Posted by Constantine M on August 29, 2004 at 06:59:01:
Galina M. Khomenko,
Olga V. Gorbanovskaya
According to the Foreigners’ Legal Status Act, which regulates various aspects of the residence or temporary stay of foreigners on the territory of Ukraine, such foreigners have the same rights and duties as Ukrainian individuals, unless other rules or provisions are envisaged by the Constitution and legal acts of Ukraine, as well as international agreements. However, many local Ukrainian legal acts envisage a number of peculiarities and sometimes obstacles that may be faced by the foreigners who intend to live and work in Ukraine. It should be noted that some of the obstacles are sometimes not easy to surmount.
In particular, according to current Ukrainian legislation, a foreign individual who intends to come and work in Ukraine in order to substantiate his/her presence and activities performed in Ukraine besides a valid passport and a Ukrainian entry visa (if applicable), may need to obtain a number of documents and pass a number of burdensome procedures listed below.
Firstly, a foreign individual entering Ukraine should fulfil the procedure of registration. According to the Instruction of the State Border Service of Ukraine On the Order of Registration of Foreign Individuals and Their Passport Documents, registration of foreigners entering Ukraine should be performed exclusively at the Ukrainian border crossing points by the State Border Service of Ukraine. The registration procedure implies the necessity to fill in the “immigration card of a foreigner”. Such registration is valid throughout the duration of a visa but not longer than for six months for the foreigner who is required to obtain a visa for crossing the Ukrainian border and up to 90 days for the foreigner who is not required to have a visa in order to enter Ukraine. For the purposes of calculating the time for a foreign individual to qualify for registration, only an uninterrupted stay counts.
Tax Identification Code
Foreign individuals who are Ukrainian taxpayers should also obtain an individual Tax Identification Code in Ukraine. The procedure is quite easy to sort out and not time-consuming.
One of the most time-consuming and burdensome procedures that can be faced by a foreigner and a Ukrainian entity where he/she intends to work is obtaining a work permit. According to the Order on Issuing Work Permits for Foreigners in Ukraine, a work permit is required for a foreign individual planning to perform labour activities in Ukraine:
— either being employed by a Ukrainian legal entity (i.e. direct employment),
— or working in a Ukrainian legal entity under a contract (for provision of personnel) concluded between a Ukrainian and a foreign legal entity.
Work permits are issued by the Employment Centres in Cities based on a written application filed by or on behalf of a potential employer with a set of documents for a period of up to one year and can be prolonged for the same period of time.
Under both structures of employment, among other documents required is a draft employment agreement between the foreign individual and the Ukrainian entity. It is a mandatory document that should be provided to the Employment Centre in a City when applying for a work permit. This requirement causes lots of misunderstandings and a specific problem for foreigners planning to work in Ukraine under an assignment, when a contract is concluded between a Ukrainian legal entity and a foreign one, as the individuals are actually employees of foreign entities and do not plan to be employed by host Ukrainian entities, while they should become so employed by virtue of the mentioned mandatory document. However, such a requirement (the conclusion of an employment agreement with a Ukrainian entity), though vague and contradictory, still exists and leads us to a number of questions such as whether the salary should be paid to the individual concerned by the Ukrainian entity, and if yes, — the amount; whether recharging of costs incurred by the home entity to the host Ukrainian entity are possible in the given case and if yes, — should they be deductible from the corporate profit tax point of view or not. All these matters are subject to separate discussion and are not dealt within this commentary.
The most important issue for a foreign individual and for a Ukrainian host entity is to obtain the work permit itself, as a legal entity engaging a foreign individual without prior acquisition of a work permit can be penalised by the state authorities with an administrative fine of UAH 850 and the foreign individual working in Ukraine without due legal grounds, in the worst case scenario, may be deported from Ukraine.
A valid work permit is the basis for obtaining an immigration type visa (the type allowing employment in Ukraine). Technically, an individual entering Ukraine with the aim of employment should possess this type of visa in his/her passport, otherwise, should the type of entry visa not correspond to a nature of stay in Ukraine, the foreign individual may be deported from Ukraine. However, this immigration type of visa is issued as a single entry one and the foreign individual still might need to apply for business type multiple entry visas should he/she need to travel to/from Ukraine during the period of the assignment. This brings us to a conclusion that in practical terms the foreign individual who needs to be indeed mobile may need to have two types of entry visa (immigration and business), while being on assignment in Ukraine.
Foreign individuals working for representative offices of non-resident companies in Ukraine need to obtain personal registration cards or so-called “service cards”. According to the practical approach of the Employment Centre in a City, such service cards should be considered as an equivalent of work permits for foreign individuals working for representative offices of non-resident companies in Ukraine. Technically, current Ukrainian legislation does not provide for an exemption for foreign individuals working for representative offices of non-resident companies in Ukraine from the need to obtain work permits. However, according to the practical approach, no work permits are required/issued by the Ukrainian state authorities for such foreign individuals should these individuals work in Ukraine on the basis of service cards.
Taxation of foreign
individuals in Ukraine
On 1 January 2004 a new Personal Income Tax Act (hereinafter — the Act) came into force. The Act left the principle in force that taxation of individuals in Ukraine depends on their tax residence status and the source of the income. Moreover, the principle that Ukrainian tax residents are taxed on their worldwide income while tax non-residents are taxed on their Ukrainian source income, also remains in force. However, the Act changed several definitions and principles that significantly influence the taxation of foreigners in Ukraine, as outlined below.
