Registration and support of companies
IT business means ample opportunities and numerous advantages in the form of simplicity of the services provided, an annual increase in demand for information services, and the possibility of doing business remotely. However, it is also a lot of risks and nuances associated with the specifics of this type of business, which should certainly be taken into account when building a business. In this article, we propose to consider the key problems in the field of taxation that IT business owners most often face, as well as possible solutions.
The first issue in which you may need the help of our experts is the issue of international structuring and tax planning, which will help to optimize the tax burden for your business in a legal way.
When deciding on the registration of a company, it is necessary to understand in advance its function in the business structure, since the choice of jurisdiction for the incorporation of a company primarily depends on the purposes for which the company is created. For example, to create a holding, first of all, you should pay attention to countries whose tax legislation provides for exemption from taxation or tax incentives for receiving and distributing dividends. For operating companies, it is worth choosing jurisdictions with a moderate tax burden or preferential IP-box regimes.
Our team will conduct a detailed analysis of foreign legislation and offer you several options for jurisdictions that are most suitable for your type of activity, as well as calculate the tax burden, which will greatly facilitate the choice of jurisdiction for your company. At this stage, we can also advise you on the application of preferential regimes for IT, for example, the use of IP-box modes, as well as on the protection of intellectual property rights, which are the most important intangible asset of an IT company.
The second issue that you will certainly face as an owner of an IT business is, of course, the already sensational rules of controlled foreign companies, implemented in 2020 by Law No. 466. Under the new rules, the profits of foreign companies for which you are a controlling person are subject to inclusion in your total taxable income in proportion to your interest in the company, and, accordingly, are subject to taxation in Ukraine. Despite the fact that the Tax Code provides for some exceptions under which companies can be exempted from taxation in Ukraine, you will in any case be obligated to prepare and submit reports of a foreign company to the Ukrainian tax authorities.
Please note that these rules come into force as early as 2022, and the same year is indicated as the first reporting year for the report on controlled foreign companies.
Our team will prepare for you a detailed consultation on the applicability of the rules of controlled foreign companies to your business, as well as help you build the most profitable strategy for tax planning and preparing your structure for the new rules.
Economic presence and main goal test
One of the most problematic issues in the activities of an IT company is economic presence. Substance requirements – business control and management in the country of registration, presence of a real local office and employees – are applied by the tax authorities to any business, including IT. Since the activities of IT companies do not depend on being tied to one place, company owners are often frivolous about creating an economic presence in the country of registration. As a result, IT companies are faced with the recognition of their structures as fictitious, the loss of tax benefits and advantages in the country of registration and business, and moreover, the closure of bank accounts.
Moreover, in the course of economic activity, situations may arise in which it will be necessary to prove to the tax authorities the economic feasibility of certain operations. For example, in the case of purchasing services from a counterparty that your company specializes in, it will be necessary to prove the economic necessity of acquiring such services and the fact that the purchased product is used in the business activities of an IT company.
We can advise you on establishing and maintaining an economic presence in your company’s country of incorporation, as substance requirements may vary depending on the chosen jurisdiction and specific type of activity.
The activity of IT companies is often accompanied by the risk of retraining a non-profit representative office into a permanent representative office. A non-profit representative office may carry out activities of a preparatory or auxiliary nature in relation to the parent company in the territory of another state and is not subject to taxation in this state. However, as soon as the scope of the activity goes beyond the preparatory nature, such representation will be recognized as permanent and, accordingly, will be subject to taxation in the state of its location.
Our team will analyze the risks of recognition of a permanent establishment in accordance with the criteria provided for by bilateral conventions for the avoidance of double taxation, and also calculate the tax burden in case of recognition of a permanent establishment.
When running an IT business, you also cannot avoid issues related to value added tax. Is the operation for the supply of IT services subject to VAT? Where will the place of supply of services be recognized? Are there exemptions for this operation?
For example, the Tax Code of Ukraine for the period up to 2023 provides for VAT exemption for all operations for the supply of software products. However, software products may include both software, which is considered part of the supply of software products and is exempt from VAT, and other derivative services, which are considered informatization services and are subject to VAT on a general basis. Accordingly, technical support, which is not included in the supply of software products, is subject to VAT at the basic rate.
We will help you get answers to the above questions and avoid the difficulties associated with determining the place of supply of services, as well as applying preferential treatment for IT services.
Attracting sole proprietors is a convenient and mutually beneficial way of doing IT business, however, it is also accompanied by significant risks. For example, quite often there is a risk of FLP retraining as full-time employees and, accordingly, there are obligations to maintain accounting and personnel records, as well as pay taxes on employees’ income. In order to avoid recognizing such relations as labor relations with all the ensuing fines and additional charges, it is worth providing for some isolation – for example, the work of FLP outside the office, remotely, using their own equipment, and it is desirable that FLP cooperate with several companies.
Our team will advise you on the taxation of sole proprietors, the choice of the optimal group of the simplified system, and also analyze the risks of retraining the sole proprietor as a full-time employee.