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Head of Tax Practice, Ilyashev & Partners
Game-Changing Tax Rules for Non-Residents
In 2021, amendments to tax legislation that pertain directly to the work of non-residents in Ukraine came into legal force and were introduced in accordance with the Law of Ukraine On Amendments to the Tax Code of Ukraine to Improve Tax Administration and Eliminate Technical and Logical Inconsistencies in Tax Legislation No. 466-IX of 16 January 2020.
The first and most shocking change that came was all non-residents operating in Ukraine were required to register directly with the tax authorities as taxpayers. Initially, a deadline was set for registration until 31 March 2021, but later on it was extended until 19 May 2021.
From now on, foreign companies and organizations that conduct business in Ukraine through their detached units, including permanent establishments, either acquire real estate or acquire ownership title to such property in Ukraine or open accounts at Ukrainian banks or acquire ownership title to an investment asset are required to register with the controlling authorities.
Registration of a non-resident with a controlling authority must be carried out subject to the following terms:
- within 10 days following the accreditation (registration, legalization) on the territory of Ukraine of a detached unit — with the controlling authority at the detached unit’s location;
- before acquisition of immovable property or acquisition of ownership title to such property in Ukraine — with the controlling authority at the location of the immovable property;
- before opening an account in Ukraine — with the controlling authority at the location of an institution (branch) of the bank or other financial institution, where an account is opened;
- before the date of the first payment for the acquired investment asset — with the controlling authority at the location of the Ukrainian legal entity, whose shares or corporate rights subsist the value of an investment asset that is the subject of such transaction.
In order to register, the company shall submit the relevant application and copies of the following documents (with the presentation of their originals):
- an extract from the relevant business register (trade, banking or other register containing the records of state registration of company/organization), issued in the country of registration of a foreign company/organization, legalized according to the prescribed procedure and accompanied by the notarially certified translation thereof into the Ukrainian language;
- a document confirming the assignment of an identification (registration, business) number (code) of the non-resident in the country of its registration, if the extract from the relevant business register does not contain the information about such number (code), accompanied by the notarially certified translation thereof into the Ukrainian language;
- the document confirming the authority of the non-resident’s representative. If the said document is issued in the country of registration of the non-resident, it shall be legalized according to the prescribed procedure and accompanied by the notarially certified translation thereof into the Ukrainian language;
- the document on accreditation (registration, legalization) of a separate subdivision of the foreign company/organization in the territory of Ukraine, if the non-resident carries out activities in Ukraine through its separate subdivision (Certificate of Registration of a Representative Office of a Foreign Company).
Consequences of a Non-resident’s Refusal to Register with the Tax Authorities
The Tax Code of Ukraine provides that checks on the fulfilment of registration obligations by the non-resident may be conducted starting from 1 July 2021.
On the basis of the results of such a check, the controlling body shall:
register the non-resident if the check results confirm the existence of economic activities carried out through the permanent establishment in Ukraine;
take measures to deregister the permanent establishment if it finds that the non-resident’s activities in Ukraine have been terminated and the permanent establishment has fulfilled its obligations as a taxpayer.
Failure to fulfil registration obligations may serve as grounds for the seizure (arrest) of the non-resident’s assets (Article 94.2.5 of the Tax Code of Ukraine), which will significantly complicate the fulfillment by the permanent establishment of its obligations (settlement with contractors, payment of wages, and making other mandatory payments). The consequences of the seizure of assets may provoke new penalties from the contractors and public authorities.
The aforementioned seizure is lifted after the non-resident has been registered with the tax authorities based on the results of the check conducted by the tax authority and upon the issuance of the relevant certificate (act).
In the said case, the non-resident will be fined UAH 100,000 for operating without proper registration.
The second change that affected non-residents was a change in tax legislation, aimed at tracking down unregistered permanent establishments in Ukraine.
