Taxation

Although Ukraine continues to have a relatively low ranking in the Paying Taxes study, there have been some considerable improvements made over the past few years in key areas of tax reform. The State Fiscal Service continues to focus on improvements in the tax system to improve the country’s position in the study.

Since 2010, the Government undertook a number of measures to improve the business environment: alleviating the tax burden, simplifying the customs code and speeding up business registration and licensing. Measures included the adoption of a new anti-corruption law, a reduction of the number of executive bodies, and reductions in the regulations pertaining to construction permits, VAT refunds and taxation. The Government has made paying taxes easier by simplifying the tax returns and further improving its e-filing system, significantly improving its time to comply.

Ukraine’s tax system includes these main taxes and mandatory payments:

State taxes:

• Corporate profit tax (CPT)
• Personal income tax (PIT)
• Value added tax (VAT)
• Excise duty
• Environmental tax
• Rental payment (takes the place of the previous royalties for subsoil exploration; radio-frequency resource utilization charge; charge for specific water utilization; charge for specific forest utilization; rental fee for transporting oil and petrol products by main pipelines, transit transporting of natural gas and ammonia through the Ukrainian territory)
• State duty

Municipal taxes:

• Property tax (now encompasses the previous land tax, real property tax, and land lease payments)
• Single tax
• Parking tax
• Tourist tax

Abolished state taxes:

• Motor vehicle first registration duty
• Royalties for subsoil exploration (now: a type of the rental payment)
• Land tax (now: a type of the property tax)
• Radio-frequency resource utilization charge (now: a type of the rental payment)
• Charge for specific water utilization (now: a type of the rental payment)
• Charge for specific forest utilization (now: a type of the rental payment)
• Fixed agricultural tax (now: a type of the single tax)
• Duty for the promotion of viticulture, horticulture and hop growing
• Special-purpose sur-charge on electric and thermal energy supply tariffs
• Special-purpose sur-charge on gas supply tariffs (starting from January 1, 2016)

CORPORATE INCOME TAX (CIT)

The tax on companies is known as corporate income tax. Legal entities incorporated and operating under Ukrainian law are normally treated as tax residents and are taxable on their worldwide income. Legal entities incorporated abroad and operating under the laws of another country are normally treated as foreign tax residents or non-residents and are taxable on two sources of income:

• Business income from carrying out trade or commercial activities in Ukraine,
• Non-business income received from Ukrainian sources.

New method to determine the taxable object

• Bookkeeping and tax accounting are now merged: In order to determine the taxable object (corporate profit), the taxpayer shall use bookkeeping and financial reporting regulations as well as data regarding income, expenses and financial result prior to taxation. The taxable object shall be determined by adjusting the financial result prior to taxation to differences increasing or decreasing such financial result. Such differences include (1) the wear and tear of fixed assets, (2) reserves (supplies), and (3) financial transactions.
• However, taxpayers whose annual income does not exceed UAH 200,000 are not obliged to apply the mentioned differences (except for a negative taxable object inherited from past reporting periods) and may determine their taxable object based solely on their bookkeeping and financial reporting data. They shall formally declare this intention to the SRS in their first annual CPT return.
• Thereafter, the new version of the Tax Code stipulates rules for determining tax differences, which shall be used to define the taxable object:

                 Wear and tear of fixed assets;
                 Building up reserves (supplies);
                 Conducting financial transactions.

• The minimum wear and tear periods have remained the same as previously.
• Herewith, the SRS has been granted the authority to inspect the accuracy of taxpayers' bookkeeping and the correctness of defining income, expenses and financial result prior to taxation in accordance with national or international accounting standards.

• There is now only one tax (reporting) period - a calendar year (instead of the previous calendar quarter, half-year, three quarters and year).

Special rules

• There are some peculiarities regarding taxation of

                 Insurers;
                 Transactions investment-related biological assets;
                 Product-sharing agreements;
                 Non-residents (the rules have not changed compared to
                    the previous Tax Code version);
                 Bookmaking activities, running lotteries and gambling;
                 Joint investment institutions and private pension funds.

