11 Taxation of individuals

Content

• 11.1 Territoriality and residence
• 11.2 Private entrepreneurs
• 11.3 Gross income
• 11.4 Tax-exempt income
• 11.5 Deductions
• 11.6 Foreign tax credits
• 11.7 Taxation of non-residents
• 11.8 Tax compliance

 11.1 Territoriality and residence

Individuals are classified into two categories for income tax purposes:

• Residents are liable for tax on their worldwide income. The standard rate is applicable to most types of income, including salary, dividends, royalties and investment income. Special tax rates apply in some cases specifically established by the law (e.g. inheritance, gifts, winnings and prizes, interest from deposits). Taxable income of foreign nationals who are tax resident in Ukraine is determined in the same manner as for Ukrainians.
• Non-residents are liable for tax only on their Ukrainian source income. A double tax rate (i.e., 30%) applies, except for interest, royalty, dividends and for salary received from a Ukrainian employer.

Tax residence

A person is tax resident in Ukraine if he or she has a place of abode in Ukraine. However, if the person also has a place of abode in another country, several tie-breaker rules apply to determine whether that person should be treated as a Ukraine tax resident. Thus:

1. The individual is deemed to be resident of Ukraine if he has a permanent place of abode (domicile) in Ukraine but not in another country.
2. If the individual has a permanent place of abode (domicile) in Ukraine and another country, the person is deemed to be resident in Ukraine if his centre of vital interests is in Ukraine. A sufficient but not exclusive ground for determining the country of an individual's centre of vital interest is the place of permanent abode of the individual's family members.
3. If an individual's centre of vital interests cannot be determined or the individual has no domicile in any country, the individual will be deemed to be a resident of Ukraine if he stays in Ukraine at least 183 days during the tax year (calendar year).
4. If residence status cannot be determined based on the previous rules, an individual will be deemed to be resident of Ukraine if he is a citizen of Ukraine.

An individual may also elect voluntarily that his or her main place of abode (and therefore tax residence) is in Ukraine. The law does not define the procedure for how this election should be made, but in practice a foreign national may apply in writing to the local tax office where he has a place of abode asking to be considered as tax resident for a given calendar year. Based on the application, the tax authorities should issue a written confirmation of the individual's tax residence status.

Non-residents are individuals who are not treated as tax residents of Ukraine under the previous rules.

Registration

All taxpayers, including foreign nationals, must register with the State Registry for Individual Taxpayers, and be assigned a personal tax ID number. This number is required for various transactions such as registering Ukrainian companies, renting apartments, opening bank accounts, and paying personal income tax. Receiving the ID number is also one of the conditions for obtaining the right to claim a tax credit (deduction) in respect of certain expenses incurred by a taxpayer during the reporting year.

For personal income tax purposes, taxpayers include:

• residents who receive income from sources in Ukraine and abroad; and
• non-residents who receive income from sources in Ukraine (except individuals who have diplomatic immunity).

In practice, non-resident individuals whose income from Ukraine is exempt under a relevant tax treaty will not need to obtain a tax ID number.

 11.2 Private entrepreneurs

Individuals who are registered as private entrepreneurs (including foreign nationals) may elect to be covered by the "single (unified) tax" regime if they meet the qualification criteria.

The unified tax regime may be enjoyed for certain activities by private entrepreneurs employing up to ten employees and with annual proceeds from the sale of goods and/or rendering services of up to UAH 500,000 (approximately USD 99,000). The monthly single (unified) tax is fixed by local authorities, and ranges from UAH 20 to UAH 200 (approximately USD 4 to USD 40), depending on the type of activity. Payment of the single (unified) tax relieves a private intrepreneur from other taxes such as personal income tax, VAT, social security taxes (except contributions to the Pension Fund), and land tax in respect of their income earned from the entrepreneurial activities.

A private entrepreneur is obliged to file with the local tax authorities reports on the amount of income received and tax paid during the reporting period within five calendar days after the end of each reporting quarter. A report to the Pension Fund is filed once a year before 1 April of the year following the reporting one.

 11.3 Gross income

Resident taxpayers are liable to pay tax in respect of any income received or credited in Ukraine or abroad during the reporting period, except for items specifically exempted from tax under the law.

Employment income

All income received or credited from employment in monetary form or in kind during a calendar year is subject to personal income tax. This includes all basic pay, overtime pay, supplemental pay, awards and bonuses, compensation for unused vacation, honoraria, taxable pensions, tax reimbursements, allowances (e.g., living, education, transportation, entertainment, and the like), fees (including directors' fees), and other income of similar nature, whether monetary, in kind, or made by way of payment to third parties on behalf of the employee.

