The Law on the State Budget-2025 and the Law on Tax Changes to Fund the Defense Forces and Ensure Financial Stability Signed

The President of Ukraine signed the Law on the State Budget for the year 2025 and the Law on Amendments to the Tax Code to fund the Defense Forces and ensure Ukraine's financial stability.

Since the beginning of russia's full-scale invasion of Ukraine, the state budget has been effectively divided into two main components: military and socio-humanitarian expenses.

All military expenditures, projected to reach UAH 2.23 trillion in 2025 (26.3% of GDP), are financed through internal revenues and borrowings. Non-military expenditures are covered by international partners’ support, which is used for social payments, economic support programs, and salaries for teachers and healthcare workers. These funds cannot be redirected for defense purposes.

To ensure a balanced internal revenue stream and finance the necessary military expenditures for both 2024 and 2025, amendments to the Tax Code were critical. These changes are expected to generate an additional UAH 8 billion by the end of 2024 and UAH 140 billion in 2025.

In 2024, the additional need for financing the Defense Forces amounted to almost UAH 500 billion. To cover it, a comprehensive approach was implemented, where the main emphasis was not on tax changes, but on overperformance of thr state budget revenues, including through de-shadowing, savings on servicing and repaying state debt, redistribution of expenditures, and an increase in domestic borrowings.

Key Provisions of the Tax Code Amendments:

1. Increase in Military Tax Rate:

For individuals, the military tax on wages, bank deposit income, rental income, additional benefits, and other income will rise from 1.5% to 5%, effective the day after the law's publication.

Private entrepreneurs under the simplified tax system:

• Groups 1, 2, and 4: A fixed military tax obligation of 10% of the minimum wage (UAH 800/month in 2025) starting January 1, 2025.
• Group 3: A military tax of 1% of turnover from Q1 2025.

Notably, military tax changes will not apply retroactively.

At the same time, domestic government bonds, in particular wartime bonds, for individuals continue not being taxed either by personal income tax or by military tax.

Social benefits, pensions, scholarships and other income that is not subject to personal income tax are also not taxed by military tax.

The military tax rate for military personnel and employees of law enforcement agencies, as defined by law, remains at 1.5%.

Military tax for single tax payers is temporarily measure established for the period of martial law.

Increase in Corporate Tax Rates:

The corporate income tax rate for financial companies will increase to 25% starting in 2025.
Banks will face a one-time 50% corporate tax on profits earned in 2024.

Transparency and Fair Taxation Measures:

Transition from quarterly to monthly reporting for Personal Income Tax (PIT) and Unified Social Tax (UST) to enhance transparency in the employee exemption system.
Increase in the minimum tax obligation for agricultural land to UAH 1,400 per hectare, ensuring greater transparency in the agricultural sector.
Introduction of advance payments for corporate tax for each individual gas station, fostering competitiveness in the fuel market.
Raising minimum prices for wine and wine products to support Ukrainian winemakers and counter competition from wine producers.
Fairer subsoil use taxation, including increased royalties on sand, gravel, crushed stone, and kaolin. For example, the royalty on crushed stone will rise from UAH 5 per ton to UAH 13 per ton.

Exemptions and Incentives:

Defense-related exemptions: No royalties will be charged on sand, gravel, or crushed stone donated for defense purposes, such as for building roads or fortifications for the Armed Forces of Ukraine.

These measures aim to increase state revenues and direct them toward ensuring national defense while fostering transparency and fairness in economic and social relations.