Organizations getting used to 2025 changes for Accounting, Tax, and Payroll

As of January 1, 2025, Ukraine has rolled out substantial tax reforms that significantly impact the accounting, tax, and payroll industries. These changes, introduced through laws like №4015-ІХ and №4113-ІХ, aim to increase state revenue, particularly for defense, while aligning with international tax standards. This article explores the key tax innovations, their implications for professionals, and steps to ensure compliance in this evolving landscape.

Key Tax Changes

Military Levy Increase

The military levy, a critical source of defense funding, has increased from 1.5% to 5%, effective January 1, 2025, and will remain in place until martial law ends. This tax applies to various incomes, including:

• Salaries: Combined with an 18% personal income tax, the total deduction is now 23%.
• Individual Entrepreneurs: Group 1, 2, and 4 pay 10% of the minimum wage (~800 UAH/month); Group 3 pays 1% of income.
• Real Estate and Car Sales: Second transactions incur 5% personal income tax plus 5% military levy; third and subsequent transactions face 18% plus 5%.
• Rental and Financial Income: Subject to 18% personal income tax plus 5% military levy.

Exemptions include military personnel, mobilized entrepreneurs, and specific incomes like maternity payments. Payroll professionals must recalibrate systems to ensure accurate withholding and reporting.

Corporate Income Tax (CIT) Adjustments

The CIT rate for financial institutions (excluding insurers) has risen from 18% to 25% (State Tax Service). For Diia City residents, pension contributions and insurance payments for employees and gig specialists are exempt from the “tax on withdrawn capital.” Other changes include:

• Charitable contributions for defense by Diia City residents are not considered taxable.
• Aircraft manufacturing income tax exemptions have been discontinued.

Accounting teams must update tax computations and financial planning to reflect these changes.

Personal Income Tax (PIT) Modifications

For Diia City residents, a 5% PIT rate applies to specialist income from the month after acquiring resident status, with 18% for the acquisition month. If residency requirements are not met, the rate reverts to 18% for the last three months’ income. Additionally, tax agents must now submit monthly PIT calculations, shifting from quarterly submissions, which increases payroll reporting frequency.

Value Added Tax (VAT) Changes

Several VAT exemptions have been abolished, including those for:

• Aircraft manufacturing imports.
• Disability enterprise products.
• Air transport services (7% rate).
• Drone and equipment imports.

Businesses must now account for VAT on these transactions, requiring adjustments in financial reporting and compliance strategies (State Tax Service).

Other Notable Changes

• Transfer Pricing: New criteria for related-party transactions and an updated list of states/territories for transfer pricing purposes, with ownership thresholds increased from 20% to 25%.
• Excise Tax: Tobacco product excise rates are increasing annually until 2027, with new retail price requirements and clarified tax calculations.
• Land Tax: Exemptions for aircraft manufacturing entities have been removed.

These changes add complexity to compliance, particularly for businesses operating in specialized sectors like Diia City or tobacco.

Implications for Accounting, Tax, and Payroll Professionals

The 2025 tax reforms present both challenges and opportunities for professionals:

• Payroll Adjustments: The military levy increase requires payroll systems to be updated to handle higher deductions. Monthly PIT calculations add to administrative tasks, necessitating efficient reporting processes. Professionals should communicate changes to employees to manage expectations around net pay.
• Accounting Compliance: The CIT rate hike for financial institutions and the abolition of VAT exemptions demand revised tax planning and financial reporting. Accurate record-keeping is critical, especially with expanded audit grounds.
• Tax Advisory: Professionals must guide clients, particularly individual entrepreneurs and Diia City residents, on navigating new tax rates and exemptions. The universal filing requirement may also increase demand for employee support in tax declarations.

Preparation Strategies

To adapt to these changes, professionals should:

1. Update Systems: Ensure payroll and accounting software supports the new military levy rate, monthly PIT reporting, and updated CIT and VAT calculations.
2. Stay Informed: Monitor updates from the State Tax Service of Ukraine and consult professional networks for clarifications.
3. Invest in Training: Participate in workshops or webinars to understand the practical implications of the new tax rules.
4. Support Employees: Provide resources or guidance to employees on tax obligations, especially for individual entrepreneurs affected by the military levy.

Ukraine’s tax reforms are driven by the ongoing war and the need to fund defense efforts, as evidenced by the military levy increase. The changes also reflect a broader push toward tax modernization, with initiatives like Diia City aimed at fostering tech innovation. However, the increased tax burden, particularly for financial institutions and entrepreneurs, may raise concerns about economic competitiveness. The abolition of VAT exemptions could increase costs for industries like aircraft manufacturing, potentially affecting their operations.

The temporary nature of the military levy increase, tied to martial law, introduces uncertainty, as professionals must prepare for potential reversions or extensions. Meanwhile, the alignment with international standards, such as updated transfer pricing rules, positions Ukraine as a more transparent partner in global tax cooperation, potentially attracting foreign investment post-conflict.

Ukraine’s 2025 tax changes, including the military levy increase to 5%, the CIT hike for financial institutions, and the abolition of VAT exemptions, mark a significant shift for the accounting, tax, and payroll industries. These reforms, while necessary for state funding, require professionals to adapt swiftly to ensure compliance and support their organizations. By updating systems, staying informed, and providing employee guidance, accounting and payroll professionals can navigate this complex landscape and contribute to Ukraine’s economic resilience during challenging times.