Value Added Tax Taxation

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					          11                  Taxation

      Value Added Tax
      by CMS Cameron McKenna LLC
      Kyiv Office
      The basic legislative act governing value added tax (VAT) in Ukraine    value and that, if the arm’s length value exceeds the contractual
      is the Law of Ukraine “On Value Added Tax” (the VAT Law). Pursuant      value by more than 20%, VAT should be calculated based on the
      to the VAT Law, which is drafted mainly in accordance with the          arm’s length value. There is some doubt, therefore, as to which
      European Union 6th Directive, tax due to the Ukrainian tax authori-     value should be used to calculate VAT when the arm’s length value
      ties is determined as the difference between VAT paid to sellers        exceeds the contractual value by less than 20%.
      (VAT credit) and VAT collected from buyers (VAT liabilities).
                                                                               For importation purposes, the 20% rate applies the higher of the
                                                                              contractual value of goods (services) or their customs value, which
      VATable transactions                                                    includes any import duties and excise tax (if applicable).
      The VAT Law includes into the list of transactions subject to VAT the
                                                                              VAT reporting and transfer
      •   The sale of goods (services), which place of supply is within the   Generally, VAT returns should be filed on a monthly basis, not later
          customs territory of Ukraine;                                       than the 20th calendar day of the subsequent month. The tax due
      •   The importation of goods into the customs territory of Ukraine;     should be transferred to the tax authorities within 10 calendar days
      •   The export of goods (related services) from Ukraine.                after the date when the tax return was required to be filed.

                                                                              In limited cases, a taxpayer is allowed to apply a quarterly report-
      VAT registration                                                        ing period.
      A person (Ukrainian or non-Ukrainian) is generally required to reg-
      ister for VAT purposes, if:                                             Late payment interest amounting to 120% of the National Bank of
                                                                              Ukraine prime rate (currently 8% per annum) is charged on late VAT
      •   Its VATable sales of goods (works, services) during the last        transfers.
          12 calendar months exceeded UAH300,000 (approximately
          USD59,400 or EUR41,300);
      •   It imports goods into Ukraine; or                                   VAT credit
      •   It supplies goods (services) on the customs territory of Ukraine    VAT incurred may generally be recovered as a credit against VAT
          with the use of global or local computer networks.                  liabilities or as a refund.

      The VAT law also allows for voluntary registration as a VAT payer.      Only registered VAT payers in Ukraine are eligible for VAT recovery.
                                                                              Due to the absence of effective procedure of VAT registration in
                                                                              Ukraine for non-Ukrainian entities, these entities cannot recover
      VAT rates                                                               Ukrainian VAT.
      The standard VAT rate applicable to VATable transactions, including
      the supply of goods and services in Ukraine, and the importation of      The tax credit is determined on the basis of the contractual value of
      goods into Ukraine, is 20%.                                             goods (services) but not higher than their arm’s length value, if the
                                                                              contractual value for such goods (services) differs from the arm’s
      A zero VAT rate applies to the export of goods and related services.    length value by more than 20%, and consists of VAT accrued (paid)
                                                                              by a taxpayer at the 20% and 0% rates in connection with:
      Certain transactions are non-VATable and these include, among
      others, most financial services, insurance and reinsurance serv-        •   The acquisition or production of goods (including the importa-
      ices, payment of dividends and royalties, etc.                              tion thereof) and services for their subsequent use in taxable
                                                                                  transactions within the scope of the business activities of a
      There are VAT-exempt transactions, including, among others, the             taxpayer;
      supply of land plots, education services, artistic and cultural serv-   •   The acquisition (building, construction) of fixed assets (including
      ices, certain State services, etc.                                          the importation thereof), for their subsequent use in the produc-
                                                                                  tion and/or supply of goods (services) for taxable transactions
                                                                                  within the scope of the business activities of a taxpayer.
      Taxable base
      The VAT law states both that the 20% VAT rate applies to the higher     If a taxpayer acquires (produces) goods (services) and fixed assets
      of the contractual value of goods (services) or their arm’s length      to be used in transactions, which are not subject to VAT or which