First of all, the tax residence status definition was changed. Contrary to the previous definition, which was linked solely to the number of days spent on the territory of Ukraine, tax residence status now depends on the place of residence, place of permanent residence, centre of vital interests of the individual, number of days spent in Ukraine and his/her citizenship. Moreover, the Act empowers an individual to claim him/herself a resident of Ukraine on the basis of acknowledgment of Ukraine as the place of main residence and filing of a respective application with the Ukrainian Tax Authorities. This might be beneficial for foreign individuals in terms of tax rates applicable to residents versus non-residents of Ukraine for tax purposes.
As regards tax rates, the Act envisages that a flat 13 % (15 % starting from 1 January 2007) tax rate is applicable to the annual worldwide income of Ukrainian tax residents.
Non-residents are taxed on their Ukrainian-source income only at 13 % or 26 % (15 % and 30 % starting from 1 January 2007) depending if their income is paid by Ukrainian resident or non-resident companies, respectively. The provision regarding tax rates (13 % against 26 %) applicable to non-residents is rather unclear in the Act, as well as the practical approach of certain tax inspectorates towards application of this provision. It should be noted that though Clarification No.50 of the Ukrainian Tax Authorities confirms the order of application of these two tax rates, in practice some Ukrainian tax inspectorates tend to tax Ukrainian source income of the tax non-residents at 26 % regardless of which entity (resident or non-resident) is the actual payer of the income.
The definition of the source of income was also changed and now is determined by the location of performance of the duties to which that income relates. Thus, Ukrainian-source income includes income derived from work or services performed in Ukraine. At the same time, the Act does not provide for the procedure of “extracting” Ukrainian source income from other income if a taxpayer who is a non-resident has several sources of income, working in more than one country. It is assumed that under the circumstances an international approach to determining the source of income, which implies a so-called “work days allocation principle” (according to which the individual’s income should be taxed proportionally to the period of time during which certain activity was performed on the territory of Ukraine) should be used for these purposes. This novella significantly expands the number of taxpayers in Ukraine, as all those foreign individuals who spend certain working days in Ukraine, technically qualify as individuals receiving Ukrainian source income and, respectively, as potential taxpayers in Ukraine under local Ukrainian legislation.
Apart from the uncertainty as to the procedure for defining Ukrainian source income, non-residents may also face some inconvenience with obtaining a Ukrainian source income, as the Act envisages a special procedure for the payment of the Ukrainian-source income by a non-resident to a non-resident (individual) through an account specifically opened by the non-resident individual at a Ukrainian bank and, such a bank should be a tax agent of the non-resident individual taxpayer. Neither the Act, nor official clarifications of the Tax Authorities provide for a clear understanding as to whether this rule relates to any case when the income is paid to a non-resident individual by a non-resident (as a company, as well as an individual). However, some indirect provisions of the Act and other pieces of legislation make us conclude that the rule should relate only to the cases when two non-residents — individuals engaged in a transaction (and not to the situation when the payment to a non-resident individual is made by a non-resident company).
Procedure of filing tax returns and paying personal
Current Ukrainian legislation envisages one tax filing per annum both for Ukrainian individuals as well as for foreigners, who have any income taxable in Ukraine on which income tax is not withheld by a tax agent (an entity which is obliged to accrue, withhold and transfer personal income tax to the budget). This provision is specifically progressive for foreigners, as in the past (prior to 1 January 2004) they had to submit five filings per annum. Now, one annual income tax return should be filed by 1 April of the year following the reporting one and one tax payment should be made (upon filing of tax return).
Tax residents who intend to leave Ukraine should file a departure tax return no later than two months prior to departure (which is not always practically possible). On the basis of the tax return, the Ukrainian tax authorities should issue a tax assessment setting out the individual’s final tax liability. When this liability is settled, the tax authorities issue a Tax Certificate, which should be required from the individual by the Ukrainian Immigration Services when leaving Ukraine.
Social security implications
for foreign individuals
Currently, the Ukrainian mandatory social security contributions (those due from an employer as well as those due from an employee) are linked to local Ukrainian salary payments. Therefore, should any income be paid to a foreign individual via the local Ukrainian payroll, such payments would be subject to mandatory social security contributions in Ukraine. In this case, the Ukrainian legal entity that is an employer is liable to make all the mandatory social security contributions to the budget.
If a foreign individual is remunerated solely from abroad, such income will not be subject to any mandatory social security contributions in Ukraine.
Tax benefits available
in Ukraine to foreign
According to the Act not as many tax benefits are available to foreign individuals in Ukraine. These benefits are burdened with certain conditions that need to be met by the individuals to enjoy the benefits in question. Among these benefits is free accommodation provided by the employer, free corporate car provided by the employer and a foreign tax credit.
We have to note that though many legislative changes were recently implemented in Ukraine, (mainly focused on (foreign) individual tax matters) and there are still controversial provisions that need to be clarified. Since the legislative environment in Ukraine is rather turbulent, let’s hope that new positive changes occur soon. ¢
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