Foreign nationals coming to Ukraine are required to comply with various taxation and registration requirements, including visa, work permit, tax registration, police registration, mandatory emergency medical insurance, etc. Non-compliance with these requirements may attract serious repercussions for individuals as well as Ukrainian hosting entities. Therefore, these issues warrant proper attention. The present article focuses on the most difficult-to-comply requirements relating to foreign personnel, namely work permits and taxation issues.
Work permits
It is every Ukrainian company’s obligation to obtain a work permit for any foreign national either employed in Ukraine or seconded to Ukraine. Although there is no limit as to the amount of time a foreign national may work in Ukraine, work permits are issued only up to a one-year period. The basic documentation required to apply for work permits normally includes:
- A formal Application letter;
- Notarised copies of the inviting company’s foundation documents;
- Documents evidencing the foreign national’s education/qualifications; and
- Confirmation from the tax authorities regarding the taxes and duties paid by the company.
Additionally, labour authorities require a company to prove that a foreign employee is needed to carry out business activities of the entity because there are no Ukrainian nationals who can perform similar duties. The authorities also take into consideration the number of Ukrainians employed by the company applying for an employment permit. However, currently there are no statutory established ratios between foreign and local employees of Ukrainian companies. Thus, the labour authorities have significant leeway in determining what an appropriate ratio is.
The technical aspects of the application process are relatively straightforward. Approval or refusal of an employment permit usually takes up to 30 days from the initial registration of the application letter. A fee of UAH 170 is payable by a company for each employment permit requested.
There can be serious repercussions for a company that employs a foreigner without an employment permit. In addition to a small fine of UAH 850, a foreigner can be deported from Ukraine at his or her employer’s cost.
Foreign personnel of representative offices
The personnel of representative offices of foreign companies in Ukraine who are employed abroad are not required to obtain work permits for their work in Ukraine. Instead, they have to be accredited with the Ministry of Economy of Ukraine and obtain a service card issued by the ministry.
Prospective legislation
Although it is no longer under consideration by the Verkhovna Rada (Parliament), the draft law On Foreign Employees in Ukraine provides us with good insights as to future reforms that may significantly alter the legal regime for foreign nationals working in Ukraine. This draft law introduced significant changes to current legislation on the employment of foreigners and in particular quotas for Ukrainian companies employing foreigners. For example, the draft law proposed that immigration authorities replace the labour authorities as the official issuers of work permits. In addition to this, the draft law attempted to introduce a so-called permit on Usage of Foreign Labour, which the company will have to obtain before applying for an employment permit for a foreign employee. The draft law was withdrawn for lack of topicality and need for essential revision. However, is it quite likely that when similar legislation is proposed it may include the aforementioned reforms.
Taxation of foreign nationals’ incomes in Ukraine
Taxation of individuals in Ukraine is governed by the Law of Ukraine “On Personal Income Tax” No. 889 of 22 May 2003 (the Law) became effective.
Taxation of an individual’s income depends on the individual’s tax residency status in Ukraine:
- Tax residents are subject to Ukrainian taxation on their worldwide income;
- Non-residents are subject to Ukrainian tax in respect of their Ukrainian source income, unless a relevant double tax treaty provides otherwise.
Ukrainian source income is defined as any income received from any activity performed in the territory of Ukraine, including income received by the individual from his/her employer, either resident or non-resident, in relation to employment exercised in Ukraine. Thus, the Law attempts to tax any income received by non-residents working in Ukraine, even if employed by foreign companies, including non-residents rendering professional services in Ukraine and non-resident CEOs of Ukrainian companies.
Tax residency
The new definition of “resident” is complex and at the moment it is not entirely clear how this definition shall be applied in practice.
Under the Law, residents are defined as individuals who have a place of residence in Ukraine. Where an individual has a place of residence in another country as well, such an individual is deemed to be a resident of Ukraine if he/she has a permanent place of residence (abode) in Ukraine. If an individual has a permanent place of residence in other country as well, he/she is deemed to be a resident of Ukraine if he/she has a centre of vital interests in Ukraine. A sufficient but not exclusive ground for determining the country of individual’s centre of vital interest is place of permanent residence of individual’s family members. In the event an individual’s centre of vital interests cannot be determined or the individual has no permanent place of residence in any country, he/she is deemed to be a resident of Ukraine if he/she stays in Ukraine at least 183 days during the tax year. If residency status cannot be determined based on the above rules, the individual shall be deemed to be a resident of Ukraine if he/she is a citizen of Ukraine.
