Do Sole Proprietors Need to Pay Tax on Written-Off Repayable Financial Assistance
Writing off debt under a repayable financial assistance agreement may have tax implications for sole proprietors. If the creditor debt originated from business activities, its write-off is, in certain circumstances, included in taxable income. However, it is not necessary to pay the single tax again on any amount previously included in income.
What is repayable financial assistance?
Repayable financial assistance is a sum of money a taxpayer receives for use under an agreement, free of interest or any other fee. A mandatory condition of such an agreement is the return of the funds received.
What income is considered for a single tax payer?
The Tax Code of Ukraine stipulates that the income of a sole proprietor – a single tax payer of the first to third groups – comprises funds received during the tax (reporting) period in monetary, material, or intangible form.
However, the following are not included in income:
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Passive income in the form of interest, dividends, and royalties.
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Insurance payments and insurance compensation.
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Budget grants.
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Income from the sale of movable or immovable property owned by the individual and used in their business activities.
Conversely, the value of goods, works, or services received free of charge is included in the single tax payer's income. Goods, works, or services transferred under agreements that do not provide for compensation or their return, as well as goods transferred for safekeeping and used by the single tax payer, are considered to have been received free of charge.
Is written-off creditor debt included in income?
For single tax payers of the third group who are VAT payers, the amount of creditor debt for which the statute of limitations has expired is also included in the income for the reporting period.
Nonetheless, the Tax Code establishes an exception: amounts of repayable financial assistance are not included in income if they were received and returned within 12 calendar months from the date of receipt.
The tax (reporting) period for single tax payers of the third group and tax agents of single tax payers of the third group – electronic residents (e-residents) – is the calendar quarter (excluding the VAT reporting period).
How is written-off repayable financial assistance taxed?
The tax service has clarified that if a sole proprietor's creditor debt to a legal entity arose from business activities, the income from such written-off debt is included in the sole proprietor's taxable income and is taxed according to the procedure defined in Chapter 1 of Section XIV of the Tax Code of Ukraine.
However, if the amount of repayable financial assistance was previously included in the entrepreneur's income and the single tax was paid on it, it is not necessary to include it in the tax base again. In this scenario, there is also no need to submit an amended tax declaration.
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