On 18 September 2019, the Parliament of Ukraine ratified a protocol (the Protocol) of amendments to the double tax treaty between Ukraine and Switzerland (the DTT) which had been signed by the states on 24 January 2019.
The full official text of the Protocol in Ukrainian is available online.
The Protocol introduces the following key amendments:
- Withholding tax (WHT) rate on interest will be established at 5%, instead of the current 10%. The Protocol will also eliminate a WHT exemption of interest on credit sales and bank loans; ultimately, the number of exceptions where the tax may be reduced to 0% will be narrowed down to instances involving the State as a party to an interest-bearing transaction.
- WHT rate on royalty will be established at 5% instead of the current 0% or 10% depending on the type of intellectual property;
- Concerning the taxation of dividends, a stake of 10% in the distributing company, instead of the current 20%, will be regarded as qualified participation allowing for WHT at a 5% rate;
- Mutual agreement procedure for treaty-related dispute resolution by means of arbitration will be introduced;
- The exchange of tax information article will be subject to amendment in line with international standards for the exchange of information upon request. Both states will have enhanced capabilities to exchange tax information. The two states will not be able to refuse to provide information solely because they have no national interest in such information and/or because of banking secrecy;
- A principle purpose test (PPT) will be introduced. PPT is an anti-avoidance instrument whose role is to ensure that double tax treaty benefits are not abused. If it is proven that one of the main purposes of a transaction is to gain tax treaty benefits, the provision of benefits may be denied.
According to the Protocol it enters into legal force starting from 1 January of the year following the year during which the states notify each other of conclusion of internal ratification procedures. With ratification by Ukraine already in the books and plenty of time left until the end of 2019 for exchange of notification, the Protocol might already enter into force beginning on 1 January 2020.
What does this mean?
- Amended rules regarding tax rates on royalties, interest and dividends must be factored in while planning future transactions.
- The PPT rule calls for any arrangement or transaction to be genuinely based on business/commercial reasons, fights against artificial structures lacking substance and seeking tax benefits alone. If PPT is not passed, any treaty benefits (such as reduction of tax rate on dividends, interest, royalties, capital gains tax exemptions; permanent establishment exemptions; tax credits etc.) may be denied.
- In plain language, if a Ukrainian business is not able to demonstrate that there are genuine business/commercial reasons for a transaction with a Swiss entity other than purely tax motives, all treaty benefits are subject to denial. It remains to be seen how the Ukrainian tax authorities and courts will implement this new anti-avoidance instrument but we expect to see the rise of a new wave of tax controversy on PPT grounds. Proper business substance at the level of Swiss companies is likely to play a key role in the process.
- Tax information exchange might intensify. This demands the attention of Ukrainian UBOs and/or Swiss bank account holders whose information might become disclosed to the Ukrainian tax authorities based on enhanced bi-lateral exchange provision. This may be relevant for Ukrainian groups with a Swiss entity in their structure where Swiss-Ukraine trade, finance or IP transactions depend on an existing Swiss tax ruling.
Who might be affected?
- Multinational corporations with entities in Ukraine and Switzerland, planning to make payments from Ukraine to Switzerland or vice versa;
- Ukrainian business groups with Swiss entities in their structures, for instance, holding, finance, IP or trading vehicles;
- Ukrainian businesses who have unrelated business counterparties in Switzerland, planning to make payments from Ukraine to Switzerland or vice versa; and
- Ukrainian individuals who have a corporate and/or financial connection with Switzerland (UBOs, holders of Swiss bank accounts, etc).
What should affected businesses do?
Affected Ukrainian businesses should consider reviewing their existing or planned corporate, financial and transactional structures involving Switzerland, in order to assess if:
- any transaction or tax benefits might be affected;
- any features of transactions might indicate their artificial nature;
- entities fulfill the substance requirements for any planned transaction and if any improvements should and can be made.
...and affected UBOs/bank account holders?
Affected individuals should consider:
- Implications of new tax rates. Switzerland withholds unilaterally a 35% WHT on interest payments on Swiss bank accounts. This WHT can be reduced to 10% by the existing wording of the DTT. After the Protocol comes into legal effect, the rate will be further reduced to 5%, which is an upside.
- Implications of removal of banking secrecy as the sole reason for the State to refuse to exchange information. They should further consider whether their banking or tax information, as now collected by Swiss banks, tax authorities and/or other competent authorities, would create problems in case of exchange of information with Ukrainian authorities.
If the analysis reveals any unfavorable characteristics, it is advisable to consider making appropriate amendments. It is recommended to conduct analysis and implement amendments as soon as possible, before the end of the year.
How can we help?
We are more than happy to assist you in resolving any issue related to the implementation of the Protocol, including:
- evaluation of its potential impact on existing and/or contemplated structures or transactions;
- offering planning solutions where possible;
- assisting with the development of the necessary defense files and fulfillment of requirements to ensure your eligibility for treaty benefits.
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.