{"id":6710,"date":"2017-06-20T15:41:18","date_gmt":"2017-06-20T13:41:18","guid":{"rendered":"https:\/\/kmp.ua\/?p=6710"},"modified":"2018-02-15T15:49:34","modified_gmt":"2018-02-15T13:49:34","slug":"dividends-payment-by-single-tax-payer-to-non-resident-is-it-in-tax-gripe","status":"publish","type":"post","link":"https:\/\/kmp.ua\/en\/analytics\/exclusive\/dividends-payment-by-single-tax-payer-to-non-resident-is-it-in-tax-gripe\/","title":{"rendered":"Dividends payment by single tax payer to non-resident: is it in tax gripe?"},"content":{"rendered":"

Previously we have already considered the controversies over the application of treaties on avoidance of double taxation regarding the payments of dividends by single tax payers (in the review “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?<\/a>“). However, taxation problems regarding the payment of dividends to non-residents by single tax payers are not limited to those issues.<\/p>\n

Another important question is related to the advance payment from income tax on dividend payment. In fact, for a single tax payer, the advance installment on payment of dividends, if paid, is a sum which can be neither used nor refunded from the budget.<\/p>\n

In this review we will dwell more on the second aspect, and also consider whether the exemption from withholding tax under the treaties vs. advance installment in case of dividend payment are mutually exclusive.<\/p>\n

 <\/p>\n

<\/p>\n

1.<\/p>\n

In accordance with para.\u00a0297.1. of the Tax Code of Ukraine (hereinafter the “Tax Code”), single tax payers shall be released from obligation for charge, payment and filling of tax accounts in particular for corporate income tax. Provided that, subpara. 57.11<\/sup>.5. of the Tax Code determines that “the advance payment from the income tax paid in connection with the accrual\/ payment of dividends is an integral part of the income tax”.<\/p>\n

Therefore, it would be logical that a certain entity that is not an income tax payer should not pay this tax in advance, including in the form of an advance payment while paying dividends.<\/p>\n

Actually, this logic worked for a fixed agricultural tax earlier (before 2015) as the “predecessor” of the single tax of the fourth group for agricultural manufacturers.<\/p>\n

Before 2015, para. 3 of para. 153.3.2. of the Tax Code stated regarding the taxpayers of a fixed agricultural tax as follows:<\/p>\n

\n

\u201c153.3.2. <\u2026><\/p>\n

The liability on accrual and payment of advance tax payment at the rate determined in para. 151.1 of Article 151 hereof shall be imposed to any resident issuer of corporate rights regardless of whether the issuer or recipient of dividends is the taxpayer and whether he enjoys the tax benefits stipulated herein or in form of the application of the tax rate other than that determined in para. 151.1 of Article 151 hereof (except for the taxpayers to whom the effect of Article 156 hereof shall extend). The liability on accrual and payment of advance tax payment shall not apply to business entities that pay the fixed agricultural tax pursuant to Section XIV hereof\u201d<\/strong>.<\/p>\n<\/div>\n

However, this provision was not duplicated when the fixed agricultural tax was replaced with the single tax of the fourth group for agricultural manufacturers in 2015.<\/p>\n

So, beginning from 2015, the question with respect to the advance payment of income tax on dividend payment arises for such agricultural manufacturers \u2013 single tax payers of the fourth group.<\/p>\n

2.<\/p>\n

Currently, the section of the Tax Code regarding the simplified system of taxation contains only the following reference on the matter:<\/p>\n

\u201c297.4. Dividends<\/strong> paid by the single tax payers of the third group (legal entities) and the fourth group to the owners of corporate rights (the founders of such single tax payers) are taxed according to the rules established by Sections II and IV of this Code<\/strong>\u201d.<\/div>\n

That is, such dividends are taxed<\/em> according to the rules established in Section II (Administration of Taxes, Fees, Duties) and IV (Individual Income Tax).<\/p>\n

3.<\/p>\n

It is necessary to note that in the wording valid until 2017, the reference was a bit different.<\/p>\n

