Rules for Ukrainians on declaring foreign income

Due to Russia’s full-scale invasion, millions of Ukrainians were forced to seek refuge in other countries, where they subsequently found official employment. This was significantly facilitated by the policy of the European Union, which has made the process of obtaining work permits and accessing the European labour market as straightforward as possible for our citizens.

In this context, a pressing question has arisen for many citizens who are now earning a living abroad: how should such foreign income be declared, and is it necessary to pay tax on it in Ukraine?

Article 67 of the Constitution of Ukraine stipulates that everyone is obliged to pay taxes and duties in the manner and at the rates established by law. All citizens, in accordance with the procedure established by law, must submit annual declarations of their financial status and income for the previous year to the tax offices at their place of residence. The declaration requirement applies to citizens who received income during the year on which tax was not withheld.

Any income received by individuals who are residents of Ukraine must be taxed in accordance with the provisions of the Tax Code of Ukraine. This rule applies regardless of where the income was received – in Ukraine or abroad. Individuals who are citizens of Ukraine and work temporarily or permanently abroad must declare income received from both Ukrainian and foreign sources.

In accordance with sub-clause 14.1.55 of clause 14.1 of Article 14 of the Tax Code of Ukraine (hereinafter – the “Tax Code of Ukraine”), income received from sources outside Ukraine shall be understood to mean anyincome received by residents, including from any type of activity outside the customs territory of Ukraine, such as interest, dividends, royalties and any other forms of passive income, inheritance, gifts, winnings, prizes, income from the performance of work (provision of services) under civil law and employment contracts, from the letting (use) to residents of property located outside Ukraine, including rolling stock assigned to ports located outside Ukraine, income from the sale of property located outside Ukraine, income from the disposal of investment assets, including corporate rights, securities, etc.; other income from any type of activity outside the customs territory of Ukraine or territories not under the control of the competent authorities.

Furthermore, sub-clause 163.1.3 of clause 163.1 of Article 163 of the Tax Code of Ukraine stipulates that the taxable income of a resident comprises:... foreign income – income (profit) received from sources outside Ukraine.

Consequently, the foreign income of resident individuals is subject to taxation. At the same time, as can be seen from the above, the issue of a citizen’s (individual’s) residency plays a significant role in the taxation process.

To resolve this issue, Ukrainian legislation and international law rely on two key concepts: tax residency and the avoidance of double taxation.

 If you remain a citizen of Ukraine, have a permanent residence here, a family or a registered sole trader, the Ukrainian tax authorities (State Tax Service) will continue to consider you a resident. This means that, in theory, you are obliged to declare all income received worldwide.

Ukraine has agreements in place with most EU countries. These are designed to ensure that you do not have to pay tax twice on the same income — both in your country of residence and at home.

If you have officially paid income tax (for example, in Poland, Germany or the Czech Republic), these amounts can usually be credited in Ukraine. To do this, you need to obtain an official certificate from the foreign tax authority stating the amount of tax paid and the tax base. This certificate requires legalisation (an apostille), unless otherwise provided for by international treaties.

If a person has no permanent residence in any country, and it is not possible to determine in which country the person has close personal and/or economic ties, they will be considered a resident provided they stay in Ukraine for at least 183 days.

The number of days is calculated including the day of arrival and departure during the period or periods of the tax year.

• If it is not possible to determine an individual’s residency with certainty based on all the above rules, the individual is considered a Ukrainian tax resident if they are a citizen of Ukraine.
• An individual’s self-declaration of the territory of Ukraine as their principal place of residence or their registration in Ukraine as a business entity is sufficient grounds to consider such a person a resident.

Individuals who are tax residents of Ukraine and are officially employed abroad are required to report their foreign earnings to the Ukrainian tax authorities. This is expressly provided for in paragraph 170.11 of Article 170 of the Tax Code of Ukraine.

 Tax rates and conversion rules

1. Personal income tax (PIT): amounts to 18% of the total income received (paragraph 167.1 of Article 167 of the Tax Code of Ukraine).
2. Military levy (ML): amounts to 1.5% (sub-clause 1.3 of clause 16¹ of subsection 10 of Section XX of the Tax Code of Ukraine).
3. Currency conversion rules: As foreign salaries are paid in foreign currency, the amount must be converted into hryvnia. The conversion is carried out at the official exchange rate of the National Bank of Ukraine (NBU) in effect on the date the funds were accrued or received (clause 164.4 of Article 164 of the Tax Code of Ukraine).

As salaries are usually paid monthly (or more frequently), it is not possible to simply convert the annual amount using a single exchange rate. It is necessary to calculate the hryvnia equivalent for each individual payment using the NBU exchange rate on the date of receipt, and then add these amounts together to obtain the total annual figure.

If a resident of Ukraine receives income from business activities abroad, this income is subject to declaration in Ukraine.

It is important to consider whether tax has been paid in the other country. For example, in many countries, tax for entrepreneurs is paid at fixed rates or depends on the type of activity.

In some cases, the taxpayer is entitled to a simplified taxation system provided for by bilateral agreements.

Income from capital investments, such as dividends, interest on deposits or royalties, is subject to taxation in Ukraine regardless of where it was received.

