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Declaration of Income 2023: How to Say Goodbye to the Tax Office, and Who Cannot Do So
Armed aggression forced millions of Ukrainians go abroad. Numerous citizens of our country invest or open business in others countries and expand geography of their own activities, while remaining in Ukraine. Such citizens face the question: in which state it is necessary to declare incomes received in 2023 and to pay taxes on them, at what rates and in what order. Volodymyr Harkusha, Managing Partner of KAC Group, explained these issues to the “Minfin” Newspaper.
Tax Code of Ukraine determines that an individual is a resident of Ukraine if:
? they have a place of residence in Ukraine or temporary place of residence also in a foreign state;
? if they have a place of permanent residence in a foreign state, but have closer personal or economic connections (center of life interests) in Ukraine. If it is impossible to determine the center of life interests, a person is considered a resident if they stay in Ukraine for at least 183 days for tax year;
? if it is impossible to determine a resident status of an individual using previous rules, they are considered a resident if they are a citizen of Ukraine.
Similar definitions of tax residency exist in most states. Situations are possible when two states simultaneously consider a person to be their resident and claim to tax their income. In such cases, the provisions of the international treaties on the avoidance of double taxation, signed by Ukraine with other states, apply. They have priority over the norms of local legislation of the participating countries.
In Ukraine, there is no official procedure for the loss or cancellation of tax resident status. When a person loses Ukrainian citizenship, they actually lose the status of a tax resident.
If a person has received a Certificate of Permanent Residence Abroad, the fact of a change in tax residency is evidenced by:
? deregistration of the place of residence in Ukraine and subsequent stay in Ukraine for less than 183 days during the tax year;
? presence of foreign assets: own home, business, confirmed investments and bank accounts in another country;
? assignment of a tax number, payment of taxes in another state;
? availability of medical insurance; payment of utility bills and other payments at the new place of residence, which confirm the change in economic and vital interests;
? court decision on loss of tax resident status.
It should be remembered that the tax authorities of Ukraine consider as residents all Ukrainians who, when leaving abroad, did not submit the latest tax declaration and did not receive a certificate about the absence of obligations to the budget. Such a Declaration must be submitted no later than 60 calendar days prior to departure abroad for permanent residence.
Who is Obliged to Declare Income in Ukraine Regardless of the Place of Stay
? natural persons — controllers of foreign companies (CFCs) who submit the first CFC report in 2023;
? residents, regardless of their location, who carried out transactions with Ukrainian investment assets (securities, corporate rights) and received dividends;
? residents who received income from foreign sources (salary, remuneration under civil law contracts, etc.), including citizens who received assistance from foreign countries and their state funds, as well as dividends from foreign companies;
? residents, regardless of their place of stay, who received income from leasing, renting or subleasing property, if the lessee is a natural person who is not a business entity, as well as from property alienation operations.
Just to be on a safe side, the tax administration singles out some special cases. For example, in the Explanation of the State Tax Service of Ukraine dated May 12, 2023 “On the Taxation of Income of Natural Persons — Residents, Received from Sources Outside Ukraine”, it is clearly stated that the income received by a natural person — resident from sources outside Ukraine is included in the total annual taxable income as foreign income and is subject to personal income tax and military levy on a general basis.
Regarding tax rates on the income of individuals (including from sources outside of Ukraine), it is worth considering Law No. 8401, which entered into force on August 1, 2023. This Law provides for the abolition of the single tax of 2% for individual entrepreneurs and a return to the rate of 5%.
However, Ukrainian tax rates, including the base rate of 18%, do not compare with the Czech tax rate of 23%, where half a million Ukrainians have emigrated, or the Polish tax rate of 36%, where there are about one and a half million Ukrainian citizens. And taxation in Spain (more than 150,000 Ukrainian forced migrants are registered) is at the level of 54%. In addition, Spanish law provides for the taxation of the income of persons who have obtained local tax residency, regardless of the place of their receipt. That is, including income, the source of which is Ukraine.
Why Is This Important?
Real practice shows a somewhat infantile attitude of our citizens, who have received the right to temporary residence and local tax registration abroad, to taxation both at the current moment and in the future. The fact is that in 2023, Ukraine implemented the necessary international norms regarding the automatic exchange of financial and tax information – CRS.
In other words, in the foreseeable future, tax authorities of Ukraine will automatically receive information from the bank accounts of Ukrainian citizens in foreign banks with all the relevant consequences. It should be understood that the foreign bank, during the client’s compliance and due diligence procedures, requires the client to provide complete personal information, including a Ukrainian passport, ITN (individual tax number) and an explanation of the sources of funds.
Local tax registration does not always solve the problem. According to the internal rules of financial monitoring, the bank mostly sends information both to local tax authorities and to Ukrainian ones. Especially if the client of the bank has assets in Ukraine, or receives income, the source of which is also Ukraine.
Therefore, for the citizens of Ukraine who have an accident abroad and receive income both from abroad and from Ukraine, it is important to take the prospects of submitting declarations in 2023, regardless of their location, seriously.
There are two key facts to remember:
? firstly, they are citizens of Ukraine regardless of their location,
? secondly, ignoring the realities of the existing legislation will lead to significant fines.
What Should Be Done Now
Systematize and analyze essential information and documents that are important for determining the tax residency of a citizen of Ukraine, taking into account existing legislation.
Pay particular attention to the taxation of personal income in the context of the relevant double taxation agreement between Ukraine and the country of residence.
Depending on the specifics of the received income, determine the acceptable tax rate and the procedures for their collection in different countries. Independently or with the involvement of specialists, draw up an individual plan for declaring income received in Ukraine or in the country of residence in order to avoid “multiple tax residency”.
In the case of making a corresponding considered decision, carry out the procedure of changing the tax residency in a legal way.