How to get paid access to software products (computer programs) from a related non-resident person without the risks of additional VAT, repatriation tax and increasing the object of taxation with income tax?

VAT

The place of supply of services for access to software products is the place where the recipient of services is registered as a business entity. Accordingly, such a transaction may be subject to VAT taxation in Ukraine.

Clause 26-1 of Subsection 2 of Section XX of the Tax Code of Ukraine (hereinafter referred to as the TCU) stipulates that temporarily, from January 1, 2013 to January 1, 2023, transactions for the supply of software products, as well as transactions with software products, the payment for which is not considered royalty, are exempt from VAT.

According to clauses 14.1.225 of the Code of Civil Procedure, royalty is any payment received as remuneration for the use or for granting the right to use an object of intellectual property rights, in particular, a computer program. Royalty payments received are not considered:

• as remuneration for the use of a computer program, if the terms of use are limited by the functional purpose of such a program and its reproduction is limited to the number of copies necessary for such use (use by the “end consumer”);
• for the purchase of copies (copies, instances) of intellectual property objects, including in electronic form, for use according to their functional purpose for final consumption or for resale of such a copy (copy, instance);
• for the purchase of things (including data carriers) in which the objects of intellectual property rights specified in the first paragraph of this subparagraph are embodied or on which they are contained, for the use, possession and/or disposal of a person;
• for the transfer of rights to objects of intellectual property rights, if the terms of the transfer of rights to the object of intellectual property rights grant the person receiving such rights the right to sell or otherwise alienate intellectual property rights or to publish (disclose) secret drawings, models, formulas, processes, intellectual property rights to information regarding industrial, commercial or scientific experience (know-how), except for cases when such publication (disclosure) is mandatory under the legislation of Ukraine;
• for the transfer of the right to distribute copies of software products without the right to reproduce them or if their reproduction is limited to use by the end consumer.

The State Fiscal Service, in its individual tax consultation dated 11.09.2018 No. 3957/6/99-99-15-03-02-15/IPK, expressed the following position: “if, under the terms of the contract, access to software products is provided, including an online service (Internet service, Internet platform), and by using such access, the payer receives software products (its copy) or the right to use software products, then for VAT purposes, the transaction for providing access to Internet sites and/or online services (Internet platforms) is regarded as a transaction for the supply of software products or a transaction for the provision of the right to use software products, and is not subject to VAT in accordance with Clause 26-1, Subsection 2, Section XX of the Tax Code of Ukraine or Subclause 196.1.6, Clause 196.1, Article 196, Section V of the Tax Code of Ukraine (depending on the terms of supply of software products specified in contract). If, according to the terms of the contract, the provision of access to software products means exclusively the provision of the right to search, process and obtain information and other similar actions carried out using such software products, without the actual supply of the software product (its copy) to the buyer, then the transaction for the provision of such access is regarded as a transaction for the provision of services for the search, process, obtain information and other similar actions, which is subject to VAT in the generally established manner at a rate of 20%.

Thus, in order to avoid VAT tax consequences from the provision of access to software products by a non-resident, the following conditions must be met:

1) payments for the use of the program must not meet the definition of royalty;

2) access to software products must not mean exclusively the provision of the right to search, process and obtain information and other similar actions carried out using such software products, without the actual supply of the software product (its copy), or the right to use the software products.

Repatriation tax

If the payment for providing access to a computer program does not meet the definition of “royalty”, then the transaction for providing access rights to the program will be exempt from paying repatriation tax in accordance with subparagraph “j” of subparagraph 141.4.1 of the Tax Code of Ukraine.

Adjustment of the object of taxation by income tax

The financial result will not require adjustment (increase) by 30% in accordance with subparagraph 140.5.4 of the Tax Code of Ukraine, if the country of residence of the supplier is not included in the List of “low-tax” countries and the organizational and legal form of the non-resident is not included in the relevant List. However, to increase the financial result by 30% and which will not be necessary if the expenses with such a non-resident will comply with the “arm’s length” rule.

It will also be necessary to prove the compliance of the terms of the agreement on providing access to the program with the “arm’s length” rule, if the transaction meets the criteria for being controlled in accordance with Article 39 of the Tax Code.