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

Soon, Ukrainian refugees who are abroad and receive 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 it will have to be made at all, the “Ministry of Finance” figured out. KAC Group partner Tetyana Kuzmych joined the discussion of the issue.

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 registration of status. 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 taxes.

Position of receiving 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. Using a number of criteria, they determine whether a person falls under the status of a tax resident of this country.

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

The first is the availability of permanent housing. But there are nuances. If a person has housing 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 vital interests,” says Tatiana. — “Then the next criterion is applied – place of usual 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,” says Volodymyr Misechko, 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 Ukrainians living abroad to be tax residents of Ukraine and, therefore, must pay taxes here.

With the countries where most Ukrainians ended up, Ukraine has signed bilateral treaties — 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 often they 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 salaried 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.

Many more problems await those who have moved abroad, but continue to work remotely for Ukrainian companies. The essence of the problem was voiced 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 another group – financially capable Ukrainians. It is for their income that Ukraine and Europe will compete, believes Tetyana Kuzmych, lawyer, tax advisor and Partner of KAC Group. “These are not always citizens, but often people who mostly lived in Ukraine. They are connected with Ukraine by close economic ties — they have businesses, real estate, and other assets that generate income. Or their relatives mostly lived in Ukraine,” Tetiana explains.

Such people often had international companies that kept retained earnings for years and sometimes decades. The phrase “tax amnesty” was applied to them. This meant that by May 1, 2022, they had to legalize their profits under preferential tax rates. Because of the war, this term was extended until July 20 of this year.

According to Tetyana Kuzmych, the processes of liquidation of foreign companies with the transfer of income to the beneficiary were supposed to be completed in 2021, but due to various reasons some of the beneficiaries had to wait until 2022. And this means the need to submit declarations in 2023 on the consequences of receiving such significant income in 2022.

“I think that there will be many difficulties and uncertainties with such incomes. After all, first of all, we are talking about millions of dollars. And this means that countries will begin to compete for the funds of wealthy families and will focus their attention on such cases,” says Tetyana Kuzmych.

But the most difficult thing to deal with taxes will be for FOPs.

What about FOPs

“Most of the current agreements on avoiding double taxation between Ukraine and other states provide that an individual must pay taxes in the country in which he resides for more than 183 days.

Therefore, after a six-month period, Ukrainian refugees in many countries must obtain the status of a local tax resident. They have to do this, even if they continue to work for Ukrainian companies remotely,” Nadiya Bezhenar, director of Auditing Company Ukrainian Consulting Group LLC (UCG), is confident.

She says that the same issues will be faced by sole proprietorships conducting business remotely while outside of Ukraine. Moreover, this will happen even if they have the status of a tax resident of Ukraine.

It seems that the Ukrainian authorities were not ready for such a development. After all, Minister of Social Policy Maryna Lazebna reported on her conversation about taxation with the head of the European Parliament Committee on Employment and Social Affairs Dragos Pislaru only at the beginning of July.

“It was about the fact that they could continue to pay income tax, personal income tax, and taxes on the activities of a sole proprietorship to the budget of Ukraine in accordance with Ukrainian legislation, if the main center of their business activity remains Ukraine, even after the expiration of 180 days of stay in the countries EU,” the ministry’s press service reported at the time. Two weeks after discussing the tax issue, the minister resigned.

“Ukraine has not done enough in terms of preserving the tax residency of Ukrainians who have temporarily moved abroad and wish to continue paying taxes in Ukraine. In particular, this problem concerns many FOP-Aitishniks.

What’s more, the latest actions of the DPS encourage non-declaration and non-payment of taxes in Ukraine. Thus, in one of the July clarifications, the tax authority says that if the FOP receives income on foreign bank accounts, it must credit them to Ukraine, otherwise they are taxed not at the FOP rate of 5% or 2%, but at the general rate for for an individual – 19.5% (personal income tax and military duty),” says Vitaly Smerdov, a partner in the tax practice of Crowe Mikhailenko.

“This will mean that the income of the FOP will be taxed as foreign income of a citizen. “Such a letter from the DPS appeared recently. We do not agree with this position. This does not correspond to either tax or currency legislation,” Vitaliy is indignant.

Nina Matvienko from KPMG in Germany talks about other nuances of taxation of private equity firms abroad. For example, if the FOP receives income from a foreign company, to its business account opened in Ukraine, but at the same time being abroad. In order to be able to spend funds (including paying taxes), in accordance with the requirements of the currency legislation of Ukraine, such an FOP must convert them into hryvnias.

The rate of such conversion was 20-25% lower than the market rate for a long time since the beginning of the war. And the FOP had to spend funds from its hryvnia account in the host country at the market rate. It is precisely because of the desire not to lose funds due to such a double conversion that some FOPs, who were forced to find themselves abroad, opened accounts in foreign banks or payment systems.

“This situation today creates risks of both additional taxation in Ukraine and the cancellation of the single tax system for such FOPs. In addition, there is a risk that the tax authority of the host country will “notice” such accounts and seek to tax the funds on them in the host country of the FOP,” says Nina.

Where is the best place to pay taxes?

The first thing to start with is to decide where it is more profitable for you

to be a tax resident. “It is the taxpayer’s responsibility to identify himself as a resident of one or another country and submit a tax return on income. You have to decide where you want to pay taxes and create closer personal and economic ties to that country.

It will be useful to collect the evidence base of such connections (bills for utility payments, availability of FOP, office, attachment of children to an educational institution, etc.),” says Olga Cherevko, founder of GLS Law Company.

