If your company plans to enter Ukraine through a commercial branch (permanent establishment), recent tax developments deserve close attention.

Recent guidance from the Ukrainian tax authorities and court practice may change the tax outcome of a common market entry structure.

Two points stand out:

  • VAT. The tax authorities now take the view that if a foreign company has a commercial branch (permanent establishment) in Ukraine, services provided to that foreign company are generally treated as supplied in Ukraine (e.g., tax ruling dated 25.05.2026 No. 3007/ІПК/99-00-21-03-02 ІПК)). In practice, they no longer focus on the usual place-of-supply rules. Instead, the existence of the branch becomes the key factor, which may trigger 20% Ukrainian VAT.
  • Withholding tax. Recent court cases (e.g., case No. 280/4264/21) show that the tax authorities increasingly challenge treaty benefits when a foreign company has a commercial branch in Ukraine. Tax treaties usually deny reduced withholding tax rates only for income connected with the branch. However, in practice, UA tax authorities may interpret this rule broadly and argue that various types of passive income fall within it.
Why does this matter?

Many foreign investors start by opening a representative office. As their business grows, they convert it into a commercial branch, establish a Ukrainian subsidiary (LLC) for greater operational flexibility, and eventually close the branch.

The problem is that closing a branch can take several years. During that period, the branch and the subsidiary may operate at the same time.

This overlap can create unexpected tax costs:

  • Services between the Ukrainian subsidiary and the foreign parent may become subject to 20% Ukrainian VAT.
  • Payments of dividends, interest or royalties to the parent company may no longer qualify for reduced treaty withholding tax rates.
  • Even independent Ukrainian suppliers may charge Ukrainian VAT on services provided to the foreign parent simply because it still has a commercial branch in Ukraine.
The key takeaways
  • When investing in Ukraine, the order and timing of each step matter. The tax impact of a commercial branch may continue long after it has stopped operating, so businesses should consider these issues before choosing or changing their market entry structure.
  • In most cases, if the goal is to engage in a long-term full-scale business in Ukraine, optimal way may be establishing the subsidiary from the very start.

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