On April 3, 2017, the President of Ukraine signed the Law on the Ratification of the Ukraine-Luxembourg Double Tax Convention and the Protocol Thereto
The Convention between the Government of Ukraine and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (the "Convention") was signed on September 6, 1997. It was voted down by the Ukrainian parliament back in 1998 as the Convention envisaged a full exemption for dividends and a comparably low rate on interest.
The governments of Ukraine and Luxembourg had been negotiating amendments to the Convention back in 2007, which resulted in signing of the Protocol to Amend the Convention (the "Protocol") on September 30, 2016.
On March 14, 2017, the Parliament of Ukraine passed the Law On Ratification of the Convention and the Protocol Thereto, which was signed by the president on April 3, 2017.
The Convention and the Protocol will enter into force once Ukraine and Luxembourg have notified each other about the completion of domestic procedures required for their implementation.
If the Convention enters into force in 2017, it will have effect as of January 1, 2018, namely: (i) in respect of taxes withheld at source, to income derived on or after January 1, 2018; (ii) in respect of other taxes on income and capital, to taxes chargeable for any taxable year beginning on or after January 1, 2018.
The Convention establishes the following rates:
| Dividends |
5%,
15% |
The 5% rate will apply if the company receiving the dividends directly holds at least 20% of the capital of the company paying the dividends. The 15% rate will apply in all other cases. |
| Interest |
5%,
10% |
The 5% rate will apply to the interest paid on any loans granted by a bank or any other financial institution. The 10% rate will apply in all other cases. |
| Royalties |
5%,
10% |
The 5% rate will apply to royalties for the use of any patent, trademark, design or model, plan, secret formula or process, or for information (knowhow) concerning industrial, commercial or scientific experience. The 10% rate will apply to royalties for the use of any copyright to literary, artistic or scientific work (including cinematographic films, and films or tapes for radio or television broadcasting). |
The Convention preserves the right of the source state to tax gains derived from the alienation of shares deriving their value from immovable property situated in the source state, even if the alienator of such shares is not a resident of the source state.
Exchange of information under the Convention has been generally aligned with the international standard of transparency and exchange of information on request. In particular, neither Ukraine nor Luxembourg can decline to supply information "solely because the information is held by a bank.”
Furthermore, Ukraine has recently become a member of the Inclusive Framework on the OECD/G20 Base Erosion and Profit Shifting ("BEPS"), thus committing to implement four minimum standards of the BEPS Package. One of these standards relates to the prevention of treaty abuse and, in particular, proposes to introduce a limitation-on-benefits rule into tax treaties, which is expected to combat treaty-shopping practices.
While the limitation-on-benefits clause has not been included in the Ukraine-Luxembourg Convention, this standard may still be implemented as soon as June 2017 when Ukraine is expected to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Additional notes
This LEGAL ALERT is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.
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