[ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 517
Notably, when negotiating salaries, Ukrainian employees always imply a net figure, and not the company cost. Are there any tax risks stemming from subcontracting individuals vs employing them? This question is typical when a foreign company investigates options for minimizing employment costs. Individual subcontractors in Ukraine are usually individuals registered as private entrepreneurs using a simplified system of taxation (implying only 5% of unified tax applicable to an individual’s gross income). However, this option is available only provided that the subcontract does not formally replace actual employment. In other words, if relations between the company and subcontractor contain key features of labour relations (such as fixed working schedule, vacations, fixed monthly remuneration, place of work in the office, etc.), such relations will be re-qualified as employment ones. As a result, additional payroll taxes will be accrued with other related adverse consequences for the employer. Is VAT payer registration necessary? VAT payer registration is required when within 12 subsequent calendar months the company supplies VAT-able goods/services (inclusive via the internet) for an amount exceeding UAH 1 million (around 25,000 EUR in 2023). However, a company may also register as VAT payer voluntarily, in particular, along with registration of an LLC. In 2022, Ukraine introduced a “ Google Tax ”. This means that foreign companies not having a legal presence in Ukraine still have to register as VAT payers in the country and pay VAT provided that they sell e-services (e-books, streaming and cloud services, applications for mobile phones, etc.) to Ukrainian end-user individuals.
How does a Ukrainian VAT refund operate? Ukraine uses a quite complicated system for electronic administration of VAT, of which a VAT refund is a part. In simple words, the conditions and procedure can be described as follows. A Ukrainian company being registered as a VAT payer in Ukraine and having no tax debts can apply for a VAT refund with regard to the negative difference between VAT obligations and VAT credit available as a result of the reporting month. Only those VAT amounts that had been actually paid to suppliers (and which are confirmed by the respective duly registered VAT invoice issued by them) or to the state budget (e.g., upon importation of goods into Ukraine) can be refunded. A VAT refund is granted upon a special application from the taxpayer in chronological order (according to the sequence of submitted refund applications registered in the national VAT refund register). Importantly, Ukrainian companies cannot refund VAT paid to foreign state budgets or to foreign suppliers not registered as VAT payers in Ukraine. What is the tax treatment of passive income distributions to a foreign affiliated company? Passive income distributions (such as dividends, interest, royalties) are subject to a 15% domestic withholding tax. However, this rate can be significantly decreased (in some cases up to 0%) should the recipient be residing in a country which has a double tax treaty with Ukraine. Ukraine has a wide network of such treaties in effect. The key conditions for applying reduced rates under the treaty are: (i) the recipient being the beneficiary owner of respective income, and (ii) such recipient having provided the Ukrainian
ILN Corporate Group – Establishing a Business Entity Series
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