On October 10, 2024, significant tax increases were announced for Ukrainian citizens and businesses alike. In what were initially called “retroactive tax increases,” the changes only have “retroactive” effect from December 1, 2024, including for private entrepreneurs. The changes are instituted for the period of martial law and will be in effect until martial law is lifted. However, some business owners and individuals need to monitor when certain provisions of the law actually come into effect, as some provisions only come into effect from January 1, 2025.
The most significant tax burden on individual taxpayers across the board relate to the military tax. Once a “small” tax on personal income (1.5%), the military tax will increase to 5% as of December 1st. This, for example, means for employers that the withholding tax on employees’ salaries will increase by 3.5%. There are no changes envisaged for the personal income tax rate of 18%, and contributions to employees’ social insurance remain at the rate of 22%.
While it might seem minor on paper, the military tax increase will place a significant tax burden on those employers who hire individuals on the basis of labor agreements. For individuals, their income will decrease by 5% on their salaries, income from lease payments, and any other sources of personal income. And, yes, this increase will affect income on interest from bank deposits. Currently, interest income was taxed at the rate of 19.5%, but as of December 1st it will increase to 23%.
What about independent contractors and their tax liability in light of the increased military tax? For independent contractors in groups 1, 2 and 4 of the simplified tax system (STS), the rate will increase to 10% of the minimum salary floor set for January 1, 2025. This means that independent contractors in these groups will pay 10% from 8,000 UAH from January 2025 (800 UAH per month).
From January 1, independent contractors and companies in group 3 of the STS will pay the military tax at a quarterly 1% tax rate from their turnover according to their results from the first quarter of 2025. Consequently, independent contractors and legal entities in group 3 of the STS will pay, in addition to their simplified tax rates of 3% or 5% (VAT payers), the 1% military tax for the relevant tax period.
The reporting period for the military tax and unified social insurance contributions will now change from quarterly to monthly in 2025, resulting in more frequent workloads for accountants in many spheres of business.
The tax changes also increase corporate income tax (CIT) for certain taxpayers. For example, banks are subject to a CIT rate of 50% in 2024, while certain financial institutions, except insurance companies, must pay 25% CIT on their profits (as adjusted according to current accounting rules). These increases will likely affect bank commissions and interest rates on deposits and loans. There are also procedural changes related to advance tax payments for retail fuel merchants (which may lead to increased fuel prices for petrol stations and consumers), currency exchange points, and arable land owners.
The hope is that more business will continue to appear for independent contractors and businesses to alleviate the monthly tax increases. However, there is always the risk that these businesses will try to avoid these significant tax increases by using the shadow economy rather than innovative resolutions. Ultimately, the Ukrainian government will need to show justification to businesses and individuals for these increases other than the need to bolster the armed forces.
