Tax Guide for US Expats Living and Working in Ukraine
Who Is Liable For Income Taxes in Ukraine
Residents of Ukraine are subject to tax on worldwide income. Individuals who are not tax residents in Ukraine are taxed on their Ukrainian-source income, which includes the following:
- Income derived from work or services performed in Ukraine
- Income and gains from the disposal of real estate in Ukraine
- Interest from deposits held in Ukraine
- Rent from property located in Ukraine
- Dividends paid on shares of Ukrainian companies
An individual is considered to be a tax resident of Ukraine if he or she has a place of abode in Ukraine. If a person has a domicile both in Ukraine and in another country, he or she is considered Ukrainian tax resident if he or she has a permanent place of abode in Ukraine. If he or she has a permanent place of residence in both countries, he or she is considered Ukrainian tax resident if he or she has a center of vital interests (for example, resident relatives) in Ukraine. If a country where the person has a center of his or her vital interests cannot be determined or if a person does not have a permanent place of residence in any country, he or she is considered Ukrainian tax resident if he or she is present in Ukraine for 183 days or more during a tax year. For this purpose, the days of presence in Ukraine need not be consecutive. If it is impossible to determine residency status based on the above, the person is considered to be Ukrainian tax resident if he or she is a citizen of Ukraine.
Notwithstanding the above, the law allows an individual to claim tax residency in Ukraine based on an acknowledgment that Ukraine is his or her main residence or on registration as self-employed person in Ukraine.
However, in practice, since January 2010, the most important criteria from the perspective of the tax authorities in Ukraine is physical presence (183 days) during a calendar year in Ukraine, which must be confirmed by documents. The majority of the tax authorities in Ukraine issues tax residency certificates only if an individual has spent 183 days in Ukraine in a calendar year and if the individual can prove this fact documentarily.
Income subject to tax. The taxation of various types of income is described below.
Employment income. The taxable employment income of residents consists of all compensation received in cash or in kind, whether the income is received in Ukraine or abroad. Non-residents are subject to tax only on their employment income derived in Ukraine.
The taxable income of a resident in Ukraine also includes allowances paid because of residence in Ukraine (hardship and cost of living allowances) and compensation received for children’s education, meals and holiday travel for the taxpayer’s family to the family’s home country.
Benefits provided by a Ukrainian employer to employees and compensation for such benefits, such as accommodation and corporate cars, are exempt from tax if the following conditions are satisfied:
- These benefits are provided with respect to the performance of labor.
- The benefits are stipulated in an applicable employment agreement.
- The employment agreement or the law imposes limits on the use of the benefits. Because the law does not currently impose any such limits, the employment agreement must specify the limits
Tax residents of Ukraine are also exempt from tax on the following types of employment income:
- Unified social tax payable by the employer on an employee’s salary
- Amounts paid by employers to Ukrainian educational institutions to cover educational costs for the training of their employees with respect to the business activities of the employer, subject to certain limitations
- Amounts paid by employers from after-tax profits to cover medical assistance to employees, subject to certain limitations
Investment income. Dividend or other profit shares paid by Ukrainian enterprises are subject to withholding tax at a rate of 5%. However, stock dividends are exempt from tax, subject to certain limitations.
Interest income received by individuals from deposits in Ukrainian banks is exempt from tax until 1 January 2015. Effective from 1 January 2015, this income will be subject to withholding tax at a rate of 5%. Other interest income is taxed at the rates.
Self-employment and business income. Taxable self-employment and business income consists of gross income (receipts in cash or in kind), less appropriately documented expenses incurred in generating that income.
Exempt income. In addition to the exempt items mentioned above, Ukrainian tax residents are exempt from tax on the following types of income:
- Tax refunds as well as payments from social security and pension funds
- Insurance proceeds, except for long-term life and non-state pension insurance (subject to certain limitations)
- Income received from entrepreneurial activities by an individual who pays tax under the simplified system of taxation
Taxation of employer-provided stock options. Ukrainian law contains no specific rules for the taxation of stock option plans. Consequently, taxation of such options is based on general principles. Because of the broad definition of income, a risk of taxation of an option at the moment of grant exists. The position of the Ukrainian tax authorities on this matter is unclear, but it appears that this risk is remote. As a result, options are likely to be taxed at the moment of exercise.
