Relocation of Ukrainian sole proprietorship abroad: what to do with taxes?

Upon the declaration of a state of war, millions of Ukrainians were forced to leave the country. Some are planning to essentially embark on a new life abroad, obtain documentation for permanent residency, commence employment, and contribute taxes in a foreign country. For individuals in such circumstances, the matter of how to properly and timely adjust their tax residency becomes a highly relevant question, aiming to avoid the issue of dual taxation in both nations.

Many have already begun contemplating this prior to the initiation of automatic information exchange. Indeed, situations are not uncommon where entrepreneurs, while operating overseas, may receive funds through payment systems akin to Wise.

This content pertains to a case where a Ukrainian, registered as a sole proprietor in Ukraine, desires to conclude their tax obligations in Ukraine after relocating to another country. Subsequently, they intend to run their business and fulfill tax duties specifically overseas. As an illustration, let's consider Poland, which currently hosts a significant number of our compatriots.

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How can a Ukrainian sole proprietor obtain tax residency in Poland

In order to qualify as a tax resident of this country, it is sufficient to meet one of two requirements:

• have your main areas of interest centered in Poland (place of living, ownership of property, business, relatives in the country);

or

• reside in Poland for over 183 days during the calendar year.

If you fulfill at least one of these criteria, the next step involves obtaining a tax residency certificate from the city's tax authorities. The general process is as follows:

• Obtaining a tax identification number, either PESEL or NIP (if you plan to earn income specifically in Poland). This can be done soon after entering the country. Without one of these numbers, Ukrainian citizens can't conduct business or pay taxes in Poland.
• Completing and submitting the CFR-1 form with your taxpayer details. This can also be done electronically.

The certificate of Poland tax residency is valid for one year. If needed, a new copy can be ordered once it expires.

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Termination of tax residency in Ukraine for sole proprietors

Ceasing tax residency status is consistently more intricate than its initial acquisition, and Ukraine follows suit in this complexity. The Ministry of Finance has officially noted that, by default, Ukrainian refugees will retain their classification as tax residents of Ukraine. Unless managed through proper optimization and adherence to relevant legislation, this circumstance carries the potential for the complication of double taxation.

Moreover, the present legal framework does not outline a distinct procedure for formally discontinuing tax residency in Ukraine. Consequently, each individual citizen would be required to personally present evidence to substantiate their transition away from Ukrainian tax residency.

For sole proprietors (SPs), this situation is further compounded, given that business registration within Ukraine stands as a fundamental prerequisite for obtaining tax residency status. Insights gained from our clients' experiences suggest that evading Ukrainian tax obligations while maintaining a registered SP in Ukraine is an improbable scenario. Irrespective of the circumstances, you are likely to remain recognized as a local resident, even if you've successfully secured residency status in Poland.

Therefore, upon relocating to Poland, the general sequence of steps for sole proprietors would be as follows:

• Close the SP and any other businesses operating in Ukraine.
• Whenever feasible, transfer all existing sources of passive income to Poland.
• Close any deposit accounts held with Ukrainian banks.
• Ensure possession of a certificate verifying tax residency in Poland.
• Submit documents for establishing permanent residency abroad, etc.

Of course, this outline is not exhaustive in its coverage of actions. The overarching aim is to minimize the grounds upon which Ukrainian tax authorities might levy taxes. By limiting income streams associated with a particular country, the probability of attracting attention from local tax authorities is reduced.

Most banks presently facilitate remote closure of Ukrainian bank accounts, obviating the need for in-person visits. Likewise, the process of dissolving an SP should not present significant challenges, as the option to do so via Diia is now available.

For SPs, complications might arise primarily during the final stages of closure. This includes the preparation and submission of a liquidation declaration or, if unresolved tax matters are present, undergoing a tax audit.

It is also worth bearing in mind that every situation in this domain can be distinctive. Consequently, for our clients, we initially extend tax planning services covering the entire procedure. Subsequently, following a thorough assessment of potential risks, we undertake comprehensive SP closure services and other measures associated with relinquishing residency.

In certain instances, merely closing the SP and securing authorization for permanent residence abroad might suffice to alter the classification from Ukrainian resident, thereby circumventing the obligation to pay taxes on additional income sources (which, in such cases, would be addressed through foreign income tax payment in Poland). Conversely, more elaborate strategies may be needed to convince tax authorities, necessitating the involvement of skilled legal professionals who can facilitate mediation negotiations or even legal recourse against tax authorities.

At present, our firm is fully equipped to offer assistance in disputes with tax authorities, regardless of the complexity, and can also guide the process of closing SPs, LLCs, or any other business structure in Ukraine.

Are there any other alternatives?

Another scenario to consider is when, after moving to permanent residence in Poland, a sole proprietor intends to continue operating their business remotely and exclusively pay taxes in Ukraine, while simultaneously avoiding tax liabilities in Poland.

This scenario holds merit, particularly given that tax rates in Poland generally surpass those in Ukraine. For instance, the Polish equivalent of Ukraine's Single Social Contribution (ESC), known as ZUS, averages around 0 per month (whereas the ESC in Ukraine amounts to approximately ). Nearly all tax residents in Poland are subject to ZUS payments. Furthermore, the Polish tax system follows a progressive structure, meaning that tax obligations hinge on income tiers and, in certain cases, present substantial reductions. The specifics hinge on your income level and the nature of your business activities.

In this case, establishing a line of defense against Polish tax authorities becomes essential. This involves collecting documents and evidence to prove that you remain a resident of Ukraine and are not obligated to pay taxes in Poland as well.

Executing this strategy necessitates meticulous navigation of the legal frameworks within both countries, close adherence to the Poland-Ukraine Double Taxation Avoidance Convention, and the potential requirement for communication with tax authorities.

The experts in our company are well-equipped to address these issues and optimize taxes according to your specific situation. Feel free to reach out – we are here to assist.

The pricing for tax optimization services can be found here.

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Feel free to reach out to our specialists for a personalized service package tailored to your specific needs.