The Tax Code of Ukraine defines a non-exclusive list of facts that confirm the existence of an authority to carry out activities in the interests, at the expense and/or in favor of a non-resident, which in its turn indicate the emergence of a permanent establishment in Ukraine, including:
- issuance by a non-resident of instructions that are mandatory for performance (including electronic communications or by transferring the electronic media) and their further performance by an individual or a legal entity;
- possession and use by an individual or a legal entity of the corporate e-mail address of a non-resident to communicate with him and/or with third parties, with which legal transactions have already been executed or shall be executed with in the future;
- entitlement of an individual or a legal entity to either possession or disposal of the stock (goods) or other assets of a non-resident in Ukraine of a material part hereof subject to the appropriate instructions of a non-resident;
- availability to an individual or a legal entity of a premise to store the property that it has taken on lease on its own behalf, purchased at the expense of a non-resident or if such property is beneficially owned by a non-resident or to third parties and which is subject to transfer to third parties subject to a non-resident’s instructions or for other purposes designated by a non-resident.
Today, the permanent establishment is a permanent place of business through which the economic activities of a non-resident in Ukraine are carried out in whole or in part, inter alia, the place of management; branch; office; factory; workshop; installation or structure for exploration of natural resources; mine, oil/gas well, quarry or any other place of extraction of natural resources; warehouse or premises used for the delivery of goods, server.
For tax purposes, the term ‘permanent establishment’ includes a building site, a building, assembly or installation facility or a related supervisory activity if the duration of works associated with such site, facility or activity exceeds six months; the provision of services by the non-resident (except for staffing services), including consulting services, by the employees or other personnel hired by it for such purposes, but only if such activities are carried out (within the auspices of one project or a project related to it) in Ukraine during a period or periods, the total duration of which exceeds six months in any period of twelve months; the residents having the authority to act exclusively on behalf of such non-resident (negotiate essential terms and/or conclude the agreements (contracts) on behalf of such non-resident), which leads to the emergence with such non-resident of civil rights and obligations; and/or to keep (store) the stocks of goods belonging to the non-resident, from whose warehouse the goods are delivered on behalf of the non-resident, except for residents having the status of temporary warehouse or licensed customs warehouse.
However, the status of a permanent establishment shall not apply to the use of buildings or structures solely for the purpose of storing, displaying or delivering goods or products belonging to the non-resident; the storage of stocks of goods or products belonging to the non-resident solely for the purpose of storage or demonstration; the storage of stocks of goods or products belonging to the non-resident solely for the purpose of their processing by another enterprise; the maintaining of a permanent place of business solely for the purpose of purchasing goods or products or gathering information for the non-resident; the referral to the entity of individuals within the framework of implementation of any agreements on staffing services; the maintaining of a permanent place of business solely for the purpose of carrying out — for the benefit of the non-resident — of any other preparatory or ancillary activities.
By virtue of the next change to tax legislation that came into legal force on 1 January 2021 — a unified method for determining the profits of a permanent establishment has been introduced — on an “arm’s length” basis.
From now onwards, when calculating the amount of taxable income, a permanent establishment shall have to use the “direct” taxation method, taking the rules of transfer pricing into account.
That is, at present a permanent establishment needs to determine the amount of taxable profits as an independent supplier of services to a non-resident (the headquarters) under the conditions similar to those existing between independent companies (with regard to the functions performed by a permanent establishment). In other words, a permanent establishment must, for taxation purposes, be considered a separate independent company.
For instance, if a permanent establishment is promoting the products, manufactured by a non-resident (conducts market surveys, provides marketing services, etc.), then the amount of its profits shall correspond to the amount of profits of a company acting independently that would have been providing similar services.
Appropriately, permanent establishments shall need to prepare transfer pricing documentation, even if their transactions with a non-resident would not exceed the margin of UAH 10 million that is required to designate the transactions as controlled.
In connection with such changes, permanent establishments that conduct business on the territory of Ukraine are advised:
- to revise their activities and to minimize the factors that could evidence a permanent establishment’s participation/mediation in executing contracts between a non-resident and Ukrainian counter-agents, as well as promotion of products manufactured by a non-resident;
- to carefully prepare transfer pricing documentation to justify the amount of taxable income reported by an established representation.