On 12 March 2018 Ukraine and the Netherlands signed a protocol amending the 1995 Tax Treaty (the Protocol).
While the text of the Protocol is not publicly available yet, the Ukrainian Ministry of Finance has already reported on the principal terms of the agreement, implying an increase in withholding tax rates ("WHT") on dividends, interest and royalty payments.
Unlike the effective 1995 Tax Treaty, the Protocol is expected to eliminate the WHT exemption on dividends presently available under some circumstances, and is also expected to increase the WHT rate on interest. More specifically:
|Income||Type||1995 Tax Treaty||Protocol|
|Dividends||Distributed to shareholders, who own at least 50% of the capital of the distributing company and an investment of at least USD 300,000 has been made.||0%||The exemption is eliminated. The reduced 5% WHT rate would apply instead.|
|Distributed to shareholders whose investment to the distributing company was guaranteed or insured by designated authorities/entities (eg, the government, Central Bank).||0%||The exemption is eliminated. A 15% WHT rate would apply instead.|
|Dividends distributed to shareholders, holding directly at least 20% of the capital of a distributing company.||5%||5%|
|Dividends distributed to other shareholders.||15%||15%|
|Interest||Interest paid on: (i) loans granted by a bank or any other financial institution; and (ii) sales of equipment and machinery on credit.||2%||5%|
|Royalties||Royalties on the use of/right to use any copyright of scientific work, patent, trademark, design or model, plan, secret formula or process, or know how.||0%||5%|
Separately, the Protocol elaborates on the procedures for exchange of information between the fiscal authorities aligning those with the recommendations of the Organization for Economic Development and Cooperation.
The Protocol is scheduled to enter into force after Ukraine and the Netherlands notify each other of the completion of the domestic implementation procedures.
The Ukrainian Parliament must ratify the Protocol for Ukraine to complete its domestic procedures.
The Ukrainian Ministry of Finance continues to gradually review the existing tax treaty network, specifically targeting those offering the full exemptions from WHT.
Amongst the most significant developments, mention should be made of the Ministry:
- signing a Protocol amending the Ukraine-UK Tax Treaty with the domestic ratification procedures still in progress;
- commencing negotiations to amend the Ukraine-Switzerland Tax Treaty;
- commencing negotiations to amend the Ukraine-Belgium Tax Treaty;
- completing the ratification procedures for the Ukraine-Luxembourg Tax Treaty, with the latter entering into force for Ukraine on 18 April 2017;
- signing a Protocol amending the Ukraine-Cyprus Tax Treaty with the domestic ratification procedures still in process.
The Ukrainian Ministry of Finance declared its intention to commence negotiations with France, Germany and the United States of America to align WHT rates on passive income with those recommended by the OECD Model Tax Convention on Income and Capital.