The constantly growing demand by Ukrainian private consumers for digital products, such as smartphone applications, computer software, audio-visual content, videogames, etc. supplied by non-resident providers (e.g., Google, Apple, Microsoft) gives rise to an increased number and volume of related electronic cross-border transactions. Since these numerous transactions have remained outside the scope of Ukrainian VAT, a fair and efficient tax mechanism covering them has long become a necessity.
The rules currently in effect only address situations when a non-resident provider supplies services (including digital ones) to business consumers on the customs territory of Ukraine. A recipient is in this case obliged to charge, collect and remit Ukrainian VAT on such taxable supplies (under the so-called reverse charge procedure), file VAT declarations (calculations) and register VAT invoices. To this date, no equivalent mechanism has existed for services (incl. digital products) supplied to resident recipients who are non-business consumers; in this case, no (Ukrainian) VAT has been charged on such supplies.
Eventually, on June 3, 2021, the Ukrainian Parliament passed amendments to the Tax Code of Ukraine intended to adequately address this important issue concerning digital services. It should be noted that Ukraine is following in the footsteps of other countries that already apply, have recently adopted or intend to implement this approach to taxation of imported digital services (such as the EU member states, UK, Canada, USA, Russia, etc.).
Below we briefly summarize the most essential provisions of Law No. 1525-IX, which may be of interest for foreign companies supplying digital products to consumers in Ukraine.
1. Mandatory VAT registration for non-resident suppliers of digital services
Non-residents that have no permanent establishment in Ukraine will be required to register for VAT if they supply their own digital services to private consumers (who include individuals purchasing the services for their personal needs as well as private entrepreneurs not registered as VAT payers) on the customs territory of Ukraine. This requirement to register will further apply to
Non-resident operators of online distribution platforms (marketplaces, internet portals, gateways) through which (non-resident) vendors offer and sell their digital services to consumers in Ukraine, and
Non-residents supplying digital services as intermediaries in their own name but on behalf of their provider.
The above mandatory registration requirement will only affect non-resident suppliers whose annual proceeds from the supply of digital services to consumers on the customs territory of Ukraine exceed UAH 1,000,000 (in equivalent according to the official exchange rate set by the National Bank of Ukraine on January 1 of the respective year), starting with the sales volume achieved in 2021. Such non-residents will have to apply for VAT registration not later than March 31 of the following year (i.e., first time on March 31, 2022 latest). Non-resident suppliers that do not reach the above threshold will be able register for VAT voluntarily. Every registered non-resident will be assigned an individual VAT number.
2. Non-resident suppliers outside the scope of the registration requirement
Herewith, supplies of digital services by non-residents in a B2B setting (i.e., to Ukrainian business consumers, which include companies and private entrepreneurs registered as VAT payers) remain outside the scope of the new rules. The respective non-resident suppliers will not be required to register for VAT in Ukraine if they do not supply to private consumers, and the existing reverse charge procedure referred to above will continue to apply in such cases.
In addition, the following categories of non-residents are explicitly excluded from the above registration requirement; they include non-residents that:
Supply digital services under intermediary agreements if the invoices issued to consumers of the services indicate / identify such services as well as their factual supplier;
Only process payments for digital services and are not involved in their provision;
Supply digital services through their permanent establishment in Ukraine.
3. Definition of digital services
Pursuant to Law No. 1525-IX, digital services supplied by non-residents to Ukrainian consumers on the customs territory of Ukraine will be liable to Ukrainian VAT. Digital services will include a broad range of IT and software services provided via the Internet, including through downloading an application on a smartphone, tablet, TV receiver, and other digital gadgets, in particular but not limited to the following:
Supplies of digital specimen, providing access to images, text, and information, inter alia, subscription to digital newspapers, magazines, books; providing access to and/or downloading photographs, graphic images, audio and video content;
Providing access to databases, including use of search engines and catalogue services on the Internet;
Supplies of electronic specimen and/or providing access to audio-visual works, on-demand audio-visual content, videogames (including providing participation in on-line videogames); providing access to TV programs (channels) or their packages (except for TV programs that are simultaneously broadcast via a TV network);
Providing access to informational, commercial, entertainment and similar web resources, including those uploaded on shared access platforms;
Supplies of remote education services on the Internet (where no human being is involved in the conducting and providing of such education), including by providing access to virtual classes, educational resources, where students perform tasks online, and are assessed automatically;
Cloud storage services;
Supplies of software and updates thereto, providing access thereto; remote software and IT equipment maintenance services;
Advertising services on the Internet, mobile apps and other digital resources; providing advertisement space, including by placing banner ads on websites.
The following shall not qualify as digital services and is explicitly excluded from the scope of Law No. 1525-IX:
Services / goods that, despite being ordered via the Internet, a mobile app or other electronic resources, are supplied physically (e.g., housing, car rental, food delivery, transportation, and other similar services);
Other (non-digital) services / goods that include / incorporate digital services in case the value of the digital services is included in the overall value of such (non-digital) services / goods;
Remote educational services supplied via the Internet in case the Internet is used exclusively as a means of communication between an educator and a student;
Supplies of the works of science, literature, and art on a material data carrier;
Consultancy services supplied by email;
Services of providing access to the Internet.
