I INTRODUCTION

Following Ukraine’s 2014 announcement of its intention to create a single economic and social space with the European Union, Ukrainian legislation is undergoing fundamental changes aimed at its harmonisation with EU Law. Following simultaneous ratification of the Association Agreement with the EU by the Verkhovna Rada (the parliament of Ukraine) and the European Parliament, on 16 September 2014, the government of Ukraine commenced substantial reforms of the law, with new taxation, corporate and banking law bills being passed into law on an almost monthly basis. Implementation of the Association Agreement is designed to create new opportunities both for Ukrainian businesses in Europe and for foreign investors in Ukraine.

In 2015, the EU decided to open a formal process that will result in the introduction of a visa-free regime for Ukrainian citizens. The EU has set a number of strict criteria, including substantial changes in the regulation of border control passport rules and exchange of information, which will create a regulatory framework for visa liberalisation with the EU.

The introduction in 2016 of a new electronic declaration system for politically exposed persons is aimed at fighting corruption, which is one of the key targets in the EU’s path before the visa liberalisation decision is taken.

On 18 December 2015, the EU Commission in its Sixth Progress Report on the Implementation by Ukraine of the Action Plan on Visa Liberalisation confirmed that Ukraine has fulfilled all of its obligations on the path to visa liberalisation with the EU.

Ukraine is also seeking to increase transparency of its business and ownership in line with the recent global trend to increase transparency and accountability of business. As part of this process, Ukraine has recently introduced a public register of ultimate beneficial owners of bodies corporate.

In April 2016, in line with the global de-offshorisation trend, the president of Ukraine created the Special Working Group on de-offshorisation. The group aims to develop a de-offshorisation law by the end of 2016.

Another substantial international instrument that influences Ukrainian legislative reforms is the Extended Fund Facility (EFF) between Ukraine and the International Monetary Fund (IMF), approved on 11 March 2015 by the IMF Executive Board, which superseded the previous stand-by arrangements. In accordance with the EFF, Ukraine is obliged to implement a number of fiscal, economic and legislative measures under the IMF’s supervision.

In compliance with the EFF, significant changes were introduced to the regulation of banking and energy sectors, anti-money laundering, anti-corruption and investor protection regimes. The general drive of these reforms is aimed towards the introduction of recognised international standards (including those of the IMF, the EU and the FATF) in these areas. However, practical achievements of these reforms remain modest.

In recent years, Ukrainian business people were primarily focused on effective wealth protection and management mechanisms. The armed conflict in the eastern Ukrainian region of Donbas and the still substantial level of corruption continues to make wealth preservation and protection a number one priority. 

II TAX

Taxation of individuals in Ukraine depends on the tax residence, source and type of income.

i Tax residency

The Tax Code of Ukraine (the Tax Code) provides the following residency tests to determine the individual’s tax residency: (1) residence (permanent residence in Ukraine for a period exceeding 183 days); (2) centre of vital interests (close economic and personal ties); and (3) citizenship.

Registration of an individual as an entrepreneur in Ukraine is also sufficient to recognise this individual as a Ukrainian tax resident. In addition, an individual may voluntarily accept to become a tax resident in Ukraine in accordance with the procedures set out in the Tax Code.

Despite the above tests, in practice the main test to determine the tax residency regularly applied by the Ukrainian tax authorities is the number of days spent by an individual in Ukraine in a calendar year.

For the purposes of the Tax Code any person who fails to qualify as a Ukrainian tax resident is considered to be a non-resident of Ukraine for tax purposes.

ii Source of income

Tax residents of Ukraine pay tax on their aggregate worldwide income. Non-residents pay tax on Ukrainian-sourced income only. Non-resident individuals are not eligible for certain deductions and exemptions available to residents for personal taxation purposes.

iii Types of taxable personal income

The Tax Code recognises both monetary and non-monetary personal income.

The Tax Code provides for the following taxable types of personal income (irrespective of residency): employment income, interest and dividends income, gifts, inheritance, investment income, insurance payments, rental income, fringe benefits, amounts of punitive damages paid and written-off payment obligations to third parties, etc.

The Tax Code specifically excludes certain types of income from the taxable basis of both residents and non-residents.

