For the majority of non-residents operating in Ukraine through permanent representative offices, the issue of registration with the tax authorities has become especially pressing since January 1, 2021, after the next amendments to the Tax Code of Ukraine introduced according to Law No. 1117-IX of December 17, 2020, came into force.
However, it should be noted that in fact, this story began a year earlier, when in 2020 the well-known Law No. 466-IX of January 16, 2020, “On Amendments to the Tax Code of Ukraine Regarding Improvement of Tax Administration, Elimination of Technical and Logical Inconsistencies in Tax Legislation” came into force. Among multiple changes introduced by this Law, it also provided for amendments to clause 64.5 of the Tax Code of Ukraine, according to which non-residents (foreign law firms, organizations) that carry out activities in Ukraine through separate subdivisions, including permanent representative offices, are required to register with regulatory authorities. The Law also stipulated that those non-residents who, as of July 1, 2020, already had permanent representative offices in Ukraine are required to submit documents to the regulatory authorities for registration within three months.
However, as has often happened before, the first who were not ready to comply with the norm of the law were the tax authorities themselves, which subsequently resulted in the Verkhovna Rada’s adoption of the previously mentioned Law No. 1117-IX of December 17, 2020, which postponed the deadline for registration by non-residents until March 31, 2021 and at the same time established that until December 31, 2020, clause 64.5 of the Tax Code of Ukraine should have been applied in the previous version.
Despite this, the procedure to register non-residents was adopted by the Ministry of Finance only on February 8, 2021 (Order of the Ministry of Finance No. 62 of February 8, 2021, amending the Order of the Ministry of Finance No. 1588 of December 9, 2011 “On Approval of the Procedure for Accounting Taxpayers and Fees”) and entered into force on March 19, 2021, just 10 days before the end of the period established by the legislator. Up to this point, the tax authorities accepted applications according to the procedure provided for registering representative offices of non-residents, that is, in a way that is not provided for by law. Realizing an inevitable delay in the adoption of such a procedure, the Ministry of Finance, trying to somehow remedy the situation, in its Order No. 62 postponed the deadline for submitting applications by non-residents by another two months from May 19, 2021, the effective date of this Order. Thus, another hierarchical conflict in the legislation formed when the bylaw actually changes the norm of the law.
This brings us to the following:
Clause 64.5 of the Tax Code of Ukraine provides that non-residents (foreign law firms, organizations) operating in Ukraine through separate subdivisions, including permanent representative offices, are required to register with regulatory authorities.
A non-resident is registered with the regulatory authority based on an application of a non-resident to be submitted to the tax authority within ten days after accreditation (registration, legalization) on the territory of Ukraine, and for a separate subdivision – to the regulatory authority at the location of the separate subdivision.
For those non-residents who already have separate subdivisions in Ukraine, the deadline for submitting applications for registration is set until March 31, 2021, which has been extended until May 19, 2021.
For registration, a non-resident is required to submit the following documents to the regulatory authority at the place of registration of the representative office (with the presentation of originals):
- extract from the relevant business register (commercial, banking or another register that records the fact of state registration of a company, organization) issued in the country of registration of a foreign company, organization and legalized according to the established procedure, unless otherwise provided for by the binding international treaties consented to by the Verkhovna Rada of Ukraine, which is accompanied by a certified translation into Ukrainian;
- a document confirming the assignment of an identification (registration, accounting) number (code) of a non-resident in the country of its registration, if the extract from the relevant business register does not contain information about such number (code) as accompanied by a certified translation into Ukrainian;
- a document confirming the authority of a non-resident representative. If such a document is issued in the country of registration of a non-resident, it must be legalized according to the established procedure, unless otherwise provided by international treaties, the consent to be bound by which was provided by the Verkhovna Rada of Ukraine, and accompanied by a certified translation into Ukrainian;
- a document on accreditation (registration, legalization) of a separate subdivision of a foreign company or organization on the territory of Ukraine if a non-resident carries out activities in Ukraine through a separate subdivision.
The application of a non-resident is submitted according to Form 1-ОПН approved by the Order of the Ministry of Finance No. 62 of February 8, 2021.
Now, who is affected by it? There is not much clarity here. Clause 64.5 states that the following persons must be registered: “non-residents (foreign law firms, organizations) that operate in Ukraine through separate subdivisions, including permanent representative offices”. That is, we can conclude that this clause applies not only to non-residents who have permanent representative offices but also to other separate subdivisions, for example, so-called “non-commercial representative offices”, that is, those whose activities are not subject to income tax.
