February 14, 2022
Ukraine implements new VAT rules for nonresidents supplying electronic services to Ukrainian customers
In January 2022, the Law of Ukraine No. 1525-IX of 3 June 2021 "On Amendments to the Tax Code of Ukraine on the abolishment of the taxation of income received by non-residents in the form of payment for production and / or distribution of advertising and improving value-added taxation on the provision of electronic services to individuals by non-residents" (Law No. 1525), took effect.
The Law No. 1525 has introduced new value added tax (VAT) treatment for supplies of electronic services by nonresidents to Ukrainian private individuals. As of 2022, such nonresidents may need to register for VAT in Ukraine, charge 20% VAT on their services, submit simplified VAT tax returns and pay tax in Ukraine.
Starting from January 2022, Ukrainian tax authorities started accepting VAT registration applications filed by nonresidents through the special web-portal.
Further to our Newsletter of 9 June 2021, this Alert summarizes the main VAT rules for electronic services, covering the recently adopted regulations and clarifications from the tax authorities.
Concept of "electronic services"
Under Law No. 1525-IX, electronic services are defined as the services provided via the Internet in an automated way, using IT and predominantly without human intervention, including by means of installation of applications on smartphones, tablets, TVs or other digital devices.
Such services include, but are not limited to:
- Supply of electronic copies, access to images, texts and information, including subscription to electronic newspapers, magazines, books, access to and/or downloading photos, graphics, videos
- Provision of access to databases, including the use of search systems and catalogue services on the Internet
- Supply of electronic copies, as well as granting access to audiovisual works, video- and audio recordings, games, television (excluding where such access is granted by means of TV broadcasting)
- Granting access to informational, commercial, entertainment, electronic and other similar resources, including those hosted on information-sharing or video-sharing platforms
- Supply of distance learning services via Internet, which do not require human participation, including access to virtual classrooms, educational resources assuming online performance of tasks and automated assigning of grades (with or without minimal human participation)
- Supply of cloud technology services by way of providing computing resources, storage resources or electronic communications systems using cloud computing technologies
- Supply of software and updates thereto, including electronic copies, access to them, as well as remote maintenance of software and electronic equipment
- Supply of advertising services on the Internet, mobile applications and other electronic resources, provision of advertising space, including banner advertising messages on websites, web pages or web portals
As noted, the above list of electronic services is not exhaustive and may be subject to broad interpretation.
The Law provides a list of transactions which do not qualify as "electronic services." Such services include:
- Supply of goods/services which are ordered via the Internet, and which are actually supplied offline (e.g., accommodation services, car rental, catering services, passenger transport services and other similar services)
- Supply of goods or services (i.e., other than electronic services) containing digital services, where the cost of digital services is included in the total value of the supply
- Supply of online distance learning services, where Internet is used solely as a means of communication between teacher and student
- Supply of scientific research, literature and art on tangible media carriers
- Supply of consulting services via e-mail
- Supply of services related to access to internet
In addition, where electronic services represent the supply of software and updates thereto – such services are temporarily exempt from VAT (until 1 January 2023).
As such, proper classification of services is crucial to correctly determine their VAT treatment. This may require additional analysis of technical aspects of the supply and services' nature, or clarifications from the authorities.
Party liable for VAT upon supply of electronic services
A nonresident without a permanent establishment (PE) in Ukraine, who supplies electronic services to Ukrainian private individuals, is considered as a VAT payer.
A nonresident does not qualify as a VAT payer where it:
- Provides electronic services under intermediary agreements, where invoices (receipts) issued to customers specify the list of such electronic services and their actual provider
- Carries out solely the processing of payments for electronic services and does not participate in provision of such services
- Supplies electronic services directly through its PE in Ukraine
Registration as a VAT payer
A nonresident must file a registration application, where total aggregate amount of its taxable supplies for the preceding calendar year exceeded the threshold of UAH1 million.
- A nonresident who has exceeded the threshold in 2021, must submit a VAT registration application by 31 March 2022 inclusively.
A nonresident who supplies electronic services and did not reach the threshold may register for VAT voluntarily.
- In this case, a registration application must be filed no later than 10 calendar days before the beginning of the reporting quarter (from which such nonresident wishes to get registered).
Submission of the application for registration as the VAT payer
A special portal solution for nonresident users who supply electronic services went live on 1 January 2022 enabling them to submit an application of registration as the VAT payers.
To register as the VAT payer, a nonresident person who provides electronic services to individuals whose place of supply is located in the customs territory of Ukraine, must submit an Application for registration of a non-resident as the VAT payer under the form N 1-POH.
The application must be supplemented with copies of:
- An extract from the relevant business register (trade, bank or other register, which confirms incorporation of the entity) issued in the country of registration of such nonresident
- A document confirming assignment of identification (registration, accounting) number (code) of non-resident in the country of registration, if the extract from the relevant business register does not contain information about such number (code)
The procedure for registration as a VAT payer, as well as the application form for registration are approved by the order of the Ministry of Finance of Ukraine No. 637 of 7 December 2021.
Reporting period, tax reporting, tax payment
- Calendar quarter is a basic reporting (tax) period for a nonresident VAT payer.
- The tax point date for supplies of electronic services by a nonresident VAT payer is the last day of the reporting (tax) period (quarter) in which the payment for electronic services was made.
- VAT-registered foreign suppliers of electronic services must submit a simplified VAT return to the tax authorities on the quarterly basis (template is approved by the order of the Ministry of Finance as of 21.10.2021 555).
- Such simplified VAT return has to be filed within 40 calendar days after the end of the relevant quarter (regardless of whether there have been any VAT-able transactions in the reporting period)
Where a nonresident has failed to timely register for VAT, such nonresident will be penalized by a fine of 30 minimal wages as of the beginning of the relevant year (for 2022, this amount equals to UAH195,000).
Clarifications from the tax authorities
The State Tax Service of Ukraine has answered a number of questions regarding the provisions of the Law 1525-IX in its information letters No. 26 and No. 27.
Among others, the tax authorities have expressed the following views:
- To define the correct VAT treatment of the electronic services, a nonresident supplier has to identify the status and location of the customer (e.g., in the special questionnaire).
- In the case of error in identification of the client, the nonresident may be held liable only where guilt is present.
- Foreign suppliers of electronic services, who have registered for VAT in Ukraine, are not able to complete VAT invoices and credit input VAT.
- Where a nonresident has failed to timely register for VAT, there is no retroactive tax assessment.
- After the registration application is filed, the tax authorities will notify the date of the VAT registration of a nonresident entity.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLC, Kiev