                                                                                                                                                              Country Profile
are VAT exempt, then VAT paid in connection with such acquisition                   •   An entity, whose VATable transactions over the last 12 calendar
(production) is not included into the taxpayer’s VAT credit.                            months are less than the refund claimed (except for where VAT
                                                                                        credit has accrued as a result of the acquisition or construction
If part of the goods (works, services) acquired and/or produced is                      (building) of fixed assets);
used in taxable transactions and the other part is not, VAT credit is
apportioned between the taxable and non-taxable transactions.                       •   An entity, which has not carried out business activities for the
                                                                                        last 12 calendar months.
VAT credit must be confirmed with valid VAT invoices or import cus-
toms declarations.                                                                  Basically, a registered Ukrainian VAT payer entitled to VAT refund
                                                                                    possesses the following options: either (1) to offset such VAT re-
                                                                                    fund against its future VAT liabilities, or (2) to claim a cash return
VAT refund                                                                          from the government. In the latter case, the Ukrainian tax authori-
Generally, where VAT credit exceeds VAT liabilities for two consecu-                ties perform a tax review of the claiming taxpayer (the duration of
tive reporting periods (months or quarters), a tax payer may ap-                    which is limited to 30 days) and, if no mistakes are identified, report
ply for a VAT refund. The amount of refund is limited to the amount                 to the government. The government transfers cash to a taxpayer on
of VAT paid to sellers in the preceding reporting period (month or                  the basis of such a positive report.
                                                                                    In practice, many Ukrainian taxpayers prefer to offset their VAT re-
The following entities are basically not eligible for refunds:                      fund against their VAT liabilities, rather then to claim cash from the
                                                                                    government which through recent initiatives has aimed to limit cash
•   An entity registered as a VAT payer for less than 12 calendar                   refunds.
    months before the month in respect of which a refund applica-
    tion is being submitted;

Tax Issues of Acquisition Financing
in Ukraine
by Ernst & Young LLC
The article by Igor Chufarov, Ernst & Young Tax & Legal Manager, was published in
Invest Gazeta on October 22, 2007 (in Russian).

In international practice investments in equities may be financed                   establish a separate legal entity in a foreign jurisdiction. This sepa-
from two sources. Investors either use their own funds or they use                  rate legal entity (hereinafter referred to as the “investor”) acquires
a combination of their own and borrowed funds that they attract                     equities (shares in the authorized capital) of Ukrainian companies
on credit for acquiring equity (a share in the authorized capital) of               from their former owners who may be both residents and non-resi-
investees. In the latter case, investors gain an opportunity to make
large acquisitions using relatively small amounts of their own finds,               Figure 1
thus increasing the return on their equity.

In Ukraine, investments are made primarily through investor’s own
funds. However, the entrance of private investment funds into the
country has contributed to the expansion of investments using bor-                                                               Investor
rowed funds. This form of financing may also be of interest to local
                                                                                                     interest expenses
investors interested in increasing the return on their investments.
Investors who contemplate using borrowed funds for investing into
Ukraine should consider a number of tax issues. The key issue is
the possibility of showing interest expenses that investors incur                                                profit repatriation
when attracting external financing to decrease tax payable by in-
vestees in Ukraine. In this article we discuss the substance of this
issue, as well as outline possible approaches to its solution.
                                                                                                      operating profit
Tax Advisor’s Task
Currently, the following “standard” structure of investment is used
in Ukraine. For acquiring companies in Ukraine investors often                                            Consolidated financial statements                                                                                                                                                205
                                                                                                                                                    Country Profile
dents of Ukraine. If the acquisition is financed from borrowed funds,      In international practice investors resolve this issue by transferring
the investor obtains a bank loan that is used to finance acquisition       debt servicing expenses to the investee. This method is called a
of shares from Ukrainian companies.                                        “debt push down” when the liability on the repayment of a loan is
                                                                           transferred to a lower level – from the investor to the acquired com-
Insofar as interest on bank loans is subject to accrual and regular        pany. This option may be implemented as follows.
payments, the investor should have funds for its servicing. The in-
vestor may obtain these funds from the acquired company in the
form of dividends. In terms of taxation, this creates the following        Standard Solution: Descending Joining
problem for the investor.                                                  The investor establishes a special purpose vehicle (“SPV”) in the
                                                                           same jurisdiction to which the acquired company belongs (in our
Although the investor and the acquired company are separate legal          case – Ukraine). The SPV obtains a loan for the acquisition of the in-
entities, the profit is determined on a consolidation basis inclusive      vestee’s shares. Upon completion of the deal, the investor decides
of all expenses incurred. Therefore, in consolidated financial state-      to join the SPV to the acquired company. As a result, the acquired
ments interest expenses on bank loans attracted by the investor            company becomes a debtor on the bank loan obtain by the SPV for
would decrease the net profit gained by the investee (See Figure 1).       acquisition of its shares.

