VAT on electronic services supplied by non-residents: changes to expect
On 28 June 2021, the President of Ukraine Mr. Volodymyr Zelenskyi has signed a so-called “Law on Google tax” (the “Law 1525”) introducing VAT on supply of electronic services by non-resident companies to the final customers in Ukraine.
Starting on 1 January 2022, if the volume of VATable supplies of a non-resident company in 2021 exceeds UAH one million (circa EUR30,750), such company will be required to (i) register as a VAT payer in Ukraine using a special procedure, (ii) file simplified VAT returns and (iii) pay Ukrainian 20% VAT charged on top of value of electronic services supplied to the final customers in Ukraine. The aforementioned VAT returns may be prepared and filed either in Ukrainian or in English while the reported VAT liabilities may be paid in UAH, USD or EUR.
The Law 1525 also introduces a definition of the “electronic services”, the key features of which are supply via Internet network, automatically, using informational technologies and mostly without human involvement. The Law 1525 also defines the final customers as individuals including those who registered as private entrepreneurs but are not registered as VAT payers in Ukraine.
Hence, starting on 1 January 2022, any supply of the so-called “electronic services” in favour of individuals and private entrepreneurs who are not registered as VAT payers in Ukraine will be subject to the Ukrainian 20 per cent VAT while these transactions are not subject to VAT at the moment. Now, the Ukrainian final customers have to wait to see how the suppliers of “electronic services” will react to the aforementioned changes – it is hard to predict whether there will be an increase in the price of “electronic services” and whether the suppliers will be ready to “absorb” a portion of newly introduced tax by means of reducing price for its services.
Moreover, since 1 January 2022, the Law 1525 abolishes a 20 per cent withholding tax on service fees for production and/or distribution of advertisement payable to non-residents. Beforehand, Ukrainian legal entities, private entrepreneurs, individuals engaged in provision of professional services and permanent establishments of non-residents in Ukraine had to accrue and pay such 20 per cent withholding tax on top of the service fees payable to non-residents at their costs. Such withholding tax was paid in parallel with the Ukrainian 20 per cent VAT which applies to import of advertising services under a reverse-charge mechanism. Now, the discriminating provision (if compared to taxation of similar payments in favor of the Ukrainian residents) will cease.
Next steps that should be taken to prepare for the new tax rules. First of all, it is necessary to analyse whether the supplied services fall within the ambit of the “electronic services” in the meaning of the Law 1525 and whether there are the “final customers” among the recipients of such services in Ukraine. If these two conditions are met, a non-resident has to wait and see whether the amount of VATable supplies of the “electronic services” supplied to the Ukrainian “final customers” in 2021 reaches UAH one million and, if this is the case, from 1 January 2022 register as a VAT payer in Ukraine. Our team will be happy to analyse potential implications of entering the Law 1525 into force for your business and prepare for the new rules of making business in Ukraine in 2022.
 Law of Ukraine “On Amending the Tax Code of Ukraine to Abolish Taxation of Income of Non-Residents Derived from Production and/or Distribution of Commercials and Improvement of VAT Taxation of Electronic Services Supplied by Non-Residents to Individuals” No.1525-IX dated 3 June 2021