The difference between the option exercise price and the fair market value of the shares on the date of exercise is considered to be taxable income to the employee. This income is subject to tax at a rate of 15% for monthly income not exceeding 10 minimum wages and 17% for the portion of monthly income exceeding 10 minimum wages. Currently, one minimum monthly wage in Ukraine equals UAH 941.
On the sale of the shares, the employee derives a taxable capital gain, which is equal to the difference between the sale price and the purchase price. The gain is taxed in the same manner, and at the same rate as the employee’s other compensation income. The gain is not taxable if it falls within the capital gains exemption described in Capital gains. Currency restrictions apply to the grant of stock options by a foreign legal entity to Ukrainian currency residents. Ukrainian currency residents must obtain a license from the National Bank of Ukraine to purchase shares in a foreign company. However, a license is not required if the shares are received as a gift. In addition, if shares are received as a gift or inheritance, the taxable amount is decreased by the amount of personal income tax and state duty (the current maximum rate is 5%).
Capital gains. A capital gain is usually calculated as the difference between proceeds derived by a taxpayer from the alienation of property and expenses incurred in connection with the acquisition of such property.
Capital gains derived from sales of property sold are subject to tax at the tax rates, but certain exemptions and special rules apply.
Personal income tax at a rate of 1% is levied on proceeds derived from the alienation of transport vehicles and motor boats sold not more than once per reporting period under a notarized agreement on which state duty (the current maximum rate is 5%) is paid. The proceeds may not be less than 25% of the cost of a new vehicle of the same make and model.
Capital gains derived from the alienation of investment assets, such as securities and other corporate rights, are included in taxable income to the extent that the annual gains exceed UAH 1,320. If the alienation of the investment assets results in a loss, such loss can be deducted against gains derived from the alienation of investment assets during the tax year, subject to certain limitations. Such loss can be carried forward to future years without limitation.
An individual who receives income from the alienation of investment assets must record the results of the transactions separately from other income and expenses and report such results in the final tax return. However, if the individual performs transactions regarding investment assets with the involvement of a securities broker in accordance with an agreement with the broker, the broker may be considered a tax agent of the individual.
Deductions. Taxable salary income received from an employer may be reduced by the social tax benefit, which varies from half to one minimum monthly wage (currently, one minimum monthly wage in Ukraine equals UAH 941), depending on the status of the individual (single parents, parents of handicapped children, widowers, certain categories of war veterans, disabled persons, Chernobyl victims and other categories).
The maximum amount of the social tax benefit is UAH 1,882 per month, which is the amount of two minimum wages, effective from 1 January 2011.
A Ukrainian tax resident who has a Tax Identification Code may apply for a tax discount by deducting from salary income the sum of certain amounts paid to Ukrainian residents during the tax year. The following amounts may be included in the tax discount:
- Payments for the education of the individual and his or her immediate family members, subject to certain restrictions
- Payments for medical assistance provided to an individual and his or her immediate family members, subject to certain restrictions (this measure will take effect in the year following the year when the Law of Ukraine on Mandatory Medical Insurance enters into effect)
- A portion of interest paid by an individual with respect to a mortgage credit
- Cost of charitable gifts made by a taxpayer in the amount of more than 2% but less than 5% of his or her annual taxable income
- Long-term life insurance premiums and contributions paid by the taxpayer for himself or herself or his or her immediate family (subject to certain limitations) to the respective Ukrainian resident entities (insurance companies)
- Private pension insurance contributions made by the taxpayer for himself or herself or his or her immediate family (with certain restrictions) to the respective Ukrainian resident entities (nonstate pension funds and banking establishments)
- Payments for artificial insemination, with certain restrictions
- Payments for state services related to the adoption of a child
- Payments for equipment that allows a taxpayer’s vehicle to use biofuel
- Expenses incurred on the building or purchase of accommodation that is classified as affordable
The total amount of the income tax discount may not exceed the total amount of taxable salary income received by an individual during the tax year. In addition, any amount of the tax discount that is not used as a result of this restriction may not be carried back or forward.
To claim the tax discount, a taxpayer must file his or her tax return by the deadline specified in the law. All of the relevant expenses incurred must be properly documented with receipts and bills. Based on the tax return, the tax authorities allow the tax discount and refund any excess tax paid not later than 60 days after receipt of the tax return.
