Double taxation for FOP: practical tips

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Ланткевич Кирило

Lawyer

Ukraine / Dnepropetrovsk region

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Publication date: 14.08.2024

I am studying in the third year of the State University of Economics and Technology.I specialize in contractual, economic and corporate law, in particular, I provide consultations and write articles.

The concept of tax residence of Ukraine 

The concept of tax residence of Ukraine is subject to interpretation in Ukrainian tax legislation, which includes the obligation to pay taxes in Ukraine and submit tax returns. The status of a tax resident of Ukraine determines how and where a person must pay taxes and what reports to submit. This is important to avoid double taxation and ensure compliance with tax obligations, both nationally and internationally.

The main criteria for determining tax residency of Ukraine:

• Citizenship of Ukraine: Citizens of Ukraine are automatically considered tax residents if they meet the conditions described below.
   
• Place of permanent residence: If an individual has a permanent place of residence in Ukraine, he is considered a tax resident of Ukraine. This means that even if a person has a place of residence abroad, but permanently resides in Ukraine, he is a tax resident.
   
• Center of vital interests: If a person has a place of permanent residence both in Ukraine and in another country, he will be considered a tax resident of Ukraine if he has close personal or economic ties (center of vital interests) in Ukraine. These can be, for example: having a main job in Ukraine, having significant economic interests (property, business), family ties and social contacts in Ukraine.

Determination of tax residency in another state

1. Automatic Residency: In many countries, a person becomes a tax resident automatically after staying in the country for a certain period, usually 6 months or 183 days per year. During this time, a person may have obligations to pay taxes in that state.
    
2. Tax Residency: As a rule, this is related to the actual stay of the person in the country. For example, in the UK, Germany and other countries, the rules for determining tax residency may include multiple criteria, such as length of stay and the existence of "tests" for residency.
    
3. Starting a business: If a person starts their own business or becomes an individual entrepreneur (sole proprietorship) in another country, this can also affect the determination of their tax residency, in particular, if the business is significant and involves a permanent stay in the country.
    
4. Local taxes: Tax residents of another country are required to pay taxes on income received both inside and outside the country, in accordance with the laws of that country.
    
5. Tax Return: Tax residents must file a tax return in the country where they are listed as resident and report all their income.

Tax residency of another state is determined by criteria that may include length of stay, employment, business conduct, and other factors. This has a significant impact on an individual's tax obligations, including the obligation to pay taxes in the country of residence and to file tax returns. It is important to take into account international agreements on the avoidance of double taxation, which can affect the determination of tax liabilities and ensure proper management of tax matters.

 Tax obligations of the Ukrainian FOP:

Tax payment and reporting in Ukraine. Income from the Ukrainian FOP: If the FOP in Ukraine continues to receive income, the Ukrainian FOP is obliged to pay taxes in Ukraine on the income received, even if it is a tax resident of another country. Tax declaration: It is necessary to submit a tax declaration in Ukraine, reporting on the income received both from the Ukrainian FOP and from other sources.

Local taxes in the country of residence. Taxes abroad: As a tax resident of another country, a person is obliged to pay local taxes in the country of residence. This can include income taxes, business taxes, social security contributions, etc. Tax reporting: Tax returns and reports are usually required to be filed in accordance with the laws of the country of residence. Declaration for the FOP: If the FOP continues to function, it is necessary to submit regular reports to the Ukrainian tax authorities and pay taxes in accordance with Ukrainian legislation.

Agreements on avoidance of double taxation

• International conventions: Ukraine has signed double taxation avoidance agreements with 73 countries. These agreements help to avoid situations where the same amount of income is taxed in both countries - in the country where the income is received and in the country of residence of the taxpayer. The agreements determine which country has the right to tax the income that is payable and which country can grant relief or credits to avoid double taxation. Legal advice on tax issues may be needed for detailed analysis of transactions.
   
• Methods of avoiding double taxation: Income received in one country may be exempt from taxation in another country, if this is provided for by the treaty. Tax paid in the country of origin of the income can be set off as a credit against the taxes due in the country of residence. The agreement may provide for a reduction in the tax rate that the country of origin of the income is entitled to charge, thereby reducing the tax burden.

Practical steps to avoid double taxation:

Check the agreement: Research the terms of the agreement between Ukraine and the country in which you are a tax resident to understand what benefits or credits are available.

Obtain proof of residency: In some cases, proof of your tax residency in Ukraine may be required to receive benefits in the country where you receive income.

Filing of returns: File the appropriate tax returns in both countries where you have income and take into account the information about taxes paid to receive tax credits or benefits.

Consultation with a tax lawyer:

Helping to avoid double taxation is critical for businesses and individuals with income from multiple jurisdictions. Here's how a assistance from a tax lawyer can help with this process:

  

Evaluation of tax treaties: A tax lawyer can analyze double taxation agreements (DTAs) concluded between countries where a business is conducted or an individual resides. This allows you to determine exactly how these agreements can affect tax obligations. A lawyer will help apply treaty provisions, such as tax exemption methods or tax credits, to avoid double taxation.

  

Tax audit lawyer: A lawyer tax law can help in choosing the optimal structure for international business to minimize tax consequences and avoid double taxation. Tax lawyer consultation on corporate structures: Advice on the creation and use of corporate structures that will meet tax requirements and take advantage of double taxation agreements.

 

Tax filing lawyers: A tax lawyer can help prepare tax returns involving income from different countries and ensure that the returns meet the requirements of both jurisdictions. Advice on filing reports and documents to obtain tax credits or benefits under double taxation agreements.

 

Tax dispute lawyer: Tax lawyers can represent the interests of a company or an individual in case of tax audits or disputes with tax authorities that may arise due to double taxation issues. A tax litigation lawyer will assist in resolving issues related to the application of double taxation agreements if conflicts arise with tax authorities.