On 15 June 2020, the Minister of Finance of Ukraine signed the Protocol amending the 1997 Tax Treaty between Ukraine and Austria (the “Protocol").
Depending on how quickly Ukraine and Austria ratify the Protocol, it could affect your business as early as in 2021. We, thus, recommend reassessing your current corporate structures and business models to comply with the new rules.
In particular, you may wish to consider:
- assessing the possible impact of the new anti-abuse rules on your current business model;
- re-examining the withholding tax rates applicable to payments covered by the Ukraine-Austria Tax Treaty.
At the same time, please note that the increase of withholding tax rates should not economically affect the taxpayers who can fully credit such withholding taxes against any taxes (corporate or personal) paid in their country of residence.
In more detail
The Protocol suggests the following amendments to the Tax Treaty:
- Dividends: The general withholding tax rate for dividends will be increased from 10% to 15%. The reduced 5% withholding tax for non-portfolio dividends (10% shareholding threshold) will remain unchanged.
- Interest: The reduced withholding tax rate of 2% will be removed and replaced with a general rate of 5%.
- Royalties: The Protocol will increase the rate applicable to copyright royalties to 10% and will allow a 5% withholding tax on other royalties.
Currently, the Tax Treaty allows the Contracting States to impose a 5% withholding tax on copyright royalties payable for literary and artistic works and prohibits any withholding taxes on other royalties (e.g., payable for patents, trademarks, secret formulas, know-how).
- Anti-abuse: Following the OECD BEPS Action 6 (Prevention of tax treaty abuse), the Protocol will introduce the principal purpose test (PPT) in Article 23A of the Tax Treaty. This test will allow refusing treaty benefits “if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefits”.
The Protocol will also amend the Preamble to the Tax Treaty, for it to include a purpose of avoiding “opportunities for non-taxation or reduced taxation through tax evasion or avoidance”.
- Exchange of Information. The provisions of the Tax Treaty on the exchange of information will be elaborated. In particular, the Protocol will specify the information to be included in an information request for it to meet the test of ‘foreseeable relevance’.
The Protocol will enter into force only after both Ukraine and Austria ratify it under their domestic legislation.
Once the Protocol is duly ratified, and the relevant notifications are exchanged, it will take thirty days for the Protocol to enter into force. The provisions of the Protocol will have full effect in respect of taxes levied in the next calendar year following the entry into force of the Protocol. It should take an additional year for the provisions relating to royalties to become fully effective.