The situations occur in practice when corporate rights of the Ukrainian enterprises owned by non-residents are alienated to another non-residents. At the same time settlements under such transactions are performed outside Ukraine. However, as the practice shows in Ukraine there is some uncertainty regarding the taxation of such transactions.<\/p>\n
Recently in our practice the situation occurred when the tax authority had tried to apply additional tax liabilities on income gained by non-resident from the sale of corporate rights of the Ukrainian legal entity to another non-resident company. Such additional charges, for some reason, were assessed to the Ukrainian company-issuer,<\/strong> which corporate rights have been sold.<\/p>\n It is worth mentioning that such approach is groundless and was not included to the final version of the act of tax audit after the submission of objections to it, because taxation of such transactions is not currently foreseen by the Ukrainian legislation.<\/p>\n Why such transactions should not be an object of taxation under the provisions of the legislation of Ukraine?<\/strong><\/p>\n According to subpara.”e” of subpara. 160.1 of the Tax Code of Ukraine (hereinafter \u2013 the “\u0422C of Ukraine”) incomes from Ukrainian sources include “income from operations on trading securities, derivatives or other corporate rights as determined in accordance with this section.”<\/span><\/p>\n We would like to note that the phrase “income from operations on trading corporate rights” was not correctly selected by the legislator, as the TC of Ukraine establishes the procedure for determining the financial result of operations on sale<\/strong> of corporate rights, not trading<\/strong> with them (subpara. 2-4 of para.153.9 of Art. 153 of the TC of Ukraine). However, such contradiction is not crucial, as “trading” is a broader term than the “sale” and the first includes the last.<\/p>\n \u00a0Thereby, the income of non-resident gained form sale of corporate rights can be recognized as object of taxation of non-resident in Ukraine. Thus, para. 160.2 of the TC of Ukraine establishes the following mechanism of paying income tax received by non-resident from Ukrainian sources:<\/p>\n “A resident or permanent establishment of non-resident making payment in favor of non-resident or his authorized person (other than permanent establishment of non-resident in Ukraine) of income with the source from Ukraine which is received by non-resident from economic activities … shall withhold tax on incomes, mentioned in para. 160.1 of this article at the rate of 15 percent of the amount of such income and at the expense of such income, which is remitted to the budget upon such payment, unless otherwise is foreseen by provisions of effective international agreements of Ukraine with the countries of residence of persons to which payments are made”.<\/span><\/p>\n Thus, the tax is withheld by the resident or the permanent establishment of the non-resident which pays the income. The TC of Ukraine does not provide for any other mechanism of payment of the income tax listed in para. 160.1. Thus, there is no mechanism of taxing the income should the settlements for corporate rights occur between two non-residents.<\/strong><\/p>\n We would like to note, that the absence of taxation mechanism of transactions mentioned above is not merely a technical point which has no effect on the appearance of the obligation to pay the tax as such.<\/p>\n Thus, the TC of Ukraine has a special definition of the object of taxation concerning \u00a0income tax for non-residents:<\/p>\n \u201c134.1.\u00a0 The object of taxation in this paragraph is:<\/span> Thus, according to this provision, the object of taxation appears if two<\/strong> conditions are met:<\/strong><\/p>\n The interpretation above indicates that not only the condition of Ukrainian source of the income, but also the taxation of such income shall be envisaged in Article 160 of the TC of Ukraine itself.<\/p>\n The following cases of income (revenue) taxation of non-residents are foreseen in Article 160 of the TC of Ukraine:<\/p>\n The situation of sale-purchase of corporate rights between two non-residents is not addressed by any cases of taxation of non-resident set forth above. Namely, the profit from sale of corporate rights by non-resident is not a subject of taxation under the Article 160 of the TC of Ukraine. In this case it is possible to conclude that there is no object of taxation of non-resident as a result of aforementioned operation because the second condition<\/strong> of <\/strong>its occurrence is not met.