In addition, certain categories of low-income taxpayers are entitled to reduce their respective incomes by an amount of the ‘social tax benefit’.

The Tax Code prescribes that if so provided by the respective international tax treaties, amount of taxes paid by a tax resident outside Ukraine may be used as credit against the amount of taxes to be paid in Ukraine, provided that the taxpayer submits a written confirmation from the foreign tax authority acknowledging that such foreign taxes have in fact been paid. However, the total amount of such foreign tax credit may not exceed the total amount of the personal income tax (PIT) due in Ukraine.

iv Rates

In 2016, a flat rate of 18 per cent personal income tax was introduced for most types of income for both residents and non-residents.

Passive income, such as dividends, interest and royalties, is generally taxable at the rate of 18 per cent, except for dividends distributed (accrued) by corporations that are subject to corporate income tax at the 5 per cent rate. Notwithstanding, the 18 per cent rate applies if the dividends are distributed (accrued) by collective investment schemes.

Income derived from disposal of real estate is taxed at the rate of either zero per cent or 5 per cent depending on (1) the type of property, (2) the frequency of disposals, and (3) the duration of the seller’s title to such property. However, disposal of real estate made by a non-resident is taxed at the rate of 18 per cent.

Standard rate for disposal of moveable property (such as vehicles) is 5 per cent. A single disposal of a car or a motorcycle within a year is non-taxable. An 18 per cent tax rate applies to the non-resident’s income from a disposal of moveable property in Ukraine.

v Gift and succession taxes

Gifts and inheritance are taxable income and both are subject to the PIT at the rate of zero per cent, 5 per cent or 18 per cent. The exact applicable rate depends on the residency status of the donator or the testator and on the degree of relation between the donator or the testator and the recipient or the heir (varying from zero per cent for spouses and children to 18 per cent for inheritance or gifts received from or by non-residents).

Tax residents shall pay income tax on inheritance and gifts irrespective of the location of the acquired assets.

vi Assets tax

Currently, the Tax Code has a consolidated assets tax that consists of land tax, non-land real estate tax and transport tax.

The land tax is payable by individuals holding title to or right of permanent use of land plots in Ukraine, irrespective of their tax residency. Particular land tax rates are determined by the municipal authorities and shall not exceed 12 per cent of the cadastral value of a land plot, depending on the type of land plot and the particular rights of its holder (i.e., either title or right to permanent use). The Tax Code provides for a number of tax exemptions regarding land tax depending, inter alia, on the status of an individual, the type of land plot, its size and the purpose of its use.

Residual and non-residual real estate owned by an individual is subject to a non-land real estate tax. The tax rates are set forth by the municipal authorities but shall not exceed 3 per cent of the minimum wage as of 1 January of the reporting (calendar) year per square metre. At the same time, the Tax Code sets forth certain exemptions for the real estate tax (e.g., the minimum size of a real estate, which is exempt from the real estate tax).

The first 60 square metres (for an apartment), 120 square metres (for a house) or 180 square metres (where an apartment and house are under the same ownership) are exempt from taxation. This exemption applies only once, irrespective of the number of properties in ownership.

If the taxpayer owns an apartment of more than 300 square metres or a house of more than 500 square metres, the amount of tax due increases by 25,000 hryvnas.

Owners of vehicles registered in Ukraine, irrespective of their residency, are subject to transport tax in the amount of 25,000 hryvnas per vehicle that is less than five years old and has an average market value exceeding 750 minimum wages. The average market value for each type of vehicle is determined by the Ministry of Economic Development and Trade of Ukraine.

vii Military duty

To provide the Ukrainian armed forces with additional funding in view of the current political situation in Ukraine, the Verkhovna Rada has introduced a military duty. Military duty is levied on Ukrainian-sourced income of non-residents and on the worldwide income of the tax residents of Ukraine at the rate of 1.5 per cent.

viii Issues relating to cross-border structuring

Ukraine has a wide network of the double taxation treaties with approximately 70 countries. However, the double taxation treaties with such jurisdictions as Malta and Luxembourg are still pending ratification. The majority of the double taxation treaties entered into by Ukraine is based on the OECD model convention.

