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12.10.2018

Non-resident individual income taxation in Ukraine: recent trends

Non-resident individuals are subject to personal income tax (PIT) in respect of their Ukrainian-source income

Key Facts
  • The procedure for the assessment and payment of the PIT and the military tax depends on the status of the income payer, as well as the type of income paid.
  • Submitting the tax return is followed by the tax authorities’ audit, during which the accuracy of the calculation of self-assessed taxes is checked as well as the correct completion of the tax return.
  • The tax authorities can ask a taxpayer to provide documents and information related to the occurrence of income, calculation and the payment of taxes.
  • According to the Tax Code of Ukraine a taxpayer is obliged to retain tax-related documents for 1,095 days following the deadline for submission of the tax return for the reporting year.
  • If the tax authorities find a violation based on the analysis of the documents provided, a taxpayer can be held financially responsible, and subject to administrative and criminal charges.

In Ukraine, non-resident individuals are subject to personal income tax (PIT) in respect of their Ukrainian-source income. According to the Tax Code of Ukraine, Ukrainian-source income means any income attributable to Ukraine, not limited to the income paid in/from Ukraine. For example, the remuneration of an employee earned due to any of their activities in Ukraine, including remuneration received from a foreign employer, shall be considered as Ukrainian-source income. Furthermore, Ukrainian-source income includes interest, dividends, royalties and other passive income, paid by residents of Ukraine, income from the leasing of property located in Ukraine, etc.

The standard PIT rate is 18%. With few exceptions, it is applied to all payments made by an employer (including foreign) in relation to employment exercised in the territory of Ukraine. With regard to dividends, the tax rate differs depending on the status of a payer. Thus, dividends paid by residents/payers of corporate income tax (except joint investment institutions) are taxed at a rate of 5%, while dividends paid by non-residents, joint investment funds and non-payers of corporate income tax are subject to a rate of 9% PIT. All other passive income is taxed at the standard rate of 18%.

In addition to the PIT, in August 2014 a temporary military tax was introduced in Ukraine. It is accrued at a rate of 1.5% to the same taxable base as the PIT. Thus, non-residents’ income, originating from Ukraine, is subject to the military tax.

It is worth mentioning that the legitimacy of the military tax is rather controversial. However, in order to avoid disputes with tax authorities the military tax is assessed and paid in most cases. As to the “temporary” nature of the military tax, it will be effective as long as the reformation of the Ukrainian Military Forces lasts. At the same time, the legislation does not determine the period of reformation or when it should be completed.

The procedure for the assessment and payment of the PIT and the military tax depends on the status of the income payer, as well as the type of income paid. For example, if remuneration for activities performed in Ukraine is paid to a non-resident by a resident (e.g. a Ukrainian legal entity employs a foreigner), then taxes are assessed and paid on behalf of the non-resident by the Ukrainian resident. If a salary is paid to a non-resident by another non-resident, then an annual declaration procedure has to be applied. In such cases the non-resident is obliged to submit an annual tax return by 1 May of the year following the year in which the PIT and the military tax should be accrued. The respective self-assessed taxes shall be paid no later than 1 August of the year following the reporting year.

Nevertheless, at this stage (once the tax return is submitted and taxes are paid) the taxation issues may not be over for the taxpayer. Thus, submitting the tax return is followed, firstly, by the tax authorities’ audit, during which the accuracy of the calculation of self-assessed taxes is checked as well as the correct completion of the tax return. Furthermore, the tax authorities can ask a taxpayer to provide documents and information related to the occurrence of income, calculation and the payment of taxes. Documents confirming the authenticity of other information specified in the tax return (in particular regarding available movable and immovable property) might also be requested by the tax authorities. In 2018, an increase of individuals’ tax audits is being observed.

Regarding the retention of documents, according to the Tax Code of Ukraine a taxpayer is obliged to retain tax-related documents for 1,095 days following the deadline for submission of the tax return for the reporting year (and if it was filed later, following the day of its actual submission). If the tax return was not submitted in breach of the provisions of the Tax Code of Ukraine, then the specified period of 1,095 days shall not apply, and the documents must be kept regardless of this period.

In practice there are many issues, since not every taxpayer has the required documents, or their documents are not completed correctly (e.g. notarisation of documents and other requirements concerning their form prescribed by the legislation). In the latter case, there is a risk that such documents will not be recognised by the tax authorities as proof of the occurrence of income, the authenticity of other information specified in the tax return, etc.

If the tax authorities find a violation based on the analysis of the documents provided, an audit in respect of a taxpayer may trigger negative consequences. According to Ukrainian legislation, a taxpayer can be held financially responsible (tax liabilities and penalties are assessed), and subject to administrative and criminal charges. As to criminal liability, it is stipulated for the tax evasion in the amount of UAH 881,000 (approximately €28,500) as of 2018. ‘Tax evasion’ includes actions such as the failure to submit documents related to the calculation and payment of taxes (tax returns, etc.), concealment of taxation objects (non-declaring of the received income in whole or in part, etc.), undervaluation of taxation objects, or the submission of false information or documents certifying the right of an individual to a tax credit or tax social benefit.

Published in Newsletter Private Clients & Family Office Services #2/2018
Update and overview on current developments in relevant tax and legal developments in 7 selected countries
View publication
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