Changes to the Tax Code of Ukraine Relating to International Groups of Companies

The Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine Regarding the Implementation of the International Standard of Automatic Exchange of Information on Financial Accounts” dated March 20, 2023 No. 2970-IX, among other things, provides for a number of changes in the field of reporting of international groups of companies. Below we are describing the main provisions of the law on these issues.

Definition of a QCAA

The QCAA agreement is an agreement concluded between the competent authorities of Ukraine and a foreign jurisdiction, which are parties to a valid international agreement containing provisions on the exchange of information for tax purposes, which stipulates for the automatic exchange of reports at a coountry level of an international group of companies between Ukraine and such a foreign jurisdiction (Qualifying Competent Authority Agreement), including the CbC Multilateral Agreement.

Definition of a CbC Multilateral Agreement

CbC Multilateral Agreement is the multilateral agreement between competent bodies about automatic exchange reports by countries (Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports), concluded in accordance with Article 6 of the Convention about Mutual Administrative Assistance in Tax Matters.

Definition of an International Group of Companies

This concept means two or more legal entities or entities without a status of legal entity that are tax residents of different jurisdictions (states, territories) (in particular, if at least one of such persons is a tax resident of one foreign jurisdiction (state, territory), which conducts economic activity through a permanent representative office in another jurisdiction (states, territories) and are related to each other by the criteria of possession or control in such a way that, according to international financial reporting standards or other internationally recognized financial reporting standards, the preparation of consolidated financial reports or the preparation of consolidated financial reports would be mandatory for them if the shares (corporate rights) of one of such members of an international group of companies were in circulation on the national and/or foreign organized stock market (stock exchange)

Definition of a Parent Company of an International Group of Companies

This concept means a member of an international group of companies which simultaneously meets the following criteria:

– directly or indirectly owns the corporate rights of other members of an international group of companies (or effectively controls such members), and the share of such ownership is sufficient to include the financial reports of such other members of an international group of companies in the consolidated financial reports of such international group of companies in accordance with international financial reporting standards or other internationally recognized financial reporting standards, or the preparation of consolidated financial reporting would be mandatory for such a company if the shares (corporate rights) of one of the participants of the relevant international group of companies were in circulation on the national and/or foreign organized stock market (stock exchange);

– financial reports of such a member are not subject to inclusion in the consolidated reports of any of the other members of the international group of companies in accordance with international financial reporting standards or other internationally recognized financial reporting standards.

Definition of a Member of an International Group of Companies

A member of an international group of companies is:

a) any separate economic unit of an international group of companies (in particular, a Ukrainian or foreign legal entity or an entity without the status of a legal entity) included in the consolidated financial reports of such an international group of companies for the purposes of such reporting, or which necessarily should have been included in the consolidated financial reports in the event that the shares (corporate rights) of such a separate economic unit of an international group of companies were in circulation on the national and/or foreign organized stock market (stock exchange);

b) any such economic unit of an international group of companies excluded from the consolidated financial reports of such an international group of companies in accordance with the criteria determined for the purposes of drawing up the specified report (regarding ownership or control between legal entities or entities without the status of a legal entity, the materiality of such economic units for an international group of companies, etc.);

c) any permanent representative office of any economic unit of an international group of companies specified in subparagraphs “a” and “b” of this subsection, provided that such economic unit prepares separate financial reports for such permanent representative office for financial, regulatory or tax purposes or for internal management control purposes.

Provisions on the Obligation to Submit Notices of Participation in the International Group of Companies

Taxpayers who are the members of the relevant international group of companies and have carried out controlled operations in the reporting year are required to submit a notice of participation in the international group of companies by October 1 of the year following the reporting year.

The changes also clearly set the requirements for the content of such a notification, namely the data that must be specified in it (clause 39.4.2.2 of the Tax Code of Ukraine).

The form of the notice and the procedure for filling it out are approved by the Order of the Ministry of Finance of Ukraine dated December 31, 2020 No. 839.

Cases of Mandatory Submission of the Report by the Country of the International Group of Companies

A taxpayer who is a resident of Ukraine belonging to the international group of companies, in the cases specified in this subsection, is obliged to submit a report to the State Tax Service for the countries of the international group of companies in electronic form in compliance with the requirements of the Laws of Ukraine “On Electronic Documents and Electronic Document Flow” and “On Electronic Trust Services”.

The report is submitted by the payer in the following cases:

1) the total consolidated income of the international group of companies, to which the taxpayer belongs, for the financial year preceding the reporting one, calculated in accordance with the accounting standards applied by the parent company of the international group of companies (in the absence of information – in accordance with international accounting standards), is equal to or exceeds 750 million euros, and in the presence of one of the following circumstances:

– the taxpayer is the parent company of an international group of companies;

– the parent company of an international group of companies authorizes a taxpayer who is a resident of Ukraine to submit a report for the countries of the international group of companies to the supervisory authority;

– in accordance with the requirements of the legislation of the jurisdiction of the tax residence of the parent company of the international group of companies, such international group of companies is not required to submit a report by the country of the international group of companies;

– there is an international agreement in force containing provisions on the exchange of information for tax purposes between Ukraine and the relevant foreign jurisdiction of tax residency of the parent company of the international group of companies, but the corresponding QCAA agreement has not entered into force as of the end of the fiscal year for which the report by the country regarding such an international group of companies must be submitted.

