Taxation issues while doing business with non-residents – seminar with GOLAW

The peculiarities of taxation in dealing with non-residents – the topic of the GOLAW Lawyers’ Seminar on the 14th of Februry. The speakers of the event were GOLAW Partner, Head of Tax Practice Iryna Kalnytska and Associate Olena Sulyma, who shared with the audience not only knowledge of the actual Ukrainian and foreign legislation, but also gave examples from their own legal practice.

As the speakers pointed out, transactions performed by business entities with non-residents, and above all with related parties, are crucial, because these transactions have a number of distinctions and risks.

According to Olena, transactions that involve interest payment and possible risks of intra-group loans deserve special attention. Thus, obtaining loans in itself can be the basis for the recognition of related persons, and obtaining loans from related non-residents, can not only serve as the basis for the application of transfer pricing rules, but also the application of the “thin capitalization rule.” In turn, the need for applying transfer pricing rules also determines the risks associated with it: additional administrative and financial burden for the preparation and submission of a report on controlled transactions and transfer documentation for specified transactions; the risk of conducting a specialized check of compliance with the transfer pricing rules; the risk of high fines; the risk of violating the arm’s length principle in such transactions.

The speaker also advised the audience to pay attention to the use of trademarks, especially when such use is in fact free of charge, and to the rules for royalties payment, and what kind of payments can be considered royalties.

Iryna, among other things, talked about the importance of proving the beneficiary owner status in case of applying preferential tax rates provided for by the International conventions on avoidance of double taxation, when paying passive income to non-residents: interest, royalty, dividends. In particular, the speaker told about the mechanisms used by the tax authorities to refute the beneficiary's privileges of the income recipient, what a taxpayer needs to prove, and how a taxpayer can refute the conclusions of the tax authorities using examples of case studies. Iryna also drew attention of the audience to the steady position of the Supreme Court that tax benefits provided for by international tax treaties cannot be applied if a non-resident acts as an intermediary in the interests of another person who actually benefits from income.

In addition, Iryna talked about the taxation of “debt into equity” transactions, that is, the transformation of the company’s debt obligations to the non-resident founder in its authorized capital.
In conclusion, the speakers highlighted a number of issues related to the taxation of representative offices’ activities: using practical examples and in the light of recent precedence, they considered the issue of recognition of a representative office as permanent establishment in the course of carrying out the auxiliary and preparatory activities for the benefit of the main non-resident company, as well as other cases in which the activities of the persons -residents can be assimilated to a permanent establishment; recent positions of the tax authorities regarding the tax consequences of financing by the parent company of its permanent representative office; possible changes provided for by the draft law on the implementation of the BEPS plan, which may affect the determination of permanent representative offices; the main provisions of the recently ratified MLI convention and their impact on business activities.

We thank all those present for your attention and hope that the information was useful and interesting for you!