№3(14)(2013)

With enactment of the Tax Code of Ukraine, special rule has regulated an issue of charging income tax on transactions with assignment of claims. However, section 153.5 of the Code refers only to transactions between old and new creditors. Debtors are informed about the fact of assignment of their debt, and can face serious problems, solutions for which are not easy to find in the Code

Paragraph 153.5 of the Tax Code of Ukraine (hereinafter - TCU) declares that for tax purposes the taxpayer keeps a record of financial results from operations for sale (transfer) or acquisition of claim liabilities in cash for goods, works or rendered services from a third party, liabilities of financial loans as well as other civil contracts. This accounting is to ensure that assigned amount of debt is costs for first creditor, and the cost resulting from new lender is income.

Thus, under first assignment of liability costs incurred by taxpayer - the first lender are determined in amount of contract value of goods (works, services) on which indebtedness has appeared, on financial credits - in amount payable according to accounting on date of making such assignment in accordance with the TCU, while other civil contracts - in amount of actual debt that is assigned. Composition of income includes amount of money or value of other assets received by taxpayer - the first creditor of such assignment and amount of his debt, which is repaid, provided that such debt was included in the costs as required by law.

The new lender's costs are transferred to the old lender to pay for purchased receivables and income - all received on account of repayment. However, taxation of new lender takes into account only positive financial result for this operation.

If income derived by taxpayer from next assignment obligations of a third party (debtor) or requirement of debtor exceed costs incurred by taxpayer for purchase of assigned liabilities of a third person (debtor), profits are included in income of such taxpayer. If expenses incurred by taxpayer to acquire assignment of a third party liability (debtor) exceed income derived by such taxpayer from next assignment obligations of a third party (debtor) or requirement of debtor, negative values are not included in cost or reduction of profits from other operations of sale (transfer) or acquisition of assigned liabilities in cash for goods or services of a third party.

There is no concern on some features or changes in tax accounting for income and expenses of debtor, as reflected by agreements, commitments under which lenders assign.

However, p. 153.5 of TCU regulates issues of liabilities assignment for financial loans which includes charges and interest payments to creditor. There is a special approach for interest accounting in TCU. In addition, this debt can be assigned to non-resident, whose income tax is originating from Ukraine and also governed by special provisions of the Tax Code.

Paragraph 160.2 of TCU states that resident or permanent establishment of non-resident, which is engaged in do for non-resident or his authorized representative (other than a permanent resident representative in Ukraine) any payment of income from sources in Ukraine, received by such resident from business activities (including non-resident accounts maintained in local currency), other than income referred to in paragraphs 160.3-160.7 of TCU, required to maintain tax on such income referred to in paragraph 160.1 of TCU that are enforced, at a rate of 15% of their amount and at their expense, which is paid to budget during such payment, unless otherwise provided by international agreements between Ukraine and countries of residence of persons for whom payments are made.

Thus, resident-borrower will make payments of funds to non-residents, and therefore is required to maintain tax withholding originating from Ukraine.

Paragraph 160.1 of TCU states that any income received by non-residents from sources in Ukraine are taxed in the manner and at the rates set out in this paragraph. For purposes of this paragraph income received by non-residents from sources in Ukraine includes:

• Interest, discount income payable to non-residents, including interest on loans and debentures issued by resident;

• Other revenues from resident (permanent establishment of other or same non-resident) business activity in Ukraine, with exception of income from earnings or other compensation for value of goods/works performed/services provided, sent/ made/provided to resident from non-resident (permanent representation), including cost of services for international calls or international information security.

And then there appears rather difficult question for debtor: whether to keep tax withholding from source of origin of Ukraine (the so-called repatriation tax) for payments to non-residents under credit agreement, obligation for which resident banks assigned to non-residents?

