Investor considerations
- Ukraine has a volatile tax system, and legislative amendments are frequent.
- Residents are taxed on worldwide income. Non-residents are taxed only on income from Ukrainian sources.
- Corporate profits are subject to 25% tax. Dividends are separately taxed at the shareholder level in the hands of individuals and foreign shareholders.
- Ukraine has a relatively high VAT rate (20%), but a low flat rate of tax on individuals (15%).
- With the exception of agricultural enterprises, the fiscal year for taxpayers follows the calendar year.
- The penalty for failing to deduct and remit withholding tax when required is 200%, plus interest.
- A recent World Bank study concluded that Ukraine was one of the most difficult countries in which to pay taxes out of the 185 countries surveyed.
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Content
9.1 Tax system
The Ukrainian tax system is evolving rapidly. The direction of reform is generally positive, although it is sometimes unpredictable. Tax laws have been revised frequently, sometimes several times in one month, and there are still many issues that need to be addressed. Tax law is often poorly worded, which results in ambiguous interpretation and increases the risk of disagreements between taxpayers and tax authorities.
Ukraine is not an easy country in which to pay taxes. In the recent "Paying Taxes" study released by PricewaterhouseCoopers and the World Bank, Ukraine was identified as one of the most difficult countries in which to pay taxes out of the 185 countries surveyed. Many companies employ tax accountants in addition to financial accountants as tax accounts are separate from financial accounts. The study estimated that a modest-sized domestic business would need to make 98 tax payments each year, and would require 2,185 hours per year to comply with its tax compliance requirements.
For several years, there have been discussions about consolidating the various revenue laws into a single Tax Code, which should ease compliance and administration. A new initiative is underway to have this introduced into Parliament sometime in 2007, and to apply from January 2008.
An interesting feature of the Ukrainian tax system is a simplified or unitary tax available for many small businesses. Qualifying sole proprietors opting to use the system pay a fixed amount of tax, while eligible entities pay a fixed rate of tax based on their revenues. In both cases, the businesses are exempted from income tax, a number of other small taxes, and potentially value-added tax (VAT). The corporate regime is discussed in Corporate tax system, while the regime for individuals is discussed in Private entrepreneurs.
9.2 Direct and indirect tax burden
Taxation accounts for around 73% of government revenues. More than three-quarters of this is collected through corporate income (profits) tax (CPT), personal income tax (PIT), and VAT.
Tax collections have increased rapidly over the past five years. The trend in income tax and VAT collections for the period 2002 to 2006 is illustrated in diagram 1.
Source: Ministry of Finance
It can be seen that the reduction of the individual tax rate in 2004 significantly increased the collection of individual taxation.
A 15% increase in overall tax revenues is forecast for 2007.
9.3 Principal taxes
On Taxation System, the law that provides the general framework for taxation in Ukraine, provides for 28 national taxes that may be imposed. The principal taxes and compulsory payments are:
On Taxation System also provides for two taxes and 14 duties that may be levied at the discretion of local authorities. The main local taxes affecting business are the advertising tax, municipal tax, and the charge for using local symbols.
Employers and employees must also make mandatory contributions to the state pension and social security funds. The rates and maximum contributions are set in the annual budget law and may result in a significant cost burden for employers (see Section 7.3 for further information). There has been widespread discussion on reducing the burden as it is considered to have a negative impact on economic growth.
9.4 Legislative framework
Statute law
According to the Constitution, taxes and levies, as well as penalties for non-compliance, may only be established by laws enacted by Parliament. Parliament exercises this prerogative frequently, and it is quite common for more than twenty amendments to be made to the various Ukraine tax laws each year, sometimes with potentially retroactive effect. Although many amendments are very minor, the frequent changes, as well as the government's failure to proceed with declared intentions and schedules for tax reform, have earned Ukraine the reputation of having an unpredictable tax system.
Strictly speaking, the State Tax Authority (STA) does not have discretion to amend the law, but in practice, the STA often issues tax clarifications that are not always consistent with the law, although this can be a function of ambiguities in the law as much as anything else. Nevertheless, it is prudent to consider STA interpretations and the risk of conflict with the STA before taking a position based on the law.
9.5 Tax treaties
Ukraine has a broad network of tax treaties, with 60 treaties in force as at 1 January 2007. Rates are reduced to as low as 0% under some treaties for dividends, interest and royalties. A summary of withholding rates under the various treaties is provided in Ukraine's tax treaty network.
Taxpayers do not require confirmation from the tax authorities before claiming relief under a treaty. However, the withholding agent must hold a certificate of residence from the treaty country for the person to whom income is paid. If the certificate is issued in a form prescribed by legislation of the treaty country it must be properly legalized (apostilled) and translated into Ukrainian language. The certificate is only valid for the calendar year of its issuance and must, therefore, be renewed annually.
