What rate of withholding tax in Ukraine in connection with the payment of interest - in the version of the Convention between Ukraine and Cyprus until 2020 (as interest was accrued until 2020) or in the version after 2020? On January 1, 2020, the Protocol to the Convention between Ukraine and Cyprus entered into force, which increased the repatriation tax rate from 2 to 5%. Let's figure it out.
To answer the question it is necessary to mention that according to paragraph 141.4.2 of the Tax Code of Ukraine (hereinafter – the Tax Code) the obligation to pay withholding tax arises at the time of payment of the relevant income (in this case interest) by the resident in favor of the non-resident and not at the time of its accrual. Also, in accordance with the Protocol to the Convention, it will apply to withholding tax in respect of amounts paid, in particular, after 1 January of the calendar year following the date of entry into force of the Protocol. The time of accrual is important to reflect the relevant payments as part of tax expenses, but not for withholding tax purposes.
Given the above, since the date of entry into force of the Protocol for Ukraine is November 28, 2019, and according to the terms of the request the interest is paid in 2020, the rules of the Convention as amended by the Protocol should be applied to such interest. That is, the withholding tax rate will be 5%. In fact, this was reported by the tax authorities in letter No. 1672.
It should also be noted that this is also true for other types of income provided for in the Protocol, in particular, dividends and capital gains tax (first of all, payments for securities, corporate rights). In addition, the entry into force of the Protocol was too painful for capital gains tax, as such payments to Cypriot residents for securities and corporate rights require a 15% withholding tax in Ukraine (such payments were not subject to tax in Ukraine before the entry into force of the Protocol).
The reduced rate of withholding tax provided for in the Convention (even if it has been increased by the Protocol) may be applied provided that the recipient of the income is its beneficiary, ie the actual owner. In addition, after the entry into force on May 23 of Law of Ukraine ‘On Amendments to the Tax Code of Ukraine to Improve Tax Administration, Eliminate Technical and Logical Inconsistencies in Tax Legislation’ No. 466-IX of January 16, 2020 (hereinafter – Law No. 466) the definition of beneficial owner was finally detailed in the Tax Code. Until now, we have had to focus only on clarifications, case law and Commentary on the Model Tax Convention of the Organization for Economic Cooperation and Development.
As a result of detailing, the sufficiency of material/technical resources of a non-resident to carry out the relevant activity was singled out as one of the main signs of beneficiary. In addition, the most reliable source for its determination is the financial statements of the non-resident together with the notes.
