Following Ukraine's 2014 announcement of its intention to create a single economic and social space with the European Union, Ukrainian legislation is undergoing fundamental changes aimed at its harmonisation with EU Law. Following simultaneous ratification of the Association Agreement with the EU by the Verkhovna Rada (the parliament of Ukraine) and the European Parliament, on 16 September 2014, the government of Ukraine commenced substantial reforms of the law, with new taxation, corporate and banking law bills being passed into law on an almost monthly basis. Implementation of the Association Agreement is designed to create new opportunities both for Ukrainian businesses in Europe and for foreign investors in Ukraine.
In 2015, the EU decided to open a formal process that will result in the introduction of a visa-free regime for Ukrainian citizens. The EU has set a number of strict criteria, including substantial changes in the regulation of border control passport rules and exchange of information, which will create a regulatory framework for visa liberalisation with the EU. The introduction in 2016 of a new electronic declaration system for politically exposed persons is aimed at fighting corruption, which is one of the key targets in the EU's path before the visa liberalisation decision is taken.
On 18 December 2015, the EU Commission in its Sixth Progress Report on the Implementation by Ukraine of the Action Plan on Visa Liberalisation confirmed that Ukraine has fulfilled all of its obligations on the path to visa liberalisation with the EU.
Ukraine is also seeking to increase transparency of its business and ownership in line with the recent global trend to increase transparency and accountability of business. As part of this process, Ukraine has recently introduced a public register of ultimate beneficial owners of bodies corporate.
In April 2016, in line with the global de-offshorisation trend, the president of Ukraine created the Special Working Group on de-offshorisation. The group aims to develop a de-offshorisation law by the end of 2016.
Another substantial international instrument that influences Ukrainian legislative reforms is the Extended Fund Facility (EFF) between Ukraine and the International Monetary Fund (IMF), approved on 11 March 2015 by the IMF Executive Board, which superseded the previous stand-by arrangements. In accordance with the EFF, Ukraine is obliged to implement a number of fiscal, economic and legislative measures under the IMF's supervision.
In compliance with the EFF, significant changes were introduced to the regulation of banking and energy sectors, anti-money laundering, anti-corruption and investor protection regimes. The general drive of these reforms is aimed towards the introduction of recognised international standards (including those of the IMF, the EU and the FATF) in these areas. However, practical achievements of these reforms remain modest.
In recent years, Ukrainian business people were primarily focused on effective wealth protection and management mechanisms. The armed conflict in the eastern Ukrainian region of Donbas and the still substantial level of corruption continues to make wealth preservation and protection a number one priority.
Taxation of individuals in Ukraine depends on the tax residence, source and type of income.
i Tax residency
The Tax Code of Ukraine (the Tax Code) provides the following residency tests to determine the individual's tax residency: (1) residence (permanent residence in Ukraine for a period exceeding 183 days); (2) centre of vital interests (close economic and personal ties); and (3) citizenship.
Registration of an individual as an entrepreneur in Ukraine is also sufficient to recognise this individual as a Ukrainian tax resident. In addition, an individual may voluntarily accept to become a tax resident in Ukraine in accordance with the procedures set out in the Tax Code.
Despite the above tests, in practice the main test to determine the tax residency regularly applied by the Ukrainian tax authorities is the number of days spent by an individual in Ukraine in a calendar year.
For the purposes of the Tax Code any person who fails to qualify as a Ukrainian tax resident is considered to be a non-resident of Ukraine for tax purposes.
ii Source of income
Tax residents of Ukraine pay tax on their aggregate worldwide income. Non-residents pay tax on Ukrainian-sourced income only. Non-resident individuals are not eligible for certain deductions and exemptions available to residents for personal taxation purposes.
iii Types of taxable personal income
The Tax Code recognises both monetary and non-monetary personal income.
The Tax Code provides for the following taxable types of personal income (irrespective of residency): employment income, interest and dividends income, gifts, inheritance, investment income, insurance payments, rental income, fringe benefits, amounts of punitive damages paid and written-off payment obligations to third parties, etc.
The Tax Code specifically excludes certain types of income from the taxable basis of both residents and non-residents.
In addition, certain categories of low-income taxpayers are entitled to reduce their respective incomes by an amount of the 'social tax benefit'.
The Tax Code prescribes that if so provided by the respective international tax treaties, amount of taxes paid by a tax resident outside Ukraine may be used as credit against the amount of taxes to be paid in Ukraine, provided that the taxpayer submits a written confirmation from the foreign tax authority acknowledging that such foreign taxes have in fact been paid. However, the total amount of such foreign tax credit may not exceed the total amount of the personal income tax (PIT) due in Ukraine.
