Supply of defense-related products on the customs territory of Ukraine are subject to the VAT exemption according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Tax Code of Ukraine (hereinafter – Code), provided that:
- such defense products belong to category of defense products defined by Paragraph 29 Part 1 Article 1 of the Law of Ukraine № 808-IX as of 17.07.2020 "On defense procurement" (with changes and additions) (hereinafter – Law № 808), and are classified by groups, commodity items and subcategories of the Ukrainian classification of the foreign economic activity products listed in clauses "a" - "n" of Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code (taking into account restrictions specified in such clauses);
- supply of defense products is carried out within framework of the state contract (agreement);
- supplier of defense products is the executor or co-executor of the state contract (agreement) within meaning of provisions of the Law № 808;
- buyer is a public customer within meaning of provisions of the Law № 808.
In case of non-compliance with the above specified conditions, such transactions are subject to the VAT in generally established manner.
Therefore, transactions of the executor of the state contract (agreement) to supply to the state customer in the customs territory of Ukraine defense products, which are defined and classified by groups, commodity items and subcategories of the Ukrainian classification of the foreign economic activity products, listed in clauses "a" - "n" of Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code (taking into account restrictions specified in such clauses), and/or transactions of the co-executor of the state contract (agreement) to supply to the executor of the state contract (agreement) in the customs territory of Ukraine such defense products, carried out within execution framework of the state contract (agreement), are subject to the VAT exemption.
At the same time, if products/services and non-current assets purchased by the executor of the state contract (agreement) / co-executor of the state contract (agreement) in the customs territory of Ukraine with the VAT were intended exclusively for use or began to be used in transactions subject to the VAT exemption according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code, then for such products/services and non-current assets purchased with the VAT, obligation to accrue the VAT tax liabilities does not arise under rules established by Paragraph 198.5 Article 198 and Article 199 Section V of the Code.
Reminder!
| Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code determines that temporarily, for a period of conducting anti-terrorist operation and/or implementing measures to ensure national security and defense, repel and deter armed aggression of the russian federation, and/or introduce martial law according to legislation, the VAT exemption applies to import to the customs territory of Ukraine and supply within the customs territory of Ukraine of defense-related products, defined as follows according to Paragraph 29 Part 1 Article 1 of the Law № 808, classified by groups, commodity positions and subcategories of the Ukrainian classification of the foreign economic activity products:
| а) 3601 00 00 00 (only for gunpowder used for defensive purposes), 3602 00 00 00 (only for explosives used for defensive purposes), 3603 (only for percussion caps, detonators, grenade fuses and propelling charges used for defensive purposes), 3604 90 00 00 (only for illuminating and signalling flares used for defensive purposes); b) 8525 60 00 00; c) 8529 90 20 00 (only for parts and accessories for equipment for transmitting and receiving voice, images and other information, including equipment for communication in a wired or wireless network, directional listening equipment, radio stations of the ultrashort-wave and short-wave ranges for military purposes, reconnaissance and signal equipment, classified under code 8525 60 00 00 according to the Ukrainian classification of the foreign economic activity products, if supply (purchase) of such products is carried out for the state customers under a defense order); d) 8524 (exclusively for subcategories 8524 11 00 90, 8524 12 00 90, 8524 19 00 90, 8524 91 00 90, 8524 92 00 90, 8524 99 00 90) (only for parts and accessories for equipment for the transmission and reception of voice, images and other information, including equipment for communication in a wired or wireless network, directional listening equipment, radio stations of the ultrashort-wave and short-wave ranges for military purposes, reconnaissance and signal equipment, classified under code 8525 60 00 00 according to the Ukrainian classification of the foreign economic activity products, if supply (purchase) of such products is carried out for the state customers under a defense order); e) 8543 20 00 00 (only for electronic intelligence and electronic warfare equipment used for the defensive purposes); f) 8702 – 8705 (only for special purpose vehicles, radar stations and trailers therefor, classified under heading 8716 according to the Ukrainian classification of the foreign economic activity products, mobile repair workshops used for defense purposes; passenger and freight vehicles of ordinary type used for defense purposes and having light armor or equipped with removable armor); g) 8710 00 00 00; h) 8806; i) 8807 (only for the unmanned aerial vehicle part); j) 8804 00 00 00 (only for parachutes and other devices intended for landing of military personnel and/or military equipment); k) 8906 (only for warships, boats and their components, unmanned maritime systems used for the defense purposes); і) group 90 (only for binoculars, night vision devices, thermal imagers, protective goggles and similar optical products, telescopic