Ukraine Introduces E-Residence as a Special Tax Regime for Foreign Entrepreneurs

On October 26, 2022, President Zelensky signed the law [1] introducing e-residence for foreign entrepreneurs.

The new law will enable foreigners to obtain an electronic residence (hereinafter “E-Residence / E-Resident”) in Ukraine with no need to become Ukrainian tax residents. Planned to enter into force on April 1, 2023, it will allow foreigners to register themselves as private entrepreneurs and to pay taxes in Ukraine.

What is E-Residence?

E-Residence is a status of an individual which provides access to certain state services, including registration, maintenance and termination of business activities in Ukraine. E-Residence does not provide any rights to live in / visit Ukraine – these remain the prerogative of the migration regulations.

Who is eligible?

E-Residence is available for individuals who simultaneously satisfy the following criteria:

• be a citizen or resident (but not a stateless person) of a country included into the list [2] issued by the Ministry of Digital Transformation of Ukraine
• be at least 18 years of age
• do not receive Ukrainian-sourced income (except for passive income)
• not be a citizen of Ukraine (e.g., in case of dual citizenship), hold Ukrainian permanent residency permit or be a tax resident of Ukraine.

To become E-Resident, a foreigner must submit an application trough the “E-Resident” information system, obtain qualified digital signature, and pass identification procedure.

E-Resident will be entitled to terminate his/her E-Residence status voluntarily by submitting respective application. Ukrainian authorities have power to terminate E-Residence status of an individual by their unilateral decision if they find that such an individual cannot be E-Resident. This status shall also be terminated if an individual’s qualified electronic signature expires.

What are the peculiarities of the tax regime for E-Residents?

In order to become a taxpayer, E-Resident, in addition to the above-listed conditions, must simultaneously meet the following conditions:

• be registered as private entrepreneur (the registration will be available online)
• open a bank account through the “E-Resident” information system with a Ukrainian bank available for selection in this system
• do not hire employees who are Ukrainian citizens or residents.

E-Residents will become taxpayers of the single tax of 3rd group which provides taxation of gross business income at a 5% rate. Deduction of any business expenses in order to decrease taxable income is not allowed.

The 5% rate applies to the annual business income which does not exceed 1167 minimum wages [3] determined by the law as of the January 1 of the tax (reporting) year. In case E-Resident exceeds the threshold, the 15% tax rate will apply to the excess amount.

Types of business activities of E-Residents are not restricted.

E-Residents must transfer their business income to the bank account opened with a Ukrainian bank. The bank will be E-Resident’s tax agent. Upon crediting funds to the bank account, the bank will withhold the tax amount according to the abovementioned tax rate at the expense of the credited funds and transfer it to the state budget.

Additionally, banks shall submit tax reports on E-Resident’s income to the Ukrainian tax authorities. Thus, all E-Resident’s tax obligations will be handled by banks, while E-Residents should not undertake tax compliance burden.

Communication between E-Residents and tax authorities must be performed exclusively by means of electronic communication.

E-Residents are not subject to the social security charges in Ukraine.

Considering the abovementioned, E-Resident’s worldwide business income transferred to his/her Ukrainian bank account will become subject to taxation in Ukraine. At the same time, in order to understand potential benefits of applying this regime, E-Residents should consider whether Ukrainian taxes and duties on business income can be credited against taxes and duties on this income in their tax residency country.

[1] Law of Ukraine dated October 6, 2022, No. 2654-IX “On Amendments to the Tax Code of Ukraine and Certain Other Legislative Acts of Ukraine regarding the Peculiarities of Taxation of Electronic Residents’ Business Activities” (the former Draft Law No. 5270 dated March 18, 2021) (hereinafter the “Law”)

[2] Previously, E-Residence (without special tax regime) was only available for citizens of Israel, Pakistan, China, Thailand, Bangladesh, Germany, Belarus, India, Moldova, Poland, Philippines, Romania, Slovakia and Hungary. Following adoption of the Law, the list is expected to be revised

[3] For instance, 1167 minimum wages in 2022 is UAH 7,585,500, which is approximately EUR 209,300 (according to the official exchange rate)