What is the difference between the accounting and reporting of a foreign company and the accounting and reporting of a resident legal entity?
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The information available on the accounting and reporting of a resident legal entity in open sources is more than enough. The main thing is not to drown in this sea of information.
The key point is the following: the form of accounting and reporting is regulated by the tax status of the legal entity and taxes that are paid by the legal entity. For example, a legal entity operating under the common system of taxation, a VAT payer, which has hired personnel and real estate on has to report profit tax, financial tax, VAT, payroll taxes, real estate tax.
When we talk about a foreign company, as a rule, we mean a representative office or a legal entity with foreign membership. Today, we will answer the question of how reporting and accounting are different for them.
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Reporting and accounting of a representative office or a company with foreign capital in Ukraine
A representative office can conduct business activities if it is a permanent (or what is also called a commercial) representative office. Or it can simply be a representative office which concludes agreements, collects information, keeps documents, in general performs an auxiliary function – then it is a non-permanent representative office. Of course, in the first case, a representative office may receive revenue on its current account, but in the second case, only funding from the non-resident for the maintenance of the non-permanent representative office.
That is, a non-resident can do business in Ukraine either through its so-called “branch”, i.e. a permanent establishment or having established here a legal entity with foreign capital. The difference is that a permanent establishment acts as a structural subdivision of a foreign company with a separate bank account, while a company established by a foreign legal entity is a full-fledged independent legal entity.
Since January 2021, a non-resident company must be registered with the tax office where the representative office is registered. This means that in terms of accounting and reporting, both subsidiaries and representative offices are practically on an equal footing.
There are differences in their activities, but they are on a different plane from accounting and reporting, for example:
- a representative office does not need to obtain a work permit for its foreign employees, while a legal entity with foreign capital does;
- a representative office can use a trademark, while a legal entity will need to obtain a license agreement;
- a representative office can easily transfer its profits to the head office, while the legal entity will have to pay the dividends and withhold the repatriation tax.
But for all that, the registration of a representative office is much more expensive and complicated than the establishment of a new company with a non-resident founder.
Thus, when choosing between a commercial representative office and a newly established company with foreign capital, in most cases the second option is more economically advantageous.
As non-residents, starting to do business in Ukraine, mostly employ citizens of Ukraine, so there will be no big savings on work permits.
As for the repatriation tax, agreements on avoidance of double taxation with other countries come into play here, which means that there is room for tax optimization. In addition, in the course of business activities, the status of a commercial representative office may increase the appetite of the regulatory authorities.
Each time when elaborating the Ukraine entry plan for our foreign Clients we weigh all advantages and disadvantages and try them on the business scheme chosen by our Clients. After that we recommend exactly the most suitable option for them.
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Accounting and reporting of a foreign company and a resident company in Ukraine
Comparing the rules of accounting and reporting for a foreign company and for a resident company, there are no fundamental differences. Legal entities with foreign investments pay taxes according to Ukrainian legislation under the same conditions as Ukrainian companies.
But! Article 11 of the Law of Ukraine On the Regime of Foreign Investments declares state guarantees of protection of foreign investments, in particular if the foreign founder has decided to terminate the activity it has a right to return the investments during 6 months without payment of fee.
Some years ago one foreign medical company, expanding the geography of its business, registered in Ukraine a legal entity with 100% foreign capital. They introduced expensive medical equipment to the authorized share capital through the importation into the customs territory of Ukraine. It should be mentioned that according to the Customs Code, import of property to authorized share capital of a legal entity with foreign investment by non-resident is exempt from import duty, while purchase abroad by a usual legal entity would not have such privilege.
In order to distinguish risks and protect the imported property, we opened a medical clinic in parallel, a wholly Ukrainian LLC, which was intended to conduct operational activities without having its own equipment. The equipment that was on the balance sheet of the company with foreign investments, was leased to the clinic. That is, in the event of serious claims or litigation during the activities of the medical clinic, the possibility of significant material or financial losses was excluded.
Summarizing all the pros and cons, the most optimal form of foreign business in most cases is the establishment of a legal entity with foreign investment. But perhaps in tandem with other organizational forms it is possible to achieve a synergistic effect, so it is advisable to consult with experts and choose the best solution.
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