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CMS Guide to Tax regimes in Central and Eastern Europe

Editors: CMS Tax Connect
 
CMS Tax Connect
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Introduction
CMS is extremely proud of its tax expertise in Central and Eastern Europe, which is among the best in the region. This expertise is a key part of our offering in Europe and a vital step in becoming the best European provider of legal and tax services.
The CMS Tax Connect guide to tax regimes in Central and Eastern Europe is one of the fruits of our close cooperation within the region. It offers a unique overview of the tax systems of 12 countries in an informative and concise format.
Each country is introduced through a “Tax at a glance” section. Here, we have compiled the key tax facts which you need to know. For instance, you can quickly find out what currency is used in Bosnia and Herzegovina, or whether Croatia is a member of the OECD. The country files then deal with the primary features of the tax system in question. They provide an overview of the most important features of the system. These country files are a highly convenient, simple way of getting an idea of the basics, so that you know what to ask in a discussion of your specific business situation.
The primary value of the country files lies in the overview they give of the region. This makes them indispensable for exploring the trends and policies that characterise the tax systems in CEE. For instance, you will learn that it is unusual to have a general corporate income tax rate of over 20%. The two exceptions are Ukraine and Austria, and in Ukraine the 21% rate is to be decreased to just 16% within the next two years. This is a fact worth noting amidst the drive to reduce budget deficits, because it proves that tax competition and the “race to the bottom” is far from over. On the contrary, the region is increasing its efforts to attract foreign investors in order to boost its economies.
Also of interest is the increase in VAT rates. No country in the region has a general VAT rate below 18%, with more and more countries tending towards the mid-20s. It may come as a surprise to some that Hungary has decided to increase its general rate to a whopping 27%. These higher tax rates offer a never-before-seen incentive to decrease VAT leakage, turning VAT planning into a priority.
At CMS, we understand that our clients would prefer not to have to deal with each jurisdiction in the region individually. That is why all our tax personnel – who work across the region as a team – are trained in international tax matters and can coordinate projects across jurisdictions, whether they are based in Ljubljana, Budapest or Prague. In this way we can deliver the seamless service which our clients value so highly.
CMS does not operate through “hubs” or out of “virtual offices”. Our tax personnel are local experts and professionals working in offices from Moscow to Vienna, Sofia to Warsaw, and Zagreb to Kyiv. This ensures that you have access to the hands-on experience and language skills you will need in the region, in order to communicate with the tax authorities effectively and resolve any tax issues that may arise quickly.
We have enjoyed putting together this guide, and trust that you will find it useful.
Tamás Fehér
E tamas.feher@cms-cmck.com
Tax at a glance in CEE
Austria
Currency: EUR
EU Member: Yes
OECD Member: Yes
Corporate income tax rate: 25%
VAT rates: 20% and 10%
Group regime: Yes
Withholding tax: Yes
Exemption on dividends: Yes
Thin capitalisation regime: No
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Bosnia and Herzegovina
Currency: The Convertible Mark (BAM)
EU Member: No
OECD Member: No
Corporate income tax rate: 10%
VAT rate: 17%
Participation-exemption regime: No
Group regime: Yes – for companies within the same political entity
Withholding tax: 10% (interest, royalties, dividends and shares of partnerships’ profits)
Exemption on dividends: Yes
Thin capitalisation regime: No
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Bulgaria
Currency: The Bulgarian Lev (BGN)
EU Member: Yes
OECD Member: No
Corporate income tax rate: 10% flat rate
VAT rates: standard rate - 20%; reduced rate – 9%
Participation-exemption regime: Yes, when dividend received by EU/EEA entity
Group regime: None
Deduction of foreign losses: Foreign losses may be offset against income from the same country. Such losses may be carried forward for five years. No carry-back
Exemption on dividends: Yes, subject to limitations.
Thin capitalisation regime: Yes, debt-to-equity ratio 4:1; Applicable to long-term loans obtained not only from related parties but also from other parties, excluding banks and other financing institutions.
Percentage holding required: None
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Croatia
Currency: The Croatian Kuna (HRK)
EU Member: No (due to join on 1 July 2013, subject to ratifications)
OECD Member: No
Corporate income tax rate: 20%
VAT rates: 25%, 10% and 0%
Participation-exemption regime: Yes
Group regime: No
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Czech Republic
Currency: The Czech Crown (CZK)
EU Member: Yes, since 2004
OECD Member: Yes, since 1995
Corporate income tax rate: 19%
Personal income tax rate: 15%
VAT rates: basic rate 20%, reduced rate 14%
Group regime: No
Withholding tax: 10% (interest, royalties, dividends and shares of partnerships’ profits)
Participation-exemption regime and exemption on dividends: Yes (10% holding required for at least 12 months)
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Hungary
Currency: The Hungarian Forint (HUF)
EU Member: Yes, since 2004
OECD Member: Yes, since 1996
Corporate income tax rate: 10% and 19%
VAT rates: 5%, 18% and 27%
Participation-exemption regime: Yes
Group regime: No
Exemption on dividends: Yes (irrespective of percentage holding)
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Poland
Currency: The Polish Zloty (PLN)
EU Member: Yes, since 2004
OECD Member: Yes, since 1996
Corporate income tax rate: 19%
VAT rates: 23%, 8%, 5% and 0%
Participation-exemption regime: Yes
Group regime: Yes, applies only to CIT. Unpopular with taxpayers due to several restrictions
Exemption on dividends: Yes. The EU or EEA beneficiary must not be exempt from tax in its country of residence and must hold not less than 10% of Polish company’s shares for at least two years (with respect to Swiss shareholders, the minimum shareholding is 25%)
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Russia
Currency: The Russian Ruble (RUB)
EU Member: No
OECD Member: No
Corporate income tax rate: 20%
VAT rates: 0%, 10% (medicines, food, children’s clothes), 18%
Participation-exemption regime: Yes (dividends only): 50% of share capital + one year holding
Group regime: Yes (since 01/01/2012)
Thin capitalisation regime: Yes, debt-to-equity ratio: 3:1
Transfer pricing regime: Yes (new since 1/1/2012)
Is it a major topic in your country? Yes

Serbia
Currency: The Serbian Dinar (RSD)
EU Member: No
OECD Member: No (observer status)
Corporate income tax rate: 10%
VAT rates: 0%, 8% and 18%
Participation-exemption regime: No
Group regime: Yes
Withholding tax: 10% (interest, royalties, dividends and shares of partnerships’ profits)
Exemption on dividends: Domestic dividends: yes; foreign: some tax credit rules
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Slovakia
Currency: The Euro (EUR)
EU Member: Yes, since 2004
OECD Member: Yes, since 2000
Corporate income tax rate: 19%
VAT rates: 20% and 10%
Participation-exemption regime: Yes
Group regime: No
Withholding tax: 10% (interest, royalties, dividends and shares of partnerships’ profits)
Exemption on dividends: Yes
Thin capitalisation regime: No
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Slovenia
Currency: The Euro (EUR)
EU Member: Yes, since 2004
OECD Member: Yes, since 2010
Corporate income tax rate: 20%
VAT rates: 20% and 8.5%
Participation-exemption regime: Yes
Group regime: No
Exemption on dividends: No
Thin capitalisation regime: Yes
Transfer pricing regime: Yes
Is it a major topic in your country? Yes

Ukraine
Currency: The Ukrainian Hryvnia (UAH)
EU Member: No
OECD Member: No
Corporate income tax rate: 21%
VAT rates: 0%, 20%
Participation-exemption regime: No
Group regime: No
Withholding tax: 10% (interest, royalties, dividends and shares of partnerships’ profits)
Exemption on dividends: Yes, if paid from domestic sources or certain qualifying foreign sources. Exemption applies irrespective of percentage holding for dividends received from residents; holding must be at least 20% for dividends received from non-residents
Thin capitalisation regime: No (instead, there are rules similar to earnings stripping restriction)
Transfer pricing regime: Yes (limited).
Is it a major topic in your country? No

Austria
General introduction
Austria is a member state of the European Union and all EU directives have been transposed into domestic law. The finance department has introduced a modern electronic system which is user oriented and flexible, and which has shortened and simplified the procedures.
Since 1 January 2011, it has been possible to obtain binding tax rulings in relation to transfer prices, group taxation and restructurings. The new procedure is already widely used in practice.
Major taxes
  • Corporate Income Tax
    • General rate: 25%
    • Qualifying venture capital companies, investment funds and pension funds: 0%
  • VAT
    • Standard rate: 20%
    • Reduced rate: 10%
  • Personal Income Tax
    • Progressive tax rate: up to 50%
    • Capital Income: 25%
    • Capital Gains from real estate (as of 1 April 2012): 25%
  • Social Security Contributions
    • Employer’s contributions: 21.83%
    • Employee’s contributions: 18.07%
  • Derivative Instruments Gains Tax
    • Applicable to all kinds of capital income: 25%
    • Real Estate Transfer Tax: 3.5%

Corporate tax
Tax basis
Taxable income is based on annual profits, which are determined under local accounting standards and adjusted for tax purposes. For specific assets like buildings or vehicles, a maximum annual depreciation rate is fixed by law. A favourable and modern group taxation regime is available, under which domestic and foreign subsidiaries may be included in a tax group.
Tax rate
The corporate income tax rate is 25%. The corporate income tax rate for qualifying venture capital companies, investment funds and pension funds is 0%. Non-profit organisations are tax exempt.
Capital gains
Capital gains are generally subject to 25% corporate income tax unless the participation exemption applies (see below).
Participation exemption
Dividends received on Austrian and EU shareholdings are generally tax exempt. Dividends received from third countries are tax exempt if (i) Austria has concluded a treaty for administrative assistance with the relevant state or (ii) the shareholding represents at least 10% of share capital and the holding period is at least one year.
Thin capitalisation
There are no thin capitalisation rules in Austria. Interest is fully deductible.
Tax loss carry-forward
Tax losses can be carried forward for an unlimited period of time and may be offset against up to 75% of annual profit (i.e. 25% of annual profit remains taxable). Tax losses are extinguished if all three of the following criteria are met:
  • 75% change in shareholders,
  • 75% change in executive directors, and
  • change of business activity.

