Date of publication: 16 February 2021
Nina Bets, Lawyer
If you are a non-resident and conduct business on the territory of Ukraine, then we got some updates for you: new legal provisions in the Tax code that apply to permanent establishments of non-residents in Ukraine have become enforceable on 1 January 2021. The purpose of these is to track down the unregistered permanent establishments and to change taxation framework that applies to their business.
All foreign companies that conduct business on the territory of Ukraine either via their permanent establishments or non-commercial establishments have time before March 31 2021 to get duly registered with fiscal authorities.
From now onwards, a permanent establishment on the territory of Ukraine shall be deemed to have emerged by a non-resident if a party that is acting on the territory of Ukraine on the latter’s behalf has a legal capacity to act in his interests, at his expense or for his benefit.
The criteria, which shall be used to “unveil” permanent establishments are as follows:
- a non-resident issues the instructions that are mandatory to perform (including electronic communications or by transferring the electronic media), to be further performed by an established representative;
- an established representative possesses and uses corporate e-mail address of a non-resident to communicate with him and/or with the third parties, which the legal transactions have already been executed or shall be executed with in the future;
- an established representative is entitled to either possession or disposal of the stock (goods) or other assets of a non-resident in Ukraine;
- an established representative takes on lease, on his own behalf, a premise to store the property, purchased at a non-residents expense or if such property is beneficially owned by a non-resident or the third parties for further transfer or for other purposes.
Unified Method of Determining Profits
From January 1 2021 onwards, a permanent establishment would be required to apply the so-called “direct” taxation method when calculating the amount of profits, taking the rules of transfer pricing into account.
That is, the amount of taxable income for a permanent establishment shall be calculated like for a detached company, which is acting independently from a non-resident — like for a service provider for a non-resident (a non-resident’s headquarters).
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 an independently acting company 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 do not exceed the margin of UAH 10 million that is required to designate them as controlled entities.
Requirement to Register as VAT Payers
According to tax legislation, permanent establishment is an entity that is subject to VAT applicable to its business transactions.
This means that all permanent establishments, which conducted the aggregate of goods/services procurement transactions on the customs territory of Ukraine worth more than UAH 1 million over the course of the previous 12 months, must register as VAT payers.
However, if a permanent establishment received financing exclusively from its native non-resident, then such transactions shall not be subject to VAT, because they would not fall within the scope of definition of the goods/services procurement transactions.
Profit Overestimation Risk
Established representatives of non-residents in Ukraine have to be aware that execution by a non-resident of contracts directly with Ukrainian counteragents may pose profit overestimation risk as the profits are being reported by an established representative.
Staff actions, functions and role of a Ukrainian established representative when generating income by a non-resident shall be taken into account by fiscal authorities when considering such cases.
Non-resident’s profits must be included with profits of a permanent establishment, depending on its functions.
In connection with above, permanent establishments 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 counteragents, as well as promotion of the products, manufactured by a non-resident;
- to carefully prepare transfer pricing documentation to justify the amount of taxable income, reported by an established representative.
Inspections to Detect Unregistered Permanent Establishments
From 1 July 2021 onwards, fiscal authorities shall have a “go-ahead” to proceed with assigning inspections to non-residents that conduct business on the territory of Ukraine and were supposed to get duly registered till the end of March 2021.
This provision shall allow the controlling fiscal authorities to inspect all non-commercial established representatives of non-residents in Ukraine for the purpose of disclosing breaches of applicable legislative requirements.
The time left to get ready for these inspections is fairly short. If any breaches are detected, non-residents shall be exposed to penalties up to UAH 100 000 (~ EUR 2900). Apart from these penalties, a permanent establishment shall have to clear the residual tax liabilities that in the opinion of fiscal authorities would become due on the territory of Ukraine.