Taxation of business activities of electronic residents
On October 6, 2022, the Parliament of Ukraine adopted the Law of Ukraine # 2654-IX (hereinafter referred to as the Law) "On Amendments to the Tax Code of Ukraine (hereinafter referred to as the Tax Code of Ukraine) and some other laws of Ukraine regarding the specifics of taxation of the business activities of electronic residents", which is entering into force on April 1, 2023.
"The launch of the e-residency project will help us fill our budget and take another step towards the development of Ukraine's strong IT brand in the world," says Mykhailo Fedorov, Minister of Digital Transformation of Ukraine.
This Law introduces a new concept into the legislation of Ukraine “electronic resident” (hereinafter - e-resident), i.e. a foreigner who has reached the age of 18, is not a tax resident of Ukraine, has received the appropriate qualified electronic trust services (electronic keys and e-document services), whose data has been entered into the "E-resident" information system (hereinafter referred to as the Information System).
This Information System is an integral part of the Unified State Web Portal of Electronic Services, within which the e-residents’ data shall be collected, accumulated, processed, protected, stored and issued. However, it should be noted that acquiring this status is not considered a sufficient condition for such individuals to have their center of vital interests in Ukraine. That is, they do not become tax residents of Ukraine according to the tax laws of our country. It is advised that e-residents take into account the relevant clauses of the convention on avoidance of double taxation between Ukraine and the state of their factual tax residency.
Let us take a look at the requirements for becoming an e-resident, the steps to obtain this status, and the taxation system.
Who Cannot Be an E-resident?
- Foreigners who have the permit to permanently reside in Ukraine or who are tax residents of Ukraine;
- Stateless persons;
- Persons who receive income with a source of origin from Ukraine for goods, works, services (except for passive income);
- Persons who are citizens, residents or whose permanent place of residence or registration is in the countries (jurisdictions) that are not on the List of states whose citizens/residents may acquire the E-resident status (hereinafter - the List) . The list is issued by the Ministry of Digital Transformation of Ukraine (as agreed with the Ministry of Finance of Ukraine), in accordance with the procedure prescribed by the Cabinet of Ministers of Ukraine. A country cannot be on the List if it is recognized as an aggressor state and/or an occupant in relation to Ukraine, if it is on the FATF "black list" or "gray list" and if the European Commission considers it lacking the mechanisms for preventing and combating the legalization (laundering) of income obtained through crime, financing terrorism or financing the proliferation of weapons of mass destruction.
For state registration, applicants must submit their application in electronic form and sign it with a qualified electronic signature (hereinafter - QES), using the Information System, which is equivalent to submitting it in person to the relevant regulatory body. The tax address of an e-resident is recognized as the e-mail address specified by such a person in the application.
The state registrar transfers the information to the controlling body (the Tax Service of Ukraine), who register the e-resident as a tax payer within 2 working days.
E-residents apply a simplified taxation system and are payers of the single tax of the third group. However, in contrast to private entrepreneurs (“FOP”) of the 3rd group, e-residents do not hire employees, whether citizens or residents of Ukraine, do not receive income with a source of origin from Ukraine, except for passive income, and the Law also stipulates that the e-residents do not pay the Unified Social Contribution.
An e-resident’s tax agent shall the bank where they shall open a current account. The E-resident can choose a bank via the Information System, and their current account can only be opened there.
The bank is obliged to:
- send notifications to the tax office on the days when such accounts are opened/closed by an e-resident;
- fully withhold and pay (transfer) the single tax to the state budget no later than within the next 2 working days from the day the funds are credited to the current account;
- submit the tax calculation of the e-resident's income amounts and the amounts of tax withheld from them within the terms established for the quarterly tax (reporting) period,. Such calculations are submitted only if funds are credited to the e-resident's account. Meanwhile, the amounts to be taxed at the 5 % rate, and the amounts to be taxed at the 15 % rate (in case of exceeding the corresponding limit (the amount of income must not exceed 1167 of the minimum wages as established on January 1 of the fiscal (reporting) year), shall be reflected separately
- bear responsibility for untimely fulfilled obligations according to the TCU.
According to the Law, the supervising authorities:
- can receive data from banks free of charge in accordance with the procedure established by the Law "On Banks and Banking" and the TCU regarding transactions on the e-residents' accounts, i.e. information on a specified date or within a specified period of time about the funds credited to the accounts, purpose of payments, identification data and account numbers of the counterparties;
- shall correspond with taxpayers who have acquired the e-resident status exclusively by means of electronic communication in electronic form.
A foreigner shall lose the status of an e-resident on the next day after the date when cancellation of e-resident status is entered in the Information System.
The e-resident status may be canceled:
- If a foreigner submits an application asking to cancel their e-resident status;
- Based on the decision of the Ministry of Digital Transformation of Ukraine in case of receiving information about the death of the person, if the person is recognized as missing, if their civil capacities are restricted or if the person is recognized as incapacitated, or if the person does not comply with the requirements of the TCU;
- If the QES validity period has expired, provided that the e-resident does not renew it within one month from the date of the expiration of the QES validity period.
We would also like to note that electronic residency is being implemented by other countries as well. For example, in Estonia, this program has been launched since December 1, 2014 and allows e-residents receive services in Estonia, such as business registration or banking, as well as access the EU market. To be precise, there have been some downsides: in 2017, the Estonian government froze the e-residency program's e-smartcards two months after finding serious data security flaws, until their owners updated their security certificates, but now the program is working fine . Unlike Estonia, Ukraine is only implementing registration as a private entrepreneur. Therefore, we hope that the program will be a success and that it will make Ukraine attractive for foreign entrepreneurs in the near future.