Multilateral BEPS Convention (MLI): entry into force in Ukraine
Tax & Legal Alert
9 August 2019
On 8 August 2019, Ukraine has deposited with the OECD its instrument of ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Convention”). The Multilateral Convention will therefore enter into force in Ukraine on 1 December 2019. Its provisions may become applicable for bilateral tax treaties concluded by Ukraine starting from 1 January 2020 (for more details please refer to section IV below).
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. Already joined by more than 89 countries, the Multilateral Convention is open for additional signatories and is expected to be signed by other jurisdictions shortly.
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, anti-abuse 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 Multilateral Convention enters 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 the signatory jurisdiction of its instrument of ratification. For Ukraine this date is 1 December 2019. The provisions of the Multilateral Convention may become applicable in Ukraine not earlier than year 2020, particularly:
- With respect to withholding taxes – starting from 1 January 2020.
- With respect to other taxes – for taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months from the date on which the Multilateral Convention enters into force.
It should be noted that the applicability of the Multilateral Convention provisions to a particular bilateral tax treaty concluded by Ukraine will depend on whether the Multilateral Convention has entered into force for the second party to that bilateral tax treaty.
Should you have any questions regarding entry of the Multilateral Convention into force in Ukraine and its effects, we will be glad to provide you with our professional advice.