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Tax position of non-taxable representative offices of foreign companies in Ukraine

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Representative offices of foreign companies in Ukraine have historically been a favourite target of the Ukrainian tax authorities.

Based on the fiscal interpretation of Ukraine’s tax code, the tax authorities attempt to tax financing from the head company in the hands of the representative office even if the latter should not constitute a permanent establishment (PE) by virtue of applicable treaty protection.

Existing court practice in Ukraine shows a tendency of courts contesting the tax authorities’ position by, among other things, referring to principles of international taxation as envisaged in Ukraine's double tax treaties.

Ruling No. K/9991/35822/11, issued by the Supreme Administrative Court of Ukraine on March 14 2013, illustrates the trend.

The tax authorities claimed that funds received by a representative office of a Dutch company from the head company, for maintenance of its activity in Ukraine, was taxable income in the hands of the representative office.

Exploiting the general principle that profits derived by a non-resident carrying on its activities in Ukraine via a PE shall be taxed based on general rules, the tax authorities assessed the representative office with additional corporate profits tax liabilities.

The Supreme Administrative Court of Ukraine, as well as two lower courts, rejected the tax authorities' claims by referring to the rule on international treaties predominance over domestic legislation, as well as to the preparatory/auxiliary functions exemption provided by the Ukraine-Netherlands double tax treaty.

The courts investigated and compared the registered activities of the Dutch head company with the representative office's activities in the territory of Ukraine, both registered and actual.

While the head offices' activities were in production and sales, those of the representative office were on the marketing, advisory and regulatory side. By such analysis the courts proved the auxiliary/preparatory nature of the representative office's activities and consequently rejected the claims on tax re-assessment.

Despite this positive trend, the tax authorities are likely to continue to adhere to a purely fiscal and budget-driven approach while ignoring treaty-based international taxation principles.

Representative offices of foreign companies in Ukraine are therefore advised to be prepared to defend their non-taxable status in court. Proper documentary proof of scope of activities is essential for building the case.

By principal Tax Disputes correspondents for Ukraine:

Svitlana Musienko, DLA Piper Ukraine, partner, Svitlana.musienko@dlapiper.com, + 38 044 4909564; and

Illya Sverdlov, DLA Piper Ukraine, legal director, Illya.sverdlov@dlapiper.com, +38 044 490 9575.

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