Analysis of the draft law:
Greetings. As a specialist with 15 years of experience in tax law, I have analyzed the submitted draft law. Below is a structured summary of the key aspects of this document.
1. Essence of the draft law
This draft law aims to adapt Ukrainian tax legislation to the requirements of the European Union, specifically regarding the implementation of Article 4 of Council Directive (EU) 2016/1164. Its primary objective is to introduce mechanisms to counter Base Erosion and Profit Shifting (BEPS) by limiting the deductibility of borrowing costs. The document significantly revises the rules for calculating tax differences for financial transactions, introducing new methodologies for calculating borrowing cost limits. The changes cover both the general corporate income tax system and the special regime for “Diia.City” residents.
2. Structure of the draft and main changes
The draft introduces systematic changes to Sections I, II, III, and XX of the Tax Code of Ukraine (TCU). Key changes compared to current regulations include:
- Terminology review: The definition of “loan” has been updated, and approaches to the classification of borrowing costs have been changed (the concepts of “financial expenses,” “exceeding borrowing costs,” and “capitalized expenses” have been introduced).
- New wording of Article 140 of the TCU: The procedure for calculating differences for financial transactions has been completely changed, replacing the old “thin capitalization” method (debt-to-equity ratio of 3.5:1) with the method of limiting borrowing costs based on EBITDA.
- Special rules for “Diia.City”: A separate mechanism for administering the tax base when the borrowing cost limit is exceeded has been introduced, including rules for carrying forward and utilizing accumulated limit amounts.
- Transitional provisions: A clear schedule for the implementation of the new rules (effective from January 1, 2028) has been established, as well as rules for handling tax differences accumulated prior to this date.
3. Main provisions for experts and businesses
For the professional community and taxpayers, the following innovations are the most important:
- Change in the concept of limitations: The transition from the “3.5 rule” to an EBITDA-based limit (30% of the indicator) is a fundamental change that brings Ukraine closer to European standards. This will force businesses to revise their financing models, as the ability to include interest in expenses is now strictly tied to the company’s operational efficiency.
- Tax control and record-keeping: Requirements for data retention have been expanded, particularly for documents justifying accumulated borrowing cost amounts, which will require companies to improve their internal tax accounting.
- New exemptions: The legislator has detailed the criteria for exemption from limitations regarding “long-term public infrastructure projects,” which is critically important for major investment projects.
- Specifics for “Diia.City”: Taxpayers under special conditions receive a complex mechanism for adjusting the tax base, which involves the application of an excess coefficient and a specific procedure for calculating corporate income tax, requiring additional consultation during calculations.
Analysis of the explanatory note:
Greetings. As a lawyer with many years of experience, I have analyzed the provided document. This is an important step in harmonizing our tax legislation with EU law. Below is a detailed breakdown for your publication.
1. Essence of the draft law
The draft law aims to implement Article 4 of Council Directive (EU) 2016/1164 into Ukrainian legislation, which establishes unified rules for limiting the tax deductibility of borrowing costs. The document introduces a mechanism whereby excessive interest expenses of enterprises are limited to 30% of EBITDA, aiming to prevent profit shifting through the artificial inflation of financial expenses.
2. Reasons and necessity for adoption
According to the drafters, the main drivers are:
- Euro-integration obligations: Fulfillment of the requirements of the National Program for the Adaptation of Ukrainian Legislation to EU law, which is a mandatory condition for EU membership.
- Combating base erosion (BEPS): Implementation of international OECD and IMF standards to counter aggressive tax planning.
- Eliminating deficiencies in current rules: The current “thin capitalization” rules in Ukraine are not identical to European requirements and apply only to transactions with non-residents, whereas the EU Directive provides a broader approach covering all debt obligations.
3. Main consequences for stakeholders
These are the key changes that businesses and experts should know:
- Universality of rules: Limitations on interest deductibility will apply to all debt obligations (regardless of whether the creditor is a resident or a related party). This makes the system more transparent but removes old exemptions for certain categories of loans.
- Transition to the 30% EBITDA model: Instead of the combined “thin capitalization” rule, businesses will switch to the classic limit calculation model, which is standard for European companies.
- Indefinite carry-forward: An important advantage for businesses is the cancellation of the current rule on the annual 5% reduction of unrecognized amounts. Now, accumulated borrowing costs can be carried forward indefinitely, which is a significantly fairer mechanism.
- Safe Harbor: To protect businesses with low risk of base erosion, a “monetary threshold” (up to 3 million euros of qualified expenses) has been introduced, allowing for the avoidance of excessive administrative pressure on medium-sized businesses.
- Tax certainty: Implementation of the provisions is deferred until January 1, 2028. This provides businesses with sufficient time to adapt their financial models and debt strategies to the new conditions.
In summary: the state is consciously moving from a protectionist, yet sometimes convoluted approach to pan-European, transparent rules of the game. While this strengthens control over borrowing costs, it simultaneously improves the predictability of the tax environment.
Analysis of other documents:
Greetings. As a lawyer with many years of experience, I have analyzed the provided list of regulatory acts that must be adopted or revised in connection with the implementation of the provisions of the mentioned draft Law.
1. Author’s position on the draft Law
The author of the document — the Cabinet of Ministers of Ukraine represented by the Prime Minister — unequivocally supports this draft Law. The Government acts as a subject of legislative initiative, officially submitting this bill for the consideration of the Verkhovna Rada and ensuring the preparation of all necessary supporting documentation for its implementation.
2. Main provisions of the document for analysis
This list is a kind of “roadmap” for fulfilling government tasks, and here is what is important for different audiences to understand:
- For legislators and government officials: The document clearly identifies the responsible bodies (Ministry of Finance, Ministry of Economy, Ministry of Digital Transformation, Ministry of Development, Ministry of Justice) and sets a specific deadline — before July 1, 2027. This demonstrates a systematic approach to implementing the EU Directive (ATAD), where tax rules are harmonized with European standards for countering tax evasion.
- For business: A key element is the need for the Cabinet of Ministers to develop criteria for classifying assets as “large-scale public infrastructure projects.” This is extremely important, as the status of such a project allows operators to exclude borrowing costs from strict limitations on their inclusion in expenses (which is an exception to the general rules for interest taxation). Also, an update to the Corporate Income Tax Return form is expected, where new calculation annexes will be added to account for indicators based on EBITDA and exceeding borrowing costs.
- For experts: The document demonstrates that the implementation of rules to counter base erosion requires a significant change in administration. Businesses will have to keep very detailed separate records of income, borrowing costs, depreciation, and accumulated amounts, which effectively introduces a complex mechanism for controlling financial transactions that must be economically justified.
In summary: this is a technical, yet critically important tool that ensures the fulfillment of the government’s “homework” regarding the alignment of Ukrainian tax legislation with the law of the European Union.
