Analyzing The Ukrainian Tax Implications Of Russia’s Invasion

Valeria Tarasenko of Dentons Kyiv discusses the Ukrainian authorities’s tax coverage modifications in response to the Russian invasion.

This transcript has been edited for size and readability.

David D. Stewart: Welcome to the podcast. I am David Stewart, editor in chief of Tax Notes Immediately Worldwide. This week: struggle and tax.

Since February 24 Russia’s invasion of Ukraine has created Europe’s largest refugee disaster since World Battle II, with greater than 10 million individuals being pressured to depart their houses and numerous casualties amongst those that remained.

As of our recording at this time, April 20, the struggle is ongoing with Russian forces refocusing their efforts within the east of the nation after failing to seize Kyiv and dropping their Black Sea flagship. The Ukrainian individuals have mounted a fierce resistance to the invasion, and in opposition to lengthy odds the federal government in Kyiv continues to function and make tax coverage.

Tax Notes reporter Sarah Paez will be a part of us in a minute to inform us about her visitor, who spoke concerning the tax modifications made in response to the invasion and what the long run may maintain.

Sarah, welcome again to the podcast.

Sarah Paez: Thanks. It is nice to be again.

David D. Stewart: Now, I perceive you lately spoke with somebody about Ukraine’s tax scenario earlier than and throughout the struggle. May you inform us about your visitor?

Sarah Paez: Certain. I spoke with Valeria Tarasenko. She’s a tax advisor with Dentons, which is a multinational legislation agency with places of work in Ukraine. Previous to the struggle she was primarily based in Kyiv, however has since relocated to Austria together with her household to flee the combating. Valeria has over 15 years of tax expertise advising Ukrainian firms on cross-border tax structuring and tax-saving options, tax dispute resolutions, and tax litigation and backbone of cross-border tax controversy.

David D. Stewart: What kind of matters did you speak about?

Sarah Paez: Nicely, we mentioned a few of the main modifications to the Ukrainian tax system throughout the struggle, together with giant reductions within the company revenue tax fee and VAT and excise taxes on gas. Valeria additionally advised me a couple of comparatively new tax regime created by the Ukrainian authorities to encourage the success of the IT companies sector in Ukraine. It has been a boon for the IT trade throughout a struggle through which most sectors have been hit very laborious economically. Lastly, we regarded forward at a few of the pending and potential future tax modifications that would affect Ukraine’s post-war economic system.

David D. Stewart: All proper, let’s go to that interview.

Sarah Paez: Hello, Valeria. Welcome to the Tax Notes Discuss podcast. It is so nice to have you ever right here.

Valeria Tarasenko: Oh, thanks.

Sarah Paez: I simply needed to form of lead in with the Russian invasion of Ukraine. Ukraine has been plunged into this struggle, so might you inform us a little bit bit about what the Ukrainian tax system has been like throughout wartime?

Valeria Tarasenko: Sure, you are proper, sadly attributable to the Russian invasion, it heated the Ukrainian economic system lots, and now we have to adapt to operate in wartime. After all, our Ukrainian authorities made lots of changes to prepare and assist Ukrainian enterprise and tried to introduce some tax system that may work each for the state and for the enterprise. These days we aren’t talking about some income, we’re talking concerning the survival of the enterprise.

The important thing message, which Ukrainian authorities addressed to all companies and inhabitants, is the companies have to keep up workplaces for Ukrainians and hopefully create new workplaces for Ukrainians which relocated from the jap half to central and western Ukraine, the place it is roughly protected to function enterprise.

Sarah Paez: Nicely, with that, what are a few of the modifications that Ukrainian companies have seen particularly of their company revenue tax?

Valeria Tarasenko: Ranging from April 1 Parliament adopted the legislation which lowered 18 % company revenue tax and the 20 % VAT to solely a single 2 % tax, which is calculated primarily based on the income the corporate had within the earlier quarter. So, just one tax is left, it is a 2 % income tax, which is clearly very low.

However it’s completely voluntary. It is not that each enterprise is obliged to switch to this method. Any enterprise which feels that taxes might be low underneath this 2 % single tax, they will voluntarily switch to the cost of this single tax.

Different firms, if it would not match with their enterprise operations, for instance, their companies haven’t been damage by this struggle scenario in Ukraine, they will proceed paying common taxes as is described throughout the common time, not wartime. However in line with statistics, I noticed that lots of Ukrainian firms, middle-sized and enormous companies, have already transferred to the cost of this 2 % income tax.

The one drawback this 2 % income tax has is the taxes must be paid prematurely. You’re calculating this 2 % tax primarily based on the outcomes of the earlier month and pay tax prematurely. If companies can afford this, in fact they switch. If not, some companies desire to remain on the common system.

Secondly, this method permits exemption from VAT, which make items, provides, and companies offered by Ukrainian firms, or imported from exterior, cheaper by 20 %, as a result of now we have 20 % VAT in Ukraine.

Plus, the reporting system can be very simplified, so it is a quite simple process to submit tax returns and pay for the brand new taxes.

