• Dmitriy Mikhailenko

    Managing Partner, Crowe LF Ukraine.
    Dmitriy’s professional activity started in 1995 with a background in law and economics with successful work in the areas of tax, contract law, investment activity, finances and securities. In 2005 Dmitriy Mikhailenko launched his own tax practice, which successfully developed into the law firm OMP Tax&Legal, later renamed Crowe LF Ukraine, which is a member of Crowe Horwath International (2017). Author of several draft laws on tax issues,
    5 books, more than 500 publications, a speaker at more than 500 conferences, workshops, webinars, round tables and other events on tax issues. Listed in the TOP 100 Lawyers of Ukraine.

Crowe LF Ukraine Member Crowe Horwath International

37 Spaska St,
Kyiv, 04070, Ukraine
Tel./Fax: +380 44 391 3003
E-mail:   perkovskaya@crowehorwath.com.ua
Web-site: www.crowehorwath.ua

Crowe LF Ukraine is a law firm launched in 2017 by the founders of law firms OMP Tax & Legal, Pravozakhyst Ukraine, Center of Land Law. Coming together as Crowe LF Ukraine, they provide a full scope of services in the fields of tax, customs, land law, international trade, foreign economic activity, etc.

High standards of service are proved by membership in Crowe Horwath International, one of the biggest worldwide advisory and auditing networks. Crowe Horwath International services include audit, accounting, legal, consulting, valuation and other services. Our global presence (764 offices in 130 countries) enables the rendering of services to our customers regardless of their location.

Crowe LF Ukraine together with Crowe Horwath AC Ukraine brings together more than 80 qualified specialists headed by well-known experts from different fields of law and consulting: Dmitriy Mikhailenko, Leonid Karpov, German Taslitskiy, Anton Kutsenko, Victor Kobilyansky, Rustam Vakhitov, Olga Bogdanova and others. They are members and actively participate in the work of public councils under the Verkhovna Rada’s Committee for Taxation and Customs Policy, Ministry of Finance of Ukraine, Ministry of Economic Development and Trade of Ukraine, State Fiscal Service of Ukraine, heads of committees in the Chamber of Commerce and Industry of Ukraine, the Union of Entrepreneurs of Ukraine and Poland, are advisers to the EBA Industry Committee on Information Technologies and members of  editorial boards of professional publications. The firm’s partners were ranked in different years among the TOP-100 best lawyers in Ukraine

The main industries of our work: IP/IT, agriculture, finance, pharmaceuticals, industry, trade, manufacturing, construction, import and export.

Famous international and national brands, representatives of large and medium businesses are customers of Crowe LF Ukraine.

Loans vs. Investments, Interest vs. Dividends: How it Works in Ukraine

At the majority of conferences dedicated to international tax planning our foreign colleagues pay a great deal of attention to the accurate holding structuring that results in mitigation of the tax burden. For this reason they traditionally use such instruments as double taxation treaties plus internal tax legislation giving benefits either for corporate profit tax or at least for incoming dividends (like the EU Parent-Subsidiary Directive). The absence of a withholding tax in the outcoming dividends jurisdiction is also welcome.

For many years such ideas and decisions have been far from the Ukrainian taxpayer’s mind. One of the reasons was the existence of an advance payment upon distribution of dividends, which, although it was further credited with a profit tax, distracted money at the moment of payment of the dividends which, along with the withholding tax, severely repelled interest to them. That is, dividends were distributed only by those who, as a matter of principle, were ready to part with the money for the opportunity to obtain legal income.

Therefore, it is still necessary to take into account the fact that for a long time loan financing, as opposed to capital contributions, gave a much greater tax effect: recognition of expenses on interest and, more importantly, on currency differences considering the multiple collapse of the hryvnia’s exchange rate, Ukrainian taxpayers were provided with high-sum tax shields.

Of course, imbalances in taxation, whether they arise in favor of the state or the taxpayer, have to be “treated” sooner or later.

In Europe, the Parent-Subsidiary Directive has been toughed with regard to the conditions for application of benefits on incoming dividends, so that it would be unreasonable to generate profits in a low-tax jurisdiction, and to then distribute dividends free from taxes to a high-tax country.


Meanwhile in Ukraine:

A) the pressure in respect of interest has been increasing:

— the “thin capitalization” rule limited the recognition of interest expenses if debt financing prevails over the own capital of the Ukrainian borrower;

— transfer pricing also limited the amount of interest recognized for the purpose of taxation. And, although the maximum interest rate on external borrowing was initially limited by the NBU, recent studies have indicated a tendency to reduce normal interest rates in order to fall into the benchmark for application of the “arm’s length” principle;

— the refusal to apply the lower withholding tax rates established by double taxation treaties, due to the lack of a beneficial owner for conduit companies, became a regular occurrence at tax inspections, so that the latest “annual” laws had to introduce special tax rules for loans attracted through the issuing of bonds on foreign stock exchanges (Eurobonds), and for loans attracted through syndicate financing;

— the NBU assigned the financial monitoring departments of the servicing banks to demand disclosure of the ultimate beneficial owners of financing companies, in order to recognize the real owners of interest income as opposed to their screening by nominal shareholders. The need to cooperate with the banks created the effect of entropy, when information about the ultimate beneficial owner of a Ukrainian daughter company — the borrower, and its foreign parent company — the lender, could differ within the Ukrainian registrar and the servicing banks. As such, against the background of the future automatic exchange of information (and the current efforts of the State Fiscal Service aimed at extracting this information from foreign official sources, which by themselves are becoming more transparent) it has brought doubt to the fans of the “screens” as regards their invulnerability;

— the NBU temporarily limited the early repayment of loans and interest payments abroad if the relevant terms for the fulfillment of these obligations had been carelessly postponed by the parties for later, let’s say, to the 2020s;

We can also add the risks here (for the time being immaterial) of liquidation of companies with negative net assets value, and legislative attempts to once again transfer the losses incurred by Ukrainian enterprises arising from foreign currency differences on outstanding loans.

However, regardless the above threats, an “awkward” financial statement complicates dialogue with banks on the receipt of new loans. It created a voluntary desire to ’capitalize’ the loans of Ukrainian companies. That is, to turn the debts on loan financing into contributions to the charter capital or additional capital.

Summing up the above, loan-to-capital conversion has been in steady demand among businesses in recent years.

B) positive shifts in the taxation of dividends took place:

— dividends from already taxed profits have been released from the profit tax advance payment, which allowed enterprises to turn to the past and find the reserves for tax-free distribution of dividends. At first, the development of such potential was restricted by the limitations of the NBU regarding distribution of dividends abroad, but some time later the NBU allowed distribution of quite a decent sum of USD 7 million;

— Personal income tax rates for dividend payments abroad were set at the modest level of 5% (for corporate profit tax payers) and 9% (for remaining taxpayers). Plus the military duty of 1.5 %. Moreover, these rates are also applied to individuals, non-residents, who for this reason may not require application of a double taxation treaty and confirmation of their resident status;

— and finally, starting from 2018, single tax payers, including agricultural enterprises of the 4th group, have been released from making the profit tax advance payment, which for them, frankly speaking, was the biggest obstacle to distribution of dividends.

All these measures in unison led to the fact that decisions regarding tax structuring for the purpose of repayment of dividends through the proper use of double taxation treaties are no longer a utopia for Ukraine. Notwithstanding the fact that we still have to face the limitations as per the beneficial owner with regard to “transit” dividends, and, apparently, study foreign experience (the Prevost case, for example), at least these issues are worth discussing now.