Tax deductions for charitable donations: what Ukrainians and foreigners living in Ukraine need to know

The Ukrainian legislation provides for tax incentives for charitable donations. Simply put, individuals have the right to reduce their annual income by the amount of expenses incurred and to refund the overpayment of personal income tax from the amount that has already been withheld. However, very often taxpayers face challenges in applying this seemingly simple tax deduction scheme.

Deloitte Ukraine’s experts – Andriy Servetnyk, Katrina Mafardzhe and Victoriia Antiuk – explained how charitable tax deductions are applied in general in other countries and how this tax incentive is implemented in Ukraine. In particular, the qualifying criteria for claiming tax deduction for charitable donations and possible obstacles that may be faced in practice.

General information on charitable tax deductions: global practice

The practice of applying tax deduction schemes is quite common in many countries and is used to support taxpayers and/or to encourage them to spend money in a certain area that the state considers necessary to develop. As for the tax incentives for charitable giving, according to the OECD study, taxpayers are encouraged by the state to make charitable contributions or donations (particularly, in such areas as culture, healthcare, education, etc.) using various methods.

In the Czech Republic, Germany, and Italy it is possible to reduce the tax base (i.e. the amount of income on which tax will be charged) by expenses incurred for charity purposes (tax deduction). The maximum amount by which the tax base can be reduced is usually limited. In particular, in Italy, a maximum of 10% of total annual taxable income is allowed to be deducted, in the Czech Republic – 15%, and in Germany – 20%. In Ukraine, the same method is applied, with the possibility to deduct only 4% of the incurred charity-related expenses from the total annual taxable income.

At the same time, in Lithuania, France, Portugal, and Sweden tax deduction for charitable donations may be made directly from the tax liability (tax credit), thus reducing the amount of tax payable.

For example, under this method, a tax incentive of EUR 1,000 reduces the amount of tax payable by EUR 1,000. However, this tax deduction is subject to certain limitations. For instance, in France, it is possible to receive a 66% tax credit for charitable contributions made to charity organizations amounting up to 20% of taxable income.

Poland, on the other hand, uses tax allocation scheme. Taxpayers can allocate 1.5% of their tax, which is payable based on the results of the annual tax return, to the account of a selected charitable organization. This is a simple way to support a charitable initiative that does not require additional costs, as the amount of tax payable does not change.

Tax deductions in Ukraine: a basic scheme of applying tax incentives and the list of requirements

Under the Tax Code of Ukraine (“TCU”), tax deduction for individuals is a documented amount of expenses by which a taxpayer’s total taxable income may be reduced.

In accordance with the Ukrainian legislation, the individuals are eligible for tax deduction if they:

• Are tax residents of Ukraine during the year for which the expenses were incurred (to learn more about the rules for determining a person’s tax residency in Ukraine, follow the link);
• Spent money during the reporting year on the purchase of goods (works, services), the list of which is expressly defined by the TCU, from Ukraine residents – individuals or legal entities;
• Received salary and/or dividends (in certain cases). Self-employed persons (including individual entrepreneurs) are not eligible for tax deduction.

In order to receive tax deduction, it is generally advised to have sufficient proof of the tax residency status (in particular, for foreigners), explanations and proof of expenses incurred (contracts, receipts indicating the taxpayer, purpose of payment, etc.) and confirmation of the entities for the benefit of which such expenses were made.

In Ukraine, it is possible to reduce the tax base through tax deduction by claiming expenses that are specifically provided for by law: education expenses, mortgage interest expenses, charity contributions, etc.

For a better understanding of how the tax deductions are applied in Ukraine, let’s look into the procedure shown in Figure 1.

