Taxes – a landmark court ruling in Ukrainian interpretation of BO concept
of the tools for preventing multinational corporations (MNCs) from such form of tax avoidance as treaty
shopping was the introduction by OECD into the Model Tax Convention of the beneficial owner concept (BO).
In this respect, the construction by the courts
of the BO concept varies from country to country. However, the common feature in
such interpretation is that the BO of the income should have the right to use
and enjoy the passive income, bears certain risks in its respect and control the income.
In Ukraine the most popular tax disputes
related to the application of the BO concept are related to royalty and
interests payment in favor of non residents. There was, however, very controversial
tax dispute regarding payment of dividends that may become a landmark case in
the tax field.
In the said case the company decided to make
payment of the dividends distributed in 2006 - 2007 to its
parent company located in Cyprus. According to DTA between Ukraine and Cyprus (that
was in force at the date of dividends’ payment) the withholding tax (WHT) on
dividends paid from Ukraine to Cyprus was 0% subject that the recipient of the
income is the beneficial owner of the dividends. Since the payment of dividends
was made in 2013 Ukrainian Co applied the said DTA and 0% WHT on dividends
In its turn tax authorities denied the
application of the 0% WHT on dividends based on the fact that in 2006 - 2007 (the period for which the dividends were
distributed) the Cyprus Сo was not the shareholder of Ukrainian Co,
thus, Cyprus Co is not the beneficial owner of the received dividends. Surprisingly, that
the Cyprus Co acquired the corporate rights of the Ukrainian Co in May 2012 just
several months before the payment of the dividends. Another interesting fact is
that the seller of the corporate rights of Ukrainian Co was the Ukrainian individual.
Hence, if the dividends were distributed directly to him, the tax rate at the
level of the recipient would be 5%.
The court of first instance and Appellate court
ruled in favor of tax authorities stating that
Cyprus Co can not be the BO of the dividend because in 2006 – 2007 the
company was not the owner of the corporate rights of Ukrainian Co. Such
interpretation of the case is rather questionable, since from legal point of view for application of
reduced WHT on dividends it does not matter who was the owner of the corporate rights
of the company in the past. The company
that is the holder of the corporate
rights at the moment of dividends’ payment matters. The same position was reflected
in the decision on the case ruled by Highest Administrative Court of Ukraine. The
court reversed the previous courts’ decisions and sent the case for a new
hearing. The grounding for such ruling was very simple, since in 2013 the
Cyprus Co was the legal and real owner of the Ukrainian Co (that was proved by
the minutes of the general members meeting of Ukrainian Co and information from
the public Company’s register) Cyprus Co is the BO of the received dividends.
Ukrainian legislation does not provide for any other extra requirements or
restrictions in this respect.
However, this is not the end of the story. The Highest
Administrative Court of Ukraine only sent the case for the new
trial to the court of first instance where the case will be reviewed from the very beginning. Considering the strengthening of the anti tax
avoidance measures on the international level and the intention of Ukraine to implement
BEPS plan into national legislation legal counsels of Ukrainian Co should tried their best to prove
that the mere purpose of alienation of
the corporate rights of Ukrainian Co to Cyprus Co was not the abuse of DTT
between Ukraine and Cyprus. It may be also presumed that during the new hearing
the court will examine the activity or substance of Cyprus Co in more details and apply the
broad economic interpretation of the BO concept.