• The restated version of the Tax Code does not provide for any regulations regarding taxation of non-profitable organizations, except for a short provision that they are not considered CPT payers (the previous version had a separate sub-section hereon).

Tax rates

The Government is constantly considering its policy options regarding a significant reduction in the statutory corporate tax rate.

• The basic CPT rate has remained 18% from the taxable object (profit).
• Special tax rates are set for

                Income (not profit!) derived from running lotteries and
                  gambling machines -10%;
                Income (not profit!) derived from conducting bookmaking
                  activities and gambling (including casino) - 18%.

Advance payments and dividends

• The annual income threshold for taxpayers obliged to make CPT advance payments (1/12 of the previous year's tax liability monthly) has been decreased from UAH 20,000,000 to 10,000,000. The 12-months period for such advance payments starts from June of a current reporting year and ends in May of the next year (previously March- February). The annual CPT return alongside a calculation of CPT advance payments shall be filed until June 1 of the next year (previously until March 1) (this provision shall apply starting from January 1,2016, though).
• The rules for CPT advance payments on dividends paid out by a taxpayer to its shareholders have been partly altered. The most important change concerns the base for the calculation of such advance payments. From now on, it shall be the amount of dividends exceeding the taxpayer's object taxable with CPT for the previous year. Previously, such base was equal to the whole amount of dividends paid. However, if dividends are paid out prior to the settlement of tax liabilities for the previous year, advance payments shall be charged to the whole amount of dividends.

Exemptions

• The temporary CPT exemptions for biofuel producers, manufacturers of energy from biofuel and machinery consuming biofuel, enterprises extracting methane (until 2020), as well as for the light industry, shipbuilding, aircraft-construction, agricultural machine-building industries (until 2021), cinematography (until 2016) have been cancelled.
• Until Jan. 1, 2016, taxpayers whose income for the previous reporting year did not exceed UAH 3,000,000 and the salary paid to employees was not less than two minimum salaries were under certain conditions entitled to apply the CPT rate of 0%.
• The special taxation regime for the IT industry does no longer apply (has been cancelled).

VALUE-ADDED TAX

In accordance with the Ukrainian legislation, Value-Added Tax or VAT is imposed on:

• (a) Domestic sales of goods and/or services,
• (b) Imported goods or services for use or consumption in Ukraine,
• (c) Exported goods or services for use or consumption outside Ukraine.

General rules

• The threshold for mandatory registration as a VAT payer has been increased from UAH 300,000 to 1,000,000 in terms of VAT-taxable transactions per year.
• The taxable base shall not be less than the purchase price/prime cost/book value of goods/services (previously the contractual price, as the general rule).

Exempted transactions

• More precisely determined the scope of VAT-exempted transactions of betting/gambling/lottery.
• Transactions for the supply of certain cereal and technical crops (customs codes 1001-1008, 1205, 1206 00, not including codes 1006 and 1008 1000 00) on the customs territory of Ukraine are exempted from VAT until December 31, 2017 (previously until December 31, 2014), except for the very first supply by manufacturers / suppliers that purchased those crops from manufacturers. The same exemption applies to export transactions of the mentioned crops.
• The VAT exemption for supply transactions of ferrous and non-ferrous metal scrap and waste paper (code 4707) is extended until January 1, 2017 (previously until January 1,2015).
• The VAT exemption for certain transactions pertaining the spacecraft industry is extended until January 1, 2018 (previously 2015).

VAT credit

• The VAT credit rules have changed. E.g., if the receipt of goods/services is the first event determining the commencement of the taxpayer's right to VAT credit, it does not need to be confirmed by a paper-form VAT invoice issued by the supplier, as previously.
• For the supply of services by non¬residents on the territory of Ukraine, the right of the resident customer to VAT credit commences on the day of the VAT invoice execution by this customer (not VAT amount payment, as previously).
• Furthermore, no link between the purchase of goods/services/fixed assets and their further use by a VAT payer in business transactions subject to VAT is required in order to claim VAT credit (starting from July 1,2015).

