{"id":6538,"date":"2017-05-23T09:34:42","date_gmt":"2017-05-23T07:34:42","guid":{"rendered":"https:\/\/kmp.ua\/?p=6538"},"modified":"2021-06-25T17:48:04","modified_gmt":"2021-06-25T15:48:04","slug":"is-it-legitimate-to-apply-the-benefits-under-the-treaties-for-avoidance-of-double-taxation","status":"publish","type":"post","link":"https:\/\/kmp.ua\/en\/analytics\/exclusive\/is-it-legitimate-to-apply-the-benefits-under-the-treaties-for-avoidance-of-double-taxation\/","title":{"rendered":"Is it legitimate to apply the benefits under the Treaties for Elimination of Double Taxation to the payments from Ukraine made by entities exempt from income tax?"},"content":{"rendered":"

The struggle against erosion of tax base is growing not only in the world, but also in Ukraine. One of the directions of this struggle is the revision of the grounds for application of the benefits under the Treaties for Elimination of Double Taxation. Today, however, such efforts are focused mainly on the analysis of the status of the recipients of payments from the territory of Ukraine, in particular, on the question, whether the recipients of payments are considered to be tax residents for the purpose of conventions and\/or beneficiary owners of such payments. However, as a condition for application of the benefits under the conventions<\/span><\/em> the tax residency of the recipient is equally important as that of the payer.<\/p>\n

This review analyses whether we can apply the exemption or reduction of the tax rates on dividends, interest, and royalties in case of payments to non-residents from the territory of Ukraine executed by entities, which are exempt from corporate income tax, such as single tax enterprises (including agriculture manufacturers \u2013 single tax payers of the fourth group), or collective investment institutions.<\/p>\n

 <\/p>\n

<\/p>\n

1.<\/p>\n

First, we will consider the definition of the conditions for application of tax benefits with regard to dividends under Article 10 of the Treaty between Ukraine and Cyprus for elimination of double taxation:<\/p>\n

\n

\u201c1. Dividends paid by a company which is a resident of a Contracting State<\/strong> to a resident of the other Contracting State may be taxed in that other State.<\/p>\n

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident<\/strong>…\u201d.<\/p>\n<\/div>\n

That means Article 10 concerns the situation when dividends are paid by a company which is recognized as the resident of the Contracting State (Ukraine), and does not concern cases when dividends are just paid from the territory of Ukraine. In other words, the application of exemption or reduction of tax under this article is literally tied to the status of the company paying the dividends as a resident of the Contracting State (Ukraine).<\/p>\n

2.<\/p>\n

The “residency” for the purposes of the Convention is defined specifically in para. 1 of Article 4:<\/p>\n

\u201cFor the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax<\/strong> therein by reason of his domicile, residence, place of management, place of registration or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof…\u201d.<\/div>\n

As regards the taxation, to which a person shall be subject, para. 3 of Article 2 of the Convention defines the following:<\/p>\n

\n

\u201c3. The taxes which are the subject of this Convention are:<\/p>\n

a) in the case of Ukraine:<\/p>\n

i) the tax on profit of enterprises; and<\/p>\n

ii) the individual income tax;<\/p>\n

(hereinafter \u2013 \u201cUkrainian tax\u201d)\u201d.<\/p>\n<\/div>\n

Thus, we can come to a conclusion that for the purposes of the Convention, the residents of Ukraine are persons that are subject to the corporate income tax and the individual income tax under Ukrainian legislation<\/strong><\/em>.<\/p>\n

And according to para. 297.1 of Article 297 of the Tax Code of Ukraine, the single tax payers are exempt from the duty of accrual, payment and submission of tax reports, in particular on the corporate income tax. It its turn, para. 141.6.1. provides the exemption from corporate income tax for the collective investment institutions.<\/p>\n

Thus, shall we come to a conclusion that legal entities or individuals, which are exempt from corporate income tax or individual income tax under the Ukrainian legislation (taxes covered by the Convention), will not to be recognized as residents for the purposes of the Convention?<\/p>\n