Additional benefits granted by employers also constitute taxable income, and include the following main items:

• Accommodation or other tangible or intangible assets provided for an employee's use free-of-charge.
• The value of goods and food provided to employees free of charge, other than special clothing, uniforms and food provided within norms established by the Cabinet of Ministers of Ukraine.
• The reimbursements of an employee's personal expenses or losses, except for items specifically exempted from tax (e.g., statutory daily allowances, cost of phone calls, dry cleaning included in the hotel invoice).
• The value of goods and services provided free of charge and the value of discounts when goods and services are sold to employees at less than the market price.

If a benefit is provided in non-monetary form, the tax base should be determined by grossing up the value of the benefit based on the formula:

Tax base = benefit value x 100% / (100% - employee's tax rate).

There are a number of important exceptions:

• The provision of accommodation or tangible assets for use free-of-charge is not taxable when it is a condition for performing labour functions by an employee or is provided under an employment contract or legislation within limits specified therein.
• Benefits in the form of free use of vehicles do not constitute taxable income if granted by a resident employer that is subject to corporate income tax.
• Amounts paid by an employer in favour of an employee under any voluntary insurance constitute taxable income for the employee. However, an exemption is available for a portion of premiums under long-term life insurance or non-state pension insurance.
• Amounts paid by employers to educational institutions for training of employees is not taxable within limited amounts.

Income from independent activities

Income from independent activities is subject to the standard rate. However, individuals registered as private entrepreneurs may elect to be covered by the single (unified) tax regime instead.

Rental income

Rental income is subject to tax at the standard 15% tax rate. The income is determined based on contractual fee but cannot be lower than the minimum rental fee determined according to the methodology established by the Cabinet of Ministers of Ukraine.

If the lessee is a business entity, it is obliged to act as a tax agent, and to withhold 15% tax from rent payments to an individual, unless that individual is registered as a private entrepreneur.

Income from prizes and winnings

Income in the form of prizes (other than cash prizes from the state lottery) and winnings is taxed at double the standard rate (30%). If the prize or winnings are received in non-monetary form, the income is grossed up to determine the tax base. The tax is withheld by the person paying the prize or winnings.

Investment income

Income from the sale of investment assets is determined independently of other income. The gain or loss is determined for each investment asset sold (sales proceeds less acquisition cost), and then aggregated for the year. If the aggregate amount is positive, it is subject to tax at the standard 15% tax rate. If the aggregate amount is negative, it is carried forward and applied against investment income in subsequent years.

There are no requirements in the law for individuals to report sales income based on market values. However:

• The tax value in the hands of the person buying the financial asset will be the amount paid. In the case of a gift, the recipient is deemed to have acquired the asset for a zero value.
• If an investment asset is sold to a related person at a loss, the loss is disregarded. Losses when an asset is gifted are also disregarded.

The following transactions are also treated as the sale of an investment asset:

• The exchange of one investment asset for another investment asset. The sales proceeds are deemed to be the market value of the shares that the individual transfers.
• The redemption of a corporate right by the issuer.

Disposal of real estate

Revenues from the sale of real estate (including incomplete constructions) is subject to tax at either 0%, 1% or 5%, depending on the nature of the real estate and the number of real estate sales performed by the same taxpayer during the calendar year. The tax is based on the higher of the price indicated in the sale agreement and the property's value calculated by the authorised state authority.

The tax should be paid before the notarisation of the sale agreement.

Disposal of movable property

Gross revenue from the sale of movable property is subject to tax at the standard rate (15%).

As an exception, one sale per calendar year of a car, motorbike, yacht or boat with engine will be subject to a lower 1% rate, provided the seller pays the stamp duty before the sale agreement is notarised.

Inheritance and gifts

Income received as an inheritance or gift is subject to tax at the following rates:

• 0% - if received from a spouse, son or daughter, parent, parent-in-law, or a spouse's children;
• 5% - if received from resident testators other than those stated above;
• 15% - if received from a non-resident testator irrespective of the relations with such testator.

Proceeds from insurance

Payments from insurance companies under the following kind of insurance are exempt from tax:

• Proceeds from health insurance, provided the insurance event is confirmed by appropriate documents.
• Proceeds from property insurance, provided the amount of reimbursement does not exceed the market value of the insured property (increased by insurance payments) and is used for repair or replacement of the damaged or lost property. If the lost property is not replaced with similar property within the period 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), the amount of insurance reimbursement will be subject to tax at the standard rate (15%).

Proceeds from life insurance when an insured person dies are taxed on the same basis as an inheritance.

 11.4 Tax-exempt income

Apart from the exceptions already noted in the discussion on employment income, the following are the main items of income that are exempt from taxation:

• Income from investments in securities issued by the Ministry of Finance and prizes from state lotteries.
• 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.
• Interest income from deposits placed with banks and non-banking financial institutions and from saving certificates (exemption is available until 31 December 2009).

