Tax on Withdrawn Capital

UKRAINE - In Brief 05 Jul 2018 by Dmytro Boyarchuk

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Yesterday, on July 4th, President Petro Poroshenko announced that he submitted draft law on tax on withdrawn capital to the parliament. It’s a very important initiative for local business environment and here is why. In Ukraine informal rules are much more important than formal legislature. A foreigner who decided to make business in Ukraine will read Tax Code, will see 18% tax rate for corporate incomes and will start building his/ her activity based on this knowledge. However, s/he will be surprised when eventually his/ her profit calculations (and tax liabilities) will substantially differ from what State Fiscal Service will invoice. The problem is that Tax Code allows discretion on what could be considered as legitimate spending (accounted for profit estimate) and what could not. Eventually, the size of tax liabilities on enterprise profit tax is an issue for bargain. Your tax payment could not be less than the last year deduction (even if your business is shrinking) and your tax deductions should fit some normative that State Fiscal Service has calculated internally. In essence, it is a kind of turnover tax - State Fiscal Service observes your turnover and estimates your deductions on enterprise profit tax based on that. That’s how it works in reality. No reason to mention that bargaining on size of tax deductions includes substantial graft. Already for few years businesses have been advocating tax on withdrawn capital which works as tax on dividends. It presumes that an entrepreneur pays enterprise profit tax only if s/he withdraws some funds from his/her company. This measure is expected to kill discretion in tax deductions. The IMF was skeptical on this reform ...