A permanent representation of a foreign company receives funds from the parent company to cover current operating expenses. Is this funding subject to value added tax (hereinafter − VAT)?
Non-residents conduct their activities in the territory of Ukraine, as a rule, by registering representative offices − permanent (through which economic activities to be carried out fully/partially) or non-commercial (research, information collection on sales markets, etc.).
In both cases, such representation can receive financing from the parent company, in particular, for covering current expenses, paying salaries to representatives of the company, etc. At the same time, the State Fiscal Service of Ukraine (hereinafter − SFSU) has recently made a rather predictable conclusion regarding such financing: it informed that of financing is compensation for the supply transactions for the permanent representation, and therefore it should be taken into account when determining the 1-million criterion for the purposes of mandatory VAT registration (SFSU letter dated 20.10.2017 р. № 2323/6/99-99-15-03-02-15/ІПК). Moreover, such an approach is not new one for tax authorities, as evidenced by the jurisprudence on this issue.
Considering the arguments of controllers, verifiers can apply their response to non-commercial representations. This conclusion concerns the accounting for financing from the parent company when determining the representation of the 1-million criterion for the purpose of mandatory VAT registration. Moreover, if, for example, the permanent establishment is already registered by the VAT payer, then, taking into account the arguments of the SFSU, it will be obliged to charge a corresponding tax on the amount of such financing.
The said conclusion of the SFSU is unlawful, and therefore it is impossible to tolerate it. Its unlawfulness is confirmed, in particular, by the fact that the representation (both permanent and non-profit) is not an independent legal entity. In fact, this is only a separate part of the property owned by the parent company. That is why the financing transferred from the parent company in favour of the representation can not be regarded as compensation for any deliveries, since in fact it is the movement of funds within one legal entity. Consequently, there should be no influence on the effects of VAT on the representation of such amounts.
In addition, financing from the parent company is sent to the mission, as a rule, to cover its costs (current expenses, payroll), and not as compensation for the supply of goods/services in favour of the parent company. Since there are no supplies of goods/services, the VAT object does not arise in this case.
Also, as part of the income tax, there is a direct indication that a permanent establishment is equated with an independent taxpayer of the income tax, who operates independently of the non-resident parent company (para. 141.4.7 of the Tax Code of Ukraine). At the same time, there is no indication of VAT.
Unlawfulness of the SFSU position is confirmed by the court practice (the decision of the Supreme Administrative Court of Ukraine dated 02.10.2014 in case No. К/9991/49059/12).
