Below you will find key information about taxation of real estate in Ukraine for individuals who owns property and for legal entities. You will see the difference in taxation between residents and non-residents.
It should be noted that defining foreigner individual as resident or non-resident from tax perspective does not relate directly to having temporary or permanent residency certificate in Ukraine. Below we provide explanation about how the tax residency should be defined and proved to notary, registering the deal and eventually reporting to tax authority about the tax amount payable by the seller.
1. Taxes from the sale
1. The seller is individual resident or non-resident
- In the case of buying, the buyer usually pays 1 % duty on obligatory state pension insurance,
- Seller or parties jointly pay 1 % of state duty from the deal price (but not less than price of the estate, proven by independent estimator).
Seller should pay the following taxes:
Residential estate, apartment:
- personal income tax 18 % (residents pay 5% instead).
- military tax 1.5 %
Special cases taxation:
- If the individual (either resident or non-resident) has owned the property for more than 3 years and for the last 1 year hasn’t sold any other real property, there is no tax.
- In case the real estate is inherited – the condition of ownership of the property for more than three years in this case does not apply, ie you can sell the property immediately. When selling such real estate, income is also not taxed.
Commercial estate, offices etc:
- personal income tax 18 % (residents pay 5% instead).
- military tax 1.5 %
The above rates applies to residents and non-residents independently on the term they own estate and the fact of sale of real estate during a year.
2. The seller/buyer is LLC, registered in Ukraine (both commercial and residential estate)
When the legal entity is the seller:
- Corporate profit tax is 18 % and will be calculated based on income and expenses.
- 1 % of state duty from the deal price
When the legal entity is the buyer:
- 1 % duty on obligatory state pension insurance
Wnen the legal entity buys property from the individual, it is the tax agent for individual income tax payment (so the tax if any withholds from the price of the estate and paid to the state budget).
3. The seller/buyer is private entrepreneur individual
The property should be bought and sold by individual (not as a private entrepreneur). Theoretically, the private entrepreneur can be party to the deal, but in practice there is no benefits from that and in case of liquidation of private entrepreneur status, the real estate should be deregistered on the individual, ex private entrepreneur.
The private entrepreneur registered on the simplified tax system, may rent out individually owned property. This is provided by law.
4. The seller/buyer is foreign legal entity
According to Art. 64.5 of Tax Code of Ukraine (TCU) foreign companies, which acquire real estate or rights to it (construction investment), should register themselves at tax authority of Ukraine.
In case of obtaining of further income, such companies will be taxed as legal entities in Ukraine through registered in Ministry of Economy Represented office or agent in Ukraine.
2. Taxes from the rent fee
A property can be rented out by a Ukrainian legal entity, the representative office of a foreign company or a private entrepreneur (who is the owner of the property as an individual).
A. Individual renting out the property
The taxes from the rent are as follows:
- personal income tax 18 %
- military tax 1.5 %
The individual should submit their tax return annually up to the1st of May of the following year (the next one) and pay tax (PIT) up to 1st of August of the following year.
In case a company rents from an individual – the company pays his taxes being his tax agent. Still, the individual is obliged to a submit tax return.
B. Private entrepreneur registered in Ukraine renting out the property
There are some limitations on real estate which are able to be rented by private entrepreneurs. The private entrepreneur can provide this activity on:
- The common system of income tax (18+1.5% of tax from profit); or
- On the 3rd group of single tax, which is 5 % of income. Income amount is limited in 2021 to UAH 7 mln per annum.
The limitations regarding size of property to be rented out by private entrepreneur starting from January 1, 2021 according to Art. 291.5.3. of TCU are as follows:
- renting of land up to 0,2 hectares;
- renting of a residential property up to 400 sq.m.
- rent of a non-residential property up to 900 sq.m.
As was mentioned above, the private entrepreneur may rent out his personally owned estate.
C. Non-resident individual is renting out the property
According to Art. 170.1.3. of TCU, real estate owned by a non-resident individual may be rented out exclusively through a private entrepreneur or a Ukrainian legal entity who perform representative functions of such non-resident on the basis of a written agreement and act as its tax agent in respect of such income.
When and if a rental is to be transferred to a non-resident owner of property abroad, a withholding tax (at rate of 15 %) additionally to personal income tax should be applied, if otherwise is not provided according to a Double Tax treaty between Ukraine and the country of residency of the non-resident of Ukraine.
D. Legal entity of Ukraine/ Representative office of foreign company in Ukraine is renting out the property
Corporate profit tax is 18 % and will be calculated based on income and expenses.
E. Foreign legal entity is renting out the property
According to Art. 64.5 of TCU as was mentioned above, foreign companies, which acquire real estate or rights to it (construction investment), should register themselves at tax authority of Ukraine.
