Ukraine is calculating the losses from the war and is seeking help from foreign partners. However, there is another huge threat to the Ukrainian economy, to which the government should respond now. War-induced labor migration can lead to the “washing out” of taxpayers who were forced to flee to other countries during the war.
How do other states view the preservation of the tax residency of Ukrainian migrants? What steps should Ukraine take to keep their taxes in the Ukrainian economy? Igor Samokhodskyi, Head of the IT and Telecom Sector of the BRDO Office for Effective Regulation, answers these questions in the column for SPEKA media.
The Russian Federation’s war against Ukraine has been going on for three months. We are already used to looking at it in the context of infrastructure or industry losses: we calculate kilometers of roads destroyed by the occupiers, stolen tons of Ukrainian grain, billions of hryvnias that Ukrainian enterprises did not earn, and so on.
But we must not forget that the key value of modern economies is human capital. These are people who work for Ukrainian companies or at least pay taxes here. Due to the war, a large number of citizens were forced to leave Ukraine and move abroad, mostly to the EU (to Poland, Germany, the Czech Republic, Romania, Hungary, Slovakia, Bulgaria). Some of them continue to receive salaries or remuneration as private individuals on Ukrainian accounts. At the same time, Ukrainians risk becoming tax residents of EU countries.
The labor migration caused by the war is a challenge for the human capital of Ukraine, to which our state must respond. As of February 24, more than 6.6 million people have left Ukraine, of which 2.9 million have received temporary protection. Assuming that at least 10% of forced emigrants continue to work, this is a huge number of Ukrainians who actually continue to work for our economy. This applies to IT companies, as well as the entire creative sphere, any professionals who can work remotely – graphic designers, analysts, communicators, accountants.
It is important for Ukraine to keep them as part of our human capital and maintain tax revenues in the Ukrainian economy.
After all, Ukrainians who continue to declare and pay taxes in Ukraine are more likely to return home after the war, as they will feel involved in Ukraine and its victory.
Why Ukraine may lose taxpayers who went abroad
Individuals are usually considered tax residents of other countries if they have a permanent residence, center of vital interests or stay in another country for more than 183 days or six months.
In addition, if a citizen of Ukraine works for an international company that has an office in the EU country where he is currently located, he may be at risk due to additional taxation (due to the status of economic employer). This situation creates legal uncertainty and risks that may be the basis for:
- liberation of Ukrainians;
imposition of penalties on them;
- transfer of settlements abroad;
- transfer of employees to “local” contracts.
The latest innovations of the National Bank of Ukraine, which are unfavorable for IT exporters, also encourage individuals to change the Ukrainian contract to a foreign one, and therefore to the place of payment of taxes.
Regarding legal entities. Even before the war, due to warnings in the media about other countries, the relocation of many Ukrainian companies began, in particular in the field of IT, which did not need to transport large amounts of heavy equipment, warehouses, production infrastructure and more. After the beginning of the active phase of the war, this trend intensified.
Legislation in other countries often requires the registration and payment of taxes for a company if it has an office in that country or if it actually controls or manages its business or business. There are also usually requirements for the registration of an individual company or its permanent establishment as a prerequisite for doing business.
For example, these requirements may apply to an IT company that has moved to one EU country, rented an office and hired staff. In this case, the requirement for re-registration in an EU country may come from both the tax service of the country and the compliance service of the customer of the IT company.
This encourages businesses to create new legal entities / permanent establishments in the host country, to renegotiate contracts on their behalf, to transfer payments abroad.
How can foreign countries solve the issue of taxation of Ukrainians?
The practice is different. Estonia, for example, believes that Ukrainian migrants should be tax residents of their country from the first day they stay on its territory. Ireland has the opposite view and says it will not make Ukrainians working remotely from the country Irish taxpayers.
Most countries, including EU members, have not yet decided on a tax residency approach for temporarily protected Ukrainians who have moved to the country due to the war and received temporary protection status. This is our window of opportunity.
Right now, the Ukrainian state must ask foreign partners for help, but not only with recovery, but also to prevent the destruction of Ukraine’s economy. To do this, as many countries as possible should follow the example of Ireland.
I offer the following arguments for maintaining the tax residency of Ukraine by persons abroad:
- The center of vital interests of displaced persons remains in Ukraine. They plan to return home after it becomes safe in Ukraine.
- The economic basis for the income of IDPs is the economy of Ukraine, not the country of temporary residence. Displaced persons and companies usually work remotely for Ukrainian customers or export services, so the formation of value added is not due to the economy of the host country.
- In disputed cases, the place of residence for tax purposes should be the country of citizenship.
What can Ukraine do to preserve the residency of our taxpayers during the war?
It is critical for Ukraine that financial flows remain in the country, as they form the tax base (ie budget revenues), GDP, affect bank liquidity, and add foreign exchange earnings.
The time to resolve this issue is running out. People and companies have to think about what they will do next, right now.
On behalf of the top political leadership of Ukraine, it is necessary to formulate an appeal to the EU countries not to recognize as tax residents Ukrainians who are under temporary protection and receive income in Ukraine.
This message should be conveyed first of all to European countries, where most Ukrainians emigrated. You should also contact the European Commission. Although it cannot impose a certain model of taxation on EU member states, it can help Ukraine advocate for this issue.
The result we need is an explanation from foreign tax authorities that they do not consider Ukrainians who are under temporary protection and receive income in Ukraine to be their tax residents. This will be an important step in preserving Ukraine’s economy and the basis for its reconstruction.