Draft Law of Ukraine

"On Development of Automobile Production in Ukraine"

The draft is an alternative to draft laws N 3677 "On Development of Automobile Industry in Ukraine", introduced by MPs Yu.Karmazin, V.Hurov, M.Rudkovskiy, and N 3677-1 "On Development of Car Industry in Ukraine", introduced by People’s Deputies V.Horbal, V.Khomutynnyk, A.Semynoha.

The draft regulates the issue of encouraging car production in Ukraine through providing enterprises producing automobiles and/or component and spare parts thereto with special tax privileges.

The draft envisages amendments to the Decree of the Cabinet of Ministers of Ukraine "On the Unified Customs Tariff of Ukraine". Particularly, the draft suggests temporary exempting enterprises producing automobiles and/or component and spare parts thereto that have respective investment (hereinafter referred to as "Enterprises") from payment of import duty when importing goods to Ukraine’s customs territory. However, imported goods shall be used by Enterprises for construction, re-construction, technical re-equipment and upgrading of car production. Such temporary procedure shall last for five years from the moment, when the Cabinet of Ministers of Ukraine approves a respective investment program for a separate Enterprise.

Amendments to the Law of Ukraine "On Enterprise Profit Tax" (hereinafter referred to as "the Law") envisage temporary exemption of Enterprises from taxation of dividends by profit tax stipulated by clause 7.8.2 of the Law and provided, such dividends are to be re-invested into developing production of materials and component parts for automobile construction. Such temporary procedure shall also last for five years from the moment, when the Cabinet of Ministers of Ukraine approves a respective investment program for a separate Enterprise.

Apart from that, amendments to the Law envisage that by the end of the five-year period of such exemption from taxation the annual 25% norm of accelerated amortization for capital assets of group 1, 2 and 3 should be introduced.

Also Enterprises shall have the opportunity to fully include into gross expenditures category expenditures related to payment or calculation of interests on debt liabilities in favor of the following enterprise profit tax payers:

• non-resident entities owning or managing 50% of the statutory fund or more;
• legal entities exempted from payment of profit tax and engaged in insurance activity or paying enterprise profit tax at a rate other than 30%.

According to the current procedure, Enterprises are allowed to include a part of the above-mentioned expenditures into gross expenditures.

Amendments to the Law of Ukraine "On Rates of Excise Duty and Import Duty for Certain Motor Vehicles" envisage changes to the list of trade items from which excise duty is paid and a raise (in the majority of cases) of rates of excise duty in hard amounts for a commodity (product) unit.

The draft envisages amendments to the Law of Ukraine "On the Customs Tariff of Ukraine". Particularly, the draft sets forth zero rates of import duty for the following separate component parts to automobiles:

• combustion engines – trade items 8407, 8408;
• body, including cabins, for automobiles – trade item 8707;
• parts and devices for automobiles – trade item 8708.

For passenger cars (trade item 8703) the draft suggests setting different rates of import duty for different time periods – separate for 2004-2005 and separate for rates applied from January 1, 2006. In the majority cases, rates to be applied from January 1, 2006, are lower than those set forth for 2004-2005.

Also, the draft suggests eliminating a number of tax privileges for enterprises producing automobiles, buses and component parts thereto (which also have respective investment). Particularly, the currently effective privileges:

• on payment of land tax (clause 6 of Article 12 of the Law of Ukraine "On Land Tax");
• on payment of value added tax (clauses 11.18 and 11.19 of Article 11 of the Law of Ukraine "On Value Added Tax").

The draft proposes to suspend the Law of Ukraine "On Stimulation of Automobile Production in Ukraine" and Article 1 of Chapter I of the Law of Ukraine "On Amendment of Some Legislative Acts of Ukraine Related to State Support to Automobile Industry in Ukraine" for all enterprises without exceptions.

According to the draft, it shall come into effect on January 1, 2004, and will be effective until December 31, 2008. However, tax privileges envisaged by the draft for Enterprises shall become effective from the moment when the Cabinet of Ministers of Ukraine approves their respective investment programs and will stay effective until December 31, 2008.