By Iryna Kalnytska, Partner, GOLAW, Kyiv
Ukrainian tax legislation is currently undergoing a complex reform to implement OECD/G20 base erosion profit shifting (BEPS) plan rules, country-by-country reporting, and other requirements of international law.
This reform started with the adoption of the amended version of Ukraine’s tax code on 1 January 2021. The enacted changes directly affect foreign companies that perform business activities in Ukraine, either via a registered permanent establishment or without a registered presence.
In particular, the new version of the tax code provides for a list of cases when a foreign (nonresident) company must register with the Ukrainian tax authorities.
When must a nonresident register with Ukrainian tax authorities?
A nonresident must register with the Ukrainian tax authorities if he either purchases immovable property or otherwise receives proprietary rights on the immovable property located in Ukraine. A nonresident must also register with Ukrainian tax authorities if he opens a bank account in Ukraine.
The tax code also provides for two cases when a nonresident must register upon the purchase of a specific type of investment asset.
First, a nonresident buyer must register with Ukrainian tax authorities if he purchases or otherwise acquires rights in a Ukrainian “property rich” company. “Property rich company” to this end means that its shares/corporate rights derive 50 percent or more of their value from the immovable property located in Ukraine.
Second, this obligation arises if shares or corporate rights in a foreign company/legal entity are alienated, and these shares mainly (50 percent or more) derive their value from the shares/corporate rights in the Ukrainian “property rich company.” To put it simply, if a foreign company has a Ukrainian subsidiary, and the shares in this subsidiary derive their value by 50 percent or more from the value of the immovable property located in Ukraine, a nonresident which purchases or otherwise receives such shares must register with the Ukrainian tax authorities.
The rules of registration of nonresidents in case of direct or indirect alienation of shares in a Ukrainian “property rich company” stem from the necessity to tax the respective income which arises from such alienation in Ukraine. These rules are largely similar to the rules set out in article 13 of the model tax convention.
The amended version of the tax code also provides for the new rules of registration for nonresidents that have an accredited/registered permanent establishment or representative office in Ukraine, which shall be analyzed in more detail below.
Registration of a nonresident with a permanent establishment/representative office in Ukraine
Under the previous version of the tax code, only a permanent establishment or a representative office of a nonresident were under obligation to register with Ukrainian tax authorities. However, under the amended version of the tax code, this obligation arises for nonresidents directly.
The types of nonresident registration with Ukrainian tax authorities depends on the type of permanent establishment a nonresident has in Ukraine. First, if a nonresident has a representative office in Ukraine of a noncommercial character (i.e., without a status of a permanent establishment for tax purposes), a nonresident must register with the Ukrainian tax authorities as a taxpayer on general terms. This type of registration will not give rise to any actual tax obligations for a nonresident, as its representative office will continue to be responsible for actual accrual, calculation, and remittance of taxes (except for corporate income tax) to the state budget. Registration of a nonresident, in this case, is rather for informational purposes.
Alternatively, if a nonresident has a registered permanent establishment in Ukraine which performs commercial activities, the nonresident must register as a corporate income taxpayer. The permanent establishment of a nonresident will lose its status as a corporate income taxpayer upon such registration. Technically, in this case, a nonresident will be responsible for the calculation and remittance of corporate income tax to the state budget, while a permanent establishment will continue to pay all other taxes, aside from corporate income tax.
It should be stressed that starting from 2021, a nonresident must determine the corporate income tax base on behalf of its permanent establishment (which performs business activities in Ukraine) in accordance with the “arm’s length principle.”
It should be stressed that starting from 2021, a nonresident must determine the corporate income tax base on behalf of its permanent establishment (which performs business activities in Ukraine) in accordance with the “arm’s length principle.”
Thus, a nonresident will not be able to apply a simplified calculation of the corporate income tax base of the permanent establishment but instead will have to engage transfer pricing specialists to that end.
Timing requirements for nonresident tax registration in Ukraine
A nonresident must register with Ukrainian tax authorities before he opens a bank account in Ukraine, purchases immovable property, or otherwise obtains proprietary rights on it, or before the first payment for the investment in asset takes place.
Timing requirements for the registration of a nonresident that has a permanent establishment in Ukraine are more complex. If a nonresident opens a new representative office in Ukraine, a nonresident must register within ten days after the accreditation of the office.
If a nonresident already has a representative office or a permanent establishment in Ukraine, a nonresident has until 19 May 2021 to register with Ukrainian tax authorities. Failure to register before the deadline will lead to substantial fines. However, these fines will apply only after 30 June 2021, due to special quarantine regime regulations.
Responsibility for failing to register with Ukrainian tax authorities
The tax code does not provide for any financial liability for a failure to register in cases when a nonresident opens a bank account in Ukraine or purchases immovable property or a specific type of investment asset, as described above. However, these operations cannot be performed without such registration (for example, to open a bank account, a nonresident must provide an official document confirming its tax registration in Ukraine).
However, under the tax code, failure to register with Ukrainian tax authorities in case a nonresident has either a permanent establishment or a separate branch in Ukraine will lead to a fine of UAH 100,000 (around USD 3,600). On top of that, the failure of a nonresident to register with Ukrainian tax authorities may lead to the administrative arrest of the nonresident’s assets and an unscheduled tax audit.
What if a permanent establishment performs only preparatory or auxiliary activities in Ukraine?
Since the specific regulations on the status and registration requirements for permanent establishments were only recently finalized, it is common that a nonresident may have a permanent establishment registered as a corporate income taxpayer in Ukraine that does not perform any commercial activities and receives no income attributable to it.
Such a permanent establishment most commonly performs only activities of an auxiliary or preparatory character, and its sole source of income is financing it receives from a nonresident. Under the previous version of the tax code, such permanent establishments opted for a simplified system of taxation (using a 0.7 coefficient to determine the corporate income tax base), which is not applicable in 2021.
Under the currently applicable tax laws, a nonresident will face a necessity to bear additional costs for filing a corporate income tax declaration (i.e., engage transfer pricing specialists to determine the income of a permanent establishment under the arm’s length principle). However, there is an alternative scenario.
If the permanent establishment of a nonresident performs only preparatory or auxiliary activities and receives no profit attributable to it, a nonresident can withdraw from its status as a corporate income taxpayer.
Currently, tax authorities insist that before doing this, the nonresident must first register as a corporate income taxpayer as described above and only then file a special application to the Ukrainian tax authorities to be stripped of the corporate income taxpayer status.
The business community does not support this approach and suggests allowing such a nonresident to be registered as a taxpayer on a general basis from the very beginning. The final word on this question will be given in the general tax consultation that will be released soon.
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