Amnesty for individuals

What is “tax amnesty”? Who does the Law apply to?

In the first place, let's get the basics right. Taxpayers may “clear”, i.e. legalize, their assets previously acquired for untaxed incomes. To take advantage of the tax amnesty, you must, on a voluntary basis, submit a one-time special tax return and pay a special fee on the amount of the “amnestied” income.
The tax amnesty may be granted to qualifying individuals, both Ukrainian residents and non-residents, who were Ukrainian residents at the time when they acquired assets or received income.

Individuals who have worked in the public sector since 1 January 2005 and persons to whom sanctions have been applied under Ukrainian laws are deprived of the right to apply for tax amnesty (the Law does not allow for “clearing” corrupt revenues).

In view of the above, the procedure provided by the Law has features of both tax amnesty and capital amnesty.

“Tax amnesty” and “tax-free liquidation” of foreign companies: what is the difference?

All people who “keep their fingers on the pulse” of recent tax changes remember that taxpayers will still have an opportunity to take advantage of “tax-free liquidation” rules—liquidate their foreign companies and receive liquidation income without paying PIT in Ukraine (but subject to 1.5% of military levy)—by the end of 2021 (or a little longer in some cases).

It should be noted that the tax amnesty and tax-free liquidation are not related; these are just two different forms of reporting personal income subject to preferential taxation. Both procedures are completely voluntary; therefore, a taxpayer may choose either option depending on what is best for him in a particular situation. Tax amnesty and tax-free liquidation may be used by the same person simultaneously for different types of income.

When should a special tax return be submitted?

The deadline for submitting a special tax return on “amnestied” income is one year – from 1 September 2021 to 1 September 2022.

What assets may be declared?

The amnesty applies to all assets acquired by an individual for income that was received before 1 January 2021 but has not been taxed yet (where required). Consequently, if income was received in 2021, the Law will not apply to this income; it must be recognized at a full tax rate in the usual annual tax return.

The amnesty may be applied to funds held in accounts with Ukrainian and foreign banks, movable and immovable property, shares and stakes in companies, as well as to other assets. The Law neither establishes an exhaustive list of assets nor sets a time limit for acquiring assets in the past.

At the same time, it should be borne in mind that so far Ukraine has statutes of limitations on tax non-payments, but there is a risk that these provisions may be removed from the laws.

Assets obtained as a result of criminal offenses (except for tax and currency law violations and some violations of economic competition protection) may not be declared and “amnestied”.

Is it required to return the property to Ukraine?

No. This idea was discussed at the law drafting stage; however, it was not included in the final version of the Law. You can legally apply amnesty to, for example, funds held in a foreign account, but only provided that you pay a special fee at a higher rate than when transferring these funds to a Ukrainian bank.

Does the Law require disclosing the sources of property?

No, it is not necessary. Besides, the tax authorities are prohibited to require any documents regarding the funds and sources of their origin, in addition to those specified in the Law.

However, if the funds are placed in a Ukrainian bank for further amnesty (which is mandatory if you need to declare cash or, for example, gold in bank bars), the bank will be obliged to conduct a full verification in accordance with financial monitoring laws, which requires that you provide supporting documents and additional information.

What does the Law guarantee?

With regard to “amnestied” income (in case it has been properly declared and a special fee has been paid), the Law provides for release from criminal and administrative liability for violations of tax and currency legislation and for some violations in economic activities.

In addition, declarants are guaranteed that information from their special tax returns will not be used in investigations and/or inspections, etc.). However, given the experience of neighboring countries, this issue should be treated with caution.

What taxes must be paid in case of filing a one-time tax return?

Within 30 calendar days from the date of submitting the tax return, a special fee must be paid as follows:

• 5% – for assets located and registered in Ukraine, including currency values in Ukrainian banks*
• 7% – for assets located abroad, if the tax return is submitted BY 1 March 2022 (a reduced rate is applied to motivate early disclosure)*;
• 9% - for assets located abroad, if the tax return is submitted AFTER 1 March 2022*;
• 2.5% – for incomes used to purchase Ukraine government bonds having a maturity of more than 365 days (no early redemption) in the period from 1 September 2021 to 31 August 2022*

* A higher rate (+2.5%) may be applied, with installment payments in three equal parts annually. The deadlines for payment of the fee will also be changed accordingly.

Should you take the opportunity to legalize your income through amnesty?

This issue should be viewed in the light of the latest news from Ukraine and the world.

Ukraine is actively implementing rules for preventing tax evasion (the rules of controlled foreign companies, among others).

The automatic tax information exchange system is expected to be launched in Ukraine under the CRS (Common Reporting Standard). As a result, foreign banks in most countries will be required to annually provide—through tax authorities of their countries—the Ukrainian fiscal authorities with information on the bank accounts opened with these banks and maintained by residents of Ukraine.

In Ukraine, many talks are now held around the introduction of “universal declaration” and the establishment of indirect methods to monitor where individuals' incomes and expenses mismatch – this may become an effective mechanism for identifying undeclared income.

Therefore, if you fail to apply amnesty to your assets and pay a special fee at a reduced rate now, you may run a risk that the tax authorities will find your assets and force you to pay the tax at the full rate of 18%; fines and penalties will be additionally accrued. Tax amnesty may be your window of opportunity if you have assets that you are willing to “clear”.

However, it is already clear that the security guarantees provided by the Law may turn out insufficient in the realities of Ukraine.

How can you understand whether you are ready for tax amnesty before the declaration deadline has come?

First of all, you need to do your “home assignment”—perform an in-depth analysis of your assets for past violations of tax and other laws and assess the risks associated with obtaining and owning such assets.

Secondly, you need to define your declaration strategy, meaning that you have to decide which form of declaration will be the most effective and suitable for you—for example, whether you should declare your funds held in an account in a foreign or Ukrainian bank, or whether you should purchase DGBs.

On top of that, you need to assess what economic and legal risks may arise from your declaring assets through amnesty. Among other things, this includes addressing the issue of protecting your personally identifiable information and potential risks of disclosing your information to third parties.

Source: NV Business