Thus, before 2017, the formulation of a special section on the simplified system of taxation in relation to the payment of dividends (paragraph 292.12) was the following:<\/p>\n

“Dividends<\/strong> paid by legal entities to owners of equity rights (founders of single tax payers) \u00a0and IV of this Code”.<\/div>\n

Let us remind you that Section III is the “Corporate income tax” section.<\/p>\n

Therefore, it would be logical to interpret that reference in the above wording in such way that it addresses the question of taxation of dividends at the level of recipients – legal entities – income tax payers or natural persons – personal income tax payers, respectively. And, accordingly, it does not relate directly to taxation at the level of the entity that pays dividends.<\/p>\n

The reference of this provision to Section III of the Tax Code in 2016 can be explained by the legislator’s “forgetfulness”: in fact, before 2015, the relevant provisions for the advance payment for income tax were contained in Section III on the income tax (in particular, paragraph 153.3.2) of the Tax Code.<\/p>\n

In 2015, section III of the Tax Code on income tax has also undergone significant changes. Among other things the provisions for advance payment were transferred to Section II. But the legislator obviously failed to coordinate the relevant references at that time.<\/p>\n

This led to the fact that in the years 2015 and 2016 the section of the Tax Code on the single tax required to tax dividends literally in accordance with the procedure specified in Section III. And that section did not provide for such a procedure at that time.<\/p>\n

Article 67 of the Constitution requires that everyone shall be obliged to pay taxes in accordance with the procedure and to the extent established by law. And if such procedure is not appropriately determined it appears that there is also no obligation. So, in particular, for this reason it can be said that in 2015 and 2016 the obligation to make the advance payment on dividend payment by single tax payers to non-residents is at least doubtful.<\/p>\n

For example, we found a court decision in which the relevant assessment of tax liabilities was canceled for these reasons:<\/p>\n

\u201cThe panel of judges agrees with the conclusions of the court of first instance, since dividends paid by single tax payers to owners of equity rights (founders of single tax payers) shall be taxed in accordance with sections III and IV of this Code (para. 292.12 of Art. 292 of the Tax Code), on reliance of which plaintiff<\/strong> accrued and paid part of the profits to the budget, that is, subpara. 133.1.1, subpara. 133.1 and 133.5 of Art. 133 of section III of the Tax Code of Ukraine. In addition, Art. 57 of the Tax Code of Ukraine, as amended in 2016, is contained in Section II of the Tax Code of Ukraine<\/strong> and refers to taxpayers that are on the general tax system\u201d.<\/div>\n

The full text of the relevant Court ruling of the Kharkiv Administrative Court of Appeal can be found at the link<\/a>.<\/p>\n

For periods after 2016, this discrepancy (however, with a certain reservation, at least in relation to 2017) could be considered as eliminated: Law 1797-VIII as of 21.12.2016 “On Amendments to the Tax Code on the Improvement of the Investment Climate in Ukraine” ( Further – “Law 1797”) removed the above-mentioned para. 292.12 and added the new para. 297.4 in its current version as presented above.<\/p>\n

Therefore, the changes introduced by the Law 1797, which in this part may seem purely editorial at first glance, in fact, significantly changed the regulation on this issue in favor of taxation of dividends of the single tax payers by the advance payment.<\/p>\n

4.<\/p>\n

Section II of the Tax Code describes the matter of the dividends as follows:<\/p>\n

Para. 57.11<\/sup>.2:<\/p>\n

\n

“The liability on accrual and payment of advance tax payment at the rate determined in para. 136.1 of Article 136 hereof shall be imposed to any resident issuer of corporate rights regardless of whether the issuer enjoys the tax benefits stipulated herein<\/span> or in form of the application of the tax rate other than that determined in para. 136.1 of Article 136 hereof.<\/p>\n

<...><\/p>\n

In this case, if the payment made by an entity is called a dividend, such payment shall be taxable when it is paid according to the norms determined in conformity with the provisions of this paragraph, whether the entity is a taxpayer or not<\/span>“.<\/p>\n<\/div>\n

