Continuing the number of specialized events for representatives of the pharmaceutical industry and public healthcare sector on 12 April 2013 Arzinger Law Office held business breakfast “Ukrainian pharmaceutical market players: main tax risks and their management”. At the event spoke lawyers from the tax practice at Arzinger: Pavlo Khodakovsky, Partner at Arzinger, Head of the Tax Practice, and Svitlana Yazykova, Senior Associate.

In his presentation Pavlo Khodakovsky pointed out differences and peculiaritiesregarding “presence” of foreign pharmaceutical companies on the Ukrainian market, among which: representative offices & permanent establishments, trade, service and production companies. He spoke in detail about their functions, finance specifics and accounting structure.

Pavlo highlighted specifics of the Ukrainian pharmaceutical representative offices which, in their majority, are non-profit structural subdivisions of non-residents and are not aimed at exercise of commercial activity but are registered, nevertheless, with the tax authorities and submit their reporting according to the rules provided for permanent establishments.

Then Svitlana Yazykova spoke about tax risks in case a representative office is declared a permanent establishment. In the majority of cases, financing provided by the parent company is recognized as income of a permanent establishment, its activity as such not of preparative and/or auxiliary nature, and exemption of received “income” from the taxation with reference to an international agreement аs illegal.

Lawyers from Arzinger’s tax practice analyzed in detail the current court practice on disputes between representative offices and supervisory authorities and pointed out Ukrainian and international trends in, and approaches to, their resolution. Therefore, attendees to the business breakfast received important information and practical advice regarding correct development of a legal position in case there is already, or will most probably arise, a dispute with the supervisory authority.    

Second part of her speech Svitlana dedicated to the current situation when several “players” (representative office and a daughter enterprise of the same non-resident) are active on the Ukrainian pharmaceutical market at the same time and how to divide functions between them properly. In particular, she determined such additional and auxiliary activities that accompany import and sale of medicinal products in Ukraine (registration for sale, clinical trials and researches, market research, information distribution on the market, advertisement, marketing, sales promotion etc.) and factors that influence the decision making about allocation of functions such as: regulatory price restriction, specifics of the state procurement, corruption risks, competition law requirements, regulatory restrictions for advertisement of medicinal products, transfer pricing, imperfection of the tax legislation, fiscal nature of supervisory authorities’ approaches etc. Attendees to the business breakfast compared the variant of simultaneous presence of a representative office of a non-resident, a service and a trading company on the market and discussed disadvantages and benefits of exercising auxiliary activities by a permanent establishment as well as reorganization of representative offices into permanent establishments or service companies.

In summary Svitlana stressed out that different combinations of market presence forms have a right to life but an ideal solution for a company’s work on the Ukrainian pharmaceutical market would be specially developed customized model that takes into account a company’s “history” and peculiarities of its work and considers other important factors.

During the event attendees had a possibility to ask speakers their questions, to give comments and to share their experience with colleagues.