Income Taxation Models for Permanent Representative Offices of Non-Residents<\/p>\n
In general, for a non-resident operat\u00ading in Ukraine through a permanent representative office, the Tax Code of Ukraine <\/em>provides for 3 (three) meth\u00adods of determining taxable income subject to taxation in Ukraine.<\/p>\n However, since current tax legislation neither prioritizes application nor clearly regulates the criteria for choosing a method for permanent representative offices to cal\u00adculate taxable income, we will review practi\u00adcal application in more detail.<\/p>\n Taxation on General Terms Provided for all Income Tax Payers Subject to Filing Tax Return <\/strong><\/p>\n The taxable item is: income in the form of a financial result before taxation, as de\u00adfined in the financial statements of a taxpay\u00ader pursuant to national accounting stand\u00adards (regulations) or international financial reporting standards.<\/p>\n This taxation method stipulates that a representative office is treated as a taxpayer carrying out activities independently of such a non-resident. Therefore, when applying this method, the following will be taken into account: income with a Ukrainian source of origin, which is received directly by the rep\u00adresentative office (service contracts are en\u00adtered into by the representative office) and costs of ensuring economic activities and representative office maintenance, which are also borne directly by the representa\u00adtive office. If part of this income is received directly by a non-resident and\/or the costs are partially borne by a non-resident, it is impossible to take them into account during the specified procedure for calculation of taxable income. Moreover, under such conditions, the sum of taxable income of a representative office may differ significantly from real income received by a non-resident in course of activities performed in Ukraine, which may prompt the controlling authority to apply another calculation method and to compare the results.<\/p>\n Taxation on the Basis of Determining by Calculation the Amount of Separate Income of the Representative Office (by relative share based on information from a separate balance sheet on financial and economic activities of a non-resident) drafting Calculation 1 <\/strong><\/p>\n The criterion for choosing this method is the statement that a non-resident carries out its activities in Ukraine and abroad and that does not determine the income from its activities carried out through its permanent representative office in Ukraine.<\/p>\n The taxable item is: the difference be\u00adtween separate income of a permanent representative office (obtained by calcula\u00adtion) and the costs borne by a permanent representative office (clause 2 Section II of Regulation No. 544).<\/p>\n By the phrase \u201ccosts borne by a perma\u00adnent representative office\u201d, legislators mean costs borne directly by a representative of\u00adfice of a non-resident.<\/p>\n To calculate the amount of separate income of a permanent representative office, as well as the relative share of a permanent representative office in the to\u00adtal amount of income of a non-resident, a representative office should submit data on total volume of income received and the costs of a non-resident as a whole, as well as information on the total num\u00adber of its employees and on value of fixed assets, to Ukrainian controlling authority certified by the tax authority of the non-resident’s country, duly legalized and translated into Ukrainian.<\/p>\n The algorithm for calculating separate income of a permanent representative of\u00adfice is to calculate its relative share in the total amount of aforementioned indicators (costs, number, fixed assets) of the non-res\u00adident as a whole and to, accordingly, define\u00a0 \u00a0its part in total income of the non-resident calculated by the relative share.<\/p>\n In view of this, it is obvious that Calcula\u00adtion 1 should be applied, particularly if the representative office directly bears all the costs related to the activities of a non-res\u00adident in Ukraine (or most part thereof), while income is received by a non-resident.<\/p>\n This method is rather problematic for use in practice, as permanent representa\u00adtive offices cannot agree on separate bal\u00adance sheets with the State Fiscal Service due to the absence of an agreement proce\u00addure and often of information approved by the tax authority of the non-resident country that is necessary for such calculation.<\/p>\n Taxation Involves Determination by Calculation of the Amount of a Repre\u00adsentative Office’s Costs (applying 0.7 coef\u00adficient to sum of income received). Calcu\u00adlation 2 is applicable <\/strong><\/p>\n The Tax Code of Ukraine <\/em>establishes that the controlling authority determines taxable income using this method (mean\u00ading during the inspection). It is clear be\u00adcause there is enough information for this method in accounting records, maintained by a representative office, and it does not require certified information from a non-resident. Moreover, it is assumed that in any case, income before taxation will be 30% of the amount of income received, and the tax burden will be fairly reasonable.<\/p>\n The taxable item is: the difference be\u00adtween amount of income of a permanent representative office, determined pursuant to accounting standards, and the amount of costs, determined by multiplying the amount of income by the 0.7 coefficient.<\/p>\n If we summarize the aforementioned information, then ideally, Method 1 (Tax Re\u00adturn) should be applied if all income and costs arising from activities of a non-resi\u00addent in Ukraine are borne by a representa\u00adtive office.<\/p>\n Method 2 (Calculation 1) is applicable if all the costs related to activities of a non-resident in Ukraine are borne directly by a representative office, while the income is received by a non-resident.<\/p>\n Method 3 (Calculation 2) is appropriate in a case where the income generated by a non-resident in Ukraine is received di\u00adrectly by its representative office, and the costs are wholly or partly borne by a non-resident.<\/p>\n Moreover, from 1 January 2018, when defining taxable item, representative offices will have to take into account new standards stipulating recognition of business transac\u00adtions between a non-resident and its rep\u00adresentative office in Ukraine as controlled ones for the purposes of transfer pricing. For such transactions, a separate value cri\u00adterion is established \u2014 volume of transac\u00adtions that may affect the taxable item should exceed UAH 10 million for the reporting year. In fact, this means that representa\u00adtive offices are subject to general rules of transfer pricing with a requirement to bring the terms of transactions into line with the \u201carm’s length\u201d principle. As our practice shows, based on the number of appeals from foreign companies having representative offices in Ukraine, there are a lot of issues and there is no sin\u00adgle answer, and in each case it is necessary to deal with such issues separately.<\/p>\n Based on complexity of the issue, we have included it in the program of our fo\u00adrum on transfer pricing and international tax planning, which EUCON holds annually.<\/p>\n