November 29, 2016
Senior Associate at ENGARDE
The law on taxing residential real estate in Ukraine was passed back in 2014. But notwithstanding the time lag it has not played any influence on the majority of Ukrainian citizens. The first reading of the law provided for massive tax reliefs. Tax obligations arose only with owners of flats with total area exceeding 120 m2 and with owners of homes with total area exceeding 250 m2. Such reliefs resulted in actually carving out the vast majority of real estate from the taxation base.
The more recent changes introduced into the Tax Code of Ukraine entered into force in 2015. They substantially increased the number of people expected to pay the residential real estate tax. Thus, the minimum taxation thresholds have been changed. In particular, only the flats with the total area less than 60 m2 and the homes with the total area less than 120 m2 are not subject to taxation.
The maximum real estate tax rate was set at not more than 2% of the minimum wage per square meter of the residential area subject to taxation in 2015 and at not more than 3% in 2016-2017.
However, the legitimacy of increasing the 2016 rate from 2% to 3% is rather disputable. The decision on this increase was taken at the end of 2015 by means of passing the Act No.909-VIII on 24 December 2015.
One of the provisions of the Tax Code of Ukraine incorporates the principle of stability. In accordance with this principle no changes in taxation can be introduced later than six months prior to the beginning of the following budget year when the new rules and rates will become effective.
That means that passing a new tax rate of 3% just several days prior to the beginning of a budget year (which coincides with the calendar year in Ukraine) is a gross violation of the principle of tax legislation stability.
In accordance with the provisions of the Tax Code of Ukraine the tax rate is established by a local council decision within the maximum rate established by the Tax Code of Ukraine. For example, the tax rate of 1% was established in the city of Kyiv on 28 January 2015 by the Kyiv City Council decision No.58/923.
Local councils are also authorized to grant tax reliefs on this tax within their respective territories. Property status and income levels are to be taken into consideration while granting reliefs for certain categories of people.
Besides, the Tax Code of Ukraine contains a list of entities, which are not subject to taxation (dormitory accommodations, orphanages, non-habitable real estate, realty owned by child orphans, handicapped children, etc.).
The Tax Code of Ukraine provides that the taxation base in respect of real estate objects owned by individuals is decreased: (1) by 60 m2 for flats irrespective of their quantity; (2) by 120 m2 for residential houses irrespective of their quantity; (3) by 180 m2 in case of simultaneous ownership of various types of real estate by a taxpayer. The taxation base, however, consists of both residential and non-residential floor area of real estate, including household outbuildings (sheds, garages, workshops, vaults, etc.).
Besides, an additional tax rate of 25 thousand hryvnyas per each calendar year has been established for flats with the area exceeding 300 m2 and houses with the area exceeding 500 m2. That means that such real estate will be simultaneously taxed by both the fixed rate and the rate denominated in percent of minimum wage.
Let us consider an example of calculation of the real estate tax for 2015 for a flat in Kyiv with the total floor area of 80 m2. The tax relief of 60 m2 will apply to the flat. In this case the flat owner shall pay the tax for 20 m2 only. As of the beginning of 2015 the amount of the minimum wage equaled 1218.0 hryvnyas, whereas the tax rate for Kyiv was at 1% of this amount. By multiplying the tax rate and the square meters subject to taxation (20 m2 x UAH 12.18) we receive the tax amount equal to UAH 243.60.
The grounds for calculating the taxation base are constituted by the information provided to the tax authorities by the State Registry of Proprietary Rights for Real Estate. Currently this is an essential problem for the tax authorities as the mentioned registry contains only a small proportion of data on the registered real estate. The bulk of information on real estate is stored in archives on paper. It is transferred into the electronic registry only in case of taking certain registration action on such information.
The provisions of the Tax Code of Ukraine establish that obligations to pay taxes arise with individuals within 60 days after receiving a tax assessment notice. This notice and payment details are sent by post or handed in to individuals by the tax authority at the place of taxpayer’s registration by the 1st of June of the year following the reporting year.
The question arising in this respect is the following. Should taxpayers show their own initiative and provide the tax authorities with the information about their real estate subject to taxation, notwithstanding the fact that the tax assessment notice hasn’t been served?
The provisions of the Tax Code of Ukraine establish the taxpayers’ right to address the tax authority in writing with the purpose of verifying the data as to ownership of real estate in question. However, it shall be borne in mind that this is a right and not an obligation of taxpayers.
A taxpayer may, inter alia, take advantage of this right in case of incorrect accrual of tax mentioned in the tax assessment notice. Due to inaccuracies of the electronic registry taxpayers may receive incorrect calculations of the mentioned tax.
In accordance with the provisions of the Tax Code of Ukraine the obligation to pay a tax arises with a taxpayer after the tax authority has performed its associated obligation to deliver a tax assessment notice. In case the notice has not been received, the taxpayer is – from the formalistic point of view – entitled not to pay the real estate tax.
But it is widely known that the overwhelming majority of tax authorities treat the legislative provisions in the manner conducive to raising money for the state budget. In this respect there is a risk that even if the tax assessment notice has not been delivered, the amount of the tax will be accrued by the tax authority after the established term. This will then result in fines for untimely payment (the fine will amount to 10% or 20% of the unpaid amount plus a surcharge of 120% of the NBU discount rate per annum).
It should also be mentioned that the provisions of the Tax Code of Ukraine establish a possibility of increasing the tax relief by means of registering real estate as co-ownership of several people or joint property of several people, provided that it is subdivided among them in kind. In these two cases each of the co-owners is considered to be a taxpayer in respect of the portion of the property owned.
Where real estate is the joint property of several people but it is not subdivided between them in kind, one of such co-owners will be established as the taxpayer by mutual consent.
Thus, each co-owner is entitled to apply her or his tax relief provided that the real estate in question is owned under the right of co-ownership or joint ownership with subdivision of the real estate in kind. This will diminish the amount of the real estate tax accordingly.
Taking the above into account, we see that in 2016 the majority of Ukrainian citizens have faced the new tax for the first time. Considering the previous tendencies the tax rate will be rising slowly year by year. Nevertheless, current legislation provides taxpayers with time and opportunity to optimize the residential real estate tax.
by Iaroslav Iarovyi
Senior Associate at ENGARDE
The article was published in the November 2016 issue of the Ukrainian Journal of Business Law (www.ujbl.info) on pp.24-25