Ukraine - Key Tax Issues for Real Estate Investors
In general, the ownership of real estate is governed by Ukraine Civil Code, Ukraine Land Code, Ukraine Commercial Code, Law of Ukraine on the State Registry of Property Rights, etc. Ownership rights to real estate are subject to state registration. The long- term (more than three years) lease of real estate, other than land, is subject to notarisation and state registration. The legal effect of land transfer (ownership, lease) occurs only after such transfer and state registration. Under Ukrainian law, no special permits or licences are generally required for a foreign investor to purchase buildings (premises) located in Ukraine. Special procedures, however, can be applied to certain categories of real estate (i.e. cultural heritage objects, integral property complexes, etc.). A foreign corporate or individual investor may acquire real estate either directly or via a local company.
Non-agricultural land ownership
The Ukrainian Government recently adopted a new land reform law effective 1 July 2021, easing the ban on the sale of certain types of agricultural land, although with certain limitations (for more information please see below). Foreign individuals and companies may acquire only non-agricultural land within the territory of settlements or outside the territory of settlements where the land is attached to real estate. Non-residents can lease the land for up to 50 years (including agricultural lands). Ukrainian companies with 100% foreign ownership may not purchase land in Ukraine. Generally, a foreign legal entity may purchase state non-agricultural land subject to a resolution of the Cabinet of Ministers of Ukraine and consent of the Ukrainian Parliament. A foreign legal entity may also purchase municipal non-agricultural land from a relevant municipal council, subject to the consent of the Cabinet of Ministers of Ukraine. To purchase state or municipal non-agricultural land, the foreign entity must set up a commercial representative office in the Ukraine. As a general rule, state and municipal non-agricultural land should be sold or leased via a public land auction. There are certain exceptions to the mandatory land auction rule: The acquisition of land plots under objects of immovable property owned by companies and individuals, as well as the acquisition of land plots for the construction and maintenance of transport and energy infrastructure (e.g. roads, airports), the construction of social housing, objects that serve the municipality (e.g. waste processing plants, heating stations, etc.), the comprehensive reconstruction of old residential districts and some other cases. These restrictions apply to foreign individuals and foreign companies.
Agricultural land ownership
According to the effective Ukrainian law, foreigners (foreign citizens, stateless persons, foreign companies, or foreign states) may not own agricultural land in Ukraine. According to the Law of Ukraine ‘On making amendments to some legislative acts of Ukraine concerning the market of agricultural land’ the land market opened on 1 July 2021. The key points of this law, inter alia, are as follows:
Ukrainian citizens can purchase land plots of no more than 100 hectares starting from 1 July 2021.
Legal entities can purchase land plots of no more than 10,000 hectares starting from 1 January 2024.
Ukrainian legal entities with foreign owners will get the right to purchase land plots in Ukraine if the relevant decision is adopted by a nationwide referendum.
Banks (including foreign banks) can purchase agricultural land plots only in case of a foreclosure on them as collateral.
Such land plots must be sold by banks in public bids within two years.
The sale of state and municipal lands is prohibited.
Payment for the acquisition of land can be made only in non-cash form.
Leasing out of real estate According to the provisions of the Ukrainian tax legislation, a foreign individual should appoint a Ukrainian legal entity or a private entrepreneur to act as its tax agent in order to be able to lease out real estate. Though, there are no similar restrictions for foreign corporate investors, but the tax authorities expressed the view that non-resident entities may lease out the real property only through their permanent establishment (PE) or an authorised property manager.
Taking real estate on lease There are no restrictions for foreigners (both individuals and companies) to take buildings (structures) on lease.
Taxation of rental income Where the foreign resident receives rental income from a Ukrainian resident or a PE of a non-resident, the lessee is obliged to withhold from the rental fee and remit to the state 15% WHT, unless the relevant double tax treaty (DTT) provides otherwise. Profits earned from renting out real estate by a resident company or a PE of a non-resident are taxable at the standard CIT rate of 18%.
Deductible expenses The Tax Code determines taxable profits as net profits before tax (NPBT) as per accounting records, either Ukrainian statutory or IFRS, and adjusted for ‘tax differences’. Some of these ‘tax differences’ make certain expenses non- deductible or partially deductible. Taxpayers whose prior year annual income equals to or less than 40m Ukrainian hryvnia (UAH), approx. USD 1.4m, may opt out of making the adjustments, i.e. all their expenses remain deductible.
Interest Generally, interest is a deductible expense under accounting rules, either Ukrainian statutory or IFRS. However, in certain cases, interest deductibility may be limited due to thin capitalisation rules (see section ‘Thin capitalisation’ below). 15% WHT on interest payable by a domestic borrower to a non-resident creditor is applied, unless the relevant DTT provides otherwise. To claim the decreased WHT rate, the recipient of interest should be proved to be a beneficial ownership of such income and the transaction should comply principal purpose test. Also, look-through approach could be applied, i.e. if the direct recipient of Ukrainian-sourced income is not the beneficial owner, the reduced rate under the DTT with the jurisdiction of the beneficial owner may be applied.
