Double taxation of Ukrainian refugees

Victor Nevmerzhitsky,

Head of Tax Advisory Department, BDO in Ukraine

 

Since the war began, millions of Ukrainians moved abroad, and many of them continue to work remotely or have found jobs in their host country. This publication covers the tax rules applicable to Ukrainian refugees in Ukraine and abroad and the ways to pay taxes by those refugees who:

  1. officially employed by Ukrainian companies;
  2. work in the host country;
  3. registered as individual entrepreneurs in Ukraine;
  4. receive social assistance.

The comments on these issues are provided in respect of the prevailing scenario when a refugee has Temporary Protection status in the EU and is being considered a tax resident of Ukraine (and therefore is not considered a tax resident of the host countries).

Please note that some EU countries consider Ukrainian refugees to be their tax residents based on the fact that they were assigned a tax number when they were granted Temporary Protection status in such country. In such a case, to maintain the status of a tax resident of Ukraine, a person should appeal to the applicable Convention for the Avoidance of Double Taxation if they have sufficient grounds to prove this (including that their center of vital interests remained in Ukraine, and they plan to return to Ukraine after the end of hostilities). This may require a procedure for mutual agreement between the tax authorities of Ukraine and the host country, which may take 1-2 years (also due to the fact that the Ukrainian tax service lacks experience in performing such procedures and sufficient number of qualified personnel against potentially large number of such requests).

It should be noted that if a person is recognized as a tax resident of another country, he/she is entitled to reduce the annual taxable income by a certain tax-free amount (the amounts differ between countries and can reach 10-11 thousand Euro per year). In other words, if the annual income is less than this tax-free amount, the person is not to pay tax in the host country.

! The Ministry of Finance of Ukraine received responses from 10 EU countries on the taxation of Ukrainian refugees, which are available at the link below.

Ministry of Finance of Ukraine (mof.gov.ua 

Furthermore, some countries require Ukrainian refugees to pay social contributions, the amount of which can be quite high, comparable to the amount of foreign tax.

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1. Payment of taxes by refugees officially employed by Ukrainian companies

Ukraine: When receiving wages from Ukrainian employers, the latter withhold 19.5% of taxes (namely, 18% personal income tax and 1.5% military duty).

Abroad: In most countries, after staying in another country for more than 183 days in a calendar year (e.g., in 2022), refugees must pay foreign taxes on Ukrainian salary received from the date of arrival in another country, even if a person has not become a tax resident of the host country. For example, in Poland, local tax is payable on a monthly basis (or after the end of the calendar year, in this case penalties will applн).

! Ireland, Lithuania and Latvia do not require Ukrainian refugees to pay tax on wage received from Ukrainian employers.

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Refugees who officially employed by Ukrainian entities (but stay abroad for more than 183 days in a calendar year) face a troublesome situation when:

  • Taxes in the host country must be paid (often at rates higher than 19.5%),
  • In doing so, Ukrainian taxes at the rate of 19.5% have already been withheld from a person’s salary. The person may file in Ukraine a tax return for 2022 with a claim for a foreign tax credit (against payment of 18% personal income tax) and a corresponding refund of the personal income tax (in the amount of the credit). It can be assumed that in wartime conditions and during the financial crisis, such a personal income tax refund will be complicated, or at best, funds will be returned to the person with a long delay.
  • For such a foreign tax credit, a person must obtain a certificate from the tax authority of the host country (and not from the foreign employer) on the amounts of income received and taxes withheld, which must be legalized (for example, by apostilling by a notary in the host country). The Ukrainian tax authorities may also require verified translation of the certificate into Ukrainian.

If it is impossible to obtain such a certificate by May 1, 2023, a person must file an application with the Ukrainian Tax Service (for example, through the taxpayer’s electronic office, using an electronic signature from Privatbank or another provider) to extend the deadline for filing an annual income tax return from May 1 to December 31, 2023.