sights and other optical devices for military weapons, if not supplied with military weapons for which they are intended, other optical, navigational and topographical instruments and instruments used for the defence purposes); j) group 93, except those included in heading 9303 and subheading 9304 00 00 00, as well as 9305 (only intended for products of headings 9303 - 9304), 9306 90 90 00 and 9307 00 00 00; k) thermal imaging binoculars, monoculars and binoculars, night vision devices (binoculars and monoculars), classified in commodity subcategories 8525 89 00 10, 8525 89 00 90 according to the Ukrainian classification of the foreign economic activity products; l) rangefinders classified under commodity code 9015 10 00 00 according to the Ukrainian classification of the foreign economic activity products; m) portable radio-electronic means of detecting and countering unmanned aerial vehicles (anti-drone guns), classified under commodity heading 8543 according to the Ukrainian classification of the foreign economic activity products; n) 8526 10 00 90; o) tactical headphones for special military purposes, classified in commodity subcategory 8518 30 00 90 according to Ukrainian classification of the foreign economic activity products.
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In case of transactions exempted from the VAT according to Sub-paragraphs 4 and 5 of Paragraph 32 Sub-section 2 Section XX of the Code (in terms of product supply under the state contracts (agreements) for the defense procurement), provisions of Paragraph 198.5 Article 198 and Article 199 Section V of the Code do not apply to such transactions (the last clause of Paragraph 32 Sub-section 2 Section XX of the Code.
| FOR REFERENCE: TERMS AND CONCEPTS DEFINED BY LAW № 808: Executor of the state contract (agreement) for the defense procurement (hereinafter – executor of the state contract (agreement)) is a business entity regardless of its organizational and legal form and ownership form or a foreign business entity (other foreign legal entity) or association of legal entities with which the state contract (agreement) has been concluded based on the procurements results specified in the Law № 808 (Paragraph 2 Part 1 Article 1 of the Law № 808). State customers in the defense sector (hereinafter – state customers) are central executive bodies, other state bodies, military formations established according to the Laws of Ukraine, determined by the Cabinet of Ministers of Ukraine (Paragraph 10 Part 1 Article 1 of the Law № 808). State contract (agreement) (hereinafter – state contract (agreement) is a contract concluded in writing form by the state customer on behalf of the state with a contractor according to the approved procurement plans for products, works and services for the defense purposes (Paragraph 17 Part 1 Article 1 of the Law № 808). Co-contractors/sub-contractors are business entities, regardless of their ownership form, foreign business entities that are involved as executors of the state contracts (agreements) on the basis of contracts, including foreign economic contract (agreement), to perform the state contracts (agreements) concluded with the state customer (Paragraph 28 Part 1 Article 1 of the Law № 808). Defense products – weapons, military and special equipment, weapons and ammunition, special components for their manufacture and operation, materials and equipment specially designed for their development, manufacture or use, special technical means, technical means of intelligence, technical and cryptographic protection of information means, special communication means, military and dual-purpose space equipment, personal protective equipment (body armor of all protection classes, impact-resistant, bulletproof helmets, impact-resistant protection kits, etc.), special means (handcuffs, batons, means equipped with tear gas, light-noise agents, etc.), special (specialized) vehicles; computer, optical, measuring and other equipment; special uniforms necessary for the performance of tasks by the law enforcement agencies, structural units of executive bodies that implement state policy in areas of ensuring protection of human rights and freedoms, interests of society and the state, combating crime, maintaining public security and order, military formations with the law enforcement functions, dual-use products for guaranteed provision of security and defense needs, development of the state's defense capability and system of national stability, as well as any other products purchased by the state customers determined according to Paragraph 10 Part 1 Article 1 Section I of the Law № 808, for guaranteed provision of security and defense needs (Paragraph 29 Part 1 Article 1 of the Law № 808). |
QUESTIONS-ANSWERS
1. Regarding the possibility of applying the VAT exemption regime established by Sub-paragraphs "e" and "g" of Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code to the product supply in the customs territory of Ukraine
If products belong to category of defense products, defined as such according to Paragraph 29 Part 1 Article 1 of the Law № 808 and are classified under commodity headings 8806 and 8807 (only for the part for unmanned aerial vehicles) according to the Ukrainian classification of the foreign economic activity products, then transactions of the co-executor of the state contract (contract) to supply the executor of the state contract (contract) with such defense products in the customs territory of Ukraine and/or transactions of the executor of the state contract (contract) to supply the state customer with such defense products in the customs territory of Ukraine, carried out within framework of execution of the state contract (contract), will be subject to the VAT exemption according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code.
