Opening an account for a Ukrainian individual entrepreneur abroad

This topic includes:

• Can a sole proprietorship conduct business abroad?
• FOP on the unified taxation system and a bank account abroad
• How does the tax office consider the income received on the foreign bank account of the Ukrainian FOP?

Can a sole proprietorship conduct business abroad?

The first issue that needs to be dealt with is the possibility of a Ukrainian FOP to conduct business activities abroad. The legislation of Ukraine (namely, the Law on Foreign Economic Activity) provides such an option for entrepreneurs.

Our legislation also enshrines a provision according to which the FOP can open a bank account in a foreign financial institution in order to comply with its obligations under foreign economic agreements and make payments in foreign currency.

And it is the NBU that is the regulator that establishes the settlement mechanism for currency transactions.

That is, it is really possible to open an account abroad in a bank, this is allowed by domestic legislation.

However, there is a certain nuance: the FOP on any taxation system must spend funds for such operational activities and credit them to a resident account in a national bank.

FOP on the unified taxation system and a bank account abroad

There is an opinion that the FOP (especially those on the single tax) can easily open a foreign bank account abroad, pay the single tax from these funds and reflect these amounts in the declaration of the payer of the single tax.

In situations where the single tax and the tax on the income of citizens would be the same, it would really work without additional questions and problems. But, taking into account our legislation, we do not recommend doing so: there is a risk of reclassification of income into completely different taxes.

Since the FOP claims to pay a lower tax (5%), and the funds of the FOP are not credited to the account in the Ukrainian bank, which is the account of the entrepreneur and registered with the tax inspectorate, opening an account abroad, even if it is opened for the entrepreneur, creates the risk of paying other taxes and fees in Ukraine.

In this case, there is not even an indication that the person received this income as an entrepreneur, because the procedure for registering such accounts abroad did not allow reporting to the Ukrainian tax inspectorate until now

Let’s generate the following situation: the FOP received funds from a non-resident to a foreign bank account and at the same time they were credited to the entrepreneur’s account opened in Ukraine.

In this case, these received funds will be subject to taxation according to the general rules applicable to FOPs, but they will not be included in the profit of the FOP.

If we simplify this idea even more, this is foreign income, which is taxed at the general personal income tax rate of 18%, and the military levy at 1.5%. This issue is regulated by the Tax Code of Ukraine.

How does the tax office consider the income received on the foreign bank account of the Ukrainian FOP?

The FOP submits a declaration, where it indicates an income of UAH 7 million, but only UAH 2 million has passed through the FOP’s account, for example. That is, the person shows 5 million hryvnias that did not go through the FOP account.

In this case, these 5 million hryvnias, which will be confirmed by a statement from a foreign bank (or banks), will be reclassified to the general taxation system, because the account was not related to the Ukrainian FOP.

The tax office can, as one of the options, perceive this part of the income as cash, which the person did not record using the cash register. In the worst case, sanctions may even be applied in accordance with the legislation on cash discipline.

Because in practice, tax authorities treat such incomes extremely negatively.

If you have any questions about the advisability of opening a bank account for a Ukrainian FOP in a foreign bank or about the issue of income taxation in the case of opening a foreign account, contact the specialists of the Prykhodko and Partners law firm.