On 21 December 2016, the Parliament of Ukraine introduced new provisions into the Tax Code relating to taxation of interest payments under Eurobonds issued in the form of Loan Participation Notes (or “LPNs”).
Generally, the amendments establish three special rules:
Historically, due to complicated requirements of the Ukrainian securities laws and currency control rules, issuance of Eurobonds by Ukrainian business was structured through foreign entities. Large corporates were able to use their offshore holding companies as the issuer of debt securities, which were guaranteed by Ukrainian operating subsidiaries. Ukrainian banks usually used an orphan special purpose vehicle (SPV) to issue the LPNs and on-lend the proceeds to the bank under a loan agreement.
Taxation of LPNs issued after 2018
Interest on loans provided by foreign lenders to Ukrainian borrowers after 31 December 2018 will be subject to a withholding tax at the rate of 5 per cent if all of the following criteria (the “Exemption Criteria”) are satisfied:
Temporary exemption for new LPNs
The amendments to the Tax Code establish a full withholding tax exemption of interest income on loans to be provided by foreign lenders to Ukrainian borrowers in 2017 and 2018, provided that the Exemption Criteria are satisfied.
Exemption for existing LPNs
Interest payments on loans provided by foreign lenders to Ukrainian borrowers prior to 1 January 2017 have also been exempted from the Ukrainian withholding tax, to the extent such loans satisfy the Exemption Criteria (with the only difference being that any foreign exchange would qualify for the first criterion).