Tax relief
In relation to R&D expenditure, a government premium of 10% of the expenditure is paid by the state.
Withholding tax
Withholding tax applies to a number of payments, including dividends, interest and royalties. The statutory rate is 25%. The rate may be reduced under a double tax treaty or the relevant EU Directive.
Transfer pricing
The OECD Transfer Pricing Guidelines are applicable, as well as the Austrian Transfer Pricing Guidelines published by the Ministry of Finance in October 2010.
Transfer prices are generally determined by reference to the market prices charged between unrelated parties, as determined by one of the methods envisaged by the OECD Transfer Pricing Guidelines.Taxpayers must maintain appropriate transfer pricing documentation, as described in the Austrian Transfer Pricing Guidelines.
Value Added Tax
The standard rate of 20% applies to all supplies of goods and services not specified as being subject to the reduced rate or exempted.
The reduced rate of 10% applies to specific supplies of goods and services such as food, water, medicines, passenger transport, cultural and sports events, residential leases, hotel accommodation, etc.
Personal Income Tax
Income tax applies to seven categories of income: income from agriculture and forestry, income from independent work, income from trade, income from employment, income from capital, income from rental and other income.
Income from capital (dividends, interest, capital gains etc.) is taxed at a flat rate of 25%. Income tax on the other categories of income is calculated at a progressive rate of up to 50%. As of 1 April 2012, capital gains derived from the sale of real estate are generally subject to a flat rate of 25%.
Other taxes
  • Wealth Tax: There is no wealth tax in Austria.
  • Inheritance and Gift Tax: Since 1 August 2008, no inheritance and gift tax is levied in Austria.
  • Real Estate Transfer Tax: Real estate transfer tax is payable at 3.5% of the consideration paid by the purchaser. In addition, a 1.1% registration fee is levied for the registration of the new owner in the land register.

Double tax treaties
Austria has concluded double taxation treaties with more than 80 states. The double tax treaties generally follow the OECD Model Tax Convention.
Bosnia and Herzegovina
General introduction
In order to explain the tax system in Bosnia and Herzegovina (“BiH”), reference must be made to the Dayton Agreement 1995 (hereinafter the “DA”). The DA established a constitution for BiH, as well as constitutions for the Entities within BiH – the Federation of BiH (“FBiH”) and Republika Srpska (“RS”). Brčko District (“BD”) was subsequently created as a third unit.
Consequently, the tax systems vary between the three units in terms of tax rates and tax benefits. Different tax authorities (at entity, cantonal and municipal levels) are responsible for collecting taxes. A centrally administered VAT regime was enacted at BiH level on 1 January 2006. The BiH Indirect Taxation Authority is responsible for collecting value added tax and customs and excise duties throughout BiH, as well as coordinating fiscal policy issues generally.
Main taxes
  • Value added tax: 17%
  • Corporate income tax: 10%
  • Personal income tax
    • 10% of gross salary in FBiH
    • 10% in RS
    • 10% in BD
  • Property tax: annual charge at various rates per square metre or based on market value
  • Real estate transfer tax: in RS, real estate transfer tax is 3% of the estimated property value. In the FBiH, cantonal laws set the tax rate by reference to the value of immovable property (5 to 8%)
  • Excise duties on some commodities, such as oil products, tobacco products, soft drinks, alcohol drinks, beer, wine and coffee.

Corporate Income Tax
Corporate Income Tax is payable by companies and other legal entities that independently and permanently carry out economic activities for profit. Non-residents are subject to the unit (FBiH, RS or BD) tax on profits achieved in that unit. The tax base is the entity’s accounting profit, adjusted in accordance with the provisions of the Corporate Profit Tax (CPT) Law. The tax rate in all three units is 10%. A wide range of incentives is available in FBiH and BD, while the CPT Law in the RS does not offer tax incentives.
Tax loss carry forward
In general, a tax loss can be carried forward and offset by reducing the taxable base in the following five years. Tax losses incurred outside the unit of residency cannot be deducted from the tax base.
Thin capitalisation
There are no thin capitalisation rules.
Withholding tax
The tax base is income realised by a non-resident taxpayer. The tax is withheld by the local entity at the time of payment abroad. In FBiH, a 10% withholding tax is charged on interest, royalties, fees for market research, tax advisory services or audit services, and insurance or reinsurance premiums. A 5% withholding tax is charged on dividends. In RS and BD, a 10% withholding tax is payable on interest paid to non-residents, interest paid by permanent establishments or subsidiaries on loans from their foreign associates, royalties, and fees for management, consulting, financial, technical or administrative services. In RS dividends are subject to a 10% withholding tax, but this can be reduced to 0% if the foreign shareholder holds at least 10% of the company paying the dividend. These rates can also be reduced under double tax treaties.
Transfer pricing
Transfer pricing issues are regulated by the applicable CPT Legislation for each entity. In all jurisdictions, the taxpayer has an obligation to report related party transactions in its tax statement (an additional document submitted with the tax return). The taxpayer must also report the value of related-party transactions separately, based on market prices or substantially similar transactions (i.e. at «arm’s length» prices). CPT legislation does not explicitly regulate the form of transfer pricing documentation. However, the legislation does stipulate the transfer pricing methods that can be used to establish the market value of the goods/services.Based on current practice, in the absence of adequate transfer pricing documentation the taxpayer runs the risk of the tax authorities not recognising expenses in full, or making a deemed increase in the revenue generated by transactions with associated companies.
Tax consolidation
Tax consolidation at group level is possible upon request, provided that all the companies within the group are residents in the same unit (FBiH, RS and BD). Different detailed regulations apply in each unit.
Value Added Tax
Any person who independently carries out any economic activity at any place, whatever the purpose or result of such activity, is a taxable person for VAT purposes. VAT is payable on all supplies of goods and services made for consideration by a taxable person acting as such in BiH, and on the importation of goods. There is a single tax rate of 17%. The BiH Indirect Taxation Authority is responsible for collecting value added tax across the whole territory of BiH. A system of tax representatives is also in place. The VAT Law follows the EU VAT Directive.
Personal Income Taxation
Personal income tax applies to an individual’s income. Residents in each entity are liable to income tax on their worldwide income (i.e. income derived anywhere in BiH or abroad). Non-residents are liable to income tax on income derived within the particular entity. Personal income tax rates apply to the difference between total taxable income and expenses recognised for tax purposes. The tax base for non-residents is gross income with various exemptions/special rules. The applicable tax rates are as follows:
  • 10% (FBiH)
  • 10% (RS)
  • 10% (BD).

Social Security/National Insurance Contributions
In all entities, contributions are calculated on the basis of gross wage (net wage multiplied by a predetermined coefficient).
Employee’s contribution
  • FBiH: 17% for pension insurance, 12.5% for health insurance, 1.5% for unemployment insurance (a total of 31% of gross wage)
  • RS: 18% for pension insurance, 12.5% for health insurance, 1% for unemployment insurance, 1.5% for child protection (a total of 33% of gross wage)
  • BD: 17% for pension insurance for employees from both entities, and 12% for health insurance (a total of 29% of gross wage).

Employer’s contribution
  • FBiH: 6% for pension insurance, 4% for health insurance, 0.50% for unemployment insurance (a total of 10.50% of gross wage)
  • RS: nil
  • BD: 6% of gross wage for pension insurance for employers who apply FBiH law.

Other
Real Estate Transfer Tax
The taxpayer is the seller of the property. In RS, real estate transfer tax is 3% of estimated property value. In FBiH, cantonal laws determine the tax rate according to the value of the immovable property (5%- 8%).
Inheritance Tax
Inheritance and gift taxes are levied at cantonal level in FBiH, at rates between 2% and 10%. In RS the tax rate is 3%.
Double Tax Treaties
BiH has 27 treaties in place.
Bulgaria
Corporate tax
Corporate taxation in general
Bulgaria levies corporate tax at a flat rate of 10%. In addition to the standard tax on corporate profits, there is also a special tonnage tax (optional regime), a gambling tax and a tax on certain expenses. Some income derived by non-resident legal entities without permanent establishments in Bulgaria is subject to a final withholding tax, which is levied on gross income. The taxable entities are primarily companies incorporated under Bulgarian law and non-resident companies (in respect of their own Bulgarian income or income derived through a Bulgarian permanent establishment).
Income from special investment schemes, trusts, pension funds and other collective investment vehicles, Bulgarian REITs, etc. are exempt from corporate income tax. However, dividends distributed by such companies are taxed at shareholder level. The tax year generally corresponds to the calendar year. Most taxpayers are required to file corporate tax returns by 31 March of the year following the respective financial year. Different reporting rules apply to companies which are subject to special taxes. Annual corporate tax is due on the same date, with advance payments made during the year being deducted from the final amount due. Bulgaria has concluded approximately 70 double tax treaties and around 60 investment protection treaties.
Tax on expenses
Bulgaria levies 10% tax on entertainment expenses, the cost of social benefits provided in-kind to employees and maintenance and running costs for vehicles.
Withholding tax
  • Dividends: Dividends distributed to Bulgarian or EU/EEA corporate shareholder are exempt from withholding tax, whilst ordinarily withholding tax of 5% of gross income applies.
  • Interest and royalties: Interest and royalties paid to qualifying EU companies are subject to 5% withholding tax provided that the payer and the recipient are related companies and certain conditions are met. The preferential rate of 5% does not apply to certain hybrid financial instruments, however. Otherwise, the tax rate is 10%, unless a more favourable double tax treaty rate applies.
  • Capital gains: Gains realised by non-residents on the sale of financial assets or real property are subject to 10% withholding tax, levied on the difference between the acquisition and the sales price.
  • Other income: Certain income derived by non-residents and not generated by a permanent establishment in Bulgaria, such as remuneration for technical services, remuneration under franchise and factoring agreements etc., is subject to a withholding tax of 10%, subject to any double tax treaty. EU/EEA entities may opt for net taxation of certain income under certain conditions, subject to following a specific procedure.

