Tax & BSO Partner, BDO in Ukraine
In recent months, millions of Ukrainian citizens (mostly women and children) have left the country for the EU and other countries. Most of them received Temporary Protection status in the EU, which according to the EU Directive gives the right to stay legally in the EU for one year (until 04.03.2023) and can be automatically extended twice for six months, but up to 1 year (until 04.03.2024), unless the reasons for such protection disappear.
Most of persons who left have not yet returned, and may not return until the end of 2022, if the hostilities continue. This introduces the question of how they should pay taxes in 2022 and in which country. This issue is of great importance since in most countries payment of taxes is very important, and non-payment is punishable by heavy fines and even criminal prosecution.
“It’s easy to acquire tax resident status in every country, but it’s hard to lose it”
1. Determining the country of tax residence
Generally, a person must pay tax on his or her world-wide income in the country, whose tax resident he or she is recognized. Therefore, the tax residence status in each country is easy to acquire and difficult to lose, and countries are vying for the right to recognize a person as their tax resident. For example, Poland (like most EU countries) considers as its residents those persons who stay in its territory for more than 183 days during a calendar year or whose center of vital interests is in Poland (personal — family, and economic — a source of income). If a person is considered a resident of two countries, the provisions of an applicable Double Taxation Convention shall apply to determine the country of tax residency of the person. Ukraine has concluded Conventions with the EU countries, which largely avoids double taxation.
“In 2020-2021, the OECD clarified that restrictions of people movement between countries due to the quarantine (resulted in compulsory stay in another country for more than 183 days) should not lead to a change in their tax residence, as this situation is an emergency”
Tax residence is determined for a calendar or fiscal year or part thereof (for example, a person may be considered a tax resident of Ukraine for January-February 2022, and a tax resident of Poland for the period from 01.03.2022, if on 01.03.2022 the person moved to Poland on permanent residence).
It should be noted that in order to determine the country of residence under the Conventions, it is necessary to analyze the circumstances of every person (in particular, whether he/she plans to return to Ukraine, whether he/she owns or rents accommodation in Ukraine and abroad, where his/her family members live, in which country he/she earns income). Furthermore, it is possible that in 2022, the OECD or other tax authorities will provide an explanation of their approach to taxing Ukrainian citizens under these extraordinary circumstances, including their tax residence and the 183-day test, as outlined below, which is currently controversial. For example, in 2020-2021, the OECD clarified that restrictions of people movement between countries due to quarantine (resulted in compulsory stay in another country for more than 183 days) should not lead to a change in their tax residence, as this situation is an emergency. Similarly, it can now be argued that many Ukrainians are forced to stay abroad because they are afraid to return to Ukraine due to the hostilities and therefore days of staying in another country from 24.02.2022 until the end of the hostilities should be disregarded for the 183 day test. Such clarifications will need to be monitored.
We will make a preliminary analysis of several typical situations assuming that a resident of Ukraine is forced to stay in the EU due to the hostilities in Ukraine, and will return to Ukraine after the hostilities. Such a person remains a tax resident of Ukraine in 2022 (and is not considered a tax resident of another country). This conclusion can also be made if staying in another country is less than 183 days.
For people who moved to the United States, Canada and other distant countries, this assumption is, most probably, not applicable provided that most of them do not plan to return to Ukraine.
2. A person works abroad under an employment contract with a foreign employer
In this case, a foreign employer will withhold the local taxes when paying remuneration to the bank account of a person in a foreign bank. For example, in Poland, the tax rates are 17% (for the first PLN 120,000 of income in a calendar year) and 32% (for an amount in excess); in Hungary - 15%.
In case of receiving foreign income, a resident of Ukraine must file an annual income declaration in Ukraine by May 1 of the following year, in particular, to report the income received abroad (by adding the certificate stated below). As a result, a person will have to pay extra for such foreign income in Ukraine:
- Personal income tax (PIT) — if the rate of tax paid abroad is less than 18% (for example, as for Poland — to pay extra 1% of PIT, if income received in 2022 is within PLN 120,000; as for Hungary - 3%). It is worth mentioning that in most EU countries, the tax rate is higher than 18%, and therefore no personal income tax is paid extra in Ukraine; and
- 1.5% of military tax.
Despite the fact that the procedure for charging, withholding and paying the military tax is identical to the personal income tax, the form of tax declaration does not provide for foreign tax crediting to the payment of military tax (which is important, if foreign tax is paid at a rate above 18%). We hope that the Tax Service of Ukraine will change the form of the declaration or provide a positive clarification on this matter.
“When exceeding 183 days of stay in another country, the foreign tax of this country is applied to the Ukrainian salary accrued for the period from the date of moving to such a country”
3. A person works remotely for a Ukrainian employer
Some office employees who went abroad have the opportunity to continue working remotely for a Ukrainian employer (teleworking from abroad) and receive a salary therefrom to a Ukrainian bank account. Most countries require paying tax on such income; however, subject to the Convention, a person's Ukrainian salary is not taxable in the host country, unless the person stays there for more than 183 days during a calendar year or any 12-month period, depending on the applicable Convention. The days of stay are counted for each country separately.
