Given its tax system, Ukraine is one of the most sought-after countries to start business ventures in Europe. The country's tax obligations largely depend on the entity's tax residency status -- whether it is a tax resident or tax non-resident.
What is a tax resident and tax non-resident?
A legal entity incorporated in Ukraine and operating according to its local law is considered a tax resident. In contrast, an overseas-incorporated legal entity that operates under the laws of another country is regarded as a tax non-resident.
This concept of tax residency in Ukraine is similar to international double taxation treaties.
Ukraine's taxation rules state that a resident entity is taxable for their worldwide income. In contrast, a tax non-resident is taxable only for their Ukrainian source of income.
The Ukrainian government introduced a new legislating framework in 2021 to attract foreign investment to the country. The framework, 'On State Support for Investment Projects with Significant Investments in Ukraine,' came into force on 13 February 2021 and offers special incentives to investment projects equivalent to or exceeding €20 million in pre-determined industries. These financial and operational incentives can be up to 30% of the invested amount and include:
- An exemption from income tax for 5 years.
- An exemption from import duty and Value-added tax (VAT) on equipment and its components imported as investment for the project.
- A reduction of land tax and rent rates for state or communal lands; mainly exemption from land tax.
How much corporate tax do companies have to pay in Ukraine?
As stated earlier, the Ukrainian Corporate Income Tax (CIT) law distinguishes between domestic and foreign companies based on their place of incorporation.
Ukraine incorporated companies are domestic or resident entities. They are taxed on their worldwide income received or accrued within the reporting period.
On the other hand, overseas incorporated companies are foreign or non-resident entities. These are taxed on their business income from activities in Ukraine and any non-business income from Ukrainian sources.
A company's gross income is its total income from the sale of goods, services, fixed assets, and any gratuitous transfers. The company is taxed on its adjusted gross income, which is its gross income less deductible expenses and depreciation allowances.
The current income tax law generally allows the deduction of reasonable business expenses. However, expenses that are disallowed as tax-deductible include:
- Any repair of company cars (exception is made in case of the company's business being transportation).
- Any contractual penalties.
- Any expenses associated with warranty repairs (the deduction rate is restricted to 10% of the total price of any such goods sold and are under warranty period).
- Any expenses occurring in connection with receptions or celebrations and similar events held for advertising purposes and connected with business activity (the deduction rate is limited to 2% of the taxpayer's taxable profit for the period).
- Any other expenses that are not related to business activity.
Ukraine's corporate income tax rate and payment dates
The basic CIT in Ukraine is 18%. The special tax rate applies to income earned from all Ukrainian sources by non-resident entities that are not engaged in business activities in Ukraine through a permanent establishment.
The corporate tax liabilities are generally self-assessed by taxpayers. The tax is to be paid every quarter, and tax returns are due within 40 days of the reporting quarter.
The reporting year for companies generally follows the calendar year.
Corporate income tax exemptions
The following are not included under taxable income in Ukraine:
- Any capital contributions which are in return for a share in the equity.
- All contributions made in cash or kind under joint activity agreements in Ukraine without the creation of a legal entity.
- Share premium received by a share issuer.
- All incoming dividends provided they were taxed on disbursal as per the corporate income tax laws
Under the current tax legislation, Ukrainian-sourced income such as dividends, interests, or royalties payable to non-residents is subject to 15% withholding tax when remitted to the entity. The tax rate can vary as per provisions of the applicable double taxation treaty.
In Ukraine, a resident corporation is a Ukrainian subsidiary of a foreign-invested corporation. Its capital gains are treated as ordinary income and taxed per Ukraine's standard corporate income tax rate.
A non-resident corporation, on the other hand, is taxed only on gains from "a taxable Ukrainian property." These gains are different from the ones exempted under the applicable double-taxation treaty. Taxable Ukrainian property includes the following:
- An immovable property situated in Ukraine.
- A property (that includes goodwill) used or owned by a taxpayer in a business carried out in Ukraine.
