CONCLUSION SCIENTIFIC LEGAL EXAMINATION on taxation of personal income received from the non-resident employer outside Ukraine

  1. Request contents

Yefimov Oleksandr Mykolaiovych, associate professor, PhD in Law, associate professor of civil and labor law department of the Kyiv National Economic University named after Vadym Hetman, received an order from the ____, hereinafter referred to as “Customer”, to conduct a scientific legal examination on taxation of income in the form of wage, namely the non-resident employees, being the citizens of other countries, work in representation office of a foreign non-governmental organization. Labor agreements are concluded between the Main Office and non-resident employees but such employees work in Representation Office registered and located on the territory of Ukraine. Salary to such employees are paid from the Main Office to their private bank accounts located outside of Ukraine in their home countries.

Should a non-resident employee pay the individual income tax on the territory of Ukraine and are there any reports to be submitted to controlling bodies in Ukraine and what is the procedure if such reports are to be submitted?

What are tax related or other possible risks for the Representative office of ___ in Ukraine or the Main Office if the international non-resident employees work in Ukraine ___ Representative office and are paid from the Main Office to their private bank accounts outside of Ukraine?

  1. Legal grounds for the scientific legal examination

1) Associate Professor Certificate ДЦ No. 046372, issued to Yefimov Oleksandr Mykolaiovych by decision of the Certifying Board dated February 25, 2016 (minutes No. 1/02-Д);

2) Diploma of the PhD in Law ДК No. 034635, issued to Yefimov Oleksandr Mykolaiovych by decision of the Presidium of the Higher Certification Commission of Ukraine dated June 08, 2006 (minutes No. 37-06/6);

3) Law of Ukraine on Scientific and Technical Examination dated February 10, 1995 No. 51/95-BP;

4) Ministry of Education and Science of Ukraine dated January 12, 2004 No. 12 on the State Authorization of Individuals and Legal Entities to Conduct Scientific and Technical Examination.

 

III. Regulations, documents and sources used in the course of the scientific legal examination:

  • Tax Code of Ukraine dated December 02, 2010 No. 2755-VI – TCU;
  • Civil Code of Ukraine dated January 16, 2013 No. 435-IV – CCU;
  • Convention between the Government of Ukraine and the Government of the Kingdom of Denmark for the avoidance of double taxation and prevention of fiscal evasion with respect to income and property taxes, signed on March 05, 1996, ratified on July 12, 1996, effective for Ukraine since August 21, 1996 – the Convention.

 

  1. Scientific Legal Research Examination Findings

 

According to subparagraph 162.1.1 of paragraph 162.1 of Article 162 of the Tax Code of Ukraine, the payer on personal income tax is an individual resident, who receives income originating both from Ukraine and from abroad. The tax status of an individual as a resident is determined in accordance with subparagraph 14.1.213 of paragraph 14.1 of Article 14 of the TCU, namely an individual resident of Ukraine. Where:

  • an individual is also the resident of a foreign country, it shall be considered a resident where such individual has a permanent place of residence in Ukraine;
  • a person has a permanent place of residence also in a foreign country, it shall be considered a resident where it has more close personal or economic relations (center of vital interests) in Ukraine;
  • the state in which the individual has his/her center of vital interests cannot be determined, or if the individual has no permanent place of residence in any state, it shall be considered the resident where s/he stays in Ukraine for at least 183 days (including the day of arrival and departure) over the fiscal year.

A reasonable basis to determine the person as a resident is the self-determination of his/her primary place of residence in Ukraine in the manner prescribed by this Code or his/her registration as a self-employed person.

According to Article 29 of the CCU, the place of residence of an individual is a housing in which he resides permanently or temporarily.

Thus, given that the request states that individuals serve in the Representation Office in Ukraine, they can be considered residents if they have permanent place of residence in Ukraine, or a center of vital interests in Ukraine, stay in Ukraine for at least 183 days during the tax year, or themselves determined their place of residence in Ukraine. In this case, according to Article 34 of the TCU, the calendar year (January 1 to December 31) shall be recognized the tax period, i.e. the tax year.

