EU weighs stricter conditions for €90bn Ukraine loan – Bloomberg

The European Union is considering tighter conditions for a €90 billion loan to Ukraine, under which part of the disbursements would be contingent on the introduction of unpopular changes to corporate taxation.

Source: European Pravda, citing Bloomberg

Details: The discussions focus on changes to a preferential tax regime currently in place for certain Ukrainian companies.

Originally designed for sole traders and small businesses, it allows companies to pay a minimum rate of 5% of revenue.

Ukraine's Ministry of Finance and key donors argue that the scheme places a burden on the wartime budget, distorts competition and supports the shadow economy.

Sources told Bloomberg that the proposal would require Kyiv to introduce a 20% value-added tax for companies currently operating under the preferential system with annual revenues exceeding UAH 4 million (about €77,623).

The EU assistance potentially affected by the new condition represents only a small part of the overall two-year package, which includes around €60 billion in defence support, while the remainder is split between macro-financial assistance and the Ukraine Facility, which provides funding for general budget spending.

European Commission spokespersons said the Commission is "working tirelessly" to finalise a memorandum of understanding that sets out financing conditions for Ukraine, but declined to provide details.

According to a Commission spokesperson, the EU executive always aligns its "reform agenda with the IMF, and this is the case also now".

The aim is to complete negotiations "as soon as possible with an ambitious reform agenda to strengthen Ukraine's economy" and accelerate its integration into the EU.

However, these efforts are likely to increase domestic political tensions in Ukraine, as the proposed measures are highly unpopular. Struggles between parliament and President Volodymyr Zelenskyy also complicate implementation.

Although the new conditions will not affect key defence assistance, their implementation is still expected to face difficulties.

Bloomberg also said that even if Ukraine gains time now, it will eventually need to reform its tax system to align with EU accession rules, including the removal of certain tax exemptions.

One source noted that Kyiv's international donors could also consider alternative measures to increase revenues or curb the shadow economy.

Background:

• European Pravda learned that the first tranche of the military component of the EU's €90 billion loan will amount to €6 billion and will be transferred to Ukraine no later than June.
• The first defence tranche will be allocated for the purchase of drones produced in Ukraine. The schedule for subsequent payments from the "military" component of the loan has not yet been approved, but they are expected to be disbursed more quickly. European Pravda reported that the next package may include ammunition, drones and air defence systems.

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