Ukraine – Thinking Beyond Borders | KPMG | GLOBAL

Ukraine

Ukraine

Thinking beyond borders

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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.

Key message

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.

However, if double tax treaties concluded by Ukraine provide for other taxation rules than those provided in the domestic legislation, provisions of the treaties prevail.

Income tax

Liability for income tax

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 Ukrainian law, an individual can choose Ukraine as the country of his/her tax residency if :He/she determines that his/her main permanent place of residence (i.e. a domicile (either owned or leased) on the territory of Ukraine.

Tax trigger points

Under domestic law, there is no threshold/minimum number of days that exempts the individual from the requirements to pay tax in Ukraine.. However, if a relevant double tax treaty provides for different taxation rules, the provisions of the treaty will prevail.

Types of taxable income

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.

Tax rates

Most type of the income is taxed at 18% personal income tax rate.

Military tax

Liability for military tax

Since July 2014 the Ukrainian Parliament temporarily introduced the 1,5% military tax for the needs of the Ukrainian army.

The base for taxation is the same as for personal income tax. The payers of the military tax is both - residents and non-residents of Ukraine.

Social security

Liability for social security

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 social security contributions (SSC) at its own expense to the state budget. Payment of the SSC is ceased when the employment is terminated.

The taxable base for the SSC is capped at 15 statutory minimum wage - currently UAH 55,845 (approximately EUR 1,800 at the current exchange rate) per month.

Foreign individuals working in the representative office of a non-resident company are not subject to the SSC.

Also, the remuneration paid by a non-resident company to an individual working in Ukraine is not subject to the SSC.

Compliance obligations

Employee compliance obligations

The reporting year in Ukraine is a 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.

Employer reporting and withholding requirements

The tax withholding and reporting requirements with respect to the employment remuneration payable to individuals in 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.

Other issues

Double taxation treaties

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 about 70 countries.

Permanent establishment implications

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.

Indirect taxes

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.

The administration of VAT is conducted electronically:

  • Every VAT payer has its own electronic VAT account within the State Treasury of Ukraine
  • A VAT payer should register each VAT invoice issued on each VAT-able supply (if any) in the Electronic Register of VAT Invoices.

The Ukrainian VAT taxation system is rather complicated. A VAT payer would be required to maintain detailed accounting of VAT and proper registration of VAT invoices in the Electronic Register of VAT Invoices, which effectively means simultaneous payments of 20% VAT output/liabilities on sale/other disposal of VAT-able goods/services (unless a VAT payer has VAT input/credit exceeding such VAT output/liabilities accrued).
The tax authorities are empowered to block registration of VAT invoice if such VAT invoice falls under the risk criteria.

Transfer pricing

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.

In fiscal years ended December 31, 2017 and December 31, 2018, business transactions carried out by Ukrainian taxpayers with

  • Non-resident related parties, or
  • Non-resident non-related parties registered in “low-tax jurisdictions” listed by the Cabinet of Ministers of Ukraine, or
  • Non-resident non-related parties with special legal forms listed by the Cabinet of Ministers of Ukraine, or
  • Through non-resident commission agents, or
  • Through nominal conduit

are deemed controlled for TP purposes if the following cumulative criteria are met:

  1. A taxpayer’s gross annual income volume exceeded UAH 150 million (ca. EUR 5.3 million as of January 1, 2017), and
  2. Annual volume of all transactions with each counterparty exceeded UAH 10 million (ca. EUR 350 thousand as of January 1, 2017).

Transactions between related parties both of which are residents of Ukraine are no longer deemed controlled in Ukraine (since 1 January 2015).

Also, starting from 1 January 2018, transactions between non-residents and their permanent establishments are deemed controlled provided that the volume of such transactions exceeds UAH 10 million.

To be in compliance with the Tax Code of Ukraine in respect of the controlled transactions, companies should take the following steps:

  • Prepare and submit to tax authorities a Report on controlled transactions before October 1 of the year following the reporting (fiscal) year; and
  • Prepare local TP documentation files supporting the arm’s length level of prices applied in the controlled transactions in order to be able to provide such documentation files to the Ukrainian tax authorities within 30 calendar days following their request.

