Foreign companies, especially in the IT or engineering field, having business interests in Ukraine, not always establish subsidiaries in Ukraine. There are many business models where offices are opened and a team of private entrepreneurs are sitting there working for a foreign company under the international economic agreements.
In these cases, the question arises whether such office can be considered a permanent representation which, moreover, has to pay taxes to the Ukrainian budget.
Representative office (also called “Permanent representation”) is a permanent place where the business activity of a non-resident in Ukraine is carried out, in particular, a branch, an office, a server etc.
What is a procedure for registering the permanent representation?
The permanent representation is to be registered in two steps.
- Registration with the Ministry of Economy (Ministry for Development of Economy, Trade and Agriculture of Ukraine).
- Registration with the State Tax Service of Ukraine as a taxpayer. After registration the permanent representation should be entered in the Registry of Non-Resident Taxpayers indicating the income taxpayer category.
How does the permanent representation of the non-resident work?
- A non-resident provides services through employees hired by it for such purposes if this activity is carried out (within the framework of one project or associated project) in Ukraine within the period(s) lasting more than 183 days in aggregate in any twelve-month period.
- Through those who actually have and usually exercise powers either to negotiate for essential terms of undertakings based on the agreement or another undertaking resulting in that the non-resident enters into agreements (concludes contracts) without changing such terms essentially and / or to enter into agreements (to conclude contracts) on behalf of the non-resident if a person carries out the mentioned activity in the interests, for the account and / or for the benefit of the non-resident exclusively and / or associated non-resident persons.
What signs has the permanent representation?
- The person has and uses a business e-mail address of the non-resident and / or its associated persons in order to interact with the non-resident and / or the third parties, with whom the non-resident has already concluded contracts or entered into other agreements, or will conclude contracts or enter into other agreements.
- The person has premises leased on his/her behalf to keep property acquired at the expense of the non-resident or owned by the non-resident or the third parties which is to be transferred to the third parties as directed by the non-resident, or for other purposes defined by the non-resident.
- Activities of the resident match with that of the non-resident.
- The activity of the non-resident is permanent and regular without any signs of the ancillary or preparatory activity.
- The resident enters into agreements on behalf of the non-resident.
Effects of recognition of an office as a permanent representation according to the results of the tax audit.
If it is established during the audit that the non-resident was carrying out its activity through separate business units, including the permanent representation in Ukraine without the tax registration, the supervisory authority shall draw up the Certificate of Audit. Based on the Certificate of Audit the supervisory authority may decide to register such non-resident in Ukraine without the application of the non-resident and without receiving any objections to the Certificate of Audit.
Liability for recognition of the business activity of the non-resident as a permanent representation without the tax registration
- Seizure of property.
- Fine of UAH 100,000 imposed on the non-resident.
- If the permanent representation has violated the procedure for paying taxes in Ukraine, the following criminal liability shall apply depending on the amount of unpaid taxes according to the art. 212 of the Criminal Code of Ukraine:
v in a considerable amount (from UAH 3,000,000.00) – a fine from UAH 3,000,000.00 to UAH 5,000,000.00.
v in a large amount (from UAH 5.5,000,000.00) – a fine from UAH 5,000,000.00 to UAH 8,000,000.00.
v in an especially large amount (from UAH 8,000,000.00) – a fine from UAH 16,000,000.00 to UAH 28,000,000.00.
Can the permanent representation include the foreign corporate income in its income / tax base?
The taxable income of the representative office should match with the income of the independent enterprise that carries out the same or similar activity under the same or similar conditions and acts absolutely independently of the non-resident, which permanent representation it is. Therefore, no foreign corporate income is to be included in the income / tax base of the permanent representation.
Judicial practice of the Supreme Court regarding the signs and taxation of the permanent representation
By the Decree dated 17 October 2019 No. 2а-16434/12/2670 the Supreme Court has determined a dominant sign of the permanent representation:
‘Having a specified place of activity is also a dominant sign of the permanent representation. It is not necessary to register the place of activity as a separate business unit so that such place can be considered the permanent representation.’
By the Decree dated 16 March 2020 in respect of the case No. 826/7675/18 the Supreme Court has determined that the item of taxation should be as follows:
‘According to the sub-clause 134.1.2 clause 134.1 article 134 of the Tax Code, the item of income taxation shall be the income (profit) of the non-resident stemming from Ukraine, which is subject to taxation in accordance with the article 160 of this Code.
Income stemming from Ukraine means any income earned by residents or non-residents, including from any activities in Ukraine (including payment (accrual) of remuneration by foreign employers), its continental shelf, in the exclusive (maritime) economic zone (sub-clause 14.1.54 clause 14.1 article 14 of the Tax Code of Ukraine).
The clause 160.1 article 160 of the Tax Code provides that any income stemming from Ukraine earned by the non-resident is liable to tax in the manner and at rates specified by this article. For purposes of this clause, the income stemming from Ukraine earned by the non-resident shall be understood to mean, in particular, other income earned by the non-resident (permanent representation of this or any other non-resident) from the business activity carried out in Ukraine, except for income from sales or as other reimbursement of the cost of goods / works performed / services provided transferred / performed / provided by such non-resident (permanent representation) to or for the resident, including cost of international telecommunication services or international information support services.’
By the Decree dated 17 October 2019 in respect of the case No. 2а-16434/12/2670 the Supreme Court has determined that the amount of profits of the non-resident shall be ascertained as follows:
‘If a non-resident carries out its activity not only in Ukraine but also abroad and does not fix profits from this activity carried out by it through the permanent representation in Ukraine, the amount of profits liable to tax in Ukraine shall be ascertained based on the separate balance sheet for the financial and business activity drawn up by the non-resident and agreed with the state tax service authority at the place of the permanent representation.’
Besides, this Decree determines a condition necessary to recognize the representation:
‘To be recognized as a permanent representation, the representation of a non-resident needs to carry out the commercial activity. For tax purposes, the permanent representation of the non-resident in Ukraine is considered a separate business entity, which does not depend on the non-resident.’
The Decree of the Supreme Court dated 15 March 2016 in respect of the case No. 826 / 14127/14 describes the effects of recognition of activity of the resident and non-resident as identical:
‘If a representation of a non-resident carries out the activity (ies), which is (are) the same as the primary activity of the non-resident, such representation shall earn the status of the permanent representation and its activity in Ukraine shall be liable to tax on general terms.’
Thus, the risk of recognition of an office of a foreign company in Ukraine as a permanent representation and taxpayer in Ukraine depends on many factors and is to be determined in each individual case.
The general rule can be established as follows: If an office (a permanent representation) carries out the commercial activity in Ukraine, that is, enters into agreements and earns profits, it is reasonable to register either the permanent representation or the subsidiary.
If the office takes no part in commercial undertakings of the non-resident, the risk of recognition of such office as a permanent representation remains (and depends on particular circumstances); however, there is only risk of the fine of UAH 100,000 with the forced tax registration. If the permanent representation has no income from its activity, it will not actually pay taxes; for this reason, there is no administrative and criminal liability for relevant violations. In this case, the question on the violation of employment law is still open but anyway has some chance of success.
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