On 28 December 2014, the Ukrainian parliament approved draft tax reform laws as part of the 2015 budget wherein the arm's length principle was legally introduced. Further, the transfer pricing rules exemption for certain major export industries is also eliminated. The 2020 tax reform introduced various changes to the transfer pricing regime, generally effective from 2021.

Covered Transactions

The specified transactions are considered controlled when their aggregate value with a single party in a calendar year is equal to or exceeds the specified monetary threshold.

The prescribed monetary limit is as follows:

The taxpayer and/or the related party’s annual income exceeds UAH 150 million (increased from UAH 50 million, net of indirect taxes); and
The value of the annual transactions with the related party and other specified cases exceeds UAH 10 million (increased from UAH 5 million, net of indirect taxes).

It is clarified that income earned for the entire year, including income earned during the period in which the 2% unified tax applied (martial law period, see Sec.8.1.1.), must be considered for determining the threshold of UAH 150 million. However, transactions carried out during the period in which the 2% unified tax applied are not considered for determining the threshold of UAH 10 million.

Further, it is clarified by the tax authorities that salary payments to non-resident individuals by Ukrainian taxpayers are considered as controlled transactions for transfer pricing purposes, provided such payments meet the prescribed monetary limit. Accordingly, if the salary payments to non-resident individuals exceed UAH 10 million annually, such transactions are required to be included in the annual report on controlled transactions and determined in accordance with the arm's length principle.

Effective from 1 January 2018, transactions between a permanent establishment in Ukraine and its non-resident parent are deemed to be controlled transactions and are subject to transfer pricing rules if exceeding UAH 10 million per year, regardless of the total income of the permanent establishment for the period.

In this regard, it is clarified that:

Operational funding transactions from a non-resident to its permanent establishment for the maintenance or services rendered to the non-resident are not considered controlled transactions as long as the funds were used exclusively for the permanent establishment. However, the transactions are economic transactions and are still included in determining if the UAH 150 million related party transaction threshold is met for transfer pricing purposes in those years;
Where a representative office is not constitutive of a permanent establishment because it only conducts activities that are preparatory or ancillary in nature, then such transactions are not considered as controlled transactions and are not subject to the reporting requirements; and
Transactions between a Ukrainian resident and a Ukrainian permanent establishment of a non-resident are not recognized as controlled transactions, even where the non-resident is a related person or is resident in a jurisdiction that has met the criteria for inclusion in Ukraine’s list of tax haven jurisdictions (see Sec. 13.5.).

Further, guidance (letter 1723/6/99-99-15-02-02-15/IPK) is issued on the controlled transactions and profit determination for permanent establishment of a non-resident in Ukraine, which provides that:

Any transaction (including internal settlement transactions) carried out between a non-resident and its Ukraine permanent establishment, which may affect the taxable income of the permanent establishment as a taxpayer, is considered as a controlled transaction. This includes all types of transactions, agreements, and arrangements, whether or not confirmed through documentation; and
The main factor is not the legal nature of the relationship between a non-resident and its permanent establishment, but rather the nature of the relationship as if the permanent establishment was a separate legal entity, which is in accordance with the comments and recommendations of the UN and OECD. It is determined based on the facts and circumstances of each case.

The Ukraine State Fiscal Service has issued a guidance letter clarifying that while determining the transaction with a non-resident to be a controlled transaction, the period during which the non-resident has related status is considered after the relevant thresholds are met. However, this rule will not apply if other conditions for controlled transactions are met including transactions conducted through a non-resident commission agent, or transactions with residents of jurisdictions that are included in Ukraine’s list of tax haven jurisdictions (see Sec. 13.5.).

