• Dmitriy Mikhailenko

    Managing Partner,
    Crowe LF Ukraine

Crowe LF Ukraine

Address: 8 Redutna Street, Kyiv, 01015, Ukraine

Tel/Fax: +380 44 391 303



Crowe LF Ukraine is a law firm launched in 2017 by the founders of law firms OMP Tax & Legal, Pravozakhyst Ukraine, Center of Land Law. Coming together as Crowe LF Ukraine, they provide a full scope of services in the areas of tax, customs, land law, international trade, foreign economic activity, etc.

High standards of service are proved by membership in Crowe Global, one of the biggest worldwide advisory and auditing networks. Crowe Global services include audit, accounting, legal, consulting, valuation and other services. Our global presence (805 offices in 130 countries) enables us to serve customers whatever their location.

Crowe LF Ukraine, together with Crowe Audit & Accounting Ukraine, brings together more than 60 qualified specialists headed by well-known experts from different fields of law and consulting: Dmitriy Mikhailenko, German Taslitskiy, Anton Kutsenko, Victor Kobilyansky, Rustam Vakhitov, Olga Bogdanova and others. They are members and actively participate in the work of public councils under the Verkhovna Rada’s Committee for Taxation and Customs Policy, Ministry of Finance of Ukraine, Ministry of Economic Development and Trade of Ukraine, State Fiscal Service of Ukraine, heads of committees in the Chamber of Commerce and Industry of Ukraine, the Union of Entrepreneurs of Ukraine and Poland, and are advisers to the EBA Industry Committee on Information Technologies and members of  editorial boards of professional publications. The firm’s partners were on various occasions ranked among the TOP-100 best lawyers in Ukraine.

The main industries of our work: IP/IT, agriculture, finance, pharmaceuticals, industry, trade, manufacturing, construction, import and export.

Customers of Crowe LF Ukraine include well-known international and national brands and representatives of large and medium-size businesses.

Tax in Ukraine

Let’s start with macroeconomic issues, since they ultimately influence both tax policy and taxation itself. The IMF and European Commission are planning to lend a lot of money this year, so in short-term perspective we will “prosper”. But not for long. In summer, the new government will be forced to introduce higher gas tariffs, so there will immediately be less money. Plus, a critically high amount of debts to be returned on foreign borrowings of our government will be reached in exactly 5 years, right before the next presidential election.

Everything is clear. Hello to fans of the IMF-dependent economy. Or rea­lists, as they like to call themselves. It’s also clear that the generosity in March will demand that IMF requirements are met. Therefore, our President, Prime Minister, Mi­nister of Finance and  Head of NBU Board signed a commitment before the IMF that the corporate income taxation system will not be changed. This means goodbye to the tax on the withdrawal of capital, or exit tax. (It is symptomatic that the signature of the chairman of the Verkhovna Rada on this document is missing — this is an estimation by the IMF of our assumed parliamentary republic).

You can certainly be optimistic and say that, as a rule, our government fulfills its promises poorly. But in this matter I will be a pessimist, and support the realists. Let’s get back to the macro.

For the next five years, Ukraine’s GDP will grow slightly, but given the falls of previous years, it will be floundering in the swamp. This is the IMF’s forecast as well. The hryvnia may fall if a global crisis begins, which is anticipated after coming elections in America.

But not by much, taking into account the mega-fall of 40 — 45% in recent years. Until the tranche had actually received our government, needing to stabilize the state budget, went ‘breaking bad’. If moral cycles exist in society, then we find ourselves in the same situation as 10 years ago — a serious decline in morals due to the absence of vertical power and a fierce political struggle. This  is directly related to taxes, because the Fiscal Service has been advised to act tough with taxpayers. In fact, this resulted, for instance, in wild reasons for additional charges of corporate income tax, which are based on illiterate understanding of accounting. Well, with differences in the exchange rate (recall the forecast that the hryvnia exchange rate would fall), the government has always fought with the fierce. As well as with unprofi­table transactions — and although they were expressly forbidden to be conside­red for corporate income tax purposes, we already come across tax inspection reports where the sum of losses is not recognized as expenses for corporate income tax, and with reference to the accounting. As such, the fears of our chief accountants about the non-objectivity of  inspectors, when the corporate income tax was attached to accounting, were fully justified.

However, accounting disputes have a bright spot: neither judges nor lawyers have proper understanding of accoun­ting. Therefore, they tend to rely on the conclusions of forensic-accoun­ting expertise, where reports are usually written by people who are a little better versed in accounting than the tax autho­rities. It is clear what I’m getting at. I don’t know what will happen tomorrow, but corporate income tax litigation, where accounting is a controversial point, has become predictable. This, unfortunately, cannot be said about administrative appeal, where too often now one has to observe the primacy of “more taxes at any cost”.

Among the latest cases that struck the imagination: the Fiscal Service attempts to charge taxes to the lessees of an unscrupulous lessor under the cover of unrealistic operations. Everyone understands: the leased office center itself is standing still and ‘going nowhere’, the leased premises are transparent to make sure of realistic transaction, but the Fiscal Service is too eager to find someone to blame among those taxpayers who are too kind-hearted and not very ‘sharp-toothed’.