Transfer pricing
Bulgarian transfer pricing rules apply to dealings between related parties and in certain cases between unrelated parties. Taxpayers are not obliged by law to create and maintain transfer pricing documentation either before or at the time of the controlled transaction. Domestic transfer pricing guidelines nonetheless recommend preparing and maintaining transfer pricing documentation on an ongoing basis. Advance Pricing Agreements are not available in Bulgaria yet.
Anti-avoidance
Bulgarian tax law adopts the substance-over-form approach to combating tax avoidance. There is also a concept of “countries with preferential tax regimes”. These are countries which do not have a tax treaty with Bulgaria where the income tax applicable to Bulgarian income is over 60% lower than the corresponding Bulgarian tax. There is also a (black) list of countries with preferential tax regimes. It includes countries such as Monaco, Virgin Islands (US and UK), Aruba, San Marino, Guam, Dutch Antilles, Hong Kong, Gibraltar, etc. Certain income paid to residents of the above countries is subject to a 10% withholding tax.
Thin capitalisation
The deduction of interest paid on loans from third parties is limited to the total interest received by the company plus 75% of its profits (calculated without taking into account interest income and expenses) where the company’s debt-to-equity ratio exceeds 3:1. Interest payable to banks is only caught by these rules if the bank and the company are related parties or the loan is guaranteed by a borrower’s related entity. In general, non-deductible interest may be carried forward and deducted from the company’s profits in the following five years, subject to specific conditions and requirements.
Compensating losses
  • Domestic: Companies may carry forward losses for five consecutive years. Carrying forward is not allowed in the context of restructuring transactions, except in the case of a change of legal form and for permanent establishments in Bulgaria resulting from an EU merger.
  • Offsetting foreign losses: The ability to offset foreign losses depends on whether the applicable double tax treaty applies the exemption or credit method.

Personal Income Tax
Taxes
Individuals resident in Bulgaria are taxed at a flat rate of 10% on their worldwide income on a self-assessment basis, unless in an employment or similar relationship. There is no minimum taxable threshold. Dividends and liquidation quotas are subject to 5% tax, calculated on the gross income. There are special rules for calculating the taxable base for capital gains upon disposal of real estate and financial assets, self-employment income, revenues from leasing of movable and immovable property, etc. Non-residents receiving Bulgarian income are subject to 10% withholding tax on the income, except for dividends and liquidation quotas, which are taxed at 5% unless a more favourable tax treaty is applicable. Generally, all income paid by Bulgarian legal entities or persons is treated as Bulgarian income. EU/EEA individuals may opt for net taxation of certain income under certain conditions, subject to following a specific procedure. In addition, there is a range of tax exemptions, some of which are also available to EU/EEA citizens.
Social security
Social security contributions (including health insurance) in Bulgaria vary between 30.7% and 31.4%, depending on the age of the employee, the type of work, etc. The apportionment of these contributions as between employer and employee depends on the particular contribution.
Local taxes
  • Real estate tax: Real estate tax is levied on the tax value of the real estate for residential property and the higher of tax value and net book value for business property. The rate varies from 0.01% to 0.45% depending on the municipality.
  • Transfer tax: Transfer tax is levied on transfers of ownership of real estate and vehicles, as well as on the creation of in rem rights over real estate. The tax base is the tax value of the property or right in question. The rate varies between 0.1% and 3.0%, depending on the municipality. The taxable person is normally the acquirer of the property/right.
  • Gift and inheritance tax: The rate of gift and inheritance tax varies between 0.4% and 6.6% for collateral relatives and non-related persons, but there is no tax where the gift is made by, or the property inherited from, a direct relative or spouse. Proceeds from the sale of inherited property are not subject to tax.

Value Added Tax
General
The standard VAT rate is 20%. The reduced rate is 9% and applies to certain tourist services such as hotels and other places of accommodation. The VAT system is generally aligned with the EU VAT Directive.
VAT registration
Persons (both natural and legal) with taxable turnover exceeding BGN 50,000 (approximately EUR 25,000) in any 12-month period must register with the tax authorities for VAT purposes. Mandatory VAT registration also applies to intra-Community acquisitions above a certain value, and to foreign entities, not established in Bulgaria, which make taxable supplies in Bulgaria in respect of which they are required to pay VAT, or which have a fixed place of business there. Taxable persons (including foreign persons) also have the option to register for VAT voluntarily.
Exempt supplies and incentives
The list of exempt supplies replicates the list contained in EU directives. Taxable persons may treat a supply under a leasing agreement as VAT-able. The same is true for transactions involving (parts of) “old” buildings and adjacent land, or non-regulated land, and leases of premises to an individual (not being a trader) for domestic purposes. The VAT Act enables investors to benefit from lighter importation requirements and shorter timescales for VAT refunds. In both cases the investor must meet certain requirements and must submit an application for permission to the Minister of Finance.
Excise duties
The following are subject to excise duties: alcohol and alcoholic beverages; tobacco products; energy products and electricity.
Croatia
General introduction
The Tax Authorities in Croatia are very formalistic and the vast bureaucratic system is not very investor oriented. The tax collection process is divided between different official authorities according to the source of tax revenue.
Main taxes
  • VAT: 0%, 10% and 25%
  • Corporate income tax: 20%
  • Personal income tax: progressive rates: 12%, 25%, and 40%
  • Real estate transfer tax: 5%
  • Excise duties: oil and refined petroleum products, tobacco, alcoholic beverages, non-alcoholic beverages, beer, coffee, motor vehicles, vessels and aircraft, luxury products
  • County, municipal and town/city taxes as part of regional and local government revenue: city surtaxes on personal income tax.

Some of the previously introduced “crisis” taxes have now ceased to apply, including:
  • The charge on the provision of mobile communication network services: in force up to 1 January 2012; and
  • The special tax on salaries, pensions and other receipts: in force from 1 August 2009 until 31 December 2010.

Corporate Income Tax
The entities subject to corporate income tax are resident companies and other legal entities carrying out activities with a view to profit, as well as permanent establishments of non-resident entrepreneurs. Individual entrepreneurs may, subject to certain conditions, elect to become corporate income taxpayers.
The corporate profit tax base is determined in accordance with the accounting regulations and adjusted for tax purposes in line with the Corporate Profit Tax Law. The general tax rate is 20%. Tax exemptions and other tax reliefs are available in accordance with special legislation regulating incentives.
Special reduction of the tax base
As of 2012, the tax base may also be reduced by the amount of profit used to increase the share capital of the company. The taxpayer has to prove that share capital was actually increased. The reduction will not apply where tax avoidance or evasion is the sole purpose of the increase.
Tax loss carried forward
Generally, a tax loss can be carried forward for five years. If the right to offset losses passes to a legal successor by virtue of a merger, acquisition or division, the right to carry forward transferred losses starts in the period during which the legal successor acquired that right. The legal successor may lose the right to carry forward tax losses if the original taxpayer had not been carrying out business activities during the two tax periods before the change, or if the business activity changes significantly in the two tax periods after the change (where the change is not intended to preserve jobs or recover the operations of the company). Similarly, where there has been no such change the taxpayer may nevertheless lose the right to carry forward tax losses if its ownership structure changes during the tax period with respect to more than 50% of its shares.
Thin capitalisation
If the amount borrowed from shareholders holding at least 25% of the shares, equity capital or voting rights in a taxable person exceeds four times the amount of that shareholder’s share in the capital or voting rights, interest on the excess will not be tax-deductible.
Participation exemption
Dividends received are not included in the corporate tax base, regardless of whether they are received from a domestic or foreign entity.
Withholding tax
Withholding tax is generally payable at the rate of 15% on the gross amount of interest, royalties, payments in respect of other intellectual property rights and service fees paid by a resident to a non-resident. Dividends paid abroad, with the exception of dividends paid to natural persons, are subject to withholding tax at the rate of 12%. Withholding tax may be further reduced under a double tax treaty (generally, the rate may be reduced to 5 or 0%). Additionally, there is a 20% withholding tax on payments for services of any kind made to persons with a business seat or place of management in certain countries blacklisted by the Ministry of Finance.
Transfer pricing
The transfer pricing legislation follows the OECD Transfer Pricing Guidelines.
Transfer pricing rules apply to transactions between related resident and non-resident companies and between two resident companies where one or both companies:
  • have beneficial tax status (i.e. pay corporate profit tax at a rate lower than prescribed); or
  • have the right to carry forward tax losses from earlier tax periods.

In accordance with a special rule for interest on loans between related parties, the arm’s length interest rate is determined and published by the Finance Minister before the beginning of the tax period in which it is to apply. If the Finance Minister does not determine and publish such a rate, the base rate of the Croatian National Bank applies (currently 7%).
Value Added Tax
The VAT system in Croatia generally follows the 6th EC Directive (as applicable prior to the adoption of the current EU VAT Directive, Directive 112/2006). With a view to fully harmonising VAT legislation before accession to the EU, further changes to the VAT legislation are expected to be adopted in 2012.
VAT rates are 25%, 10% (tourist accommodation, certain newspapers and periodicals, edible oils and fats, infant food, water (except bottled water) and sugar) and 0% (with right to deduct for bread, milk, medicine, etc.). Foreign entrepreneurs perform supplies subject to VAT within Croatian territory have the right to a VAT refund, where there is reciprocity with the entrepreneurs’ country of residence. There is no general presumption of reciprocity vis-à-vis EU countries.
Personal income tax and other taxes
Personal income tax
Personal income tax applies to an individual’s income. Different methods of calculating the tax base apply to different sources of income. The tax base for residents is determined on a worldwide basis, while non-resident taxpayers are only liable to pay tax on income sourced to Croatia. Tax rates are progressive: 12%, 25%, and 40%.
City surtax
Municipalities and cities may levy an additional tax, called the city surtax, which is calculated and withheld on the amount of personal income tax payable. City surtax is payable by reference to the residence or habitual abode of the taxpayer, at rates varying from 0 to 18%.
Social security contributions
Pension contributions (payable by the employer):
  • Inter-generation solidarity contribution at the rate of 20% (for employees insured according to the previous pension system); or
  • Inter-generation solidarity contribution at the rate of 15% and Individual capital saving at the rate of 5%.

