We use a case example where an audit firm based in Ukraine and a foreign entity entered into an agreement for due diligence services. The foreign entity is carrying out an international technical assistance project under the Law of Ukraine, which grants it VAT exemption. Will the resident firm also be exempt from VAT for the due diligence transaction?
If an international treaty, approved by the Verkhovna Rada of Ukraine, has rules different from those in the Tax Code of Ukraine (TC), the treaty’s rules take precedence (clause 3.2 of the TC). Ukraine’s Constitution recognizes such treaties as part of national legislation (Article 9 of the Constitution).
The international treaty rules exempt income sourced in Ukraine from taxation, reduce the tax rate, or refund the difference between the paid tax and the amount the non-resident owes under the treaty (Article 103 of the TC). The Ukrainian Law No. 360 ratified the Framework Agreement between the Government of Ukraine and the Commission of the European Communities, signed in Brussels on December 12, 2006. According to Article 3 of the Framework Agreement, projects funded by Community funds are not subject to various taxes and fees in Ukraine, including VAT. Contracts financed by the Community are exempt from VAT, stamp duties, registration fees, or similar charges in Ukraine, irrespective of the parties’ origin. If the contract involves goods from Ukraine, it must be based on prices excluding value-added tax. “Goods” include any product, service, and/or rights for sale. The term “contract” in clauses 3.2-3.7 of Article 3 refers to a written agreement between the Commission of the European Communities and a legal entity or individual, made to implement a foreign aid project (program) funded by the European Community (Law No. 360).
Therefore, if the non-resident represents the Commission of the European Communities, the due diligence services provided under the contract are not subject to VAT.
