Tax Guide for Private Entrepreneurs in Ukraine

Introduction

Private individuals, willing to conduct entrepreneurial activity without incorporation of separate legal entity, can do it by registering as Private Entrepreneur. This form of business is simple to register and maintain and additionally, can offer good tax savings through the Simplified Tax Regime available for such structure.

There are two main taxation systems for private entrepreneurs: General Tax Rules and Simplified Tax Regime. Whereas all private entrepreneurs are by default on General Tax Rules, Simplified Tax Regime is available subject to certain requirements as per type of business, annual turnover and require registration with tax authorities as Unified Tax Payer. Note that foreign individuals are allowed to be on Simplified Tax Regime only if they are tax residents of Ukraine as defined by Tax Code.

This article provides comparative overview of the two tax regimes for private entrepreneurs, details of taxation, and reporting rules for each of the two options.

Overview


Private entrepreneur (PE) is a natural person (not legal entity), registered with the State Registry of Legal Entities, Private Entrepreneurs and Public Formations (hereinafter – Companies Registry) with the aim to conduct business activity in Ukraine.
For more details on state registration of PE, key features of this form of business and information on compliance procedures for PE please see our article Guide to Private Entrepreneur Business Structure.

This article provides information on taxation rules and possible tax regimes for private entrepreneur as well as key considerations which can be useful to choose optimal tax regime for your business.

There are two main taxation systems for PE: General Tax Rules and Simplified Tax Regime. Whereas all private entrepreneurs are by default on General Tax Rules, Simplified Tax Regime is available subject to certain requirements as per type of business, annual turnover and require registration with tax authorities as Unified Tax Payer.

General Tax Scheme

By default, Private Entrepreneur entity is subject to taxation as per the general tax rules as described below. However a PE can apply for Simplified Tax Regime at the time of registration or anytime thereafter as long as it satisfies the relevant requirements.

General Tax Regime

  • income tax rate (tax accrued on income minus expenses from entrepreneurial activity) – 18%
  • military tax – 1,5 %
  • social security tax  – 22 % from profit (net income), but not less than 22 % from minimal wage in Ukraine (i.e. in 2017 not less than UAH 704 per month) and not more than 22% from 25 minimum living salaries in Ukraine (i.e. starting from May, 2017 not more than UAH 9,262).
  • additionally, PE on general taxation system may have to pay 20% VAT (in cases as prescribed by law), property tax etc.
  • PE has to file annual tax reporting (on income tax and social security tax)
  • PE has to pay taxes on quarterly basis (income tax) and yearly basis (military tax and social security tax)
  • PE are obliged to maintain Book of Income and Expenses (such Book is subject to registration by tax authorities)
  • PE is obliged to use cash register
  • in cases when PE hires employees or other individuals, who are not PE:
    • PE withdraws income tax (18%)  and military tax  (1,5%) from salary of each employee at the time of payment of the salary (paid at the expense of the salary)
    • PE pays social security tax at 22% on each employee’s salary (paid on top of the salary at the expense of PE) but not less than UAH 704 per month and not more than UAH 9,262 per month.
    • PE is obliged to file monthly (social security tax agent) and quarterly (income tax agent) reporting as tax agent of private individuals

Simplified Tax Regime

This tax scheme is the most attractive point of Private Entrepreneur business structure


A Private Entrepreneur structure can opt for and enjoy the Simplified Tax Regime that offers considerable tax savings if it satisfies certain conditions as explained further below. A PE under the Simplified Tax Scheme pays only a single Unified Tax, the rate of which depends on the amount of income, number of employees, type of business etc. The Unified Tax rate is considerably lower when compared to the General Tax Scheme which requires the PE to pay a number of different taxes. Application for registration for Simplified Tax Scheme/Unified Tax-payer can be filed either at the time of PE registration with the Companies Register or after that with tax authorities. PE can become a Unified Tax payer not more than once per year and can switch to General Tax scheme (for that he/she have to notify tax authorities 10 calendar days prior to next reporting quarter).

