The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI") is one of the steps in the implementation of the Action Plan on Base Erosion and Profit Shifting ( the "BEPS Action Plan").
The purpose of the MLI is to prevent abuse of the provisions of international double taxation conventions (Tax Conventions), which resulted in tax avoidance and tax underpayment in Ukraine using artificial foreign corporate structures and/or transactions.
Ukraine signed the MLI on 23 July 2018. The Verkhovna Rada of Ukraine ratified the MLI on 28 February 2019. On 8 August 2019, Ukraine sent the MLI ratification documents to the Depositary of the Organization for Economic Cooperation and Development (OECD), which means that the MLI will enter into force for Ukraine on 1 December 2019. Ukraine will become the 31st state for which the MLI will come into force.
It is important that the MLI distinguishes between the date of entry into force and enactment. Put simply, despite the date of entry into force being 1 December 2019, the MLI will be applied for Ukraine with respect to withholding taxes – starting from 1 January 2020, and with respect to other taxes – starting from 1 June 2020.
Ukraine has chosen 77 Tax conventions to which MLI will apply. However, it is worth paying special attention to the fact that the MLI applies only to Tax conventions by the states that have chosen the Tax Convention for Ukraine as one to which the MLI applies and for which the MLI was in force on the date of the relevant transactions. In addition, in order the relevant Tax Convention is considered amended, Ukraine and another state are required to choose the same provisions of the tax convention, which is modified by MLI.
To find out whether another state has chosen the Tax Convention for Ukraine as one to which the MLI applies and how this Tax Convention will be changed, you may use a special "tool" at the OECD official web-site.
- since the Netherlands have not chosen the Tax Convention for Ukraine, as the MLI-covered, the entry into force and beginning of application of the MLI for Ukraine in any way will not affect the tax convention between Ukraine and the Netherlands;
- the Cyprus has chosen the Tax Convention for Ukraine, but has not yet deposited the ratification documents on the MLI. Accordingly, despite the entry into force and enactment of the MLI for Ukraine, the Ukraine-Cyprus Tax Convention will not be amended until the entry into force and enactment of the MLI for Cyprus;
- Malta, like Ukraine, has chosen the Tax Convention Malta – Ukraine as the MLI-covered. For both Malta and Ukraine, the MLI will apply to withholding taxes starting from 1 January 2020. However, for other taxes, the MLI will apply to Malta from 1 January 2021. While for Ukraine MLI will be applied from 1 June 2020. This means that the provisions of the Malta – Ukraine tax convention with respect to taxes other than withholding taxes will remain unchanged under the MLI until 1 January 2021.
Much has been written on the amendments that will be entered into the Tax conventions in connection with the entry into force and enactment of the MLI.
At the same time, in the immediate future the taxpayers who carry out transactions with foreign contractors should paid the most attention to the Principal Purpose Test. This test provides for the possibility of refusal to provide Tax convention benefits or advantages (exemption or reduced tax rates), if the principal or one of the principal purposes of the structure or transaction was to obtain such benefits or advantages under the Tax Convention. This test is similar to the concept of "Business Purpose", which the tax authorities sometimes used for additional taxation without proper and detailed justification. Therefore, taxpayers should analyze their structures and transaction with foreign contractors (especially with related parties) in advance and prepare a detailed justification of the business reasons for the existence of the relevant structures and the implementation of the relevant business transactions.
It is also necessary to pay attention to the amendments provided by the MLI regarding the taxation of non-residents' income from the sale of shares and corporate rights, the value of which mainly derives from immovable property located in Ukraine, in respect of which a "property" test will be introduced not only on the date of sale, but also during 365 days preceding the sale of shares/corporate rights.
The MLI-changes regarding the definition of the term "permanent representative office" are also important, but until the relevant changes are made to the Tax Code and tax authorities begin to pay special attention to the existing, but not legally formalized permanent representative offices of non-residents, these changes are likely to remain without due attention of Ukrainian business.
There is no doubt that the amendments provided for by the MLI under the Mutual agreement procedure are also extremely important, but for them to be proper implemented, it will obviously be necessary to make relevant amendments to the Tax Code of Ukraine.
Subtleties of Interpretation
It should also be taken into account that the Commentaries to the OECD Model Tax Convention (on the basis of which all Tax conventions of Ukraine are concluded) already takes into account some BEPS and MLI provisions. Since both the tax authorities and the courts use the Commentaries to the OECD Model Tax Convention as an additional source to interpret Tax conventions, it is likely that the tax authorities of Ukraine will try to apply the Commentaries even in those Tax conventions to which the MLI does not apply.
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.