Victory in landmark case on status of non-commercial representative office

LA Law Firm defended the interests of an international pharmaceutical company in a tax dispute concerning the non-commercial status of its representative office in Ukraine.

For the first time, the tax authority applied an approach under which it concluded that a significant level of funding of the representative office, relative to the non-resident's income from Ukraine, allegedly indicated the commercial (permanent establishment) nature of its activities. The defendant also argued that registration and pharmacovigilance activities constituted indicators of a permanent establishment.

The LA Law Firm team represented the client both at the pretrial stage and throughout all three judicial instances. The attorneys refuted the tax authority's position on funding, as such an approach is neither provided for by law nor supported by court practice.

A key aspect of the case was also to confirm the approach that at the development stage, a representative office may incur expenses exceeding the profit earned by the parent company from the relevant country. Only by organically developing in a jurisdiction does the company gradually change this ratio to the opposite. Moreover, registration and pharmacovigilance activities, according to court practice, constitute preparatory and auxiliary activities.

As a result of the proceedings, the Supreme Court remanded the case to the court of first instance, which fully granted the claim and cancelled the additional tax assessments.

This decision is the first in terms of the proportion of funding of representative offices and is of fundamental importance, as it will shape the approach and practice of tax authorities toward all representative offices of non-residents, regardless of their sector of activity.

"The market is following this case, as the future of foreign representative offices in Ukraine depends on it. At a time when the temptation to apply a harsh approach to taxpayers is growing, it is especially important to uphold fundamental principles and transparent approaches. In the long term, this is what will benefit the budget," Vitalii Savchuk commented.

The project was led by Partner Vitalii Savchuk, together with Senior Associate Yaroslav Furiaka.