Foreign individuals are allowed to be on Simplified Tax Regime only if they are tax residents of Ukraine as defined by Tax Code.

Note that Unified Tax does not apply to incomes, received by individual not in the course of his entrepreneurial activity, accordingly to such other incomes general taxation rules will apply.

A PE on Simplified Tax regime pays one tax (Unified Tax) and does not have to pay the following separate types of taxes:

  • income tax
  • military tax
  • VAT for supplies on the territory of Ukraine (with exceptions as defined below for 3rd group of Unified tax-payers)
  • land tax (except tax on land, which is not used by PE for his/her business activity)
  • in addition, social security tax is paid by PE in amount on PE discretion, but monthly amount of payment cannot be:
    • For the 1st Group: less than 1/2 *(22% of minimal wage) (at present minimal wage amounts 3200 UAH) and cannot be more than 25 minimum Ukrainian living wages (at present minimal living wage amounts 1684 UAH).
    • For the 2nd and 3rd Groups: less than 22% of minimal wage and cannot be more than 25 minimum Ukrainian living wages (i.e. not less than UAH 704 per month and not more than UAH 9,262 per month.).
    • Note that social security tax is paid quarterly and reporting is filed annually. Amounts of minimal wage and Ukrainian living wage are defined by law for the specific period of time.

Unified Tax Rate

Taxation under the Unified Tax scheme depends on which group the PE belongs to as described below.

1st Group: 

A PE belongs to 1st Group if:

  • number of employees is 0
  • type of business activity is retail sale of goods on market or personal customer services
  • annual income is up to 300 000 UAH

Application Tax and Other Points:

  • tax rate: defined by municipal authorities in the amount up to 10% from living wage as of the 1st of January of the reporting year (as of 1st of January 2017 living wage was 1600 UAH)
  • reporting – annually
  • tax payment – monthly
  • vacation and sick leave – there is not tax for max 30 days vacation plus max 30 days sick leave per year
  • PE are obliged to maintain Book of Income (such Book is subject to registration by tax authorities)

2nd Group 

A PE belongs to 2nd Group if:

  • number of employees is up to 10
  • type of business activity – production /sale of goods; restaurant business activity;  services to individual customers or other Private Entrepreneurs who are under the Simplified Tax Regime
  • annual income is up to 1,500,000 UAH

Application Tax and Other Points:

  • tax rate: defined by municipal authorities in the amount up to 20% from minimal wage as of the 1st of January of the reporting year (as of 1st of January 2017 minimal wage was 3200 UAH)
  • tax payment – monthly
  • reporting  –  yearly
  • vacation and sick leave – there is not tax for max 30 days vacation plus max 30 days sick leave per year
  • PE is obliged to maintain Book of Income (such Book is subject to registration by tax authorities)
  • PE is obliged to use cash register in cases when annual income of such PE exceeds 1,000,000 UAH

3rd Group: 

A PE belongs to 3rd Group if:

  • number of employees can be any
  • type of business activity can be any
  • annual income is up to 5,000,000 UAH

Application Tax and Other Points:

  • tax rate: 3% from income (when VAT is not included in Unified Tax); 5 % from income (when VAT is included in the Unified Tax); note that tax base is all amount of income of PE and expense deduction is not envisaged
  • reporting – quarterly
  • tax payment – quarterly
  • PE are obliged to maintain Book of Income /Book of Income and Expenses (the latter – for VAT-payers), such Book is subject to registration by tax authorities
  • PE is obliged to use cash register in cases when annual income of such PE exceeds 1 000 000 UAH

In cases when PE of 2-3 groups hires employees or other individuals, who are not PE:

  • PE withdraws income tax (18%)  and military tax  (1,5%) from salary of each employee at the time of payment of the salary (paid at the expense of the salary)
  • PE pays social security tax at 22% on the top of each employee’s salary at the expense of PE, but not less than UAH 704 per month and not more than UAH 9,262 per month.
  • PE is obliged to file monthly (on social security tax) and quarterly (on income tax) reporting as tax agent of private individuals

Taxation Example

Deciding on which tax scheme to adopt


Denis is a software engineer based in Kiev. He is being hired by a USA company on a freelance basis for a compensation of $4000 per month. Denis is working by himself and does not have any employees. Denis wants to register Private Entrepreneur structure for this purpose. How can Denis minimize his taxes and maximize his take home pay?

