To resolve most important social and economic tasks of the state, the laws regulating taxation of business entities should provide for:

• Optimal combination of fiscal and incentive functions of taxation;
• Stability of general taxation rules during several years;
• Elimination of double taxation;
• Conformity with taxation systems of other states.

Tax rates shall bear a normative character and may not be established individually for each business entity.

In accordance with the Art 92 of the Constitution of Ukraine taxes and the taxation system in Ukraine shall be established exclusively by laws of Ukraine.

The main legal act which stipulates basic principles of the Ukrainian taxation system and establishes taxes is the Law of Ukraine on Taxation System of 25.06.91 according to which the Ukrainian taxation system consists of 26 national and 17 local taxes.

The amount of taxes which should be paid by a non-resident and the appropriate payment order depend on the type of business activity of such a non-resident. Generally, there are five possible types of business activity a non-resident could arrange in Ukraine, namely:

• Commercial contracts with residents of Ukraine (export/import, leasing etc.);
• Business activity through a permanent representative office;
• Joint activity with residents on the territory of Ukraine without forming a legal entity;
• Business activity through an incorporated joint venture or subsidiary.

In this article we would like to pay your attention to Profit tax which is probably the most important for non-residents' business activity.

The special act which sets the main principles and rules of the taxation of profit of enterprises in Ukraine is the Law of Ukraine on Taxation of Profit of Enterprises of 22 May 1997 (hereinafter called PT Act), according to which payers of profit tax among non-residents are:

• Legal entities or individuals set up in any legal form receiving revenues originating from Ukraine;
• Permanent establishments (representative offices) of non-residents receiving revenues originating from Ukraine or acting as agents (representatives) for such non-residents.

According to PT Act any revenues received by non-residents from business activities in Ukraine shall be taxed in the order and at rates set in this Law.

Thus in accordance with the item 13.2 of PT Act a resident or a non-resident's permanent establishment making any payments to the non-resident, resulting from business activities in Ukraine, shall be obliged to deduct and pay a so-called "withholding tax" at the rate of 15 %. It is paid to the state budget at the time of such payment, unless otherwise provided by provisions of effective international treaties.

For taxation purposes revenues received by non-residents from sources in Ukraine shall be:

• interest;
• dividends;
• royalties;
• freight;
• leasing (rent) payment;
• revenues from the sale of real estate located on the territory of Ukraine;
• profits from transactions with securities or other corporate rights;
• revenues from joint business activities on the territory of Ukraine and revenues from long-term contracts on the territory of Ukraine;
• remuneration for non-residents' cultural, educational, religious, sport and entertainment activities on the territory of Ukraine;
• brokerage, commission, or agency fees;
• insurance or reinsurance contributions and premiums;
• revenues in the form of gambling wins;
• revenues in the form of charitable contributions and donations;
• other revenues from business on the territory of Ukraine, except for revenues in the form of compensation of the cost of goods (works, services) transferred to residents from such non-residents.

As it was mentioned above a uniform withholding tax rate is 15%. But there are certain exceptions. For instance, non-residents' incomes paid by residents as compensation for transport freight shall be taxable at the rate of 6 %. The special order and rates are also provided for taxation of insurance and reinsurance premiums, fees for advertising activity, etc.

Under PT Act a permanent representative office of a non-resident in Ukraine is a permanent place through which a non-resident's activity is carried out on the territory of Ukraine. In particular, to permanent representative offices belong: branch, affiliate, office, plant, factory, workshop, mine, petroleum or gas wells, opencast mine, etc.

A permanent representative office of a foreign company in Ukraine is not considered as a legal entity, but its tax responsibilities are equal that of a legal entity.

Revenues of non-residents, operating on the territory of Ukraine through their permanent establishments, shall be taxable on general terms (i.e. as revenues of residents of Ukraine). As of January 1, 2004 the basic rate is 25%. For taxation purposes, such permanent establishments shall be equal to a taxpayer operating independently of such a non-resident.

When a non-resident's incomes from sources in Ukraine cannot be determined by direct calculation, such incomes shall be ascertained as the difference between gross revenues and gross expenses, applying a coefficient of 0.7 to the gross revenue thus obtained.

A permanent establishment, before it begins its operations, shall be registered with the tax body at the place of its location. Under PT Act for taxation purposes residents acting under non-residents' authority resulting in civil law rights and obligations (i.e. entering into contracts on behalf of non-resident) shall be regarded as permanent establishments.

Use of advantages provided by treaties on avoiding of double taxation is the most essential, efficient and legal method of tax planning. All aspects of taxation of profit of enterprises described above are implied in practice only if there is no international tax treaty with Ukraine.

Thus item 18.1 of PT Act provides that if an international treaty ratified by the Verkhovna Rada (the Parliament of Ukraine) contains rules other than those stipulated by PT Act, then, the rules of the international treaty shall be applied.

The list of countries that have signed agreements on avoiding of double taxation with Ukraine (or with the former USSR) include: Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Yugoslavia, Finland, France, Georgia, Germany, Great Britain, Hungary, India, Indonesia, Italy, Japan, Kazakhstan, Kirgizia, Latvia, Lithuania, Macedonia, Malaysia, Moldova, Mongolia, Netherlands, Norway, Poland, Republic of Korea, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, Turkmenistan, USA and Uzbekistan.

An incorporated joint venture and a subsidiary are legal entities under the Ukrainian legislation. So, they are residents of Ukraine and shall to pay all appropriate taxes. Revenues of non-residents obtained as a result of the joint business activity with residents of Ukraine without forming a legal entity are also subject to withholding tax.

Before making an investment decision, an investor looks at a whole series of factors. It is worth noting that some of Ukraine's economic indicators are attractive to investors, namely:

• Low rate of inflation,
• Stable exchange rate,
• Political stability,
• Rate of privatisation (although portfolio and large strategic investors look for large enterprises with depth of privatisation at least at 50% while in Ukraine to date there has not been enough of them).

But there are factors influencing economic conditions like insufficient credit resources and their high price, excessive regulation and taxation of the economy.

The steps necessary for the improvement of the investment climate in Ukraine include the resolution of outstanding problems involving foreign traders and investors in Ukraine in an open and transparent manner and consistent with Ukraine's international obligations for the independent and fair adjudication of cases and the recognition and enforcement of foreign arbitral awards through the relevant legal procedure.

Everyone welcomed passage of the Law on the Judiciary and the empowerment of the enforcement authority in the Ministry of Justice, and looks forward to enactment of the new Civil Code (as of January 1, 2004), and the adoption of a Tax Code. The progress of continued agricultural reforms in Ukraine, especially as a result of the 2001 passage of the Land Code, is outstanding. Besides, Ukraine makes efforts to take all necessary steps towards WTO accession.

Ukraine needs significant amounts of investment. In order to apply them effectively, the Ukrainian investment infrastructure needs to be significantly improved, both in quality and quantity. Foreign companies planning to start their business in Ukraine require well-developed administrative, tax, and court systems in order to ensure security for their investments. Existing systems require further attention, particularly with regard to resolving disagreements on fulfillment of commercial contract obligations, and regulating problems with the tax authorities.

Anyway, nowadays Ukraine is viewed by investors-both foreign and Ukrainian-as a more attractive place to invest their capital.