HR and tax alert | January 2016

Ukraine reduces income and social tax rates

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Executive summary

At the end of 2015, the Parliament of Ukraine made several changes to the current tax law of Ukraine. In particular, the changes affect the personal income tax rates and simplify and reduce the rates for Unified Social Tax.

The respective changes will impact employers operating on the Ukrainian market and employees (both Ukrainian citizens and foreign assignees to Ukraine).

Key changes to income tax

Change to income tax rate for employment income

Income tax will be applied to salaries at a flat rate of 18%, compared to the graduated rates of 15%-20% previously.

Reduction in the “passive” income tax rate

The income tax rate for “passive” income has been reduced from 20% to 18%. In particular, this impacts the following types of income classed as “passive”:

  • interest (including bank deposits)
  • investment income
  • royalties
  • dividends from non-resident companies and collective investment institutions

Dividends received from Ukrainian resident companies will continue to be taxed at 5%.

Change to the tax rate for pensions

Taxable pension receipts (amounts in excess of three time the monthly minimum wage as of 1 January of a given year) will also be subject to a flat rate tax of 15%, as opposed to the previous graduated rates of 15%-20%.

No requirement to file an income tax return for those receiving income from two or more tax withholding agents

There is no longer a requirement to file an income tax return for individuals who receive income from two or more tax withholding agents. This change only applies in respect of 2016 tax returns onwards; the requirements for 2015 tax returns remain unchanged.

Increase in real estate tax rate

The marginal tax rate on real estate (excluding plots of land) has increased from 2% to 3% of the monthly minimum wage as of 1 January of a given year per square meter (currently UAH 41.34 per sq. m, approximately EUR 1.6).

If the taxpayer owns residential real estate where the total area exceeds 300 sq. m. (for an apartment) and/or 500 sq. m. (for a house), the amount of real estate tax should be increased to UAH 25,000 (approximately EUR 940) annually for each residential property.

Changes to taxation of cars

Currently, cars are subject to tax if they are under five years old and have a market value in excess of 750 times the minimum wage on 1 January of the tax year in question, currently, UAH 1,033,500, (approximately EUR 38,840).

If the car reaches the age of 5 years after its production during the reporting year, the tax is paid for the period from 1 January of the year concerned until the start of the month where the car becomes 5 years old. The tax rate remains unchanged and amounts to UAH 25,000 (approximately EUR 940), which must be paid annually for each car that is taxable.

Changes to the Unified Social Tax (UST)

The UST rate for employers in 2016 has been set at 22% of the taxable base (previously it ranged from 36.76% to 49.7% depending on the class of professional risk, and income up to the payroll cap).  This excludes the special rates of accrual for disabled persons, which remain at the previous year’s level (8.41%, 5.3% and 5.5%).

The UST rate of 22% will also be applied to the taxation of remuneration for civil law contracts (34.7% previously) and temporary disability aid (33.2% previously).

Importantly, there will no longer be any employee UST contributions. This was previously required at 3.6% withheld by the employers from employees’ gross income and 2.6% withheld from the civil law contractors’ remuneration.

The maximum amount of monthly income to which UST applies has been increased from 17 to 25 “subsistence minimums” for able-bodied persons (UAH 34,450 approximately EUR 1,295).

The previous regime whereby the level of UST was higher for professions with higher levels of risk has been abolished, and the new UST rates apply to all professions, reducing the level of complexity within the system.

Next steps

The Ukrainian Parliament has aimed to create a better climate for employers operating in the Ukrainian market and to encourage compliance among employers when paying employees’ salaries.

The changes to the tax rates for employees should improve the position for both employers and employees. Further, the changes should encourage more employers to pay the amounts of employees’ salaries officially, as some employers in Ukraine have historically paid some or all of their employees’ salaries unofficially, without paying taxes. These changes should encourage employers to adopt compliant remuneration practices and will level the playing field for compliant organizations.

Employers operating in Ukraine will need to examine how the new personal income tax and UST rates will affect their remuneration strategy, particularly for equalized inbound and outbound assignees, as well as their position in the market.

EYG no. DN0928

For additional information with respect to this alert, please contact the following: