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Double-taxation relief and tax treaties
Tax system overview
Ukrainian tax legislation is built on the principle of non-discrimination and equal terms of taxation for any business entity in the Ukraine. This applies equally to foreign investors. The following laws are the main tax laws in the Ukraine:
- Law on the System of Taxation;
- Law on Local Taxes and Duties;
- Law on Taxation of Company Profits;
- Law on Value-Added Tax;
- Law on Unified Customs Tariffs; and
- Laws on Excise Duty.
Under the Law on the System of Taxation, only taxation laws may introduce taxes and duties and set their rates. Only taxes and duties stipulated by the Law on the System of Taxation shall be paid. Amendments to this Law and other taxation laws concerning rates and the mechanism for calculating taxes shall be made not later than six months before a new budget year and will take effect from the beginning of the new budget year. The Law on Taxation of Company Profits fixes the rates of taxation of profits depending upon the business activities concerned. The Law on Value-Added Tax fixes the general rate of value-added tax at 20 per cent as well as defining a range of transactions that are exempt.
Double taxation relief and tax treaties
Under Article 20 of the Law on the Regime of Foreign Investment, the national regime applies to a foreign investor or its joint venture as regards taxation unless otherwise stipulated by international treaties. Ukraine has entered into bilateral treaties on the avoidance of double-taxation with more than 60 countries including Austria, Belgium, Bulgaria, Great Britain, Finland, France, Germany, The Netherlands, Norway, Poland and the USA. Some of these concluded treaties provide for other rates of taxation in relation to dividends, interest and royalties than do the current national laws of Ukraine. For example, under the treaties of Ukraine with Germany, France and China, tax imposed upon dividends shall not exceed:
- 5% of the gross amount of dividends if the investor owns at least 20% (for German and French investors) or 25% (for Chinese investors) of the capital of a company; or
- 10% of the gross amount of dividends in other cases for German and Chinese investors and 15% for French investors.
Under the treaties with Germany and France, tax on interest shall not exceed:
- 2% of the gross amount of interest paid in connection with the rendering of loans by a bank or financial institution, sale under credit conditions of industrial, commercial or scientific equipment or the rendering of services or sale of goods; or
- 5% (for Germany) or 10% (for France) of the gross amount of the interest in other cases. Under the treaty with China the tax on interest shall not exceed 10% of the gross amount of interest. The treaty with Belgium stipulates that tax shall not be more than 15% of the gross amount of interest.
Interest is not taxed if:
- it is paid to the government of another contracting state or under loans guaranteed by another contracting state or authorised body of a contracting state;
- it is paid under commercial loans connected with the leasing or supply of goods, products or services;
- it is paid under loans rendered by banks, excluding loans payable to the bearer; or
- it is paid on deposits with banks, including state-owned banks except deposits payable to the bearer.
The treatment of the taxation of royalties has been specially agreed upon in the treaties with Germany and China. Under the treaties, royalties arising in one contracting state and paid to an investor from another contracting state shall be taxed in the other contracting state if the investor is the owner of the royalties. Where royalties are taxed in the first contracting state, the tax shall not exceed 5% (for German investors) or 10% (for Chinese investors) of the gross amount of royalties.
Corporate taxes
The Law on Taxation of Company Profits fixes the following rates of taxation of profits for resident entities:
- Basic profit tax rate of 25%;
- Zero tax rate on profits obtained from the fulfillment of agreements on long-term life insurance and agreements on pension insurance within the system of non-governmental pension fund schemes;
- Rate of 3% on profits from insurance contracts on other kinds of insurance;
- Rate of 25% on dividends, paid when dividend payments are made to shareholders, with the same rate and tax payment mechanism applying when net profits from joint investment activities (for example, production activities where no legal person is created) are paid to the parties;
- Zero tax rate for gross profits of not-for-profit entities received free of charge in the form of money or property as financial aid or charitable donations;
- Rate of 25% on prizes, including wins from the lottery, casinos or other gambling entities;
- Rate of 6% on the gross profits of non-residents received as residents’ payments for freight on vehicles;
- Rate of 25% on transactions involving securities.
Under Article 13 of the Law, for the purposes of taxation the following are treated as income received by a foreign investor:
- Interest, discount profit (including interest paid under promissory notes) paid in favour of a non-resident company;
- Dividends paid by resident companies;
- Royalties, engineering services and income from freight;
- Leasing fees paid by a resident or permanent representative office in favour of a non-resident company;
- Profits from real estate sales;
- Profits from securities transactions;
- Profits from investment contracts;
- Fees from cultural, educational, religious, sporting and entertainment activities in Ukraine;
- Brokerage, commission or agents’ fees received for services rendered in Ukraine in favour of resident companies;
- Contributions and premiums for insurance or reinsurance of risks in Ukraine (including insurance of life risks) or insurance of resident companies from risks outside Ukraine;
Profits from wins (prizes) from the lottery (except for state lotteries), casinos or other gambling entities; from the organisation and undertaking of gambling business and lotteries (except for state ones); - Profits in the form of charity contributions and donations for the benefit of non-residents; and
- Other profits from business activities in Ukraine, excluding compensation for goods, works or services rendered to resident companies, including services for international communications or international information.