<\/strong><\/p>\n It is necessary to mention that the international practice provides for the cases when tax authorities tried to impose taxes on transactions on the sale of corporate rights between non-residents. It is the high profile case concerning the acquisition of Indian company Hutchison Essar Limited (later it was renamed to Vodafone Essar Ltd.) by the Vodafone Company. In this case the acquisition of corporate rights of Indian company was carried out via a transaction between the resident of Netherlands \u2013 Internetional Holdings BV Company acting as a buyer and the resident of the Cayman Islands \u2013 company Hutchison Telecommunications International Ltd<\/em>, acting as a seller. The Indian tax authorities \u201cdid not like\u201d this transaction “bypassing” their jurisdiction. In this connection the litigation was initiated and lasted from 2007 to 2012. Despite the negative decisions of courts of previous instances, the Supreme Court of India held that Indian tax authorities do not have the jurisdiction concerning the taxation of transactions between foreign companies registered outside India.<\/strong><\/p>\n However, Indian tax authorities are not going to give up that easy because in 2012 they initiated amendments to tax legislation, which should provide for taxation with retrospective effect. Therefore, this dispute is yet to be finalized.<\/p>\n In conclusion, we should mention that the outlined attempt to make additional tax charges indicates that, at present, Ukrainian tax authorities are trying to establish the practice of taxation of such transactions; however, they still do not have a clear understanding of approach to this situation.<\/p>\n Considering the Indian practice on this issue, one should not exclude the probability of making amendments to tax legislation aimed to taxation of non-residents’ transactions for assets that are inherently located in Ukraine.<\/p>\n The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" The situations occur in practice when corporate rights of the Ukrainian enterprises owned by non-residents are alienated to another non-residents. At the same time settlements under such transactions are performed outside Ukraine. However, as the practice shows in Ukraine there is some uncertainty regarding the taxation of such transactions.<\/p>\n Recently in our practice the situation occurred when the tax authority had tried to apply additional tax liabilities on income gained by non-resident from the sale of corporate rights of the Ukrainian legal entity to another non-resident company. Such additional charges, for some reason, were assessed to the Ukrainian company-issuer,<\/strong> which corporate rights have been sold.<\/p>\n It is worth mentioning that such approach is groundless and was not included to the final version of the act of tax audit after the submission of objections to it, because taxation of such transactions is not currently foreseen by the Ukrainian legislation.<\/p>\n Why such transactions should not be an object of taxation under the provisions of the legislation of Ukraine?<\/strong><\/p>\n According to subpara.”e” of subpara. 160.1 of the Tax Code of Ukraine (hereinafter – the “\u0422C of Ukraine”) incomes from Ukrainian sources include “income<\/strong> from operations on trading<\/strong> securities, derivatives or other corporate rights<\/strong> as determined in accordance with this section.<\/span>“<\/p>\n We would like to note that the phrase “income from operations on trading corporate rights” was not correctly selected by the legislator, as the TC of Ukraine establishes the procedure for determining the financial result of operations on sale<\/strong> of corporate rights, not trading<\/strong> with them (subpara. 2 – 4 of para.153.9 of Art. 153 of the TC of Ukraine). However, such contradiction is not crucial, as “trading” is a broader term than the “sale” and the first includes the last. <...><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[78],"class_list":["post-706","post","type-post","status-publish","format-standard","hentry","category-exclusive","tag-tax-other"],"_links":{"self":[{"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/posts\/706"}],"collection":[{"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/comments?post=706"}],"version-history":[{"count":6,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/posts\/706\/revisions"}],"predecessor-version":[{"id":8973,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/posts\/706\/revisions\/8973"}],"wp:attachment":[{"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/media?parent=706"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/categories?post=706"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kmp.ua\/en\/wp-json\/wp\/v2\/tags?post=706"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\n <\u2026><\/span>
\n 134.1.2. income (revenue) of non-resident, which is subject to taxation according to Article 160 of this Code, with the source from Ukraine.\u201d<\/span><\/p>\n\n
\n