Ukraine: Income tax and VAT implications of intra-group services

Income tax or VAT aspects for companies receiving intra-group services

Income tax or VAT aspects for companies receiving intra-group services

Companies receiving intra-group services need to consider certain income tax or value added tax (VAT) aspects.

Not all intra-group services have a “business purpose,” and thus, the taxpayer company may not the right to include the cost of such services in expenses for income tax purposes. For example, the purchase of services that duplicate the functionality of a Ukrainian company's internal departments or services that are needed exclusively for the parent company (such as preparing consolidated financial statements, paying board member expenses, etc.) may not have a “business purpose.”

To prove the existence of a business purpose when purchasing intra-group services, Ukrainian companies need to consider the following.

  • The management of a Ukrainian company must understand the essence of the services, while the employees who use these services must also be aware of how and through which channels the services are provided.
  • Primary documents issued upon receipt of services need to make it possible to easily understand the type of services rendered; their scope, conditions, and term of their provision; and the circumstances under which the services were provided.
  • Intra-group services need to affect the economic activity of a Ukrainian company by, for example, increasing sales or profits or, conversely, reducing costs.
  • Under similar conditions, whether third parties would be willing to order these services. 

In order to avoid the risk of the tax authorities challenging the company's expenses for income tax purposes, accrual of VAT liabilities or non-resident income tax (such as, in connection with reclassifying payments for services received as payment for engineering services or royalties), the company needs to have proper documentation of the received services. Case law (the Supreme Court of Ukraine in resolution No. К/9901/25039/18 of 2018) indicates that the receipt of services cannot be considered properly documented in certain situations. For instance:

  • Acts of delivery and acceptance of works (services), reports, tax invoices, and payment orders alone are not reliable evidence of the actual implementation of the disputed transactions.
  • The submitted acts of delivery and acceptance of works (services) contain only the name of the services provided, and as such it is impossible to estimate the amount of work performed, time spent, information materials used, or to identify the participation of contractors in the provision of works / services.
  • Reports do not disclose the scope of services provided (specific actions) and do not identify the persons responsible for their provision and receipt.

KPMG observation

Tax professionals have observed that for taxpayers to confirm receipt of intra-group services, they need to determine that properly executed primary documents (contract or act of delivery and acceptance of services) are available and contain all the mandatory elements required by Ukrainian law. Taxpayers also need to consider keeping all e-mails that are closely related to the provision / receipt of services; documenting the results of the provision services in detail so as to prove the existence of:

  • A list of services with a detailed descriptions and results
  •  An assessment of the impact on the company's activities and financial indicators
  • A list of supporting documents (electronic correspondence) in the context of each of the services provided
     

For more information, contact the head of KPMG’s Global Indirect Tax Services:

Lachlan Wolfers | +852 2685 7791| lachlan.wolfers@kpmg.com

 

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