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UKRAINE
Taxation of Nonresident Entities
Corporate Assessments and Payments
Personal Assessments and Payments
As Ukraine moves toward a free market economy, it faces numerous difficulties. However,
Ukraine offers ample investment opportunities in terms of its growing consumer demand for
goods and services and its skilled work force.
Deloitte & Touche, the Deloitte Touche Tohmatsu International member firm in Ukraine,
has an office in Kiev. The firm offers accounting, statutory and international auditing,
management consulting, and tax and legal services, as well as services that assist needs
arising from the changes occurring in Ukraine, such as banking and foreign exchange
services, privatization consulting, financial investigations and valuations, and human
resource services.
Office Director: Nicolas Gerra
Auditing Services: Sergey Kostiuk or Maurice Downey
Management Consulting Services: Alexander Tarabukhin
Tax and Legal Services: Yevgen Zanoza
Telephone: +7 (044) 229 4365
Telecopier: +7 (044) 228 7644
Forms of Business Organization. Besides noncorporate state enterprises, the main types
of business entities in Ukraine are open and closed joint stock companies, full and mixed
partnerships, sole proprietorships, and branch and representative offices of foreign
companies. Joint stock companies (open or closed) and mixed partnerships are the only
forms that constitute separate legal entities.
Exchange Controls. The karbovanets (URK), the legal Ukrainian currency, is not fully
convertible. Residents and nonresidents may hold hard currency and karbovanets accounts
with authorized banks and may import and exchange currency in accordance with the
procedures of the National Bank of Ukraine. Ukrainian exchange control legislation defines
residents of Ukraine as:
Nonresidents are:
Legislation provides that transactions between Ukrainian legal entities must be made in
legal Ukrainian currency (URK) only. Transactions between Ukrainian legal entities and
nonresidents of Ukraine can be in foreign currency.
Ukrainian legislation requires the mandatory conversion through authorized banks on the
Interbank Currency Market of Ukraine of 50% of foreign currency received by residents at
the market rate. However, hard currency receipts of enterprises with foreign investment
from sales of products, services, or works produced by themselves are exempt.
Further exemptions from the 50% mandatory conversion are:
Residents and nonresidents of Ukraine need individual licenses from the National Bank of
Ukraine for effecting currency operations, except for:
* Foreign currency that was duly brought into Ukraine at an earlier date.
* Foreign currency payments related to foreign trade transactions.
* Foreign currency payments related to credits, interest, and dividends.
* Foreign and Ukrainian currency taken out of Ukraine by residents of Ukraine (up to the limits specified by the National Bank of Ukraine).
* Repatriation of foreign investment amounts in the case of termination of investment activity.
Bringing foreign currency into Ukraine is not subject to licensing.
Local Participation or Management Requirements. Foreign investors may own 100% of
shares of an enterprise, and the personnel of a company may be made up entirely of foreign
individuals. However, the number of expatriates within a representative office may be
subject to a quota.
Investment Incentives. Enterprises with foreign investment, including joint ventures that
were created before 1 January 1995, can enjoy tax holidays for up to five years from the
date a qualifying investment is made. A qualifying foreign investment is an investment by a
foreign-owned enterprise in a Ukrainian legal entity of not less than 20% of the paid-in
capital that complies with one of these conditions:
If the contribution of the foreign investor to the authorized capital is less than the equivalent
of US$50,000 but more than US$10,000, the enterprise with foreign investment can enjoy a
tax holiday for one year from the date the investment is made.
A newly created business will be deemed to be an enterprise with foreign investment if the
qualifying investment is made within a calendar year from the registration date. Tax
incentives become effective for the enterprise from the date the qualifying investment is
made.
Foreign investment projects in some priority areas also benefit from the following
privileges:
Accelerated depreciation rates will apply to plant and equipment.
However, according to the Law on Tax on Profit, which came into force on 1 January
1995, these benefits will only be available during the first five years after the date on
which the investment was made to enterprises with foreign investment created and
registered prior to 1 January 1995.
