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.

Through the first half of 2024, the economy of Ukraine managed to be very resilient: during the second quarter, GDP was up 3.7%; industrial production-8.1% due to the increase of steel production by 29.8%, in the food industry by 15.9%, and mining-9.3%. The volume of construction increased with finished works by 37.1% primarily due to building reconstruction. Despite all the hardships that Ukraine is going through, business activity remains strong, with over 90% of small and medium-sized enterprises back in operation by the end of 2023. For instance, 304,048 new individual entrepreneurs registered in 2023, 35% more than in 2022.

Bilateral Agreements between Israel and Ukraine

• Double Taxation Agreement
• International Investment Agreement

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Ukraine regarding avoiding double taxation was signed on December 25, 2003, and entered force on December 31, 2006.

To read the agreement in English, click here.

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on June 15, 1994, and went into effect on February 17, 1997. The RPPI is an agreement between Israel and Ukraine that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds. 

To read the agreement in English, click here. 

Applicability of the MLI

Both Ukraine and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Ukraine on the other hand, affixed its signature to the MLI on the 23^rd of July, 2018 and its provisions became effective as of the 1^st of December, 2019.

Residency for Tax Purposes in Ukraine

Individuals

1. A resident of Ukraine is someone who lives there. An individual who also resides in a different country is regarded as a Ukrainian resident if they have a permanent abode (domicile) in Ukraine.
2. They are a resident of Ukraine if their primary socioeconomic relationship center of vital interest is in Ukraine, even if they have a permanent residence in Ukraine and in another country. This can include where their family lives.
3. However, if it is not possible to determine the location of their center of vital interest and they have no fixed address in any country, then they are resident in Ukraine if they have resided there for at least 183 days in any calendar year.
4. Even freelancers and entrepreneurs operating in Ukraine as private individuals are subject to the tax regime of residents and have to pay taxes from all he/she earned worldwide.

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

Companies

In Ukraine, the place of corporate residence of a company generally corresponds to the location of a company’s legal incorporation (registered).

To learn how a company is considered a resident of Israel, click here.

The Tax System in Ukraine

Ukraine’s tax authority is called the State Tax Service of Ukraine (STS)

Income Taxation: 18%

Taxation of Companies and Branches: 18%

VAT: 20%

Capital Gains Tax: 18%

Withholding Tax

Inheritance Tax in Ukraine

In Ukraine, there is no separate gift or inheritance tax, but income from gifts or inheritances is taxed as personal income tax (PIT) at the following rates:

1. 0%: If the gift or inheritance is from close family members (spouse, child, parent, sibling, grandparent, or grandchild).
2. 5%: If the gift or inheritance is from other Ukrainian residents (not close family members).
3. 18%: If the gift or inheritance involves a non-resident (either giving or receiving), regardless of the relationship.

Additionally, stamp duty must be paid on the transfer of certain properties (e.g., real estate or cars) located or registered in Ukraine, whether they are transferred as a gift or through inheritance. This applies to both Ukrainian and foreign individuals.

Relocation to Ukraine

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 was used in the project.

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

Real Estate Taxation in Ukraine

Real estate tax is applied to all individuals who own residential and non-residential properties in Ukraine and is based on the surface area of the property. Exceptions apply for an area of up to 60 m2 for flats, 120 m2 for houses, and mixed property types up to 180 m2 are not considered.

Local governments may offer additional exemptions, but they do not apply to properties that are more than five times larger than the exemption limits or those used to generate income. The real estate tax rate is defined by the local governments and shall not be more than 1.5% of the minimum salary per square meter as of 1 January tax year. For example, the rate for 2020 was UAH 70.85 per square meter, while for 2024 it is UAH 106.50 per square meter, and for 2025, it is UAH 120 per square meter.

Furthermore, in case a property is larger than 300 m2 for an apartment or 500 m2 for a house, an additional UAH 25,000 per year is calculated for each such property. Taxpayers shall have to pay the tax within 60 days of the issuance of a tax assessment by the government. Non-residents are entitled to rent out their property in Ukraine only by using Ukrainian tax agents.

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 a 25% withholding tax. The tax authority can allow, under certain circumstances, to reduce or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more. 

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us. 

For more information on money transfers abroad, click here. 

Types of Business Entities in Ukraine

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.

Joint Stock Company (JSC): This is a company whose capital can be divided into shares. Compared to LLCs, these companies have more complicated legal requirements and are accountable to more regulations. JSCs can either be public or private.

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 Ukrainian market environment.

Joint Venture (JV): In Ukraine, this structure is not a legal entity but a joint activity of two parties to get profits. A foreign investor is granted the right to enter into a joint venture with a Ukrainian partner under a JV, and it can be with or without assigning property by its parties.

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

Until 31 December 2030, Ukraine allows a reduced useful life for certain assets (like machines, equipment, and vehicles) to speed up depreciation. Also, from now until 1 January 2035, investors with significant investments are exempt from corporate income tax (CIT) for five consecutive years, based on the size of their investment. Industrial parks also receive tax benefits, such as no income tax for ten years, but only if the funds are used to develop the park.

Small businesses and individuals can use a simplified tax system, which has low rates and less reporting but has restrictions on certain activities. There are different groups depending on business size and activity. Group 1 is for small entrepreneurs with no cash register requirements, while Groups 2 and 3 require cash registers if revenue exceeds a certain amount (UAH 1,562,000 in 2024). Agricultural producers can also use a simplified tax system, based on their land size and income from agriculture.

Foreign tax credits are available for residents who pay taxes on income abroad, as long as there is a tax treaty between Ukraine and the other country. The foreign tax credit is limited to the amount of Ukrainian tax owed.

Ukraine Double Tax Treaties