In 2016, a flat rate of 18 per cent personal income tax was introduced for most types of income for both residents and non-residents.
Passive income, such as dividends, interest and royalties, is generally taxable at the rate of 18 per cent, except for dividends distributed (accrued) by corporations that are subject to corporate income tax at the 5 per cent rate. Notwithstanding, the 18 per cent rate applies if the dividends are distributed (accrued) by collective investment schemes.
Income derived from disposal of real estate is taxed at the rate of either zero per cent or 5 per cent depending on (1) the type of property, (2) the frequency of disposals, and (3) the duration of the seller's title to such property. However, disposal of real estate made by a non-resident is taxed at the rate of 18 per cent.
Standard rate for disposal of moveable property (such as vehicles) is 5 per cent. A single disposal of a car or a motorcycle within a year is non-taxable. An 18 per cent tax rate applies to the non-resident's income from a disposal of moveable property in Ukraine.
v Gift and succession taxes
Gifts and inheritance are taxable income and both are subject to the PIT at the rate of zero per cent, 5 per cent or 18 per cent. The exact applicable rate depends on the residency status of the donator or the testator and on the degree of relation between the donator or the testator and the recipient or the heir (varying from zero per cent for spouses and children to 18 per cent for inheritance or gifts received from or by non-residents).
Tax residents shall pay income tax on inheritance and gifts irrespective of the location of the acquired assets.
vi Assets tax
Currently, the Tax Code has a consolidated assets tax that consists of land tax, non-land real estate tax and transport tax.
The land tax is payable by individuals holding title to or right of permanent use of land plots in Ukraine, irrespective of their tax residency. Particular land tax rates are determined by the municipal authorities and shall not exceed 12 per cent of the cadastral value of a land plot, depending on the type of land plot and the particular rights of its holder (i.e., either title or right to permanent use). The Tax Code provides for a number of tax exemptions regarding land tax depending, inter alia, on the status of an individual, the type of land plot, its size and the purpose of its use.
Residual and non-residual real estate owned by an individual is subject to a non-land real estate tax. The tax rates are set forth by the municipal authorities but shall not exceed 3 per cent of the minimum wage as of 1 January of the reporting (calendar) year per square metre. At the same time, the Tax Code sets forth certain exemptions for the real estate tax (e.g., the minimum size of a real estate, which is exempt from the real estate tax).
The first 60 square metres (for an apartment), 120 square metres (for a house) or 180 square metres (where an apartment and house are under the same ownership) are exempt from taxation. This exemption applies only once, irrespective of the number of properties in ownership.
If the taxpayer owns an apartment of more than 300 square metres or a house of more than 500 square metres, the amount of tax due increases by 25,000 hryvnas. Owners of vehicles registered in Ukraine, irrespective of their residency, are subject to transport tax in the amount of 25,000 hryvnas per vehicle that is less than five years old and has an average market value exceeding 750 minimum wages. The average market value for each type of vehicle is determined by the Ministry of Economic Development and Trade of Ukraine.
vii Military duty
To provide the Ukrainian armed forces with additional funding in view of the current political situation in Ukraine, the Verkhovna Rada has introduced a military duty. Military duty is levied on Ukrainian-sourced income of non-residents and on the worldwide income of the tax residents of Ukraine at the rate of 1.5 per cent.
viii Issues relating to cross-border structuring
Ukraine has a wide network of the double taxation treaties with approximately 70 countries. However, the double taxation treaties with such jurisdictions as Malta and Luxembourg are still pending ratification. The majority of the double taxation treaties entered into by Ukraine is based on the OECD model convention.
Currently while considering trans-border structuring options Ukrainian private business is focused on such jurisdictions as the Netherlands, Estonia, Hungary, Slovakia, Latvia and the UAE due to the favourable provisions of the respective double taxation treaties between Ukraine and these countries. While Cyprus remains to be one of the most popular and attractive cross-border structuring option for the majority of Ukrainian businessmen in tax planning and private wealth protection and preservation, the interest in structuring through the Netherlands, Estonia, Hungary, Malta, Luxembourg, the UAE and other jurisdictions with favourable tax regimes for holding, financial and operational companies will continue to grow for the observable future.
As a part of the tax reform the transfer pricing rules set in the Tax Code were significantly amended, in particular with regard to the list of transactions that are subject to the transfer pricing regulation (the TP Rules). The TP Rules are based on the OECD Transfer Pricing Guidelines. These regulations require that prices for goods and services in certain transactions shall be set on an arm's length principle.
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* Alina Plyushch is a counsel and Dmytro Riabikin is an associate at Sayenko Kharenko.
Previously published in Law Business Research
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