Purchasing services from a non-resident: when a person not registered for VAT must account for the tax, and when not

Sole proprietors and companies that are not VAT payers regularly purchase services from non-residents: advertising, hosting, software subscriptions, consultancy, development work, equipment hire. For some of those transactions the Tax Code of Ukraine places the obligation to charge and pay VAT on the recipient. In July 2025 the Supreme Court held that this requirement does not extend to single tax payers who are not registered for VAT. The State Tax Service has not changed its position since, so the question remains contested and is usually identified during a tax audit.

This article covers the conditions under which the obligation arises and those under which it does not, how the tax is calculated and on what form it is reported, the reasoning of the Supreme Court and the limits of that judgment, the response of the tax authority, and what a taxpayer should do before the transaction and after an audit report. It concerns sole proprietors on the single tax, legal entities on the simplified system, and newly incorporated companies that have not yet reached the turnover which triggers mandatory VAT registration under clause 181.1 of the Code.

In brief

• The obligation to charge VAT arises only where four conditions are met simultaneously and falls away if any one of them is absent.
• The recipient’s VAT registration is not among those conditions: it determines the reporting form, not the existence of the obligation.
• No input VAT credit arises for a person not registered for VAT, so the amount charged is a final cost of the transaction.
• Such a person does not file a VAT return but a separate form: the Calculation of tax liabilities accrued by a recipient of services who is not registered as a VAT payer.
• In July 2025 the Supreme Court held that a single tax payer who is not registered for VAT has no such obligation. This has not yet changed audit practice.

Read also: What the tax authority sees in 2026, Tax limitation period of 1,095 days, Business purpose in transactions with non-residents.

The legal structure

Chapter V of the Code is built around the concept of a “person” under sub-clause 14.1.139, which does not coincide with the class of registered VAT payers. The recipient’s obligation therefore arises only where four conditions are met at the same time:

• the supplier is a non-resident, and the transaction is not taken outside Article 208 by reason of that non-resident’s registration under clause 208-1.2;
• the place of supply of the particular service is determined to be within the customs territory of Ukraine;
• the transaction is an object of taxation and is not exempt;
• the recipient falls within the class of persons under sub-clause 14.1.139.

The conditions are cumulative. The absence of any one of them removes the question entirely rather than reducing the amount.

The recipient’s VAT registration does not appear in that list: it affects how the transaction is reported, not whether there is anything to charge.

First condition: the supplier and its registration status

Clause 180.2 identifies the recipient of services as the person responsible for charging and paying the tax where services are supplied by non-residents, including their permanent establishments not registered as taxpayers. Clause 180.3 and clause 208.5 place such a recipient on the same footing as a VAT payer as regards payment of the tax, recovery of tax debt and liability.

There is one carve-out from that rule. Under the second paragraph of clause 208.1, Article 208 does not apply where electronic services are supplied by a non-resident registered as a VAT payer under clause 208-1.2 and the recipient is a sole proprietor who is not registered for VAT. In that case the non-resident charges and pays the tax, while the recipient charges nothing and files no Calculation.

Since most large digital service providers are registered in Ukraine, the counterparty’s status should be checked against the register of non-residents registered as VAT payers maintained by the State Tax Service. The carve-out is drawn narrowly: it applies only to sole proprietors, so for a legal entity on the simplified system the transaction remains within Article 208.

Second condition: the place of supply

Clause 186.4 is the residual rule: the place of supply is the place of registration of the supplier, save for the transactions listed in clauses 186.2, 186.3 and 186.3-1. Those three exceptions are therefore what must be checked, and only if none applies is the place of supply determined by reference to the supplier, in which case no Ukrainian VAT arises.

Clause 186.3 sets out a closed list of services for which the place of supply is the place of registration of the recipient. It includes consultancy, engineering, legal, accounting and audit services, the development, supply and testing of software, data processing, the supply of staff, advertising services, the hire of movable property other than vehicles and bank safes, telecommunications services and freight forwarding services.

Clause 186.3-1 fixes the place of supply of electronic services as the location of the recipient.

