Valentyna Georgytsya, CEO of BuhalteriO

Today, many software authors risk their capital due to the incorrect classification of royalties as Sole Proprietor (FOP) income. BuhalteriO experts help developers correct such mistakes and report transparently. If you have received compensation from abroad, our professional income tax declaration for 2025 guarantees you peace of mind during audits. Find out why the status of an entrepreneur does not save the author and how to act correctly.

Regarding the nature of income in the form of royalties received by a natural person — the author of a computer program — and the illegality of its qualification as Sole Proprietor (FOP) income, as well as recommendations for tax reporting.

I. Analysis of the actual circumstances of receiving foreign royalties by the author

For correct tax qualification, it is necessary, first of all, to consider in detail the conditions under which the right to receive compensation arose:

  1. A natural person created a computer program (a work in the form of a game).
  2. Compensation for the use of this work is paid by an American company and is qualified as “royalties” in the payer’s and bank’s documents.
  3. Tax in the USA was withheld at a rate of 10%, as confirmed by Form 1042-S.
  4. The natural person did not carry out state registration of copyright in Ukraine.
  5. Despite this, the natural person mistakenly chose the model of receiving income through a 3rd group Sole Proprietor (FOP) and paid a 6% single tax.

The described facts indicate a systemic error in choosing the taxation model, which could lead to significant penalties in 2026.

II. Legal status of the author and the nature of intellectual property rights

1. An author is always a natural person

According to Art. 1 of the Law of Ukraine “On Copyright and Related Rights”:

“Author — a natural person who created a work through their creative labor.”

According to Art. 11 of this Law:

“The primary subject of copyright is the author of the work. Copyright arises from the moment of the work’s creation and does not require mandatory registration.”

Below are the key legal points that determine the status of the copyright subject:

  • The primary holder of economic copyright is exclusively a natural person, not a Sole Proprietor (FOP).
  • The status of a Sole Proprietor (FOP) does not change or replace the natural person as the subject of copyright.

Thus, the status of an entrepreneur does not affect the original ownership of an intellectual product created by a person’s creative labor.

2. State registration of copyright is not mandatory

According to Art. 18 of the Law of Ukraine “On Copyright and Related Rights”:

“State registration of copyright and agreements concerning the author’s rights is carried out at the request of the author.”

This provision of the law entails the following important consequences for the software author:

  • The absence of state registration does not deprive a person of copyright.
  • The absence of registration does not affect the tax qualification of income as royalties.

Thus, legal protection of a work arises automatically, regardless of the presence of official certificates from state authorities.

III. The tax nature of income and the definition of royalties in the Tax Code

For the correct calculation of tax liabilities, one should refer to the norms of the Tax Code of Ukraine regarding the definition of royalties:

According to sub-para. 14.1.225 of Art. 14 of the Tax Code of Ukraine (TCU):

“Royalty — any payment received as compensation for the use of or the granting of the right to use an object of intellectual property rights, in particular, literary works, computer programs, patents, trademarks, etc.”

Based on this definition, the following conclusions can be drawn regarding the current situation:

  • A computer program is an object of copyright.
  • Payments are made specifically for the use of this object.
  • Therefore, by its legal nature, this income is a royalty.

Qualifying the payment as a royalty is a decisive factor for choosing the correct tax rate within the reporting for 2025-2026.

How royalties are taxed in Ukraine

(a) PIT (Personal Income Tax)

According to Art. 167 of the TCU, the basic rate is 18 percent. Royalties are included in the total taxable income of a natural person in accordance with Art. 170.3 of the TCU:

“Income in the form of royalties is taxed according to the rules established for the taxation of passive income of natural persons.”

(b) Military Tax

According to para. 16¹ of Subsection 10 of Section XX of the TCU, the military tax is 5 percent of the object of taxation.

In total, the overall tax burden on the author’s passive income consists of the following elements:

  • 18% PIT + 5% military tax.

These deductions are mandatory for all residents of Ukraine who receive compensation for the use of intellectual property objects.

IV. Why receiving royalties is not a Sole Proprietor (FOP) business activity

According to Art. 42 of the Commercial Code of Ukraine, entrepreneurship is an independent economic activity. Let’s consider the main features that characterize such activity:

  • provision of services;
  • sale of goods;
  • performance of works;
  • systematicity of operations as an economic activity.

The absence of at least one of these features calls into question the possibility of using the simplified taxation system for the received income.

Why receiving royalties does not correspond to the features of entrepreneurship

Analyzing the activity of the computer program author, the following inconsistencies with Sole Proprietor (FOP) principles can be highlighted:

  1. The Sole Proprietor (FOP) does not provide any services to the counterparty:
    • The author does not perform work at the request of the payer.
    • He does not provide consultations, development, or support.
  2. The Sole Proprietor (FOP) does not sell goods (there is no sale of material or digital goods).
  3. The payment is made specifically for the right to use the object (royalty), and not for the process of its creation.

This reasoning allows for a clear distinction between active entrepreneurial activity and the passive receipt of benefits from owning rights.

