On 24 December 2015, the Verkhovna Rada (the "Parliament") of Ukraine adopted the Law of Ukraine No.909-VIII On Amendments to the Tax Code of Ukraine and Other Laws with regard to Ensuring Balanced Budget Revenues in 2016 (the "Law").
Against the backdrop of other important changes, the Law not only increased the tax burden for owners of real estate, both residential and commercial, but also engendered the whole range of uncertainties related to the administration of Real Estate Tax.
The recent amendments warrant a closer look at some practical aspects for commercial and residential property owners, including the trends pertaining to real estate taxation.
Implications for taxpayers
As a general comment, Real Estate Tax is payable by any owner of a Ukraine-based real estate, be it resident or foreign individual or legal entity, save for the exempt one.
By Law, the duty to pay Real Estate Tax arises upon the acquisition of the title to real estate property after such real estate property is commissioned or acquired into ownership, as applicable. For Real Estate Tax to apply, local municipal authorities must duly decide on the applicable rate, which may not, however, exceed the maximum statutory rate being currently capped at 3% of the minimum statutory monthly salary ("MSMS") (UAH41.34 or approx. USD1.7 in 2016) per square meter.
While it is not a universal practice yet, some of the local municipal authorities have already established the following Real Estate Tax rates applicable at their administrative territories. Thus, Kyiv City and Lviv City accordingly, have decided on the applicable rates for the legal entities as follows:
- in Kyiv: 1% of MSMS per square meter (in 2016 being UAH13.78 or approx. USD0.55) for both residential and non-residential premises with 0.1% MSMS rate for tax-privileged premises like hospitals, museums etc.;
- in Lviv: 2% of MSMS per square meter (in 2016 being UAH27,56 or approx. USD1) for residential premises and from 0.5% to 1% of MSMS per square meter for non-residential premises depending on the location of such premises.
With the Law coming into force on January 1, 2016, the maximum statutory rate has been increased from 2% to 3% of the MSMS with an additional fixed Real Estate Tax of UAH25,000 per annum (approx. USD1,000) being introduced for "luxury dwelling": (i) apartments of over 300 square meters, and/or (ii) houses of over 500 square meters.
The 2016 upward revision at the maximum statutory rate may reasonably suggest that, at least, some municipal authorities might consider revisiting the earlier established rates of Real Estate Tax.
In this context, on 14 January 2016, the Lviv City Council has adjusted the Real Estate taxation rules in Lviv by introducing an additional fixed amount Real Estate Tax of UAH25,000. Other local municipal authorities have also expressed their intention to increase the applicable Real Estate Tax rates.
As a separate comment, if the local municipal authorities fail, or select not, to introduce the applicable Real Estate Tax rate in a given municipality, Real Estate Tax should formally not apply. In this connection, however, the tax authorities expressed the view that, under the circumstances, the applicable Real Estate Tax rate should be deemed to be established at 0% rate.
While 0% rate does not give rise to tax liabilities, this interpretation of the tax authorities brings about a risk that owners of real estate property would still be required to file a tax return. If this interpretation of the tax authorities were to take prevalence then taxpayers would be liable for the failure to submit, or timely to submit, Real Estate Tax return, with the relevant tax penalties attached.
Applicable law provides for two types of Real Estate Tax incentives namely: (i) expressly exempt types of real estate property and (ii) additional privileges conferred upon by the local municipal authorities.
Thus, local municipal authorities may confer Real Estate Tax incentives, inter alia, upon legal entities, individuals, non-governmental organizations, religious organizations depending, however, on a type of real estate property.
Such additional tax privileges are not, by definition, applicable with respect to property (i) with area exceeding 500 square meters; and/or (ii) used for profit generating purposes. This carve-out suggests that commercial property may not, by definition, enjoy any additional tax privileges.
The Tax Code of Ukraine also provides an exhaustive list of real estate property that is not subject to Real Estate Tax.
Thus, Real Estate Tax does not apply to: (i) industrial buildings, inter alia, production facilities, workshops, warehouses of industrial enterprises, as well as (ii) buildings and premises of agricultural enterprises which are used in agricultural purposes (collectively "Industrial Property").
While the Law is express listing such exempt types of property, the applicability of the relief is not entirely clear. Thus, the Tax Code of Ukraine does not elaborate on the criteria for classification of real estate property for the exemption purposes. The tax office, in turn, insists that in order to qualify for the said exemption the exempt type of the building/premises must be supported by the State Classifier of Buildings and Premises.
This position of the tax office is very liberal if compared with the earlier expressed intent to abrogate most of the said exemptions. The tax office advocated this position for the 2016 Law purposes. While the Parliament has not supported this proposal, we may not rule out that the cancellation of the Real Estate Tax exemption for Industrial Property may be back on the agenda.
Reporting and assessment of Real Estate Tax liabilities
Individuals, whether Ukrainian or foreign, are being assessed with Real Estate Tax by tax office by being issued the Tax Notification-Decision by 1 July of the calendar year following the reported one.
In contrast, legal entities are obliged to self-report Real Estate Tax liability by filing - on a current basis - an annual Real Estate Tax return by 20 February.
While individuals pay Real Estate Tax liabilities on the annual basis in arrears within 60 days after being served with the Tax Notification-Decision, legal entities instead are obliged to pay Real Estate Tax in quarterly installments.
In this connection, it is not entirely clear if real estate property alienated by a legal entity during a reported year would cause an acquiring legal entity to file a Real Estate Tax return for the remaining period of a reported year and/or if quarterly installment advanced by a alienating entity would be reimbursed by the tax office on a prorated basis.
Separately, the analysis of the applicable rules brings about a reasonable inference that Real Estate Tax reporting and payment may be problematic for foreign owners of Ukrainian real estate.
Thus, real estate taxation rules do not elaborate on how the Tax Notification-Decision should be served upon foreign individual, as an owner of Ukraine-based real estate property. By law, such Tax Notification-Decision should be delivered QUOTE at the address where the Ukraine-based property is located UNQUOTE without any further guidance regarding the practical aspects thereof.
The law is even more uncertain with regard to reporting and assessment of Real Estate Tax liabilities by foreign legal entities.
In opinion of the Ukrainian tax authorities, a non-resident legal entity may consider reporting and payment of taxes in respect of its Ukrainian real estate, inter alia through: (1) representative office; (2) asset management company or (3) registration with the Ukrainian tax authorities for the reporting and payment of taxes in respect of its Ukrainian real estate. None of these alternatives appear to be undoubtedly supported by the Tax Code of Ukraine nor commercially warranted.
To sum up, the legislative framework on real estate taxation in Ukraine still brings a lot of questions and uncertainties. In the absence of clear guidance provided by law, the tax office typically fills in the gap with its interpretations which are not, however, always liberal or favorable for the taxpayers.
With the marginal increase in the applicable tax rates, the 2016 Law has failed to eliminate the uncertainties with the administration of Real Estate Tax especially when it comes to taxation of Ukrainian real estate owned by foreign title holders.