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Tax consequences of the receipt of royalties from non-residents

During our seminars “Everything about Royalties” I am telling in detail about taxation of royalties that the Ukrainians pay abroad and each time the attendees ask questions about nuances of taxation of royalties that are paid by non-residents. As the speaking time is limited I have to answer the questions privately. So I have come up with an idea to prepare an instruction on how to minimize amount of taxes paid from royalties received from non-residents. I impart knowledge, please, catch it)))

Let us consider, for example, the situation when the Ukrainian company receives royalties from the resident of the United States for the use of a trademark or software.

According to the internal legislation of the United States the U.S. company shall be a tax agent and shall be obliged to withhold 15% of tax from the amount of royalties at the time of payment. In this case the U.S. resident may apply the reduced rate of the tax on royalties in accordance with the Convention between the Government of Ukraine and the Government of the United States of America on Avoidance of Double Taxation and Prevention of Evasion of Payment of Taxes on Income and Capital if he obtains documents confirming that the Ukrainian company is a resident and a beneficiary. Article 12 of the Convention provides for that the reduced rate for trademarks and software shall be 10 percent from the amount of royalties.

It means that before payment of royalties in favor of the U.S. resident you need to verify whether he has the following:

a reference on residence issued by the Ukrainian tax authority, apostilled and translated into Ukrainian language;

a document confirming that the Ukrainian company is an actual owner of royalties and is entitled to dispose of them, that it is not an intermediary, agent, nominal holder with regard to these royalties (for instance, documentary evidence on registration of a trademark and copyright in the United States, a chain of agreements with actual owner of rights, declaration confirming that the company is a beneficiary etc.).

If these documents are not available, the rate of the tax in the United States will amount to 15%. In view of this, it is better to set out clear provisions on this matter in licensing agreement in order to avoid unpleasant surprises.

According to Article 24 of the Convention in order to avoid double taxation the resident of Ukraine shall have the right to include the tax on royalties levied in the United States into the amount of profit tax (for business entities) or income tax on natural persons. The passive incomes such royalties are subject to taxation as part of incomes of natural persons but not individual entrepreneurs. It must be taken into account that only amount which does not exceed the amount of the Ukrainian tax may be applied to withholding tax. For instance, if you paid 1000 USD from the royalties and the amount of profit tax income tax on natural persons is 1000 UAH, so only 1000 will be credited. This credit is not postponed to future periods.

For this purpose, in accordance with item 13.5 of the Tax Code of Ukraine, before submitting a declaration to the supervisory authority the resident of Ukraine should obtain in the tax authority of the United States on the place of registration of a non-resident the reference on the amount of paid tax on royalties and amount of transferred royalties. It is possible to obtain such a reference through the U.S. resident or to submit the relevant request individually. The reference should also be apostilled and translated into Ukrainian language (the translation should be notarized). The reference should be submitted to the supervisory authority together with a declaration. It is necessary to indicate the relevant amounts of received royalties and paid withholding tax in the declaration.

For natural persons there is a privilege on prolongation of the term for submitting declaration on assets and income. In accordance with item 170.11.2 of the Tax Code of Ukraine if a resident of Ukraine cannot get the reference from a non-resident on the amount of the paid withholding tax before the deadline for submitting declaration, this term may be prolonged till 31 December of the year following the reporting year.

Unfortunately, this privilege on prolongation of the term for declaration submitting is not applied to business entities.  That is why, if it impossible to obtain a reference before the deadline for submitting declaration on profit tax, the tax payer may submit a clarifying declaration under the procedure prescribed by item 50.1 of the Tax Code of Ukraine.

In general, taxation of royalties received from non-residents from other countries is not much different but there are always certain nuances in every individual case. The attorneys of Synergy Patent Law Agency are always ready to assist You to solve Your taxation and legal issues. Create and earn royalties!!!