On 23 September 2019, the president of Ukraine signed into law the Bill "On Amendments to the Criminal Code of Ukraine and the Criminal Procedure Code of Ukraine Purposed to Reduce Pressure on Business" (the Law), as adopted by the Parliament of Ukraine on 18 September 2019. The Law (i) decriminalizes the criminal offense of so-called fictitious business activity, and (ii) increases both thresholds and criminal penalties for the criminal tax evasion.
What Does It Mean?
Historically, criminal liability for "fictitious" business activity has been relied upon by the tax office as an instrument of undue pressure on Ukrainian businesses with fictitious business activity being defined as establishing or acquiring legal entities to cover-up illicit activities.
The alleged fictitious business activity was often used as a pretext of aggressive tax assessments, which typically led to stalling the commercial operation of targeted legal entities. What have even further aggravated the situation was that with the fictitious entity — anywhere in the chain of supply — the tax office would disregard any and all transactions up the chain as "artificial," thus, (i) denying corporate income tax deductions, (ii) assessing back taxes and, ultimately, (iii) prosecuting for criminal tax evasion the legitimate businesses, which would have had little, if at all, knowledge of any "fictitious" entity down in the chain.
To deal with these issues, as well as to improve the business climate in general, the Law:
- decriminalizes the criminal offense of fictitious business activity
- increases both thresholds and criminal penalties for the criminal tax evasion:
- the "insignificant" criminal tax evasion
- the threshold triggering criminal liability has been increased from UAH 960,500 (c. USD 38,000) to UAH 2,881,500 (c. USD 115,000) or from 1,000 to 3,000 of statutory non-taxable minimum incomes (in the parlance of the applicable law) (STAMI)
- the criminal penalty has been increased from UAH 17,000 - 34,000 (c. USD 680 - 1,360) to UAH 51,000 - 85,000 (c. USD 2,000 - 3,400)
- the "significant" criminal tax evasion
- the threshold has been increased from UAH 2,881,500 (c. USD 115,000) to UAH 4,802,500 (c. USD 192,000) or from 3,000 to 5,000 of STAMI
- the criminal penalty has been increased from UAH 34,000 - 51,000 (c. USD 1,360 - 2,000) to UAH 85,000 - 119,000 (c. USD 3,400 - 4,760)
- the "aggravated" criminal tax evasion
- the threshold has been increased from UAH 4,802,500 (c. USD 192,000) to UAH 6,723,500 (c. USD 269,000) or from 5,000 to 7,000 of STAMI
- the criminal penalty remaining the same - UAH 255,000 - 425,000 (c. USD 10,200 - 17,000)
Please note that, since 2012, there is no jail time for criminal tax evasion; however, (i) criminal penalties, (ii) barring convicted executive officers from top positions or from carrying out certain activities, and (iii) seizure of property, are still in place.
These amendments shall enter into force on 25 September 2019.
It is worth noting that the Law will have a retrospective effect with regard to criminal offenses already committed. In practical terms, pending criminal proceedings should be discontinued, while convicted persons should be exonerated from criminal punishment, and criminal records should be expunged.
Points to Remember
To summarize, the Law (i) decriminalizes the criminal offense of fictitious business activity, and (ii) increases both thresholds and criminal penalties for the criminal tax evasion. Generally, these developments are expected to have a considerable positive impact on the Ukrainian business climate.