Debt-to-Equity Swap: How to Safely Structure It for a Ukrainian LLC (ТОВ)

The Debt-to-Equity Swap (D2E swap) mechanism is a transaction where a company's debt to its member is not repaid with cash but is instead "converted" into an additional contribution to its charter capital. For Ukrainian LLCs, this option was explicitly introduced only with the adoption of the Law "On Limited and Additional Liability Companies" in 2018. Before then, similar structures were not explicitly described in the law, and tax authorities and banks often viewed them with suspicion.

Today, the transaction is permitted by law, but its execution comes with several requirements—and this is where businesses most often run into trouble. In this article, we analyze one of the most common, yet legally complex, scenarios: converting a right of claim, obtained by an individual owner after the liquidation of a foreign creditor company, into capital.

1. The Initial Situation

In 2015, a citizen of Ukraine established two companies:

1. A Ukrainian LLC (he is the sole member);
2. An Estonian company (OÜ).

During its operations, the Estonian company provided the Ukrainian LLC with a loan of €5,000,000. Subsequently, a decision is made to liquidate the OÜ. The only asset remaining after settling all debts with creditors in Estonia is the right of claim against the Ukrainian LLC for the same amount.

Upon liquidation, this right of claim is transferred to the ultimate beneficial owner as a liquidation asset of the OÜ. The owner then plans to "settle" the Ukrainian LLC's debt as follows:

1. The LLC's General Meeting passes a resolution to increase the charter capital by an amount equivalent to the acquired right of claim.
2. The owner incurs a personal monetary obligation to the LLC to make the corresponding additional contribution.
3. The two mutual monetary obligations—the LLC's old debt to the owner and the owner's new duty to contribute—are terminated through a simultaneous set-off.

In business practice, such a transaction is commonly referred to as a set-off of mutual homogeneous claims (zarachuvannyam zustrichnykh odnoridnykh vymoh)—although legally, this is a simplified name.

A key consideration. The sole member here is simultaneously the ultimate owner of both companies, the creditor, and the debtor. The fact that the debt was not collected for years does not in itself prohibit a subsequent set-off—but the State Tax Service (STS) will most likely question the "economic logic" of such a prolonged deferral during an audit. This should be substantiated in advance with documents: loan agreement terms, a business plan for the group of companies, etc.

2. Tax Consequences for the Owner in Ukraine

PIT and Military Levy

The owner is a tax resident of Ukraine, so the transfer of the right of claim for €5,000,000 to him entails direct tax consequences. The receipt of property (including property rights) upon the liquidation of a foreign legal entity is recognized as foreign income (Article 170.11 of the Tax Code of Ukraine):

• Rates: Personal Income Tax (PIT) at 18%, military levy (viyskovyi zbir) at 5% (a total of 23%).
• Tax Base: The tax is calculated on the investment profit—the difference between the market value of the received right of claim (€5 million in UAH equivalent) and the documented expenses for creating (acquiring) or increasing the capital of the Estonian company in the past.

⚠️ Rule. The tax is calculated and paid based on the annual property and income declaration for the year in which the liquidation of the OÜ was officially completed and the rights of claim were transferred. For example, if the property rights are received in 2026, the declaration must be filed by April 30, 2027, and the tax must be paid by August 1, 2027.

CFC Requirements

In connection with the liquidation of the Estonian asset, the owner is also obligated to:

1. Notify of the termination of participation in a CFC—within 60 days from the date of the OÜ's official removal from the Estonian Commercial Register (Äriregister).
2. File a CFC report—full or abbreviated, along with the annual property and income declaration for the reporting year.

3. Position of the State Tax Service (STS)

When analyzing cross-border D2E swaps, the State Tax Service (Derzhavna Podatkova Sluzhba, STS) takes a cautious, fiscally-oriented position:

• Timing of the transfer of rights. A set-off will not be recognized as legitimate if it is carried out before the official completion of the non-resident's liquidation. The LLC's owner can only sign the set-off agreement after the Estonian registrar issues a document confirming the company's closure and the distribution balance sheet records the transfer of the right of claim to the owner.
• Statute of limitations. If the repayment deadline for the €5 million has passed more than 3 years ago (taking into account the suspension of deadlines during martial law), the STS may attempt to classify the debt as a bad debt liability of the LLC and assess 18% corporate income tax at the company level even before the set-off. This is one of the key risks of the entire scheme—if necessary, the loan agreement terms should be extended in a timely manner through additional agreements.
• Currency Control. The bank will typically require a complete update of the currency agreement profile in the NBU system (replacing the non-resident creditor with the individual owner of the company) before the set-off can be processed.

