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Recent Changes in Taxation during Martial Law

Recent Changes in Taxation during Martial Law

Ukraine
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On April 5, 2022, the Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine on Improving Legislation for the Period of Martial Law” No. 2142-IX dated March 24, 2022 (“Law No. 2142”) came into force.​

The Law No. 2142 aims at decreasing of tax and administrative burden for businesses, entrepreneurs and individuals. Major changes include the following:

Unified tax

The list of persons (natural and legal entitles) eligible to be Unified Tax payers on special conditions (the 3-d group, 2 % rate) was broadened. As of now Unified Tax payers on special conditions can also be enterprises that import cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 or more people, vehicles for the transportation of goods.

The date starting from which a taxpayer is considered a taxpayer of the 3rd group on special conditions (2% rate) was clarified. The following rules apply to identify the date:

  • from April 1, if the taxpayer submitted an application for special tax conditions before April 1;

  • from the day following the day of submission of the application for special tax conditions, if such application is submitted after April 1; or

  • from the date of state registration, if the taxpayer has submitted an application for special tax conditions within 10 days from the date of its state registration.

Upon termination or cancellation of martial law, all taxpayers will be automatically reverted back to paying taxes they used to pay before their transition to payment of the Unified Tax under special conditions.

VAT

The Law No. 2142 clarified the VAT rules regarding payers of the Unified Tax of the 3-d group with tax rate of 2 %. Such tax payers for the period until the termination or cancellation of the martial law are exempt from obligation to charge and pay VAT on supply of goods, works and services within the customs territory of Ukraine. The same exemption applies to importation of goods to the customs territory of Ukraine, as well as VAT tax reporting. Their registration as a VAT payer is suspended during the period of the martial law in Ukraine. Transactions performed by a Unified Tax payer of the 3-d group under special conditions are not subject to VAT.

At the same time, if goods / services (i) were purchased or manufactured with VAT before the start of the application of 2 % rate by a Unified Tax payer and (ii) were used or sold during the period of application of 2% rate in transactions that are not subject to VAT taxation, then the VAT payer is obliged not later than the last day of the reporting period during which its VAT registration is renewed to increase its VAT liabilities. At the same time, the tax base for increasing VAT liabilities on non-current assets is determined on the basis of their book value as of the beginning of the reporting (tax) period during which such operations are executed. In case no accounting for non-current assets was done - based on the market prices. In terms of the tax base for goods / services, such VAT liabilities shall be increased on the basis of the cost of their acquisition.​

Additionally, for the period of martial law, the following operations are exempt from VAT:

  • importation of goods into the customs territory of Ukraine under the customs import regime by business entities registered as Unified Tax payers of the 1-st, 2-d and 3-d groups, except for tax payers of the 3rd with the tax rate of 3 %;

  • importation by natural persons to the customs territory of Ukraine of cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 people or more, vehicles for goods transportation. Such transactions by natural persons are also exempt from excise tax.

These exemptions do not apply to goods originating from the aggressor state in respect of Ukraine, or imported from the temporarily occupied territories of Ukraine or from the territory of the aggressor state in respect of Ukraine.

Personal Income Tax

The Law No. 2142 amended some peculiarities related to Personal Income Tax charged on agricultural products grown by natural persons.

Income received from the sale of agricultural products grown directly by a natural person to a business entity, shall be finally taxed by such business entity as a tax agent of the natural person during income payment.

Tax agents reflect in tax calculations (i) the total amount of income accrued (paid) in the reporting tax period, received by natural persons from the sale of their self-own agricultural products to a business entity with the status of a tax agent, as well as (ii) the total amount of tax withheld. At the same time, the tax calculation shall not include information on the amounts of specific payments, the amount of tax accrued on them, as well as information regarding Personal Income Tax payer who received income from the sale of self-grown agricultural products to a tax agent.

Import / export of goods and transport

From the date of entry into force of Law No. 2142 and during the period of martial law, the following are exempt from import duty:​

  • goods imported (shipped) to the customs territory of Ukraine by enterprises for free circulation, except for alcohol, alcoholic beverages, beer, tobacco products and industrial tobacco substitutes;

  • cars, car bodies, trailers, motorcycles, vehicles designed to transport 10 people or more, vehicles for the goods transportation imported by citizens to the customs territory of Ukraine for free circulation

These exemptions do not apply to goods originating from the aggressor state in respect of Ukraine, or imported from the temporarily occupied territories of Ukraine or from the territory of the aggressor state in respect of Ukraine.

Law No. 2142 also simplifies customs formalities to facilitate and speed up importation of goods to the customs territory of Ukraine, in particular, the Cabinet of Ministers of Ukraine can determine the goods for which exemption from the customs clearance documents necessary for importation will be provided.

