Income Tax in Ukraine
Personal Income Tax:
The standard annual filing deadline is 30 April of the year following the reporting year.
It may be extended to 31 December based on an application from the taxpayer if the documents for a foreign tax credit need to be obtained from a foreign jurisdiction.
If an individual plans to leave Ukraine to live in another country, he/she must submit a ‘departure tax declaration’ no less than 60 days prior to his/her departure and settle the tax due based on an assessment issued by the tax authorities.
The tax year is calendar year.
Both, residents and non-residents, are taxable at 18% personal income tax rate. In addition, such income is a subject to temporary military tax at 1.5% rate.
The concept of tax residency incorporated in the Ukrainian legislation is similar to that of most double taxation treaties.
An individual is considered a Ukrainian tax resident if he/she has a domicile in Ukraine. If an individual also has a domicile in another state, the individual is qualified as a tax resident in Ukraine if he/she has a permanent place of residence in Ukraine.
If the individual also has a permanent place of residence in the other state, then the individual becomes a tax resident in Ukraine if he/she has a centre of vital interests in Ukraine. This could be the place where the individual's family members have a permanent abode.
In case it is not possible to determine the centre of vital interests, or the individual does not have a permanent place of residence in any country, the individual is qualified as a tax resident in Ukraine if he/she is present in Ukraine for a period (periods) exceeding 183 days during a calendar year. For the purpose of calculation of days of presence in Ukraine, both days of arrival and departure are taken into account.
If it is not possible to determine the residence status of an individual based on the above conditions, an individual is qualified as a Ukrainian tax resident if he/she is a citizen of Ukraine.
Non-residents are individuals who do not qualify as residents of Ukraine.
All income received from employment in monetary form or in kind during a calendar year is subject to PIT. This includes all basic pay, overtime pay, supplemental pay, awards and bonuses, compensation for unused vacation, all other monetary amounts, and additional benefits granted by employers to employees.
Taxable income of foreign nationals who are residents of Ukraine is determined in the same order as for Ukrainians.
Income from disposal of property:
Proceeds from the sale of real estate (a house, a flat, or a share of such a house/flat/cottage) is exempt from taxation if it is the first disposal for the year and the asset was in the individual’s possession for more than three years (the latter condition does not apply to sales of inherited property). A 5% rate (for tax residents) and 18% rate (for tax non-residents) apply to subsequent sales of immovable property during the calendar year. Commercial property does not qualify for the aforementioned exemption. The tax must be paid before notarisation of the sale-purchase agreement.
One sale per calendar year of a car, a motorcycle, or a scooter is exempt from taxation. A 5% rate applies to subsequent sales by tax residents. An 18% rate applies to incomes from the disposal of movable property received by tax non-residents. In addition, the 1.5% military tax applies to such income if it was taxed with PIT.
Dividends received from a Ukrainian legal entity CIT payer (other than a collective investment arrangement) are subject to PIT at a 5% rate. Dividends paid by non-residents, mutual investment funds, and non-payers of CIT in Ukraine are taxed at 9%.
In addition, the 1.5% military tax applies to such income (as well as any other income taxable with PIT).
Bank interest, as well as most other passive income, is subject to 18% PIT starting from 1 January 2016. In addition, the 1.5% military tax applies to such income.
Banks and credit unions are required to withhold PIT and report to the tax authorities the total amount of interest income and tax withheld during a given period without providing any information on the individuals or their bank accounts.
Generally, all income received or accrued for the taxpayer (or paid to third parties for the benefit of the individual) in any form is taxable, with some minor exceptions:
· Accommodation provided by an employer to an employee free-of-charge, if its provision is an essential condition for the performance of an employee’s labour function, or if it is approved by a ’collective agreement’ (an agreement between personnel and the employer), or if it is established by the law within specified limits. The apartment or a house should belong to the employer.
· Premiums paid by an employer in respect of non-state pension insurance of its employees within a limit equal to 15% of the employee’s monthly salary, but at a maximum of 2.5 of the amount of minimal salary set by the Law on State Budget of Ukraine for the reporting year. For 2018, it is UAH 9,307.50 per month.
· Amounts paid by employers to Ukrainian specific educational institutions for employee training/retraining, within specific limits and conditions. The maximum monthly exemption is three times the minimal salary set as of 1 January of the reporting year for every completed or partially completed month of such education (for 2018, the maximum is UAH 11,169). The labour relations and obligation of the employee to work three years for the respective employer after the completion of education no longer apply.
· Alimony received from residents.
