Ukrainian VAT on digital services supplied by non-residents

17 December 2021 - Publication

Who must register as a VAT payer?

Ukrainian legislation provides that non-residents should register as VAT payers in Ukraine if all of the following conditions are met:

the non-resident does not have a permanent establishment in Ukraine,
the non-resident supplies digital services to individuals or private entrepreneurs (not VAT payers) in the customs territory of Ukraine,
the sum of all the supplies for the year 2021 exceeds the amount equivalent to UAH 1 000 000.

Digital services mean services provided via the Internet, automated, using information technology. Tax Code of Ukraine refers to digital services in particular but not exclusively, subscription to e-newspapers, magazines, books, providing access and / or uploading photos, graphics, videos; provision of access to the use of Search Engines on the Internet; provision of cloud services; software supply and its updates; provision of advertising services on the Internet, mobile applications; provision of access to information, commercial, entertainment electronic resources; provision of distance learning services on the Internet.

Though Ukrainian tax legislation exempts VAT software supply operations until January 01, 2023, unless other clarifications by the tax authority are provided, we assume that such transactions will fall under the stated exception and will not be subject to VAT till 2023.

It is worth saying that if the digital services are supplied via an agent and on his behalf, such an agent (if he is a non-resident) will be responsible for calculating and paying VAT. But be aware that if the bills for services contain information about the actual supplier, the agent will not bear responsibility for VAT.

How does it work?

If the non-resident meets the above requirements, an application for VAT payer registration must be submitted to the tax authority by March 31, 2022. Such an application shall be submitted electronically using the electronic cabinet but still, there is a requirement to additionally send a letter in writing which confirms the data provided during the electronic registration.

There is no need for non-resident VAT payer to form a tax credit and make a VAT invoice. The only reporting that must be filed is a simplified VAT return (also submitted electronically) which files within 40 days after the end of each quarter. There is a possibility of correcting the errors in the submitted VAT returns by offering a clarifying calculation and additional payment of the required tax amount. If there is an overpayment, it can be defended to tax payments for the next tax period, but there is no possibility of refunding such an amount to a non-resident’s account.

A taxpayer must determine its tax obligations and pay the respective tax in USD or EUR. The non-resident will have the payment requisites and the forms of VAT return in the electronic cabinet (still under development), which among other things will allow the non-resident to communicate with tax authorities and even appeal against additional tax assessments. Also, there is no restriction concerning the account from which the taxes must be paid, so we believe that non-residents will be free to pay taxes straight from their foreign bank accounts.

An interesting question the non-residents may face while reading the norms concerning VAT obligations is the date of occurrence of VAT liabilities. We believe that despite the obligation to register as a VAT payer by March 31, 2022, VAT liabilities of a non-resident arise from the date of his actual registration as a VAT payer. It means that if a non-resident submits an application earlier than the stated date, he will have to accrue VAT from the date of his registration but not after March 31, 2022.

Place of supply of digital services.

As was mentioned above the digital services which fall under 20% VAT must be supplied in the customs territory of Ukraine. The place of services’ supply for an individual will be determined according to the actual location of such an individual, for private entrepreneur- according to the place of registration of such entrepreneur.

The actual location of the individual – the recipient of services will be determined according to the location of the telecommunications provider, mobile country code of the SIM-card, IP address. Payment address of an individual, bank details, in particular the place of maintaining a bank account used for payment for digital services may serve as additional evidences in order to determine the location of an individual.

Which digital services are exempt from VAT?

There are some exceptions concerning 20% taxation. The following operations will not be classified as digital services for the VAT purposes:

supply of goods/services ordered per Internet but delivered without the use of the Internet (eg. food delivery services, car rental services);
supply of goods and / services, other than digital services, which include digital services, if the cost of digital services is included in the total cost of such goods / services;
provision of distance learning services on the Internet, if the Internet is used exclusively as a means of communication between a teacher and a student;
supply of copies of works in the field of science, literature and art on tangible media;
provision of consulting services by e-mail;
provision of Internet access services.

The consequences of non-registration

Suppose a non-resident who meets the requirements for VAT registration in Ukraine does not submit the related application. In that case, the tax authority will send a tax notice via the competent authority of a foreign state informing non-resident about such non-compliance.

Such a non-registration will cost a non-resident a fine amounted to UAH 195 000 (as of the year 2022).

To sum up, it should be noted that it is time for non-residents, which supply digital services to Ukrainian individuals, to analyze the type of provided services and to distinguish if they correspond to digital services for VAT purposes.

We also assume the possibility of incorrect qualifications of provided services such as those that are subject to VAT by the tax authority. This will result in an increased number of court disputes over the wrongly calculated VAT.

Considering that the non-resident VAT administration process is a new mechanism for Ukraine, it is highly recommended for non-residents to (1) firstly, correctly determine the services provided and, (2) secondly, to obtain qualified assistance in registration as a VAT payer to avoid potential disputes with the tax authorities and meet all deadlines.