tion and quite of­ten sub­ject to spe­cific reg­u­la­tions. In the past, one of the key el­e­ments was the spe­cial VAT regime when agri­cul­tural pro­duc­ers were en­ti­tled to keep all or sub­stan­tial por­tions of the col­lected VAT as some kind of sub­sidy. Yet, this spe­cial VAT treat­ment ceased to ex­ist at the end of past year. The most im­por­tant re­main­ing spe­cific tax fea­ture for agri­cul­tural pro­duc­ers is the en­ti­tle­ment to the uni­form tax regime of the 4th cat­e­gory which is ded­i­cated to the ex­emp­tion from cor­po­rate in­come tax and fee for spe­cial use of wa­ter re­sources in lieu of which some kind of fixed fee is ap­plied based on the vol­ume and value of the land used in such agri­cul­tural pro­duc­tion. How­ever, ben­e­fits of this regime for for­eign in­vestors seems to have be­come more lim­ited and the fu­ture des­tiny of this regime is also in doubt whether it will not fol­low the can­celled spe­cial VAT regime.

Up un­til 2015, the spe­cial tax regime was known as a fixed agri­cul­tural tax which had been a na­tion­wide tax. Since 2015, the fixed agri­cul­tural tax regime has been can­celled with si­mul­ta­ne­ous ex­ten­sion of uni­form tax regime to the 4th cat­e­gory, which at first sight seems to be sim­i­lar to the for­mer fixed agri­cul­tural tax. But, the shift is not en­tirely equal. One of the dis­tinc­tive dif­fer­ences is that there is no clause un­der the uni­form tax regime that the div­i­dend dis­tri­bu­tions of such tax­pay­ers are ex­empted from ad­vance cor­po­rate profit tax pay­ments as it were the case with the fixed agri­cul­tural tax ( pre­vi­ous clause 153.3.2. of the Tax Code). The is­sue is that the Tax Code con­tains spe­cial pro­vi­sions that cor­po­rate res­i­dent tax­pay­ers when dis­tribut­ing div­i­dends shall pay a cor­po­rate tax at the stan­dard rate ( cur­rently 18%) in ad­vance re­gard­less of the sta­tus even as tax ex­empted en­ti­ties or re­liefs of the prof­its from tax­a­tion. The ad­vance cor­po­rate profit tax ( ACT) is paid out by the com­pa­nies own funds who are pay­ing the div­i­dends, i. e., no with­hold­ing from the div­i­dends. ACT when paid may be used by law only for off­set of fu­ture cor­po­rate profit tax li­a­bil­i­ties, i. e., is not sub­ject to re­fund to the tax­payer or al­low­able for off­set against other taxes. There­fore, such ACT be­comes for agri­cul­tural tax­pay­ers at the uni­form tax regime of the 4th cat­e­gory just an ex­tra tax ex­pense be­cause th­ese tax­pay­ers do not pay reg­u­lar cor­po­rate profit tax and thus do not have the tax li­a­bil­i­ties against which ACT may be used for off­set­ting that li­a­bil­i­ties.

The­o­ret­i­cally, such reg­u­la­tion ap­plies to any div­i­dend dis­tri­bu­tion un­der this regime since the be­gin­ning of 2015. Yet, for the years un­til 2017, there have been at least tech­ni­cal ar­gu­ments to chal­lenge the ap­pli­ca­tion of the ACT charge as at that time the sec­tion on uni­form tax contained in­cor­rect ref­er­ence to the pro­ce­dure that shall be ap­plied. This er­ror has been ad­justed by the law with ef­fect since Jan­uary 1, 2017. There­fore, for this year the above- said ex­cuse is al­ready not lit­er­ally ap­pli­ca­ble. The cur­rent po­si­tion of the tax au­thor­i­ties is that the dis­tri­bu­tion of div­i­dends by agri­cul­tural pro­duc­ers at the uni­form tax regime trig­gers an 18% tax ( ACT). Pub­licly known at­tempts of the tax­pay­ers to over­rule such po­si­tion ( ex­pressed in the form of tax rul­ings) in ju­di­cial pro­ce­dures have so far failed. As such, in­vestors shall take into ac­count this an­tic­i­pated tax bur­den or at least its ex­po­sure.

Div­i­dend dis­tri­bu­tions to in­di­vid­u­als are ex­plic­itly ex­empted by the Tax Code from the ACT charge. I. e., only div­i­dends paid to other le­gal en­ti­ties are in­her­ent with the ACT. For in­di­vid­u­als, the ex­tra ben­e­fit is also avail­able of ap­ply­ing per­sonal in­come tax to the div­i­dends from such tax­pay­ers ex­empted from cor­po­rate profit tax at the half of stan­dard rate.

In case of div­i­dend dis­tri­bu­tions to non-res­i­dents from agri­cul­tural tax­pay­ers un­der the uni­form tax regime, then the tax ex­empted en­ti­ties re­duc­tion of with­hold­ing tax un­der the tax treaties may be also ques­tion­able.

Gen­er­ally speak­ing, the fu­ture of the dis­cussed spe­cial tax regime is un­cer­tain. In­tro­duced ini­tially in 2009, in the form of a fixed agri­cul­tural tax planned for a lim­ited pe­riod of time and then ex­tended for a num­ber of times, fi­nally in­def­i­nitely, maybe de-facto stopped and even with­out leg­isla­tive changes.

Since 2015, this tax regime was legally changed into a do­mes­tic tax. Do­mes­tic taxes are lit­er­ally charge­able only within ter­ri­to­ries of lo­cal mu­nic­i­pal­i­ties which cur­rently by law are lim­ited by boundaries of cities, towns, vil­lages. There­fore, even now ap­ply­ing this tax regime in re­spect of agri­cul­tural busi­ness be­yond of­fi­cial boundaries of hu­man set­tle­ments which seems to be ques­tion­able from a pure le­gal per­spec­tive. The fu­ture of this regime may de­pend just on change of the tax im­ple­men­ta­tion prac­tice.

5 Pankivska St., 5 floor, Kyiv 01033, Ukraine; ad­min@kmp.ua, ww.kmp.ua, www.ao.kmp.ua +38 044 490 7197

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