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Dividend Taxation – The Balancing Act
Following the enactment of the Tax Code in 2011, and its subsequent amendments, Taxand Ukraine reviews the dividend taxation regime as of 1 September 2012, and analyses taxpayers' issues of concern while planning dividend distributions.
1) Advance tax on distribution of dividends
Dividend distributions are generally subject to advance corporate profits tax (CPT) at a standard rate of currently 21% (to be decreased to 19% in 2013, and 16% in 2014).
Advance CPT paid to the state can be recovered by offsetting against the CPT liability of the paying company in future periods. Currently, CPT liability is calculated and paid on a quarterly basis, so that advance CPT can be offset against quarterly CPT liability.
In the most common cases, exemption from advance CPT is available where:
- The portion of dividends is distributed to individuals (resident or non-resident)
- Intermediate holding distributes the dividends to corporate shareholders (resident or non-resident). The exempt amount is equal to the amount of dividends received by the paying entity from its subsidiaries in current and previous periods.
2) Taxation of resident shareholders
Dividends received by a Ukrainian holding company from Ukrainian subsidiaries are unconditionally exempt from CPT.
Foreign-sourced dividends are exempt from CPT, subject to the following cumulative conditions:
- The Ukrainian company directly holds at least a participation of 20% in the capital of the paying entity
- The subsidiary is based in a jurisdiction that does not qualify as a tax haven jurisdiction (according to the list determined by the government).
Domestic and foreign-source dividends received by resident individuals are subject to 5% personal income tax.
3) Withholding tax on outbound dividends
Dividend distributions to non-resident shareholders are subject to withholding tax at rate of 15% (for corporations) or 5% (for individuals), unless a double tax treaty provides for a lower rate.
Application of a treaty rate is conditional on the payee to qualify as the 'beneficial owner' of the income. The concept and definition of 'beneficial owner' has been introduced as an anti-abuse measure under the Tax Code starting 1 January 2011, and the practice of application of the concept is currently developing. Recent letters from the tax authorities indicate that the definition of beneficial ownership requires an analysis of whether the payee may be viewed as intermediary.
Distributions of dividends require careful planning to prevent tax inefficiencies that may arise due to a delay or inability to offset advance CPT. Such inefficiencies occur if a significant amount of dividends is paid at once, and there is not sufficient CPT liability in the future periods for CPT recovery.
In case of business models that involve a Ukrainian intermediary holding, it is important to consider the risk that the advance CPT payable on dividends by such a holding to its ultimate parent is impossible to recover. This is because dividends received by an intermediary holding from subsidiaries are treated as exempt income and, accordingly, there will be no CPT liability in future periods to offset advance CPT. The solution is to match the amount of inbound and outbound dividends in the period to ensure the exemption from advance CPT.
Attention should be paid to the new CPT payment regime for large taxpayers (annual revenue over UAH 10 million) to take effect in 2013. Instead of quarterly payments and calculations, CPT would be paid in monthly instalments based on profits of the previous year with subsequent reconciliation based on actual profits at the end of the year. It is currently not clear whether advance CPT can be credited against monthly CPT instalments.
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