Thin capitalisation Ukrainian thin capitalisation rules apply to companies whose debts to non- residents exceed equity by 3.5 times. The deduction of interest expense on loans from non-residents is limited to 30% of the corporate income tax base (excluding tax losses carried-forward from previous periods) increased for the amount of financial expenses under accounting rules and tax depreciation. The ‘thin capitalisation’ rules do not apply to financial institutions, companies engaged exclusively in leasing activities and loans from foreign banks.
Depreciation According to the Tax Code, tax depreciation rules are aligned to financial accounting rules with some modifications. In particular, the Tax Code sets a minimum period for the useful life per class of the fixed assets for tax purposes (e.g. for the buildings – 20 years).
Loss carry forward Ukrainian tax legislation provides for tax losses to be carried forward indefinitely with no limitations.
Withholding tax on dividends The payment of dividends to non-resident shareholders is subject to a WHT at the rate of 15%, unless the relevant DTT provides otherwise.
Value-added tax (VAT) The supply of buildings or premises is subject to 20% VAT. A VAT exemption applies to second and subsequent supplies of housing. The supply of land is exempt from VAT except where the value of the land is included in the value of the real estate. The lease of privately owned buildings, premises and land is subject to 20% VAT. The lease of state-owned land & premises of state-owned enterprises is exempt from VAT, if the lease payments are paid to state or local budgets.
Capital gains on the sale of property Profits from the sale of the real estate should be recognised according to financial accounting rules, either Ukrainian statutory or IFRS, and taxed at the standard CIT rate of 18%. Capital gains of a non-resident company from the sale of real estate located in Ukraine is subject to 15% WHT. Some DTT concluded by Ukraine limit Ukraine’s taxing rights to capital gains in such transactions. The direct and indirect sale of shares of a Ukrainian entity owning the real estate is subject to 15% WHT under certain conditions and most of the DTT do not provide any exemption from WHT for such a case. The WHT is applicable if:
The shares of a foreign company, at any time in the 365 days preceding the alienation of shares, derive more than 50% of their value from shares in a Ukrainian company, which is owned directly or indirectly by such a foreign company.
The shares of an Ukrainian company, at any time in the 365 days preceding the alienation of shares, derive more than 50% of their value from immovable property, which is owned or used by an Ukrainian company under the long- term lease, financial lease, etc.
Personal income tax (PIT) The income received from the disposal of a house, a flat, a cottage (including attached land), or a plot of land within the limits set by Ukraine’s Land Code, if it is the first disposal for a year and the asset was in the individual’s possession for more than three years, is non-taxable for both Ukrainian tax residents and (arguably) tax non-residents. Income received from the second and consecutive sales of the above objects, or any sale of a different asset is taxed at 5% PIT plus 1.5% military tax for Ukrainian tax residents and at 18% PIT plus 1.5% military tax for Ukrainian tax non-residents. The above tax rates apply only to property located in Ukraine. Rental income received by an individual is subject to PIT at the standard 18% tax rate plus 1.5% military tax. The taxable income is determined, based on contractual fee, but should not be lower than the specific minimum rental fee. Deduction of expenses is not allowed. The income received by Ukrainian tax residents from sales of immovable property located abroad is subject to a standard 18% rate plus 1.5% military tax. For personal income tax purposes, income from disposal of immovable property cannot be lower than the ‘valuation price. The valuation certificate must be provided to the notary.
Real estate transfer tax (RETT) The transfer of real estate is subject to stamp duty at the rate of 1% of the contract value. For the buyer the purchase of real estate (except for land plots) is subject to a state pension fund charge at the rate of 1% of the real estate value.
Land payments The Civil Code requires the mandatory notarisation of contracts for the lease of buildings/premises for a period longer than three years. The contract for the lease of land should be notarised. The sale of shares in a Ukrainian company is not subject to stamp duty or any other transfer taxes. The land tax is paid by either owners or lessees of land plots. In case of lessees, the land payment is levied in the form of rental payments for land use and land tax. In all other cases, the rate of a land tax is up to 5% of normative monetary valuation of the land plot adjusted by an indexation rate. If there is no normative valuation of the land plot the taxpayer should apply the normative valuation of the square meter of land in the respective region. The rate of land payment for landowners is set by local councils and it may vary from 0.3% to 12%. If the lessee is selected on competitive grounds, the tax (rent) rate may exceed 12%.
Real estate tax (RET) All owners of real property in Ukraine are subject to local real estate tax (RET). The tax base is determined based on the total area of the real estate asset. Some types of property are exempt from RET. The RET rate is set by the local council, but generally cannot exceed 1.5% of the minimal salary per sqm. For 2021, the maximum is UAH 90 per sqm (approximately USD 3.3 per sqm). RET paid by legal entities is a tax-deductible expense for CIT purposes. If the taxpayer owns one or more residential property objects with a total area of an asset more than 300 sqm (for an apartment) or 500 sqm (for a house), the tax amount increases by UAH 25,000 (approximately USD 925) per year for each such asset.
Source: Key Tax Issues at Year End for Real Estate Investors 2021/2022, PwC