Taxes for Foreign Citizens in Ukraine – Heavy Load to Bear or Tax Paradise?
By Ernest Gramatskiy and Yuriy Zabiyaka
Gramatskiy & Partners
The headlong development
of the Ukrainian
economy and its attractive
investment climate obviously
have an influence on the increase
in the number of people, including
foreigners, who tend to engage in business in this country.
Undoubtedly, it is impossible to make investment in the Ukrainian
economy and to perform other activities providing a benefit
without consideration of the peculiarities of taxation of this income,
which also depend on the residential status of a person.
The order of taxation of personal incomes in Ukraine, including
incomes of non-residents, is regulated, first and foremost,
by the On Personal Income Tax Act of Ukraine of 22 May 2003,
No. 889-IV (hereinafter – the Act). According to Sub-paragraph
9.11.1 Paragraph 9.11 Article 9 of the Act, incomes originating
from Ukraine that accrue (are paid, passed) for the benefit of
non-residents are taxed in concordance with the rules established
for residents considering the peculiarities determined by
Ukrainian legislation. Income originating from Ukraine is an
income received by a taxpayer or accrued on their benefit from
performance of any activity in Ukraine, including incomes accrued
to non-residents, as follows: who work in entities located
in Ukraine, particularly in representations of non-residents – legal
entities regardless of the sources of payment of such income;
who are members of governing bodies of residents – legal entity
or person-subject of entrepreneurial activity or their representations
abroad and draw salary in this connection, receive other
payments or remuneration at the expense of the mentioned residents;
who are subjects of entrepreneurial activity or perform
independent professional activity in Ukraine regardless of the
source of payment of such income.
It should be pointed out that the term “peculiarities” used in
Sub-paragraph 9.11.1 Paragraph 9.11 Article 9 of the Act means
that tax rates for certain types of taxes differ from the tax rates
applied in taxation of the profits of residents.
Particularly, profits of non-residents received under civil
agreements, for example, from executing contractor`s agreements,
from leasing personal or real estate, from selling real estate,
and also profits in the form of investment income and value
of the objects of the received heritage, are subject to taxation at
the tax rate of 30% (for comparison: the tax rate of the mentioned
incomes received by residents is 5-15%).
Foreign citizenship doesn’t always condition the non-residential
status of a person. This is particularly so if such a person became
a citizen of Ukraine as their tax burden would decrease.
Thus, according to the Act a person may be recognized as a
resident in the following cases:
- if a person has a place of residence in Ukraine;
- if a person has also a place of residence in a foreign state,
they are considered a resident if such person also has a place of
residence in Ukraine; if a person has also a place of permanent
residence in the foreign state, they are recognized as a resident if
they have more close personal or economic relations (center of life
interests) in Ukraine;
- if a state where a person has a center of life interests cannot
be identified or if a person doesn’t have a place of residence in both
states, they are recognized as a resident if they stay in Ukraine not
less than 183 days (including day of arrival and day of departure)
during the period or periods of the tax year;
- if it is impossible to determine the residential status of person
using the previous statements, a person is considered a resident if
they are a citizen of Ukraine;
- if a person has no citizenship and doesn’t fall under the previous
statements then their status is determined according to the
rules of international law.
Thus, if a person has a place of residence not only in Ukraine
then one should determine in which country their place of residence
is permanent. At the same time, availability of foreign citizenship
is not always testimony of a person’s residential status.
As mentioned above, if a person also had a place of permanent
residence in the other state their residential status would be
determined depending on the presence or absence of center of life
interests in Ukraine. So as to determine that a person has more
close personal or economic relations in Ukraine one should use,
for example, the place of permanent residence of members of their
family or the person`s registration in Ukraine as an entrepreneur.
As regards the registration of foreigners and stateless persons,
Article 7 of the On Legal Status of Foreigners and Stateless Persons
Act of Ukraine of 4 February 1994, No. 3929-XII defines the right
of the above-mentioned persons to perform investment, foreign
economic and other types of entrepreneurial activity stipulated by
Ukrainian legislation. With it they have the same rights and duties
as citizens of Ukraine if anything else doesn’t arise from the Constitution
and the Laws of Ukraine.