Clause 186.2 operates differently: the place of supply is tied not to a party to the contract but to the place of actual performance or the location of the property. It covers services connected with movable property, in particular repair, processing, valuation and ancillary transport services; services connected with immovable property; and services in the fields of culture, the arts, education, science, sport and entertainment. Here the answer depends on the facts: repair of equipment carried out by a non-resident within Ukraine gives a Ukrainian place of supply even though no such service appears in clause 186.3, whereas the same repair carried out abroad does not.

The place of supply is therefore answered by classifying the particular service under clauses 186.2, 186.3 and 186.3-1, not by the residence of the counterparty.

Third condition: object of taxation and exemption

Clause 185.1 defines the object of taxation by reference to the supply of services whose place of supply is within the customs territory of Ukraine. The preceding condition is thus part of this one: once a Ukrainian place of supply has been established, the object exists and need not be demonstrated separately.

Two exceptions remain to be checked. Article 196 takes the transactions listed in it outside the object of taxation. Article 197 exempts a transaction which is an object of taxation. In both cases no liability is charged, but the ground differs, and it should be identified precisely in objections to an audit report.

Fourth condition: the recipient as a person under sub-clause 14.1.139

The list in sub-clause 14.1.139 is exhaustive. A single tax payer who is not registered for VAT does not fall within it. This is the basis of the Supreme Court’s position and the very point on which the tax authority disagrees.

Where the obligation arises: rate, taxable amount, tax point

Under clause 208.2 VAT is charged at the standard rate or at 7 per cent for the services specified in the fourth, fifth and sixth paragraphs of sub-clause (c) of clause 193.1.

The taxable amount under clause 190.2 is the contractual value of the service inclusive of taxes and duties but exclusive of VAT itself, translated at the National Bank of Ukraine rate on the date the liability arises. If the non-resident has withheld any tax in its own jurisdiction, that amount is not excluded from the taxable amount.

The date is fixed by the third paragraph of clause 187.8 on a first-event basis: either the debiting of funds from the account in payment for the services or the execution of the document evidencing the supply of the services by the non-resident, whichever occurs first.

Reporting

A person not registered for VAT files no VAT return and issues no tax invoice: clause 208.4 expressly relieves such a person of the obligation to issue an invoice and refers instead to a separate reporting form.

The full title of that form is “Calculation of tax liabilities accrued by a recipient of services not registered as a payer of value added tax, which are supplied by non-residents, including their permanent establishments not registered as taxpayers, within the customs territory of Ukraine”. It was approved by Order of the Ministry of Finance No. 21 of 28 January 2016, together with the VAT return form and the Procedure for the completion and filing of VAT reporting. Structurally it is not a return but a single-page document: the value of the service received, the VAT charged, and no lines for input VAT credit or a negative balance.

The Calculation is not filed continuously but only for the reporting month in which the tax liability arose. Where there were no transactions with a non-resident in a given month, no nil return is required. The filing deadline is 20 calendar days after the last day of the reporting month (clause 49.18.1), and payment is due within 10 calendar days after that deadline (clause 57.1). Failure to file the Calculation attracts a separate penalty under clause 120.1, irrespective of whether the VAT itself has been paid.

Why no input VAT credit arises

Clause 208.5 places the recipient on the same footing as a taxpayer for a closed list of purposes: payment of the tax, recovery of tax debt and the imposition of liability. The formation of an input VAT credit is not among them. The credit is also unavailable procedurally: no invoice is issued under clause 208.4, and under clause 198.6 the only basis for an input VAT credit is an invoice registered in the Unified Register of Tax Invoices.

The consequence is economic and should be built into pricing before the contract is signed. For a registered VAT payer Article 208 is financially neutral, because the liability and the credit are settled within the same period. For a person not registered for VAT there is no such neutrality: the service becomes more expensive by the amount of the tax, permanently. Subsequent registration does not cure the position, since the right to an input VAT credit operates from the date of registration and does not extend to amounts charged earlier.

The position of the Supreme Court

Judgment of the Administrative Court of Cassation within the Supreme Court of 23 July 2025 in case No. 520/32392/24.

A company on the single tax, group 3, at the 5 per cent rate and not registered for VAT, hired movable property from a United States company, with the result that the place of supply under clause 186.3 fell within the customs territory of Ukraine. The tax authority assessed additional VAT of UAH 65,562 and a penalty of UAH 16,390.50, together with UAH 7,480 for failure to file the Calculation. The courts of first instance and of appeal upheld the tax authority. The Supreme Court set aside all the tax assessment notices and awarded costs against the tax office.