Currently while considering trans-border structuring options Ukrainian private business is focused on such jurisdictions as the Netherlands, Estonia, Hungary, Slovakia, Latvia and the UAE due to the favourable provisions of the respective double taxation treaties between Ukraine and these countries. While Cyprus remains to be one of the most popular and attractive cross-border structuring option for the majority of Ukrainian businessmen in tax planning and private wealth protection and preservation, the interest in structuring through the Netherlands, Estonia, Hungary, Malta, Luxembourg, the UAE and other jurisdictions with favourable tax regimes for holding, financial and operational companies will continue to grow for the observable future.

As a part of the tax reform the transfer pricing rules set in the Tax Code were significantly amended, in particular with regard to the list of transactions that are subject to the transfer pricing regulation (the TP Rules). The TP Rules are based on the OECD Transfer Pricing Guidelines. These regulations require that prices for goods and services in certain transactions shall be set on an arm’s length principle.

The TP Rules apply primarily to cross-border transactions with related foreign entities. However, they may also apply to transactions between unrelated parties (namely, cross-border transactions involving counterparties from certain ‘low-tax’ jurisdictions).

The above transactions are subject to the TP Rules provided that the following criteria are met: the total taxable income of the respective Ukrainian taxpayer or its related parties exceeds 50 million hryvnas and the volume of such transactions with any particular counterparty exceeds 5 million hryvnas (exclusive of VAT) in the relevant calendar year (each such transaction a ‘controlled transaction’). Ukrainian taxpayers are required to report all controlled transactions to the tax authorities on an annual basis.

Based on such reporting, as well as on their own monitoring and tax audits, Ukrainian tax authorities have the ability to make transfer pricing adjustments and impose additional tax liabilities in respect of the controlled transaction if the terms and conditions of a particular controlled transaction are not on an arm’s-length basis.

III SUCCESSION

Rules governing succession are incorporated in the Sixth Book (Chapter) of the Civil Code of Ukraine (the Civil Code). Conflict of law issues arising out of and connected with succession are set forth in the Law on Private International Law. Useful guidelines on the application of the succession legislation are outlined in the Letter of the High Special Court of Ukraine on Civil and Criminal Cases on court practice in succession cases dated 16 May 2013.

Following Roman civil law traditions, succession in Ukraine is regulated either by way of a testament or pursuant to provisions of the Civil Code (succession by law).

A testator’s estate is defined as all the testator’s rights and liabilities remaining in force after his or her death.

The death of the testator triggers probation. Within six months after the commencement of the probation, the heirs may either execute or renounce their rights to succession.

Transfer of title to heirs is effected on the basis of a certificate of inheritance issued by a notary or, in rural settlements, by the authorised officer of a municipal government body, upon expiration of the six months’ probation period. Issuance of a certificate is mandatory for immoveable property, while for moveable property it is optional (though highly recommended).

i Intestacy rules

Inheritance by law arises if a testator leaves no valid will and testament. Inheritance by law rules will also apply if the testator has left a will but it was successfully challenged by heirs or if inheritance was renounced by heirs.

There are several lines of priority of succession. The testator’s estate is distributed among the heirs of each priority line (i.e., the heirs of each priority line exclude the members of the next lines). This order of succession may be changed upon written and notarized agreement between the heirs when such agreement does not infringe rights of the heirs that are not parties thereto.

The principle of representation applies (i.e., in case of the death of an heir of the first priority line (e.g., the testator’s son) his or her heirs will have the right to their share of the inheritance).

The Civil Code intestacy rules provide that only individuals may inherit by law. The right to succession may be executed by an heir upon provision of evidence of his or her relations with the testator (e.g., birth or marriage certificate). The heirs of the same priority line inherit the testator’s estate in equal shares; however, they may enter into a separate agreement and decide upon distribution of the testator’s estate among them.

ii Inheritance by will

The Civil Code sets out strict requirements to the form of the will. It shall be made by a testator in writing with a statement of the date and place of notarisation. The testator may define as the heirs either individuals or legal persons. Only adult persons of full legal capacity may execute a will (they must be 18 years old (or in certain cases 16) or over and with full mental capacity).

