Ukrainians are offered the opportunity to legalize all property and money for 5%.
Ukraine is preparing to launch a tax amnesty, or so-called zero-tax returns for everyone.
People will be asked to "remember" what income (in cash or assets) they did not pay taxes on at the time, and now legalize everything they have acquired.
The filing of special declarations will be open for a year—from July 2021 to July 2022. Anyone who files a "zero declaration" during this period will be required to pay between 2,5% and 9% (depending on the asset) and will be considered "forgiven."
After paying the one-time tax, the money and property will be considered legal and can be used safely both in Ukraine and abroad, said Danil Getmantsev, head of the relevant parliamentary committee.
All of these innovations are contained in the package of presidential laws submitted to the Rada at the end of February. It's worth noting right away that the tax amnesty idea is nothing new; it was one of Zelenskyy's campaign slogans. As Getmantsev put it, "We're already a year and a half late with this."
But initially, it was assumed that the authorities would first deal with the incomes of officials and politicians, and only then tackle the rest of the population. Now, however, they're offering everyone the opportunity to "legalize."
There are other questions.
"The mechanism itself is confusing; it seems poorly thought out. For some reason, the declaration is submitted to a notary, and therefore costs money. You'll have to pay an additional 2 rubles. What kind of notary lobby is this? Why shouldn't declarations be submitted to lawyers or the housing office?" Rostislav Kravets, head of the Kravets and Partners law firm, quipped.
He also points out that all money in bank accounts will be subject to legalization. "It's unclear how they can be verified for tax liability, and whether the grandmother who sold milk and carrots from her garden will also be forced to file a zero tax return," says Kravets.
However, the main nuance is what will happen to those who do not legalize their property.
Danil Germantsev stated that the upcoming tax amnesty will be entirely voluntary. This means you don't have to file any returns, and you won't face any penalties. But then the question arises: what's the point of the "amnesty?"
"Logically, after the 'D' date, when everyone voluntarily 'zeroes out,' the next stage should begin—tough measures against tax evaders. Otherwise, the tax amnesty simply loses its meaning," says economist Alexey Kushch.
He also notes that voluntary legalization is usually followed by mandatory income declarations for everyone and punishment for those who conceal them.
So it's entirely possible that the authorities are rolling out the upcoming changes to Ukrainians in small increments, so as not to escalate the situation too much prematurely.
"The country" I explored how Ukrainians are being offered to legalize their property, and what tax amnesty means in our context.
What to declare and how much to pay
At the end of February, Zelenskyy submitted four bills to parliament on tax amnesty: No. 5153 (amending the Tax Code), No. 5154 (amending the Budget Code), No. 5155 (amending currency legislation), and No. 5156 (amending the Criminal Code and other codes). All of them are considered urgent. However, the texts of these bills were only released today.
Based on these, the details of the upcoming tax amnesty are as follows:
1. Ukrainians will be asked to declare assets in the country or abroad that were acquired using income not declared as of January 1, 2021.
2. Individuals who are residents (that is, citizens of Ukraine) or non-residents who were residents at the time of acquisition of assets are eligible for the tax amnesty.
3. Minors and incapacitated individuals are prohibited from filing tax returns, as are those who filed tax returns under anti-corruption legislation beginning on January 1, 2005 (officials, civil servants, members of parliament, etc.). The exception is those who filed tax returns but never secured the position (for example, because they failed a competitive selection process). This means that neither politicians nor officials will participate in the current tax amnesty. Everything is being prepared for businesses and ordinary citizens. But the question immediately arises: are officials and members of parliament exempt from the amnesty because they have already filed tax returns and are considered "clean" before the law (which is highly doubtful, given how these returns are verified) or will there be a separate, more stringent "amnesty" for them? There is no answer to this question yet.
4. A zero declaration can be personalized or "impersonalized" (meaning, identified by a special code) and is submitted through a notary. This, as Rostislav Kravets noted, entails additional costs, approximately 2 hryvnias for notary services.
