Guidance on Taxation on Royalties in Ukraine
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Many foreign companies that have Intellectual Property objects in Ukraine do not use them by their own but give licenses for the use of Intellectual Property objects. The royalty plays an important role in such relationships and in various questions that arise around it.
In this article we consider peculiarities of payment royalty to non-residents of Ukraine requirements for license agreements and taxation.
Definition of Royalty in Ukrainian Legislation
According to The Tax Code of Ukraine the royalty means any payment, received as compensation for permission for using of any Copyrighting or related rights for literary works, scientific or artistic works, including computer programs, other records by contents, video- and audio- cassettes, cinematograph films or tapes for radio and television broadcasting, programs of broadcasting organizations, any Patents, registered trademarks, designs, secret drawings, models, formulas, processes, rights for information regarding industrial, commercial or scientific experience (know-how).
Furthermore, in Ukrainian legislation there are two different concepts: payments that are royalties and payments that are not royalties.
Payments that are not royalties mean payments for transferring Intellectual Property objects. As the nature of these concepts is different so regimes implemented to these concepts are different.
Legal Aspects of Royalty
As royalty is compensation for using of Intellectual Property objects so relationships of it should be regulated by license agreement or license. According to The Civil Code of Ukraine a License Agreement consists of:
- The Type of License;
- Sphere of use of the Intellectual Property Agreement (rights according to the agreement, ways of use of the Intellectual Property objects, territory and duration);
- The amount, procedure and terms of payment;
- Other conditions that parties consider as essential.
In practice, the frequent mistake is conclusion of a license agreement for the use of Intellectual Property object according to filed application but not to a Certificate or Patent. Actually tangible Rights for Invention, Utility Model and Industrial Design are valid from the date following the date of registration and rights for trademark are approved by a Certificate issued after Registration. Furthermore, subject matter to the license agreement cannot be rights for use of Intellectual Property object that are not valid for the date of conclusion agreement. Hence, validity of agreements where subject matter is rights that are not exist may be attacked.
In Ukraine there is no required registration of license agreements, but this registration available at the request of the parties.
Even though a license agreement is concluded and constitutes all requirement elements, there are some pitfalls in taxation of royalty.
Taxation of Royalty – Gross Expenses of Licensee
As royalty is a payment so licensee is interested in allocation amount of paid royalty to gross expenses because in such way licensee can reduce sum of profit tax. Let's get considered the situation when Ukrainian company - licensee – pays royalty to non-resident of Ukraine.
First of all it is important to distinct the two concepts:
- Payment of royalty for non-residents;
- Payment of royalty for non-residents with offshore status.
According to the meaning of the Tax Code of Ukraine non-residents are:
- Foreign companies and organizations which established according to the legislation of other countries; as well as their registered branches placed on the territory of Ukraine.
- Diplomatic missions, consular offices and other official representatives of other states and international organizations in Ukraine.
- Individuals that are non-residents of Ukraine.
Non-residents with an offshore status means non-residents placed on the territory of offshore zones except non-residents placed on the territory of offshore zones that have an extract from the founding documents that certify normal status of such non-residents.
If a licensee pays royalty to a non-resident, he could allocate to gross expenses an amount of royalty that does not exceed 4% of income received during last year. If the licensee pays royalty to a non-resident with offshore status, he cannot allocate any amount of royalty to gross expenses.
Besides status of a licensor there are matters of other elements:
- Intellectual Property object. In case when rights for Intellectual Property object first appeared in favor of resident of Ukraine and next were transferred to a non-resident, the sum of royalty for using such object cannot be allocated to gross expenses.
- The sum of royalty. If the sum of royalty paid to one non-resident during one year would be more than 100,000 euro, then for payment such sum the licensee is required to provide a bank organization with Act of price expertise issued by State Information-Analytical Center of monitoring of external markets.
What’s more, analyzing of court practice shows that tax officers pay attention to correspondence royalty with business activity of the licensee. For example, the subject matter of the license is permission for use of a trademark registered for drugs, but licensee uses this trademark for food. In this case, tax officers may decide that there is no correspondence between drugs and food and that's why such payments could not be allocated to gross expenses. Also, we recommend evidencing all documents that certify use of Intellectual Property object in business activity of licensee.
Note: The Tax Code of Ukraine states that foreign legal entities receiving income including with the origin of Ukraine are also taxpayers. Tax rate is 15% of received income. This tax should be withheld by resident that pay such sum of royalty. This rule has an exception: resident obliged to withhold tax could be exempt of taxation if it is provided by International Agreement of Ukraine. The ground of such exception is reference certify that the non-resident is a resident of the country with which Ukraine concludes Double Taxation International Agreement.
In conclusion, the taxation of royalty in Ukraine has many pitfalls. So, it is important to pay attention to all nuances from license agreement and Intellectual Property object to International Agreements.