Sarah Paez: That is very complete. Additionally it actually sounds just like the Ukrainian authorities is form of giving this feature to companies in case they’re actually struggling.

I needed to ask you a little bit bit extra about excise taxes and the way these may have an effect on the import and export of products throughout the struggle and likewise VAT. The VAT on the import and provide of petroleum has been lowered from 20 % to 7 %. Are you able to speak a little bit bit extra about that and what that is provided to the Ukrainian forces and likewise probably Ukrainian households?

Valeria Tarasenko: Sure, really it means lots as a result of I bear in mind, inside two weeks after the invasion began, costs of petroleum went up by 50 %, which is lots. It implies that as soon as costs to petroleum went up, costs to different merchandise may even go up due to logistics. Every thing will depend on petroleum. It was a proper determination to cancel excise tax on import and provide of petroleum and petroleum-related items, as a result of such items are topic to excise in Ukraine.

Plus, Parliament voted to cut back VAT on petroleum from 20 % to 7 % and costs on petroleum for retail prospects dropped considerably. After all, it additionally stopped costs on different items, that are not directly affected by their costs on petroleum in Ukraine, so it was completely the suitable determination.

I do not bear in mind if I discussed it or not — all these measures are short-term measures. It is only for the interval of the struggle, when the federal government declared martial legislation standing. As soon as martial legislation standing is terminated or canceled, all these excise taxes and common VAT charges might be relevant once more.

Sarah Paez: I additionally needed to ask, since you mentioned these are short-term measures, with all these tax modifications and particularly reducing taxes in lots of conditions, how is the Ukrainian authorities guaranteeing the sustainability of public income, particularly throughout wartime?

Valeria Tarasenko: It is very laborious to discuss sustainability in our scenario. It is a matter of survival. When the struggle began, the federal government really declared, “Enterprise, should you can, please pay taxes prematurely.” Plenty of companies did. They paid taxes prematurely to assist Ukraine and the state.

However now the economic system is dropping, and I noticed the reviews from IMF that the Ukrainian GDP can shrink by 35 % for 2022. So, in fact it’s extremely laborious to discuss sustainability of public revenues, however nonetheless the federal government does their finest to plan and to get some income from the taxpayers.

As I mentioned, for companies it is a key job to keep up workplaces for Ukrainian residents. Not like company tax, private revenue tax was not modified and no tax profit was offered for people or for his or her derived revenue. When Ukrainian residents obtain a wage, it will likely be nonetheless topic to 18 % private revenue tax, 1.5 % navy tax and social contributions. All these taxes will go to the state.

Secondly, how Ukrainian authorities tries to fill within the funds is it managed to subject navy bonds and it efficiently offered the bonds to Ukrainians. And naturally, it is financing from different states and from worldwide establishments, comparable to IMF. We’re lending. Sadly now we have to lend cash now.

Sarah Paez: You’ve got mentioned earlier than that the Ukrainian authorities, and by extension the Ukrainian tax system, has sort of actually been in survival mode throughout this time. Are you able to speak a little bit bit about what the tax administration has been doing? Have they suspended any of their common scheduled actions? Are there issues they are not doing?

Valeria Tarasenko: Sure, I might say that Ukrainian tax administration is now very consumer pleasant. They terminated and canceled all tax audits and no tax audit is permitted now. Really all their pointers, the best way to apply these new tax advantages which have been launched into the legislation, they’re offering rationalization how it’s a must to apply, which is allowed, which isn’t. I might say that they are pleasant to prospects, in contrast to it was earlier than as a result of their method was at all times fiscal. That is first.

Secondly its short-term tax legal responsibility for violation of tax legislation — violation will not be submission of obligatory tax returns, sure tax reporting in time, or nonpayment of taxes in time as a result of a taxpayer did not have the capability to pay. Its penalties are usually not charged for these violations, however there’s an obligation of inside six months to adjust to the tax necessities after the extermination or expiration of the martial legislation standing. Now no tax penalties are charged that apply to the taxpayer, which can be sure reduction as a result of in some areas, it was very laborious to conform. Even submitting a tax return was laborious.

Sarah Paez: What else has the tax administration performed to make the struggle efforts simpler? You talked a little bit bit about how the federal government’s making an attempt to shore up its coffers. What about by way of donations to the struggle effort? What sorts of tax modifications have you ever seen there?

Valeria Tarasenko: Sure, in each jurisdictions now we have donation allowances. It is often very small quantities. Parliament adopted the legislation, which permits each firms and Ukrainian residents to deduct a part of the donations, which they donated for Ukrainian humanitarian wants, to Ukrainian charity funds, or to the Ukrainian navy forces. For those who donate, it’s a must to present sure proof and paperwork that you simply offered a donation. Part of these quantities will be deducted upon tax reporting for 2022, which will be enormous quantities compared to what was allowed earlier than the struggle.

Sarah Paez: Now, many industries have suffered throughout the struggle, as you have mentioned, however really IT companies appear to be doing pretty OK. Are you able to speak a little bit bit about how IT companies are doing and what types of tax incentives the federal government has provided to them, notably the Diia Metropolis Regulation?

