A Ukrainian FOP in the Netherlands

Why do we recommend that clients living in the Netherlands close their Ukrainian FOPs?

Let's break down how the Convention for the Avoidance of Double Taxation works, where and how such entrepreneurs are taxed, and how to later prove this in another country.

The convention between Ukraine and the Netherlands applies standard rules that determine tax residency, and if one criterion does not give an answer, you move on to the next:

1. Permanent home — where do you actually live?
2. Centre of vital interests — where are your family, work, business, and social ties?
3. Habitual abode — where do you spend more time during the year?
4. Nationality — if the previous criteria did not help determine it, which practically never happens, then the tax authorities of the two countries agree between themselves.

In the convention, a FOP's (Ukrainian sole proprietorship's) income is classified as "business profits" (profit from entrepreneurial activity) and is taxed only in the country of residence, if there is no permanent establishment (PE) in the other country.

A permanent establishment (PE) is a physical place of doing business in Ukraine (an office, warehouse, staff). Not the FOP registration, not a bank account, not real estate, but precisely the place from which the activity is conducted.

A PE arises if three conditions are met simultaneously:

1. There is a place (an office, room, coworking space, workplace)
2. This place is fixed (used regularly)
3. Activity is conducted through it.

If you live in the Netherlands, work from Dutch territory, and have no office or staff in Ukraine, Ukraine has no right to tax your FOP income.

The Belastingdienst rules explicitly state that you declare your worldwide income and it is taxed under the Box 1 rules.

And to obtain an exemption or tax credit in Ukraine, you need to provide the ДПС (Ukrainian tax authority) with a certificate of Dutch residency and proof of tax payment in the Netherlands.

These are documents such as:

1. Woonplaatsverklaring — a certificate of Dutch residency, ordered free of charge through a form on the Belastingdienst website (1–3 weeks).
2. Aanslag inkomstenbelasting — the tax decision for the year, which appears automatically in Mijn Belastingdienst after the return is processed (from 1 to 6 months).
3. Aangifte — a copy of the submitted return, also in Mijn Belastingdienst.
4. An apostille (mandatory) — through Dienst Justis.
5. A translation into Ukrainian.

Sometimes you need to prove to the Ukrainian tax authority that the residency is specifically NL and that there is no permanent establishment in Ukraine.

Typical mistakes by Ukrainian FOP owners in the Netherlands that we often observe:

1. They think a FOP automatically makes them residents of Ukraine, but residency is determined by where you live.
2. They pay the single tax (ЄП) in Ukraine, thinking that is enough, but the Netherlands still taxes a resident's worldwide income.
3. They do not file a return in Ukraine, and then the ДПС sees only non-payment of taxes.
4. They do not apostille documents from the Netherlands, and Ukraine will not accept them without an apostille.

So, from a tax point of view, keeping a Ukrainian FOP in the Netherlands is not advantageous.

The Netherlands taxes a FOP's income as worldwide income anyway, even if you pay the single tax (ЄП) in Ukraine. The ЄП is not recognised by the Netherlands as an income tax at all.

A FOP gives no tax advantages in the Netherlands, and you cannot use deductions.

You will have to do more administration, file two returns, gather documents, and pay for apostilles and translations.

As for Ukraine, it considers that a FOP must pay the unified social contribution (ЄСВ) and the single tax (ЄП) regardless of residency. The Netherlands taxes the income of residents, while Ukraine taxes the legal status of the FOP.

You can avoid paying the ЄСВ and ЄП only if you do not receive money into the FOP account, do not issue acts/invoices as a FOP, and do not conduct activity from Ukrainian territory.

Keeping a FOP makes sense only in exceptional situations, for example, if there are important Ukrainian clients who do not work with foreign companies, if you need a Ukrainian account, or if there are weighty property-related or legal reasons.