In a context marked by the need to strengthen strategic sectors and attract investment, Ukraine has implemented special regimes such as Defense City and Diia City, designed to stimulate activities related to defense, technology, and innovation. However, as recently clarified by the State Tax Service of Ukraine, adherence to these regimes does not imply exemption from compliance with transfer pricing rules or the arm’s length principle.
This pronouncement is particularly relevant for multinational groups operating in Ukraine under complex intra-group structures, as it reaffirms that sectoral tax incentives do not alter substantive obligations in relation to controlled transactions.
General Transfer Pricing Framework in Ukraine
Ukraine has progressively aligned its transfer pricing regulations with international standards, particularly with the OECD Guidelines. These provisions are mainly regulated in Article 39 of the Tax Code of Ukraine, which establishes the criteria for identifying controlled transactions, the applicable analysis methods, and the corresponding documentation obligations. Under this scheme:
- Transactions between related parties must be carried out at market value.
- Taxpayers must prepare transfer pricing documentation when certain thresholds are exceeded.
- The tax authority may make adjustments when the agreed terms differ from those that would have been agreed by independent parties in comparable circumstances.
The main objective of these provisions is to prevent the erosion of the tax base through artificial pricing in intra-group transactions.
Special Regimes: Defense City and Diia City
Defense City
The Defense City regime was designed to strengthen the defense industry by providing tax incentives and favorable conditions to strategic companies in the sector. These incentives may include preferential tax treatment, administrative facilities, or specific sectoral benefits.
Diia City
For its part, Diia City is a special regime aimed at the technology and digital industry, offering a favorable tax environment for companies in the IT sector, startups, and technological innovation companies. Its benefits include alternative tax regimes and specific contractual structures. However, the critical point—according to the official statement—is that membership in these regimes does not eliminate the obligation to correctly apply transfer pricing rules when there are transactions with related parties.
Scope of Transfer Pricing Obligations Under Special Regimes
The clarification from the Ukrainian tax authority states that:
- Companies benefiting from these regimes must continue to apply the arm’s length principle.
- Controlled transactions must be documented and justified in accordance with current regulations.
- Sectoral tax benefits do not replace or modify transfer pricing compliance obligations.
From a technical perspective, this means that:
- If an entity under Diia City provides technological services to its foreign parent company, the price must be justified by comparable analysis.
- If a company in Defense City receives intra-group financing, the interest rate must be aligned with market conditions.
- If there are royalty or shared service payments, these must be economically justified.
In other words, the special regime does not act as a “shield” against the review of intra-group transactions.
Risks of Non-Compliance
The main risk lies in the misperception that a preferential regime reduces tax scrutiny. On the contrary, in many cases, jurisdictions offering sectoral incentives maintain stricter oversight to prevent tax base erosion practices.
The consequences of non-compliance may include:
- Tax adjustments on agreed margins or prices.
- Re-classification of income.
- Penalties for incomplete or inadequate documentation.
- Interest on certain taxes.
In addition, non-compliance can affect corporate reputation and generate significant financial contingencies.
Interaction with International Standards
The Ukrainian authority’s position is consistent with the international trend: tax incentives should not be used as a mechanism to distort intra-group prices or to artificially transfer profits.
The application of the arm’s length principle is cross-cutting and prevails over preferential sectoral treatment. This reinforces the need to maintain consistency between:
- Functional profile.
- Risks assumed.
- Reported profitability.
- Technical documentation.
Strategic Compliance Management in Environments with Tax Incentives
The message from the tax authority is clear: sectoral benefits do not replace technical compliance in transfer pricing. Companies operating in Defense City or Diia City must adopt a preventive approach, ensuring that their intra-group structures are properly justified and documented. Efficient tax planning should not be confused with the absence of substantive obligations.
Having a company specializing in transfer pricing allows for the integration of economic analysis, contract review, and regulatory assessment from a coordinated international perspective. In this context, TPC Group provides technical advice for the review of intra-group structures, preparation of documentation, and risk assessment in jurisdictions with special tax regimes, aligning corporate strategies with international standards and tax defensibility criteria.
Source: GOV.UA