August 12, 2020 · 6 min read
As of today, there are two types of representative offices that non-residents can open in Ukraine:
- representative offices that conduct business activities, are corporate income tax payers and pay other taxes and fees in cases established by law (permanent representative offices);
- representative offices that do not conduct business activities and, accordingly, are not corporate income tax payers (non-permanent representative offices).
Paragraph 14.1.193. of Article 14 of the TCU defines that a permanent representative office is a permanent place of activity through which a non-resident conducts business activities in Ukraine, i.e., activities whose result and purpose is to generate profit. At the same time, sub-paragraph 3 of paragraph 14.1.193. of Article 14 of the TCU stipulates that a permanent representative office is not the use of buildings or structures exclusively for the purpose of storing, displaying, or delivering goods or products belonging to a non-resident; the storage of goods or products belonging to the parent company solely for processing by another enterprise or for storage or display; the secondment of individuals to the disposal of a person for the performance of personnel provision service agreements; the maintenance of a permanent place of activity exclusively for the purchase of goods or products and for collecting information for a non-resident, or exclusively for the purpose of carrying out for a non-resident any other activity of a preparatory or auxiliary nature.
That is, from the perspective of tax legislation, a representative office without the right to conduct business activities is not considered a permanent representative office and must engage exclusively in preparatory and/or auxiliary activities that do not generate profit.
This very definition must be taken into account when the parent company performs any actions through a representative office without conducting business activities.
It should also be noted that in practice, tax authorities focus not on the definition of the representative office's status in its constituent documents, but on the essence of its activities. If the representative office receives income (which is considered the conduct of business activities), such income is subject to corporate income tax. In practice, virtually any transfer of funds to the representative office's accounts not from the parent company gives tax authorities grounds to classify such operations as profit generation.
At the same time, it is clear that for the functioning of a representative office, whether it conducts business activities or not, certain funds and other material assets are required. Very often, a representative office owns, for example, a car, equipment, etc. When the question of selling the representative office's property arises, the following should be considered.
Firstly, the conclusion of a sale and purchase agreement by a non-permanent representative office for any material assets in its own name carries a significant tax risk of being classified by tax authorities as a permanent representative office, as income will be received from the sale of property, resulting in an obligation to pay corporate income tax.
Based on paragraph 12 of the Instruction on the procedure for registering representative offices of foreign business entities in Ukraine (hereinafter – the Instruction), approved by the order of the Ministry of Foreign Economic Relations and Trade of Ukraine dated 18.01.96 No. 30, a representative office always acts on behalf and by proxy of a foreign business entity. Therefore, the seller in the sale and purchase agreement for any property of the representative office must be the parent company, on behalf of which the representative office, represented by its Head, concludes the agreement. Such wording will help minimize the risks of tax authorities reclassifying a non-permanent representative office as a permanent one.
Special attention should also be paid to the Head of the representative office having the authority to conclude a particular agreement. If the constituent documents of the representative office lack a clearly defined authority for the Head to conclude agreements on behalf of the parent company (as is often the case), care should be taken to formalize a decision of the parent company, according to which it instructs the Head of the representative office (or another authorized person who will sell the property on its behalf) to sell certain clearly defined property of the representative office, and specifies in this decision where the proceeds from its sale will go. In particular, the financing (maintenance) of the representative office in Ukraine can be indicated as the intended use of such funds.
Concurrently with the decision, it is advisable for the parent company to issue a power of attorney in the name of the Head of the representative office, or the authorized person who will sell the property on its behalf.
It should be noted that the decision and power of attorney formalized by the parent company must be duly legalized.
Other specifics of concluding sale and purchase agreements for the property of a non-permanent representative office depend on the property being sold and are regulated by the civil, commercial, and tax legislation of Ukraine.
Thus, the main tax risk for a representative office that does not conduct business activities, when selling its property, is the risk of such a representative office being recognized as permanent within the meaning of the TCU, and, accordingly, the emergence of an obligation to pay corporate income tax.
To minimize tax risks, sale and purchase agreements for the representative office's property should be drafted with particular care, and the internal documents of the representative office and the essence of its activities should be studied. Also, it is necessary to ensure the existence of duly formalized decisions of the parent company regarding the sale of property, and powers of attorney for the person who will sign such an agreement, properly approved and certified.
More information regarding legal practice in our company can be found in the Legal Practice section.