Taxes on individuals
Before the adoption of the Law on Income Tax for Individuals, matters were regulated by the Decree of the CMU on Income Tax for Citizens. Income tax was calculated on the basis of a progressive scale: the more the individual earns – the higher is the tax rate. The Law on Income Tax for Individuals, adopted on 22 May 2003, stipulates a fixed tax rate for incomes of individuals at the level of 15% of taxable income. At the same time, the Law prescribes some exemptions:
rate of 5% shall be used for calculating of income tax from:
- interest on current or deposit bank account (including card account);
- interest or discount from inscribed (registered) savings (deposit) certificates;
- interest on contributions to credit unions established in accordance with the legislation;
- investment income which is paid by the company operating the assets of mutual investment institutions;
- profits from hypothecation certificates in accordance with the legislation;
- profits from certificates of real estate activities funds;
- profits paid by the president of a building financing fund;
- profits of a participant in bank management funds. rate of 30% shall be used for calculating tax from wins (prizes) from the lottery (except for state lotteries).
The tax rates for residents and non-residents shall be the same.
Incomes of foreigners, in addition to the sources of income of residents, shall also be taxable if a non-resident:
- works in an entity, located in Ukraine, including representations of non-resident legal entities irrespective of sources of income;
- is a member of a governing body of resident legal entities or resident businesses or their representations abroad and obtains wages thereupon, other payments or compensations;
- has a business or performs independent professional activities in the territory of Ukraine irrespective of sources of income.
Special tax situation
A special taxation regime is stipulated for small and medium sized enterprises (SMEs). A simplified taxation procedure has been set up under Presidential Decree No. 1328/98 on “Support to Agricultural Producers” (2 December 1998) together with CMU Regulation No. 271 “On the Procedure for Accumulating and Using money Accrued by Agricultural Producers as VAT Taxpayers for the Sale of Goods (works and services) of their own Production”. These documents determined that, from 1 January 1999 until 1 January 2004, VAT on the sale of goods, works and services by agricultural producers (APs) - except for milk and “meat on the hoof” - to reprocessing plants should not be paid to the state budget. These moneys should be placed in special accounts and used exclusively to purchase raw materials and technical equipment for the production needs of APs. The VAT exemption for the sale of milk and “meat on the hoof” and the system of using VAT receipts for AP production needs was effected by the Law amending Article 11 of the VAT Law which took effect on 10 March 1999.
Almost immediately after the Presidential Decree, a Law “On Fixed Agricultural Tax (FAT)” was adopted. This Law stipulates payment of FAT instead of 11 state taxes and duties. These privileges are available to any AP if at least 50% of its gross profits in the previous year were obtained from the production or the reprocessing of agricultural goods. FAT may be paid in cash or in kind and is fixed for the duration of the Law.
To ease the taxation burden for SMEs working in other fields of business activities, the President of Ukraine issued another Decree which allows SMEs to pay a unified tax («UT») instead of 10 different taxes. The principle of the UT is that taxpayers pay some fixed tax to the budget based on turnover for a certain period. The UT is paid to the treasury account and the treasury itself splits the payments among corresponding funds and budgets (20% and 23% are paid to the state and local budgets, respectively and 42% and 15% are paid to the State Pension and Social Security Funds, respectively). The UT system allows any business to operate without burdensome reporting to the tax inspectorate. The UT is applied to SMEs with less than 50 employees and with annual turnover below 1 million UAH.
The Decree proposes two kinds of UT that can be chosen by the taxpayer but only once a year:
- payment of the UT at the rate of 6% of turnover plus VAT at the rate 20%; or
- payment of the UT at the rate of 10% of turnover, without payment of any VAT.
The UT is paid instead of:
- VAT, excluding cases when the UT is 6%;
- Corporate tax, which is 25% of gross profits;
- Land tax;
- Fee for use of natural resources;
- Innovation fund tax, which is 1% of turnover;
- Social security fee, which is 5.5% of the payroll;
- Road fees, which are up to 1.2% of turnover;
- Communal tax (which is paid to the local budget and is not burdensome);
- Pension fund fees, which are 32% of the payroll;
- Fee to the Disability Social Insurance Fund.
Withholding taxes
A resident company that makes payments in favour of an investor as its profit from business activities in Ukraine shall:
- deduct from the payments and additionally pay tax on repatriation of profits at a rate of 15%;
- deduct from the payments and additionally pay tax at a rate of 6% on profits received from freight;
- deduct from the payments and additionally pay tax at a zero tax rate on payments made in pursuance of insurance or reinsurance contracts with the insurers which meet the requirements of the level of financial reliability stipulated by the Ukrainian government;
- deduct from the payments and additionally pay tax at a rate of 15% on payments made in pursuance of insurance or reinsurance contracts with other insurers;
- deduct from the payments and additionally pay tax at a rate of 20% on profits received from advertising services in Ukraine; and
- deduct from the payments and additionally pay tax at a rate of 25% on profits received from any other activities.
Profits received as interest or discounts on state securities sold to investors outside Ukraine through authorised agents (non-resident companies) or as interest paid to investors for credits received by Ukraine and reflected in the State Budget of Ukraine or estimates of expenses of the National Bank of the Ukraine are exempted from taxation.
