Head of International Corporate Law and Fintech Practice
Expert in fintech, crypto, and international corporate law with over 20 years of experience. Specializes in crypto licensing (VASP/CASP), iGaming business support, and international structuring, asset protection, and OSINT analytics for risk assessment and due diligence.
Avoidance of double taxation
In today’s globalized world, the issue of double taxation is becoming particularly relevant for Ukrainian citizens, especially in the context of large-scale relocation due to military aggression.
Ukraine, being a party to 70 bilateral conventions, has created an extensive system of protecting its tax residents from excessive tax pressure in international activities.
Resident status
According to the Tax Code of Ukraine, a resident is a person who has a permanent place of residence in Ukraine or is present on its territory for ≥183 days during the year.
However, a special regime applies to individual entrepreneurs (IEO):
- Sole proprietors are automatically considered residents, if registered in Ukraine and receive income through Ukrainian accounts.
- Even when moving abroad (for example, due to military aggression by the Russian Federation), individual entrepreneurs can retain residency if they continue to pay taxes in Ukraine and declare their primary place of residence in the country.
Consequences of dual residency
The problem of dual residency arises when another state also recognizes a person as its tax resident due to a long stay on its territory.
For example, Polish law may determine a Ukrainian citizen as its resident if he stays in Poland for more than 183 days.
In such cases, double taxation conventions play a decisive role, which contain special “conflict resolution rules” to determine the priority jurisdiction.
International agreements provide for several main methods of eliminating double taxation.
- The exclusion method provides that income that is taxable in one country is completely excluded from the tax base in another. This mechanism is often applied to income from real estate or permanent establishments abroad.
- The offset or tax credit method allows you to set off tax paid in a foreign jurisdiction against tax liabilities in Ukraine.
- The third approach – the deduction method — provides that foreign tax is taken into account as an expense that reduces total taxable income.
For taxpayers who receive income through foreign bank accounts, the source of income principle is particularly relevant.
According to this principle, if services are actually provided from the territory of Ukraine, the income is subject to taxation in Ukraine regardless of the physical location of the individual or the location of their clients.
Double Taxation Convention:
Ukraine’s bilateral tax treaties are based on two key principles.
- The residency principle gives the country where a person is a tax resident the primary right to tax all of his or her income, with the exception of certain categories.
- The source principle determines that income that has a source of origin in another country may be partially taxed in that country. For example, for dividends or royalties, limited tax rates are set in the country of source (usually from 5% to 15%).
How to avoid double taxation:
The practical implementation of double taxation avoidance mechanisms involves several sequential steps.
First, the terms of a specific convention with the host country should be analyzed to determine the optimal method of avoiding double taxation.
For example, for a person who has moved to Germany but continues to receive income from Ukraine, the provisions of the Ukrainian-German convention, which provides for income taxation in Ukraine with the possibility of applying the offset method in Germany, apply.
Among the problematic aspects, it is worth noting the complexity of resolving dual residency situations, which require individual analysis of specific international agreements.
Currency control during transfers to foreign accounts remains a challenge, which may lead to additional checks.
Of particular note are changes in legislation after 2022, when a significant part of Ukrainian citizens have actually switched to taxation abroad, which creates the need to update the contractual framework and adapt existing mechanisms to new realities.
Ukrainian taxpayers, regardless of their geographical location, have the opportunity to effectively use international conventions to minimize tax risks.
The key elements of a successful strategy are timely confirmation of tax residency, selection of the optimal method of avoiding double taxation in accordance with a specific international agreement, and regular monitoring of changes in the tax legislation of Ukraine and the host country.
For a comprehensive solution to these issues, we recommend engaging the company Prikhodko & Partners.
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