Encapsulated taxation of agricultural business
The agricultural sector is one of the most important in the Ukrainian economy. The taxation of the agricultural sector is respectively under special attention and quite often subject to specific regulations. In the past, one of the key elements was the special VAT regime when agricultural producers were entitled to keep all or substantial portions of the collected VAT as some kind of subsidy. Yet, this special VAT treatment ceased to exist at the end of past year. The most important remaining specific tax feature for agricultural producers is the entitlement to the uniform tax regime of the 4th category which is dedicated to the exemption from corporate income tax and fee for special use of water resources in lieu of which some kind of fixed fee is applied based on the volume and value of the land used in such agricultural production. However, benefits of this regime for foreign investors seem to have become more limited and the future destiny of this regime is also in doubt whether it will not follow the cancelled special VAT regime.
Up until 2015, the special tax regime was known as a fixed agricultural tax which had been a nationwide tax. Since 2015, the fixed agricultural tax regime has been cancelled with simultaneous extension of uniform tax regime to the 4th category, which at first sight seems to be similar to the former fixed agricultural tax. But, the shift is not entirely equal. One of the distinctive differences is that there is no clause under the uniform tax regime that the dividend distributions of such taxpayers are exempted from advance corporate profit tax payments as it were the case with the fixed agricultural tax (previous clause 153.3.2. of the Tax Code). The issue is that the Tax Code contains special provisions that corporate resident taxpayers when distributing dividends shall pay a corporate tax at the standard rate (currently 18%) in advance regardless of the status even as tax exempted entities or reliefs of the profits from taxation. The advance corporate profit tax (ACT) is paid out by the companies own funds who are paying the dividends, i.e., no withholding from the dividends. ACT when paid may be used by law only for offset of future corporate profit tax liabilities, i.e., is not subject to refund to the taxpayer or allowable for offset against other taxes. Therefore, such ACT becomes for agricultural taxpayers at the uniform tax regime of the 4th category just an extra tax expense because these taxpayers do not pay regular corporate profit tax and thus do not have the tax liabilities against which ACT may be used for offsetting those liabilities.
Theoretically, such regulation applies to any dividend distribution under this regime since the beginning of 2015. Yet, for the years until 2017, there have been at least technical arguments to challenge the application of the ACT charge as at that time the section on uniform tax contained incorrect reference to the procedure that shall be applied. This error has been adjusted by the law with effect since January 1, 2017. Therefore, for this year the above-said excuse is already not literally applicable. The current position of the tax authorities is that the distribution of dividends by agricultural producers at the uniform tax regime triggers an 18% tax (ACT). Publicly known attempts of the taxpayers to overrule such position (expressed in the form of tax rulings) in judicial procedures have so far failed. As such, investors shall take into account this anticipated tax burden or at least its exposure.
Dividend distributions to individuals are explicitly exempted by the Tax Code from the ACT charge. I.e., only dividends paid to other legal entities are inherent with the ACT. For individuals, the extra benefit is also available of applying personal income tax to the dividends from such taxpayers exempted from corporate profit tax at the half of standard rate.
In case of dividend distributions to non-residents from agricultural taxpayers under the uniform tax regime, then the tax exempted entities reduction of withholding tax under the tax treaties may be also questionable.
Generally speaking, the future of the discussed special tax regime is uncertain. Introduced initially in 2009, in the form of a fixed agricultural tax planned for a limited period of time and then extended for a number of times, finally indefinitely, maybe de-facto stopped and even without legislative changes.
Since 2015, this tax regime was legally changed into a domestic tax. Domestic taxes are literally chargeable only within territories of local municipalities which currently by law are limited by boundaries of cities, towns, villages. Therefore, even now applying this tax regime in respect of agricultural business beyond official boundaries of human settlements which seems to be questionable from a pure legal perspective. The future of this regime may depend just on change of the tax implementation practice.