Assignment of a claim by a non-resident to a resident - what about the repatriation tax?

Pursuant to the sub-para. 141.4.2 of the Tax Code of Ukraine (hereinafter − TCU), a resident or permanent establishment of a non-resident, which makes in favour of a non-resident or a person authorized by him/her any payment of income with a source of origin from Ukraine obtained from economic activities, must withhold the tax from such incomes at the rate of 15 percent (mainstream rate of tax).

A resident or permanent establishment of a non-resident shall act as a tax agent of its non-resident counterparty, and shall be obliged to calculate, withhold and remit the amount of repatriation tax to the budget. Tax shall be paid when paying income in favor of a non-resident. That is, if a resident does not pay anything to a non-resident, then there is no obligation to remit tax to the budget in advance either.

If a resident fails to fulfill its obligations to a non-resident, the latter (the original creditor) may transfer the right to claim against the resident (debtor) under the transaction to another person - a new creditor (resident or non-resident).

For example, a resident did not pay dividends to a non-resident for a long period of time. Thus, the resident has accumulated a debt to a non-resident, and the non-resident later transferred a debt claim to another resident - a new creditor (cession).

If everything is clear in the situation with a non-resident - repatriation tax is payable, then in the case of the transfer of a debt claim by a non-resident to a resident (new creditor) the following question arises, Do you need to pay such tax?

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Position of regulatory authorities and court practice on transfer of a debt claim by a non-resident to a resident and payment of repatriation tax

The controlling authorities respond in the affirmative to such a question. According to the tax authorities, in economic terms, the payment of debt in favor of a new resident creditor will be considered a payment in favor of the original non-resident creditor, and therefore repatriation tax must be paid.

That is, if we return to our example with dividends, according to the tax authorities, the payment of the dividend debt by the debtor to the new creditor will, in essence, be considered a payment of dividends, and not a payment of debt received by the new creditor as a result of the transfer of a debt claim.

However, our lawyers do not agree with this approach of the tax authorities, given the following:

• According to the requirements of civil legislation, as a result of cession, the rights of the original creditor are transferred to the new creditor to the extent and under the conditions that existed at the time of the incurrence of the obligation.

• The transfer of a debt claim is a replacement of the creditor in the obligation by transferring his/her rights to another person under the transaction.

• That is, the composition of legal relations changes - the non-resident ceases to participate in legal relations from the moment of conclusion of the agreement, and the new creditor is an independent entity in such legal relations.

In addition, if you refer to judicial practice, the court notes (decision of the Dnipropetrovsk District Administrative Court of February 10, 2020 in case No. 160/6858/19) that for presence of the resident-debtor obligation to withhold tax on repatriation, the following conditions must must be met:

• income is paid with a source of origin from Ukraine (see sub-para. 141.4.1. of the TCU)

• income is received from economic activity (see Article 3 of the Economic Code of Ukraine)

• Payment is carried out by a resident or a permanent establishment of a non-resident

• Payment is made to a non-resident or its authorized representative (the new creditor is not an authorized representative of the non-resident).

Thus, in case of the transfer of a debt claim by a non-resident to a resident, the resident debtor has no obligation to calculate, withhold and remit tax on repatriation upon payment of such debt.

It should be taken into account that if the requirements of sub-para. 141.4.2 of the TCU are not fulfilled, controlling authorities will apply measures of financial responsibility to the resident-debtor who pays the debt to a new creditor-resident and does not withhold tax.

Thus, there are two ways out of this situation, namely:

• Pay tax on repatriation and then refund the overpaid tax;

• Before making the payment, contact a lawyer, who would correctly draw up a request for obtaining tax advice from the controlling authority; get individual tax advice, which due to the requirements of Article 53 of the Tax Code of Ukraine, exempt from financial responsibility. Hereafter you can act depending on the results:

1. If the tax advice is negative, with the help of a lawyer you can appeal it in court and prove the rightness of your position. This way is easier for the taxpayer, because at the stage of obtaining tax advice there are no charges from the tax authorities, and therefore the risks are less.

2. If the taxpayer acted recklessly and has already received a tax notification-decision, then by challenging it in court, he/she puts everything on the line.

We recommend using the tax advice option, because the procedure for refunding overpaid tax on repatriation is extremely complicated and costly, so it is better to think in advance and protect yourself from unnecessary expenses.

If you do not want to waste your time on negotiating with tax authorities, we can offer you legal support and assistance in solving one problem or your business in general. Our company employs lawyers specializing in tax law, as well as accountants who will make sure that the tax authorities will not have any questions about your business.

Do you need advice and solutions to your problems? Don’t hesitate to contact us! We can help you organize tax consultation and operation of the representative office in Ukraine.