Dividends, Interest and Royalties Withholding Tax Rate in the United Kingdom Will Be Raised

13/ 11/ 2017

On October 9, 2017, Oleksandr Danyliuk, Minister of Finance of Ukraine, and Alan Duncan, Minister of State for Europe and the Americas at the UK Foreign and Commonwealth Office, signed the Protocol to Amend the Convention between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation (hereinafter referred to as “the Protocol”). In fact, this means that if a UK company is the owner of the trademark, then in case of royalty payment the Ukrainian company will be obliged to withhold a repatriation tax at a rate of 5% (earlier, taxes in Ukraine were not withheld at all). There is a similar situation with credit agreements. After the Protocol provisions enter into force, in case of interest payments, taxes will be withheld in Ukraine at a rate of 5% (earlier, taxes in Ukraine were not withheld at all). For dividends, the situation has not undergone catastrophic changes. While earlier, in case of payment of dividends, a Ukrainian company had to withhold tax at the rate of 10% (in some cases, at the rate of 5%), from now on, the general rate will be 15%. It will be possible to reduce the Ukrainian tax rate to 5%, but only if the founder owns more than 20% of the Ukrainian company’s capital. In fact, Great Britain continues to lose its attractiveness for international structuring: the UK’s exit from the EU and impossibility to use preferential tax rates provided for by the European law for British companies; inclusion of British partnerships in the list of non-residents for transfer pricing purposes; and, finally, raising the tax rates under an international convention with Ukraine are unlikely to contribute to the cooperation of the Ukrainian businesses with the country. The Protocol is not currently in force, as both Ukraine and the United Kingdom have to implement internal state procedures necessary for the ratification of this Protocol. The signing of such a Protocol testifies Ukraine’s commitment to the course chosen to implement the BEPS Action Plan and, in particular, bring the existing conventions for the avoidance of double taxation in line with the OECD requirements. After the amendments to the Convention come into force, they will directly influence both existing and future international holding and financial structures, in which the United Kingdom is involved. This material does not constitute professional advice; in the course of its preparation, only the information posted on the official website of the Ministry of Finance of Ukraine was used. IRYNA KALNYTSKA Attorney at law, Head of tax practice GOLAW

In fact, this means that if a UK company is the owner of the trademark, then in case of royalty payment the Ukrainian company will be obliged to withhold a repatriation tax at a rate of 5% (earlier, taxes in Ukraine were not withheld at all).

There is a similar situation with credit agreements. After the Protocol provisions enter into force, in case of interest payments, taxes will be withheld in Ukraine at a rate of 5% (earlier, taxes in Ukraine were not withheld at all).

For dividends, the situation has not undergone catastrophic changes. While earlier, in case of payment of dividends, a Ukrainian company had to withhold tax at the rate of 10% (in some cases, at the rate of 5%), from now on, the general rate will be 15%. It will be possible to reduce the Ukrainian tax rate to 5%, but only if the founder owns more than 20% of the Ukrainian company’s capital.

In fact, Great Britain continues to lose its attractiveness for international structuring: the UK’s exit from the EU and impossibility to use preferential tax rates provided for by the European law for British companies; inclusion of British partnerships in the list of non-residents for transfer pricing purposes; and, finally, raising the tax rates under an international convention with Ukraine are unlikely to contribute to the cooperation of the Ukrainian businesses with the country.

The Protocol is not currently in force, as both Ukraine and the United Kingdom have to implement internal state procedures necessary for the ratification of this Protocol.

The signing of such a Protocol testifies Ukraine’s commitment to the course chosen to implement the BEPS Action Plan and, in particular, bring the existing conventions for the avoidance of double taxation in line with the OECD requirements.

After the amendments to the Convention come into force, they will directly influence both existing and future international holding and financial structures, in which the United Kingdom is involved.

This material does not constitute professional advice; in the course of its preparation, only the information posted on the official website of the Ministry of Finance of Ukraine was used.

IRYNA KALNYTSKA

Attorney at law, Head of tax practice GOLAW