Tax Policy in the face of conflict

It has been interesting to see how tax policy evolves in the face of conflict. We have no better example of this than the Ukraine and Russia war to illustrate these tax policy developments. First, the tax treaty between Russia and Ukraine has been terminated. Double tax relief through tax treaty is no longer possible for Ukraine and Russia taxpayers. Domestically in both countries, the recent tax changes focus on providing relief in tax compliance obligations or tax exemptions for affected taxpayers especially for those in military service. But there also are some increased tax consequences for those not contributing properly to the war effort.


In Ukraine, recent tax changes have mostly been by regulations from the State Tax Service, although there is a recent tax reform proposal announced effective for 2023 to provide tax relief through legislation. Ukraine has proposed cutting the individual tax rate from 18% to 10% with expanded deductions and exemptions, although prospects for enactment of the tax cuts are uncertain at this moment.

In the interim, regulations have been issued with targeted tax relief. The Ukraine State Tax Service has confirmed that entrepreneurs may deduct the value of donations of goods, services, and money provided to Ukrainian armed forces personnel and a similar rule making tax-free any charitable assistance received by families of combatants that died or were injured during martial law.

The State Tax Service is also looking for ways to minimize double taxation for Ukrainian refugees residing in other European countries and is requesting coordination of tax residency status with other EU member states by allowing “COVID precedent" rules to be applied. Those rules were used during the pandemic to ignore tax resident status based on days physically present in other European countries. If the coordination is successful, refugees would be nonresident in their host country despite their physical presence of more than 183 days (about 6 months) and the refugees would continue to be Ukrainian tax resident.

The Ukrainian government has also proposed a couple of tax changes raising tax rates for Russian companies operating in Ukraine and multinational companies operating in Ukraine that also continue to do business in Russia.


In Russia, tax changes have taken a similar direction. Early in the conflict the central bank had placed restrictions on foreign currency transfers and require foreign companies operating in Russia to disclose the company’s beneficial owners. This month Russia proposed to exempt from individual income tax and social security contributions any financial assistance payments made by employers to employees mobilized to serve in the armed forces. The exemption applies to payments provided up to 200,000 rubles. The exemption will apply to mobilized employees themselves, as well as to employees whose family members have been mobilized. These expenses will continue to be deductible by the employer.

Individual entrepreneurs called up for military service will be entitled to deferred tax and social security payments for their business and utilize extended tax deadlines. The extended due dates will generally be 3 months after the entrepreneur has completed military service.

Russia is also providing tax incentives to companies developing technology equipment locally as a substitute for imports that are no longer available to Russia due to economic sanctions. These incentives include a zero corporate tax rate for 7 years and reduced social security contributions.

Finally, the Russia Ministry of Finance announced a proposal in July affecting nonresident employees working for a Russian company outside of Russia. These employees will be subject to a Russian nonresident withholding tax of 30%. This rule would apply even though the services are not performed in Russia and the employee is not residing in Russia. Potentially this will cause double taxation unless an income tax treaty is in force between Russia and the country of residence to provide double tax relief. A reminder that Russia just terminated the tax treaty with Ukraine, so we can get a sense the taxpayers who will be affected by this proposal.

We are likely to see further tax proposals in the months and years ahead from Ukraine and Russia to address issues arising from the conflict.

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