- Inventory that is part of any business carried out in Ukraine.
Companies may generally carry forward their tax losses indefinitely, although the carry back of losses is not allowed.
Taxation on dividends
In the case of resident companies, dividends received from other resident companies are not included in taxable income. However, any dividend received from a non-resident entity is subject to corporate tax in Ukraine.
The dividends that a Ukrainian resident company pays are mainly subject to Advance Corporate Tax (ACT), charged at the standard Ukraine corporate tax rate. The ACT base is the dividend paid by the company exceeding its taxable profit for the year from which the dividends are payable. The tax is due when the dividends are paid.
A Ukrainian company may offset the ACT it has paid against its corporate income tax liability. Moreover, the company may carry forward the excess ACT to reduce its tax liability in the future.
The ACT paid on dividends is not refundable and can only be used to offset Ukraine's corporate income tax.
Value-Added Tax in Ukraine
Value-added tax (VAT) is levied on the supply of goods and services in Ukraine. It is also levied on the import and export of goods and auxiliary services. Auxiliary services are services included in the customs value of imported and exported goods.
The VAT law in Ukraine treats both manufacturing and merchandising entities uniformly. Under this law, the VAT due to the State is the difference between VAT collected from customers and VAT paid to suppliers.
The standard Ukrainian VAT rate stands at 20%. Apart from that, VAT at 14% applies to the import and supply of certain agricultural products in Ukraine, while 7% VAT applies to the supply of pharmaceutical and healthcare products. Goods exported and re-exported from Ukraine are taxed at 0%. The 0% VAT rate also applies to the supply of international transport services, toll manufacturing services, and others.
The criteria defining exported services are not very clear; however, the Ukrainian law provides a list of services considered exports. This list includes services on licenses, transfer of copyrights, and for non-residents to use trademarks and patents.
A temporary VAT exemption for the supply of software and software upgrades is applicable until 31 December 2022.
Transactions that are not subject to VAT include:
- The placement, issuance, and cash sale of securities.
- The interest or commission in lease payments under a financial lease agreement.
- The transfer of title to a pledged property under a loan agreement and its return to the ledger post the expiry of the agreement (conditions apply).
- Insurance or reinsurance transactions.
- Provision of financial loans and bank guarantees.
- Reorganization of a legal entity (merger, spin-off, accession, division, and change of legal form).
- All education services.
- Any artistic or cultural services.
- All healthcare services.
- Some mass media services.
- Some privatization services.
According to Ukrainian law, VAT can be recovered if the goods, works, or services are deductible from the company's profits. For example, in the case of fixed assets, they are subject to depreciation, which is deductible.
VAT on business expenses may be recovered as a credit against output VAT or a refund. Exceptions to this are:
- VAT on inputs that correspond to exempt supplies.
- VAT on some expenses that are not considered deductible from corporate profits under Ukraine's corporate tax legislation.
An input tax credit can be claimed only if the VAT has already been paid to the supplier.
At present, there is no clarity on VAT refund by a foreign entity not registered as a VAT payer in Ukraine.
There are no partial exemption rules. Companies engaged in taxable supplies can recover VAT on their expenses, whereas those involved in exempt supplies cannot claim VAT recovery. Partly exempted companies engaged in taxable and exempt supplies need to calculate the amount of the input tax they should recover.
Companies need to file VAT returns every month in electronic form. The returns are due within 20 calendar days from the reporting month's end.
Non-residents supplying B2C digital services to Ukraine-based clients have to submit simplified quarterly VAT returns within 40 calendar days from the end of the reporting quarter.
Under the VAT legislation, all VAT liable transactions must be properly documented with corresponding tax invoices. The legislation provides a detailed list of items to be included -- a tax invoice, VAT amount, selling price, a registration number of the taxpayer, etc. The VAT paid to suppliers must be documented with tax invoices to be considered a deductible. Finally, tax invoices can be issued only by an individual or entity registered as a taxpayer for VAT purposes.
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