Royalties in favor of a non-resident registered in the form of a partnership (LLP, LP, LLC): tax consequences
Royalties paid to a non-resident with a partnership legal form may create a number of tax consequences for both the royalty payer and the recipient. In this article, we will consider the key aspects related to the taxation of such transactions in Ukraine.
What are royalties?
According to the Tax Code of Ukraine (TCU), royalties are payments of any kind received as a reward for the use or right to use:
intellectual property objects (patents, trademarks, copyrights);
technologies;
information that has commercial value.
Who is the recipient of a partnership?
A partnership (limited partnership) is a form of legal entity that is widely used in international practice. The most common examples of partnerships are:
LLC in the USA;
LP and LLP in the UK.
Partnerships are often used in IT business structures, consulting, licensing and other industries.
In the tax context, it is important to consider the status of the partnership:
Income transparency:
In some jurisdictions (USA, Canada, UK, EU countries), partnerships do not pay taxes on their own, and their profits are distributed among the participants.
Non-transparent (self-taxation):
In this case, the partnership pays taxes on its own in the country of registration.
The status of the partnership affects the application of double taxation agreements (DTAs) between Ukraine and the country of registration.
Tax consequences for Ukraine
Repatriation tax (PNR):
According to the Tax Code of Ukraine, royalties paid to a non-resident are subject to tax at a rate of 15%. This tax is withheld by the royalty payer at the time of payment.
How to reduce the rate?
A reduced rate or exemption from taxation for DTAs is possible if the following conditions are met:
A certificate of partnership residency is available.
Recognition of the partnership as the beneficial owner of income.
Recognition of the beneficial owner of income:
If the partnership is “transparent” for taxation, the tax authorities of Ukraine may not recognize it as the beneficial owner of income. In this case, it is necessary to prove the status of its participants as beneficiaries.
Documentary confirmation:
The royalty payer must obtain:
A certificate of residency of the partnership.
Documents confirming the status of the partnership and its participants (if necessary).
Without these documents, the tax rate will be 15%, even if the UPDO provides for a reduced rate or exemption.
Recommendations for business
Analysis of the structure of the recipient of income:
Check whether the partnership is the beneficial owner of income.
In the case of “transparent” status, clarify the tax status of the partnership participants.
Documentation:
Obtain a certificate of residency of the partnership.
If necessary, documents confirming the status of the partnership participants.
Application of the UPDO:
Make sure that the UPDO is in force between Ukraine and the country of registration of the non-resident.
Apply the UPDO only if all necessary documents are available.
Consultations with tax specialists:
The complexity of taxation of partnerships requires a professional analysis of each situation.
Conclusion
Paying royalties to a non-resident registered in the form of a partnership requires a careful approach. The tax status of the partnership, its participants, and compliance with the requirements of the Tax Code of Ukraine and international agreements are key factors in minimizing risks.
If you are planning payments to a partnership or other form of cooperation with non-residents, contact our specialists. We will help you avoid tax risks and ensure compliance with all requirements.
Contact us for a consultation today!
