How to calculate foreign income tax correctly?
Issues of receiving foreign incomes and paying income tax (dividends) abroad still remain vital for everyone who makes business outside Ukraine or receives incomes for rendering services abroad. First of all, it concerns high-tech companies and IT private entrepreneurs. This article gives answers to some FAQ of our Clients regarding taxation and ownership of participation interests outside Ukraine.
Ownership of foreign participation interests
Participation interests are treated as civil rights, i.e. rights of the person whose share is set in the authorized capital (assets) of business entity. Participation interests may include powers of such person to participate in the management of the business entity, to receive a certain share of incomes (dividends) of such business entity and assets in case of its winding-up in accordance with the law, as well as other powers prescribed by the law and constituent documents.
In Ukraine, the procedure of declaring ownership of participation interests is prescribed for state officers only. They shall fill-in, on a yearly basis, the Declaration of Incomes at the National Agency on Corruption Prevention official website. State officer shall indicate in the Declaration, inter alia:
- information about ownership of participation interests, either directly or under the trust agreement, jointly with name, registration state, law and organizational form of the company.
- data about incomes, including income in the form of salary; income under civil agreements; income from the lease (hire) of property; income received outside Ukraine.
- investment income. Investment assets include, inter alia, participation interests.
Therefore, only state officers shall declare in Ukraine ownership of the foreign participation interests, either directly or indirectly (under the trust agreement).
Foreign investment means currency operation which provides the contribution of currency values into foreign investment objects in order to receive income.
The investment provides both incorporation of legal entities abroad and the purchase of participation interests (shares in the legal entity’s authorized capital).
For investment in the amount up to 50,000 USD inclusively, natural person — a citizen of Ukraine (not a business entity) should have individual e-License issued by the National Bank of Ukraine. Instruction “On the Procedure of issuing individual licenses on foreign investments” sets forth an exhausted list of terms for obtaining the license on purchase of participation interests abroad, namely actual currency operation upon cost remittance via the Ukrainian authorized banks. If such an operation is not performed, the license on investment shall not be issued.
Investments in the amount exceeding 50,000 USD shall be based on the individual license of the National Bank of Ukraine granting the resident’s right to make a certain investment.
A temporary prohibition to purchase foreign currency based on individual licenses of the National Bank of Ukraine has been imposed in 2016; so today investment in the amount exceeding 50,000 USD is impossible.
But it is possible to purchase foreign companies’ participation interests even without an actual investment of funds from Ukraine abroad. In such case license of the National Bank of Ukraine is not required. There is also no need to indicate data about the foreign company registered by the natural person — resident of Ukraine.
Dividends received abroad
Pursuant to the Tax Code of Ukraine, natural person — resident of Ukraine shall calculate, declare and/or pay tax on the following types of incomes:
- incomes originated from Ukraine.
- foreign incomes i.e. originated outside Ukraine.
Tax base shall also include investment income from taxpayer’s operations upon securities, derivatives and participation interests issued in other forms (except securities).
Investment income shall be calculated as a positive difference between the income received by the taxpayer from selling a certain investment asset, with regards to exchange rate difference (if any), and its cost based on the documented aggregate expenses on purchase of such assets (except operations upon derivatives).
Personal income tax rate.
Personal income tax rate makes up 18 % from the tax base, while the tax rate on incomes received as share dividends due to ownership of participation interests accrued by non-residents makes up 50 % from the aggregate tax rate.
Also, until completing reforms of the Military Forces of Ukraine, the military fee applied temporarily, amounting to 1.5 %.
Dividends originated outside Ukraine shall be subject to the following taxation:
- Personal income tax amounting to 9 % from income;
- Military fee amounting to 1.5 % from income.
So we tried to answer the questions of our Clients’ concern regarding taxation on dividends received abroad. Of course, tax planning issue still remains one of the most dynamic ones. Today the Ukrainian government has registered draft laws aimed at making amendments to the rules applicable to controlled foreign companies and at combating aggressive tax planning. Therefore, either in case of incorporating a company in one of the foreign jurisdictions or in case of rendering services to foreign legal entities, special attention should be drawn to legislative acts or an experienced professional lawyer should be engaged for consulting.