Grants in Accounting and Taxation

State institutions or funds financed from the state budget may be the sources of grant funding. A significant number of such programs provide for co-financing, while beneficial conditions apply to frontline territories. In terms of their origin, state grants may be budgetary or non-budgetary. Currently, there are four providers of budget grants: the Ukrainian Cultural Foundation, the National Development Institution, the Ukrainian Youth Foundation, and the Ukrainian Veterans Foundation. Grants received from other state grant providers are not considered budgetary grants; therefore, for taxation purposes, they are classified as non-repayable targeted state aid.

Since the beginning of the full-scale war, Ukrainian businesses have been actively financed by international donors that provide both grant-based and mixed support. Such support may be received by individuals, individual entrepreneurs (IEs), and legal entities. Most often, the funds are intended for the purchase of equipment and the creation of jobs. At the same time, international grants may be provided for training, consulting services, mentoring support, assistance with entering international markets, participation in international exhibitions and business events, and similar activities.

Budgetary Grants

If a budgetary grant is received by an individual entrepreneur (IE) who is a single tax payer, it is not included in the entrepreneur’s income and is not subject to single tax, provided it is used for its intended purpose (subparagraph 4 of paragraph 292.11 of article 292 of the Tax Code of Ukraine). However, such income is taxed under the general rules established by the Tax Code of Ukraine for individual taxpayers ( Public Information and Reference Resource (ZIR) of category 107.01.03). If the grant is used for its intended purpose, the individual is exempt from taxation (subparagraph 170.7-1.1., article  170 of the Tax Code of Ukraine).

A budgetary grant received by an individual entrepreneur (IE) under the general taxation system is also not included in the entrepreneur’s business income (net income). These funds are taxed not as business revenue, but under the general rules applicable to ordinary individuals (pursuant to paragraph 170.7-1 of Article 170 of the Tax Code of Ukraine), provided they are used for their intended purpose. According to this provision, budgetary grants received by an individual are not included in the individual's total income and are not subject to taxation, provided the grant funds are used for their intended purpose. However, in the event of misuse, both the IE, regardless of the chosen taxation system, and the individual must include the entire amount in taxable income, declare it, and pay 18% personal income tax (PIT) and a 5% military levy.

If a budgetary grant is received by a legal entity that is a single tax payer, it is not included in the entity’s income, provided it is used for its intended purpose and the grant provider has the relevant status in accordance with the list approved by the Cabinet of Ministers of Ukraine (i.e. is included in the above-mentioned list of four providers of budgetary grants). If the terms of the grant agreement are breached or the funds are not used for their intended purpose, the grant amount is taxed at twice the single tax rate (6% or 10%). If the legal entity is a corporate income taxpayer, the tax adjustments provided for under Article 140 of the Tax Code of Ukraine apply. Specifically, the profit or loss before taxation is reduced by the amount of grant income received and increased by the amount of costs incurred at the expense of these funds.

Non-Budgetary and International Grants

If an individual entrepreneur (IE), regardless of the taxation system chosen, receives a non-budgetary or international grant, the amount of such grant is not included in the IE’s business income, but is included in the individual’s income as other income and is subject to personal income tax (PIT) at the rate of 18% and a military levy of 5%, as applicable to individuals (ZIR, category 107.01.03). A grant received by an individual is taxed in the same manner. It should be noted that state grant providers act as tax agents with respect to grant recipients; therefore, they are required to report the payment of grants and the withholding of taxes in their tax reporting. As regards legal entities, the taxation of received grants also depends on whether the grant is budgetary (state-funded) and on the taxation system under which the enterprise operates. However, it should be taken into account that the mere receipt of a grant is not subject to VAT, since no transaction of supply of goods or services takes place.

