Permanent establishment and electronic services: Should a non-resident register as a VAT payer (Deloitte experience)

As you know, starting from 1 January 2022, the tax legislation requires that foreign companies providing electronic services in Ukraine pay 20% VAT, the so-called «Google tax».

However, the requirement to register with the tax authorities does not apply to non-residents that provide electronic services through a permanent establishment. In this case, it is the permanent establishment in Ukraine which is subject to VAT registration.

At the same time, the account of the State Tax Service of Ukraine (STS) is designed in such a way that a non-resident with a permanent establishment in Ukraine is automatically rejected when trying to register as a VAT payer.

What should a non-resident with a permanent establishment in Ukraine that is not involved in the provision of electronic services do?

This was the issue that our client approached us with. The peculiarity of the situation was that the client provided electronic services directly to consumers in Ukraine without involving a permanent establishment. The permanent establishment had neither the operational capacity nor the infrastructure or authority to provide electronic services in Ukraine.

Under the circumstances, neither the permanent establishment nor the non-resident could pay VAT on the provision of electronic services in Ukraine. The client was in a «grey zone» with a number of risks faced—from penalties for not having tax registration and additional VAT charges on the representative office or non-resident to reputational damage.

However, the client was determined to fulfil its tax obligations in full and requested the Deloitte team to assist in communicating with the tax authorities. We sent a written appeal to the State Tax Service with a detailed explanation of the situation and justification of the fact that the client meets the criteria for VAT registration provided for in para. 208¹.2 of Article 208¹ of the Tax Code of Ukraine.

After rounds of discussions between the Deloitte team and representatives of the State Tax Service, the client received an official response in which the tax authorities agreed with the arguments provided and confirmed that the client could register as a VAT payer in accordance with Article 208¹ of the Tax Code of Ukraine. As a result of close cooperation of all parties and openness of the STS, the non-resident’s registration was successfully completed. For this purpose, the STS had to modify the functionality of the taxpayer’s account to make the client’s repeated attempt to register technically possible.

If you have any questions regarding the information contained in this alert or need assistance with the registration of non-resident e-service providers as VAT payers, please contact our Tax and Legal experts. The Deloitte team has extensive experience in tax law and is ready to assist you with your request.