Ukraine’s Draft Law No. 16036: A New Era for Interest Deductions

Ukraine is set to introduce significant changes to its corporate tax regulations, specifically targeting how businesses can deduct interest expenses. Draft law No. 16036, approved by the Cabinet of Ministers on September 7, 2026, proposes a broad new limit on interest deductions. This change, scheduled to take effect on January 1, 2028, will apply to all debt obligations, moving beyond the current focus on foreign or related-party loans. The aim is to prevent companies from artificially reducing their taxable profits through excessive interest expenses.

Understanding the New Interest Deduction Limit

The core of draft law No. 16036 is the introduction of a cap on excess borrowing costs. From January 1, 2028, businesses will only be able to deduct interest expenses up to 30% of their Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This new rule will apply regardless of whether the lender is a resident or non-resident of Ukraine, or if the parties involved are related or unrelated. This broadens the scope considerably compared to previous regulations.

A key aspect of the proposed law is that it maintains a threshold of €500,000. If a company’s borrowing costs do not exceed this amount, the new deduction limit will not apply. This ensures that smaller businesses or those with modest borrowing expenses are not unduly affected by the new regulations. The calculation of excess borrowing costs will be the difference between borrowing expenses and any interest income a company receives.

How the New Rule Differs from Current Practices

The current tax framework in Ukraine has limitations on interest deductions, but these are often tied to specific conditions, such as the location of the lender or the relationship between the borrower and lender. Draft law No. 16036 removes these distinctions. Previously, a company might have structured its loans to avoid restrictions by borrowing from a domestic, unrelated entity. Under the new proposal, such strategies will no longer be effective in bypassing the deduction limits.

The proposed system moves towards a general test that covers all debt. This aligns Ukraine’s tax practices with broader international trends, particularly those influenced by European Union directives. The goal is to create a more uniform and less easily circumvented system for managing corporate tax liabilities related to financing costs.

Transition Period and Future Implications

The Ukrainian government has provided a transition period, with the new rules set to begin on January 1, 2028. This gives businesses nearly two years to review their existing debt structures and make any necessary adjustments. Any interest amounts that were not recognized under the old rules by the end of 2027 will be subject to the new regime starting in 2028.

The draft law also includes provisions for carrying forward unused deduction limits. Unused borrowing-cost limits can be carried forward for five tax years. However, borrowing costs that were not recognized before the new rules take effect may be carried forward without a time limit. This distinction is important for businesses to understand as they plan for the upcoming changes.

Alignment with EU Anti-Avoidance Measures

The Ministry of Finance has stated that draft law No. 16036 is being introduced as part of Ukraine’s efforts to implement EU Anti-Tax Avoidance Directives (ATAD). Specifically, it references Article 4 of Council Directive (EU) 2016/1164, which addresses limits on excess borrowing costs. By adopting this measure, Ukraine is working to harmonize its tax legislation with EU standards, aiming to prevent tax avoidance and ensure a fairer tax environment.

This move is part of a larger reform effort that also includes measures to address related-party transactions. The government has indicated that some companies have used pricing strategies in dealings with affiliated enterprises to lower reported profits in Ukraine. Draft law No. 16036, alongside separate transfer-pricing regulations, aims to close these loopholes and promote clearer, arm’s length dealings between companies. Businesses that rely heavily on debt financing should carefully model the impact of the proposed 30% EBITDA limit before the 2028 deadline.

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