Economic activity and royalties of a non-resident in Ukraine
It should be noted that a separate division of a foreign company, organization is a representation that does not carry out the economic activity in Ukraine and do not fall under the definition of a permanent establishment in accordance with paragraphs 14.1.193 p. article 14.1. 14 sec. I Tax Code of Ukraine (TCU). However, according to TCU this separate division has the obligation to pay taxes and fees and for the registration must submit to the supervisory authority the documents which are specified by paragraphs 4.2 and 4.4. sec. IV Procedure of registration of taxes and fee payers.
The registration of the separate non-resident subdivision
At the same time registration of the separate non-resident subdivision does not release such subdivision from the obligation of the registration payer of income tax if it starts economic activity and meets the definition of a permanent establishment.
Separated subdivisions of legal entities are non-residents who meet the definition of permanent establishment under paragraphs 14.1.193 p. article 14.1. 14 of the Tax Code of Ukraine, before the start of its business activities are registered (registered as an income taxpayers) in the control bodies at their location in the manner determined by sec. V Procedure of registration of taxes and fee payers.
A separate division of the non-resident that is taken into account in controlling body as the payer of the income tax, and decided to do business activities through a permanent establishment, is required to submit to the supervisory authority a registration statement on Form № 1-PSC in the manner determined by sec. V Procedure of registration of taxes and fees payers.
Royalty payments for computer software
Nowadays, the majority of separate subdivisions of non-residents are working in the IT sector, in Ukraine. For such organizations the operations related to accounting and taxation of royalty payments are routine. It is worth noting that the State Fiscal Service of Ukraine provided an explanation which is dedicated to the royalty payments for the software in a letter dated 28.09.2016 p. №21036 / 6 / 99-99-15-02-02-15: "If the company makes payments, which, according to accounting data, fall under the definition of royalties, but for the purposes of the income tax taxation such payments are not royalty, subsequently such non-resident’s income from Ukraine, paragraph. 141.4 TCU does not apply.”
However, there are number of cases when such documents as TCU and International treaties provide user with different rules, but according to the paragraph 3.2 of the TCU, the International treaties have priority on the Code to avoid double taxation and contain their clear definitions and regulations. In the case of application of the rules of the international treaty in the payment of royalties to non-resident (tax exemption or the application of a reduced rate) for the definition of royalties, should be used the provisions of an international treaty.