Renting of the property is a fairly popular option for generating income from assets. Not an exception for such a mechanism is the Ukrainian real estate market.
In this article, we would like to highlight the main points regarding the mechanism for renting real estate in Ukraine and to focus on the taxation issues of these relations.
First of all, it should be understood that foreigner could lease out his/her property exclusively through a private entrepreneur or through the legal entity (authorized persons), that has to be a resident of Ukraine, who perform the representative functions of such a foreigner based on a written contract and act as his/her tax agent. (clause 170.1.3 of the Tax Code of Ukraine).
If a non-resident (owner of real estate), hands over real estate without registration as the private-entrepreneur, or not through a Ukrainian legal entity, he/she will be considered as a person who avoids paying taxes.
We offer to consider several possible options for the implementation of rental activities for foreigners in Ukraine. These may include the following options:
(1) registration as a private entrepreneur in Ukraine,
(2) registration of legal entity in Ukraine, for the implementation of activities,
(3) lease out through the management company.
OPTION 1. Registration of a non-resident as a private entrepreneur
In this case, the algorithm of this options is assumed the following actions:
(1) registration of a non-resident as a private entrepreneur in Ukraine,
(2) conclusion of the lease agreement by the private-entrepreneur (the private-entrepreneur is the landlord).
It should be understood that a person who has registered as a private entrepreneur, is considered as a business entity (paragraph 2 of Article 55 of the Commercial Code of Ukraine). Accordingly, such a person has the right to legally carry out economic activities in Ukraine.
To obtain the status of a private entrepreneur, it is necessary to carry out the appropriate registration actions of the establishment of the private entrepreneur in the Unified Register of Legal Entities, individuals – entrepreneurs and public organizations in Ukraine.
The status of the private entrepreneur also allows taking advantage of using a simplified taxation system in Ukraine, namely register as a single taxpayer of the third group.
Taxpayers of this group pay tax only in the amount of 5% of the received income (or 3%, in case of registration also as the VAT payer).
The Unified Social Contribution is also applicable to the private entrepreneur. The amount of such a contribution is 22% of the minimum wage for one month. Nowadays, such amount is 1039.06 UAH (approximately – 37 US dollars, at the hryvnia exchange rate 1 US dollar = 28 hryvnias). The specified payment is paid quarterly (that is, for the quarter it will be necessary to pay the Unified Social Contribution in the amount of UAH 3117.18 – approximately 111 US dollars).
At the same time, it should be understood that the application of the Single Taxpayer System of the Third Group is possible in the following case:
if the total income for the calendar year does not exceed more than 5 000 000 UAH. Sucha limit was raised to 7 000 000 UAH, but the corresponding draft of the law hasn`t become in force yet;
the total area of the premises that will be leased for non-residential premises does not exceed 300 square meters, and for residential premises, such a limit is 100 square meters. (the specified space limit applies only to the private entrepreneur and does not apply to legal entities operating in another legal form, for example, LLC).
We also would like to note the following advantages and disadvantages, which in our opinion are inherent in this option:
tax optimization –
For the landlord (owner) of the premises, it will be possible to register as a Single Taxpayer Of 3 Groups and, accordingly, the amount of taxes will be either 3 % (if the private entrepreneur would be registered as the VAT payer) or 5% (if the private entrepreneur is not separately registered by the VAT payer).
the possibility of registration as a VAT payer –
This moment could be an important point for some tenants, such as the retailers because in this case, the tenant will have the right to form a tax credit.
expansion of assets that can be recovered (personalized liability of a citizen) – It should be understood that the private entrepreneurial will be liable for all his/her property that belongs to him as a citizen.
Thus, in the case of application of administrative fine or the penalties, other assets of the owner of the premises will be at risk of collection.
This risk is relevant primarily for other assets concentrated in Ukraine.
introduction of accounting and financial reporting of the private entrepreneur activity –It should be understood that the landlord will need to make additional costs for paying for the accountant services.
increasing sanctions for liability in the field of urban development –In this case, the administrative fine, that provided by the Law of Ukraine “On the responsibility for offenses in the sphere of urban-planning activity”, could be applicable for the landlord.
This law applies only to business entities (legal entities and private entrepreneurs) and provides for fines for violation of the construction procedure, for example: in the case of unauthorized construction work with interference in the supporting and enclosing structures. The amount of fines provided by this law is significant, for example, the maximum amount could be 1800000 hryvnias.
This risk will be relevant if unauthorized reconstruction work or other unauthorized construction work is carried out on the premises with intervention in enclosing and supporting structures.