Both Report on controlled transactions and local TP documentation files should be should be prepared in Ukrainian language only.

Penalty for failure to (timely) submit the Report on controlled transactions is 300 minimum cost of living as of January 1 of the reporting year (ca. EUR 16,500 as for FY2017) and 1% (but not more than 300 minimum cost of living) of each individual transaction volume if such transaction is not disclosed in the Report. Penalty for failure to submit the TP documentation file at request is 3% of the respective transaction volume, but not more than 200 minimum cost of living – ca. EUR 11,000 (as for FY2017) for TP documentation file with each counterparty.

Also, starting from January 1, 2017, there are introduces new penalties for each day of late submission of the Report on controlled transactions/declaration of controlled transactions (in the amount of 1 minimum cost of living for every day of late submission) and transfer pricing documentation file (in the amount of 2 minimum cost of living for every day of late submission) after established deadlines.

In case of the second failure to submit Report on controlled transactions / transfer pricing documentation after 30 calendar days for penalties expired there is a new fine in the amount of 5 minimum cost of living for every day of such failure.

According to the Tax Code of Ukraine, the payment of penalties does not release the taxpayer from the obligation to submit the Report on controlled transactions and/ or transfer pricing documentation files.

In case the prices/ profitability levels in controlled transactions are found to lie outside the arm’s length range, the tax authorities can adjust the respective prices/profitability levels for tax calculation purposes to the median of the range. In case of self-adjustment the taxpayer may adjust prices/profitability level only to maximum/minimum of the arm’s length range. Such adjustments will be performed only if this does not result in decrease of a taxpayer’s tax liability in Ukraine.

If the Ukrainian taxpayers have entered into Advance Pricing Agreement (“APA”), the tax authorities has no right to change TP methodology during TP audits that was previously negotiated and specified in APA between the taxpayers and tax authorities.

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 period for which the tax authorities can audit the controlled transactions (limitation period) is 2555 days (7 years).

Immigration

Work permit/visa requirements

On 27 September 2017, the changes to the employment legislation which came into force. The changes simplified the procedure of work permit obtaining:

  • The list of the documents required for work permit was reduced (only 3-4 documents have to be provided)
  • The period of work permit obtaining was shortened (from one month to 2 weeks).

At the same time there is a requirement concerning minimum salary paid to the foreign employees depending on the minimum statutory wage (in 2018 – approximate equivalent EUR 1,200).

There is no need to obtain visa for applying a work permit. The requirement to apply for visa is will depend on the physical presence of the individual in Ukraine.

Generally, Ukraine has visa free regime for citizens of CIS counties. The EU, US and Japanese citizens and citizens of some other countries may also enjoy visa free presence in Ukraine for 90 days 180 days period.

In case a foreign individual intends to obtain temporary residence permit in Ukraine, he/she has to obtain visa D for this purpose (despite of the visa regime with the country of the nationality).

Local data privacy requirements

According to the Ukrainian law on personal data protection, 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.

Exchange control

Generally, there are no significant restrictions regarding the flow of the foreign currency into the country. 

Regarding the flow of the foreign currency out of the country – there are certain restrictions for legal entities and individuals:

  • There is a requirement to obtain licenses from the National Bank for some type of the operations (investments etc.)
  • There are some limitations on dividend payment, repayment of the foreign currency loans etc.

Among other exchange control restrictions are:

  • 50 percent of foreign currency proceeds received by residents under cross-border agreements must be sold on the Ukrainian inter-bank foreign exchange market
  • Goods/services exported from Ukraine have to be actually paid to the Ukrainian counterpart within 180 calendar days upon actual export of Ukrainian goods/services abroad.

Non-deductible costs for assignees

The deduction of assignee-related costs is very limited and is possible in case:

  • the costs are borne on the territory of Ukraine
  • there are costs of certain type: donations to charitable organizations, tuition payments, life insurance premiums and pension contributions, interests on a mortgage loans etc.

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