According to subparagraph 163.1.3 of paragraph 163.1 of Article 163 of the TCU, the object of the resident’s taxation includes foreign income, i.e. income (profit) derived from sources outside Ukraine. Thus, according to subparagraph 168.2.1 of paragraph 168.2 of Article 168 of the TCU, the taxpayer receiving income from a person who is not a tax agent and foreign income must include the amount of such incomes s to the total annual taxable income, file a tax return for the tax year, and pay tax on such income. Thus, according to subparagraph 168.2.2 of paragraph 168.2 of Article 168 of the TCU, the person who is not a tax agent is considered a non-resident or an individual who does not have the status of a business entity, or is not a person registered with the regulatory authorities as the person engaged in independent professional activities.

According to subparagraph 14.1.180 of paragraph 14.1 of Article 14 of the TCU, the tax agent with respect to the personal income tax is a legal entity (its branch, department, another business unit), self-employed person, representation office of the non-resident legal entity, investor (operator) under the production-sharing agreement which, regardless of the legal status and method of the other tax assessment and/or form of accrual (payment, provision) of income (in cash or in kind) shall accrue, withhold and pay the tax in accordance with section IV of the TCU to the budget on behalf and on the account of the individual from income paid to such a person, keep tax records, file tax returns to the regulatory authorities and be responsible for violations of the rules as prescribed by Article 18 and Section IV of the TCU.

Therefore, given the above, it should be concluded that the individual who has one of the hallmarks of a resident and receives income in the form of wage from a non-resident legal entity shall declare such income and pay personal income tax him/herself within the terms established by the TCU.

Risks, connected with tax dodging for revenues of private individuals for the headquarters:

Risks for the Headquarters in the Kingdom ____ are considered as absent for the reason of absence of attributes of recognizing it by commercial agent, established in paragraphs 14.1.180-14.1. of section 14 of Internal Revenue Code of Ukraine and paragraphs 168.1.1., clause 168.1., section 168 of Internal Revenue Code of Ukraine, videlicet the Headquarters is not a resident of Ukraine and requirements, established by Internal Revenue Code of Ukraine are not applied for its activities. Inasmuch as in accordance with functioning Internal Revenue Code of Ukraine, the obligation of taxpaying for revenues of private individual from revenues, received from non-resident, who is not a tax payee, lies with such private individual, considered as absent and also reputational risks for the Headquarters.

Risks, connected with tax dodging for revenues of private individuals for Representative office in Ukraine:

Risks for Representative office in Ukraine are regarded as absent for the reason of the absence of attributes of its recognition by tax payee, established by paragraphs 14.1.180 – 14.1. of section 14 of Internal Revenue Code of Ukraine and paragraphs 168.1.1. clause 168.1., section 168 of Internal Revenue Code of Ukraine, videlicet Representative office is not obligated to accrue, deduct and reimburse tax, introduced by part IV of Internal Revenue Code of Ukraine, to the budget on behalf of and at the expense of private individual from revenues, inasmuch as Representative office doesn’t perform such payments to this person.

There is negligible risk of erroneous execution for Representative office in Kyiv of recognizing it by tax payee on the side of regulatory authority. In connection with the absence of legal reasons for such erroneous recognition, it is considered that such risk is not connected with financial expenses in the form of fines and taxes.

Risks, connected with tax dodging of private individuals for the Headquarters:

Non-fulfillment of this requirements in accordance with paragraphs 47.1.2, clause 47.1, section 47 and section 110 of Internal Revenue Code of Ukraine comes laden with risks for private individuals in the form of following responsibilities:

  1. Fine in the amount of 170 grivnas for failure to provide tax declarations from the tax for revenues of private individuals. For subsequent failure of providing – fine in the amount of 1020 grivnas (clause 120.1 of section 120 of Internal Revenue Code of Ukraine).
  2. Fine in the amount of 25 % from amount of determined (overcharged) by tax authority tax for revenues of private individual (clause 123.1., section 123 of Internal Revenue Code of Ukraine).
  3. In case of default of payment of agreed amount of financial obligation during established terms, indicated by Internal Revenue Code of Ukraine, such taxpayer holds responsible in the form of fine in the amount of:
  4. 10 percents of redeemed amount of tax debt in case of 30 calendar days delay (including):
  5. 20 percents of redeemed amount of tax debt in case of more than 30 (including) calendar days delay (clause 126.1., section 126 of Internal Revenue Code of Ukraine).

 

According to paragraph 3.2 of Article 3 of the TCU, where an international treaty ratified by the Verkhovna Rada of Ukraine establishes the rules other than those provided for in this Code, the rules of the international treaty shall apply.

