On 17 November 2023, the Draft Law on Amendments to the Tax Code and the Law of Ukraine on Virtual Assets (the “Draft Law”) was submitted to the Verkhovna Rada. This Bill was long awaited because since the adoption of the Law on 17 February 2022, it has not entered into force because the condition was the entry into force of amendments to the Tax Code. The Bill is now in committee and awaiting a decision. This is a significant step towards the legalisation of cryptocurrency in Ukraine as the main issue remains the taxation regime for cryptocurrency.
The Bill was inspired by the EU MICA Directive, which we wrote about in detail in our article. Quite a lot of terms and provisions were adopted from the Directive, although not as detailed and with some changes. The purpose of this article is to give a brief overview of the draft law in order to understand how the legislator sees the prospects of cryptocurrency regulation, as it is clear that the bill has a long way to go in the committees and the chamber of the Verkhovna Rada and it may change quite significantly.
The Draft Law supplements Article 14 of the TCU with new terminology, namely adds the term “virtual assets” within the meaning of the Law on Virtual Assets. Also from virtual assets can now receive investment profit for the purposes of TCU. That is, it is investment profit that is taxable.
The financial result (profit or loss) from operations on the alienation of virtual assets is determined as the amount of income received from the alienation of virtual assets, reduced by the initial value of virtual assets.
In the case of acquisition of a virtual asset, the initial cost will be defined as the acquisition cost and other costs directly attributable to the acquisition of the asset. That is, the investment profit will be defined as the difference between the value at which you sold the token and the acquisition cost. Moreover, you can add the price of gas (gas is the fee you pay when transacting on the ether network) to the original cost. This is important because sometimes transactions are quite expensive, especially during the so-called “gas wars”.
Proposed personal income tax rates for investment profits from operations with virtual assets:
That is, the legislator has provided a rather long transition period during which it will be possible to pay a reduced rate of personal income tax.
But there is a peculiarity that concerns the amounts. The right to such rates will have PIT payers the amount of investment income from transactions with virtual assets which does not exceed 7 million hryvnias (approximately $195,000 at the exchange rate as of November 2023) for the reporting period. All others will pay the general personal income tax rate of 18 per cent. Accordingly, if the amount exceeds UAH 7 million, the taxpayer will lose the right to such rates on the entire amount of investment profits.
The law itself also has many changes compared to the previous version. Let us look at a few key points regarding the definition of tokens and what types of services require authorisation in Ukraine.
Interestingly, in contrast to the previous version, the new version divides the main powers between the Ministry of Digital Transformation (everything except e-money tokens) and the National Bank (e-money tokens).
The bill defines 4 types of tokens:
Let us elaborate on each type, as the draft law has some interesting features.
E-money tokens are defined as virtual assets whose value is linked to the value of the Ukrainian hryvnia. The key feature is that e-money tokens will be a legal means of making payments for goods, works and services throughout Ukraine. Such means may be used by mutual agreement of all participants of such settlements.
Issuers of such tokens may be exclusively banks and non-banking financial institutions resident in Ukraine. That is, here we see a full-fledged electronic hryvnia, which can be used for business-to-business settlements. It will be interesting to watch the implementation of this mechanism in life, whether banks will unite and create a single electronic hryvnia, or each bank will do it separately.
Simply put, this is a type of virtual asset for which there is a transaction in which the value of the token is linked to the value of other assets (underlying assets). For example, real estate or corporate rights. The underlying asset of such a token cannot be another virtual asset.
The main feature of this type of token is that the issuer of such tokens has only monetary obligations to the owner of the token. That is, upon redemption, the issuer will be obliged to pay the cash equivalent at the current market value of the underlying asset.
A service token is also tied by a transaction to the underlying asset, but unlike the previous type, the issuer’s obligation here is to transfer the underlying asset itself to the token holder. But if for some reason the transfer of the underlying asset is not possible, the issuer is obliged to pay a cash equivalent in the amount of the market value of the asset.
The provisions of the Civil Code of Ukraine on things apply to asset-linked tokens, service tokens and unclassified tokens.
Unclassified virtual assets include all other assets that do not fall within the previous definition or those that have other virtual assets (i.e. derivatives) as their own underlying asset. The issuer of such assets has only the obligations it has assumed in one way or another.
As a general rule, authorisation of public offerings of virtual assets is not required, except for public offerings of electronic money tokens. For the latter, authorisation by the NBU is required.
Service types copy the types from MICA. We will not list them in detail here.
We will only note that authorisation will be required to provide services related to virtual assets. Authorisation for residents of Ukraine will cost one thousand non-taxable minimum incomes of citizens (UAH 17,000), for non-residents three thousand non-taxable minimum incomes of citizens (UAH 51,000). We would like to note that the amount of the authorisation fee may still change, so keep your hand on the pulse.
It is worth briefly mentioning innovation zones. The purpose of the zone is to promote innovation in the field of virtual assets. The main feature of such zones will be the exemption of residents from authorisation for the period of participation in the zone. The duration of participation is set at 3 years.
Participation in the zone costs UAH 100,000. Also, the Ministry of Finance should establish certain criteria for applicants for participation in the zone, they should be based on the assessment of the following factors:
It is clear that this bill may still undergo numerous changes and additions. But, we can already understand the approximate framework for the functioning of the cryptocurrency market in Ukraine. Obviously, such regulation has long been relevant, given the scale of cryptocurrency use by the population and integration into business processes. We will follow the life cycle of the draft law in the future.
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