Tax Treatment of Non-residents in Ukraine
Tax Code of Ukraine – TC of Ukraine
State Fiscal Service of Ukraine and organizational chart – SFS
Procedure for taxation of income paid to a non-resident or his permanent establishment is determined by section 160 of Tax Code of Ukraine which regulates the relationship between non-residents and tax payers of income – residents of Ukraine paying such income, they have received on the territory of Ukraine, to non-residents.
According to the definition in Tax Code of Ukraine, residents are foreign companies and organizations established under the laws of other states, their registered (accredited or legalized) in accordance with the legislation of Ukraine branches, representative offices and other separate units located on the territory of Ukraine; diplomatic missions, consular offices and other official representative offices of other states and international organizations in Ukraine; natural persons who are not residents of Ukraine (p. 14.1 (14.1.122) section 14 Tax Code of Ukraine).
Permanent representative office is a fixed place of business through which economic activities of non-residents in Ukraine, are carried on.
The procedure of determining income and tax rate
The income received by non-residents in Ukraine are:
– interest, discount incomes, which are paid in favor of non-residents, including interest on loans and debentures issued (granted) by a resident;
– dividends paid by a resident;
– income from engineering;
– leasing / rent paid by residents or permanent representations in favor of non-lessors / landlords under contracts of operational leasing / rental;
– income from sale of a non-resident-owned real estate situated in the territory of Ukraine, including the property of a permanent representation of the non-resident;
– profit from operations in securities trading, derivatives or other corporate rights determined according to Section III of Tax Code of Ukraine standards;
– income derived from conducting of joint activities on the territory of Ukraine;
– income from long-term contracts in the territory of Ukraine;
– reward for cultural, educational, religious, sports, recreational activities on the territory of Ukraine by non-residents or their authorized persons;
– brokerage, commission or agency fees received from residents or other permanent representative of non-residents with respect to brokerage, commission or agency services provided by a non-resident or a permanent establishment in the territory of Ukraine in favor of residents;
– contributions and premiums to the insurance or reinsurance of risks in Ukraine (including life insurance risks) and insurance against the risks of residents outside Ukraine;
– income derived from activities in the field of entertainment (except of activities with the state lottery money);
– income in the form of charitable contributions and donations to non-residents;
– other income from non-resident (permanent representative of this or another non-resident) economic activity on the territory of Ukraine.
Paragraph 160.2 section 160 of Tax Code of Ukraine establishes that from the income listed above a resident of Ukraine is to withhold tax at the rate of 15%, in addition to freight which is taxed at a rate of 6% in accordance with p. 160.5 of Tax Code of Ukraine. The exception is the income received in the form of revenue or other forms of compensation for the cost of goods / completed works / provided services, sent / given to a resident by such a non-resident (permanent representation), including the cost of services for international communication and information support.
Annually, SFS should provide inquiry to non-residents (in Ukrainian) confirming payment of the tax. Responsibility for completeness and timeliness of taxes transfer to the budget has a payer, carrying the payment of a non-resident (p. 152.8 section 152 of Tax Code of Ukraine). The tax is paid to the budget at the time of such payments, unless otherwise is stipulated by international agreements of Ukraine with the countries of residence of persons to whom payments are made.
Thus, the norm of p. 160.2 section 160 of Tax Code of Ukraine establishes the obligation to withhold tax from the income of non-residents originating from Ukraine on the basic rate of 15% and at the same time makes an exception for non-residents` income listed in p. 160.3 – 160.6 section 160 of Tax Code of Ukraine. However, this Code provides preferential conditions for taxation of such income if the signed international treaties of Ukraine with countries of their residence stipulates other rates.
Exceptions to the rules of non-residents` taxation
Exceptions to the rules of tax treatment for non-residents in accordance with p. 160.3. section 160 of Tax Code of Ukraine are income taxation of non-residents received in the form of income from interest-free (discount) bonds or treasury bills. Such income is taxed at the rate established by p. 151.1. section 151 of Tax Code of Ukraine, that is at a rate of 21% in the following order:
– tax base is profit which is calculated as the difference between the nominal value of interest-free (discount) securities paid or accrued by the issuer and the purchase price of the primary or secondary stock market;
– the purchase or sale of these securities may be carried out on behalf and at the expense of the non-resident, exclusively by its permanent establishment or a resident working on behalf of or by means of such non-resident;
– resident or permanent establishment of non-residents are responsible for full and timely payment of taxes in the budget hold back from income from interest or interest-free (discount) securities.
At the same time, the central organ of executive power ensuring the formation of the state financial policy establishes the order (for residents or non-resident permanent establishments) of calculating the tax liability of non-residents and the retention of records and making the corresponding tax budget established by p. 160.3 section 160 of Tax Code of Ukraine.