When exceeding 183 days of stay in another country, the foreign tax of this country is applied to the Ukrainian salary accrued for the period from the date of moving to such a country. Therefore, the person will have to report such income to the tax office of the host country and pay the tax according to local procedures.
As the Ukrainian employer continues to withhold Ukrainian taxes, double taxation will arise. To avoid it, a resident of Ukraine must file in Ukraine by May 1 of the following year an annual income declaration with a request to the Ukrainian tax service to return the overpaid personal income tax, having added the stated below certificate.
It should be noted that the Irish Revenue clarified that salaries of Ukrainian residents who came to Ireland due to the war and received from Ukrainian employers are not subject to Irish tax and social security contribution. The tax authorities of other countries will probably follow this example or accept the argument that the stay in another country from 24.02.2022 before the end of еру hostilities was forced, and therefore these days should be disregarded for the 183 day test.
4. Ukrainian private entrepreneur working abroad
Most IT professionals who left Ukraine continue to work as private entrepreneur (PE) registered in Ukraine, who provides contracted services to Ukrainian or foreign customers and receives remuneration to a Ukrainian bank account (or through payment systems such as Payoneer). In doing so, they mostly work remotely from the housing in which they live abroad, sometimes from coworking, which in both cases can be considered as having a “permanent base” in another country. For the most part, such a base can be considered “available on a regular basis” in case of stay in another country for more than 183 days in any 12-month period.
Accordingly, after 183 days of stay, such a person is taxable in the host country in respect of income received from the date of arrival as an independent contractor (even if the person is not recognized as a tax resident of that country), unless the foreign tax authority agrees that stay in another country from 24.02.2022 before the end of the hostilities was forced, and therefore these days should be disregarded for the 183 day test.
Note that this gives rise to double taxation without the possibility to avoid it(factoring in the current form of the single taxpayer declaration, which does not provide for crediting foreign tax to pay single tax), namely:
- payment of single tax in Ukraine at the rate of 2% or 5%;
- payment of tax in the host country.
5. Receiving charitable assistance
Ukrainian tax residents must file an annual tax declaration in certain cases, such as:
- receiving income other than from a Ukrainian employer (as the employer withholds taxes when paying wages); in particular, in the form of funds, goods and services obtained free of charge;
- receiving non-target charitable assistance from a charity provider — an individual or a legal entity, if the total amount of received non-target charitable assistance exceeds UAH 1,240.50 in 2022. Charitable assistance provided under certain conditions and expenditure priorities is targeted; non-targeted assistance is provided without establishing such conditions or priorities.
There is the issue whether the value of charitable assistance (including payments from other governments and international organizations), free housing, food and services received by Ukrainian residents in other countries due to the war is subject to declaration and taxation in Ukraine. We are hopeful that the legislator will amend the Tax Code or the Tax Service of Ukraine will provide clarification on the matter.
According to the recent clarification letter of the Tax Service of Ukraine and the resolution of the Cabinet of Ministers of Ukraine the following items are not taxable (thought the Tax Code does not provide such exemption):
- monetary payments according to e-Support state program;
- additional monetary payments from the United Nations to internally dislocated persons.
6. Certificate from the tax authority of another country on the amount of tax and levy paid
It is noteworthy that in order to obtain the right to credit taxes and levies paid outside Ukraine, a person must obtain from the tax authority of another country a certificate of tax and levy paid, as well as the taxable base and/or item. This certificate is subject to legalization in the respective country, for example by affixing an apostille. In practice, most Ukrainian citizens will not be able or willing to receive these certificates (that occurred with migrant workers in previous years), which poses a risk of double taxation of such income in Ukraine.
The question also arises — how actively the Ukrainian Tax Service will try to identify foreign income for 2022 in the event of non-declaration. In the pre-war years, most migrant workers did not declare their foreign income (in 2021, they transferred a record USD 15 billion to Ukraine, and their actual income was even higher). Announcement of intent to strengthen control over the taxation of migrant workers’ incomes caused a severe backlash in society. It can be assumed that the Ukrainian Tax Service did not deal with this issue, in particular due to the relatively small amount of potential tax revenues (as in many countries tax rates are higher than in Ukraine) and the lack of an effective mechanism for detecting such foreign unreported incomes. Even if information is received under the CRS Standard in respect of bank accounts of Ukrainian residents in other countries (which for 2022 was planned for September 2023), most of these accounts are likely to have small turnovers and balances and therefore information thereon will not be transmitted.
Also notice that the above comments are based on the analysis of applicable law, without assessing the practical probability of identifying factual circumstances of the person by the tax authorities of Ukraine and other countries.