STS Position on Corporate Income Tax for the LLC

The main question for the business is whether the LLC itself generates income when it "closes" the debt to a member and converts it into a share in the capital.

• ITR of the STS of Ukraine No. 3977/IPK/99-00-21-02-02-06 dated 06.11.2023. The STS explicitly confirms that additional contributions to the charter capital can be made by setting off mutual homogeneous claims between the company and a member (Art. 18 of the Law on LLCs and Art. 601 of the Civil Code of Ukraine). The Code does not provide for any special adjustments to the financial result—the transaction is reflected according to general accounting rules.
• ITR of the STS of Ukraine No. 428/IPK/99-00-21-02-02 IPK dated 21.01.2026. A more recent ruling pertains to a similar instrument—contributing a debt to a non-resident member to the company's additional capital (without changing the size of the charter capital), which appeared in the law in August 2025. Here too, the STS confirms: there are no special adjustments, and everything is reflected according to accounting rules. This conclusion is practically useful for the "classic" D2E as well, although it concerns a related instrument—so consider it an additional argument rather than a direct regulation of charter capital.

Separately, the STS notes that the exchange of a right of claim under a loan for a share in the charter capital (or a contribution to additional capital) does not create VAT liabilities (clauses 196.1.1 and 196.1.5 of the Tax Code of Ukraine).

4. Court Practice: Typical Risk Indicators

The rules allowing the set-off of claims when increasing an LLC's capital have been in effect since June 2018. During this time, courts have established several consistent risk indicators:

1. Formal requirements for the minutes. Courts emphasize that the resolution of the General Meeting (or the decision of the sole member) to increase capital must explicitly and in detail record the non-monetary form of the contribution. If the resolution does not specify that the contribution is made precisely by setting off a specific homogeneous claim (with the details of the loan agreement), the procedure risks being declared invalid. This requirement is technically simple—the key is not to forget it.
2. Reality and homogeneity of claims. A set-off is legitimate under Art. 601 of the Civil Code, but courts carefully check the "timeliness" of the debt. The classic rule is: at the time of the set-off agreement, the performance deadline for the loan repayment obligation must have already occurred. If the loan agreement states repayment is due in 2028, but the set-off is conducted in 2026 without amending the terms, the tax authorities can successfully challenge such transactions. Let's not forget: the Civil Code also allows for other ways to terminate obligations (e.g., novation)—the specific structure should be agreed upon with a lawyer based on the actual circumstances.
3. Disputes regarding bad debt. If the STS proves that the LLC's obligation to the creditor has effectively become uncollectible (the statute of limitations has expired, the obligation was de facto written off), courts often side with the tax authorities and order the company to pay corporate income tax on the "virtual" income. This is another argument for not delaying the paperwork and monitoring the statute of limitations.

5. Summary for the Client (Owner)

Stage / Risk	Key Requirement / Consequence	Status / Action
Corporate Law	Setting off debt against an increase in the LLC's charter capital is permitted by the current Law on LLCs.	Permitted. Draft a Resolution and a Set-off Agreement with a detailed description of the contribution.
Financial Volume	The transaction is conducted for the amount of €5,000,000 at the official NBU exchange rate on the date of the resolution.	Monitor the exchange rate. The LLC will necessarily incur exchange rate differences.
Owner's Personal Tax	Foreign income arises. A 23% tax (PIT + Military Levy) is due on the difference between €5 million and the costs of purchasing/capitalizing the OÜ in 2015.	Mandatory payment. Prepare documents from 2015 confirming expenses to reduce the tax base.
Loan Statute of Limitations	The debt must not be overdue (more than 3 years).	Review the agreements. If necessary, sign additional agreements to extend the terms.
Commercial Bank	The bank will not approve the change in the currency agreement without documents proving the legal origin of the €5 million at the Estonian level.	Financial monitoring: gather the Estonian company's bank statements, contracts, and invoices in advance.

Recommended Sequence of Actions

1. Complete the full liquidation in Estonia, obtaining the distribution balance sheet (asset distribution plan).
2. Change the creditor in the Ukrainian servicing bank (replace the non-resident with the individual owner).
3. Draft a corporate resolution for the set-off and have it notarized.
4. Register the changes in the Unified State Register (USR).
5. File CFC reports and pay personal PIT.

Important Disclaimer

The scheme described is generally workable and permitted by law, but it simultaneously touches upon civil, corporate, tax, and currency regulations—and each of these areas has its own nuances, exceptions, and current (sometimes contradictory) practices. This article provides general guidance only and is not a substitute for individual legal advice. Before implementing such a transaction in practice, we strongly recommend engaging specialized lawyers and tax consultants who can thoroughly review your specific documents, deadlines, and circumstances.