A testator may set out in a will any additional bequests in favour of any designated person (e.g., right to abide in the inherited real property). The testator may also determine certain preconditions or conditions for his or her heirs to satisfy in order to receive the right to inheritance (e.g., residence in certain place, being of a certain age). However, such preconditions must not contradict the law or principles of public morality.

A document executed in breach of will execution rules set out in the Civil Code or by a person lacking full legal capacity is deemed void ab initio.

A will is deemed void when there is evidence that the testator has executed the purported will either by coercion or as a result of fraud. Upon claim of the interested person such will may be declared void by the judgement of the court.

Spouses may draft a joint will. Apart from the will a testator may also enter into a succession agreement under which acquirer obliges to undertake certain actions prescribed by alienator (testator) in return for ownership rights to the testator’s estate.

iii Mandatory inheritance

Testator’s right to choose heirs is limited by provisions of Section 1241 of the Civil Code, which guarantees that underage or disabled children, spouses and parents shall in any case inherit at least half of the portion they would have received in the absence of the last will. Under Ukrainian law the definition of a ‘disabled person’ covers both persons with disabilities and retired persons.

iv Conflict of law issues

As a general rule succession is governed by the law of the country of the last residence of the testator (i.e., if a citizen of Romania resides and dies in Ukraine the applicable law is that of Ukraine). However, if a testator executes a will he or she can choose his lex patriae (e.g., in the case of a Hungarian testator – the law of Hungary).

There are, however, certain overriding provisions of lex specialis. The form of the act shall correspond to the requirements of the law of a place (country) of the testator’s death. However, the will may not be declared void on the basis of error in form if it corresponds to the law of the country where the testator’s immoveable property is situated, the lex patriae, the law of the country of the last residence or the law of the country where the will was executed, whichever is applicable.

Transfer of title to immoveable property shall be governed by the law of the state where such immoveable property is situated.

v Matrimonial rules

In 2014–2015 no amendments were made to the Family Code of Ukraine (the Family Code), the act governing matrimonial relations in Ukraine. Same-sex marriages are not recognised by the Family Code and their official recognition is unlikely in Ukraine in the foreseeable future.

The Family Code provides for tenancy-in-common of the spouses’ property with certain exclusions (e.g., personal belongings, property acquired before the marriage). This regime can be changed by way of a prenuptial agreement. Prenuptial, maintenance and alimony agreements must be executed in writing and notarised. However, there is no developed case law in Ukraine regarding such agreements. Difficulties may arise in the case of foreign spouses and with conflict of law issues.

IV WEALTH STRUCTURING & REGULATION

i General overview of private wealth regulation

None of the forms of legal entities provided by Ukrainian corporate legislation may be viewed as specifically designed for private wealth management purposes. The trusts and foundations are generally not recognised in Ukraine, though the relevant terminology sometimes appear in the new legislation.

Significant developments in the legislation aimed at establishing economic and financial transparency occured in 2015. Substantial changes were introduced to the regulatory regime of the banking sector.

ii Beneficial owners’ disclosure requirements

Following FATF Recommendations 24 and 25 in late October 2014 the Verkhovna Rada introduced requirements to the disclosure of the ultimate beneficial owners (UBO) of Ukrainian legal entities.

Current Ukrainian legislation provides that all legal entities in Ukraine shall file with the State Registry of Legal Entities and Private Entrepreneurs of Ukraine (the State Registry) information on their: ownership structure and the UBO. The filing requirements do not cover legal entities whose members are exclusively individuals.

Upon filing with the State Registry, the UBOs’ personal data (including full name and place of residence) is publicly available on the webpage of the State Registry.

The definition of the UBO included into the AML Law (as defined below) covers both shareholding and dominant control tests endorsed by the FATF in the 2014’s Guidance on Transparency and Beneficial Ownership. Moreover, nominee shareholders may not be registered as the UBOs of Ukrainian legal entities.

Failure to file information on the UBO results in fines being imposed on the management of Ukrainian legal entities (up to 8,500 hryvnas).

