Since independence in 1991, Ukraine’s tax system has undergone a slow transformation towards a more market-based taxation structure. In the process, the system has become more structured, though it still lacks transparency and clarity. However, overall the transformation of Ukraine’s tax system has resulted in general taxation levels in Ukraine moving closer to international norms. In addition, the total number of applicable taxes decreased after the 1997 taxation reform. This trend continued in 1998 and 1999.

In comparison with its CEE peers, Ukraine’s tax and tariff rates are relatively modest, as is shown by the table below. For example, in terms of tariff barriers, Ukraine’s market is less protected than those of Hungary, Poland and Russia.

Table: Tax Profile of Ukraine

General govt tax revenue
% of GDP
Max marginal

tax rate (’98)


mean tariff %

Czech R.
4.8 ‘96
6.2 ‘96
18.0 ‘96
14.2 ‘96

Source: World Bank, EBRD, Flemings/SARS Consortium estimates.
Note: 1998 data.

Nevertheless, constant changes in tax rates and procedures, irregular introduction of new types of taxes, and the lack of co-ordination between institutions responsible for tax policy remains an obstacle for FDI in Ukraine. In addition, Ukrainian accounting practices do not yet conform to internationally accepted accounting principles. As a result, Ukraine’s legislation is still viewed as inconsistent, frequently changing and weakly enforceable by most practitioners. This results in uncertainty for foreign investors, magnifying the risks associated with doing business in Ukraine.

The most significant taxes currently applicable in Ukraine are:

  • a 20% value-added tax (VAT);
  • a 30% corporate profit tax;
  • a personal income tax, based on an employee's income (ranging from 20-50%); and
  • Payroll taxes paid by the employers to the Social Insurance Fund, Pension Fund, and Employment Fund (total contributions to these funds amount to 37.5% of wages).

All taxes with the exception of withholding taxes on dividends, interest, freight and engineering services are paid in local currency. Both Ukrainian and foreign entities pay their taxes on a quarterly basis.

Corporate Tax Law

The "Law on Business Profits Tax", adopted in 1997, is the current corporate tax law governing the taxation of Ukrainian corporate entities. The corporate tax law provided new tax rates for Ukrainian corporate entities and modified the basis on which entities are taxed, with the result that Ukrainian taxation principles are now more in line with Western practice. In addition the law cancelled automatic profit tax exemptions for companies registered with qualified foreign investment of more than $100,000 prior to January 1, 1995. However, the language of the law and unclear procedural issues, as well as numerous small amendments, have created additional problems for corporate taxpayers.

Corporate tax is levied on the gross profits of an enterprise. Gross profits are defined as revenues obtained by an enterprise from all of its activities carried out in Ukraine and abroad during the reporting period, including revenues: (i) from the sale of products (works, services), fixed assets, intangible assets, securities, currency values and other types of financial instruments, and other material items; (ii) from leasing operations; (iii) from royalties; and (iv) from non-sales transactions, less the cost of production and other permitted expenses and deductions.

Unlike previous Ukrainian tax legislation, the current corporate tax law provides for clearer definitions of permitted costs and expenses. For example, interest payments for loans, incurred for working capital needs and for the acquisition of fixed and intangible assets required for current production needs, may now be included in the cost of production, as well as payments for investment management and depository services, expenses connected with the payment of dividends and expenditures for printing and issuing shares and other securities.

In addition, the following items (among others) may be included in the calculation of the cost of production:

  • costs incurred in the start-up and implementation of production;
  • costs incurred in connection with the production process (materials, tooling, current maintenance etc.);
  • costs incurred in the establishment of environmental protection measures;
  • expenses associated with the management of the production process (e.g. mandatory audits, certification of products and business trips (within the limits stipulated by law));
  • expenses for salaries and wages;
  • expenses for training and retraining of employees;
  • expenses for mandatory social security and pension payments and for voluntary social benefits provided to employees (e.g. cafeterias, transportation services);
  • depreciation of fixed and intangible assets;
  • costs incurred in marketing and selling products; provided, however, that costs for participation in trade fairs and entertainment expenses may not exceed two percent of sales volume;
  • payments for banking services.

Depreciation is calculated on the basis of book value in accordance with the rates of depreciation established under regulations issued by the Council of Ministers of the former USSR. Prior to the adoption of the corporate tax law, depreciation rates were very conservative. However, the current Corporate Tax Law permits enterprises to determine independently their rates of depreciation, provided, however, that such rates may not be more than twice those established by the applicable regulations and also must not result in an increase in the prices of products produced by the enterprise. Depreciation of intangible assets is calculated based on their initial cost of acquisition and their period of effective use (but not more than 10 years). Intangible assets whose value does not decrease as a result of their use in the production process (e.g. goodwill) are not subject to depreciation.


Value-Added Tax, or VAT, is levied at a standard rate of 20 percent on most business transactions and imports on the territory of Ukraine. Exports, sales of certain essential goods and sales in foreign currency are not subject to VAT. VAT is a two-tiered tax that is applied to both import and domestic retail sales (import VAT and sales VAT), enabling the Ukrainian government to use the tax as a means for protecting its domestic market from foreign imports. The tax is levied on the difference between company-paid VAT and customer-paid VAT. The new VAT law requires special registration: companies subject to paying VAT are required to register at local tax administrations.

Most business transactions involving the supply of goods, works or services are considered taxable. VAT is applied to such transactions at one of two rates: either at 0 percent, or at the standard 20 percent. Until the latest amendment in December 1999, essential items as coal and electricity were taxed at the zero rate. However, whilst no taxes are payable on the supplies themselves, they are treated as taxable with regards to input VAT credits. Some transactions such as financial operations (except when fixed assets are transferred between entities) and privatization transactions (since July 1999) are considered not subject to VAT. The authorities have also granted zero VAT for local shipbuilders.

If a VAT claim is in excess of the turnover tax, then the VAT-payer is eligible for a refund, which shall be made within the month following the accounting period. Late refunds will accrue interest. If the VAT-payer fails to apply for a refund, the difference is carried over to the next return. It is the obligation of the taxpayer to keep invoices and journals. No VAT credit will be given unless supplies are supported by invoices or other evidence.

If a VAT-payer makes a 20 percent-rated supply, the tax due must be taken into account. This is turnover or output tax and is charged to the customers. If the customer is a VAT-payer and the supplies are for use in his business, the tax is subject to an input VAT credit. Any VAT charged for business purchases is subject to VAT credit. It is not allowed to reclaim as VAT credit any purchases that are non-business related, any operations not subject to taxation, or any exempt supplies.

Import VAT in Ukraine operates on the principle of destination, as opposed to origin. In effect, goods imported from other CIS countries may pay VAT in the exporting country, and then again at Ukrainian customs, unless a special treaty exists (such as with Russia). Exports are considered zero-rated, although VAT is payable on transport for export.