Currently, one of the most favourable treaties is the Ukraine-Cyprus treaty, which provides for 0% withholding tax on dividends, interest and royalties. However, the treaty has recently been renegotiated (but not ratified), and increased rates will apply (10% on interest and royalties, 5/15% on dividends) after it has been ratified.
9.6 Administration of the tax system
National taxes are administered by the STA. Local taxes are administered by the various local governments.
The allocation of revenues between national and local governments is set out in the annual budget law. Revenues are allocated based on source, rather than by amount. For example, revenues from personal income tax, although administered by the STA, are often allocated to local government. One consequence is that payments for some national taxes may need to be made to local government accounts.
9.7 Registration requirements
All taxpayers are required to register with the STA and to obtain a tax number. Registration is undertaken through the local tax office where the individual or business is located.
Without a tax number, it is not possible to open a bank account in Ukraine.
9.8 Tax returns and payments
Personal income tax returns are filed for each calendar year. Individual taxpayers whose entire income is subject to withholding tax at source (e.g., salaries) are not required to file income tax returns, although they may choose to do so if they are entitled to a tax credit. The personal income tax return must be filed by 31 March of the following year.
Corporate income tax returns are filed on a quarterly basis, and returns must be filed within 40 calendar days of the end of each quarter. Resident companies and non-resident entities with a permanent establishment in Ukraine must keep records that comply with Ukrainian tax rules.
Withholding taxes must be paid to the state not later than the date that the income is paid. Tax in respect of income that is accrued but not paid to individuals should be transferred to the state within 20 calendar days of the last day of the reporting month.
Value-added tax returns are generally filed on a monthly basis. The return must be filed within 20 calendar days of the last day of each month. As an exception, VAT-registered persons with annual sales of less than UAH 300,000 may opt for quarterly filing.
If the filing date for any return falls on a weekend or a public holiday, the return should be filed on the following working day.
Payment of tax must be made within ten calendar days from the day on which the return is required to be filed or the assessment is issued. Payments are normally made through designated bank accounts.
9.9 Assessments
Taxpayers make returns and payments on a self-assessment basis. However, if the tax authorities determine that the tax shown on the return is incorrect, they may assess taxes within 1,095 days (three years) from the deadline for filing a return or the date on which the return is actually filed, whichever comes later.
There is no limit on the period in which an assessment may be made if a taxpayer has deliberately evaded tax (if proven in court) or when a taxpayer fails to file a return. The tax authorities will also charge significant penalties for late filing or understatement of tax liabilities.
9.10 Appeals
Assessments may be appealed administratively or through the court system. The initial appeal is made to the local tax office that issued the assessment. If an appeal is rejected, a taxpayer may appeal in turn to the regional and national office.
An administrative appeal must be filed to the relevant level of the tax administration within ten calendar days of receiving an assessment or official advice that an administrative appeal has been rejected at a lower level.
The tax authorities must respond to the appeal within 20 calendar days. If they fail to do so, the appeal is deemed to be decided in favour of the taxpayer. The 20-day period may be extended by up to 60 days, but only if the authorities advise the taxpayer in writing within the initial 20-day period.
At any stage of the process, or if the national office rejects the appeal, a taxpayer is entitled to pursue an action through the courts instead.
Submitting an appeal suspends the requirement to pay the assessed tax, as well as the accrual of interest and penalties. Interest and late payment penalties will apply only if the taxpayer fails to pay the taxes by a revised due date after the appeal is finally resolved.
9.11 Withholding taxes
It is very important to ensure that withholding taxes are properly deducted and accounted for. Businesses generally have an obligation to withhold tax on payments to individuals (including sole proprietors) and payments to non-residents. Failure to withhold tax can attract a 200% penalty, as well as interest.
Withholding tax must be remitted to the authorities no later than the date when the payment is made to the income recipient.
Passive income (dividends, interest, royalties) from Ukrainian sources that is paid to non-resident entities is generally subject to 15% withholding tax. Other payments, including "engineering services," lease payments, agency and brokerage fees, are also subject to 15% withholding tax, but payments for most other services are not subject to withholding.
In addition, 15% withholding tax applies to gain on the sale of property, including real estate and securities, when paid by a resident to a non-resident entity.
All withholding tax rates may be reduced under a relevant tax treaty.
Payments to non-resident persons for advertising services performed in Ukraine are not subject to withholding. However, the resident payer is required to pay, from its own funds, a 20% tax based on the value of such services.
