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On 3 June 2021, the Ukrainian parliament adopted a draft law introducing a 20 percent value-added tax (VAT) on digital services supplied by foreign entities to Ukrainian customers (‘Draft Law’).

Scope of the Draft Law

Under the Draft Law, if a non-resident of Ukraine supplies digital services via the Internet to Ukrainian individuals or to private entrepreneurs who are not registered as VAT payers (B2C transactions), such supplies are subject to 20 percent VAT in Ukraine.

According to the Draft Law, digital services are services provided via the Internet, including by means of installation of applications on smartphones, tablets, TVs, etc.

Among these, the following fall within the confirmed list of digital services:

  •  supply of electronic copies or granting access to images, text, and information; including subscriptions to electronic newspapers, magazines, books; providing access to and/or downloading images, videos, etc.;
  • granting access to databases, including search engines and directory services;
  • supply of electronic copies and/or granting access to audio or video, games, as well as supply of certain services granting access to TV programmes (i.e. channels);
  • granting access to information, commercial entertainment, and other similar digital resources, particularly (but not limited to) resources hosted on platforms for sharing access to information or video materials;
  • supply of cloud services;
  • supply of software and related updates, including supply of electronic copies, and granting access to software, as well as supply of remote support services;
  • supply of advertising services on the Internet, mobile applications, and other electronic resources, and supply of advertising space, etc.

At the same time, the Draft Law provides a list of services that are not subject to the new VAT rules. The following services should be exempt from the new requirements:

  • ordering (booking) services via the Internet (provided that the actual supply of services takes place without the use of the Internet; for example, car rental services, etc.);
  • supply of works of science, literature, and art on physical objects;
  • supply of distance-learning services over the Internet, if the Internet is used exclusively as a means of communication;
  • supply of consulting services by e-mail, supply of Internet access services (for example, services supplied by Internet service providers).

Taxpayers

Non-residents of Ukraine supplying digital services are deemed to be VAT payers provided that they do not have a permanent establishment in Ukraine.

In certain cases, intermediaries providing digital services or services related to payment processing will not require the service provider to obtain VAT registration.

The obligation to register for VAT in Ukraine arises if the annual VATable revenue equals or exceeds UAH1 million. The Draft Law also provides an option for voluntary VAT registration.

Place of Supply

The new rules relate only to suppliers of digital services to Ukrainian individuals or private entrepreneurs who are not registered in Ukraine as VAT payers (B2C transactions).

The place of supply of digital services will be determined using information about the location of a digital services recipient. This information includes the location of the Internet provider, and the country code of the recipient’s SIM card or IP address. Additionally, information like payment address, the location of a bank account through which digital services are paid for, and other business information could all be considered as additional evidence for determining the location of a digital services recipient.

If services are supplied to private entrepreneurs, the location of the recipient of these services is determined by the place of the private entrepreneurs’ registration.

Tax Compliance Obligations

The Draft Law provides for a special reporting procedure for non-residents supplying digital services. The reporting period for such non-residents will be one calendar quarter.

Non-residents will not be required to issue VAT invoices. However, they will be required to prepare and file a simplified VAT return. This simplified VAT return (prepared in either Ukrainian or English) would be submitted via an electronic portal that is yet to be developed by the tax authorities specifically for these purposes.

Tax Control

The Draft Law provides for the right of the Ukrainian tax authorities to request information from non-residents of Ukraine supplying digital services on the supply of such services, the cost of the services provided, and the terms of payment.

Under the Draft Law, the activities of non-residents of Ukraine supplying digital services to the country are subject to a new type of tax audit: a special off-site tax audit.

Tax Penalties

If a non-resident of Ukraine supplies digital services without registration as a VAT payer in Ukraine, the Ukrainian tax authorities could assess additional VAT liabilities based on the amount of digital services supplied and request that the supplier registers as a VAT payer in Ukraine. Unregistered non-residents could also be subject to a tax penalty in the amount of 30 minimum wages (approximately EUR6,000 as of 2021).

Entry Into Force

The new rules apply as of 1 January 2022. Regarding 2021, if the total volume of digital services provided exceeds UAH1 million then the non-resident must register as a VAT payer in Ukraine before 31 March 2022.

How can KPMG assist you?

  1. We will analyse whether the services supplied by a foreign company fall within the scope of ‘digital services’ for Ukrainian VAT purposes and comment on whether VAT registration is required.
  2. We can make an initial VAT registration and develop a step-by-step plan to ensure ongoing compliance with the new VAT rules.
  3.  We can provide VAT-compliance outsourcing services.