Based on the abovementioned reference, the advance payment must be paid whether the entity paying the dividends is a taxpayer or not and regardless of the existence of tax benefits for the income tax.<\/p>\n

The given text is almost identical to that of the para. 153.3.2. of the Tax Code in its wording before 2015. Moreover, in that version there was a special provision stating that the obligation for this advance payment does not apply to the payers of a fixed agricultural tax. This can be understood in such a way that the legislator considered that on the basis of the said general provisions fixed agricultural tax payers, as all residents, fall within the scope of this provision. And this is precisely why for their exclusion a special norm was introduced stating that fixed agricultural tax payers are not subject to the specified obligation.<\/p>\n

In the current wording of the Tax Code such a direct exemption is not explicitly foreseen for single tax payers.<\/p>\n

5.<\/p>\n

Since literally no exemption from the advance payment on dividends for entities that are on a simplified system of taxation is provided, it is expected that the approach of tax authorities will be fiscal.
\nThus, the following response in this regard (in the annex) was published on the public information resource of the State fiscal service:<\/p>\n

“Thus, the legal entity – single tax payer shall be obliged to calculate and make an advance payment from the income tax on dividends payment (except from the payment of dividends to natural persons) in accordance<\/strong> with the rules set forth in para. 57.1 of appendix 1 of Art. 57 of the Tax Code. The specified advance payment is made to the budget before \/ or at the same time with payment of dividends, without the amount of the accrued tax liability of a single tax being reduced by the amount of the such advance payment”.<\/div>\n

Currently, based on existing decisions regarding appeals against tax consultations on this matter, the courts maintain this position, refusing taxpayers in the abolition of individual tax consultations.<\/p>\n

Provided that, the courts rejected quite logical considerations that the advance payment on dividends is part of the income tax, and therefore shall be payable only by income tax payers.<\/p>\n

The relevant court decisions are available in the Unified State Register of Court Decisions and placed in the “Useful Documents” section by link 1<\/a> and link 2<\/a>.<\/p>\n

6.<\/p>\n

As for the payment of dividends in 2017, however, one can still speak of the nonapplicability of the procedure in accordance with para. 297.4. of the Tax Code taking into account the principle of stability of tax legislation, established in para. 4.1.9. of the Tax Code:<\/p>\n

“Stability – changes to any elements of taxes and fees cannot be made later than six months before the start of a new budget period<\/strong> in which new rules and rates will be applied. Taxes and fees, their rates, as well as tax breaks cannot be changed during the budget year;”.<\/div>\n

The elements of the tax include, among others, (para. 7.1 of Art. 7 of the Tax Code) the procedure for calculating tax liability, the term and the procedure of the payment of tax.<\/p>\n

The provisions of para. 297.4 of the Tax Code, introduced by Law 1797 are apparently adopted less than six months before the beginning of 2016.<\/p>\n

Consequently, we can say that the substitution of para. 292.12 with para. 297.4 with the reference to another procedure (Section II instead of Section III) changed the elements of the tax less than 6 months before the beginning of the year, and therefore these changes are not applicable until at least 2017.<\/p>\n

In jurisprudence there is a decision in favor of the inapplicability of the “new” provisions in view of the principle of stability of tax legislation. However, one of such decisions concerning another tax is considered in our newsletter of 16.06.2017 “Progress of the High Administrative Court of Ukraine in the vehicle tax issue<\/a>“.<\/p>\n

7.<\/p>\n

General exemptions from the advance payment for income tax on dividends are set forth in para. 57.11<\/sup>.3 of the Tax Code:<\/p>\n