Another case is a mass penalty campaign for tax invoices issued by companies for themselves. For example, when using goods that are not part of their business activity. Please note that in these cases, the VAT is paid on time, based on the VAT-return. The issue was whether it was necessary to register the tax invoice at all, and the law allows for interpretation in favor of the taxpayer. The fact that this story has grown into massive penalties clearly indicates that the government has returned to planning to fill the budget in this way.

Should we proceed with the ongoing practice of blocking tax invoices?

As a result, VAT is converted into a turnover tax from two sides: someone has their tax invoice blocked, someone has it passed for registration, but still the bu­yers receive claims that they contacted the ‘wrong’ companies, but claim a tax credit, and even a budget refund!

The legislative initiative is keeping up with practice

Everyone has probably heard of the Draft Law On Cancellation of the Right to Recover VAT from Farmers with a macro effect in the amount of UAH 50 billion. As well as of the initiative of the Pension Fund to raise the limit for charging the single social contribution, and at the same time to apply it at a regressive rate to income above the limit too. And to tax all directors with a triple minimum single social contribution. This, by the way, is the main expected effect in terms of expected income — all you have to do is to multiply the number of registered enterprises — after all, there is a director in each one — for a triple single social contribution, and the forecast will be ready (not to mention the fact that half of them are “dormant”, and will not be forced to pay any single social contribution penalties). Finally, the Ministry of Social Policy estimates formal, but sometimes not very comprehensive, criteria for qualifying relations with private entrepreneurs as labor relations.

All this is intended to give the budget some money, big or small, time will tell. But the middle class seems to be in danger of being destroyed. There’s nothing to catch — let’s remember the GDP growth forecast.

Liberalization in the sphere of currency regulation

We have big hopes for such great initiatives as extending the term for foreign economic payments, the replacement of investment licenses with limits, or the replacement of loan registration with a notification procedure. But from the last point, we understand that the authorities are simply afraid of giving full monetary freedom.

On 17 January 2019 clarification was issued by the NBU, where instead of canceled limits on foreign borrowings (11%), banks are obliged to check interest income in the order of financial monitoring, including those where LIBOR or the Central Bank rate of a particular country is exceeded. That is, in some situations even such a loan will be doubtful, where the interest rate is less than 11%.

It is worth remembering here that the NBU’s currency liberalization came about thanks to the entry into force of the anti-offshore package (replacement of currency control with tax control over operations with low-tax jurisdictions, although… see above about financial monitoring), though its adoption was delayed.

In fact, these anti-offshore initiatives are striking due to their professionalism. They hit the majority of the usual mo­dels of tax optimization, and in some ca­ses — several times. For example, non-market purchase of goods from an offshore without substance could be taxed as notional dividends, while the law already contains the controlling mechanisms in the form of a 30% tax difference or Transfer Pricing.

As well it shall not be included in the expenses of the buyer as a non-business operation. This tax difference is also returned to the Draft Law. It seems that the fiscal authorities are not confident in their arsenal of combating offshore companies and have included enough in the draft law and to spare — maybe something will ‘shoot’. Or they did so to be able to bargain at the discussion stage of the draft law in Parliament.

As we have already mentioned, the set of tools for fighting is quite considerable. Tools like:

— controlled foreign companies (taxation of the undistributed profit of a foreign company) from the controller — a resident of Ukraine as imputed dividends, but at the rate of personal income tax of 18%;

— extended rule of thin capitalization, which they intend to extend to loans from residents (including Ukrainian investment funds);

— the procedure of taxation of transactions between non-residents with shares, who directly or indirectly receive most of their value from Ukrainian real estate, evokes concern and respect.

Even if these rules are incomplete in terms of procedures, they cannot be ignored by taxpayers who do not build their business on the principles of “they won’t find out about us.” Moreover, after joining the automatic exchange of information (from foreign banks — to our tax authorities), it will become easier to find out.

At this point we can be optimistic and assume that reasonable international taxation, at least for a number of business models, can be structured in terms of an anti-offshore package. But it will require both forecasting and more thorough study along with higher costs. At least for a real office abroad.

In the meantime, as we understand, the movement of the BEPS law to Parliament is being slightly slowed, do not believe the negotiations with the IMF, in a package with it there is a one-time declaration and amnesty of income and capital.

And now it is the tax rate within the framework of this amnesty, which is being negotiated. And when someone wants, say, less than 5%, and others — more than 9%, the negotiations may take a long time.

Summing up, we would once again advise businesses to re-read the draft law (it is officially published on the website of the Ministry of Finance) and “try it for size” with regard to their own business. And even better, to reschedule it in a reasonable assumption that this draft will become a law, for example, from 2020.


P.S. The article turned out caustic, perhaps it’s a sign of the times. Nevertheless, let us accept and treat with gratitude everything that it prepares us for.


P.P.S. I thank Daniil Monin for his reviews on the macro-situation on which I relied in the first part of the article.