Investment projects with significant investments in Ukraine: tax preferences

Payers, we remind you that in order to create favorable conditions for attracting investments to Ukraine and stimulating economic development of regions, the Law of Ukraine № 1116-IX as of 17.12.2020"On state support of investment projects with significant investments in Ukraine" (hereinafter – Law № 1116-IX).

This Law has been in effect for over a year and its task is to stimulate attraction of strategic investors in the national economy by implementing state support for large investment projects.

Provisions of the Law № 1116-IX:

- distinguish the following concepts: investor with significant investments, investment project with significant investments, special investment agreement;

- established forms of the state support for investment projects with significant investments;

- defined requirements for applicants regarding the implementation of investment project with significant investments and specifics of concluding a special investment contract;

- provided for the responsibility of parties of a special investment agreement and control over execution of such agreements;

- clarified guarantees of investors' rights.

Please note that investment project with significant investments must meet the following requirements:

- to be implemented on the territory of Ukraine in the following areas:

processing industry (except for production and turnover of tobacco products, ethyl alcohol, cognac and fruit alcohol, alcoholic beverages);

extraction for further processing and/or enrichment of minerals (except for hard and brown coal, crude oil and natural gas); wastes management;

transport;

warehousing;

postal and courier activities, logistics;

education, science and scientific and technical activity;

health care;

art, culture, sports, tourism and resort and recreation sphere;

- provide for the construction, modernization, technical and/or technological re-equipment of relevant investment objects, purchase of necessary equipment (machinery) and accessories for it, and may also provide for construction at the expense of investor's funds with significant investments necessary for the implementation of investment project with significant investments of adjacent infrastructure facilities;

- creation of 80 or more new working places with an average salary of employees, amount of which is at least 15% higher than the average salary in relevant sphere in region where the project is implemented, for the previous calendar year;

- investments amount in investment objects during the implementation period of investment project with significant investments exceeds amount equivalent to 20 million Euros (such amount is calculated according to the official exchange rate established by the National Bank of Ukraine on the actual investment date);

- implementation period does not exceed 5 years.

Forms of providing state support for investment projects with significant investments are:

- exemption from payment of certain taxes and levies (corporate income tax, land tax, value added tax),

- exemption from import duty taxation of new equipment and components imported exclusively for the implementation of such investment project,

- provision of the preferential right of land use of the land plot owned by the state or communal property for the implementation of project,

- provision of construction, reconstruction, restoration, capital repair of adjacent infrastructure facilities (roads, communication lines, means of heat, gas, water and electricity supply) at the expense of state, local budgets and other sources not prohibited by the law, engineering communications, etc.), necessary for the implementation of project.

Herewith, the total amount of state support for investment project with significant investments is established in a special investment agreement and should not exceed 30 percent of the planned amount of significant investments for the project. Methodology for calculating amount of state support for investment project with significant investments was approved by Resolution № 714 of the Cabinet of Ministers of Ukraine as of 07.07.2021.

In order to implement state support, the Law of Ukraine №1293-IX as of 02.03.2021 "On amendments to the Tax Code of Ukraine regarding taxation peculiarities of business entities implementing investment projects with significant investments" made appropriate changes to tax legislation.

Regarding the income tax

Sub-section 4 Section XX of the Tax Code of Ukraine (hereinafter – Code) stipulates temporarily, until 01.01.2035 income taxation specifics of the investor-enterprise with significant investments (except for those implementing investment projects in the extraction for further processing and/or beneficiation of minerals) are applied, which is a party to a special investment agreement, provided that such profit is obtained as a result of execution of such a special investment agreement.

Income is exempted from the corporate income taxation for five consecutive years, starting from the first day of the first month of the calendar quarter, which is determined by the taxpayer-investor with significant investments in an application submitted by him / her to the controlling body at the registration place of such taxpayer in an arbitrary form about exercising right to apply exemption, but not earlier than the date of submission of such application, as well as the date specified in Register of investment projects with significant investments, the date of fulfillment by the investor with significant investments of obligations provided for in the special investment agreement, regarding introduction of volume of significant investments in investment objects and the start of operation of such objects investing within the framework of implementation of investment project with significant investments and on the condition that the taxpayer-investor with significant investments fulfills his / her obligations under a special investment agreement. Herewith, period of application of such exemption cannot exceed validity term of a special investment agreement.

Attention! Exemption of income is accompanied by the need to submit application to the controlling body about the use of relevant exemption right (submitted according to rules of Paragraph 42.4 Article 42 of the Code.

Please note that quarterly reporting is established legally for this category of payers and it is prohibited to use only the annual tax (reporting) period.

In addition, the total amount of funds exempted from taxation (amounts of tax that are not paid to the budget and remain at the disposal of the taxpayer-investor with significant investments) is taken into account as a part of the total amount of state support for investment project with significant investments provided for by a special investment agreement according to the Law № 1116-IX.