\n

“The advance payment, stipulated by \u00a0subpara. 57.11<\/sup>.2 of this paragraph, cannot be applied in case of payment of dividends:<\/p>\n

to the owners of the corporate rights of the parent company, paid within the amount of revenue of such company, received in the form of dividends from other entities. If the amount of payment of dividends to the owners of corporate rights of the parent company exceeds the amount of dividends received by such company, dividends paid within such excess shall be taxed according to the rules established by \u00a0subpara. 57.11<\/sup>.2 of this para. For tax purposes, the parent company keeps a record of dividends received from other entities and dividends paid to the owners of the corporate rights of such a company on a cumulative basis and displays dividends in the tax return in accordance with the procedure established by the central executive body, which ensures the formation and implementation of the state financial policy;<\/p>\n

a taxpayer whose income is exempt from taxation in accordance with the provisions of this Code, in the amount of income exempt from taxation during the period for which dividends are paid<\/strong>;<\/p>\n

natural persons\u201d.<\/p>\n<\/div>\n

In this list we are interested in the exemption of taxpayers whose income is exempt from taxation in accordance with the provisions of this Code. There arises a question whether this can be applied to single tax payers.
\nWhen reading the highlighted provision of paragraph 57.11<\/sup>.3 of the Tax Code literally, the exception relates to income tax payers. That is, for the exemption to be applied, the entity must, first of all, be recognized as an income tax payer.<\/p>\n

In accordance with para. 15.1 of Art. 15 of the Tax Code the following are recognized as income tax payers:<\/p>\n

“Natural persons (residents and non-residents of Ukraine), legal entities<\/strong> (residents and non-residents of Ukraine) and their separate divisions that own, receive (transmit) objects of taxation or carry out activities (transactions) that are subject to taxation in accordance with this Code or tax laws<\/strong>, which impose a duty to pay taxes and fees in accordance with this Code”.<\/div>\n

Therefore, if an entity – single tax payer, according to the Code is recognized (under the general provisions of para. 57.11<\/sup>.2. of the Tax Code) as a payer of an advance payment for income tax on dividends, which according to the Code (para. 57.11<\/sup>.5) is an integral part of the income tax, it should accordingly be considered an income tax payer. So this part of the qualification can be considered as passed.<\/p>\n

The exemption, however, applies literally to a taxpayer whose income is exempt from taxation in respect of dividends paid from such an income that is exempt from income tax. That is, for this part of the qualification, the profit itself, as the object of taxation, is exempt.<\/p>\n

And the single tax payers are exempt by the Code as subjects (para. 297.1 of the Tax Code), that is, the exemption relates not to the actual profit earned by single tax payers, but to themselves as special subjects (category of payers). These are different tax elements.<\/p>\n

Consequently, the application of the exemption for a single tax payer under considered exception, as provided for in para. 57.11<\/sup>.3, seems rather unlikely to be substantiated.<\/p>\n

8.<\/p>\n

The formal qualification of single tax payers as income tax payers, if they make an advance payment for income tax on dividends, allows them to be recognized as residents for the purpose of treaties for elimination of double taxation.<\/p>\n

That is, when such entities are making an advance payment, the arguments discussed in our previous letter on withholding tax (“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?<\/a>“) disappear.<\/p>\n

If, however, a single tax payers in the payment of dividends to a non-resident insist on non-application of the advance payment due to their exemption from income tax, they will thus establish the grounds for their non-recognition as residents (those subject to income tax in Ukraine) for the purpose of the treaty, and hence for the application withholding tax in full.<\/p>\n

In other words, there is created a “tax gripe”, where at least one of the taxes (either 15% of the amount of dividends as a withholding tax or 18% “in excess” of the amount of dividends as an advance payment) shall be applied when making a payment to non-residents.<\/p>\n

Generally speaking, such approach is in line with BEPS practices that are ensuring income taxation in the country of origin.<\/p>\n

It should be noted that such actual tax regime can be considered as an analogy to the currently discussed exit capital tax: the income of the single tax payers of the fourth group is not actually taxed (except the payment for used land) as long as such income remains “in business”; however, the tax is charged when such income is taken out of business.<\/p>\n

The<\/em><\/strong>\u00a0<\/em><\/strong>above commentary<\/em><\/strong>\u00a0<\/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

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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