5. All assets (movable and immovable property, securities, corporate rights, etc.) can be declared. However, there are exceptions.
6. The following assets are not subject to declaration: 1. "obtained as a result of criminal offenses," with the exception of those falling under the articles of tax evasion or violation of currency legislation. 2. assets for which cases have been opened under the articles of "Money Laundering" and "Terrorist Financing."
7. The deadline for filing declarations is from July 1, 2021, to July 1, 2022. This means that you can "legalize" your income starting this summer.
How much will you have to pay for legalization?
Rates vary depending on the asset: for money and property located in Ukraine, it is 5% of the amount; for assets placed abroad (say, in foreign banks), it is 9%.
"This is being done to encourage declarants to return funds to their home countries and legalize them here at a lower rate," Kushch explained.
If the "illegal funds" are used in government bonds (they must be purchased between January 1, 2021 and June 20, 2022, before filing a zero tax return), then you will only have to pay 2,5%.
"The logic is clear—in this case, citizens would essentially be financing the budget by lending to the state. The only question is how this money will then be spent and whether it will be 'lost' in the budget. It would be more logical to issue special infrastructure government bonds and, with the money raised, to, say, upgrade strategic communications in cities, even for the construction of new nuclear power plant units and so on," Kushch noted.
Money to be laundered must be placed in special bank accounts (meaning cash cannot be "whitewashed"), and assets must be assessed (obviously, the assessment must also be paid for).
The tax must be paid within 10 days from the date of filing the declaration.
There will be a tax audit of the declaration, but they won't check the source of income, Getmantsev assured.
"But if there's a tax audit, then there will be liability for inaccurate data, meaning a 'punishment for error' is inherently envisaged. There's also the question of the verification system—if tax authorities are suddenly inundated with millions of declarations, will there be enough resources to quickly verify them all? How will the databases work? How will personal information be protected?" Kravets asks.
Target group
Who will not have to declare anything, and yet will not be subject to claims from tax authorities?
Several types of property are exempt from filing declarations and paying taxes. These include:
- Real estate: an apartment up to 120 square meters or a house up to 240 square meters (unfinished construction, if there is ownership of the land)
- Non-residential, non-commercial property up to 60 square meters. This could be, for example, a garage or a shed, but not a property that is rented out and from which you generate income—such a property is subject to declaration.
- a plot of land within the framework of free privatization standards (up to 2 hectares)
- One vehicle. However, there are exceptions: a vehicle designed to carry 10 or more people, with an engine larger than 3 liters, and a value exceeding 375 minimum wages (2,25 million hryvnias). The latter are subject to declaration.
- other assets, with a total value of no more than 400 thousand hryvnias.
In other words, the list basically covers the standard "set" of assets of the average Ukrainian family. It turns out that most Ukrainians are automatically exempt from the tax amnesty—they won't need to file any declarations to be considered "clean" for tax purposes.
Who then is the tax amnesty aimed at if it does not apply to officials and deputies, nor to ordinary citizens with low incomes (even shadow ones)?
"It turns out that the targets are migrant workers, entrepreneurs, including sole proprietors, as well as Ukrainians with above-average incomes who receive their salaries in envelopes or under the sole proprietorship scheme (these could be, for example, IT specialists – Ed.)," says Kushch.
Why is the "amnesty" being launched and what will happen next?
Why is a tax amnesty necessary at all? From the government's perspective, it's simple.
"The idea is, in principle, sound. After a protracted period of chaotic capital accumulation and a colossal shadow economy, a so-called 'zero point' is needed to reset the entire system," says Kushch.
In other words, for the state, the amnesty is an attempt to bring the economy out of the shadows and generate substantial one-time budget revenues. Exactly how much can be collected is still unclear, but in any case, we're talking billions.
Anyone who files a zero tax return and pays the tax will receive "legal" property. This means that tax authorities and the state will never have any questions about it, either in Ukraine or abroad. This means that even if you haven't paid taxes for years, you can pay 2,5-9% and sleep soundly.
