Risks of creation of the permanent establishment under the agency and/or commissionaire agreement
The agency and commission schemes of work on the market for goods (works, services) distribution came in the sight of the BEPS1 Action Plan initiatives as related to the prevention of occurrence of artificial circumvention of permanent establishment.
It is provided by the BEPS2 Action Plan initiative, that not only the conclusion of contracts by the resident on behalf of а non-resident, but even the participation of resident in the process of conclusion of contracts without the fact of its signing on the part of such resident, may lead to the obtainment by the resident the status of permanent establishment of а non-resident.
Thus, it is proposed to interpret the “conclusion of the contract” broader, including the cases when a resident plays a primary role in the conclusion of contracts (participation in the discussions and contract negotiations) which are concluding and signing by the non-resident without significant changes.
During the assessment of resident’s activity as such, that lead to the permanent establishment status, it is also proposed to consider a number of factors such as: the presence/absence of substantial control (instructions, requirements) of the implementation of the commission activities by the commission agent on the part of non-resident; provision of information by the commission agent regarding his activity with the view of obtainment of consent from the non-resident; performance by the resident of agency or commission activity exclusively for one or few non-residents for a long period of time; providing of the services by the agent or commission agent in parallel with a distribution activity with regard to other companies, etc.
The foregoing attests the presence of risks of recognition the residents as permanent establishment of non-residents with regard ti significant number of agency and/or commission schemes of work on the market for goods (works, services) distribution, that are currently used.
Despite the fact, that formally Ukraine has no responsibilities regarding the implementation of the BEPS Action Plan, indicated risks are real, because Ukraine by its own initiative is joining the BEPS Action Plan and begins the process of implementation of the BEPS Action Plan in national legislation.
Thus, it is referred to the Presidential Edict No. 180/2016 as of April 28, 2016 “On measures regarding counteraction the reduction of the tax base and transfer of profits abroad“, under which a working group for preparation of relevant changes to the legislation with due regard to the BEPS Action Plan initiatives was created.
In addition, the Ukrainian tax authorities are well aware of the BEPS Action Plan and support the proposed Concept of implementation of the main recommendations of BEPS in Ukraine, , one of the components of which is change proposals to subpara. 14.1.193 of the Tax Code of Ukraine in accordance with the BEPS Action Plan initiatives.
Therefore, it is possible that agency and/or commissionaire resident’s activities in favor of non-residents should in the near future become one of the key issues during tax audits, tax information collection, etc.
Given the abovementioned, we advise not to delay the review of agency and commission agreements for potential risks of respective activities qualification of the resident as such, that leads to emergence the permanent establishment of non-resident.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
Recognition and taxation of permanent establishments of non-residents on the territory of Ukraine in the light of latest practice of the Supreme Court of Ukraine – BEPS implementation?
Commentary regarding draft laws No. 3769 and No. 3768