The state is trying to support internally displaced persons (IDPs) who are forced to leave their homes due to active hostilities. In a new place, they have to build a new life and often a career. Therefore, there are a number of state and volunteer programs that contribute to their adaptation and employment after relocation. One of such measures is compensation to entrepreneurs that hired IDPs. More on the specifics of taxation of such payments read below.
Compensation for labor costs of IDPs
The funds that an individual entrepreneur received as compensation for labor costs for employing internally displaced persons are not included in the individual entrepreneur's taxes, since this payment is not directly related to entrepreneurial activity. Let's explain in detail why.
According to items 1, 2 of the Procedure for providing the employer with compensation for labor costs for the employment of internally displaced persons as a result of hostilities during martial law in Ukraine, approved by Resolution of the Cabinet of Ministers of Ukraine No. 331 of March 20, 2022 (hereinafter – Procedure No. 331), compensation for labor costs for each employed person from among internally displaced persons (including those employees who received a certificate of registration of an internally displaced person after employment) as a result of hostilities during martial law in Ukraine (hereinafter – compensation for costs) is provided at the expense of the Fund of Compulsory State Social Insurance of Ukraine in the event of unemployment and other sources not prohibited by law. Compensation for expenses is provided to the employer, except for employers who are budgetary institutions (except for providers of social services), by the funds of compulsory state social insurance, for each employed person under the terms of a fixed-term or indefinite employment contract, in particular under part-time work. A person from among internally displaced persons may be employed under the terms specified in Procedure No. 331, once.
The funds are compensated in the amount of the minimum salary established by law, or the corresponding amount calculated from it, in the event that the person specified in item 1 of Procedure No. 331 worked for an incomplete month, monthly for the duration of the provision of compensation for expenses, which is determined by the third paragraph of item 3 of Procedure No. 331 (the total duration of the provision of compensation for expenses cannot exceed three months, and for persons with disabilities from among internally displaced persons - six months from the date of employment of the person under the conditions provided for in item 2 of Procedure No. 331), for each employed person for whom the employer pays a single contribution to mandatory state social insurance, for the period of martial law and within 30 calendar days after its abolition or termination (item 3 of Procedure No. 331).
According to item 177.2 of the Tax Code of Ukraine (hereinafter – the Tax Code), the object of taxation of individual entrepreneurs under the general taxation system is net taxable income, i.e. the difference between total taxable income (revenue in monetary and non-monetary form) and documented expenses related to the economic activities of such an individual entrepreneur.
Expenses related to the income of individual entrepreneur
Item 177.4 of the Tax Code defines a list of expenses directly related to the receipt of income by an individual entrepreneur from conducting business activities under the general taxation system.
Thus, the expenses of an individual entrepreneur include, in particular, the costs of paying labor of individuals who are in an employment relationship with such a taxpayer, which include the costs of paying basic and additional wages and other types of incentives and payments based on tariff rates, in the form of bonuses, incentives (item 177.4.2 of the Tax Code).
In accordance with point 1 of item 292.1 of the Tax Code, the income of a single tax payer of the individual entrepreneur is income received during the tax (reporting) period in monetary form (cash and/or non-cash); tangible or intangible form, as defined in item 292.3 of the Tax Code.
Income does not include passive income received by such an individual in the form of interest, dividends, royalties, insurance payments and compensation, income in the form of budget grants, as well as income received from the sale of movable and immovable property owned by the individual and used in business activities.
Income of a sole proprietorship received as a result of conducting business activities and taxed in accordance with Chapter 1 "Simplified System of Taxation, Accounting and Reporting" of Section XIV "Special Tax Regimes" of the Tax Code is not included in the total annual taxable income of an individual determined in accordance with Section IV of the Tax Code of Ukraine "Personal Income Tax" (item 292.9 of the Tax Code).
In addition, the income of a sole proprietorship also does not include the amounts of earmarked funds received from the Pension Fund and other mandatory state social insurance funds, from budgets or state earmarked funds, including within the framework of state or local programs (point 4, item 292.11 of the Tax Code).
Since the income received by individual entrepreneurs as compensation for labor costs of internally displaced persons from the mandatory state social insurance funds is not related to the results of economic activities by such entrepreneurs, such income is not included in the income of an individual entrepreneur, but is taxed according to the general rules for individual taxpayers established by the Tax Code.
Income taxation procedure
The procedure for taxation of income of individuals is regulated by Section IV of the Tax Code, according to item 163.1.1 of which the object of taxation of a resident is the total monthly (annual) taxable income.
Article 165 of the Tax Code defines an exclusive list of income that is not included in the total (monthly) annual taxable income of a taxpayer.
According to item 165.1.1 of the Tax Code, the following income is not included in the total monthly (annual) taxable income of a taxpayer: the amount of state and social material assistance, state assistance, compensations, the cost of social services and rehabilitation assistance (including monetary compensation for persons with disabilities, for children with disabilities during the implementation of individual rehabilitation programs for persons with disabilities, the amount of assistance for maternity leave), remuneration and insurance payments that the taxpayer receives from the budgets and funds of mandatory state social insurance and in the form of financial assistance to persons with disabilities from the Fund for Social Protection of Persons with Disabilities in accordance with the law, decrees of the President of Ukraine and acts of the Cabinet of Ministers, as well as the cost of social assistance in kind to low-income families received from providers of social services in accordance with Law of Ukraine No. 2671-VII of January 17, 2019 "On Social Services".
In accordance with point 1.7 of item 161 section 10 of chapter XX "Transitional Provisions" of the Tax Code, income that, in accordance with chapter IV of the Tax Code and section 1 of chapter XX "Transitional Provisions" of the Tax Code is not included in the total taxable income of individuals (is not subject to tax, is taxed at a zero rate), except for income specified in point 165.1.36, 3 and 4 of item 170.131 of the Tax Code and item 14 of section 1 of chapter XX "Transitional Provisions" of the Tax Code, is exempt from taxation by military levy.
Thus, the amount of compensation for the employment of internally displaced persons, which is provided to an individual from the Compulsory State Social Insurance Fund in case of unemployment, is not included in the total monthly (annual) taxable income of the taxpayer, that is, it is not subject to personal income tax and military levy.
