Ukraine ratified the Multilateral BEPS Convention
Tax & Legal Alert
1 March 2019
On 28 February 2019, the Ukrainian Parliament passed the Law “On Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Convention”). Already joined by more than 87 countries, the Multilateral Convention is open for additional signatories and is expected to be signed by other jurisdictions shortly.
The Multilateral Convention is one of the 15 Actions of the BEPS Action Plan - the project of the Organization for Economic Cooperation and Development (OECD) to develop measures to counter base erosion and profit shifting.
I. The scope of the Multilateral Convention
The Multilateral Convention is intended to automatically modify all existing bilateral treaties/conventions for the avoidance of double taxation (“bilateral tax treaties”) specified by the signatories to the Multilateral Convention (“contracting countries”) in their notifications to the Depository (OECD). This eliminates the need for bilateral negotiations on changes to the existing tax treaties between the countries.
Ukraine notified the OECD of its intention to update its 76 bilateral tax treaties, including those with Cyprus, and the United Kingdom.
A bilateral tax treaty will be subject to the provisions of the Multilateral Convention if the following conditions are met simultaneously:
- both contracting parties have ratified the Multilateral Convention; and
- both contracting parties have notified the OECD of their willingness to modify the existing bilateral tax treaty through the Multilateral Convention.
The Multilateral Convention is expected to make changes to more than 2,000 bilateral tax treaties concluded between different countries worldwide.
II. The effects of joining the Multilateral Convention
The specific feature of the Multilateral Convention is that it allows making the same changes to the chosen bilateral tax treaties instead of all. It is flexible as it provides for the implementation of various versions of its provisions (on a choice of contracting states) regulating a number of issues and enables to reject certain changes to the existing bilateral tax treaties.
Consequently, the effects of signing the Multilateral Convention may differ from treaty to treaty. In order to gain an insight into the impact of the Multilateral Convention on a specific bilateral tax treaty it is necessary to analyze the provisions (and their versions) accepted by each of the contracting countries for such treaty, as well as to find out whether both contracting states have notified the OECD about their intention to modify such treaty through the Multilateral Convention.
III. Key modifications accepted by Ukraine by signing the Multilateral Convention
1) The purpose of bilateral tax treaties
The wording of preambles of bilateral tax treaties will be amended to include the contracting countries’ intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in bilateral tax treaties for the benefit of residents of third states).
2) Prevention of tax treaty abuse (Principal Purpose Test)
Bilateral tax treaties will include an important rule aimed at preventing tax treaty abuse based on the Principal Purpose Test (“PPT”). Under the PPT, if one of the principal purposes of transactions or arrangements is to obtain benefits under a bilateral tax treaty, these benefits will be denied.
In practical terms, this means that tax authorities may challenge the use of bilateral agreements by asking questions about the purpose of establishing a company abroad and the solid grounds for making payments to such company.
3) Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property
Usually bilateral tax treaties envisage that gains derived by a resident of a contracting country from the alienation of shares or other interests in an entity may be taxed in the other contracting country provided that such shares or interests derived a certain part of their value from immovable property situated in that other contracting country. Now this rule applies if the relevant value threshold is met at any time during 365 days preceding the alienation.
4) Permanent establishment
The Multilateral Convention introduces a number of changes concerning the creation of a permanent establishment (e.g. splitting-up of contracts, changes in the list of activities that do not give rise to a permanent establishment, antiabuse rule for permanent establishments in third jurisdictions, etc.).
5) Mutual agreement and dispute resolution procedure
The Multilateral Convention includes measures to improve the procedure for resolving treaty-related disputes. If a taxpayer believes that the actions of one or both of the contracting countries result or may result in taxation out of accordance with the bilateral tax treaty, the procedure allows such taxpayer to request an inquiry by a competent authority of either of the contracting countries.
If the competent authority finds the taxpayer’s request to be justified but cannot decide on the matter at its own discretion, the case is to be resolved through the mutual agreement procedure involving the competent authority of the other contracting country.
IV. Entry into force and enactment
The Law on ratification of the Multilateral Convention (“Law”) is currently pending signature by the President of Ukraine. Once the Law is signed, Ukraine must deposit its instruments of ratification with the OECD. The Multilateral Convention will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by Ukraine of its instrument of ratification. It may be expected that provisions of the Multilateral Convention will become applicable for Ukraine starting from 01 January 2020.
For more details on how business should react to signing of the Multilateral Convention please follow the link.
Should you have any questions regarding Ukraine’s signing of the Multilateral Convention and its effects we will be glad to provide you with our professional advice.