Incomes of non-residents which are not subjected to taxation
Paragraph 160.4 section 160 of Tax Code of Ukraine determines that some income received by non-residents are not subjected to taxation:
– interest or income (discounts) on government bonds, local bonds or debt securities, the performance of obligations which are secured by state or local guarantees, sold or distributed to non-residents outside the territory of Ukraine through the authorized agents – non-residents;
– interest paid to State or municipal budget loans (loans or foreign loans), which are reflected in the State Budget of Ukraine or local budgets or estimates of the National Bank of Ukraine, or credits (loans), which are received by business entities and the implementation of which is provided by state or local warranty.
Features of taxation of income from international treaties
The application of the international treaty of Ukraine for the avoidance of double taxation with respect to the total or partial exemption from taxation of income of non-residents originating from Ukraine is defined in section 103 of Tax Code of Ukraine. Thus, in accordance to p. 103.1 of this article application of the rules of the international treaty of Ukraine is carried out by the exemption from taxation of income originating from Ukraine, reducing the rate of tax or refund of the difference between the paid amount of tax and the amount the non-resident must pay according to the international treaties of Ukraine. According to the norms of this article a resident of Ukraine (tax agent corresponding to a non-resident) has the right to apply the tax exemption or reduced tax rate under relevant international treaties of Ukraine, provided that such resident is the beneficial owner (beneficiary or recipient) income and resident of the country with which an international treaty of Ukraine is signed.
Beneficial recipient (beneficial owner) of income is a person who is entitled to receive such income (p. 103.3 section 103 of Tax Code of Ukraine). However, according to the second paragraph of this item, the beneficial (actual) recipient (owner) of income can not be legal or natural person even if that person is entitled to receive income but is an agent, nominee landlord (nominal owner) or just an intermediary with respect to such income. That means that for tax purposes in accordance with the international treaty a non-resident can not be an intermediary acting on sublicensing conditions. He should be the direct owner of such income. Thus, in accordance with the second paragraph of p. 103.2 section 103 of Tax Code of Ukraine preferential taxation is permitted only if a non-resident gives to a resident of Ukraine (tax agent of such a non-resident) the document confirming the tax resident status in accordance with the requirements of p. 103.4.
Paragraph 103.5 claims that such certificate is issued by the competent (authorized) authority of the country as defined by international treaties of Ukraine, approved by the law of the country concerned and should be properly legalized and translated in accordance with the legislation of Ukraine. Certificate confirming resident status of a non-resident for the application of the benefits of an international treaty on avoidance of double taxation should be properly translated in accordance with the legislation of Ukraine. The correctness of translation of certificate from one language to another is certified by a notary if he knows the appropriate languages. Otherwise, the translation of the document can be made by a translator, the authenticity of the translation is authorized with a signature of the notary.
The resident of Ukraine, whose income is paid to non-residents in the reporting (tax) year, if a non-resident gives a certificate information about the previous reporting tax period (year), may apply the rules of the international treaty of Ukraine, in particular concerning the release (reduction) of the tax, in the reporting (tax) year to produce a certificate at the end of the reporting (tax) year (p. 103.8 section 103 of Tax Code of Ukraine). According to p. 103.10 of this paragraph in case of absence of the inquiry on income originating from Ukraine, they are subjected to taxation in accordance with tax legislation of Ukraine.
Tax on income of non-resident running a business in Ukraine through a permanent establishment
Paragraph 64.5 of section 64 of Tax Code of Ukraine stipulates the procedure for registration of a permanent establishment in the SFS. The fact that non-residents do business through a permanent establishment is legalized by the act, the form of which is approved by order № 998.
According to p. 160.8 section 160 of Tax Code of Ukraine the amount of income of non-residents who are operate in the territory of Ukraine through a permanent establishment are taxed according to standard procedure. This permanent establishment for tax purposes is equal to the taxpayer engaged in activities regardless of the non-resident.
If a non-resident operates not only in Ukraine but also abroad and does not determine the profit from activities that is conducted through a permanent establishment in Ukraine, the amount of income subjected to taxation in Ukraine is determined on the basis of drawing up the balance of financial and economic activity by a non-resident. Such balance must be coordinated with the SFS at the location of the permanent establishment.
Calculation of taxable profit and non-resident income tax, which operates in Ukraine through a permanent establishment, is made on a form approved by order №115.