The Ukraine State Fiscal Service has issued a guidance letter (2626/6/99-00-05-05-02-06/IPK of 1 July 2020) clarifying the application of the new rules for the determination of taxable income of a permanent establishment while taking into account the arm's length principle. The guidance provides that effective from 1 January 2021 (originally effective 23 May 2020), the determination of the taxable income of a permanent establishment involves:

Functional analysis of the non-resident's activities conducted through its permanent establishment in Ukraine and the nature of the relationship between the permanent establishment, the non-resident, and the counterparties of the permanent establishment and the non-resident; and
Selection of the most applicable transfer pricing method and comparable transactions or independent legal entities that carry out comparable activities in accordance with the functional profile of the permanent establishment, the calculation of the price range (profitability), etc.

Effective from 1 January 2021 (originally effective 23 May 2020), taxpayers can no longer apply the following previously allowed methods to determine the taxable income of a permanent establishment in Ukraine:

The determination of taxable income in the general order established for resident taxpayers in accordance with the Tax Code, in which case the permanent establishment is equated for tax purposes as a taxpayer conducting its activities independently of the non-resident parent;
The determination of taxable income on the basis of a separate statement of the permanent establishment’s financial and business activities that is prepared by the non-resident and agreed to by the tax authority of the location of the permanent establishment, which applied if a non-resident carries out activities in Ukraine and abroad and does not separately determine the profit from the activities conducted through its permanent establishment in Ukraine; and
The determination of taxable income calculated by the non-resident as the difference between income and expenses, determined by applying a coefficient of 0.7 to the amount of income received, which applied in the event that it is not possible to determine the profit by direct calculation.

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Effective from 1 January 2019, certain transactions performed through intermediaries are considered as controlled transactions for transfer pricing purposes. Import or export transactions performed between a resident and a non-resident through one or more persons (intermediaries) will be considered controlled transactions, where the transaction between a resident and such other persons (intermediaries) is not, otherwise, recognized as a controlled transaction, and if:

The intermediaries do not perform any essential functions associated with the acquisition (sale) of the goods (works or services); or
The intermediaries do not use any significant assets or assume significant risks for the acquisition (sale) of the goods (works or services).

In the case of an intermediary being a Ukraine resident, the above-controlled transactions are subject to the reporting requirements.

In determining if income/transaction thresholds are met for transfer pricing purposes, income arising from operational and non-operational foreign exchange differences are to be included. However, it is clarified that income and expenses from foreign exchange differences are not taken into account for the purpose of calculating the volume of transactions with each counterparty.

The list of specified transactions includes:

The purchase or sale of goods, works, or services by a taxpayer with a non-resident related party;
The purchase or sale of goods, works, or services by a taxpayer with a resident related party, if the related resident:

declared a tax loss in the previous year;
applied any special tax regimes for the relevant tax year;
paid corporate tax or VAT at rates different than the standard rates under the law for the relevant tax year; or
did not pay corporate tax or VAT for the relevant tax year;

The purchase or sale of goods works, or services by a taxpayer with a non-resident party registered in a jurisdiction that applies a corporate tax rate lower than the rate applied in Ukraine by 5% or more (i.e., 13% or less, given Ukraine current rate of 18%) or does not provide timely and full exchange of tax information and financial requests (see list below); and
Intercompany payments between a non-resident and its permanent establishment in Ukraine (effective from 1 January 2019).

The following specified transactions with non-residents are deemed controlled transactions:

Purchase or sale of goods, works, or services through a non-resident commission agent;
Transactions with non-residents that are not subject to tax in the country in which they are based, or they are not tax residents in the jurisdiction in which they are registered. Effective from 1 January 2018, transactions with such non-residents will be subject to addition in the pre-tax financial result of the taxpayer at 30% of the value of such transactions; and
Cross-border sale of corporate rights (shares) with a related non-resident if the prescribed monetary limits are met. Corporate rights include a share in the authorized capital, the power to participate in management, and entitlement to profits and assets.

