Non-Resident Loans: Repatriation Tax Payment

Cooperation with non-residents almost always entails tax consequences for the enterprise. In this article, we will consider obtaining a loan from a foreign enterprise and the procedure for conducting such an operation.

What is required to obtain a loan from a non-resident

Obtaining a loan from a non-resident is regulated by NBU Board Resolution No. 270 dated 17.06.14, 'On Approval of the Regulation on the Procedure for Residents to Obtain Loans in Foreign Currency from Non-Residents'. According to the said resolution, to receive funds in foreign currency, an enterprise must conclude an agreement with an authorized bank for servicing such operations.

Also, a mandatory condition for obtaining and using credit funds from non-residents is the execution of a loan agreement between the enterprises and its registration with the National Bank of Ukraine. In case of non-compliance with these conditions, the enterprise is subject to a fine of 1% of the loan amount, converted at the NBU exchange rate on the date of receipt of such funds.

Interest paid by the enterprise to a foreign creditor is considered income for the latter, with its source of origin from Ukraine. Therefore, according to Article 141 of the Tax Code of Ukraine, non-resident income tax must be withheld from such income. However, in practice, among taxpayers of such tax, another name is used – repatriation tax.

What is the amount of repatriation tax to be paid

Guided by Article 141, sub-paragraph 4.2 of the TCU, repatriation tax is paid at a rate of 15% of the accrued interest amount, unless otherwise provided by an International Treaty on the Avoidance of Double Taxation, which may be concluded between Ukraine and the non-resident's country. Before paying the tax, it is necessary to check whether the non-resident lender is included in the list of states with which such international treaties have been concluded.

This tax is withheld from the non-resident's income and must be transferred to the budget at the moment of its payment. When calculating interest in foreign currency, the tax is paid at the NBU exchange rate on the day such income is paid. In fact, the foreign enterprise receives the amount of accrued interest minus the tax paid to the budget of Ukraine.

What needs to be done to avoid double taxation

To avoid double taxation, an international treaty may be concluded between Ukraine and the non-resident's state. Careless study of international treaties or their erroneous interpretation can lead to errors in the calculation and payment of repatriation tax.

From the experience of conducting such operations, it can be stated that difficulties very often arise when determining the country to whose budget the income recipient must pay tax. International treaties define the amount and procedure for paying repatriation tax, specifically indicating in which of the two states such income is subject to tax.

The full list of countries with which double taxation treaties have been concluded was updated by Letter of the State Fiscal Service of Ukraine No. 78/7/99-99-01-02-02-17 dated 02.01.2018.

For the legitimate use of international treaty provisions, the non-resident must provide the borrower with a certificate issued by the competent authorities of the foreign state, confirming that they are a resident of the country with which the treaty has been concluded.

Such a certificate to the borrower must be:

• translated into Ukrainian
• duly legalized (consular legalization of official documents or apostille affixing)
• submitted to the tax authorities.

Which party should pay repatriation tax

International treaties on the avoidance of double taxation are an integral part of Ukrainian legislation and have priority over the Tax Code of Ukraine. However, international treaties do not always clearly state which party should pay the tax. Therefore, from our point of view, for ultimate certainty regarding the avoidance of double taxation and to prevent errors in calculating repatriation tax, it is better to specify in the loan agreement which party should pay such tax.

To confirm the payment of tax on income received in Ukraine, a non-resident must request a certificate of income tax paid by them in Ukraine. This certificate is intended to allow the non-resident not to pay tax on such income to their country's budget.

To obtain it, the foreign enterprise sends a written request for such a certificate to the relevant tax authority of Ukraine through the resident who made the tax payment to the non-resident. This request must be submitted in Ukrainian or a foreign language along with an official translation into Ukrainian.

A resident enterprise that has accrued and paid repatriation tax must reflect such an operation in line 23 of the Corporate Income Tax Declaration, where the amount of tax paid on non-resident income is indicated for the reporting period in which such payment actually occurred. A detailed calculation of such tax is provided in Appendix PN to the Declaration (Report of Tax Liabilities of Non-Residents who received income with a source of origin from Ukraine).

From all the above, it can be concluded that upon receiving a loan from a resident of another country, it is necessary to thoroughly study the procedure for calculating and paying taxes on the interest paid for such a loan. To avoid errors, it is necessary to accurately determine in which country and at what rate the repatriation tax should be paid.

Our specialists will advise you on legal issues and accounting matters regarding the correct preparation of documents and the procedure for tax payment, which will subsequently help avoid the assessment of double tax or penalties from state authorities.

You might also be interested in our articles on Submission of a certificate confirming non-resident status with an electronic apostille and Taxation of payments to non-resident individuals.