Registration, Operation, and Taxation of Representative Offices of Foreign Companies in Ukraine
Despite the rather severe impact of the global economic crisis on economic processes and the investment attractiveness of Ukraine, foreign companies continue to view our country as an opportunity to expand business and to enter the markets of Eastern Europe. One of the most common options is running a business through a representative office.
Opting in favor of a representative office enables the use of a trademark or a brand name of a foreign company without a licensing agreement, to employ non-resident individuals without obtaining permits from the employment center (just for a given representative office), to exercise direct control over its operation by financing expenses. In fact, customers will deal with the main company, which in some instances is more attractive.
In this article we will discuss the key issues of registration, operation, and taxation of the representative offices of foreign companies in Ukraine.
The general definition of the term “representative office” is provided in Article 95 of the Civil Code of Ukraine: “A representative office is a separate division of a legal entity that is located outside its location and represents and protects interests of the legal entity”.
On Foreign Trade Activity Act of Ukraine of 16 April 1991 provides the following definition:
“A representative office of a foreign business entity is an entity or a person who represents interests of the foreign business entity in Ukraine and has duly executed powers. The difference in the above definitions is that the functions of a non-resident’s representative office may be performed by other person representing the interests of the latter and which is not a separate division”.
For the purpose of taxation in Ukraine, there are definitions of the Tax Code of Ukraine (hereinafter — TCU):
“A permanent representative office is the permanent location of operation, where a non-resident runs his business operation fully or in part, including: a location of management, branch, office, factory, workshop, structure for exploration of natural resources, mine, oil/gas well, quarry or any other production of natural resources, storehouse or premises used for delivery of goods.
For tax purposes, the term “permanent representative office” includes a construction site, a construction, assembling or installation object or related supervisory activities, if the duration of such site, object or activities exceeds six months; provision of services (except for provision of personnel), including counseling , by a non-resident through employees or other personnel engaged for such purpose, but if such activities are carried out (in a single project or a related project) in Ukraine for a period or periods whose total duration exceeds six months in any twelve month period; residents who are authorized to act exclusively on behalf of such a non-resident, which entails civil rights and obligations of the non-resident (making agreements (contracts) on behalf of such non-resident, keep (store) goods belonging to the non-resident, when goods are supplied on behalf of the non-resident, except for residents with the status of the temporary storage or customs licensed warehouse).
A permanent representation does not include use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the non-resident; storing goods or merchandise belonging to the non-resident solely for the purpose of storage or display; storing goods or merchandise belonging to the non-resident solely for the purpose of processing by another enterprise; maintenance of the permanent location of business solely for the purpose of purchasing goods or merchandise or for collection of information for the non-resident; assignment of individuals under agreements on provision of personnel services; maintenance of the permanent location of business solely for the purpose of any other activities for the non-resident, whose activity is of a preparatory or auxiliary nature”.
Types of representative offices
Depending on the type of operation, non-residents plan to carry out in Ukraine (full scope, partial business operation or sole representative functions without profits), representative offices may be:
— commercial (for tax purposes, the term “permanent” is used);
— non-profit (without the right to carry out business operations).
This division is explained by the taxation features of each type of representative offices. The revenue of commercial (permanent) representative offices in Ukraine is subject to the same taxation rules that are applied to revenues of residents of Ukraine. If the business activity is not planned, it is possible to register a non-profit representative office, but the entity should comply with the choice and remember that it may be only preparatory or auxiliary activities, gathering information for a non-resident, market research, storage of inventory or goods.
A representative office of a foreign business entity is not a legal entity and it does not carry out any independent economic activity. In all cases it acts in the name and on behalf of the non-resident and only in the latter’s interests. Accreditation of representative offices of foreign banks is carried out by the National Bank of Ukraine according to the On Banks and Banking Act of Ukraine. Registration of representative offices of other foreign business entities is performed by the national agency on economic policy (as of now it is the Ministry of Economic Development and Trade).