Health care contributions (payable by the employee):
  • Obligatory health care insurance at the rate of 15%;
  • Unemployment insurance at the rate of 1.70%; and
  • Work Accident or professional illness insurance at the rate of 0.50%.

Real Estate Transfer Tax
Real estate transfer tax is payable by the transferee at the rate of 5%. The tax base is the market value of the real estate at the time of purchase.
Czech Republic
Radko Matyáš
E matyas@ccsconsulting.cz
Ingrid Špačková
E spackova@ccsconsulting.cz
General introduction
The tax system in the Czech Republic is very similar to other European tax systems, having undergone years of harmonisation. The Czech system includes the following taxes: personal income tax, corporate income tax, VAT, road tax, real estate tax, real estate transfer tax, inheritance and gift tax, excise taxes and energy taxes. Health and social insurance also form part of the Czech tax system.
Main taxes and rates
  • Personal income tax: 15%
  • Corporate income tax: 19%
  • VAT
    • 20% basic rate
    • 14% reduced rate
  • Social & Health Insurance Contributions
    • Employer’s contributions: 34% of gross salary
    • Employee’s contributions: 11% of gross salary

Corporate Income Tax
The corporate income tax rate is 19%. There is also a reduced rate of 5%, levied on investment, pension and share funds. There are currently (2012) no significant amendments planned for corporate income tax, except for taxation of the lottery and betting. In 2011 lottery and betting companies were tax exempt and only paid a special lump sum charge on net income derived from betting and lottery activities. In 2012, such companies will be subject to corporate income tax of 19%, while still having to pay the special lump sum charge.
Tax losses
Tax losses can be carried forward for five years after the year in which they were generated. The deduction of carried-forward tax losses is limited if there is a change in the direct shareholding of the company of more than 25%. In this case, losses are only deductible if at least 80% of current revenue is generated from the same business activity as that carried out in the taxable period when the tax loss was generated. Under Czech law, tax losses cannot be offset against the profits of another company within the group.
Participation exemption and dividend exemption
The participation exemption applies to income generated from the transfer of shares in Czech and foreign (even non-EU) companies. However, certain conditions apply to the exemption: the parent company must hold at least 10% of the shares for more than 12 months; in the case of a company tax-resident in a non-EU country (i.e. where the parent company is a tax resident in the Czech Republic and the subsidiary is a non-EU resident), that country must also have signed a double taxation treaty with the Czech Republic, and its corporate income tax rate must not be lower than 12%. The exemption does not apply to shares acquired as part of the purchase of a business or part thereof. The conditions for tax exemption of dividends are analogous to the conditions for the participation exemption.
Research and development expenses
A taxpayer may deduct from the tax base 100% of the expenses incurred, during the relevant taxable period, in carrying out research and development projects. These may relate to experiments or theoretical work, proposed technologies etc. This means that such expenses will be deductible twice – once as expenses incurred to generate income, and secondly as items deductible from the tax base.
Investment incentives
Manufacturing companies may be granted a partial or complete income tax allowance for a period of up to 5 years, together with support for the creation of new jobs and employee re-training. Investment projects in the Czech Republic may be financed from three main public sources – local investment incentives, EU structural funds and EU central funds.
Withholding tax
Among others, income from dividends, interest and royalties is subject to domestic withholding tax. The withholding tax rate is 15%. The only exception is the 5% rate, which applies to finance leasing fees. Where the income is paid to a non-resident, the rate of withholding tax is usually reduced by a double taxation treaty or under the relevant EU Directives.
Transfer pricing
In the Czech Republic, all transactions with associated enterprises must be carried out in accordance with the arm’s length principle. Preparing transfer pricing documentation is not obligatory under Czech law; taxpayers may prepare such documentation in accordance with the OECD Transfer Pricing Guidelines or the EU Transfer Pricing Documentation approach, or they may present other evidence and documents. It is the taxpayers’ decision as to how they prove and justify the prices between associated enterprises. Taxpayers may also ask the tax authorities for a binding ruling regarding transfer prices.
Thin capitalisation rules
The thin capitalisation rules concern loans and credit granted by related persons, and apply not only to interest but to all finance costs relating to the loan or credit. The debt-to-equity ratio which is expected to be maintained is 4:1. Finance costs exceeding this ratio are generally non-deductible. Moreover, finance costs exceeding this ratio and paid to a tax resident in a non-EEA country are recharacterised as dividends. Such dividends are subject to the standard 15% rate of withholding tax, unless the relevant double taxation treaty provides otherwise.
Value Added Tax
Czech VAT law is harmonised with the EU VAT Directive. For 2012, the standard rate is 20% and the reduced rate is 14% (increased from the 2011 rate of 10%).
The majority of goods and services are subject to the standard rate. The reduced rate applies to food, medicines, printed matter, public transportation, water and distribution, cultural activities, accommodation, and construction works. In 2012, a reverse charge system was introduced for construction and assembly services in an effort to prevent tax evasion. The 2012 increase in the reduced tax rate is the first step in the planned unification of the VAT rate, a reform which will be completed in 2013 with a single rate of 17.5%.
Personal income tax
The tax base for an individual includes all income generated by any activity. The Income Taxes Act recognises five sources of income: employment, entrepreneurial activity, capital, leased property and other income. The personal income tax rate is 15%. Tax on employment income is calculated on the basis of “super-gross” income. This represents gross income increased by an amount corresponding to the social security and health insurance contributions paid by the employer (34% of gross income).
Deductions are available against income from entrepreneurial activities and property leasing, either in the amount of actual expenses or as a fixed percentage of income (30% - 80%). From 2014, it is intended to abolish the super-gross basis of assessment and increase the personal income tax rate to 19%.
Rates of social security contributions
  • Health Insurance
    • Employee: 4.5%
    • Employer: 9%
    • Sole trader (contributions calculated on 50% of tax base): 13.5%
  • Social Insurance
    • Employee: 6.5%
    • Employer: 25%
    • Sole trader (contributions calculated on 50% of tax base): 31.5%

The social insurance contributions cover sickness insurance, pension insurance and state employment policy contributions. There are caps applicable to the assessment base of employer’s and employee’s contributions for both social security insurance (48 times average monthly wage – 1,206,576 CZK) and health insurance (72 times average monthly wage – 1,809,864 CZK). Contributions are not payable on the excess.
Other tax news
As of the end of 2011, the Czech Republic has signed 80 double taxation treaties. During 2011, for instance, it signed a treaty with Hong Kong and renewed its treaties with Poland and China.
Hungary
General introduction
Hungary is characterised by a very high number of taxes, many of them special taxes which only affect certain targeted industries, such as the banking, energy, telecoms, pharmaceutical and retail sectors. As some of these taxes were introduced retroactively, and many of them are very controversial, Hungary’s tax system has a reputation of being unpredictable. At the same time, entities that fall into neither of the “targeted” categories enjoy a very generous tax system with many tax planning and tax reduction opportunities. Below is an overview of the main Hungarian taxes and their rates.
Major taxes
  • Personal income tax: 16 – 20.32%
  • Corporate income tax: 10% / 19%
  • VAT
    • 27% basic rate
    • 5 and 18% reduced rates
  • Local business tax and innovation contribution: 2% + 0.3% on gross income
  • Social and other payroll taxes and contributions on salary
    • Employer’s contributions: 28.5 % of gross salary
    • Employee’s contributions: 18.5 % of gross salary (partially capped)
  • Healthcare contribution on non-salaried income: 10%, 14% (capped) or 27%

