Thinking beyond borders
Individuals are subject to Ukrainian income tax as either tax residents or tax non-residents. Residents are taxable in Ukraine on their worldwide income, whereas non-residents are taxable on their Ukrainian-sourced income which, inter alia, includes remuneration for the work performed in Ukraine, whether paid by a resident or by a non-resident company. Nevertheless, both residents and non-residents are taxable at the same tax rates, which are described below.
However, if double tax treaties concluded by Ukraine provide for other taxation rules than those provided in the domestic legislation, provisions of the treaties should generally prevail.
The Ukrainian rules on immigration and the obtaining of work permits for foreign individuals are amended frequently, thus it is advisable for business travelers to clarify these issues with professional advisors prior to committing to extended work periods in Ukraine.
An individual’s tax liability in Ukraine depends on whether the individual is viewed as a Ukrainian tax resident or a non-resident. While Ukrainian tax residents are taxable in Ukraine on their worldwide income, tax non-residents are taxable on their Ukrainian-sourced income which, inter alia, includes remuneration for the work performed in Ukraine, whether paid by a resident or by a non-resident company.
The concept of tax residency incorporated in Ukrainian law is similar to that of most international double taxation agreements. According to the law, an individual can choose Ukraine as the country of his/her tax residency based on the following criteria:
Under domestic law, tax liability is triggered upon performing any compensated work in Ukraine and/or receiving personal income (interests, dividends, rental income, etc.) from Ukrainian sources. However, if a relevant double tax treaty provides for different taxation rules, the provisions of the treaty will prevail.
In general, taxable income includes any income received in-cash, in-kind, and in the form of a material benefit. For extended business travelers, the types of income that are generally taxed are employment income and any Ukrainian-sourced income. Fringe benefits such as housing, business car, and moving expenses could be tax-exempt if they are properly structured.
Both Ukrainian tax residents and tax non-residents are taxable at the same flat tax rate – 18 percent.
Since July 2014 the Ukrainian Parliament temporarily introduced the 1,5% military tax for the needs of the Ukrainian army. The military tax is paid in addition to the personal income tax.
The tax base is not capped and is withheld from all income, which is subject to personal income tax.
Generally, according to the provisions of the Ukrainian legislation, an individual becomes enrolled in the Ukrainian state social security system upon signing an employment agreement with his/her Ukrainian employer. Starting the date of the signing of the employment agreement, the employer is responsible for accrual and payment of USSC (at its own expense) to the state budget. Payment of the USSC is ceased when the employment is terminated.
The taxable base for the USSC is capped at 25 subsistence minimum - currently UAH 34.450 (approximately EUR 1,100 at the current exchange rate) per month.
Foreign individuals working in the representative office of a non-resident company are not subject to the USSC.
Also, the remuneration paid by a non-resident company to an individual working in Ukraine is not subject to the USSC.
The reporting year in Ukraine is the calendar year.
Income paid by a Ukrainian entity is taxed at the source of payment. Such income is not subject to additional reporting in Ukraine.
Income received from a non-Ukrainian entity is subject to tax based on the tax return, which is due on 30 April of the year following the reporting, or 60 calendar days before departure from Ukraine, whichever happens earlier. The tax is due on 31 July of the year following the reporting year or before the departure from Ukraine.
The tax withholding and reporting requirements with respect to the employment remuneration payable to individuals in the Ukraine arise only for employers, Ukrainian entities, and the representative offices of foreign companies in Ukraine.
Non-resident entities which pay the employment remuneration to individuals working in Ukraine are not subject to tax withholding and reporting requirements in Ukraine.
According to Ukrainian legislation, if an international double tax treaty concluded by Ukraine provides for other taxation rules than those provided in the domestic legislation, provisions of the double tax treaty would prevail. Currently Ukraine has double tax treaties with 69 countries.
There is a potential risk that a permanent establishment could be created in Ukraine as a result of extended business travel, but, if structured properly, this risk may generally be mitigated.
In Ukraine, value-added tax (VAT) at 20 percent is levied on the supply of goods and services in the customs territory of Ukraine and on the importation of goods and services to Ukraine. Certain supplies are VAT-exempt (e.g. domestically produced baby food products, published periodicals, textbooks, books etc.). Export supplies are zero-rated.
Starting from 1 April 2014 import and supply of medicines and medical products in the territory of Ukraine are no longer exempt from VAT. Supply and import of medicines and medical products allowed for the production and consumption in Ukraine and included to the State Register of Medicines and on supply of medical products according to the list approved by the Cabinet of Ministers of Ukraine (the “CMU”) are subject to 7% VAT. Suppliers of medicines and medical products are entitled to VAT credit arising from purchases of goods and services at both 7% and 20% VAT rate according to the general rule.
As of 1 January 2015, a new VAT mechanism was introduced. It provides that a VAT payer may credit input VAT up to the amount recorded in the respective VAT invoice.
IT companies enjoy VAT exemption in terms of development, disposal and testing of software, data processing services and advisory services on IT issues, other IT services up to 2023.
