A relief for some, a trap for others? How the government decided to “take care” of your rental income
10 June 15:55
Ukrainians who rent out property now have a reason to consider coming out of the shadows. This opportunity arose after Ukrainian lawmakers voted to reduce the personal income tax (PIT) rate for such citizens from 18% to 5% effective January 1, 2027. Will this be enough of a reason to “step out of the shadows”? "Komersant Ukrainian" investigated.
The law on the taxation of income earned through digital platforms, adopted on June 9, is intended to help “bring out of the shadows” all those who use transportation, delivery, housing rental, and goods sales services in their activities. But private landlords had a chance to get their own “personal” law earlier, as proposals to ease tax requirements for them had been circulating for a long time.
Not the first attempt
In February of this year, Bill No. 15031 was registered in parliament, proposing not only to reduce the personal income tax rate on rental income from 18% to 5%, but also to introduce a temporary exemption for the duration of martial law and generally exempt such income from taxation. However, this legislative initiative did not gain support, just like many other similar proposals.
According to Nina Yuzhanina, a representative of the Verkhovna Rada Committee on Finance, Tax, and Customs Policy, she has been working on this issue for the past three years, proposing both draft laws and amendments, but the Ministry of Finance did not see the point in giving the market a chance to “come out of the shadows” through a simplified tax system and a reduced rate.
“Today, an individual who rents out real estate must pay an 18% income tax plus a 5% military levy, for a total of 23%, and then file an annual tax return, filling out all sections of the form—which details a person’s financial status, including both taxable and non-taxable income for the year, as well as assets held at year-end. This is very complicated, and few people can manage it. Therefore, only a limited number of people—primarily those who need to report official income—choose to officially rent out real estate to individuals. That is why this 5% rate should have been introduced long ago. But the Ministry of Finance did not agree; they said that this was completely illogical and that “we are seeking financial resources in wartime conditions,” the expert notes.
There may be a simple explanation for why government officials have now agreed to lower the tax rate. It has to do with the law on taxing income earned through digital platforms. It is designed to ensure a level playing field for all market participants. And when discussing the taxation of taxi drivers’ and delivery workers’ income, one cannot overlook landlords, who also use digital platforms.
So, the decision has been made, and the tax burden will be reduced starting January 1, 2027. And Olena Shulyak, chair of the parliamentary Committee on the Organization of State Power, Local Self-Government, Regional Development, and Urban Planning, already has grounds to state that, in her opinion, this is one of those cases where a lower tax rate can yield better results for the state:
“Lowering the rate to 5% should create incentives to work legally, enter into official contracts, and pay taxes. In the end, everyone wins: landlords will get simpler and clearer rules, tenants will have better protection of their rights, and the state will gain additional revenue and a more transparent market.
Someone will still lose
The scenario where everyone wins seems rather optimistic. Because there are potential problems. Nina Yuzhanina, a member of the Verkhovna Rada Committee on Finance, Tax, and Customs Policy, supports lowering the tax rate for landlords but notes the presence of “bottlenecks.” She explained that she had studied specific situations and tried to understand why some people who live in suburban homes but rent out apartments in the city are in no hurry to do so officially. And here are the conclusions Nina Yuzhanina reached:
“This new measure does not currently comprehensively solve the problem faced by landlords. In particular, because a person who rents out property loses property tax benefits; that is, if a landlord rents out housing, they lose the tax-exempt square footage for which no property tax is paid. That is the first point. The second, which has an even more serious impact, is that a problem arises with receiving assistance for low-income individuals—that is, subsidies—which are lost if the housing is rented out. In other words, it cannot be definitively stated that merely lowering the tax rate—even under a simplified tax filing system for such citizens—will lead to 100% formalization.”
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But, according to the MP, we have to start somewhere and prepare for the next changes.
Incidentally, the Ministry of Finance has already begun preparing for the changes: a few days ago, a government decision amended the procedure for notaries to submit notifications of real estate lease agreements. Notaries are now required to submit these notifications electronically on the day the contract is certified, using a qualified electronic signature and including information about the notary, the lessor, the lessee, and the leased property.
The Ministry of Finance hopes that these changes will automate data processing in the State Tax Service’s information and communication system and improve the efficiency of administering personal income tax on rental income from real estate. In other words, the tax authorities have already promised to pay closer attention to those who officially rent out housing.
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