Privatization. Privatization is an important part of the government program to improve
market relations in Ukraine. The program of privatization includes privatization of the state
residential fund and privatization of state enterprises and companies. Unfortunately, no
provision for the privatization of land exists at the present time. Land cannot be purchased
by a legal entity but only leased from the state.
Entities targeted for privatization by foreign investors are defined by the state property fund
of Ukraine. Participation of foreign investors in the privatization process is allowed, but
with limitations. For example, low-priced enterprises can be purchased by foreigners only
after an auction is held for local investors or the enterprises are otherwise offered to
Ukrainians. However, the law is expected to be changed in 1995 to authorize participation
of foreigners in auctions on an equal rights basis.
Areas where privatization is restricted at present include power and energy production,
defense industry enterprises, and units of the main state transportation organizations. Only
13% of enterprises intended for privatization were privatized by the end of 1994.
Companies registered under Ukrainian law are regarded as resident and are taxable on
their worldwide profits. The tax is known as the tax on profit.
Tax on Profit Rates. The standard rate of tax, effective January 1, 1995, on profit is 30%.
This rate applies to both resident and nonresident entities. However, some types of
activities (such as agricultural production and processing for the taxpayer's own purposes,
fishing and fish product processing, and construction in the countryside) are exempt from
tax.
In addition, the profit of a Ukrainian legal entity is exempt from tax if:
Taxable Income. Taxable income includes a company's worldwide profits with some
deductions for business expenses.
Foreign income taxes may be credited against Ukrainian income taxes, but the credit is
limited to the amount of income tax payable on the foreign-derived income.
Exchange gains and losses are generally included in the computation of taxable income.
The former Soviet Union's regulations requiring the straight-line method of depreciation
are still valid in Ukraine. However, accelerated depreciation may be used if the tax
authorities grant their specific approval; approval is granted to investments in new
technology.
Taxation of Nonresident Entities
Nonresident entities with permanent establishments in Ukraine pay tax on their income
received from activities in Ukraine.
Nonresident entities operating permanent establishments usually pay tax once a year.
Tax provisions regarding groups of companies do not exist. One of the parties to a group
must maintain accounts for the joint activity of the group. The profit obtained from the joint
activity is allocated to the companies according to their agreement, and each company adds
the allocated income to its separate income for tax purposes. No special provisions apply
to intercompany dividends. No provisions regarding thin capitalization and no specific
provision on transfer pricing exist.
Corporate Assessments and Payments
The tax year corresponds to the calendar year. Resident companies must file final returns
by 15 March of the year following the tax year. Taxes are assessed on a quarterly basis,
and preliminary payments of the estimated tax on profit are required on a monthly basis.
Nonresident entities with permanent establishments in Ukraine must file final returns by 5
February of the following year. Taxation of such entities is calculated on a yearly basis.
Resident individuals of Ukraine are subject to personal income tax on their worldwide
income. Nonresidents are subject to tax on Ukrainian-source income only.
Treatment of Families. Married couples are assessed separately, as are children.
Personal Income Tax Rates. Tax rates are deductible by 50% for income obtained in hard
currency. Profit distributions (such as dividends and shares of profits) of Ukrainian tax
residents are taxed at a rate of 15%.
Taxable Income. Taxable income comprises gross income from all sources. Personal
taxable income in Ukraine is determined by reference to the residence status of the
taxpayer. A person is considered to be a resident in Ukraine if he or she is present in
Ukraine for more than 183 days during a tax year (the calendar year). A resident is subject
to Ukrainian taxation on his or her worldwide income earned during the whole year.
Exempt income. Some income is exempt. Of most interest to expatriates are certain
employer-paid allowances, which are exempt:
Personal Assessments and Payments
Foreign citizens who are subject to income tax in Ukraine should file forecasts of their
current-year personal income with the State Tax Inspectorate by 1 February of the cur-rent
year. If foreign citizens come to Ukraine after 1 February, they should file forecasts within
one month of their arrival in Ukraine.