However, in terms of taxation, the investor and the acquired compa-        Theoretically, under this option (See Figure 3) the acquired com-
ny would be considered as separate taxpayers. Expenses incurred            pany’s profit before taxation may be decreased by the amount of
by one of them would not decrease the taxable profit of the other.         interest expenses on the loan. However, in Ukraine this is hard to
Accordingly, interest expenses incurred by the investor would not          achieve. Under Ukrainian tax law, the acquired company would be
decrease the taxable profit of the acquired company. This means            allowed to include loan interest into the tax deductible expenses
that the investor would have to pay interest from its own net profit       provided that the attracted funds are used for its own business ac-
and, consequently, would incur additional expenses in the form of          tivities. Business activity is determined by law as the activity aimed
increased corporate profit tax (CPT).                                      at gaining income by taxpayers.

To illustrate, let us assume that for the acquisition of a 100% of a       Under this option, the borrowed funds would be used by the SPV
Ukrainian company an investor (a resident of Cyprus) attracted a           for the acquisition of shares which would cease to exist and would
loan with an annual accrued interest of USD 100. The investee’s            be repaid as a result of joining.
annual profit before taxation is USD 200. The CPT rate for the ac-
quired company is 25%.                                                     The acquired company would not receive any benefits or additional
                                                                           income from the use of these funds. Therefore, the tax authorities
The investor’s consolidated financial statements at year-end would         would most likely challenge the tax deductibility of interest expens-
be (See Figure 2):                                                         es on the loan for the acquired company. Accordingly, the acquired
                                                                           company would pay interest from net profit after taxation.
Figure 2
                                                                           Figure 3
 #     Item
 1     Acquired company’s profit before taxation              200                                               Investor
 2     Investor’s interest expenses                           (100)
 3     Total profit before taxation                           100

 4     Corporate profit tax (item 1 х 25%)                    (50)

 5     Net profit                                              50
       Effective interest rate (item 4/item 3 х 100%)         50%

If the investor cannot deduct interest expenses from the taxable
profit of the Ukrainian company, the effective CPT rate increases up
to 50%! Should the investor be allowed to do so, the amount of tax                                             100%
payable in Ukraine would decrease from USD 50 to USD 25, and the
effective tax rate would be 25%.
It could be argued that the investor may deduct interest expenses
when determining the tax in its own jurisdiction. However, in most
cases the international tax planning mechanisms available to the
investor allow avoiding taxation in a foreign jurisdiction. Thus, in the
example, the income gained by the investor would not be subject
to taxation in Cyprus. The only practical possibility for the investor
to utilize interest expenses for decreasing taxes is by including it in
the tax deductible expenses of the Ukrainian company.                                                                                                                                      207
      This option is not feasible in Ukraine and alternative solutions must      argument used by the Ukrainian tax authorities to challenge the de-
      be considered.                                                             ductibility of interest expenses. At the same time, the SPV and the
                                                                                 acquired company could be recognized as related parties and the
                                                                                 amount of the lease would have to be determined based on “usual
      Alternative Solution: Ascending Joining                                    pricing” rules for tax purposes (i.e., fair market value). This means
      Under this option, the investor also establishes an SPV in Ukraine         that the lease payment may not be fixed at a minimum amount and
      which acquires the investee’s shares using attracted loan funds.           should be substantiated. This requirement limits the opportunity of
      However, upon completion of the deal, the investor decides to join         increasing the margin remaining at the SPV, consequently limiting
      the acquired company to the SPV and not vice versa. Thereby the            the amount of interest which may be included into its tax deductible
      SPV obtains all assets and liabilities of the acquired company and         expenses.
      becomes its legal successor.
                                                                                 It should be also noted that this option would have practical dif-
      The main difference of this option from the previous one is that           ficulties depending on the acquired company’s activities (e.g., it
      the SPV is permitted to argue that borrowed funds were used in its         would be hardly practical to lease out the facilities and property of
      business activities, since the SPV eventually purchases the invest-        a bank).
      ee’s business (incl. interrelated facilities and properties) with loan
      funds. Since the SPV obtains taxable income from the use of prop-
      erty, then the legal requirements that the expenses incurred are to        Summary
      be directed at gaining income, would be substantially met.                 Obviously there is no universal answer to this issue and each solu-
                                                                                 tion will be particular to the situation. In addition, apart from the key
      At the same time, this option also has a number of challenges.             taxation issues discussed above, each of the options requires an
                                                                                 analysis of a number of no less important tax issues. Some pos-
      First of all, there is no guarantee that the tax authorities would         sible issues include identification of tax implications of the joining,
      agree with the inclusion of interest into the SPV’s tax deductible         value added tax payments for leasing property, calculation of the
      expenses. For instance, they may argue that the loan is not used           interest cap to be included in the tax deductible expenses of the
      in its business activities, as it was obtained for acquisition of shares   Ukrainian company, and independent valuation of the transferred
      which ceased to exist after the completion of the joining. Such an         property. Clearly the tax structuring of an investment project should
      approach aligns quite well with the principle of form over substance       be started as early as possible.
      commonly used by the Ukrainian tax authorities. Therefore, using
      this option, it would be necessary to pre-secure the tax authorities’      Figure 4
      consent by requesting a tax clarification.

