Passive income (dividends, interest, royalties) from Ukrainian sources that is paid to non-resident entities is generally subject to 15% WHT. Other payments, including payments for engineering services, lease payments, and agency and brokerage fees, are also subject to 15% WHT, but payments for most other services are not subject to withholding. WHT rates may be reduced under a relevant tax treaty.
The 15% WHT rate applies to income (rather than capital gain) on the sale of real estate and on profits from the sale of securities.
Capital gains from alienation of shares in Ukrainian companies are subject to 15% WHT unless such shares are traded on a qualifying stock exchange or the respective DTT provides for exemption. Starting from 1 July 2020 capital gains from alienation of foreign companies holding shares in rich in real estate Ukrainian companies are also subject to 15% WHT. In case of alienation of a Ukrainian company, a non-resident may be required to register in Ukraine and pay the WHT due on capital gains.
Capital gains from disposal of interest-free (discounted) bonds and treasury bills are taxed at an 18% rate.
Payments for freight services (including sea freight) are subject to 6% WHT.
А special 5% WHT rate on qualifying Eurobond yield applies (excluding payment of interest to residents of low-tax jurisdictions).
Starting from 1 January 2021 certain types of payments will be treated as deemed dividends subject to 15% WHT. Such payments include (i) payments for goods / services/ shares purchased in controlled transactions in excess of the arm’s length level; (ii) the amount of understatement of the selling price of goods/ services in controlled transactions below the arm's length level; (iii) payments related to reduction of share capital, share buy-back, exit from shareholding or similar transactions that result in decrease of Ukrainian company’s retained earnings.
As a general rule, the WHT due should be withheld and remitted to the tax authorities by the Ukrainian taxpayer that makes respective payment to a non-resident and no later than the date of such payment. In certain cases, e.g. deemed dividend distribution, the option of later WHT payment is envisaged based on a gross-up mechanism.
Application of treaty benefits
The non-resident recipient of income sourced in Ukraine must also be considered the beneficial owner of such income in order to benefit from the reduced tax rates under relevant tax treaties. The beneficial owner test applies only if it is also stipulated by the respective DTT. According to the Tax Code, agents, nominee holders, and other intermediaries in respect of received income cannot be beneficial owners of income sourced in Ukraine, and, therefore, are not entitled to favourable treaty provisions. Lack of substance at the level of income recipient, e.g. lack of sufficient decision-making powers, assets, qualified employees, equity, significant functions and risks with respect to the received income, may indicate that such recipient of Ukrainian-sourced income is a mere intermediary and consequently not the beneficial owner of such income.
Interest payable under a syndicated loan through the organising bank may be subject to reduced WHT rates under the DTTs between Ukraine and the country of residence of each participating bank.
Starting from May 2020 the Tax Code provides for a look-through approach for all taxpayers, i.e. if the direct recipient of Ukrainian-sourced income is not the beneficial owner, the reduced rate under the DTT with the jurisdiction of the beneficial owner may be applied.
Starting from May 2020 the Tax Code also incorporates a principal purpose test (PPT) under which DTT benefits may be denied if one of the principal purposes of a cross border transaction was an intention to obtain such treaty benefits (this is basically alignment with MLI).
Payments to non-residents for advertising services are not subject to WHT. However, the resident payer is required to pay, from its own funds, a 20% remittance tax based on the value of such services.
A resident payer is similarly required to pay, from its own funds, a 12% remittance tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does not meet the requirements set by the authorised state agency. Otherwise, 0% or 4% rates apply depending on the type of reinsured risk.
As taxes on advertising and insurance are levied on a resident party, they cannot be relieved using a tax treaty.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) came into force for Ukraine on 1 December 2019. Ukraine decided that the MLI should cover all its DTTs (except for the treaty with Qatar), but not all other countries choose to apply the MLI to their treaties with Ukraine. Therefore, not all treaties with Ukraine are modified by the MLI.
Ukraine chose the following MLI novelties/amendments to apply to its treaties:
- Principal purpose test (PPT).
- Changes to the PE definition.
- Anti-abuse rule for PEs located in third jurisdictions.
- 365-day rule for capital gains.
- Improvements to the mutual agreement procedure.
It is noteworthy that the new rules apply to a certain treaty only if the other signatory thereto also chooses to apply the same rules.
