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Which Taxation System is Better for Your Company? Limitations of Simplified Taxation System

10/ 05/ 2021
  Tetiana Sheremet. Tax Expert of Accountor Ukraine When expanding to Ukraine, companies often see the option of registering as a “Single Tax” payer as a possibility to minimize tax liabilities and simplify accounting processes. But is this a reasonable decision in all cases and for all companies? Let us look at the most important differences between the tax systems. 1) Defining Tax Base The simplified taxation system aka “Single Tax” defines the tax base as revenue, that is, as proceeds from the sale of goods and services that the taxpayers receive for their services in cash or via bank transfer by means of prepayment or post-payment. In this case, it is possible to choose the rate: 5% or 3% (if the company is a VAT payer). Hence, regardless on the costs incurred and profits from business activities, the company must pay tax from the proceeds in the amount of 5%, or 3% if registered as a VAT payer. Under the general taxation system, the tax base is defined as profit according to accounting data – that is, pure profit, and not all the proceeds. Profit is calculated as income minus expenses, and a tax rate of 18% is applied. Companies that are just starting out often face the situation when their expenses exceed their income, as an effective business launch may not be cheap and easy. 2) Barter transactions, offsetting Barter and offsetting are allowed under the general system. Under the simplified taxation system, only cash and cashless payments are allowed. 3) Maximum annual income The general taxation system does not impose any restrictions on revenue. The simplified taxation system has revenue restrictions: up to 1167 minimum wages, which was UAH 7,002,000 as of Jan 1, 2021. Companies that exceed the revenue limit are transitioned to the general taxation system. In addition, when transitioning to the general system, some controversies may arise in revenue recognition. E.g., in case of pre-payment under the simplified system, income would be taxed, but if realization happens after the company switches to the general system, there is a risk of double taxation. 4) Restrictions on activities The simplified taxation system imposes certain restrictions on the company’s activities: there is a certain list of activities which are prohibited, e.g. selling cars and light vehicles, the activities of insurance agents and brokers, accounting and auditing. 5) Restriction of contributions to charter capital The aggregate of shares in the company’s charter capital owned by legal entities that are not payers of the Single Tax must not exceed 25%. That is, if the founder is a non-resident, the company cannot opt for simplified taxation system. To sum it up, the simplified taxation system can be beneficial for highly profitable enterprises whose income significantly exceeds their expenditure. So, if you are starting a business expected to bring high profits with minimum investment, it makes sense to consider the simplified taxation system (if the expected annual revenue does not exceed UAH 7 million). The general taxation system, on the contrary, is beneficial for companies with low profitability and companies that need to spend significant costs to start operating (starting production, hiring personnel, purchasing fixed assets etc.), as tax amount in such situation will be minimal. The choice of taxation system must be made based on the expected sales volume and type of business activities. The Accountor Ukraine team will be happy to help you choose the perfect taxation system for your company.

Tetiana Sheremet

Tax Expert of Accountor Ukraine

When expanding to Ukraine, companies often see the option of registering as a “Single Tax” payer as a possibility to minimize tax liabilities and simplify accounting processes. But is this a reasonable decision in all cases and for all companies?

Let us look at the most important differences between the tax systems.

1) Defining Tax Base

The simplified taxation system aka “Single Tax” defines the tax base as revenue, that is, as proceeds from the sale of goods and services that the taxpayers receive for their services in cash or via bank transfer by means of prepayment or post-payment. In this case, it is possible to choose the rate: 5% or 3% (if the company is a VAT payer). Hence, regardless on the costs incurred and profits from business activities, the company must pay tax from the proceeds in the amount of 5%, or 3% if registered as a VAT payer.

Under the general taxation system, the tax base is defined as profit according to accounting data – that is, pure profit, and not all the proceeds. Profit is calculated as income minus expenses, and a tax rate of 18% is applied.

Companies that are just starting out often face the situation when their expenses exceed their income, as an effective business launch may not be cheap and easy.

2) Barter transactions, offsetting

  • Barter and offsetting are allowed under the general system.
  • Under the simplified taxation system, only cash and cashless payments are allowed.

3) Maximum annual income

  • The general taxation system does not impose any restrictions on revenue.
  • The simplified taxation system has revenue restrictions: up to 1167 minimum wages, which was UAH 7,002,000 as of Jan 1, 2021.

Companies that exceed the revenue limit are transitioned to the general taxation system. In addition, when transitioning to the general system, some controversies may arise in revenue recognition. E.g., in case of pre-payment under the simplified system, income would be taxed, but if realization happens after the company switches to the general system, there is a risk of double taxation.

4) Restrictions on activities

The simplified taxation system imposes certain restrictions on the company’s activities: there is a certain list of activities which are prohibited, e.g. selling cars and light vehicles, the activities of insurance agents and brokers, accounting and auditing.

5) Restriction of contributions to charter capital

The aggregate of shares in the company’s charter capital owned by legal entities that are not payers of the Single Tax must not exceed 25%. That is, if the founder is a non-resident, the company cannot opt for simplified taxation system.

To sum it up, the simplified taxation system can be beneficial for highly profitable enterprises whose income significantly exceeds their expenditure. So, if you are starting a business expected to bring high profits with minimum investment, it makes sense to consider the simplified taxation system (if the expected annual revenue does not exceed UAH 7 million).

The general taxation system, on the contrary, is beneficial for companies with low profitability and companies that need to spend significant costs to start operating (starting production, hiring personnel, purchasing fixed assets etc.), as tax amount in such situation will be minimal.

The choice of taxation system must be made based on the expected sales volume and type of business activities.

The Accountor Ukraine team will be happy to help you choose the perfect taxation system for your company.

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