We have recently advised to a French company involved in IT technology on two topics concerning peculiarities of running its 100 per cent owned Ukrainian company. As the issues raised are of interest to numerous investors in Ukrainian business, it is our pleasure to publish our Explanations on Registration of a Ukrainian business entity as a payer of the Value Added Tax and Variants of employee remuneration

 

The following issues are under review:

  • Is there a legislative requirement of mandatory registration of an enterprise as a payer of the Value Added Tax;
  • Comparison of variants for employee remuneration (hired employees versus registered private entrepreneurs).

 

First Issue
The provisions of Article 2 of the law of Ukraine "On Value Added Tax" specify the following criteria of VAT payers:
The VAT shall be paid by:
2.1. any person, who:

a) carries or plans on carrying on business activity and is registered as a VAT payer at its voluntary resolution;
b) is subject to mandatory registration as a VAT payer;
c) imports goods (adjacent services) in volumes that are taxable with VAT subject to the provisions of this Article.
2.2. Any person registered as a VAT payer at its voluntary resolution.
(clause 2.2 of Article 2 as amended by the Law of Ukraine of 03.06.2005 No. 2642-IV)
2.3. The registration of a person as a VAT payer is mandatory in cases if:
2.3.1. The total volume of transactions on supply of taxable under this Law goods (services), including same with use of global or local computer networks, is calculated for (paid or received by) a person or the amounts payable by such person to the third party contractors, during twelve preceding calendar months exceeds 300000 hryvnias (without consideration of VAT).
(sub-clause 2.3.1 of Article 2 as amended by the Law of Ukraine of 03.06.2005 No. 2642-IV sub-clause 2.3.1)
2.3.3. A person who supplies goods (services) in the customs territory of Ukraine using global or local computer networks. A non-resident person may only carry on such activity via its permanent representative office, registered in the territory of Ukraine.
.........
(Article 2 as amended by the Law of Ukraine of 26.09.97 No. 550/97-ВР, of 15.01.98 No. 25/98-ВР, of 20.11.98 No. 277-XIV, of 14.09.2000 N 1955-III, in edition of the Law of Ukraine of 25.03.2005 No. 2505-IV)
Thus, the obligation of registration as a VAT payer is fully grounded by the effective legislation.

 

Second Issue
Concerning selection of method of labour remuneration the review of two options is suggested:

 

  • calculation and payment of income as a salary to the hired employees;
  • calculation and payment of income as payments for the services of private entrepreneurs who render services under the contracts made with the enterprise.

 

 

In case of calculation and payment of income as a salary to hired employees an enterprise and an employee would have to make the following payments:

a) To the funds for mandatory social insurance based on payroll:

  • the pension fund - 32,3 %;
  • the social insurance fund - 2,9 %;
  • the fund for social insurance in case of industrial accident and temporary incapacitation - 0,9% (based on the field of activity where the enterprise is engaged);
  • the fund for social insurance in case of unemployment - 1,6 %.
    b) To the funds from salary of every employee:
  • the pension fund - 2%;
  • the social insurance fund - ranging from 0,5% to 1%;
  • the fund for social insurance in case of unemployment - 0,5%. c) Income tax of natural persons at a rate of 13% of the amount of income less payments to the funds and allowance of 50% of the minimal wage (the amount of allowance set for 2005 is 131,00 hryvnias) set by the Cabinet of Ministers of Ukraine for payroll employees in case the amount of calculated salary does not exceed 630,00 hryvnias.

 

For example, in case of payment of calculated income of 1000,00 hryvnias to a payroll employee the following payments to the funds will be required:

a) Payer - enterprise -payroll based:

  • the pension fund 32,3% = 323,00 hryvnias;
  • the social insurance fund 2,9% = 29,00 hryvnias;
  • the fund for social insurance in case of industrial accident and temporary incapacitation 0,9% = 9,00 hryvnias;

 

b) Payer- employee- salary based:

  • the fund for social insurance in case of unemployment = 16,00 hryvnias;
  • the pension fund 2% = 20 hryvnias;
  • the social insurance fund 1% = 10 hryvnias;
  • the fund for social insurance in case of unemployment 0,5% = 5 hryvnias;

c) Income tax of natural persons = (1000,00 - 20,00 - 10,00 - 5,00)х13% = 125,45 hryvnias.

 

Thus, in case such system of labour remuneration is opted, for every 1000,00 hryvnias calculated as payment to an employee an enterprise would have to pay at its own expense 377,00 hryvnias and withhold 160,45 hryvnias from an employee. As a result, an employee would receive a net amount of 839,55 hryvnias out of 1000,00 hryvnias of income.

 

In case of calculation of income as a payment for services to a private entrepreneur who performs work under a contract with an enterprise, the actual remittance of funds to the bank account of such entrepreneur in full, without any withholding (cash payment at a cash desk of an enterprise is allowed).
According to the provisions of the Decree of the President of Ukraine "On Simplified System Of Taxation, Accounting and Reporting Of Small Entrepreneurs" of 28.06.1999 No. 746/99 (as amended) for natural persons-entrepreneurs taxed by unified tax the rate of tax is set at 20,00 to 200,00 hryvnias per month.
For the activity in the field being reviewed the rate of tax shall be at 200,00 hryvnias per month. Hence, if a monthly remittance of 1000,00 hryvnias to the account of such private entrepreneur for services is made, a unified tax of 200,00 hryvnias per month would be payable to the state budget (exchequer). Top limit of annual income of a private entrepreneur is set at 500 thousand hryvnias (the annual amount of unified tax shall amount to 2400 hryvnias). However, this method of calculation and payment of remuneration has its drawbacks, specifically:

a) a mandatory state registration of persons rendering services to an enterprise as entrepreneurs at their location of residence in the bodies of executive power and tax authorities;

b) a mandatory reporting to tax authorities (quarterly);

c) independent accounting for income and expenses, timely payment of unified tax;

d) a mandatory renewal of contract with an enterprise after elapsing of every 30 calendar days; failure to do so would lead tax authorities to conclusion that a given private entrepreneurs is in fact a hired employee and the payments to the social insurance funds stipulated for payroll employees (as described above) would be claimed against an enterprise;

e) should the total income of such private entrepreneur for the preceding 12 month exceed 300000,00 hryvnias he/she would be required to register as the VAT payer;

f) procedure for cancellation of the state registration of private entrepreneur is extremely complicated and lengthy.

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