Stanislav KARPOV, counsel, attorney, counsel, co-head of Tax Disputes Practice
Along with a “temporary protection” status obtained abroad, millions of Ukrainians were also granted a right to social allowance to be given by the local European authorities. For people, who lost their home and job, such financial aid is nearly the only source of subsistence. Therefore, the refugees were in shock by the information published in Ukrainian media that the income tax shall be paid regarding this type of allowances.
It has to be admitted that the tax legislation of Ukraine indeed prescribes to declare allowances received from foreign authorities and to pay income tax at the rate of 18% as well as military tax at the rate of 1.5%. The refugees shall submit a tax declaration for the year 2022 till 1 May 2023, and the income tax and the military tax shall be paid till 1 August 2023 respectively.
At that, the attention should be paid to similar social allowances (benefits) paid to Ukrainian citizens by means of app “ePidtrymka”, in particular, for those persons who worked in the territories where military activities and military operations took place (6500 hryvnas). It is remarkable that according to the State Tax Service of Ukraine such allowances paid in Ukraine are not subject to taxation both by income tax and military tax.
With this background, it is a nonsense that people who might have lost almost anything in Ukraine have to pay taxes with respects to foreign-sourced income whereas in contrast the similar income received in Ukraine is not to be taxed.
Due to absurdity of such situation, we believe, that respective amendment might be made to the Ukrainian tax legislation till the end of this year.
In addition, the other question is on how Ukrainian tax bodies are to find out that Ukrainians receive allowances from foreign authorities. Besides, such payments sometimes are made by cash.
The automatic tax data exchange could be the efficient way for tax authorities to receive tax information from other countries. Such model involves foreign banks which transfer information about Ukrainians’ bank accounts as well as on bank transactions to Ukrainian tax authorities.
However, according to the Ministry of Finance of Ukraine, such procedure is to be put into effect in 2024, which means that it is to enclose the data for the year 2023. Also, this model is not to cover information on payments made by cash.
As a result, in order to determine the scope of Ukrainian citizens who received foreign-sourced income, the tax bodies probably will request other countries to provide information about persons obtained “temporary protection” status and about allowances received by such persons.
Keeping in mind the number of transferred Ukrainian people, the scope of works to obtain their financial information as well as the extent of information are really huge. Therefore, it is not necessarily that tax bodies will undertake such measures. Moreover, it is not a guarantee that financial information in European countries is stored centrally, which can be an obstacle for tax bodies to receive such information in full.