      In addition to tax considerations, the joining may have practical
      difficulties depending on the activities of the acquired company.                                               Investor
      Thus, if the investee is a bank, the bank joining an SPV which has no                     loan
      banking license would be legally impossible. The problems would
      also arise with joining a company which provides a wide range of                                               100%
      services to subscribers (telephone companies, cable network
      operators) as agreements with each subscriber would have to be
      concluded again. Finally, if the acquired company implements a
      construction project, its joining to another legal entity may require                                   loan
      all permits, licenses, and approvals be re-issued and this may also
      result in suspension of construction for a long period of time.

                                                                                           operating profit
      If joining is not practical the following option may be considered as
      it does not require corporate reorganization.
      Is it Possible to Waive Joining?
      As with previous options, the investee’s shares are acquired by an                                IPC lease
      SPV established by the investor in Ukraine. However, instead of join-
      ing, the SPV leases the interrelated facilities and properties for a
      fixed lease payment and uses it for carrying out its operating activi-
      ties. There is a margin between income from the use of the interre-                                             Investee
      lated facilities and properties and expenses for the lease payment
      from which the SPV would pay interest on the loan. Using this option
      (See Figure 4) the acquired company’s shares are not liquidated
      and the SPV continues to own them. This would also eliminate one

                                                                                                                                                         Country Profile
Tax Aspects of Business Administration under
Various Forms of Management with
Foreign Capital Participation
by By Baker Tilly Ukraine
(an Independent Member of
Baker Tilly International)

