An avoidance of double taxation: why pay more?

Residents of Ukraine, dealing with non-residents, should keep in mind an opportunity of tax optimization using avoidance of double taxation. To use the opportunity the note from a competent authority should be taken, and in some cases it’s valid without legalization. The situation is similar with the income of non-residents, obtained from Ukraine.

The Tax Code of Ukraine facilitates the understanding of the situation with payment of income to non-residents, devoting the separate article to this aspect of avoidance of double taxation application.

As for the implementation by Ukrainian residents the right given by bilateral agreement, the Order of State Tax Administration of Ukraine № 173 of 12.04.2002 "On confirmation of tax resident status of Ukraine" still stands as the main regulatory act.

Under the general rule, the resident, who makes any payment from income to non-resident, when the source of the income is in Ukraine due to economic relations, must withhold tax from such income at the rate of 15 percent of its amount and at its expense. The tax is paid to the budget during such payment, if the international treaties of Ukraine do not specify the other procedure. There are near seventy such treaties, including those that are “USSR heritage”.

Thus, among the European countries in this list are: Austria, Belgium, Belarus, Bulgaria, Great Britain, Greece, Denmark, Estonia, Iceland, Ireland, Italy, Cyprus, Latvia, Lithuania, Macedonia, Moldova, Netherlands, Norway, Poland, Portugal, Republic of Serbia, Montenegro, Russian Federation, Romania, Slovakia, Slovenia, Turkey, Hungary, Finland, France, Germany, Croatia, the Czech Republic, Switzerland, Sweden. Among the other countries of the world are the following: Algeria, Azerbaijan, Brazil, Egypt, Georgia, Israel, India, Indonesia, Iran, Kazakhstan, Canada, China, South Korea, Kuwait, Malaysia, UAE, South Africa, Syria, Singapore, USA , Turkmenistan, Japan, etc.

Article 103 of the Tax Code of Ukraine defines that application of the rules of the international treaty of Ukraine is carried out by exemption from taxation income originating from Ukraine, reduction of the tax rate or by returning the difference between the amount paid and the amount of tax that non-resident must pay, in accordance with an international agreement of Ukraine.

Person (tax agent) is free to use tax exemption or reduced tax rate stipulated in the relevant international treaty of Ukraine during income payment to non-resident, when the non-resident is the beneficial owner (owner) of income and a resident of the country with which an international treaty of Ukraine is signed.

Application of international treaties of Ukraine regarding exemption or reduced rate of tax is allowed only if a non-resident provides his tax agent with the document confirming the status of tax resident. The basis for the exemption from taxation revenue originating from Ukraine is providing non-resident’s provision of his tax agent with certificate (or a notarized copy), which confirms that the non-resident is a resident of the country with which an international treaty of Ukraine is signed, as well as other documents, if it is stipulated by an international agreement of Ukraine.

The certificate is issued by the competent (authorized) authority of the country (due to the international agreement of Ukraine), in the form approved under the legislation of the country, and must be properly legalized, translated in accordance with the Ukrainian regulation. If the non-resident doesn’t give the certificate, his or her income originating from Ukraine are taxable according to Ukrainian legislation.

The person who pays the income to non-resident should submit to the State Tax Service of its location (residence) report on paid income, withheld and remitted tax on non-residents income,  in case of the making payments to non-residents in the accounting period (quarter) with a source of income originating from Ukraine.

When resident receives income from the above-mentioned countries, we should refer to the Order № 173. According to paragraph 2 of the Order certificate of Ukrainian tax residence is issued within 10 working days by a State Tax Inspectorate at the location of the legal entity (the place of residence of a natural person).

We must remember that for the application of such a certificate in another country, it must be legalized (through consular offices), and translated into the appropriate language. But in relations with countries of Hague Convention abolishing the Requirement of Legalization for Foreign Public Documents it’s enough to apostille the certificate. At the same time the Federal Republic of Germany has a special procedure, which does not even require apostille.

Nor legalization or apostille is required in relations with residents of countries with which Ukraine signed an agreement on legal assistance and legal relations in civil and criminal cases, and with residents of the participating countries of the Convention on legal assistance and legal relations in civil, family and criminal affairs.

Among others, it is, Kazakhstan, Russia, Turkmenistan, the Baltic States, Belarus, Czech Republic, etc.