Repatriation of company revenues: how to withdraw money from a Ukrainian company abroad to the parent company?
When entering the Ukrainian market, foreign companies, as a rule, are aimed at making profit. Of course, in the first years of activity earned funds can be used for reinvestment, at times they may have negative financial indicators, but the ultimate goal is always to make a profit, which at some point they will need to return to the parent company.
In this publication, we will talk about various options for repatriation of profits, taking into account the form of doing business in Ukraine.
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What is the procedure for withdrawing funds from the legal entity?
The most common business organisation scheme in Ukraine is the registration of a legal entity (usually in the form of a limited liability company) founded by a foreign parent company.
In this case, the funds earned in Ukraine are returned through a dividend payment procedure in favour of the founding company. The main tax prerequisites for such payment are as follows:
- Payment of corporate taxes. In Ukraine, such tax is the income tax for legal entities, which is paid at 18%.
- Payment of tax on dividends in favor of non-resident. Thus, after the payment of taxes by a Ukrainian company, for the payment to a non-resident, you must pay the tax at 15% once again. The tax is paid when dividends are distributed by a Ukrainian company (acting as a tax agent), but at the expense of a non-resident.
Apart from dividend distribution, non-residents also have other options of income return, but their application is limited by a number of conditions.
Thus, the businesses that need start-up capital are recommended to use the refundable financing assistance from the founder. As can be understood from the name of this type of loan, it is refundable. If there is no interest for the use of the loan and the relevant agreements are developed correctly, the future profits of the Ukrainian company may be used for the repayment. At the same time, the return of such funds is tax-exempt.
Another common method of repatriation is the structuring of a foreign company through a group of companies, some of which develop and provide training and other similar services required in the business activities of the Ukrainian company, which will pay for them.
Risks: Import of services are monitored by regulatory authorities as a way of tax evasion and funds withdrawal abroad. Therefore, if processed incorrectly, it may result in penalties.
However, having competently proved the reality of the services and supported them by all the documents, we get a situation where a Ukrainian company shall not pay tax on the repatriation of income, as well as may attribute such income of a non-resident to expenses, and thus, reduce the taxable base.
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It is important to pay attention to the fact that this option can’t be applied to all types of services / work. Thus, the production of advertising will require payment of 20% of the amount paid to a foreign company, at the expense of the payer. Similar rules exist for other payments in favor of non-resident.
In this case, you should also take into account that non-payment of taxes in Ukraine, where payment for services will be expenses, does not exempt from payment of funds received for services in the country of non-resident. Therefore, when returning funds, you should take into account not only the tax laws of Ukraine, but also the country of final beneficiary.
What is the procedure for withdrawing funds from the representative office of a foreign company?
Although according to the Tax Code, permanent representative offices shall be taxed as legal entities independent of the parent company, in terms of corporate taxes, from the point of view of income repatriation, the representative office of a foreign company in Ukraine is the most advantageous scheme.
The fact that permanent representative offices (this option does not work for temporary representative offices, as they cannot be used for commercial purposes and receive income) are taxed as ordinary legal entities means that in this part they duplicate the provision 1 of the previous section, namely, the payment of income tax (in the same amount).
However, as regards the return of income, the representative office will return the income this way, the income will be exempt from taxation in accordance with the provisions of the Tax Code.
That is why activities through a representative office in the tax context may be more profitable than through a LLC (except for cases of import of services through a group of parent companies).
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Repatriation of profits through agency or similar agreements
An alternative variant, which is something like a half-way house between the options described in section 1 and 2, is the activity of Ukrainian companies, which act as representatives of non-residents through commission agreements, commercial mandate agreements, etc.
In such cases, the return of funds will depend on whether it is a regular activity of such agent. Usually, the ordinary course of business means providing such services to different Clients, or only one of them:
- If the non-resident company is the sole principal, the income received under the agency agreement is subject to repatriation under the rules stipulated for the return of the revenue by the permanent representative office. However, it is not necessary to register such an agent as a representative office.
- If the agent is not affiliated with a non-resident and provides services to an unlimited number of persons, the funds shall be returned to the non-resident without withholding any taxes from such non-resident. In this case, the agent’s remuneration under the relevant agreement will be subject to general taxation. However, this is the issue of economic activity of the agent, rather than of the non-resident principle.
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Tax regulation of return of income received in Ukraine offers only a small list of options that a foreign company can use.
Except for the return of proceeds for goods or services, most other options provide for payment of additional taxes associated with the repatriation of profits. Proper structuring may help minimize such taxes, but it is usually impossible to avoid paying them completely.
If you want to find the best option for your business, don’t hesitate to call us.