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Ukraine: Verkhovna Rada Acts to Save the Economy

(Apr. 25, 2014)

On March, 27, 2014, the Verkhovna Rada (Ukraine’s legislature) passed an act entitled the Law on Preventing Financial Catastrophe and Creating Pre-Conditions for Economic Growth in Ukraine (Law of Ukraine No. 1166-VII [in Ukranian] (Mar. 27, 2014), Verkhovna Rada website.)

The Law entered into force on April 1, 2014, immediately after its official publication. According to Ukrainian commentators, the Law is aimed at increasing revenues, improving collection of taxes, simplifying certain provisions of the Tax Code, and implementing measures for efficient use of public funds. (Serhii Vlad, No Way to Retreat: Default [in Ukrainian], HOLOS UKRAINY, No. 62 (Apr. 2, 2014), at 20). The Law amends more than 30 existing legal acts of Ukraine, including the Tax Code, the Law on Banks and Banking Activities, the Law on Compulsory State Pension Insurance, the Law on State Assistance to Families Bearing Children, and numerous acts regulating activities of the law enforcement authorities. (Law No. 1166-VII, supra.)

Among major measures introduced by the new Law are the following:

Income Taxation

The corporate income tax rate is increased from 16% to 18% (id. Part I, art. 3) and the Value-Added-Tax rate is established at 20% (id. art. 10). A tax rate of 7% is introduced for previously tax-free transactions involving medical equipment and pharmaceuticals. (Id.) In regard to individual income taxation, a progressive tax rate of 15%, 17%, 20%, 25%, and 30% will apply depending on the taxpayer’s combined income, which will include dividends, interest, royalties, investment income, and salaries. (Id. Part I, arts. 6 & 9; Part II, art. 2.)

An additional 0.5 % tax will be collected from all individuals and legal persons exchanging foreign currency, in order to fund the compulsory state pension insurance. (Id. Part II, art. 1.)

Real Estate Tax

The Law modifies the base for real estate taxation. Formerly, the tax was based on the size of the living area of one’s residence. Now, the tax will be calculated taking into account the acreage of the lot as well. (Id. Part. I, art. 25.) Local authorities are allowed to set tax breaks for residential property and for religious organizations. (Id.)

Other Fees and Taxation

A two-fold tax increase in fees is imposed on radio frequency resources in Ukraine. (Id. Part I, art. 33.) There are also newly increased vehicle registration rates depending on the engine size of the vehicle. (Id. Part I, arts. 15 & 16.) In addition, the excise tax is increased to 39% on alcohol and alcoholic beverages, 31.5% on tobacco, and 42.5% on beer. (Id. Part I, art. 15.)

Assistance to Families Raising Children

The Law states that each woman is entitled to receive a payment in the amount of 41,280 Ukrainian Hryvnas (UAH) (about US$3,440) after her child is born. This is paid as a first payment in the amount of UAH10,320 (about US$860) immediately following the child’s birth registration, with the remaining amount paid in equal parts during the next 36 months. (Id. Part II, art. 7.) Even though a lower amount of child assistance (UAH35,288), was paid under the former law, it had a higher monetary value because the currency exchange rate was better and the payment increased substantially with each subsequent child. (Anna Ogrenchuk & Elena Volianskaia, Act of the Week: Taxes and Fees Will Go Up [in Ukrainian], IURLIGA.UA (Apr. 8, 2014).)

Retirement Benefits

Pensions paid by law enforcement agencies to their former staff members, as well as pensions of judges, prosecutors, and other civil servants, will be reduced from 80% to70% of their salaries. (Law of Ukraine No. 1166-VII, Part II, art. 3.3.)

Reduction in Civil Service Workforce

The system of law enforcement in Ukraine will be changed and the number of agencies and their staff sizes will be reduced. Following the proposed structural reorganization, the staff of the Security Service of Ukraine will be reduced from the current 33,500 persons to 31,050 (id. Part II, art. 4); the Ministry of Internal Affairs staff, from 324,400 persons to 245,000 (id. Part II, art. 5.1); and the Department of Civil Protection staff, from 2,993 persons to 2,694 (id. Part II, art. 6). The Office of the Prosecutor General will be restricted to employing only 20,367 people. (Id. Part II, art. 3.1.)

Prepared by Olena Yatsunska, Law Library affiliated researcher, under the supervision of Peter Roudik, Director of Legal Research.