The Law also provides that “a sufficient ground for determining that the individual is resident in Ukraine is the individual's independent election that his/her main place of abode is the territory of Ukraine according to the procedure established by this Law”. The Law does not define the procedure for election by an individual’s of his/her tax residency status. Nevertheless, based on the Order of the State Tax Administration of Ukraine No. 50 of 29 January 2004 (the Tax Clarification), the individual may apply in writing to the local tax office in the district where he/she has place of abode asking to consider him/her a tax resident of Ukraine in a given calendar year. Based on the application the tax authorities should issue written confirmation of individual’s tax residency for his/her employer.
Taxable income and exemptions
The Law removed special expatriate concessions provided under the previous legislation. However, certain types of income earned by expatriates may be exempt from tax based on general rules, including free accommodation provided by an employer, use of vehicles (if provided by a Ukrainian resident employer that is a payer of corporate profits tax), compensation payments within the limits established by Ukrainian legislation, etc.
Tax rates
The standard tax rate for tax residents is 15%. It is applicable to most types of incomes, including salary income, dividends, royalties, investment income and gifts (with certain exceptions). Income in the form of prizes (except for prizes from the state lottery in cash) is taxed at double standard rates (i.e. 30%). Interest income from bank deposits and saving certificates is taxed at a 5% rate effective from 1 January 2010.
Income earned by non-residents from sources in Ukraine in the form of interest, dividends and royalty is taxed at the same rate as for residents. Any other income earned by non-residents from sources in Ukraine is taxed at the double standard rate (i.e. 30%). The Law is unclear whether a standard or a double rate should apply to salary income earned by non-residents in respect of work in Ukraine. In accordance with the Tax Clarification of 29 January 2004, income paid to non-resident individuals by a Ukrainian employer shall be taxed at the standard rate (i.e. 15%). However, it remains unclear which rate (i.e. 15% or 30%) shall be applied to salary income paid to non-residents through a foreign payroll.
Foreign tax credit
Tax resident individuals are allowed to credit foreign taxes paid on income received abroad against their Ukrainian tax liability provided there is a double tax treaty between Ukraine and the relevant foreign state. An official confirmation issued by the relevant foreign tax authority and legalized by the Ukrainian Embassy / Consulate abroad will be required. From 22 December 2003, instead of legalisation apostil may be used in accordance with 1961 Hague Convention abolishing legalisation of foreign documents, which became effective for Ukraine from that date.
Tax compliance
The Law simplified tax compliance requirements for foreign nationals. In particular, foreign nationals are no longer required to file preliminary and quarterly tax returns, neither are they obliged to make advance payments of tax during the year in respect of income received abroad.
Both tax resident and non-resident individuals are obliged to file an annual personal income tax return with the local tax authorities, if during a reporting year such individuals received any income that was not subject to final taxation at source (e.g., income received abroad). The tax return must be filed before 1 April of the year following the reporting one and the tax due must be paid by 10 April.
In the event of departure from Ukraine to a place of permanent abode abroad, a tax resident individual is required to file his/her “departure” tax return not later than 60 days prior to his/her departure and settle the tax due based on the assessment issued by the tax authorities.
Non-compliance with the above requirements may attract severe fines and interest, plus potential criminal responsibility. Thus, the tax compliance issues warrant proper attention.
Social security
Ukrainian employers are liable to pay mandatory contributions to Ukrainian social security and pension funds in respect of their foreign (as well as Ukrainian) national employees at the total rate of 36.66%-49.6% based on gross remuneration, as well as withhold employee’s contributions to the Pension and Social Security Funds totalling 3.5% and remit to the appropriate authorities. Current legislation does not establish obligation for foreign nationals temporary employed in Ukraine to make contributions to the Unemployment Insurance Fund. The tax base subject to the social contributions (both employer’s and employee’s) is currently capped at UAH 4,815 (approximately US $1,670) per employee per month and will be increased during the year.
Based on the existing legislation and the current practice, no obligation to pay Ukrainian mandatory social contributions arise in respect of salary paid to individuals, including foreign nationals, through a foreign payroll.
By Yulia Y.Kadibash, Manager with PricewaterhouseCoopers Ukraine
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