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Tax Service

Review of consultations from the State Tax Service regarding certain transactions with non-residents

4/1/2024
Tax Service

Resident did not withhold tax from non-resident's income but paid the tax independently: will there be a penalty?

Question: A company has entered into a licensing agreement with a non-resident provider. The company is required to pay royalties monthly for the right to use software/a non-exclusive license to the software. Can the company, with a provision in the contract stipulating payment of the full invoice amount without any deductions, pay the non-resident the full amount specified in the invoice and pay the non-resident income tax sourced from Ukraine according to the formula provided in the third paragraph of subparagraph 141.4.2 of Article 141 of the Tax Code at its own expense when paying income to the non-resident, and would this be considered a violation of tax legislation with possible sanctions against such a company?

Tax Service Response: If tax on non-resident income was not withheld at the time of payment to the non-resident, then the resident has an obligation to determine and pay the non-resident income tax at their own expense, based on the calculation defined by the third paragraph of subparagraph 141.4.2 of Article 141 of the Tax Code.

A taxpayer who made payments to a non-resident without withholding and paying tax on such income to the budget, or who transferred tax on non-resident income to the budget not in full, is subject to a penalty as provided in Article 125-1 of the Tax Code.

According to paragraph 120.2 of Article 120 of the Tax Code, failure to comply with requirements for independently amending tax returns entails a penalty of 5% of the understated tax liability. No penalties are applied if the taxpayer independently calculates taxes in accordance with the Tax Code requirements.If, under the terms of the contract with the non-resident, the resident did not withhold tax from the relevant non-resident income (in this case - royalties), but calculated such tax based on the calculation defined by subparagraph 141.4.2 of Article 141 of the Tax Code and paid it to the budget upon payment of such income at their own expense (taking into account the presence of the relevant provision in the contract with the non-resident) and declared such tax in the corporate income tax return for the period to which such payment relates, then the penalties provided by the Code do not apply.

For further details, refer to IPC dated 28.02.2024 No. 1015/IPC/99-00-21-02-02.

Resident provides engineering/consulting services to non-resident: what about VAT?

Question: A company intends to conclude a contract with a non-resident (Client) for the provision of services within the Project framework, which involves the use of land and future construction on the respective land plot. What are the VAT consequences?

Tax Service Response: For tax purposes, the list of engineering services is limited to the list defined by subparagraph 14.1.85 of the Tax Code, regardless of broader definitions of this term in other legal acts.Therefore, if the services provided by the taxpayer to the non-resident fall under the definition of "engineering" as specified in subparagraph 14.1.85, the place of supply of such services is the location of registration of their recipient. If the non-resident recipient of the services does not have a permanent establishment in Ukraine, then the operations of supplying such services by the company to such non-resident are not subject to VAT.

If the supply of services by the company to the non-resident does not correspond to the definition provided in subparagraph 14.1.85 of the Tax Code, then such operation is subject to taxation on general terms at the standard rate, as the place of supply of such services is considered the place where they are supplied on the customs territory of Ukraine.

If the services mentioned in the inquiry, including consulting services related to the creation of a new object, fall under the category of services listed in paragraph 186.3 of the Tax Code, then for VAT purposes, the place of supply of such services is considered to be the place where the recipient of such services - a non-resident registered as a business entity - is located. If the services do not fall under the category of services listed in paragraph 186.3 of the Tax Code, then for VAT purposes, the place of supply of the services mentioned in the inquiry is the customs territory of Ukraine.

For further details, refer to IPC dated 15.01.2024 No. 234/IPC/99-00-21-03-02.