Current Ukrainian legislation does not provide for any specific rules regarding controlled foreign companies (CFC), however, in the course of de-offshorisation, which was started in 2016, significant development of the CFC rules is in process, and it is expected that by the end of 2016 Ukraine will have introduced new CFC legislation.

iii New requirements of the National Bank of Ukraine

In 2014, the National Bank of Ukraine (NBU) started to develop the strategy of Ukrainian banking sector reform, with the principal goal of securing its transparency, sustainability and stability. Following the IMF’s recommendations, the NBU has substantially amended legislative requirements for the owners and ownership structures of Ukrainian banks. As at the time of writing, the NBU has already liquidated about 70 banks, which in the beginning of 2014 represented about 30 per cent of the banking system of Ukraine.

New provisions have amended procedures for obtaining the NBU’s approval for acquisition or increase of significant interest in Ukrainian banks. Thresholds for acquisition or increase of the significant interest are set at 10 per cent, 25 per cent, 50 per cent and 75 per cent and the NBU’s approval is required when any of these thresholds is reached. When considering the approval, the NBU analyses the transparency of the future structure of a bank (direct and indirect shareholders, including ultimate beneficial owners); the business reputation of the managers of the bank or individuals who are applying for acquisition of the significant interest; sources of the applicant’s own funds, out of which the significant interest is intended to be acquired; and the ability of the applicant to provide additional financial support to the bank, etc.

If the significant interest is acquired or increased without obtaining the approval, the NBU may impose a fine on the direct significant owner, or on any legal entity in the bank ownership structure, of up to 10 per cent of such significant interest. However, payment of the fine does not remove the obligation to obtain the approval. In the period before obtaining the approval, the NBU may temporarily deprive the owner of voting rights and appoint an authorised representative to whom their voting rights are transferred, as well remove the owner’s right to take part in the management of a bank.

In general, the bank’s structure is considered transparent, provided that the documents submitted to the NBU disclose (1) all the legal entities and individuals who own the significant interest directly or indirectly or have a decisive influence over the bank’s management or activity; (2) all key shareholders of a bank and all key shareholders of the legal entities in the ownership chain of a bank; and (3) the relations between mentioned legal entities and individuals. Any bank ownership structure that includes discretionary trust arrangements is viewed by the NBU as non-transparent, as it restricts the NBU’s ability to establish the ultimate owner of a bank.

If a bank’s structure is considered ‘non-transparent’, the NBU may designate the bank as problematic. In such case the NBU gives the bank a term of up to 180 days to bring the structure of the bank into accordance with relevant transparency requirements, and if the bank complies with such requirements, the NBU declares it insolvent.

iv Anti-money laundering and anticorruption regime

The Law on Prevention and Counteraction to Legalisation (Money Laundering) of the Proceeds from Crime, Terrorism Financing, as well as Financing of the Proliferation of Weapons of Mass Destruction (the AML Law) together with the Criminal Code of Ukraine (the Criminal Code) is the primary legislative act in the sphere of anti-money laundering in Ukraine.

In line with the EFF, the AML Law is aimed at compliance with the principal FATF recommendations (including the 40 Recommendations) on combating money laundering and terrorist financing.

Ukrainian anti-money laundering regime includes a two-level strict monitoring system over the financial operations performed by residents and non-residents of Ukraine. Initial financial monitoring (identification of a client, details of and grounds for particular financial operation, etc.) of financial operations is conducted by intermediaries including banks, insurance (and reinsurance) companies, other financial institutions, stock and commodities exchanges, professional members of the security market (e.g., brokers, dealers), notaries, auditors and individuals rendering accounting services, attorneys at law and other persons providing legal services (the initial financial monitoring performers).

The AML Law, inter alia:

  • a provides for outsourcing of client identification or verification to a third party;
  • b authorises the initial financial monitoring performers to require a client to provide its ownership structure to enable them to determine beneficial owners of the client;
  • c introduces financial monitoring with respect to national or foreign politically exposed persons and officials of international organisations, establishes a high-level risk for operations involving (or carried out in the interests of) politically exposed persons or officials of international organisations and provides for additional measures of financial monitoring for clients with a high level of risk; and
  • d clarifies the legal basis for termination of relationships with a client by the initial financial monitoring performers in case the identification or verification of a client is not possible.

