Kreston solution: VAT analysis for equipment supply and installation in NATO projects in Ukraine

The participation of foreign companies in projects financed or implemented with the involvement of NATO in Ukraine is accompanied by a number of tax issues, in particular regarding value-added tax (VAT). Particular attention is required for transactions related to the import of equipment, the involvement of Ukrainian contractors in installation work, and subsequent invoicing to international organizations. This publication analyzes the VAT implications for a Dutch company supplying equipment from outside Ukraine, engaging Ukrainian subcontractors for installation works, and invoicing NATO (NCIA, Brussels). The analysis is based on the provisions of the Tax Code of Ukraine, applicable international agreements, and official clarifications issued by the Ukrainian tax authorities.

Question:

Our client is a company from the Netherlands who will do installation work and supply of goods, equipment, etc. in Ukraine. The goods will be coming from outside of Ukraine but the installation work will be done by Ukraine installation. companies. Our client will invoice NCIA (part of NATO) in Brussels. Often supplies to NATO are exempt from vat but these are often local regulations for which NATO needs to supply a certificate to the supplier. We assume that the local Ukraine subcontractors will need to charge van on their invoices to our client. We would like to know if this is correct? If this vat is reclaimable? How about the import of the goods by our client in Ukraine? Is it possible for them to import goods and is import-vat applicable? Does our client need to charge vat on their installation supplies, etc. in Ukraine?

So

1. What is the consequence for vat for the import in Ukraine of the goods by our Dutch client? Will there be import vat applicable? Will the Dutch company be able to claim the import vat? What is the % of import vat? Is there no exemption for goods that are for the use of the NATO (It concerns Antennas and equipment for installing)?

2. Will there be vat charged on the installation work performed in Ukraine by the Ukraine subcontractors on their invoices to our Dutch client (company doing the installation supply for the NATO)? Will our Dutch client be able to claim the UKR vat?

3. Does our client need to charge UKR vat on their final invoice to NATO? Would NATO be able to claim the vat?

Question 1:

1. 1. What is the consequence for vat for the import in Ukraine of the goods by our Dutch client? Will there be import vat applicable?

Goods imported into the customs territory of Ukraine are subject to VAT (TCU Clause 185.1).

Exemptions:

1. imported goods to fulfill an international contract on technical assistance;

2. imported goods to fulfill an international contract entered into by Ukraine and ratified by the Verkhovna Rada of Ukraine.

3. imported defense goods that fall under certain categories of the Ukrainian Classification of Goods of Foreign Economic Activity (UKT ZED).

1.2. Will the Dutch company be able to claim the import vat? What is the % of import vat?

The entity is unable to declare VAT payments as it is not a registered VAT payer and does not prepare or submit tax reports to the regulatory authorities.

Basis:

• TCU Art. 200

• regulatory authorities’ response in the ZIR (category 101.26).

1.3. Is there no exemption for goods that are for the use of the NATO (It concerns Antennas and equipment for installing, military Antennas I presume, I have requested the HS Codes)?

The TCU does not contain any VAT exemptions directly related to relations with NATO.

However, the Tax Code provides for certain tax features for transactions carried out:

1. under an international agreement on technical assistance;

2. under an international agreement ratified by the VRU;

3. for the supply of certain groups of defense goods.

   1. VAT exemption: importation into Ukraine, supply within Ukraine of goods and services as international technical assistance or financed by international technical assistance. Such assistance shall be provided in accordance with international agreements of Ukraine, the binding nature of which has been approved in accordance with the legal procedure.

Basis:

• TCU Para.197.11 Article 197.

Tax exemption is regulated by Resolution No. 153 of the CMU of 15 February 2002. According to the specified document, the implementation of assistance projects (programs) is subject to mandatory state registration (clause 11).

Thus, legal transactions in the scope of international technical assistance projects are exempt from VAT.

2. International treaty rules apply, if such a treaty exists, the binding nature of which has been approved by the Verkhovna Rada of Ukraine.

Basis:

• TCU Article 3.

E.g., on 22 September 2015, Ukraine’s government and NATO entered into the Agreement on the Status of the NATO Representation in Ukraine, ratified by Law of Ukraine No. 989-VIII of 4 February 2016. The Agreement provides for tax exemptions for projects financed by NATO (Articles 25 and 26).

The STS’s clarification of 13 November 2023 No. 4085/ІПК/99-00-21-03-02-06 states that the procedure for accounting, registration, and control over the implementation of such projects is not regulated by law.

Thus, transactions conducted in accordance with the above agreement are not subject to taxation in Ukraine.

3. The VAT exemption applies where defense goods classified under certain  groups, commodity items, and subcategories of the UKT ZED are imported into and supplied within the customs territory of Ukraine.

Basis:

• TCU Para. 32 Subpara. 2 Sec. XX

Thus, a transaction involving goods specified in TCU Para. 32 Subsection 2 Section XX is exempt from VAT.

Question 2:

1. 1. Will there be vat charged on the installation work performed in Ukraine by the Ukraine subcontractors on their invoices to our Dutch client (company doing the installation supply for the NATO)?  

Transactions involving the provision of services by Ukrainian subcontractors are subject to VAT, with VAT being charged by the service providers.

Basis:

TCU Art. 185, 186, 187.

The TCU does not contain any VAT exemptions directly related to relations with NATO.

However, the Tax Code provides for certain tax features for transactions carried out:

1. 1. under an international agreement on technical assistance;

   2. under an international agreement ratified by the VRU;

   3. for the supply of certain groups of defense goods.

The taxation of such transactions is described in the response to question 1.

2.2. Will our Dutch client be able to claim the UKR vat?

The entity is unable to declare VAT payments as it is not a registered VAT payer and does not prepare or submit tax reports to the regulatory authorities.

Basis:

• TCU Art. 200

• regulatory authorities’ response in the ZIR (category 101.26).

Question 3:

1. 1. Does our client need to charge UKR vat on their final invoice to NATO?

It is highly likely that the transaction will not be subject to VAT, as Ukraine and NATO have entered into the Agreement on the Status of the NATO Representation in Ukraine of 22 September 2015, ratified by Law of Ukraine No. 989-VIII of 4 February 2016. The Agreement provides for tax exemptions for projects financed by NATO (Articles 25 and 26).

1. 2. Would NATO be able to claim the vat?

The entity is unable to declare VAT payments as it is not a registered VAT payer and does not prepare or submit tax reports to the regulatory authorities.

Basis:

• TCU Art. 200

• regulatory authorities’ response in the ZIR (category 101.26).

Thus, the VAT treatment of transactions related to the supply and installation of equipment for NATO projects in Ukraine largely depends on the legal framework of the specific project, the existence of an applicable international agreement or international technical assistance status, as well as the classification of goods under the UCGFEA.

Foreign companies that are not registered as VAT payers in Ukraine are not entitled to recover import VAT or input VAT paid as part of the cost of services provided by Ukrainian contractors. At the same time, where relevant international agreements with NATO apply, certain transactions may be fully exempt from VAT. Given the complexity of the regulatory environment, each project requires an individual tax analysis before its implementation begins.