The tax consequences of dividend payments depend on who is the founder of the company: a legal entity or an individual, a resident or non-resident of Ukraine. We are going to consider the peculiarities of taxation of dividends, if the founder is a legal entity − resident.
Basic Rules
The procedure for payment of the tax liability on the income tax, when dividends payments, is established by para.57.11 of the Tax Code of Ukraine (hereinafter − TCU). At payment of dividends to founders, the advance payment under the income tax should be paid. Moreover, the obligation to pay an advance payment occur in any company carrying out the payment of dividends in favour of the founders − legal entities, regardless of whether it is subject to the income tax or not. In other words, not only issuers of corporate rights, registered by payers of the income tax, should pay an advance payment, but also legal entities applying a simplified taxation system.
The term for payment of the advance payment is not related to a certain reporting date or the deadline for the submission of a tax return, but depends solely on the period of payment of dividends. Therefore, the advance payment must be paid before or simultaneously with the payment of dividends.
It should be remembered, if it was decided to pay dividends at the general meeting, such payments are to be made regardless of whether there is a taxable income or not. And the presence of a negative value of taxable profit is not a reason for non-payment of dividends, because dividends are a part of the net profit determined by the financial statements of the company.
Calculation of advance payment
The calculation of the advance payment depends on whether the monetary obligation for the income tax for the reporting year is paid off, on the basis of which dividends are paid, or not.
The advance payment is calculated from the amount of excess of dividends payable over the value of the subject of taxation for the corresponding reporting year, on the basis of which dividends are paid, the monetary obligation for which is paid off. That is, in the event that such a monetary obligation is paid off, the advance payment is calculated by the formula:
AP = (D - S) × 18%,
where AP – advanced payment;
D – accrued amount of dividends;
S – subject of taxation on the income tax for the tax (reporting) year, on the basis of which dividends are paid, the monetary obligation for which is paid off.
Of course, if the subject of the income tax for the tax (reporting) year exceeds the amount of accrued dividends (S > D), then the advance payment should not be paid.
In the presence of an outstanding monetary obligation, the advance payment is calculated from the total amount of dividends payable according to the formula:
AP = D × 18%.
If dividends are paid for an incomplete calendar year, in order to calculate the advance payment, it is used the value of the subject of taxation calculated proportionally to the number of months for which dividends to be paid.
If dividends are paid in a non-monetary form, the basis for calculating the advance payment is the cost of such payment as determined in the decision of dividends payment. The use of ordinary prices in the calculation of dividends is provided only in controlled transactions. And starting from 01.01.2017 the cost of such payments is calculated on the “arm’s length” principle.
It is also important that the amount of dividends payable is not reduced by the amount of the advance payment.
Prepaid advance payments
According to the rules established in para.57.11.2 of TCU, the amount of pre-paid advance payments of income tax during the reporting period, when the dividends payment is the subject to reduction of accrued tax liability for income tax declared in the declaration for such reporting period.
In the event that the amount of the prepaid advance payment exceeds the amount of the accrued tax liability by the issuer of corporate rights for the corresponding reporting period, starting from 01.01.2017 the amount of such excess is allowed to be transferred to the reduction of tax liabilities of the next reporting periods until its full repayment, and upon receipt of a negative value of the subject to taxation of such a subsequent period − to reduce tax liabilities of future accounting periods until its full repayment.
The amounts of dividends received by the payer of the income tax from other taxpayers of this tax are not included in its incomes. Similarly, the amount of paid dividends is not included in the expenses of those payers who paid them.
Appliance of differences
When the income tax taxation, it should be applied differences arising in accordance with the provisions of para.III of TCU. The mechanism for applying the differences arising in the implementation of financial transactions is defined in Art.140 of TCU. In particular, paras.140.4.1 of TCU provides for that before taxation the financial result should be decreased on the amount of accrued incomes in the form of dividends payable in favor of the payer of the income tax from other payers of the income tax.
Moreover, the right to reduce the financial result before taxation is provided only in case of reflection of amounts of accrued dividends as incomes in accordance with the provisions of accounting. This is noted in the letter of the Ministry of Finance dated July 25, 2016, № 31-11130-09-10/21370.
