• Larysa Vrublevska

    Partner, Head of Transfer Pricing Practice, ILC EUCON

EUCON

Address: 33 Taras Shevchenko Blvd,
Office 12, Kyiv, 01032, Ukraine
Tel./Fax: +380 44 238 0944; 238 0413 E-mail: ilc@eucon.ua
18 Jana Dantyszka St,
Poland, 02-054, Warsaw
Tel./Fax: +48 22 658 1025
Tel./Fax: +48 57 000 8575
Web-site: www.eucon.ua

Our philosophy on protecting a client’s rights is simple — to prevent legal risks and litigation.

International Legal Center EUCON provides services representing the interests and outsourcing of non-residents and residents doing business in Ukraine and abroad.

An important feature of services provided by the firm is a comprehensive study of clients’ problems, particularly the involvement of auditors, financial advisers, tax advisers, deep doctrinal research tasks. This approach enables us to provide comprehensive and intelligent solutions for our clients.

The firm operates from two offices. Yaroslav Romanchuk heads the Ukrainian office in Kyiv and Ihor Yatsenko is the head of the Polish office in Warsaw.

The team of International Legal Center EUCON advises clients on the most complicated issues of tax, transfer pricing, corporate, business restructuring, assets protection, commercialization of IP rights objects, tax planning with application of non-material assets.

The firm’s clients include international and Ukrainian industry leaders that come from oil and gas, energy, agriculture and food industry, telecommunications, trade, transport, metallurgy, chemical industry, construction, hospitality, finance, etc.

The performance of International Legal Center EUCON and its partners is highlighted by numerous recognitions and awards.

Since 2010 EUCON has been included in the list of top 50 Leading Law Firms in Ukraine according to the annual ratings conducted by the Yuridicheskaya Practika Weekly and Kommersant-Ukraine Publishing House. EUCON is recognized as being among the leading tax law firms according to the national legal directory Ukrainian Law Firms. A Handbook for Foreign Clients, Kyiv Post, Legal Awards, international directories Legal 500 EMEA, World Tax and World Transfer Pricing, International Tax Review.

In 2015 EUCON won the Ukraine Transfer Pricing Firm of the Year award at the annual European Tax Awards 2015, International Tax Review.

The tenth anniversary awards ceremony of the best Ukrainian lawyers Legal Awards 2016 named International Legal Center EUCON Transfer Pricing Firm of the Year in Ukraine.

In view of the current trends in tax policies, International Legal Center EUCON has established a separate transfer pricing practice and enlisted lawyers in addition to auditors and assessors.

International Legal Center EUCON and the International Audit Union established and operate the Transfer Pricing School attended by managers of accounting and financial divisions.

Our philosophy when protecting a client’s rights is simply to prevent legal risks and litigation.

International Legal Center EUCON provides services representing the interests and outsourcing of non-residents and residents doing business in Ukraine and abroad.

The firm operates at two offices. Yaroslav Romanchuk heads the Ukrainian office in Kyiv and Ihor Yatsenko is the head of the firm’s Polish office in Warsaw.

The team of International Legal Center EUCON advises clients on the most complicated issues of tax, transfer pricing, corporate, business restructuring, assets protection, commercialization of IP rights objects, tax planning with application of non-material assets.

Clients include international and Ukrainian industry leaders that come from the oil and gas sector, energy, agriculture and food industry, telecommunications, trade, transport, metallurgy, chemical industry, construction, hospitality, finance, etc.

The performance of the International Legal Center EUCON and its partners is highlighted by numerous recognitions and awards.

Since 2010 EUCON has been included in the list of Top 50 Leading Law Firms in Ukraine according to the annual ratings of Yuridicheskaya Practika Weekly and Kommersant-Ukraine Publishing House. EUCON is recognized among the country’s leading tax law firms according to the national legal directory Ukrainian Law Firms. A Handbook for Foreign Clients, Kyiv Post, Legal Awards, international directories Chambers & Partners, Legal 500 EMEA, World Tax and World Transfer Pricing, International Tax Review.

In 2015 EUCON won the Ukraine Transfer Pricing Firm of the Year award at the annual European Tax Awards 2015, International Tax Review.

 

Income Taxation Models for Permanent Representative Offices of Non-Residents

In general, for a non-resident operating in Ukraine through a permanent representative office, the Tax Code of Ukraine provides for 3 (three) methods of determining taxable income subject to taxation in Ukraine.

However, since current tax legislation neither prioritizes application nor clearly regulates the criteria for choosing a method for permanent representative offices to calculate taxable income, we will review practical application in more detail.

