On December 28, 2014 the Law of Ukraine no. 77-VIII “On Amending Certain Legislation Acts of Ukraine to Reform Mandatory State Social Insurance and Legalization of Payroll,” was adopted. The Law came into force from January 1, 2015 (“Law 77”). Law 77 restated the Law of Ukraine “On Mandatory State Social Insurance” and introduced a “simplification” of single social charge (“Single Social Charge”) by stipulating that from January 1, 2015 the rate of the Single Social Charge shall be decreased (coefficient 0.4 to be applied to the existing rate), if a company complies simultaneously with the following criteria:
- Total basis for accrual of the Single Social Charge exceeds 2.5 times or more than the average monthly basis for accrual of the Single Social Charge in 2014.
- Average salary in the company has increased by at least 30% in comparison with that in 2014.
- Average payment per each insured person, once the coefficient is applied, is not less than UAH 700.
- Average salary in the company is not less than 3 times the minimum monthly salary. (At present, the minimum monthly salary is UAH 1,218; thus the average salary in the company should be not less than UAH 3,654.)
Before intending to comply with the above criteria, we would recommend that the company take into consideration the following:
- Law 7 does not take into account the companies where the average salary in any way has been 3 times or more than the minimum monthly salary. In view that from January 1, 2015 the rate of individual income tax was increased from 17% to 20% (on amounts in excess of 10 times the minimum monthly salary), the “benefit” from “simplification” of the Single Social Charge does not seem to be evident for an employee of the company who is paid a high average salary.
- Criteria are difficult (if even possible) to implement taking into account the aggravating economic situation in Ukraine.
- If a company hires numerous employees then the implementation of criteria will require significant human accounting resources of the company both for performing the criteria and confirming the actual performance of the criteria in front of the fiscal authority during regular audits.
- Law 77 did not amend accordingly the Law of Ukraine “On Payment and Recording the Single Contribution to Mandatory State Social Insurance” which directly establishes rates of the Social Single Charge. This creates a significant risk that the fiscal authority, when auditing payment of the Social Single Charge, may (but in practice will) be guided by provisions exclusively of the Law of Ukraine “On payment and recording the single contribution to mandatory state social insurance” rather than Law 77 and, in doing so, it will require payment of the Social Single Charge at normal rate(s) subject to possible penalties.
- Law 77 stipulates that coefficient 0.6 shall be applied to the rate of the Social Single Charge from January 1, 2016. But it still remains unclear (i) whether such coefficient shall be applied by all companies or only those who have complied with the criteria (literal interpretation may give an argument that the coefficient shall be applied by all companies but there is a risk that the fiscal authority may take a different view) and (ii) whether coefficient 0.6 shall be applied in 2016 only or both in 2016 and in subsequent years?
Thus, until relevant changes are made to the legislation, the application of a coefficient to the existing rate of the Single Social Charge cannot be recommended.