On 23 July 2018, the acting Minister of Finance of Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"), which was initially signed in Paris on 7 June 2017 by 68 countries.

The Multilateral Instrument enables Ukraine to complete one ratification procedure in order to modify its existing double tax treaties (identified by Ukraine in its MLI Position paper as "Covered Tax Agreements") in a synchronised manner without requiring the separate amendment of each particular treaty.

In particular, Ukraine indicated that 77 of its existing double taxation treaties will be modified based on the MLI, including (among others) those with Cyprus, The Netherlands, UAE, UK, Poland, the Czech Republic, Malta, Ireland, Luxembourg, Switzerland, Latvia and Estonia.

One of the most important aspects of the MLI is the introduction of the Principal Purpose Test ("PPT") which is a general anti-abuse rule denying the benefits of a double taxation treaty. In particular, according to the PPT,a benefit under the Covered Tax Agreement shall not be granted in respect of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.

Further, the MLI improves the mechanisms for resolving disputes concerning the application of double tax treaties and allows the taxpayer to present its case to either contracting state. The improved dispute resolution mechanism will likely lead to quicker and more efficient administrative procedures and actions.

Given the broad and somewhat vague definition of the РРТ, especially when coupled with the beneficial ownership concept already being actively applied by the Ukrainian tax authorities, the approach to cross border planning and structures could change significantly. More than ever, taxpayers will need to pay close attention to their business transactions with foreign jurisdictions, and carefully evaluate how MLI will affect their operations and develop appropriate plans to address its impact.

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