Ukrainian Taxation System

Waging an existential war for its survival, the Ukrainian state also faces a number of other challenges that, if successfully passed, will make the country more successful and stronger, or the diagnosed problem will remain unrecognized and unresolved, which will become a stumbling block in our development.

Taxation system and main tax rates

Currently, there are seven national and four local taxes and fees in Ukraine, which can classically be divided into direct (corporate income tax, personal income tax) and indirect (VAT, excise, rent, property tax, etc.) taxes.

With basic tax rates of 18% (for corporate income tax and personal income tax) and 20% VAT, Ukraine is among those European countries with an average tax burden. At the same time, a number of benefits and special tax regimes (such as, for example, a single tax, a special taxation regime for IT business, special rules for the taxation of investment funds, etc.) make it possible to reduce the effective tax burden. The excise duty rates on the relevant products are equal to or lower than the average excise duty rates in European countries.

At the same time, providing legal mechanisms for tax avoidance, Ukraine, despite the war, is implementing mechanisms to fight the ‘base erosion and profit shifting’ (BEPS) in accordance with the recommendations and guidelines of the OECD and the EU. In particular, Ukraine undertook to implement the eight most important steps for the state:

Action 3: disclosure by natural persons-residents of Ukraine of their participation in foreign companies that they control (CFC), and the rules of taxation of such companies;

Action 4: limit the costs of financial transactions with related parties;

Action 6: prevention of abuses in connection with the application of treaties on the avoidance of double taxation;

Action 7: prevention of artificial avoidance of recognition of permanent establishment status;

Actions 8-10: improving control over transfer pricing;

Action 13: reporting rules by the country for international groups of companies.

Despite the war and the related significant number of transitional provisions in legislation, Ukraine did not stop the implementation of these steps. Thus, for example, according to the results of reporting on controlled foreign companies for 2022-2023[1], the State Tax Service received 30,057 reports on CFC from 11,391 controllers. Geography of controlled companies: Poland – 25%, Great Britain – 13%, United States of America – 11%, Cyprus – 9%, Estonia – 7%, other countries – 35%.

The introduction of the CFC institute was quite difficult, which is mainly due to the low quality of the legal and regulatory framework, which gave rise to many misunderstandings and inconsistencies. However, after receiving the first experience of reporting by both taxpayers and tax authorities, it is expected that the legislators will take into account the existing collisions and gaps and by the next reporting period, the deficiencies will be corrected.

In addition to the rules of the CFC, Ukraine conducts active regulatory and technical preparation for the automatic exchange of tax information – CRS (Common Reporting Standard). As early as 2024, the state will start exchanging information about residents’ financial accounts, which should increase the transparency of business operations and make it impossible to hide funds in order to exclude them from taxation.

Another component in the field of international taxation is double taxation treaties. Thus, to date, Ukraine has concluded 71 conventions on the avoidance of double taxation, which allow to settle taxation issues with the majority of countries with which Ukrainian residents do business.

Problems

The main Achilles heel of the Ukrainian tax system is administration. According to Paying Taxes 2020, businesses spent an average of 328 hours on tax administration, while the global average was 240 hours and the EU average was 161 hours. The following years, marked by covid and wartime changes in the administration, only complicated the already difficult fulfillment of fiscal formalities.

According to the Tax Hell Index 2023, published by “The 1841 Foundation”[2], Ukraine was in 4th place in the ranking of countries with the worst tax systems (however, for the sake of fairness, it is worth mentioning that one of the significant negative factors is the mentioned Russian invasion and the economic problems caused by it; instead, rapprochement in Ukraine’s relationship with the West is considered as a factor that will significantly improve the situation).

In addition, tax audits by fiscal authorities mostly end up with additional taxes and fines, although, as statistics show, most of these fines are successfully cancelled by businesses in courts[3]. The large number of relatively low-quality audits is a serious problem that creates a significant burden on the judicial system, but the percentage of disputes won by businesses clearly demonstrates that, with a sound legal position, taxpayers can achieve justice and restore their violated rights. 

Financial monitoring

As is clear from the description above, Ukraine in general adheres to the basic recommendations of the OECD in the field of taxation and belongs to progressive countries that implement the best practices developed in the field of anti-tax evasion. However, the general picture will be incomplete if we do not mention the related field that ensures Ukraine’s stay in the “white lists” – financial monitoring. In 2020, a new edition of the relevant law came into effect, which qualitatively changed the approach to financial monitoring and provided greater flexibility to the relevant subjects in their issue of identifying suspicious financial transactions.

The effectiveness of the National Bank of Ukraine as a specialized regulator in the field of financial monitoring for banking institutions should be noted separately. Oversight by the regulator and the application of rather harsh sanctions encourages banks to be meticulous in analyzing their customers and their financial transactions. Although such increased attention on the part of banks sometimes leads to delays in carrying out financial transactions, the proper preparation, legal support and communication may resolve most issues in a short period of time.

Currency control

A significant problem for Ukraine since 24 February 2022 has been the introduction of currency restrictions on settlements for foreign economic transactions. Thus, to date, there continue to be a number of prohibitions and restrictions on the payment of dividends, interest payments and repayment of loans, P2P transfers, etc.

At the same time, taking into account the gradual stabilization of the foreign exchange market, the National Bank of Ukraine regularly reviews restrictions and cancels some of them, if the current situation allows.

Thus, subject to early planning of foreign economic operations, their proper structuring and documentary support, business can minimize its inconveniences; and the improvement of the situation on the foreign exchange market give reasons to hope for the further removal of existing restrictions. 

Summary

“Nothing is certain except death and taxes”, Benjamin Franklin.

“He said that there was death and taxes, and taxes was worse, because at least death didn’t happen to you every year”, Terry Pratchett.

Ukrainian tax rates are statistically average compared to those of Western countries, and the implementation of best practices in the field of fighting tax evasion and in the field of financial monitoring ensure Ukraine a place in the club of “white” countries. At the same time, the complexity of administration and the low quality of the regulatory framework when implementing innovations require significantly more time and attention for taxpayers to fulfill their duties.

Therefore, using the analogy of Benjamin Franklin and Terry Pratchett’s comparison of taxes and death, we can conclude that “Ukrainian taxes – are not a terrible death, but it can be long and painful if not prepared for it properly.”

[1] https://tax.gov.ua/media-tsentr/novini/779389.html

[2] https://the1841foundation.com/wp-content/uploads/2023/10/TH-Index-2023-The-1841-Foundation_ENG.pdf

[3] https://tax.gov.ua/diyalnist-/pokazniki-roboti/vregulyuvannya-podatkovih/informatsiya-schodo-oskarjen-rishen/743304.html