Tax reforms in the tourism industry: how do things work today?

Svitlana Nakonechna and Solomia Borshosh, Tax and Legal services

The historic sightseeing places of Lviv attract approximately 1.5 million tourists every year. This number is currently growing due to the European championship EURO 2012 along with the city’s approved strategy of economic development. The role of tourism is difficult to overstate. In fact, out of fifteen economic clusters operating in the city, tourism was recognized as one of the core spheres of the Lviv economy (along with business services).

More and more Lviv citizens are engaged in tourism or tourism-related businesses. Interestingly, there are up to ten work places operating in order to meet the needs of one tourist (hotel industry, food, travel agencies, folk crafts, advertising and promotion, media, transport and communication services, etc.). Hence, tourism is the sphere that should be most widely supported and fostered in the city. That being said, it is worth noting how the tourism industry has been impacted by the newly adopted Tax Code (TC). What has changed and how tourist business entities can operate today are the issues we will focus on in this article.

Non-deductible fees paid to ‘single taxpayers’

It is well-known that the majority of tourism businesses benefited from the simplified tax regime (single tax). That is why, the main change in the corporate profits tax (CPT) rules that affects this area is the provision of the TC under which businesses cannot deduct expenses incurred through the purchase of goods and services from entrepreneurs under the ‘single tax’ regime. As such, a business cannot deduct its expenses, which leads to its corporate profits tax liability being increased. As a result of this, businesses paying CPT now intend to limit their contracts with private entrepreneurs.

This provision has caused inconvenience for most business entities functioning in the tourism industry. For instance, let’s take one of the most essential elements of any tourist trip — transportation. The majority of transportation professionals had the single tax payer status. Today, when a travel agency orders transport services for its tourist trips, it is directly forbidden by the TC to deduct the price of the services for tax purposes. In case the majority of a private entrepreneur’s counterparties are CPT payers, the entrepreneur will have to change his/her tax status and become a taxpayer under the general rules if he/she wishes to preserve the existing business relationships. In this situation a taxpayer would pay the personal income tax — 15—17% of the profit and the 34.7% single social contribution. In total, the amount of obligatory payments would significantly exceed the single tax.

The second potential scenario for private entrepreneurs is to concentrate on the work with non-CPT payers. In some cases this is feasible, e.g. for the travel agencies who resell only tourist vouchers for individuals. On the other hand, this would still be narrow activity, as business will not have space to manoeuvre and develop in the future.

“Tax holidays” for the tourism industry

A provision of the TC allows tourism agencies to use so-called “tax holidays”. The TC allows a 0% CPT rate until 1 January 2016 for those companies which meet the following requirements: the size of their income per each tax period (cumulative from the beginning of the year) does not exceed UAH 3 million and average employees’ salary is not less than two times the minimum wage (from 1 April 2011 the minimum wage in Ukraine is UAH 960). The majority of tourist agencies operating in Ukraine meet these requirements. However, despite such an amiable provision, business entities tend not to enter into the “tax holidays” as they suspect this provision may be prematurely cancelled somewhere down the road or become a reason for recurring tax audits. Furthermore, the TC includes a list of industries which are not covered by the 0% CPT rate provision. This list, in particular, includes business entities conducting cross-border transactions, which is the case for the majority of tourism agencies. These reasons together encourage businesses to shun the “tax holidays” and continue to pay taxes in the usual manner. 

Tourism in the VAT context

In contrast to CPT rules, the TC was much stricter for taxpayers who had paid the value added tax (VAT) along with the single tax. On 1 January 2011 such entrepreneurs found themselves “out of the game” since the TC does not allow for payment of both taxes. Again, businesses have to choose whether to pay VAT and its partners receive the right for input VAT credit, or to pay only the single tax without any VAT liabilities or credits in transactions.

It is worth mentioning that the TC — similar to the previously existing VAT Law — includes a separate provision on VAT for tourism services. The innovation for tourism is that the TC establishes the same regime of taxation for both residents and non-residents. The TC excluded the provision that the supply of tourism services can only be provided by a resident. This innovation of the TC may positively influence the tourism industry throughout the country. In fact, it may attract new foreign investments which could eventually result in financial growth in the tourism industry, as well as improvement of provided tourism services.

The TC also adds exemptions to some transactions in the tourism industry such as supply of vouchers for sanatorium and resort treatment, recreation and vacation in Ukraine (except for the treatment and recreation themselves) for children under 18, as well as disabled adults. Hopefully, such exemptions will lead to a decrease in prices for the abovementioned services, making them more accessible for the population.

Tourism fees

One more innovation introduced by the TC for tourism is the implementation of a tourist fee as a local tax. This is a fee which is paid by the people who arrive at the city and receive (consume) the services of temporary accommodation with the obligation to leave the location on time. The decision on the rate of the fee was adopted by the local authorities and set at 0.5- 1% of the price of the whole period of stay at local accommodations (hotel, hostel, dormitory, etc.). Thus, the fee may increase the price of the accommodations without any increase in profitability of the industry. However, it is expected that the tourism fees collected will only be used by the local authorities for the potential development of the tourism industry.


The adoption of the TC is having a significant impact on the tourism industry. Although it is difficult to give a clear evaluation of the changes at this stage, we hope that the Ukrainian tourism industry and, in particular, the Lviv tourism market continue to develop with services being provided at traditional European levels.