Sole proprietor on the single tax and foreign currency: taxes without mistakes

A sole proprietor on the single tax who receives income in foreign currency is taxed under the general rules of the simplified system, but with a special procedure for converting it into hryvnias and with regard to foreign exchange regulations.

Legal framework: where we start
The key rule is Article 292.5 of the Tax Code of Ukraine: the foreign currency income of a single-tax sole proprietor is converted into hryvnias at the official NBU exchange rate on the date it is received, and all amounts in the records are shown only in the national currency. In addition, the requirements of foreign exchange legislation and foreign economic activity must be observed with respect to documentary confirmation of receipts from non-residents. The single tax rates do not depend on the currency of receipt; only the method of determining the tax base via conversion at the NBU rate changes, while subsequent movements of the currency (sale, conversion, etc.) do not affect the amount of business income.

When income is considered received
For tax purposes, it is crucial to correctly determine the moment when income in foreign currency is considered received. If a non-resident pays directly to the entrepreneur’s foreign currency account in a Ukrainian bank, the income date is the day the funds are credited to this account (or from a transit account to the current one, if the bank uses such a mechanism). In the case of receipts via international payment systems (Payoneer, Wise, Deel, etc.), the income date is the day the funds are credited to the account in the payment system, not the date of the subsequent transfer to a Ukrainian bank; the NBU rate on that date must be used.

If the currency remains on a foreign account for a long time without being transferred to Ukraine, the tax authorities tend to treat such receipts as ordinary individual income rather than business income. In that case, personal income tax of 18% and a 1.5% military levy apply under the rules for taxing foreign income of individuals instead of the single tax. Therefore, it is beneficial for the entrepreneur to ensure that foreign currency proceeds are transferred to “entrepreneurial” accounts within the prescribed time limits in order not to lose the right to the simplified regime for these amounts.

How to convert foreign currency into hryvnias
The basic conversion rule is simple: foreign currency income is converted into hryvnias once – at the official NBU rate on the date it is received for tax purposes. If the funds are credited to the entrepreneur’s foreign currency bank account, the NBU rate on the credit date to that account is used, regardless of when and at what rate the currency is later sold. When income first arrives in a foreign payment system, it is reasonable to use the NBU rate effective on the date the funds are credited to the account in that system, because that is when the income arises under the Tax Code.

It is important that the full amount of foreign currency proceeds determined at the NBU rate is included in income without any reduction for bank fees or other charges. For example, if a non-resident transfers 2,000 US dollars, the bank withholds a 50‑dollar fee and 1,950 is actually credited, for tax purposes income is calculated based on the full 2,000 dollars. Any exchange rate fluctuations after the income recognition date do not change the amount that the entrepreneur reports in accounting and tax returns, even if the actual hryvnia proceeds from selling the currency turn out to be higher or lower.

Exchange differences and currency sales
A common mistake is trying to add exchange differences or “profit” from selling currency to taxable income by following an accounting approach. For a single-tax sole proprietor the rules are different: the tax authorities state that exchange differences and the result from selling currency are not included in income subject to the single tax. This means that if the entrepreneur sells currency at a higher rate than on the income recognition date, the additional hryvnia gain is not taxed as business income.

Court practice and tax clarifications for legal entities on the simplified system also confirm that exchange differences from selling currency do not form the single tax base, and the tax authorities apply this approach to sole proprietors as well. The flip side is that if the exchange rate falls, the loss from selling currency does not reduce the taxable base of a single-tax sole proprietor either, so the entrepreneur bears all exchange rate risks. From a tax planning perspective, it is therefore important to understand that taxable income is fixed once at the moment of receipt and is not adjusted for subsequent conversions.

Practical points for a single-tax sole proprietor
To minimise tax risks, a sole proprietor should keep a full set of primary documents: contracts with non-residents, invoices, acts of services rendered, and bank or payment system statements. It is necessary to monitor foreign currency accounts to ensure that all receipts are strictly business-related, and transfers via payment services should preferably be brought into Ukraine within the same reporting period so that they are not treated as foreign income of an individual. In the records, the entrepreneur shows hryvnia amounts recalculated at the NBU rate on the date of receipt, which are then used to calculate the single tax, the military levy and, in parallel, the minimum social contribution; automation tools may be used, but the entrepreneur remains responsible for the data and decisions.

If you have any questions or issues related to the taxation of foreign currency income of a single-tax sole proprietor, the drafting of contracts with non-residents, or the accounting and reporting of such amounts, I recommend seeking an individual consultation with a lawyer who will analyse your specific situation and help minimise tax risks.

Author – Yuliia Popadyn, attorney in tax and housing law at the law firm “Legal Company ‘WINNER’.