Ukraine ratified the Protocol to Tax Convention with the Netherlands
Tax & Legal Alert
- 1. Withholding tax rates
- 2. The right to obtain benefits under the Convention
- 3. Information Exchange
- How can we help?
On 15 June 2021, the Ukrainian Parliament passed a law ratifying the Protocol amending the Convention between the Netherlands and Ukraine for the Avoidance of Double Taxation (the “Convention”).
Inasmuch as the Parliament of the Netherlands ratified the Protocol as far back as 2018 following the “silent approval” procedure, the Protocol provisions may become effective as soon as 01 January 2022, subject to exchange of instruments of ratification between Ukraine and the Netherlands in 2021.
Below is a brief overview of the main changes to the Convention.
1. Withholding tax rates
The Protocol provides for the following changes in the withholding tax rates when income is paid from one state to a resident of another state:
- The right to apply a 0% withholding tax rate is no longer applicable when the beneficial owner of the dividends is a company (other than a partnership) that owns directly at least 50% of the capital of the company paying the dividends and has invested at least USD 300,000 in the paying company.
- The right to apply a 5% withholding tax rate remains applicable when the beneficial owner of the dividends is a company (other than a partnership) that owns directly at least 20% of the capital of the company paying the dividends. In other cases, the basic rate of 15% applies.
- Interest. Single withholding tax rate of 5% has been set instead of the current 2% and 10% rates.
- Royalty. A 5% withholding tax rate is set for royalties paid to their beneficial owner instead of 0% in the previous version of the Convention (except for royalties for the use, or right to use any copyright of literature or artistic work, where the applicable rate remains at 10%).
2. The right to obtain benefits under the Convention
The Convention is supplemented by the Principal Purpose test aimed at preventing the abuse of tax benefits provided under the Convention.
Tax benefits under the Convention may not be granted if obtaining these benefits was one of the principal purposes of any arrangement/transaction that resulted directly or indirectly in these benefits, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Convention.
3. Information Exchange
The Protocol significantly expands the powers of tax authorities as to the exchange of information for tax purposes, and details the procedure for such exchange.
How can we help?
We will be happy to provide you with our advice on issues related to these changes and their impact on your current business transactions or business structure, in particular:
- to look into the possibility of applying the Convention to payments from Ukraine (for example, reduced withholding tax rates for dividends, interest and royalties); and
- to assess whether the Principal Purpose Test is passed in any arrangement or transaction to which Convention benefits are applied.