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Business urges the Government to resolve the issue regarding the tax residency of Ukrainian citizens abroad

01/ 07/ 2022
  Due to the war started by the russian federation on the territory of Ukraine, many Ukrainians were forced to leave the country starting from February 24, 2022. Nevertheless, Ukrainian citizens remain inextricably linked with Ukraine. A significant part of such persons continues to work remotely for Ukrainian companies or other organizations, receiving wages and paying all necessary taxes and deductions. In connection with this, certain issues arise in the context of taxation and they need to be resolved at the government level. According to the rules in the vast majority of countries, Ukrainians can be recognized as tax residents of the host country and will be exposed to the risk of double taxation if they stay abroad for more than 183 days. Thus, they will be subject to taxation both in Ukraine and in the country of their actual stay. The situation with the taxation of income from business activity/provision of services by an individual entrepreneur in the territory of another state is similar. Given that some citizens were forced to leave the country back in February as the war had started, the issue of acquiring tax residency from another country should arise for them at the end of August – already in less than 2 months. However, at present, the issues of avoiding double taxation remain unsettled. We do not observe efforts from the state to protect Ukrainian citizens abroad from this risk. Accordingly, they may experience a significant tax burden. Along with the double taxation of labor income received from Ukrainian employers, there is a risk of double payment of social contributions from the wages of employees who continue to work under labor contracts with Ukrainian employers, but are physically outside Ukraine due to the military aggression of the russian federation. In the countries where Ukrainian citizens are temporarily residing, there may be an obligation for Ukrainian employers and/or employees to pay contributions to state insurance for various types of payments from the income of Ukrainian employers. Considering that Ukrainian employers are obliged to pay a single social contribution in Ukraine when paying wages, the payment of social contributions in host countries will lead to the double payment of social contributions from the income of Ukrainian employers. Ukraine has agreements on social security with some EU countries, which provide an exemption from the payment of social contributions in the host countries if a Ukrainian employer sends an employee to perform labor activities in the territory of another country. However, in most cases, the temporary stay of Ukrainian citizens on the territory of other countries is not due to a business trip and is not registered as such. Accordingly, there are no procedures for exemption from the payment of social contributions in host countries, where the obligation to pay such contributions arises. Besides, Ukraine does not have social security agreements with many countries. Given the above, the European Business Association appeals to the Ministry of Finance and the Ministry of Social Policy of Ukraine with a proposal to establish contacts with the relevant state bodies of foreign countries as soon as possible and reach agreements with them that would eliminate the risk of double taxation of citizens of Ukraine who are temporarily abroad. Currently, we are not aware of such efforts on the part of state bodies of Ukraine. It is no less important to issue clarifications promptly or, if necessary, introduce changes to the current Ukrainian rules that would solve the problem of double taxation of citizens incomes. It is also essential to start a public discussion of these issues immediately so that Ukrainian citizens and the regulatory authorities have a clear understanding of what tax changes should occur after a stay of 183 days in another country and what measures the authorities are taking to solve the problem. It is crucial not to leave the issue ignored, but to start working directly with foreign partners and within the country to solve the problem of double taxation. We really hope for a dialogue on this issue and for the initiative of state bodies.

Due to the war started by the russian federation on the territory of Ukraine, many Ukrainians were forced to leave the country starting from February 24, 2022.

Nevertheless, Ukrainian citizens remain inextricably linked with Ukraine. A significant part of such persons continues to work remotely for Ukrainian companies or other organizations, receiving wages and paying all necessary taxes and deductions. In connection with this, certain issues arise in the context of taxation and they need to be resolved at the government level.

According to the rules in the vast majority of countries, Ukrainians can be recognized as tax residents of the host country and will be exposed to the risk of double taxation if they stay abroad for more than 183 days. Thus, they will be subject to taxation both in Ukraine and in the country of their actual stay. The situation with the taxation of income from business activity/provision of services by an individual entrepreneur in the territory of another state is similar. Given that some citizens were forced to leave the country back in February as the war had started, the issue of acquiring tax residency from another country should arise for them at the end of August – already in less than 2 months.

However, at present, the issues of avoiding double taxation remain unsettled. We do not observe efforts from the state to protect Ukrainian citizens abroad from this risk. Accordingly, they may experience a significant tax burden.

Along with the double taxation of labor income received from Ukrainian employers, there is a risk of double payment of social contributions from the wages of employees who continue to work under labor contracts with Ukrainian employers, but are physically outside Ukraine due to the military aggression of the russian federation. In the countries where Ukrainian citizens are temporarily residing, there may be an obligation for Ukrainian employers and/or employees to pay contributions to state insurance for various types of payments from the income of Ukrainian employers. Considering that Ukrainian employers are obliged to pay a single social contribution in Ukraine when paying wages, the payment of social contributions in host countries will lead to the double payment of social contributions from the income of Ukrainian employers. Ukraine has agreements on social security with some EU countries, which provide an exemption from the payment of social contributions in the host countries if a Ukrainian employer sends an employee to perform labor activities in the territory of another country. However, in most cases, the temporary stay of Ukrainian citizens on the territory of other countries is not due to a business trip and is not registered as such. Accordingly, there are no procedures for exemption from the payment of social contributions in host countries, where the obligation to pay such contributions arises. Besides, Ukraine does not have social security agreements with many countries.

Given the above, the European Business Association appeals to the Ministry of Finance and the Ministry of Social Policy of Ukraine with a proposal to establish contacts with the relevant state bodies of foreign countries as soon as possible and reach agreements with them that would eliminate the risk of double taxation of citizens of Ukraine who are temporarily abroad. Currently, we are not aware of such efforts on the part of state bodies of Ukraine.

It is no less important to issue clarifications promptly or, if necessary, introduce changes to the current Ukrainian rules that would solve the problem of double taxation of citizens’ incomes.

It is also essential to start a public discussion of these issues immediately so that Ukrainian citizens and the regulatory authorities have a clear understanding of what tax changes should occur after a stay of 183 days in another country and what measures the authorities are taking to solve the problem.

It is crucial not to leave the issue ignored, but to start working directly with foreign partners and within the country to solve the problem of double taxation.

We really hope for a dialogue on this issue and for the initiative of state bodies.

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