Tax Amnesty: How to Declare Cash and Cryptocurrency

From September 1, those who have decided to legalize their assets, purchased with “shady” income, will be able to fill out a zero declaration. Still, it will not be possible to declare cash directly. There are many fears about the legalization of cryptoassets, so “Minfin” found out how to submit this type of a declaration with minimal risks.

The decision on whether to take part in the declaration campaign is only the first step. All its pros and cons have already been analyzed by “Minfin” in detail. At first glance, as soon as you decide to declare, next actions become extremely simple: the list of assets, the range of potential declarants and everything else is spelled out clearly in the relevant law. All a shadow asset owner needs to do is fill out a tax return and pay tax.

But, as it turned out, even more questions arise later.

“How to separate assets that were received (acquired) from the income from which taxes and fees were not paid or were not paid in full, from those that were received from completely legal sources?

Or, say, a citizen knows that all assets were acquired from legal sources. Is it necessary to prove something additionally to the tax authorities in this case, and under what circumstances should it be done?” Kateryna Strukova, Lawyer of Stron Legal Services, enlists the most common questions.

For their own comfort, owners of expensive assets need to have supporting documents confirming the payment of taxes on all the amounts spent on their purchase, which is unlikely. There is another option, a costly one.

“We recommend our clients to declare houses with the area of over 240 square meters and apartments over 120 square meters, as well as currency values ??placed on bank deposits, rights to claim property rights, and movable property, including cars worth over UAH 2.25 million,” Yuliia Matkovska, Managing Partner of “Matkovskaya & Partners” Law Firm, says.

Lawyers comment that most often their clients ask questions about the best way to “legalize” funds, which is understandable.

A joint study by the NBU, the government, Mastercard and Ernst & Young estimated the shadow cash economy of Ukraine at UAH 702 billion.

According to the Head of the Parliamentary Committee on Finance, Tax and Customs Policy Danylo Hetmantsev, citizens currently have more than USD 50 billion undeclared. By the way, it is possible that some of these funds have already been transported abroad.

The law provides for several options to declare funds. “Minfin” conducted their thorough analysis.

Cash: 4 Legal Ways to Report to the State

The first thing to note: you will not be able to simply state cash in the declaration. This restriction was not coincidental.

“The legislators considered the lessons of other countries and the domestic experience of e-declaration, when officials sometimes declared cash in larger amounts than it actually was.

Such actions, in fact, were attempts to legalize further receipts of non-taxable cash. That is why, in order to amnesty cash, funds will need to be deposited into a special account in a Ukrainian and/or foreign bank, so no one will have any doubts about its real amounts,” Vasyl Andrusiak, Partner at “Moris”, explains the lawmakers’ logic.

So, option 1: placing funds on an account in a Ukrainian bank (as no one will transfer money to a foreign bank for declaration purposes only).

To do this, you will have to open a special account in any of the banks, having previously filled out a questionnaire, which will ask you to indicate the origin of the cash. For instance, these could be the following sources:

• assets received from doing business, realizing independent professional activities;
• assets received in the form of non-taxable income;
• assets received as a gift;
• assets received from other sources of origin.

By the way, questions in the questionnaire may differ: the NBU prescribed only the general procedure for opening a special account and the mandatory information that the declarant must disclose, but the bank can include questions to the questionnaire at its discretion.

“The bank will still check the source of the origin of the money that is accrued to the client’s account, although the law does not make it necessary to indicate the source. As a rule, the bank requires that the amount of proceeds does not exceed the three-year amount of income from which taxes are paid,” Ihor Yasko, Managing Partner of the “Winner” Law Firm, says.

In addition, the declarant will have to indicate the country of origin of such assets. If the assets, for example, have a source of origin from the aggressor country, the bank will simply refuse to open an account.

After completing the financial monitoring procedure and confirming the sources of origin of the above-mentioned assets, the declarant can:

• transfer money to their own current bank account;
• withdraw money and close a special account;
• use a special account as a current one (having submitted a corresponding application).

If the financial monitoring service has suspicions about the funds placed on a special account, such funds can simply be frozen.

Option 2: purchase of government bonds. Another possibility to legalize cash from which taxes have not been paid is to lend to the state. To declare cash through the purchase of government bonds, you will have to fulfill two conditions:

• purchase securities with a maturity period of at least a year without the right to early redemption;
• the acquisition period is from September 1 of this year to September 1 of the following year.

There are two indisputable advantages of this way of declaring.

Firstly, one can make good money of government bonds now. As an example, the weighted average return of 1.5-year government bonds placed by the Ministry of Finance on August 31 amounted to 11.3%, 3-year government bonds – 12.4%. It is possible that the cost-effectiveness will continue to grow if the NBU decides to raise the key rate at the next meeting on September 8.

Secondly, this option will save on tax. “If we consider the tax rate only, the smallest percentage of declared values ??will be paid when investing in government bonds of Ukraine, and it will equal to 2.5%,” Ihor Yasko says.

Nevertheless, there are two significant drawbacks. In fact, the declarant freezes their funds for at least a year. The main issue, however, is that in this case, the funds will still be checked for legality of origin.

Option 3: declaration of a right to a monetary claim. A perfect solution for those who want to declare cash in advance and for those who want to avoid the hassle of financial monitoring checks.

