Taxation of a representative office of a non-profit foreign organization in Ukraine
Cost of services:
Reviews of our Clients
... our work on joint projects assured us of your high level of professionalism
Registering and taxing a non-resident's representative office, branch or subsidiary of a non-profit foreign organization in Ukraine can be a complex and time-consuming process.
When a non-resident establishes a representative office or another separate unit in Ukraine, it's usually with the intention of conducting business or performing representative functions on behalf of the non-resident.
Depending on the purpose of the establishment, the tax status of the representative office or separate unit can vary. In this article, we will discuss the nuances of taxation related to these types of entities.
You may also like: What Documents are Required for Accrediting a Non-Governmental Organization's Representative Office in Ukraine?
The tax status of a non-resident and their separate unit
When discussing the tax status of a non-resident's representative office (including that of a non-profit foreign organization), two main concepts come into play:
- a permanent establishment refers to a non-resident's permanent place of activity in Ukraine;
- a non-permanent establishment (non-commercial representation): this refers to a separate unit that does not engage in the non-resident's main business activity in Ukraine, but instead performs only representative or auxiliary functions.
For tax purposes, the main difference between these concepts is that:
- a permanent establishment is subject to tax on profits (with a standard 18% tax rate based on financial results);
- a non-permanent establishment is not registered as a taxpayer for profit tax purposes and, therefore, is not subject to this tax.
Note. According to clause 3.2 of the Information Letter of the State Tax Service №20 (an explanation to the Tax Code of Ukraine) https://tax.gov.ua/data/material/000/369/466649/InfoList20.pdf, a non-profit foreign organization's representative office (and/or branch) is considered a non-permanent establishment when registered with the tax service.
You may also like: Change of Head of Non-Governmental Organization's Representative Office in Ukraine
Who determines the tax status of a non-resident's representative office and when?
The assignment of permanent or non-permanent representative status is determined by the tax authorities at the time of registration of the non-resident and its separate unit for tax purposes.
Under current legislation, non-residents (foreign legal entities and organizations) can:
- operate in Ukraine through separate units (including permanent representative offices);
- purchase real estate;
- obtain property rights to property in Ukraine;
- open accounts with Ukrainian banks;
- acquire ownership of investment assets from another non-resident who does not have a permanent representative office in Ukraine.
- non-residents are required to register with the relevant authorities.
Please note! The registration of a separate unit occurs simultaneously with the registration of the non-resident.
You may also like: How to Obtain a Residence Permit in Ukraine for Members of a Non-Governmental Organization?
Procedure for registering a non-resident – representation of a non-profit foreign organization
To register as a non-resident, both non-residents and their separate subdivisions must submit an application in the form of No. 1-ОПН to the supervisory authority.
After registration, a certificate in the form of No. 34-ОПП is issued to the non-resident and their separate subdivision. The certificate specifies whether “...the non-resident conducts activities in Ukraine through separate subdivisions that are not permanent establishments” or “...through separate subdivisions that are permanent establishments.”
Such certificates are issued separately to the non-resident and its separate division.
Please note! Regulatory bodies regularly monitor signs of non-residents conducting business activities in Ukraine without being registered for tax purposes. If the regulatory body identifies signs of a non-resident engaging in economic activity on Ukrainian territory without registering for tax purposes (including through separate subdivisions), they will initiate an audit of such activity. If it is confirmed that the activity is unregistered, the tax authorities may carry out an inspection, declare the funding received by the parent organization as income, and issue a tax notice-decision with the following penalty sanctions:
- imposing a fine of UAH 100,000 on the non-resident;
- the non-resident additionally pays 18% income tax on the financial result received and a penalty of 5% of undeclared tax.
Please note! The tax notice-decision may be appealed in administrative and judicial proceedings.
What is the duration of the tax status of a consulate?
There are no specific time limits for the tax status of a non-resident representative office or separate subdivision. However, the representative office (especially a non-permanent one) must strictly comply with certain criteria that confirm its status throughout its activities.
You may also like: What Is a Non-Governmental Organization Representative Office and How Does It Operate?
What can lead to the recognition of a non-permanent representative office as permanent?
The following factors can be highlighted:
1. The representative office leases premises in its own name for storing property acquired at the expense of the non-resident and subject to transfer to third parties at the direction of the non-resident or for other purposes specified by the non-resident.
2. The activities of the consulate are identical to the activities of the non-resident.
3. The funding of the representative office amounts to more than 30% of the non-resident's total income.
4. Use of the non-resident's corporate mail by the representative office.
5. The activities of the representative office are of a permanent nature, not ancillary.
Why aren't the branches/representative offices of non-governmental organizations and charitable foundations considered permanent establishments?
A permanent establishment is considered to be a representation of a non-resident engaged in business activity and receiving income from it. In turn, the activities of branches/representative offices of non-governmental organizations or charitable foundations are not aimed at obtaining and further distributing profits, so these organizations do not have the characteristics of a permanent establishment.
Please note! If the representation of a non-resident is not a taxpayer of income tax, this does not exempt it from paying other taxes.
What types of taxes can a company pay if it has a permanent or temporary establishment (including a representative office of a foreign non-profit organization)?
A separate unit in the form of a temporary establishment can:
- pay the Unified Social Tax and act as a tax agent for Personal Income Tax and Military Tax, if it has hired employees;
- register for VAT voluntarily and become a VAT payer;
- pay real estate tax, if it owns any property;
- pay land tax, if it owns any land.
A separate unit in the form of a permanent establishment can:
- pay the Unified Social Tax and act as a tax agent for Personal Income Tax and Military Tax, if it has hired employees;
- register for VAT if it has earned over UAH 1 million within a year and become a mandatory VAT payer, or voluntarily register for VAT;
- pay real estate tax, if it owns any property;
- pay land tax, if it owns any land.
You may also like: Accreditation Process for Foreign Non-governmental Organizations in Ukraine
Taxation of financing of a parent company's representative office
Since non-permanent establishments (including establishments of non-profit foreign organizations) are not taxpayers of income tax obtained from the parent company, financing is not considered income for taxation purposes.
On the other hand, permanent establishments are taxpayers of income tax on general terms and calculate income tax on the financial result calculated according to the accounting rules. Therefore, financing received by a permanent establishment from a parent company is recognized as income of such establishment.
Proper formulation and analysis of financial operations of a non-profit foreign organization's establishment is a guarantee of safe and minimal attention from regulatory authorities. Qualitative analysis of activities and correct documentation of economic operations protects your business and allows you to take advantage of all the benefits and privileges of a non-permanent establishment.
1. Accounting support: control of income and expenses to confirm the status of a non-permanent establishment, salary calculations, consulting in the field of taxation of non-resident establishments, tax calculations and payments, submission of reports to regulatory authorities.
2. Legal support: provision of legal services to clients for legal issues that may arise during the process.
Contact us if you plan to accredit a representative office in Ukraine and need qualified assistance not only in registration, but also in taxation matters.
The cost of support for non-profit organizations can be found here.
