Ukraine: Ukraine And Switzerland Sign Protocol Amending Double Taxation Treaty

What happened?

On 24 January 2019, Ukraine and Switzerland signed a protocol (the Protocol) amending the double tax treaty between the two countries (the DTT).

Please note: The full official text of the Protocol in Ukrainian is not yet publicly available. This overview is based on the press release by the Ukrainian Ministry of Finance, as well as the German text of the Protocol available online (

The Protocol introduces the following key amendments:

  • Withholding tax (WHT) rate on interest will be established at 5%, instead of the current 10%. The Protocol will also eliminate WHT exemption of interest on credit sales and bank loans; ultimately, the number of exceptions where the tax may be reduced to 0% will be narrowed down to fact patterns involving the State as a party to an interest-bearing transaction.
  • WHT rate on royalty will be established at 5% instead of the current 0% or 10% depending on the type of intellectual property;
  • Concerning the taxation of dividends, a stake of 10% in the distributing company, instead of the current 20%, will be regarded as qualified participation allowing for WHT at a 5% rate;
  • Mutual agreement procedure for treaty-related dispute resolution by means of arbitration will be introduced;
  • The exchange of tax information article will be subject to amendment in line with the international standard for the exchange of information upon request. Both states will have enhanced capabilities to exchange tax information. The states may not be able to refuse to provide information solely because they have no national interest in such information and/or because of banking secrecy;
  • A principle purpose test (PPT) will be introduced. PPT is an anti-avoidance instrument whose role is to ensure that double tax treaty benefits are not abused. If it is provable that one of the main purposes of a transaction is to gain treaty benefits, benefits may be denied.

While the timing of the Protocol's coming into legal effect is not clear yet, ratification procedures by both states must be completed beforehand. In Ukraine, the Protocol must be ratified by the Ukrainian parliament.

What does this mean?

  • The Protocol appears to be an attempt to align the DTT with the latest version of the OECD Model Tax Convention and demonstrates both countries' commitments to implement the BEPS Action Plan's core measures on treaty shopping.
  • Amended rates of tax on royalty and interest must be factored in while planning future transactions.
  • The PPT rule calls for any arrangement or transaction to be genuinely grounded on business/commercial reasons, fights against artificial structures lacking substance, and seeking tax benefits alone. If PPT is not passed, any treaty benefits (such as tax rate reduction on dividends, interest, royalty, capital gains tax exemptions; permanent establishment exemptions; tax credits etc) may be denied.
  • In plain language, if a Ukrainian business is not able to demonstrate that there are genuine business/commercial reasons for a transaction with a Swiss entity other than purely tax motives i.e. to get DTT benefits, all treaty benefits are subject to denial. It remains to be seen how the Ukrainian tax authorities and courts will implement this new anti-avoidance instrument but we expect the rise of a new wave of tax controversy on PPT grounds.

Tax information exchange might intensify. What are the implications?

  1. This demands the attention of those Ukrainian UBOs and/or Swiss bank account holders whose information might become disclosed to the Ukrainian tax authorities upon their request, based on this enhanced bi-lateral exchange provision.
  2. The general trend towards tax transparency goes well beyond exchanging information upon request. For instance, Swiss policy on spontaneous exchange of tax rulings (action 5 of BEPS minimum standards package) calls on Switzerland to share with the other state details of Swiss tax rulings that, without such an exchange, could cause BEPS concerns. This may be relevant for Ukrainian groups with a Swiss entity in their structure where Swiss-Ukraine trade, finance or IP transactions depend on an existing Swiss tax ruling.

Who might be affected?

  • Multinational corporations with entities in Ukraine and Switzerland which plan to make payments from Ukraine to Switzerland or vice versa;
  • Ukrainian groups with Swiss entities in their structures, for instance, holding, finance, IP or trade vehicles;
  • Ukrainian businesses who have unrelated business counterparties in Switzerland and plan to make payments from Ukraine to Switzerland or vice versa; and
  • Ukrainian individuals who have a corporate and/or financial connection with Switzerland (UBOs, bank account holders open with Swiss banks, etc).

What should affected businesses do?

Affected Ukrainian businesses should consider reviewing their existing or planned corporate, financial and transactional structures involving Switzerland, in order to assess if:

  • any transaction or tax benefits might be affected;
  • any features of transactions might indicate their artificial nature;
  • necessary substance requirements are fulfilled for the planned transaction and if any improvements should and can be made.

...and affected UBOs/bank account holders?

Affected individuals should consider:

  • Implications of newly suggested tax rates. Switzerland withholds unilaterally a 35% WHT on interest payments on Swiss bank accounts. This WHT can be reduced to 10% by the existing wording of DTT. After the Protocol comes into legal effect, the rate will fall to 5%. Thus, there will be a reduction in tax of 5%. This is an upside.
  • Implications of removal of banking secrecy as the sole reason for the State to refuse to exchange information. They should further consider whether their banking or tax information, as now collected by Swiss banks, tax and/or other competent authorities, would create problems if being exchanged with Ukraine's authorities.

If the analysis reveals any unfavorable characteristics, it is advisable to consider making appropriate amendments. The best time for analysis and amendments is before the Protocol is enacted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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