Track the money: Tax authorities will find out about the foreign accounts of Ukrainians
The first exchange of information will be in 2024 for the year 2023
Last year, Ukraine joined the international Multilateral Competent Authority Agreement on the Automatic Exchange of Information on Financial Accounts and recently adopted the relevant national legislation on this issue. Stanislav Karpov, an attorney at ADER HABER, told Mind what it means in practice.
What is the automatic exchange of financial account information?
The essence of the process is that financial institutions (mainly banks) will collect information about the owners of accounts opened with them, identify residents of partner countries among them, and transfer information about such accounts to the tax authorities of such partner countries.
In other words, if, for example, a Ukrainian resident holds an account in a German bank, such a bank will transfer information about such an account to the German tax authorities, which, in turn, will automatically transfer such an information to the State Tax Service of Ukraine.
Similarly, Ukrainian financial institutions will act in the opposite direction, collecting and transmitting information on financial accounts held by people who are residents of the exchange partner countries.
Read also: The first tax data sharing is expected in 2024: MPs open tax access to Ukrainians' accounts abroad
What kind of information will be transmitted?
Financial institutions will transmit the following information:
- name, address, the jurisdiction of residence, and tax number of the account holder;
- account number;
- name and identification number of the financial institution where the account is opened;
- account balance or value as of the end of the relevant calendar year, and if the account was closed during such a year – at the time of account closure.
What about banking secrecy?
Indeed, in this case, it can be argued that the veil of banking secrecy is being lifted and becomes more transparent.
However, bear in mind that the information is not disclosed in full, but only to the extent specified in the information exchange agreement.
In addition, the legislator has determined that tax authorities are prohibited from providing information on accounts to other people, including law enforcement or other government agencies, local governments, legal entities and individuals, except in cases of providing such information in accordance with the requirements of the Criminal Procedure Code of Ukraine.
Read also: No secret millionaires: Tax authorities are going to identify Ukrainians who receive the minimum wage "on paper", keeping millions in foreign banks
How will the tax residence of account holders be determined?
Financial institutions will determine the account holder's residency in a particular jurisdiction based on the documents and information available to them regarding the financial account holders. To this end, financial institutions may request additional information and documents from account holders.
In this case, based on the results of the analysis, the financial institution may conclude that the account holder is a resident of two or more partner countries. In this case, the information will be transferred to all such partner countries, whose tax authorities must already determine whether they consider such a person to be their tax resident.
Therefore, Ukrainian financial institutions should take into account that when they have grounds to consider a person as both a resident of Ukraine and a resident of at least one partner country, such a person will be considered a resident of the relevant partner country for the purposes of information exchange.
When will the information exchange start?
The technical aspects related to the transfer of information and its protection are still to be settled, but it is expected that the first exchange of information will take place in 2024 for the year 2023.
In other words, in 2024, the Ukrainian tax authorities will receive information on foreign accounts held by Ukrainian residents during 2023 and on the cash balances on such accounts as of the end of 2023.
With which countries will the exchange take place?
In total, more than 100 countries have already joined the information exchange agreement, the full list of which is available on the website of the Organisation for Economic Cooperation and Development.
The list of specific partner countries with which Ukraine will exchange information will be announced later, when all the procedures for Ukraine's accession to the information exchange are finalised.
What are the consequences for Ukrainian residents?
Residents of Ukraine should be prepared for the fact that the Ukrainian tax authorities will find out about their foreign accounts. It means that if the funds on such accounts have not been properly declared and taxed, it may be the basis for additional tax liabilities by the Ukrainian tax authorities.
In this context, the question of the large number of Ukrainians who have been forced to leave as a result of the war and have acquired bank accounts abroad naturally arises.
However, last year the tax legislation was amended to provide that received assistance during 2022-2023 from the budget funds of foreign countries, their state funds and foreign charitable organisations will not be taxed.
In addition, the Parliament is currently considering exempting such income not only from taxation but also from the declaration. Therefore, there is no need to worry about the taxation of such income for 2022-2023.
In addition, the legislator has determined that information on financial account(s) cannot be used to determine the amount of tax liabilities if the aggregate balance on such an account(s) does not exceed the equivalent of $250,000 as of 31 December of the calendar year that corresponds to the period of martial law in Ukraine.
Even though this wording is not entirely unambiguous, it is hoped that the tax authorities will not use the information on such financial accounts for all years during which martial law is in force to impose additional tax liabilities.
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