Unified Tax payers (except for payers of the 3-d group with tax rate of 3 %) can declare goods for customs clearance on the basis of a preliminary customs declaration containing all the necessary information for importation of goods. At the same time, customs clearance of such goods must be executed as soon as possible, but not longer than one working hour from the moment the goods and vehicles for commercial purposes are presented.

Also, Law No. 2142 gives the Cabinet of Ministers of Ukraine the right to make the following decisions:

  • to establish the transfer of goods on the basis of not expanding export control in accordance with the Law of Ukraine "On the State Control over International Transfers of Military and Dual-Use Commodities";

  • to establish a list of goods not subject to prohibitions and restrictions on their movement across the customs border of Ukraine as per the Customs Code of Ukraine; and

  • establish the list of goods in respect of which the customs authorities do not take measures to promote the protection of intellectual property rights as per the Customs Code of Ukraine. 

Aside from the mentioned, for the period of the martial law / state of emergency, non-residents are exempt from the obligation to be registered within the customs authorities, as required by Art. 455 of the Customs Code of Ukraine.

Environmental Tax and Property Tax

Law No. 2142 stipulates that taxpayers are exempt from the Environmental Tax if the source of pollution or the location of the waste is within the territory of active combat operations or in the temporarily occupied territory.

Law No. 2142 also provides for exemption from Property Tax (other than land) on residential real estate if is (i) located within the territory of active combat operations, temporarily occupied territories or (ii) is unsuitable for habitation in connection with the military aggression of the Russian Federation according to the following rules:​

  • If such residential real estate was owned by natural persons, the tax is not accrued and is not paid for 2021-2022 reporting years;

  • If such residential real estate was owned by legal entities, the tax is not accrued and is not paid for the period from March 1, 2022 to December 31, 2022.

Owners of non-residential real estate (natural persons and legal entities) are also exempt from the obligation to pay Property Tax: from March 1, 2022 to December 31 of the year in which martial law will be terminated.​

The list of territories with active combat operations, temporarily occupied territories, as well as the procedure for declaring residential real estate uninhabitable will be established by the Cabinet of Ministers of Ukraine.

Taxes administration

Local authorities may establish local taxes and fees without following all procedures of state regulatory policy. In particular, local authorities do not have to hold public hearings on the issues of establishing taxes, publish a draft act for discussion, etc.

The moratorium on desk audits of tax declarations of Unified Tax payers of 4-th group has been lifted.

Until the termination or cancellation of martial law, a moratorium has been introduced on customs audits: new audits shall not start, and the started audits are to be stopped; customs audit acts, statements and tax notices shall not be sent. At the same time, the state of limitations for customs audits was stopped.

Taxpayers are allowed to file tax returns in paper form during the martial law.

The deadline for tax obligations fulfilling due to its impossibility in timely manner was extended. As of now all taxpayers can file reports and pay taxes and fees within 6 months after the termination or cancellation of martial law (previously the deadline was 3 months).

Other planned changes in the taxation of business entities associated with economic ties with the aggressor state

On April 1, 2022, the Draft Law No. 7232 “On Amendments to the Tax Code of Ukraine on the Taxation of Business Entities Connected with Economic Relations with the Aggressor State” (hereinafter – the Draft) was preliminary approved. In accordance with the Draft a business entity that has economic ties with the aggressor state shall pay taxes at the tax rate with a multiplier of 1.5.

The multiplier will be applied to the following taxes:

Corporate Profit Tax (except for withholding tax);

Environmental Tax;

Rent on Subsoil Use; and

Property Tax.

The following business entities will be recognized connected with economic ties with the aggressor state:

  • a legal entity resident of Ukraine, the founder or ultimate beneficial owner (controller) of which, directly or indirectly as of February 23, 2022 is a resident of the aggressor state;

  • a legal entity resident of Ukraine, which receives income in any form originating from the aggressor state, or which directly or indirectly has a share or other corporate rights in a legal entity - resident of Ukraine or a foreign legal entity - non-resident of Ukraine, that receives income originating from the aggressor state;

  • a legal entity resident in Ukraine that is a member of an international group of companies, if the parent company or any other member of such international group of companies receives income from a source originating from the aggressor state; and

  • a legal entity resident in Ukraine that is a member of an international group of companies, if the parent company or any other member of such international group of companies provides economic support to the aggressor state.

Certain economic entities with economic ties to the aggressor state may be exempted from the application of the multiplier if their activities are of social, humanitarian or economic significance for Ukraine. The list of criteria for granting exeption shall be established by the Cabinet of Ministers of Ukraine.

By Viktoriya Fomenko, Partner, Integrites

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