Israel-Ukraine Tax Treaty

Business activity in Ukraine

Ukraine’s banking and financial services sector plays a significant role in the country’s economy, with its banks offering a range of services including lending, investment, and asset management. Some of the best investment opportunities in Ukraine include agribusiness, education, medical equipment, oil and gas equipment, safety and security, and infrastructure. Specifically, Ukraine’s agriculture is a key aspect of its business activity, as it has a favorable climate and fertile soil that allows it to export large amounts of grain, sunflower oil, poultry, and dairy products.

Currently, Ukraine has a very small tourism sector. Tourism only accounts for 1.4% of Ukraine’s GDP. However, it still significantly impacts Ukraine’s national income, contributing 3.5 billion dollars to the Ukrainian GDP and supporting a $10.4 billion atoll impact in 2019. This important economic activity supported 1.2 million jobs in Ukraine. Ukraine’s GDP is currently 200 billion USD with a 3.4% annual change.

Bilateral agreements between Ukraine and Israel

Several agreements were signed between Israel and Ukraine:

1. Agreement on Social Security
2. Agreement on the Avoidance of Double Taxation
3. Agreement on the Protection and Encouragement of Investments

Agreement on Social Security

Israel and Ukraine have signed an Agreement on Social Security. This agreement was signed in 2012. It strengthened the social protection of citizens in both Israel and Ukraine and expanded cooperation between the two countries.

Agreement on the Avoidance of Double Taxation

Israel has also signed an Agreement on the Avoidance of Double Taxation with Ukraine in 2003. This agreement was implemented in 2007.

Agreement on the Protection and Encouragement of Investments

Israel and Ukraine implemented an Agreement on the Protection and Encouragement of Investments, which was signed in 1994. It created more favorable conditions for investments by investors from both Israel and Ukraine. The investments made by investors are treated equally under the provisions of the agreement.

Reciprocal Promotion and Protection of Investments

Ukraine and Israel have signed Reciprocal Promotion and Protection of Investments. This treaty was adopted in 2010 and went into force in 2012. The purpose of this agreement was to create favorable conditions for greater investments from both countries while stimulating economic cooperation to mutually benefit both countries.

To read the agreement in English click here.

Applicability of the MLI

Ukraine and Israel have signed an MLI, meaning there is an automatic transfer of information between the two countries. Ukraine signed the MLI in 2018 and Israel signed the MLI in 2017. Ukraine and Israel ratified it in 2019.

With this agreement, the two countries created favorable conditions for the implementation of trade and economic cooperation.

This is important, as the MLI prevails over the treaty to prevent double taxation between Israel and Ukraine. Thus, if either of the countries wants to set a different policy, they must enact it in a treaty between them and make stipulations from the corresponding clauses in the MLI.

Residency for tax purposes in Ukraine

Residence of an individual

In Ukraine, an individual is considered a tax resident if they meet either one of the following criteria:

1. If an individual’s interests in Ukraine are unknown or they do not have a home in another country, they will be considered a resident if they stay in Ukraine for at least 138 days in a year.
2. If an individual has a registered permanent residence in Ukraine, they are considered a tax resident regardless of the number of days spent in the country.

Once an individual qualifies as a tax resident in Ukraine, they are subject to taxation on their worldwide income, including income earned both within Ukraine and abroad. Tax residents are required to file an annual tax return in Ukraine and pay taxes on their income according to the Ukrainian tax laws.

To read about how an individual is considered a resident of Israel, click here.

Residency of a company

A company is considered a tax resident of Ukraine if it is incorporated under Ukrainian law. Thus, if the company is registered in Ukraine, it is subject to taxation on its worldwide income in Ukraine.

If a company is not incorporated in Ukraine but has its “place of effective management” within Ukraine, it may be deemed a tax resident of Ukraine. This refers to the location where key management and commercial decisions are made. If the company’s operational decisions are mostly made in Ukraine, it may be considered a tax resident.

To learn about how a company is considered a resident of Israel read here.

The tax system in Ukraine

The Ukrainian Tax Authority is called “The State Tax Service of Ukraine”.

