TAX AUTHORITIES FIND OUT FOREIGN ACCOUNTS OF UKRAINIANS

Stanislav KARPOV, сounsel, Co-head of Tax Disputes Practice

Last year Ukraine joined the international Multilateral Agreement of Competent Authorities on Automatic Exchange of Information on Financial Accounts, and recently adopted relevant national legislation on this issue. What does this mean in practice?

What is an automatic exchange regarding financial accounts?

The essence of the process boils down to the fact that financial institutions (mainly banks) will collect information about the owners of accounts opened by them, identify among them residents of partner countries and transfer information about such accounts to the tax authorities of such partner countries.

That is, if, for example, a resident of Ukraine is the owner of an account in a German bank, then such a bank will transfer information about such an account to the German tax authorities, which, in turn, will then automatically transfer such information to the State Tax Service of Ukraine.

In a similar way, financial institutions of Ukraine will act in the opposite direction, collecting and transmitting information about financial accounts belonging to persons who are residents of exchange partner countries.

Which information will be transmitted?

Financial institutions will provide the following information:

– name, address, jurisdiction of residence, tax number of the account holder;

– account number;

– name and identification number of the financial institution where the account is opened;

– the balance or value of the account as of the end of the relevant calendar year, and if the account was closed during such year – at the time of closing the account.

And what about bank secrecy?

Indeed, in this case, it can be argued that the veil of bank secrecy is somewhat lifted and becomes more transparent. At the same time, it should not be forgotten that the information is not disclosed in full, but only within the limits defined by the information exchange agreement. In addition, the legislator determined that tax authorities are prohibited from providing information about accounts to other persons, including law enforcement or other state bodies, local self-government bodies, legal entities and individuals, except in cases of providing such information in accordance with the requirements of the Criminal Procedure Code of Ukraine.

How will the tax residency of account holders be determined?

The account holder’s residency in one or another jurisdiction will be determined by financial institutions based on the documents and information they have about the owners of financial accounts. For this purpose, financial institutions may request additional information and documents from account holders.

At the same time, based on the results of the analysis, the financial institution may come to the conclusion that the account holder is a resident of two or even more partner countries. In this case, the information will be transferred to all such partner countries whose tax authorities have already established whether they consider such a person to be their tax resident.

Therefore, Ukrainian financial institutions should take into account the fact that if they have reason to consider a person a resident of Ukraine and a resident of at least one partner country, then for the purposes of information exchange, such a person will be considered a resident of the corresponding partner country.

When will information sharing begin?

Currently, the technical points related to the transfer of information and its protection remain to be settled, but it is expected that the first exchange of information will take place in 2024 for 2023.

In other words, in 2024, the tax authorities of Ukraine will receive information about foreign accounts that belonged to residents of Ukraine during 2023 and about the balance of funds in such accounts as of the end of 2023.

With which countries will the exchange take place?

In total, more than 100 countries have already joined the information exchange agreement, a full list of which is available on the website of the Organization for Economic Cooperation and Development. The list of specific partner countries with which Ukraine will exchange information will become known a little later, when all the procedures for connecting Ukraine to information exchange will be finally completed.

What are the consequences for residents of Ukraine?

Residents of Ukraine should be prepared for Ukrainian tax authorities to find out about their foreign accounts. Therefore, if the funds in such accounts were not properly declared and taxed, then this may be grounds for additional tax liabilities from the tax authorities of Ukraine.

In this context, the question of the large number of Ukrainians who were forced to leave as a result of the war and, accordingly, acquired bank accounts abroad, usually arises. However, changes were made to the tax legislation last year, according to which aid received during 2022-2023 at the expense of budget funds of foreign countries, their state funds and foreign charitable organizations will not be taxed. In addition, the Parliament is currently considering the issue of exempting such income not only from taxation, but also from declaration. Also, there is no need to worry about the taxation of such income for 2022-2023.

In addition to this, the legislator determined that information about a financial account (accounts) cannot be used to determine the amount of tax liability, if the aggregate balance in such account (accounts) does not exceed the equivalent of 250 thousand US dollars as of December 31 of the calendar year, which falls during the period of martial law in Ukraine.

Although this wording is not quite unambiguous, it can be hoped that the tax authorities will not use information on such financial accounts for all the years during which the martial law will be in effect to calculate additional tax liabilities.