Ukraine Introduces E-Residence as A Special Tax Regime for Foreign Entrepreneurs
On April 1, 2023, the Law which enables foreigners to become e-residents in Ukraine (hereinafter “e-residence / e-resident”), will enter into the force (the “Law”)
What is e-residence?
E-residence is a status of a foreigner which enables him/her to:
register, maintain, and terminate business activities in Ukraine (types of businesses are not restricted); and
pay taxes on business income in Ukraine.
At this stage e-residents are not allowed to register companies in Ukraine remotely. E-rResidence does not also provide any rights to live in / visit Ukraine, while these remain the prerogatives of the migration regulations.
Before the launch of e-residence, several regulations are still to be adopted.
Who can become e-resident?
E-residence is available for individuals only. To be eligible to become e-residents, an individual must simultaneously meet the following criteria:
be a citizen or resident (but not a stateless person) of a country included into the list issued by the Ministry of Digital Transformation of Ukraine (the “List”);
not be a citizen of Ukraine (e.g., in case of dual citizenship), hold Ukrainian permanent residency permit or be a tax resident of Ukraine;
be at least 18 years of age;
not receive Ukrainian-sourced income (except for passive income).
To become a taxpayer, e-resident, in addition to the above-listed conditions, must simultaneously meet the following conditions:
be registered as a private entrepreneur (the registration will be available via online means);
open a bank account through the “E-Resident” information system with a Ukrainian bank available for selection in this system;
not hire employees who are Ukrainian citizens or residents.
Previously, when e-residence was a pilot experiment and didn’t envisage a special tax regime, it was only available for citizens of Israel, Pakistan, China, Thailand, Bangladesh, Germany, Belarus, India, Moldova, Poland, Philippines, Romania, Slovakia and Hungary. However, the List is expected to be revised.
What is the procedure for obtaining / terminating e-residence?
To become e-resident, a foreigner must submit an application through the “E-Resident” information system, obtain a qualified digital signature issued by an authorized service provider, and pass the identification procedure.
E-resident will be entitled to terminate his/her e-residence status voluntarily by submitting a respective application. Ukrainian authorities have a right to terminate e-residence status of an individual by their unilateral decision in case of the individuals death, restricted or lost civil capibility, or non-compliance with eligibility requirments for e-residents. This status shall also be terminated if an individuals qualified electronic signature expires, unless it is renewed within one month following the expiry date.
What are the peculiarities of the tax regime for e-residents?
E-residents will become taxpayers of the 3rd group single tax which means taxation of the gross business income at the 5% rate. Deduction of any business expenses in order to decrease taxable income is not allowed.
However, the 5% rate only applies to the annual business income which does not exceed 1167 minimum wages determined by laws as of the January 1 of the tax (reporting) year (in 2023 it will be UAH 7,818,900, which is approximately EUR 201,455 according to the official exchange rate established by the National Bank of Ukraine). In case e-resident exceeds the threshold, the 15% tax rate will apply to the excess amount.
At the same time, e-residents are not subject to the social security charges in Ukraine.
The tax compliance should be quite simple and almost does not require e-residents direct participation, as most e-residents tax obligations will be handled by banks. In particular, e-residents must transfer their business income to a bank account opened with a Ukrainian bank. Upon crediting funds to the bank account, the bank will withhold the tax amount according to the abovementioned tax rate at the expense of the credited funds and transfer it to the state budget. Additionally, the bank will submit tax reports on e-resident`s income to the Ukrainian tax authorities.
Communication between e-residents and tax authorities must be performed exclusively by means of electronic communication.
E-residence regime provides instruments to declare and tax foreigners` business income in Ukraine with the minimum compliance burden. However, potential double tax issues may arise which need to be assessed in advance before choosing new regime.