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Messenger IT benefits and the realities of obtaining them
The new Law of Ukraine № 5091-VI of 05.07.2012 “On Amendments to Section XX ‘Transitional Provisions’ of the Tax Code of Ukraine regarding the specifics of taxation of subjects of the software industry” …
Features of obtaining benefits for enterprises operating in the IT sector
The new Law of Ukraine № 5091-VI от 05.07. 2012 “On Amendments to Section XX ‘Transitional Provisions’ of the Tax Code of Ukraine regarding the specifics of taxation of subjects of the software industry” came into force last year, starting from 03.08.2012. Thus, according to the new procedure for maintaining the register, approved by the Ministry of Finance order of 14.01.2013 № 12 and entering into force on 15 February 2013, new taxation features are applied.
Thus, since early 2013 new taxation specifics apply to subjects of the software industry, which provide benefits with respect to VAT and profit tax.
Essence of the benefit
Starting from early 2013, the benefit provides for exemption from payment of VAT (p. 26-1 sch. 2 of Sec. XX of the Tax Code of Ukraine) for operations related to the supply of software products until 1.01.2023 and a reduction of the profit tax rate to 5% for subjects of the software industry.
VAT benefit
Profit tax and VAT benefits are not linked. To obtain VAT benefits, it is necessary to carry out clearly defined supply operations, while the reduced profit tax rate applies to entities that are subjects of the software industry (to obtain it, an application must be submitted and a registration certificate of a subject of the software industry must be obtained, to which special taxation conditions apply).
Profit tax benefit
The specifics of obtaining the profit tax benefit are clearly prescribed by legislation. First of all, it should be noted that according to subparagraph 1.4 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine a subject of the software industry may be considered a business entity only if it meets certain criteria over the course of the four previous consecutive reporting quarters:
- according to the types of economic activity specified in subparagraph 1.5 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine, at least 70% of the entity’s income must be derived from performing work, selling goods and providing services;
- the initial value of intangible assets and fixed assets of the enterprise exceeds by more than 50 times the amount of the minimum wage established by law at the beginning of the tax year;
- the entity has no tax debts;
- no court decision has been made to declare the entity bankrupt.
To obtain the registration certificate of a subject of the software industry, which is the basis for applying special taxation, an application must be submitted to the local State Tax Inspectorate in the form approved by Ministry of Finance Order № 12 of 14.01.2013.
The submission of the registration application to register an entity to which special taxation is applied as a subject of the software industry must be carried out by the head and a representative of the legal entity – the taxpayer, to the local State Tax Inspectorate no later than 30 calendar days before the start of the reporting quarter from which the entity plans to obtain the right to special taxation.
Since this document entered into force only on 15.02.2013, to obtain the right to apply the profit tax benefit business entities had the right, as of 01.12.2012, guided by the conclusions of the letter of the State Tax Service of Ukraine dated 21.11.2012 № 9429/0/71-12/15-1317, to submit registration applications in the form (at that time still a draft of the Ministry of Finance order).
If on 15.02.2013 a subject of the software industry submitted to the local State Tax Inspectorate an application in the form provided by the draft Ministry of Finance order, then it does not need to submit any further applications.
Together with the registration application the business entity submits financial statements for the last four quarters and copies of primary documents confirming the right to use the special taxation features. What are these documents?
These can include all primary documentation evidencing the performance of agreements specified in subparagraph 1.5 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine: invoices, cash orders, contracts with customers, bank statements, acts of performed works and services rendered. The primary documentation must confirm the receipt of more than 70% of income from economic activity related to the software industry in accordance with subparagraph 1.5 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine. When filling out the registration application, the types of economic activity for services rendered, works performed and goods sold should be indicated in accordance with subparagraph 1.5 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine, specifying the corresponding KVEDs selected on the basis of DK 009:2010 “Classification of Types of Economic Activity”.
To verify the legitimacy of applying the special taxation features by a subject of the software industry, the authorized body of the State Tax Service has the right to conduct an unscheduled inspection of the taxpayer within 10 working days from the moment of receiving the application.
In the absence of grounds for registering a subject of the software industry as an entity entitled to special taxation, the State Tax Service, within 15 working days from the date of receipt of the registration application, is obliged to include the taxpayer in the register and send by mail or issue a notification of receipt of the certificate. A subject of the software industry can use this benefit only from the quarter following the registration, since if the date of entry into the Register is considered the date of making the corresponding record, then the date of registration and the start of the certificate’s validity is considered the first day of the quarter following the date of inclusion in the Register.
In the case of newly created entities operating in the software industry for at least two tax quarters, the analysis of compliance with the criteria of subparagraph 1.4 of paragraph 15 of subsection 10 of Section XX of the Tax Code of Ukraine is carried out based on the entity’s actual activities. For such entities, the State Tax Service bodies must conduct an unscheduled documentary non-departure inspection to verify compliance with the mentioned criteria.
If non-compliance with the criteria is detected, the business entity will be considered a taxpayer on general terms from the moment such non-compliance is identified and will be deprived of the ability to apply the special taxation features for the following four reporting quarters from the moment the non-compliance is discovered. For the period during which the use of the benefit was unlawful, the taxpayer must pay the missing amount (up to the amount of tax on general terms) and penalty to the budget, starting from the moment when such non-compliance was identified.
In the event of changes in the data compared to those indicated in the certificate, the subject of the software industry must, within 30 calendar days, submit an application marked “Changes” to the State Tax Service in the same order as for registration, and also return the certificate.
Making changes is carried out by the same procedure as issuing the registration certificate, with the only difference that in this case amendments are entered into the Register, and not a new entry.