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On 19 September 2019, the Parliament of Ukraine ratified (i) the Protocol amending the 2000 Tax Treaty between Ukraine and Switzerland (Ukraine-Switzerland Protocol), as well as (ii) the Protocol amending the 1996 Tax Treaty between Ukraine and Turkey (Ukraine-Turkey Protocol).

What Does It Mean?

The Ukraine-Switzerland Protocol

The Ukraine-Switzerland Protocol will transpose into the 2000 Tax Treaty the following revisions:

  • Dividends  The reduced 5% WHT rate will apply to shareholders, who directly hold at least 10% (as opposed to the currently applicable 20% requirement) of the capital of a distributing company. The 15% WHT rate will apply in all other cases.
  • Interest and royalty  The Ukraine-Switzerland Protocol is set to abolish the currently effective exemption from WHT for certain interest and royalty payments. In particular, the Ukraine-Switzerland Protocol would establish 5% WHT rate for all interest and royalty payments. The full exemption, however, would remain for interest paid, received or secured by one of the contracting states.
  • Application of treaty benefits  The Ukraine-Switzerland Protocol will introduce the Principal Purpose Test (PPT) in line with the standards of BEPS Action 6. The PPT will operate to deny treaty benefits where it is reasonable to conclude that "obtaining that benefit was one of the principal purposes" of the associated arrangement or transaction.
  • Exchange of information  The Ukraine-Switzerland Protocol (i) perfects the mechanisms for exchange of information on request between the fiscal authorities and (ii) improves the mutual agreement procedure between the states.

The Ukraine-Turkey Protocol

While the tax rates would remain unaltered, the Ukraine-Turkey Protocol: (i) aligns the definition of "resident" with that of the OECD Model Tax Convention on Income and Capital, (ii) introduces new provisions with respect to collection of taxes and (iii) elaborates upon and streamlines the procedure for exchange of information on request between the fiscal authorities.

Significantly, the PPT standard is not a part of the Ukraine-Turkey Protocol. However, this standard may still be implemented once Turkey completes the ratification procedures with respect to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In this context, both Ukraine and Turkey have chosen the 1996 Tax Treaty as a covered tax agreement and made a notification that they wish to modify the treaty using the MLI.

What Next?

The protocols are scheduled to enter into force after the states notify each other about the completion of the domestic implementation procedures. When the protocols enter into force, the respective tax treaties with Switzerland and Turkey would automatically be amended.

In this context, if Ukraine and Switzerland / Turkey were to complete the domestic implementation procedures by the end of 2019, the protocol would take effect from 1 January 2020, with respect to (i) taxes withheld at source to income derived on or after 1 January 2020 and (ii) other taxes on income and capital, to taxes chargeable for any taxable year beginning on or after 1 January 2020.

Points to Remember

The protocols with Switzerland and Turkey could affect your business as early as in 2020. We, thus, recommend reassessing your current corporate structures and business models to be in compliance with the new rules.

In particular, you may wish to consider:

  • re-examining WHT rates applicable to payments covered by the Ukraine-Switzerland Tax Treaty
  • revisiting your debt financing arrangements in light of an interest rate increase under the Ukraine-Switzerland Protocol and the introduction of the PPT standard
  • ascertaining the organizational structure in light of the new qualifying capital threshold
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