Withholding tax. How does the concept of the beneficiary owner work in Ukraine?
Recently the fiscal authorities have been paying quite close attention to the status of the beneficiary owner as a ground for withholding tax reassessment. One of the recent examples is the court case, where the fiscal authorities successfully challenged the beneficiary owner status of the recipient of interest paid by PrivatBank and, thus, proved that there were no grounds to apply for PrivatBank relief from taxation in Ukraine at the source of payment (ruling of Dnipropetrovsk Administrative Court of Appeals in case No. 804/3765/16 dated March 16, 2017).
The latest disputes with the fiscal authorities show that in general there are two main aspects of beneficiary owner concept to pay attention to, while paying income to non-resident entity out of Ukraine and applying at the source of payment relief from taxation or reduced tax rate under the double tax treaties.
The first one is that under the Tax Code of Ukraine any foreign entity, receiving any type of taxable income out of Ukraine, should have the status of the beneficiary owner in respect of such income in order to enjoy the benefits of the double tax treaties at the source and at the moment of payment of income.
Unlike the Tax Code of Ukraine, the double tax treaties, as a rule, set the discussed requirement as a prerequisite to enjoy double tax treaty benefits only in respect of passive income (dividends, interest, royalty). However, following the provisions of the Tax Code of Ukraine, should the recipient of income have no beneficiary owner status, the tax is withheld at the source, even if the double tax treaty allows relief from taxation in Ukraine or reduced tax rate, regardless of such status.
An example of such unlimited application of the beneficiary owner requirement by the fiscal authorities is taxation by withholding tax of payment for transportation services, supplied by freight forwarding company, which contracted the carrier to provide such services. The fiscal authorities take the approach, according to which payment for transportation services in the discussed case should be taxed in Ukraine at the moment of payment, regardless the provisions of the double tax treaty, even if the latter does not formally require such status in order to enjoy relief from taxation in Ukraine. The last of the letters of the SFS covering the issue of application of withholding tax on freight forwarding services was issued on February 8, 2017.
Another aspect of the beneficiary owner concept is the proof of the status of the beneficiary owner. The Tax Code of Ukraine defines neither the notion of the beneficiary owner, nor the evidence required to support respective status, but rather names the entities, which shall not be regarded as having such status, i.e. agents, nominees or intermediaries.
Currently the court practice on the issue of status of the beneficiary owner is quite limited. Moreover, the courts take different approaches to the evidence proving such status, which depend on the type of income paid. For example, in case of royalties paid under sublicense agreement the courts take quite formal approach: the license agreement between the recipient and the holder of intellectual property rights is usually regarded as due evidence of the recipient’s status as beneficiary owner.
Another example is interest paid on a loan, where the courts analyze the status of the recipient in more detail. As the case of PrivatBank shows, the court considered the official information on the aim of the recipient’s activity, financial statements and tax reports of the recipient. In the negative for PrivatBank decision the court concluded that the loan was financed through the monetary funds, received in exchange for the bonds, issued for the purposes of financing such loan, and the interest on loan was afterwards repaid by the recipient as interest on bonds.
To sum up, currently the Ukrainian entities, which pay income to non-resident entities and apply double tax treaty benefits at the source of payment, should be ready to prove the beneficial owner status of the recipient of such income. Otherwise, they are at risk of additional tax charges of withholding tax liabilities and respective penalties.