Transfer pricing rules under Ukrainian law 



Transfer pricing as a means of price control in transactions between related parties is one of the most important issues in international taxation intended to ensure that profits shall be taxed in the country of origin. To address this international practice, new provisions were introduced to the Tax Code of Ukraine which entered into force on 1 September 2013. The article will consider the main provisions of transfer pricing rules in force and the issues connected with them.

According to the current law, transfer pricing methods apply to specifically stipulated transactions (called ‘controlled transactions’) including: (i) transactions with affiliated non-resident contracting parties; (ii) transactions with affiliated resident contracting parties, if such parties had taxable profit losses for the previous calendar year or apply special tax regimes, or pay the corporate profit tax at the rate lower than the usual tax rate, or are not payers of the corporate tax rate as of the beginning of the current calendar year (i.e., agricultural producers which are payers of the fixed agricultural tax, IT companies which apply 5 percent rate of the corporate profit tax, companies and sole entrepreneurs that are payers of the unified tax); and (iii) transactions with any (not affiliated) non-resident contracting party registered in the jurisdiction where the corporate profit tax rate is 5 percent lower than the CPT rate applied in Ukraine or being a payer of the corporate profit tax at such a rate (14 percent currently and 11 percent from 1 January 2014). The list of such jurisdictions should be published by the Cabinet of Ministers of Ukraine. As no such list has been published, up to now taxpayers should be aware of the tax rates applicable to their contracting parties in their country of origin.

According to the law, transfer pricing rules will be applied only to the above mentioned transactions where the total scope of each contracting party equals or exceeds UAH 50m per year. Therefore, if a transaction is deemed controlled but its scope does not exceed the above threshold, the transfer pricing rules shall not be applied. This essentially differs from the provisions prior to 1 January 2013, when the prices of any transaction with affiliated parties had to comply with fair market prices.

The provisions of the Tax Code determine the transfer pricing methods, such as comparable uncontrolled price, resale price, cost plus, profit allocation and net profit. No other methods may be applied. The method of uncontrolled comparable prices should be preferential as far as required information for comparison is available. According to these methods, the controlled price should be within the limits of the determined maximum and minimum price or maximum and minimum market level of profitability, depending on the method applied (the procedure of determining the market range of prices and profitability is statutorily approved). No deviations from a transfer price are possible (an exception applies to a certain goods (e.g., some agricultural goods) the price of which may differ by a maximum of 5 percent, lower in case of sales and higher in case of purchases, from market prices until 1 January 2018). The Cabinet of Ministers has already established the sources of information for market prices to be used for transfer pricing purposes. This caused concern among tax specialists since most of the editions are state controlled and, accordingly, the information therein may not be completely impartial.

Large taxpayers (whose revenue for the previous four quarters exceeds UAH 500m or the total amount of tax paid exceeds UAH 12m) may apply to the tax office for the conclusion of agreements on price formation for the purpose of taxation. Non-residents can start the procedure of entering into such agreements through the tax authorities in the country of their residence. However, conclusion of an agreement may be denied if the suggested prices do not correspond to the arm’s length principle. Besides, entering into an agreement does not release such parties from their reporting and disclosure obligations in connection with transfer pricing.

The law requires that all controlled transactions shall be reported to the Ministry of revenues and duties annually until 1 May of the year following the reporting year. Tax authorities are entitled to enquire as to whether taxpayers having reported their controlled transactions with documentary evidence that transactions correspond to the arm’s length principle. Large taxpayers are also required to submit information on the group and group’s transfer pricing policies to the tax authority, if required. Thus, although one of the principles of transfer pricing is that the contract price shall be deemed to be a fair price unless the tax authority proves otherwise, this provision transfers the burden of proof to taxpayers who will be obligated to substantiate that the price used in transactions corresponded to market prices. The law stipulates rather significant penalties for non-compliance with these obligations: 5 percent of the amount of controlled transactions for failure to report them, and approximately €10,000 for failure to provide additional information upon request from the tax authorities for large taxpayers. In addition, failure to fulfil reporting obligations may lead to a statutory tax audit.

Along with the transfer pricing rules used for controlled transactions, the Tax Code of Ukraine uses the term ‘fair price’. Fair price is defined as the price for the purpose of the corporate profit tax and value added tax for some kinds of transactions (e.g., barter transactions, transactions with fixed assets, free-of-charge rendering services and provision of goods, among others) and unless proved otherwise, the contract price is a fair price. The law explicitly states that transfer pricing methods shall only be applied to controlled transactions and the provisions formerly applied to determine fair price were withdrawn. While the professional evaluation of fixed assets may be done for tax purposes, it remains unclear how fair price should be determined if, for example, free-of-charge services were rendered. In conjunction with the fact that the previous provision on possible deviation from market prices by 20 percent was abolished, it creates the potential ground for disputes with the tax authorities.

As stated above, transactions with affiliated parties not exceeding the established threshold do not fall under the transfer pricing rules and transfer pricing rules are not applicable. By virtue of the current provisions, the contract price will be considered a fair price. Nevertheless, to remain on the safe side, taxpayers should have sufficient evidence to prove the grounds for contract prices. This is particularly relevant when the amount of transaction with a particular contracting non-resident party exceeds the equivalent of €100,000, since according to the currency regulations of the National Bank of Ukraine, the decision of the government expert centre with respect to the contract price is required.

Thus, the existing legislation does not clarify all questions which taxpayers may have with respect to transfer pricing. It may be expected that as far as the tax authorities receive first reporting with respect to transfer pricing, up to 1 May 2014, new case law will be formed and it will become evident how the law is applied by tax authorities.


Svetlana Kovalska is a partner at Karpov & Stifutin. She can be contacted on +380 44 233 11 16 or by email:

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Svetlana Kovalska

Karpov & Stifutin

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