In case of reaching/exceeding the total amount of state support received by the taxpayer-investor with significant investments according to the Law №1116-IX, above the limit established according to this Law regarding the total amount of state support for investment project with significant investments, the taxpayer is obliged, starting from the first day of the first month of the calendar quarter of the tax (reporting) period in which such an excess occurred, to calculate and pay corporate income tax in general order.

It should also be noted that if the taxpayer-investor with significant investments carries out controlled operations defined by Article 39 of the Code within the scope of activities related to the execution of a special investment agreement, the corporate income taxation object, which is taxed at the basic (main) rate, determined separately at the level of: price excess, determined according to the "arm length " principle over the contractual (contract) cost (cost at which the corresponding operation should be reflected according to national provisions (standards) of accounting or international standards of financial reporting) of sold goods (works, services); excess of the contractual (contract) cost (cost at which relevant operation should be reflected according to national accounting provisions (standards) or international financial reporting standards) of purchased goods (works, services) over the price determined according to the "arm's length" principle. If the investor-taxpayer with significant investments is a controlling person, adjusted income of the controlled foreign company, determined according to Article 39² of this Code, is a separate corporate income taxation object, which is taxed at the basic (general) rate. At the same time, the specified taxation objects are not exempted from taxation and are subject to taxation in the general manner.

In the case of early termination of a special investment agreement, the taxpayer loses right to apply special taxation rules and is obliged to determine the corporate income tax liability in the general manner based on the tax (reporting) period results in which a special investment agreement was early terminated.

For all other previous periods of using the corporate income tax exemption, the taxpayer is obliged, within a period determined for the quarterly tax (reporting) period, starting from the first day of the month following the month in which a special investment contract was terminated early, to submit a clarifying tax corporate income tax declaration(-s), calculate and pay corporate income tax liability, fines and penalties according to rules of the Code. At the same time, if early termination of a special investment agreement is due to a violation of the state's obligations to provide state support under a special investment agreement or occurrence of the force majeure circumstances, the specified rule is not applicable.

Also, the statute of limitations established by Article 102 of the Code is not applicable.

Land payment

Specifics of land payment are defined in Sub-section 6 Section XX of the Code. Paragraph 11 of this Sub-section establishes that temporarily, until 01.01.2035 in part of the land payment for land plots, the normative monetary valuation of which has been carried out and which are used in the framework of the investment projects implementation with significant investments (except for investment projects in mining sphere for further processing and/or beneficiation of minerals), local self-government bodies may:

firstly: to set land tax rates and rent for state and communal land in amount lower than the amount of land tax established by decision of relevant local self-government body for a certain category of land, payable in the relevant territory;

secondly: to exempt from the land tax payment.

Please note that the total amount of funds exempted from taxation (tax amounts that are not paid to the budget and remain at the disposal of taxpayer-investor with significant investments) is also taken into account as a part of the total amount of state support for investment project with significant investments provided for in the special investment agreement, which is provided according to the Law  № 1116-IX, and if the total amount of state support for such investment project is reached, the taxpayer-investor with significant investments, starting from the calendar month in which the specified amount is reached, loses right to apply the benefit.

Upon reaching the total amount of state support for investment project with significant investments during the reporting (tax) period, the taxpayer-investor with significant investments is obliged to submit a clarifying tax declaration for such reporting within 20 calendar days from the date of entering relevant information in Register of investment projects for such reporting (tax) period, in which to increase the tax liability for the land payment for the period starting from the calendar month in which the total amount of state support for investment project with significant investments was achieved.

Herewith, until the date of amendments to the lease contracts of land plots used as a part of implementation of investment projects with significant investments, in connection with achievement of the total amount of state support for investment project with significant investments, the rent amount for calculating tax liabilities from rent is determined according to rules defined by Paragraph 288.5 Article 288 of the Code.

Financial sanctions and fines determined by the Code for underestimating the land payment liability, for the period starting from the date of reaching the total amount of state support for investment project with significant investments until the date of entering relevant information in Register of investment projects with significant investments regarding achievement of the total amount such support is not applicable.

