Relocation 2022: How to Avoid the Double Taxation Trap in the EU and VAT Blocking in Ukraine

 

October 2022. The war has been going on for eight months. The euphoria of “we moved assets and people to safety” has passed. Now comes the time for a reality check, and it has a specific price in Hryvnias or Euros.

Many of you have moved production to Zakarpattia or the Lviv region, and sent your back office to Poland, Germany, or Spain. You think you have saved the business. Tax authorities (both Ukrainian and European) think otherwise: they see a “scheme” and a new tax base.

If you haven’t conducted a tax audit of your new structure yet — you are already late. But we will try to fix the situation before your accounts are blocked.

Relocation within Ukraine: Risks of Tax Invoice Blocking

Moving to Lviv, Ivano-Frankivsk, or Uzhhorod creates an illusion of safety. But changing your legal address is a red flag for the Risk Monitoring System (SMKOR).

The Opponent’s Logic (State Tax Service):
The inspector sees: a company from Kyiv or Kharkiv abruptly changes its address, changes the nomenclature of goods (because you are adapting to the market), and starts working with new counterparties. To the tax algorithm, this looks like “carousel fraud” or fictitious activity.

Legal Hack: How Not to Lose VAT

Do not rely blindly on the Taxpayer Data Table. In practice, in October 2022, we see mass blocking of tax invoices, even for “white” businesses.

• Submit Form 20-OPP for new rental properties or warehouses before starting active operations. Absence of 20-OPP at the new location guarantees blocking.
• Record force majeure. If your primary documents were lost during occupation or shelling, do not wait for an audit. Notify the STS via the special procedure (according to Law No. 2120-IX and bylaws) to get a deferral, not a fine.

Tax Residency in the EU: The 183-Day Rule and Double Taxation

This is the most painful point as of autumn 2022. Many business owners and top managers left for Europe in February-March. Let’s count: March + 6 months = September.

That is, as of now, you have likely been in the EU for over 183 days.

What is the risk?

You continue to manage a Ukrainian LLC, receive a salary or dividends on Ukrainian cards, paying taxes to our budget (and this is patriotic). But the tax authorities of Germany, Poland, or Spain consider you their tax resident.

Logic of the European Inspector:
“Do you live here? Do your children go to school here? Have you been here for more than half a year? Pay taxes on ALL global income to our treasury.” And their rates are not our 5% or 18%. It can be 30-45%.

Legal Hack: Center of Vital Interests

There is no “automatic” double taxation, but there is a risk of paying the difference. Your defense is the Double Taxation Avoidance Conventions.

To remain a tax resident of Ukraine, you need to prove that your “center of vital interests” remained in Kyiv, not in Warsaw:

• Keep your Ukrainian residency registration (propyska).
• Demonstrate that your main business and source of income are in Ukraine.
• Do not rush to buy real estate in the EU as an individual without consulting an international lawyer.

Simplified 2% System: Pitfalls for International Business

The introduction of the 2% single tax rate (Law No. 2120-IX) in the spring was a salvation. But now I see businesses relaxing. Owners think: “I am on 2%, no one will touch me.” This is a mistake.

Transitioning to 2% does not exempt you from liability for violations committed before the transition.

Moreover, if you plan to work with foreign counterparties, the status of a 2% Single Tax payer can become a problem for VAT reimbursement or tax credit abroad. This is a survival tool, not for long-term international structuring.

FAQ: Answers to Current Relocation Questions

1. Can a director manage a Ukrainian firm while sitting in Spain?

Yes. But if the director is the real center of decision-making (management and control), then the Spanish tax authorities may recognize your Ukrainian company as a resident of Spain and force you to pay corporate tax there. At LBA, we solve this through proper structuring of powers and protocols.

2. Is it worth transferring assets to a new firm in Western Ukraine?

It is worth it if you want to protect them from physical destruction by war. But legally, the transfer of assets must take place at market prices. If you “transfer” equipment for 1 Hryvnia, expect additional charges for income tax and VAT.

3. How to confirm the impossibility of paying taxes due to the war?

You need a clear internal order within the enterprise and an evidentiary basis (damage acts, certificates from the State Emergency Service, extracts from the registry regarding the combat zone). Just saying “we have a war” is not enough for the tax authorities — the Ministry of Finance has approved a strict confirmation procedure.

Conclusions: War Will Not Write Off Tax Debts

Will the war write everything off? No. The war will only delay audits. Now, in October 2022, you have a window of opportunity to bring your document flow in line with the realities of relocation.

Do not wait until the European tax authorities send you a “demand letter” or the Ukrainian ones block your invoices. At LBA, we specialize in complex cases where taxes, asset security, and international law intersect. Our task is your financial result, not the process for the sake of the process.

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About the Author

Denys Fedorkin — Managing Partner of Law Business Association (LBA). A lawyer with 17 years of experience in business protection, tax law, and real estate transaction support. Specializes in resolving complex disputes with state bodies and structuring international assets.

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