Non-Residents’ Income Taxation in Ukraine

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Non-Residents’ Income Taxation in Ukraine 22.11.2016 19:39

The taxation procedure for the income, obtained by a non-resident from Ukrainian source is mainly governed by the Tax Code of Ukraine.

According to the definition given by the Tax Code of Ukraine non-residents are:

foreign company, organization, established in accordance with the laws of other states and their (accredited or legalized) branches, representative offices and other separate units located on the territory of Ukraine and registered in accordance with the laws of Ukraine;
diplomatic missions, consular offices and other official representations of other states and international organizations in Ukraine;
natural persons, not the residents of Ukraine (p.p.14.1.122).

What includes the income of non-residents?

Specifics of non-residents taxation are determined in Article 141.4 of the Tax Code of Ukraine. So, the income, obtained by a non-resident from Ukrainian source, means the following:

interest, discount income, paid in non-resident’s favour, including borrowing and debenture interest, issued by resident;
dividends paid by resident;
royalties;
freight and income from engineering;
lease/rent payment, paid by residents or permanent establishments in the non-resident’s favour - lessor/renter under operational lease contracts;
income from property sale, located in the territory of Ukraine, owned by a non-resident, including property of non-resident’s permanent establishment;
income from securities, derivative securities or other equity rights trade business, as provided by this section;
income obtained from joint ventures in the territory of Ukraine, from implementation of long-term contracts in the territory of Ukraine;
reward for carrying out cultural, educational, religious, sporting entertaining activities by non-residents or their authorized representatives in the territory of Ukraine;
brokerage, commission or agent’s fee, obtained from residents or permanent establishments of other non-residents for brokerage, commission or agency services rendered by non-resident or its permanent establishment in the territory of Ukraine in residents’ favour;
fee and bonuses for risks insurance or reassurance against in Ukraine (including life assurance) or risk insurance of residents outside the territory of Ukraine;
income obtained from entertaining activities (except for national money lottery conducting);
income in the form of charitable contributions and donations in non-resident’s favour;
other income from carrying out of business activity by a non-resident (permanent establishment of this or other non-resident) in the territory of Ukraine, except for income in the form of earnings or other kind of value compensation for goods/executed works/rendered services, delivered/executed/rendered to a resident by such non-resident (permanent establishment), including cost of international telecommunication services or international information support.

Tax rate

As a general rule pp pp.141.4.2 provides that the resident or non-resident’s permanent establishment, which make any payment in non-resident’s or authorized person’s favour are obliged to deduct tax from aforementioned income at a rate of 15%of their amount. However, in pp. 141.4.3 - 141.4.6 set forth certain exceptions to this rule, including certain changes in procedure for taxation.

According to the Tax Code of Ukraine the following tax rates are established:

1) The amount of income obtained in the form of interest-free (discount) bonds or treasury obligations incomes, is taxable at a rate of 18% (p.136.1),
2) The amount of freight, paid by a resident to non-resident under charter parties, is taxable at a rate of 6%,
3) The insurers or other residents, who make insurance payments (insurance fees, insurance premiums) and insurance benefits (insurance indemnities) under the provisions of risk insurance or reinsurance contracts, including life assurance, in non-resident’s favour, are obliged to impose taxes on amounts transferred in the following way:

within the terms of compulsory insurance contracts, under which insurance benefits (insurance indemnities) are paid in favour of natural persons - non-residents, and also under risk insurance contracts under international Green Card System - at a rate of 0%;
within the terms of risk insurance contracts outside the territory of Ukraine, under which insurance benefits (insurance indemnities) are paid in non-resident’s favour, except for risks, outlined above, - at a rate of 4% of reinsured amount transferred, at the insurer’s expense at the moment of transfer of such amount;
during conclusion of risk insurance or reinsurance contracts directly with insurers and reinsurers - non-residents, whose financial reliability rating meets the requirements established by State Commission for Regulation of Financial Services Markets (including through reinsurance brokers, who as prescribed by such State Commission, prove that reinsurance was performed by the reinsurer whose financial reliability rating meets the requirements established by State Commission),- at a rate of 0%;
in cases other than stated above - at a rate of 12%of such payments (benefits) (pp. 141.4.5).

