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Tax Code for Ukraine

At the beginning of 2011 Ukrainian tax payers got a present; a new Tax Code which came into effect on January 1st, replacing 17 tax laws.
The introduction of this Tax Code brought about significant changes in Ukraine’s taxation system, which includes two types of taxes: national taxes that go to the total budget of the country and local taxes.

Romana SchurPrior to January 1st, 2011 there were 29 national taxes and 14 local ones, so when the new Tax Code came into place, this automatically reduced the number of taxes by 20, one of the repealed taxes being the tax on advertising. This was a positive development as a whole for simplifying the country’s taxation system.

The bulk of the budget will still be financed by:

  • Corporate income tax
  • Value added tax (VAT)
  • Personal income tax (PIT).

Corporate income tax

The changes in the way that corporate income tax is calculated and paid will apply to income earned and expenditure incurred on and after April 1st, 2010. The tax is charged on income earned from sources both within and outside Ukraine. The taxable income is reduced by the amount of expenditure determined in accordance with the requirements of the Tax Code.

A very important aspect of this new tax reform is that the corporate income tax is to be reduced over a period of four years from 23% in 2011 to 16% in 2014. This will unquestionably lighten the burden of tax payers. Practically all nations use reductions in income tax as a means to attract more investments and that is exactly what the authors of the new Tax Code are hoping to achieve.

A very important aspect of this new tax reform is that the corporate income tax is to be reduced over a period of four years from 23% in 2011 to 16% in 2014

The income of non-residents and corporate bodies categorised as non-residents will be taxed at additional income tax rates of 0, 4, 6, 12, 15 and 20%. In total, the Tax Code defines 13 main types of income of non-residents that may originate in Ukraine. For example, interest and discounts paid to a non-resident, including loans and bonds, will be taxed at the time of payment at a rate of 15%.

Value added tax

The new Tax Code provides for voluntary registration as a payer of VAT for companies, whose sales of goods and services do not exceed € 27,500. This provision applies if:

  • The company has been registered as a business for a period of at least 12 months and
  • In the past 12 months the company’s sales of goods and services to other payers of VAT make up at least 50% of its total sales of goods and services.

This restriction means that newly-established businesses must be operating for more than 12 months before they can register as payers of VAT, alternatively, they must register if their taxable sales exceed € 27,500.

Previous Ukraine’s Law on Value Added Tax stated that a company may voluntarily register as a VAT payer if such a company is conducting or planning to conduct business operations.

During the transitional period of 2011-2013, VAT will be charged at a rate of 20% and in 2014 the VAT rate will be reduced to 17%.

During the transitional period of 2011-2013, VAT will be charged at a rate of 20% and in 2014 the VAT rate will be reduced to 17%

Now that the Tax Code is in motion it is mandatory to register invoices of tax by VAT payers in the National Registry of tax invoices. The dates when this will commence to be applicable will depend on the amount specified in the tax invoice, as follows:

  • For amounts over € 92,000 from January 1st, 2011.
  • For amounts over € 46,000 from April 1st, 2011.
  • For amounts over € 9,000 from July 1st, 2011.
  • For amounts over € 920 from January 1st, 2012.

The above procedure will give the tax payers the right to apply for tax deductions on VAT. They must enter the information contained in tax invoices and/or calculated adjustments into the National Registry as established by the resolution of the Cabinet of Ministers of Ukraine.

Personal income tax

Previously, in accordance with the Law of Ukraine on Personal Income Tax, personal income tax was charged at a rate of 15% on the taxable personal income, whilst under the new Tax Code the two differentiated rates of 15% and 17% will be used. The 17% rate will only be applied if the income exceeds 10 times the amount of minimal wage which is established by the law at € 860. The differentiated tax rate is intended to enhance the revenue budget.

For some types of personal income special rates are specified by the Tax Code, for instance, dividends will be charged at a rate of 5%.

With the new laws set into place, new deadlines must be met, thus by May the 1st of the year following the tax year, one must submit income tax returns and the deadline for paying personal income tax is August the 1st of the year following the tax year.

Special tax regimes

In addition, the new Tax Code also provides three special tax regimes. Small businesses will have a simplified taxation scheme. This system can be used both by sole traders and by corporate bodies regardless of their business.

In one of the schemes a body corporate can use the simplified taxation system if it employs up to 50 people and its sales revenue does not exceed 92,000 euros. This scheme uses the payment of unified tax, which is one of the local taxes and replaces the payment of income tax, mineral resources, land tax, VAT and some other taxes.

However, tax payers using this simplified system may still choose to pay VAT and apply for VAT deductions on the purchases they make, for them their tax rate is 6%, while for those who do not pay VAT the tax rate is 10%.

Single Social Security Contribution…

Another effect that came into place on January 1st, 2011 is that instead of paying separate contributions to the Pension fund, Social Insurance fund for temporary disability, Social Insurance fund for unemployment and industrial accidents, employers will be paying a single social security contribution; the bulk of the money will go to the Pension Fund of Ukraine which in 2011 becomes a self-regulated non-profit organisation.

It should be noted that the single contribution for compulsory state social insurance is not a tax and so its payment is regulated not by the Tax Code but by a separate Ukrainian law.

The introduction of the Tax Code as a single statutory act that defines all the regulations pertaining to the charge and payment of taxes is definitely a positive development. Of course, as it is applied in practice, some of its provisions will have to be refined or amended, and some concepts will have to be defined in more detail.

As for whether the new Tax Code makes the lives of shareholders easier or further complicates them, it is something that you should be the judge of!

Prepared by Romana Schur,
Leading tax consultant of
Nexia DK. Auditors & Consultants (Lviv, Ukraine)
Exclusively for Russian Survey RS