On 13 March 2017, the Parliament of Ukraine ratified the Convention between the Government of Ukraine and the Government of the Grand Duchy of Luxembourg for avoidance of double taxation and prevention of tax evasion regarding taxes on income and on capital (“Convention”). The Convention was signed on 06 September 1997; however, the ratification did not take place due to the members of Ukrainian Parliament disapproval of certain provisions. Namely, the Convention initially established low tax rates for interest and dividends whereas in same treaties with other countries these rate range from 5% to 10%. Thus, on 30 September 2016, the parties signed the Protocol amending the disputed provisions of Convention before both were ratified.
As to Luxembourg, the Convention covers the income tax on individuals, the corporation tax, the tax on fees of directors of companies, the capital tax, and the communal trade tax. As regards Ukraine, the tax on profits of enterprises and the individual tax are subject to the Convention’s application.
The Convention as amended by the Protocol provides for the following withholding tax rates that will apply to passive income:
The Convention prescribes a preferential 5% rate on dividend payments if the dividend recipient owns at least 20% of the capital of the dividend paying company. In other cases, a 15% rate applies.
Under the Convention, interest payments will be subject to a 10% rate. A reduced 5% rate applies in the case of interest arising in Luxembourg/Ukraine and paid on any loans of whatever kind granted by a bank or any other financial institution of Ukraine/Luxembourg, including investment banks and saving banks.
Royalties paid for the use of, or the right to use any patent, trade mark, design of model, plan, secret formula or process, or know-how, are subject to 5% rate. A 10% rate applies to payments for the use of, or the right to use any copyright of literary, artistic or scientific work.
The Convention comes into force after governments of both Ukraine and Luxembourg notify each other through the diplomatic means. The provisions of the Convention regarding taxation will apply in the following year after coming into force.
Authors: Tetyana Berezhna, Maksym Maksymov