Taxation of income from transactions with domestic government bonds

Author: Maryna Pokotylo, Partner at F&P

In the current economic environment, domestic government bonds remain one of the most attractive instruments for investors – individuals, legal entities, single taxpayers, and farmers. However, to avoid any surprises with tax liabilities, it is important to understand which income from domestic government bonds is taxable, which is not, and what changes in legislation are relevant as of September 2025.

Main regulatory sources

• The Tax Code of Ukraine (TCU), in particular Section IV of the TCU, Art. 162 (who is a personal income tax payer), Art. 165 (income not included in tax income) and the military fee subsection.

• Law of Ukraine “On Capital Markets and Organized Commodity Markets” No. 3480-IV.

• Resolution of the Cabinet of Ministers No. 80 of January 31, 2001 “On Issuance of Domestic Government Bonds” as amended.

• Official explanations of the State Tax Service (STS) and the Ministry of Finance.

What are government bonds?

Domestic government bonds (DGBs) are debt instruments issued by the Ministry of Finance of Ukraine to raise funds for the state budget. By investing in domestic government bonds, the buyer provides a loan to the state. In turn, the state guarantees repayment of the nominal value of the bond within a certain period of time and payment of income, which is usually accrued in the form of interest (coupon payments).

What is income from government bonds

The income that investors can receive from domestic government bonds is generally divided into:

1. Coupon income (interest) – if the bond provides for periodic payment of interest (coupons).

2. Investment income – is the difference between the proceeds from the sale (or redemption) of bonds and their acquisition cost (including acquisition costs, if any).

Peculiarities of taxation for individuals

In accordance with the Tax Code:

• Clause 165.1.52 of Article 165 of the TCU provides that investment income from transactions with government securitiesissued by the Ministry of Finance of Ukraine, including income from domestic government bonds (including exchange rate differences), is not included in the total monthly or annual taxable income of a resident individual.

• Interest income received by the taxpayer and investment income from operations with domestic government bonds are not subject to military duty in accordance with subparagraph 1.7 of paragraph 16-1 of subsection 10 of section XX of the Tax Code of Ukraine.

Thus, a resident individual who receives coupon income or investment income from transactions with domestic government bonds does not pay personal income tax and military duty on such income.

Peculiarities of taxation for legal entities

For legal entities, income from domestic government bonds is included in the pre-tax financial result, which is the basis for calculating income tax (18% rate under Article 136 of the Tax Code). Such income includes:

1. Coupon income: Periodic interest payments on coupon bonds. This income is accrued in accounting on an accrual basis (in accordance with NSAU 13 “Financial Instruments” or IFRS 9 if the entity applies international standards).
2. Investment income: The difference between the selling (or redemption) price of government bonds and their purchase price, adjusted for expenses (e.g., brokerage commissions or bank fees).
3. Income from discount bonds: The difference between the nominal value at maturity and the purchase price amortized at the effective interest rate.

Unlike individuals, for whom income from domestic government bonds is exempt from personal income tax and military duty (sub-clauses 165.1.2 and 165.1.52 of Article 165 of the Tax Code), legal entities include this income in their total taxable income.

Taxation features for single tax payers

Single taxpayers (individual entrepreneurs and legal entities under the simplified taxation system) should be particularly careful when dealing with domestic government bonds (OVDPs), as such transactions may have tax and legal consequences.

According to the position of the State Tax Service (ІПК № 44/ІПК/99-00-21-02-02/ІПК), the sale of domestic government bonds may be classified as financial intermediation, which is prohibited for single tax payers of groups 1-3 in accordance with subpara. 291.5.1 OF THE TCU. The legislation lacks a clear position on the possibility of purchasing domestic government bonds solely for income (without further sale). At the same time, in the classification of economic activities (KVED), securities transactions can be interpreted as the provision of financial services, which also falls under the prohibition of financial intermediation.

For legal entities on the simplified taxation system, participation in such transactions may result in the loss of the right to apply the single tax if the STS recognizes that they have violated the terms of the simplified taxation system.

Individual entrepreneurs (IEs) are entitled to purchase domestic government bonds as private individuals, provided they use personal accounts rather than business accounts and do not act on behalf of third parties. If these requirements are violated, the transactions may be regarded as financial intermediation, which may result in the loss of the single tax payer status.

One of the problems that has been actively discussed recently is that single taxpayer farmers of the 4th group, who have invested in military government bonds, face the fact that the State Tax Service takes into account the entire amount of repayment of government bonds (i.e., both nominal and interest) when determining total income. This may lead to a violation of the criteria (e.g., the share of income from agricultural activities that must be at least a certain percentage, e.g., 75%) and loss of the single tax payer status.
MPs and businesses are initiating amendments to the draft law No. 13420, which stipulate that when determining the share of income of a single taxpayer of the 4th group income (profits) from securities will not be taken into accountif such income includes income tax has been paid. This should reduce the risk of losing the special regime.

Conclusion

Domestic government bonds are an effective and most legal way to generate investment income, especially for individuals, as Ukrainian legislation exempts such income from personal income tax and military duty. However, for legal entities and single tax payers, there are nuances that can lead to risks if changes are underestimated or income is incorrectly accounted for. Careful analysis, legal support and attention to detail will help avoid undesirable tax consequences.