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Managing and Founding Partner, Arzinger
Senior Associate, Real Estate & Construction, Arzinger
Taxation of Real Estate and Transactions in Ukraine
Before making a final decision on entering into a particular asset deal or structuring business in Ukraine, it is crucially important to consider all the details of real estate taxation and other entailed costs. That is why the aim of this piece is to highlight general taxation rules that will likely be of interest to real estate owners and tenants.
The taxation of real property in Ukraine is regulated by the Tax Code of Ukraine (TCU), and has certain peculiarities among which we should note a different tax regime for land and buildings. The main taxes related to real estate are the property tax (that includes land and real estate taxes), corporate income tax, value added tax, personal income tax, military duty, and others that are applicable as the case may be.
Real Estate Tax
This is a local tax, levied on both residential and non-residential properties (buildings, apartments, etc.) or their parts. This tax does not consider the title to the underlying land. At the same time, certain immovables are exempt from the real estate tax. Such exemption applies to state and municipal properties, certain social objects (religious, educational facilities, others) and some types of commercial property (temporary constructions used by SMEs, certain agricultural and industrial facilities, etc.).
Local councils may determine other exemptions from the real estate tax based on the financial standing of certain groups of individuals.
All individuals and legal entities — owners of facilities, regardless of their residency.
The rate is determined by local councils. Nevertheless, the tax rate per 1 sq.m cannot exceed 1.5% of the minimum wage established as of 1 January of the tax year. This results in a maximum rate of UAH 70.85 or EUR 2.66 per sq.m. in 2020.
As a surcharge, an additional UAH 25,000 is paid for each apartment (or part of it) with an area exceeding 300 sq.m and for each house (or part of it) – exceeding 500 sq.m.
The tax amount is calculated by multiplying the total area of the facility by a tax rate. As an exception for individuals, the tax base for residential properties is reduced by an area of 60 sq.m for an apartment and 120 sq.m for a house. Thus, the taxpayer who owns both an apartment and a house, in which the areas of the aforesaid figures are exceeded, benefits from an exemption of 180 sq.m.
The real estate tax is paid once a year.
Tax Objects and Forms of Land Fee
The land fee is paid as (i) a land tax or (ii) a land rent and levied in respect of land plot, land share (so-called “pai”) or even unallocated and unregistered land lying under a building.
Under the law, certain individuals or legal entities are excused from paying the land tax (for instance, agricultural producers registered as a IV group taxpayer in the simplified taxation system).
The owners pay the land tax and the tenants pay the land rent.
The tax base is a normative monetary valuation of a land plot in a region or the size of the land plot in case assessment of the valuation of such land plot was not carried out.
The rate is determined by local councils. The maximum rate for a land plot with a normative monetary valuation does not exceed 3% of its valuation. There are also certain exceptions, as set out in the TCU for various land plots. By contrast, the tax rate of a land plot without valuation may come to 5% of the normative monetary valuation of arable lands in the region in question.
Big tax benefits are established for agricultural lands. The tax rate for an agricultural land plot with registered normative monetary valuation may range from 0.3% to 1% of its valuation. For land without such valuation the tax may be charged at the rate of 3%. This makes business projects much more attractive for agricultural producers, especially in anticipation of the lifting of the moratorium on the sale of agricultural land.
The land tax is paid once a year.
Land rent is usually higher than the tax and its amount is set out by the lease agreement. Hence, a list of restrictions is established by the TCU for lease of public lands. In particular, the land rent rate must not be less than the land tax rate for the respective category of land and must not exceed 12% of its valuation. The high threshold does not apply to leases executed under land bidding. Some restrictions also apply to subleases of public lands, inter alia, the sublease payment must not exceed the lease payment.
Corporate Income Tax
The taxation of asset deals between legal entities is the same as that of other transactions and depends on the legal entity’s taxation system.
For example, asset deals for the seller — a Ukrainian legal entity registered as a taxpayer on general grounds — will be taxed at a tax rate of 18% from taxable profits (i.e. the difference between contractual price and residual value of assets). Non-resident companies, all Ukraine-sourced income, including income from real estate transactions, are subject to a withholding tax which, as a rule, is 15% unless otherwise given under a double taxation treaty.
Value Added Tax
The payment of Value Added Tax is generally applicable to the supply of goods and services by a VAT payer. The TCU states that asset deals are considered as the supply of goods.
However, there are certain exemptions. The sale of an undeveloped land plot is VAT-exempt. Developed land plots are subject to VAT even in case the construction object is not completed. A developed land plot is disposed of with the building, which is subject to VAT.
The lease of public land plots is VAT-exempt. The rent payments for private land plots might be subject to VAT if the landlord is a VAT payer.
The share acquired in a Ukrainian SPV (property holding company) is also VAT-exempt. That makes such transactions more attractive in taxation even if it involves a higher volume of transactional work (legal and financial due diligence, merger control, SPA-structure, etc.). Hence, the consequences of such an acquisition are vital and should be considered before closing.
The issue of securities is also a VAT-exempt operation, which makes it a more frequent option for developers and investors, especially in residential property. In practice, this option triggers the involvement of corporate and venture funds into a project.
The rate is 20% of the contractual price for products and services.
Personal Income Tax
Taxation of Rental Income
This tax is applicable to the income of individuals (residents and non-residents) at a rate of
18%. Here the income from transactions with real property and emphyteusis (agricultural easement) is considered.
As a rule, this tax is withheld by the tenant of the property (beneficiary of emphyteusis) from the landlord’s income. If the tenant is a private person, the landlord pays the tax. Non-residents should enter into special agency agreements. An agent (so-called “tax agent”) under such an agreement shall withhold the tax amount from the income and pay it on behalf of the non-resident.
Failure to have a tax agent for a non-resident could be considered tax evasion and is subject to prosecution.
Taxation of Proceeds from the Sale (exchange) of Real Estate
Income from the sale of real estate (commissioned and unfinished) is taxed on the basis of a 5% rate.
The first sale of residential property in one year, regardless of its area, is tax-exempt. It could be applied if the seller owns the property for at least 3 years before the sale. The exemption does not apply to inherited property.
Disposal of any other (non-residential) pro- perties, as well as of the 2nd (or more) residential property within one year, is subject to taxation at the rate of 5% for both residents and non-
In order to supervise the due payment of the tax, an obligatory property valuation has been introduced. The notary, while certifying an agreement, has to check if the price of the property in question is higher than its valuation. In case the sale of a property is carried out at a lower price, the tax obligations calculated from the price in the valuation report are registered with the relevant register.
Taxation of Inherited Property or Gift Property
Income received as property from blood relatives and spouses is not subject to taxation (0% rate). The 5% applies to a person’s income in the case of an heir who is not a blood relative or spouse/first-degree relative.
The rate of 18% applies in the event that a non-resident successor inherits the property from a resident.
Pension Fund Contribution
The pension fund contribution is paid under the Law of Ukraine On the Duty for Obligatory Pension Insurance for the acquisition of buildings and constructions but not of land. The rate is 1% of the contractual value and is always paid by the buyer.
State (stamp) duty
The state duty comes to 1% of the contractual value of any property (it applies to both property and land transactions).
This duty was introduced into the TCU with the purpose of reforming the Armed Forces of Ukraine. The rate is 1.5% of the contractual price or any other income. This duty is charged on all transactions with real property which is subject to personal income tax.