Ukrainian Government Approves Draft Law on Withdrawn Capital Tax

At a meeting held on October 4, the Cabinet of Ministers of Ukraine approved the bill “On Amendments to the Tax Code related to the tax on withdrawn capital”. The Bill proposes to introduce a tax on the withdrawn capital instead of the profit tax.

In addition, the acceptance of the bill will involve the following:
– Change of methodological approaches to taxation of interest for the use of credit received from non-residents – related persons;
– Application of transitional provisions for banks entitled to remain payers of income tax until 2020 inclusive;
– Exemption from taxation on the deduction of capital dividends that are paid for the period 2013-2017, within the scope of taxable profits from which the corporate profit tax was previously paid.

The main concerns when accepting the draft law were that implementing the Draft Law in 2018 would result in state budget losses amounting to UAH 26 billion as well as local budgets losses in amount of UAH 5.4 billion.

Even the president of Ukraine admitted that there can be revenue risks involved. “Is there a risk that the revenues to the state budget will be reduced? Yes. And we clearly realize that. And we must foresee the appropriate compensators so that the state budget and social programs will not be affected,” noted Petro Poroshenko.

A people’s deputy from the Samopomich Union, Andriy Zhurzhiy, who attended the meeting of the Cabinet of Ministers of Ukraine in October, stated his assurances about the losses foreseen and added that the same grim scenarios were used when the unified social tax was reduced which turned out to be far from the reality.

He added that “when assessing the effect of the tax on the withdrawn capital, we must clearly calculate what the additional revenues from the value-added tax will be, since we are going to have both the legalization of the economy and new investments, and how much more of the tax on the incomes of individuals we will have, since we are going to have new jobs created. We will also have additional non-tax revenues, since the main taxpayers are foreign or state-owned companies. The latter pay part of the profits to the state budget as non-tax payments. Therefore I am sure that we will be “in the black””.

It is expected that the acceptance and implementation of the new law will improve the investment climate by becoming an incentive for businesses to reinvest into production and development rather than deduct money as dividends. Another benefit will be the simplification of regulations and administration procedures.

The Government of Ukraine also believes that it can be possible to compensate any budget losses by means of a significant increase of the tax rates or by cost reductions, while at same time the Ministry of Finance does not agree with the increase of the tax rates and considers the reduction of public expenditures and the more efficient utilization of the budget as a preferable option for compensating future budget losses.

Moreover, the introduction of the abovementioned law can assist the state in anti-corruption battle as the majority of Ukrainian businesses will be able to become completely transparent and this way the new law can stimulate economic growth.
As a result of meeting, the relevant Draft Law was approved by the Government with optimal solutions as to exactly what type of costs shall be subject to a decrease still in the works.

For more information, feel free to contact:
Nadiya Omelchuk
Country Executive, Eurofast Ukraine

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