Despite possible abuses by non-bona fide businesses, properly structured and implemented secondment arrangements allow attracting highly qualified professionals, improving overall business performance, as well as achieving tax planning goals.

In this article, we discuss the tax features of the secondment arrangements where a Ukrainian company purchases secondment services from a foreign service provider.

Corporate income tax (CIT)

The Tax Code of Ukraine (“the Tax Code”), Article 14.1.183, defines “secondment services” as a commercial or civil agreement under which a person that provides the service (a resident or a non-resident) assigns to another person (a resident or a non-resident) one or several individuals to perform functions set forth in such an agreement.

From a CIT perspective, the Tax Code requires no adjustments to be made in respect of purchasing secondment services from companies that are non-residents of Ukraine. Thus, under the general rule, service fees payable to foreign secondment service provider are fully deductible for CIT purposes.

However, the tax adjustments may be required where the foreign secondment service provider is:

  • registered in a low-tax jurisdiction, such as Cyprus, the UAE, Ireland (the list of such jurisdictions is approved by the Regulation of the Cabinet of Ministers of Ukraine No. 1045 of 27 December 2017); or
  • registered in a specific form, such as the British limited liability partnership (the list of such forms is approved by the Regulation of the Cabinet of Ministers of Ukraine No. 480 of 04 July 2017).

If either of the above conditions apply, deductibility of the secondment service fees will be limited to 70% of their amount.

This tax adjustment is due only where a Ukrainian customer meets three other conditions as well:

  • it is a CIT payer (as opposed to a single tax payer); and
  • it is required to, or it elects to, apply the tax adjustments; and
  • transaction on purchase of secondment services does no qualify as a ‘controlled transaction’ for Ukrainian transfer pricing purposes.

Finally, the above 30% deductibility limitation may be mitigated or eliminated if the Ukrainian customer prepares the transfer pricing documentation (without filing the transfer pricing report). In such a scenario, the taxable base must be adjusted to the ‘arm’s length’ price. Where the purchase of secondment services is regarded as a ‘controlled transaction, the Ukrainian customer will also have to file a transfer pricing report and fulfill other transfer pricing obligations as well.

Withholding tax (WHT)

Secondment services fees are not featured in the list of Ukrainian-source income of non-residents set forth in Article 141.4.1 of the Tax Code. Therefore, a purchase of secondment services from a non-resident supplier should not be subject to the Ukrainian WHT. The said Tax Code provision specifically exempts ordinary business income (the value of services provided, works performed, and goods sold) from the WHT. Such an approach is applied in the Kharkiv Appeal Administrative Court’s ruling of 22 May 2017 in the case No. 820/4154/16.

The Ukrainian tax authorities may, however, object to the above approach by stating that, in a secondment arrangement, it is personnel that is provided (assigned) but not a service. In our view, such a fiscal argument is unsubstantiated because the legal nature of a secondment arrangement is indeed a service under the general definition of a service set forth in Article 901 of the Civil Code of Ukraine, as well as under the definition of a secondment arrangement set forth in the Article 14.1.183 of the Tax Code.

Permanent establishment (PE)

The assignment of personnel under a secondment agreement should not constitute a PE of a non-resident service provider in Ukraine as Article 14.1.193 of the Tax Code specifically excludes secondment services from the list of activities that may give rise to a PE.

Value-added tax (VAT)

Under Article 186.3 of the Tax Code, the place of provision of secondment services is determined as a place where the customer is registered. Therefore, a Ukrainian customer purchasing secondment services from a non-resident provider shall charge output VAT liabilities in accordance with the ‘reverse-charge’ mechanism set forth in Article 208 of the Tax Code. Importantly, Article 208 of the Tax Code requires that the Ukrainian customer assesses output VAT irrespective of whether such a customer is a registered VAT payer.

Thus, the Ukrainian customer must self-assess output VAT liabilities upon transfer of secondment service fees or their acceptance based on the relevant services acceptance protocol, whichever event occurs earlier. If a Ukrainian customer is a registered VAT payer and the assigned personnel perform functions related to VAT-able transactions of the customer, the latter can also recover the previously charged output VAT in the (same) period when output VAT is assessed (the customer must also register the tax invoice in the electronic register). The purchase of secondment services from a non-resident provider will thus effectively be a VAT-neutral transaction.

However, a VAT-related inconvenience may still arise: to register a tax invoice, the Ukrainian customer must secure a sufficient ‘limit’ in the electronic VAT system, which means that the Ukrainian customer must either secure enough input VAT or transfer the relevant amount of cash funds to the relevant account in electronic VAT system.

Personal income tax (PIT), military duty, and social security contribution

Importantly, optimization of Ukrainian payroll-related taxes via secondment services arrangements with a non-resident service provider entails significant tax risks for the Ukrainian customer. In this case, the personnel perform their functions in Ukraine, but neither Ukrainian customer, nor foreign provider pay payroll taxes to the Ukrainian budget. Apparently, should the Ukrainian tax authorities reveal that a business avoids paying payroll-related taxes by way of using secondment arrangements with a foreign provider, the tax authorities will be determined to assess additional taxes to such a business.

To mitigate the abovementioned tax risks, as well as regulatory risks (fines for failure to comply with the employment legislation), the Ukrainian customer should consider employing the personnel assigned to the customer based on the secondment service agreement. In such a case, the Ukrainian customer may pay at least a minimum wage to the seconded personnel and remit the payroll taxes due to the Ukrainian budget. The parties to the secondment agreement may include an explicit provision on employment of the assigned personnel by the customer (while the seconded staff are simultaneously employed with the service provider). Article 14.1.183 of the Tax Code specifically states that such a clause could be negotiated by the parties to a secondment agreement.

Considering that the Ukrainian tax authorities are likely to interpret the laws relating to the secondment services fiscally, they may attempt to deny the deductibility of secondment payments to a foreign provider and the right to the input VAT where the assigned personnel are also hired by the customer. Therefore, the Ukrainian customer should thoroughly document the provision of secondment services by the provider and the performance of functions by the assigned personnel. The customer should also provide solid business reasons to use secondment arrangements and develop relevant business policies to properly regulate issues relating to secondment arrangements at a corporate level.

Regulatory issues

In addition to tax implications, regulatory issues should also be considered before concluding secondment services with foreign providers. There may be arguments that a foreign provider must obtain a ‘permit to hire employees for their further assignment to perform works in Ukraine at another employer’, even despite the absence of a relevant regulation in force on this issue.

Also, the Ukrainian customers should be aware that Article 39 of the Law on Employment of Population prohibits secondment service providers to assign personnel to customers (employers) where:

  • the employer has laid off employees within a year;
  • the employer fails to observe the required number of core employees engaged in core business processes;
  • the employer desires the assigned personnel to perform functions under harmful, dangerous, or physically intensive working conditions.


Secondment arrangements create an opportunity for the customer to attract highly qualified professionals, improve efficiency of specific business processes, and reduce the tax burden. Purchasing secondment services from a provider that is registered in a foreign jurisdiction may be advantageous from the Ukrainian corporate income tax, withholding tax, value-added tax, and payroll related taxes perspectives. At the same time, aggressive tax optimization via secondment arrangements entails significant tax and regulatory risks for a customer. These risks can be mitigated via proper financial clauses, substantiation of business reasons to use secondment arrangements, and relevant corporate policies.

Andriy Reun,  Head of tax practice, and Vitaly Ivashyn, associate, tax practice,

exclusively for «Yurydychna practyka» № 15 (1059), 10.04.2018