Collaboration with foreign partners is standard practice for Ukrainian entrepreneurs. More and more companies are prioritizing international operations, where knowledge of legal and tax regulations and timely tax advice are key. When exporting goods or services, it is essential to understand all the nuances of how to avoid tax risks when working with foreign clients—an area where the experts at the international law firm Maira Consult provide valuable assistance.
Tax risks when working with foreign clients arise at every stage of cooperation with investors or clients from abroad. Problems may arise when dealing with non-resident counterparties, in the event of errors in a foreign economic contract, or if key terms are not specified in the contract.
According to the State Tax Service of Ukraine, fiscal oversight of legal entities cooperating with foreign counterparties has been tightened in recent years. In addition, due to amendments to Article 102 of the Tax Code, transactions conducted by non-residents are subject to audit for a period of seven years.
Foreign National Residency in Ukraine
Determining the status of a foreign client as a resident of Ukraine is the basis for the imposition or absence of double taxation.
A foreign partner is legally considered a Ukrainian resident and holds tax residency certificates if one of the following conditions is met:
legally resides in Ukraine on a permanent basis;
stays in the country for more than 183 days within a single calendar year;
has economic or social ties to the jurisdiction (place of employment, business presence, investment, source of income, country of residence of family members, ownership of real estate with a registered residence).
If a person is recognized as a Ukrainian tax resident, all types of income generated both within the country and abroad are subject to taxation. If, however, the individual has non-resident status, the tax applies only to income generated within the country. Incorrect classification of tax status creates tax risks when working with foreign clients, specifically leading to fines and additional tax assessments.
The Economic Nature of Transactions
When working with citizens of other countries, you should take into account the key taxation provisions established by international conventions. A foreign client who may require tax advice may be involved in the following situations:
the purchase/sale of real estate owned by a foreign national—tax is assessed in Ukraine at a rate of 23% (personal income tax + military levy);
the transfer of dividends or royalties by a Ukrainian company to non-residents abroad—at a rate of 15% (the rate may be reduced under certain provisions of the international convention);
acquisition of a stake in the authorized capital or investment in the form of purchasing company assets—at the rate applicable in the non-resident’s country (there is a risk of reclassifying the loan as a non-repayable loan, if there is no specific agreement regarding the repayment of financial assistance);
loans issued by a foreign partner to a resident legal entity—15% (preferential taxation may apply if there is a treaty between the countries);
transactions involving remuneration for services rendered, the sale of goods, or intellectual property.
Upon the conclusion of the agreement, it must be subject to national legislation, taking into account the provisions of international double taxation treaties.
The amount of the tax liability depends on how the tax authority classifies the transaction (agreement). The lawyers at Maira Consult strongly recommend analyzing tax residency certificates, contract and agreement documents, and the economic and legal aspects of the transaction.
Proper drafting of contracts
To avoid tax disputes and prevent tax risks for companies with foreign beneficiaries, the contractual structure must be carefully designed. It should include the key criteria listed below.
Key Points for Structuring the Agreement | Specifics |
Precise Subject Matter of the Agreement | The clarity of the subject matter of the contract lies in the precise description of the service using terminology that will not lead to the reclassification of the relationship as an employment relationship. Any words that could affect the recognition of the contract as an employment contract should be avoided: salary, vacation, chain of command, working hours, internal rules, and others. |
Specifying the Scope of the Contract | Properly defining the scope of activities or services helps avoid additional VAT assessments. To do this, you should review local legislation and use terminology that reflects the specific nature of the contract. |
Use of Invoices | When working with foreign parties, it is customary to issue invoices to counterparties. Under Ukrainian law, it is customary to conduct transactions using certificates of completion. It is also advisable to have a Letter of Justification, which makes it easy to confirm the type of service for which funds were transferred. |
Indication of tax residency | It is important to specify tax residency certificates in the contract. This will allow the parties to be identified as residents of different countries who are liable for taxes at their place of registration (citizenship). |
Professional tax advice will help ensure, in transactions with foreign clients, that the contractor and client appear to be fully independent and demonstrate that the service is genuine and not based on an employment relationship.
Forming a Legal Entity
A company’s tax status is the key requirement that allows it to receive payments from foreign clients without any negative consequences. The most effective and advantageous legal entity structure for freelancers and small businesses is a sole proprietorship (FOP) in the third tax group under the single tax system, which is not subject to VAT. When registering an individual entrepreneur in the second tax group, it is important to take into account the ban on the export of goods (services).
When scaling up their business or working on large projects, Ukrainian companies with the following organizational forms engage in secure cooperation with foreign clients limited liability companies. LLCs operating under the general or simplified tax systems have all the tools needed to conduct export operations while minimizing tax risks when working with foreign clients and eliminating currency risks.
Selecting KVED Codes
Before providing services to foreign customers, it is necessary to obtain tax advice and verify that the KVED codes listed in the taxpayer’s registry match the KVED codes corresponding to the actual services provided. It is critically important that the codes match the services described on the invoice.
Mistakes Entrepreneurs Make When Working with Foreign Clients
In international business, common mistakes that can lead to tax risks for companies with foreign beneficiaries or overseas clients most often include:
Incorrect tax structuring.
Vague or non-transparent contractual arrangements.
Unverified residency of the parties or missing tax residency certificates.
Incorrect allocation of tax liabilities in contracts.
Incomplete tax payments or delays in filing financial statements.
Such errors in tax planning may result in penalties, disputes with the tax authorities, or the freezing of a corporate account.
Tax Consulting for Ukrainian entrepreneurs and foreign clients provide an opportunity to thoroughly analyze the implications of contracts and agreements and prevent legal, economic, and financial risks. Timely expert support allows you to prepare a complete set of documents in advance for tax authorities and financial institutions in the event of disputes. Maira Consult’s support will resolve questions about how to avoid tax risks when working with foreign clients and help you operate without lawsuits, additional tax assessments, or fines.