1. Forms of business administration at the territory of Ukraine and          It is worth mentioning that, in case of an acquisition operation, there
tax consequences.                                                            exist certain risks to get an enterprise with hidden problems. To
                                                                             avoid such situation, foreign investors generally turn to the special-
   а) Enterprise with foreign capital in the form of a limited liability     ists to perform a due diligence inspection of a Ukrainian enterprise.
                                                                             It does not matter if the enterprises have been acquired or newly
   b) Representation; and                                                    established – all of them perform the State registration of foreign
                                                                             investments at the local or oblast’ state administration (for instance,
   c) Joint activities.                                                      for Kyiv it is done by the Kyiv city state administration) within three
                                                                             working days after their actual contribution in accordance with a
2. Labor relationship of enterprises with the Ukrainian and foreign          procedure, being defined by the Ukrainian Cabinet.
employees: tax aspects.
                                                                             Unregistered foreign investments do not provide any right to receive
In October 2007 «The Washington profile» published top-twenty                privileges and guarantees, stipulated by the Law № 93/96-VR;
list of the countries, considered as the most attractive for inves-          namely – the transfer of their income, profits, and other payments
tors (direct investments), which also included Ukraine (being 18th           abroad (Section ІІІ).
in the general list). That is why more and more foreign enterprises
make investments into the Ukrainian economy. In connection with              Subsequently there appears an «affiliated person» problem in the
this fact there arises a question: in which form a foreign investor will     process of activities between the foreign parent company and the
be present – joint venture with a Ukrainian company; representative          Ukrainian subsidiary enterprise. In accordance with Clause 1.26. of
office; or set up a separate enterprise in the form of a limited liability   the Law on the profits, an affiliated person is a legal entity (in this
company. Let’s briefly consider all alternatives.                            case), which controls a tax payer or is controlled by such tax payer.
                                                                             When speaking about the exercise of control, we mean the direct
І. In case of set up a limited liability company or a joint stock com-       or indirect ownership of at least 20 % of the authorized fund of a tax
pany with foreign investments, such enterprise will be a resident            payer. And, in accordance with Clause 7.4. of the Law on the profits,
of Ukraine, and all taxes will be applied to it in accordance with the       any income, gained by a tax payer from the sale of goods (works,
sphere of its activities.                                                    services) to affiliated persons, shall be defined based on the con-
                                                                             tractual prices, which, however, shall be not less than the ordinary
   — It is possible either to register a new enterprise, which takes         prices, existing at the market on the date of sale.
   a longer period of time, or to acquire the corporate rights of the
   already existing limited liability company. After a nonresident           ІІ. In accordance with Clause 1.17. of the Law of Ukraine № 334/94-
   has acquired the corporate rights of a Ukrainian limited liabil-          VR «On the taxation of the enterprises’ profits», dated 28.12.1994,
   ity company, it will be necessary to make amendments to the               a permanent representation of a nonresident in Ukraine is a per-
   Charter and to re-register as an enterprise with 100 % foreign            manent place of operation, through which the economic activities
   investments.                                                              of the nonresident are carried out fully or partially at the territory of
                                                                             Ukraine. The Law № 959-ХІІ «On the external economic activities»,
   — Also the legislation of Ukraine allows the acquisition of shares        dated 16.04.1991, provides the following definition: «a representa-
   of a Ukrainian issuer by a foreign investor (Law of Ukraine               tion of a foreign subject of economic activities is an institution or
   № 93/96-VR «On the foreign investment regime», dated                      a person, which represents the interests of the foreign subject of
   19.03.1996). At that there is no need to re-register the Charter          economic activities in Ukraine and possesses the duly executed
   of the enterprise and all derivative documents. Acquisition and           appropriate authority to do that».
   sales of securities at the Ukrainian market may be performed by
   nonresidents only through a Ukrainian trader. In case of a sub-           Permanent representations at the territory of Ukraine are not legal
   sequent sale of the Ukrainian securities, belonging to a nonresi-         entities (Article 95 of the Civil Code of Ukraine) and act based on
   dent, to another nonresident enterprise, the seller will receive          the powers, written down in the Provision on representation, and
   income with the source of origin from Ukraine.                            the notarially executed Power of Attorney for the head of the rep-                                                                                                                                           209
      resentation. The Provision shall be executed by a nonresident legal            carrying out of its activities independently from the nonresident),
      entity, and shall indicate the activities, which the representation in-        separated from the total amount of the nonresident’s gross
      tends to carry out; at that the area of activities of the representation       income based on the corresponding calculations, and the gross
      shall not be wider than the one of the parent enterprise.                      expenses, borne directly by the permanent representation.
                                                                                     The form of such calculations has been presented in Appendix
      Representations of a foreign enterprise, carrying out economic ac-             1 «Procedure for calculation of profits tax of a nonresident,
      tivities in Ukraine, shall be mandatorily registered as the profits tax        carrying out its activities at the territory of Ukraine through a
      payers at the tax inspection on a par with residents; at the statistics        permanent representation», approved by the order of the State
      authorities they should enter their data to the Uniformed State reg-           Tax Administration of Ukraine № 274, 31.01.1997. With this aim
      ister of enterprises and organizations, and they shall also be regis-          the enterprise should present, to the tax authorities, the data on
      tered at all social insurance funds: Pensionary fund (contributions            the total volumes of gross income and incurred expenses in the
      - 33,2 % from the wages fund), Social insurance fund in connec-                course of the nonresident’s conduct of its economic activities,
      tion with temporary disablement (contributions 1,5 %), Fund on the             the total quantity of employees, and the value of the nonresi-
      mandatory state social insurance of Ukraine in case of unemploy-               dent’s capital funds, attested by the tax service in the country of
      ment (contributions 1,3 %), and the Social insurance fund in case              residence, translated into Ukrainian language, and legalized.
      of accidents at production and the professional diseases (contribu-
      tions are accrued in accordance with classes of professional risk          3. Definition of taxable income by way of application of 0,7 coef-
      of the production, which are conferred individually to each specific          ficient to the amount of gained (accrued) gross income. This
      enterprise).                                                                  variant is used in case it is impossible to define the taxable
                                                                                    income by way of direct computation of income, gained by a
      Like any resident subject of economic activities, the representa-             nonresident at the territory of Ukraine. The tax authority defines
      tions, in case of the gross income of more than 300 thousand hry-             the taxable income as a difference between the gross income
      vnya ( 60 thousand US dollars) per year, shall be registered as the           and gross expenses, defined by way of application of 0,7
      value added tax (VAT) payers. During the primary registration a               coefficient to the amount of gained (accrued) gross income.
      specific application shall be filed, containing the data on the repre-        Such method is applied, if the expenses in connection with
      sentation, including the quantity of employees in accordance with             administration of activities by a permanent representation have
      the staff list at the moment of registration. Any carrying out of the         been paid for (accrued) both in Ukraine and abroad, or if a non-
      economic activities at the territory of Ukraine by a nonresident with-        resident is not capable of providing the data on the total volume
      out the registration of its permanent representation as the profits           of the gross income gained and expenses incurred from the
      tax payer is prohibited and considered as tax evasion («Provision on          conduct of the nonresident’s economic activities.
      the procedure of registration and accounting of the permanent rep-
      resentations of nonresidents in Ukraine as the profits tax payers»,        It is worth mentioning that the cash funds, received by a represen-
      approved by the order of the State Tax Administration of Ukraine №         tation from its parent nonresident enterprise to ensure its activities,
      293, dated 12.08.1997).                                                    are considered by tax authorities’ representatives (letters of the
                                                                                 State Tax Administration of Ukraine №№ 10205/7/15-1317, dated
      Permanent representations shall maintain records in accordance             27.06.2003, № 3335/6/12-0216, dated 13.04.2006) either as the
      with the Ukrainian standards of business accounting, while in the tax      non-repayable financial assistance, or the payment for services,
      accounting they shall draw up and file declarations and reports to the     which have been provided by the permanent representation to «its»
      tax inspections and funds on a par with the resident enterprises.          nonresident. And the cash funds received should be reflected by
                                                                                 the permanent representation in the gross income structure.
      To carry out independent export and import activities, a represen-
      tation shall, on general grounds, be registered (accredited) at the        Thus, in a general form, the procedure of the permanent represen-
      customs authorities.                                                       tations’ taxation is as follows. A permanent representation taxes its
                                                                                 income on general grounds under the rate of 25 %. Later on, while
      There is certain difference in the procedure of the profits tax calcu-     transferring this income to the parent nonresident company or us-
      lation for representations. Thus, a representation may independ-           ing its amount, representations, like all other enterprises, withhold
      ently choose the definition of the taxable income from the following       a so-called repatriation tax from this amount and at its expense un-
      three allowed variants:                                                    der the rate of 15 % (Clause 13.2. of the Law on the profits). This tax
                                                                                 is paid to the budget simultaneously with the payment of income,
      1. Definition of taxable income based on general grounds – profits         unless otherwise provided for at the international agreements.
         taxation is applied to a difference between the income, received
         by a representation, and all expenses, allowed by the legislation.      In accordance with Clause 13.1. of the Law on the profits, any in-
                                                                                 come, received with the source of its origin from Ukraine, shall in-
      2. Definition of taxable income based on the drawing of a separate         clude not only the income from commercial activities, but also the
         balance of the financial and economic activities. Such defini-          passive income – dividends, royalty, and interest.
         tion is possible, if a nonresident carries out its activities not
         only in Ukraine, but also abroad, and at that it does not define        In case there exist certain concluded agreements on the evasion
         income from its activities, being carried out at the territory of       of double taxation between Ukraine and the nonresidents’ coun-
         Ukraine through the representation. In such case the amount             tries, the income will be taxed in accordance with the international
         of income, which should be subjected to taxation in Ukraine,            agreements.
         shall be defined based on the drawing of a separate balance of
         the nonresident’s financial and economic activities, concerted          The mechanism of application of the international agreements is de-
         with the tax authorities at the place of registration of the per-       fined by the «Procedure of exemption (reduction) from taxation of
         manent representation. A separate balance of the financial and          income with the source of its origin from Ukraine in accordance with
         economic activities comprises a balance of the gross income             international agreements of Ukraine on the evasion of double taxa-
         (which would be received by the permanent representation from           tion», approved by the resolution of the Ukrainian Cabinet № 470,

