INCOME TAXATION OF THE PROVISION OF HOUSING FREE OF CHARGE IN THE COURSE OF MISSIONARY ACTIVITY IN UKRAINE - Научное сообщество
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INCOME TAXATION OF THE PROVISION OF HOUSING FREE OF CHARGE IN THE COURSE OF MISSIONARY ACTIVITY IN UKRAINE

08.03.2015 17:35

[Секция 5. Административное право. Административное процессуальное право. Таможенное и налоговое право. Муниципальное право]

Автор: Fedchyshyn Yuriy, research Fellow of the Institute of Financial Law


Ukrainian law treatment of certain certain tax issues on the undocumented provision of housing free of charge to the missionaries by the church registered as a non-profit organization in Ukraine.

The evangelistic and missionary activities of Christian churches as well as the activities of other churches in Ukraine play a vital role in the life of Ukrainian society. Missionaries provide the example of openness and social responsibility taking care of the most sensitive areas of social problems in Ukraine. At the same time, many foreign missionary organizations work in a very informal way, which can cause problems when interacting with Ukrainian formalistic legislation. In this Abstract we analyse the tax pitfalls of providing undocumented free of charge provision of housing by the church to its missionaries in Ukraine.

On the treatment of general activities of the NPO for the tax law purposes

According to the Ukrainian tax law, non-profit organizations («NPO») do not conduct profitable activities as their main goal [1]. Tax law specifically envisages that income gained from the designated sources by non-profit organizations is exempt from income tax. However, an income of non-profit organizations that is not gained from such specifically designated sources is subject to income tax [2].

On the status of missionaries for the tax law purposes:

Missionary work is defined in the tax legislation as an independent professional activity, and missionaries are treated as self-employed persons. Missionaries are deemed to be carrying out their activities independently, and cannot be considered employees within their missionary activities [3]. However, a missionary can still be employed by the NPO if he or she provides any labour services to it and signs a work contract according to the labour legislation.

On the issue of income of the NPO for the free of charge provision of housing:

Provision of housing is treated as the provision of services. Free of charge provision of services occurs when there is no demand for compensation in exchange for such a provision of services. The free of charge provision of services is treated as a sale of result of services [4]. Income of non-profit organizations derived from such services is not specifically exempt from income tax by the tax law, and Ukrainian tax law stipulates that if a non-profit organization receives such an income, such a non-profit organization is liable to income tax. Income for these purposes is calculated according to the amount of income derived from such other sources reduced by the amount of costs related to such income, but not exceeding the amount of such income [5].

According to the abovementioned, tax authorities may treat the free of charge provision of housing as a deemed rental agreement between the missionaries and the NPO, and state that the provision of such services should be included in the gross income of the NPO and reflected in its tax declaration as «Other income» received in the form of «unpaid rental services». The amount of the deemed compensation for such services is calculated according to the usual prices which are considered to be equal to the market value. 

Such a qualification is not undisputable. An alternative and sound approach is to treat the free of charge provision of services by the NPO as being outside the scope of income tax, since the NPO does not receive any compensation for the provision of such services and there is no increase in economic benefits or equity for the NPO. Such an approach would most likely be supported by the court according to the established judicial practice.

On the income for the missionary if he or she is employed by the NPO:

In the situation the missionary is employed by the NPO to perform any functions, the missionary may be treated as obtaining a qualifying additional benefit which is subject to income tax [6]. The amount of such benefit is calculated according to the usual prices which are deemed to be equal to the market value.  The NPO as the employer would be treated as a withholding agent for such a tax [7]. Thus, the NPO may be subject to penalties if it fails to withhold the tax.

Conclusions

The legislation is mostly sensitive to the non-profit charitable activities of the missionaries. However, a careful planning for activities in Ukraine is always advisable in order to reduce uncertainty and unnecessary confrontation with the tax authorities. It was correctly pointed out the «legitimate interest of countries to decide on what they regard as a public benefit and to apply the necessary fiscal controls […] in order to prevent tax evasion […]» [8].




1. Article 14.1.121 of the Tax Code of Ukraine

2. Article 133.1.4 of the Tax Code of Ukraine

3. Article 14.1.226 of the Tax Code of Ukraine

4. Article 14.1.13 of the Tax Code of Ukraine

5. Article 157 of the Tax Code of Ukraine

6. Article 164.2.17 of the Tax Code of Ukraine

7. H. Voytsitskyi & Y. Zaluskyy, Ukraine – Individual Taxation, Country Analyses IBFD (accessed 25 Feb. 2015)

8. S. Heidenbauer et al., Cross-Border Charitable Giving and Its Tax Limitations, 67 Bull. Intl. Taxn. 11 (2013), Journals IBFD



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