The tax year is the calendar year. Four tax installments should be made during a year: on 15
March, 15 May, 15 August, and 15 November. Foreign citizens should submit personal tax
returns on 15 April, 15 July, and 15 October. The final tax return must be filed by 1
February of the year following the tax year. The final settlement must be made with the tax
authorities within one month of this date.
Basic Rates. Dividends paid to nonresident companies are subject to a withholding tax of
15%.
Revenue that is obtained by a foreign legal entity from Ukraine but is not related to
business activities in Ukraine is taxed at the following rates:
* Fifteen percent for revenues from dividends, interest, royalties, licenses, and rent.
* Six percent for international freight payments in favor of foreign legal entities.
These rates apply to all foreign legal entities unless a double tax treaty provides otherwise.
Rates Under Double Tax Treaties. Ukraine honors the treaties concluded by the former
Soviet Union, which generally follow the Organization for Economic Cooperation and
Development (OECD) model. Among these treaties are those concluded by the Council for
Mutual Economic Assistance (COMECON). Signatories of these treaties also included
Bulgaria, the former Czechoslovakia, Hungary, Mongolia, Poland, and Romania, but
Hungary no longer recognizes the COMECON treaties, nor do some of the other states
formed out of the Soviet Union-in particular the Baltic states. Furthermore, Ukraine has
signed and ratified new treaties with Belarus and Poland, which will supersede the
COMECON treaties.
Value Added Tax. Value added tax (VAT) is applied at a rate of 20%. According to
Ukrainian legislation, the sale of goods or services is subject to VAT. The amount of VAT
that a business will transfer to the state budget for any given period is determined as the
difference between the VAT paid or to be paid for materials, goods, and services and the
VAT received from customers.
If VAT on sales is less than VAT on expenses, VAT is not refunded from the state budget,
except for any VAT paid relating to goods that are not subject to VAT.
Export sales; diplomatic sales; and sales of coal, coal powder briquettes, and electricity
are exempt from VAT. In such cases, VAT paid on expenses may be either deducted from
future payments or reclaimed from the state budget.
VAT on imported goods (import VAT) has to be paid in Ukrainian karbovantsi by
Ukrainian legal entities when the customs declaration is submitted to the Customs Office.
The value of the imported goods, for the calculation of VAT, is converted to local currency
at the exchange rate set by the National Bank of Ukraine.
Raw materials and equipment that are imported by Ukrainian residents for their own
production processes, as well as oil, gas, and raw materials and equipment and spare parts
for agricultural uses that are imported for production purposes (including barter
transactions), are not subject to import VAT.
Payroll Taxes. Payroll taxes in Ukraine include payments for social security, payments for
state pensions, payments to the state fund for the Chernobyl disaster, and payments to the
state employment fund. Payroll taxes are paid by the employer in karbovantsi on a monthly
basis. The aggregate rate is 52%. The tax base is the employer's wage and salary fund.
Excise Duty. The rate of excise duty ranges from 10% to 200%. Excise duty on imported
goods is based on the customs value, which is translated into Ukrainian karbovantsi at the
exchange rate set by the National Bank of Ukraine.
Customs Duties. Goods imported into Ukraine are subject to customs duties in accordance
with the general customs tariff of Ukraine. Some goods are subject to preferential
treatment.
For the majority of imported goods, the preferential rate of import customs duty ranges
from 5% to 10%. For some goods, mainly chemical products and the raw materials used to
manufacture them, the rate of customs duty is 0%, as Ukraine depends on foreign imports to
meet its needs in these areas. A minority of goods, which are produced by Ukrainian
producers or destined for consumption purposes (for example, agricultural products, food,
alcoholic drinks, furs, goods made from precious stones, and carpets), are subject to
customs duty at higher rates, usually from 10% to 20%, but the duty may be as high as 50%
in some cases.
Property imported into Ukraine as a contribution of the foreign investor to the statutory fund
of an enterprise with foreign investment or imported for investment purposes on the basis
of other agreements is exempt from customs duty.
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