Will Ukrainian refugees pay taxes abroad?

“The most incomprehensible thing in this world is the tax scale.” – Albert Einstein.

Tax residency in Ukraine

Residency and citizenship are different legal terms.

Citizens of Ukraine can be tax residents of other countries, as well as citizens of foreign countries tax residents of Ukraine.

What does the term “tax resident” mean? An individual who pays taxes at his place of residence/stay and is a resident of the state in which such taxes are paid.

The place of permanent residence of the taxpayer is considered to be housing where he is registered or rented by him for a long time.

The place of stay of an individual is a stay in the country for more than 183 days.

When determining the residence of a person, such a criterion as the “center of vital interests” is taken into account – this is the country where the person permanently resided, worked, where his family and property are located.

Taxation of Refugee Individuals

In the event that a taxpayer acquires the status of a tax resident in a foreign state, he does not lose such status for the State Tax Service of Ukraine (STS). That is why, in order to avoid double taxation, Ukrainian refugees need to document the fact of their residence in another country (for example, provide a rental agreement, a long-term/permanent residence permit, etc.).

If it so happened that an individual paid taxes twice: in the host country and in Ukraine, then no later than May 1, 2023, it is necessary to send an income tax return to the State Tax Service, in which the basis and amount of overpaid personal income tax – profit / income tax, with for the purpose of refunding the difference in tax paid. In addition, we recommend obtaining a certificate from the competent authority of a foreign state with information on the amount of tax paid and the object of taxation, which should be submitted together with the tax return to the State Tax Service (such a certificate is subject to apostille in the country of issue).

How is financial assistance taxed?

Please note that at the legislative level of the state we expect a positive decision on the issue of exempting Ukrainian refugees from paying taxes for financial assistance received abroad. Unfortunately, our legislation provides for the inclusion of such assistance (other than assistance received from charitable organizations) in taxable income.

On August 19, 2022, the State Tax Service of Ukraine joined the Multilateral Agreement of the Competent Authorities of Foreign States on the Automatic Exchange of Information on Financial Accounts, which will allow (tentatively from 2023) to track the bank accounts of Ukrainians opened abroad with the amounts of funds received on them. for their subsequent taxation. Therefore, it remains to be hoped that in the near future amendments will be made to legislative acts regarding the exemption of Ukrainian refugees from taxation of financial assistance received abroad.

Taxation of Ukrainian individual entrepreneur

What happens to the taxation of FOP income that went abroad, but who, however, continue to work, receiving income on bank accounts opened in Ukraine?

The tax legislation of our state provides that, despite the implementation of economic activities by individual entrepreneur outside Ukraine, the income of the latter is subject to taxation in Ukraine. In addition, the country of residence (if we are talking about such residence for more than 183 days) considers its territory as a “permanent base” for the economic activity of such Ukrainian individual entrepreneur, therefore, the income of the latter is subject to taxation there from the date of arrival / registration of such persons.

Unlike an individual who submits a tax return and has the opportunity to indicate the overpaid tax in order to obtain the difference from its payment in a foreign state, the single tax payer’s declaration does not provide for the possibility of crediting the paid “foreign tax” against the payment of a single tax in Ukraine.

Tax residency abroad

Each state has its own tax laws and rules for determining a person as its resident and receiving income tax from such a person.

Most countries, as an example: Bulgaria, Poland, Hungary, Lithuania, assigning the status of a tax resident, start from the time of stay of an individual in the country or pay attention to his economic and business activity.

However, some countries see as the main criterion for determining tax residency not the country where an individual has a “center of vital interests”, but the duration of stay in such a country, for example: Estonia, Germany, Turkey, Latvia, Moldova, Georgia, Czech Republic, etc.

Let us analyze the specifics of taxation of Ukrainian refugees using the example of such states as Poland, Germany and Spain.

