Grantees of the Ukrainian Startup Fund have to pay a 19.5% tax

Recently, the Ukrainian Startup Fund has been operating in Ukraine. It provides grants for development to local startups of $25,000 and $50,000. As AIN.UA found out, the startup is obliged to pay tax on this grant. As AIN.UA found out, the startup is obliged to pay tax on this grant.

During the study of the matter, the editor of AIN.UA learned that not only the Ukrainian Startup Fund grants are taxable. Under the Ukrainian jurisdiction, a startup has to pay tax on any grant.

The editor of AIN.UA shares the details.

How did it become known about the grant income tax?

In July 2019, the Cabinet of Ministers launched the Ukrainian Startup Fund, a state program that provides grants to Ukrainian projects.

As it became known to AIN.UA, some startups have already received a grant under this program, but not in full, as the amount reduced due to taxes. Startups were provided with an explanation from the STS about the reason for such taxation.

At the same time, according to AIN.UA, some participants in the grant program do not yet suspect that they will not receive the full amount. The point is that the information about the tax is provided almost at the very end of the program when a startup counts on the grant and is waiting for payment.

Why grants are taxable?

There is an explanation by the State Tax Service, which was provided to the Innovation Development Fund under the Ministry of Finance. It says the following:

If a startup receives a grant (a one-off special-purpose payment to individuals and legal entities) and operates as an individual entrepreneur, such a grant is subject to general taxation. In other words, if the founder of a startup is an individual entrepreneur and he or she receives a grant, in this case, one is considered as an individual who has received income but not from business activities. Such a grant is the total income of an individual, which is taxed under the general rules.

Such income is subject to an 18% income tax and a 1.5% military fee.

If the grantee is a legal entity, it pays an income tax on the grant.

The USF provides two amounts of grants, but the sum is less than expected:

  • The promised sum is $25,000. The grantee receives $25,000, minus a 19.5% tax = $20,125.
  • If the promised amount is $50,000, a startup gets $50,000, minus a 19.5% tax = $40,250.

Exchange rate difference

Tax isn’t the only trouble the startup is facing. The currency of Ukraine is hryvnia, which means that the grant amount is paid in hryvnia, not in dollars. And an important nuance is that the grant is paid at the rate at the time of application, not at the time when the money comes to the account. As a result, due to exchange rate fluctuations, a startup may receive even less money than expected at the very beginning. However, it may be even more.

Some startups are not aware of this either.

The editorial staff of AIN.UA talked to several startups about the tax that no one expected. Everyone says that it’s unpleasant and strange to get a much smaller amount than you expected at the beginning. At the same time, one of AIN.UA’s interlocutors said “never look a gift horse in the mouth,” and he doesn’t get peeved with the Ukrainian Startup Fund.