If of non-resident’s income with its source in Ukrainian can not be determined by direct calculation, the taxable profit is determined by SFS as the difference between income and expenditure, defined by applying to the amount of the revenue ratio of 0.7. Permanent establishment of tax liability is determined by applying the coefficient of 0.7 and is a separate calculation of taxable income and tax on the profits of the permanent representative of non-residents in the form approved by order №115. Residents of Ukraine providing agency, trust, commissions and other similar services for the sale or purchase of goods, works and services by and for the benefit only of the non-resident (including contracts with other residents on behalf of and for the benefit of non-resident) hold and list the tax of income derived from Ukraine to relevant budget, determined for profits of non-residents operating in the territory of Ukraine through a permanent establishment. In addition, these residents are not subjected to additional registration in the state tax authorities as tax payers (p. 160.9 of section 160 of Tax Code of Ukraine). Reports are submitted to the SFS authority within 40 days after the end of the reported quarter.
Total procedure for computing of taxable profits of a permanent establishment
Realized profit by non-residents with a source of origin from Ukraine is determined by the formula:
I – amount of income of the reporting (tax) period (determined in accordance with sections 135 – 137 of Tax Code of Ukraine);
Cs – cost of goods sold, work performed and services rendered;
C – amount of the other expenses of the reporting (tax) period (determined in accordance with sections 138 – 143 of Tax Code of Ukraine taking into account the rules established by section 152 of Tax Code of Ukraine).
In addition, the object of taxation is the income (profit) of non-residents with a source of origin from Ukraine, taxed according to the norms of section 160 of Tax Code of Ukraine.
The base of profits of a permanent establishment taxation is the monetary value of income as an object of taxation that is defined in the norm of section 134 considering sections 135 – 143 of Tax Code of Ukraine. And the income tax is calculated by the taxpayer on their own at the rate is specified in section 151 considering the section XX of NC Ukraine. A non-resident who operates not only in Ukraine but also abroad, and at the same time does not determine the profit from their activities through a permanent establishment in Ukraine should determine the amount of profit in Ukraine on the basis of drawing up a separate balance of financial and economic activity.
Separate balance of financial and economic activity is a balance of revenue that a permanent establishment would have received from the activities regardless of a non-resident separately of total income on the basis of the calculation of the relevant income and expenses of permanent establishment.
Taxable income is the difference between the individual income of a permanent establishment and incurred expenses. To calculate the individual income of a permanent establishment by direct counting the taxpayer submits to the authority of the SFS:
– total amounts of revenues and expenses incurred by a non-resident conducting business in general;
– the total number of employees (the total number of employees for the permanent representation of the non-resident is the average number of employees during the reporting (tax) period);
– value of fixed assets of non-residents (it should not be specified for a specific date, such as at the end of the reporting period, but the average cost during the reporting (tax) period).
Such data must be certified by the tax authorities in the country of residence, duly legalized and translated into the Ukrainian language. In addition, if a residence country a non-resident files income tax once a year or every six months, the data for another tax period can be certified by the auditor (auditing firm). If the tax periods coincide, i.e. it comes to data for the same tax period in which the tax statements are presented in the country of residence, the data must be certified only by the tax service of the country of residence.
If the representative is unable to provide certified data on total income received and expenses incurred by a non-resident carrying out economic activities as a whole, the total number of employees and the value of fixed assets of non-residents, the relevant payment is not provided. In this case, SFS determines taxable income applying to amount of income ratio of 0.7.
Taxation of offshore costs
The term “non-residents with offshore status” refers to non-residents located on the territory of offshore zones, except the non-residents located on the territory of offshore zones which provide the taxpayer an excerpt from the title documents legalized by relevant consular office of Ukraine indicating an ordinary (non-offshore) status of such non-resident (p. 161.3 section 161 of the Tax Code of Ukraine).
Tax Code defines specific rules for taxation of the costs for acquisition of goods (works, services) from non-residents with offshore status. Thus, in accordance with the p. 161.2 section 161 of Tax Code of Ukraine, signing the agreements that stipulates payment for goods (works, services) to non-residents who have offshore status or payments through such non-residents or their bank accounts, whether they are carried directly or through other residents or non-residents, the cost of tax payers spent for such goods (works, services) are included in their costs in the amount of 85% of the cost of these goods (works, services).
Thus, it is applied from the calendar quarter coming after the quarter when the official publication of the list of offshore zones, established by the Cabinet of Ministers of Ukraine (Decree № 143-p). Advertising costs in full amount are not included in the expenses for tax purposes. In addition, next points are not included in full to expenses received (acquired) from the non-resident with offshore status:
– consulting, marketing, advertising under the second paragraph of p. 139.1.13 p. 139.1 section 139 of Tax Code of Ukraine;
– engineering services in accordance with p. 139.1 ( 139.1.15 (a));
– royalties accrued for the benefit of non-residents with offshore status, according to p. 140.1 (140.1.2 (a)) section 140 of Tax Code of Ukraine.
Author: Kateryna Bovan