The government has also issued a list of legal forms and jurisdictions with which transactions are deemed controlled transactions. The list mainly includes various partnership forms (general, limited, etc.), as well as certain other legal forms in 26 jurisdictions, namely:

Australia	Austria	Belgium
Canada	Czech Republic	Denmark
Estonia	France	Germany
Israel	Italy	Japan
Luxembourg	Malta	Mauritius
Netherlands	New Zealand	Poland
Singapore	Slovak Republic	South Korea
Switzerland	Turkey	United Arab Emirates
United Kingdom	United States (including Delaware, California, Florida, Nevada, New Jersey, New York, and Texas)

The list applies in respect of transactions carried out on or after 27 July 2017. It is clarified that even where the listed legal forms and jurisdictions have actually paid corporate income tax for the year, the transactions may continue to be deemed as controlled if the entity meets any of the other specified conditions for determination of controlled transactions including that the transactions:

Are with related non-residents;
Involve the sale and/or purchase of goods and/or services through a non-resident commission agent; or
Are with residents of jurisdictions included in the Cabinet of Ministers tax haven list.

Further, where a non-resident pays corporate tax in the State where it is registered, such a non-resident may be considered a tax resident of that State. This must be evidenced by a certificate (as per approved format) issued by the tax authority of the State of residence and legalized and translated according to Ukrainian legislation.

It is also clarified by the guidance issued on 6 February 2019 that transactions with specified U.S. states also include transactions with residents in the form of limited liability company, and the same are deemed as controlled transactions for transfer pricing purposes. Accordingly, the Ukraine taxpayer is required to increase its financial results in relation to such transactions by 30% of the transaction price, i.e., the value of the goods, works, or services, unless the transaction is at arm's length supported by documentation or the non-resident has actually paid corporate income tax for the year.

Further, the guidance issued on 30 September 2024 clarifies that as per the Germany-Ukraine tax treaty, the German corporate income tax (Körperschaftsteuer) is equivalent to the Ukraine corporate income tax and is treated as a relevant tax for determining whether the transaction is a controlled transaction (see above for conditions to be met). It is also clarified that the recognition of a taxpayer as a tax resident in Germany must be carried out taking into account the provisions of Article 4 (Resident) of the treaty, as well as the tax legislation of Germany.

In respect of scenarios involving transactions with related entities and declaration of loss during the year, on 15 May 2014, the Ukraine Ministry of Revenue and Duties issued guidance on the application of transfer pricing rules for a taxpayer's transactions with a related resident party who had carried forward losses to offset profit in the previous tax year. Although the taxpayer transaction with the related resident party exceeded UAH 150 million, the use of carried forward losses in the previous year does not cause the application of the transfer pricing rules because the offset did not result in a net loss for the related party. If the offset had resulted in a loss for the previous year, the transfer pricing rules would have applied.

The Ukraine State Fiscal Service has issued a guidance letter (2654/6/99-00-05-05-02-06/IPK) clarifying the application of a 30% adjustment (increase) in taxable income for transactions with a tax haven and non-taxed entities.

The letter clarifies that where goods are sold to residents of low-tax jurisdiction or that are not subject to tax in the jurisdiction in which they are based or not resident for tax purposes in the jurisdiction in which they are registered, the 30% adjustment requirement applies even if the thresholds for controlled transactions are not met. In such cases, a taxpayer is required to increase their pre-tax financial result by 30% of the value of the goods sold as reflected in the sales price specified in the contract with the buyer.

However, the 30% adjustment will not apply if it is confirmed that the sales price is at arm's length. Where the arm's length price is determined and is higher than the sales price, the pre-tax financial result is adjusted (increased) by the difference.

Low Tax Jurisdictions List

The Ukrainian government has issued a list of low-tax jurisdictions for transfer pricing purposes. If a jurisdiction has a corporate tax rate at least 5 percentage points lower than Ukraine’s general corporate rate of 18%, it is considered a low tax jurisdiction. Effective from 1 January 2017, this list also includes jurisdictions that are non-cooperative with regard to information exchange (i.e., not timely or full exchange). The amended list is effective from 11 April 2018 (see Sec. 13.5.). If a taxpayer engages in a listed commodity transaction with a related or non-related party, the CUP method must be applied.