 11.5 Deductions

Business

Private entrepreneurs (other than those subject to the unified tax regime) are entitled to deductions from their gross income on the same basis as corporations.

If the actual expenses can not be documented, then a standard deduction may be applied. The rate of deduction ranges from 5% to 60%, depending on the type of activity.

Non-business

There are no major deductions available to individuals in Ukraine. A registered taxpayer may claim a deduction (so-called "tax credit") from annual taxable income for a limited amount of documented expenses incurred in the reporting year for:

• Secondary professional or higher education of the taxpayer and his or her family members (spouse, parents, parents-in-law, children).
• Premiums for voluntary long-term life insurance or non-state pension insurance.
• Donations to Ukrainian charity and not-for-profit organizations in an amount exceeding 2% of the taxpayer's taxable income.

The total deductions may not exceed the amount of taxable income received in the form of salary. Amounts not deducted from income of the reporting year cannot be carried forward.

Social security contributions

Taxable income is reduced by the amount of mandatory employee contributions to the State Pension Fund and to other social security funds.

The employer's mandatory pension and social security contributions are not included in the taxable income of the employee.

For details on Social Security contributions, see Section 7.3

 11.6 Foreign tax credits

Tax residents are allowed to credit foreign taxes paid on income received abroad against their Ukrainian tax liabilities provided there is a double tax treaty between Ukraine and the relevant foreign state. The amount of foreign tax credit is limited to the amount of Ukrainian tax that would arise from the equivalent income in Ukraine. The taxpayer also requires an official confirmation of payment issued by the relevant foreign tax authority concerned

 11.7 Taxation of non-residents

Non-resident individuals are subject to Ukrainian tax only on income that has a source in Ukraine. The source rules for individuals are broader than those for corporations. For individuals, any income received from activities performed, capital employed or property used in Ukraine will have a Ukrainian source.

Income earned by non-residents from sources in Ukraine in the form of interest, dividends or royalties is taxed at the same rates as for residents, unless subject to a lower rate under a relevant tax treaty. Salary and director's fees paid by a Ukrainian resident employer (including a representative office) are also taxed at the standard rate.

Any other income earned from sources in Ukraine, including salary and director's fees paid by a non-resident employer, is taxed at double the rate applicable for residents. However, consideration should be given to the provisions in Ukraine tax treaties, which often exempt income earned by individuals from short-term visits to Ukraine from Ukrainian tax.

 11.8 Tax compliance

Obligations of withholding agents

Employers and other business entities that pay income to individuals are defined as tax agents, and are responsible for withholding the tax and state pension and social insurance contributions and remitting it to the state and appropriate authorities.

Tax agents should remit the withheld tax to the state not later than the date of payment of income to individuals. Tax in respect of income that is accrued but not paid to the individuals should be transferred to the state within 20 calendar days following the end of reporting month.

If income is paid in kind, the tax agent should remit the tax to the state not later than the next banking day following the day of payment. Tax agents who fail to withhold tax from income paid to individuals are responsible for payment of the tax liability (plus fines and interest). The individual concerned is not obliged to settle the tax liability (i.e., the tax authorities may only recover the tax by pursuing the tax agent).

Tax agents must also file quarterly reports on income paid to individuals and the amount of tax withheld from that income.

Tax returns for individuals

A taxpayer is not required to file an income tax return if his or her only income during a reporting year is received from tax agents. However, if the individual wishes to claim a tax credit (deduction) for expenses incurred during the year or to claim a foreign tax credit, the individual may file a return.

Overpaid personal income tax should be returned to the taxpayer within 60 calendar days from the date of filing the tax return. If there is a delay, the state treasury has to pay a fine to the taxpayer in an amount from 10% to 100% of the refund due, depending on the period of delay.

A resident or non-resident individual who receives taxable income from entities or sources that are not tax agents is required to file a personal income tax return with the tax authorities. The return is filed with the local office where the individual resides, and must be filed by 31 March of the year following the reporting year. Tax due on the return must be paid by 10 April. Payment must be made in local currency (hryvnia).

Usually, no extensions are available. However, an individual who was not able to file the tax return by the deadline because of reasonable circumstances may apply for an extension of time to file. Adequate documentation must be provided to support the application. The return would then be due within 30 calendar days after the reasonable circumstances end, and any payment would be required within ten days of that new filing date.

If a tax resident departs from Ukraine, the individual must submit a "departure tax declaration" no less than 60 days before his departure, and settle the tax due based on the assessment issued by the tax authorities. No such requirement exists for non-resident individuals.