Taxation on General Terms Provided for all Income Tax Payers Subject to Filing Tax Return

The taxable item is: income in the form of a financial result before taxation, as defined in the financial statements of a taxpayer pursuant to national accounting standards (regulations) or international financial reporting standards.

This taxation method stipulates that a representative office is treated as a taxpayer carrying out activities independently of such a non-resident. Therefore, when applying this method, the following will be taken into account: income with a Ukrainian source of origin, which is received directly by the representative office (service contracts are entered into by the representative office) and costs of ensuring economic activities and representative office maintenance, which are also borne directly by the representative office. If part of this income is received directly by a non-resident and/or the costs are partially borne by a non-resident, it is impossible to take them into account during the specified procedure for calculation of taxable income. Moreover, under such conditions, the sum of taxable income of a representative office may differ significantly from real income received by a non-resident in the course of activities performed in Ukraine, which may prompt the controlling authority to apply another calculation method and to compare the results.

 

Taxation on the Basis of Determining by Calculation the Amount of Separate Income of the Representative Office (by relative share based on information from a separate balance sheet on financial and economic activities of a non-resident) drafting Calculation 1

The criterion for choosing this method is the statement that a non-resident carries out its activities in Ukraine and abroad and that does not determine the income from its activities carried out through its permanent representative office in Ukraine.

The taxable item is: the difference between separate income of a permanent representative office (obtained by calculation) and the costs borne by a permanent representative office (clause 2 Section II of Regulation No. 544).

By the phrase “costs borne by a permanent representative office”, legislators mean costs borne directly by a representative office of a non-resident.

To calculate the amount of separate income of a permanent representative office, as well as the relative share of a permanent representative office in the total amount of income of a non-resident, a representative office should submit data on total volume of income received and the costs of a non-resident as a whole, as well as information on the total number of its employees and on the value of fixed assets, to Ukrainian controlling authority certified by the tax authority of the non-resident’s country, duly legalized and translated into Ukrainian.

The algorithm for calculating separate income of a permanent representative office is to calculate its relative share in the total amount of aforementioned indicators (costs, number, fixed assets) of the non-resident as a whole and to, accordingly, define its part in total income of the non-resident calculated by the relative share.

In view of this, it is obvious that Calculation 1 should be applied, particularly if the representative office directly bears all the costs related to the activities of a non-resident in Ukraine (or most part thereof), while income is received by a non-resident.

This method is rather problematic for use in practice, as permanent representative offices cannot agree on separate balance sheets with the State Fiscal Service due to the absence of an agreement procedure and often of information approved by the tax authority of the non-resident country that is necessary for such calculation.

 

Taxation Involves Determination by Calculation of the Amount of a Representative Office’s Costs (applying 0.7 coefficient to sum of income received). Calculation 2 is applicable

The Tax Code of Ukraine establishes that the controlling authority determines taxable income using this method (meaning during the inspection). It is clear because there is enough information for this method in accounting records, maintained by a representative office, and it does not require certified information from a non-resident. Moreover, it is assumed that in any case, income before taxation will be 30% of the amount of income received, and the tax burden will be fairly reasonable.

The taxable item is: the difference between the amount of income of a permanent representative office, determined pursuant to accounting standards, and the amount of costs, determined by multiplying the amount of income by the 0.7 coefficient.

If we summarize the aforementioned information, then ideally, Method 1 (Tax Return) should be applied if all income and costs arising from activities of a non-resident in Ukraine are borne by a representative office.

Method 2 (Calculation 1) is applicable if all the costs related to activities of a non-resident in Ukraine are borne directly by a representative office, while the income is received by a non-resident.

Method 3 (Calculation 2) is appropriate in a case where the income generated by a non-resident in Ukraine is received directly by its representative office, and the costs are wholly or partly borne by a non-resident.

Moreover, from 1 January 2018, when defining taxable item, representative offices will have to take into account new standards stipulating recognition of business transactions between a non-resident and its representative office in Ukraine as controlled ones for the purposes of transfer pricing.
For such transactions, a separate value criterion is established — volume of transactions that may affect the taxable item should exceed UAH 10 million for the reporting year. In fact, this means that representative offices are subject to general rules of transfer pricing with a requirement to bring the terms of transactions into line with the “arm’s length” principle.

As our practice shows, based on the number of appeals from foreign companies having representative offices in Ukraine, there are a lot of issues and there is no single answer, and in each case it is necessary to deal with such issues separately.

Due to the complexity of the issue, we have included it in the program of our forum on transfer pricing and international tax planning, which EUCON holds annually.