REALWorld Law

Corporate vehicles

Permanent establishment

Does the concept of a 'permanent establishment' apply when a foreign person invests in real estate and, if so, how much does it cost to set up such a permanent establishment, how long does it take and what corporate governance requirements apply?



The applicable legislation does not lay down direct requirements for the registration of a permanent establishment for the purposes of investing in real estate situated in Ukraine.

However, the Ukrainian tax authorities have expressed the opinion that the ownership of Ukrainian real estate may be considered to constitute a permanent location of activity in Ukraine (ie a permanent establishment) subject to mandatory registration with the tax authorities. This position is arguable as mere ownership as such does not lead to permanent establishment in absence of commercial activities, or personnel acting on behalf of the foreign company etc. Moreover, there is a separate requirement for non-resident investors (foreign companies) to register with the Ukrainian tax authorities after acquiring a real estate asset which is subject to taxation in Ukraine.

A permanent establishment of a non-resident may be registered as a representative office in Ukraine. The representative office of a foreign entity is subject to registration with the Ukrainian Ministry of the Economy, the State Department of Statistics, the local tax authorities and the state pension fund. Employment records for all the employees of a permanent establishment must also be kept with the General Directorate for Servicing International Representative Offices.

The Ukrainian Ministry of the Economy will issue a registration certificate for the representative office within 60 working days following the payment of the state duty and the submission of all required documents. The registration of a representative office with the State Department of Statistics, local tax authorities and the state pension fund takes about three weeks.

The registration of a representative office with the Ukrainian Ministry of the Economy incurs a state duty of 2,270 UAH. Additional expenses (notary's fees, etc) may also be payable.

Under Ukrainian law, a representative office is not a legal entity and operates on behalf of the foreign corporate investor. Ukrainian law does not, therefore, regulate the corporate governance of representative office. The foreign company must, however, appoint the head of the representative office and grant him a power of attorney.

The existence of a permanent establishment once an investment in Ukrainian real estate has been made and the necessity to register a representative office should be reviewed in each particular case depending on the purpose for which the real estate is to be used.

As a rule, specifically in relation to investment in plots of land, foreign investors use a multi-step structure involving the incorporation of a joint venture company in an offshore jurisdiction, which then owns a Ukrainian company, which, in turn, owns another company which holds the real estate located in Ukraine.