Law on BEPS: Application of tax treaties

The so-called BEPS Law[[1]](https://www.integrites.com/publications/law-on-beps-application-of-tax-treaties/#_ftn1) introduced a number of fundamental changes to the Tax Code of Ukraine (“TCU”).

Such changes address the procedure of application of double tax treaties, including the payment of dividends, interest and royalties to non-residents.

It should be noted that respective changes came into force on May 23, 2020.

 

 

 

What are the key changes?

Conditions of application of tax treaties have been clarified and complemented with new ones. Moreover, the look-through approach for application of tax treaties has been introduced, as well as the Mutual Agreement Procedure (“MAP”).

 

Conditions of application of tax treaties

Beneficial owner	Beneficial owner	Clarified
	The Principal Purpose Test	Introduced

 

The Principal Purpose Test (“PPT”)

Tax exemption and application of reduced tax rate, stipulated in respective tax treaty, shall not be granted if the main or primary purpose of the relevant business transaction of a non-resident with a resident of Ukraine is to obtain such benefit.

Meanwhile, if a tax treaty establishes other rules, the provisions of this treaty shall apply.

However, it is important to remember that the PPT is also provided by the MLI Convention, which has already entered into force in Ukraine. Therefore, it is necessary to check not only the relevant tax treaty, but also whether the MLI applies to respective treaty.

 

 

Beneficial owner of income

This is an entity (both legal or individual) which has a right to receive the income and to be beneficial with respect to income. An entity is not a beneficial owner if there’s further transfer of received income without executing the functions, bearing risks and use of assets with respect to such transaction and / or lack of substance to execute necessary functions, bear risks and use assets.

 

The look-through approach for application of tax treaties

If income is paid to a person who is not a beneficial owner, the provisions of the treaty with the jurisdiction of which a beneficial owner is a resident shall apply.

If the look-through approach was not applied during payment and the tax was overpaid, the post-factum look-through approach could be applied in order to refund overpaid tax.

Status of beneficial owner for any application of look-through approach shall be proven by a non-resident.

 

The Mutual Agreement Procedure

If tax authority of Ukraine or another country carries out or may carry out taxation that does not comply with a tax treaty, a taxpayer has the right to apply for the MAP.

The application shall be submitted to the Ministry of Finance of Ukraine (unless another body is specified in the relevant treaty).

The MAP may be applied if a tax treaty provides such a right to taxpayer.

 

What steps should be taken due to respective changes?

1. Analysis of impact of the changes on existing corporate structures and activities.
2. Assessment of respective risks.
3. Identification of the functions of non-residents in the structure and their strategic importance for business.
4. Development of the ways to minimize identified risks and valuation of respective costs.
5. Decision on the strategic changes to the structure.

 

[[1]](https://www.integrites.com/publications/law-on-beps-application-of-tax-treaties/#_ftnref1) The Law of Ukraine «On amendments to the Tax Code of Ukraine regarding the improvement of taxes administration, elimination of technical and logical inconsistencies in tax legislation» №466-IX of January 16, 2020 (hereinafter – «the Law»)