The government has clarified that transfer pricing adjustment in respect of controlled transactions involving non-residents registered in a low tax jurisdiction will be made at 30% of the transaction price unless the transaction is at arm's length and is supported by documentation.

Definition of Related Entities

For the purpose of transfer pricing, related parties can be defined as when one party directly or indirectly holds 25% (20% until 31 December 2019) or more of the capital or voting rights of the other party, or a third party holds 25% or more of the capital or voting rights of both parties. This definition also applies to public companies when the state has 25% or more ownership in both parties.

The definition of related entities is widened with effect from 1 January 2018 to include:

An individual and a legal entity if the individual is the ultimate beneficial owner;
Two or more entities if the ultimate beneficial owner is the same individual;
Two or more entities if the powers of a single executive body of the entities are exercised by the same individual; and
A chain of legal entities if each entity holds at least 25% of the shares in the next entity.

Applicable Transfer Pricing Methods

The following transfer pricing methods, similar to those specified in the OECD guidelines apply to the transactions between related parties:

Comparable uncontrolled price (CUP) method; Resale-price method;
Cost-plus method;
Transactional net margin method (TNMM); and
Profit split method.

The comparable uncontrolled price method is generally the preferred method and is introduced as the primary method to determine arms’ -length price for commodities as quoted on stock exchanges - if other methods are used, the taxpayer is required to disclose their supply chains up to the unrelated counterparty. From 2021, however, the so-called sixth method is introduced for quoted commodities, with the arm’s length price for such commodities being the agreed price or the quotation price, whichever higher.

The tax authority has clarified that while determining the comparable conditions of transactions, the characteristics of assets used in controlled transactions may be taken into account. Further, a party may only be selected for research if complete and documented information on the financial performance of the controlled transactions is established.

The income from transactions between associated persons is determined under special rules. Accordingly, income realized by the taxpayer from goods and services supplied to associated persons is generally calculated on the basis of contract prices. They may not be lower, however, than the usual prices for such goods and services on the date of the transaction. The taxpayer's costs for purchasing goods and services from associated persons are generally calculated on the basis of contract prices. If the contract price is higher than the usual price at the time of the purchase, however, the usual price prevails. The same applies to barter transactions, where an adjustment may be made even if the parties are not associated persons.

Effective 1 January 2019, the principle of substance over form is introduced for the purpose of determining the arm’s length price of a transaction, which must be applied by considering the actual actions of the parties to the controlled transactions and actual conditions of a transaction's execution, even in the absence of documentation of the transaction.

The tax authority has also introduced a requirement for the taxpayer to provide a justification for using the information of several tax years in determining the range of profitability and for calculating the weighted average value of the profitability indicator.

Use and Availability of Comparables

For periods beginning on or after 1 January 2015, both taxpayers and tax authorities may use the following to compare the commercial and financial conditions of controlled transactions to determine the arm’s length price:

Any information on comparable uncontrolled transactions executed by the taxpayer or its counterparty with other unrelated parties;
Any publicly available information on comparable transactions and the parties involved;
Controlled transactions may be considered comparable if:

there are no significant differences between the transaction that could materially affect the financial result in the application of the appropriate transfer pricing method; or
such differences can be eliminated by making adjustments to the conditions and financial results to prevent the differences from affecting the comparison;

Other sources used by taxpayer to legally obtained information if the taxpayer provides that information to tax authorities; and
Information obtained by tax authorities through international tax treaties to which Ukraine is a party.

The State Fiscal Services is explicitly disallowed in the Tax Code from using information sources that are not publicly available or only available to public authorities.

Further, the State Fiscal Services must use the same sources of information as used by the taxpayer unless it can be shown that other sources provide more accurate/reliable information for the comparability of business operations and financial conditions. In such a case, the State Fiscal Services is limited to using sources of information that are publicly available. While the State Fiscal Services is not allowed to specify which sources may be used, sources such as Bureau van Dijk (Orbis, Amadeus, RUSLANA) and Interfax (Spark) are considered sources of information that meet the condition of being publicly available.

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