We shall stress that we are talking about non-recognition of the particular categories of individuals and legal entities as residents of Ukraine specifically for the purposes of the Convention (and its application), as for the purposes of the Tax code the term “resident” is defined differently \u2013 subpara. 14.1.213. However, for the purposes of the Convention we shall use separate definition envisaged by the Convention.<\/p>\n

3.<\/p>\n

Therefore, there may be grounds to consider that the benefits concerning the exemption or reduction of the tax rate for the dividends under the Convention with the Republic of Cyprus shall not be applied if the dividends are being paid by the companies \u2013 single tax payers or collective investment institutions since they are exempt from corporate income tax in Ukraine under Ukrainian legislation and therefore shall not be recognized as Ukrainian residents for the purposes of the Convention.<\/strong><\/em><\/p>\n

4.<\/p>\n

As regards the other types of income paid from the territory of Ukraine, such as interest or royalties, this conclusion is not so obvious upon the first reading of relevant Articles of the Convention, since it literally contains no reference to the payment by the residents.<\/p>\n

However, in fact the same approach as concerning the dividends may be also applied to these types of income:<\/p>\n

Article 11 “Interest” of the Convention under consideration envisages the following:<\/p>\n

\u201c1. Interest arising in a Contracting State and paid to a resident of the other Contracting State…\u201d.<\/div>\n

That means, Article 11 concerns interest \u201carising in a Contracting State\u201d (Ukraine).<\/p>\n

And this term is specially defined in para. 5 of Article 11for the purposes of the Convention :<\/p>\n

\u201c5. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or a resident of that State…\u201d.<\/div>\n

So, if the interest is paid not by the State or its administrative-territorial unit, or local authority, it is assumed that such interest arises in a Contracting State (Ukraine) only if it is being paid by a resident of Ukraine.<\/p>\n

Therefore, it turns out that the applicability of the benefits concerning the interest according to Article 11 of the Convention also depends on the status of the entity paying the interest as a resident for the purposes of the Convention: if the entity paying the interest is not recognized as a resident of Ukraine (due to exemption from corporate income tax in Ukraine) \u2013 Article 11 \u201cInterest\u201d of the Convention shall not cover such cases<\/strong>.<\/em><\/p>\n

5.<\/p>\n

Likewise, we can consider royalties.<\/p>\n

Article 12 of the abovementioned Convention concerns \u201c1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State …\u201d.<\/p>\n

And such royalties are defined for the purposes of the Convention by para. 6 of the abovementioned Article as follows:<\/p>\n

\u201c6. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or a resident of that State …\u201d.<\/div>\n

Thus, regarding royalties we can come to a conclusion: if an entity paying the royalties is not recognized as a resident of Ukraine (on the ground of being exempt from corporate income tax in Ukraine), Article 12 \u201cRoyalties\u201d of the Convention is not being applied to such cases<\/strong><\/em>.<\/p>\n

6.<\/p>\n

The described situation is typical not only for the Convention with the Republic of Cyprus. It is rather typical for all treaties for the elimination of double Taxation. For example, similar conclusions can be drawn from the analysis of the relevant articles of the Convention between Ukraine and the Kingdom of the Netherlands, as well as of the majority of other Ukrainian treaties for the Elimination of Double Taxation.<\/p>\n

7.<\/p>\n

As a result, there are sufficient grounds to consider that no exemption or reduction of withholding tax rates for dividends, interest, royalties shall be applied under relevant treaties for the elimination of double taxation in case of payments from (i.e. entities exempt from the corporate profit tax in Ukraine) to non-residents paid by \u201cinternal offshores\u201d (i.e. entities under the Ukrainian legislation exempt from corporate profit tax).<\/p>\n

8.<\/p>\n

We are not yet aware of application of such approaches in practice by the Ukrainian tax authorities, however it would be quite logical and \u201cin line with\u201d BEPS. Therefore, we would propose to consider the possibility of such approach as real and to take it into account.<\/p>\n

The<\/em><\/strong>\u00a0<\/em><\/strong>above commentary<\/em><\/strong>\u00a0<\/em><\/strong>presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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