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23.09
2019
Igor Kryzhanovsky on the double taxation case law for Legal High School students Back

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The lecturer told the students of Legal High School about determining passive income according to the provisions of the Tax Code of Ukraine. According to the sources of origin, passive income can be conditionally divided into the following groups: interest income from the placed funds and securities; investment income; royalties; dividends; insurance payments and indemnities. The lawyer stressed that today Ukraine has signed agreements and ratified the Convention on the avoidance of double taxation with 76 countries of the world. In this case, the resident may reduce the calculated amount of tax by the amount of tax paid abroad, but in the case of providing a certificate confirming the amount of foreign income received and payment of tax abroad (clause 13.5 of the Tax Code of Ukraine).

The lawyer settled on disputes about the use of the concept of “beneficial owner”, speaking in the language of cases.

Taking the case № 826/6241/17, the lecturer voiced the tax position. Therefore, the lender’s major interest income (9.5%) on UK loans was not taxed, and the proceeds of the loan were obtained from third parties by placing the debentures in the form of bonds. In the meantime, the lender has actually transited the interest income received from the taxpayer in favor of bondholders issued by the lender, so these individuals are the proper beneficiaries of the interest.

In turn, the position of the taxpayer assumed that the lender is the primary lender first of the six companies, and after their reorganization – the borrower, so the lender is the sole beneficiary of interest. The lender is a resident of the United Kingdom within the meaning of the Double Taxation Agreement between Ukraine and the United Kingdom and is taxable in the United Kingdom. The status of the lender’s tax resident is confirmed by Her Majesty’s Apostille and Certified Chief Secretary for Foreign Affairs and Commonwealth Affairs with a Certificate of Location issued by the Royal Customs. The court’s position was interesting: according to the OECD Model Convention Comments, the owner’s benefit test was introduced and should only be applied where a resident taxpayer has concluded a contract with a non-resident solely to obtain a tax benefit (benefit) provided for by the Convention norms tax consequences). However, if the agreement with the non-resident did not pursue such a purpose, then the benefit test should not be applied.

No evidence was presented by the tax authority to prove the purpose (or purpose of tax evasion) of the purpose, nor to indicate what tax benefit the taxpayer received when paying interest on a UK resident loan compared to paying it to third parties which the tax authority deems necessary beneficial owners. According to the certificate, the lender is registered in the UK and has no overdue tax obligations, all tax reports are timely; the financial statements of the lender indicate that the entire amount of interest received is attributed to the income of the lender during the period of the loan agreement; the issuance by the lender of the bonds is not evidence of independent participation in the business relationship (cover of other beneficiaries), as it is an independent activity not prohibited by the law of the country of registration; Persons who have purchased the bonds of the lender are not parties to the loan agreement and therefore cannot be considered as lenders to the borrower and beneficiaries in respect of interest. The terms of the agreement did not specify the other party that could be the owner of the interest and did not specify that the lender acts as an agent or intermediary.