Exercising the right to a tax deduction for charitable donations in Ukraine

In order to claim a tax deduction, a number of steps must be taken:

• First of all, a Ukrainian employer must withhold personal income tax from your salary in the reporting year (e.g., in 2024) and transfer it to the budget.
• During the tax year under review, you must make the relevant expenditures by transferring funds to the accounts of non-profit organizations that meet the requirements set forth in clause 133.4 of Article 133 of the TCU and keep supporting documents OR make donations of property, having available donation agreements indicating the value of such property.
• As a final step, it is necessary to file an income tax return and Annex F3 by 31 December of the next calendar year (for example, by the end of 2024 for the 2023 reporting year), as well as to provide documentary evidence of the expenses incurred in order to claim tax deduction.

After this, if all requirements are met, a certain percentage of personal income tax paid will be returned to the Ukrainian bank account that you indicated when filling out the relevant field of your tax return.

However, it should be noted that not all charity-related expenses are deductible. Pursuant to subpara. 166.3.2, clause 166.3, Article 166 of the TCU, the maximum amount of charity-related expenses allowed for deduction from an annual taxable income may not exceed 4% of such annual taxable income.

As of the reporting year 2022, this limit was increased to 16% (clause 21, subsection 1, Section XX of Transitional Provisions of the TCU). By using this mechanism, the state intended to encourage Ukrainians to donate; however, this opportunity could only be used for the results of 2022 until the end of 2023.

For a better understanding, we suggest considering an example of calculating the amount of tax deduction for charitable donations:

Pitfalls in exercising the right to a tax deduction for charitable expenses

When preparing a tax return to claim a tax deduction, you should pay attention to many practical aspects that are not specified in the legislation:

• The tax authorities will assess the deductibility of charitable expenses based on the form, not the substance

The Ukrainians often make target donations to individuals or organizations they trust. Accordingly, taxpayers who make charitable donations may transfer funds, for example, to the personal accounts of volunteers. Please note that such expenses are not classified as charity-related based on the express provision of the law.

In practice, it is impossible to claim as deductible the transfers made to special charitable accounts (for example, the accounts of the National Bank of Ukraine or UNITED24) as such legal entities are not non-profit organizations. Therefore, it is always recommended to check whether the legal entity is registered in the relevant registers when calculating expenses that may be claimed as deductible.

• Confirmation of the expenses. What documents are required by the tax authorities?

The Tax Code does not define a specific list of documents that a taxpayer is required to provide to claim a tax deduction for charitable donations. Therefore, the lists are determined by the established practice of the tax authorities and, in some cases, at the discretion of the tax inspector. In case of making charitable donations of money, the State Tax Service may require the following documents from the taxpayer:

• payment documents confirming the payment, the name of the sender and the recipient, as well as the purpose of such payment (in case of charitable money transfers);
• a donation agreement (in case of charitable donation of property) indicating the value of the donated property;
• a certificate of tax resident of Ukraine (in practice, it is always requested from foreigners);
• a certificate of length of stay in Ukraine (also required from foreigners);
• a passport of a citizen of Ukraine with a valid place of registration in Ukraine.

Currently, there is a tendency for the Ukrainian tax authorities to refuse the grant of tax deductions to taxpayers. In practice, we have encountered cases where the tax authorities refused to grant tax deductions based on the improper execution of supporting documents for an individual’s expenses, for example, due to the lack of notarized copies of payment documents. Please note that when exercising the right to such deduction, it is important to know both your obligations and rights. The taxpayer may appeal against an unlawful decision of the tax authorities not to grant tax deduction.

In conclusion, we would like to note that although the Tax Code of Ukraine does provide for charity-related tax deductions, there are significant gaps in the legislation when the taxpayers try to exercise their right to claim tax deductions. A significant number of practical obstacles to confirmation of expenses incurred, the complexity and bureaucracy of the process, and sometimes an insignificant amount of tax deduction received often demotivate the taxpayers.

In our opinion, these obstacles should not influence a taxpayer’s choice to file or not to file tax returns to claim tax deductions. The more taxpayers are aware of and exercise their rights, the more precedents will appear and become an established practice in this area.