The account in the payment system for the Individual Entrepreneur

With society’s gradual informatization and the expansion of opportunities to use various resources, there is a clear trend towards using electronic resources, including payment systems, in particular during the implementation of business activities. This practice is explained by the relative ease of operation of payment systems compared to banks, the multifunctional use of the account, and the speed of operations.

At the same time, in connection with the rather controversial practice of the Ukrainian tax authorities, the question remained unclear for a long time: “Is it possible for a sole proprietorship to use the same Wise or Payoneer when conducting business, and if so, how does the Tax Office qualify such income: personal, which is subject to aggregate taxation at the rate of 19.5% or as the income of an individual entrepreneur, which should be taxed at the rate of 5%?”. Therefore, in this article, we will consider, as an example, precisely the 3rd group with a rate of 5% as the most common among individual entrepreneurs who are on the simplified taxation system. We will try to deal with the above-mentioned issues.

Is it possible to use an account in the payment system for entrepreneurs?

As we noted above, the last few years have been marked by ambiguity and a fragmented approach of the Ukrainian tax authorities to solving the issue of the legitimacy of the use of payment system “simplifiers” by the IE (FOP) during the implementation of business activities with the subsequent taxation of the received income at a 5 per cent rate.

For example, in Individual Tax Consultation No.1974/IPK/99-00-24-03-03-06 dated 20.07.2023, the State Tax Office noted that funds received under foreign economic contracts and credited to an account opened in the Payoneer system and not to a currency account for business activities at the Bank of Ukraine are not included in the income of an individual entrepreneur as a single taxpayer. That is, such funds are taxed according to the rules established for ordinary taxpayers – individuals, namely 18% personal income tax + 1.5% military levy.

A similar position was expressed in another Individual Tax Consultation No. 1700/IPK/99-00-24-03-03-06 dated 05.07.2023: the taxpayer reported that he was on the simplified tax system of the third group and planned to provide services to a non-resident company legal support of the latter’s activities and, as a result, receive remuneration using the Wise payment system. The tax service stated that in this case, it is not about the income of a natural person-entrepreneur but about foreign income subject to taxation by Art. 170 of the Tax Code of Ukraine, i.e. according to the same 18% personal income tax and 1.5% military duty.

At the same time, there were ITCs in some places, which contained a completely opposite position to the one mentioned above.

According to the position of the Ukrainian Tax Authority expressed in the Individual Tax Consultation No. 669/IPK/99-00-24-03-03 dated 09.02.2024, if the funds received from foreign economic activity are credited to an account opened in the Payoneer and Wise systems, and are subsequently transferred to accounts opened in banking institutions in Ukraine for business activities, then such funds are included in the income of an individual entrepreneur and are taxed in accordance with the procedure determined by Chapter 1 of Chapter XIV of the Code.

At the same time, if the specified funds remain at the end of the reporting tax period in accounts opened in the Payoneer and Wise systems, that is, if they are not credited to accounts opened in Ukrainian banking institutions for business activities or are credited to accounts in Ukraine that are opened for personal needs, then such funds are taxed according to the rules established for taxpayers—natural persons.

In fact, the State Tax Service confirmed the legitimacy of a “single” IE (FOP) using an account in the payment system and applying a 5 per cent single tax rate to such income.

This approach was also established at the level of the Public Information and Reference Resource (ZIR) of the State Tax Office, where the tax authority noted the possibility of extrapolation of the application of a single tax to income received through payment systems, provided that the specified funds are subsequently transferred to the IE (FOP) account opened in Ukraine.

So, starting from 2024, the Ukrainian fiscal authority has, in fact, refuted the presumption of taxation of all income received by an individual entrepreneur on the accounts of Wise, Payoneer and other payment systems, personal income tax, and military levies.

Overview of payment systems for IE (FOP)

Taking into account the positions of the fiscal authority, we have made a selection of payment systems, opening an account which, given its features, will allow taxing of the received income at the rate of 5%, provided that the specified income is transferred to the “FOP account” in Ukraine:

Payoneer (USA):

• there is an option to open a business account for the IE (FOP);
• individual details of accounts in a number of currencies are provided;
• funds are withdrawn directly to a bank account, that is, funds can be transferred without any problems, thus fulfilling the mandatory requirement set forth by the Ukrainian tax authority to legitimise income taxation at the rate of 5%.

Bankera (Lithuania):

• open accounts for freelancers (FOPs);
• provide individual details in IBAN format;
• offer transfers via SEPA, SWIFT, and FX.

Paysera (Lithuania):

• multi-currency accounts for more than 30 currencies;
• offer individual EUR details in IBAN format;
• convenient and functional mobile application.

Wise (UK):

• there is an option to open a business account for sole traders;
• provides individual account details and IBAN for 10 currencies;
• no fees are charged for keeping funds in the account.

SatchelPay (Lithuania):

• open accounts for freelancers (FOPs);
• offer SWIFT/SEPA international transfers, as well as transfers in 38 currencies;
• offer API integration for payments and acquiring.

Tips for individual entrepreneurs when opening an account

Given the existing practice of the Ukrainian Tax Office, it is possible to draw certain conclusions and form a number of recommendations that should be followed when using payment systems for conducting business activities.

Firstly, we recommend using a business account (not a personal one). In this case, it is much easier to “attach” the fact of economic activity than in the case of using a personal account. Moreover, the above implicitly follows from the position of the DPS, which was expressed in Individual Tax Consultation No. 3066/IPK/99-00-24-03-03-06 dated 19.09.2023. According to its content, it is understood that if an individual entrepreneur opens an account in a foreign bank as an individual citizen for the purpose of carrying out business activities abroad and not for business activities, and funds for services provided within the scope of such activities are received into such an account, then the income in the form of received funds is included in the total annual taxable income as foreign income and is subject to personal income tax and military levy on a general basis.

Secondly, you should keep the original documents for the transactions made through the payment system. Thus, a feature of “simplified” IEs (FOPs) is the absence of strict accounting requirements. For the 3rd group, only income accounting is necessary. In the case of a tax audit, you must provide all checks, deeds, contracts, invoices and tax invoices for each payment received. The above should be extrapolated to operations carried out through payment systems because the right to tax the income received through them at a rate of 5% determines the obligation of a natural person-entrepreneur to ensure the preservation of all supporting documents.

Taking into account the sufficiently changing positions of the Ukrainian tax authorities, including in the context of the analysed issue, it is necessary to constantly keep a “hand on the pulse” through timely consultation with specialists who practice in this field. Contact our team for advice on the application of tax legislation.