                                                                                                                                                      Country Profile
dated 06.05.2001. The basis for exemption (reduction) from taxa-               the formation of the capital funds’ book value), as well as a tax
tion of income with the source of its origin from Ukraine is the provi-        credit on the VAT. If the property, which is returned, does not
sion of a certificate to the representation by the nonresident, which          exceed the value of the participants’ contributions, no gross
certificate is issued by a competent authority and confirms that the           income will appear for the participants (Clause 4.2.12 of the
nonresident is the resident of a country, with which an agreement has          Law on the profits).
been concluded. In accordance with Hague Convention, which can-
cels the requirement for legalization of the foreign official documents    IV. It is necessary to execute an employment permit for the foreign
(and Ukraine is a participant to this Convention), such certificate        employees of permanent representations or residents of Ukraine.
shall be exempted from consular legalization as a formal procedure,        The duty to obtain such permit has been placed exactly on the
if the nonresident country has also signed this Convention. It will be     employer. In accordance with the «Rules of use of the cash foreign
sufficient for the competent authorities simply to put an apostille.       currency at the territory of Ukraine», approved by the resolution of
                                                                           the Governing Board of the National Bank of Ukraine № 200, dated
ІІІ. The presence of a foreign investor in Ukraine is possible in case     30.05.2007, resident legal entities and foreign representations may
of establishment of a joint venture. Organization of activities and        use cash foreign currency from their current accounts for labor re-
the mechanism of taxation of the joint activities are regulated by the     muneration, payment of premiums and prizes for nonresident em-
norms of Clause 7.7 of the Law on the profits and Clause 3.2.8 of          ployees, who work in Ukraine by a contract, subject to conclusion
the Law on the VAT. If the activities have been arranged in the form       of labor contracts. However, they may also pay these amounts in
of the joint activities, the agreement on the joint activities shall be    hryvnya. Wages of the resident employees may be paid only in hry-
registered as a separate tax payer (for the VAT and the profits tax).      vnya.

