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Local Employers Face Risks Related to Tax on Foreigners’ Salary Income
Resident employers act as tax agents and are required to withhold personal income tax from the salary income paid to individuals, both resident and non-resident. If an employer fails to withhold the proper amount of tax, the tax authorities may require that employers pay tax assessment plus penalties of 200% of the tax due.
In June 2010 the State Tax Administration of Ukraine (STAU) reiterated its earlier position that foreign individuals are subject to personal income tax on their Ukrainian salary at the double rate of 30% unless they qualify as residents. Employers that apply tax at 15% rate are exposed to a risk of tax assessment and penalties. Taxand Ukraine examines the impacts on employers.
The Ukrainian Personal Income Tax Law lacks clarity. In particular the tax rate applicable to salary income of foreign individuals. For almost 5 years tax authorities and employers relied on the STAU ruling issued in 2004, under which Ukrainian salary income of foreigners (both residents and non-residents of Ukraine) was subject to personal income tax at the standard rate of 15%.
Although the law remained unchanged at the end of 2009, STAU changed its position. STAU cancelled the 2004 ruling and issued a new one stating that employers must withhold 30% tax from the salary of foreigners unless a foreigner obtains a certificate confirming his residency in Ukraine for tax purposes.
The attempts of the business community to establish fair rules and prevent discrimination were not successful. However, the tax authorities at least agreed not to make assessments and not to apply penalties retroactively for the period 2004 to 2009.
According to the letter of 14 June 2010 the STAU uses fiscal interpretation to determine the applicable tax rate, specifically:
- Tax rate applicable to salary income of non-residents is 30%
- Foreigners who qualify as tax residents of Ukraine may obtain a certificate of residency from a local tax authority. Although regulations governing the issue of certificates are not legally-binding, STAU insists that tax may be withheld at the 15% rate only upon receipt of certificate
- The 15% rate shall apply from the month during which the certificate is issued until the end of current year. It is not possible to claim an adjustment of tax retroactively from the beginning of the year
STAU approach exposes employers acting in their capacity as tax agents to:
- increased employment costs if employers gross up the salary to cover higher tax rate
- risk of tax assessments and 200% penalty for tax periods starting January 2010 if the 15% tax rate was applied and there was no evidence of tax residency of the individual
There are legal grounds for employers to disagree with STAU's fiscal interpretation of the law. Employers are advised to keep proper defense files to support the tax residency status of their expat employees.
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