A separate personal income tax rate of 9% applies to dividends.

If the source country has withheld tax on such income (for example, dividend tax), the taxpayer is entitled to a credit for the amount paid.

Income from the sale of property, vehicles or other assets abroad is also subject to taxation in Ukraine.

In the case of the sale of property, account must be taken of taxes paid in the country where the property is located.

Income from letting property or the sale of copyright abroad is subject to taxation in Ukraine on a general basis. In this case, the principle of crediting taxes paid in the source country also applies.

As a general rule, the legislation sets the following deadlines for filing returns and paying taxes:

• Submission of the tax return: by 1 May of the year following the reporting year.
• Payment of taxes due: by 1 August of the year following the reporting year.

If, due to the objective circumstances of the war, the taxpayer lacks the technical or physical means to file returns and pay taxes on time, these obligations are deferred. They may be fulfilled without incurring penalties within 6 months from the date of the official termination or lifting of martial law in Ukraine.

Foreign wages are reported in the specially designated line 10.7 (‘Income received from sources outside Ukraine’).

• Column 3 of line 10.7: indicate the total amount of funds earned abroad, converted into hryvnia at the NBU exchange rate (in accordance with the requirements of paragraph 164.4 of Article 164 of the Tax Code of Ukraine).
• Column 6 of line 10.7: enter the amount of personal income tax payable to the budget (calculated as 18% of the amount in column 3).
• Column 7 of line 10.7: enter the amount of military levy payable (calculated as 1.5% of the amount in column 3).

Receiving an official salary abroad does not oblige a citizen to pay the Unified Social Tax (UST) in Ukraine.

However, if you wish for this period of employment abroad to be counted towards your Ukrainian insurance record (for future pension provision), you may pay the Unified Social Tax voluntarily. To do so, you must enter into a relevant agreement on voluntary participation in the compulsory state social insurance system with the tax authority at your place of registration in Ukraine.

The tax authority has the right to request documents to verify the accuracy of the amounts stated in the declaration. To avoid additional charges and penalties, be sure to keep and prepare:

1. An official certificate from your foreign employer stating the amounts of salary paid and taxes withheld.
2. Bank statements showing the accounts into which the funds were directly paid.

To resolve the issue of double taxation, countries conclude international agreements for the avoidance of double taxation (hereinafter – DTA). These agreements provide for the following main mechanisms:

1. Tax credit: taxes paid in one country are credited as a tax credit in the taxpayer’s country of residence. This reduces the amount of tax payable.
2. Tax exemption: income taxed in one country is fully exempt from taxation in the other. For example, the country of residence does not tax income received abroad.
3. Tax reductions: DTAAs often provide for special rules whereby tax rates on certain types of income (e.g. dividends, interest, royalties) are reduced to a certain level.

Most DTAs are based on the OECD (Organisation for Economic Co-operation and Development) Model Convention. Such agreements usually specify:

• rules for the allocation of taxing rights between countries;
• the classification of income (wages, dividends, royalties, etc.) and the procedure for its taxation;
• mechanisms for resolving disputes between countries relating to double taxation;
• other aspects related to preventing aggressive tax planning and tax evasion.

Pursuant to sub-clause 170.11.2 of clause 170.11 of Article 170 of the Tax Code of Ukraine, where, in accordance with the provisions of international treaties ratified by the Verkhovna Rada of Ukraine, a taxpayer may reduce the amount of their annual tax liability by the amount of tax paid abroad, they shall specify the amount of such a reduction on the grounds indicated in the annual tax return.

In particular, to avoid double taxation, Ukraine has concluded a number of agreements with other countries. There are currently more than 70 bilateral intergovernmental agreements (conventions) on the avoidance of double taxation in force. These include countries such as Poland, the Czech Republic, Slovakia, Bulgaria, Spain, Portugal, Sweden, Norway, Latvia, Lithuania, Estonia, etc. (the full list of relevant agreements can be found on the official website of the State Tax Service of Ukraine under the section ‘International Cooperation’ – ‘Bilateral intergovernmental agreements (conventions) in force on the avoidance of double taxation’).

These agreements, in particular, provide that tax on income paid abroad is credited against tax liabilities for personal income tax in Ukraine.

Accordingly, pursuant to paragraph 3.2 of Article 3 of the Tax Code of Ukraine, if an international agreement, the binding nature of which has been approved by the Verkhovna Rada of Ukraine, establishes rules other than those provided for in this Code, the rules of the international agreement shall apply.

In accordance with paragraph 13.4 of Article 13 of the Tax Code of Ukraine, amounts of taxes and duties paid outside Ukraine shall be credited when calculating taxes and duties in Ukraine in accordance with the rules established by this Code.

To be entitled to a credit for taxes and duties paid outside Ukraine, the taxpayer must obtain from the state authority of the country where such income (profit) is received, authorised to levy such tax, a certificate stating the amount of tax and duty paid, as well as the tax base and/or taxable object. The said certificate is subject to legalisation in the relevant country and at the relevant foreign diplomatic mission of Ukraine, unless otherwise provided for by Ukraine’s international treaties in force (clause 13.5 of Article 13 of the Tax Code of Ukraine).