Corporate tax
General system
Hungary has a progressive corporate income tax system. Yearly profits below HUF 500 million (approx. EUR 1.6 million) are subject to a 10% tax rate, whilst the excess is taxed at 19%. Some income is taxed at a flat 19% rate, however. The tax base is calculated on the basis of accounting profits and then adjusted by increasing and decreasing items. As a general rule, expenses not incurred in relation to the business activities may not be deducted.
Withholding tax
Any payments (including dividends, interest, royalties, service fees, etc.) made to foreign, non-individual taxpayers are free of withholding taxes, even if they are paid to low-tax or non-treaty jurisdictions. This, coupled with a wide-ranging tax exemption on dividends, makes Hungary a good location for holding companies.
Tax loss carry forward
Tax losses accumulated in a tax year may generally be carried forward indefinitely. However, losses from previous years may not be used to reduce profits by more than 50% in any one year. There are also strict conditions on the use of losses predating a transformation or change of control. The main conditions are that the company remains within the same corporate group and/or that it actually pursues and derives turnover from its earlier activities, or those of its predecessor.
Participation exemption
Dividends received are always free from corporate income tax, unless the payer is a controlled foreign company. Capital gains on the sale of participations are tax exempt if initially, at least 30% is acquired, a notification is made to the tax authority upon its acquisition and it is held for at least one year. Opting for the participation exemption regime means that any potential capital losses will not be tax deductible. It is also possible for foreign companies to relocate their place of effective management (tax residency) to Hungary, and take advantage of this exemption subject to the same conditions. This applies even with regard to participations purchased prior to the relocation.
Transfer pricing
Hungarian taxpayers have three primary obligations with regard to transfer pricing: (i) to make a declaration to the tax authority in respect of each related party, when entering into a transaction with that party for the first time, and in respect of termination of the related party status, (ii) to maintain transfer pricing documentation with regard to every related party transaction (save where an express exemption applies) and (iii) either to use arm’s length prices in related party transactions, or to adjust their corporate income tax base as if arm’s length prices had been used. The above requirements apply vis-à-vis both foreign and domestic related entities. The legal definition of “related party” is lengthy, but the term generally refers to holdings of 50% or more.
REITs and the IP regime
Hungary has recently introduced a REIT regime, one of the first in the CEE region. Under the new regime, there are corporate income tax, property transfer tax and local tax exemptions for investments in property. In order to qualify, the REIT must have initial capital of at least EUR 32 million, at least 25% of its shares must be listed and held by small investors and at least 90% of its profits must be distributed each year. The REIT’s portfolio may contain properties located abroad as well as in Hungary. Hungary’s IP regime is also highly beneficial. Firstly, royalty income may benefit from an effective 5% corporate income tax rate. Further, there are two ways to achieve tax exemption on capital gains from the sale of IP rights. One option is to use a roll-over relief mechanism, whereby the capital gains can be used to buy new IP rights in lieu of those sold. The second option is analogous to the participation exemption regime described above (involving notification and a minimum holding period). This may also be utilised by entities relocating their tax residency to Hungary.
Value Added Tax
The Hungarian value added tax regime is based on and essentially complies with the framework of the EU Directives. The standard rate of VAT is now 27%, which is the highest in the EU. An 18% preferential rate applies to socially sensitive food products and hotel services. A second reduced VAT rate of 5% applies to books, daily and other newspapers, medicines and medical goods, and central heating etc.
Personal Income tax
Strictly speaking there is only one (flat) rate of personal income tax, which is 16%. However, adjustments are made to the tax base using multipliers which vary from 1 (e.g. for certain investment income) to 1.27 (e.g. for higher-than-average employment income), resulting in effective rates of between 16% and 20.32%. In addition, the very generous family allowance can be used to reduce the tax base and, in many cases, can result in effective tax of nil.
There are also payroll and similar taxes in place, such as the healthcare contribution. The rate of this contribution may be 10%, 14% (capped) or 27%, depending on the type of income in question. It is usually payable by the party paying the remuneration, though in some cases it is payable by the recipient.
In respect of employment income, the employer pays a total of 28.5% of gross salary and the employee a total of 18.5% in payroll taxes and contributions. One element of the employee’s contributions (relating to pension insurance) is capped.
Poland
Agnieszka Wierzbicka
E agnieszka.wierzbicka@cms-cmck.com
General introduction
The tax system in Poland has been gradually reformed since the 1990s and has undergone frequent and fundamental changes. As a result, it is complicated and contains provisions that are difficult to follow.
Foreign investors may experience some difficulties arising from Polish tax law, for example all communications with tax authorities must be in Polish and the tax authorities are very formalistic and bureaucratic in many situations. Moreover, tax law is subject to frequent amendments and therefore requires special attention. For this reason, employing a local adviser is a must.
Foreign collective investment undertakings still have to comply with restrictive administrative burdens in order to benefit from tax exemptions. Furthermore, existing tax incentives concerning research and development investments are encumbered with strict formal requirements that are difficult to meet. There is a friendlier tax regime for small and medium enterprises, in that they can opt for simplified income tax and cash method for settling VAT, amongst other things. In addition, up to a certain level of income they are relieved from full bookkeeping requirements.
The current rates of the main taxes are
  • Personal income tax: 18% and 32% for individuals, 19% for sole traders or partners in partnerships
  • Corporate income tax: flat 19% rate
  • VAT – basic rate: 23%, reduced rates: 8%, 5% and 0%

Corporate Income Tax
Scope
The Corporate Income Tax Law (the “CIT Law”) lays down the rules under which income received by legal persons is taxed. Legal entities with Polish CIT residency are taxed on their worldwide income, while non-residents are subject to CIT on income generated in Poland, unless an applicable double tax treaty provides otherwise. The basic CIT rate is 19%. The CIT Law also provides for tax exemptions and reliefs.
Taxable base
CIT is payable on the total taxable income earned during a tax year, i.e. the difference between aggregate taxable revenue and aggregate tax-deductible costs. Tax losses may be carried forward and offset against income in the following five tax years. However, only 50% of the loss may be deducted in any one year.
Withholding tax and participation exemption
Provided that a relevant tax treaty does not provide otherwise, payments of interest and royalties made to foreign entities are subject to 20% withholding tax. Payments made by a Polish company to an EU-based (or EEA-based) related company are subject to 5% withholding tax until 30 June 2013, and fully exempt after that date, provided that (i) the EU or EEA-based related company has held at least 25% of the share capital of the Polish company, or (ii) the Polish company has held at least 25% of the share capital of the EU or EEA-based related company, or (iii) another EU or EEA-based company has held at least 25% of the share capital in both the paying and receiving company, for a period of two years, and the related company is not exempt from tax in its country of residence. The two-year holding requirement may also be satisfied after payment. Dividends are subject to 19% withholding tax. However, if a beneficiary: (i) is established in an EU or EEA country, or in Switzerland; (ii) is not exempt from tax in its country of residence, and; (iii) holds not less than 10% of the shares in the Polish company (25% for Switzerland) for at least two years, the dividend is exempt from withholding tax. Dividends or similar income paid by Polish companies to other Polish companies are subject to a participation exemption from corporate income tax. This applies where the beneficiary holds at least 10% of the company’s shares for at least two years.
Transfer pricing
The Polish transfer pricing regulation is based on the arm’s length principle and generally follows the OECD Transfer Pricing Guidelines. For transfer pricing purposes, parties are treated as related if one of them participates, even indirectly, in the management or control of the other, or holds at least 5% of its shares. Parties are also treated as related if a third-party controls or holds shares in them. If a transaction is deemed not to be at arm’s length, the tax authorities may substitute market prices for the actual transaction prices. If a company enters into transactions with related parties or parties that are residents of “tax havens”, then transfer pricing documentation must be prepared.
Value Added Tax
Scope
Polish VAT law is harmonised with EU regulations. VAT payers include legal persons, organisational units without legal personality and individuals that independently carry out a business activity. Taxpayers are required to register for VAT purposes in Poland. If they plan to engage in EU activities, they must also register as EU VAT payers.
VAT rates
The standard VAT rate is 23% and applies to almost all supplies, unless the regulations explicitly provide for one of the reduced rates of 8% and 5% to apply. These rates have been introduced in response to the current financial crisis and will remain in force until the end of 2013, after which the 23% and 8% rates will return to 22% and 7% respectively, while the 5% rate will remain unchanged. The reduced rate of 8% is applicable inter alia to health-related goods and books. Supplies of certain agricultural products are subject to VAT at 5%, while certain other transactions are subject to a 0% VAT rate, e.g. the supply of ships to ship-owners. Furthermore, a number of supplies of goods and services are exempt from VAT without the right to deduct input VAT, e.g. certain financial and insurance services.
VAT calculation
VAT returns are submitted either monthly or quarterly. The amount of VAT due is calculated as the amount of output VAT after deduction of input VAT. However, in respect of some goods and services (such as accommodation and catering services) there is no right to deduct the input VAT incurred by the receiving party. In this regard the regulations do not necessarily reflect EU law.
Personal Income Tax
Scope
The Personal Income Tax Law (the “PIT Law”) is similar to the CIT Law. The details of PIT taxable revenue, tax deductible costs and tax exemptions are much the same as for the CIT Law. Generally, individuals pay tax on their salary income or self-employment income. Polish residents are taxed on their worldwide income while non-residents are only subject to Polish tax on income generated in Poland.
Tax rates
Salary income is subject to progressive taxation with a two-bracket structure. The PIT Law provides for an initial allowance of PLN 556.02 on the lowest income bracket. The tax rates and brackets are as follows:
Tax base (PLN)
  • up to PLN 85,528: 18% of the amount remaining after deducting the allowance of PLN 556.02
  • above PLN 85,528: PLN 14,839.02 plus 32% of the amount exceeding PLN 85,528

Sole traders or partners in partnerships can, under certain conditions, opt for a flat 19% income tax rate.
Social security
Social security in Poland consists of pension, disability, sickness and accident insurance. All are payable on a monthly basis and are calculated on the basis of the employee’s gross salary. The rates of the contributions are:
  • Employer’s contributions in percentage of gross salary
    • Pension: 9.76%
    • Disability: 6.50%
    • Sickness -
    • Accident: 0.40% to 8.12%
  • Employee’s contributions
    • Pension: 9.76%
    • Disability: 1.50%
    • Sickness: 2.45%
    • Accident -


Additionally, employers are obliged to withhold employee healthcare contributions of 9%. However, 7.75% of this is deductible from the employee’s PIT. The remaining 1.25% is calculated on the basis of gross salary less employee’s pension, disability and sickness contributions.
Other relevant issues and taxes
Apart from the taxes described above, there are 9 additional taxes, including real estate tax and excise duty. Recently, the Polish government announced plans to impose a tax on the extraction of minerals and hydrocarbons (e.g. shelf gas). The Polish authorities are currently pursuing a policy of amending tax treaties so as to remove tax sparing clauses. The changes to the treaty with Malta have been ratified; similar amendments to the treaty with Cyprus are awaiting ratification.
Russia
General introduction
There are three levels of taxes in the Russian Federation:
  • Federal taxes: VAT, corporate income tax, excise taxes, personal income tax, mineral resources extraction tax
  • Regional taxes: company property tax, transport tax, gambling tax
  • Local taxes: land tax, individual property tax

Corporate Income Tax
Corporate income tax is paid by:
  • Russian legal entities (on their worldwide income)
  • Foreign legal entities doing business in Russia through a permanent establishment and/or receiving Russian-sourced income

The general corporate income tax rate is 20% (2% accruing to the federal budget and 18% to the regional budget, though this may be reduced to 13.5%). Expenses are deductible if they are related to the taxpayer’s business, economically justified and properly supported with documentation. Some expenses are non-deductible or partially deductible (e.g. penalties payable to the State Treasury, some advertising expenses). Tax treaties may help in deducting these expenses.
On 1 January 2012 a tax consolidation regime entered into force, applicable only to so-called “important taxpayers” (conditions: a shareholding of more than 90% in Russian subsidiaries, total group taxes ≥ RUB 10 billion (approx. EUR 250 million); total group revenue ≥ RUB 100 billion (approx. EUR 2.5 billion); total group assets ≥ 300 billion (approx. EUR 7.5 billion). A new transfer pricing regime also entered into force on 1 January 2012. The new law has been drafted according to the OECD rules and provides for five transfer pricing methods: comparable uncontrolled price (top priority method), resale minus, cost plus, comparable profitability and profit split. This new law also makes it compulsory to draw up a transfer pricing report and to provide certain other documents.
Participation-exemption regime
Dividends received by a Russian company are taxed at a 9% flat rate (even if received from a foreign entity).
A participation exemption applies if the following conditions are met:
  • participation of at least 50% in the distributing company (or depositary receipts giving an entitlement to more than 50% of financial rights),
  • one-year minimum holding.

