Working with non-residents: where tax risks arise for IT-businesses

What are the tax implications of paying a foreign cloud infrastructure provider, and does a Ukrainian specialist’s work on behalf of a non-resident create a risk of establishing a permanent establishment in Ukraine? The answers depend not on the name of the contract or whether the business belongs to the IT sector, but on the actual substance of the transactions.

This topic was discussed during the professional event «Tax strategies in IT», which took place on July 17 at the initiative of the NGO International Association of Advisors. Oleksandr Gyurzy, a member of the UNBA Committee on customs and tax law, participated in the discussion.

One of the practical issues raised was the payment of non-resident income tax when paying a foreign provider for cloud infrastructure services, hosting, server rack rental, and Infrastructure as a Service (IaaS) — the provision of virtual servers, storage, and network resources as a service.

O. Gyurzy explained that the tax authority distinguishes between payments for services and royalty payments depending on exactly which rights and resources the customer receives. If a non-resident merely provides access to cloud infrastructure or information resources without transferring ownership rights to intellectual property or physical server equipment for use, the payment is considered compensation for the cost of services rather than a royalty.

Under this approach, the payment is not subject to non-resident income tax in accordance with paragraph 141.4 of the Tax Code. The speaker noted that the State Tax Service has adhered to this position in recent years, particularly in individual tax consultations.

The final classification of payments always depends on the actual terms of the specific agreement and the true substance of the business transactions. It is the analysis of the subject matter of the agreement, the scope of the rights transferred, the terms of software use and the supporting documents that is decisive in determining the tax consequences.

Separately, the participants discussed the risks of a foreign company establishing a permanent establishment in Ukraine. O. Gyurzy emphasized that these criteria do not depend on whether the business belongs to the IT sector. They are determined by the Tax Code, international double taxation treaties, and the approaches set forth in the Commentary on the OECD Model Convention.

The mere fact that a Ukrainian specialist performs work or provides services to a foreign company does not automatically create a permanent establishment. The risks increase if core business processes are actually carried out on Ukrainian territory, operations are managed, or key decisions are made there, while the non-resident accumulates income in another jurisdiction.

Panel participants also discussed modern approaches to structuring software transactions, the relationship between the SaaS model and royalties, confirming the status of the beneficial owner of income, documenting the business purpose, the specifics of applying DEMPE analysis when paying royalties to related non-residents, and practical aspects of complying with the «arm’s length» principle in transfer pricing.