The Tax Burden on Banks is Expected to Increase from January 1, 2024

On December 6, the President of Ukraine signed the Law of Ukraine "On Amendments to the Tax Code of Ukraine on the Taxation Features of Banks and Other Taxpayers" No. 3474-IX (hereinafter - the "Law"). In addition to tax increases, which are expected in a period of high budget spending on defence needs, the Law sends negative signals about the investment climate, which is already not very favourable during martial law. 

The law stipulates that the corporate income tax rate applied to banks' profits based on the results of the 2023 tax year will be at a 50% rate. Nonetheless, the tax paid at a rate of 18% for the previous tax periods of 2023 (quarter, half-year, three quarters) is deemed to be a properly fulfilled tax obligation, and does not require additional payment of the difference between the previous and the new rate. In violation of the Constitution of Ukraine, the Law is retroactive.  

Moreover, according to the financial results of the 2023 tax year, banks will be prohibited from reducing the financial result before taxation by corporate income tax in the amount of the negative result of the object of taxation of previous tax years This proves the expropriation nature of the measure in question, because the legislator did not help banks during the crisis years, and they invested their own funds in covering losses in the past. In case of applying such a reduction, the bank shall reflect in the 2023 tax declaration the negative result of the object of taxation, based on the 50% rate, and in the event of an additional tax obligation - to pay such difference. The same rule shall apply to advance payments on corporate income tax on dividends paid in 2023 at a rate of 18%. 

Starting from January 1, 2024, a rate of 25% will be applied to the bank's profit, adjusted profit of the bank's controlled foreign company, dividends paid by the bank. Perhaps, one of the indirect considerations was the compulsion to reinvest the received income in the assets of banks, that is, the increase of expenses in the economy of Ukraine. We consider this method of implementation to be erroneous, because the incentives for reinvestment should, for the most part, be in structural reforms and the introduction of alternative ways of reducing risks in financial services markets. 

The legislator justifies this decision by the fact that in the conditions of strict monetary regulation and increased inflationary pressure, respective circumstances that are favourable for the growth of the net profit of banks have arisen, and such profit is not a direct consequence of the increased productivity of banking activities. Therefore, as the legislator notes, such profits can be a source of additional revenues to the budget to achieve effective distribution of economic benefits. However, taxation by industries seems like a very controversial solution: the way to optimize the tax burden in such circumstances would likely involve shifting the centre of income to non-bank financial institutions and other financial intermediaries. 

Additionally, provisions regarding taxation are often contained in contracts with foreign counterparties, for example, in loan agreements. Therefore, banks that are parties to such agreements should carefully analyze the impact of the mentioned legislative changes on their contracts. In particular, attention should be paid to representations and warranties regarding taxes, financial indicators and reporting, business models, provisions regarding material adverse change and early repayment of loans. 

The law entered into force on December 8, 2023, and the 25% rate provision is going to become effective from January 1, 2024.