It should be recalled that Verkhovna Rada of Ukraine ratified Multilateral Instrument (MLI). This document consequences for business – in the following.
Glossary Clarification
Ukraine concluded international treaties on avoidance of double taxation with many countries (Double taxation treaties, hereinafter – DTT). Their current list is regularly confirmed by letters from the State Fiscal Service of Ukraine. Today, many provisions of such DTT are irrevocably obsolete, which allows to use them for aggressively optimizing of tax payments. And this applies not only to Ukraine but also to the world as a whole.
It would take a long time to update these DTT based on the model convention of the Organization for Economic Cooperation and Development (OECD). In this regard, the civilized world chose a different way. OECD developed the Multilateral Convention – MLI, which included a number of standard amendments to DTT. Countries adhere to it through signing a protocol detailing which countries want to apply MLI, as well as MLI provisions that agree to apply. At the same time, the specific provisions of MLI within the framework of a particular DTT apply only if both countries – the parties of such a DTT have chosen them. A simplified search task is supported by a special table, posted on OECD website, which clearly shows which countries by which MLI articles coincide.
The main provisions of MLI chosen by Ukraine
Main provisions of MLI chosen by Ukraine are:
- Principal purpose test (hereinafter – PPT) (Art. 7 MLI). It does not allow the use of the DTT exemptions (in particular, Withholding Tax (hereinafter – WHT), if the main purpose of the transaction is to obtain such exemptions. However, PPT is not a beneficial test, they cannot be equated. The latter will apply the tax service in order to additionally pay WHT in parallel.
The tax authorities will conclude whether this condition is met. At the same time, taking into account the practice of tax audits, in Ukraine we can expect that the SFSU will not be deeply involved into what the taxpayer intended to optimize the tax or not, and will begin to massively additionally accrue WHT to payers. How can be a person protected from this? First of all, due to the gathering of all possible evidence that a particular business model associated with payments abroad is due only to economic and other circumstances.
- Income from the sale of shares and other comparable rights (including corporate rights other than securities), the value of which is more than 50% over the past 365 days prior to such sale is formed by the property located in the territory of Ukraine. This rule is set forth in Art. 9 MLI. Its analogs before MLI are already contained in a number of DTTs (namely, in Art. 13 Capital gains). It assumes that the proceeds from the sale of such shares/rights should be taxed in Ukraine if the overwhelming part of the value of such rights is formed by real estate in that same country.
However, this rule should be applied if a buyer of corporate rights that meets the above conditions is another company resident in Ukraine. If both the seller and the buyer are non-residents, much will depend on local rules that, in the light of such changes, will be established by the Tax Code of Ukraine (hereinafter – TCU).
This conclusion is to some extent complementary to the previous one. It is difficult to predict whether the SFSU will actively apply this rule until the appropriate changes are made to the TCU. At the same time, there is such a risk. There are no direct restrictions on this, and this is facilitated by the priority of international agreements over local rules recorded in Art. 3 of TCU. Also, it should be noted that draft bill, which to be modified under the rules of BEPS by TCU, envisaged changes, including the rules on sale of shares/corporate rights under consideration.
