Tax Regulation (#11 November 2014)

With the support ofTax Regulation

Foreign companies often operate in Ukraine through a separate unit in the form of a representative office. In that case, taxpayers work with non-residents through their representative offices in Ukraine. Pursuant to the provisions of the Tax Code of Ukraine that govern taxation of non-residents, the income of non-residents that conduct their activities through a permanent representative office are taxed under the general procedure. And for tax purposes, such permanent representative offices are deemed identical to taxpayers who conduct their business independently of such a non-resident. Under the new legislation on transfer pricing, where controlled transactions include business transactions of purchasing/selling goods, works (services) with related non-resident persons and non-residents, who are registered in the countries with the income tax rates lower by 5 or more percentage points than in Ukraine, or who pay such tax at the rate of 5 of more percentage points lower than in Ukraine, taxpayers had many questions about the procedure of recognizing transactions with non-residents as controlled ones.

Recognition of a representative office as an independent taxpayer for tax purposes (pursuant to clause 8, Article 160 of the Tax Code) needed additional explanations. УSince our clients include companies that carry out transactions with non-residents directly and through their representative offices, and most often they have a question if they need to use the value criterion of UAH 50 million separately for a non-resident and its representative office,Ф Yaroslav Romanchuk, managing partner of International Legal Center EUCON, says.

In his opinion, the amounts of the transactions should be summed up and all transactions should be considered transactions with non-residents. Similarly, the transactions that are carried out solely with a representative office are viewed as transactions with non-residents directly. УIt is a simple conclusion. It is enough to analyze the definitions of a СresidentТ and a Сnon-residentТ in the Tax Code,Ф he explains.

A permanent representative office of a non-resident is a permanent location, where business operations of a non-resident take place in full or in part. And in particular, it includes managing offices, branches; offices; a factory; a workshop; an installation or a structure for prospecting natural resources; a mine, an oil/gas well, a quarry or any other production of natural resources; a warehouse or premises used for delivery of goods.

And non-residents include:

a) foreign companies, organizations that are established under the legislation of other countries, their registered (accredited or legalized) branches, representative offices and other separate units in Ukraine;

b) diplomatic missions, consular offices and other officials, representative offices of foreign countries and international organizations in Ukraine;

c) individuals, who are not residents of Ukraine.

Therefore, according to Mr.†Romanchuk, there is no doubt that a non-resident and its representative office in Ukraine should be viewed as one person. This is further confirmed in the letter of the Ministry of Revenue and Taxes of 15 May 2014 No.8645/6/99-99-19-02-02-15. In addition, the letter also explains that transactions between a representative office and a non-resident are not regarded as controlled ones, as they are conducted within the same legal entity.

Representative offices of non-residents often conduct transactions with related persons Ч residents of Ukraine and there was a question about their duty to report controlled transactions. УI believe, representative offices should report as they are recognized as taxpayers pursuant to clause 1, Article 15 of the Tax Code. And Article 39 of the Tax Code that regulates control of transfer pricing explains that all taxpayers (except for the National Bank of Ukraine), which carried out controlled transactions during the reported period, are required to submit a report,Ф Mr. Romanchuk says.

If a resident conducts business transactions with a representative office of an unrelated non-resident, which pays income tax in Ukraine under general terms, such transactions are not considered to be controlled transactions. УProbably, a representative office would need to provide the information (according to the relevant provision on non-residents) about its income tax rate. In particular, we provided these explanations to our non-resident clients that conduct business in Ukraine.Ф

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