· Interest income from current bank accounts that is used solely for the receipt of salaries, scholarships, pensions, social aids, and other social payments received by individuals.
· Interest from securities issued by certain state bodies of Ukraine.
· Shares received from the capitalisation of undistributed profits, provided that allocation of shares between shareholders of the Ukrainian resident entity remains unchanged.
The USC made by an employer per Ukrainian tax legislation is not included in the taxable income of the individual. Contributions made to foreign pensions and/or social security funds are considered as an individual's additional taxable income.
Non-taxable compensation includes, but is not limited to, the following:
· Certain state aids and benefits (such as unemployment allowance, maternity allowance etc.);
· Charity (with certain restrictions);
· Reimbursement by an employer in Ukraine of employees’ business trips expenses within certain limits, provided these expenses are properly documented in accordance with Ukrainian legislation;
· The part of the pension not exceeding 10 subsistence minimums (in 2017 – UAH 12,470);
· Payment received from a life insurance company;
· Scholarship that does not exceed the subsistence minimum multiplied by 1.4 coefficient (in 2017 – UAH 2,240);
· Gift value that does not exceed 25% of a minimum salary (in 2017 – UAH 800);
· Fees paid by an employer for education of an individual if the monthly amount of the fee doesn’t exceed 3 minimum wages per month (in 2017 – UAH 9,600);
· Social security contribution made by the employer.
Deduction from Income:
Tax resident individuals may be entitled to the following main tax deductions from their income:
· Charitable donations to the Ukrainian charities and non-profitable organisations, in an amount not exceeding 4% of the taxpayers taxable income;
· Expenses on education of the taxpayer and his/her dependents;
· Premiums for Ukrainian voluntary long-term life insurance or non-state pension insurance for the benefit of a taxpayer and his/her dependents. In 2017 a deductible limit is UAH 2,240 per month for a taxpayer and UAH 1,120 for dependents;
· Cost related to a child adoption – in a full amount;
· Limited amount of mortgage interests, provided it is used to finance the acquisition of a taxpayer’s main place of residence.
Corporate Income Tax:
CIT applies to taxable profits earned by resident entities in Ukraine and abroad and non-residents with a permanent establishment (PE) in Ukraine. Resident entities are taxed on their worldwide income. Non-resident entities are taxed on their Ukrainian-source income.
Ukraine's standard CIT rate is 18%.
WHT, at a rate of 15%, applies to the majority of income payments for non-residents, unless an exemption is given under a double taxation treaty (DTT). Ukraine has 74 effective DTTs in place.
Special CIT rates for insurance and gambling activities:
In addition to general CIT at the 18% rate, insurance companies also pay special CIT of 0% and 3% on their income. Long-term life insurance premiums, insurance premiums under voluntary pension programs, and voluntary medical insurance premiums are subject to the 0% rate; the 3% rate applies to all other insurance premiums (excluding reinsurance contributions, premiums, and payments) received by the company. Such amounts of CIT due at 0% or 3% paid from insurance premiums reduce taxable profit of an insurance company, which is subject to the standard 18% rate.
Organisation of lotteries and operating of gambling machines are subject to a 10% rate; an 18% rate applies to bookmaker and other gambling activities (including casinos). Contrary to CIT for insurance companies, amounts of CIT of 10% or 18% paid from gambling income do not reduce taxable profit of a company engaged in gambling activities (standard 18% rate is applied to the full amount of the taxable profit).
Corporate residence is determined by the place of incorporation.
Permanent establishment (PE):
The Ukrainian definition of a PE generally follows the PE definition from the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, but with stronger agency tests.
In particular, a non-resident’s PE is defined as a fixed place of business through which the business activity of a non-resident entity is wholly or partly carried out in Ukraine. A PE includes, among other things, a place of management, affiliate, office, server, etc.
The Tax Code contains the concept of a service PE whereby the provision of services (apart from the provision of personnel), including consultancy services, by a non-resident through its employees or other personnel in Ukraine, shall constitute a Ukrainian PE of this non-resident, provided such activities (within the framework of one project) last more than six months in any 12-month period.
A construction site in Ukraine may also give rise to a taxable presence of a non-resident in Ukraine in the form of a PE if the length of the construction activities exceeds six months.
The Tax Code also provides for the concept of a non-dependent agent, which means, specifically, a Ukrainian agent acting on behalf of more than one non-resident in the ordinary course of its business should not constitute a PE in Ukraine.
