Ukraine: Transactions with Partnerships under Transfer Pricing Control

Published on September 22, 2017

On July 27, 2017, the Resolution of Cabinet of Ministers of Ukraine No 480 of July 4, 2017 came into force. The Resolution No 480 contains a list of legal forms of non-residents transactions with which are considered controlled transactions for transfer pricing purposes. The adoption of this list can affect many taxpayers who have not dealt with transfer pricing rules before.
 

According to changes in the Tax Code of Ukraine effective January 1, 2017, the list of controlled transactions for transfer pricing purposes was expanded to include transactions with non-residents who do not pay corporate income tax: for example, German (as well as Austrian and Swiss) ”Kommanditgesellschaft” (company name ends with KG), British limited liability partnership (company name ends with LLP) and other legal forms, mainly partnerships, mentioned in the CMU Resolution No 480.
 

Transactions with a non-resident established in the form mentioned in CMU Resolution No 480 are considered as controlled transactions regardless of whether a taxpayer is related with such non-resident or not. The only exception: transactions are not considered controlled, if a non-resident paid corporate income tax and there are no other grounds to control transactions with such non-resident (e.g. affiliation with counterparty, registration of counterparty in a low-tax country).

Transactions with non-residents established in the form mentioned in the Resolution No. 480 are treated controlled from effective date of Resolution No 480, that is, from July 27, 2017, if financial thresholds for recognition of transactions as controlled are achieved.
 
Taking into account the changes in the Tax Code effective 01.01.2017 and the entry into force of the CMU Resolution No 480, the taxpayers cooperating with foreign partners should check the legal form of their counterparties, including unrelated counterparties. This is particularly important in case of business relations with German firms who often operate in the form of a limited partnership (KG) which is the third most popular legal form of doing business in Germany.
 

If the legal form of counterparty is mentioned in the Resolution No 480, the value of transactions with such counterparty exceeds UAH 10 million, and taxpayer’s annual income exceeds UAH 150 million, then transactions with such counterparty will most likely qualify as controlled transactions. In this case, the taxpayer has an obligation to file a report on controlled transactions for the year in which the transactions took place and to prepare transfer pricing documentation for such transactions. Failure to comply with these requirements is subject to significant penalties.