“CONSTRUCTIVE” DIVIDENDS: TAX OPTIMIZATION OR A RISKY OBLIGATION FOR UKRAINIAN ENTREPRENEURS?

Abstract

The study aims to analyze the identification, accounting, and taxation of constructive dividends, providing a structured approach for enterprises to ensure compliance with tax regulations. The research focuses on assessing corporate income taxpayers' obligations regarding constructive dividends during the reporting period, in accordance with the criteria defined by the Tax Code of Ukraine. To achieve this goal, the research combines qualitative and quantitative methods, including comparative legal analysis, a systematic review of tax legislation, case studies of corporate accounting practices, and data visualization techniques of practical applications in corporate accounting. The article has established that constructive dividends can arise in various transactions where a company provides payments, benefits, or other economic advantages to non-residents that are not formally declared as dividends but effectively represent a distribution of profits, as defined in international tax legislation. Such reclassifications typically occur when transactions lack a valid business purpose, involve non-arm’s length terms, or result in an undue benefit to the non-residents at the expense of the company, leading tax authorities to treat them as deemed dividend distributions for tax purposes. Additionally, the study highlights that whether international double taxation treaties apply to constructive dividends depends on the specific wording of each treaty. To minimize tax risks, companies must maintain proper documentation and comply with transfer pricing regulations. As a result of the study, an algorithm for applying international agreements to avoid double taxation regarding constructive dividends has been designed. One of the key contributions of this research is the development of a structured algorithm for applying international tax treaties to avoid double taxation on constructive dividends. It also provides a practical framework that helps businesses systematically identify, record, and properly tax these transactions. The practical value of this study lies in its ability to provide enterprises with a structured approach to identifying and managing constructive dividends, reducing tax risks, ensuring compliance with tax regulations, and optimizing tax liabilities through the effective application of international treaties.