A resident payer is similarly required to pay, from its own funds a 12% tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does not meet requirements set by the authorised state agency. A 0% rate applies otherwise.
As the taxes on advertising and insurance are levied on the resident party, they cannot be relieved using a tax treaty.
9.12 Tax audits
The tax authorities may carry out scheduled audits a maximum of once each year. Business entities must be notified of the audit in writing at least ten days before the scheduled audit. For normal business entities, the scheduled audit should be carried out within 20 business days, although the period may be extended by up to ten days.
In addition, the tax authorities may perform out-of-schedule audits in any of the following circumstances:
- A taxpayer does not respond within ten days to a request for information from the tax authorities when the tax authorities are cross-checking information, the cross-audit of another business entity has revealed a violation by the taxpayer, or the data in a tax return is inadequate.
- A business entity does not file tax returns on a timely basis;
- A taxpayer initiates an appeal process against an assessment;
- A business entity is reorganized or liquidated;
- A tax police investigation requires that a taxpayer's accounts be audited;
- A taxpayer claims a VAT refund for an amount exceeding UAH 100,000.
The duration of an out-of-schedule audit cannot exceed ten business days.
Before starting an audit, the tax inspector must present a written order to the taxpayer, outlining the scope and period of the tax audit.
9.13 Penalties
Penalties are often specified in terms of a multiple of the monthly "non-taxable allowances," which is currently UAH 17.
Multiple penalties may be imposed, and total penalties may potentially exceed 150% of the tax. Liability is assessed by the tax authorities.
Late filing
In addition to a nominal penalty, if the tax authorities assess tax when a taxpayer fails to file a return, penalties could reach up to 50% of the tax assessed, depending on the period of delay.
Late payment of tax
If a taxpayer does not pay the amount of tax shown in its tax return on time, or fails to pay an assessment within the time shown on the assessment notice (or if the taxpayer appeals the assessment, within ten days of the final resolution of the appeal), penalties are imposed as follows:
- 10% of the underpaid tax for delays of up to 30 calendar days;
- 20% of the underpaid tax for delays of 31 to 90 calendar days;
- 50% of the underpaid tax for delays exceeding 90 calendar days.
Understated tax liabilities
If during an audit the tax authorities determine that the tax liability shown in the taxpayer's return is understated, they will impose penalties of up to 50% of the tax assessed, depending on the timeframe involved.
Furthermore, a penalty of 50% of the tax assessed will be imposed if a taxpayer understates its tax liabilities by a "large" amount. The Criminal Code defines "large" to be any amount over UAH 600,000 for 2007. Consequently, a total penalty of 100% may apply.
Tax evasion
In addition to the above, if a taxpayer (or officials of the company) are convicted of tax evasion, a penalty of 50% of the tax due will be imposed.
The individual taxpayer (or officials) may also be subject to penalties under the Criminal Code. For a first offence, fines of up to UAH 340,000, prohibition from occupying certain positions or engaging into certain activities for up to three years, or imprisonment for up to five years may be imposed.
Failure to withhold and pay tax
If a taxpayer does not pay tax when it is a mandatory condition for the sale of goods, or a taxpayer fails to withhold tax when required, a penalty of 200% of the deficient tax is imposed.
Arithmetic or methodological errors in tax return
If the tax authorities determine during a "desk review" that arithmetic or methodological errors in a tax return resulted in an understatement of tax liabilities, a penalty will be imposed of 5% of the additional tax assessed.
Interest for late payments
When tax is not paid on time, interest for late payment is charged on a daily basis in addition to the above penalties. The rate is 120% of the NBU prime rate that is effective at the date the payment was due or the date that payment was made, whichever is higher.
For amounts calculated on the tax return, interest accrues from the date the tax was due. When the tax authorities assess tax, interest accrues from the due date for payment shown on the notice.
Interest is charged on the entire outstanding tax, including penalties.
Voluntary disclosures
If a taxpayer voluntarily discloses and pays the underpaid tax before the tax authorities commence an audit:
- A 5% penalty should be paid based on the amount of under-declared tax.
- Interest will not be charged.
To benefit from this rule, a taxpayer must have filed an amended tax return. Normal penalties and interest will also still accrue if a court rules that the taxpayer had evaded tax.
Penalties during appeal
Penalties and interest do not accrue during the appeal process appeal process.
9.14 Tax clarifications
Tax clarifications may be sought from the tax authorities, and thetax authorities are required to issue such clarifications.
Tax clarifications are not legally binding and do not provide solid protection against tax assessments and penalties. However, in practice tax clarifications are useful in resolving disputes with local tax authorities regarding uncertainty in the tax legislation.
