Paying membership fees to a non-resident: what about income tax?

Is a transaction involving payment of membership fees by a resident to a non-resident subject to income tax?

According to subpara. 14.1.122 of the TCU, non-residents are

a) foreign companies, organizations, partnerships and other associations of persons established in accordance with the laws of other states, their registered (accredited or legalized) branches, representative offices and other separate subdivisions located in Ukraine, as well as legal entities without the status of a legal entity established in accordance with the laws of foreign states or territories that are not residents of Ukraine, in accordance with the provisions of the TCU.

b) Diplomatic missions, consular offices and other official representative offices of other states and international organizations in Ukraine;

c) individuals who are not residents of Ukraine.

According to para. 133.2 of the TCU, non-resident income tax payers include:

♦ legal entities established in any organizational and legal form and receiving income originating from Ukraine, except for institutions and organizations that have diplomatic privileges or immunity under international treaties of Ukraine (sub-clause 133.2.1 of the TCU)

♦ non-residents who carry out business activities in Ukraine through a permanent establishment and/or receive income originating from Ukraine, and other non-residents who are obliged to pay tax in accordance with the procedure established by Section III of the TCU (subpara. 133.2.2 of the TCU).

In accordance with the provisions of para. 141.4 of the TCU, income received by a non-resident with a source of origin in Ukraine is taxed in accordance with the procedure and at the rates specified in Art. 141 of the TCU.

The list of income earned by a non-resident with its source of origin in Ukraine is set out in subpara. 141.4.1 of the TCU.

Taking into account that membership fees are not singled out as a separate type of income received by a non-resident with a source of origin in Ukraine, such payments are considered as part of other income from the non-resident's business activities in Ukraine (sub-clause "k" of clause 141.4.1 of the TCU).

A resident, including an individual entrepreneur, an individual engaged in independent professional activity, or a business entity (legal entity or individual entrepreneur) that has chosen the simplified taxation system, or another non-resident conducting business activities through a permanent establishment in Ukraine, who makes any payment in favor of a non-resident or an authorized person from income with a source of origin in Ukraine received by such non-resident (including to accounts of a non-resident maintained by a non-resident). The requirements of this paragraph do not apply to the income of non-residents received by them through their permanent establishments in Ukraine (subpara. 1 of subpara. 141.4.2 of the TCU).

If the payment of income originating from Ukraine is made in favor of an international organization that has immunity under international treaties, such income is not subject to taxation in Ukraine.

Thus, if a resident pays membership fees in favor of a non-resident, a tax of 15% of the amount is withheld and paid by such non-resident when such fees are paid, unless otherwise provided by the provisions of applicable international agreements.