For the aims of taxation, two or more persons, carrying out joint          Representations, like all other resident enterprises, charge, with-
(mutual) activities without the establishment of a legal entity, shall     hold, and transfer income taxes for all their employees to the budg-
be considered as an individual entity within such activities. That is      et. The wages of both resident and nonresident employees are
why the arrangement of cooperation in the form of an agreement             subjected to the profits tax at the rate of 15 %.
on the joint activities can be described in the following way:
                                                                           Physical nonresident persons’ taking out of the cash foreign cur-
1. Operation on the contribution of property to the joint activities is    rency, received as a labor remuneration, is carried out in accord-
   equated to the supply (sale) operation. Accordingly, if the con-        ance with «Instruction on the transference of currency of Ukraine,
   tributions are made with the property (capital funds, goods, and        foreign currency, bank metals, payment documents, other bank
   intangible assets, for instance, with the right to use a land site),    documents, and payment cards via the customs border of Ukraine»,
   there arise certain tax obligations on the VAT (Clause 3.2.8 of the     approved by the resolution of the Governing Board of the National
   Law on the VAT) for the resident participants, as well as the gross     Bank of Ukraine № 283 (Clause 1), dated 12.07.2000.
   income (or the reflection of operation on the capital assets’ sale
   in accordance with Article 8 of the Law on the profits). At that,       Thus, a physical person is entitled to take the currency of Ukraine
   gross expenses will be formed at the separate accounting of the         abroad in the amount, not exceeding 50 000 hryvnya per person
   joint activities for the cost of the contributed tangible property,     (regardless of the age), in particular, jubilee and commemorative
   which expenses will participate in re-calculation of the increase       coins out of non-precious and precious metals in the amount, not
   (decrease) in the book value of goods, stock, etc. in accord-           exceeding 3000 hryvnya, out of which:
   ance with Clause 5.9 of the Law on the profits, or the book value
   of the capital funds will be formed. The tax credit (amount of             а) Subject to verbal declaration of the currency of Ukraine
   expenses, incurred in connection with acquisition of goods                 (excluding coins out of non-precious metals) to the customs
   during the reporting period) will be formed in the tax accounting          authority in the amount, not exceeding 15 000 hryvnya; and
   of the VAT of the agreement on the joint activities.
                                                                              b) Subject to written declaration of the currency of Ukraine (in
2. f the contributions are made with cash funds, then no tax con-             particular, coins out of non-precious metals) to the customs
   sequences will arise. Also no gross income will appear in the              authority, if its amount exceeds 15000 hryvnya.
   separate tax accounting of the joint activities (Clause 4.2.5 of
   the Law on the profits).                                                Taking out the currency of Ukraine, received as a labor remunera-
                                                                           tion, in the amount, exceeding the norms, established by this
3. During the conduct of the joint activities, all expenses incurred       Instruction, as well as in cases, not stipulated by this Instruction, is
   and the amounts of the incoming VAT are reflected in the                carried out based on the individual license of the National Bank, the
   separate tax accounting of the agreement on the joint activi-           copy of which is sent by the respective structural department of the
   ties, which is maintained by one of the authorized participants         National Bank to the State customs service of Ukraine.
   in accordance with the norms of the Law on the VAT and the Law
   on the profits.                                                         The work record cards for the foreign employees are maintained
                                                                           in accordance with the Ukrainian legislation. The record of serv-
4. After the completion of the joint activities all property, being        ice of a foreign employee is calculated based on the records in
   accounted under the agreement on the joint activities, is               such card (for instance, to pay for a period of temporary disabil-
   divided and returned to the participants. This operation is also        ity). The work record cards of employees of both resident and
   equated to the supply (sale) operation, which is carried out by         nonresident representations are kept at the General Directorate
   the tax payer – the agreement on the joint activities. That is why      of the Kyiv city council on the servicing of foreign representations
   tax obligations on the VAT and the gross income (or reflection          or at the departments of foreign relations and external economic
   of realization of the capital funds in accordance with Article 8        activities of the State oblast’ administrations (if a representation
   of the Law on the profits) will appear in the separate account-         is registered at any oblast’ of Ukraine). The work record cards
   ing of the joint activities. At that there will appear a right of the   of employees, working for residents of Ukraine, are kept at the
   participants for a tax credit and gross expenses (expenses on           enterprise.                                                                                                                                        211
           Standard of
      #                               LLC                                  Representative Office              Joint Activity

