ALERT: Ukraine ratified the MLI Convention to prevent BEPS
The Law of Ukraine on ratification of the MLI Convention came into force on the 2 nd of April 2019 Accordingly, we should expect modification of Ukraine’s international treaties for the avoidance of double taxation (“double taxation treaties”, or “ in the nearest future What is the MLI Convention and what is the purpose of its development?
The Convention on the Multilateral Instruments (officially the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”) is a treaty developed by Organization for Economic Co operation and Development (the OECD) for the purposes of combatting base erosion and profit shifting (“BEPS Framework”).
Currently, 129 states became members of the Inclusive Framework on BEPS and 87 states became signatories of the MLI Convention.
Within the terms of BEPS, the purpose of the MLI is to:
(1) prevent treaty abuse;
(2) prevent the artificial avoidance of the permanent establishment status;
(3) neutralize the effect of hybrid mismatch arrangements; and
(4) improve dispute resolution.
What provisions are introduced to Ukrainian tax regulation by the ratification of the MLI?
The MLI provides the “minimum standards”, which must be obligatorily adopted by countries (including article 6 article 7 and article 16 of the MLI, which are described below) and some optional articles that are chosen based on the preference of the state Ukraine ratified the following set of rules that are applicable within the MLI:
(1) Purpose of the Tax Treaty –(article 6 of the MLI): preamble clarifying that tax treaties are not intended to create opportunities for double non taxation through evasion or avoidance
(2) Principal Purpose Test PPT ) – (article 7 of the MLI): establishing rules that a benefit under the double taxation treaties shall not be granted, if obtaining that benefit was one of the principal purposes of any arrangement or transaction, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the double taxation treaties.
(Exception from this rule is applied if the competent authority upon request from that person and after consideration of the relevant facts and circumstances, determines that such benefits would have been granted to that person in the absence of the transaction or arrangement).
(3) Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property (article 9 of the MLI): establishing rules under which such gains may be taxed in the other Contracting Jurisdiction if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value from immovable property situated in that other Contracting Jurisdiction
(4) Anti abuse Rule for Permanent Establishments Situated in Third Jurisdictions (article 10 of the MLI): establishing rules under which the benefits of the legal entities shall remain taxable according to the domestic law of its Contracting Jurisdiction.
(5) Artificial Avoidance of Permanent Establishment Status (article 12 of the MLI): establishing rules, according to which, in case a legal entity habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts, that enterprise shall be deemed to have a permanent establishment in that Contracting Jurisdiction.
(6) Artificial Avoidance of Permanent Establishment Status through Specific Activity Exemptions (article 13 of the MLI, option «A»): the rule stipulating the specific activity exemption in the treaty definitions of a Permanent Establishment Status applies only to activities of an auxiliary or preparatory character In part 4 of the art/ 13 the anti fragmentation rule was added to aggregates activities carried out by closely related enterprises for purposes of determining the existence of a Permanent Establishment.
(7) Splitting up of Contracts (article 14 of the MLI): specific rules are established for determining whether the relevant period referred to in a provision of a double taxation treaty regarding permanent establishment has been exceeded These rules apply to projects such as construction and installation projects or other specific projects identified in the relevant provision of the Covered Tax Agreement (including supervision or consultancy relating to such projects).
(8) Mutual Agreement Procedure (article 16 of the MLI): taxpayers can present a case to the competent authority of a relevant MLI jurisdiction, if they consider that the actions of one or both of the Contracting States have led or will lead to taxation that is not in accordance with the treaty between those States Time for submission of the case three years from the first notification of an action resulting in taxation, which is not in accordance with the treaty.
What are the prerequisites of applying the provisions of the MLI?
By ratifying the MLI Convention, Ukraine has covered 7 6 agreements for the avoidance of double taxation with respect to taxes on income (“Covered Tax Agreements”) As of today, however, only half of them are going to be modified upon the Convention’s entry into force for Ukraine This is because the application of the Convention to a particular Double Tax Treaty (“ is subject to a number of prerequisites, as follows.
(1) Has the MLI Convention entered into force for Ukraine?
In general, the MLI itself comes into force on the first day following a period of three months after the depositing of the ratification instrument with the OEDC, which should be done by th e Ministry of Foreign Affairs of Ukraine This is expected to happen soon as the draft law on the ratification of the MLI was marked by the President of Ukraine as top priority legislation So, in general, the MLI might come into force for Ukraine in August September 2019.
Separately, the provisions of MLI, which modify the Covered Tax Agreements in respect to 1 withholding taxes and 2 other taxes, shall have effect in each state that is a Party to a Covered Tax Agreement Contracting Jurisdiction”) according to the following rules.
- withholding taxes (i e concerning the taxes withheld at source on amounts paid or credited to non residents) from 1 January following the MLI entry into force date for each Contracting Jurisdiction.
- other taxes (i e other taxes levied by that Contracting Jurisdiction) taxable/accounting periods beginning from six months after the date the MLI enters force for each Contracting Jurisdiction.
(2) Have both of the Contracting Jurisdictions ratified the MLI and deposited the ratification instrument as required by the MLI?
The MLI will enter into force on the first day of the month following the third month after both Contracting Jurisdictions have deposited their instruments of ratification The current status of the depositing of the ratification instrument for every MLI signatories is available on the web site of the OECD: (http://www oecd org/tax/treaties/beps-mli-signatories-and-parties.pdf) A s of 09 0 4 2019 only 25 states fulfilled the requirement on depositing the ratification instrument.
(3) Have both of the Contracting Jurisdictions listed the double taxation treaty with each other as
the treaties they wish to be modified by the MLI?
Among the treaties listed as Covered Tax Agreement by Ukraine are:
- treaties that will be duly modified by the MLI, as they are listed both by Ukraine and corresponding Contracting Jurisdiction as Covered Tax Treaties For example, Covered Tax Treaties with Canada, Cyprus, Israel, Russia, United Kingdom etc.
- treaties that will not be modified by the MLI because corresponding Contracting Jurisdiction did not sign the MLI at all Double taxation treaties with such countries as United States, Algeria, Azerbaijan, Belarus, Brazil, Cuba, Iran, Jordan, Kyrgyzstan, Lebanon, Libya, Macedonia, Moldova, Mongolia, Montenegro, Morocco, Syria, Tajikistan, Thailand, Turkmenistan, Uzbekistan, Vietnam These tax treaties will be modified by the MLI, when these countries sign and ratify the MLI under their domestic laws.
- treaties that will not be modified by the MLI because corresponding Contracting Jurisdictions did not include treaties with Ukraine in the list of Covered Tax Agreements Double taxation treaties with such countries as United Arab Emirates, Austria, Georgia, Germany, Indonesia, Japan, Kuwait, Malaysia, Malta, Netherlands, Norway, Saudi Arabia, Spain and Switzerland.
There is no requirement to prepare consolidated version of the double taxation treaties amended by the MLI Convention Some jurisdictions have adopted consolidated versions of their respective DTTs however, this is not expected to happen in Ukraine anytime soon.
Accordingly, MLI Convention provisions will coexist with the Covered Tax Agreements and in every case the provisions of two legal acts have to be consulted 1 the provision of the MLI Convention (including reservations specific for each country), and 2 double taxation treaties Conclusion if your business makes use of, or is considering to use, double taxation treaties with Ukraine, it is advised to check your corporate and tax structuring for the compliance with requirements of the MLI Convention.
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