Will the upcoming tax amnesty, as presented by the president, allow us to achieve these goals?
Alexey Kushch says that the state's interest (that is, rebooting the economy and bringing it out of the shadows) is highly questionable.
"As other countries' experience shows, before implementing a tax amnesty, tax reforms must first be implemented, meaning eliminating the factors that drive the economy underground. In our case, these are primarily labor taxes. High payroll tax rates force businesses to pay wages in envelopes. To make them fair, the tax rate must be set at approximately the same level as what businesses pay for servicing "gray" wages (cashing out, sole proprietorship schemes, etc.), which is approximately 10%," says Kushch.
Also, by this logic, a large-scale tax reform for businesses, which Zelensky also promised when running for office, should be implemented.
But, as it turns out, there are no tax reforms yet; in fact, the screws are being tightened on businesses. In other words, there are virtually no incentives being created for entrepreneurs to come out of the shadows and operate honestly. Corruption, extortion, and blackmail of businesses, especially by law enforcement agencies, have also persisted.
"In this situation, it's more profitable for entrepreneurs to remain in the shadows, avoiding disclosing their income. Proving that a businessman is evading taxes or committing any other financial crime is difficult. But if they do reveal money in Ukrainian accounts, it can be seized at any moment under a freshly fabricated criminal case. And as long as this threat remains, no one will disclose their income in Ukrainian bank accounts. Not for 9%, not for 5%, not even for 1%. Currently, the tax amnesty will only benefit those who file electronic declarations—politicians, officials, security officials, judges, and members of parliament. Or for those who aspire to become one. This way, they will have the opportunity to disclose their shadow income. Another option: when someone needs to register a large purchase, they will deposit the money into their account, pay 5%, and use it to complete the transaction. “That is, this is a one-time instrument that will not lead to the de-shadowing of the economy,” one Kyiv entrepreneur told Strana.
"It's unlikely that people will legalize their property and continue to live and work legally. This means that instead of a tax amnesty, we'll have a blank slate, or at least a loophole for corrupt officials who can legalize their shadow income through relatives and proxies," says Kushch.
As for the interests of ordinary citizens, who are being offered the opportunity to "pay up and sleep soundly," they are also not yet clear.
"For example, if you open an account or purchase something abroad, the Ukrainian 'zero declaration' won't carry any weight. They'll still require a verified source of income. And overall, this legalization mechanism is already quite outdated; it should have been implemented in the 90s, not now. So far, it looks like an attempt to swindle people out of money and write off several billion to launch the 'amnesty' system, which is quite cumbersome, as it requires colossal human and technical resources," says Kravets.
If we also take into account that the “legalization” will be purely voluntary, as Getmantsev promises, then it is completely unclear why anyone would pay.
However, it is possible that the tax amnesty is only the first step.
"Next up could be universal income tax reporting. And those who don't pay now will pay double, or even triple, later. As a result, migrant workers, self-employed Ukrainians, and entrepreneurs risk facing enormous fiscal pressure. For example, if the same migrant worker, having saved $50, chooses not to share with the state by filing a zero tax return and then buys an apartment, they'll pay not 5%, but almost 20% (18% personal income tax and 1,5% military tax). The same applies to sole proprietors and Ukrainians receiving their wages in envelopes. And if the authorities crack down on tax evaders, they'll have to pay not only for new property but also for property they acquired long ago—say, an apartment that exceeds the permitted 120 square meters," Kushch concluded.
For example, right now, in parallel with the “voluntary” zero declaration, they want to tighten the requirements for income declarations.
For example, if currently a warning or a fine of 3-5 non-taxable minimums is provided for submitting false information, then draft law No. 5156 already talks about a fine of 5-15 non-taxable minimums (and does not talk about a warning at all).
A new article has also been introduced specifically for sole proprietors and self-employed individuals. If they fail to file a tax return or file it late, or fail to keep track of their income and expenses, they will be subject to a fine of 50-100 non-taxable minimums (up to 1,7 hryvnias).
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