How to save tax revenues from Ukrainians who fled abroad

We call for maintaining the residence of Ukraine for our citizens who are temporarily abroad, and to prevent taxation of Ukrainians in the host country. With this request, as well as proposals for the next steps of the state to solve the problem, the experts of BRDO and the Association “Information Technology of Ukraine” addressed the Prime Minister of Ukraine in an official letter.

Due to the war, a large number of citizens were forced to leave Ukraine, most moved to the EU – to Poland, Germany, the Czech Republic, Romania, Hungary, Slovakia, Bulgaria and more. As a result, both individual entrepreneurs and entire Ukrainian companies are at risk of being granted EU resident status.

Natural persons are generally considered to be their tax residents in other countries if they have a permanent residence, a center of vital interests or stay in their territory for more than 183 days or more than 6 months. However, some countries have considered Ukrainians tax residents since day one, particularly Estonia.

In addition, if a citizen of Ukraine works for an international company that has an office in the EU country where he is located, there may be risks of additional taxation for such an international company (through an economic employer or a permanent establishment). This situation creates legal uncertainty and risks that may be the basis for: the release of Ukrainians, the imposition of fines on them or the transfer of payments abroad.

Regarding legal entities. Currently, there is a mass relocation of Ukrainian companies abroad (in particular, this applies to the IT sector). Legislation in other countries often requires companies to register and pay taxes if their country has an office in the country or is actually doing business in that country. There are also usually requirements for the registration of an individual company or its permanent establishment – as a prerequisite for business.

This creates legal uncertainty, which encourages business to create new legal entities in the host country, to re-sign contracts on their behalf, to transfer payments abroad.

Why is it important to prevent the taxation of Ukrainian entrepreneurs who are currently forcibly relocated to other countries?

1️⃣ It is critical for us that financial flows remain in Ukraine, as they form the tax base (ie budget revenues), GDP, affect bank liquidity, and add foreign exchange earnings.

2️⃣ The center of vital interests of displaced persons and companies should remain in Ukraine. The vast majority of displaced persons plan to return as soon as it becomes safe in Ukraine, as they feel part of Ukrainian society.

3️⃣ Lack of income received on foreign accounts. Income financial transactions take place in the banking system of Ukraine.

4️⃣ The economic base for income is the economy of Ukraine, not the economy of the country of temporary residence. Displaced persons and companies, as a rule, work remotely for Ukrainian customers or exporting services, so the formation of value added is not due to the economy of the host country.

The Government of Ukraine should call on foreign states to exempt Ukrainians and Ukrainian companies from taxation if such income is received on Ukrainian accounts as part of international assistance to Ukraine due to Russia’s aggressive actions. This requires a more detailed study of the impact of legal institutions on the situation of displaced persons and companies in each country.

This publication was produced with the financial support of the European Union. Its contents are the sole responsibility of BRDO and do not necessarily reflect the views of the European Union.