! This raises the following practical issues:

  • Time to be spent to get the wet-signed hard copy certificate from the tax authority of the host country;
  • Payment for the apostilization notary services (or spend a lot of time on legalization through the Ukrainian consulate in the respective country);
  • Money to be spent on the verified translation of the certificate into Ukrainian;
  • The tax authorities of some countries issue such certificates only in electronic form (e.g., in the Netherlands, Spain), which makes their legalization quite complicated or even impossible. Currently, the Ukrainian tax authorities do not take this practical aspect into account and still require legalization of the hard copy certificates, which in these cases makes it impossible to credit foreign taxes against the Ukrainian 18% personal income tax;
  • Social security contributions paid abroad (analogous to the Ukrainian unified social tax) are not subject to offset against Ukrainian taxes.
2. Payment of taxes by refugees working in a host country

Ukraine: as a general rule, tax residents of Ukraine must file an annual income tax return for 2022 if they receive wages and other taxable income abroad. Salary from a foreign employer should be reported in gross amount, translated into hryvnias at the NBU exchange rate on the date of receipt of each amount. Such salary is taxed in Ukraine at a rate of 19.5% (namely, 18% personal income tax and 1.5% military duty). The amount of 18% of personal income tax (but not the military duty) can be reduced by the foreign tax on such income (but not more than 18%).

For the foreign tax credit, a legalized certificate from the tax authority of the host country on the amounts of declared income and taxes paid should be obtained, as described in clause 1 above.

Abroad: In most cases, individuals who are officially employed by a foreign employer do not have to file an annual tax return in the host country (since the employer’s accounting department makes annual recalculations as necessary).

However, if it is necessary to file an annual tax return in the host country, it is recommended to obtain certificates from foreign employer(s) on the amounts of salary received and taxes withheld, and to contact a local accountant to prepare and file the annual tax return. This will help to avoid technical errors and difficulties with a foreign language, although requiring certain expenses.

3. Payment of taxes by refugees registered as individual entrepreneurs (in Ukraine)

Ukraine: Ukrainian individual entrepreneurs must pay the relevant Ukrainian taxes on their business income, regardless of place of their actual residence (e.g., 2% or 5% single tax for a 3rd  group of individual entrepreneurs). In doing so, Ukraine considers registration of a person as an individual entrepreneur to be a sufficient condition for recognizing such person as its tax resident.

! The Ukrainian Tax Service insists that the income of individual entrepreneurs from business activities that have not been credited to accounts in Ukrainian banks (but have remained on Wise, Payoneer, etc.) should be taxed at the rate of 19.5%.

Abroad: in the case of sole proprietors providing IT or other services on their own remotely (for example, working from a rented apartment in another country), after staying in the host country for more than 183 days, most countries will require to pay local taxes on such income from independent personal services (in respect of income earned from the date of arrival in that country and not from the date of expiration of the 183-day period). In doing so, it is impossible to credit the Ukrainian single tax against the payment of a foreign tax, or vice versa.

In addition, some countries require self-employed persons to be registered as such in the host country (which in some countries enables to pay foreign taxes at lower rates). In the absence of such registration in the host country, the income received by a person from business activities will be subject to foreign taxes at standard personal income tax rates (which may be quite high), without the possibility of deducting business expenses.

! Lithuania does not require Ukrainian refugees- individual entrepreneurs to pay Lithuanian income tax on contracts concluded before the war.

4. Payment of taxes by refugees receiving social assistance

Ukraine: as a general rule, in case of receipt of taxable income from which taxes were not withheld upon payment, tax residents of Ukraine must file an annual income tax return for 2022 and pay Ukrainian taxes at the appropriate rates.

However, the Tax Code of Ukraine has recently been amended to provide that refugees do not need to file a tax return in Ukraine for 2022 and 2023 to declare the below social assistance, as it is tax exempt in Ukraine.

27. The total monthly (annual) taxable income of a taxpayer for the tax (reporting) years 2022 and 2023 shall not include income in the form of funds or free goods (services) (hereinafter referred to as “assistance”) provided from the budgetary funds of foreign states and their state funds to such a taxpayer and members of his/her family of the first degree of kinship as persons affected by the armed aggression of the Russian Federation against Ukraine and who have exercised the right to temporary protection in accordance with the legislation of such foreign state.

Paragraph one of this clause applies to all forms of such assistance, including when received as an additional benefit, as well as from foreign companies and organizations that carry out charitable activities in accordance with the laws of the relevant foreign jurisdiction.

If you have any additional questions regarding the double taxation of Ukrainians abroad, please do not hesitate to contact our specialists for advice.