4) The residents, who pay benefits to non-residents for production and/or distribution of advertising, at the moment of such payment shall pay tax at a rate of 20% of such benefits amount at own expense.

Tax exempt income

According to the provisions of p.p.141.4.10 of the Tax Code of Ukraine, income is tax exempt, if obtained by non-residents in the following forms:

interest or income (discount) for government securities or local loans, or debt securities, under which fulfillment of liabilities is secured by national or local guarantees, sold or allocated by non-residents outside the territory of Ukraine through authorized agents - non-residents, or
interest paid to non-residents for loans (credits or foreign loans) obtained by state to local budget, represented in State Budget of Ukraine or local budgets or cost estimate of National Bank of Ukraine, or for credits (loans), obtained by business entities and which implementation is secured by national or local guarantees.

Avoidance of Double Taxation

State Fiscal Service of Ukraine in its letter dated 29 January 2016 №2815/7/99-99-12-01-03-17 provided a list of countries with which international treaties on avoidance of double taxation were concluded as on 01.01.2016. According to this list, Ukraine is currently a party to such agreements with 73 countries.

Application of the rules of the international treaty of Ukraine is carried out by

exemption from taxation of income originating from Ukraine,
reducing the tax rate, or by
returning the difference between the amount paid and the amount of tax that must be paid by a nonresident in accordance with an international treaty of Ukraine.

According to p. 103.2 the person (tax agent) has the right to apply for the tax exemption or reduced tax rate provided by the relevant international treaty of Ukraine at the time of the payment of income to a non-resident if:

such non-resident is the beneficial (actual) recipient (s) of the income; and
he is a resident of a country with which an international treaty of Ukraine is concluded.

Application of provisions of international treaty of Ukraine regarding the tax exemption or application of a reduced tax rate is allowed only if a non-resident provides the person (tax agent) a confirmation of his status as a tax resident. In particular, a certificate (or notarized copy thereof) which confirms that the non-resident is a resident of a country with which an international treaty of Ukraine is concluded, as well as other documents, if it is provided by an international agreement of Ukraine.

Such certificate shall be issued by the competent (authorized) agency of the country as defined by international agreement of Ukraine, in the form approved under the laws of the relevant country, and must be duly legalized and translated in accordance with the laws of Ukraine. The correctness of translation of the certificate from one language to another shall be notarised.

However, in accordance with p.103.10 in case of failure by a non-resident to file the certificate pursuant, the non-resident’s income originating from Ukraine is subject to taxation in accordance with the laws of Ukraine on taxation.

Some procedural issues

The person paying the income to the non-resident shall in the case of exercising in the reporting period (quarter) of payments of income to non-residents originating from Ukraine submit to the regulatory authority at its location (place of residence) report on the income paid, withheld and remitted to the budget of taxes on income of non-residents within the time period.

It is important to bear in mind that responsibility for the completeness and timeliness transfer of taxes to the budget shall be borne by the taxpayers who make those payments to non-resident. (p.137.3)

It should be noted that the tax is paid to the budget at the time of such payment, unless otherwise provided by the provisions of effective international treaties of Ukraine entered into with residence countries of persons, in favour of which payments are made. (pp.141.4.2)

The State Fiscal Service of Ukraine bodies shall every year provide to non-residents a certificate (in Ukrainian) for confirmation of tax payment.

To conclude, the sphere of taxation of the income, obtained by non-residents in Ukraine is clearly regulated, and the international treaties on avoidance of double taxation are particularly important in this regard.

Lawyers of «APC» have many years’ experience in providing services to citizens and non-residents of Ukraine on taxation and transfer price formation. Considering permanent changes in Ukrainian legislation it is reasonably to seek advice and legal support.

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