Ratification of the Multilateral Instrument
On February 28, 2019, the Supreme Council of Ukraine ratified the Multilateral Convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (hereinafter referred to as the "Multilateral Instrument").
Ratification of the Multilateral Instrument implies that Ukraine implements steps 6 and 14 of the BEPS Plan and thus introduces amendments into the valid inter-state treaties for the avoidance of double taxation. The Multilateral Instrument contains the provisions that are binding on each state that signed it and contains non-binding provisions that may be applied to each individual treaty, subject to decision of a state.
Ukraine plans to apply the below provisions with respect to its treaties on the avoidance of double taxation with other countries:
- Each treaty is supplemented with the preamble whereby the treaty shall not apply to the persons who apply such treaties for the purpose of tax evasion (Article 6 of the Multilateral Instrument).
- Application of the tax advantages stipulated by the treaties is restricted if the primary purpose is gaining such advantages; this is the so-called Primary Purpose Test (Article 7 of the Multilateral Instrument).
- It is determined that a taxpayer may independently initiate the possibility of mutual finalization and approval (Article 16 of the Multilateral Instrument). These provisions enable a person to file an application with the competent body of any of the Treaty States and fix a time limit for filing such application (within three years upon establishment of the taxation case which fails to comply with the provisions of the Treaty). Such reached understanding shall be subject to implementation regardless of any time limits stipulated by the domestic laws of the Treaty States.
In addition, Ukraine plans to apply the following provisions of the Multilateral Instrument to such treaties:
- In the instances of taxation of income from disposal of shares or participation interests of business entities, the cost of which results primarily from the real estate property (Article 9 of the Multilateral Instrument), such income shall be governed by the regulations regarding taxation of such incomes at the place of location of the relevant real estate property, provided that such shares or participation interests were held at least within one day out of 365 days preceding the treaty; in addition, such regulations shall be applied with respect to the shares or participation interests in a partnership or trust.
- Counteraction to tax evasion on the part of permanent representative offices located in the third jurisdictions (Article 10 of the Multilateral Instrument) as a result of non-application of advantages (exemptions), which are stipulated by the treaties and governing the procedure for taxation of a permanent representative office located in the third jurisdiction if a tax rate in such jurisdiction is 60 percent lower than the rate which would have been paid in the first country.
- Counteraction to deliberate avoidance of the status of permanent representative office pursuant to:
- Agency agreements and similar strategies (Article 12 of the Multilateral Instrument) due to strengthening of the regulations regarding application of commission agreements; it is now determined that a permanent representative office is established in the instances when activities are carried out by an agent which regularly enters into contracts on behalf of an entity or plays a fundamental role in entering into them.
- Exceptions provided for certain types of activities (Article 13 of the Multilateral Instrument) as a result of narrowing the definition "preparatory and auxiliary activities".
- Division of contracts (Article 14 of the Multilateral Instrument) as a result of prohibiting the division of contracts by the criterion of time limits.
The Multilateral Instrument does not change the texts of Ukraine's international treaties on the avoidance of double taxation but is applied along with valid treaties, though amending their provisions.
The list of international bilateral treaties on the avoidance of double taxation, which will be governed by the provisions of the Multilateral Instrument, is formed by each state on its own. Amendments may be introduced only into the treaties with those states that will also decide to introduce amendments into the treaties with Ukraine as well as in the instances when the list and contents of the aforementioned amendments are approved by both states.
For Ukraine, the Multilateral Instrument enters into full force and effect on the first day of the three calendar months upon Ukraine's submission of its ratification instrument to the Organization of Economic Cooperation and Development for the purpose of its storage by the latter.
If a group of companies has contracts/structures in Ukraine and other jurisdictions, which enjoy certain advantages under the treaties for the avoidance of double taxation and makes payments to such jurisdictions subject to application of the below advantages:
- It is necessary to analyze the structure for the existence of the risk that a primary purpose of the contract/structure is gaining tax advantages under the treaties, and if such risk is established, then the rule regarding "business purpose of the transaction" should be confirmed - it is necessary to prove that the contract giving rise to the right of application of the tax advantage has a real economic (business) purpose. If a "business purpose of a transaction" is not proved, and there are grounds to assume that gaining such advantage was one of the primary purposes for establishing the structure / implementation of a transaction, the relevant tax advantages under the treaties for the avoidance of double taxation may not be granted, and there is a risk that they will be denied by the tax bodies, and additional tax liabilities will be determined.
- It is necessary to verify the contracts / structures for taxation of income from disposal of the business entities' shares or participation interests, the cost of which results primarily from the real estate property (Article 9 of the Multilateral Instrument) and determine the place of taxation of the aforesaid income.
- It is necessary to verify the contracts/structures for taxation of incomes at the place of existence of the permanent representative office.
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