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Guide To Ukraine’s Tax Code: Discriminatory Rules for Cross Border Service Fee Deduction
With effect from 1 April 2011, Ukraine's Tax Code will limit / restrict a deduction in consulting fees, marketing, advertising, engineering services and license fees (royalties). Taxand Ukraine looks at how international treaties designed to avoid double taxation may override discriminatory restriction for the deduction of such fees paid to non-resident service providers.
The tax code will be applicable if fees are paid to foreign service providers and the amount of relevant expense exceeds the following thresholds:
- for consulting marketing, advertising fees - 4% of the buying entity's revenue for the previous reporting year
- for engineering fees - 5% of customs value of respective equipment imported to Ukraine
- for royalty, the use of trade marks, patents and know-how - 4% of licensee's revenue for the previous reporting year.
A Ukrainian business entity may be disallowed to deduct the above types of fees merely due to the fact that the service provider is a non-resident. If service fees are paid to a resident entity or a permanent establishment of a foreign entity, a deduction will be allowed.
In order to deal with cases of discrimination, foreign investors operating in the Ukraine via a subsidiary are advised to:
- review cross border service fee arrangements of a Ukrainian subsidiary in order to identify cases of potential discrimination
- verify whether a specific treaty can be of use for protection against discrimination
- take timely actions to implement provisions of the relevant treaty.
The risk of a dispute with the Ukrainian tax authorities should not be ignored. Article 52 of the Tax Code of Ukraine provides for the possibility of obtaining a tax ruling from the Ukrainian tax authorities, which may be of help to manage risk of dispute.
Your Taxand contact for further queries is:
T. +380 44 492 8282
Download the full commentary to Ukraine's tax code here: