Ukraine tax: Authorities change position on taxation of nonresidents

The State Tax Administration of Ukraine (STAU) issued a letter on 22 September 2009 in which it changes its position on the tax treatment of payroll income (i.e. salary and other compensation items) received by foreign assignees from Ukrainian employers.

In previous guidance, the STAU confirmed that the Ukrainian-source income paid by a Ukrainian employer to a foreign employee who does not qualify as a Ukrainian tax resident is subject to the regular tax rate of 15% regardless of where the individual is tax resident in the relevant reporting year. However, it is now the STAU's position that all Ukrainian-source income received by a foreign employee not qualifying as a Ukrainian tax resident, either from a Ukrainian or a foreign employer, should be taxed at a 30% rate (i.e. twice the standard rate) unless a special tax residence certificate is received from the Ukrainian tax authorities. According to the STAU, a tax residence certificate is the only document confirming the tax status of an individual.

The new approach of the STAU clearly demonstrates its intent to tax all compensation items considered to be Ukrainiansourced (i.e. related to an assignment in the Ukraine) of foreign individuals. Ukrainian companies employing foreign assignees could be faced with the situation in which they will not be able to obtain a residence certificate at the beginning of the year and, therefore, will have to apply the 30% rate until the individual qualifies as a Ukrainian tax resident. At the same time, obtaining a tax residence certificate could mean that the worldwide income of the individual should be subject to tax in Ukraine.

Although the STAU's position is not supported by the language of the Personal Income Tax Law, the new guidance may result in the application of the higher 30% rate on income paid through Ukrainian payroll before a tax residence certificate can be obtained. Moreover, the tax authorities will inquire about compensation items and employment structure in more detail, requesting data on income paid by a foreign employer. This is likely to have a significant impact on inbound assignees.