With this approach, the declarant proclaims that the money they own has been lent to a third party. Therefore, it is not possible to place them in a bank or, say, buy government bonds.

“We cannot exclude the option when defaulters declare significant loans to create a channel for the receipt of legal funds for themselves in the future,” Vasyl Andrusiak notes.

Option 4: Tax-Free Alternative to a Tax Amnesty

On July 14, 2020, the Parliament adopted amendments to the Tax Code, granting capital amnesty to offshore lovers. The Ukrainians who control foreign companies (CFCs) were given the opportunity to liquidate them, after which strict rules of taxation of transactions with such companies will begin to operate.

Often, a CFC was created to accumulate and keep assets out of sight of the Ukrainian regulatory authorities. Now this offshore company can be liquidated, and one will submit a declaration of income with the payment of only 1.5% of the military duty.

To take advantage of the norm, two conditions must be met:

• liquidation of a CFC must be completed by December 31, 2021;
• the declarant, being a shareholder, participant, partner or controlling body of a liquidated company, is obliged to file a tax application, specifying the details of the company, as well as the property and income received as a result of the liquidation.

“Of course, we recommend tax-free liquidation of CFCs under Law 466 to owners of the assets the value of which, upon legalization, justifies the costs of lawyers and tax consultants. Through this mechanism, it is possible to legalize both the rights of claim and assets in the assessed value.

This makes sense for their further implementation, when the difference in value becomes subject to personal income tax. Some experts insist on declaring assets exclusively in money, referring to discrepancies in the norms of this law,” Volodymyr Harkusha, Managing Partner of “KAC Group”, explains.

How You Should Declare Your Bitcoins

For many Ukrainians, the question of how to declare cryptoassets will be just as relevant as the question of the legalization of cash.

According to the leading analytical company “Chainalysis”, in 2020, investments in bitcoin allowed Ukrainians to earn about USD 400 million. As a result, Ukraine entered the top 10 countries in terms of profit from investments in number one cryptocurrency.

This year, the country is in fourth place in the cryptoassets use rating.

Andrii Timonov, Lawyer at “Riyako & Partners” Law Firm, says that declaring cryptoassets will actually provide an opportunity in the future to use the funds received from their sale without the need to confirm the legality of their receipt. This will be extremely important if our state begins to compare the expenses of its citizens with their income (as it has intended to do earlier).

“As for other types of assets, it is required to declare cryptocurrency if it was purchased for the income from which taxes were not paid, of if cryptocurrency was donated to the payer without paying taxes.

At the same time, it is necessary to clearly understand that the amnesty will correct old “mistakes” only (those before 2021). If the declarant is going to sell their cryptoassets now or in the future, they will have to pay taxes according to the general rule: 18% of personal income tax plus 1.5% of the military fee,” Vasyl Andrusiak reminds.

Anyway, the declaration process itself is not so simple. Stanislav Klimov, Partner of “Kodex” International Legal Company, explained to “Minfin” that there is currently no legislative act in Ukraine that fully regulates the legal status of cryptocurrency. For instance, cryptocurrency is subject to declaration under the Law “On Prevention of Corruption”.

However, the provisions of this law relate to persons authorized to perform the functions of the state or local self-government. By the way, our government officials have actually begun to actively declare their bitcoins.

In their declarations for the past year, Ukrainian officials have “revealed” nearly UAH 75 billion of cryptoassets.

Nonetheless, if desired, it is not only civil servants who can now legalize their bitcoins.

Nina Betz, Head of Tax Law Practice at “Ilyashev & Partners” Law Firm, suggests a solution: “The law does not provide for the possibility of declaring cryptocurrency to ordinary citizens, and the current legislation does not contain a definition of the concept of cryptocurrency. However, it can be subsumed under the concept of “other assets”, which, if desired, will make it possible to indicate the presence of such an asset in a special declaration.”

How to Optimize the Declared Assets Tax Payment

The law also provides the declarant with the possibility to choose when to pay tax, and in what amount. The Founder and Director of “De Jure” Legal and Consulting Company Hryhorii Tripulskyi told “Minfin” about ways to optimize tax payments.

First of all, at all applicable rates, a deferral of payment of the fee from a one-time voluntary declaration is proposed. At the request of the declarant, the payment can be made in three equal installments within three years. Moreover, the percentage is quite nice. From assets located in Ukraine, instead of paying 5% in case of payment by installments, you will have to pay 6%, which is still quite beneficial.

“Surely, getting a loan in hryvnia for 2 years at a rate of 1% is very tempting. For foreign assets, instead of 9%, you can pay 11.5% within three years, and for government bonds, instead of 2.5%, you can choose 3%, which is also quite convenient. The law also proposes to pay tax on foreign assets immediately in the period from September 1, 2021 to March 1, 2022 at a preferential rate of 7%, and even if declaration took place during this period, you can opt for an installment plan of three years at a rate of 9.5%,” Tripulskyi describes.

In his opinion, a way to minimize tax may be to understate the value of declared assets by decreasing their price (for instance, through reduced appraisal of real estate in Ukraine). Such an understatement will make it possible to pay a lower amount of the amnesty fee, and in the future, in case of sale of real estate, the price at which it was declared will still not be considered.

Another method to minimize the amount of tax payment is the acquisition of annual government bonds: the rate is only 2.5%, but there is still a significant percentage on government bonds paid by the state.

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