However, the exemption does not apply to dividends received from companies residing in low-tax or “black-listed” jurisdictions (the list of these jurisdictions has been produced by the Ministry of Finance).
Thin-capitalisation regime
Thin capitalisation rules apply where a Russian company has an outstanding debt (“a controlled debt”):
  • to a foreign company that holds (directly or indirectly) more than 20% of the Russian company’s share capital, or
  • to a Russian company that is an affiliate of the aforementioned foreign company, or
  • in respect of which the above affiliated person and/or the foreign company itself act as a guarantor or surety, or otherwise guarantee repayment of the debt by the Russian debtor company, and
  • the debt-to-equity ratio exceeds 3:1 (12.5:1 for banks and leasing companies).

According to Russian thin capitalisation rules, interest payments which exceed the threshold are non-deductible, qualify as dividends and are subject to withholding tax.
Corporate Property Tax
In general, Corporate Property Tax applies to the value of fixed assets held by Russian companies or foreign companies located in Russia, at a rate set at regional level. This cannot exceed 2.2%.
Value Added Tax
The standard VAT rate is 18%. A reduced 10% rate applies to books, periodicals, medical goods, some foods and children’s clothes.
A 0% VAT rate applies to the following transactions:
  • Exports of goods outside Russia
  • Works and services relating to the transit of goods
  • Some services and goods supplied to foreign diplomatic missions etc.

Personal Income Tax
Tax residents (persons present for at least 183 calendar days during a 12-month rolling period) are taxed on their worldwide income at the following rates:
  • 13% for most types of income;
  • 9% for dividends received from Russian or foreign companies;
  • 35% for prizes, insurance receipts and interest on bank deposits in excess of specific limits.

Non-residents are liable for tax on their Russian-sourced income at the rate of 30%, irrespective of the type of income (dividends are subject to a withholding tax of 15%). It may be possible to apply the relevant provisions of a tax treaty to exempt certain types of income from Russian non-resident taxation. Foreign employees having the status of a “Highly Qualified Specialist” (HQS - employees of Russian entities or branches of foreign entities earning more than RUB 2,000,000 (approx. EUR 50,200) gross per year) are subject to personal income tax at the rate of 13% regardless of whether they are Russian tax residents or not.
Social Contributions
Employers, both Russian companies and branches of foreign entities, are subject to contributions to social funds from the remuneration paid to their employees. From 1 January 2012, the general rate of these contributions is 30% (some types of small businesses benefit from a lower rate of 20%) which is applicable to gross annual remuneration of up to RUB 512,000 (approx. EUR 13,000). 10% is levied on the excess. From 1 January 2012, employers are required to pay social contributions on the remuneration of all foreign employees as well. Nonetheless, foreign employees with HQS status are exempt from social contributions.
Serbia
General introduction
The tax system in the Republic of Serbia is mainly centralised and investor friendly. Most taxes are collected at national level, with the exception of property tax, which is collected on a municipal level.
Most important taxes
  • Value added tax: 0%, 8% and 18%
  • Corporate income tax: 10%
  • Personal income tax: depends on type of income (progressive rates between 10% and 20%) Additional annual income tax is levied on income exceeding the prescribed threshold (10% and 15%)
  • Property tax: 0.4% to 2%
  • Real estate transfer tax: 2.5%

Excise duties on oil derivatives, tobacco products, alcoholic beverages, imported non-alcoholic beverages and powders, syrups and coffee
Corporate tax
The entities subject to corporate taxation are resident legal entities and non-resident entrepreneurs generating profit through permanent operating units (branches, plants, representative offices, places of production, factories, workshops etc.). The taxable base is determined by adjusting accounting profit, as stated in the profit and loss statement, pursuant to the provisions of corporate profit tax legislation. Capital gains are recognised as part of the corporate profit tax assessment, but they are not pooled with general income. The tax rate is 10%.
Tax loss carried forward
Any tax losses incurred in the course of commercial, financial and non-commercial transactions and declared in the tax return, with the exception of capital gains and losses (capital gains are treated separately, although they are included in the tax return), may be carried forward and used to reduce the taxable base for a period of 5 years.
Participation exemption
  • Dividends received from a company resident in Serbia are exempt from corporate income tax.
  • Dividends received from a non-resident company are not exempt, but a tax credit is available.

Thin capitalisation
Interest on loans from associated persons is not recognised as an expense if the loan exceeds four times (ten times for banks) the amount of the taxpayer’s equity (4:1 /10:1 debt-to-equity ratio). If the interest rate on a loan exceeds the reference interest rate published by the Ministry of Finance for the given currency, such interest is not tax deductible (arm’s length principle).
Withholding tax
The tax base is income received by a non-resident taxpayer. Dividends, copyright fees, interest, capital gains and consideration for leases of real estate and movables are taxed at the rate of 20%, unless otherwise provided by a double tax treaty.
Transfer pricing
Transfer pricing issues are regulated by the Serbian Corporate Profit Tax (CPT) legislation. Although Serbia is not a member of the OECD, the Serbian CPT Law adopted principles from the OECD Transfer Pricing Guidelines. The Serbian CPT Law does not impose a specific obligation to maintain transfer pricing documentation and does not explicitly regulate the content of transfer pricing documentation. However, the CPT Law stipulates which transfer pricing methods can be used (comparable uncontrolled price, cost plus, resale price) and also lays down an obligation to declare transactions between associated persons in the tax return.
Tax consolidation
Tax consolidation is allowed for groups of companies where all members are Serbian residents and one company directly or indirectly controls at least 75% of the shares in the other companies. Tax consolidation must continue for at least five years, otherwise each company will have to pay all the tax it would have paid if there had been no consolidation.
Value Added Tax
Any person who independently carries out any economic activity at any place is a taxable person, whatever the purpose or result of such activity. VAT is payable on all supplies of goods and services made for consideration in Serbia by a taxable person acting as such, and also on imports of goods.
The VAT Law generally follows the EU VAT Directive. The applicable tax rates are 8% (certain foods and beverages, medicines, textbooks and teaching aids, newspapers, accommodation, utility services, etc.) and 18%, while financial, educational, medical and cultural services etc. are exempt.
Personal Income Tax
Personal income tax applies to an individual’s income. Residents are liable to income tax on their worldwide income (i.e. income from Serbia and abroad). Non-residents are liable to income tax on Serbian income only. The personal income tax rate for salaries is 12%. Income from self-employment, agriculture and forestry, dividends and capital is taxed at a rate of 10%, while other types of personal income (royalties, rent and other income) are taxed at a rate of 20%.
In addition, annual income tax applies to income that exceeds three times the amount of the average annual salary for Serbian citizens. Non-Serbian citizens’ annual income is taxed if it exceeds five times the average annual salary in Serbia, as determined by the National Statistics Office.
Annual income tax rates are progressive as follows:
  • Residents: for income in the range three to six times average annual salary – 10%, for income above six times average annual salary – 15%;
  • Non-residents: for income in the range five to eight times average annual salary – 10%, for income above eight times average annual salary – 15%.

Social Security/National Insurance Payments
Social security contributions are due from both employers and employees at a total rate of 35.8% of gross salary (split equally), and from self-employed individuals. The maximum base is five times average gross salary.
The social security contributions paid by self-employed individuals and employers/employees are respectively as follows:
  • Pension and disability insurance: 22% / 11%
  • Health insurance: 12.3% / 6.15%.
  • Unemployment insurance: 1.5% / 0.75%.

Other
Real Estate Transfer Tax
This tax is payable by the seller of the property. The tax base is the property’s market value. The rate is 2.5%.
Real Property Tax
Property tax is levied on immovable property located in Serbia, at a rate of 0.4%-2%. For companies, the property tax rate is 0.4%. The taxable base is generally the market value / book value of the property.
Inheritance Taxes
Taxes are levied on inheritances/gifts at progressive rates of 2% and 2.5%.
Double Tax Treaties
Serbia has 47 treaties in place.
Slovakia
Róbert Janeček
E janecek@ccstax.sk
General introduction
The Slovak government has been trying to make the tax system attractive to foreign investors. There is however red tape attached to tax proceedings before the Slovak tax authorities and frequent changes take place within the tax legislation. The Slovak tax system appears to be simple, but it is also very formalistic and, from administrative point of view, demanding. This affects the stability of the business environment.
The Slovak tax system now includes the following taxes:
  • corporate income tax: 19% including income tax on emission quotas
  • VAT: 20% standard rate, 10% special rate for certain goods and services
  • personal income tax: 19% with a tax credit and progressive tax allowance
  • mandatory contributions to social security and health care
  • excise taxes: tobacco, wine, alcohol, mineral oils, beer, electricity, gas, coal
  • municipal taxes: real estate tax, motor vehicle tax, accommodation tax, etc.
  • other charges based on specific legislation: administrative fees, court fees, etc.