Transactions between related parties are subject to transfer pricing rules introduced by the Tax Code of Ukraine. Income received by a taxpayer from transactions with a related party should be determined in accordance with arm’s length principle.
Starting from July 2015 the criteria of controlled transactions have been significantly revised. In order to be deemed controlled a transaction:
1. shall occur with non-resident related party OR
2. shall involve non-resident related commissioner OR
3. shall occur with a non-resident (regardless of its relation to the Ukranian entity) registered at 1) so-called "low-tax jurisdiction" OR 2) jurisdiction that has no treaty on exchange of information with Ukraine.
1. taxable income of a taxpayer and/or its related parties from all types of activities exceeds annual amount of UAH 50 mln.
2. amount of business transactions between a taxpayer and/or its related parties exceeds UAH 5 mln for the respective fiscal year.
Those transactions between related parties both of which are residents of Ukraine are no longer deemed controlled (since 1 January 2015).
The new transfer pricing rules also apply to those transactions between related parties that involve an unrelated party that doesn’t perform key functions, assume key risks or employ key assets are recognized as controlled transactions.
Furthermore, a minimum number of 3 comparable transactions is no longer required. Until 2015, the range of prices/profitability should be calculated on the basis of information on 3 or more comparable transactions.
New form of price monitoring in controlled transactions has been introduced as of 2015. In order to verify that conditions of controlled transactions meet arm's length principle, the State Fiscal Service of Ukraine have the right to conduct a survey of authorized persons and/or employees of the taxpayer (or its contractor) while analyzing reports on controlled transactions or transfer pricing documentation files. The procedure of such survey is established by the State Fiscal Service of Ukraine.
Based on the recent amendments, a transfer pricing documentation file that substantiates the arm’s-length nature of royalty payment to a non-resident gives taxpayer a right to attribute such costs to gross expenditures.
Also, a taxpayer should increase its financial result for 30% of a transaction value from transactions on purchase of goods/assets/services from a related or non-related party registered in a "low-tax jurisdiction". This rule is not applicable if a taxpayer prepares TP documentation file substantiating the arm's length level of prices established in such transactions.
The large taxpayers have the right to conclude advance pricing agreements (hereinafter - APA) with the tax authorities. Provided that a taxpayer complies with the terms of previously concluded APA, the tax authorities are not allowed to accrue additional tax liabilities or penalties with respect to the controlled transactions covered by the APA.
The limitation for conduction of a special TP tax audit is 2555 days (7 years).
* if a subject of such transaction is a good listed on commodity exchange, it is strongly suggested that taxpayer applies comparable uncontrolled price method to substantiate compliance to the arm’s-length principle.
Under the Ukrainian law, all foreign nationals have to obtain work permits prior to their work in Ukraine. However, there are certain exceptions, which, inter alia, relate to foreign individuals working in a local representative office of a foreign company.
As a general rule, foreign individuals coming to Ukraine should have a relevant type of visa. However, citizens from visa-exempt countries (citizens of the European Union (EU) and certain other countries, including Bulgaria, the Vatican, Estonia, Iceland, Canada, Cyprus, Latvia, Lithuania, Lichtenstein, Malta, Monaco, Norway, Poland, Portugal, Romania, San-Marino, Slovakia, Slovenia, the US, Hungary, the Czech Republic, Switzerland, and Japan) are allowed to enter Ukraine for a period of up to 90 days in a 180-day period without visas.
Generally, visas are granted by Ukrainian consulates abroad. There are three types of visas for Ukraine.
Please note that the temporary residence permit is a document that allows an individual to travel in/out of Ukraine without any restrictions during the period of validity of said permit, which is usually one year.
According to the Ukrainian law on personal data protection (the Law), any entity can process an individual’s personal data only upon having the individual’s consent.
Starting 1 July 2012, illegal collection, storage, use, destruction, distribution or change of personal confidential information (including personal data) is subject to both criminal and administrative liability.
The main currency control rules applicable for legal entities in Ukraine are as follows.
Goods/services imported by a Ukrainian entity or money that is due for goods/services exported from the Ukraine have to be actually delivered/paid to a Ukrainian counterpart within 90 calendar days upon the payment for foreign goods or actual export of Ukrainian goods/services abroad (the restriction is effective from 3 December 2014 until 4 March 2016). There are penalties for non-compliance.
Payments abroad under certain transactions (supply of services, transfer of intellectual property rights, redemptions of promissory notes, purchasing shares/securities issued by a foreign entity, opening an account with a foreign bank) are subject to bank control. A Ukrainian company transferring money under a contract where the price exceeds EUR50,000 (or its equivalent in another currency) should receive price evaluation statement from the State Information and Analytical Center for Monitoring of External Commodity Markets in Ukraine confirming that the contract price corresponds to market prices.
At the same time, no price valuation statement will be required when payment is made for financial, travel, communication, freight and forwarding services supplied from abroad provided that Ukrainian entities have respective licenses (permits) to carry out relevant business activities.
The NBU's rules also oblige the companies to sell foreign currency earnings as follows.
Personal costs would not be tax deductible for the assignee with the exception of the following: