The Simplified Taxation System
The issue of taxation is one of the most painful for the residents of Ukraine. Due to the mentioned fact we have decided to provide you with a brief overview consultation on taxation.
As Benjamin Franklin once noticed: “In this world nothing can be said to be certain, except death and taxes”.
For that very reason we have decided to consult you on a simple, but almost indispensable issue of the simplified taxation system. The mentioned system is established by the Tax Code of Ukraine, adopted by the Law of Ukraine dated December 12, 2010 No №2755-VI (hereinafter referred to as the Tax Code of Ukraine).
The Simplified Taxation System, Financial Accounting and Reporting: what does it mean?
In accordance with the provisions of the Articles 291.2 and 291 of the Tax Code of Ukraine, the simplified taxation system is a special taxation procedure. Due to this procedure the payment of certain taxes and fees is replaced by the single tax payment. As per the abovementioned procedure a simplified financial accounting and reporting system is also brought in.
As in the previous years, encouragement with the simplified taxation system shows a desire of a State to promote the formation and development of small enterprises, to support domestic producers and reduce corruption, аs well as to create conditions for employment. The conditions for positive changes in the national economy shall arise by virtue of the above mentioned facts.
The simplified taxation system is above all aimed at stimulating the small business development, which is considered to be the main engine of market relations in the country.
In accordance with the provisions of the Item 1 of the Article 297 of the Tax Code of Ukraine business entities (legal entities and individual entrepreneurs), when passing to the simplified taxation system, are exempted from the following taxes:
- The company income tax.
- The individuals income tax (the relevant income is obtained when carrying out business activity).
- The value-added tax on transactions within the customs territory of Ukraine (except for uniform tax payers of the fourth group) – such individuals are not exempted from paying a value-added tax on imported goods and services.
- The land tax (except for the lands, which are not used for entrepreneurial activity).
- The rental fee for the special use of water (for uniform tax payers of the fourth group).
Before applying the simplified taxation system, it is important to understand, which groups of business entities may be uniform tax payers.
The provisions of the Item 291.4 of the Article 291 of the Tax Code of Ukraine define the following 4 groups.
The first group includes individual entrepreneurs, who do not use the hired labour and the annual income of whom does not exceed 300 000 UAH.
The mentioned entrepreneurs may deal exclusively with retail trade on the markets and the provision of domestic services.
In accordance with the provisions of the Items 293.1 and 293.2 of the Article 293 of the Tax Code of Ukraine for this group of entrepreneurs the village, township and city councils establish a single tax at the rate that does not exceed 10% of the subsistence minimum, which is established by the State as at January 01 of the financial taxation year.
The second group includes individual entrepreneurs, who do not use the hired labour at all or use it, but when not more than 10 persons are hired. In addition the annual income of these entrepreneurs does not exceed 1 500 000 UAH.
The mentioned entrepreneurs may provide domestic services to residents or single tax payers, production and/or sale of goods, as well as activities in the restaurant business.
The individual entrepreneurs, who provide housing agency services, agency works concerning buying, selling and assessment of real property, as well as production, supply, sale of jewelry and household items made of precious metals, precious stones and semi-precious stones, may not be considered as uniform tax payers of the second group.
In accordance with the provisions of the Items 293.1 and 293.2 of the Article 293 of the Tax code of Ukraine for this group of entrepreneurs the village, township and city councils establish the single tax at the rate that does not exceed 20% of the minimum wage, which is established by the State as at January 01 of the financial taxation year.
The third group includes individual entrepreneurs or legal entities, whose annual income does not exceed 5 000 000 UAH.
In accordance with the provisions of the Items 293.3 of the Article 293 of the Tax code of Ukraine the single tax for this group is established at the rate of 3% of the income (for the value-added tax payers) or 5% of the income (for other individuals).
The fourth group includes agricultural goods producers, whose part of the agricultural goods production of the previous tax (reporting) year is equal or exceeds 75 percent.
The single tax rate for the mentioned producers is established at the rate of 3% of the income (for the value-added tax payers) or 5% of the income (for other individuals).