Reduced treaty rates
|Dividends||Interest (2)||Royalties (3)|
|Non-resident individuals||5/18 (4)||5/18 (4)||18||18|
|Austria (18)||5||10||2/5 (5)||0/5|
|China, People’s Republic of||5||10||10||10|
|Denmark||5||15||0/10 (7)||0/10 (15)|
|Finland||0/5 (8)||15||5/10 (7)||0/5/10|
|France||0/5 (9)||15||2/10 (5)||0/5/10|
|Korea, Republic of||5||15||5||5|
|Netherlands (20)||0/5 (11)||15||2/10 (5)||0/10|
|Russian Federation||5 (13)||15||10||10|
|Sweden||0/5 (14)||10||0/10 (5)||0/10|
|Switzerland (21)||5||15||0/10 (5)||0/10|
|United Arab Emirates (22)||5||15||3||0/10|
- The ownership threshold for the non-portfolio rate is 10%, 20%, 25%, or 50%, depending on the specific provisions in the treaty.
- Several treaties contain a rate of 0% on interest paid to or guaranteed by a government or one of its agencies.
- If more than one rate is shown, this means that the rate will depend on the type of royalties paid.
- The 18% rate applies to dividends from privileged shares or other fixed payments on shares, as well as to disguised employment income. Dividends received from a Ukrainian legal entity CIT payer (other than collective investment arrangement) are subject to the 5% rate. Dividends received from collective investment funds are subject to the 9% rate.
- The lower rate applies to interest paid on certain credit sales and on loans granted by a financial institution.
- The treaties with Japan, Malaysia, and Spain were entered into by the USSR before it dissolved. Ukraine will continue to honour these treaties, unless they are superseded. A new treaty with Malaysia has already been signed and awaits ratification from the Malaysian side. Ukraine has already ratified the new treaty. This new treaty provides for 5%/15% rate for dividends, 10% for interest, and 8% for royalties. A new treaty with Spain is announced to be signed soon.
- The lower rate applies to interest paid in connection with the sale on credit of any industrial, commercial, or scientific equipment, unless the debenture is between associated enterprises.
- The 0% rate applies if the investor holds at least 50% of the capital of the company paying the dividends and the capital invested is at least 1 million United States dollars (USD); the payer of dividends should not operate in the field of gambling, show business or an intermediation business, or in auctions.
- The 0% rate will apply if a French company or companies hold, directly or indirectly, at least 50% of the capital of the Ukrainian company, and the aggregate investments exceed 5 million French francs.
- The lower rate applies to interest paid on any loan granted by a bank.
- The 0% rate applies if the investor directly holds at least 50% of the capital of the company paying the dividends, and the capital invested is at least USD 300,000.
- The 10% rate applies if the company receiving the dividend has, for an uninterrupted period of two years before the dividend is paid, owned at least 25% of the capital stock of the company paying the dividends.
- The 5% rate applies if the capital invested is at least USD 50,000.
- The 0% rate applies if the Swedish company directly holds at least 25% of the voting power of the company paying the dividends and at least 50% of the Swedish company is held by Swedish residents.
- The Protocol amending the treaty with Denmark is announced to be signed soon. Under the draft Protocol the zero tax rate for royalty income should be abolished.
- The 5% rate on dividends applies if the Cypriot company holds at least 20% of the capital of the Ukrainian company paying the dividends and the capital invested is at least 100,000 euros (EUR).
- The lower rate applies in the case of interest paid in connection with the sale on credit of industrial, commercial, or scientific equipment or on any loan granted by a bank.
- The treaty with Austria is amended by a Protocol, which awaits ratification. Under the amended treaty, the WHT rates will be as follows: 5%/15% for dividends; 5% for interest; and 5%/10% for royalty.
- Ukraine signed a treaty with former Yugoslavia before it dissolved. Ukraine applies this treaty in its relations with current Montenegro and Serbia, unless the treaty is superseded.
- The treaty with the Netherlands is amended by a Protocol, which awaits ratification. Under the amended treaty, there will be no WHT exemption for dividends. The new WHT rates will be as follows: 5%/15% for dividends, 5%/10% for interest, and 5%/10% for royalty.
- The treaty with Switzerland is amended by a Protocol that has been already ratified by Ukraine, but still awaits finalisation of the ratification procedures from the Swiss side. Under the amended treaty, there will be a unified 5% WHT rate for all types of interest and royalty payments.
- The Protocol amending the treaty with the United Arab Emirates is announced to be signed soon. Under the draft Protocol, the WHT rates will rise as follows: for interest from 3% to 5%; for royalty from 0%/10% to 5%/10%.