Valeria Tarasenko: Sure. I feel IT trade is the one trade which possibly in the long run will profit from the scenario as a result of for IT specialists, you simply want a laptop computer and that is all. You’ll be able to relocate in anyplace, whether or not inside Ukraine or exterior Ukraine and proceed working.

Sure certainly, we had a really nice initiative from our president, Volodymyr Zelenskyy, which got here into power ranging from January 1, 2022, with so-called Diia Metropolis Regulation, which supplies numerous tax privileges and authorized privileges to firms that are working within the IT sector.

I might first discuss the important thing tax profit, which the Diia Metropolis Regulation supplies. It supplies very low taxes on incomes paid to staff or IT specialists engaged by IT firms. It is solely 5 % private revenue tax, 1.5 % navy tax, and really insignificant social contribution, which is round $55 per thirty days, which is nothing. Mainly, efficient tax fee for IT specialists working or engaged by IT firms is 6.5 %, which may be very, very low.

I feel lots of IT specialists worldwide would favor to work and keep and to be a tax resident of Ukraine and pay such a low tax. However to be a resident, like an organization, which may fall inside this Diia Metropolis regulation, it needs to be a pure Ukrainian firm. It needs to be a authorized entity registered in Ukraine and its actions must relate to IT exercise.

There’s a very in depth checklist of actions, which is massive: IT will be laptop programming, cybersecurity consulting, sport growth, design, and many others. Rather a lot, lots. The checklist is absolutely in depth of actions. There are a minimal variety of necessities, however they’re very do-able, just like the minimal variety of staff needs to be not lower than 9. Common wage per thirty days, it needs to be round €1,200, which can be very inexpensive.

Actions, as I mentioned, must be IT-related. 90 % of income needs to be obtained from IT enterprise exercise. Solely 10 % will be different varieties of exercise, like dividends, for instance, like passive incomes or one thing like this. The founders or useful house owners can’t be from the jurisdictions listed within the blacklist, from sanction checklist jurisdictions, or from Russia. That is all.

This regime remains to be very enticing as a result of a part of Ukraine remains to be roughly protected, particularly the western half. Plenty of Ukrainian IT specialists have been relocated to these areas and their firms additionally re-registered to these areas. They nonetheless can apply this Diia Metropolis, a really favorable Diia Metropolis regime.

I see that I nonetheless have requests from some worldwide IT firms or some multinational firms, however with giant IT departments, to register a authorized entity in Ukraine for IT functions. I see that lots of job vacancies are open for IT sector as properly, even now throughout the wartime, due to this very useful tax regime for the IT sector.

Sarah Paez: Have you learnt what number of companies have taken benefit of this legislation?

Valeria Tarasenko: I feel each IT firm working in Ukraine has already registered earlier than the struggle or tried to register now as a result of as I mentioned, it’s extremely useful. It provides lots of advantages to the IT sector in Ukraine.

Sarah Paez: I needed to show now to form of a future look, and typically it is laborious to form of take into consideration what the long run might appear to be, however permit your self to think about. What tax laws is predicted within the postwar time? As you have mentioned, many of those legal guidelines that you have gone over are going to run out as soon as martial legislation ends. What’s forward for the post-war interval?

Valeria Tarasenko: Sure, it’s extremely laborious to foretell what modifications might be, however I am certain that after the struggle many modifications might be launched. It will depend on the wants in Ukraine.

Firstly, now we have to rebuild these areas which have been fully destroyed. We’ve got to construct new homes, new residence buildings for these individuals who used to stay in these areas. I am certain there might be some particular tax preferences for development, for residential development, for infrastructure tasks. I am certain that might be. There isn’t any draft legal guidelines, however at the least I see {that a} tax committee of the Ukrainian parliament had discussions that we have to determine some mannequin which can permit Ukraine to rebuild as quickly as potential the areas which had been destroyed.

Secondly, they understand that this aggression from Russia will keep even after we signal a peaceable settlement, so we as a nation and as a state have to actually make investments into the event of our navy trade. I additionally anticipate that there might be some particular regulation, possibly particular legislation for navy trade, together with some tax regulation for growth of this sphere as properly.

One initiative, a draft of legislation which is already within the parliament and into account, is about further taxation of multinational firms which have each operations in Ukraine and nonetheless energetic operations in Russia. Corporations which haven’t withdrawn from Russia. They wish to introduce a particular tax, one at the least now mentioned, a 1.5 % along with the company tax, ecology tax, property tax, these multinational subsidiaries financial institution in Ukraine.

I might say that this draft legislation is closely criticized now as a result of the standards. It is not very clear and it may be interpreted in numerous methods. Subsidiaries of multinational firms that are working in Ukraine, they’re actually like, “No, you should not vote for this legislation.” However I feel topic to dialogue and a few amendments, it’s going to more than likely be adopted inside subsequent month.

Sarah Paez: Nicely, thanks a lot, Valeria. That was a really fascinating dialog and simply gave a very nice rundown of what is taking place in Ukraine on the tax aspect.

Valeria Tarasenko: Thanks.