Taxes on Social Assistance Received Abroad

In connection with the full-scale invasion of the Russian Federation into Ukraine, millions of Ukrainians were forced to leave their homes and go abroad.

According to the Office of the United Nations High Commissioner for Refugees, as of September 30, 2022, the number of refugees from Ukraine registered for temporary protection or in similar national protection schemes in Europe was about 4.2 million people.

Along with temporary shelter, citizens of Ukraine received the right to social benefits from local authorities.

In this article, we are analyzing whether it is necessary to declare and pay taxes in Ukraine on payments received abroad as social assistance.

Are Foreign Payments Considered the Income of Citizens?

According to Art. 163 of the Tax Code of Ukraine, the subject of taxation of a resident of Ukraine is foreign income, which is a type of income received from sources outside of Ukraine.

If the source of payments of any taxable income is foreign, the amount of such income is included in the total annual taxable income of the taxpayer – the recipient, who is obliged to submit an annual tax return, and is taxed at the rate of 18% (par. 170.11 of Art. 170 of the Tax Code of Ukraine).

In addition, a military fee at the rate of 1.5% is paid from such income.

Therefore, at the moment, the legislation does not define social assistance with a source of payment outside of Ukraine as income that is not included in the calculation of total taxable income (Art. 165 of the Tax Code of Ukraine).

In connection with the above, residents of Ukraine have the obligation to declare monetary assistance for housing and communal services, social assistance for children and other types of social benefits received abroad, and to pay taxes on them in Ukraine.

Note that the possibility of reducing the tax burden or exemption from paying taxes is available only if citizens have evidence of paying taxes on foreign income in a foreign jurisdiction. However, according to the rules in force in the vast majority of foreign countries, the payment of social assistance is not accompanied by the payment of taxes in the country of payment. As such, it is not possible to use such a benefit.

At the same time, material assistance received by citizens in Ukraine is exempt from any taxation.

Tax Declaration and Payment Terms

Income received in 2022 should be reported in the following tax year.

The deadline for submitting the annual tax return for 2022 is May 1, 2023.

The tax payment period for income received in 2022 is until August 1, 2023.

How Can Tax Authorities Find Out about the Fact of Receiving Foreign Income?

If social assistance is received in non-cash form, for instance, to a specially opened bank account abroad, there is an option to receive information about cash receipts as part of the automatic exchange of tax information on financial accounts (CRS).

On August 19, 2022, Ukraine joined the Multilateral Agreement of Competent Authorities on Automatic Exchange of Information on Financial Accounts, which will allow state authorities to receive information on foreign accounts of residents.

Please note that the first exchange of tax information in the mode of the CRS General Reporting Standard between Ukraine and more than 100 countries of the world is planned for September 2024. In addition, such a mechanism does not solve the issue of cash payments.

Currently, tax authorities have the right to request foreign state authorities to provide information on persons who received financial assistance. However, given the significant volume of such work, the probability of tax authorities taking these measures is low.

Consequences of Non-Fulfillment of Tax Obligations

1) Application of fines:

• a fine of UAH 340 for failure to submit or late submission of a declaration;
• administrative responsibility in the form of a warning or the imposition of a fine in the amount of 3 to 8 tax-free minimum income of citizens (UAH 51 – 136);
• fine for non-payment of taxes – 10% of the amount of tax or 25% in case of qualification of actions as intentional;
• a penalty of 120% of the annual accounting rate of the NBU, starting from the first day of delay for each calendar day of delay.

2) In case of non-submission of the declaration, the statute of limitations for bringing the taxpayer to financial responsibility does not apply. This means that when a violation is detected, the tax inspectorate will be able to charge fines at any time, regardless of how much time has passed since the violation.

Thus, the issue of taxation of social benefits received by residents of Ukraine in other states requires legislative regulation.

Lawyers and consultants of K.A.C. Group will be happy to advise on issues related to changes in the legislation in connection with the imposition of martial law, as well as provide comprehensive legal support.