Date of publication: 22 January 2019
Nina Bets, Lawyer
Source: Yurydychna Practyka
The concept of beneficial owner is presented in the OECD Model Tax Convention on Income and on Capital of 2014 and the Tax Code of Ukraine. The list of proceeds to which the concept of the beneficial owner applies is set forth in the international treaties on the avoidance of double taxation, ratified by the Verkhovna Rada of Ukraine.
Article 103 of the Tax Code of Ukraine, which defines the procedure for application of the international treaty of Ukraine on the avoidance of double taxation with regard to the total or partial exemption of the non-residents’ income originating from Ukraine from the income tax, provides for the following: “The beneficial (actual) receiver (owner) of the income for the purposes of application of a reduced tax rate, pursuant to the rules of Ukraine’s international treaty, to dividends, interest, royalty, remuneration, etc., of a non-resident, received from the sources originating in Ukraine, shall be deemed the person which is entitled to receive such income.
However, the beneficial (actual) receiver (owner) of the income shall not be a legal entity or an individual, which is an agent, nominal holder (nominal owner) or just an intermediary in respect of such income, even if such person is entitled to receive the income.
In turn, the OECD Model Tax Convention on Income and on Capital of 2014 provides that income may be taxed in another state, if the resident has a real right to such income and such income is taxable in such other state.
The mere essence of the concept of beneficial owner lies in the fact that in order to recognize the person as a beneficial owner of income and for the purpose of further applying an agreement on avoidance of double taxation, not only the availability of legal grounds for receiving direct income is important, but also the fact that the beneficial owner is a person who benefits from such income and determines its further economic fate.
Beneficiary in court practice
The analysis of court practice demonstrates that Ukrainian courts are abandoning the formal approach. If earlier in order to confirm the beneficiary status the availability of a certificate of the resident of a foreign state was sufficient, today the courts are increasingly analyzing whether the person has been an actual recipient of such income.
The case of PJSC CB PrivatBank is the most indicative.
The court accepted the arguments of the tax authority that UK SPV Credit Finance PLC is not a beneficial owner of the income, but a nominal holder, intermediary of such income, since the company arranged the transit of the interest revenue received on loans from the PJSC CB PrivatBank in favor of beneficial holders of bonds issued by this company. The court did not accept the tax residence certificate as a proof of the beneficial owner’s status, since this document does not confirm or refute the information about the owner or intermediary of such income.
Unlike the case of PJSC CB PrivatBank, in which the court sided the tax authorities, in the case of PJSC Philip Morris Ukraine a decision was made in favor of the taxpayer.
Circumstances of the case: Philip Morris Global Brands Sarl (PM Brands) (Switzerland) and Philip Morris Global Brands Inc (PMGB) (USA) entered into an Intellectual Property Agreement. According to the agreement, the PMGB has an exclusive right to any royalties that may be paid by any recipient of the right under any assignment (transfer) agreement.
The Ukrainian PJSC and the American PMGB entered into the agreement on the use of the intellectual property object, namely, a number of trademarks. The terms and conditions of the agreement are drawn up in such a way that they do not contain provisions on agency or intermediary functions of PMGB (USA), which means that the company has the actual proprietary rights of the owner to such trademarks.
The court has concluded that the licensor is the beneficial owner since pursuant to the license agreement it guarantees that it is a legal owner of all rights granted to the licensee under the agreement and that such rights are free of any obligations to third parties. Therefore, the PJSC has lawfully applied a rate of 10% during the taxation of the royalties paid.
The main arguments used by the tax authorities when substantiating their claims were as follows: the analysis of agreements concluded with a non-resident, information about the non-resident company obtained from public sources, and the requests to the competent jurisdictions where the company of the beneficial owner of income is registered.
On 23 July 2018 Ukraine has finally signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The main purpose of this MLI Convention is to counteract the base erosion and profit shifting.
The MLI Convention not only provides for the use of concept of beneficial owner, but also introduces the Principal Purpose Test to prevent abuse of tax treaties.
The Principal Purpose Test means that tax exemptions will not be granted for profit or capital, if there is reason to believe that obtaining such benefit is one of the main objectives of the transaction.
In practice the attention will be paid to the purpose of payments abroad (for example, whether there is a commercial purpose and essence in the purpose of the transaction, or the transaction in question is mainly aimed at obtaining tax benefits).
Local laws in certain countries already provide for similar general anti-abuse rules. According to these rules, the tax authorities have the right to refuse to apply tax benefits under any agreements, if such agreements do not have any commercial purpose and are solely aimed at obtaining tax benefits.
Following the signing of the MLI Convention, the Principal Purpose Test will apply to all treaties for the avoidance of double taxation signed by Ukraine. It is expected that for Ukraine the MLI Convention will take effect not earlier than in 2019 – this time is required for the ratification of agreement.