Analogy: If a person has written a book and receives compensation for its use, they do not provide a “book reading” service, but receive royalties. The same applies to a program. Therefore, this income is passive income of a natural person in the form of royalties.

V. Consequences of incorrect reclassification of author’s income as Sole Proprietor (FOP) income

For a clear understanding of the scale of the error, let’s compare the two taxation models in the following table:

CriterionCorrect ClassificationIncorrect Classification
Nature of incomeNatural person’s royalty3rd group FOP income
Tax burden18% PIT + 5% Military Tax6% single tax
Subject of lawNatural personBusiness entity (FOP)

As we can see, the difference in rates and the status of the subject creates the prerequisites for accusing the taxpayer of tax evasion.

Using the Sole Proprietor (FOP) model in this case is legally incorrect for the following reasons:

  • The Sole Proprietor (FOP) is not the primary holder of copyright;
  • The Sole Proprietor (FOP) did not carry out entrepreneurial activity in the form of services;
  • The Sole Proprietor (FOP) tax regime cannot replace the taxation of passive income.

Such reclassification carries the risk of additional tax liabilities and penalties during an audit in 2026.

VI. International taxation according to the Ukraine-USA Convention

According to Art. 12 of the Convention between Ukraine and the USA on the Avoidance of Double Taxation, the tax in the source state cannot exceed 10%.

Let’s consider the practical aspects of applying this Convention for a Ukrainian resident:

  • The USA withheld 10% — this corresponds to international norms.
  • Ukraine has the right to tax this income, but with the credit for the tax paid in the USA.

Correct application of the credit mechanism allows for avoiding an excessive financial burden on the author.

VII. Recommendations for filing a tax return and preparing documents

1. Filing a return in Ukraine

To legalize income and avoid claims from regulatory authorities, a natural person is recommended to perform the following actions:

  1. File an annual declaration of property status and income in the prescribed form.
  2. In the section “Income received abroad,” reflect:
    • the gross amount of royalties at the NBU exchange rate;
    • the amount of tax paid in the USA (10%);
    • the amount of PIT to be paid additionally (18% minus 10%);
    • the amount of military tax 5% (without credit).

Timely filing of the return is a key stage in the process of correcting previous reporting errors.

2. Documents that should be prepared

In the case of an audit, the author must have a generated package of documents confirming the nature of the payments:

  • Form 1042-S (USA);
  • bank statements on the receipt of funds;
  • contracts or Terms of Service of the platform;
  • a written explanation about the nature of the income as royalties.

The presence of these documents will allow for a reasoned defense of the taxpayer’s position before tax inspectors.

3. Translation of documents from the USA

Since the primary documents are issued in a foreign language, it is necessary to ensure their proper formatting for Ukrainian authorities:

  • Form 1042-S and other appendices should be translated into Ukrainian.
  • The translation must be carried out by a professional translator.
  • Notarial certification of such a translation is recommended.

Properly certified translations are a mandatory condition for the recognition of foreign documents as official evidence.

4. Risk of automatic exchange of information

In view of the implementation of CRS/FATCA standards, the following risk factors should be considered:

  • The Tax Service of Ukraine automatically receives data on income in the USA.
  • It is possible to receive requests for providing explanations or returns.
  • Preparation of documents is the most effective defense strategy.

Automation of data exchange makes hiding income or its incorrect qualification practically impossible.

VIII. Advantages and features of the state registration of copyright procedure

Although registration is not mandatory by law, in our current realities, it performs an important protective function. Let’s consider situations in which registration becomes necessary:

  1. In case of program theft or its illegal copying by third parties.
  2. When blocking access to the platform or losing digital evidence of authorship.
  3. During the consideration of court disputes regarding the payment of compensation.

A state certificate significantly simplifies the process of proving authorship and protecting property interests in the legal field.

Therefore, copyright registration is a recommended preventive measure of legal protection for every developer.

IX. Final conclusions on the correct taxation of natural persons’ royalties

Based on the analysis, we have formed a final list of conclusions that will help the author correct the current situation:

  1. Copyright belongs exclusively to the natural person, and a Sole Proprietor (FOP) cannot be its primary holder.
  2. The received income by its nature is a royalty (sub-para. 14.1.225 TCU), not entrepreneurial profit.
  3. Reclassifying royalties as Sole Proprietor (FOP) income at 6% is a legally flawed and risky model.
  4. The correct model provides for the payment of 18% PIT and 5% military tax, with the possibility of crediting the US tax against PIT.
  5. A tax credit (deduction) for income in the form of royalties is not provided for by law, as it applies only to wages.

Compliance with these recommendations will provide the computer program author with reliable legal protection and full tax transparency.

Order a professional royalty declaration at BuhalteriO today

An error in qualifying income from intellectual property is not a sentence, but a reason to act professionally. In our time, financial transparency is becoming a developer’s main asset, so the transition from risky schemes to legal reporting is the best investment in your peace of mind. BuhalteriO specialists will help account for every dollar of tax paid in the USA and flawlessly prepare reporting for the past year. Protect your copyrights and capital by entrusting complex calculations to professionals.