VAT invoices

• No more need to receive a paper VAT invoice from the supplier to claim VAT credit; instead, a respective VAT invoice shall be issued by the supplier only in an electronic form and registered with the VAT Invoices Register. The buyer can order and receive an electronic confirmation and copy of the invoice directly from the Register. Such registered electronic VAT invoice is the basis to claim VAT credit for the amounts indicated therein.
• The supplier and buyer are no longer obliged to maintain their own registers of issued and received VAT invoices.
• Starting February 1, 2015, all VAT invoices are subject to registration with the VAT Invoices Register, irrespective of VAT amount (until then only invoices exceeding UAH 10,000 are subject to registration).
• A VAT invoice shall be registered with the VAT Invoices Register within 180 calendar days upon its execution (previously 365 days); otherwise, the right to claim VAT credit is forfeited.
• VAT invoices issued by consumers of services rendered by non-residents on the territory of Ukraine, are now also subject to registration with the VAT Invoices Register (previously - not).
• The Tax Reform Law introduced liability of taxpayers for a late registration of VAT invoices with the VAT Invoices Register in form of penalties ranging from 10 to 50% of the amount declared in the respective invoice.

The new electronic VAT administration system. Automatic VAT refund

• The detailed procedure of VAT administration is yet be approved by the Cabinet of Ministers of Ukraine.
• Special accounts of VAT payers shall be opened in the system of electronic administration for VAT payments; all VAT payments/refund shall be settled exclusively through these accounts.
• A special formula is introduced to calculate VAT amounts of VAT invoices registered with the VAT Invoices Register.
• Due VAT amounts are withheld automatically from the accounts by the State Treasury of Ukraine based on amounts and other data submitted by the SRS.
• The taxpayer shall replenish outstanding amounts of tax liabilities to its special account from its current account; excess amounts shall be transferred back upon request of the taxpayer.
• VAT payments are settled at the end of a reporting period on the basis of a tax declaration.
• To claim an automatic VAT refund, a VAT payer shall, among other pre¬conditions, possess fixed assets with a book value exceeding three times the VAT amount claimed for refund or present a one-year bank guarantee from a listed bank (a new condition), and within the last 12 months have invested into its fixed assets at least UAH 3,000,000.
• At the same time, most other criteria/features required to claim an automatic refund (like the number of employees or amount of the average salary) have been cancelled.
• VAT declarations shall be filed only in an electronic form.
• Starting July 1, 2015, the VAT amount for which VAT payers are entitled to register their VAT invoices with the VAT Invoices Register shall automatically increase by the average monthly VAT amount declared during the last 12 reporting months/4 quarters. Thereafter, this amount shall be subject to automatic quarterly adjustment by the average VAT amount declared and paid by the VAT payer during the last 12 reporting months / 4 quarters.
• Starting July 1, 2015, the SRS is no longer authorized to conduct inspections of the accuracy of VAT refund claimed by taxpayers after that date.

Tax rates
VAT is levied at a rate of 20% of the taxable amount for domestic sales and imported goods or services. For exported goods or services, the VAT rate is zero. The general rule is that the taxable amount is defined on the basis of the contractual value of the goods or services supplied.


PERSONAL INCOME TAX (PIT)

Individuals who are tax residents of Ukraine are subject to personal income tax on their worldwide income. Non-resident individuals are taxed only on income from Ukrainian sources. The Tax Code also introduced a number of significant amendments to the way individual taxpayers are taxed.

