The current legislation of Ukraine permits foreign legal entities forming its subsidiaries in Ukraine.
There are 2 types of such formations 1) representative office (not considered as legal entity, non-taxable, with no right to conduct commercial activity) and 2) permanent establishment (not considered as legal entity, taxable, entitled to conduct commercial activity), both of which have limited legal capacity with many restrictions on holding full-fledged commercial activity (e.g. investment activity, etc).
Tax legislation of Ukraine recognizes a permanent establishment as a tax payer, but its taxation treatment is much less favourable than Ukrainian legal entities. By way of example, any financing, obtained by permanent establishment from its head office shall be taxed at the rate of 25%. In addition VAT taxation is also not beneficial for permanent establishment comparing to LLC, for example.
Contrary, the representative office is not a tax payer, however, only if its functions include purchase of goods for own purposes, search of information, conduct of any preparatory or auxiliary actions to its head office in Ukraine, like some promotional campaigns, participations in exhibitions, etc. If the representative office conducts any other activities, it is recognised as the permanent establishment with respective tax implications.
Legislation lays down special treatment of bank accounts in domestic and foreign currencies for both representative office and permanent establishment. Representative offices may open bank accounts of “H” type, which may be used only for transactions related to maintenance of its activity. All other transactions through such accounts are very limited. Permanent establishments may open bank accounts of “Ï” type, which may be used for wider list of transactions and are almost identical to accounts of ordinary Ukrainian business entities (however, there are some limitations on purchase of foreign currency, prohibition of investment activity through such accounts comparing to Ukrainian residents). Also conduct of foreign trade activity and possibility of sale-purchase of land in Ukraine are also very restricted for both representative office and permanent establishment.
Currency legislation recognizes representative office and permanent establishment as residents, i.e. all payments within Ukraine are to be effected only in national currency – hryvna. Payments in foreign currency require obtainment of individual license from the National Bank of Ukraine. Expatriation of profits by foreign representative offices and permanent establishments shall be subject to additional 15% withholding tax.
In addition, a one-time state registration duty for opening representative office or permanent establishment in the amount of 2.500 USD is payable to the Ministry of economy of Ukraine (please note that it is only a state duty, which does not include attorney`s fee, translation, apostil and other paperwork expenses). Furthermore, some draft laws, if adopted, shall require additional accreditation of representative offices and permanent establishments in the competent state bodies.
The only advantage of representative office and permanent establishment comparing to limited liability company is that foreign employees are not required to obtain work permits, while it is obligatory for Ukrainian legal entities.
Alternatively, limited liability company has complete legal capacity with no restrictions or limitations attributable to representative office or permanent establishment, mentioned above. In addition, forming LLC takes approx. 700 USD including attorney`s fee, translation, apostil and other paperwork expenses. Thus, advantages are evident.
Based on foregoing, establishment of LLC in Ukraine is more advantageous and, thus, more advisable for foreign companies comparing to registering representative office or opening permanent establishment.