Law of Ukraine "On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine Regarding the Validity of Regulations during the Period of Martial Law" No. 2120-IX dated 15 March 2022 introduced a number of material changes to the existing tax framework, including radical extension of the simplified tax system, reduction of value added tax ("VAT") and fuel excise duty for certain products, as well as various tax reliefs. The changes are intended to lighten the tax burden for businesses, charities, and individuals during war and for the nearest post-war period.
Below is the summary of those changes.
Simplified taxation system
From 1 April 2022 and until the termination of martial law in Ukraine, the simplified tax system (a.k.a. flat tax system, "FTS"), which is now a tax device for small enterprises, will be extended and apply with the following new features:
- large businesses will be allowed to apply the FTS as Group 3 flat tax payers, provided that their annual income does not exceed UAH 10 billion in a calendar year (a "peacetime" limit is around UAH 7 million).
- the list of industries/persons excluded from the FTS was shortened and now includes businesses related to excisable goods, gambling, currency exchange, mining and sale of minerals, as well as banks, insurance companies, pawnshops, non-resident individuals and legal entities);
- tax rate for the Group 3 has been reduced to 2% of income ("peacetime" rates are 3% or 5%, depending on VAT status of the FTS taxpayer);
- VAT will not apply to the supply of goods, works and services whose place of supply is in Ukraine;
- FTS Group 1 and Group 2 taxpayers will pay the FTS voluntarily.
Switching to the FTS Group 3 "wartime" model is voluntary (both for the existing FTS Group 3 taxpayers and for the other taxpayers who qualify for the model). Existing FTS Group 3 taxpayers (i.e. those who used this system before 1 April 2022) can continue apply "peacetime" FTS model.
The "wartime" FTS will be automatically cancelled immediately after the termination of martial law, and all "wartime" FTS taxpayers will be automatically turned back to the tax regime they had immediately before switching to the "wartime" FTS.
For the period of martial law:
- a reduced 7% VAT rate will apply to the import and domestic supply of gasoline, diesel fuel, liquefied natural gas, and oil to Ukraine;
- transactions for delivery or provision of goods and services to the military, law enforcement agencies or for the needs of state defence and/or medical institutions will not be considered "supply" for VAT purposes (i.e. they will not be subject to VAT), except when such transactions are taxed at zero VAT;
- transactions for import and domestic supply of defence goods, medicines and medical devices determined by the Cabinet of Ministers of Ukraine are exempt from VAT;
- it is allowed to include the VAT amount in the tax credit based on duly executed primary (payment) documents for transactions of purchase of goods/services for which no tax invoices are registered, provided that within 6 months after the termination of martial law, all VAT invoices will have to be duly registered in the Unified Register of Tax Invoices), and the VAT tax credit recognised during the period of martial law will have to be clarified (adjusted) on the basis of registered tax invoices;
- the rules regarding the "conditional" supply for VAT purposes will not apply to goods that have been (i) destroyed or lost due to force majeure during the period of martial law, (ii) transferred into state or municipal ownership, and (iii) provided in favour of other persons for the defence needs of Ukraine during the period of martial law.
For the period of martial law,
- for gasoline, other oil products, heavy distillates, liquefied natural gas, propane, and isobutane, the excise duty rate is set at zero;
- the transfer of fuel to the military, law enforcement agencies, and medical institutions, forcible seizure of fuel for the needs of the state, or the transfer of fuel as humanitarian aid is tax-exempt.
Corporate profit tax ("CPT")
- During the period of martial law or state of emergency, non-profit organisations are allowed (i) to carry out activities of the transfer of property, provision of services, use of income to finance expenses not related to the implementation of their goals (objectives, tasks) and activities of the organisation, provided that such services or property are voluntarily provided (transferred) to the military or law enforcement agencies for the needs of state defence, and/or (ii) transfer funds to special accounts opened by the NBU for fundraising purposes.
- Taxpayers are allowed to fully account as their expenditures the cost or value of special personal protective equipment (helmets, bulletproof vests made to military standards), technical surveillance equipment, medicines and medical devices, personal hygiene products, food, supplies and other goods, works performed and services provided, as per the list determined by the Cabinet of Ministers of Ukraine, which are voluntarily paid for (transferred to) the military or law enforcement agencies, and the funds transferred to special accounts opened by the National Bank of Ukraine for fundraising purposes.
Personal income tax ("PIT")
- Charitable aid provided to combatants and persons who reside in combat areas and who suffered from the Russian armed aggression is exempt from personal income tax.
- Tax rebate for individuals in 2022 will be applied to funds transferred to charities and donations to non-profit organisations (up to 16% of total taxable income earned in the reporting year).
Unified social security contribution ("USC")
From 1 March 2002 and until the termination of martial law and additionally during 12 months after the termination or abolition of martial law:
- individuals engaged in independent professional activity, FTS taxpayers and farmers are entitled to refrain from paying unified social security contributions (USC) for themselves;
- FTS Group 2 and Group 3 taxpayers are allowed to refrain from paying USC for their mobilised employees.
Land and environment tax
- From 1 March 2022 and until 31 December of the year following the year when the martial law would be terminated or abolished, taxpayers are exempt from paying land fees (land tax and land rent for state-owned and communal land plots) for the following types of land plots:
- land plots located in the territories where hostilities are (were) taking place or in the temporarily occupied territories (the "Combat Areas");
- land plots littered with explosive objects or where fortifications have been built (the "Littered Lands").
- During 2022-2023, the minimum tax liability will not be charged or paid for land plots in Combat Areas and on Littered Lands.
- From 2022, the environmental tax on properties/facilities located in the Combat Areas will be abolished.
The list of Combat Areas is to be determined by the Cabinet of Ministers of Ukraine, and the Littered Lands are to be determined by the regional military administrations.
- Tax audits are suspended and new audits will not be conducted until the termination of martial law, except for:
- factual audits (carried out at the place of actual activity of the taxpayer). The moratorium on conducting actual audits, which was introduced for the period of quarantine, has been lifted;
- desk audits of tax reports or adjustment calculations for which a VAT refund request has been made.
- During the period of martial law and the three months after its termination, a moratorium is introduced on inspections verifying the accuracy of accrual and payment of USC. Fines and penalties will not be applied during this time.
- Martial law "freezes" all the periods established in tax legislation (statute of limitation, periods for consideration of tax ruling requests, etc.).
- Penalties will not be charged for violations of tax legislation due to martial law, and any penalties already charged will be cancelled.
- Damage caused by inaction of the tax authorities due to the legal regime of martial law or state of emergency will not be reimbursed to taxpayers.
- Business entities are obliged to ensure the possibility of settlements for goods using payment cards. An administrative fine of UAH 1,700 to 17,000 is imposed for violation of this obligation.
- The time frame, within which software registrars of settlement transactions can work without Internet connection, has been expanded.
- Until the termination of martial law, entrepreneurs are exempt from sanctions for violating the Law of Ukraine "On the Use of Registrars of Settlement Transactions in the Areas of Trade, Catering and Services Provision." The only exception is sanctions for violations in sales of excisable goods.
For further information, please contact Asters’ tax and private client Partner Kostyantyn Solyar, Senior Associate Yurii Dmytrenko and Associate Ruslan Golovko.