Our refugees abroad: where and how to pay taxes to FOPs and employees

Soon, Ukrainian refugees living abroad and receiving income there will be faced with a choice: to pay taxes in Ukraine or to choose tax residency in the host country. How to make the right choice and why you have to make it at all, the Ministry of Finance explained. KAC Group partner Tetiana Kuzmych joined the discussion.

Currently, there are still about 5.6 million of our refugees abroad. Half of them are economically inactive: children under 18 and men and women over 65. But about 2.8 million can work. According to various estimates, only 25-30% of all officially registered refugees have found work so far, i.e. about 700-840 thousand. They mostly filled the labor markets of Poland and Germany – that is where the majority of Ukrainians obtained temporary protection.

Romania, Moldova and Slovakia are in third place in terms of the number of departures and status registrations. If you look at the neighboring countries to which Ukrainians also went, a smaller number of compatriots found themselves and submitted applications for temporary protection in the Czech Republic and Hungary.

Another part of Ukrainian refugees continue to work remotely for Ukrainian companies or registered as private enterprises. Soon, everyone who lives abroad and works will have to choose where to pay their taxes.

Position of host countries

The host countries of our refugees have their own logic and believe that a person should pay taxes where he permanently lives and receives income. With the help of a number of criteria, they determine whether a person falls under the status of a tax resident of that country.

According to Tetyana Yashchenko, partner of EXPATPRO, there are three main criteria for tax residency.

The first is having a permanent home. But there are nuances. If a person has a home in both Ukraine and the Czech Republic, he will be considered a resident of the country with which he has closer personal and economic ties. That is, where the center of her vital interests is.

“It may happen that it is impossible to determine the center of life interests,” says Tatiana. — “Then the next criterion is applied – place of habitual residence. If you live longer in Ukraine, you will remain its tax resident.”

“If neither the first nor the second criteria worked,” Tatyana explains, “the third criterion is applied – citizenship. In this case, tax residency will coincide with the person’s country of citizenship.”

“Actually, the second criterion is the main one,” believes Volodymyr Misechko, a lawyer and managing partner of the Misechko and Partners law firm. “In practice, the main feature of residency is the factor of 183 days. That is, an individual is considered a resident of the country where he spent more than 183 days on legal grounds,” says Volodymyr.

However, there may be differences in legislation in other countries. Yes, it takes only 90 days to acquire tax residency in Switzerland, and in Germany you can become a German tax resident already in the second month.

Position of Ukraine

Ukrainian legislation considers that Ukrainians living abroad are tax residents of Ukraine, and therefore must pay taxes here.

With the countries where the majority of Ukrainians ended up, Ukraine has signed bilateral agreements – the Convention on the Prevention of Double Taxation. They were signed precisely so that people who live in several countries do not pay taxes several times. Simply put, if you paid tax in Poland, it should be credited to you in Ukraine, and vice versa. In fact, tax systems in different countries are different, there are many types of taxes and they often do not correspond to each other, and therefore there is no general comparative basis.

Currently, those Ukrainians who got a job in local companies do not pay taxes themselves, a tax agent – their employer – does it for them. He deducts these taxes from their salary. This group is the least concerned about tax residency.

But if these Ukrainians want to quit their job and open their own business, they will be surprised to learn that they have already automatically become tax residents of the host country, despite the fact that Ukrainian legislation expects them to submit a declaration and pay taxes in Ukraine.

Much more problems await those who have moved abroad, but continue to work remotely for Ukrainian companies. The essence of the problem was announced by the European Business Association at the beginning of July. The EBA believes that for Ukrainian employers there is a risk of double payment of social contributions from the wages of employees.

“There are no procedures for exemption from the payment of social contributions in host countries where the obligation to pay such contributions arises. In addition, Ukraine does not have social security agreements with a large number of countries,” the EBA says. Because of this, the EBA believes, many Ukrainians may lose their jobs, as Ukrainian companies will not be able to pay their taxes in Ukraine, and will receive fines.

There is also another group – financially capable Ukrainians. It is for their incomes that Ukraine and Europe will compete, believes Tetyana Kuzmych, lawyer, tax advisor