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02/06/2011

Tax Reform Reloading - Problems of reforming the tax System of Ukraine: " Beneficial owner - lack of definition in OECD model convention and German practice ". 02/06/2011. Problem.

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02/06/2011

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  1. Tax Reform Reloading -Problems ofreformingthe tax System of Ukraine:"Beneficialowner - lackofdefinitionin OECD modelconventionandGermanpractice" 02/06/2011

  2. Problem • Art. 160 of new Tax Code (TC): income (e.g.: dividends, interest and royalties) received from Ukrainian origin by non-residents generally taxable in Ukraine, unless respective Double Taxation Agreement (DTA) foresees a different taxation • Reduced tax rates can be applied according respective DTA if the recipient is the beneficial owner (art. 103.2); respective certificate of residence has to be provided (art. 103.4) • Art. 10-12 OECD Model Convention “beneficial owner” mentioned as condition • OECD model convention (e.g. as well in DTA Ukraine-Germany) no definition of „beneficial owner“ • Art. 103.3 par. 2: recipient not beneficial owner, if he is only an “agent, nominal shareholder or intermediary” – even in case this agent, nominal shareholder or intermediary has got the right receiving this income. • Question: how to prove not being only “agent, nominal shareholder or intermediary”

  3. Comments to OECD Model Convention • Sense of beneficial owner: avoidance of transfer entities (“treaty shopping”) • But, not a final shareholder should be regarded as beneficial owner, but the person (entity), who (which) can decide on its own discretion how to proceed with respective income • Attention: • recipient 100% owned by a single third party does not exclude beneficial ownership at recipient • even profit transfer agreements do not exclude beneficial ownership

  4. German Practice • As OECD Model Convention, most of German DTAs do as well not contain a definition of Beneficial Owner – except with Italy, Norway, Sweden and the USA • DTA Germany-Sweden: • Beneficial owner (+), if income is assigned to the recipient as taxable income according tax legislation of recipients state • DTA Germany-USA 1989 • Beneficial Owner (+), if income assigned to the recipient as taxable income according tax legislation of recipients state (definition canceled according minutes to DTA Germany-USA 1989/2006) • DTA Germany-Italy and Germany-Norway: • Right to receive respective income and • Income to be assigned as taxable income according tax legislation of both contracting countries

  5. Conclusion • proving “the right to decide on its own discretion” practically not possible • Therefore focus on tax residency – as outlined in above mentioned DTAs – is a common practicable approach • Suggestion: • Delete par. 2 of art. 103.3 TC • Implementation of formal application for a certain DTA to be applied (to be submitted together with a valid certificate of residence) • In case of royalties a copy of brands registration or any other document which proves grounds of royalties

  6. Management Reporting • Implementation Cost Centre Accounting • Financial Due Diligence • IFRS-Transfer • Recruiting of financial personnel • Tax Consulting • Interim-Management • Outsourcing Accounting TOV Otten Consulting

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