New War Tax Introduced in Ukraine

On July 31, 2014 the Ukrainian Parliament passed Law No. 1621-VII “On Introduction of Amendments to the Tax Code of Ukraine and Certain Other Legislative Acts of Ukraine”, which introduced a war tax in Ukraine.

Who is affected?

All natural persons, whether residents or non-residents, who receive income with a source from Ukraine.  In addition, residents must pay the war tax on their income received outside of Ukraine.  All tax agents will also be responsible for withholding the war tax.

What types of income are affected?

  • salaries;
  • incentive awards, additional compensations and other discharges and remunerations which are accrued, paid out or granted to natural persons in connection with labor relations;
  • payments under civil law contracts;
  • state lottery winnings;
  • non-government lottery winnings;
  • winnings from gambling.

Who are the tax agents?

Employers are responsible for calculating, withholding and paying the war tax to the state budget on behalf of their employees.  Tax agents, such as banks, financial institutions, business entities which make payments in favor of third parties, etc.), are responsible for calculating, withholding and paying the war tax on income derived from Ukrainian sources, while taxpayers are independently responsible for paying the war tax on income derived from foreign sources and income derived from sources exempted from paying taxes to the state budget. 

When will the war tax be collected?

The new amendments to the Tax Code came into effect on August 3, 2014 and, therefore, any income received on or after this date will be subject to the war tax.

What is the tax rate?

The flat tax rate is 1.5%, which should be withheld from the entire amount of an individual’s accrued income before subtraction of the unified social insurance contribution and personal income tax.  For example, if an employee receives 5,000 UAH in gross salary, then such salary will be taxed as follows: unified social insurance contribution (5,000 UAH x 2.6% = 130 UAH); personal income tax ((5,000 UAH – 130 UAH) x 15% = 730.50 UAH); war tax (5,000 UAH x 1,5% = 75 UAH).

Concluding remarks

The war tax has been put into temporary effect until January 1, 2015.  Several accounting issues remain open; for example, will their be new forms for accounting and reporting the war tax for employers and entrepreneurs?  Will a separate account be established for payment of the war tax (much like the unified social insurance fund)?  We expect these and other issues to be resolved quickly, as the war tax should be calculated, withheld and transferred starting this month.

Frishberg & Partners is a full service, Kiev-based law firm, specializing in Ukrainian law since 1991 (for more information please see www.frishberg.com).

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