                                                                           Is not a legal entity (art. 3 of   Without creation of legal entity
      1    Legal Status               Legal body
                                                                           a Low 95 CKU)                      (i. 1 art. 1130 CKU)

                                      On a certain term or on an indefi-
                                                                           Determines by the legal body       On a certain term (i. 5 art. 1141
                                      nite term (article 5 of Law &On
      2    Term of creation                                                who creates representative         CKU) or permanently (i. 1 art.
                                      a certain term or on an indefinite
                                                                           office                             1142 CKU)
                                      term (article 5 of a Law 1576)

                                      The size of statutory fund must                                         Joint activity can be carried
                                      put together not less the equiva-                                       out on the basis of participants
                                                                           Legislative requirement is
      3    Statutory fund size        lent of 100 minimum wages                                               association (simple society)
                                      at the moment of LLC creation.                                          or without the participants as-
                                      (article 52 of a Law № 1576)                                            sociation (i. 2 art. 1130 CKU)

                                      Before state registration 50 %,
           Statutory fund manner
      4                               other – during the year (item 3 of                  –                                    –
           of payment
                                      article 144 CKU)

                                                                           Enactment, issued by legal         Agreement on joint activity, in
      5    Statutory documents        Statute (article 143 CKU)
                                                                           body (i. 3 art. 95 CKU)            writing (art. 1131 ЦКУ)

                                                                           Legal body, who created
      6    Founders                   Physical and legal bodies                                               Physical and legal bodies
                                                                           representative office

                                      Minimum – one (i. 2 art. 41 CKU);    Legal body, who created
      7    Founders number                                                                                    Not less than two
                                      Maximum- ten (i. 1 art. 141 CKU).    representative office

      8    License, opportunity       Yes (art.1 of a Low №98/96)          No (art.1 of a Law №98/96)         No (art.1 of a Law №98/96)

           Obligation responsibili-   Within the limits of cost of hold-   Chargeable legal body, who
      9                                                                                                       By agreement of the parties
           ties                       ings (i. of 2 items 140 CKU)         created representative office

                                                                           Distribution of profit is car-
                                                                           ried out by a legal entity who     Order of profit distribution is
      10   Profit sharing             Participants draw dividends
                                                                           created a representative           established by agreement


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