Answer:

Taking into account

  • total yearly income of Denis is 48 000 USD, which is equivalent of 1 248 000 UAH per year (if we take 1 USD=26 UAH); and
  • type of business activity of Denis: software engineer,

Denis

  1. may not use 1st group of Unified Tax payers (as his yearly income exceeds allowed annual income limit for this group and type of business activity is not allowed to tax payers of 1st group)
  2. may not use 2nd group of Unified Tax payers (as his type of business activity is not relevant to tax payers of 2nd group)
  3. can register and use 3rd group of Tax-payers on Simplified tax regime (as for this group there is no limit as per types of business activities and his annual income will not exceed 5,000,000 UAH annual income allowed for 3rd group). Taking into account that IT services, supplied overseas, are exempt from VAT in Ukraine, such PE should choose 5% tax rate for his income (as he will not be registered as VAT-payer)
  4. can use General Taxation Scheme (as all PEs are allowed to use this type of taxation)

Based on the above, Denis has two choices: a) register as Private Entrepreneur under the 3rd group of tax-payers; or b) opt for General Taxation Scheme.

If Denis’s PE decides to be taxed as tax-payer of 3rd group of Unified tax payers:

  • his annual income tax in 2017 will amount: 62,400 UAH (5% from 1,248,000); plus
  • social security tax can be defined in the amount at Denis’ own discretion, but not less than 8,448.00 UAH (12*(3200*22%))

Accordingly, in this case total tax for Denis in 2017 will amount 70,848.00 UAH, whereas his net income will be UAH 1,177,152.00 (which is UAH 1,248,000 – UAH 62,400 – UAH 8,448.00 UAH). 

2.  If Denis decide to opt for general taxation scheme:

  • his social security tax for 2017 will amount UAH 111.144.00 (maximum possible monthly social security tax UAH 9,262 *12)
  • total income tax for 2017 will amount: 221,686.92 UAH = (UAH 1,248,000  – 111.144.00 UAH)*(18+1.5)%

Accordingly, in this case total tax for Denis in 2017 will amount 332,830.92 UAH, whereas his take home income will amount to UAH 915,169.08 = UAH 1,248,000 – UAH 332,830.92.

As we see from the above-mentioned example, tax-payers on Simplified Tax regime enjoy much more favorable rules of taxation and receive much higher net income.

Note that for the purposes of this example, minimal wage was taken for 2017.

In Summary


A Private Entrepreneur whose income does not exceed 5,000,000 UAH would in most cases benefit from choosing the Simplified Tax Scheme rather than General Tax Scheme. Among pluses of Simplified Tax Scheme is lowers tax rates for income tax and social security tax, simple reporting rules and possibility to pay Unified tax instead of multiple taxes for tax-payers on General Tax Scheme.

Note that tax base under General Taxation Scheme is defined as income minus expenses, born in the course of entrepreneurial activity (including social security tax and other expenses), tax base for 1st group is living wage and for 2nd group is minimal wage. For the 3rd group of Unified Tax-payers tax base is full amount of revenue (no deductions possible).

Foreign citizens, registered as PE in Ukraine, can be registered on Simplified Tax Regime, though according to Tax Code of Ukraine they will be considered as tax residents of Ukraine in this case.  

Related Resources


Here are some additional resources about setting up a legal structure in Ukraine that you might find useful :

For further information, please contact us.