Can the legal entity – single tax payer of Group III apply the simplified taxation system providing financial assistance (returnable or non-returnable) to an individual, including individual-entrepreneur?

Press service of the State Tax Service of Ukraine, published 11 July 2022 at 16:30 Chapter: News

Sub-paragraph 14.1.257 Paragraph 14.1 Article 14 of the of the Tax Code of Ukraine № 2755-VI as of 02.12.2010 with changes and amendments (hereinafter – TCU) stipulates that financial assistance is a financial assistance provided on non-returnable or returnable basis.

Non-refundable financial assistance is:

amount of funds transferred to the taxpayer according to donation agreements, other similar agreements or without concluding such agreements;

amount of bad debt reimbursed to the creditor by the borrower after writing off such bad debt;

amount owed by one taxpayer to another taxpayer that has not been collected after the expiration of statute of limitations;

principal amount of loan or deposit granted to the taxpayer without setting terms for return of such principal amount with exception of loans granted under perpetual bonds and demand deposits in banking institutions, as well as the interest amount accrued on such principal amount but not paid (written off).

Returnable financial assistance is amount of funds received by the taxpayer for use under contract that does not provide for the charging of interest or provision of other types of compensation in the form of a fee for the use of such funds and is mandatory until return.

Paragraph 291.5 Article 291 of the TCU specifies types of activities under conditions of which the legal entities cannot be the single tax payers, in particular, of Group III.

Sub-clause 6 of Sub-paragraph 291.5.1 Paragraph 291.5 Article 291 of the TCU stipulates that business entities that carry out activities in financial intermediation sphere, except for activities in insurance, which are carried out by insurance agents, cannot be the single tax payers of Group III, defined by the Law of Ukraine № 85/96-VR as of 07.03.1996 "On insurance", surveyors, emergency commissioners and adjusters, defined in Section III of the TCU.

Herewith, Sub-paragraph 2 Paragraph 292.1 Article 292 of the TCU stipulates that income of legal entity – single tax payer of Group III is any income, including income of representative offices, branches, departments of such legal entity, received during the tax (reporting) period in a monetary form (cash and/or non-cash); material or non-material form, defined in Paragraph 292.3 Article 292 of the TCU.

Income of the single tax payers of Group III does not include, in particular, amounts of financial assistance provided on the returnable basis, received and returned within 12 calendar months from the date of its receipt (Sub-paragraph 3 Paragraph 292.11 Article 292 of the TCU).

Part 3 of Article 333 of the Economic Code of Ukraine № 436-IV as of 16.12.2003 with changes and amendments stipulates that financial intermediation is activity related to the receipt and redistribution of financial funds, except for cases provided for by the law. Financial intermediation is carried out by banks and other financial and credit organizations.

Given above specified, provision of financial assistance (returnable or non-returnable) to an individual, including for individual-entrepreneur is not activity in the financial mediation sphere and therefore does not contradict requirements of Sub-clause 6 of Sub-paragraph 291.5.1 Paragraph 291.5 Article 291 of the TCU regarding staying on the simplified taxation system.

At the same time, activity of legal entity – single tax payer of Group III on providing financial assistance (returnable or non-returnable) to an individual, including to individual – entrepreneur on a permanent basis can be considered as financial mediation under conditions of which the payer cannot apply the simplified taxation system.

Part 5 of Sub-paragraph 298.2.3 Paragraph 298.2 Article 298 of the TCU stipulates that single tax payers are obliged to switch to paying other taxes and levies determined by the TCU, in case of activities that do not give right to apply the simplified taxation system or non-compliance with requirements of organizational and legal forms of business – from the first day of a month following the tax (reporting) period in which such activities were carried out or a change in the organizational and legal form took place.

To income received from activities that do not give a right to apply the simplified taxation system, the single tax rate for payers of Group III (legal entities) is set at the double rates, determined in Paragraph 293.3 Article 293 of the TCU (Paragraph 293.5 Article 293 of the TCU).

More information is in the “Knowledge Base” of public information and reference resource