Corporate Income Tax
Corporate Income Tax (CIT) is levied on the worldwide income of Slovak legal entities and the Slovakian income of foreign legal entities. However, income arising from a gift or inheritance, or from dividends received from local or foreign subsidiaries, is exempt from CIT. The tax base for CIT is taxable revenues less tax deductible costs incurred in the generation of such revenues. This is based on the yearly accounting result, which is reported in compliance with Slovak Accounting law. The general tax rate is 19%.
Thin capitalisation rule
Slovakia does not have a specific limit on thin capitalisation. However, credit and loans granted by a foreign related party are limited by the arm’s length principle.
Transfer pricing
Transfer pricing is currently considered to be a high priority issue in Slovakia. Slovak taxpayers who enter into transactions with foreign affiliated entities (known as “controlled transactions”) must review their scope and pricing. This review should be based on the principles of the OECD Transfer Pricing Guidelines. The Slovak Income Tax Act stipulates methods which are to be used by taxpayers to establish that the prices charged between related parties are in line with the arm’s length principle. Slovak companies must also keep written records of all controlled transactions entered into with related parties outside Slovakia. The same applies to transactions between tax residents and their permanent establishments located in Slovakia or abroad.
The contents of the documents required to be kept are specified in guidelines issued by the Ministry of Finance. As proof of correct application of the arm’s length principle, tax inspectors will require, at a minimum, simple documentation containing basic information about the group and the scope of activities of its member companies. Generally speaking, local affiliates do not have to submit this documentation, unless asked during a tax audit or for the purpose of obtaining approval of the chosen transfer pricing method. Such documentation could also be required in respect of an advance pricing arrangement (APA) in line with the OECD Transfer Pricing Guidelines.
Tax losses
It is possible to deduct a tax loss from the tax base over no more than seven (7) consecutive tax periods following that in which the loss was recorded. In relation to mergers, this rule allows the successor company to deduct the tax loss recorded by the predecessor company, provided that the purpose of the merger was not solely to reduce the tax base of the legal successor.
Group regime
The Slovak tax regime does not allow any tax consolidation for groups of companies. Every legal entity which is part of a group is treated as a separate, stand-alone entity subject to tax, with its own rights and liabilities with regard to the tax authorities and proceedings. It is not possible to deduct tax losses generated by one company and offset them against the tax base of another company in the same group.
Interest and royalties directive
Slovakia transposed EU directives relating to the withholding tax exemption for intra-group interests and royalties in 2004. If such income arises between related parties where the holding company has at least a 25% interest in the other company; or between two companies in which a third company has a holding of at least 25% (for at least 24 months in both cases), such income is exempt from withholding tax regardless of the provisions of the relevant double tax treaty.
Dividends
Dividends received from domestic and foreign legal entities are not subject to Slovak corporate income tax, provided that they are paid from the after-tax profits of the payer. Dividends paid by companies established in Slovakia to local or foreign shareholders are not subject to withholding tax regardless of the provisions of the relevant double tax treaty.
Investment incentives
The Slovak Republic has adopted a special law to encourage investment and provide for tax incentives, in the form of tax relief for certain taxpayers for a limited period. These must be local entities participating in a government programme of assistance for foreign investors and recipients of investment incentives. The European Committee’s approval, followed by that of the Slovak authorities, is required for these incentives, as they are considered to be state aid under European legislation and no general exemption is available in respect of them.
Value Added Tax
Since 1 January 2011, Slovakia has charged 20% standard VAT on supplies of goods and services. This rate will be changed to 19% in the year that the European Commission determines that Slovakia’s budget deficit is lower than 3%. A reduced rate of 10% applies to medication and pharmaceutical products, and medical tools and devices. Books and printed media also benefit from this rate, except newspapers and publicity material, i.e. leaflets containing more than 50% advertisements. Imports (from non-EU countries) are subject to VAT, which is levied by the customs authority on a taxable base calculated as the sum of customs value, customs duties, fees and excise tax. Financial and insurance services, together with social, healthcare and other non-profitable services, are tax exempt.
VAT is fully harmonised and complies with the EU VAT Directive. A taxable person is obliged to register for VAT purposes if it achieves turnover of EUR 49,000 over a period of 12 consecutive months. For entities not exceeding this threshold, voluntary VAT registration is possible.
A group of businesses with financial, economic and organisational links can register as a VAT group using a single identification number. Each business must be a taxable entity and must not be a branch or division of a taxable entity of a foreign country. The VAT group must appoint a representative who acts on behalf of all group members for VAT purposes and whose role is limited to ensuring compliance with the VAT Act. As from 1 January 2012, VAT processing in the Slovak Republic is fully electronic (including the refund procedure, VAT declarations and e-communication with the Slovak tax authority).
Personal Income Tax
Personal income tax is collected by local employers. All tax obligations regarding personal income tax are fulfilled by the employer on behalf of his employee. The personal income tax rate is 19%. Individuals are entitled to basic tax allowance, which is progressively reduced for taxpayers with higher income. The full annual tax allowance of EUR 3,560 is available to taxpayers with earnings of up to EUR 18,538. Entitlement to the allowance lapses entirely when a person’s annual earnings exceed EUR 32,776. Taxpayers who live with an unemployed spouse are entitled to an additional allowance. Personal income tax may be further decreased by a tax credit in the amount of EUR 243 for every child living with the taxpayer (up to the child’s 26th year).
Employees must ask their employers to make their annual tax returns. Otherwise, they are obliged to submit an income tax return themselves, generally no later than 31 March of the following year. Social and health care insurance contributions are collected by the employer in the same manner as income tax. The employee’s social security contributions are deductible from his/her income tax base. The rates are as follows:
  • Employee insurance rate
    • Illness: 1.40%
    • Pension: 4%
    • Disability: 3%
    • Unemployment: 1%
    • Health Care Insurance: 4%
  • Employer insurance rate
    • Illness: 1.40%
    • Pension: 14%
    • Disability: 3%
    • Unemployment: 1%
    • Guarantee: 0.25%
    • Injury: 0.8%
    • Solidarity reserve fund: 4.75%
    • Health Care Insurance: 10%

Other tax issues
The Slovak tax system benefits from numerous double tax treaties, entered into with many jurisdictions. Being a member of the EU, Slovakia also has the benefit of EU legislation, which has a clear impact on the Slovak tax system. To ease communication with the Slovak tax authority, it is recommended to appoint a tax representative.
Slovenia
General introduction
Following the reforms of the last decade, public administration has become friendly and user oriented (e-government and e-tax portals), modern and flexible (shorter and simplified procedures, introduction of agency for investment and promotion).In line with these public administration reforms, the tax administration, though still somewhat bureaucratic and formalistic, has also progressed to a level where it can be said to serve its purpose well.
Major Taxes
  • Corporate Income Tax
    • General rate: 20%
    • Qualifying venture capital companies, investment funds and pension funds: 0%
  • VAT
    • Standard rate: 20%
    • Reduced rate: 8.5%
  • Personal Income Tax
    • Progressive tax brackets: 16%, 27% and 41%
    • Dividends: 20%
    • Capital gains: 0 – 20%
  • Social Security Contributions
    • Employer’s contributions: 16.1%
    • Employee’s contributions: 22.1%
  • Derivative Instruments Gains Tax
    • Regressive rates: 0 to 20%
    • Short term contracts: 40%
  • Real Estate Transfer Tax: 2%

Corporate tax
Tax basis
Taxable income is based on accounting profits as determined under IFRS or Slovenian accounting standards, with the taxpayer generally having the choice. Regardless of this choice, profits are adjusted for tax purposes in an identical manner. Generally speaking, only those expenses that are directly required for the generation of taxable revenues are allowed as deductible. Only 50% of entertainment expenses and fees paid to the supervisory board are deductible for tax purposes.
Tax rate
The standard corporate income tax rate is 20%. The corporate income tax rate for qualifying venture capital companies is 0%, subject to specific conditions. Investment funds that distribute 90% of their operating profits for the preceding tax year by 30 November of the current tax year are taxed at a rate of 0%. Pension funds established in accordance with the Pension and Disability Insurance Act are taxed at a rate of 0%.
Capital gains
50% of capital gains may be exempt from tax if certain conditions are met. Only 50% of capital losses are deductible. Venture capital companies can apply a full participation exemption to capital gains realised from the transfer of shares acquired through their venture capital investments, provided that certain conditions are met. Losses incurred on the transfer of shares acquired under a venture capital scheme are not deductible for tax purposes.
Participation exemption
Dividends received by Slovenian taxable persons are generally subject to a full participation exemption.
Thin capitalisation
Interest on loans from shareholders who, directly or indirectly, at any time during a tax year, hold at least 25% of the capital or voting rights of the taxable person (with the exception of banks and insurance companies as borrowers) is deductible only if it is attributable to the part of the loan that does not exceed the 4:1 debt/equity ratio. Interest paid in excess of this rate is regarded as a hidden profit distribution, which means that it is essentially re-characterised as dividend-like income.
Tax loss carried forward
Tax losses can be offset against taxable profits indefinitely in following years. If there is a change of ownership then some restrictions may apply.
Tax relief
Tax relief, by way of a reduction in the tax base, is available for:
  • up to 60% of R&D expenditure
  • up to 30% of expenses for investment in non-fixed assets and equipment
  • up to 45% of salaries for certain categories of employees and up to 100% of salaries where handicapped workers are employed
  • Other tax reliefs: training and further education of employees, donations, voluntary additional pension insurance