At the same time, clause 60, Subsection 10, Section XX of the Tax Code of Ukraine (defining the registration period for those who already have a representative office) uses the phrase “non-residents (foreign companies, organizations) that carry out economic activities on the territory of Ukraine”, which may hint that this clause does not apply to “non-commercial representative offices”.
If you carefully consider the procedure for registration and the actual Form 1-ОПН, it provides for registration both with and without registration as an income taxpayer. At the same time, if you are registered as an income taxpayer, there are several options you can choose from:
- carrying out business activities on the territory of Ukraine through a permanent representative office that meets the definition of a separate subdivision (clause 133.3, Article 133, Section I of the Tax Code of Ukraine)
- carrying out business activities on the territory of Ukraine through a permanent representative office that does not meet the definition of a separate subdivision (clause 133.3, Article 133, Section I of the Tax Code of Ukraine)
That is, as we can see, the legislation does not give an unambiguous answer to whether non-residents who have “non-commercial” representative offices in Ukraine need to register. Until the last moment, the tax authorities themselves spoke only about non-residents who have permanent representative offices and quite often referred them to the highest-level tax authorities for advice.
Finally, in its informational letter No. 20 dated September 30, 2021, the State Tax Administration issued a detailed explanation on this issue. From the text reveals that all non-residents, both those with a permanent representative office here and those with a “non-commercial representative office”, must register with the tax authorities. The only difference is that the “owners” of permanent representative offices must also register as payers of corporate income tax.
In terms of liability for non-compliance with the requirements of the law, first of all, you need to pay attention to the second paragraph of clause 60, Subsection 10, Section XX of the Tax Code, which states that inspections of non-residents (foreign companies, organizations) who were supposed to be registered according to the procedure established by clause 64.5 and who did not meet the requirements of the law can be scheduled from July 1, 2021.
At the same time, the Tax Code provides for the following sanctions for non-compliance with the requirements of clause 64.5 of the Tax Code of Ukraine:
- administrative seizure of property (clause 94.2.9. of the Tax Code of Ukraine)
- fine in the amount of UAH 100,000.00 (clause 117.4 of the Tax Code of Ukraine)
What are the consequences of such registration of a non-resident with the tax authorities? The previous version of clause 64.5 (as amended by Law No. 466-IX of January 16, 2020) provided for the registration of only a separate subdivision of a non-resident. Accordingly, the amendments introduced by Law No. 466-IX added requirements for registering a non-resident who has a separate subdivision in Ukraine. Clause 133 of the Tax Code of Ukraine, which defines the list of income taxpayers, was also amended to exclude separate subdivisions of non-residents from this list and include non-residents who have separate subdivisions in Ukraine. Based on this, as well as taking into account the explanations provided for by the tax authorities, it is assumed that non-residents themselves, and not their permanent representative offices, should now draw up an income tax return and pay the corresponding amounts of this tax. Suppose a non-resident has several permanent representative offices in Ukraine. In that case, it needs to determine the taxable profit and, accordingly, draw up and submit a separate income tax statement for each representative office. At the same time, the permanent representative offices themselves remain payers of other taxes and fees. They must also be registered with the tax authorities.
According to the tax people, the concept of registration with the tax authorities and registration as income taxpayers of non-resident enterprises was developed in 2018-2019 by a working group under the Ministry of Finance of Ukraine on the implementation of the Plan to Counteract the Erosion of the Tax Base and Withdrawal of Profits from Taxation, which included specialists of the Project Office of Reforms under the Ministry of Finance, the National Bank of Ukraine and a wide range of experts-representatives of audit companies. Subsequently, the project was evaluated by the Organization for Economic Cooperation and Development. The purpose of the concept was to clearly distinguish between the powers and responsibilities of non-residents regarding the payment of taxes in Ukraine.
As you can see, the implementation of the concept in practice, as always, faced the unwillingness of executive authorities to respond to changes quickly. As a result, the process of registering non-residents is somewhat chaotic and, as always, a race against the clock.
In conclusion, it should be noted that there is still no clear answer to how those non-residents who have registered will pay income tax in the future. The tax service in its information Letter No. 20 only indicates that the tax should be paid in UAH and also suggests authorizing the representative office itself to pay tax for a non-resident by a separate power of attorney. Therefore, we can only hope that the tax authorities will have time to create a precise mechanism for its payment by non-residents before the deadline for paying income tax.