The reasoning. Chapter V of the Code, which contains the obligation to charge VAT on services purchased from a non-resident, extends only to “persons” within the meaning of sub-clause 14.1.139, and that list does not cover a single tax payer who is not registered for VAT. Without the status of a person there is no basis for charging the tax, and without a charge the reporting obligation falls away as well. As a further argument the Court relied on clause 291.2 and sub-clause 3 of clause 297.1, which relieve a single tax payer of the obligation to charge, pay and report VAT, save for those who have elected a rate providing for its payment.

On the binding force of that conclusion. The inclusion of the position in the Court of Cassation’s review of case law is of informative value, but the legal basis of its binding force lies elsewhere and is stronger. Part five of Article 13 of the Law of Ukraine “On the Judiciary and the Status of Judges” provides that conclusions on the application of rules of law set out in judgments of the Supreme Court are binding on all public authorities which apply the relevant legislative act in their activities. The State Tax Service is such an authority. This is therefore not a recommendation which the authority is free to disregard, but an obligation which it is not discharging.

Limits of the judgment

The parties to the case. The claimant was a legal entity, and the judgment operates on the part of sub-clause 14.1.139 that concerns legal entities. For sole proprietors the list contains a separate, identically constructed sub-clause, which supports extending the conclusion to them. But that remains an extrapolation rather than a direct judicial answer, and the tax authority exploits the gap.

The transaction in dispute. The case concerned a hire of property. The test itself does not depend on the type of service, because it examines whether the recipient falls within the class of persons rather than what was purchased. That makes the argument transferable to other services, including electronic ones, but not equivalent to a direct answer in respect of them.

The periods covered. The periods in dispute were 2020 and 2021, so the Court did not consider later amendments to the Code. No amendments were made to the relevant part of sub-clause 14.1.139, which makes this limitation formal rather than substantive.

The scope of the conclusion. It rests on the test of a person’s status and therefore operates only where that test applies. Where the Code expressly designates an unregistered person as a taxpayer, as clause 181.2 does for the importation of goods, reliance on this judgment is misplaced.

The position of the tax authority after the judgment

The authority has not revisited its approach. In December 2025, five months after the judgment, a clarification was published by the Main Directorate of the State Tax Service in Odesa Region, and in the spring of 2026 the same proposition was repeated verbatim by the Ivano-Frankivsk Directorate. Both texts require a sole proprietor who is not registered for VAT to charge and pay the tax under Article 208 as soon as an electronic service is purchased from an unregistered foreign supplier, with no mention of the purchaser’s tax regime.

These publications do not have the status of an individual tax ruling under Article 52; they are informational materials on departmental websites. They afford protection to no one, but they show precisely how an inspector will argue.

A checklist before paying a non-resident

1. Classify the subject matter of the contract under clauses 186.2, 186.3 and 186.3-1. If none of them covers the service, the place of supply is determined by reference to the supplier under clause 186.4 and the question falls away.
2. Check Articles 196 and 197. If the transaction is taken outside the object of taxation or exempted, no liability arises.
3. For electronic services, check whether the non-resident is registered under clause 208-1.2. For a sole proprietor who is not registered for VAT this removes the obligation entirely.
4. Establish your own status under sub-clause 14.1.139. The list covers persons on the general system and single tax payers who are also registered for VAT. A single tax payer who is not registered for VAT does not, on the Supreme Court’s view, fall within it.
5. If the obligation arises, determine the date under clause 187.8, the taxable amount under clause 190.2 and the rate under clause 208.2, file the Calculation and pay within the prescribed periods.

Common errors

Equating registration with the obligation. The absence of VAT registration does not in itself dispose of the VAT question on services purchased from a non-resident.

Checking only the supplier’s residence. What matters is the classification of the particular service under clauses 186.2, 186.3 and 186.3-1, not the mere fact that the counterparty is foreign.

Extending the Supreme Court’s conclusion to the general system. A person on the general system is a payer of taxes and duties established by the Code other than the single tax and therefore falls within the list in sub-clause 14.1.139 even without VAT registration.