Withholding tax
Withholding tax applies to a number of payments, including dividends, interest, royalties and payments for services to black-listed countries. The statutory rate is 15%. The rate may be reduced by application of a double tax treaty or the relevant EU Directive.
Transfer pricing
Transfer prices are determined by reference to the market prices of the same or comparable goods or services as charged between unrelated parties (comparable market prices). Comparable market prices are determined by one of the methods provided by the OECD Transfer Pricing Guidelines. The arm’s length interest rate is calculated based on the Regulation on the Acknowledged Interest Rate and depends on the currency, maturity and credit rating of the related parties. Taxpayers must maintain transfer-pricing documentation on a continuous basis. A prescribed abstract of the documentation must be enclosed with the tax return when the return is filed with the tax authorities. The transfer pricing rules generally apply to cross-border transactions, but they can also apply to transactions between domestic related parties in specific circumstances.
Value Added Tax
The Slovenian VAT system has been harmonised in accordance with the EU VAT Directives. There are two VAT rates applicable in Slovenia. The standard rate of 20% applies to all supplies of goods and services not specified as being subject to the reduced rate or exemptions.
The reduced rate of 8.5% applies to supplies of goods and services such as supplies of foodstuffs, supplies of water, supplies of medicines, passenger transport, admission to cultural and sporting events, royalties, renovation and repairing of private dwellings, hotel accommodation, etc.
Personal income Tax
Personal income tax applies to six categories of income: income from employment, business income, income from basic agriculture and forestry, rental income and royalties, income from capital (interest, dividends and capital gains) and other income. Dividends, interest and capital gains are taxed at a flat rate. Income tax on other categories of income is calculated using progressive rates.
Other taxes
  • Property Tax: The tax rate for premises is set between 0.10% and 1.25%, depending on the type and value of the property.
  • Real Estate Transfer Tax: This tax is usually payable by the seller on transfer and is charged at a rate of 2% on the selling / market value of the real estate.
  • Contractual Work Tax: A tax of 25% is levied on each gross payment to individuals made pursuant to a contract for temporary work, save for certain exempt activities (e.g. care for the disabled).
  • Derivative Instruments Gains Tax: This tax is levied at regressive rates from 20% to 0%, depending on the period of holding. Gains realised on short-term contracts are taxed at 40%.

Double tax treaties
The double tax treaties concluded by Slovenia follow the OECD Model Tax Convention on Income and on Capital, with some modifications. Slovenia currently has double tax treaties in force with 48 countries. The treaty with Belarus and a new treaty with Cyprus will come into force on 1 January 2012.
Ukraine
Yevheniy Deyneko
General introduction
In 2011, the Ukraine Parliament codified all tax legislation by adopting the Tax Code of Ukraine (the “Tax Code”). As a result, a number of concepts which are common in other jurisdictions (for example: beneficial owner, true business goal and substance over form) have become part of Ukrainian tax legislation. In addition to codifying existing tax principles, the Tax Code introduces a new real estate tax.
Although codification was intended to bring more clarity and consistency to tax legislation, the new Tax Code actually appears to lack the desired clarity. Furthermore, it is different in its approach and generally more biased towards state revenue than the tax laws previously in force. As a result, previous court decisions and clarifications from the tax authorities may no longer apply.
Main taxes
  • Corporate income tax: 21%
  • VAT: 0%, 20%
  • Personal income tax: 5%, 15%, 17% (depending on income type and amount)
  • Excise tax: the rate depends on the type of excise goods
  • Natural resource charges: subsoil use charges, royalties, special purpose mark up for natural gas supplies

Corporate Income Tax
As of 2012, the standard Corporate income tax «CIT» rate under the Tax Code is 21%, which will be decreased annually to 16% by 2014. Notwithstanding the reduction from 25% in 2010 down to 16% by 2014, the actual tax burden on Ukrainian companies with foreign investments and Ukrainian businesses doing business with foreign partners may in fact increase.
Restricted deductibility of fees for certain services and royalties
The deductibility of fees for consultancy, marketing and advertising services provided by a non-resident to a Ukrainian company is now limited to 4% of such company’s income for the preceding reporting year. The deductibility of expenses incurred in respect of engineering services provided by non-residents is also subject to a limitation, set at 5% of the customs value of imported equipment to which those services relate. The deductibility of royalties paid by a Ukrainian company to a non-resident is now limited to 4% of the Ukrainian company’s income for the preceding reporting year, save for royalties paid by Ukrainian broadcasting companies and licences for foreign films and music and literary works. In addition to the above, royalties and expenses relating to certain services may be entirely non-deductible if, for instance, they are paid to offshore or non-taxable foreign entities, or someone other than the beneficial owner.
Restricted deductibility of interest on foreign shareholder loans
The interest paid by a Ukrainian borrower to its non-resident (direct or indirect) majority shareholder, or to such shareholder’s related parties, is subject to a temporary deductibility limit. The deduction made in respect of such interest may not exceed: (i) the amount of interest income received by the borrower from lending its own assets plus (ii) 50% of the taxable profit of the company for the reporting period (calculated without interest income). The disallowed balance can be carried forward by the borrower to the next reporting period subject to the same limitations. Interest in excess of the arm’s length rate is never deductible when paid to related parties.
Participation exemption rules
There are no participation exemption rules in Ukraine as such. However, whereas dividends are tax exempt when received by one Ukrainian CIT-paying company from another, the same dividends are taxable when received by a Ukrainian company from a non-resident company (save for dividends received from a non-offshore non-resident entity controlled by a Ukrainian company, which are also tax exempt).
Advance CIT on dividends by a Ukrainian company and exempt distributions
The Tax Code requires advance payment of CIT, levied at a standard rate on the gross amount of dividends, which must be paid by the distributing company to the state treasury prior to or upon distribution. This advance payment is not a separate tax on dividends but constitutes a part of CIT that is paid in advance and can be offset by the distributing company against its CIT liability for the tax period during which the distribution is made. In practice, this advance CIT payment requirement could cause a cash flow shortage for the company, preventing it from making a full distribution of dividends to its shareholders. There are a number of circumstances in which the advance CIT requirement does not apply, including distribution to individuals, by real estate fund managers, by a holding company etc.
Tax loss carry forward
Carrying forward of tax losses is generally allowed in Ukraine. However, in practice the tax authorities have now adopted a very restrictive interpretation of the rules. This effectively results in tax losses existing on 1 January 2011 being unavailable for carry forward and deduction. For 2012, it is expected that Parliament may restrict carry forward and deduction of losses accumulated up to 1 January 2012.
Transfer pricing rules
There are some basic rules regarding transactions between related parties, swap deals, in-kind contributions to charter capital etc., which generally require arm’s length prices to be set. However, this topic is not yet very well developed in Ukraine.
Value Added Tax
Ukraine uses the input-output model, which is very similar to the system used in the EU, where the government is paid the difference between VAT collected from buyers and VAT paid to suppliers. Transactions subject to VAT generally include supplies of goods or services in Ukraine (including those supplied free of charge), and imports and exports of goods, including ancillary services.
Non-taxable transactions include financial services transactions, insurance and reinsurance transactions, sales of shares, monetary contributions to charter capital, dividend distributions, royalty payments and supplies of plots of land (except those whose value includes buildings built on them).
VAT rate and taxable base
The standard tax rate of 20% (which will be reduced to only 17% in 2014) applies to all taxable transactions. Some transactions are zero-rated, such as exports of goods including ancillary services. The taxable base is generally the contractual price for supplies of goods or services but it cannot be less than fair market price.
VAT registration
A company must register as a VAT payer if its total revenues for the last 12 calendar months from supplies subject to VAT exceed UAH 300,000 (approximately EUR 30,000). Below that threshold, voluntary VAT registration is possible; however experience shows that it is too bureaucratic and burdensome.
VAT refund
A taxpayer is generally entitled to a VAT refund where its VAT output exceeds its input, but a number of legal and practical limitations and conditions apply to obtaining VAT refund. In practice, not all VAT payers may in fact receive a VAT refund, even where all formal legal requirements are met, due to the state treasury deficit. The Tax Code provides for an automatic cash VAT refund for eligible taxpayers (primarily exporters) under a less cumbersome and time-consuming procedure. However, in practice it is not an easy exercise to join the list of eligible taxpayers. The Tax Code provides for the government to pay interest on late VAT (at 120% of National Bank of Ukraine base rate).
Personal Income Tax
Ukrainian tax residents are subject to Personal income tax «PIT» on their worldwide income, whereas non-residents are only taxed on income originating from Ukraine. A residency test (based on the one used in the OECD Model Tax Convention) is used to determine a particular individual’s permanent place of residence and whether or not he/she is a Ukrainian tax resident.
Generally, a standard tax rate of 15% applies to a resident’s income up to 10 times the official minimum wage (around UAH 10,000 (approx. EUR 952)), while any income in excess of this amount is subject to tax at 17%. Certain types of income are subject to reduced tax rates. For example, a 5% rate applies to dividends, interest on bank deposits, interest on bonds, etc. However, certain types of income are subject to increased tax rates. For example, prizes and winnings are subject to 30% tax (except for the state lottery which is subject to the standard tax rate).
Income received by non-residents is generally subject to the same tax rates as above. However, a higher-than-usual tax rate may apply to income received by a non-resident from the sale of real estate in Ukraine. The “single social contribution” is a significant cost for employers and private entrepreneurs. This is calculated and collected separately from taxes and is formally outside the tax authorities’ remit. It is charged at a rate of 36.76% - 49.7% (depending on the business sector), but the amount on which this contribution is levied is currently capped at UAH 17,068 (approx. EUR 1,625).
Recent changes
The Parliament of Ukraine adopted a comprehensive amendment to the Tax Code which became effective on 1 January 2012. This new law has introduced new simplified tax rules for private entrepreneurs and small enterprises which apply in lieu of a number of ordinary taxes (CIT, PIT, and in some cases even VAT, land tax, etc.).

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