01 Double tax treaties
There are no tremendous changes in the work with non-residents, but restrictions can’t be avoided. Let’s review some of them.
Double tax treaties are a very convenient mechanism of international cooperation that allows paying taxes only in one of the countries, choosing more appropriate tax rate. Under the Tax Code the usage of double tax treaties under the payment of income to non-residents in Ukraine is possible only if such a non-resident is a resident of this country and actual receiver (beneficiary) of such an income (art. 103.2 of the Code). The Code defines that the beneficiary of income can’t be a legal entity if such an entity has the right to get income, but is an agent, nominal owner or a dealer regarding such income. The art. 103.8 of the Tax Code guarantees a person who pays revenues to a non-resident in the reporting (tax) year the right to use the terms of the international treaty in case a non-resident submits the certificate with the information for the previous tax period (year). This right is concerned to the exemption (decreasing) from taxation in the reporting (tax) year, with the receiving of certificate after the end of reporting (tax) period.
The usage of the double tax treaty under the payment of income to non-residents now is possible only if such a resident is an actual receiver (beneficiary) of such income. In case of difference between withhold from income tax amount and necessary payable sum, due to the rules of international treaty, according to the art. 103.11 of the Tax Code, non-resident has the right to apply to the tax authorities at the place of 4. residence of the person, that paid such income to non-resident with taxes withhold.
After adequacy of data regarding the transferring of corresponding tax amounts by the entity that paid income to non-resident is confirmed, state tax authority has to return corresponding amount to non-resident or provide with the response. In case of approved excessiveness of paid tax, funds return is carried out by the State Treasury of Ukraine on the basis of the resolution of tax authorities. Procedure of funds return is carried out by transferring funds to the account of the person that received excessive tax from the income of non-resident. This person returns excessive paid funds and returned by the Treasury of Ukraine to non-resident. In this case there’s an option of passing excessively paid funds towards other tax liabilities of the person on the basis of its written application (grounds: part 2 art. 103.14).
02 Repatriation tax, differentiation of rates
In p. 14.1.54 and 14.1.55 of the Tax Code the definition of “Income with the source of origin from Ukraine” and “Income received outside the territory of Ukraine” has been officially settled. Before there was no specific definition, partially this issue was discussed in the clarifications of tax authorities and regulations of the Cabinet of Ministers. Income received by non-resident in Ukraine is a subject of taxation at different rates.
If otherwise is foreseen in regulations of international treaties of Ukraine with countries of residence of entities, other foreign countries at the rate of 15% income is subject to taxation in the form of (art. 160.1 – 160.2):
- Percents, discount incomes that are paid for the benefit of non-resident, including interests on loan and debts.
- Dividends paid by resident.
- Royalty.
- Fright and incomes from engineering.
- Leasing and renting payment that paid residents or permanent Representative Offices paid in the favour of non-resident.
- Incomes from the sale of immovable property located on the territory of Ukraine that belongs to non-resident including the property of RO of non-resident.
- Incomes received from trading operations: trading in securities, derivatives and other corporate rights.
- Incomes received from joint activity on the territory of Ukraine and also from accomplishment of long-term agreements in the territory of Ukraine.
- Remuneration for performing by non-residents or authorized by them persons cultural, educational, religious, sport, entertainment activities on the territory of Ukraine.
- Brokerage, commission or agent remuneration, received from non-residents or from permanent representative offices of other non-residents for brokerage, commission and agent services provided by non-resident or by its permanent representative office on the territory of Ukraine in favor of residents.
03 Restrictions on including into tax deductable expenditures, services purchased from non-residents 01/01 Consulting, marketing, or advertising expenses
Consulting, marketing, or advertising expenses
Consulting, marketing, or advertising expensesin an amount exceeding 4% of the prior year’s sales income (excluding VAT and excise tax) for the year preceding the reporting period (except of expenses incurred in respect of the non-residents’ permanent representative offices). If non-resident has off-shore status, such expenses are not included into gross expenditures in full amount (p. 139.1.13);
Expenses on engineering services
Expenses on engineering servicesin an amount exceeding 5% of the customs value of the imported equipment in accordance with the corresponding contract (except of expenses incurred in respect of the non-residents’ permanent representative offices) (art. 139.1.14). The tax deduction of the mentioned expenses incurred in favor of non-residents that are not beneficial (actual) recipients (owners) of such a payment for services is entirely prohibited. If non-resident has off-shore status, such expenses are not included into gross expenditures in full amount (art. 139.1.15).
