It is encouraging to note that the awareness of the Ukrainian citizens is increasing from year to year. People are starting to think about proper optimization and payment of taxes instead of inventing the schemes of hiding incomes from taxation.
Recently, we have begun to receive a lot of questions from our clients – designers, photographers, programmers regarding taxation of royalties that they receive from abroad. In this post, I tackle the existing myths and give the step-by-step instruction with regard to taxation of royalties received by private entrepreneurs paying a single tax.
What percentage should be paid on royalties
The fact is that most people think that if they pay a single tax at the total rate 5%, so it is possible to pay the same 5% tax on royalties and not to worry. In fact, royalties as well as percentage and dividends relate to passive incomes of a natural person that are subject to taxation at the rate 18% of an income tax on natural persons and 1,5% of a military fee. Because the owner of intellectual property objects is a natural person but not a private entrepreneur. Moreover, royalties paid by non-residents are also subject to taxation with a withholding tax.
It turns out that the royalties are subject to double tax burden – a withholding tax + an income tax on natural persons and a military fee. In order to prevent this, it is enough to apply the international agreement on avoidance of double taxation and to prepare carefully the documents about which I will tell you more below.
Ukraine has concluded agreements on avoidance of double taxation with 75 countries and this list will be extending in the future. These agreements allow to pay a withholding tax on royalties at a reduced rate (as a rule, it is 5% or 10% of royalty amount). It is a good relief as a withholding tax is paid by non-resident (who is a tax agent) at the time of payment. That is, the Ukrainian licensor receives an amount of royalty reduced by a tax.
However, it is not enough just to ask the non-resident, who is a licensee, to pay a tax at the rate specified in the international agreement. In order to benefit from this tax relief it is also essential to reaffirm the residence of the Ukrainian licensor before the payment is made. How exactly to reaffirm the residence it must be prescribed by the national tax law of the non-resident’s country. For one country, it is enough to send a scanned copy of passport, for another – it is necessary to receive a certificate or a reference on the residence at the fiscal authorities. Furthermore, it is desirable to explore this information at the stage of concluding the license agreement until the payment of royalty is received.
In most cases, international agreements also request to reaffirm that the receiver of royalties is a beneficiary (please, avoid confusing with beneficial company’s owner). For instance, when the national of Ukraine is a sub-licensee. In this case, in order to make a payment a non-resident may ask to provide him with a chain of agreements up to the ultimate owners of rights or request the reference confirming that the receiver of royalties is a beneficiary. This is normal and legitimate; it’s also worth to get ready for this in advance.
Let’s turn now to the issue on elimination of double taxation in Ukraine. Can we pay an income tax on natural persons at the rate 8% instead of 18% (in case when a withholding tax was 10%)? Yes, we can! For this purpose, it is necessary to receive from a non-resident the reference of a tax authority, where the non-resident is recorded, about the amount of royalties paid by him and a withholding tax (items 13.3-13.5 of the Tax Code). This reference is so important that the law even allows asking for postponement of the term of annual declaration submission if you can’t get the reference from a non-resident in time (item 170.11.2 of the Tax Code). The reference should be translated into Ukrainian and the translation should be duly notarized. The reference should also be apostilled (legalized) in the country of its issuance unless the requirement on apostilling the official documents is not eliminated by the international treaty (for instance, there is no need to apostille the documents issued in CIS countries in accordance with Article 13 of the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases).
There is also another nuance. The tax legislation of the non-resident’s country may request that he must report at the registered tax address on payment of royalties to Ukraine and assessment of a withholding tax. It was normally given from 14 up to 30 days to submit such information. That is why it is better to address a non-resident to ask the tax authorities to issue the reference after he has reported on the transaction.
If you received royalties in 2018 it’s time to start thinking about submitting your annual declaration of income. The guidelines on how to fill out the declaration approved by the Order the Ministry of Finances from 02.10.2015 № 859 states that foreign incomes are indicated in box 3 of the line 10.6. The amount must be indicated in the Ukrainian hryvnyas (UAH) on foreign exchange rate of the National Bank of Ukraine at the moment of payment to the account (item 164.4 of Article 164 of the Tax Code). The line 12, the line 18 and the line 21 must also be filled in, where the amount of taxes paid abroad is indicated. In the line 22 of the declaration you must indicate an amount based upon the difference between the income tax on natural persons and a withholding tax in accordance with item 170.11.2 of Article 170 of the Tax Code. You must also to fill out the Enclosure Ф3 and to submit it together with a declaration.
And that’s all the instruction. Create and earn royalties! The attorneys of Synergy Patent Law Agency will assist you to optimize the tax burden and will answer all the questions interesting you.
Author: Anastasiia Radomska
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