Tax legislation landscape applicable to representative offices of foreign companies in Ukraine has been dramatically changed. New provisions on recognition, taxation and administration of taxable representative offices of non-residents in Ukraine apply as of 01.01.2021.
The changes have impact on large multinational corporations with production and / or trading centers in Ukraine. The changes may also impact those companies offering intermediary operations through Ukrainian entities as well as foreign businesses in construction, trading, and many other areas. Those foreign companies which have registered representative offices in Ukraine also need to take into account the new rules.
Changes are aimed at preventing avoidance of permanent establishment status in Ukraine. Mismatch between management structures driven by business needs of the group and newly adopted Ukrainian tax legislation puts at risk tax policy of large corporations with regards to intragroup relations and cracks it open to tax exposure.
Ukraine has joined OECD’s BEPS plan. Heading towards fulfilling its obligations under the BEPS agreement, Ukraine has ratified MLI in 2019 and adopted so-called “BEPS Law” (the “Law”) as of 16.01.2020 amending the Tax Code of Ukraine (the “TCU”).
Due to multiple inconsistencies and short transitional period stipulated for in the Law, both the TCU and the Law were subsequently amended by a series of laws in the course of 2020, which cumulatively established the new legal framework with respect to taxation of non-resident operations in Ukraine.
Recognition of PEs of Non-Resident in Ukraine
► Implementation of MLI-like permanent establishment anti-avoidance rules to the TCU
Ukrainian tax authorities usually apply fiscal approach. Therefore, if non-resident’s activity in Ukraine bears signs of permanent establishment (the “PE”) as provided for in the TCU, irrespective of the provisions of tax treaties of Ukraine, there is a risk of tax inspections, and assessment of additional tax obligations by tax authorities.
This puts the taxpayer in a position to challenge such tax assessments, unless the activity of representative office is carefully reviewed, and respective risks have been mitigated.
► Intermediary Operations with Related Parties
It may be the case that Ukrainian companies through its local personnel perform certain functions for the benefit of the group/parent company or other companies of the group.
Therefore, all such intra-group relations must be carefully reviewed from a recognition of PE risk perspective.
► PE signals
The TCU provides for a list of criteria of existence of an PE. Any item from the list may be a ground for tax authorities to run the inspection to assess whether there is a PE of non-resident in Ukraine. For example, employees of a local subsidiary of a large international group using the corporate email domain of the headquarters is one of such signals.
Although, existence of any criterion does not necessarily lead to recognition of the PE in Ukraine, there is a risk of such claims from the tax authorities.
Taxation of PEs
PEs are now subject to corporate profit tax (the “CPT”) based on their financial results adjusted in accordance to transfer pricing provisions to be in line with “arm’s length principle”.
Administering of PEs
► Registration of Non-Resident as CPT Taxpayer
Non-residents operating in Ukraine through PEs are now recognized as CPT taxpayers instead of PEs themselves. Therefore, such non-residents shall register with tax authorities as CPT taxpayers at a location of their PEs prior to starting operations in Ukraine.
Non-residents whose PEs have been already registered as CPT taxpayers shall re-register themselves as CPT taxpayers instead of PEs until the 31.03.2021.
► Tax Inspections and Fines
Starting from 07.2021, tax authorities will have a right to inspect non-residents and assess whether activities of non-resident shall be treated as those incurring the PE in Ukraine.
► Recognition of PE in such case will result in:
► non-resident’s forced registration as a CPT taxpayer;
► imposition of fine in an amount of UAH 100,000 (ca. EUR 3,000), which may lead to a non-resident’s property arrest;
► allocation of non-resident’s profits to PE and assessment of unpaid CPT liabilities; and
► assessment of fines and penalty interest, including 10% to 50% of the amount of CPT liabilities assessed and 120% of discount rate of the National Bank of Ukraine annually applicable to the amount of unsettled tax liabilities (including the amount of fines) for every day of failure to settle CPT liabilities.
Although some of the potential consequences of application of the new rules may be quite severe, respective risks may be addressed subject to timely risk due diligence and mitigation of risks.
Therefore, we recommend non-residents in any way present in Ukraine, or even simply cooperating with Ukrainian legal entities or individuals, to carry out a limited risk due diligence of such activities with regards to applicable PE risks and available mitigation remedies. In this respect we recommend that the following deadlines shall be considered.
03.2021 – deadline for registration of non-residents having a PE in Ukraine as a CPT taxpayers; and
07.2021 – tax authorities start commencing the tax inspections on recognition of PEs.