Retention tax or Withholding tax (WHT) is an income tax that is paid by the employer (the source), rather than the employee (the recipient), to the government. The term withholding tax is also known as pay-as-you-earn (PAYE) or pay-as-you-go. Every country has its percentage of retention tax.
Employers are obligated to pay certain taxes before giving their workers wages that are due to them. This is because particular laws require that taxes be deducted before the money is used for other purposes. This measure is to prevent the likelihood of unpaid tax during tax season.
The WHT goes toward income tax and national insurance payments in Ukraine. This assists in preventing an accumulation of large tax bills when employers file their tax returns. As you will see in the example below, small amounts are deducted from each paycheck.
Example of withholding tax:
Let’s say Artem's gross salary is $30,000 per year / $2,500 per month. Artem would not receive $2,500 every month; he would take home around $2,125, as 15% ($375) would be withholding tax.
Can I get withholding tax back?
When it is time to complete an annual tax return, one is advised if they paid too much tax based on the individual circumstances. If they paid in excess for the year, they are given a refund. This is based on several factors, including their type of employment, total income, length of time that they worked for, and the tax code.
Ukraine's Withholding tax: Overview
Ukrainian withholding tax applies at the standard 15% rate to Ukraine-sourced income. This includes royalties, dividends, capital gains, and interest received by a non-resident company unless there is an applicable double-taxation treaty provided.
Other types of income are subject to a 20% WHT payable by the Ukrainian resident from its funds (not withheld).
Income received by a non-resident company from the sale of goods works, and services (subject to certain exceptions) does not qualify as Ukraine-sourced income that is subject to withholding tax.
The 15% WHT rate does not apply to capital gain. Instead, it applies to income on profits from the sale of securities and on the sale of real estate.
Capital gains from the alienation of shares of the rich in real estate Ukrainian companies (direct or indirect) are also subject to 15% WHT. Unless shares are traded on a qualifying stock exchange or the DTT has room for exemption. Capital gains from the alienation of shares in Ukraine's business organizations are subject to 15% WHT.
The capital gains from the disposal of interest-free (discounted) bonds and treasury bills are, however, higher. These gains are taxed at an 18% rate.
Excluding payment of interest to residents of low tax jurisdictions, qualifying Eurobond yield has a 5% WHT rate that applies. Also, there is a 6% WHT on freight services (including sea freight).
From the year 2021, various types of payments will be treated as deemed dividends subject to 15% WHT.
These payments include:
(i) The amount of understatement of the selling price of services or goods in controlled transactions below the arm's length level;
(ii) Payments that result in a decrease of a Ukrainian company’s retained earnings. These could be an exit from shareholding, share buy-back, reduced share capital, etc;
(iii) Payments for shares, services, or goods purchased in controlled transactions over the arm’s-length level.
In special cases such as deemed dividend distribution, the option of late WHT payment is permitted. This is because it may be based on a gross-up mechanism. Generally, however, the WHT due should be withheld and remitted to the tax authorities by the Ukrainian taxpayer that makes respective payment to a non-resident. This should be no later than the date of such payment.
Ukraine has tax treaties with at least 70 countries. These treaties prevail over Ukraine's domestic law. Income derived by a non-resident from Ukrainian sources may be reduced or eliminated by these tax treaties Ukraine has entered into with the particular countries.
Most of these treaties follow the OECD Model Convention. Ukrainian domestic law, however, does not have a unilateral double-taxation relief.
If it is provided for under an applicable double-taxation treaty, Ukrainian resident companies are allowed to claim foreign taxes as a credit on income received abroad against corporate profit tax due on such income in Ukraine. The amount of this credit is generally limited, however, by the amount of corporate profit tax due on the foreign income.
Application of treaty benefits
According to the Tax Code, nominee holders, agents, and other intermediaries are not entitled to favorable treaty provisions. This is because they are not the beneficial owners of income sourced in Ukraine.
Lack of substance at the level of income recipient may indicate that such recipient of Ukrainian-sourced income is a mere intermediary. As a consequence, they are not the beneficial owner of such income. A non-beneficial owner lacks:
• Sufficient decision-making powers
• Qualified employees
• Significant functions.
The non-beneficial owner is a high risk in respect to the received income.
A non-resident recipient of income sourced in Ukraine should be considered the beneficial owner of such income to be a recipient of reduced tax rates under relevant tax treaties.
Interest payable under a syndicated loan through the organizing bank may be subject to reduced WHT rates under the DTTs between Ukraine and the country of residence of each participating bank.
From May 2020, the Tax Code has allowed for a look-through approach for all taxpayers. In this instance, 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 is applied.
The Tax Code also incorporates a principal purpose test (PPT). This is to investigate the main purpose of a cross-border transaction. If it is discovered that the intention is to obtain treaty benefits, these DTT benefits may be denied.
On December 1, 2019 the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) was made effective in Ukraine. Certain provisions, including PPT, came into force as of January 1, 2020.
In addition to the PPT, Ukraine chose the following MLI amendments to apply to its treaties:
• Improvements to the mutual agreement procedure.
• Anti-abuse rule for PEs located in third jurisdictions.
• Changes to the PE definition.
• 365-day rule for capital gains.
A tax treaty is not applicable for taxes on advertising and insurance levied on a resident party. Additionally, WHT does not apply to non-Ukrainian residents for advertising services. Ukrainian resident payers, however, have a 20% remittance tax based on the value of advertising services.
Similarly, they are required to pay, from their funds, a 12% remittance tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does not meet the requirements set by the authorized state agency. In most cases though, 0% to 4% rates apply, dependent on the type of reinsured risk.
The benefit of withholding tax in Ukraine is that the process ensures that those in the business sector have enough money to pay their taxes. It also, therefore, makes it less likely to evade taxes. Additionally, withholding tax provides a steady flow of income to the Ukrainian government.
Drawbacks involve over-paying taxes that create opportunity costs for workers. Withholding tax also promotes an apathy between employment income and tax that can fuel unchecked government expenditure.