Extending the conclusion to single tax payers registered for VAT. They do fall within the class of persons and charge the tax on services purchased from a non-resident on ordinary principles.

Treating a clarification on a directorate’s website as a ruling. Relief from liability under clause 53.1 is available only on an individual written ruling, and under clause 52.2 it protects solely the taxpayer to whom it was issued.

Conclusion

The obligation to charge VAT on services purchased from a non-resident is tied not to the recipient’s registration status but to four cumulative conditions: the status of the supplier, the place of supply, the existence of an object of taxation, and the recipient’s membership of the class of persons under sub-clause 14.1.139. Registration determines only the form of reporting. That is why the assertion “we are not VAT payers” answers none of the questions in this article, and why the tax authority’s demand “you received the service, therefore pay” answers none of them either.

The Supreme Court’s conclusion goes to the fourth condition: a single tax payer who is not registered for VAT does not fall within the class of persons, and Chapter V therefore does not extend to it at all. That is a fundamentally different construction from an exemption: an exemption presupposes that an obligation arose and was then lifted, whereas here it does not arise, and consequently no obligation to file the Calculation arises either.

The legal force of that conclusion is underestimated. It is not a position the State Tax Service is free to weigh at its discretion: under part five of Article 13 of the Law “On the Judiciary and the Status of Judges” it is binding on the supervisory authority. In practice, however, the authority does not apply it, so for the taxpayer the question is not who is right but what financial exposure a dispute entails.

That exposure is defined by the Code and can be quantified in advance. On an assessment the taxpayer faces the VAT itself, a penalty of 10 per cent under clause 123.1 or of 25 per cent under clause 123.2 if the supervisory authority establishes intent, a separate penalty for failure to file the Calculation under clause 120.1, and interest. In the case described above the 25 per cent penalty was applied. Where the aggregate is less than the expenditure on administrative and judicial challenge, charging and paying the tax is the rational course. Where it is greater, or the transaction recurs, it is worth obtaining an individual tax ruling in advance: the answer will predictably be negative, but clause 53.2 permits a ruling to be challenged in court, and its annulment obliges the authority to issue a fresh ruling taking account of the court’s conclusions. The dispute is then resolved before the transaction rather than after an audit report.

Two gaps sustain the uncertainty. There is no direct judgment of the Supreme Court concerning a sole proprietor rather than a legal entity, and none specifically on electronic services and the interaction between Articles 208 and 208-1. A separate risk lies in a possible amendment to sub-clause 14.1.139 that would remove the basis of the Court’s conclusion. While those gaps remain, the single tax payer’s position is strong in substance and at the same time exposed in practice, and it is that divergence which determines the choice of strategy.

Frequently asked questions

Must a single tax payer that is not VAT-registered account for VAT on non-resident services?

The tax authority says yes where the four conditions of Article 208 are met. In its judgment of 23 July 2025 in case No. 520/32392/24 the Supreme Court held the opposite for a single tax payer that is not VAT-registered: such a payer is not a "person" within sub-clause 14.1.139 and therefore has no obligation. Audit practice has not changed, so the dispute is usually resolved in court.

Which form is used for reporting?

Not the VAT return and not a tax invoice, but a separate Calculation of tax liabilities accrued by a recipient of services who is not registered as a VAT payer. It is filed only for the month in which the liability arose.

How are the date and the taxable base determined?

The date follows the first event under the third paragraph of clause 187.8: debiting of funds or execution of the document evidencing the supply. The base is the contractual value of the service including taxes and duties other than VAT itself, translated at the NBU rate on the date the liability arises (clause 190.2). The rate is 20 or 7 per cent.

Can the VAT accrued be claimed as input credit?

No. Clause 208.5 equates the recipient to a payer only for a closed list of purposes, and the right to input credit is not among them. For a non-payer the amount is a final cost of the transaction and should be priced in before signing.

When does no obligation arise at all?

Where any one of the four conditions is missing: the supplier is not a non-resident or is registered under clause 208-1.2 as a supplier of electronic services; the place of supply is outside Ukraine; the transaction is outside the scope of tax or exempt under Articles 196 and 197; or the recipient is not a person within sub-clause 14.1.139.