Considering the fact that the citizenship of private individuals (employees) is not indicated in query, it is necessary to indicate that tax special aspects of received  by them revenues from the headquarters, located in the __________ will depend on the citizenship of private individual.

Thus, for example, if private individual is a citizenship of the Kingdom of Denmark, it is worthwhile to assume that on August 21, 1996, the Convention between Ukraine and the Government of the Kingdom of Denmark for the avoidance of double taxation and prevention of fiscal evasion with respect to income and property taxes entered into force for Ukraine; according to Article 1, it shall apply to the persons who are residents of one or both of the Contracting States. Thus, in accordance with paragraph 1 of Article 4 of the Convention, for its purposes, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other similar criteria. However, this term does not include a person who is liable to tax in that State in respect only of income from sources in that State or property situated therein.

Where pursuant to paragraph 1 of Article 4 of the Convention an individual is a resident of both Contracting States, then its status shall be determined as follows:

  1. a) it shall be considered a resident of the Contracting State in which it has a permanent home; where it has a permanent home in both Contracting States, it shall be considered a resident of the State in which it has more close personal and economic relations (center of vital interests);
  2. b) where the Contracting State in which it has its center of vital interests cannot be determined, or where it has no permanent home in either Contracting State, it shall be considered a resident of the Contracting State in which it has an habitual abode;
  3. c) where it has an habitual abode in both Contracting States or it usually does not live in any of them, it shall be considered a resident of the Contracting State, the national of which it is;
  4. d) where it is a national of both Contracting States or where it is not a national of any of them, the competent authorities of the Contracting States shall settle this mutual by mutual agreement.

Therefore, where an employee of a non-resident legal entity has a permanent home in the Kingdom of Denmark, this employee shall be considered a resident of the Kingdom of Denmark for tax purposes, and shall not be considered a resident of Ukraine.

According to Article 2 of the Convention, it shall cover the personal income tax in Ukraine. According to paragraph 4 of Article 2 of the Convention, it shall also cover any identical or substantially similar taxes imposed by either Contracting State after the date of the Convention in addition to, or instead of, the existing taxes that Contracting State. That is, the Convention shall apply to the personal income tax as identical or substantially similar taxes assessed after the Convention date.

Article 24 of the Convention provides that, subject to the laws of Ukraine concerning the release of the tax paid in the territory outside Ukraine (which shall not affect the general principles hereof) for the tax payable under the laws of Denmark and in accordance with this Convention, whether directly or by deduction of profits, income or property subject to the withholding tax in Denmark, a credit shall be allowed versus any Ukrainian tax calculated by reference to the same profit, income or property, in respect of which the Danish tax is calculated.

According to Article 25 of the Convention, the nationals of the Contracting State shall not be subjected to any taxation in the other Contracting State or any requirements associated with them which would be different or more burdensome than the taxation and relevant requirements to which the citizens that other State are or may be subjected in the same circumstances.

However, the Minutes prepared during the Convention signing provides that with respect to subparagraph a) ii) of paragraph 3 of Article 2 of the Convention it should be understood that the Ukrainian personal income tax shall apply to the citizens of Ukraine, foreign citizens and stateless persons, irrespective of whether they are the residents or non-residents of Ukraine.

 

Conclusion:

Given that:

  • pursuant to the Minutes prepared at the time of the Convention signing the personal income tax shall apply to the foreign nationals, regardless of their tax residence status;
  • pursuant to Article 24 of the Convention on the tax payable under the laws of Denmark and in accordance with this Convention, whether directly or by deduction of the withholding tax on profits, income or property in Denmark, a credit shall be allowed versus any Ukrainian tax calculated by reference to the same profit, income or property, in respect of which the Danish tax is calculated;

the employees of a legal entity, which is the resident of the Kingdom of Denmark, who receive wage in the Kingdom of Denmark, meet one of the hallmarks of the resident of Ukraine, and pay the personal income tax shall declare their annual taxable income in accordance with the TCU and pay the specified personal income tax, reduced the amount of such tax (tax credit) paid in the Kingdom of Denmark.

Such occasion relate to the situation, when private individual, who have concluded a contract with the headquarters is a citizenship of the Kingdom of Denmark and has characteristic feature of the resident of this country. And it isn’t related to the situation, when private individual is a citizenship of other country then the Kingdom of Denmark. Such situations should be considered with taking into consideration the existence of corresponding international agreements concerning avoidance of double taxation and content of such agreements.

 

 

      O.M. Yefimov

 

      September 27, 2018