For the registration of a foreigner or stateless person as an entrepreneur
they have to stay on the territory of Ukraine on a legal basis
(registration of the passport document on the territory of Ukraine or
the presence of the certificate for permanent or temporary residence
in Ukraine) and to register their place of residence. The On State
Registration of Legal Entities and Natural Persons – Entrepreneurs
Act of Ukraine of 15 May 2003, No. 755-IV determines the single order
of registration of citizens of Ukraine, as well as citizens of other
states and stateless persons who intend to be entrepreneurs.
In addition, independent determination of the place of residence
in Ukraine in the established order or their registration as a
self-employed person is sufficient grounds for recognizing a person
as a resident. Concerning the independent determination by
a person of their principal place of residence, the main difficulty
is that neither precise definition of the notion “principal place of
residence” nor the way for determining it can be found in Ukrainian
legislation. That is why to answer the above question one should
issue from the following conditions.
Foreigners have the right to move on the territory of Ukraine
and choose their place of residence in Ukraine in accordance with
the established order. Under the On Freedom of Movement and Free
Choice of Place of Residence in Ukraine Act of Ukraine of 11 December
2003, № 435-IV freedom of movement and free choice of place of
residence in Ukraine are guaranteed to foreigners and stateless persons
who stay in Ukraine on a legal basis except for abridgements set
by the law. The place of residence of a person is defined in Article 29
of the Civil Code of Ukraine of 16 January 2003, No. 435-IV and is
understood as a house, apartment, other premises adapted for living
in (hostel, hotel etc.), in an appropriate population unit where a
person lives permanently, mainly or temporarily.
Regarding the absence of any legislative requirements to the determination
of the place of residence as the principal one and the fact
that a person determines it independently, a foreigner can determine
any registered place of residence in Ukraine as the principal one.
Talking about the registration of a foreigner as a self-employed
person, it should be pointed out that self-employed persons in
Ukraine are entrepreneurs who are registered in the above-mentioned
order and persons who perform independent professional,
i.e. scientific, literary, artistic, educational or teaching activity.
These persons in Ukraine are private notaries, lawyers, doctors,
auditors and certain others provided that these persons are not wage
labourers and entrepreneurs. The order of registration of every person
mentioned above is determined separately.
In consideration of the above-stated, if a foreigner has chosen
a place of residence in Ukraine as a principal one or has registered
as a self-employed person they have the right to determine
their own residential status independently. To this effect they
have to turn to the tax authority situated in the region of their
place of residence with a request in a form of a statement (the
form of the statement is set by Regulation of the Cabinet of Ministers
of Ukraine of 12 December 1995, No. 1074, On Rules of
Entrance by the Foreigners and Stateless Persons to Ukraine, their
Departure from Ukraine and Transit Passage through its Territory)
to recognize them for the purposes of taxation as a resident in a
current year regarding their personal income tax.
Ukrainian tax legislation in the part on taxation of profits of
non-residents is rather loyal. In comparison with many other
European states the income tax rate for non-residents regarding income
originating from Ukraine is not high. For example, in France
this tax rate is 33.3%, in Norway – 40%.
In addition foreigners who receive profits originating from
Ukraine have rather wide possibilities for getting residential status
which allows the amounts of taxes to be lowered considerably.
But of late a trend has appeared in law-enforcement practice
of a worsening in the non-resident’s position. Thus, in the official
and other recommendations tax authorities and their officials point
out that in many cases while taxing the profits of non-residents
higher tax rates are to be applied. Earlier, as regards the taxation of
the pro fits of non-residents they were guided by the rules of taxation
of profits of residents. There are also some new recommendations
where possibilities for receiving residential status are limited.
In any case it is possible to constrain the tax burden on the profits
of a foreign citizen who performs any operations connected to the
acquisition or alienation of property or rights of property in Ukraine
only in case of long-term planning of each operation and careful
choice of the optimal way of operations with assets still at the stage
of acquisition of these assets. Obviously, it is possible to perform the
above-stated planning only with the presence of special knowledge in
the sphere of tax law and scholarship in the law-enforcement practice
in this sector in Ukraine. Thus, it is evident that till the moment
of acquisition of property or rights of property in Ukraine a foreign
citizen is recommended to involve appropriate experts for determining
the most beneficial ways to attain the desired effect.
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