On October 6th 2016, the Ukrainian State Fiscal Service (“USFC”) released Guidance Letter № 21833/6/99-99-15-02-02-15 (“Letter”), which clarifies the terms of application of the reduced rate of withholding tax (“WHT”) on dividends, paid by an Ukrainian legal entity to a Cypriot legal entity according to the provisions of the effective double-tax treaty (“DTT”), signed between Cyprus and Ukraine in 2012.
In accordance with the Letter, a reduced rate of WHT – 5 %, instead of 15 % standard rate – can be applied to dividends paid by an Ukrainian tax resident legal entity to a Cypriot legal entity, which a) owns 100% of the share capital of such entity and b) is a beneficial owner of such income.
The position of the USFS was based on the following facts:
According to article 10 of the DTT, a reduced rate of WHT levied on dividends paid by Ukrainian legal entity, (namely 5%) can be applied if the beneficial owner, i.e. a Cypriot legal entity, holds at least 20% of the capital of the paying company or has invested in the acquisition of the shares or other rights of the company in equivalent of at least €100,000.
Based on article 103 of the Tax Code of Ukraine (“TCU”), a reduced tax rate foreseen by a DTT can be applied if the Cypriot legal entity is a beneficial recipient (owner) of the income and is a tax resident of a country with which Ukraine has signed a DTT. Proof of tax residency should be provided in this case.
Pursuant to the decision of the High Administrative Court К/800/52155/13 from March 24, 2014, beneficial ownership should not be treated in a narrow technical sense, but rather it should be considered within a context of tax avoidance and tax treaty abuse. Thus, a real beneficial owner is a person who possesses not only a legal ownership over the profits received, but economic ownership as well, i.e. can determine the subsequent economic “fate” of such income.
If a recipient of the dividends does not meet those requirements, the standard 15% rate of the WHT should be applied.
Alena Malaya
Tax and Legal Advisor
Direct tel: +380 44 278 12 66
Email: alena.malaya@eurofast.eu