Following income types are now considered taxable income:

• Passive income (accrued bank deposit interest, dividends) irrespective of the amount;
• Winnings in state lottery irrespective of the amount (previously - only amounts exceeding 50 minimum wages);
• Pensions exceeding three minimum salaries (currently UAH 4,350) are subject to taxation regarding the excess amount (previously - only pensions higher than UAH 10,000);
• Forgiven debt amounts not exceeding 50% of the minimum salary (as of January 1 of the current year) per year shall not be taxable.

Tax rates

• The basic rate increased from 15% to 18%.
• The tax rate applicable to the part of monthly labor-related income (payroll) exceeding 10 minimum wages (currently: UAH 13,990) has risen from 17 to 20%.
• The preferential rate of 10% for miners and employees of public relief services does no longer apply.
• The tax rate for all passive incomes (including royalty, bank deposit interest, excluding dividends, except for those paid out by joint investment institutions), investment incomes - 18% (previously 15%).
• The tax rate for dividends paid out by resident CPT payers - 5%; paid out by non-residents - 15% (previously 5%).
• Tax benefit (deduction)
• In the year 2015, the tax benefit was still applied at the rate of 50% (extended for one more year). Starting from 2016, the 100% tax benefit was applied.

TEMPORARY WAR TAX

• The period during which the war tax is raised has been extended indefinitely (until the Parliament of Ukraine passes a resolution on the accomplishment of the reform of the Ukrainian armed forces; previously deemed to be raised only until January 1,2015).
• The taxable base has been extended and shall now include any Ukrainian and foreign source personal income of resident individuals and Ukrainian source income of non-resident individuals (not only their payroll and lottery winnings/gambling prizes).

PENSION AND SOCIAL SECURITY CONTRIBUTIONS

The social security system in Ukraine covers pensioners, workers and their dependants for work-related accidents, illness, retirement, death and disability benefits, sickness and maternity benefits, medical care, severance pay, and child and family allowances.

Mandatory contributions to Ukrainian social security and pension funds only apply if the salary is paid through the payroll of a Ukrainian entity, which also includes representative offices of foreign legal entities in Ukraine. Voluntary contributions to the State Pension Fund, the Employment Insurance Fund and the Social Security Fund are possible.

Employer contributions
Ukrainian employers are liable to pay social security contributions on behalf of their Ukrainian and foreign national employees.

As of Jan. 1, 2011, all social security contributions are consolidated into a Unified Social Tax under the Law of Ukraine “On the collection and accounting of a unified contribution to the mandatory state social insurance.” The tax rate is 22% (until 2016 it depended on the risk  assessment for enterprises in specific sectors and varied from 36.76% to 49.7%).

Employee contributions
Until 2016 the Unified Social Tax paid by employees was similar to the UST paid by their employers and set at a rate of 3.6% for both domestic and foreign employees. Starting January 1, 2016 it was canceled.


SINGLE TAX

New taxpayer groups

Four taxpayer groups instead of six previously:

• 1st group: individual entrepreneurs not utilizing any labor force, conducting trade in goods on marketplaces and/or rendering personal services, whose annual income does not exceed UAH 300,000 (previously 150,000);
• 2nd group: individual entrepreneurs rendering    services, including personal services, to other single tax payers and/or individuals, (2) producing and/or selling goods, conducting restaurant business, provided they fulfill all following criteria during a calendar year: the number of hired labor force does not exceed 10 at a time; and the income does not exceed UAH 1,500,000 (previously 1,000,000);
• 3rd group: individual entrepreneurs and legal entities whose annual income does not exceed UAH 5,000,000; the number of staff is not limited (this group replaces former groups 3-6);
• 4th group: agricultural manufacturers (with a share of agricultural production in the previous reporting year equal or exceeding 75%) (Previously, they were classified as payers of the so called single agricultural tax, which has been abolished).
• Single tax payers are not released from the property tax on real estate (other than land plots) and motor cars.
• Starting from July 1, 2015, taxpayers of the 3rd group, and from January 1, 2016 - taxpayers of the 2nd group are obliged to use cash registers for their transactions, except for those who conduct their business on marketplaces or small retailers trading in goods through mobile shops (currently there is no such obligation).

