On 21 December 2016, the Parliament of Ukraine introduced new
provisions into the Tax Code relating to taxation of interest
payments under Eurobonds issued in the form of Loan Participation
Notes (or "LPNs").
Generally, the amendments establish three special rules:
reduced 5 per cent withholding tax rate on interest payments
for the LPNs issued after 2018;
withholding tax exemption of interest payments for the LPNs
issued during 2017 and 2018; and
withholding tax exemption of interest payments for the existing
LPNs issued prior to 2017.
Historically, due to complicated requirements of the Ukrainian
securities laws and currency control rules, issuance of Eurobonds
by Ukrainian business was structured through foreign entities.
Large corporates were able to use their offshore holding companies
as the issuer of debt securities, which were guaranteed by
Ukrainian operating subsidiaries. Ukrainian banks usually used an
orphan special purpose vehicle (SPV) to issue the LPNs and on-lend
the proceeds to the bank under a loan agreement.
Taxation of LPNs issued after 2018
Interest on loans provided by foreign lenders to Ukrainian
borrowers after 31 December 2018 will be subject to a withholding
tax at the rate of 5 per cent if all of the following criteria (the
"Exemption Criteria") are satisfied:
a loan provided by the foreign lender to the Ukrainian borrower
is funded by issuance of debt securities on a foreign exchange
included in the list to be approved by the Cabinet of Ministers of
funds provided by a foreign lender under a loan to the
Ukrainian borrower have been raised for the purpose of making
(directly or indirectly) such loan; and
as of the date of issuance of debt securities by a foreign
lender, it (and/or any payment agent through which interest is
paid) is not a resident of a low-tax jurisdiction (such as the BVI,
Cyprus, Hong Kong, Panama) the list of which is approved by the
Cabinet of Ministers of Ukraine.
Temporary exemption for new LPNs
The amendments to the Tax Code establish a full withholding tax
exemption of interest income on loans to be provided by foreign
lenders to Ukrainian borrowers in 2017 and 2018, provided that the
Exemption Criteria are satisfied.
Exemption for existing LPNs
Interest payments on loans provided by foreign lenders to
Ukrainian borrowers prior to 1 January 2017 have also been exempted
from the Ukrainian withholding tax, to the extent such loans
satisfy the Exemption Criteria (with the only difference being that
any foreign exchange would qualify for the first criterion).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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