Income taxation: 18%

Taxation of companies and branches: 18%

VAT: 20%

Capital gains tax: 18%

Withholding Tax

Inheritance tax and estate tax in Ukraine

In Ukraine, there is no inheritance tax. However, there is a real estate tax on all residential and non-residential property owned by individuals.

Relocation

Today, there are many Jewish communities and organizations active in various cities and regions across Ukraine, including Kyiv, Odessa, Dnipro, Lviv, and Kharkiv. Israeli communities are also present in various regions throughout Ukraine, most notably Lviv, Odessa, and Kyiv. Israelis usually reside in Ukraine for business reasons, diplomatic missions, education, or personal preferences.

Ukraine promotes immigration into the country by providing various tax incentives. Specifically, in 2021, Ukraine’s “Tax Incentives Law” went into force. It was an important part of Ukraine’s investment promotion agenda and will be in effect until 2035 for businesses that implement qualified projects. The law provided VAT and customs duties exemptions for the importation of equipment and spare parts intended for use within the project. Furthermore, profits earned under the investment project may be exempted from cooperate income tax for five years. Finally, the law created an incentivized land tax rate or in some cases an exemption from land tax. Local governments were given the discretion to grant incentives or exemptions from land tax if the land is used in the project.

Real estate taxation in Ukraine

In Ukraine, real estate is subject to various taxes and fees. There is a real estate tax on all residential and non-residential property owned by individuals. This tax went into effect in 2015. The tax rate is set by local governments but usually does not exceed 1.5% of the minimum salary. If a taxpayer has one or more properties with the area of one asset being more than 300 square meters for an apartment of 500 square meters for a house, the tax will be increased by UAH 25,000 per year for each asset.

Property owners in Ukraine are required to pay an annual property tax, and the tax rate is determined by local authorities and may change based on factors such as the type of property, location, and its assessed value. The rates can vary from 0.1% to 2% of the property’s assessed value.

There is also a Real Estate Transfer Tax in Ukraine. When real estate is transferred, a one-time transfer tax is levied, generally at a rate of 1% of the property’s assessed value. It is important to note that local authorities may have the ability to set different rates within a certain range.

Transfer of funds from Israel to Ukraine

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact Us.

For more information on money transfers abroad, click here.

Types of business entities in Ukraine

1. Limited Liability Company (LLC)- In Ukraine, the LLC is the most popular form of business entity. Both individuals and companies can register an LLC in Ukraine. It is unique in Ukraine because the share capital is divided into parts and not in the number of shares, and each member owns a part of the company as prescribed in the LLC charter.
2. Joint Stock Company (JSC)- This is a company whose capital can be divided into shares. Compared to LLC’s, these companies have more complicated legal requirements and are accountable to more regulations. JSCs can either be public or private.
3. Representative Office and Branch- An RO does not engage in commercial activities and its main purpose is to conduct market research. This type of entity is common when the foreign company is not yet ready to commence business activities but wants to investigate the Ukranian market environment.
4. Joint Venture (JV)-In Ukraine, this structure is not a legal entity but joint activity of two parties with the purpose of getting profits. A foreign investor is granted the right to enter into a joint venture with a Ukranian partner under a JV, and it can be with or without assigning property by its parties.
5. Sole Proprietorship- Popular in Ukraine, this is a business operated by a single individual. It is popular because it is the most flexible form of business entity. It is important to note that the owner has unlimited personal liability for the company’s obligations and debts.

Incentive laws in Ukraine

There are numerous incentives for relocating to Ukraine. The country is attractive for investment, especially in the agribusiness, infrastructure, and safety sectors. Currently, there is a CIT exemption for the income received by investors with noteworthy benefits, which will last until 2035. The taxpayer may use this regime within five consecutive years after having received the status of investors with significant investments. The overall amount of possible tax benefits is directly correlated with the investment made.

Furthermore, in 2022, Ukraine introduces a tax a customs incentive, which ensured support for taxpayers during the martial law period. Specifically, one of the most important incentives relates to growing a simplified gross-based taxation, which is otherwise available to small and medium businesses, including private entrepreneurs. Now, almost any business willing to opt for such special single tax regimes are included. There is also a number of customs-related reliefs.

Ukraine’s Double Tax Treaties