In accordance with the provisions of the Items 291.5 of the Article 291of the Tax code of Ukraine the non-residents, representational offices (branches) of legal entities, which are not the single tax payers, or entities in the authorized capital of which the totality of shares of legal entities (not single tax payers) equals or exceeds 25 percent, may not be included to the 1-3 groups. As the tax payers of the 1-3d groups may not also be the entities that provide the following activities:
- the organization and conduct of gambling games, lotteries and wagering,
- the foreign currency exchange,
- the production, export, import and sale of excisable goods (except for retail sale of fuel and lubricants, beer and table wines),
- the extraction, production and sale of precious metals and stones, jewelry and household items made of precious metals, precious stones and semi-precious stones,
- the production and sale of underground resources (except for local significance resources),
- the financial activities (including insurance, leasing, investment, activities with securities and pawnbrokers activities), except for insurance activities of insurance agents, surveyors, emergency commissioners and adjusters,
- the enterprise management,
- the post and communication (except for courier),
- the sale of pieces of art and antiques,
- the touring activity,
- the audit,
- the lease of land, which exceeds the plottage of 0.2 hectares or housing, which exceeds 100 square meters or non-residential premises, which exceeds 300 square meters.
Moreover, in accordance with the provisions of the Items 291.5-1of the Article 291of the Tax Code of Ukraine, entities that produce the excisable goods (except for grape wine materials producers) or when more than 50 percent of their income is obtained from the sale of decorative plants (except for producers of cut flowers), may not be included to the 4th group of the uniform tax payers.
The provisions of the Item 291.7 of the Article 291 of the Tax Code of Ukraine establish the exhaustive list of services that may be considered as domestic services when determining the uniform tax payer group. The mentioned services include:
- the production and repair of custom tailored clothing, footwear, headgear, carpets, furniture and joinery (carpentry) products, haberdashery, jewelry, travelling and metal products;
- the technical servicing and repair of motor vehicles, cycling transport and two-wheeled motor vehicles, radio and television and other audio and video facilities, electrical appliances and other household appliances, clocks, jewelry, musical instruments and other personal appliance, household consumption and metal products;
- the personal belongings and household goods rental;
- the photographic work and retouching of photographic tape services;
- the laundry services, linen and other textiles dry cleaning, cleaning and dyeing of textile, knitwear and fur products;
- the made-to-order skin curing;
- the hairdresser;
- the funeral services;
- the agriculture and forestry services;
- the household worker;
- the room cleaning services.
The performer of entrepreneurial activities that meets the requirements of the uniform tax payer may independently make the decision on choosing or moving to a certain type of the simplified taxation system.
For this purpose in accordance with the provisions of the Item 298.1.1 of the Article 298 of the Tax Code of Ukraine the performer of entrepreneurial activities shall file an application to the relevant authority of the state fiscal services.
The form of the mentioned application is approved by the Order of the Ministry of Finance of Ukraine dated December 20, 2011 No 1675.
The tax declarations form for the uniform tax payers is approved by the Order of the Ministry of Finance of Ukraine dated June 19, 2015 No 578.
The provisions of the Article 292 of the Tax Code of Ukraine establish the method for determining the uniform tax payers’ income, which in further shall be used to determine a tax amount.
It is important for you to know the following particularities of the abovementioned method.
The entities income (the uniform tax payer) is considered to be the whole income, which was received during the reporting period.
The whole income of the individual entrepreneur (who is the uniform tax payer), which was received during the reporting period except for certain cases, is also considered to be his income.
Such passive incomes as percentage, dividends, royalties, insurance payments and compensations, as well as incomes received from the sale of movable and real property, that belongs on the property right to an individual and is used in the individual entrepreneurs’ economic activities are not the part of the individual entrepreneurs’ income.
It is necessary to notice that the individual entrepreneurs’ income is not the part of the individual’s income.
The free received goods (works and services), such as gifts, released debt or similar, as well as overdue liabilities (for the uniform tax payer of the third group) are the components of the uniform tax payer’s income.
The commission (agency) fee is also the part of the uniform tax payer’s income.
Whereas the uniform tax payer’s income does not include the following:
- the value-added tax,
- the intercompany payment,
- the refundable financial aid,
- the contributions to the charter capital,
- the incorrectly paid money or money for the returned product,
- the dividends.
With due consideration of the above given information it will be easier for you to choose the proper taxation system.
Managing Partner of the Law Firm "FOX" Vladimir Marinich