In case of providing further activity such as renting out the office or apartment, such foreign company would pay relevant taxes (corporate profit tax and VAT in some cases) through:
- Representative office registered in Ministry of Economy in Ukraine.
- Agent representing the foreign company in Ukraine and responsible for non-resident company taxes.
3. Taxes on ownership
According to Art. 266.5.1 of the TCU, tax rates for residential and / commercial real estate owned by individuals and legal entities are set by decision of territorial communities in accordance with the law and the long-term plan for the formation of communities, depending on the location (zoning) and types of such real estate, in an amount not exceeding 1.5% of the minimum wage established by law on January 1 of the reporting (tax) year, for 1 sq.m of the tax base.
A. Residential estate, apartment:
The law provides in 2021 that real estate tax should be paid in the case where a person owns an apartment of more than 60 sq.m or a private house of more than 120 sq.m, or 180 sq.m. total in case of owning both an apartment and house. The maximum tax rate is 1.5 % of the minimal official salary (in 2021 this is UAH 6000 per month, so 1.5 % is 90 UAH, which is to be paid in 2022), per each meter above this minimum quantity of meters. In cases where apartments are more than 300 sq.m and houses are more than 500 sq.m, the rate is plus 25000 UAH per each object.
B. Commercial real estate, offices etc:
The rate of real estate tax is conditional and depends on the decision of local authorities (if there is no decision, there is no tax). The maximum rate is 1.5 % of the official minimum salary (in 2021 this is 6000 UAH, 1.5% is 90 UAH) per meter.
Residential status of individual owner of the property
Please note that mentioned above rates for residents and non-residents individuals are stipulated in the Tax Code of Ukraine, which also has a definition of who is considered to be a resident. Tax residency matters for determining tax amount, and the tax residency is not determined by citizenship or residency (temporary or even permanent) in this case.
If a foreigner becomes a tax resident of Ukraine at the date of sale, he is entitled to tax rates applicable to residents of Ukraine.
Before the deal the state register, which is in most cases public notary carrying out functions of state register, estimate the taxes payable by the seller of real estate. Eventually upon the deal the notary submits form 1ДФ to tax authorities with determination of the tax, even if this is 0 % tax.
So, how can we determine tax residency of foreigner, selling the real estate and what practically matters to define him as tax resident of Ukraine
According to Art. 14.1.122 and 14.1.213 of the Tax Code of Ukraine (TCU), the tax residency is being defined by several thresholds, the main one is the place of permanent living/residence.
Still public notaries may not rely on counting days in passport of foreigner (should be 183 days during a year or more, in Ukraine), because he is entitled to provide only residency permit for the deal, not passport, he may also have other passport etc. So, there are other ways of defining tax residency applied.
Extract from Art. 14.1.213 of TCU, defining tax resident:
“If a natural person also resides in a foreign country, he / she is considered a resident if such a person has a permanent residence in Ukraine; if a person also has a permanent residence in a foreign country, he is considered a resident if he has closer personal or economic ties (center of vital interests) in Ukraine. If the state in which the individual has a center of vital interests cannot be determined, or if the individual does not have a permanent residence in any of the states, he is considered a resident if he stays in Ukraine for at least 183 days (including the day of arrival and from during the period or periods of the tax year.
A sufficient (but not exclusive) condition for determining the location of the center of vital interests of an individual is the place of permanent residence of members of his family or his registration as a business entity.
If it is impossible to determine the resident status of a natural person using the previous provisions of this sub-clause, a natural person is considered a resident if he is a citizen of Ukraine.”
To define tax residency precisely, also the Double tax Treaty (DTT) between Ukraine and the country of citizenship or other place of permanent residency should be considered, because the definition of resident for tax purposes can slightly be different in DTT and Tax Code of Ukraine and in that case the DTT will prevail.
Based on TCU’s definition of tax resident above, permanent residency in Ukraine can be considered as granting tax residency in Ukraine. But as you may see from definition above there still can be options to choose other tax residency even when foreigner has permanent residency.
There is another important paragraf in the Article 14.1.213 of TCU:
A sufficient basis for determining a person as a resident is his / her independent determination of his main place of residence on the territory of Ukraine in accordance with the procedure established by this Code, or his registration as self-employed person (private entrepreneur status).
From the definition above it is clear that temporary residency by itself doesn’t provide the right to become a tax resident of Ukraine. There are additional measures that need to be taken to be considered a tax resident of Ukraine.
We provide more detailed consultancy on this question as our experts are tax lawyers and financial specialists.
We would be pleased to advise you more in details for your particular case.
Laudis Legal & Accountancy