Tax and Legal Newsletter, Ernst & Young, Kyiv, Ukraine, June 10, 2010

KYIV - Ernst & Young Tax and Legal Newsletter June 2010 contents:

[1]  NBU explains foreign investment procedure
[2]  No VAT refund shall be granted on acquisition of non-resident services
[3]  VAT on supply of goods by the agent (provided the principal does not have VAT registration)
[4]  Charging VAT on restructuring transactions
[5]  Shortlisted countries for tax residence documents for which no apostille is required

[1] NBU explains foreign investment procedure
On 4 June 2010 the National Bank of Ukraine (NBU) published Letter No. 13-215/2974-9413, which explains the foreign investment procedure in connection with the coming into effect of the Law of Ukraine No. 2155-VI "On Making Changes to Some Legislative Acts of Ukraine with the Purpose of Stimulating Foreign Investments and Loans" of 27 April 2010 (hereafter – Law No. 2155).

Law No. 2155, which took effect on 15 May 2010, invalidated a number of foreign investment restrictions (including the requirement that foreign investments must be made in the national currency of Ukraine through investment accounts at designated Ukrainian banks).

The NBU states that presently the draft amendments to the by-laws and regulations, including NBU Regulation No. 280 "On the procedure for foreign investments in Ukraine", are being brought into compliance with the requirements of the Law No. 2155.

Until these amendments come into effect, NBU explains that the list of the allowed foreign investment transactions is wider than the one provided in Regulation No. 280. In particular, it is allowed to transfer the foreign currency of the 1st Group of the Classifier of Foreign currencies and bank metals as follows:
       [1] from the foreign to the current account of the resident (no investment account is used);
       [2] from the foreign investor’s account to the resident’s current account, to the investment account of the other foreign investor and to the foreign account opened with a designated bank for performance of joint investment activities by the foreign investor and by the resident, without the establishment of legal entity in Ukraine;
       [3] to the depository account of the foreign investor-legal entity in the designated bank with the purpose of forming an investment deposit from the investment account of the said investor and its foreign accounts (foreign currency funds from the foreign investor’s depository account may be returned to his personal investment accounts and to his accounts overseas).

To disinvest or to repatriate income and other proceeds from investment activities in Ukraine, foreign investors are allowed to transfer foreign currency:
       [1]  from the resident’s foreign account to the foreign investor’s investment account with an authorized bank;
       [2]  from the investment account of the foreign investor to the investment account of the other foreign investor;
       [3]  from the current account that the foreign investor and the resident opened to perform the joint investment activities in Ukraine without establishment of a legal entity, to the investment account of this foreign investor.
According to the Letter, no individual NBU license to use foreign currency as a means of payment on Ukrainian territory is required for performing these currency transactions.
In addition to this, if the foreign investment is not registered by the investor, the purchase or the transfer of foreign currency is allowed in order to regain the investment without submission of a document that confirms its state registration (information message), provided there exists written confirmation from the foreign investor about the absence of the state registration.

[2] No VAT refund shall be granted on acquisition of non-resident services
The State Tax Administration of Ukraine (STAU) announces that VAT amounts that were paid (accrued, reflected) as part of tax liabilities related to the acquisition of non-resident services shall not be included in calculations of VAT refund (according to Letter No. 7466/7/16-1517-04 of 15 April 2010).

Substantiating its position, the STAU argues that according to sub-para 7.7.2, para 7.7, Clause 7 of the VAT Law, the negative value that equals the tax actually paid in previous tax periods to providers of goods (services) by the recipient of such goods (services)is subject to budgetary refund.

At the same time, tax accounting procedures for transactions related to receiving non-resident’s services in Ukrainian customs territory provide for no in-cash VAT payment. Hence, according to the STAU, VAT on these transactions should not be included in line 2 of the calculation of the VAT refund. Tax and

[3] VAT on supply of goods by the agent (provided the principal does not have VAT registration)
The STAU has published its Letter No. 4812/5/16-1516 (No. 8267/7/16-1517-26) of 26 April 2010, which interprets charging VAT on supplies of goods by the VAT registered agent (where the principal is not VAT payer).

The STAU says that the agent should pay the full VAT charged on the total proceeds from sales. The agent is, however, disallowed VAT credit in connection with these transactions. Unwilling to provide strong substantiation for its position, the STAU instead refers readers to para 4.7 and para7.3 of the VAT Law.
[4] Charging VAT on restructuring transactions
On 15 April 2010 State Tax Administration issued Letter No 7465/7/16- 1517-07, which explains VAT taxation of restructuring operations.

The STAU states that, in case of reorganization, a transfer of assets from one legal entity to another takes place. Meanwhile, the acquirer’s compensation for the transaction is all of the target’s liabilities. However, in accordance with subpara 3.2.8 of the VAT Law, supply of assets for compensation (including goodwill value) from one taxpayer to another is not subject to taxation.

Thus, given the requirement of subpara 7.4.1 of the VAT Law, a legal person that carries out restructuring must reflect its tax liabilities in the "tax liabilities" section of the VAT return in the tax period in which the transfer of assets took place. Such VAT liabilities should be calculated based on the arm’s length price (but not lower than the purchase price) of the assets (or their part) inasmuch as the VAT payer reported VAT credit in connection with purchase of such assets (their part).

[5] Shortlisted countries for tax residence documents for which no apostille is required
STAU explains the features of the application of international treaties of Ukraine on legal assistance in the part which relates to cancellation of the requirement to legalize / put an apostille on certificates of tax residence (Letter No. 10233/7/12-0117 dated 26 May 2010).

Specifically, the Letter provides that the tax residence documents certified by the tax authorities of foreign countries are accepted in Ukraine without any additional notarization, if they are issued in the following countries: Azerbaijan, Bulgaria, Belarus, Armenia, Estonia, Kazakhstan, Kyrgyzstan, Latvia,
Lithuania, Poland, Russia, Romania, Serbia, Tajikistan, Turkmenistan, Uzbekistan and the Czech Republic.
The STAU also reports the termination of Annex 2 to STAU Letter No. 8780/7/12-0117 of 17 May 2004 (on the Convention abolishing the requirement for the legalization of foreign official documents), which provided a more detailed list of international legal assistance treaties to which Ukraine is a member.

We can thus expect that Ukrainian tax authorities will now require an apostille / legalization of the tax residence documents issued by the tax authorities of the People's Republic of China, Hungary, Mongolia, Georgia and the Republic of Vietnam.

NOTE: Ernst & Young is a member of the U.S.-Ukraine Business Council (USUBC), Wash, D.C.,