When a transfer of own funds to an IE’s account is not income
Tax authorities treated anything received to an individual entrepreneur’s (“IE”) account as income throughout almost the entire period of the simplifiedtaxation system’s use. However, revolutionary changes have occurred recently.
Lately, the tax authority has stopped recognizing the transfer of own funds or money from a spouse to an account of an IE under a simplified taxation system as income. Only funds from entrepreneurship activities are recognized as income of an IE using a simplified taxation system. Let’s consider the nuances.
All cash receipts in the reporting period are treated as income of the single tax payer, with reference to the provisions of item 292.1 of article 292 of the Tax Code of Ukraine. The receipts listed in item 292.11 of article 292 of the Tax Code of Ukraine are not recognized as income, along with those received by an entrepreneur as an individual, or passive income in the form of interest, dividends, royalty, insurance payments and reimbursements, income in the form of government grants, or income from sale of owned moveable and immoveable property.
Over this long period of time, entrepreneurs got used to the following procedure: in order to avoid issues with the tax authority, money was credited to a private individual’s account as “non-gratuitous financial assistance” when an account needed to be replenished. A reference was made to the number and date of an agreement, or “sales revenue for a certain period”. Then an agreement for the period of up to 12 months was necessary to make a reference to the agreement. Such an agreement could not be concluded with the IEs themselves (that is, IEs could not enter into agreement with themselves as individuals).
Regarding the second wording of the reference, cash sales for the period mentioned in the banking document should have been not less than the amount of funds credited.
If money was received to an account with the reference of “account replenishment” or “depositing personal savings”, the source of funds did not matter and the tax authority insisted on recognition of such amounts as income, because such wordings are not stipulated in item 292.11 of article 292 of the Tax Code of Ukraine.
We would like to note that nothing has changed in the legislation, but the tax authority’s opinion changed. From now on, only funds received from entrepreneurship activities directly are treated as income of an individual entrepreneur who is a payer of the single tax. Therefore, funds received from a spouse to an account of a person who is not an entrepreneur are not treated as entrepreneurial income. Such an opinion is explained by referring to the Family Code recognizing the cases of the spouses’ joint property. Entrepreneurial income, salary, or income received from other legitimate sources, are specific cases of such joint property.
Therefore, when money is transferred from a wife’s account to a husband’s IE account, or vice versa, marital joint property of the spouses is actually transferred. This is not considered a business transaction of purchase and sale or provision of services. Therefore, tax professionals now agree that the amounts do not have to be included in the income of a IE who is a single tax payer if the wording “Transfer of own funds to the wife (husband). Exempt from VAT” is used at the time of transfer, or “Transfer of family savings. Exempt from VAT”. In such cases, the amounts do not have to be included in the income of an IE – payer of the single tax.
However, in such a situation, supporting documents must be provided to prove that these are the funds from marital joint property, actually, and that taxes were withheld from such funds earlier. So, primary documents confirming the legitimacy of funds must be provided. This can be salary, dividends, sale of property, savings with a bank, insurance payments, etc. Income certificates, information from the State Taxpayer Register, declaration of assets, etc., can serve as supporting documents. The supporting documents evidencing the payment of taxes and mandatory charges should also be available.
An option to use such transfers and not count the amounts received as income can be applied to legally married spouses. A transfer of funds between unregistered partners, however, is treated as taxable income received from a third party (Explanation provided by the State Tax Service.)
Although the tax authority may agree, we should not forget about the financial institutions with which the account is opened, as they carry out financial monitoring. In the event of a major transfer, the bank has a legitimate right to request the provision of the primary documents confirming the sources of origin of the funds. If not provided, an account can be blocked until further clarification of the issue.
Finally, we would like to note that this is a new opinion of the tax authority that may change. Therefore, we don’t recommend using such funds transfers too often. When making such transfers, you should take into account all the nuances mentioned above.
Natalia Shcherbak, accounting and tax consultant