Still, there is a list of exclusions from the PE definition. In particular, according to the Tax Code, auxiliary and preparatory services of a non-resident should not result in the creation of a PE. However, in practise, the Ukrainian tax authorities usually interpret the term ‘business activity’ in a very broad sense, and, without the DTT protection, may consider any type of activity as giving rise to a taxable presence (i.e. a PE) of a foreign entity in Ukraine.
Starting from 1 January 2018, transactions performed between a non-resident and its PE in Ukraine are now considered controlled for transfer pricing purposes, if their value exceeds UAH 10 million (net of indirect taxes) for the corresponding tax (reporting) year.
The Tax Code determines taxable profits as net profits before tax (NPBT) as per accounting records, either Ukrainian statutory or International Financial Reporting Standards (IFRS), and adjusted for ‘tax differences’.
Taxpayers with prior year annual income equal to or less than UAH 20 million (net of indirect taxes) may opt out of making the adjustments. Note that they do remain eligible for loss carryforward allowances (see the Deductions section).
A taxpayer is entitled to adopt any of the methods of inventory valuation prescribed by financial accounting rules, namely: the first in first out (FIFO) method, weighted average methods, identified cost of unit of goods, normative cost, or sale price. The last in first out (LIFO) method does not apply in Ukraine.
Capital gains on the sale of property:
Income from the sale of property (including buildings and land plots) should be recognised according to financial accounting rules.
Income from securities:
Profit from trading in securities is taxable at the standard CIT rate. Incurred losses are non-deductible, but may be carried forward to offset future profits from trading in securities without any limitations.
Dividends received by a Ukrainian entity from another Ukrainian entity, which is a CIT payer, are exempt from CIT. Dividends received by Ukrainian companies from Ukrainian taxpayers under the simplified tax regime or foreign companies are not exempt from CIT.
Companies paying dividends are required to pay advance CIT on payment of dividends (ATD) at the standard CIT rate, unless the dividends are paid to individuals or out of received dividends (with some other exceptions). ATD applies only to the portion of dividends that exceeds profits of the respective dividend year for which CIT is already paid.
If the amount of the paid ATD exceeds the amount of the accrued CIT of the taxpayer-issuer of corporate rights, the excess amount will be applied to reduce the taxpayer’s CIT obligations in the following periods. In case the taxpayer is in a loss-making position, the said amount will be applied to reduce the CIT obligations in the following periods until it is fully utilised. Collective investment vehicles and taxpayers under the simplified tax regime are released from ATD.
Interest received by taxpayers is included in their taxable income on a general basis according to financial accounting rules.
Income from rent/royalties received by taxpayers is included in their taxable income on a general basis according to financial accounting rules.
Foreign exchange gains/losses:
Realised and non-realised foreign exchange gains/losses are generally treated as taxable income/deductible expenses, similar to financial accounting rules.
Other significant items:
Ukrainian tax legislation does not provide special tax treatment for bribes, kickbacks, or illegal payments.
Income received as payment for goods (works, services) shipped (provided) while the taxpayer used the simplified tax system will increase the NPBT.
Foreign income is taxed under the general rules, and there are no special rules regarding anti-deferral or unremitted earnings.
Deductions from Income:
Depreciation and amortization:
Assets whose values are more than UAH 6,000 that have a useful life exceeding one year are required to be depreciated for tax purposes. Depreciation is determined on a monthly basis and computed using the following methods:
· Reducing balance.
· Method of accelerated reduction of a residual value.
The production-based method of amortisation is not allowed for tax purposes.
Fixed assets are divided into 16 groups according to their statutory minimal useful life. The useful life of fixed assets may be extended by a taxpayer.
The application of a reduced statutory minimum useful life to machines and equipment purchased during the period between 1 January 2017 and 31 December 2018 is allowed, on the condition that the taxpayer employs such assets in its business activity and applies the straight-line method of depreciation thereto.
There are no special rules prescribed for tax accounting of repair costs in respect of production fixed assets and intangible assets. Ukrainian accounting principles or IFRS rules should apply. Expenses on repairs and reconstruction of non-production fixed assets and intangible assets are not deductible.
The following intangible assets may be amortised using one of the above-mentioned methods over the period of an asset's lifetime as defined in the documents certifying the rights to the intangibles and considering the minimum period set by the law:
· Rights to use natural resources.
· Rights to use property.
· Rights on intangible assets.
· Technology, know how (not less than five years).
· Copyrights (not less than two years).
· Other intangible assets.
Taxpayers are entitled to set the amortisation period of the intangible assets on their own, but it must not be less than two years and not more than ten years of continuous operation (this only applies when the documents establishing the right to use do not specify a term for the use). NPBT is adjusted by the amount(s) of residual value of written-off non-production equipment and intangible assets as per accounting data.
