On 3 April 2017, the President of Ukraine signed the law ratifying 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 capital gains (the “Convention”), including the amending Protocol to the Convention.
The Convention between two states was signed as long ago as on 6 September 1997, but has not been ratified until now. On 30 September 2016, parties amended several provisions of the Convention by the Protocol, including articles regarding taxation of dividends, interest and royalties. Luxemburg ratified the amended Convention on 23 December 2016.
The Convention will apply to taxes chargeable and income derived on or after 1 January 2018.
Thus, the overall number of effective income tax treaties entered into by Ukraine is going to increase to 73.
Below is summary of key provisions of the Convention.
A source state may tax only certain types of capital gains, namely:
The Convention provides for reduced tax rates at source for passive income (dividends, interest, royalties) derived by a resident of the contractual state, who is a beneficial owner of such income:
However, reduced rates do not apply if a resident of the contractual state has a permanent establishment in the source state.
With respect to interest and royalties there is also a specific anti-avoidance rule prescribing that reduced tax rates apply only to the arm’s length part of amount of the respective payments. The amount of interest/royalties exceeding the arm’s length level is taxable at standard rates (taking into account other provisions of the Convention).
Please note that provisions of the Convention regarding taxation of interest do not prejudice new rules of taxation of LPN Eurobond structures that are in effect from 1 January 2017.
Historically, Luxembourg has been one of the most popular jurisdictions to establish holding companies. However, in the absence of the convention on the avoidance of double taxation between Ukraine and Luxembourg, Ukrainian businesses have used advantages of Luxembourg to a very limited extent.
Establishing a holding company in Luxembourg may have the following advantages: