Ukraine’s business community hasn’t forgotten last year’s dramatic change in the State Tax Administration’s approach towards taxation of foreign individuals’ incomes, when a 30 percent tax on non-residents’ salaries was introduced – double the amount previously required from most foreigners.
Unsurprisingly, this situation generated extreme anxiety in the business community. But in a recent positive turn of events, there are signs of a much-appreciated compromise.
Not only did the controversial new rules double the tax rate on many foreigners in Ukraine, the procedure by which foreigners and stateless persons were to obtain Ukrainian tax residence status have also changed. Previously, foreigners could obtain such status with a minimum of trouble. They only had to file a claim with tax authorities stating that they considered Ukraine their main place of residence – having proved that they were indeed resident here and having provided sufficient grounds for staying in Ukraine.
But the termination of State Tax Administration Order #50 from Jan. 29, 2004, which supported a 15 percent tax rate on non-residents’ incomes, and the tax administration’s overview letter #28593/7/17-0717 of Dec. 23, 2009, which created a number of additional conditions for obtaining tax residency status, turned out to be bombshells.
Given the abrupt change in the Ukrainian tax administration’s position, January saw considerable confusion on the part of both tax authorities and taxpayers. Some provisions of the overview letter required additional clarification, and the document did not address all of the cases that commonly crop up. Meanwhile, many district tax inspectorates, apparently waiting for the situation to clarify, refused to accept foreigners’ claims concerning voluntary determination of residence status. Such problems represented only the tip of the iceberg.
Thus, representatives of the European Business Association, with the active support of the chairman of the EBA Tax Committee, Vladimir Kotenko, held a number of difficult but fruitful meetings with regulatory body representatives. Apparently impressed by the resonance this issue had in the business community, the tax administration was open to a dialogue with businesspeople and agreed to meet them halfway.
Though the State Tax Administration of Ukraine has not abandoned its approach to taxing non-residents’ salaries (they insist on a 30 percent tax rate), they agreed to soften the requirements for the voluntary determination of a foreigner’s residence status. District tax inspectorates have already started to accept foreigners’ claims and issue the appropriate notifications.
The tax administration is working on formalizing this liberalized approach by amending the overview letter mentioned above. Although the authorities have fielded numerous requests that they revise their position (the business community seems to understand that it is wise to ask for more than it expects to get), only some of the requests will be satisfied.
In a nutshell, the following are the most important positive revisions that the tax administration is likely to make to the overview letter:
Penalties and additional tax charges for the past: The tax administration supports the view that no penalties or additional tax charges should apply to the periods when order #50 was effective.
Support documents for obtaining tax residency: A precise list of the documents required for obtaining tax residence status will be prescribed. The list will no doubt be extensive and a foreigner (or employer) will have to make a considerable effort to collect all the documents on it. Regrettably, even under the revised approach, there will be cases in which a foreigner will likely be unable to obtain all the documents he or she needs, as the tax administration still has not accounted for all the scenarios under which a foreigner might stay in Ukraine.
Foreigners with long-term residency: The tax administration is now envisaging the possibility of a simplified procedure for obtaining residence status for foreigners who were considered Ukrainian tax residents in the previous calendar year. This is the issue that, as treated in the current overview letter, has generated the most criticism.
Tax recalculation: 15 percent versus 30 percent; the possibility of recalculating taxes withheld from a foreigner’s income at a 30 percent rate, provided that he or she subsequently confirms Ukrainian tax residency for the respective periods, remains in doubt. At the moment, the legal grounds for such recalculation are under investigation. Unfortunately, the authorities doubt that recalculation is achievable.
This issue mostly affects newcomers to Ukraine. The uncertainty should be taken into account when a newcomer’s compensation strategy is being designed.
The negative impact that this situation has had on day-to-day business in Ukraine highlights the importance of good, clear and workable tax legislation. Ukraine needs better tax laws and the European Business Association will continue to help achieve this goal.
Anna Derevyanko is the executive director of the European Business Association, a leading Kyiv-based business advocacy group. She can be reached at firstname.lastname@example.org.