On 3rd of June, the Verkhovna Rada of Ukraine (VRU) adopted the Law “On Amendments to the Tax Code of Ukraine Concerning the Abolition of Taxation of Income Received by Non-Residents in the Form of Payment for Production and / or Distribution of Advertising and Improvement of the Procedure for Value Added Taxation of Transactions on Supply of Electronic Services by Non-Residents to Individuals” (hereinafter – the “Law”).
The Law is aimed at creating favorable conditions both for business and State to efficiently and easy administrate the procedures related to tax payment.
The Law has already entered into force and will apply to reporting (tax) periods from 1 January 2022. However, according to the transitional provision, a non-resident, which total amount from transactions for the provision of electronic services to individuals in the customs territory of Ukraine for 2021 calendar year exceeds UAH 1 million by 31 March 2022, shall apply for registration of a non-resident as a taxpayer .
“This is a so-called ‘Tax on Google’,” said the Chairman of the VRU Committee Danylo Hetmantsev, “Firstly, we abolish the withholding tax on advertising income. This tax hinders the development of advertising services. Secondly, instead, we are introducing a simplified procedure for registration and payment of value added tax for those providing e-commerce services in Ukraine. To date, the current state of affairs is that such giants as Facebook, Viber and others do not pay VAT. It is estimated that three billion hryvnias are not transferred to the state budget for advertising services alone.”
VAT payers shall be:
Electronic services, in particular, but not exclusively, include:
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supply of electronic copies, granting access to images, texts and information, including subscriptions to electronic magazines, books, newspapers;
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granting access to databases, including the use of search engines and directory services on the Internet;
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provision of cloud technologies for data placement;
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supply of electronic copies and / or providing access to audiovisual works, video and audio works to order, games;
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granting access to information, educational, commercial and entertainment electronic resources;
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supply of software and updates to it, including remote maintenance of software and electronic equipment;
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provision of advertising services on the Internet, mobile applications and other electronic resources.
Electronic services do not include transactions on:
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supply of goods / services, the actual supply of which is carried out without the use of the Internet;
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supply of goods and / or other services, other than electronic services, which include electronic services, if the cost of electronic services is included into the total cost of such goods / services;
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provision of distance learning services on the Internet, being used exclusively as a means of communication between a teacher and student;
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supply of copies of works of art, literature and science on tangible media;
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providing consulting services by e-mail;
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provision of Internet access services.
The Law abolishes the taxation of income received by non-residents in the form of payment for the distribution and / or production of advertisement at the rate of 20%.
Amendments to the Tax Code of Ukraine provide for special rules on taxation of electronic services rendered by non-residents, in particular: no need to issue tax invoices; and completion of the simplified form of tax returns to be submitted via ad hoc portal solution for non-resident users. The first value added tax returns shall be filed at the end of first quarter 2022 by non-residents who have reached the supply volume preconditioning their registration as VAT payers.
Therefore, it is important for non-resident companies providing electronic services to individuals in Ukraine to assess the scope of the electronic services rendered in Ukraine and the impact of the implemented measures on their business activities. For more information on the potential impact of the newly adopted tax rules on your business, please contact our Tax and Legal Team.
“The introduction of VAT on transactions for the supply of electronic services is not unexpected; in fact, it is an implementation of the generally accepted principle stipulating that cross-border services are subject to indirect taxes in the country of final consumption and in accordance with its rules.
As VAT on electronic services was introduced in the EU back in 2015, it can be expected that international companies to which this tax shall apply have already smooth-running mechanisms in place to determine the location of their end users and, consequently, the amount of tax liabilities in each of the countries where the services are provided.”
Svetlana Kovalska
Senior Manager, Tax & Legal