The report by the country of the international group of companies is prepared for the financial year established by the parent company of the international group of companies, which may not coincide with the calendar year, and is submitted within twelve months after the end of such financial year (in the absence of information on the financial year established by the parent company of the international group of companies – within twelve months after the end of the calendar year);

– there is an international agreement in force containing provisions on the exchange of information for tax purposes between Ukraine and the corresponding foreign jurisdiction of the tax residence of the parent company of the international group of companies, but there are facts of systematic non-fulfillment of the relevant QCAA agreement.

The State Tax Service body shall notify the taxpayer – a resident of Ukraine, who belongs to the international group of companies, and the parent company of which is a tax resident of such foreign jurisdiction, about the existence of such facts (including those revealed on the basis of a notice of the foreign jurisdiction of the authorized member of the international group of companies about the systematic non-fulfillment of the relevant QCAA agreement, provided to the competent authority of Ukraine).

Such notice is sent within 10 working days from the date of establishment of the facts provided for in this subsection.

For the purposes of this subsection, a systematic failure to comply with a QCAA agreement with respect to a foreign jurisdiction means that the foreign jurisdiction of tax residence of the relevant member of the international group of companies has a valid QCAA agreement with Ukraine, but has suspended the automatic exchange of reports across the countries of the international group of companies for reasons other than those comply with the terms of such an agreement, or in some other way, for a long time and consistently does not automatically provide Ukraine with reports by the country of the international group of companies that are at its disposal, or about international groups companies that have members in Ukraine.

Cases of Exemption of the Payer from the Obligation to Submit a Report on the International Group of Companies

In the presence of one or more circumstances provided for in paragraphs five to seven of subsection 39.4.10 (which are defined above), a taxpayer who is a resident of Ukraine who belongs to an international group of companies is exempted from submitting a report by the country of the international group of companies regarding the relevant financial year, if the following conditions are met simultaneously:

1) an international group of companies, of which such a taxpayer is a member, submitted a report by the country of the international group of companies for the relevant financial year through another authorized member of the international group of companies in the foreign jurisdiction of its tax residency for such financial year;

2) submission of the report by country of the international group of companies is carried out no later than the deadline for submission of the report by the country of the international group of companies;

3) the legislation of the foreign jurisdiction of the tax residency of the authorized participant of the parent company provides for requirements for the submission of reports by the country of the international group of companies for the purposes of automatic exchange of tax and financial information;

4) the foreign jurisdiction of tax residency of an authorized member of an international group of companies has a valid QCAA agreement with Ukraine as of the end of the fiscal year for which, in accordance with subsection 39.4.11 of this subsection, a report by the country of the international group of companies must be submitted regarding such international group of companies;

5) the foreign jurisdiction of the tax residency of the authorized member of the international group of companies has not notified the competent authority of Ukraine about the systematic non-fulfillment of the relevant QCAA agreement;

6) a member of an international group of companies has notified the tax authorities of the jurisdiction of their tax residency that they are authorized to submit a report by the country of the international group of companies for the relevant international group of companies (if such notification is provided for by the legislation of the jurisdiction of tax residency of this member of the international group of companies);

7) a taxpayer who is a resident of Ukraine, belonging to the same international group of companies, has informed the Satte Tax Service about a member of the international group of companies, who is an authorized member of such an international group of companies to submit a report by the country of the international group of companies, by submitting a notice of participation in the international group of companies.

Consequences of Error Detection in the Report

If the supervisory authority detects errors in the submitted report by the country of the international group of companies or receives notification of such errors from the competent authority of another jurisdiction on the basis of the QCAA agreement, it notifies the taxpayer of the need to correct errors or clarify information in the submitted report by the country of the international group of companies.

The taxpayer is obliged to submit a revised report by the country of the international group of companies with appropriate corrections or to provide an explanation by means of electronic communication no later than 30 calendar days from the date of receipt of the notification of the supervisory body.

Terms of Fulfillment of Obligations by Payers

Taxpayers who are members of the relevant international group companies and in 2022 carried out controlled operations are obliged to submit a notice of participation in an international group of companies by October 1, 2023.

Norms regarding submission of a report by taxpayers by the country of the international group of companies (if the payer is not the parent company) are applied for the first time in relation to the financial year that begins in the period from January 1 to December 31 of the year in which the CbC Multilateral Agreement enters into force, with at least one foreign jurisdiction that is a party to the CbC Multilateral Agreement and is a partner of Ukraine in the field of automatic exchange of information.

As noted on the website of the State Tax Service of Ukraine, in accordance with clause 2 of Section 8 of the MCAA CbC Multilateral Agreement, this Agreement will enter into force for Ukraine on the date the competent authority sends a notification to the OECD Secretariat of the Coordination Body of the Agreement, which will contain the information provided for in clause 1 of Section 8 of the MCAA CbC Multilateral Agreement (a list of jurisdictions with respect to which Ukraine intends to implement this Agreement and, accordingly, with which it wishes to carry out automatic exchange of CBC reports).

That is, in order for the MCAA CbC Multilateral Agreement to enter into force both for Ukraine and for each jurisdiction with which Ukraine wishes to automatically exchange information, both competent authorities (the State Tax Service and the competent authority of each such jurisdiction) must declare their intention to automatically exchange information between themselves by submitting a notification to the MCAA CbC Multilateral Agreement referred to above. As of March 2023, the specified notification has not yet been submitted by Ukraine, so the MCAA CbC Multilateral Agreement has not yet entered into force for Ukraine.