The AML Law also provides for the formation of a national analytical database that may be used by the law enforcement agencies of Ukraine and other countries for the purposes of identification, examination and investigation of crimes related to money laundering and other illegal financial transactions.

The major authority vested with the general supervision of the financial monitoring system function is the State Service for Financial Monitoring of Ukraine (the Service). The Service, inter alia, adopts standards and recommendations as to the conduct of financial monitoring and keeps updated the list of persons connected with terrorist activities and targets of international sanctions.

The Criminal Code provides for a criminal liability for laundering of the proceeds of a crime. This leads to imprisonment of up to 15 years, combined with confiscation of the proceeds of a crime and property of the liable person, as well as deprivation of the right to perform certain activities or hold certain positions for up to three years.

In 2015, Ukraine introduced the Law on Prevention of Corruption, which provides a new electronic system of submission of the declarations of the politically exposed persons and persons authorised to perform the functions of a state or local government (the Person) and provides for a comprehensive list of information that must be reflected in the declaration.

The following shall be reflected in the Person’s declaration:

  • a assets of the Person and his or her family members;
  • b real estate owned by the Person and his or her family members, including joint ownership, lease or other right of possession;
  • c cash assets, including cash, assets placed in bank accounts, deposits to credit unions and other non-bank financial institutions;
  • d securities, including shares, bonds, checks, certificates, promissory notes, including those controlled by another person (indicating the share in the company); and
  • e all financial liabilities of the person (including loans, liabilities under lease contracts, amount of cash paid in respect of the principal amount of the loan and interest thereto, liabilities under insurance contracts and assets lent to other persons).

V CONCLUSIONS & OUTLOOK

Ukrainian legislation is going through a reform period, with the aim of becoming compliant with international and EU standards, in particular in the course of the visa liberalisation process. Substantial changes are already visible, though the climate for private wealth management and protection in Ukraine is still not friendly enough.

There is a growing need to introduce these structures at the owners’ level. First-generation Ukrainian business people are starting to look into restructuring their businesses to secure the interests of their families for years to come.

A reliable and effective solution for achieving these goals remains the creation of a cross-border structure with a trust or foundation at the top. Such structuring provides for a transparent and reliable ownership and control system for the business and helps to protect the interests of the beneficiaries. Since Ukrainian legislation now emphasises transparency as a major requirement for all such structures, it is always important to consider that the UBOs of such structures may be disclosed to Ukrainian authorities and that such information will be publicly available.

In 2015–2016, the Ukrainian tax system did not show enough stability. In 2016, Ukraine reverted to a flat tax rate. In the course of fighting corruption, anti-BEPS measures are widely being considered, including the necessity of implementing the CFC rules and tax amnesty proposals. While these initiatives have not yet been introduced, the taxpayers can enjoy a wide network of Ukrainian double tax treaties and opportunities to use their benefits.

Ukrainian law covers the main aspects of succession and matrimonial relations, and provides for the possibility of entering into agreements, structuring such relations and defining specific regulations for specific cases. No updates or amendments thereto have been announced by the Ukrainian government at this stage.

Apart from the banking sector, currently there are a number of draft laws aimed at reforming the financial services sector to ‘clear’ it of unfair non-banking financial institutions. Draft laws provide for new requirements on transparency (i.e., disclosure of the ultimate beneficiaries) and the financial standing of such institutions. To improve the effectiveness of the state regulation system for financial markets, the draft laws envisage liquidation of the current state regulator (the State Commission for Regulation of Financial Services Markets of Ukraine) and transfer one part of its powers to the NBU and another part to the National Securities and Stock Market Commission. Therefore, if the relevant legislation is implemented, the NBU is expected to start the second ‘clear-up wave’.

The AML Law and the Criminal Code serve as the main sources of the Ukrainian anti-money laundering regime. In particular, the AML Law provides for the financial monitoring procedures.

Ukraine is gradually moving forward to a disclosure and transparency regime, in particular by introducing the electronic declaration of assets by individuals. Ukraine is also developing certain de-offshorisation regulations and, inter alia, it is expected that by the end of 2016 the new CFC rules will be adopted.

Footnotes

1 Alina Plyushch is a counsel and Dmytro Riabikin is an associate at Sayenko Kharenko.