Regarding the personal income tax and military levy taxation of income in the form of international grants, which are paid in favor of individuals-entrepreneurs

Press service of the State Tax Service of Ukraine, published 15 September 2023 at 17:00 Chapter: News

Taxation of income received by individual-entrepreneur from conducting economic activities, except for persons who chose simplified taxation system, is carried out according to Article 177 of Section IV of the Tax Code of Ukraine (hereinafter – Code) or Chapter I of Section XIV of the Code, depending on the chosen taxation system.

Paragraph 177.2 Article 177 of the Code stipulates that taxation object is the net taxable income, that is, difference between the total taxable income (revenue in monetary and non-monetary form) and documented expenses related to the economic activity of such individual-entrepreneur.

Paragraph 177.6 Article 177 of the Code stipulates that in case that individual-entrepreneur receives income other than from the conduction of entrepreneurial activity, within the limits of types of such activity chosen by such individual-entrepreneur, such income is taxed according to the general rules established by the Code for individual taxpayers.

Income for individual-entrepreneur – single tax payer is income received during the tax (reporting) period in monetary form (cash and/or non-cash); material or non-material form defined in Paragraph 292.3 Article 292 of the Code. At the same time, income does not include passive income received by such individual in the form of interest, dividends, royalties, insurance payments and compensation, income in the form of budget grants, as well as income received from the sale of movable and immovable property owned by individual and is used in its economic activity (Paragraph 292.1 Article 292 of the Code).

In addition, income of individual-entrepreneur – single tax payer also does not include amounts of earmarked funds received from the Pension fund and other mandatory state social insurance funds, from budgets or state earmarked funds, including within the limits of state or local programs (Sub-paragraph 4 Paragraph 292.11 Article 292 of the Code).

Please note that terms of the grant agreement concluded between individual-entrepreneur and non-profit organization (charitable fund or public organization) do not provide for the production (manufacturing) and/or sale of products, performance of works, provision of services by such entrepreneur for benefit of the specified organization, but only provision of financial assistance in the project implementation.

As follows, since income in the form of grant is not related to the result of economic activity of individual-entrepreneur, such income, regardless of the taxation system chosen by individual-entrepreneur, is taxed according to the general rules established by the Code for individual taxpayers.

Income taxation procedure of individuals is regulated by Section IV of the Code, according to Paragraph 163.1 Article 163 of which resident’s taxation object is, in particular, the total monthly (annual) taxable income and foreign income is income (profit) received from sources outside of Ukraine.

List of income that is included in the total monthly (annual) taxable taxpayer’s income is determined by Paragraph 164.2 Article 164 of the Code.

Paragraph 167.1 Article 167 of the Code stipulates that the 18% tax rate is the tax base for income accrued (paid, provided) to the payer (except for cases specified in Paragraphs 167.2 - 167.5 Article 167 of the Code).

Also, the indicated incomes are subject to the military levy taxation (Sub-paragraph 1.2 Paragraph 16¹ Sub-section 10 Section XX "Transitional provisions" of the Code).

Military levy rate is 1.5% of the taxation object, defined by Sub-paragraph 1.2 Paragraph 16¹ Sub-section 10 Section XX "Transitional provisions" of the Code (Sub-paragraph 1.3 Paragraph 16¹ Sub-section 10 Section XX "Transitional provisions" of the Code).

Accrual, withholding and payment (transfer) of the personal income tax and military levy to the budget are carried out according to procedure established by Article 168 of the Code and Sub-paragraph 1.4 Paragraph 16¹ Sub-section 10 Section XX "Transitional provisions" of the Code.

Grant is a one-time non-returnable targeted payment of a sum of money to individuals and legal entities or a donation of equipment, premises (usually from their own funds and property) by citizens and legal entities, including foreigners, as well as international organizations, for conducting scientific research, implementing energy- and resource-saving technologies, taking environmental safety measures and eliminating consequences of environmental disasters, performing creative works, publishing works of artistic, scientific, educational, visual, medical and other literature, etc. (From practice of using terms, words and phrases in the jurisprudence).

Situation 1. Grant is provided for benefit of individuals-entrepreneurs by a charitable foundation or public organization

Sub-paragraph 164.2.20 Paragraph 164.2 Article 164 of the Code stipulates that the total monthly (annual) taxable taxpayer’s income includes other incomes, except for those specified in Article 165 of the Code.

Sub-paragraph 168.1.1 Paragraph 168.1 Article 168 of the Code stipulates that tax agent who accrues (pays, provides) taxable income for the taxpayer’s benefit, is obliged to withhold tax on the income of individuals and military levy from amount of such income at his expense using the 18% tax rate, defined in Article 167 of the Code, and military levy rate of 1.5%, established in Paragraph 1.3 of 16¹ Sub-section 10 Section XX "Transitional provisions" of the Code.

Taking into account above specified, income in the form of a grant paid by a charitable foundation or  public organization – residents of Ukraine for benefit of individuals-entrepreneurs, is included in their total monthly (annual) taxable income as other income and is taxed by legal entity as the tax agent with personal income tax and military levy on the general grounds.

Situation 2. Grant is provided for benefit of individuals-entrepreneurs by international charitable foundation

During accrual (receipt) of income received in the form of currency values or other assets (value of which is expressed in foreign currency or international units of account), such income is converted into UAH at exchange rate of the National Bank of Ukraine effective at the time of accrual (receipt) of such income (Paragraph 164.4 Article 164 of the Code).

Taxation procedure of foreign income is defined in Paragraph 170.11 Article 170 of the Code, according to Sub-paragraph 170.11.1 of which, if source of payments of any taxable income is foreign, amount of such income is included in the total annual taxable income of the taxpayer – recipient, who is required to submit annual tax declaration and is taxed at the 18% rate, determined by Paragraph 167.1 Article 167 of the Code, except for cases specified by this Sub-section.

Sub-paragraph 170.11.2 Paragraph 170.11 Article 170 of the Code stipulates that if, according to norms of the international agreements, binding consent of which has been given by the Verkhovna Rada of Ukraine, the taxpayer can reduce amount of the annual tax liability by amount of taxes paid abroad, he determines amount of such reduction on the specified grounds in the annual tax declaration.

Sub-paragraph 168.2.1 Paragraph 168.2 Article 168 of the Code stipulates that the taxpayer who receives, in particular, foreign income, is obliged to include amount of such income in the total annual taxable income and submit tax declaration based on results of the reporting tax year, as well as pay tax and military levy on such income.

At the same time, person who is not the tax agent is considered to be non-resident or individual who does not have status of subject of entrepreneurial activity or is not a person who is registered in the controlling bodies as a person conducting independent professional activity (Sub-paragraph 168.2.2 Paragraph 168.2 Article 168 of the Code).

Procedure for submitting annual property and income declaration (tax declaration) is determined by Article 179 of the Code.

Taking into account above specified, if individual-entrepreneur (resident of Ukraine) receives income from sources outside of Ukraine in the form of international grants, amount of such income is included in the total annual taxable taxpayer’s income as foreign income and is subject to the personal income tax and military levy on the general grounds.

Herewith, individual is required to submit tax declaration for results of the reporting tax year, as well as pay tax (military levy) on such income.

Reminder! Communication tax platforms operate in bodies of the State Tax Service for operational communication with business. Each application received by the platforms is processed as quickly as possible and feedback is given to the applicant. We advise taxpayers, organizations and associations representing business interests to contact communication tax platforms in case of issues that require prompt consideration.