Taxation of cross-border trade in Ukraine
Modern technologies together with relative openness of foreign markets allow Ukrainian enterprises that have connections abroad to conduct their business activities not only within the territory of Ukraine but also outside of it. Sometimes such activities do not include entry of goods in Ukrainian territory or their transportation abroad: Ukrainian enterprise can purchase goods in one foreign country and sell them in another one. Such entrepreneurial activities are usually called cross-border trade and their popularity in Ukraine keeps rising.
Issues related to conduction of such trade usually lie within the field of taxation (income taxation and Value Added Tax) and documental formalization of such transactions.
Legal entities and their divisions that are created and conduct their activities in accordance with Ukrainian legislation are considered to be residents of Ukraine and therefore their activities are taxed in accordance with rules that are set for the residents. Article 133 of the Tax Code of Ukraine provides that residents which are obligated to pay income tax include in particular business entities (legal entities that conduct their business activities both in Ukraine and abroad). So Ukrainian enterprises, that conduct their activities abroad are also considered to be income tax payers. Moreover Article 134 of the Tax Code of Ukraine provides that income tax can be imposed on income which originates from abroad.
At the same time, major part of income that is received by Ukrainian enterprises abroad is not supposed to be taxed there. In particular it applies to income and other forms of revenues received from goods, works, services that are provided / completed / rendered to a foreign resident.
In accordance with general practice such income is not recognized as income which originates from abroad. Usually taxed income received by foreign companies in the country of its origin includes the following:
- lease payment / rent and other “passive” types of income.
And even this income can be exempted from taxation if there is an agreement about avoidance of double taxation between Ukraine and country of its origin which provides such exemption.
Ukrainian legislation does not set any special procedure for accounting of received income and defrayed expenses from abroad. Such income and expenses are accounted in accordance with general rules that are set by Articles 135-143 of the Tax Code of Ukraine. Thus, income received from sale of goods is reflected in accounting documents as of the day when the seller obtains ownership rights to such goods while income received from provision of services and conduction of works is reflected as of the day of issuance of a completion certificate or other document which confirms provision of service or completion of work. Expenses which form the cost of sold goods, completed works, rendered services are recognized as expenses of the period in which income from such goods, completed works and rendered services is reflected in accounting documents. Other expenses are recognized as expenses of the report period in which they were defrayed with consideration of some peculiarities.
Received income or defrayed expenses from abroad business activity of Ukrainian enterprise are proven by the following primary documents:
- Acts of acceptance;
- Certificates of rendered services;
- Work completion certificates;
- Extracts from bank accounts;
- Cash receipts and other documents.
According to the letter of the Ministry of Finance of Ukraine number 31-08410-07-29/26066 dated 24.10.2011 legalization of these documents is not required since documents that were issued abroad are to be legalized only if they were issued as the result of participation of foreign authorities or directly by them. Primary documents, including contracts that were entered into by business entities are not considered as such. At the same time these documents must be translated into Ukrainian since Subsection 1.3 of the Regulations on documental confirmation of accounting information provides that all primary documents, accounting records and financial statements must be in Ukrainian. Documents that are drafted in a foreign language and are subject to reflection in accounting documents must have organized authentic Ukrainian translation.
Article 185 of the Tax Code of Ukraine provides that VAT is imposed solely on VAT payers’ transactions related to distribution of goods and services the final destination of which is within territory of Ukraine (also transactions of import and export as well as services of international transportation). Based on the definition of “final destination of distribution” which is provided by Article 186 of the Tax Code of Ukraine it is possible to reach the conclusion that Ukrainian VAT is not imposed on transactions related to distribution of goods from one foreign country to another without them crossing Ukrainian borders. Also VAT is not imposed on majority of services that are provided by Ukrainian resident to a business entity that is registered abroad.
But at the same time countries where the actual distribution of goods and/or services occurs may impose VAT or similar taxes on the mentioned transactions. Documental formalization of such transactions has to be conducted in compliance with the requirements set by legislation of the country where distribution of goods/ services occurs.
This material was written by legal experts of law firm “Pravova Dopmoga”.
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