August 12, 2020 · 3 min read
How to tax payments to non-resident individuals
Legal entities (both commercial enterprises and non-profit organizations) sometimes need to engage non-resident individuals to provide certain professional services, such as: services of trainers, lecturers, article editors, layout designers, etc. As a rule, appropriate contracts are concluded and service acceptance certificates are signed with such individuals. In this regard, some of our clients have questions about how such payments to non-resident individuals should be taxed (and whether they need to be taxed at all).
In our opinion, such agreements with non-residents are essentially ordinary civil law agreements within the meaning of the Civil Code of Ukraine (hereinafter – CCU). Therefore, when determining the specifics of taxation for services acquired by taxpayers under such agreements, the norms of current legislation should be applied to them as to ordinary civil law agreements (in any case, we could not find any exceptions in the CCU regarding the application of its norms to civil law relations with non-residents). This means that for such operations, in accordance with Sections 4 and 20 of the Tax Code of Ukraine (hereinafter – TCU), legal entities – recipients of such services are tax agents and are obliged to withhold and transfer to the budget personal income tax (PIT) and military levy – 18% and 1.5% respectively. In addition, in accordance with paragraph 1 of part 1 of Article 7 and part 5 of Article 8 of the Law of Ukraine "On the Collection and Accounting of a Single Contribution to Compulsory State Social Insurance" dated 08.07.2010 No. 2464-VI, when accruing income to individuals for performing work (providing services) under civil law contracts, a single social contribution (hereinafter – SSC) should be accrued at a rate of 22% (again, this law also does not provide for any exceptions for non-resident individuals). It is worth noting that tax authorities hold a similar opinion – see letter of the Main Department of the SFS in Kyiv dated 25.11.2015 No. 18007/10/26-15-17-01-12.
Is it possible to apply the norms of a double taxation avoidance convention
Here, a question may arise regarding the possibility/impossibility of applying the norms of double taxation avoidance conventions. In our opinion, it is possible to use the relevant conventions for similar operations, but with some nuances. The vast majority of such conventions indeed grant residents of Ukraine the right not to tax the income of non-resident individuals with PIT (or to tax them at a preferential rate).
However, regarding SSC and military levy, the norms of such conventions, in our opinion, cannot be applied (since SSC and military levy are not «similar or essentially analogous» to PIT or any other tax/levy specified in typical double taxation avoidance conventions). Of course, it should also be remembered that the norms of the relevant conventions can only be applied provided that all requirements of paragraph 103.4 of the TCU (provision by non-residents of certificates confirming their «non-resident status») and paragraph 170.10.3 of the TCU («when concluding a contract with a non-resident, the terms of which provide for such non-resident to receive income with its source of origin in Ukraine, the resident is obliged to specify in the contract the tax rate that will be applied to such income»).
In addition, it should also be remembered about the possible emergence of a VAT object of taxation for similar operations in case the place of provision of these services, in accordance with Article 186 of the TCU, is the customs territory of Ukraine.
You may also be interested in the articles Loan from a non-resident: repatriation tax and Certificate of non-resident status confirmation with an electronic apostille.
