New personal income tax law
October 2003
A new personal income tax law will be introduced effective from 1 January 2004 with exceptions for certain provisions that will become effective at a later date.
A summary of the new personal income tax regime is presented below.
Taxpayers
Definition of taxpayers includes residents who receive income from sources in Ukraine and abroad and non-residents (except for individuals who have diplomatic immunity) who receive income from sources in Ukraine.
Residents are individuals who have place of abode in Ukraine. Where an individual has place of abode in other country as well, such individual is deemed to be resident of Ukraine if he/she has a permanent place of abode (domicile) in Ukraine. If an individual has domicile in other country as well, he/she is deemed to be a resident of Ukraine if he/she has a center of vital interests in Ukraine. A sufficient but not exclusive ground for determining country of individual’s center of vital interest is place of permanent abode of individual’s family members.
In the event an individual’s center of vital interests cannot be determined or the individual has no domicile 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 (calendar year). If residency status cannot be determined based on above rules, an individual shall be deemed to be resident of Ukraine if he/she is a citizen of Ukraine.
Non-residents are individuals who do not qualify as residents of Ukraine.
Taxable income
Resident taxpayers are liable to pay tax on any income accrued or received by the taxpayer during the reporting period except for items exempt from tax.
Taxable income of non-residents includes income from sources in Ukraine. Income from sources in Ukraine is defined as any income received from any activity in the territory of Ukraine. The main items specified in the non-exclusive list of incomes from sources in Ukraine include:
- salary accrued or paid to a taxpayer by an employer (either resident or non-resident) in respect of employment exercised in Ukraine;
- interest, dividends and royalties paid by residents;
- investment profits from transactions with securities and corporate rights;
- income from renting out or disposal of movable and immovable property;
- prizes (except for prizes from the State Lotteries);
- gifts;
- charity donations;
- assets received as inheritance if such assets or source of payment are located in Ukraine;
- income from entrepreneurial or independent professional activity in Ukraine.
Additional benefits granted by employers to employees constitute taxable income. Additional benefits include the following main items:
- Cost of lodging or free of charge use by employee of any tangible or intangible assets. Exemption is available where employment contract or law provides for provision to employee of accommodation or other tangible or intangible assets within limits specified in the contract or law. Benefit in form of use of vehicles does not constitute taxable income if the right to use vehicles is granted to employee by a resident employer who qualifies as payer of corporate profits tax.
- Value of property or food provided to employees free of charge except for value of special clothing, uniforms and food provided to employees within norms established by the Cabinet of Ministers of Ukraine.
- Amounts of reimbursements of employee’s expenses or losses, except for items exempt from tax.
- Financial assistance granted to employee including forgiven debts.
- Value of goods, services provided free of charge and value of discounts in respect of goods, services sold to employees at a price lower than market price.
For in-kind income the tax base is computed as value of income determined at market price increased for VAT and excise tax if applicable and grossed up for the tax cost (i.e. [100: (100 – tax rate)]).
Taxable income shall be reduced by amount of mandatory employee’s contributions to state pension and social security funds.
Exemptions
The following main items of income are exempt from taxation:
- Income from investments in securities issued by the Ministry of Finance and prizes from State Lotteries.
- Payments in respect of mandatory insurance of individuals including employer’s contribution to the state pension and social security funds.
- Alimony received from residents.
- Shares received from capitalization of undistributed profits provided that allocation of shares between shareholders remains unchanged.
- Amounts received from employers in respect of certain types of medical treatment and services.
- Income from disposal of car, motorbike, yacht or boat with engine provided the seller pays the stamp duty upon sale.
- Amounts paid by employers to educational institutions for training/re-training of employees within limits of 1.4 times the subsistence minimum (i.e. at present UAH 510) per month of education. If employee terminates employment during education or prior to the end of the second calendar year following the year when education was completed the cost of education should be taxed as additional benefit.
Social tax allowance
Low-income individuals (with monthly income of less than 1.4 times the amount of subsistence minimum for able-bodied individuals – currently UAH 510) can claim a Social Tax Allowance (STA). Amount of the STA equals the statutory minimum wage (currently UAH 185 and effective from 1 December 2003 – UAH 237) for ordinary taxpayers and 150% - 200% of minimum wage for some privileged categories. For the transition period of 2004 – 2006 amount of STA will constitute 30%, 50% and 80% of the minimum wage for 2004, 2005 and 2006 respectively.