Regarding the value added tax

Peculiarities of the value-added tax payment provide for exemption from the value-added tax of import to the customs territory of Ukraine. Paragraph 76 Sub-section 2 Section XX of the Code stipulates that operations involving import to the customs territory of Ukraine under the customs import regime of new equipment (machinery) and accessories for it are exempted the value added taxation, defined in Sub-paragraph 15 Paragraph 4 Section XXI "Final and Transitional Provisions" of the Customs Code of Ukraine, which are imported by the taxpayer-investor with significant investments exclusively for implementation of investment project with significant investments for the implementation of a special investment contract for the following commodity subcategories according to the Ukrainian classification of the FEA products: group 84 "nuclear reactors, boilers, machines, equipment and mechanical devices; under the following codes: 8402 - 8405, 8406 82 00 10, 8406 82 00 90, 8411, 8412, 8413 40 00 00, 8413 50, 8413 60 20 00, 8413 60 70 00, 8413 60, 0 0 80 1, 80 84 10 8413 70 29 00, 8413 70 30 00, 8413 70 35 00, 8413 81 00 00, 8413 82 00 00, 8414 10, 8414 40 90 00, 8414 80, 8416, 8417, 8417 (except 8418 1018. 80 10, 8418 21, 8418 29 00 00, 8418 50, 8418 91 00 00, 8418 99) , 8423 90), 8424 10 00 90, 8425 (except 8425 41 00 00, 8425 42 00 00, 8425 49 00 00), 8426 - 8431, 8433 60 00 00, 8434, 8435 (only machines and mechanisms for production of juice or similar beverages), 8436 - 8442, 8443 (except for 8443 13 10 00), 8444 00, 8445 - 8448, 8449 00 00 00, 8451, 8452 (except for 8452 10, 8452 30 00 00, 8452 90 00 00), 8453 - 8466, 8470 30 00 00, 8471 50 00 00, 8472 30 00 00, 8474, 8475, 8477, 8479, 8480, 8481 (except for 8481 80), 8483, 8486, 8487, from group 85 "electric machines, equipment and their parts; equipment for recording or reproducing sound; television equipment for recording and reproduction of images and sound, their parts and accessories" under the following codes: 8501, 8502, 8503 00, 8504, 8506, 8507, 8511, 8514, 8515, 8525, 8526, 8528, 8529, 8530, 8537, 8538 10 00 00, 8543, from group 86 "railway locomotives or tram motor cars, rolling stock and their parts; track equipment and devices for railways or tram tracks and their parts; mechanical (including electromechanical) signaling equipment of all kinds" under the following codes: 8607, 8608 00 00 00, from group 87 "means of land transport, except railway or tram rolling stock, parts and equipment thereof" under code 8709, from group 90 "optical, photographic, cinematographic, control, measuring, precision devices and apparatus; medical or surgical; their parts and accessories" under the following codes: 9006 30 00 00 (only for cameras intended for medical and surgical examination of internal organs), 9007, 9008, 9010 50 00 00, 9010 90 20 00, 9011, 9012, 9018 (except 9018 31, 9018 32, 9018 39 00 00), 9019, 9020 00 00 00, 9022, 9023 00, 9024, 9026, 9027, 9030, 9031, 9032. Herewith, list and volumes of import of such goods are approved by the Cabinet of Ministers of Ukraine with conclusion of a special investment agreement.

Exemption from the value added taxation is applicable within the period of implementation of the investment project and unused at the time of customs clearance of goods of the total amount of state support, defined in a special investment agreement, taking into account data from Register of investment projects with significant investments regarding amount of such support, as well as dates and the time of entering relevant information in such Register. At the same time, such exemption from taxation until the controlling body receives information about reaching/exceeding the total amount of state support or about termination of provision of such support according to Register of investment projects with significant investments is not considered as a violation of tax legislation and does not entail occurrence of an obligation to pay value added tax and/or penalty.

Amounts of the value-added tax not paid to the budget in connection with application of exemption from taxation from the value-added tax until the date of receipt by the controlling body of information about such achievement/exceeding or about termination of such support according to Register of investment projects with significant investments are subject to reimbursement by the taxpayer-investor with significant investments in manner prescribed by the law and a corresponding special investment agreement, and they are not subject to rules of the Code regarding the tax debt repayment.

Please note that in case of alienation of equipment (machinery) and accessories for it, imported to the customs territory of Ukraine in this manner, earlier than five years from the date of their import to the customs territory of Ukraine or in case of their non-target use or early termination of a special investment contract (except for cases where early termination of a special investment agreement is caused by a violation of the state's obligations to provide state support under a special investment agreement or occurrence of the force majeure circumstances), the taxpayer-investor with significant investments is obliged to pay tax liabilities based on the tax period results in which such alienation, misuse or early termination of a special investment agreement falls, for the value added tax amount that should have been paid when such goods were imported to the customs territory of Ukraine and is also obliged to pay penalty according to the Code, calculated from the day of import to the customs territory of Ukraine until the day of an increase in the tax liability. At the same time, the statute of limitations established by Article 102 of the Code is not applicable.

Please also take into account that provisions of Paragraph 76 Sub-section 2 Section XX of the Code are not applicable to goods originating from a country recognized as the occupying power according to the law and/or as the aggressor state against Ukraine in accordance with the law or imported from territory of the occupying power (aggressor) and/or from the occupied territory of Ukraine, defined as such according to the law.