Key changes in tax legislation relating to transfer pricing

Summary

At the beginning of 2025, amendments to the Tax Code of Ukraine (hereinafter referred to as “TCU”) and related regulations came into force. These amendments particularly relate to transfer pricing issues.

Legislative Component

• Law of Ukraine dated June 18, 2024, No. 3813-IX “On Amendments to the Tax Code of Ukraine on Peculiarities of Tax Administration during Martial Law for Taxpayers with a High Level of Tax Compliance”
• Law of Ukraine dated December 4, 2024, No. 4112-IX “On Amendments to the Tax Code of Ukraine and Certain Laws of Ukraine on the Implementation of the Recommendations of the Council of the Organisation for Economic Cooperation and Development on Tax Measures to Further Combat Bribery of Foreign Officials in International Business Transactions”
• Law of Ukraine dated December 4, 2024, No. 4113-IX “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Stimulating the Development of the Digital Economy in Ukraine”

Resolution of the Cabinet of Ministers of Ukraine dated December 27, 2024, No. 1505 “On Amendments to the Annex to the Resolution of the Cabinet of Ministers of Ukraine dated December 27, 2017, No. 1045” (hereinafter – Resolution No. 1505).

Amendments to the TCU effective from January 1, 2025

The Laws of Ukraine dated June 18, 2024, No. 3813-IX and dated December 4, 2024, No. 4113-IX introduced the following amendments to the TCU, which will come into force on January 1, 2025:

1.     Subpara. 14.1.159 of the TCU, which defines the criteria for related parties, has been supplemented with new provisions introducing the concept of “economic relationship”. Legal entities are recognised as related if:

• The income of a resident legal entity from the sale of products to a separate non-resident legal entity during a calendar year amounts to 75 percent or more of the income of such resident legal entity from the sale of products to all non-residents, provided that such income amounts to 50 percent or more of the total income of such legal entity from the sale of products
• The value of products purchased by a resident legal entity from another separate non-resident legal entity during a calendar year is 75 percent or more of the value of products purchased by that entity from all non-residents, provided that the sum of such purchase transactions is 50 percent or more of the total value of products purchased by that resident legal entity.

The practical application of this criterion for determining related parties has not yet been clarified by the tax authorities.

2. Subpara. "c" of subpara. 14.1.159 of the TCU has been clarified and the lower limit of the share of corporate rights of each person in the next legal entity in the chain for determining the relationship has been increased (from 20 to 25 percent).

3. Amendments to subpara. "c" of subpara. 14.1.159 of the TCU regarding the possibility for tax authorities to prove the relationship of persons not only in court, but also based on the results of an audit.

4. The approaches to the formation of the list of jurisdictions (territories) for the purposes of subpara. “c” of subpara. 39.2.1.1 of the TCU have been changed.

Changes have also been made to the conditions of entry into force of the list of "low-tax" jurisdictions in case of revision of the participating countries. Thus, if amendments to the list are approved by the Cabinet of Ministers of Ukraine (hereinafter – CMU) before November 30, such amendments shall apply from January 1 of the reporting year following the calendar year in which such amendments are made. If amendments to the said list are approved after November 30, such amendments shall apply from January 1 of the second reporting year following the calendar year in which such amendments are made.

5. The TCU has also been updated with subpara. 39.2.1.2¹, which sets out the criteria according to which transactions with non-residents whose legal form is included in the list approved by the CMU are recognised as uncontrolled.

According to the amendments, business transactions of a taxpayer with a non-resident whose legal form is included by the CMU in the list of organizational and legal forms of non-residents, in the absence of the criteria set out in subpara. “a” – “c”, “d” of subpara. 39.2.1.1 of the TCU, are recognised as uncontrolled if at least one of the following conditions is met:

1) the non-resident is a resident of the state (territory) with which Ukraine has a double taxation treaty, which is confirmed by submitting to the central executive body that ensures implementation of state tax policy, by October 1 of the year following the reporting year, a certificate in paper or electronic form that the non-resident is resident of the country with which Ukraine has the relevant international treaty (except for the state (territory) included in the list of “low-tax” jurisdictions), in accordance with para. 103.5 of the TCU

2) all participants (partners) of the non-resident are residents of the state (territory), with which Ukraine has a double taxation treaty, which is confirmed by submitting to the central executive body that ensures implementation of state tax policy, by October 1 of the year following the reporting year, a certificate in paper or electronic form that the all participants (partners) of the non-resident are residents of the country with which Ukraine has the relevant international treaty (except for the state (territory) included in the list of “low-tax” jurisdictions), in accordance with para. 103.5 of the TCU.

6. The approach to the application of penalties for violations related to the submission of the Report on Controlled Foreign Companies committed from January 1, 2022, and during the period of martial law in Ukraine until the last calendar day (inclusive) of the calendar month in which martial law will be terminated or cancelled has been changed. Also, in accordance with the changes, if the controlling person fulfils the obligations provided for in Article 39² of the TCU within six months after the termination or cancellation of martial law, the penalties for violations provided for in para. 1-8 of para. 120.7 of the TCU do not apply (para. 1-4 of para. 72 of subsection 10 of section XX “Transitional Provisions” of the TCU).

Amendments effective from March 25, 2025

It is also worth noting that on March 25, 2025, the Law of Ukraine dated December 4, 2024, No. 4112-IX “On Amendments to the Tax Code of Ukraine and Certain Laws of Ukraine on the Implementation of the Recommendations of the Council of the Organisation for Economic Cooperation and Development on Tax Measures to Further Combat Bribery of Foreign Officials in International Business Transactions” will come into force. The Law will introduce the following amendments to the TCU:

1. The amount of the penalty for failure to submit a Notification on Participation in a Multinational Group of Companies (hereinafter – Notification) has been increased to 100 (previously 50) times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year (para. 120.3 of the TCU).

2. The procedure for determining the amount of the penalty for late declaration of controlled transactions in the submitted Report on Controlled Transactions (hereinafter – Report) in the case of submission of a clarifying Report has been changed. After the amendments come into force, the penalty will be one time the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year for each calendar day of late declaration of controlled transactions in the submitted Report in case of submission of a clarifying Report, but not more than the amount equal to one of the two values, which is lesser in size - either 300 times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year, or 0.5 percent of the amount of controlled transactions undeclared in the submitted Report on Controlled Transactions (para. 120.6 of the TCU).

3. The amount of the penalty in case of late submission of the Notification has been reduced. After the amendments come into force, the penalty will be one time the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year for each calendar day of late submission of the Notification, but not more than 50 (previously 100) times the subsistence minimum for an able-bodied person established by law as of January 1 of the tax (reporting) year (para. 120.6 of the TCU).

Changes to the list of “low-tax” jurisdictions

The previous list of “low-tax” jurisdictions in force per the Resolution of the Cabinet of Ministers of Ukraine No. 1045, dated December 27, 2017, has been replaced by a new list enacted in Resolution No. 1505, dated December 27, 2024. As per the new resolution, a considerable number of countries were removed from the list, which now contains only 46 jurisdictions (territories); for example, the Republic of Cyprus, the United Arab Emirates, Ireland, Hong Kong, the Principality of Liechtenstein, Moldova, etc, have been excluded.

However, it should be noted that in view of the new version of subpara. 39.2.1.2 of the TCU, which in particular defines the procedure for the entry into force of the list of “low-tax” jurisdictions, there is currently uncertainty as to the first reporting year for which the new list of “low-tax” jurisdictions should apply. Expert opinions currently differ between 2025 and 2026. As the tax authorities have not yet taken a position on this issue, we recommend waiting for further clarification.