In order to register a representative office of a foreign business entity that has no intention to conduct business in Ukraine, the following should be submitted:
— a registration application in any form;
— an excerpt from the trade (banking) register of the country, where the foreign business entity has a formally registered office;
— a certificate from the bank, where the applicant has an account;
— an authorization for representation functions in the form pursuant to the legislation of the country where such foreign business entity is officially registered.
All the documents should be notarized at the place of issue, properly legalized, translated into the Ukrainian language and verified with the translator’s seal. The state fee for registration of representative offices is established in the amount of USD 2,500.
The certificate of registration is issued no later than within 60 working days after payment of the state fee. Starting from the date of registration, the representative office is deemed open. The Ministry of Economic Development and Trade maintains a registry of the registered representative offices.
Given the fact that the On State Registration of Legal Entities and Individual Entrepreneurs Act of Ukraine does not apply to foreign representative offices, and therefore information about them is not included in the Unified State Register. The identification code is issued for them by the Ministry of Statistics. Thus, within the 10-day period following the registration with the Ministry of Economic Development and Trade, the registration certificate, a power of attorney to act as a representative, the regulation on operation of the separate division and a completed registration form should be submitted to an office of the Ministry of Statistics in order to be included in the Register. The certificate of USREOU is issued within a 5-day period.
After that, the representative office should carry out its registration with the Ministry of Revenue and Taxes of Ukraine within 10 calendar days following the date of the state registration (accreditation, legalization) at its location. The procedure for registration of a taxpayer is regulated by the Order of registration of payers of taxes and fees of 9 December 2011, No.1588.
The representative offices of non-resident legal entities that meet the definition of permanent representative offices should be registered as income tax payers in the manner established by Section V of the Order before they start their business operation:
— application of the form No 1-RPP;
— a copy of the document confirming the USREOU code;
— a copy of the document of registration, legalization, accreditation or certification of establishment in another way.
Registration of a representative office that does not carry out business activity in Ukraine and does not fall under the definition of the permanent representative office is performed based on the following documents according to Clauses 4.2 and 4.4, Section IV
of the Order:
— application of form No. 1-OPP;
— a copy of the document confirming the USREOU code;
— a copy of the document of registration, legalization, accreditation or certification of establishment in another manner.
If a foreign company or an organization acquires property rights to real estate or land in Ukraine that is subject to taxation, if the method and purpose of acquisition does not imply establishment by such company (organization) of a separate division or a permanent representative office of the non-resident in Ukraine, such a non-resident should submit to the state tax service the following documents:
— Application of the form No. 1-OPP;
— A copy of an excerpt from the trade, bank or court register issued in the country of registration of a foreign company or organization, which is legalized in the established manner, unless otherwise stipulated by the international agreements ratified by the Verkhovna Rada of Ukraine, with a notarized translation into Ukrainian (except for diplomatic missions);
— A certified copy of entitling documents confirming ownership of the property or right to use a land plot issued and registered in the name of the non-resident by competent authorities of Ukraine;
— Documentary evidence or justification that the method and purpose of acquisition does not require establishment by such company (organization) of a separate division or a permanent representative office of the non-resident in Ukraine, and that possession of such property by a foreign company is temporary and will be followed by alienation.
Registration of a representative office of a foreign company as carrying no business activity does not exempt the office from the obligation to register as a payer of income tax if such activity is expected to begin. Otherwise, if the tax agency performs an audit and finds out that there has been business activity without registration of a payer of income tax, the agency will send a formal note to the foreign competent agency requesting collection of taxes.
Moreover, pursuant to the On Collection and Accounting of the Single Social Fee for the Obligatory State Social Insurance Act of Ukraine, representative offices of non-residents should pay the social tax and be registered with an office of the Pension Fund. For this purpose, an application should be submitted within the 10-day period following the date of registration of a representative office of the non-resident to the national agency in charge of economic policy.
The documents that need to be submitted along with the application include:
— a certificate of registration of a representative office issued by the national agency on economic policy;
— a document confirming the USREOU Code;
— a copy of the power of attorney for the manager of the representative office.
