Ukrainian Parliament voted for ratification of the Double Tax Treaty with Republic Malta

On 13 April 2017 the Verkhovna Rada of Ukraine adopted the Law “On ratification of the Convention Between the Government of Ukraine and the Government of the Republic of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Protocol to it”.

I. Withholding tax rates

Convention Between the Government of Ukraine and the Government of the Republic of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter, the “Treaty”) particularly allows to apply the following reduced withholding tax rates:

• 5% on dividend payment, when the beneficial owner (in Ukrainian version of the Treaty – “owner in fact”) of the dividend is a company, other than a partnership which holds directly at least 20% of the capital of the company paying the dividends; and 15% on dividend payment in all other cases;
• 10% on interest payments or exemption in certain cases (e.g. if interest is paid with respect to a loan guaranteed by the Government of the other state);
• 10% on royalties.

II. Capital gains

The source state may tax gains derived by a resident of the other state from the alienation of shares deriving more than 50% of their value, directly or indirectly, from immovable property situated in the source state.

III. Permanent establishment

The Treaty contains the standard provisions on permanent establishment - fixed place of business through which the business of an enterprise is wholly or partly carried out. For building side, a construction, assembly or an installation project, or supervisory activities in connection therewith the permanent establishment arise if project or activities continue for more than 9 months.

IV. Limitation of benefits

Article 21 envisages that a resident shall not receive a benefit under the Treaty “if the main purpose or one of the main purposes of such resident or a person connected with such resident was to obtain the benefit of the Convention.” However, this provision is not applicable when a company is engaged in “substantive business operation” (in Ukrainian version of the Treaty – “independent business activity”) in the state if its residence and the relief from the taxation claimed with respect to income that is connected with such operations.

V. Entry into force

The Law is prepared for the signature of the President of Ukraine. The Treaty will enter into force after the signing of the Law by the President of Ukraine and on the date of the second country giving a notification that its internal ratification procedures were completed. The Treaty shall thereupon have effect:

    a) in Ukraine: 

            i. in respect of taxes withheld at source on amounts paid on or after 1 January in the calendar year next following that in which the Convention enters into force; and 

            ii. in respect of other taxes for taxable years or periods beginning on or after 1 January in the calendar year next following that in which the Convention enters into force;

    b) in Malta: in respect of taxes on income derived during any calendar year or accounting period, as the case may be, beginning on or after 1 January immediately following the date on which the Convention enters into force. 

VI. Other comments

As regards applying a reduced withholding tax rate on dividends, it is necessary to pay attention to the special provisions of the Treaty, which relate to the non-standard tax regime in Malta.

The Treaty does not contain special protocol that would set the additional conditions for the exchange of information between competent authorities (including the form of request for information).

Given the disparity in Ukrainian translation of the Treaty (in particular, between terms “partnership” and “substantive business operation”), please note that both versions of the Treaty are equally authentic, and in case if any different interpretations arise from translation, there is no version (either Ukrainian or English) which shall prevail. In this connection, the interpretation of the Treaty may be required.

We will be happy to provide you with advisory support on the issues you may have in relation to Treaty and its application.