4. Place of supply of digital services
Law No. 1525-IX follows the traditional approach with respect to the place of supply of digital services, which generally determines if the services are subject to Ukrainian VAT. For VAT purposes, such place is considered as the factual location / whereabouts of the recipient (for a consumer who is an ordinary individual) or the place of the consumer’s registration (for a consumer who is a private entrepreneur not registered as a VAT payer). The following criteria shall apply to help determine the recipient’s location:
The country where the fixed line is installed (telecommunication provider is located) through which the services are received;
The country code of the consumer’s SIM-card used to receive the services;
The location of other communication means through which the consumer receives the services or the country to which the access card has been sent (the location of an electronic device can also be tracked by its IP address);
The consumer’s payment (invoicing) address and payment (banking) details;
Other important commercial information.
The new law further stipulates that unless a (services) agreement provides that the recipient of digital services is a business entity, the services are deemed to have been received by an individual consumer (including a private entrepreneur not registered as a VAT payer). It should be noted that in Ukrainian contract practice, legal agreements normally contain sufficient information to identify both parties and their legal status, so that a definitive conclusion can always be drawn whether or not the customer (recipient) is a business or a private consumer.
5. Electronic interaction with the Ukrainian Tax Office
The Ukrainian Tax Office shall provide for a special digital user interface to be available on its official website. Through this interface, non-resident suppliers of digital services will be able to set up their own electronic accounts with the Tax Office, register for VAT, download and submit electronic (registration) forms, file VAT declarations, complaints, receive tax notifications/assessments, and otherwise communicate with the Tax Office. E.g., a registered non-resident will be able to file electronic complaints regarding tax assessments within 90 calendar days upon receipt by the non-resident of a tax assessment; the complaint shall be considered by the Tax Office within 90 calendar days.
Parallel to communication via the non-resident supplier’s electronic account, the Tax Office will duplicate all messages / documents by sending them to an email specified by the applicant during registration. Hence, the whole communication between non-resident VAT payers and the Ukrainian Tax Office is meant to be electronic only.
On top of that, registered non-resident suppliers will be able to correspond with the Tax Office, besides Ukrainian, in English. For that purpose, all relevant official forms of documents that the Ministry of Finance of Ukraine shall approve (registration forms, declarations, tax assessments, etc.) shall have English language equivalents. The Ministry of Finance of Ukraine shall further approve a procedure for an electronic identification of the non-resident in its electronic account maintained by the Tax Office.
Another essential novelty of Law No. 1525-IX is that for VAT accounting purposes, a document certifying that electronic services have been duly provided can be any document confirming the payment of service fees, including an electronic document sent by electronic communication means. Thus, the provider and the recipient of digital services will not have to execute a standard paper-based hand-over report (acceptance act) regarding digital services, and tax accounting paperwork will be reduced (compared to other VAT transactions involving services).
6. Taxable base. Tax rate. Declaring and remitting VAT
The taxable base will be the (contractual) value of the supplied digital services. The applicable tax rate is 20% of the taxable base, which is included in the service fee. Both the taxable base and the tax amount due shall be expressed in hard currency (USD or EUR).
Starting 2022, non-residents registered as VAT payers in Ukraine will have to submit simplified electronic VAT declarations (pursuant to a form to be approved by the Ministry of Finance of Ukraine). The declaration shall be filed on a quarterly basis, within 40 calendar days after the end of a reporting calendar quarter, regardless of whether or not any services have been supplied during this period.
The payment deadline for the VAT amount indicated in the declaration shall be 30 calendar days after the expiration of the filing deadline. Payments are to be made in hard currency (USD or EUR). The official exchange rate set by the National Bank of Ukraine on the day of filing shall apply.
Please note that registered non-resident VAT payers will not have to execute and register Ukrainian VAT invoices and they will not be entitled to a tax credit (this is otherwise not relevant for them in a B2C setting because the Ukrainian consumer will ultimately bear the burden of VAT included in the service fee).
Failure to register for VAT by a non-resident supplier of digital services will inflict a financial penalty amounting to 30 minimum statutory wages as of January 1 of the reporting year (currently, UAH 180,000, or approx. USD 6,667). Failure to timely file a VAT declaration and/or remit due VAT amounts will be subject to the same regular fines that apply to resident VAT payers.
Further, if a non-resident supplier of digital services fails to register for VAT in Ukraine, the Ukrainian Tax Office may communicate this fact to the competent tax authority of the foreign country by sending a special tax notification urging them to assist with registration.
8. Advertisement tax to be abolished
Besides introducing digital VAT, Law No. 1525-IX abolishes the controversial “advertising tax” (20%). This tax is currently payable by Ukrainian residents that purchase advertising services (the manufacture and/or distribution of advertising) from a non-resident. The tax will be abolished starting January 1, 2022. This measure will undoubtedly boost and increase the volume of cross-border transactions in the advertising sector as it effectively eliminates the financial burden of the said tax borne by resident advertising purchasers.
By creating a VAT mechanism for imported digital services, Law No. 1525-IX will close the existing gap in Ukrainian tax laws and generally have a positive financial impact on the country’s economy as an additional source of income for the state budget. On the flip side, it will eventually result in rising service fees and increased expenses for Ukrainian private consumers. The non-resident suppliers will have, in their turn, to make certain organizational / administrative and financial efforts in order to ensure registration, accounting for VAT, proper reporting and tax payment, etc.
Last but not least, enforcement against non-resident service providers avoiding mandatory registration, reporting, and VAT payment might be complicated. It will largely depend on effective cooperation of the Ukrainian Tax Office with the tax authorities of the respective foreign countries within the framework of international treaties concluded by Ukraine.
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