IT FOP and VAT: when the risk arises

Providing IT services to foreign customers has long become a typical business model for Ukrainian sole proprietors (FOPs), especially those in the third group of the single tax. The main “feature” of this model is foreign‑currency income, no VAT, and often a complete absence of interaction with the domestic market. At the same time, the introduction of a general threshold for mandatory VAT registration at the level of UAH 1 million for simplified‑tax‑system FOPs, as well as discussions on abolishing the “VAT benefit” for single‑tax payers, have raised the question of whether an IT‑FOP working almost exclusively with non‑residents may be required to register as a VAT payer and what exactly creates such a risk.​

When does VAT actually “switch on”?
The first key point is to understand that the object of VAT taxation is not any service, but only those whose place of supply is located within the customs territory of Ukraine. For services, including in the IT sphere, the place of supply does not automatically coincide with the country of the provider but is determined under the special rules of Article 186 of the Tax Code of Ukraine.​

For IT and electronic services, the legislator has established a single approach: the place of supply is considered to be the place of registration of the service recipient. This means that when an individual entrepreneur (FOP) programmer sells their code, support, development, hosting, SaaS or other digital services to a non‑resident company that has no permanent establishment in Ukraine, the place of supply of such a service is outside the customs territory of Ukraine and, therefore, such an operation is not subject to Ukrainian VAT.​

Export of IT services to a non‑resident: what about the UAH 1 million threshold
The second element of the framework is the threshold for mandatory VAT registration. Currently, it is UAH 1 million of total supply turnover over the last 12 calendar months, and once this threshold is exceeded, the person must register as a VAT payer within the prescribed period. The tax authorities emphasise in their clarifications that this million‑hryvnia threshold includes all transactions subject to VAT at any rate, as well as exempt (conditionally exempt) transactions – in fact, the entire volume of taxable turnover.​

At the same time, it is specifically underlined that transactions which are not an object of VAT at all, i.e. where the place of supply is determined to be outside Ukraine, are not included in the calculation of this threshold. For an IT‑FOP this means that if all (or the overwhelming majority of) services are provided to non‑residents with the place of supply abroad, such export does not form the “million” for compulsory VAT registration.​

Where does the real risk of VAT registration arise?
The risk for an IT‑FOP stems not so much from the mere fact of working with non‑residents as from the mixed nature of the activity and possible changes in legislation. If part of the transactions is carried out for Ukrainian residents (business clients or individuals), the place of supply of such services is already determined to be in Ukraine, and they automatically fall into the base for calculating the UAH 1 million threshold.​

In practice, an IT‑FOP that starts as a “pure exporter” quite often gradually begins to take on small orders from Ukrainian customers – from website maintenance to the development of small modules, integrations, design or consulting. If the volume of such resident‑based operations increases, they may be the very factor that leads to exceeding the threshold and to the obligation to register as a VAT payer. An additional challenge is the ongoing discussions about abolishing the “benefit” for single‑tax payers and expanding the areas where VAT registration will become mandatory once a certain turnover is reached, regardless of the client structure.​

A separate dimension: electronic services and the role of the non‑resident
It is important to distinguish between a situation where a FOP itself provides IT services to a non‑resident and a situation where a FOP receives electronic services from a non‑resident (for example, advertising, cloud services, marketing tools). For received electronic services, the law sets special rules: if the non‑resident is registered as a VAT payer in Ukraine under the simplified procedure of Article 208¹ of the Tax Code, it is the non‑resident who is responsible for charging and paying VAT, even if the recipient is a FOP that is not a VAT payer.​

If, however, the non‑resident is not registered as a VAT payer in Ukraine, then according to the clarifications of the tax authorities, the FOP recipient of electronic services (who is not a VAT payer) must independently charge and pay 20% VAT under Article 208 of the Tax Code, regardless of whether the volume of such services exceeds the UAH 1 million threshold or not. This is no longer about the VAT registration threshold, but about a separate obligation to pay VAT as a tax agent; however, such situations often become the first “signal” for the tax authorities regarding the scale of the FOP’s activity and may prompt a more detailed analysis of its turnover in the context of overall VAT registration.​

Practical steps to minimise risks
To keep the risk of VAT registration under control, an IT‑FOP should build a systematic approach to recording transactions. First of all, this means separating the accounting of income from non‑residents (export of IT services with the place of supply abroad) and income from residents (transactions with the place of supply in Ukraine); a separate register or analytical accounts in the accounting system make it possible at any time to show which transactions are included in the “million” and which are not.​

It is also important to record the tax status of the customer: whether the non‑resident has a permanent establishment in Ukraine, whether they are registered as a VAT payer for electronic services, as well as to correctly define the types of services (IT, electronic, consulting, marketing) at the level of contracts and primary documents. Clear contractual documentation and transparent income accounting make it possible to reasonably demonstrate that a significant part of turnover is export of services that does not create a VAT taxable object and should not be included in the threshold for mandatory registration.​

Author – Yuliia Popadyn, attorney in the tax and housing law practice of the WINNER Law Firm

If you have any questions or issues related to determining the place of supply of IT services, calculating the UAH 1 million VAT threshold, drafting contracts with non‑residents or charging VAT on received electronic services, it is advisable to seek individual tax advice and professional legal support to minimise the risks of additional tax assessments, penalties and forced VAT registration.