A comprehensive analysis of the taxation of additional payments to staff working remotely or abroad.

Labour relations in Ukraine have, to a certain extent, stabilised within their own instability and variability. Employers are seeking ways to improve working conditions and attract skilled staff, as the problem of labour shortages is becoming increasingly acute. Tax and legal considerations play a significant role in this search.

The general trend of recent years (remote working and learning during the pandemic, and similar developments during the war) calls for standardisation and a unified approach to taxation, as well as the adaptation of these developments within the legal framework.

Home-based and remote work

The specific features of home-based and remote working grant the parties a certain degree of discretion, particularly regarding business travel and the reimbursement of expenses for the use of their own means of production, materials, tools and so on.

In the case of home-based or remote work, the issue arises of compensation for the costs of electricity, water supply, internet access, the use of personal technical equipment, and so on.

A comprehensive analysis of labour legislation, as well as standard contracts for home-based and remote work, leads to the conclusion that the taxation of compensation payments differs from the taxation of wages.

In this regard, Individual Tax Ruling No. 4543/IPK/99-00-24-03-03 dated 20 September 2024 is currently in force. Expenses for electricity, internet and so on do not fall within the exemptions set out in Article 165 of the Tax Code of Ukraine (since it is Article 165 of the Tax Code of Ukraine that sets out the list of income not subject to personal income tax).

Consequently, compensation payments for home-based or remote work fall within the scope of sub-paragraph 164.2.17 of the Tax Code of Ukraine and are considered an additional benefit. Such income is also subject to military levy (sub-paragraph 1.2 of paragraph 161 of Subsection 10 of Section XX ‘Transitional Provisions’ of the Tax Code of Ukraine).

Regarding the Unified Social Contribution (USC): Compensation paid to employees for the use of their own tools and personal transport for production purposes is not included in the wage fund.

Furthermore, the List of Types of Payments Made at the Employer’s Expense on Which the Unified Social Contribution Is Not Charged (approved by Resolution of the Cabinet of Ministers of Ukraine No. 1170 of 22 December 2010) it is stated that compensation paid to employees for the use of their own property for production purposes does not form part of the basis for calculating the Unified Social Contribution (USC).

Consequently, as compensation payments are not included in the composition of wages, such income does not form the basis for calculating the Unified Social Contribution (USC).

Remote work abroad

The situation is more complex when it comes to remote work carried out outside Ukraine. The key criterion for determining the taxation regime is the individual’s resident status. In accordance with sub-paragraph 14.1.213 of the Tax Code of Ukraine, a resident is defined as a person who has their place of residence in Ukraine. If a person also has their place of residence in another country, the so-called ‘residency test hierarchy’ is applied:

1. Place of permanent residence.
2. Centre of vital interests (presence of family, property, source of income).
3. Staying in Ukraine for at least 183 days during a calendar year.
4. If the above criteria do not allow residency to be determined, a decision is taken by mutual agreement between the competent authorities of both states in accordance with an international agreement.

 

Thus, even if an employee is physically abroad, they may remain a tax resident of Ukraine if they maintain their principal place of residence or centre of vital interests within its territory (for example, family, property or business ties).

If an individual is a resident of Ukraine, their income from any source – whether in Ukraine or abroad – is subject to taxation in Ukraine (sub-paragraph 163.1.1 of the Tax Code of Ukraine). In such cases, the Ukrainian employer acts as a tax agent, calculating and withholding the taxes and duties prescribed by law from the employee’s salary, regardless of the place where the work is actually performed.

However, if an employee loses their status as a resident of Ukraine and becomes a tax resident of another country, their income may be taxed at their place of residence rather than in Ukraine. In such a case, there is a risk of double taxation: the income may be taxed both in Ukraine (as a payment from a Ukrainian source) and in the country of residence (as income received within its territory).

To avoid this, the provisions of international treaties are applied. One of the most problematic aspects of remote working from abroad is the risk of conflicting interpretations of an employee’s tax status and, consequently, double taxation of their income.

Dual residency

An employee who moves abroad for an extended period may simultaneously meet the criteria for residency in both Ukraine (based on the centre of vital interests) and the host country (based on the number of days spent there or their place of permanent residence). As a result, both states consider themselves authorised to tax their income in full.

In such cases, the employer must comply with the provisions of the Tax Code of Ukraine, whilst the offsetting of taxes and their administration effectively falls on the employee themselves.

Dual determination of the source of income

The second typical conflict arises from the fact that Ukraine treats income paid by a Ukrainian employer as income from a source in Ukraine, even if the employee physically carries out the work abroad. At the same time, the host country may treat the same income as income received within its territory.

This creates a dual source of taxation: each party considers that it has taxing rights over the same income.

Ways to minimise risks

To avoid double taxation, it is advisable to provide documentary evidence of residency status (a tax residency certificate issued by the competent authority of the host country) and to apply the provisions of bilateral double taxation agreements.

The position of the State Tax Service of Ukraine

In numerous individual tax rulings (in particular, ITR No. 3516/ITR/99-00-04-04-03-06 of 2022, No. 3143/IPK/99-00-04-04-02-06 of 2023), the tax authority emphasises that:

• if the employer is a resident of Ukraine and the employee receives a salary from them, such income is deemed to be income from a source in Ukraine, regardless of the place where the work is actually performed;
• the employer is obliged to act as a tax agent and to withhold personal income tax and the military levy when making payments;

 

However, the State Tax Service does not provide a clear answer on how to proceed if an employee loses their status as a resident of Ukraine. In such cases, the tax authority often states that determining tax residency falls outside its remit and recommends referring to international treaties or the authorities of another state. This creates legal uncertainty, primarily for employees, as employers generally seek to minimise risk and treat the employee as a tax resident of Ukraine without further detail or clarification.

The State Tax Service’s approach reflects the prevalence of the fiscal approach: income paid by a Ukrainian employer is treated as income from a source in Ukraine, even if the employee is physically located abroad. This approach carries the risk of double taxation if another country simultaneously claims the right to tax the same income.

To summarise the above, it can be concluded that additional payments to home-based and remote workers are subject to personal income tax and the military levy, but are exempt from the Unified Social Contribution (USC). With regard to the taxation of wages and additional payments to employees who are abroad, the rules set out in Ukrainian tax legislation apply to the employer, whilst the employee themselves is responsible for ensuring that taxes are correctly paid in the country where they are staying or of which they are a resident. That said, international rules on determining resident status are rather contradictory, and the issue of double taxation is indeed a pressing one and quite common.

Read the article on the website of the Ukrainian Bar Association: here.