Ukraine: Implement multilateral convention to implement tax treaty related measures

​published on October 19, 2018

On 23th July 2018 the acting Finance Minister of Ukraine, Ms. Oksana Markarova, has signed multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting (”MLI”). 

• The MLI shall cover all of 77 agreements for the avoidance of double taxation to which Ukraine is a party;
• Ukraine has reserved the right not apply in their entirety Article 3 (Transparent Entities), Article 4 (Dual Resident Entities), Article 5 (Application of Methods for Elimination of Double Taxation), Article 8 (Dividend Transfer Transactions), Article 11 (Application of Tax Agreements to Restrict a Party's Right to Tax its Own Residents), and Article 17 (Corresponding Adjustments) of the MLI;
• Ukraine has chosen to apply Paragraph 4 of Article 7 (Prevention of Treaty Abuse) introducing the principal purpose test to deny tax treaty benefits where the principal purpose of an arrangement or transaction was to obtain those benefits;
• Ukraine has chosen to apply Paragraph 4 of Article 9 (Capital Gains) of the MLI allowing taxation of capital gains from the alienation of shares or comparable interests, such as interests in a partnership or trust, in the source state if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 percent of their value directly or indirectly from immovable property (real property) situated in the source state;
• Ukraine has not excluded application of provisions contained in Article 12 and Article 14, and has chosen to apply Paragraph 2 (Option A) of Article 13 of the MLI which deal with preventing artificial avoidance of permanent establishment status through commissionaire arrangements, specific activity exemptions and splitting-up of contracts;
• Ukraine has chosen to apply the provisions contained in Article 16 of the MLI modifying the mutual agreement procedure.

The MLI must be ratified by the Parliament of Ukraine to become effective. The ratification is expected to occur until end of 2018. It is important to note that some countries with largest volumes of foreign direct investments in Ukraine, for instance, the Netherlands, Germany, Austria, Switzerland and some other have not mentioned their tax treaties with Ukraine when joining the MLI. The tax treaties between Ukraine and these countries will, therefore, not be affected by the MLI provisions. In respect of other countries, however, the taxpayers should pay special attention to the newly introduced principal purpose rule and the updated rules with respect to permanent establishment and taxation of capital gains, as these areas are associated with high tax risks.