According to National Bank of Ukraine Resolution No.492 of 12 November 2003, depending on the type of representative office, the following accounts may be opened:
— Current accounts of the “N” type in the national currency for official representative offices and representative offices of legal entities — non-residents that are not engaged in business activities in Ukraine;
— Current accounts of the “P” type in the national currency for permanent representative offices;
In order to open an account of the “N” type, the following should be submitted:
— An application of the representative office of the legal entity — non-resident;
— A notarized copy of legalized or apostilled excerpt from the trade, bank, or court register or the registration certificate of the local authority of a foreign state on registration of the legal entity — non-resident;
— A copy of the certificate of registration of the representative office of the non-resident legal by the authorized agency of Ukraine, which is certified by the issuing agency, or notarized, or signed by an authorized officer of the bank ;
— A notarized copy of legalized or apostilled power of attorney for a person to perform representative functions in Ukraine;
— A notarized card with samples of signatures and the appropriate seal.
The representative office of a legal entity — non-resident that uses hired labor and is a payer of the single fee should additionally submit a copy of the document that confirms that the representative office of a legal entity — non-resident is registered by the Pension Fund of Ukraine.
In order to open an account of the “P” type, in addition to the above-mentioned documents, the following should be submitted:
— A request by the legal entity — non-resident to open an account for the permanent representative office;
— A copy of the document confirming that the permanent representative office is registered by a relevant state tax office.
The permanent representative offices of non-residents that obtain income from sources in Ukraine or perform agency (representative) and other functions in respect of such non-resident are payers of income tax.
The Tax Code provides for several ways to tax representative offices:
1) The general order, if the representative office is equal to the taxpayer that operates separately from the non-resident. Calculation of the income tax liability is made in the general tax return that is valid at the time of filing. In this instance, calculation of the tax object should be guided by the requirements of Section III of the Tax Code that establish recognition of income and expenses and set requirements for supporting documents.
2) If the non-resident carries out its activities not only in Ukraine and does not determine income from the activity through the permanent representative office in Ukraine, the taxable income is determined based on the non-resident’s separate balance sheet agreed with the supervisory authority at the location of the permanent representative office. The separate balance sheet of financial and economic activity shows the separate income of the representative office and its direct expenses. In order to calculate the separate income of the permanent representative office, the taxpayer files the information on the total income and expenses by the non-resident, the total number of employees, and the value of fixed assets of the non-resident. The information should be certified by the tax authorities in the country of the non-resident, duly legalized and translated into Ukrainian.
Taxable income is determined as the difference between the separate income and expenses of the representative office.
3) If it is impossible to determine the income earned by the non-resident in Ukraine by the direct calculation, the taxable income is determined by the controlling authority as the difference between income and expenses that are determined by applying coefficient 0.7 to the amount of the income. In this case, the calculation of the taxable income in the established form should be filed.
The procedure of calculating income tax liability for non-residents, who carry out activities through a permanent representative office, has been approved by the Ministry of Finance of Ukraine of 25 June 2013, No.610. This document approves the tax reporting forms that should be filed depending on the type of taxation by the representative offices of non-residents at their locations.
In the course of business, a representative office may earn revenue that is exempt under international agreements to which Ukraine is a party and if such income is received from transactions that do not fall under the definition of “permanent representative office”, it is not subject to taxation in Ukraine. It includes income from preparatory or auxiliary activities, from activities carried out at a construction site, or installation and assembly facility.
Not for profit representative offices are not subject to income tax and consequently they do not file reports related to the tax.
Regarding VAT, permanent representative offices register as VAT payers in the general manner and under the general rules:
— mandatory registration — if the total amount of taxable transactions related to supply of goods (services) and accrued (paid) during the last 12 calendar months exceeds UAH 300,000 (approximately EUR 27,000) (excluding VAT);
— voluntarily registration — if at least one transaction is performed related to taxable supply.
Our experience in supporting the activities of non-residents’ representative offices enables us to highlight the most important issues that should be taken into account when choosing a form of non-resident’s operation in Ukraine.
The most important thing is the need to define activities, because it affects the legal form of the non-resident’s division, the procedure of registration with the tax authorities, and taxation. That is why we always recommend that our clients evaluate all possibilities and risks taking into account the peculiarities of Ukrainian legislation.