Poland

Convention between the Government of Ukraine and the Government of the Republic of Poland for the avoidance of double taxation of income and property and the prevention of tax evasion

Ministry of Finance of the Republic of Poland (Department of Income Tax) in July 2022, on the basis of the previously concluded Agreement of 12.01.1993 between Ukraine and Poland on the avoidance of double taxation, taking into account the fact that the stay of Ukrainians in Poland is associated with fleeing from the war, due to with Russia’s military aggression against Ukraine and the introduction of martial law on the territory of Ukraine, decided the following: “As for Ukrainian residents in Poland, the Polish tax authorities provide a flexible and individual approach, which does not deny the possibility of maintaining the center of vital interests in Ukraine in wartime.”

Poland will not recognize Ukrainian refugees who are forced to stay on its territory for more than 183 days as its tax residents, except for the case when an individual, of his own free will, applies to the competent authorities to recognize him as a resident of Poland.

Germany

Agreement between Ukraine and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and property

For tax residency, it is enough to stay in the country for 183 days.

The payment of taxes by a person in Germany will depend on the determination of his status as a resident or non-resident.

The taxpayer has the right to reduce the amount of tax on foreign income payable in Ukraine by the amount of taxes paid in Germany.

Spain

Ukraine has a bilateral double taxation agreement with Spain in accordance with the Convention between the Government of the Union of Soviet Socialist Republics and the Government of Spain

The payment of taxes by a person in Spain will depend on the determination of his status as a resident or non-resident.

The taxpayer has the right to reduce the amount of tax on foreign income payable in Ukraine by the amount of taxes paid in Spain.

Where is the best place to pay taxes?

Each individual must decide for himself where it is more profitable for him to be a tax resident, and then file an income tax return with the competent authorities of the chosen country.

In order to confirm the tax residence, it is necessary to collect supporting documents: rental agreements, utility bills, certificates from educational institutions, etc.

If the taxpayer decides to be a tax resident of another state, then it is necessary to withdraw from the tax residence of Ukraine and register in the chosen country where such a person stays for more than 183 days.

Unfortunately, until today there is no international legislative act with a clear explanation and delimitation of the concept of involuntary residence, which is not fraught with the payment of taxes by Ukrainian refugees abroad and obtaining the status of a tax resident.

Ukraine will attempt to designate all persons under temporary protection in other countries as residents of their state, although currently laws do not determine the status of a resident of Ukraine after the expiration of 183 days for persons who have received temporary protection in other countries.

Controversial issues in the taxation of income of Ukrainian refugees in the host state and in Ukraine will be resolved by mutual agreement.

What to do in case of obligations to pay taxes with which the payer does not agree?

From the time tax liability arises, within three years, such a taxpayer has the right to file an application with the competent authority, which, on the principle of reciprocity, must eliminate such violations.

To date, an explanation is expected from the European Union regarding a common position on the tax residence of Ukrainian refugees.

How to minimize tax risks?

Such a phenomenon as the war in Ukraine, which forced a large number of Ukrainians to temporarily move to other countries, has not yet been encountered in the world, therefore, all prescribed international conventions, treaties and EU laws do not provide for conditions on how to deal with victims in Ukraine and persons who have received protection in other states.

However, until a separate EU law is adopted or Ukraine concludes a long-term cross-border agreement on the protection of the rights of Ukrainians who have been forced to move to other countries, the issue of conflicts in double taxation of taxpayers will not be resolved.

Therefore, in order to minimize the likelihood of tax disputes and, as a result, legal liability, as well as in order to be able to return the amounts of taxes paid and choose a tax residence, the taxpayer should take the following actions:

• Submit an appropriate application to the Tax Inspection Payer Service Center and obtain a certificate confirming the status of an individual as a tax resident of Ukraine.

• Submit a relevant application to the Tax Inspection Payer Service Center and obtain a certificate to confirm the status of an individual entrepreneur as a tax resident of Ukraine.

• Obtain a certificate from the competent authority of a foreign state with information on the amount of tax paid, the object of taxation.

• In the event that a person decides to stay abroad, one should withdraw from the tax residence of Ukraine and register in the chosen country where such a person stays for more than 183 days.