There is no need for a special proof for statement that when contract of assignment under loan agreement and loan agreement (subject to change) and full payment of funds to creditor by assignment are enforced:

• borrower does not have either income or expenses as sum of his liabilities does not change (assuming that some obligations are forgiven or reduced due to transfer of foreign currency statute of limitations that does not expire). Changing creditor in obligation does not terminate debtor's payment in obligations under loan agreement. Commitments should be made in favor of new creditor;

• non-resident - new creditor does not have incomes, income payments are not done in its favor.

But at the time of funds payment for non-resident as a new lender under credit agreement, there is an issue of withholding tax on income that will be paid, and there could be several points of view.

First. Principal amount of loan that will be repaid to non-resident (as new creditor) is not included in income and is not taxable and tax of 15% will not be charged under repayment. These rules can be justified with paragraphs 14.1.267 and 153.4.1 of TCU.

Subsection 153.4.1 of TCU states that with specifications established by Section III “Corporate Income Tax” of the Tax Code, funds or property held by taxpayer under obtaining principal financial loans by taxpayer, including subordinated debt, borrowing from others, creditors and repayment of principal financial loans, loans to taxpayer for others, debtors, collection of consolidated mortgage debt holders of mortgage participation certificates, replacement of one share of consolidated mortgage debt with another are not included in income and are not taxable. Loan is money provided by residents who are financial institutions or non-residents, except residents under offshore status, borrower for a specified period of obligation to return and payment of interest on loan amount (paragraphs 14.1.267 of TCU).

Accordingly, principal amount of loan to the borrower is not included in cost. Funds or property provided by taxpayer under taxpayer return of principal, including subordinated debt, loan, part of consolidated mortgage debt at maturity mortgage participation certificate, but not exceeding amount paid for acquisition of such certificate to others, creditors, loan interest and principal to provision of credit, loans to others, debtors, foreclosures (replacement) of one share of consolidated mortgage debt to another are not included in cost according to the law (§§ 153.4.2 of TCU).

Interest (accrued before and after transfer) under credit agreement is withholding (sub-paragraph "a" of § 160.1 of TCU) subject to paragraphs 153.2.5 of TCU. Therefore, at the time of payment of 15% deducted from amount paid. Amount of interest included in borrower's expenses is based on paragraphs 141.2 and 161.2 of TCU and p. 153.2.4 of the Tax Code. Date of recognition of interest as expense is determined on basis of art. 138 of TCU.

It should be noted that, in accordance with paragraphs 153.4.1 of the Code, funds in connection with return of principal financial loans, loans to others taxpayer-debtors are not included in other income. In our case (although contract assignment on new creditor rights and obligations of original creditor), resident did not commit actual provision of funds to borrower (including in foreign currency).

Second. Income of non-resident (other than income under p."й" of art. 160.1 of TCU) for special operation with assignment is determined with section 153.5 of Tax Code (there is separate accounting for financial result on this operation), which was discussed at the beginning.

Non-resident resident borrower provides information with supporting documents of expenses incurred for purchase of claim. Amounts paid to non-residents as a new lender and are greater than costs of non-resident's are considered as income, 15% of income (profit) is taken at the time of payment.

Note! Repayment obligations under loan agreement do matter. If interests are to be repaid at first (at least in amount not greater than costs of non-resident to buy) still there is an issue of withholding tax on interest. If principal amount of loan is to be repaid at first, we can talk about lack of income (in amount not greater than purchase costs of non-resident).

Borrower costs are formed in the same way as in the first point of view.

Third (fiscal). Incomes of non-resident, under which there is 15% tax payment as referred to in paragraphs 160.1-160.2 of TCU. They include tax withholding on the full amount of income that is paid (ie, excluding any costs of non-resident without applying pp. 153.4-153.5 and other provisions of Chapter III of "Income Tax" of the Tax Code to determine taxable income tax).

Borrower costs are formed in the same way as in the first point of view.

To summarize, the second point of view on issue of taxation the payments to non-residents as a new lender seems the most logical and balanced in respect of income and taxes of non-resident. However, unfortunately, there is a contradictory situation of TCU rules. Therefore, taxpayer should apply for an individual tax clarification if he will be in this situation.