Yashchenko and Kuzmych believe that Ukrainians should do this on their own. “The principle of voluntary declaration of annual income by the subject is embedded in all tax systems. At the end of the year, a citizen must independently choose where to submit a declaration and how and where to pay taxes. Including those arising from the excess already paid by him in the current period,” says Tetyana Kuzmych. “Only the person himself fully understands whether he meets the criteria for tax residency,” says Yashchenko.

Nadiya Bezhenar believes that one of the options that exist at the moment is to consider a change of tax residency for oneself: to withdraw from the tax residency of Ukraine and register as a resident of the country where a person stays for more than 180-183 days.

“It is not so easy to stop being a tax resident of Ukraine,” says Vitaly Smerdov. According to him, even if you really want to sell your home, business, and remove yourself from registration and military registration, a person will still remain a tax resident of Ukraine in the eyes of the Ukrainian tax service: there is no separate and legally defined procedure for depriving of residency in Ukraine.

“If you lose your [Ukrainian] tax residency, it’s not cool,” says Olga Cherevko. — Tax rates in the host country may be much higher than in Ukraine, and you may also be subject to repatriation tax in Ukraine.”

“For example, the personal income tax rate in Romania is 10%, in Slovakia – 19%, if this income does not exceed 38.5 thousand euros. If it is higher, the rate increases to 25%,” says Volodymyr Misechko.

“There is a progressive tax on the income of private individuals in the Czech Republic. If an employee earns no more than EUR 67,000 per year, he pays 15% tax, if the amount of income is greater, the tax will be 23%,” says Tetyana Yashchenko.

“In Portugal,” says Olga Cherevko, “a tax rate of 48% will apply to income of 80,000 euros or more.” This is the standard amount of earnings for our FOP IT people,” she says. According to her, in Spain the progressive rate is from 19% to 47%. In Poland, tax rates vary from 17% to 32%, if the income was more than PLN 120,000.

“The personal income tax in Germany is high, and the personal taxation rules are different from the Ukrainian ones. The basic differences are a progressive scale of taxation, different groups of natural tax payers, as well as the possibility of reducing the tax base by taking into account expenses allowed by law,” says Nina Matvienko.

In Germany, she cites an example, local consultants recommend FOPs from Ukraine to register as freelancers, and also advise to check the need to register as VAT payers.

The lawyer says that most likely, each country will try to claim recognition of Ukrainians who have moved as their tax residents after 183 days of their stay.

The exception for today is Poland, which issued an “optimistic” clarification on granting temporarily displaced Ukrainians the right to choose the country (Ukraine or Poland) for paying taxes. Ireland also stated its position on non-taxation of certain incomes of Ukrainians. Regarding other countries, the forecasts are not so optimistic yet.

We solve problems independently: we collect a portfolio

All the lawyers with whom the Ministry of Finance spoke agree that there may be many nuances, and one must be prepared for this. “Questions usually arise when permanent residence, place (source) of income and citizenship do not coincide,” says Tetyana Yashchenko.

Questions will arise from the tax authorities of any country, and it will take the path of least resistance – it will apply the most quantitatively simple criterion – 183 days. But there are other criteria. Nina Matvienko believes that special attention should be paid to them if a person wants to prove his status as a tax resident of Ukraine.

For example, try to prove in the tax country of residence that the center of your life interests is located in Ukraine, or that Ukraine is your permanent place of residence. “In the event that the tax office wants to check you, you should have a “papochka” together,” says Olga Cherevko.

Conditional folder:

Certificate of payment of taxes in Ukraine
Another certificate is a certificate of a tax resident of Ukraine (in the near future it will also be possible to obtain it in electronic form)
Do not leave the place of registration (we support permanent residence in Ukraine)
We do not close the FOP
We do not close accounts in Ukrainian banks
We leave the children attached to their studies

institutions (relevant references can be requested)
We regularly pay utility bills in Ukraine, keep receipts
Some lawyers also advise to have a certificate on the application of the agreement on the avoidance of double taxation
This approximate file, according to Nina Matvienko, will help to “maneuver” and provide evidence in favor of your status as a tax resident of Ukraine. In her opinion, the special status of “temporary shelter”, which Ukrainians in other countries receive precisely because of the war, can also play a role in favor of maintaining residency.

In international law, according to Matvienko, there are cases when the tax authority, in order to determine the country of tax residency, assessed the presence of a person’s intention to return to the country of his usual residence. The status of “temporary shelter”, and not, for example, a permanent residence permit, may indicate that Ukrainians intend to return to Ukraine. Therefore, temporarily displaced Ukrainians must remain tax residents of Ukraine, at least in 2022.

There are also cases concerning the criterion of 183 days. Back in 2020, the OECD developed recommendations that explained the case of 183 days. At that time, the organization said that quarantine measures in the conditions of the pandemic should not affect the tax residency of individuals. And already this June, the OECD said that it plans to return to the discussion of this issue, although not because of the Russian-Ukrainian war, but because of increasing the mobility of workers.

“Globally, there is no other way to solve this issue than to regulate the legislation of the European Union, taking into account the conditions of the EU Directive on temporary protection, or to initiate the signing of separate agreements with each individual country by the state authorities of Ukraine, which, of course, is a more complicated and lengthy process.” – believes Nadiya Bezhenar.

The Ukrainian authorities declare that they are working on solving the problem.

For now, this issue has to be settled with the help of activists. In May, for example, the Office of Effective Regulation — an independent expert and analytical center — together with the IT Association of Ukraine appealed to the Ukrainian government and the Ministries of Finance of Bulgaria, Germany, the Czech Republic, Hungary, Poland, Romania and Slovakia with a request not to change the tax residency of refugee entrepreneurs . So far, only Poland has given a positive response in favor of Ukrainians.