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Volodymyr Gurlov commented tax exemptions for hotels in Ukraine

  • Author: Volodymyr Gurlov
  • Practice areas: Taxation
  • Date of publication: 31/08/12

While preparing an analytical material about tax exemptions for hotels Olena Makeyeva, managing partner of audit firm “Aksyonova and Partners” addressed Volodymyr Gurlov, a partner of law firm “Pravova Dopomoga” for his expert opinion. The provided comments have been used in the article. The article also included opinion of Andriy Skipyan, the President of Hoteliers and Restaurateurs Club Hoteliero.

The article is available on website.

The article of Olena Makeyeva will be really interesting to hoteliers so the full text is provided below (translation from Russian):

“After examination of tax exemptions that are provided for different branches of economy one may conclude that originally they are stipulated in a way to be impossible to implement in practice. Legislators either originally do not understand the issues of particular business or preferences are nothing but a political motto or the business can perfectly do without these exemptions. Olena Makeyeva, leading partner of Audit firm “Aksyonova and Partners” for UBR.UA

Quite recently we’ve examined a new law which provides tax exemptions in the field of IT and concluded that the final version of the law is of no need for the market representatives. This time I would suggest to analyze how tax exemptions work in hotel business.

At first in accordance with Subsection 17 of Section 4 of Transitional provisions of the Tax Code of Ukraine tax exemption were provided to hotels in regard to taxation of income of hotel business enterprises. The exemption meant that hotels would not have been paying an income tax for 10 years starting since 1.01.2011. But there is a condition under which such exemptions are applied. In order to receive 10-year tax exemption the revenues of hotel from rendering of services of hotel rooms provision for temporary stay must comprise not less than 75% of total income for the respective tax period during the period of tax exemptions. In other words 75% of hotel income must be received from hotel rooms. It is quite clear that this regulation was stipulated to engage foreign investors long before Euro 2012.

Most likely legislators expected that this harmless condition would not scare away foreign investments since the very idea of Ukraine hosting Euro 2012 suggested that the tourism will prosper during this period. But Euro 2012 lasted only for 1 month which is not an income tax period (income tax period is equal to 3 months). Therefore according to my observations neither of hotels used the tax exemption. This is because during three months tax period even during Euro 2012 neither hotel was able to comply with a single requirement of the Tax Code of Ukraine.

“Such percent correlation could not satisfy the condition of exemption obtainment. Practice shows that a significant source of hotel income, especially of a big one, is comprised by income from provision of conference and F&B services rather than from hotel rooms. So the hotels had no real opportunity to use the tax exemption during Euro 2012”. This is how the situation was commented on by the President of Hoteliers and Restaurateurs Club Hoteliero Andriy Skipyan.

Euro 2012 successfully came to an end, tourists returned back home. And management bodies of the hotels finally paid their attention to the fact that they were not able to use tax exemptions. Dissatisfaction of representatives of the field would grow each day. Somebody managed to make some profits during Euro 2012 but the hotel business was left aside because the exemption did not work. Not without their influence the Tax Code of Ukraine faced some changes and on 15.08.2012 the President signed law number 5180-VI according to which the condition for tax exemption was somewhat changed. Starting since 01.01.2011 (retroactive action) the barrier was lowered to 50%. I think that this is due to business representatives who did not want to give up their dream to use tax exemptions. But it is now unclear how will tax bodies react to corrections in income tax returns which will show overpayment of income tax due to application of tax exemption. But it is unlikely that it will be possible to use tax exemption retroactively. Andriy Skipyan also added that: “Change of rate is the first step towards practical application of exemption. It is too early to make any real predictions – the practice will show how first attempts to use tax exemptions will influence the development of hotel business in Ukraine. Generally we hope for the better.”

Volodymyr Gurlov, partner of Law firm “Pravova Dopomoga” pointed out that many representatives of hotel business were interested in extension of so called 50% barrier onto previous tax periods “The thing is that tax returns for these periods are already submitted and taxes are paid. But taking into consideration that the barrier was lowered to 50% many hotels can use it even for 2011. However the Tax Code of Ukraine does not have the answer whether it is possible to use exemptions for the previous one and a half years. As a general rule the law does not have retroactive power. This means that 50% barrier could be applied only since the moment when changes to the Tax Code entered into force. Thus for the previous one and a half year period the right to exemptions is calculated based on 75% barrier. Most likely the State Tax Service of Ukraine will take this position as the most fiscal one. But everybody knows conditions in which the law on decrease of exemption “barrier” was passed (the bill was passed on the next day (!) after its registration in the Parliament). This allows us to conclude that there are some political backgrounds that may alter even ultra-fiscal position of the State Tax Service of Ukraine. In this regard representatives of the State Tax Service may provide official clarification on the procedure of exemptions application. As for those who do not wish to wait for clarifications we can advise to receive individual tax clarification. But those should be careful because the answer may not be the one they want.”

Use of tax exempted money is also an important issue.  The owner does not decide how to use the money for his business development and extension. In accordance with Subsection 21 of Section 4 of Transitional provisions of the Tax Code of Ukraine the procedure of tax exempted money use is approved by the Cabinet of Ministers of Ukraine.

All we can do is to believe that promised exemptions will work and political promises will find their practical implementation as well as foreign investors will not get disappointed in our country. But the hotel business still has many unsolved regulatory issues.”

This comment relates to Taxation practice of our law firm.

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