Alexey Paliy, Managing partner, Attorney at law
at Primary Advisers LLC
Viktoriia Vysotska, Senior Lawyer
Primary Advisors LLC
In the current economic environment, the issue of gifting investment assets is becoming increasingly relevant in both private and corporate relations.
Individuals are more frequently transferring assets such as shares, company equity interests (corporate rights), bonds, and other financial instruments as gifts. The motivations vary: passing on a business as an inheritance, strengthening partnerships, reorganizing family property relations, or even optimizing taxation.
However, gifting investment assets is not merely a legal act of transferring property without compensation; it is also a tax-significant event. Unlike traditional gifts of real estate or cash, the transfer of investment assets has specific tax implications governed by Chapter IV of the Tax Code of Ukraine (TCU).
Definition of Investment Asset and Taxable Object
According to subparagraph “a” of subparagraph 170.2.7, paragraph 170.2, Article 170 of the TCU, investment assets include:
“A package of securities, derivatives, or corporate rights expressed in forms other than securities, issued by a single issuer.”
Thus, corporate rights also fall under this definition, even if not formalized as securities.
Mechanism for Determining the Taxable Object
All operations involving the gifting of investment assets are subject to taxation under Chapter IV of the TCU. Specifically, Article 174 of the TCU—”Taxation of Income Received as Inheritance or Gift”—defines the procedure for taxing gifts received by individuals, including investment assets.
According to subparagraph “v” of paragraph 174.1, Article 174 of the TCU, objects of gifting may include:
“Securities (excluding deposit (savings) and mortgage certificates), corporate rights, ownership of a business object as such, i.e., ownership of a single property complex, intellectual (industrial) property or the right to receive income from it, property and non-property rights.”
Tax Rates and Payment Deadlines
The taxation of income received by a taxpayer as a result of accepting a gift of property or non-property rights is taxed at rates depending on the degree of kinship between the parties to the agreement and the residency status of the individuals.
- 0% – For Close Relatives
Subparagraph 174.2.1 of paragraph 174.2, Article 174 of the TCU provides for a zero tax rate if the donor and the recipient are family members of the first and second degrees of kinship, or if the recipient is a person with a disability of group I, an orphan child, or a child deprived of parental care.
- 5% Personal Income Tax (PIT) + 5% Military Levy – For Other Residents
According to subparagraph 174.2.2 of paragraph 174.2, Article 174 of the TCU and paragraph 16-1 of subsection 10 of section XX of the TCU, the value of any gifted object received by recipients who are not family members of the first and second degrees of kinship of the donor is taxed at a rate of 5% of the value of the share (PIT) for residents of Ukraine (paragraph 167.2 of Article 167 of the Code), as well as a military levy at a rate of 5%.
The obligation to pay the tax rests with the recipient (paragraph 174.3 of the TCU).
- 18% PIT + 5% Military Levy – For Non-Residents
According to subparagraph 174.2.3 of the TCU, if the recipient is a non-resident, a tax rate of 18% of the value of the share (PIT) and a military levy at a rate of 5% apply.
The obligation to pay the tax rests with the non-resident recipient; however, in practice, it is often fulfilled by the donor by agreement.
The recipient (both resident and non-resident) is required to submit an income declaration by May 1 of the year following the reporting year (subparagraph 49.18.4, paragraph 49.18, Article 49 of the TCU) and pay the relevant taxes by August 1 (paragraph 179.7, Article 179 of the TCU).
Prohibition of Loss Accounting in Gifting
According to paragraph 170.2.5 of Article 170 of the TCU: In the case of gifting or transferring an investment asset as an inheritance, the investment loss arising from such an operation is not considered when determining the overall financial result of operations with investment assets.
That is, even if the donor incurs a loss (for example, the asset’s value has decreased compared to the purchase price), they are not entitled to account for this loss in future tax records.
Therefore, it is advisable to consider the following aspects:
- Gifting investment assets may be tax-inefficient in the event of a loss in value—you cannot “offset the loss” as you can with a sale.
- It is advisable to consider the form of asset transfer—it may be more beneficial to conduct a sale at the minimum market price followed by transferring the proceeds as a gift (for relatives—at a zero tax rate), to be able to record losses.
Conclusions
Operations involving the gifting of investment assets have complex tax regulations and require careful legal and financial consideration. On one hand, it is a convenient way to transfer property within a family or business structure; on the other hand, it is a source of potential tax obligations and losses. Thus, gifting investment assets is not just a civil agreement but also a tax obligation with potential consequences:
- It is important to analyze the residency status and degree of kinship;
- Remember the deadlines for submitting declarations and paying taxes;
- Consider that losses from gifting are not accounted for to reduce future taxes.
Therefore, before gifting investment assets, it is necessary to carefully weigh.
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