Offshore regulation in Ukraine - Cyprus

by Roman Zavhorodnii, Ukraine and Jesús Alamo Ascencio, Spain & EU
Last updated Tuesday, February 6, 2018

Ukraine and Cyprus have an agreement «On avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income», in accordance to which incomes may be taxed only once and only in jurisdictions, where they are received.

In Ukrainian legislation the notion «Offshore» is not provided. Instead of it, the transactions, which are made with residents of offshore jurisdictions, are called «Regulated transactions».

In accordance to art. 39 of Tax code of Ukraine (hereinafter – TCU), the transaction is considered to be regulated, if the transaction is carried out with non-resident, which is registered in state (territory), which is included by Cabinet of Ministers of Ukraine (the highest executive power body) into the specific list of states of territories («tax heaven» list, provided in the end of report).

Thus, in case of transaction with the party, which is the resident of one of the countries, included in abovementioned list, Ukrainian party is obliged to provide a report about such transaction to tax authority.

The regulated status of transaction allows tax authorities to provide extra (comparing to non-regulated transactions) audits and verifications, the purpose of which is to ascertain, if the price of transaction was normal (comparing to similar non-regulated transactions), or it was artificially understated to avoid taxation on the territory of Ukraine.

Possible consequences of transactions with residents of the offshore jurisdictions

Financial remedies (mentioned in TCU):

Non-reporting about regulated transactions – 528 600 UAH (art. 120.3 TCU) + 1 762 UAH for each day of delay of filing the report (art. 120.4 TCU).
1% from the amount of regulated transactions, which are not declared in tax report (art. 120.3 TCU) + 1 762 UAH for each day of delay of declaring of the regulated transactions (art. 120.4 TCU).
3% from the amount of regulated transactions, about which requested by tax authorities documentation was not provided (art. 120.3 TCU) + 3 524 UAH for each day of delay of providing of the requested documentation (art. 120.4 TCU).
In case, if tax authority ascertains the fact of understatement of the price (subsequently, the understatement of the tax base), the tax authority includes the missing amount in taxable profit (art. 39.1.3 TCU) and charges a fine in amount from 25% to 50% of included in taxable profit missing amount (art. 123 TCU).
Criminal remedies (mentioned in Criminal code of Ukraine):

Willful evasion of taxes, fees or other compulsory payments which are part of the taxation system established by law, by an official of an enterprise, institution or organization of any ownership status, or by any unincorporated entrepreneur, or by any other person liable to pay such taxes, fees or other compulsory payments, where such actions resulted in actual nonreceipt of significant amounts (> 881 000 UAH) of funds by budgets or special state funds – 17 000 – 51 000 UAH or/and deprivation of the right to occupy certain positions or engage in certain activities for a term up to 3 years.
Also, in accordance to art. 15 of law of Ukraine «On Prevention and Counteraction of the Legalization (Laundering) of the Proceeds from Crime, Terrorist Financing and the Financing of the Proliferation of Weapons of Mass Destruction», each transaction, which amount is equal or more than 150 000 UAH (or its equivalent in foreign currency, bank metals or other assets) and one of parties of which is resident of countries, included to «Tax heaven» list, is the subject to obligatory financial monitoring. Thus, the bank, as an entity which provides primary financial monitoring, can terminate the transaction if its purpose seems to be «laundering» of the proceeds of crime. After such termination bank has to provide all information about the transaction to state authorities, which can start an investigation of it. Despite this issue is not regarded to tax evasion and tax authorities, still it can make difficulties in providing the transactions with residents of the offshore jurisdiction.

Summarizing, the work with offshores nowadays in Ukraine requires being careful and prudent in planning of such transactions and not to abuse the understating of prices of transactions. Thus, for example, if transactions with offshores take only 20% of all transactions of the company, tax authorities are unlikely to pay attention on such company. But If the volume of regulated transactions is more than 30%, there is a risk to be noticed and audited by tax authorities.

The size of fines are valid for January 2018.

The exchange rate of the Hryvnia (UAH) to the Euro (EUR) is 35,04 UAH/EUR for 17 of January 2018.

The list of «Tax heaven» countries and territories

Anguilla

Principality of Andorra

Antigua and Barbuda

Aruba

Commonwealth of the Bahamas

Barbados

Kingdom of Bahrain

Belize

Bermuda

Republic of Bulgaria

Bosnia and Herzegovina

British Virgin Islands

Brunei Darussalam

Republic of Burundi

Republic of Vanuatu

Virgin Islands United States of America

Guadeloupe

Republic of Guatemala

Guernsey

Gibraltar

Special Administrative Region of China Hong Kong (EU)

Grenada

Georgia

Jersey

Republic of Djibouti

Commonwealth of Dominica

Dominican Republic

Republic of Estonia

Islamic Republic of Iran

Ireland

Autonomous Community of the Canary Islands of the Kingdom of Spain

Republic of Cape Verde

Cayman Islands

The state of Qatar

Kyrgyz Republic

Republic of Cyprus

Autonomous province of Kosovo and Metohija of the Republic of Serbia

Republic of Cuba

Curaçao

Lao People’s Democratic Republic

Republic of Latvia

Republic of Liberia

Lebanese Republic

Principality of Liechtenstein

Republic of Mauritius

Special Administrative Region of China Macao

The former Yugoslav Republic of Macedonia

Federated Territory of Labuan Malaysia

Maldives

Republic of Malta

Kingdom of Morocco

Martinique

Republic Marshall Islands

Federated States of Micronesia

Republic of Moldova

Principality of Monaco

Montserrat

Republic of Nauru

Niue

United Arab Emirates

Sultanate of Oman

Isle of Man

Cook Islands

Turks and Caicos Islands

Republic of Palau

Republic of Panama

Republic of Paraguay

Commonwealth of the Northern Mariana Islands

Madeira Autonomous Region of the Portuguese Republic

Puerto Rico

Independent State of Samoa

Republic of San Marino

There are no any international treaties, which could oblige Cypriot authorities and entities to provide any information about bank accounts, shareholders of the companies etc.

Despite that fact, in accordance to art. 166-11 of the Code of administrative offences of Ukraine, failure of legal entity to provide to state registrar information about ultimate beneficial owner of a legal entity entails a fine in amount from 51 000 UAH to 85 000 UAH.

Thus, if Ukrainian legal entity has the offshore company as a shareholder, it is obliged to provide the information about its (offshore company) shareholders to Ukrainian state registrar.

Talking about bank account: in Decree of the Cabinet of Ministers of Ukraine «On the system of currency regulation and currency control» set the obligation for any resident of Ukraine to obtain an individual license for placement of currency values in accounts and deposits outside Ukraine.

Thus, if resident of Ukraine decides to open and to use any accounts and deposits outside Ukraine, he will have to obtain an individual license, subsequently, National bank of Ukraine gets known about this kind of operations with currency.

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