On July 18, 2024, the Verkhovna Rada of Ukraine introduced Draft Law No. 11416, titled “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Taxation Features During the Period of Martial Law” (referred to as the “Draft Law”). This draft legislation proposes significant changes that could substantially impact the tax obligations of businesses operating under martial law. If passed in its current form, the Draft Law will likely increase the tax burden on businesses and tighten certain aspects of compliance with tax authorities.

Below, we outline the key proposed changes as detailed in the Draft Law:

1. Updating Rules on Military Levy Collection

The Draft Law proposes a considerable expansion of the military levy, coupled with an increase in its rate:

  • Increase in Military Levy Rate: The wages, dividends, and other individual income levy would rise to 5%.
  • Corporate Income Tax: Legal entities, regardless of their tax system, would be subjected to a 1% military levy on their total income.
  • Individual Entrepreneurs: Entrepreneurs in the 3rd group of the simplified tax system would pay a 1% military levy on their income. In contrast, those in the 1st, 2nd, and 4th groups would pay a levy of 5% on twice the minimum wage as of January 1 of the reporting year (currently, this amounts to 710 UAH).
  • Vehicle Registration: A 15% military levy would be applied to the cost of vehicles upon their first state registration.
  • Mobile Communication Services: Users would be charged a 5% military levy on the cost of mobile communication services.
  • Sales of Jewelry: A 30% military levy would be imposed on income from the sale of jewelry items.

2. Advance Payments of Corporate Income Tax for Retail Fuel Sellers

Businesses engaged in retail fuel sales would be required to make monthly advance payments of corporate income tax:

  • Calculation of Advance Payments: The payment would be 0.5 times the minimum wage as of January 1 of the reporting year per 1 cubic meter of storage capacity for gasoline, diesel, and liquefied gas. This equates to approximately 3,550 UAH per cubic meter of storage tanks registered in the Unified Register of Licensees and Fuel Circulation Places.
  • Reduction of Tax Obligation: The advance payments would reduce the corporate income tax obligations for the reporting period at the base rate. However, if the advance payments exceed the tax obligation for the year, the excess cannot be refunded or credited towards future taxes.
  • Compliance and Audits: The timeliness and accuracy of these advance payments will be subject to desk audits by tax authorities. The advance payment amounts cannot be refunded as overpaid mistakenly paid tax or credited toward paying other charges.

3. Minimum Personal Income Tax Base

The Draft Law permits local councils to establish a minimum base for personal income tax on salaries, potentially above the actual earnings of individuals:

  • Local Authority Decisions: Councils can set a minimum tax base for salaries that must be no less than the legal minimum wage for a monthly tax period.
  • Employer Responsibilities: If actual salaries fall below this base, employers must pay the difference in personal income tax from their funds. There are no upper limits on the tax base, which could lead to situations where employers must cover a significant shortfall in personal income tax.

4. Communication

The Draft Law introduces electronic correspondence between tax authorities and certain taxpayers:

  • Affected Taxpayers: This requirement applies to large taxpayers, VAT payers, excise taxpayers, financial agents in specified cases, and e-residents.
  • Compliance: These taxpayers cannot opt out of electronic communication, and all correspondence sent through the electronic cabinet will be considered duly delivered

5. Inventory During Tax Audits

Taxpayers would be required to conduct an inventory of assets during tax audits:

  • Scope and Compliance: Taxpayers must inventory fixed assets, inventory holdings, and cash balances as requested by the tax authority, with the mandatory presence of tax officials.
  • Penalties for Non-Compliance: Refusal to allow tax officials' presence during the inventory could result in property seizure, which can only be lifted once the inventory is completed with tax officials present. The Draft Law does not specify the time frame for officials to attend, potentially leading to extended asset seizures.
  • If the audit during which the tax authority requests an inventory relates to VAT reimbursement, and the taxpayer fails to comply with the requirement to conduct the inventory and/or allow tax representatives to be present, the amount declared by the taxpayer for reimbursement will be reduced and credited to the tax credit of the subsequent reporting (tax) period.

6. Other Proposed Changes

Additional provisions in the Draft Law include:

  • Excise Tax on Beverages: A new excise tax of 0.1 euros per liter would be imposed on beverage producers and importers, including water, mineral, and carbonated drinks with added sugar or flavorings.
  • Notification of Tax Compliance: Taxpayers who regain the ability to fulfill their obligations during martial law must notify the tax authority, or the authority may independently determine that the taxpayer is able to comply.
  • Changes to VAT Exemptions: The Draft Law removes the VAT exemption for imports or exports with a customs value not exceeding 150 euros and reduces the threshold for VAT-exempt imports into Ukraine from 150 to 45 euros.