Analytics

The Ministry of Finance of Ukraine recently published¹ the completed questionnaires filled by the authorized state authorities of some European Union countries regarding peculiarities of tax residency determination and taxation of income of Ukrainian citizens temporarily staying abroad during the period of martial law in Ukraine.

The questionnaires were filled by the countries, where a significant number of Ukrainians are staying. Unfortunately, the results of the analysis of the answers are discouraging.

Only the competent authorities of Latvia and Lithuania stated that there would be no tax consequences for Ukrainian companies in case of remote work of top management of the company from their respective country.

Thus, Latvia notes that Ukrainian company may have tax obligations to register as a taxpayer in the country where the head of the company stays and works remotely only if such stay leads to creation of a permanent establishment.

The competent authorities of Lithuania, on the other hand, determine the residency of the company and its relevant tax obligations in the country based on its place of registration, regardless of the actual place of management.

On the other hand, the companies which top management is staying in Poland, the Czech Republic, Germany, Denmark or Belgium, should regard the tax consequences.

In particular, the Ministry of Finance of Poland emphasizes that a company will be considered a tax resident of Poland if, among other criteria, its place of effective management is located in Poland. Therefore, although each case should be analyzed separately, including consideration of the relevant Agreement on avoidance of double taxation, the risk that Poland will insist that Ukrainian companies should be recognized as a tax resident of Poland, as per our opinion, is rather significant.

As proceeds from the completed questionnaires, the following countries hold position similar to the position of Poland:

• Belgium stated that, in principle, any company having a place of effective management or administration in Belgium acquires Belgian tax residency with the corresponding obligation to comply with Belgian tax legislation, to submit corporate income tax and VAT tax returns, other forms of reporting and pay taxes in Belgium.
• The Czech Republic stated that, in the case under consideration, the company will acquire tax residency of the Czech Republic with corresponding obligations on registration with the tax authority, taxation of worldwide income in the Czech Republic and compliance with the requirements of Czech legislation.
• Denmark duplicated the above-mentioned position of Poland, Belgium and the Czech Republic.
• Germany also supported the above position yet added that the factual circumstances of each particular case should still be assessed. In particular, whether the managing body of the company consists of one person working remotely from Germany or several people. If the managing body consists of several people, with only one of them living and working remotely from Germany due to the war in Ukraine, the competent German authorities are inclined to conclude that this should not lead to the recognition that the “place of effective management” is present in the country and, as a result, change in tax residency.

Austria, Italy and Portugal did not provide comments on this issue, however, we expect a similar approach to the issue, as in most other EU countries.

Accordingly, we do not exclude that most European countries at least at the level of national legislation would have questions to Ukrainian companies, which top management is living and continuing to work and make decisions with regard to the companies remotely from the territory of such countries.

If according to the local legislation of both Ukraine and the country where the top management of the company is located, the company would be considered a tax resident of both states, the states should determine the tax residency of Ukrainian company based on the provisions of the relevant bilateral agreement of Ukraine on avoidance of double taxation. As noted above, according to part 3 of Article 4 of the relevant bilateral agreements, the place of the actual managing body will be critical for determination of the residency status.

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.

Footnotes:

¹Questionnaire of the Ministry of Finance of Ukraine regarding taxation abroad: https://www.mof.gov.ua/uk/taxation_abroad-654.

Kind regards,

© WTS Consulting LLC, 2023

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