Non-taxable income
With the introduction of the new personal income tax law the concept of non-taxable minimum will disappear. However, the law explicitly provides that for purpose of application of other laws that contain reference to non-taxable minimum the amount of UAH 17 should be used. However, for purposes of qualification of infringements or crimes under administrative and criminal legislation the amount of UAH 17 should be replaced by the amount of the STA.
This will result in the increase of threshold for qualification of tax evasion as crime (i.e. current threshold of UAH 17,000 will increase in 2004 to UAH 71,100).
Deductions
Taxpayer can claim a limited deduction from his/her annual taxable income for the amount of documented expenses incurred in the reporting year in respect of:
- Interest (certain portion) on mortgage. This deduction will be available after 1 January 2005.
- Secondary professional or higher education of taxpayer or his/her family members (spouse, parents, parents-in-law, children). Deduction is limited to the amount of up to 1.4 times the subsistence minimum (i.e. currently UAH 510) per month of education;
- Certain types of medical treatment of taxpayer or his/her family members. This deduction will be available in the year following the year when the law on mandatory medical insurance is introduced.
- Premiums on voluntary long-term life insurance or non-state pension insurance. Deduction is limited by the amount of up to 1.4 of subsistence minimum per month of the insured period in case of self insurance and Ѕ of this amount in case of insurance of taxpayer’s family members. Deduction for expenses on non-state pension insurance will be available after 1 January 2005.
- Donations to charity and not-for-profit organizations in the amount from 2% to 5% of individual’s taxable income.
Total amount of deductions cannot exceed amount of taxable income received in the form of salary. Amounts not deducted from income of the reporting year cannot be carried forward.
Tax rates
Residents
For 2004 – 2006 the standard tax rate for tax residents is 13% and from 1 January 2007 the tax rate will be 15%. The standard rate is applicable to most types of incomes, including salary income, dividends, royalties, investment income, gifts (with certain exemptions).
Interest income from deposits placed with banks and non-banking financial institutions and from saving certificates is taxed at a 5% rate effective from 1 January 2005. It appears that in 2004 taxation of interest is not governed at all as existing rules will be suspended from 1 January 2004 and new rules will be introduced from 1 January 2005.
Income in form of prizes (except for prizes from the state lottery in cash) is taxed at double standard rates (i.e. 26%/30%).
Non-residents
Income earned by non-residents from sources in Ukraine in form of interest, dividends and royalty is taxed at the same rates as for residents (i.e. 13%/15% for dividends and royalty and 5% for interest from bank deposits).
The Law provides that any other income earned by non-residents from sources in Ukraine is taxed at double standard rates (i.e. 26%/30%). However, the Law is unclear whether standard or double rates apply to salary income earned by non-residents in Ukraine. We are working to clarify this issue with lawmakers and the tax authorities.
Some types of income are taxed based on special rules at the rates described below.
Income from rent of real estate
If lessee is a business entity, it is obliged to withhold from rent payments to a lessor-individual, who is not registered as private entrepreneur tax at standard rates (i.e.13%/15% for resident lessor and 26%/30% for non-resident lessor).
The law requires that rental agreements with a lessee-individual who is not registered as private entrepreneur be notarized. Notaries are obliged to report about such rental agreements to the tax authorities.
Income from renting out real estate is determined based on contractual fee but not lower than minimum rental fee determined according to methodology to be approved by the Cabinet of Ministers of Ukraine.
Income from disposal of real estate
With effect from 1 January 2005 income from disposal of real estate will be taxed as follows.
Sale of one apartment or house (including attached land) per year that was acquired prior to 1 January 2004 is taxed at the rate of 1% for first 100 sq. m of premises and 5% for the portion of income attributable to premises exceeding 100 sq. m based on the property value.
Sale during a reporting year of more than one apartment, house, unfinished construction or other real estate acquired before 1 January 2004 is subject to tax at 5% rate based on the property value.
Sale of real estate acquired after 1 January 2004 is taxed at a standard rate based on gain realized from the sale. In case of sale of one apartment/house per year, taxable gain can be reduced by 10% for each calendar year of the property ownership, except for year of the property acquisition.
