Schemes of electronic commerce in Ukraine for foreign companies
The sphere of e-commerce is rather complicated from the point of view of regulation, however, consulting companies working on projects of this kind usually have developed schemes of entering the market and carrying out activities there.
However, there are situations when the Client comes to a consultant with its own business model, which works differently from the standard approaches of this industry, and the regulation of which does not immediately fall within the existing regulatory framework. We will discuss one of such cases in this publication.
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The core of the case: Non-standard business model
Our lawyers were contacted by the Client - a Turkish e-commerce platform, which wanted to enter the Ukrainian market. The Client was interested in a whole range of legal services, such as tax consulting, corporate law in terms of business registration in Ukraine and others. However, above all, it was interested in testing its non-standard business model.
The essence of the model was to carry out activities, where:
- The buyer orders the goods at one of the leading Ukrainian marketplaces by making a payment to the account of a Ukrainian company (e.g. a non-profit representative office) established by our Client;
- The Ukrainian business entity pays for the services of contractors: marketplaces, bank delivery services, etc. In addition, the Ukrainian entity had to pay the cost of goods to the Turkish manufacturer, with which our Client had the appropriate arrangements;
- As a result of settlements with all contractors, the Ukrainian entity had to balance the income received from buyers with the expenses for contractors and maintenance of the office, and therefore there should have been virtually no tax liabilities in terms of doing business. Import of goods into Ukraine should also have enjoyed a special preferential customs regime, since the goods should be sent directly to the buyer, and their value would not exceed the relevant preferential limit;
- The main income has to be generated in Turkey, where the state supports the export by returning the percentage of the price of the export transaction.
Since the main problems of the Client’s business model may have been related to tax and customs aspects, the model was primarily tested by our tax lawyers.
Read also: Corporate Income Tax: Who Shall Pay It?
Taxation of e-commerce schemes in Ukraine: Legal advice
In the course of testing and advising the Client, our lawyers came to the following conclusions:
- Although the use of a non-commercial representative office implies that there is no need to pay taxes, at the same time it does not allow receiving funds for goods. Its use for such purposes will lead to recharacterization of the company into a commercial representative office, which will be obliged to pay additional taxes;
- Registration of the company will not allow to implement the Client’s plan in full, as having reached the mark of UAH 1 million such subject would have to be registered as a payer of value added tax (VAT), which would not allow the Client to get a tax credit for absolutely all expenses in future. Consequently, the Client will have to make donations or increase the goods price for the consumer. The latter had be a strategic advantage over competitors, and therefore this option was not suitable for the Client;
- An alternative option would be to organise activities through agency/commission or order agreements. For the proper organization of such activities, the agent should be independent of the principal, and its activities in the provision of agency or other similar services should be its main business activity. In other words, such services should be provided to a range of companies as the agent’s main activity;
- In order to implement the option with intermediary agreements, our lawyers advised the Client to apply to the tax authorities for individual tax advice, which exempts from potential liability when following the position set out therein;
- In addition, the Client was informed about the potential possibility of the court proceedings with the tax authority, as the tax advice cannot cover all aspects of the activity, and the Client’s business model in general, will definitely raise questions of the controlling authorities.
Together with the Client we managed to find the best way of action and develop the market entry strategy.
If you need help with any aspect of the Ukrainian market entry, don’t hesitate to call us. We will be glad to provide you with all necessary answers and help.