The Tax Code of Ukraine and most of Ukraine's double taxation agreements require compliance with at least 2 requirements for purposes of applying the tax treaty benefits to payments of dividends, interest, royalties and, potentially, certain other payments to foreign persons (companies).
In particular, to enjoy the tax treaty benefits in respect of the Ukraine-sourced payments referred to above, a foreign person (company) shall be:
- a tax resident of the jurisdiction which Ukraine has an effective double taxation treaty with, and
- the beneficial owner of the income received from the relevant Ukrainian company.
The first requirement is easy to meet – a Ukrainian company simply asks for and obtains a tax residency certificate from the relevant foreign person (company).
The second requirement poses more difficulties to comply with. It is also the most common reason for the denial of the tax treaty benefits and application of the relevant tax penalties by the Ukrainian tax authorities. This is due to the fact that the beneficial ownership concept is new to Ukraine, convoluted and fact-driven – all these factors complicate the proper application of this concept by both the taxpayers and the Ukrainian tax authorities.
To have a better understanding of whether or not the beneficial ownership test is met, the associated tax risks and / or solutions aimed at reducing these risks, the Ukrainian companies should consider:
- performing an independent review of the payments to foreign companies and receiving an unbiased professional opinion on correctness of the tax treatment of such payments and compliance with the beneficial ownership requirement; and
- documenting the beneficial ownership status or, if the tax risks are revealed, take the necessary steps to mitigate the tax exposure in accordance with the recommendations provided.
Expert: Oleg Chaika, Partner and Head of the International Tax and Cross-Border Transactions practice.