Rates. Flat income tax rates of 1%, 5%, 15%, 17%, 30% and 34% are imposed on individuals in Ukraine. The rates vary according to the type of income.
Income or gains derived from the alienation of real estate are taxed at a rate of 0% or 5%, depending on the following:
- Duration of ownership of such property
- The size of the property
- The frequency of alienations
- Type of property
Effective from 1 January 2013, a 5% rate will apply to deposit interest or discount income derived from savings or deposit certificates.
A 10% tax rate applies to employment income of mine workers.
A 17% tax rate applies to resident and nonresident individuals whose monthly income exceeds the amount of 10 minimum wages (established on 1 January of the reporting tax year; currently, 10 minimum wages equal UAH 9,410 [US$1,185]). The 17% rate applies to the excess amount. Otherwise, a 15% tax rate applies regardless of the tax residency status.
A 5% rate applies to dividends and royalties received by resident and nonresident individuals in Ukraine.
Gifts and inheritances received are treated as income and are subject to personal income tax at rates of 0%, 5% or 15%. The applicable rate depends on the residency status of the giver and on the degree of relation between the giver and recipient.
Tax rates of 30% and 34% apply to prizes and gains derived from non-statutory lotteries. The 30% tax rate applies to monthly income not exceeding 10 minimum wages. The 34% rate applies to the portion of monthly income that exceeds 10 minimum wages. Currently, one minimum monthly wage in Ukraine equals UAH 941.
The law provides a special procedure for the payment of Ukrainian-source income by a nonresident individual or company to a nonresident individual. Under such procedure, the income must be paid through an account specially opened by the recipient nonresident individual at a Ukrainian bank, which acts as a tax agent of the individual. If taxable income is paid to the individual in cash or in kind, personal tax must be settled by the individual during the 20-day period following the receipt of such income.
Income received in foreign currency is translated into Ukrainian currency at the exchange rate established by the National Bank of Ukraine on the date of receipt. The translated amount is then subject to tax at the same rates as income in Ukrainian currency. The exchange rate on 10 March 2011 is US$1 = UAH 7.9351.
Relief for losses. Loss carryforwards and carrybacks are not allowed.
B. Property tax
Property living space that exceeds 120 square meters for an apartment and 250 square meters for a house is subject to property tax. Property tax varies from 1% of a minimum salary (UAH 941 [US$118]) to 2.7% of a minimum salary (UAH 2,541 [US$319]) per square meter of living space.
C. Social security
Effective from 1 January 2011, social security contributions to four Ukrainian social security funds (pension, unemployment, temporary disability and accident at work) are combined under the newly established unified social tax and the pension fund of Ukraine is assigned to act as its administrator.
Locally paid salaries are subject to the unified social tax, payable by the employee at a 3.6% rate and payable by the employer at a rate ranging from 36.76% to 49.7% depending on the workplace’s safety rating. The base for the contributions is capped by the maximum monthly wage base, which is currently UAH 14,115 (US$1,778).
Unified social tax is not payable on salaries paid from outside Ukraine by nonresident employers to their employees.
E. Tax treaties
Ukraine is currently honoring the double tax treaties entered into by the former USSR with Cyprus, Japan, Malaysia, Mongolia and Spain.
Ukraine has entered into new double tax treaties with the following countries.
Algeria
India
Russian Federation
Armenia
Indonesia
Austria
Iran
Singapore
Azerbaijan
Israel
Slovak Republic
Belarus
Italy
Slovenia
Belgium
Jordan
South Africa
Brazil
Kazakhstan
Sweden
Bulgaria
Korea (South)
Switzerland
Canada
Kuwait
Syria
China
Kyrgyzstan
Tajikistan
Croatia
Latvia
Thailand
Cuba
Lebanon
Turkey
Czech Republic
Libya
Turkmenistan
Denmark
Lithuania
United Arab Emirates
Egypt
Macedonia
Estonia
Moldova
United Kingdom
Finland
Morocco
United States
France
Netherlands
Uzbekistan
Georgia
Norway
Vietnam
Germany
Poland
Yugoslavia
Greece
Portugal
Hungary
Romania
Iceland
Ukraine has signed a double tax treaty with Luxembourg, but this treaty has not yet been ratified.
To learn more about the history, culture, economy and other information about Ukraine
We have been preparing US income tax returns for US Citizens and permanent residents living in Ukraine for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Ukraine and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Ukraine.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email