What is a representative office of a non-governmental organization and how does it work?
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A Representative Office of a foreign non-governmental organization is a separate subdivision of a foreign non-governmental organization, which is duly registered (accredited) on the territory of Ukraine and carries out its activities.
A Representative Office is not a legal entity. The Representative Office carries out its activities on behalf of the parent organization and within the powers that are usually defined in the Power of Attorney to the Head of the Representative Office.
Additionally, the Representative Office may have a Statute or Charter, which regulates the activities of the Representative Office.
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Who manages the Representative Office of a non-governmental organization?
The Head of the Representative Office has the authority to act for and on behalf of the parent organization. A Power of Attorney granted to the Head of the Representative Office is usually issued for a specified period of time.
The power of attorney must specify the powers that the Head of Representative Office needs in any case, namely:
- To enter into legal relations and contracts with individuals and legal entities, other representative offices operating on the territory of Ukraine. At the same time the parent organization has the right to establish restrictions on the amount or subject of agreement.
- To open bank accounts in UAH and other currencies in any bank of Ukraine.
- To conclude employment agreements (contracts), to hire and dismiss employees, as well as to perform any other actions concerning employees.
- To get EDS keys, to submit reports.
- To represent the interests of the representative office in state and local authorities, including providing explanations, documents on behalf of the parent organization.
- To apply to state and local authorities, courts, etc. for protection of rights and interests.
- To file, sign, conclude any documents related to the activities of the Representative Office.
The Power of Attorney can include any other provisions and powers necessary for the activities of a particular Representative Office. In our practice, there have been situations where the Representative Office had to enter into a ,000 contract, but the Power of Attorney for the Head of Representative Office had not been updated for quite some time and provided for a limit of ,000. To avoid the long process of issuing a new power of attorney for the Head of the Representative Office, the parent organization provided us with a letter of confirmation of the contract, and we divided the amount of the contract equally between the two contracts.
However, the counterparty does not always agree to such terms, so the authority of the Representative Office Head should always be up-to-date and consistent with the goals of the Representative Office.
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Tax status of a representative office of a non-governmental organization in Ukraine
As we noted above, the Representative Office is not a legal entity, which means that it cannot obtain the status of a non-profit organization after 2017. This is ambiguously pointed out by the tax authorities in their consultations.
However, a representative office receives funds, has expenses and is obliged to keep accounting records.
Representative offices of foreign NGOs in most cases will not have the status of a permanent establishment, and therefore will not be income tax payers.
Please note! In any case it is necessary to separately analyze the documents and activities of the representative office.
Representative offices of non-governmental organizations are not VAT payers. However there are exceptions when representative offices can pay VAT, for example when importing goods on the territory of Ukraine, when providing paid services or when carrying out business activities.
Besides, a number of transactions, for example, supply of certain goods or provision of services in accordance with Article 197 of the Tax Code of Ukraine are exempt from VAT. Therefore, when operating a Representative Office it is necessary to check what goods and services will be provided by the Representative Office and on what grounds.
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Restrictions and prohibitions on the activities of a representative office of a non-governmental organization
The main problem that arises in the activities of a representative office is the absence of the status of a legal entity. Consequently, some activities that are only allowed to legal entities cannot be carried out by the Representative Office. Also, a representative office cannot be included in certain registries or use certain legal mechanisms and procedures.
For example, a representative office cannot be included in the register of non-profit organizations, because it is not a legal entity. Also, in the process of working with representative offices, we have realized that a representative office cannot register the car which is necessary for its work.
Hence, if you are planning to carry out activities in the territory of Ukraine through a separate division, remember that the separate division (branch or representative office) may have certain restrictions in terms of the acquisition and disposal of property, as well as entering into legal relations with other persons.
Reporting and personnel issues of the representative office of a foreign non-governmental organization in Ukraine
A representative office of a foreign non-governmental organization must keep accounting and personnel records.
Like other business entities, representative offices in their legal relations with employees must comply with the requirements of labor legislation, and, therefore, employ, dismiss and transfer employees within the framework of the Labor Code of Ukraine with the issuance and preservation of relevant documents. Also, in the case of labor relations, the representative office is obliged to accrue and pay taxes for employees.
If you carry out activities in Ukraine through a separate subdivision, you need to take care of:
- accounting services;
- personnel services;
- legal support for the representative office.
In case of absence of accounting and primary documents the tax authorities can impose penalties in the course of inspection.
In the absence of adequate personnel records and maintenance of the necessary documentation, an inspection by the State Labor Inspectorate may impose a fine for violation of labor legislation (the amount depends on the violation).
Certainly, the information stated in our article is only basic knowledge of how a representative office functions in Ukraine. In practice we face a lot of interesting and complicated tasks, solution of which allows our Clients to perform functions of the Representative Office in Ukraine safely.
If you are planning to register a Representative Office in Ukraine, don't hesitate to contact us. Foremost, we'll help you to determine whether this is the best option to achieve your goals in Ukraine.