Business expenses
Employee who failed to return to the employer amounts received as advance for business trip and other business purposes within three banking days from the date of returning from business trip or completing the legal action for which the advance was given, employer should withhold from employee’s salary a fine at the rate of 15% based on amount of advance not returned on time.
If employee failed to return unused advance within the calendar month when statutory reporting term expires, amount of the advance not returned to employer will be subject to tax at standard rate (in addition to the fine).
Insurance
Amounts paid by employer in favour of employee under any voluntary insurance constitute employee’s taxable income. Exemption is available for premiums under long-term life insurance or non-state pension insurance within the limit equal to 15% of employee’s monthly salary but maximum 1.4 times the amount of subsistence minimum (currently UAH 510) per month.
Tax is levied at standard rate on:
- 60% of the amount received by individuals based on agreement of pension insurance or long-term life insurance. Exemption is available for payments to individuals who are over 70 years old or where insurance event results in first category disablement of the insured individual.
- Redemption amount in case of earlier termination by the insured individual of pension insurance agreement or long-term life insurance agreement.
- Payments from insurance companies under other kind of insurance are exempt from tax provided:
- In case of life/health insurance the fact of insurance event is duly confirmed by appropriate documents. In the event of death of an insured individual payment to beneficiary is taxed similarly to inheritance.
- In case of property insurance the amount of reimbursement does not exceed market value of the insured property (increased by insurance payments) and is used for repair or replacement of the damaged or lost property. If lost property is not replaced with similar property within terms established by the law (calendar year following the year of insurance event for movable property and two calendar years following the year of insurance event for immovable property) amount of insurance reimbursement will be subject to tax at standard rate.
Inheritance and gifts
Value of property (except for securities, corporate rights and intellectual property) inherited by/from spouse is taxed at a zero rate.
5% rate applies in case of inheritance from parents, parents-in-law and children of:
- Movable property, real estate, amounts due under insurance agreements;
- Cash and deposits in the amount up to 100 minimum wages (from 1 December 2003 - UAH 237).
Tax at standard rate (13%/15%) applies to:
- Value of securities, corporate rights and intellectual property inherited from spouse, parents, parents-in-law and children;
- Amounts of cash and deposits over 100 minimum wages inherited from parents, parents-in-law and children;
- Royalties in respect of inherited intellectual property rights;
- Any property inherited from individual who is not first level family member (i.e. spouse, parents, parents-in-law and children).
Tax is levied at double standard rate (26%/30%) to any property inherited from non-residents.
The above rules for taxation of inheritance will be effective from 1 January 2005. Rules for taxation of inheritance will also apply to cash, property, property rights, value or services received by individual as a gift after 1 January 2005.
Tax administration
Employers and other business entities that pay income to individuals are defined as tax agents who are responsible for withholding the tax from income and remitting it to the state. Tax agents should pay tax to the state at the date of payment of income to individuals. Tax in respect of income that is accrued but not paid to individuals should be paid to the state within 20 calendar days following the end of reporting month.
If income is paid in-kind or from cash-box, tax agent should remit tax to the state on the next banking day following the day of payment. Tax agents who failed to withhold tax from income paid to individuals are responsible for payment of tax liability whereas individual concerned should be free from obligation to settle the tax liability.
Tax agents should file quarterly reports on income paid to individuals and amount of tax withheld from such income.
Individuals who received their annual income exclusively through tax agents are not obliged to file a tax return. However, such individuals are free to file a tax return if they wish to claim tax credits.
Overpaid tax should be returned to the taxpayer within 60 calendar days from the date of filing the tax return. In case of delay of tax repayment the state treasury has to pay to the taxpayer a fine in the amount of 10% (if delay is up to 30 calendar days), 50% (if delay is from 31 to 90 calendar days) or 100% (if delay is longer 90 calendar days) of the amount due.
According to Law “On Settlement of Tax Liabilities” No 2181–III dated 21 December 2000 personal income tax returns should be filed by 1 April of the year following the reporting one and tax should be paid within 10 days of filing the return.
Controversial requirement currently applicable to foreign nationals to file preliminary and quarterly tax returns and make quarterly advance tax payments will be terminated effective 1 January 2004.
(Law of Ukraine “On Tax on Individuals Income” № 889-IV dated 22 May 2003)
(Tax & Legal Affairs , No 54/10, October 2003)
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