If a legal entity that is a single tax payer receives non-budgetary state grants or international grants, the amount of such grant is included in the legal entity’s income and is subject to the single tax at the standard rate (3% or 5%). If the legal entity is a corporate income tax payer, no tax adjustments are made upon receipt of a non-budgetary or international grant. Income is recognized in accordance with accounting rules (in proportion to the expenses incurred or the depreciation of assets). It should also be taken into account that, regardless of the type of grant received, a grant is treated by a legal entity in accounting as targeted financing. The main accounting rules governing such funds are established by National Accounting Standard (NAS) 15 “Revenue”, approved by Resolution No. 290 of the Cabinet of Ministers of Ukraine No. 290 of 29.11.1999.

Reporting Treatment

Ukrainian grant providers, acting as tax agents, are required, following the quarter in which grants were awarded, to submit the unified tax reporting package and complete Section III of Appendix 4DF, providing detailed information on budgetary grants.

If an individual entrepreneur (IE) under the general taxation system receives a budgetary grant, the amount of such grant is not reflected in the IE’s annual tax return as part of business income. Expenses incurred using grant funds are not taken into account when calculating the IE’s net taxable business income and therefore are not deductible from the taxable income. For an IE who is a single tax payer, the amount of such grant is likewise not reported in the entrepreneur’s tax return. However, an individual who has received a budgetary grant, whether in the capacity of an IE or as a private individual, reports the amount thereof in line 11.3 of Section III of the Declaration of Property Status and Income as a non-taxable budgetary grant, but only if there are other grounds for filing this annual declaration by the individual.

If the grant is not used for its intended purpose, the grant amount loses its status as non-taxable income and becomes the taxpayer’s general income, subject to declaration and taxation under the general rules. Specifically, the recipient must pay personal income tax (PIT) and the military levy, and report the grant amount in Section II of the Declaration of Property Status and Income. If the grants received are non-budgetary or international, they are reported in the individual’s Declaration of Property Status and Income in the ordinary manner.

Accounting for Fixed Assets Acquired with Grant Funds

An individual entrepreneur (IE) under the general taxation system keeps records of expenses, as this is necessary to determine taxable income. The keeping of records for fixed assets and the accrual of depreciation are carried out at the IE’s own discretion (i.e. they are not mandatory). Expenses incurred for the acquisition of fixed assets are not included in business expenses and are not subject to depreciation. This is because an IE does not maintain accounting records in the same manner as legal entities, and expenses are deemed to be only those amounts paid by the entrepreneur out of proceeds from business activities. Since the equipment was acquired using non-repayable grant funds provided by donors or the state, there is no entitlement to tax depreciation in respect of such assets. However, the acquired equipment may legally be used in business activities, and primary documents (invoices, agreements, acceptance certificates, etc.) are issued in the name of the IE and must be retained for grant reporting purposes.

If fixed assets are acquired by a legal entity using grant funds, they are recognized in accounting as assets financed through targeted financing of capital investments. Their initial cost is determined in accordance with the general rules, while income from such financing is recognized not immediately but gradually, in proportion to the depreciation charged on such assets.

In some cases, fixed assets are acquired through mixed financing (part of the funds being grant funds and part the entity’s own funds). In such cases, the fixed assets are recognized on the balance sheet at their full initial cost (including both grant and own funds) in accordance with NAS (NP(S)BO) 7. The grant-funded portion is recorded as targeted financing in account 48 and is subsequently recognized as income in proportion to depreciation (accounts 69 and 745), while the portion financed from the entity’s own funds is accounted for in the ordinary manner.

Please note! With regard to VAT, if equipment or materials purchased with grant funds are used in taxable transactions within the scope of the enterprise’s business activities, the tax credit is recognized on a general basis.

In conclusion, it should be noted that some grant agreements provide for the creation of jobs, whereby employees are hired and their remuneration for a certain period is paid from grant funds. In such cases, grant recipients should bear in mind that remuneration paid to employees out of grant funds is subject to taxation on the general basis: 18% personal income tax (PIT) and a 5% military levy must be withheld from salaries, and a 22% unified social contribution (USC) must be accrued. The tax exemption applicable to grants concerns exclusively the income of the grant recipient itself (for example, an enterprise or an IE), provided that the grant is budgetary, and does not apply to the salaries of employees.

Natalia Shcherbak, Accounting and Tax Consultant