Tax rates

• Tax rates for the 1st and 2nd groups are set by local municipalities in percentage from the minimum salary/wage as of January 1 of a reporting year (up to 10% for the 1 st and 20% for the 2nd group).
• Tax rates for the 3rd group are set as percentage from income: 3% + VAT or 5% (VAT included). Previously it was 2% + VAT or 4% (VAT included).
• Tax rates for the 4th group are set as percentage from the normative valuation of (1 ha of) the area of agricultural lands owned/used by taxpayers, depending on the type of the land.

EXCISE DUTY

Taxpayers

The list of taxpayers has been expanded by:

• Retail traders in excisable goods;
• The wholesale supplier of electric energy;
• Licensed producers of electric energy selling it outside the wholesale market of electric energy;
• Owners of imported trucks re¬equipped as excisable passenger motorcars.

Excisable goods

The list of excisable goods has been expanded by (and excise duties are introduced for):

• Substances used as components of motor fuel, alternative motor fuel;
• Passenger motor vehicles intended for the transportation of 10 and more persons, freight vehicles (trucks);
• Electric energy.

Excise duty rates

• Excise duty has been increased for certain excisable goods, like

                 Cigarettes without filter;
                 Petroleum products, liquefied gas, substances used as
                    components of motor fuel, alternative motor fuel;
                 Passenger motorcars and other cars intended mainly for
                    the transportation of people;
                 Motorcycles and motorbikes.

• Excise duty rates with respect to excisable goods sold by retail traders shall be set by municipal councils (2-5% of the turnover).
• The special excise duty for transactions with securities and derivatives has been abolished.

TAXATION OF PASSIVE INCOME OF CITIZENS (INTEREST ACCRUED ON DEPOSIT, CURRENT AND CARD ACCOUNTS).

Dividends received by a domestic company from another domestic company are not subject to corporate income tax. Dividends paid by a Ukrainian company are subject to an advance corporate income tax (ACT) at the time the dividends are paid. The tax is accrued on a gross basis and is charged to the payer of the dividends. A Ukrainian company may use ACT to reduce its corporate income tax liability for future periods. If the taxpayer does not have sufficient corporate income tax liability for the period, ACT paid may be carried forward indefinitely. ACT does not apply to certain dividends (i.e. dividends paid by a Ukrainian investment fund, a holding company that pays dividends out of dividends received from а company that pays fixed agricultural tax, etc.).

In 2014, The Finance Ministry of Ukraine has proposed increasing the limit for deposits, on which interest rates taxes will be imposed, from UAH 50,000 to UAH 100,000.

Starting from 01 January 2015, tax rate on passive income, including interest accrued on deposits, as well as savings/current/card accounts was increased from 15% to 18%. Apart from that military contribution in amount of 1.5% will be accrued on passive income of citizens, including interest accrued on deposit, current and card account.


NEW TAX TYPES

The new property tax now comprises three types of taxes, which used to be separate taxes:

• Tax on real property other than land plots (real estate tax);
• Transport tax;
• Land tax.

REAL ESTATE TAX

• The object of taxation shall be both residential and non-residential real estate (previously only residential).
• New exemptions from taxation added:

                 Residential property unsuitable for living (e.g. due to its
                   dilapidation);
                 Non-residential property utilized by small and mid-size
                   enterprises conducting their business in "small architectural
                   forms" (constructions not considered buildings) or on
                   marketplaces;
                 Industrial buildings (in particular, workshops, production
                   facilities, warehouses of industrial enterprises);
                 Buildings and constructions of agricultural manufacturers
                   intended for use directly in agricultural activities;
                 Residential and non-residential property owned by
                   non-governmental organizations of disabled persons and
                   their enterprises.
                 At the same time, the tax-exempted portion of residential
                   real estate owned by individuals has been reduced
                   (irrespective of the number of owned real estate objects):
                 Apartments - from 120 to 60 m2;
                 Residential houses - from 250 to 120 m2
                 Mixed residential property (apartments and houses
                   simultaneously owned by a person) - 180 m2.

