Payment in kind: a legitimate form of cost optimization

First of all, we would like to note that only partial payment of wages in the form of products (goods) – the so-called payment in kind - is allowed under applicable legislation. Payment of wages in kind, as an exception, if stipulated by a collective agreement, may be provided in those industries or professions where such payment is equivalent to compensation in monetary form and is usual or desirable for employees (according to article 23 of the Law of Ukraine No. 108/95-ВР of  24.03.1995 ).

Such payment is most often made in agriculture, forestry and fisheries. Although the current legislation allows payment in kind of not more than 30% of monthly wages, some companies pay a higher share of salary or even the entire salary in kind.

Payment is most often made with products grown or manufactured on a farm or at an enterprise (grain, vegetables, flour, sugar, oil, milk, or other agricultural products). Such payment usually takes place when a company is short of funds. It helps keep working capital.

In order to avoid any misunderstandings with supervisory authorities, such payment must be agreed with an employee: it must be stipulated in an employment agreement or in a collective agreement. This means that it cannot be made without an employee’s consent.

If such payment is stipulated by a collective agreement, such agreement shall also contain the list of professions for which payment can be provided in such a form, the list of products used as payment, the pricing procedure, and maximum payment percentage. If employees are hired by an individual entrepreneur, there is no collective agreement (unlike legal entities, individual entrepreneurs are not required to have one). Therefore, the decision to pay a part of wages in kind must be also approved by members of employee collective elected by employees.

The cost of products paid towards wages can be calculated based on the product price not exceeding its prime cost, which, in its turn, must be determined under the company’s accounting rules. It should also be taken into account that not all the products (goods) can be provided in kind towards wages.

The following products are not allowed to be provided towards wages:

- mineral fertilizers;

- products of the pulp and paper industry;

- construction materials and products made from them;

- timber (except materials obtained during logging);

- all types of alcoholic beverages, including spirits and wine materials;

- non-food consumer goods;

- industrially processed consumer food products, except for sugar, intended for settlements with agricultural enterprises and seed factories, as well as drivers of motor transport organizations, railway transport workers who ensure the transportation of sugar beets;

 - products of processing of essential oil crops, except vegetable oil, intended for settlements with employees of agricultural enterprises;

- silkworm cocoons;

- shag, tobacco and tobacco products;

- products of animal husbandry, fur;

- wool (raw material);

- leather and leather raw materials;

- flax, hemp, cotton raw materials for textile industry;

- medicinal plants, castor oil plant, hops, poppy;

- sugar beet roots and products of their processing;

- seed products;

- beekeeping products, except honey;

- breeding stock of animals.

If the decision to pay wages in kind is taken, the manager should issue an order indicating the recipients (surname, name and patronymic), their positions, the amounts of payment, the list of products, the price and value thereof. The respective employees must read and sign such an order. The product issue is documented using an in-kind payment statement. The employees confirm that products have been received by putting their signatures in the statement.

Unlike payment in cash, payment in kind is considered a taxable item for a company. The cost of products transferred is subject to VAT on general terms, if the employer is VAT payer, VAT assessment basis is determined by the provisions of item 188.1 of article 188 of the Tax Code of Ukraine – at the level of contractual value. However, for in-house manufactured products, the price must be not lower than usual. If the prime cost of the product is lower than usual prices, two tax invoices are necessary:

-        the first one for the actual price of supply;

-        the second one for the amount of the excess of the usual price over prime cost.

If the prime cost of the product exceeds the usual price of such products, then the tax invoice for the amount of the excess of the prime cost over the usual price is not required. This explanation is provided in the tax advice of the State Tax Service of Ukraine No. 965/6/99-00-07-03-02-06/ІПК of 06.03.2020.

As far as profit tax is concerned, pursuant to subparagraph 134.1.1 of article 134 of the Tax Code of Ukraine, a taxable item is the profit determined by means of adjustment of the profit or loss before tax calculated based on accounting rules by the differences arising under the provisions of section ІІІ of the Tax Code of Ukraine. However, such differences do not arise either when wages are calculated in cash form or in kind, or when they are paid to employees. This means that such a taxable item does not exist.

It is crucial for business entities that are single tax payers to note that, unfortunately, they cannot pay wages to their employees in kind, as such payment is treated as barter – non-monetary form of settlement. The use of such type of settlements is prohibited to them (under paragraph 291.6 of article 291 of the Tax Code of Ukraine). However, if they do carry out the respective transaction, they must switch to the general taxation system from the first day of the month following the tax period in which such a violation is committed (subparagraph 4 of paragraph 298.2.3, article 298 of the Tax Code of Ukraine).

The cost of products received by an employee towards wages is also subject to individual income tax, war levy and single social contribution. 

War levy is withheld from the in-kind part of wages, similarly to their cash part, based on item 16-1 of subsection 10 of section ХХ of the Tax Code of Ukraine. The war levy rate is 5%. The war levy is withheld from the total amount of wages for the month, including the part issued in kind. We would like to note that the provisions of the Tax Code of Ukraine do not directly stipulate the procedure used to determine the assessment base for war levy, in particular, considering the details stipulated in paragraph 164.5 of article 164 of the Tax Code of Ukraine for individual income tax. Therefore, tax agents do not apply the provisions of paragraph 164.5 of article 164 of the Tax Code of Ukraine when calculating war levy assessment base. This means that in-kind coefficient is not applied when war levy assessment base is calculated.