Expenses on royalties payments
Expenses on royalties payments in an amount exceeding 4% of the prior year’s sales revenue (excluding VAT and excise tax) for the year preceding the reporting period (except the expenses incurred in respect of the nonresidents’ permanent representative offices and expenses incurred in respect of the legal entities with activities in the sphere of television and broadcasting, that are included into expenses in full amount).
The tax deduction of expenses on royalties payments is entirely prohibited in the reporting period in favor of:
1. non-resident having an offshore status;
2. non-residents that are not beneficial (actual) recipients (owners) of such payment for services (except the cases when beneficiary provided other legal entities with the right to receive such a payment) (art. 140.1.2);
3. the royalties are paid to the non-resident in respect of intellectual property rights which were initially registered by a Ukrainian resident; the non-resident is not subject to tax with respect to the royalties in its country;
4. legal entity that is due to the art. 154 of this Tax Code is not the subject to tax or pays another tax under the rate which is different from the one stated in p. 151.1 of the art. 151 of this Tax Code.
04 Restriction in work with offshore
Article 161.3 of the Code sets the term “non-residents that have offshore status” – are nonresidents located on the territory of offshore zones (with exception of non-residents located on the territory of offshore zones, that provided the tax payer the extract from legal documents, legalized by the corresponding Consular institution of Ukraine, that testifies non-offshore status of such a non-resident. In case of agreements stated in the 1st part of this paragraph, tax payer has to refer to the stated extract regarding explanation to the tax return.
Under conclusion of the agreement that foresee payment of goods (services) in favor of non-residents, that have off-shore status; when the payments are made through such non-residents or through their bank accounts, independently from the form and the entity with the help of which such a payment is made – tax-payers expenses for payment for such goods (works, services) is included into its expenses in the amount of 85% from the value of these goods or services.
If non-resident has off-shore status, consulting, marketing, advertising or engineering expenses are not included into tax deductable expenditures in full amount (art. 139.1 .13 and 139.1.14). The tax deduction of expenses on royalties payments is entirely prohibited in the reporting period in favor of non-resident having an offshore status.
In correspondence with the Tax Code (art. 160.9) residents that provide brokerage, agent and trust services on sales or purchase of goods, works, services in favor of non-resident (including concluding agreements with other residents on behalf of and in favor of non-resident) get and transfer to the corresponding budget tax on profit received by the non-resident from the source in Ukraine stated in the order foreseen for taxation of incomes of non-residents, that have business activities in Ukraine through their permanent representative offices. Hereby such residents are not the subject to additional registration in tax offices as tax payers.
Residents that make payments to non-residents for production and / or distribution of advertisement for such a resident, has to pay tax under the rate of 20% from the amount of such expenses on own account (art. 160.7 of the Tax Code).
In case of concluding agreements with non-residents it’s not allowed to use in the tax clauses due to which enterprises that makes the payments of incomes, are obliged to pay the income tax of non-residents. The following taxes paid in other countries are not allowed to include into reduction of tax liabilities: capital duty (property tax) and capital gains, realization tax, postal and other indirect taxes, independently if they are included into the category of income taxes or the subject to separate taxes in accordance with legislation of foreign countries (art. 161 of the Tax Code).
Legal entities – non-residents are able not to use the services of governor – resident of Ukraine for property leasing that is owned by them on the right of private property. However, property that is owned by a physical person – non-resident can be leased only through physical person – private entrepreneur or legal entity – resident (authorized persons) that will fulfill representative function of such a non-resident under the written agreement and it’s his tax agent regarding such incomes. Non-resident that breaks these rules will be considered as a tax evader (please check Art. 170.1.3).
In the art 190 of the Tax Code there’s the information that the base of taxation under importation of goods to the customs territory of Ukraine is the contract value that is not less than the customs value of such goods, stated in correspondence with the Tax Code, including customs and excise tax, that are subject to payment, including VAT (it’s included into the price of goods or services). The base of taxation for the services that are provided by non-residents on the customs territory of Ukraine, is a contract value of such services taking into consideration of taxes, charges, but excluding VAT that is included into the price of delivery according to legislation.
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