• Local councils are entitled to set tax rates and increase the above tax- exempted thresholds.
• Tax rates shall be set by local councils depending on the type of real property and its location, and shall generally not exceed 2% of the minimum salary (as of January 1 of the reporting year) for 1 m2 of real estate (previously there were differentiated rates, which depended on the square of real property). In 2015, the maximal tax rate of 1% of the minimum salary shall apply to non-residential property.

TRANSPORT (CAR OWNER) TAX

Taxpayers are legal entities and individuals who own registered (passenger) cars having been in use up to five years and cost more than 750 minimum salaries on the 1st of January of the current year, which is UAH 1,033,500 in 2016 (until 2016, engine capacity of 3,000 cm³ and more was required instead).

• There is a fixed tax rate of UAH 25,000 for a car, to be paid annually.
• Due tax amounts for individuals will be determined by the SRS, which then sends out (hands in) respective tax invoices (annually before June 1 of the respective reporting year). The tax shall be paid within 60 days after the receipt of an invoice.
• Legal entities shall determine their due tax amounts themselves, and indicate them in annual tax declarations filed before February 20 of the reporting year. The tax shall be paid quarterly, 30 days after the expiration of a quarter latest.

LAND TAX

• Tax rates are changed for land plots, which normative valuation has been conducted (irrespective of their location). Instead of the fixed rate of 1% of the normative valuation, the new rates are established by local councils up to the following maximal figures (from the normative valuation):

                 Generally-3%;
                 Agricultural lands - 1 %;
                 12% - land plots being in permanent use by business
                   entities (except for state and municipal enterprises).

• The tax rate for land plots, which normative valuation has not been conducted, outside of inhabited areas, is no longer fixed (5%). It shall be set by local councils up to the maximum figure of 5%.
• The list of legal entities released from the duty to pay land tax has been significantly shortened; several temporary tax exemptions (for the aircraft building, shipbuilding industries, and cinematography) have been cancelled.
• Local councils are entitled to establish privileges for taxpayers.
• The annual amount of lease payments (for the lease of state or municipal property lands) stipulated by a lease agreement shall generally not exceed 12% of the normative monetary valuation of the land (previously there were some differentiated rates, e.g. for land plots used to locate renewable energy production facilities).

TAX COMPROMISE

Introduced by law of Ukraine No. 63-VIII of December 25, 2014

• The tax compromise provides for a release of taxpayers and/or their executive officers from legal liability for understating their corporate profit and/or value added tax liabilities for any tax periods until April 1,2014. Taxpayers may choose to apply the compromise procedure only within 90 calendar days after the law on tax compromise came into force (January 17, 2015), i.e. until April 17, 2015.
• In order to make use of the tax compromise procedure, a taxpayer shall submit adjusted CPT and VAT returns indicating the amount of overstated expenses and/or VAT credit. The form of such returns is yet to be approved by the Ministry of Finance of Ukraine.
• The taxpayer has to pay only 5% of the understated CPT/VAT liabilities; the remaining 95% shall be considered written off and no penalties/criminal or administrative liability apply. In its turn, the written off amount does not affect the taxable base of the taxpayer, i.e. is not considered non-repayable aid.
• The tax compromise procedure shall not exceed 70 calendar days from the day of the filing of an adjusted tax return. The SRS is entitled to carry out an extraordinary tax inspection thereafter.
• Tax liabilities contested by a taxpayer (in an administrative or court procedure) may also be included into the tax compromise. To this end, the taxpayer shall submit a written application to the SRS.
• As soon as the taxpayer pays its agreed tax liabilities, the compromise procedure is considered accomplished. Its results may not be further questioned/challenged.