The Ukraine State Fiscal Service recently issued guidance letter 1723/6/99-99-15-02-02-15/IPK on the treatment of transactions between a non-resident and its permanent establishment (PE) in Ukraine as controlled for transfer pricing purposes, as well as the determination of taxable profits.

The letter notes that PEs of non-residents that receive income from a Ukraine source or that perform agency (representative) and other functions related to such non-residents or their founders are treated as taxpayers in Ukraine. As such, any transactions (including internal settlement transactions) carried out between a non-resident and its Ukraine PE that may affect the taxable income of the PE as a taxpayer would fall under the definition of controlled transactions. Taking this into account, business transactions carried out between a non-resident and its PE office in Ukraine are recognized as controlled if the volume of such transactions determined in accordance with the accounting rules exceeds UAH 10 million (net of indirect taxes) for the relevant tax year. This includes all types of transactions, agreements, and arrangements, whether or not confirmed through documentation.

The letter also clarifies that for the purpose of taxing a PE, the main factor is not the legal nature of the relationship between a non-resident and its PE, but rather the nature of the relationship as if the PE was a separate legal entity, which is in accordance with the comments and recommendations of the UN and OECD. In this respect, the nature of the relationship is determined based on a study of the actual circumstances, and may take the form of (but not limited to):

• A relationship in which the PE carries out functions that, under similar circumstances, could be performed by an independent service provider that enters into a relationship with the parent company as a customer (for example, marketing or advertising services);
• A relationship in which the PE carries out a function that, under similar circumstances, could be performed by a general contractor or subcontractor under a construction contract with a third party or the parent company; or
• A relationship in which the PE carries out a function that, under similar circumstances, could be performed by an independent distributor of goods, a commission agent, or other intermediary.

Lastly, the letter clarifies that if a non-resident carries out activities in Ukraine and abroad and does not separately determine the profit from the activities conducted through its PE in Ukraine, the amount of taxable income in Ukraine must then be determined on the basis of a separate statement of the PE’s financial and business activities that is prepared by the non-resident and agreed to by the tax authority of the location of the PE. In the event it is not possible to determine the profit by direct calculation, the taxable profit of the PE must then be calculated by the non-resident as the difference between income and expenses, determined by applying a coefficient 0.7 to the amount of income received.