Amortisation of goodwill is not permitted (i.e. not deductible) for tax purposes.
Organisational and start-up expenses:
There is no limitation for deduction of organisational and start-up expenses incurred prior to the entity's registration (accounting rules should apply).
Research and development (R&D) expenses:
R&D expenses are deductible according to financial accounting rules.
Interest paid is generally deductible for CIT purposes, but the deduction of interest expense in favour of non-resident related parties is limited according to the thin capitalisation rules (see Thin capitalisation in the Group taxation section).
NPBT can be reduced by the amount of written-off debts that qualify as bad debts under the Tax Code (including the write-off, performed within the amount of bad debts provision). The Tax Code contains the detailed list of criteria for debts to be qualified as bad ones.
Loan loss provisions (LLPs) for banks and other financial institutions.
Banks and other financial institutions create LLPs according to IFRS.
Starting from 1 January 2018, the limit on the deductibility of LLP’s for banks and other financial institutions is abolished. The LLP amounts, which were not deducted as of 31 December 2017 due to the limitations in the Tax Code effective in the past periods (so called 'overlimit'), are fully deductible in 2018-2019 (in equal parts).
Banks are allowed to recognise in the tax accounting a positive (negative) difference resulted from revaluation of the amount of LLPs, which may occur at the beginning of 2018 due to the transition to IFRS 9, provided that such amount is reflected in the equity accounts of banks.
Other reserves (provisions):
Provisions for vacation and salary payments are allowed. Other provisions for future costs (i.e. warranty, contingent liabilities, etc.) are disallowed. Respective expenses covered by these provisions (except vacation and salary payments) are deductible when actually incurred.
Only 70% of payments for goods or services to non-profit organisations (except budgetary ones) is tax deductible.
The deductibility of the costs of goods or services supplied for free to non-profit organisations is limited by 4% of the previous year’s taxable profit (by 8% of the previous year’s taxable profit in respect of payments to non-profit organisations in the sphere of sport, physical culture and physical culture education).
The obligatory Ukrainian social security insurance contributions, including state pension contributions charged on payroll expenses, are deductible for employers.
There are no limitations prescribed for the deduction of the employer’s payment to non-state pension organisations (financial accounting rules should apply).
Payment for directors:
Payments (including bonuses) relating to business are normally deductible payments.
Fines and penalties:
Fines, penalties, and forfeits, which were accrued in accordance with civil legislation for the benefit of entities that are not CIT payers (except for private individuals) or that are taxed at a 0% CIT rate, are not tax deductible.
CIT, PIT, WHT/remittance taxes, and VAT incurred on purchases are not deductible. VAT is deductible if it cannot be recovered. Other taxes are generally deductible in full.
Other significant items:
There is no requirement to prove the connection of costs to the company’s 'business activities'. The exception is the need to differentiate between business and non-business fixed assets.
General requirements for the documentation of the transactions for accounting needs (i.e. contracts, acts of acceptance, etc.) will also apply for the substantiation of expenses for tax purposes.
Non-repayable financial aid (goods, services), which was provided free of charge for the benefit of its recipients (other than duly registered non-profit organisations) that are not CIT payers or that are taxed at a 0% CIT rate, are not be deductible.
Net operating losses:
Losses can be carried forward without limitations. Ukrainian tax legislation does not provide for refunds for losses carried back.
Payments to foreign affiliates:
The following rules need to be followed with regard to payments to foreign affiliates:
· Only 70% of payments for goods or services to residents of low tax jurisdictions is tax deductible.
· Deduction of royalties paid to a non-resident is limited to royalty income plus 4% of net income of the previous year. Starting from 1 January 2018, this limit also applies to payments to non-resident entities established under certain legal forms (e.g. a partnership) according to the list of organisational and legal forms of such non-residents in terms of states (territories), established by the Cabinet of Ministers of Ukraine.
· Royalties paid to (i) non-beneficial owners, (ii) low tax jurisdictions, (iii) non-residents that are exempt from tax on royalties in the country of their residence, and (iv) non-residents for trademarks originated from Ukraine are not tax deductible.
The first and the second of the above limitations can be waived if a taxpayer confirms the arm’s length level of payments in accordance with the transfer pricing rules (even if the transactions are not controlled for transfer pricing purposes).
The latter one should apply at any case (even if the payments are at 'arms length' level) unless a beneficial owner grants the right to receive the royalties to other parties.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.