Changes in personal income taxation

The Law of Ukraine "On amendments to the Tax Code of Ukraine and other laws of Ukraine regarding ensuring the balance of budget revenues during the period of martial law" No. 4015-IX dated 10 October 2024 (the "Law No. 4015") came into effect on 1 December 2024 (with certain exceptions). The new tax rules introduced by the Law No. 4015 have already been adjusted and are in effect with the changes and additions provided by the Law of Ukraine "On amendments to the Tax Code of Ukraine and other laws of Ukraine regarding the stimulation of the development of the digital economy in Ukraine" No. 4113-IX dated 4 December 2024 (the "Law No. 4113"), which came into force on 1 January 2025. Below we provide comments on the main changes provided by the Law No. 4015 and the Law No. 4113.

Increase in the military levy rate from 1.5% to 5%

The Law No. 4015 increases the military levy rate applied to most types of personal income, such as salaries, remuneration under civil law contracts, interest on deposits, dividends, etc., from 1.5% to 5%. This increase is time-limited: Law No. 4015 establishes that starting from 1 January of the year following the year in which martial law is abolished or cancelled, the military levy rate will again be 1.5%.

The Law No. 4015 also provides exceptions for special categories of individual taxpayers (military personnel and employees of the Armed Forces of Ukraine, Security Service of Ukraine, and others) – their incomes continue to be subject to the military levy at the rate of 1.5%, not 5%.

At the same time, the adopted version of the Law No. 4015 contained certain inconsistencies and allowed for multiple interpretations of its provisions, in particular, regarding the calculation of the military levy amounts from income accrued before and after 1 December 2024. Moreover, the Law No. 4015 established obligation to pay the military levy for private entrepreneurs starting from 1 October 2024, when the Law No. 4015 had not yet been adopted and had not come into force.

The Law No. 4113 made certain corrections and clarifications to the relevant rules established by the Law No. 4015. According to the changes introduced by the Law No. 4113, an individual’s income, which is included in the total annual taxable income for the 2024 reporting (tax) year and is taxed via filing an annual income tax return for 2024, including foreign income, should still be subject to military levy rate of 1.5%. Consequently, the 1.5% military levy rate applies, in particular, to foreign income received by taxpayers in December 2024.

At the same time, taxable income from property transactions, as well as taxable income in the form of the value of inherited or donated property received after 1 December 2024, shall be subject to military levy at a rate of 5%, regardless of whether such income is included into the annual income tax return for 2024. 

Payment of the military levy by private entrepreneurs - single taxpayers

As a reminder – previously private entrepreneurs - single taxpayers were not payers of the military levy. At the same time, the Law No. 4015 establishes such an obligation for this category of taxpayers: for single taxpayers of the first, second, and fourth groups of simplified taxation system, military levy is paid at the rate of 10% of the statutory established minimum monthly wage in effect of 1 January of the reporting year (in 2025 – UAH 8,000); for single taxpayers of the third group of simplified taxation system – at the rate of 1% of the income subject to single tax. Considering the changes provided by the Law No. 4113, such an obligation is established from 1 January 2025 and is in effect till 31 December of the year in which martial law is abolished or cancelled. Single taxpayers of the first, second, and fourth groups of simplified taxation system are required to pay the military levy by making advance payments no later than the 20th (inclusive) of each month. Payment of the military levy by single taxpayers on the third group of simplified taxation system shall be done within 10 calendar days after the deadline for submission of the quarterly tax return.

Deadlines for submitting payroll tax reports

The Law No. 4015 provides for a change in the frequency of submission of payroll tax reports by the tax agents (employers, legal entities that pay other (non-employment) types of income to individuals) from quarterly to monthly. The monthly tax period is also applicable for notaries who are required to submit tax reports upon notarization of sale (exchange) contracts concluded between individuals.

Taxation of assistance received by individuals affected by the armed aggression of the Russian Federation against Ukraine

The Law No. 4015 provides for an exemption from taxation and reporting of aid received by individuals affected by the armed aggression of the Russian Federation against Ukraine and who have exercised the right of temporary protection. The exemption applies to income received before 31 December of the year in which martial law is terminated or cancelled (before the changes such rules applied to 2022 and 2023 reporting years).

Clarification of the period for applying the reduced personal income tax (PIT) rate to the income of specialists of Diia City residents 

According to the changes made to the Tax Code by the Law No. 4113, the PIT rate of 5% applies starting from the calendar month following the calendar month of acquiring Diia City residency. 

Prior to the Law’s enactment, a similar approach was set out in the clarification of the State Tax Service of Ukraine, with the Law No. 4113 effectively confirming its lawfulness. 

As a result, the income of Diia City residents’ specialists accrued (paid) in the month of acquiring the Diia City residency is taxed at the rate of 18%.  

PIT rules for specialists of new Diia City residents (so-called "start-ups") 

The Law No. 4113 amends the Tax Code and establishes that a reduced PIT rate of 5% may be applied to the income of specialists until 31 December of the calendar year following the calendar year of acquiring Diia City residency, even if a legal entity does not comply with the requirement for the average personnel headcount (9 individuals) during this period. This provision applies exclusively to Diia City residents which joined Diia City regime pursuant to part 3 of article 5 of the Diia City Law (on a "start-up" basis) and meet the requirements set out in the Diia City Law.  

If a Diia City resident does not meet the specified requirements, particularly regarding the average personnel headcount, such resident, as a tax agent, has an obligation to calculate and pay PIT on the income of specialists at the general rate of 18% for the last three months of the year following the calendar year when the Diia City residency was acquired, taking into account taxes already paid on such income (i.e., requiring the payment of the difference between PIT at the 18% rate and the PIT already paid at the 5% rate). This requirement to pay the additional tax applies exclusively to Diia City residents, which obtained residency status under part 3 of article 5 of the Diia City Law, starting from 1 February 2025. 

Clarification of the exemption from fines for violation of Controlled Foreign Companies (CFC) rules during the martial law 

The Law No. 4113 stipulates that fines for violation of the CFC rules committed between 1 January 2022 and the last day of the martial law will not be applied if a person fulfills the respective obligations (outlined in the article 39-2 of the Tax Code) within six months after the martial law is abolished.