Dividend Taxation Rules

It is known that the purpose of any business is to make a profit. The profit received by the enterprise can be directed to the further development of the enterprise or distributed among its participants (founders) by paying dividends.

According to the definition given in par. 14.1.49 of Art. 14 of the Tax Code of Ukraine, dividends is a payment made by a legal entity – the issuer of corporate rights, investment certificates or other securities in favor of the owner of such corporate rights, investment certificates and other securities certifying the investor’s ownership of shares (assets)) of the issuer, in connection with the distribution of part of its profits, calculated according to the rules of accounting.

The main condition for the payment of dividends is the presence of the company’s net profit for the relevant period of activity. This is the profit that remains at the disposal of the company after the payment of taxes, fees, deductions and other mandatory payments to the budget.

To determine the net profit, it is necessary to refer to the accounting data, in particular to check the line 2350 “Net Financial Result: Profit” of the statement of profit and loss.

The following points should be taken into account when the owner decides to pay dividends:

1) The amount of dividends may not exceed the amount of net profit of the enterprise for the period in which dividends are paid.

2) In determining the frequency of accrual and payment of dividends, one should refer to the relevant legislation governing the legal status of enterprises of various organizational and legal forms, as well as comply with the provisions of the charter or other constituent document of the company.

For instance, limited liability companies may pay dividends for any period that is a multiple of a quarter, unless otherwise provided by law. For joint-stock companies a basic period is a reporting year, unless a shorter period is determined by the general meeting.

3) Dividends can be paid for previous reporting periods, if the company has not previously decided to determine the distribution of net income (i.e., if it has not paid dividends or if there is no decision on the direction of profits for the development of the company).

For example, dividends for 2019-2020 can be distributed in 2022.

Next, we will consider the rules of taxation of dividends, which differ depending on which group of taxpayers belongs to the legal entity that pays dividends, as well as taking into account the diversity of persons who may be recipients of income in the form of dividends.

1. Payment of dividends in favor of individual participants

Dividends are subject to personal income tax (PIT) and military duty.

PIT rates:

– 5% – if the dividends are accrued by the income taxpayer, which is on the general system of taxation;

– 9% – if the legal entity that pays dividends is a single tax payer and is on the simplified taxation system, or is a non-resident or has the status of a mutual investment institution (corporate and mutual investment funds);

– 18% – if dividends are accrued on shares or other corporate rights that have the status of preferences, or other status that provides for the payment of a fixed amount (such payments for tax purposes are equated to wages).

The rate of military duty is 1.5% of the amount of dividends. At the same time, the Verkhovna Rada of Ukraine registered the Fraft Law No. 7311, which proposes to increase the rate of military duty from 1,5% to 3% for the period of martial law and state of emergency. Consideration of the Draft Law has not yet taken place. The Main Committee on Finance, Tax and Customs Policy recommends adopting the Draft Law as a basis after its consideration in the first reading.

The tax agent responsible for paying taxes to the budget at the expense of a natural person receiving dividends is a legal entity issuing corporate rights or securities.

Please note that dividends are finally taxed at the time of their accrual, i.e., at the time of the owner’s decision on their distribution and payment.

Taxes are paid to the budget when paying dividends in a single settlement document. Banks accept payment documents for the payment of dividends only on condition of simultaneous submission of a settlement document for the transfer of personal income tax and military duty to the budget.

If dividends are accrued but not paid, the taxes are subject to transfer to the budget within 30 calendar days following the last day of the month of accrual of income in the form of dividends.

The above tax rules are also relevant for non-resident individuals in whose favor dividends are paid. This is due to the fact that dividends are income with their source of origin from Ukraine and, therefore, are taxed at the rates determined for residents (par. 14.1.49 of Art. 170 of the Tax Code of Ukraine).

2. Payment of a “dividend” advance contribution by income taxpayers

According to par. 57.1-1.2. of Art. 57 of the Tax Code of Ukraine, the issuer of corporate rights, which decides on the payment of dividends to its owners, accrues and pays to the budget an advance payment of income tax.

This applies only to those taxpayers who chose the general system of taxation.

The following criteria are important for determining the amount of the advance payment and the need to pay it:

– the fact of filing the income tax declaration for the tax (reporting) year, based on the results of which dividends are paid;

– the fact of full payment of tax liabilities under such declaration.

In this case, the advance payment is calculated exclusively from the amount of excess of dividends payable, over the value of the object of taxation for the relevant tax (reporting) year, based on the results of which dividends are paid. The total object of taxation is reflected in line 04 of the income tax declaration.

NB: if the owners of the enterprise have decided to distribute the profit for several periods (years), the calculation of the advance payment should be carried out for each year separately.

For example, consider several cases of dividend payments for 2021.

Situation No. 1.

