1 June 2017
On Toughening of Compensation for Non-resident Transport Services in Ukraine | commentary of Oleksandr Maydanyk, Bloomberg BNA

Non-resident taxpayers in Ukraine will incur a 15 percent tax on compensation for international transportation services when they act as intermediaries for these services, the Ukrainian State Fiscal Service (SFS) has said.

The service clarified the treatment of tax providing an interpretation of the Tax Code in a letter on taxation of transportation costs and cargo insurance, published May 18 in Visnik, the country's official tax publication.

The SFS letter cites Art. 141 of the Ukrainian Tax Code, which stipulates that non-residents’ income from business activities in Ukraine is taxed at 15 percent, unless other conditions are provided by the international treaties between Ukraine and the beneficiary's country of residence.

Revenues or other kinds of compensation for goods or services paid by a Ukrainian resident to a non-resident are exempt from taxation, according to Art. 141.

Intermediaries, Beneficial Owners 

However, the SFS specified that if a non-resident acts as an intermediary—hiring other resident or non-resident companies or individuals to implement transportation services in Ukraine—the compensation they receive is to be taxed at 15 percent.

“If the reimbursement of transportation costs is not made directly to the non-resident carrier but to the intermediary, then such payment is not subject to the provisions of international treaties that make it exempt from taxation or apply a reduced tax rate,” the clarification letter states.

As a result, transportation services will be taxed differently depending on whether they were provided directly or through an intermediary, says Oleksandr Maydanyk, counsel at EPAM Ukraine, a Kiev-based law firm.

According to Maydanyk, when a non-resident is exclusively responsible for the transportation services, the tax on the non-resident's income won't apply, because the payment will be considered as a “non-resident's revenue for services.”

However, when a non-resident is merely compensated for the expenses—for instance, when they acted as an intermediary and hired other companies to provide services—the SFS will regard that payment as a “different kind of income,” therefore, such payment will be taxed at 15 percent regardless of the international treaties between the Ukraine and the beneficiary's country of residence.

“[I]n this situation, the party that received reimbursement for the expenses will be seen as an intermediary to the real transportation services provider; therefore, the income recipient will not be [seen as] the real beneficiary that has a right to be tax-exempt,” Maydanyk said in a May 22 email to Bloomberg BNA.

According to Maydanyk, such “controversial reading” provides a “restrictive interpretation” of the Ukrainian Tax Code provisions, related to the beneficial owners of income. In international tax practice, such interpretation mostly applies to the passive income only, the he said.

Bloomberg BNA, 24.05.2017