2. Regarding determination of a taxpayer as a performer of the state contract (agreement) / co-performer of the state contract (agreement) / state customer, as well as whether transactions are carried out within framework of execution of the state contract (agreement) and what documents confirm this fact
As for this question, the State Tax Service recommends contacting the Ministry of Strategic Industries of Ukraine as the main body in planning defense procurement and the Ministry of Defense of Ukraine as the main body in implementing defense procurement.
3. Regarding definition of code according to the Ukrainian classification of the foreign economic activity products, by which it is necessary to classify defense-related products
As for this question, the State Tax Service recommends contacting:
Chamber of Commerce and Industry of Ukraine (their regional branches) or scientific and research institutions of forensic expertise – regarding defense products produced in the customs territory of Ukraine;
State Customs Service of Ukraine – regarding defense products imported to the customs territory of Ukraine.
4. Regarding documentary evidence for applying the VAT exemption regime established by Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code
Conditions under which the VAT exemption regime established by Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code is applied, and provisions of Paragraph 198.5 Article 198 and Article 199 Section V of the Code are not applied, are defined in Paragraph 32 Sub-section 2 Section XX of the Code.
At the same time, the State Tax Service informs that accuracy of accrual of the VAT tax liabilities and/or legality of applying the VAT exemption regime, defined by Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code, can be established exclusively based on the results of relevant audits provided for by the Tax Code of Ukraine.
5. Regarding accrual of the VAT tax liabilities according to rules established by Paragraph 198.5 Article 198 and Article 199 Section V of the Code, in the application of the VAT exemption regime established by Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code to supply of defense products in the customs territory of Ukraine
If transactions of the co-executor of the state contract (contract) for supply of defense products to the executor of the state contract (agreement) in the customs territory of Ukraine and/or transactions of the executor of the state contract (agreement) for supply of defense products to the state customer in the customs territory of Ukraine, carried out under the state contracts (contracts) for defense procurement, are subject to the VAT exemption according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code, then obligation to accrue the VAT tax liabilities under rules established by Paragraph 198.5 Article 198 and Article 199 Section V of the Code will not arise.
6. Regarding a right of the VAT payer to declare tax amounts included in the tax credit paid (accrued) in connection with the purchase of products / services for production of preferential products according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX "Transitional provisions" of the Code
VAT payers who, in fulfillment of the state contracts (agreements) on the defense procurement, carry out supply of defense products) that are subject to the VAT exemption according to Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code, may declare for budget reimbursement amount of negative tax value that arose as a result of non-application of Paragraph 198.5 Article 198 and Article 199 Section V of the Code according to the last clause of Paragraph 32 Sub-section 2 Section XX of the Code.
REGULATORY AND LEGAL ACTS REGULATING EXEMPTION FROM THE VAT TAXATION OF SUPPLY OF DEFENSE PRODUCTS IN THE CUSTOMS TERRITORY OF UKRAINE:
1. Tax Code of Ukraine with changes and additions.
2. Law of Ukraine № 808-IX as of 17.07.2020 “On defense procurement” with changes and additions.
Legal basis for the VAT taxation is established by Section V and Sub-section 2 Section XX of the Tax Code of Ukraine.
Conditions under which the VAT exemption regime established by Sub-paragraph 4 Paragraph 32 Sub-section 2 Section XX of the Code applies are defined in the specified Sub-paragraph of the Code and the Law № 808.