If the income tax declaration for 2021 is filed and the monetary obligations under such return are repaid, the calculation of the amount of the advance payment is carried out according to the following formula:

[Amount of excess] = [amount of dividends] – [object of income tax for 2021]

If the excess amount is calculated to be negative (–), it is not necessary to pay an advance.

If the amount of the excess has a positive value (+), the advance payment is paid at the rate of 18% of the amount of the excess.

Situation No. 2.

If the income tax declaration for 2021 is not filed and/or the monetary obligations under such return are not repaid, the advance payment is calculated from the total amount of dividends payable at the rate of 18% of the total amount.

Please note that the amount of dividends payable to the owner is not reduced by the amount of the advance payment. The “dividend” advance payment shall be credited to the reduction of the accrued income tax liability declared in the tax declaration for the relevant tax (reporting) period, or transferred to the reduction of tax liabilities of subsequent periods.

At the same time, the tax legislation provides for cases in which the advance payment is not paid, namely in the case of dividends paid to:

– natural persons;

– in favor of the owners of corporate rights of the parent company, paid within the amount of income of such company, received in the form of dividends from others;

– a payer of income tax, the income of whom is exempt from taxation in accordance with the provisions of the Tax Code of Ukraine, in the amount of income exempt from taxation in the period for which dividends are paid;

– collective investment institutions;

– residents of Diia City – taxpayers on special terms.

3. Payment of dividends in favor of non-resident legal entity

A resident who makes any payment from income originating in Ukraine in favor of a non-resident, including the payment of dividends, withholds tax on such income at the rate of 15% of their amount and at their expense, paid to the budget during such settlement, unless otherwise provided by the provisions of international agreements (the so-called repatriation tax).

Fot instance, Art. 10 of the Convention between the Government of Ukraine and the Government of the Republic of Cyprus on Avoidance of Double Taxation provides that dividends may be taxed in accordance with Ukrainian law, but if the beneficial owner is a resident of Cyprus, the tax shall not exceed:

– 5% of the total amount of dividends, if the beneficial owner owns at least 20% of the capital of the company paying dividends, or has invested in the acquisition of shares or other rights of the company equivalent to at least 100,000 euros;

– 15% of the total amount of dividends in all other cases.

However, the application of the provisions of an international agreement requires the fulfillment of certain conditions:

– the non-resident in whose favor the dividends are paid must be the beneficiary (actual) recipient (owner) of income and a resident of the country with which Ukraine has concluded an international agreement;

– providing a non-resident tax agent with a document confirming the status of a tax resident of a country with which an international agreement has been concluded, namely a certificate (or its notarized copy) issued by an authorized body of a foreign state, and other documents if required by international agreement.

In addition, we recommend taking into account the provisions of the Multilateral MLI Convention (steps 6, 14, 15 of the BEPS Action Plan), ratified by Ukraine and covered by a number of tax treaties concluded with foreign countries.

The Convention provides for the application of the Principal Purpose Test (PPT), which means that a benefit under an international double taxation treaty is not granted in respect of income or capital if there are grounds to conclude that receiving this benefit was one of the main objectives of concluding the agreement.

4. Dividend taxation of controlled foreign companies (CFCs)

A CFC is any legal entity registered in a foreign state or a foreign entity without the status of a legal entity under the control of a natural or legal person resident in Ukraine.

The rules of income taxation of CFCs came into force on January 1, 2022.

We will analyze two cases related to the payment of dividends to CFCs.

Situation No. 1. A CFC owns the corporate rights of Ukrainian companies that pay dividends to it.

In this case, the amount of the CFC’s profit received in the form of dividends from legal entities of Ukraine (both directly and indirectly through a chain of controlled legal entities) is considered the amount of dividends received directly by the controlling entity.

At the same time, dividends are taxed at “classic” rates set by the Tax Code of Ukraine for individuals.

Such income is not taken into account when determining the adjusted profit of the CFC, and is not subject to further taxation during the actual payment of dividends in favor of the controlling entity.

Situation No. 2. A CFC does not own the corporate rights of Ukrainian companies and distributes net profit to the controlling entity (directly or through a chain of indirect ownership).

In such circumstances, the rules for the taxation of dividends will differ depending on when the distribution of the CFC’s profits is made, before or after the submission of the CFC’s report.

In order to avoid double taxation (by including the dividends by the controlling entity in its total taxable income and at the same time including them in the adjusted income of the CFC), we recommend distributing dividends before the CFC’s report, and if it is not possible, by the end of the second calendar year, following the reporting year. In this case, the controlling entity will pay personal income tax at the rate of 9%.

Please note that when determining the rules of taxation of dividends, one should take into account the individual characteristics and legal status of each issuer of corporate rights and a natural or legal person who is the recipient of income in the form of dividends.

If you have any questions about the specifics of CFC’s dividend taxation or need advice on how to manage the accrual of dividends at current tax rates, as well as to resolve other issues related to taxation of dividends and equivalent payments, lawyers and consultants of K.A.C. Group will be happy to provide legal support.